NIO Inc.

Hello, ladies and gentlemen. Thank you for standing by for NEO Incorporated's first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui.

Good morning and good evening, everyone. Welcome to NIO's first quarter 2024 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 Lee, founder, chairman of the board, and the chief executive officer, Mr. Stephen Fong, chief financial officer, and Ms. Stanley Chu, senior vice president 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 US Private Security 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 US Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange of Security 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 Neil's earnings press release and this conference call include discussions of unaudited non-GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to Neil's press release, which contains a reconsolidation 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.

Hello, everyone. Thank you for joining NIO's 2024 Q1 earnings call. In Q1, NIO delivered 30,053 premium smart EVs. In Q2, thanks to the launch of all the model year products, unleashed of sales capabilities, together with a more flexible sales policy, NIO's deliveries started to pick up month by month. In April, NIO delivered 15,620 vehicles, and in May, 20,544 vehicles. Our market share in the premium BEV segment continued to grow, with year-over-year growth far above the segment average. The total deliveries in Q2 is expected to be between 54,000 and 56,000 units. up 129.6% to 138.1% year-over-year. In terms of NIO's financial performance, during model year product transition in Q1, the vehicle margin was 9.2%. In the meantime, with the improvements on the utilization of the charging and swapping facilities, and on the profitability of the after-sales services. Cost loss on the other sales was greatly reduced quarter by quarter. Now, I would like to share with you the recent highlights of our products and the operations. On April 25th, the 87th Executive Edition was launched at Beijing Auto Show. The delivery of this executive sedan has started in late April. With all round upgrades, the 2024 NIO 87 batch caters to the needs of the business community. It's well-placed to compete with the premium executive models, especially ICE models such as BMW 5 Series, Audi A6, and the Mercedes E-Class. In terms of NAD, on April 30, we started to push Urban NLP Plus to all NLP users, making it the largest release of its kind, accessible by more than 260,000 users on over 1.4 million kilometers of highway and urban streets. 726 cities in China. NOP Plus has been an industry leader in terms of its user base and coverage. During the Labor Day holiday, 48.1% of the total mileage was driven with NOP Plus, making user journeys safer and more relaxing. Since day one, NIO has developed a clear brand roadmap starting from the premium segment to build up skills and experience, and then introducing a mass market brand to reach and serve more users. With that, we will be able to make greater contributions to a more sustainable future. On May 15th, at the International Day of Family, we introduced Anvo, a new brand for the mainstream family market. Envoy is from Envoyage, and its Chinese name, Le Dao, translates into path to happiness. On a mission to make family life better, Envoy is committed to bringing products with the ultimate experience value and optimal ownership cost. The pre-order of its first product, L60, was started LCC is a smart electric midsize SUV. The official product launch and delivery will begin in September. The launch of Envo has shifted us into a higher scale, expanding our reach to a wider user base. As more people are aware of our technologies and products, we will add closer our vision of a blue sky coming. As for the sales and service networks, so far, NIO has 154 NIO houses and 388 NIO spaces, as well as 344 service centers and 64 delivery centers. About the charging and the swapping networks, so far, NIO has 2,472 power swap stations worldwide and has provided over 45 million swaps. Besides, NIO has also installed over 22,000 power chargers and destination chargers. In the meantime, more industry players have joined NIO's charging and swapping network. As of now, We have partnered with Chang'an, Geely, JAC, Cherry, Lotus, GAC, and FAW to jointly expand and standardize the battery swapping network. More investors have taken notice and recognized the value of NIO's charging and swapping business. On May 31st, NIO Power signed a strategic investment agreement of RMB 1.5 billion with the support of strategic investors, NIO will be able to further develop its core technologies and expand the network. On May 13th, NIO was named in the 2024 Fortune China ESG Impact Seed. We have continued to show those social responsibilities and lead by example in the ESG domain. to further contribute to sustainable development worldwide. Despite the failed competition, our continuous investment in technology, products, services, and the community starts to pay off and set us apart from others. Niel's premium brand precision, industry-leading technologies, and innovative chargeable, swappable, and upgradable power experience have been recognized by more people, and thus driven steady sales rebound. We will continue to speed up software integration, optimize products and experiences, improve system capabilities and operational efficiency to gain a larger market share. In the meantime, As the company unfolds its multi-brand strategy and enters a broader market, we expect to bring out more potential for growth. As always, thank you for your support. With that, I will now turn the call over to Stephen for Q1's financial details. Over to you, Stephen.

Thank you, William. I will now go over our key financial results for the first quarter of 2024. To keep this brief, I only refer to amounts in RMB today. I encourage listeners to refer to our earliest press release, which is posted online for additional details. Let's begin with revenue. For the quarter, for the first quarter of 2024, total revenues were 9.9 billion RMB, down 7.2% year-over-year, and 42.1% quarter-for-quarter. 85% of revenue comes from vehicle sales in Q1, totaling 8.4 billion RMB, down 9.1% year-over-year, and 45.7% quarter-of-quarter. The decrease year-over-year was mainly attributed to lower average selling price as a result of user rights adjustments since June 2023, and a decrease in delivery volume. the decrease quarter-over-quarter was mainly attributed to a 40% decrease in data volume, which was affected by seasonal factors. Turning to other sales, other sales were 1.5 billion RMB, showing a 5.2% increase year-over-year and an 8.2% decrease quarter-over-quarter. The year-over-year growth was mainly due to the increase in sales of parts, after sales vehicle services, and the provision of power solutions, which grew with our user base. And the power should offset by decrease in revenue from sales of used cars and auto financing services. The decreased quarter of a quarter was mainly attributed to a decrease in revenue from sales of used cars. Then let's have a look at the gross margin. Overall gross margin was 4.9%. compared with 1.5% in the same period of last year and 7.5% in the last quarter. Changes in gross margin were primarily driven by vehicle margins. Vehicle margin was 9.2% in this quarter, compared with 5.1% in Q1 2023 and 11.9% in Q4 2023. The year-over-year increase was mainly due to the decreased material cost per unit in Q1 2024. The quarter-for-quarter decrease was mainly due to lower average selling price as a result of increased promotion during product transitioning, changes in product mix, and partially offset by the decreased material cost per unit. Next, moving on to the operating expenses. R&D expenses were 2.9 billion RMB, declined 6.9% year-over-year, and 27.9% quarter-to-quarter, which has been driven by decreased design and development costs and decreased personal costs in research and during functions in the first quarter of 2024. SG&A expenses were 3 billion RMB increased by 22.5% year-over-year and decreased by 24.6% quarter-to-quarter. The year-over-year increase was mainly due to, first, the increase in personal costs related to sales functions. Second, the increase in expenses related to the company's sales and services network expansion. And third, the increase in sales and marketing activities. The quarter-to-quarter decrease was mainly due to, first, the decrease in sales and marketing activities and professional services. And second, the decrease in personal costs related to sales and general corporate functions. Now, we proceed to the bottom line. Last, for operations worth 5.4 billion RMB, represent an increase of 5.5% year-over-year, and a decrease of 18.6% quarter-over-quarter. Net loss, worth 5.2 billion RMB, represent an increase of 9.4% year-over-year, and a decrease of 3.4% quarter-to-quarter. And finally, our balance of cash and cash equivalents, restricted cash, short-term investment, and long-term time deposits was 45.3 billion RMB as of March 31st, 2024. For more information and details of our August 1st quarter 2024 financial results, please refer to our earnings press release. Now this concludes our prepared remarks. I will now turn the call over to the operator to proceed our Q&A session.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can re-enter the queue. Your first question comes from Tim Seau from Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for taking my questions and congratulations on the good feedback on Vogue and those as some strategic for your power. I have two questions. The first question is about the gross profit margin, because as we remember, the company previously guided VCO gross profit margin would be back to mid-teens, as the strategic focus of New Brain is profitability and cash generation, while Envo would be the one going for volume. However, we saw increasing promotion for New Brain in April and May, which worked pretty well, actually, and successfully boosted volumes. Will management consider to continue this kind of more aggressive promotion on NEO brand for better volume in upcoming months? And do we need to revise down our deco margin expectation? That's my first question.

Thank you, Tim. I will ask Stanley to answer your question.

Yeah, I think regarding the margins for NEO,

Yeah, regarding the gross margin, actually we upgraded our NT2 product to 2024 version from March. During the transition period of the model year product change, more promotions were offered to the old models, leading to the decrease of our average selling price in Q1. And additionally, more lower margin models like 85 and 85T was sold in Q1. All those factors lead to the decrease of our gross margin. As you mentioned, we delivered over 20,000 vehicles to users in May. With the recovery of sales volume, We will further optimize our product mix and negotiate with our supply chain partners for more cost efficiency in the following months. So we expect the vehicle margin will return to double digits in Q2 and continue to improve in Q3 and Q4. Yeah, but considering the intensifying market competition, We will also be more flexible on sales policy to make sure our market position is secure. Thank you, Tim.

