In its Q3 2023 earnings call, Polestar (NASDAQ:PSNY) announced record deliveries, a strengthened business plan, and updates on upcoming models. The company also provided insights into its financial position and future delivery targets.
Key takeaways from the call include:
- Polestar achieved record deliveries of 13,976 cars in Q3 2023, a 51% increase from the previous year. The company has delivered a total of 41,817 cars in the first nine months of the year, marking a 37% growth.
- The company's Polestar 2 model year 2024 has been positively received, and preparations for the production and testing of upcoming models Polestar 3 and Polestar 4 are underway.
- Polestar is focusing on cost reduction, improved efficiency, and margin over volume as part of its strengthened business plan. The company targets total annual deliveries of around 155,000 to 165,000 cars by 2025.
- Polestar's Q3 2023 financial results showed a revenue growth of 41% to $613 million, driven by volume growth and price increases. However, an inventory impairment charge of $28 million impacted profitability.
- The company plans to reduce its workforce by 300 by the end of the year as part of its efforts to become leaner and more efficient.
- Polestar is partnering with Google (NASDAQ:GOOGL) to integrate Android Automotive OS into its cars and has a strategic partnership with Hertz for fleet sales.
- The company plans to announce a new production site outside of China, adding to its existing plants in Meizu and Hangzhou Bay.
During the call, Johan L. Malmqvist, a representative from Polestar, stated that the company expects approximately 160,000 deliveries in 2025. He also mentioned that the company will require an additional $1.3 billion to achieve break-even cash flow in 2025. This amount is based on the expected accumulated negative free cash flow from the end of Q3 2021.
Polestar also highlighted the significance of the Chinese market and the potential for existing Polestar 2 customers to upgrade to the Polestar 4. The company expressed confidence in its product lineup and its ability to achieve volume targets. Production at the South Carolina facility is expected to begin in the summer of 2024, which the company believes will contribute to profitability and emotional appeal in the US market.
Polestar's plans are in place to address short-term financial challenges and achieve break-even by 2025. The company considers its reduction in funding needs exceptional compared to competitors. With a strong product lineup and operational preparations, Polestar believes it is well-positioned for success and value creation for shareholders.
InvestingPro Insights
InvestingPro's real-time data and insights provide some additional context to the current state of Polestar's financial health and market performance.
InvestingPro Tip 1: Polestar has been quickly burning through cash. This aligns with the company's announcement of needing an additional $1.3 billion to achieve break-even cash flow by 2025.
InvestingPro Tip 2: The company's revenue growth has been slowing down recently. While Polestar reported a 41% revenue growth to $613 million in Q3 2023, it's important to monitor this trend in the coming quarters.
InvestingPro Tip 3: Polestar's stock has fared poorly over the last month. This could be a reflection of market sentiment towards the company's short-term financial challenges.
InvestingPro currently offers 10 additional tips related to Polestar's performance and future outlook. These insights can provide a more comprehensive understanding of the company's financial health and market position. By using InvestingPro, investors can gain access to these valuable insights and make more informed decisions.
Full transcript - PSNY Q3 2023:
Operator: Hello and welcome to the Polestar Q3 2023 Results Conference. [Operator Instructions]. I would now like to hand the conference over to Bojana Flint. You may begin.
Bojana Flint: Thank you, operator. Hello, everyone. Bojana Flint from Polestar Investor Relations. Thank you for joining our Q3 2023 results call. Thomas Ingenlath, our CEO; and Johan Malmqvist, our CFO, will start with their opening remarks, followed by analysts and retail investor questions but before then, I will cover some housekeeping points. I would like to remind participants that many of our comments today will be considered forward-looking statements under U.S. Federal Securities Laws and are subject to numerous risks and uncertainties that may cause Polestar's actual results to differ materially from what has been communicated. These forward-looking statements include, but are not limited to, statements regarding the future financial performance of the company, production and delivery volumes, financial and operating results, [Indiscernible] outlook and medium term targets, funding raising and funding requirements, macroeconomic and industry trends, company initiatives and other future events. Forward-looking statements made today are effective only as of today, and Polestar undertakes no obligation to update any of its forward-looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors containing our SEC filings. In addition, management will make references to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our non-GAAP financial measures with our most directly comparable GAAP measures is in the investor of the presentation issued earlier today. With that, I'd like to turn the call over to Thomas. Please go ahead.
