Li Auto Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 28, 2024

There are 10 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Lee Auto's Second 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.

Operator

Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Speaker 1

Thank you, Kiely. Good evening and good morning, everyone. Welcome to Li Auto's Q2 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 Tianli begin with prepared remarks. Our President, Mr. Dong Hui Ma and Senior Vice President, Mr. James Liangjun 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 Lioto's earnings press release and this conference call include discussions of unaudited U.

Speaker 1

S. GAAP financial information as well as unaudited non GAAP financial matters. 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 U. S. GAAP measures.

Speaker 1

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. Please go ahead.

Speaker 2

The NEV penetration rate in China in July was approaching 50%, indicating higher adoption of smart electric vehicles versus ICE vehicles. As consumer increasingly favor leading brands with strong sales and substantial user bases, we expect the NEV market to further concentrate around top brands. In a complex and rapidly changing environment, in the Q2, we achieved strong sales performance by focusing on user value and operating efficiency. We delivered more than 108,000 vehicles in the Q2, representing an increase of 25.5% year over year. In the RMB 200,000 and higher NEV market, our market share grew from 13.6% in Q1 to 14.4% in Q2, ranking 1st among domestic auto brands.

Speaker 2

Since June, we have remained the top selling brand in RMB 200,000 higher SUV market in China across NEV and ICE vehicles. In terms of performance by model, all Li Auto models remained leaders in their respective market segments. In Q2, VL7 and VL8 claimed the top two spots in sales in the RMB300000 and over large SUV and EV market, while VL9 continued to be a top sales full size SUV among users. Additionally, production and delivery for Liao 6 continue to ramp up since its launch in April. Driven by its compelling product features and precise market positioning, LEO6 monthly sales deliveries monthly deliveries have consistently exceeded 20,000 units since June.

Speaker 2

LEO6 ranked 2nd in sales in the RMB 200,000 and higher passenger vehicle market, including both NEVs and ICE vehicles, only short of Tesla Model Y. Recently, we reached multiple delivery milestones. On June 21, our cumulative deliveries exceeded 800,000 vehicles, making us the 1st emerging new energy auto brand in China to reach this milestone ever. In July, we set a new monthly delivery record of 51,000 units per month. On August 21, our cumulative deliveries surpassed 900,000 units, an unprecedented achievement for Chinese Premium Auto Brands.

Speaker 2

I would like to take this opportunity to express my gratefulness to each member of Li Auto and for their hard work and also my gratefulness to all of our users for their recognition and support. In the Q2 of 2024, we recorded total revenues of RMB31.7 billion, up 10.6% year over year, while maintaining a healthy gross margin of 19.5%. We're confident that our operating performance will improve further in the second half of this year as VL6 completes its production ramp up and cost reduction and efficiency improvement efforts come to fruition. Vehicle delivery is the only the beginning of a typical user journey. Through frequent OTAs, we continually add new features and optimize our user experience, allowing the auto vehicles to grow with our users.

Speaker 2

In July, we released OTA 6.0 and OTA 6.1 to all Mega and L Series users, introducing major improvements across autonomous driving, smart space and smart electric drive features. I would like to highlight the substantial progress we made in autonomous driving. In July, we rolled out our HD Map List NOA to over 240,000 LiDAD Max users. This version is no longer dependent on prior information and therefore can operate on almost all roads across all cities in China. Our HD Map List NOA is very well received, which is also reflected in our accelerating order intake.

Speaker 2

Since this feature was introduced to beta users in May, the proportion of NLA test drives has nearly doubled. Following the rollout of OTA 6.0, the daily user engagement rate of City NOI has nearly grown has increased nearly eightfold and the average NOA map mileage per user has almost tripled. As of now, over 99% of users use our autonomous driving features regularly, with cumulative NOA mileage surpassing 1,110,000,000 kilometers. Additionally, user satisfaction and AD MAX take rate are both increasing steadily. Our autonomous driving system continued to iterate quickly.

Speaker 2

On our autonomous driving summer launch event on July 5, we introduced the industry's first JUUL system automatic autonomous driving solution, integrating an end to end model for E2E with an vision language model or VLM. We rolled out the new solution to approximately 1,000 data users by the end of July. The E2E and DLN models brought much stronger conflict resolution and reasoning capabilities to our autonomous driving system. The one model approach also facilitates rapid iterations. Our early bird beta testing version iterates 3 to 4 times weekly, with an average daily user engagement rate of over 70%.

