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Operator: Hello and thank you for standing by. Welcome to Lucid’s Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker, Maynard Um. Sir, you may begin.

Maynard Um: Thank you, and welcome to Lucid Group’s fourth quarter 2022 earnings call. Joining me today are Peter Rawlinson, our CEO and CTO; and Sherry House, our CFO. Before handing the call over to Peter, let me remind you that some of the statements on this call, include forward-looking statements under federal securities laws. These include, without limitation, statements regarding the future financial performance of the Company, production and delivery volumes, financial and operating outlook and guidance, macroeconomic and industry trends, company initiatives and other future events. These statements are based on 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 fillings with SEC and the forward-looking statements on Page 2 of investor deck available on the Investor Relations section of our website at ir.lucidmotors.com. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the investor deck. With that, I’d like to turn the call over to Lucid’s CEO and CTO, Peter Rawlinson. Peter, please go ahead.

Peter Rawlinson: Thank you, Maynard, and thank you, everyone, for joining us for our fourth quarter earnings call. I’d like to start by extending a heartfelt thank you to the entire Lucid team. I’m proud of their perseverance, resourcefulness and teamwork. This allowed us to drive meaningful improvements in the back half of 2022 and close out the year with production above our previously stated annual guidance. We went from making 279 vehicles in 2021 to 7,180 in our first full year of production. And we went from delivering 125 vehicles to customers in 2021 to 4,369 deliveries in 2022. Now I’d also like to thank our suppliers and partners who work diligently with us to navigate through an exigent year. And of course, I would particularly like to call out the PIF, who have not only been a committed investor but really an incredible strategic partner.

We are most grateful for their partnership. And of course, I’d like to thank our customers one of the things I’m joined most is getting to meet you and see your delight when you take delivery of your rooted air. You are a big part of what drives us to deliver the quality and experience to so deserve. But let’s not forget that 2022 was also a seminal year for the Company, a year when we finally realized our issue of producing an EV embodying our view of the most advanced technology possible and getting that into customers’ hands in significant numbers. That was not without its challenges, but as ever, the team work tirelessly to resolve as I will cover later. Now during that period, I’ve also observed a growing realization and acknowledgment of our view that our core EV technology is not just the best, but the best by a tangible margin.

We see this acceptance widely by many in the know by those who follow the EV and technology space. In fact, even some of our detractors are coming to this inevitable conclusion that the Lucid Air is a truly incredible product. Now this awareness has happened though in the large part, not just through an overwhelming endorsement from journalists and outlets in the automotive sector. But moreover, through customers experiencing the range, comfort and sheer driving pleasure of our cars. Now some of you may have heard of , but there are really three steps that will lead to our success as a company and those steps of manufacturing sales and profitability. In short, in respect of our cars, can we make them, can we sell them? And can we make money on?

So in 2022, our primary focus was the first of these steps. So, it wasn’t it possible for us to manufacture cars. We’ve got the right leaders in place, brought logistics in-house, and I personally worked tirelessly on the factory floor, leading the team to identify and remove the manufacturing bottlenecks that we faced. And the fact that I take in today’s earnings call from our headquarters here in Europe, California, is symbolic as the transition of the day-to-day factory operations and our Arizona team. Let me be clear, production is no longer a bottleneck. We were also able to deliver Lucid Air touring and a small number of Lucid Pure in the fourth quarter and delivered our first Air into Europe and Saudi Arabia as promised. So, we now have the rates of Air covering a spectrum of performance and range on the road today.

And Sapphire, our highest performance Air is scheduled to start production this summer. You may indeed have seen a video on social media of Lucid Air Sapphire in a quarter mile road race with the Tesla Model S Plaid, the Bugatti Chiron and the Ducati motorcycle. Lucid Air Sapphire extraordinary performance is clearly a testament to the superiority of the technology we have developed in-house. So whilst other EVs may offer a choice between performance, range, efficiency, charging speed, luxury and space, variance of Lucid Air lead in all of these key metrics. And this is fundamentally enabled through the vertical integration of our technology, we design, we develop and manufacture our motor inverter by directional charger and race-derived battery pack in our powertrain factory in Arizona.

