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

So again, I'm Ben Kallo, cover sustainable energy and mobility. Very happy to have Claire McDonough here, the CFO of Rivian. Thank you, Claire, for joining us.

Thanks for having us.

So I know it's been a busy 24 hours. So thank you for joining us. Maybe we'll just start there with the VW relationship, and then we can maybe work backwards to some other things. But last night, you guys announced the closing of your JV with Volkswagen. Maybe you could just start by telling us the background on how the relationship was formed and then what occurred leading up to the closing last night of the relationship.

Sure. The relationship started a while back. And as you can imagine, for a transaction such as this one, our technical teams have spent many months together in conference rooms, working through all of the technical details of how Rivian can take our network architecture and associated electronic control units as well as our software stack and extend that vertically integrated capability across really the entirety of the Volkswagen Group portfolio of brands. And so as you think about a challenge that they've had as they look at their software and attempts to really create a full software-defined vehicle and the capability set that Rivian has built over many years as well as the fact that over the last 12 months, we were able to bring to market a true zonal network architecture with our transition to our Gen 2 R1 product as a whole, and that really enabled us to showcase the capability, performance and innovation of our team in an -- on the road package with that R1 that was really a great showcase of what we could do and the capabilities we could bring to the table for their set of brands as a whole. And over the course of the last several months, we were able to take one of the Volkswagen Group products. We were able to create a drivable demonstrator vehicle. So we took all of the core ECUs out of their vehicle, replace them with our electronic control units, and we're able to turn on all the functionality of the vehicle, add new features, provide over-the-air updates for that vehicle as well and really demonstrate and showcase what was possible as we think about this partnership over the long term. And that created a tremendous amount of excitement, as you can imagine. The engineers on the Volkswagen Group side saw the ability to be very agile and innovative with the feature set. But importantly, for this joint venture, we're creating a scalable architecture that can service vehicles on the premium end, which is more akin to what we see with our R1 products on the road, but take that same architecture and scale it all the way down to their entry-level more mass market products as a whole, that enables the opportunity for us to drive a breadth of offering, a feature set that can span the breadth of -- from the Porsche down to a Volkswagen Group product as a whole and beyond the sort of scope of the portfolio, also address international markets. Volkswagen Group is a very global company. And so this is another area that's really exciting for Rivian as we now think about building a feature set that's going to be -- have a high degree of capability and performance in a number of core global markets as well, which will allow our R2, which is going to be built on our midsized platform, to have a true step change and faster innovation for global market entry than we would have probably done independently on our own as well.

And maybe we'll just take a step back and then we get some more details about the relationship. Maybe could you just talk -- because we have a wide range of investors in the audience, just some of the short history of Rivian as it became a private company to a public company, your flagship product and then kind of your product road map after that.

Sure. So Rivian was founded about 15 years ago. And our Founder and CEO, R.J. Scaringe, wanted to create a product that really helped consumers drive towards electrification, a product that consumers at the time thought that an electric vehicle needed to be a very small form factor product. Yet as you looked across the North American market, 80% of the vehicles sold were trucks and SUVs. And he thought about the fact that consumers are not going to make this leap into electrification unless you give them a product without compromise, that doesn't make them step out of a large form factor truck into a very small vehicle. And so he started out with our flagship products, which are an R1T, which is an electric pickup truck, and an R1S SUV as well. And they were truly designed as flagship vehicles that are as capable on-road as you think about the performance and driving and these are faster 0 to 60 than many, many sports cars on the market, but also incredibly capable off-road vehicles as well. And he was able to do that and try and create a product that inspired consumers to make that leap of faith, knowing that in the future, when all vehicles are electric, just being an electric product isn't enough to convince the consumer to make that transition. He truly wanted to build the best product on the market to help accelerate EV adoption as a whole. And beyond our R1 products, we also created and formed a partnership with Amazon, centered around an electric delivery van. And so we worked very closely with Amazon's logistics teams on understanding what are the drivers' routines, what were the core constraints and how could we together design a vehicle that helped drive efficiency, that helped reduce the cost of every delivery that, that Amazon driver was going to be making across the country. And so we together worked on the, what we call, the EDV, the electric delivery van, for that last mile application. And I think the Amazon relationship is another great partnership that Rivian has created and worked through over the course of the last handful of years as a whole as we now think about building the relationship with the Volkswagen Group as well in the future. And then as we look out into the future, I spoke a little bit about R2. R2 is a 2-row SUV that will be coming out in the first half of 2026. And while our R1 flagship vehicles were really built more for a North American-centric market, R2 is going to be a global platform for Rivian as a whole, and we're really excited about the opportunity to start production here in North America, but have the R2 enter Europe and other global economies as well that will be further enhanced by the work that we'll be collaborating with Volkswagen Group through our new joint venture together as a whole.

