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

RJ Scaringe, doesn't need really any introduction, CEO of Rivian. Thanks for joining us. Thanks for being here.

Yes, of course. Happy to be here.

I was just going to say to you privately, but might as well just say it here. I love going on the test drives and sitting in the backseat with people that have never experienced it before.

Yes.

And just seeing the reaction, not just the performance but just the quality, the quality of the vehicle and the suspension and the materials you use. It's super, super interesting. Well, thanks for joining. I wanted to give you just a chance at the top to kind of tell us what's key messages for the audience. You asked me, how is my summer? What I get up to? And I'm talking about my vacation. I don't think you had as much time off. You're so busy.

Yes. Yes.

Yes. That's good. You signed up some stuff, right?

Yes, that was the idea.

Yes. But -- so well, key messages, and then we'll get into a good discussion. Please, guys, tell me participate. So your questions are better than mine but hardly, please.

Yes. So it's -- as you said, it's been a busy summer, a busy year for us. And we've got a few big objectives, which I'll ladder into. I'm sure some of the core questions you're thinking about. But number one, we continue to focus on ramping production. And the ramping of production for our first set of products are flagship consumer products, R1T and TVNOS, which Adam is referring to, along with our commercial vans. That's really critical to achieve the level of fixed cost leverage or fixed cost absorption we need on the pathway to profitability in our normal facility, our first production plant. That's playing out as we simultaneously are working towards a big set of updates that we're rolling into the vehicle in the first half of next year, that not only provide a number of cost savings but create a number of enhanced features for consumers and also lays the technical foundation for what will go into our 2 product line. And that's really the third big areas. We've been really focused on making sure we leverage all the learnings from the ramp-up of our first set of products into this next platform, what we call R2, and defining the characteristics of it, how it's built, the sequence, how it's built, how we consolidate parts, how we simplify the architecture has been a huge focus for the last year, and we're really seeing that culminate. And we'll be showing that product publicly early part of next year. So we're in that like final sort of chase of like what we show is what we're going to build. So there's a lot of work happening on that as well. And it's a fun part of a program because we're working on something so much and we've shown nothing. So it's -- we're excited to reduce the asymmetry, so to speak, of what we know we're doing and what the world has yet to see that we're doing.

RJ, you've been through production hell.

And supply chain, too.

And supply chain hell, yes, and pricing hell and other hell. And these are learning experiences, and you still have a strong balance sheet. You still got the time to make the decisions to become a self-funding company at some point. But how would you compare your level, maybe anxiety is the wrong word, but real concern about being on top of the issues that were coming up sometimes faster than you were solving them. Kind of where are you now in kind of that line of scrimmage? And when you compare it to how let's say, a year ago, which was pretty nary.

Yes. I think the way I'd look at this is there's 3 big questions that we think about. And I would certainly think all of you think about in determining sort of like where our anxiety level should be number one. And the most important is, does our brand and the ultimate -- ultimately, the set of products we build, does it resonate with consumers? So are we building something that people want? And if the answer to that is no, then I should get off the stage, and there's no point to talk about the other categories, but that's really foundational and the objective of R1 as a platform was to establish the brand, really open that brand umbrella, if you will, and create the platform -- the brand platform by which we've introduced other products over time. And in that regard, it's been enormously successful. So we continue to see very strong demand backlog. We have market-leading residual values. If you buy our R1S today, you can sell it tomorrow for more than you bought it for. If you order an R1S today, you're not going to get until the end of next year. That's a problem but a high-class problem. It's a good problem to have. And what we found is the level of residents are achieving with the brand philosophy and the brand vision. And as that then manifest into the product features and the trade-offs we've made, it's been very, very strong. And so of course, the question becomes how do we make sure we repeat that with R2 at a lower price point? So first and foremost, we're very pleased with where that is. We continue to invest in that. We're going to be ramping up awareness through additional physical locations and making the products more accessible to future customers.

You're going to have one in Laguna Beach, I think, too?

Yes, right around the corner, yes. Yes, which should be cool.

Second one?

