Li Auto Inc - ADR Aktie

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto's First Quarter 2026 Earnings Conference Call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website.

On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma and our CTO, Mr. Yan Xie, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese there will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted]

Hello, everyone. This is Li Xiang. Thank you for joining today's earnings conference call. In Q1 of this year, our deliveries entered a growth trajectory. From January to April, Li Auto returned to the top position in sales among Chinese brands and the Chinese new energy vehicle market priced at RMB 200,000 and above. Monthly sales of our BEV model, the Li i6 has stabilized at 20,000 units per month, ranking top 3 among all BEV SUVs. On May 15, we launched the all-new Li L9 with deliveries starting on May 17. The all new L9 comes in 2 [indiscernible] Livis and Ultra priced at RMB 509,800 and RMB 459,800, respectively. The primary goal of our all-new generation Li L9 is to achieve the market position of a flagship SUV, an important aspect of flagship product perception such as styling, suspension and chassis, range extender and electric powertrain as well as intelligence and computing power it sets the standard for what the next generation of flagship SUVs possess.

Within just 2 weeks, the L9 Livis secured over 10,000 orders with transaction prices of over RMB 500,000, we expect that we will maintain a market share of over 20% in the RMB 500,000 and above NEV SUV market. Starting in June, we will focus our communication and promotion efforts on Li L9 Ultra aiming to capture a 20% market share in the RMB 400,000 to 500,000 NEV SUV market. The all new Li L9 marks the beginning of a series of new product rollouts for the Li L Series. In late June, we will launch all new Li L8, an exceptional 5-seater flagship SUV. As the 5-year version of the all new Li L9, it is a complete overhaul from the previous generation, and it is no longer a downgrade from the L9. We believe the all-new Li L8 must be might be the best handling large activity globally while delivering the most comfortable 5-seat experience in its class. With the launch of the all-new Li L9, we have successfully and fully deployed our proprietary Maho M100 chip and the MINDVLA model.

This mass production of our full stack hardware software solution was a key milestone for us. We're the first company in China to deliver full functionalities on a brand-new chip in its first ever on vehicle deployment. The Maho M100 chip is the 5-nanometer automotive-grade AI inference chip built on an AI-native dynamic data flow architecture. This unique architecture and superior treating power established a long-term technological moat for us. With an integrated hardware and software design, our chip delivers 3x the effect of computer power per unit cost. Furthermore, the Maho M100-chip enables us to deploy our latest MINDVLA model on our vehicles. The number of parameters in this new model increased tenfold from the previous version.

The rollout of Maho M100 and MINDVLA is just a starting point. Moving forward, with larger models and data training a higher position and higher frame rates, we expect a massive leap in the automotive and the autonomous driving experience. The May 15 event focused primarily on hardware and vehicle performance, we believe it would require a dedicated 2- to 3-hour session to fully showcase our advancements in software and intelligence. We're planning a separate launch event in June dedicated to sovereign AI. We'll take the time to provide an in-depth walk-through of the real-world experience across in-cabin interaction, salvation model, autonomous driving, system agents and our Maho chip. We look forward to giving a deep dive into the many things we can bring to our lives through software and embodied AI. Please stay tuned.

With the steady rollout our core technologies and our updated product portfolio, we maintain our full year sales growth target of 20%. With that, I'll turn the call over to our CFO Johnny, to walk you through our financial performance. Thank you.

Thank you, Li Xiang. Hello, everyone. Given time to strength, my remarks will be limited to first quarter financial highlights. All figures will be quoted in RMB unless otherwise stated. For further details, including the corresponding U.S. dollar amount, we encourage you to refer to our earnings press release. Total revenues in the first quarter were RMB 23 billion, down 11.4% year-over-year and 20.1% quarter-on-quarter. This included RMB 21.5 billion from vehicle sales down 12.7% year-over-year and 21% quarter-over-quarter. The year-over-year decrease was mainly driven by a lower average selling price due to different product mix. The sequential decrease was mainly attributable to reduced vehicle deliveries due to seasonal factors related to the Chinese New Year holiday and lower average selling price due to different product mix.

Cost of sales in the first quarter was RMB 21.2 billion, up 2.7% year-over-year and down 10.4% quarter-over-quarter. Gross profit in the first quarter was RMB 1.8 billion, down 66% year-over-year and 54.8% quarter-over-quarter. New core margin in the first quarter was 6.1% versus 19.8% in the same period last year and 15.8% in the prior quarter. The year-over-year and the sequential decrease was mainly due to the different product mix. Gross margin in the first quarter was 7.9% versus 20.5% in the same period last year and 17.8% in the prior quarter. Operating expenses in the first quarter were RMB 4.8 billion, down 4.8% year-over-year and 13.8% quarter-over-quarter. R&D expenses in the first quarter were RMB 2.7 billion, up 8.3% year-over-year and down 9.8% quarter-over-quarter. SG&A expenses in the first quarter were RMB 2 billion, down 19% year-over-year and 22.6% quarter-over-quarter. The year-over-year and sequential decrease was mainly due to the decreased employee compensation and reduced expenses related to marketing and promotion activities.

Loss from operations in the first quarter was RMB 3 billion versus RMB 271.7 million income from operations in the same period last year and RMB 442.6 million loss from operations in the prior quarter. Operating margin in the first quarter was negative 13% versus 1% in the same period last year and negative 1.5% in the prior quarter. Net loss in the first quarter was RMB 2.3 billion versus RMB 646.6 million net income in the same period last year and RMB 20.2 million net income in the prior quarter. Diluted net loss per ADS attributable to ordinary shareholders were 2.26% in the first quarter versus diluted net earnings of 0.62 in the same period last year and RMB 0.01 in the prior quarter. Turning to our cash flow and balance sheet.

Net cash used in operating activities in the fourth quarter was RMB 6.1 billion versus RMB 1.7 billion used in the same period last year and RMB 3.5 billion provided in the preform. Free cash flow was negative RMB 7.4 billion in the first quarter versus negative RMB 2.5 billion in the same period last year and RMB 2.5 billion in the prior quarter. Our cash position remained solid with a quarter-end balance of RMB 94.3 billion. With this strong tax position, we continue to return to our -- to shareholders through USD 1 billion share repurchase program announced in March. To date, we have repurchased a total 17.5 million Class A ordinary shares, including 7.3 million ADS for a total consideration of USD 148.4 million.

And now for our business outlook for the second quarter of 2026, the company expects the delivery to be between 95,000 and 100,000 vehicles and quarterly total revenues to be between RMB 24.1 billion and RMB 25.4 billion. This business outlook reflects the company's current and pre review on the business situation and market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator and start our Q&A session. Thank you.

[Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley.

[Interpreted] So my first question is about L9. So how is the order inflow for the auto L9. And the wait period for the -- variant have stretched to 9 to 11 weeks. So could you share the company's production capacity arrangement for this model? And what is the targeted sales mix of the L9 in your second quarter delivery guidance? That's my first question.

[Interpreted] First of all, the order pattern for the L9 is very clear. The top-selling lived version accounts for over 90% of all orders and the already fully loaded Ultra version accounts for the other less than 10%, which reflects the customer recognition of our latest advanced technology and the willingness to pay for features and performance and which also showcased our steady foothold in the market above RMB 500,000, which is a very positive trend for the brand. Later down the road, we're going to strengthen the performance -- promotion efforts on the Ultra version and continue to optimize the order mix.

Secondly, on production capacity. The all new L9 and L8 will both be manufactured in our -- base and the 2 cars can be adjusted flexibly between the production line. So in the long term, we're confident of our ability to manufacture these 2 models. May and June will be the ramp-up period for these 2 cars and the monthly production capacity will fall between 4,000 and 5,000 units per month. At the moment, the 2 tone body color of -- and also some of the unique parts on this model are supply constraints, slightly supply constrained. We're now working around the clock with core suppliers to come up with solutions to make sure that we can deliver these cars to our customers as soon as possible. In the meantime, we have ample production capacity for the Ultra version, and we'll be able to adjust our production based on market demand.

And finally, on L9 deliveries in Q2, considering the production ramp-up, we expect to deliver around 8,000 units between the middle of May and the end of June. After we fully ramp up in Q3, we're confident that the all-new generation online will reach a delivery level over the previous generation outline.

[Interpreted] My second question is about the profitability. What's your profitability outlook for the second quarter? And from a full year perspective, when do we expect to see a clear inflection point for earnings and given the rise in raw material cost is a return to profitability achievable this year? And separately, the Auto i6 now account for nearly 60% of the total vehicle sales, what is the for level of the overall gross profit margin? And lastly, could you also share the growth margin target for the L9 and other upcoming models scheduled to launch later this year? That's my follow-up question. .

Tim, this is John. I will take this question. Our first quarter gross margin was impacted by several factors, including the model refresh cycle. We need to refresh our -- starting from the line and also a higher mix of I6 and L6 deliveries in the total and also purchasing tax subsidy to the I6. However, with the launch and delivery for all new L9, we expect our gross margin to recover about 10% in the second quarter. Looking at the full year, as we complete our model refresh cycle and optimize our production ramp up, we expect continued improvement in our gross margin. This year, our first priority is to successfully complete the refresh for the Li L series.

We are pleased to see that the Li L9 -- our flagship capabilities and technology leadership is gaining strong market recognition and we're spending market share about half-million price range. The success of our all this L9 levers establishing a solid foothold in the price segment marks -- forward, building upon the success of original Li L9. This year's all new Li L series as well as our EV portfolio, including the I9 we launched with future extensive in-house developed technologies and lay a solid foundation for us over the next 2 years. Thank you.

Your next question comes from [indiscernible] with Citic.

[Interpreted] Let me ask in English. What are the -- on vehicle performance [indiscernible] differentiation highlights and actual cost reduction achieved by the [indiscernible] large model? And what is the next development direction of the company's auto driving system.

This is Jen. Let me answer your question. Compared to our ADAS 8.0 version, this 9.0 version powered by our in-house M100 chip shows significantly improvement. It mainly shows at our [indiscernible] decisions in complex scenarios with more human light control, both longitudinally and lay and smoother more comfortable driving and riding experience overall. 9.0 is our first AD version running on our in-house chips, which is already one of the best the highly competitive market, but it's really just the beginning. With the new platform, the sensor will collect data and higher precision and higher range, which while the powerful compute of M100 allows us to run larger and better algorithms. So this new platform let us improve data, compute and algorithms all at the same time. And this -- and that's what will drive much faster leap in our autonomous driving capabilities.

For the next step of autonomous driving, First, we will further scale up our input data and precision models, enabling more driving-related semantic information to be fed into the newer network as this allows the model to see significantly more signals right from the sensors. Second, we will improve the model's cognitive capabilities, especially its ability to learn short-term cost and effect relationships. This empowers the model to go beyond the simple behavior fitting, allowing it to make human-like judgments in more complex urban traffic scenarios.

Finally, we will make the system much better and to the execution stage with more compute latency optimizations from our in-house operating system and a fully drive by wire chassis and the car will control motion more precisely and respond faster. This -- that means the autonomous driving system will feel more confident and more importantly, safer. Also, because we design the software and the hardware together our in-house M100 chip delivers triple computing power of the previous generation platform at half the cost. Our similar cost brings 6x higher effective computing power. Under the same model, our input trend rate has tripled with an even greater increase in inference rates. Our goal is to match the performance of Tesla's FSDB 14 in the United States in the second half of this year. The higher performance AI inference system built around M100 chips give us a strong foundation to make this happen. Thank you.

[Interpreted] Let me ask in English. Since the implementation of the store partner program, what subsidies have been observed in key metrics such as south [indiscernible] area average monthly sales story, out for employees and expense ratio in pilot stores compared to before the reform. Has the program's current impact on sales volume met expectations? And how does the company quantitively evaluates the programs effect booked in sales in Q3 and beyond?

[Interpreted]

Since we started to roll out the store partner program as we grant the store managers with genuine decision-making authority and profit sharing rights, it has really fully unlocked the potential of our frontline sales team. First of all, on the store manager level, we can see a fundamental shift in mindset, they've transitioned from previously store execution -- executors to actual business operators. They are able to independently view the ROI of different business activities and really focus on the operating efficiency. In the meantime, it has also increased the stability of core management teams and long-term commitment.

The store management programs have led the store owner to invest in the store long term. They've shifted their focus from chasing short-term sales targets to cultivating the local user base spreading word of mouth and building the competitors of their stores in the long term. From a timing standpoint, Q1 was -- is a typical low season in car sales and we're in the early stage of rolling out the store manager program. On average, each of our stores have all beaten their monthly sales target -- we have also successfully cleared the inventory for the previous generation L Series and also significantly increased user satisfaction.

Going forward, as our store managers accumulate more operational experience and combined with our training systems and support system, we believe that the operational efficiency and capability of our stores will continue to increase. Thank you.

Your next question comes from Tina Hou with Goldman Sachs.

[Interpreted] So my first question is regarding the upcoming Li Auto L8 facelift. So wondering if there is any information that management can share at this point?