Now is our world-class EV powertrain software. And I want to clarify that a large part of our incredible range of performance is indeed software derived. And I think that there’s insufficient understanding and appreciation of this core Lucid capability. And this is where the importance of our in-house technology leadership is paramount. Not only does it provide advantages in performance, efficiency, charging times, interior space among many other features, we also expect it will provide a cost advantage at scale. And there are tangible metrics that will lead us to believe our technology is probably several years ahead of even our next closest competitor, who, in turn, we believe, is several years ahead of others. And we continue to invest in cutting-edge innovation.

This is a central capability, which only find really exciting and personally really inspiring. A great example is our new motor sports going unit with integral electric motor, inverter and transmission, which is already in use as the standard frontline units for a leading electric racing series. Our Lucid’s, Lucid’s very latest technology, resulting in unprecedented compactness and lightweight for its Air . Now I am also proud to say that Lucida achieved the highest possible rating of five stars in the rigorous Euro NCAP safety assessment with a full five stars for each category. We brought a clean sheet design and engineering to Lucid Air with the goal of securing the highest possible safety ratings. Also in the fourth quarter, we released 22 over-the-air software update and in particular, released UX 2.0, which is our most expensive software update to date, comprising literally tens of millions of new lines of source code across nearly every upgradable computer in the vehicle.

Lucid Air was engineered from the start with this over-the-air capability and is in every car we make today. And many of the upgrades and refinements were based on owner feedback and ideas, and our incredible software team is looking on further developments and improvements and features, and you’ll see these continuously rolled out over time. Our software capabilities are further demonstrated through our recent decision to initiate a voluntary recall of a small number of lucid airs related to a supplier issue. Now I want to be super clear. We were not mandated to do this, but we have an unwavering commitment to our customers. We were able to identify potentially impacted vehicles by sending a software update to all of our vehicles that allowed us to scan for a particular electrical signature within each car and thereby, to identify the less than 300 cars potentially affected by this supplier issue.

Now this truly innovative over-the-ear solution is an example of our world-class software capabilities and advanced technologies, believe me very few car companies would have been able to implement such a solution. Now I’d also like to address some questions that we’ve been getting about battery cell supply. In the fourth quarter, we signed an agreement with for battery cells. We expect this agreement along with our existing agreements with LG and Samsung to give us sufficient cell supply for our Air and Gravity programs comfortably through 2025. So having manufactured 7,180 vehicles and delivered 4,369 vehicles in 2022, we currently have more than 28,000 reservations, in fact, more than we plan to make in 2023. And this doesn’t include the up to 100,000 vehicles under the agreement with the government of Saudi Arabia with deliveries expected to start this year.

Now as we indicated last quarter, one part of the variance between production and deliveries is the distribution of vehicles across three areas of the delivery process, and that is vehicles in transit, vehicles awaiting quick delivery inspection and vehicles awaiting delivery to a customer. Now some of the vehicles were also internal fleet cost for test drives and engineering. A further constraint is because latching the precise specification of cars we build to that of the customer selection. But like many other companies, we are not immune from a challenging macroeconomic environment. Now Sherry will go through our guidance in more detail, but I want to reiterate that we are not limited by production. We could scale up, but we’re making a conscious decision to match production, whilst focusing upon cost-effective build quality.

We are focused on building versions of Air to meet customer interest, converting reservations into orders, meeting and increasing customer demand and getting Lucid Air into the hands of more drivers who can become brand advocates. And I want to stress that this is nothing new to Lucid team. Having designed and engineered Lucid Air through a time of considerable turbulence in the supply chain, we built our greenfield factory in arguably one of the most challenging times the industry has ever seen with the COVID pandemic, later overcoming newer supply chain and logistics bottlenecks to ramp production. Indeed, we’ve posted through circumstances outside of our control while growing and becoming a stronger and more nimble companies from our experiences.

And we’ll continue focusing upon innovation and bringing the best products we believe anyone has ever seen to market to do to our customers, but also to make the planet a better place for generations to come in so doing. And we’re not only building zero emission cars. We’re building zero emission cars that make the best use of the world’s resources and that’s through our advanced technology and design. It’s this mission and our incredible customers that drive us every day. And indeed, that’s why I am so optimistic about our future. In 2023, we have two prior strategic areas of focus. Number one, customer awareness and growth; and number two, a laser focus on cost. Sherry will talk more about costs in her prepared remarks. So let me speak now to growth.