Thomas Ingenlath: Thank you, Bojana, and thank you, everyone for joining us today at a slightly different time than we normally would hold our call. The reason for this, as you probably know, is that we are hosting Polestar Day here in Los Angeles tomorrow morning. We will have a number of technology partners, including Mobileye, Luminar, and Bcomp, joining us to deep dive into the technologies that will form the future of our cars. It's shaping up to be a fantastic event and for those of you, that aren't able to join us. We will be publishing a recording of the keynote presentations and highlights from the exhibition area on our web site afterwards. Starting with the results. The third quarter saw record deliveries of 13,976, a growth of 51% compared to last year. We saw a positive impact from channel market and product variant mix and the start of Polestar 2 model year 24 deliveries. In total, during the first 9 months of the year, we delivered 41,817 cars.Growth of 37% compared to the same period last year and Johan will take you through the financial results in more detail in a moment. Turning to the operational highlights of the last quarter. Starting with Polestar 2 and significantly upgraded model year 2024. Deliveries of this higher priced model continue to ramp up and it is receiving great reviews. Top Gear calls it one of the most complete electric cars money can buy. Autotrader ranks at 4.5out of 5 stars. It's the highest possible rating in the safety, power and features category. Similar high scores and headlines continue to be published across pretty much all of our key markets. This is a car that until now we have built our brand commercial operations and supply chains, this one car. When you consider this, you can see the significant opportunity that we now have with 2 new models, luxury performance SUVs coming to the market. Let's start with Polestar 3. Preparations for start of production, first in China early next year, and then in the U.S. in the summer of 2024 are progressing well. Polestar 3 successfully completed hot weather testing in the UAE in September, and the last phase of testing will be completed by the end of this year. The new electric performance SUV created a bus when it arrived in our Polestar spaces over the summer and it is attracting new Polestar customers to come in and experience it firsthand. I spent a few days myself with one of our Polestar 3 test vehicles last month and even for me, it was an eye opener to experience how much of a shift the car represents to us, the ride and handling and of course, the luxurious spaciousness. Turning to Polestar 4, our SUV coupe. Last time we met, I talked about the positive reception this car had at the Chengdu Auto Show. Now two weeks ago, we held the first media test drives on nimble racetrack, when journalists got to push the car to the limits. The resulting reviews are very positive. Especially with regards to its performance, handling and passenger comfort. Start of production of Polestar 4 in Hangzhou Bay begins next week with customer deliveries in China starting before the end of the year and in the rest of the world planned for mid-2024. Polestar is the leading partner of Google and Polestar 2 was the first car on the market to feature Google's Android Automotive OS when it launched in 2019. Since then, we've seamlessly integrated a number of apps into our cars, most recently Prime Video which we announced in September. Several other manufacturers have now followed the path of our successful cooperation with Google. Now as I alluded to earlier, we will deep dive into a number of exciting innovations tomorrow at Polestar Day. Our full lineup of cars will also be on show in the U.S. for the first time, and we are giving visitors a chance to experience the first dynamic experiences Polestar 3 and Polestar 4 on the roads here in Los Angeles, as our test engineers conducting ride alongs. I have talked before about the value of this unique position and platform that we have created a strong and established market presence with a wide sales and service network that extends far beyond most pure EV startups and matches what most traditional OEMs offer. Over the last few months, we took the necessary steps to rework our business plan. We are reducing costs, and improving efficiency to create a more resilient and profitable poster and reducing our funding needs at the same time. Achieving cash flow breakeven already in 2025 will show the strength of our asset light biggest model. Margin over volume is our way forward, supported by a gorgeous lineup of 4 exclusive performance cars. Our strategic direction is clear; we are safeguarding the premium position of the Polestar brand. This plan reduces our expected cash outflow from the end of September this year to 2025 to around $1.3 billion, following additional support announced today from our two major shareholders. In 2025, we are targeting total annual deliveries of around 155,000 to 165,000. In addition to the value derived from our growing lineup of Polestar 3, Polestar 4, and Polestar 5, we are taking several actions to improve margins and reduce Opex. Johan will cover in a bit more detail the contribution of this actions. I will give you some further color where we have to introduce more significant changes to our operations. Main steps are taken to further improve our margin, introducing more flexible packs. As our model lineup grows into most luxurious segments, we also need to offer customers the ability for greater customization generating more revenue across our car lineup. Taking a more focused approach to our market presence. Starting in Europe, we have a number of markets that are both performing well and show continued scope for further profitable growth. We are going to shift investments into these from markets, which are either smaller or less profitable. It's not about leaving a market, but about directing our resources to where they give us the best impact. In some cases, we will also move to an importer model. As you know, since the start of the summer, our operations in China are part of a JV with Meizu providing a stronger foundation for us to succeed, improving the profitability of our U.S. business. Part of this turnaround will be driven by the introduction of Polestar 3, a car that will be much better positioned for the U. S. consumer and especially once production in South Carolina starts. With that said, we are taking further steps to adjust and target our brand build and marketing spend and we are making sure that we have the most efficient retail partners set up. Identify product cost reduction opportunities, both by working closely with R&D and purchasing, we have ambitious but realistic cost reduction opportunities identified to reduce the bill of material. We're also reducing our operation expenditure across the business, which Johan will go into more detail on in a minute. 2025 is an important milestone, but not the end state. Our ambition is, of course, to continue to develop the Polestar brand our volumes and profitability in the long term. We have a significantly stronger foundation from which to build on than many others. We have strong and a unique brand and strong and supportive shareholders and with that, I'll hand over to Johan. For more on the Q3 results, 2023 outlook and some detail behind our strength business plan and of course, the funding update. Thank you listening in and I look forward to taking your question after Johan remarks.
