Li Auto Inc

HKEX:2015

Earnings Call Transcript 2022-Q1

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.

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

[Janet Zhang, executive]

Thank you, Amber. Good evening, and good morning, everyone. Welcome to Li Auto's first quarter 2022 earnings conference call.

The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have our President, Mr. Kevin Yanan Shen; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li, will join for the Q&A discussion.

Before I 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 wheels expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that 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 press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

With that, I will now turn the call over to our President. Please go ahead, Kevin.

[Yanan Shen, executive]

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

In the first quarter of 2022, the EV boom continued. According to the China Passenger Car Association, or CPCA, retail sales of new energy passenger vehicles in China reached 1.07 million in the first quarter of 2022, representing a year-over-year increase of 146.6%. And EV penetration rate climbed to a record high of 28.2% in March 2022.

As the leader in the new energy vehicle market, we are excited to be one of the driving forces behind the industry continued innovation and evolution. Thanks to our Li ONE's outstanding feature and the compelling appeal to family users. We delivered 31,716 Li ONE's during the quarter, aiming industry-wide supply chain challenges, up 152.1% year-over-year and achieved a total revenue of RMB 9.56 billion, 167.5% higher than the first quarter of 2021.

The past 7 months was undoubtedly a difficult period for all of us, given the headwinds caused by the COVID-19 pandemic. We have been no exception to the supply chain disruptions and rising material and logistics costs that challenged the entire auto industry. Our Changzhou manufacturing base is located in center of the Yangtze Delta region, which is home to over 80% of our part suppliers, especially in the city of Shanghai and Kunshan.

The 2019 resurgence in this area since late March has incapacitated some suppliers in Shanghai and Kunshan. Some of them completely shut down their production and delivery, making it impossible for us to maintain production after exhausting our parts inventory. This materially affected our production in April, resulting in delayed deliveries to our customers. As a result, we only completed 4,167 deliveries in April.

In light of the encouraging signs of the recovery from the pandemic in the Yangtze Delta region, we expect our total deliveries in the second quarter of this year to be between 21,000 to 24,000 vehicles. We should note there are still uncertainties with respect to the pace of the recovery. While we are doing everything in our power to increase our production and overcome supply chain constraints, aiming to shorten the delivery waiting time for Li ONE users while meeting all pandemic prevention and containment requirements from the government. To help offset the sharply rising raw material costs, particularly the battery cost, we raised the price of Li ONE by RMB 11,800 effective April 1 this year.

Moving to the profitability. In the first quarter, our gross margin remained robust at 22.6%. Our R&D expenses increased 167% year-over-year to RMB 1.37 billion, accounting for over 14% of our total revenues, as we continue to enhance our strategic investment in autonomous driving, intelligence costed and electrification.

The increase in R&D together with our direct sales and servicing network expansion resulted in a 151.5% increase in our operating expense year-over-year. Despite the deliberate increase in expenses to drive growth, our net cash flow from operations was positive for the eighth consecutive quarter at RMB 1.83 billion, thanks to our outstanding manufacturing and operational efficiency.

In addition to propelling growth, our expanding direct sales and servicing network serves as an important and efficient interface for us to gain insight into our users' needs and desires. We think like a user, this perspective informs and motivates us as we strive to continually, please users with updated features, product designs and services.

As of April 30, 2022, we have 225 retail stores covering 106 cities and the 292 servicing center and the Li Auto authorized body and paint workshops operating in 211 cities. Going forward, we will continue to grow our sales network and the cadence that accommodates both our objective to capture market demand and the risk related to the ongoing dynamic.

With respect to R&D, since we released our OTA 3.0 to introduce our full stack NOA on December 1 last year and become the third automotive OEM globally to develop a full stack sales development NOA, more than 100,000. 2021 Li ONE users have enjoyed NOA-assisted driving as of the end of April.

We are pleased to see our sales development process contribute to the consistent improvement in our NOA's safety and functionalities. Its penetration rate has reached to 61.3%, which means that 61.3% of our users utilize NOA on the highways once it's available. The data gathered from the NOA mileage in real-life driving scenarios will play a crucial role in our future ADAS development and facilitate our ultimate goal of full -- fully autonomous driving.

