Xpeng Inc. Q1 FY2021 Earnings Call

Hello ladies and gentlemen. Thank you for standing by for the First Quarter 2021 Earnings Conference call for XPeng Incorporated. At this time, all participants are in listen-only mode. After the management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Zilin Ma, Director of Investor Relations of the company. Please go ahead, Mr. Ma.

Thank you. Hello everyone and welcome to XPeng's first quarter 2021 earnings conference call. Our financial and operating results were issued by newswire services earlier today and are available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today's call will include our Co-Founder, Chairman, and CEO, Mr. Xiaopeng He; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu; and Managing Director of Strategy, Mr. Charles Zhang, and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the US Securities and Exchange Commission. The company does not assume any obligations to update any forward-looking statements except as required under the applicable law. Please also note that XPeng's earnings press release and this conference call include the disclosure of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. XPeng's earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman, and CEO, Mr. Xiaopeng He. Please go ahead.

Hello, everyone. Thank you for joining XPeng's first quarter 2021 earnings conference call today. Heading into 2021, the electrification and modification are accelerating the disruption of internal combustion vehicles. Notably, the penetration rate of high-energy passenger vehicles in China surpassed the 10% threshold for the first time. The EV adoption in top-tier cities experienced record-high growth with the penetration rate reaching around 20%. Being part of this unprecedented disruption opportunity, I strongly believe that XPeng is well poised to lead the development and transformation of the industry. My belief is firmly underpinned by our long-term strategic investments and leadership in smart EV technology that we have been building out over the past years. Our strong momentum continued in the first quarter of 2021 with another quarter of record vehicle deliveries, despite traditionally slower season demand and challenges from industry-wide chip shortages. Our total vehicle delivery number in the first quarter reached 13,340, representing a 487.4% year-over-year increase, consisting of 5,366 G3s and 7,974 P7s. According to the new car insurance registration data reported by the China Automotive Technology and Research Center, in terms of volumes, the G3 ranks number one among Class BEV SUVs, and the P7 ranked number three among Class B BEV sedans in Q1. We attribute this outstanding performance to our industry-leading full-stack, in-house developed software technology and our solid differentiated product strategy. Fueled by strong delivery growth, our revenue reached RMB2.95 billion in Q1, representing year-over-year and quarter-over-quarter growth of 616.1% and 3.5%, respectively. Meanwhile, our profitability continues to improve, highlighted by a gross margin of 11.2%, an increase of 3.8% from the prior quarter. On January 26, we began to push OTA updates for XPILOT 3.0 to our customers and started to recognize revenues from XPILOT software. As such, our vehicle revenues in the first quarter now include software revenues for the first time in our history. I believe that XPeng is the only Chinese automaker that has been able to charge for full-stack, self-operated autonomous driving software separately. Since mass deliveries of the P7 began in June 2020, we have delivered over 23,000 P7s as of March 31, and on a cumulative basis, the attach rate of XPILOT 3.0 has exceeded 20% as of March 31. Such attach rate increased to approximately 25% in March 2021. I believe that XPILOT software monetization will become a recurring revenue model and generate profits in addition to our sold vehicles. Going forward, building on our rapid technology innovations powered by our full-stack in-house R&D capabilities, and hardware-software integration solutions, we will rollout XPILOT 3.5 and XPILOT 4.0, our next generation of autonomous driving technologies in the next few years. Our XPILOT will make the advanced autonomous driving experience accessible across a wider range of scenarios and ultimately bring about end-to-end highly automated driving. They will also help to further distinguish our brand leadership in the smart EV market. Next, I'd like to share our latest achievements in technology advancements for smart EVs. Since launching our navigation-guided pilots for the highway or NGP in late January this year, NGP has assisted our customers in driving 2.3 million kilometers, which is approximately 1 million kilometers a month, with the NGP-assisted mileage penetration rate exceeding 50% among those P7s that activated as of March 31, 2021. This strong usage frequency not only reflects the broad applications of NGP but also testifies to the satisfaction and trust customers have in using it. In March, we successfully accomplished our NGP-guided expedition across highways from Guangzhou to Beijing. This expedition of over 3,000 kilometers marks the nation's longest of its kind. During the entire expedition, the NGP human intervention was only 0.7 times per 100 kilometers on average. Notably, more than 90% of autonomous lane changes, overtaking other vehicles, switching ramps, and going through tunnels were executed successfully, which I believe outperformed all other mass-produced autonomous driving systems in the market. Here I would like to highlight the strategic importance of our capability to deploy our autonomous driving technologies on mass-produced vehicles. Through those vehicles equipped with NGP capabilities, we're able to collect highly valuable cases when our customers use NGP. We're now able to achieve fast iterations of our algorithm on a weekly basis based on our advanced