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

All right. Good afternoon, everybody. Thank you so much for joining us for this session with Rivian as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the lead U.S. autos and autotech analyst here at Deutsche Bank. Extremely pleased to be joined by Claire McDonough, who is the CFO of Rivian today for a fireside chat discussion on some of my prepared questions, but also we'll leave some room for questions from all of you in the room. So as you probably all know, Rivian is an electric vehicle manufacturer. It specializes in light truck and commercial vehicle production, software and service solutions for retail as well as fleet customers. The company is aiming to produce about 50,000 units this year, targets positive gross margin for 2024, and we're certainly looking to chat through all this. So welcome, again, and thanks for being here.

Thanks for having us.

And one more thing. If you haven't driven it yet, we have a couple of Rivian SUV -- very sharp looking Rivian SUVs in front of the lobby on the street there. And just sign up, you can add it to your meeting list. I know we have a few reservation holders, not -- sitting right in front of us who would love to actually drive it all the way home. Let's start maybe as an update to current condition and how things are going, I guess, for Rivian. Can you provide an update on the supply chain conditions you're navigating? Are you still seeing bottlenecks? Is this improving sequentially? And, at this point, I guess what would be the main impediment to full rate production?

As we sit here today, we've seen a material improvement in the broader supply base and supply chain as we look at the broader backdrop. And so for us, as we've talked about as part of our Q1 earnings call, the key impediment has been access to power semiconductors. And so the introduction and ramp of our in-house Enduro drive unit is a key enabler for us to really mitigate some of the supply constraints that we've seen. And the Enduro ramp continues to be slightly ahead of plan for us, which is great to see. We announced as part of our Q1 earnings call the successful introduction of the Enduro drive unit and LFP battery pack into our EDV -- or our commercial van. And a couple of weeks ago, we built our very first salable R1 that were configured with that Enduro drive unit. I've been driving an R1S within Enduro the last handful of weeks and can say first-hand experience that it's a phenomenal product, expanded range. We've now have 352 miles of range with our large pack and Enduro drive unit. So we're really excited now to have the opportunity to have some of that Enduro production volumes, not just filling the EDV demand and volume as we ramp up production of EDVs, but also now alleviating many of the R1 roadblocks that we've experienced in the past from a supply base.

That's good to hear. So I guess when you first guided to this 50,000 unit production target for this year, were you already contemplating some benefits in the production ramp from in sourcing Enduro, which is clearly alleviating some of the issue with the supply base?

That was always contemplated in our overall guidance. So we knew that we were going to take some downtime in Q1 with the EDV to introduce new technologies, and then we'd be ramping that up over the course of the year. And then as we've talked about in the past, right, we see more of a material acceleration in our one production in the back half of the year as now we're allowing the introduction and production of Enduro into R1. And so we've seen just a handful or sliver of that production in the Q2 time frame, but that will be a key catalyst as we work into Q3 and Q4.

Okay. What do you think in terms of consumer demand and receptiveness to your current pricing? So you're not disclosing backlog anymore, but can we get some sense of demand trends you're seeing recently, any signs of consumer slowdown?

Overall, we continue to have a really robust backlog of preorders that extends into 2024. We certainly have seen some impacts of the broader macroeconomic environment in 2023 as we compare current daily order rates relative to what we saw maybe a year ago. But we've seen really a stable environment throughout the course of this year from a demand vantage point.

That's encouraging. I guess, the -- in terms of the few things we get to monitor from the outside, it seems like the R1T pickup is now available for delivery in like 14 days or less. I think that's actually a selling point on the website. While the R1S SUV new orders would be delivered in 2024. Do you have the flexibility to shift your production mix for one to the other to adjust for different demand patterns?

