Rivian Automotive, Inc. / DE Q2 FY2024 Earnings Call

Good day, and thank you for joining us. Welcome to the Rivian Second Quarter 2024 Earnings Conference Call. All participants are currently in listen-only mode. Please note that today's conference is being recorded. After the presentations, there will be a question-and-answer session. I would now like to introduce your speaker today, Tim Bei, the Vice President of Investor Relations.

Good afternoon and thank you for joining us for Rivian's second quarter 2024 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 in the second quarter and provide an update on the progress we're making against our value drivers. Prior to discussing quarterly details, I want to reinforce the key messages conveyed in depth during our recent Investor Day. To achieve the full potential of our vision, we need to aggressively drive towards profitability. The fundamental levers underpinning this goal include the recent transition to our second generation R1 and the subsequent introduction of our mid-sized platform, which underpins R2. I am encouraged by the progress ramping up our second generation R1 vehicles as well as developing R2, which we expect to launch in the first half of 2026. The ability to dramatically reduce costs in a condensed timeframe and drive continual improvement in the customer experience is based on our intentional approach to vertical integration. From the beginning, we have vertically integrated certain components of the vehicle, driven by the desire to create superior customer experiences and deliver long-term structural cost advantages. The success of this is demonstrated by a recent J.D. Power APEAL Study where Rivian received the highest score and recognized as the most satisfying brand across the automotive industry. We spent years developing key technologies such as our software, electrical hardware, economy, and propulsion. The significant cost and performance benefits from these technologies give us confidence in our ability to continue developing and building highly desirable vehicles across the R1, R2, and R3 product lines. As a testament to our industry-leading technology platform, on June 25th, we announced the expected joint venture with Volkswagen Group. The announcement validates our technology platform and is expected to substantially expand the market applications for our software and associated zonal electrical architecture. Rivian's proven electronics and software platform is expected to serve as the foundation for future software development in the partnership. The technical workstream to prepare the integration of our electrical architecture and software technology stack into Volkswagen Group products is moving along very well, and we expect to close the joint venture in the fourth quarter of this year. As the auto industry transitions to smarter, more connected, more complex, and integrated vehicle architectures, we strongly believe our technology is best positioned to deliver a modular and scalable platform that will help create highly compelling products and services that we expect will accelerate consumer shift to electrification. Additionally, I want to take this opportunity to acknowledge our team, who has continued to execute on our second generation R1 ramp of production and deliveries, R2 development, and the formation of our joint venture with Volkswagen Group. During the second quarter of 2024, we successfully completed the retooling upgrade in Normal. This was a pivotal operational event for the company. The upgrade introduced new technologies and cost-focused material changes into the R1 vehicle platform, while also incorporating manufacturing process improvements that are expected to enhance cycle time, utilization, and cost. For example, we have reduced complexity and lowered the cost associated with the vehicle body, with a heavy emphasis on removing parts, processes, and steps. These changes have reduced nearly 1,500 joints and contributed to an expected 30% improvement in the R1 production line rate. Following completion of the retooling upgrade, we resumed production and are encouraged with the early progress of ramping our second generation R1 variants. The new R1 vehicles have hundreds of design, engineering, and performance upgrades, with the most significant being an entirely new zonal architecture, new compute and autonomy platform, new in-house drive units, and a re-engineered suspension system. The introduction of the second-generation R1 platform, combined with commercial cost reductions and commodity tailwinds, are expected to enable significant material cost reductions. Importantly, I want to emphasize there is more to go. We are focused on reducing R1 costs beyond 2024 through lower material costs and conversion costs. As we continue to source materials for R2, we are seeing opportunities to further reduce the cost of R1 through additional supplier cost reductions. In addition, we believe the expected joint venture with Volkswagen Group will allow us to achieve more favorable pricing from suppliers. This includes components, chipsets, printed circuit board assemblies, and all the associated content that relates to those hardware systems. I want to delve in further on our new second generation drive units which represent a significant change in capability and cost. The second generation R1 includes our Ascent motor system which underpins our new Tri-Motor and Quad-Motor variants. These motor configurations in addition to our Dual-Motor released in 2023 mean all motors on all Rivian vehicles are now designed, engineered, and manufactured fully in-house. The 850 horsepower Tri-Motor variants are expected to start deliveries toward the end of the third quarter. The Tri-Motor variant is equipped with two Ascent motors in the rear and one Enduro motor in the front for a blend of exceptional power and range. The Tri-Motor R1T delivers 0 to 60 miles per hour in 2.9 seconds while offering an estimated range in conserve mode of approximately 400 miles. The Quad-Motor is designed for peak adventure with four Ascent motors. The Quad-Motor delivers 1,025 horsepower and goes from 0 to 60 in less than 2.5 seconds, achieving the quarter-mile in less than 10.5 seconds. Feedback on our second generation R1 has been very positive. It is a fundamentally better vehicle while simultaneously costing less to build. We're excited to get more of our second generation products to customers and available for demo drives in the coming quarters. At Rivian, we wake up every day thinking about ways to make our products better. This is based on our sense of urgency in transitioning the world towards a fossil fuel-free future. This is achievable by creating products that are deeply exciting to consumers, products that carry attributes and design characteristics that pull people out of internal combustion vehicles because they're experiencing something that isn't just better for the environment but also really enjoyable and desirable to use every day. 