Thank you. That's very clear. Thanks for sharing all the details. My second question is about Neopower. As William just mentioned, I think Neopower secures the first extent of strategic investment of $1.5 billion or around $200 million. So looking forward, will Neopower get and accept more funding support from other card makers in the battery swap alliance? And separately, in addition to Neopower, is there any other tick-horns or business units within the group that could follow suit to seek external capital injection and be gradually carved out? Could Matt McKean give us some examples? That's my second question. Thank you.

Thank you, Tim. After Neopower's first financing, we still have about 90 shares. We have already started an independent financing plan. We will also open up other car companies We are open to the investment of the investors. We think that NEO Power itself has a long-term sustainability. We are very optimistic. Of course, it is now in an investment stage. It needs to establish a network. It needs to establish a national network first. There are indeed some money-saving investments. But in general, its profitability is very clear. Basically, we can give you a reference. We have about 60 orders of service per day. We can basically make even. So if you look at our daily service of about 100,000, Thank you for the question. For the new power, we have just completed the first

round of fundraising, and after this round of financing, NIO still has around 90% of the equity in NIO Power. And NIO Power is now open for the external investors, be it investment from the investors or from the car companies, we are open for that. Of course, for the longer term, we do believe that NIO Power has a financial sustainability because we do have a promising and a positive outlook for that. At the starting stage, As we need to build up the network for the power swap facilities, the upfront investment is relatively heavy. However, we do see a clear roadmap for the profitability with new power. Let me share with you a number. Right now, for the break-even point of a single power swap station, it's around 60 swaps per day. And if you look at our current power swap service, every day on average we offer around 100,000 power swaps. With around 2,000 stations, it means that for each station, on average, they are already providing around 30 swaps per day. So for the longer term, we do see a viable roadmap for the sustainability and also the profitability of our power swap business. Not to mention that we can also leverage the revenues contributed by the energy storage and also the flexible battery upgrade of the power swap.

Thank you, Tim.

Thank you. Your next question comes from Ming Sun Lee from Bank of America. Please go ahead.

Hi, William and the management team. This is Ming from Bank of America. So my first question is regarding AmoBrand. So right now we are close to the end of second quarter. So could you give us some guidance regarding your sales channel expansion and also capacity related to Anvo brand? And also, could you give us a rough product pipeline for the Anvo brand? Thank you. That's my first question.

Thank you. Thank you, Ming. Our current plan is to have about 100 stores ready by the end of September. So from the Catex point of view, because Le Dao's stores don't need to invest as much as NIO, like NIO House, so in general, its efficiency is still very high. So each store's investment is almost between 100 to 2 million RMB. So from the Catex point of view, we think this is not a big pressure for the whole company.

Thank you for your question. Our current plan is that when we start to launch and deliver the first product of Anwo in September this year, we're going to open up around 100 stores in China. CapEx West, as Anwo's sales stores or point of sales, does not come with new house, which does not require heavy investment in that case. The overall CapEx will be pretty efficient, around 1 to 2 million RMB per store. It won't be a very heavy burden from the CapEx perspective.

Yeah.

I'm sorry. Yeah. Yeah. Yeah.

For example, like one model this year and then maybe two model next year. Yeah. Yeah.

Then next year, we will launch the second model. This is a medium-sized SUV suitable for larger families. We will launch it next year. Of course, our subsequent products are in the planning. In general, Envo will not have too many products. But in terms of each product, we hope that its sales can reach a relatively high share in the Western market. Regarding the Onvo's product line, actually the first product, L60, it will be directly competing with Model Y. It's a mid-size SUV for family users.

And then next year, we're going to introduce the second product from Anvo. It will be a mid-large SUV for bigger families. We also have other products in the pipeline. But overall speaking, for Anvo, we will not have many products in its offering. We will be focusing on enhancing the market share and also the sales volume of each product in their respective segment. Overall speaking, the total sales volume for Anvo's segment, which is a family car market with a starting price of around 200,000 RMB. The total size is around 4 million, and we do believe that we have a good opportunity and the room for growth in that segment.

Thank you, Ming.

Thank you, William. Thank you, William. And my second question is related to your third brand, because we read the news today that the Firebrand could be launched or shown to the market probably by the end of this year. And could you also give us some latest update on the third brand? And last time during the event call, you mentioned that probably five brand products could be sold in new households, new space. So could you confirm on this network sharing? Thank you.

Thank you. So, from the current direction, we will share the same sales network with NIO in China. This is similar to the relationship between MINI and SMART, MINI and BMW. Of course, our cars should not be more expensive than MINI, but our products must be better than it. um thank you for the question regarding our third brand firefly the r d activities are in good progress several months ago i've already tried one of the early builds of their first model and it's pretty good

Regarding the Firefly product, in the Chinese market, it will be a boutique compact vehicle. Although its price segment is around 100 to 200,000 RMB, but it will follow a very high standard for the safety and the quality. So it will be a well-designed boutique car for the Chinese market. In terms of the sales channel, it will also share the point of sales with NIO. just like how Mini is sharing its dealership source with BMW. We will be using a similar approach. However, the selling price of Firefly will not be as expensive as Mini, but product-wise, it is definitely a very good product. We will start the product delivery from the first half of next year. Brand launch and the product launch, we don't have the specific date for that, but the delivery date is already more or less defined. That is the first half of next year.

Thank you, William.

Thank you. Thank you, Min.

Thank you. Your next question comes from Bin Wong from Deutsche Bank. Please go ahead.

Thank you. My question is about the margin. Because you migrated to NT 3.0 this year, so all the new brand products, How much margin improve we can achieve through a technology upgrade? At the same time, based on the same NT 3.0 technology, can you provide the volume assumption to reach the overall company back even? That's my first question. Thank you.

Thank you, Wang Bin. Of course, our NEO product will be gradually switched from ET9 to the third generation platform starting from next year. But from the third generation platform in general, we of course hope to have a better horsepower rate. A large part of this is from the use of more self-sufficient technologies, such as chips. Of course, this can significantly improve our horsepower rate. Of course, there are also some, we also saw some, for example, space for battery cost reduction. So, in general, we, from the design goal of NP3, we are, the average net profit, we certainly hope to reach more than 20%. This, of course, is our goal. We are still very confident about this. We are still, our goal is to say, China's core business, NIO, can make a profit. We still maintain such a business goal. As for Envoy, we have announced a pre-sale price. Of course, this is not our final price. From the perspective of the current pre-sale price, we still have a very good profit margin. You know that the competition is very intense in the Angola region. But we will not sacrifice... We will not trade with a particularly low interest rate. This is not our direction. We believe that Angola will maintain an interest rate of more than 15 in the long term. This is of course our business goal. If we look at it with Tesla, its interest rate today is also around 16.7. So we will definitely go there in the Angola. Thank you for the question. Regarding new brands, starting from next year, we will gradually upgrade our products to the third generation, and the first product on NT3 will be ET9. And for the third generation products,

We will also take different approaches to improve the vehicle margin. For example, we will start to put more in-house technologies into our vehicles, like chips, for better vehicle margin performance. We also see some opportunities with battery cost reduction. So overall speaking, our target for the NT3 product margin will be around 20% on average. And we do have a confidence of realizing that average margin of 20% from NT3. And regarding the break-even target for the new brand, our target is still the same, that is to realize the monthly sales volume of 30,000 units with a vehicle margin of around 20%, and then we will be breaking even with the core business of the new brand in China. And regarding our second brand, Anvo, we have announced the pre-sale price during the brand launch, but we haven't released the final price yet. Even with the pre-sale price, we can realize a pretty good vehicle margin. Of course, we also understand that the competition in on-wall segments is more intense than new. In that case, we will also strike a balance between the volume and the margin. We will not boost the sales volume at a cost of our vehicle margin. And for the longer term, our margin target for on-wall products will also around or even above 15%. Because looking at Tesla, their current product margin is around 16% to 17%. And for Anvo, realizing a margin of above 15% is also a reasonable and achievable target for us in the longer term. For Anvo brand to break even its monthly sales volume should be at least 20,000 to 30,000 units per month.

Thank you. My second question is about the older backlog for Anvo. You actually, in an interview, said that you are very concerned about the onboard initial order backlog. Some market talk is that you already have 60,000 cancelable orders right now. Can you comment on that number and how satisfaction you are about the onboard order so far? Thank you.

Yes, you know that we have never announced the number of pre-ordered orders. Because pre-ordered orders are... We don't think there is too much reference. But indeed, the number of on-board orders exceeds our expectations. Our on-board president also said this in an interview. But we will not announce the number of pre-orders. We can only say that now, in a situation where one of our stores has not been opened yet, there is already a pre-order that exceeds our expectations. This is what we can communicate at the moment.

