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NIO Inc. (NYSE:NIO)
Q4 2019 Earnings Call
Mar 18, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello, ladies and gentlemen. Thank you for standing by for NIO, Inc. fourth-quarter 2019 earnings conference call. [Operator instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Jade Wei, associate vice president of investor relations of the company. Please go ahead, Jade.

Jade Wei -- Associate Vice President of Investor Relations

Thank you, Edison. Good evening, and good morning, everyone. Welcome to NIO's fourth-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 website.

On today's call, we have Mr. William Li, founder, chairman of the board, and chief executive officer; Mr. Steven Feng, chief financial officer; and Nick Wang, VP of finance. Before we continue, please kindly be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. 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 an 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 the unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to news 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 CEO Mr. William Li. William. Go ahead, please.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Hello, everyone, and thank you for joining our 2019 Q4 earnings call today. We delivered a combined 8,224 ES8 and ES6 vehicles in the fourth quarter of 2019 representing a 71% sequential increase from the prior quarter. Cumulative deliveries of ES8 and the ES6 reached 20,565 in 2019, representing an 81% increase from 2018. The COVID-19 has broken out in China since January 2020.

The overall sales and deliveries of the auto industry in China are materially impacted, and the passenger vehicle sales in China slumped 41% in total in January and February 2020 compared to the same period last year. Against this backdrop, NIO has delivered a total of 2,305 vehicles in January and February, which is lower than our target prior to the outbreak. In response to the micro environment, on one hand, we have actively explored a variety of online channels, including wide streaming platforms, and fully leveraged the well-developed online functions of NIO app to promote online sales. NIO's end-to-end direct sales business process has enabled us to continue our sales efforts during this special time.

On the other hand, from spring festival to now, NIO has maintained 24/7 maintenance and power services through our cloud-based service system to support users 'daily usage. Our products and the service system have withdrew due to the arduous test during the outbreak and won wide recognition of our user community. Thanks to our loyal user community and the superior word of mouth reputation, recently, orders generated through user referral have reached 69%, much higher than the 45% average user referral rate in 2019. With the joint efforts of our users and teams, the total number of new production orders reached over 2,100 in the past 30 days, representing 70% of the order growth level in December 2019 as the outbreak gradually brought under control in China.

NIO Houses and NIO Spaces are cautiously being reopened with increasing foot traffic in stores. Based on the current trend, we would hope the daily NIO order rate to return to the level of last December and April. In terms of production, the work resumption has been postponed across China, which has impacted our production and supply chain to various extents. Although our Hefei plant resumed the production on February 10 and the production of most of our supply chain partners have basically returned to normal, partners located in Hefei province will still need some time to recover.

Constrained by the limited supply capacity, we expect the aggregate deliveries of Q1 2020 to be around 3,400 to 3,600. We have been monitoring the supply chain very closely and have seen positive changes every day. We do see the supply chain recovery has sped up since the mid of March. So we hope that the production capacity can return to normal in April.

In the first two quarters, the safety of our employees and users remain our top priority. Thanks to the efforts of our users and teams, we have weathered the storm and passed the toughest time. In particular, thousands of new users joined various public benefit activities during the outbreak and made contributions to the prevention and control initiatives in Hefei and other regions. Looking forward to 2020, there are many challenges facing the China and the global economies, which is bound to significantly affect the overall auto industry in China.

We believe that NIO will stand out from the competition in this difficult market environment. We are confident about our product competitiveness, integrated online and offline operations and innovative business model based on user enterprise. After the organizational adjustments and the efficiency improvements in 2019, our teams are well prepared to achieve the 2020 sales target, continuously improved gross margin and systematically optimize the overall operational efficiency. First, facing the pressure of the outbreak, we are still confident to achieve the preset sales target for 2020.

NIO product family will be more competitive and diverse in 2020. In April, NIO will start the delivery of the all new ES8, a smart electric flagship SUV. The all-new ES8 has made nearly 188 improvements. And most importantly, the NEDC range will be virtually improved.

