NIO Inc

NYSE:NIO

Earnings Call Transcript 2019-Q1

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for NIO Incorporated's First Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Jade Wei, Senior Director of Investor Relations of the Company. Please go ahead, Jade.

[Jade Wei, Senior Director, IR]

Thank you, Annie. Good evening, and good morning, everyone. Welcome to NIO's first quarter 2019 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 Web site.

On today's call, we have Mr. William Li, Founder, Chairman of the Board, and Chief Executive Officer, Mr. Louis Hsieh, our Chief Financial Officer, and Mr. Nick Wang, our Vice President of FINANCE. Louis is joining us by telephone from the United States.

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 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. The company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that NIO'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 NIO's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

With that, I will now turn the call over to our CFO, Louis Hsieh. Louis, please go ahead.

[Louis Hsieh, CFO]

Thank you, Jade. Hello everyone, and thank you for joining our call today.

In the first quarter 2019, NIO delivered 3,989 ES8s, our high-performance premium electric SUV, exceeding the company's prior delivery targets between 3,500 to 3,800. This was followed by 1,124 ES8 deliveries in April, bringing total aggregate deliveries to 16,461 vehicles as of April 30, 2019.

Compared to the fourth quarter of 2018, we experienced softer demand in the first quarter due to accelerated deliveries made at the end of last year in anticipation of electric vehicle subsidy reductions, as well as seasonal factors surrounding the Chinese New Year holidays. Further, we have seen the slowdown in ES8 orders, which became noticeable after Chinese New Year, and has worsened into the current quarter. We anticipate a sequential decrease in deliveries when second quarter closes, primarily due to (1) macro-economic concerns over the lingering US-China trade war, (2) overall continued sluggishness in the Chinese auto market which saw year-to-date wholesale vehicle sales drop 15% year-over-year, and retail vehicle sales drop 12% year-over year, and (3) larger-than-anticipated electric vehicle subsidy cuts, which lower ES8 subsidies by 40% to RMB 40,500 from RMB 67,500 in 2018.

Subsidies will further be reduced to RMB 11,520 beginning June 26, 2019. Additionally, we believe there is some cannibalization of ES8 orders in the current quarter caused by ES6, which became available in NIO Houses this quarter. ES6 is a sportier, less expensive SUV by approximately RMB 90,000. We anticipate this more challenging and uncertain sales environment to dampen sequential demand and reflect continued weakness in ES8 sales in the current quarter.

In light of these challenging sales backdrop and macro-economic environment, the Company has already begun taking steps to control costs and optimize operational efficiencies. Nick will elaborate more later on the call, but some early results of our cost control efforts are already reflected in first quarter numbers.

A quarter-over-quarter 28.8% sequential decrease in R&D spend and a quarter-over-quarter 32.2% sequential decrease in SG&A spend. These initial efforts provide us the runway required to optimize the business sustainably for the long-term. We expect to see more efficiency gains to pick up in the coming quarters. Also, as part of the larger restructuring initiative to optimize operational efficiencies, we made the hard and necessary decision to pare down headcount by 4.5% to 9,390 global employees as of April 30, 2019, from 9,834 at the end of 2018.

And now I'd like to give you an update on our sales expectations for the ES8 and ES6. With 1,124 ES8s delivered in the month of April, total ES8 deliveries for the year 2019 four months, stood at 5,113. Moving to our ES6, our second production model, a five-seater high-performance premium electric SUV, we are excited that as of today, the first ES6 ready to be delivered to our external user is rolled off the production line. In June, as scheduled, more ES6s will be produced and the first deliveries will reach NIO users. The ES6 has received broad-based positive feedback from the media and potential customers ever since the recent Shanghai Auto Show. And the early reviews from our ES6 test drive campaign launched in May bode well for continued positive momentum.

We currently have more than 12,000 ES6 pre-orders as a growing pipeline, among which over 5,000 were added during the past five-and-a-half weeks since the Shanghai Auto Show. When our users had the access to touch and feel the ES6 for the first time, we are confident that as more and more new potential users start to experience the ES6 firsthand, from behind the wheel and on the road, that the vehicle's competitive features and price will translate to increased market demand.