Johan L. Malmqvist: Thank you Thomas. Hello, everyone, and thank you for joining us today. As Thomas said, we are in Los Angeles, getting ready for the Polestar Day tomorrow. Where we are going to be joined by 100 of customers, media, investors and analysts. Before moving into the quarterly highlights, Key business actions from our strengthened business plan and the 2023 outlook, I would like to revisit points Thomas and I raised in our Q2 results call in late August. Firstly, we said we expected a stronger second half of the year in terms of margin and volume. Reflecting the ramp up of the upgraded and higher priced Polestar to model year 2024 and we still expect that with Q4 being our strongest volume quarter this year. We saw improvement in the core business margins during Q3, on the back of the positive mix and as we continue to roll out Polestar 2 model year 2024 alongside reduction in raw material costs, we expect margin progression to strengthen for the remainder of the year. Secondly, we said that looking ahead into 2024, we will benefit from the Rapid product rollout and 2024 is just around the corner, and Polestar 4 is starting production in a matter of days, with first customer deliveries commencing in China next month, followed by other markets in mid-2024. Polestar 3 start production is also on track with first customer deliveries expected in Q2 2024. Thirdly, we said that the cost savings measures announced with our Q1 2023 results which would include taking out both existing headcount as well as roles that are planned for this year, we're progressing well. We are now at a point that we will have 300 fewer employees by the end of the year. Lastly, we said we would continue to explore other areas we can become leaner and more efficient to take down costs further and improve our competitiveness. Thomas is taking you through the business drivers of our strengthen business plan, and I will pick up on those briefly after I cover our quarterly results and 2023 outlook. Starting with some operational highlights first. With established presence in 27 markets, we are now focused on improving the profitability in each of these. We will drive sales and service through our Polestar spaces and service points as our model lineup grows to 3 cars in the next 6 months. As you know, we benefit from access to an existing, scalable, state of the art manufacturing footprint of our experienced partners, Volvo (OTC:VLVLY) Cars and Geely. At the production plant in Meizu, we continue efforts to reduce both costs and overall CO2 impact of our Polestar 2. In Hangzhou Bay, where Polestar 4 is manufactured, the first cars will start to come off the line next week. We will soon announce another production site outside of China and plan to start producing Polestar4s there in mid-2025. Like I said, Polestar 3 production in Chengdu is on track and preparations at the South Carolina factory are also progressing well. Moving now to the financial highlights for the third quarter of 2023. We delivered 13,976 cars this quarter versus 9239 last year, a growth of 51%. Revenue increased 41% to $613 million, driven by volume growth as well as price increases implemented last year and the model year 2024 ramp up. Offset by various sales support actions, including discounts.In regards to channel mix, this quarter has reverted to a more normal level of around 60% Fleet sales, 40% retail, and that has benefited revenue through product variant mix. Our strategic partnership with Hertz is progressing well and at the end of Q3, we have delivered about 15% of the 65,000 commitment. We continue to be excited about this partnership and there is a strong collaboration in helping to develop what is currently a challenging EV market. As a broader point, fleet is and will remain an important part of our business. Putting aside the Hertz Partnership, a very high percentage of our remaining fleet book is corporate car schemes, which attract margins that are more closely aligned with our retail business and provide access to an important pool of target customers for our upcoming product lineup. Turning to gross profit for Q3 2023, it was approximately $4 million, corresponding to a margin of almost 1%, broadly in line with last year. Although the core business benefited from a positive channel market and product variant mix, gross profit in the quarter was impacted by a large inventory impairment charge of $28 million. Demand in certain markets, in particular in the U.S., was weaker than we anticipated which led to fewer cars being sold and an inventory buildup. Due to the margin profile in the U.S., with high import duties consequently, there was a need to write down the value of the inventory. We also had an impact from secondhand cars which have started to come into our inventory in a more meaningful way. Recognizing the impact on the profitability of our business, we have taken mitigating actions to temporarily cut production volumes in order to improve the inventory balances. With regards to selling, general and administrative expenses, they were up $58 million to $236 million. Reflecting primarily higher advertising, selling and promotional activities ahead of the Polestar 3 and Polestar 4 deliveries. Research and development expenses were up $30 million, reflecting continued investment in future vehicles and technologies. Operating loss was $261 million compared to $196 million last year. Moving on to cash flow for the first 9 months of 2023. Cash used for operating activities was $1.3 billion, mainly driven by operating loss, high levels of inventory and trade payable payment. As previously guided we repaid related party payables in the quarter via new short-term working capital facilities. This reflects a more natural funding solution as we continue to develop our longer term capital structure. Cash used for investing activities was $189 million, primarily as a result of Polestar 2, Polestar 3 and Polestar 4 intellectual property investments partially offset by the divestment of the Chengdu plant, where the Polestar 1 was previously produced. Cash provided by finance activities was $1.5 billion, reflecting short-term borrowings of $3.4 billion, of which $800 million was drawn down from the Volvo Cars shareholder loan facility and principle repayment of $1.9 billion. At the end of third quarter of 2023, cash and cash