Hello, ladies and gentlemen, thank you for standing by for NIO Incorporated Fourth Quarter and Full Year 2018 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, Ms. Jade Wei, Senior Director of Investor Relations of the company.

Please go ahead, Jade..

Thank you, Christian. Good evening and good morning, everyone. Welcome to NIO's fourth quarter and full year 2018 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted at the company's IR website. On today's call, we have in Beijing, Mr.

William Li, Founder, Chairman of the Board and Chief Executive Officer, and in Hong Cong Mr. Louis Hsieh, our Chief Financial Officer and Mr. Nick Wang, our VP of Finance. Louis and Nick will begin with prepared remarks and William will join for the Q&A session.

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 the certain filings of the company with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and its conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures.

Please refer to NIO's press release which contains reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn this call over to our CFO, Mr. Louis Hsieh. Louis, please go ahead..

Thank you, Jade. Hello everyone. Thank you for joining us today. We are pleased to report our fourth quarter and first full year results as a public company. Our results reflect broad based accomplishments across our organization and provide us with a strong base for moving forward in 2019. I'll begin with some highlights.

In Q4 2018 production continue to ramp for our NIO JAC manufacturing sites and we delivered 7,980 ES8, during the quarter to bring our total deliveries to 11,348 units for 2018, which helped strengthen the ES8 brand and solidified our leadership position among premium electric 7-seater SUVs.

Revenues increased 134% sequentially from the third quarter and total revenue reached RMB 4.95 billion for the first year following our initial deliveries in June 2018.

In December 2018 we launched the ES6, our 5-seater high performance premium electric SUV as well as the 6-seater ES8 version, with 7 passenger SUV in the past now we have a 6-seater version. These launches exemplify our focus on continued market penetration to enhance products and services.

We remain confident in our growth prospects in the coming year. We expect a greater than anticipated sequential decrease in deliveries in the first quarter of 2019, partially due to accelerate deliveries made in the end of last year in anticipation of EV subsidy reductions in China in 2019.

Number two, seasonal slowdown surrounding the January 1, and Chinese New Year holidays. Number three, soft macroeconomic conditions in China, particularly in the auto sector. As a result, we expect ES8 deliveries in the first quarter to total between 3,500 and 3,800 units.

And we have completed 1,805 and 811 deliveries in January and February respectively. In 2019 - by the end of February 2019, we had over 4,200 orders for ES8 with RMB 5,000 deposits and RMB 45,000 production order payments.

Going forward, we will no longer report the pre order number for ES8 as deliveries of ES8 enters a short and more normal stage of delivery times. Furthermore, going forward, we will report delivery numbers each quarter rather than giving monthly updates.

We expect deliveries in the second quarter 2019 to reflect continue weakness as we await the result of the 2019 EV subsidy policy in China and improvements in the macroeconomic conditions. We continue to monitor policy changes in support of the EV industry and the subsidies offered to buyers of electric vehicles.

Yesterday on March 5, in China the Chinese Central Government announced a reduction in the VAT tax from 16% to 13% for manufacturing industries as part of the overall tax reduction and information plan to boost the macro economy.

We believe these measures will benefit the overall economy and consumption markets in the long term, including the auto industry. On another positive note in mid-December, we were excited to officially launch our ES6 with a pre-subsidy price starting from RMB 358,000.

We are confident that the competitive features and prices of ES6 will lead a significant interest in the mass market. ES6 5-seater SUV possesses exceptional performance with acceleration from zero to 100 kilometers an hour in fastest 4.7 seconds; exceptional range of 510 kilometers NEDC [ph] and a fully featured luxurious interior.

As at the end of February, we had already received over RMB 7,300, RMB 5,000 pre-orders. We plan to generate additional interest in ES6 through participation in the high profile Shanghai Auto Show in April. We expect this order backlog to increase as ES6 show cars are delivered to our NIO houses in May.

As potential buyers can actually see, touch and test drive and experience ES6's driving performance and comfort. As of the end of February, we have made good progress in preparing the production for ES6 we are on track to achieve our goal to begin deliveries in June of 2019. The geographic reach of NIO's users continues to expand.

Through the end of February 2019, our ES8 model has been delivered to 270 cities connecting users across the country. With over 14,000 ES8s now on the road, we continue to receive valuable feedback from users.

Positive feedback remains brisk in key areas including driving function, interior quality, no mediator interactions, superior service and user engagement. During the first winter, we heard from users about drive range challenges with the ES8 for long distance trips.

Although our cloud data indicates that 95% of ES8 usage is in the city driving and only 5% is related to long distance travel. We accelerated our efforts to expand our highway power swap station network covering both the G2 and G4 expressways as well as the majority of the G15 expressway.

Now, new users can travel between Beijing, Shanghai and Shenzhen without stopping for hours with recharge simply by using NIO battery swap centers, which provide a fully swap battery within five minutes.

