Polestar Automotive Holding UK Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to the Volstar Q3 2023 Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You would then hear an automated message advising your hand is raised. I would now like to hand the conference over to Brianna.

Operator

You may begin.

Speaker 1

Thank you, operator. Hello, everyone. Brianna Flynn here from Polestar Investor Relations. Thank you for joining our Q3 2023 results call. Thomas Singenloth, our CEO and Johan Malphist, our CFO, will start with our opening remarks, followed by analyst and retail investor questions.

Speaker 1

But before then, I will cover some housekeeping points. I would like to remind participants 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 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, near term 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 Pfizer undertakes no obligation to update any of its forward looking statements.

Speaker 1

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 With that, I would like to turn the call over to Thomas. Please go ahead.

Speaker 2

Thank you, Pollyanna, And thank you to 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 Web Starting with the results.

Speaker 2

The 3rd 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 poster 2 model year 2024 deliveries. In total, during the 1st 9 months of the year, we delivered 41,817 cars, Growth of 37% compared to the same period last year. And Johan will take you financial results in more detail in a moment. Turning to the operational highlights of the last quarter.

Speaker 2

Starting with poster 2 and the 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. OddTrader ranks at 4.5 out of 5 stars. It's the highest possible rating in the safety, power and features category.

Speaker 2

Similar high scores and headlines continue to be published across pretty much all of our key markets. This is Karl. And up until now, we have built our brand, commercial operations and supply chainsaw. This one car. When you consider this, you can see the significant opportunity that we now have with 2 new models, luxury performance SUVs coming to the market.

Speaker 2

Let's start with poster 3. Preparations for start of production, first in China early next year and then in the U. S. In the summer of 2024 are progressing well. Borsell 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.

Speaker 2

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 1 of our positive 3 test vehicles last month and even for me, it was an eye opener to experience how much of a shift the car represents to us, The ride and handling and of course, the luxurious spaciousness. Turning to Posta 4, Our SUV coupe. Last time we met, I talked about the positive reception this car had at the Chengdu Auto Show. Now 2 weeks ago, we held the 1st media test drives on Ningbo Race Track, where journalists got to push the car to the limits.

Speaker 2

The resulting reviews are very positive, especially with regards to its performance, handling and passenger comfort. Start of production of Posthar IV in Hanzhou 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-twenty 24. Posta is a leading partner of Google, And Posta 2 was the 1st car on the market to feature Google's Android Automotive OS when it launched in 2019. Since then, we've 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.

Speaker 2

Now as I alluded to earlier, we will deep dive into a number of exciting innovations tomorrow at PulseDay. Our full lineup of cars will also be on show in the U. S. For the first time, and we are giving visitors a chance to experience the first dynamic experiences Posters 34 on the roads here in Los Angeles is our test engineers conducting ride alongs. I have talked before about the value of this unique position and platform that we have created.

Speaker 2

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 and reducing our funding needs at the same time. Achieving cash flow breakeven already in 2025 will show the strength of our asset light biggest model. Margin over volume is our way forward, supported by a gorgeous lineup of 4 exclusive performance cars.

Speaker 2

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 US1 $300,000,000 Following additional support announced today from our 2 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 Posta 3, 45, We are taking several actions to improve margins and reduce OpEx.

Speaker 2

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 margins, introducing more flexible packs. As our model lineup grows into more luxurious segments, 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.

Speaker 2

Starting in Europe, we have a number of markets that are both performing well and show continued scope For further profitable growth, we are going to shift investments into these from markets, which 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'll also move to an important moment. As you know, since the start of the summer, Our operations in China are part of a JV with Meiju, providing a stronger foundation for us to succeed. Improving the profitability of our U.

Speaker 2

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 and especially once production in South Carolina starts.

Speaker 2

With that said, we are taking further steps to adjust and target our brand build 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 and D and purchasing, we have ambitious but realistic cost reduction opportunities identified to reduce the bill of material. We are also reducing our operation 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.

Speaker 2

Our ambition is, of course, 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 on than many others. We have strong and a unique brand 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 strength and business plan and of course, the funding update. Thank you for listening in, And I look forward to taking your questions after Ilan's remarks.

Speaker 3

Thank you, Thomas. Hello, everyone, and thank you for joining us today. As Thomas said, we are in Los Angeles getting ready for the poster day tomorrow, where we are going to be joined by hundreds of customers, media, investors and analysts. Before moving into the quarterly highlights, 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.

