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

Okay. Great. Thank you, everybody, for joining us. My name is Mark Delaney, and I cover Rivian for Goldman Sachs. I'm very pleased to have Claire McDonough, the CFO of the company with us. Thank you so much for joining.

Thanks for having me.

Let's dig right into the Q&A. Rivian raised its guidance for production this past quarter and now expects to make about 52,000 vehicles in 2023 from its prior forecast of about 50,000. And what is contributing to the improved volume and what is gating production growth at this stage?

As we think about the increase in our guide from 50,000 to 52,000 the key contributor there has been through the ramp of our Enduro in-house drive unit line as a whole. One of the key constraints to our production in 2022 was driven by a lack of power semiconductors. And so with the introduction of our Enduro drive units, we've also introduced a new power semiconductor supplier to Rivian. And so that's opened up a lot of the supply constraints that we've seen in the past. And we've made steady progress over the course of 2023 in Q1, first introducing the Enduro drive unit and having those first units going towards our commercial van program. Over the course of Q2, we helped continue to ramp up production of our commercial vehicles and then also build some excess capacity as well or excess supply to begin to introduce those in Enduros into our R1 vehicles. And so as we look at the back half of the year, we'll continue to ramp up production, and a lot of that growth will really be enabled by the continued progress that we're making with the Enduro ramp.

And you're talking about profitability for a moment, and I think Enduro's a factor here. You commented on the last call and in the last couple of earnings calls, that Rivian has a clear line of sight to reaching a 25% gross margin and a high teens adjusted EBITDA margin. Could you talk about some of the key drivers to get there?

Sure. First, as we look at gross profit itself, the key levers for us are continuing to ramp up production volumes within our normal production facility itself. That, as we provided in our Q1 earnings call, we provided a little bit of details or context on a bridge from where our current financial results were in Q1 to the end of 2024. As we think about the continued scaling and production of our facility in both the ramp of R1 vehicles and continued growth of our commercial van line as well. That's the single largest driver as we think about the path to positive gross profit for us. The other key factors for us are driven by introductions of new technologies within the vehicle. And I spoke to the Enduro impacts that we saw in the first half of this year. To put it into context or perspective, the introduction of our LFP battery pack as well as our Enduro drive unit in our commercial vans allowed us to reduce our material costs for the van by 35%. And so as we look ahead to 2024, in the middle of next year, we'll be taking some downtime in the plant to introduce a number of new technologies into the R1 vehicle platform. So those include the introduction of our next-generation network architecture that allows us to move from really a domain-based set of controls. So if you think about it, lots of different computers running the different systems within the vehicle to a true zonal architecture. So we've reduced the number of electronic control units by about 60%. We've also reduced the length of the wire harness in the vehicles by 25% and given we're not wiring to all of those incremental ECUs as well. So significant cost savings. We'll also bring our LFP pack into the R1 unit as more of our entry or base trim. And then beyond that have additional work as we think about some of the structural pack changes that we're making for our high nickel packs as well, that remove significant costs as we think about the mix of LFP versus high nickel cells within those vehicles and then we'll continue to have the Enduros as well as our quad motors in as part of that introduction in 2024. So that's a key catalyst as we think about the path for Rivian to positive gross profit. But also not just positive, as Mark said, right? How do we achieve a 20% vehicle gross profit margin in aggregate? And then the last driver for us as well or I would say, one of the other enablers for our material cost reduction road map is also through commercial negotiations. When Rivian started out and developed and put in place the supply contracts for the -- for our launch, right? We were a preproduction company and many of those supply agreements embedded in it sort of a risk premium associated with where we were in terms of our production history and volumes. Now we've been in a place to demonstrate our ramp -- demonstrate the desirability of our vehicles and also, right, dangle a little bit of a curative of what's coming next as we think about the introduction of our next-generation vehicle platform in R2. So there's significant progress that we also anticipate to see us through ongoing commercial cost-down efforts with the supply base. And then last but not least is really some of the dynamics around pricing. So we'll both be moving beyond some of our early preorders that had lower price points associated with them. And then we'll be introducing new variants of the vehicles, such as our Max Pack, 410-mile range Max Pack that will come out in later this year as well.

A lot to dig into there. Maybe following up on the pricing piece of the discussion. So prior to March 2022, there was lower pricing and then -- since then Rivian has raised pricing. Can you just talk a little bit more on where you are with that backlog and working through the backlog of the lower-priced vehicles and talk about what the shipments look like today between the older pricing and the new pricing stack? And maybe when you think you're done shipping the vehicles or -- it's immaterial to volumes at the older pricing.

