Q2 2023 Polestar Automotive Holding Uk Plc Earnings Call

Participants

Bojana Flint; Head of IR?; Polestar Automotive Holding UK PLC

Johan L. Malmqvist; CFO; Polestar Automotive Holding UK PLC

Thomas Ingenlath; CEO & Director; Polestar Automotive Holding UK PLC

Alexander Eugene Potter; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Andres Juan Sheppard-Slinger; Research Analyst; Cantor Fitzgerald & Co., Research Division

Dan Meir Levy; Senior Analyst; Barclays Bank PLC, Research Division

Erik Golrang

Steven Bryant Fox; Founder & CEO; Fox Advisors LLC

Tobias Beith; Research Analyst; Redburn (Europe) Limited, Research Division

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Polestar Q2 2023 Results Conference. (Operator Instructions) Please be advised today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Bojana Flint. Please go ahead.

Bojana Flint

Thank you, operator. Hello, everyone. My name is Bojana Flint from Polestar Investor Relations. Thank you for joining our Q2 2023 results call.
Before handing over to Thomas Ingenlath, our CEO; and Johan Malmqvist, our CFO, for their opening remarks, I will cover some housekeeping points. I would like to remind participants that many of our comments today will be considered forward-looking statements under U.S. federal securities laws and are subject to numerous risks and uncertainties that may cause Polestar's actual results to differ materially from what has been communicated. These forward-looking statements include, but are not limited to, statements regarding the future financial performance of the company, production and delivery volumes, financial and operating results, outlook and guidance, macroeconomic and industry trends, company initiatives and other future events.
Forward-looking statements made today are effective only as of today, and Polestar undertakes no obligation to update any of its forward-looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors section of our annual report on Form 20-F filed with the SEC.
In addition, management will make references to non-GAAP financial measures during the call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our non-GAAP financial measures with our most directly comparable GAAP measures is in the investor of the presentation issued earlier today.
With that, I'd like to turn the call over to Thomas. Please go ahead.

Thomas Ingenlath

Thank you, Bojana. Let me reflect on some of the key operational and business highlights and outlook for 2023.
It was a record second quarter for us, with 36% growth in deliveries versus last year. Combined with the first quarter, we delivered around 28,000 vehicles in the first 6 months of this year with particularly strong growth in many of our established markets and solid growth in some of our newest markets. We increased revenue by 18% to $1.2 billion for the first 6 months of 2023 and with continued strong momentum into the second half of the good year, we expect to deliver between 60,000, 70,000 vehicles and a gross margin of 4% for 2023.
Coming to recent business developments. Last quarter, I talked about the first customer deliveries of our upgraded Polestar 2, and these have now started to ramp up, taking us past another milestone having 150,000 cars manufactured in just over 3 years. The upgraded Polestar 2 is the best version to date. We improved software longer range of up to 650 kilometers and faster charging with an effect of up to 205 kilowatts. All while reducing credit gate carbon emissions by 3 tonnes per car and introducing the new smartphone phase identity from Polestar 3 on the 2.
It is a fantastic car. J.D. Power's Tech Experience Index placed Polestar 3 in the top 3, and there are a number of enthusiastic independent reviews across motoring magazines and on YouTube. Just a few weeks ago, we were at the Goodwood Festival of Speed in the U.K., where Polestar 3 and Polestar 5 had their dynamic debuts, making the traditional hill climb in front of the crowd. Seeing these 2 cars and what they are capable of in terms of performance and driving experience is a testament to our outstanding engineering teams.
I'm delighted that Polestar 3 is now available for customers to experience in many of our retail spaces around the world. And Polestar 5 shows what the next steps are for our brand, reflected in its design handling and top-level spot premium positioning.
We have started formally taking orders for Polestar 4, our SUV coupe, less than a week ago at the Chengdu Auto Show. And now 3 days in reception and order take have been fantastic. As a reminder, our SUV coupe combines the great space with an amazing dynamic driving attributes. It is positioned between Polestar 2 and the Polestar 3 in terms of size and price. Polestar 4 is on track to start production in November with the first customer deliveries in China expected before year-end. Deliveries to the rest of the world are planned for early 2024.
Now moving on to our joint venture in China, which is taking steps to strengthen the development of our brand there. I believe that this innovative partnership with Xingji Meizu Group, an acknowledged mobile device company with excellent software competence is the best way to succeed in this important and highly competitive EV market. Software and user experience will be key to the success.
The latest steps on the important technology journey is autonomous driving. Last week, we announced a collaboration with Mobileye for the adoption of the autonomous driving solutions, making Polestar 4, the first production cut to feature Mobileye's Chauffeur technology. When launched, Chauffeur is expected to offer eyes-off point-to-point autonomous driving on highways as well as eyes-on automated driving for other environments. As our lineup growth, we continue to develop our commercial footprint, shifting to permanent larger retail spaces to deliver a premium customer experience.
We have recently opened spaces in Porto, Portugal, Chengdu, China and Houston and Palm Beach in the United States. In the U.K., we are opening new 3 test spaces in Glasgow and North London in the coming months. And in Canada, we are expanding with additional spaces in cities where we already have a presence like Vancouver, Toronto and Montreal.
Staying in North America, we have announced the adoption of Tesla's charging standard for all new Polestar sold in the U.S. and Canada from 2025, making it even easier to own and charge your Polestar.
Finally, before I hand over to Johan, I want to touch upon the outlook. Despite macroeconomic uncertainty, we continue to expect a stronger second half supported by the easing of supply chain disruptions and reducing raw material costs. As mentioned, we expect to deliver a 4% gross margin for the year. But this level of profitability is not enough.
We have already taken steps to manage costs and are taking an even harder look at ways that will improve our margins. We continue to work closely with our 2 very supportive main shareholders on funding options. We will provide more detail on all our efforts and concrete actions in conjunction with the third quarter results.
Thank you for listening in. And I look forward to taking your questions after Johan's remarks.