Speaker 2

Additionally, we developed in house reconstructed and generated world models for training and validation purposes. This new JUUL system architecture has many benefits, including more efficient inference, faster model iterations and more human like route planning and better overall user experience. To cope with our growing product portfolio and greater number of vehicles owned, we continue to upgrade and expand our sales and servicing network. In Q2, we upgraded existing shopping mall stores and replaced some lower performing ones with new sales centers located at major auto parts. The proportion of sales centers has increased to 31%, with the total number of showroom display spots increasing by over 13% over the last quarter.

Speaker 2

As of July 31, 2024, we had 4 87 retail stores located across 146 cities, as well as 411 service centers and Li authorized body and paint shops operating in 220 cities in China. Looking at our charging networks, as of August 27, we had 733 charging supercharging stations in operation with 3,428 charging stalls. Alongside the ongoing build out of our own supercharging stations, we collaborated with a number of premium partners to launch the 1st batch of what we call lease selection supercharging stations in July. We will continue to expand the coverage and increase the density of our supercharging network. This improves the charging experience for our users, allowing more families to choose Lee Auto's products with no concerns.

Speaker 2

Looking ahead to the Q3 of 2024, we expect vehicle deliveries to be between 145,000 to 155,000 units. As a growth driven company, we're committed to creating products and services that exceed our users' expectations, while strengthening our brand in the new energy and premium car market. In the first half of twenty twenty five, we expect to launch our battery electric SUVs to serve a broader range of family users. With that, I will now turn it over to our CFO, Johnny, to walk you through our financial performance.

Speaker 3

Thank you, Lisa. Hello, everyone. I will now walk you through some of our 2024 Q2 financials. Due to time constraint, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the Q2 were RMB31.7 billion or $4,400,000,000 up 10.6 percent year over year and 23.6 percent quarter over quarter.

Speaker 3

This included RMB 13,300,000,000 or $4,200,000,000 from vehicle sales, up 8.4% year over year and 25% quarter over quarter. The year over year increase was mainly attributable to the increase in vehicle deliveries, partially offset by the lower average selling price, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the 2nd quarter was RMB25.5 billion or US3.5 billion dollars up 13.8% year over year and 25.3% quarter over quarter. Gross profit in the second quarter was RMB6.2 billion or 8 $50,000,000 down 0.9 percent year over year and up 16.9% quarter over quarter.

Speaker 3

Vehicle margin in the 2nd quarter was 18.7% versus 21% in the same period last year and the 19.3% in the prior quarter. The year over year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the 2nd quarter was 19.5%

Speaker 4

versus 21.8%

Speaker 3

in the same period last year and 20.6% in the prior quarter. Operating expenses in the 2nd quarter were RMB5.7 billion or US785.6 million dollars up 23.9 percent year over year and down 2.7% quarter over quarter. R and D expenses in the 2nd quarter were RMB3 1,000,000,000 or US416.6 million dollars up 24.8 percent year over year and down 0.7% quarter over quarter. The year over year increase was primarily due to increased expenses to support the expanding product portfolios and technologies as well as increased employee compensation as a result of the growth in the number of staff on a year over year basis. The sequential decrease was primarily due to decreased employee compensation, offset by increased expenses to support expanding product portfolios and technologies.

Speaker 3

SG and A expenses in the 2nd quarter were RMB2.8 billion or US387.4 million dollars up 21.9% year over year and down 5.5% quarter over quarter. The year over year increase was primarily due to increased employee compensation as a result of the growth in the number of staff as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to decreased marketing and promotion activities and employee compensation on a quarter over quarter basis. And income from operations in the 2nd quarter was RMB468 1,000,000 or $64,400,000 versus income from operations of RMB1.6 billion in the same period last year, a loss from operations of RMB584.9 million in the prior quarter. Operating margin in the 2nd quarter was 1.5 percent versus 5.7% in the same period last year and negative 2.3% in the prior quarter.

Speaker 3

Net income in the 2nd quarter was RMB1.1 billion or $151,500,000 down 52 point 3% year over year and up 86.2 percent quarter over quarter. Diluted net earnings per share per ADS attributable to ordinary shareholders was RMB1.05 or US0.01 dollars 4 in the Q2 versus RMB2 point 18 in the same period last year and RMB0.56 in the prior quarter. And turning to our balance sheet and cash flow. Our cash position remains strong and stood at RMB 97,300,000,000 or USD 13,400,000,000 as of June 30, 2024. Net cash used in operating activities in the Q2 was RMB 429,400,000 or $59,100,000 versus net cash provided by operating activities of RMB 11,100,000,000 in the same period last year and net cash used in operating activities of RMB3.3 billion in the prior quarter.