NIO is the only company with battery swap technology to enable seamless long distance driving in China, China's main highways at ES8 akin to ICE cars and refueling convenience. Reflecting our drive for continuous improvement, we continue to update and offer software to improve our user experience.

Utilizing our over the air technology in December we upgraded our ES8 software to version 1.2.0. Over 200 functions have now been added to optimize to provide enhanced safety, driver convenience and improve the overall driving experience, since our first software version launch in June.

Key among these include as ADAS functions such as automatic emergency braking, forward collision warning and lane departure warning, we target additional major ADAS functions in the first half of 2019. Our service network continues to grow. As of the end of February 2019, we opened 13 NIO houses and 16 pop up NIO houses in 27 cities across China.

In addition by year end, our number of service centers increased to 166 cities, mainly composed of authorized service centers. We are pleased to report our worry free service package continues to receive rave reviews and are continue to see about 90% of our users purchase the worry free service packages.

We continue to monitor how users are utilizing available power solutions. As of the end of February 2019, approximately 78% of users have installed the home chargers, which are the most efficient and convenient charging solution for the daily usage. We also completed over 38,00 one click power service touch touching 64% of users.

Our power swap stations were also utilized actively in cities and on highways by 32% of our users. Add to this the more than 170,000 public chargers identified through our NIO approximately were utilized by 59% of our users. And it is clear our users are well served by flexible and growing charging infrastructure.

We'll continue to monitor usage trends and evaluate our feedback as we continue to improve and enhance available power solutions. In China, the Chinese New Year is the busiest travel season of the year.

This year between January 28 to February 18 the heart of the holiday travel period we provide over 16,000 one click power services to our users, which earned a satisfaction rating exceeding 4.9 out of 5 in the post service surveys.

We are proud of our NIO Power and NIO Service teams for their hard work to provide seamless exceptional support to NIO ES8 users on the road across the country. Delivering a holistic user experience exceeds expectations is a key competitive differentiation and one that create significant barriers to potential competitive entrance.

Because of this we continue to think beyond the delivery of our vehicles to ensure that NIO Service and NIO Power provide the highest quality service to the NIO community. Our NIO community continues to expand beyond our users who purchase ES8.

Our online NIO community is growing fast with a new app recording over 800,000 active users and 190,000 daily active users on peak days. A highlight of 2018 for NIO community was our Annual NIO Day.

In December, we hosted the Flagship NIO Day event in Shanghai and welcomed over 10,000 members of the NIO community to share insights into our vision for the future, as well as officially launching the ES6. This event has now been viewed online over 1.5 billion times.

Through a variety of offline activities in 2018, we've gained valuable experience and data and with continued rolling out more offline activities to attract target users in 2019. On a separate note, we would like to give you an update on our plan for building the manufacturing facilities in Jiading, Shanghai.

In 2017, we signed a framework agreement and memorandums with the government and related entities in Jiading, Shanghai to build a manufacturing plant for NIO. Recently, we have agreed in principle that these contractual counterparties - with our contractual counterparties that terminate the plan at this manufacturing plant.

These decisions are made based on two reasons. First, in 2018, a new policy was issued by the government authorities, which allows and encourage the entities that operate its vehicle research, development and design to work with vehicle manufacturing companies to manufacture vehicles cooperatively.

This joint manufacturing model between NIO and JAC, endorsed and perceived as an innovative manufacturing model in China.

Secondly, through an efficiency perspective, we can leverage the existing capacity of NIO JAC plant and enjoy the flexibility to expand the capacity to support NIO's market penetration and growth plans for the next two or three years.

In the long run, we will still focus on joint manufacturing model and continue improving the effectiveness of capital investments in manufacturing. 2019 is an important year for NIO. As we have a full year of production of the ES8 and begin deliveries of the ES6.

While soft economic conditions may temporary demand for some segments of the auto industry, in China the EV segment is expected to continue to grow. Our goals in 2019 center around increasing market penetration, but effectively improving our production and operation efficiency.

Longer term we're committed to investing in the research and development to insure our products and experiences remain in the forefront of the EV industry and exceed our users' expectations.

As we complete our first six months as a public company, I would like to thank the growing NIO user community for their ongoing trust the diligent NIO teams for the commitment to our vision and the investor community for your interest and support of this journey with NIO.

Thank you again and I will now turn the call over to our Vice President of Finance, Nick Wang to provide the financial details for the quarter. Nick, please..

Thank you, Louis. As Louis mentioned, we concluded 2018 on a strong note. I will now go over some of our financial results for the fourth quarter. And to be mindful of the length of this call I encourage listeners to refer to our earnings press release, which is posted online for our full years and other additional details.

Total revenues in the fourth quarter of 2018 were RMB 3.44 billion or $499.7 million, representing an increase of 133.8% from the third quarter of 2018. Our total revenues are made of two parts, vehicle sales and other sales.

Vehicle sales in the fourth quarter of 2018 were RMB 3.38 billion or $491.8 million, representing an increase of 137% from the third quarter of 2018 and accounted for 98% of total revenues in quarter. The increase in fourth quarter vehicle sales over the third quarter of 2018 was attributed to accelerate deliveries of ES8 in quarter.

