Polestar Automotive Holding UK PLC Q1 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Polestar Q1 2023 Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I will now like to hand the conference over to our speaker today, Bojana Flint, please go ahead.

Thank you, operator. Hello, everyone. My name is Bojana Flint from Polestar Investor Relations. Thank you for joining our Q1 2023 results call. Before handing over to Thomas Ingenlath, our CEO, and Johan Malmqvist, our CFO for their opening remarks, followed by analysts and shareholder questions, I will handle some housekeeping points. I would like to remind participants that many of our comments today will be considered forward-looking statements under U.S. securities laws and are subject to numerous risks and uncertainties that may cause Polestar's actual results to differ materially from what has been communicated. These forward-looking statements include, but are not limited to, statements regarding the future financial performance of the company, production and delivery volumes, financial and operating results outlook and guidance, macroeconomic industry trends, company initiatives, and other future events. Forward-looking statements made today are effective only as of today and Polestar undertakes no obligation to update any of the forward-looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the risk factor section of the annual report on Form 20-F filed with the SEC. In addition, management will make references to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our non-GAAP financial measures with the most directly comparable GAAP measures is included in an investor update presentation issued earlier today. With that, I would like to turn the call over to Thomas, please go ahead.

Thank you, Bojana. The first quarter was a good example of the team's hard work and commitment. We have achieved record first-quarter deliveries of 12,076 cars, up 26% year-on-year, and end the second quarter of this year with good commercial momentum. I would like to spend a few moments reflecting on what has enabled this. The main things that set Polestar apart as a brand. As the first quarter shows, we are in the middle of a period of strong growth, creating a footprint across 27 markets that allows us to adapt our commercial operations to match supply and demand across the world. This is complemented by our stable production base with over 130,000 cars manufactured to date. We also have a well-balanced mix between retail and fleet customers. Our global partnership with Hertz to supply 65,000 cars is working well and with the significant numbers out there, this provides a fantastic opportunity for potential customers to experience our costs. Reflecting how we are maturing as a business, we are starting to see our first repeat customers. This is a significant step for our young brand, as it reduces our reliance on only winning new customers. It also provides the foundation for our pre-owned business, creating another entry point for new customers. Recently, we introduced significant upgrades to Polestar 2. And I'm happy to say that it remains one of the top-selling cars in many markets across Europe, North America, and Asia. The launch of the BST 230 special edition also pushes the boundaries of performance and has been very well received. Polestar 3, our design-led electric performance SUV had its debut in North America recently, where it generated very strong interest. We successfully unveiled Polestar 4, the latest example of our design and performance capability a few weeks ago. We launched it in China and expect to start production in the fourth quarter. But we also received major interest around the world. We plan to start deliveries in other markets from mid-2024. In addition to design and innovation, sustainability is what the Polestar brand represents. It is our focus across all parts of the business, and we reduced our relative CO2 emissions per car sold by 8% in 2023, decoupling our emissions from sales growth. This is a foundation that we will continue to build Polestar's premium luxury brand on. We are totally committed to this ambition and believe that price stability is important to our customers. Now, as you might have seen, Volvo Cars announced early today that they need additional time to complete the software development for the new all-electric platform, which is also the basis for our Polestar 3. This means that startup production in Chengdu, China is now expected in early 2024. Importantly, the start of manufacturing Polestar in Charleston, U.S.A., is still on track for mid-2024. The adjustments to Polestar 3 do not impact Polestar 4, as they are based on different platforms. We also acknowledge the tougher economic outlook for the automotive industry. Due to both of these reasons, we have adjusted our 2023 global volume expectations to a range of 60,000 to 70,000 vehicles, representing an annual growth rate of 16% to 36%, following record deliveries of 51,491 cars last year. We have actively managed our cost base since mid-2022, but we need to do more. That's why we are intensifying our efforts, including putting in place a group-wide hiring freeze and reducing our headcount by 10%. We're doing this in a structured way across all our markets while safeguarding our programs. These necessary actions will benefit our cost base here, and more so in 2024. Now, I would like to ask Johan to comment on our financials.