Now, through the lens of optimizing efficiencies, controlling costs and managing cash flow, I would like to provide more specifics on how we are approaching certain business decisions as they relate to our service networks. Starting with our NIO Houses, NIO Houses and NIO Pop-up Houses are important to our direct sales model. We currently have 15 NIO Houses in 12 cities across China. These are complemented by 17 NIO Pop-up Houses in an additional 17 cities.

Going forward, we will shift our focus to smaller NIO Pop-up Houses or similar kinds. NIO Pop-up Houses require less capital and provide greater flexibility on the cost side. We believe that the combined number of NIO Houses and NIO Pop-up Houses across China provide the necessary support and coverage for our sales and market penetration plans and a limited number of new facilities will be added in the near future.

For NIO Service Centers, as of April 2019, we have 14 covering major cities across the country. We had additional 100 Authorized Service Centers nationwide, forming a comprehensive network coverage. Authorized Service Centers, or ASCs, represent cooperation with existing Tier 1 4S dealership partners. We have a dedicated team that selects, trains, and certifies ASCs to be part of our network. To support our sales goals in 2019, we will focus on the asset-light ASCs to extend our service coverage.

Turning to NIO Power, we presently have 125 NIO battery swap stations throughout the country, which we believe will provide sufficient coverage for our users at this stage. By continually analyzing user location data, we can flexibly deploy these resources and adjust locations to more fully optimize the efficiency of this power solution network. With NIO Power Mobile, we currently have around 500 on the road which can easily support both our current users as well as our anticipated future users in 2019.

Currently, around 80% of NIO users have installed home chargers, which remain as the most efficient and cost-effective power solution for both our users and the company. We launched our Fast Charger power station recently at the Shanghai Auto Show and the number of the fast charger is still small. We will only install future fast chargers based on surged demand of our vehicles and service needs.

In April, we opened our one-click power solution network to other electric vehicle brand users in China. With this program, third-party EV owners in China are able to use our NIO Power one-click valet charging services. This will allow for growth of this service, improve the operating efficiency, and expand NIO's brand awareness among the electric vehicle general public.

On a separate note, I would like to give you a brief update on a few of our ongoing initiatives. At the Shanghai Auto Show, the company showcased a preview version of ET7, a high-performance premium electric sedan. Recently, the company made the decision to design and develop ET series with the future NIO platform 2.0 or NP2, a new generation product platform of NIO with Level 4 autonomous driving capabilities. We will provide an update on the launch timeline of the ET series in the future. Meanwhile, the company plans to leverage the platform technologies from the ES8 and ES6 to create a new model design more efficiently and expect to launch the third vehicle model in 2020.

We will continue to invest in research and development for our products and technologies, in particularly, NP2. As we do so, we will look to build strategic research alliances with partners in the automotive and technology sectors. We expect such collaborations can continually advance the technologies of our vehicles and platforms through leveraged strength and resources.

Recent developments, firstly, we are very pleased to announce that NIO has entered into a framework agreement with Beijing E-Town International Investment and Development Company, E-Town Capital, an investment corporation headquartered in Beijing Economic-Technological Development Area, so-called BDA. Pursuant to this agreement, the company will establish an entity as NIO China in BDA and contribute certain businesses and assets into this Entity. E-Town Capital will initially invest up to RMB 10 billion through its affiliated entities or jointly with third parties in NIO China in exchange for a minority equity stake. Furthermore, it is expected that E-Town Capital will help NIO to build or to find third-party partners to build a new manufacturing facility for our next-generation vehicles of NIO. We will continue working together toward signing a binding definitive agreement for this investment.

Secondly, in April 2018, the Company established a joint venture company, GAC-NIO, together with NIO Capital, Guangqi New Energy Automobile and GAC, to mainly engage in electric vehicle and parts development, sales and services. William Li, Founder, Chairman and Chief Executive Officer of NIO, is serving as the chairman of GAC-NIO. About a week ago, GAC-NIO released its new brand, Hycan He Chuang, and plans to launch the first vehicle model this year. We expect to work strategically with GAC-NIO and leverage each other's strength in technologies, supply chains and service networks.

