XPeng Inc. (NYSE:XPEV) Q3 2022 Earnings Call Transcript

XPeng Inc. (NYSE:XPEV) Q3 2022 Earnings Call Transcript November 30, 2022

XPeng Inc. misses on earnings expectations. Reported EPS is $-2.77 EPS, expectations were $-2.56.

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

Alex Xie: 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 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 maybe 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 including 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.

He Xiaopeng: Hi, everyone. I am He Xiaopeng. In the third quarter of 2022, XPeng delivered 29,570 electric vehicles, a year-over-year increase of 15%. Cumulative deliveries in the first three quarters of 2022 totaled 98,553 electric vehicles, representing a growth of 75% year-over-year. Frankly, we are going through a very challenging period in pursuing our long-term goals. In response, we recently conducted an in-depth strategic review and implemented organizational restructure. The competition for smart EVs is similar to a marathon. I believe that only strong players with core technologies, well-rounded capabilities and the ability to monetize from both hardware and software will eventually win in the long run. To enhance our product competitiveness and boost cells, we will simplify configurations while improving our hardware and software products attractiveness to incorporate customers’ voices and needs.

As market competition intensifies, we will sharpen our marketing to highlight the great value in our industry-leading smart and electrification technologies and further enhance our branding, sales and service capabilities. I would also like to take this opportunity to sincerely thank our customers and shareholders for their valuable suggestions regarding these areas for improvement. Within the new organizational structure, I will focus on XPeng’s strategy, product planning and R&D. My goal will be to drive organizational change and upgrades, ensure customer values is reflected in our entire product development process, including design, R&D, sales and service holistically making our business operation more concentrated and efficient. In a recent strategic review, I am more convinced that the adoption of smart EVs will accelerate in the second half of 2023.

We will unwaveringly invest in the R&D of autonomous driving and smart cockpit technologies to strive to reduce the cost of these technologies to our customers while ensuring that customers’ needs and preferences are at the center of our innovation to enhance our smart products’ competitiveness and profitability as well as our customer satisfaction. At the same time, the platform-based approach for our vehicles and powertrain will improve the efficiency of our research and development and will help consistently reduce our R&D expenses and BOM costs through technologies. Besides, our ecosystem affiliates, XPeng Aero HT and XPeng Robotics have both raised funds recently and are now well equipped to operate independently. As a result, I will be spending much less of my time on our ecosystem affiliates operations.

Our Co-Founder, Mr. will resign as an Executive Director of the Board of Directors to focus more on products. In addition, we are restructuring our brand and marketing team through a strengthened team and more targeted content, I believe will succeed in addressing the key factors that affect consumers’ purchase decisions in the most sought-after channels and across a broad range of customer demographics, paving the way for more powerful brand awareness of XPeng in our products. Leveraging our dedicated EV platforms with a focus on architecture and powertrain, we expect to increase our R&D efficiency, enhance our cost control measures and improve supply chain management. In line with our mission, we have invested in three powerful EV platforms over the past few years, including our fully established E platform and our third-generation F platform and H platform, both of which are expected to be mass produced next year.

Together, these advanced platforms form a solid technology foundation to support our product upgrades and iterations. Our core technologies, including our powertrain system, advanced driver assistance systems, chassis and electrical and electronic architecture will be shared across multiple vehicles we are developing as much as possible. As a result, the required R&D cycle time and expenditure for each new product will be reduced, while the vehicle software and hardware quality will be more stable. We have also adjusted the organizational structure for our EV product management team accordingly. Each EV platform will be led by a senior product manager in charge of product development across the complete product cycle from design and development to sell, forming a market-led closed-loop system to improve user experience in sales.

Mass deliveries of the G9, our flagship SUV equipped with our most advanced technologies, commenced at the end of October. All of the G9s are equipped with an 800-volt high-voltage platform that enables excellent driving range. It’s charging speed also outperforms all the other EV models in the market. The increasing market recognition of G9’s outstanding capabilities has marked XPeng’s leadership in not only smart technology, but also electrification. Such a reputation is not only popularized in China but also overseas. Despite near-term challenges brought by COVID-related restrictions and production ramp up, we are confident that the G9 will soon rank among the top three in terms of monthly sales volume in a battery electric SUV segment priced above RMB300,000 and draw closer to number one next year as we continue to enhance our brand recognition.

We believe G9’s sales ramp up will drive future sales volume and pull it out of the trial we experienced in October. Moreover, beginning in the first quarter of next year, we will successfully launch three new vehicle models, which will further strengthen our product competitiveness. We also expect consistent improvement in our marketing capabilities to make our subsequent product launches successful. As we continue to rollout new products and technologies, coupled with technology differentiation of our next-generation full-scenario ADAS products, we are confident that we will achieve a significant increase in sales volume and average selling price, gaining a revenue growth in 2023 that exceeds the industry average and increasing our market share.

