Nio (NIO.US) Earnings Conference Call Transcript: Confident that Gross Profit Will Turn Positive Next Year , $100 Million Financing Will Be Divided into Short- and Long-Term Loans

On December 30, NIO Automobile reported its third quarter 2019 financial results. Total revenue for the third quarter of 2019 was RMB1.84 billion, with market expectations of RMB1.632 billion, compared with RMB1.47 billion in the same period last year, net loss of RMB2.554 billion, and market expectations of RMB2.939 billion, compared with a net loss of RMB9.757 billion in the same period last year.

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Tencent’s $100 million has already been covered by The U.S. financial statements for the third quarter, with another $95 million to be provided by Li Bin.

It is true that some layoffs and organizational structure softenings have been made, and by the end of this year the number will certainly be within 7,500, with the highest number at the beginning of the year being about 9,900.

In the past two months, the average daily number of large orders (more than 100), has been rising recently.

After the financial results were released, NIO founder and CEO Li Bin, NIO CFO Fengxuan and other executives attended the conference call to interpret the analyst’s questions.

The following is a transcript of the Content of NIO Conference Call:

Credit Suisse: I have two questions, the first is about financing, last round financing is $200 million, right? So wonder if $200 million is done? At the same time, is this achieved in the financial statements in the three-quarter report, is it only in the four-quarter report?

Feng Wei: I first answer the first question, as we all know, Li Bin is also also hoping to sign a financing of $200 million, at present, Tencent contribution, that is, the contribution of 100 million U.S. dollars has been covered in our third quarter financial statements. So as for libin, there’s $95 million to be provided by him.

We’ve done a lot to save our expenses and costs, and we’re working hard to make our 2020 budget, and our plan is to further improve our efficiency and further reduce our research and development spending in 2020. Of course, we’ll share more details with you at our fourth-quarter revenue meeting.

Li Bin: For workforce, we did make some layoffs and organizational structure optimization in terms of efficiency optimization this year. By the end of this year, our number will certainly be within 7500, but because there are some still in the legal process, the number is actually less than this, we see some of these adjustments will be included next year Q1, including some subsequent improvements should play a big role. So overall, we’re improving operational efficiency, lean management is a place where we’ve been improving before, and we’re constantly improving. So we continue to manage the lean.

Credit Suisse: How many people were there at the beginning of the year?

Li Bin: At the beginning of the year we were at our highest time at about 9,900, at the peak. I would also like to say that, compared with the reduction in the number of people, it is more important for us to control the overall cost and cost efficiency. Then we will constantly review the organization structure to achieve the performance of a more efficient team.

Morgan Stanley: I have a few questions, one of which is your sales expectations, and I’d like to know more about some of your sales in 2019, and of course I’d like to know more about some of your plans for next year. Also based on some of your strategies, you have made some new models in the middle of this season, from next quarter, we will have more challenges, I would like to ask from the EC6 this model, the current competition is also very fierce. And, from your ES8 perspective, you’ve made an upgrade, but the market is still a segment of the niche. So there’s another question, which is that you’ve also said what you want to do by the end of the year, what kind of planning do I think about some of your space expansion slots in 2020? What kind of people do you want to have to support your expansion?

Li Bin: Let me answer this question, we actually have been in the last few months, since September, we actually saw challenges in the market as a whole, but we saw that ORDERS for ES8 and ES6 are rising gradually. All I can say is that in the last two months, we’ve averaged more than 100 a day, and it’s been rising all the time. If you look at some domestic media reports to know that all our exhibition cars are short, we are now talking about the overall order trend is very very good, we can also see this situation.

In fact, we look at the overall, our product positioning should be said to be very right, we see there are some changes in this market, that is, in the past quarter, Audi, Mercedes-Benz new models have released the price of China, are beginning to sell in China. So, if the user looks at it, they can know that our product is very, very competitive. The advantage of cost-effective is very high, that other aspect, we actually came in the market of three hundred and forty thousand such medium-sized luxury cars, medium-sized luxury SUV market, we have in fact entered all the cars such a top 10, that is, compared with gasoline cars we have been two months in a row into the top 10, And we believe this ranking will gradually improve.

In fact, if from a consumer’s point of view, in the three hundred and forty thousand mainstream luxury medium-sized SUV, Thereis is undoubtedly a very suitable choice, we add edgy we introduced to change electricity and so on a series of services, in fact, is also our needs, The user’s needforus us will be much better than we expected at the outset.