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. During the second quarter of 2024, we made significant progress driving greater cost efficiency, further strengthening our balance sheets, validating the differentiated nature of our technology stack, and establishing new business opportunities. During the second quarter, we produced 9,612 vehicles and delivered 13,790 vehicles, which represented the primary driver of the $1.2 billion of revenue we generated. As expected, second quarter production was impacted by plant downtime associated with the retooling upgrade. Our deliveries were strong as we sold through the majority of the inventory of our first generation R1s. Due to strong Q2 performance, which led to our lower starting finished goods inventory balance and the continued ramp of production throughout the third quarter, we expect our third quarter deliveries to be below our second quarter results, and production volumes to be in line with our first quarter levels. Total gross profit was negative $451 million. Our gross profit loss per vehicle delivered was approximately $33,000, which includes approximately $15,000 of depreciation and amortization expense and $1,200 of stock-based compensation expense. In addition, we incurred approximately $2,400 per vehicle delivered in the quarter related to our cost of revenue efficiency initiatives, which we do not anticipate being part of our long-term normalized cost structure. We expect to see significant cost reductions in our R1 platform during the second half of 2024 as we ramp the production and deliveries of our second generation R1 vehicles. Additionally, the reduction in our LCNRV write-down for the quarter compared to Q1 2024 reflects the progress we are making in association with our material cost reductions and operational efficiencies associated with our second generation R1 vehicles. We remain confident in our path to deliver modest positive gross profit in the fourth quarter of 2024 and for the full year of 2025. Importantly, our team is already focused on driving incremental costs out of our R1 platform to help achieve our long-term gross profit target of 25%. The key drivers of our long-term R1 profitability include reducing material costs, leveraging our fixed costs, and scaling our revenues per delivered unit through product mix and pricing, software and services, and other revenue streams. During the second quarter, we also announced the intention to form an equally controlled and owned joint venture with the Volkswagen Group to create next-generation electrical architecture and best-in-class software technology. In association with this deal, Volkswagen Group has made an initial investment of $1 billion into Rivian, with up to $4 billion in planned additional investments for a total deal size of $5 billion. The incremental investments are subject to the completion of definitive agreements, the achievement of certain milestones, and the receipt of regulatory approvals. Assuming all criteria are met, we expect that the full $5 billion is intended to flow to the benefit of Rivian. In addition to the $5 billion of capital to Rivian, we anticipate incremental benefits through cost savings on materials, operating expense efficiencies, and future revenue opportunities associated with the joint venture. The initial and planned investments by Volkswagen Group, in addition to our cash, cash equivalents, and short-term investments, are expected to provide the capital to fund Rivian's operations through the ramp of R2 in Normal, as well as the mid-sized platform in Georgia, enabling a path to positive free cash flow and meaningful scale. As RJ mentioned, we expect the deal to close in the fourth quarter of this year, and we will provide additional details at that time. During the second quarter, we improved our cash flow from operations by 41% compared to the first quarter of 2024. This improvement is reflective of our continued focus on cost and greater working capital efficiency across the business. As compared to the first quarter of 2024, we reduced our gross profit loss per vehicle by approximately $6,000 and made progress on reducing our gross inventory balance. We believe these trends will result in further improvements in our cash usage for the second half of 2024. As we look ahead, we are reaffirming our 2024 production guidance of 57,000 units, delivery expectations of low single-digit growth compared to 2023, EBITDA guidance of negative $2.7 billion, and capital expenditures of $1.2 billion. As a reminder, coming out of the retooling upgrade, we are currently operating the R1 line on a two-shift operation, which results in a 56,000 unit annual run rate output. Our commercial van line is currently running on a limited one-shift operation, which has a potential to deliver a run rate annual output of 15,000 units. As we look ahead for 2025, we expect that our Normal facility will not be producing vehicles for more than one month during the second half of the year as we upgrade and integrate new equipment into the plant ahead of our first half of 2026 R2 launch. We continue to see a clear path to a long-term, approximately 25% gross margin target, high teens adjusted EBITDA margin target, and approximately 10% free cash flow margin target. I wanted to again thank our team, partners, customers, suppliers, and shareholders for the tremendous support. With that, let me turn the call back over to the operator to open the line for Q&A.

