Earnings Call Transcript - NIO Q4 2023

Operator, Operator

Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the Company. Please go ahead, Rui.

Rui Chen, Head of Investor Relations

Good morning and good evening, everyone. Welcome to NIO's fourth quarter and full year 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman of the Board and the CEO; Mr. Steven Feng, CFO; and Mr. Stanley Qu, Senior VP of Finance. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call include discussions of the unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

William Li, CEO

Hello, everyone. Thank you for joining NIO's 2023 Q4 and full year earnings call. In Q4 of 2023, NIO delivered a total of 50,045 premium smart EVs, up 25% year-over-year. In 2023, NIO's cumulative delivery reached 160,038 units, representing our goals above 30.7% from 2022. In January and February of 2024, due to the seasonality of the industry and the Chinese New Year, NIO delivered 18,187 vehicles. On March 7, NIO will start to deliver the 2024 model, featuring enhanced performance and experience. With that, NIO will gradually bounce back, and the total delivery in Q1 is expected to be between 31,000 to 33,000 units. In terms of NIO's financial performance, with continuous improvements on the bond costs, the vehicle gross margin increased to 11.9% in Q4. Now, I would like to share with you the recent highlights of our product, R&D, and operations. On December 23, Nio Day 2023 was held in Xi'an, Shaanxi province, where the Smart Electric executive flagship NIO ET9 was unveiled. ET9 embodies NIO's full stack of capabilities and globally leading technology, featuring core technologies such as in-house developed AD chip, NX9031 Full-Domain 900v architecture, and the SkyRide Chassis System. ET9 defines the technology standard for the next generation of premium smart EVs, with delivery starting in Q1 2025. In the meantime, NIO will soon start to deliver its 2024 model with configuration and performance upgrades, including the brand new center computing platform, Adam, which brings the computing power to a new level. Enabled by the industry's high computing power, NIO’s software release has become faster, making our products more competitive. This means that NIO Assisted and Intelligent Driving, or NAD, has seen a significant increase with the total validated open mileage increasing to over 1 million kilometers in five months, including 650,000 kilometers of complicated urban driving scenarios in 606 cities. In Q2, the NOP+ for urban roads is expected to be released to all NT2 users, making this OTA update the largest public release of its kind in China. In addition, NIO's mass market brand will make its debut in Q2, with the first product launched in Q3 and mass delivery starting in Q4. As for our service network, NIO has 148 new houses and 352 new spaces, as well as 314 service centers and 62 delivery centers. About the charging and swapping network to date, NIO has 2,419 Power Swap stations worldwide, providing over 39.5 million swaps cumulatively. It has also installed over 10,000 power chargers and 11,600 destination chargers. During the Chinese New Year, on the billings day, NIO completed 19,199 swaps; one power station on the highway provided 195 swaps, demonstrating that battery swap has become the most reliable solution for NIO users. Following the battery swap cooperation with Changan and Geely, two further digital cooperation agreements were signed with JAC and Chery in January. NIO will roll out comprehensive and in-depth cooperation on battery swap with these partners. Moreover, NIO has partnered with multiple energy companies to jointly build swap stations. The value of battery swap has been appreciated by more users, making a holistic, chargeable, swappable, and upgradable solution a well-recognized core advantage of NIO. In 2024, NIO plans to build 1,000 new battery swap stations and 20,000 chargers, bringing the total to over 33,310 swap stations and 41,000 chargers by the end of 2024. Regarding the capital market, in December, NIO received a $2.2 billion strategic investment from Abu Dhabi investor CYVN Holdings. This investment further strengthened NIO’s balance sheet, laying a solid foundation for NIO’s investment into the next generation of core technologies and products, and supporting global sustainable development. NIO always stays true to its foundational mission of being a Blue Sky Company. In general, NIO was selected by Corporate Knights into the 2024 Global 100 most sustainable companies, marking the second time in a row NIO made the list. NIO was positioned safely among more than 6,000 companies worldwide, up 20 months compared to last year. As competition intensified in 2024, we see both challenges and opportunities, with faster deployment of charging and swapping facilities and changes in consumer behavior. The premium BEV segment to which NIO belongs will soon arrive at an inflection point of growth. In the second half, a new brand for the mass market will also become a growth driver. In 2024, we will continue to focus on corporate top priorities, leveling up system capabilities, managing costs, and bringing our A-game to the next phase of competition. As always, thank you for your support. With that, I will now turn the call over to Steven to provide financial details.

