Lucid Group Inc

NASDAQ:LCID

Earnings Call Analysis

Lucid Foresees Improved Margins, Adjusts Production Outlook

Lucid Group, riding on technological advancements, partnered with Aston Martin, reflecting its technological strengths and market recognition. Vehicle production increased to 1,550 units in Q3, with deliveries up by 4% from Q2. However, revenue declined 9% QoQ due to product mix changes, but with an improved gross margin due to lower impairment charges. Lucid adjusted its production outlook to 6,000-8,500 vehicles, down from the initial guidance of more than 10,000, citing inventory management, not production capacity, as the reason. The balance sheet remains strong with $4.9 billion in cash and investments, expecting sufficient liquidity through 2025. Capital expenditures for 2023 are projected at $1 billion to $1.1 billion, signaling continued investment in growth.

Embracing Prudence in the Face of Rising Interest Rates

In the latest earnings call, the theme of prudent financial management in the context of an uncertain economic environment with persistently high interest rates was emphasized. Peter Rawlinson, CEO of Lucid, underscored the company's commitment to efficiency and cost optimization across all business aspects, including car manufacturing, working capital, and inventory. Moreover, he signalled the company's efforts to bolster delivery numbers. As interest rates hike up the cost of purchasing vehicles, Rawlinson noted Lucid's steps to support customers in this challenging climate. Interestingly, Lucid's substantial cash reserves have been a silver lining, generating significant interest income that partially cushions the higher interest expense.

The Anticipated Launch of Gravity SUV and its Market Impact

The discussion took a turn towards the future with Rawlinson sharing expectations for the upcoming Gravity SUV, which is set to launch in late 2024. The Gravity SUV is projected to significantly expand Lucid's market reach, especially within the burgeoning SUV segment. Rawlinson detailed the strategic decision to design Gravity on a distinct platform from the Lucid Air, allowing the company to target diverse markets with two clearly differentiated products, thereby reducing the risk of cannibalization between models. This approach not only fosters innovation but also streamlines production processes. Sherry House, CFO of Lucid, commented on the financial logistics, citing greater asset utilization and shared production infrastructure as pivotal in flexibly responding to market demands.

Financial Outlook and Capital Expenditures

The financial spotlight revealed a focused strategy on managing capital expenditures. House stated that the CapEx guidance for the year had been reduced from an initial range of $1.5 billion to $1.75 billion to $1 billion to $1.1 billion. Around $500 million of the planned 2023 CapEx has been deferred to 2024, aligned with the Gravity SUV launch. This reallocation signifies potential savings and a conscientious effort to manage liquidity. In terms of spend trends, the emphasis appears to be shifting from the Lucid Air, which has already seen most of its related expenditure, to the Gravity and subsequent midsize models on the horizon.

Adjustments in Average Selling Price (ASP) and Future Trends

House acknowledged the decrease in the company's ASP during the transition from Q2 to Q3, attributing the decline to the introduction of the lower-priced Pure model in the US and increased exports to Europe and Saudi Arabia. For Q4, she predicts a consistent ASP, with the US remaining the predominant market, but countenances possible increases in both KSA and European deliveries. The steady ASP guidance suggests a controlled approach to product mix and pricing in the face of geographic expansion efforts.

Closing Remarks on Earnings Call

The earnings call wrapped up with a brief reiteration of Lucid's financial prudence, ongoing production improvements, and anticipation of the Gravity SUV's market entry. The dialogue throughout the call reverberated with a sense of cautious optimism, underpinned by strategic planning and a firm grasp on fiscal responsibility in the face of global economic pressures.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to Lucid's Third Quarter Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Head of Investor Relations, Maynard Um. Please go ahead.

[Maynard Um, executive]

Thank you, and welcome to Lucid Group's Third Quarter 2023 Earnings Call. Joining me today are Peter Rawlinson, our CEO and CTO; and Sherry House, our CFO.

Before handing it 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 filings with the SEC and forward-looking statements on Page 2 of our investor deck available on the Investor Relations section of our website at ir.lucidmotors.com.

In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the investor deck.

With that, I'd like to turn the call over to Lucid's CEO and CTO, Peter Rawlinson. Peter, please go ahead.

[Peter Rawlinson, executive]

Thank you, Maynard, and thank you, everyone, for joining us for our third quarter earnings call. In Q3, we delivered a number of the key milestones that we set out to achieve. In September, we started production of the Air Pure Rear-Wheel Drive, as we said we'd do, and we are currently in the process of ramping up its production.