Thank you, Thomas. Hello, everyone. Thank you for joining us today. It's great to see so many of you again on the call and on the webcast. During the first quarter of 2023, we have delivered 12,076 cars globally, up 26% year-on-year, reflecting strong volume development in key markets such as the U.S., Canada, and the UK. We have entered the second quarter with a well-established global presence in 27 markets on four continents, with over 140 sales locations and nearly 1,120 service points. Before moving on to quarterly financial highlights, and to echo Thomas's points, I want to emphasize that we, the management, are extremely focused on positioning Polestar prudently to tackle the near-term challenges arising from later than anticipated Polestar 3 startup production and a tougher economic outlook faced by the automotive industry. We will deploy marketing and sales support activities to continue to build and protect our brand value and maintain growth momentum. This will be compensated with intensified cost management efforts we are announcing today. As a reminder, you have heard us say this before, we recognize the challenging macro environment we have and continue to operate in. We started taking actions more than six months ago. We are pleased to see those initiatives starting to come through in the numbers, especially in our operating expenses. However, this is not enough and we are taking further steps to strengthen Polestar in the near term and reduce the cost base by taking out around 800 roles that were planned to be added this year, taking us back to the 2022 base of around 3,000 employees. We are undertaking a wide range of additional actions while at the same time safeguarding the development of Polestar 5 and Polestar 6. Moving to the financial highlights for the first quarter of 2023. Revenue increased 21% from $452 million to $546 million, driven by higher Polestar 2 sales across major geographic markets and price increases on model year 2023. Despite the price increases, revenue per vehicle decreased slightly primarily due to a negative translation currency effect, as well as the negative channel and mix effect. Gross profit increased from a negative $7 million to a positive $18 million, and gross margin was up 3.4%, reflecting the model year 2023 price increases established in the second half of 2022 alongside a positive foreign currency transaction effect. This was partially offset by higher freight and input costs. Selling, general and administrative expenses were down 11% at $189 million due to active cost management. Research and Development expenses were up 11% or $4 million with continued product development for future vehicles and technologies. Operating loss decreased by nearly $60 million or 23%, predominantly driven by higher gross profit and active cost management. Moving on to cash flow, cash used by operating activities for the first quarter of 2023 was $283 million, mainly driven by operating loss, higher levels of inventory and trade payables payments. Cash used for investing activities was $131 million, primarily as a result of Polestar 3 and Polestar 4 intellectual property investments. Cash provided by financing activities was $323 million, reflecting short-term borrowings of $637 million, of which $300 million was drawn down from the Volvo Cars shareholder loan facility, partially offset by principal repayments of $311 million. At the end of the first quarter of 2023, cash and cash equivalents stood at $884 million. With continued support from our two major shareholders, we're closely monitoring the market and exploring potential equity and debt offerings to fund operations and business growth. Thank you again for joining. And over to the operator for live Q&A by the analysts. We will answer the top questions from shareholders.

Thank you. We will now take the first question. It's from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi, good morning. Thanks for taking my question. First off, I was wondering if you could dissect the change in your vehicle forecast for the year a little bit further. I'm trying to understand how much you would relate to the macro? And then further, can you talk about pricing strategies for the rest of the year given what's going on in the market in general and your prior strategies and then I have a follow-up?

So maybe I start?

Yes.

Okay. Hi, Steve. As we mentioned in the introduction, the lower volumes compared to the previous guidance reflect the combination of both the later than originally anticipated deliveries of the Polestar 3 and the tougher market conditions. Now, we haven't disclosed the breakdown. What we can say is that given the tougher economic climate, it's difficult for us to compensate for the absence of the Polestar 3 volumes with incremental Polestar 2 volumes. That, coupled with higher market uncertainty, is what led us to call down the volumes and provide a range.