Steven Feng, CFO

Thank you, William. I'll now go over our key financial results for the fourth quarter of 2023. As we are mindful of the length of this call, I will refer to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Let me start with revenue; for the fourth quarter of 2023, total revenues reached RMB17.1 billion, up 6.5% year-over-year and 10.3% quarter-over-quarter. 90% of revenue came from vehicle sales in Q4, which was RMB15.4 billion, representing an increase of 4.6% year-over-year and a decrease of 11.3% quarter-over-quarter. The improvement year-over-year was driven by growing delivery volume despite the impact of lower average selling price resulting from product mix changes. The decrease quarter-over-quarter was mainly attributed to a decrease of 9.3% in delivery volume. Moving to other sales, other sales reached RMB1.7 billion, growing 27.6% year-over-year and 0.4% quarter-over-quarter; the year-over-year increase was mainly due to increased sales in accessories and the provision of power solutions, which both grew with our user base. Now, let's have a look at the gross margin. Overall gross margin was 7.5% compared with 3.9% in the same period of last year and 8.0% in the last quarter. The increase year-over-year was mainly due to the increased vehicle margin. The slight decrease quarter-over-quarter was due to the decrease in margin from the provision of power solutions as a result of expanded power network, even though vehicle margin was growing. The vehicle margin was up to 11.9% in this quarter, compared with 6.8% in Q4 2022 and 11.0% in Q3 2023. The year-over-year increase was mainly due to the decrease in material costs per unit in Q4 2023 and lower base in Q4 2022, which resulted from inventory provisions, accelerated depreciation on production facilities, and losses on purchase commitments for the previous generation of ES8, ES6, and EC6 recorded. Let me move on to the operating expenses. R&D expenses were RMB4.0 billion, remaining stable year-over-year and increased 30.7% quarter-over-quarter. The increase was mainly driven by incremental design and development costs for new products and technologies, and higher personnel costs in R&D functions. SG&A expenses were RMB4.0 billion, increased 12.6% year-over-year and 10.1% quarter-over-quarter, which was mainly related to higher personnel costs in sales functions and increased sales and marketing activities. Moving to the bottom line, the loss from operations was RMB6.6 billion, representing a decrease of 1.6% year-over-year and an increase of 36.8% quarter-over-quarter. Interest and investment income was RMB1.4 billion, increased 288.7% year-over-year and 375% quarter-over-quarter. The increase was primarily attributed to the recycling of unrealized gain from other comprehensive income to investment income of RMB977.3 million related to available-for-sale debt from upstream industry investment. Net loss was RMB5.4 billion, representing a decrease of 7.2% year-over-year and an increase of 17.8% quarter-over-quarter. Last but not least, our balance sheet has strengthened with RMB57.3 billion in cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits as of December 31, 2023. For more detailed information on our unaudited 2023 full-year financial results, please refer to our earnings press release. This concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

Operator, Operator

Your first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao, Analyst

Hi, management team. Thanks for taking my questions. I have two questions. The first one is about our upcoming investment. Is NIO still planning to launch and deliver the first model in the upstream late in the quarter? And secondly, you've mentioned just two quarters away; could you share more information about the channel strategy, target numbers of stores, store types, and the scale of the charging network? Any additional information would be greatly appreciated. So that's my first question.