As you know that for us, we never disclose any pre-order intake or numbers as the pre-orders are refundable and we don't need a very solid reference for us to look at the actual performance of the product. However, it is true that with the pre-order intake, it has surpassed our expectation, as also mentioned by the president of Anwo L&I in some interviews. So overall speaking, without opening up any stores or having products to the market, we have already received the pre-order set beyond our expectation. That's the information we can share.

Thank you very much. Thank you.

Thank you. Thank you.

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Thanks for taking my questions. Two questions. The first question is, You mentioned that right now you have 2,400 swap stations. To my best understanding, only the third generation and latest battery swap stations could help Anvo to swap the batteries. Could you please remind us how many units of the later generation battery swap stations could help for the Anvo swap?

Thank you. Our three-generation station will undergo some modifications, but the amount of work will not be very large. It will be an investment of about 200,000 to 300,000 RMB. When it is modified, it can be used for paradise. However, our three-generation station is more than 1,000 seats, so the three-generation station itself is more than 1,000 seats. From June, we will officially deploy our four-generation station next week. Of course, the four-generation station can be integrated with Envoy and NIO. Of course, this year, we will see how many power stations we need to deploy according to the entire market plan. But all the four-generation stations can be used by Envoy. So if you look at the current progress this year, Thank you for the question. For our third-generation power swap station to be compatible with Envolve's products, we do need to make some necessary modification. It is not a very expensive one, around 200,000 to 300,000 RMB per station for the modification.

So far, we have already installed more than 1,000 third-generation power swap stations. So that will be a base. In the meantime, actually next week, we will start to install our fourth-generation power swap stations. And these stations will be compatible with both Envo and the new products. And also later this year, depending on the market and the demand, we will also see and decide how many fourth-generation stations we need. to deploy for new and on-world products, but all fourth-generation stations can be accessed by on-world products. Probably with that, by end of the year, in the market, there will be more than 1,000 stations that can be compatible with on-world products.

We will not change all the three-generation stations, because not every station needs to be changed. So, in general, we...

Of course, it doesn't mean that we will modify or open up all the fourth generation stations to Envo users as not every station needs to be modified or open up to the second brand. Not to mention that to start with, Envo will not have a very big user base for the current year. In that case, the experience of those brands will be pretty good.

We can still clearly see the relevance of the growth of sales in a region after the construction of the exchange station. We are selling very well in the long triangle. Our long triangle has more than half the sales of our entire company. Of course, we also have more than 800 exchange stations in the long triangle, which is estimated to be close to 900. So we can see these similarities. So we are also looking at the whole ROI model, which is the deployment of an exchange station, the deployment of a single exchange station, how much sales can it bring, whether it's for Angle or for NEO. So our next step in the deployment of exchange stations, we think we have basically formed the network in the whole country. So our next step in the deployment of exchange stations will be more based on the promotion of sales In the meantime, we also see some correlations between the number of power swap stations or the density of the power swap stations in certain regions and the south performance in that region. For example, in the Yangtze River Delta area,

Basically, half of our users are based out in that area. And in this area, we have already installed nearly 900 power swap stations. So there is a correlation between the number of stations and the number of cells. In that case, we are also developing a ROI model to calculate the return on the power swap station investment. In that case, our deployment of the power swap station and the decision on the deployment will be also relevant to their contributions to the sales volume beat sales of new or sales of the Anwo brand. As right now, we have already initially established a charging and swapping network for China to cover most of the basic needs. For the next step, we will look closely at the return on the investment of all the power swap stations, the return on the south volume. In that case, our deployment next step will also be more targeted.

Thank you. So my second question is regarding the Neville Street license permit. I think you are among the first batch to receive the Neville Street autonomous driving testing license permit. How do you plan to utilize this opportunity and how should you further develop on the autonomous driving technologies. Thank you.

Thank you. Thank you for the question.

Yes, two days ago, we have received the L3 testing permit issued by four ministries, including MIT. And also, among all the startups, we are one of the earliest to receive the first batch of permits issued by the government. This also represents a recognition of our technology. For the next step, with the permit with the testing capability, we will be able to keep more frequent communications with the government regarding the application and also the testing of the higher levels of autonomous driving technologies, which will also be very important for the entire industry.

Thank you.

Thank you. Your next question comes from from HSBC. Please go ahead.

Thank you, team. My first question is probably still an extra mile on the margin pricing. So second quarter, probably we're going to see higher economic scale, almost doubled versus the first quarter, yet the promotion and also lower mix likely to remain as a dilution. So you talked about the flexible pricing earlier. So could you put us in a bit more context about how we prioritize pricing mix and volume and each of them waiting on the margin side?

Thank you, Yuchen. I think the growth of the sales in May and April is a comprehensive result. First of all, we completed the product exchange. We switched to 2020 models. The competitiveness of the entire product must have increased. Secondly, I think our entire BaaS, which is Batch as a Service, Our strategy is very important. In March, we launched the long-life battery strategy. At the same time, we adjusted the price of the battery. Based on the extension of battery life, and the extension of battery life through operation, we have a better agreement with the battery supplier on battery quality assurance. In short, the adjustment of the price of our bus is very important for the user to accept the subscription mode. Our current subscription ratio, which is the ratio of using the TV streaming method, is more than 80%. So the whole take rate has significantly increased. Of course, for BaaS, we have also given some measures such as four months per month and one month per month. The third one is very important, which is the expansion of our sales network. Since the increase in sales capacity in the second half of last year, we have realized that our sales network and sales personnel are not enough. So we have been doing this construction since the 30th or 40th quarter of last year. Starting from March or April this year, we have qualified the number of our fellows has increased significantly. They have also started to contribute to the sales orders. This is very important. Of course, we also saw the increase in the number of our e-challenges, and the recognition of our e-challenges, and the recognition of our scalable and scalable upgrades, as well as the reputation of our product quality. I saw that two days ago, China Car Transport Association, our ES8, and several other models are all in the top of the group. So this is a very comprehensive thing. So I don't think it's a simple price adjustment. In fact, we didn't officially announce the price adjustment. We just gave some benefits in terms of bus, some oil cars, self-exchange, electric cars, and subsidies. In fact, we didn't give any other things.

Thank you for the question. In the April and also May, we have witnessed the increase in our sales volume, but such increase is actually due to multiple factors. The first is we have just completed our model year facelift in the first quarter of this year. With that, it has significantly improved the competitiveness of our products. And secondly, we have adjusted our BAS policy. This March, we have announced our long-life battery strategy and also the adjustments to the bus monthly subscription fee. By optimizing our operations and also working with our battery suppliers for longer battery warranty, we can prolong the lifetime of the battery and lower the monthly fee for our users. This is actually a very important approach to boost the take rate of the bus service. After the announcements and adjustments, the take rate of the battery as a service has raised to more than 80%. Also, we are offering some time-limited promotions on the bus service. Right now, our users can buy four months of the bus and enjoy one month for free. The third reason is regarding the improvement on our sales capabilities and capacity. In the second half of last year, we realized that we didn't have enough sales capacities and capabilities, which means we didn't have enough point of sales or the sales persons on team. In that case, we started to build our sales capacity and capabilities. And starting March, April this year, we are seeing more and more qualified fellows to contribute the sales and also orders to the company. So these are several major reasons that are boosting our sales volume in the past two months. In addition to that, there are several other reasons. For example, we are deploying and opening up more and more power swap stations. More and more people are also getting to know and starting to recognize the value of a chargeable, swappable, and upgradeable solution. And also, we have a pretty stable residual value on our used vehicles. Recently, there was an evaluation coming from the industry institution, and the ES8 and several other new models actually have the best RB performance among all the BEV products. So it is not just about the adjustments on the prices, not to mention that we haven't announced any price reductions on our products. We are offering some promotions like battery-as-a-service policy promotions or some trade-in incentives for the ICE car users, but no price reductions on the products. 接下来我们当然还是会

We hope to continue to improve the performance of毛利. One of the important things is that we have started from June. We are going to optimize the mix of products. For example, we have started to hand over ET7 from the end of April. ET7 and ES8, EC7 products are very competitive in the segment market. We will give more requirements in this regard. to increase the proportion of high-price products. In other aspects, we are also doing more detailed management of variable marketing. In fact, in June, we have collected some short-term sales policies. For example, we changed the number of chains, In the meantime, we also will continue to improve our vehicle margin. So starting June, we are taking several actions. The first is to keep improving our product mix. We have started to deliver our ET7 in late April.

EP7, ES8, and the EC7, they're pretty competitive in their respective segments, and we will also encourage our frontline teams and our fellows to put more focus on this high-margin product to help us optimize product mix. And secondly, we are also optimizing our variable marketing expenses. Starting June, we are also doubling back on our time-limited offers and promotions on the products. For example, we are reducing the number of free power swap brochures we gave out to our users. So overall speaking, we will keep improving our sales volume steadily while optimizing the vehicle margin.