Next year, we'll do something there. So the next question is, if provided, we've done a really good job of creating a product portfolio that customers want and a brand that's interesting and cleared and holistically understood, we then need to be able to produce products. And so the ability to ramp, and this is what you're referring to in your question, is such an important part of this. And we've built a large production facility just South of Chicago and Norma, Illinois. And we've had a lot of challenges ramping that. There were supply chain challenges. We launched 3 products at the same time. And when you think about launching a product, there's thousands of components that need to come together from hundreds of suppliers. They need to come together in perfect sequence, meaning, if you're missing 1 part, the vehicles can't be built. If you are missing 1 part, you have inventory accumulation issues. So it has to be really well synchronized. And so doing 1 launch is difficult. Doing 3 launches is really difficult. Doing 3 launches where you're establishing and setting up the plant where we started this in February, March of 2020 with the backdrop of work-from-home pandemic, it was extremely challenging. Layering on top of that then some of the supply chain challenges, which I've talked about a lot in 2022. It just made for a more complex and more difficult ramp than certainly what we envisioned. Now we've learned a lot from that. Sort of chief among those learnings is to not launch 3 products at the same time in the same plant. But we've come out of it, and we're now -- we've rounded the corner. You're starting to see that in our numbers. The production numbers are going up. And along with that, our cost structure is dropping very quickly, largely because we're running the facility. The manufacturing doesn't work well if you have these enormous fixed cost and you're producing at a fraction of the intended output. So the fixed cost absorption we're now seeing was one of the core drivers to -- we saw Q1 to Q2, $35,000 gross margin improvement. We're going to continue to see similar level of improvements as we go through the path to very strong positive gross margins for R1. And then the third thing that I'd be thinking about is, is there a pathway for growth? So provided we have a product that people want and provided we have an ability to ramp production and operate the plant in a strong positive gross margin way, can we replicate some of those successes into a broader -- a larger market and a bigger, larger addressable market with our R2 product line? And in that regard, of course, I'm very bullish on it. I think we're set up extremely well. The way that product is coming together looks great, but that's been a core focus for a lot of our team, and it's something we're beyond excited to show as we get into early next year.

Okay. Let me launch off the point three, the growth. You don't share order book information anymore, and I totally respect that. So how can you convey where demand is? What can you say that indicative of as you get more vehicles in the wild, you don't advertise. And so you get the word of mouth. You obviously gave the wait time. That's fine. I don't know if that's moving out or some other indication of on the forward demand.

I mean we -- just as you're probably looking for metrics for our demand, we also look for metrics for our demand. And its reservation backlog is a bit of a challenging one because you essentially end up with glass ceilings where once you build up enough of a line, it's sort of a deterrent for additional orders. So if someone in here said, "Boy, I really like the vehicle I saw upfront. I'd like to buy one. When can I get it?" And I say, "Well, early 2025." You'd say, "Okay, fine, I'm going to buy something else." So that's it's easy to misinterpret that number. So what we actually find to be really useful is looking at the used marketplace. And the used marketplace represents a healthy check of pricing. So if vehicles are selling used for more than MSRP, that means there may be a little bit of pricing room. It also means there's a little bit of -- the demand is exceeding supply, which is good. And then we look at not just like a 1 month old because there are people that still buy Rivian and sell it the next day to make a little more money. It's frustrating, but it happens, but it's actually useful for us to watch and observe that. But actually, what does a 6-month-old Rivian sell for? What does a 12-month-old Rivian sell for? And that is a useful metric for us to gauge sustained robustness of demand. It's also very valuable for us to unlock leasing, which we haven't done yet. We intentionally held off on offering a leasing product because we had a lot of confidence in residual volume. We wanted to prove that with market-leading measured residualize that will lead to exceptionally strong leasing packages.

What's the IRA application on leasing?

Works great for leasing, yes.

And it does work?

Yes.

There are ways to do it?

[ 7,500 ] does work with that, yes. So that it creates, we think, some really interesting ways to access more price-sensitive customers, but that was an extension to your question, but the core of it is we really look a lot at how the vehicle is doing in the marketplace.

I'd like to go to the business model. I mean one of the things that really differentiates you is your level of vertical integration. It really stands out in the ex Tesla EV startup community. You do your own OS. That really differentiates you. It's hard. You do your own inference chip designs. Tell us again for this audience may not be as familiar like why is doing your own OS important? And I have a few other questions as some other things that you do internally that are perhaps an advantage.

