Lucid Group, Inc. Q1 FY2023 Earnings Call

Hello, and thank you for joining us for Lucid Group's First Quarter '23 Earnings Conference Call. At this moment, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. I will now turn the conference over to Maynard Um. You may begin.

Thank you, and welcome to Lucid Group's first quarter 2023 earnings call. Joining me today are Peter Rawlinson, our CEO and CTO; and Sherry House, our CFO. Before handing the call over to Peter, let me remind you that some of the statements on this call include forward-looking statements under federal securities law. These include, without limitation, statements regarding the future financial performance of the company, production and delivery volumes, financial and operating outlook and guidance, macroeconomic and industry trends, company initiatives and other future events. These statements are based on predictions and expectations as of today and actual events or results may differ due to a number of risks and uncertainties. We refer you to the cautionary language and the risk factors in our most recent filings with the SEC and the forward-looking statements on Page 2 of our investor deck available on the Investor Relations section of our website at ir.lucidmotors.com. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the investor deck. With that, I'd like to turn the call over to Lucid's CEO and CTO, Peter Rawlinson. Peter, please go ahead.

Thank you, Maynard, and thank you, everyone for joining us for our first quarter earnings call. In quarter one, we produced 2,314 vehicles and delivered 1,406. Sherry will go into more detail on our financials, but I would like to first thank all our employees. We have the best EV on the market. And really, I believe, the best car on the market, and it would not have been possible without the collective efforts of our entire team, which is a direct result of tremendous perseverance, resourcefulness, and teamwork. I want to express my deep personal gratitude to everyone who has contributed and the teams that will help advance our mission going forward. I'm very excited about our future and the opportunities that lie ahead of us. We have the best EV on the market and truly, I believe, the best car on the market. And it would not have been possible without the collective efforts of the entire team. I would like to welcome three new members of the Board, Sherif Marakby, Chabi Nouri, and Ori Winitzer. Together, they bring significant global experience in the areas of marketing, finance, and operations, across automotive technology and luxury consumer goods. Now these additions are a reflection of the company's evolution as we mature to the growth and brand awareness stage of our life cycle. I'd also like to congratulate Turqi Alnowaiser on his appointment as Lucid's Chairman of the Board and also thank Andrew Liveris for his guidance during his service as Chairman. And also, a heartfelt thank you to our outgoing Board members, Nancy Gioia, Tony Posawatz, and Frank Lindenberg for their significant contributions and their dedication to Lucid's mission. Now last quarter, I laid out two significant strategic priorities for the company: Number one, growth and brand awareness; and number two, a laser focus on cost. We have taken immediate action on both. We made the decision to adjust our workforce in Q1 given evolving business needs, productivity improvements, and broader economic uncertainty, which we, like many others, are not immune from. Whilst we believe this positions us to be more agile and puts us in the best position for success moving forward, it was nonetheless a difficult decision. Sherry will speak to our cost focus in greater depth. So let me provide an update on our growth and brand awareness progress. Now we continue to make strides in growing our brand awareness. And I'm proud to say that Lucid Air was recently awarded a number of prestigious industry accolades adding to our existing portfolio of awards such as the 2022 Motor Trend Car of the Year. At the 2023 New York International Auto Show, Lucid Air was crowned the 2023 World Luxury Car. Lucid Air was also named the U.S. News and World Report 2023 Best Hybrid & Electric Cars list for best luxury electric car. Now these awards reinforce our belief that the Lucid Air is not just the best EV in the world, but the best car available in the world today. The Lucid Air sets a new industry benchmark for range and two versions that were the first EVs to achieve an EPA estimated range over 500 miles. And we set these new standards, thanks in part to our groundbreaking in-house developed technology, which continues to garner significant industry attention. In fact, Lucid recently received the 2023 Newsweek Powertrain Disruptor of the Year award. I cannot underscore enough how advanced our technology is, making it the best in the world on many metrics. I believe that we are years ahead of our next closest competitor, who in turn we believe is several years ahead of their next closest competitor. I believe that as more companies come to the realization that developing world-class powertrains is not as easy as we make it look, then we will continue to grow more interest in our patented hardware and software technology from other OEMs. And in fact, we continue to see interest from multiple parties. As I've said in the past, whilst this is not an area where we put a tremendous amount of proactive attention, I'm pleased with the growing levels of interest and progress that we're receiving with these OEMs. So our technology and know-how is what enables us to have game-changing range, supercar levels of performance, super-fast charging, a luxurious and spacious interior, and exceptional aerodynamics. But I also want to stress that the best technology does not mean most complex nor most expensive. In fact, it's quite the opposite. I believe that our vehicles are fundamentally easier to manufacture in many ways than our competitors. And this is done through brilliant in-house engineering, a design for manufacture, and very high degrees of innovation. And we're not resting on our laurels. We're using advanced technology to drive down the costs for EVs. We're moving towards more efficient EVs in order to decrease the battery pack sizes, which will enable lower-cost