And in terms of pricing?

We have, in the course of the next week, the model year '24 starting of Polestar 2. And as we explained before, the upgrade of tech, the significant feature increase, and the better performance of this car in terms of range, we will combine that with an increase of price of the Polestar 2 of this model year. This is again supported with our statement that, of course, we see as well that our customers expect, on one hand, stability in our pricing and for that reason we will proceed persistently. Obviously, again linking this to our volume corridor, I mean, one of the reasons why we are prudent in giving this corridor is because we indeed intend not to push past into the market for any price just to achieve a volume that we once announced, but indeed, gives us the opportunity to maintain the right balance between the volume that we achieve and what we achieve in terms of margins and price stability with our products.

Great, that's really helpful. And then I was just curious, like, when we think about the 27 countries you're in, there seems to be a lot that you can control in terms of branding and sales efficiencies. What is sort of the difference between an African region where you're operating well versus one that's new? And how do you bring that up? What's the potential in terms of just improving sales through better sales metrics in some of the lower performing regions today?

Well, if you have a closer look at the regional breakdown of our sales, I think it's pretty good example of what advantages it is to have this, I call it now, widespread of 27 markets. There is one thing that in a newly established market, of course, needs some time to develop its full potential. The other effect is that, of course, there are regional fluctuations happening in quarters, like incentive cuts in the country, which, of course, naturally dampen interest from customers for a moment. But if you have a broad base, you can indeed compensate. For that reason, for example, in Scandinavia, many countries have incentive cuts in this quarter. Compensating that was exceptionally good sales in the UK, for example. Of course, that is indeed a very good effect of being that widespread.

Great, that's all very helpful color. I appreciate it. Thank you.

Thank you.

Thank you. We will now take the next question. It's from the line of Winnie Dong from Deutsche Bank. Please go ahead.

Thanks so much for taking my questions. I appreciate that you're not breaking down the reasons for the reduced guidance between the push-out of Polestar 3 and the macro challenges. But maybe can you talk about the order trends that you've been observing, any sort of specific strengths by region or weakness by region that'd be appreciated? That's my first question. Thanks.

Yeah, we left 2022 obviously with a very strong order book. And we indeed still have a solid order book that we are working down, which helps customers not wait too long for them. Obviously, that model year '24 will be an additional push for the Polestar 2 sales and the campaign waiting to roll out now when the cars are in production. For that reason, we have good conviction in the potential to achieve our sales of Polestar 2. Having said that again, obviously the macroeconomics and our ambition to maintain the pricing and the premium position of this car and not enter into a price war. For that reason, we have this prudent outlook. I mentioned a bit about differences in regions in the beginning. Obviously, there were effects at the beginning of this year in Nordic countries where customers knew that the incentives would not be in place anymore and thus pushed their sales in December 2022, which, of course, helped us in December 2022 a lot. But for that reason, of course, the first quarter was weaker there and we expect this to normalize in the Nordic countries. We also have started, of course, much more explaining and pushing the fact that the purchase of Polestar 2 in 2023 in the U.S. via a lease program qualifies for incentives. For that reason, we see the pickup of interest and order for the Polestar 2 in the U.S. again, after we had a slowdown at the end of 2022 when the car did not qualify for the incentives. So that's another effect that makes us positive about the outlook for Polestar 2 orders.

Thanks, that's all very helpful. My follow-up is on the cost management side, the global freeze and the 10% headcount reduction that you just announced today. Can you maybe elaborate more on timing and what parts of the business are managing that for you? And then maybe any more quantifiable annualized saving from reduction? Thank you.

Yep, thanks Winnie. As we've communicated, we're implementing a 10% headcount reduction. That's off an existing base of around 3,300 employees. So this would then put us at 3,000 employees, which is the same level we ended last year. We would then intend to keep that through this year. So we're working through the specifics of the headcount reduction. As it relates to the 300 roles, you can expect to see those cost savings start coming through in SG&A during the second half of this year, and then with the full run rate effect next year. If you take into account the reduction of the additional 500 planned headcount for the year, then, of course, those costs are even higher.

