Polestar Automotive Holding UK PLC Q3 FY2023 Earnings Call

Hello and welcome to the Polestar Q3 2023 Results Conference. I would now like to hand the conference over to Bojana Flint. You may begin.

Thank you, operator. Hello, everyone. Bojana Flint from Polestar Investor Relations. Thank you for joining our Q3 2023 results call. Thomas Ingenlath, our CEO; and Johan Malmqvist, our CFO, will start with their opening remarks, followed by analysts and retail investor questions. But before then, I will cover some housekeeping points. I would like to remind participants that many of our comments today will be considered forward-looking statements under U.S. Federal 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, overall outlook, and medium-term targets, fundraising and funding requirements, macroeconomic and 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 its forward-looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors contained in our SEC filings. 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 the reconciliation of our non-GAAP financial measures with our most directly comparable GAAP measures is in the investor presentation issued earlier today. With that, I'd like to turn the call over to Thomas. Please go ahead.

Thank you, Bojana, and thank you, everyone for joining us today at a slightly different time than we normally would hold our call. The reason for this, as you probably know, is that we are hosting Polestar Day here in Los Angeles tomorrow morning. We will have a number of technology partners, including Mobileye, Luminar, and Bcomp, joining us to deep dive into the technologies that will form the future of our cars. It's shaping up to be a fantastic event and for those of you that aren't able to join us, we will be publishing a recording of the keynote presentations and highlights from the exhibition area on our website afterwards. Starting with the results. The third quarter saw record deliveries of 13,976, a growth of 51% compared to last year. We saw a positive impact from channel market and product variant mix and the start of Polestar 2 model year 24 deliveries. In total, during the first 9 months of the year, we delivered 41,817 cars—a growth of 37% compared to the same period last year, and Johan will take you through the financial results in more detail in a moment. Turning to the operational highlights of the last quarter. Starting with Polestar 2 and significantly upgraded model year 2024. Deliveries of this higher-priced model continue to ramp up and it is receiving great reviews. Top Gear calls it one of the most complete electric cars money can buy. Autotrader ranks it 4.5 out of 5 stars, the highest possible rating in the safety, power, and features category. Similar high scores and headlines continue to be published across pretty much all of our key markets. This is a car that until now we have built our brand, commercial operations, and supply chains around—this one car. When you consider this, you can see the significant opportunity that we now have with two new models, luxury performance SUVs coming to the market. Let's start with Polestar 3. Preparations for the start of production, first in China early next year, and then in the U.S. in the summer of 2024, are progressing well. Polestar 3 successfully completed hot weather testing in the UAE in September, and the last phase of testing will be completed by the end of this year. The new electric performance SUV created a buzz when it arrived in our Polestar spaces over the summer, and it is attracting new Polestar customers to come in and experience it firsthand. I spent a few days myself with one of our Polestar 3 test vehicles last month, and even for me, it was an eye-opener to experience how much of a shift the car represents in ride handling and, of course, the luxurious spaciousness. Turning to Polestar 4, our SUV coupe. Last time we met, I talked about the positive reception this car had at the Chengdu Auto Show. Now two weeks ago, we held the first media test drives on a nimble racetrack, where journalists got to push the car to the limits. The resulting reviews are very positive, especially concerning its performance, handling, and passenger comfort. The start of production of Polestar 4 in Hangzhou Bay begins next week, with customer deliveries in China starting before the end of the year and in the rest of the world planned