equivalents stood at $951 million. Before shifting topic to our strengthened business plan and funding update, let me address the 2023 outlook. We now expect to deliver about 60,000 vehicles for this year as we maintain a disciplined approach to our premium brand positioning against the background of a weakening global consumer demand, particularly affecting the rate of EV adoption. Flowing from lower deliveries for the year and the financial performance to date, in particular inventory impairment charges, we now expect a full-year gross margin around 2%. Turning to our strategic direction, which remains unchanged and in line with our premium brand positioning. Our strengthened business plan targets an accelerated margin improvement and a reduction of our total funding need to the point of anticipated cash flow breakeven in 2025. By 2025, we are targeting our 4 car models to generate total deliveries of around 155,000 to 165,000. We have taken a thorough look at all aspects of our business with a keen focus on measures to enhance the gross margin.In 2025, with an improved product mix and the following business measures, we are targeting gross margins in the high teens. We expect more than half of this progression to come from our model range rollout with more luxurious and exclusive cars.Cars that would naturally carry a gross profit margin of over 20%. We have reviewed the structure of our product offering recognizing a high degree of options could lead to improved margins. Therefore, we will be introducing, as Thomas said, more flexible option packs for our customers, hence generating more revenue. We will have a more focused approach to market presence in Europe, we will be directing sales and investments towards markets that have the greatest potential for profitable growth. In China, recognizing the competitive landscape we have taken a different approach and formed an innovative joint venture. We are very excited about the prospects. Firstly, in selling more cars, and secondly, through the technology that our partner will bring to our cars, which could be deployed internationally in addition to China.In the U.S., our objective is to improve the profitability of that market. Given the current China centric manufacturing footprint, which leads to high levels of tariffs into the U.S. This will in part be addressed by the production of Polestar 3 in Charleston, and even further from mid-2025 with a new manufacturing plant for Polestar 4 outside of China, which we will announce soon. This location also enjoys more favorable trade agreement terms with the U.S. Lastly, improved product cost is also a key ingredient in our path towards higher margins. Here, we are working very closely with our two main contract manufacturing partners to drive down costs. While maintaining the high quality product our customers love and expect. We believe these 4 main initiatives alongside much improved product mix will enable us to achieve a gross margin in the high teens. The rest will come from a combination of factors I outlined above; tax and options, optimized market presence in Europe and China, stronger profitability of our U.S. business and from optimized production costs. Alongside margin enhancing measures, we have also identified initiatives to reduce operational costs and become even leaner and more efficient as we continue to grow. We announced headcount reductions early this year and like I mentioned at the beginning, those negotiations were completed successfully and Polestar now employees around 300 fewer employees globally. Furthermore, we will look to resize and better optimize advertising sales and promotion spend and ensure our sales footprint, digital and R&D setup is operating more efficiently as we scale the business. Although we have been steadfast at safeguarding our car programs, we have and will be very disciplined in our planned Capex spend. Finding ways to either reduce or push payments out beyond the cash flow breakeven point. We're also looking at ways to reduce working capital. For example, with the manufacturing footprint that is closer to the end markets as well as the new setup in China with the joint venture will be able to significantly reduce our inventory needs. In combination, we expect cost management actions and those on gross margin will see Polestar reach cash flow breakeven in 2025. Of course, this is not the end state. 2025 will be an important milestone for our business and thereafter, we expect to continue to grow volumes, building on a profitable 3 car baseline to also include Polestar 5 and Polestar 6 as well as future models. Moving on to funding updates. With business actions to manage costs, drive higher margins and cash flow outlined by both Thomas and I we have reduced our total funding need. Showing their continued commitment for Polestar, we are pleased to announce that our 2 major shareholders have both increased their support. Volvo Cars has extended the maturity of the existing shareholder term loan to 2027, and is providing additional funding of $200 million. In addition, Geely Sweden Holdings AB, an affiliate of Geely Holdings, is providing $250 million shareholder term loan on substantially the same conditions as the Volvo Cars shareholder term loan, including a maturity in 2027.Both loans have an optional equity conversion feature.Based upon the expected cumulative negative free cash flow from the end of third quarter 2023 until achieving cash flow breakeven targeted for 2025 and taking into account existing and new financing and liquidity support from Geely and Volvo Cars, Polestar requires external funding of approximately $1.3 billion. We continue to work on a plan which will provide the remainder of required until we achieve the targeted cash flow breakeven in 2025. We expect to finalize this funding plan in the near term and it will include both additional debt and equity. In short period of time, Polestar has achieved so much already and the hard work of our colleagues and the support of our main shareholders means we are now at the beginning of an exciting phase as we move from 1 to 4 models and with a more efficient organization, we can see a clear path towards profitability within 2 years. Thank you again for joining and over to the operator for the live Q&A by the analysts and then we will answer top questions from our shareholders.
