Lucid Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Lucid Group first quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. Later, we will conduct a question and answer session. To ask the question during this time, please press star 11 on your touch tone telephone. You would then hear an automated message advising your hand is raised. To remove yourself from the queue, please press star 11 again. I would now like to hand the conference over to your speaker for today. Maynard Alm, Senior Director of Investor Relations. Please go ahead.

Thank you, and welcome to Lucid Group's first quarter 2024 earnings call. Joining me today are Peter Rawlinson, our CEO and CTO, and Gagan Dhingra, our interim CFO and principal accounting officer. 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 limitations, 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 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 our investor deck. With that, I'd like to turn the call over to Lucid CEO and CTO, Peter Rawlinson. Peter, please go ahead.

Thank you, Maynard. And thank you, everyone, for joining us on our first quarter 2024 earnings call. In my prepared remarks today, I'll discuss our partners at the PIF, our better than expected production and delivery figures, our cost advantage, and our overall momentum, all of which makes me more optimistic than I've ever been about our future. Now, I believe there are two key factors that really set Lucid apart, our superior in-house technology and our partnership with the PIF, who have been steadfast investors and partners. In Q1, we raised $1 billion in capital through a private placement of convertible preferred stock to an affiliate of the PIF. We're a strategic partner in the country's plan to achieve its Saudi vision 2030 goals. I'm very grateful for the PIF's continued confidence and their steadfast support. Now, turning to production and deliveries. In Q1, we produced 1,728 Lucid Airs, and we delivered 1,967, both slightly above our expectations. In fact, it was our best quarter to date for deliveries, up 39.9% year over year. Our lower production than deliveries is an active decision to be cost-conscious and is not a reflection of production bottlenecks. For 2024, we expect to produce approximately 9,000 vehicles, which is consistent with our guidance last quarter. Let me now provide you with an update on where I believe Lucid stands today. We've made solid progress on both brand awareness and pricing with our general brand awareness raising in the first quarter despite reducing media spend from the fourth quarter. Lucid Air is increasingly recognized as a superior vehicle in nearly every aspect that customers value. For the third consecutive year, Lucid Air was named the best luxury electric car by US and World Report on its 2024 Best Hybrid and Electric Car Awards. Lucid Air is the only EV to win this category award three years in a row. Another achievement that sets us apart. Lucid Air solves buyers key concerns. It has price parity with gas car equivalents. It's the longest range and fastest charging production car in the US market. It's engaging to drive with remarkable performance and it enjoys a lower total running costs due to its efficiency. Now, consumers are savvy and they recognize the deficiency of other EVs in the market, particularly the limited range of most EVs. To ease fears of range anxiety, other automakers must produce and install bigger batteries, which results in higher cost to charge the vehicle and longer relative charge times versus Lucid Air. Remember, Lucid Air is the most efficient vehicle in its class, as measured in miles per kilowatt hour, while leading the industry for range and charging speed and having a lower total cost to charge. I've seen commentary about our losses per vehicle, but such speculations reflect a lack of knowledge about our costs and our scale-up intentions. Inside the extensively high cost of goods line item is the cost of the factories and equipment needed to make the vehicles and scale our business. If we envisage the company would only make a small number of vehicles, we would have purchased less equipment and built a smaller factory. But we have a more ambitious goal to provide affordable, long-range EVs for mainstream mass market consumers. And as we scale, the