Our first question comes from George Gianarikas with Canaccord Genuity. You may proceed.

Hi. Good afternoon, and thank you for taking my questions. Maybe just to start, can you just please talk about your geographic strategy, particularly in Europe in light of the recent VW relationship?

Thanks, George. As it stands today, the R1 products are being sold throughout the United States and Canada. And our EDV products, our commercial van products, are primarily focused in the United States, but we have made some deliveries in Europe and specifically in Germany. Now, regarding our future products with R2 and, of course, R3, those have been developed really at their core to fit not only the US market but also to fit the European market. You can really see it as you look at the R2, R3 combination of what we believe captures a sweet spot in terms of addressing demand for midsize SUVs in both US and European markets but also with R3, capturing a smaller crossover market. And so, as you've heard us talk about many times, this is one of the aspects we're so excited about with the R2 platform is just the growth in the addressable market for us as a business.

Thank you. Maybe as a follow up on the VW relationship, I know you're still working through the details, you mentioned that. But is there any update on the potential to transfer some of your OpEx into that JV? Thank you.

Yes. As you said, we haven't announced the specifics around the joint venture, inclusive of any associated cost sharing. But I think importantly, I'd want to call out how this relationship was formed. It's really founded on the basis of leveraging the technical platform that we built around our network architecture, our topology of ECUs, and of course our software stack, and enabling that technology to really scale well beyond Rivian's product line and allowing us to get to global scale across multiple markets very quickly. So we're ecstatic about the impact that can drive in terms of helping to create exciting products that give consumers choices to move towards electrification. We're also excited about the scale that that provides us from a sourcing point of view and a supply chain point of view as we think about the components and the assemblies that go into those systems.

Thanks.

Thank you. Our next question comes from Mark Delaney with Goldman Sachs. You may proceed.

Yes, good afternoon. Thanks very much for taking the questions. First, I was hoping to better understand how the company is tracking toward the target of positive gross margin in the fourth quarter and have the drivers changed at all, especially as we've seen things like a 2.99% incentive that you're utilizing and perhaps that changes the mechanics to the positive gross profit bridge?

Thanks, Mark. There are still three key drivers to our path to positive gross profit in Q4. The first is the variable cost improvement. We spent a lot of time at our Investor Day talking about the material cost reduction roadmap associated with our new Gen 2 technology introductions, material cost reductions that we've had through supplier negotiations, as well as the commodity cost tailwinds that we anticipate seeing throughout the course of the second half of this year into 2025 as well. The second driver is our fixed cost leverage, and this is enabled by the retooling upgrade that we had in Normal, which has improved our production line rate by approximately 30%. And this together with the increased Q4 production volumes we anticipate seeing, as well as our reduction in depreciation expense across the business, will help drive this fixed cost leverage. And the last key driver for us, as we talked about in the past, is an increase in revenue per delivered unit, and this we'll see through the introduction of our Tri-Motor R1s that you heard RJ speak about in his prepared remarks, as well as non-vehicle revenue growth from the sale of regulatory credits and the introduction of our pre-owned Rivian sales. We continue to remain confident in our path to positive gross profit in Q4. And it's important to note that our Q2 results had very limited sales of our Gen 2 vehicles. So you're not actually seeing any of the flowthrough of the improvements that we've made throughout our production line or our material costs, yet flow through the results themselves as we look at the Q2 actions as a whole.

Thanks for that, Claire. My second question was how to better think about the material cost improvements you're looking to achieve, such as the 20% for the Dual-Motor Large Pack second gen R1 compared to the first gen. I think those cost improvements did not incorporate some of the potential savings you think you may be able to realize now that you have the VW news out there and some of the response you've seen from suppliers. So I realize it's still somewhat early, but can you share a bit more on the magnitude of potential material cost improvements you may see as you're able to execute on some of that expanded opportunity? Thank you.

