Hello, ladies and gentlemen. Thank you for standing by for NEO Incorporated's second quarter 2026 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, Mr. Rui Chen, AVP and head of IR, corporate finance and strategic investment of the company. Please go ahead, Rui.

Good morning and good evening, everyone. Welcome to a new second quarter 2026 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 Mr. William Li, Founder Chairman of the Board and Chief Executive Officer, and Ms. Danny Chu, Chief Financial Officer. 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 views expressed today. Further information regarding risks and uncertainties is included in certain sitings of the company with the U.S. Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Niel's earning press release and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. Please refer to Niel's press release which contains a reconciliation of the unaudited non-gap measures to comparable gap measures. With that, I will now turn the call over to our CEO, Mr. William Li. William, please go ahead.

Hello everyone, and thank you for joining NIO Inc.'s Q2 earnings call.

In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%.

In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the company delivered a total of 107,658 smart EVs, achieving year-over-year growth of 49.4%. In Q2, the NIO, Envo, and Firefly brands all achieved year-over-year and quarter-over-quarter growth in both sales volume and average transaction price. More specifically,

The new brand delivered 60,945 vehicles, leading China's passenger vehicle market with transaction prices above 350,000 RMB across all powertrain types. The Anvo brand delivered 29,124 vehicles, demonstrating strong growth momentum. And the Firefly brand delivered 17,589 vehicles, maintaining its leadership in the high-end compact car market.

In July and August, the company delivered 35,534 and 35,836 vehicles respectively.

The total deliveries are expected to range between 108,000 and 111,000 units.

In terms of financial performance, in the second quarter, the company's overall profit margin is 18.4%. This is due to the further optimization of high-profit models' continuous hot sales and cost structure. Despite the pressure of the industry raw materials and chip costs, the overall profit margin remains at 18.5%.

On the financial side, in Q2, the company's gross margin stood at 18.4%. Driven by continued strong performance from the higher margin products and ongoing cost optimization, despite pressure from sharply rising raw material and chip costs, the vehicle gross margin remained solid at 18.5%. The growth margin of other cells was 17%, with services and community-related businesses continuing to contribute to profitability.

二季度,公司保持non-gap經營利益盈利, 並達成正向經營現金流和自由現金流, 現金儲備進一步提升至567億元人民幣, 經營基本面進一步夯實, 為公司長期可持續增長提供了更強的資金保障。

In Q2, the company continued to generate non-gap operating profit as well as positive operating cash flow and free cash flow, further increasing its cash reserves to 56.7 billion RMB. This helped strengthen the company's business fundamentals while laying solid groundwork for its long-term sustainable development.

接下来我跟大家交流一下公司产品研发和运营方面的进展。

Now turning to our products, R&D, and operations.

In the future, on July 9th, the full-scale technology flagship SUV ES8 5-seater version will be officially launched and will be delivered soon. With the 5-seater space advantage, it is better to satisfy the needs of users to diversify the full-scale travel. Since the launch of the new ES8, the market has continued to be strong. It has been launched for 335 days and has achieved the 140,000 new cars delivered. In the market of 400,000 used cars and large SUVs, the market remains in the lead. In the study of Jielan Road users' recommended value, the future ES8 will be the first pure electric car to achieve a double champion in sales and user reputation. At the same time, the technology administrative flagship SUV ES9 will begin to deliver at the end of May, gradually transforming the traditional luxury original SUV user group. In June and July, are the top sellers in the used car market with a sales price of more than 500,000 yuan in China. The continuous release of flagship models will further consolidate the leading advantage of future brands in the high-end pure electric market.

For the new brand, on July 9, the flagship SUV ES9 launched and began deliveries of the five-seat version, catering to more diverse user needs and scenarios with its five-seat layout and spacious interior. The ES8 has maintained strong momentum since launch and achieved the 140,000 units delivery milestone in just 335 days, leading China's passenger vehicle segment in the 400,000 RMB price range and the large SUV segment. In the Net Promoter Score Survey by Landroads, the new ES8 achieved the highest NPS among BEVs, ranking first in both sales volume and product reputation. In the meantime, The flagship executive SUV ES9, which began deliveries in late May, has started winning over users from traditional luxury fuel-powered SUVs, leading in sales volume among passenger vehicles with transactional prices above 500,000 RMB in June and July. The continued strong performance of new brands' flagship models has further strengthened its leading position in the premium BEV market.

L90 delivered a total sales of over 60,000 units in the first half of the first half of the first half of the first half of the first half of the first half of the first half of the first half of the For the Anwu brand, the L90 surpassed 60,000 deliveries within its first year since launch, ranking number one among the large battery electric SUVs priced around 300,000 RMB. The L80 continued to see steady deliveries.

Winning broad vaccinations with its exceptional cargo space and scenario-based functionality. In Q2, leveraging the outstanding product strength of the L90 and L80, the Anvo brand became the sales leader among large SUVs priced below 300,000 RMB. In addition, the upgraded L60 better meets the needs of its target users, further strengthening Anvo's sales momentum.

The Firefly brand has been number one in market share among high-end compact cars for 15 consecutive months, maintaining its leadership in the segment. Its precise product positioning and unique brand identity

continue to win the hearts of target users.

In terms of smart driving, on June 18th, the latest version of the new world model was rolled out to over 700,000 new and on-board users.

As the second major release this year, the new version further leveraged the word model architecture and closed-loop reinforcement learning, delivering significant enhancements in functionality and user experience. User adoption has continued to grow. Since the upgrade, new users' knowledge with Urban NLP has increased by 92.8%. The upgrade also covered all Envoy users whose knowledge with Urban NOA increased by 127.8% following the upgrade.

