TD SYNNEX Q1 2024 Earnings Call Transcript

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May 20, 2024

There are 10 speakers on the call.

Operator

Standing by for Lee Auto's First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Zhang, Investor Relations Director of Li Auto.

Operator

Please go ahead, Janet.

Speaker 1

Thank you, Ken. Good evening and good morning, everyone. Welcome to Li Auto's Q1 2024 earnings conference call. The company's financial and operating results were published in our press release earlier today and are posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr.

Speaker 1

Xiang Li and our CFO, Mr. Johnny Tier Li to begin with prepared remarks. Our President, Mr. Dong Hui Ma and our Senior Vice President, Mr. James, Tianjin Zou will join for the Q and A discussion.

Speaker 1

Before I continue, please be 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.

Speaker 1

Further information regarding risks and uncertainties is included in certain company filings with the U. S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward looking statements, except as required under applicable law. Please also note that L'Eoto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial matters.

Speaker 1

Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li.

Speaker 1

Please go ahead.

Speaker 2

Now translating for Mr. Li. First, I'll begin with a review of Li Auto's Q1 performance. In the Q1, we delivered over 80,400 vehicles, up 52.9% year over year. According to China Automotive Technology and Research Center, the NEV market priced over RMB200000 grew by 24.8% year over year during the Q1.

Speaker 2

While our growth rate far exceeds that of the market, making us the leader among all premium and UV brands. Driven by the vehicle delivery growth, our total revenue for the Q1 reached RMB 25,600,000,000 a year on year increase of 36.4%. Our gross margin for the Q1 remained healthy at 20.6% despite the launch of Li Mega, the changeover of the L Series and the following price adjustments. In the long run, our robust balance sheet with cash reserves of over of nearly RMB 100,000,000,000 will continue to support us to focus on user value creation and firmly invest in R and D as we continue to offer products and services for families that exceed their expectations. Nevertheless, we have admittedly encountered multiple challenges since the start of the year from both internal operations and changes in the external environment.

Speaker 2

Our performance this quarter fell short of our expectations made at the beginning of this year. In response, we immediately took action and swiftly implemented adjustments across our business, including an organizational restructure and workflow optimization. We're confident that these initiatives will enhance our internal operating efficiency and improve the quality of our decision making going forward, allowing us to focus more on creating and delivering user value. Turning over to products. We've released LiMaggio on March 1, our first HPC bev model and high-tech flagship NPV for large families.

Speaker 2

Built on our latest 800 volt battery electric platform and equipped with Q1 5C battery, Li Mega is one of the fastest charging mass produced vehicle passenger vehicles in production today. During China's Labor Day holiday, the average charging time for Li Mega users at our supercharging stations was only 12.8 minutes, significantly alleviating energy anxiety. On April 18, we launched BL6, a 5C premium family SUV that offers young families who are seeking family vehicles priced below RMB 300,000. LII L6 offers a spacious interior and superior configurations and can support a CLTC range of 13 90 kilometers. In terms of safety, LEO6's vehicle body is designed to meet the most stringent safety testing standards in the industry.

Speaker 2

Combined with this ever improving full scenario AEV systems that comes with a standard on the vehicle, the L6 offers robust safety for families on

Speaker 3

the road. With

Speaker 2

the official launch of the LEMEGA and LEL6 as well as the 2024 model year VL7, L8 and L9, we now offer a product portfolio that caters to a wide range of family users at price points ranging from RMB200000 to RMB600000. Facing challenges in the competitive market landscape in late April, we swiftly responded to evolving user needs with the introduction of a new pricing scheme that received very positive feedback and resulted in a substantial increase in store visits. During the Labor Day holiday, weekly order growth hit an all time high. In particular, VL6 received over 41,000 orders within its initial launch sales period from April 18 to May 5. We're sparing no efforts to ensure a robust supply and production ramp up for LEO 6 to drive a rapid increase in deliveries.

Speaker 2

Along with the release of our new models, we continue to make improvements in our autonomous driving platform. In mid May, we began releasing the AB Pro 3.0 to all of our users with an upgrade to a large model based BV architecture with improved functionalities, including highway NOA with driver takeover mileage of over 1,000 kilometers. City LCC capable of identifying traffic lights and real time to autonomously stop and go at intersections and automated parking that can manage complex parking spaces. We launched public beta testing for the AD Max 3.0 in May, where approximately 1,000 users tested our latest City NOA feature, which does not require high definition maps and covers all roads nationwide. We plan to deploy the city NOA in all ADMAX vehicles through OTA in Q3 this year after we complete the initial nationwide testing.