Yeah. Thanks, Mark, for the follow up. You're absolutely right. There's—the 20% that we've referenced in cost reduction on the bill of materials for a like-for-like vehicle, that's based upon technical changes made to the vehicle and supplier negotiations that we drove over the last 18 months. There's certainly more room to go in terms of applying some of the leverage that we're going to see not only with the relationship we're building with Volkswagen but also with the scale that comes with R2. And so we do see continued progress as we drive towards the long-term goal of 25% gross margin for our normal facility. And it's—these continued cost efforts that we're talking about here reducing our bill of materials, we also see improvements happening in our conversion costs at the plant. And those conversion costs are both the continued progress around efficiency improvements within the plant, but also over time, the enhanced fixed cost leverage that's going to come from bringing R2 to production in Normal as well.

Thank you. Our next question comes from Philippe Houchois with Jefferies. You may proceed.

Yes, good afternoon. Thank you very much. A couple of questions for me. One is about the EDV in the release. Could you give us an update on how your customer trials are going on and might have kind of an idea of when you might have first customers outside of the Amazon deal?

Thanks for the question, Philippe. The EDV program is something that for us is—we're really excited about the impact of it in terms of reducing carbon emissions on a per mile basis is outstanding over internal combustion vehicles. And we've been able to really prove the robustness of the platform and the strength of the offering through our relationship and partnership with Amazon. Having a large deployed fleet of these before we started running the pilot programs we've talked about in the past with non-Amazon customers was really helpful as we were fine-tuning not just the vehicle, but also the software surrounding the vehicle. Over the course of this year, we've been running pilots in anticipation of more significant ramp-up in 2025. This focus on pilots is really reflective of the nature of this business where these are large decisions around large numbers of vehicles for a lot of these bigger fleets. It's appropriate that we build effective working models for how the vehicles are serviced, what digital support the vehicles have, what infrastructure changes are necessary for each respective fleet. It's a lot different than adding a single charger in your garage when you buy an R1, when you're thinking about adding many chargers and a lot of new power into, let's say, a fulfillment center, distribution center, or an operating center if you're a business that's running 20, 30, 40, 50, or even 100-plus vans out of it. So these are great learnings that we've been driving off the basis of what we've put together with Amazon. We are looking forward to starting to talk about other customers beyond Amazon.

Thank you very much. If I could ask one more question. Regarding the Volkswagen relationship, is it correct to say that you expect it to close in the fourth quarter? At that time, will you disclose the terms of the joint venture, assuming you and Volkswagen agree? Also, will we receive information on the accounting and how costs might be shared with the joint venture in each region during the fourth quarter?

Yes, exactly. We'll be filing the definitive agreements associated with the Volkswagen technology joint venture. Once the JV is closed, which we anticipate being in Q4 this year, we will provide additional clarity on some of the financial impacts of the JV to Rivian's longer-term financial forecast and trajectory, as RJ pointed out. We do anticipate seeing beyond the capital that the Volkswagen Group will provide incremental benefits including material cost savings, operating expense efficiencies, and future revenues associated with the joint venture.

Great. Thank you very much.

Thank you. Our next question comes from Dan Levy with Barclays. You may proceed.

Hi. Thank you for taking the questions. I wanted to go back to Mark's question earlier, and maybe you could just help us unpack some of the ASP dynamics in the quarter because we know that there was some discounting that you needed to use to clear out some of the old inventory. And I guess wondering really what the – how we should think about the right starting point for where you were on an ASP perspective in the second quarter, if we forget about some of the discounts? And based on what you're seeing, I believe you need to hit flat ASPs from where you were in 1Q to hit the gross margin. So just anything on the right way to look about ASPs and the discounting needed for your targets.

