Rivian Automotive, Inc. / DE Q4 FY2022 Earnings Call

Good afternoon, and thank you for joining us for Rivian's fourth 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 future products and product enhancements, including R2; and our expectations regarding vehicle production and 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. 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. 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. 2022 is a transformational year for us. We fought through a difficult operating environment to ramp the R1T, the R1S, and the EDV, with total production of 24,337 vehicles for the year. Beyond ramp, we focused our product teams on our next generation of in-vehicle technologies in the R2 platform. I want to thank our team, suppliers, and partners for their grit and determination in helping Rivian achieve its targets. In the fourth quarter, we increased production over 10,000 units. This represents a 36% increase over the third quarter of 2022. We maintain a vehicle backlog that provides clear demand visibility well into 2024. We launched our Adventure Network, which gives customers a smoother charging experience. We expanded our service infrastructure to 28 physical service locations in addition to nearly 200 mobile service vans, and we pushed a range of major software updates to our customers. Our core priorities for 2023 are ramping production of our R1 and RCV platforms, driving cost reductions, developing the R2 platform and its future technologies, and delivering an outstanding end-to-end customer experience. In my role as CEO, my most important responsibility is to make sure we have the right leaders and the right organizational design in place to drive focus and execute on our priorities. It's great to see the very capable and experienced leaders we've added over the last year. Equally important to ramping production is our drive towards profitability. We are focused on reducing our bill of materials, conversion costs, logistics costs, and overall operating expenses. Core to this is our close work with our supplier partners to lower our material costs through new engineering solutions as well as revisiting some of the customer and commercial negotiations that were agreed to years ago when Rivian was still in prelaunch. In support of these efforts, we held a Supplier Day at the end of 2022, where we hosted over 400 members of our supply chain at the plant to demonstrate the growth and the scale of what we're building. Our supplier partners are engaged and fully understand the benefits of us achieving profitability as quickly as possible. One of the enablers to reduce our material cost is the introduction of our future technologies. Earlier this month, we started producing saleable units of our in-house Enduro drive unit. Enduro is our single-motor drive unit, and in our commercial van platform, we use it in our front-drive application, and in the R1 platform, as a dual motor setup, we use it for all-wheel drive application. The Enduro drive units are also accompanied by our new lithium iron phosphate battery packs for our commercial van line. These LFP packs are ideally suited for commercial use cases due to their low cost and durability of this chemistry. Another important example of our technology development that I'm excited to introduce is the 390-mile R1S max pack variant. We begin deliveries on this vehicle this fall, and we expect high demand for this new offering. The R1S max pack will launch with the dual motor configuration, leveraging our Enduro drive unit, and will deliver 0 to 60 acceleration in around 3.5 seconds. And when we couple that with our full air suspension and electro hydraulic damping system, it will really deliver incredible on-road and off-road performance. The purpose of our investments in software, electronics, drive units, and batteries is to improve performance and to create long-term structural cost advantages. These technologies will serve as the foundation for our R2 platform. Our production ramp and the introduction of multiple vehicle platforms has equipped our team with valuable manufacturing operations and product development experience in a short period of time. We're taking advantage of these learnings and are aggressively applying this experience to our first mass market vehicle, the R2, as well as to our new manufacturing facility in which we'll build the R2 located in Georgia, with the goal of establishing a considerably lower cost structure. Speaking of R2, we're really at an exciting and defining moment for the program. We have members across our organization, from design to engineering to manufacturing, coming together to develop what we believe is a true category-defining platform. Over the next 6 months, we'll be finalizing the majority of the core engineering and sourcing decisions that will drive how the R2 product line is built and the speed at which we can ramp production to profitability. We spent years creating our brand and award-winning set of products that drive excitement and attract new customers to what we're doing. The validation received from our customers and media continues to be strong. In fact, the R1T received several new accolades, including being named Best Ownership Experience among Premium Battery Electric Vehicles by J.D. Power. In addition to its Editors' Choice award, the R1T was also included in Car and Driver's coveted 10Best award for 2023. And along with that, it was praised as being the best driving pickup Car and Driver has ever tested. In consumer reports, customer satisfaction survey, Rivian was rated among the highest across all categories with our R1T being the highest-rated truck. We've also received the highest safety rating of TOP SAFETY PICK+ from IIHS, and that's passing IIHS's new tougher standards for 2023 across all categories. On our go-to-market side of the business, which includes our customer engagement, service, delivery, and demand generation teams, we've experienced rapid growth over the past year as we built the foundation for our end-to-end customer experience and software and service offerings. We need to execute against our robust customer backlog and remain focused on our customers as we scale our 150,000 units of annual capacity in Normal into ultimately multiple production plants around the world. The enthusiasm for our products and our brand, combined with the progress we're making on our future vehicles and technologies along with the strong team that we've built, gives me confidence in our ability to help drive the massive impact we need on this planet and the transition to a carbon-free economy. With that, I'll pass the call over to Claire.

