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

Okay. Great. Thank you, everybody, for joining. My name is Mark Delaney. I cover Rivian for Goldman Sachs. Very pleased to have with us yet again Claire McDonough, the CFO of Rivian. Thanks for joining.

For having me.

Well, I thought maybe to kick things off, I'd ask you a little bit more on the company more broadly. And Rivian was ranked #1 by consumer reports in terms of owners wanting to buy from the company again. And I know something you guys think a lot about. So I'd love to get your thoughts around why you think that is.

Sure. So as we think about the brand positioning that we've built and the customer loyalty that we've been able to earn over the course of the last 3 years, it's largely been enabled by the central thesis that RJ started with, which was we didn't want to just build the best EV, we wanted to build the best vehicles on the market as a whole. And so that started with the opportunity that we've had to really debunk the way people thought about an EV at the time. We were one of the -- we're one of first to market with an electric truck, for example. And so from a development standpoint, we wanted to create a product that could be the best off-roading vehicle out there. The best on-road in terms of performance, capability, utility. Lots of amazing sort of brand attributes and features like our embedded flash light that creates that sort of surprise and delight for consumers. But at its core, also create of course technology stack that enables the product to get better and better and better over time. And so as you think about the engagement that we have with our consumer base, it centers around that last [indiscernible] update, the opportunity for them to experience new features, new attributes, new driving [ stance ] dynamics that continue to unlock the power of their product as well. And so I think that, that is really center to why Rivian has been able to achieve this award-winning status, has, right, the leading share in the market around intent to repurchase, which is 900 basis points higher than the next OEM as well.

That's great. And a lot of us, I think, can certainly see some of those things when we had the opportunity to be owners or do test drive so that's wonderful. Maybe moving to demand. Can you talk a little bit more around what the company has seen in terms of demand? And what gives you confidence in low single-digit volume growth for this year?

The demand environment is a challenging one is as a whole as evidenced by a lot of comments made by other OEMs in the space and the high level of incentive spend that we're seeing across the board. And this is a challenge, it also exists within Rivian beyond the broader macroeconomic backdrop that we are playing in as a whole. We also have some acute supply-related challenges. There were some news a couple of weeks back around Rivian having to stop production of our commercial vehicles based off of the supplier challenge that we had in getting parts at speed and at scale that we're looking for. Our teams are working day in and day out, 24 hours to resolve these challenges and issues. But it also has impacted how we think about the availability of our full variance of products right now from the consumer standpoint. So if you go, for example, on our website, and you look for a R1T, there's very limited supply of R1Ts given the way that we ramped up production over the course of Q2 and into Q3. Starting first with our R1S, the standard pack product, introducing our Max Pack product and building from there. And our go-to-market teams are essentially focused around how are we continuing to grow awareness for our brand, given the fact that today, we're not yet a household name across the country. And how are we getting more and more vehicles, to your first question, Mark, on the brand experience, into the product itself because that is the best sales pitch that we can have is just driving and experience the product for yourself in the market. So we've unlocked sales out of our service centers, to unlock 60 different physical locations for consumers. We've opened a number of new spaces. We opened Boston just last week. San Diego, Nashville, Austin, Texas over the last couple of months as well to continue to expand Rivian's physical presence across the board as our teams are focused on continuing to drive demand for our product and increase our overall order rate.

When I take some of the comments you just made a challenging macroeconomic backdrop for the entire industry, some of the supply chain issues. I mean, does that change the view that you can grow low single digit or the shape of how the year might look?

So as we've talked a little bit about in Q2 -- Q3, we anticipate that having lower overall delivery volumes. And part of that was driven by the fact that we've had depleted a significant portion of our R1 inventory as we sold down significant portion of our Gen 1 product. While we are starting to ramp up production of our Gen 2 products within our normal facility. And as I mentioned, some of the supply chain challenges that we've had impacts the rate in which we're now building our product as a whole. And that plays into the diversity of offering that we can provide to consumers that sort of feedback into it. So the teams are focused as I mentioned, on continuing to drive and increase our order rates and increase brand awareness as a whole so that we can continue to drive towards our outlook.