So we have flexibility to shift the overall production mix between R1T and R1S. And as you think about what we built to date as of Q1, from an R1 production vantage point, we've built about 75% of our volume in R1T. That was the first vehicle that we brought to market. And so that was really the more efficient vehicle as we have had greater time to ramp and progress that variant. And now we're in a position whereby, in Q2, it will be the first quarter in which R1S will be the majority of our production volume. So we've seen significant progress in our ramp of R1S. And as you look at the broader backdrop, about 70% of our preorders have been for R1S. So we want to make sure that we're in a position to really start to work through more of that R1S backlog and have our production replicate the demand that we've seen.

And I guess it's in process, but is there any specific reason where -- or any specific bottlenecks?

So no specific bottlenecks. We've made continued progress to increase the penetration of our R1S mix. And today, it's majority S that we're building overall.

Okay. Are you still working through pre-March order vehicles? When should we expect needs to be fully worked through?

So we're still in the process of working through the backlog of pre-March first 2022 preorders. What you'll continue to see over the course of this year and into next year is the feathering in of some new post-March 1st orders. Some of that's driven by the introduction of new technologies. For example, we didn't have the Enduro or dual motor available to consumers who are putting in reservations or putting in preorders in that pre-March 1st capacity. So today, we have the opportunity to shape some of that demand, offer some of those variants to some of that pre-March 1st backlog. And so we'll have some of those Enduros going to new customers, hopefully get through more of that backlog faster by shifting some of that demand into Enduro or into some of the MAX packs that we'll also start to build.

Can you remind us the expected mix of EDV versus R1 this year? And I believe, into next year, you will shift more of your production mix to R1? How are your deliveries with -- well, I guess let's just start with, yes, the expected mix, and then I'll follow up.

Sure. In 2022, about 20% of our revenue was related to sales of the EDV and related software and services that we provide for Amazon. We expect that to generally be true as we think about the overall contribution mix for 2023 as a whole. And then next year, we'll be taking a couple of weeks of downtime within our plants to introduce a number of key next-generation technologies into the R1 platform. So that includes the introduction of our next-generation network architecture that changes from really a domain-based set of controls to a zonal control architecture, simplify our wire harness, reduces complexity of manufacturing and is a key enabler for really what's coming next as we think about the advancement of our new technologies. And we'll also be introducing our LFP battery pack, which is our standard pack into the R1 vehicles, that provide a really nice $73,000 entry point for R1T customers into the R1 platform as a whole. And then we have some additional changes to our battery pack that will be coming for high nickel batteries as well. And so we're really excited about a lot of these key technologies that will drive material cost savings within the business. And so we're taking some downtime to introduce those technologies. And while we're taking that downtime, we'll also expand the installed capacity of that R1 line from 65,000 units to 85,000 units overall. So we'll serve sort of dual purposes in that 2024 timeframe.

The capacity for EDV stays the same, and then the R1 growth in '24?

So we're still keeping the normal plant at the 150,000 units of installed capacity. So EDV will go from 85,000 to 65,000.

Okay. I guess my question is, how are you deliveries to Amazon going in? To the extent you have this very large multiyear contract with them for a lot of vehicles, why not produce more sooner?

We're really excited about the continued deployment of the fleet of EDVs. I saw some of my first out-in-the-wild and in my own neighborhood. So all my kids came out and we swarmed the Amazon delivery driver last Saturday who was delivering packages to interview her, get her feedback on her own experience of driving the EDV. And I would say the universal feedback that we get from Amazon drivers has been fantastic, right? They love the fact that we've really brought to market a purpose-built vehicle that thinks about and contemplates their work patterns. The way that they ingress and egress in and out of the vehicle, how the software between Amazon's back-end software system and Rivian's are so interconnected that makes their life better, easier as they think about the efficiency of their own operations. And in this sort of a couple of minutes with the Amazon driver, she was raving about we have cooled seats in the vehicles as well as on a hot Saturday, and so she was really excited about having that sort of deluxe feature set that was making her life and her experience as an Amazon driver that much better as well. As we think about the overall deployment, this year, we took the call of introducing key technologies that materially reduce our bill of materials in the vehicle. So through the introduction of our LFP pack and Enduro drive unit in Q1, we were able to reduce our material costs by 25% in that timeframe. So now we're in the process of ramping back up that production overall and have been working with Amazon on the deployment of thousands of vehicles across 500 different sites in the U.S. And the installation of these vehicles is not just the delivery of the vehicles, but Amazon is also working on building out charging infrastructure to support the utilization of that EDV fleet as well. So it does take some time as they build out the infrastructure to ingest more and more advance within the fleet.