leverage in our model should become obvious. And we're embarking on a transformational phase, the expansion of our vehicle lineup. Lucid Air Pure is already here with a starting price from $69,900. And the Gravity SUV program is scheduled for start of production late this year. Our SUV's total addressable market is six times larger than the market we could access in 2023. And the excitement is palpable. In a third-party survey, already two-thirds of EV SUV purchasing tenders would consider Lucid. And this is worth emphasizing, two in every three people intending to purchase an electric SUV knows and would consider Lucid. Amongst all SUV purchase intenders, EVs and gas SUVs, more than 50% would consider Lucid. Now, this is a staggering figure for any brand, let alone a new one, and thus reflects the significant opportunity ahead. We are continuing to invest in our future with further vertical integration, stamping, body and whites for the Gravity SUV program, paint shop expansion, and powertrain at AMP1, an important part of our longer-term cost and quality strategy. We've applied all of our learnings from AIR and incorporated them into our SUV program. So I'm confident that Gravity will redefine the segment with world-class range, efficiency, charging speed, and interior volume. Later this year, we plan to host analysts and institutional investors at our AMP1 facility in Arizona to show you our state-of-the-art factory manned by our incredible employees and the machines that build the machines. We'll also have vehicles on the road later this year for you to test drive. And following the Gravity SUV program, we see another step change in total addressable market expansion with our midsize vehicle, which is scheduled for start of production in late 2026. I'm confident that we can achieve unrivaled levels of efficiency for this crucial mid-sized class vehicle. And again, I can't stress enough, efficiency is the key to a smaller battery for any given range. And a smaller battery is a key element to lower cost when it comes to making an EV. I can't wait to show you our mid-size game changer. Next, I'd like to talk about our technology business. Our Aston Martin deal continues to generate more interest in our technology from other prospective partners. And additionally, we are the sole supplier of the front drive unit to a leading electric racing series. Please watch this space as we continue to discuss monetization opportunities across all aspects of our technology, including our world-class software. I'll close with additional details about our momentum. We surpassed 12,000 vehicles on the road in Q1, which takes us nicely past the critical threshold into boosting word of mouth awareness. And I'm pleased with the 39.9% year-over-year uptick in sales in Q1 and with the momentum we're seeing here in April. I always offer caveats. We expect typical seasonal slowing in Saudi Arabia in Q2. And we expect typical seasonal slowing globally in Q3 as consumers go on vacation. Despite this, for the first time, I feel we're on the cusp of escape velocity. We have sales momentum, a compounding efficiency advantage, unprecedented interest from consumers and corporate partners, more than $5 billion in total liquidity, and gravity, which I believe is on track to become the world's best SUV. Therefore, I've never been more confident in our future. So, before turning the call over to Gagan, I would like to take a moment to acknowledge a recently announced management change. Derek Carty will now lead digital's organization as interim head, taking over from Mike Bell, who will be leaving to pursue other opportunities. I'd like to thank Mike for all of his contributions. Mike joined Lucid in early 2021 and was instrumental in building a truly unparalleled software organization. Mike will be staying on for a period of time in an advisory capacity, and I have full confidence in Derek and the digital organization as we enter into our next transformational phase of the company. So I'll end with a big thank you to all of our suppliers, our partners, and our shareholders. And most of all, thank you to all these employees for your commitment, your dedication, and sheer hard work. So with that, I'd like to turn it over to Gagan Dhingra to provide an update on our financials. Gagan.