Speaker 3

We saw improvement in the core business margins during Q3 on the back of a positive mix. And as we continue to roll out Polestar 2 Model Year 24 Alongside reduction 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-twenty 24. Polestar 3, startup production is also on track with first customer deliveries expected in Q2 2024.

Speaker 3

Thirdly, we said that the cost savings 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. We're 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 strength and business plan, and I will pick up on those briefly after I cover our quarterly results and 2023 outlook.

Speaker 3

Starting with some operational highlights first. With established presence in 27 markets, We are now focused on improving the profitability in each of these. We will drive sales and service through our Polestar spaces and service points As our mono lineup grows to 3 cars in the next 6 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 Taizhou, We continue efforts to reduce both costs and overall CO2 impact of our Polestar 2.

Speaker 3

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-twenty 25. 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 Q3 of 2023. We delivered 13,976 cars this quarter Versus 9,239 last year, a growth of 51%.

Speaker 3

Revenue increased 41% to $613,000,000 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 regards to channel mix, this quarter has reverted to a more normal level of around 60% fleet sales, 40% retail and that 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's a strong collaboration in helping to develop what is currently a challenging EV market.

Speaker 3

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 €4,000,000 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 Payment charge of $28,000,000 Demand in certain markets, in particular in the U. S.

Speaker 3

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.

Speaker 3

Recognizing the impact on the profitability of our business, we have taken mitigating actions to temporarily cut production volumes in order to improve the inventory balances. With regards to selling, general and administrative expenses, they were up $58,000,000 to 2.36 Reflecting primarily higher advertising, selling and promotional activities ahead of the Polestar 3 and Polestar 4 deliveries. Research and development expenses were up $30,000,000 reflecting continued investment in future vehicles and technologies. Operating loss was $261,000,000 compared to $196,000,000 last year. Moving on to cash flow for the 1st 9 months of 2023.

Speaker 3

Cash used for operating activities was SEK 1,300,000,000 mainly driven by operating loss, higher levels of inventory and trade payable payments. 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 $189,000,000 Primarily as a result of Polestar 2, Polestar 3 and Polestar 4 intellectual property investments, Partially offset by the divestment of the Shangdu plant, where the Posthar 1 was previously produced. Cash provided by finance activities Was $1,500,000,000 reflecting short term borrowings of $3,400,000,000 of which $800,000,000 was drawn down from the Volvo Cars Shareholder loan facility and principal repayments of $1,900,000,000 At the end of the Q3 of 2023, Cash and cash equivalents stood at $951,000,000 Before shifting topic to our strength and business plan and funding update, Let me address the 2023 outlook.

Speaker 3

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 a 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 of around 2%. Turning to our strategic direction, which remains unchanged and in line with our premium brand positioning. Our strengthened business plan targets an accelerated margin improvement and a reduction of our total funding need to the point of anticipated cash flow breakeven in By 2025, we are targeting our 4 car models to generate total deliveries of around 155,000 to 165 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.

Speaker 3

We expect more than half of this progression to come from our model range rollout with more luxurious and exclusive cars, cars that will naturally carry A gross profit margin of over 20%. We have reviewed the structure of our product offering recognizing a high degree of options could lead to 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, we will be directing sales and investments towards 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.

Speaker 3

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.

Speaker 3

S. This will in part be addressed by the production of Polestar 3 in Charleston and even further from mid-twenty 25 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 2 main contract manufacturing partners to drive down costs, while maintaining the high quality product We believe these 4 main initiatives alongside much improved product mix Will enable us to achieve a gross margin in the high teens.

Speaker 3

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 from 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.

Speaker 3

We announced headcount reductions earlier this year. And like I mentioned at the beginning, those negotiations were completed successfully and Post are now employees Around 300 fewer employees globally. Furthermore, we will look to resize and better optimize advertising sales and promotion spend and ensure our sales footprint, digital and R and 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 CapEx spend, 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.

Speaker 3

For example, with the manufacturing footprint that is closer to the end market as well as the new setup in China with the joint venture, we will be able to In combination, we expect cost management actions and those on gross margin will see Polstar 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 3 car baseline to also include POTAR V and POTAR VI 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 I, we have reduced our total funding need.

Speaker 3

Showing their continued commitment for Polestar, we are pleased to announce that our 2 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 200,000,000 In addition, Geely Sweden Holding AB, an affiliate of Geely Holding, is providing $250,000,000 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 upon the expected Cumulative negative free cash flow from the end of Q3 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, Polstar requires external funding of approximately $1,300,000,000 We continue to work on a plan, which will provide the remainder of the funding required until we achieve the targeted cash flow breakeven in 2025. We expect to finalize this In short period of time, Polestar has achieved so much already And the hard work of our colleagues and the support of our main shareholders mean we are now at the beginning of an exciting phase as we move from 1 to 4 models.