Operator: [Operator Instructions]. Our first question comes from the line of Andres Sheppard from Cantor Fitzgerald. Your line is open.
Andres Sheppard: Hi, good afternoon, everyone, and thanks for taking that question and congratulations on the quarter. I guess, our first question is you provided your outlook for delivery targets for 2025 approximately 160,000.You now have about 60,000 expected deliveries for this year. I'm curious if you can maybe give us some color on how we should be thinking about deliveries in 2024?Should we be looking at somewhere in the midpoint between those 2, or what's the best way to think about it? Thank you.
Johan L. Malmqvist: Hi. This is Johan. I think the way you should think about it, well, two things.One is that the way you should think about it is that looking at the start of production and the rollout of cars, as we mentioned in the initial comments, really the, the Polestar 4 and the Polestar 3 those deliveries will occur in more meaningful way really starting from Q2.So you have the second half of the year with the 3 car lineup. So there's definitely going to be a certain phasing next year that reflects them to start of production and the deliveries. We'll come back to this when we are in regards to guiding more specifically on 2024 as part of our Q4 earnings, but I think that's - the what I would take into consideration now.
Andres Sheppard: Got it. No, that's super helpful. I appreciate that. And maybe as a quick follow-up, I just wanted to better understand, the new financing and liquidity.So with the $450 million from Geely and Volvo, you mentioned that, you'll require another $1.3 billion to get to that breakeven cash flow, in 2025. Any sense of when that timing for that $1.3 billion will look like? Is that - it's still a bit of a short term need or with this additional financing, does this give you a little bit more flexibility on timing? Thank you very much.
Johan L. Malmqvist: Yes, I can help provide some color there just to - kind of - to give that, make that picture a little bit clearer. So, where the $1.3 billion stems from is that it's based upon the expectedaccumulated negative free cash flow as from the end of Q3 through cash flow breakeven in 2025 and that accumulated cash flow, we expect to be around $1.9 billion and then we deduct the existing - both existing and financing support from our owners around $600 million to get to the $1.3 billion. So between now and then, of course, we expect that quarterly cash burn in 2024 to slow and then ultimately arrive at a cash flow breakeven in 2025 based upon all the actions that we are now executing on as reflected in the remarks from Thomas.
Andres Sheppard: I see. Very helpful. Thank you again. Congrats on the quarter. I'll pass it on.
Operator: Our next question comes from the line of Alexander Potter with Piper Sandler. Your line is open.
Alexander Potter: Perfect. Thanks guys. So the first question I had was if you could give an update on how the joint venture in China is progressing. I know that was a relatively recent announcement, but I'm curious if there have been any, maybe initial findings and short term goals and medium term goals for that joint venture.
Thomas Ingenlath: Yes. Thomas here, I will take this question on the China JV, which is indeed progressing well. Obviously, very much the launch of the Polestar 4 now going into production and coming to customers in December first time is very much under the light of it being the first execution of the JV, really. The software in this car will already be designed and influenced by our partner there. So the customer gets this full benefit of connectivity and China targeted entertainment system in this car. So the fruits of this JV already within this short time come alive,but of course, really in 2024, when I say that now here publicly when there is as well, a Polestar 4 coming together with the car to market. Then of course, it will become full-fledged what we expect to be a car that is consumer centric made in for China and having that benefit of a software partner there that knows that business very well. We have the rollout of our Polestar spaces in China as well happening parallel to that, having, of course, already a target by the end of this year, which is a base for us, really accelerating now in China and we see that definitely Polestar 4 with the media feedback with the preordering converting into real orders, is showing that traction - a - of a product that is definitely in China resonating well, which it’s size and it's spaciousness, but as well, of course, a special combination of us having now software in the car, which is designed by and for Chinese customers.
Alexander Potter: Okay. Great. That's super helpful and then maybe just a related question onto that then. Is it possible for you to take those learnings and that China-specific software infotainment offering and leverage it in your other vehicles as well, I know that in the past, you've talked about how Polestar 2 maybe isn't an ideal fit for the Chinese consumer, the Chinese market. Is there a way that you can leverage the JV to push sales of that product, or is that something that's not maybe on the radar screen?