Speaker 3

Free cash flow was negative $1,900,000,000 or negative $254,900,000 in the 2nd quarter versus positive RMB 9,600,000,000 in the same period last year and negative RMB5.1 billion in the prior quarter. And now for our business outlook for the Q3 of 2024, the company expects the deliveries to be between

Operator

145,000

Speaker 3

1,155,000 vehicles, representing a year over year increase of 38% to 47.5%. The company also expects 3rd quarter total revenues to be between RMB 39.4 billion and RMB RMB42.2 billion or US5.4 billion dollars and US5.8 billion dollars representing a year over year increase of 13.7% to 21.6%. This business outlook reflects the company's current and preliminary view on its business situation and 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.

Operator

Thank

Speaker 5

you.

Operator

Your first question comes from Tim Sow with Morgan Stanley.

Speaker 6

So my first question is about the, autonomous driving. I think the Li Auto is diving into the NTM autonomous driving technology and expanding the team aggressively. How would Li Auto evaluate the return and efficiency of such ambitious investment? What could be the more relevant metrics for investors to assess the results and the commercialization progress of Li Auto's anti anatomic tri beam technology? That's my first question.

Speaker 6

Thank you.

Speaker 2

Since the beginning, our investment yield on autonomous driving has always been pretty high. And in terms of operating metrics, we'd like to focus on 2 key results. One is whether our user is willing to use it and second is whether users are willing to pay for it. So on the user front, metrics include the percentage time used or percentage mileage used. And since we launched HD Maplet in LA in July, users' usage rate has been increasing steadily as shown by both the daily active rate and the mileage driven have both increased many fold.

Speaker 2

On the market front, the improvement in NOA has positive effects on adoption rate since for potential users who come to our stores, the percentage of users who take NOA on test drive has increased more than twice. And the percentage of NOA AD MAX take rate on every model has also been increasing, especially cars priced above RMB 300,000. The percentage of AD MAX take rate has already approached 70%. And we believe the VLM and ETE model marks the beginning of establishing entry barriers in terms of R and D for autonomous driving because we believe that this generation is real AI powered autonomous driving. And AI further relies on large amounts of data and computing power.

Speaker 2

So only companies with the ability to invest in this data and training capability and also have a large enough user or vehicle base are able to become bigger and bigger in autonomous driving. And this improvement in autonomous driving will then further increase sales overall and also the number of ADMAX equipped vehicles. And this further in return allows us to invest even more in autonomous driving. So this is a very positive snowball effect.

Speaker 6

My second question is about the competition. Could management comment on the ongoing competition between Li Auto and Huawei? How do you expect the competitive landscape to evolve into second half as both brands like Li Auto and Idols keep striving for the tough spot in family SUV market with advanced smart driving features? That's my second question. Thank you.

Speaker 2

So first of all, Hema is our biggest competitor in the market. And our view is that we will continue to coexist with Hema in the long term in a very healthy fashion. And our attitude has always been to continually learn from Huawei, especially its R and D system and methodologies in operations and management. As for us as a startup company to have such a model to learn from is very critical.

Operator

Your next question comes from Bin Wang with Deutsche Bank.

Speaker 5

I've got 2 questions. Number 1 is about margin guidance for this year. Did you maintain a full year 20% gross margin guidance, especially for the Q3? Basically, you mentioned that AD Max version proportion increased to more than 70%. Is that going to be increased in the product mix and then the Q3 gross margin vehicle gross margin back to 20%?

Speaker 5

That's the first question. The second question is about your pure EV products. This is where you have been postponed vehicle by almost half a year. Did you change the design, especially with interior design because for software spec feature, it show like the design did not change yet. Most of customers prefer to change standard design to differentiate from the mega decline.

Speaker 5

Can you provide any comment on that? Thank you.

Speaker 3

Hello Amit, this is Johnny. I'll take the first question. I think last quarter, we guide vehicle margin of around 18%. Actually, finally, we deliver 18.7%, and this is an effort

Speaker 4

of the

Speaker 3

company and also the product mix and delivery the final delivery. So for the Q3, we believe our vehicle marketing will come back a little bit around will be over 19%, and the total gross margin will be about 20% in the Q3. Thank you.

Speaker 2

Li Mega has been a great validation of our capabilities in 800 volt high voltage drivetrain and also our R and D capabilities in this area, including the drivetrain efficiency of our high voltage platform and also the end to end charging experience and capabilities. And as we make improvements in autonomous driving, we have also become a Tier 1 player in autonomous driving. And similarly, our competitiveness in smart cockpit or smart space has also been very strong historically. So for our best SUVs, we really only need to solve 2 important problems. The first one is overall styling of the product.

