XPeng Inc. (NYSE:XPEV) Q2 2023 Earnings Call Transcript

XPeng Inc. (NYSE:XPEV) Q2 2023 Earnings Call Transcript August 18, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2023 Earnings Conference Call for XPeng Inc. At this time, all participants are in listen-only mode. After management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Mr. Alex Xie, Head of Investor Relations for the company. Please go ahead, Alex.

Alex Xie: Thank you. Hello, everyone, and welcome to XPeng’s second quarter 2023 earnings conference call. Our financial and operating results were issued by our newswire services earlier today and available online. You can also view the earnings press release by visiting the IR section of our website at ir.xiaopeng.com. Participants on today’s call from our management will include Co-Founder, Chairman, and CEO, Mr. He Xiaopeng; Vice Chairman and President, Dr. Brian Gu; Vice President of Corporate Finance and Investments, Mr. Charles Zhang; Vice President of Finance and Accounting, Mr. James Wu; and myself. Management will begin with prepared remarks and the call will conclude with a Q&A session. A webcast replay of this conference call will be available on the IR section of our website.

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Before we continue, please note that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the relevant public filings of the company as filed with the US Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that XPeng’s earnings press release and this conference call include a disclosure of unaudited GAAP financial measures, as well as unaudited non-GAAP financial measures.

XPeng’s earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures. I will now turn the call over to our Co-founder, Chairman, and CEO, Mr. He Xiaopeng. Please go ahead.

Xiaopeng He: [Foreign Language] Hi, everyone. During the first half of this year, given the intensified competition and rapidly evolving environment, I led a set of reforms across business strategy, organizational structure, product, and marketing to tackle huge risks and challenges and forge significant comprehensive transformation within the short time frame. Today, I’m pleased to report that this transformational adjustment have generated better than expected results internally and externally and propelled Xpeng into the initial phase of a virtuous cycle. The G6 has become the dominant BEV model in the RMB200,000 to RMB300,000 price market segment, turbo charging our sales growth momentum. We’ve created meaningful breakthroughs in commercializing our industry-leading full-stack self-developed EV platform and intelligent technologies.

We have formed a long-term strategic partnership with Volkswagen. As part of our partnership, we’ll embark on broad-based collaborations to develop EV platforms and intelligent software technology, creating long-term value for both companies. Moreover, an inflection point in user acceptance for ADAS is emerging faster and stronger than we expected. We saw orders for the G6 Max version accounted for 70% of total G6 orders in the first month of its official launch, far exceeding our estimates. Our NPS and OTA satisfaction scores improved continuously in the first half of the year, reaching an industry-leading level as we prioritize customer-centric transformation. In addition, the changes at Xpeng have boosted team morale, owner engagement and the confidence of suppliers and other external partners.

This provides a strong foundation for advancing organizational adjustments, cost-saving initiatives, efficiency improvement and new product launches. [Foreign Language] This month marks the ninth anniversary of our inception. Over the past nine years, we have been steadfastly committed to advancing technological innovation. That commitment has never wavered. We plan to advance full-stack technology innovation in core areas to make leading-edge smart EV products accessible to a broader range of customer cohorts across the globe. As we grow to a larger scale, we’ll build a sustainable business model underpinned by full stack capabilities across hardware, software, commercial operations and partnerships for empowerment. [Foreign Language] As we move forward with this recent transformation, I continuously remind myself and the team that in order to succeed in this growing competition in the long run, we must consistently look beyond short-term financial performance as we tirelessly evolve and advance our underlying capabilities.

That said, I’m glad that our efforts to elevate our underlying capabilities across the board have begun to bear fruit. Our vehicle deliveries have grown sequentially for six months straight and continue to grow. Specifically, the P7i, our new product launched in March 2023, has been gaining great consumer traction with its monthly deliveries surpassing 3,000 units for two consecutive months since June, overcoming supply chain challenges. As we enter the second half of this year, we believe we will further ramp up the capacity and product competitiveness of the P7i model lineup to drive its continued sales momentum. [Foreign Language] More importantly, our first strategic model built on SEPA 2.0, the G6, made its market debut at the end of June and has quickly become a phenomenal bestseller in the segment.

Guided by our SEPA 2.0 enabled platform-based cost efficiency and a pricing strategy that prioritizes scale expansion, XPeng G6 has emerged as the industry pioneer in introducing the most advanced technologies, such as 800-volt SiC platform and full scenario ADAS which is accessible to mainstream consumers of RMB200,000 to RMB300,000 price market segment. Furthermore, the G6 has become more popular across a wide range of consumers, including those in both higher and lower price segments. [Foreign Language] Today, I want to extend my deep gratitude to those owners who are patiently awaiting delivery of their XPeng G6. We’re making every endeavor with our supplier partners to ramp up our production output for the G6, especially for the Max version.