closed-loop data capabilities. With a growing number of P7s on the road, I believe XPeng will have the largest and fastest growing Smart EV fleet with closed-loop data capabilities on China's road networks. Recruiting and retaining excellent technical talent is the foundation of our ability to lead innovations in technology and development in the smart EV industry. As of March 31, 2021, our R&D team represents approximately 40% of our total headcount. With our firm commitments to build a strong R&D team, we aim to strengthen our leadership and cutting-edge innovations, including electrification and modification for Smart EVs and further technological leadership in the industry. We'll be able to continuously introduce new vehicle models featuring more powerful hardware to support our fast iteration of software. At the Shanghai Auto Show on April 19, we unveiled the P5, the world's first mass-produced body equipped with LiDAR. The market warmly welcomed the P5 with enthusiasm, supporting pre-order reservations that exceeded our expectations and surpassed 10,000 in just 53 hours following its debut. The P5 is designed as a Class A sedan with a roomier inner space than most of the B Class sedans in the market. For more advanced autonomous driving systems and smart cockpit technology and roomy space, we have created for our customers a completely new experience of a smart safe space beyond their homes and workplaces. Our customers can now use this great space to take a nap, watch films like in a private cinema, and enjoy outdoor camping and more. We plan to start deliveries of the P5s in the fourth quarter of this year. Additionally, we plan to start internal user testing of XPILOT 3.5 with NGP autonomous driving capabilities on major urban roads at the end of this year and release the OTA updates at the end of next year. In our continuing efforts to improve software and engineering performance, we provide customers with the most powerful mass-produced autonomous driving system available with China's road system at an attractive price point. Such an approach significantly differentiates us from many of our peers. In addition, we're making solid progress in the research and development of our next-generation autonomous driving hardware platform and next-generation powertrain system, including high voltage and supercharging systems. We look forward to updating you on these developments in due course. As the smart EV market continues to grow fast, we are accelerating the build-out of our infrastructure facilities as part of a long-term strategic roadmap and investment. As of March 31, XPeng's physical sales and service network consists of 178 sales stores and 61 service centers across 70 cities in China. Of the 178 stores, 88 were directly operated by us. In April, we entered into a long-term strategic partnership with China's biggest auto dealership company, the Zhongsheng Group. This partnership will provide both XPeng's industry-leading smart EV products and Zhongsheng's high-quality services to consumers across China and further accelerate smart EV adoption. We remain committed to expanding our nationwide sales network to approximately 300 stores, covering 110 cities by the end of the year. We also continue to expand our supercharging network. As of March 31, the number of XPeng-branded supercharging stations expanded to 172, covering 60 cities. Additionally, our free charging program has been available on more than 1,000 supercharging stations as of April 30 this year, covering over 160 cities. We expect that there will be more than 500 XPeng-branded supercharging stations by the end of this year. In terms of production, at our Zhaoqing factory, we have completed upgrading the production lines so that they can produce both the P7 and the aforementioned P5 concurrently. We are now conducting trial production runs of the P5 model. We believe our manufacturing costs will meaningfully decline when we're able to produce the P7, P5, and the new G3 at the same production plants. Additionally, with financial support from the Wuhan government, in April, we entered into a cooperation agreement with the City of Wuhan to build our third factory there. The new manufacturing base will contain both manufacturing and powertrain plants and have an annual capacity of 100,000 units. With funding support from local governments in Wuhan and Guangzhou, we will expedite investment and construction on our plans in these two cities. When fully completed, XPeng's three factories located in Zhaoqing, Guangzhou, and Wuhan will have a total annual design capacity of 300,000 units. Moreover, with minimal factory revamps and increased work shifts, the potential peak output can come close to 500,000 units in total. This provides us an excellent foundation to capture widespread demand in the transformation towards smart EVs. Turning to our overseas development. In the third quarter, we exported more than 300 G3s to Norway. We plan to start deliveries of the P7 to Norway in the second half of the year. Moving forward, we will actively boost our efforts in Norway and other European markets to expand our local sales, delivery, and service mechanisms. As a smart EV designer and manufacturer that knows China better than any other peer, XPeng will remain focused on delivering differentiated and smart products built upon our industry-leading autonomous driving technologies that meet vast market demands. This relentless effort will further our mission to shape the mobility experience of the future. Now moving on to our guidance. Excluding pre-order reservations of the P5s, we are already seeing a historical high of our order backlog. We will strive to ramp up production and minimize the impact from the industry-wide shortage. In the second quarter of 2021, we expect our smart EV deliveries to be approximately 15,500 to 16,000 units, and our total revenue to be approximately RMB3.4 billion to RMB3.5 billion.

