Lucid Group, Inc.

Hello, and thank you for standing by. Welcome to Lucid's fourth quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to your speaker, Maynard Um. Sir, you may begin.

Thank you, and welcome to Lucid Group's fourth quarter 2022 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 laws. 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 two 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.

Thank you, Maynard, and thank you, everyone, for joining us for our fourth quarter earnings call. I'd like to start by extending a heartfelt thank you to the entire Lucid team. I'm proud of their perseverance, resourcefulness, and teamwork. This allowed us to drive meaningful improvements in the back half of 2022 and close out the year with production above our previously stated annual guidance. We went from making 279 vehicles in 2021 to 7,180 in our first full year of production. And we went from delivering 125 vehicles to customers in 2021 to 4,369 deliveries in 2022. Now, I'd also like to thank our suppliers and partners who work diligently with us to navigate through an exigent year. And of course, I would particularly like to call out the PIF, who have not only been a committed investor, but really an incredible strategic partner. We are most grateful for their partnership. And of course, I'd like to thank our customers. One of the things I enjoy most is getting to meet you and see your delight when you take delivery of your Lucid Air. You are a big part of what drives us to deliver the quality and experience you so deserve. But let's not forget that 2022 was also a seminal year for the company. a year when we finally realized our vision of producing an EV embodying our view of the most advanced technology possible and getting that into customers' hands in significant numbers. That was not without its challenges, but as ever, the team worked tirelessly to resolve, as I will cover later. Now, during that period, I also observed a growing realization and acknowledgment of our view that our core EV technology is not just the best, but the best by a tangible margin. We see this acceptance widely by many in the know, by those who follow the EV and technology space. In fact, even some of our detractors are coming to this inevitable conclusion that the lucid air is a truly incredible product. Now, this awareness has happened. though in the large part, not just through an overwhelming endorsement from journalists and outlets in the automotive sector, but moreover, through customers experiencing the range, comfort, and sheer driving pleasure of our cars. Now, some of you may have heard my synopsis, but there are really three steps that will lead to our success as a company. And those steps are manufacturing, sales, and profitability. In short, in respect of our cars, can we make them? Can we sell them? And can we make money on them? So in 2022, our primary focus was the first of these steps to prove it was indeed possible for us to manufacture cars. We put the right leaders in place, brought logistics in-house, and I personally worked tirelessly on the factory floor, leading the team to identify and remove the manufacturing bottlenecks that we faced. In the fact that I'm taking today's earnings call, from our headquarters here in Newark, California, is symbolic of the transition of the day-to-day factory operations to Stephen David and our Arizona team. Let me be clear. Production is no longer a bottleneck. We were also able to deliver a lucid air touring and a small number of lucid air pure in the fourth quarter and delivered our first airs into Europe and Saudi Arabia as promised. So we now have variants of air covering a spectrum of performance and range on the road today. And Sapphire, our highest performance air, is scheduled to start production this summer. You may indeed have seen a video on social media of the Lucid Air Sapphire in a quarter mile drag race with the Tesla Model S Plaid, the Bugatti Chiron, and a Ducati motorcycle. Lucid Air Sapphire's extraordinary performance is clearly a testament to the superiority of the technology we have developed in-house. So whilst other EVs may offer a choice between performance, range, efficiency, charging speed, luxury, and space, variants of Lucid Air lead in all of these key metrics. And this is fundamentally enabled through the vertical integration of our technology. We design, we develop, and manufacture our own motor, inverter, bi-directional charger, and race-derived battery pack in our powertrain factory in Arizona. Now, integral to this is our world-class EV powertrain software. And I want to clarify that a large part of our incredible range and performance is indeed software-derived. And I think that there's insufficient understanding and appreciation of this core Lucid capability. And this is where the importance of our in-house technology leadership is paramount. Not only does it provide advantages in performance, efficiency, charging time, interior space, among many other features, we also expect it will provide a cost advantage at scale. And there are tangible metrics that lead us to believe our technology is probably several years ahead of even our next closest competitor who, in turn, we believe is several years ahead of others. And we continue to invest in cutting-edge innovation. This is a central capability which I find really exciting and personally really inspiring. A great example is our new motorsports glide unit with integral electric motor, inverter, and transmission, which is already in use as the standard front glide unit for a leading electric racing series. And this embodies Lucid's very latest technology, resulting in unprecedented compactness and light weight for its power output. Now, I'm also proud to say that Lucid Air achieved the highest possible rating of five stars in the rigorous Euro NCAP safety assessment, with a full five stars for each category. We brought a clean sheet design and engineering to Lucid Air with the goal of securing highest possible safety ratings. Also in the fourth quarter, we released 22 over-the-air software updates, and in particular, released UX 2.0, which is our most extensive software update to date, comprising literally tens of millions of new lines of source code across nearly every updatable computer in the vehicle. Lucid Air was engineered from the start with this over the air capability and is in every car we make today. And many of the plates and refinements were based on owner feedback and ideas. And our incredible software team is working on further developments and improvements and features, and you'll see these continuously rolled out over time. Our software capabilities are further demonstrated through our recent decision to initiate a voluntary recall of a small number of Lucid Airs related to a supplier issue. Now, I want to be super clear. We were not mandated to do this, but we have an unwavering commitment to our customers. We were able to identify potentially impacted vehicles by sending a software update to all of our vehicles that allowed us to scan for a particular electrical signature within each car, and