Johan L. Malmqvist

Thank you, Thomas. Hello, everyone, and thank you for joining us today.
In the first 6 months of 2023, we have delivered 27,841 cars globally, up 31% year-over-year, with strong volume growth in markets such as the U.K., Canada and Australia, and with incremental sales in our newest markets of Italy and Spain. With an established global presence in 27 markets on 4 continents, we have opened 25 new Polestar spaces since June last year, bringing the total to 150 million. We're developing our retail sales footprint into larger permanent facilities that will better accommodate our growing lineup.
Our customers continue to benefit from an extensive service point footprint up 200 in a year to about 1,130 and as Thomas said, we are adopting the Teslas North American charging standard for all new Polestar sales in the U.S. and Canada from 2025.
Before moving on to the financial highlights and the 2023 outlook. I would like to echo the points Thomas raised on expecting a stronger second half of the year, reflecting the transition to the upgraded Polestar 2 Model year '24 with higher anticipated both volume and margin. We also expect first deliveries of Polestar 4 in China. As a reminder, and looking further ahead to 2024, we will benefit from the rollout of the Polestar 4 to other markets as well as the commencement of Polestar 3 deliveries from Q2 2024.
The cost saving measures announced last quarter, which include taking out both existing headcount as well as roles that were planned for this year are progressing well. In addition, as Thomas said, we continue to explore other areas where we can become leaner and more efficient to take down costs further and improve our competitiveness. And here, we will give an update at our next earnings call.
Moving to the financial highlights for the second quarter of 2023. Revenue increased 16% from $589 million to $685 million, driven by higher Polestar 2 deliveries and price increases implemented last year on model year '23, in part offset by sales channel mix, product mix and higher discounts. Gross profit decreased from $61 million to a negative $1 million.
Last year, the quarter benefited from 2 positive items: an inventory valuation and the release of accruals related to the 2020 recall. This year, there are 3 items that adversely impacted cost of sales in the quarter; a higher contract manufacturing costs of $52 million, supplier charges for semiconductors and batteries of nearly $18 million and an inventory impairment of $10 million. These were partially offset by positive foreign currency effect of $12 million.
Selling, general and administrative expenses were up $ 25 million to $260 million reflecting primarily higher advertising, selling and promotional activities. Research and development expenses were down $21 million due to lower amortization for the Polestar 2 in part offset by continued investment in future vehicles and technologies.
As reported, operating loss decreased $353 million or 56% to $274 million. Excluding the onetime share-based listing charge of $372 million in Q2 2022, operating loss increased 8% or $19 million, predominantly impacted by the negative gross profit.
Moving on to cash flow. Cash used for operating activities for the first 6 months of 2023 was $661 million, mainly driven by operating loss, higher levels of inventory and trade payable payments. Cash used for investing activities was $281 million, primarily as a result of Polestar 2, Polestar 3 and Polestar 4 intellectual property investments. Cash provided by financing activities was $1.064 billion, reflecting short-term borrowings of $1.672 billion, of which $750 million was drawn down from the Volvo Cars shareholder loan facility and principal repayments of $608 million. At the end of the second quarter of 2023, cash and cash equivalents stood at $1.057 billion.
Before I hand over to the operator, let me wrap up with our 2023 outlook. We are reaffirming our previous guidance, expecting between 60,000 and 70,000 vehicle deliveries for the year, which represents annual growth of approximately 16% to 36%. We also expect a full year gross margin of around 4% on the back of an anticipated stronger second half.
In regards to funding, during the first half of the year, we've tapped into various funding sources where today we still have available capacity, such as continuing to access short-term working capital facilities. We have also upsized our trade finance facility to EUR 600 million. And we have utilized part of the $1.6 billion shareholder support package.
Also, since quarter end, as part of our ongoing program to maximize liquidity, we sold our Chengdu plant that previously manufactured the Polestar 1 for $71 million. We are working on multiple options to address the broader funding need. These efforts are driven hand-in-hand with our 2 main shareholders who continue to be very supportive.
Thank you again for joining, and over to the operator for the live Q&A by the analysts, and then we will answer top questions from our shareholders.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Alexander Potter from Piper Sandler.