Gagan Dhingra Thank you, Peter. Thank you to those who are taking the time to join us today. Before I get to my prepared remarks, I would also like to start by thanking the entire Lucid team. I am continually amazed by and thankful for everyone's dedication and perseverance. Turning to our 2024 first quarter financial results. During the first quarter, We produced 1,728 vehicles, and we reiterate our guidance to produce approximately 9,000 vehicles this year. We delivered 1,967 vehicles in Q1, up nearly 40% year-over-year, and up 13% sequentially. In Saudi Arabia, we resolved some of the logistical go-to-market challenges we had in Q4, and we were able to ramp up deliveries in Q1. We are also pleased with North American volumes, which we think is benefiting from growing brand awareness and increasing number of vehicles on the road and improving affordability. We are encouraged by what we are seeing. Turning to the P&L. For Q1, revenue was $172.7 million, up 9.9% sequentially, driven primarily by higher deliveries. Average selling prices were down sequentially due to mix, as well as the pricing adjustments which affected a part of the quarter. Cost of revenue in Q1 was $404.8 million. Despite lower average selling price, our gross margin improved on a quarter-over-quarter basis due to both cost optimization initiatives, including reduction in bill of material and logistics cost. and low impairment charges in Q1 related to LCNRV. The LCNRV amount was approximately $137.8 million, a 20.8% reduction from Q4. Fixed cost related to the depreciation of our factories and equipment remains a large part of the cost of revenue, and as we ramp up production and deliveries, we expect the overhead per vehicle to significantly improve. There are many controllable and uncontrollable variables that can affect gross margin. And as a result, we don't typically provide specific gross margin guidance. However, I want you to provide some directional color to aid in your modeling. Looking forward to the second quarter of 2024, we anticipate gross margin to be flat despite a full quarter price adjustment in Q2 instead of half quarter impact in Q1. This improvement is mainly due to further cost optimization initiatives. As we move into the back half of the year, we expect to build inventory of components for the gravity SUV program resulting in an increase in LCNRV impairments from an accounting standpoint. This, in addition to higher depreciation due to further Phase II activation, is expected to adversely affect gross margin. I mentioned this in my prepared remarks last quarter as well. We have identified additional opportunities in cost of goods sold, and we continue to focus on implementation and further areas for cost out. Longer term, our technology will be a key driver of our gross margin. With scale, I believe you will see strong gross margins with efficiency the key enabler. Now moving to operating expenses. R&D expense in Q1 totaled approximately $284.6 million up 17.1% sequentially. We expect R&D to increase further as we ramp up the new vehicle programs. I think it's widely accepted that Lucid has the best EV technology in the world. SG&E expense in Q1 was approximately $213.2 million, down 11.5% from Q4. The sequential decrease was primarily due to lower sales and marketing spent due to seasonality and low professional services and other general expenses due to continued cost optimization initiatives. Although we have identified additional cost reduction opportunities to execute this year, we expect SG&E to increase primarily due to continued investments in strategic growth initiatives. We ended the first quarter with 50 studio and service centers, excluding our temporary and satellite service centers, up from 45 in Q4. On the service side, we ended Q1 with 54 mobile vans in the fleet and 93 nationwide approved body shops. We plan to continue to strategically expand our studio and service center footprint as well as satellite service centers, which will cost effectively provide additional locations for Lucid customers. In 2024, we see a pathway to operating leverage. The key will be driving volumes and scale. Our stock-based compensation in the quarter was $63.7 million. Total other income was $49.2 million, down from $83.1 million in Q4. The decrease was primarily attributable to a known cash loss of $19.9 million related to the change in fair value of our equity securities of Aston Martin shares, which we received in Q4 as a part of our strategic technology arrangement. In Q1, we achieved an adjusted EBITDA loss of $598.4 million, a slight improvement from $604.6 million in Q4. Moving to the balance sheet, in Q1, we raised $1 billion through a private placement of convertible preference stock to an affiliate of the PIF. I would like to echo Peter and thank the PIF for the partnership and the commitment to Lucid and our mission. PIF's partnership and support separates us from others in the industry. We ended the quarter with approximately $4.6 billion in cash, cash equivalents, and investments, with total liquidity of approximately $5.03 billion. Note this excludes the $60.8 million in value of the Aston Martin shares as of March 31. We have been able to consistently sustain a strong balance sheet over time, and as we have done for the last several years, we will continue to be opportunistic in exploring financing. Turning to inventory. Total inventory decreased 18.8% sequentially, primarily due to further raw material drawdown and lower purchases as we optimize our existing inventory. This is consistent with what I outlined last quarter, where we continue to see a pathway to a significant reduction in raw material on hand. Capital expenditures in Q1 was $198.2 million, down from $272.6 million in Q4. Moving to the outlook for 2024. We forecast production of approximately 9,000 vehicles in 2024, and we will continue to prudently manage and adjust our production to meet our sales and delivery needs. As Peter mentioned, we are pleased with the demand we are seeing, but I would also remind you that we typically see some seasonality in Saudi Arabia toward the end of the second quarter. With regard to our liquidity position, we ended the quarter with total liquidity of approximately $5.03 billion. We expect this will give us a runway to the start of production of the gravity SUV program and into the second quarter of 2025. Moving to CapEx. We will continue to focus on our future growth initiatives, and we expect capital expenditures for 2024 to be approximately $1.5 billion. This reflects certain deferrals in our capital outlay from last year. The expansion for completely built-up unit the completion of the M1 Phase II expansion for stamping, paint shop, powertrain on-premise, and body and wipe for the Gravity SUV program. From a product perspective, we are scheduled for start of production of the Gravity SUV program in late 2024 and scheduled for start of production of our high-volume midsize platform in late 2026. Our performance this quarter continues to demonstrate the positive momentum. The expansion of our total addressable market, the pure upcoming gravity SUV and mid-size programs provides further opportunities. And I feel very good about our cost optimization strategies and see many opportunities ahead. With that, let me turn it back to Maynard to get to your questions.