[Interpreted]

As we start to complete our L Series product lineup, it is becoming clear that 9 will be a flagship 6 seater, and the new L8 will be a flagship 5-seater. The 2 cars will complement each other and continue to strengthen our foothold in the high-end flagship market. The L8 has already been registered with the MIIT in April of 2026. And we're planning to launch in [indiscernible] in June of 2026. Compared to the previous generation of new car is larger in overall dimensions as well as wheel base. The car will feature a 5-seat configuration with a rare passenger space significantly improved and overall riding experience also much improved. On the powertrain front, the car will also feature our in-house developed 5.5-liter 1.5-liter turbocharge range extender system with a 72.7 kilowatt hour 5C large capacity batteries, which is exactly the same as the one seen on the L9. The 2 cars will share the same technological platform and have great energy consumption and range performance. .

Apart from that, the L8 will also be featured in a true tone body color as an option and also an electric running board as another option. For more information, please stay tuned for our launch event in June. Thank you.

[Interpreted] So my second question is regarding AI. So wondering how does management view the current competition and investment in the AI industry. Also what is management's thought on the competition in the industry.

[Interpreted]

In our view, the competition in the mid- to high-end car vehicle segment over the next 3 to 5 years, will really be a competition of a body AI. The highest technical barrier and the core determinant of the company's long-term success and comparison business will be a deeply integrated chip and large foundational model. Take our real-world experience with in-house developed chips as an example. As in the past, technology and information really flow freely in the industry because everybody uses NVIDIA chips and others could easily approach our teams, our former employees and reach a very close level performance despite our many innovations.

However, with our in-house developed chips and much greater scale, much more computing power, much greater scale in our models, -- we will -- we use a completely different architecture and making this traditional poaching approach in effective because we're fully integrated vertically between hardware and software. So going forward, we will turn our systematic capability into our core moat. Our capabilities and outputs will no longer be easily replicated by others. Another critical factor is time. It took us 4 years to bring our in-house chips from starting the program to vehicle production. In the next decade, while maintaining our technological innovation edge we will also ensure the technological barriers that are sufficiently advanced and provide a long enough time horizon as a competitive advantage. Thank you.

Your next question comes from Jing Chang with CICC.

[Interpreted]

So my first question is about the -- also the intelligent as just mentioned by Mr. Li Xiang, we will hold a more detailed intelligent technology launching event in June. So I would like to ask about -- do we have any updates on our current strategy and also planning regarding to the human robotics.

[Interpreted]

In the long run, we can clearly see whether it's our factories, our stores and our users, but all need humanoid robot. And we believe that robots should not be limited to start-ups or medium-sized companies or large companies, it should not be limited to us. Robots will be a standardized labor and it's something that any company who's willing to make a difference in their field should adopt and is not limited to any specific type of companies. As long as a company needs human beings, it will use robots, is only a difference between whether they purchase the robot from somebody else or they evolve in now, that would be the only difference.

So from a time standpoint, -- my belief is that for humanoid robots to reach full-scale development, deployment and commercialization to a point, just like where we got to with electric vehicles, between 2010 and 2015. To get to that point, it takes -- will still take more than 3 years because in every specific area, the technological path has not converged and there are many problems that remain to be solved. So in between this period, we still need to work on solving many hard problems. .

[Interpreted]

So my second question is about the overseas market. So could you share more updates on our latest overseas strategy, including our plans for '26 and also going years, our pace and also the contribution of international expansion, such as the overseas market [indiscernible] target key regions and also our product pipelines in our markets. .

[Interpreted]

We're steadfastly advancing our internationalization strategy and taking a paced approach to this. Based on the local market size, industry landscape and competitiveness, we will have truce between a model, including establishing local subsidiaries working with local dealerships or using the sole -- local sole distributor. In any case, we want to work with leading companies or partners locally and quickly build an integrated service system encompassing sales, delivery and after sales. Our product and brands have continued to be recognized globally. In April -- in the Beijing Auto Show in April, we have received a lot of attention from overseas media and users and partners. .

We have also officially signed contracts with Saudi Arabia and UAE distributors. In the Middle East and Middle Asia market, Central Asia market, we will be taking our L Series, the range extender product line as the main product offer there. The first product will be an overseas dedicated all new Li L9 which is optimized based on local conditions and charging capability, UI and software ecosystem, thermal management, including serious hardware and software optimizations.

We will also be entering the -- we'll be entering the Middle East and Central Asia market in Q3. Also, starting in May, we will be gradually entering markets like China, Cambodia, Lao and Myanmar to further cultivate our Southeast Asia market. In the second half of this year, we will introduce the all-electric VI6 in Europe. And additionally, for right-hand drive markets, we will launch the right-hand drive version of our Li Mega in key Asia Pacific markets, including Hong Kong, Mainland China -- Hong Kong, China and Singapore by the end of this year. Regarding products, we're implementing a precise regional customization approach. All of our upcoming models will incorporate compliance with overseas regulations right from the early stage of R&D to better support our ongoing global strategy. Thank you.

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

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your lines. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto's Fourth Quarter and Full Year 2025 Earnings Conference Call. The company's financial and operating results were published in our press release earlier today and are posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma; and our CTO, Mr. Yan Xie, will join for the Q&A discussion.

Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Now translating from Mr. Li Xiang.

Thank you for joining our earnings call today. Over the past year, Li Auto has been going through an important period of strategic adjustments. As we scaled, we've reassessed a number of core capabilities, especially how to sustain sales efficiency and organizational vitality in a direct sales model.

The problem that we've identified is that in the past, we have used a dealership mindset to manage our store front. However, for our direct sales model, the key is really managing each storefront. And therefore, without dealers, we need to figure out how to manage the storefronts effectively on our own.

Therefore, since the third quarter of last year, we've been focused on improving store rollout quality, strengthening day-to-day store operations and upgrading incentives, training and enablement for our teams. Ultimately, it comes down to one question. How do we sell well?

With sales volume and productivity per salesperson as our key metrics, we implemented a series of targeted changes. First, we optimized division of labor and consolidated our sales force. By closing and replacing underperforming locations, we addressed site selection issues and moved sales teams from lower traffic, second-tier malls to higher potential locations, such as prime Tier 1 shopping districts and flagship stores in major auto hubs. This has directly improved store productivity and sales per head.

To further enhance our frontline sales, we also upgraded our operating mechanisms. In March, we launched our store partner program, making each store the basic operating unit. Top store managers now have real operating decision power and profit sharing shifting from a pure management role to true store operators. At a time when profitability is challenging across the auto retail industry, we want to develop store managers who can earn over RMB 1 million per year and enable our top performers to make 3x the industry average. Just as importantly, this strengthens our frontline capability and helps keep our orders and deliveries firmly in the top tier of the premium segment.

Turning to products. We will officially launch the all-new L9 lineup in the second quarter. With comprehensive upgrades from powertrain, autonomous driving to chassis technology, we aim to create a clear step change in user experience versus competing models and regain leadership in the flagship SUV segment. The new Li L9 will come standard with an 800-volt architecture and 5C ultra-fast charging. It would also feature our next-generation full stack in-house developed range extender 3.0 system, delivering higher generation efficiency and greater output. With further MBH improvements and our proprietary EGR low-temperature start technology, the new Li L9 offers a cabin quietness and driving experience comparable to best along with improved winter energy consumption.

We will also debut the world's first AI-powered engine oil maintenance system, enabling long service intervals of up to 3 years or 30,000 kilometers. Our top-of-the-line Li L9 Livis, priced at RMB 559,800, reflects our vision for flagship SUV in a mirror of embodied AI. It will feature the world's first mass-produced fully drive-by-wire chassis along with an 800-volt fully active suspension system, delivering best-in-class comfort and handling. Response speed and safety performance across steering, braking and suspension are also significantly enhanced, providing the execution foundation for autonomous driving and embodied AI.

In addition, the Li L9 Livis will be powered by 2 in-house developed 5-nanometer M100 chips, delivering 6x the effective computing power of 4U. Together with our data flow architecture and in-house intelligent driving stack, it enables end-to-end integration of our algorithms and computing platform. The success of the new Li L9 will directly determine the market potential of the entire L Series.

If the previous L9's, competitiveness was driven primarily by smart product definition, the new generation L9 will build its core advantage through technology. Our BEV models are also continuing to ramp up. With sustained efforts alongside our suppliers, the supply constraints on the Li i6 have been gradually easing. We will keep increasing capacity to further shorten delivery lead times.

Meanwhile, as owners put more miles on their vehicles, positive real-world experiences have driven the Li i8 NPS up by more than 20%. In the NEV Brand Health Study, recently released by Land Roads, the Li i8 also ranked #1 in NPS among all large SUVs, improving experience and satisfaction are now translating into a recovery in order in sales.

Since March, Li i8 orders have increased 33% versus the same period in February and 179% versus January. Together, the Li i6, i8 are strengthening the market foundation of our BEV portfolio. Our priority is to fully resolve the issues we encountered earlier to ensure our BEV offerings establish a solid foothold in the market.

Looking back at [ DevNet ] last year, the Li i6 faced multiple timing-related headwinds after launch, including initial sales policies, the production ramp and the phaseout of purchase tax subsidies which pressured gross margin. At the same time, these factors also set the stage for our margin improvements this year.

In the second half of 2026, we'll be launching the Li i9, a new flagship BEV SUV further expanding our BEV portfolio to meet a wider range of customer needs. 2026 will be a pivotal year in Li Auto's evolution into an embodied AI company. As competition intensifies in the NEV market, we will continue to strengthen our technology moat and complete our transformation from a smart EV company to an embodied AI company, positioning us for the next phase of the competition.

In 2025, our R&D spending totaled RMB 11.3 billion, which approximately was 50% was allocated to AI-related initiatives. We will maintain this investment strategy in 2026 as we continue to build the core capabilities required of an embodied AI company.

For Li Auto, AI has 2 main dimensions: creating AI and applying AI, bringing our products to people to life while improving efficiency across the organization. On the Create AI side, we have rebuilt our R&D organization from the ground up to operate the way an embodied AI company should. We're developing capabilities and attracting top talents across the interface chips, foundation models, software and hardware.

At the product level, we see the vehicle as an intelligent agent with real vitality and AI is what brings that vitality to life. Built on our next-generation technology platform, our products will all evolve in ways you will see over time. There will not be near extensions of traditional cars or EVs. Instead, they will be proactive and increasingly life-like in how they learn and improve, and that will be reflected in our high-frequency experiences in daily lives.

From an efficiency standpoint, AI is helping reverse the slowdown in information flow and decision-making that can come with scale. By integrating AI and work alongside agents, where we're gaining the speed and agility of a start-up and our iteration and evolution, and we are already seeing early results of day-to-day operations this year. In other words, AI is not only reshaping our tools, it also is enabling a more dynamic high-velocity organization.

In closing, I want to emphasize that we will convert the capabilities and systems we've built from the Li L9 launch in 2022 to today's broader automotive and embodied AI technology stack into a real user experience and measurable business value. This will serve as the cornerstone of our long-term competitive positioning for the next decade. We look forward to your continued attention of welcoming you to experience our next generation of products. With that, we will turn it over the call to our CFO, Johnny, to walk you through our financial performance.

Thank you, Li Xiang. Hello, everyone, given time constraint my remarks today will be limited to fourth quarter financial highlights. All figures will be quoted in RMB unless otherwise stated. For further details, including the corresponding U.S. dollar amounts and full year financial results, we encourage you to refer to our earnings press release.

Total revenues in the fourth quarter were RMB 28.8 billion, down 35% year-over-year and up 5.2% quarter-over-quarter. This included RMB 27.3 billion from vehicle sales, down 36.1% year-over-year and up 5.4% quarter-over-quarter. The year-over-year decrease was mainly due to lower vehicle deliveries. The sequential increase was mainly due to the increase in vehicle deliveries, partially offset by lower average selling price due to the different mix following the commencement of the i6 deliveries.

Cost of sales in the fourth quarter was RMB 23.6 billion, down 33% year-over-year and up 3.3% quarter-over-quarter. Gross profit in the fourth quarter was RMB 5.1 billion, down 42.8% year-over-year and up 14.8% quarter-over-quarter. Vehicle margin in the fourth quarter was 16.8% versus 19.7% in the same period last year and 15.5% in the prior quarter. The year-over-year decrease was mainly due to different product mix. The sequential increase was mainly due to the estimated Li MEGA recall cost booked in the prior quarter, partially offset by lower average selling price due to different product mix following the commitment of the i6 deliveries.

Gross margin in the fourth quarter was 17.8% versus 20.3% in the same period last year and 16.3% in the prior quarter. Operating expenses in the fourth quarter were RMB 5.6 billion or 5.8% year-over-year and down 1.3% quarter-over-quarter. R&D expenses in the fourth quarter were RMB 3 billion or 25.3% year-over-year and 1.4% quarter-over-quarter.

The year-over-year increase was mainly due to the cost related to AI and other programs to support product portfolio expansion and technology advancements. SG&A expenses in the fourth quarter were RMB 2.6 billion, down 14% year-over-year and 4.4% quarter-over-quarter. The year-over-year decrease was mainly due to decreased employee compensation.

Loss from operations in the fourth quarter was RMB 442.6 million, versus RMB 3.7 billion income from operations in the same period last year and RMB 1.2 billion loss from operations in the prior quarter. Operating margin in the fourth quarter was negative 1.5% versus 8.4% in the same period last year and negative 4.3% in the third quarter.

