Expected to return to double-digit gross profit margin in car sales in the second quarter (Nio 1Q24 conference call minutes)

Nio FY24Q4 Interpretation Meeting Minutes:

Below are the minutes of Nio's 2024 first quarter earnings conference call:

I. Review of Core Financial Information:

II. Detailed Content of Financial Results Conference Call

2.1. Key Points from Management's Statements:

Product and R&D Achievements: The company launched the ET7 Executive Edition and introduced a new brand to the mainstream family market on May 15. Nio's autonomous driving (NAD) capabilities have also made progress, significantly expanding coverage.

Market Strategy and Expansion: Currently, Nio has an extensive sales and service network, including 154 Nio Centers, 388 Nio Spaces, and a strong charging and battery swapping network.

Strategic Investments: Nio Energy (NIO Power) signed a strategic investment agreement of 1.5 billion RMB to expand the charging and battery swapping network and develop core technologies.

2.2. Q&A Analyst Interactions

Q: Regarding the gross profit margin, the company previously stated that the gross profit margin would return to the mid-teens, as NIO's strategic focus is on profitability and cash generation, not just sales volume. However, we have seen increased new car promotions in April and May, which have been very effective in boosting sales. (1) Will management consider continuing this more aggressive promotion in the coming months to increase NIO's sales? (2) Do we need to lower our gross margin rate expectations?

A: Nio upgraded its products to the 2024 version in March 2024 and provided more promotions during the model transition period, leading to a decrease in average selling price in the first quarter. In addition, more lower gross margin models such as ET5 and ET5T were sold in the first quarter, leading to a decrease in gross margin. With the rebound in sales in May, Nio will further optimize its product mix, negotiate with supply chain partners to improve cost efficiency, and expects vehicle gross margin to return to double digits in the second quarter and continue to improve in the third and fourth quarters. Considering intensified market competition, Nio will also maintain flexibility in sales policies to ensure market position.

Q: NIO Power has just received an initial round of 1.5 billion RMB (approximately 200 million USD) in external strategic investment. (1) Will Nio continue to accept funding from other automakers to expand the battery swapping alliance? Apart from NIO Power, (2) are there other business units within the group planning to seek external funding and gradually spin off? Can you provide some examples?

A: Nio completed the first round of financing for NIO Power, with Nio still holding about 90% of the shares and open to external investors, whether from investors or car companies. Nio believes NIO Power has financial sustainability as the outlook for the battery swapping business is promisingIn the initial stage, the network construction of battery swapping facilities requires a relatively high initial investment, but Nio believes that the battery swapping business has a clear path to profitability. Currently, the breakeven point for a single battery swapping station is approximately 60 swaps per day. Nio's average daily number of swaps has reached 100,000, meaning each station provides about 30 swaps per day on average. In the long run, Nio believes that the battery swapping business is sustainable and profitable.

Q: As Nio approaches the end of the second quarter, (1) can you provide some guidance on capital expenditures related to sales channel expansion and branding? (2) Additionally, could you give a brief overview of the brand's product line?

A: Nio plans to open around 100 stores in China when it launches and delivers its first product in September this year. These sales stores do not include NIO House, do not require a large investment, and are expected to have capital expenditures ranging from 1 to 2 million RMB per store. From a capital expenditure perspective, this will not be a significant burden. The first product, L6, will directly compete with the Model Y and is a mid-sized SUV designed for family users. Next year, Nio will launch the second product, a mid-to-large-sized SUV designed for larger families. Overall, the brand will focus on the market share and sales volume of each product in its respective market segment.

Q: (1) Can you provide some updates on the third brand, Firefly? (2) It was mentioned in the last conference call that this brand may be showcased at NIO House, can you confirm this network strategy?