Other sales in the fourth quarter of 2018 were RMB 54.4 million, or $7.9 million, representing an increase of 27.5% from the third quarter of 2018. The increase in fourth quarter other sales over the third quarter of 2018 was mainly attributed to increase the revenue recognized from the home chargers installed and service provided in the quarter.

Cost of sales in the fourth quarter of 2018 was RMB 3.42 billion or $497.7 million, representing an increase of 115.8% from the third quarter of 2018. The increase in cost of sales over the third quarter of 2018 was mainly driven by the increase of delivery volume of ES8s in the quarter.

Gross margin in the fourth quarter of 2018 was positive 0.4% compared with negative 7.9% in the third quarter of 2018, mainly driven by the increase of vehicle margin in the quarter. Vehicle margin in the fourth quarter was positive 3.7% compared with negative 4.3% in the third quarter of 2018.

The increase of vehicle margin was mainly driven by the increase of production and the delivery volume of the ES8 in the quarter.

Research and development expenses in the fourth quarter of 2018 were RMB 1.52 billion or $220.4 million, representing an increase of 83.8% from the fourth quarter of 2017 and an increase of 48% from the third quarter of 2018.

The increase in research and development expenses over the third quarter of 2018 was primarily attributed to the n increased number of personnel and the increase in design and professional expenses related to research and development activities of the ES6, a 5-seater high performance premium electric SUV launched in December 2018.

Excluding share-based compensation expenses, a non-GAAP measure, fourth quarter research and development expenses were RMB 1.49 billion or $217.4 million, representing an increase of 83.1% from the fourth quarter of 2017, and the increase of 57.8% from the third quarter of 2018.

Selling, general and administrative expenses in the fourth quarter of 2018 were RMB1.95 billion or $282.9 million, representing an increase of one with 130% from the fourth quarter of 2017 and an increase of 16.5% from the third quarter of 2018.

The increase in selling, general and administrative expenses of the third quarter of 2018 was primarily attributed to increased marketing and the promotional activities, increased expenditure on rental and other expenses related to the sales network expansion and an increase the number of selling, general and administrative employees.

Excluding share-based compensation expenses, a non-GAAP measure selling, general administrative expenses were RMB 1.83 billion or $265.5 million, representing an increase of 123.5% from the fourth quarter of 2017 and an increase of 38.1% from a third quarter of 2018.

Loss from operation in the fourth quarter of 2018 was RMB 3.45 billion or $501.3 million, representing an increase of 106.4% from the fourth quarter of 2017 and an increase of 22.7% from the third quarter of 2018.

Excluding share-based compensation expenses, adjusted loss from operations, a non-GAAP measure was RMB 3.31 billion or $480.7 million in the fourth quarter representing an increase of 102.4% from the fourth quarter of 2017 and an increase of 39% from a third quarter of 2018.

Share-based compensation expenses in the fourth quarter of 2018 or RMB 141.7 billion or $20.6 million dollars representing an increase of 282.6% from the fourth quarter of 2017 and a decrease of 67.2% from the third quarter of 2018.

The increase in share-based compensation expenses over the fourth quarter of 2017 was primarily attributed to increase option granted to employees in 2018.

The decrease in share-based compensation expenses over the third quarter of 2018 was primarily attributed to the higher accumulative share based compensation expenses recognized in the third quarter, which was related to the satisfaction of stock options granted pre-IPO to certain employees with the performance condition of an IPO.

Net loss was RMB 3.5 billion or $509.5 million in the fourth quarter of 2018, representing an increase of 106.1% from the fourth quarter of 2017 and an increase of 24.6% from the third quarter of 2018.

Excluding share-based compensation expenses, adjusted net loss, a non-GAAP measure was RMB 3.36 billion or $488.9 million in the fourth quarter of 2018, representing an increase of 102.1% from the fourth quarter of 2017, and an increase of 41.3% from the third quarter of 2018.

Net loss attributable to NIO's ordinary shareholders in the fourth quarter of 2018 was RMB 3.52 billion or $511.5 million, representing an increase of 26.4% from the fourth quarter of 2017 and a decrease of 64% from the third quarter of 2018.

Excluding share-based compensation expenses and accretion of redeemable non-controlling interest to redemption value, adjusted net loss attributable to NIO's ordinary shareholders a non-GAAP measures was RMB 3.34 billion or $486.2 million for the fourth quarter.

Basic and diluted net loss per ADS in the fourth quarter were both RMB 3.37 or $0.49 per ADS. Excluding share-based compensation expenses and accretion of redeemable non-controlling interest to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 3.2 or $0.47 per ADS in the fourth quarter.

Our balance of cash and cash equivalents restricted cash and short term investment was RMB 8.35 billion or $1.21 billion as of December 31, 2018. And now for our business outlook, for the first quarter of 2019, the company anticipates a sequential slowdown in vehicle deliveries compared to the fourth quarter of 2018.

