Xpeng Inc. Q3 FY2022 Earnings Call

Hello, ladies and gentlemen. Thank you for joining us for the Third Quarter 2022 Earnings Conference Call for XPeng, Inc. Today’s conference call is being recorded. I will now hand over the call to your host, Mr. Alex Xie, Head of Investor Relations for the company. Please go ahead, Alex.

Thank you. Hello, everyone and welcome to XPeng’s third quarter 2022 earnings conference call. Our financial and operating results were issued by our 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.xpeng.com. Participants on today’s call from our management will include: Co-Founder, Chairman and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Finance, Mr. Dennis Lu; Vice President of Corporate Finance and Investments, 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 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 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 U.S. Securities and Exchange Commission. The company does not assume any obligation 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 the 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 financial measures to the unaudited GAAP measures. I will now turn the call over to our Co-Founder, Chairman and CEO, Mr. He Xiaopeng. Please go ahead.

Hi, everyone. I am He Xiaopeng. In the third quarter of 2022, XPeng delivered 29,570 electric vehicles, representing a 15% increase compared to the previous year. Cumulative deliveries for the first three quarters of 2022 reached 98,553 electric vehicles, showing a growth of 75% year-over-year. We are currently facing a challenging period in achieving our long-term goals. Therefore, we have recently completed a comprehensive strategic review and made organizational changes. The competition in the smart EV sector is akin to a marathon, and I believe that only those with strong core technologies and solid capabilities who can monetize both hardware and software will prevail in the long term. To improve our product competitiveness and boost sales, we will simplify configurations while enhancing our hardware and software products to better reflect customer preferences. As market competition intensifies, we will refine our marketing strategies to emphasize the exceptional value of our leading smart and electrification technologies and further bolster our brand, sales, and service capabilities. I also want to express my sincere gratitude to our customers and shareholders for their valuable feedback on these improvement areas. Within the new organizational structure, I will concentrate on XPeng's strategy, product planning, and R&D, aiming to drive organizational change to ensure customer value is integrated into our product development process across design, R&D, sales, and service, making our operations more focused and efficient. Following a recent strategic review, I am increasingly convinced that the adoption of smart EVs will accelerate during the second half of 2023. We will continue to invest in the R&D of autonomous driving and smart cockpit technologies, striving to lower costs for our customers while centering our innovations around their needs and preferences to enhance the competitiveness and profitability of our smart products as well as customer satisfaction. Additionally, our platform-based approach for vehicles and powertrains will enhance R&D efficiency and help consistently reduce our research and development expenses and BOM costs through technology innovation. Furthermore, our ecosystem affiliates, XPeng Aero HT and XPeng Robotics, have recently secured funding, enabling them to operate independently. Consequently, I will dedicate less time to overseeing our ecosystem affiliates. Our Co-Founder, Mr. [indiscernible] will step down as an Executive Director of the Board to focus on product development. We are also restructuring our branding and marketing teams to create a more robust team and targeted content, which I believe will effectively address key consumer purchase considerations across a variety of channels and demographics, paving the way for greater brand recognition of XPeng. By leveraging our committed EV platforms with an emphasis on architecture and powertrains, we anticipate increased R&D efficiency, enhanced cost control, and improved supply chain management. In line with our mission, we have invested in three robust EV platforms over the last few years, including our fully established E platform and our upcoming third-generation F and H platforms, both set for mass production next year. Together, these advanced platforms form a strong technological foundation for our product upgrades and iterations. Our core technologies, such as our powertrain system and advanced driver assistance systems, will be shared as widely as possible across our developing vehicles. This approach will shorten the required R&D cycle time and expenditures for new products while also stabilizing software and hardware quality. We have also realigned the organizational structure of our EV product management team. Each EV platform will be overseen by a senior product manager responsible for product development through the entire lifecycle, forming a market-led closed-loop system to enhance the user experience during sales. Mass deliveries of the G9, our flagship SUV equipped with our advanced technologies, began at the end of October. Every G9 model features an 800-volt high-voltage platform, offering excellent driving range and superior