Rivian Automotive Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Rivian Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I'd now like to turn the conference over to your speaker today, Tim Bey, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us for Rivian's Q3 2023 earnings call. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business operations and financial performance that may be considered forward looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties Are described in our SEC filings and today's shareholder letter.

Speaker 1

During this call, we will discuss both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP financial measures is provided in our shareholder letter. Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we'll cover on today's call. With that, I'll turn the call over to RJ, who will begin with a few opening remarks.

Speaker 2

Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I'll highlight key developments during the Q3 and provide an update on the price we're making against our core value drivers. Importantly, I want to take this opportunity to There's been a lot of noise and a lot of dialogue recently around EV adoption. And I want to emphatically state Just how deeply convicted we are that the entire automotive industry will be transitioning to electric over the next 1 to 2 decades.

Speaker 2

We've built and designed our business around this transition. We've designed our team structure, our technology stack, the way we approach vertical integration To not only help our business scale profitably, but to ensure we're positioned to be a leader in this generational opportunity. We believe a substantial competitive advantage is our approach to vertically integrating our in vehicle computers, software stack and propulsion platform along with our efficient direct to consumer go to market strategy. R2 will benefit from investments we've made in R1 and will represent our 1st global platform. Additionally, Rivian's production ramp and introduction of multiple vehicle platforms in our Illinois plant has provided significant learnings in a compressed time frame.

Speaker 2

Our team will apply this experience to our new manufacturing facility in Georgia with the goal of achieving a considerably lower cost structure. Now in the short term, I want to acknowledge the macroeconomic and geopolitical pressures impacting consumers and businesses, most notably the increase in interest rates. In this context, we remain laser focused on the factors within our control, Driving greater cost efficiency, continuing to ramp production, investing in differentiated technologies, continuing to enhance the Rivian customer experience, and maintaining a strong balance sheet. Our financial and operating results during the Q3 of 2023 represent progress on each of these fronts. Before I get into the 3rd quarter's milestones and performance, I wanted to touch on an important new development, which was just released.

Speaker 2

We have amended our Amazon agreement with terms and conditions, which provide the opportunity to sell commercial vans to other customers, helping more companies reduce their CO2 emissions. With more than 10,000 EDVs on the road and 260,000,000 delivered packages, we are already seeing meaningful impact from our initial rollout. We are excited to continue our work with Amazon to deliver on their initial order of 100,000 vehicles along with a diverse set of new commercial customers. We're confident the value of our vans, software and services offerings can provide fleet customers and are in active discussions With a number of large potential fleet customers to launch pilot programs, it's important to appreciate that the sales cycle for commercial vans typically begins With lower volume pilot programs. The most recent quarter demonstrated sequential production growth, further improvement in our profitability per vehicle, Introduction of the new MaxPack variant with up to 4 10 miles of range, rollout of multiple over the year updates to enhance the customer experience and focused investment on commercial infrastructure to support our expanding fleet of vehicles.

Speaker 2

Within the plant, we continue to see progress across our production lines. We produced 16,304 vehicles during the Q3 and continue to ramp our Enduro drive unit line. As a result of this, we are raising our production guidance for the year to 54,000 total units. Later this month, we plan to take about a week of downtime For validation builds to support the incorporation of engineering design changes into the R1 platform, which will be implemented in the planned downtime in the Q2 of 2024, which we discussed in the last earnings call. These new technologies include our simplified electronic control unit topology And cost reductions across a variety of areas, including the vehicle harness, body structure and battery pack.

Speaker 2

These technology changes represent Rivian's continued emphasis on driving greater cost efficiency. They will significantly contribute to driving towards Rivian's long term gross margin targets. Rivian vehicles have now driven over 490,000,000 miles, which provides us with great data and feedback on how our vehicles perform in different environments and what features can be added or enhanced to improve our customer experience. This past quarter, we pushed major over the air updates, which improves ride quality, enhance the towing experience and offer customers a new way to interact with the different drive modes. Over 90% of our customers update their software within 5 days of it becoming available.

Speaker 2

It's great to see this level of engagement with our software. Later this quarter, we plan to launch our leasing platform on select R1T vehicles in certain regions. We look forward to offering this as a new way for our to take delivery of Caribbean and plan to expand the lease offering to additional regions across more vehicles as the program matures. We currently have 45 service centers along with 408 mobile service vehicles. In addition, we recently opened Rivian Spaces, our version of retail stores In Vancouver, Seattle, Chicago, Brooklyn, Nashville, Atlanta and Denver.

Speaker 2

Our DC fast charging network also continues to expand. We currently have 57 Rivian Adventure Network charging sites. Progress continued on the development of the R2 platform As well as preparing the future production site in Georgia. I was just there a few weeks ago. It's great to see the site starting to take form, which is the direct result of strong collaboration between the state, local community and Rivian.