So in general, our products and services competitiveness has won the user’s reputation, including our user’s input and support. So, overall, we are very confident about the performance of ES6 throughout next year. If we go to beijing, Shanghai and other cities, in fact, our market share in all more than 300,000 medium-sized SUVs, we are in many cities have been in the top five positions, I think this gives us a lot of confidence.

ES8 We deliver new models every April, and ES8 has a great increase in our new range. There are also 188 improvements, which our users are looking forward to. In fact, this quarter of our old cash ES8 is also very good, we do not have any inventory, or very popular. So we’re very confident about the SALE of THE ES8 for the full year next year. If you look at this segment, you will actually find that in such a segment, we and traditional such as Q7, XC90, and BMW X5, GLE we still have a very large competitive advantage, in terms of performance, intelligence, service, and Model X than also have a very large competitive advantage.

EC6 is a very beautiful car, after this appearance, now the response of the market is also very good, because we have opened to accept the intention of trading booking, the number I will not say too much today. But we are also good from the current reflection, but this car will not be delivered until September next year, of course, the impact on next year’s sales will not be particularly large. But overall, next year we are still very confident in the performance of our ES8, ES6 and EC6 cars in our respective segments.

From the point of view of sales growth strategy, we have in fact been from three aspects to see, the first is of course, is to continuously improve our products and services, the second is to let users to speak for us, through the user’s word-of-mouth, and user recommendations can be more efficient to let more people understand us. The third is the expansion of the sales network.

In terms of sales networks, we see a role in promoting our sales, and of course we added NIO Space in the fourth quarter of this year, many of them working with our partners. Our NIO Space expansion is a very efficient way to expand, next year we generally target the goal of the year, our NIO House and NIO Space by the end of the year, a total of about 200, we are now 70 by the end of this year. Next year we will also add a lot, mainly for China’s prefecture-level cities in this area of some cities, including the economically developed areas of some smaller cities coverage.

We’ve got a lot of experience in the middle, and What I’m saying is that NIO Space expansion isn’t really going to increase significantly, we’re not going to add a lot of more people, we have a lot of partners working with nio Space, and we have people on the ground, but the overall benefits are very high. Therefore, the expansion in this area will not significantly increase our staff.

Our car now has our users in 296 cities, we add channel expansion, we believe that next year’s overall sales base is still very good.

CICC: You also expect your sales to rise further in the fourth quarter, and I’d like to have two more to answer my questions. Including my follow-up question, for example, in the fourth quarter you would say you expected to sell 8,000 cars, and that would be a new high, and we wanted to ask what was the sustainability of your production? Second, the delivery of each of your stores, In fact, just Li Bin also said that you now have about 70 Ula space, that is to say, each store, about 40 cars will be sold every month, I would like to ask if this sales will be sustainable? That is, you build some of the New Azure space can also be delivered every month is also 40 cars? If there are 200 NIO Spaces next year, does that mean that in theory we can sell about 8,000 cars a month? Thank you.

Li Bin: Thanks, I’ve actually talked about why we started our order delivery growth in September, mainly because of the competitiveness of the product, the recommendation of the user, and the expansion of our entire network. This in the middle of course is the first or product competitiveness, if we look at it, NIO is more successful in the mainstream, high-end market, we now 300,000 to 500,000 range successfully established our own brand, I think this is more successful to do such a point.

We’ve recently looked at some of the mainstream, high-end brands that have also launched some of their electric cars, such as Jaguar’s IPACE last year, and this year’s E-Tron and EQC. Their pricing is basically 6.7 million yuan, it should be said that we are waiting for their products, a look feel that NIO product scompetitive products or very strong. So there are some wait-and-see users who easily choose us.

Another is that I think there is a point that we are happy to see, although in the second half of this year, sales of electric vehicles are down, but we can see that the decline is mainly these low-end electric vehicles, mainly in the operation of vehicles in this area, because subsidies receded after, They do have a lot of pressure from a cost point of view. But if you look at the private market, whether it’s us or Tesla or some other electric car brand, the 2C market is actually after so many years of electric car education, and many users in this market are increasingly leaning toward electric cars at the same price point. So that’s why we look at the market of more than 300,000 medium-sized SUVs, and there are more than 400,000 medium and large SUVs, these two markets add up to more than 1 million units, and we think we have enough confidence in this market to occupy a relatively reasonable proportion of the market.