Thank you. That's very comprehensive. The next question is on the overseas business. The European Union anti-subsidy investigation towards China EV might come out as a preliminary result next week. So could we have an update refresher on NEO's overseas footprint, including Europe and also Mideast?

Yeah, of course, we are waiting for their announcement. But we think this is a very wrong direction. Because the global sustainable development We believe that increasing tariffs on new energy-related products is the opposite of the goal of the whole world's sustainable development. Of course, from the perspective of an enterprise, we will adjust our direction and strategy according to their latest decisions. Currently, NEO's overall sales in Europe is relatively low, so it won't have any impact on our entire company's short-term operations. But in the long term, whether it's Envoy or Firefly, we will, of course, adjust to the most reasonable strategy based on their next tariffs.

Thank you for the question. It's true that the entire industry is waiting for the preliminary announcement on the anti-subsidy probe of Europe. From our perspective, we don't think such probe is in the right direction. Imposing tariffs on the new energy vehicles is actually going against the initiative of the sustainable development of all humankind. Of course, we will also adjust our directions and strategies according to the latest change on the tariffs of the product. Overall speaking, at the moment, the sales in our European market is still quite moderate in comparison to our total vehicle sales. So the impact on our short-term operations is limited. For the longer term, be it for NIO or for Envo and Firefly products, we will also develop and make necessary adjustments to our strategies according to the latest terrorist policy.

From the Middle East perspective, we should be in the UAE this year.

Regarding the Middle East market entry, later this year, we are going to start to offer our products and services in the UAE market. We are making market entry preparation right now.

Thank you.

Thank you, Yuqian.

Thank you. Your next question comes from Jing Cheng from CICC. Please go ahead.

Hi. Thank you for taking my questions. My first question is a quick follow-up question. So can we share with us more information on the financial impact of the major especially BAS policy adjustment in the first quarter, such as our BAS rental fee adjustment and also our 441 battery rental and also our battery swap coupons, these financial impacts, especially for our income statement. And this is my first question.

Yeah, about the bus price adjustment, I think two parts. First, it's about the price reduction from like 980 to 728. Currently, no material impact to NIO's revenue and gross profit margin. I think as mentioned by William, we make this adjustment based on assumptions that the battery can be used for a longer time and also some optimization of the battery life operations. So that's first. Secondly, about the promotions used for months and one month for free. We granted this equity to the users for five years. So generally, the financial impact of this promotion is about below 6,000 per car. So that's the general impact of this policy. Yeah.

Yeah, thank you. My second question is about

Also for our online also Firefly. So this year we will have our first car and next year we will have Firefly to be launched. And our three sub-brands, including you, will form a quite complete product matrix in next year. So can you share more information on this? different positions and also the different relationships between these three brands? And also, in what aspects can we collaborate?

Yeah. From the three brands, the positioning is very clear. From NIO, we are positioned in the high-end market, the premium market. The target audience is mainly business and family-based users. FiveFlight is the mainstream family market. FiveFlight's target audience is mainly family-based users. Of course, I've mentioned FiveFlight before. In China, it's more of a boutique, a small car, an entry-level car. So from a positioning point of view, its positioning is also serving the needs of families, especially the needs of the second car. So the positioning of these three brands is still very clear. So if we talk about it from a price point of view,

Thank you for the question. Regarding the positioning of our three different brands, actually they are very clearly differentiated. For NIO, it is a premium brand target business-oriented users and business communities also have a steal over to the family-oriented users. For Anvo, it targets the premium family market, mass market. So its target user is very clear, family users. For Firefly, as I've mentioned, in China, it will be an affordable boutique compact car. We target the family-oriented users, especially those families who are buying Firefly as their second vehicle. That's about the positioning of these three brands. Price-wise, it is also pretty clear. the starting prices of all three brands will be around 100,000, 200,000, and 300,000 RMB. That is also clearly differentiated. However, these three brands do share a similarity, that is the power swap. All three brands can support power swap.

Then all of our hardware and software, the ability between them is highly applied. Of course, from the point of view of this switch station, we can see that the switch station between ANGLE and NEO can be shared. Of course, there is also the whole engineering aspect. In fact, we can share a lot of things. If we make it, currently our L60 is the first product of Le Dao. Then it is also suitable for In addition to PowerSwap, the three brands also share the fundamental capabilities for smart technologies, electrification, and also vehicle engineering capabilities.

For example, when it comes to smart technologies, software-wise, hardware-wise, three brands can share quite a lot of synergies. For the power swap stations, as we've already mentioned, NIO and Envo will be sharing the same power swap station and also structure. For the vehicle engineering, there are also quite a lot of capabilities that can be shared across all three brands. In terms of manufacturing and production, the first model of Envo L60 will be manufactured in NIO's second factory, NIO F2. So from this perspective, you can tell how much synergies we can leverage and how much investment we can share across peer brands.

Thank you, Tianjin.

Thank you. Your next question comes from Tina Hao from Goldman Sachs. Please go ahead.

Thank you for taking my question. So my first question is regarding Actually, just now William mentioned to keep the volume steadily increased and then to improve growth margins. So can we interpret this as for the upcoming month, we do expect the vehicle volume to be above 20,000 units per month? That's my first question. Thanks.

Thank you, Tina. From what we've seen so far, our demand is still very stable. Of course, we are facing some minor problems in the near future. In May, our order demand has actually exceeded our production capacity. So basically, the delivery volume in May is the largest production capacity we can produce per month. We do see a pretty stable demand on our product.

Recently, we do have several small headaches. For example, in May, actually, the order demand has exceeded our production capacity. So the actual deliveries we achieved in May basically means the maximum number of vehicles we can produce for that month. So we do see a steady and sustainable growth momentum on our order intake, and we have a confidence of continuing that.

And thank you. Can I just have a quick follow-up for, so for the, I think starting from September, you will start to deliver Envo. So does the 20,000 units sort of forecast or target include Envo or exclude Envo? 我们这个乐道发布了以后,我们事实上是看到了

It is also a positive promotion for the NIO brand. So we didn't see the NIO demand being affected by the release of Le Dao. Of course, from the production point of view, we have been training our workers. We hope to increase our production capacity by opening part of the double shift. So what we just talked about, of course, does not include Le Dao.

After the launch of Anvo brand, we actually see positive impact on the sales of the new product. It hasn't affected the demand on the new product. In the meantime, we are also training the operators and also the frontline teams so that we can get ready for the production of Anvo's product. we may also arrange dual shifts in certain production lines or sections to fulfill the demand of both brands and products. Regarding whether this number you've just mentioned, well, if it has included the volume assumptions for Envo, actually it does not. That is only the assumption for the new brand.

Thank you. That's very clear. Thanks, William. And then my second question is regarding the operating expenses. So first on SG&A, in the first quarter, we see SG&A actually increased by 22% year over year. So should we expect similar type of increase in the following three quarters? And also actually starting from September, since there will be 100 new stores for EnvoEdit. So in that, like the last quarter, should we expect SG&A expense to increase to grow even higher. And then in terms of R&D, on the other hand, I see it down 7% year over year. So for like overall R&D expense, what kind of annual spending level do you think it will be like a sustainable or steady state kind of expense for us to keep competitive in terms of our hardware and software technology? Thank you.

Yeah, regarding operating expense, the first is about selling expense. Yeah, actually, in Q1, our marketing activities decreased, considering the impact of Chinese New Year festival and also the seasonal change. Starting from Q2, we are expecting that the percentage of selling expense against the vehicle revenue will be improved if our sales growth quarter over quarter can be achieved as planned. So that's about the price. Along with the launch of Anwo, we don't think the efficiency will be damaged since with the volume increase of Anwo, we will have a larger sales revenue. This is about the efficiency of selling expense. For the R&D expense, the fluctuation in Q1 is in line with the cadence of our R&D activities, especially the development of new vehicle models and core tech. Generally, the forecast for R&D expense in 2024 will be consistent with 2023. That is to say the non-GAAP quarterly spending will be around three billion RMB. I think this outlook is consistent with our prior quarters like statement. Thank you, Tina.

Thank you. Yes, I understand that in terms of SG&A as a percentage of revenue is going to decline, but just in terms of the year-over-year growth for SG&A, shall we expect it to grow more than 22% this year?

I think based on our current forecast that we don't think it will exceed 20% in 2024.

Okay, that's very clear. Thank you.

Thank you.

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

Thank you for joining us today. If you have further questions, please feel free to contact Neil's IR team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you. Thank you. So, Thank you. Thank you. you you Thank you. Thank you. Bye. you you

Thank you Thank you. you

Hello, ladies and gentlemen. Thank you for standing by for NEO Incorporated's first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Rui Chen, Head of Investor Relations of the company. Please go ahead, Rui. Thank you, Rui.