I spoke about the early momentum we had that was impacted by our ability to manufacture as for delivery. We identified the issues and move quickly to address them. We’ve gotten past the major bottlenecks limiting manufacturing, but this had some impact on the demand we generated early on, and this has been exacerbated by the challenging macroeconomic environment. But we know there’s real interest in our car. We know this because despite not having an aggressive brand awareness campaign, we generated a considerable amount of consumer interest and reservations. And these are customers that discovered leases at lags that a coveted early dream-addition and granting customers who love this luxury EV. We’ve learned so much from our early adopter customers, and they’re on the cutting edge of automotive, they are the taste makers.

And now we’re ready to expand to a broader audience Just so I work side-by-side with the team in Arizona to alleviate the manufacturing of mix, I’ve been personally touring the country visiting our studios, listening to our sales associates, delivering cars in person and speaking to customers to garner all their insightful feedback. And I’ve taken this feedback to energize the team with a renewed focus upon building broader and more targeted brand awareness. This effort reaches across our organization, from leadership to the retail customer experience and further is the progress we’ve already seen with national ride and drive programs. Indeed, we’re inviting people to experience the best and those who best understand this are our customers who ultimately become our very best advocates.

And there’s also a critical mass we’re nearing. In my experience, there’s a tipping point in brand visibility once enough vehicles are on the road. And I believe we’re getting really closer to that point now. I’m proud to say that today indeed we believe there’s a Lucid Air in every single space of the U.S.A. And turning to our product road map, we have stealth look coming, metal restoring, more cure all-wheel drive and pure rear-wheel drive, the purest of the pures. We have a lot of like demand for these products. However, I should note, we are experiencing a supply chain issue with stealth look that will impact our ability to ship these in Q1 of this year. And we have quite a bit of demand here, and we’re working very hard to resolve this.

We’ll also be ramping up international shipments this year, of course, to Europe and to the Middle East. And I’m really excited about the gravity SUV, which remains on track for start of production in 2024. Gravity builds upon everything we’ve achieved thus far. Driving further advancements of our in-house technology to create a luxury SUV like none other. Gravity is a further evolution of Lucid’s core DNA of luxury, spaciousness and efficiency through its in-house technology, setting itself apart from the competition with a previously unattainable combination of supercar performance and seating for up to seven adults. I look forward to Gravity’s publican veiling later this year. So I want to leave you with a message of restless optimism for the year ahead.

We have what we view as the very best car imaginable in production today. A view substantiated with countless reviews and accolades. Plus, we have more attainable versions arising very soon. We now need to amplify this message across a broader customer audience in order to broaden awareness, which will in turn drive sales. We’ll be ramping up in key new international markets. We’ll be producing with quality and volume. Clearly landmark products are on their way in Sapphire and Gravity, supported by technology road map to keep us clearly ahead of the competition. I consider myself privileged to lead our talented team through this, the next step of our journey. And with that, let me turn it over to Sherry for an update on our financial. Sherry?

Sherry House: Thank you, Peter, and thank you to those who are taking the time to join us today. In 2022, we scaled virtually every part of our business while keeping a sharp focus on execution. We made tremendous strides in our production ramp began delivering grand touring, air touring and in the U.S. and initiated deliveries into Canada, Europe and the Middle East. We also launched Lucid Financial Services to provide loan and lease products to our customer base and had our most significant over-the-air software upgrade in US 2.0, just to name a few of our many achievements. We were able to accomplish this despite supplier, supply chain, logistics and quality issues throughout parts of the year, and we finished the year on a strong production note coming in above our previous annual production guidance.