In September, we will kick off the delivery of the EC6, a smart electric coupe SUV. In the fourth quarter, over 100-kilowatt hour battery pack will be launched into the market. The iterative product experience is the most important cornerstone for NIO to maintain our leading position in the premium smart electric SUV market in China. In addition, we'll continue our efforts in sales network expansion and build more NIO Spaces, which are estimated to be around 200 by the end of this year.

User referral is another important driver of sales growth. With the growing user base and industry-leading, word-of-mouth reputation, we believe that the orders generated from user referrals will increase at an even faster rate in the future. Second, gross margin improvement is one of the top objectives of NIO in 2020. With the supply chain optimization, continuous cost reduction of the battery pack and manufacturing cost saving per vehicle brought forward by production scaling up and management optimization, we have confidence to achieve our goals that our gross margin can turn positive in the second quarter and reach two digits by the end of the year.

Third, we'll continuously improve operational efficiency. We have made significant organizational optimization and business adjustment in 2019. The overall headcount has reduced from close to 10,000 at the beginning of 2019 to less than 7,000. Due to one-off expenses in Q4, the operating loss in the fourth quarter of 2019 was higher than that of the third quarter.

We have basically finished all the order adjustments which has laid a solid foundation for 2020. In 2020, the company has set up very strict expense control and efficiency improvement targets and implemented rigorous measures in daily operations accordingly. We are pleased to see encouraging results year to date and expect around 35% expense reduction compared to the prior quarter given under the pressure of the outbreak. Lastly, with regards to all the financing efforts, NIO issued $435 million convertible notes in February and March to several unaffiliated Asia-based investment fund to support the company's daily operations and business development.

at this moment, we have already finished all the private placement. On February 25, we signed the collaboration framework agreement with Hefei municipal government. The JAC NIO manufacturing plant for ES8, ES6 and the EC6 is located in Hefei, which enjoys a strong automotive and digital legacy and resources, and it's one of the core cities and transportation hubs in the Yangtze River Delta economic zone. Under the framework agreement, NIO plans to establish NIO China headquarters in Hefei and Hefei government plans to provide resources and funding support for the long-term growth of NIO China.

Both parties expect to sign the definitive agreement before the end of April. Thank you for your support. With that, I will now turn the call over to Steven to provide the financial details for the quarter. Steven, please go ahead.

Steven Feng -- Chief Financial Officer

Thank you, William. I will now go over our key financial results for the fourth quarter of 2019. As being mindful of the length of this call, I encourage listeners to refer to our earnings press release, which is posted online for our full-year results and other additional details. Our total revenues in the fourth quarter were RMB 2.85 billion or $409.1 million, representing an increase of 55.1% quarter over quarter.

Our total revenues are made of two parts: vehicle sales and other sales. Vehicles sales in the fourth quarter were RMB 2.68 billion or $385.5 million, representing increase of 54.8% quarter over quarter and accounted for 94% of total revenues in this quarter. The increase in vehicle sales quarter over quarter was attributed to higher deliveries achieved from our existing user referrals and the expansion of our sales network through the continued launch of NIO Spaces in the fourth quarter of 2019. Other sales in the fourth quarter were RMB 164.4 million or $23.6 million, representing an increase of 59% quarter over quarter.

The increase in other sales over last quarter was mainly attributed to the increase of home chargers installed and accessories sold, which was in line with improvement of vehicle sales in the fourth quarter. Cost of sales in the fourth quarter were RMB 3.010 billion or $445.6 million, representing an increase of 50.7% quarter over quarter. The increase in cost of sales was mainly driven by the increase of delivered volume of the ES6 and ES8. Gross margin in the fourth quarter was negative 8.9%, compared with negative 12.1% in the third quarter of 2019.

The improvement in gross margin over last quarter was mainly driven by the improvement of vehicle margin. More specifically, vehicle margin in the fourth quarter was negative 6%, compared with a negative 6.8% in the third quarter of 2019. The improvement of vehicle margin was mainly due to improved efficiency driven by the increase of production and delivered volumes of ES6 and ES8. R&D expenses in the fourth quarter were RMB 1.03 billion, representing a decrease of 32.3% year over year, an increase of 0.3% quarter over quarter.

