Earnings Call Transcript - PSNY Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Polestar Fourth Quarter and Full Year 2022 Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bojana Flint. Please go ahead.

Bojana Flint, Investor Relations

Thank you, operator. Hello, everyone. My name is Bojana Flint from Polestar Investor Relations. I will cover a few housekeeping points before handing over to Thomas Ingenlath, our CEO; and Johan Malmqvist, our CFO. Their remarks will take about 15 minutes, and we will then open the line for analyst questions followed by questions received from our shareholders. Before handing over the call to Thomas, I would like to remind participants that many of our comments today will be considered forward-looking statements under the U.S. federal securities law and are subject to numerous risks and uncertainties that may cause Polestar's actual results to differ materially from what has been communicated. 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 section of our report on Form 20-F or our other documents we filed with the SEC. You may also find more information or forward-looking statements in our filings with the SEC or our investor presentation and recent press releases, which may be found on our Investor Relations website. Further, we're hereby advising you not to place undue reliance on the preliminary estimated unaudited operational financial results for the year and quarter ended December 31st, 2022 that we are announcing today. Our independent registered accounting firm has now completed its audit of our year-end results. The preliminary estimated unaudited information presented today could be subject to material adjustments and should not be considered a substitute for the annual report in Form 20-F that we will be filing for the year ending December 31st, 2023. In addition, management will make reference to non-GAAP financial measures during the call. A discussion of why we use non-GAAP financial measures, as well as information regarding the reconciliation of our non-GAAP financial measures with our most directly comparable GAAP measures, is available in our earnings press release as well as in the investor update presentation issued earlier today. With that, I would like to turn the call over to Thomas. Please go ahead.

Thomas Ingenlath, CEO

Thank you, Bojana. And thank you to everyone who has joined our results call. I now reflect on the outcome of 2022 and what lies ahead. I am confident we have the right strategy to capture the market opportunity with our established global presence and rapid product rollout. As more than five years as CEO, I know that our focus on design innovation and sustainability resonates with the market and makes customers passionate about our brand. This underpins the role we play in the much-needed shift to sustainable mobility. Now, recent achievements. I want to underline how delighted I am with everything we achieved in '22. It was our biggest year yet despite the fluid and challenging environment. There are many highlights of 2022 to mention. Most importantly, we delivered what we said we would: more than 50,000 vehicles globally, an 80% year-on-year increase. Today, there are around 100,000 Polestar vehicles on the road in 27 markets. There are 158 retail locations and over 1,100 points where our customers can get service. Only one other pure EV player in the market has this kind of global footprint. Thanks to the huge team effort, over 21,000 vehicles were delivered in the first quarter—the record quarter to date—to help us surpass the 50,000 volume target. This was an important milestone, which demonstrated the abilities and strengths of our team, and I would like to thank everyone at Polestar who made this happen. We grew our revenues to $2.5 billion, up over 80%. Together with support from our major shareholders, we strengthened our liquidity to remain laser-focused