Xpeng Inc. Q2 FY2023 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2023 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After 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. Alex Xie, Head of Investor Relations for the company. Please go ahead, Alex.

Thank you. Hello, everyone, and welcome to XPeng's second quarter 2023 earnings conference call. Our financial and operating results were issued by our newswire services earlier today and 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 from our management will include Co-Founder, Chairman, and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investments, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; 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 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 obligation to update any forward-looking statements except as required under applicable law. Please also note that XPeng's earnings press release and this conference call include a 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. He Xiaopeng. Please go ahead.

Hi, everyone. During the first half of this year, due to intensified competition and a rapidly changing environment, I introduced a series of reforms in our business strategy, organizational structure, product development, and marketing to address significant risks and challenges, leading to a comprehensive transformation in a short period. I am pleased to share that these changes have produced better-than-expected results both internally and externally, putting XPeng on the path to a virtuous cycle. The G6 has emerged as the leading BEV model in the RMB200,000 to RMB300,000 price range, significantly boosting our sales momentum. We've made noteworthy advancements in commercializing our self-developed electric vehicle platform and intelligent technologies. Additionally, we have established a long-term strategic partnership with Volkswagen that will enable extensive collaboration on developing EV platforms and intelligent software technologies, creating long-term value for both entities. We are also seeing a quicker than anticipated rise in user acceptance of ADAS. Orders for the G6 Max version accounted for 70% of total G6 orders in its first month, far exceeding our predictions. Our NPS and OTA satisfaction scores steadily improved in the first half of the year, reaching an industry-leading level as we focus on customer-centric transformation. Furthermore, the changes at XPeng have positively impacted team morale, owner engagement, and the confidence of suppliers and partners, laying a strong foundation for organizational adjustments, cost-saving measures, efficiency improvements, and new product launches. This month marks the ninth anniversary of our inception. Over the last nine years, we have remained dedicated to advancing technological innovation. This commitment is unwavering. We plan to continue our full-stack technology innovation in key areas to make cutting-edge smart EV products accessible to a wider range of customers globally. As we scale up, we will develop a sustainable business model supported by full-stack capabilities across hardware, software, commercial operations, and empowering partnerships. As we progress with this recent transformation, I consistently remind my team that to succeed in the long-term competitive landscape, we must look beyond short-term financial performance as we evolve our capabilities. That said, I'm glad that our efforts to enhance our underlying capabilities are starting to show results. Our vehicle deliveries have increased sequentially for six consecutive months, and this trend continues. Specifically, the P7i, launched in March 2023, has garnered strong consumer interest, with monthly deliveries surpassing 3,000 units for two consecutive months since June, despite supply chain challenges. In the second half of the year, we anticipate further increases in the capacity and competitiveness of the P7i model lineup to sustain its sales momentum. More significantly, our first strategic model built on SEPA 2.0, the G6, debuted at the end of June and rapidly became a bestseller in its segment. Leveraging our SEPA 2.0 platform's cost efficiency and a pricing strategy focused on scaling up, the XPeng G6 has led the industry in introducing advanced technologies, such as the 800-volt SiC platform and full scenario ADAS, making them available to mainstream consumers in the RMB200,000 to RMB300,000 range. The G6's popularity spans a broad consumer spectrum, including both higher and lower price segments. Today, I want to express my sincere gratitude to the owners who are awaiting their XPeng G6 deliveries. We are working diligently with our supplier partners to increase production for the G6, particularly for the Max version. We expect significant growth in G6 deliveries in September, driving our monthly deliveries to exceed 15,000 units overall. In the fourth quarter, we will continue to accelerate G6 production to meet the rising market demand following its initial deliveries, aiming to deliver more than 10,000 G6 units monthly. With the ramp-up of G6 production and enhanced configurations for other models, we aim for peak monthly deliveries of 20,000 in the fourth quarter. I believe the success of the G6 is just the start. Looking ahead, we plan to launch a broader range of top-selling models powered by SEPA 2.0. In July, we announced our long-term strategic partnership with the Volkswagen Group, which I believe is a milestone not only for XPeng's journey but also for the development of the auto industry in China. XPeng and Volkswagen share a strong alignment in our technological beliefs and long-term vision for smart EV evolution, complemented by our respective industry strengths. Our collaboration will begin with two B-class BEV models, combining XPeng's leading smart EV technology with Volkswagen's