NIO Inc.

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. Ray Chen, Head of Investor Relations of the company. Please go ahead, Ray.

Good morning and good evening, everyone. Welcome to NIO's third 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 CEO, Mr. Stanley Chu, CFO. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission. the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update and 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 gap financial information as well as unaudited non-gap financial measures. please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

Hello, everyone. Thank you for joining NIO's 2024 Q3 earnings call. In Q3, the company achieved a new quarterly record with 61,855 deliveries. The new brand, Mantent, is positioned as the top-selling brand in China's BEV segment, priced above 300,000 yuan, with its market share reaching 48%. The Ongo brand also started to deliver its first model L60 on September 28th, marking its entry into the broader mainstream family market. In October 2024, the company delivered 20,976 vehicles. While the Anvo brand continues to run top production capacity, the company's total deliveries in Q4 are expected to be between 72,000 and 75,000 units. On the financial side, our Q3 results reflected continued improvement in component costs leading to a vehicle margin of 13.1%. Besides, the gross margin of other sales has improved steadily. Supported by sustained growth in the revenues and the gross margin, the company achieved a positive operating cash flow and the free cash flow in Q3. Now, I would like to share with you some updates on our products and operations. Niel's executive flagship, 89, is in the final testing and the preparation before mass production. And the delivery is expected to start in March next year. The 89 brings together Niel's leading innovation. Its delivery will reinforce Niel's premium brand image. With new models to be introduced in the coming year, The new brand will be more focused on improving profitability. The Anvo S60, aiming at the mainstream family market, has been a hit with family users thanks to its spacious cabin, ultra-low energy consumption, comprehensive safety features, and the hassle-free charging and swapping experience. Now, we are ramping up our supply chain capacity. Niel's monthly production capacity is expected to hit 10,000 units in December and 20,000 units by March. Besides, on December 21st, Niel's third brand, officially named Five Lives, will make a global debut on New Day 2024. Its fourth product will be delivered in the Its first product will be delivered in the first half of next year. Targeting the boutique compact car market, the Firefly brand will enrich the company's product lineup and make full use of existing sales networks. In terms of smart driving, by October, Niel's Smart Driving had over 610,000 users. and 78.4% had activated NEOS Navigate on pilot. Together, they had driven over 1.39 billion kilometers with NOP. The onboard smart driving, based on the company's experience and expertise built over time, was rolled out with the S60. making Envoy the first brand to deliver vision-based and navigation-guided smart driving on urban roads. The company's success footprint continues to grow. So far, NIO has 176 NIO houses and 412 NIO spaces worldwide, while Envoy has 191 stores across China. On the service end, the company has 300 and 98 service centers and 65 delivery centers. The Power of Counties plan is making strong headway, with more partners joining us, expanding the network. As of now, the company has 2,737 power source stations worldwide, including 887 on highways. having provided over 58 million swaps for NIR and ANVA users. In addition, over 24,000 power chargers and destination chargers are up and running. They continue to expand globally. On November 28, the first NIR house in the MENA region will open up, and our sales and delivery have already started in the UAE. Next year, with new products from Anwu and Firefly, the company will accelerate its international market entry. On September 29, NIO China signed a new investment agreement and secured $3.3 billion from the strategic investors. This capital boost reinforces our balance sheet and reflects the investor's high confidence in NIO's industry leadership. On October 26, the 2024 NIO Cup Formula Student Electric China came to an end. Supporting the event for 10 years, NIO has helped more than 60,000 talented students chase their dreams in rapidly evolving smart EV industry. November 25th marks NIO's 10th anniversary, a milestone that wouldn't have been possible without the trust and the support of our users and the investors. Going forward, as the new brand starts to enter new product cycle, and Onward and Firefly will deliver more new products, the company is embarking on a phase of robust growth. We are confident in what's to come. Thank you for support. With that, I will now turn the call over to Stanley for Q3's financial details. Over to you, Stanley.

Thank you, William. Let's now review our key financial results for the third quarter of 2024. Our total revenues were 18.7 billion RMB, decreased 2.1% year-over-year, and up 7% quarter-over-quarter. Vehicle sales were 16.7% billing RMB down 4.1% year-over-year, primarily driven by a lower average selling price due to changes in product mix, partially offset by higher deliveries. Vehicle sales increased 6.5% quarter-over-quarter, which was mainly due to the increased delivery volume. Moving to the performance of other business, other sales were 2 billion RMB, grew by 19.2% year-over-year and 11.9% quarter-over-quarter. The year-over-year increase was mainly due to the increase in sales of parts, accessories, and after-sales vehicle services and provision of power solutions, and partially offset by lower sales of used cars. The increase quarter-over-quarter was mainly attributed to the increase in sales of parts, accessories at after-sales vehicle services at provision of power solution. Vehicle margin was 13.1% in this quarter, compared to 11% in the same period of 2023 and 12.2% last quarter. The year-over-year increase was mainly due to decreased material cost per unit and partially offset by lower average selling price as a result of changes in product mix. A quarter-over-quarter increase was mainly due to decreased material costs per unit. Overall gross margin was 10.7%, up from 8% in the same period of last year and 9.7% in the last quarter. Turning to OPEC, R&D expenses were 3.3 billion RMB, increased 9.2% year-over-year and 3.1% quarter-over-quarter. The year-over-year increase was both mainly driven by the increased personnel costs in R&D functions. SG&A expenses were 4.1 billion RMB, increased 13.8% year-over-year at 9.3% quarter-over-quarter, which was mainly driven by higher personnel costs related to sales functions and increased sales and marketing activities associated with new product launch. Loss from operations was 5.2 billion RMB, up 8.1% year-over-year and relatively flat quarter-over-quarter. Net loss was 5.1 billion RMB, showing an increase of 11% year-over-year and remaining relatively stable quarter-over-quarter. Lastly, we ended the quarter with a stronger balance sheet, with total cash and cash equivalents restricted cash short-term investments, and the long-term time deposit amounting to 42.2 billion RMB. That wraps up our prepared remarks. For more information and the details of our audited third quarter 2024 financial results, please refer to our early press release. Now I will turn the call over to the operator to start our Q&A session. Thank you.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. 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 Sowell. with Morgan Stanley. Please go ahead.

