Earnings Call Transcript - RIVN Q3 2024

Operator, Operator

Good day. Thank you for standing by. Welcome to Rivian's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Tim Bei, Vice President of Investor Relations. Please go ahead.

Tim Bei, Vice President of Investor Relations

Good afternoon and thank you for joining us for Rivian's Third Quarter 2024 Earnings Call. Today I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our CFO; and Javier Varela, our Chief Operations Officer. 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 results 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 will turn the call over to RJ who will begin with a few opening remarks.

RJ Scaringe, CEO

Thank you, Tim, and thank you all for joining us today. I'm going to start by talking about the R1 and specifically the Gen 2 ramp up. First, the material costs, the progress we've made, as well as the efficiency improvements within the plant, are really important and critical for our long-term profitability as a business. Those changes and a lot of the changes in the supply chain were focused on cost, but we also introduced hundreds of other design and engineering changes that enhance the performance of the customer experience in the vehicle. One of those is the introduction of a new variant, what we call our Tri-Motor. It puts a single motor in the front and two motors in the back, delivering exceptional performance. Performance is better than our first-generation quad, but with a much lower cost in terms of what it takes to manufacture and also with a substantial improvement to efficiency. We're seeing a lot of excitement around the Tri and we're excited to also be bringing the Quad to market, the updated Quad in 2025. We brought on around 50% of the bill of materials by cost with new suppliers or new contracts with the Gen 2. However, challenges with one supplier have limited our production, and we're working very hard to address that. This is one of our highest priorities, and we see it as a short-term issue, but it certainly introduced challenges in Q3. The learning that went into the Gen 2 ramp up, the component design, and the systems design are underpinning what's going into R2, which is advancing on track. We're delivering a level of performance and capability that really looks and feels like Rivian, but at a substantial reduction in terms of overall cost. We've sourced about 85% of the bill of materials on the R2 program within our aggressive cost targets, allowing us to reduce the cost of R2 relative to R1 by about 45%. The launch of our plant and production line in Normal and the expansions we're making to the facility are well underway, positioning us to start deliveries of R2 in the first half of 2026. We also announced the sourcing of battery cells for the program, using a cylindrical cell, a 4695 cell. That relationship with LG has been pivotal. Today's structural battery pack acts as a core structural element of the vehicles. This is critical for us to deliver at the price points we've talked about with R2 while maintaining a healthy positive gross margin. As for the joint venture with Volkswagen, it continues to progress well, and we're excited about the impact we can drive through leveraging our technology. We've involved our hardware and software into a Volkswagen Group product, an encouraging step forward. The investments from Volkswagen are critical in supporting Rivian's growth through the launch of R2 and the opening of our production plant in Georgia. Ultimately, this capital will take us through to positive free cash flow. I want to restate the importance of creating a compelling product in driving the transition to electrification. The R1S is the most popular SUV over $70,000 in California, not just the most popular electric SUV, but the most popular SUV sold in California. We hope to see that excitement continue with R2, pulling customers away from internal combustion vehicles. We're optimistic about the future and thank all those who continue to support this vision, including our employees, customers, partners, suppliers, communities, and shareholders. With that, I'll pass the call to Claire.