Thank you, Xiaopeng He. Hello, everyone. XPeng's robust performance in the first quarter of 2021 demonstrates our strong capability to make differentiated Smart EVs that appeal to various needs of the large and growing customer base. Thanks to our record-breaking deliveries in the traditionally weak season. In Q1, we witnessed the quarter-over-quarter increase in our top line and further improvement in our profitability. In particular, our gross margin continued an upward trend sequentially, hitting double-digits in the quarter. Additionally, for the first time, revenue from our XPILOT software was recognized in the top line and reflected in gross margin, marking a significant milestone in the Chinese EV industry. Moreover, our sound financial condition and strong cash position enable us to better execute our growth strategies, cement competitive advantages, and seize tremendous growth opportunities in the Smart EV sector. Now I would like to walk you through our detailed financials for the first quarter of 2021. Total revenues were RMB2.95 billion for the first quarter of 2021, representing an increase of 616% from RMB412 million for the same period a year ago, and an increase of 3.5% from RMB2.85 billion for the fourth quarter of 2020. Revenues from vehicle sales were RMB2.81 billion for the first quarter of 2021, representing an increase of 655% from RMB372 million for the same period of 2020, and an increase of 2.7% from RMB2.74 billion for the first quarter of 2020. The year-over-year increase was primarily due to the delivery of the P7, which started at the end of June last year. The quarter-over-quarter increase was primarily attributable to the revenue recognition of XPILOT 3.0 software in the first quarter of 2021 since the functionality was fully delivered to the accumulated group of software purchasers, partially offset by the lower government subsidy for new energy vehicles starting from January this year. Gross margin was 11.2% for the first quarter of 2021, compared with negative 4.8% for the same period of 2020, and 7.4% for the first quarter of last year. Vehicle margin was 10.1% for the first quarter of 2021, compared to negative 5.3% for the same period of 2020, and 6.8% for the fourth quarter of 2020. The improvement was primarily attributable to the material cost reduction and revenue recognition of the XPILOT software sales. Research and development expenses were RMB535 million for the first quarter of 2021, representing an increase of 72% from RMB311 million for the same period of 2020, and an increase of 16% from RMB460 million for the first quarter of 2020. The year-over-year increase was mainly due to: 1) the increase in employee compensation as a result of expanded research and development staff, 2) higher expenses relating to the P5 development, and 3) share-based compensation expense recognized in the first quarter of 2021. The quarter-over-quarter increase was mainly due to 1) an increase in employee compensation in line with increasing engineering staff, and 2) high expenses relating to the development of the P5. Selling, general and administrative expenses were RMB721 million for the first quarter of 2021, representing an increase of 124% from RMB322 million for the same period 2020, and a decrease of 22% from RMB918 million for the first quarter of 2020. The year-over-year increase was mainly due to 1) higher marketing, promotional and advertising expenses to support vehicle sales, 2) the expansion of our sales network and associated personnel cost, lease expenses for sales and service stores, and commission for the franchised stores, and 3) share-based compensation expenses recognized in the first quarter of 2021. The quarter-over-quarter decrease was mainly due to lower marketing, promotional and advertising expenses compared with the peak sales season in the first quarter last year. Loss from operations was RMB904 million for the first quarter of 2021, compared with RMB649 million for the same period of 2020 and RMB1.1 billion for the first quarter of 2020. Excluding share-based compensation expenses, the non-GAAP loss from operations was RMB814 million for the first quarter compared with RMB649 million for the same period of 2020 and RMB1.1 billion for the fourth quarter of 2020. Net loss was RMB787 million for the first quarter, compared with RMB650 million for the same period a year ago and RMB787 million for the first quarter of 2020. Excluding share-based compensation expense, the fair value change on derivative liabilities related to the redemption right of preferred shares, the non-GAAP adjusted net loss was RMB696 million for the first quarter of 2021, compared with RMB645 million for the same period a year ago and RMB713 million for the fourth quarter of 2020. Net loss attributable to the ordinary shareholders of XPeng Incorporation was RMB787 million for the first quarter, compared with RMB935 million for the same period of 2020 and RMB787 million for the fourth quarter of 2020. Excluding share-based compensation expenses, fair value change on derivative liabilities related to the redemption right of preferred shares, and accretion of the preferred shares to redemption value, the non-GAAP net loss attributable to the ordinary shareholders of XPeng Incorporation was RMB696 million for the first quarter of 2021, compared with RMB645 million for the same period of 2020 and RMB713 million for the fourth quarter of 2020. Basic and diluted net loss per American depository share were both RMB0.99 for the first quarter of 2021. The non-GAAP basic and diluted net loss per ADS were both RMB0.88 for the first quarter of 2021. Each ADS represents two Class A ordinary shares. Now, turning back to the balance sheet. As of March 31, 2021, our company had cash and cash equivalents, restricted cash, short-term deposits, short-term investments and long-term deposits totaling RMB36.2 billion compared with RMB35.3 billion as of December 31 last year. To be mindful of the events surrounding our earnings call for our first quarter financial results, I encourage listeners to refer to our earnings press release for further details. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