Hi, good evening, Neo Management team. This is Tim from Morgan Stanley. Thanks for taking my questions. I have two questions. The first one is about brand strategy alignment. Because we know that since the L60, Envoy L60, was launched in September, the orders of Neo Brands and Envoy Brands have been seesawing. Thank you, Tim. In October, the supply and demand of Niel's products decreased a bit.

In general, it is an active adjustment, because we are sure that before September, we have delivered 20,000 parcels every month, but we also realize that the pressure of our labor is very high, because the continuous improvement of NEO labor is our core goal. So in October, we have collected a lot of sales. We should be in Paris by the end of September. In comparison, we have collected about 15,000 sales. Of course, this will certainly have some impact on sales, but this is basically what we expected. So, of course, we saw that in November, we also saw that some of our early prices stabilized, and our needs were restored. At present, it seems that our plan is progressing. We think that using two brands or three brands to face different users is a successful strategy from the current point of view. It is a successful brand strategy. As for Le Dao, its main users are indeed users from the price range that competes with it. For example, the first major user source of Le Dao is Mod3 users. We also analyze some data internally In terms of the impact of NEO on NEO users, our own data shows that there is only about 2% of the impact. Indeed, there are very few users who do not buy NEO because of this NEO. There are very few users, but our current data is only about 2%. So our gain is much greater than this decrease. So in general, we think this is a successful strategy.

Thank you for the question. Regarding the overall delivery volume of the new brand, you see a decrease in our delivery volume starting October. That is more of an active adjustment than a passive result. As before October, our monthly delivery volume was above 20,000 units for several months consecutively. But in the meantime, we also realized that the vehicle margin has been under pressure as we have some promotions and marketing expenses on the product. Then starting October, we have dealt back on our expenses on that part by reducing around 15,000 RMB per unit on the promotional costs and the marketing costs. With that, inevitably, you see the impact on the sales volume. But starting November, as we are stabilizing our delivery volume and the demand, we are seeing the recovery from our volume recovery. And regarding our brand strategy, overall speaking, we think that using two or three brands to target different user groups is a successful strategy for now. For the envelope, it is still competing with other competitors in the same price segment. Right now, when we are looking at the main source of the envelope users, a majority of them actually come from the Model 3 And internally, we're also looking at the potential competition between the Anvo brand and the NIO brand. But the actual overlapping or the impact on the NIO brand is pretty minimum, only around 2%. It is true that few users may choose Anvo over NIO, but the overall impact on the sales and delivery of the NIO brand is limited. In that case, the combined increments of both Anvo and NIO still surpass the volume loss we had.

on the new brand in the past one or two months.

To clarify that, to look at the source of our onboard users, the top one source of these onboard users actually is coming from Model 3.

Thank you very much, William. My second question is about the production ramp-up. Because we noticed the production REMBOP of L60 so far is still a little bit slow. What is the main reason to a more moderate REMBOP pace? Would there be any impact to our current older backlog towards the year end? And in the meantime, in view of the busy model pipeline of Fireflies and also the new ET9 in March next year, as William just mentioned, and the more upcoming models under UNDO and NEW, how would the group consider solving the bottlenecks into 2025? That's my second question. Thank you.

Thank you, Tim. In fact, everyone is looking forward to L-60's production to be faster. But if we look at the latest technologies, such as the 900-volt technology, it will affect the production of batteries and motors, including our We also used a lot of our new electronic appliances. Our coconut structure is also a very advanced structure. There are a lot of new technologies in it. So in general, this is an expected pace. We did not go through a very large launch stock. It seems that the first month or the second month's turnover can be significantly higher. Because we are actually a relatively normal pace. If you look at the complete turnover month, in December, the third complete turnover month can reach 10,000 units. Then in March next year, our turnover target, our capacity and turnover target is 20,000 units. We think this is a reasonable pace of turnover. So in general, it may be because of everyone's expectations and some differences. In fact, because recently, China has a lot of subsidies, local subsidies, as well as some national subsidies such as self-advocacy. Some of the current policies are to the end of the year. So, because of the current delivery to next year, some orders will be affected objectively. This impact is not small. We also saw that we have 5-60% of users. The reason for this defeat is that 5-60% is definitely because there is no way to upgrade in the near future. You can also understand that for a car of about 200,000 yuan, it may be a very large amount of 1-20,000 yuan. So this can also be understood. ET9 and FiveFly will also have their own climbing rhythm. But in general,

um thank you for the question for the elbow l60 it's true that people have high or the market has a higher expectation for its ramp up and the production capacity however we also need to understand that l60 comes with a lot of cutting edge technologies For example, it has the 900-volt high-voltage architecture, which is also intertwined with the production and the preparation of the battery and the power train system. It also has a pretty advanced EE architecture. Its operating system and digital system, like coconut, also equipped with a lot of new technologies. So such technology preparation will also take time. And we also didn't prepare a sufficient launch stock so that we will realize a very high delivery in the first month. We actually believe that ramping up to 10,000 units per month in December, that is our third month of the full month delivery, and then ramping up to 20,000 in March next year is a reasonable speed and pace. It's true that this speed may not live up to some of your expectations. And we also understand that on the subsidy side, by the end of this year, some local subsidies and also the national trade-in subsidy will be gone. In that case, for some users who placed the order later may not have their cars picked up by the end of this year, and that will affect their subsidy. In that case, we have also looked at the users who eventually turned us off or turned us on. And the 50% to 60% of those users eventually rejected us because of the late delivery and failure of not getting the subsidy by the end of this year. It's also understandable, as after all, on-board project is around $200,000 something, and $10,000 or $20,000 subsidy can be a significant amount to them. For ET9 and the Firefly, in general, they also have their own ramp-up pace and the preparation. But for these two projects, we will prepare the launch store more actively.