The slight increase in R&D expenses over last quarter was primarily attributed to the incremental design and development costs for EC6 and all-new ES8 launched in December 2019, offset by less employee compensation due to a reduced number of R&D personnel. SG&A expenses in the fourth quarter were RMB 1.55 billion, representing a decrease of 20.5% year over year, an increase of 32.8% quarter over quarter. The increase in SG&A expenses over last quarter was primarily attributed to increased marketing and promotion activities and additional costs on the optimization of our organization and sales network, offset by less employee compensation due to a reduced number of selling, general and administrative employees. Loss from operations in the fourth quarter was RMB 2.83 billion, representing a decrease of 18% year over year, an increase of 17.3% quarter over quarter.

Share-based compensation expenses in the fourth quarter were RMB 51.2 million, representing a decrease of 63.9% year over year and a decrease of 27.3% quarter over quarter. The decrease in share-based compensation expenses over last quarter was primarily attributed to the continuous decline of employee numbers and impact of part of their share-based compensation expenses being recognized within the accelerated manner, out of which the expenses decreased gradually over the vesting period. Net loss was RMB 2.86 billion in the fourth quarter, represented a decrease of 18.2% year over year and an increase of 7.6% quarter over quarter. Net loss attributable to NIO's ordinary shareholders in this quarter was RMB 2.89 billion, represent a decrease of 17.7% year over year and an increase of 7.3% quarter over quarter.

Basic and diluted net loss per ADS in the fourth quarter were both RMB 2.81 or $0.40 per ADS. 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 2.73 or $0.39 per ADS in the fourth quarter. Our balance of cash and cash equivalents, restricted cash and short-term investment was RMB 1.06 billion as of December 31, 2019. And now for our business outlook.

As William mentioned, for the first quarter of 2020, the company expects deliveries to be between 3,400 and 3,600 vehicles, representing a decrease of approximately 56.2% to 58.7% from fourth quarter of 2019. The expected decrease is primarily attributed to the constrained production and delivery impacted by the novel coronavirus outbreak. The company also expects the total revenue of first-quarter 2020 to be between RMB 1.21 billion to RMB 1.27 billion or between $173 million to $183 million. This would represent a decrease of approximately 55.3% to 57.6% from the fourth quarter of 2019.

This business outlook reflects the company's concurrent and the preliminary view on the [Inaudible] situation and market conditions, which is subject to change. Now this concludes our prepared remarks. I will now turn the call over to the operator to facilitate our Q&A session.

Questions & Answers:


Operator

[Operator instructions] First question comes from the Lei Wang of CICC. Please go ahead.

Lei Wang -- CICC -- Analyst

Good evening, William and Steven. Lei Wang speaking from CICC. Congratulations on the recent financing activities. I do believe that means a lot.

So basically, I got two questions. So in the business outlook, it guides a quarter delivery between the 3,400 to 3,600 in the first quarter of 2020. So do you might provide some guidance on the sales target over this year? So will that be something close to like 30,000 units? That's the first question.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thanks for your questions. In our previous remarks, we have provided the guidance for Q1, that is 3,400 to 3,600. But just like we mentioned, this is mainly affected by the production capacity. Although our Hefei plant has resumed the production on February 10, but the production capacity is still limited by the supply capacity, especially for those partners located in Hubei province for the February and March delivery.

Although at this moment, most of the partners have resumed their production, but we still have some limitations and constraints regarding the part supply. So for the partners in Hubei, they will still need some time to recover. The main challenge for the delivery in January is because of the production constraints. Because after we produce our products, we will need to ship our products to the delivery centers and also make the appointment with our users to deliver the product to them.

For the first-quarter delivery, the main reason of the constraint is because of the production. But just like I mentioned, in the past 30 days, our orders have been increased. And right now, the new orders have accumulated for over 2,100 or close to 2,200. It means that the daily new orders is around 70%.

