Rivian Automotive, Inc. (RIVN) Earnings Call Transcript & Summary

Next up, we're very happy to have Rivian. If you've driven an R1, you might be excited about the company, certainly excited about the stock, especially given where it is at the moment. Rivian IPO-ed in 2021. It's got a, as I mentioned, a great product around the R1T, the R1S, the EDV and a lot that's coming on the R2 side. The R2 platform is scheduled to be launched in 2026 in the Georgia plant. As I mentioned, the product really is amazing. I think one of the things that we keep pushing them on, and we're going to push Claire a little bit on this today, is the potential for pricing because I do think there's a real opportunity because the product is so strong. But not only do they have great product, they have great services. And they understand something that we have long looked for in the industry: it's sort of the lifetime revenue stream. And there's a great understanding not just on the commercial side of FleetOS, but there's also a great understanding of generating profit and revenue or revenue and profit off the aftersale of the vehicle, whether it be the second or third owner and that sale process or subscription services or updates to the vehicle, which really opens up the iceberg of opportunity that we think a lot of automakers are missing at the moment. It's really interesting to see a company in its early stages really understand that. So today, we're very happy to have Claire McDonough, who's the Chief Financial Officer, and we've spent a lot of time with -- over the last 2 years and probably more than Claire would like to with us. So we appreciate her actually coming here and helping out -- helping us out to understand what Rivian is all about.

So really, first, to kind of kick off the start of production or the ramp of production, I should say, is sort of top of everybody's mind in understanding what's happening here. There's been some sort of downgrades of expectations. A lot of that has to do with what's going on in the supply chain side, right? You can only make what you get, right, or you can only put together what you actually get from the supply chain. So maybe you can just talk to us about how that is progressing, how you're thinking about this year. The 50,000 units this year has been rumored to be too low, and there might be some upside over time. Maybe talk about sort of what your actual capacity could be if suddenly everything that you're dealing with on the supply chain side actually got worked out, and you had a flood of parts and actually started running full throttle on production.

Sounds great. First, maybe I'll start with Q1 production levels that we've seen at our plant in Normal, Illinois. And throughout the course of Q1, we continued the build-out and production of our R1 product line, which houses our R1T, our truck; and our SUV, the R1S. And we saw meaningful growth in the production quarter-over-quarter as we think about really the rate of growth that we've experienced throughout the course of Q1. As we also experienced in Q1, we took some downtime with our EDV, or our Electric Delivery Van, line as well. And we took that downtime to integrate 2 new key technologies into the vehicle: the first is our LFP battery pack, and the second is our in-house Enduro drive unit. And while production levels were low and expected to be low in that Q1 time frame, I would say that the great bright spot is the fact that our Enduro drive unit launched on time and is ramping according to our schedule and plan. And back to the second part of your question, as you think about what unlocks incremental volume for Rivian throughout the course of 2023, one of the biggest unlocks for us is related to the supply chain. So in our Q4 earnings call, we spoke at length about power semiconductors being that gating factor from an overall supply perspective. And one of the key mitigation tools that we have at our disposal is the introduction and the ramp of the Enduro drive unit this year, which unlocks a new secondary supply base of our power semiconductors within the plant. And then also as we think about the fact that we're building today quad motors on the R1 line, and now we'll be introducing dual motor configurations, right, we meet half of the power semiconductors per vehicle as you think about the introduction of the dual motors into the R1 line as well. And so as we talked about the 50,000 units of guidance that we provided for 2023, the gating factor that we talked about was supply. And so our ability to continue to ramp and execute against the growth of that Enduro drive unit, which today is feeding the EDV line. In the second half of this year, we'll move to more of a surplus position, whereby we're building excess Enduro drive units that can also fulfill our R1 volumes as well. That's really where the upside opportunity relies from an overall ramp and production perspective.

So if we were to think outside the semiconductor issue on the power supply side, I mean, the -- what would the rest of the lines be able to -- on the R1 and the EDV roughly be able to run that? I mean we're looking at 100,000 units or -- I mean that's the final capacity, right, of Normal?