outstanding design and engineering. Volkswagen also plans to make a long-term equity investment in XPeng amounting to around $700 million. We will deepen our partnership with Volkswagen to enhance synergies in next-generation EV platforms, software technology, and supply chain capabilities, benefiting from economies of scale. I am enthusiastic about this partnership, which reflects Volkswagen's confidence in our in-house developed core technologies and innovative capabilities. Together, we are creating a unique collaborative business model that merges software and hardware full-stack technology, aiming to unlock significant value for our shareholders. As technology trends evolve, I believe we are moving from an era of software-defined cars to one dominated by AI-powered vehicles, with XPeng being a leading advocate for this change. We anticipate considerable benefits from this evolution. I will establish an enterprise-level team to oversee autonomous technology R&D, roadmap management, and operations, with a focus on unifying the development for ADAS and other innovative initiatives. We are preparing for the disruptive impact of AI on current automotive technology, as human-machine interactions and AI-driven autonomous driving redefine our driving experiences. I look forward to sharing our latest R&D developments in intelligent technologies on our 2023 Tech Day, scheduled for October 24. In the second half of the year, we aim for significant advancements in experience and coverage with our XNGP ADAS to enhance customer acceptance and adoption, widening the technology gap with competitors. The development of our XNGP, which operates without high precision maps, is progressing swiftly. We recently conducted professional media test drives of XNGP prototypes across various districts in Beijing, receiving overwhelmingly positive feedback from participants regarding the XNGP-assisted driving capabilities. In our upcoming OTA software update, we will release XNGP without high-definition maps in the first batch of cities, along with other exciting new features that we have yet to announce. We are confident that the map-independent XNGP will be available to customers in approximately 50 cities by the year's end. Our technology innovations will also focus on reducing XNGP's BOM cost by around 50% by 2024, ensuring our models feature the most advanced autonomous driving hardware as standard. We are also exploring flexible pricing models for our software subscription services. I am collaborating closely with our President, Ms. Wang Fengying, to achieve the highest level of cost control among automakers globally and in China, making cost savings a core objective across product design, R&D, manufacturing, supply chain, and marketing. With several cost-saving initiatives progressing well, I am optimistic about reducing overall costs by 25% by the end of 2024, with even greater results in specific areas. These initiatives will enhance our product competitiveness and significantly improve gross margins in 2024. Interestingly, two years ago, I noted that no automotive company could deliver competitive autonomous vehicles to consumers at the RMB150,000 price point. However, with our technology innovations and cost reductions, I have revised this perspective and developed a clear plan to make autonomous vehicles affordable for the largest market segment in China, which is the RMB150,000 range. This will significantly enhance the accessibility of intelligent autonomous driving. In regard to sales, marketing, and service capabilities, under the leadership of our President, Wang Fengying, we have steadily improved customer satisfaction and inter-team collaboration. Looking ahead to the second half of the year, we will accelerate our business model transformation across domestic and international sales channels, which includes significant optimization of our sales network and collaborations with additional top dealers. These efforts will facilitate our expansion and enable us to gain market share in Tier 2 and lower-tier cities. In terms of cash flow, our cash reserves at the end of Q2 2023 totaled RMB33.7 billion. With vehicle deliveries returning to a growth trajectory, we have significantly reduced our operational cash outflow to around RMB1 billion. In the second half of 2023, with accelerating sales growth from the G6 and other new products, we expect our gross margin to gradually recover, and we will continue to enhance our operating efficiency. Consequently, we anticipate our overall cash flow from operations will become positive in the latter half of the year. Now, turning to our guidance, we expect total vehicle deliveries to range between 39,000 and 41,000 units in Q3 2023, reflecting quarter-over-quarter growth of 68.1% to 76.7%, with revenue projected between RMB8.5 billion and RMB9 billion. Thanks to the proactive adjustments we've implemented over the past several quarters, as we enter the third quarter of this year, we have observed a positive feedback loop forming at XPeng around sales, branding, team morale, and cash flow. As AI continues to transform the automotive industry, we expect our virtuous cycle to expand and enhance more areas in the next two years. Thank you, everyone. Now, I will hand the call over to our new Vice President of Finance, Mr. James Wu, to discuss our financial performance for the second quarter of 2023. Prior to joining XPeng, James held senior finance positions with General Motors in both the US and China and at SAIC-General Motors-Wuling Auto. We look forward to leveraging his extensive experience in finance and operations management and his insights into international business practices. James's expertise is perfectly suited to lead our finance and operations team, and we anticipate his valuable contributions as we strive for our next level of success.