Third, ES6 manufacturing agreement, in April 2019, we entered into a manufacturing cooperation agreement with JAC for the ES6, which is basically a supplement to our existing manufacturing agreement of the ES8. We will continue paying JAC manufacturing fees on a per-vehicle basis and compensate JAC for its audited operating losses. Please refer to our earnings press release published on our IR website a few hours ago for more details.

With that, I will now turn the call over to our Vice President of Finance, Mr. Nick Wang, to provide the financial details for the quarter. Nick, please go ahead.

[Nick Wang, VP, Finance]

Thank you, Louis. I will now go over some of our financial results for the first quarter of 2019. To be mindful of the length of this call, I will address financial highlights here and encourage listeners to refer to our earnings press release which is posted online for additional details.

Our total revenues in the first quarter of 2019 were RMB 1.6 billion, or US$243.1 million, representing a decrease of 52.5% from the fourth quarter of 2018. Our total revenues are made of two parts; vehicle sales and other sales. Vehicle sales in the first quarter of 2019 were RMB 1.5 billion, or US$228.8 million, representing a decrease of 54.6% from the fourth quarter of 2018. The decrease in vehicle sales over the fourth quarter of 2018 was attributed to accelerated deliveries of the ES8 in the fourth quarter of 2018 in anticipation of EV subsidy reductions in China in 2019, as well as the seasonal slowdowns surrounding the Chinese New Year holidays in the first quarter of 2019.

Other sales in the first quarter of 2019 were RMB 96.0 million, or USD14.3 million, representing an increase of 76.4% from the fourth quarter of 2018. The increase in other sales over the fourth quarter of 2018 was mainly attributed to increased revenues derived from NIO life merchandise and services provided in the first quarter of 2019.

Cost of sales in the first quarter of 2019 was RMB 1.9 billion, or USD275.7 million, representing a decrease of 45.9% from the fourth quarter of 2018. The decrease in cost of sales over the fourth quarter of 2018 was mainly driven by the decrease of delivery volume of the ES8 in the quarter.

Gross margin in the first quarter of 2019 was negative 13.4%, compared with positive 0.4% in the fourth quarter of 2018, mainly driven by the decrease of vehicle margin in the quarter. More specifically, vehicle margin in the first quarter of 2019 was negative 7.2%, compared with positive 3.7% in the fourth quarter of 2018. The decrease in vehicle margin was mainly driven by the decrease of delivery volume of the ES8 in the quarter.

Research and development expenses in the first quarter of 2019 were RMB 1.1 billion, or USD 160.7 million, representing an increase of 55.4% from the first quarter of 2018 and a decrease of 28.8% from the fourth quarter of 2018. Excluding non-GAAP share-based compensation expenses, research and development expenses were RMB 1.0 billion, or USD155.9 million, representing an increase of 52.7% from the first quarter of 2018 and a decrease of 30.0% from the fourth quarter of 2018. The decrease in research and development expenses over the fourth quarter of 2018 was primarily attributed to the higher design and professional expenses incurred in the fourth quarter of 2018 to support the frequent test research and development stage of the ES6, our 5-seater high-performance premium electric SUV launched in December 2018.

Selling, general and administrative expenses in the first quarter of 2019 were RMB 1.3 billion, or USD196.7 million, representing an increase of 71.5% from the first quarter of 2018 and a decrease of 32.2% from the fourth quarter of 2018. Excluding non-GAAP share-based compensation expenses, selling, general and administrative expenses were RMB 1.2 billion, or USD183.9 million, representing an increase of 67.6% from the first quarter of 2018 and a decrease of 32.4% from the fourth quarter of 2018. The decrease in selling, general and administrative expenses over the fourth quarter of 2018 was primarily attributed to decreased marketing and promotional activities and decreased expenditures on outsourcing professional services.

Loss from operations in the first quarter of 2019 was RMB 2.6 billion, or USD 390.0 million, representing an increase of 78.8% from the first quarter of 2018 and a decrease of 24.1% from the fourth quarter of 2018. Excluding share-based compensation expenses, non-GAAP adjusted loss from operations was RMB 2.5 billion, or USD 372.2 million, representing an increase of 75.7% from the first quarter of 2018 and a decrease of 24.4% from the fourth quarter of 2018.