So the final capacity is 150,000 units. The R1 capacity is 65,000 units today. And so as we think about the overall growth rate in our production cadence throughout the course of 2023, you'll see as we build up that Enduro volume and unlock and alleviate some of those supply constraints, we have the ability to produce at the installed capacity rate in that R1 line overall. The EDV line is a little bit different dynamic for us as today, we're just producing vans for the Amazon program. And so today, the overall -- we're just running that in a single-shift operation, whereby on the R1 line, we're operating it on a dual-shift, a 2-shift operation.

Got it. And the EDV is somewhat gated by the demand side of what is -- from the pull from the Amazon side at this point or is that not the case?

So Amazon is equally working on building out their own infrastructure to support the integration of the electric delivery vans across all of their DSPs across the country. And so they've started with a fairly dispersed approach across over 500 different end markets that are being deployed with EDVs today. And so we're building towards greater volumes with them as we look in the years ahead and building on the growth rate that we had in 2022.

Got it. Okay. And when we think about the next leg of capacity comes on in Georgia, I think it's 2026. What is the installed capacity in the first leg or even in total? And are we looking at that being completely R2s? I think in the past, there was a little bit of RT that was going to come into the Georgia plant, but I think that's been pushed out, and we're looking at R2s at the moment. So what's the potential capacity there?

So the total capacity will be 400,000 units in Georgia, and we'll build it out in a modular fashion. So with 200,000 units coming online first in the 2026 time frame. And R2 is a platform the same way that the R1 vehicle is a platform with an R1T and R1S. So you could think about there certainly being different variance over time that will sit on that R2 platform as well.

Got it. So the 2 other -- the second 200,000 tranche, is there -- have you guys given us a time frame on that? Or the first is 2026; the second, we haven't got any...

We haven't given specifics on when that second 200,000 units come online.

Okay. And if we think about the R1 and the R2, one of the very pleasant surprises, I think, you found as cost is inflated to some degree is that you've had some obvious upward price adjustments. It's not something we usually hear in the auto industry, although actually, we're hearing more of it these days than we have in the past. What is your opportunity to potentially take more price on the R1? I mean, is it as orders are -- I mean, functionally, like as you slip these in, you obviously don't want to raise price on people in the backlog. But I mean, what is your opportunity to take price over time in response to just market dynamics or potentially higher input costs?

We see that the bigger opportunity is being there to really stretch and extend the top end of the portfolio, whether that's the addition of new technologies in the vehicle, so how we think about taking what's already a phenomenal product today and making that even better, right, quicker, longer ranges over the long term, where incremental trim packages as well that help us extend up ASP as well. And we've talked a bit about in the past the fact that within our preorder base of configured orders, we've seen a strong orientation towards our more premium offerings as well. So that gives us confidence to continue to invest in the product development road map for the R1 product in particular. And the opportunities that we have is to leverage many of those technologies as we think about the cross-platform investments that will become the foundation for R2 as well. So we're getting a strong return on those investments as well.

Got it. Okay. And then when you think about the R2, I mean it's going to come in at a sort of a more semi-mass market price point, but we're only talking about 200,000 units of capacity. So theoretically, that could be somewhat of a premium product. I mean you're talking about the R2 as opening up the market for you. So I understand that like over time, it might go down in price point. But I mean when it's first launched, I mean, there's going to be tremendous demand for the product if it's anything like the R1, even just a slightly scaled-down version. I mean, what -- I mean, how are you thinking about pricing on that to kick off? Or where you -- maybe not even if you give us a dollar value, that would be great. But how you would position that -- how you're going to position that in the market.

Sure. So one of the important pieces is really looking at the portfolio overlaps and pricing. And so as you think about the R1 base price today of an R1T starts at $73,000, we think about, right, how does the most premium R2 stretch up towards that level but ensuring that we're leaving the R1 platform as our true flagship platform in the market that will maintain strong overall ASPs for us. And so that's largely how we think about it. I would say one of the important pieces that we've continued to look out and evaluate, especially given some of the broader changes in price over the course of the last year or so within the EV space, is to always ensure that we were building the unit economic model of R2 with a more normalized pricing environment in mind for us. And so while you could have looked back at the market at sort of the average ASPs in the high 60s and even beyond for some comparable vehicles, we were making sure that we were building a model in infrastructure and cost structure that could accommodate much lower price points as well as we think about the broader spans of that product.