So for the level, it's actually quite similar or actually close to the 70% of the December level last year. At this moment, we're seeing the orders ramping up, so we're quite confident about our annual sales target because our model is made to order. So if we can resume the normal production, then it means that we can deliver our products to the users at a much faster rate. Every day, we have accumulated some new orders from the users.

And at this moment, we have around 5,000 order backlogs. I cannot give you a specific number regarding our annual sales target. But according to all the data that I have shared, we are quite confident to achieve our internal annual sales target.

Steven Feng -- Chief Financial Officer

Your next question.

Operator

[Operator instructions]

Jade Wei -- Associate Vice President of Investor Relations

Hi, operator. We think that Lei was dropped. so please continue with next analyst, please. Thank you.

Operator

All right. Sure. Thank you. Our next question is from the line of Mr.

Dan Galves of Wolfe Research. Please go ahead.

Dan Galves -- Wolfe Research -- Analyst

Thank you very much for taking my questions. So volume was much higher in Q4 versus Q3, but the gross margin only improved a small amount. Can you talk about some of the things that maybe offset the impact of better scale?

Steven Feng -- Chief Financial Officer

Yes, Stanley, please answer this question.

Stanley Qu -- Vice President of Finance

This is Stanley. As you mentioned, the volume increased in the fourth quarter, but the gross margin slightly increased. The main reason is about the volume mix of our products. We sold all ES6 base version in the fourth quarter, so the selling price is a little bit lower than the ES8.

So that's the main reason for the gross margin slightly increasing in fourth quarter. Yes. The -- yes. So yes.

Dan Galves -- Wolfe Research -- Analyst

OK. That makes sense. And then as you're looking ahead, I think that you said that you're expecting double-digit gross margin by the end of the year, but maybe you could clarify that comment. Can you give us a sense of what volume level that would require to get to that double-digit gross margin target? And if you can achieve that, would that support cash outflow of neutral? Or what do you think that there would still be a cash outflow once you get to double-digit margins on the vehicles?

Steven Feng -- Chief Financial Officer

OK. Yes. As William mentioned in his speech, the gross margin improvement in the 2020 is mainly because the -- our supply chain optimization and continuous cost reduction of that battery pack and also manufacturing, cost savings brought forward by production, scaling up and management optimization, and we have confidence that we can achieve this in 2020. Regarding the volume, and also we mentioned before, is we have clear time, but it's difficult for us to mention this volume scale here for you, but we are confident to to get -- achieve of this target, yes.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

I just want to add one point. In terms of the production capacity of the Hefei plant, we think the vast economy of scale should be around 4,000 per month. Not [Inaudible] the one shift to production. So the one shift to production should be around 4,000 per month.

If we can get today's [Inaudible] then, probably this can basically support our operation target. We believe for this year, we should have some opportunities to achieve this.

Steven Feng -- Chief Financial Officer

And then perhaps some comments from Steven. If you look at our GP margin, it's related with several parameters. Of course, first, the volume; and second, that's our price: third, our cost. Of course, we expect -- we don't change our sales target for 2020, and we are very confident we can achieve this sales target although the outbreak of novel coronavirus in January and February.

And if we look at our sales choice, we think and we are confident, we are able to raise the ASP as more attractive options, such as the new panel. And also, if you look at our cost side, of course, the battery cost will anyway decline. Then if we look at our other bond cost, that's the auto parts from other suppliers, we believe a 10% decrease is reasonable. Third, and if you look at our previous accounting records, we actually compensate the NIO plant.

And that means with the production volume to rise, our manufacturing expenses will gradually drop, decline, and we expect that to achieve that 30% decline this year just from its manufacturing cost.

Dan Galves -- Wolfe Research -- Analyst

That's very helpful. Thanks a lot.

Steven Feng -- Chief Financial Officer

OK.

Operator

Our next question is from the line of Tim Hsiao of Morgan Stanley. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, Will and Steven and management team. Thanks for taking time to host the call. Just a few quick questions. First of all, could I just have a quick follow-up question regarding the gross margin because you just mentioned about the different product mix.