Due to accelerated delivery made at the end of last year in anticipation of EV subsidy reduction in China in 2019, the seasonal slowdown surrounding the January 1st and Chinese New Year holidays as well as the current moderate macroeconomic conditions in China.

For the first quarter of 2019, the company expects deliveries of the ES8 to be between 3,500 and 3,800 vehicles, representing a decrease of approximately 56.1% to 52.4% from the fourth quarter of 2018.

The total revenues to be between RMB 1,390.9 million and RMB 1,515.7 million or between $202.3 million and $220.5 million, a decrease of approximately 59.5% to 55.9% from the fourth quarter of 2018. This business outlook reflects the company's current and preliminary view on the business situation and market condition, which is subject to change.

Now, this concludes our prepared remarks. I will now turn the call over to the operator, to facilitate our Q&A session. Thank you..

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question today comes from the line of Dan Galves from Wolfe Research. Please go ahead..

Hey, good morning, everyone. Thanks for taking my questions. I was hoping that you could talk a little bit about your expectations for the government EV subsidy policy.

In 2019 when do you expect this to be announced? What are some of the positives and negatives? Will your the bigger 84 kilowatt hour battery help offset some of the reduction? And finally, do you expect more cities in China in 2019 to put restrictions or quotas on internal combustion vehicles?.

Thank you, Dan.

William, do you want to answer this question?.

Yes, I can. So thanks for your question. I will speak in Chinese and Ruohe will help me to translate. Right now we haven't received any official announcement from the government regarding the subsidy policies in 2019. And we expect that it will be announced officially recently.

For the overall direction, we - although we haven't received any official announcement we believe that compared with last year the subsidy policy in 2019 will be decreasing significantly.

But if we look at the positive side as mentioned by the Chinese Government yesterday they will be keeping supporting NEV's development especially the support in terms of the taxations for the NEV especially for the pure electric vehicles there is no need to pay the purchasing tax for the buyers.

And we believe that this support in the taxation will be continued. And we also believe that the advantages of the consumption tax on the electric vehicle will also continue. And for NIO our product positioning taps into the premium segments, compared with other entry level brands and models.

We will receive very limited effect from the decreasing subsidy, and on the other hand we do receive a lot of advantages with the taxations. So in the long run we will be in the advantageous position.

And another advantage of decreasing subsidy is that before we will deduct - before we have to deduct the subsidy for our users and we need to wait for the subsidy from the government. And it takes a very long time to wait for the subsidy from the government.

And we need to pay some advancement payments and after the subsidy decreases actually we will receive - since we’ll receive more advantages with the taxations actually it will help us to release the pressure of the cash flow. And in the long run, I believe that the Chinese policies will be supporting the EV's development.

And I have this thought from two perspectives. The first is that there will be a lot of the benefits in terms of the use of electric vehicles. For example, the EV can drive freely in Beijing and in Shanghai we have advantages with the license plate applications of EV.

And I believe that more cities will be enacting this kind of EV friendly policies in the future. And secondly, we do receive a lot of benefits with the taxes. And for NIO as we are a premium brand, I believe this will help us to expand our market, especially we can take up the market shares of users who used to be the ICE car users.

So all sum up in the short-term, especially in the second quarter this year we will be facing some pressures, but the pressures on ourselves is much lesser than the pressure on other electric vehicle companies.

And in the long run, we believe that we will keep receiving the benefits and advantages from the policies and this will help us to expand our market..

Thank you, William. Dan also as far as your other question, Hainan Island has no inactive restrictive license plate restrictions. So Sanya and Haikou are also joining that list. So we expect many more cities in the next in the coming years to restrict the ICE license plates in those cities to prevent pollution and to move toward electric car future..

Thank you..

Next question?.

Your next question comes from the line of Ryan Brinkman from JP Morgan. Please go ahead..

Hi. Good morning. Thanks for taking my question. I would like to explore a bit more the implications of not building the wholly owned assembly plant in Shanghai. Presumably this could have a very positive implication for return on invested capital.

Could you talk to about the potential impact on earnings relative to pursuing a wholly owned - relative not pursuing a wholly owned approach? And then is there anything to think about, about the potential timing of expected future models? Does this development have the potential to either delay or perhaps even accelerate the timing of one additional model might launch beyond the ES8 and ES6?.

Okay. Thank you Ryan. This one I think I'll let William answer this. He's the most familiar with the plant situation.

William you want to go?.

Okay. Thanks for the question. As we all know last November the MIP has enacted a very important file called No.

15 file and in this file it stated that the Chinese Government endorsed the cooperation between the car R&D companies like NIO, with the existing manufacturing companies or manufacturing plants that means that the cooperative mode between NIO and JAC is endorsed by the Chinese Government.

Of course a lot of details regarding this document still need to be finalized and we expect that on the 1st of June, the details and this document will be finalized officially and it will be opening for the applications and approval procedures.