charging speed compared to other market EVs. The growing acknowledgment of the G9's remarkable capabilities positions XPeng as a leader not just in smart technology but also in electrification, with this recognition gaining traction both domestically and internationally. Despite challenges related to COVID and production scaling, we are confident that the G9 will soon be among the top three in monthly sales volume within the battery electric SUV segment priced above RMB300,000 and will approach the top position next year as we enhance our brand visibility. We anticipate that the ramp-up in G9 sales will contribute to future sales volumes and help overcome the trial period we experienced in October. Moreover, we plan to launch three new vehicle models starting in the first quarter of next year to further strengthen our competitiveness in the market. We also foresee consistent improvements in our marketing strategies to ensure successful subsequent product launches. As we continue introducing new products and technologies, combined with the technological differentiation of our next-generation full-scenario ADAS products, we are confident in achieving significant increases in sales volume and average selling price, leading to revenue growth in 2023 that surpasses the industry average and expands our market share. Since the third quarter of this year, we have made considerable strides in the mass production of autonomous driving technology. We are focused on building consumer trust and their willingness to purchase our offerings with top-tier ADAS software. On September 17, we launched the City NGP pilot program in Guangzhou. In urban traffic situations, which are far more complex than highway scenarios, XPeng’s P5 has led in providing the best-in-class driver safety and experience at significantly lower hardware costs. We are accelerating the development of our next-generation full-scenario advanced driver assistance product, XNGP, and plan to roll out its key features to several dozen cities in the third quarter of 2023. In my opinion, the upcoming launch of XNGP will mark a turning point where smart driver assistance software becomes an essential, frequently used product. We are also thrilled to see a substantial portion of current G9 orders being for the max version featuring XNGP ahead of its OTA rollout. We look forward to making our cost-competitive XNGP available in more models next year. Furthermore, we believe that the hardware costs of XNGP will significantly decrease as our technology progresses and will be markedly lower than those of our competitors. Driven by robust product awareness and cost competitiveness, we are optimistic that XNGP will achieve national adoption in no time. On October 31, the XPeng G9 received the Guangzhou Intelligent Connected Vehicle Road Test permit, making it the first unmodified mass-produced vehicle to qualify for autonomous driving tests on public roads in China. With simultaneous advancements in our XNGP and robotaxi capabilities alongside a closed-loop data approach in software iterations, we aim to be the first to realize autonomous driving with cost-effective mass-produced vehicles. We firmly believe in the value proposition of our self-developed, industry-leading technologies for both our customers and the commercial value for our enterprise as we work toward the commercialization of our smart and electrification technologies. We are open to opportunities for strategic partnerships and technological collaborations globally. In terms of cash liquidity, we currently hold over RMB40 billion. We increasingly recognize the importance of sustaining steady growth during challenging times, not just in favorable periods. As such, we will implement cautious cost control measures over the next few quarters and years to enhance operational efficiency and streamline our investment projects. With our targeted R&D strategy and versatile vehicle and technology platforms applicable across different models, we plan to launch future products at reduced R&D costs. A stronger product portfolio and internal organizational restructuring will also significantly enhance our sales efficiency. Moreover, due to early investments in our production capabilities, our capital expenditure requirements will substantially decrease over the next few years compared to 2022. Consequently, we are confident that our cash reserves of RMB40 billion will support our growth in the coming years, and our cash flow will improve significantly as product sales increase. Looking ahead to the fourth quarter, we will focus on minimizing the effects of COVID-related restrictions in China and making internal adjustments for longer-term development. We estimate November deliveries to reach at least 5,800 units mainly due to the G9 production ramp-up, and we are doing our utmost to expedite our order backlog deliveries. In December, we anticipate a significant month-over-month recovery in deliveries. We expect to deliver between 20,000 and 21,000 vehicles in the fourth quarter of 2022, generating revenue between RMB4.8 billion and RMB5.1 billion. We will hasten internal organizational adjustments and management improvements in the upcoming quarters. We are confident we will position ourselves among the top contenders in the smart vehicle sector over the medium to long term. Thank you all. Now, I will hand the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the third quarter of 2022.