So could we have a little bit more color about the gross margin of EC6, the model launch in the upcoming Septembers? Would that be similar to ES6 or ES8 or could be slightly higher or similar or lower? And separately, we noticed that the selling and marketing expenses rose a bit in fourth quarter last year sequentially. So could we expect that to become the norm or further trend-up considering that we target to open up to 200 stores -- I mean, NIO Space by end of this year? And lastly, is our collaboration agreement binding on Hefei government before the deal is officially signed by end of April? Will the collaboration of potential investment take place at our China owned or at the listed company level? Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thanks for your questions. Because we haven't disclosed or announced the specific pricing of the EC6 and our EC6 is actually benchmarked against model Y, we launched the EC6 at the end of last year, and we received very positive feedback from the public and other users. We will determine the specific pricing of the EC6 based on the market situation. We think probably we will announce the specific pricing around July.

Gross margin is a very important objective for the company, just like I mentioned in my speech. EC6 has shared many components together with ES6. At the same time, EC6 battery cost can be significantly reduced. In terms of the unit cost per watt hour in this Q4 will be reduced by 25% compared with the same period last year.

So with all those factors in consideration, we are quite confident about achieving the good gross margin target for the EC6 regardless of the pricing. Just like we have mentioned, NIO Space started from last -- actually, last year, Q4. The main cooperation model for the NIO Space is to work together with other partner to set up and expand the NIO Spaces in the market. We work together with the partner based on the orders or the specific transactions that they can achieve in their stores.

So this transaction is based on the offline traffic and the orders that they can settle in their own NIO Spaces. Although speaking, the NIO Space model is quite efficient, and it's different from the NIO Houses. We're not going to increase the number of the NIO Houses this year. So we believe the NIO Space will not have a significant impact on our SG&A, and the efficiency of the NIO Space is actually quite high.

Under the collaboration framework agreement with the Hefei municipal government, NIO China is an independent entity for the RMB financing activities. The Hefei municipal government will support the new China's long-term growth through the RMB financing project. It's not part of the NIO Inc. equity financing project.

We haven't signed the definitive agreement yet with the municipal government. After we signed the final agreement, we will disclose the specific details.

Tim Hsiao -- Morgan Stanley -- Analyst

Thank you.

Steven Feng -- Chief Financial Officer

Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Ryan Brinkman of JP Morgan. Please go ahead.

Ryan Brinkman -- J.P. Morgan -- Analyst

My question -- thanks for taking my question. I'm just curious how you are thinking about the likely sales or pricing outlook for battery electric vehicles, including for your vehicles relative to internal combustion engine vehicles in light of the almost unprecedented recent decline in the price of oil and, presumably soon, gasoline? Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Actually, to date, the China government has adjusted the oil price and reduced the supply 15%. But the government will adjust this oil price based on the international oil price, but it will not go any lower than $40 because the crude oil price is that is $40. At this moment, the crude oil price in the international market is around $30. So it means that the Chinese government will not have any space to reduce the price further.

Based on the current price, the cost of EV usage is still much better than that of the combustion cars. So we think they will not have any significant changes regarding this cost of usage. I think it's the market consensus that, in the long term, EV is going to replace combustion cars. The main reason for this trend is not because of the cost of usage.

It's mainly because the EV is better fitted for the autonomous driving technologies and ADS in terms of the response time of the motors. At the same time, the Chinese government is quite determined in terms of the emission reduction. For example, the government has released many favorable policies for the EVs in terms of the license plate and tax reductions. So those are the main impetus for the users to choose EV over combustion cars.

Ryan Brinkman -- J.P. Morgan -- Analyst

Thank you.

Operator

Thank you. [Operator instructions] Our next question is from the line of Bin Wang of Credit Suisse. Please go ahead.

Bin Wang -- Credit Suisse -- Analyst

Thank you. I actually want to clarify several numbers. Number one is about gross margin. You mentioned gross margin will be improving in 2020.