依托顶尖的模型算法, 系统架构与工程落地能力, 未来是行业首家实现通用芯片平台 与自研芯片平台系统贡献开发 重复发版的科技。 我们实现了跨平台, 跨品牌用户都能获得 全市民周期持续领先的自驾体验, 为用户带来长用长心的 智能出行体验。

Powered by leading model algorithms, systematic architecture, and strong engineering capabilities, NIO is the industry's first car company to develop and roll out smart driving systems in parallel across general-purpose and proprietary chip platforms, with a common software branch and synchronized releases. Users across different technology platforms and brands can enjoy a continuously evolving industry-leading smart driving experience throughout the vehicle lifecycle.

In terms of sales service network, so far, we have opened 165 future centers, 376 future spaces, 441 open stores, 420 service centers, and 93 delivery centers. In the J.D. Power customer service satisfaction research in 2026, we have achieved the highest satisfaction of luxury brands and Chinese brands in the future. Since the establishment of the list, future brands have maintained this result. On the sales and service front, so far the company has 165 new houses, 376 new spaces, 441 almost stores, as well as 420 service centers and 93 delivery centers.

In JD Power's 2026 Customer Service Index Study for NEVs, The new brand ranked number one among both premium brands and Chinese brands, maintaining its top position since the rankings were first introduced. Our high-quality services have earned widespread recognition from both the industry and users.

充電網絡方面,截至目前, 我們在全球已累計佈局4,123座換電站, 建成超過30,294根超充裝和目的地充電裝。 8月7日, Weilai is the 4th generation and the 5th generation of Huanlian station. The 5th generation of Huanlian station can realize the 3 brands of Weilai, Le Dao and Yingwu Chong, all-car configuration, covering from small cars to large SUVs. The operation and service efficiency of the 5th generation station is significantly improved, further strengthening the ability to serve and open to the outside world. At the same time, relying on standardized and scaled energy operating system, In terms of the power network, at present, the company has 4,123 power swap stations and 30,294 power chargers and destination chargers worldwide.

On August 7th, NIO's 4,000th power swap station went live. marking the launch of its first 5th generation station. The 5th generation can support battery swaps for all models of Miele, Anvo, and Firefly, covering a wide range of vehicle sizes, from compact cars to full-size SUVs. With significantly enhanced operational and service efficiency, the 5th generation station is able to provide enhanced external services and support open operations. Leveraging standardized power operations at scale, the company is also exploring value-added businesses, such as electricity trading, further unlocking the commercial value of battery swapping.

On July 23, we will continue to stick to the pure electricity development route and create a sustainable and better future with our users.

On July 23rd, NIO was named by Time Magazine as one of the world's most sustainable companies of 2026, becoming the only Chinese automaker on the list. We will continue to advance our BEV roadmap, shaping a more sustainable and brighter future with our users.

Currently, the competition in the Chinese automotive market has entered a new stage. The competitive pattern has led to several key changes. Pure electricity penetration continues to increase rapidly, All-in-one has become the mainstream form of power in the market. The industry has entered the brand purge period into the brand purge period. Brands have become important factors for users to choose products. Competition has also been a single product competition, turning into the final stage of comprehensive institutionalized competitiveness of enterprises. For a long time, we have always focused on all-in-one, focused on high-end, focused on the effort of institutionalized construction, in line with the latest development trend of the industry. In the future, we will enter a new high-quality growth cycle. We are very optimistic about achieving certain operating goals.

As China's automotive market enters a new phase of competition, the landscape is undergoing several important changes. First, with the rapid growth of BEV penetration, BEVs have become a mainstream powertrain in the market. Second, the industry is moving from a period of brand ambiguity toward greater brand clarity. with brand becoming an increasingly important factor in consumers' purchasing decisions. Third, the final round of competition is shifting from product-level competition to competition in comprehensive system capabilities. For years, we have remained committed to the premium BEV strategy and have been building our system capabilities. This puts us well aligned with the industry's evolution and positions us for a new phase of high-quality growth. We are confident in achieving our operating targets.

感谢大家的支持,现在Stanley将为大家介绍2026年第二季度的财务业绩,请Stanley.

Thank you for your support. With that, I will now turn the call over to Stanley for Q2's financial details. Over to you, Stanley.

Thank you, William. Let's now review our key financial results for the second quarter of 2026. Our total revenues reached RMB32.1 billion. up 69.1% year-over-year at 25.9% quarter-over-quarter. Vehicle sales were 29.1 billion RMB up 80.1% year-over-year and 27.5% quarter-over-quarter. The year-over-year growth was mainly due to the increased deliveries and a higher average selling price driven by a more favorable product mix. The quarter-over-quarter increase was driven by higher deliveries. Other sales were 3.1 billion RMB, up 7.2% year-over-year, and 12% quarter-over-quarter. The year-over-year growth was driven by increased sales of parts, accessories, and after-sales vehicle services, partially offset by decreased sales of used cars and technical research and development services. The quarter-over-quarter increase was due to increase in revenues from used car sales and parts accessories and after sales vehicle services sales. Looking at margins, vehicle margin was 18.5% compared with 10.3% in Q2 last year and 18.8% last quarter. The year-over-year improvement was driven by a more favorable product mix. while quarter-over-quarter vehicle margin remained stable. Overall gross margin was 18.4% versus 10% in Q2 last year at 19% last quarter. The year-over-year increase was mainly due to the increased vehicle margin and the quarter-over-quarter slight decrease was mainly due to gross margins from vehicle sales, provision of power solutions, and sales of parts, accessories, and after sales vehicle services. Turning to OPEX, R&D expenses were 2.1 billion RMB, decreased 28.7% over year, and increased 13.8% quarter over quarter. The year over year decrease was mainly driven by lower personnel costs in R&D functions due to organizational optimization, reduced design and development costs from different development stages, and improved operational efficiency. The quarter-over-quarter increase was mainly due to the incremental design and development costs for new products and technologies, as well as the increased personal cost in research and development functions. SG&A expenses were 4.4 billion RMB, increased 11.6% year-over-year. and 22.5% quarter-over-quarter. The year-over-year increase was mainly driven by increase in sales and marketing activities associated with new product launches, while the quarter-over-quarter increase also reflected increased sales and marketing activities associated with new product launches, as well as higher personnel and related costs. for marketing functions and share based compensation for general corporate functions. Loss from operations was 0.3 billion RMB, down 92.9% year over year, and up 12.4% quarter over quarter. Excluding share based compensation expenses, adjusted profit from operations was 0.2 billion RMB. Net loss was 0.5 billion RMB, showing a decrease of 89.4% year-over-year and an increase of 59% quarter-over-quarter. Excluding share-based compensation expenses, adjusted net profit was 26.1 million RMB. Furthermore, our positive operating cash flow grew substantially and we achieved positive free cash flow. Our cash position strengthened further. with 56.7 billion RMB in total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits. That wraps up our prepared remarks. For more information and the details of our audited second quarter financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our queuing session. Operator?