Speaker 2

And the second one is to make sure that we have well over 200,000 charging stations by the time we start deliveries of our BEV products. So overall, we are pretty confident in the competitiveness of our fab electric SUVs. And our plan or our goal is to become a Tier 1 player in the premium fab market in 2 years' time.

Operator

Your next question comes from Tina Hao with Goldman Sachs.

Speaker 7

So thanks, management, for taking my question. First question is regarding our competition strategy into the second half of the year. So especially given that we don't have any new model launches for the second half, how are we expecting to maintain or even improve our sales volume? The second question is, since earlier this year, management has lowered overall volume guidance to a low end of 560,000 units for full year 2024. However, we also gave a quite high CapEx guidance at around RMB 15,000,000,000, I think, in Q1.

Speaker 7

So given the lowered volume guidance, how should we think about the pace of capacity expansion as well as new CapEx guidance? Thank you.

Speaker 4

Tina, this is James. I will take your first question. New models, only one of the reasons contributing to sales growth. And from my point of view, efficient sales operations is another way to promote sales. And that's what we are doing now.

Speaker 4

Looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online need. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. In addition, our recent increased publicity of autonomous driving also facilitated sales growth, in particular, the sales of ADMAX models. As the results show, our market share in the renminbi 200,000 and higher NEB market increased to 14 0.4% in Q2 2024 from 13.6% in the Q1. We aim to grow our market share in this segment further to 16% in the last quarter this year.

Speaker 3

Tina, this is Johnny. I think with James, as I just mentioned, 16% market share on the NEV market above RMB 200,000. And if we assume a healthy passenger vehicle market in the second half of this year, Yes, we are very confident our full year deliveries will finally over 500,000 deliveries of vehicles. And for the CapEx, we have optimized our CapEx pace. And in the beginning of this year, we estimate the CapEx is about $2,000,000,000 Currently, we estimate the CapEx will be $1,100,000,000 to $1,200,000,000 And for the free cash flow and for Q and Q and Q, the free cash flow has been positive.

Speaker 3

And with going with the optimize of the CapEx investment and also the improvement of the operation and efficiency, we are very confident that our free cash flow will come back to positive starting from the second half.

Operator

Your next question comes from Zhu Yingbo with Fitech Securities.

Speaker 8

So I have two questions. The first question is about end to end autonomous driving. So what's our view about our future plan in this area? And the second question is about Robert Taxi, how we see this trend? Thank you.

Speaker 2

First of all, on end to end VLM model, the iterations rate and performance actually exceeded our operations. Since we began our 1,000 early bird testing program in July. In less than a month, the model has gone through 9 iterations, on average, a new iteration every 34 days. The amount of data used for training has also increased from 1,000,000 clips at the beginning to 2,300,000 clips currently. And the model capabilities have also been increasing along the way.

Speaker 2

Many of our early bird testing users have posted many videos of their end to end driving on social media to showcase the great performance on city roads. The rapid iteration of the model won't be possible without highly efficient and automated testing capabilities. And we rely on world models to build a simulation testing system. And this system, using user feedback and using real world scenario reconstruction and generated technology, we have built a pool of a library of mistakes and testing scenarios for our models to make sure that our models are most fully tested and trained. This testing program can rate the models in terms of safety, comfort and many other dimensions.

Speaker 2

And we believe that there has been a fundamental change in autonomous driving R and D. It has increased from feature iteration to model capability iteration. And the speed of iteration is highly dependent on whether we have high quality and large amounts of high quality data and large amounts of computing power. And also what I mentioned earlier, which is the automated simulation testing program. So our end to end VLIM test system, we're planning for this system, we're planning to launch a greater scale or approximately 10,000 user scale testing program starting in September.

Speaker 2

And on your question regarding RoboTaxi, our view interestingly is that as we reach level 4 autonomous driving, the demand for taxi for ride hailing and taxi will actually decrease. And obviously, the market will take more time for us to observe and to see how it develops in the future.

Operator

Your next question comes from Paul Gong with UBS.

Speaker 9

So we have seen recent weak consumption sentiments in China, but the auto sales series continue to grow in terms of the sales volume. In the environment of the government stimulus as well as certain pricing adjustments upwards by the German premium brand, have you seen the competitive environment in the high end markets has sequentially improved recently?