Okay. On the last earnings call, you commented that R1 potential output with the current 2-shift operation is 56,000 units per year. Is this the run rate we should expect in 2025?

So as we think about 2025, there's a couple of key items to point out. First of which we'll have a significant level of downtime in the second half of the year to integrate R2 into our facility. So today, we have 150,000 units of capacity within our facility. And in normal, we'll be increasing that capacity to 215,000 overall units. And so -- there's significant work happening in many of our shared shops within the plant in that time frame to unlock the increased total nameplate capacity of this facility as a whole as we bring R2 online in the first half of 2026. So certainly, that will have an impact in terms of the overall production output for 2025 as a whole. And we're -- as we talked a little bit about on our last earnings call, anticipating continuing to run 2 shifts of operations on our one line and then a single limited shift of operation on our commercial online next year.

How quickly could Rivian flex up to the 85,000 potential capacity for R1, if there was sufficient demand? And what might it take to have that kind of a demand environment?

As we think about the opportunity, it's working with collectively with the supply chain. So for us, we would need our supplier partners to continue to invest in their own capacity, labor forces, to support a third shift of operations within Rivian. It certainly is available an option to your question, if demand is available to meet that increased volume. However, as we look at the overall composition of the 215,000 units of installed capacity that we'll have in the future will -- that will be split between a total maximum capacity of 155,000 units of R2 available volume, we'll have the 85,000 units of potential in R1 and then 65,000 units of potential volume with our [ commercial van ] program. Now those figures don't add up to 215,000. And so that gives us the opportunity to flex between our shift patterns, between each of the 3 vehicle lines to optimize for gross profit, optimize for the demand environment that we're seeing at the time and gives us a lot of financial flexibility as we think about the composition of our performance and production plans.

Okay. Speaking of the commercial platform, what type of use cases beyond last mile package delivery could be supported by that?

There's a lot of great opportunities for us to utilize our commercial van program for other end markets beyond the last mile delivery space as a whole. So we collectively use our van internally as our mobile service vehicle. And so those vans are opted with everything from on-the-go tire change equipment, to service your vehicle at your home. So that's sort of one example of a different service level use case. And you can imagine many others, whether those be in the commercial delivery field, servicing industries, can utilize our commercial vans for a number of different applications as well.

I did see on my way to the airport this weekend, a R1T being used as a business vehicle. So multiple ways for incorporations to the Rivian users.

Yes.

And maybe help us understand how long might it be before commercial shipments could be material beyond Amazon?

As we've talked about, 2024, it's really a year of pilot development work with many large, scale commercial fleets as a whole. And as we look ahead, we think about the sort of second half of '25 as starting to be the early foundation of more significant volumes of commercial vans, sales opportunities as a whole as we take those pilot fleets and convert some of them into larger scale orders. And for us, it's not just about selling someone a vehicle, we're trying to support and service those customers through the end-to-end life span of the product itself. So in many cases, there's complexity in building out service-related arrangements with our commercial counterparties. We're also helping them understand what it will be from an investment in their own charging infrastructure to support, bringing EVs into their internal fleet, and helping teach them about a lot of the total cost of ownership advantages that an EV may enable for them over the life span the product. Knowing it may have a higher upfront cost but a much lower cost to operate in its life span. So our teams are spending a lot of time with many of these suite operators to help on that education front as well.

Rivian has a number of opportunities beyond just selling the cars themselves, software services, regulatory credits. So maybe you can talk a little bit more on some of those other initiatives at the company. And help us better understand how material the software services business is for Rivian today? And what are some of the biggest drivers of that?

