Rivian Automotive Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Rivian's Second 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. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to Tim Bey, Vice President of Strategic Finance and Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us for Rivian's Q2 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 R.

Speaker 1

J, who will begin with a few opening remarks.

Speaker 2

Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments during the Q2 and provide an update on the progress we are making against our core value drivers. Production continues to ramp, which is translating into improved profitability and capital efficiency. We are also driving material cost reductions Through commercial and engineering design updates, including the integration of our in house dual motor into the R1 product line.

Speaker 2

We remain focused on the customer experience as we expand our physical, digital and mobile footprint and took important steps during the quarter to improve our charging experience. Importantly, prior to getting into the quarter's details, I'd like to thank our employees, customers, partners, suppliers, communities and shareholders for their continued support of our vision. Consistent with our last earnings call, Claire and I will be inviting different leaders to join us each quarter. For this call, I've asked Waseem Bensaid, our Senior Vice President of Software Development to join given the critical role software plays in enabling our business And the ever improving and expanding capabilities and features of our vehicles. During the Q2, we produced 13,992 vehicles, which represents a 50% increase compared to the Q1.

Speaker 2

Importantly, approximately 70% of the R1 units produced during the Q2 were R1S vehicles. This represents the first time R1S quarterly production was higher than R1T production. Our team in Normal has made strong progress through the first half of the year, Maturing the manufacturing process of the R1S to the point where the build efficiency is essentially equal to the R1T. It's also important to note the R1S is more profitable than the R1T. The ramp of our in house Endura Motor line remains a key enabler to near term production performance.

Speaker 2

Due to our progress during the first half of the year, We are increasing our 2023 production guidance to 52,000 total units. Building on the successful launch of the in house Endura Motors for our commercial vans last quarter, We successfully integrated this motor into the dual motor variant of the R1 platform during the Q2. This is an important milestone from a cost perspective and will also be instrumental in expanding the consumer market opportunity for our R1 vehicles. We believe the majority of our long term R1 demand will come from our dual motor variants. These variants have pricing that starts at just over $70,000 extend up to 400 miles of range, reach 0 to 60 miles per hour in as quick as 3.5 seconds, Tow up to £11,000 and generate over 800 foot pounds of torque and 650 horsepower.

Speaker 2

We believe the dual motor variants offer great value while providing high on and off road performance. The technology and clean sheet approach we've taken With the R1 product line has really enabled the uniquely differentiated product, the features, the attributes, the way the vehicle feels So special. And this is the result of thousands and thousands of trade offs we're making between different pieces of content, the way we think about The way we think about technology, integrating with that design. And of course, the R1 product line was intended and is Our handshake with the world, it's our flagship product. And so as we've now been thinking a lot about how does that brand position that we've created from a product point of view Integrate across the mosaic of all the other touch points we have as a company and then of course into R2, those same That same mindset and that same ethos is being applied, of course, in a smaller price a smaller form factor and a lower price point.

Speaker 2

And having spent a lot of time with the teams and Closely coordinating all these different trade offs and sort of thinking about how does Rivian manifest at this lower price point with a smaller form factor, I can say we couldn't possibly be more excited about what's to come with R2 and really looking forward to showing that product in the early part of 2024. It represents in much the same way that R1 rethought a segment, rethought a space, R2 takes that even further and stretches our ideology and our brand ethos really into such a great segment and such a large adjusted market. Now on to our 2nd quarter results, which reflects our continued extreme focus on cost efficiency as we accelerate our drive towards profitability. On a quarter over quarter basis, delivered vehicles grew by 60%, while gross profit per vehicle improved by about $35,000 We achieved meaningful reductions in both R1 and EDV vehicle unit costs across the key components, including material costs, Manufacturing labor, overhead and logistics. Maintaining our cost reduction efforts through consistent focus and collaboration across all levels of the company It's a core part of the culture we're building.

Speaker 2

I also want to take this opportunity to highlight some of the progress we're making through our partnership with Amazon. When designing the electric delivery van, we set out to develop a delivery van, which offers a step change in safety, innovation, technology and of course driver comfort. As of early July, there were EDVs in operation across over 800 cities in the United States. In addition, we recently initiated deliveries of EDVs to Amazon in Europe. It was a strong quarter and we remain focused on ramping production, driving cost efficiencies, developing future technologies and creating an amazing customer experience.

Speaker 2

With that, I'll pass the call to Hassim to discuss our software development strategy.

Speaker 3

Thank you, RJ. It's good to be here to discuss our software capabilities and the progress we are making. The impact of software is pervasive throughout the company. The most obvious and customer facing aspects of our software is what customers see and experience through their in vehicle digital experience, Our over the air updates and the review in Mobile App. Our priority here is to take feedback from our customers and enhance the customer experience, Whether that's through drive modes, comfort features, range efficiency or addressing other pain points that customers may experience.

