蔚來 (NIO) 2019 Q2 法說會逐字稿

Hello, ladies and gentlemen.

Thank you for standing by for NIO's Inc.

Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Today's conference call is being recorded and will last approximately 1 hour.

I'll now turn the call over to your host, Miss Jade Wei, Senior Director of Investor Relations of the company.

Please go ahead, Jade.

Good evening, and good morning, everyone.

Thanks for joining NIO's Second Quarter 2019 Earnings Conference Call.

The company's financial and operating results were published in the press release yesterday and are posted on the company's IR website at ir.nio.com.

On today's call, we have Mr. William Li, Founder, Chairman of the Board and Chief Executive Officer; Mr. Louis Hsieh, our Chief Financial Officer; and Mr. Nick Wang, our VP of Finance.

Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties.

As such, the company's actual results may be materially different from the views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that NIO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures.

Please refer to NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

With that, I will now turn the call over to our 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 24 and why we are having this call now.

We have made significant positive progress in NIO 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 24.

Further, we believe 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 advisers 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 will subject -- that would subject us to a disclosure obligation.

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

William?

Thank you, Louis.

Thanks to everyone who is in our call today.

I will speak mainly in Chinese and [Miss Eve Tang] will interpret for me.

(foreign language)

[Interpreted] In the second quarter of 2019, NIO delivered 3,553 vehicles, including 3,140 ES8; our 6- and 7-seater high-performance electric flagship SUV and 413 ES6; our 5-seater high-performance premium smart electric SUV, which commenced user deliveries in late June.

In the third quarter, we expected to deliver between 4,200 and 4,400 vehicles and bring our cumulative deliveries of ES8 and ES6 to over 23,000 by end of September to users in over 270 cities throughout China.

As of today, our ES8 and ES6 users have driven more than 250 million kilometers.

And to support our users under both, NIO Power has completed more than 200,000 charges through our "One Click for Power" services.

(foreign language)

[Interpreted] We achieved our second quarter delivery results against a backdrop of four factors.

First, continued overall weakness in the Chinese auto market, which saw a 14.3% drop in passenger vehicle wholesale sales from a year earlier.

Second, there is competitive discounting among premium auto brands with data showing that average selling price in this segment has dropped 20% to 25% compared to peak levels.

Third, electric vehicle subsidy reductions is starting from late March and again, in late June, which affected demand for electric vehicles.

And lastly, slowing consumer discretionary spending as a result of the microeconomic (sic) [macroeconomic] uncertainties surrounding U.S.-China trade tensions.

(foreign language)

[Interpreted] Despite the overall environment, for the first 8 months of 2019, sales of our ES8 ranked first in China's premium electric SUV market.

ES8 was the only electric vehicle among the other 9 (inaudible) models in top 10 of the overall premium mid to large SUV market.

(foreign language)

[Interpreted] We started deliveries of our ES6 in late June.

Since then, we have received broad-based positive reviews on the ES6 from both media and our users, particularly for its outstanding driving experience, extended driving range and competitive design features.

We have seen growth of our order backlog accelerating in the last 4 weeks as we started to roll out a more expansive sales network, and more importantly, as more and more ES6 users act as our unofficial brand ambassadors and spread favorable word-of-mouth.

From the production perspective, we will begin producing and delivering the ES6 standard version at more competitive retail prices at end of September.

In addition, starting in October, we will begin delivering the ES6 and ES8 with an 84 kilowatt hour battery pack, extending their NEDC driving range to 510 kilometers and to 430 kilometers, respectively.

Going forward, we will continue to enhance product competitiveness and strengthen sales by further advancing our software and autonomous driving technologies.

(foreign language)

[Interpreted] We believe in the commitment to long-term competitiveness, supported by cutting-edge technology, outstanding products and excellent services.

We will continue to invest in leading technology and currently have filed over 4,200 patents and in Q2, our new pilot had achieved a comprehensive Level 2 plus ADAS after version release and update.

Furthermore, as of August, NIO and NIO ES8 both ranked first in brand and in product quality accordingly according to research by J.D. Power on China's new energy vehicle user experience.