for mid-2024. Polestar is the leading partner of Google and Polestar 2 was the first car on the market to feature Google's Android Automotive OS when it launched in 2019. Since then, we have seamlessly integrated a number of apps into our cars, most recently Prime Video, which we announced in September. Several other manufacturers have now followed the path of our successful cooperation with Google. Now, as I alluded to earlier, we will deep dive into several exciting innovations tomorrow at Polestar Day. Our full lineup of cars will also be on show in the U.S. for the first time, and we are giving visitors the chance to experience the first dynamic experiences of Polestar 3 and Polestar 4 on the roads here in Los Angeles, as our test engineers conduct ride-alongs. I have talked before about the value of this unique position and platform that we have created—a strong and established market presence with a wide sales and service network that extends far beyond most pure EV startups and matches what most traditional OEMs offer. Over the last few months, we took the necessary steps to rework our business plan. We are reducing costs and improving efficiency to create a more resilient and profitable Polestar while reducing our funding needs simultaneously. Achieving cash flow breakeven already in 2025 will show the strength of our asset-light business model. Margin over volume is our way forward, supported by a gorgeous lineup of four exclusive performance cars. Our strategic direction is clear; we are safeguarding the premium position of the Polestar brand. This plan reduces our expected cash outflow from the end of September this year to 2025 to around $1.3 billion, following additional support announced today from our two major shareholders. In 2025, we are targeting total annual deliveries of around 155,000 to 165,000. In addition to the value derived from our growing lineup of Polestar 3, Polestar 4, and Polestar 5, we are taking several actions to improve margins and reduce operating expenses. Johan will cover in a bit more detail the contribution of these actions. I will give you some further color where we have to introduce more significant changes to our operations. Main steps are taken to further improve our margin by introducing more flexible packages. As our model lineup grows into the most luxurious segments, we also need to offer customers the ability for greater customization, generating more revenue across our car lineup. Taking a more focused approach to our market presence. Starting in Europe, we have several markets that are both performing well and show continued scope for further profitable growth. We are going to shift investments into these from markets that are either smaller or less profitable. It's not about leaving a market, but about directing our resources to where they give us the best impact. In some cases, we will also move to an importer model. As you know, since the start of the summer, our operations in China are part of a joint venture with Meizu, providing a stronger foundation for us to succeed while improving the profitability of our U.S. business. Part of this turnaround will be driven by the introduction of Polestar 3, a car that will be much better positioned for the U.S. consumer, especially once production in South Carolina starts. With that said, we are taking further steps to adjust and target our brand-building and marketing spend, and we are making sure that we have the most efficient retail partners set up. Identify product cost reduction opportunities, both by working closely with R&D and purchasing. We have ambitious but realistic cost reduction opportunities identified to reduce the bill of materials. We're also reducing our operating expenditure across the business, which Johan will go into more detail on in a minute. 2025 is an important milestone, but not the end state. Our ambition is to continue to develop the Polestar brand, our volumes, and profitability in the long term. We have a significantly stronger foundation from which to build than many others. We have a strong and unique brand and strong and supportive shareholders, and with that, I'll hand over to Johan for more on the Q3 results, 2023 outlook, and some detail behind our strengthened business plan and, of course, the funding update. Thank you for listening in, and I look forward to taking your questions after Johan's remarks.