Now the Air Pure Rear-Wheel Drive is our most attainable [ variant ] with a starting price of just $77,400. However, it sacrifices absolutely nothing for the style and technology, range and performance, space and practicality. It has it all. The Pure Rear-Wheel Drive can charge up to 150 miles in just 12 minutes. And has an official EPA estimated range of 419 miles, more than any other electric car currently available besides other Lucid Air models.

But most importantly for me, it's incredibly delightful and engaging to drive. And we continue to push the boundaries of our technology with a Pure Rear-Wheel Drive efficiency of approximately 4.7 miles per kilowatt hour, and this is further widening the gap against our competitors.

Now for customers, this means the ability to go further with less batteries. And because the battery is small, this means the car weighs less, is more agile and can cost less than a vehicle of similar range with a larger battery pack. So you get a greater distance, small battery, less raw materials, lower running costs, immense interior space and it's much better for the environment.

We also started production of Lucid Air Sapphire in September, and we delivered the first cost to customers at a special event in early October. The Air Sapphire is the world's first fully electric luxury super-sports sedan, achieving a 0 to 60 miles per hour time of just 1.89 seconds, 0 to 100 miles per hour time in just 3.84 seconds and 0.25 mile time of 8.95 seconds with a top speed of 205 miles an hour. Air Sapphire delivers both 1,234 horsepower and an efficiency of 3.61 miles per kilowatt hour as well as an EPA estimated range of 427 miles on a single charge, representing an extraordinary fusion of capabilities. I mean for reference, the closest competitors provide perhaps between 20% and 50% less range.

Now the technology that underpins Sapphire enables an unsurpassed blend of performance, agility and versatility. And the result is an extreme performance car, but it's not just about 0 to 60 [ time ]. That's just one dimension. It's truly a rewarding car to drive with amazing road car dynamics. In fact, Jason Cammisa, who is a well-regarded automotive journalist said, with the Lucid Air Sapphire is like the best-handling sedan in the history of the world or maybe the best-handling car period. With Lucid Air Sapphire, we once again raised the bar and increased the gap between Lucid and its competitors, creating the world's most well-rounded and versatile, high-performance EV.

We also achieved major manufacturing milestones in September. In Arizona, we officially shifted general assembly to the Phase 2 factory. This is just the start as construction continues on the new powertrain manufacturer area with our body-in-white expansion and stamping facility getting really vertically integrated out there. We made history in Saudi Arabia also opening of country's first-ever car manufacturing factory. In its first phase, the factory has a capacity to assemble 5,000 Lucid vehicles a year, and operations are already underway.

Now before turning to production and deliveries, I'm delighted to announce the appointment of Mr. Marc Winterhoff as our new Chief Operating Officer, a newly created role, which reports directly to me. This appointment is a natural evolution of the company as Lucid enters the next phase of its growth. In just 2 years, we expanded our global sales and service footprint, built our second factory facility located in Saudi Arabia. We signed our first technology agreement with Aston Martin, and we are working assiduously on future vehicles, the Gravity SUV as well our more affordable midsize vehicle.

Thus, the execution of our strategy towards global manufacturing supply chain, sales and service, marketing and international markets is indeed critical to our success, and I am confident that Marc's intimate knowledge of Lucid and extensive automotive experience will be invaluable as we continue to grow. And I believe this will significantly benefit us by freeing up my time to focus upon mighty strengths, namely the product strategy and its technical execution, the overall commercial strategy and a long-term vision for this company.

I particularly look forward to help drive our technology advantage over our competitors with our exciting technology road map. And naturally, I'll also be closely partnering with Marc in essential day-to-day matters and operations.

Now turning to production and deliveries. In Q3, we produced 1,550 vehicles. Now this does not include over 700 vehicles that were in transit to Saudi Arabia. Whilst these were manufactured in Q3, they will only be counted towards production upon final assembly at our AMP-2 facility in Saudi. And we delivered 1,457 vehicles in the third quarter, including initial deliveries Lucid Air under the Ministry of Finance agreement. We decided to prudently align our production with deliveries. And we are adjusting our production outlook to a range of 8,000 to 8,500, down from more than 10,000. Now, Sherry will touch on this in a little more detail.

Now turning to brand awareness. A critical imperative has been very specific in compelling sales and marketing initiatives and actions to enhance awareness and demand. Efforts are well underway and showing good results. In North America, the majority of orders in the third quarter came in fact from new customers. These are customers whose first contact with Lucid within the quarter of their order.

And we believe that our targeted data-driven approach to marketing as well as our compelling offerings are bearing fruit despite an uneven macro environment. The volume of Lucid Air on the road also continues to grow, and it's exciting to see all photos of Air sightings in a while that people are sending out. I believe that our brand awareness can benefit more meaningfully once we hit that critical mass of cars on the road. So we're pleased with our brand awareness progress in the U.S. as well as in the Middle East. We're making progress in Europe with test drive growth, but we're still early on in our journey there, frankly, and expect more significant progress towards growth next year.