Our users have given us an average rating of 4.9 out of 5 for hundreds of thousands services received

(foreign language)

[Interpreted] 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.

Thank you, William.

Facing the challenges in China's auto industry, we are focusing our sales initiatives in 3 areas: creating retail points of sales, called NIO spaces; strengthening regionally-driven promotions; and implementing commercial leasing options for corporate users and fleet operators.

First, NIO space.

We are expanding our sales network through NIO-branded sales zones called NIO spaces.

NIO spaces, which are normally less than 200 square meters, will allow us to quickly, cost-effectively and meaningfully increase the number of sale points in the market.

They will primarily located in shopping centers and malls, communities with high traffic flow.

The majority of the NIO spaces will be invested by our selected partners.

By the end of 2019, we aim to have established around 200 NIO spaces in over 100 cities across China.

These will vastly expand our sales footprint throughout China, where more potential users can see, touch, feel and drive and truly enjoy the exhilarating ES6 and ES8 driving experiences.

Second, we are significantly strengthening our sales approaches by encouraging more regionally driven promotions.

In September, we introduced the free battery swapping policy, and it is attracting a large group of potential users to the cities with existing swapping stations.

In Beijing, ICE vehicle users have opportunities to buy an ES8 or ES6 with extra incentives.

In addition, we offer more than 8 different auto financing programs with 7 banks to our users, which significantly diversifies the solutions available to meet different users' cash needs.

We see these actions being implemented.

We have seen order growth accelerating significantly since September -- beginning of September.

We're also driving sales through selling cars to corporate users and fleet operators.

Moreover, we introduced a membership subscription program in which users have opportunities to rent and drive our products for 1 month or more to fully experience the product and services.

In addition to these sales initiatives, we are implementing comprehensive cost control measures across the organization.

These measures primarily focus on increasing efficiencies and streamlining operations within our sales and service network, in our R&D functions as well as reducing our headcount.

First, our sales and service network.

As mentioned previously, we are expanding our office and sales network by adding NIO spaces.

NIO spaces are cost way to implement significant and larger footprint in the market and are much less capital intensive compared to our flagship NIO houses.

Turning to R&D.

We remain committed to advance driving technologies and development of our second generation platform, NP2.

In the future, our R&D investments will focus on mass production applications.

We will actively seek strategic partnership opportunities, advanced technology development as a means to prudently manage our spending in this category.

We'll 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.

Thank you, Louis.

I will now go over some of our financial results for the second quarter of 2019.

To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release, which is posted online for additional details.

Our total revenues in the second quarter of 2019 were RMB 1.5 billion or USD 219.7 million, representing a decrease of 7.5% from the first quarter of 2019.

Our total revenue are made of 2 parts: vehicle sales and other sales.

Vehicle sales in the second quarter of 2019 were RMB 1.4 billion or USD 206.1 million, representing a decrease of 7.9% from the first quarter of 2019, mainly due to the decrease in sales volume caused by electric vehicle subsidiary reduction announced in late March and the slowdown of macroeconomics in China, which has been exacerbated by the U.S.-China trade war.

Other sales in the second quarter of 2019 were RMB 94 million or USD 13.7 million, representing a decrease of 2% from the first quarter of 2019, mainly attributed to the sales decline in charging piles, which was in line with decline in vehicle sales.

Cost of sales in the second quarter of 2019 was RMB 2 billion or USD 293.2 million, representing an increase of 8.8% from the first quarter of 2019, mainly caused by accrued recall costs in relation to the company's voluntary recall of 4,803 vehicles announced on June 27, 2019.

Total recall costs accrued in the second quarter of 2019 were RMB 339.1 million or USD 49.4 million, including RMB 283.3 million or USD 41.3 million recorded in cost of vehicles sales and RMB 55.8 million or USD 8.1 million recorded in cost of other sales, respectively.

Excluding the accrued recall costs, cost of sales in the second quarter was RMB 1.7 billion or USD 243.8 million, representing a decrease of 9.6% from the first quarter of 2019.