Thank you, Thomas. Hello, everyone, and thank you for joining us today. As Thomas said, we are in Los Angeles, getting ready for Polestar Day tomorrow. Where we are going to be joined by 100 customers, media, investors, and analysts. Before moving into the quarterly highlights, the key business actions from our strengthened business plan, and the 2023 outlook, I would like to revisit points Thomas and I raised in our Q2 results call in late August. Firstly, we said we expected a stronger second half of the year in terms of margin and volume, reflecting the ramp-up of the upgraded and higher-priced Polestar 2 model year 2024, and we still expect that with Q4 being our strongest volume quarter this year. We saw improvement in the core business margins during Q3, on the back of the positive mix and as we continue to roll out Polestar 2 model year 2024 alongside reductions in raw material costs, we expect margin progression to strengthen for the remainder of the year. Secondly, we said that looking ahead into 2024, we will benefit from the rapid product rollout, and 2024 is just around the corner, and Polestar 4 is starting production in a matter of days, with first customer deliveries commencing in China next month, followed by other markets in mid-2024. Polestar 3's start of production is also on track, with first customer deliveries expected in Q2 2024. Thirdly, we said that the cost-saving measures announced with our Q1 2023 results, which would include taking out both existing headcount as well as roles that are planned for this year, are progressing well. We are now at a point that we will have 300 fewer employees by the end of the year. Lastly, we said we would continue to explore other areas where we can become leaner and more efficient to take down costs further and improve our competitiveness. Thomas is taking you through the business drivers of our strengthened business plan, and I will pick up on those briefly after I cover our quarterly results and 2023 outlook. Starting with some operational highlights first. With an established presence in 27 markets, we are now focused on improving profitability in each of these. We will drive sales and service through our Polestar spaces and service points as our model lineup grows to three cars in the next six months. As you know, we benefit from access to an existing, scalable, state-of-the-art manufacturing footprint of our experienced partners, Volvo Cars and Geely. At the production plant in Meizu, we continue efforts to reduce both costs and the overall CO2 impact of our Polestar 2. In Hangzhou Bay, where Polestar 4 is manufactured, the first cars will start to come off the line next week. We will soon announce another production site outside of China and plan to start producing Polestar 4s there in mid-2025. Like I said, Polestar 3 production in Chengdu is on track, and preparations at the South Carolina factory are also progressing well. Moving now to the financial highlights for the third quarter of 2023. We delivered 13,976 cars this quarter versus 9,239 last year, a growth of 51%. Revenue increased 41% to $613 million, driven by volume growth as well as price increases implemented last year and the model year 2024 ramp-up, offset by various sales support actions, including discounts. In regard to channel mix, this quarter has reverted to a more normal level of around 60% fleet sales, 40% retail, which has benefited revenue through product variant mix. Our strategic partnership with Hertz is progressing well and at the end of Q3, we have delivered about 15% of the 65,000 commitment. We continue to be excited about this partnership, and there is a strong collaboration in helping to develop what is currently a challenging EV market. As a broader point, fleet is and will remain an important part of our business. Putting aside the Hertz partnership, a very high percentage of our remaining fleet book is corporate car schemes, which attract margins that are more closely aligned with our retail business and provide access to an important pool of target customers for our upcoming product lineup. Turning to gross profit for Q3 2023, it was approximately $4 million, corresponding to a margin of almost 1%, broadly in line with last year. Although the core business benefited from a positive channel market and product variant mix, gross profit in the quarter was impacted by a large inventory impairment charge of $28 million. Demand in certain markets, in particular in the U.S., was weaker than we anticipated, which led to fewer cars being sold and an inventory buildup. Due to the margin profile in the U.S., with high import duties consequently, there was a need to write down the value of the inventory. We also had an impact from secondhand cars, which have started to come into our inventory in a more meaningful way. Recognizing the impact on the profitability of our business, we have taken mitigating actions to temporarily cut production volumes in order to improve inventory balances. With regards to selling, general and administrative expenses, they were up $58 million to $236 million, reflecting primarily higher advertising, selling, and promotional activities ahead of the Polestar 3 and Polestar 4 deliveries. Research and development expenses were up $30 million, reflecting continued investment in future vehicles and technologies. The operating loss was $261 million compared to $196 million last year. Moving on to cash flow for the first nine months of 2023. Cash used for operating activities was $1.3 billion, mainly driven by operating loss, high levels of inventory, and trade payable payment. As previously guided, we repaid related party payables in the quarter via new short-term working capital facilities. This reflects a more natural funding solution as we continue to develop our longer-term capital structure. Cash used for investing activities was $189 million, primarily as a result of Polestar 2, Polestar 3, and Polestar 4 intellectual property investments, partially offset by the divestment of the Chengdu plant, where the Polestar 1 was previously produced. Cash provided by financing activities was $1.5 billion, reflecting short-term borrowings of $3.4 billion, of which $800 million was drawn down from the Volvo Cars shareholder loan facility and principal repayment of $1.9 billion. At the end of the third quarter of 2023, cash and cash equivalents stood at $951 million. Before shifting topics to our strengthened business plan and funding update, let me address the 2023 outlook. We now expect to deliver about 60,000 vehicles for this year as we maintain a disciplined approach to our premium brand positioning against the background of weakening global consumer demand, particularly affecting the rate of EV adoption. Flowing from lower deliveries for the year and the financial performance to date, in particular inventory impairment charges, we now expect a full-year gross margin around 2%. Turning to our strategic direction, which remains unchanged and in line with our premium brand positioning. Our strengthened business plan targets accelerated margin improvement and a reduction of our total funding need to the point of anticipated cash flow breakeven in 2025. By 2025, we are targeting our four car models to generate total deliveries of around 155,000 to 165,000. We have taken a thorough look at all aspects of our business with a keen focus on measures to enhance the gross margin. In 2025, with an improved product mix and the following business measures, we are targeting gross margins in the high teens. We expect more than half of this progression to come from our model range rollout with more luxurious and exclusive cars—cars that would naturally carry a gross profit margin of over 20%. We have reviewed the structure of our product offering, recognizing that a high degree of options could lead to improved margins. Therefore, we will be introducing, as Thomas said, more flexible option packs for our customers, hence generating more revenue. We will have a more focused approach to market presence in Europe, directing sales and investments toward markets that have the greatest potential for profitable growth. In China, recognizing the competitive landscape, we have taken a different approach and formed an innovative joint venture. We are very excited about the prospects—firstly, in selling more cars and secondly, through the technology that our partner will bring to our cars, which could be deployed internationally in addition to China. In the U.S., our objective is to improve the profitability of that market. Given the current China-centric manufacturing footprint, which leads to high levels of tariffs into the U.S., this will in part be addressed by the production of Polestar 3 in Charleston, and even further from mid-2025 with a new manufacturing plant for Polestar 4 outside of China, which we will announce soon. This location also enjoys more favorable trade agreement terms with the U.S. Lastly, improved product cost is also a key ingredient in our path towards higher margins. Here, we are working very closely with our two main contract manufacturing partners to drive down costs while maintaining the high-quality product our customers love and expect. We believe these four main initiatives, alongside a much-improved product mix, will enable us to achieve a gross margin in the high teens. The rest will come from a combination of factors I outlined above; tax and options, optimized market presence in Europe and China, stronger profitability of our U.S. business, and optimized production costs. Alongside margin-enhancing measures, we have also identified initiatives to reduce operational costs and become even leaner and more efficient as we continue to grow. We announced headcount reductions early this year and, as I mentioned at the beginning, those negotiations were completed successfully, and Polestar now employs around 300 fewer employees globally. Furthermore, we will look to resize and better optimize advertising sales and promotion spend, ensuring our sales footprint, digital, and R&D setup is operating more efficiently as we scale the business. Although we have been steadfast at safeguarding our car programs, we have and will be very disciplined in our planned capital expenditures, finding ways to either reduce or push payments out beyond the cash flow breakeven point. We're also looking at ways to reduce working capital. For example, with the manufacturing footprint that is closer to the end markets, as well as the new setup in China with the joint venture, we will be able to significantly reduce our inventory needs. In combination, we expect cost management actions and those on gross margin will see Polestar reach cash flow breakeven in 2025. Of course, this is not the end state. 2025 will be an important milestone for our business and thereafter, we expect to continue to grow volumes, building on a profitable three-car baseline to also include Polestar 5 and Polestar 6, as well as future models. Moving on to funding updates. With business actions to manage costs, drive higher margins, and cash flow outlined by both Thomas and me, we have reduced our total funding need. Showing their continued commitment to Polestar, we are pleased to announce that our two major shareholders have both increased their support. Volvo Cars has extended the maturity of the existing shareholder term loan to 2027 and is providing additional funding of $200 million. In addition, Geely Sweden Holdings AB, an affiliate of Geely Holdings, is providing a $250 million shareholder term loan on substantially the same conditions as the Volvo Cars shareholder term loan, including a maturity in 2027. Both loans have an optional equity conversion feature. Based on the expected cumulative negative free cash flow from the end of the third quarter of 2023 until achieving cash flow breakeven targeted for 2025 and taking into account existing and new financing and liquidity support from Geely and Volvo Cars, Polestar requires external funding of approximately $1.3 billion. We continue to work on a plan which will provide the remainder of the required funding until we achieve the targeted cash flow breakeven in 2025. We expect to finalize this funding plan in the near term, and it will include both additional debt and equity. In a short period, Polestar has achieved so much already, and the hard work of our colleagues and the support of our main shareholders means we are now at the beginning of an exciting phase as we move from one to four models, and with a more efficient organization, we can see a clear path towards profitability within two years. Thank you again for joining, and over to the operator for the live Q&A by the analysts, and then we will answer top questions from our shareholders.