So is the vehicle gross margin or is the overall gross margin, including vehicle, that's number one I want to clarify. The second thing is about one-off expense. Can you quantify how big is the size of one-off expense? And what's the detail about the expense? That's the second thing. And the third thing is, actually, you mentioned that, in the first quarter, the cost would decline by 35% or another, or another translation is that the loss making in the No.

1 quarter would decline by 35%. So what's the base for a decline for 35% in the first quarter this year? That's the three things I want to clarify. And besides, actually, I have one question about the financing because think about the share price right now, the CB actually has a potential risk to demand [Inaudible] now converted to the share. So for upcoming, do you have any further financing after the Haikou Hefei and tie up any further financing plan? And actually, you can see in the media report, the [Inaudible] automaker match [Inaudible] your investments, such as the GD, such as JC.

So do you see any synergy, if you would really got a shareholder from the traditional carmaker? For example, you can share their supply chain and there maybe the components supply with much lower cost. Thank you.

Steven Feng -- Chief Financial Officer

OK. So perhaps, I want to start with the GP margin question. Yes, we think we will achieve positive GP margin for second quarter of 2020 and double-digit GP margin in Q4 of 2020. Of course, first, we refer it as our vehicle GP margin.

And you can see our -- because vehicle sales accounted for 94% of our total revenue. So our overall revenue -- our overall GP margin will be close to our vehicle GP margin. That's first. Second, if you look at our other sales GP margin, it also improved in Q4 2019.

And we are confident that with our efforts, our other sales GP margin will also improve in 2020. That's the first. And I think Stanley will give you more explanation about the one-off, one-time cost.

Stanley Qu -- Vice President of Finance

Yes. The second question is about the one-off, one-time expense. The majority were related to organizational restructuring across all functions, facility leasing contract termination, compensation and also the strategy adjustments around the manufacturing and the supply chain. So that's the second question, yes.

Steven Feng -- Chief Financial Officer

Total numbers. [Inaudible] total number.

Stanley Qu -- Vice President of Finance

Total number is around RMB 400 million. That's the second question. Third is about the -- our forward-looking about the net loss of the first quarter of 2020, the comparison is with the fourth quarter of 2019. So compared with fourth quarter of 2019, we expect the first quarter of 2020 will decrease by 35%.

It's quarter-on-quarter comparison. Yes.

Bin Wang -- Credit Suisse -- Analyst

I understand. So it's not the opex is the bottom line. So it's about RMB 2.9 billion decline 35%. Is that true? So it's not opex, it's the bottom line, not net loss.

Stanley Qu -- Vice President of Finance

Yes, net loss, yes.

Bin Wang -- Credit Suisse -- Analyst

OK.

Stanley Qu -- Vice President of Finance

Yes. Net loss, confirmed net loss, yes. So the fourth question goes to William.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

As we have been working together with other OEMs in various ways. For example, we have been working together with JAC in terms of the manufacturing, and we also have a very good collaboration with GAC in terms of the GNC new joint venture. Recently, both parties have decided to increased investment in this joint venture. And this joint venture is going to kick off the mass production of their vehicle models.

We will continue this cooperation with those OEMs. Regarding other OEMS, we will continue to explore other possibilities to work with them in terms of the supply chain and R&D. But in terms of the equity or capital aspect, we don't have any specific information that we can disclose at this stage. If we have any information that we would like to disclose, we will share those information as soon as possible.

Bin Wang -- Credit Suisse -- Analyst

Thank you.

Operator

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

Lei Wang -- CICC -- Analyst

Hi [Inaudible]. I was disconnected, and I was not able to finish the last question. So do we have some guidance on what the capex is going to be this year? Because it was reported that we are about to invest R&D center, a new R&D center and also the segment manufacturing site.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

In terms of capex . For 2020, the majority will be used for the new product model launch. For example, the tooling required for the product launch. It is less than $200 million.

In terms of the cooperation with the Hefei municipal government, after we signed the definitive agreement with the government, we are not going to invest to build the R&D center or the manufacturing base in the Hefei municipal city. And this is not going to cause any pressure on our capex.