Speaker 3

Over here, I have actually been called the Chief Reddit Officer given my interaction with customers on the Rivian subreddit. Since launching our R1 platform in the fall of 2021, we have pushed 22 major software updates to our vehicles. These updates have been filled with features such as Birds Eye Camera View, DriveCam, Snow Mode, Camp Mode, Pet Mode and much more, all designed to enhance our customers' experience. Most recently, this included the integration of a better route planner, which we expect to meaningfully improve our customers' charging and routing experience. This technology will give our customers the ability to plan and compare charging stops along the way.

Speaker 3

It also provides us data to help with the site selection of our revenue adventure fast charging network. And the roadmap we have is equally exciting. While I don't want to share too much yet, over the next months, you will see us launch The towing mode update, including trailer profiles, but camera views, adaptive range estimation and towing charge stations discovery in the navigation app. We also plan to launch drone mode, which will provide an immersive camera experience powered by our computer vision and augmented reality We believe that our software capabilities are a structural differentiator that will only grow in importance As electric vehicles continue to increase in complexity, our unique capabilities stem from the intentional decisions we made years ago, When we decided to truly take a clean sheet approach to the software stack and electrical hardware in the vehicle. What this means is that we own the software stack and control nearly every single computer in the vehicle.

Speaker 3

We designed our software stack to scale to multiple hardware architectures, allowing us to rapidly support 3 product variants With the high level of COBRA use across R1T, R1S and EDV. This modular platform approach is also enabling us to prepare rapid migration to our next gen zonal electrical architecture, which brings Increased levels of system integration and will allow us to achieve significant material cost savings, Thanks to the hardware consolidation. As I mentioned earlier, at Rivian, software is foundational. It supports and optimizes functions throughout the company. What I just described was on the consumer facing side of our work.

Speaker 3

The work my team does behind the scenes is equally important. Our connected software architecture Allows us to gather sophisticated data that provide powerful insights, enabling us to improve the reliability and safety of our products and reduce our service costs. It allows our service teams to perform remote diagnostics and assess the issues that customers may be experiencing well in advance. So we can determine when to deploy mobile service vehicles, what parts to bring, and in some cases, even fix the issue Through over the air software. This in house platform also powers our manufacturing operations in the plant, allowing us to have In line diagnostics that automatically detect potential assembly issues as the vehicle moves through the line and allows us to perform Exhaustive electrical quality checks on our vehicles.

Speaker 3

This ultimately saves us time, improves quality and improves efficiency During the manufacturing process, as a team, we're excited about the work we do and the impact we are having. It's not often that you get the challenge to redefine how an industry views software. We're encouraged by the work we have done and even more excited about what's to come. With that, let me turn the call over to Claire.

Speaker 4

Thanks, Waseem. 2nd quarter results reflect the strong progress our team delivered against the operating plan we outlined earlier this year. As R. J. Mentioned, we remain focused on the drivers of long term value for our business, ramping production, driving cost efficiencies, building future technologies and improving the customer experience.

Speaker 4

Turning to our Q2 results. We produced 13,992 vehicles and delivered 12,640 vehicles, which was the primary driver of the $1,100,000,000 of revenue we generated. Total revenue for the quarter included $34,000,000 of proceeds We expect the sale of regulatory credits to increase over time, but to vary quarter to quarter. During the Q2, we improved our gross profit per vehicle by approximately $35,000 as compared to the Q1 of 2023, representing a gross margin improvement of over 4,400 basis points. The primary drivers include fixed cost leverage, The change in LC and RV inventory write downs and losses on firm purchase commitments, material cost reduction and increased revenue per vehicle delivered.

Speaker 4

Now going deeper into the material cost reduction drivers. After a full quarter of EDV production, with the introduction of the LFP battery pack In our in house Enduro drive unit, we are now seeing a 35% reduction in material costs for our vans as compared to Q4 2022. Concurrently, we've seen and continue to see strong progress on our R1 material cost reduction through commercial cost down efforts and a reduction in short term premiums. Total gross profit for the quarter was negative $412,000,000 as compared to negative $704,000,000 in the same period last year. Total operating expenses in the Q2 of 2023 Fell to $873,000,000 as compared to $1,000,000,000 in the same period last year.

Speaker 4

The primary driver of the reduction in operating expenses was related to lower levels of stock based compensation expense. We continue to rationalize our operating expenses despite significant investments in core in vehicle technologies and the customer experience. Over the past year, we have expanded our physical and mobile service offerings, increased our demo drive capacity, Developed and launched a new motor platform, expanded our Rivian Adventure network, built a parts distribution center and remanufacturing center and so much more. All of this was done while lowering our quarterly operating expenses by $131,000,000 of which $89,000,000 consisted of cash expenses. These are all forward investments that position us to capitalize on our direct to customer relationship and enable us to scale efficiently as our car park grows.

Speaker 4

Our gross profit improvements, coupled with our operating expense rationalization, resulted in $424,000,000 of improvement in adjusted EBITDA as compared to the prior year. We ended the Q2 of 2023 with $10,200,000,000 in cash, cash equivalents and short term investments. We continue to believe that our cash can fund operations through 2025 and with the addition of our $1,500,000,000 green convertible notes and the amendment and extension of our $1,500,000,000 asset based lending agreement earlier this year. We have strengthened our balance sheet as we approach the launch of R2 in 2026. Turning to our business outlook for 2023.