Thanks, Dan. The challenge with introducing an update or a second generation to a product, while still, of course, producing the first generation, is precisely what you just referenced, which is that we—that we—the decision to cease production, immediately start production, and have no inventory in the system. So, it's the inventory of our Gen 1 vehicles. We did have some attractive pricing on some of those variants of our Gen 1 vehicles to essentially, as you said, clear them through the system as we then start producing and delivering our Gen 2 vehicles. We don't look at that as a long-term shift in pricing but rather reflective of the step change we've seen in the Gen 2 vehicles in terms of performance and capability. We're really pleased with the results that we saw in Q2. You saw that the number of deliveries exceed production by quite a bit, and that was really the burn down or burn through of the Gen 1 inventory. Now, in terms of ongoing expectations for ASP, I'd want to call out here that with the introduction of the Gen 2 vehicle, Claire references that we have a Tri-Motor and we have a Quad-Motor. The Quad-Motor performance is extremely high. It's a significant step forward relative to our first-generation Quad. Acceleration is a lot quicker, the range and efficiency is improved, and the thermal performance, especially for off-road and intense driving, is outstanding. This allowed us to move the Quad-Motor up-market and the Tri-Motor to really occupy the price position and price space where we saw the first-generation Quad operate. That was very intentional. Between the Dual-Motor, the Tri-Motor, and the Quad-Motor, we've created a wide band of pricing starting at just over $70,000 and going well into over $100,000. That allows us to not only offer vehicles to those that are very price-sensitive but also provide products that meet customer desires for the best of what we can build. Those changes in the drivetrain definitely help maintain ASP, but importantly we also have a new trim package that we've just launched, known as the Ascent trim. This trim package, integrated into the Tri and the Quad-Motor configurations, offers customers a variant or choice at a higher price point while delivering more content and features.

Maybe just adding a couple of additional points of color back to prior comments that we've made in the past. In our Q4 earnings call, we mentioned that we expected our ASP for the vehicles themselves to be consistent in Q4 of ‘23 relative to Q4 of ‘24. We still expect that to be the case as we sit here today. As we think about the seasonality of the business, consistent with Q4 of last year, it's far more indexed towards R1 sales relative to commercial van sales, which in aggregate lifts the overall revenue per delivered unit because of the Amazon-related seasonality that we expect to continue to be the case in Q4 of this year. Furthermore, in RJ's final comments, we'll have sales of our Tri-Motors in Q4, which will allow us to stretch up the higher end of ASPs to complement our starting price point, which remains at $69,900 for our Standard packs for R1T.

Got it. So it sounds like there's some positive mix assumptions in there. Thank you. Just as a follow-up, I wanted to go to the VW investment and wondering, from a— the fact that you got this money in what I think many of us consider to be a more efficient manner than going through the capital markets, what does this allow you to do from a product plan or capacity perspective that wasn't previously on the table if you were going to be fully reliant on the capital markets?

A really important part of what this deal represents for us is that it really eliminates a lot of the risk that was projected around our balance sheet and allows us to focus on launching R2 still in Normal, still using our Normal facility. As you’ve heard Claire and I both mention as part of our Investor Day, we now have the balance sheet to support launching R2 but also to support taking us through to positive cash flow. We recognize the importance of that focus on driving efficiency into the business, both in terms of how we operate the business and in terms of our capital deployment, from a CapEx point of view and investment perspective. The organization is highly focused on driving towards profitability and is hyper-focused on the launch of R2 and what that represents for us in terms of the scaling that accompanies it.

Thank you. Our next question comes from Joseph Spak with UBS. You may proceed.

Thanks. Good afternoon. RJ, maybe you could just dive a little bit more into what is exactly happening in the plant and what's impacting the R1 line, R2 work during next year. And then, Claire, can we expect that the R1, given that most of the changes are already done, can ramp back up pretty quickly so we can understand the shape of gross margins next year because it sounds like you guys are planning for maybe some sequential improvement until that downtime, maybe a downtick in the third quarter and then a recovery in the fourth quarter. I just want to make sure that's—we're properly calibrated there.

Sure, Joe. As we think about the operations next year, we're looking at 2025. We’ve said we're going to be taking the plant down for roughly a month while we make some of the changes necessary to integrate the R2 production into the plant. Some of that work has already happened. We did some of the preliminary work in the most recent shutdown in conjunction with the move from Gen 1 to Gen 2 on our R1 platform. The shutdown that's going to happen in the second half of next year will make the splicing together of certain parts of the plant possible. That's part of our plan. We'll be working around that. But as we did with the Gen 1 to Gen 2 transition, we wanted to provide very early guidance around this and ensure expectations were appropriately set for what will have to happen in the plant next year to integrate R2.

