Rivian Automotive, Inc. / DE Q3 FY2022 Earnings Call

Good afternoon, and thank you for joining us for Rivian's third quarter 2022 earnings call. Joining us on today's call, we have RJ Scaringe, our Founder, Chairman and Chief Executive Officer; and Claire McDonough, our Chief Financial Officer. A copy of today's shareholder letter is available on our Investor Relations website. Before we begin, I would like to remind you that during the course of this conference call, our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities laws, including, without limitation, statements regarding our market opportunity, industry trends, business operations, strategy and goals, our production ramp and manufacturing capacity expansion, our proposed joint venture with Mercedes Benz, our future products and product enhancements, including R2, and our expectations regarding vehicle deliveries. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, which are described in our SEC filings and today's shareholder letter. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter. With that, I'll turn the call over to RJ who will begin with a few opening remarks.

Thanks, Tim. Hello, everyone, and thank you for joining us today. Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we'll cover on today's call. Having just passed the one-year anniversary of the start of production for the R1T, I want to take this opportunity to highlight the progress our team has made this past year. We launched four variants across our consumer and commercial vehicle platforms. We have been awarded MotorTrend's Truck of the Year, along with other media accolades. We produced more than 15,000 vehicles as of September 30, and we continue to ramp our production to fully utilize our normal facility. In addition, we also launched our go-to-market operations and services, which include our physical service centers and mobile service vehicles, delivery operations, FleetOS, financing, insurance, remarketing and the Rivian Adventure Network, our in-house developed and produced network of DC fast chargers. It's been rewarding to see the excitement and enthusiasm for our first generation of products. We believe we're in a unique position during a transformational time for the auto industry. Production of our designed and developed products continues to ramp at our large-scale vertically integrated production facility in Normal. We have significant demand visibility as evidenced by our consumer and commercial backlog. We have a strong balance sheet with $14 billion of cash that offers us the flexibility to navigate these uncertain economic times and look for capital-efficient methods to drive growth. We remain focused on ramping production in a cost-efficient manner, and we've seen improvement across our cost of goods sold, operating expenses and capital expenditures over the past quarter. The third quarter was another record for the Rivian team. We produced over 7,300 vehicles across the R1T, R1S, and EDV product lines. Our key focus remains ramping our normal facility to achieve the targeted annual capacity. As part of this progress, we reached a key milestone recently as our second manufacturing shift started producing vehicles. It takes extraordinary coordination to ramp a highly vertically integrated facility of this size, and I'm grateful for all the hard work that's gone into it. We continue to see strong demand for our products. As of November 7, we had over 114,000 net preorders and reservations for our R1 vehicles. As a reminder, these orders are from the United States and Canada only and are net of deliveries and cancellations. The third quarter was also important for our commercial business. In early September, we announced the signing of an MOU with Mercedes-Benz for a strategic partnership for commercial electric vans in Europe, the world's largest van market. We continue to deliver EDVs to Amazon and expand our FleetOS offering. Amazon has delivered over 5 million packages with the EDVs and is now making deliveries in over 100 cities. Every two weeks, I spend a few days driving the EDV as my daily driver. It's a great way for me to personally experience what the drivers of these vans actually experience, everything from the seating position to the unique pocket door to the overall vehicle dynamics; it's a really exciting package. At stoplights or parking lots, the enthusiasm I see firsthand from people who are seeing it for the first time or asking questions about it is really exciting, and we're happy to help raise the bar for electrifying logistics. As we continue to look for opportunities to scale our platforms, production, and technologies in capital-efficient ways, we're strategically investing in our in-house technologies, which will enable differentiated product performance and capabilities while also delivering structural cost advantages. Our in-house software capabilities allow us to be agile and provide customers with an improved experience. On the hardware side, we're excited to ramp production of our fully in-house drive unit. The Enduro production lines are coming to life now. It's great to see not only the vertically-integrated motor but also the design of our manufacturing lines. In early 2023, we plan to introduce the Enduro motor and our first LFP battery pack into the commercial van line in Normal. These changes will enable optimized performance at a significantly lower cost. It's imperative that we get the introduction of these new technologies right, so we've allocated meaningful time to quality loops and process checks in the first quarter. We are excited about the progress our teams are making across future vehicles and technologies, as well as improving the performance and cost of our current offerings. While we haven't shown any of our future products yet, I couldn't be more excited about the work happening on our next platform. The smaller size of this platform is enabling some wonderfully unique products, and we are looking forward to unveiling these to the world. I want to thank our dedicated team members, suppliers, and importantly, our customers and communities for the tremendous support you continue to show us. With that, I'll pass the call over to Claire.