Gross margin in the second quarter of 2019 was negative 33.4% compared with negative 13.4% in the first quarter of 2019.

Excluding accrued recall costs, gross margin in the second quarter was negative 10.9%.

More specifically, vehicle margin in the second quarter of 2019 was negative 24.1%, decrease from negative 7.2% in the first quarter of 2019, mainly driven by accrued recall costs.

Excluding accrued recall costs, vehicle margin in the second quarter was negative 4%.

Research and development expenses in the second quarter of 2019 were RMB 1.3 billion or USD 189.4 million, increasing 20.6% sequentially, primarily attributed to the increase in rigorous testing activities of ES6 before its mass production in second quarter of 2019.

Selling, general and administrative expenses in the second quarter of 2019 were RMB 1.4 billion or USD 207 million, increasing 7.7% sequentially primarily driven by the company's marketing expenditures on the Shanghai Auto Show and ES6 test drive campaign in the second quarter.

Loss from operation in the second quarter of 2019 was RMB 3.2 billion or USD 469.9 million, increasing 23.2% sequentially.

Excluding accrued recall costs and expenses, loss from operations in the second quarter was RMB 2.9 billion or USD 418 million.

Our net loss was RMB 3.3 billion or USD 478.6 million in the second quarter of 2019, increasing 25.2% from the first quarter of 2019.

Basic and diluted net loss per ADS in the second quarter were both RMB 3.23 or $0.47.

Our balance cash and cash equivalents, restricted cash and short-term investment was RMB 3.5 billion or USD 503.4 million as of June 30, 2019.

And now for our business outlook.

For 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 RMB 1,593 million or USD 232 million and RMB 1.663 billion or USD 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 sessions.

Please?

(Operator Instructions) First questions comes from the line of Feng Wei from CICC.

I have 2 questions.

The first question is about your cash flow from financing activities.

Would you please share the progress of your capital raising in China and besides the Tencent instrument deal, did you try other financing options?

That's the first question.

And my second question is about the sales orders of the ES8 and ES6.

We have observed very strong momentum of ES6.

The ES6 sales declined after recall.

Would you please share your thoughts as far as the sales outlook of ES8 and ES6.

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 have USD 200 million convertible bond deal.

So that one is the one that is already disclosed.

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

Okay.

(foreign language)

[Interpreted] Thanks for your questions.

The sales of ES8 in July and August is quite challenging.

That's a fact and this is the same challenge faced by other EV companies.

Because with the subsidy reduction starting from the 26th of June, we can see the majority of EV sales have declined, and this is the challenge for the whole industry.

(foreign language)

[Interpreted] As you can see in July and August, we didn't take any initiative to provide rebates or the price reductions for the ES8 users.

Because you can see there is a transaction price for the users of ES8, the price of ES8 actually increased by 10%.

But just now, I had mentioned that the price of those premium cars in the market actually has reduced.

So this means that they will affect the sales of our cars in the July and August time.

(foreign language)

[Interpreted] We are quite confident about the competitiveness of the ES8 product and the service.

As you can see in September, the lease and the sales of ES8 are picking up in the market.

And in October, we're going to deliver the 84 kilowatt hour battery version ES8.

We believe with this we can actually help us to extend the drive range of ES8, which has been an issue for ES8 in the past, and this can help us improve the competitiveness of our ES8.

The specific segment for ES8, we believe, it can actually compete with other EV cars and the premium SUV.

(foreign language)

[Interpreted] From the January to August, the sales of our ES8 ranked as the top 3 for the 7-seater and the 6-seater SUV market segment.

(foreign language)

[Interpreted] Thank you.

Next questions comes from the line of Bin Wang from Crédit Suisse.

(foreign language) I actually have 2 questions.

The number one is about recall because originally, we see the company claimed the recall costs were mainly due to the battery supplier, which is CATL.

But now, we've seen results starting -- most of the cost go to NIO, more than half, or is there reason that lead to such a difference.

That's for the first one question.