Thanks, RJ. I want to reinforce the important steps we took during 2022 to drive towards profitability. Our goal is to build Rivian for the long term, to build a company capable of adapting during good times as well as challenging ones. In the last year, we took intentional measures to focus our product portfolio and drive a lower cost structure. Operating expenses in the second half of 2022 fell 21% as compared to the first half of the year. For the full year 2022, operating expenses were in line with 2021 results, while we continue to invest in and scale our delivery and go-to-market operations and next-generation technologies. In addition, our team was able to reduce our capital expenditures for 2022 to $1.4 billion versus $1.8 billion in 2021 due to the fact that our equipment and facility costs were more highly concentrated leading into our start of production in Normal. We're encouraged by this progress and recognize there is an additional opportunity to drive greater efficiency. We are concentrating our investments and resources on growing the consumer business while continuing to leverage our existing commercial platform. We believe these core aspects of our company represent the greatest levers to maximize our impact and drive attractive financial returns. I will now review our fourth quarter 2022 results. The last 12 months were characterized by economic uncertainty as well as significant supply chain volatility across the industry. By focusing on factors within our control, our team was able to achieve meaningful milestones. During the fourth quarter, we produced 10,020 vehicles and delivered 8,054 vehicles, which generated $663 million of revenue. We generated a negative gross profit of $1 billion for the fourth quarter of 2022. Gross profit for the fourth quarter was impacted by a lower of cost or net realizable value, LCNRV, adjustment. As discussed in the past, the LCNRV adjustment breaks down the value of certain inventory and records losses on firm purchase commitments to the amount we anticipate receiving upon vehicle sale after considering the future costs necessary to ready the inventory for sale. As of December 31, 2022, LCNRV was $920 million as compared to $95 million as of December 31, 2021. These charges are expected to continue through 2023. However, as we reduced the cost of goods sold per vehicle by lowering material production, logistics, and other costs, we anticipate that the total charge will decline. We forecast reaching positive gross profit in 2024 and therefore expect by the end of 2024, we will no longer have material LCNRV inventory charges and losses on firm purchase commitments associated with the production at our Normal plant. In addition to LCNRV, there were factors that negatively impacted our cost of goods sold that we do not believe are reflective of our long-term cost structure. The most significant driver continues to be our production levels. Producing highly vertically integrated vehicles at low volumes on lines designed for higher volumes means we currently carry more overhead per vehicle produced. This impact has and will continue to be magnified during the ramp of our second shift in production as we introduce new technologies like our LFP battery pack and Enduro motor, for which we stopped the commercial production line for the majority of the first quarter of 2023. Additionally, because we are in an LCNRV position, we do not fully capitalize our logistics and conversion costs into inventory, which can lead to volatility in our cost of goods sold based on the amount of inbound materials we received in a particular quarter or the difference between our vehicle production and deliveries as we saw in Q4 2022. Operating expenses in the fourth quarter of 2022 fell $1.3 billion as compared to the same period last year. Approximately $1.1 billion of this difference was due to higher non-cash expenses in the fourth quarter of 2021, including a donation to Forever by Rivian and stock-based compensation in conjunction with the IPO. The remaining reduction of approximately $200 million was due to lower cash expenses associated with the operations of our business. We continue to prioritize investments in our core in-vehicle technologies and customer experience while also driving additional focus and cost optimization across the business. Our adjusted EBITDA for the fourth quarter of 2022 was negative $1.5 billion, which compares to negative $1.1 billion for the fourth quarter of 2021. We ended the fourth quarter of 2022 with $12 billion in cash, cash equivalents, and restricted cash. This excludes the capacity under our $750 million asset-based revolving credit facility. We continue to monitor the economic environment and believe we have a high level of flexibility regarding the cadence of our growth investments. I want to take this opportunity to highlight important operational changes