Speaker 4

We remain focused on ramping production and driving greater cost efficiency across the company. Based on the progress of our production ramp, Including the ramp of our in house motor, along with the latest understanding of the supply chain, we are increasing our production guidance to 52,000 total units. We have also seen strong progress in our cost down efforts and are improving our adjusted EBITDA guidance to negative $4,200,000,000 Finally, we are reducing our capital expenditure guidance for 2023 to $1,700,000,000 Due to a shift in capital expenditure timing, we continue to believe the average capital expenditures per year between this year and next year We'll be in the low $2,000,000,000 area. In closing, we have seen progress in all three aspects of our path to generate positive gross margin: ramping production, driving material cost down and increasing average selling price. The substantial reductions in EDV material costs Driven by the introduction of the LFP pack and Enduro DRIVE unit is reflective of the material cost improvements we expect to experience with our R1 platform Following the 2024 shutdown to re rate the R1 line to 85,000 units per year and introduce new technologies.

Speaker 4

This reinforces our confidence in our long term financial targets. We 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 you. Please stand by while we compile the Q and A roster. One moment for our first question please. Our first question comes from the line of Dan Levy with Barclays. Your line is now open.

Speaker 5

Hi, good evening and thank you for taking the question. Wanted to dig in first On the gross margin improvement, and I realize you said that you're making progress on each Of the areas that you flagged in terms of improved fixed cost absorption and material cost reduction, but Maybe you can give us a little bit of a voiceover, a little bit deeper color on how this is playing out. How much more ground is there in terms of renegotiating some of your supplier contracts? How much more upside is there on the pricing front? And any color on the path to being contribution margin positive, which is a step and ultimately getting to total gross margin positive.

Speaker 2

Thanks, Dan. Yes, this is a major, major focus for us as a business And something that across all aspects of product developments, our quality teams, our manufacturing teams, we're working towards. And as we look at unpacking, as your question sort of dug into the gross margin improvements, A portion of it absolutely is the fixed cost absorption improvements that just are borne out of the increased volume. But I'm glad you point out a really important element of this is also material cost improvements, so reductions in our bill of materials. And this is, what we're seeing today is some of, but not all of the improvements that are coming.

Speaker 2

And as Claire said in her opening remarks, we've achieved roughly 35% reduction in material costs on the EDD program In conjunction with the shutdown that happened at the beginning of this year, and we expect a similar level of reductions On R1, with the shutdown that's going to be coming next year. But preceding that, there's a whole host of ongoing commercial negotiations, some of which we're already And I want to just call out a few of the points that I also made in my opening Comments, a lot of the improvements in engineering that are going into the vehicle are to drive cost out. So, a big One of the biggest areas is the improvements we're making to the network architecture and consolidating a number of our ECUs into a smaller number of ECUs, ultimately a 60% reduction And the number of ECUs in the vehicle and along with that, roughly 25% reduction in the wiring harness length in the vehicle. And so when we look at when we talk about the confidence we have around further reductions in costs, This is not confidence out of thin air. This is confidence that ties to contractual obligations associated with these component changes as well as contractual obligations with our suppliers Built into commercial negotiations and we'll continue to see significant improvements quarter over quarter And the cost structure to build our vehicles ultimately laddering up to the margin targets we talked about, the 25% gross margin target For our normal facility, for our normal vehicles produced our normal plant.

Speaker 2

And Claire, do you want to maybe just talk a little bit about some of the other aspects here around contribution?

Speaker 4

Sure. On a contribution margin basis, given the significant impact to our material costs on the EDV, the EDVs that we're producing today are Commercial contribution margin positive. And then as we think about the R1, the R1 will be contribution margin positive By the end of this year, as you heard from RJ, through continued progress on supplier contract negotiations, as well as some of the upside to price as we introduce the MaxPack variant later this year.

Speaker 5

Thank you. That's very helpful. And then just as a follow-up, I think one of the broader themes In the EV sales landscape today is just around demand and I think, there's questions broadly around Some weakness of demand. Maybe you can give us a sense, I know you've taken away the order backlog, but what confidence do you have That your backlog will sustain well into 2024 and that you're going to be supply constrained for The foreseeable future.

Speaker 2

One of the things we're perhaps most excited about is just how well received the products have been And the level of excitement we see from our customers and the folks that are driving our vehicles and we see that manifesting J. D. Power awarding us the highest level of customer satisfaction within the EV space, within the premium EV space. But importantly, we see it through the day to day interactions we have with the owners of our vehicles and they become the biggest advocates and Essentially, marketers, if you will, for our brand and what we're building. With that said, we feel very Confident in the continued backlog that we have.