Thank you, team.

The next question comes from Nick Lay with JP Morgan. Please go ahead.

Thank you for taking my questions, Nick from JP Morgan. My first question, so for William, is how do, strategically, how do we find a balance between possibility and volume? And William just mentioned that in the third quarter, or in recent months, we reduced the incentive by 15,000 RMB. That obviously has support, should support a vehicle margin into year end, but at the same time, that's probably at expense of the slower sales volume. So, lower term, can you share with us how should we think about the balance between profit margin and volume? Or, in other words, do we have a desired vehicle margin in 4Q in the medium to longer term? I remember Neil in the past talked about long-term vehicle margin between 15%, 18%, or even 20%. Can you share with us the medium to long-term volume and profit margin strategy? Thanks.

Hi, Nick. Hi, I'm Stanley. About the balance between profit and quantity, William mentioned that in the future, we will stick to the high-end positioning of future brands. So, how to continue to improve its profitability has become our main focus. So, as you said, we have narrowed our sales policy since October. In the short term, there will be some impact, but we can also see our backlog in the recent month from October to November. In addition, the three-week margin is 13.1%. Uh, uh, uh, uh, Thank you for the question, this is Stanley speaking

Regarding your question on the balance between the volume and the profitability, as also mentioned by William, after the launch of the envelope, for the new brand, our primary focus is to keep enhancing our premium brand positioning and improve our product profitability. So this will be our focus from now and beyond. And also, starting October, we started to dial back on our product promotions and incentives. For the short term, it has affected our sales volume But in the past one month or so with operations, we also see a bounce back momentum on our order backlog. And regarding the vehicle margin of the new brand, in the third quarter, it's 13.1%. And for the fourth quarter, we set the target at 15% for the new brand, and we are confident to gradually live up to that target in Q4 this year. And as we keep enhancing the premium positioning of this brand, for the year of 2025, we will take 15% vehicle margin as the baseline, and by improving our marketing strategies and supply chain, we target to realize 20% gross margin going forward for the new brand.

Thank you. Thank you. My second question is related to CAPEX and OPEX guidance. We are launching a new brand, 5Flight into 25, and also higher-end ET9 product and so on. So can you give us some guidance regarding OPEX, the OPEX ratio as well as CAPEX in 25 things? Okay.

Indeed, as we said earlier, we will launch ET9 next year, and there will be three launch platforms next year. In terms of operating costs, we also saw that during the third quarter, especially in terms of sales costs, the amount of SG&A has risen a lot. There is a part of the amount that has been increased, mainly from the fun sales, network construction and sales preparation. In the fourth quarter, this part of the expenditure will also increase, because we just mentioned that we currently have 190 stores, and our goal at the end of the year is to have 300 stores. Next year, in order to achieve such a goal of 20,000 by March, we will actually gradually expand our sales performance. the sales network and personnel. So from the first quarter of next year, after the sales performance of Le Dao is basically in place, the overall investment output will have the corresponding better ratio. Before that, relatively speaking, our sales cost will be relatively higher. After the first quarter of next year, the first quarter will slowly return to normal. So the whole Overall, with the gradual increase of OPEX sales next year, we are confident that we will achieve a cost-effectiveness increase. In terms of CAPEX, this year's investment in CAPEX is much lower than last year. Basically, as of now, Thank you for the question. As mentioned, starting next year, we will start to deliver our ETMI, and there will also be new models coming from our second and the third brands.

So overall speaking, there will be increments with our OPEX. As you can see, actually in the third quarter of this year, we already see an increment in our SG&A expenses. That is mainly because we were preparing the sales network and the sales force for the launch of the Anvo brand. And such expenses will continue in Q4 and will also continue to increase in Q4 as right now we have around 190 stores stores in China. And by the end of this year, we plan to have around 300 stores up and running for the Anvo brand. So we will need to invest in those facilities and the stores. And in the meantime, our target for March next year is to realize a 20,000 monthly target. In that case, we will need to keep improving our sales network and also sales force. But as we are building up the self-capacity and the capability for the onboard brand and going into Q1 next year when the capability and capacity are well established, our SG&A expenses will also gradually coming down. So at the moment, the SG&A is taking a big chunk of our self-revenue, but this will gradually come to a reasonable level starting Q1 next year. In that case, our OPEX, along with the increase of our source volume, will have an efficiency improvement quarter over quarter from next year. Regarding CAPEX, this year our overall CAPEX actually had a significant decrease from last year. The full year CAPEX is around 8 billion RMB, and for next year we will keep it around the same level. So we will keep a very prudent management of our capex expenses.

Thank you, Nick.

Your next question comes from Ming Sanli with Bank of America. Please go ahead.

Hi, William. This is Ming from Bank of America. So my first question is related to the situation in Europe. I want to know that after The tariff in EU is increased. Do you change your pricing strategy? And currently, does this impact the demand in Europe? Thank you. That's my first question.