And then based off of the second part of your question as well, given the impending shutdown, there will be some choppiness to the financial results as we look at not just a quarter sequential improvement in our results regarding the gross margin trajectory. As I mentioned in my prepared remarks, we still maintain that we'll have a modest positive gross profit for the entire year of 2025 in particular. But certainly, with the shutdown in the second half, we'll feel some of the impacts of lower absorption of labor overhead and depreciation like we experienced in Q2 of this quarter, due to lower production volumes that we had in the Normal facility itself. Nevertheless, RJ’s point about the November shutdown pre-work for our Q2 shutdown shows that we were able to return right back to line rate based on the aftermath of that shutdown. We expect not to see a staged ramp back up from a production standpoint, as we’ll have already ramped up our supply chain, which is one of the gating factors as we’ve gone through the course of ramping up new technologies in our redesigned Gen 2 product.

Okay. Thank you for that. As a second question, I don't know if you guys really ever—certainly don't address this—talk about it this way. I'm curious if you ever look at it or think about it this way. You call out some of the impacts to the gross loss per vehicle from factors that aren't part of the cost structure this quarter. I know that's offset a little bit by regulatory credits, but if we also take out D&A and stock comp, it seems like you're actually much closer to a cash gross profit breakeven level. Is that something that directionally is correct? It seems like if that's true, you would actually hit that before you would hit your mildly gross profit positive number in the fourth quarter.

Yeah, Joe, that's absolutely right and we've wanted to call out in my prior prepared remarks just the impact of roughly $15,000 of depreciation per unit, $1,200 of stock-based compensation per unit, and then about $2,400 of other costs of revenue initiatives in the quarter. So, that was roughly $14,000 of loss per unit if you make those three respective adjustments. We certainly would anticipate hitting sort of a cash breakeven prior to a positive gross profit.

Thank you. Our next question comes from Alex Potter with Piper Sandler. You may proceed.

Great, thanks. Claire, just a quick one following up on that last question, that these, I guess, 'other initiatives', the $2,400 a unit, just in layman's terms, what is that?

In layman's terms, the way I would characterize it is that, as you can imagine with the significant changes we made in suppliers with the introduction of swapping out roughly half of our material costs as we move from Gen 1 to Gen 2, there are certain costs associated with contract modifications or amendments that we've made, and that's largely what is reflected there.

Okay, very good. I guess my second question is on the Volkswagen joint venture. So presumably, I know you've got yet some work to do when it comes to hashing out the financials and all of these things and we'll await information on that in Q4. But in the meantime, presumably you've got engineers, and you've got procurement people who are eager to start doing something, design or getting better supplier negotiations underway. Are they expected to just sit tight and not do anything until the ink is dry? Or are they allowed to sort of go out into the world and start, I guess, restarting supplier negotiations, for instance, with the heft of Volkswagen behind them or working collaboratively with Volkswagen engineers to actually design the platform into Volkswagen vehicles or do they just have to sit tight?

From a supplier point of view, we are already seeing some of the tailwinds associated with our Volkswagen joint venture and partnership. As you can imagine, at the component level and at the electronics level within the vehicle, we’re seeing a lot of suppliers that we have long relationships with who are very excited about this and see this as an opportunity to scale beyond just the Rivian product line to the technology we've developed but beyond that into the Volkswagen Group product portfolio. So that’s been a really encouraging early read-through regarding how our collaboration is perceived and looked at by the supply chain. From a technical point of view, we talked about this even with the announcement of the deal. Volkswagen Group's CEO and I, Oliver, have been speaking on how the teams have been working well together. This isn't an endeavor of this scale and of this magnitude without having done work together and having gone through a lot of beyond due diligence into the actual creation of work content or work product, if you will. So, Wassym, I’d like to invite you to share some insights regarding this.

Yeah. Thanks, RJ. We're actually extremely excited about the progress we're making in the integration, particularly the electrical architecture integration analysis. Our engineers have been working very closely with the Volkswagen Group, and we actually have a driver with a demonstrator now that contains the Rivian electronic components and the Rivian software stack. We're moving forward really, really well in understanding how our technology will scale up and down across the entire Volkswagen Group portfolio.

Great. Thanks very much. Appreciate it.

Thank you. Our next question comes from Ben Kallo with Baird. You may proceed.

Thank you. My first question is more near term. Just, RJ, if you could talk about demand trends you've seen since the refresh. And then my second question is, your brand is important to everyone, but to you guys, you've done a good job of building a brand. Can you talk to us about how you measure that internally or any way that you can put context to how you built your brand and how that extends to future models? Thank you.

