NIO Inc. (NYSE:NIO) Q2 2023 Earnings Call Transcript

NIO Inc. (NYSE:NIO) Q2 2023 Earnings Call Transcript August 29, 2023

Operator: Hello, ladies and gentlemen, and thank you for standing by for the NIO Incorporated [First] (ph) Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Eve Tang from Capital Markets. Please go ahead.

Eve Tang: Good morning and good evening, everyone. Welcome to NIO’s second quarter 2023 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted at the company’s IR website. On today’s call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Steven Feng, Chief Financial Officer; Mr. Stanley Qu, Senior VP of Finance; and Ms. Jade Wei, VP of Capital Markets. Before we continue, please be kindly reminded that today’s discussion will contain forward-looking statements that made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such, the company’s actual results may be materially different from the views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO’s press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

William Li: [Foreign Language] [Interpreted] Hello, everyone. Thank you for joining NIO’s 2023 Q2 earnings call. In the second quarter of 2023, NIO delivered a total of 23,520 smart electric vehicles. In July 2023, as we started mass production and ramp up of more new models, NIO’s monthly delivery volume grew rapidly to 20,462 units, representing a year-over-year growth of 104% and a new monthly high. According to the retail statistics of [Cartrack] (ph), in July, NIO was the best-selling brand in the premium electric vehicle segment with the transaction price of over RMB300,000, claiming a 59% market share. As NIO completes its product lineup, further expands the sales and service network and the power network, enhances its all-around sales capability and the [role of] (ph) sales and marketing plans, the competitiveness of the NT2 products has been further unleashed.

The delivery volume in the third quarter of 2023 is expected to be between 50,000 — 55,000 and 57,000 units. And now I would like to share with you the recent highlights of our products, R&D and operations. Following the delivery of the flagship coupe SUV EC7, the flagship sedan 2023 new EC7, and the all-round SUV all-new ES6 earlier this year, we started to deliver the smart electric tour ET5 Touring or ET5T for short, and the flagship SUV all-new ES8 in June. In the second quarter, NIO achieved high-quality delivery of five new models, with user satisfaction exceeding our expectations. This also proves NIO’s capabilities of conducting fast product iteration and the managing product complexity. In September, we plan to launch and deliver the new mid-sized coupe SUV EC6, which marks the completion of our product transition to the NT2 platform.

With that, NIO’s entire NT2 product lineup, featuring eight different models, will have entered the premium BEV market to better cater to the diverse needs of the users in the premium segment and drive the steady growth of deliveries. NIO’s product safety has been highly recognized by authoritative institutions worldwide. On July 12, 2023, NIO’s smart electric mid-sized sedan ET5 and the mid large SUV EL7, which is called ES7 in China, both obtained the 5-star safety rating from Euro NCAP, making NIO the first car brand receiving the 5-star rating since Euro NCAP adopted the new testing protocols for 2023. Enabled by the full stack technologies developed in-house and the closed-loop data management, NIO has made significant progress in the assisted and intelligent driving.

User base and engagement continue to grow. At present, over 100,000 NIO users have activated Navigate on Pilot Plus, or NOP Plus, and have driven on it for over 80 million kilometers. The mileage penetration rate of NOP Plus has reached 53%. In the meantime, we have carried out multiple rounds of early bird programs in Beijing and Shanghai for NOP Plus in all operational domains, including in urban environments. In terms of the sales and service network, so far, we have 420 NIO House, NIO space and pop-up stores in 143 cities and 304 service centers as well as 58 delivery centers in 201 cities worldwide. Since July, we have started to take a more active manner in expanding the user touchpoints and sales channels and enlarging the sales team in China.

These actions will further increase our sales capabilities and propelling sales growth. As for the charging and swapping network, to date, we have installed 1,747 power swap stations worldwide and provided more than 27 million battery swaps. Our expressway battery swap network in China consists of 476 swap stations along the 10 major expressways, connecting 68 major cities. We’ve also deployed over 7,900 power chargers and 9,700 destination chargers. NIO has become the automotive brand with the most public chargers and the most chargers along expressways in China. In the meantime, NIO’s charging map has connected with over 1.36 million third-party charges worldwide. On July 20, NIO announced the flexible battery upgrade service by day, providing users with more options and fulfilling more use cases.