Thanks, Gagan. We'll now start the Q&A portion of the call. Before we take questions from those on the phone, I want to post some questions that our retail investors sent in through the SAIT technology platform. Our first question is from Anaf. Can you elaborate on Lucid's pathway to profitability? What are the key milestones and challenges the company anticipates facing in reducing production costs and achieving positive gross margins?

Thank you, Anaf. It's all about scale. The more we can scale, the more cars we make, the more volume we can spread. The fixed cost, that's the cost of our investment, our incredible factory and facility, our long-term investments across the sale of each car. So how do we do that? We need to continue growth of Lucid Air sales right now. And right now, we're trending up 40% from Q1 this year relative to last year. Now, in a similar period, we see the sales of Tesla Model S down very, very considerably. We're outselling key competitors like Porsche Taycan. It's about scale. And the next thing on that scale path is to get gravity into production that will have a multiplier effect upon the market size. And gravity is scheduled for start of production late this year. And then beyond that, we need to get our midsize vehicle, our volume vehicle, priced at around, we believe, about $48,000, get that into production, and it is on schedule for production for late 26. And I've got to tell you just how much our current finances cost. are truly dominated by the major investments that Lucid's made for its future. Things like the expansion of our Arizona factory. We've got nearly four million square feet in there. General assembly is ready. We're putting robots in now for building the body structure for the gravity. We've invested in a huge stamping line. We're integrating logistics. we're bringing a powertrain facility right under that one roof and that's exactly where we're going to make the units that we supply to Aston Martin all under one roof and I think there's some photographs in the presentation Maynard and videos on our social media pages and then the other thing is that you know the real big advantage that Lucid's got over everyone else is efficiency and I don't say that as an engineer I say that as a businessman That efficiency means we can make cars with smaller batteries, with less batteries than anyone else. That means because the battery is the most costly part of an EV, we will be able to make cars more cost-effectively and therefore with more profit margin than anyone else, which leads perfectly to your role, Gagan.

Yeah, thank you, Peter. And two things more, scale and continuous cost-optimization initiatives. With scale, we'll be able to significantly bring down, number one, the fixed cost per vehicle, including depreciation of the investment we made in the factory, which is a big part of our cost of goods sold. Number two, labor and overhead, as you get more efficient when you work at the optimum capacity. Number three, also the bomb cost, as volume provides a significant cost leverage. Now, let me add to the cost optimization initiatives that we've been working very aggressively, and I'm personally leading this on a daily basis with big support from Peter. As I said in the prepared remarks, we were able to reduce the bill of materials, which is the cost of the parts that go into a car, and also logistics costs significantly this quarter. We have also identified additional opportunities to execute throughout the year.

Thank you. Thanks. Our next question from the platform is Jason. The stock price keeps dropping. What measures will you be employing to bring the price up considerably? It seems product output is extremely low.

Thanks, Jason. Now, look, I share price again. Again, it's all about volume. So forgive me, because the share price and the path to profitability are interwoven. Against a broader EV market where other makers' products are really down, we're up 40% on deliveries year on year. We're bucking that trend. It's all about scale. It's about recognition on the brand, and I believe we're getting there, and we've got gravity coming. Just to put this in perspective, in Q1, for the first time ever, Lucid outsold Porsche Taycan. We've outsold the Mercedes-Benz EQE for the third consecutive quarter. We've outsold the Mercedes-Benz EQS as well for third consecutive quarter. We've outsold the new BMW i7. And we've outsold the Audi e-tron GT for the fifth consecutive quarter. I want to also explain another matter here. We're not manufacturing constraint. This isn't a ramp-up situation. We can make them. It's very much an economy situation. It's about growing awareness of just how awesome the product is and the sales will follow. And that's the trajectory we're on. It's all about these sales and volumes. And I also want to just put, as a final point, I would like to put Lucid's stock price in context for this year. Just for context. Tesla's down about 25.6%. Rivian's down about 56%. We're down 27%. So really, there is a trend here in this sector. But clearly, we've got a path to get out of it. Gagan, do you want to add some color?

Yeah, thank you, Peter. And again, we are also very focused on execution and optimization of cost. We have the most efficient recall, but it's not just about the sustainability story. It's about growth, it's about scale, and it's about the profitability. I expect it will show in our margins over time as we scale.

Thanks. The third question is from Justin. Is Lucid in talks with any of the legacy automakers to provide battery or motors for production?

