Lucid Group, Inc. (NASDAQ:LCID) Q2 2023 Earnings Call Transcript August 7, 2023
Operator: Hello, and thank you for standing by. Welcome to Lucid Group’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Maynard Um. Sir, you may begin.
Maynard Um: Thank you, and welcome to Lucid Group’s Second Quarter 2023 Earnings Call. Joining me today are Peter Rawlinson, our CEO and CTO; and Sherry House, our CFO. Before handing the call over to Peter, let me remind you that some of the statements on this call include forward-looking statements under federal securities law. These include, without limitation, statements regarding the future financial performance of the company, production and delivery volumes, financial and operating outlook and guidance, macroeconomic and industry trends, company initiatives and other future events. These statements are based on the predictions and expectations as of today, and actual events or results may differ due to a number of risks and uncertainties.
We refer you to the cautionary language and the risk factors in our most recent filings with the SEC and the forward-looking statements on Page 2 of our investor deck available on the Investor Relations section of our website at ir.lucidmotors.com. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the investor deck. With that, I’d like to turn the call over to Lucid’s CEO and CTO, Peter Rawlinson. Peter, please go ahead.
Peter Rawlinson: Thank you, Maynard, and thank you, everyone, for joining us for our second quarter earnings call. We hit several major milestones in Q2, none of which could have been accomplished without the incredible commitment of our employees. Thank you to the Lucid team for your passion and dedication in driving our mission forward. We also have many exciting events and announcements planned in the second half of this year that I’m very eager to share with you. But before I do, let me start with our major Q2 milestones and provide an update on our progress of our initiatives. In June, we announced a landmark agreement with Aston Martin, providing them access to our Sapphire electric vehicle powertrain technology, indeed, Sapphire-enabled Aston Martin EVs. Aston Martin chose Lucid following a competitive process to ensure that they access what they felt was not only the best but also the most advanced and suitable technology available on the planet.
This agreement represents the advent of a core pillar of Lucid Group, namely our technology supply and licensing, and in so doing, reaffirms the commercial value of our patented technologies. We believe this could represent a harbinger of future opportunities not only in applications for the automotive market but also in markets such as commercial transportation and even aviation. Also in the second quarter, we raised $3 billion in capital to fund the forward business, removing financial concern and demonstrating the strength of our partnership with our core partner, the Public Investment Fund. Sherry will go into greater financial detail of both the Aston Martin agreement and the capital raise later in her prepared remarks. In Q2, we produced 2,173 vehicles and delivered 1,404.
In addition, we had a significant number of vehicles that were in transit to Saudi Arabia. These are cars which were produced but not yet delivered, which we have started delivering to customers in Q3, and Sherry will further elaborate upon this as well. Over the last 2 quarters, I spoke about the company’s 2 strategic priorities: growing brand awareness and cost efficiencies. Now whilst we still have work to do, I’m pleased to say that some of the initiatives we’ve actioned are seeing solid progress. We saw another strong increase in the number of test drives sequentially through Q2, and the third-party data shows that our brand awareness in the luxury and premium segment is growing to a much stronger place. And as our fleet size grows, so does the number of Lucid Air sightings.
We believe that there is a marketing and demand benefit when we achieve a critical mass of vehicles on the road, and we’re making headway here. We continue to garner strong accolades and received an authoritative independent summary of how Lucid Air stacks up against the competition with MotorTrend most recently naming Lucid Air the best electric luxury vehicle you can buy in 2023. It’s also important to highlight that Lucid is being asked with increasing frequency by government and nongovernment organization partners to showcase our cars and technology at a growing number of events in the U.S. and Europe. Our name recognition and positive brand associations are growing significantly in the government trade associations and nongovernment organization space.
We’ll also be launching a customer referral program, which we think will get our loyal customers excited about the opportunities for both physical and experiential redemptions. Our customers are some of our most ardent advocates, and we want to reward them for their fervor. And with our brand awareness moving in the right direction, we’re now putting more energy behind it to capitalize upon the interest, including the recent reinstatement of Lucid’s original pricing. And Sherry will talk more about this in her prepared remarks. So looking into the second half of the year, we have many exciting events and announcements coming. We’re on track to execute our deliveries under the purchase agreement with the government of Saudi Arabia and thus far, I’m pleased with consumer and government demand in the region.