Share-based compensation expenses in the first quarter of 2019 were RMB 119.6 million, or USD17.8 million, representing an increase of 184.0% from the first quarter of 2018 and a decrease of 15.6% from the fourth quarter of 2018. The decrease in share-based compensation expenses over the fourth quarter of 2018 was primarily attributed to the decrease of share-based compensation expenses related to certain directors and executive officers.

Our net loss was RMB 2.6 billion, or USD390.9 million, in the first quarter of 2019, representing an increase of 71.4% from the first quarter of 2018 and a decrease of 25.1% from the fourth quarter of 2018. Excluding share-based compensation expenses, adjusted non-GAAP net loss was RMB 2.5 billion, or USD 373.1 million, in the first quarter of 2019, representing an increase of 68.2% from the first quarter of 2018 and a decrease of 25.5% from the fourth quarter of 2018.

Net loss attributable to NIO's ordinary shareholders in the first quarter of 2019 was RMB 2.6 billion, or USD 395.2 million, representing a decrease of 32.8% from the first quarter of 2018 and a decrease of 24.6% from the fourth quarter of 2018. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, adjusted net loss attributable to NIO's ordinary shareholders on a non-GAAP basis was RMB 2.5 billion, or USD 372.7 million.

Basic and diluted net loss per ADS in the first quarter of 2019 were both RMB 2.56, or 38 cents. Excluding share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value, non-GAAP adjusted basic and diluted net loss per ADS were both RMB 2.42, or 36 cents. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 7.5 billion, or USD1.1 billion, as of March 31, 2019.

On 1st January 2019, the company adopted "ASC 842 Leases" and used the additional transition method to initially apply this new lease standard at the adoption date. Right-of-use assets and lease liabilities were recognized on the company's consolidated financial statements.

And now for our Business Outlook, for the second quarter of 2019, the Company expects deliveries to be between 2,800 and 3,200 vehicles, representing a decrease of approximately 19.8% to 29.8% from the first quarter of 2019. This outlook incorporates the planned deliveries of several hundred ES6s in June 2019. The company also expects second quarter total revenues to be between RMB 1.1 billion and RMB 1.3 billion, or between US$169 million and US$193 million. This would represent a decrease of approximately 20.7% to 30.5% from the first quarter of 2019.

This concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

[Operator]

Operator: Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Bin Wang of Credit Suisse. Please go ahead.

[Bin Wang, Credit Suisse]

Hi. Thank you so much for taking my questions. I have three ones. The first one is about ES6 order. Actually you said that in the past 5.5 weeks ago around 5,000 orders. What we call in the conference call in the year 2018 result, you mentioned already have 7,000 orders by around March -- early March, so around 12 months in between, it seems that [indiscernible] not much order received, can you explain why in that [indiscernible] not much order for ES6? That's number one question.

Number two question is about your recent announcement about your NIO China. Can I know what's the specific arrangement assuming under less call will be another joint venture between NIO Inc. and E-Town, and what will be the asset ingestion into this NIO China asset detail, please?

And number three, can you confirm whether your full-year volume guidance changed or not, and remember your full-year year bottom guidance is 40,000 units is more than 20,000 ES6, can you remind us your full-year overall guidance? Thank you.

[Louis Hsieh, CFO]

Hey. Wang Bin, this is Louis. I'll take one and three, and I'll let William and Nick answer two. For one, we had about -- we had 7,000 something orders, pre-orders for ES6, but don't forget those orders are refundable. So, during May -- margin, I mean during that month before the Shanghai Auto Show, there wasn't a thousand or so plus, I can't remember the exact number, who also got a refund on their order. So what we're talking about is new orders from April, I guess, 17th or 18th when the Shanghai Auto Show started until yesterday. So, those five weeks, but don't forget there's also cancellations in orders. So it's a moving target. But it's very encouraging to see 5,000 new pre-orders in only 5.5 weeks since ES6 was launched. It has gotten obviously very good accolades and very good reviews from the press and from driving magazines.