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can re-enter the queue. Your first question comes from Bin Wang with Deutsche Bank.

Thank you. My question is about the order flow sustainability about your ESA and ES9 ECUV. We know that in the premium ECUV markets, some of your peers, competitors, although show knife on a few, several months.

So can you explain why that and how you differentiate to fit in the competition in the high end premium ECUV market?

Thank you.

Thank you, Wang Bin. Our main flagship products, ES9 and ES8, have very strong demand. In August, ES8 delivered 10,999 units, nearly 11,000 units. In the 11-month period, we delivered 140,000 units. In September, In September, we will definitely receive the delivery of the 150,000 units. In a year, we will deliver more than 150,000 units. So its demand is still very strong. I have also talked about the Chinese car industry. Because the new products are falling too fast, there are very few cars that can continue to be popular. So ES8 should be said that our new ES8 has broken Thank you for the question. Regarding new flagship models, including the ES8 and ES9, they will continue to see strong demand. For the ES8 in August, we delivered around 10,099 units. And in 11 months, we have delivered more than 140,000 ES8s.

And in September, it's going to witness its next milestone of 150,000 deliveries, which means that in less than one year since its launch, it has already surpassed 150,000 unit deliveries. So the demand for the models are pretty strong. And as previously we've talked about how the products are quickly iterated and introduced in the Chinese automotive market, For a new model in the market, it's somewhat difficult. We're having difficulty to lost its popularity and attention by the market. But for the ES8, it may be the first model that is breaking away from this market trend.

Our technology flagship SUV ES9 is still in high demand. Our low-end special version and our... The current waiting period for the signing board is still more than three months. Almost four months, more than three months. The demand is still very strong. From the current point of view, if we compare August and July, because in July we have some pre-ordered orders. If we look at August, we don't have pre-ordered orders. Our new orders,

And regarding our flagship executive SUV, ES9, it also sees strong demand since its launch, especially for the Horizon Edition and the Signature Edition. Right now, for users placing an order, they will need to wait for three months or nearly four months to pick up a new car. And if we look at the sales number of the ES9 in August and July, as in July we were still consuming some pre-orders, but if we are making a comparison between the incremental orders in July and August, we actually have seen a growth from July to August. So we are also confident in the continuous popularity and also demand for the ES9.

and so on.

And also, one thing worth noting is that around three quarters of the ES9 users are actually from non-existing new users, from users outside of the new user community. This also shows that ES9 has successfully reached out to a broader user base.

There are several reasons for the popularity and the demand for the ES9. The first is the technology innovation.

On the ESMI, we have introduced or debuted several thousands of industry-first or industry-leading technologies, and tech innovation is still so far a very important competitiveness and also differentiation of our products.

第二个就是我们产品的定义是精准满足了在高端市场的商务兼顾家庭的用户或者这种商务需求的用户的

And secondly, the product definition has precisely catered to the needs of the users in the premium segment, especially users buying the car for their business needs and also for their family occasions, where our cars have catered to both their emotional as well as functional needs. And our users also speak highly of the product experience.

The third one is our charging service network. The charging service network and our social service system have brought us a very hard-to-reduce system-based advantage. According to this brief report, our social service has won three consecutive titles in the new energy car brand. We are also in J.D. Power's social service satisfaction research in 2026.

And the third is the holistic and one-of-a-kind experience enabled by our charging and swapping network as well as our after-sales services which are actually a systematic capability difficult to replicate by the competitors. According to the land road recent study on the aftermarket satisfaction on the new energy vehicles, we've been topping the list for three times consecutively. And also in J.D. Powers recent research in terms of the post-market satisfaction on the new energy vehicles, we are also ranking the first for several years in a row. So for the premium segment, such experience centering on the services and post-market services are also very important.

The last point is also a very important point. I have talked about the Chinese car market many times. In the market of new and old cars, from the wonton period of the brand to the clear period of the brand, the user's purchase decision has changed from parameters in the past few years to choosing a brand. We have established a high-end pure electric market We have established a brand new word The user actually formed a wide-ranging form of a BBA's next future choice High-end fully electric future choice such a market consensus If you look at our future brand in the purchase of our future users In the reason for the purchase of this decision The reason for the brand is already more than 30% That is also a proof of our future in the high-end market have already established a brand image.

