Earnings call: NIO Inc. reports robust Q3 results, plans expansion

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Earnings call: NIO Inc. reports robust Q3 results, plans expansion

NIO Incorporated (NYSE: NIO), a leader in China's premium smart electric vehicle market, delivered a robust performance in the third quarter of 2023, with vehicle deliveries soaring by 75.4% year-over-year to 55,432 units. The company's market share in China's EV segment surpassed 45%, maintaining its top position. The launch of the All-New EC6 in September bolstered its product lineup, and the company anticipates Q4 deliveries to range between 47,000 to 49,000 vehicles. Financially, NIO reported total revenues of RMB19.1 billion, marking a 46.6% increase year-over-year. Despite a challenging macroeconomic environment, the company has maintained a strong cash position with RMB45.2 billion in cash and cash equivalents.

Key Takeaways

  • NIO's Q3 vehicle deliveries hit 55,432, a 75.4% increase year-over-year.
  • The company holds over 45% market share in China's EV segment.
  • Q3 revenues reached RMB19.1 billion, up 46.6% year-over-year.
  • Vehicle margin stood at 11% in Q3; a decrease from 16.4% in the same period last year.
  • NIO ended Q3 with RMB45.2 billion in cash and cash equivalents.

Company Outlook

NIO's management expressed confidence in their long-term competitiveness within the Smart EV industry, emphasizing the introduction of advanced technology capabilities and the first vehicle operating system with LiDAR SoC in China. Plans to expand the battery swap network and open it to the industry were compared to cloud infrastructure, showcasing the company's strategic vision for infrastructure development.

Bearish Highlights

The company's vehicle margin declined to 11% in Q3 from 16.4% in the previous year, primarily due to changes in the product mix. Loss from operations increased by 25.2% year-over-year to RMB4.8 billion, reflecting the competitive pressures and investments in R&D and market expansion.

Bullish Highlights

NIO's aggressive expansion of its sales and service network, charging and battery swapping infrastructure, and partnerships with companies like Changan Automobile and Geely Holdings are expected to fortify its market position. The acquisition of a manufacturing facility from JAC could potentially reduce manufacturing costs by about 10%.

Misses

The company reported a decrease in vehicle margin year-over-year, mainly due to a change in product mix and partially offset by decreased battery costs. Additionally, the gross margin contracted to 8%, influenced by the vehicle margin changes.

QA Highlights

During the Q&A session, NIO addressed the challenges and strategies for expanding into lower-tier cities, the importance of maintaining stable prices despite intense competition, and their approach to balancing sales volume with product margins. They also provided guidance for vehicle margin, projecting an increase to 15%-18% in 2024.

NIO's leadership remains committed to long-term investments in core technologies and the timely release of core products. They also noted their approach to cost optimization, including a 10% reduction in headcount, which is expected to save around RMB2 billion by 2024. The company's second brand, ALPS, will share a battery swap network with NIO, while maintaining distinct sales channels and service centers.

In terms of R&D, NIO plans to maintain its quarterly spending between RMB3 billion and RMB3.5 billion, supporting the ongoing development of its NOA (NIO Pilot) function, which is being rolled out city by city based on user demand.

NIO's presence in the overseas market is in the early stages, with new houses, spaces, and service centers opened in Europe. The company is focused on improving user experience before scaling operations. The executives believe that the transition from premium ICE (NYSE: ICE ) vehicles to EVs will accelerate as competitors expand their EV offerings and charging infrastructure.

The earnings call concluded with a note on the importance of infrastructure coverage for wider adoption of BEVs and NIO's plans to enhance its network to support this transition. NIO's management invited further inquiries through its investor relations team, signaling ongoing transparency and engagement with investors.

InvestingPro Insights

NIO Incorporated's impressive 75.4% year-over-year increase in vehicle deliveries and a substantial market share in China's EV segment reflect its strong position in the industry. However, InvestingPro provides a deeper financial perspective on the company's performance and outlook:

InvestingPro Data reveals that as of the last twelve months ending in Q3 2023, NIO's Market Cap stands at 13.32 billion USD. Despite the growth in revenue, which saw a significant increase of 26.61% during the same period, the company's Gross Profit Margin was relatively low at 4.47%. The challenges are further underscored by an Operating Income Margin of -41.63%, indicating that operating expenses are high relative to income.

InvestingPro Tips highlight a couple of critical aspects for investors to consider. NIO holds more cash than debt on its balance sheet, which is a positive sign for financial stability. However, the company is also showing a declining trend in earnings per share, which could be a cause for concern regarding profitability.

Investors should note that NIO's stock price has been quite volatile, and the company is trading near its 52-week low. This volatility, along with the fact that analysts do not anticipate the company will be profitable this year, may affect investment decisions.