In July, we organized the host city election for NIO Day 2023, and the city of Xi’an was voted by new users as the host city this year. On August 20, we partnered with Worldwide Fund for Nature and Qilian Mountain National Park in installing the world’s first photovoltaic self-consumption system with V2G capability. It features solar power stations, V2G chargers and battery electric vehicles. Moreover, we initiated the Clean Parks Citizen Scientist program to engage more users and the public in conserving biodiversity and supporting the establishment of a volunteer system for national parks in hope of striving for a shared vision of blue skies. In July, NIO received a strategic equity investment from CYVN Holdings, an investment vehicle majorly owned by the Abu Dhabi government.

The investment package totaled US$1.1 billion. In addition, we will also cooperate with the new strategic investor to jointly pursue opportunities in our international business. Although the smart EV market is full of challenges and the competition is increasingly fierce, with our continuous efforts in core technologies, product portfolio, sales capabilities, manufacturing and logistics, we are fully ready to rise to the challenge. We believe that with focused marketing and self-strategy as well as execution, NIO can drive the steady growth of sales and deliveries while further optimizing the cost structure and enhancing operating efficiency on all fronts. We look forward to NIO’s strong market performance in the second half. As always, thank you for your support.

With that, I will now turn the call over to Steven, who will provide the financial details for the second quarter. Over to you, Steven.

Steven Feng: Thank you, William. I will now go over our key financial results for the second quarter of 2023. And to be mindful of the length of this call, I will reference to RMB only in my discussion today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Our total revenues in the second quarter were RMB8.8 billion, representing a decrease of 14.8% year-over-year and a decrease of 17.8% quarter-over-quarter. Our total revenues are made of two parts: vehicle sales and other sales. Vehicle sales in the second quarter were RMB7.2 billion, represent a decrease of 24.9% year-over-year and 22.1% quarter-over-quarter. The decrease in vehicle sales year-over-year was mainly due to the lower average selling price as a result of higher proportion of ET5 and 75-kilowatt hour standard-range battery pack deliveries and decrease in delivery volume.

The decrease in vehicle sales quarter-over-quarter was mainly due to a decrease in delivery volume. Other sales in the second quarter were RMB1.6 billion, representing an increase of 119.9% year-over-year and 9.3% quarter-over-quarter. The increase in other sales year-over-year was mainly due to the increase in sales of used cars, accessories and provision of power solutions, as a result of continued growth of our users. The increase in other sales quarter-over-quarter was mainly due to the increase in sales of used cars and provision of power solutions, as a result of continued growth of our users, partially offset by decrease in revenue from provision of auto financing services. Gross margin in second quarter of 2023 was 1.0% compared with 13.0% in the second quarter of 2022 and 1.5% in the first quarter of 2023.

Vehicle margins in the second quarter was 6.2% compared with 16.7% in the second quarter of 2022 and 1.1% in the first quarter of 2023. The decrease in vehicle margin year-over-year was mainly attributed to changes in product mix, partially offset by decreased battery cost per unit. The increase in vehicle margin quarter-over-quarter was many due to decreased promotion discount for the previous generation of ES8, ES6 and EC6. R&D expenses in the second quarter were RMB3.3 billion, representing an increase of 55.6% year-over-year and increase of 8.7% quarter-over-quarter. The increase in research and development expenses year-over-year and quarter-over-quarter was mainly attributed to: first, the increased personnel costs in R&D functions and increased share-based compensation expenses recognized in the second quarter of 2023; and second, the incremental design and development costs for new products and technologies.

SG&A expenses in second quarter were RMB2.9 million, representing an increase of 25.2% year-over-year and increase of 16.8% quarter-over-quarter. The increase in SG&A expenses year-over-year and quarter-over-quarter was primarily due to: first, the increase in personnel costs related to sales functions; second, the increase in sales and marketing activities, including the launch of new products; and third, increased rental and related expenses related to company’s sales and service network expansion. Loss from operation in the second quarter was RMB6.1 billion, representing an increase of 113.5% year-over-year and increase of 18.8% quarter-over-quarter. Net loss in the second quarter was RMB6.1 billion, representing an increase of 119.6% year-over-year and increase of 27.8% quarter-over-quarter.

Our balance of cash and cash equivalents, restricted cash, short-term investment and long-term time deposits was RMB31.5 billion as of June 30, 2023. Now, this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

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Q&A Session

Operator: Thank you. [Operator Instructions] And the first question will come from Bin Wang of Credit Suisse. Please go ahead.

Bin Wang: Thank you. My question is about your sales network structure. Recently, I heard you hired a few of the salesperson from other luxury brands such as BMW, Mercedes and Audi. So, what’s the reason you hired non-NIO salesperson recently? And how is the impact so far for your sales volume increase? We also found that in your third quarter guidance, you actually implied in August and September, September will be lower compared to July. So, kind of what’s the reason behind it? It’s because supply chain issue? Thank you so much.