Lei Wang -- CICC -- Analyst

OK. Thanks, William. Very clear.

Operator

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

Your line is open. You can ask your question. Right. [Operator instructions] Our next question is from the line of Paul Gong of UBS.

Please go ahead.

Paul Gong -- UBS -- Analyst

HI, William. Hi, Steven. Thanks for taking my question. Two questions.

The first one is I remember in first quarter last year, you have to pay -- you have to prepay the battery purchase to CATL for the full year. Is that still the case heading to 2020 and heading through this year? This is my first question. And my second question is regarding your assumption on the battery price declining throughout 2020. You mentioned that in Q4 of 2019, your battery cost is 20% cheaper than Q4 of 2018.

But in Q4 of 2019, you were still making negative gross margin despite of 8,000 deliveries. So when you mentioned by end of this year you are going to achieve double-digit gross profit margin, what further battery cost decline or assumption have you used? I think Steven mentioned 10% decrease on the other [Inaudible] cost, but I just want to have your assumption on the battery cost assumption for this. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thanks for the question. Last year due to the subsidy reduction, the passenger vehicle sales in China has slumped significantly. But because our users are private users and for other OEMS, normally, they sell their cars for the operating usage. In this case, our sales didn't decline that significant compared with the sales of other OEMs.

That is why, right now, we are one of the most important partner with CATL. This year, our cooperation with CATL is going to be even closer. This means that we can get a much better deal, together with the CATL, compared with last year, for example, in terms of the payment terms. In terms of the price, starting from one year and a half ago, we have been working together with CATL to reduce the price of the battery.

This year, we have witnessed a significant cost reduction. Starting from the second quarter, we will have a continuous cost reduction every quarter. In the fourth quarter of this year, we will launch the 100-kilowatt hour battery pack and the CTT battery pack. With those new battery packs, we can further reduce the cost without affecting the performance and the drive range of our vehicle models.

The cost -- the unit cost per watt hour is going to be reduced by 20% compared with last fourth quarter at the battery pack level. So we're confident that we can improve the gross margin. Just like we have mentioned, in terms of the gross margin improvement, the main drivers are the battery cost reduction, other bond cost reduction and the manufacturing cost savings. We are quite confident to see the positive results from those gross margin efforts.

Paul Gong -- UBS -- Analyst

Thank you very much.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Paul Gong -- UBS -- Analyst

That's very helpful. Very glad to know that. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator instructions] Our next question is from the line of Ming Li of Bank of America Merrill Lynch. Please go ahead.

Ming Li -- Bank of America Merrill Lynch -- Analyst

Thank you. Thank you, William and the management team for your time. So I just have a few quick questions. So my first question is that, right now, because the overall EV consumption sentiment is still not very strong in China.

So how do you think about any new strategy to help your volume sales? I know you're talking about new products and also the NIO Space expansion, but do you -- will you have any new strategy to have on the volumes sale? That's my first question. Second question, some of the -- your competitors already discussed to use LFP battery to lower the battery cost, but do you think it's a feasible choice for you since you have battery swap service, and you have a lot of LCM battery for swap? So do you think it's a possible choice? Or you don't think it's a good choice for you to lower your own cost of tax? That's my second question. And my third question is that how -- what's the capex do you plan to spend on the battery swap and the battery charging station for this year? That's my third question. Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Yes. It's a quite unique advantage for NIO in terms of the battery-related innovations. This year, we are going to launch a new contract called battery as a service. This is going to leverage the power swap stations and the swapping technologies we have.

It's quite important to improve the overall existing efficiency. In the world, only NIO can provide these kind of services to the users. Users can lease the battery or swap the battery and upgrade the battery according to the specific needs. Right now, we have already launched the 84-kilowatt hour battery pack to the users in our battery circulation system.

So the users are free to -- allowed to upgrade their battery packs with this 84-kilowatt hour battery. In terms of the battery as a-service, this is going to be a very important strategy for us to put ourselves besides all the other strategies we have mentioned. We are now having very close discussions with the government authorities regarding the specific policies for the battery as a service. The current progress is quite positive if there is any kind of important information that we will share with everyone right away.