Claire McDonough, CFO

Thanks, RJ. During the third quarter of 2024, we made progress driving greater cost efficiency and validating the differentiated nature of our technology stack. During the third quarter, we produced 13,157 vehicles and delivered 10,018 vehicles, which represented the primary driver of the $874 million in revenue we generated. As mentioned in our second quarter earnings call, we expected Q3 deliveries to decrease on a sequential basis due to the reduced R1 inventory. We started the third quarter with low finished goods inventory of R1 due to the successful sell-down of our first-generation R1 vehicles in the second quarter. Demand for R1 vehicles was negatively impacted in Q3 2024 by production disruption and a challenging consumer backdrop. The sequential production ramp, following the plant retooling upgrade and part shortage, limited the availability of specific R1 variants for sale in the third quarter. Total gross profit was negative $392 million. Our gross loss per vehicle delivered was approximately $39,100, which includes $18,600 of depreciation and amortization expense and $600 of stock-based compensation expense. We incurred approximately $3,700 per vehicle delivered related to our cost of revenue efficiency initiatives, which we do not anticipate being part of our long-term normalized cost structure. The introduction of the second-generation R1 platform, combined with the commercial cost improvements and commodity tailwinds, is expected to enable a 20% material cost reduction when comparing an R1 dual motor with large pack produced in Q1 2024 versus Q4 2024. Importantly, in the third quarter, we saw a meaningful reduction in our second-generation R1 material cost compared to our first-generation. This is in line with our target, and we expect this trend to continue into the fourth quarter. We remain focused on driving greater cost efficiency throughout the company and continue to see this result in lower operating expenses. Our GAAP operating expenses in the third quarter were $777 million, the lowest level we've had in three years, reflecting the cost savings initiatives we've implemented. We are reaffirming our annual production guidance of 47,000 to 49,000 vehicles. We expect to increase our Tri-Motor and commercial van production and deliveries in the fourth quarter, as those variants only require one Enduro motor. We believe this is a short-term obstacle, reaffirming our annual delivery outlook with low single-digit growth compared to 2023, reflecting a range of 50,500 to 52,000 vehicles. We expect to have a modest GAAP gross profit in the fourth quarter of 2024, supported by three key drivers. First, revenue per unit is expected to increase driven by non-vehicle revenues such as regulatory credits, service, remarketing, software, and other services. We expect about $300 million in regulatory credit sales in 2024. We also anticipate an increase in the R1 average selling price as we improve our sales mix with more Tri-Motor sales in Q4. We also expect to see enhancements in material costs due to design changes, supplier negotiations, and lower raw material costs. Additionally, changes in vehicle design, manufacturing processes, and depreciation of initial vehicle tooling are expected to reduce our fixed cost per vehicle delivered in the fourth quarter. We also expect LCNRV and firm purchase commitment balances to decline in Q4. The new technology introduced into R1 was strategically designed to benefit R2 in the long term. Building R2 in Normal first allows us to leverage our operations, leadership team, and existing manufacturing and logistics operations. Given these benefits, along with the significant progress made in sourcing R2, we anticipate R2 will have a faster path to profitability compared to R1. While we continue to make progress on R1's cost structure, our team is focused on addressing the component shortage impacting our ability to produce Enduro motors. Due to lower 2024 volumes, we are revising guidance for our 2024 annual adjusted EBITDA to a loss between $2.825 billion to $2.875 billion, while CapEx guidance remains unchanged at $1.2 billion. Looking ahead, we are excited about the significant opportunity from our joint venture with Volkswagen Group. The proceeds from the joint venture, along with our $6.7 billion in cash and short-term investments, are anticipated to fund Rivian's growth roadmap, bringing us to free cash flow positive. We will share cost savings potential, milestones, and other benefits upon closing, which we expect to happen this quarter. I wanted to again thank our team, partners, customers, suppliers, and shareholders for their tremendous support. Let me turn the call back to the operator to open the line for Q&A. Thank you.

Operator, Operator

Now, first question coming from the line of Emmanuel Rosner with Wolfe Research, your line is now open.

Emmanuel Rosner, Analyst

Thank you so much. My first question is around the improvement in the gross profit and implications for the unit economics on R1. Obviously, you expect a fairly meaningful amount of reg credits in the fourth quarter, and then it's a modest gross profit. So I would assume without it, it's still somewhat unprofitable. Can you maybe comment on where you are in the path of improvement in unit economics? How should we think about it in terms of how much does a fourth quarter mean for how do we think about it for 2025 and which other levers you have to keep improving in place?

Claire McDonough, CFO

Sure, thanks, Emmanuel. As you noted, one of the primary drivers of the improvement that we anticipate seeing in our gross profit as we drive into Q4 is revenue per unit growth. That's driven by both the $300 million that I mentioned regarding regulatory credit sales this year, as well as improvements we expect in our average selling prices. As we look into 2025, we will also be launching our Quad motor offering, which will be a tailwind for overall ASP increase catalysts for the business. The variable cost per unit improvement will continue to be seen in reduction in material costs from Q3 into Q4. Additionally, we still have meaningful commodity cost improvements in the pipeline. We continue to see tailwinds in the R2 sourcing process as we look ahead to further improvements from a commercial cost reduction perspective. Regarding fixed cost per unit dynamics, the reduction in our production guidance for this year has affected progress here, but we’re driving efficiencies within our production plant through the transition to our Gen 2 R1 vehicles. We also expect depreciation expenses to decrease as we are further into production.

Emmanuel Rosner, Analyst

Okay, that's a lot of great insight, Claire. Would you expect 2025 gross profit to also be positive? Can you give us some indication of how to think about reg credits for 2025?