And the fourth one is, as also previously talked about, the entire automotive market is now shifting from a period of brand ambiguity to a period of brand clarity, where users' purchasing decisions was previously largely based on the specifications of a product, and now their decision is mostly driven by the brand. And in that case, NIO has also established a pretty solid foothold and a clear brand awareness in the premium battery electric vehicle market. Among many users, they naturally believe that if they are going to choose a car to replace their existing Mercedes, BMW, and Audi, then NIO will be their natural choice. And if they are looking for a premium BEV model, then NIO is also their go-to car. Among our existing NIO users, we've also studied their purchasing decision, where we find that the brand reputation and awareness is already accounted for more than 30% of their purchasing decision. This has further proven our solid foothold in the premium BEV market.

那我们从这个中端的上显的数据去看的话,二季度呢,NIO brand在中国市场的平均的成交价是40.6万元。 And if we further look at the numbers by the insurance associations, in Q2, the average selling price of the new brand was 406,000 RMB, far higher than the prices of Mercedes, BMW, and Audi.

and ranking the first among all the mainstream premium brands. And in July, the average selling price of the new brand was over 430,000 RMB.

We believe that the scarcity of this brand and its competitiveness will become a very important basis for the long-term participation in market competition of these three brands in the future.

and we believe that the scarcity of such premiumness of our brands as well as the competitiveness of our brands across all three brands will also become a long-term foundation for our competitiveness going into the future.

Thank you, Wang Bin. Thank you.

Your next question comes from Tin Sao with Morgan Stanley.

Hi, this is Tim from Organ Stanley. Thanks for taking my questions and congrats on the third consecutive profitable quarter. I have two questions. The first one is about Envo. Because compared to the robust growth of the Neo and the Firefly brands, we noticed Envo's customer conversion and order momentum have been relatively moderate to RAM since launch. So I just want to know that how is the progress in rest and adjustment to customer incentive in the selling strategies and looking forward what further changes with management plan to effectively improve Anvo's order momentum. Yeah, that's my first question. Thank you.

Thank you, Tim. Anvo's market competition is indeed much more intense. Compared to NIO and Firefly, Indeed, they are participating in a very intense market competition, whether it is from the number of brands or the number of models. If we look at it, the results obtained from the launch of this brand to the present are actually very good from a segment market point of view.

Thank you for the question. It's true that Anvo is actually in a more competitive market than Neo and Firefly, where the level of competition, the intensity level of competition in terms of the number of brands and also the number of models are also much more intense than that of Neo and Firefly. But if we look at the Anvo's overarching performance since its launch, especially from its specific segment and market, it has actually done some good progress and achievements.

First of all, let's look at the market price. In the first half of this year, we all know that the market price of Chinese used cars is very challenging. However, the average market price of Le Dao's brands has exceeded 240,000 yuan, which is more than last year. In fact, in the first half of this year, only eight brands in China achieved a price increase. So Le Dao is one of them. In terms of the, if we look at the average selling price of the ANWO products, as we all know that the passenger vehicle market in the first half of this year

was a bit challenging. And even amid these challenges, Anwo still achieved an average selling price of 240,000 RMB, achieving also significant growth year over year. And in the first half of this year in the Chinese automotive market, only eight brands managed to achieve increase both in their sales volume as well as the average selling price, where Anwo is one of these eight brands. So in terms of the average selling price, Anwo is even outperforming. from traditional luxury brands. So if we perceive Anvo as a premium family-oriented brand, it is actually achieving a pretty good baseline from this brand definition perspective.

The second is that the comprehensive competitiveness of Le Dao products is still very strong. If we look at the conversion rate from sales clues to orders, this is very leading in the industry. In other words, will be able to see the success rate of our products once they get in touch with Le Dao. We can also see that our main challenge now is the brand's popularity. The brand's popularity of Le Dao is indeed going to be similar to that of the future brands five or six years ago. So, we hope that through more active and proactive ways, through cross-border cooperation, In terms of the overall product competitiveness, we also see some good progress and also foundation.

especially a good conversion rate from self leads and opportunities all the way to orders, which means that when users get to know about the brand and products, it's also more possible and likely for them to place an order on the onboard product. So right now, for the onboard brand, the challenge is more about its overall brand awareness, where its current brand awareness is maybe comparable with Neil's awareness around five to six years ago. So right now, our focus is also to enlarge the brand awareness and also the popularity through also different collaborations, offline activities, and also engagement with more targeted communities.

第二个举措就是我们会加快未来乐道盈虎虫三个品牌共用的Sky门店的布局, 持续加强销售网络的建设,能够让乐道的品牌更多的触达,

And the second actions we are taking is to keep rolling out our sky stores where we can host the new Anwu and Firefly brands under the same roof. With that, we are able to further expand our sales network and also to really introduce our Anwu brand to more users in the lower tier cities.

will continue to launch new products to serve a broader family user group. Of course, in terms of direction, we will still maintain the position of Le Dao as a high-quality family car brand. We will not enter such a market too low. We will also balance the relationship between quantity and horsepower. In general, we think that the Chinese market is now And the third action is to also introducing new onboard products so that we can also reach out to broader family user base. But in the meantime, we will still

maintain Onvo's positioning as a premium, high-quality, family-oriented brand. So we will not be very aggressive in entering into the entry-level segment. We will still strike a balance between the sales volume and also the vehicle gross margin. Right now in the Chinese automotive market, we actually see a vacancy where there is no such brand that is comparable with the upscale are product lines of the Toyota or Volkswagen that can serve the needs of the family users. This is where we see the opportunity for Envo to develop its awareness in that specific segment.

Tim, thank you.

Thank you, Ruilin, for sharing the details. My second question is a quick one. Just want to note that if management can share next year's new model, refresh in the key launch milestones, for the Neo, Envo, and the Firefly, the three brands on that group.

Yeah, that's it. Thank you.