To access a more comprehensive list of InvestingPro Tips, including insights into NIO's cash burn rate, returns on assets, and equity, investors can consider a subscription to InvestingPro. Currently, there is a special Cyber Monday sale offering up to 60% off, and by using the coupon code sfy23, an additional 10% discount can be availed on a 2-year InvestingPro+ subscription. With 18 additional tips listed in InvestingPro, subscribers can gain a more nuanced understanding of NIO's financial health and market potential.

Full transcript - NIO Inc (NIO) Q3 2023:

Operator: Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Third 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, Mr. [Indiscernible] Head of Investor Relations of the Company. Please go ahead, [Indiscernible].

Unidentified Company Representative: Good morning and good evening, everyone. Welcome to NIO's third quarter 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have Mr. William Li, Founder, Chairman and the CEO; Mr. Steven Feng, our CFO; and Mr. Stanley Qu, Senior VP of Finance. Before we continue, please be kindly reminded 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 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 (OTC: SPXCY ) 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]

Unidentified Company Representative: Hello everyone. Thank you for joining NIO’s 2023 Q3 earnings call.

William Li: [Foreign Language]

Unidentified Company Representative: In the third quarter of 2023 by making the most of a complete product line-up on the NT2 platform, the improvement of over our self-capacity and capability as well as the continuous expansion of self, service and power networks, NIO delivered a total of 55,432 premium smart electric vehicles, up 75.4% year-over-year. The retail stat from Cathart [Ph] showed that in Q3 NIO ranked first in China’s EV segment with an average construction price of over RMB300,000 with market share above 45% in the segment.

William Li: [Foreign Language]

Unidentified Company Representative: In September, NIO launched and it delivered the All-New EC6, a mid-sized coupe SUV upgraded to the second generation. It also marked the completion of NIO’s product line-up on the NT2.0 platform. In Q4, as price war deepens and the competition gets tighter for Smart EVs NIO delivered a total of 32,000 and 33 vehicles in October and November up 32.2% from last year while maintaining our prices stable. In Q4, the total deliveries are expected to be between 47,000 to 49,000.

William Li: [Foreign Language]

Unidentified Company Representative: Going forward, we will stay focused on executing self-strategies and improving operational efficiency. We believe the competitiveness of NIO’s second generation products will be further unleashed next year.

William Li: [Foreign Language]

Unidentified Company Representative: In terms of NIO’s financial performance attributed to the increased sales mix for higher priced models decreased parts costs and improved economies of scale enabled by more deliveries combined with the refined management of sales policies the vehicle margin in the third quarter reached 11%.

William Li: [Foreign Language]

Unidentified Company Representative: Next, I would like to share with you the recent highlights of our products R&D and operations.

William Li: [Foreign Language]

Unidentified Company Representative: On September 21st NIO held NIO Inc. NIO’s innovation and technology day. At the event NIO’s 12 full stack technology capabilities covering the holistic business scenarios for Smart EVs from multiple brands and platforms were introduced to the public for the first time. In the meantime, NIO also unveiled China's first vehicle operating system SkyOS and the in-house developed LiDAR SoC named Yang Jian demonstrating NIOs systematic R&D capabilities leading the industry.

William Li: [Foreign Language]

Unidentified Company Representative: Regarding assisted and intelligent driving, NIO has been quickly iterating the system capabilities. On November 15th, Power Swap Pilot for Highway beta was released in China. So far, 29 Power Swap stations on highways already support this feature. PSP seamlessly combines NLP+ and Power Swap, bringing NIO users a hustle-free highway driving and battery swapping experience that is automated and intelligent from end to end.

William Li: [Foreign Language]

Unidentified Company Representative: In the meantime, NIO has rolled out the NLP+ for urban traffic, providing users with uninterrupted driving experience from point A to point B both on highways and on city streets. Enabled by NIO's generalization capability in-house and taking into consideration the high-demand routes on users' wish lists, we've started to roll out NLP+ for cities, route by route, from November, and will gradually realize wider coverage. At present, the NLP+ has been released to early-bird users in several major cities and is quickly becoming available for more routes and in more cities, which has far surpassed the target announced at NIO Inc. At our upcoming NAD Communication event, we will be sharing more information about that.

William Li: [Foreign Language]

Unidentified Company Representative: In terms of the sales and service network, so far we have 468 new house, new space, and pop-up stores in 152 cities, as well as 314 service centers and 62 delivery centers in 217 cities.

William Li: [Foreign Language]

Unidentified Company Representative: As for the charging and the swapping network, to date we have installed 2,226 power swap stations, over 9,400 power chargers, and over 11,000 destination chargers worldwide. More than 1.46 million public chargers have been connected with NIO's charging map.