I mean -- and just to push on pricing a little bit because the product is so unique and it is so good if you've ever driven it. Is there ever an opportunity, and we're talking about incremental price hikes or not hikes, but mix up of the R1, to ever reset the product pricing? Because I mean it seems like -- I mean I push you guys on this all the time. So I mean this is not -- you're probably want me to stop asking these questions. But I mean, when you think about it, it's almost like you have a Range Rover and Range Rover Sport on the way. And there is this extreme scarcity of your product, it is very unique and it is a very good product. Will there ever be a time where you could kind of consider sort of repositioning and saying, hey, listen, the R1 is going to be 150,000-unit or 100,000-unit run vehicle. We're going to maintain that as a real premium. The R2 is going to be a sport and then we'll have some -- to start some high-price R2. And then we have something on the R2 platform that comes in at a lower price point. It's a differentiated product that is a little bit more mass market. Because it almost seems like R2 is getting into sort of the luxury mass market. It doesn't even need to go down that low to be successful if it's anything like the R1.

I think what...

Shift in strategy a little bit, I mean, is what I'm asking about on the pricing dynamics.

I think one of the things that we're really focused on is ensuring that there's significant global supply for that vehicle platform overall. And we'll certainly have the opportunity to start and launch with more premium, right, trim packages and more premium mix as we think about the scarcity value of those very first R2s that will be in the market. But again, as -- back to the point that I mentioned, it's all about ensuring that we're building with a cost structure in mind that allows us to drive towards and in excess of our target margins even at lower price points as well. So that's really a bit of the calculus that we've looked at.

Okay. And when you think about the -- back to the supply side of things really quickly, the semiconductor issue. You're solving that someone with Enduro. You're solving that with some -- we're going to sort of dual motor as opposed to quad motor. You're finding these ways internally to deal with this and second supply and maybe using less semis or using less motor to deal with it. How much externally has the issue been solved with some of your suppliers? I mean, are you finding it still a real challenge and you're just like, okay, we have to find a second source? We have to find a way to work around this because we're just not getting the answers or the supply that we need from our existing partners?

I would say we've seen constraints within the broader silicon carbide supply chain as a whole. And so one of the advantages that we've had from an engineering capability and development, our vantage point is the fact that we design our inverter in-house. That inverter can utilize both silicon carbide. It can also use silicon IGBTs as well. And so because of that, it provides more flexibility and then through the drive unit efficiency that our team has been able to gain as well, we've been able to in certain cases expand the range of our vehicles while transitioning from silicon carbide to silicon. And so I think it comes back to the advantages of the level of vertical integration that we have as a business and so the nimbleness in which we can respond and adapt and innovate around supply constraints that exist.

Got it. Okay. One of the big things is getting the gross margin breakeven, right? I think you're talking about that and getting actually into positive territory into 2024. Is that purely a question of scale and in a certain level of production that's significantly above 50,000 units? I mean, how do you kind of envision getting there?

Sure. As we think about the gross profit bridge from Q4 2022 to Q4 of 2024, as you mentioned, we expect to see a true step-change not just to breakeven but to positive territory in that time frame. And about 2/3 of that overall bridge is driven by fixed cost leverage that's derived from put -- having greater levels of volume running through our plant in Normal, Illinois. The other final 1/3 of that walk is split 50% based off of how we're effectively reducing our material costs. And so the material cost reductions are driven by design-related changes. So whether that's the introduction of our in-house drive units, whether that's introduction of LFP battery packs into the mix, whether it's our next-generation network architecture, our next-generation battery packs, there's a lot of core technologies that will be introduced over the course of '23 and '24 that materially reduce our material costs. And then the other component of the material cost reduction is driven by commercial negotiations and commercial cost-downs as well. And many of our supplier agreements were set back in 2018, 2019 before we were a preproduction business and company. So there's an embedded right risk that's baked into many of those contracts. So now we have the opportunity as we're bidding out some of these new technologies with the supply base, as we think about the curate of R2 as well in the longer term, that allows us to reset pricing with many of those supply partners as well. And then the final piece is ASP. And that ASP is driven both by the shift from our early preorder customers, so those pre-March 1st preorder business, which will largely be exhausted throughout the course of 2023. And then the other elements are really this mix shift as we think about the next generation of technologies going into the vehicles themselves. So the ability to gain pricing power with new performance, new capabilities, new trim levels that allow us to meaningfully increase ASP as well over that time frame.