All of this was achieved through the perseverance and collaboration of the entire Lucid team. I’d like to extend my sincere gratitude to them and to our customers, our partners and our suppliers without whom this would not have been possible. Now turning to our fourth quarter and 2022 financial results. For 2022, we recorded revenue of just over $608 million, up from just over $27 million in 2021 and achieved an adjusted EBITDA loss of $1.97 billion versus a loss of $952 million in 2021 in 2021. In 2022, we made important investments in our future and did so while ensuring a healthy balance sheet throughout the year with an average liquidity balance of over $4.8 billion. Now moving to the fourth quarter results. We produced 3,493 vehicles, delivered 1,932 and generated revenue of $257.7 million.

Cost of revenue was $615.3 million for the fourth quarter. As we produce vehicles at low volumes on production lines designed for higher volumes, we have and we will continue to experience negative gross profit related to labor and overhead costs. However, as we scale production, we would expect to see economy of scale benefits. Additionally, we recorded a lower of cost or net realizable value, which we also refer to as LC NRV adjustment of $204.9 million in Q4. This amount contemplates the value we anticipate receiving upon vehicle sale after considering costs necessary to convert the inventory on hand into a finished product. Our LC NRV impairment increased 10% on an absolute basis, primarily due to the production of multiple variants of air and an increase in inventory levels associated with the ramp in production.

We typically receive several questions from the investment community on LC NRV and how to normalize this impact. The impairment calculation has various levels of complexity. And so understandably, it’s very difficult to back out when assessing gross margin. What I would say is we have seen improvements in gross margin throughout the year. When adjusting for the LC NRV, we went from an average gross margin of negative 138% in Q1 and Q2 to an average negative 58% in Q3, Q4 and for a total gross margin improvement of 2.3x over that period. And we’re far from done. We have many additional opportunities identified that I’ll illustrate in a moment. Moving to operating expenses. We’ve been able to hold operating expenses essentially flat while increasing the revenue line 32% quarter-over-quarter.

R&D expense totaled approximately $221.3 million, up 4% sequentially. The sequential increase was primarily related to gravity and payroll expenses, partially offset by lower stock-based compensation expense. SG&A expense was approximately $170.9 million, down 3% sequentially. The sequential decrease was primarily due to lower stock-based compensation expense and reduction of specific external professional services. Staff based compensation in the quarter was $71.3 million, approximately $11.9 million was in cost of revenue, $28.5 million in research and development and $30.9 million was in SG&A. In other income, we recognized a noncash gain of $256 million related to a change in fair value of a common stock warrant liability. I’d like to highlight, though, that this noncash warrant related impact can be influenced quarter-to-quarter by a number of factors, but one of the larger factors is Lucid Group’s share price at the end of the quarter.

The decrease in our share price was one of the key reasons for the noncash gain. The inverse should also hold true so that’s something to consider as some of you build forecasts at the end of each quarter. In Q4, we achieved an adjusted EBITDA loss of $623.6 million. Moving to the balance sheet. We ended the quarter with just over $4.4 billion in cash, cash equivalents and investments with total liquidity of approximately $4.9 billion when considering our global credit facilities. This included the successful completion of a $1.5 billion capital raise in Q4, which was comprised of an aftermarket offering for net proceeds of $594.3 million and also the consummation of a private placement of shares to the PIF for aggregate proceeds of $915 million.

The public investment fund of Saudi Arabia has been a committed investor and a strategic partner for Lucid for many years, and we’re so grateful for their partnership and support. Since 2018, the PIF has invested $3.6 billion, including $915 million through its private placement in Q4 2022 through IAR, an affiliate of the PIS. They’ve also been instrumental in introducing us to many of the ministries throughout Saudi Arabia and those relationships and partnerships have resulted in significant economic and administrative support as we launch our international operations in the Middle East. Back to the balance sheet, we’re very proud of the balance sheet strength that we’ve been able to consistently sustain over time. As you’ve seen over the last 15 months, we have access to a variety of funding options from the $2 billion green convertible bond offering the end of 2021 to the $1.5 billion GAAP to market and private placement at the end of 2022, coupled with government support in Saudi Arabia and the large $1 billion ABL facility we put in place with a world-class banking syndicate.