Thanks, Justin. Thanks for the question. You know, I can't emphasize enough. You know, this is absolutely central to the whole vision of the company. And that's why we're called Lucid Group. You know, the vision is to have a meaningful impact upon the planet, upon the environment, to take technological leadership and to use that leadership that we can travel further with less. and be truly sustainable, and then to share that technology and provide that technology to other companies. And we've taken the first step. We're providing the Sapphire technology, a hypercar technology, to no less than Aston Martin. And there's a time scale associated with this, you know. I mean, you know, the technology that we've got in our current lineup of touring, grand touring, was ideally suited to a luxury performance car from another automaker. But what really excites me is the potential for the technology that we're currently developing right here in this building in Lucid headquarters where I speak for a mid-sized tech platform. This is the tech that really is going to suit a high-volume family car of the future. And that's what's going to create the multiplier effect. So as you can appreciate, we can't really talk about specifics, but indeed we are in talks. There are large OEMs that appreciate the value of our tech, and they are certainly interested in working together with us. Gagan, would you like to add anything to that?

Yeah, and of course, under the right economics.

Absolutely. And I think therein lies another misunderstanding. Because of our current finances, There's this myth, this complete misinformation that our tech is so expensive, and it's completely the opposite. Our tech is made for affordability at scale. It's designed around reducing the need for battery, which is the biggest cost item of making an EV. So actually adopting Lucid's technology is a route to significantly reducing the cost of making an EV. And this is simply just not sufficiently appreciated or understood.

Great. And our last question is from Robert. Will Lucid make an affordable car to compete with Tesla?

Well, I've got an answer to that. We already are. The Lucid Air pure rear-wheel drive, finest machine on the planet, $69,900, the price I promised back in September 2020. We're already competing with Tesla, but wait till un-midsize comes out late 26. That's when we'll have a car, $48,000, $50,000, and that is the big one, the one that's going to be really exciting.

Great. Now we'd like to take questions from the phone lines. Tawanda, can we take the first question, please?

Yes, thank you. Please stand by. Our first question comes from the line of Adam Jonas.

Your line is open.

Hey, everybody. Hi, Peter. You said in your prepared remarks and in the statements that you published that sales momentum is building. Can you quantify what supports that statement and over what period was it measured? Were you talking year on year or were you talking about momentum building kind of more during the quarter and sequentially?

Okay, yes. Hi, Adam. So if we look at 2023 versus 22, I believe we were up by 37% or close to 37% from memory. And if you compare Q124 to Q123, that's where we had the 39.9%, very, very close to 40% growth. So we're bucking the trend of the market quite nicely. Okay.

And just as a follow-up, you said that your focus remains on cost, a relentless attention to cost. And you mentioned some big improvements this quarter on BOM costs specifically. Can you give some examples of this improvement in BOM within the quarter? And who are you benchmarking for the BOM costs for the gravity? Thank you.

Adam, thank you for your question. So, yes, in this quarter, despite the pricing actions, our gross margin improved and is mainly due to cost optimization initiatives, including BOM cost reduction. And within BOM costs, there are various components, and we are working hard with both the supplier side of things and internally, and internally more on the technology side of it, where we are bringing the battery cost down, our car is the lowest per vehicle range. But also then on the logistic side of it, we are able to bring our cost down significantly quarter over quarter. And in addition, we identified a few other initiatives that we want to execute throughout the year. We're also managing our inventory very effectively that helps bring the cost down.

Great. We'll take our next question to Wanda.

Please stand by for our next question. Our next question comes from the line of John Murphy with Bank of America.

Your line is open.

Good evening, everybody. Peter, I don't necessarily mean to conflate, you know, the company necessarily with Tesla for many reasons. But I mean, as we look at the S and X, you know, the company was struggling and it wasn't until the three and the Y that there was kind of an escape velocity on self-funding. And it seems like we're looking at sort of somewhat of a parallel here. And I don't mean to make an explicit direct comparison, but it does seem like the space or the smaller vehicle launching in late 26 will be sort of where you potentially reach that escape velocity similar to when they hit the three and the Y. So I was wondering if you would maybe kind of concur with that to some degree, right? I hope you don't take offense to that, but to some degree. And then also, as we think about that, we're seeing sort of these dribs and drabs, and I wouldn't say, you know, a billion dollars is a drip and a drab. It's a lot of money. But, you know, sort of this question from investors, will you be able to get the funding sort of guaranteed to get to the launch of that escape velocity, or maybe it's the space, in 2026? So, I mean, one, do you kind of,