Alexander Eugene Potter

Great. Thanks, guys. So -- maybe first question is on the launch timing of Polestar 4 versus Polestar 3. So it's -- it's great to see Polestar 4 still on track. You said you're going to start production here, I think, in November, start deliveries in China end of the year and then deliveries for Polestar 3 are going to start in the middle of next year. I know those vehicles are built on different platforms. So that's partially impacting the difference in timing. But I think it would be helpful if you could just summarize exactly what those differences are between the platforms and why it's possible for you to remain on track for Polestar 4? And what sort of learnings you'll have going forward with future launches to make sure that future launches more resemble the Polestar 4 launch versus the Polestar 3 launch?

Thomas Ingenlath

Yes. Thomas here, thanks for the question. Well, the difference -- I'm very happy to point out the difference between the 2 SUVs because let's face it, yes, the label SUV is both the same, but there is a significant difference between a Polestar 3, very much bringing to the customer what is a high seating position, and that's what people associate with the traditional SUV that you have that kind of superior feeling of having a great overview.
While the Polestar 4 is a bit more of a different animal here, let me call it for that reason, the SUV coupe. So it is on the lower side of the SUVs. And -- and for that reason, if you -- when you see the 2 cars together, and that's, of course, the great thing happening now, people can compare it and see what big differences and stands and what it does in delivery of customer experience.
Positioning is well different. Obviously, there is a price difference. The Polestar 4 is clearly position price-wise below the Polestar 3. So for that reason, there's a much, much bigger scope of customer segment that we can reach with these 2 cars in our hands, and we could do with just 1 car.
And as well about launch cadence, I mean, obviously, the Polestar 4 now being on sale in China already and launching there and being in the market first, while the Polestar 3 will, of course, make the entrants first in Europe and in the U.S.. So it's kind of the other way around. One car and very strong in China, first time now and the other car in Europe and U.S.. And then the vice versa are coming down in this -- in the second phase into U.S. and Europe, the Polestar 4 and the Polestar 3 then to China. So that's kind of the couple that are coming there to the market in '23/4.
Now, technology-wise, we have to as well make sure that people understand this indeed all new platforms that Polestar 3 is built on is, of course, technology-wise as while the pinnacle with NVIDIA computing in there the Luminar LiDAR included in the technology. Very complex, not easy to handle. I have to give that to the engineers being there full time on the job doing it. But of course, this as well contributing to the car coming only into production in January in the beginning of 2024.
So I think software is -- the learning is software and competence and handling software is, of course, the core competence to have high focus on, take all the learnings that we made with this. And of course, emphasize the competence within our company, but of course, as well within the group. That's clearly where we have big learnings from these 2 all new products.

Alexander Eugene Potter

Okay. Great. So second question, maybe on the macroeconomic situation and the mix or price sensitivity of your incoming orders. Just wondering if you noticed, obviously, your revenue was growing slower than your deliveries, which implies mix or more price sensitivity, lower price trends, not on very high-end packages. Do you think that, is that a function of sensitivity to the interest rates, the macro situation? Just anything you'd be willing to say on, I suppose, mix and price within your order book would be helpful.

Johan L. Malmqvist

Yes, Alex. Johan here. I mean you touched upon the influencing factors here. When we look at the average selling price. There is an impact of, in part, like you said, a negative mix effect attributable to both channel and product variant. There is also then a component of higher discounts. And then the third element is a negative translation effect.
So all those 3 weigh in. We saw that tendency also in Q1. And if we look at on a go-forward basis, of course, say, for FX. At some point, the channel mix and the product mix will settle down because here, we are comparing in regards to the development from last year. And then we do expect the discounts also to the level of.
There was in Q2, for example, in part tied to the selling of the model year '23 and clearing out that inventory. So we should see an impact of that. And that's also playing into our affirmation of the 4% gross margin guidance for the year.