William Li: [Foreign Language]

Unidentified Company Representative: NIO's long-tested and well-proven battery swapping system has offered over 32 million convenient, efficient, and safe battery swaps to new users, making Power Swap the most trusted recharging solution for them. NIO Power Cloud and NIO's Power Swap Network have been opened to the entire industry. In November, NIO partnered with Changan Automobile and Geely Holdings respectively on battery swapping. In the future, NIO will join hands with more industry partners in such areas as formulation of swappable battery standards, battery swap network, R&D of battery swapping vehicles, and the management of battery assets, so as to provide the holistic, chargeable, swappable, and upgradable solution to more smart EV users and jointly contribute to the development and wider adoption of battery swap.

William Li: [Foreign Language]

Unidentified Company Representative: NIO Day, NIO’s annual gathering with users will be held on December 23 in Xi'an, Shaanxi province. This year we will unveil a brand new flagship model a real epitome of NIO’s innovative technologies. This product will become a technology benchmark for Smart EVs and a trendsetter of the Smart EV technologies worldwide.

William Li: [Foreign Language]

Unidentified Company Representative: On September 26 with contributions to shaping a low-carbon industry where innovative EV battery swapping NIO received the great innovation award of the 2023 Paulson Prize for sustainability. This award is a recognition of the novelty and expandabilities as well as the economic and environmental benefits of NIO’s battery swapping technology and the business model.

William Li: [Foreign Language]

Unidentified Company Representative: The 2023 NIO Cup Formula Student China a racing car design competition for college students was held from November 8 to November 12 in Hefei [Ph] NIO has been sponsoring and supporting the competition since 2015. So far, Formula Student China has cultivated more than 40,000 young professionals for China’s automotive industry becoming one of the most important cradles of young automotive talent in China.

William Li: [Foreign Language]

Unidentified Company Representative: The next two years will see the most intense competition during the transformation of the automotive industry. Faced with massive uncertainty in the external environment recently we’ve sorted through and have adjusted our key objective priorities and action plans to become more focussed on efficient execution and improvement of system capabilities. While ensuring long-term investment in core technologies, strong sales and service capabilities to navigate the intense market competition and on-time release of the NIO core product from the from the three brands. We will continuously optimize internal working processes and the division of roles and responsibilities, stay focused on projects that can contribute to the company's financial performance, and comprehensively improve organizational efficiency and resource utilization. We are very confident of NIO's long-term competitiveness in the Smart EV industry.

William Li: [Foreign Language]

Unidentified Company Representative: As always thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the third quarter. Over to you, Steven.

Steven Feng: Thank you, William. I will now go over our key financial results for the third quarter of 2023. To be mindful of the length of this call, I will reference RMB only in my discussion today. I encourage listeners to refer to our earliest press release, which is posted online for additional details. Our total revenues in the third quarter were RMB19.1 billion, representing an increase of 46.6% year-over-year and an increase of 117.4% quarter-over-quarter. Our total revenues are made up of two parts, vehicle sales and other sales. Vehicle sales in the third quarter were RMB17.4 billion, representing an increase of 45.9% year-over-year and 142.3% quarter-over-quarter. The increase in vehicle sales year-over-year and quarter-over-quarter was mainly attributable to higher vehicle deliveries. Other sales in the third quarter were RMB1.7 billion, representing an increase of 55% year-over-year and an increase of 4.5% quarter-over-quarter. Gross margin in the third quarter of 2023 was 8%, compared with 13.3% in the third quarter of 2022 and 1% in the second quarter of 2023. The changes of gross margin year-over-year and quarter-over-quarter was mainly attributable to the changes of vehicle margin. More specifically, vehicle margin in the third quarter was 11%, compared with 16.4% in the third quarter of 2022 and 6.2% in the second quarter of 2023. The decrease in vehicle margin year-over-year was mainly attributable to changes in product mix, partially offset by the decreased battery cost per unit. The increase in vehicle margin in quarter-over-quarter was mainly due to changes in product mix, as well as decreased promotion. R&D expenses in the third quarter were RMB3 billion, representing an increase of 3.2% year-over-year, and a decrease of 9.1% quarter-over-quarter. The slight increase in research and development expenses year-over-year was mainly attributable to increased personnel costs in research and development functions, partially offset by the decreased design and development costs, and deduction of expenses due to support for technology advancement provided by local government authorities during the third quarter of 2023. The decrease in research and development expenses quarter-over-quarter was mainly due to the support for technology advancement provided by local government authorities during the third quarter of 2023. SG&A expenses in the third quarter were RMB3.6 billion, representing an increase of 33.1% year-over-year and an increase of 26.3% quarter-over-quarter. Loss from operations in the third quarter was RMB4.8 billion, representing an increase of 25.2% year-over-year and a decrease of 23.3% quarter-over-quarter. Loss, in the third quarter was RMB4.6 billion, representing an increase of 10.8% year-over-year and a decrease of 24.8% quarter-over-quarter. Our balance for cash and cash equivalents, restricted cash, short-term investment and long-term time deposits was RMB45.2 billion as of September 30, 2023. Now, this concludes our prepared remarks. I will now turn the call over to the operator to proceed with our Q&A session.