vehicles. And we have much more to come with an exceptional technology roadmap and further enhancements and innovations, pushing the envelope on what's possible, including for our mid-sized platform. Now looking more near-term, Sapphire is on track for the start of production later this summer in mid-September. The Lucid Air Sapphire will feature three motors, carbon ceramic brakes, an aerodynamic package, new sports seats, and a crack-tuned suspension for a sublime driver-focused sporting experience. It's expected to boast sub-two seconds north to 60 miles an hour and sub-four seconds north to 100 miles an hour with a sub-nine seconds quarter mile at a top speed exceeding 200 miles an hour. I've been test-driving Sapphire very recently and I'm finding it extremely satisfactory in terms of its performance. I'm also excited to announce that the Gravity SUV entered a new phase of development with road testing having started a couple of weeks ago. Just as the Lucid Air redefined the sedan category, I believe that the Gravity SUV is positioned to do exactly the same for its corresponding SUV category. Indeed, we're taking all the best elements there and putting them into an SUV, game-changing range and efficient to create amazing interior space, fast charging performance, and luxury. And just last week, I was out in a Gravity on a test drive, and I'm delighted with the progress that has been made. I make no mistake, the Gravity SUV will be a true landmark. And we can't wait for you to experience the Gravity SUV at an unveil later this year, at which time you'll be able to place a reservation. We think you're going to absolutely love it. Now in software, we continue to make big strides. We had five over-the-air updates in Q1 with a number of features that customers have been requesting, including CarPlay and scheduled charging. And indeed, we're working on many more exciting updates. We're listening intently to what our customers want while simultaneously providing more in-house design features to provide our customers with whatever best-in-class experience they prefer. And what's more important is to emphasize that we've designed our cost to be over-the-air updatable from the very start. And I believe that very few have the over-the-air capability to the same degree. It's a platform on which we can do so much more. On our last earnings call in February, I spoke about customer awareness of the Lucid brand. We see brand growth happening in stages, starting with the innovators, then early adopters, and moving to early majority and beyond. We believe we are still early on in our customer growth stage of innovators and early adopters. And as we achieve a tipping point in brand visibility, once enough cars are on the road, we believe we will see a higher velocity of growth. And we've continued to take serious action and a holistic data-driven approach to our marketing programs focused on qualified awareness, digital conversion, test drive experiences and conversion to orders and deliveries. And we're seeing some early wins. The number of test drives has nearly doubled in the first quarter from the fourth quarter of last year. I believe that seeing is believing, and once you experience the handling, the quality, the performance, and the interior space of Lucid Air for yourself, you'll understand the award-winning nature of our vehicles. We see test drives as the key stepping stone for customers considering the purchase of a Lucid Air. We launched our Dream Ahead Tour last month, which is designed to showcase the Lucid Air’s game-changing electric vehicle performance and technology. Consumers will have the opportunity to experience and drive our three Lucid Air models, the Lucid Air Pure, the Lucid Air Touring, and Grand Touring, and they will do that in 42 key cities right across the USA. Now in fact, the White House promoted our Dream Ahead Tour as part of President Biden's EV acceleration challenges, highlighting actions to encourage EV deployment. I'm also delighted to announce that Andrea Soriani recently joined Lucid as our new Head of Marketing. Andrea brings over 25 years of experience in luxury brands and automotive, having worked at companies such as Maserati, Ferrari, and TAG Heuer. And we certainly expect Lucid, Sapphire, and the Gravity SUV to further elevate awareness of the Lucid brand. There are many more grassroots efforts underway capitalizing upon our incredibly passionate customers, who are also our biggest advocates. Now there's a misconception out there that Lucid Air's starting price is far higher than it actually is. Many people out there really believe that the Lucid Air is a $200,000 car. Well, the fact is that the starting price for Lucid Air Pure is $87,400, which we believe is a truly compelling offering in the marketplace today. And we're working on ways to achieve broader access. We started deliveries of the Lucid Airs with self-prepared features last month, and we deliver more Lucid Air Dream and Grand Touring this quarter to customers in the EU and in Saudi Arabia. We've resolved some of the gating items, and we'll continue to focus on ramping up production of stealth appearance and components for international shipments in the second quarter. We expect diluted air fuel volumes in the back half to also ramp with the start of the Lucid Air Pure real-world drive in North America. We're on track to produce over 10,000 vehicles in 2023 with company-wide initiatives ongoing that will enable higher volumes as market conditions allow. And Sherry will go through guidance in greater detail. So in closing, we recognize that we have more work to do, but we're making progress with our strategic priorities, and the team is totally energized. Our mission and our optimism are unchanged. We're committed to a more innovative and environmentally sustainable future, designing, building, and delivering the best EVs on the market as we expand globally and develop more exceptional vehicles, such as the Gravity SUV, which we plan to launch in 2024. I am confident that we have the most advanced technology. We have the right operational infrastructure and the know-how to deliver. And we have a track record of tenacity that will make us stronger. And so with that, let me turn over to Sherry for an update on our financials. Sherry?

