NIO Inc Q1 2023 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tim Hsiao - Morgan Stanley - Analyst : (Spoken in Mandarin). My first question is about what are your cost controls because NIO has been investing more aggressively since 2021 on new models, sales and marketing and energy replenishment network. So in light of the challenge in the industry and the macro outlook, will NIO consider streamlining the model portfolio and cutting back on investment in some projects, like smartphone, battery, chipset and refocus resources on a few flagship models? Separately, does NIO still stick to its original schedule to launch a mass-market brand, ALPS, next year? So that's my first question, thank you. William Bin Li (Interpreted) Thank you, Tim, for your question. As you have mentioned, the market competition is intensifying and we do face a lot of changes in the market dynamics. For the NIO technology platform 2.0, we are about to show the whole lineup of the eight products based on the NT2.0 and this eight products will enter the market in the near term gradually. The current focus for us is to make sure we have the new organization structure to have a more targeted sales strategy and marketing strategy for all the eight products to reach its own target user groups. Because when we design those products, we do have specific positioning of the different products in their specific segment and target group. So the current challenge for us is to make sure the marketing and the sales teams can be more dedicated on these eight products in terms of showroom layout and the product reach and the marketing reach and the distribution of the resources as the sales and marketing teams. We want to make sure for each product we have a dedicated team to take responsibilities in terms of the sales and marketing efforts. Of course, for those key products we will put more resources to make sure we can reach much better sales performance. But just like I mentioned, the focus for us now is to make sure we can have more dedicated resources for the eight products separately and to make sure they can achieve a good market share in terms of their specific segment. Of course, we need to be more agile in terms of challenges of the changing market situation to ensure our competitiveness in terms of the products and the services. Regarding the topics of the R&D projects, overall speaking we would like to insist on offering big directions in terms of the R&D projects. In the short term, yes, we do have some pressures but we think it's really important and necessary for us to focus on those R&D capability building to build our long-term competitiveness. But at the same time, based on other resources and the priorities of the Company, we can adjust the pace of the investment for all those different R&D projects. For the question regarding ALPS project, our timing for ALPS brand is still the same, that is the second half of 2024, where we plan to launch the ALPS product at that time and we will choose the specific timings for those different products. However, at the same time, we want to make sure for the ALPS products that we can have a much faster pace in terms of the go-to market, because this can help us to improve the efficiency and have much better planning of the resources, especially at the marketing and sales front.

Question: Tim Hsiao - Morgan Stanley - Analyst : Thank you.

Question: Bin Wang - Credit Suisse - Analyst : Thank you, I've got two questions. Number 1 is about the margin outlook. We reached the [10k] demand for ES6 in the third quarter, so what is the gross margin expectation we can have for the third quarter, second half? That is the number 1 question about gross margin guidance. (Spoken in Mandarin). Stanley Qu Hi Bin, this is Stanley. As William mentioned, with the delivery of our NT2 product with higher price from Q2 to Q3, the average selling price and gross profit margin per car will recover. So we are confident that the gross profit margin will start to recover to double digits in Q3 and over 15% in Q4. Thank you.

Question: Bin Wang - Credit Suisse - Analyst : Thank you.

Question: Ming-Hsun Lee - Bank of America - Analyst : Thank you, William and Steven. I also have two questions. My first question is what is the battery price decline in first quarter and how much does the battery price help gross margin in the first quarter? Could you also comment on the second quarter and third quarter's battery price trend? That's my first question, thank you. Stanley Qu Hi Ming. Generally, the price of lithium carbonate differs a little bit from Q1, so this leads to a certain increase of our gross profit margin. Regarding amount-wise, I think the RMB2,500 per car, but recently I think we can also see the lithium carbonate price also recover a little bit to RMB310,000 per ton. So when (inaudible) change of lithium price will bring uncertainty to our gross profit margin. That's generally the impact of lithium.

Question: Ming-Hsun Lee - Bank of America - Analyst : Also the guidance on operating expense, sorry. Stanley Qu Okay, regarding operating expense, one is for the R&D expense. The upcoming years remains to be the crucial stage for our R&D and also mass production of our core technology and new models. So our average each quarter of 2023 the non-GAAP R&D expense will be kept at RMB3 billion to RMB3.5 billion per quarter. Yes, we will also manage the spending curve and also keep improving our system efficiency. For SG&A expense, we can see a decline in Q1. The main reason is because the reduced marketing activities and also seasonality impact of Chinese New Year along with more marketing events like auto show, road show and also launch of new models. The SG&A total amount will increase from Q2, but the efficiency will be improved from Q3 since all NT2 products will be launched and more revenue will be realized. that's the guidance for OpEx of next quarters.