We’ll continue to take a holistic and opportunistic approach towards funding business. We believe we have access to a variety of available options in debt and equity markets as well as access to low-cost government programs. Turning to inventory. Inventory increased 22% in the quarter due to our production volume ramp and the number of vehicle variants that we are now producing. Capital expenditures were $289.9 million in Q4. Year-to-date CapEx was approximately $1.1 billion, slightly lower than our guidance of $1.2 billion, which is due to timing of payments and the deferment of certain costs by reconfiguring usage of Phase 1 at AMP 1 in Arizona in order to use it for a longer period of time before we fully cut over to Phase 2 in Arizona. Before providing our 2023 outlook, I want to speak to our top two priorities of the Company.

Heading into 2023, we recognize the difficult market environment and particularly the impact higher interest rates and market uncertainty has on consumers’ inclination to purchase, and we’re taking action. We talked about our two strategic priorities in 2023 being: number one, growth; and number two, cost. Peter spoke to our growth priority. So I’ll largely address cost. But before doing so, I’d like to make one comment on our growth. Beyond our focus on vehicle growth, I believe we have a number of additional opportunities, many of which are already beginning to become additive to 2023. Our strong technology advantage is no longer in question. our range, our performance, our efficiency, our charge times, we’re increasingly being recognized for our in-house technology.

And these are creating opportunities. We generated revenue from our motorsports electric drive unit in Q4. We expect to recognize a small amount of revenue from a U.S. government award for battery module prototypes and a number of others have reached out to us for discussion on licensing or purchasing our technology. In addition, we signed our first vehicle emission credit deal in the U.S. It’s a multiyear deal, and we expect to recognize a small amount of revenue starting in 2023, and we see considerably more opportunity here as the regulatory environment around many parts of the world’s Titan. Turning to costs, there are two areas of cost that we are zeroing in on. The first is driving down the cost per vehicle. The second is cost optimization of operating expenses.

And let me go through each. On the manufacturing and cost of goods sold side, we’ve been intensely focused on reducing costs. We have daily cost improvement meetings across various areas of manufacturing, engineering and supply chain. Last year, we were able to reduce costs to more than cover the headwinds in the form of battery raw material input costs. As we are sitting here in February, we already have identified cost opportunities at a similar level to last year that we expect to implement by the end of this year. And we are surfacing more innovative ideas in cross-functional internal meetings and value engineering workshops with our supply base. This is before considering the impact of the Inflation Reduction Act which we expect to contribute as much as a couple of thousand dollars per vehicle.

As we look ahead to Gravity, we’ve already sourced approximately 70% of Gravity components with a very strong carryover of suppliers from air. And I’m happy to report that on an aggregate basis to date, we’ve been able to stay in alignment with our cost target for Gravity. Another area of COGS focused for this year is inbound freight. We’ve achieved significant reductions last year by moving our international freight from air transit to sea, but we’ve identified another 2x to 3x savings that we believe is possible. We have a task team assigned, and we think this is one of the fastest realizable cost reduction opportunities available to us this year. On the operating expense side, we’re instilling the same approach. We’re looking at all facets of spending with a multitude of ideas on the table.

In SG&A, we do expect growth in a couple of key areas. Number one, we’ll continue to strategically build out our service and delivery footprint throughout the U.S., Europe and the Middle East as we meet the needs of our growing customer base and our commitment to customer care. However, we’re simultaneously studying ways to drive increased efficiencies out of our existing studio and service center assets and were feeding this information into our future planning. And second, we’re increasing our investment in IT enterprise systems to support the increasing production and delivery volume, global expansion, continuous improvement in cybersecurity and growth in cloud data resources for both our active customer fleet and our internal R&D initiatives.

We are instilling a culture of cost consciousness and we’re working across the Company to identify and execute on numerous cost efficiency opportunities. Now to our outlook. For 2023, while we believe we have capacity for greater production, we’re forecasting a production range of 10,000 to 14,000 vehicles. Given the uncertain macro environment, we think it’s prudent to provide a guidance range that’s larger than what we would provide under normal circumstances. While we don’t provide quarterly guidance, I want to highlight some things to consider as you think about the linearity throughout the year. In Q1, factory production in the early part of January was reduced by seven days of production due to a planned year-end physical inventory count.