Rivian's a distinct advantage is in the opportunity to own similar to the commercial opportunity we just outlined, own the end-to-end life span of their product for commercial and consumer customers as a whole. And so we have the opportunity to engage in everything from financing and insurance, to the remarketing efforts of your vehicle that you may be trading into buy a Rivian. As well as in fourth quarter of this year, we'll be turning on the first new Rivian vehicle platform internally as well to bring more customers into the fold of our products and our brand. And then beyond that, we have many of the software-enabled services. And that, first and foremost, started with our FleetOS offering such that Amazon has a subscription for every commercial van that they sell in the market. And then beyond that, we recently launched our Connect+ offerings, which is an advanced connectivity and infotainment feature set that consumers can pay on an annual subscription or monthly subscription for. And then '25, we'll be launching some paid features for Autonomy platform as well, which we're excited to bring to market as a whole. So in aggregate, there is meaningful both cost and profit opportunity as we look at the software and services space in aggregate and see meaningful share that Rivian can occupy in fully engaging and creating and optimizing the customer experience for the full lifespan.

In terms of driver assistance, what type of capability do you think is needed for Rivian to have materially higher monetization? And does the company need to get to eyes off capability in order to enable that?

As we look at the autonomy space, we see autonomy over time becoming more and more important component of purchase intent for the product. So while there's certainly a significant amount of direct monetization features, we also believe that autonomy creates more of a large-scale margin platform opportunity as you think about consumers' willingness to pay for premium features in the vehicle, and what that can able for them from an experience perspective. When we look at our road map, the Gen 2 truly marks the first in-house Rivian autonomy platform from an end-to-end standpoint. And our AI-first approach in autonomy, we think, will help enable Rivian, the same way we've seen continuous improvement in our software development road map. The same will be true as we look at our autonomy platform and the opportunity that we have to continue to drive and capture Rivian miles amongst the fleet of vehicles that are operating on the road today, and utilize our capabilities both with in-house simulations as well as our fleet to continue to drive performance and upgrades into the products themselves over time. So we started, first and foremost, with autonomy on a safety -- from a safety standpoint and approach. But our ambition over time is to continue to add features that give consumers more of that convenience of time back over time as well.

That makes sense. Regulatory credits are also a key source of profit improvement. Can you give more color on how the market for regulatory credits is evolving not only this year but over the intermediate-to-longer term?

On regulatory credits, we've seen the market continue to increase in terms of broad scale, non-EV focused OEM demand for credit as many of those OEMs have leaned away from some of their own electrification strategies and approaches as well. And so as we look, this becomes an important funding source for the business to -- as we talked about at our Investor Day, we have $200 million of reg credits under contract for 2024. And this creates a nice opportunity for Rivian to earn very high-margin attributes on the vehicles that we're selling in market as well and certainly is a focus for our team.

Maybe talk about the future product road map, R2 was an important launch, it's the company's 2-row SUV, plan to start production is the first half of 2026. Can you tell us more on how development of the R2 is going?

The R2 development is going well. We're in flight with many of our sourcing efforts with the supply chain, which is an important component to making sure that we're on track from a timing perspective with R2 launches as we talked a little bit about. We're also planning some downtime in the second half of 2025 for us to integrate many of the new in-house shops into our manufacturing facility and plant. And so those efforts are also underway as we were starting to kick off a new building for our body Shop and general assembly facility in Normal as well.

Maybe you can talk a little bit more around the demand response to R2. You had a very large number of preorders placed within the first 24 hours. Anything else you can share on how R2 has tracked in terms of demand?

R2 is -- people see R2 out there and just love the product. So the #1 question that we both ask ourselves and you all asked us as well as how can we go faster with R2. I was down in Pebble Beach a few weeks ago for the Car Show, and we had R2 and R3X there and consumers are so excited about what's coming next. And so we've been doing a little bit of a vehicle road show with R2 and R3 across the country, driven the excitement that the products are certainly driving across the board and as we're trying to drive greater levels of awareness after a broader addressable market. They've been very helpful in enabling and helping that as well.