We currently estimate that G6 delivery volume in September will grow significantly, fueling our monthly deliveries to reach over 15,000 units in total. In the upcoming fourth quarter, we’ll continue to accelerate G6 production throughput to capture the increasing market popularity that has followed its first batch of deliveries with a goal to deliver more than 10,000 G6 monthly. With G6 ramp-ups and enriched configurations for other on-sell models, we will strive for a peak monthly delivery of 20,000 in the fourth quarter. I believe the success of the G6 is just the beginning. Moving forward, we plan to introduce an even wider range of SEPA 2.0-enabled top-selling models. [Foreign Language] In July, we announced our long-term strategic partnership with the Volkswagen Group.

I believe that forming this partnership marks a milestone not only in XPeng’s business journey, but also in China’s auto making development. XPeng and the Volkswagen Group are highly compatible in our underlying technological beliefs and long-term vision for the evolution of smart EVs, and we each hold compelling and complementary industry advantages. Combining XPeng’s industry-leading smart EV technologies with Volkswagen’s world-class design, engineering and supply chain capabilities. Our collaboration will begin with two B class BEV models to bring best-in-class technologies, top-notch products and a superior experience to our customers. Volkswagen Group will also make a long-term strategic equity investment in XPeng for a total consideration of approximately $700 million.

We’ll continually deepen our cooperation with the Volkswagen Group and build stronger synergies in the next-generation EV platforms, software technologies and supply chain capabilities, sharing economies of scale. I’m excited about this strategic partnership, which underscores Volkswagen’s confidence in and recognition of our in-house self-developed core technologies and groundbreaking capabilities. Our corporation creates the globe auto industry’s first collaborative business model that integrates software and hardware full stack technology, and we’re moving to capitalize on this opportunity to generate immense value for our shareholders. [Foreign Language] As technology trends continue to evolve, I’m convinced that globally, the era of software-defined cars will conclude and will venture into a new era of AI powered vehicles.

XPeng will be among the most active advocates of this evolution, where we expect to reap substantial benefits. As we progress, I will establish an enterprise-level team taking charge of autonomous technology R&D, road map planning and operations. I’ll personally lead this macro intelligent tech team, unifying the development planning for ADAS, smart cabin, electrical and electronic architecture functions as well as the evolution of several innovative initiatives. We’re ready for AI to disrupt the existing automotive technology system as human machine copilot and AI power autonomous driving gather steam and reshape our driving habits. I look forward to presenting our latest achievement and R&D road map in intelligent technologies at our 2023 Tech Day on October 24.

[Foreign Language] Over the second half of this year, we plan to make additional major breakthroughs in experience and coverage with our XNGP ADAS to further drive customer acceptance and the adoption process, widening the technology gap with our peers. The development of our XNGP that does not rely on high precision maps is speeding up, and we just completed a number of professional media test drives with XNGP prototype versions across many districts in Beijing this week, and media who participated gave overwhelmingly positive reviews on the XNGP-assisted driving because it did not rely on high-definition maps or prior knowledge of the roads. For our next OTA software update slated for October, we will roll out the XNGP independent of HD maps in the first batch of cities, along with other new features that we have yet to announce, but are sure to delight XNGP — to delight XPeng owners.

We’re confident that we’ll make non-HD map reliant XNGP available to customers across approximately 50 cities by the end of this year. Through technology innovations, our work will also entail cutting XNGP’s BOM cost by about 50% by 2024, ensuring our models have the most advanced autonomous driving hardware as a standard configuration. We’re simultaneously exploring flexible pricing models for our software subscription business. [Foreign Language] I am closely working with our President, Ms. Wang Fengying to achieve the highest cost control level among car makers in the world and China and prioritize cost savings as one of the core goals for various business units, including product design, R&D, manufacturing, supply chain and marketing. With several cost-saving initiatives going well, I have great confidence in achieving the goal of reducing overall costs by 25% by the end of 2024, with even better results in some other subdivisions.

These cost-saving initiatives will strengthen our product competitiveness and substantially drive gross margin improvement in 2024. Interestingly, two years ago, I expressed my view that considering cost effectiveness, no auto company could offer competitive autonomous cars to consumers at RMB150,000 level. But as we implement technology innovation and full cycle cost reduction, I have changed my mind and formulated a clear plan to make autonomous cars affordable for the largest market segment in China, the RMB150,000 price range. This will greatly promote the accessibility of intelligent autonomous driving. [Foreign Language] In terms of sales, marketing and service capabilities, under the leadership of our President, Wang Fengying, we have continuously improved customer satisfaction and cross-team collaboration.