The second one is about the margin outlook because we've seen the organic margin, gross margin in the second quarter actually has been improving compared to our first quarter, but we see two new developments.

The number one is that at NIO would open the NIO [space] (corrected by company after the call) over with third party partners to share part of the profit with the third party.

And secondly things is that NIO sales do more promotion since the third quarter such as the free auto insurance, auto finance and free battery swap.

So what's the margin guidance because previously we guide the margin will improve in the second half.

William (foreign language)?

Okay, (foreign language)

(foreign language)

Translates the (inaudible)...

[Interpreted] Okay, to answer the...

And Nick, do you want to do the growth margin question?

I think they should translate the first part.

The battery recall.

[Interpreted] we have pretty clear responsibility with the battery supply chain partners regarding the issues and they had been made clear in the announcement in the national markets monitoring 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 that the share of the responsibility is actually quite reasonable and that the cost segmentation is also quite reasonable.

(foreign language)

[Interpreted] But the responsibility is quite clear regarding the battery recall issue.

Yes.

This is Nick.

I'm happy to answer the second question about margins.

I'm going to speak only in English for the sake of the audience.

Actually in Q2, you're right, Wang Bin.

We accrued our portion of the battery recall related costs at a roughly RMB 283 million in the cost of vehicle sales.

If you exclude accrued battery recall costs, the company's overall gross margin was around negative 11% in Q2 but out of it, actually our vehicle margin, vehicle sales margin is negative 4%, so better, okay?

Both margins were better than Q1 margins essentially.

But we also expect we're going to deliver more vehicles in the second half of 2019, which I believe will certainly help the gross margin from the scale economy, especially production related.

However, we also expect some mix margin trend coming from the model mix and options.

Thus, you can call it the controllable element but market-driven, okay?

With that, the gross margin will highly depend on the volume of the deliveries and unit price, including the options of each vehicles 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.

Next question comes from the line of Ryan Brinkman from JP Morgan.

The first one relates to gross margin and the context of a softer volume environment.

So now 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 volume?

Nick, you want to take that?

I think -- yes, you're absolutely right.

Q2, the vehicle gross margin is negative 4%.

Again, like you said, in the second half, we probably still get to see a pretty tough market, but we also see a potential up take in our volumes, I think.

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

Okay.

Great.

And my second question just relates...

And Ryan (inaudible)...

Yes?

Let me finish up.

We're going to start delivering the base model of the ES6 at the end of this month, probably next week.

So the ES6 base 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 we'll 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 option.

The options are very high margin.

So but volume will definitely help the vehicle gross margins.

That's very helpful.

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 costs and capabilities of a NIO space compared to a NIO house?

Well, the NIO space sometimes are prepaid by partners and also, the cost will be less than RMB 1 million if we had to do it all ourselves on average.

So it's very economical.

It's also in a high-traffic area.

So that's the direction we're going.

The larger NIO houses were done initially to help the company build a brand and to get users into the NIO brand and NIO user experience.

So those have 3- to 5-year lease terms.

So they will -- as going forward, you'll see our strategy will be to build more smaller NIO space-type operations and if we renew NIO houses, they won't be as big and as luxurious as the ones that are in the regional ones in Beijing and Shanghai and other large cities.

(foreign language)

[Interpreted] I'd like to add a few points about the NIO space.

Our corporation model for the NIO space is different from the traditional dealership or corporation because for us, we still control the touch point and the user relationship in the NIO space.

We have our own fellows directly to serve our users in those NIO space.

So it means that our distribution strategy will be direct to sales.

We just work with our partners for the allocation of facilities and initial investments at the beginning.

So basically, the cost is going to be based on the deals that we have made in the NIO spaces.

Ryan, we're actually very excited about NIO space.

Just as we begin to roll it out in September, we've seen a significant uptake in orders the last 3 weeks.

But this whole month of September has been doing much better than July and August.

July was quite slow, August a little bit better, and then September is really picking up.

And I think it's very important as we reach touch points.