We've also been working on improving the customer journey. From the start of the journey with a financial service process all the way through the final delivery process. And we've made great progress, but we do still have some more work to do. We're also working on new sales initiatives to accelerate deliveries and to improve the customer experience. So a lot of things happening behind the scenes that we're really excited by.

I'm also pleased to announce that Lucid customers can gain access to more than 15,000 Tesla Superchargers in North America. And then we will integrate the North American changing standard into our vehicles in 2025. And of course, all Lucid vehicles with the current CCS charging standard, will be able to access that network through an adapter. Now this is an important addition to providing our customers expanded access to reliable and convenient charging solutions.

Now turning to software. Earlier today, we started rolling out our latest over-the-air software update. This update will enable a new revolutionary feature in vehicle-to-vehicle charging. Not only are we solving range anxiety with our industry-leading range but the Lucid Air can now also lower anxiety for owners of other EVs with less range. So please stay tuned for more details of this in the very near future.

But let me tell you why this is so significant. This is a shining example of our systems approach to the design of the vehicle. It's the tight integration of our cutting-edge software with our state-of-the-art technology. Now this systems approach of integrating hardware and software is what allows us to provide these value-added updates. And I believe a few in the auto industry can do it as well as to the degree that we can. And with Lucid Air, the longer you own the car, the better it can get, we continue to improve and add functionality as you own the car.

Now I invite you to watch a video with Mike Bell, our Head of Digital. You can find on the Tech Talks section of our Lucid website and which I hope will give you some insight into our software differentiation and a glimpse into what to come.

I'm also delighted to say that we recently closed our Aston Martin arrangement. Sherry will go through this in more detail, but I want to highlight that Lucid was chosen as part of a competitive process based upon the merits of our Sapphire technology. And, in fact, since the announcement of the Aston Martin deal, I'm very pleased to say that we have seen an increase in inbound interest to access our great technology.

As we move forward, I continue to see significant market potential. We'll continue to advance our technology and look to further widen the technology gap. Some in the market are talking about the potential for a reduction in EV investments by other OEMs.

Now whilst I urge the industry to accelerate the transition to sustainable transportation, nonetheless, if this were to come to bear, I believe that Lucid would be in a prodigious position to benefit through our technology licensing business. And whilst Lucid is becoming widely recognized as having the best EV technology [indiscernible]. Some may be led to believe that it's expensive to make. And this is not well understood. [ All this ] technology was designed from the outset for mass manufacturability.

I cannot close without talking about a product I'm very excited about, the Lucid Gravity, a 3-row, 7-passenger SUV. And I can't wait to unveil it at our special launch event on November 16, next week at the LA Auto Show. The Gravity will significantly expand our market opportunity opening up a total addressable market that is nearly 3x larger and growing.

More importantly, for our customers and for the planet, the Gravity takes all the innovations of Lucid Air and builds upon the range, the efficiency, the performance, the driving experience, the interior space, just everything that people love about the Air and help redefine the Sedan space we will now bring to Gravity. And in turn, we will redefine the SUV in the electric age.

But let me be clear that Gravity SUV isn't an Air Sedan design that we just converted to an SUV. But Gravity has been designed from the ground up to be a true SUV. Now I don't want to reveal too much, but I think you're going to love it, and I can't wait to show it to you all next week. And I hope that many of you will be able to join us for this momentous occasion.

So in closing, we recognize that there are forces that are out of our control and that some are not. We are navigating an uneven macro environment that is also affecting many others in the industry. But I'm excited about the remainder of this year and for 2024. In addition to Gravity and the expansion into a larger and growing market, we have a number of other announcements that I'm excited to share with you in the future. We know we have a lot of hard work ahead of us. And I'd like to close by saying thank you to our most important asset, our employees, to our suppliers and to our partners.

And with that, let me turn it over to Sherry for an update on our financials. Sherry?

[Sherry House, executive]

Thank you, Peter, and thank you to those who are taking the time to join us today. I'd like to start by acknowledging our employees for their perseverance, dedication and especially their hard work. And our suppliers and partners for their deep commitment. We've endured through the pandemic, global supply chain disruptions and now an uneven macro environment.

Despite all of this, we gained almost 300 basis points of U.S. market share in the Premium Luxury Sedan market year-to-date as of September 30 versus the same period in 2022. We opened manufacturing locations in 2 continents, and we launched our full of Air variants. We believe we have the best car in the market, and we're equally excited to redefine the SUV market with Gravity.