And the advantages for NIO is that first of all we don't need to apply for the subsidies or the carbon emission credit, via JAC we can directly apply this from the government. And secondly for NIO as an independent car companies, we can manage our products very well and this will be helping us with our long-term strategic planning.

And we receive a lot of benefits from this and with this we can review and replan our investment in the manufacturing and we can also improve the management efficiency of manufacturing. So in the long run we will be upholding this manufacturing cooperative mode.

At the moment JAC is our only manufacturing partner and in the future in the long run, we may embrace other partners in this regard and this will also be important part of our long-term strategy.

And currently because last year, during the second half of last year we have modified our production lines for both ES8 and ES6 production and now the annual capacity of NIO JAC manufacturing site is about 100,000 units per year.

And recently we'll be having some discussions with JAC and we decided that our third model will also be manufactured in this new JAC manufacturing site. Of course to be compatible with the third model we need to make some investment and modifications in our production lines and we will undertake part of this investments.

And in this regard, our cooperative mode with JAC will continue and after the upgrade, the annual capacity of this manufacturing side will be about 150,000 units per year and this can be compatible with three models in the next two to three years.

And for the follow-up manufacturing plan, we may be working with other manufacturing partners with other manufacturing sites. But we will keep this cooperative mode in the long run, so that we can meet our satisfying capacity.

And based on our working experience and cooperative experience with JAC, it takes about 20 months from planning to ramping up to the ideal capacity. And in the future, we will also uphold this so that we can meet our capacity demand.

And we don't think this will be a bottleneck for the company's development and also it helped us to reduce the capital expenses. As for the optimization of the 2019 capital expenses, because of this termination of Shanghai plant, maybe Louis or Nick, you can share some figures..

Okay. I think based on this change of the strategy, I think it's definitely going to be some short-term and mid-term saving on CapEx sending for sure. And over long run, we believe that this can translate into a long-term higher return on asset as well..

Okay, thank you..

Thank you, Ryan.

Next question?.

The next question comes from the line of Nick Lai from JP Morgan. Please go ahead..

Hi. Good morning, William and Nick and Louis. Thank you for taking my question.

Just one very simple question regarding the pricing strategy, can we talk about our long-term pricing, our medium term pricing strategy considering two moving parts or two moving factors, one is subsidy cut and second is potential localization of model three in first quarter? Thank you..

Okay. Thank you, Nick.

William, do you want to talk about our pricing strategy?.

Okay. And we'll be committed to adopting a more reasonable pricing strategy instead of just to reduce the price to take up the market share. And for ES8 and ES6 we have battery leasing package or policy, which means that user can get RMB 100,000 reduction if they chose this battery leasing service. And they only need to pay the monthly fee.

And from the number perspective over 70% of our ES8 users have chosen this battery leasing service. So in this regard, for ES6 users, they only need to pay about RMB 258,000 before subsidy and they don't need to pay the purchasing tax. And from the pricing perspective, our product can be very competitive in the markets.

And we understand that our competitors had several rounds of price reductions recently. They may be facing some competitive pressures so they need to reduce this price. But I believe or I think this price reduction can damage the brand image and the loyalty of their existing users and consumers.

And in the long run, NIO will not tap into - NIO will not try to take up a bigger market share by simply reducing the price. Instead we want to innovate our service mode to improve our user satisfaction and user loyalties and then we can improve our sales and market share.

So I believe with our pricing strategy and battery leasing service, as well as the innovations with our service mode, we can keep our competitive edge in this market. And for this year to improve our brand awareness and market penetration, we will be hosting some test drive events or user experience events so that we can touch upon more users..

Thank you, William. And Nick, I think in my view, the Tesla price reductions it is my opinion I think is impart directly because NIO is already - our ES8 are selling Tesla's top brands S and the X which is why price reduction was so significant, 15% to 20% is huge.

And on Model 3 I think Model 3 is the base version which doesn't even compare close to our ES6 in performance or range is over RMB 400,000. As William just said ours just 258,000 if you take the battery lease options to start with. So I don't think it solves the competitive problem for Tesla in China..

Yes, thank you William and Louis. I was actually - if we plan to release MSRP but thank you for the answers. Thank you..

So ours is 358 theirs is about 410 the cheapest version. But the Model 3 is the small car it's not even the same class, it's a smaller sedan. It's like comparing 318i BMW, ours is more like an X5 the ES6. Our range is 510. Their range is about 300 kilometers. Our acceleration is a second faster than theirs, got to 60 in 4.7, theirs like 5.7 or 5.8.

Theirs have a single motor, ours is dual motor. So it's not comparable..

Indeed. Thank you, Louis..

Thank you..

Your next question comes from the line of Vincent Ha from Deutsche Bank. Please go ahead..

Hi. Thanks management for taking my questions. I have questions on two areas. Number one is on the longer term counts of sales outlook. We noticed that the company is giving a more conservative guidance for first and second quarter.