Thank you, Tim. From the perspective of future brands, of course, we will have some new products in the 5th and 6th seasons. Of course, the market should be able to understand this. Onward, we will have a new strategic product launch next year, which will further enrich our product line. From the point of view of FiveFlight, the FiveFlight brand is this type of car. Of course, we will continue to carry out special versions and subsequent technical replacements. In general, FiveFlight is a bit like iFORM.

Thank you for the question. For the new brand, for next year, we will be introducing new products coming from the five and the six series product lines. I believe that the market is also aware of some of our latest plans. Where for the Envo brand, next year, we're going to introduce a major strategic new product that will also help to enrich our existing product lineup. and for the Firefly brand, we will keep this single model strategy but keep rolling out special editions and also technology upgrades. So for Firefly, it's a bit like taking the iPhone approach where it will stay in this same product but with new editions.

Thank you, team. Thank you, Rayleigh.

Your next question comes from Paul Gong with UBS.

Hi, William. Thanks for taking my question. My first question is regarding your vehicle gross margin outlook for the next two quarters. Some bits are ongoing cost inflation. We're aware that the memory costs continue to go up. And I just want to listen to your thoughts. How does that impact the vehicle gross margin? Thank you.

Hello, Paul. This year, there is a lot of pressure on the cost side. According to what we talked about before, for the future, from the beginning of March this year, the cost of memory, general materials, and batteries has actually risen. In terms of the entire second quarter, compared to the end of last year, the average cost of a single car has risen by about 140,000 yuan per car.

Thank you for the question. It's true that since this year, the cost structure of the automotive industry has been under pressure. And for the company, we've been facing pressure coming from the rising material costs, including memory chips, batteries, and also other bulk materials. And if we look at the cost in Q2 as well as the cost in late Q4 last year, The average cost impact or cost increase is around 14,000 RMB per car.

Of course, the second-generation company has also done a lot of work to stabilize our profits, to deal with the pressure of the cost increase. In this, we have maintained the price stability of the three brands. We did not exchange the sales by simply lowering the price. In Q2, we've taken a series of efforts to stabilize our vehicle margin and under the rising cost of pressure

and as previously mentioned, we've been actually using and taking a very stable pricing strategies for our products. We didn't really lower the price in exchange for the sales volume. And secondly, on the supply side, we've been working with the supply chain to take a series of optimization measures, the efforts as well as commercial negotiations. With all these efforts combined, we managed to stabilize our vehicle margin at 18.5% in Q2.

Of course, in the second half of the year, we also see the risk of material costs continuing to rise. We expect it to be between 2000 and 3000 yuan per car. Of course, the company will continue to take appropriate measures. The overall goal is to keep the Q3 and Q4 margin of the entire vehicle at a level similar to Q2.

And going into the second quarter, we expect the material cost to continue to increase by another 2,000 to 3,000 RMB. But we will also take a series of countermeasures to mitigate this risk. In Q3 and Q4, we hope to stabilize our deco world margin at the same level as in Q2.

So my second question is,

Despite all this cost pressure, you have done significant improvements in terms of profitability over the past one year. My question is, what gives you management confidence that these improvements are sustainable rather than, say, cyclical?

Yes, indeed. Of course, this is a comprehensive measure. On the one hand, as William mentioned earlier, the entire automotive market has entered a competition of brands. As we mentioned earlier, the future brands, the sales of ES8 and ES9, are still very stable. And the occupancy rate in the entire high-end market is also very high. These two models are still very visible in our entire portfolio. The horsepower of these two models Thank you for the question.

To that, we need to take a comprehensive measure towards that. The first is that, as also mentioned by William, the automotive competition in China is now shifting to more brand-driven. and for the new brand, our ES9 and ES8 are still seeing pretty stable demand and also with significant market share in their respective segment. These two models, they are also making major contribution in our product mix as well as the vehicle margin as both of them has over 20% vehicle margin and this will be our foundation for the overall performance.

will continue to optimize our cost structure, to define our products more accurately, and to look for a way to reduce costs with our partners. This has been going on deeply since the past few seasons, and combined with the ability of our internal nuclear research and supply chain, we have actually found a very

And the second is to keep rolling out optimizations towards our cost structure by making more accurate product definition and also by working on the cost reduction opportunities together with our supply chain partners. These are the efforts that we've been working on in the past several quarters and internally we've been doing All this decoupling and analysis of our R&D and also supply chain capabilities, putting them into the atomic granularity, identifying also opportunities for continuous cost reduction, and we will also keep up this good work.

我想補充一下,今年確實中國的汽車市場的壓力是非常大的, 但如果你去看未來整個公司的增長的質量, This is still very high. This is what we talked about in the last three years. This is the continuity of long-term profit and loss. In the first half of this year, our sales increased by 67%, but our revenue is higher than the increase in sales. Our revenue increased by 86%. If we look at the gross profit, the total gross profit, we increased by 282%. This increase is faster than the increase in revenue. This result was achieved when the cost of raw materials and storage chips increased significantly this year. As Sanli just mentioned, the cost of the second quarter went up to 14,000 yuan per car on average and at the end of last year. In the second half of this year, it will still increase by 2,000 to 3,000 yuan, which means that it will increase from 16,000 yuan to 17,000 yuan. And as mentioned, the Chinese automotive

has been under cost of pressure, but even amid all these challenges, the company has still managed to achieve high-quality growth, as shared by Stanley, some of the efforts we've been taking to secure the long-term and sustainable growth of our business. And I'd like to also share some numbers. In the first half of this year, our sales volume increased by 67% year-over-year, where our total revenue increased by 86% year-over-year. That is faster than our volume increase. And in terms of our gross profit, it increased by 282% year over year, much faster than the growth of our revenue. And this is amid all the challenges coming from the supply side, the rising raw material costs on the chips and on everything. And as mentioned, also in Q2, the impact on the vehicle is around 14,000 RMB. on average, where compared from late last year, where in the second half of this year, such impact will continue to enlarge by another 2,000 to 3,000 RMB, which means that in the second half of this year, compared with Q4 last year, our cost structure will be burdened by another 16,000 to 17,000 RMB. But even against this backdrop, we still aim to achieve are steady growth in our gross profit. This is also a demonstration of our system capabilities and also competitiveness in terms of our technology, products, supply chain, sales, and also brand management.