Sure. As we think about what are the impacts overall, we'll continue to have a mix of both early price customers as well as new price customers as we continue on through '23 and well into 2024 as well. Some of that dynamic is also driven by the fact that when we initially launched, we didn't have our dual motor offering available to those early customers. Some of our early customers have converted to dual. But because of those variants, we'll also be selling some of those dual motors to new customers at higher price points as well. So it's more of a feathering effect as you think about the broader increases in revenue and ASP that you'll see over the coming quarters as a whole.

That's helpful. We spoke about volume, cost, price. Maybe we can put it all together. On the last earnings call, you mentioned your expectation to reach contribution margin positive by year-end on the R1 platform. You're already there, I think, on EDV. Let's take it the next step. When do you think the company will reach a positive gross margin overall?

We expect to reach positive gross profit in 2024. And as I spoke about the impact of the introduction of new technologies, coupled with the commercial cost-down efforts and the introduction of some of these newer, higher-priced ASP variants, and full priced post March 2022 orders really all comes together in the -- towards the end of 2024. And so you see that the power of each of these core forces coupled with us continuing to ramp our production volumes, that allows us to take a true step change in gross profit as we think about the exit rate for the business in that 2024 context.

Okay. That's helpful. Can you talk a bit on inflation? I mean, you mentioned negotiations and you got more scale. So perhaps commercial negotiations could be a bit more favorable. But talk a little bit more holistically on what sort of inflationary or maybe even deflationary trends Rivian may be seeing at this point in terms of both materials and labor.

On the material side, we have seen significant deflation, especially around battery cell raw material prices as a whole. And that's been -- that was sort of one of the key pain points as when we started production, I think lithium prices were about $18 a kilogram. They went up over 80%, and now are back down in sort of 30s today. So there's been sort of a significant level of volatility there. Rivian will continue to benefit as some of these deflationary forces or just the market comes back down to more normalized levels overall. And as we think about that from a timing perspective, it's also not as if, right, the spot market moves and we immediately have that priced into our vehicles. And we -- so we've talked a bit about -- we'll see some of those impacts in the Q4 time frame of this year. Certainly, we'll experience those impacts as we look to 2024 as a whole. But there's sort of more tailwinds on the commodities front as we look to the future. And then to your question on labor, it's an area where we've been very focused on continuing to invest in our workforce in Normal, Illinois. We have a $22 an hour starting wage for our employees. All of our employees earn equity as well within the business. So certainly a premium employer in that market and has -- as a result of that, been able to draw from a pretty large radius around the Normal facility and plant.

That's helpful details. We've all had to dust off our accounting textbooks to study the lower cost or net realizable value charges. And maybe talk a little bit more on what those are. But I think how to think about that as well between the first half of the year into the second half of the year. And then maybe more importantly, as you get to contribution margin positive on both R1 and EDV, are we still going to be thinking about LCNRV charges in 2024?

Sure. So I'll give you a little bit of a brief history on LCNRV, so those of you in the audience that may not be as familiar with it. Essentially, what we do is we take the value of our inventory and we say, what will it cost us to turn that -- those raw materials into a finished product, right? So we're taking into account all of the cost from a conversion perspective to build the finished vehicle and then we effectively mark down our inventory, so that we could achieve an implied 0% margin on it. And so as you saw within our financial results over the course of 2022, that LCNRV charge rose up. And as you've seen in the first half of this year, we started to significantly reduce that LCNRV charge within the business. It is a little bit of a forward-looking metric. So it's driven to say at the end of the quarter, what -- how do you achieve that 0% margin in the next quarter. And so it does contemplate a little bit of the continued advancements in terms of efficiency or volumes. That was one of the key drivers while we saw a much higher level of LCNRV reduction in the charge in Q2 as we're looking ahead to Q3, which will be more of our higher volume quarter given some of the Q4 seasonality that we experienced within the business. And so we expect as we look ahead for the second half of the year, we wanted to make sure that we took a pretty conservative approach on how quickly that charge will continue to unwind for us in aggregate. And so we expect that second half reduction in charge to be lower than the first half given the significant step-up that we saw in -- right, production volumes going up 50% in Q2, right? Delivery volumes going up 60%. Those are very material step changes within the business itself.

Okay. And then if you are theoretically contribution margin positive on vehicles, does that mean there's no more LCNRV charges in '24? Or is that too simplistic?