we're making in Normal. In addition to the commercial van line shutdown during the first quarter of 2023, which we expect to result in a drop in overall production and deliveries relative to Q4 2022, we also expect to be taking both the R1 and EDV production lines down for a week during the fourth quarter of 2023 to prepare for a capacity change that will happen in 2024. In the first half of 2024, we intend to take production of the plant down for a few weeks to implement new technologies into our vehicles and shift the overall capacity of the plant to be about 55% R1. While the incorporation of these new technologies temporarily impacts production, they are expected to provide improved vehicle performance and range and deliver cost reductions that are critically important to our path to profitability. Now turning to our 2023 outlook. We are guiding to 50,000 vehicles produced for the year. This represents a doubling of year-over-year production while also accounting for the risks and uncertainties associated with the supply chain and integration of our new technologies. We expect the ramp of our second shift for the R1 line to continue to progress through the first quarter. We expect full-year production to be back-end weighted due to supply constraints we believe will alleviate in the second half of the year and the commercial line downtime we're taking in Q1 2023. During 2023, our gross margin is expected to remain negative, but we anticipate improving on a dollar basis for the year as we reduce our cost of goods sold per vehicle produced, improve our average selling prices per vehicle and begin to see our LCNRV charge decline. For 2023, total operating expenses are expected to modestly increase as compared to 2022. As a result of these factors, adjusted EBITDA is expected to be negative $4.3 billion in 2023, an improvement of $900 million versus 2022. We continue to rationalize our capital expenditures due to a greater focus on our core business. Capital expenditures in 2023 are expected to be $2 billion driven by additional investment in our Normal and Georgia facilities, next generation technologies and the continued build out of our go-to-market operations. In addition to our 2023 guidance, I wanted to address the capital needs of the business over the medium term. The largest lever in our forecast is the swing from negative $1 billion of gross profit in Q4 2022 to a step change in positive gross margin in 2024. There are 3 key levers that enable this improvement. First, the most impactful driver is the per-unit reduction of labor overhead and ramp expenses as our large-scale plant produces a greater number of units. With the addition of our second shift, the plant in Normal is currently staffed to produce a significantly higher number of units than our current run rate. For context, these expenses represent 2/3 of the bridge from our current COGS per unit to what we expect by the end of 2024. The second area is our material costs. We have a detailed road map of both engineering and commercial cost downs. As RJ mentioned, our recent Supplier Day demonstrated the win-win opportunity for our suppliers to participate in Rivian's growth. The final bucket is price. The implementation of our reservation system in early 2022 provides us the pricing flexibility to accommodate the introduction of new products, technologies, and inflationary pressures. While most of our deliveries today are based on pre-March 1, 2022 pricing, we expect to see a meaningful step change in average selling price over the next 2 years as we introduce new higher-priced variants as well as move to our post-March 1 preorders. In addition to the gross profit improvements I outlined, we expect to see significant leverage of our operating expenses over this period as we leverage our R&D and SG&A expenses over a much larger sales base. We also anticipate being able to maintain our capital expenditures in the low $2 billion area over this time frame. Our objective continues to be driving towards profitability and our prudent deployment of capital. From a cash burn perspective, we expect 2024 to improve versus 2023 by approximately 40%, enabled by the step change we see in gross profit. In 2025, we expect our cash burn to improve meaningfully versus 2024 as we have a full year of production at our new price points and the incorporation of our next generation technologies. We remain confident that our cash and cash equivalents can fund our operations through 2025. We continue to evaluate a variety of capital markets available to Rivian ranging across the capital structure. We plan to employ a portfolio-based approach as we look to maintain a strong balance sheet position. 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 margin target, and approximately 10% free cash flow target. With that, let me turn the call back to the operator to open the line for Q&A.