The first question comes from Jeff Chung with Citi.

Hi, excellent results. This is Jeff from Citi. So I have two questions. The first question is about the software. Can you break down software revenue and gross profit in the first quarter this year? More specifically, how much software revenue was derived from the first quarter this year and how much from the rest of 2020 ended GP margin? How should we see this software income and profitability in the second quarter and the second half? This is my first question. Second question is about the vehicle GP margin. It seems that the G3 equipped with the LFP battery is accretive to the GP margin. So how much faster compared with the LCM battery? Secondly, in the first quarter announcement, you mentioned that the first quarter cost of goods sold came down quarter-over-quarter due to lower material costs. Could you quantify a bit in terms of what kind of materials led to lower cost and how would you see the cost trend into the second quarter?

Okay. Thank you, Jeff. Very good questions. I will try to handle the questions and then Brian, Charles, or Xiaopeng He can supplement later. Number one is the software. In Q1, our total revenue from the XPILOT 3.0 software was about RMB80 million. Among that, around RMB50 million was from those contracts purchased by customers last year, and the other approximately RMB30 million is from those software sold this year. So, in general, the software accounts for about 2.5 percentage points of the margin. Among the 2.5 points, 1.5 will be contributed from those contracts sold last year. The other 1 percentage point is from those contracts sold in the first quarter because we had a very good NGP skin from Guangzhou to Beijing. We are seeing that software and also the hardware for XPILOT is increasing in March and also in April. So we foresee that software penetration will be even higher in the second quarter. But again, in the first quarter, the total revenue or the total margin includes around 3,000 units of software that the customer purchased last year. For the second quarter, we're not as high as 2.5%, but definitely will be higher than 1 percentage point from the first quarter. That's number one. The second question is for the G3. Yes, actually, we have a material advantage compared with the LFP battery versus the LCM battery. But I cannot tell you the exact number. We have seen, for example, we maintain the same MSRP, same available marketing; however, we have the better material cost. So that would improve our G3 margin as well. We started the delivery of the LFP G3 in April, so we will foresee margin improvement for G3 in the second quarter. And number three is for the material cost reduction. Yes, we have the material good news compared with Q4. The good news is primarily from the battery cost reduction. We actually negotiated with our battery supplier to get the battery cost reduction, and that negotiation was completed earlier this year. So we have some material cost reductions. The percentage will be from 5% to 10% in terms of the cost reduction versus the level at the end of last year. I hope I answered your questions.

Thank you. No more questions. Thank you.

The next question comes from the line of Edison Yu with Deutsche Bank.