Very conversely then, another EV start-up you're seeing the order book continue to grow on the R1 side. And I don't know if you -- I should know this. You guys released your first quarter numbers, I think, it was yesterday, right?

Yes.

Was there any update on the order book with that? Or are you guys not -- you guys are not going to disclose that on an ongoing basis going forward?

Right. We're not going to disclose the order book on an ongoing basis going forward. And part of that is -- the single-biggest deterrent to putting in an order is how long the waitlist is as well. So it's on us to ramp production and get as many vehicles out into the market into happy customers' hands. The receptivity of the community that we're building has been phenomenal. We just won the J.D. Power Award for premium electric vehicles as well based off of the survey and feedback of the early customers of Rivian. So it was great to see that ongoing recognition and feedback from many of our owners as well.

When you think about just on the wait time because it is very important, I understand why you're doing that. I mean, how are you holding on to folks as they continue to wait? I mean, 50,000 units this year, you're saying your -- I mean your backlog -- I'm implying, but you're saying you're going to sell through your backlog at least through 2023. So it might be larger than that. We'll see. I'm not trying to look for exact number, but how do you hold on to those folks and really continue to market to them and have them not slip out into buying a competitive product?

Sure. So to clarify, the preorder backlog through '23 is the pre-March 1st backlog from last year. So there's -- the backlog extends well into '24. But it's a key consideration for us. So one of the key initiatives that we've had has been around our drive -- test drive program. So getting and making sure that every one of our preorder customers has the opportunity to experience a Rivian, drive a Rivian as well. One of the other core benefits that we have is the fact that before the IRA bill was put into place, we allowed our customers to transition from their current preorder of $1,000 that was fully refundable to commit $100 of that purchase would be a committed purchase. And so many of the preorder customers before that August time frame are also able to be grandfathered into the $7,500 tax credit as well. And so that's another, I would say, sticking point as we think about the value that is embedded within our preorder base as well.

That's good strategy. Do you had a question?

Yes. I mean the product has been phenomenal. As you think about your next 2, 3 years, we've had some speakers come up that explain there will be 300 EVs hitting the market in the next 5 years. Where do you think most of the competition would be? And how does your product you differentiate you're kind of ahead of the curve?

Sure. There's 3 key themes that I think that drive into our points of competitive differentiation. The first is the strength of the brands that we've built and are building actively. So we spoke a bit about, right, the community that we're building around Rivian. Our best advocates are owners, and those are, right, our organic viral salespeople out in the world, giving many more test drives than we could give as a company. So I would say that's one of our key points of competitive advantage and differentiation. The second is the level of vertical integration that we have within our vehicles, the opportunity set that comes from starting with a clean sheet, being able to design an EV from the ground up. And so that starts with, right, the core intersection of hardware and software. And so we've been in a position to, right, design our network architecture from the ground up, have full in-house, full-stack software capabilities. And so if you're a Rivian owner you've experienced just the velocity of change from, right, the software updates that you're getting in your vehicle each and every month that are adding performance, capability, new drive modes, new feature set and our ability to listen to our customer base and actively respond not just with, right, things that are happening in your infotainment but also how are we proactively mitigating service challenges through the telematics and connectivity of the vehicles that we're constantly learning from as a business as well. So I would say that's the second core piece. And then the last one is the direct-to-customer relationship we had. John spoke a bit about, right, the software and services opportunity that we have over the longer term. And that's a huge margin driver as we think about the opportunity set to expand the embedded car park that we have and continue to build out this suite of high-margin recurring revenues, whether that's on the fleet side through our FleetOS offering with Amazon or whether those are to consumer/customers as well.

Great.

When we snow mode rolled out, it was pretty cool. It was last like 3 or 4 months, right?

Yes. Exactly.

It's pretty awesome thing.

Just in time for the holidays.