Our first question comes from Rod Lache with Wolfe Research.

Just a couple of things maybe just to kick things off. Do you have an estimate for the magnitude of the LCNRV losses you expect in 2023?

Thank you, Rod. Regarding the LCNRV, as I mentioned earlier, we currently have a $920 million charge, which we anticipate will be fully offset in our P&L as we aim for positive unit economics in 2024. The guidance I can provide is that the reduction of this $920 million charge won't be a straight line over the next few quarters, but we expect to see some impacts starting as early as Q1 as we lower material costs in our vehicles. Additionally, with technology advancements such as the introduction of the LFP battery pack and Enduro drive unit in the EDV, we've achieved a significant reduction in material costs. For instance, the marginal unit we are currently producing for the EDV is now profitable because of these technological improvements. As we move into 2023 and 2024, what has been a challenge throughout 2022 is expected to turn into a positive factor.

Okay. So it's actually going to decline. So it would be a subtraction from your cost of goods sold, just to clarify that, in 2023?

That's correct.

Okay. RJ, could you share your initial thoughts on how the R2 cost structure will differ from R1 in order to remain competitive when the vehicle launches? What is your outlook on achieving those goals? While we often focus on batteries in this discussion, are there other non-battery opportunities you foresee? Are there any unique design or manufacturing innovations you plan to apply to that vehicle?

Thanks, Rod. When considering the R2 platform, we are leveraging many technologies that will also be introduced in R1, particularly our updated electronics and network architecture. This will allow us to consolidate numerous computing functions into fewer electronic control units, simplifying both the wiring and the number of computing platforms throughout the vehicle. As Claire mentioned, our Enduro drive units, along with our focus on vertically integrating our propulsion platform from the drive unit perspective, will lead to significant cost changes for R1. We will take these advancements and apply them extensively to R2. In terms of the vehicle body, interior, and chassis systems, we have gained substantial insights from the development and launch of R1 and the EDV program. Our design approach for this product emphasizes identifying opportunities to consolidate parts, utilizing larger single-piece stampings, and employing extrusions or castings for part consolidation. This not only reduces the number of vehicle parts but also minimizes joints and connections, thereby simplifying the assembly and sourcing processes. This is a major focus for us with the R2 product. The core objective is to ensure that the essence and excitement of our brand are preserved in the R2 lineup while achieving a significantly lower cost structure. Additionally, our position regarding the supply chain has improved compared to when we were sourcing components for R1, where many were procured in 2018 and 2019 before we launched the product and received overwhelming customer feedback. Currently, as we select and negotiate supplier contracts for R2, we are also using these agreements to drive better costs for R1, and we are seeing more aggressive pricing across all vehicle components. Overall, we anticipate a noticeably lower cost structure for R2, which is fundamental to our vision for that product.

RJ, it seems you're considering innovations such as Giga castings to reduce the number of parts in a vehicle's structure. Do you currently have insight into this? Are you starting to understand the component cost structure for the R2? Lastly, as you approach profitability and gross profit margins, what volume targets do you have in mind for 2024? You mentioned a capacity of 150,000 units, but do you believe you'll reach at least 100,000 within that period?

In response to your first question about component and system design in our vehicle, we focus on identifying opportunities to streamline complexity throughout all technology layers of our products. For instance, in our Enduro drive unit, we managed to consolidate the gearbox, motor, and inverter, which are usually three separate components, into a single casting, referred to as 3 in 1. This approach allows us to simplify assembly by reducing the number of fasteners and speeding up the build time for the drive unit. We apply this strategy across various components, including seat frames, door systems, and body structures. This holistic thinking is integral to our design process and is supported by our vertical integration of technology. Additionally, we've made significant strides in reducing the number of onboard computers and electronic control units by adopting a zonal architecture, where we utilize centralized computers instead of multiple function-based ones. This shift is a key area of focus as we prepare for R2.

And Rod, maybe...

And the volume?

Regarding the volume question, as I mentioned earlier, we currently have 65,000 units of R1 capacity at our Normal plant, and we are working on increasing that capacity. By mid-year next year, we expect to have 55% or approximately 85,000 units designated as R1 capacity as we re-rate the lines. Next year, we will experience a multi-week shutdown to facilitate the addition of this incremental R1 capacity. Simultaneously, we will be rolling out several next-generation technologies that RJ highlighted. We will continue to ramp up production after the shutdown in the latter half of the year, but we anticipate fully ramping up the newly re-rated capacity from an R1 perspective by the end of 2025.

So just to clarify what you're saying, are you saying that you're not going to have the 85,000 units of R1 capacity available for 2024? Or will you?

It will be available. We're re-rating the lines midyear in 2024. And so from a full year perspective, we won't have the full year impact of that re-rate as we go through the process of a couple of weeks shutdown and then ramps back out of that shutdown in the back half of the year.

Okay. But despite that, you're still thinking that you can get to gross profit in 2024?

That's right.

Okay. Just to clarify, it looks like you're expecting a gross profit loss of around $2 billion in 2023. There may be about half of the LCNRV benefit carried over from 2023 to 2024, which gives you approximately $1.5 billion. Additionally, there's a $13,000 price increase; if that had been applied this year, it would have improved things by about $650 million. This means you might be looking at a gross profit loss of around $850 million. The remaining factors will depend on the volume you anticipate as well as reduced component costs. Does that sound accurate as we consider the path to next year?