Good morning and good evening, everyone. Welcome to NIO's first quarter 2024 earnings conference call. The company's financial and operating results were published in a press release earlier today and are posted on the company's IR website. On today's call, we have Mr. William Lee, founder, chairman of the board, and the chief executive officer, Mr. Stephen Fong, chief financial officer, and Ms. Stanley Chu, senior vice president 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 US Private Security 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 Security 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 Neil's early press release and this conference call include discussions of unaudited non-GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to Neil's press release, which contains a reconsolidation 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.

Hello, everyone. Thank you for joining NIO's 2024 Q1 earnings call. In Q1, NIO delivered 30,053 premium smart EVs. In Q2, thanks to the launch of all the model year products, unleashed of sales capabilities, together with a more flexible sales policy, NIO's deliveries started to pick up month by month. In April, NIO delivered 15,620 vehicles, and in May, 20,544 vehicles. Our market share in the premium BEV segment continued to grow, with year-over-year growth far above the segment average. The total deliveries in Q2 is expected to be between 54,000 and 56,000 units. up 129.6% to 138.1% year-over-year. In terms of NIO's financial performance, during model year product transitioning in Q1, the vehicle margin was 9.2%. In the meantime, with the improvements on the utilization of the charging and swapping facilities profitability of the after-sales services. Growth loss on the other sales was greatly reduced quarter by quarter. Now, I would like to share with you the recent highlights of our products and the operations. On April 25th, the 87th Executive Edition was launched at Beijing Auto Show. The delivery of this Executive Sedan has started in late April. With all round upgrades, the 2024 NIO87 batch caters to the needs of the business community. It's well placed to compete with the premium exacto models, especially ICE models such as BMW 5-Series, Audi A6, and the Mercedes E-Class. In terms of NAD, On April 30th, we started to push Urban NLP Plus to all end-to-users, making it the largest release of its kind, accessible by more than 260,000 users on over 1.4 million kilometers of highway and urban streets, and in 726 cities in China. NOP Plus has been an industry leader in terms of its user base and coverage. During the Labor Day holiday, 48.1% of the total mileage was driven with NOP Plus, making user journeys safer and more relaxing. Since day one, NIO has developed a clear brand roadmap, starting from the premium segment to build up skills, and experience, and then introducing a mass market brand to reach and serve more users. With that, we will be able to make greater contributions to a more sustainable future. On May 15, at the International Day of Family, we introduced Anvo, a new brand for the mainstream family market. Anvo is a firm on voyage. and its Chinese name, Le Dao, translates into path to happiness. On a mission to make family life better, Anvo is committed to bringing products with the ultimate experience value and optimal ownership cost. The pre-order of its first product, L60, was started. L60 is a smart electric midsize SUV. The official product launch and delivery will begin in September. The launch of Anvo has shifted us into a higher scale, expanding our reach to a wider user base. As more people are aware of our technologies and products, we will add closer our vision of a blue sky coming. As for the sales and service networks, so far, NIO has 154 NIO houses and 388 NIO spaces, as well as 344 service centers and 64 delivery centers. About the charging and the swapping network, so far, NIO has 2,472 power swap stations worldwide and has provided over 45 million swaps. Besides, NIO has also installed over 22,000 power chargers and destination chargers. In the meantime, more industry players have joined NIO's charging and swapping network. Geely, JAC, Cherry, Lotus, GAC, and FAW. So jointly expand and standardize the battery swapping network. More investors have taken notice and recognize the value of NIO's charging and swapping business. On May 31st, NIO Power signed a strategic investment agreement of RMB 1.5 billion. With the support of strategic investors, NIO will be able to further develop its core technologies and expand the network. On May 13th, NIO was named in the 2024 Fortune China ESG Impact Seed. We have continued to show those social responsibilities and lead by example in the ESG domain. to further contribute to sustainable development worldwide. Despite the failed competition, our continuous investment in technologies, products, services, and the community starts to pay off and set us apart from others. Niel's premium brand precision, industry-leading technologies, and innovative chargeable, swappable, and upgradable power experience have been recognized by more people, and thus driven steady sales rebound. We will continue to speed up software integration, optimize products and experiences, improve system capabilities and operational efficiency to gain a larger market share. In the meantime, As the company unfolds its multi-brand strategy and enters a broader market, we expect to bring out more potential for growth. As always, thank you for your support. With that, I will now turn the call over to Stephen for Q1's financial details. Over to you, Stephen.

Thank you, William. I will now go over our key financial results for the first quarter of 2024. To keep this brief, I only refer to amounts in RMB today. I encourage listeners to refer to our earnings press release, which is posted online for additional details. Let's begin with revenue. For the quarter, for the first quarter of 2024, total revenues were 9.9 billion RMB, down 7.2% year-over-year, and 42.1% quarter-for-quarter. 85% of revenue comes from vehicle sales in Q1, totaling 8.4 billion RMB, down 9.1% year-over-year, and 45.7% quarter-of-quarter. The decrease year-over-year was mainly attributed to lower average selling price as a result of user rights adjustments since June 2023, and a decrease in delivery volume. The decrease quarter-over-quarter was mainly attributed to a 40% decrease in data volume, which was affected by seasonal factors. Turning to other sales, other sales were 1.5 billion RMB, showing a 5.2% increase year-over-year, and an 8.2% decrease quarter-over-quarter. The year-over-year growth was mainly due to the increase in sales of parts, after sales vehicle services, and the provision of power solutions, which grew with our user base. And the power should offset by decrease in revenue from sales of used cars and auto financing services. The decreased quarter of a quarter was mainly attributed to a decrease in revenue from sales of used cars. Then let's have a look at the gross margin. Overall gross margin was 4.9%. compared with 1.5% in the same period of last year and 7.5% in the last quarter. Changes in gross margin were primarily driven by vehicle margins. Vehicle margin was 9.2% in this quarter, compared with 5.1% in Q1 2023 and 11.9% in Q4 2023. The year-over-year increase was mainly due to the decreased material cost per unit in Q1 2024. The quarter-for-quarter decrease was mainly due to lower average selling price as a result of increased promotion during product transitioning, changes in product mix, and the partial offset by the decreased material cost per unit. Next, moving on to the operating expenses. R&D expenses for 2.9 billion RMB declined 6.9% year-over-year. and 27.9% quarter-to-quarter, which has been driven by decreased design and development costs and decreased personal costs in research and dealing functions in the first quarter of 2024. SG&A expenses were 3 billion RMB, increased by 22.5% year-over-year, and decreased by 24.6% quarter-to-quarter. The year-over-year increase was mainly due to, first, the increase in personal costs related to sales functions. Second, the increase in expenses related to the company's sales and services network expansion. And third, the increase in sales and marketing activities. The quarter-to-quarter decrease was mainly due to, first, the decrease in sales and marketing activities and professional services. And second, the decrease in personal costs related to sales and general corporate functions. Now, we proceed to the bottom line. Last, for operations worth 5.4 billion RMB represents an increase of 5.5% year-over-year and a decrease of 18.6% quarter-of-a-quarter. Last, 5.2 billion RMB represents an increase of 9.4% year-over-year and a decrease of 3.4% quarter-to-quarter. And finally, our balance of cash and cash equivalents, restricted cash, short-term investment, and long-term time deposits was 45.3 billion RMB as of March 31st, 2024. For more information and details of our August 1st quarter 2024 financial results, please refer to our earnings press release. Now this concludes our prepared remarks. I will now turn the call over to the operator to proceed our Q&A session.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can re-enter the queue. Your first question comes from Tim Seau from Morgan Stanley. Please go ahead.

Hi, everyone. Thanks for taking my questions and congratulations on the good feedback on Vogue and those as some strategic for your power. I have two questions. The first question is about the gross profit margin, because as we remember, the company previously guided VCO gross profit margin would be back to mid-teens, as the strategic focus of Neobrain is profitability and cash generation, while Envo would be the one going for volume. However, we saw increasing promotion for Neobrain in April and May, which worked pretty well, actually, and successfully boosted volumes. Will management consider to continue this kind of more aggressive promotion on NEO brand for better volume in upcoming months? And do we need to revise down our deco margin expectation? That's my first question.

Thank you, Tim. I will ask Stanley to answer your question.

Yeah, I think regarding the margins for NEO,

Yeah, regarding the gross margin, actually we upgraded our NT2 product to 2024 version from March. During the transition period of the model year product change, more promotions were offered to the old models, leading to the decrease of our average selling price in Q1. And additionally, more lower margin models like 85 and 85T were sold in Q1. All those factors lead to the decrease of our gross margin. As you mentioned, we delivered over 20,000 vehicles to users in May. With the recovery of sales volume, We will further optimize our product mix and negotiate with our supply chain partners for more cost efficiency in the following months. So we expect the vehicle margin will return to double digits in Q2 and continue to improve in Q3 and Q4. Yeah, but considering the intensifying market competition, We will also be more flexible on sales policy to make sure our market position is secure. Thank you, Tim.