Net income in the fourth quarter was RMB 20.2 million versus RMB 3.5 billion net income in the same period last year and RMB 624.4 million net loss in the prior quarter. Diluted net earnings per ADS attributable to ordinary shareholders was RMB 0.01 in the fourth quarter versus RMB 3.31 diluted net earnings in the same period last year and RMB 0.62 diluted net loss in the prior quarter.

Turning to our balance sheet and cash flow. Our cash position remains solid with a year-end balance of RMB 101.2 billion. Net cash provided by operating activities in the fourth quarter was RMB 3.5 billion versus RMB 8.7 billion, provided in the same period last year and RMB 7.4 billion yields in the third quarter.

Free cash flow was RMB 2.5 billion in the fourth quarter versus RMB 6.1 billion in the same period last year, a negative RMB 8.9 billion in the prior quarter.

At the end of 2025, we had a total of 30,728 employees.

And now for our business outlook. For the first quarter of 2026, the company expects the delivery to be between 85,000 and 90,000 vehicles and quarterly total revenue to be between RMB 20.4 billion and RMB 21.6 billion. This business outlook reflects the company's current and preliminary view on the business situation and market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

[Operator Instructions] Your first question comes from Tim Hsiao with Morgan Stanley.

[Interpreted] So my first question is about the channel. I think the management just mentioned that Li Auto now plans to optimize the sales networks and reportedly close up to 100 stores. What are company's plans and progress regarding channel optimization?

Separately, could you elaborate a bit more about the store partner mechanism? CEO just mentioned in addition to the incentive program to the store manager, any further implementation details you can share with us? And when should we expect it to show positive results? That's my first question.

[Interpreted] I need to first start with the clarification on channel optimization. The rumor about closing 100 stores is false. In reality, we've always conducted routine optimization of our stores facing out a small number of underperforming stores that cannot reach their sales targets. And this is simply part of the normal operations to address past issues like core store locations or declining foot traffic in certain shopping districts.

Our core channel strategy this year is very clear, quality over quantity. We will add new stores this year. New stores will prioritize top-tier shopping malls and premium auto parks to strengthen brand presence and attract higher quality traffic. As for city coverage, our footprint in lower city tier cities is already fairly complete. And going forward, we will focus on increasing store density in higher-tier cities aligned with our ramp-up of BEV sales.

Meanwhile, we continue to improve sales and service experience, covering in-store reception, test drives, delivery, highway supercharging stations, staff with attendance during holidays. As a result, we've been seeing user satisfaction and positive feedback keep climbing. While we are on the topic, let me also share a bit about our new store partner program officially launched on March 1. We're treating each store as a core business unit and building a great sales model that's truly unique to Li Auto.

First, we remain fully committed to direct sales. This ensures consistent service quality and a unified national pricing strategy. Meanwhile, we're now delegating decision-making power and sharing profits with store managers to really motivate our frontline teams and enable them to think like real business operators.

In terms of store operations, store managers now have autonomy in 3 areas: customer acquisition, day-to-day operations and managing their own teams. And we've changed how we evaluate them as well, no longer just on sales volume. Now the performance measured on operating results of the stores. The goal is to make every store manager feel like they're running their own businesses and be fully accountable for the results. This new model also helps us solve past problems at the root, like opening stores without thinking through and other issues on store expansion.

Going forward, store managers will be involved from day-to-day site selection with clear ownership and accountability. This way, we raise store quality right from the start, and the company will back it up with financial support and digital tools to empower our frontline team. We aim to see significant sales and operational improvements from Q3.

Ultimately, we believe a healthy, efficient sales and service system is the foundation of strong sales and market leadership. Since last August, we've spent 7 months to systematically recalibrate our direct sales management framework. This includes high-quality store expansion, refined operations and store manager incentives as well as frontline training. That all is to build a truly sustainable competitive sales and service network for the long run.

[Interpreted]. My question is about the product -- the new product for the upcoming all-new L9 and the L9 Livis, could you please shed light on the launch time line, pricing strategy, product competitivity, competitiveness in a crowded race and vehicle profitability?

[Interpreted] So first, to your question about products. This year, we will be launching -- in Q2, we'll be launching our all-new Li L9 Livis equipped with our in-house developed MAC 100 chips. And the reason we call it an embodied AI robot is really because we've completely revamped the technical stack from a sensing brain and body from all these 3 dimensions.

So first of all, let me start with the autonomous driving front. In the past, the technical paradigm is really to drive -- to have the machines to learn to drive through watching videos. They're not really understanding the physical world, but rather they're just watching videos and trying to imitate human behavior from these videos.

However, we -- as we conducted our R&D, we identified that the most efficient way is really to understand the physical world. So when we say VLA model, we're really trying to use the language to understand and understand how the world works as opposed to just simply interpreting the video. So as we move from 2-dimensional cameras to 3-dimensional vision transformers, we can really understand the 3D world much better. And that requires a revamp of the full stack from video encoder to the chips to the algorithms, we can -- how we can enable compute directly from a large model to actually enable physical behavior. And I believe this will be a major technological shift across the world, across autonomous driving as well as physical robots happening this year. So as I mentioned earlier, this is going to be a real VLA. The language models really understand and thinks about the physical world before it makes the decision to move. So that's on the sensing side, perception side.

And then next on the hardware itself on the execution side, Li L9, as we've released earlier, will be equipped by -- with a fully drive-by-wire system, which includes drive-by-wire steering, 4-wheel steering, electrical mechanical break, 800-volt fully independent active suspension where we have pumps powering suspension each wheel independently.

What that all combined will do is that it will provide us with the level of agility that's never achieved before in a vehicle. And beyond that, all the signals and the decision-making doesn't happen through an MCU, which was the paradigm before. But rather, we have large models to directly process these inputs and the output goes directly to the actuators as opposed to going through a much less sophisticated MCU. So that's what we believe is the real smart car is going to be like. And we believe that L9 is going to be the beginning of all this. Thank you.

Your next question comes from Paul Gong with UBS.

[Interpreted]. So my first question is regarding the 2026 sales volume target based on the current environment. And more importantly is how should we balance the volume and the market share targets versus our own margins? How important the volume target is in our overall balance of the development?

[Interpreted] So 2026, as you all know, is going to be an important year from a product perspective as we release the third generation of product. We are very confident about our products. We also noticed that this is going to be the most competitive year to date. This year, you will be seeing more cars released -- more than cars released in the RMB 200,000 and above market than all of the years previously combined. But at the same time, the overall growth of the market is very limited.

So considering all this, our total goal is still to reach a 20% year-on-year growth for all 2026. And to support all of this, we have a 3 plus 2 strategy, first, starting on 3. The 3 pillars to support our sales. The first one is the sales system. We will continue to be committed to our direct sales model. And as we've implemented new mechanisms, we will start to see benefits this year of the direct sales model.

And the second pillar is the L Series launch, starting with the L9, this new generation of L Series will really be a key pillar to our sales this year. So we will make sure that we get every detail right from the product release to product -- to supply, delivery to sustain -- to ensure the success of L9 and upcoming L Series models.

And the third pillar is BEV ramp-up, which includes i6, i8, i9 and MEGA. In the past few months, we've addressed the supply constraints. We have also fixed issues around the release, sales and marketing. So this year is, as the year goes on, we believe that the volume on our ad products will be steadily ramping up which is going to account for a very significant market in the premium market.

Now moving on to the 2. The 2 -- the first one is the AI-related investments. In the past year, we spent billions on chips, on models. This is going to be the year I believe that all these investments start to bear fruit, meaning that they will provide a very differentiated product experience to our users.

And to summarize, this experience will be proactive, will be high frequencies that every consumer can feel and benefit from in their everyday life. The second of the 2 is our overseas strategy. This is going to be the first full year where we officially run our overseas markets. But through the years of accumulation before, and we believe that this year is going to start to see results and support a long-term growth and overseas remains what we see as a long-term growth opportunity.

[Interpreted]. So my second question is regarding the impact of raw material cost inflation, including the metals, memories and batteries. What would be the strategy for the company to face this challenge? Should we absorb that within the supply chain? Or should we pass this part of the cost inflation to the downstream?

[Interpreted] We believe that the current cost pressure is still largely concentrated on key components like batteries and memory chips, which has indeed had some impact on unit vehicle cost. In response, we've already put in place the following measures. First, we are strengthening supply chain collaboration to stabilize pricing while securing supply.

On the cost side, we've signed long-term agreements with our core suppliers to lock in both pricing and volumes for key raw materials upfront. This helps us hedge against short-term market volatility and on the supply side especially for AI-related components like memory chips, we have been tight recently. We are continuing to work with key suppliers and to secure dedicated allocation, ensure priority support for production and new model launches. Where contracts include clear pricing terms and adjustment mechanism, we strictly adhere to these terms where there is no such agreement, we work hand in hand with suppliers to share the cost pressure and navigate the cycle together, aiming for mutual benefits in the long term.

We'd like us to sincerely thank all of our supply chain partners for their ongoing support for Li Auto. And secondly, we're driving end-to-end cost optimizations in the meantime. We are identifying cost-saving opportunities across the entire value chain from product to R&D to manufacturing, logistics and cost quality.

At the same time, we're maximizing economies of scale through platform-based development and higher part commonality across models. This allows us to absorb as much as of the external cost pressure internally as possible. Our in-house developed and manufactured range extender, electric drive units, power modules, self-developed and contract manufacturing domain controllers, silicon carbide power chips and 100 autonomous driving chips and battery packs, all of this is helping us to better manage costs.

Third, we're taking a more rational and steady approach to new vehicle pricing. For our 2026 models, pricing will reflect a balanced consideration of raw material volatility, R&D investments and user value to ensure the healthy and sustainable profitability. Our goal is to bring gross margins of new products back to normal to a healthy range. Overall, we're confident that by combining supply chain collaboration, long-term agreements that lock in key costs, platformization, proprietary technologies and rational pricing, we can effectively contain the impact of raw material price increases with a manageable range and maintain stable gross margins and operational quality.

Your next question comes from Jing Chang with CICC.

[Interpreted] So my first question is about in response to recently, we have heard about some media reports about the company's consideration of share buybacks. So please confirm if there are any related plans?

Yes. Hi, this is Johnny. I think this is not a media request about a media reporter at Weibo. As a dual primary listing company, both in U.S. and Hong Kong Stock Exchange, we recognize that share buyback is one of the ways or tools we should consider for enhancing shareholder value. And with respect to share repurchase, currently, we don't have any -- we don't have additional information need to be disclosed. Thank you.

[Interpreted] So my second question is about R&D expense. So what will be our guidance for the R&D expense in 2026? And also last year, we spent almost half of our R&D related to intelligence or AI-related areas. So what is the portion guidance for this year?

Okay. Thanks for your question. This is also Johnny. We expect the R&D expenses this year to remain around RMB 12 billion with AI-related initiatives accounting for half of the cost. This includes the investment in AI infrastructure such as in-house chip development and computing power as well as R&D for AI products like autonomous driving system and Li Xiang engine invested in the last several years.

So to clarify, we don't -- the automotive and AI as different -- as independent business. We invest on the R&D side to build AI capability and put it in our company as a whole business model. We monetize all the R&D investments through our current business model. It's not a separate business model.

Your next question comes from Feixiang Gao with Citic.

[Interpreted] So my first question is about iSeries. So could you give us some details about i8 and i6 orders, sales and especially about the ramping up production of i6? And how do you evaluate Sunwoda battery safety and its cost reduction contribution?

[Interpreted] Now let me start with Li i8, since its launch in July last year, user satisfaction has continued to rise as owners accumulate miles on their vehicles.and they are satisfied, particularly with driving, charging experience and autonomous driving. The NPS of i8 has risen by over 20% compared to the early post-launch period. During the Chinese New Year holiday, our 5C ultra-fast charging and OTA 8.3 autonomous driving upgrade received strong user acclaim, pushing NPS to an all-time. In Land Roads second half of the 2025 survey, Li i8 ranked #1 in NPS among all large SUVs.

Fueled by the strong word of mouth, Li i8 orders have steadily rebounded. Daily orders in early March were up threefold over threefold -- sorry, over nearly 180% versus January. This clearly upward trends reflect strengthening market demand.

And now turning to Li i6. We've successfully moved past the most challenging phase of production ramp-up. We are now in the stable delivery phase. Li i6 product strength has been thoroughly validated with this distinctive exterior design, spacious interior, efficient energy consumption and agile handling. It precisely meets the needs of young families. It experienced strong order momentum since launch. And at the same time, all of the supply chain bottlenecks have now been fully resolved. We used to face short-term volatility in battery supply, but we worked closely with our core suppliers to scale production capacity.

We also introduced a purchase tax subsidy and extended care policy. I'd like to thank all of our Li L6 users for their understanding and patience. We expect Li L6 to sustain a steady monthly sales of around 20,000 units, and we are on track to efficiently deliver the current order backlog within the next 1 or 2 months. Most importantly, Li L6 success clearly shows that Li Auto's brand appeal has successfully extended from the EREV segment into the BEV segment.

Moving on to our battery strategy. We will commit -- we are committed to an open partnership approach while working closely with industry leaders, we retain control in all these partnerships. When it comes to the vehicle performance, we led battery architecture design and rigorously controlled quality at every step. Regardless of which partner supplies the cell, all batteries must meet Li Auto's unified Li's standard for performance, quality and safety.