The NVIDIA Orin-X chipset and the LiDAR on our next full-size SUV, the L9 will further improve our vehicles autonomous driving capabilities. Our R&D efforts to develop our range extension system, chassis and the domain controller in-house are also bearing fruits. These R&D trends, among others, will be unveiled in our second production model, the L9. That leads us to our update on products.

Our first model, Li ONE, has been a proven success catering to the needs of families in China. After Li ONE emerged as one of the industry's best SUV choice for family users, we built on our strengths and are getting ready to launch our second production model, the L9. Despite a few pandemic-related box in the road, we are forging ahead with our plan to commence the delivery of the L9 in the third quarter.

The L9 is a flagship SUV for family users based on our new generation EREV platform, offering best-in-class combination of performance, safety and intelligence. As just mentioned, it features our fully sales developed range extension system, chassis control system and central vehicle domain controllers, which empower its outstanding dynamic performance and drivability.

In keeping with our fundamental belief that safety should always be standard, not optional. Every L9 is built to our strictest safety standards and come equipped with our upgraded autonomous driving system, Li AD Max, capable of all-scenario NOA for enhanced driving safety and convenience.

The L9 also comes standard with first-class premium features such as sumptuous seats, a high-performance audio system and all new 3-dimensional interactive experience. Above all, the L9 aims to meet the needs of more family users and the delight users by proactively satisfying desire that they may never knew exist.

Since we released the teaser information for the vehicle, we have received a great deal of positive customer feedback. And we can't wait to deliver our L9 and amaze our users with all its features and benefits. In parallel with our EREV development, we are also investing in R&D for next-generation electric vehicle technology, including high C-rate battery, high-voltage platform and ultra-fast charging technology, with the goal of building an end-to-end BEV and charging ecosystem that can support a driving range of more than 400 kilometers with only 10 minutes charging.

As a leader in the new energy vehicle industry, we are dedicated to leading the future of mobility, while also making a positive impact on the environment of our society. On April 19, we released our first ESG report, which marks yet another step forward in our sustainability journey and underscore our results to operate responsibly.

In addition, we are pleased to report that our Class A ordinary shares were included in the Shenzhen and Shanghai Hong Kong Stock Connect programs on March 14 and April 25 this year, respectively. This allows us to access a broader investor base and share our growth trajectory and further success with users, partners, and investors in Mainland China, we are the financial market.

Looking forward, we will continue to create the right products for family users. Preserving through challenges with our laser focus on operational and financial efficiency, propelling progress and inspire happiness along the way.

With that, I would like to turn it over to our CFO, Johnny for a closer look at our financial performance. Please go ahead.

[Tie Li, executive]

Thank you, Kevin. Hello, everyone. I will now go over some of our financial results for the first quarter of 2022.

To be mindful of the length of this call, I will address financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details.

Total revenues in the first quarter of 2022 were RMB 9.56 billion or USD 1.51 billion. representing an increase of 167.5% from RMB 3.58 billion in the first quarter of 2021. This included RMB 9.31 billion or USD 1.47 billion of vehicle sales in the first quarter of 2022, an increase of 168.7% from the first quarter of last year. The increase in vehicle sales over the first quarter of 2021 was mainly attributable to the increase in vehicle deliveries in the first quarter of 2022.

On a quarter-over-quarter basis, total revenues and vehicles, vehicle sales decreased 10% and 10.3%, respectively primarily due to the decrease in vehicle deliveries in the first quarter of 2022. Revenues from other sales and services were RMB 253.4 million or USD 40 million in the first quarter of 2022, representing an increase of 127.2% from RMB 111.5 million in the first quarter of 2021, an increase of 3.6% from RMB 244.7 million in the fourth quarter of 2021.

The increase in revenue from other sales and services over the first quarter of 2021 was mainly attributable to the increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales.

Cost of sales in the first quarter of 2022 was RMB 7.4 billion, or USD 1.17 billion, representing an increase of 150.1% year-over-year and a decrease of 10.2% quarter-over-quarter. Gross profit in the first quarter of 2022 was RMB 2.16 billion or USD 341.3 million, representing an increase of 250.9% year-over-year and a decrease of 9.1% quarter-over-quarter.