So, I think from the point of view of this few months, we also know that the past few months this market has a lot of concern about NIO, in such a case, we can have such sales results, in fact, it is also fully explained our product services, as well as user reputation in this area of competitiveness, as well as the executive power of our team So from now on we are still very confident to say that this sales growth sales trends, we are confident to maintain, or to do further expansion.

From next year’s competitive landscape, at least I did not see particularly competitive products come out, from a Mercedes, BMW, Audi from the perspective of Tesla, Tesla Model 3 domestic I think also by a lot of consumers digested, after all, the Model3 and EX6, although the price difference is not too much, but our car, I believe it’s more competitive and not the same product segment, so overall we’re pretty confident.

You just said NIO Space and NIO House average per store to calculate, can not simply do so, we now said before 45% of the user is actually new users, is our original user recommended. So how to measure the role of this channel, we actually have to look more carefully. But, if we look at it now, it’s true that NIO Space has a role to play in sales, especially in places where we didn’t have NIO House before, and that’s a big deal.

Of course we can’t say exactly how much a NIO Space will sell, and we’re still looking at it today, because most of our NIO Space is actually starting at Q4 this year, and we may need some more time to operate this data and we can know better. But no matter what? China’s market is very, very large, many local users may not have seen NIO, not even see electric vehicles, we through the region of such an extension, through our such an EXPANSION of NIO Space, so that more people can contact us, Anyway, he’ll definitely have a boost to our sales.

We have more, more detailed such operational experience data out of the future will do more detailed exchanges with you.

Goldman Sachs: In December, or in 2020, you should say how many of the 8,000 expected sales are ES6, and what the future holds, especially in the first quarter of 2020. Also do you have any cash targets for the quarter, including whether you have a target of putting cash outflows under control at $2 billion, or whether you have CFO, or some CEO-related performance goals?

Li Bin: We ES8 in Q4 we probably expect more than 1300 vehicles, ES6 we will be more than 6,700 units, is roughly such a rough proportion. So, we’re still happy to see that this is a very significant improvement back compared to the ES8 and Q3. Next year, because the ES8 will start delivering the new model next April, we believe it will return to a very competitive level, so this is about a Q4 scenario at the moment.

FONG: Thank you very much for your second question, it should be said that many investors are concerned about our cash flow, from our point of view, we will do our best to do cost savings. If we look back, we can see, in fact, a lot of car manufacturers they have good cash flow is to sell more cars, although cash is a challenge, but based on our current good sales momentum, I think the cash from sales is relatively healthy, This is a very fundamental basis for our business, and if you look at our balance sheet, including some of our extra cash, we are also doing our financing projects at the moment. I would say that we are currently continuing to finance projects, including some of our cost-saving measures, and I believe the company will be in a healthy state of operation.

The first point is to do cost savings, the second point of financing, the third point is to have a very strong sales, this is our current strategy, thank you.

UBS: I have two questions, the first question is based on your current market pricing in an environment, I think you want to reach a positive gross margin in the future, what might be the future? What will be done? You actually said, from the PERSPECTIVE of CV financing, Tencent has already invested a lot of money. I’ve also seen some specific synosmuch scenarios for your Q3 and Q4, and you said you have expectations for the fourth quarter, but we don’t see some expectations for future financing and borrowing to support your expectations.

Li Bin: Thanks, this increase in gross margin is a very important part of our 2020, and we have continued to improve our gross margin from sales volume, from our product mix, pricing, and some of our batteries.

We are following our current three-piss outlook, and we are fully confident that our gross margin for the full year will be done, with a positive gross margin for the full year, of course, in which quarter and what month. Of course we want it to come earlier, but we also need some synthesis, including not exactly sales, but also the decline in battery costs, and some of our management efficiency improvements. But I can say with certainty that next year the gross profit of the whole vehicle will turn the right thing for the whole year and we are very confident that we can do it.

Feng Yu: Well, I would like to answer you just said that Tencent has given us 100 million U.S. dollars of financing, in fact, this has two points to tell you, one is 100 million U.S. dollars, is 360 days of borrowing, is a short-term loan. That is to say, we put this $50 million on our short-term loans, and $50 million we make it into a three-year loan, in other words, it’s our long-term borrowing.

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