William Li, CEO

Thank you for the question. As I've mentioned in the prepared remarks, in the second quarter of this year, we are going to unveil our second brand for the mass market. In the third quarter, we will launch the very first product of this new brand, with mass release and delivery starting from the fourth quarter of this year. The verification builds of this car already rolled off the line in Q4 last year, and we are pretty satisfied with the condition of that build. In terms of the sales and service network for this new brand, it will have its separate and independent sales network. However, we can leverage the existing service resources of the new brand for after-sales services and touchpoints. In terms of the power swap network, we've previously mentioned that we have a private network and a public network similar to cloud infrastructure and services. For the private network, it's the power swap stations and facilities that are designated and exclusive to the new brand. In addition to that, we have a public network sharing resources with not only our second brand but also other car companies, as we have signed agreements with several car companies and more will join the public service facility as well. Our fourth generation power substation will be compatible with both new products as well as existing products, and we will start to build the fourth generation swap stations from April this year. Previously, we mentioned that in 2024 we are going to install another 1,000 swap stations, and most of the stations will be fourth generation stations for the public network.

Tim Hsiao, Analyst

Thank you for sharing all the details. My second question is now on the margin target. If you recall, that would be difficult to reach out. I think the management team mentioned that the gross profit margin for 2024 this year would be around 15% to 18%. And there could be an additional 0.5% margin uptick contributed by in-house production. Based on the current market environment and compare plans gap, do you still maintain the same target this year? Or look for any potential changes to the margin target? That's my second question. Thank you.

Steven Feng, CFO

Hi, Tim. Regarding the margin, yes, for the whole year, we will keep this 15% to 18% target, but quarter-by-quarter there might be some changes. As you may know, we will upgrade our NT2 product to the 2024 version in March. During the transition from old to new products, more promotions will be offered for the older models, leading to a decrease in gross profit margin in Q1. However, starting from Q2, along with the volume ramp-up of our 2024 version, and also the further cost optimization activities we previously mentioned, we believe our vehicle margin can trend upwards. So starting from Q2, we are confident that the gross margin of 15% to 18% can be achieved for NIO brands. In the long run, our target for the NIO brand margin will also be over 20%. Thank you, Tim.

Operator, Operator

Thank you. Your next question comes from Ben Wang from Deutsche Bank. Please go ahead.

Ben Wang, Analyst

Thank you. My first question is about the 2024 volume target. In your report, you target 200,000 units for full year '24, which means 25% growth. Can you confirm what your target is? That's my first question. Number two is about the second product from the NIO brand, mass market brand. In a recent interview, you mentioned there may be a full-size SUV bigger than the first one following an MTV. Can I confirm if you're planning for the new plan in the next second and third products? Thank you.

William Li, CEO

Thank you for that question. For this year, the competition is going to continue to be intense. However, as we've mentioned, we will have our products for the 2024 models with enhanced performance, especially much better computing power, which will help us strengthen the overall competitiveness of our existing products. This year, we will focus on accelerating the service, allowing us to release more new features on the chips and computing power. Additionally, in the second quarter, we're going to release our NOP+ for urban roads to all NT2 users. By doing this public release, we can also enhance the competitiveness of the products. So far, we have around 500 new houses and spaces, and we will continue to enlarge our network. From last year, we've also improved our sales force, and we see this sales force starting to reflect positively in our delivery results for February. In terms of our sales volume, we aim for around 20,000 units per month. For your second question about our mass market brand, some media have reported on our publicly tested vehicles on the roads and visibly teased our very first product. The first product of this mass market brand will directly compete with Tesla's Model Y but will support battery swap, making it highly competitive.

Ben Wang, Analyst

Thank you very much.

Operator, Operator

Thank you. Your next question comes from Yuqian Ding from HSBC. Please go ahead.

Yuqian Ding, Analyst

Thanks team. I have two questions. The first is we want to understand what's management's priority or strategy between pricing and volume. We noticed that the company acted quite refrained in pricing compared to universal price actions from peers. Has that been seen to stabilize ticket prices? So does that indicate more profitability as a priority over volume for this year? Or is this a tactic before our new mass market brand coming to the market? That's the first one.

William Li, CEO

Thank you for the question. Starting the second half of this year, NIO Group will sell two brands simultaneously. Strategy wise, we have also differentiated the two brands. For the NIO brand, we will not sell any products that are cheaper than the existing ET5. Even for products in our pipeline, we will target the premium segment, focusing more on gross margin rather than volume. We will not cut prices or pursue higher volume at the cost of our gross profit margin. For the second brand, aimed at the mass market and family-oriented users, we will focus on volume as a priority. This combined brand portfolio will help us achieve healthier long-term sustainable development.