agree with some of that logic that that that's when you reach escape velocity and will you have the funding to get there thank you john an interesting parallel and a very thoughtful question from you as always i i mean look uh the vision is to get to very significant volume and clearly that comes in two steps um well there's three steps first of all scale air more with with brand awareness Step two, go for about six times the term with gravity. And I really believe there's a very big, significant opportunity with gravity that Model X didn't capture because Model X was a bit car-like, a bit... CUV-like, whereas gravity is a proper SUV, and it's a seven-seat three-row. And we've got this unique secret weapon that we can go further with less battery and address the critical cost of making these products, and which you'll see unfold as we get to a degree of scale which gravity will enable. But it's true to say that we won't bear full fruition of all that until we get the mid-sized platform into production. And it's scheduled for start of production late 26. Now, regarding our partnership, what really sets us lucid apart is the combination of two things. A unique world-class technology combined with our special relationship with the PIF. And that relationship with the PIF transcends a merely financial one because they are invested in us a cornerstone of transitioning the economy of Saudi Arabia to a sustainability model with their audacious vision 2030 and they are in there we are in this together they are equally incentivized for success right now running in Saudi Arabia is the first car plant they've ever had operating in its elusive plants Right now, we're laying the foundations, literally pouring the concrete for our complete business unit, our CBU factory, which is scheduled to sink with the advent, the arrival of the midsize there in Saudi Arabia. They are incentivized for our success. We are mutually incentivized for success. Nothing less than success is acceptable here.

Okay, that's kind of helpful. Just one second, follow-up. 9,000 vehicles produced or airs produced this year. You already delivered more than you produced. I think there's well over 5,000 units or I think there are over 5,000 units in inventory. Could we see deliveries significantly above that 9,000 production number? I think you did 239 deliveries greater than production this quarter. Should we expect something similar to that go through the rest of the year or could it actually be higher?

Well, we haven't guided on that. Naturally, I'd love to see it. What is crucial here is the key message is that management is taking prudent steps in balancing production with delivery so that we don't get an undue amount of inventory and have that working capital tied up. This is prudence from management.

Thanks, Tawanda. We'll take our next question, please.

Our next question comes from the line of Tay Michaeli with Citi. Your line is open.

Great, thanks. Hi, everyone. Just two questions for me. First, Peter, can you just give us an update on kind of supplier readiness for the Gravity launch and what progress you're making there and just overall how you're feeling about that? And then maybe a second question, just going back to the gross margin, I know there's a lot of noise in that number. I was hoping you could talk a little bit to what you're seeing across trends for kind of variable margins, just kind of looking at parts, material, freight and warranty, excluding kind of labor and overhead costs, if you can give us a little bit of sense of how that's trending, that would be helpful too. Thank you.

Thanks, Jose. Yeah, so I'm personally overseeing the march towards the gravity start of production. Literally in this room, every morning, my morning starts with a review of the status. And in order to ready the program, we need to sync three activity streams, the readiness of the gravity product, the readiness of the factory, our Arizona factory, and the build out of that, and the installation of all the equipment, and the third thing you cover in your question was the readiness the supply base and absolutely we're all over this we have literally a few hundred suppliers with thousands of parts truly drawn upon some of the best suppliers right around the world and that is something we're managing very closely and to that aim I want this process to be really super transparent so I personally commissioned the team to to make a series of videos which will tell the tale for everybody who's following the company, the path to gravity, the road to gravity, the series. We launched that just last week, and that's going to trace those three connecting pillars, the product, the factory readiness, and supply chain readiness. But we've got a major advantage this time with this product each day because we're not trying to do it coming out of So there should be a lot more opportunity for us to do SQA, which is supplier quality awareness and audit. And we have our supplier quality engineering teams visiting those suppliers and checking and verifying and validating the readiness for starter production late this year. Now, regarding margins, I would like to defer the question to Gagan, please.

Yeah, thanks, Peter. So, on the gross margin, we have been working very hard with both the supplier side of things and then taking costs out of the business. And, you know, looking at the BOM costs first, is a significant effort. We are continuously bringing thousands of dollars out from the cost. But one thing this quarter specifically, I want to call about technology. Our car also has the lowest cost of ownership. And if you look at in the investor deck, we added slides seven and slide eight explaining how our car has the lowest cost. And it will be good for you to look at that And then in parallel, you know, our cost optimization team, this team is challenging each and every one and also for every dollar value. And I'm personally leading this initiative with support from Peter. But what does that mean to us? We're able to significantly bring the logistic cost down. We are looking more and more opportunities. Now it's a matter of scale because we today are spending significant amount of money on the fixed cost. Even on the variable cost, we identify more opportunities and it will help us because look at from suppliers perspective also, they also allocate their fix overhead to the volume they deliver. But we have a path to go there, and with gravity coming late 2024, we're getting close and close to our capacity, and that will give us enough operating leverage. Thanks, Tawanda. Can we move to our next question?