Speaker 2

Looking at our charging network, we currently have 404 supercharging stations in operation with 1770 charging stalls. During the May Day holiday, we provided over 54,000 complimentary charging sections and waived charging fees for users across our models. At the same time, we provided over 96,000 charging sessions to NEB users across the countries across different brands. We will continue to expand and accelerate investments in our supercharging network and aim to have over 10,000 charging stations charging stalls in operation on highways and cities in China by the end of this year, continually improving the ultra fast charging experience for all of our BAB users. With respect to our sales network, we have established a presence across all 1st year, new 1st year and second tier cities as well as 89% of 3rd tier cities nationwide.

Speaker 2

This year we'll steadily expand our reach into additional cities to boost the penetration rate of any needs in China. Moreover, our service network is also expanding very rapidly, ensuring high quality services for our users. As of April 30, 2024, we have 481 retail stores covering 144 cities as well as 361 service centers and Li Auto authorized body shops operating in 2 10 cities across the country. Looking ahead to the Q2, we expect vehicle deliveries to be between 105,000 110,000 driven by robust market demand and our new products and recovery in orders. By fine tuning the pace of our operations and upgrading our matrix organization, I'm confident that we will further enhance operating efficiency, increase user value and pursue healthy growth.

Speaker 2

Next, I will turn it over to our CFO, Johnny.

Speaker 3

Thank you, Jim. Hello, everyone. I will now walk you through some of our 2024 Q1 financials. Due to time constraints, I will now address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the Q1 were RMB25.6 billion or $3,600,000,000 up 36.4% year over year and down 38.6% quarter over quarter.

Speaker 3

This includes RMB 24,300,000,000 or US3.4 billion dollars from vehicle sales, up 32.3 percent year over year and down 39.9% quarter over quarter. The year over year increase was mainly attributable to higher vehicle deliveries, partially offset by the lower average selling price due to the different product mix and pricing strategy change between the 2 quarters. The sequential decrease was mainly due to decreased vehicle deliveries, which were affected by seasonal factors related to Chinese New Year holiday and lower than expected order intake in March. Cost of sales in the Q1 was RMB20.3 billion or $2,800,000,000 up 36.1 percent year over year and down 36.3% quarter over quarter. Gross profit in the Q1 was RMB5.3 billion or US731.9 million dollars up 38% year over year and down

Speaker 4

46% quarter over quarter.

Speaker 3

Vehicle marketing in the Q1 was 19.3% versus 19.8% in the same period last year and 22.7% in the prior quarter. The vehicle margin remained relatively stable year over year. The sequential decrease was mainly due to lower average selling price as a result of pricing strategy changes in the Q1 and truck adjustments of warranty reserve in the prior quarter based on updated estimates of cost of future claims. Gross margin in the Q1 was 20.6% versus 20.4% in the same period last year and 23.5% in the prior quarter. Operating expenses in the Q1 were RMB5.9 billion or 800 and $12,900,000 UP 70 1.4 percent year over year and down 13.1% quarter over quarter.

Speaker 3

R and D expenses in the Q1 were RMB3 1,000,000,000 or 420 $2,300,000 up 64.6 percent year over year and down 12.7% quarter over quarter. The year over year increase was primarily due to increased employee compensation as a result of growth in number of staff as well as increased expense to support the expanding product portfolios and technologies. The sequential decrease was mainly in line with timing and progress of new vehicle programs. SG and A expenses in the Q1 were RMB3 1,000,000,000 or $412,400,000 up 81% year over year and down 8.9% quarter over quarter. The year over year increase was primarily due to increased employee compensation as a result of the growth in number of staffs as well as increased rental and other expenses associated with the expansion of sales and servicing network.

Speaker 3

The sequential decrease was mainly due to lower vehicle deliveries. Loss from operations in the Q1 was RMB584.9 million or $81,000,000 versus income from operations of RMB 405.2 million in the same period last year and RMB3 1,000,000,000 in the prior quarter. Operating margin in the Q1 was negative 2.3% versus positive 2.2% in the same period last year and the positive 7.3% in the prior quarter. Net income in the Q1 was RMB 591.9 $591,100,000 or $81,900,000 down 36.7 percent year over year and 89.7% quarter over quarter. Diluted net earnings per ADS attributable to ordinary share was RMB0.56 or 0.08 dollars in the Q1 versus RMB0.89 in the same period last year and RMB5.32 in the prior quarter.