Thank you. That's very clear. Thanks for sharing all the details. My second question is about Neopower. As William just mentioned, I think Neopower secures the first extent of strategic investment of $1.5 billion or around $200 million U.S. dollar. So looking for, will Neopower get and accept more funding support from other card makers in the battery swap alliance? And separately, in addition to Neopower, is there any other tickhorns or business units within the group that could follow suit to seek external capital injection and be gradually carved out? Could Matt Moutin give us some examples? That's my second question. Thank you.

Thank you, Tim. After Neopower's first financing, we still have about 90 shares. We have already started an independent financing plan. We will also open other car companies and other companies. We are open to the investment of investors. Of course, we think that Neo Power itself has a long-term sustainability. We are very optimistic. Of course, it is now in an investment stage. It needs to build a network. It needs to build up the national network first. There are indeed some super-rich investments. But in general, its profitability is very clear. Basically, we can give you a reference. We have about 60 orders of service per day. We can basically bake even. So if you look at our daily power exchange service, which is close to 100,000, Thank you for the question. For the new power, recently we have just completed the first

ROUND OF FUNDRAISING, AND AFTER THIS ROUND OF FINANCING, NIO STILL HAS AROUND 90% OF THE EQUITY IN NIO POWER, AND NIO POWER IS NOW OPEN FOR THE EXTERNAL INVESTORS, BE IT INVESTMENT FROM THE INVESTORS OR FROM THE CAR COMPANIES, WE ARE OPEN FOR THAT. OF COURSE, FOR THE LONGER TERM, WE DO BELIEVE THAT NIO POWER HAS A FINANCIAL SUSTAINABILITY, BECAUSE WE DO HAVE A PROMISING AND POSITIVE OUTLOOK FOR THAT. AT THE STARTING STAGE, As we needed to build up the network for the power swap facilities, the upfront investment is relatively heavy. However, we do see a clear roadmap for the profitability with new power. Let me share with you a number. Right now, for the break-even point of a single power swap station, it's around 60 swaps per day. And if you look at our current power swap service, every day on average we offer around 100,000 power swaps. With around 2,000 stations, it means that for each station, on average, they are already providing around 30 swaps per day. So for the longer term, we do see a viable roadmap for the sustainability and also the profitability of our power swap business. Not to mention that we can also leverage the revenues contributed by the energy storage and also the flexible battery upgrade of the power swap.

Thank you, Tim.

Thank you. Your next question comes from Ming Sun Lee from Bank of America. Please go ahead.

Hi, William in the management team. This is Ming from Bank of America. So my first question is regarding AmoBank. So right now we are close to the end of second quarter. So could you give us some guidance regarding on your sales channel expansion and also capacity related to onboard brand. And also, could you give us a rough product pipeline for the onboard brand? Thank you. That's my first question.

Thank you. Thank you, Ming. Our current plan is that by the end of September, we will have about 100 stores ready. So from the Catex perspective, Le Dao's stores don't need to invest as much as Niel House. So in general, the efficiency is still very high. So each store's investment is between 100 to 2 million RMB. So from the Catex perspective, we think this is not a big pressure for the whole company.

Thank you for your question. Our current plan is that when we start to launch and deliver the first product of Anwo in September this year, we're going to open up around 100 stores in China. CapEx West, as Anwo's sales stores or point of sales, does not come with new house, which does not require heavy investment in that case. The overall CapEx will be pretty efficient, around 1 to 2 million RMB per store. It won't be a very heavy burden from the CapEx perspective.

Yeah. Sorry.

Yeah. Yeah. Yeah.

For example, like one model this year and then maybe two model next year. Yeah. Yeah.

Then next year, we will launch the second model. This is a medium-sized SUV suitable for larger families. We will launch it next year. Of course, our subsequent products are all planned. In general, Envo will not have too many products. But in terms of each product, we hope that its sales can reach a relatively high share in the market. Regarding the Onvo's product line, actually the first product, L60, it will be directly competing with Model Y. It's a mid-size SUV for family users.

And then next year, we are going to introduce the second product from Anvo. It will be a mid-large SUV for bigger families. We also have other products in the pipeline. But overall speaking, for Anvo, we will not have many products in its offering. We will be focusing on enhancing the market share and also the sales volume of each product in their respective segment. Overall speaking, the total sales volume for Anvo's segment, which is a family car market with a starting price of around 200,000 RMB. The total size is around 4 million, and we do believe that we have a good opportunity and the room for growth in that segment.

Thank you, Ming.

Thank you, William. Thank you, William. And my second question is related to your third brand, because we read the news today that the Firebrand could be launched or shown to the market probably by the end of this year. And could you also give us some latest update on the third brand? And last time during the call, you mentioned that probably five brand products could be sold in new households, new space. So could you confirm on this network sharing? Thank you.

Thank you. But it could a good shelter. So you are number woman from what kind of function that you're going to have to come back to both way her near to share the good thing on the bigger social one law. Did I do her mean you have not mean you have been doubted about that. I want to say you guys who would matter being me. You're going down. We're going to timing can you be tough on. Thank you for the question. Regarding our third brand, Firefly, the R&D activities are in good progress. Several months ago, I've already tried one of the early builds of their first model and it's pretty good.

Regarding the Firefly product, in the Chinese market, it will be a boutique compact vehicle. Although its price segment is around 100 to 200,000 RMB, but it will follow a very high standard for the safety and the quality. So it will be a well-designed boutique car for the Chinese market. In terms of the sales channel, it will also share the point of sales with NIO. just like how Mini is sharing its dealership source with BMW. We will be using a similar approach. However, the selling price of Firefly will not be as expensive as Mini, but product-wise, it is definitely a very good product. We will start the product delivery from the first half of next year. Brand launch and the product launch, we don't have the specific date for that, but the delivery date is already more or less defined. That is the first half of next year.

Thank you, William.

Thank you. Thank you, Min.

Thank you. Your next question comes from Bin Wong from Deutsche Bank. Please go ahead.

Thank you. My question is about the margin. Because you migrated to NT 3.0 this year, so if you own a new brand product, margin improve we can achieve through a technology upgrade. At the same time, based on the same NT 3.0 technology, can you provide the volume assumption to reach the overall company back even? That's my first question. Thank you.

Thank you, Wang Bin. Of course, our NEO product will gradually switch to the third-generation platform starting next year. In general, we hope to have a better profit margin from the third-generation platform. A large part of this is from using more self-sufficient technologies, such as chips. Of course, this can significantly improve our profit margin. Of course, there are some... We also saw some... For example, the space for the reduction of battery cost. So, in general, from the point of view of the design goal of NP3, we hope that the average net profit can reach more than 20%. Of course, this is our goal. We are still very confident about this. We are still... Our goal is to say that China's core business, Niel, can make a profit. This is our goal. As for Envoy, we have announced a pre-sale price. This is not our final price. From the current pre-sale price point of view, we still have a very good profit margin. You know that the competition is very intense in the Angola region. But we will not sacrifice... We will not use a particularly low horsepower to change the sales volume. This is not our direction. We think that Angola will maintain a horsepower rate of more than 15 in the long term. This, of course, is our business goal. If we look at it with Tesla, its horsepower rate is about 16 to 17 today. So we will definitely go to Angola. Thank you for the question. Regarding new brands, starting from next year, we will gradually upgrade our products to the third generation, and the first product on NT3 will be ET9. And for the third generation products,

We will also take different approaches to improve the vehicle margin. For example, we will start to put more in-house technologies into our vehicles, like chips, for better vehicle margin performance. We also see some opportunities with battery cost reductions. So overall speaking, our target for the NT3 product margin will be around the 20% on average. And we do have a confidence of realizing that average margin of 20% from NT3. And regarding the break-even target for the new brand, our target is still the same, that is to realize the monthly sales volume of 30,000 units with a vehicle margin of around 20%, and then we will be breaking even with the core business of the new brand in China. And regarding our second brand, Anvo, we have announced the pre-sale price during the brand launch, but we haven't released the final price yet. Even with the pre-sale price, we can realize a pretty good vehicle margin. Of course, we also understand that the competition in on-wall segments is more intense than new. In that case, we will also strike a balance between the volume and the margin. We will not boost the sales volume at a cost of our vehicle margin. And for the longer term, our margin target for on-wall products will also around or even above 15%. Because looking at Tesla, their current product margin is around 16% to 17%. And for Anvo, realizing a margin of above 15% is also a reasonable and achievable target for us in the longer term. For Anvo brand to break even its monthly sales volume should be at least 20,000 to 30,000 units per month.

Thank you. My second question is about the older backlog for Oval. You actually, in an interview, said that you are very concerned about the onboard initial order backlog. Some market talk is that you already have 60,000 cancelable orders right now. Can you comment on that number and how satisfaction you are about the onboard order so far? Thank you.