Vehicle margin in the first quarter of 2022 was 22.4% compared with 16.9% in the same quarter of 2021 and 22.3% in the fourth quarter of 2021. The increase in vehicle margin over the first quarter of 2021 was driven by higher average selling price attributable to the increase in vehicle deliveries of 2021 Li ONE since its release in May 2021.

Gross margin in the first quarter of 2022 was 22.6% compared to 17.3% in the first quarter of last year and 22.4% in the fourth quarter of 2021.

Operating expenses in the first quarter of 2022 were RMB 2.58 billion or USD 406.5 million, representing an increase of 151.5% year-over-year and an increase of 9.4% quarter-over-quarter.

Research and development expenses in the first quarter of 2022 were RMB 1.37 billion or USD 216.7 million, representing an increase of 167% year-over-year and an increase of 11.7% quarter-over-quarter. The increase in research and development expenses over the first quarter of last year was primarily driven by the increased employee compensation as a result of our growing number of research and development staff as well as increased costs associated with new product development. The increase in research and development expenses over the fourth quarter of last year was mainly driven by increased employee compensation.

Selling, general and administrative expenses in the first quarter of 2020 were RMB 1.2 billion or USD 189.8 million, representing an increase of 135.9% year-over-year and an increase of 6.8% quarter-over-quarter. The increase in selling, general and administrative expenses over the first quarter of 2021 was primarily driven by increased employee compensation as a result of our growing number of staff as well as increased marketing and promotion activities and rental expenses associated with the expansion of the company's sales network.

Loss from operations in the first quarter of 2022 was RMB 413.1 million or USD 65.2 million compared with RMB 407.7 million loss from operations in the first quarter of 2021, and RMB 24.1 million income from operations in the fourth quarter of 2021. Net loss was RMB $10.9 million or USD 1.7 million in the first quarter of 2022 compared with RMB 360 million net loss in the first quarter of 2021 and RMB 295.5 million net income in the fourth quarter of 2021.

Now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB 51.19 billion or USD 8.07 billion as of March 31, 2022.

Operating cash flow in the first quarter of 2022, was RMB 1.83 billion or USD 289.3 million. Free cash flow was RMB $502 million or USD 79.2 million in the first quarter of 2022.

And now for our business outlook. For the first -- for the second quarter of 2022, the company expects the deliveries to be between 21,000 and 24,000 vehicles, representing an increase of 19.5% to 36.6% from the second quarter of 2021. The company also expects second quarter total revenues to be between RMB 6.16 billion and RMB 7.04 billion or USD 972.3 million and USD 1.11 billion, representing an increase of 22.3% to 39.8% from the second quarter of last year.

This business outlook reflects the company's current and preliminary view on the business situation and market condition. In particular, the encouraging signs of recovery from the resurging pandemic in the Yangtze Delta region, which are all subject to change due to uncertainties related to factors such as the pace of the pandemic recovery, among others.

I will now turn the call over to the operator and start the Q&A session. Thank you.

[Operator]

[Operator Instructions]. Our first question comes from the line of Fei Fang from Goldman Sachs.

[Fei Fang, analyst]

[Foreign Language]

Great quarter. I have 2 questions. First, about the business outlook was the broader market level assumptions that management are working with in terms of both supply and demand. What's the specific launch timing for L9? How will production ramp up? Any comment on the broader market environment would be very helpful.

Second is about margin. The first quarter margin was a beat. Kevin discussed a retail price increase in April. So can you refresh us on the margin guidance from here?

[Yanan Shen, executive]

Thank you, Fei Fang. This is Kevin. Thank you for your question. Okay.

On your first question, in fact, the outlook we gave just now is based on our expectation of the recovery of the production of our suppliers in Yangtze Delta region. Basically, you can see from end of April to now, although still a lot of suppliers are still struggling to recover, but we already see some of the positive signs that at least half of our suppliers already resumed their production. So therefore, for the -- there still are uncertainties for the next step.