Thomas Ingenlath: Well, within the China market, obviously, the range of Polestar cars and Polestar 3, of course, will be an important product there as well, will get the benefit of this software being much more catered for the China market.So that goes across the car line. I mean, an interesting aspect of it because a lot of what I see happening there in terms of what is being done for the customer in terms of software in the care, I absolutely expect for us as well learnings for the rest of the world. Of course, this will not be a direct translation and we have a very strict border between what is the cloud and the customer electronics in China versus the Western world.Having said that certain behaviors of what we see entertaining features, I definitely see benefits from us learning there.
Alexander Potter: Ok great. I hate to harper on China here, but my last question is also related to China. So that there's obviously been a lot of, maybe geopolitical saber rattling lately, particularly in Europe about trying to throw up protection and barriers on imports of vehicles from China. What are your thoughts on this? I know that nothing is set in stone yet, so there's a lot of uncertainty, but you alluded to potentially a new factory location in your prepared remarks. I'm just interested in knowing what you're planning in terms of maybe a worst case scenario if - if the European Union does institute something resembling a Protectionist Policy against the imported Chinese cars.Thanks.
Thomas Ingenlath: Yeah. To answers anyway on that, on one hand, I mean, something's very clear,we are - we are buying our cars from our contract manufacturing partners that’s is very straightforward purchase, on arm's length base. So, I think that portrays very well how fair we just simply have to buy our cars from our manufacturing partner. The other thing is for some time now, I mean, obviously, this journey started, like two years ago, we had to make an effort to diversify our manufacturing footprint. We have started with Polestar 3 being, as well now implemented into the U.S. plant, in South Carolina, where we will produce this car not only for the U.S., but we will, as well, export from the U.S.the car to Europe.So that certainly is a way of us de-risking our business.The other way is, that our second important SUV that we will introduce now the Polestar 4. We are very soon being quite precise about how we found a way of having a second production footprint for this car as well.So, obviously, yes, we have taken, very concrete steps that already in the near future will be in place for us to be prepared for such.
Alexander Potter: Very good. Thanks very much you.
Operator: Our next question comes from the line of Dan Levy with Barclays.
Dan Levy: Hi. Good afternoon to you. Thank you for taking the questions. I wanted to start just by asking, within the - within the path to getting to breakeven, which you laid out a number of steps and I think one of those was on, getting improved costs in your licensing of manufacturing capacity and technology from Volvo and Geely, what is the line of sight to, attracting those costs? How critical step in is this in getting to gross margin breakeven? And in the event of a - of a weaker environment, what is - how much pressure does it put on that target of extracting those costs saves?
Johan L. Malmqvist: Yes. Thanks, Dan. I think first point to make clear is that the bulk or the absolute majority of margin accretion comes from the product mix and the improved margin profile of these vehicles. What we laid out in the remarks in regards to, continue to work on and drive down the production costs in close collaboration with our contract manufacturing partners. I mean, on the one hand, that's something that we would and anyone would typically expect, continue regardless. We're just making sure that, we're putting extra emphasis on it. With that being said, of course, here we derived a mutual benefit of that especially on those platforms that we share. So, from that perspective, we, as well as they are both all three of us very much focused on this and that's where we would expect it to add accretively to the already healthy margin profiles of these products.
Dan Levy: Got it. Understood. Thank you. The second question is just around demand broadly and two part question. A, maybe you could just give us a sense at least for Polestar 4. I know you said there's been very positive reception from, from the media in China, if you have a sense on, the visibility of orders or the magnitude of backlog, and then the other question is this, so to the extent that it's just obviously a very tight macroenvironment, across the regions, to the extent that you need to pivot on any component of the plan, what is your ability to pivotwithin the plan that you've laid out this afternoon?
Thomas Ingenlath: Well, Thomas here, and I will - I would really like to make sure that that exercise of working on the business plans strengthening it and making resilient was, of course, very much as well to make sure that those important goals The breakeven in 2025. The reduction of the funding need is all working in an environment where obviously, demand is in the world's climate, at the moment, something which is very different to when we started the journey in 2017, even in 2020, it was still a complete different picture than we have today. So for that reason, be rest assured that this exercise of this business plan and took very much into account that we cannot now dream of fancy demand scenarios, but have put down there a very achievable and realistic baseline. So that was a very important, element of us doing this work of summer.
Dan Levy: Understood. And then Polestar 4.Any visibility on near term volumes or the backlog?
Johan L. Malmqvist: Well, I think like Tom said, I mean, based upon, the initial reactions from the different events have been received very well. So I think we're very excited about this project. We're starting the deliveries in China, and so of course, that will serve as a good proxy of its success, and it's - it is one of those products that we expect the higher volumes to come from and I think it's very well positioned to do so.