William Li: [Foreign Language] [Interpreted] Well, thank you, Bin Wang. For your first question, actually, around June, we have realized that inside of the company in terms of the number of our salespersons as well as the capabilities of selling products, we are lagged behind by the competitors in the market. For example, for those luxury brands like BMW and Mercedes, the size of their sales team is six to seven times of ours. Without sufficient personnel or touchpoint, we cannot realize a very good user satisfaction, realize very good test drives or high conversion rate from these two orders. So starting from June and — July and August, we have taken a more active manner in improving our sales capabilities. And with that, we hope that the company will be able to support the new orders of 30,000 units per month that will be contributed by our sales network as well as the personnel increase.

So that by the end of September, we will be able to realize that target. Of course, it takes time for us to really train the personnel and also to find the locations. So, we will have that initial capability ready by the end of September, and then the real effect will kick in from October. That is our existing plan for the improvement. This is also why starting July and August, we’ve been taking some active measures and actions in expanding our sales network and touchpoints, especially in lower-tier cities where we don’t have a full-fledged facilities or stores, we hope to really secure and hire experience and seasoned salespersons who have their networks and user bases already to help us with the sales test. And regarding your second question, in July, we have delivered more than 20,000 vehicles.

And as shown by our guidance, our delivery volume in August and September are lower than that in July. This is mainly because by the end of July, we have announced the adjustment to our power swap user benefits. Before users enjoy or entitled to four or six free swaps per month, but starting from August 1, all the new orders are not entitled to free swaps anymore. This also helped us to pull ahead some orders or users with strong demand for power swap in July, and this has also affected the delivery volume in July. In terms of the August, we believe that it will take some time for the order momentum and intake to be back to the normal track. But in the meantime, in August, we’ve also witnessed a new high of the numbers of test drives and leads.

Average speaking, during the weekends, we have more than 10,000 test drives. This represents a significant growth from the past month. And in the meantime, we also understand that it will take some time for the test drive to be truly converted into orders and we will wait for that. But overall speaking, we are very confident in stabilizing the order intake as well as the delivery volume. In the meantime, we also need to understand the external challenges, especially the challenges and the pressure from the macroeconomic environment. So, our forecast and guidance have also considered that — those external factors. But overall speaking, we are confident in the delivery volumes we provided. Also, we must understand that in July, inside of the premium battery electric vehicle segment, priced over RMB300,000, we have already realized the 59% market share.

This has proven a very solid foothold of NIO in this segment, and we will continue to make efforts in transforming and converting ICE users into buying EVs in the premium segment. In this case, we will also make more efforts in expanding our channels at touchpoint. Thank you, Wang Bin.

Bin Wang: Thank you.

Operator: The next question comes from Tim Hsiao of Morgan Stanley. Please go ahead.

Tim Hsiao: Hi. Thanks for taking my question. So, my first question, basically, I just want to follow up regarding the sales volumes into second half. Because as William just mentioned, we successfully upgraded our sales team and sales network. So, looking into fourth quarter, I recall that we expect our monthly sales can stay above 20,000. So, if that’s the case, look into fourth quarter, should we expect NIO to grow the sales further to above 20,000 or even like 25,000? And what could the contribution from the four volume driving models covering like ET5, ES6? So, could you just provide some update regarding volume? And my second question is about the gross profit margin. Because according to the management’s previous guidance, I think the vehicle gross profit margin could get back to double digit in the second half.

So, after the RMB30,000 cost in late June, do you still stick to your previous view on sequential margin expansion into second half? What would be the pace in the quarter and fourth quarter, respectively? That’s my second question. Thank you.

William Li: [Foreign Language] [Interpreted] Thank you, Tim, for your question. Regarding your first question, of course, we target to realize and stabilize our monthly delivery to be above 20,000 units starting Q4 this year. But in the meantime, we are also preparing our sales capability, so that we can support the new orders of 30,000 units per month. In this case, we are expanding our channels and also personnels. As mentioned, we will be occurring these initial capabilities by the end of September, and we will take some time for the preparation and ramp-up. We believe that the effect of our sales capability improvement will be kicking in from October and November with positive progress from that time point. In terms of the reference to the NT1 product we’ve experienced, normally, we realize that it will take around one to two years for the new product to reach a sound and stable volume on a monthly basis.