Speaker 2

We have clear visibility into deep into 2024 with that backlog that's established. And as more and more vehicles are on the roads and we now have tens of thousands of R1s on the roads, It continues to feed the flywheel of awareness about the brand. And as I said, some of our strongest advocates are People that are driving our vehicles every day. And so we're quite bullish on the continued strong demand we have for our products.

Speaker 5

Great. Thank you.

Operator

Thank you. One moment for our next question, please. And the next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open.

Speaker 6

Hey, thanks everybody. My first question is on Tesla charging. As we know, there's a kind of a two way flow here where there's power, there's electrons going into the car, but then data coming out of the car to Tesla. So I'm curious what data are you required to share or planning to share with Tesla as you join their charging network? Then I have a follow-up.

Speaker 2

Adam, thanks for the question. Yes, this is I think an exciting development just around The relationship that we've put together with Tesla along with other manufacturers to utilize the North American charging standard event as a part of that Access their charging network. And we continue to build out our Rivian Adventure network and that will also have North American charging Standard adapters or plugs, I should say, on it. And that allows us with our network to access a very large car park with the Existing Tesla car park that's out there, which gives us much clearer visibility to profitability of our charging network as well. But in terms of specifically what occurs in terms of data transfer, there's not any data transfer built into the relationship.

Speaker 2

So it's a charging relationship whereby our customers will access the network and ultimately pay for the charging and that will flow from us through to Tesla.

Speaker 6

Okay. Thanks for confirming that. And just a follow-up on your ADAS strategy. You have Mobileye today, but we understand You'll be adding your own camera based ADAS system side by side with Mobileye on the same windshield. I'm just wondering how long you plan on having These 2 redundant systems together before you substitute Mobileye and rely on your own in house system.

Speaker 6

Thanks.

Speaker 2

Yes. As we think about some of the key differentiating elements of what we're building, of course, Yohme Sim spoke about Our electronic stack and building our own network architecture and designing and developing all the core issues in the vehicle, which is what facilitates and enables this significant reduction in number of VCs to the vehicle that will be coming into play next year. In much the same way, we also deeply believe That controlling the sensor set, the perception stack across the vehicle and allowing that to feed into our autonomy compute module, What that gives us is the ability to have really early fusion of information, meaning we can cross leverage information across multiple cameras, Our radar set and in the future additional sensors as well to put us in the best position to have high quality Our perception information then feeds into our control algorithms. So with that as a I guess, a bit of a technical background on it, That's the reason we've taken the view of owning the hardware stack and the software stack around our self driving platform is going to put us in a position to create Long term, the lowest cost system with early sensor fusion and therefore, the highest level of confidence from the perception stack feeding into the Getting into the control system.

Speaker 6

Okay. Thanks, RJ.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of John Murphy with Bank of America. Your line is now open.

Speaker 7

Good evening, guys. RJ, I just wanted

Speaker 3

to follow-up in particularly as we have Waseem

Speaker 8

on the line as well on that comment you just made. When we think about that next gen architecture, I can understand kind of what you just talked about. Is there anything else from the software size Or the functionality of the vehicle from the powertrain side or the HMI side that this next gen architecture allows you to do that Might not be able to do right now and might put you out in front in the lead versus other vehicles.

Speaker 2

Sure. Well, thanks, John. This is something we're super excited about. It's actually the reason we have Waseem join the call today, so he could I'll provide some additional color and commentary on the importance of software and how this is such a core aspect of our organization and Been built into every aspect of how we think about our vehicle platforms and architectures. Just to comment on and I'll pass it to Waseem for some additional comments.

Speaker 2

Probably, if we wind the clock back many years, we took the decision to develop All the ECUs across the vehicle and so that's typically these are ECUs that would be coming from Tier 1 suppliers and those ECUs typically when they come from Tier 1 suppliers that sort of embodied in that ECU is a set of functions and therefore of course a set of software applications. And that Mosaic in a traditional world that Mosaic of 3rd party Tier 1 source ECUs has to work together. And it's a very cumbersome Network architecture to work with and makes things like over the year updates very, very difficult because you have to coordinate across multiple different companies On a software platform and software stack that you as the manufacturer would know. We felt very, very strongly that this is something that had to be core to us as a business. We built deep domain expertise In terms of our electronics development capability, of course, our software development capability and That of course launched into the R1 product where we own the software stack, we own essentially all the ECUs in the vehicle.

Speaker 2

What that also does in addition to allowing us to do lots of over the year updates and as you heard Waseem mentioned earlier since the launch we've had 22 major over the year updates. Beyond that, it allows us to look at cost optimization in a really unique way because a specific controller is not tied to a Specific sourcing relationship or to a specific set of functions, but rather, we control the controller and we control what's on it. So over time, we're consolidating the number of computers we have in the car to be significantly reduced. And next year, that First step of that is a 60% reduction in the number of computers in the car relative to today. Now that doesn't necessarily directly create Customer features, of course, it takes cost out of the vehicle, allows us to operate with we think a significant multi $1,000 structural cost advantage relative to the traditional approach.