Yuqian Ding, Analyst

Got it. My second question pertains to the recent discussions about supporting the EV industry more aggressively without constraints on profitability. It seems that there is increasing pressure, making industry consolidation harder. Thanks for the strong insights on the new mass market brand and value proposition. Are we aggressive enough on pricing? You mentioned a volume priority, but if industry pressure lingers, are we ready to be aggressive on pricing for the long term?

William Li, CEO

It's true that in this business climate, we face intense competition from all types of car companies. However, our confidence in our capabilities will allow us to withstand competition. We also see opportunities for cooperation amid competition; for example, we've announced power swap cooperation with various car companies, including partnerships with energy companies for constructing power swap stations. In summary, while competition is inevitable, we are focused on navigating through it responsibly and efficiently.

Operator, Operator

Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee, Analyst

Hi, thank you, William and team. I have two questions. First, regarding the overseas market, do you expect NIO to enter new countries this year? Will you cooperate with local distributors in foreign markets, or will you maintain a direct sales business model? Do you have any overseas sales target for this year? Thank you. That's my first question.

William Li, CEO

Thank you for the question. Currently, we are primarily focused on the Chinese market as it is the largest and most competitive in the automotive industry. However, we will not stop our exploration into the international markets. So far, we have already entered five European countries and will keep refining operations in those areas. This year, we are also preparing to enter new markets, such as the UAE, where we've received strategic investments. For other countries, we are monitoring conditions and remain flexible in our strategies. We may consider cooperating with local partners for market entry, but in general, we will maintain a direct sales model in China and our current European markets.

Ming-Hsun Lee, Analyst

Thank you, William. My second question is regarding battery technology. Recently, many auto brands have launched a 100-volt charging battery system. When do we expect NIO and your second brand to start providing this spec? After introducing the fast-charging battery, will you shift more focus onto building charging stations instead of battery swap stations in 2025? Thank you.

William Li, CEO

Thank you for the question. NIO has a long-standing strategy focused on ultra-fast charging and quick battery swaps. We are already the most proactive in deploying public chargers in China. Our power charging business is already breaking even, and we will continue to deploy more chargers. Very soon, we are going to install and launch our 640 kilowatt power chargers. We will follow the latest technologies in the charging industry. However, we also emphasize that power swap is unmatched in speed; it can never be outdone by charging. Additionally, we are focusing on long-life batteries as well. In summary, both battery swapping and charging are essential parts of our strategy, and we will continue to innovate in both areas.

Operator, Operator

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Paul Gong, Analyst

Hi, thanks for taking my question. My first question is regarding your R&D budget for 2024. How much do you plan to spend on R&D this year? If possible, could you provide a rough breakdown of how much will go to NIO models versus the mass market brand and autonomous driving software?

Stanley Qu, Senior VP of Finance

Hi, Paul, this is Stanley. Regarding your question about the R&D expense expectation for 2024, generally, the scale of R&D expense will be consistent with 2023. The average quarterly spending for R&D will also be around RMB3 billion. That's the overall guidance for R&D.

William Li, CEO

In terms of how we will allocate the R&D expenses this year, we will focus on fundamental technologies that can be shared across all three brands. Our R&D investments will be mainly directed toward smart and electric technologies. Approximately 70% of our R&D personnel will focus on smart technologies.

Paul Gong, Analyst

My second question is regarding the costs of Alps. You mentioned the cost is going to be about 10% lower than Tesla. Could you provide more details on the volume scale that you're assuming for these costs and what key advantages have you adopted to achieve this cost advantage over Tesla?

William Li, CEO

Thank you for the question. For Tesla, as they publicly disclose their gross margin details, it’s easy for us to make comparisons. In terms of the advantages for Alps and its cost structure, China being the largest automotive market offers well-established supply chains. We can benefit from domestic supply chains and our successful R&D activities contribute to improving cost structures. This foundation allows us to achieve a lower cost structure without massive volume. Reasonable volume in China for our manufacturing would be around 10,000 units per month, and we don't require levels as high as 1 million units.

