Li Auto Inc.
Q3 2022 Earnings Call Transcript

Published: 9 Dec 2022

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Investor Relations of Li Auto. Please go ahead, Janet.

[Janet Zhang:]

Thank you, Matt. Good evening, and good morning, everyone. Welcome to Li Auto’s third quarter 2022 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted on the Company's IR website. On today's call, we have our President, Mr. Kevin Yanan Shen; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li; together with our senior management, Mr. Donghui Ma and Mr. Yan Xie, will join for the Q&A discussion. Before we 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 recurrent 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 and the Hong Kong Stock Exchange. The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto'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 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. With that, I will now turn the call over to our President. Please go ahead, Kevin.

[Kevin Yanan Shen:]

Thank you, Janet. Hello, everyone, and thank you for joining our call today. I will review our third quarter key highlights. In the third quarter, we navigated our model succession and launch cycle as well as the challenging macro environment and supply chain constraints. Against this backdrop, we delivered 26,524 vehicles, up 5.6% year-over-year. Despite our supply chain bottleneck, we delivered over 10,000 lead airlines in September, the model's first four months of production. This marked the first time that the Chinese branded premium model priced over RMB400,000 achieved monthly sales of more than 10,000 vehicles, demonstrating Li L9 as a topic among full-size SUVs for family users. This success was due to the exceptional strength of our team, their outstanding management of the Li L9 ramp-up process and their skillful collaboration with our supply chain partners. As Li L9 continues to surpass user expectations with class-leading features in drivability, safety, interior space, passenger experience and smartness, demand remain robust, providing constantly strong order inflow for the model. Li L9 has been the sales champion among full-size SUVs in China since its delivery started. Benefiting from Li L9 strength, our total delivery in October reached 10,052, representing a 31.4% year-over-year increase. This followed by a record breaking 15,034 vehicle deliveries in November. As always, we would like to extend the sincere gratitude to our over 200,000 Li ONE users, we will continue to adhere to higher the industry service standards and continue to improve the performance of Li ONE through OTAs. On September 30, we launched Li L8, a six-seat premium family SUV that succeeded Li ONE. We also unveiled Li L7, a seven-seat flagship family SUV on the same day. We commenced the deliveries of Li L8 in November. Let me provide more details of this vehicle. Li L8 employs our new generation all-wheel drive range extension system and boast over 100 features in their standard configuration. It's available in two trims

[Johnny Tie Li:]