Yes. Right. You can see that on YouTube and really appreciate what it is. It's pretty awesome stuff. And it's kind of simple but kind of amazing, right? Like as a consumer you must -- I mean people must love that. There's been some news reports, I think, in the Wall Street Journal and other places that the exclusivity with Amazon might be something that you're kind of negotiating out of. Can you just remind us what the exclusivity is. So my understanding was really for last-mile delivery full stop specifically. So negotiating out of that might not be that necessary for you to really grow with other customers. But I would imagine if you're negotiating out of that or changing that are negotiating out of it, I mean, just curious what your -- what the discussions are. I got to imagine somebody like FedEx or UPS is waiting in the wings because last-mile delivery really they're kind of the other 2 folks out there that are behemoths. I don't know if you can comment on if there's other customers waiting in the wings. But what's going on with the exclusivity? How is it structured? And are there talks going on?

Sure. So first off, we'll start with the Amazon relationship itself, which remains incredibly strong. As you probably have seen, there's been an Amazon blog post that they put out recently, talking about the over 3,000 vehicles that are in the field and the 75 million packages that they've been able to deploy with those vehicles as well. And so I would say, as we sit here today, there's a lot of excitement around the carbon impacts that this deployment has had across the board as we think about Amazon's climate pledge in particular. And as we think about, right, with IRA and the commercial benefits, the long tail of commercial customers that are also equally excited about the broader commercial EV opportunities as well. One of the advantages of the Amazon program that we have is the opportunity to work through what's been the largest deployment of electric vehicles into a fleet over that time frame as well in a commercial capacity. And so that -- those core learnings that we've gone through with them, not just from the vehicle but how are we deploying the vehicles, how are we utilizing our telematics-based software solutions to help improve uptime in the vehicles and reduce total cost of ownership for Amazon are critically important as we think about the long-term commercial opportunity set that sits out there as well for ourselves. And the exclusivity agreement with last mile is through 2026. So it is a time-based agreement that we have with them. We do have the opportunity to think about the broader long tail of commercial customers beyond that last-mile cohort as well. And there's certainly lots of cargo or other types of use cases that could be utilized with the sort of vehicles that we have in our disposal. And then as we think about the opportunity to really expand the customer base as well, the Amazon agreement is a cost-plus-based agreement. So the incremental volume opportunity is also a benefit to Amazon over the longer term as we leverage all of the fixed costs and labor of running that line.

Got it. So there's no -- it sounds like there's no change. So that's going on right now?

No change.

Got it. Okay. You mentioned the IRA commercial vehicle side largely understandable. But on the R1 and the R2 side, it could be pretty impactful. I know there's kind of the -- potentially this gap here. I mean how does the R1 line up right now with the new rules that we've -- or sort of interpretation of the rules or the law that we just got last week? And how are you setting up the R2 to be theoretically fully compliant, so you're getting the full 7,500 and maybe even different into the $35 per kilowatt hour in some way as well?

So for R1, because of the price point of the vehicles themselves, it's hard for it to qualify. There's leasing opportunities that are available for R1 that become attractive for also commercial use cases. So if you were a general contractor and you're purchasing an R1T for your vehicle, you can take advantage of some of those commercial credits as well. So that's really the opportunity set as we think about R1s. And then it's more so to focus on how we're building out the supply chain for battery cells for R2 so that we'll have battery-compliant vehicles given at that price point, it becomes a much more meaningful incentive as you think about the opportunity set available to R2 as well. But beyond the credits that we'll receive as well, we do get because we're building our battery modules and battery packs in-house. So we do have the $10 per kilowatt hour credits that hit this year, which is a benefit for us. And then one of the other advantages we have with IRA is associated with all of the incentives for charging, the charging networks that we're building out as well. We build our DC fast chargers in-house at our plant in Normal, Illinois. And so one of the points of the bills that have been put in place around charging infrastructure is that needs to be made in America. And there are actually very few players that have manufacturing capabilities in the U.S. right now that can tap into the billions of dollars of available funding there.

And can you remind us what -- how that would work for the chargers with IRA?

So there's multiple different incentive packages available for charging-based infrastructure. And so it can be upwards of 80% of the cost to put that charger in place through government credits.