It's too simplistic in that because it contemplates the cost to produce the vehicle, right, where the contribution margin, as we define it, is really more of the variable cost to build that incremental unit. This is also contemplating all of the conversion costs, so the labor, overhead, depreciation to bring that -- those raw materials into the finished products. So it won't be a -- it will certainly improve as our margins improve, but it won't completely flip until we reach positive gross profit.

Okay. That's helpful. Maybe we can talk about mix and selling more R1S vehicles relative to R1T, I think is positive. We were looking at the configurator studio as we're working on the question list and it looks like right now, the R1S Adventure trim is about 5,000 higher in price than the comparable R1T. So should we think about that as dropping through to gross profit dollars since they share a common platform, and I would think pretty similar costs?

R1S is a right higher-margin vehicle for us. So as we think about some of the structural differences between the vehicles at 2 less closures in the R1S, given we don't have a gear tunnel there where we have the gear tunnel in our truck, and we essentially replaced truck bed for a third row of seats in the vehicle. So it is a higher-margin vehicle. It is also just a higher AST segment and category as you think about the large SUV market as a whole. And we have a phenomenal value proposition as we think about where the R1S sits and the significant demand backlog that we've built for those vehicles.

Maybe look at R2, you alluded to it already in the conversation. But how much do you think R2 can see price reductions relative to R1? And what would that mean for the TAM you could address? Because at a lower price point, I would think there's a larger number of buyers.

It's a great question and something that we're working quite diligently on it at the moment. So as we think about price point for R2, we've generally talked about it in the $40,000 to $60,000 area. And as we think about what we want to achieve with this product, we do want it to be that mass market global scaling product for our business and to harness a lot of the essence an adventurous spirit that R1 has helped establish for our brand, but allow us to really open up the broader audience through a reduction in price point as we think about what we can achieve with R2. And we're just having a quick conversation on this earlier today. I think as well when we look across the leadership team that we have in place today, we have a really great tension between our design team, our engineering teams, our go-to-market teams, our manufacturing operations and manufacturing engineering teams and service teams to say, "How are we making the right levels of trade-offs," to assume we're not saying yes to too many things which is going to limit the overall sales potential of the vehicle. And so -- and how are we thinking about a lot of the design for manufacturability elements, right, the sort of philosophy of how do we create simplified design that's able to very quickly scale and ramp in our production facilities. So I think we're in a really good position as we had many of those debates as a leadership team to start to arrive at what the feature sets and elements of what that R2 will look like.

You mentioned international opportunities and scaling globally. So maybe we could stick on that topic a little bit. You're now selling your commercial vehicle in Europe. Maybe talk about logistically what it takes to sell in Europe. Is it as simple as putting cars on a -- or vans in this case on a ship and you can sell it in Europe? Or is there a lot more to it? And maybe extend that a little bit in terms of what you might learn in terms of being able to sell consumer vehicles there, too.

Right. And our vans today for Amazon are being sold in the European market. And so as part of that ramp in our ability to partner with Amazon, we've been building out our service infrastructure and network within Europe to support the vehicles that we're deploying there. It's also a really great training tool as we think about the longer-term introduction of R2 vehicles that we hope to bring to the market as well. And we designed and developed the EDV together with Amazon, always with global aspirations in mind. And so it was always designed to ensure that we were able to meet all of the regulatory needs of the European market, and we've gone through all of the homologation protocols for that as well. We also, last week, introduced our new Chief Commercial Officer and President of Growth Strategy, Kjell Gruner, who joined us. He was formerly the CEO of Porsche in North America and has extensive experience prior to that with European OEMs in his earlier career. So we're also excited about the opportunity to bring in talent that has both robust experience, building brands, building community, and building an elevated customer experience in the North American market, but also someone that can help us architecture for that future growth opportunity that we see in Europe.

That's very interesting. Maybe we can shift gears a little bit and talk on demand. And given what's been a long wait times to get an R1, some customers tend to put in orders as well in advance, sometimes over a year long. So as you're notifying consumers to prepare for deliveries, what are you seeing in terms of conversion rates on that backlog? Are you seeing anything unusual in terms of cancellation rates? Or is the backlog holding up well?

