Hello ladies and gentlemen. Thank you for standing by for NIO Incorporated’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded and will last approximately one hour. 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. .

at Thu Sep 26 11:30:00 2019 ]audited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to NIO’s press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CFO, Louis Hsieh, for opening remarks. Louis, please..

Thank you, Jade. And good morning, and good evening everyone. Before we get started, I would like to take this opportunity to explain our decision to cancel the original call scheduled on September 24th and why we are having this call now. We have made significant positive progress in NIO's China funding projects with certain parties.

As you can imagine, we are in a very sensitive period during which we are not at liberty to disclose the confidential information related to those projects, which led us to initial decision to cancel the original call on September 24th.

Further, we believed the Q2 earnings release distributed yesterday provided a good update on the company’s operations and financial performance. This is a very fast moving and fluid situation with many advisors helping to navigate this period of time and it has not been easy to find a path that is best for everyone.

However, after receiving numerous investors' inquiries since the original call cancellation, we ultimately decided that resuming our original plan to hold the call provides more transparency and serves the interest of our investing community better.

As it relates to the call, please understand that we will not be able to disclose any specific information or answer any questions regarding the NIO China funding projects today. We will disclose further information when the projects reach a stage that would subject us to a disclosure obligation.

With this, I will turn the call over to William Li for our business highlights.

William?.

at Thu Sep 26 12:17:00 2019 ] hundreds of thousands services received. [Foreign language] In response to these challenging market conditions, we are aggressively expanding our sales efforts to accelerate orders, taking comprehensive measures to reduce our costs across the organization and improve overall operational efficiency of the Company.

Louis will share more details on these initiatives later in the call. Louis, please go ahead..

at Thu Sep 26 12:58:00 2019 ]irst, our sales and service networks. As mentioned previously we are expanding our offices' sales network by adding NIO Spaces. NIO Spaces are a cost-effective way to implement significantly enlarge our footprint in the market and much less capital intensive compared to our flagship NIO Houses. Turning to R&D.

We remain committed to advanced driving technologies and the development of our second generation platform, NP 2. In the future, our R&D investments will focus on mass-production applications, and we will actively seek strategic partnership opportunities in advanced technology development as a means to prudently manage our spending in this category.

We will also be reducing costs by further optimizing the size of the workforce. After extensive internal reviews, we have determined that our headcount can be further reduced.

We target to reduce our headcount to around 7,800 by the end of the third quarter from over 9,900 in January 2019 and we expect further headcount reductions by the end of this year, through both restructuring and spinning-off some business units.

With this, I will now turn the call over to our Vice President of Finance, Nick Wang, to provide the financial details for this quarter. Nick, please go ahead..

at Thu Sep 26 13:20:00 2019 ] for the third quarter of 2019, the company expects deliveries of vehicles to be between 4,200 and 4,400 units, representing an increase of approximately 18.2% to 23.8% from the second quarter of 2019; total revenues to be between RMB1,593 million or $232 million and RMB1.663 billion or $242.2 million, representing an increase of approximately 5.6% to 10.3% from the second quarter of 2019.

This concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session. Please..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. First question comes from the line of Feng Wei from CICC. Please go ahead..

at Thu Sep 26 15:15:00 2019 ] of ES8 and ES6. We have observed very strong momentum of ES6, but ES8 sales declined after recall. Would you please share your thoughts about the sales outlook of ES8 and ES6? Thanks..

Thank you, Feng. I think on the first question, we’re not going to take that question for now, because it relates to the China financing projects. You do know that from the release that we do at $200 million convertible bond deal, so that one is the one that has already been disclosed.

Regarding to the ES8, ES6 orders, William, do you want to address that question please?.

at Thu Sep 26 15:00:00 2019 ]issue for ES8 in the past, and which can help us to improve the competitiveness of our ES8. In this specific segment for ES8, we think it can actually compete with other ICE parts and the premium SUV.

[Foreign Language] From January to August, the sales of our ES8 ranked as the top three for the 7-seater and 6-seater SUV market segment. Thank you..