Thank you Xiaopeng, and hello, everyone. Before I start, I'd like to say that I'm really happy to join Xiaopeng at this exciting time and look forward to our future interactions. Now I would like to provide a brief overview of our financial results for the second quarter of 2023. I will reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB5.06 billion for the second quarter of 2023, a decrease of 31.9% year-over-year and an increase of 25.5% quarter-over-quarter. Revenues from vehicle sales were RMB4.42 billion for the second quarter of 2023, representing a decrease of 36.2% from the same period of 2022 and an increase of 25.9% from the first quarter of 2023. The year-over-year decrease was mainly attributable to lower vehicle deliveries and the discontinuation of new energy vehicle subsidy while the quarter-over-quarter increase was mainly due to higher vehicle deliveries of the P7i. Gross margin was negative 3.9% for the second quarter of 2023 compared with 10.9% for the same period of 2022 and 1.7% for the first quarter of 2023. Vehicle margin was negative 8.6% for the second quarter of 2023 compared with 9.1% for the same period of 2022 and negative 2.5% for the first quarter of 2023. The year-over-year and quarter-over-quarter decreases were explained by first, the inventory write-downs and losses on inventory purchase commitments amounting to RMB0.2 billion related to the model G3i as management lowered its forecasted sales due to stronger-than-expected market amounts for newly launched vehicle models with a negative impact of 4.5 percentage points on vehicle margin. Secondly, increased sales promotions and the expiry of new energy vehicle subsidies mentioned above. R&D expenses were RMB1.37 billion for the second quarter of 2023, representing an increase of 8.1% year-over-year and an increase of 5.5% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as we expand our product portfolio to support future growth. SG&A expenses were RMB1.54 billion for the second quarter of 2023, representing a decrease of 7.3% year-over-year, and an increase of 11.3% quarter-over-quarter. The year-over-year decrease was primarily attributable to the reduction of commissions paid to franchise stores and lower marketing and advertising expenses. The quarter-over-quarter increase was mainly resulting from higher marketing and advertising expenses to support new product launches. As a result of the foregoing, the loss from operations was RMB3.09 billion for the second quarter of 2023 compared with RMB2.09 billion for the same period of 2022 and RMB2.59 billion for the first quarter of 2023. Net loss was RMB2.8 billion for the second quarter of 2023 compared with RMB2.7 billion for the same period of 2022 and RMB2.34 billion for the first quarter of 2023. As of June 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments, and time deposits in total of RMB33.74 billion. To be mindful of the length of our earnings call, I encourage listeners to refer to our earnings press release for more details on our second quarter financial results. This concludes our prepared remarks. We'll now open the call to questions. Operator, please go ahead.

Yes. Thank you. And the first question comes from Tim Hsiao with Morgan Stanley.

So my first question is about the improvement of the component supply because I expect that the third quarter volume guidance indicates a continuous improvement in the component supply. However, the longer waiting times have negatively impacted the new order momentum of G6 recently. I would like to know when you anticipate the bottleneck will be fully resolved and how we can boost the order momentum of G6. Additionally, do we expect the 10,000 per month to be closer to a stable monthly run rate or more like 30%? Will XPeng consider adding new suppliers for the upcoming model to prevent such bottlenecks from recurring? Thank you.

Thank you for your question. We are very confident in the future sales of the G6, and it is certainly going to be very competitive. Currently, in the RMB200,000 to RMB300,000 price range, it is one of the top players, and we expect orders to continue to increase. However, we are currently facing a challenge with the Max version due to a shortage of some core intelligent parts. We have seen a ramp-up in the supply of these parts since August, and we anticipate this momentum will continue into September and October. Therefore, as we move into Q4, we expect to achieve at least 10,000 monthly deliveries for the G6. We have made several adjustments and improvements to prevent such shortages in the future. For instance, with the introduction of our SEPA 2.0 platform, we can not only lower the overall production costs for our upcoming models but also reduce our supply chain reliance. This will allow for easier management of our supply chain moving forward. We plan to develop many more models based on SEPA 2.0, which will provide better management and control over the supply of our core parts. Additionally, SEPA 2.0 enables us to use many mutually compatible parts across our platform, which will support the development of our future models. Overall, based on what we have seen from the G6 and the advancements in our technology, we believe that our supply chain constraints are being resolved. Thank you.