Speaker 2

It was a strong quarter as we continued to deliver on our operational and financial goals. I would like to thank our employees, customers, partners, suppliers, communities and shareholders for their continued support of our vision. With that, I'll pass the call to Claire.

Speaker 3

Thanks, RJ. I would like to reiterate that our team is focused on 4 key value drivers: driving greater cost efficiency, Continuing to ramp production, investing in differentiated technologies and continuing to enhance the Rivian customer experience. 3rd quarter results demonstrate advancement in each of these aspects of our business. During the Q3, we produced 16,304 vehicles and delivered 15,560 4 vehicles, which was the Primary driver of the $1,300,000,000 of revenue we generated. Total gross profit for the quarter was negative $477,000,000 We remain focused on improving our gross profit per vehicle delivered.

Speaker 3

During the Q3, our gross loss per vehicle improved by approximately $2,000 versus the Q2. This improvement would have been approximately $14,000 better, excluding the impact of the change in LC and RV and losses on firm purchase commitments. So therefore, LC and RV and losses on firm purchase commitments More significantly contributed to the improvement in gross profit during the Q2 as compared to the Q3, highlighting the improvements we have made in ramping production and reducing the material cost of our vehicles. As a reminder, when our LC and RV balance And losses on firm purchase commitments declines. It reduces cost of goods sold and positively contributes to gross profit.

Speaker 3

We expect by the end of 2024, we will no longer have material LC and RV inventory charges For the quarter was negative $942,000,000 In October of this year, we raised a $1,750,000,000 green convertible note, which further strengthens our balance sheet as we approach the expected start of construction of our Georgia plant early next year. By maintaining a strong balance sheet, We're well positioned as we look to start production of the R2 platform in 2026. The offering was not completed until after the Quarter end. Accordingly, the $1,600,000,000 of net proceeds from the raise was not included in our Q3 2023 Ending cash balance of $9,100,000,000 Turning to our business outlook for 2023, We remain focused on ramping production and driving greater cost efficiency across the company. Based on The progress we've seen year to date across our manufacturing process and our cost down efforts, we are raising each aspect of our 2023 annual guidance.

Speaker 3

We are raising our production guidance to 54,000 units, improving EBITDA guidance to negative $4,000,000,000 And lowering our CapEx guidance to $1,100,000,000 The improvement in estimated CapEx is driven mostly by timing of spend and by our efforts to reduce costs across the business. As a reminder, because Amazon limits the intake of new commercial vans During its peak holiday delivery period, we expect a more significant gap between production and deliveries in Q4 relative to prior periods. As RJ mentioned and as we discussed on last quarter's earnings call, we expect to shut down both the consumer and commercial lines in our Illinois facility In the Q2 of 2024, to introduce a number of new in vehicle technologies to the R1 platform. We believe these changes will meaningfully reduce our material costs and position Rivian to exit 2024 with a much improved margin profile. We are planning to adjust the production rate of the lines whereby the planned annual capacity will be for 85,000 units for R1 And 65,000 units for EDV, keeping the total facility at an annual capacity of 150,000 units.

Speaker 3

Our downtime in Q2 2024 and associated ramp up in Q2 and Q3 2024 is expected to impact roughly 2 quarters of production. While the incorporation of new design changes impacts near term production, We are confident it better positions Rivian to be more profitable and competitive over the long term. Overall, we continue to see a clear path to our approximately 25% gross margin target, high teens adjusted EBITDA margin target and approximately 10% free cash flow margin target. With that, let me turn the call back to the operator to open the line for Q and A.

Operator

Thank Our first question comes from the line of Rod Lache with Wolfe Research, your line is now open.

Speaker 4

Hi, everybody. I had a question on costs and a question on demand. Just first, my impression is that you're making better than expected progress on cost, just simply because you improved Your gross loss by $16,000 ex LC and RV, I didn't see any average price Improvement and presumably volume isn't helping you just yet because you haven't gotten the contribution margin positive on the R1. So Is that correct? Because it is interesting since you haven't yet benefited from the new architecture of the pack and all the other things that are coming in

Speaker 3

Thanks for the question, Rod. As you think about the key drivers in the margin improvement that we saw Over the last quarter, it was driven by the 23% increase that we saw in delivery volumes. So there was some fixed cost leverage. But we also saw significant improvement in material costs, which was driven both by a mix shift to greater concentration of EDV delivery volumes. So roughly about 30% of our revenue in Q3 was from sales of the EDV itself, which is, as you mentioned, is a higher margin, already contribution margin positive for Rivian vehicle platform for us.