Alexander Eugene Potter

Okay. Good. That's very helpful. Maybe last 1 and then I'll turn it over. You mentioned a number of drivers regarding the expectation for higher deliveries in the second half versus the first half. Obviously, you've got the Polestar 2, you have some deliveries of Polestar 4. Would it be possible? I don't know how much visibility you have on specifics here, but how much additional tailwind could you have from potentially opening new markets? I think you mentioned Spain and some others, driving greater penetration maybe of regions that historically hadn't been able to order as many Polestar 2s. How big of a driver is that of your incremental growth versus just basically saying, look, we have more products, and I think our products are more compelling, and that's why we're going to get more orders.

Thomas Ingenlath

While I tend to emphasize you rather the customer waiting for the model year '24. We see that a lot of people have been intrigued by the improvements that we have made with range, a rear wheel driven single motor, definitely, that is where especially in the markets where the Polestar 2 is known where people were looking forward to this model. And for that reason, that will be the stronger effect on a stronger second half of 2023.
We indeed see, of course, the effect that investment that you do in opening a market, you definitely need a certain time to spend in the market before you see figures picking up. So indeed, there will be an effect of our investment going now further down in the south of Europe that will pay off bit by bit.
Can we expect 2023 second half already showing much of that? I think it's more an investment for '24 and '25 that we made there in these markets.

Operator

This is from the line of Steven Fox from Fox Advisors.

Steven Bryant Fox

Could you talk a little bit about the margin expectation for the second half? So you roughly are talking about 520 basis points improvement in gross margins half over half. Can you talk, maybe break down how much is coming from volume versus mix versus other changes in your cost structure? And then I had a follow-up.

Johan L. Malmqvist

Sure. I mean the reaffirmation of the full year guidance of 4% is based upon a couple of things. One, drivers the improved profitability that comes with the Polestar 2 model year '24 sales. I mentioned the targeted sales -- the targeted campaigns to sell out the model year '23 falling away as we're clearing out that inventory. And then the third component part is really with the easing of the supply chain disruptions and seeing lower raw material costs coming through. So those are the 3 drivers that lead us to the improved margins for the second half.

Steven Bryant Fox

And just 1 other quick question on that. How much -- how -- should we assume how much back end loaded that is Q4 versus Q3? Do you expect meaningful improvement in Q3? Or do we have to wait for that mix to improve much more in Q4?

Johan L. Malmqvist

I think you should expect to see a gradual improvement.

Steven Bryant Fox

Okay. That's helpful. And then just in terms of the liquidity situation. I might have missed this, but beyond the cash on the balance sheet, can you talk about other [way]? What's the total number -- total dollars available of liquidity untapped to this point after all the changes in Q2? And just -- I know it's a tough time to be talking specifically about capital raises. But can you talk broadly speaking about capital raise versus further strategic actions in terms of maybe narrowing the band of focus on the sales and marketing in order to preserve cash versus shareholder dilution, things like that?

Johan L. Malmqvist

Okay. Let me provide some color then we'll see if you have any follow-on questions. But okay, in regards to funding and liquidity in general. First, let's start with the fact that we had about $1 billion of cash on the balance sheet at the quarter end. And then as I mentioned in my opening remarks, we've tapped into various funding sources during the course of the first half, continue to access short-term working capital facilities. That's very much of an ongoing exercise. We've upsized the trade financing facility to EUR 600 million at quarter end, I believe we utilized around EUR 400 million of that facility. I mentioned the fact that we've utilized part of the $1.6 billion shareholder support package and there, we've utilized around $1 billion of that support package, where as we disclosed now fully drawn on the $800 million shareholder loan from Volvo and utilized around $200 million of the commitment from PSD.
You also saw that at the beginning of Q3 here, we sold our Chengdu plant, the one that previously manus this Polestar 1 for $70 million. And then I think just from a broader perspective, then we are continuing to work on multiple options to address the broader funding need. And that's, of course, an ongoing activity as well.

Steven Bryant Fox

Great. That's helpful. So it sounds like roughly untapped liquidity is about EUR 800 million still. And then on top of that, you -- the cash is understated for the plant sale. Is that roughly correct?

Johan L. Malmqvist

What was the last question or comment, sorry?

Steven Bryant Fox

The sale of the plant in China came after the quarter ended, so the cash is understated but...

