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

All right. Good afternoon, everybody, and thank you so much for joining us for this closing discussion for the day 1 of our conference, together with Rivian. I'm Emmanuel Rosner. I'm the lead U.S. autos analyst here at Deutsche Bank, and I'm extremely excited to be joined by Claire, who is the CFO of Rivian. Rivian is an electric vehicle manufacturer specializing in light and commercial vehicle production software and service solution for consumer and fleet customers. The company is targeting to produce 57,000 units this year. It recently unveiled its R2 and our R3 vehicle, with the R2 stated for launch in the first half of 2026. And just last week, Rivian disclosed their refresh redesign R1 vehicles as well. So extremely excited for you to be here today to discuss all these dynamics going on. Thanks for being here.

Thanks for having me.

So maybe to start, let's talk about these recent developments at Rivian. You unveil and started selling the second generation of your R1 vehicles late last week, incorporating some new technology and features but also designed for lower cost of production and better manufacturing efficiency. Can you talk to us about the main changes in the new vehicles, what customer's reception has been so far, even though it's only been, I guess, a few days. And whether you were able to liquidate inventories of the old model before June 6 when you unveil this?

Sounds good. So last week was a really exciting week at Rivian to bring our Gen 2 product to market. From an investment conversation we've talked a lot in the past about some of the cost-down efforts that we have within the product. But we haven't talked a lot yet about all of the net new features that some of these new technologies have enabled. And so now it was great to put our vehicles in the hands of many different elements of the broader media complex from influencers to traditional media players to experience the product for themselves. And I think that the review largely speak for themselves. We were really excited about what we heard back, which was our thesis going in, which is how do we significantly reduce the material cost of the product while also driving ease of manufacturability, but doing that in a way that the consumer walks away saying that this is an even better product as well. And we saw that truly in stages as we look at some of the media reactions to the product itself. I'm happy to go through some of the key changes that we made as well. First, we have introduced our own next-generation in-house drive unit that is powering our tri-motor offering as well as our quad-motor offering. And so if you saw the Gen 1 product was back with 0 to 60x of 3 seconds. Our tri-motor now does 0 to 60 in 2.9 seconds, while also offering expanded range capabilities of up to 410 miles if you're driving in conserve mode. Equally, for the true enthusiasts, our quad-motor offering is 1,025 horsepower. So when you think about the performance of the product, the torque that is available within this product, it goes 0 to 60 in under 2.5 seconds. And we put our -- a little bit of gamification into our software suite such that you can go into Rivian launch mode, time yourself going 0 to 60 or going that 0.25 mile to truly test out the performance of utility of this next-generation product. We've also offered new, more premium trims with the tri-motor and quad-motor offering. So really excited about what's coming next with some new color ways, new incremental Rivian music packages with Dolby Atmos that truly creates an environmental experience as if you're in an IMAX movie in your own vehicle. So really, really compelling offering as we think about some of the premium end of the spectrum that comes with tri-motor and quad-motors. One of the other significant changes that we made to the product that we've talked a bit about in the past is the move to a zonal network architecture. So we went from our first-generation product that had 17 ECUs powering the vehicle, and we've reduced that count down to 7. That's also enabled us to reduce our wire harness length by over 1.6 miles of harness -- of wiring that reduces 44 pounds of mass out of the vehicle. So again, back to the core theme around cost efficiency and design for manufacturability. It's a great example of our engineering teams that work -- that are continuing to innovate as we move from controllers that control the specific element of the vehicle previously. So you could think about our ECU controlling the climate controls of the vehicle, for example, to now truly having 3 zonal ECUs that are controlling the right-hand side of the vehicle or the left-hand side of the vehicle. So this [ lift] sits on the shoulders of our software team that are now mapping all of the core systems to these higher-power ECUs that are now in place within the vehicles themselves. One of the additional introductions we had with the launch of the Rivian autonomous platform as well. Again, we've increased the compute 10x in the vehicle. And we've introduced all new [ parts ]. We have 11 new cameras that we've designed in-house, 5 radars that allows Rivian to see 10 seconds ahead of you as you're driving or traversing down the highway. And so from a consumer standpoint, you'll see the clarity of imagery and in terms of the cameras, and it's also enabled by just the speed and processing power of these new NVIDIA [ drive or in ] chips that are powering this next-generation autonomy stack for us as well.