Our first question comes from Andres Sheppard from Cantor Fitzgerald. Your line is open.

Hi, good afternoon, everyone, and thanks for taking my question and congratulations on the quarter. I guess, our first question is you provided your outlook for delivery targets for 2025—approximately 160,000. You now have about 60,000 expected deliveries for this year. I'm curious if you can maybe give us some color on how we should be thinking about deliveries in 2024? Should we be looking at somewhere in the midpoint between those two, or what's the best way to think about it? Thank you.

Hi. This is Johan. I think the way you should think about it—well, two things. One is that the way you should think about it is that looking at the start of production and the rollout of cars, as we mentioned in the initial comments, really, the Polestar 4 and the Polestar 3—those deliveries will occur in a more meaningful way really starting from Q2. So you have the second half of the year with the three-car lineup. So there's definitely going to be a certain phasing next year that reflects them to the start of production and the deliveries. We'll come back to this when we are in regards to guiding more specifically on 2024 as part of our Q4 earnings, but I think that's what I would take into consideration now.

Got it. No, that's super helpful. I appreciate that. And maybe as a quick follow-up, I just wanted to better understand the new financing and liquidity. So with the $450 million from Geely and Volvo, you mentioned that you'll require another $1.3 billion to get to that breakeven cash flow in 2025. Any sense of when that timing for that $1.3 billion will look like? Is that still a bit of a short-term need, or with this additional financing, does this give you a little bit more flexibility on timing? Thank you very much.

Yes, I can help provide some color there just to kind of give that picture a little bit clearer. So, where the $1.3 billion stems from is that it's based upon the expected accumulated negative free cash flow from the end of Q3 through cash flow breakeven in 2025, and that accumulated cash flow we expect to be around $1.9 billion. Then we deduct the existing—both existing and financing support from our owners, around $600 million, to get to the $1.3 billion. So between now and then, of course, we expect that quarterly cash burn in 2024 to slow and then ultimately arrive at a cash flow breakeven in 2025 based upon all the actions that we are now executing on, as reflected in the remarks from Thomas.

Perfect. Thanks guys. So the first question I had was if you could give an update on how the joint venture in China is progressing. I know that was a relatively recent announcement, but I'm curious if there have been any initial findings and short-term goals and medium-term goals for that joint venture.

Yes. Thomas here, I will take this question on the China JV, which is indeed progressing well. Obviously, very much the launch of the Polestar 4 now going into production and coming to customers in December first time is very much under the light of it being the first execution of the JV, really. The software in this car will already be designed and influenced by our partner there. So the customer gets this full benefit of connectivity and China-targeted entertainment systems in this car. So the fruits of this JV are already coming alive within this short time, but of course, really in 2024—when I say that now here publicly—when there is as well a Polestar 4 coming together with the car to market. Then, of course, it will become full-fledged what we expect to be a car that is consumer-centric, made for China, and having that benefit of a software partner there that knows that business very well. We have the rollout of our Polestar spaces in China also happening in parallel to that, and we have a target by the end of this year, which is a base for us to really accelerate now in China. We see that definitely Polestar 4, with the media feedback and the pre-ordering converting into real orders, is showing that traction—a product that is definitely resonating well in China, with its size and its spaciousness, but as well, of course, a special combination of us having now software in the car, which is designed by and for Chinese customers.