on business execution. Business execution that first and foremost prioritizes and safeguards our rapidly expanding premium product portfolio despite prolonged macroeconomic and ongoing supply chain constraints. So starting with design and our product development, we launched our first luxury SUV, Polestar 3, in October 2020 in Copenhagen, and we were extremely pleased with the reception it received, including order intake. Polestar 3 is a powerful design electric performance SUV that appeals to the senses with a distinct shape and excellent driving dynamics. It is a car that has been designed from start to finish and built for the electric age. We are currently working with our manufacturing partners to start production in the middle of this year. Once the production in China commences, the team will move to Charleston, South Carolina looking to start U.S. manufacturing of the Polestar 3 in mid-2024. Keep an eye out this spring; we will host some exciting Polestar 3 events in the U.S., meeting customers, investors, and media. In January, we launched a major update of Polestar 2, featuring a new high-tech frontend that reflects the design language premiered by Polestar 3. Polestar 2 also received substantial sustainability and performance increases with a battery upgrade and new, more powerful and more efficient models. For the first time, Polestar 2 is significantly upgraded. In short, we showed our continued love for Polestar 2 by keeping it fresh and exciting alongside launching new vehicles. We're doing both because we believe it's very important to keep our customers connected with our brand and satisfaction high. The focus on customer satisfaction has been a critical factor that has ensured Polestar 2 remains amongst the top 10 best-selling vehicles in many markets, including the U.K., Sweden, Norway, Canada, South Korea, and Australia. And as I promised, I'm happy to confirm Polestar 4 is in the starting blocks. We can't wait to show it to you and we will very, very soon. Moving to innovation, another key pillar for Polestar. We recently reached an agreement with Google for our vehicles to benefit from their latest enhancements such as a new HD map in Polestar 3 and the rollout of remote actions for Polestar 2. We are expanding our partnership with Luminar from Polestar 3 to include their LiDAR technology in Polestar 5. The utilization of LiDAR technology continues to gain momentum as global focus on next-generation safety and autonomy increases. It's worth mentioning that Polestar 3 with LiDAR became available in February for order at polestar.com. Sustainability underpins everything we do. Our ambitious sustainability project, Polestar 0, continues to build momentum. In the last few years, we added 8 new partners, bringing the total to 24 overall, and we are making strong strides toward our goal of creating a truly climate-neutral product by 2030. We initiated the pathway report in response to the climate crisis in collaboration with our partners. We believe collective actions to reduce greenhouse gas emissions in the supply chain and increase renewable energy integration are needed in addition to faster EV adoption. To sum it up, I am extremely excited for 2023. This year, we will fundamentally build on all our achievements from 2022, and despite a still uncertain and fluid operating environment, we plan to deliver 80,000 cars, 60% more than last year. Polestar, in the coming months, will meaningfully transform from a one-model company to having a lineup of three cars in our portfolio. Three vehicles that are free from legacy constraints and backed by a sustainable asset-light model, we will capture more of the market growth opportunities while always staying true to our core pillars of design, innovation, and sustainability. Now, I would like to ask Johan to comment on our financial results and give some guidance on the outlook for '23.