And in terms of the order, we have enough order to on hand, yes. So right now, the single biggest risk is still the production of our suppliers. And in terms of the March market launch plan for L9, as we just mentioned in the third quarter of this year. Yes, L9 will be delivered to our customers.

And overall -- I think for the overall EV business, behind us, we already see that in the past 2 quarters, we have already seen a very strong growth both the production and the consumption. So looking to the future, I think there are uncertainties. First of all, is the recovery of the supply chain. On the other hand, if the pandemic persists for a longer time, our fear is that the consumers spending desire will reduce, yes. So that's another thing we are monitoring closely.

On your second question, actually, we -- right now, it's not time for us to provide another updated guidance for our gross margin.

[Operator]

Our next question comes from Tim Hsiao from Morgan Stanley.

[Tim Hsiao, analyst]

[Foreign Language]

So I've got 2 questions. The first question is about the sourcing strategy because we think the production recovery appear as a matter of time. But has Li Auto taken any extra precautions, for example, reviewing or changing your current sourcing strategies in the wake of the recent disruption in Yangtze River Delta region. As Kevin mentioned, 80% of our suppliers are currently located there. So any thoughts on further diversification in China or offshore?

Second question is about the potential price hike or margin pressure. Because on top of the 11,800 price high of Li ONE since April, if there is any pressure on the further crisis adjustment or to spec inside of likely further price hike of key components, for example, like batteries into second half, especially production cost has substantially increased recently?

[Yanan Shen, executive]

Thank you, Tim. This is Kevin again. So first of all, for the supply chain management. In fact, we -- in the past, we already have the measurement to try to qualify more suppliers to supply us. So that will not change. And right now, of course, with the pandemic, we are -- we will definitely consider some short-term measurement to counter the impact because we will -- there are still uncertainties of the recovery of the dynamic in front of us.

For the long-term, I don't think we'll take any dramatic measurement to change our supply chain management strategy. Because the dynamic is -- we think still is a onetime issue for us. And the supply chain strategy is a long-term thing.

And for the price adjustment, in fact, with 2021 Li ONE, actually, when we increased the price on April 1, we already took the -- took into consideration of all the foreseeable material cost increase, yes. But we are -- but we will continue to closely monitor the volatility of the cost. So right now, we're doing -- we don't see another need to further change our price, yes. But that's based on the current information we have.

[Operator]

Our next question comes from [indiscernible] from HSBC.

[Unknown Analyst]

[Foreign Language]

My 2 questions. First is on the order book and the demand outlook. What's the new order book momentum post the price hike? And how would the new order book in April compared to January? And looking ahead, how would management would expect high-end pricing category, EV demand in second half looks like more gross quota are back-end loaded.

And the second question is on the product cycle and product strategy. We may see L9 coming through and next year would be a big product cycle launching yes. Will we have your insight on how we plan the 5 models, 5 new models value proposition in the coming 18 months and the conviction or the product philosophy to enable them or potentially the segment winner?

[Yanan Shen, executive]

Thank you, [indiscernible]. This is Kevin. I will take the first question and leave the second question to Li Xiang.

As we all know that the -- in April 1, we increased our price. Naturally, the -- a lot of sales leads were consumed in the end of March, yes. So therefore, in the very beginning of April because we have to restart the sales leads our pipeline. So therefore, the first half of April was a little bit slow. But since the last week of April and also the -- also the first week of May, we already see a very strong comeback of the order intake. The only exception is like Shanghai because the pandemic stopped us from taking orders.

So overall, we are still very confident that the -- how Li ONE will continue to be demand will continue to be very strong. Overall, for the high-end EV market. Overall, unless the dynamic persist very long time and hurt the economy very badly. Otherwise, we think the demand will continue to be stable, yes.

And -- but from our side, because our Li ONE and also our incoming L9, the product competitiveness is very, very strong. So therefore, despite the demand side fluctuation, we still have a very strong confidence that these 2 products will do very good this year in market.

[Xiang Li, executive]

[Foreign Language]

This is Li Xiang. I'm translating for Li Xiang, the Founder of the company.