Okay. Great. That's super helpful. And then maybe just a related question onto that, is it possible for you to take those learnings and that China-specific software infotainment offering and leverage it in your other vehicles as well? I know that in the past, you've talked about how Polestar 2 maybe isn't an ideal fit for the Chinese consumer, the Chinese market. Is there a way that you can leverage the JV to push sales of that product, or is that something that's not maybe on the radar screen?

Well, within the China market, obviously, the range of Polestar cars and Polestar 3, of course, will be an important product there as well, will get the benefit of this software being much more catered for the Chinese market. So that goes across the car line. I mean, an interesting aspect of it because a lot of what I see happening there in terms of what is being done for the customer in terms of software in the car, I absolutely expect for us as well to learn from it for the rest of the world. Of course, this will not be a direct translation, and we have a very strict border between what is the cloud and the customer electronics in China versus the Western world. Having said that, certain behaviors of what we see—entertaining features—I definitely see benefits from us learning there.

Okay, great. I hate to harp on China here, but my last question is also related to China. So there's obviously been a lot of geopolitical saber rattling lately, particularly in Europe, about trying to throw up protection and barriers on imports of vehicles from China. What are your thoughts on this? I know that nothing is set in stone yet, so there's a lot of uncertainty, but you alluded to potentially a new factory location in your prepared remarks. I'm just interested in knowing what you're planning in terms of maybe a worst-case scenario if the European Union does institute something resembling a protectionist policy against imported Chinese cars. Thanks.

Yeah. To answer this anyway, on one hand, I mean, something's very clear—we are buying our cars from our contract manufacturing partners. That is a very straightforward purchase on an arm's length basis. So I think that portrays very well how fair we just simply have to buy our cars from our manufacturing partner. The other thing is for some time now, I mean, obviously, this journey started like two years ago; we had to make an effort to diversify our manufacturing footprint. We have started with Polestar 3 being, as well, now implemented into the U.S. plant in South Carolina, where we will produce this car not only for the U.S., but we will, as well, export from the U.S. the car to Europe. So that certainly is a way of us de-risking our business. The other way is that our second important SUV that we will introduce now—the Polestar 4—we are very soon being quite precise about how we found a way of having a second production footprint for this car as well. So, obviously, yes, we have taken very concrete steps that already in the near future will be in place for us to be prepared for such.

Hi. Good afternoon to you. Thank you for taking the questions. I wanted to start just by asking, within the path to getting to breakeven, which you laid out a number of steps and I think one of those was on getting improved costs in your licensing of manufacturing capacity and technology from Volvo and Geely. What is the line of sight to attracting those costs? How critical a step is this in getting to gross margin breakeven? And in the event of a weaker environment, what is—how much pressure does it put on that target of extracting those cost savings?

Yes. Thanks, Dan. I think the first point to make clear is that the bulk or the absolute majority of margin accretion comes from the product mix and the improved margin profile of these vehicles. What we laid out in the remarks in regards to continuing to work on and drive down the production costs in close collaboration with our contract manufacturing partners. I mean, on the one hand, that's something that we would and anyone would typically expect to continue regardless. We're just making sure that we're putting extra emphasis on it. With that being said, of course, here we derive a mutual benefit of that, especially on those platforms that we share. So from that perspective, we, as well as they are both— all three of us very much focused on this, and that's where we would expect it to add accretion to the already healthy margin profiles of these products.

Got it. Understood. Thank you. The second question is just around demand broadly and a two-part question. A, maybe you could just give us a sense, at least for Polestar 4. I know you said there's been very positive reception from the media in China—if you have a sense of the visibility of orders or the magnitude of backlog, and then the other question is this, so, to the extent that it's just obviously a very tight macroenvironment across the regions, to the extent that you need to pivot on any component of the plan, what is your ability to pivot within the plan that you've laid out this afternoon?