thereby to identify the less than 300 cars potentially affected by this supplier issue. Now, this truly innovative, over-the-air solution is an example of our world-class software capabilities and advanced technologies. Believe me, very few car companies would have been able to implement such a solution. Now, I'd also like to address some questions that we've been getting about battery cell supply. In the fourth quarter, we signed an agreement with Panasonic for battery cells. We expect this agreement, along with our existing agreements with LG and Samsung, to give us sufficient cell supply for our air and gravity programs comfortably through 2025. So having manufactured 7,000 180 vehicles and delivered 4,369 vehicles in 2022. We currently have more than 28,000 reservations. In fact, more than we planned to even make in 2023. And this doesn't include the up to 100,000 vehicles under the agreement with the government of Saudi Arabia with deliveries expected to start this year. Now, as we indicated last quarter, one part of the variance between production and deliveries is the distribution of vehicles across three areas of the delivery process. And that is vehicles in transit, vehicles awaiting delivery inspection, and vehicles awaiting delivery to a customer. Now, some of the vehicles were also internal fleet cars for test drives and engineering. A further constraint is, of course, matching The precise specification of cars revolves to that of the customer selection. But, like many other companies, we are not immune from a challenging macroeconomic environment. Now, Sherry will go through our guidance in more detail, but I want to reiterate that we are not limited by production. build quality. We are focused on building versions of AIR to meet customer interest, converting reservations into orders, meeting and increasing customer demand, and getting Lucid AIR into the hands of more drivers who can become brand advocates. And I want to stress that this is nothing new to Lucid team. Having designed and engineered Lucid AIR through a time of considerable turbulence in the supply chain. We built our greenfield factory in arguably one of the most challenging times the industry has ever seen with the COVID pandemic, later overcoming newer supply chain and logistics bottlenecks to ramp production. Indeed, we persevered through circumstances outside of our control while growing and becoming a stronger and more nimble company from our experiences. And we'll continue focusing upon innovation and bringing the best products we believe anyone has ever seen to market to delight our customers, but also to make the planet a better place for generations to come in so doing. And we're not only building zero-emission cars. We're building zero-emission cars that make the best use of the world's resources, and that's through our advanced technology and design. It's this mission and our incredible customers that drive us every day. And indeed, that's why I am so optimistic about our future. In 2023, we have two primary strategic areas of focus. Number one, customer awareness and growth. And number two, a laser focus on costs. Sherry will talk more about costs in her prepared remarks. So let me speak now to growth. I spoke about the early momentum we had that was impacted by our ability to manufacture airs for delivery. We identified the issues and moved quickly to address them. We've gotten past the major bottlenecks, limiting manufacturing. But this had some impact on the demand we generated early on. And this has been exacerbated by the challenging macroeconomic environment. But we know there's real interest in our car. We know this because despite not having An aggressive brand awareness campaign, we generated a considerable amount of consumer interest and reservations. And these are customers that discovered leases through our accolades. There's a coveted early Dream Edition and Grand Touring customers who love this luxury EV. We've learned so much from our early adopter customers. And they're on the cutting edge of automotive. They're the tastemakers. And now we're ready to expand to a broader audience. Just as I work side by side with the team in Arizona to alleviate the manufacturing bottlenecks, I've been personally touring the country, visiting our studios, listening to our sales associates, delivering cars in person, and speaking to customers to garner all their insightful feedback. And I've taken this feedback to energize the team with a renewed focus upon building broader and more targeted brand awareness. This effort reaches across our organization, from leadership to the retail customer experience, and furthers the progress we've already seen with national ride and drive programs. Indeed, we're inviting people to experience the best, and those who best understand this are our customers, who ultimately become our very best advocates. And there's also a critical mass we're nearing. In my experience, there's a tipping point in brand visibility once enough vehicles are on the road. And I believe we're getting really closer to that point now. I'm proud to say that today, indeed, we believe there's a lucid air in every single space of the USA. And turning to our product roadmap, we have stealth look coming, metal roof touring, more pure all-wheel drive, and Pure rear-wheel drive, the purest of the pures. We have a lot of latent demand for these products. However, I should note, we are experiencing a supply chain issue with stealth look that will impact our ability to ship these in Q1 of this year. And we have quite a bit of demand here, and we're working very hard to resolve this. We'll also be ramping up international shipments this year, of course, to Europe and to the Middle East. And I'm really excited about the Gravity SUV, which remains on track for start of production in 2024. Gravity builds upon everything we've achieved thus far, driving further advancements of our in-house technology to create a luxury SUV like none other. Gravity is a further evolution of Lucid's core DNA of luxury, spaciousness, and efficiency through its in-house technology, setting itself apart from the competition with the previously unattainable combination of supercar performance and seating for up to seven adults. I look forward to Gravity's public unveiling later this year. So, I want to leave you with a message of restless optimism for the year ahead. We have what we view as the very best car imaginable in production today, a view substantiated with countless reviews and accolades. Plus, we have more attainable versions arriving very soon. We now need to amplify this message across a broader customer audience in order to broaden awareness, which will in turn drive sales. We'll be ramping up in key new international markets. will be producing with quality and volume. Truly landmark products on their way in Sapphire and Gravity, supported by technology roadmap to keep us clearly ahead of the competition. I consider myself privileged to lead our talented team through this, the next step of our journey. And with that, let me turn it over to Sherry for an update on our financial sharing.