Thank you and congrats on the quarter. First question is, could you give us an update on the LiDAR testing and validation with Livox? Is it meeting your performance requirements? And are you confident that the P5 with a LiDAR will be hitting the streets in the fourth quarter? And then a second question is on the reservation number. I know you disclosed it shortly after the release. Could you maybe provide us with an update? And if it's not the exact number, I know you don't give that, but some sense of relative to your expectations. How much higher is this number tracking? I will translate.

So we’ve tested multiple LiDARs of different brands and we compare them by different parameters in terms of their human craftsmanship, their costs, and also their capability of being mass-produced. The LIDAR we use on P5 is actually from DJI, Da-Jiang, and we are very open to other options. By 2022 to 2023, the new models that we are launching may adopt different brands that produce LiDARs. Essentially, we're very confident that right now, with our complete full spec sensing performance on our vehicles and our production capabilities, we can actually complement some of the LiDAR technology shortages out there. However, in the long run, we hope to achieve a good balance between the cost of the technology and the capability of mass production, while balancing the performance across different parameters. So we are very confident that by Q4 this year, we can launch the P5 equipped with LiDAR. Regarding your second question about the reservation number, obviously we can't disclose the exact number, but compared to the P7 launch at the Shanghai Auto show last year during the same period, the P5 reservation number is a few times more than that of the P7. Also getting feedback from our frontline sales force, the same period last year when we first launched the P7, they felt some pressure from the market regarding the price of the P7. However, this year with the launch of the P5, every single feedback has been very positive regarding the launch of the P5. So we're really confident that the actual performance in terms of orders and deliveries of the P5 will be very encouraging.

The next question comes from the line of Tim Hsiao with Morgan Stanley.

Hi management team. Congratulations on solid results and thanks for taking my questions. So my first question is about the components. Compared to other EV startup peers, XPeng this year apparently has many more new models, especially in the second half. While we expect the chip shortage to ease in the second half, what else has XPeng done to ensure that there will be sufficient components supply for either facelifts or new launches later this year, especially since a lot of new models will also be coming to the market in the second half? My second question is just a quick follow-up on the guidance. What kind of visibility do we have so far on chip supply? How much inventory do we have at the moment to support the production plan throughout the whole second quarter and meet guidance for sequential volume growth into the sequential volume growth?

Thank you for your questions. Regarding the shortage in chipsets, it is currently a big challenge for all automakers, and nobody can really promise that they can solve the problem in a short time. For smart EV manufacturers, Q2 will be the most challenging timeframe. We hope that by Q3 this year, things will get better. However, if not, then Q1 next year may see the tension become more released. To prevent ourselves from getting into a difficult situation, we have taken several measures. For example, we have made many pre-orders with our existing suppliers. We communicate directly with the heads of different suppliers of chipsets to ensure we have enough inventory and orders in place to support our future development and production. Because we have a lot of closed-loop automated R&D technology, we are flexible in adapting to different chipsets in manufacturing our vehicles, allowing us to look for new partners and manufacturers of chipsets to become more adaptive to market changes.

Hey, Tim, this is Brian. I just want to add that in terms of the guidance we gave for this quarter, we have considered the constraints of the chip shortage situation that Xiaopeng described. This reflects constrained numbers. Without constraints, obviously, the delivery number would be higher than what we have projected. However, the visibility on the chip shortage is not very clear. So it will be subject to changes, and we keep a very close eye on the situation.

Now in terms of other components, as we deliver more new models in Q3 or Q4 this year, we will face some constraints in terms of other components aside from the chip shortage. For example, one important thing is the battery supply. Right now we are using LFP for some of our vehicle models, and the ramp-up of the adoption of LFP will take about one quarter. By Q3 this year, we estimate that we will reach a comfortable level of adopting LFP batteries. The market demand for LFP batteries is larger than expected, and that is why in Q3 and Q4 this year, we believe we will be able to reach a more comfortable level of production with this new battery. As Brian mentioned before, our guidance for this year has factored in the calculation of all of those components I just mentioned.

Great. Thank you, Mr. He and Brian.

The next question comes from the line of Nick Lai with JPMorgan.