To the user, the experience is identical. There are no differences whatsoever. Additionally, starting in 2026, all Li Auto vehicles will be equipped with batteries from only 2 brands, Li Auto brand and CATL. This marks a deeper level of integration with our core partners.

We ask for your continued trust in the Li Auto brand because Li Auto's quality has never dependent on any single supplier. It's defined by our full stack in-house R&D, our rigorous quality control systems and the core values we've upheld from day 1. When people choose Li Auto, it means they're choosing the most reliable assurance. Thank you.

[Interpreted] So my second question is about the in-house chips MAC 100. So could you give us more color about these chips such as mass production time line and where can we see the cost savings and efficiency gains. In addition, how should we understand the company's software and hardware integration and when we'll see the gap between different automakers because of this integration? That's all.

Okay. This is Yan. Let me answer your question. And M100 we delivered with L9, a new series, and we already started mass production. For M100 itself, with the same silicon area, M100 delivered significantly higher effective compute, giving our VRA algorithms much more design space. For example, we can run our VRA model with about 6x the parameters and 10x the compute of the previous generation while still achieving high frame rate and faster influence.

More importantly, as our in-house models, compiler stack and operating system evolved together through codesign, we are beginning to unlock the real potential of our full self-developed autonomous driving stack. The performance gain we see today are important, but the bigger impact is that this system now integration will significantly accelerate how fast our autonomous driving capabilities improve over time.

Once the system is officially deployed, we expect the pace of capability improvement to increase substantially. M100 also works closer with Halo OS and vehicle by wire system. In every entire coordination between autonomous driving compute, computation pre and post processing and vehicle control. This shortens the end-to-end latency from sensor photon input to vehicle actuation to around 200 to 300 milliseconds, directly improving the driving experience. The higher local compute also allows us to deliver more intelligent capabilities beyond autonomous driving.

Over time, the car will behave more and more like a robot. Some of these capabilities will first appear on the new L9, and we will continue to expand them in the future and more M100 also brings significant cost advantage. First, the BOM cost per chip is much lower than external solutions. And second, we removed the XCU controller used in the previous generation platform. By replacing it with M100 combined with the Halo OS virtualization receive over RMB 1,000 per vehicle.

Third, thanks to our data flow architecture and codesign of model and chips, we achieved higher long-term efficiency today and maintain much greater headroom for future performance improvement. When we started developing our own chip in 2022, we believe that around 2025, the industry would move into a new phase where models, chips and operating systems have to be designed together.

That kind of vertical integration creates real differentiation in performance efficiency and user experience. Over time, the gap between companies will start to look like the gap between Apple and Android in cell phone world. Once you achieve full stack hardware software integration, the advantage became structural and it keeps widening. Thank you.

Your next question comes from Tina Hou with Goldman Sachs.

[Interpreted] So my first question is regarding embodied AI. So for the next 1 to 2 years, wondering what's the strategic plan from Li Auto? What kind of products are you -- are we expect to see? And then also the progress or time line of these products. Also, in terms of the strategic priority, how do you decide between EVs, robotaxi as well as humanoid robot?

[Interpreted] So in terms of the embodied AI strategy, first of all, on the technological and product front, we believe that there's a lot of commonality regardless what kind of product, physical product we're talking about. So this is an area we will be investing heavily in because we believe that all these investments will be shared across different product shapes and forms. This includes the device side inference chips, the foundation models and operating system as well as the entire data training workflow.

In the meantime, on the commercial side, we will be very careful as we invest and explore. We'll be adopting the start-up model in areas like AI glasses and robots instead of using a traditional large company approach where we invest heavily in unverified direction. We will work more like a startup company to start these new initiatives and wait our way through.

[Interpreted] So my second question is regarding our R&D restructuring. Wondering if the restructuring has been completed and then also under the new structure, how is the progress regarding our autonomous driving?

[Interpreted] We went through a major organization change in January, where we completely revamped our hardware and software functions. And all this has a shared goal, which is to build a silicon-based digital human being or a smart human being. That's our overall goal.

And in order to achieve this reorganization, we've basically reconnected across all our businesses and regrouped the functions by the specific part of the human that they're responsible for as opposed to previously dividing by the so-called business units or the product. So this organization or the specialization happens in 3 areas.

The first one is what we think of as brain, and this includes like data sets, which is comparable to human lungs and the chips, which is comparable to the heart, and operating system compared to the neuro system. And then all of these are organized together so that we can work through pre-training and post training and infrastructure together and think of these as the brain.

And my rule for these teams is that they cannot touch applications because in many companies, the fundamental research team are attempted to work on applications. But in our case, the brains should not have their own hands, but they should focus on building a very robust brain that can be used across different hardware and software applications.

And then on top of the brain team, we have what we call the applications team or in our language, we call it the core software team. This core software team includes software tools like MCP. They include teams that build agents, includes teams that focuses on skills and teams that focus on memories. And all of these different components are designed to work with a shared operating system.

That's how we can organize all these different components of software to actually do things for us as opposed to just become a conversational road map. So they can actually -- it can actually strategize and execute a task given by human beings.

And then -- so everything I mentioned above is software, which includes skilled memories. And again, here, we avoid the team to the temptation to want to build their own brains. We don't want the body to have its own little brain, but rather we want them to fully utilize the powerful brain that was built by the previous team that I mentioned.

So this team focuses mostly on the body, the applications. And then finally, we have the hardware team. This is about building dedicated hardware for AI, for embodied AI, which include an energy team, an electric drive team and the controllers team and when I say controller teams, we don't necessarily use actual controllers like the one seen in automobiles in the past because we've now -- we're now working with a model where we built MCPs for the different components so that the large model can directly talk to these MCPs and control these different components, which makes them a lot more intelligent and more efficient.

And when I put these 3 teams together, the major benefit that I see is that they're able to work together across different products because they enable each other's work as opposed to the file that you see with traditional models. And that's how we can deliver products that are also differentiated from the traditional products.

So after we made this rework many people at the beginning didn't understand why we are making this change. But over time, very quickly, they're starting to see the efficiency gain in the workflow. For example, for the autonomous driving team they used to iterate their models every 2 weeks. But after the change, they're now able to turn out iteration every 1 day, which is a 14x improvement. And again, as I mentioned earlier, this is partly thanks to the collaboration across the different teams. They all stayed in one room and worked together as opposed to having different departments talk between silos. That's how we believe we can really build in embodied AI that you will see very soon.

There is one important thing that I want to add in the -- around the beginning of this year, we've seen many important managers, especially in the R&D field. We've seen several major departures, many of them have been with the company for over 5 years which is something I believe you've also noticed in the market. These leaders in many cases, they're first in line of their business.

They went through the entire 0-1 cycle with Li Auto in a startup mode. And they've been very well received by the investment community and many of them have had major funding and as we've seen on the news already. So first of all, I wanted to congratulate these former colleagues for getting good reception in the market, not just funding but also overall reception. And we -- I really wish all of you go back in to compete in your respective market and wish your business to develop well and for you to have a success in your new venture.

At the same time, I also want to point out that this change has really given rise to a very exciting change within the company. It has enabled many of the young leaders across technology, in business units and foundation models, product -- vehicle product lines and embodied AI. It has embodied new -- enabled new leaders in these areas of many were born after 1990 or 1995 to really take the spot and take the burden and they're really -- we are starting to see a full bench of very talented and motivated colleagues, which is prepping the company really for the next decade.

I believe this overall is really a win-win situation for us and our employees and really ready us for the new decade of development. So I want all of you, investors and those who care about the company, rest assured that this young generation is taking over very well, and they're building on the solid foundation that's built by their predecessors and have yielded some really, really good results, especially in some key technical areas for -- including some of the thesis and key research problems are post-'95 generation has made a major contribution and even some newly fresh college graduates.

Many of them were born after the year 2000, they've made some major contributions to our products, to our technology and our are at the forefront of our research and R&D. So this is a really exciting time and I'm really excited to see all this and also makes me very confident about the next decade that's to come. Thank you.

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

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your lines. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto's Third Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website.

On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma; and CTO, Mr. Yan Xie, will join for the Q&A discussion.

Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks.

With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Now it's translation for Mr. Li. The third quarter of 2025 was also the first quarter in the second decade of Li Auto. We went through many challenges, including supply chain, product life cycle, PR challenges as well as changing policies. All these factors have had a negative impact on our operations and deliveries.

However, today, I want to take this opportunity to talk about our long-term thinking in the next decade and three most important choices that we need to make, organization, products and technology.

The first choice we need to make is organization. The challenge we're facing is whether to choose an entrepreneurial model or a professional management model. In the last 10 years of Li Auto, the first 7 of those years, we operated as an entrepreneurial model company. But as we scaled over time to a scale that we've never seen before, especially in terms of revenue, around the time of 2022, many people suggested to us to shift to a professional management model. Because historically, whether it's Mercedes or BMW or any of these 100-year-old car enterprises as well as Microsoft and Apple, which is the tech giants have all operated under this model and have great success.

In the last 3 years, we tried very hard to make ourselves used to this professional management model. We -- but after implementation, we realized -- we came to the realization that the entrepreneurial model and the professional management model are fundamentally different, and it is irrelevant to processes and organization structures. The difference really lies in management principles and key operating principles. And also, they are tailored to different stages of growth and industry environment.

The professional management model can be very successful, but it relies on three factors. The first one is that the industry and technology cycle has to be relatively stable. And the second is that the enterprise is already in a leading position and the position is relatively stable. And the third one is that the founding -- the founder and the founding team are either lost their motivation or are not actively involved in the company.

If all these three criteria are satisfied, a professional management model could be a very ideal choice, whether it's Apple or Microsoft have both flourished after professional management took over and grew from $100 billion in revenue to $1 trillion companies.

However, the entrepreneurial model is catered to an entirely different environment. First of all, the industry and technology cycles are going through fundamental changes. And second, the industry is very unstable and the entrepreneur -- and the company enterprise itself is not yet a leader. And thirdly, the founder and the founding team are still devoted to everyday work with their full passion and fully motivated. As AI is shaping many industries today, the environment that we live in and considering the traits of this company, we think that we fit into the entrepreneurial model way better.

The entrepreneurial model really is about four things. First of all, there needs to be more conversations as opposed to reports. In a rapidly changing environment, deep conversations is really key to increasing our knowledge and judgment of the world as well as to making bold decisions.

And secondly, is focusing on user value as opposed to just short-term deliveries. Only those things that create value for the users are worthy to be delivered as opposed to only focusing on how many tasks that we delivered on.

And third one is keep increasing efficiency as opposed to occupying more resources. For example, if we spend $10 on doing something last year and this year we need to do it with $8. That's how we have, have resources to really spend on projects and investments that do not generate short-term revenue, but really benefit us in the long term.

And fourth, the key is to recognizing the key issues as opposed to just creating information asymmetry.

And only as we create more value and increase efficiency and solve the key issues, can we really thrive in a highly competitive and rapidly changing environment and consistently meet customer demand? In the last 3 years, me and my team have tried very hard to adapt to the professional managed model, and we have forced ourselves to embrace all kinds of changes. However, we all realize that we became a diminished version of ourselves.

NVIDIA and Tesla are still operating as an entrepreneurial company. And if the largest and strongest companies are all operating in the entrepreneurial model, there is no reason for us not to utilize our strength and what we're most used to.

Since 1998, I have 27 years of running entrepreneurial companies, and I have never worked in any large corporation as a professional manager. Now we're facing a highly competitive and rapidly change -- an environment with rapidly changing technologies. I personally am passionate about products, about automobiles and about AI. And work is my largest passion.

So, why don't I focus on what I'm most used to and what I'm best at to manage Li Auto. And that's how -- that's the most important first choice as we look into our second decade. As a result, starting from Q4 this year, I and my founding team will firmly revert back to the entrepreneurial model and to embrace the new era and new technological challenges.

The choice of organizational model is the foundation of everything. Looking into the next decade, the next key question is how we really solve issues for our customers. First of all, what products do we build? And where is technology headed? That's always the essence of everything.

First of all, on products. We also need to make an important choice. What kind of products should we really build for our users? Is it electric vehicles? Is it smart devices? Or is it embodied robots? If we only focus on electric vehicles, competition is really all about an arms race in spec sheet.

Do you have more -- 20 kilometers of range more? Do you have a car that's 2 centimeters longer in dimensions? And if it's only focused on electric vehicles, it's all about larger space, more range and cheaper prices and maybe copy some proven designs, just like how Li L9 has been copied.

Other than that, all R&D investments are waste, stronger sensors, bigger models, more computing power, better active suspension are always waste of cost. And even stronger and stronger computation power and active ride suspension may even have negative impact on range.

And secondly, if we choose to focus on smart devices, then we'd automatically be focused more on what happens in the screen. Features that used to belong to smartphones and smart tablets will be migrated to the car environment. In fact, most of the innovations in smart devices is really about moving what's already available in smartphones into vehicles and moving mobile apps into head units, deploying larger language models in head units and even do coding in cars and conduct deep research.

But then, we ask ourselves the question, when our users buy our cars, do we really buy it for their work or deliver better life? If certain experience are better -- already better in mobile phones and tablets or computers and more natural, why should we even bother putting them in cars? All these investments create very little incremental value for users.