Before turning to Q3 results, let me speak about the Aston Martin agreement. We're pleased to have closed the deal and pursuant to the terms of the agreement, we received approximately 28.35 million ordinary shares in the first cash installment of USD 33 million. Excluding the Aston Martin shares, this deal is anticipated to be worth in excess of $350 million.

Turning to our cost control program. As you'll recall, this was one of our top 2 priorities we highlighted at the beginning of this year. The 5-part cost control program that we implemented in the first half of this year has yielded significant operational improvements and cost savings through inventory level drawdowns as well as vehicle direct cost, freight and overhead cost reductions. We've been able to draw down our raw material inventory levels by approximately 10% from the start of Q3 through improvements made in material planning and inventory management.

Particularly, we've been able to improve forecast accuracy of our inbound shipping channels and optimize inventory entitlement through the course of the program. These lower inventory levels have resulted in materialized savings related to logistics and material handling labor, equipment rentals and working capital. For vehicle direct costs during Q3, we were able to implement measures such as battery cell optimization and product development improvements. For example, a new battery cover is being introduced across all modules that we manufacture. Additionally, we've introduced packaging improvements on large parts such as fascias, panels and glass as part of Lucid's carbon footprint reduction plan.

The cost control program for vehicle direct cost has also helped identify and steer further opportunities for 2024 with key measures such as product feature consolidation and upgrades as well as bringing select operations in-house. Further cost reduction opportunities have also been identified in both cost of goods sold and OpEx.

Now turning to our 2023 third quarter financial results. We produced 1,550 vehicles during Q3. These are factory gated vehicles that are ready to be sold to a customer. This does not include the over 700 additional vehicles that were manufactured and then prepared into semi CKD kits. These kits are not counted as factory gated until they're finally assembled at our AMP-2 factory in Saudi Arabia. The Saudi Arabia vehicles are a combination of retail customer and government cars, and we hope to deliver many of them in Q4. We delivered 1,457 vehicles, up 4% both year-over-year and sequentially versus Q2. We had hoped to deliver more vehicles in Saudi Arabia in the third quarter. However, the scale up time has taken a little longer than estimated.

Turning to the P&L. In Q3, we recorded revenue of $137.8 million, which represented a quarter-over-quarter decline of 9% largely driven by a change in product mix. Cost of revenue was approximately $469.7 million for the third quarter. Our gross margin improved slightly on a quarter-over-quarter basis primarily due to lower impairment charges in Q3 related to the lower of cost or net realizable value that we also refer to as LCNRV. This amounted to $230.8 million in Q3, a 21.7% reduction from Q2.

Looking forward to Q4, although there are many controllable and uncontrollable variables that can affect gross margin, we anticipate improvements to gross margins, driven primarily by projected reductions in impairments, on costs and logistics, along with us beginning to recognize productivity improvements as part of our transition to AMP-1 Phase 2, offset to some degree by incentives to help aid conversions. I would also highlight that our results do not include any potential IRA benefits as we work through fully contemplating the accounting dynamics. However, we still expect to be able to recognize benefits, which may be up to $2,000 per vehicle and we're evaluating the timing of recognition.

It's also important to note that there have been meaningful reductions in commodity costs which we've not yet benefited from due to higher-than-optimal inventory levels. As we work down inventory we built partly due to COVID and partly due to the inventory ramp-up associated with the launch of new vehicle variants, we expect to see meaningful financial benefits in 2024. We'll be watching very carefully for any inflationary impacts that may offset these gains, however.

Now moving to operating expenses, R&D expense totaled approximately $230.8 million, down 1% sequentially. SG&A expense was approximately $189.7 million, down 4% sequentially. The sequential decrease was attributable to better cost management partially offset by higher marketing expense. We added 4 new locations to our studio and service center network in Q3 bringing our total at the end of the quarter to 45, excluding our temporary and satellite service centers.

On the service side, we ended Q3 with 41 mobile vans in the fleet in 77 nationwide approved body shops. We also plan to continue to open satellite service centers, which will cost effectively provide additional locations for Lucid customers. Our stock-based compensation in the quarter was $68.2 million, down 4% sequentially. You should expect to see an increase in Q4 due to vesting as well as incremental hires.

Total other income was $122.3 million, up from $74 million in Q2. The increase was largely attributable to higher interest income due to higher average balances and book yield from cash and investments. We also recorded a noncash benefit of $60.3 million related to the change in fair value of our common stock warrant liability, up from $42.1 million in Q2. As a reminder, this noncash impact can be influenced quarter-to-quarter by a number of factors with one of the larger factors being Lucid share price at the end of the quarter. In Q3, we achieved an adjusted EBITDA loss of $624.1 million.