Speaker 4

Okay. Paul, this is James. I will take your question. And I believe our recent robust sales performance has been largely contributable to our, lead serious competitive advantage from its product strengths. And our adaptability and ability to make swift adjustment in responding to the market.

Speaker 4

Apart from the traditional sales channels in the Q2, we ramp up our investment in online marketing resources such as Douyin and other online platform, achieving significant results as it brought our substantial increase in sales leads. Additionally, we are revolutionizing our sales system by giving more empowerment to regional level. This system allows each region to adopt regional sales strategy in a flexible approach on the condition of accomplishing profit target given by the company. This approach significantly enhances the sales potential to reach to each region. Last but not least, since June 2024, the NEV penetration rate in the RMB200000 and higher market has reached over 50%, which is a significant milestone.

Speaker 4

After this, I think the premium AAV industry will continue to consolidate. And I believe the auto will be one of the main beneficiaries doing this process. Thank you.

Speaker 9

So my second question is regarding the preparation work for the BEV models next year. Given the half a year adjustment of the launching time, will you adopt more new technologies than latest technologies? And how much of the scale have you been preparing for the supply chain in terms of the capacity?

Speaker 2

Our plan is still to launch multiple 800 volts high voltage fuel electric vehicles next year, 2025. In terms of R and D, everything is on track. So far, we have completed multiple rounds of low volume trial production of prototype vehicles. And according to our testing and including, for example, high temperature, high humidity, durability testing schedule, everything is going according to plan. And in terms of supply chain readiness, everything is also on track.

Speaker 2

The planned production capacity is sufficient to meet the sales targets. And the factories for manufacturing vehicles have completed production, completed construction. And the 4 major lines of stamping, welding, painting and assembly are also under testing and installation. We are planning to have key components developed in house on our BEV electric vehicles, and these have also been going through performance testing. External suppliers and our partners have also been developing and building out their production capacity on track.

Speaker 2

Everything is going according to plan. So overall, we're very confident to deliver our bev models next year according to plan.

Operator

Your next question comes from Yucan Ding with HSBC.

Speaker 8

So I got two questions. The first, as last season management talked about reallocate the model display in the channel to maximize the product mix and bring more exposure to the high end model like L8. How does that go versus expectation? The second question is about there's been quite some restructuring and adjustment in the first half. Could you refresh the full year R and D expense guidance and highlight us change, if any?

Speaker 8

Thank you.

Speaker 4

Okay. This is James. I will take your first question. As we open more stores in auto parks, the number of display spots for LH has gradually recovered. We also developed the new online sales channels, including Douyin and to ensure sufficient sales leads for L8.

Speaker 4

So now L8 sales has been steadily improving since April. Currently, its monthly deliveries has recovered to the range of 6000 to 7000 units.

Speaker 3

This is Johnny. For the R and D, we expect the full year GAAP R and D will

Speaker 2

be

Speaker 3

below RMB12 1,000,000,000.

Speaker 5

Thank you.

Operator

Your next question comes from Jing Chong with CICC.

Speaker 8

So my first question is about the still the distribution network. After the review of the first half of twenty twenty four, we have made a lot of improvements. So just as Mr. Liqiang mentioned about, we increased the proportion of the central stores. So can you share more about the detail behind the above changes about the logic and our sales on the distribution network expansion and also entering into the lower tier cities?

Speaker 8

And also what we should do more to prepare for the launch of the new models next year?

Speaker 4

Okay. Jing Chen, this is James. I will take your question. So first of all, we are sticking to our direct sales model and we are aiming to display all models in our showrooms. And that's what we are doing now.

Speaker 4

Our retail stores in auto parks have larger floor spaces and have the capacity to display 9 to 11 vehicles. And we will display all of our models in these stores. So since the start of this year, we have been making many adjustments towards our sales channels. We are gradually replacing low performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open large high quality stores there.

Speaker 4

In terms of our achievements so far, the proportion of our stores in auto parks has increased from 34% last year end of last year to 31% at end of June 2024. We plan to further increase the proportion to close to 50% by end of this year. And regarding your question that next year for the BEV, when we launch our BEV models, so we will continue to increase the proportion of the car park stores next year, so to facilitate our display sports. The showroom capacity per store also improved. Alongside the increased proportion of stores in auto parks, the number of showroom vehicle per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024.

Speaker 4

And we plan to further increase this metric to cover 6 units per store by end of this year. Our total number of showroom display stores has increased from 2,000 642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by end of this year. Thank you.

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. Yanan Zhang, please go ahead.

Speaker 1

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

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