Johan L. Malmqvist

It is. But is it at $70 million, correct.

Steven Bryant Fox

Right? So there's about EUR 800 million untapped [euros] liquidity available on top of the cash on the balance sheet?

Johan L. Malmqvist

Correct.

Steven Bryant Fox

Okay. And so it sounds like at this point, there wouldn't be any changes in sales and marketing strategy, manufacturing strategy, product rollouts as in reaction to where your balance sheet stands. It sounds like you can continue with your strategy for the next couple of quarters at least.

Johan L. Malmqvist

Yes. There's no change in the strategy. With that being said, as we -- both Thomas and I alluded to in our opening remarks. We are continuing to work on the overall cost structure, taking a hard look at not only the OpEx but also the gross margins. And there, we expect to be able to come back in the next earnings call with some more concrete color around that but it doesn't impact the overall strategy of the company now.

Operator

This is from the line of Andres Sheppard from Cantor Fitzgerald.

Andres Juan Sheppard-Slinger

Congratulations on the quarter, and thank you for taking our questions. I want to maybe start off. Just curious if we can perhaps get a bit of an update on the Hertz partnership. Just curious if you're able to maybe give us a bit more details on how that relationship is taking shape. And if we can maybe get a sense of how those deliveries are going currently.

Thomas Ingenlath

Yes, Thomas here, happy to confirm on one hand, the -- the relationship being one which I think for both sides is a good one. Happy one. We see that what we were aiming for with this is taking place, and that means Polestar 2 being available for people to experience the brand, the car and getting to know something that they might have not done before and experienced an electric car.
And we have this 5-year contract with 65,000 volume around the Polestar 2 kicked off already in 2022 with first deliveries. But of course, after this initial (inaudible) in '22, we have already now in the first quarter continue to deliver to Hertz. And this will gradually continues slightly grow as well. But of course, within the 65,000 frame over '23, '24 to '25.
So there we have for the Polestar 2 this journey ahead. Having said that, with Polestar 3 and 4 joining, of course, we will be exploring how they could become part of this relationship with the Hertz as well.

Andres Juan Sheppard-Slinger

Got it, Thomas. That's very helpful. And maybe as a quick follow-up. In terms of your delivery guidance for this year. We know that Q4 tends to have the higher seasonality. And so I think safe to assume the higher number of volumes should take place in Q4. But how should we think about Q3 as it relates to maybe Q2 in terms of deliveries? Just trying to get a sense of how those deliveries will shape up for the second half of the year.

Thomas Ingenlath

Yes, the model year '24 is now in quarter 3, the big new thing about delivery. So this is when it's happening that the first customers will get that Polestar 2 with the new smartphone and the new technical features and the volume growth indeed towards the peak in the fourth quarter, but the third quarter will be in continuous growth towards the quarter 4. So that's how quarter 3, of course, is a very important quarter for us where we have a high focus now to keep that momentum going.

Johan L. Malmqvist

But I think you're right. It will be weighted towards the Q4, as you pointed out, again, just like on the gross margins, a gradual improvement.

Thomas Ingenlath

I think that our organization is very well trained for this Christmas hype.

Andres Juan Sheppard-Slinger

Understood. And maybe just 1 last one, if I could. I know we've asked already about the capital needs. And I'm just curious in terms of your thought process here, whether you're leaning more towards some sort of equity raise or fixed income rates or perhaps a strategic private placement of source? Just curious as how you are thinking about the upcoming capital rate requirement and whether you're leaning maybe more 1 way than another way.

Johan L. Malmqvist

Yes. No, it's a good question. And of course, it has a lot of considerations to it. I think we're very conscious of the fact that we have a low free float. So getting in within the company and issuing more shares, of course, would help address that. With that being said, we also recognize that the dilution impact given where the share price is at and then also just the overall macro perspective where the markets are, is not need to take into account. So we are looking into both tracks, both equity and debt recognizing that it's going to require a combination of both of those in order to address our overall broader funding plan. And this is, again, as I mentioned before, we're working very hand in hand with our owners on these to drive these efforts.

Andres Juan Sheppard-Slinger

Understood. Congratulations on the quarter.

Operator

This is from the line of Tobias Beith from Redburn.

Tobias Beith

I have 3, if that's okay. And I guess where I'd like to start is on the sequential gross margin bridge. And actually, I would just like a little bit more information here on, I guess, why it deteriorated so much. And then I've got 2 follow-ups.