So can you quantify for us the cost or margin benefit from these new ones? How much of the improvement has to do with better supplier conditions versus cheaper new components or technology?

As we think about the overall efficiencies, this shutdown that we went through in April to introduce new technologies was also an opportunity for us to group a number of part changes as well so that we had a significant change in our bill of materials all at once. And this is truly what delivers Rivian on its path to positive gross profit in Q4, and we've talked a bit in the past about the material cost being the largest driver in the walk to positive gross profit for the business. As we think about the breaking points between drivers of true just pure engineering changes relative to some of the supplier negotiations, I would say it's sort of 60, 70, 30, 30 to 40 as we think about supplier negotiations relative to engineering design changes.

And a few months ago, you also introduced your future R2 and R3 more affordable vehicles. How much parts and technology commonality will there be between these and the new R1s?

So the key systems that will power R1 that will ultimately find their way into R2 are centered around the electronic architecture in the product itself. And so we often talk about the move from our first generation R1 to our second generation product as a bigger step relative to the step that we'll now take from our Gen 2 product to R2. So in a lot of instances, as we think about the ECUs, as we think about the software stack, if we think about the autonomy that will power R2, if there's a lot of shared commonality between what just went into the Gen 2 product itself, it then will be levered as we bring R2 to market. And in certain other instances, we'll have more of a evolution of drive unit that will go into R2, that's continuing to build on the core learnings that we've gone through as we've now brought to market 2 fully in-house, drive units and are working towards a third one for R2.

Let's shift a little bit about -- let's talk about the environment, and I guess, the demand backdrop. All this work you're doing is in the middle of a general backdrop of U.S. demand for EV that is maybe slowing down. We're seeing that in price cuts, rental car fleet, EV volume goals being lowered across the board by all sorts of automaker. Is demand for Rivian products being impacted? And if so, how do you address the current environment?

We're still pretty early on our broader road map as it pertains to building out many of our go-to-market capabilities and functionality. Some of that's evidenced by lower levels of brand awareness for our product. And so as we sit here today, the R1 is a best-selling EV in the market over $70,000. Rivian itself was a top -- had top 5 EV share in Q1 of this year. And we have the opportunity as we think about the launch of R2 to take all of the performance capability and attributes of that flagship product and translate it to a much larger accessible and consumer base as we continue on forward down the path. And so for us, it's continuing to drive awareness. Today, we're utilizing our physical infrastructure, both from our service network. So we have about 57 service centers across North America that we execute test drives out of. We've been building more in-house sales capabilities within that service network to further complement the physical or retail spaces program that we have as well to continue to make sure that more customers can experience the product for themselves because driving is the best way to sell Rivian, the more consumers that are aware of what we've built and have actually gotten behind the wheel the better. We've had some cars out here today. So hopefully, many of you guys have had a chance to test drive for yourselves.

You guided to 57,000 units of production this year. What have you assumed about the main trajectory for your product in order to absorb this production? And are you worried at all by the pricing environment for EVs?

As we think about the production cadence from a delivery standpoint, our guidance for the year has been that deliveries will increase from -- in the low single-digit area for both the consumer products as well as for the commercial vans. I think we've seen throughout the course of 2024, a lot of excitement around Rivian that stemmed from both the March reveal of the R2 and R3 and showing casing what's coming next, that's a great brand-building moment for our company. Equally, as we think about this next-gen offering and launched this past week and getting more awareness for Rivian and what's coming next. That gives us confidence in the building blocks that we're generating from a demand generation standpoint, as we think about a more test drives, more interactions with consumers and spreading word of mouth as well.

How is demand for the standard pack R1, which you started producing even before, I think the -- or at least offering before the shutdown and now sort of like started producing maybe with the LFP battery. Can you talk about the trim mix within R1 in terms of your production or demand?

As we think about the standard range pack, it's really an important entry price point for us. So for example, our standard range R1T starts at $69,900. And so for the consumer that wants to experience the brand, we've also seen it be a great tool to bring more consumers into our website environment into the R1 shop to check what inventory may be available for purchase as well. But it's not as if every consumer that may have been drawn to the site for the standard pack ends up with that standard pack as evidenced by some of our commentary on our Q4 earnings call where we actually saw an uptick in order rates in Q4 of our quad-motor offering when we launched the standard pack. But again, it was that curiosity and understanding the accessibility of the product on the lower end that drew more awareness for what we were providing.