Thank you, Peter, and thank you to those who are taking the time to join us today. In 2022, we scaled virtually every part of our business while keeping a sharp focus on execution. We made tremendous strides in our production ramp, began delivering grand touring, air touring, and pure in the U.S., and initiated deliveries into Canada, Europe, and the Middle East. We also launched Lucid Financial Services to provide loan and lease products to our customer base and had our most significant over-the-air software upgrade in UX 2.0, just to name a few of our many achievements. We were able to accomplish this despite supplier, supply chain, logistics, and quality issues throughout parts of the year, and we finished the year on a strong production note, coming in above our previous annual production guidance. All of this was achieved through the perseverance and collaboration of the entire Lucid team, I'd like to extend my sincere gratitude to them and to our customers, our partners, and our suppliers without whom this would not have been possible. Now, turning to our fourth quarter in 2022 financial results. For 2022, we recorded revenue of just over $608 million, up from just over $27 million in 2021, and achieved an adjusted EBITDA loss of $1.97 billion, versus a loss of $952 million in 2021. In 2022, we made important investments in our future and did so while ensuring a healthy balance sheet throughout the year with an average liquidity balance of over $4.8 billion. Now, moving to the fourth quarter results. We produced 3,493 vehicles, delivered 1932 and generated revenue of $257.7 million. Cost of revenue was $615.3 million for the fourth quarter. As we produce vehicles at low volumes on production lines designed for higher volumes, we have and we will continue to experience negative gross profit related to labor and overhead costs. However, as we scale production, we would expect to see economy of scale benefits. Additionally, we recorded a lower cost or net realizable value, which we also refer to as LC-NRV, adjustment of $204.9 million in Q4. This amount contemplates the value we anticipate receiving upon vehicle sale after considering costs necessary to convert the inventory on hand into a finished product. Our LC-NRV impairment increased 10% on an absolute basis primarily due to the production of multiple variants of air and an increase in inventory levels associated with the rampant production. We typically receive several questions from the investment community on LCNRV and how to normalize this impact. The impairment calculation has various levels of complexity, and so understandably, it's very difficult to back out when assessing gross margin. What I would say is we have seen improvements in gross margin throughout the year, When adjusting for the LCNRV, we went from an average gross margin of negative 138% in Q1 and Q2 to an average negative 58% in Q3, Q4 for a total gross margin improvement of 2.3x over that period. And we're far from done. We have many additional opportunities identified that I'll illustrate in a moment. Moving to operating expenses. We've been able to hold operating expenses essentially flat while increasing the revenue line 32% quarter over quarter. R&D expense totaled approximately $221.3 million, up 4% sequentially. The sequential increase was primarily related to gravity and payroll expenses, partially offset by lower stock-based compensation expense. SG&A expense was approximately 170.9 million, down 3% sequentially. The sequential decrease was primarily due to lower stock-based compensation expense and reduction of specific external professional services. Stock-based compensation in the quarter was 71.3 million. Approximately 11.9 million was in cost of revenue, 28.5 million in research and development, and 30.9 million was in SG&A. In other income, we recognized a non-cash gain of $256 million related to a change in fair value of a common stock warrant liability. I'd like to highlight, though, that this non-cash warrant-related impact can be influenced quarter to quarter by a number of factors. but one of the larger factors is Lucid Group's share price at the end of the quarter. The decrease in our share price was one of the key reasons for the non-cash gain. The inverse should also hold true, so that's something to consider as some of you build forecasts at the end of each quarter. In Q4, we achieved an adjusted EBITDA loss of $623.6 million. Moving to the balance sheet. We ended the quarter with just over $4.4 billion in cash, cash equivalents, and investments, with total liquidity of approximately $4.9 billion when considering our global credit facilities. This included the successful completion of a $1.5 billion capital raise in Q4, which was comprised of an at-the-market offering for net proceeds of $594.3 million and also the consummation of a private placement of shares to the PIF for aggregate proceeds of $915 million. The Public Investment Fund of Saudi Arabia has been a committed investor and a strategic partner for Lucid for many years, and we're so grateful for their partnership and support. Since 2018, the PIF has invested $3.6 billion, including $915 million through its private placement in Q4 2022 through IAIR, an affiliate of the PIF. They've also been instrumental in introducing us to many of the ministries throughout Saudi Arabia, and those relationships and partnerships have resulted in significant economic and administrative support as we launch our international operations in the Middle East. Back to the balance sheet. We're very proud of the balance sheet strength that we've been able to consistently sustain over time. As you've seen over the last 15 months, we have access to a variety of funding options, from the $2 billion green convertible bond offering at the end of 2021 to the $1.5 billion at-the-market and private placement at the end of 2022, coupled with government support in Saudi Arabia and the large $1 billion ABL facility we've put in place with a world-class banking syndicate. We'll continue to take a holistic and opportunistic approach towards funding business. We believe we have access to a variety of available options in debt and equity markets, as well as access to low-cost government programs. Turning to inventory, inventory increased 22% in the quarter due to our production volume ramp and the number of vehicle variants that we are now producing. Capital expenditures were $289.9 million in Q4. Year-to-date CapEx was approximately $1.1 billion, slightly lower than our guidance of $1.2 billion, which is due to timing of payments and the deferment of certain costs by reconfiguring usage of Phase 1 at AMP 1 in Arizona in order to use it for a longer period of time before we fully cut over to Phase 2 in Arizona. Before providing our 2023 outlook, I want to speak to our top two priorities as a company. Heading into 2023, we recognize the difficult market environment and particularly the impact higher interest rates and market uncertainty has on consumers' inclination to purchase. And we're taking action. We talked about our two strategic priorities in 2023 being number one, growth, and number two, cost. Peter spoke to our growth priority, so I'll largely address cost. But before doing so, I'd like to make one comment on our growth. Beyond our focus on vehicle growth, I believe we have a number of additional opportunities many of which are already beginning to become additive to 2023. Our strong technology advantage is no longer in question. Our range, our performance, our