Speaker 3

But beyond the EDV, we also saw significant material cost savings as well for R1, driven by the continued work of our Procurement team, as we've been renegotiating many of our supply agreements, and then it also incorporated some of the early sales of our dual motor to consumers as well that benefited the reduction in material costs. In addition to those Two key levers. We also saw continued softening in the broader logistics market and space. So that was also a contributor to the improvement that we saw on a per unit basis for Q3.

Speaker 4

That's helpful. So yes, the contribution margin must be on the RCVs. On the demand side, could you talk about how quickly you can expand the RCV to other customers? I understand That there's a process with pilots and planning with these fleets, but any thoughts on how we can think about RCV sales into 2024 or 2025. And on the R1, you're currently on at 65,000 units.

Speaker 4

You will be at 85,000 units at the end of next year capacity. Presumably, you'd need at least 180 orders per average day just to meet Like your current capacity, maybe you could talk a little bit about, whether you're seeing convergence to that kind of a number. What's the Trajectory of demand that you're seeing in the orders?

Speaker 2

Hi, Rod. Thanks for the question on the commercial vehicle and R1. Just to speak first on the commercial vehicle side, we of course, we've been working on this exclusivity agreement with Amazon for a while and we've talked So it's not as if we were surprised by that this morning. And with that, we've been building The relationships with a diverse set of commercial operators and that's everything from last mile to retail To a wide variety of industrial commercial business cases, which require businesses that require commercial vans. And while the fleet and the use cases are diverse, the one element that's very common for these large fleets Is the necessity of running pilots as a way to prep the network or prep the system To ingest a completely different type of vehicle in terms of its need for charging infrastructure, and as well as changes to the standard operating procedure for those respective businesses.

Speaker 2

And so what we'll be announcing soon is a range of different pilot programs that will proceed much larger orders As these large fleets start to plan the electrification of their infrastructure. As it pertains to R1, we of course, you can see in the numbers for Q3, we continue to maintain an extremely strong Market share position at the price points at which the R1 platform operates. So as you think about volume of vehicles, electric vehicles sold, Let's say, at over $75,000 price point, we're a very significant market share player that the brand is connected incredibly well with consumers And we're seeing that translate to not only continued excitement for the brand, but we see that really manifest as Really strong residual values and in particular, really strong used vehicle pricing. So Google search of used Rivian R1S will just reveal Just how robust the pricing and therefore the demand for these products are. So with that said, this is before we've even launched A number of additional variants are going to be coming online.

Speaker 2

We've just recently launched MaxPack. We've launched the dual motor. But early next year, we'll be launching our standard battery pack. We'll be launching additional TRIM configuration. And importantly, starting now or starting later this month, We're going to be launching on Select Models as you heard Claire and I described in the opening statements.

Speaker 2

Select Models are leasing program That leasing program creates a different way for customers to access the product, which is really helpful in an environment with interest rates as we see them today. So we remain very bullish on R1 program and its long term demand. And as I indicated, I think that The RCV platform, commercial van platform, really is, in our view, The best commercial van option available for fleet any sort of large fleet and we're working very hard to Translate that into volume over the course of the next several quarters with these pilot programs that I referred to at the start.

Operator

Thank you. Our next question comes from the line of John Murphy of Bank of America. Your line is now open.

Speaker 5

Good evening, guys. Just a quick question on the 4th quarter implied volumes. It looks like they're a fair amount lower than what you did in 3rd quarter on production. Just curious, is this a question of days in the calendar? Or is there something else going on, sort of in the plan?

Speaker 5

Is it What you mentioned on the Amazon deliveries where you might downshift the EDV a little bit, I mean, what's going on there?

Speaker 2

Yes. Claire spoke to this in our opening statements, but we have we're planning a longer shutdown in the Q2 of 2024 To implement a whole host of changes that introduced a dramatic reduction in our material costs for building materials for the R1 platform, But those changes also improve the operations of the plant and allow us to produce vehicles with less labor per vehicle and therefore less cost per vehicle. Proceeding that shutdown in Q2, twenty twenty four, we have a 1 week shutdown in Q4, and That's planned to do some of the longer lead changes in the plant and it requires us to shut down all production for approximately a week. So you're certainly seeing that in the numbers. And then I'd say broadly, we've we're also recognizing some of the Days lost around the holidays, associated with Christmas and, and of course, the New Year holiday.

Speaker 5

Okay. And then just one follow-up on the physical service network build out. RJ, how are you sizing that At the moment, because I mean that's obviously something that you're getting way ahead of, the customer needs there. How you're locating and deciding on locations? What's the cost of those and how are you sizing those?

Speaker 2

Yes. As you know, we've and we've talked about this in the past in past earnings calls, We are building a service footprint that relies on both physical brick and mortar service locations. We'll have about 50 of those In the U. S. By the end of this year, but supplementing that and actually performing a majority of our service are mobile service vehicles.