Moving to the balance sheet. We ended the quarter with approximately $4.9 billion in cash, cash equivalents and investments, with total liquidity of approximately $5.45 billion. We've been able to consistently sustain a strong balance sheet over time. And as we've done for the last 2 years, we'll continue to be opportunistic in exploring and diversifying access to financing sources.

Turning to inventory. Total inventory decreased 6% sequentially. Presuming that supply chain pressures continue to stabilize, we continue to see a pathway to a significant reduction in raw material days of inventory on hand as we work toward greater predictability in the transportation channel in refiner inventory management processes and systems. Capital expenditures were $192.5 million, down 5.5% versus Q2.

Moving to the outlook. We are adjusting our production outlook to a range of 8,000 to 8,500 down from our prior guidance of more than 10,000. I want to make clear that production is not our bottleneck. But rather we're taking a prudent approach to inventory management and working capital to better align with deliveries. The timing of in-transit semi knocked-down kits to Saudi Arabia could affect production in any given quarter, as you saw in Q3. So that's something to keep in consideration as well.

With regard to our liquidity position, we ended the quarter with total liquidity of approximately $5.45 billion. We expect this will give us runway through the start of production of Gravity and into 2025.

Moving to CapEx. We expect capital expenditures for 2023 to be between $1.0 billion and $1.1 billion, reflecting deferrals in our capital outlay. CapEx will support our continued growth objectives as we strategically invest in manufacturing capacity and capabilities, some moderate investment in retail studios and service center capabilities across the globe as well as vendor tooling for Gravity and other areas supporting growth of Lucid's business.

Before I close, I want to mention the Form S-3 that you may have seen filed today after market close. This is not a new issuance and it's related to the previously announced private placement of common stock to the PIF in June of 2023. Pursuant to the agreement, we were required to file a registration statement. So this is simply the execution of our contractual obligations, and this is not a new issuance.

I'd like to close by saying that I'm proud of the team's execution in a difficult environment that affects many in the industry. We started production of Pure Rear-Wheel Drive in Sapphire in September. We transitioned over from Phase 1 to our new Phase 2 facility for general assembly in Arizona. We opened AMP-2 in Saudi Arabia, all on time. We closed the Aston Martin Deal, launched our referral program and will be delivering our vehicle-to-vehicle charging feature through an over-the-air update, highlighting the tight integration of our hardware and software. Something we believe a few others in the industry can do. But we know we have much more work to do. We're working hard to increase the number of vehicles on the road, to help drive an inflection and brand awareness. We're keeping a strong focus on cost control, and we're working diligently on improving the customer journey.

And on November 16, we'll finally release more details about our Gravity SUV at our unveil event at the LA Auto Show. We can't wait to show you this incredible SUV. We think you're going to love it.

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

[Maynard Um, executive]

Thanks, Sherry. We'll start the Q&A portion. Before we get to questions on the phone, we're going to post some questions from our retail investors through the Say platform. So we'll start the first question. What is the plan for Lucid to expand their operations and start becoming a profitable company?

[Sherry House, executive]

Thanks, Maynard. Well, I think we answered the question about our expansion plans already with our discussion of the AMP-1 Phase 2 expansion in Arizona, with the AMP-2 in Saudi Arabia as well as the expansion of our studio and service network.

The second part of your question refers to our path to profitability. This is where our cost control program and the efficiencies that we're looking to adapt through every part of our organization is a core part of our company's focus. Our most important areas of focus continue to be building material cost-down initiatives, manufacturing, labor and overhead cost-down initiatives, automation of key process and expansion of core system capabilities. All of this is to be coupled with our extensive demand generation activities globally. As we ramp production and with Gravity company coming, we believe it will start to really show the strength of our business model. And of course, we'll have midsize to look forward to as we exit in the decade.

[Maynard Um, executive]

Great. Second question, are there any plans to stop the current slide of stock prices? What are the efforts Lucid is doing for it?

[Peter Rawlinson, executive]

Well, as you know, stock movement is a function of a number of factors. And some factors are clearly beyond any company's control. There are things like interest rates, supply chain issues and other macro conditions that can make it extremely challenging for any company to offer the kind of predictability that investors would like to see. Now that said, what is within our control is continuing to deliver on our product rollout promises to continue to innovate, to invest and to make important progress against our plan. We'll also continue to push the revenue opportunities beyond automobiles, whether in technology, emission credits and indeed software. So quite simply, we have to execute. And the announcement today of the org structure changes, I believe, will help us really, really tremendously.