efficiency, our charge time were increasingly being recognized for our in-house technology. And these are creating opportunities. We generated revenue from our motorsports electric drive unit in Q4. We expect to recognize a small amount of revenue from a U.S. government award for battery module prototypes. And a number of others have reached out to us for discussion on licensing or purchasing our technology. In addition, we signed our first vehicle emission credit deal in the U.S. It's a multi-year deal, and we expect to recognize a small amount of revenue starting in 2023. And we see considerably more opportunity here as the regulatory environment around many parts of the world tightens. Turning to cost. There are two areas of cost that we are zeroing in on. The first is driving down the cost per vehicle. The second is cost optimization of operating expenses. And let me go through each. On the manufacturing and cost of goods both side, we've been intensely focused on reducing costs. We have daily cost improvement meetings across various areas of manufacturing, engineering, and supply chain. Last year, we were able to reduce costs to more than cover the headwinds in the form of battery raw material input costs. As we are sitting here in February, we already have identified cost opportunities at a similar level to last year that we expect to implement by the end of this year. And we are surfacing more innovative ideas in cross-functional internal meetings and value engineering workshops with our supply base. This is before considering the impact of the Inflation Reduction Act, which we expect to contribute as much as a couple thousand dollars per vehicle. As we look ahead to gravity, we've already sourced approximately 70% of gravity components with a very strong carryover of suppliers from air. And I'm happy to report that on an aggregate basis to date, we've been able to stay in alignment with our cost targets for gravity. Another area of COGS focus for this year is inbound freight. We've achieved significant reductions last year by moving our international freight from air transit to sea. But we've identified another 2 to 3x savings that we believe is possible. We have a task team assigned, and we think this is one of the fastest, realizable cost reduction opportunities available to us this year. On the operating expense side, we're instilling the same approach. We're looking at all facets of spending with a multitude of ideas on the table. In SG&A, we do expect growth in a couple of key areas. Number one, we'll continue to strategically build out our service and delivery footprint throughout the U.S., Europe, and the Middle East as we meet the needs of our growing customer base and our commitment to customer care. However, we're simultaneously studying ways to drive increased efficiencies out of our existing studio and service center assets, and we're feeding this information into our future planning. And second, we're increasing our investment in IT enterprise systems to support the increasing production and delivery volume, global expansion, continuous improvement in cybersecurity, and growth in cloud data resources for both our active customer fleet and our internal R&D initiative. We are instilling a culture of cost consciousness, and we're working across the company to identify and execute on numerous cost efficiency opportunities. Now to our outlook. For 2023, while we believe we have capacity for greater production, we're forecasting a production range of 10,000 to 14,000 vehicles. Given the uncertain macro environment, we think it's prudent to provide a guidance range that's larger than what we would provide under normal circumstances. While we don't provide quarterly guidance I want to highlight some things to consider as you think about the linearity throughout the year. In Q1, factory production in the early part of January was reduced by seven days of production due to a planned year-end physical inventory count. We'll also start building vehicles for Europe and the Middle East in earnest shortly, and so there will be some transit time associated with that. In addition, due to supply chain challenges, we were unable to deliver on the popular stealth look option, resulting in a reduction of buildable configurations heading into Q1. And so we made a strategic decision to moderate some production as we transitioned to buildable configuration. Thus, we expect Q1 to be down significantly on a sequential basis with a corresponding impact on margins in Q1. In Q2, we will ramp shipments to the Middle East and Europe. So we would expect total deliveries to increase in Q2. We will also begin to build popular configurations across several vehicle variants, including pure in higher volumes for which demand remains very strong. Starting in Q3, we may begin activating parts of phase two at AMP1, and we expect some transitional downtime could occur. In Q4, with phase two, We would expect higher efficiencies as specific shops come online and hence greater potential manufacturing output versus the rest of the year. While I would caution that there are many controllable and uncontrollable variables that can affect gross margin, I wanted to provide some color on the direction of our gross margin. We expect lower volumes in Q1 to impact gross margin, but expect sequential improvement throughout the year. which should be supported by some of the expected bill of material cost downs and inbound freight opportunities that I just mentioned a moment ago. Regarding our liquidity position, we ended the quarter with approximately 4.9 billion in total liquidity, which we believe provides sufficient capital at least into the first quarter of 2024. Moving to CapEx, we expect capital expenditures for 2023 to be between 1.5 and 1.75 billion, reflecting some efficiencies and deferrals in our capital outlay, which is lower than the $2 billion annual CapEx that we provided at the beginning of 2022. We are moving forward with parts of Phase 2 in Arizona, as we believe will benefit from a number of cost efficiencies, including bringing logistics more fully on site, bringing staffing in-house, as well as plant efficiencies. We also are looking at activating Phase 2 online in stages on a shop-by-shop basis, which we expect will allow us to defer some capital expenditures until 2024 without a delay in the estimated gravity timing. Lastly, as Peter mentioned, we had more than 28,000 reservations as of February 21st, and this is before counting the potential impact of the up to 100,000 vehicles from KSA. At the time we first started providing reservations, we had not started production or deliveries And we provided this figure as a proxy to estimate potential future revenue. With the progression of our business, we believe production and deliveries are a better representation of the progress of our business. And so, going forward, we will no longer plan to provide an updated quarterly reservation number. However, we plan to continue to provide quarterly production and delivery figures shortly following the end of each quarter. As we look into 2023, we'll continue to focus on strong capital discipline, leaving no stone unturned for every cost optimization or elimination opportunity. We are proud of our technology and product achievements. We're gearing for growth while simultaneously taking a vigorous and comprehensive look at reducing costs, and I am very excited about the opportunities that lie ahead of us. With that, let me turn it back to Maynard to get your questions. Maynard.