Thank you, Peter, and thank you to those who are taking the time to join us today. I'd like to begin by calling out a few recent highlights. Last month, we announced that Lucid joined the United Nations Global Compact, the world's largest corporate initiative advancing sustainable and socially responsible business practices. Sustainability is an integral part of what we do every day. It's our mission, and we view this as a natural progression in our sustainability journey as a company. Last month, we also signed the first annual agreement with the Human Resources Development Fund, or HRDF in Saudi Arabia. This agreement operationalizes the memorandum of understanding signed with the HRDF in October 2022 and will facilitate Lucid training programs and will fund skills development and salaries for Saudi Nationals who work within our organizations within Saudi Arabia. The public investment fund has connected us to many of the ministries throughout Saudi Arabia and this HRDF agreement is another example of how those relationships and partnerships have resulted in significant economic and administrative support as we launch our international operations in the Middle East. The PIF has been a committed investor and a strategic partner for many years and we're very grateful for their partnership and support. I'd also like to provide an update on the SEC investigation that was previously disclosed on December 6, 2021. On April 27, 2023, SEC staff informed Lucid that the SEC concluded their investigation related to the business combination between Churchill Capital Corporation IV, which was Lucid's legal predecessor, and Atieva, Inc. in certain projections and statements. I'm pleased to inform you that they do not intend to recommend an enforcement action by the SEC against the company, which we view as a very positive outcome. We consider this matter closed. I also want to talk about the Form S-3 and Form S-8 that you may have seen filed today after market close. We amended the existing S-3 with the filing of a new S-3. As you’ll recall, we consummated a private placement of common stock to Ayar for aggregate proceeds of $915 million in December 2022. In connection with this private placement, we agreed to register the shares with the SEC. The Form S-3 is intended to register these shares by amending the existing Form S-3 that we filed in August 2022. This action was to fulfill our contractual obligations regarding registration rights and is not a new issuance. We also filed a Form S-8. As a reminder, the Form S-8 is primarily to register the additional shares made available under the company's second amended and restated 2021 stock incentive plan, which was approved by the stockholders at the 2023 Annual Meeting on April 24. Moving to the business. As Peter mentioned, in Q1, we made the very difficult decision to streamline our workforce to better position the company for the future. We took a $22.5 million restructuring charge, which was at the lower end of the $22 million to $28 million we indicated in late March. Given that we were able to reallocate certain employees to other critical positions within the company. We anticipate the final part of this restructuring actions approximately $2 million to occur in the second quarter. Now turning to our 2023 first quarter financial results. We produced 2,314 vehicles, up 225% year-over-year, and delivered 1,406 vehicles, up approximately 291% year-over-year. Making Q1 2023 our second highest performing quarter in terms of production and delivery volumes. Though its performance was less than Q4 2022. As we guided last quarter, we expected Q1 to be down significantly versus Q4 2022. While we work to drive up qualified awareness of our world-class products and also work to unlock production of sell the European and the Middle East variants. As Peter mentioned, we've now resolved some of those gating items and are focused on ramping these three areas further in Q2. For Q1, we recorded revenue of $149.4 million, which represented a year-over-year increase of 159%. Cost of revenue was $500.5 million for the first quarter. Our gross margin was down on a quarter-over-quarter basis. This reduction was driven by lower volumes, which we signaled would be down in our Q4 earnings call in February. As part of that $500.5 million in cost of revenue, we recorded impairment charges of approximately $227 million in Q1 related to lower cost or net realizable value, obsolescence, and losses from firm purchase commitments. Now moving to operating expenses. R&D expense totaled approximately $229.8 million, up 3.8% sequentially due in part to Gravity testing and tooling. Peter spoke about Gravity, and we're very excited that road testing has already begun. This increase was partially offset by the execution of cost initiatives to reduce outside services as well as freight. SG&A expense was approximately $168.8 million, down 1.2% sequentially. The sequential decrease was primarily due to lower base staff compensation and IT expenses. While we are intently focused on optimizing costs, which I will talk about in a moment, it's equally important to note that we are continuing to invest behind our strategic and growth priorities including sales and service, customer care, and the build-out of international offices and infrastructure. To that end, in the first quarter, we're excited to have opened five new studios and service centers, three are international sites with one each in Montreal, Toronto, and also Norway and two are in the U.S. with one in the Washington, D.C. area and the second in the San Francisco Bay Area. This brought our total at the end of the quarter to 40. We'll continue to be strategic and judicious with our site expansion and are utilizing cost-effective pop-up studios with great effect to complement our studios for brand awareness. On the service side, we ended Q1 with 38 mobile vans on the fleet in 73 nationwide approved body shops to ensure high customer satisfaction as the fleet of Lucid vehicles continues to grow. Our stock-based compensation in the quarter was $55.3 million. We also recorded a non-cash expense of $40.8 million related to the change in fair value of our common stock warrant liability. As a reminder, this non-cash impact can be influenced quarter-to-quarter by a number of factors with one of the larger factors being Lucid share price at the end of the quarter. In Q1, we achieved an adjusted EBITDA loss of $643.9 million. Now moving to the balance sheet. We ended the quarter with just