Thomas Ingenlath

So if I understand your question but I just wanted some more color on Q2. Q2 was slightly below expectation. It was -- and that's in part due to -- there was some true-up of costs related to '22 for semiconductors, but -- so that's 1 part. Fundamentally, though, I mean, it's just as the trend was in Q1 impacted by then the full year run rate effect of the higher raw material and freight costs compared to last year.
And as I mentioned also, the impact of higher discounts. So I think it was a carryover from Q1 and something that we had guided on before anticipating a low gross margin for the first half of the year. So to some extent, in line with that, again, I think the true-up supplier charges and the impairment -- inventory impairment is, I would say, probably the main deviating factors.

Tobias Beith

Okay. Understood. And then my second question relates to your balance sheet. It looks like potentially your backlog increase. If I have a look at your advance funds payments from customers increased about $10 million quarter-over-quarter. And I was wondering if you could perhaps comment on order intake in the period and whether the driver of this increase is primarily from fleet or the consumer channel?

Thomas Ingenlath

I would say that -- I mean, okay, the number on the balance sheet, as you said, is of course, there's a correlation to the order book. There is obviously -- there's an FX impact as well there to take into consideration. But I think when we look at the order book in general, I think the same comment applies as what we said in Q1 that -- we've seen that now kind of stabilize to, call it, more normalized levels, and that's where we still are today.

Tobias Beith

Okay. Understood. And then I guess my last question relates to financing. In your subsequent events disclosure highlights that you raised an additional $800 million of debt at an effective interest rate of about 7%. I was wondering what the motivation was here rather than raising equity? And perhaps whether you have a time line on paying down your working capital loans given the balance outstanding is now more than $2 billion?

Thomas Ingenlath

Okay. So -- if we look at the funding activities for the first 6 months and there's some subsequent activity, that's very much tied to the short-term working capital facilities that we have, that we have been working to refinance. We have the -- also the drawdown of the shareholder loan from Volvo -- weigh in there. And I think those are sources of funding that have been made available to us. And as we indicated in earlier calls, the intention was then to draw down on those and for that to materialize as a means to fund the sale through 2023. So that's -- there, we're simply executing on that plan as we in parallel and look for alternative or more diverse funding sources, including equity.
Sorry, Tobias, what was the last part of the question?

Tobias Beith

What is the outstanding balance of working capital...

Thomas Ingenlath

Sorry, yes. Okay. That's right. Sorry. So thank you. In regards to working capital, there is an outstanding overdue related party balance to Volvo cars. And there, our intention is to settle that during the course of Q3 to a large extent.

Tobias Beith

Okay. Sorry, that is useful information, but I was more interested in your expectations on repaying the other loans that you have to credit institutions. It looks like that balance is now $2 billion.

Thomas Ingenlath

Yes. Okay. I mean that's part of the overall cap structure and that's very much tied into our overall funding plan here. So as we grow the business, there's, of course, a need for taking additional capital. And there, we can do that in the form of debt or equity. So the development of the capital structure and the balance sheet will be a function of that. And there, like I said, we're working and looking at different ways to then fund us going forward.

Operator

This is from the line of Erik Golrang from SEB.

Erik Golrang

I have 2 questions. First of all, on the -- I think you said a $10 million impairment in the quarter, was that just finished [PS2s] inventory? Or what specifically was that?

Thomas Ingenlath

Erik, that's -- a quick answer, yes.

Erik Golrang

Then the second question on the Polestar 4 production starting in November. I guess it's super early. But can you say anything about expected volumes here in Q4? Or if it's just insignificant sort of Q1 indications and just general traction sort of order intake, given that a lot of OEMs (inaudible) a little bit to get momentum for new models in China at the moment?
And then the third question, coming back to the topic of cash and the balance sheet. If we think about underlying cash flow here and the run rate you've had in Q1 and Q2. Anything -- any reason to expect that changing much in the second half, of course, taking into account higher volumes and a slightly better gross margin. But anything else that would make underlying cash flow here in H1 better or worse than it actually is?

Thomas Ingenlath

Thomas, let me start with the first part of your question about Polestar 4 and start of production and volumes. Now for us, it's, of course, important to have now a good secured start with high quality in the first weeks. Having said that, there's a steep good ramp-up curve plant, which nevertheless, of course, will have its effect in quarter 1. And quarter 1 is, of course, the first strong quarter for -- that has Polestar 4 volume significantly than kicking into our deliveries.
Launch of the car now in Chengdu with couple of them understand as well. And I would love to take a little moment here for highlighting what the JV that we announced a couple of weeks ago, thus there for us. You know that in Chengdu as well, it was then part of the presentation of the Polestar 4 that the software that goes into Polestar 4 will be from start the Polestar OS, which is the big contribution of our JV partner, a mobile phone company that obviously has a very strong core competence in customer-facing software user experience that will bridge links your devices, the car and the phone and brings you that one holistic experience.
And indeed, we see that this is a big game changer and strong, strong assets that we got here, which will make the Polestar 4 a very, very hot topic, and it is and people are very interested, curious and excited about it and Flyme Auto Core, which is underlying base start for this Polestar OS gets very, very good credits and rating in terms of user experience and great connectivity.
So that's where, despite the fact that we see, of course, an incredible competitive market there in China. But we believe that this was a very, very crucial step for us to have a highly competitive position in this market. So we are looking very much forward to the development of this JV in China.