Johan Malmqvist, CFO

Thank you, Thomas. Hello, everyone, and thank you for taking the time to join us today. It's great to see so many of you on the call and on the webcast. Starting with operational highlights first. We delivered 51,491 cars globally in 2022, of which 21,067 were in the fourth quarter—our record quarter to date. Just to stop and reflect on that for a moment, delivering over 21,000 cars in the quarter is a fantastic achievement for a young company. As Thomas mentioned, it is an important milestone which demonstrates both our capability and strength. Our ability to ramp up production, meet the logistical challenges of handing over the keys to over 21,000 customers across the globe in one quarter, and the strength of our brand and products. Most importantly, it demonstrates that we have the capability to execute in a fluid and still challenging environment. We are now active in 27 markets on four continents and have 158 sales locations with over 1,100 service points. We grew these by 40% to 50%, complementing our digital-first direct-to-consumer approach with our expanding physical footprint. We also recognize that it is still a challenging macro environment. As I shared on the last earnings call, we started to take actions already last year. I'm pleased to see that those initiatives have come through in the numbers, especially in our operating expenses. I am proud of what we have accomplished through the tremendous hard work and dedication of our entire organization. Moving to the financial highlights for the full year 2022. Revenue increased 84% from $1.3 billion to $2.5 billion, mainly driven by the increase in Polestar 2 vehicle sales with continued commercial expansion across both existing and new markets. This growth was partially offset by slightly lower revenue per vehicle due to product, market mix, and foreign exchange impacts. To put this into context, we mainly sold the long-range dual motor variant of the Polestar 2 in 2021, while in 2022 we introduced other variants to offer choice to our customers, some at lower price points, which had an impact on average revenue per vehicle. Regarding market mix, our sales in 2022 were proportionately higher outside of Europe, where revenue per car is typically lower, and in terms of foreign exchange, this was due to a strengthened U.S. dollar against predominantly European currencies. Gross profit increased from $1 million to $119 million, leading to an improved gross margin of 4.9%. This was driven by higher Polestar 2 sales and lower fixed manufacturing costs, along with price increases in the latter part of the year. Partially offset by foreign exchange, which led to higher costs of sales and product and market mix. Selling, general, and administrative expenses were 21% higher at $865 million compared to 84% growth in revenues as we began to accrue benefits of scale. Research and development expenses were down 27% to $171 million due to the absence of Polestar 1 amortization, partially offset by higher spending on future vehicles and technologies. The operating loss, excluding the one-time share-based listing charge of $372 million, decreased 8% from $995 million to $914 million. Moving on to Q4 2022, I would like to point out four items. Revenues in the quarter were nearly $1 billion as we delivered 21,000 cars, a great achievement. Gross margin was 6.3%, better than expected as the full effect of the price increases introduced earlier in the year came through in the quarter, but input costs are still lagging and only had a meaningful impact in December. Thirdly, selling, general, and administrative expenses were kept flat compared to the same period last year due to the active cost management that I mentioned earlier. Finally, together, these resulted in a reduced operating loss of $205 million, down 39% when compared to Q4 2021. Moving on to cash flow. Cash used for operating activities for the full year was $1.1 billion, mainly driven by operating loss, working capital increase in inventories and trade receivables as a result of higher production and sales and interest expenses due to increased financial indebtedness. Cash used for investing activities was $0.7 billion, predominantly driven by intellectual property investments for Polestar 2, Polestar 3, and Polestar 4. CapEx in Q4 was lower than expected but largely due to timing. Cash provided by financing activities was $2.1 billion, driven by net listing proceeds of $1.4 billion and a net increase in short-term borrowings of $0.7 billion to support the continued growth of the company. So at the end of 2022, cash and cash equivalents stood at approximately $1 billion. Before I hand over to the operator, let me wrap up with the outlook for 2023. Global volume is expected to be approximately 80,000 cars, an increase of 60% year-on-year, predominantly driven by Polestar 2 sales. We expect gross margin to be broadly in line with 2022, with volume and product mix supporting margin progression later in the year. Finally, we are on track in terms of liquidity, and as we previously communicated, we continue to explore potential equity and debt offerings to raise additional capital to fund operations and business growth. Thank you again for joining. Over to the operator for the live Q&A by analysts and then as Bojana said, we will answer some questions from our shareholders.

Operator, Operator

Now we're going to take our first question. The first question comes from Winnie Dong from Deutsche Bank.

Winnie Dong, Analyst

Okay. Great. On your 2023 delivery targets, you exited 2021 with a pretty strong cadence in the Q4 quarter. Any reason why we might not think your guidance is a conservative number? And should we be expecting a sequential step down in Q1 and improving throughout the year? That's my first question. I have a follow-up.

Thomas Ingenlath, CEO

Yes, Thomas here, Winnie. Well, I think it's a well-known effect in the market that Q1 following Q4 always sees a little dip that then picks up again in spring—a very natural behavior. The overall guidance of 80,000 as a target for 2023 is simply us being very realistic about what we feel is doable in a world that is still recovering from the effects of the pandemic. Yes, of course, we have a much better situation when it comes to supply chain and logistics, and the 80,000 target is an increase of over 60%. So I think that's definitely something we feel is a strong growth from where we ended in 2022 with 50,000. And let’s not forget, the bulk of the 80,000 is from the Polestar 2, which will benefit from a very nice upgrade in tech. The effect of expanding our product portfolio is very meaningful with the addition of the Polestar 3, and the Polestar 4 already in sight. That effect will be much stronger and fully realized in 2024.

Johan Malmqvist, CFO

And maybe just to follow on with a brief statement about the phasing for the year. As Thomas mentioned, just the natural seasonality of the business indicates that volumes tend to be lower at the beginning of the year, and we expect volumes to be weighted towards the second half, primarily due to the recently launched Polestar 2 model year ‘24 and some of the Polestar 3 volumes expected later in the year.