Thomas Ingenlath: And, the phase that we are in now, I mean, but something's, of course, now important, we have had the first, drive of the journalists, the next phase is, of course, to have now customers coming into the car and being able to drive the kind order to make that big move from preorders to - to fixed orders. So that is the phase that we are in and obviously we are very optimistic about that we will be successful in making that shift of the preorders and attract many more customers. I mean, one thing is clear, the first of all being a car which indeed now unleashes that opportunity for us in China will of course be a very important element of making the volume of the Polestar 4 very significant for our brand and just from a personal experience, I mean - I - so much of our existing customers from Polestar 2, we see have a very strong interest in exploring this car and upgrading to it.So we see, of course, that's why we always say we are not brand starting from scratch, all that, I say, no, investment in building up the brand, building that customer base, with 1000 of 10000 of Polestar 2 customers. Of course, that is a very new and additional channel of us really bringing that potential of people upgrading and going from a Polestar 2 to Polestar 4 spending that much more money on that next level of exclusive SUV.
Dan Levy: Great. Thank you.
Operator: [Operator instructions] Our next question comes from the line of Tobias Beith with Redburn Atlantic.
Tobias Beith: Hi, good evening. Thanks for taking my questions. I have a couple actually and fortunately, they are all for Johan and I guess maybe let's take them one by one. My first question is as follows. Can you explain how cumulative cash flow to breakeven is only $1.9 billion when free cash burn this quarter was $700 million with very low Capex and seemingly still lots of intangibles and capital equipment relating to the Polestar 3, 4, and 5 still yet to be acquired.
Johan L. Malmqvist: Yes. Hi, Tobias. Thank you for the question. So, as you correctly point out here, of course, what it implies is that we expect to coordinate cash burn in 2024 to slow down significantly and that, of course, is on the back of, in part, then the volumes from Polestar 3 and 4 and the margin profiles for those cars, like I said in my opening remarks, being an over 20%. So the, the earnings generated by those cars the primary driver to your question or the answer to your question, that in addition then to executing on these actions that we've laid out further than take out costs. This would have improved the margin profile of, of Polestar and then there's in regards to net working capital and Capex, yes, there's a natural buildup of inventory as we, introduce these models, but of course, there's also a benefit of more localized production, that would help taper that to some extent and then in regards to Capex, I mean, we continue to invest in the car programs, but with that being said, that's also an area that we've taken a hard look at to see primarily as it relates to the phasing of the Capex to make sure that we can arrive at this breakeven point in 2025.
Tobias Beith: Okay. So is it possible that, perhaps some of the Capex that you have anticipated pre-2025 now comes after 2025?
Johan L. Malmqvist: Yes, I would say that that's definitely one of the actions we've looked at. With that being said, we've also been very adamant about keeping our car programs and so, but of course to the extent where we can change the cash - we can conserve cash, whether it's looking at pushing out or different ways to fund the projects, then yes, then we have taken a look at that.
Tobias Beith: Okay. Understood.You estimate that additional funding requirements in addition to what was announced today, to get to the point of being free cash flow positive is $1.3 billion. Does this exclude proceeds from short-term working capital loans?And if so, what has been assumed for net new loan proceeds between now 2025?
Johan L. Malmqvist: Yes. Okay.So the assumption around that is that the existing debt will remain. So to the extent that it's made up of short-term working capital lines that those will be rolled over, and I think we've been able to demonstrate our ability to do so. The current borrowings from our shareholders have laid out, it's extended out through 2027 and so the $1.3 billion funding need is then based upon the cumulative cash flow less the new support from their owners and the remaining - what remains, unutilized from the prior $1.6 billion, so collected them $600 million to get to the $1.3 billion funding.
Tobias Beith: Okay. Understood andif I look at your balance sheet, advanced payments from customers roughly half quarter-on-quarter,and I know we've discussed on prior earnings calls about the correlation between this line item and the order book, I was wondering if it's therefore right to conclude that Polestar’s backlog is halved?
Johan L. Malmqvist: Yes. Thanks for raising that point, Tobias.I appreciate it. The answer is no, and the reason for the lower amount in Q3. It's actually it's related to certain arrangements with fleet customers that were initiated in Q2 which in Q3 had led to a re-class to deferred revenue. So it has to do with timing and invoicing and when Polestar is obligated to deliver the vehicle. So in in your effort to be able to, try to correlate that line item to the order book, I would say that it's relatively flat quarter-on-quarter.
Tobias Beith: Okay. Understood. And then my last question is really about expectations for Polestar 3 and Polestar 4. If I have a look at where Polestar 2 volumes are today, they're tracking roughly 50% below your prior 2025 expectations and incentives are already present in some of your major end markets on the model year 2024, Polestar 2. I was wondering what volumes have you assumed for Polestar 3 and 4 this time out to 2025 and what gives you success -what gives you confidence in that success?