Thank you for the questions. Next question comes from the line of Bin Wang from Credit Suisse. Please go ahead..

at Thu Sep 26 15:34:00 2019 ] quarter, such as the free auto insurance, also auto finance and free battery swap. So what's the margin guidance? Because previously we guided margin will improve in the second half. Thank you..

William, the….

Okay. Well, thank you. [Foreign Language].

at Thu Sep 26 15:45:00 2019 ].

at Thu Sep 26 15:48:00 2019 ]first part about battery recall..

at Thu Sep 26 15:52:00 2019 ]bureau. But you need to understand, our relationship with the battery supply chain partner is a long-term one. We have agreed on how we are going to cover the cost of the battery recall. But the battery recall is a very significant cost, because it will cover the new battery pack production, logistics and execution.

We believe the share of the responsibility is actually quite reasonable and the cost segmentation is also quite reasonable. But the responsibility is quite clear regarding the battery recall issues..

at Thu Sep 26 15:55:00 2019 ]economy, especially production related. However, we also expect some mix margin trend coming from the model mix and options. That's the -- you can call it the controllable element but market driven.

With that, the gross margin will highly depend on the volume of the deliveries and unit price, including the options of each vehicle we sell. So with our best estimation so far, the gross margin will still be negative for the rest of the year, I think, conservatively speaking. So that's my answer for this margin related part..

Thank you for the questions. Next question comes from the line of Ryan Brinkman from JP Morgan. Please go ahead..

The first one relates to gross margin in the context of a softer volume environment. So backing out the higher warranty costs in 2Q, with the underlying margin of negative 4% or so, have been roughly in-line with your expectations.

And how should investors expect vehicle gross margin to trend going forward given this backdrop of lower industry and NIO volumes?.

Nick, you want to take that?.

I think, yes. You're absolutely right, Q2, the vehicle gross margins, negative 4%. Again, like I said, the second half, we're probably still going to see a pretty tough market. But we also see potential uptake in our volumes, I think.

So overall, the current estimation range for the vehicle margin in Q3 is going to be around, I will say, vehicle margin -- I mean around negative 6%. And Q4 is between negative 6% to negative 10%, conservatively speaking..

Okay, great. Thank you. And my second question just relates….

We're going to start delivering the base model of the ES6 at the end of this month, so probably next week. So the ES6 based model will have a lower margin if it doesn't have all the options. It'll be counter-weighted somewhat by the 84 kilowatt battery versions that will start shipping next month for Q4, which will have a higher gross margin.

And then as Nick said earlier, it depends on the uptake of the volume -- of the options, the options are very high margins. But volume will also -- would definitely help the vehicle gross margins..

That's very helpful, thank you. Just my last question is on the distribution strategy.

If deliveries remain fewer than anticipated for longer, could that cause you to consider potential adjustments to distribution strategy, particularly with regards to the presumably largely fixed cost NIO houses? Can you talk about the relative cost and capabilities of the NIO Space compared to a NIO House?.

at Thu Sep 26 16:02:00 2019 ]paid by partners and also the cost will be less than RMB1 million if we had to do it all ourselves on average. So it's very economical. It's also in high traffic area. So that's the direction we're going.

The larger NIO Houses, we're done initially to help the company build a brand and to get users into the NIO brand and NIO user experience. But those have three to five year lease terms. So they will -- going forward, you'll see our strategy would be to build more smaller NIO Spaces type operations.

And if we do renew NIO Houses, they won't be as big and as luxurious as the ones that are in the original ones in Beijing and Shanghai and other large cities..

at Thu Sep 26 16:12:00 2019 ]. So basically, the cost is going to be based on the deals that we have made in the NIO Spaces..

at Thu Sep 26 16:15:00 2019 ]effective way for us to increase our reach throughout China’s large cities..

Thank you for the questions. Next question comes from the line of Dan Galves from Wolfe Research. Please go ahead..

Hi, thanks for taking my questions. So I think as a result of the market conditions and kind of the things -- the way things have played out this year, it seems like you have a lot of plans of changes to the business. I was wondering and probably thinking about the business at lower volumes longer term.