Thank you, Kevin. Hello, everyone. I will now go over some of our financial results for the third quarter of 2022. To be mindful of the length of this call, I will address financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details. Total revenues in the third quarter of 2022 were RMB9.34 billion or US$1.31 billion, representing an increase of 20.2% from RMB7.78 billion in the third quarter of 2021. This included RMB9.05 billion or US$1.27 billion of vehicle sales in the third quarter of 2022, up 22.5% year-over-year and 6.6% quarter-over-quarter. This increase was mainly due to our delivery of Li L9, starting in late August, which raised our average selling price in the third quarter of 2022. Revenues from other sales and services were RMB296.4 million or US$41.7 million in the third quarter of 2022, representing a decrease of 23.9% from the same period last year, an increase of 19% from the second quarter of this year. The year-over-year decrease was attributable to the sales of automotive regulatory credits in the third quarter of 2021, which didn't recur in the third quarter of 2022. The quarter-over-quarter increase in revenue from other sales and services was mainly due to the increased sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the third quarter of 2022 was RMB8.16 billion or US$1.15 billion, representing an increase of 36.8% year-over-year and an increase of 19.1% quarter-over-quarter. The increase in cost of sales was mainly driven by higher average cost of sales due to our delivery of Li L9 starting in late August and a provision related to Li ONE as we lower its order forecast considering the stronger-than-expected market demand for Li L9 and our accelerated launch of Li L8. A provision in the amount of RMB802.8 million or US$112.9 million was made based on our updated order forecast for Li ONE after the launch of Li L9 and Li L8. Gross profit in the third quarter of 2022 was RMB1.18 billion or US$166.2 million, decreasing 34.8% year-over-year and 37.1% quarter-over-quarter. Vehicle margin in the third quarter of 2022 was 12% compared with a 21.1% in the third quarter of 2021 and 21.2% in the second quarter of this year, mostly due to the provision related to Li ONE as mentioned. Excluding this impact, the vehicle margin was 20.8% in the third quarter of 2022. Going forward with our production ramp-up and the responsible cost management, we expect to realize greater economies of scale and drive cost down further, putting us back on track to hit our profitability inflection point. Gross margin in the third quarter of 2022 was 12.7% compared to 23.3% in third quarter of last year and 21.5% in the second quarter of this year. Operating expenses in the third quarter of 2022 were RMB3.31 billion or US$465.6 million, increasing 73.4% year-over-year and 15.9% quarter-over-quarter. R&D expenses in the third quarter of 2022 were RMB1.8 billion or US$253.6 million, up 103.1% year-over-year, and 17.8% quarter-over-quarter. The year-over-year increase was primarily driven by increased expenses associated with future models, as well as increased employee compensation as a result of our growing number of R&D staff. As quarter-over-quarter increase was primarily driven by increased expenses associated with the future models. Selling, general and administrative expenses in the third quarter of 2022 were RMB1.51 billion or US$211.9 million, up 47.6% year-over-year and 13.8% quarter-over-quarter. The year-over-year increase was primarily driven by increased employee compensation as a result of growth -- of the growth in our staff headcount, as well as increased rental expenses associated with the expansion of the Company's sales network. This quarter-over-quarter increase was primarily driven by increased marketing and promotion activities and increased employee compensation as a result of the growth in our staff headcount. Loss from operations in the third quarter of 2022 was RMB2.13 billion or US$299.4 million compared a loss of RMB97.8 million in the same period last year and a loss of RMB976.5 million in the second quarter of this year. Net loss was RMB1.65 billion or US$231.3 million in the third quarter of 2022 compared with RMB21.5 million in the third quarter of last year and RMB641 million in the second quarter of 2022. And now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits, short-term investments, long-term time deposits and long-term financial instruments that were included in long-term investments totaled RMB55.83 billion or US$7.85 billion as of September 30, 2022. Net cash used in operating activities in the third quarter of 2022 was RMB508.3 million or US$71.5 million. The change in net cash used in operating activities over both the third quarter of last year and the second quarter of this year was mainly due to the increase in payment related to inventory purchase, partially offset by the increase in cash received from the customer. Free cash flow was negative RMB1.96 billion or negative US$275.3 million in the third quarter of 2022. And now for our business outlook, for the fourth quarter of 2022, the Company expects deliveries to be between 45,000 and 48,000 vehicles, representing an increase of 27.8% to 36.3% from the fourth quarter of last year. The Company also expects fourth quarter total revenues to be between RMB16.51 billion and RMB17.61 billion or US$2.32 billion and US$2.47 billion, representing an increase of 55.4% to 65.6% from the fourth quarter of last year. This business outlook reflects the Company's current and preliminary view on the business situation and market condition, which is subject to change. Going forward, we believe our navel and collaborative corporate culture, execution discipline and strong balance sheet will allow us to face challenging markets head on and continue to deploy capital and resources efficiently to focus on our products and innovation initiatives and drive our long-term growth. I will now turn the call over to the operator and to start the Q&A session. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Tim Hsiao with Morgan Stanley. Please go ahead.

[Tim Hsiao:]

[Foreign Language] So my first question is about vehicle sales. So how should we think about the stable monthly run rate the sales of L7, L8, L9 in aggregates next year? Could the sales of the whole L family models stay at around like 25,000 to 30,000 level on a monthly basis as previously expected? And in the meantime, considering the decline in store traffic in October and November due to the COVID, does Li Auto's order backlog so far remains strong and adequate enough to bolster the delivery momentum into first quarter 2023?

[Kevin Yanan Shen:]

Yes. Tim, you want me to answer your first question first, right? Okay. About the outlook of L9, L8 and L7, so we can only make a judgment based on the competitiveness of this product and also outlook based on the market size of each of these product segments. So, our outlook is that for L9, the stabilized monthly sales should be around 8,000 to 11,000. That's our estimation; and for L8 will be 10,000 to 15,000, yes -- 14,000; and L7, now it's quite early to do estimations. So basically, the -- for the Q1 outlook, we believe the beginning of Q1, our backlog will continue to drive strong delivery performance. And of course, after Chinese New Year we need to bring more order in. We have strong confidence that in Q1 we'll continue to beat the overall EV market performance. But Tim, as you mentioned, there are some factors that's beyond our control, like COVID, but we believe we will beat the overall EV market performance.

[Tim Hsiao:]

[Foreign Language] So my second question is about the battery EV, the pure EV. With the current update on Li Auto BEV pipeline, where the Company followed its original plan to launch two BEV models next year within 2023?

[Xiang Li:]

[Foreign Language] So, we were pretty certain that next year, we'll be releasing our first electric vehicle. And so, the two big events are next year. One is the release of the first electric vehicle and the other one is the delivery -- commence delivery of L7.

[Tim Hsiao:]

[Foreign Language] Thank you very much for the updates.

[Operator:]

Our next question will come from Olivia Hsu with Goldman Sachs. Please go ahead.