A: The development of the Firefly brand is progressing smoothly, and Nio test drove the early version of its first model several months ago. Firefly will launch compact models in the Chinese market, with prices ranging from 100,000 to 200,000 RMB, but will adhere to very high safety and quality standards, designed as exquisite small cars for the Chinese market. In terms of sales channels, Firefly will share sales outlets with NIO, similar to the model of MINI sharing dealerships with BMW. Although Firefly's prices will not be as expensive as MINI, the product quality is very good. Delivery is planned to start in the first half of next year, but the specific brand and product release dates are yet to be determined.

Q: Regarding the gross profit margin, it will be fully upgraded to version 3.0 this year. (1) How much gross profit margin improvement can be achieved by migrating all NIO brand products from 2.0 to 3.0 through technological upgrades? Also, (2) can you provide an assumption for the overall company sales volume based on the 3.0 technology?

A: Nio will gradually upgrade products to the third generation next year. In the third generation products, Nio will increase vehicle gross margins in various ways, such as introducing more proprietary technologies like chips to improve vehicle gross margin performance. Additionally, we see the decrease in battery costs contributing to margin improvement. Nio's goal is to achieve an average gross margin of 20% for NT3.0 platform products (the first NT3.0 product ET9), and we are confident in achieving this goal. For the Nio main brand, the breakeven target is to reach a monthly sales volume of 30,000 vehicles with a vehicle gross margin of 20%For the second brand, the competition in the price range of the second brand will be greater than that of the NIO main brand, and we will not sacrifice gross profit margin for sales volume. In the long term, we aim to achieve or exceed a gross profit margin of 15% for its products. For the breakeven point of the second brand, the monthly sales volume will need to be at least 20,000 to 30,000 units.

Q: Regarding the overall order backlog of the second brand, there are market rumors that there are currently 60,000 cancellable orders. Can you comment on this number and the current order situation?

A: NIO has never disclosed the number of pre-orders because pre-orders are refundable and are not a reliable reference for actual performance. However, pre-orders have indeed exceeded expectations. Although no stores have been opened or products launched, pre-orders have exceeded expectations.

Q: Currently, there are 2,400 battery swapping stations, and it is understood that only the latest third-generation swapping stations can be used for battery replacement for the second brand. Can you provide a reminder of how many third-generation swapping stations can be used for swapping?

A: Third-generation swapping stations can be modified (an investment of RMB 200,000 to 300,000) to be used for the second brand, with over 1,000 third-generation stations themselves. Starting next week, the deployment of fourth-generation swapping stations will officially begin, supporting both the second brand and the NIO brand. As of now, by the end of this year, there will be over 1,000 swapping stations available for the second brand users. Of course, we will not modify all third-generation stations because not every station needs modification, and there are not that many second brand users initially.

NIO can significantly see that the construction of swapping stations can drive sales. In the Yangtze River Delta region, there are nearly 900 swapping stations, and the vehicle ownership has reached half of the national total. NIO is also working on an ROI model to calculate the relationship between swapping stations and sales volume. Next, NIO will closely monitor the return on investment of swapping station deployment. We believe that we have basically formed our network nationwide, so our next step in swapping station deployment will be more based on promoting sales.

Q: NIO is one of the first companies to obtain a license for autonomous driving tests. How does the company plan to utilize this opportunity and further develop autonomous driving technology?

A: NIO obtained an L3 testing license two years ago and was one of the earliest startup companies to receive a government-issued license. This represents recognition of our technology. Next, NIO will use this license to communicate more frequently with the government, promote the application and testing of higher-level autonomous driving technology, which is very important for the entire industry.

Q: In the second quarter, we may see an increase in economic scale, but promotions and a lower product mix may continue to affect gross profit margins. Can you provide details on how the company balances pricing, product mix, and sales volume?