Thank you, Ming. European tariffs will definitely affect our price strategy. Currently, we are still using a global unified pricing method. So in general, the price of our European car has increased a lot. Of course, from a strategic point of view in the European market, this must be a relatively long-term strategy. Our main focus at the moment is to establish our sales and service system, to understand the needs of local users, and put the satisfaction of the users in the first place to consider. This is not because of the official adjustment. In fact, in the past few years, we have basically not prioritized sales. We are controlling a reasonable investment, with the satisfaction of the users and the overall construction of the brand as our priority target. Thank you for the question. It's true that with the tariffs on the battery electric vehicles from China,

It has affected our pricing strategy and also sales volume in Europe. Overall speaking, for the overseas market, we still adopt this unified global pricing strategy. That is basically a cost with a markup on top. In that case, because of the tariffs, our prices in Europe actually have gone up quite significantly. However, our strategy for the European market is always aiming for the long term. At the moment, we will stay focused on improving our sales and service network, understanding the needs of the local users, and to improve our users' satisfaction on the services and the products. This strategy is not just because of the tariffs. Even before the tariffs, we've been focusing on several key targets than simply prioritizing our sales volume. We will need to make sure that we have a reasonable investment into our European businesses while maintaining a good user satisfaction and also improving our brand awareness. Again, our target for Europe is for the long term. And also, out of the five European countries we have already entered, Norway is not affected by the tariff policy. In that case, our sales volume in the Norwegian market is still pretty good.

Yes, thank you. So my second question is related to the gross margin profile. for onboard brand because Stanley just mentioned the new brand in 4Q, gross margin will continue to improve to around 15%. But assume you will deliver around 20,000 units onboard in 2024, what is the rough gross margin profile for this brand? And when your monthly delivery reach 20,000 units for onboard brand, What is the potential growth margin profile for the bread? Thank you.

Okay, Ming. In 2024, because of the early stage of Le Dao L60's rise, as well as the early stage of user authority, the overall profit margin is relatively low. But in 2024, overall, we still have a positive profit margin of 20,000 units. Of course, it is a profit margin of various numbers. In the year of 2025, with the gradual rise in production and delivery, we set a standard target of 10% for the entire on-wall brand. As we continue to optimize the cost structure of the product, and as we continue to add new products to Le Dao,

Thank you for the question. For this year, as we have just launched and started to deliver the product, at the early stage of the ramp-up and also because of the exclusive user rights for the early users, the actual vehicle margin for the Anvo L60 is not very high. It's a positive growth margin, but in a single digit. For next year, for the year of 2025, as we ramp up both production capacity and the delivery volume, we expect that for the Envo brand, its vehicle margin will be around 10%, and that will be our baseline for the next year to work on. And with the continuous improvement on the product cost structure and also with more products joining the overall lineup, we believe that for the next year, our overall vehicle margin target for the Envo brand will be around 15%.

Thank you, Min.

Your next question comes from Bin Wang with Deutsche Bank. Please go ahead.

Thank you very much. My product is about new products in the second half. You just mentioned you have a low-plus growth in 2025, and the first half seems to be only niche products such as the 89 and a new brand. However, what's the plan for the second half? Do you plan to refresh, go to new generation for your C-volume products such as the 85, 85 Touring, and ES6, 86? All these four products will go to new generation or not in 2025, second half. Thank you.

Thank you, Mr. Wang. Next year, we will continue to switch to a new generation of NIO brands. So we will enter a new product cycle. Of course, the first product is ET9. There will be new products on the market in the future. Of course, there will also be some current products. We will basically complete all the product swaps and upgrades in the next two years. So we are doing this step by step. From the perspective of Onward, in addition to L60, we will also have two domestic SUVs for the market next year. These two products have been in development for a while. Now we are also preparing for mass production. We will complete the family market of home SUVs next year. The next two products, one is the medium-sized 6-seater and 7-seater SUV, and the other will be a 5-seater SUV. If we make a comparison, we are not too different from the ideal L8 and L7, these two products. After all, it was pushed a little late, and the car is also very competitive. The whole cost control is also very good. Now our L60 and ideal L6 are about 40,000 yuan. We believe that our new two products will have a very good price competitiveness compared to its L8 and L7. Next year, with the addition of our power-on cable, charging cable and charging cable, we will also enhance our joy. On the 21st, on the New Year's Day, next month, a month later, we will show it to you. The product will also be shown, the brand will also be shown. The brand will be released, the product will be shown. So next year, in general, next year is actually the whole future will enter a new product cycle. So this is also a basis for our growth next year. We will achieve 100% of this sales growth next year. We are still confident in general.

Thank you for the question. For next year, under the new brand, our products will be upgraded to the next generation platform, and ET9 will be the first product coming off from the latest generation platform. There are also other products in the pipeline. There will be also facelifts and upgrades Those will be the facelifts and upgrades of our existing products. So basically, in 2025 and the 2026, we will complete the upgrades of our existing new products step by step. Regarding the Envo brand, next year, we will continue to deliver and sell our first product, L60. But in the meantime, we also have another two family SUVs in the pipeline ready to launch into the market next year. The R&D of these two products is in good progress, and they are also getting ready for the mass production. With these two products launched into market, we will have a complete lineup for the family SUVs under the Anvo brand. For these two new products, one will be a mid-large size SUV offering with six and seven-seater versions, and another will be a large size five-seater SUV. And these two products are pretty competitive regarding their cost structure and the product performance. A proper benchmark to look for will be L8 and L7 of LiAuto. If you look at our L60 with L6 from LiAuto, the price difference is $40,000 RMB, and you will probably understand the rough price range for our next two It will be also with the similar pricing strategy, and with that, the price will be highly competitive. In the meantime, we are also completing our charging and swapping network, especially with more facilities available in the county-level places in China. In that case, with more comprehensive self-network and service network, we are very confident with the overall performance of the Onvo brand next year. Regarding Firefly, we are going to deliver our the very first product of the Firefly next year. The product is actually named Firefly. We actually follow the mini strategy where the brand and the first product share the same name. We are going to share more details on the brand and the product on December 21st this year at our New Day. Our brand will be making an official debut and we will also unveil the first product. Overall speaking, we are very confident with this product and the blind lineup. With that, for the entire company, our sales volume next year will be doubling on top of this year's results.