[Olivia Hsu:]

[Foreign Language] Now let me translate my two questions. The first question is about the pricing and competition. Recently, Tesla has announced a meaningful pricing cut in Chinese market. What is Li Auto's response to that? And how should we examine such pricing competition next year? Is it expected to be more severe? The second question is on the supply chain management. As Kevin mentioned in the briefing, there exist supply chain uncertainties. Could you please clarify what's the key bottleneck for now? And as the COVID-related policies changed a lot recently, what is the expected impact on the auto production in the next several months? Thank you.

[Kevin Yanan Shen:]

Thank you, Olivia. Yes, let me take your question. Your first question about the price cut from Tesla side. Actually, we see a little impact on our order flow because our products right now, L9 and L8 is -- the price segment is higher than Tesla's main selling model, yes. And we would expect the same kind of situation in next year. So yes, we still have a strong confidence that in this industry turmoil we'll continue to lead. For your second question, how about the supply chain, yes, of course, we are glad to see the new COVID policy that ultimately -- the -- with the pandemic will resolve, actually, the supply chain will back to normal. But as we should all know that for the next two, three months, based on the trend we see in other foreign countries once the policy change, we may see here and there, the manpower shortages. Right now, we already see some of these kind of manpower shortages impact our production, especially in our supplier side. Yes. So we are working closely with our supply chain partners, try to mitigate all these risks, and we even start to prepare some of the workforce by ourselves. Whenever there is a shortage, we'll send the workforce to help our supply partners. Yes.

[Olivia Hsu:]

Got it. That’s very clear. Thank you.

[Kevin Yanan Shen:]

Thank you.

[Operator:]

Our next question will come from Ming-Hsun Lee with Bank of America. Please go ahead.

[Ming-Hsun Lee:]

[Foreign Language] My first question is regarding your decision to make silicon carbide by yourself. And compared to your peers, some choose to build the internal capacity for factory, some decide to design chips by themselves, but what is the decision -- why is the decision is made for this capacity build? Thank you.

[Kevin Yanan Shen:]

Thank you, Ming. This is Kevin. Let me take this question. Actually, just to clarify, we are not in Suzhou manufacturing the silicon carbide chip set. Actually, we are making the power drive module with the chipset. So while we choose to design our own power module, it's because the power module is closely integrated into our five-in-one electric motors and our three-in-one electric motors. So therefore, the thermal solution and the size of this module are very important for our competitiveness and energy efficiency. That's why we choose to build this module bus design and build these modules by ourselves. Yes, just to clarify.

[Ming-Hsun Lee:]

And my second question, the new energy vehicle [indiscernible] will change in Shanghai in 2023. So could you remind us, what is the current contribution from Shanghai area? And how do you see the impact after the policy change? Besides that, would you speed up your battery EV launch in order to make the potential overload after the priority change? [Foreign Language]

[Kevin Yanan Shen:]

Thank you. So Shanghai accounts for 6% to 5% of our sales volume. Yes. So of course, the policy change, of course, will have some impact on our sales in Shanghai. But actually, as we should all know, most of the Li Auto customers are not buying a new car. They are kind of upgrading their cars. So in theory, we already have the car plate, so therefore we are actively working with Shanghai -- with our Shanghai to build a new sales strategy for next year to mitigate the impact of this policy change. But again, overall, Shanghai is only like 6% of our sales total volume. And about the BEV, actually just now BEV already in the scopes that next year, we're going to have a launch of our first BEV car, yes.

[Operator:]

[Operator Instructions] Our next question will come from Xu Yingbo with CITIC. Please go ahead.

[Xu Yingbo:]

[Foreign Language] My first question is about Li ONE has got some cost about in RMB800 million cost for [indiscernible] so what is the principle for this cost? And how can we expect for the future potential cost of produced ONE? And my second question is about metric organization, could you please talk more about that? Thank you.

[Johnny Tie Li:]

I will take your provision question. This is Johnny. And for this provision, it's already set to the raw materials, which means the parts already in our inventory or the purchase commitment we made to our suppliers for those inventory and parts commitment, we don't plan to make it into vehicles in the future. So, the provision was based on the lower of cost and net realizable value based on our estimate and negotiation with the vendors. So it's an estimate. So, when I finally realized in the next two quarters, there will be some minor adjustment to the final amount comparing with quarterly gross margin is not very significant.