Looking ahead into the second half of the year, we’ll accelerate our business model transformation across our domestic and international sales channels. To that end, our efforts will include optimizing our sales network drastically and partnering with more top dealers. These initiatives will spur our expansion and help us gain market share across Tier 2 and lower-tier cities. [Foreign Language] Regarding cash flow, our cash on hand at the end of the second quarter of 2023 amounted to RMB33.7 billion. With vehicle deliveries back on track for sequential quarter growth, we significantly narrowed our cash outflow from operations to around RMB1 billion. With the second half — over the second half of 2023, with accelerating sales growth from the G6 and other new products, we expect our gross margin to rebound gradually and will continue to improve our operating efficiency.

As a result, we expect our overall cash flow from operations to turn positive for the second half of the year. [Foreign Language] Now, moving to our guidance. We expect our total vehicle deliveries to be between 39,000 and 41,000 units in the third quarter of 2023. Representing 68.1% to 76.7% quarter-over-quarter growth and revenue to be between RMB8.5 billion and RMB9 billion. Thanks to the proactive adjustment we made over the last several quarters, moving into the third quarter this year, we have seen our sales, branding, team morale and cash flow started to form a positive loop at XPeng. As the power of AI reshapes the automaking industry, we expect our virtuous cycle to accelerate and cover more areas over the next two years. [Foreign Language] Thank you, everyone.

With that, I’ll now turn the call over to our new VP of Finance, Mr. James Wu, to discuss our financial performance for the second quarter of 2023. By way of introduction, before joining XPeng, James held executive finance roles at both General Motors US and China headquarters and at SAIC-General Motors-Wuling Auto. We look forward to tapping into his extensive experience in finance and operations management and his valuable insight into international business practices. James’ skill set is ideally suited to lead our finance and operations team, and we look forward to his contributions as we embark on our next level of success.

James Wu: Thank you Xiaopeng, and hello, everyone. Before I start, I’d like to say that I’m really happy to join Xiaopeng in this exciting time and look forward to our future interactions. Now I would like to provide a brief overview of our financial results for the second quarter of 2023. I will reference RMB only in my discussion today unless otherwise stated. Our total revenues were RMB5.06 billion for the second quarter of 2023, a decrease of 31.9% year-over-year and an increase of 25.5% quarter-over-quarter. Revenues from vehicle sales were RMB4.42 billion for the second quarter of 2023, representing a decrease of 36.2% from the same period of 2022 and an increase of 25.9% from the first quarter of 2023. The year-over-year decrease was mainly attributable to lower vehicle deliveries and discontinuation of new energy vehicle subsidy while the quarter-over-quarter increase was mainly due to higher vehicle deliveries of the P7i.

Gross margin was negative 3.9% for the second quarter of 2023 compared with 10.9% for the same period of 2022 and 1.7% for the first quarter of 2023. Vehicle margin was negative 8.6% for the second quarter of 2023 compared with 9.1% for the same period of 2022 and negative 2.5% for the first quarter of 2023. The year-over-year and quarter-over-quarter decreases were explained by first, the inventory write-downs and losses on inventory purchase commitments amounting to RMB0.2 billion related to the model G3i as management lowered its forecasted sales due to stronger-than-expected market amounts for newly launched vehicle models with a negative impact of 4.5 percentage points on vehicle margin. Secondly, increased sales promotions and the expiry of new energy vehicle subsidies mentioned above.

R&D expenses were RMB1.37 billion for the second quarter of 2023, representing an increase of 8.1% year-over-year and an increase of 5.5% quarter-over-quarter. The year-over-year and quarter-over-quarter increases were mainly due to higher expenses related to the development of new vehicle models as we expand our product portfolio to support future growth. SG&A expenses were RMB1.54 billion for the second quarter of 2023, representing a decrease of 7.3% year-over-year, an increase of 11.3% quarter-over-quarter. The year-over-year decrease was primarily attributable to the reduction of commissions paid to franchise stores and lower marketing and advertising expenses. The quarter-over-quarter increase was mainly resulting from higher marketing and advertising expenses to support new product launches.

As a result of the foregoing, loss from operations was RMB3.09 billion for the second quarter of 2023 compared with RMB2.09 billion for the same period of 2022 and RMB2.59 billion for the first quarter of 2023. Net loss was RMB2.8 billion for the second quarter of 2023 compared with RMB2.7 billion for the same period of 2022 and RMB2.34 billion for the first quarter of 2023. As of June 30, 2023, our company had cash and cash equivalents, restricted cash, short-term investments and time deposits in total of RMB33.74 billion. To be mindful of the length of our earnings call, I will encourage listeners to refer to our earnings press release for more details on our second quarter financial results. This concludes our prepared remarks. We’ll now open the call to questions.