My second question is about pricing competition. I would like to understand management’s perspective on the potential effects of the new price war alongside competitors, such as Tesla's upcoming new model launches in September. Does XPeng need to adopt more aggressive pricing or promotional strategies for the current G6 or upcoming models? If so, how should we anticipate the impact on vehicle margins in the third quarter and beyond? Can we effectively manage the cost pressures within our supply chain? That's my second question. Thank you.

Hey, Tim, it's Brian. Let me address your question. First, the recent price changes from our competitors have not significantly affected our sales, particularly the growth trend of the G6, as we anticipated competitive pressure when we set our pricing for G6. The momentum we generated remains strong. Before discussing pricing and gross margin trends, I want to emphasize our current strategy of regaining growth and scale, which is our main strategic priority for this year. We have successfully gained growth momentum, and we are predicting a return to our historical high quarterly revenue rates. This will ultimately help us achieve economies of scale and efficiency. Another priority for the second half of the year is to generate strong cash flow. As mentioned earlier, we expect our growing delivery numbers to result in positive cash flow on an operational level during the second half. This will be crucial for us to improve our economic momentum. Regarding the gross margin trend, I'll pass it over to James to provide you with some estimates, but we cannot give specific guidance at this time; however, he can outline some trends for you to consider.

Yes. I just wanted to add that as Brian mentioned, our focus is clear in gaining volume and scale, which will help improve our gross margin. We experienced some impact from the G3i in Q2, but we still have production scheduled for G3i in the third quarter, so we will have another portion coming through then. As we increase volume in Q3 and into Q4, we expect our gross margin to improve over time. With a better mix of products sold in the second half, we anticipate our gross margin to turn positive in the fourth quarter of this year. Lastly, I want to reiterate what Brian stated. From a cash flow perspective, as we increase volume in the second half, we have already observed significant improvement in cash flow during Q2. We are confident that we will achieve positive operating cash flow and maintain a healthy cash balance by the end of the year. Thank you.

Thank you very much, Brian and James, for the details shared. Thank you.

Thank you. And the next question comes from Tina Hou with Goldman Sachs.

Thank you to the management for addressing my question. My first inquiry is regarding the development of the distribution network. As management has indicated, there will be numerous changes and optimizations, particularly focusing on lower-tier cities in the latter half of this year and into next year. Should we anticipate an increase in sales and marketing expenses for the second half of this year and for 2024? Thank you.

Hey, Tina, this is Brian. I think you're right. We're actually making changes to our sales channel and strategy. We envision more partners to be our sales investors, store investors, and sales agents. I think this will lead to better penetration of lower-tier cities as well as optimize the sales performance because we are simultaneously phasing out weaker performers, both in owned and our current channels. Interestingly, we believe this will lead to a more efficient operation and lower sales marketing costs. Because we think right now, the optimal efficiency has not been achieved with our current model. Additionally, we have not partnered with enough high-quality and efficient operators. So with a renewed focus on partnership and higher standards for our sales partners, we envision more efficient and lower sales and marketing ratios.

So my second question is about the operating level breakeven point. Since management mentioned that the gross margin will start becoming positive in Q4 this year, I’m curious about the expected operating profit breakeven point considering we are still continuously investing in R&D. Thanks.

Yeah. Thanks, Tina. I think for guidance on overall company breakeven as well as more cash flow forecast, we're actually maintaining our current view that by 2024, we will achieve quarterly free cash flow positive. So that's something we're confident we can hit next year. And then for the overall breakeven year, we still maintain that it will be around 2025 for the whole company.

Thank you. And the next question comes from Paul Gong with UBS.

My first question is about autonomous driving without HD maps. I understand it could increase coverage in terms of cities. How does the cost compare to the previous version that used HD maps? What key challenges do we need to address to achieve this?