Speaker 3

And turning to our balance sheet and cash flow. Our cash position remains strong, as stood at RMB98.9 billion or $13,700,000,000 as of March 31, 2024. Net cash used in operating activities in the Q1 was RMB3.3 billion or $462,900,000 versus net cash provided by operating activities of RMB7.8 billion in the same period last year and RMB17.3 billion in the prior quarter. Free cash flow was negative RMB5.1 billion or negative US700.1 million dollars in the Q1 versus positive RMB 6,700,000,000 in the same period last year and a positive RMB 14,600,000,000 in the prior quarter. And now for our business outlook.

Speaker 3

For Q2 of 2024, the company expects the deliveries to be between 105,000 and and 10,000 vehicles, representing a year over year increase of 21.3% to 27.1%. The company also expects 2nd quarter total revenues to be between RMB 29,900,000,000 and RMB 31,400,000,000 or $4,100,000,000 and $4,300,000,000 representing a year over year increase of 4.2% to 9.4%. This business outlook reflects the company's current and preliminary view on its business situation and the market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q and A session.

Speaker 3

Thank you.

Operator

Thank Your first question comes from Bin Wang with Deutsche Bank.

Speaker 5

The first question is about volume. Basically, your guide level second quarter will be 105,000 units to 110,000 units, which means the second half you need to sell 360,000 units, which means monthly volume will be close to 60 1,000 units because mega volume is quite small and the MLI will be late. So just the EI EV, the monthly volume will go to 60,000 units stable, which is a challenge. So if you have some pressure to achieve this number, would you further revise on the pricing to FIFO volume or actually you just want to compromise the profit and give up the volume target. My second question is about gross margin.

Speaker 5

Previously, you guided full year gross margin will be 20%. If you want to maintain a 20% gross margin after your pricing cut, what's the key driver for the margin? Is it because the volume increase when the monthly volume go to $60,000 or other driver for maintaining a 20% gross margin? Thank you.

Speaker 6

Okay. This is James. I will take your first question. First of all, the L6 series has been widely recognized by users for its product strength and price point. And during the initial sales period from 18th April to May to 5th May, the cumulative orders of L6 reached over 41,000 units, which was excellent sales performance.

Speaker 6

The order intake of L6 series has maintained strong growth momentum posted the initial sales period. Additionally, after we implemented the new pricing strategy for the auto L7, L8 and L9, Their order flow has also showed ongoing improvements. In summary, our sales momentum has gradually improved, and we are optimistic about the continued ramp up of the monthly sales going forward. And I will hand over to our CFO for the second question.

Speaker 3

Hello, Amit. This is John. I think to us, the most important part after Q1's challenge, as Dhee Chen mentioned, especially after March 1. I think the most important cost at the current stage is still a recovery. I think it's also everyone's primary concern and I, the company.

Speaker 3

And as we all know, the auto industry has a significant economy of scale. So as such sales can come back, I believe the gross margin pressure will be somehow released. So and also with the L6 additionally, outside the sales growth, Product mix optimization will be another factor, which can impact our gross margin. And as Alyssa mentioned, we implemented a lot of several actions to control the organization degree and fee, which will help the margin to come back. And but to remind you, I think we faced those challenges since March.

Speaker 3

So the Q2 will be the most difficult for the company in this year. Thank you.

Operator

Your next question comes from Tim Tsao with Morgan Stanley.

Speaker 7

So just want to follow-up regarding the sales problem because as management just mentioned the competition in China EV market has been getting worse year to date. Although Li Auto just launched 2024 facelifts in the L6 and also had the reasonable price adjustment, What would be the company's strategy to further boost the volume front here? If sales stay suppressed, would the company ever consider to upgrade the spec or further the cut prices to provide the actual impact to the sales volumes into second half, not just to L6, but also to the L789 and the battery EV pure EV into second half? So that's my first question.

Speaker 2

1st in terms of pricing strategy, in fact after the price adjustment in April, we've received consistent feedback that the current pricing is very competitive in the market. And it's also been very well received by our customers, as shown in continued order intake growth since April. So we don't have any further plans for price cuts. In terms of gross margin, we always believe that for a healthy company, sales and gross margin are the 2 most important operating metrics. And as a company, as a 9 year old car company, Li Auto has continually held ourselves against these two important metrics.