Rui Chen, Head of Investor Relations

Yes, to translate that, we didn't specifically look at Tesla China but are comparing with Tesla globally.

Operator, Operator

Thank you. Your next question comes from Cheng Jing from CICC. Please go ahead.

Cheng Jing, Analyst

Thank you for taking my questions. I have two quick questions. The first is regarding the charging and battery swap network. Our construction progress in the charging network is still quite fast in China. However, many other companies are also accelerating their fast charging network construction. How do you envision maintaining our first-mover advantage, and how do you view the relationship between fast charging and battery swapping?

William Li, CEO

Thank you for the questions. It's encouraging to see many companies, including peers, focusing on installing chargers in China. More public chargers enhance the charging experience and efficiency overall. We are dedicated to installing more chargers, but we also provide battery swapping facilities. We currently have the most power swap stations, and we have established a significant network effect that we can leverage. Charging and swapping are complementary rather than conflicting; users benefit from both methods based on their needs. Battery swapping, which is a fully automated process, provides the best experience for users.

Cheng Jing, Analyst

Thank you. My second question pertains to the lower-tier city market. In 2023, our sales proportion in tier 3 cities increased a bit, but our sales in tiers 3 and below remain less than 20% compared to BMW's over 40%. What steps do we take to further penetrate lower-tier cities?

William Li, CEO

Thank you for the question. In 2024, we need to focus on expanding our reach in lower-tier cities to boost sales in these areas. We recognize the importance of this and began actions in the latter half of 2023 to enhance our presence in these cities. Currently, a significant portion of our sales volume is generated in tier one cities. We need to find efficient approaches to penetrate lower-tier markets and install more charging and swapping facilities there, enhancing overall user experiences. This challenge presents both opportunities and challenges for us in 2024.

Operator, Operator

Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou, Analyst

Thanks for taking my questions. The first question is regarding your sales network and sales team expansion plan this year. For both the NIO brand and for Alps brand, how many new stores do you expect to open this year, and how many new salespeople do you expect to hire for each of these brands?

Stanley Qu, Senior VP of Finance

Tina, can you repeat your question, please?

Tina Hou, Analyst

Sorry, my first question was regarding your sales network and sales team expansion. Could you share for 2024 how many stores you plan to open for both NIO and Alps brand? How many salespeople do you expect to hire for these brands?

William Li, CEO

Thank you for your questions. For NIO, we have already opened 500 new houses and spaces in China. For this year, our priority is not to open more stores for the NIO brand. Instead, we will concentrate on improving the efficiency of each point of sale, replacing low-efficiency locations with those of higher efficiency. For our sales force for NIO, we already have more than 5,000 people, and enlarging the team is not a focus at this time. However, for the second brand, we have secured locations and resources with minimal lead time for store openings, aiming for no less than 200 points of sales. We will also leverage our training system of NIO to prepare the sales team for the launch of the new model.

Tina Hou, Analyst

Thank you very much. Can I just have a follow-up? Will the Alps store locations resemble those of the NIO locations?

William Li, CEO

The Alps brand is targeting different user groups with distinct needs and price segments. Thus, while it will have its principles and logic for store locations, it will focus on being more efficiency-oriented, resembling Tesla's sales stores rather than needing the full-fledged self-store model like NIO.

Tina Hou, Analyst

Thank you. My second question is, could you provide some CapEx guidance for 2024? What will be the breakdown between vehicle CapEx and the charging/swapping infrastructure CapEx?

Steven Feng, CFO

Yes, sure, we will control our CapEx investment in 2024. We have already canceled or delayed projects with a payback period longer than two to three years. In general, the CapEx this year will be significantly lower than that in 2023. Regarding the deployment of our power swap station network, we will leverage resources from our business partners for further expansion.

Rui Chen, Head of Investor Relations

Thank you again for joining us today. If you have further questions, please feel free to contact NIO's investor relations team through the contact information on our website. This concludes the conference call. You may now disconnect lines. Thank you.