Claire McDonough, CFO

Sure. Our goal remains to target positive gross profit for 2025. However, we're operating in a fluid environment and will provide additional details on that outlook during our Q4 earnings call, along with more formalized guidance. Regarding regulatory credits, we anticipate them to be in line with what we've seen in 2024.

Operator, Operator

Thank you. Our next question coming from the line of Adam Jonas with Morgan Stanley. Your line is now open.

Adam Jonas, Analyst

Thanks everybody. So you highlighted a challenging consumer environment. Just wanted to drill on that. Can you remind us what percentage of your volume in the quarter is pre-ordered versus sold out of dealer inventory? And how is that changing? Additionally, given events of this week, can you remind us what portion of your sales are customers who realize a full $7,500 tax credit? Also, what percentage of your sales are leased? Can you confirm how Rivian is not taking any direct residual value exposure related to those leases?

Claire McDonough, CFO

Sure, Adam. As we consider leasing, our lease penetration was 42% in the quarter. Chase is our lease partner, and Rivian, along with Chase, shares the residual values of the vehicles included in that leasing program. We utilize third parties to assess the residual values that we anticipate achieving, adjusting our reserves monthly and quarterly based on market conditions. Regarding preorders, we saw an uptick in consumers utilizing early preorder pricing to their benefit as they purchased the remainder of Gen 1 vehicles in Q3. Most of our sales that receive the $7,500 credit are primarily leased consumers due to the price point of our vehicles and income levels, meaning most customers do not qualify for that credit on financed or cash purchases.

Operator, Operator

Thank you. Our next question coming from the line of Dan Levy with Barclays. Your line is now open.

Dan Levy, Analyst

Hi, good evening. Thank you for taking the question. I want to start and just follow up a bit on Emmanuel's question. Just to decompose the third quarter COGS per unit, it was roughly $127,000 if you backed out the cost of revenue initiatives. Could you provide a clearer perspective on your current COGS per unit? How do we anticipate improvements into 2025?

RJ Scaringe, CEO

Thanks, Dan, for the question. This is, of course, something we spend a tremendous amount of time focusing on. The third quarter was a hard quarter to analyze due to the Gen 2 platform's ramp-up and a number of supplier relationships that changed. We replaced about 50% of the bill of materials as measured by cost, and external supply interruptions impacted our production levels that quarter. If we compare material costs from Q1 to Q4, our Q4 material costs are projected to be 20% lower than what we experienced in Q1, indicating significant progress in lowering our bill of materials, enhancing our cost structure. We are also increasing operational efficiency in plant operations, leading to improved quality and smoother assembly flows. Despite the challenges, we continue to guide on Q4 towards a positive gross margin overall.

Javier Varela, Chief Operations Officer

Thank you, RJ. Our focus is on improving performance by implementing lean acceleration, compressing value streams, and empowering shop floor teams. We've seen promising results in the past weeks, enhancing cross-functional collaboration. Our priorities include immediate performance improvements and preparing the plant for R2's rollout while maintaining quality and cost efficiency.

Adam Jonas, Analyst

Great. Could you provide some insights on the benefits from stronger operations in '25 and the potential to drive COGS per unit down?

Claire McDonough, CFO

As we think about 2025, a core benefit we will have is producing the Gen 2 for the entire year compared to what we faced during 2024. The challenges in 2024 were amplified due to the shutdown for Gen 2 integration. Going forward, the leadership team, including Javier, will drive operational efficiency in our facility to prepare for R2's start of production in 2026. We will experience another production shutdown in the second half of 2025 for refinements.

RJ Scaringe, CEO

Yes. The Volkswagen relationship framework is designed to allow efficient technology deployment across their brands, focusing on zonal architecture to optimize their cost structures. We are excited about this partnership as it allows both Rivian and Volkswagen to drive significant efficiency in product development and manufacturing.

Operator, Operator

Thank you. Our next question coming from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney, Analyst

Yes, good afternoon. Thank you very much for taking my question. I think 2024 production guidance implies that production in the fourth quarter will be a little over 11,000 units or roughly 865 vehicles per week. Where do you currently stand regarding supply constraints with the Enduro motor?

Javier Varela, Chief Operations Officer

Thank you, Mark, for your questions. We have been actively addressing the supply constraint, which we view as a short-term issue. Our teams are working diligently with the supplier, demonstrating urgency and collaboration. We're ramping up new capacity and have seen promising improvements in recent weeks. We're on a positive trajectory to resolve the issue in the near future.