As we think about that 2024 bridge, right, it's a combination of increased volumes that are driving significant fixed cost leverage within the business as we're continuing to ramp up production levels in the plant in Normal. And then the next 2 core drivers for us is the reduction in our material costs, which you heard RJ talk a bit about, is really delivered through both the combination of engineering design changes in the vehicle through the introduction of these next generation technologies and then the commercial cost-down efforts that we have underway overall. So I would guide you to about a 50-50 split as we think about the core drivers between commercial cost downs and engineering changes to drive the material cost reduction. And then at the same time, we have both the step change in pricing as we move past the pre-March 1, 2022 pricing, and then we also introduced some of the newer higher-priced variants into the fold as well that also further improves or increases ASP in 2024.

Our next question comes from the line of John Murphy with Bank of America.

Just a first question around what's going on with suppliers. It sounds like there's still a fair amount of bottlenecks there. Just curious if you could sort of elucidate where those specifically are, how much they're holding you back. And I mean I kind of applaud you, RJ, for having that Supplier Day. It sounds like it's a good thing to build those relationships, but it sounds like you felt like you needed to do that both for sort of comfort on their part, but also for you to get maybe closer to them and pull them along. So I'm just trying to understand what those constraints are at the moment, how much they're holding you back in 2023 and why you need to kind of get in there and kind of do that bear hug on that Supplier Day.

Yes. Thanks, John. As we look at 2022, there's a lot of challenges just with some of the surprises and the things that we didn't expect in terms of supply interruptions and component availability. Now as we look at 2023, we have much better visibility and a much clearer picture of access to supply and where there are going to be challenges or constraints. And very different than where we were last year. That visibility allows us to focus on exactly what will go wrong or what will be a gap. And as I said today in the numbers that Claire referenced earlier in terms of guidance, it really reflects supply constraint, in our case, around power semiconductors. And this is being addressed through working hard with suppliers, but also as I talked about bring up the new driving at the Enduro drive unit, we've sourced the power semiconductors for this in a way that allows us to have multiple to continue to ramp. So we have a different set of power semiconductor suppliers for our existing driving unit as a quad motor from what we have in the dual motor and in the single motor for the commercial van. So those changes of the new technology, along with the supplier relationships we've built, allow us to alleviate some of that constraint, but it will be the ultimate limiting factor for us this year. And fortunately, unlike last year, we can plan around it. We have this building into what those constraints look like. So it's not going to be a surprise, which is why we're wanting to be thoughtful on how we guide here.

RJ, many people want to understand the situation better. It's not a temporary issue, as the supply chain challenges and internal factors are not resolving quickly. Can we clarify how many units we could produce if we had access to all the semiconductors? For example, would we be able to reach 100,000 units instead of 50,000 this year? Is that too complicated to break down?

The main issue we are facing is that the supply constraint is by far the most significant challenge. We have mentioned our second shifts coming online and the ramp-up of that second shift, but we haven't detailed what is limiting that ramp. Ultimately, it comes down to component supply, particularly on the R1 line. For the commercial vehicle line, we are still operating on a single shift. We wish we had enough components to fully operate the plant across all lines and shifts, but that's not the reality. Regarding power semiconductors, we have multiple sources of supply as well as various technologies at our disposal. We utilize both silicon carbide and silicon IGBTs and have some flexibility in how we implement these across our vehicle platforms. However, it is clear that some of the constraints related to silicon carbide are going to pose challenges over the coming year. We are working diligently to strengthen our supply chain so that as we transition from this year into 2024, we are well-positioned for growth. Additionally, when considering R2, this aspect is a significant factor from a power module perspective.

Okay. And then just lastly, real quick. CapEx at $2 billion is a little bit lower than we would have expected. Claire, is that the kind of thing that you can kind of run with as you're launching Georgia and the R2 and ultimately maybe the R3 at some point? Or could there be a significant step-up as that plant ramps in '24, '25, and we see the R3 come on there as well?

Sure, John. As I talked about, our expectation is that we'll maintain our CapEx in the low $2 billion area over the next couple of years and the guidance reflects the continued build-out of our facility in Georgia, continued investment in our plant in Normal, and then the continued investments that we have across our go-to-market operations as well as across the business in aggregate. So the way I would characterize it is that the $2 billion per year certainly sets us up in a position to launch R2 in Georgia in 2026, as we've talked about in the past.