Thank you, Mr. He, and hello, everyone. Now I would like to provide a brief overview of our financial results for the third quarter of 2022. I will reference RMB only in my discussion today, unless otherwise stated. Our total revenues were RMB6.8 billion for the third quarter of 2022, an increase of 19.3% year-over-year and a decrease of 8.2% quarter-over-quarter. Revenues from vehicle sales were RMB6.2 billion for the third quarter of 2022, an increase of 14.3% year-over-year and a decrease of 10.1% from the last quarter. The year-over-year increase was mainly attributable to higher vehicle deliveries, while the quarter-over-quarter decrease was mainly due to lower vehicle deliveries for the P5 and G3i. Gross margin was 13.5% for the third quarter of 2022 compared with 14.4% for the same period of 2021 and 10.9% for the last quarter. Vehicle margin reached 11.6% for the third quarter of 2022 compared with 13.6% for the same period of 2021 and 9.1% for the last quarter. The quarter-over-quarter increase was mainly attributable to product mix changes. R&D expenses were RMB1.5 billion for the third quarter of 2022, an increase of 18.5% year-over-year and an increase of 18.5% quarter-over-quarter. The year-over-year increase was mainly due to the increase in employee compensation as a result of expanded research and development staff. And the quarter-over-quarter increase was primarily associated with higher new vehicle development to support our future goals. SG&A expenses were RMB1.6 billion for the third quarter of 2022, an increase of 5.7% year-over-year and a decrease of 2.3% quarter-over-quarter. The year-over-year increase was mainly due to expansion of our sales network and associated personnel costs. The quarter-over-quarter decrease was mainly attributable to lower operating expenses. As a result, the loss from operations was RMB2.2 billion for the third quarter of 2022 compared with RMB1.8 billion for the same period of 2021 and RMB2.1 billion for the last quarter. Net loss was RMB2.4 billion for the third quarter compared with RMB1.6 billion for the same period a year ago and RMB2.7 billion for the last quarter. Comprehensive loss was RMB0.7 billion for the third quarter compared with RMB1.6 billion for the same period a year ago and RMB0.8 billion for the last quarter. The primary difference between the comprehensive loss and net loss was foreign currency translation gain resulting from the rapid appreciation of U.S. dollar-denominated assets. As of September 30, 2022, we had cash and cash equivalents, restricted cash, short-term investments, and term deposits totaling RMB40.1 billion. To be mindful of the length of our earnings call, I will encourage listeners to refer to our press release for more details on our third quarter financial results. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.

Thank you. We have a first question from Tim Hsiao with Morgan Stanley. Please proceed.

So my first question is about deliveries because the vehicle deliveries have been slow in rest of the month, likely due to the modern translation and COVID curbs. XPeng has done a series of organizational restructuring, but how fast could this adjustment translate into more meaningful volume recovery in the upcoming months, assuming the impact from the COVID restriction could ease over time? And separately, have we adjusted our 10,000 target for G9 per month or the new P7 next year due to the current supply-demand challenges, as this is also hardly correlated to the company’s profitability into 2023? So this is my first question. Thank you.

Alright. First of all, thank you for your question. Regarding – well, I just reviewed a lot of historic cases of how manufacturers do changes over time. And currently, the organization adjustment that XPeng is conducting is for the mid to long-term goals, not for the short-term. So we ask for your patience. At the same time, we are very confident that we can see more significant changes to be translated into our sales performance in the coming several quarters. And in 2023, our market share will be further expanded. Now in the short-term, if the pandemic can be well under control, we are confident that in December, we can still maintain our original goal of reaching 10,000 of monthly sales for G9, and we are very confident that we can be ranked among the top three players in the battery electric SUV segment priced above RMB300,000. Now in 2023, with the roll-out of our further developed XNGP function, we believe that G9’s sales volume can be further enhanced to exceed P7’s performance compared to the same developmental stage in history. At the same time, P7’s competitiveness will be further enhanced alongside our technological improvements and their sales performance will also improve in the coming year as well. Now in mid-2023, we expect to launch a new product or a new model priced between RMB200,000 to RMB300,000, which will be a B-class midsize SUV, and that will definitely help us to further boost our product sales. We believe that the sales volume of this particular model will actually exceed our current product portfolio. Thank you.