Operator, Operator

Winnie, do you have further questions?

Winnie Dong, Analyst

I'm sorry, I was on mute. That was helpful. Can you expand more on the gross margin trajectory for the year? You alluded to a similar level versus 2022. Could you provide a year-over-year comparison and a breakdown of factors driving these, perhaps discussing the impacts on pricing, regional mix, and product mix as well?

Johan Malmqvist, CFO

Yes, no, absolutely. I can provide more color on the gross margins for this year. As we guided in the release, we expect gross margins to be broadly in line with 2022. However, we do anticipate some pressure on margins during the first half of the year due to the ongoing impact of raw material prices, as well as some increased sales support in select markets. We expect margins to improve later in the year as volumes pick up and we begin to see the impact of model year '24 deliveries, and as I mentioned, the first deliveries of Polestar 3. It's worth mentioning that we have not assumed any reductions in material costs during the year, which would, of course, be margin accretive depending on timing.

Operator, Operator

Now, we're going to take our next question. And the next question comes from the line of Charles Coldicott from Redburn.

Charles Coldicott, Analyst

I've got a couple. I guess where I start is on raw materials. What are your expectations for the impact of raw material cost inflation on earnings in 2023? I'm looking for a figure in the hundreds of millions of dollars, if that's okay. I have a couple of follow-ups.

Thomas Ingenlath, CEO

Yes, that's a tough question to answer in regards to providing guidance there. What I can say is what I stated in the sense that for Q4, whilst we saw the full impact of the price increase introduced earlier in the year, there was still a lag on the increased input costs; we really only saw that have a meaningful impact in December. As I mentioned, we do expect some margin pressure during the first half of the year because of the full impact of raw materials coming through, and then in the second half, margins should begin to improve.

Charles Coldicott, Analyst

Okay, great. So just to make sure I understand, in the fourth quarter, the margin improved because your raw material price inflation didn't increase as you thought it would; however, you're going to start to realize some of these increases in the first half of the year. Then they should get offset in the second half of the year. Is that right?

Thomas Ingenlath, CEO

That's right. That's correct.

Charles Coldicott, Analyst

Okay, great. And then just my second question. If I look at your regional websites, it looks like the order book for the Polestar 2 in the U.S. covers less than one month of sales versus 8% in Europe and roughly 3% in China. What actions are you taking to increase brand awareness in North America and China, given how important this is for the success of the Polestar 3? I'm also wondering if you're willing to share how your 2023 volume guide splits by major region.

Thomas Ingenlath, CEO

Generally, the order book we have entering 2023 is a good one, and we are still busy working that down. Regarding the activities we have for the U.S. markets, we have initiated promotions for the Polestar 2 that make it eligible for tax incentives when leased, which is a program we are heavily promoting now. This will enhance the Polestar 2's position in the market. Brand awareness in the U.S. is something we plan to increase with the Polestar 3 debut. We're rolling out targeted promotions as we move towards the summer. So the Polestar 3's arrival alongside the Polestar 2's promotions will significantly boost our visibility. This is different from 2022 when we had a large promotional push during the Super Bowl. This year, our strategy is more focused. Additionally, we expect production of Polestar 3 in our Charleston plant to significantly impact how much our products and brand are present in the U.S. market. At present, we have 30 spaces operating in the U.S., and we'll increase this number by around 10% throughout the year, including locations in Washington, D.C., and Miami. I believe that overall, there's going to be significant progress for Polestar in the U.S. over the course of this year.

Johan Malmqvist, CFO

And maybe just to address the regional mix and give some color. For the full year ‘22, the U.S. accounted for a little short of a quarter of the sales, while Europe accounted for around two-thirds with the rest distributed across other regions, including Asia Pacific. I would expect a similar mix for 2023, possibly with a slightly higher portion of sales coming from the Asia Pacific region.