Operator, please go ahead.

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Q&A Session

Operator: Yes. Thank you. [Operator Instructions] And the first question comes from Tim Hsiao with Morgan Stanley.

Tim Hsiao: [Foreign Language] So my first question is about the improvement of the component supply because I expect third quarter volume guidance suggests a continuous improvement of the component supply. However, the longer waiting time has adversely affected the new order momentum of G6 lately. So just want to know that when do you expect the bottleneck would be fully removed and how could we reboost the order momentum of G6? And do we expect the 10,000 per month is more like the [30%] (ph) or stable monthly run rate. And will XPeng consider to add [indiscernible] with the new supplier for the upcoming model to avoid such bottlenecks on relapsing? Thank you.

Xiaopeng He: [Foreign Language] Thank you for your question. First of all, we are very confident of G6 future sales, and it’s definitely going to be very competitive. And right now, looking at G6 among the RMB200,000 to RMB300,000 price range, definitely, it is one of the top players. And definitely, we expect orders to continue to go up. However, right now, the biggest challenge that we face is the Max version because we are lacking in the supply of some of the core intelligent part. But we’re seeing the ramp-up of the supply of the parts in August — since August, and going into September and October, we expect the same ramp-up momentum to continue as well. So definitely going into Q4, we expect to achieve at least 10,000 monthly deliveries for G6.

And right now, we have done actually a lot of adjustments and revolutions to avoid such shortage issues in the future. For example, with the launch of our SEPA 2.0 platform, not only can we reduce the overall production cost of our future models, but we can reduce the reliance and dependence of our supply chain as well. So in the future, our supply chain will be much more — which will be much easier to manage, and it will be much more straightforward as well. In the future, we will have much more models that are built on SEPA 2.0, which means that we can have better management and control over the supply of our core parts. And because of the SEPA 2.0, we also can actually have a lot of parts that are mutually compatible on the platform that can support the development of a lot of our future models.

So overall speaking, given what we observed from G6 so far, and thanks to the development of our technology, we believe that our supply chain constraint is getting resolved. Thank you.

Tim Hsiao: [Foreign Language] So my second question is about the pricing competition. So I just want to learn more about the management’s view on the potential impact on the new wave of price war along with the competitors like Tesla’s upcoming new model launches in September. Does XPeng need to get more aggressive with their pricing or promotion strategies for current G6 or upcoming models? If so, how should we think about the impact of vehicle margin in third quarter and thereafter? Could we effectively pass through the cost pressure to our supply chain? So that’s my second question. Thank you.

Brian Gu: Hey, Tim, it’s Brian. Let me address your question. First of all, the recent price movements of our competitors have not really impacted our sales, especially the growth trend of G6 because when we actually established our pricing for G6, we anticipated competitive pressure. And I think the resulting, I think, momentum, I think, is actually intact. But before I address the pricing as well as gross margin sort of trends, I want to underscore that our strategy right now is to make sure that we regain growth and scale. I think that’s the foremost strategic priority for us this year. As you can see that we have actually successfully gained growth momentum. We actually now are forecasting returning to our historical high in terms of revenue — quarterly revenue rates.

That actually will help us in the long run to gain scale economy as well efficiency. Another priority that we actually also as a company, we want to achieve for the second half of this year is to gain very strong cash flow. As you heard earlier that we actually anticipate with the growth of our deliveries, our cash flow for the second half on the operational level be positive. So I think that’s also important for us to build momentum into improving economy. So on the gross margin trend, I’ll hand over to James to give you some sort of trend — sort of estimate. But I think that’s something that clearly, we cannot give guidance at the moment, but I think it can give you some trends to analyze.

James Wu: Yes. So I just wanted to add, as Brian mentioned, our focus is very clear in terms of gaining volume and scale, which obviously will help improve our gross margin as well as we’ve seen our manufacturing costs. As mentioned in the earlier script, we’ve got some [EOP] (ph) impact from the G3i in Q2. I just want to note that we still have some level of production scheduled for G3i in the third quarter. So there will be another portion coming through in the third quarter. And as we increase volume in Q3 and into Q4, we expect our gross margin to improve over time. And as we sell a better mix products in the second half, we do expect our gross margin to become positive in the fourth quarter of this year. And lastly, I just want to echo that Brian mentioned, from a cash flow standpoint, as we increase volume in the second half, we’ve already seen some pretty big improvement in the second quarter in terms of cash flow.

And into the second half, we are pretty confident that we will be achieving positive operating cash flow and have a really healthy cash balance towards the end of the year. Thank you.

Tim Hsiao: Thank you very much, Brian and James, for the details shared. Thank you.

Operator: Thank you. And the next question comes from Tina Hou with Goldman Sachs.