Just want to make a clarification. We mentioned that the December delivery overall will reach 10,000, not just G9, the overall delivery for December. Just want to make that clarification.

So my second question is about the cash flow. In light of the challenging macro backdrop, investors are increasingly concerned about cash flow. The company still has a pretty strong cash position and balance sheet based on the latest financial statement. But will there be any potential changes to our supplier payment terms or a surge in new money investment next year that may deteriorate our operating cash flow? What kind of cash burn should we expect next year? And separately, based on the latest financial statement, short-term borrowing also increased more substantially in the quarter. Is there any specific reason for that? That’s my second question. Thank you.

Hey, Tim, it’s Brian. Let me address your question. First of all, the payment terms for our suppliers, we don’t see any material change. We’re actually maintaining pretty favorable payment terms with our suppliers and partners. And then if you look at the cash operating cash outflow, the first three quarters is actually less than RMB6 billion. And then we anticipate the entire CapEx for this year 2022 to be less than RMB4.5 billion, which is lower than what we anticipated earlier in the year. Looking to 2023, we actually see a significant change and reduction in CapEx due to a number of factors. First of all, as Xiaopeng mentioned earlier, we actually pretty much completed our capacity build-out, so we don’t need to incur significant CapEx for that. We also have completed the construction of these new product platforms for the new car launches. A lot of these CapEx has already been incurred. Next year, we think the CapEx for us will be significantly lower, actually below RMB3 billion in our estimate for next year. In line with the current streamlining and focus that we are doing in our R&D projects, we think the R&D expenses next year compared to 2022 will also see growth in line or reduction. We also see SG&A expenses going down due to some of the structural organizational changes we mentioned. So overall, we’re actually very confident that we can see free cash flow outflow significantly improve next year compared to this year. Also with our current cash on hand, we have very adequate resources to meet our business plan and also anticipate that carries us to our projected cash flow positive state sometime in 2024.

Hey, Tim, this is Dennis. I just want to supplement one point regarding your question on the short-term borrowing. Yes, you are right we have increased our short-term borrowing in the third quarter. The reason is basically for the kind of the money management because we have established considerable credit lines with a variety of banks. We tactically drew down some part of the credit lines to strengthen the relationship with banks. That’s why you see a slight increase in the short-term borrowing at the end of September.

Great. Thank you very much for sharing, Dennis and Brian.

Hi, this is Alex. I just like to clarify, when Brian mentioned the decrease of SG&A expenses, it means like as a percentage of revenues in 2023 compared with as a percentage of revenues in 2022. Thank you.

Okay, thank you.

Thank you. We have next question from the line of Ming-Hsun Lee with Bank of America. Please go ahead.

My question is that the ASP trend in 4Q based on the difference between your volume guidance and also the revenue guidance. So could you give us more color on this? And besides that, looking into 2023, what’s your plan to control the component costs as well as the battery costs in order to maintain your gross margin? Thank you.

Ming, this is Dennis. Regarding your question on the ASP, yes, you’re right, in the third quarter, our ASP increased primarily compared with quarter two, primarily due to the better sales mix P7, which also improved the margin. For the quarter four, the P7 in terms of P7 mix will be lower. However, because of the mass delivery of the G9, we will be able to maintain the P7 and G9 mix at about maybe 55% to 60%. So we will actually see a slight increase in terms of ASP compared with the quarter three, offsetting some variable marketing spending on the P5 and G3. So that’s the answer to your first question. Regarding the material cost increase, so far, we haven’t seen the big changes in battery cost for the next year, mainly for the first quarter. However, we believe due to more supply, we are seeing opportunities in terms of battery supply. That would, in return, translate into a cost reduction maybe in the second half. The cost improvement will help to maintain or to improve our margin, offsetting the NEV subsidy discontinuation.