Yes. So if we look at what's going to play out over the next 15 years, we're going to witness the vast majority of vehicles being electrified. That means motor supply is going to grow. Battery supply is going to grow. And in our view, that will cease to be a differentiation point. Being electric will just be the way. And I'd say while we talk about electrification as sort of a core of the change that's occurring, I think the much more challenging and much more difficult transition we're going to witness is the role of software and electronics in the vehicle. And it's much harder to copy a robust, highly integrated, holistically designed software and electronics ecosystem within the vehicle, largely because of how that's been done to date. So with the exception of ourselves and Tesla, as Adam said, legacy OEMs or the incumbent OEMs leverage a variety of Tier 1 suppliers to provide computers that go into the vehicle. You may hear them called ECUs, electronic control units. That have some specific set of functions or some domain that they control. And those -- that sort of set of ECUs, which are outsourced to third parties and along with those outsourced DCs, the software stack that sits on them, makes it very challenging to cross-leverage, compute to cross leverage any sort of perception if it's associated with self-driving. And more so, it makes it really hard to do updates. It makes it really hard to improve the software stack. And so we took the view, we have the strong conviction that owning the entirety electronic stacks, so all the computers in the vehicle, and then owning the software stacks that sits on them, creates an opportunity to have a much more holistic customer experience, user interface experience, which is great from a demand point of view, and you'll feel it in the vehicle. And it's not to say that vehicles may have different features. But the way those features are executed in the way they come across the vehicle feels much more seamless. But above and beyond creating a seamless digital experience, it also represents an opportunity to have very regular and meaningful updates to the software stack. And a lot of OEMs, a lot of vehicles will claim to have the ability to do an over-the-year update. But they're relatively infrequent, and they tend to be very surface level, like the clock moves on the screen and the color changes on the screen, but they're not fundamentally changing the way the dynamics are in the vehicle or the way the sensor stack is being utilized. And we do an over year update every 3 or 4 weeks, and they're meaningful. And it's in response to features we see coming in. It's in response to what we see happening at a macro level across, how consumers are interacting with products and electronics and technology. And so the third area that's really important is cost. When you control the software stack and the electronic stack, you can consolidate compute platforms to a much smaller number of computers within the vehicle. And that's really hard to do if you're trying to work with multiple third parties to consolidate features that may today exist across different ECUs. And so I think this is actually going to be the hardest thing for incumbent players to replicate, in part because the organization that they've built weren't designed for this. So they have organizations that are designed to procure features or procure ECUs versus organizations that design computers and develop software that run in those computers. And so from the very beginning, that's just how we were built. We don't -- we're not a procurement organization around technology. We go build it. And so it's so embedded into our culture and how we operate. That allows us to move very fast, and we think that's going to represent a significant differentiator long term, both on the cost side and the consumer feature side.

Now RJ, a CEO of an EV startup recently told me, and the CEO has a -- can make a mean jackfruit taco, who's going to live with that. He told me recently that when it comes to ADAS, okay, and developing and training your own vision-based autonomous system, that you either want to do it all in-house the way Tesla does, full stack and to try to do everything internally or get someone else to do it all as much of that as possible. And that in-between route of kind of like having your own OS and then working with someone else, that gets complicated. You currently use an outside supplier for that, but you're -- in public with making efforts to try to look for ways to do it yourself. And you might even have a side-by-side for a while and...

Yes. Yes.

Okay. Tell us about that journey? Why are you doing that? Why is it so important for you to take control of that rather than just trust a system, which a lot of my clients say is more than good enough and getting better all the time?

Yes. So as we think about the world of self-driving, there's a few aspects to consider here. So -- and there's lots of different sort of levels of self-driving. And there's -- frankly, there's a ton of confusion on what those levels represent. But ultimately, you have a set of sensors that have the objective of perceiving the world, such a perception stack and the efficacy through which those sensors perceive the world unlock or enable the ability of the vehicle to control and make decisions in a safe manner, break, steer, accelerate and so on. And the way a lot of the systems were architected in the beginning, including our Gen 1 architecture, was to have some of those sensors be sensors that are directly controlled by the integrator, the developer, in this case, us. But then a few select sensors come from a third party. And the challenge when you have these sort of mixed systems is it leads to a very late fusion of your perception stack. And so if you have a front-facing camera that's, let's say, not providing raw data, but rather providing object classification and vector association. So it says, this thing is a car. This thing is a bike, and it's got an XYZ vector of velocity and acceleration of this, you don't get to take the raw information and merge it with all the other cameras in the vehicle to create a better, more accurate aggregate view of what the world is. And it'd be like to make it easier to visualize. If you think of how we as humans process information, my eyes, my ears, my sense of smell, they're -- I have a really early fusion of all that information. I don't like to see something, make a determination as to what it is, do that whole analysis and then I my ears hear something, make a determination with it. And once they're both determined to try to match those, at the very beginning, I merge that information stream in my brain, of course. So in a vehicle, you want to be doing the same thing. You want a really early perception fusion such that you can get the highest level of accuracy in terms of how the world is perceived by cross-leveraging, particularly in the world of ML, cross-leveraging all the insights that may be gained from each sensor. So our view is to do that well. And to be able to do that iteratively and learning over time, it's really important to control the entirety of the perception stack and then to control the entirety of the compute stack and the control stack. And so what we're going to be launching here shortly is any sensor that wasn't our own is now becoming our own, and it's a part of a broader initiative to make sure that, we believe, self-driving over time, over the next 10 years will become a feature that is important to customers in their purchase decision. I'd say today, it's not the primary driver. If you look at folks that are buying Rivians, they're not buying or not buying. Because of our self-driving feature set, it's sort of a nice to have. We think in particularly with R2, and as we move into the second half of this decade, that becomes a more important consideration. And so we've invested heavily. We have a very strong ML team that's been -- perception team that's been built to ensure we have what we think of as best-in-world solution in terms of perception stack, the way the perception is run. And you referenced it, Adam, but the compute stack that supports that.