Since the third quarter of this year, we have made significant progress in the mass production of autonomous driving technology. We continue cultivating consumers’ trust in and willingness to purchase our product with best-in-class ADAS software. On September 17, we debut our City NGP pilot program in Guangzhou. In urban traffic scenarios, which are significantly more complex than highway scenarios, XPeng’s P5 took the lead in delivering the best-in-class driver safety and driving experience at a much lower hardware cost. We are accelerating the development of our next-generation full-scenario advanced driver assistance product, XNGP and plan to release its major functions to several dozen cities in the third quarter of 2023. In my view, the upcoming release of XNGP will represent an inflection point where smart driver assistance software, becomes a must-have product with high-frequency usage.

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We are also pleased to see that a high proportion of current G9 orders are for the max version that features XNGP ahead of the XNGP’s OTA rollout. We look forward to enabling our cost competitive XNGP next year in more models. Furthermore, we believe XNGP’s hardware costs will have the opportunity to be reduced as our technology advances and become significantly lower than that of our peers. Driven by strong brand awareness of our product and cost competitiveness, we are confident that XNGP will rapidly gain widespread adoption nationwide. On October 31, the XPeng G9 obtaining the Guangzhou Intelligent Connected Vehicle Road Test permit making XPeng G9 the first unmodified mass-produced vehicle to qualify for autonomous driving tests on China’s public roads.

With the parallel development of our advanced driver assistance system, XNGP and robotaxi capabilities alongside a closed-loop data and a complementary approach in software iterations, we plan to be the first to realize autonomous driving with cost effective mass-produced vehicles. As we strive to bring our smart technologies and electrification technologies into commercialization, we firmly believe in the value proposition that our in-house developed, industry leading technologies bring to our customers as well as our commercial value for our enterprise. We are open to opportunities for strategic cooperation and technology collaborations globally. Regarding cash liquidity, our current cash amounts to over RMB40 billion. We have become increasingly aware of the importance for automakers to maintain steady growth in adversity and not just in prosperity.

Therefore, we will implement prudent cost control initiatives over the next few quarters and next few years to improve operational efficiency and streamline our investment projects. Building on our more focused R&D strategy and vehicle and technology platforms that can be applied across different vehicle models, we plan to rollout future products at a lower R&D cost. A stronger product portfolio and internal organizational restructuring will also help significantly improve our sales efficiency. Furthermore, thanks to our early investment in our production capabilities, our CapEx needs will significantly decrease over the next couple of years compared with 2022. Therefore, we are confident that our cash position of RMB40 billion will support our business growth in the coming years.

Also, our cash flow will substantially improve as our product sales grow. Looking ahead to the fourth quarter, we will focus on mitigating the impact of COVID-related restrictions in China and making internal adjustments for our medium and long-term development. Our November deliveries are estimated to reach at least 5,800 units mainly due to the impact of the G9 production ramp up. We are trying our best to expedite deliveries of our order backlog. In December, our deliveries will rebound significantly month-over-month. We expect to deliver a total of 20,000 to 21,000 vehicles in the fourth quarter of 2022 and generate revenue between RMB4.8 billion to RMB5.1 billion. We will accelerate internal organizational adjustments and management upgrades in the coming quarters.

We’re confident that we will rank among the top players in the smart vehicle industry in the medium to long-term. Thank you everyone. With that, I’ll now turn the call over to our VP of Finance, Mr. Dennis Lu, to discuss our financial performance for the third quarter of 2022.

Dennis Lu: 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 result of foregoing 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 in total of 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.

Q&A Session

Operator: Thank you. We have a first question from the line of Tim Hsiao with Morgan Stanley. Please go ahead.

Tim Hsiao: 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.

He Xiaopeng: 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 can we are very confident that we can be ranked among the top three players in the battery electric SUV’s segment, price 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 further exceed actually P7’s performance compared to the same developmental stage are in the history. At the same time, P7’s competitiveness will be further enhanced alongside with our technological improvements with the €“ and also their sales performance will be improved in the coming year as well. Now in mid-2023, we expect to launch a new product or a new model that are price between RMB200,000 to RMB300,000, which will be a B-class midsized SUV and that will definitely help us to further boost our product sales. And we believe that the sales volume of this particular model will actually exceed our current product portfolio.

Thank you.

Brian Gu: 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.

Tim Hsiao: So my second question is about the cash flow. In light of the challenging macro backdrop, investors are increasingly concerned about expense 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 turn or surge in new modern 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, expense short-term borrowing also increased more substantially in the quarter. Is there any specific reason to that? That’s my second question. Thank you.

Brian Gu: 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 a 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 actually also foresee the entire CapEx for this year 2022 to be less than RMB4.5 billion and lower than what we anticipated earlier in the year. And then 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 that we actually pretty much completed our capacity build out, so we don’t need to incur significant CapEx for that.

We also have also completed the construction of these new product platforms for the new car launches. So a lot of these CapEx has been already incurred already. So next year, we think the CapEx for us will be significantly lower, actually below RMB3 billion in our estimate for next year. And also in line with the current streaming line 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 that growth actually in line or reduction. And we also see that 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. And also with our current cash on hand, we have very adequate resources to meet our business plan and we also anticipate that carries us to our projected cash flow positive sometime in 2024.