Speaker 2

But importantly, it also opens up opportunities to do some really amazing features where you can cross leverage compute, you can cross Leverage perception as I referred to in the autonomous with Adam's question. But Waseem, maybe if you can talk just a little bit about this. I know you said in your comments, we don't want to give away too much, but we told late last night, Waseem and I are reviewing Some of our software roadmap and I am so excited for the world to see the things that we're that we have coming. So, Tasim, maybe you can talk a bit about that.

Speaker 3

Yes, absolutely. I think really the core strength that we have is we own every single computer on the vehicle. So We're able to not only update the infotainment or the connectivity, but we can update the vehicle controls, we can update the vehicle dynamics, the energy management, ADAS, the way the vehicle drives, the way the vehicle navigates communicates with the entire world. We're able to create End to end unique experiences that really redefine the ownership with our customers and really create That regular connection with our community of customers. So, we have those capabilities to continue enhancing Future said, through that complex integration, we're also able to leverage on those Skills so that we can virtually distribute all these different software features into more constrained hardware platforms in the future, which will bring significant Costs down and significant bill of material savings for us for the next generation.

Speaker 3

I think the last item that I'd really want to highlight And this is usually not very obvious. I think it's really the role of software behind the scenes. The entire connected data infrastructure that we have created where we not only collect data to help With product improvements, reliability improvements, safety improvements, but we're also able to help with reducing the service costs For the company, we're also helping with the acceleration of the overall manufacturing ramp. We're also able to help With the improvements from a quality standpoint for our manufacturing.

Speaker 2

That's very helpful. Can I

Speaker 3

just ask one Last one is on

Speaker 8

the R1S, was it 70% of the R1 mix in the quarter? I'm just curious how we should think about mix on our R1s Going forward, is the R1S going to continue to take a greater portion of the mix? That's ramping up further and further? Or is this the kind of Level set, mix we should think about going forward?

Speaker 2

Yes, John, it's a great question. As We commented on before, up through the Q1 of this year, we've been producing in any given quarter, Majority of vehicles are produced through R1T. And the Q2 of this past quarter was the first time that R1S Representing a majority of what we're producing. And so, for the next quarter or 2, we'll be producing greater than 70% plus of R1S To help address some of the really long backlog and this is by far and away one of the biggest customer complaints we have, which is the amount of wait Time associated with getting IRUVIA in today, so to bias a little bit towards addressing some of that very long painful backlog for R1S. But then with that, steady state long term settling into about 70% R1S production with the remaining 30% being R1T.

Speaker 8

Thank you very much.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Rod Lache with Wolfe Research. Your line is now open.

Speaker 9

Sorry, I was on mute. Can you hear me now?

Speaker 2

We can, Ron.

Speaker 9

Okay. Sorry about that. I was hoping that you can give us a sense, first of all, on the BOM Advantage that you see from being able to acquire components with your own silicon and software. Presumably, most of your peers are still buying steering systems and braking systems and ADAS systems and Suppliers are generating some additional revenue for the engineering and software that they are adding. Is there a way To maybe talk about what this actually will ultimately mean for an R1 and R2 in terms of dollars per vehicle and When you'll be sort of more competitive than them in terms of cost?

Speaker 2

Yes. This is a great question. It's a bit hard to speak to from an apples to apples point of view. But What I'd like to do is just maybe look at 2 aspects of this. The first is, as you said, removing the Tier 1 as an aggregator of features onto an ECU, what you might often hear called the domain controller, that removes that margin stacking effect.

Speaker 2

But importantly, it allows us to optimize the way we design the hardware around what we're delivering from a feature set point of view, meaning we're not taking A piece of hardware that's been developed for a broad application across many to many different vehicles take like a body controller or a powertrain control module. So the first is just the optimization that occurs simply by it being specifically designed for us. But the second, and I've spoken to this a couple of times here, That I think is really, really important and very hard to do if you don't control the hardware in its entirety is the ability to consolidate What are typically separate ECUs that are tied to specific function sets and to be able to consolidate those ECUs into single Computers that are really tied to a zone of the vehicle, like let's say a front zone of the vehicle, a middle zone of the vehicle or rear zone of the vehicle. And that massive reduction in number of computers in the vehicle not only simplifies not only reduces the number of Modules, but also simplifies the wiring harness and the electrical architecture of the vehicle. And so This is an area for us that's been a core focus.

Speaker 2

And ultimately, we're talking about 1,000 of dollars in savings per vehicle. And To be able to build an architecture that has as few of computers, as small number of computers as possible, as simplified of a wiring harness as possible, becomes a massive enabler for cost down, and we're going to see that first in R1 next year with some of the changes I talked about already. But importantly, this forms the basis of what will be going into R2. And R2 from a cost point of view has very aggressive targets Above and beyond just what we're putting in place with the electrical architecture and the compute stack that's in the vehicle, But also well into other aspects of body design, which will leverage the opportunities afforded to it through the simplification of electronics and network architecture.