Speaker 3

And with a more efficient organization, we can see a clear path towards profitability within 2 years. Thank you again for joining and over to the operator

Operator

Our first question comes from the line of Andrea Sheppard with Cantor Fitzgerald. Your line is open.

Speaker 4

Hi, good afternoon, everyone, and thanks for taking our question and congratulations on the quarter. I guess our first question is, you provided your outlook for delivery targets for 2025 of approximately 100 And 60,000 you now have about 60,000 expected deliveries for this year. I'm curious if you can maybe give us some

Speaker 3

Hi, this is Johan. I think the way you should think about it well, 2 things. One is that the way you should think about it is that looking at the start of production and the rollout of the cars, As we mentioned in the initial comments, really the Polestar 4 and the Polestar 3, Those deliveries will occur in more meaningful way really starting from Q2. So you have the second half of the year with the 3 car lineup. So there's definitely going to be a certain phasing next year that reflects on the start of production and the deliveries.

Speaker 3

We'll come back to this one we in regards to guiding more specifically on 2024 as part of our Q4 earnings. But I think that's the But I would take into consideration now.

Speaker 4

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 $450,000,000 from Geely and Volvo, you mentioned that you'll require another 1.3 to get to that breakeven cash flow in 2025. Any sense of when that timing for that 1,300,000,000 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?

Speaker 3

Yes, I can help provide some color there just to kind of to give that make that picture a little bit clearer. So Where the 1.3% stems from is that it's based upon the expected accumulated negative free cash flow As from the end of Q3 through cash flow breakeven in 2025. And that accumulated cash flow, we expect to be around SEK 1,900,000,000. And then we deduct the Existing both existing and financing support from our owners around SEK 600,000,000 to get to the SEK 1,300,000,000 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

Speaker 5

remarks from Thomas and I.

Speaker 4

I see. Very helpful. Thank you again. Congrats on the quarter. I'll pass it on.

Speaker 3

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Alexander Potter with Piper Sandler. Your line is open.

Speaker 6

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

Speaker 2

Yes. Thomas here. I will take this question on the China JV, which is indeed progressing well. Obviously, Very much the launch of the Posta 4 now going into production and coming to customers In December 1st time, it's very much under the light of it being the first Execution of the JV really. 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 system in this car.

Speaker 2

So the fruits of this JV already within this short time come alive. But of course, really in 2024 when I say that now here publicly when there is as well a poster phone 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 in for China and Having the benefit of a software Affine partner there that knows that business very well. We have the rollout of our process spaces In China as well, happening parallel to that, having, of course, already a target by the end of this year, Which is the base for us really accelerating now in China. And We see that definitely, positive 4 with the media feedback, with the preordering converting into real orders It's showing that traction, a, of a product that is definitely in China resonating well with its size and its Spaciousness, but as well, of course, the special combination of us having now software in the car, which is Designed by and for Chinese customers.

Speaker 6

Okay, great. That's super helpful. And then maybe just a related question And on to that then, is it possible for you to take those learnings in 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?

Speaker 2

Well, within the China market, obviously, the range of Polestar cars And the Posta 3, of course, will be an important product there as well. We'll get the benefit of this Software being much more catered for the China 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 learnings 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.

Speaker 2

Having said that, certain behaviors of What we see entertaining features, I definitely see benefits from us learning.

Speaker 6

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 Maybe geopolitical saber rattling lately, particularly in Europe about Trying to throw out 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.

Speaker 6

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 the imported Chinese cars. Thanks.

Speaker 2

Yes, two answers anyway on that. On one hand, I mean, Something is very clear. We are buying our cars from our contract manufacturing partners. That's A very straightforward purchase on arm's length base. So I think that purchase is very well how Fair.

Speaker 2

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 2 years ago. We had to make an effort to diversify our manufacturing Footprint, we have started with also 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.

Speaker 2

S, but we will as well export from the U. S. To Europe. So that Certainly, it's a way of us derisking our business. The other way is, that our second Important SUV that we will introduce now the poster for.

Speaker 2

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

Speaker 6

Very good. Thanks very much.

Operator

Our next question comes from the line of Dan Levy with Barclays. Your line is open.

Speaker 7

Hi. Good afternoon to you. Thank you for taking the questions. 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 extracting those costs?

Speaker 7

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 saves?