Operator: Thank you. [Operator Instructions] Our first question comes from Tim Hsiao with Morgan Stanley (NYSE: MS ). Please go ahead.

Tim Hsiao: Thank you very much for taking my questions. I actually have two parts of the questions. The first one is about the battery swapping because a new [Ph] as just mentioned for the expanded strategic alliance in battery swapping from previous partner like Sinopec (OTC: SHIIY ) to Changnan and the Geely. Could you share a little bit more about your plans of how to structure the new alliance of battery swapping and the potential financial impact like your CapEx and operating loss? So in the long term, will you consider to spin off the battery swapping business and operate it independently or even go public as a stand-alone third-party battery swapping or utility operator? So that's my first question.

William Li: [Foreign Language]

Unidentified Company Representative: Thank you, Tim for your question. Yes, recently we have announced the cooperation agreement with both Changnan and Geely on the battery swapping. And in terms of the battery swap network, the way we look at it is a bit similar to the cloud service or the cloud infrastructure. Both power swap stations and cloud infrastructure require and rely on the network effect. Both can have a pretty long investment cycle. And both actually started with the internal services first. And after sufficient validations and verifying the demands and the fulfillment for our users' needs, we will then open up the service to the public. So after five years of validation and internal services, we believe that we are ready to provide such a network and a service to the industry. And it's about time to open up the network to the industry.

William Li: [Foreign Language]

Unidentified Company Representative: And as we all know that there are quite a lot of benefits with power swap. It is faster than charging and also it has better user experience. It also brings values and benefits to users and also the society. Especially in China, many users living in the urban environment or compound and apartments do not have a home charger. In fact, actually, more than 50% of our users cannot install a charger at home. In this case, battery swap becomes even more important and convenient for those users who do not have home chargers. This is also very important for the mass market brand because NIO is, after all, a premium brand and many of our users can still have chargers at home. But for the mass market brand, the percentage of not being able to have home chargers will be higher. That's why when we started to share our battery design standards and also specifications for the mass market brand to the industry peers, many of them are very interested in this alliance. We have already announced two agreements and there are several more that are still in negotiation. As they also believe that with NIO's current battery swap technologies, service standards and also service network, this is what they need for their products as well as for their users.

William Li: [Foreign Language]

Unidentified Company Representative: And also in terms of the business model for the power swap, we believe that it is sustainable both from the business perspective as well as from the finance perspective especially after 5 years of operations and validation we have confidence in the sustainability of battery swap. In terms of our battery swap network as we will continue to expand our power swap network there will be a CapEx also relevant to such networks development. But in the meantime we are also looking for approaches where we may introduce partners into our power swap network. Basically they will buy the battery swap station as a product from us and then they will install stations and hand it over to us for the operations. In this case, they will be the holding this battery assets for us. There are a thousand of such stations already running based on this business model. For the longer term, we will also be looking for partners holding the battery swap station assets. In terms of NIO Power's charging service, it is already almost break-even. As you may know, that 80% of our power was charged for the non-NIO users. For the longer term, NIO Power charging will also be a profitable business. Actually, in certain areas and with certain charging stations, the operations with certain swap stations, the operations are already profitable. In terms of spinning of the power swap stations, there are some investors showing their interest into having power swap business as an independent business. We are also in conversation with them.

William Li: Okay, thank you, Tim. Your next question?

Tim Hsiao: Sure. Thank you, William for sharing all the details. My next question is about car manufacturing. As you just mentioned, NIO announced to acquire the production facility from JAC. First, does that mean NIO has been granted the manufacturing license? In the meantime, I think that means NIO officially shifted from the asset-light business model to asset-happy. In the near term, how should we think about the unique cost of vehicle manufacturing from fourth quarter onwards? I think previously we provided vehicle margin guidance for 50% for December quarter. In the long-term, do you still think that the full step in-house development, production, and direct vehicle sales without relying on dealers would be the most ideal model for both NIO and ALPS mass market brand, or if there would be any major difference? That's my second question. Thank you.

William Li: Steven will answer this question.