Thanks, Ben. Ultimately, our first set of products, R1, was our handshake with the world, and they were received really positively. Two years ago, it was exciting as we introduced the Gen 2 of our R1 products to see how strong the media reaction was to those products. Recognizing we took a great vehicle and made it even better, and that is something that we saw echoed across a variety of different media outlets from lifestyle to automotive to more pure technology outlets, reflecting the strength of what we've built. This serves as a wonderful foundation for our continued growth, as you pointed out, in developing our brand and how we're perceived. We certainly look at things internally with a whole host of metrics that we track regularly. But it's also important for the analyst and investor community to consider how third parties view our brand. Most recently, J.D. Power has conducted various analyses of brand strength or the strength of a product offering in the market. We've previously performed extremely well in this, and most recently in their annual APEAL Study that assesses vehicle performance and overall packaging, we emerged as the number one rated brand in their study. Achieving this after having had prior number one performance in earlier years is incredibly encouraging and bodes well for what's to come with R2. If we can carry the same brand strength and market share penetration we currently possess in the premium segment—where we continually rank as one of the best-selling vehicles priced over $70,000 in the US—by applying that strength and market share to our R2 product—starting at $45,000 and R3 pricing to be determined, but lower than R2— we feel very positive about what that represents in terms of volume, addressing a considerable gap in product choice for compelling EVs under $50,000.

Thank you. Our next question comes from Shreyas Patil with Wolfe Research. You may proceed.

Hey, thanks a lot for taking my question. First of all, I'm curious about what you're seeing in terms of opportunities in the sale of regulatory credits. I appreciate it can be lumpy with $17 million in the quarter, but are you seeing growing opportunities to sell right credits at this point, given some of the struggles that we're seeing with the legacy OEMs?

Claire referenced it just in regards to our top line in terms of revenue. However, the regulatory credit environment is certainly very strong right now. Practically speaking, that means we have the potential to generate more revenue around our credits market than what we initially planned or anticipated. More importantly, the strength of the credits market reflects the decisions we see from numerous companies investing less into electrification or presenting fewer products across multiple segments and different price points. This void of products is what creates this strong credit environment. For us, the most important take is the demand environment we see coming into 2026 and 2027 will be very advantageous for us, as there remains a significant amount of latent demand. This demand is waiting for the right type of product, one that has the best combination of form factor, product positioning, attributes, and features. Many consumers have been waiting for the right product to arrive, and until now, they continue to purchase an internal combustion vehicle or a hybrid. We see this very large pool of demand waiting for something that closely aligns with what R2 offers.

Okay, great. And my second question is, in thinking about your software architecture, one of the defining elements is that it is almost entirely built in-house from the baseline operating system to the middle layer hypervisor application layers. You've talked before about legacy automakers not really having this level of vertical integration. Clearly, this is a big competitive advantage. However, now that VW is able to access the software platform, I'm curious how you think about the long-term advantage in software. Do you still see potential to maintain an edge over most legacy OEMs, even those that may want to replicate your approach? Or do you feel that the industry will eventually catch up, and this is now an opportunity for you to monetize this asset and help the industry transition to software-defined vehicles?

There are a few ways to speak to this. First, before we get to product differentiation and customer-facing advantages, building a network architecture and associated electronics stack that allows for significant consolidation of ECUs—and therefore simplification—not only reduces the number of ECUs but also simplifies the harness and related wiring infrastructure within the vehicle, creating meaningful structural cost advantages when compared to a traditional platform, which can have 50 to 100 ECUs. We’ve talked about our Gen 1 vehicle having 17 in-house ECUs; we’ve now reduced that down to 7. This results in a significant multi-thousand dollar structural cost advantage tied to having a network architecture and topology of computers that's both simpler and lower cost than the traditional approach. Now, of course, our partnership with Volkswagen will extend that cost advantage into their respective products. It will enhance our scale and volume, which will, in turn, allow us to source those components and systems at a lower cost. From a consumer-facing point of view, owning not just the hardware, but also the software—along with an optimized architecture—allows us to continue making our software significantly better. The features not only become more rich and robust but can truly improve more than simple surface-level appearances, such as your display or user interface. We can change the way the vehicle behaves dynamically, update the battery management system and its charging profile characteristics, allowing the vehicle to improve over time. These enhancements are more difficult to achieve with a traditional setup where third parties produce a labyrinth of ECUs—minor adjustments often require coordinating multiple players. Changes that can take us minutes may take months for a traditional approach. Moreover, what customers experience, beyond just vehicle performance and handling, is fundamentally linked to our user interface framework, digital design, and overall user experience—all of which have received considerable development effort. We believe this will remain a differentiator made possible by our platform but requires both advanced hardware and software. We hope that by delivering this robust platform through our joint venture with Volkswagen, it will enable them to create products that are exciting and meet the gaps in consumer choice. It’s apparent we have a significant lack of options in the EV market today compared to the combustion world.