Operator, Operator

Now we're going to take our next question. And the next question comes from the line of Dan Levy from Barclays.

Dan Levy, Analyst

I wanted to start by asking about operating expenses—looking for underlying trends in OpEx.

Johan Malmqvist, CFO

Okay. I heard the first part of your question. You're looking for guidance regarding OpEx. What I can say is we continue to apply a restrictive spend in light of the prolonged challenging macro environment. However, we also need to consider our expanded footprint as we are now established in 27 global markets. Additionally, we plan to ramp up marketing spending in preparation for the upcoming two car models, Polestar 3 and ultimately Polestar 4. All in all, I would expect selling, general, and administrative expenses to increase year-on-year, by a similar percentage increase as seen in 2022.

Dan Levy, Analyst

Great. As a second question, I think earlier in the Q&A, you made a comment about market initiatives. Maybe you could clarify what that means, and also discuss the pricing trend related to Polestar 2. One of your competitors made headlines by cutting prices earlier in the year. How does that factor into your thinking?

Johan Malmqvist, CFO

Yes. What I meant there is really related to the fact that we have established ourselves in eight additional markets. So we are focusing on ensuring our brand presence in these newly added markets just as we have done in the others by investing in brand awareness.

Thomas Ingenlath, CEO

Regarding the pricing and positioning, I think it's very clear. China is a very competitive market where different companies have different strategies. While the EV player you mentioned is focusing on competing in the mass market, Polestar's ambition is to firmly establish itself in the premium luxury sports car segment. Yes, of course, we see Polestar 2 competing against Model 3, but with the introduction of Polestar 3, 4, and 5, our strategy is focused on developing desirable vehicles that offer great technology and design at a price point that reflects that. The Polestar 2 upgrade we're introducing is a prime example. We’re providing improvements not just in aesthetics but also in technology and performance to offer substantial value to our customers, which aligns with our premium strategy.

Dan Levy, Analyst

If I could just squeeze one more in, please. I see your press release mentions you are exploring potential equity or debt offerings to raise additional capital. Could you remind us of the minimum cash balance required and what types of options you might have to gain additional liquidity? I know you recently raised the facility with Volvo and Geely. What other financing opportunities might exist beyond straight equity or debt?

Johan Malmqvist, CFO

Sure. Let me address that broadly first. As we previously announced towards the end of last year, we secured $1.6 billion in shareholder financing, which has undoubtedly helped bolster our financial position. At year-end, we had approximately $1 billion in cash on the balance sheet. We continue to explore funding options and have had success raising capital through local working capital facilities and trade financing, among other avenues. We recognize the need to raise additional capital, either from debt—continuing to access capital markets—or equity, or a combination of both, and that is something we are actively pursuing.

Dan Levy, Analyst

And what is the minimum cash balance?

Johan Malmqvist, CFO

We don’t specifically guide on the minimum cash balance needed. What I can say is we had $1 billion at the end of 2022. We don't necessarily need to hold that amount of cash on hand as we stand right now. However, it certainly helps our financial position as we enter 2023. Additionally, based on the liquidity support from our shareholders and the cash on our balance sheet, we continue to believe we will be adequately funded through 2023.

Operator, Operator

The next question comes from Charles Coldicott from Redburn.

Charles Coldicott, Analyst

In the second quarter of 2023, you have roughly $520 million worth of payables due to Volvo Cars. Can you explain how you expect this to be covered? Will this come from the liquidity support from TSB? Also interested in your working capital trend for 2023?

Thomas Ingenlath, CEO

In regards to working capital, we expect it to grow with sales. However, as you correctly point out, we still have scheduled payments, including overdue payables toward Volvo that you referenced. We plan to settle those during the year, and the settlement of those payables, around $0.5 billion, is part of the cash forecasting for the year, as previously stated. We expect to be adequately funded through 2023.

Operator, Operator

Dear speakers, there are no further questions over the audio lines. I would now like to hand the conference over to our management team for any written questions.