If you guys haven't seen in the outside lobby, there's an R1S and an R1T out there, too, so you can take a look at that. One of the things I think that you get lots of compliments about is the brand. Could you talk about just the Rivian brand and how important that is and some of the things, whether it's the way you go to market or other ways that you guys have built a brand really to distinguish yourselves from ICE vehicles, but also from Tesla?

As we think about the building blocks and the foundation of the Rivian brand, the R1 product is really central to establishing ourselves as a brand-new automotive business in the market with our first vehicles coming off of our production lines about 3 years ago at this point in time. And we often talk about the R1 as our handshake with the world. This is Rivian introducing itself to consumers and establishing the foundation for us to build upon as we move beyond more premium side of the market, given the price points of our products are from roughly $70,000 to well north of $100,000 to begin to introduce a much broader addressable market with what will come into the fold with R2 as a whole. And we've also created -- while we're certainly premium in price point, we've always wanted to create the brand as an invitational brand. We've created products that we don't want you to just sort of step back and admire. We want you to drive them. We want you to go have adventures with them. We want you to go get them dirty and truly experience what a Rivian can unlock for you. Before joining Rivian, I hadn't done much off-road driving and having the confidence of my Rivian that can truly take me up rock crawls and through ravines is something that's been a key part of our brand as a whole, as we think about the confidence that we're trying to instill in consumers as they make that move to electric and as they understand the performance capability and utility of the product as a whole. The other piece I would call out is when we created the product set, we wanted to also create a community. And while it's harder to have a master plan on community creation, we're so pleased with what we've been able to establish with our Rivian owners. They often get together for activities and groups. We recently launched a program for our consumers to be referrals for the brand as well since word of mouth is so important as you think about the importance of a purchase as large as a vehicle.

I think all auto OEMs have had headwinds, interest rates, one of them. In addition to that, can you talk about navigating interest rate environment with your sales, with the price point you're at? And then also, if you could weave in just I think just after the election, the electric -- the EV tax credit is in question. And so how you guys think about that going forward?

Sure. Since our start of production, we've been in a high inflationary market as a whole. For us, we're also -- while we have, certainly, headwinds from a broader consumer backdrop driven by the interest rate environment, we're also in a position whereby our broad-based awareness for Rivian is still quite low. And so one of the core initiatives that we've had is making sure we create additional opportunities for customers across the country to get behind the wheel of our product for them to understand and experience it for themselves as we think about how we continue to build on the brand position that we have and start to grow that awareness for the product as a whole.

And maybe just taking a step back, could you talk about your manufacturing capacity? And I think one interesting thing that you've done is leverage your current factory to kind of pull forward the R2. So can you walk us through that and then plans after your current factory?

Sure. Our current manufacturing facility is in Normal, Illinois, which is about just over 2 hours from Chicago. And today, that houses an R1 line as well as a commercial van line. We've just poured our foundations last week and are going vertical right now on building an expansion to the plant for an R2 body shop and general assembly as part of the facility. So we'll be increasing the overall capacity of the normal plant up to 215,000 units of annualized production and are excited to have the opportunity to now have better fixed cost leverage as we ramp up R2 within the facility. So we'll have the overall benefit of the R1 unit economics as well as the commercial van unit economics benefiting from the overall scale of production volumes within the normal plant while also having a faster path to profitability for the R2 product as a whole, given the fact that today we're about 85% sourced with our suppliers on R2 and so have very good visibility into the material cost structure of the product as well.

One thing that I think that outsider investors, us and you guys have been laser-focused on is getting gross margin positive on the R1 or on the overall platform. Could you just talk to us about some of the levers of getting there in Q4? And then maybe weave in what the VW relationship helps on that front as well.