[Maynard Um, executive]

Thanks, Peter. The third question, I think, we answered in our prepared remarks, as it relates to any guidance for 2024. Sherry mentioned, the outlook is typically something we give on our Q1 earnings call. So we'll move to the next question. What will Lucid do to prevent cash burn per vehicle?

[Sherry House, executive]

Great. Well, first, let me just start with the cash and liquidity that we have on hand. In my prepared remarks, I think, I might have just said $5.54 billion should have said $5.45 billion. So I just want to get that correct on the record. But this particular question, a lot out there today that is misleading and frankly misunderstood as it relates to this question. First off, it [ conflates ] cost with investment.

And this particular question, specifically asking about our cash burn for vehicle. It's really important to note that there's a number of noncash expenses that are in our P&L, things that we've already paid for that are showing up in the P&L. So the largest ones include depreciation. This is not just of our manufacturing and studio service center expansion efforts, but also for all other depreciation related to facilities, investment in our new program tools as well.

Additionally, we talk about the impairment we refer to it as the LCNRV, which looks not yet today, but it also includes costs today that are related to future quarters. So it's conflating future costs in the current period, which can give a misleading interpretation of these numbers.

So with that as a backdrop, there are a number of things that we are doing today at a company level and at a per vehicle level. And those are as follows. And some of them just talked about. Some cost reduction, manufacturing labor and overhead reduction, efficiencies across all areas of our business, importantly, also enabling the flywheel effect that we expect to naturally occur is more of our cars are in the market and in people's driveways.

And our fantastic customers have the ability to drive enthusiasm in their neighborhoods and on the street. So what is important here is that we have a plan and we are working diligently across every area of our business to reduce costs, drive enthusiasm for our brand and bring profitability to our investors as quickly as possible.

[Maynard Um, executive]

Thanks, Sherry. Maggie, I would like to turn to the phone lines for questions.

[Operator]

[Operator Instructions]. Our first question comes from John Murphy from Bank of America.

[John Murphy, analyst]

Just a first question here and Sherry just about the Saudi CKD units. It's [ 700 ] plus in the quarter, and I would imagine there'll be some more to come in the fourth quarter. Sort of an optimist might say, hey, that's the significant reason you have the guide down on production units, but sort of customers might say, hey, those aren't included.

So I'm just trying to understand where these units are ultimately going to be accounted for. And if we think about the [ 700,000 ] units going to Saudi, I would imagine they're effectively presold. I mean there's no question that there's orders there. So I would imagine that the revenue recognition and the sale would occur almost immediate upon your final assembly there. So just how are these being accounted for? And how should we think of that relative to the guide down in production for the year?

[Sherry House, executive]

So first off, the SKD units, as we said, are not showing up in production for this quarter. So we'll be building those out presumably over the next quarter. So they'll show up in production numbers likely mostly in Q4, okay. So that's the first part of your question.

With respect to being presold, I can't really speak to the exact transaction dynamics with us in the Ministry of Finance. We really don't speak about the specific transaction elements of any of our customers. But what I can say is that part of these units will be for the government and part of them will be for retail. We have already begun deliveries to the government, as we said in the 10-Q, though that was nonmaterial for this last quarter, and we expect to increase going forward.

[John Murphy, analyst]

Okay. Sherry, maybe just to follow up on that. I mean there will be a reload on this in the fourth quarter, right? So I mean, it does seem like you're selling yourself short or being a little bit too humble on what was executed this quarter and what might be executing in the fourth quarter. Would it be fair to assume that these -- you're calling SKDs, I call them CKDs, whatever on these knockdown kits. We'll continue to reload for the foreseeable future until that AMP-2 is really up and running?

[Sherry House, executive]

Yes. So we'll be establishing a quarterly cadence over time. I think that's fair to say. And it's going to be important for us also to introduce other product variants into the region. So we've been producing new product variants that will also be shipped over to Saudi as well. Some of those will be produced in the quarter. Some of those are going to be in ships at the end of the quarter or not yet into production numbers. But, yes, I mean you're going to be sending vehicles over there, producing them into finished units and then delivering them and then completing that process each quarter.

[Peter Rawlinson, executive]

Yes. I think we'll reach an equilibrium point, John, where those units in transit equalize out. It's -- a lot of this is due to the shipping time, getting those kits from Arizona right around the world to the [ Kingdom ]. And I think that we -- you have to remember that those are incomplete units. So they have to be counted as work in progress, they cannot be counted as factory gated. They might leave the factory in Arizona, but that doesn't count factory gated until they're reassembled and that moment of leaving the factory in Saudi Arabia, that's when for accounting purposes, we can count them as produced.