Any sort of quantifiable savings rate that we can think about?

We're still working through the specifics of that, Winnie. But of course, you can use the 300 as a proxy against those 300 reduction in headcount versus the actual numbers. I should also mention that we're also working on additional initiatives to drive out cost and to conserve cash in the company, such as trimming the development costs of certain car programs, efficiency gains with our commercial operations, where for example, we've seen improvements in the quality levels of the Polestar 2 leading to lower warranty repairs. This is a little bit of what we touched upon before regarding our 27 markets, simply improving the efficiencies there and how we operate now that we're becoming more established. So those are examples of additional actions across the company that we're taking.

Got it. That's very helpful. Thank you so much.

You're welcome.

Thank you. We will now take the next question. It's from the line of Tobias Beith from Redburn. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. I was just wondering if we could return back to audit intake. If I look at your balance sheet, advanced payments from customers declined sequentially, again this time from $41 million now to $33 million, suggesting that gross new orders in the period may have been less than 12,000 units, which I guess, if I annualized, is 12,000 units less than the bottom end of your guided corridor. Any further comment on how orders have trended year-to-date and perhaps maybe what you're doing to stimulate new orders through the year? And I have two follow-ups if that's okay.

Well, isn't that an indication simply that we have also been able to deliver faster to our customers? I mean, the order book has always two sides to it. Strong order book, yes, but it means that customers, especially in the last year, had to wait quite long for delivery. This normalizing is what you're reading in these numbers, which is indeed shrinking. So for that reason, don't interpret this number as indicating interest going down. That's again, order intake is something that varies across regions. Generally, the first quarter in the automotive industry tends to be slower than in the second half of the year, and we see that trend happening again this year. The fatigue in January-February is something that, with spring, is picking up. We will see that effect in 2023.

And Tobias, just on your phasing, don't forget, as we communicated before, we do expect volumes to be weighted more towards the second half. That's the case, even with the absence of the Polestar 3. Part of that reason is also due to the Polestar 2 model year '24, which we then anticipate will drive a higher growth.

Okay, cool. Thank you. And my second question relates to the Polestar 4. The indicative price that you announced at the Shanghai Auto Show of $60,000, given prior comparisons to the Porsche Macan was a little lower than I'd anticipated. Do you still think that the comparison between Polestar and Porsche makes sense? Or do you think investors should now think of Polestar as attempting to disrupt BMW or Mercedes Benz?

You mentioned the $60,000 price point and suggested it seems a bit low. It's important to understand that our direct sales business model has clear pricing, and customers don't walk into our shop expecting to negotiate for better deals. The list price isn't entirely comparable. When considering the $60,000 price, it's worth noting that this car might lack certain performance specifications and features. However, it’s essential for us to clarify that the Polestar 4 doesn't compete directly with the Tesla Model Y. Instead, it is more closely aligned in price to the Porsche Macan. It’s crucial for us to position this car correctly because we have our own brand identity and are not trying to replicate the Porsche Macan. We're introducing a new product, and that guidance helps prevent any misconceptions about it being a direct competitor to the Tesla Model Y.

Okay, thank you. Just a quick point of clarification. Is the $60,000 price point your top-end variant, so I guess the equivalent of the dual-motor large pack Polestar 2, and future variants may be cheaper, or should we think of the Polestar 4 as having more expensive variants to be announced in the future?

In the presentation at Auto Shanghai, we clearly outlined the price range for the Polestar 4, which is between $60,000 and $80,000. This range should be what you keep in mind. When we specify the price as being RMB350,000 to RMB540,000, you need to convert that to dollars, which results in a much broader price range than the $60,000 mentioned.

Okay, I'll look at the presentation. I must have missed that. Thank you for the answers. I'll pass the line.