Thanks, RJ. I want to echo your excitement around the third quarter results and the progress the team is making. During the third quarter, we produced over 7,300 vehicles and delivered nearly 6,600 vehicles, which was the primary driver of the $536 million of revenue we generated. We recorded negative gross profit of $917 million in the third quarter. We continue to be impacted by the high fixed cost structure associated with running high-volume production lines at low volumes while we ramp. We recorded a $696 million accounting adjustment in the third quarter related to LCNRV. As discussed on prior calls, the LCNRV adjustment writes down the value of certain inventory to the amount we anticipate receiving upon vehicle sale after considering the future costs necessary to ready the inventory for sale. The increase in our LCNRV charge represents the vast majority of the increase in cost of goods sold compared to the second quarter of 2022. The increase in LCNRV compared to the second quarter is primarily due to an increase in overall inventory and firm purchase commitment values ahead of the start of our second manufacturing shift. In addition, similar to prior quarters, gross profit for the quarter was also impacted by the inflation of our raw materials as well as supply chain challenges, which caused the need for expedited shipping. Operating expenses grew by approximately $160 million compared to the same quarter last year. The primary driver of this increase is stock-based compensation expense, which we did not recognize prior to our November 2021 IPO. When looking at our operating expense this past quarter versus the second quarter of 2022, we saw a nearly $150 million decrease. Our Q3 operating expenses reflect our ongoing prioritization of investment in our core and vehicle technologies and customer experience while continuing to drive additional focus and cost optimization across the business. We continue to focus on deploying capital in the most efficient way and ensuring that every dollar spent helps us toward our long-term financial targets, which in turn helps accelerate the impact we can deliver. Our adjusted EBITDA for the third quarter was negative $1.3 billion, which is flat to the second quarter of 2022. We ended the third quarter with about $14 billion of cash on hand. We continue to monitor the economic environment and believe we have a high level of flexibility regarding the cadence of our growth investments. We remain confident in our ability to fund operations with cash on hand through 2025, excluding the impact of our investment in the contemplated joint venture with Mercedes-Benz. We continue to work with the state of Georgia and the Joint Development Authority on our second domestic production facility. We are adjusting the timeline for launching the R2 platform and expect it will launch in 2026. We expect the R2 platform will unlock a massive global market expansion opportunity for Rivian and are excited about the development work underway. We are also reaffirming our 2022 full-year guidance of 25,000 total vehicles produced. The supply chain continues to be our largest source of uncertainty as we continue to ramp production. We've experienced five days of production downtime in October and November due to a lack of supply of a key component, which limited our quarter-to-date production. In the fourth quarter of 2022, we expect the in-transit time from rail shipments, coupled with an increase in volumes from the ramp of our second shift towards the end of the quarter, will cause a significant discrepancy between production and deliveries. In addition, we're reaffirming our 2022 adjusted EBITDA guidance of negative $5.45 billion. We're lowering our capital expenditure guidance to $1.75 billion due to our streamlined product roadmap and the shift of certain capital expenditures to 2023. As RJ mentioned, we have over 114,000 net R1 preorders as of November 7. As we ramp our production and deliveries, we believe preorders will become an increasingly less important measure of our fundamental progress as a business. Going forward, we no longer plan to provide an updated preorder number during our quarterly earnings calls. In closing, I want to reiterate our confidence in our long-term financial targets. We see a clear path to our approximately 25% gross margin target, high teens EBITDA target, and approximately 10% free cash flow margin target. With that, let me turn the call back to the operator to open the line for Q&A.