[Sherry House, executive]

Yes. And, in fact, if you look at total inventory, you would have noticed that went down by 6%. Raw material went down about 12% that was due to some of the better material planning we had talked about as well as inventory management. Finished goods actually went down as well around that same amount. But work in progress went up and that went up because of these specific SKDs. But again, on the whole, you're down about 6% on an inventory basis. You're just going to see a different composition of it now going forward.

[John Murphy, analyst]

That's really helpful. And then just, Peter, just real quickly, a second one. The idea of licensing powertrain technology seems like it should be coming more and more appealing to the industry at large as everybody is struggling to get these EVs launched profitably. It's not just you, but it's literally everybody. Has anything changed in the tenor of discussions? Or is there anything new you can say directly on this? And maybe you could kind of confirm that you might be having these conversations in Korea, Japan, Europe and North America, maybe all the major regions and China, obviously, too.

[Peter Rawlinson, executive]

There's nothing specific I can talk to, but I will say this. We've closed successfully -- delighted to close our agreement with Aston Martin. And that's indeed, awareness of that has definitely catalyzed a degree of inbound interest. Now, that said, the sort of technology we've got right now suits pretty high-end cars like Aston Martins.

But as we transition to our technology, which is appropriate for a midsized platform, that's when we are -- we will be in a position to attract a whole new strata of clientele, more family cars, more affordable Echelon altogether. And so really, we're looking at how could we accelerate that technology for the powertrain to midsize that we could be in a position to capture any inbound interest in that position of the market.

[Sherry House, executive]

And I want to provide maybe an ecosystem perspective on this as well. I mean we're not going to prognosticate about what other OEMs are going to do. But if you read a lot of the earnings scripts that just came out, people are starting to look at the portfolio they have of ICE products and EV and you hear some hinting as to possible pullback a bit on EV. If that were to be the case, we're not saying that it is, we do think that us having this technology licensing program puts us in an advantage position and we can possibly help some of these OEMs as a partner.

[Peter Rawlinson, executive]

And I think there's also a recognition as well, John. It's relatively straightforward to do a kind of average okay EV because you just buy the parts off the shelf. But that is going to be unacceptable -- is already. And I think it's such a recognition that we got something very special with our technology. And there's -- we still haven't got the message out, just how affordable our technology is in its own rights.

But when you overlay the true power of efficiency, our efficiency of drive units and our whole system means we can go further with less batteries. This addresses the cost of the battery. And I think that there's a growing awareness of this, which is our strategic advantage and our customers can leverage this, Aston martin can leverage this. And it can mean that Aston Martin can be lighter with the same range because it's got less battery. And that's an incredibly valuable attribute for the super sports car like an Aston.

[Operator]

Our next question comes from Steve Fox -- Steven Fox from Fox Advisors, LLC.

[Steven Fox, analyst]

I wanted to ask a question. I think I've asked in a different way. The company has definitely battened down the hatches in terms of costs and done a lot to leverage technology and the [indiscernible] start you've had with the production. All of that is -- you should receive applaud for how you've reacted to higher interest rates. However, I mean, to me, it seems like the company might need to take some drastic steps in the future. Given that interest rates look like they're going to stay higher and maybe move higher to sort of modify your ambitions. What would trigger such an event in your mind, Peter? Like it just seems like it's a more niche market for a longer time for Lucid unless you can argue the opposite for, say, the next 12 to [ 24 ] months.

[Peter Rawlinson, executive]

I think we're taking a very prudent, very nuanced view. Sherry is doing a great job in leading the imperative cost -- cost optimization. We're looking at all measures here, looking at our efficiency of making the cars, looking our working capital, looking at inventory, all aspects of the business. We're also pushing like crazy to improve our delivery numbers.

Now I think that we're looking at Gravity, which is going to be a transformative product just around a year from now, late 2024 with a considerably greater market -- market potential than -- and a growing market potential in SUV. And I think that's going to have a transformative impact within the company. We've always taken a very prudent and nuanced view for cost control and cost effectiveness within the company. And all I can say that, that will continue as an absolute core cornerstone of our thinking and our very being here at Lucid.

[Sherry House, executive]

And the other thing I would just say about the interest rate environment. I mean, it is known that it is more expensive right now for customers to buy cars, we know that. And that is why we are offering some support there. But there is another side to the interest rate environment for Lucid in particular. We're sitting on a very large cash balance and we have a lot of this invested. So we've actually been experiencing quite a bit of interest income associated with those costs -- with the cash balance as well in the interest rate environment. So there is another side to it as well as it pertains to us in particular.