On question three, regarding the guidance, we had targeted for the year -- you know I've been telling people recently about 35,000 to 40,000 as of in March or so a few months ago. The slowdown has hit us with the subsidy reduction. Remember, ES8 subsidies went from 67,000 down to under 40,000 and going to 11,000 ES8 soon. And then with the trade war and the softening environment, I think at this time we are not prepared to give any kind of target number for the full-year, what I'd like to do is wait until ES6 is launched and see how that ramps up. So, we'll be in a better position to give full-year sort of targeted numbers -- it's unofficial, but targeted numbers in a couple of months once ES6 is launched. And then William and Nick, you want to take the E-Town question?

[William Li, Founder, Chairman, and CEO]

[Foreign Language] Wang Bin, thank you for your question. So, regarding our recent announcement about our framework agreement with the E-Town International Investment and Development Company, which is E-Town Capital, actually E-Town Capital while being helping us through a third-party partners and also its affiliated entities to inject about RMB 10 billion in exchange for the minority equity stake for the NIO, and at the same time, NIO will be establishing NIO China in the BDA E-Town. So we will be relocating part of our major business to this NIO China, but still our NIO, Inc. will be holding most of its control over the NIO China and also NIO China will be part of our consolidated statements.

So, NIO China will be important channel and a tool for our RMB fundraising, because it's through our public in the NYSE we have a very diverse fundraising channel for the U.S. owners. With the NIO China, we can diversify our fundraising channel for the RMB. With both fundraising channels, I think it will help us to sustain our future development for the second generation platform, and the team is now working with E-Town on the details of these definitive agreements, and there will be a lot of details that need to be refined, and we will keep you guys updated on this news.

[Operator]

Thank you. Our next question comes from the line of Lei Wang of CICC. Please go ahead. Your line is open.

[Lei Wang, CICC]

Okay. Thank you for taking my questions. So my first question is also about NIO China. So if E-Town becomes a minority shareholder of NIO China decides the term bid in fresh capital, what can NIO expect from E-Town and will NIO still have manufacturing facility in Beijing? So would you prefer they also think or turn to the in-house manufacturing in the future? That's a first question.

The second question is about how to stimulate the sales, if the demand continues to remain weak, do you have any other plans to stimulate the sales is the second question? And the second question is about NIO, [indiscernible] JV in the future generate any cash flow to NIO and what is the synergy between NIO and the JAC NIO? Thank you.

[Louis Hsieh, CFO]

Okay. William, you want to take these three questions, after Eve translates?

[William Li, Founder, Chairman, and CEO]

Okay. [Foreign Language]

So, regarding your first question, the framework agreement that we entered with the E-Town Capital is mainly -- has many mentioned that the E-Town Capital will be helping or will be helping us to find the third-party partners to build a manufacturing facilities for the next-generation platform product. But for the near-term, we will be upholding the joint manufacturer model as we are having right now with the JAC, because this manufacturing co-operation has a very high efficiency in terms of the management and investment. Of course, we will not exclude any opportunities that we may be establishing our own manufacturing facilities, but for this RMB 10 billion fundraising or asset raising, it is more of a development research and also the user network requirements.

[Foreign Language]

Regarding your second question about the sales volume of ES6, actually we've kicked of the global media test drive and also the nationwide user test drive and we've getting a lot of feedback, a positive feedback and a review from these people and participants. So for the next following months, we will be taking active market campaigns both online and online, so that more people can appreciate and understand our product. We will organize more test drives for our potential users and we will also seek to expand our sales channels, of course direct selling will still be one of our top priorities, but at the same time, we will try to find opportunities, so that we can present our products from our partner sites and more people will get to know our brand. And for ES6, we believe it is a very powerful and strong product compared with the Q5 from Audi, GLC from Mercedes Benz and X3 from BMW actually ES6 on par with these.