Thanks, Sherry. We'll now start the Q&A portion of the call. Before we take questions from those on the phone, I do want to take a question from our retail investors sent in through the SAIT technology platform. The first question is, is the Saudi PIF taking Lucid private?

As a policy, Lucid does not comment on market rumors, and so we don't have anything to say specific to this question. What we said in our prepared remarks is that PIF has shown a commitment to Lucid, having provided $3.6 billion since 2018, including $915 million through its participation from the subscription agreement just in Q4 2022. PIF has not only been a committed investor, but also a strong strategic partner, and we're very grateful for their partnership.

Hear, hear. Their partnership and support has been phenomenal.

Great. Tawanda, actually, I think we'll move to the questions from the phone lines, please.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Murphy with Bank of America. Your line is open.

Good evening, everybody. You know, I just wanted to dig into sort of the decline in the reservations and sort of this new line that demand may be a little bit weaker than expected. I mean, and Peter, when you look at this, the implied price on the old backlog was $94,000.00. And then on the current backlog, it's 96,000. So it kind of indicates that the mix improved. So it seems like these folks might be a bit stickier. But you're indicating that the demand relative to your production is weakening. But it's still far in excess of what you're talking about producing this year of 10,000 to 14,000 units. So I'm just trying to understand why if production is not an issue, why you wouldn't produce more to drive revenue and profits this year if that backlog is real.