Do you think R2 attention is helping or hurting current R1 sales?

I think it helps R1 sales. I think to a certain degree, there's misconceptions in the market around the price point of our R1. And so given some of the IRE benefits on leasing, I think consumers are surprised that you can lease a standard pack R1 in the $600 a month range as a whole. And so we're actually seeing some consumers that are bridging themselves with a 24-month lease to get to when Rivian be producing R2s in the market as well.

In June, the company announced a proposed joint venture with VW for your electrical and electronic architecture. Can you give additional color on how that is developing towards a definitive agreement and what is left to be worked out?

We're continuing to work closely with the Volkswagen Group. As we mentioned on our Q2 earnings call, we anticipate closing the transaction in Q4 of this year and are continuing to progress on many of the technical milestones associated with the joint venture. Wassym, who's our Chief Software Officer, spoke on our Q2 call about the continued development work that we're doing to create more of a drivable demonstration vehicle for Volkswagen Group to take out the core ECUs that they had in their products, mainly from Tier 1s and replace them with Rivian's [ zonals ] to showcase the capability and performance that Rivian can help unlock for many of their future products as well.

In the past, Rivian had an investment from Ford and an MOU to partner with Mercedes for electric vans. We've also seen lots of proposed partnerships in the auto industry over the years. So as you think about some of these other situations either that Rivian specifically has been involved with or the industry more holistically, maybe can help us better understand how that influence the way you're trying to structure the VW joint venture.

One of the advantages of the Volkswagen technology joint venture that we have is the components of what's included in that, which is our electrical hardware and our software stack. Part of the advantage of focusing on those 4 technologies is the extensibility and scalability of the way that we built those technologies, which can now be applied to a much larger spectrum of vehicles in the market. So I would characterize that as being quite different relative to some of these prior partnership opportunities that Rivian has evaluated in the past. And our engineering teams are really excited about the opportunity we have now to solve for the full spectrum from the most premium vehicles to the entry-level price points. And how we leverage our capability set and shared technology stack and software stack to flex up and flex down the spectrum as we think about the opportunity at hand in that partnership together with Volkswagen Group.

That's helpful. In addition to the $5 billion in funding from VW for the proposed joint venture, Rivian is also expecting incremental benefits through cost savings, operating expense efficiencies and potential revenue synergies. Can you give us any more color, in particular, with some of the expense efficiencies that you may be able to see?

We'll be able to provide more color in Q4 once the definitive agreements are finalized. However, conceptually, the way to think about it is, today, we have an electrical hardware team. We have a software team, which Rivian pays 100% of the cost of that team that's been developing for Rivian. Now the majority of those teams that are focused on these core elements of our products will go into the joint venture and be shared from an actual capital perspective between both parties. So that creates inherent value as we think about the sharing of the 4 technology stack, which, as I mentioned, can be leveraged and shared across both vehicle platforms as a whole.

Maybe talking on Europe, Rivian has been selling the commercial vehicle in Europe. Have you been surprised at all by anything you've experienced as you've been selling vehicles internationally?

Beyond the sales of our commercial vans to Amazon in Europe, which are predominantly in Germany, we've been selling in Canada as well for our R1 products. And so building up more of that international capability set. And part of this thesis with some of the work with Amazon in Germany was also to create this entry point for us, so that when we're bringing R2s to market, we have more of that inherent foundation already in place. We're not starting truly from a clean sheet of paper as well. So that certainly plays true as we think about Rivian's future ambitions to sell R2s into global markets beyond the North American one as well.

And it sounds like R2 then is the vehicle we should expect first to be sold in Europe for consumers? And any sense of when to think about that timing? I would imagine you'd start delivering in North America first, but how long before we can envision Europe?