Thank you, Paul.

Thank you very much, William and Stanley, and congratulations for the achievements.

Thank you. Your next question comes from Nick Lai with J.P. Morgan.

Thank you for taking my question. My first question is financial-related. With very strong operating cash flow and free cash flow generation by first half, can you maybe remind us our cash burn, including CapEx and R&D, and what level of free cash flow can we anticipate by year-end? And with very strong cash position right now, can you remind us? Where do we plan to invest or spend our cash in terms of CapEx and R&D? That's my first question. Thank you.

Thank you, Nick. Let me tell you a few things. One is our CapEx. Our capital spending this year will basically remain at the same level as last year. As I told you before, it's basically at the level of 60 to 70 billion yuan per quarter. Thank you for the questions. I will answer to your question through several major aspects. The first is regarding CapEx.

For this year, we expect our full-year capex to be relatively flat from last year, roughly 6 to 7 billion RMB per year. And such investment is mainly used for basically product research and development, as well as the rollout of our sales and service network. Not much investment going into the capacity and also factory side.

第二個方面就是我們將持續 and many more. Our goal this year is to build 1,000 power stations. This is different from what we did in the past. Since the start of our project in 2024, we have achieved a long-term progress. We have cooperated with more than 40 local state institutions in 25 provinces across the country.

And the second is that we will continue to roll out and expand our charging and also swapping network. For this year, we still plan to build 1,000 new power swap stations, but different from previous years where In 2024, we've introduced the Power Up Partner Plan, where through the plan we would like to collaborate with different partners for the construction of our charging and swapping infrastructure. And this year we've made major progress in this plan, where we've been partnered with over 40 state-owned enterprises, platforms, and also financial institutions across 25 provinces and cities in China, In constructing our charging and swapping infrastructure. And for this year, we expect all the newly built infrastructure will be sponsored or funded by our power-up partners.

The third point is that our bus model is getting more and more recognized by users. And the battery assets related to the bus model are actually also obtained by our financial institutions and various partners. are all recognized and supported. So from the perspective of Weineng's financing, the financing channels for all aspects of this year and the first half of this year are basically fully open. So we can also see that Weineng's future debt from 1.6 billion at the beginning of the year actually dropped to 1.5 billion at the end of the second quarter. So the whole thing is in the case of investment increases, the absolute amount of the whole thing has still dropped.

And the third is that our battery as a service business model is also earning more recognition from also more users. This is also helping our battery asset management and the battery asset management company getting stronger support from the financial institutions and also different partners. In the first half of this year, for the battery asset management company, we know as we also see some good progress regarding the fundraising across different channels. And in terms of the amount due from the battery asset management company, it is also reduced from over $16 billion earlier this year to less than $15 billion in end of Q2, considering that we are also enlarging the user base and also the business size of the battery asset management. The increase in the absolute term is also relatively proportionally, so this is also a good sign.

总的来说,随着销量的持续增长以及包括我们经营的逐步的改善, 我们整个三四季度的目标对于现金流来说, 依然是我们希望能够实现经营现金流和自由现金流的这样的一个正向的目标。 In summary, the total amount of cash reserves can continue to increase in the third and fourth quarter.

With increase in sales volume as well as ongoing efforts in improving our operating performance, we expect that in Q3 and Q4, we can maintain the positive free cash flow as well as operating cash flow. With that, we also believe that in the second half of this year, our cash position will continue to enhance.

Thank you, Nick.

Thank you. My second question is ADAS related. The market is indeed very, very competitive. Every peers offer the autopilot function or features. So I'm wondering from user standpoint, how do we differentiate ourselves from peers? Thank you, Nick. In terms of AD, our supply value this year

This shows that the world model plus long-term learning plus the advantage of the group's intelligence and technical route. From our cloud-based training, the probability of investment is much lower than that of our peers. We actually achieved a very good user experience. This fully proves the advantage of our technical route.

Thank you for the question. This year people actually start to see the benefits and also the advantage of our overall architecture featuring the new world model plus the reinforcement, closed-loop reinforcement learning and also collective intelligence. Especially considering that the actual investment, computing investment and the computing power we used for the co-op training For the autonomous driving and smart driving functionalities, relatively small, achieving such good experience with our latest release, this has also proven the advantages of our technology roadmap.

前面我讲到了我们的新版本,在今年6月18号,几个品牌,几个平台,新版本同步推送给70万用户, 这个也是证明了我们技术架构的一个先进性。

And also, as mentioned earlier today, on June 18th, we actually have pushed our latest new word model version to over 700,000 users across different brands and also technology platform. Simultaneously, this has also proven the advances of our technology and architecture.

Then, there is a data that we can share. We have developed our own chip. And also I would like to share some numbers with you. For the CDAR user, that's our third generation platform equipped with NX-9031.

Smart Driving Chip, where among this group of users, around 58% of them have been engaging smart driving functionalities for more than half of their trips.