Yes, you know that we have never announced the number of pre-ordered orders. Because pre-ordered orders are... We don't think there is too much reference. But indeed, the number of on-board orders exceeds our expectations. Our on-board president also said this in an interview. But we will not announce the number of pre-orders. We can only say that now, in a situation where we haven't even opened a store, there is already a pre-order that exceeds our expectations. This is what we can communicate at the moment.

As you know that for us, we never disclose any pre-order intake or numbers as the pre-orders are refundable and we don't need a very solid reference for us to look at the actual performance of the product. However, it is true that with the pre-order intake, it has surpassed our expectation, as also mentioned by the president of Envo L&I in some interviews. So overall speaking, without opening up any stores or having products to the market, we have already received the pre-order set beyond our expectation. That's the information we can share.

Thank you very much. Thank you.

Thank you. Thank you.

Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Thanks for taking my questions. Two questions. The first question is, You mentioned that right now you have 2,400 swap stations. To my best understanding, only the third generation and latest battery swap stations could help Anvo to swap the batteries. Could you please remind us how many units of the later generation battery swap stations could help for the Anvo swap?

Thank you. Our three-generation station will undergo some modifications, but the amount of work will not be very large. It will be an investment of about 200,000 to 300,000 RMB. When it is modified, it can be used by Le Dao. However, our three-generation station is more than 1,000 seats, so the three-generation station itself is more than 1,000 seats. We started in June, which should be next week. We will start to officially deploy our four-generation station. Of course, the four-generation station can be integrated with Envoy and NIO. Of course, this year we will follow the entire market plan to see how many exchange stations we need to deploy. But all the four-generation stations can be used by Envoy. So if you look at the current progress this year, Thank you for the question. For our third-generation power swap station to be compatible with Anvo's products, we do need to make some necessary modification. It is not a very expensive one, around 200,000 to 300,000 RMB per station for the modification.

So far, we have already installed more than 1,000 third-generation power swap stations. So that will be a base. In the meantime, actually next week, we will start to install our fourth-generation power swap stations. And these stations will be compatible with both Envo and NEO products. And also later this year, depending on the market and the demand, we will also see and decide how many fourth-generation stations we need. to deploy for new and on-world products, but all fourth-generation stations can be accessed by on-world products. Probably with that, by end of the year, in the market, there will be more than 1,000 stations that can be compatible with on-world products.

We won't change all the three-generation stations, because not every station needs to be changed. So, in general, we...

Of course, it doesn't mean that we will modify or open up all the fourth generation stations to Anwo users as not every station needs to be modified or open up to the second brand. Not to mention that to start with, Anwo will not have a very big user base for the current year. In that case, the experience of those brands will be pretty good.

We can still clearly see the relevance of the growth of sales in a region after the construction of the exchange station. We are selling very well in Longevity. Longevity has more than half of the sales of our entire company. We also have more than 800 exchange stations in Longevity, which is estimated to be close to 900. So we can see these similarities. So we are also looking at the whole ROI model, which is the deployment of an exchange station, the deployment of a single exchange station, how much sales can it bring, whether it's for Angle or for NIO. So the deployment of our next exchange station, we think our entire network is basically formed. So the deployment of our next exchange station will be more based on the promotion of sales, In the meantime, we also see some correlations between the number of power swap stations or the density of the power swap stations in certain regions and the south performance in that region. For example, in the Yangtze River Delta area,

Basically, half of our users are based out in that area. And in this area, we have already installed nearly 900 power swap stations. So there is a correlation between the number of stations and the number of cells. In that case, we are also developing a ROI model to calculate the return on the power swap station investment. In that case, our deployment of the power swap station and the decision on the deployment will be also relevant to their contributions to the sales volume, be it sales of new or sales of the Anwo brand. As right now, we have already initially established a charging and swapping network for China to cover most of the basic needs. For the next step, we will look closely at the return on the investment of all the power swap stations, the return on the south volume. In that case, our deployment next step will also be more targeted.

Thank you. So my second question is regarding the Neville Street license permit. I think you are among the first batch to receive the Neville Street autonomous driving testing license permit. How do you plan to utilize this opportunity and how should you further develop on the autonomous driving technologies. Thank you.

Thank you. Thank you for the question.

Yes, two days ago, we have received the L3 testing permit issued by four ministries, including MIT. And also, among all the startups, we are one of the earliest to receive the first batch of permits issued by the government. This also represents a recognition of our technology. For the next step, with the permit with the testing capability, we will be able to keep more frequent communications with the government regarding the application and also the testing of the higher levels of autonomous driving technologies, which will also be very important for the entire industry.

Thank you.

Thank you. Your next question comes from from HSBC. Please go ahead.

Thank you, team. My first question is probably still an extra mile on the margin pricing. So second quarter, probably we're going to see higher economic scale, almost doubled versus the first quarter, yet the promotion and also lower mix likely to remain as a dilution. So you talked about the flexible pricing earlier. So could you put us in a bit more context about how we prioritize pricing mix and volume and each of them waiting on the margin side?

Thank you, Yuchen. I think the growth of our sales in May and April is a comprehensive result. First of all, we completed the product exchange. We switched to 2020 models. The competitiveness of the entire product must have increased. Secondly, I think our entire BUS, which is Batch as a Service, Our strategy is very important. In March, we announced the long-life battery strategy. At the same time, we adjusted the price of the battery. Based on the extension of battery life, by operating to extend battery life, we have a better agreement with battery suppliers in terms of battery quality assurance. In general, the price adjustment of BUS is very important for the user to accept the subscription mode. Our current subscription ratio, which is the ratio of the use of the TV, is more than 80%. So the whole take rate has significantly increased. Of course, for BaaS, we have also given some measures of four-month delivery and one-month discount. The third one I think is very important, which is the expansion of our sales network. Since the increase in sales capacity in the second half of last year, we have realized that our sales network and sales personnel are not enough. So we have been doing this construction since the third or fourth quarter of last year. Starting from March and April this year, we have qualified The number of fellows has significantly increased. So they also started to contribute to the sales order. So this is also very important. Of course, there are others. We also saw this. With the increase in our change of power stations, there is also this kind of recognition of our change of power. This is our recognition of the upgrade. And our security rate. The security rate of the product's reputation. Because we just saw it two days ago. China Car Transport Association, our ES8, and several models are all in the group store. The performance is all top. So this is a very comprehensive thing. So I don't think it's a simple price adjustment. In fact, we also did not officially announce the price adjustment. We are only in the bus side. There are also some oil cars, self-change electric cars. In terms of subsidies, we gave some benefits. In fact, we did not give any other things.

Thank you for the question. In the April and also May, we have witnessed the increase in our sales volume, but such increase is actually due to multiple factors. The first is we have just completed our model year facelift in the first quarter of this year. With that, it has significantly improved the competitiveness of our products. And secondly, we have adjusted our BAS policy. This March, we have announced our long-life battery strategy and also the adjustments to the bus monthly subscription fee. By optimizing our operations and also working with our battery suppliers for longer battery warranty, we can prolong the lifetime of the battery and lower the monthly fee for our users. This is actually a very important approach to boost the take rate of the bus service. After the announcements and adjustments, the take rate of the battery as a service has raised to more than 80%. Also, we are offering some time-limited promotions on the bus service. Right now, our users can buy four months of the bus and enjoy one month for free. The third reason is regarding the improvement on our sales capabilities and capacity. In the second half of last year, we realized that we didn't have enough sales capacities and capabilities, which means we didn't have enough point of sales or the sales persons on team. In that case, we started to build our sales capacity and capabilities. And starting March, April this year, we are seeing more and more qualified fellows to contribute the sales and also orders to the company. So these are several major reasons that are boosting our sales volume in the past two months. In addition to that, there are several other reasons. For example, we are deploying and opening up more and more power swap stations. More and more people are also getting to know and starting to recognize the value of a chargeable, swappable, and upgradeable solution. And also, we have a pretty stable residual value on our used vehicles. Recently, there was an evaluation coming from the industry institution, and the ES8 and several other new models actually have the best RB performance among all the BEV products. So it is not just about the adjustments on the prices, not to mention that we haven't announced any price reductions on our products. We are offering some promotions like battery as a service policy promotions or some trade-in incentives for the ICE car users, but no price reductions on the products. 接下来我们当然还是会

We hope to continue to improve the performance of毛利. One of the important things is that we have started from June. We are going to optimize the mix of these products. For example, we have been teaching ET7 since the end of April. ET7, ES8 and EC7 products are very competitive in the segment market. We will give more requirements in this regard. to increase the proportion of high-price products. On the other hand, we are also doing more detailed management of variable marketing. In June, we have collected some policies for short-term sales. For example, the number of power chains, In the meantime, we also will continue to improve our vehicle margin. So starting June, we are taking several actions. The first is to keep improving our product mix. We have started to deliver our ET7 in late April.

