Rivian Automotive, Inc. / DE Q4 FY2023 Earnings Call

Good afternoon, and thank you for joining us for Rivian's fourth quarter and full year 2023 earnings call. Before we begin, matters discussed on this call, including comments and responses to questions reflect management's views as of today. We will also be making statements related to our business operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties 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 our 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 thanks for joining us today. During our call, I will highlight key developments during the fourth quarter, provide an update on the progress we're making against our value drivers, and discuss steps Rivian is taking to adapt to evolving market conditions in our industry. Before I dive in, as part of our ongoing focus on driving cost efficiency, we announced internally today the difficult decision to reduce the number of salaried employees by approximately 10%. These difficult decisions, among other initiatives, I plan to discuss, enable us to maximize the impact we can have as a company. We hold a deep conviction that the entire automotive industry will electrify over the long term. This means, as an industry, we're replacing roughly 1.5 billion internal combustion passenger cars across the planet over the next couple of decades. Rivian's mission is to accelerate this transition. A major goal with the launch of R1 was to build a brand that deeply resonates with customers. Beyond our active owner groups and the R1S being the top-selling EV in the US priced over $70,000, in an owner satisfaction survey conducted by Consumer Reports, Rivian was rated as the number one automotive brand with the highest likelihood for customers to purchase again. We intend to harness this brand strength as we launch R2, which we will be unveiling on March 7th. R2 represents the essence of our brand while targeting the significant mid-sized SUV segment, a massive market with limited compelling EV options beyond Tesla. R2 has been developed with vertically-integrated propulsion platforms, electronics, and software to create an incredible user experience. Our team is laser-focused on the factors within our control that will drive Rivian's long-term value. These include driving cost-efficiency, optimizing our production and deliveries, investing in differentiating technologies, enhancing the Rivian customer experience, and maintaining a strong balance sheet. The progress we've made on ramping production and driving greater cost efficiency was significant in 2023. During the full year, we more than doubled production and deliveries and exceeded our initial production guidance by more than 7,000 vehicles. The team achieved this while also successfully managing the complex integration of new engineering design changes, including our in-house drive units for both the EDV and R1 platforms, LFP battery packs for EDV, and new vehicle variants, such as our Max Pack. Ramping production and introducing new technologies across multiple vehicle platforms has presented challenges, but importantly, our team has gained significant learnings in a compressed timeframe. This experience will be foundational as we execute against our 2024 plan. We took significant steps towards driving greater efficiency in 2023. Gross profit per vehicle improved by approximately $81,000 when comparing the fourth quarter of 2023 to the fourth quarter of 2022. As we start 2024, I want to emphasize our team's continued sense of urgency and ownership mindset in driving further efficiencies throughout the organization. During our second-quarter shutdown, we plan to incorporate additional material cost reductions with the integration of new design engineering changes in the R1 platform, further supplier cost reductions, capture the flow-through of commodity price improvements, and further optimize our manufacturing expenses. We believe these steps position us to achieve modest gross profit in the fourth quarter of 2024. As we start 2024, I want to address the broader industry context, which I referred to during our third-quarter call. Our business is not immune to existing economic and geopolitical uncertainties. Most notably, the impact of historically high interest rates, which has negatively impacted demand. In this fluid environment, we appreciate the expressed interest in demand visibility from the investment community. The conversion of orders to sales can be impacted by several factors, including delivery timing, location of order, monthly payments, and customer readiness. Our order bank has notably reduced over time as deliveries have more than doubled in 2023 versus 2022 along with the impact of cancellations due to both the macro environment and the customer factors I just referenced. For 2024, we expect our total deliveries to derive from our existing backlog as well as new orders generated during the year. Our key focus is on increasing demand to achieve our 2024 delivery targets. Our go-to-market strategy is built on growing brand awareness, enabling our direct-to-consumer experience, and importantly, providing more opportunities for consumers to experience our award-winning R1T and R1S vehicles firsthand. We're scaling our Rivian Spaces program, which are retail spaces, and today we have 11 sites open across North America, most of which have opened in the last six months. These sites have garnered over 130,000 visitors so far in 2024. Complementing our Spaces' footprint are more than 50 service centers serving as another location for current and potential customers to experience our vehicles. We provided over 13,000 demo drives already in the first quarter and consider this to be one of our key demand-building strategies. We've also expanded the lineup of our vehicles and recently introduced our Standard Range variant, which provides an accessible price point for more potential Rivian customers. We are encouraged by the early results. The steps we're taking in 2024 will be foundational in positioning Rivian as a leader in the transition to electrification. The opportunity ahead is significant. We're taking deliberate action to drive additional cost efficiency as we continue building our go-to-market capabilities and develop our R2 platform. I would like to thank all those who continue to support our vision, including employees, customers, partners, suppliers, communities, and shareholders. With that, I'll pass the call to Claire.