Speaker 9

Okay. Thanks for that. I was hoping you can just separately talk about Any progress that you've made in your discussions with Amazon regarding the exclusivity deal and just thoughts on the outlook for demand for the EDV and whether some resolution of that is required in order to achieve the target of positive gross profit next

Speaker 2

year? Sure. So we continue to have a great relationship with Amazon. It's a great partnership. I think one of the things that I'd want to call out is just the complexities of scaling a logistics network or I should say, Taking a scaled logistics network and converting it to electric, as I said in my opening comments, we're now we now have EDVs operating in over 800 cities across the United States.

Speaker 2

We've recently entered Europe with the product and the feedback we're getting from drivers has been incredible. You can find this All over the web and certainly no shortage of YouTube clips around just I'd say the level of excitement And how the drivers recognizing the amount of driver focus that went into the design of all the touch points, Ingress, egress, the UI, so we're really pleased with that. Now with that said, as we work closely with Amazon to expand How many of those vehicles are getting out and of course that ties to how rapidly we ramp the production of the EDD product. We're also and I've talked about this before Actively working with Amazon to allow us to sell vehicles outside of Amazon sooner than what was originally contemplated in our contract. And so that work remains ongoing.

Speaker 2

We're very optimistic on that work. Again, the close partnership and of course Amazon's Large position in Rivian helps align incentives to have us solve this year very shortly.

Speaker 4

And Radha, addressing your second part of the question on impact to gross profit positive in 2024, We haven't contemplated any external sales beyond Amazon from a commercial standpoint in the comments that we've historically made.

Speaker 9

Okay. Just to clarify, are you contemplating Amazon at its current run rate? Or is that A major factor at all in the positive gross profit target?

Speaker 4

The way I would characterize it is, as we've talked about in the past, Q4 is always a seasonally low volume quarter for Amazon, and so that is also been reflected in our gross margin commentary, given the Q4 bridge that we've spoken about in the past.

Speaker 9

Okay. All right. Thank you.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of George Jan Noritis with Canaccord Genuity, your line is now open.

Speaker 10

Hi, good afternoon and thanks for taking my questions. 1st to focus on your pricing strategy. I know you mentioned earlier that the demand landscape is Incredibly strong, but I'm curious as to whether you have thoughts on what's happening with some of your competition in the marketplace and whether you feel comfortable with current prices Your vehicles.

Speaker 2

Thanks, George. We've we take a very Methodical and thoughtful approach to how we look at our vehicle pricing. And if we look at between the R1T and the R1S, Each of those products, when we think about A price, there's actually a band of pricing that they operate And that band is enabled or unlocked if you will, by the introduction of additional variants. So the first step in that is introducing the dual motor Into the vehicle, as you heard in my opening comments, the dual motor as our base powertrain is a really exciting configuration. It's So capable of 0 to 60 in 3.5 seconds, towing of £11,000 It's really an enjoyable architecture and as a base configuration, it's outstanding.

Speaker 2

And of course, it doesn't have the same off road capabilities necessarily as the quad motor, But we think for a majority of use cases, it's really a perfect fit. So that's the first step in providing customers with the lower priced variant of either R1T or R1S. And then the next step, which is coming here shortly, is the introduction of our standard pack. And the standard pack not only is a lower cost pack for us to build, but importantly allows customers to get into an R1 vehicle just over $70,000 And so as we think about The positioning of the product, the capabilities of the product, both on road, off road dynamically, the feature set that's in the vehicles, We feel quite comfortable with the positioning of what we've done. Now, I'd also want to just There's lots of ways to try to measure demand.

Speaker 2

And one of the things we look very closely at is residual value. And residual value is Nice, because it gives us a reflect it sort of reflects how our used vehicles are trading, which gives us an indication of overall demand positioning. And The R1 products within the truck and SUV segment are among the best residual values of any product In those categories, regardless of electric or combustion. So across both combustion vehicles and electric vehicles, our vehicles are maintaining value extremely well. And even so far as a brand typically you buy a brand new car, the moment you transact on a vehicle, you lose roughly 10% to 15% of its value.

Speaker 2

People often say you drive it off a lot and it loses value. In our case, once the transaction occurs, the vehicle value doesn't really drop. They're maintaining Really well. And of course, that's just an artifact of the strong demand backdrop that we have and the willingness to pay for the products we're building.

Speaker 10

Thank you. And maybe as a follow-up, you spent a lot of time in the release discussing vertical integration. Maybe relative to your initial plans a couple few years ago, the speed at which you vertically integrate Maybe it's been a little bit slower. So I'm curious if there is one key component of your business that you could in source today in a world of Infinite capital theoretically, what would it be? Thank you.

Speaker 2

We spoke about this a bunch on the call today. The area that I would say that we've from the very beginning, we knew We wanted to completely control and we do completely control and feel very good about this is investing in the software and electronics So I would say that's among the most important things to own in looking at what is a Structurally cost advantaged vehicle manufacturer look like in the world of today. We've recently Vertically integrated our drive unit and that's with the Enduro drive unit, the single motor per axle. And Claire commented on this before, but that is creating Very meaningful cost advantages relative to what we launched with. And just as a reminder, what we launched with, we did the inverter in house, The gearbox in house, the assemblage in house, we purchased the rotor and stator from a supplier.