So I would certainly characterize it as R2 was designed for global markets. The intention is for us to service not just the North American market but international markets as well with that midsize platform. But we'll certainly start with sales here in North America and then expand in a manner that allows us to build out the brand inappropriately -- sorry, appropriately with each of those international markets as we think about the continent of Europe.

Okay. And some financial questions, if I could. The company is expecting a modest positive gross profit in the fourth quarter of this year. How are you tracking towards this goal? And as you think about factors like lower material costs, volume and nonvehicle revenue, how do they get you to that target?

Sure. When we think about the 3 key drivers of our path to positive gross profit. The first is variable cost improvement. On a variable cost side, we have contractually driven many of the changes through the shift from our Gen 1 product to Gen 2 where we changed out roughly half of our material costs in our vehicles to drive to a much lower cost structure. At our Investor Day, we outlined some of the pinpoints from our large pack dual motor product from Gen 1 to Gen 2, which resulted in about a 20% reduction in our material cost in aggregate. So we have line of sight into the step changes that's happening on that side of the equation. On the fixed cost element, as I mentioned in your prior question, we're still working through the supply chain impact so that could impact the fixed cost leverage that we'll be able to achieve should we not be able to resolve some of this acute issue in the near term, but we're working hard to do so. And then as we think about the revenue per delivered unit have visibility, as we outlined in Investor Day on the impacts from regulatory credits, we'll be unlocking some increases in terms of the sale of used Rivians, which will also enable more of our early customers to trade in their Gen 1 product for a Gen 2 product, now that we'll be having our tri-motor vehicles available in late Q3 and into Q4 as well. That allows consumers to really step into a product that has outstanding range within conserved mode, enabling over 400 miles. But also, 0 to 60x that will sort of surpass our original [indiscernible] motor and Gen 1 products as well.

Very good performance.

Yes.

The company also expects a modest positive gross margin in 2025. Maybe talk about how you see profit drivers next year and how that may differ from what you're thinking about for this year and for the fourth quarter?

Sure. As we look to 2025 from a profit driver standpoint, we'll have our Gen 2 product for the full year. So unlike this year, we're really only selling our Gen 2 product in Q3 and into Q4, we'll have that available for us from a cost perspective for the entirety of 2025, which is a key enabler for the step change we anticipate seeing from a cost perspective. The other components as we think about tailwinds are enabled by continued commodity cost dynamics. From a supply chain perspective, many of our contracts are [indiscernible] looking, and so we'll see continued benefits as we've seen some of the commodities come down over the course of this year, that will help create tailwinds for next year as a whole. There'll also be some drivers as we think about the launch of our Quad-Motor in 2025 that pushes ASP up a little bit higher as well above our tri-motor offering and creates sort of that pinnacle of the Rivian R1 portfolio from an ASP standpoint, importantly as well. We also anticipate next year we'll have comparable regulatory credits relative to 2024 that will help drive meaningful opportunities as well for us.

That's helpful. At the Investor Day, you spoke about trying to reach positive adjusted EBITDA in 2027. Can you help us better visualize what would need to happen for that to occur, in terms of things like how many vehicles a year you might have to sell as one of the key KPIs we should be thinking on?

In the 2027 time frame, we'll be well-positioned to more fully ramp up R2 production within our Normal facility. And so what's centered around that 2027 outlook of achieving EBITDA positive will be not full capacity of the Normal plant, but starting to approach somewhere in the ballpark of that 200,000 unit a year milestone.

Okay. Software services aftermarket. Those are some of the higher margin opportunities you have. How do you think about those contributing to the company's 25% gross margin target and getting to that positive EBITDA level?

We see software and services as a key enabler to Rivian achieving its 25% long-term gross profit target. As we look at the margin differential, we've talked historically about vehicle gross profit in and around the 20% ZIP code and then seeing software and services having the opportunity to unlock 65% or even greater in many of this truly software-enabled services opportunity for the business to significantly improve that rate. Albeit they'll be much smaller from an overall revenue standpoint, relative to the sale of vehicle.