Thank you. Our next question comes from the line of Andrea Sheppard with Canada Fitzgerald. The line is open.

Hey, everyone. Good afternoon. Congratulations on the quarter, and thanks for taking our question. Peter, I was just – I wanted to follow up on maybe deliveries to Saudi Arabia, try to get a sense if it's possible to maybe quantify it a little bit as to how that agreement will develop later this year, next year, and onwards. I think in the past you had mentioned that – and please correct me if I'm wrong – but that a lot of these deliveries would include the gravity and the midsize high-volume model, which have yet to reach their SOPs. So just wondering, are we able to quantify what these deliveries to Saudi Arabia will be this year, next year, as you work your way up to the gravity? Yeah.

We're not planning to guide on the split in the future. But our deliveries on Q1 exceeded 500 units. I'm very confident that we've got equal demand for our products in Saudi, particularly for the SUV. That's going to be quite an interesting market. But again, I'm not in a position to guide right now on these. And we haven't decided yet whether we'd guide on that specific split either, Andrew.

Okay, got it. That's helpful. But so over 500 deliveries in Q1 were to Saudi Arabia. So that's helpful. Okay. And then just a question on liquidity. You know, you touched on the updated liquidity. Obviously, the $1 billion recent capital raise fortifies the balance sheet. In your presentation, you mentioned that liquidity on hand is efficient to fund a business. I believe it's until second quarter 2020. of next year. So I guess my question is, you know, as you're thinking for your next capital race, do you, to the extent of the ability you can answer, do you foresee that coming from the PIF or perhaps would that be from external capital? I guess what I'm asking is with $6.4 billion in funding from the PIF so far year to date, do you foresee a situation where the next race may also be with them or elsewhere? Thank you.

Well, look, we're a technology company. We're on a growth trajectory and it's a capital intensive endeavor. We know that. And so all I can say is that we will take an entrepreneurial opportunistic view of raising capital when the business requires it. We are very, very aware and appreciative of the very special relationship and the steadfast support that the Public Investment Fund has shown us and gone every single round supporting us to date. And I think that puts us in a very strong position. It takes us past the start of production of gravity and well into next year. And I think that's an enviable position. It puts us in a very strong position financially.

Thanks, Tawanda. Can we move to the next question, please?

Our next question comes from the line of Tobias Beth with Whitburn Atlantic. Your line is open.

Hi, good evening, and thanks for your time. I have two questions for Gagan, please, and I'll ask them separately. Through 2024, the expectation is that production processes will become more vertically integrated as you continue to build out the Phase 2 expansion of AMP1. Can you confirm whether this will increase losses in the near term while volumes are subscale?

Yeah, so as I said in the prepared remarks, we typically don't guide gross margin because of certain controllable and non-controllable factors. However, I can provide some directional color. In Q2, I expect that gross margin will remain flat despite the full quarter impact of pricing actions we took in Q1. In Q1, the impact was for part of the quarter. Scaling back to second half of the year, now purchase of gravity components ahead of production which will result in increasing inventory, i.e. result in LCNRV, and also higher depreciation as a result of Phase II activation, we expect to have some negative impact on the gross margin. But then, you know, we have gravity scheduled for production late this year. As we move to next year, we expect things to change significantly.

Okay, but sorry, just to ask my question slightly differently. On a variable margin basis, do you expect the higher vertical integration to decrease the variable margins in the near term on both air and gravity?

Yeah, that's a great question. Now, it is a game of scale. We're getting better on contribution margin trim by trim. Now, the bomb cost, freight, and certain overheads, part of contribution margin you know, get significantly impacted when you have a low volume. And with scale, it significantly improves because suppliers also amortize their fixed costs based on the volume they deliver. It's a matter of scale. The more we get close to our capacity, our margins get much better.

Okay, understood. And then, Just to return back to the question that Adam and Itte asked, if I exclude the impairment charge from your cost of goods sold and make a simplistic assumption that all of the DNA charge is within COGS, then in the first quarter this year, underlying costs per unit delivered actually increased 5% sequentially. And given that delivery volume was 13% higher, with some of these cars presumably benefiting from last year's overproduction. I was wondering if you could comment on what happened.

Yeah, it is a factor of incentive as well. So if you look at, we took some pricing actions in the current quarter. So it's because of the pricing actions which were largely offset by the cost reduction activities.