Johan L. Malmqvist: So maybe I can start it - I mean, we've not to just give not broken down the volume targets identified by car model. I think what we expect is, and as I alluded to, if anything that we see that the Polestar 4, becoming more of a golden product. We think it's very well positioned to be that and it caters well for both the Asian market and the U.S. market and Europe for that matter.
Thomas Ingenlath: Okay. Maybe Thomas here, sorry. I would love to add as well. Obviously, I would call Polestar 3 and 4, of course, much more worldwide catering cars, size wise, they are addressing a need in the U.S. and in China, much more than the Polestar 2 can do as a fairly compact European sized car and Polestar 3 and 4 both will have the benefit of the manufacturing footprint, which obviously makes it much more profitable to sell them in China and U.S. and in Europe equally. So for that reason, I think it's fair to say thatfor Polestar 3 and 4, we are very well positioned to reach the volume ambition and we very clearly have as well made clear in the last earning calls that we will not drive volume on the on the expense of margin and for that reason to concentrate with the Polestar 2 on those markets where this car can achieve the margins that we expect is as well a very strict and clear policy that we have now. So I think that explains as well, how that relates to volume expectations that had been put out long ago for Polestar 2.
Tobias Beith: All right. Understood. That's helpful, Thomas and Johan. Appreciate it. Thanks for your time.
Operator: Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Bojana. The floor is yours.
Bojana Flint: Thank you so much. We will now take a few minutes left until the end of the call. We'll take three top questions from our retail shareholders. So I will read them out and then Thomas and Johan can answer them. So the first stop question as an investor, what can we look forward to the stock achieving and your further rollouts of your great vehicles to a larger demand and how you're going to create that demand? I read this as a volume confidence in our product lineup and our volume ambition. So Thomas?
Thomas Ingenlath: Well, as mentioned before of me, obviously, the moment of us introducing now Polestar 4 and Polestar 3 is a game changer in that respect. We have on one hand, first time SUVs and then two of them very nicely positioned from each other going into the market. We all know that the SUV segment has a much larger target group, the addressable market, almost across the world for SUVs is the biggest and better cost as well for these. So that should be the main answer for that. Having said that, China JV, again, opens up to China market for us, much, much more optimistic situation than ever before and of course, we brought the Polestar 3 and the Polestar 4 very early now into our Polestar spaces in order to have enough time months to get the customers excited about these cars. So there are a lot of actions, including a big, big test drive coming up in the beginning of 2024 for journalists where we will, of course, drive a lot of attention to this new car's coming.
Bojana Flint: Perfect. Thank you. Moving on to question number two. What is your plan to stop the short term bleeding?
A - Thomas Ingenlath: Yeah. Just to reiterate the effort that has been done over summer to bring a business plan into play here, which is resilient working in an environment, which obviously is tougher than years before and that break even in 2025, and really, I mean, how many months is that? I mean, that is not now talking here long term in the future, that is a very reachable goal. The reduction of the funding needs to a dimension, which I think compared to a lot of our peers, is actually exceptional and low, I mean, in that respect. So I think we really did a lot of our homework now to in order to, make that future and the success of Polestar are very tangible.
A - Johan L. Malmqvist: And I think, you know, we've made 3 very significant steps forward in regards to the funding solution here.Thomas said, we've lined out clearly the action to get to this lower funding need. We have the support from the owners and we're well progressed in regards to the holistic funding plan to close-up the remaining gap.
Bojana Flint: Great. And let's take the third and final question. When can we expect to see production from the South Carolina facility and what impact will it have on the company?
A - Thomas Ingenlath: Yes, okay. Summer of 2024, very simple answer on that one and the effect and impact, two things. I mean, very clearly, it's a big enabler for us in our profitability journey, having a car that is produced in the U.S. for the U.S. and it, of course, is as well a big emotional thing obviously, again, a car produced in the U.S. for the U.S, of course, is a very different starting point for us to be here out with successful product.
Bojana Flint: Fantastic. Thank you. So closing remarks, and we are on time to finish at 3 p.m.
Thomas Ingenlath: Closing remarks. Thanks, Bojana. Okay. Yeah, let me check this now. Polestar has made this significant achievement since launch. We established a new brand. We have gained footholds in the markets and of course, we have now developed this very, very strong product lineup that we're about to roll out. This has prepared our companies operationally for scale up of volumes and Polestar is now at a pivotal point. We have adapted to a constrained financial context requiring focus and value [Indiscernible]. Polestarwill become successful and Polestarwill create significant shareholder value.
Bojana Flint: Thank you. Operator, we are concluding the call. Thanks everyone for joining, and we'll speak again soon.
Operator: Ladies and gentlemen, this concludes today's conference. [Operator Closing Remarks].
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