Speaker 2

And our mobile service vehicle fleet, as I said at the start, is more than 400 vehicles today. It's as of I think This week, it's 408, but it continues to grow. And that the beauty of mobile service first strategy is from a customer point of view, It's a much easier process. So if there's an issue on the vehicle rather than you as the customer having to deal with the vehicle being dropped off They're taken to a service center. We simply come to you.

Speaker 2

We come to your house, we come to your place of business and perform the service on-site. And more than half well over half of all of our service operations there in mobile, we expect that to shift into Greater than 3 quarters of all service operations will be performed with mobile service. Now that doesn't completely relieve the need for physical infrastructure. The physical infrastructure is important for More significant service activities. And as I said, that's why we continue to grow and invest in that network and we'll see that Growing, where since we put service locations closest to where we have large pools or large pockets of demand.

Operator

Thank you. Our next question comes from the line of Joseph Spak with UBS. Your line is now open.

Speaker 6

Thanks so much, everyone. Claire, I know you sort of talked a little bit about Some of the puts and takes into next year, but you're right now running at a $65,000 run rate this quarter. So in the context of the downtime and the 150 Okay. Total capacity, how should we be thinking about next year's potential? Is that sort of 65 run rate You know about the right level you guys are planning for next year?

Speaker 3

Joe, as you mentioned, there's going to be a number of puts and takes Overall, and it's important to note that the impacts of the shutdown are temporary in nature, but the benefits We'll be there for the future and RJ spoke briefly to just the magnitude of technology changes that will be introduced Into the R1 vehicles next year that creates a true step change in our material cost roadmap and path to positive gross Profit margin for us as a whole. So as you think about the cadence of the year, as I mentioned in my prepared remarks, right, we'll start Q1 is akin to our current and existing run rates. And then Q2 and Q3 will be heavily impacted quarters from standpoint, where we'll take multiple weeks of downtime throughout the course of Q2, and then we'll be ramping up All of the respective variants of R1, both in Q2 and into Q3 as well. And then as we've talked about In the past, Q4 becomes that run rate potential for the business where you'll see Rivian continuing to ramp up our volumes From a production standpoint for both R1 as well as our commercial volumes, you'll see the full impacts of each of the new technologies Hitting our material costs, that also coincides with a significant percentage of The commercial cost down opportunity that we have in front of us as well.

Speaker 3

And so those elements come together in connection as well with Rivian is fulfilling our pre-threeonetwenty 22 preorders, which also results in a step change in our average selling price of the vehicle Over that period of time as well. So next year is certainly a year of different puts and takes, But that's directionally how I would think about the volume cadence.

Speaker 6

Okay. That's helpful. And actually, It dovetails nicely into my next question from RJ or Claire. I mean, you've talked about this in the past about The higher ASPs with the backlog and RJ, you sort of mentioned some of the affordability concerns out there on In EVs, but really I'd say in broader auto as well, at least in the headlines. So Clearly, you have good visibility on your backlog through 2024, but how are you thinking about or planning for The margin profile for the business, when you go once you get past that, like if affordability Is a greater concern, do you have enough line of sight on cost reduction initiatives or other efforts to sort of help balance out what might be a little bit of a tougher Pricing environment?

Speaker 2

Yes. We've talked about this a bit in the past, but when we think about the R1 platform, We launched with quad motor large packs, that's our middle sized pack and one trim configuration. And what we've done over the last few months is we've started to introduce additional Build combinations above and beyond that. So we introduced the dual motor that's built around our Enduro motor platform. We of course introduced our Max pack, which is our largest battery pack.

Speaker 2

Next year, we'll be introducing our standard pack, which is our smallest battery pack and we'll be introducing A variety of different trim and build combinations along with that over the course of the next year. And what that does is it provides us with A broader spread of prices or price choices for consumers on the R1 platform to essentially Be able to target both the most price sensitive customers as well as customers that are looking to buy sort of the fully loaded maximum content vehicle. And What that effectively does is it allows us to benefit from the higher margin profile on these higher priced Full content vehicles and balance it with the lower priced, lower content vehicles And still look at it through as we look at that fill in the ASP, still see ASP grow over time. And a big contributor to that, which Claire Alluded to is as we start to blend in newer pricing and we move past the pre March 1, 2022 pricing, That's also going to have an accretive effect on overall ASP. The other thing to keep in mind from a demand point of view It's just the scale of the segments that we're operating in.

Speaker 2

The 3 year SUV space and the pickup segment Represent very large pools of demand. And of course, across those large pools of demand, there's a range of prices. But this is a really important element for us is just recognizing how much overall demand potential there is and we're seeing with increased awareness and excitement for the brand that translate to lots and lots of new EV customers. The other thing which is worth just bringing up in the context of some of the negotiations that we've had with R1 Is the bill of material cost reductions we're seeing and these are significant and we're going to see them quarter over quarter. I've described it before almost like the staircase Set of changes quarter over quarter with a big step being that which comes in Q2 of next year.