Thanks, RJ. I'd like to reiterate our excitement for the long-term success of Rivian. Over the course of 2023, we made significant progress in all four key value drivers, driving greater cost efficiency, continuing to optimize production and deliveries, investing in differentiated technologies, and continuing to enhance the Rivian customer experience. During the fourth quarter, we produced 17,541 vehicles and delivered 13,972 vehicles, which was the primary driver of the $1.3 billion of revenue we generated. Total revenue for the quarter included $39 million of proceeds from the sale of regulatory credits. We expect the sale of regulatory credits to increase over time but to vary quarter-to-quarter. For the full year 2023, we produced 57,232 vehicles, which was significantly above our initial guidance of 50,000 vehicles and more than double 2022 production. Total gross profit for the quarter was negative $606 million. Gross profit per vehicle delivered was approximately negative $43,000. During the fourth quarter, cost of goods sold was negatively impacted by $70 million of cost primarily associated with our planned 2024 shutdown or approximately $5,000 per vehicle delivered. These costs include supplier-related expenses, accelerated depreciation, and other expenses related to the new technology and cost-saving design changes going into the R1 platform. While we could incur additional costs associated with the planned shutdown in technology and design changes in the near term, we do not anticipate these costs to be part of our normal course of business in the longer term. During the fourth quarter, we also delivered a higher proportion of consumer vehicles due to Amazon's expected seasonality. For context, the proportion of our total revenue attributed to Amazon was 8% in the fourth quarter of 2023 versus 30% in the third quarter of 2023. Given our commercial vans have lower material costs due to the technology changes made in 2023, the lower deliveries during the quarter negatively impacted our gross margin. In addition, due to this dynamic, the vast majority of the increase in finished goods inventory in the fourth quarter of 2023 was related to commercial vans. Changes in LCNRV and losses on firm purchase commitments benefited our fourth-quarter results by $7 million as compared to $106 million in the third quarter of 2023, a difference of approximately $6,300 per delivered unit on a quarter sequential basis. Next, I want to help provide more clarity on how we bridge from our fourth-quarter 2023 results to where we expect to reach modest gross profit in the fourth quarter of 2024. The largest driver, which represents approximately 50% of the bridge, is our plan to reduce our variable cost per unit. The majority of this will be accomplished through material cost reductions, planned as part of our Q2 2024 shutdown. As a reminder, this is through engineering cost reductions, such as our ECU and wire harness simplification through our commercially negotiated cost reductions and contribution from lower raw material costs. The second driver, representing approximately 35% of the bridge, is through our focus on driving greater efficiency through our production facility. As part of our planned shutdown, we are increasing the R1 line rate by approximately 30% to more efficiently produce vehicles. We also expect to see a benefit from declining LCNRV and firm purchase commitment balances in 2024. The final piece of the bridge, which represents approximately 15%, is the scaling of our non-vehicle revenue. With over 70,000 Rivians on the road, we have the opportunity for increased revenue areas such as regulatory credits, accessories, service, remarketing, and software-enabled services. These drivers are core to our long-term margin targets, and we expect to continue to drive recurring revenues in these areas as the car park grows and we expand our offerings. Our adjusted operating expenses for the fourth quarter were $706 million. For the full year, our adjusted operating expenses of $2.7 billion represented 2.5% growth versus 2022, despite our production and delivery volumes more than doubling over the same period. As RJ mentioned earlier, we are in the process of optimizing our operating expenditures by reducing our salaried employees by approximately 10%, along with a limited number of non-manufacturing hourly employees. Our adjusted EBITDA for the quarter was negative $1.1 billion. For the full year, our EBITDA was just under our guidance of negative $4 billion. Turning to our business outlook for 2024, we remain focused on driving greater cost efficiency across the company. We are guiding to 57,000 total vehicles produced for the year. Compared to 2023, we anticipate consumer and commercial vehicle deliveries to grow by low-single digits. As we discussed on last quarter's earnings call, we expect to shut down both the consumer and commercial lines in our plant for several weeks during the second quarter to introduce cost savings and in-vehicle technologies to the R1 platform. We believe these changes will meaningfully reduce our material costs and position Rivian to exit 2024 with a much improved margin profile. While the direct downtime will be over a portion of Q2, we anticipate this to impact all four quarters of output, as we prepare the facility for the work and then individually ramp each vehicle variant, as well as our supply chain following the shutdown. As for the first quarter of 2024, due to managing changes in our supply chain associated with the introduction of new materials, we expect to factory gate approximately 13,500 units for the quarter. We expect that there will be a few thousand more vehicles, which are built but not factory gated as they wait for an updated part we expect to receive in April. We anticipate the first quarter total deliveries to be approximately 10% to 15% below the fourth quarter of 2023 deliveries. While the incorporation of new design changes impacts near-term production, we are confident it better positions Rivian to be more profitable and competitive over the long term. We expect 2024 EBITDA to be negative $2.7 billion as we focus on continuing our go-to-market infrastructure buildout and the development of R2, while also optimizing our costs driven by the integration of key new engineering technology and design changes, negotiated supplier cost reductions, and a more efficient operating expense structure. Recently, we have taken measures to rationalize our capital expenditures due to a greater focus on our core business. Capital expenditures in 2024 are expected to be $1.75 billion, driven by additional investments in our production facilities, next-generation technologies, and the continued buildout of our go-to-market operations. We remain confident that our cash, cash equivalents, and short-term investments can fund our operations through 2025. We aim to maintain a strong balance sheet position by continuing to drive cost efficiencies and improve our vehicle unit economics while opportunistically evaluating a variety of capital markets available to Rivian ranging across the capital structure. Over the long-term, we continue to see a clear path to our approximately 25% gross margin target, high-teens adjusted EBITDA margin target, and approximately 10% free cash flow margin target.