Does Amazon or AWS help with that effort?

AWS helps in terms of using it to train our system. So...

Okay. They do the neural net training? You use them or...

Well, we use just some of their compute platforms yes, yes, in the cloud. And so that's another big question.

Yes, on the training side.

Yes, we saw your report. I mean, how things...

Okay. Sorry.

No, but you can train, you can have an on-site on-prem training. You can use cloud. Ultimately, there's a question of cost as to which you do, and I think long term, you'll see people use a hybrid approach. You've sort of baseload. You have something that's not on-prem stack and then you'll have some cloud to do some peak usage.

Questions for RJ? If you don't mind waiting for the mic, we can get it to you.

So RJ, in the context of ownership as your customers, as you have -- obviously, you have high customers right now because they're enthusiast and whatnot. As we move down the price scale with R2 and what not, it'd be more price sensitive to total cost ownership. Obviously, charging cheaper than gasoline, especially out here. But like things like insurance and tire or gig, which given the weight of the thing and given the higher torque, how do you think about managing those? Or you see anecdotal evidence of people that buy one to go ahead, no idea insurance of cost so much. I had no idea. I'd go through tires over 6 months, et cetera. How do you -- obviously, you wait to get wait. So if you get the weight down, that will help. But like in terms of insurance, it seems like insurance companies are pick to total one, if the battery gets in because they just don't know how to fix it. How do we get those costs down? Or how do we make this more accessible to the mass market as we move forward?

Yes. Well, specifically on insurance, we think there's a lot of aspects of insurance that are important to just think about here. So we think this is something that historically has not had a lot of involvement from OEMs. So typically, the OEM produces, delivers the vehicle to a third party to a dealer. And the dealer then takes care of customer action. They charge 10% to 15% to the OEM to sell it. And then there's another company that does the insurance. And the challenge with that is the insurance companies then removed from a lot of the core decisions that are made in the vehicle to properly assess both repair costs and importantly, risk. And the reason I call out risk is historically, the risk of a vehicle getting into an accident was entirely on the shoulders of the driver. Over time, the risk of the vehicle, getting the accident is going to increasingly may be on the shoulders of the vehicle. It hasn't talked they'll be going more and more towards the vehicle. And so we launched an insurance product that's in 49 -- I think it's 49 states today. We're about to launch to 50th state, but it's a great product. It's a profitable part of our business. And part of that is such that we can work very closely with the back-end partner who's actually providing the capital to provide the insurance to assess risk and to assess repair costs with complete symmetry of understanding such that we can achieve the lowest possible rates. And importantly, on the Rivian insurance product, your insurance becomes cheaper the more that you engage our self-driving feature set. Because statistically, our vehicle drives better than the best driver in the world. We don't -- our vehicle doesn't like look down for text. It doesn't get distracted by nice sunsets. So the -- we see that as a growing role for OEMs to play in the insurance world, particularly in the context of autonomy. Yes, tires, tire wear is depending on a lot of things, including how much you like to accelerate. So we have the data on this. Now it's fun to watch. My dad is really bad tire wear in his vehicle because he drives way too quick.

But rotating tires is also -- people don't do it. I don't know but it does help.

So if you're -- with an electric vehicle because -- a lot of electric deals, I should say, they're quick and they're fun to drive. So people drive them a little bit more aggressively. And as a result, you do tend to wear the driven wheels a little bit more. But that's something that is usage based. And what we found, thus far, is that we have customers who are going 40,000 miles in a set of tires. There are customers who are going 6,000 miles on the same set of tires. It's just very driver-dependent. And what we've messaged is to say, like if you're driving a vehicle hard, you're going to wear out your tires more quickly. I think from the weight point of view, as we move into products like R2, the difference in weight, you're talking 500 pounds to 1,000 pounds, it's not so significant that you're going to see materially different wear characteristics. And then the last thing I'd point out is we do a lot of work closely with the tire suppliers on compounds and the -- what we call like the efficiency tires or the low-rolling resistant tires, the compounds tend to be a little bit harder, so less sticky. So less good from a performance point of view, better from a wear and range point of view. And so as more and more customers at lower price points select the most range efficient tire, they may not realize it, but they're also selecting the most wear resistant tire as well.