Our first question comes from John Murphy with Bank of America. Your line is open.

Good afternoon, guys. Thanks for all the info. A couple of quick ones. That announcement that you're not going to provide on the preorders anymore. I am just curious what the motivation is for that. Are we getting to a point where the preorders are getting so robust or long that ebbs and flows in those relative to production might not actually be that informative? I mean, what's kind of the driving factor in that change in communication?

Thanks, John. This is Claire. As it pertains to the preorders, our sentiment was more so that we're one year post our start of production as an organization. We're starting to really ramp up our production and the deliveries associated with our R1 platform, so don't feel like it's really a meaningful metric for us to continue to provide overall to the market. Obviously, given the 114,000-unit backlog that we currently have that extends us into 2024 as well, it's a robust backlog of demand that we have for our vehicles. And this is going to be consistent with what you'll see from us on a go-forward basis as it pertains to additional new product launches as well.

Okay, that's helpful. And then RJ, on the Mercedes JV, I just wonder if you could give us an update there. I mean, I think a skeptic could say, hey, listen, you would have been able to enter and be successful in the European market ultimately on your own over time, just given your product. But an optimist might say, hey, listen, that opens up that market that much faster and provides more robust growth sooner. Just curious if you can kind of maybe couch the direction there on optimist versus skeptic and any other updates you might be able to give us there.

Sure, John. Yes, Mercedes is, in terms of a partner and somewhat to be looking at how do we accelerate electrification faster, there's very much an aligned mentality, aligned mentality around the need to electrify, aligned mentality on how we think about products and the position of products and the execution of products. So it's a relationship and a partnership that we're working towards that we think kind of on both sides to accomplish more together. Ultimately, as we think about this, as we look at this market, it is an important and large space for the commercial van space in Europe. And we felt Mercedes was a great partner to be looking at this with.

Okay. And then if I could just sneak one more in. The delta in deliveries versus production, Claire, will that continue to expand over time? Or are we kind of looking at sort of a one-time gap opening up here in the fourth quarter? Just trying to gauge the revenue recognition versus the production so we can think about that for our models going forward.

The Q4 gap will be exacerbated here in particular because we have the second shift that that's coming online and really ramping from a production perspective that back-weights the volumes from a production perspective in the second half of the quarter. And then that, coupled obviously with the shift that we've had to rail and then the holiday period where customers are a little bit harder to find in that last week of December will be a driver of that core shift for us. Obviously, what we don't deliver in Q4 rolls into the upcoming quarter, so you start to normalize over time as we ramp closer to the installed capacity within the plant in Normal. So the gap should narrow on a percent basis on a go-forward basis.

That’s very helpful. Thank you very much, guys.

Our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.

Hi, everyone. Claire, my first question is regarding your quarter-on-quarter calculations from the second to the third quarter. Your revenue increased by $172 million, and your gross loss improved by $182 million when excluding LCNRV, which is significant and more so than it was last quarter. Based on my calculations, the increase in your gross profit excluding LCNRV was greater than the change in revenue. There may have been some unusual factors affecting gross profit last quarter, but I just wanted to confirm that my calculations are accurate and see what you can highlight that improved sequentially, aside from LCNRV, that contributed to the greater gross profit increase compared to revenue change. Thank you.

Thanks, Adam. So unpacking the question first about LCNRV itself, it's important to understand there are different components. So the way to your calculation, which is entirely excluding it, is not necessarily the way that I would direct you to look at it. The segment you may want to look at instead is really looking, in particular, at the change in increase in LCNRV versus the complete exclusion of it. The way to think about it is LCNRV is really accelerating the recognition of losses as we take in raw materials and have our firm commitments, which we're then grossing up to say, what is the cost for us to turn these materials into that end-state vehicle themselves? And so as it pertains to the quarter, we get both the benefit of a reduction of bill of materials and conversion costs associated with sort of the baselining of inventory levels if inventory were held constant within those two quarters. And so that's why we look to that increase as you look at that calculation in particular. And so if you're looking based off of your own metrics, there, right, it's more of an 11% increase in that cost of goods sold on a comparable basis versus a 47% increase in deliveries in aggregate. So we've made meaningful progress to sort of close the loop on that front, but I wanted to just direct you to some of those nuances.