Thank you. Our first question comes from John Murphy with Bank of America. You may proceed.

Good afternoon, guys. Just a question on the downtime, relative to the R1 versus the launch of the R2. And RJ, just curious, is it maybe better to focus on pulling forward the launch of the R2 and committing capital both human and dollars to pulling that forward and getting that high-volume program up and running as opposed to tinkering with the line on the R1 and maybe circling back to that R1 line later? Is that possible or are there constraints, or I'm just kind of misguided and these things can both happen at the same time and you can't pull the R2 forward at all?

Yeah, thanks, John. We're certainly working very hard to make sure we deliver R2 on time and to the extent possible, pull any time we can out of the program. I think what has us so excited about R2 is, if you look at the success of R1 in terms of how the markets responded to the brand and product, it's the top-selling EV with a price point of over $70,000. Our hope is to translate the brand strength we've demonstrated for Rivian with R1 into the R2 product and into a much lower-price segment which has a very large addressable market. The key thing, though, coming back to your question on R1, is just recognizing how much of the content going into the shutdown in Q2 actually translates to R2. So, there’s a massive consolidation of our ECUs in the vehicles. That's all the computers in the vehicle which we design and engineer in-house. We've consolidated them, reducing the number of computers by about 65%. That network architecture and associated ECU topology are very closely related to what's in R2. So, it not only de-risks R2, but it's part of the development process and sequence associated with the launch of that product. These changes that we're making to R1 regarding just the overall changing out of hundreds of components and associated suppliers with those components also corresponds to several supplier engagements we have that link to R2. The volume that R2 brings allows us to be more aggressive in pricing with a number of the suppliers on the R1 program. So, the two are very much interlinked. With that said, as we think about our focus as a business, the shutdown and the updates associated with it in our bill of materials and along with the line are really part one to the major focus for us as a business, which is the successful launch and rapid ramp-up of R2 production.