Looking ahead, you said that after this recent factory upgrade, available capacity for R1 will be 56,000 units on 2 shifts before, obviously, any shutdowns, et cetera. If I add a stable number of EVs, it doesn't necessarily suggest much volume growth in 2025 until R2 is launched, sort of like the following year. First of all, is this the right understanding that 2025 is sort of like stable-ish type of volume rather than real growth? And if so, is it a function of demand for the R1?

So part of the efficiency that we went through in our retooling of our normal facility was to increase the line rate of our R1 line by 30%. And so prior to the shutdown, on 3 shifts of production, we could build 65,000 units in an annualized basis. Now with just 2 shifts of production, as you mentioned, Emmanuel, we can build 56,000 units. . And so we're driving significant operational efficiency into the production. And we're continuing to watch the broader market backdrop and competitive landscape as we think about what would the signals need to be for us to add incremental capacity prior to the launch of R2 in the first half of 2026, which will come online within our normal facility as well.

In terms of the EDV program, can you elaborate on the current capacity for it? And do you expect to accelerate volume in the out years? Or will Amazon take steady deliveries until all orders are satisfied?

On the commercial van side, our capacity within our normal plant is 65,000 units of commercial van capacity. When we bring R2 into normal, the nameplate capacity of the normal plant will be 215,000 units of capacity and we'll have a maximum capacity of 155,000 units of R2. And so for example, if you built 155,000 units of R2, you would have 60,000 units remaining to split between R1 and our commercial van program as a whole. . And so as we look at the longer term of normal and its output, we have a lot of operational flexibility to flex between production volumes within each of the lines for R1, R2 and the commercial vans themselves, such that we can orient the plant towards maximum gross profit contribution for Rivian that allows us to increase our cash flow generation out of the normal site as a whole. And today, we're just building on a single shift in normal for our commercial vans and not even a full shift at that. We've talked a lot in the past about the longer-term sales cycle required for the commercial van business itself. So we're in market speaking to a number of large B2B enterprise players about the capabilities, the total cost of ownership advantages that our van can provide, and we truly believe it is best-in-class in terms of performance within the commercial van space in the market itself, but it will take us some time to build up more of the longer-term demand trajectory beyond the Amazon relationship that we have as well.

Let's pivot a little bit about pricing and margins. As we stand here midyear through 2024, can you talk about your latest thinking on margin trajectory this year? I think you said Q2 will be messy. Why is that? And are you on track for gross margin profitability by the end of this year?

So as we think about some of the dynamics of Q2 margin, Q2, we've used the word messy in the past because it will be our lowest production volume quarter as a whole. We were down for the vast majority of April with the plant retooling, and then have been in the ramp phase of building back up production volumes in the facility. Beyond that, we're also what we're selling in Q2 is really Gen 1 inventory. And so as we think about at what point do we start to get into the sales of more of the Gen 2 product, it's not really until Q3 and Q4, where it's much more material from an overall contribution standpoint as a whole. And then as we think about the commentary that we've made in the past on our confidence road map to Q4 gross profit positive. As we sit here today, we've had a great opportunity to demonstrate the operational capabilities of our manufacturing, engineering and ops and facilities teams in a very compressed time frame of making significant changes and improvements in our production facility that's now ramping and scaling of high quality production. We've also now seen the launch and start of production of the product, different variants that are coming down our production line in which we have contracts in place for the supplier -- renegotiated supply contracts for what we're building in the plant itself. And great receptivity from the broader media community as well for what's coming next.

So based on what you've seen post retooling and re-rate, the input cost now from your new supplier relationship, the rate of the factory, some of the cheaper components [ that's not you ], this is what gives you confidence in getting to that profitability by the end of the year?

That's right.

How should we think about the trajectory of profitability as we move forward and into next year? Is next year a year with more volume, more cost improvements? Will there be smaller or larger investments since you will be getting closer to this in R2 type of launch? I guess what happens beyond this sort of like near-term milestone of gross margin positive?

It certainly doesn't stop there as we think about reaching gross profit positive in Q4 of this year, and there's certainly a long-range plan that drives Rivian to support its longer-term target margins of 25%. As we think about 2025, in particular there, there will be some ongoing commodity cost tailwinds that will continue to pull through our material costs within the business. So that will be a contributor for us. . One of the other dynamics that we'll see in '25 is from a mix standpoint. So in '24 as we're thinking about the ramp up, we started with standard range [ quad-motor ] vehicles, and we'll be ramping up towards the back half of this year with our tri-motor configuration. But quads aren't going to come into play until '25. So from the full suite of offerings, we won't have that until the 2025 period that will be sort of another driver of the business as we have the current cost structure for the full year of 2025 versus really just the second half of 2024.