If you look at the sales volume of ES8 for the first four months of 2019, you will find a sales volume ranked the first place among all the seven-seater premium SUV, actually the sales volume of ES8 has surpassed the volume of XC90 for the first four months of this year, and the sales volume of ES8 is a true side the sales of the Model X from Tesla. And for ES6 it will be tapping into a wider market, the 5-seater SUV and in this competition, we believe that the ES6 will be outperforming other products even including the gasoline cars.

[Foreign Language]

As for your third question about the joint venture between GAC and NIO, we just announced the GAC news latest brand that is HYCAN in Hangzhou and they will be launching their product next year. This is a very important long-term strategic partnership for both sides. So we can leverage each other strength in terms of the R&D, supply chain and service network and we can also utilize the synergies and we have confidence with this sustainable and long-term partnership. We may not see an immediate -- we may not see some immediate payback or returns at the short-term, but we believe for the long-term this will be a very good partnership for both sides.

[Foreign Language]

And also for this high com actually the price range of high com will be a bit lower than the price range of new product. So, with this platform or with this joint venture, it doesn't mean that NIO will be selling our product directly with this platform. In fact, we want to leverage its cost efficiency on this highly competitive platform, so that we'll spread it into the wider market. This is another approach for NIO to expand our market presence.

[Lei Wang, CICC]

Okay. Thank you very much.

[Operator]

Thank you. Our next question comes from the line of Dan Galves of Wolfe Research. Please go ahead.

[Dan Galves, Wolfe Research]

Thanks for taking my questions. The first question is related to the competitive dynamic for ES8. What is expected with the subsidy ready to come down even further in June that you might have a pre-buy of this product? Maybe if you could just talk about what vehicles the ES8 is competing with, and how it's doing competitively and in terms of market share. The second question is just about if you could help us to understand the cash burn in Q1 if you could give us any detail on what the CapEx was working capital and more importantly what is the outlook for the cash burn in future quarters once the ES6 launches, should we be expecting a significant lower cash burn in the future? Thank you.

[Louis Hsieh, CFO]

William, do you want to take the ES8 competitive landscape question; and Nick, you can take the cash burn question for -- in R&D and CapEx spent. William?

[William Li, Founder, Chairman, and CEO]

Okay. [Foreign Language]

Regarding the question about the competitiveness of ES6 -- sorry -- ES8 actually ES6, sorry ES8 not only targets at the premium electric SUV. It also aims at the segments of all the premium six and seven-seater SUV including EV and also the gasoline cars. So our competitors in this segment include [indiscernible] from Volvo and Model X from Tesla. So for the short-term the subsidy reduction may affect our competitiveness a little bit, but we do have other advantages including our high performance, our use of friction, our user network and our users they get to enjoy 10% purchasing tax discount for buying an EV. And they also enjoy the preferential policies for the license plate application and usage in cities like Beijing or Shanghai. So in with other advantages will help us to offset the impact of the subsidy reduction. And we believe that ES8 will strong -- will still be a very strong and powerful product in this segment. Thank you.

[Nick Wang, VP, Finance]

I think to answer your questions about the cash burn. I think in Q1 we, I won't call it burn, we actually have a cash outflow of over RMB 4 billion, but the special note will be paid because in December we delivered more than 7,000 units but in Q1 when we delivered like roughly a half of it. So there is a huge working capital gap. A lot of the payment occurs in the months of January and February as well. So working capital will take a significant portion of it. And also, if you look at our expenses item like R&D as well as C&A that actually take us some large portion as well. So overall in moving forward we think that this cash burn rate is going to go down quarter by quarter for a couple of reasons. Number one, it's actually with the launch ES6 we're going to bring more volume into the picture. Accordingly and the as a result working capital is going to help our cash flow.

Number two with the launch of our LOP or Lean Operation Program, essentially you can call it internal organizational optimization program. We're going to cut down our cost, cut down unnecessary spending in both strategic spending of RMB by rebalancing our product portfolio and also balancing our self-network spending versus seek some, strategic alliance in the channels, so we can cut down significantly. And also in terms of people's and the daily operation we issued a new policy and put the stringent mindset into people's minds. So and that makes the - makes the lean operation concept not only reflected in the numbers but also reflect in every minds of our employees.