EP7, ES8, and the EC7, they're pretty competitive in their respective segments, and we will also encourage our frontline teams and our fellows to put more focus on this high-margin product to help us optimize product mix. And secondly, we are also optimizing our variable marketing expenses. Starting June, we are also doubling back on our time-limited offers and promotions on the products. For example, we are reducing the number of free power swap brochures we gave out to our users. So overall speaking, we will keep improving our sales volume steadily while optimizing the vehicle margin.

Thank you. That's very comprehensive. The next question is on the overseas business. The European Union anti-subsidy investigation towards China EV might come out as a preliminary result next week. So could we have an update refresher on NEO's overseas footprint, including Europe and also Mideast?

Yes, of course, we are all waiting for their announcement. Of course, we think this is a very wrong direction. Because the global sustainable development We believe that increasing tariffs on new energy-related products is the opposite of the goal of the whole world's sustainable development. Of course, from the perspective of an enterprise, we will adjust our direction and strategy according to their latest decisions. Currently, NEO's overall sales in Europe is relatively low, so it won't have any impact on our entire company's short-term operations. But in the long term, whether it's Envoy or FiveFly, we will of course adjust to the most reasonable strategy based on their next tariffs.

Thank you for the question. It's true that the entire industry is waiting for the preliminary announcement on the anti-subsidy probe of Europe. From our perspective, we don't think such probe is in the right direction. Imposing tariffs on the new energy vehicles is actually going against the initiative of the sustainable development of all humankind. Of course, we will also adjust our directions and strategies according to the latest change on the tariffs of the product. Overall speaking, at the moment, the sales in our European market is still quite moderate in comparison to our total vehicle sales. So the impact on our short-term operations is limited. For the longer term, be it for NIO or for Envoy and Firefly products, we will also develop and make necessary adjustments to our strategies according to the latest terrorist policy.

From the Middle East perspective, we should be in the UAE this year.

Regarding the Middle East market entry, later this year, we are going to start to offer our products and services in the UAE market. We are making market entry preparation right now.

Thank you.

Thank you, Yuqian.

Thank you. Your next question comes from Jing Cheng from CICC. Please go ahead.

Hi. Thank you for taking my questions. My first question is a quick follow-up question. So can we share with us more information on the financial impact of the major especially bus policy adjustment in the first quarter, such as our bus rental fee adjustment and also our 441 battery rental and also our battery swap coupons, these financial impacts, especially for our income statement. And this is my first question.

Yeah, about the bus price adjustment, I think two parts. First, it's about the price reduction from like 980 to 728. Currently, no major impact to NIO's revenue and the gross profit margin. I think as mentioned by William, we make this adjustment based on assumptions that the battery can use for a longer time and also some optimization of the battery life operations. So that's first. Secondly, about the promotions, use for months and one month for free. We granted this equity to the users for five years. So generally, the financial impact of this promotion is about below $6,000 per car. So that's the general impact of this policy. Yeah.

Yeah, thank you. My second question is about

Also for our online also Firefly. So this year we will have our first car, and next year we will have Firefly to be launched. And our three sub-brands, including you, will form a quite complete product matrix in next year. So can you share more information on these different positions and also the different relationships between these three brands? And also in what aspects can we collaborate?

Yeah. In terms of positioning, it also serves the needs of families, especially the needs of the second car. The positioning of these three brands is still very clear. If we talk about the price segment, the main sales price is more than 100,000 yuan, more than 200,000 yuan, and more than 300,000 yuan. So the price difference between them is also relatively clear. Of course, their common feature is that they can exchange electricity.

Thank you for the question. Regarding the positioning of our three different brands, actually, they are very clearly differentiated. For NIO, it is a premium brand, targets business-oriented users and business communities, also have a steal-over to the family-oriented users. For Anvo, it targets the premium mass market, so its target user is very clear family users. For Firefly, as I've mentioned, in China, it will be an affordable boutique compact car, We target the family-oriented users, especially those families who are buying Firefly as their second vehicle. That's about the positioning of these three brands. Price-wise, it is also pretty clear. The starting prices of all three brands will be around 100,000, 200,000, and 300,000 RMB. That is also clearly differentiated. However, these three brands do share a similarity. That is the PowerSwap. All three brands can support PowerSwap.

Another point is that in terms of intelligent and electrification, as well as in terms of entire engineering, it is also very useful. Especially from the point of view of intelligent, all of our hardware and software, their ability is highly useful. Of course, from the point of view of the power station, we can share the power station between ANGLE and NEO. In terms of engineering, we can share a lot. For manufacturing, L60 is the first product of Le Dao. It is also produced in the F2 factory of NIO. So we can see that these three brands can share a lot of capabilities and investment.

In addition to PowerSwap, three brands also share the fundamental capabilities for smart technologies, electrification, and also vehicle engineering capabilities. For example, when it comes to smart technologies, software-wise, hardware-wise, three brands can share quite a lot of synergies. For the PowerSwap stations, as we've already mentioned, NIO and Envo will be sharing the same PowerSwap station and also structure. For the vehicle engineering, there are also quite a lot of capabilities that can be shared across all three brands. In terms of manufacturing and production, the first model of Anvo L60 will be manufactured in NIO's second factory, NIO F2. So from this perspective, you can tell how much synergies we can leverage and how much investment we can share across three brands.

Thank you, Tangjing.

Thank you. Your next question comes from Tina Hao from Goldman Sachs. Please go ahead.

Thank you for taking my question. So my first question is regarding actually just now William mentioned to keep the volume steadily increased and then to improve growth margins. So can we interpret this as for the upcoming months we do expect the vehicle volume to be above 20,000 units per month. That's my first question. Thanks.

Thank you, Tina. Yes, so from what we've seen so far, we see that our demand is still very stable. Of course, some of the small problems we're facing in the near future are that we're China China China China China China

It's true that we do see a pretty stable demand on our products. Recently, we do have several small headaches. For example, in May, actually, the order demand has exceeded our production capacity. So the actual deliveries we achieved in May basically means the maximum number of vehicles we can produce for that month. So we do see a steady and a sustainable growth momentum on our order intake, and we have a confidence of continuing that.

And thank you. Can I just have a quick follow-up? I think starting from September, you will start to deliver on-vote. So does the 20,000 units sort of forecast or target include on-vote or exclude on-vote?

After Le Dao was released, we actually saw that it was also a positive promotion for the NIO brand. So we didn't see the NIO demand being affected by Le Dao's release. Of course, from a production point of view, we have been training our workers. We hope to increase our production capacity by opening part of the double shift.

After the launch of Anwo brand, we actually see positive impact on the sales of the new product. It hasn't affected the demand on the new product. In the meantime, we are also training the operators and also the frontline teams so that we can get ready for the production of the Envolve product. We may also arrange dual shifts in certain production lines or sections to fulfill the demand of both brands and products. Regarding whether this number you've just mentioned, well, if it has included the volume assumptions for Envolve, actually it does not. That is only the assumption for the new brand.

Thank you. That's very clear. Thanks, William. And then my second question is regarding the operating expenses. So first on SG&A, in the first quarter, we see SG&A actually increased by 22% year over year. So should we expect similar type of increase in the following three quarters? And also actually starting from September, since there will be 100 new stores for envelope added. So in that, like the last quarter, should we expect SG&A expense to grow even higher? And then in terms of R&D, on the other hand, I see it down 7% year over year. So for like overall R&D expense, what kind of annual spending level do you think it will be like a sustainable or steady state kind of expense? for us to keep competitive in terms of our hardware and software technology. Thank you.

Regarding operating expense, the first is about selling expense. Actually, in Q1, our marketing activities decreased considering the impact of Chinese New Year Festival and also the seasonal change. Starting from Q2, We are expecting that the percentage of selling expense against the vehicle revenue will be improved if our sales growth quarter over quarter can be achieved as planned. So that's about selling price. Along with the launch of Onvo, we don't think the efficiency will be like damaged. since with the volume increase of onward, we will have a larger like sales revenue. So this is about the efficiency of selling expense. For the R&D expense, the fluctuation in Q1 is in line with the cadence of our R&D activities, especially the development of new vehicle models and the core tech Generally, the forecast for R&D expense in 2024 will be consistent with 2023. That is to say, the non-GAAP quarterly spending will be around 3 billion RMB. I think this outlook is consistent with our prior quarters-like statements. Thank you, Tina.

Thank you. Yeah, I understand that in terms of SG&A as a percentage of revenue, it's going to decline. But just in terms of the year-over-year growth for SG&A, shall we expect it to grow more than 22% this year? Yeah.

I think based on our current forecast, we don't think it will exceed 20% in 2024.

Okay, that's very clear. Thank you.

Thank you.

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

Thank you for joining us today. If you have further questions, please feel free to contact Neil's IR team through the contact information provided on our website. This concludes the conference call. You may now disconnect your line. Thank you.