Hello, ladies and gentlemen. Thank you for standing by for Viomi Technology Company Limited Earnings Conference Call for the First Quarter of 2022. [Operator Instructions]. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Cecilia Li, the IR Director of the company. Please go ahead, Cecilia.

Thank you, operator. Hello, everyone, and welcome to Viomi Technology Co. Limited Earnings Conference Call for the First Quarter of 2022. As a reminder, this conference is being recorded. The company's financial and operating results were issued in press as earlier today and are posted online. You can download the earnings press release and sign up for the company's e-mail distribution list by visiting the IR section of the company's website at ir.viomi.com. Participating in today's call are Mr. Xiaoping Chen, Founder, Chairman of the Board of Directors and Chief Executive Officer; and Mr. Wickham Thai, the Head of our Finance Department. The company's management will begin with prepared remarks, and the call will conclude with a Q&A session. Before we continue, please note today's discussion 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 that egress today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other filings filled with the U.S. Securities and Exchange Commission. The company doesn't assume any obligation to update any forward-looking statements, except as required by law. Please also note, Viomi's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Viomi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Xiaoping Chen. Mr. Chen will deliver his remarks in Chinese, followed immediately by English translation. Mr. Chen, please go ahead.

[Foreign Language]

Thank you, Mr. Chen. I will quickly translate our founder's remarks before discussing our financial performance for the first quarter of 2022. Hello, everyone. Thanks for joining our first quarter 2022 earnings conference call. In the first quarter, our total net revenues reached RMB 712 million, in line with our previous guidance. The year-over-year decline in revenues is mainly attributable to two factors. First, this year, we cut off the selling of Xiaomi sweeper robots, which had a high prior-year base for comparison. Second, since the beginning of this year, owing to the widespread COVID-19 recurrency and strict pandemic control measures, market consumption decreased in the first quarter, along with slow demand industrywide. To strengthen our long-term product competitiveness and brand awareness, we continue to invest in R&D and increased marketing and advertising spending. As a result, our R&D-related personnel and experts at the beginning of this year grew by nearly 47% compared to the beginning of 2021, primarily due to the expansion of our AI and algorithm patent tool. As of March 31st, 2022, our stimulated global patent applications and the registered patents reached 5,232 and 3,142, respectively. Furthermore, to support the release of our new products in the first quarter, we launched a large number of elevator and print app among our trending technology branding positioning. Our investments in R&D and marketing for long-term growth caused a temporary loss in the first quarter. However, we also noted an increase in sales contribution from our premier products, thanks to the increased investment in R&D and innovation. In addition, we further improved our operating quality through project portfolio adjustment and strict manufacturing cost control. Our gross margin for the first quarter increased to 26.3%, again, representing a year-over-year and quarter-over-quarter improvement and demonstrating our enhanced product and brand strength. At…

[Operator instructions] Our first question comes from Hildy Ling from Morgan Stanley. Please go ahead.

[Foreign language] Thank you very much management for giving me this opportunity to ask some two simple minor questions, small questions. The first one is about the sales trend in the recent sales trends in April and May. And how about -- and also the trends in terms of byproduct perspective, how are they trending? And also about the trends in terms of the pricing and on the volume? The second question is about the -- our strategy and -- expectation for the second half of the year and our strategy behind it. And compared with our strategy and expectations set at the beginning of the year, how has that changed given the macro volatility? And have we adopted any -- was a plan of strategy change in this regard because of the macro changes?

Okay. Thank you for this question. And for the first question, entering into April and May, we saw the consumption environment is weak due to the impacts from recurring pandemic and, thus, our sales performance is also impacted. While we observed this sales contribution of our premium products with higher gross margins are increasing. Second, among our new products released in last year and this year, we saw sales of space and millennial series of air conditioners increased due to seasonal demand as well as the popular functions during cognizing period such as forced space cooling, UV stabilization, and fresh air system. Besides certain smart devices such as smart locks, also received good market feedback and sales performance. We saw the sales of some large appliances such as refrigerators, washing machines are relatively weak due to the lack of how we services of installation and logistics as a result of COVID control measures. Going forward, this year, we expect the overall average price to maintain stable compared to the last year with a certain fluctuation for varied categories as we expect the overall sales volume increase, we're entering into the second half. Well, again, this is still depending on the consumer demand and the pandemic situation the next months. Regarding the second question of our expectation on the second half -- okay. With the increasing quarantine regions and continued with macroenvironment since April, we expect the consumption trend won't demonstrate material rebound, but should believe compared to the first half of this year as we saw the government has taken some measures to stimulate consumption. And we are also taking some measures to carry down the expenses and cost of our products.

[Foreign language] Thank you very much, management. I don't have further questions. Thanks.