[Louis Hsieh, CFO]

Hey Dan, it's Louis. We expect Q2 cash burn to be a little bit high. But then Q3 and Q4 once ES6 starts delivery and we expect the cash burn to come down relatively quickly.

[Dan Galves, Wolfe Research]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Fei Fang of Goldman Sachs. Please go ahead.

[Fei Fang, Goldman Sachs]

Hi, William, Louis, Nick, Jade. Thanks for taking my question. Can you give us an update on the content and specs of the ES6, are we still on track to install 811 NCM batteries and also will level 2.5 be ready upon the launch and also in light of the current environment, do you see opportunities to reduce component prices from suppliers. And if so where do you see most of that, whether it's a battery motor, inverter or others? Thank you.

[Louis Hsieh, CFO]

Thank you, Fei. William, do you want to talk about ES6 specs and current reduction in price possibilities?

[William Li, Founder, Chairman, and CEO]

Yes. [Foreign Language]

About the 811 NCM battery pack, actually it is proceeding as our schedule. So it will be available to our users in July and actually in our validation and it passed, the 811 NCM battery pack showed strong performance. So we're quite confident about it. As for our corporation and partnership with CATL, our battery solid supplier, actually we have a long-term cost reduction framework with CATL. So we will be witnessing significant cost reduction in terms of the battery pack from the third and the fourth quarter of this year. Based on our volume assumption, in this framework, you will witness this cost reduction by this one. Thank you.

[Operator]

Thank you.

[Fei Fang, Goldman Sachs]

That's very helpful.

[Louis Hsieh, CFO]

Thank you.

[Operator]

Our next question comes from the line…

[Louis Hsieh, CFO]

Dan, it's Louis. Sorry. It's Louis Hsieh. Some of the specs just for your -- what you asked about the ES6 is very competitive with the likes of Mercedes EQC I-Pace Model 3 and Model X and Model S from Tesla. So it's very fast zero to 60 in 4.7 seconds. It has a longer range 500 plus kilometers with an 84 kilowatt battery. And so its performance, its communication, it's service everything should be very competitive if not better and its price below all those models including the Model 3. So we think it's a very price competitive car. It looks sporty, it's sharp and it is full of amenities.

[Operator]

Thank you. Our last question comes from the line of Yen Min [ph] of Deutsche Bank. Please go ahead.

[Unidentified Analyst]

Hi, [indiscernible]. Thanks for taking my questions. I've got two quick questions here. My first question is on the future new products. As Louis has just mentioned, it seems like we will be launching another model in 2020 before the ET series. Just could you please share with us your source behind this decision and also would this be another SUV model and what sort of market seminar are we targeting at. And my second question is as mentioned just now that the demand was negatively impacted by the annually subsidy cuts. So wondering if there's any chance of -- if there's any chance that you would be adding lower price streams for the ES6 and ES8 models to drive the demand? Thank you.

[Louis Hsieh, CFO]

William, you want to answer these two?

[William Li, Founder, Chairman, and CEO]

Okay. [Foreign Language]

So about the ET7 and also our new product, we launched our ET preview during Shanghai Auto Show this year and we have received a lot of positive feedback and review about this ET preview, but actually earlier this year, we decided that we would like to launch our ET7, our second generation platform NP2 because the -- recently, we decided to launch this ET7 on our second generation platform, NP2 because the next several years will be very important for the transformation of ADUS, AD and the smartness technologies. So you will be seeing the transformation for the sensors, for the computing unit and also for the E architecture of the vehicle and we want to see this ongoing transformation that's why we decided to put the ET7 on the second generation platform.

So, in terms of the launching time of ET7, it is postponed a little bit. I think this is also the best decision - it is postponed for the next generation. I believe this is a positive decision for the company, for our investors as well as our users, but at the same time, we understand that the market is expecting a new product or a new model from NIO. So earlier this year, we decided that we - on top of the current generation platform, we would like to leverage our existing technologies to launch a new model next year and right - at the moment, we may not share sufficient information with you, but you understand that NIO can be quite efficient and agile in terms of our [indiscernible] development. So you can expect the launch of this new model next year.