over $3.4 billion in cash, cash equivalents, and investments with total liquidity of approximately $4.1 billion. We're very proud of our ability to consistently sustain a strong balance sheet over time. We've been able to access a variety of funding options from the $2 billion green convertible bond offering at the end of 2021 to the $1.5 billion ATM in private placement at the end of 2022, alongside government support in Saudi Arabia and the large $1 billion ABL facility we put in place with a world-class banking syndicate. We'll continue to take a holistic and opportunistic approach towards funding the business, and we continue to believe that we have access to various options in debt and equity markets as well as access to low-cost government programs. Turning to inventory. Inventory increased sequentially due to the pace of our production volume ramp versus delivery in the quarter, raw materials associated with new vehicle variants that we are now producing, and a higher volume of in-transit inventory as we move the remainder of the components, which are eligible for ocean transport to sea. Over the balance of the year, we expect a significant reduction in raw material days of inventory on hand, yet supply chain pressures eased somewhat. We obtained more predictability in the transportation channel and we refined our inventory management processes and systems. Capital expenditures were $242 million in Q1. Now moving to the outlook. We are on track to produce over 10,000 vehicles in 2023 with company-wide initiatives ongoing that will enable Lucid to pivot to higher volumes as market conditions allow. While we typically don't provide delivery guidance, we wanted to provide some directional color to help you with your modeling. For Q2, we are targeting deliveries to be up sequentially. We now have cars in all U.S. showrooms for test drives, and we have a broader set of buildable configurations available, though it is important to note that we are still scaling those programs, and we're continuing to work on our sales and qualified awareness initiatives. We expect that Q3 production and delivery numbers will ultimately be determined by how fast we are able to ramp the pure buildable configuration. And as for Q4, we are expecting that to be our largest quarter of the year. While I would again caution that there are many controllable and uncontrollable variables that can affect gross margin, I want to provide some context on our expectation for the direction of gross margin this year. In the second quarter, we expect improvement on higher sequential volume. We also expect to realize improvements throughout the year as a result of our cost efficiency and cost optimization efforts. Specifically, our workforce restructuring in the first quarter is expected to result in annualized cost savings of approximately $91 million, geared towards cost of revenue, with the balance of the annual savings attributed to operating expenses. You will start to see the full impact of the savings in Q2, less the approximately $2 million restructuring charge that we mentioned above and which will hit in Q2. Second, we've been working on a number of bill of material cost reduction efforts. We're expecting to see cost savings by the end of the year, not necessarily throughout the year with more reductions already identified for 2024. Third, we have restructured a number of our freight contracts, and we believe that we'll continue to see improvements in this area over time. Lastly, we're working diligently to reduce the days outstanding of our raw material inventory. Over the past 18 months, we have held additional inventory due to concerns on part availability and logistics slowdown and, in some cases, banking parts due to tooling capacity planning. However, this excess inventory has significant storage costs, reduces our ability to benefit from commodity price reductions that are now occurring, and also increases risk for obsolescence in some parts expire or are updated due to engineering changes. We believe that there are significant savings as we unwind some of this excess inventory to simultaneously refine our tracking and inventory systems. These actions will both reduce our working capital and our cost of revenue. Other gross margin tailwinds include the opportunity from the Inflation Reduction Act, which we think could contribute as much as a couple of thousand dollars per vehicle as the regulatory environment also gets more stringent and we see opportunity on the emission credit side around the world. Recall, we signed our first emission credit deal in Q4 of 2022. Regarding our liquidity position, we ended the quarter with approximately $4.1 billion in total liquidity, which we believe provides sufficient capital at least into the second quarter of 2024. Moving to CapEx. We expect capital expenditures for 2023 to be between $1.4 billion and $1.6 billion, reflecting some efficiencies, which were identified over the last quarter, and deferrals in our capital outlay. CapEx to support our continued growth objectives as we strategically invest in manufacturing capacity and capabilities, our retail studios and service center capabilities across the globe and development of different products and technologies and other areas supporting growth of Lucid's business. Phase 2 of the factory build-out in Arizona is progressing and we believe will benefit from a number of cost efficiencies, including moving logistics more fully on site and later bringing stamping in-house. We're also looking at bringing Phase 2 online in stages on a shop-by-shop basis, which we expect to allow us to defer some capital expenditures and associated depreciation expense until 2024 without a delay in the estimated Gravity timing. With regard to our manufacturing progress in the Middle East, the first facility, also referred to as SSKD, in Saudi Arabia with capacity of up to 5,000 units is nearly complete and equipment installation will begin next month. We had a ribbon-cutting for our SKD building in Casa Grande, Arizona, trained-up staff that came over from the Middle East. We expect to be operational in Saudi Arabia in Q3. This is very exciting and exactly where we want to be. In closing, I want to express my gratitude to the entire Lucid team as well as our investors, partners, suppliers, and customers. With your support and commitment, we are several steps closer to realizing an environmentally sustainable future. With that, let me turn it back to Maynard to get your questions. Maynard?