Steven Feng: Okay. So, Tim, you started with your question about manufacturing and car manufacturing. During this acquisition, the manufacturing agreements between NIO and JAC are still performed and stipulated. And the production activities of the models in the corporation are going on normally. Going forward, if there is any change to the manufacturing corporation with regards to the rest of the models between NIO and JAC or other institutions [Ph] that constitute significant information after this acquisition or in the future. NIO will communicate with and disclose the capital market in a timely manner, comply with the right norms and regulations and the rules for listed companies.

William Li: [Foreign Language]

Unidentified Company Representative: And also to add on to Steven's comment, if we bring the entire manufacturing fully in-house, overall speaking, our manufacturing costs will be reduced by around 10%.

Tim Hsiao: Great. Thanks very much, William and Steven, for details. Thank you. Thanks a lot.

Operator: Our next question comes from Nick Lai with JPMorgan (NYSE: JPM ). Please go ahead.

Nick Lai: [Foreign Language]

William Li: Thank you Nick. [Foreign Language]

Unidentified Company Representative: In this round of organizational optimizations, we have identified several principles because over the years of development, we have some low efficiency positions and jobs and also some duplicated roles and responsibilities. In this case, we have identified these low efficiencies or redundancies in the organization. We've improved the processes of lower efficiencies and we've also eliminated jobs and positions that are duplicated or are of low efficiencies. And also, in terms of the projects deferred or terminated, basically we look at the projects and their financial contributions. If they cannot bring any financial contribution in the coming three years, we will be thinking about deferring them or terminating them. For example, if they cannot contribute to the gross margin or the P&L, they may need to be deferred or reconsidered. A quick example is regarding the in-house manufacturing of our batteries. We've identified that in the coming three years, bringing battery production in-house will not help us with the gross margin improvement. In this case, we have decided to defer the plan. We will still continue to do the in-house R&D of battery cells, battery materials, and battery packs. But we will outsource the manufacturing of the battery packs for better overall efficiency and performance. So for this round of optimization, we've done a detailed and thorough review and adjustments and also made the necessary adjustments based on the needs of the business and the resources of the entire company.

William Li: [Foreign Language]

Unidentified Company Representative: But in the meantime we will still make sure that we don’t miss our – will dilute our investment and resources for the high priority items for the coming two years. The first is the long-term investment for the core technologies so that we can still keep leading in terms of the product and the technologies. As mentioned earlier today, as the NIO Day 2023 we are going to unveil a brand new flagship model and this car will be equipped with a lot of state of the art technologies that are leading the entire automotive industry. And our second priority is the continuous development of our sales and service network. Recently we have enlarged the sales teams. We have also increased the number of the point of sales so that we can get ready for the more intense competition in the coming two years, because if we don't make such preparations, we will not be navigating the intense competition. An example is that in October in Shanghai, our sales volume has outnumbered that of BMW (ETR: BMWG ) and Mercedes running on all power sources, including ICE cars as well as EVs. In cities from Jiangsu or Zhejiang provinces, we are also establishing a pretty solid foothold with a pretty significant market share. But when it comes to lower tier cities like 4th tier or 5th tier cities, we still have a long way to go. In cities where the EV infrastructure is not yet ready, we are also not outperforming those well-established brands. In this case, we need to continue to develop our sales and service networks. In terms of our sales performance in Zhejiang, Jiangsu and Shanghai, actually 50% of our sales volume is contributed by the sales in these three areas. On the one hand, it shows that our products are well recognized in the highly competitive markets in these three places. On the other hand, it also means that we need to further enhance our brand awareness in the lower tier cities. And the third priority in the coming two years is to secure the on-time release of our NIO core products from the third brands. We have already made investments and the products of this third brand will be coming into the market very quickly in the coming two years.

William Li: Thank you, Nick.

Nick Lai: [Foreign Language] Thank you. It's very clear. My second question is really about the [Indiscernible] sales performance and margin. And how to consider these two factors when it comes to the market competition and also maintain a 15% of the margin in 4Q and a relative target of let’s say 20% to 22% or the 2022 margin sometime to 2024 and beyond? Thank you.

William Li: [Foreign Language]

Unidentified Company Representative: Our strategy for the third quarter is pretty clear. That is to keep our prices stable. Earlier this year, in June we have adjusted our user benefits. Actually both our existing users and the new users were affecting this adjustment pretty well. So we may be the only company able to satisfy both existing users and the new users with a benefit of adjustments. And since then we have been keeping a pretty stable price strategy as we believe that it is beneficial to our brand image and also product competitiveness. And also users experience and benefits. As going into Q4 the price war steepens, the competition also gets more fierce. For many well established brands like our competitors BMW and Mercedes, they are also slashing prices pretty aggressively. Even on their EV models the price reduction can be as high as 31%. But we still keep a pretty stable price amid this fierce competition. This is also reflected, this stable prices are also reflected in our improved vehicle margin. So our longer term strategy will be keeping our price stable while continuously improving our vehicle margin. In the meantime we will also improve our sales capacity, capability and efficiency so that we can bolster our sales volume. But this can take time and we will be staying patient. We will not realize or boost our sales volume at the cost of our product margin as this is not healthy for the longer run. Maybe Stanley can also add more information regarding the specific financial numbers.