Speaker 2

On our dual motor setup, that's now come in house and That's the strategy we'll continue to pursue with the propulsion platform and we're working very hard to continue to advance that given The cost efficiencies and cost advantages that clearly is driving in the business.

Speaker 9

Thank you.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Speaker 11

Yes. Good afternoon. Thank you very much for taking my question. I was hoping to better understand the financial outlook and the updated EBITDA guidance For 2023, I believe it implies a slightly larger EBITDA loss in the second half of this year relative to the first. So I was hoping to better understand what the drivers of that maybe?

Speaker 4

Mark, one of the key drivers embedded within that second half guidance is a more conservative outlook around the magnitude of tailwinds that we described to the unwind or reduction in our LC and RV charges on a go forward basis. I mean, so that's a little bit of color as you think about the fact excluding LC and RB, we expect to make significant progress against our Improved gross margins as we track throughout the second half of the year. We begin to introduce the Enduro drive units that RJ just spoke about Into the R1 vehicle, that will be a material cost reduction there, the continued progress from a commercial cost down vantage point, as well as some of the increases that we'll continue to see as we ramp up production in the course of Q3 And importantly as well, drive towards higher average selling prices through the introduction of our dual MaxPack in the end of this year as well.

Speaker 11

Thanks for that, Claire. And then my other question was just on the opportunity for Rivian to sell products beyond the vehicle. You spoke a bit already around software, but I think there's other services and accessories that are an important part of the long term opportunity for Rivian in terms of profitability, so things like insurance and selling some of the gear and camping accessories and Curious if you could share an update around where the company stands on providing some of those products? Thanks.

Speaker 2

Thanks, Mark. When we think about The overall revenue opportunities we have as a business, of course, the obvious place for us to all sort of our minds to go to is the vehicle. But there's a whole ecosystem of products and services that surround the vehicle that we think represent significant Opportunities both in terms of alleviating customer pain points, but also in terms of creating really exciting and sort of joyful customer experiences. And so, that starts with the purchase process and simplifying what a digital transaction looks like, which we've done through platform as we continue to push ourselves hard to improve that further, that then immediately connects into the insurance platform. We've not announced any of the Specifics on the returns for our insurance platform, but it's a profitable part of our business and it's the attach rate This is quite high.

Speaker 2

So we're very bullish on the long term potential of our insurance offering. And then as you called out, What we think of as our venture products, so the gear that goes with the vehicle, this is a huge opportunity and something that particularly as we look at the R2 product line, There's some really exciting, intentionally thought out opportunities that sort of as the vehicle is being architected, We're putting some of these really fun personalization items into this contemplated adventure products offering. We're also moves cost out of the core vehicle and into the accessories, which allows us to achieve a baseline vehicle with very aggressive Cost structure. And then last but certainly not least is the role that software complaints. So there's a host of ways This has been talked about and looked at.

Speaker 2

I think often this is sometimes oversold, I'd say in the space where We sort of imagine these very, very large revenue numbers or companies often imagine these. I want to call out that we believe table stakes Are going to be is going to require a very robust, very thorough software platform, But that it still provides opportunities for very specific unique highly differentiated highly complex features to be sold as an additional service or subscription. And we've seen this play out in the autonomy space, but we see and where we certainly have plans For ourselves, but there's a host of other areas. And Waseem, if you can just talk about this for a moment, because this is something I know you and I spend a lot of time on.

Speaker 3

Thanks, RJ. I mean, first of all, we are developing and expanding software and services For our commercial business, every EDV that we sell today comes with a subscription for FU2S. We continue to enhance that road map and add More features and more services to it. On the consumer side, as Ajay mentioned, we are being Really extremely thoughtful about which features could become paid options. We believe that there is an opportunity In a specific subset of features, those features need to meet certain criteria.

Speaker 3

It has these are features that Require a very high level of complexity from a development standpoint or features which require high compute whether it's in the vehicle Or in the cloud. We have internally a road map that we will communicate As we basically build it with our customers.

Speaker 11

Thank you very much.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is now open.

Speaker 7

Thank you very much. So it sounds like the factory rerates planned for next year is very important Stepping towards reaching your goals, can you maybe just help us understand again the timing of it? And importantly, What sort of available capacity it would leave you with on the other side of it, but also effective capacity for 2024

Speaker 2

Thanks, Emmanuel. The Updates we're making to the line next year. I'm glad you asked the question the way you did. They have really two core purposes. The first is, As you called out, it's a capacity increase for the R1 line where we effectively grow the capacity of R1 from 65,000 units

Speaker 6

on an annual basis to 85,000 units.