When we launched our first product by the end of 2019, it was 1 single product, which became a big success. But from that time on, we started to look at our product portfolio as a combination of different products. And therefore, since then, we started developing 5 different platforms to support our product portfolio, including the range extended platform, 800 high-voltage electric vehicle platform, the autonomous driving platform, smart space platform and our electric e-architecture platform. So all these fly platforms combined together support our wide range of products across different price ranges.

So by 2021, if you look at Li ONE as a product, in the RMB 300,000 to RMB 400,000 in EV market and already had a 30% market share and it's still increasing. And that's our standard for a successful hit product, and we think that's a very comparable market share in the target market. And with that in mind, we want to continue to deliver hit products in every price range within our target markets. And we look at our product portfolio with 2 perspectives.

The first one is that we pair a different body type with different energy sources. And by that, I mean, electric -- pure electric vehicles will have one body type and extended range vehicles would have a different body type. So when we built -- started building range extended vehicles, we felt -- we realized that the best body type was SUVs because neither sedans or MPVs were a good fit from a packaging standpoint for range extended vehicles.

And by the same logic, when it comes to electric vehicles, we realize that big SUVs are no longer a good fit because for energy efficiency reasons. And therefore, when we deliver our first electric vehicle, you will see a completely new body type that we believe is best optimized for electric -- pure electric vehicles. And with this combination, we believe there will be no cannibalization between our own electric vehicle and range extended vehicle product portfolios. And with those, we will completely cover the RMB 200,000, RMB 500,000 target market.

So that was our first strategy. And the second strategy is with respect to the price range. So with the goal of covering the entire RMB 200,000 to RMB 500,000 price range, in every 10,000 -- 100,000 segment we will have 1 hit product, one in range extended and one in pure electric.

We had a good start because our first product was in the RMB 300,000 price range. So from there, we can go up to RMB 400,000 to RMB 500,000, and we can also go down to between RMB 200,000 and RMB 300,000. So in every segment, as I said earlier, there will be one EV and one REV and they will all be built based on those 5 platforms I mentioned earlier, the range extended vehicle platform, the high-voltage electric vehicle platform, autonomous driving platform, smart space platform and e-architecture platform.

So by analogy, you can see our product portfolio is very similar to iPhone, where -- we have one key concept and platform. And from there on, it covers all different price ranges with the iPhone 12, iPhone 12 Pro, iPhone 12 Promax and even the iPhone Mini. And in every price range, you can see the product is an absolute leader in that market segment. And that has been our role in -- our goal and philosophy since 3 years ago.

[Operator]

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

[Ming-Hsun Lee, analyst]

[Foreign Language]

So my first question is for the battery price and also the leasing supply. In the future, where you think the leasing supply will constrain the EV growth for China. And also currently, the battery price is still high. Do you think this is because of some speculative trading? Or it's really mainly because of real demand?

Second question regarding your point of sales expansion, previously, your target is 400 stores by the end of the year. But under the pandemic, where you slowed down the progress? And also in terms of the charging pile, do you have any plan are all of your charging station based the supercharging infrastructure?

[Yanan Shen, executive]

Yes, Lee. This is Kevin. Thank you for the question. 3 questions.

First of all, we think right now the battery cost, especially the raw material cost is already deviated from the reasonable price of course. So with the supply increase, we'll definitely see gradually the raw material cost should go down, yes. But overall for this year, we still expect the -- probably the price will still stay in a relatively high position. That's our outlook, yes.

So of course, this high price of the raw material we will translate into the increase of the end consumer price Therefore, we will kind of hurt the market demand. But as I mentioned just now, with our Li ONE and our L9 because our product competitiveness is very high. We still have strong confidence that even with a slightly higher price, we can still get a lot of order.

For example, for Li ONE even though we increased the price starting from April 1. But as I've just mentioned, starting from end of April until now, we see the orders still are coming strong, yes.

And in terms of the retail stores, we did have a quite aggressive plan by end of this year, we want to have more than 400 retail stores. Right now, of course, because of this pandemic issue, we are revisiting our plan. But we should all agree that the number of retail stores will -- is a fundamental requirement for us to achieve a higher sales volume next year. So therefore, it doesn't matter how big the impact the pandemic for this year. We still want to open as many retail stores as possible despite the impact of the dynamic.