Stanley Qu: Hi Nick. Our vehicle gross profit margin is 11 for Q3. And we are confident to achieve a higher margin in Q4 considering more production efficiency, lower price of lithium carbonate and also decreased part cost. Our target is also still kept at 15% for Q4. And from long run as an important project internally we have started to further improve our cost structure for NT2 products by optimizing design, improving supply chain and production efficiency and also business negotiation with our partners. As mentioned by William, our new brand keeps focus on premium market segment and we will keep product prices relatively stable. So combined all those factors together we believe our vehicle margin can be further increased to 15% to 18% in 2024. That's the general guidance for vehicle margin.

William Li: [Foreign Language]

Unidentified Company Representative: And also looking at our previous – margin for Q3 [Indiscernible] we actually managed to build a deeper margin that stood at 21%. So for a much longer term we will also target actually a deeper margin [Indiscernible]

Nick Lai: Thank you.

Operator: The next question comes from Yuqian Ding with HSBC. Please go ahead.

Yuqian Ding: Thanks Tim. This is Yuqian Ding here. I got two questions. Maybe we roll it one by one. The first one is on the cash position. We noticed the cash balance increasing quarter-on-quarter. Other than the strategic investment and the convertible bond there is also still a 1 billion increase. Does that come from the improving operation? Can you shed a little bit more light on that?

Stanley Qu: Hi Yuqian Ding. This is Stanley. As the new product delivery wrap up in Q3 we achieved positive operating cash flow. Going forward if our sales continue to grow we are confident to realize healthy operating cash flow. So that's for your first question. Yes.

Yuqian Ding: Okay. Got it. Thank you. The second question is on the OPEC reduction. Thanks for William's sharing on optimizing the battery business. We also read there is also a headcount cut. Could you share more on whether there will be asset write-offs during the process of the cost optimization? And when we would expect us to reach a lean yet sustainable shape?

Stanley Qu: Hi Yuqian. About the cost optimization. We reduced 10% working positions and completed the adjustment in November. But for Q4 there will be almost no financial impact since we need to pay additional compensation for the employees who left the company. Offset with less payroll cost. But for next year together with the headcount reductions we also delayed or cancelled certain projects as mentioned by William. So the total impact to 2024 will be a total cost of around RMB2 billion.

William Li: [Foreign Language]

Unidentified Company Representative: Around 200 million. Yes. This round of optimization has helped us to improve the financial performance slightly over our previous budget. However, we do need to have some one-time expenses due to the severance package for the terminated employees.

Yuqian Ding: Got it. Thank you. Thanks William and Stanley.

Operator: The next question comes from Ming-Hsun Lee with Bank of America (NYSE: BAC ). Please go ahead.

Ming-Hsun Lee: Hello William and management. Thank you for taking my question. My first question is regarding your second brand, ALPS, in 2024. In the future, will you consider to share the charging station and the battery stop station along with NIO brand? And also, will you also consider to share the sales channel with NIO brand? Thank you.

William Li: Thank you Ming. [Foreign Language]

Unidentified Company Representative: Yes. When it comes to our mass market brand the – out. Actually recently we have just had the very first validation field of this brand real of the production line actually of the condition of this verification view this is pretty good. It can be maybe one of the best VB [Ph] cars we have in the history of NIO. So we are very confident in the competitiveness of this project. And before the official launch and the delivery we still have time to continue to optimize and improve the project. In terms of our power swap and charging network strategy, for NIO, our battery swap network will be coming in two parts. The first is the exclusive network for NIO and NIO users. And the second will be a shared network, not only for NIO users, but also for ALPS users and other brands with swappable vehicles. In terms of the charging network, we have been sharing our chargers already to many non-NIO brands. In terms of the self-network, this will be separated. So they will have their own self-stores. But we will be sharing the service capacities and the facilities. So service centers will be shared between NIO and ALPS.

Ming-Hsun Lee: Thank you, William. Thank you. So my second question is regarding your 2024 product. Because this year you already updated all of your new models and also launched some new models. So in 2024, will you have some facelift version of the existing model and start to use 800-voltage charging system on your car? So in this case, do you have any guidance about the battery swap station you will expect? Thank you.