Thanks, Sherry. We'll now start the Q&A portion of the call. We'll start by taking Q&A from our retail investors through the safe platform, which is a very important constituency of our shareholder base, followed by live analyst questions. So our first retail question is, Peter, you have said, and I would just like to underpromise and like to overdeliver. You promised 20,000 deliveries in 2022 and 49,000 in 2023. We got 4,022, and guidance is just 10% to 14% for '23. When will we see underpromising and overdelivering? It has been the complete opposite so far.

Thank you, Maynard. I'd just like to start by saying to everyone I acknowledge and empathize with the frustration, and I take this very seriously. Under-promising, over-delivering isn't about setting low standards or being complacent. It's about being realistic and proactive. And then going above and beyond to try to exceed expectations. And we as a management team take it very, very seriously. Back in '21, few could have foreseen the disruption to the logistics and supply chain that we saw in 2022 that affected the whole industry; it wasn't just Lucid. Many other established car companies were affected the same way. I was part of the team that worked night and day in that factory to resolve issues throughout '22. And as a huge team effort, we did that. And now, we're facing challenges in the market, macroeconomic effects, and high interest rates, which do impact us. We've seen all of the federal tax incentives at the end of 2022. And these are factors that are very difficult to predict. When we guide, we do so with absolute honesty and integrity to the very best that we can estimate. I truly empathize with our shareholders who are here with us through the long run. But I nevertheless believe that this is a technology race, and the technology that we've developed is unique. It's hugely differentiating. It will enable us to push vehicle prices down because we've got more efficiency, which means we can go further with less battery energy, equating to the same distance as anyone else with smaller batteries, and batteries are a high-cost item, which gives us an advantage in terms of potential gross margin. I believe this will come to bear in the future. And we've also got compelling products coming. We've got Sapphire, which is going to be a halo product for the brand and help grow brand awareness. As we know, that is a limiting factor right now. And then we've got the big one for production coming next year, the Gravity, which I think is going to be a seminal product. So I temper this with unerring optimism for the future for Lucid.

Thanks, Peter. The second question is, would you consider launching the Gravity with more price-accessible trims first to attract more buyers considering the current economic conditions?

Yeah. First thing, I would say that from a principal perspective and given where we are in the life cycle maturity of our company, we do think it's important to balance volume and price not to optimize one to the detriment of the other. Your question is timely because we have been studying this topic, looking at launch cadence, the time between launches, the price elasticity curves and where the intersection of those end up optimizing for the company. It's still a little bit early for us to comment on our intended approach. But what I can say is that we've already sourced about 80% of the components for the Gravity; it's going really well, and we've been able to stay within our cost targets, which will ultimately give us maximum flexibility to react to dynamic market conditions over time. We're also taking lessons learned from the Air in looking at how we can shrink the amount of time between trim launches, hence, getting all buildable configurations into all regions out to the public faster. And finally, we know it's important that customers are aware of the full price spectrum for the vehicle. We found that a lot of people simply don't know that we offer, in the case of the Air, a vehicle with a starting price of $87,000, as Peter mentioned a few moments ago, and hence, awareness is something that we continue to focus on. So we'll keep you posted as we can share more, perhaps if the Gravity unveil later this year and in 2024 as we approach starter production.

Thanks, Joana. Can we turn it over to phone questions, please?

Our first question comes from Chris Pierce at Needham & Company. Your line is open.

Hey. Good afternoon. Just a clarification. Did I hear you right that test drives are up 200% in Q1 '23 versus the fourth quarter of last year? If that is the case, I was just curious what was driving that given the Dream Ahead Tour launched in the second quarter, I believe?

That is correct. We've initiated a comprehensive series of activities that together form the foundation of our upcoming marketing strategy. It's not just the Dream Ahead Tour that is leading to increased test drives; we've also been proactive at the studio level with initiatives from our headquarters to get more people in the car. People are impressed by the sportiness, driver engagement, refinement, and comfort of driving the Lucid Air. Individuals who have never experienced EVs before are drawn to this. It's essential to get people behind the wheel to truly understand the experience. Very few individuals will purchase a car without first taking a test drive. I see this as a pathway to a future purchase and ownership experience.

Okay. Lastly, I would like to know about the cars listed on the website and in your inventory. Are you taking any specific measures to align with the test drives or the Dream Ahead Tour to help move that inventory? Or is it simply that you will build cars based on the specifications and configurations that customers request? I want to understand your approach to these aspects, considering that you're not focusing on time or price.

Well, we're reconfiguring the website to make the customer experience more seamless and straightforward. We're showing the cars we have currently available that can be spent on that website. And of course, we're building to order. We've recently introduced the dark side look of the Lucid Air, and that's really attracting a very different audience. It's a very different vibe, a more youthful appearance to that car. And it's a very handsome manifestation of the range. So we're doing all those things; we've got increasing volumes of touring out there. We've got tourings in the studio to experience, and test drives are undergoing. And of course, we're bringing more and more affordable versions of Air Pure. The Air Pure is coming out, and later this year, we'll be bringing the real-world drive variant of the Air Pure out. Remember that many people believe that the Lucid Air is a $200,000 car; it actually starts at $87,400, and we need to really dispel this myth.

Thank you. Our next question comes from John Murphy with Bank of America. Your line is open.

Hi. Good afternoon, guys. Peter, in your comments, it sounded like you were alluding to potentially licensing or selling the powertrain technology. And it sounded like that was actually pretty far along potentially with some customers. I'm just curious, if you can comment on that or give us any other color as to what those comments meant.