I guess, conceptually, to my question around you have a very, very large order from Amazon. But it seems like going into next year, you're essentially allocating less of your capacity towards it? Is it because of differences in profitability profile?

So I would say that the installed capacity that we've always contemplated for the vans contemplated more customers than Amazon. And so as you think about what would it take to fill that 65,000 units of commercial van capacity that's continuing to build out, right, a broader commercial pipeline of customers that's clearly -- Amazon with -- as that flagship customer for us, but building out sort of more of a long tail of potential commercial customers to fill the capacity.

Understood. And so as we look to 2024, you spoke about some planned re-rate of the plants happening for R1 in the first half of the year. When will the plant be ready to produce at the full 150,000 run rate?

The way I would characterize it is as we look out to the back end of 2024, we'll talk about it sort of first on R1 volumes, and then we'll spend a little bit of time on the commercial van side. On R1s, we'll have the opportunity to have taken some of that downtime, ramps back up and be able to produce up to 85,000 units of installed capacity that we'll have. And then as I mentioned, all of the historical guidance or comments that we provided around Rivian's financials have historical -- through '25 have historically just contemplated Amazon as that full commercial customer. And so from a production and operational efficiency perspective, we only plan to run, right, that EDV on a single-shift operation. So think of that as really half of that 65,000 units of installed capacity that we'll be driving towards as we think about continued ramp-up of the broader EDV portfolio for Amazon.

Okay. So half you start with until you sign new customers that would justify it. Okay. Are you actively working on these extra customers? Or at this point, you're focused on the existing ones?

We're focused on Amazon right now, but certainly see a lot of interest and demand as we think about the long tail of commercial customers.

Understood. Let's think about your margins a little bit. So in Q1, you made substantial changes to EDV that seem to have helped with your bill of materials, specifically with this in-house Enduro. Can you elaborate on the changes made, and what we can expect in terms of cost savings and other benefits through the rest of the year?

We're -- in Q1, we saw about a 17% improvement relative to Q4 in terms of gross profit per delivered vehicle, excluding the impacts of our LC [indiscernible] lower cost or net realizable value. And so as you think about what -- we were able to deliver that 17% improvement despite the fact that we produced and delivered fewer vehicles in that timeframe as a whole. And we were able to do it because of the benefits that we saw in reductions in material costs from the introduction of LFP and Enduro. And then also, as we thought about some of the freight benefits that we received in that Q1 timeframe relative to Q4 as well, we've seen moderation in the broader freight backdrop. So as supply chains have gotten better, freight costs have also improved. And so we saw some of those benefits as well. And then beyond that, we saw increases in our average selling prices. So a lot of that was driven by more significant mix shift to R1S in Q1. As I mentioned, we were sort of not quite at majority R1S, but starting to get there within the business. So that was another catalyst and driver for us. As we look to Q2 and beyond, the benefit of Q2 is now you're ramping up that EDV volume. So as you think about the contribution of a higher-margin vehicle for us with all of the new technologies in EDV, that will create added benefit in Q2. We'll also be in a position to start to realize more and more of some of the commercial cost negotiations that we've been going through with the supply base as well that will continue to improve throughout the course of the year. And then as we look more towards the back end of the year, we start to get some of the benefits of Enduro introduction into the R1 vehicles. We'll also start to see some ASP increases as we introduce Max pack towards the end of the year as well, and as we ramp up production, now that Enduro is sort of unlocking our ability to really lean into the installed capacity that we have today for the R1 vehicles.

Can you update us on the input cost inflation or deflation that you're observing, and impacts on your bill of materials? With lithium pricing coming down, are you typically on long-term supply contracts, or should we think about the impact on margin positively in the near term?