Speaker 2

But we've been able to leverage Suppliers' excitement for R2 to achieve materially lower costs in our bill of materials That will start to layer in along with what comes in Q2, but even beyond that. And so R2 is sort of This incredible carrot for suppliers and one of the things that's become very clear, particularly in the last 2 to 3 quarters is just how well the Rivian brand is resonating And suppliers are recognizing relative to some of their other customers just how much volume we're delivering and how much demand there is for our products Relative to a wide variety of established brands and they recognize that that excitement for our brand We'll also translate to lower price points and the R2 captures the essence of our brand, but of course, in a smaller package and in a much lower price point.

Operator

Thank you. Our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Speaker 7

Yes. Good afternoon. Thanks for taking my question. You reiterated your view to be gross margin positive in 2024, but I'm hoping to better understand if your views on how Rivian will get there Changed at all recently given the volatility in the industry more broadly with competitors cutting EV vehicle prices, but also costs falling and Rivian as you

Speaker 2

Thanks, Mark. I'll let Clare jump into this as well. This is just such an important topic. And ultimately, there's I just spoke to it a bit, but there's a few major levers. The first being, the continued ramp up of our production The fixed cost absorption that comes with that, we're seeing the benefits of that quarter over quarter as we continue to ramp.

Speaker 2

So It's numerically very easy to understand. The second, which is maybe less It's not as easy to see without having a look into all of our supplier negotiations and discussions is the significant progress we're making contractually With redefining, bill of material costs or our material costs through negotiations with suppliers, The resourcing of new suppliers or through changes to the component or system design to achieve those cost reductions. And the shutdown that we have in Q2 of next year of 2024 will allow us to implement a large bundling of all those Changes both in terms of suppliers, part design changes, component changes, I've talked about this a lot in the past, but massive consolidation of our ECU topology, Massive simplification of our harness, simplification of our body structure, simplification of the HVAC system in the vehicle, So there's big changes that are going to be coming as part of that shutdown. And we saw a similar or it's worth noting With the commercial vehicle with the EDV, when we had the shutdown earlier this year, we had a 35% reduction in our So we're expecting and anticipating a similar level of Step change in our material costs following the shutdown.

Speaker 2

And then lastly, which I spoke to a moment ago is growth in ASP. And that's going to be both due to the layering in or the feathering in of new pricing, which again, we'll just see quarter over quarter as more and more of Our deliveries are associated with new pricing, meaning post March 1, 2022, as we work through that. And then the other is the introduction of some of these new trim packages, MaxPack as an example. We have some new trim configurations going to be coming out next That will also help us grow ASP. So it's a combination of ramp, material costs and ASP that give us a very high degree of confidence in our Long term gross margin for the business.

Speaker 7

Yes. Thanks for that, RJ. And my follow-up was on a related topic on margins. Last quarter, you spoke about your expectation for R1 to be contribution margin positive exiting This year is actually your expectation. Thank you.

Speaker 3

Mark, we still expect R1 to be contribution margin positive exiting this Here, for newly priced units.

Operator

Thank you. Our next question comes from the line of Chris McNally with Evercore, your line is now open.

Speaker 8

Thanks so much team. Sorry to follow on the same topic. But if we I wanted to look at that sort of the shape of the gross profit progression as we think about next year. And so And just paraphrasing, could we think about this minus $32,000 per vehicle as sort of linearly getting better in Q4 and Q1? And then obviously, there's a big step change.

Speaker 8

You talked about all the massive improvements in the architecture Q2. You have some Re ramp in Q3, so I don't want to put it's going to be a more complex number. But coming out of Q3 into Q4, that's where we should start to really see the gross profit ramp probably well through positive because then obviously you have targets in 2025 that include double digit gross profit, does that sound like a shape where you get a big change out of the Q2, Q3 Into Q4 because that's where a large amount of the architecture costs change out.

Speaker 3

Yes. So Chris, as you think about the near term cadence, one area I wanted to just call out is, as I mentioned in Rob's Question, EDV was a significant contributor to our Q3 margin improvement itself. And so as you look to Q4, Given the seasonality of Amazon's business, that will be a fraction of the volume that they took in Q3 of this year. And so you won't see this linear path from Q3 to Q4 in terms of the gross profit losses per unit There, just given some of the mix shift, as you look to Q1, you'll see more similar types of dynamics, especially as you start to ramp up Greater volumes of our Enduro drive units, where you're seeing some of the new technology introductions that we have in R1, You'll see the benefits of MaxPack as well throughout the course of Q4 and Q1 that are contributing to the cost down roadmap For R1, and then as you mentioned, if you were to just look at the material cost trajectory, that's where you'll see the significant step change Really in the second half of twenty twenty four, as each of the new technologies that we'll be introducing will start to go into production in the line as well.