那在收费模式方面,我们现在是对于新的,新车的这个用户,未来的乐道,对于新车的用户,我们都是五年,在上市的时候给他五年的这样一个免费的这样一个订阅,那对于二手车的用户,或者说超过了这个 and so on. The second-hand car users, for example, if the owner sells the car, we will provide this kind of subscription service to these second-hand car users. We now have 380 subscribers per month. The number of subscribers we can receive is close to 20%. This is still a very positive And regarding the business model for the smart driving service,

Well, right now for the new users and on-board users, we offer them a five-year complimentary subscription to our smart driving capabilities and systems. But for the used car users, or when they expire on this five-year complimentary service, they will have to definitely pay for the subscription. For the used car users, they are paying 380 RMB per month for the smart driving subscription. where we now see a penetration rate of around 20% among these used car users. This is also a pretty sizable amount showing also the competitiveness of our product and experiences. And of course right now this is just a small user base, but for the longer term we believe that this will also be a quite sizable source of revenue for our business. Right now every year the revenue from that part of the business is around several thousands of millions of RMB.

Thank you.

Your next question comes from Ming Sun Li with B of A. Hi, William.

This is Ming. So I also have two questions. So first question is related to your fifth generation battery swap station. With more expansion of your new swap station, this can accommodate all of your three brands. Could you give us more details regarding the capex per station and also maintenance cost compared to your previous generation swap station? Besides that, right now you are also open to some other auto OEMs for your battery service. Could you elaborate your pricing strategy and also your unique economy model? Thank you. That's my first question.

Okay. Ming. Regarding the fifth generation of battery stations, in terms of compatibility, We have used a flexible solution. So in the future, Le Dao, fireflies, and three brands of different sizes can all be replaced in a power station. In terms of cost, the fifth generation station is based on the fourth generation station. In fact, there is still a further decline. So from the material cost of a single power station, there is actually a further optimization. In general, Thank you for the question. Regarding the fifth generation power substation, we have adopted a flexible design where the station can accommodate

all models from NEO, ANWO, and the Firefly basically can be compatible with cars of different dimensions and sizes. And in terms of the cost, we've also achieved continuous improvements on top of the Gen 4, where in terms of the material costs, we've achieved also optimization and reduction in cost. And for per station cost, if we're excluding batteries in the station as well as all the In terms of operation, it is divided into two levels. One is that all of our power stations are actually doing continuous optimization of operation.

All of them, especially the people in charge here, with the improvement of the error rate of the exchange station, with the improvement of our software capabilities, the overall performance, compared to the beginning of last year, it has actually increased by 50%. Then, from the point of view of the five-generation station, we have a chance. Of course, the error rate of the five-generation station is still in the process of breaking through. In terms of the operations of the swap stations,

We've been also making continuous improvements in terms of the actual people efficiency of supporting the operations of all stations. We've also made improvements in terms of the first time through of the power swaps as well as the software features. Between current performance as well as the performance earlier last year, it's already improved by 50%. Of course, for the fifth generation, as they are new to the field, so we are still ramping up its first time through, But comparing with the previous generations around the same time frame, we already see quite significant improvement in terms of the success rate of our power swaps among the fifth generation station. Overall speaking, we also believe that the efficiency of fifth generation will be much better than the previous ones.

关于第三个我们的对外合作,其实我们跟多家主机厂在前两年也签署了这个 and others. Of course, during this period, some of the projects that have fallen to the ground, such as communication and negotiation, are also in the process of continuing to be carried out. With the development of Robotaxi in the past two years, Robotaxi and e-commerce are actually a very compatible or basic infrastructure support. So these works are still being carried out. From the current one, the one you just mentioned, In terms of the framework of cooperation and fees, we will basically use an intervention fee form. Of course, this still depends on the specific landing later. After the actual landing, we will reveal some details to you in detail. Of course, these external cooperation, in fact, we have also entered a new stage with the development of new people in the past two years. We have gradually recognized the advantage of switching power. And the third is regarding the partnership and also alliance with other OEMs regarding power swap.

Several years ago, we signed up with several OEMs regarding this PowerSwap alliance, and we still have this ongoing communications and also collaborations on some projects. And in the meantime, as Robotex is becoming a very popular area where we see PowerSwap station and the PowerSwap service in general can be a good infrastructure support for the Robotex business, so we are also exploring opportunities with our partners from that perspective. In terms of the cooperation framework and also how we charge them on such services, we basically will charge them for the admission fee for the use and access to our PowerSwap network. But more details are still being discussed and are to be closed when we have the actual project in the implementation. And also for the entire new energy vehicle industry, it has been entering into this new stage where more and more people start to realize the benefits of a power swap and the more OEMs are also embracing the idea of swappable vehicles where for the new power, the advantage is with more partners joining this effort, it can help us to optimize and amortize our operating costs. And by standardizing the battery packs, we can also improve the efficiency as well as optimize the cost structure.

Thank you, Mi.

Thank you, Stanley. My second question is related to your operating expense. Especially, we noticed that your sales and marketing expenses in the second quarter is higher. Is it because you launched more new models during the quarter? Could you give more guidance for your 2026 operating expense? Thank you.

Okay, me. I would like to talk about two things. One is the cost of our research. The cost of our research is basically the same as what we talked about in previous seasons. We will maintain this level of 250 million in the non-GAAP season. Based on the progress of our research projects and businesses, we will adjust the spending level and rhythm in a dynamic way. So from every season in 2026,

Thank you for the question. I will still share the information according to two types of overall expenses. The first is regarding the R&D expenses. As mentioned, we will basically be staying flat with our R&D expenses, non-GAAP around $2.5 billion and We will also make the adjustments, dynamic adjustments according to the actual cadence and the pace of our projects and the business. But for this year, it will be roughly 2.5 billion per quarter in terms of the R&D investment.