In September, we expect to start producing Lucid Air Pure rear-wheel drive. Now the Pure rear-wheel drive will be able to achieve 419 miles on an EPA cycle with just an 88 kilowatt-hour battery pack. And let me do the quick math for you. This equates to an efficiency of approximately 4.74 miles per kilowatt-hour. Indeed, at 4.74 miles per kilowatt-hour, the single-motor Lucid Air Pure tops every other EV on the U.S. market. What this efficiency means for customers is the ability to go further with less battery. And because the battery is smaller, this means in turn that the car weighs less, is more agile and more importantly, can cost less than a vehicle of similar range which needs a larger battery pack, to get greater distance, smaller battery, lower materials costs, lower running costs, lower total cost of ownership, immense interior space and much better for the environment.
And what really excites me is this technology that enables this 4.74 miles per kilowatt-hour for Air will in turn enable more affordable products in the future. In fact, as the price of the vehicle goes down, the cost of the battery becomes even more significant because it is the largest single cost of the vehicle. This is where efficiency becomes most critical. Now I’ve been asked many times, Lucid has an advantage for now, but how long before others go and catch up? And my reply to this is always the same. Far from this gap shrinking, we’re working assiduously to grow that gap because it’s critical to the planet that we achieve higher-efficiency EVs. Achieving a 4.74 miles per kilowatt-hour is testament to that. And we won’t stop pushing the envelope on our technology.
Work has been well underway on our next-generation power technology for our midsized platform. Now also in September, we plan to commence production of Sapphire. Preproduction has, in fact, already begun, and we’ve held a number of viewings for media and early customers already. Sapphire will boast a 0 to 60 time of 1.89 seconds, a 0 to 100 miles an hour time of 3.84 seconds, and a standing-quarter mile time of 8.95 seconds. But whilst I think the power and the performance is impressive, I can only begin to tell you how immensely delightful and responsive Sapphire is just to drive normally, even when you choose to exploit a mere fraction of the performance. This, to me, is one of its most surprising, engaging, even endearing attributes. Sapphire fuses hypercar performance, delightful handling, the tractability and turning response of torque vectoring with everyday usable in an unprecedented combination.
Then in October, we’ll be hosting a special launch event as well as making the first Sapphire customer deliveries. Now outside of the North America, we are continuing to expand our footprint. We plan to open our Dusseldorf studio in late September, and I’m particularly excited about the prospects for this market. We took the Lucid Air Dream performance to the Autobahn, where its best-in-class drag coefficient range and high-speed stability turned many heads on some of the most iconic roads in Europe. Now also in September, we plan to have the opening ceremony for our manufacturing facility in Saudi Arabia. We’re incredibly excited about this official opening of our second Lucid factory and our first manufacturing facility outside of the United States.
And finally, the announcement everyone has hotly been anticipating. We plan to formally unveil the Lucid Gravity to the world in November at a special launch event that will be live streamed for everyone to watch. Turning to software. In the second quarter, we pushed 7 over-the-air software updates with some major enhancements. I can’t emphasize enough the significance of our ability to enhance almost every part of the vehicle with software updates. And we have a more significant vision for our software strategy, one that we think very, very few in the industry can match. And I’m really excited about the long-term potential here. Please stay tuned. So to sum up, despite an uncertain macro environment, I’m very excited about the back half of this year.
We plan to start executing on purchase agreements with the government of Saudi Arabia, produce and deliver Pure rear-wheel drive, produce and deliver Sapphire, officially opening our manufacturing facility in Saudi Arabia and, of course, unveil Gravity at our marquee launch event in November and more to come that we’re not quite ready to announce yet. I really cannot wait for you to experience these amazing cars. And with that, let me turn it over to Sherry for an update on our financials. Sherry?