Speaker 7

So my second question is about expenses. So based on Li Auto's updated sales target for 2024 and 2025, what would be the reasonable sizes of employees, sales networks, sales and marketing expenses as well as R and D spending? And when will the benefit of the cost savings be meaningfully reflected in the auto's financial? That's my second question. Thank you.

Speaker 3

Hi, Tim. This is Johnny. I think given the New Year's new sales growth target, the company has adjusted very quickly in the last less than 2 months to adjust resource allocation across various attacks to better align with this year's operating objectives. Just as Yihan just mentioned, we focus a lot on operating efficiency. I think you had read that in the last 4 years operation of the company.

Speaker 3

We expect this adjustment will have some initial impact on results, but starting from Q2, most of them will impact operating efficiency after the second quarter. Thank you.

Operator

Your next question comes from Tina Hao with Goldman Sachs.

Speaker 4

So my first question is in terms of the new store sales network expansion plan. So previously, we had a target of 400 new stores this year. So just wondering now with our new strategy, what is the target number there? And also among the stores, what's your split between the city center stores as well as like city, maybe suburban stores? And in terms of different city tiers, what is your consideration there?

Speaker 4

Thank you.

Speaker 6

Hi, Tina. This is James. I will take your question. And so regarding our stores expansion plan, we will first of all, we will plan our sales and service networking at once according to sales demand, while expanding our sales network in terms of quantity, we will also continuously optimize the quality of each retail store by offering more showroom vehicles and improving the store space considering we now have more and more different models. So this year, we have already opened 43 new retail stores with more than half of them having the capacity to display over 9 showroom vehicles.

Speaker 6

In the meantime, we have closed some smaller ones. As of May 19, the number of total retail stores reached 488. So this is the latest number. And by city tiers, as you just asked, we have achieved 100% coverage of all first tier cities, new first tier cities and the second tier cities and 89% coverage of 3rd tier cities. We also had 215 showrooms across the country to broaden our coverage of more cities, which help us to penetrate to the Tier 3 and Tier 4 cities.

Speaker 6

Aligned with our new sales target, we are gradually changing our pace of market penetration in order to better suit the current business needs. As to the store types of types for our new stores, we have gradually increased the proportion of stores in automotive parks over the past year. In the long run, we will continue to increase the percentage of stores in automated parks as we expand our model portfolio and improve our brand awareness and the influence. Thanks for your question.

Operator

Your next question comes from Yingdao Zhu with ScitEx.

Speaker 4

So I have two questions. The first one is about an OA about autonomous algorithm and the difference of this algorithm and how we see the future of this autonomous thing. The second question is about product. How we plan for the pure easy product later this year and next year? Thank you.

Speaker 2

First of all, on the question regarding City of NOA, there are 3 major paths in this area, completely dependent on HD Map, partially independent and simply independent of HD Map. And obviously, the completely independent solution is the most difficult path because it doesn't rely on the coverage and update frequency of HD Maps as long as there's navigation coverage, City NOI can work. So our plan is to release a completely independent HD Map independent ADEMAX solution to all users in Q3 this year for City NOI. And fundamentally fully independent solutions is real artificial intelligence in terms of autonomous driving. It uses data driven models to use data to train models to mimic human behavior and in place for completely rule based solutions.

Speaker 2

And Tesla's concept of end to end big model is similar concept driven by data driven model solution. It's very easy to reach consensus on this conceptual solution, but to implement it requires a lot of data and computing power. And this is not something that all car companies are capable of or have the resources of achieving. Therefore, we believe that different companies will select one of those 3 solutions based on their current situations and capability and resources. And these different choices would result in different products and user value creation.

Speaker 2

The second question on our later BEV products. First of all, we will not be releasing our BEV SUV later this year. The latest plan is to release it in the first half of next year and for two reasons. The first reason is we believe in order to sell premium fab SUVs, necessary requirement is to have enough branded charging stations. We believe correct level is to get similar levels of Tesla in China.

Speaker 2

That would be the perfect timing for releasing our next bad product. And secondly, another constraint is the number of parking spots in stores, in store parking spots, display spots. And this is very critical for us to be able to sell multiple cars across multiple price points and to supply a consistent sales of over 10,000 units per model. And in order to achieve that, we need about an additional 500 to 600 display spots across the country. Otherwise, we will be only increasing the number of products rather than the number of sales volume.