We’ll also start building vehicles for Europe and the Middle East in earnest shortly. And so there will be some transit time associated with that. In addition, due to supply chain challenges, we were unable to deliver on the popular stealth look option resulting in a reduction of buildable configurations heading into Q1, and so we made a strategic decision to moderate some production as we transition to buildable configuration. Thus, we expect Q1 to be down significantly on a sequential basis with a corresponding impact on margins in Q1. In Q2, we will ramp shipments to the Middle East and Europe, so we would expect total deliveries to increase in Q2. We will also begin to build popular configurations across several vehicle variants, including pure and higher volumes for which demand remains very strong.

Starting in Q3, we may begin activating parts of Phase 2 at AMP 1, and we expect some transitional downtime could occur. In Q4, with Phase 2, we would expect higher efficiencies as specific shops come online and hence, greater potential manufacturing output versus the rest of the year. While I would caution that there are many controllable and uncontrollable variables that can affect gross margin, I wanted to provide some color on the direction of our gross margin. We expect lower volumes in Q1 to impact gross margin but expect a sequential improvement throughout the year, which should be supported by some of the expected bill of material cost down and inbound freight opportunities that I just mentioned a moment ago. Regarding our liquidity position, we ended the quarter with approximately $4.9 billion in total liquidity, which we believe provides sufficient capital at least into the first quarter of 2024.

Moving to CapEx. We expect capital expenditures for 2023 to be between $1.5 billion and $1.75 billion, reflecting some efficiencies and deferrals in our capital outlay, which is lower than the $2 billion annual CapEx that we provided at the beginning of 2022. We are moving forward with parts of Phase 1 in Arizona as we believe will benefit from a number of cost efficiencies, including bringing logistics more fully on site, bringing staffing in-house as well as plant efficiency. We also are looking at activating Phase 2 online in stages on a shop-by-shop basis, which we expect will allow us to defer some capital expenditures until 2024 without a delay in the estimated Gravity timing. Lastly, as Peter mentioned, we had more than 28,000 reservations as of February ’21, and this is before counting the potential impact to be up to 100,000 vehicles from KSA.

At the time we first started providing reservation, we have not started production or delivery, and we provided this figure as a proxy to estimate potential future revenue. With the progression of our business, we believe production and deliveries are a better representation of the progress of our business. And so going forward, we will no longer plan to provide an updated quarterly reservation number. However, we plan to continue to provide quarterly production and delivery figures shortly following the end of each quarter. As we look into 2023, we’ll continue to focus on strong capital discipline, leaving no stone unturned for every cost optimization or elimination opportunity. We are proud of our technology and product achievements. We’re gearing for growth while simultaneously taking a vigorous and comprehensive look at reducing costs, and I am very excited about the opportunities that lie ahead of us.

With that, let me turn it back to Maynard to get your questions. Maynard?

A – Maynard Um: Thanks, Sherry. We’ll now start the Q&A portion of the call. Before we take questions from those on the phone, I do want to take questions from our retail investors sent them through Say Technologies platform. And the first question is, is the Saudi PIF taking Lucid private?

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

Peter Rawlinson: Peter here. The partnership and support has been phenomenal.

Maynard Um: I think we’ll move to the questions from the phone lines, please.

Operator: Thank you. Our first question comes from the line of John Murphy with Bank of America. Your line is open.

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

Peter Rawlinson: Yes. Peter here, John. That’s a very cogent point. First of all, we do have over 28,000 reservations. But remember that a reservation doesn’t guarantee itself is transmitting — translating into delivery. These are nonbinding reservations. So you can’t bank on a reservation automatically into delivery. I’d also like to point out that the 28,000 does not include the 100,000 that are potentially being ordered by the government of Saudi Arabia. So we’re sitting in a very good position in that respect. I think what we’ve got to focus on is providing cars building configurations from a factory that precisely match the configuration of the customer order. For example, we’ve got stealth trend coming. We’ve got a little delay in stealth trend because of a supplier issue.

And there’s a lot of orders for stealth. And then there’s pure in volume, although we’ve delivered some pure and many of those reservations are waiting for the availability of the pure solution of pure the real-world drive. So, I think a lot of this is our focus on providing new variants, our focus on building cars with the utmost attention to quality and cost in terms of optimizing our processes and matching the cars that we do build to the precise reservation — the precise specification of the customer whilst in meaningful that a reservation in itself is non-binding and not guaranteed to transition to the consummation of an order.