No, John. I'm not in a position to disclose anything tangible at this juncture. As I said earlier, we continue to receive incoming interest. And I think there's a growing awareness that we have something very, very special here in terms of performance and efficiency. If you can have something more efficient, you carry less batteries, so you burden with less matter weight, and this makes the car really more agile and a better driver-focused experience. So the technology we have today is eminently suitable for higher performance vehicles with our drive units of 600 to 670 horsepower capability. When we develop lower power units, more affordable units from the mid-sized platform in a few years' time, that technology would be more appropriate for more mainstream manufacturers. We've not proactively gone out to seek any engagement in this arena, but we've had multiple OEMs come speak to us, and we are in dialogue with several right now. And that's all I really can disclose at this juncture.

Okay. And then, Sherry, maybe just two quick financial questions for you. The $411 million of finished goods inventory would indicate there's almost 4,000 units in stock. Is that about right or is there something else in that finished goods inventory that would be considered that wouldn't be a complete vehicle?

Yes, that is a little bit misleading. So I'm glad you asked the question, John. The finished goods inventory includes the inventory that is available for sale, but it also includes our test fleet vehicles, loaner vehicles that we have in order to give optimal customer care experiences for the end customer, showroom cars as well. These are vehicles that ultimately, after a few thousand miles on them or perhaps, no miles on them in the case of showroom cars or media cars, are vehicles that we will ultimately sell, but they're not available for sale today. So it's important to differentiate between available for sale today and finished good inventory that is being used for other customer-facing purposes.

Okay. And then just the other financial question. I mean, there's a lot going on right now, so I haven't had a chance to completely go through that S-3. But it sure looks like a mixed shelf. I mean, is there the availability for you to raise material amounts of capital under that shelf that's been filed? I'm sorry, once again, I haven't gone through the details there, but it looks at first blush like there's a lot of room for you to raise capital.

Well, again, this is not a new issuance. This was really just a contractual obligation that was associated with the subscription agreement that we did with the PIF back in December of 2022.

Thank you, John.

Okay.

Thank you, John.

Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Shepherd with Cantor Fitzgerald. Your line is open.

Hi. Good afternoon, everyone. Congratulations on the quarter and thank you for taking our questions. Peter, I wanted to follow up on one of the previous questions regarding licensing. I understand you aren’t providing additional details on that. I’d like to ask the question in a different way. Considering the slight decrease in production guidance for this year and the current gross margins, what is the hesitation to present this as a new revenue stream? You have the proof of concept with the Formula E series and consistently highlight how your technology is superior to competitors. I’m trying to grasp why this isn’t being introduced sooner instead of later. Thank you.

We are completely open and engaged in discussions. Our priority must be clear. Last year, I dedicated myself to resolving logistics and supply chain challenges by working extensive hours in the factory. Currently, my main focus is on increasing brand awareness and collaborating with Andrea to develop a cohesive marketing strategy that highlights our exceptional vehicle. I believe our technology roadmap is outstanding, and we will gradually release more affordable tech options suitable for different original equipment manufacturers in various market segments. There isn't anything specific to share at this moment in our conversations with third parties. I will make a formal announcement if there are any significant developments. We are receptive, but my main focus needs to be on our products rather than actively pursuing licensing opportunities.

Got it. Okay. Understood. And maybe as a quick follow-up, I was wondering if you can perhaps just give us any color on the deliveries starting to Saudi Arabia as part of the major agreements? There was a brief comment from Sherry at the end. Sorry, if I missed it. Just wondering maybe you can elaborate a bit further just in terms of how you see those progressing?

Yeah. So I think you’re referring to the Ministry of Finance agreement that we have in which they have committed up to 50,000 and maybe up to a total with the option for another 50,000 to a total of 100,000 units over the next 10 years. We are progressing those conversations. We are in active dialogues. We’re in the process of building out the specs for the first vehicles that they want to receive later this year. So that is actively ongoing.

Okay. Thanks, guys. Congrats again. I’ll pass it on.

Thank you.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Steven Fox with Fox Advisors. Your line is open.

Hi. Good afternoon. Two questions, if I could. First of all, the change in guidance in terms of going from 10,000 to 14,000 to 10,000. How much of that would you say is related to just some concerns on the macro or your ability to build brand versus just factory production issues? Any details you can provide on that? And then I have a follow-up.

Yeah. I think it's important as we take a very responsible perspective of this, that we match the cars that we build, the production volumes with the cars that we deliver, and that's the balancing act. Certainly, we believe that the macroeconomics are playing a part in the deliveries right now. We also believe that the interest rates play a part. Even for a high-end product, even in this part of the market, interest rates provide a headwind. But we've got initiatives within the company to turn the sources on to up the volumes, should those market conditions improve. And we are ready to scale up pending that and also as we amplify brand awareness. And also, I come back to this misconception, which seems to be out there. But yes, people believe it's a $200,000 car; actually, the entry-level price is $87,400. It's probably conceivable that people think of it as a $300,000 car because it's so amazing, but actually, it's much more attainable, and we need to spread that word as well.