I appreciate that. Thanks. As a follow-up on reservations, can you provide an update on where your customers are coming from and what vehicles they currently own? Additionally, could you share information about your deliveries, specifically how many are from Tesla or truck or SUV owners? Any additional insights would be helpful. Thanks.

Sure, Adam. In developing the R1T and R1S, we aimed to create flagship products that would establish our brand and allow us to expand our product lineup over time. We intended for these vehicles to attract a diverse range of customers from various vehicle types and brands. Now that we have actual data, we're pleased to see a wide array of customers. While some are transitioning from Teslas, no single brand dominates our demand. Importantly, nearly 90% of our customers do not currently own an electric vehicle, indicating that our brand is successfully bringing new customers into the EV market and facilitating that transition. Additionally, a significant portion of R1T buyers are new to pickups, introduced to this unique, lifestyle-oriented vehicle. Similarly, many customers are opting for the R1S as their first SUV, fulfilling a long-held desire for an efficient, full-size 3-row SUV that excels both on and off the road. This is attracting a broad range of customers.

Thanks, RJ.

Our next question comes from the line of Joseph Spak with RBC. Your line is open.

Thanks so much, everyone. Claire, I want to go back to Adam's question because I was sort of pulling on a similar thread here and I'm trying to sort of update real time for what you just said. So if I just look at auto COGS divided by deliveries in the second quarter, no adjustments, and then I do the same thing in the third quarter but adjust for the increase in the inventory adjustment, as you just suggested, it still seems like that COGS per unit, while still obviously above what you're selling the vehicle for, did improve like over 30%. So can you just help us understand, like is that not right? Like is there something with the accounting that does not allow you to do that calculation?

No, that's absolutely right. As I had mentioned, right, as you factor the sort of apples-to-apples comparison of the way that you're looking at it, Joe, you would see a 33%-plus improvement on a quarter sequential basis.

Okay. Maybe I misheard that. I thought I heard 11%. Okay. And is that...

Dollars is showing an 11% growth, but that is also based on a 47% increase in deliveries. So you really need to consider both of those factors together.

Okay. And so that's sort of the leverage you're seeing in the plant? Or is there anything with mix between R1s and the vans in the quarter that impacted that?

The biggest driver that we've seen on a quarter sequential basis is just some of the cost efficiency that we're driving within the plant, moving beyond some of the start-up-related costs as well. That's a key enabler for us as we've seen and continue to moderate down that cost of goods sold per vehicle.

We've launched multiple vehicles at the same time, which meant that the start-up costs Claire mentioned were accumulated as we increased production of these vehicles concurrently.

Okay. Thanks a lot. And RJ, I guess this is a second question. A couple of quarters ago, you talked about the revised plans, some changes to CapEx timing, et cetera. I'm just wondering, in light of IRA and kind of appreciate you're still probably evaluating that. But like does that cause you to reevaluate the plans again and maybe accelerate or reaccelerate some of that in-house cell development? Because I think that was one of the things that may have had a sort of slight pushup, but the return profile on that investment seems to be greatly accelerated versus what you were thinking at the time and then obviously also directly impacts the financials of the rest of your business. So just wanted to get your thoughts on that.

Yes. I mean, there are still some moving pieces with IRA, but we think this is a really powerful step and an important step by the U. S. government to really create strong tailwinds not only for electrification but also for the build-out of a domestic supply base around battery cells. We couldn't be more excited about this, and it's certainly driving shifts in how we think about the overall battery supply chain. It's not just the cells; it's also the core materials that go into the cells, lithium hydroxide, lithium carbonate, some of the key precursor materials are areas we're spending a lot of time focusing on. Not only making sure we have security of supply as we think out through the end of the decade, but making sure that that supply qualifies for all the benefits associated with the IRA bill. Now at the cell level, it's particularly important for us as we think about our two platform vehicles. This has long been the plan to have domestically produced cells that would go into the vehicle. This just places greater emphasis on achieving that quickly.

Okay, thank you.