Thank you. I've got a second question about your service margin, because you actually have improving in the service margin in the third quarter to only negative 8.8. Can you explain what's the driver for the margin increase in the third quarter in the service, and what's your guidance for the number four quarter this year and 2025 for the service? It's going to be a single digit of negative gross margin in next year. So we will get it. Thank you.

Okay, Wang Ming. The driving factor of Q3's power increase is mainly two aspects. One is the continuous optimization of our zero component cost, including the cost of our battery and the cost of other zero components. In fact, compared to the previous record, there is still a lot of improvement. Secondly, with the increase in sales, the production volume has also reached a new height. After the production volume increases, the manufacturing efficiency of our entire factory, the distribution of these products, has also been improved. Therefore, the overall labor force has increased from 12.2% in the second quarter to 13.1% in the third quarter. In the fourth quarter, for future brands, The motivation comes from two aspects. One is what we mentioned earlier. We still want to build NEO into a high-end brand. As a high-end brand, we will focus on improving its profitability. Therefore, the sales policy will be tightened. Another factor is that we will continue to optimize our supply chain. In addition to these two factors, we are confident that we will continue to increase the horsepower by 15% in the fall. In 2025, there will be several aspects of the overall increase in horsepower. One is the continuous improvement of our entire supply chain. Next year, we will have some very important This will bring a significant improvement to our entire cost. In addition, next year, William also mentioned the future products. With these products, we will also introduce more product competitiveness and cost competitiveness products into NIO's portfolio. So these common factors will make NIO

Thank you for the question. Regarding the vehicle margin improvement in the third quarter, it is mainly because of the two drivers. The first is the improvements and optimization on the cost of the parts and components, including batteries and other parts. In the third quarter, such improvement is more significant than the previous quarters. And the second driver is as we are ramping up our source volume, our production capacity and volume is also leveling up. In that case, we can also leverage the efficiency improvement and the better amortization on the manufacturing side. With that, we have improved our vehicle margin from 12.2% in Q2 to 13.1% in Q3. And going into the fourth quarter, for the new brand, as was mentioned, our circus will be enhancing the premium positioning of this brand. In that case, we will keep improving the product profitability by dialing back on the marketing expenses and the promotions, and also keep improving our supply chain cost structure. With that, we are confident that we can gradually realize a vehicle margin of 15% in the Q4 this year for the new brand. Going into next year, we will also look for several key drivers to continuously improve our vehicle margin. including the improvements on the supply chain and the supply side. Next year, there will be several major iterations and upgrades on the smart hardware, which can further improve our cost structure. And also, as mentioned by William, next year, there will be iterations and facelifts on the new brand and the new products. By introducing more competitive products with more competitive cost structure into our portfolio, we can also improve the overall profitability of the brand. With that, we are also confident to realize a 20% vehicle margin for the new brand in 2025.

Your next question comes from Yukon Ding with HSBC. Please go ahead.

Thanks, team. I got two questions. The first is on the autonomous driving. What's the management would say the key milestone for NEO in the coming 6 to 12 months on this account? What's the key challenges at the moment? What is the biggest highlight of NEO's capability? Maybe give us a bit of a breakdown in terms of user adoption, end-to-end modeling, development, processing power, and its cost. Thank you.

Thank you, Yuqian. At the end of July, at NEAR INS, we published our first smart driving world model, NEAR World Model. We believe that this is the future of the world model. We have started to use this model in mass production vehicles. In fact, we have already opened some public enterprises such as the先锋领航团. In the past, we used the circuit board to do the safety function. I see that there are some third-party assessments recently. Our performance should be far better than our competitors. We can also see that we are the first to use full-sensitivity to realize the navigation support function in the city area. In fact, we have a new version of the update recently. In general, the user reviews are also very good. So in general, in the next few months, we can also see that based on our end-to-end algorithm, based on our data avoidance, as well as our world model, new models like this, special models, we will see that in the next few months, we will have some new versions that will be released. We will gradually see some of our investments come out. Thank you for the question. In late July at the new in 2024, we have introduced the new word model.

and also the end-to-end solution based on the new world model, NWM. And we have already started to release some functionalities based on the new architecture and the world model, and also have invited users for some internal testing and experience of this new architecture. Actually, before that, we have already released end-to-end active safety features, and in some third-party testing and assessments on active safety performance of the electric vehicles, our performance is actually pretty good, better than many of our peers. And for the Anvo brand, it is also the first brand to deliver a vision-based navigation-guided smart driving for the urban roads. Recently, we have also just launched a new release, and our users also really appreciated and liked that feature. So overall speaking, with our computing power and sensing capabilities on the vehicles, with our data closed loop, and also our end-to-end word model, we will be leveraging these capabilities, and in the following months, there will also be several releases. And gradually, you will see the effect coming from all these R&D investments. And for the entire industry, there are actually different roadmaps and solutions, and we have chosen this roadmap, and we are confident in the success and the result of that roadmap.

那从AD的smart driving的用户价值的角度来讲呢, We have been talking about this for a long time, and the meaning of this is to reduce the number of accidents. Reducing the number of accidents is a basis. We talked about it earlier. Our goal is that next year, we hope to achieve 10 times more safety than the individual. The number of accidents must be 10 times lower. Now, we can definitely achieve this goal. So we think that the first thing to do is to solve the safety problem. On the basis of this, we are going to solve the problem of usability, including the experience and user value of the release experience. This is a very persistent route that we have been following. Just like we are doing the end-to-end, we are also using the end-to-end first to focus on safety. Then we can see that it really brings a very good benefit to the user.

And regarding our smart driving, we always have this principle. That is, it should serve the benefits and the interests of our users. In that case, we have two principles. The first is that the smart driving should relieve the driving pressure of our users. And secondly, it should reduce the accidents, traffic accidents. And for next year, our target is that with the smart driving assisting the driving tasks of the human drivers, the safety level should be 10 times higher than the fully driving by the human drivers. And this is actually an achievable target. And safety is always a top priority of our features. On top of that, by securing a good safety of the feature, we will then look at the usability and also the experience of the feature, such as for the releasing the pressure and the stress of driving. We have the same approach for our other features, like our end-to-end model. We started with active safety, and we see significant benefits on improving the safety of our users with that feature.