Speaker 2

And that was the exact issue that L8 ran into in the past few months because we decreased the displace box of L8 by 40%. But that is being recovered by now and we are adding more displace box for the VL8. So to summarize, enough charting stations and enough incremental display spots are 2 critical and necessary conditions for selling our fab SUV product. And we believe we'll reach this point in the first half of next year.

Operator

Your next question comes from Paul Gong with UBS.

Speaker 8

So two questions for me. The first one is, sooner or later, we're going to have the full product line within the BEC. Do you consider building the dedicated brands or channel for the BEV's products? The second question, given the huge cash reserve and the share price performance recently, will you consider share buyback at some point? Thank you.

Speaker 6

Okay. This is James. I will take your first question. And regarding the BEV and our REV models. So we will stick to our direct sales model in the domestic market and we will strive to showcase all of our product in our retail stores and showrooms.

Speaker 6

In the meantime, we have initiated internal discussion on differentiated retail strategy, and we may launch some innovative pilot progress in the future. And we will share additional relevant details in due course. And I hand over to our CFO, John Lee, for your second question.

Speaker 3

Hi, Paul. For the share buyback, currently, we don't have a such plan. And we will periodic make some assessment based on company's financial position, capital market and other priority more prioritized cash needs for our meeting.

Operator

Your next question comes from Yucan Ding with HSBC.

Speaker 9

I got 2 questions. The first is to ask about the growth conviction, especially our total addressable market is mainly hinged on the family users that's largely middle cost relevant, but it seems to be melting down. So is the growth coming from the increasing TAM or the relative competition versus the other peers offering, but we're seeing above RMB200 ks above increasing model supply? And second question is whether the company will consider harvesting some low hanging fruit in the overseas market with relevance to the domestic market, it seems the pricing and the competition is more favorable and the global OEM are moving marginally towards hybrid, the range extender seems to be a good solution.

Speaker 2

So on the first question, our focus will remain on the market of NEV vehicles pressed over RMB 200,000 for family users. And this will continue to be our focus in the mid to long run because we firmly believe that there's still much to be done in the market in terms of product and there are many areas where we can improve to better serve our users and create value for them in the long term.

Speaker 6

Okay. I will take your second question. And regarding the overseas market strategy, so as the auto vehicle models became increasingly popular overseas, we will accelerate the establishment of our after sales servicing networks in order to provide the best service experience for our overseas users. We will build an after sales service network in international market, where we already have an established user base. We plan to start our own after sales network, after sales service network in Central Asia and in the Middle East this year, which is ongoing right now.

Speaker 6

We will select appropriate dealers for market expansion in overseas countries and regions outside Western Europe and North America. Given the adjustments of this year's sales target, we will focus our efforts in the domestic market this year. We will share more details in due course.

Operator

Your next question comes from Ming Sun Lee with Bank of America.

Speaker 5

So recently media reported company have certain reorganization. And in the future, what is your strategy for your reorganization? And what department or what area you will input more resource to develop?

Speaker 2

So in this most recent organization restructuring, one most important change is that we've established a new department called quality operations. And the thinking behind this change is to allow our business units to really focus on high quality decision making and operating efficiency instead of focusing on processes and operating these processes. And typically for an organization change, it takes about 12 months to 24 months to see real results. So we think a good time to reevaluate will be sometimes in 20252026.

Speaker 5

So this year, we can see Lioto's development in NOA is speeding up. So right now, for your client base, how important do you think the ROA for your customer base? And after if Tesla opened the FSD version 12 China will at least change consumers' behavior. And in the future, if some auto company, they don't have NOA functions on the car, are they able to sell car

Speaker 3

First

Speaker 2

of all, we firmly believe that NOA makes it easier and more safer for our users to drive. And as we've seen in the latest release of our Mapless NOA beta version in May, from the feedback from the first group of users, they drive over 65% of their total mileage using CityNLA. And this penetration rate is a good testament to their to how widely accepted our latest version of NLA here among our users. And in terms of tablet FSDV12, we believe that the next stage of competition across for smart electric vehicles, autonomous driving will be a primary reason for our users as they consider buying a car. FSD V12, after it becomes available in China, will only make users focus even more on autonomous driving functionalities as well as experience, which will further increase enhance the importance of the creation of industry standard and the development of the technology in the industry.

Speaker 2

And again, in return, drive different car companies to invest even further in improving the performance of NLA features.

Operator

As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Zhang, please go ahead.

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to contact Liotta's Investor Relations team. That's all for today. You may now disconnect your lines. Thank you.

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