The backlog has been holding up well. As we mentioned last quarter, we had the opportunity to have our first quarter where we had R1S production that outpaced R1T. And that's really important for us given the broader backlog for our vehicles have always been more heavily weighted towards S. And so we are now in a position to have our production volumes mirror or match more closely with the backlog that we have from a demand standpoint. And so we're excited about bringing more and more vehicles to market. Actually one of the biggest inhibitors to purchase or the reason why someone cancels is wait time. So we're excited to continue to work through that backlog, get more of the community out there growing and building awareness and excitement for the vehicles and the brand as well.

There's been a lot of volatility in EV industry pricing. Maybe you could talk as CFO, some of the key variables you consider as you set price and how you assess what the prices should be set at.

As CFO, I'm very focused on what is the broader unit economic constructs that we're bringing to market. How do we chart and see the path to long-term margin targets for our vehicles as a whole. And as we look at and trade off some of the balances there, we look at broader market sets, we look also at, I would say, really the comprehensive value proposition that we're providing to customers. In many cases, with R1T and R1S, there's not truly a comparable product out there. And so we also are careful not to just focus entirely on is it 0 to 60 acceleration? Is it range, right? It's really how do you think about the entirety of the user experience that you're offering for customers and capturing that in your value proposition and how are we also equally communicating that value proposition to the market as well. And one testament of the strength and success that we have seen there is really demonstrated through the fact that last year we won J.D. Power's top rated EV in the premium segment. But we were actually the highest rated vehicles of all of J.D. Power's ratings as they thought about the customer experience, and this is through survey results with our owners. And so we're also really excited last quarter we had Wassym, who leads our software team around the excitement that comes through every [ over there ] update that we're providing in the market. We typically update the vehicles on a monthly cadence. And so we've also been able to add so much benefit through software over the course of our starter production to where we sit today, which is a really exciting part of vehicle ownership as well.

That's interesting. You had an announcement earlier this year that Rivian drivers will gain access to some of the Tesla charging network later in 2024. Have you seen any change in order rates since you made that announcement?

One of the key reasons why we made the announcement, went in with others in the industry on the evolution to the North American charging common standard, is because of the importance of ranging [ via these skills ] as you think about a hurdle to EV adoption. And I think that with everyone going to this -- or most everyone, I would say going to this common standard, it's a huge enabler for our current customers that in 2024 will now have access to 12,000 and growing Tesla superchargers across the country. So this is helping to reinforce their own ownership experience. It's also a key enabler as we think about the unit economics for the build-out of our own charging network too, right? So the largest part of the EV car park today is Teslas. And so now our Rivian Adventure Network chargers can benefit from the sort of added velocity in the market of not just being able to address Rivian and other non-Tesla owners as we're attracting folks into our open network but also attracting truly all EV owners as a whole. So it's a huge enabler for us, we think, for the longer term, as we continue to drive this transition to EVs.

And sticking on the charging network topic, Rivian has its own chargers, oftentimes at national parks and outdoor sites aligned with the brand proposition that Rivian brings. How big do you think your own charging network can become over the next couple of years?

One of the key enablers for us as well as there's phenomenal government incentives with [ NEMI ] funding grants that can fund up to 80% of the CapEx investment for the build-out of charging infrastructure. And so for us, we're excited about the continued development path for us, right, to build and introduce our MAX compatible chargers. And so once we do that, we'll continue to scale and build out the road map for the future. Today, we have over 40 sites that are live, hundreds of leases underway and are excited about the opportunity to continue to build upon that road map for the future and continue to make it a nice margin catalyst for us as well as we think about some of the benefits of those grants that will enable very robust and fast paybacks for Rivian.

You mentioned software and over-the-air updates. So if we could talk a bit more on that topic, how much do you think consumers are willing to pay per month for software and services? And how do you see Rivian executing against that opportunity set over time?

Our approach to software and related services has really focused on what is the base offering that we want to make sure that every owner of Rivian is able to experience as they continue -- as we continue to invest in the feature set over time. There certainly are a number of features that require higher levels of compute in the vehicle or higher levels of ongoing maintenance from our software teams that we believe do require monthly recurring payments associated with them. And there certainly is a larger opportunity, especially as we look at more of the autonomous and ADAS road map for the business on a go-forward basis that allows us to tap into some of this high-margin recurring revenue pool of business. And we spoke a little bit earlier about the gross margin trajectory. We do see software and related services as being a significant amplifier of our long-term margin as we see the opportunity set for 500 basis point plus of incremental margin lift through software and services over time as we continue to scale and build out our car park and offer more of these services. Today, we are making software-related revenue streams. We had software-related revenue streams from the sale of every one of our electric delivery vans that we sell to Amazon through our fleet OS offering. Fleet operators and customers are very used to paying monthly subscriptions to help them manage their fleets. And so that's, I think, another training ground for us as we think through the opportunity set that's out there and the work that we're already doing and the revenue that we're already earning in that regard.