Thank you, William. The second question is breakeven and capital requirements. It looks like next year is very exciting, fully loaded with a strong product cycle, also coupled with CapEx and OPEX intensity. So do we have a refreshed break-even timetable? And how do we look at the capital requirement in the coming 12 to 18 months?

Hi, Yixuan. Regarding the entire capital demand, In fact, we achieved a positive free cash flow in the third quarter. In fact, from the current guidance of sales in the fourth quarter, we also expect to achieve a positive cash flow. Therefore, in 2025, as we just talked about, one is the whole big goal of our sales, and the rhythm of our quarter-by-quarter, With the increase in sales, our entire cash flow will still achieve a positive growth. So from the perspective of cash, the growth of these cash flows will support my daily OPEC needs and our CAFEC. So this is a general situation for cash. Thank you for the question. Regarding the requirements for the capitals,

In the third quarter of this year, we have a realized positive free cash flow. And in Q4, according to the current volume guidance, we expect to continue the positive free cash flow. And for the year of 2025, as we target to double our delivery volume and also by controlling our spending and the pace quarter over quarter, we expect that we will continue a positive growth on our operating cash flow. And such growth will sustain our OPEX and CAPEX on the activities. So regarding the capital requirement or in general fundraising requirement, we don't have a must-have agenda. Instead, we will adjust our fundraising plan and agenda according to the market more dynamically. 关于这个盈利的问题呢,我还是希望从三个点跟大家沟通一下,就是

One is, as you can see, as a car company, a growing car company, sales is the most important thing for us. Just now, we also presented the plan of our new product and sales plan from the three brands. So, with all the image of the three products and the delivery of new products, we are very confident in the growth of our sales next year. The second point is about the interest rate. We also talked about our goal for Q4 this year, as well as the overall interest rate of next year. Based on the increase in sales, we are also confident to achieve the gradual optimization of the interest rate. The third point is that we will continue to work on the efficiency of our capital. We actually have a project called mining. We have been doing well since last year. Our goal is to And regarding your question on the profitability, I would like to answer to that from three perspectives.

The first is that as still a young automotive company, sales volume is still a very important factor for us to consider. And just now we have introduced the product plan of all three brands for the next year. With new brands and new products coming into the market, we will be able to realize a higher volume, and we are also confident with our sales volume in the coming years. And the second is regarding the vehicle margin. We also will continue to improve our vehicle margin from Q4 this year together with our sales volume. And the third is the continuous cost-saving and efficiency improvement initiative. Inside of the company, we actually started a project called Cost Mining to just identify the waste and also improve the cost structure and reduce or save costs on all aspects. And we also see pretty good effect with this initiative With that, we expect that with improved volume, with improved operations, our loss will also be gradually narrowed.

Yes, so just now, Stanley talked about the path we took. Of course, in the short term, we have seen that in terms of research and investment, we have basically maintained a relatively high research and investment output. In terms of sales services, including our telecommunications line, This includes some of our new, very fun, such as the construction of this sales system, the construction of the sales service system. There must also be some short-term pressure. But we are still confident about the continuous collection of losses. At present, from the whole company's point of view, we are still using the 26-year annual profit as one of our operating goals. Then we also do it according to this. I'm going to work on this in all aspects.

This is William speaking. Stanley has just introduced our approach to narrow the loft. Regarding our overall expenses, our R&D expenses will continue to stay at this relatively high level, and for the SG&A expenses, because of our power-up county plans, we will roll out the charging and swapping networks, and also we will need to boot up the sales and service network for the onward brand, so the SG&A expenses will also be under short-term pressure. But still, we will make sure that we are on the right track to gradually narrow our losses. And regarding the profitability, the entire companies do use 2026 as the timing where we will achieve the full year break even. And we will be also planning our strategies and activities according to that target.

Thank you, Yuchen.

Your next question comes from Chang Jing with CICC. Please go ahead.

Hi, thank you for taking my questions. So my first question is a following-up question for the overseas market. So we actually, our brand and also models in Europe market quite early as a pioneer, but now we also see some peer brands, companies, they accelerate their exposure in the European markets. So can you share our current European market strategies, whether we can differentiate our brands and also to further expand our volume? Also, especially combined with the launch of Firefly, new models next year, will there be a more aggressive overseas expansion target next year?

Thank you, Tan Jun. Indeed, we have been in Europe for a while. From the overall management perspective, it is certainly a bit different from what we expected at that time. But we entered the European market in the NIO brand according to a very long-term plan. But if you look at our next plan, we have ANBO. We have this Firefly, then these two brands, they have more markets to enter. So our next global expansion, this Angle and Firefly will play a greater role. From NIO's point of view, because it is in a premium market, if you add the European tax now, it is almost the same as the price of many cars and Porsche. So in fact, its market This scale will be limited. We will still keep a long-term investment. We will increase the priority of Envoy and FiveFly entering our global market. So this is a general strategy adjustment. It's not called adjustment. In fact, this is our specific strategy. Maybe next time you will see Envoy and FiveFly will enter more countries and enter more markets.

Thank you for the question. It's true that new has been in the European market for a while, and its overall operations and performance didn't really live up to our original expectation. Yet, for the new brand, our expectation for the European market is actually for a pretty long-term vision. And also starting this year and the next year, another difference is regarding our second and third brand, Almo and Firefly. These two brands have a broader market globally. With that, we will also be able to continue our international expansion, leveraging these two brands, and these two brands will be playing a bigger role in our next step. Especially for new, it is a premium brand. Now with the tariffs in Europe, its selling price is basically on par with the price of a Porsche. In that case, its market is becoming more and more limited. But we will still keep a long-term presence of the new brand in the European market. But in the meantime, we will prioritize the global expansion with the Envo and the Firefly brand. That will be our strategy. So starting next year, you will see that Envo and the Firefly products are becoming available in more and more countries and regions.