And thirdly, the third route is for us to make our cars into an embodied AI in the physical world or in layman terms, robots. The movie transformer told us that there are broadly two types of robots. The first type looks like human beings and the second type looks like cars. Knight Rider and Cars, these TV shows or movies have clearly showed us car-shaped robots is going to be a mainstream type of -- form factor of robots going forward.

So, how do we transform our cars into robots? We need to give it ears and eyes for perception. We need to give it brains and nerves, which is modeling capability. We need to give it heart, which is computing power, and we need to reshape the hardware to make it a stronger physical presence. So, our robots need to have -- need to parallel the top drivers and can not only drive but also pick you up, park for you, have to charge the car up, have to close the door, open the door and meticulously make your life more convenient and safer. It can also play the role of parents, assistants or even flight attendants and to provide you the convenience and take care of you within the sphere of the car, just like first-class cabin and the services on planes. And it's also like when we're a little that our mother takes care of us and make us happy.

So, how do we define a good embodied robots? How do they make them to change from passive machines into an automated machine and then further into proactive machines?

In the next decade, the most valuable embodied AI products is going to be vehicles that are automated as well as proactive. And competition is really to how automated and proactive can we make these products and how can we fuse them into high-frequency life experiences something that once we get used to, we can never go back.

So, whether it's electric vehicles or smart devices, these are not necessarily bad choices, but we think they're not sufficient. And only if we choose the embodied AI, which is the hardest about these three problems, can we really change the life of our users and really provide automated and proactive services that only embodied AI products can provide. And it's really like what you see in Transformers movies, they're car-shaped robots or what we see in Cars or Knight Riders, they are robots that are shaped in cars. And I believe that this is the biggest challenge and opportunity that we entrepreneurs see in this new era.

And the next choice is about technology or more specifically, our full stack AI system. What do we choose? What kind of technology do we choose to power this full stack AI system? Is this something that's language-based that's faced towards the digital world? Or is this something faced towards the physical world?

These two options require completely different system capabilities. If we want to build a good embodied AI, we need to build an AI system that's completely different from language-based AI models, including perception like eyes and ears, including the model itself like brain, including the operating system like nerves and including the computation power, which is like hearts and also the physical body itself, just like human body.

At this moment, there's no third-party supplier that can provide the full-stack system. And in fact, not any company can provide even part of this system. And the focus of large language models is really focusing on the model itself and computation. Larger models and more computation power is always going to generate stronger capabilities. However, for embodied AI, we need to better understand the physical world. And the model is also built on our understanding of the physical world.

Accuracy is the first priority and generalization only comes next. Operating system needs to make sure the optimal integration is made between the hardware and the software and also provide higher frequency and also the system needs to be fast and precise. And also this computation power that powers the perception, the model and the operating system needs to reside on the device side as opposed to the cloud side.

And lastly, we also need to modify the hardware itself to become a really embodied hardware. And for example, our active suspension, it's just like a 3D nerve system -- nerve control, and it can increase the efficiency and precision of execution in the physical world.

So, if we look at this entire AI system through the lens of embodied AI, you will see that there are so many changes that needs to happen and desperately need to happen.

The first change comes in perception. Based on the current model and the computation power that can be deployed on the device, the current 3D BEV or occupancy network or 2D Vision Transformer, the effective range of perception, I'm talking about the effective as opposed to theoretical maximum is only just about over 100 meters, which is way less than human eyes.

However, if we upgrade it to 3D Vision Transformer, which is just similar to how human eyes works, this range can be increased by 2x, 3x, and it can solve more than 50% of the common issues we see in autonomous driving. 3D Vision Transformer is not only limited to autonomous driving, but it can also benefit interactions with the car inside and outside of the car. These can also all become possible. So that requires fundamental breakthroughs in perception models, both in research and also development. And also requires tailored chips for embodied AI, just like M100, which we have developed and also requires a very strong compiler team and high-efficiency cooperation.

The next area of improvement is in models. It's only with 3D Vision Transformer can we really understand the world. The VL in the BLA is really -- can really understand and perceive the world better and human data can be more effectively used for training and world model can also be used more effectively for training.

For example, in the status quo computation platform, a 4-billion parameter MOE model can only run at 10 hertz. But the execution frequency is 60 hertz. So, we can increase the frequency of the model by 2x to 3x. It can also automatically solve many issues, including comfort and speed of reaction in autonomous driving. And it also requires us to fundamentally modify and customize the traditional GPU architecture and to have a dedicated operating system. And M100 again, is really designed for solving these embodied AI problems.

And lastly is the embodied hardware itself. A human being can typically react to braking and steering in about 450 milliseconds. And for a typical autonomous driving system from perception to execution, the entire closed loop takes about 550 milliseconds. So, for a typical driver today, they can easily -- it's very obvious to them that autonomous driving is much slower. It's like an elderly driving car.

The drive-by-wire system can reduce the response time to about 350 milliseconds. And the difference of 200 milliseconds is not to be underestimated. It can roughly reduce the accident rate by over 50% and it also feels better even than driving by themselves, and it's also safer. It's safer both in the subjective as well as the objective sense.

So based on these needs, all the entire control mechanism will be different. And if we only focus on increasing the scale of model just like we did in language models, for example, if we increase the size of model 2x and with a corresponding increase in computation power, the really performance increase is only going to be 5% to 10%. But if we look at this from an embodied AI perspective and to solve the key issues in every stack -- on every level of stack, the next-generation autonomous driving can really increase the performance by 5- to 10-fold. And that is what can power embodied AI to perform fast and accurate and valuable services. And that's the difference between 0 to 1.

In the past 3 years, we have made a lot of progress in technology and systems for embodied AI. And that makes us very confident about the next-generation products. The start of embodied AI robots starts with car robots and starting this year, I believe, and hundreds of billions of revenue is only a starting point.

So, the above three key strategic choices really laid the foundation for the next decade of our development. It's more challenging than the last decade. And we're deeply aware that real competition isn't really about short-term wins. It's about staying on the right path over the long term and having the dedication to keep investing in it. Backed by a strong financial foundation, we will stay focused, embrace our beloved entrepreneurial management style and build leading body intelligence products.

So Li Auto can navigate market cycles, lead technological transformation and become a company that creates unique lasting value for users and society in the long run.

Finally, I will also look forward to engaging with you guys in this manner moving forward rather than presenting a quarterly report in a fixed format. And I want to express my gratitude to all of you for your support and trust, especially during our most challenging times. We're fully committed to making Li Auto the best performing company in embodied intelligence and the greatest creator of user value within the next 3 to 5 years. Thank you.

Thank you, Xiang. Hello, everyone. I will now walk you through some of our third quarter financials.

Given time constraints, my remarks today will be limited to the financial highlights. All figures will be called in RMB, unless otherwise stated. For further details, we encourage you to refer to our earnings press release.

Total revenues in the third quarter were RMB 27.4 billion, decreased 36.2% year-over-year and 9.5% quarter-over-quarter. This included RMB 25.9 billion from vehicle sales, decreased 37.4% year-over-year and 10.4% quarter-over-quarter, mainly due to lower vehicle deliveries. The sequential decline was partially offset by a higher average selling price due to the different product mix.

Cost of sales in the third quarter was RMB 22.9 billion, down 22% (sic) [ 32% ] year-over-year and 5.3% quarter-over-quarter. Gross profit in the third quarter was RMB 4.5 billion, down 51.6% year-over-year and 26.3% quarter-over-quarter.

Vehicle margin in the third quarter was 15.5% versus 20.9% in the same period last year and 19.4% in the prior quarter. The year-over-year decrease was mainly due to estimated Li MEGA recall cost and the higher per unit manufacturing cost from lower production volume. The sequential decline was mainly due to the same recall-related costs. Excluding such recall costs, vehicle margin would have been 19.8% in the third quarter.

Gross margin in the third quarter was 16.3% versus 21.5% in the same period last year and 20.1% in the prior quarter. Excluding the above-mentioned Li MEGA recall cost, gross margin would have been 20.4% in the third quarter.

Operating expenses in the third quarter were RMB 5.6 billion, down 2.5% year-over-year and up 7.8% quarter-over-quarter.

R&D expenses in the third quarter were RMB 3 billion, up 15% year-over-year and 5.8% quarter-over-quarter. The year-over-year increase was mainly due to the impact of the pace of new vehicle programs and increased investments in expanding our product portfolio and technology, along with expenses from the product configuration adjustment. The sequential increase was mainly due to those same product configuration adjustment expenses.

SG&A expenses in the third quarter were RMB 2.8 billion, down 17.6% year-over-year and up 1.9% quarter-over-quarter. The year-over-year decrease was mainly due to the recognition of share-based compensation expenses regarding the CEO's performance-based awards in the third quarter of last year.

Loss from operations in the third quarter was RMB 1.2 billion versus RMB 3.4 billion income from operations in the same period last year and RMB 827 million income from operations in the prior quarter.

Operating margin in the third quarter was negative 4.3% versus 8% in the same period last year and 2.7% in the prior quarter.

Net loss in the third quarter was RMB 624.4 million versus RMB 2.8 billion net income in the same period last year and RMB 1.1 billion net income in the prior quarter.

Diluted net loss per ADS attributable to our ordinary shareholders was RMB 0.62 in the third quarter versus diluted net earnings of RMB 2.66 in the same period last year and RMB 1.03 in the prior quarter.

Turning to our balance sheet and cash flow. Our cash position remains strong with a quarter ended balance of RMB 98.9 billion. Net cash used in operating activities in the third quarter was RMB 7.4 billion versus RMB 11 billion provided in the same period last year and RMB 3 billion used in the prior quarter.

Free cash flow was negative RMB 8.9 billion in the third quarter versus RMB 9.1 billion in the same period last year and negative RMB 3.8 billion in the prior quarter.

And now for our business outlook. For the fourth quarter of 2025, the company expects the deliveries to be between 100,000 and 110,000 vehicles and quarterly total revenues to be between RMB 36.5 billion (sic) [ RMB 26.5 billion ] and RMB 29.2 billion. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change.

That concludes our prepared remarks. I will now turn the call over to the operator and start our Q&A session. Thank you.

[Operator Instructions] Your first question comes from Yingbo Xu at CITIC.

[Foreign Language] So, I have two questions. The first question is about -- we are very glad to hear the company's return to entrepreneurship and next decade plan. But any R&D and development needs time. So my first question is that if we just say next year 2026, what kind of technology or product progress can we expect? And also from the investors' perspective, how long can we really see a technology or product jump in future? How long?

And the second question related to BEV. The company's transition from EREV to BEV, it's challenges. So can we please give us more information or confidence in the BEV part, how we prepare for the effective technology reserve and supply chain preparation?

[Interpreted] On your first question about 2026, next year, we'll be launching our AI system based on our internally developed M100 chips. And once this system gets in the car, that's where we will start to see real value and change of user experience.

As I mentioned earlier, our products would go from a passive -- a machine that passively takes orders to a more automated machine and even a proactive machine that can provide services for the users. So, unlike large language models, which can conduct deep research or video generation, this embodies AI products and really benefit our users in their everyday use at a very high frequency.

And on the second part about the next 10 years, unlike programming or traditional rule-based programming, we do not have a feature list or a list of functions. Instead, AI really -- for a complex AI system, if we can solve key issues in some important areas and improve performances in some bottleneck points, then we will start to see a series of changes that are unimagined before. And that's our late understanding of embodied AI and AI system. And this is really the room for imagination for the next 10 years.

On the key in-house BEV-related technologies, we focus on three areas: electric drive, battery systems, and electronic control.

First of all, on the electric drive system, our focus is on efficiency and user experience. We have an in-house developed and outsourced our manufacturing of silicon carbide power chips and in-house developed and in-house manufacturing of power modules and motor controllers, but also establish our own dedicated drive motor factory. We have built a full chain in-house development capability stemming from silicon carbide power chips, power modules to electric motor assemblies. Our electric drive technology covers all BEV and EREV models, ensuring quiet and smooth driving experience while also optimizing for energy consumption and vehicle driving range.

And secondly, on the battery system, our focus is on ultrafast charging and safety. We have built a full stack in-house capability around 5C ultrafast charging batteries with full control over self-chemistry, BMS control modules and algorithms as well as battery pack layouts and structural design and achieving three core advantages across ultrafast charging, long driving range, and long service life.

On the supply front, we also have a combined strategy of external procurement and in-house development. Li Auto's own 5C batteries will enter mass production next year. This industrialization of in-house developed technology will further strengthen our battery safety and also improve user experience.

And thirdly, on the electronic control system, our goal is to provide the best driving experience also through in-house developed hardware and software. On the software side, we have full stack in-house development capability of powertrain control, power management and engine calibration. On the hardware side, our core domain controller PCB layout are all developed in now as well as the underlying software.

Together with our in-house chassis technology, and we were able to enhance driving smoothness and comfort and make the drive experience easy and intuitive to our users. So, through a combination of three electrical technology, including battery electric control and electric drive, we provide our users with a special fast charging long-range and smooth and safe driving experience.

Your next question comes from Tim Hsiao from Morgan Stanley.