Sherry House: Thank you, Peter, and thank you to those who are taking the time to join us today. Before sharing our Q2 results, I’d also like to extend my sincere gratitude
this year. We successfully closed the transaction in June. As Peter mentioned, we also announced a landmark technology deal with Aston Martin. Aston Martin will pay Lucid a technology access fee of $232 million, comprising $100 million in ordinary shares of Aston Martin and aggregate cash payments of $132 million phased over a period of 3 years, with the ordinary shares and $33 million of the cash payable to Lucid following deal closing, which is expected later this year. Aston Martin will also commit to an effective minimum spend with Lucid on powertrain components of $225 million in addition to engineering integration fees.
Monetizing Lucid’s award-winning technology is a key part of our forward strategy, and we’re delighted to commence this new arm of our business with a partner as well respected as Aston Martin. Concurrent with our earnings release, we announced the finalization of our milestone agreement with the government of Saudi Arabia with an initial commitment to purchase 50,000 vehicles and an option to purchase up to an additional 50,000 over a 10-year period. It’s a powerful affirmation of our product and a testament to our strategic relationship with the country. On the manufacturing front, our Saudi Arabia semi-knocked-down, also referred to as SKD facility, is nearly complete and is on track for production in September. We expect to scale deliveries from this facility in Q3 [indiscernible] for both consumers as well as various government entities within KSA.
This SKD facility will be capable of up to 5,000 units per year and is part of our larger AMP-2 campus, which at full scale is expected to produce up to 155,000 units per year. Before I turn to our second quarter financial results, let me briefly touch on the reinstated pricing. At the beginning of this year, we spoke about our 2 strategic priorities, brand awareness and cost initiatives. The targeted actions we took to invigorate our marketing programs in the luxury and premium segments is resulting in greater brand awareness. A few moments ago, Peter spoke to the third-party validation of our stronger brand position. We started seeing evidence of this with our order volumes increasing towards the end of July, and we aim to capitalize on this brand awareness momentum by taking actions to improve vehicle affordability for customers.
Hence, we have reinstated pricing levels to those which we contemplated in our original business plan. The early reception has been very strong with a 3x increase in orders in the first full day of the program as compared to the end of July. The return on investment that we’re now seeing gives us more confidence in the next steps of our plan to further improve brand awareness and importantly, conversion. Turning to costs. We have realized cost improvements in a number of areas but we’ve also had some offsets. In 2022, we realized cost reductions in our bill of materials. And in 2023, we’ve experienced significant improvements in our logistics costs through more efficient routing combined with declining rates globally. Our manufacturing labor costs have also come down, and our manufacturing efficiency has gone up as a result of our workforce reduction and productivity initiatives implemented earlier this year.
However, we still see tremendous opportunity across the organization for cost downs that have been identified as part of a 5-part cost control program that we implemented in the first half of this year. We believe that some of the largest opportunities exist in bill of material costs, manufacturing overhead, scrap reduction and professional services spend. While some of these cost reductions can be realized this year, we expect much more will be realized in 2024. To provide some context, many of the bill of material cost reductions take time to implement and validate. Additionally, realization of these savings requires us to work through our existing inventory balance first. We’re still carrying high inventory levels partly due to COVID and partly due to the optimization required in material planning as we bring on new vehicle variants.
As a result, both cost downs as well as other savings in areas such as commodity price reductions won’t be realized until we work through this existing inventory, which we expect will meaningfully occur in 2024. It’s important to note that we also see other forms of income in the next few quarters. We estimate IRA benefits of around a couple of thousand dollars per vehicle, which we do not currently recognize in our results. Additionally, we’ve now signed several emission credit deals and expect to recognize revenue starting in Q3. Although the total amount is not material yet, we are seeing further interest and opportunity here. Now turning to our 2023 second quarter financial results. We produced 2,173 vehicles, up 213% year-over-year and delivered 1,404 vehicles, up approximately 107% year-over-year, so flattish sequential relative to our expectations for units to be up quarter-on-quarter.