Another thing is that it is not the same as in the Chinese market. Because in the Chinese market, we started from the high-end market. So now Envoy can share the exchange debt built by Niel. But if we look at the global market, the price of Envoy like this, the positioning of Envoy's market is definitely more suitable and can have a higher sales volume faster. So it is a very good support for us to build this exchange network. And another difference is that here in the Chinese market, we started with the new brand for the premium segment. And then we established the power swapping and the charging network, and Anwo brand is now sharing

all these established resources and networks. But when it comes to the global market, actually, according to the product definition and the brand positioning, Anwu actually has a larger market. And also, it can ramp up to a higher volume much faster than the NIO brand. In that case, the power swap stations and the charging facilities deployed for the Anwu brand will then be leveraged by the NIO brand. So in the global market, actually, the NIO brand will rely more on the Anwu brand. And with that, we will be establishing the charging and swapping facilities centering on the Envo brand and the Firefly brand for the global market.

Okay, thank you. My second question is regarding to the other sales gross loss. So we can see the gross loss of other sales. also narrowed significantly for the previous quarters, which I think may be related to the increase in our sales volume and also the increase in our charging and swapping charges and also services. So how do we look forward to the trend of the gross profit margin of other sales and whether we have an expectation when it can turn positive?

Hello, Mr. Chen. Regarding other businesses, Q2 and Q3, we have achieved a gradual reduction in losses and an increase in interest rates. The main reason is that one is the increase in the efficiency of our post-sales service. We also mentioned it in the previous few records. Another one is the layout of our blockchain network. It is also because of the development of our 4th generation station. the pace of the deployment has slowed down. So the overall loss has been reduced. Of course, in the next quarter, the efficiency and profitability of our entire customer service will continue to improve. But in order to support the entire future, especially the sales improvement of Le Dao brand, we will still stick to the infrastructure-based strategy. So, at present, the layout of the entire exchange chain chain has begun to speed up. Combined with the exchange chain line-on-line plan we announced previously, the layout of the entire exchange chain chain will also speed up further next year to achieve the goal of our exchange chain line-on-line. The early layout will bring us the loss of other businesses. So, of course, our goal is Thank you for the question. Regarding other business, in the second and third quarter,

we have narrowed the losses on other business and also improved the growth margin. This is mainly because on the one hand, we have been improving the efficiency of our after-sales services, and on the other hand, because of the R&D pace of the fourth-generation power swap station, we had slowed down the network deployment and infrastructure construction of the power swap stations. With that, our net loss has narrowed in the third quarter, But in the coming quarters, on the one hand, we will still continue to improve the efficiency and also the profitability of our after-sales services. However, on the other hand, for the entire company, especially for the Envo brand, we will need to speed up our infrastructure construction so that we will have our power swap stations and other facilities built in advance earlier than the actual need. And in the meantime, with our power-up context plans, For the coming quarters, we will speed up the installation and construction of this swap station. With that, there will be higher loss on other business. But overall speaking, we hope that the profitability or the improvement on the up-to-date services can offset the loss we have on the advanced deployment of this power swap facility. That will be our overall strategy. Thank you, Xiaobin.

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

Hi, William. Thanks for taking my questions. Two questions here. The first question is regarding the demand visibility for the Anvo L60. You seem to be pretty confident with 20,000 units of the volume of the L60 delivery in March. That would put the L60 on par to Xiaomi's 27 and the Li Auto L6 for now. But when you consider right now it is peak season with the help of the stimulus and moving to Q1 is going to be slack season with perhaps less policy support. How do you have such visibility? Will you carry over, let's say, a significant amount of the backlog you take from right now into the Q1 delivery or how Do you have such kind of strong visibility for the 20,000 delivery in March?

Thank you, Paul. We are very confident about the demand for L6. In the recent period, it is because we have to wait for a relatively long period of time. At the same time, there is a problem with the supply and demand at the end of the year. If we look at it in the near future, we may not have such a hot demand compared to September. But if we look at a very important number, which is the conversion rate of our market price, we see that it is in a very high position. Of course, it is not convenient to talk about the specific number, but if we look at it now, our market price conversion rate is far higher than any other model, including NIO. So we see that in general, in this market, it is very competitive with its products and prices compared to its competitors. So we are very confident about this. Now our main job is to build up our network coverage as soon as possible. We now have more than 190 stores. In terms of area coverage, it is still not high enough. Compared to Tesla, it is still relatively low. So we will continue to open more stores and build up our energy consumption. These functions will continue to be seen by everyone. Since January, we have basically been on the same level in terms of subsidies. So we believe that Dejia itself, based on its productivity, based on the improvement of our sales capacity, and the impact of this subsidy, will be able to eliminate it by January. We are very, very confident about the needs of L60, because we are very confident about its productivity, including the continuous construction of such a network,

Thank you for the question. We are confident in the demand for the L60. As in the recent several months, the wait time for the delivery of the L60 is relatively long, and also as starting next year, some of the subsidies on the vehicles will be gone. In that case, our short-term demand is affected because of this disturbance. But if you look at the actual conversion rate from test drive to order, you will see a pretty high rate. Please forgive me that I cannot disclose the specific number, yet this conversion rate is higher than any existing new product. So overall speaking, with a competitive product, with a competitive price, we are competent with this product, even against the competition in the markets. And for the moment, our main focus is to enhance the coverage of its sales and service network. At the moment, it has around 190 onboard stores. And for the next step, we will enlarge the coverage as in comparison to Tesla and Liotto, such coverage is not extensive enough. So we will open more stores. We will enhance and enlarge our sales force. Gradually, you will see the positive effects of these actions. And starting January next year, the subsidies will basically be canceled or removed for all the products in the similar segment. In that case, it will be on the same level for the competition. But with a stronger product competitiveness and also established self-capacity and capability, we are confident with L60's overall performance.