Thank you for your question. This is slightly technical. I'll try to provide a simple and straightforward answer. When we are equipped with high-definition maps, it's very easy for XNGP to be guided because we know when we expect to change lanes before turning left or right. However, without the high-definition maps, things get much trickier because the XNGP system has to judge by itself where to change or what kinds of situations will change beforehand. For example, it needs to be equipped with the hardware sufficient to actually identify dotted lines on the road or solid lines on the road or signs and characters that indicate left turn corners or right turn signals. This is just like when a person visits a new environment; it takes time to get acquainted. There is always a possibility for mistakes. However, there are a lot of benefits that come from this non-HD map reliant XNGP. First of all, you don't need high-definition maps, which means you can go wherever you want, as long as you have the necessary conditions and the hardware equipped with the XNGP. Theoretically speaking, as long as your phone can guide you there, our XNGP without HD map reliance can also guide you there. The second benefit is that you don't need to jump through hoops to get policy approval because of its high safety. The third benefit is that you don't have to spend extra to purchase high-definition maps, and also, a significant benefit is that you lower a lot of the maintenance costs because it is in the nature of the XNGP to recognize any sort of road conditions. For example, there might always be construction going on the road that might not be indicated in high-definition maps, and you need to adapt to those changes. Now, obviously, what you mentioned in your question are the major challenges. It mainly comes down to the capability to identify environmental elements, including words and characters, signs and signals, pictures, and all of the traffic, vehicles, and other kinds of road participants that surround you, and you have to make decisions based on that ahead of time. And that is my simple answer. I hope that helps. Thank you.

My second question is still about the HD maps and the autonomous driving technology without them. Does that mean it requires observing more environments and performing more calculations, which would demand even greater processing power from the chips? Also, regarding the cost reduction of autonomous driving hardware as we approach 2024, you mentioned a 50% decrease in costs. Does this imply that you will be using more advanced software to lessen the need for processing power, or should we expect to maintain an even higher level of processing power?

Thank you for your question. When we adopt multi-model perception fusion and use advanced algorithms, it does require more computing power. However, we've been successful with our XNGP even using 30 TOPS. Currently, we have 512 TOPS available. We believe we are well-prepared. You can expect to hear more about our strategies for reducing costs while enhancing our intelligent driving capabilities at our Tech Day on October 24. One key topic will be how we can lower production costs through technological and management innovations at the operational level. For instance, regarding computing power, we are exploring how to optimize our electronic and electrical architecture to improve efficiency, possibly by using one PCBA and two SoCs to handle everything together. This is just an example, and more details will be shared at our Tech Day. Thank you.

Thank you very much. Quite helpful. Thank you.

Thank you. And the next question comes from Bin Wang with Credit Suisse.

My one question is about new products for 2024. You also mentioned that you are developing a self-driving car priced around RMB150,000. Will this be a product slightly lower than the G6, possibly called G5? Thank you.

Hey, Bin. This is Brian. We have planned for two new model launches next year, but specifics, I will not be providing at this moment. Obviously, we envision those will all be large volume drivers for growth, likely to be launched in the second half.

Thank you. And the next question comes from Xinchi Yin with CITIC Securities.

My first question is about our guidance on the product pipeline in the second half. What is the exact release date of the MPV XPeng? Can you provide more details on the MPV, such as price, size, and cruising ranges? My second question pertains to strategic collaboration. Besides Volkswagen, are there any other OEMs interested in collaborating with Xiaopeng? What is our stance on potential collaboration opportunities in the future? Thank you.

Let me take the first question. The development of our upcoming seventh-seater is progressing well. We expect to stick to our original plan to debut the car in late Q4. While we do not anticipate mass deliveries by the end of the year, we plan to begin mass deliveries starting next year, and we will ensure our supply chain is well-prepared for this vehicle, learning from past experiences. Unfortunately, I cannot provide many details about the car at this time. However, I can share a few key points. First, it is built on the SEPA 2.0 platform, which means it aligns in terms of intelligence and integration with the G6. Another selling point is its spaciousness; we expect it to have the largest interior space compared to similar vehicles at the same price point. Additionally, it has excellent handling and drivability, providing a top-notch driving experience. That's all I can share for now. Thank you.

All right, Xinchi, this is Charles here. I'll address your second question. Our strategic partnership with Volkswagen Group is a long-term and a win-win partnership. We highly complement each other's strengths in this partnership. Our collaboration on the G9 is only a start, and we see other opportunities for collaboration in the future. We believe that we have created the first-of-its-kind collaborative business model on the full stack platform and the software technologies. In terms of potential collaboration with other parties, we remain open-minded but will also be very selective. We will look for the strategic and commercial value that can benefit us and our partners.

Thank you. And the next question comes from Yuqian Ding with HSBC.