But then is there an increase in investment as you get closer to this R2?

So the guidance we've had from a CapEx vantage point is that we'll spend roughly $1.5 billion of CapEx, so it will be slightly higher than the $1.2 billion guidance that we've had for this year.

Got it. You were talking about these raw materials cost coming down. Can you update us on the input cost, deflation or that you're observing? We've obviously been hearing about these battery prices coming down as a result of the demand environment and the supply environment. But what are you specifically seeing? And what would be the timing of you seeing those benefits?

There's a lag effect in terms of the market spot prices coming down and then when do we actually realize that from a delivered production perspective. So for us, we'll see more of that begin to take hold in the second half of this year. And then as I mentioned, we'll see more of it fully taking effect in 2025.

And then would you expect the most recent round of China tariffs to impact your cost at all? I'm thinking, for example, a potential impact on the economics of your LFP battery pack?

Today, our -- we use LFP for both our commercial van program as well as our standard range pack in the R1 product itself. The current dynamics that have been noted in the press around some of the potential changes are still too early. They're in a comment period, so it's hard for me to truly comment on that question, in particular, and knowing that it's still a little bit in the work.

But it is imported from China currently the LFP pack?

Yes.

Okay. Let's talk about R2. Now that you've revealed the R2 vehicle, are you on track for production and deliveries in the early 2026? And since you're going to use the normal Illinois plant, is there a potential for a faster time line on the ramp in production?

As you can imagine, our goal is to move as quickly as we possibly can to bring R2 to market, but it's not just Rivian, we need to mobilize supply base. As part of that ramp, we need to integrate a number of new pieces of equipment within our facility. And so I would characterize the first half of 2026 timing as being appropriate for our ramp timeline as a whole, but know that we're doing everything that we can within our capacity to continue to push our team to pull time out as well.

So what is the work that you need to execute on to get ready for R2?

So today, the work is around -- centered around sourcing opportunities, securing supplies agreements and contracts for each of the respective parts of the product itself, continuing to source all of the equipment that will go into our production facility, and in many cases, contracting some of the work to increase line rate, as we think about the investments that we'll be making in our paint shop, for example, that will be one of the key investments to unlock the move from 150,000 units of capacity today up to the 215,000 mark.

What will R2 be in terms of price points? And what's the addressable market? And then where do you see most of the competition coming from? And is there a risk that it could be much more at that price point by then?

So the starting price point for R2 is $45,000. We see R2 really stretching up to -- in and around the highest and most premium configurations of R2 sort of ending before R1 begins. And as you think about the relative pricing architecture of the products themselves. And I think that as we think about the addressable market for R2. For us, we think about it not just in the lens of R2, we also think it in the lens of what we call our midsized platform that will house not just the R2 products, but also R3. We designed it for global markets, so that we're in a position to not just sell in North America but expand production to Europe over the longer term to build our brand globally. And as we think about the broader competitive set, I think one comment I'd make is that we are always looking to drive innovation within the market. And so if you looked at our R1 products, were already award-winning, fantastic products in terms of performance and capability and utility. And we just made them even better. And so it's not as if we necessarily have to see competition to continue to push ourselves to drive innovation across the board. It's something that we're naturally doing day in and day out as we say, how can we make things better and cost less because our core objective is to ensure we're driving widespread EV adoption across the board, which is going to naturally have to come hand-in-hand with much lower cost vehicles over the longer term.

How are you thinking about profitability of the R2 vehicle? And what are the levers to reduce the cost of goods sold in order to make it profitable?

For R2, we believe that R2 products can really hit Rivian's internal targets as it pertains to vehicle margin profile, which from a vehicle standpoint is approximately 20% margin target over the longer term. I think one of the key changes that we've seen, which has been really encouraging for us is as we've gone to market to source for R2, we're seeing Rivian's position in the market dramatically different than when we were in market sourcing R1 or even when we were in market resourcing and going through the supplier cost-down efforts as part of our Gen 2 launch as well. So we're seeing that continued progression. And I would say that there's increasing confidence in how our products are resonating and the market share we've been able to achieve with a far more premium product that gives people confidence as they think about their desire to strategically partner with Rivian as we open up a much more broad addressable price point with R2 and R3 future.