[Foreign Language] So, I have two quick questions focusing on the near-term operation. So, the first one about the product, Li i Series. Could the management team share the latest update on orders and deliveries of Li i8 and i6? And in the meantime, how and when could you start the current supply bottleneck of the Li i6 and i8? And how should we think about the normalized sales volume of the two i Series models in the following months?

Second question is about cash flow. Li Auto actually registered increasing operating cash outflow of about RMB 7.4 billion or free cash outflow of RMB 8.9 billion during this quarter. So, this caused quite a significant drop in company's cash reserve drained away. Why is that? And how should we think about the cash flow in the following quarters? That's my second question.

[Interpreted] This year, we established our BEV portfolio with i8 and i6 models. And respectively, they cover the mainstream and premium segments for the family BEV market. These new cars create a solid foundation for the long-term stable growth of our BEV business.

We also deployed our products to support the dual energy strategy, namely EREV and BEV, which effectively complement each other and to meet the diverse needs of our users. A key highlight that's worth mentioning is that we have made breakthroughs in key regional markets. The i-Series has successfully entered core BEV markets such as Beijing, Shanghai, Jiangsu and Zhejiang, with orders in these areas starting to increase significantly from September.

Li i8 and i6 are steadily going through the path of production ramp-up, delivery acceleration and market penetration. And starting in November to address production ramp-up challenges, we will officially start to begin a dual supplier strategy for our batteries on Li i6. We will ensure consistent performance and quality standards between these two suppliers. We will expect monthly Li i6 production capacity to steadily increase to about 20,000 units starting from early next year.

We sincerely apologize to customers who placed orders on i6 and still waiting for the cars to be delivered. Due to constraints in the supply chain planning of key components and the pace of production ramp-up, your vehicle is still -- the delivery schedule has been affected. We deeply appreciate your trust and choice in Li Auto, and we kindly ask for your continued understanding and patience. Our team is working around the clock to accelerate production and expedite the delivery process.

And for the second question, Tim, this is Johnny. I think for the operating cash flow, it's about two reasons. First, as we guided in the last earnings release, the third quarter, we faced great pressure on the deliveries and the delivery decrease will make the revenue decrease, which will finally impact the operating cash flow and also the impact of shortening of the payment cycle to suppliers. And this is, as you may know, it's due to the government's authority starting from good in the national wide.

Actually, we value our partnership with our supply chain partners and actively respond to their requirements. Currently, the settlement period for all our accounts payable is 60 days and the payment is either through bank transfer or bank notes without any business notes or some kind of certificates from the OEM, just the normal bank notes.

Your next question comes from Ming-Hsun Lee from BofA.

[Foreign Language] So, my first question is that because next year, the trade-in subsidy policy will change and also the EV purchase tax will increase from 0% to 5%. If the subsidy decline next year, what will be your sales strategy for 2026?

[Foreign Language] So, my next -- second question is that in 2026, your Li i and Li L series will have a new generation. So what can we expect the most -- the new features, specs and what will be the new advantages for your new models?

[Interpreted] We believe this change marks the auto industry's transformation from policy-driven adoption to organic market-driven adoption. And it is precisely during this phase that the value of stronger players can really stand out. As the purchase tax policy phases out, there will be fluctuations in the first short term, we believe. We expect to see a pull-forward effect, namely as customers rush to lock in their incentives at the end of 2025, that will naturally lead to a substantial dip in deliveries in Q1 2026.

Looking into the longer term, we are optimistic about the penetration rate of NEVs. In 2026, the NEV penetration rate in the domestic Chinese market will probably reach between 55% to 60% with the rate in the premium segment exceeding 60%.

At the Auto, our response strategy is to guarantee user benefits and adapt to new standards with our new vehicles rolling out during the transition period. And for the transition period, we have a peace of mind purchase program covering the purchase tax difference for i6 customers who locked in their orders in 2025, but take deliveries in 2026. All of our 2026 models meet the new standards for gas and energy consumption, so they will qualify for 2026 incentives.

In the longer term, we will continue to be dedicated to user value and offset policy impacts through technology advancements. For example, we will be fully adopting 800-volt high-voltage platform and 5C ultrafast batteries to enhance efficiency and reduce energy consumption in 2026. We aim to operate about 4,800 supercharging stations by 2026, with 35% of which will be on highway service stations.

We'll continue to deepen our supply chain localization and leverage economies of scale to stabilize pricing, while accelerate product iteration to keep all 2026 models at the forefront of product competitiveness. As the product strength, we must accelerate model innovation and accelerate further.

In summary, this policy phase out marks a watershed moment for the industry's shift from -- towards high-quality development. Li Auto is poised to achieve a historic breakthrough in deliveries in 2026, and we will navigate this cycle through superior product strength and user value, thereby consolidating our leadership in the premium market.

Usually, on product release dates and more details, we need to choose an appropriate time to release publicly. But today, I still want to take the opportunity to give a glimpse on our product rollout for next year.

The next year for L Series is going to be a major generational upgrade. And the changes are based on deep research of users and their feedback as well as our accumulation of technology over the years, and we want to build a very strong product that's also fundamentally different from the current generation. And all this is to support our goal of reclaiming leadership in the EREV market in 2026.

In terms of model configuration, we'll be going back to the simplified SKU approach, which balances market coverage as well as supply chain efficiency. So, even the base model will not compromise in terms of user experience and will have all features as standards.

And in terms of design upgrades, while retaining our iconic design DNA, we will be upgrading the premium deal and craftsmanship. We'll strike a balance between strong brand identity and fresh user appeal and to refine our products to better serve the needs of family users.

On the core technology front, 5C standard supercharging will be standard on all models and seamlessly integrating with our existing charging network to efficiently address range anxiety. And at the same time, we will reinforce our position as the EREV leader, building on our first-mover advantage and deep expertise in EREVs.

The 2026 L Series refresh is about responding to market uncertainty with certainties on technological upgrades, delivery cadence and user value. We will announce the specific launch timing and further details at the appropriate time. Please stay tuned.

Your next question comes from Paul Gong at UBS.

[Foreign Language] So let me translate. I have two questions. The first one is regarding the recall of the MEGA. I noticed this was announced in Q4. Why are you booking it in Q3? And how did you determine the amount and the sharing between yourself and the supply chain? What's the impact for the Q4 GP margin? And if possible, please also update us about the latest situation of the callback of the recall as well as the latest order of MEGA.

My second question is regarding the AI. Can you please update us the latest development of VLA, large model and the user feedback. If possible, please also give more color for the future targets and upgrades process.

Paul, this is Johnny. I think, I will shortly and we will respond to your question very shortly. First, we recognized this in Q3 is just we regard this event as a subsequent event. So it will be accrued in the most recent quarter, we can recall. So, it's a bit accounting standard.

And for the recall, I think we have announcement. I don't want to repeat most of the details covered. And currently, we just make all the battery pack to fulfill the recall requirement, the demand and which means we lower the delivery of our 2025 MEGA delivery. So, which means all the battery pack, we shipped most of them to replace the 2024 recall. I think that best serve the customers' benefit. And that's the company's value proposition.

[Interpreted] We rolled out our VLA Driver to all of our AD Max vehicles in September. And with the strong migration capability of our model across all releases, all of our AD Max users have access to this new model, including the new i Series users as well as the Li L9 users who bought the car back in 2012, and they're able to experience its core capabilities across the board.

User feedback and data analysis have very clearly showed the effectiveness and the level of experience improvement. We can see that Li L Series and i Series owners have a strong -- Vi i Series owners have a stronger willingness to use VLA Driver with both DAU and MPI showing improvements.

In the meantime, users generally report the VLA to be smoother, especially in longitudinal control and more proactive and decisive in detours and more accurate in route selection at complex intersections. And with ongoing iterations, the functions of VLA will continue to achieve further breakthroughs.

For OTA 8.0, which is our first full-scale rollout, the priority is mostly focused on safety. And in early December, we will release the OTA 8.1, which further enhances VLA perception capabilities for more precise and responsive behavior. And by year-end, we will deploy an architecture upgrade to strengthen language behavior interaction and streamline the decision-making process, which will be compatible with our upcoming in-house developed M100 chip.

Beyond core system improvements, we're rolling out a series of innovations, including the industry's first defensive driving AES feature to enhance safety capability and any point to any point full scenario automated parking and a smart finder to find charging stations and park automatically. And all this completes the smart mobility ecosystem.

Your next question comes from Tina Hou from GS.

[Foreign Language] Thanks management for taking my questions. So, I just have one question. What is the progress in terms of our in-house developed SoC as well as the operating system and then the progress in terms of open source and future development?

Let me answer your question. We believe that AI inference system is a core foundation for intelligent vehicles. To achieve this efficiency, the system must be designed as integrated architecture, not as separate parts. Our in-house design controller hardware and operating system have enabled us to reduce development time from industry average of 15 months to 9 months, while lowering cost by 20%. Many modules in the inference stack still come from suppliers.

To innovate faster together, we open source to Halo OS, enabling collaborative development with our partners and ecosystem. In September, we established the Halo OS Technical Steering Committee, and assisting companies across intelligent vehicle value chain signed the community charter, including OEMs, chip makers, software and hardware service providers and component suppliers.

At the same time, we are undergoing our own vehicle foundation model for physical AI. Our focus is to improve perception, understanding and response, so the model can see further, understand better and react faster.

The AI inference chip is the computing engine of this system. Our controller built with our in-house design chip M100 is now undergoing large-scale system testing. We expected commercial development to take place in the next year. Co-designed with our foundation model, compiler and software system, we expect that the M100 within our next-generation VLA-based autonomous driving system to achieve at least 3x the performance to cost ratio of today's high-end chips. On the basis of highly efficient AI inference and execution systems, our next priority will be faster iteration, continuous performance improvement and lower cost. Development of our next-generation platform and chip has already begun. Thank you.

Thank you. As we are now reaching the end of our conference call today, I would like to turn the call back over to the company for closing remarks.

Ms. Janet Chang, please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, Darcy. Good evening, and good morning, everyone. Welcome to Li Auto's Second Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in our press release earlier today and are posted on the company's IR website.

On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks; our President, Mr. Donghui Ma, and CTO, Mr. Yan Xie, will join for the Q&A discussion.

Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve 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 company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Our CFO will start his remarks in Chinese. There will be English translation after he finishes all his remarks.

With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Hello, everyone. This is Li Xiang and thank you for joining today's earnings conference call. In the second quarter of 2025, we delivered over 110,000 vehicles, bringing total revenues to RMB 30.2 billion. According to insurance registration data from the China Automotive Technology and Research Center, we captured a 13.4% market share in the RMB 200,000 and above NEV market in China, making yet another quarter where we have top segment sales among Chinese auto brands.

As of the end of July, our cumulative deliveries exceeded 1.36 million vehicles. I would like to extend my sincere gratitude to those 1.36 million families who have placed their faith in us as well as our partners, shareholders and employees for being part of this journey. We launched Li MEGA Home in April this year. The sales results far exceeded our expectations, with approximately 3,000 units sold monthly, 14 months after launch in March last year Li MEGA has become the best-selling MPV priced above RMB 500,000 since May 2025. And then the top-seller among all BEVs in the same price range since June 2025.

These achievements demonstrate our ability to quickly identify issues and grow while standing as a powerful testament to our product value and validated by the market at test of time.

The refreshed Li L series that we launched in the first half of this year experienced sales fluctuations since June due to sales and service system adjustments and other market factors. Despite these challenges in June and July, we maintained our top sales -- top 3 position in the RMB 200,000 and above NEV market. We will draw on Li Auto's ability to thrive in challenging conditions and swiftly complete the restructuring of our sales and service systems. This includes enhancing sales and delivery capabilities, building an end-to-end marketing system and boosting sales team morale.

Meanwhile, we will focus on creating value for our users to respond more effectively to market dynamics. We officially launched Li i8 in July 29 -- on July 29 with delivery starting on August 20. Li i8 showcases our latest innovation and redefines BEV SUVs by combining the versatility of off-roaders, the right at handling of luxury sedans and the comfort of MPVs. Its pioneering design is a key reason why users choose Li i8, validating our product philosophy. Since its launch, our focus has been on accumulating positive user word of mouth for this innovative product. We are especially pleased to see a test drive satisfaction rate of over 97%. As customers experience the product firsthand, Li i8 continues to gain momentum. Since deliveries began on August 20, we received glowing reviews from the initial batch of customers.

We expect cumulative deliveries of Li i8 to exceed 8,000 units by the end of September. We're confident that over time, just like Li MEGA, Li i8 will establish itself as the best benchmark in its price range.

Additionally, preparation for our 5-seat BEV actually, Li i6 is progressing smoothly. We plan to launch Li i6 and commence deliveries at the end of September. Li i6 will expand our product lineup to cater to a broader audience base.

To support our BEV launch, we offer the largest charging network among automakers in China. As the automaker was the fastest-growing charging network over the past few years, Li Auto strives to empower BEV users with a hassle-free experience. As of now, we have more than 3,100 charging stations equipped with over 17,000 charging stalls. Among these charging stalls along the highways over 1,000 supercharging stations cover China's busiest 9 East-West and 9 South North Highway routes, a 150-kilometer interval on average.

Additionally, more than 2,100 urban supercharging stations are spread across over 266 with an average coverage radius of 3.5 kilometers in first and second-tier cities. We're confident that we will reach our 4,000-station goal by the end of this year. Our charging network also leads the industry in terms of charging rate.