Our next question comes from the line of Rod Lache with Wolfe Research. Your line is open.

Hi, everyone. You mentioned that you have funding available until late 2025 with cash on hand, excluding this joint venture plant. I wanted to confirm what that entails. By late 2025, will you have increased production in Normal and funded most of the Georgia assembly? I also noticed you didn't provide any updates regarding vertical integration into batteries or cathode active material. Is that aspect included in your funding plan, especially for the R2?

Thanks, Rod. As we've talked about in the past, we remain confident in our cash on hand through 2025. As we've also spoken about, we will opportunistically evaluate opportunities for us to invest in high-growth, high-return options for Rivian on a go-forward basis. As you heard from RJ's last comments, a lot of the work that our team is doing across the board pertains to securing cell raw materials and the R&D and build-out and capabilities we have in-house here. Those are all things that we're currently evaluating and working on as an organization as well. The embedded guidance that we do have does certainly consider some meaningful investments in that cell roadmap as we sit here today and look out at the building blocks for that future state opportunity. What the guidance doesn't include today is really much more of the large-scale manufacturing build-out of our cells, which would follow, of course, the development and build-out of our R2 platform as we've spoken about in the past. So those are our core items that I just wanted to call out as you think about the building blocks and roadmap to that cash on hand through 2025.

Okay, all right. That's helpful. Is it possible that, that can change prior to the ramp of the R2? Or is that something that just it takes a longer time to kind of get that pulled together?

Rod, as Claire mentioned, much of what we have planned includes funding for the development and pilot activities related to our domestic cells, as well as the establishment of our cathode active material supply chain. Additionally, as we consider future product lines, part of our planning involves creating opportunities to make timely decisions that will impact our strategy in 2026 and beyond. We will make those decisions with a focus on the need to raise capital for initiatives that we believe will yield strong returns. Developing domestic battery cells is certainly one of those initiatives. We see this as essential in the long term, and the main consideration is how quickly we can scale up production capacity.

You will be producing over 10,000 vehicles in the fourth quarter. I assume that this benefits, to some degree, from the second shift, although you are still facing supply chain constraints. Could you provide any insights on your current position in the S-curve and what the trajectory might look like going forward, especially considering that some are reporting delays for the R1S vehicles? I'm curious if that has any implications for the ramp-up.

Yes. The second shift is now operational. We're producing vehicles that are being delivered to customers, which is exciting. Launching a second shift requires additional team members and extra hours each week for production. However, there is a ramp-up period involved. While this ramp-up is much quicker than what we experienced with the first shift during the setup of our lineup and plant, it doesn't start at full capacity. We are currently navigating this ramp-up, and it is progressing well, as you noted in your question. We are very aware of supply chain limitations, which influenced the timing of the second shift's launch. We wanted to ensure we had the necessary parts to produce the vehicles before hiring more team members. As of now, the ramp-up is going well. The first shift is also making improvements. As Claire mentioned earlier, our focus is not only on the ramp-up but also on operational and cost efficiencies, many of which naturally arise from achieving higher output and utilizing fixed costs more effectively with increased volume. We are dedicated to fully ramping the second shift and entering 2023 in a strong position.

Thank you.

Our next question comes from the line of Charles Coldicott with Redburn. Your line is open.

Hi, guys. Thanks for taking my question. My first one, on the R2 and the delay to 2026 from 2025 previously, can you talk a bit about what's changed there, and maybe also how this changes, if at all, your investment plans for the period up to 2025?

Sure, Charles. This doesn't represent a material change in the product by any means. This is really reflective of making sure that the production site is prepared. We have the appropriate amount of time to go through the ramp-up phase, leveraging a lot of lessons learned as we've gone through the ramp of the R1T, the R1S, the EDV 700 and the EDV 500 over the last 12 months. So those ramps have informed our thinking on making sure that we have as close to a flawless ramp as possible with R2. Now in terms of investment dollars, Claire and I spend a lot of time with our teams on working very hard to push off payments on some of the CapEx as much as we can. But ultimately, some of these things require us to spend over the course of next year and, of course, into 2024 as well.