Well, Thomas here, and I would really like to make sure that that exercise of working on the business plans strengthening it and making it resilient was, of course, very much as well to make sure that those important goals—the breakeven in 2025. The reduction of the funding need is all working in an environment where obviously, demand is in the world's climate at the moment something which is very different from when we started the journey in 2017, even in 2020; it was still a completely different picture than we have today. So for that reason, be rest assured that this exercise of this business plan took very much into account that we cannot now dream of fancy demand scenarios but have put down a very achievable and realistic baseline. So that was a very important element of us doing this work over the summer.

Well, I think like Tom said, based upon the initial reactions from the different events, they have been received very well. So I think we're very excited about this project. We're starting the deliveries in China, and so of course, that will serve as a good proxy of its success, and it is one of those products that we expect the higher volumes to come from, and I think it's very well positioned to do so.

And the phase that we are in now, I mean, something's of course now important: We have had the first drive of the journalists. The next phase is, of course, to have now customers coming into the car and being able to drive to make that big move from pre-orders to fixed orders. So that is the phase that we are in, and obviously, we are very optimistic that we will be successful in making that shift of the pre-orders and attract many more customers. I mean, one thing is clear; first of all, being a car which indeed now unleashes that opportunity for us in China will, of course, be a very important element of making the volume of the Polestar 4 very significant for our brand. Just from a personal experience, I mean, so much of our existing customers from Polestar 2, we see have a very strong interest in exploring this car and upgrading to it. So we see, of course, that's why we always say we are not a brand starting from scratch—all that, I say, no investment in building up the brand, building that customer base, with thousands of 10,000 of Polestar 2 customers. Of course, that is a very new and additional channel for us really bringing the potential of people upgrading and going from a Polestar 2 to Polestar 4, spending that much more money on that next level of exclusive SUV.

Hi, good evening. Thanks for taking my questions. I have a couple, actually, and fortunately, they are all for Johan, and I guess maybe let's take them one by one. My first question is as follows: Can you explain how cumulative cash flow to breakeven is only $1.9 billion when free cash burn this quarter was $700 million with very low Capex and seemingly still lots of intangibles and capital equipment related to the Polestar 3, 4, and 5 still yet to be acquired?

Yes. Hi, Tobias. Thank you for the question. So, as you correctly point out here, of course, what it implies is that we expect to coordinate cash burn in 2024 to slow down significantly, and that, of course, is on the back of, in part, then the volumes from Polestar 3 and 4 and the margin profiles for those cars—like I said in my opening remarks—being over 20%. So the earnings generated by those cars will be the primary driver to your question or the answer to your question, that in addition then to executing on these actions that we've laid out further to take out costs. This would have improved the margin profile of Polestar, and then there's in regard to net working capital and Capex—yes, there's a natural buildup of inventory as we introduce these models, but of course, there's also a benefit of more localized production that would help taper that to some extent, and then in regards to Capex, I mean, we continue to invest in the car programs, but with that being said, that's also an area that we've taken a hard look at to see primarily as it relates to the phasing of the Capex to make sure that we can arrive at this breakeven point in 2025.

Okay. So is it possible that perhaps some of the Capex that you have anticipated pre-2025 now comes after 2025?

Yes, I would say that that's definitely one of the actions we've looked at. With that being said, we've also been very adamant about keeping our car programs, but of course to the extent where we can change the cash, we can conserve cash, whether it's looking at pushing out or different ways to fund the projects, then yes, then we have taken a look at that.

Our next question comes from Alexander Potter with Piper Sandler. Your line is open.

Thanks very much. I appreciate your time. My final question is really about expectations for Polestar 3 and Polestar 4. If I have a look at where Polestar 2 volumes are today, they are tracking roughly 50% below your prior 2025 expectations, and incentives are already present in some of your major end markets on the model year 2024, Polestar 2. I was wondering what volumes have you assumed for Polestar 3 and 4 this time out to 2025, and what gives you confidence in that success?

So maybe I can start it—I mean, we've not just given not broken down the volume targets identified by car model. I think what we expect is, and as I alluded to, if anything, that we see that the Polestar 4 is becoming more of a golden product. We think it's very well positioned to be that, and it caters well for both the Asian market and the U.S. market, and Europe for that matter.