Speaker 3

And so that's going to be that step change in terms of gross margin improvement. However, that step change will be mitigated by some volume related impacts given our production rates for Q2 and Q3. And so Q4 is where you'll see more of the run rate potential coming out of the shutdown itself and the full complement

Speaker 8

Make sense. I guess there's a lot of moving parts, but basically if we think about next year, there's Q1 clean quarter and Q4 obviously clean again there will be the EDV issues then, but basically it all comes out of Q4. So okay, In terms of the shape, that all makes sense. One of the areas you've also been really improving upon has been on the OpEx And I'm just curious how do we think about if we run rate going into next year, when do we have to start to build in some OpEx For Georgia pre work, some obviously can be capitalized, but do we have to start to build in And OpEx investment as I think about for 2024? Thank you.

Speaker 3

As you think about the OpEx drivers, you'll start to see Georgia pickup in 2024, but beyond that, you'll also see more material investments as we approach The 2024 shutdown to introduce new technology. So as our team today is increasing the number of prototypes we're building in advance of the shutdown And increasing the level of engineering design and development work that we're doing with our supply partners for those new technology introductions, you're seeing A little bit of a tick up of R and D that you'll see throughout the second half of this year and into the first half of next year itself. But in aggregate, we don't expect a material increase. We'll certainly see some continued increases across the board. But we'll continue to maintain sort of the slight increased level that we've seen of late over the longer term.

Operator

Thank you. Our next question comes from the line of Emmanuel Rosner with Deutsche Bank, your line is now open.

Speaker 9

Thank you very much. So it's exciting to hear that you'll be able to sell the Commercial vehicles to other customers. I was wondering if you can try and help us with a directional sense of Volume split between that and the Amazon ones and also timing. So after the re rate next year, you'll have I think 65,000 units of capacity for the commercial vehicles. How quickly or on the what timeline do you think that you will be able to Essentially fill that capacity between your current customers and any new one.

Speaker 2

As I spoke to before, the sales process for commercial customers really Is it relatively long sort of lead time process whereby it's important for these large fleet operators To run pilot programs, both to understand the unique idiosyncrasies of the vehicle, but also to understand What changes are necessary from an infrastructure point of view? And as is often the case where the vehicles will be based out of their hub Wasn't originally designed with a lot of power. So it doesn't have necessarily power to support daily charging or night charging of the vehicles and that Takes time to install that. We've learned this some of the challenges associated with converting existing facilities to support large EV fleets. We've learned this through the lens of our relationship with Amazon very clearly.

Speaker 2

And so those pilot programs which we'll be Kicking off, we'll be announcing a number of them shortly, will lead to larger volumes, but we want to be careful to Just set expectations in the right way that these pilot programs will take some time. And so we think of this as some volume associated both the pilots and orders that come following the pilots in 2024, but the significant opportunity really starts to kick in, in 2025 As these larger customers transition from pilot to at scale development.

Speaker 9

Okay, that's helpful. And then my second question is on CapEx. So obviously, quite a big cut Again to this year's guidance, I think you've mentioned among other factors, timing delays. I guess historically when you've lowered the CapEx Over the last few quarters or so, there was no real increase in CapEx for the future periods. But how should we think about This particular cost, like are you going to see something next year in terms of CapEx that's higher than what you previously contemplated?

Speaker 9

Or in the end, you can Leave it at your regular framework.

Speaker 3

So, Menyal, what we've talked about in the past has been approximately $2,000,000,000 We're on average between 23 24. I'd say that We'll be in a position to be below that average, just slightly below that average, if you think about the trajectory And the significance of cuts that we've had in 2023 itself, it's really been driven by both Some improvements that we've had in terms of longer dated payment terms on some of the work that we're doing within our production facility And with our equipment purchases as well as the episodic nature of some of our investments predominantly surrounding There's the shutdown and introduction of new technologies, that's really the largest contributor to the reductions that we've made This year that will hit in the early part of 2024.

Operator

Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Your line is now open.

Speaker 10

Great. Thanks for taking my questions. If I look at gross profit ex the LC and RV, it's Trending, I think, close to 38,000 a vehicle and that has improved a lot from Q1, where I think it was close to 80,000, but still Quite a big gap to get to the gross profit. I mean, I think in Q1, you kind of framed like a certain percent was leverage, certain price, Is engineering certain price down? Is there any sort of framework how we get from the sort of $38,000 today to the breakeven?

Speaker 10

What are sort of the main drivers from here? Is it Mostly the pricing and engineering at this point or is there still some leverage there?