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

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

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

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

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

Operator: Please standby for our next question. Our next question comes from the line of James Picariello with BNP Paribas. Your line is open.

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

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

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

Peter Rawlinson: Yes, there’s quite a lot of interest in Stealth. And unfortunately, we’ve got a little bit of a delay due to supply chain challenges, which we’re working seriously to resolve.

James Picariello: Okay. Understood. And on gross profit for this year, and it does sound as though the LC NRV formula is quite complicated. But that totaled almost $570 million negative noncash impact for 2022. Is there any way to think about what that impact will look like for this year? And any clarity on if this year goes to plan, your plan as stated here, when gross profit breakeven, the time horizon as to when that could be achieved, I think would be — obviously would be really helpful?

Sherry House: Sure. So as I said on the prepared remarks, we’re really proud of the actions that we were to take last year in terms of cost reduction, cost down inbound freight reductions that led to a 2.3x improvement when you went from the first half of last year to the second half of last year when removing the effects of the LC NRV. As we look forward to next year, the way that we’re thinking about it is we have identified areas for bill of material cost reductions. We have identified areas for inbound freight reductions we do see emission credits starting to come more into play. We do expect to start getting the benefits of IRA impacts. We do also see some lessening of our need to be buying ahead significantly in the spot market.

Last year, this time, we were buying ahead a lot of semiconductors. We’re not doing that nearly as much as we were last year this time. All of those are potential tailwinds and benefits to gross margin. On the other side, some of the things that you’ll see is as the trim mix changes and it moves to more pure, those are lower margins. So that’s kind of working against you from a gross margin profitability perspective, also just looking ahead as we start to activate some of the additional equipment in the factory that’s going to see a little bit more of a burden in terms of depreciation, which is also going to act in the opposite direction. So what I wanted to do now is to just at least help contextualize a little bit of where the puts and the takes are, we’re not here going to share exactly when we think we’re going to be gross margin positive but I think that those are important factors to take into consideration as you’re thinking about your model.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Your line is open.

Andres Sheppard: I just wanted to touch on the guidance once more. So that 10,000 to 14,000 number, which is roughly in line with the preliminary guidance for last year, can you talk about some of the kind of the assumptions that are embedded in that guidance and just maybe a little more granularity? I presume that, that’s — you said before that you will begin shipments to Europe and Middle East later this year. So I presume that part of that production is being included in there. I’m just wondering, if you could maybe add a little more context there?

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

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

Peter Rawlinson: Indeed, I actually share your optimism. I think that it’s a really big dining opportunity here. But I have to have laser focus. I’ve described the three steps, the three steps forward. Can we link these cars? Can we sell them? And can we make a module on them? Last year, my focus was on manufacturing, and we make them, my focus now is on amplifying the message, attracting a broader audience and ramping up our sales. But you’re absolutely right. I mean this is a technology race, and this is very little understood. There’s a reason we’ve got outstanding range with the reason we’ve got so much more range than the competition. It’s not born due to an oversized battery pack. It’s more upon exclude efficiency, which we’ve created through in-house technology.

That means we can go further with a smaller battery pack. That means our car can be lighter and more agile and more cost-effective to make. And this is where we have a leadership. And this is so relevant to many other companies that haven’t really invested in this new era of electric technology, but it’s also good applications outside of automotive in heavy industry, aerospace and agriculture.

Sherry House: And as you have heard me say in prior earnings calls as well, this just doesn’t have an application just for like the passenger cars like Peter is saying, but also opportunities for fleet operators. They more than anybody, appreciate the efficiency, the performance, the range that we have uptime is important to them. Range is important to them. So, those are factors that we think also makes us a very attractive option for fleets as well.

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

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Ron Jewsikow with Guggenheim Partners. Your line is open.

Ron Jewsikow: First on reservations. Are you seeing higher cancellation rates on maybe your higher trim vehicles? Or what drove the recent decision to add an incentive on select trim levels?