In addition, we had a significant number of vehicles that were in transit to Saudi Arabia. We had planned to get these vehicles to Saudi Arabia out for delivery before the Eid and summer holidays, though they were delayed due to supplier issues. Those issues are now largely resolved, and we expect deliveries to customers and the government of Saudi Arabia to ramp this quarter and in Q4. Turning to the P&L. In Q2, we recorded revenue of $150.9 million, which represented a year-over-year increase of 55%. Cost of revenue was $555.8 million for the second quarter. Our gross margin was down on a quarter-over-quarter basis. The reduction in gross margin was driven by impairment charges of approximately $295 million in Q2 related to lower of cost or net realizable value that we also refer to as LC NRV, which was largely due to reinstatement of the original pricing program, obsolescence and losses from firm purchase commitments.
Other sources of the cost of revenue increase this quarter included component scrap and onetime costs related to special campaigns to repair or replace under warranties. Now moving to operating expenses. R&D expense totaled approximately $233.5 million, up 2% sequentially, with the largest factor attributable to higher stock-based compensation expense due to our annual equity refresh taking place within the quarter. SG&A expense was approximately $197.7 million, up 17% sequentially. The sequential increase was attributable to higher payroll-related expenses and higher stock-based compensation expense as well as IT and G&A investments as we build out the global business. We opened 1 new studio in Q2, bringing our total studios and service centers at the end of the quarter to 41.
This excludes our temporary and satellite service centers. The number of studio openings can vary quarter-to-quarter, but we’ll continue to be strategic and judicious with our site expansion and will also leverage cost-effective pop-up studios, which have been highly effective in complementing our studios for brand awareness. On the service side, we ended Q2 with 43 mobile bands in the fleet and 74 nationwide-approved body shops. We expect to increase the number of satellite service centers, which will cost-effectively provide additional locations for Lucid customers. Our staff-based compensation in the quarter was $71.4 million. We also recorded a noncash benefit of $42.1 million related to the change in fair value of our common stock warrant liability.
As a reminder, this noncash impact can be influenced quarter-to-quarter by a number of factors, with one of the larger factors being Lucid’s share price at the end of the quarter. In Q2, we achieved an adjusted EBITDA loss of $710.3 million. Moving to the balance sheet. We ended the quarter with approximately $5.5 billion in cash, cash equivalents and investments with total liquidity of approximately $6.25 billion. We’ve been able to consistently sustain a strong balance sheet over time. And as we’ve done for the last 2 years, we’ll continue to be opportunistic in exploring and diversifying access to financing sources. Turning to inventory. Inventory decreased 16.5% sequentially due to the reduction in raw materials and inventory write-down.
Presuming that supply chain pressures continue to stabilize, we see a pathway to a significant reduction in raw material days of inventory on hand as we work toward greater predictability in the transportation channel and refine our inventory management processes and systems. Capital expenditures were $203.7 million, down 15.7% versus Q1. Moving to the outlook. We’re reiterating our production outlook for more than 10,000 vehicles in 2023. We’ve noted in the past that production is not our bottleneck but we’re being prudent in managing vehicle inventory. For those of you updating your models, I want to point out that the SKD vehicles that are partially assembled in Arizona and completed in KSA will not be counted as a production unit until they are finished in KSA, so an increasing amount of our production volume will be coming from KSA as we finish out the year.
Although we typically don’t provide delivery or gross margin guidance, we want to provide some direction to help you with your modeling. We expect deliveries to be up the back half of the year, and we expect Q4 to be our largest quarter of the year as we ramp sales to customers in the government of Saudi Arabia, ramp Pure all-wheel drive and introduce our most affordable variant, Pure rear-wheel drive in September. There are many controllable and uncontrollable variables that can affect gross margin but let me provide a little color on our expectations based on what we know today. We expect gross margin to improve through the back half of the year. We expect the improvement to be driven by higher volume as well as lower LC NRV and an expectation for fewer one-off expenses that occurred in Q2 of this year.
With regard to our liquidity position, we ended the quarter with total liquidity of approximately $6.25 billion. We expect this will give us runway through the start of production of Gravity and into 2025. Moving to CapEx. We expect capital expenditures for 2023 to be between $1.1 billion and $1.3 billion, reflecting some efficiencies which were identified over the last quarter and deferrals in our capital outlay. CapEx will support our continued growth objective as we strategically invest in manufacturing capacity and capabilities, some moderate investment in retail studios and service center capabilities across the globe and other areas supporting growth of Lucid’s business. I’d like to close by saying that we recognize the uncertainties in the macro environment and we’re being thoughtful about how we navigate through this.