Okay. Assuming the $5 billion VW funding comes through as planned from 2024 through 2026, how are you thinking about any additional capital needs that Rivian may have?

We'll continue to be opportunistic as we look at future raises for Rivian over time. But as we mentioned in our Q2 earnings call, the $5 billion of capital from Volkswagen Group enables Rivian to fund the launch of R2 in Normal, build into Georgia and it enables Rivian a path to free cash flow positive, which is obviously a critical milestone for the future.

Speaking of the future, you also have the Georgia facility that you've announced. Maybe help us better understand when Georgia may go into production?

We haven't announced specific timing for Georgia other than the fact that it will follow R2 in Normal. However, we've continued to make certain investments that gives us a bit more flexibility in terms of the time lines to turn the Georgia facility online as well. So I would characterize today as we have flexibility as we think about the exact time line to turn that facility online for the business.

Got it. We have a couple of minutes left. I do want to see if anybody in the audience has a question. Otherwise, I can go ahead and ask the last one or two. Yes, we've got one in the front. If you don't mind just waiting for a microphone.

Thank you. It appears that range anxiety is an issue for a lot of consumers and a lot of new competitive vehicles are still coming out with a range that begins with a 2 not a 3. Just wondering what your views are? And how much further can you extend the range over the next few years?

Range anxiety is certainly a key constraint to EV adoption as a whole. And I think there's 2 ways in which you can attack the challenge at hand. One is through availability of highly reliable charging infrastructure across the board. Most consumers charge roughly 90% of all of their use case needs in their home. And so I think that as consumers evaluate the trade-offs of the couple of trips that they're going to make in a year, the charging network will be more and more important in their comfort level with that range anxiety as a whole because it's also important that the battery pack itself is the most expensive part of the vehicle. And so the challenge with just increasing battery pack sizes as a whole is the cost element of what that enables and the unfavorability from a mass perspective, that it also results in as well, which is a little bit of a countervailing force as you think about getting consumers to make that trade-off and trying to get EVs down to more parity level pricing with ICE vehicles in the market as a whole. So for us, I think the key enablers and that's been a big part of why we're continuing to invest in building out the Rivian Adventure Network of charging locations, given the opportunity for Rivian to ensure that we have highly reliable charging for our customers. We've also opened up our Rivian network to have availability to the Tesla Supercharger network with our NACS adoption opportunity on a go-forward basis. And we're trying to get more and more adopters out to our customers as well, so they can take advantage of that as a whole.

Yes. Sneak one last question in from the back.

So electric vehicles have still a fairly low market penetration of about 1%, which means, in my mind, there's a lot of white space to go after. Tesla has a very interesting position in the market and you have threats from China. What do you see as the potential development of that competitive landscape? Who ends up taking those -- that 99% of the market? And what are the driving factors on who's going to win?

A great question and something that we look at a lot. And when I started the conversation today, I spoke a little bit about the premise that we started Rivian with, which was imagine a world where every vehicle is electric. And so competing on the fact of being electric is not a point of competitive differentiation. We need to compete with the best products in the market as a whole. And that's really the way that we've approached this opportunity as a whole. And to a certain degree, because of some of the resistance of people that haven't tried something new, haven't driven an EV yet, it does take us that opportunity to create a product that really allows consumers to say I had no idea that an EV could do this. But an EV could truly enable adventure and experiences for me as a whole. And so we -- it's been a central part of our brand DNA and how we engage and unlock the opportunity of how we communicate and connect with our products in the broader market as a whole to drive brand differentiation, to create a unique swim lane for Rivian. And ultimately, to go after the 90-plus percent of consumers that are today buying an ICE vehicle versus an EV, and helping them think differently and give EVs a chance as well.

Great. Well, unfortunately, we're going to have to end it there. Claire, thank you so much for joining us.

Thanks, Mark.