You said EVs have the potential to reduce service needs relative to combustion engine vehicles. Now that you've had vehicles on the road for some time now, what have you seen in the data? And is that materializing?

So as we look at the broader industry as a whole, we've done a lot of work around what are the ongoing service costs of the vehicle relative to the total cost of ownership. And as you look at and benchmark ICE vehicles in that capacity relative to EVs, you see roughly a 40-plus percent reduction in the cost of service over the life span of that vehicle. So it is a really meaningful long-term enabler for us as we think about the fact that -- right? No one needs an oil change anymore, right? There's huge advantages of the efficiency that we can deliver. And one of the key areas that we've invested in our business is the build-out of our Mobile Service operations. Today, over 50% of all service incidents are captured and covered through Mobile Service. And so this as a consumer is a far better experience, right? Our van is coming to your house or your workplace to fix your vehicle. And it's also far more capital efficient for us as we think about the scale of our network and the ability to use our service centers and locations for some of those acute incidents. But they're really the sort of hubs of a broader spoke of mobile service bands that are out there in the market, repairing vehicles and delighting customers as well.

I'm going to ask one more, and then I'll give the folks in the audience an opportunity as well. It's on CapEx. So Rivian has done a good job of controlling CapEx over the last couple of years. You guided for average CapEx in '23 and '24 to be in the low $2 billion range. As Rivian gets ready to launch R2, should investors expect a material increase in CapEx? Maybe north of $3 billion or any way to dimensionalize what it might go to as the company scales as you prepare for new vehicle launches?

So as we look to the starter production of R2 in our Georgia facility in '26, we'll see most of the construction phase of that project take place over the course of 2025. And so as you look at the overall CapEx, we'll certainly see higher levels of CapEx in that '25 and into 2026 capacity. We haven't provided specifics yet at this point in time. But we would sort of guide to that being a more elevated level and that will come down as well.

Great. Yes, we've got a question in the back. So let's do a couple of questions from the audience. So if you don't mind just waiting for the mic.

Claire, just if you can lay out a little bit -- how do you think about the capital raise strategy? And I know you mentioned on the last call that you want to be opportunistic and you guys already did a convert at when you guys are at $13. So how do you think about it over the next 3, 4 years? I mean it's basically about, I guess, you're crossing the chasm in the next couple of years. So it would be great if you can share that.

Sure. As we think about the capital raising road map for Rivian, as of Q2, we had $10.2 billion of cash on our balance sheet and a $1.5 billion ABL facility that was unused. We have significant runway ahead of ourselves. As we've said in our past earnings calls, right, the cash position that we have on the balance sheet today has the opportunity to fund our operations through 2025. But we're also going to continue to be very opportunistic as it pertains to maintaining a conservative balance sheet position to weather any storm, any disruption that may be happening in the broader market as a whole. And we'll look to a variety of end markets as we think about the funding trajectory for the business, and we'll continue to remain opportunistic.

Great. Yes. One last question in the middle there.

So in terms of the aftersales care, you mentioned the service vehicles. Just what are the limitations in terms of geographic spread? And in terms of operation limitations, so where do we draw the line where the car would need to be called back rather than fixed on the spot?

Sure. One of the key criteria for us today from a delivery perspective is what is your proximity to one of our service locations. Right? A big part of the customer experience and making sure that each of your potential prospective happy customers is availability of service. And so we've been very intentional in ring-fencing what that average drive time to our service center is. And the back -- the strength of the backlog that we've had has allowed us to have flexibility as we've rolled out vehicles across the country. Today, we have over 40 service centers. We'll add another 20 in the second half of this year. So there's quite a high rate of velocity of new service centers coming online over the coming weeks and months. And we'll continue to build out that infrastructure over the coming years as we continue to scale the car park as a whole. And equally, we've been investing in the continued build-out of our Mobile Service fleet, which is over 250 vehicles and growing and scaling as well. So it's a key enabler for us and we look forward to the continued build-out of those service operations so that we can have greater reach and breadth of -- from a geographic perspective.

Great. Well, unfortunately, we're going to have to end the session there. Claire really appreciate you joining us today.

Thanks for having me. Appreciate it.