William Li: [Foreign Language]

Unidentified Company Representative: Yes, it's a common standard and the practices for the automotive industry to have model years or facelifts. But for our NT2 products, we will not have any major modifications or upgrades. As many of them were just newly launched or delivered to the market. To stabilize our quality and the supply chain, we will only make minor improvements and upgrades on our NT2 products. In terms of our plan for the power swap stations in 2024, as I've mentioned, we will not only build our exclusive battery swap network, but also a battery swap network for sharing. On the one hand, we will build this power swap network for other brands, or that can be shared with other brands. In the meantime, we will also continue to look at the demand of our NIO users. So that if there are any requirements or high demand stations or locations, we will also install stations there. But we are still working on the specific plans and the numbers.

Ming-Hsun Lee: Thank you William.

Operator: Our next question comes from Paul Gong with UBS. Please go ahead.

Paul Gong: Hi, thanks. Thanks for taking my question. My first question is regarding your sales force, sales team. I think in last quarter's earnings, you mentioned that you are going to significantly increase your sales people's headcount. May I double check how this has been proceeding at this moment? Have you achieved your original target of expanding sales team or have you adjusted your original plan?

William Li: Thank you, Paul. [Foreign Language]

Unidentified Company Representative: At the present, for our frontline fellows, we have a team of around 5,700 persons. But many of them were just newly on board. Around 3,300 of them were newly on board into the company. It still takes some time for them to really get to know the brand and also get familiar with the entire sales processes. Because for the newly hired fellows, we will spend around one month and a half on the trainings. And afterwards, we can start to sell vehicles to our users. According to our history data, a seasoned fellow on average will need to spend around six months to be familiar with the brand and the processes, and will become a real sales force for the company. So we need to be patient with these newly hired fellows, as many of them just joined the company in September and October. But in the meantime, we will also be completing and improving our assessment and evaluation systems. Our training systems. We will also bring these fellows more efficient tools, so that they can really make full use of their sales capacity and capability.

Paul Gong: Thanks. My second question is regarding the R&D spending. I think this quarter you had about RMB300 million, quarter-over-quarter decline on the R&D. And the explanation is some incentives from the local government. Can you quantify that number? And more importantly, going forward, what would be your projected quarterly R&D spending?

William Li: Stanley, you answer the question.

Stanley Qu: Yes. There are some slight decreases, considering the support we received from the local authorities. But in the long run, as we mentioned during the past earnings quarter, our non-GAAP R&D investment per quarter will also be kept at RMB3 billion to RMB3.5 billion. As mentioned by William in the previous statement, we will also ensure investment in core technologies and also the advantages of technology and product and guarantee the timely launch of the new product. So the investment in R&D will not decrease. There will be a slight fluctuation across different quarters. Thank you, Paul.

Paul Gong: Thank you. That's very helpful. Thank you.

Operator: The next question comes from Cheng Jing with CICC. Please go ahead.

Cheng Jing: [Foreign Language] My first question is regarding to autonomous driving. We have already opened the submission of a wish list in September. So, relying on group intelligence, we try to expand the function, the NOA function in NMAP [Ph] cities, which is a little bit different from other OEMs. They open up city by city. So, could you please introduce our ideas on the implementation of NOA function in the city area? And also, given our target of the cumulative mileage of 60,000 kilometers by the end of this year, how is our current progress?

William Li: Thank you, Cheng Jing. [Foreign Language]

Unidentified Company Representative: In terms of NIO's NOP Plus for cities, actually, we leverage our generalization capabilities as well as the crowd-sourcing AI capabilities so that we can roll out this NOP route by route for our users based on their demand. Of course, in the meantime, we have also formulated the data closed-loop capabilities where we can really leverage all this data coming from the generalization and also crowd AI. At the NIO Inc, we have announced that by the end of this year, we are going to open up the route covering around 60,000 kilometers of mileage. And so far, our progress is pretty good. And we already have established the capabilities of releasing NOP Plus for early-bird users in more than 100 cities. And we will be rolling out such a service and invite our users into the program step by step so that it can be covering more cities with more users gradually. Of course, in terms of city-based or road-based autonomous driving or NOP, we will see some of our peers, they have some marketing slogans regarding their services. But we believe that NOP Plus, especially NOP Plus for cities, is a pretty serious service. And we would like to make sure that our users have a safe and also good experience. And then we will roll out the service and its coverage step by step. But overall speaking, our progress has far surpassed our expectations. And after all, we already have more than 100,000 vehicles running on the road. This will also help us to further formulate and improve our data closed-loop.

William Li: [Foreign Language]

Unidentified Company Representative: Especially for every new NT2 vehicle, it is standard with 4 Aurene [Ph] chips and also 33 high-performance sensors. This will further help us to formulate the data close loop and improve the data capabilities and in return we will also accelerate the capabilities for iteration. This is also a very unique advantage of NIO which is quite different from any other competitors offering the similar service.