All right, great. Thanks.

Thank you. Our next question comes from Ron Jewsikow with Guggenheim Securities. You may proceed.

Yeah. Good evening and thanks for taking my questions. RJ, you've discussed in the past that as Rivian opens new spaces, order intake in those geographies accelerates. I know you've laid out your plan for 2025 concerning spaces, but is there any way to think about what is launching in the coming quarter or the second half of this year just to consider demand being an important part of your bridge to gross profit in the fourth quarter?

Yes, as you indicated, we have several spaces that will be launching over the next 6 to 12 months. These spaces are fantastic platforms for consumers to experience our vehicles firsthand, allowing them to sit in them, touch, and engage with all the features. Furthermore, we've really activated our service infrastructure over the last six months to bolster our demo drives program. We currently have over 60 service locations, and we are continuously growing the number of those locations that exceed just service. They not only provide service, but also facilitate test drives, demo drives, delivery, and other sales-related activities. Beyond our spaces and service infrastructure, we are also expanding our Rivian Adventure Network, that is our DC fast charge network—another touchpoint for our customers to experience the brand. Today, that network is close to being Rivian exclusive, but later this summer, we’ll be opening it up for non-Rivian customers as well, serving as a great way for people to engage with Rivian and understand our products.

Yeah, thanks for that. And maybe just to follow up on Shreyas’s question about credit revenues—is the $17 million this quarter reflective of the full potential or are there more revenues to come in the back half of the year regarding gross profit breakeven?

Yes, Ron. As we mentioned at Investor Day, we have over $200 million of regulatory credits under contract right now for 2024 itself. There are additional contracts in place for 2025 and beyond as well. So $17 million is merely the tip of the iceberg as we consider the opportunity for 2024 and the potential revenue from the sale of our regulatory credits.

Thanks for taking my questions.

Thank you. Our next question comes from Stephen Gengaro with Stifel. You may proceed.

Thanks. Good afternoon, everybody. I think, two for me. The first, when we talk about the gross profit progression and expectations for the fourth quarter and beyond, could you outline which of the three drivers has more or less confidence and what specific metrics or indicators you might be using to track your progress?

Certainly. As we reflect on the three key drivers for our path to positive gross profit in Q4, those being: variable cost improvement, fixed cost leverage, and an increase in revenue per delivery unit—on the first component, we have clear visibility into the contracts with our supplier partners that are under contract, indicating the trajectory of cost reductions. Similarly, as we consider fixed cost leverage, this is being enabled by the recent upgrade we completed in Normal which has improved our production line rate by around 30%. Together with the increased production volumes in Q4, as well as the reduction in depreciation costs across our business, these factors will drive fixed cost leverage. Lastly, on the increase in revenue per delivered unit, we are ramping up our Ascent drive unit line which will allow for sales of our Tri-Motor units, while also supporting revenue growth via the sale of regulatory credits and the introduction of our pre-owned Rivian sales. We feel confident in this solid trajectory toward positive gross profit in Q4, noting that in Q2, sales of Gen 2 vehicles were quite limited, thus the improvements we’ve made haven’t adequately flowed through yet.

Great, thanks. That’s good color. I appreciate that. The other quick question is on CapEx for 2025; could you provide any parameters we should consider?

As we consider CapEx for 2025, we estimate spend to be around the $1.5 billion area.

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

Thank you everyone for joining us today. We're really thrilled with the progress we're making on transitioning to our second generation R1 vehicles, the associated cost structure that drives both at the bill of materials level and within our operations is a crucial stepping stone for us as a business. The efficacy with which this launch is occurring reflects our growing capabilities. I'm also really pleased to see how customers are responding positively to our products. That favorable reaction to our second generation R1 positions us well for what’s to come with R2, leveraging a significant amount of the content, particularly around the network architecture for ECU topology, the software stack, and the updates we've made to the R1 platform's componentry. Thank you again for joining us. We anticipate continued advancements and progress as we aim for profitability, and look forward to engaging with everyone again soon.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.