Question: Yuqian Ding - HSBC - Analyst : (Spoken in Mandarin).

Question: Yuqian Ding - HSBC - Analyst : I'm sorry. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call

Question: Yuqian Ding - HSBC - Analyst : Yes, sorry. (Spoken in Mandarin). I've got two questions. The first is do we have plan to introduce any budget version of our existing model, especially the potential volume carrier ET5, but lower price and lower content to access more volume? The second question, we're talking about the scale down a little on OpEx burn. Generally, does that also affect or postpone our breakeven point of the year? William Bin Li (Interpreted) Thank you, Yuqian, for your question. We understand that there are many different kind of pricing movements in the market. But for us, regarding ET5, we don't think it's reasonable for us to have a budget version of the ET5, because our philosophy is that we believe the different configurations or the important configurations should come as a standard for all of our NT2 products. For example, the dual motor, AD suite and other important functions and features. We believe those standard package philosophy can serve the long-term interests of our users. But at the same time, we do have some flexibilities in many other different approaches, for example user rights such as the free battery swapping. When we make those kind of considerations and adjustment, of course, the important thing is to make sure we can put the users' interest first. When we decide to make those kind of adjustment, we also need to consider the interest of our installed base. For the second question regarding the breakeven point, according to the current situation, we do think probably we need to delay our breakeven point to within one year. We think this is probably a reasonable assumption. William Bin Li Thank you, Yuqian.

Question: Nick Lai - JP Morgan - Analyst : (Spoken in Mandarin). My first question is really following up the previous question regarding cash burn and CapEx cycle and so on. [You] just mentioned that you'll push back the RMB spend and so on. I'm more curious about our 2024 and 2025 planning. How should we expect the CapEx or cash burn in 2024 and '25? Would that be flat or up or down compared with 2023? Thank you. William Bin Li (Interpreted) Thank you for your question, Nick. Regarding the dynamic and the forward market expectation, we understand it's important for us to control the risk and keep the stable and sound business operations. For the ALPS brand, basically the project is moving forward according to our plan. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call For the production side, we believe the current production capacity is sufficient to support the needs of NIO brand and ALPS brand. It means that, in terms of production facilities and capacities, there's no need for big CapEx investment. In the market front, we believe, starting from this year, we should have sufficient power swap stations to support both brands to share the power swap stations. Previously we mentioned that probably for the go-to-market of ALPS brand we do need to make some investment in terms of CapEx and OpEx. But we would like to control the pace of the go-to-market cadence to make sure we can have much faster movement and cadence and have a

Question: Nick Lai - JP Morgan - Analyst : (Spoken in Mandarin). My second question is really simple, really about the product mix, yes. The new product ALPS is going to account for a meaningful portion of the volume and how should we think about the conditions [on this for margin]? How should we think about the product mix going forward? Thanks. Stanley Qu Hi, Nick. Regarding the volume percentage of ET5, ET5 Touring ES6 and EC6 I think from a long run, the percentage will be 80% around. Yes. From the long run, as I mentioned earlier, this year I think with all the NT2 product launched, our gross profit margin can recover to 15%. And long term, considering the cost advantage brought by the in-house technology capability and also the innovative supply chain development, the NT2 product gross profit margin target will still be 20% from the long run. Yes. Thank you.

Question: Paul Gong - UBS - Analyst : (Spoken in Mandarin). My first question is regarding the new models' sales trends. It seems that a few recent new models all shared (inaudible) similarity with strong starts but after a few months, they subsequently declined. Does our ES6 also face such kind of, say, challenges or how should we avoid this happening again? William Bin Li (Interpreted) Thank you, Paul, for your question. Last year we launched three products, ET7, ES7 and ET5. To be honest, in terms of the recent performance of these three products including the second quarter, we understand the market performance of these three products is lagging behind of our expectations. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call If we look at the factors affecting the performance of these three products, just like I mentioned before, last year for the users who purchased those three products, they have more user rights and benefits and they can enjoy the national subsidies. But this year for the users purchasing these