But does it really change our longer term expectation of around like 40,000 to 45,000 deliveries for the full year 2019? And what would be the split between ES6 and ES8? And then a little bit follow up on the sales outlook. We recently saw a really positive documentary coming off from the 60 minutes of CVS.

And I think that really helps to raise the awareness of the brand inside China. I wonder whether the company is trying to leveraging on these publicity to help on the sales and help the traffic in the NIO houses. My second question is for the fundraising. Now congratulations on the successful like convertible notes raising last month.

And my question on this one is that, can we have a rough idea of what is the cost for the options for the insurance? And then the second question, is that going forward is this likely to be the major way of further fundraisings in future? So those are the two questions. Thank you..

Thank you, Vincent. This one I'll take the numbers question. The understanding is our forecast has not changed for 2019. As we said the slower than expected start in Q1 and Q2 will partly be due because the subsidy is normally announced in January in China this year it's already March. It hasn't been announced. So that uncertainty and we said the macro.

The other thing is don't forget in February is only half a month because Chinese New Year took up the first 10 days of holiday. We had some delivery delays in February due to the - getting license registration offices open in China. So the 811 is exceptionally low. So we expect a pickup in March of this year.

And as I said, we have over 4,200 orders for ES8 that are in the bag 5,000 and 45,000. 1,300 of them are for the 6-seater version of the ES8. The 6-seater version won't be available until Q2. So it's not the slowdown as it is pronounced as it looks from the numbers. So I appreciate that question, Vincent.

On the 60 minutes article it's great publicity in the U.S. and outside, unfortunately 60 minutes isn't shown in China, but is a very positive view of Williams strategy and vision for the company. On fundraising, the convertible bonds had - premium is a little bit higher than we like this coupon is 4.5% is a five year CB with three year put.

I don't think CB will be the primary source of fundraising for us in the future we have many other sources of fundraising. We have enough cash to launch ES8 and ES6, but as you know because of a car company's nature we will need to tap the capital markets at some point in the future.

We also have credit lines available to us, we have a lot of strategic interest in investing in NIO through partnerships and others and also we have the ability do credit financing on the battery lease receivables we get in others to generate a significant amount of cash by - from our battery leasing and other revenues.

You want to talk about fundraising more?.

Yes, actually there is two points I just want to add on top of what Louis just mentioned, essentially you're asking about the structure of the CB.

In this transactions I think there are two elements of the derivative financial structure and derivative nature one is a capital upper straight that's basically shows the management the company's confident over the long run, especially the high appreciation of stock price that's basically - in that the elements that basically increased our straight price from 27.5% to 100%.

The other element that as we call it a zero straightforward shares essentially allow the company to purchase back some shares and make this shares lendable to the potential that CB investor in the marketplace. There's a typical practice in the market, in the CB market. Okay..

Thank you. Does that answer your question, Vincent. Basically our forecast remains unchanged there may be slightly more ES8 orders since we already have 7,300 three or four months before launch. So we think that's a very strong number. And then ES8 I think will - Q2 should be better than Q1.

But I think our ES8 is already the number one selling premium EV in the market already. So it's already out selling the Model X by a wide, wide margin. So it’s basically already the market leading position. Next question..

Your next question comes from the line of Fie Fang from Goldman Sachs. Please go ahead..

Hi, good morning. Thanks for taking our question. It is very impressive to see the ramp up of ES8 volume and your brand.

Can management talk about the operational lessons that you have learned from branding ES8? What have worked, what have not and would you plan to do differently for ES6 and the third model? And also for ES6, how do you think about the cannibalization risk with ES8?.

Thank you, Fie. William do you talk about lessons you've learned from branding ES8 and any cannibalization against ES6, with the ES6 cannibalizing ES8..

Yes. Thanks for the question. ES8 is our first product and from manufacturing to delivery in terms of the readiness of supply chain, quality and software we need to improve a lot. And for the past six months, we've experienced a lot of challenges.

And some days we need to manufacture at least 100 or 200 cars and we need to deliver that many cars every day. And this is a huge pressure for us. And I got to say we have overcome that period of time, and I will appreciate our team for this great contribution. And as of today, we've delivered cars to 270 cities in China.

And the geographical distribution of our users is quite wide. We even have users in the Northeast China, which is one of the coldest areas in China. And which means that we also face some pressures with our service.

I cannot say this is a lesson learned, but for the last quarter - for the first quarter last year we do paid a lot of attentions with the user experience. For example, to guarantee a smooth car usage and experience in the winter we spent a lot of time with the user services in these areas.

And also because we didn't want to keep our users waiting for such a long time, we have some intensive user deliveries. And for these - for what we got from past quarter we think we can further improve our efficiencies with the services and service operations.

And I believe this will be a long-term target and this will help us to further improve our user satisfactions. And starting from this year, we believe that NIO has entered into the second phase of a competition we call it the qualifying round.

And the priority of this round is that we need to improve our operation efficiency without compromising on the user satisfaction. This is one of the most important tasks at the moment..