That's helpful. Can you discuss the triggering points for bringing Phase 2 online in stages? Additionally, does focusing on certain stages beyond the CapEx efficiencies offer benefits in terms of vehicle production costs and your ability to respond to fluctuations in demand? Thank you.

Yes. No, I think it's an important question. So we're in the process of adding significant, I think, 2.85 million additional square feet in Arizona, Casa Grande facilities. And it's a number of our shops are being either expanded or new buildings. And what we're finding is that as we look at our production plans, we have the ability to continue to eke out a bit more volume out of some of our existing machinery, tooling, and equipment in the existing shops for a bit longer, which would allow us to take certain of the shops, like stamping perhaps paint, and potentially delay the onboarding of those, hence, you will delay the depreciation expense that accompanies that particular machinery, tooling, and equipment and facility to a little bit longer. The other thing we're doing is we're really carefully looking at all of the equipment that's going in each of these shops. And to the extent that there is volume equipment that could potentially be delayed, like the addition of additional robots, for instance, we're looking to put those in place and activate those as they're needed instead of doing it all at one time. The other thing that's really unique about what we're doing in the general assembly hall is that we're going to have the ability to dial up the jobs per hour between a few different job power points. So it's not a unit step increase in direct labor and bringing on the equipment, but instead, we'll have the ability to dial that up gradually and we're going to work to be really thoughtful about that so we can minimize depreciation expense and also the efficiency of the workforce as well.

Great. That’s all. Very helpful. Appreciate the answers. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of an unidentified participant with Evercore. Your line is open.

Thank you. Hi, Peter, Sherry, and team. So looking at ASPs, there were about $106,000 per vehicle this quarter. so that either implies some heavy discounting below MSRP or a lot of our trend. Can you maybe speak a little more to that and how we can think about that going forward?

As you consider the mix compared to 2022, you will notice an increase in other trims besides Grand Touring and Dream. There is a growing presence of touring models, and we are beginning to introduce peers into the lineup. Throughout the remainder of this year, we expect to maintain a healthy mix as higher trim levels will start to be distributed to the Middle East and Europe. You will see these higher-end products gaining exposure in those regions while we also start to ramp up the Pure model in the U.S. and later introduce it overseas as we close out the year and move into 2024. This mix of trims will continue. We did implement a $7,500 continuation program for the first couple of months of the year, which is also reflected in the revenue figures you observe.

Okay. And it's safe to say that the $7,500 continuation program will come off going forward throughout '23?

It did come off, yes.

Yes. Okay. And then just one quick modeling question for you, Sherry, on the LC NRV cadence. Is there any sort of guide on how we might see those charges hit in the remainder of this year and the next, just so that we can lay it out cleanly in the model and understand how those might affect the bottom line?

It's a great question. The LC NRV charges have been really kind of between $180 million, $200 million-ish to $20 million the last three quarters. So we've kind of seen it basically leveling off. We do expect to see an improvement of that over time because part of the charge is associated with the inventory we have on hand, given my comments that we're looking to reduce the days outstanding of inventories on hand and not bringing fresh inventory in terms of raw materials and also work in process, finished goods, we would expect that to start to taper down. So as you're looking forward this year, we are expecting some reduction in that over time. The other thing that we have had in some impairments there is we had mentioned some obsolescence. We had mentioned some scrap. I had mentioned the fact that we have some different activities ongoing to really address that in a more proactive way, and that's partly us improving our systems. It's partly us not having to hold as much inventory on a precautionary basis because we're not experiencing the same supply chain issues and the same COVID issues that we had in the past. So bringing down that inventory and making sure it's more current inventory will also improve the situation throughout the year.

Understood. Thank you for the detailed answer.

Of course. Thank you.

Please stand by for our next question. Our next question comes from the line of an unidentified participant with Redburn. Your line is open.

Hi. Thanks for taking my question. If we exclude the non-cash inventory write-down charge, your COGS per unit only improved by about 8% versus the fourth quarter 2022, which likely reflects the rotation towards the lower content Pure and Touring variants, but also some of the discounts that you just mentioned. Are you able to provide some data points for analysts and investors on the work that's being done internally to remove the costs from the vehicle?

Sure. I mentioned some of the efforts in my earlier remarks, but let me offer additional context. We are focused on reducing the bill of material costs in two main ways. First, through commercial agreements with our suppliers to lower piece prices. As we increase volume on new programs, suppliers are more willing to negotiate current program prices. Second, engineering changes that may lead to increased costs also play a role. We expect to see these effects throughout the year, but it's important to note that existing inventory must be managed before we can fully benefit from new lower-cost parts. This is why I indicated that the impact will be more noticeable toward the end of the year and into 2024, as some changes will take effect then. We have also made significant progress in freight costs, which will be evident more in Q2 and Q3 due to renegotiated contracts, along with improvements in manufacturing overhead. Additionally, the workforce reduction will lead to greater cost efficiencies primarily in cost of revenues rather than operating expenses, and you can expect to see that in Q2. These various cost-cutting initiatives will start to positively influence our gross margin. Finally, we also discussed how greenhouse gas credits and the Inflation Reduction Act will begin to contribute later in the year as we implement our rotation.