Of course, as you can see, the cost of R&D has been reduced to a certain extent compared to the investment in our future company's history. But I think our research and development efficiency is actually higher. There are two sides to it. On the one hand, we are still focusing on the pure electricity route. We are not focusing on power generation in the pure electricity route, including the soul hole. So in this way, our research and development will be more focused. The core technology can be reused in different brands and different models, so the efficiency will be higher. The second part is that as we started last year, and many others, the efficiency of our internal development system and organization is constantly improving. So in general, under such an investment intensity, we can still ensure such competitiveness in core technology and key products.

And in terms of the R&D expenses, maybe some will compare our current expenses with our previous level or with our competitors where definitely our expenses is relatively low. But we also need to really pay attention to the utilization of such expenses and also the efficiency of our R&D activities. First of all, NIO has been staying committed to the battery electric vehicle roadmap. With that, we can be more focused on the technologies and the products related to the BEV roadmap without spreading our efforts across BEV, PHIVE, or RIV. And secondly, as we've been rolling out this CPU mechanism internally, with the CPU mechanism, we can also better measure and improve the efficiency of our R&D systems as well as our R&D organizations. So even with a relatively moderate investment into the R&D activities, we can still maintain our leadership and advancements in the technologies and also products.

第二个方面呢,从这个SG&A角度来讲, 首先我们来看它这个SG&A占这个销售收入的一个比例, 从non-GAAP的角度来说呢, 我们一季度和二季度的这个比例基本上都是在13%上下, In terms of the proportion, this is in line with our expectations. Secondly, in the second quarter, especially in terms of sales revenue, there is a lot of one-time investment in the second quarter. Because all of our new products in the second quarter, basically all of our new products this year, are mainly released in the second quarter. Including our ES9, including some of our Le Dao's new exchange rates this year, Most of them are concentrated in the second quarter. Such a one-off impact will bring about 500 million growth to the second quarter of SCNA. So in the next two quarters, there should not be so much of a one-off impact. Finally, from the perspective of the third and fourth quarters, SCNA, our entire control goal is still hope to achieve 10% to 11% of the total income of non-GAAP SDAs. This is also a goal that can be achieved through hard work.

And regarding the SG&A expenses, if we look at the SG&A as percentage to the sales revenue in the first and the second quarter, under the non-GAAP standard, it's around the 13% in the first half. And also in the second half, as we see a slight increase in terms of the sales expenses, it's mainly driven by some one-off expenses as we have most of our new products for this year were launched in second quarter including our ES9 and also some facelift models for Anvo. So that one of impact is roughly $500 million. Majorly happened in Q2 where in the second half we don't expect to have such one of impact in terms of the sales expenses. So in terms of the second half outlook, in terms of the SG&A expenses as percentage to the South revenue. Under the non-GAAP standard, we expect it to be around 10% to 11%. This is also a controllable as well as an achievable target for us. Thank you, Ming.

Thank you, Stanley. Thank you.

Your next question comes from Jing Chang with CICC.

Thank you for taking my question. Time is limited. I have only one question. We know that our senior vice president, Mr. Ren Shaoqing, has founded an embodied AI startup company in which we have made a strategic investment. So what are the long-term cooperation potentials between This new company and new and also what long-term value can it bring to our company?

Yes, as you can see from the news, our private person, Shaoqing, will start his business in the field of physical AI. In the future, he will be a strategic shareholder to support his business. At the same time, Shaoqing will still be the head of the future smart value department. He will still have such a technical direction and long-term strategy to achieve this smart value. He will participate in the work in this area. We believe that such an arrangement for the future, on the basis of our core business, we can still maintain Thank you for the question.

Yes, Mr. Ren Shaoqing, the head of our smart driving department is now also starting up a new business regarding physical AI and also embodied intelligence. And Neil is supporting his business as a strategic shareholder. But in the meantime, he will still be the head of our smart driving department responsible for the overarching technology as well as the long-term tech roadmap for our products. and we also think that such arrangement is necessary and also meaningful as right now NIO is staying focused on our core business but in the meantime through this startup by Mr. Lin we can also keep tracking of the latest developments in the physical AI and also embodied intelligence without diluting our focus affecting our P&L but in the meantime such can also help to make full use of our resources as well as attracting external strategic shareholders and investors. So we think this is a good arrangement.

另外还有一点也想补充一下, 大家知道这个非这个AI领域, 这个人才竞争是非常激烈的, 那么我们认为呢, 用一个创业公司的那一个架构的角度来讲, 去吸引行业里面最 And also as we all know that the competition for the AI talent within the arena of a physical AI is also quite intense.

So through such a startup, we can also better capture the top-notch talents in the industry. And that will also be beneficial to the long-term development of both this startup as well as for our AI-related business. And for the long term, we believe that we will have a lot of strategic collaborations and projects between you and also this AI startup.

Thank you.

Thank you. Thank you. Thank you.

Your next question comes from Yuqing Ding with HSBC.

Thank you, team. Hi, Sally. So my question is, what's your volume outlook for this year and maybe some analyses that will lead to more and also our new model for COVID-19?

I think your voice is breaking.

Yichen, can you repeat your question? Thanks.

Yeah, sure. Yichen, we still can't hear you.

Can you hear me now?

Yes, much better.

Okay, yeah. So I'll just repeat. My question is about a volume outlook in fourth quarter and 27, given maybe strong senility and the backdrop of new model cycle next year.

We believe that the market will still recover in the fourth quarter of this year. We believe that the average transaction volume will be more than 40,000 a month. This is our goal. In the medium to long term, we still believe that we will have more than 40,000 We expect that the passenger vehicle market to be able to recover in Q4 this year. With that, our target for Q4 is achieving an average volume of over 40,000 units per month.

And for the mid and the long term, with our product lineup as well as our sales and service network coverage, we expect our annual volume growth to be around 40% to 50%. And we will maintain that for the mid and the long term.

Thank you, Yuzhe.

As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.

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