Our next question comes from the line of Doug Dutton with Evercore ISI.

So given the target for positive gross margins in '24 and what we've heard about the road to reach this goal with the LCNRV phaseouts and rerates at the factory, in your mind, can '25 approach a normalized gross margin profile, assuming full capacity at Normal and price to normalization on the R1 platform prior to sort of R2 coming online? And a follow-up there, is that target still 15% to 20%?

Sure. Our long-term vehicle gross margin target is 20%. And then through the introduction of additional software and services, we've guided to a long-term overall aggregate gross margin target of 25%. Our expectation is through the continued ramp of the R1 and EDV in Normal, we can certainly arrive at our target vehicle margins, and 2025 becomes really that sweet spot as volumes come together and we have our first full year production with the integration of our next generation technologies and price points as well. So I have a lot of confidence around the cash flow generation that Normal can provide Rivian and believe that Normal can support our operating expenses as a company as we continue to invest in the build-out of the R2 platform and get ready to start to launch that platform in Georgia in '26.

Okay. That's helpful. And then just an accounting question for me. Could we have a brief description or explainer on the CapEx and liabilities bucket at the bottom of the cash flow statement?

We can follow up with you with some details there.

Our next question comes from the line of Dan Levy with Barclays.

I wanted to ask about the commentary on the preorders, and I see that they are expected to last into 2024. Can you provide any additional insight on how preorders have trended year-to-date? Specifically, you mentioned pricing as a tailwind and the impact of higher pricing eventually coming through. However, considering the price cut from one of your major EV competitors, how do potential price reductions factor into your considerations?

Thank you, Dan. When considering the R1 product line, it really stands as our flagship offering. We developed and launched it to strengthen the brand. The pricing and market segments for these products focus on a broader range of vehicles, specifically the 3-row SUV and 3-row pickup. The pricing structures should be compared to competitors within those segments, and we are confident in our positioning. The R1T with our standard pack will be priced starting at $73,000, while the R1S will be around $80,000, offering robust performance as a 3-row SUV. We believe our pricing strategy is sound. We made adjustments in 2022 and have not changed since then. As Claire mentioned, our reservation approach now provides us with greater flexibility to adjust pricing over time. Additionally, we anticipate that introducing new technologies and features will help us increase our average selling price, as Claire indicated, not only with new pricing for orders after March 1 but also by incorporating these advancements in the vehicles.

Great. And as a follow-up, I wanted to ask about the direction of some of the material costs. And I know you mentioned on your end, some initiatives to drive cost down. But I want to just ask about the raws because we've seen some cost moderation on the raws. So maybe you can just talk about whether some of the raw material costs are coming down? Or I know there's a dynamic of contract resets. And so those might be higher year-over-year. So maybe you could just talk about the underlying BOM given the movement in some of the raw material costs.

Sure. Today, we haven't seen those actually hit our financial statements because many of our contracts are actually backwards looking as it pertains to inflation index prices that are embedded within those contracts. And so we'll begin to see some of those benefits as we progress throughout the course of 2023 itself. I would also say that embedded within our guidance, we've been a bit conservative of not forecasting really significant reductions in those material costs overall. So much more projecting more of the status quo of what we're seeing today on a go-forward basis.

Our next question comes from the line of George Gianarikas with Canaccord Genuity.

I'd just like to piggyback on the previous demand question, that preorder question. I know you're not disclosing the preorders, but given there have been so many high-profile admissions of a weakening environment for demand, particularly for EVs, I'm curious as to whether you could shed any light or color as to how your net preorders have been tracking?

Certainly what we're witnessing in the macro and what we're seeing in terms of interest rate is, I think, across the industry, having an effect of moderating overall demand. But what we would say is, and as we think about it, the demand backlog that we have is very robust. It gives us a clear line of sight until well into 2024. And with that, it really focuses the attention of the organization on satisfying this large backlog and ensuring that we can get customers vehicles. One of the biggest complaints, in fact, our customer team tells me this every week, is around delivery timing. How can I get my vehicle sooner? Is there a way to get ahead in the line? So this is our core challenge today. Now with that said, it's really important to note with the R2 program, we made comments on this earlier, the focus on cost and the focus on engineering the vehicles really to achieve a materially lower price point is key. And as we look out into the middle of the decade, 2026 and beyond, this cost structure, we believe, is going to be really important. And some of the areas we've invested in terms of vertical integration, we think will be foundational for delivering on those costs.