Got it. And then on production, so I think to meet your 25,000 target, you need to average about 850 units a week in the final quarter. Can I ask if you've exceeded that rate in any of the weeks so far? Or is that a missing component that may have impacted production so far? And then maybe along the lines of a prior question, thinking into next year, should we think that quarter-on-quarter growth is kind of linear through next year or will there be some seasonality to that?

The overall growth, when considering both weekly and quarterly changes, can be viewed as a combination of our plant operations and our supply chain. As we approach 2023, we anticipate healthy quarter-over-quarter growth. We do have scheduled downtime at the end of the year for line enhancements and capacity expansions at the plant, which we've discussed previously. In the first quarter of the upcoming year, we will be integrating our Enduro Drive unit and LFP pack into the EDV platform. This involves a new battery pack and drive unit, along with various related changes. The introduction of this new propulsion platform, which will provide significant cost benefits that we are excited about, will require some time. We have accounted for adequate time in our plans for next year to ensure we go through the necessary quality checks and training for a smooth launch.

Perfect. Thank you.

Our next question comes from the line of George Gianarikas with Canaccord. Your line is open.

Good afternoon and thanks for taking my question. Just quickly, you recently had a recall and I'm curious if you could share your thoughts on how your service department performed and how you see those facilities and personnel ramping over the next 12 months?

Thanks, George. Just as a point of background, we had a recall for a torque fastener in one of our suspension components, and it called for inspection and tightening, which the operation takes a couple of minutes on a vehicle. This was a really remarkable opportunity for us to demonstrate the benefit and value of a direct service network. We, today, have completed that operation on 83% of our fleet, with about 10% in line of sight to another 10% that's currently scheduled. The speed at which we were able to very rapidly address this across the entire fleet, and to do it moments after the decision was made to do this voluntary recall, and to have our service leadership immediately working on deploying this within hours to provide inspections in operations. Within weeks, to have now over 83% of the vehicles complete is really something we're proud of, and our customers saw that as well. The ease at which the process was for customers was great, where we could go to their homes, where we can go to their places of business. In some cases, they would come into service locations, but we tried to make it as seamless as possible. Ultimately, I think the transparency in which we handled the situation was appreciated by our customers.

Thanks. And just if I could ask one more. There's been some recent high-profile missteps in autonomy. And one of your competitors stated that it may not be critical for them to develop that technology in-house. I'm just curious as whether your view has been updated on that and whether you think it's critical to have your autonomous offering developed in-house.

Yes. Within the autonomous space, there's a broad spectrum of ways to approach it. To oversimplify, you have very hardware-heavy systems where a vehicle has $100-plus thousand worth of sensor set and compute. Then you have more hardware-constrained systems that are designed to be deployed on vehicles that are purchased by customers where you have thousands of dollars of sensor units and compute. Our approach is to focus on the latter, where we're developing an in-house autonomous platform that will grow in capability but using a more constrained set of sensors, in our case, a very camera-heavy and radar-heavy platform. This is something that we do believe is really important as we talk about not just highway assist features but growing above what we see today in the Level 2 space. This takes time but it certainly benefits from having a very large deployed fleet with vehicles driving many millions of miles. As of today, our vehicles have driven over 92.5 million miles, which is great, but all those miles contribute to great learning opportunities to build and grow this platform.

Thank you.

Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.

Thank you very much. First, a quick question around how do we think about some of the units and company economics going forward. So I guess in the quarter, you've had quite a bit of an improvement in cash, R&D and SG&A type of spending. Do you view these as a new run rate that is sustainable or especially as volume increases? Or how should we think about it? And then at the unit level, obviously, nice to see the improvement in, I guess, the gross losses. What would be sort of like the reflect the run rate, production rate or cadence that you need to achieve to sort of essentially shrink these losses and bring that more into a positive territory as we look at it?