Now by the end of this year, we'll be in over 100 cities and so -- and it's a very cost-effective way for us to increase our reach throughout China's large cities.

Next question comes from the line of Dan Galves from Wolfe Research.

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 break even at in the future?

And how much capital do you think that you need to kind of execute (inaudible) and have a reasonable balance sheet?

Yes, I mean, that's a very good question.

I think it's -- we don't have enough data.

We just started rolling out the NIO spaces.

And as you know, on the volume side, at the beginning of this year, when we did our forecast for this year, we didn't expect the -- China's auto market has never shrunk, as far as I know, and then it shrunk 14 months in a row.

So we want to see how -- and you also know we just released the new car, ES6.

So we would like to see how the momentum in the market to sales pick up.

We will do our budgeting at the end of the year.

By then, we'll have 3 or 4 months with dozens of NIO spaces to see how the economics work versus a traditional model, and I think is that you're going to see us cut cost significantly, Dan.

So you will see a much leaner operation from NIO.

And so I think as the volumes won't be the 120,000, 150,000 that we had talked about actually with these big NIO houses.

The other thing is we have R&D initiatives in place to reduce our battery pack cost significantly, which will come out next year as well.

So those will all be calculated together as we do budgets, and as we get more (inaudible).

It's a little bit too early, I'm not trying to avoid your question, but we don't have this budget for next year yet given all these -- the turmoil and all the changes in the market this year.

But give us until the end of the year.

That's fair and just a follow-up, if I could is the cash burn -- I was wondering if you could talk to us about kind of the level of prelaunch 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 cost 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?

The answer is yes.

We cannot burn -- we cannot do 3.2 billion in operating loss.

You see a significant reduction in Q3 and a further reduction in Q4.

we have to do it.

(inaudible)

I mean, don't forget, we were to cut headcount from 9,900 down to 7,800 and there's further to come.

And we have also have strict expense controls in place.

We're not expanding capital, we are spending capital for NIO spaces but not for a lot of other things.

We have not started adding any swap centers, there's not as much cash usage and with a lower headcount, and we also plan to spin-off some noncore businesses as well, which we would disclose as the deals get done.

William, did you want to add something?

Yes, yes, yes.

(foreign language)

[Interpreted] Right.

Louis mentioned, right now, we are taking some initiatives to cut down the costs and improve the efficiency.

With the ongoing financing projects and the cost reduction of ES6 as well as the initiatives to improve the operational efficiency, we believe that the company will have a sustainable development and operation.

(foreign language)

[Interpreted] The company has been very transparent over financials including cash flow and cash position.

We would like the investors community and the media to have a complete and fair view about the company's cash situation.

(foreign language)

[Interpreted] Recently, some media has reported some inaccurate numbers about our cash situation.

In the report, the media mentioned that we have operating loss that is around USD 5.7 billion, which is not accurate, so I'd like to use this opportunity to make some clarifications.

(foreign language)

[Interpreted] In their report they have counted in the accretion on the preferred shares issued to private equity investors prior to the IPO last year.

Our non-GAAP operating loss was RMB 22 billion, which is significantly lower than the USD 5.7 billion the media has reported.

Among the RMB 22 billion over 10 billion was spent on R&D average and the projects.

We have always been considered R&D and user service as our priority for operating investment and other spending.

We have filed 4,200 patents globally and build a very strong EV brand in the premium sector.

In terms of the service network, we have built a comprehensive service network number nationwide, covering user in 270 cities in China.

(foreign language)

[Interpreted] And everyone know that the R&D for the auto industry requires a long lead times.

We are now committed to developing the NP2 to use the advanced and cutting edge technology and autonomous driving technology in our products.

We said we have to raise sufficient capital to support our future developments.

As the only Chinese premium smart EV brand and a very premium global competitive brand, we are very confident that investors will support us.

Yes, I think -- I found the Bloomberg article very, very insulting.

I mean, the headline was USD 5 billion Loss.

As William said, that's not -- they didn't break out the fact that a lot of those were preferred shares pre-IPO that were marked up at the IPO.