Cheng Jing: [Foreign Language] So my second question is regarding the overseas market. Will it still be one of our strategic focus? And can you briefly introduce the current operating situation of our overseas market this year regarding to the sales volume, our layout program of our core regions and also about the dealerships and infrastructure structures, and also our next year's target and plan.

William Li: [Foreign Language]

Unidentified Company Representative: At the moment, in five European countries, we have opened six new houses, eight new spaces, two multifunction service centers, and also partnered with 54 authorized service centers. We have also installed 30 power swap stations in five European countries. But in terms of our business development in Europe, we are still at the early stage of the business development and expansion. We want to continue to test the water, ensure we have good user experience before we scale our operations and the business there. That's why volume is not a priority for us in terms of our European business. And in the coming one year, we will continue to be staying at this stage. We will make sure that our capability and capacity are sufficient to serve our users in Europe before we start to work on a higher scale.

Cheng Jing: Thank you.[Foreign Language]

Operator: Our next question comes from Jason Getz with Mizuho Securities USA. Please go ahead.

Jason Getz: Hi guys. Thanks for letting me ask the question. You talked a couple of months back about 20,000 vehicles a month in December. We are running a little bit below that now. What have been the biggest headwinds there? Has it been some production challenges, maybe broader macro weakness? And then what would it take to get to that 20,000 units? And how should we think about the run rate moving through 2024 with the new Salesforce?

William Li: [Foreign Language]

Unidentified Company Representative: Thank you for the questions. As we have mentioned earlier today in the premium battery electric vehicle segment priced over RMB200,000 NIO has realized a 45% market share in the third quarter of this year. Actually our market share in this segment has been pretty stable around 40%. So this has proven that we have a relatively solid foothold in the premium BEV segment. We have a pretty significant also stable market share already established in the segment. But when it comes to convincing users of premium ICE cost of buying a premium EV, it is actually more difficult than convincing a mass market users, because for the mass market users buying a car of RMB100,000 or RMB200,000 they pay attention to the ownership cost and also the usage cost of the product. But for the users of premium electric vehicles, they pay more attention to other factors. And the second reason that may be affecting the wider adoption of premium BEV is regarding the coverage of infrastructure. I've also shared in the Yangtze River Delta areas, mainly Shanghai, Jiangsu and Zhejiang, we have a pretty significant market share. Our sales volume has outnumbered that of BMW, Audi and Mercedes with their ICE car sales. A very important reason behind this is because we have 700 power swap stations already established in this area. So infrastructure is also playing a very important role in boosting the sales volume and the adoption of electric vehicles. So far in China, we have already installed over 2,000 power swap stations, but roughly 700 of them are along the highways. In some regions and areas, our power swap stations are still not widely accessible. In this case, we will need to also speed up and enhance our infrastructure coverage so that we can further boost the wider adoption of electric vehicles. So basically, two main reasons. The first is regarding the consumption habits of the premium vehicle users, and the second is mainly because of the coverage of the infrastructures for electric vehicles. But we believe that this trend of convincing ICE users of buying EVs, or this overall trend of transforming into battery electric vehicles, will be picking up its speed. Because we also find that some of our peers and competitors, before they only had hybrid vehicles or range-extended vehicles, but now they are also launching their battery electric vehicles. Such strategy will also push the transformation of the entire industry. So we are actually happy to see such transformation. And also, many car companies are now also installing and expanding their charging network, and NIO is working on our battery swap network. With wider infrastructure, we will also boost the adoption of the battery electric vehicles. So, overall speaking, we believe that 2024 will be better off than in 2023, because in 2024 we will also be having a more stable product portfolio without frequent product launch and delivery, which has also slightly disturbed our overall execution.

Jason Getz: Got it. Thanks. And then a quick follow-up. On the battery swap partnership side, is there any kind of design changes that your partners would have to do to their vehicles in order for them to use the swap stations? And if so, have you guys talked about what percent of mix of vehicles they produce might need to be kind of changed or edited in the production process in order to do battery swapping?

William Li: [Foreign Language]

Unidentified Company Representative: Actually, we have shared the battery spikes and also the design details of our battery packs for the mass market brand to our battery swap partners. And they will need to design and engineer their vehicle products, mainly chassis interfaces, following our battery standards. It will take some time for them to decide on the right models and complete the product R&D. But the overall investment and R&D expenses for developing such new models based on our battery standards won't be very high.

Jason Getz: Got it. Thank you.

Operator: As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

Unidentified Company Representative: Thank you again for joining us today. If you have further questions, please feel free to contact NIO's investor relations team through the contact information provided on our website. This concludes today's conference call. You may now disconnect your line. Thank you.

William Li: Thank you.

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