Speaker 3

Yes. Thanks, Dan. I think First point to make clear is that the bulk or the absolute majority of margin accretion comes from The product mix and improved margin profile of these vehicles. The what we laid out in the remarks in regards to Continue to work on and drive down the production costs in close collaboration with our I mean, on the one hand, that's something that we would and anyone would typically expect to continue regardless. We are just making sure that we're putting extra emphasis on it.

Speaker 3

With that being said, of course, Here, we derive the 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 why we would expect it to add accretively to the already healthy margin profiles of these products.

Speaker 7

Got it. Understood. Thank you. The second question is just around demand broadly and 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.

Speaker 7

If you have a sense on 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 Macro environment, across the regions, to the extent that you need to pivot on any components Of the plan, what is your ability to pivot within the plan that you've laid out this afternoon?

Speaker 2

Well, Thomas here, and I will I would really like to make sure that, that exercise of working on the business plan, Strengthening it and making resilient was, of course, very much as well to make sure that those important goals, 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 to when we started the journey in 2017. Even in 2020, it was still a complete 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 there a very achievable and realistic baseline. So that was very important element of us doing this work over summer.

Speaker 7

Understood. And then, Pollstar 4, any visibility on near term volumes Backlog?

Speaker 3

Well, I think like Thomas said, I mean, based upon The initial reactions from the different events has 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. But And it's one of those products that we expect higher volumes to come from, and I think it's very well positioned to do so.

Speaker 2

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 the kind order to make that big move from preorders to Fixed orders. So that is the phase that we are in. And obviously, we are very optimistic about That we will be successful in making that shift of the preorders and attract many more customers. I mean, One thing is clear that Posta IV being a car which indeed now unleashes that opportunity For us in China, we'll of course be a very important element of making the volume of the poster for very significant for our brand.

Speaker 2

And just from a personal experience, I mean, so much of our Existing customers from Ploestar 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 brands starting from scratch. All that, I say no, investment in building up the brand, building that customer base with 1,000 of 10,000 of Posta 2 customers. Of course, that is a Very new and additional channel of us really bringing that potential of people upgrading and going from a poster 2 to poster 4 spending that

Speaker 7

Great. Thank you.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Tobias Beth

Speaker 5

I have a couple actually and Unfortunately, they're all for Johan. I guess maybe let's take them 1 by 1. My first question is as follows. Can you explain how cumulative cash flow to breakeven is only $1,900,000,000 When free cash burn this quarter was $700,000,000 with very low CapEx and seemingly still lots of intangibles and capital equipment Relating to the Polestar 3, 45 still yet to be acquired.

Speaker 3

Yes. Hi, Tobias. Thank you for the question. So as you Correctly point out here, of course, what it implies is that we expect the quarterly cash burn in 2024 to slow down significantly. And that, of course, is on the back of, in part then the volumes from Polestar 34 And the margin profile for those cores, like I said in my opening remarks, being in excess over 20%.

Speaker 3

So The earnings generated by those cars is the primary driver to your question or answer to your question. That in addition then to executing on these actions that we've laid out to further then take out costs, Yes, we will improve the margin profile of Poststar. And then There's in regards 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 Tapered 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.

Speaker 5

Okay. So is it possible that perhaps some of the CapEx that you've anticipated pre 2025 now comes after

Speaker 3

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. And so 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. Okay.

Speaker 5

Understood. You estimate that additional funding requirements In addition to what was announced today, to get to the point of being free cash flow positive is $1,300,000,000 Does this exclude proceeds from short term working capital loans? And if so, What has been assumed for net new loan proceeds between now 2025?

Speaker 3

Yes. Okay. So the assumption around that is that the existing debt will Remain. So to the extent that it's made up of short term working capital lines, that those will be rolled over. And I think we've been able to demonstrate our ability to do so.

Speaker 3

The current borrowings from our shareholders have laid out, it's extended out to 2027. And so the 1.3 Funding need is then based upon the cumulative cash flow, less the new support from the owners and The remaining what remains unutilized from the prior SEK 1,600,000,000, so collected then SEK 600,000,000 To get to the 1.3 funding.

Speaker 5

Okay, understood. If

Operator

I look at

Speaker 5

your balance sheet, Advanced payments from customers roughly half quarter on quarter. And I know we've discussed on prior earnings calls about The correlation between this line item and the order book, I was wondering if it's therefore right to conclude that Polestar's backlog is halved.