That's pretty compelling, right, for you guys to -- it seems like it to me. Do we have any questions in the room? I've got 1 or 2 more.

Can you help us just size the market for the R1 platform in its totality? Because obviously, it's a high-price-point vehicle. So sometimes struggle a little bit with trying to figure out how long can you sustain 125,000 vehicles or something of that nature.

Sure. So in 2024, we'll be expanding the capacity for the R1 program to 85,000 units overall. So we see significant potential for us to continue to have strong ASPs at that overall volume within the broader market.

Do you expect further price increases on that platform in your long-term plan? Or how do you think about that?

So we expect ASP to go up. But as we mentioned, the ASP rising is really given the introduction of higher mix variance overall. So that's the driver versus just a straight pricing impact or change.

Got it. And then how long do you think it will take to take advantage of the EV charging incentives you just talked about, particularly after that 80%?

So we expect to be able to start to participate in those forms of credits beginning in 2024. We're working towards opening our RAN charging network as well that will allow us to have access to some of those government funds.

I want to ask a little something about the capital structure. It's a growing business with a lot of opportunity. I mean, how do you evaluate different opportunities within the market to raise capital? Do you have any thoughts about your balance sheet? And if you look to taking advantage of some of the debt markets when they come down a bit?

So one of my key objectives, as you can imagine, is to ensure that we always have and maintain a strong balance sheet overall. And pro forma, we raised a green convert last month. And so pro forma for that convert had $13.5 billion of cash and cash equivalents on our balance sheet as of the end of December. And so as we think about the broader financing opportunity and suite for Rivian, it's to ensure that we're always being opportunistic as we think about the broader capital markets backdrop. And we've talked a lot about internally building a portfolio-based approach for how we're going to continue to finance the business. So that can take everything from how we're potentially leaning into the increased inventory and borrowing base that we have to expand ABL capacity to think about structured finance solutions for key elements of our business or whether that's thinking about more debt solutions, more equity-linked solutions as well is part of that.

Just one last question on sort of competitive positioning. The R1T, once again, a great truck, it's sort of -- you look at it sort of as a midsized pickup competitor. But I mean it's kind of a sort of an affluent midsized pickup competitor segment, if you will. When you think about the RT over time, eventually, right, I know that's kind of been pushed out to an undetermined sort of launch date, that's the other thing that would go really up against, based on what we understand the product, to potentially be against an F-150, Silverado, Sierra or Ram. But obviously, once again, probably an affluent sort of higher-end trim mix. Do you think that's an eventuality? Or is that the kind of thing that may be dropped out of the product portfolio forever? Or is it, I mean, something that really could come back in? Because it does seem like there's room in the market, again, for a really high-end truck that might pick up 10, 20 -- I mean probably a whole lot more than that, tens of thousands of units, maybe 150,000 units, at a very high trim level that may take advantage of the R1 platform stretched and really be wildly profitable product for you.

So I think one of the advantages that we see, and we've seen this with our R1T launch, is the fact that we're creating a white-space product. So while the truck market is a huge and significantly profitable segment in the U.S., we actually see EVs as an opportunity to expand the truck market. Because as you think about what are the constraints for most consumers, when they think about should I buy an SUV or a truck, for example, they're thinking about walkable storage area, which R1T captures in spades, whether it's our Gear Tunnel or Frunk or Tonneau cover on the bed of the truck itself. So it's been a great product for us to really stretch and expand how people think about this segment and how we think about the overall potential growth of the truck segment as well more broadly. And for us, as we thought about really working through the course of the last 18 months, we wanted to ensure that we were focusing our product road map. And so that was why we said, let's focus first and foremost on the R2 platform, which is going to be that global-scaling platform for us. So we'll continue to monitor the market and look, but certainly haven't made -- the RT for us is sort of on the shelf at this point.

I think with that, if there's one more question, we can squeeze in. But otherwise, we're going to wrap up here. Claire, thank you so much for joining us. We really appreciate it as always. We look forward to having the truck here next year. We didn't have the truck here this year. But next year, we're going to have it outside waiting for everybody to drive. So thank you very much.

Thank you.

Thanks very much.