Question: Paul Gong - UBS - Analyst : Thank you. (Spoken in Mandarin). So sorry, I forgot to translate. So, my second question is regarding the marginal outlook of the high-end NIO brand versus the low-end ALPS brand. NIO brand remains to be relatively expensive thanks to the branding and the excellent service Company has been offering but has yet to achieve a satisfactory or kind of like excellent margins. So, you are moving towards an ALPS to the relatively the lower end. How do you foresee the margin would be like especially compared to the high-end ones? Thank you. William Bin Li: (Interpreted) Thank you for your questions. Regarding the brand positioning, I believe right now it's a very chaotic) period for the brand positioning. For most of the users in a majority of the time, they choose a product based on the price. So, right now, in terms of our product, our service as well as of our technology and experience, we believe we are much better than others in those different areas. But the values of our product and services and the technologies are not reflected in the perceived value and the price of the products. This is the reality that we're facing right now but we believe for the long run. The value of our product and services will be recognized by the users and by the markets. At the same time, we do face some challenges in the macro environment, for example the lithium carbonate cost has significantly impacted our vehicle gross margin. Back in 2021, we have reached around 20% vehicle gross margin. At that time, we believe if the lithium carbonate cost goes back to a reasonable level, we should still have a chance to reach 20% vehicle gross margin. In the long term, we believe in terms of the economies of scale and the efficiency improvement as well as the vertical integration of our core components and in-house R&D capabilities, there's a strong base for us to achieve a 20% vehicle gross margin. That's for NIO. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call But for ALPS, the strategy is very different because we believe that in terms of the vehicles gross margin is actually more about how you define the product and how we design the product. So, for ALPS, it's more about finding the best solution in the specific segment that the ALPS brand targets at. For us, if we look at the market, we see some companies that they sell the product at a price of around RMB200,000 but they can still achieve over 20% vehicle gross margin. So, it shows that this is achievable for NIO because we have many high-spec configurations in our products. For example, the over 1,000 top computing powers and all those smart features. It will be very difficult for us to lower the cost on those components, and this will factor is in terms of lowering the price of our products. But for ALPS is different. When we define our business products, of course, the target for us is to achieve reasonable vehicle gross margin and we believe it is reasonable and is possible for us to achieve the 20% vehicle gross margin.

Question: Jing Chang - CICC - Analyst : (Spoken in Mandarin) My first question is about the NOP+. Our NOP+ beta version has been open for several months. So, can you share some users' data such as usage, time or accumulated mileage or the average takeover mileage during this period? How is their feedback? We can see the official version will be a charge for subscription. So, can you share more of your understanding of subscription charge? Also, in the second half of this year, we can see that highway navigation function to swapping stations will be further launched. So what do we see of improvement of customers' experience with this new function? The last one is, is there any time plan for our city NOA function in the second half year? William Bin Li (Interpreted) Thank you for your question. I will answer the NOP+ related question and Steven is going to address the question about the power swap stations. For the NOP+, right now we have over 50,000 users using the NOP+ services. For us, the accumulated mileage of the NOP+ is over 41 million kilometers, and every week the mileage is around 2 million kilometers. We have already started the test of the NOP+ in the city scenarios and use cases. This year, we're going to accelerate the test of the NOP+ in the city use cases, or the urban use cases. When it gets ready, we will also release these features to the users. Based on our internal evaluation right now, we are very confident regarding the performance of the NOP+ in the urban scenarios. At the same time, regarding the NAD we're also doing some test and if, in the future, the regulations and the laws are in the right place for the NAD releases, then we will release the NAD for our users when the regulations is in the right place. We believe this is probably right now all the R&D of NOP+ and NAD is basically on track and according to our schedule. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call

Question: Jing Chang - CICC - Analyst : (Spoken in Mandarin). Steven, thank you.

Question: Vijay Rakesh - Mizuho - Analyst : Yes, hi. Just a quick question. You have given some of the new ramps of the five-year models. It looks like you're getting a good response from it. Would you expect the second half or even third quarter production run rates to get to the 20,000 per month on average? Just wondering what the expectation is on second half to first half deliveries. William Bin Li (Interpreted) Thank you Vijay, for your question. Of course, for us, the target for the second quarter of this year is to deliver over 20,000 units every month and we are very confident to achieve this target. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 09, 2023 / 12:00PM, NIO.N - Q1 2023 NIO Inc Earnings Call

Question: Vijay Rakesh - Mizuho - Analyst : If you look at some of the cities, more of the tier 2 cities, is that a near term - could that be a challenge for NIO given you don't have enough swap stations, etc. on the tier 2 cities etc. Thanks, appreciate. William Bin Li (Interpreted) This year our target is to deploy 1,000 additional power swap stations. The majority of those power swap stations will be deployed on the highways. Some of them will be installed in the Tier 3 and the Tier 4 cities. We believe that this is going to directly boost the sales performance of our products. Actually, in April we started the deployment of the power swap station 3.0 and we accelerated the deployment in May. In June we believe that we are going to deploy around 100 power swap stations 3.0. We believe gradually from now on we are going to speed up the deployment of the power swap stations.