Just as a follow-up, great segue into my question about vertical integration. I mean I'm sure you've read the same press releases that I have that some of your peers are getting incredibly deep into that. I mean they're partnering with mines, buying mines, buying stakes in mines, and doing things that seem to be a little bit far afield. I'm curious as to how much vertical integration, in your opinion, is too much vertical integration? Do you think that longer term, that might be something that you might explore as well?

Yes. Well, George, I think the core of the question is sort of pointing towards lithium. And your previous question talked about raw material costs, and this has certainly had the most outsized impact across the EV industry, with lithium hydroxide spot market price hovering around $80 a kilogram, up 4, 5x relative to what it was a year, 1.5 years ago. So this is a real consideration as everyone, certainly ourselves included, thinking about what's the right sourcing relationships for lithium in lithium hydroxide, lithium carbonate, and we're certainly in midst of a lot of those discussions. And I think it's causing the material sources and, in our case, the manufacturers, the OEMs, to think about deal structures that are very different than what existed 2 years ago, 3 years ago, 4 years ago. That could involve ownership positions, but I think for the most part, the opportunities lie just more in unique structuring. And so we haven't announced anything on that front, but it's something I spend an enormous amount of time on and work very closely with some of the very large players in this space.

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

You're using up a significant amount of cash this year, having spent over $6 billion. You currently have $12 billion, so at this spending rate, you can sustain yourselves for a few more years. Looking at the guidance, adjusted EBITDA is expected to improve slightly, and with higher CapEx, free cash flow may see some modest improvement this year, but not significantly. What are your thoughts on the possible need to raise capital? When will you begin making those decisions? Or should we expect a substantial change in the coming years?

We'll continue to look at a variety of capital market solutions to maintain our strong balance sheet position. We plan to execute a portfolio-based approach for our capital raising across the entirety of the capital structure. And as I mentioned in my prepared remarks as well, we expect to see pretty significant moderation from a cash burn perspective in 2024 relative to 2023 as gross profit or the movement from negative gross profit to positive gross profit is a key lever in that walk of improvements. And then as we talked a bit about as well, 2025 is significant improvement from there as well.

Got it. I think in the last call, you mentioned you're planning an LFP plant. That's not actually in the near-term horizon. Any thoughts on raising capital to accelerate that given the health at a higher rate that might apply there?

Yes, Colin. As I referenced in the context of lithium supply, if you move slightly downstream from a battery supply point of view and thinking about IRA, there's going to need to be investment in new capacity. And the types of structures and arrangements to achieve that dedicated capacity, there's lots of different ways to look at that. That's something, certainly, that's part of our plan and something that we're spending time on. We haven't announced anything on that front either, but it is a very important aspect of what we're doing in terms of creating new supply, creating supply that's IRA compliant, both in terms of raw material but also in terms of cell production.

And you have your own LFP chemistry? Or do you have a partner for it? Or you had your own?

When considering the development of our battery portfolio, we have an internal team focused on creating chemistry. This team is dedicated to understanding various trade-offs to determine the appropriate cell for different duty cycles and applications. They collaborate closely with key partners to quickly achieve the necessary scale. Currently, our vehicles employ a high nickel chemistry, which we developed in tandem with our supplier to enhance performance. We will soon launch an LFP product first in commercial vans, made in collaboration with a partner we have yet to announce, but those vans will be on the road shortly. Looking ahead, we plan to work with a range of partners and adopt various approaches to scale our different cell form factors and chemistries, including both high nickel and lithium iron phosphate.

Our next question comes from the line of Ryan Brinkman with JPMorgan.

I wanted to get your thoughts on any impact to Rivian you see from the Inflation Reduction Act. I remember as that bill was being written, it was speculated it could have been various different proposals. But in the end, it only subsidized the lower-priced vehicles, right, and benefits those manufacturers that are making the batteries that are vertically integrated or partnered, which you have yet to do. So do you see any benefit in charging or other tailwinds? And how do you expect or hope to or plan to position the company to better benefit from that act as the next several years play out?