We'll start to see improvements in our overall sell prices towards the end of this year. There is a bit of a lag effect related to how quickly we'll realize some of those cost benefits or savings, but those will be significant savings for us as we've gone through this period of significant sell price inflation, and now we're seeing moderation in the backdrop.

So starts at the back end of this year and then gets significant as you move to next year? And then the introduction of LFP batteries into the mix, what is the -- can you give us a sense on how and when this would be impacting profitability?

So for us, the introduction of LFP will be commensurate with the shutdown that we'll have in the middle of next year.

Okay. What's your expected margin trajectory this year and heading into next year? What are the key pieces of the bridge to get you to positive territory, I guess, at some point next year?

So there's 3 key levers for us. The first is volume. As we are able to have fixed cost absorption within our production facility and plant in normal. The second is really related to the reductions in material costs. And that reduction in material cost is roughly evenly split between the opportunity for us to introduce new technologies in the vehicle like our Enduro drive unit or LFP battery path or a next-generation network architecture as well as some of the supplier negotiations that we're undergoing that drive the remaining 50% of those material cost reductions. And then the last remaining piece for us is really average selling price. And so as we continue to progress through the course of this year and into next year, we'll continue to see increases in average selling prices we're selling through more of the first post-March preorders or selling into that backlog of customers and then also equally adding in some higher ASP drivers like our 400-mile range Max pack variant as well.

In terms of the relative size of these buckets, are they relatively comparable?

So their relative size bridging from Q1 of '23 to Q4 of 2024 is about half is related to volume. And then at the remaining half, they're roughly evenly split between material cost reduction and increases in average selling prices.

And then you were speaking about some cost efficiency opportunities and then some negotiations with suppliers. Can you discuss some of these opportunities, whether from the supplier base or internally?

If you take a step back and look at when Rivian set all of its material contracts, they were established, created back in 2018, 2019, when Rivian was a preproduction business. And so there was an embedded level of risk that, that supply base took in engaging in the investments on their side to service Rivian and launch with us as a whole. And so one of the keys is, as we've been in a position over the course of 2022 to ramp and demonstrate Rivian's ability to ramp, we've now turned the corner in our ability to showcase the technology road map of what's coming, the curate of the R2 program that will be launched in 2026, in an effort to drive strategic alignment with the business so that these suppliers are now reducing that sort of risk cost that was initially embedded within those contracts to drive towards more normalized pricing level for a player like Rivian.

So does this happen just midyear or mid contract? Or is it sort of -- are there like specific -- like how do you go about changing the pricing or conditions in the middle of a production run?

So there's lots of different strategies being deployed. And in some cases, it's a true just commercial cost reduction on exactly what we're purchasing today. In other cases, we have explored utilizing different parts to drive towards material cost reduction within the vehicles that we're building. And in some cases, we've resourced to different suppliers as well. And so, for us, it's an ongoing process. So the cost savings will be gradual over the course of 2023 and 2024 given the fact that, in some cases, there are parts changes that are driving some of the lower pricing.

Let's focus on R2 now since it's exciting next vehicle. When are you planning on unveiling R2?

So R2, we'll show to the world early 2024. I was down at our design studio last Friday, spending time with the team and the clays. And we're incredibly excited about the differentiation of the products. And we get to see it and get excited about it every single day, but we're really excited to show it to the broader public as well.

What's your latest thinking in terms of pricing and market positioning?

From an overall price vantage point, we see this really targeting the MEB of the broader midsized SUV crossover market. So straddling were the broader ranges of $40,000 to $60,000 area in aggregate. And so that also creates a nice stretch for the brand as you see R1 with an average selling price starting at $73,000, so this lives right below that as we think about the opportunity set available to Rivian. And as we think about R2, right, R2 really means on the brand and ethos of what R1 has started. R1 created flagship vehicle that's phenomenal on-road, off-road. I've climbed boulders in R1s having never driven off-road before. It is a confidence-inspiring vehicle. And so as you think about what is the translation to R2, right? It still maintains some of that adventure aesthetic, but it's also contemplating and thinking about how can we really focus on where we're investing in, in capabilities that allow us to maintain that more affordable price points, and therefore, a larger addressable market for the vehicles themselves. So we're spending a lot of time in the studio on some of those key trade-offs today, but wanting to make sure it truly has some of that Rivian brand essence embedded in it as well.