[Kevin Yanan Shen:]

Yes. Second question, I think, Li Xiang will take

[Xiang Li:]

[Foreign Language] Actually, since we founded Li Auto, we've always dreamed of becoming a $1 trillion or RMB1 trillion company. And as you can see, next year we're expecting to become RMB100 billion company already. So personally, I have never run -- built a company from $0 billion to $1 billion -- $100 billion company from scratch. And most of my colleagues have not had that experience either. Most of my colleagues, either they come from companies that are smaller than that or they come from companies that became that ours years ago or they work off of a remote office does not headquartered in China. So we have seen this issue a long time ago. So since 2019, we've been starting to study software and hardware companies that have reached the size of RMB1 trillion very, very deeply to see how they managed their business at different stages and what we can learn from them. And one thing in common that we've seen is that, they've all transformed to a matrix organization when they reach the level of about RMB10 billion. And so for Li Auto, when we started from zero to one, speed was efficiency, speed meant everything. But as time went on, we saw that in a very long value chain where quality and efficiency is very important. In our one to 10 stage, quality is efficiency. So a successful enterprise will need to be able to -- for their internal purposes, we need to have a very robust planning perception execution process. And for their customers, they need very strong R&D from product, sales and services. So the matrix organization was the only way to manage this entire process end to end. To make an analogy, the horizontal teams make sure that they built the road, they maintain the roads and the roads are good to run for vehicles. And the vertical teams are the ones that build cars, maintain the fleet and make sure the cars run smoothly on the road. And these cars are on the well built and maintained roads are responsible for delivering good services and products to our consumers, which forms a very healthy cycle. So we first started piloting this thought in what we call IPD, integrated product development, and the process has actually been validated by the success of L9, L8 and L7, where you might have seen the success of Li ONE, which in a certain view could be a coincidence. But through the application of IPD, we've made that a certainty so that we can replicate the success with our current and ongoing future product development. So we are now in the process of applying our pilot process on a much larger scale to make sure that our company continue to turn out successful products and services to our customers.

[Operator:]

And our last question will come from Jing Chang with CICC. Please go ahead.

[Jing Chang:]

[Foreign Language] So my first question is about the effect of [indiscernible] in the third quarter, our R&D and selling expense increased to RMB1.8 billion to RMB1.5 billion [indiscernible]. So, you gave a small guidance on next year's expense ratio? And considering that next year, we will have a brand-new BEV platform model on the market and a more complicated and a more channel network layout. So, in addition, in terms of R&D [indiscernible] mainly to our in-house research.

[Johnny Tie Li:]

This is Johnny. I will take your first question about R&D expenses. This year's R&D expenses will tap as we guided, will be around US$1 billion, which is RMB7 billion for the whole year. It's as expected. And for next year, currently, we see over RMB10 billion to RMB12 billion depending on our final decision on some investments we will start next year in 2024. So, it will be RMB10 billion to RMB12 billion for next year.

[Xiang Li:]

[Foreign Language] If we look back to 2020, until now, our R&D spending mostly fall into three areas. The first area is product development, which you see similar exercises in traditional car OEMs. The second one is technological platforms, including our EREV platform, our high-voltage BEV platform, our Smart Space platform, autonomous driving platform. These are shared platforms that all of our vehicles use. The platformization allow us to maximize cost or cost efficiency, R&D efficiency and user experience and make sure that they're consistent across all products of our company. The third one is new and fast-growing is our system development, which includes supercomputing, the supercomputing platform, cloud computing platform and our IT infrastructure. These are very long-term but crucial investments for our company. And in terms of organization, the product and technological platforms are run by Mr. Ma Donghui and system development is run by our CTO Xie Yan. And in terms of spending level, we spent the most today in technical platforms followed by product and then thirdly, system infrastructure. And going forward, we expect to see more spending in system and infrastructure, which might eventually overtake technological infrastructure, because we think in the longest term the most crucial investment or a competitive advantage lies in our system and infrastructure capability.

[Jing Chang:]

[Foreign Language] My second question is about product design and planning. In the family car market segment, how can you exclude with product depreciation in addition to different models such as SUV or MPV and also different number of seats, what can be looking forward to get a greater differentiation?

[Xiang Li:]

[Foreign Language] Our philosophy is the same as before. We still believe that price and seat configuration is the best way to segment the market. And this has been partly tested by the success of L9 and L7, which is soon to start delivery. In that, these three cars actually have attracted three very different user groups. If you look at L9, it pretty much attracted premium car buyers at the same price point or even higher than the current price level of L9. And L8 pretty perfectly replaced Li ONE and kind of share a very similar customer base as Li ONE. And L7 has been attracting a lot of young family users aged between 25 and 35. So price -- as you can see, pricing and seat arrangements have allowed us to very efficiently cover the market and different user groups and there has even been some surprises in the case of L7, where we've been able to tap into new age groups that we hadn't -- we weren't expecting before.

[Operator:]

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

[Janet Zhang:]

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Alto's Investor Relations team. Then that's all for today. Thank you, and have a good weekend.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.