Yes, Peter here. John, that's a very cogent point. First of all, we do have over 28,000 reservations. But remember that a reservation doesn't guarantee itself is transmitting and translating into These are non-binding reservations. You can't bank on a reservation automatically transitioning into a delivery. I'd also like to point out that the 28,000 does not include the 100,000 that are potentially being ordered by the government of Saudi Arabia. So we're sitting in a very good position in that respect. I think what we've got to focus on is providing cars, building configurations from the factory that precisely match the configuration of the customer order. For example, we've got stealth trim coming. We've got a little delay in stealth trim because of a supplier issue, and there's a lot of orders for stealth. And then there's pure in volume, although we've delivered some pures. And many of those reservations are waiting for the availability of the purest version of pure, the real world right. So I think a lot of this is our focus on providing new variants. our focus on building cars with the utmost attention to quality and cost in terms of optimizing our processes and matching the cars that we do build to the precise specification of the customer whilst being mindful that a reservation in itself is non-binding and not guaranteed to transition to the consummation of an order.

Additionally, we're in the process of expanding internationally, and that takes time. We'll also be putting some vehicles on boats and starting to really bring more volume to the Middle East and the Europe, especially as we're exiting Q1 and into Q2. So you're going to start to see that pick up throughout the year in volume.

And also, John, our advice, our guidance for the year is a reflection of the range due to the uncertainty of the current macroeconomic conditions. And the effect on consumer behavior is challenging in such circumstances.

Okay, then if I could just ask one quick follow-up. You're emphasizing your technology and the advantages you have which is pretty impressive. What kind of opportunities in the near term as far as licensing and potential product sales on the powertrain side do you think could effectively be executed, or is this the kind of opportunity that might be two to five years out as opposed to something that would be one to two years out?

Well, John, I'd love to do this. I think we've got a technology which I've observed a sea change in the last year. There's a widespread recognition that the technology that I believe is the best is being recognized as so very widely. Yet we'd like to make our technology available to other automakers and customers. And not just automakers, there are a range of applications. Our focus has been as an executive team to focus on Ramping up production. My focus right now is just amplifying the message to a broader audience. so that we can ramp up our sales. My focus has not been going out to lobby for licensing agreements with our technology to other automakers. We've been very passive in that respect. And I think that's the right focus for us. Let's focus on our own product first and foremost, and then good things will come.

And then in addition, I think that any test that we continue to apply in those cases is accretive to our business, You know, can it leverage where we are today as a business? And is it going to not distract from our core focus as a company? So when it meets those, then it becomes a higher likelihood of success.

Thank you very much, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of James Piccarello with BMP Paribus. Your line is open.

Hi, guys. Just to ask John's question, first question, just another way or more bluntly, the 10 to 14,000 production guide, that's a deeper reflection of underlying demand as opposed to any limitations on your ability to ramp production, right? Because production is no longer the bottleneck. If you were to annualize your fourth quarter production, right, that would get you to 14,000 units for the full year. So, yeah, can you just kind of unpack that one more time in terms of what informs this range? Is it demand or is it, yeah?

Certainly, and your math is irrefutable. Look, we've sold production that is not the gating issue here now. My focus is on sales. And here's the thing. We've got what I believe to be the very best product in the world. And just too few people are aware of not just the car, but even the company. And so we need to amplify my focus now away from production to amplifying customer awareness that we've got this amazing car with unprecedented range, technology, efficiency, incredible driving machine, a great driver's car, just unbridled joy of ownership that we're getting feedback from owners who've experienced this. We need to amplify that message and broaden the awareness, which in turn will drive sales. And that is the focus right now. It's not that we're production-constrained.

And then in addition, reservation holders, some of them are waiting for us to offer their very specific configurations in volume. We talked about that already, whether it be pure, whether it be stealth, whether it be some of the Middle East and European configurations as well.

Yeah, there's quite a lot of interest in stealth. And unfortunately, we've got a little bit of a delay due to supply chain challenges, which we're working assiduously to resolve.

Okay, understood. And On gross profit for this year, and it does sound as though the LCNRV formula is quite complicated, but that totaled almost $570 million in negative non-cash impact for 2022. Is there any way to think about what that impact will look like for this year and any clarity on You know, if this year goes to plan, your plan, as stated here, you know, when gross profit break even, the time horizon as to when that could be achieved, I think would be, you know, obviously would be really helpful.

Sure. So as I said on the prepared remarks, we're really proud of the actions that we were able to take last year in terms of cost reduction, cost down, inbound freight reductions. It led to a 2.3x improvement when you went from the first half of last year to the second half of last year. when removing the effects of the LCNRV. As we look forward to next year, the way that we're thinking about it is we have identified areas for bill of material cost reductions. We have identified areas for inbound freight reductions. We do see emission credits starting to come more into play. We do expect to start getting the benefits of IRA impacts. We do also see some lessening of our need to be buying ahead significantly in the spot market. Last year, this time, we were buying ahead a lot of semiconductors. We're not doing that nearly as much as we were last year this time. All of those are potential tailwinds and benefits to gross margin. On the other side, some of the things that you'll see is that as the trim mix changes And it moves to more pure, those are lower margins. So that's kind of working against you from a gross margin profitability perspective. Also, just looking ahead, as we start to activate some of the additional equipment in the factory, that's going to be a little bit more of a burden in terms of depreciation, which is also going to act in the opposite direction. So what I wanted to do now is to just at least help contextualize a little bit of where the puts and the takes are. We're not here going to share exactly when we think we're going to be gross margin positive, but I think that those are important factors to take into consideration as you're thinking about your models.

Thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Andra Shepherd with Cantor Fitzgerald. Your line is open.

Hi, good afternoon. Thanks for taking my question and congrats on the quarter. I just wanted to touch on the guidance once more. So that 10 to 14,000 number, which is roughly in line with the preliminary guidance for last year, can you talk about some of the kind of the assumptions that are embedded in that guidance and just maybe a little more granularity? I presume that that's, you know, you said before, that you will begin shipments to Europe and Middle East later this year, so I presume that part of that production is being included in there. I'm just wondering if you can maybe add a little more context there. Thank you.

It is, absolutely. We're including, you know, in the guidance, a number of costs to Europe and the Middle East. We've already supplied small numbers to those markets, but we're really ramping up now in earnest in the very near quarter. We've also, it includes the ramp-up in customer demand for pure, for metal roof touring, for rear-wheel drive pure, and a number of factors. As an executive team, we've taken a very careful look at the landscape, and we've been very cognizant in our thinking, our guidance, of prudent guidance with a bandwidth, which reflects the uncertainty of the market in these challenging macroeconomic times.

Got it. Thanks, Peter. And maybe one quick follow-up. I wanted to touch on licensing again. You know, I think some perception out there is that over the long term, this licensing component could potentially be the largest contributor to revenue in the future, and You know, maybe I'm not thinking about this correctly, but I presume that I would certainly improve gross margins. You know, I understand the emphasis being almost entirely on ramping up production and car sales. But why not introduce this licensing revenue segment, you know, perhaps prior than initially anticipated? Thanks.

Indeed, I actually share your optimism. I think that it's a really beguiling opportunity here. But I have to have laser focus. You know, I've described the three steps, the three steps forward. Can we make these cars? Can we sell them? And can we make a margin on them? Last year, my focus was on manufacturing. Can we make them? My focus now is on amplifying the message, attracting a broader audience, and on ramping up our sales. But you're absolutely right. I mean, this is a technology race, and this is very little understood. There's a reason we've got outstanding range. We're the reason we've got so much more range than the competition. It's not born due to an oversized battery pack. It's born upon extraordinary efficiency, which we've created through in-house technology. That means we can go further with a smaller battery pack. That means our car can be lighter and more agile and more cost-effective to make. And, you know, this is where we have a leadership. And this is so relevant. to many other car companies that haven't really invested in this new era of electric technology, but it's also good applications outside of automotive in heavy industry, aerospace, and agriculture.

And as you may have heard me say on prior earnings calls as well, this just doesn't have, you know, an application just for like the passenger cars, like Peter's saying, but also opportunities for fleet operators. They, more than anybody, appreciate the efficiency, the performance, the range that we have. Uptime is important to them. Range is important to them. So those are factors that we think also make this a very attractive option for fleets as well.

I do also think, though, that there is a time actual time scale to this. I think that many traditional automakers have only just come to terms with the fact that battery electric is indeed the future. And I think that amongst those, many are yet to recognize the value of high technology solutions, not commoditizing EV technology. and the true value of efficiency. Mark my words, efficiency is not some esoteric thing that appeals just to engineers and scientists. It has a tangible value to the commercial viability of a company, because the battery pack is the biggest single big ticket item in the bill of materials of the car. And if you can meaningfully reduce the size of the battery, for a given range through efficiency, that means that you can make a more profitable product. And I think that many people are actually really wakening up to this and this realization.

Wonderful. Okay. Thanks, Peter. Thanks, Sherry. Congrats on the quarter. I'll pass it on. Thank you.

Thank you.

Thank you very much. Thank you. Please stand by for our next question. Our next question comes from the line of Ron Jusico with Guggenheim Partners. Your line is open. Ron Jusico, Guggenheim Partners, Your line is open.

Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggenheim Partners, Your line is open. Ron Jusico, Guggen

Well, remember that when we have a reservation, it is a non-binding reservation. So there's no guarantee that someone who's made a reservation will actually follow through with that. What we are seeing is a very strong demand, particularly for a product for the forthcoming pure, real-world live pure touring. I think that we've had a very strong take of Green Edition and Grand Touring, but I think there is a latent demand for other products in the range, and particularly Stealth. I think there's a strong demand for Stealth, and that's why I'm frustrated that we have some supply chain issues now which are delaying that a little bit, but it's coming very soon.

Okay, that's helpful. And then presentation calls out strong demand for AirPure, and I think that makes perfect sense, especially when we look at the the implied potential sales in the reservation backlog. But is that the single biggest gating factor for 2023 production? Or maybe are we underappreciating some of the stealth and international batching being pretty large issues? I guess the way we think about it is the share is ramping pretty meaningfully.