Sure. please?

Okay. Can I ask as you, as we go towards the latter half of the decade, and you see autonomy become more important, how do you guys -- what's the house view on what percentage of vehicle miles travel do you think, from an autonomous perspective, deserved to be in owned by consumer run vehicle versus in more of a fleet, maybe ride-share kind of model? How do you guys see that developing over time?

That's a great question. Without necessarily putting a percent to it, our own thinking on this is we have these kinds of debates all the time, and they're really fun philosophical debates. And we ourselves have moved back and forth on the scale. The way I'd characterize it is we believe there's going to be the types of miles that are purely commoditized and point A to point B and where ownership of the asset is less important and where even the features of the asset is less important, it needs to be safe. It needs to be clean. It needs to go from A to B. But that doesn't represent a majority of the miles. And I think early on, like 10 years ago, when a lot of people were doing academic studies on this, there as wild numbers that said, "Well, 90% of the world is going to be shared fleet." I think what we see is there's still a significant portion of the world, certainly more than half -- not world, significant portion of miles accumulated that will be in things that are owned. And a lot of that is practical. I have a car seat that needs to stay in the car. I have my gym clothes were in the car. So there's practical reasons that customers will want to keep some level of personal ownership. But importantly, in the things -- regardless of whether it's a 90-10 or 80-20 split, we can debate those ratios. The things that are owned will tend to be more aspirational, not necessarily in price, but in terms of it's something that you connect with. Because if you can get your commoditized transport elsewhere, the thing that you own needs to be the thing that you have energy about it, you have passion about it. It's like I like the brand. I like the product. So it sort of comes back to one of the reasons we feel so strongly around building a strong brand identity with a really crisp and well understood by us perspective on how we make product level trade-offs, future-level trade-offs needs to be really, really, really strong. And if you do that well, you can build a really strong brand over time. That helps create that connection point.

Just with coming up on time. I just want to kind of fire a couple of rapid fire things your way and just kind of get your quick bullet reaction because we're kind of out of time. Number one cost opportunity for you over the next 6 months as you kind of head into the new architecture.

With new architecture with that?

Or is it the new -- what would -- give me both.

But for us, we have a big update that's coming next year with hardware, I referred to it. We call this our Paragon program. By far, the biggest is the ECU consolidation. And I actually would say, I think this gets way less attention as you talk about, which is great, but I think the ability to consolidate ECUs is not a few hundred dollars. We're talking multi-thousand dollar savings to move to a fraction of the number of computers in the car than what we've historically seen.

And then outside of that?

Outside of that, we have a number of improvements we're making in how the vehicle's processed through the plant.

Okay. And what we -- and where do you test these things?

So we have -- actually, funny, we have a pilot facility about 15 miles from here, and we're building the vehicle I just described. And the reason we do that, it's a big pilot facility, so it's like a mini production line. We build these in a pilot line to one, we need a lot of them, so for our full fleet. But we -- that line is actually run by our operations team. So we have leaders that come from our normal facility. And when we run pilot those, they are based here. And they work closely with our engineering teams to essentially work through any assembly process issue, sequence issue. And frankly, it's a learning from what we went through when we launched -- when we first launched, essentially our pilot run was when we were ramping production. So now we're going to be integrating in bunch of product updates into the plant. And the plant can't go down for months. It needs to be the plants down for a couple of weeks, and we come back on at full strength. So we're working through, as we speak, all those issues such that it's a seamless immediate sort of binary plant comes back on, and it's running very quickly.

Just finally, on Georgia, kind of what does the site look like now? And when could we actually start to...

Site is looking cool. We haven't put pictures of that yet, but we're excited. Our team was on site there, and I -- they presented me pictures this week. I mean there's lots of dump trucks, lots of earthmoving equipment. We're getting close to having all the grading complete. It's a big site. It's a 2,000-acre site. We're going to build it across 2 phases. And then early part of next year, the building will start going up. And then along with that happens, as you all know, once the grading work is done, the building design is completed, it happens very quickly. And then through the end of next year, we'll start to install some of the equipment.

That's awesome. RJ, thanks for spending time with us.

Yes.

Really appreciate it. All right. I wish we have more time.

Yes.