Thank you, William. Also I think in my view ES6 will - obviously will have cannibalization effect on ES8, but I think that's normal. They're both SUVs one is 5-seater, one is 7-seater. But I want to remind you that the 5-seater version, 5-seater SUV market is many times bigger than the 7-seater SUV market, which is very limited in China.

So I think as the potential for ES6 is much larger in orders and is reflected in our half year forecast than ES8. So I think it's inevitable..

Actually Louis has mentioned one important information, the market size of the premium 5-seater SUV is 10 times bigger than that of premium 7-seater SUV, which means that the total volume of the 5-seater SUV above the price of RMB 300,000 is over 1 million units. But that's also ES - that of 7-seater SUV is only about 100,000 units.

And we care a lot about our overall market share instead of just for ES8 or ES6. And for ES6, our target this year is to let more people to know this brand, to know this car and to try this car. That's why this year we are planning for a wide range of test drives around China so that more users or more potential users can have a try.

And for our existing users who tried or drove ES8 for a while actually the feedback is quite positive, because we understand the demand and the needs of the Chinese users and we are confident about the product we provide to them.

And actually NIO has one of the highest user satisfactions and we also keep - want to keep improving this user satisfactions. If you read some self-generated content on the social media they have some attractive titles criticizing about NIO's services, competitiveness or our product.

But if you look at the real user feedback, you will find that the feedbacks from our users are quite positive. And in the long-term, I believe this is a foundation to our future competitiveness..

Thank you, William.

Next question?.

Your next question comes from the line of Paul Gong from UBS. Please go ahead..

Yes, sure. Thanks for taking my question. My first question is regarding your strategy. After this subsidies declined.

Say, how much percentage you could pass this shortfall to your customers or you plan to pass? If the subsidy declined by $100, how many dollars do you expect the customers might pay as an extra to make up this short fall?.

William, you want to talk about the subsidy effect on our pricing, the forms of subsidy or if you want me to do it?.

There are two types of - do we need translation, sorry. There are two types of subsidy, one is national subsidy, one is local subsidy. Actually it is not very easy for some users in some cities to get local subsidy already. And as for the subsidy declined or reduction, if the subsidy decline by RMB 1 actually user need to pay for that RMB 1.

So there is no plan to adjust our price because of this subsidy reduction, which means that if the national subsidy decreases by RMB 10,000 this year, the users need to pay RMB 10,000 more.

And before we receive the official announcement of the subsidy policy this year, actually even if the subsidy policy of this year is released, there is no plan to reduce our price to cover the short fall..

To add to that, I think our prices is already for the price and value performance ours is really the best in the market with ES6 and ES8. And that's why I think in my view, that's why Tesla has been aggressively lowering their price, because of their market share losses to NIO. And so, I think there is no reason for us to take down our price.

The subsidy will keep our margins in place. And also with the 3% reduction in VAT tax, that should help our gross margin significantly. So I think the government policies are actually quite positive for us..

Okay, thank you. Yes, my second question is regarding the ES6 orders. I heard it was 7,300.

How does this compare to the ES8 orders at the same stage? Say, at the same time last year, what was the cumulative ES8 orders, can you share with us?.

Yes. I think ES8 at that point was a little bit better, because it was the first time NIO had all this hype for the whole year and it was a big event. So NIO ES8 orders were about 10,000 at this time. But don't forget ES6 we haven't start - I mean we haven't started the marketing campaign, yet. This is mostly the referrals, word of mouth.

So you'll see us in April when the Shanghai Auto Show takes off, as William had mentioned having a lot more marketing on ES6. In addition, part of the reasons our cost are high for Q4 than Q1 is we are building a lot of ES6s to be available in May for test price.

That's one thing we learned about ES8 is that we didn't have enough cars for people to test drive, it is very hard to test drive a car. And now we have NIO houses in 27 cities. So we're going to build - so there will be a cost in Q1 to absorb the cost building a lot of ES6s a lot of test drives.

When people drive our ES8, the majority of them will buy that car, vast majority of them. We did ES6s even better because the lighter sportier version of the ES8 it drives phenomenally. So we believe that once we start allowing test drives the order number will go up quite fast in the May June timeframe..

Actually ES6 and ES8 focused on different market and user groups. For ES8, it's tapped into the premium 7-seater SUV segment and in that segment we don't have many competitors.

And also ES8 represents the first official debut and product launch of NIO and a lot of users who are not potential 7-seater SUV users bought our cars because they love NIO brand, that's why we receive more orders than ES6 at the early stage of ES8 product launch.

And for ES6 the market situation is different it taps into a bigger market, but at the same time the competition is fiercer. For example we have Q5, GLC, X3 in this market segment and their sales volume every month is over 10,000 units.

But we are also very confident with our ES6 performance, user experience, the advantages with the taxes and the innovative services and we believe we can keep this competitive edge in this market segment. We already expected that the early stage of ES6 order is not as good as ES8.

That's why as Louis mentioned, we will be holding large scale test drive campaigns and the marketing campaigns starting from May, and we believe that in this bigger and more competitive market segment ES6 will be very competitive compared with traditional ICE cars..