Yeah, it's an overlay of another. It's more annoyance than that. I mean, it's just, you know, the different specifications of cars, interior color, interior exterior between the range of Turing, Grand Turing and Pure. And then you've got the wheel combinations. And then you overlay that with the stealth. There's quite a number of combinations here. And it's matching. you know, the discrete requirements, the very discerning requirements, a very discerning high-end customer base with our ability to build specifically those specs of cars and get those to the customers. That is one factor. And then we have the overlay of the international deliveries and the fact then that you've got relatively long journeys to faraway places between the factory and actually the customer. So all these factors conspire to, and we give a very analytical approach. Sherry has led a very thorough analysis from the executive team looking at a whole range of factors to lead to these conclusions.

Thanks. Take a full cross-functional look at that across every single area from supply chain to manufacturing to all of those. And as we said that manufacturing is very well prepared to be able to take on additional volumes as they come forward.

Production is no longer a bottleneck here. But I would say that one of the biggest factors we face, and I'll be very transparent here, is I believe, from my perspective, we've got the very best car in the world, and not enough people know about it. And actually, that is an entirely solvable problem, I believe.

Yeah, yeah, I appreciate that. Thanks, Peter, and thanks, Sherry.

Thank you. You're very welcome. Please stand back for our next question. Our next question comes from the line of Chris McNally with Tevacor. Your line is open.

Thanks so much, team, for taking the question. Two quick ones, one on pure and then one just qualitatively on gross margin. So, Peter, on pure, You mentioned that, you know, more units and more volume will be available in early 2024. And just to combine the sort of demand, wait time, and reservations comments, you've already answered some of the other questions. Why couldn't you produce more pure this year that would pull in higher conversion from the reservations and just do it this year as opposed to 24? That was the part that wasn't clear.

Oh, we don't have to wait until 2024. What we've said is that gravity will start production in 2024. We're absolutely indeed doing that, Chris. We're ramping up pure and rear-wheel drive pure throughout this year. It's what we need to do is ramp up the supplier's ability to supply the parts for those particular models.

Okay, so while production is not a bottleneck, there is maybe component supply issues that has a natural ramp curve for Pure. So you are somewhat limited on the amount that you can produce of Pure this year, even though it's not a quote-unquote bottleneck.

That's right. And we're further ahead with four-wheel drive Pure than two-wheel drive Pure. And actually, two-wheel drive Pure is a great car as well because it's a classic rear-wheel drive car, great driver's machine.

Peter, just because there's always a question that will result in this chicken and egg of demand versus production, would you be willing to venture on a goal-forward basis? Do you think pure will be greater than 50% of the demand for air if we put gravity aside?

I would think that's a reasonable assumption, yes. I think that we're looking for just its price point will determine that that figure, that presumption would be reasonable, yes. I can't guide precisely on the product mix, but I would think you're not far off.

Yeah, I would think that over time that that's what you would see. You're going to have some different impacts here in the near term because some of the regions like the Middle East and Europe haven't had the opportunity to enjoy some of the higher products yet. So there's going to be, you know, maybe a little bit more focus on those earlier and then they would get pure a little bit later.

Indeed, that's what we're going to be building green and grand tourings now very soon for Europe and the Middle East in numbers as we ramp up that. So there will be a skew towards higher end products, but I think that will be transient. in those markets.

Okay, great. And then, Sherry, just one more for you. I know you don't want to give gross margin targets or guidance, but is it fair to assume, you talked about the cost improvements from sort of, you know, the 58% sort of quote-unquote normalized in second half, you'll make some improvements over the course of 2023, but you really won't get the unit scale under absorption just given the numbers versus you know, where sort of second half and Q4 are. Is it fair to assume that that is probably by far the absolute largest bucket to get you to gross margin positive and that when I think about a high utilization number, you probably have to get production into the 30 plus units to sort of have high utilization on just phase one. Again, no numbers, but conceptually.

Yeah, I think conceptually you're thinking about the right way. I think that we're seeing really good reductions in bill of material costs and the, as I said, in some of the other areas where I think we have some control, including inbound freight. But that, you know, remember, it's going to take through the year to start to see. So it's going to be gradual over time. And then when you look at volumes probably increasing over that period, we guided that Q1 will be low. And the fact that You've got some depreciation that's going to start activating as we bring on some of those additional shops towards the end of the year. That's going to increase the depreciation, and the volume is not going to catch up entirely to that, right? So you've got some competing forces there, but I think you've got a pretty good understanding of it as you just described it.

Much appreciated.

Thank you. Ladies and gentlemen, this concludes our Q&A session. I would now like to turn the call back to Maynard for closing remarks.

Thanks, everyone. This concludes Lucid's fourth quarter 2022 earnings conference call. Thank you all for joining us today, and you may now disconnect.