Speaker 3

Yes. Thanks for raising that point, Tobias. I appreciate it. The answer is no. And the reason For the lower amount in Q3, it's actually it's related to certain arrangements with fleet customers that were initiated in Q2, Which in Q3 has led to a reclass to deferred revenue.

Speaker 3

So it has to do with timing of invoicing and when Polestar is obligated to deliver these So in your effort to be able to try to correlate that line out into the order book, I would say that it's relatively flat quarter on quarter.

Speaker 5

Okay, understood. And then my last question is really about expectations for Polestar 3 and Polestar 4. If I have a look at where Polestar 2 volumes are today, they're 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. Matt, I was wondering what volumes have you assumed for Polestar 3 and 4 this I'm out to 2025. And what gives you success what gives you confidence in that success?

Speaker 3

So maybe I can start with I mean, we've not We have not broken down the volume guidance of 25 by our model. I think What we expect is, and as I alluded to, if anything that we see that the post Star IV Becoming more of a quality product. We think it's very well positioned To be that, then it caters well for both the Asian market and the U. S. Market and Europe for that matter.

Speaker 2

Okay. Thomas here, sorry. I would love to add as well. I mean, obviously, I would call now the process 34, of course, much more worldwide catering cars. Size wise, they are Addressing a need in the U.

Speaker 2

S. And in China, much more than the Polestar 2 can do as a fairly compact European sized car and Posta 3 and for both will have the benefit of The manufacturing footprint, which obviously makes it much more profitable to sell them in China and U. S. And in Europe Equally. So for that reason, I think it's fair to say that for poster 34, we are Very well positioned to reach the volume ambition.

Speaker 2

And we've very clearly as well made Yes, in the last earning calls that we will not drive volume On the expense of margin and for that reason to concentrate with the Polestar 2 on those markets where this car Can achieve the margins that we expect is as well 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, long years ago for PROSTA 2?

Speaker 5

All right. Understood. That's helpful, Thomas and Johan. I appreciate it. Thanks for your time.

Speaker 3

Thank you, Tobias.

Operator

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

Speaker 1

Thank you so much. We will now take we've got a few minutes left until the end of the call. We'll take 3 top questions from our retail shareholders. So I will read them out and then Thomas and or Johan can answer them. So the first stop question, as an investor, What can we look forward to the stock achieving and your further rollout of your Grace vehicles to a larger demand?

Speaker 1

And how are you going to create that demand? I read it as a volume confidence in our product lineup and our volume ambition. So Thomas?

Speaker 2

Well, as mentioned before of me, obviously, the moment of us introducing our poster 4 and poster 3 It's a game changer in that respect. We have, on one hand, first time SUVs And then 2 of them very nicely positioned from each other going into the market. We all know that the SUV segment As a much larger target group, the addressable market almost across the world for SUVs is the biggest and that of course counts as well for SUVs. So that should be the main answer for that. Having said that, China JV again opens up the China market for us Much, much more optimistic situation there than ever before.

Speaker 2

And of course, we brought the Posta 3 and the Posta 4 very early now into our Posta 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 this new car is coming.

Speaker 1

Perfect. Thank you. Moving on to question number 2. What is your plan to stop the short term bleeding?

Speaker 2

Yes. Just to reiterate the Effort that has been done over 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.

Speaker 2

So I think we really did a lot of our homework now to in order to Make that future and the success of Polsar very tangible.

Speaker 3

And I think we've made 3 very significant steps In regards to the funding solution here, as Tom has said, we've lined out clearly the actions to get to this lower funding need. We have the support from the owners, And we are well progressed in regards to the holistic funding plan to close out the remaining gap.

Speaker 1

Great. And let's take the 3rd and final question. When can we expect to see production from the South Carolina facility? And what impact will it have on the company?

Speaker 2

Yes. Okay. Samar 24, very simple answer on that one. And the effects 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.

Speaker 2

S. For the U. S. And it of course is as well a big emotional thing. Obviously, again, a car produced in the U.

Speaker 2

S. For the U. S, of course, is a very different starting point for us to be Yes, out with the successful product.

Speaker 1

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

Speaker 2

Closing remarks. Thanks, Verona. Okay. Yes, let me take this now. POLSA has made this significant achievement since launch.

Speaker 2

We established a new brand. We have Gained footholds in the markets. And of course, we have now developed This is very, very strong product lineup that we are about to roll out. This has prepared our companies operationally for scale up of volumes. And Polestar is now at a pivotal point.

Speaker 2

We have adapted Postor will become successful and Postor will create significant shareholder value.

Speaker 1

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

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Polestar Automotive Holding UK Q3 2023
00:00 / 00:00