Speaker 2

But I'd say more importantly in the area that we believe we're going to have Certainly, there'll be lots of interest in over the next few quarters is what that represents in terms of a step change in our cost structure. And we integrate with that shutdown a host of product level improvements that simplify the vehicle And remove considerable costs consistent with what Claire and I both spoke about before that we saw with associated with

Speaker 6

the shutdown in ADV. Now that's not to say and I want to

Speaker 2

be very clear, that's not to say cost improvements aren't happening leading up to that. We have a very clear roadmap with You contractually set up agreements with our suppliers, some of those being commercial, some of those being technical changes proceeding This batch, if you will, of changes coordinated changes that are happening with the shutdown. Now in terms of the timing of the shutdown that will be happening mid next year, We are doing everything we possibly can to minimize the amount of time we need to have the line down to make those changes and improvements, But it will have an impact as a result of the line being down on the R1 output during that timeframe. And we haven't provided guidance in terms of 2024 production volume yet, But certainly that will play into ultimately the guidance we do provide.

Speaker 7

Okay. That's very helpful. And then let me ask you about your balance sheet. Claire, you made comments in the prepared remarks that you've obviously strengthened it, and you still have $10,000,000,000 in cash, and it will take you to, I guess, operationally through 2025. How are you thinking about Additional needs for capital raise and potential timing of it and in the modalities of it?

Speaker 7

Like Is it something that you could you would think of doing short sooner rather than later? Or to the extent that you have room until 2025, it will be Later on, we're more opportunistic.

Speaker 4

Thanks, Emmanuel. As you mentioned, we remain confident in our cash balance And the fact that it can fund our operations through 2025. And as I spoke about in my prepared remarks, with the addition of the Convertible notes that we raised in our ABL, that further derisks the launch of R2 as we think about the $10,200,000,000 of cash and equivalents we have on the balance sheet today. But with that said, our priority is to maintain a strong balance sheet. For us, it provides a safeguard during volatile industry conditions and mitigates risk, while scaling important growth capital projects such as the investments that we're making into R2 and our facility in Georgia as well.

Speaker 4

And so with that in mind, We'll continue to evaluate a variety of capital markets available to Rivian across the entirety of the capital structure. And as we've spoken about and exemplified by our actions in the first half of this year, we'll continue to employ a diversified approach

Operator

Thank you. One moment. And our final question will come from the line of Benjamin Callow with R. W. Baird.

Operator

Your line is now open. Mr. Kallo, your line is now open. Comes from the line of Chris Pierce with Needham. Your final question.

Speaker 6

Can you guys talk about the mechanics and the plumbing behind the one day sale in the sense that are these new customers or existing reservation that are kind of willing to swap out of a current reservation versus waiting for a reservation? Or is this kind of Yes. To get flexibility, have the vehicle sooner or the customers tend to want what they want and this gives you opportunity to kind of find new customers. I just want to get a sense of Yes. How it went?

Speaker 6

Will we see more of them? That type of thing.

Speaker 2

Thanks, Chris. I think you're referring to An event we get in normal and where we had an on-site sale. Yes, this has gotten so much more attention than we ever could have imagined. This was an artifact of us looking at some of the vehicles that are coming off the line and the potential Where those vehicles were sort of late on matches where our customer changed order configuration or changed color combination whatever that the case may have been Where they were available to be matched locally and essentially provide a bypass on having to ship the vehicles. It was something we did more than the experiment to look at.

Speaker 2

I would say it's sort of one of many types of experience we run and conduct Being direct to consumer and having the ability to do things like that.

Speaker 9

Thank you.

Operator

Thank you. At this time, I'd like to hand the conference back over to Mr. R. J. Scrinch for closing remarks, please.

Speaker 2

Well, I want to thank everybody for joining today. We're really excited about the progress we're making And hopefully reflected collectively in our comments and discussions today, it's clear that our focus very much remains on not only ramp continuing to ramp production In our normal production facility, but importantly, driving costs down across the business on our path to profitability. And we see that manifesting in significant progress between Q1 and Q2 in Our overall gross margin structure and we intend to continue to make that type of progress as we approach the long term target for the normal facility of 25% gross margins. I'd say the other point I'd want to call out and this again evidenced By Waseem joining us here on the call is just the importance that we place on the technical differentiation of our products and our platform And not only enabling us to run and manage our operations more effectively in terms of over the year updates, continued progress or continued features That make their way into vehicles, but importantly, actually simplifying the vehicle architecture because of the control of these core technology stacks around electronics, software and associated network architecture. And that really forms the basis or the foundation, if you will, For what's to come with our R2 platform, and this is so foundational to what we're building and Obviously, it takes a lot of work on the front end to build all this capability, and both on the hardware side and the software side.

Speaker 2

But we're going to start to see the benefits of that being realized in the immediate term through the cost savings and the Significant improvements we'll see quarter over quarter, but importantly, we'll see it when we reveal and show the products for R2 and the level of Content and what will be available at the price points we'll be talking about for R2 when we show that product early next year. So with that, thank you everyone for joining and look forward to our next call. Thank you.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful

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Earnings Conference Call
Rivian Automotive Q2 2023
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