Thomas Ingenlath, CEO

Thomas here again. We have selected six of the top voted questions that reached us. I will now try to answer them within the time we have left. Question number one: It’s said that Polestar is not a known brand in the U.S. What efforts are being taken to improve this? To start, I would like to explain the difference we have compared to some of our competitors. Our strategy from day one was to develop our footprint in critical EV regions rather than first establishing a strong presence in our home country, as many competitors do. That’s why we're successful; Polestar 2 is amongst the top 10 best-selling vehicles in many markets, including South Korea, the UK, and Sweden. We will indeed accelerate growth in the U.S. and have allocated $20 million this year towards brand awareness. Our strategy is focused and targets the Polestar 3 market introduction. We're aiming for a more sustained brand presence rather than a superficial launch. Additionally, production of Polestar 3 in the Charleston plant will greatly enhance our product and brand visibility in the U.S. market. As of today, we have 30 spaces operational in the U.S. and plan to expand by 10% this year, including new locations in Washington, D.C. and Miami. Question number two: Can you share any details on Polestar's long-term plans for expanding its product line? We will fundamentally transform from being a one model company to having a lineup of Polestar 2, Polestar 3, and Polestar 4. By 2024, Polestar will have these 3 models fully available, and we are already preparing for the next launch of Polestar 5 in late '24, which will be fully available by '25. Following that, the Polestar 6 Roadster will expand our portfolio by 2026. We will maintain a strong focus on ensuring that our product lineup doesn't become stale as we begin evaluating the second generation of our vehicles. Question number three: Will Polestar utilize Volvo dealerships for displaying, selling, and servicing Polestar vehicles? Yes, we utilize Volvo dealerships for servicing; that's how we have over 1,100 service centers established. The Polestar sales spaces are primarily in consumer-friendly areas, operated by investors we recruited and trained. In the U.S., we specifically choose Volvo dealers to invest in Polestar spaces. This selective strategy has proven effective during the EV market's growth. Question four: Do you think a new factory in the Carolinas will help ramp up production and increase market share in North America, especially since consumers may associate the brand with China? Absolutely. Establishing production in the Carolinas is crucial to ensure that consumers see Polestar as a European brand with a global production footprint. This will be a significant step towards bolstering our market position in North America as we expand our production capabilities globally. Question five: Does the company plan to offer a more entry-level model similar to Tesla Model 3? Polestar 2 is our entry-level model for the brand, and we have no intentions of developing anything below it. Our ambition is not to produce 10 million or even 20 million cars per year; instead, we aim to focus our product portfolio upwards in the market. Question six: Does the federal tax credit serve as an incentive to buy a Polestar? The Polestar 2 is currently eligible for a $7,500 federal tax credit when leased, and our commercial strategy reflects this. The Polestar 3, priced above the tax credit threshold, will be launched in a high-spec luxury model. We are pleased with order intake and don’t see the necessity to reduce prices. Going forward, we may introduce variants that meet the tax credit threshold, but that will be evaluated at a later time.

Bojana Flint, Investor Relations

Thank you, Thomas. Everyone, Bojana here. I would just like to apologize. I believe we had some technical issues during the opening remarks, and there was some interference on the sound. We will post the recording very soon on our website and ensure that those interferences are taken out. I apologize for that, and we will obviously improve going forward. With that, I will just pass to Thomas for his closing remarks, and thank you again for joining us.

Thomas Ingenlath, CEO

Yes, from my side, a big thank you for your interest and for joining us. You have heard that 2022 was a great year, and we really had a massive end of the year party to celebrate those successes. Looking forward, in 2023 we fundamentally upgraded Polestar 2. We will start producing Polestar 3, and indeed, we will launch Polestar 4 this year. The shift from being a one-car company to having a product portfolio of three models that address core EV growth segments will help us achieve our targets. Thanks a lot.

Operator, Operator

Thank you for participating. You may now all disconnect. Have a nice day.