Thank you. We will now take the next question. It's from the line of Dan Levy from Barclays. Please go ahead.

Hi. Good afternoon to you. Thanks for taking the questions. Wanted to go back to just the pace of quarterly volume. Maybe you could give us a sense in the first quarter if the 12,000 units of deliveries was that a function of demand or was that just a function of the output? And with the guidance that you're providing, the step up in volume is that just more so a function of output increasing, or was that just a function of sort of seasonality and more demand coming online?

If you're asking about the quarter, I think it was a mix of both. In the very beginning of this year, we were indeed lacking stock, having sold lots of cars in the last quarter of 2022. So a certain degree of not being able to deliver more cars was also because we didn't have that many cars in stock. This is, of course, normalizing and not the case anymore. Interestingly enough, in this call for the first time, we have not talked about supply chain issues, which I think is amazing. The supply chain issues are not a topic that much this year. This will not be the issue for the rest of the year. Seasonality, indeed, is mentioned because you always in quarter one and probably in quarter two still have less automotive business compared to quarters three and four. So that trend will again happen in 2023.

Yeah, I can only echo what Thomas said is that, there was a little bit of a tight supply going into this year. So a combination of the two, Dan. But on a go-forward basis, production is we don't expect to be an impediment. It's going to be more demand driven, as I said, with volumes increasing and weighted towards the second half again, also as we start delivery of the model year '24.

Got it. Okay. So you passed the supply constraint, and it's more of a function of demand. Thank you. Second, wanted to ask about the pricing strategy. I appreciate your comments about focusing on stability for your customers, but maybe you can talk about how you think the macro plays into your pricing strategy, if at all?

Well, the macro definitely plays into that. For example, the model mix, of course, customers are more price-sensitive and would probably think twice if they add another package to it. Generally, the average price we sell the Polestar 2 has an influence when people are in the environment more careful in spending money. Of course, we had an influence from that side.

And you saw an element of that in the average selling price for Q1. Actually, that reflected the benefits of the prior price increases. It was overshadowed by a negative translation effect. There was also a small element of negative variant mixed effect, to Thomas's point. So I think that's one example of that macro conditions.

Great, thanks. If I could just squeeze one more in, please. I know you mentioned that Polestar 4 is on a different platform than Polestar 3, and so that's why it's not going to be delayed. But maybe you could just remind us of what pieces of software are shared or aren't shared between the two? And just the confidence that you have that Polestar 4 is still going to be on track for SOP before the end of the year?

The customer-facing aspect of the Entertainment Software is indeed shared. The Android-based Google system is part of both Polestar 3 and Polestar 4 for the customer, providing a unified experience. However, I wouldn’t limit this to just the electric platform since it involves two different teams working on it. One contract is managed by one team, while another team handles a different contract. Additionally, the timing for the two cars is largely independent, meaning that there is no impact of the launch of Polestar 3 on the launch of Polestar 4. This independence isn't simply a result of using different electronic architectures.

Okay, thank you.

Thank you.

Thank you. We will now take the next question. It's from the line of Andres Sheppard from Cantor Fitzgerald. Please go ahead.

Hi, good morning or good afternoon. Thank you for taking our questions. Congratulations on the quarter. A lot of our questions have been asked. Maybe I'm wondering, can you give us an update on how the plans regarding manufacturing in South Carolina are progressing? Is that still on track? Are there any updates there? Thank you.

The update is that it's on track. The timing for the production in South Carolina to start producing Polestar 3 is still on track for the middle of 2024.

Got it. Okay, that's very helpful, Thomas. Thank you. And then maybe as a follow-up, is it possible to quantify a little bit further the relationship with Hertz, in terms of how deliveries are going or kind of what's to be expected for either later this year or next year? Just trying to get a sense of how we should be thinking about it? Thank you.

In regards to Hertz, it is still according to plan with 65,000 cars gradually being delivered over this five-year period. There was an initial tranche that was delivered in 2022, which continues to build during 2023 before landing at a more level run-rate as from next year for the remaining volumes. So it's going to be a gradual build-up before we get to more of a stabilized run-rate of the 65.