Yes. So Ming, just to also add to this, in the fourth quarter, due to the volume contraction and also launching of our new product, G9, I think the gross profit will face some pressure versus the third quarter, and the first quarter, given the subsidy elimination, which impacts some of our lower-priced models, so that will also present a challenge for the gross profit. However, our view is that with the volume rebounding starting in the second quarter and the rest of the year with scale, we anticipate battery prices to moderate and also show some opportunities for decline later in the year, I think the gross profit trend will improve significantly in the later half of next year.

Okay. Thank you, Brian and Dennis. I have no further questions.

Thank you. We have next question from the line of Nick Lai with JPMorgan. Please go ahead.

Now let me translate my question firstly. Now Chairman just mentioned that you are going to change a lot of strategy regarding the management, including branding and marketing team and can you elaborate more on what are going to change in terms of branding strategy and marketing campaign? And when can we expect those changes to have an impact on underlying demand or volume?

Alright. Thank you, Nick, for your question. We’re actually conducting or in the midst of doing this organizational adjustment with focus on our branding and marketing. Looking back, in the past, our branding and sales and marketing mainly focused on sales with more emphasis on boosting the sales of our products, but going into the future, we are going to balance different aspects of our branding, marketing and sales with innovative measures, and we plan to actually reduce our spending to boost sales, while increasing our spending in marketing. The second thing regarding the organizational adjustment is that we expect to integrate our organization to make it more efficient and effective. We plan to recruit high-quality talent from different industries to boost our sales and marketing efficiency, and we aim to launch a series of measures in order to tackle different challenges as well as boost our effectiveness in alignment with our product portfolio and customer satisfaction while adjusting to customer demand. Our near-term strategy for these organizational changes will take place in the coming 15 months, but we believe that in the long run, we will continue such adjustment to achieve our mid to long-term goals. Thank you. And just allow me to add several key points. The first one is that we will have a clearer positioning of our brands and products. The second point is that we are aiming for the long game, not just for the short term. The third point is that we are going to be more aggressive and proactive in our sales and marketing campaigns rather than being passive like in the past. The fourth and last point is that we will remain very customer-oriented and focused. Thank you.

My second question is about the autonomous driving XNGP solution. Can you provide more detail on how we differentiate from other solutions like LI and Audi? Management mentioned looking for potential partnerships on the NGP product; can you elaborate on that as well? Thank you.

First of all, allow me to address the first part of your question. From our own user experience, there are four key components to the adoption of ADAS technology nowadays. The first component is scenario coverage or scenario support. From our data, we noticed that highway and parking only make up about 10% of people’s daily use in terms of the scenario, and 90% of people’s use of ADAS technology is actually on city roads. The second component to the adoption of ADAS is the cost, specifically how much people are willing to pay for advanced technology. We are confident that in the future, the cost of affording our XNGP or related ADAS software will be able to be reduced to 20% to 30% of their current cost. The third component is safety, and the fourth component is the true value that we are able to contribute to our customers. For XNGP, where we are rolling out our city-based scenario or functions, we are actually expanding the scenario coverage by over 9x because 90% of the usage happens on city roads compared to only 10% for highways and parking scenarios. In the past, without our XNGP, people mainly relied on high-definition maps or laser-related technologies; however, those pose a lot of challenges, especially in areas where high definition mapping is not available. This caused a significant difference in user experience and safety. That’s not our final target. We launched XNGP, which allows very consistent performance even in areas without high-definition mapping, and our goal is to provide our customers with a seamless and safe driving experience, just like being a passenger in a car driven by an experienced driver. This kind of seamless integration is why we are very confident in the rollout of our XNGP to achieve higher customer satisfaction. Thank you.

Yes. And Nick, to answer your second question regarding the openness in terms of collaboration and cooperation, I think it’s all generated from our recognition that we have spent a lot of effort and resources to develop market-leading technologies. We believe that in addition to increasing our sales, there is tremendous value embedded in these technologies that can be monetized in other ways. We have leading technology in smart driving autonomy, smart cockpit, electrification, and high-voltage platform, etc. So, I think these technologies could become valuable if we can make them more scalable and leverage potential partners’ resources to penetrate scenarios or markets we currently don’t focus on. With that, we are evaluating a number of potential opportunities to help us scale these technologies without compromising our focus on producing attractive and competitive products ourselves. This is our approach. Obviously, if there are more specific developments, I am happy to provide updates when they become available.