Okay, but the pricing actions Surely they're not in your COGS anymore because I've excluded the impairment charge.

Yes, but it's multiple things that go in that factor. So when we say pricing actions, we basically like for Pure and Turing that the pricing that we offered and Plus Mix both together play a significant role in that component.

All right, this has been most helpful. Thank you very much for your time.

Thanks, Tawana. Can we move to the next question, please?

Our next question comes from the line of Stephen Fox with Fox Advisors. Your line is open.

Hi. Thanks for all the color this evening. I just had a question on the push to have more third-party related sales of hardware and software. I guess I was wondering if you would say over the last few quarters whether there's been an increasing number of bottlenecks in getting to the finish line on some of these deals. I'm curious just because it seems like you've proven out some cost advantages that you can provide from a third-party standpoint, and the pressures on OEMs to get their bond costs down have only increased in the last year to date. Any color on that and your progress going forward would be helpful. Thanks.

That's an interesting point, Steve. I would say this, that there's a time scale, there's a cadence, there's a chronology associated with any such arrangement with a traditional OE. There's a natural cadence to the place they work and operate, and also there's this sort of impending regulatory overhang in terms of the drivers for their transition to sustainable mobility model. So all I can say is just watch this space. We need patience when we're talking to large automakers.

Okay, thank you very much.

Please stand by for our next question. Our next question comes from the line of James Ficaraglio with BNP Paribus. Your line is open.

Hi, everyone. This is Jake on for James. So if I just look at your liquidity and the implied cash burn with the $5 billion lasting into the second quarter of 2025, it looks like the implied cash burn stepped up from roughly $900 million in your previous commentary to over $1 billion now. So how should everyone think about cash burn really through next year once you get through the launch of the gravity?

Yeah, so if you look at, you know, there are multiple things go in the cash one. One is the capital investment that we're making. You know, as we are guided, we expect to spend around $1.5 billion in our investments, which is expansion in Arizona, taking from 30,000 installed capacity to 90,000 because of paint shops, stamping, body and white coming later this year. And then M2, which is in Saudi Arabia, where we are making significant investment building our CBU facility. So that capital expenditure play a significant role there. And also in the next year, we have significant amount of capital expenditure that will continue.

Got it. It's very helpful. And then just following up on John's question about the midsize, more mass market model, have you guys thought about providing some more just detail on it, maybe some teaser pictures a little earlier to try to drum up some, just more interest from a broader consumer base and even potentially opening the door of reservation to just generate some more liquidity. Thank you.

Well, and that's an interesting point. I actually think that the consumer has been ill-served by some players in this space and by taking reservations way, way ahead of time in a very artificial manner. What we believe is a much greater degree of transparency and really getting closer to that product being an absolute reality. You know, remember that any such reservations and money taken is a false form of liquidity because it's something we would have to put in escrow anyway. It's not true liquidity. And we believe in absolute transparency. and showing the product with a realistic specification. As we're doing, say, with gravity, we've not taken reservations deliberately until we get closer to the start of production. This is a philosophy that we've adopted and we will let you know that time in the future. when we open a waiting list for gravity. And we're not even close to, I don't think it's right to be opening up reservations on a product that is over two years out. I just don't think, I think it all serves the consumer and it's something that I think there's a transparency that's lacking from that.

Thank you. Our next question comes from the line of Stefan Gingara with Stifel. Your line is open.

Thanks for taking my question. Just going back to a question about the cash burn, can you give us any sense, as we think getting to the midsize launch, sort of the cadence of CapEx necessary in 25, 26 timeframe?

Well, I mean, it's interesting. We haven't guided on that yet. But, I mean, we are in a very good position, which will see us beyond gravity starter production. We have some amazing incentives from the Kingdom of Saudi Arabia for setup of our factory there, our AMP2 facility. And that's where we're going to put in the midsize product to start with.

Great. Thank you. And just a quick follow-up on the gravity order question. How soon before production begins do you open up gravity orders?

It's an interesting point. I think that, as I say, we can look forward to us opening a waiting list when we feel that in absolute transparency we can release more specific details of the trim and specifications of that vehicle. I don't want it to do it in an environment of opacity. Gravity is scheduled for start of production later this year, and we're on that runway now. Every day counts as we build up a crescendo to that launch, and we will let you know. Watch this space. Great. Thank you, Peter. Thank you.

Thank you. So this concludes Lucid's first quarter 2024 earnings conference call. Thank you all for joining us today, and you may now disconnect.