In terms of charging poles starting from this year, we already have a team starting to build the charging poles. Right now, the initial focus of this team is to primarily build charging poles along the highway, especially those highways connecting the big cities, yes. So right now, the primary focus is still the highway to connect the cities. And within the city, depends on the customer needs, yes, we will very -- we will choose carefully whether we want to build charging poles within city, yes. That's the strategy right now we have, yes.

[Operator]

Next question comes from Xue Deng from CICC.

[Xue Deng, analyst]

[Foreign Language]

So my first question about -- the financial question about other income of RMB 280 million in the first quarter. So where does it come from? And my second question is about the gasoline cost negotiation. Therefore that many car companies said that they frequently negotiate the cost quarterly or half semiannually on. So how about that? So if the price -- is the cost of battery yield continue to increase by the middle of this year. How do we reflect and will be further with our selling track to reflect the cost of increase?

And last question about the product pipeline. And you can see that many brands they want to launch -- need to launch by few industries then the recent position -- price positioning of around RMB 200,000 this year, and the market has very high expectations for these totals. How to review the market of outpace the significant submarket? And going to our plan, if we are going to launch again and with the price below RMB 300,000 I think that it should be not before 2024. So I'll be worried about if the entry to the market today to meet these market opportunities.

[Tie Li, executive]

Thank you, [ Xue Den ]. This is Tie Li. I will take the first question is the other gains, the increase of other gains compared with last quarter was mainly the VAT refund upon collection as well as our company was qualified as a software company.

[Yanan Shen, executive]

This is Kevin. For the battery cost, we agreed with our suppliers with a framework to kind of relate the battery price with the fluctuation of the upstream raw materials. So therefore, for the coming quarters, we don't need to renegotiate everything. But of course, we'll always come back to our suppliers as for cost savings. That's for sure, yes. And also, as I just mentioned, the price increase already reflected our expectation of the -- for the raw material price in the coming quarters, yes.

[Xiang Li, executive]

[Foreign Language]

It's very clear to us that by 2025, our core customers will still be families with kids. And with that, 3 things become very clear. First is that we're always going to build vehicles with an acceptable level of interior dimensions for family users. And the second one is that all of our vehicles will be all-wheel drive. And third is that we want to make sure that every vehicle includes our latest autonomous driving and smart space solutions, so that every family member are able to enjoy them.

And with these 3 things in mind, it's very natural that we will continue to focus on the RMB 200,000 to RMB 500,000 price range. And within this range, we'll continue the mine of $300,000, $400,000, which is our starting point. And from there on, we'll expand upward to the full-size market and downwards the midsize market. So this year, as you know, our focus will be the L9 release. And next year, we'll be launching 3 new vehicles, including a new -- completely new range extended vehicle and also our first battery electric vehicle. And you will also see our first product in the first -- in the 200,000 to 300,000 midsized market.

[Operator]

Our next question comes from Bin Wang from Credit Suisse.

[Bin Wang, analyst]

[Foreign Language]

I only have a one question about the battery price. So can you know when do you start to come in for the price increase for battery? And because you mentioned the battery price increased by 30%. Is it from the January 1 or start from second quarter? If the first quarter already considering the price increase of the battery, you also actually increased price start from April 1. It does mean the second quarter a marginal further increase. So can you some guidance on this?

[Yanan Shen, executive]

Yes, Wang, thank you for the question. It's a rather complicated question. So basically, the first quarter is financial performance already to consideration of the, of course, already to consideration of part of the battery cost increase. And the impact was not that dramatic primarily due to, as you know, that we have inventories. So therefore, the cost, in fact, it's a rolling mix, yes. So that's for the first quarter.

From second quarter, we'll have the best free cost increase, as you mentioned. And at the same time, from the beginning of this quarter, we'll have a selling price increase. So yes, so therefore, it's not that we can expect some very high gross margin compared to last quarter, yes. Okay.

[Operator]

Right. Thank you. As we are reaching the end of our conference call, I would like to turn the call back to the company for closing remarks. Ms. Janet Zhang. Please go ahead.

[Janet Zhang, executive]

Sure. Thank you once again for joining with us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team, and that's all for today. Thank you, and have a good one.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.