I was wondering if there was any way, you could roughly talk to us about, given kind of changes to cost structure that you’re planning, and changes to distribution strategy.

Is there a volume level that you believe that you can breakeven at in the future, and how much capital do you think that you need to kind of [Technical Difficulty] have a reasonable balance sheet?.

at Thu Sep 26 16:21:00 2019 ]. It's a little bit too early. I'm not trying to avoid your question. But we don't have the strategic budget for next year yet, given all these -- the turmoil and all the changes in the markets this year. So give us about -- give us until the end of the year..

at Thu Sep 26 16:23:00 2019 ] follow up, if I could is, the cash burn. I was wondering if you could talk to us about kind of the level of pre-launch cost for ES6 in terms of marketing and engineering that may go away in Q3. But on the other side it seems like most of the cash costs for the recall happens in Q3.

So I mean maybe just talk to us about, is there a potential to meaningfully reduce the cash burn that you saw in Q2, in Q3 and Q4?.

at Thu Sep 26 16:25:00 2019 ] burn -- if we cannot do RMB3.2 billion in operating loss, you see a significant reduction in Q3 and a further reduction in Q4 is there's -- we have to do it..

Okay. Okay, thanks very much….

at Thu Sep 26 16:25:00 2019 ] non-core businesses as well, which we will disclose as the deals get done.

William, do you want to add something?.

at Thu Sep 26 16:40:00 2019 ]smart EV brand and a very premium global competitive brand, we are confident that investors will support us..

Yes. I think, I found the Bloomberg article very, very [insulting]. I mean, the headline was $5 billion loss. As William said, that's not. That -- he didn't break out the fact that a lot of those were preferred shares pre-IPO they're marked up at the IPO. So those -- the real number is closer to $3 billion over four years.

And as William said, most of that is toward R&D. So I don't -- we weren't very happy with the way Bloomberg use that as the headline. It's not very accurate..

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

at Thu Sep 26 16:44:00 2019 ]vehicle and is this only applicable to ES8, or is also applied to ES6 as well? This is the first question regarding the incentives. My second question is regarding the cost cuts on the cost of goods, especially on the procurement.

Have you negotiate with your supplier on the cost after the subsidy cut in late June? If yes, can you help us to give a rough idea how much has been cut in second half versus first half, especially on the battery side? Thank you..

William, do you want to discuss the incentives? And then, Nick, you can discuss the financial impact of the batteries, and the supply chain..

at Thu Sep 26 17:00:00 2019 ] house close to the power swap station. Thank you very much..

Okay. And then, Nick, do you want to talk about -- I think a lot of the supply chain costs, we are renegotiating with a lot of suppliers as our volume begins to get larger, second is also I think the battery pack costs has come down on a year-over-year basis, and will continue to go down we believe each year on a per kilowatt basis by 10% to 15%.

Nick, is there anything else on the supply?.

at Thu Sep 26 17:02:00 2019 ] from now to the next year four quarter, we will -- we can continuous reduction of the battery cost. But right now, I cannot share with you about the specific percentage, because we have reached agreements with our supply chain partners regarding this.

But we believe for the next Q3 and Q4 we should -- for the next year Q3 and Q4, we should be able to reach significant cost reductions..

Thank you, Paul..

Hey Paul, I think I'll….

Go ahead, Nick. Do you want to add to the….

Yes. Your first part of question also involving what the financial leasing actually….

Yes..

at Thu Sep 26 17:09:00 2019 ] the basis -- the rough estimate, I think it's roughly RMB10,000 per unit roughly..

at Thu Sep 26 17:10:00 2019 ]?.

Yes, roughly..

Okay, thank you..

Thank you, Paul. Thanks Nick.

Operator, are we -- is that conclude the hour?.

Yes, certainly. There are no further questions at this time, and the call is around the hour mark. I'll turn the call back to company for closing remarks..

Okay. Thank you once again for joining us on this quarterly conference call. We look forward to talking to you next quarter. Have a good evening, or have a good day..

This concludes today's conference call. You may now disconnect your lines. Thank you..