Thank you. We have next question from the line of Bin Wang with Credit Suisse. Please go ahead.

Hi. My first question is about auto backlog, basically two parts. Number one, what's the new order flow for China in November? Second, what's the accumulate order backlog for G9, because COVID has impacted and your delivery should be more than 10,000 order backlog already secured? Thank you.

Hey Bin, it’s Brian. First of all, as you have tried a number of times, we don’t disclose backlog on any model or particular company backlogs. But there are a few things that I want to point out to you. One is that as you can see, our delivery timetable has extended to later in the first quarter, showing our strong orders at hand, and we will also be delivering a significant number of G9s in December. That's one indication. Secondly, we are confident that with our sales momentum, we see G9 becoming one of the top three, if not the top two battery electric SUV models over RMB300,000 price, which is also an indication of the level of demand that we see.

Actually, I just want to check because on your official website, when we try to book G9 online, it shows an expected delivery time. I want to know whether this might change according to your order backlog, because sometimes it was one week to four weeks, sometimes it’s 12 weeks, indicating that demand waiting time is changing depending on the auto backlog. I just want to know whether G9 waiting time on your website is changing according to your order backlog in real-time? Thank you.

Yes. Bin, you are right. The wait time is correlated to the real-time demand and also our production ramp-up capabilities. So, what you see in the retail store reflects the various models' real-time delivery timetable.

Thank you. We have the next question from the line of CITIC Securities. Please go ahead.

I will translate my question. My question is about how to be demand-oriented? Specifically, the first one is what is the real customers’ demand? Secondly, how do we find them? What will we do in terms of our structure? Yes, that's my question. Thank you.

Alright. Thank you for your question. Now, there are two basic logics behind the auto-making industry, especially for us OEMs. The first is to adopt the theory of a bucket, which means that you need to identify your weakest links and also identify your strengths as well. In the past several years, myself and a lot of our peers have been doing their best to identify and improve their weak links in terms of product safety, quality, service quality, and also cost control. We are also striving to further perfect our service quality, product design, interior design, smart cockpit, and others. In the long-term, one of the key competitive strengths is to clearly identify your goals, both short-term and long-term. You must ensure that you understand the current focus, whether you are aiming for short-term results or the long run. The second logic behind the auto-making industry is to define your customer portfolio or targeted customer goals. For the past 2 to 3 years, XPeng has established itself as a global company in the long run, seeking to build scale. We have made our future three-year plan based on this vision. Unfortunately, I’m unable to disclose more information regarding the future lineup or specific market demand for car models today. However, I can affirm that autonomous driving or ADAS technology will be standard configurations in our product lineup, delivering high-quality products with consistent performance. That’s our long-term goal as we further enhance our technological capabilities and cost control measures.

My second question is about P7. In 2023, we will have launched a new P7 with better configurations. I think this would cause a rise in the BOM cost. Will we maintain a relatively stable GP margin and drive our MSRP, or do we want to boost our sales and maintain or even lower our price? Thank you.

Yes, it’s Brian again. The upgraded P7 next year will reflect technology advancements, particularly in the areas you’ve seen on the G9. The P7 will have equally advanced autonomous driving architecture, along with faster charging and higher voltage capabilities, as well as several other upgrades. Benefiting from platform development, since many advancements are shared among the modular and platform development, we believe we can control the cost of the new P7 to maintain similar margins as the current version. Some models of the current P7 will continue to sell alongside the upgraded version. Essentially, the new P7 will become a high-end version showcasing top-tier technology while maintaining the segment's price and profitability.

Thank you. 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 Investor Relations. Thank you.

Thank you. This concludes today’s conference call. You may disconnect your lines now. Thank you for your participation.