Thanks, Emmanuel. First off, as you noted, we're really encouraged with the progress that we've made to prudently manage our operating expenses across the board, and you're seeing that now through the performance in our Q3 OpEx itself. As it pertains to more so of the baseline, our expectation is from an R&D perspective, that those R&D expenses will increase in Q4 relative to the level of spending in Q3, largely the result of a lot of the development work that is underway for the introduction of our LFP pack and Enduro Drive unit in the commercial van program itself. There are a lot of development builds happening in the backdrop that will contribute to that overall increase in R&D that we expect to see in Q4. But we do expect to continue to manage our OpEx spend in aggregate as we're driving a lot of capital efficiency while at the same time, investing heavily in the customer experience. On an ongoing basis, we're continuing to open up additional service centers and our charging network, things of that nature, which contributes to that overall SG&A balance for us while also driving incredible efficiency across every dimension in our control as we're scaling the business forward. To answer the second question you had on unit economics and what that looks like on a go-forward basis, I think one of the pieces that's most important to first understand is that today, as you look at our cost of goods sold, the majority of that cost of goods sold per unit is really fixed costs within the business. The biggest lever we have is really focused on our ramp from a production perspective. It would be helpful to provide guidance as it pertains to the core inputs and drivers as we take our gross margins from the current state to the path to positive unit economics in 2024. As we've talked about in the past, we expect to see a material step change in gross margin in that walk from current state to that 2024 time frame. The biggest lever, not surprisingly, is that fixed cost leverage, as well as our opportunity to move beyond some of the start-up-related costs that you heard RJ and myself talk about that we've already seen from a progress perspective, Q3 versus Q2. That reflects about two-thirds of the margin walk. Just wanted to ensure that you had a sense for the magnitude of how important ramp is from an overall unit economic perspective. The second key driver for us is associated with pricing. As we've discussed in the past, the post-March 1 configured preorders reflect a $93,000 average ASP. We've got a lot of exciting next-generation technologies that will be coming into the fold that allows us to believe that ASP could even drive meaningfully higher moving forward. That’s the second core lever in that economic walk. Lastly, all of the core focus and work that we're doing to reduce our bill of materials is pivotal. The engineering and design changes and the roadmap we have in place aim to drive meaningful cost savings within that bill of materials over the next couple of years. Lastly, all the work that our procurement teams are doing around commercial cost-down opportunities as we scale the business will be essential.

That's incredibly detailed and helpful. Can I just ask a quick clarification on this and then I have a question on free cash flow? But the fact that you're facing these targets and walk on 2024, does that correspond or match with the specifics of that unit number where you think that these economics essentially work with the volume at the right place? So I guess what happens in between, I guess?

We'll continue to see ongoing performance and improvement as we scale, especially given the magnitude of how important ramp is across the board. The important piece here is that in 2024, you see each of these key levers really in place as it pertains to production ramp, as it pertains to Rivian moving to those post-March 1 preorder base, and importantly, as you think about the composition of a lot of the engineering design changes that we have from a roadmap perspective, all come together to drive a meaningful step change in gross profit.

Okay, that's clear. And then on the free cash flow side, so with some of the efficiencies in CapEx this year but also some of it being, I think, timing into next year, how should we think about CapEx going forward? I think your previous view was maybe low $2 billion year in, year out. Should 2023 be ahead of this as a result of some of these movements?

We still expect that CapEx should be in that low $2 billion area as well, even despite the fact that there will be some push of CapEx spend from 2022 to 2023.

Our next question comes from the line of Colin Langan with Wells Fargo. Your line is open.

Thanks for taking my question. IRA was pretty new when you last reported. Just trying to get your latest thoughts. You mentioned LFP, and that's sort of hitting early next year. There's a little uncertainty around how that might impact LFP in terms of supply chain compliance, given the check suppliers and the rules are pretty tough there. Do you still think LFP makes sense long term? Also, regarding the commercial credit side, how does that work with some of your customers? Are they going to capture most of the credit benefit, or are you able to kind of get some of that back to your margin?