As we think about Q4 gross profitability, there's really 3 key drivers for Rivian to improve upon. The first is improvements in our revenue per delivered unit. We spoke on our Q3 earnings call about the benefit of additional regulatory credit sales in 2024 that are -- we anticipate selling about $300 million of rate credits based off of what we've achieved to date, that puts about $274 million in Q4 itself. So that will be a significant tailwind for us. We've also seen our average selling prices increase, both because as we look back at our Q3 results. We didn't have the full assortment of [ NIC. ] So we've introduced a brand-new tri-motor variant into the market at the tail end of Q3. That will have much more meaningful sales volumes in Q4 as it more heavily contributes to the overall profitability of Rivian as a whole. And then beyond that, in Q3, we ended some of our early preorder pricing as well. And so we'll have just a more representative quarter as we think about the level of average selling prices for R1 products as a whole. As we look at the next driver for the business, which is really centered around variable cost improvement, while the Q3 numbers themselves were a little bit noisy in nature, we have seen significant progress on the reductions in our material costs that were associated with the transition from our first generation to our second-generation R1 unit as a whole. And we'll continue to see that be a tailwind as we look ahead to 2025, especially driven by the fact that there's additional commodity cost tailwinds that are not yet fully realized in our actual results. And then the other piece that will be a catalyst or driver for us is the opportunity for us to continue to leverage our 2 sourcing with many of our strategic suppliers as we think about the opportunity to continue to reduce the cost structure of the product overall. We mentioned it a little bit on the call that we had yesterday on our joint venture with Volkswagen. We also see in the future material cost savings associated with the opportunity for us to collectively source ECUs for the joint venture in aggregate. So we'll be benefiting from much larger volumes. And given the fact that we'll be utilizing a shared architecture across all of the different products, there's a lot of cost synergies as we think about our core partners in the electrical hardware arena as well.

We get the question about liquidity quite often. It was last night. Could you tell us a little bit more? I think the overall $5 billion commitment was upsized. But could you just tell us about the relationship with VW from a liquidity perspective and then where that gets Rivian as far as how much liquidity runway it provides?

Sure. So as we ended Q3, we had $6.7 billion of cash on our balance sheet. Together with the transaction, the $5.8 billion transaction we announced last night, that in total would put $12.5 billion of liquidity over several years. And I can walk through some of the timing since it is quite a structured transaction. We put out a shareholder letter yesterday, which I would say is the best sort of cheat sheet of looking at each of the respective time lines and payment mechanisms that we'll set out over the next handful of years associated with the joint venture. So as we separate out the $5.8 billion of consideration from the JV, we received $1 billion that took the form of a convertible note back in June of this year when we announced our intent to create this joint venture with Volkswagen Group. $500 million of that will convert at roughly $10.84 a share. And then the additional $500 million will convert at a 45-day VWAP to December 1, which is when that will convert to equity. The next phase is the capital that we received from the closing of the joint venture. So we -- that was originally going to be $1 billion. What we announced yesterday was taking that up to $1.32 billion, which is associated with the background IP that the joint venture will leverage as well as Volkswagen Group's 50% stake in the joint venture as a whole. Next, we have a 2025...

On that point though, what would cause it to go from that $1 billion to $1.3 billion just since June?

Sure. As you can imagine, a deal like this one is a complex set of negotiations together with the Volkswagen Group. And as we went through the process of negotiating each of the elements of the transaction, we had the opportunity to pull forward some future benefit opportunity as part of that closing consideration, and then we've added in a new equity investment in the second half of '27 and early '28 that was also additive relative to the original construct that we had brought to market in June.

Okay. One question that comes up is, are there other opportunities outside of Rivian and Volkswagen to sell from the JV to other OEMs?

Yes, there's certainly opportunities for us to take the work that we're doing together with Volkswagen and take that capability set and extend it to other automotive manufacturers as a whole. Part of the beauty of the offering and the work that we're doing there is given the breadth of scale of Volkswagen Group's products and the international markets that they touch, this creates a foundation for both parties to extend that network architecture, that software stack to potentially be the reference operating system for the automotive industry as a whole. And we think that, that's one of the really exciting parts of this transaction and a big piece of why our technical teams that are going into the joint venture are so excited about the opportunity to help accelerate electrification and EV adoption across the board with the entirety of Volkswagen's portfolio.

[indiscernible] would you do that as Rivian or as a joint venture?

We would do that as the joint venture as a whole.

And the last part of the question was how much runway it gives you. And so what can you tell us about what that amount of capital allows Rivian to do?

For us, solving the capital road map for Rivian was an important aspect of the transaction as a whole. And so with our current cash plus the proceeds that we anticipate receiving through the joint venture, that funds Rivian through the ramp of R2 in normal. It allows us to invest and ramp up R2 and R3 in our Georgia facility and take the business -- it takes the business to free cash flow positive as well. So it's significant capital that funds us to meaningful scale.

And as we look ahead to next year, because the R2 is coming out in '26, how should we think about next year in terms of volumes, but then also in terms of things to watch out for as milestones in '25?

Sure. As we look out to '25, we referenced it a little bit on our earnings call. We do continue to see a challenging backdrop. We ask ourselves every day, how can we pull R2 in faster given the benefits that it will have to our overall profitability within the business and opportunity to ramp and scale as a whole. So we'll provide more details on our Q4 earnings call as we provide our 2025 outlook in particular.

Great. Thank you very much, Claire.

Thank you.