Speaker 3

So the 3 drivers remain As you think about them being the fixed cost leverage that we'll get from increased volume from current state to the end of 2024, as well as the material cost down trajectory and improvements in average selling price as a whole. As you look at the progress that we've made over the course This year, that's largely been driven by the improvements that we've seen in fixed cost leverage from the production ramp As well as the progress that we've been making on material costs, given the technologies we've introduced in EDB, which R. J. Referenced, Resulted in a 35% improvement in our material costs and the EDV itself and then continued progress against Both the introduction of new technologies such as the dual motor introductions that we've had in R1. And then beyond that, we've also continued to see progress as RJ mentioned in the visibility that we have today in our contractual Agreements with supplier partners that are continuing to come down as we look both to the business in the future.

Speaker 3

The other key that we've seen has been around the commodities environment and backdrop. And to date, You're not really seeing the softness in some of the key battery cell raw materials reflected in our current results. So some of that trajectory is still to come as you think about impacts for the end of this year and into 2024 as well.

Speaker 2

I think Claire and I both spoke to this, but it's important to call out when we talk about material cost reductions And pulling overall our bond costs down, these are contractual, meaning this isn't like us sitting over here hoping that this is going to come down. These are Detailed contractual negotiations part by part, supplier by supplier and the effectivity data on some of these Where it's, let's say, just a pure negotiation on a part that's not going to change or on a supply that's not going to change, we've been able to accelerate the effectivity date To have already happened or to be happening prior to the shutdown in Q2 of 2024. But for some of the larger changes On things like, let's say, for example, the significant consolidation of ECUs that we're driving or the massive refactoring of our harness that takes Roughly 25% of the harness length out, those involve engineering changes that involve New suppliers and completely new supplier contracts. And so the bundling of some of those big multi $1,000 changes that have effectivity dates In April, we have 100% confidence those are going to occur. Those are again, I'm using the word here as clearly as I can.

Speaker 2

These are contractual Agreements, but the contractual agreements have an effectivity date and they're tied to when we start production with those new components. So as we look at this transition, the continued ramp, as I said earlier, that's we understand the number that's just The numerics of fixed cost absorption and on the BOM cost side, it's just understanding what I understand it's hard for all of you to see, but very clear for us to see the contractual obligations that we've negotiated with all of our suppliers.

Speaker 10

I guess, I think in Q1, you had kind of indicated half of the gap was leverage and then it was like a quarter price and then a quarter supplier and engineering. At this point, we have already cut it in half. I mean, how should we think between those three items? Is it now equally a third, a third each of what's going to drive that closing that gap? I guess,

Speaker 3

Colin, we're not going to provide an update specifically to the bridge that we had commented on, but as I mentioned, the significance in the progress that we've seen to date has really been driven by fixed cost leverage from production ramp And some of the progress in our material cost down trajectory. So you can extrapolate that to understand Yes. Those are sort of relative re weighting of those 3 key drivers for us.

Operator

Thank you. Our next question comes from the line of Jordan Levy with Truist Securities. Your line is now open.

Speaker 5

Hi, all. It's Henry on for Jordan here. Just a quick one around some of the current macro news on EV demand. I want to get a sense of any small changes in your thinking around the LONAVAR II timing, etcetera, due to this? Or do you think The backdrop for you to be substantially improved by the time it rolls out in 2026.

Speaker 5

Thanks.

Speaker 2

Yes. Ultimately, as we look at, I'd say, probably beyond even R2, just at this space, I think there is a overreaction to some of the Short term headwinds, short or medium term headwinds we see between interest rates being at record high levels and of course those aren't going to drop down anytime In the next month or 2, but this is something that will recover over time and some of the geopolitical challenges that we have across the world. So if you look at R2 launching in 2026, everything about R2 in terms of its ability to And our deep confidence in its ability to capture the essence of our brand, we're enormously excited about the product, but to do it at a price point That's considerably lower than what we have in R1 and at a form factor size that makes it Sort of fit from an adjusted market point of view, fit the largest segment in the United States. We couldn't be more excited and bullish on this product. And we think the timing of it works out beautifully in terms of The brand buildup that we're driving with R1 and off the back of that to then have a product that is sized physically in terms of its footprint As well as priced, such that it can really capture the hearts and minds of buyers, but also give customers a real choice.

Speaker 2

There's an extreme vacuum of choice we feel in the sort of $45,000 to $1,000 price range from midsize SUVs. There's just not a lot of great options. And as a result, we see very highly concentrated market share With Tesla, but we believe there's a need for alternatives and those alternatives need to be very robustly developed With vertically integrated software electronics and a deeply seamless user experience, user interface, which is of course what we're developing with R2.