Okay. Maybe Thomas here, sorry. I would love to add as well. Obviously, I would call Polestar 3 and 4 much more worldwide catering cars—size-wise, they are addressing a need in the U.S. and in China, much more than the Polestar 2 can do as a fairly compact European-sized car. Polestar 3 and 4 both will have the benefit of the manufacturing footprint, which obviously makes it much more profitable to sell them in China and the U.S., and in Europe equally. So for that reason, I think it's fair to say that for Polestar 3 and 4, we are very well positioned to reach the volume ambition, and we very clearly have made clear in the last earning calls that we will not drive volume at the expense of margin. For that reason, to concentrate with the Polestar 2 on those markets where this car can achieve the margins that we expect is a very strict and clear policy that we have now. So I think that explains as well how that relates to volume expectations that had been put out long ago for Polestar 2.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Bojana. The floor is yours.

Thank you so much. We will now take a few minutes left until the end of the call. We'll take three top questions from our retail shareholders. So I will read them out, and then Thomas and Johan can answer them. So the first top question as an investor, what can we look forward to with the stock achieving and your further rollouts of your great vehicles to a larger demand and how you're going to create that demand? I read this as a volume confidence in our product lineup and our volume ambition. So Thomas?

Well, as mentioned before, obviously the moment of us introducing now Polestar 4 and Polestar 3 is a game changer in that respect. We have on one hand, first-time SUVs and then two of them very nicely positioned from each other going into the market. We all know that the SUV segment has a much larger target group; the addressable market almost across the world for SUVs is the biggest and better cost as well for these. So that should be the main answer for that. Having said that, the China JV again opens up to the China market for us, a much more optimistic situation than ever before, and of course, we brought the Polestar 3 and the Polestar 4 very early now into our Polestar spaces in order to have enough time—months—to get the customers excited about these cars. So there are a lot of actions, including a big, big test drive coming up in the beginning of 2024 for journalists, where we will, of course, drive a lot of attention to these new cars coming.

Perfect. Thank you. Moving on to question number two. What is your plan to stop the short-term bleeding?

Yeah. Just to reiterate, the effort that has been done over the summer to bring a business plan into play here, which is resilient, working in an environment which obviously is tougher than years before and that breakeven in 2025. And really, I mean, how many months is that? I mean, that is not now talking here long term in the future, that is a very reachable goal. The reduction of the funding needs to a dimension, which I think compared to a lot of our peers, is actually exceptional and low. I mean, in that respect, we really did a lot of our homework now to make that future and the success of Polestar very tangible.

And I think, you know, we've made three very significant steps forward in regards to the funding solution here. Thomas said, we've lined out clearly the action to get to this lower funding need. We have the support from the owners, and we're well progressed in regarding the holistic funding plan to close up the remaining gap.

Great. And let's take the third and final question. When can we expect to see production from the South Carolina facility and what impact will it have on the company?

Yes, okay. Summer of 2024—very simple answer on that one—and the effect and impact: Two things. I mean, very clearly, it's a big enabler for us in our profitability journey, having a car that is produced in the U.S. for the U.S., and it, of course, is as well a big emotional thing. Obviously, again, a car produced in the U.S. for the U.S., of course, is a very different starting point for us to be here out with a successful product.

Fantastic. Thank you. So closing remarks, and we are on time to finish at 3 p.m.

Thank you, Bojana. Polestar has achieved significant milestones since our launch. We have successfully established a new brand and secured a presence in the market. Additionally, we are preparing to launch a robust product lineup. Our operational strategies have positioned us well for scaling up production volumes, and Polestar is currently at a crucial juncture. We have adjusted to a challenging financial environment that demands focus and value. Polestar is poised for success and aims to generate substantial shareholder value.

Thank you. Operator, we are concluding the call. Thanks everyone for joining, and we'll speak again soon.

Ladies and gentlemen, this concludes today's conference. Thank you all for joining, and we'll speak again soon.