That's very helpful. One follow-up. If you think about product cadence and spacing of product, do you feel like the tack that Tesla is taking of a relatively sparse product launch but constant improvement is more appropriate in the direction you're heading, or do you think something closer to a typical sort of four to five-year product lifecycle with many products interspersed is the way you're ultimately going to land as we kind of look five to 10 years in the future?

Yeah. When we think about it from a customer point of view, one of the things we see as most valued is making sure that the platform and architecture of the vehicle allows for a continuous stream of updates. In the R1 product, customer satisfaction is extremely high. The brand strength is high. Consumer Reports rates us as having the highest level of brand equity, where the likelihood to repurchase is the highest for our brand. A lot of this is borne out of the updates we're making through software improvements. We think that's a dramatic shift in how we think about products and overall vehicle lifecycle. That will translate into R2. Learning from what we went through in launching R1 with R1T and R1S, along with the commercial vans, all in parallel, we've simplified the product portfolio cadence with R2. There’s a single vehicle that we're launching, and the number of build combinations and trim combinations is very limited, with an emphasis on managing rapid ramp-up of the supply chain and driving operational efficiency into the R2 plan.

Thank you. One moment for questions. Our next question comes from Adam Jonas with Morgan Stanley. You may proceed.

My first question is, how much of the volume that you forecast for this year is pre-order versus what you would expect to be sold out of inventory? And I have a follow-up.

Thanks, Adam. Our backlog is something that we know invites questions around it. A lot of the customers in our backlog have been there for years. As a result, it's not as if the moment someone gets to the front of the line, they can take delivery at that moment due to several life situations, such as when they are ready to take on a new vehicle, the coordination around their financing expectations, etc. The way to think about our backlog is to recognize that this will continue to exist through the remainder of this year. In parallel with delivering vehicles from our backlog will also be delivering vehicles from newer orders, orders that occur over the course of this year. This is a transition for us as a business where we go from purely delivering from backlog to quick deliveries for new demand. To facilitate this transition, we've created customer-facing structures named the R1 Shop to allow more common build combinations to be available and to allow customers to access vehicles more quickly. One of the most common questions we still receive is, 'How quickly can I get my vehicle?' Managing this dynamic of immediate gratification alongside customers who've been waiting for two to three years has been challenging, and we expect to continue managing that balance throughout the year.

Okay. And just as a follow-up, the EV world has changed, RJ, since the 2021 IPO in various ways, including more moderated demand and a pretty uncertain economic environment. Has the Board and the management team remained fully committed to that vertically integrated strategy in Georgia, or has any alternative to the greenfield option in Georgia or adjustments in terms of size or potential partnerships been considered?

Thanks, Adam. The way we've approached our Georgia facility is to build out the plant across two phases, so it's not a single 400,000 unit block but rather two 200,000 unit blocks. We think we're in a significant moment where there is a lack of choice of highly compelling EV products in the $45,000 to $55,000 price range. Recognizing the average price of a new vehicle transaction in the United States last year was around $48,000, we need to understand how to excite the 93% of the market that currently isn't buying an EV. R2, with the layout, package, and configuration, creates a compelling configuration and generates strong demand. We remain very bullish on the R2 segment and product itself. We have engaged with suppliers to ensure that we can ramp effectively and shape our production roadmap, albeit measured across two phases, which has been thoughtfully aligned with the scale of the opportunity and transition we foresee during this decade.

Thank you. One moment for questions. Our next question comes from Joseph Spak with UBS. You may proceed.

Thanks. Good afternoon. Just on the workforce reduction, obviously, some tough decisions. I know Claire and RJ have focused on gross profitability, but can we focus a little on OpEx? You're cutting the workforce by 10%, but how do you ensure that this is the right level? In 2023, if I look at where Tesla was at a similar level of sales in 2015, you're still about 80% above that.

Yeah. Thanks, Joe. When we think about OpEx, there's a number of components here. If we look first at R&D — between R&D and SG&A, on the R&D side, while useful to compare to Tesla in 2015, we are competing against Tesla and others in 2024. We're driving incredible focus on efficiency and how we develop our products. Internally, we talk about being the most efficient at turning capital into amazing products, but we need to be spending appropriately in core areas. A few areas we made the decision to develop vertically in-house, creating what we believe to be significant long-term advantages, are around the electronic stack in the vehicle, the ECU and computer topology, the software, and our high-voltage architecture, which creates technical differentiation and enhances the consumer experience markedly.