Peter Rawlinson: Well, remember that when we have a reservation, it is a nonbinding reservation. So there’s no guarantee that someone who’s made a reservation will actually follow through with that. What we are seeing is a very strong demand particularly or a product sort of forthcoming pure, redrive Pure touring. I think that we’ve had a very strong uptake of green addition and grand touring, but I think there is a latent demand for other products in the range and particularly stealth. I think there’s a strong demand for stealth, and that’s why I frustrated that we have some supply chain issues now, which are delaying that a little bit, but it’s coming very soon.

Ron Jewsikow: Okay. So that’s helpful. And then presentation calls out strong demand for Air Pure. And I think that makes perfect sense, especially when we look at the implied potential sales in the reservation backlog. But is that the single biggest gating factor in for 2023 production, or maybe are we under appreciating some of the stealth and international batching being pretty large issues. I guess the way we think about it ramping pretty meaningfully.

Peter Rawlinson: Yes, it’s an overlay of another — it’s more none than that. I mean it’s just the different specification of cars, interior color, exterior between the range of touring, Grand Touring and Pure and then you’ve got the real combinations and then you overlay that with the stealth. There’s quite a number of combinations here, and it’s matching the discrete requirements, the very discerning requirements, a very discerning high-end customer base. With our ability to build specifically those specs of cars and get those to the customers. That is one factor. And then we have the overlay of the international deliveries and the fact then that you’ve got relatively long journeys to faraway places between the factory and actually the customer. So all these factors conspire to, and we give a very analytical approach. Sherry has led a very thorough analysis from the executive team looking at a whole range of factors to lead to these conclusions.

Sherry House: Capable of cross-functional look at that across every single area from supply chain to manufacturing to all of those, and as we said that the manufacturing is very well prepared to be able to take on additional volumes as they come for.

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

Operator: Please standby for our next question. Our next question comes from the line of Chris McNally with Evercore.

Chris McNally: Two quick ones, one on Pure and then one just qualitatively on gross margin. So Peter, on Pure, you mentioned that more units and more volume will be available in early 2024. And just to combine the sort of demand, wait time and reservations comments you already answered to some of the other questions. Why couldn’t you produce more Pure this year that would pull in higher conversion from the reservations and just do it this year as opposed to ’24? That was the part that wasn’t clear.

Peter Rawlinson: We don’t have to wait till 2024. What we’ve said is that Gravity will start production in ’24. We’re absolutely indeed doing that, Chris. We’re ramping up Pure, and we will drive Pure throughout this year. It’s what we need to do is ramp up the suppliers’ ability to supply the parts for those particular models.

Chris McNally: Okay. So while production is not a bottleneck, there is maybe component supply issues that have a natural ramp curve for Pure. So you are somewhat limited on the amount that you can produce Pure this year, even though it’s not a “bottleneck.”

Peter Rawlinson: That’s right. And we’re further ahead with four-wheel-drive Pure than two-wheel-drive Pure. And actually, two-wheel drive is a great car as well because it’s a classic. We will drive car, they are driver’s machine.

Chris McNally: Okay. Peter, would you — I mean just because there’s always a question that all a result of this chicken in egg of demand versus production. Would you be willing to venture on a go-forward basis do you think Pure will be sort of greater than 50% of sort of the demand for Air if we put Gravity?

Peter Rawlinson: I would think that’s a reasonable function, yes. I think that we’re looking for just its price point will determine that that figure with that presumption would be a reasonable I can’t dive precisely on the product mix. But I would think you not far off.

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

Peter Rawlinson: And that’s what we’re going to be building Green and Grand Touring is now very soon for Europe and the Middle East will be a skew towards higher end products, but I think that will be transient in those markets.

Chris McNally: Okay. Great. And then, Sherry, just one more for you, I know you don’t want to give gross margin targets or guidance. But is it fair to assume you talked about the cost improvements from sort of the 58% sort of “normalize” in second half, you’ll make some improvements over the course of 2023. But you really won’t get the unit scale under absorption, just given the numbers versus where sort of second half and Q4 are? Is it fair to assume that, that is probably, by far, the absolute largest bucket to get you to gross margin positive? And that when I think about a high utilization number, you probably have to get production into the 30-plus units to sort of have high utilization on just Phase 1, again, no numbers, but conceptually.

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

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

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