[Steven Fox, analyst]

That's helpful. And if I could just ask maybe a more upbeat question and I look forward to seeing the Gravity next week. But like when you think about ramping revenues from the SUV, how complementary do you think you can make it to the existing models out there, existing stores, so that like the incremental cost to ramp Gravity is more on the production side and less on the sales side?

[Peter Rawlinson, executive]

I mean I think that we configured on stores to have room for Gravity alongside Air. It's always been a part of our sort of cohesive strategy that we've implemented. We're investing in our retail network, but a lot of that is built out and ready for Gravity. And I think we also should think of the very considerable investment we've already made in Phase 2 of our factory in Arizona ready for the Gravity.

I think another point here, Steven, is just have different products Gravity is from Air. When we look at cannibalization, of course, we took the decision not to just base Gravity upon Air platform and therefore, result in some kind of car-like sort of compromise. We really designed Gravity as a true SUV with its own new platform. We made that investment to create 2 very, very distinct product lines between Air and Gravity. So I think we can really capture people's imagination into very distinct markets from 2 very distinctly different products as a consequence of that.

[Sherry House, executive]

And then just from a financial perspective, the way I think about it is much higher asset utilization, not just at the stores, at the service centers, at the sales staff, but also we're sharing a paint shop. We're sharing powertrain, we're sharing general assembly. So there's going to be a number of areas where this is just going to give us more flexibility as a company to really respond to the demand signals that we're seeing in the market.

[Peter Rawlinson, executive]

Absolutely. I mean Air and Gravity will go down the same line. So you'll actually have the same production line that we built in the factory, you might see 1 Air and a couple of Gravities, a couple of Airs, 3 or 4 Gravities and they'll be coming [ to life ] alongside each other. And that's a real economy of scale.

[Operator]

Next, we have James Picariello from BNP Paribas from Exane.

[Thomas Scholl, analyst]

This is Jake on for James. So first is looking at your - just looking at your liquidity, it looks like we're looking at about a $900 million cash burn in the -- per quarter in [ 1Q '25 ]. First, can you confirm if that's accurate? And then how much of that is tied to the Gravity launch versus just continued run rate on the Air?

[Sherry House, executive]

Sure. So the free cash flow this quarter is actually lower than what you just cited by a couple of hundred million. And then your second question was about the Gravity launch. And what was the question related to the Gravity launch?

[Thomas Scholl, analyst]

Just how much of the cash burn is tied to the Gravity launch versus continued run rate on the Air?

[Sherry House, executive]

Sure. So -- maybe I'll answer that a little bit on the CapEx side. So you'll see that we guided our CapEx down to $1.0 billion to $1.1 billion for the balance of the year. Now we're not giving guidance, but you can do the math. You can see that we started the year with a capital CapEx guidance of around $1.5 billion to $1.75 billion. What we were able to effectively do, is we were able to move roughly $500 million of that CapEx for 2023 into 2024. So when you get into 2024, we do expect to have about $500 million of CapEx spend to finish the launch in the facilities as well as the machinery, tooling and equipment associated with that Gravity onboarding.

And so we did recognize some savings. So that's why it's not as high as $1.75 billion in totality, but that will be related to the Gravity. We'll also have some vendor tooling as we move into next year, probably spent about 1/3 of the vendor tooling in 2023, about 2/3 of that yet in 2024. So the Air, the majority of the spend has already occurred, of course, you have people that continue to be on carryover product, continuing to make advancements and improve the product but the spend on an engineering level and an R&D level is really shifting into Gravity and then also the midsize as well.

[Thomas Scholl, analyst]

And then [ looks ] like ASPs in the third quarter took a pretty big step down as Pure mix ramped up. How should we expect that to trend in the fourth quarter as we see more Saudi shipments and you guys strip the stock higher?

[Sherry House, executive]

Yes, you're right. So as we went from Q2 to Q3, we had an ASP drop. That was partly expected, as I guided last quarter, I talked about how we were going to be introducing the Pure and larger numbers in the U.S. in that we were also going to be ramping shipments and deliveries into Europe and KSA, but that's small on a comparison, a percentage basis as it relates to the U.S. deliveries in Q3. So as we move to Q4, we continue to see the U.S. as being the dominant market. We do see KSA and Europe increasing. But I would guide that it's going to be relatively flat. I think it will be a similar mix as you're seeing in Q3, as you'll see in Q4.

[Operator]

Thank you. I would now like to pass back to Maynard for closing remarks.

[Maynard Um, executive]

Thank you. So this concludes Lucid's Third Quarter 2023 earnings conference call. Thanks, everyone, for joining us today, and you may now disconnect.