In what ways will it be different from the R1 in terms of content, but also manufacturing process? Like what lessons have you learned from R1 in order to get confidence you can manufacture and sell R2 profitably?

So first, one of the key differences is starting place with suppliers. So we talked a little bit about, right, where we were in 2018, 2019, relative to the work that we've been conducting over the course of the last 2 years to get that -- those material costs down. I hear we're starting from a very different position of negotiations as it pertains to the R2 platform and the size and skill that, that platform will become over time for Rivian. I'm not just in North America, but globally as well. So for us, right, starting and establishing with that lower material cost is critically important. And one of the key areas of focus for us is how do we leverage the continued progress that we've made in some of our key technologies. So whether it's the Enduro drive unit that becomes more of sort of a sister platform for R2, whether it's in network architecture, that will be leveraged as we think about the transition to R2, we have good visibility into the road map that's bridging us to that lower cost base today as we think about what's currently established in our R1 pipeline and portfolio as a whole. And then the other key for us is really the -- I would say there's sort of good interplay between our manufacturing engineering teams, our operations teams and our product development teams, right? That creates that healthy tension of the best part is no part. The best weld is no weld. So how do we create an environment that's challenging and pushing from a true first principles approach at design efficiency for where R2 could be.

And as we think about the EV landscape in 2026 and beyond, which is around the time frame you're starting R2 production, how are you envisaging the competitiveness of R2 vehicles in pricing and cost of goods sold? Where do you see -- well, I guess I'll leave it at this. It feels like this could already be a fairly crowded field by then.

We think that as you look at this sort of MEB of the market, one of the things that's incredibly important is technology, right? In the premium end of the space, you can utilize premium interiors to create sort of an experience for a customer. When you get down to these lower price levels, it's really how you think about the brand positioning, how you think about the UI/UX experience for the customer, and how you think about the leverage and opportunity set that we have with all of these cross-platform investments that are leveraged over this new platform for us. And that's where I think we'll continue to shine. We also, as you look at R1, have built a really unique design aesthetic as well, right? They're very noticeable when you're driving down the road. And I think the opportunities that we have as well is to continue to allow R2 to stand out and really sort of lean on some of that success that we've brought to market with R1.

Let's talk about software and services. That's been a big part of the Rivian story pretty much since the beginning. As you deliver your vehicles, can you talk about how that's progressing with your early customers and with Amazon? Where will you differentiate yourself in the future on software and on service?

We really want to own the full end-to-end ownership experience for commercial customers and for consumers as well. And so what we started with was how do we create a seamless transaction experience. So if you go in online and you buy a Rivian, you can purchase, right, insurance, financing, trade-in your vehicle in about 6 minutes. Is that convenient and fast. And so some of the early investments we've made is really ensuring that we had this integrated experience for our customers with services like financing and insurance. Over time, as you've seen, we're constantly updating our vehicles with over-the-air updates. And so we've added incremental drive modes and feature sets to the vehicles. Over time, we'll have the opportunity to create features that can be bundled or paid features for consumers. But right now, we're really excited about offering continuous value accretion for Rivian owners that have seen the range of their vehicles, increase over the lifespan of their ownership and true enhancements to some of the new drive modes that we've offered as well.

And then on the commercial side, is there any -- you already have revenue from that fleet management?

On the commercial side of the business, every EDV that we sell to Amazon is connected to a FleetOS subscription. And so we're also excited about the opportunity for us to continue to leverage some of the investments that we've made in the fleet management capabilities for Amazon, right, that through a digital experience can be utilized for, right, your fleet or my fleet of 1 or 2 vehicles as well. So there's a lot of synergy in some of the investment that we've been able to derive as we think about serving both of those end customers.