Currently, all of our charging stalls support charging rates of 250 kilowatts or higher with over 61% being 4C and 5C chargers. All of our upcoming charging stations use 4C and 5C charging stalls, further enhancing the ultra-fast charging capability of our energy replenishment network.

Furthermore, we continue to explore and build a new ecosystem for our automotive charging services. In June, we launched China's first pass-through supercharging station in Changzhou with functions like gas -- which functions like a gas station. It allows users to stay in the cars while supercharging multiple vehicles at the same time, making the charging experience more efficient and more convenient.

We're also testing autonomous charging robots, aiming to redefine smart charging in the future. We remain committed to ongoing investments in research and development to further solidify Li Auto's leading position in intelligence. We believe that intelligence is becoming an increasingly critical, maybe even the most critical driver of users' purchasing decisions. It will also reshape the automotive and mobility industry.

We expect our AI investments this year to exceed RMB 6 billion, which will be allocated to infrastructure development as well as product and technology development. On August 20, we officially rolled out our proprietary VLA large model driver and Li Xiang Tong Xue Agent with the delivery of Li i8. As the industry's first VLA architecture to be delivered in production vehicles. The VLA Driver large model is scheduled to be deployed on all the AD Max models by OTA updates by mid-September.

The VLA large -- Driver large model integrates spatial and linguistic intelligence with behavioral strategy. It boasts enhanced capability and precise spatial perception, chain of thought reasoning and decision-making natural language interaction just like human drivers and route diffusion generation and optimal path selection. By adopting a technical architecture that more closely resembles human intelligence.

The VLA Driver large model significantly enhances user experience in areas such as defensive driving, smoothness and comfort 3-point turns, continuous task execution and underground garage navigation. Furthermore, through ongoing and reinforcement learning, it can become increasingly adept at understanding user preferences.

Meanwhile, our proprietary foundation model, MindGPT-powered Li Xiang Tong Xue has evolved from a voice assist into an intelligent agent. The agent's enhanced capabilities greatly expand the in-car service ecosystem. For example, they can act as a life assistant to connect with food delivery apps and pick-up orders at restaurants or activate vehicles' external cameras and make payments by scanning and paying fees at parking lots.

Its memory capability not only increases the diversity of tools but also makes Li Xiang Tong Xue more emotionally resonant and personalized.

Going forward, we will continue to build our AI capabilities and harness our R&D achievements to continuously advance product iteration and evolution. With the vehicle as platform, we're committed to bringing the physical and the digital world, extending the benefits of AI to every user. Beyond AI, our R&D also focuses on core areas such as electric drive technology and 5C supercharging.

For instance, our proprietary drive motors, including key components like silicon carbide power chips have significantly boosted vehicle energy efficiency and range. Another key R&D focus is 5C batteries. We have developed in-house batteries out and a thermal management system that can better support ultrafast charging and long driving range. The 5C battery can maintain a high charging power of over 300 kilowatts, while it charges from 0% to 80% of SOC.

Additionally, the battery life span is exceptional, even after 1,500 full charge discharge cycles in supercharging mode, battery health remains above 80%, which is industry first. We will continue to leverage our in-house R&D advantages to further bolster product competitiveness and optimize production costs by developing key technologies in-house and manufacturing our work through joint ventures.

Turning now to our sales and service network. A recent organizational restructuring will empower us to build our store-centric user operation capability, which we believe will help boost sales conversion and improve how we communicate our brand and product there.

Meanwhile, we will continue to define our network structure by expanding and upgrading coverage in major auto parts and shopping malls. We will gradually increase the number of stores in lower-tier cities to reach more user cohorts. To better support our BEV launches, our store expansion schedule has been strategically front-loaded this year.

As of now, we operate over 550 retail stores across more than 150 cities nationwide, with net additions of about 50 stores and 700 display spots since the end of last year. Throughout our journey, we have always believed in doing what we believe is right even when it's difficult. From EREVs Li ONR and Li L series to BEV, Li MEGA and Li i8, our commitment to developing advanced technology and better products remains unshaken, no matter how much adversity we face.

This year, we've demonstrated progress in BEV innovation with offerings like Li MEGA Home and Li i8. Looking ahead, we will remain devoted to creating superior EREVs and BEVs while strengthening our brand. We will continue to leverage technological innovation to lead industry transformation. Through our long-term persistent efforts who will aim to provide our users with cutting-edge technology, extraordinary services and meaningful companionship.

I will now turn the call over to our CFO, Johnny, to walk you through our financial performance.

Thank you, Xiang. Hello, everyone. I will now walk you through our second quarter financial performance. Given time constraints, my remarks today will be limited to some key financial results. All figures will be quoted in RMB unless otherwise stated. For further details, including the corresponding U.S. dollar amount, we encourage you to refer to our earnings press release.

Total revenue in the second quarter were RMB 30.2 billion, down 4.5% year-over-year and up 16.7% quarter-over-quarter. This included RMB 28.9 billion from vehicle sales, down 4.7% year-over-year and up 17% quarter-over-quarter. The year-over-year decrease was mainly due to lower average selling price caused by product mix changes, customer interest subsidies and higher sales incentives, partially offset by increased vehicle deliveries.

The sequential increase was mainly due to the increase in vehicle deliveries. Cost of sales in the second quarter was RMB 24.2 billion, down 5.2% year-over-year and 17.3% quarter-over-quarter. Gross profit in the second quarter was RMB 6.1 billion, down 1.8% year-over-year and up 14.1% quarter-over-quarter.

Vehicle margin in the second quarter was 19.4% versus 18.7% in the same period last year and 19.8% in the prior quarter. The year-over-year increase was attributable to lower average cost of sales mainly due to cost reduction, partially offset by lower average selling price caused by product mix changes, customer interest subsidies and higher sales incentives.

Vehicle margin remained relatively stable over the prior quarter. Gross margin in the second quarter was 20.1%, versus 19.5% in the same period last year and 20.5% in the prior quarter. Operating expenses in the second quarter was RMB 5.2 billion, down 8.2% year-over-year and up 3.8% quarter-over-quarter.

R&D expenses in the second quarter were RMB 2.8 billion, down 7.2% year-over-year and up 11.8% quarter-over-quarter. The year-over-year decrease was primarily due to decreased employee compensation. The sequential increase was mainly impacted by pace of new vehicle programs and higher expenses to support our product portfolio expansion and technology advancement.

Our SG&A expenses in the second quarter were RMB 2.7 billion, down 3.5% year-over-year and up 7.4% quarter-over-quarter. The year-over-year decrease was primarily due to decreased employee compensation, partially offset by increased marketing and promotion activities. The sequential increase was mainly due to increased marketing and promotion activities. And income from operations in the second quarter was RMB 827 million, up 76.7% year-over-year and 204.4% quarter-over-quarter.

Operating margin in the second quarter was 2.7% versus 1.2% (sic) [ 1.5% ] in the same period last year and 1% in the prior quarter. Net income in the second quarter was RMB 1.1 billion, down 0.4% year-over-year and up 69.6% quarter-over-quarter. Diluted net earnings per ADS attributable to ordinary shareholders were RMB 1.03 in the second quarter, versus RMB 1.05 in the same period last year and RMB 0.62 in the prior quarter.

And now turning to our balance sheet and cash flow. We maintained a robust cash position of RMB 106.9 billion as of June 30, 2025. That cash used in operating activity in the second quarter was RMB 3 billion versus RMB 429.4 million in the same period last year and RMB 1.7 billion in the prior quarter.

Free cash flow was negative RMB 3.8 billion in the second quarter versus negative RMB 1.9 billion in the same period last year, a negative RMB 2.5 billion in the prior quarter. And now for our business outlook for the third quarter of 2025. The company expects the delivery to be between 90,000 and 95,000 vehicles and quarterly total revenues to be between RMB 24.8 billion and RMB 26.2 billion. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is started to change.

That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

[Operator Instructions] Your first question comes from Tina Hou from Goldman Sachs.

[Interpreted] I have 2 questions. The first one is regarding our sales volume because this year, we're seeing the L series, their sales volume has been declining. So how does management plan to achieve our full year target through product marketing as well as channel strategies going forward? And then the second question is regarding our self-developed chips, can management give us some update on this front?

[Interpreted] I'm translating for this Ma here. Focus -- there has been a big focus on sales recently. And because our product consist of BEVs and EREVs, so I will answer these questions on -- from 2 perspectives.

First of all, on the EREV front, we will solidify our market position through intelligence. As a leader in range extended technology, we're enhancing product competitiveness through major upgrades in assisted driving. Starting in September, all the AD Max models across our EREV lineup will receive the VLA assisted driving system. We delivered the VLA preview version to users alongside VLA delivery.

The performance improvement that VLA brings can be compared to the improvement from ChatGPT 3.5 to 4.0. The VLA Driver large model has 4 billion parameters over 10x higher compared to our previous end-to-end model. This is analogous to an increase in brain capacity. This has significantly improved experiences in 2 core areas.

In daily driving, it delivers substantially improved smoothness and comfort, many users comment that it's now very difficult to tell a part, whether it's the car driving itself or the human driving. In addition, in terms of parking, users have praised our newly introduced VLA summon function and parking functions as it actually addresses pain points while at the same time, giving them better experience.

From an industry perspective, we believe the VLA architecture is going to be highly aligned with human intelligence evolution. We're seeing more and more industry participants recognize and join the VLA camp. We believe that future competition of assisted driving will hinge on iteration speed for which reinforcement learning is the key.

The simulation environment required for reinforcement learning has been built and is now operational. The core technology behind this is the world model, which is used to reconstruct and generate the scenarios and data required for reinforcement learning.

Moving forward, we will leverage the system to rapidly iterate the VLA model so as to maintain its industry-leading position. That's our EREVs.

On the BEV front, this year, our lineup with BEV will be released over time through 2 major models gradually opening up new growth opportunities. Li MEGA has steadily achieved monthly sales of over 3,000 units, stabilizing our BEV sales foundation. Since its launch, our Li i8 has received very positive feedback from test drives. We're now ramping up production capacity and striving to deliver between 8,000 to 10,000 units cumulatively by the end of September.

In September, we will launch Li i6. The model has very attractive design. It drives very well; it balances comfort and sportiness and has excellent space experience. It precisely meets the needs of younger consumers and has the potential to become our sales driver in the BEV segment.

On the marketing front, we will be adopting tailored strategies for different markets. Our sales servicing system is now built around 1 headquarter and 23 provincial regions, with the core principle being localization with strategies tailored to local markets.

For example, in the northern region, we will be focusing on promoting EREV models, because of their range -- their advantages in range and performance in winter. And in southern regions, we're prioritizing BEV model, highlighting selling points like energy efficiency, spacious interior and smart features, aligning closely with the local consumer preferences. We'll increase marketing investment moving away from our previous assumption of great products will sell themselves. We'll fully embrace digital operations, building a sophisticated digital marketing platform and to track and optimize the entire consumer journey from audience targeting and lead generation to opportunity conversion. This enables precision -- precise decision-making on online marketing investments and significantly improving campaign effectiveness.

On the channel side, for Tier 1, Tier 2 and Tier 3 cities, we're optimizing our store portfolio to improve consumer acquisition and conversion with a core focus on optimizing existing resources. We'll optimize store locations; we're proactively relocating stores in suboptimal positions for lower traffic areas to ensure higher consumer reach and operational efficiency.

Meanwhile, we'll balance store mix. We're refining the ratio between mall-based stores and central stores in auto parts, leveraging mall store strength in high consumer traffic areas to attract visitors while utilizing central store's high conversion capability to close sales, creating a seamless acquisition to conversion loop and enhancing overall offline operational efficiency.

To accelerate our coverage in lower-tier cities, we're adopting a lightweight model called [ Star Plan ] to deploy stores to unlock the new growth potential. Compared to traditional stores, these Star Plan stores require lower investments and have a shorter set of cycle, enabling rapid development in core locations within Tier 4 and Tier 5 cities.

By increasing store density, will -- we boost brand visibility and fully tap into the potential of lower-tier markets and inject fresh momentum into our overall sales growth.

This is Yan. Let me share some information about our in-house design chip. The chip successfully tapered out and returned at the beginning of this year. And it is currently ongoing in vehicle testing and everything is in good shape. We expect to deploy it on our flagship models and deliver it to users next year. It takes about 3 years from setting up the project and to its shipment.

As far as I know, it is the fastest among similar efforts. The performance is quite satisfactory, compared to the most powerful chips on the market, it could provide 2x performance when running GPT like large language models and 3x when running vision models like CNN.

We designed a novel data flow architecture in which model competition is mostly driven by data, not instructions like other architectures. And in this way, the chip could achieve higher parallelism at the runtime, and we believe it is more suitable for large neural networks. The data-driven logic is orchestrated by our in-house design compiler allowing the hardware to be more efficient and running at a higher frequency than most comparables in the market.

Quite different from other AI chips on the market, we adopted a truly -- a true hardware software co-design approach, the chip, the compiler, the runtime system and the halo operating system are designed together from the beginning. So we can vertically integrate the hardware and software modules to a more powerful AI inference system and more easily, and it could keep on scaling in the future.