Thank you. My second question is regarding the next-generation platform, NT3. I think that NT2 versus NT1 has a significant improvement of the autonomous driving calculation power, including the four O-rings. and also has improved some of the powertrain efficiency. Right now, when you are thinking about designing the NT3, how do you think of the platform in terms of, let's say, the computing power for the AD, the battery size, the power of the motor, and the system integration, the architecture, et cetera? So can you give us a little bit of color of the technology direction of the NT3 platform, please?

Thank you. If we look at it, for NEO, ET9 is the first model of our new platform. So you can see that whether it is from the high-pressure structure, or from the 100 million structure, or from our operating system, or from our AD Central Computing Cluster, we will use our own machine chip. as well as our entire sensor. If you look at it, it's very different from our current product. It's definitely a very big upgrade. So basically, we will use these technologies on ET9 for subsequent products. Based on this, we will do the relaying of our existing products. For the new brand, the ET9 will be the first model coming off from our latest generation technology platform.

It is equipped with many new things, including high voltage architecture, e-architecture, operating system, smart driving capabilities enabled by our in-house developed chip for the smart driving, and also advanced and high performance sensors. So if you look at its configuration and performance, it is quite different from any of our existing products. It is basically at a different level. And gradually, these technologies will be trickling down to our future products on the third-generation platform. We will use these technologies to iterate and upgrade our existing products. And for ATMI, it is the embodiment of our R&D investment and the results achieved in the past 10 years.

Thank you, Paul.

Your next question comes from Tina Hu. with Goldman Sachs. Please go ahead.

Thanks, management, for taking my questions. The first one is regarding operating expenses. In terms of R&D, I also see that usually in the fourth quarter there is around about close to $1 billion of RMB of higher R&D expense versus third quarter. Should we expect a similar type of seasonality into 4Q24? And also for 2025 as we continue to develop new products and then continue to invest in autonomous driving and other technologies, what level of R&D spending are we looking at? And also for sales and marketing in 2025, seeing that this year we launched one model, the Envo L60, but next year we're going to launch four new models. So it doesn't seem like the SG&A expense is going to slow down in terms of the growth. Is my understanding correct? Thanks.

关于R&D expense, 一个就是我们在研发长度上 基本上还是维持 季度30亿左右的这样的一个投入的规模 从季度的波动来看 还是随着我们研发的 the progress and strength of each quarter. You just asked about the situation of the fourth quarter. Currently, it is predicted that it will be a little more than the third quarter, because it is also improved with the development rhythm of these new products that we just talked about. From the overall development of 2025, In terms of investment, we will still maintain the same strength as this year. That is to say, every quarter, we will invest about 3 billion in non-GAAP. Because of the size of our entire research team, it is still about 11,000 people at present. With the change of the project, there may be an increase. Secondly, in terms of sales management costs, As I mentioned earlier, next year, with the increase in sales, in terms of the quarter, our entire goal is to increase the proportion of our SG&A to the sales revenue. We hope to achieve such an increase in efficiency.

Regarding the R&D expenses, in general, we will be having our investment in R&D for around 3 billion RMB per quarter, and we will be stabilizing at around that level. But because of the differences of the project and also at the different stages of the product R&D, the actual spending, there will be ups and downs in the actual spending for every quarter. For example, in the fourth quarter of this year, the R&D expenses will be higher or is expected to be higher than the third quarter. That is also mainly because of the products are at the different stage of the R&D and the cycle, and the expenses will also be different accordingly. For the year of 2025, we will also keep our R&D expenses at around the same level. That is around 3 billion RMB per quarter on the non-GAAP basis. We will also keep the R&D team in the rough similar size, around 11,000 people. And then as we progress with our R&D projects and product development, there will also be slight ups and downs in the R&D expenses on a quarterly basis. But in general, it will be around $3 billion. Regarding the SG&A expenses, as also I've mentioned, in line with the increase of our sales volume, we will also have SG&A expenses going up. But we will also manage this quarter over quarter so that we can make sure that we optimize the ratio of the SG&A in comparison to the overall sales revenue.

Thanks, Stanley. So my second question is regarding the share of losses of equity investee. So we've seen over the past three quarters that we have seen a negative number and that number has been expanding. So is this related to the battery as a service operation? And then how should we think about this loss from the equity investee going forward? Thanks.

是,在三季度, share of loss of equity 确实有一些增加。 那我们呢,出于整个公司战略的考虑呢, also made some investments in the entire industry surrounding the future. The increase in losses in these three seasons is mainly due to the losses of the investment companies. This is a competitive industry, so the losses are still quite normal. In fact, every season of Weineng is actually a profitable state. So Weineng will not bring a loss increase to this account. Speaking of Weineng, Weineng's entire business scale this year, after the 1st quarter bus price adjustment, the whole bus penetration rate has actually risen very quickly. After the increase in sales of Weilai and Le Dao two brands,

Thank you for the question. In the third quarter, the share of the losses of the equity has increased. That is mainly because for the entire company, we have made some investments into the upstream and the downstream companies centering on this industry. And in the third quarter, the loss went up mainly because of the losses of our investee, which is also acceptable and understandable as they are also in a highly competitive industry. In terms of Waynone, which is our battery asset management company, its actual business means that it will not worsen our losses on the shares because if you look at its actual business, since Q1 this year, after we have adjusted the prices for the battery as a service monthly subscription fee, we actually have witnessed a higher take rate on the bus service, especially in the second half with both new and the on-board products into the market. The business actually experienced the growth with the battery asset management. In that case, it has a pretty promising profitability going forward.

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