Thank you, William.

Next question?.

Your next question comes from the line of Bin Wang from Credit Suisse. Please go ahead..

Thank you. I actually have three operation questions. The number one is about the NIO House number I noticed that right now is 27, so we have been guiding is about 70, but end up this year. So I want to know whether you have any change about the plan for NIO House number. That's number one question. Number two is about the Tesla actually.

Now we have localized the Model Y next year. Can I assume the ES6 compete with Model Y, because Model Y has been set at 10% bigger than the Model 3. Since that will compete with Model Y so I want to know whether it will compete with Model Y meanwhile because the Model 3 have a such a big success in the U.S.

do we have any plan to introduce a similar model than the Model 3 for NIO in the future say 2021? And the third question is about the software, one of the key things is about the, so far our ADAS have still not fully been utilized because of the software, you have been guiding software maybe ready in the May year.

So can we have update about the software when will it be fully ready to have a much better user experience.

And lastly I also have a question about battery, since the ES6 have better battery, can we know when is the battery can be used I mean the same 811 battery can be used to ES8 and when will be used, if at use will the price offer ES8 will be increase or not? Thank you..

Thank you, Wang Bin. I'll take one at a time. On NIO Houses, we currently have 13 in 11 cities and 16 pop-up NIO Houses. We wanted a large footprint as we launch ES6 and because of the dispersion of the ES8 orders across the cities. We won't - you won't see us go to 70 cities this year. So, we realized that the expenses are high.

So we are controlling the expenses, so you'll see high expenses in Q1 and then we should see a gradual decline, significant decline and expenses in Q2, Q3, and Q4, as we march toward profitability.

So it's number one, we think we have pretty good coverage in the 27 cities we may add a few more, but it won't be a large-scale expansion into 70 cities this year. Second, Model Y, Model Y was supposed to be some kind of announcement next week. I don't worry about it, because it won't be here for a year or so in China, if even then.

It should be 10% bigger than the Model X as what they say, it's closer to ES8. But is a Model X - Model 3, so the Model 3 is 400, the cheapest version RMB 420,000, is 10% more that means the Model Y will be over RMB 500,000 when it comes to China in a year or two. And that will still not be as price competitive with our ES6, which is RMB 358,000.

And that depends on whether you get one motor or two motors in the Model Y. So I think is our ES6 will compete very well, it should be a slightly bigger, it'll be X5 versus X3, which is what I think the Model Y will be comparable to. So I think our car is more than ready to meet the challenges of Model Y, when it comes to China.

As far as Model 3 is concerned, we are in discussions about MP2 platform, NIO platform 2. But we haven't decided on what the format of that will be. So we don't know, if we will - but there's no immediate plans in the next year to have a car that will compete with Model 3 of that size. We think ES6 already competes more than favorably with Model 3.

Chinese prefers SUVs to sedan and ours is an SUV, Tesla's is a small sedan. Sedans are not preferred choice. Second is the model the ES6 is cheaper than the Model 3 and much higher price performance statistics faster, longer range, much more luxurious.

Remember the Model 3 is a slim down no - nothing fancy in the interior with not the same service level as ES6. So I think they are different classes and I think the ES6 should be a much more appealing car to Chinese users. Your question on ADAS software, we - the current timing is for highway pilot or NIO highway pilot to be available sometime in Q2.

Don't forget the NIO ES8 are already equipped with the ADAS hardware. So for us once that's available - once we order that package, we will get a high revenue a high gross margin number. So we'll turn it on, on the software side it will make over RMB 35,000 to RMB 40,000 by doing that.

So we expect NIO pilot, the current timetable is next quarter it will be released in available for ES8 and ES6 owners. On the battery, 84 kilowatt battery is going to be available for both ES8 and ES6. So ES6 for a cheaper version can use the 70 kilowatt battery as well.

And then for ES8 owners who have 70 kilowatts, William and NIO is offering a onetime trade-in value where you can get 60% off for an 84 kilowatt battery if you want to buy that. So we are offering it available, it's the same battery pack. So it's swappable. So for the 70 kilowatt batteries they're from ES8 that are changed.

We will use them in our swap network. So they won't go to waste. And so we expect that battery to have - for the ES6 it takes the range to 510 on the 84 kilowatt, for the ES8 it takes the range from 355 to 420. So that will solve the range issues for that many - the biggest complaint from ES8 owners was range.

So we expect to have a solution for them by June, July of this year. Does that answer your questions, Wang Bin? Okay, great. I think it does. Next question, please..

There are no questions at this time. I'd like to turn the call back over to the company to closing remarks. Thank you..

Okay. Well, thank you everyone for joining us today. We - from William and Nick and Jade and Heather and I and Stanley here in Hong Kong and Beijing. We thank you for your time. We look forward to seeing you in the future calls. Thank you..

Thank you everyone..

This concludes this conference call. You may now disconnect your line. Thank you..