The first question is about when management anticipates the moment for autonomous driving similar to the iPhone 4. It seems that big data will eventually address the corner cases, but to truly achieve hands-off, eyes-off, and minds-off driving, is regulatory support necessary? Or is the technology naturally progressing to a point where no engagement is needed over millions of miles?

Thank you for that question. It's a bit tricky. I'll try to answer it to the best of my ability. In short, I believe that 2025 or 2026 will mark a significant advancement in autonomous driving, akin to the iPhone 4 moment. There are several factors that influence this. The first is achieving full area coverage, which means covering 95% of China's roads, including highways, urban areas, and parking garages. The second factor is the cost of manufacturing and producing high levels of intelligence. The third is overall capability, which includes safety and the driving experience. As you noted, the takeover rate is important. We anticipate achieving, for example, a level of zero to one takeover per 1,000 miles within the next two to three years. Currently, on highways, we have one takeover per 10,000 kilometers. Another critical aspect of the driving experience is whether it can surpass a human driver in terms of intelligence and efficiency. I personally expect that we will reach this iPhone 4 moment in 2025 due to the rapid development of large language models, which we believe is accelerating our timeline; otherwise, it may be 2026. Thank you.

My second question is about the new product cycle. Although we understand there may be limitations on details that can be shared, the company did mention that the pricing spectrum is between RMB150,000 to RMB350,000. We see the midsized G6 targeting RMB200,000 to RMB250,000, while the compact size may cover the lower end. Are we considering revising or refreshing the G9 model for the potential RMB250,000 to RMB350,000 pricing point? How do we position ourselves within the desired pricing spectrum? Any additional information would be appreciated. Thank you.

This is a topic that we have discussed internally multiple times. Unfortunately, I cannot provide all the information. However, what we can say is that we expect that by the second half of 2024, XPeng is going to launch multiple new models as well as multiple replacement versions of previous models based on the same platform. These will be priced between RMB150,000 to RMB350,000. This is because we identified multiple market needs for various price ranges and different models from our prior experiences. The demand could be from individual use or for smaller and larger families. However, we're glad to report that with our current big platform strategy using our SEPA 2.0 platform with modular design, we can produce new models meeting diverse market demands efficiently and at a low cost. So there's definitely a lot to look forward to in the future. Thank you.

Thank you. And the next question comes from Ming-Hsun Lee with Bank of America.

My question is about your gross margin for the second quarter. Aside from certain discounts and lower sales contributions from G9 compared to the first quarter, is there any other reason for the decline in your gross margin quarter-over-quarter? Are there any non-cash items affecting this?

Hey, thank you. This is James. I'll answer this question. You're right. In Q2, as mentioned earlier, there's a portion of the G3i EOP impact that we booked in Q2. I want to emphasize that a majority of the impact is non-cash because of the acceleration of the unamortized toolings we have booked due to our decision. Excluding the EOP impact, we still had a slight lower gross margin versus Q1. That is mainly because of the increased promotional spending on some of our older models. This is partially offset by lower battery costs that we've seen in the second quarter. To answer your question regarding profitability impact, a significant impact will come from the working capital improvement as we increase our volume. We expect to see considerable working capital gains in the second half, improving our operating cash flow. Thanks.

So my second question is regarding the fast-charging battery. In July, you started to sell the 4C NCM battery. However, at that time, the sales portion was quite small, likely due to the high cost of the battery and the lack of comprehensive supercharging stations. Recently, there have been some fast-charging LFP batteries in the market. Will you begin discussions with your suppliers about adopting these types of batteries in the future to reduce costs?

Yeah. Thank you, Ming. It's Charles. First of all, when we mass-produce the G9, we already provided our customers with a 3C NCM and also LFP battery as standard configuration. At the time of mass production, it already represented the best-in-class fast-charging technology available in the market. At this point, it remains competitive in the market this year. To answer your question regarding the charging experience, I want to clarify that the 3C battery combined with the 800 voltage platform can achieve best-in-class fast-charging technology on our 480-kilowatt supercharger. Even on standard charging ports, I believe that 90% of the ports in the market support 800 voltage and fast charging to our 800 voltage and 3C battery powertrain technology.

Thank you, Charles.

Thank you. And as this does conclude the question-and-answer session, I would like to turn the call back over to the company for any closing comments.

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 Piacente Financial Communications.

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