Ford and GM recently announced they were lean into the Tesla supercharging network. Do you think this is something Rivian could contemplate doing in addition to or instead of the Rivian Adventure Network?

We are excited about the opportunity for more consumers to have access to reliable charging infrastructure. And so as we sit here today, we're dedicated to the continued build-out of our Rivian Adventure Network that is enabling and allowing many of our consumers to have access to a high-quality charging experience, but certainly open over the future to partnerships or approaches to work with others as we all want to help enable the acceleration of EV adoption.

And then what are your latest thoughts on AI and self-driving development? Is this something you still need to do and develop internally? Or can you rely on partners?

We think as we look at the broader ADAS road map, we do think it's important as we see autonomy is a key driver of innovation in the broader mobility space as a whole. There's really 2 ends of the spectrum as you think about approach or path to ADAS development. There is more of a hardware unconstrained world as you think about the Waymo's of the world, and then there's more of a hardware constrained view or a more camera centric view of the world. We're really focused on -- today, we're a Level 2 ADAS platform. And our objective is to scale that up to Level 3 and continue to build our fleet, our data set to improve over time. So hopefully, it can converge up to some of those higher levels. But really the near-term focus is on Level 2, Level 3 safety and self-driving features.

Two final questions around capital allocation. You've guided to low $2 billion in CapEx each year through 2025. What's included in this CapEx by 2025? Like by the end of the year '25, will you have the 150,000 unit capacity in Normal, and 200,000 units in Georgia built and ready to produce. So would you need additional CapEx to complete Georgia and start production in 2026?

As you think about the CapEx spend, we'll have largely built the structure of Georgia in that '25. So as you think about sort of payment terms for the facilities portion that will largely be behind us. We do have contracts with many of our equipment suppliers. So we have payment terms post-startup production. And so in the case of some of the equipment in the facility itself, they'll be still being paid for throughout '26.

And what's your expected pass and timing to break even free cash flow, with $11 million of cash in the bank at the end of the first quarter, do you expect having to raise additional capital before R2 production? And if so, does it make sense to do so in the near term?

For us, we'll continue to be opportunistic as it pertains to building out diverse portfolio of options for us to continue to fund the business. Over the course of the first half of this year, we did a $1.5 billion convert. We also raised and upsized our ABL facility, which collectively added $2.4 billion of incremental liquidity into the business. And so I think these are just examples of the continued funding from multiple different end markets that we'll continue to look at as we drive to ensure we have a really strong balance sheet position going into the ramp in start of R2.

Helpful. Let me open it up to the room if there are any questions. Or else I give a couple more. Anyone in the room? Over there, on the right.

I'll just hit on that last question. I mean it's sometimes better to take money when you can -- when you need it and you're bearing cash. Product is great, but kind of seems like maybe you should just like the bullet and raise equity forward. And it just seems like you're kind of playing with fire, economy and all that's going on. So I guess, the question is just at what point do you kind of make that decision where you have to -- or are there other strings you can pull like a partnership or something like that, where [indiscernible] conserve some capital and perhaps maybe to raise as much as what the market thinks. Because honestly, the product is great, but truly, I'm just saying this, I have like neighbors that are saying me [indiscernible] question whether they would buy an R1S because like if the company going to be around. It shocks me that some people that are not involved in financial markets even asking that, that they are hearing that. So at some point, you probably do want to put a stake out there and say, you have enough cash.

Maintaining a strong balance sheet position is a key priority for us. And as you've seen us throughout the course of our life cycle as a business, we've always sort of taken that approach of ensuring that we are pre-funding the business for future growth and well ahead of the needs of the business. Our priority right now is ramping production and driving down costs so that we're starting to really reduce the level of cash burn within the business so that we're stretching and extending the runway for capital and growth across the board.

Any final one. I think message was crystal clear. Claire, thank you so much for being here, and thanks, everyone, for joining.

Thank you.

Appreciate it.

Thank you.