Because we have the swapping technology in place, so we are quite willing to explore different technologies and materials for the battery packs. But when we make these decisions, we will consider the performance experience and the cost. For example, we have the same battery pack size with different kind of energy density, like 100-kilowatt hour battery pack and 84-kilowatt hour battery pack. This year, with the C2P technologies, we will be able to launch this 100-kilowatt battery pack.

This is our unique advantage. This means that we should also be free to explore the possibilities in terms of the RFP material. In terms of the swap station and capex investment related with the battery, we will increase the investment a little bit this year because our user base is increasing. But overall speaking, for this year, it's going to be around RMB 100 million.

Ming Li -- Bank of America Merrill Lynch -- Analyst

Thank you, William.

Operator

[Operator instructions] Our next question is from the line of Fei Fang of Goldman Sachs. Please go ahead.

Fei Fang -- Goldman Sachs -- Analyst

Hey, great. Let me try my luck this time. Thanks, William, Steven and Jade. Just two quick questions.

So apologies if this has been covered before. So for the first-quarter volume guidance, is it possible to break it out by ES8 and ES6? And then the second question is that we noticed the net cash in the fourth quarter didn't really change much from the third quarter despite we still have a RMB 2.8 billion loss. So can you maybe walk us through some of the major items in the cash flow statement? What has been sort of driving the better than sort of earnings, free cash flow in the fourth quarter? Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

In terms of the sales for the third quarter, the majority of the sales are contributed by the ES6 because we are about to deliver the all new ES8 in April. This means that the orders for the current ES8 is going to decrease because people would like to place order for the all-new ES8. Our model is make to order. So this is quite unique for us because at the end of last year, we have launched the all-new ES8 and started to accept the orders from the public.

Steven Feng -- Chief Financial Officer

Regarding the second question about the cash flow of fourth-quarter 2019, I think first is about we closely monitored our cash position in fourth quarter. So the operating flow, I think, decreased compared with last quarter. And secondly, as we mentioned in our Q3 2019 earnings release, [Inaudible] was closed in the fourth quarter. So there is still some cash injection in this quarter.

So combined with those effects, I think, the total net cash outflow is a little bit lower than the total loss. So I think that's the reason. Thank you.

Fei Fang -- Goldman Sachs -- Analyst

And sorry, I just want to confirm that [Inaudible] was $100 million. That's the inflow -- financing inflow in the fourth quarter.

Steven Feng -- Chief Financial Officer

Yes.

Fei Fang -- Goldman Sachs -- Analyst

OK, great.

Steven Feng -- Chief Financial Officer

Yes. We -- [Inaudible] subscribed totally $100 million and the majority came in in the fourth quarter.

Fei Fang -- Goldman Sachs -- Analyst

That's great. Very helpful. Thank you.

Operator

And there is no further questions. Now I'd like to turn the call back over to the company for closing remarks.

Jade Wei -- Associate Vice President of Investor Relations

Thank you again for joining us today. If you have any questions, feel free to contact NIO's investor relations team through the contact information provided on our website. So this concludes the conference call. You may now disconnect your lines.

Thank you.

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Thank you. Thank you, everyone.

Steven Feng -- Chief Financial Officer

Bye.

Operator

[Operator signoff]

Duration: 83 minutes

Call participants:

Jade Wei -- Associate Vice President of Investor Relations

William Li -- Founder, Chairman of the Board, and Chief Executive Officer

Steven Feng -- Chief Financial Officer

Lei Wang -- CICC -- Analyst

Dan Galves -- Wolfe Research -- Analyst

Stanley Qu -- Vice President of Finance

Tim Hsiao -- Morgan Stanley -- Analyst

Ryan Brinkman -- J.P. Morgan -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Paul Gong -- UBS -- Analyst

Ming Li -- Bank of America Merrill Lynch -- Analyst

Fei Fang -- Goldman Sachs -- Analyst

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