Okay, cool. Thank you. And I guess my second question is that the Lucid Air began production roughly one year after beta prototyping testing began. And clearly, COVID impacted some of the start of production timeline. But shouldn't analysts and investors use the same timeline to conclude that the Gravity SUV begins production in roughly nine months to 12 months from now, given your announcement that this nameplate has just begun road testing?

All I can say is that we've got to get the product absolutely right. There is a gestation period between data and start production. There's also a nomenclature issue here. We are on target for started production late 2024 for the Gravity.

Could you please outline what needs to happen between now and the start of production so we can track progress in real-time? I'm not sure when you expect the vehicle to be homologated.

Yeah. Well, I mean, homologation comes relatively late because that has to be conducted to process and tooling that represents levels of authenticity for the production. So right now, we're road testing the beta vehicles for core attributes, structural integrity, drivability, suspension tuning. We're starting on some of the great developments, the traction control and antilock braking systems, the core attributes of the vehicle, then we will move to a phase of interior development. They want to have representative interiors at this stage. Later this year, we'll move bases with representative interiors so we can do all that development. Then the long lead tooling items are being kicked off because some of the parts take over a year to tool, and then we'll go through a preproduction run through next spring, culminating in production late 2024 on track. And I believe it will be a seminal product. Gravity is on track. It's a landmark, and it's going to be a landmark three-row SUV, super practical, super high performance, extraordinary range, extraordinary performance attributes.

Great. This has been super helpful. Thank you. I’ll pass the line now.

Thank you. Please stand by for our next question. Our next question comes from the line of Ron Jewsikow with Guggenheim. Your line is open.

Good evening, and thanks for taking my question. Peter, just wanted to get your thoughts on kind of competitive dynamics in the market right now. From our vantage point, it feels like a pretty challenging market for luxury electric vehicles, but wanted to get your view on if price cuts from one of your large domestic competitors on their luxury line of vehicles is having any impact on demand for used vehicles?

Well, I think what you're referring to is perhaps a different part of the market. I believe that there is a challenge to the entire market right now because of macroeconomics and because of interest rates, which actually do affect this space of the market. We're seeing key competitors from Germany discounting their products very heavily; that's not just the U.S. manufacturer that you may be referencing, the Germans are heavily discounting their vehicles and I think there are challenges right across the marketplace. I think what we need to do is just amplify awareness just how compelling our product is. We've got better range, we've got better interior comfort, we’ve got more unique features, we're faster charging, we're more efficient, and we have superior technology. We've got a fundamentally superior driver engagement experience. I was taking some potential customers for test drives just yesterday, and they were blown away by the overall driving and riding experience. We just need to get more people behind the wheel. That's what this is about. We don't have a 100-year heritage or history. We don't have an existing customer base. We need to win in new advocates, new customers.

That's super helpful. And it's good to hear you out in the field kind of promoting the product.

Personally, most weekends I'm out meeting customers at events, and the grassroots evangelism is growing. This doesn't happen overnight. This will take some time. We are planting the seeds for a forest to come in the future. Make no mistake.

Makes perfect sense. I guess you gave the data points around test drives and the number of cities you're going to for the Dream Ahead tour. Is there anything you can commentary you can provide on kind of the cadence for order trends since that started or is it too early?

It's too early to do that. There are so many factors that overlay; it's very dangerous to project. But what I would say is that we've more than doubled the number of test drives in the last quarter. I believe that very few people would buy a car without a test drive. I see that as a key stepping stone, a key conduit, a very relevant metric, and that is a step towards purchasing ownership. What we see is the best salespeople we've got are our customers that become advocates, and some of them even evangelize for us. There's something very genuine about that.

Yeah. These test drives also give us personal touch points in order to enter into dialogue with the customers, better understanding their needs, and then it allows us to gain intelligence on what the customer needs, the pricing they're looking for, the interest rates that they're looking for. All of these are going to be data points that we can use to refine offerings that will best meet the customer needs.

And then we're streamlining the whole customer experience, making the website much more intelligible, more intuitive, and more user-friendly to streamline the ordering process online.

That's super helpful. And just last quick question for me, kind of Gravity, any learnings from the Air launch process over the last 12 months to 18 months that will help inform the Gravity launch call it, 12 months from now?

Yes, of course. I mean, we want to continuously improve, and there's a continuous improvement and learning process which we take very seriously. The engineering team for Gravity works very closely with the production team in full process design for manufacture. This is a really collaborative team sport, which we take very seriously. I really believe Gravity is going to be a seminal product. I don't think there's going to be anything even close. It's taken all the technology that we've developed to date and more that we're going to bring to this, because the problem with SUVs is getting range without unduly large battery, which becomes super heavy, and then you lose payload capacity on the car. This is a multi-dimensional, hugely technical challenge, and only now, I believe, are we ready to give it a shot. Gravity is going to be huge for us. I'm very excited about it.

Very helpful color. Thanks, Peter, Sherry, and team. I’ll hop back in queue.

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back to Maynard for closing remarks.

This concludes Lucid's first quarter 2023 earnings conference call. Thank you all for joining us today, and you may now disconnect.