Yes, it's Nick here. My two simple questions: the first question is the margin impact of the chip shortage and related price hike. I guess the management, Brian and Mr. He, have already answered part of that question regarding chip supply, so maybe just on margin outlook in light of the raw material price; can you give us some indication or guidance on how you mitigate such high material price headwinds? The second question really is regarding the business model, specifically for XPILOT 3.0. At the moment our customers pay roughly around RMB20,000 to get XPILOT 3.0 service. I'm curious, as we launch or roll out XPILOT 3.5 or 4.0 in the future, will customers have the ability to pay for that on demand or will it be more on a subscription model?

Hey, Nick, this is Dennis. Let me handle your first question. In our first quarter, we did not have the material impact on the margin due to the chip or the raw material. So, not in the first quarter. Looking at the second quarter, we do anticipate some impact due to the raw material, for example, from the steel and aluminum. These components may have slight cost impacts on our margin. We are also sourcing some alternative chips and helping our suppliers to procure chips. Therefore, while there are some material cost increases, the total impact from these two components combined will be less than 1 percentage point in terms of margin, and that amount is somewhere around RMB1,000 to RMB1,500, which is less than 1% of the margin impact for the second quarter. For the third quarter, we need to keep a close watch, but the situation probably won't be relieved by then.

For the second part of your question, I believe that a pay-per-use model or a subscription model will actually cost our customers more than paying a one-off fee for that software and service charge. Going forward, we are considering other service charge possibilities and will communicate any updates to the market in a timely manner.

The next question comes from the line of Bin Wang with Crédit Suisse.

My question is about some serving capability after XPILOT, particularly 3.5, what was the comparison between our solution and quality solutions compared to XPILOT 3.5 open NGP. Thank you.

In terms of XPILOT 3.0 and its functionality, we will have an official release when we launch the P5 later this year. However, right now, I can comment on different solutions and the different criteria for evaluating those solutions. Basically, we have to balance several aspects. First, you must look at the combination of functionalities. Second, you have to look at the integration of the hardware and software and the overall cost of using the solution. Third, you must evaluate the usage scenarios of that particular solution. Lastly, you need to consider user feedback, whether they find it a good experience. Currently, you may come across videos that claim to be performing well in certain aspects, but that is only in specific functionalities or at a very high cost. Right now, what XPeng is trying to do is to deliver solutions for autonomous driving that can balance all of these aspects at a reasonable cost so that we can provide the most superior experience in autonomous driving to our customers. We are launching different versions, and we want to achieve a future where we can use our technologies to support not just GP but also all urban roads in China and eventually cover all traffic scenarios.

Thank you.

The next question comes from the line of Ming Lee with Bank of America.

Okay. My question—I have two questions. The first question is regarding the mid-period Q3 upgrade. When will you start to do this? Will you use the contract manufacturing business model, or will you use your own capacity? If you manufacture by yourself, will it be margin neutral or slightly helpful to your margin? The second question is regarding the LFP battery orders. Last time during your earnings call, you mentioned that around 10% of Q3 orders are for LFP battery versions, and 20% of orders for the P7 are for LFP battery versions. After 2 months, do you see any structural changes regarding your order combinations? Thank you.

Regarding the newer version of the G3, we actually wouldn't do any upgrades in terms of its autonomous driving capability because we hope that the next version or the upcoming G3 will support a higher level of autonomous driving. Regarding the second part of your first question, if we were to produce the next version or next model of the G3 in our own facility, definitely the margin will improve. It will also impact the gross margin of other models positively. Regarding the demand for LFP batteries, we have seen more demand for that battery than expected. So for both G3 and P7, those orders for LFP have surpassed what we disclosed in the last conference call. We are in the process of negotiating with many battery suppliers, hoping they can ramp up their capacity to support that order demand for Q3 this year. In the long run, we are confident that the demand for LFP will continue to rise and will help us drive margins overall.

Let me just add regarding the LFP battery front, what we see is that the increased demand is actually additive to our existing demand for NCM battery-powered models. In fact, we have not seen the number of NCM models decline due to the launch of LFP batteries. We believe that LFP batteries actually expand our customer base because of the wider pricing. Given the capacity ramp-up, we think the mix will reach a steady-state percentage by the third quarter, where we believe we will see the most significant contribution on the volume side.

Thank you, Brian.

As there are no further questions, now I would like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact XPeng's Investor Relations through the contact information provided on our website or the TPG Group Investor Relations. Thank you.

This concludes today's conference call. You may now disconnect your line. Thank you.