But we’re pleased so far with the progress we’re seeing across some of our targeted initiatives and the momentum in our brand awareness and orders. We’re also excited by what’s coming in the remainder of the year. We’re getting the Air into more customers’ hands this quarter in Saudi Arabia. We will deliver Pure rear-wheel drive, our most affordable Air trim in September. We’ll start deliveries of the Air Sapphire in October, and in November, we’ll have our big Gravity unveil, a lot to be excited about in the 2 quarters ahead. With that, let me turn it back to Maynard to get your questions. Maynard?
Maynard Um: Thanks, Sherry. We’ll now start the Q&A portion of the call. Today’s Q&A will feature questions from some of our retail investors, which is an important constituency of our shareholder base through the Say Technologies platform, followed by live analyst questions. Before we take questions from those on the phone, let’s move to the Say questions here.
A – Maynard Um: The first question. What is the current status of your midsized EV development? Are you still planning on building it or alternatively providing licensing your platform to another OEM, similar to Aston Martin recent deal? Are you still aiming for a mid-decade release?
Peter Rawlinson: Well, I’m delighted that the midsized EV development is on schedule for mid- to late decade. It’s going to represent a further development in our technology and really take the efficiency story to the next level. That’s really important. Expect all the attributes of efficiency, the space concept that you see in our current vehicles, the charging speed that you experienced in the Air to be there. For that, we’re developing our next-generation powertrain and we’re already started working on that. That needs to be ready to sync with the start of production of the platform. We’re looking at all opportunities. The car’s going to be a global vehicle. We’re going to make it much more accessible in terms of its price point.
And this was all with the strategy, the vision of Lucid to start with high-end product we’re seeing with Air and Gravity to develop the world’s most advanced technology and then to use that to deploy it to make electric cars more attainable. And a center point of that whole thesis is how far can we go with how little battery, how efficient can we make the car. That’s what [indiscernible] is all about. That’s what our technology is all about. And we’re going to really — that’s going to manifest itself fully in the midsized platform.
Maynard Um: Great. We’ll move to the next question. Could you provide an update regarding the development of your energy storage system? What is the current status of your ESS pilot program testing? And when should we expect it to go into production phase?
Sherry House: Thanks, Maynard. Yes, in addition to the vehicle development and tech licensing businesses, we have envisioned that energy storage systems could be another monetization option for us. This could be ESS as the vehicle itself or residential storage systems as an example. While we have completed some early pilot work, it’s not a strategic focus for us right now. In light of macroeconomic uncertainty and higher interest rates, we think it’s important at this time to stay focused on our two highest priorities, which our vehicle sales business and our tech licensing business.
Maynard Um: Thanks, Sherry. The next one we addressed in terms of the delivery numbers in the back half, so I’ll move to the question after. Is the partnership with Apple still in the works?
Peter Rawlinson: Well, it’s a company policy. I can’t speak of potential partnerships with any company, clearly. I would say that we were delighted to have rolled out Apple CarPlay, and I think that really addressed a lot of — we listen to the voice of the customer, and I think that was a big win for so many people. I think we have developed now a really fantastic user experience with our software. But it’s important to give the customers choices they want and to let them choose. So we’re open to all partnerships that make sense, including that.
Maynard Um: Thanks, Peter. The next question we already addressed in terms of our increasing brand awareness, so let me move to the next question. How often will we see ventures where Lucid is licensing or allowing companies like Aston Martin to use Lucid technology in the next 5 to 10 years?
Peter Rawlinson: Well, first of all, I’m really thrilled to be partnering with Aston Martin. Such a storied company with such great history and just an ideal partner for us. Lucid started with relatively high-end, high-performance technology that we’re seeing in Lucid Air and we’ll see very soon in Sapphire. So it’s appropriate and timely that we have a partner whose core DNA is high technology and high-performance attributes. So there’s a perfect synergy here. As we progress as a company and come progressively down-market into a more accessible place and more affordable, our technology, our powertrain technology will become more affordable. And then that would, in turn, more mainstream partners in the future. But I believe there’s a time scale to this.