Speaker 5

Awesome. Thanks for that. And then kind of just piggybacking off the software space. Could you just update us again on some of the monetization You'll see in the software segment kind of into next year and then kind of longer term?

Speaker 2

We've spoken about this before, but we really believe in terms of the large scale Opportunities to monetize, we think the most the model that we think is going to Fit and has shown to fit the most is around autonomy. And as we look at higher levels of autonomy, the ability to charge for that, And there's a variety of ways that that can be done, monthly fee payments as well as upfront payment for access to a higher level of autonomy. We do think there's been an over it's been overestimated how much Vehicle manufacturers can charge for every software feature. So the way that we think about it is the features that have a lot of complexity And require a lot of development, autonomy being a great example of that. Some of what we think of as some of the really interesting immersive user experiences, Particularly as you start to think about AR and the way that the vehicle can interact with its environment, we think those represent opportunities for An incremental charge above and beyond the base platform, but like the idea of charging for heated seats or charging for sort of the binary 1 or 0 like turning We don't think that that's going to land well with consumers and we don't think that that's going to be a sustained model For charging for software, we think it really ties to the much more complex, much more heavy development platforms.

Operator

Thank you. Our last question is from Alex Potter with Piper Sandler. Your line is now open.

Speaker 11

Perfect. Thanks a lot. I was wondering if you could give us an update on your battery strategy. I know that historically you've been working in house Potentially on having your own chemistry, your own cell, I think you've spoken relatively favorably about LFP. Any changes in your thinking There about what you're doing now and also looking forward to R2?

Speaker 2

So This is a space that's rapidly evolving. And as we look out over the next decade, one of the things that's become very clear Through both the lens of policy, but also through the lens of securing long term supply Is the upstream supply some of the raw materials? So lithium hydroxide, lithium carbonate, of course, nickel, Thinking also very much and more recently about graphite, and each of these Upstream raw materials has different implications around the cell manufacturing itself. So something like graphite, of course, has a very Closely tied relation to the anode chemistry, whereas, let's say, lithium hydroxide is a little bit more commoditized and more easy to Easier to integrate into a downstream supply. And so where we've been spending a lot of time is building a very robust strategy around Each of the components of the cell and each of the raw materials of the cell from an upstream relationship point of view and also making sure that those upstream relationships And the way we want to engage with those upstream suppliers integrates with the way we've structured our deals with battery cell suppliers.

Speaker 2

And in the case of R2, this is really important given the role that IRAs are going to play in terms of driving Advantage pricing with the consumer facing tax credit and in the effect that that will have in terms of consumer behavior. So we're incredibly focused on upstream supply. I also think that the last 18 months have been a really challenging environment in that, particularly if you think about What happened in 2022 and into the beginning of 2023 where there was, I would say, a lot of bad deals done In the upstream raw material supply, where people were overpaying and inflating the market and it made it hard to do a good deal. We sort of watched some of that play out and I'd say in the aftermath of some of that exuberance, there's now A lot more rational deals that are on the table in terms of securing some of that upstream supply of raw materials.

Speaker 11

Great. Okay. That was going to be my next question. So I guess maybe one last one, just a simple one. How many Pre March 1st orders do you still have in the backlog?

Speaker 11

Presumably, there shouldn't be very many of them left. At what point is that going to be completely clean? Thanks.

Speaker 3

Alex, we'll continue to work through the pre March 1 pre order base as a whole. And as we've talked about in the past, they'll be feathered in both new orders as well as pre March first orders, especially as we expand Our production to include more dual motor units, which weren't available to those pre March 1 consumers originally, And we'll introduce MaxPack and there's a variety of new introductions over the course of 2024 as well. So you'll continue to see both new orders

Operator

Thank you. I'd now like to turn the call back over to RJ Skerinch for closing remarks.

Speaker 2

Well, thanks everyone for joining us on the call today. We've spent the time over the last quarter really continued to focus on things we've said we're going to focus on, driving up Production volume and achieving better fixed cost leverage, achieving meaningful reductions in our material costs from a bill of materials point of view, Working on building out our commercial and go to market operations to allow us to not only continue driving demand, but to continue driving up Our ASPs and importantly focused on developing our next set of products around the R2 platform, Which as you heard me say, we couldn't be more excited about and really looking forward to showing to the world in the early part of next year. As we now look out and particularly with all the discussion around long term EV penetration and the timing penetration, I want to just end by saying, we remain deeply convicted around the transition of the entirety of our transportation space, and we're committed to building customers building products that Our customers absolutely love and building a brand around those products that continues to resonate across a variety of price points and a variety of form factors, Which of course the R2 platform will really help deliver on.

Speaker 2

So with that, thank you everyone for joining. Look forward to our next call.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Rivian Automotive Q3 2023
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