Our next question comes from Rudi Wei from CICC. Please go ahead.

Yeah. This is Rudy Wei we from CICC, and thank you very much for the management presentation. Actually, I have two questions here, and maybe I can ask them one by one. The first is that one of your strategy is to increase the gross profit margin by optimizing the product structure, so many low-end products have been out of production. So I wonder whether this process is almost completed at this stage. And to which extent do you think that the gross profit margin can be improved in the future? [Foreign language]

Okay. Thanks for this question. The product portfolio optimization is still ongoing for us as we need to balance the overall sales and the sales growth of new premium products as well as introduce the alternative products for low-end markets. Currently, we are adjusting the product lines for multiple categories, including air conditioners, refrigerators, and sweeper robots. With respect to the gross margin, as you can see, the margin has been improving in the past year. In 2022, we are confident to maintain an overall margin level of over 20% and made with seasonal fluctuation due to inventory cleanup for some categories during the promotional season. With the product portfolio optimization, we expect the gross margin still to improve on a year-over-year basis.

And my second question is about our water purifier product. since we have been doing water purifiers business for a long time, but the market has been declining actually in recent years. And actually, your water purifier business also is segment. But we noticed that since more brands are introducing water purifier products recently. Also, we noted the increase of your consumables businesses related to water purifiers. So I wonder whether you have the same feeling that more brands are doing this business? And what do you think of the recent future of the water purifying market? [Foreign language]

As we can see in the recent two years, the growth of the overall demand of water purifier is not as far as some other cleaning categories, but it is still a potential market with increasing penetration rate. And we also observed from our frontline research as well as from the industry data the consumer needs change over time and the industry develops throughout the [Indiscernible]. Firstly, we have seen the market contribution of large plus water purifiers with over 800 gallons are increasing. The market is gradually phasing out some small plus water purifiers, and more companies starting increasing their introductions of large plus water purifiers as well. Secondly, smartification has been one of the required demands of consumers. Third, water purifiers with multiple functions are more needed by the market, namely instant heating, mineralization and UV stabilization, etc. The desktop purify, as you mentioned, is also a trend in the industry. We have developed and introduced desktop purifiers. And in the second half of this year and next, we will introduce additional SKUs with multiple functions.

The next question comes from Lu Xuanzi from Guojin Securities. Please go ahead.

[Foreign language]

For the first question, the overall positioning of our sweeper robots, both in the domestic and overseas market is a mid-to-high end. As currently sweeper robots is not a necessity compared to large plans and the market penetration rate is still low, per our research and market data, the consumers who buy sweeper robots are less sensitive on price, and they are highly demanding on obstacle avoidance and multiple functions and smartification. In terms of functions, we focus on automatic dust collecting and self-cleaning, which are also the trend for current market. In addition, we developed different versions for our consumers with diverse nets such as sweeper robots with UV sterilization and SKU designed for families with pests. More importantly, as we offer one-stop smart home solution with bundled sales of smart plans and devices, our sweeper robots is able to connect with whole-home smart products for interactions, remote control, and inspection. As the only one movable plans, the sweeper robots can scan the home and create home map for our future development, such as the security detection system. For the second question regarding the offline sales, our off-line sales, as well as the new store openings, are indeed impacted by the recurring pandemic and current control in some regions and logistic was delayed in some cities. To mitigate the decline sales from off-line channels due to the COVID lighting, we shipped more marketing and sales resources toward our nice channels, particularly some social platforms such as Douyin. In addition to small and cleaning products, we have started to sell wide plans on Douyin, live streaming, and have seen good sales performance. We also depend on cooperation with platforms, including Tmall and Jindong to journey promote whole-home smart device portfolio. Our largest store [Indiscernible] is on the track through the COVID lighting impacted the store opening and furnishing to some degree. We are also seeking cooperation opportunities with diverse third-party offline channels. We recently reached strategic partnership with China Telecom and with Kuka Home, which is [Indiscernible] to integrate off-line resources and promote our smart product portfolio.

[Foreign language]

Okay. I'll translate our founder's comments. So as we can see at this moment, it's a little hard to focus the pandemic situation in the rest of this year. As you can see, we don't know how long the pandemic situation and some content control measures, [we’ll update]. And we think it do take some time for the consumers to recover the consumption continues. So meanwhile, we will take very prudent way to improve our operations as well as to maintain a very healthy gross margin level as well as the healthy cash level. But we are confident, in the mid-to long term, the China economy will recover. But in the meantime, we will just invest in R&D and such expenses to maintain a very stable development.

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

Thank you once again for joining us today. If you have further questions, please only ask through the contact information on our website or the Piacente Group, our investor relations consultant. Thank you all. Have a good night.

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