So the real number is closer to USD 3 billion over 4 years.

And as William said, most of that is toward R&D.

So we weren't very happy with the way Bloomberg use that as a headline.

It's not very accurate.

Next question comes from the line of Paul Gong from UBS.

I have 2 questions.

The first one is regarding the regional promotion mentioned by Louis.

Given this involves a lot of details measures like the battery swap surface and some extra incentive including the financial lease.

Can you help us to quantify what is a rough amount per vehicle and is this only applicable to ES8 or it also applies to ES6 as well.

This is the first question regarding the incentive.

My second question is regarding the cost cuts on the cost of goods sold, especially for the procurement.

Have you renegotiate with your supplier on the cost cuts after the subsidy cuts in late June.

If yes, can you help us to give a rough idea how much has to cuts in the second half versus first half, especially on the battery side.

William, do you want to discuss the incentives?

And then Nick, you can discuss the financial impact of the battery and the supply chain?

(foreign language) William translate.

(foreign language)

Recently, we have launched the free power swaps services to the users if they drive their cars to the power swap station, which has been quite widely welcomed by our users.

(foreign language)

[Interpreted] Every day, we have around 1,000 users drive their cars to the powers swap stations to use this service.

But as you know, that power swap station cost, mainly includes the construction cost and the renting cost.

The electricity cost is actually quite low.

So for 1 power swap, it may cost around 50-kilowatt hours and this means that the cost will be around just RMB 50 and in this calculation it means that every day the additional cost will be around the RMB 50,000.

(foreign language)

[Interpreted] Actually, we have a very high home charger installation rate, which is close to 80%.

Overall speaking, the free powers swap facilities will not contribute a lot to the company's costs.

It will not impact on the cost very significantly.

Previous, we have already promised to our users that they can enjoy the inter-city or out of city free power swap services.

So this can be considered as part of the cost.

(foreign language)

[Interpreted] Compared with our competitor's free super charging services, our experience is much better.

(foreign language)

[Interpreted] Right now, there is a very popular concept among the users is that they would like to get a house close to the power swap station.

(foreign language)

[Interpreted] Thank you for your question.

Nick, do you want to talk about -- I think a lot of the supply chain cost -- we are renegotiating with a lot of suppliers as our volume begin to get larger.

Second of those, I think the battery pack cost 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?

(foreign language)

[Interpreted] In terms of the battery cost we can predict the quarterly battery cost reductions, this is mainly due to the volume increase by the industry and NIO in terms of the battery pack.

Right now, we think from now to the next year, Q4, so we will continue the reduction of the battery cost but right now, I cannot share with you about the specific percentage because we have reached agreement with our supply chain partners regarding this, but we believe that for the next Q3 and Q4, for the next year and Q3 and Q4, we should be able to reach significant cost reduction.

Thank you, Paul.

Go ahead, if you want to add.

Yes, Paul.

Yes, your first part of your question also involving what's the financial leasing facility.

Yes, we actually have a very successful financial leasing plan rolled out nationwide with seven partner banks.

Some of the big commercial banks I mean, in this serves the purpose of attracting a lot of traffic into our showroom and we can see a clear upward trend in the past 2 months and also in terms of per unit cost, is a function of the overall percentage of how many customers pay 100% or take the financial product and how much percentage do they take sort of interest subsidy programs essentially.

So namely, we used to have this RMB 100,000 battery leasing program.

Now, we will replace the majority away, a third-party financial institution, I think financial loans with a similar amount but we actually have a discount Interest subsidy on this.

So overall, I think the per-unit basis, on a rough estimate, I think it's roughly RMB 10,000 per unit.

RMB 10,000 per unit?

Yes, roughly.

Thank you, Paul.

Thanks, Nick.

Operator, is that concludes the hour?

Yes, certainly.

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

Okay, thank you, once again, for joining us on this quarter's conference call.

We look forward to talking to you next quarter.

Have a good evening or have a good day.

Good day.

Thank you very much.

Thank you.

This concludes today's conference call.

You may now disconnect your line.

Thank you.