Okay, thanks for that. And on CapEx, you talked about a fiscal '23 and '24 average below $2 billion. Is that still the case?

Of course. As we think about the broader context, first and foremost, we are focused on driving efficiency across the entire company. These efforts have enabled us to shift CapEx and dramatically reduce the required CapEx across the business. This is through pressuring investment areas, including how efficiently we can invest in re-rate activities, the level of tooling investments, and adjusting efficiency in our go-to-market operations.

Thank you. One moment for questions. Our next question comes from Rod Lache with Wolfe Research. You may proceed.

Hi, everyone. Your release mentions the 2024 forecast requiring an improvement in order rate, driven by planned go-to-market strategies. Is it reasonable to assume that the Q1 deliveries projected here are reflective of the current order run rates, around 12,000 or 135 per day? What impact are the new strategies, like the standard variance and leasing, having? Also, how will you get the word out?

Sure. Thanks, Rod. We launched the Standard pack variant recently, which had strong reaction in demand generation. Importantly, it has also driven demand for our Quad Large pack. We are building out our go-to-market infrastructure, which includes our 11 Spaces and over 50 service centers, to create opportunities for customers to experience our R1T and R1S vehicles firsthand. Getting customers in our vehicles is the most effective way to drive brand awareness and convert that into orders and sales, and we have focused on building up those capabilities in the business.

Thank you. Regarding the EDV demand outside of Amazon, can you provide an update?

We're excited to have new customers running pilot programs, with more coming online. We've talked about the complexities related to transitioning to an electric fleet for large players. These pilot programs will start to transition into larger orders throughout the year. We don't anticipate the significant step-up in demand from non-Amazon customers until next year, around 2025.

Thank you. One moment for questions. Our next question comes from George Gianarikas with Canaccord Genuity. You may proceed.

Thank you for taking my questions. I'd like to understand the Q1 delivery cadence, which is down by 10% to 15% sequentially. Can you help explain the reasons behind that? Is it related to supply, or does it connect with your earlier comments on demand?

Thanks, George. Claire referenced some impacts from supplier changeovers, which will be felt in Q1, shown in some one-time charges from Q4. We'll feel more of that in Q1. We'll also build several thousand vehicles that won’t be deliverable to consumers, leading to lower guidance. While the plant won't shut down in Q1, we do anticipate the impact of the scale of supplier changeover and will work to make deliveries quickly in Q2.

Thank you. As a follow-up, with over 70,000 cars on the road, how has the data collection informed you about product performance and what you'll put into the R2?

There's a lot to learn. One of the things that's been surprising is how customers interact with the overall digital experience and digital ecosystem of the vehicle. We closely track how users engage with the experience, and it has led to enhancing usability. The software roadmap looks at how everything fits together. Active dialogues with customers inform how we develop future software features, thereby shaping the content needed in R2 to deliver a Rivian experience while also considering price point.

Thank you. One moment for questions. Our next question comes from Dan Levy with Barclays. You may proceed.

I wanted to start with a question on your bridge to gross margin breakeven. Can you help me understand what incremental offsets are currently enabling you to get to this breakeven?

As you heard in my remarks, the largest piece of the bridge left from Q4 '23 to Q4 '24, in which we expect modest gross profit, is variable cost. This is enabled by continued negotiations with suppliers and opportunities for material cost reductions. We also have planned engineering design changes, and the declining commodity prices such as lithium are helping our cost structure. I would also note that the fixed cost absorption is a smaller bucket under today's circumstances, with our operational efficiency becoming a major focus.

As a follow-up, can you comment on the demand-side pricing elasticity? Are you looking to hold firm on pricing amid current demand?

Thanks, Dan. We're monitoring the pricing environment closely. The recent launch of our Standard pack was to ensure we meet customer requests and tap into a price-sensitive market. While we recognize there's demand elasticity at play, we feel comfortable with the current pricing of the Standard pack. However, we need to approach the general market and how competitors behave with caution.

Thank you for your participation. You may now disconnect.