Johan L. Malmqvist

And then just to come back to your second point there, you're right, I would, I think, expect a similar cash flow profile for the second half as for the first half. I would add 1 consideration is what I touched upon before. There are attention then to settle a large part of the overdue related party payables to Volvo. So I would make consideration for that.
And then just a final comment around that question off -- I mean, in addition to the available capacity and the cash on the balance sheet that we discussed earlier, there, of course, is ongoing work to access additional funds here during the fall. And don't forget, we have 2 very supportive shareholders supporting us as well.

Operator

This is from the line of Dan Levy from Barclays.

Dan Meir Levy

I wanted to start with a question on the mix in the second quarter. There's some disclosure in the MD&A, that fleet was 70% of your sales in the second quarter. So I'm hoping if you could just unpack that figure, how much of that was to the car rental channel as opposed to corporate customers in Europe who will frequently purchase on fleet? And what is the go-forward expectation on the mix of fleets?

Johan L. Malmqvist

Okay. we don't necessarily discuss the specifics of the fleet, the mix within that channel. What we can see is that we have seen and as you've noted, a gradual then shift in the channel mix to more fleet bills. And of course, now we're getting to a point where that's starting to settle down, so to speak, in line with what you would expect.

Thomas Ingenlath

To add here. I mean the corporate company car market is, of course, very important for us in the premium segment that makes a high percentage of where you work. In our Europe mix, you know that 1 of the strongest and successful market is U.K. and that contributes, of course, with a very high percentage to this fleet percentage.
So for that reason, it is indeed at a level now where we see as well that we definitely don't want to exceed this. But on the other hand, it's almost natural and it is, of course, to a certain degree, a healthy level because we -- again, with the U.K. success, it brings this percentage with it.

Dan Meir Levy

Right. So just to clarify on the car rental mix within that. Are you clear now of sort of the excess Polestar 2 inventory? And so certainly, car rental was probably a piece of this. Are you past sort of the need to rely a bit more heavily on the car rental channel?

Thomas Ingenlath

Well, we elaborated a little already on the model year change from model year '23 to '24 and obviously, a model year going out, has certain other necessities than new model year with great new features, customers waiting for that. So yes, indeed, we, of course, see as well there a change between the first half of this year and the second half connected to the model year change in the Polestar 2.

Dan Meir Levy

Okay. And then my follow-up is a question on mix broadly. You're going to launch Polestar 4 later this year, Polestar 3 next year. Obviously, those come with premium ASPs versus where you're selling Polestar 2. Maybe you can give us a sense of the magnitude of uplift you'll get on mix from those vehicles.

Johan L. Malmqvist

Yes. I mean it's correct, as you point out, Dan, that with those cars and the higher price points, there's a higher margins, there will be margin accretion next year. We haven't guided on '24 at this point in time. But I mean, directionally, that's, of course, where we're heading.

Thomas Ingenlath

I would even dare to say that, of course, this is a very crucial element for '24 after a year where we not only in the volume with Polestar 3 and 4 coming into it but as well when it comes to margins with this price points of this cars. We, of course, see great potential with this.

Johan L. Malmqvist

And it is just a final comment. I mean, it is 1 of the primary drivers in the margin in our journey to improve gross margins, of course, is the product mix. So it is a fundamental driver to margin accretion.

Bojana Flint

We should move to the retail shareholder questions now because we only have 10 minutes left.

Thomas Ingenlath

All right. And let me take that, then I read them out as well.

Bojana Flint

Yes. That will be great, Thomas. Thank you.