With the landing of VRA models on vehicles, we observed that computing power increase could translate to ADAS performance increase better than before, which means higher the computing power, the better the performance, and it's more predictable. We have very strong confidence our innovative architecture as well as the full stack development capability could become our continuous differentiated capabilities and grow even stronger in the future.

Your next question comes from Tim Hsiao from Morgan Stanley.

[Interpreted] So my first question is about adjustments to the sales system. What's the current progress of the adjustment to the auto sales system. Could you comment on the rationale behind the adjustment and the result you expect to achieve? In the meantime, could this change is adversely affect short-term sales performances and the pace of the new model launches? That's my first question.

[Interpreted] Translating for Mr. Ma here. In August, we went through a major reorganization of our sales team. Now currently, the headquarter directly manages 30 -- 23 regions, we also established new departments for sales and service operations and marketing. We've also restructured the store site collection team, strengthened our training academy and enhance our vehicle delivery teams.

The new organizational structure is now fully operational and operating smoothly. In driving the sales system transformation, we adopted a 4-step approach in internal methodology. The frontline experts clearly are identified as the key stakeholders. We focused on addressing 3 core needs of their -- of the frontline experts, while aligning with the company's goal of delivering the best direct sales store experience.

So the first need we're trying to address is to ensure the frontline experts earn a competitive income. The income of frontline sales experts is directly hinged upon 2 things: order volume and sales. We have established a dedicated marketing department to generate more online needs and restructured the site selection team to boost offline foot traffic to stores. We now give authority for sales strategy development during non-peak periods. We've also strengthened the training academy, equipping our experts with high-quality product message and materials and tools to improve order conversion rates.

Second, we will provide them with growth opportunities. We've built a dual-track career advancement path for frontline staff, offering both specialists and managerial tracks. We've launched targeted training programs for store managers, clearly defining long-term career pathways. This enhances team stability and strengthens frontline execution capability.

And thirdly, we will enhance efficiency. We've reduced reporting layers and adopted a flatter and faster decision-making structure. Now feedback channels dedicated quality, and operations teams have been established, ensuring frontline concerns are heard, addressed, acknowledge and acted upon. This leverages our direct sales model to quickly resolve on-the-ground challenges. The sales system transformation is not a reactive adjustment, but it's a proactive strategic move to better align with frontline needs and further strengthen our direct sales advantage.

While there may be some short-term adaptations in the long run, it will continuously enhance both user experience and team effectiveness. Regarding new vehicle launches, our timeline remains unchanged, and the support is now even stronger. Li Auto's new model rollout is progressing strictly according to our established part of the road map. Li i8 was successfully launched at the end of July, with deliveries beginning on August 20. Our production facilities are currently operating at full capacity.

By the end of September, we expect to cumulatively deliver over 8,000 units of Li i8 and aiming to challenge the 10,000-unit mark. Looking ahead, Li i6 will also launch as scheduled in September. The sales system transformation is designed to provide stronger support for these new launches optimizing sales and service processes, elevating the consumer purchase experience and ensuring smooth new model launches and driving rapid sales growth. Thank you.

Your next question comes from Yingbo Xu from Citic.

[Interpreted] So I have 2 questions. The first one is that i8 has adjusted some of the configurations. What's our future strategy for the product and SKU for future models? And my second question is that, how do we see the gross margin level under the consumption of the third quarter sales and revenue guidance?

[Interpreted] First of all, we will be, for sure, reducing the number of SKUs back to the time of Li ONE and the Li L9, we'll be focusing on a single SKU and making sure it's competitive, is maximized and providing customers with the best product and value for money.

In terms of technological platform and products, we will be iterating faster. The issue we're facing today is by the time we play one hand; our peers are -- have played 2 hands.

The pace of iteration is equivalent to letting our peers see our cars while we're playing. So we must increase the pace of iteration of both products and technology and to make sure that we can play faster. We're confident that by 2026, both in terms of vehicle products and AI, we will be having a stronger lead compared to the time of L9 back in 2022.

This is Johnny. For the third quarter gross margin. I think with the current sales volume and revenue guidance. We expect to maintain our gross margin at about 19%. Yes, just as the second quarter and first quarter. Thank you.

Your next question comes from Paul Gong from UBS.

[Interpreted] So my 2 questions. The first one is regarding i6. Within the allowed scope. Can you please share more regarding the product positioning, the launching timetable as well as the marketing plan? My second question is regarding your overseas strategy. I'm not sure what is our latest thoughts. And I would appreciate if you can share more color on this?

[Interpreted] For i6, I'm pretty confident that Li i6 will become the most competitive product in the large 5-seater that SUV market because it has a unique exterior design. It has industry-leading space and comfort and is very long range and one of the best real-world ranges. It would also be equipped with our industry-leading VLA Driver large model. It will also be the best handling Li Auto product for -- till today.

On Li i6, we will be taking a more user-centric, a new way of marketing. We'll be speaking to our product value and experience in a way that users can understand more easily. And for sales deliveries and services teams, the training will also be more effective.

And lastly, we will seriously take PR defense. We'll make sure that problems are addressed before they're extended.

Translating for Mr. Ma here. With our first program, Li ONE was delivered in volume that was back in -- in the beginning of 2020. We look at 2020 and through 2024 as the first stage of development for Li Auto, where we focus on the domestic market and on EREV products.

The second phase is from 2025 to 2027. The markets we sell in will be formally expanded to global and domestic markets, and products extended to electric vehicles. And the third phase will be after 2027, where we will be focusing on all 4 autonomous driving and new form factors of AI agents. 2025 is the initial year of our global strategy.

On the R&D front, we have built development centers in Germany and the U.S. On the sales channel side, we are formally starting to build overseas and after sales and after sales organization and building an overseas team as well as a range of IT systems.

And on the product front, all of the products that we're developing to be launched in 2026, will be taken into account global regulations. And in terms of product road map, we are also -- in terms of marketing -- go-to-market strategy, we also have solidified our overall plan to focus on Middle East, Central Asia and Europe.

The overseas market is both an opportunity and a challenge. For example, overseas, Li Auto is not a very well-known brand, just to name a few of the challenges. So the overseas market expansion will take time and effort, but we have enough patience and resolution. And in fact, the overseas market expansion has been one of the top medium- to long-term strategies for Li Auto. Thank you.

Your next question comes from Jing Chang from CICC.

[Interpreted] So I have 2 questions. The first is, we have seen that our operating cash flow or net cash flow outflow further expand in the second quarter. So may you explain what's the main reason? And how should we view the subsequent cash flow situation in the future? And the second question is about the autonomous driving. So we can see some [Technical Difficulty] changes in our autonomous sector. And also, we see the regulatory tightening on autonomous driving. Will that affect our future development and also our iteration and also deployment of our new VLA factors.

This is Johnny. I will take the first question. I think in the second quarter, as our payment term in -- by the end of last year was 3 months to 4 months. So basically, we are paying off most of the payables of last December, November and January, February, basically.

So this is why the second quarter, we have some negative operating cash flow. And as you may know, we have already adjusted suppliers' payment term to 60 days to respond to the regulatory requirements and the industry trend. So basically, in the third quarter, the operating cash flow negative -- the operating cash flow used can be -- will be in the third quarter. And we expect that will improve the cash flow in the fourth quarter if we can have a better sales volume guidance in the fourth quarter. Thank you.

[Interpreted] Translating for Mr. Ma here. So to directly answer the question, yes, our assisted driving team has seen a few departures recently. But some level of talent movement is not uncommon in this blossoming industry. And the percentage of people involved are actually very small. So we'd like to extend our sincere thanks to those who have left for their contribution at Li Auto. And together, we have truly delivered many great products and experience for our users.

Our current assisted driving team operates with a very clear organizational structure, a well-developed talent pipeline and strong strategic resource of talent. In light of recent changes, we have appointed new leaders who bring a more useful energy to the roles. They carry extensive experience from the past work and offer an international technical perspective.

We have the kind of innovative thinking that will drive the team forward. And to add to that, Li Auto's strong brand appeal and promising prospects continue to attract outstanding talent from across the industry and bringing fresh energy to our team. We're steadily advancing our VLA product delivery.

The VLA preview version we have already delivered featuring VLA driving, VLA parking and VLA summon capabilities. We expect to roll out a complete version with [indiscernible] all of the AD Auto Max users in September, adding the VLA command functions to deliver more convenient and intelligent assisted driving experience.

We also have another major update scheduled for October to create additional user value. The increased regulatory focus on assisted driving really represents an important fact towards healthy and orderly growth for this industry. From our perspective, a stricter regulatory environment helps to truly capable companies with real technical expertise to stand out.

And Li Auto safety and compliance have always been our top priority when developing new technologies. As we adapt to these evolving standards, we've been strengthening our testing protocols and quality control systems. This not only improves VLA's technological maturity and reduce potential risk but also helps us to deliver a safer and more reliable assisted driving experience for our users.

Throughout VLA's development, we've maintained focus on user values and compliance boundaries, constantly striking a balance between safety validation and experience innovation. We're confident and fully capable of maintaining consistent progress in VLA's development and ensuring a timely rollout. Thank you.

Your next question comes from Ming-Hsun Lee from Bank of America.

[Interpreted] So right now, Li Auto already built a lot of 5C supercharging station. In the future, will you open your charging station for other brands? How will you operate the charging station? If you start to give other brand to use, will it impact your own brand car owners, user experience?

And my second question is regarding to the autonomous driving technology. So right now, you have a very good VLA technology. But after VLA, how do you expect the development direction of autonomous driving and the technology iteration?

[Interpreted] Translating for Mr. Ma here. For Li Auto vehicle owners, I can ensure that the experience with our charging stations will always be the best. I can summarize the experience with 4 words: coverage, speed, experience and value for money.

First of all, coverage. We're absolutely #1 among all automakers in terms of the number of supercharging stations. We have about 1.5x the number of charging stations compared to Tesla. Wherever our users go, they can easily find our charging stations. We completed the coverage along the G318 Sichuan-Tibet best highway route and core sections of the 9x9 highway network in China. We now operate the largest urban and highway supercharger network of any automaker in China.

Second, speed. Our charging network supports 500 kilometers of driving range with only 10 minutes of charging. Just the time of buying a cup of coffee, it's really, really fast. And experience, our charging network provides our -- a very integrated experience between the vehicle and the charging stall. And with very intelligent charging planning, charging reservation and plug-in charge functionality.

Combining that with a lightweight charging, charging poles designed to be easily handled with one hand and is especially user-friendly for female users. In terms of value for money compared to the owners of other EV brands, Li Auto vehicle owners enjoy a dedicated preferential electricity charging rates, saving on every charge. And in addition to that, our owners can use their loyalty points to offset our charging costs.

These aren't just numbers on paper. They translate into real everyday charging experience that our users can come -- provide positive feedback on every day. Our 2C and 4C charging stalls have been open to vehicle owners of other brands. But those other owners won't be able to have the same level of experience as our vehicle users because the best experience requires seamless integration of the vehicle as well as the charging stations. Thank you.

[Interpreted] And in fact, in the beginning of 2025 has really been the most challenging period for assisted driving with technological and experience progress slowing down, at the same time, regulatory pressures have grown. However, I see this as the darkest just before [Technical Difficulty] The VLA represents a clear pathway towards L3, L4 and even L5 autonomous driving. As it operates really in a way like human, only we can expect it to perform 10x or even 100x better than human drivers in the future.

VLA is a true agent in the third stage of AI, and we build these capabilities in 2 ways. First, it requires human experience by learning from human data and the foundational model through large-scale operation of SFT and RLHF to achieve performance on par with human drivers. It's like an apprentice learning from a master.

But more importantly, it undergoes reinforcement training within environment generated by a world model using RLAIF to train agents. For example, we many times see L4 vehicles in China as well as overseas following to track for example, construction zones. And this kind of data is very limited in the real world and cannot be used for training.

However, with the world model, we can generate countless variations of cars falling into these traps and enabling the agent to learn rapidly and resolve these issues effortlessly through reinforced practice.

The world model provides data that is more difficult, more comprehensive and higher in quality and more challenging than real-world data. This approach effectively addresses critical issues in real-world data such as underrepresentation, imbalanced distribution and the impact of unavoidable polluted data on agent.

We believe that ongoing iterative training and development, the VLA will achieve a level of driving safety, at least 10x that of a human driver within the next 2 years or so. The challenge behind this lies in equipping the agent with both a more powerful brand and a stronger heart. By brain, we refer to model scale. The end-to-end model has 0.3 billion parameters, while our VLA model has 4 billion parameters, which remains far inferior to human capabilities and expanding this scale will substantially enhance generalization capability.

Scaling the model will also require significantly more computing power on the device side, which access the heart to supply the brain with the necessary resources to supply larger models. And in the meantime, the realm of world models and RLAIF, we will likely require at least 10x more computing power for reasoning than before to generate the environment and data necessary for RLAIF training. We anticipate that with the enhancements in reinforcement training, a lot of scale and computing power, the speed of our progress will far exceed anything we've seen with our previous approaches.

I believe that in the next 35 years, the largest application of agents in the digital world will be programming, coding. While in the physical world, it's going to be autonomous driving. And I believe that Level 4 autonomous driving will be achieved by 2027.

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

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your lines. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]