Thank you. We will now take the next question. It's from the line of Alex Porter from Piper Sandler. Please go ahead.

Excellent. Thanks very much. So I just have one question. It goes back to the topic of software. I think it's an important one. It seems a lot of people in the industry are struggling with it. So basically, I suppose the main question is can you summarize Polestar's philosophy with regard to software development? And then maybe more broadly, your partners' philosophies, Volvo and Geely's philosophies with regard to software development? Do you think any fundamental changes need to be made by the industry or by your company more specifically regarding software in order to prevent delays to vehicle launches or other production disruption in the future? Thanks very much.

All right. I have to go back here a little bit to how the product portfolio and what we call the essence model of Polestar is actually based on. From almost day one with Polestar, we had to explain that our key thing is not to have that one thing where we build on and what we invest into; this is the base of everything. It's the opposite. We have access to different technology in the group, and depending on the type of car that's at the price point, we pick and choose that technology. For that reason, yes, there are different technology bases for our cars, which we then for the customer experience tune to become Polestar. That's where the interface for the entertainment, driving functions, and features that is, of course, unified. But the technology might differ underneath. There are projects like the Polestar 3, which obviously is at the pinnacle of innovative technology coming to the market, with an electronic architecture that enables LiDAR-supported unsupervised highway piloting. This is part of this architecture. I would say the complexity and innovativeness of that platform has to be handled. This is a case now with Polestar 3. Of course, the painful learning steps are being taken. I believe that if we learn from these steps, it will pay off in the future. We already have great benefits from new technology with over-the-air updates, which we perform with the Polestar 2. That initial learning curve was challenging, but now it’s just happening.

Okay, very good. Thanks a lot. I appreciate it.

Thanks, Alex.

Thank you. There are no further questions for the telephone. At this time, I would like to hand back over to the speakers for shareholder questions.

Yeah, right. We have shareholder questions. Bojana was bringing the top three important questions together here, and I have them in front of me. Question number one, why has Polestar not invested in brand awareness in the U.S. market? The brand has still not been considered as an alternative in numerous comparisons of the vehicles that technically exceed many of its most popular competitors. This statement, of course, is provoking me a little bit as I cannot confirm that we have not invested in brand awareness. We have invested heavily over the last years into awareness of Polestar. I have to mention that we have improved year-on-year brand awareness in the U.S. market. From 10% aided brand awareness last year to 13% today, which is very close to competitors. I want to say again that we are not in a bad position as it sometimes appears. We will continue our efforts for improvement. We have a trending million-dollar marketing campaign coming in the second quarter in the U.S. market. With this, the Polestar 3 has a very successful engagement rate and we are aiming to build on that. It will take time but our brand awareness is not as lagging as is sometimes displayed. The Polestar 2 has seen great sales success, placing fifth in electric vehicle statistics. Second question picks up a similar topic but it's broader. How does Polestar dramatically increase market awareness? From the U.S. perspective, we have a slight limping behind in U.S. market awareness. However, if you put this in perspective globally and compare select regions, our brand awareness is strong. In Germany, 25% brand awareness compared to 5% for Neo and 4.5% for BYD. In the Netherlands, it's 41% brand awareness with others much lower. That perspective helps contextualize our performance. We aim to further increase awareness as we enter 2024 with a full range of vehicles. The third question we covered already regarding the South Carolina plant, confirming that mid-2024 is the start of production there. Closing remarks from my side, in 2024 we will have a portfolio of three cars, including two electric SUVs. Polestar 3 is set to arrive at retail locations by summer. The launch of Polestar 4 has created headlines and garnered positive media reception. Production will start in Q4 2023 with global sales commencing early in 2024. We will continue to build on the success of the Polestar 2 with significant tech upgrades for model year 2024. Thank you for joining this call.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.