Thomas Ingenlath

All right. Last minute then on questions from retail. What's the strategy for recovering your stock is the first question?
And I understand why this is, of course, on the top of the list. And let's be clear, I mean, I believe definitely that our shares are undervalued and especially since we report on great ticking the boxes of our milestones and delivering. So we talked as well about 2 technical limitations in that. I mean, our funding position, we have Johan addressed it before already, of course, this is putting pressure on it. And on the other hand, the free float, which again is, of course, going ahead, 1 of our aims to heal that and increase the free float.
Now having said that, we should this well, of course, I mentioned that it's a macroeconomic environment with high interest rates and general uncertainty that is, of course, not only impacting us but the whole industry. Very clearly, the years -- the year ahead, the -- what is going to happen with Polestar 3 and 4. I mean, imagine, I mean, we have 2 SUVs joining our program, our spaces and them landing in 27 markets that we have invested in to prepared and that are ready to work with these cars. Of course, we expect that the picture of how -- how people look? How investors look upon Polestar will dramatically change with this happening in the months to come.
We have, I think, a brand that has an incredible sympathy amongst the journalist people, investors. I think with this commercial success that we expect with the model range coming into the market, I think that should be a great mixture to indeed recover our stocks.
Next question was, number two, could you please provide insight into Polestar's strategy for expanding its market presence and achieving sustainable growth, especially in the light of evolving electric vehicle landscape and increasing competition?
Yes. Again, the market presence that we have invested into that we are not only in Europe but in U.S. and Asia Pacific in 27 markets out there. And -- we have been working on that and very, very excessively the rapid model rollout, again, something which is, I think, very, very unique free cars in the pipeline, Polestar 3, 4 and 5 prototypes, very, very far developed and production facilities ready to take these cars not only in 1 region, but with Charleston ready to produce a Polestar 3 in 2024. Of course, we think that, that is a very favorable position to fight the competition.
Number 3 is when will South Carolina facility begin producing the [vehicles]?
Now I answered that just now, middle of '24. The production in Carolina will ramp up and start the Polestar 3. Just mentioning here that this again is something very unique that we can already now open that manufacturing in a different region that quickly after having started production at all.
Now the question number four, how do you plan to keep stock a float? Why is there absolutely no buzz about your great vehicles?
First part of it, how do you plan to keep stock float? I think I've answered the question before. The second part. Well, there is buzz. We have -- and now I concentrate a bit on the U.S. because, obviously, this question is very much changed from a U.S. background. We have the U.S. Polestar tour, we had it in spring in New York and L.A.. We have in 65% of our spaces in the U.S. have now Polestar 3 on display. And each and every space is locally making the buzz and events and inviting customers into the space to experience the car.
The marketing spend in the U.S. is up 20% year-to-date versus '22. 15,000 test drives have been conducted so far. And of the model year '24 Polestar 2, the test drives have just this week started in Denver. And I think you will see in the take out and the Lifestyle media reflections of this test drive. And I'm pretty sure that they will be as enthusiastic and positive as we have seen it in Europe.
Yes, last but not least, all the spaces in the U.S. on the 21st of September will host simultaneous consumer nights. So you can see there are a lot of actions now happening around Polestar 2 and model year '24 and the Polestar 3. And on top of that, we, of course, know as well that we have to improve and work with communication generally, and we are planning to come to the U.S. as well towards the end of the year and make a big event in November in the U.S.. So that as a heads-up of what's still coming.
I don't come on to the last question, which is given the rapid advancement in autonomous driving tech and the increasing integration of AI in the automotive sector. Could you share how Polestar's positioning itself to capitalize on those developments? And ensure if vehicles remain at the forefront of innovation and safety?
Right, the -- the beauty of our model of how we are set up building on various platforms. I think we highlighted the press release recently about the integration of Mobileye AD technology in the Polestar 4, how this is nicely playing out. We have, on 1 hand, in the Hi-tech Polestar 3 with sensing software, preparing for the highway hands-free and eyes-off piloting a car that is prepared for redundancy. On 1 hand, on the other hand, in the Polestar 4, with the Mobileye ADAS equipment and then switching in the future to as well hands-off and then eyes-on, eyes-off depending on the timing. Obviously, the Chauffeur functionality that Mobileye is preparing going into Polestar 4 as a world first. So we have in both products, I think, very well prepared for us participating in the very exciting -- I think it will be a very big thing for the automotive sector and really indeed now in the coming 2, 3 years.
Finally, I'd say the autonomous drive functionality for the -- for the private driver becomes reality and become something which definitely will be part of the premium luxury segment. So that's where we, I think, have a very, very good position with 2 strong partners providing technology and developing that together with us into customer products.

Bojana Flint

That's it.

Thomas Ingenlath

That's it. Here we go.

Bojana Flint

Perfect. Well, thank you very much, everyone, for joining, and we shall speak soon in our next quarter results.

Thomas Ingenlath

Thank you.

Operator

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.