Yes. I believe the IRA bill is very ambitious and well-suited to encourage widespread electrification and to establish a supply chain in the U.S. In relation to our R1 product line, it offers some advantages, particularly because we manufacture modules in the U.S., which gives us a $10 per kilowatt hour benefit on the R1 platform. This is a benefit focused on manufacturing. However, our vehicles in the R1 platform do not really qualify for consumer-facing credits. The situation is different for R2. As mentioned previously, it's crucial that we ensure compliance with IRA regulations in both the vehicle design and the manufacturing process, including the batteries. The price of R2 vehicles needs to be significantly lower and align with the requirements outlined in the IRA. Additionally, sourcing key materials and manufacturing the cells must be executed in a way that qualifies us for the $7,500 consumer credit. This is a key factor in our approach to the R2 program and significantly influences our sourcing and engineering choices.

Okay. Great. I also want to follow up on the earlier discussion about pricing, specifically the up to 20% reduction for some Tesla models, as well as Ford and others. I understand there are lower input costs in battery metals, but is there anything else contributing to this? It seems like a significant drop. How do you feel about the current demand and new order intake levels at the prices you are charging?

I believe, as I mentioned earlier, that we are confident in the value of our offerings at today's pricing levels, particularly when comparing the R1S to other 3-row SUVs that provide similar range and performance. We feel it represents a strong value. While we may have a bias, the R1S accelerates from 0 to 60 in 3 seconds and offers over 300 miles of range. Recently, we announced a max pack range of 390 miles, which, combined with the Enduro dual motor configuration, achieves 0 to 60 in 3.5 seconds. Delivering these features at the pricing we offer compares favorably to our competitors. As you mentioned, there have been price reductions of around 20% in some vehicles in the R2 market. Many vehicles in that segment experienced significant price increases in the first half of 2022, followed by rapid declines. What we are seeing now indicates a more stable and sustainable long-term pricing model for midsized crossovers and SUVs compared to the fluctuations we experienced in early to mid-2022.

Our last question comes from the line of Mark Delaney with Goldman Sachs.

One for me, please, was about the re-rating discussion and specifically around the timing and how much of the capacity is being shifted towards R1. I had thought that R1 capacity might be adjusted to something like 2/3 of the facility and perhaps that might be taking place later in 2023. So maybe you could update us on what may have changed in terms of the timing in '24 and the 55% that you spoke about today.

Sure, Mark. As we looked at the re-rating process within the plant, we really tried to optimize around the level of investment that would be required to increase that re-rate capacity. And as we've talked about in the past, desiring today to maintain the 150,000 units of installed capacity in Normal, but just slightly tweak that more towards the consumer side of the business today. And so that was really the way that we calibrated around the trade-offs on how deeply we would have to disrupt the line or the level of downtime that would be required to make a more material increase in the production capacity of the R1 line as we thought about this re-rate process itself. So those are some of the core considerations that we went through as we evaluated the re-rate opportunity for us. And after we sort of go through this re-rate, we'll obviously think through additional opportunities to increase that potentially over time as well.

That's helpful, Claire. And on the IRA, thanks for all the comments you made already so far. But in terms of demand from commercial customers, including for the delivery van, have you seen any change in terms of customer interest levels and when they may be able to or may be interested in taking vehicles?

Thanks, Mark. I should have commented on that in the context of the IRA. Just to be clear, the requirements for domestic cell production for commercial vehicles are much different. In the case of our commercial vans, they are applicable, and the same goes for the R1T in commercial applications. We do see this, and it’s something that some of the business owners purchasing R1Ts are leveraging. For the commercial vans, we believe this will be very important. As we engage with customers outside of Amazon, we recognize this as a significant enabler, helping to drive the large-scale transition of our commercial vehicle fleet towards electrification.

Thank you. I would now like to turn the conference back over to RJ Scaringe for closing remarks.

All right. Well, thank you, everyone, for joining the call, and thanks for the questions. As I said in my starting comments, we're really excited about what we see in front of us. 2022 was an important year for us. It was a critical year where we launched and ramped 3 different vehicles between the R1T, the R1S, and the EDV platform. And as we look into this year, more than doubling the overall output, but importantly, getting a lot of customers or a lot of vehicles into a lot of customers' hands. We'll start to see a lot more of these on the roads, whether that's the commercial vans or the consumer vehicles, the R1T and the R1S. And as that ramp continues and as we start to see more and more of our vehicles on the road, as Claire and I both described, the core focus for us is driving cost down across the business. Some of that will happen naturally as volumes go up when we get the fixed cost leverage that Claire described in some detail, but that's also happening through the engineering changes we're making and this really heavy focus on the commercial relationship with all of our suppliers. So with that, we're very excited about the year ahead and looking forward to getting a lot more vehicles on the road and our path towards profitability. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.