With regards to LFP, this is a cell that, from a chemistry standpoint, works really well in vehicles that require high cycle life, so vehicles that see lots of charge/discharge cycles relative to a high nickel cell. Consequently, commercial applications are perfect for this type of application regarding cycle life. Furthermore, the lower volumetric energy density associated with an LFP cell fits nicely into a vehicle that's physically large because you have the space to fit the pack and achieve enough energy storage but do it in a larger space. We're quite bullish on LFP. Interestingly, with regard to IRA, there's not a stringent requirement for commercial applications of source to cell. This is critical. The $7,500 credit for low GVW commercial vehicles stands regardless of the source of the cell. The size of those incentives grows as you move into higher gross vehicle weight classes. Also, we believe that the supply chain will evolve. The benefits I referenced at a high level of an LFP chemistry for high cycle life applications are real. There are meaningful advantages. We see a lot of opportunities to build a domestic supply chain for both the production of LFP cells but also for the cathode active material, as well as some other precursor materials. Beyond that, of course, by the nature of an LFP cell, you remove nickel and cobalt, making it easier to maintain compliance with IRA.

And on the commercial credits, do you think your customers will get that benefit? Because I'm not sure some of us think that there might have been cost-plus arrangements for some of the vehicles.

Our large commercial customers, with whom we're launching our commercial business, will indeed achieve some of those credits. There are also credits that are manufacturer-facing with IRA. We're very conscious of managing both sides of those credits—customer-facing as well as manufacturer-facing.

Got it. And just last question. On the joint venture with Mercedes, how does the production split work? Is there a fixed amount? Because, I mean, is there any concern because Mercedes obviously has an established footprint there? Is it just sort of you each have an allocation of production? Or if there's demand, you could take over most of the production? How does that sort of work in the agreement?

At this point, we're still working through many specifics of our agreement. We've signed and announced an MOU around this joint venture, but there's still much work to be done in terms of defining exactly how it will work.

Our final question comes from the line of Ryan Brinkman with JPMorgan. Your line is open.

Thanks for taking my questions. Maybe just a couple around the planned increase in production here in 4Q. I think squeezing from your reiterated full year outlook, it implies about a 45% sequential growth on top of 3Q's, I think, 67% improvement. Firstly, you mentioned being short a specific component in 3Q. Are you able to share what that component is or if you've cycled past that shortage? What has been your experience so far here in 4Q in the first 5 weeks of the quarter, et cetera, maybe with regards to the second shift, too?

Ryan, we've discussed before the improvement we're seeing broadly within the supply chain, particularly relative to the first half of this year, which we've spent some time discussing how challenging that was. So that improvement is certainly continuing to happen. With a vehicle that has hundreds of suppliers and thousands of components coming from these suppliers, it only takes one part from one supplier to stop the line. As Claire mentioned earlier, we lost five days of production this quarter because of a single component supply shortage. We've spent significant time working closely with the supplier of that component to prevent this from occurring again, and we've established solid contingencies to manage this risk moving forward. We do believe there will continue to be challenges with the supply chain; however, with this specific instance, we think we've settled it, allowing us to continue ramping without those interruptions.

Okay, very helpful. And then just lastly, I think last quarter, you had talked about preserving free cash outlook by deferring some CapEx spending that was discretionary into next year. Now with the pushout of the R2 a bit, how are you thinking about that? Are you maybe looking to trim capital expenditures next year relative to what might have otherwise been the plan?

As you've heard, we both took down our guidance from a CapEx perspective this year. Part of that is a shift into next year. Next year does have some incremental benefit in that we're not spending at the same capacity towards the plant build-out in Georgia. Overall, as I mentioned, we still expect to be in that low $2 billion area, even with those movements.

I would now like to turn the call back over to RJ for closing remarks.

Thanks, everybody, for joining the call. It was great to have such a broad spectrum of questions here today. Just to reiterate some of the points Claire and I both made throughout the call, we're really looking forward to the continued ramp of our production line. The impact this has not only on the economics of our business but very importantly on ensuring we deliver to customers, excited customers that help us to bring them their vehicles, get them in their R1T, their R1S as soon as possible. That's a critical focus for us. As we look out into 2023, the continued ramp and continued growth in deliveries is our core focus, and with that, of course, driving efficiency into and across the business, not just on our cost of goods sold but across our operating expenses as well as how we deploy capital from a CapEx point of view. So with that, thank you, everybody, for joining, and we look forward to our next earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.