A: NIO saw sales growth in April and May mainly due to 1. the annual model upgrade enhancing product competitiveness, 2. adjustments to the battery leasing policy, and operational optimization. The acceptance rate of Battery as a Service (BaaS) has increased to over 80%, and we also offered some limited-time promotions (pay 4 months of battery rental within five years and get 1 month free). 3. The company is also increasing sales staff and capabilities. 4) User acceptance of battery swapping is high, retention rate is high, NIO has not lowered product prices but adjusted through the BaaS policy and subsidies for trade-ins, the main brand has not reduced pricesStarting in June, we will continue to optimize our product portfolio. We began delivering the ET7 at the end of April, hoping to increase the proportion of high-priced vehicles in the delivery structure while reducing limited-time promotions. The "buy 4 get 1 free" policy will expire on May 31st to improve the gross profit margin of vehicles.

Q: The results of the anti-subsidy investigation in Europe will be announced next week. Can you provide an update on Nio's latest progress in the European and Middle Eastern markets?

A: Nio believes that imposing tariffs on new energy vehicles goes against the original intention of sustainable development. In the short term, the European market accounts for a small proportion of sales, with limited impact on short-term operations. In the long term, the company will adjust its strategy based on the latest tariff policies. Later this year, Nio will enter the Middle Eastern market, first launching products and services in the UAE, and is currently preparing for the market.

Q: Regarding the financial impact of price adjustments, especially the first-quarter price adjustment policies such as changes in battery leasing fees, the 441 battery leasing, and light battery exchange coupons, what is their impact on the financial statements?

A: Price adjustments have two main impacts. Firstly, the price adjustment from 980 yuan to 728 yuan has no significant impact on Nio's revenue and gross profit margin. This adjustment is based on the assumption of extended battery life and optimized battery operations. Secondly, regarding promotional policies, such as the promotion of leasing a battery for 4 months and getting 1 month free (up to 5 years), the financial impact of this promotional policy on each vehicle is approximately below 6,000 yuan.

Q: Regarding the brand and Firefly, this year we will launch the first zero-emission vehicle. The three major sub-brands, including Nio, will form a complete product matrix next year. (1) Can you share more information about the different positioning and relationships of these three brands? (2) In what areas can they cooperate?

A: The positioning of the three brands is very clear. Nio is a high-end brand targeting business and household users, while the Firefly brand is a mass-market brand targeting high-end household users, with a clear target audience of families. Firefly will launch affordable compact cars in the Chinese market, mainly targeting household users, especially those purchasing as a second car. The three brands also have clear price differentiations, starting at 100,000, 200,000, and 300,000 RMB respectively. Additionally, all three brands support battery swapping and share basic capabilities in smart technology, electrification, and vehicle engineering. For example, in smart technology, software, and hardware, the three brands can achieve many synergies. In terms of manufacturing and production, the first model of the L60 will be produced at Nio's second factory, indicating that the brands can leverage synergies and shared investments.

Q: Will vehicle sales in the coming months exceed 20,000 units per month?

A: Nio has indeed seen stable demand for its products, with order demand in May exceeding production capacity. The actual delivery volume in May reflects the maximum production capacity. Nio is confident in maintaining stable and sustainable growth momentum. The forecast target of 20,000 units does not include sales of the new brand and applies only to the Nio brandQ: Sales, general and administrative (SG&A) expenses in the first quarter increased by 22% year-on-year. (1) Will SG&A be higher with the opening of 100 new stores in September, especially with the new store opening spree?

Additionally, research and development (R&D) expenses decreased by 7% year-on-year. In order to maintain competitiveness in hardware and software technology, (2) what does Nio consider to be the reasonable level of annual R&D expenses?

A: In the first quarter, market activities decreased due to the impact of the Spring Festival and seasonal changes. Starting from the second quarter, it is expected that the proportion of sales expenses to vehicle revenue will improve, especially with the launch of new models, increasing sales volume will enhance the efficiency of sales revenue. The fluctuation in R&D expenses is consistent with the pace of new vehicle and technology development. It is expected that R&D expenses in 2024 will remain consistent with 2023, with Non-GAAP quarterly spending of approximately 3 billion RMB. Nio expects SG&A expenses to increase by no more than 20% year-on-year.

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