I believe the market will come to us. I mean, it’s little known, the vast majority of car companies today are just buying their powertrain from other companies. We are maybe 1 of maybe 2 or 3 that are vertically integrated. We believe that we’re about at least 3 years ahead of the nearest competitor. And that nearest competitor is probably many, many years ahead of their closest competitor in terms of core EV technology. Now I think a lot of the traditional car companies are starting to look at this, but frankly, they’re way behind. And I think that as we increase the gap, the very fact we’re getting to these extraordinary levels of efficiency, the 4.74 miles per kilowatt-hour, this is an indicator that the gap is growing, not narrowing. I think that a number of these traditional car companies are going to be left behind.
And then I think that will be a real opportune moment for us as they seek to get on to the electric vehicle bandwagon, which we’ll be a juggernaut by then.
Maynard Um: Thanks, Peter. Now we’d like to take questions from the phone lines. Towanda, can we queue up the first question, please?
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Operator: [Operator Instructions]. Our first question comes from the line of John Murphy with Bank of America.
John Murphy: Just a first question, Peter. I mean, the Aston Martin contract sounds great, and it seems like it might be the tip of the spear of things to come on selling the powertrain technology or licensing it. I’m just curious if you can confirm that there are other talks going on or that is part of the game plan. I know you can’t talk about specific companies. And then maybe sort of secondarily with that, explain the economics beyond the initial sort of payments here on shares and cash. That $225 million of powertrain development payment or revenue, I’m not sure exactly how you want to characterize that, Sherry. What kind of economics does that bring within? And is there something beyond this initial $450 million payment?
Peter Rawlinson: Peter here. So yes, I mean, we’re thrilled to have Aston Martin as a partner. It’s a supply and technology partnership. Well, the elements, the core elements that we’re going to supply are Wunderbox battery modules and battery technology, part of our battery monitoring system and the twin rear-drive unit that is destined for Sapphire. So this is top line technology which we’re enabling Aston Martin really to get completely ahead of the pack with in terms of their move to electrification, and it’s a wonderful result for both parties. We’re also going to help with the technological implementation and integration such as traction control, stability control and braking systems. The way that our power unit is integrated into their chassis, into their tires, the weight of the vehicle, the weight distribution of their vehicle.
And so that sort of leads to the 2 elements of revenue here as a piece which is accessing the technology, and I’d let Sherry elaborate on that. It’s an accessing fee, and then there’s a supply fee, which is based upon clearly the number of vehicles that will be sold. We’ve stated for some time, we’ve been in dialogue with a number of parties. We’re not proactively reaching out to anybody. And my priority is to have — really satisfying our first customer, Aston Martin. That is my #1 priority now is to ensure that they get excellent service and get the full might of our technological prowess behind them. But I’m open to dialogue with any other interested party that may come along. But clearly, right now, the technology we’ve got today suits higher-end products.
In a few years’ time will be in a situation where we could countenance a partnership for a more mainstream product when we get midsized platform technology ready.
Sherry House: Great. I’ll take the economics part of that question, John. So as we said, Lucid is going to get a technology access fee of $232 million. That’s comprised of $100 million in ordinary shares and aggregate cash payments of $132 million. That’s going to be phased over 3 years. Now a portion of the cash, $33 million, some engineering fees and the $100 million ordinary shares, that is available after deal closing, which we expect later this year. That will initially be recorded as deferred revenue, which will begin to release into the income statement as prototypes and/or production parts are shipped to AML. The second part, the minimum spend on powertrain components of $225 million, that will be for prototype parts as well as production parts and then there will also be engineering integration fees. That will occur over time. So as the parts are shipped, the revenue will be due to us.
John Murphy: And just a follow-up on that. I mean, a very simple question. I mean, do you think those margins will be sort of very strong supplier margins that would be in the mid-teens with return on invested capital in the high 20s or is that still TBD?