[Foreign Language]

As for the demand after the subsidy cuts, actually for our ES6 and ES8, we target at the premium SUV segment for both electric cars and also the combustion car. For ES6 and ES8 their competitors including a lot of premium SUVs from luxury brands, and even with this competition we still believe that we have a strong competitiveness. We have the tax discount with purchasing tax, consumption tax and also duty. We also have a strong performance. We have good user services. We also have the preferential policies for the licensed plate, application and usage. So we believe that maybe in the short-term, the subsidy cost may affect us a little bit, but in the long run we do have the strong market performance in this segment. And as more and more people starting appreciate - start appreciating and adopting EVs, we believe in the long run ES6 and ES8 will be very powerful.

[Unidentified Analyst]

Thank you.

[Louis Hsieh, CFO]

Thank you.

[William Li, Founder, Chairman, and CEO]

Thank you.

[Operator]

Our next question comes from the line of Paul Gong of UBS. Please go ahead.

[Paul Gong, UBS Securities]

Yes. Thank you. I have two questions. The first one is regarding this deal subsidiary, NIO China, since E-Town, wherein E-Town has committed RMB 10 billion just for minority interest in this NIO entity. Does that mean, NIO Incorporation is also committed for more than RMB 10 billion investment into this NIO China entity? If so, is this a NIO investment into the NIO China in the form of cash or in the form of technology or whatever, or maybe I think, can you give us a little bit color on this? This is my first question. My second question is, I noticed on the balance sheet, there is some item within the equity got additional paid in capital that has declined from RMB 41.9 billion to RMB 40 billion, declined by RMB 1.9 billion during this quarter. Can you please give us a little bit color, what was the reason for that? Thank you.

[Louis Hsieh, CFO]

William, you want to talk about E-Town, NIO China?

[William Li, Founder, Chairman, and CEO]

Okay. [Foreign Language]

Regarding this NIO China with E-Town, actually it doesn't mean that we will be investing more than RMB 10 billion into this NIO China in exchange for more equity stocks. Is that easier to cut our NIO Inc. current business, actually most of our business including our employee, including ours sales network are based in China. Over 90% of our employees are based in China. So for this asset, for this existing asset we already have a high end goods evaluation. So this is how we work with this NIO China, we'll be leveraging this existing asset and the business for the equity fundraising. Thank you.

[Paul Gong, UBS Securities]

So, could you factor them more briefly to understanding it in the way you give some minority shares at your Beijing E-Town and they paid in RMB 10 billion as an investment into this entity, so it's kind of in the form of portfolio finance through equity?

[William Li, Founder, Chairman, and CEO]

Yes.

[Louis Hsieh, CFO]

That's correct. That's actually from E-Town and it's affiliated. Yes.

[Paul Gong, UBS Securities]

Okay.

[Louis Hsieh, CFO]

I'm going to address your second question, Paul. Essentially this reduction on the equity portion RMB 1.9 billion reflected and it was strictly related to the convertible bond that we issued back in around the end of January, early February. So in this bond I can explain a little bit more detail. There is a two derivative product; one is called a prepaid -- prepaid forward. The other one is called additional call option. If you understand the fundamental structure, initial structure of a convertible bond, it's actually a face value plus 30%, 30% the price over the stock price at the time of issuance. So, on top of it, we actually put additional call option which raised the stock price to call, the strike price from 30% to 100%, because that's take roughly $80 million. The other one is the prepaid forward capital. Essentially, we use the part of the proceeds from this debt issuance to buy back some of the stock and to sweeten the deal essentially. So make this transaction completely completed. So overall, this has actually resulted in the reduction in our equity positions of RMB 1.9 billion as you compare in our balance sheet.

[William Li, Founder, Chairman, and CEO]

Thank you, Paul.

[Paul Gong, UBS Securities]

Okay. Thank you.

[Operator]

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

[Louis Hsieh, CFO]

Thank you, everybody, for joining us today.

[William Li, Founder, Chairman, and CEO]

Thank you, and see you next quarter.

[Nick Wang, VP, Finance]

Thank you everyone.

[Operator]

Thank you. This concludes this conference call. You may now disconnect your line. Thank you.