So is it mainly about sourcing?

Sourcing is a key component of it. I would say that it's -- the combination of sourcing and then the continued advancements in design for manufacturability as well that are certainly key drivers of -- and the efficiency we need to deliver for R2 to be profitable, much more quickly than we thought with R1 product as well.

I think you're seeing it invested in a couple of weeks in normal. You've already shown us the R1 redesign, the R2, the R3, the R3X, what can we expect at the Investor Day?

Well, one of the opportunities is to go and drive and experience the Gen 2 product for yourself. And as you think about -- outside of our normal facility, we have test track and off-road course there. And so it really allows people to put the vehicle to the test to see the performance for themselves. So that's a key market opportunity. We're also focused on how do we continue to build confidence with the investor community on our financial trajectory as we think about, first, our path to positive gross profit, and over the longer term to positive EBITDA and positive free cash flow as well. So certainly focused on making sure we're sharing the confidence we have in our near and long-term road map as a whole.

And then just maybe a couple of questions on capital and capital allocation. what's your latest thinking about timing of the Georgia factory? And when would spending be needed?

We haven't given specifics around timing for investments for Georgia. We'll continue to look at the broader capital markets as we think about the right timing to pull the Georgia facility into the longer-range production plan, but remains very committed to the opportunity to build R2 and R3 in Georgia.

Once you estimated runway with the current cash position, when would you need to raise more capital? And what options are you considering?

What we've said publicly in the past is that we have cash on hand to fund operations through the launch of R2. We'll continue to be opportunistic as we assess the broader end capital market about funding options. And sort of the Georgia timing relates to what that road map looks like for the funding requirements for the business as we think about the flexibility we have to build the production out in a more sequential basis versus building out Georgia in a faster related time line.

So through first half of 2026, there would be enough cash, but you would be opportunistic before that.

Yes.

I think we have a couple of minutes for any questions in the room. Is there any? I wanted to ask you about software and services. The -- it was a big part of the Rivian story during the IPO process. As to the refresh R1 software subscriptions or premium connectivity package, can you talk about the size of the opportunity?

Software and related services is a significant long-term opportunity for the business itself. So what you're seeing with our Gen 2 launch is, the launch of our Connect+ and so that is premium-related connectivity for your product that enables wireless hotspots in the vehicle and access to all of the great infotainment features that we just recently launched Google Pass. So if you're waiting at a charging site, you can pass your Disney+ or Netflix onto your screen and watch with your family or kid in that capacity. So we're excited about the continued offering that we're bringing to market there. And then one of the other significant unlocks for us is with the launch of our Rivian Autonomy platform, we'll now be unlocking more paid features as well as we think about our ADAS road map, which is a key driver for the long-term recurring margin opportunity that we see embedded within our software road map.

Great. Before formally wrap it up -- we do have a question, please.

Where the relationship with Amazon stands? And kind of the commercial business overall. My sense is Amazon might have kind of delivered -- or delayed taking some of their deliveries. What's their commitment to continuing to buy vehicles on the Rivian platform? How long does that carry you? And any sense of when we might hear about another commercial customer coming on with Rivian? And then how important is that to the business model?

As we think about the commercial business and relationship with Amazon, we have maintained a really strong relationship with Amazon. As a whole, Amazon is our largest shareholder and partner, and obviously a great B2B customer, given that they've been fastest to transition their fleet to electric vehicles as well. As I mentioned with Emmanuel's question previously, the longer-term sales road map does take some time as we think about building relationships with other enterprise level consumers of our products, and building out the longer-term pipeline to a much larger scale orders within the business. We still have a lot of conviction around the opportunity at hand in the commercial space. And as I mentioned, believe that we truly have a differentiated and outstanding product in the market that can capture meaningful long-term share. And the more that we produce, the more fixed cost leverage that we have within our normal facilities. So that certainly becomes a tailwind for us as we produce incremental commercial volumes over the longer term.

Before we wrap it up, I was tasked to formally remind everybody and invite you to our reception on the rooftop of Deutsche Bank Center, which is on the way out here to the right. Beautiful rooftop overlooking Central Park with most of the global auto team here at DB. So Claire, thank you so much for your time and insight. And thank you, everybody, for joining.