Claire McDonough, CFO

Sure, Mark. Our regulatory credits are now expected to be around $300 million for this year. As we progressed through this year, we’ve noticed an increase in the underlying value of regulatory credits being sold to several OEM counterparts, enabling us to capture more value than initially estimated.

Operator, Operator

Thank you. Our next question coming from the line of Joseph Spak with UBS. Your line is now open.

Joseph Spak, Analyst

Thank you very much. Claire, just regarding 2025, when you mentioned gross profit positive, is that for the full year or at some point during the year? How should we think about regulatory credits in that context?

Claire McDonough, CFO

Sure, Joe. We aim to achieve positive gross profit for the entire year in 2025, but we anticipate some quarterly variances. Regulatory credits will contribute towards reaching that target as they may be recognized on a variable timeline influenced by different circumstances.

Operator, Operator

Thank you. Our next question coming from the line of George Gianarikas with Canaccord Genuity. Your line is open.

George Gianarikas, Analyst

Hi, good afternoon, and thank you for taking my questions. Regarding the Volkswagen relationship and the Scout vehicle, can you clarify how much collaboration exists between Rivian and Volkswagen with regards to aesthetics and engineering?

RJ Scaringe, CEO

Thanks, George. The joint venture consists mainly of electrical architecture, ECUs, and software integration. Aesthetics and vehicle design decisions remain with the individual brands within Volkswagen Group. Our collaboration focuses on the technological aspects, which will be implemented across products and brands, enhancing efficiency and cost-effectiveness. As we said previously, the sales cycle for larger fleets takes time, including decisions on operational procedures and necessary charging infrastructure. We're beginning to see signs of progress from efforts put in place last year, and we expect to see more traction in 2025. We're excited to see our vans in real-world operation with different branding.

Operator, Operator

Thank you. Our next question coming from the line of Tom Norian with RBC Capital. Your line is now open.

Tom Norian, Analyst

All right. Thanks for taking the question. Regarding regulatory credits, if I look at the Q3 gross profit of negative $392 million, and accounting for $300 million expected in Q4, that might imply about $117 million benefit in Q4. Can you elaborate on the cost improvement expected sequentially?

Claire McDonough, CFO

Sure, Tom. While we typically avoid providing specific metrics, the key drivers of Q4 gross profit improvement will stem from a significant increase in our average selling price as we transition to more full-price sales with Tri-Motors. The end of early preorder pricing will naturally elevate our ASP, while we anticipate depreciation and LCNRV levels to decline, along with improvements in variable costs per unit. Q4 will better represent our go-forward trajectory into 2025.

RJ Scaringe, CEO

To clarify about R2 pricing, the starting price of $45,000 corresponds to a variant with a range over 300 miles. We anticipate strong demand for R2 as we offer compelling choices in the sub-$50,000 price range, which sharply contrasts with limited options currently. Our goal is to deliver a unique product that resonates with customers and meets their needs.

Operator, Operator

Thank you. Our next question is from someone at BNP Paribas. Your line is now open.

Unidentified Analyst, Analyst

Hi everybody. Regarding revenue per unit increase for Q4, does this exclude the $275 million in regulatory credits? Is the increase being referenced relative to the previous year or compared to Q1? Can you also address how much visibility exists for the order book?

Claire McDonough, CFO

The revenue per unit increase in Q4 is related to improvements compared to Q3 this year, excluding regulatory credits. We anticipate a higher commercial van proportion in the quarter, affecting ASP but expect a blended increase overall. Regarding the order bank’s visibility, we noted a 20% increase in demo drives in Q3 relative to Q2.

RJ Scaringe, CEO

The Volkswagen joint venture is projected to close before the end of the year. We've been working closely with the team at Volkswagen to define the key performance indicators that will unlock certain financing portions of the deal.

Operator, Operator

Thank you. Our next question coming from the line of Edison Yu with Deutsche Bank. Your line is now open.

Unidentified Analyst, Analyst

Hi, thank you so much. This is Edison Yu from Deutsche Bank. You mentioned that 85% of the sourcing of R2 BOM is already done. Will potential tariff changes under the new administration affect these cost targets?

RJ Scaringe, CEO

The R2 sourcing process has been strategically planned, considering potential tariff impacts even prior to the election. We aimed to source suppliers to minimize large tariffs and structure contracts to mitigate risks. We're closely monitoring policy developments affecting the upstream supply chain.

Claire McDonough, CFO

In Q3, we saw a significant decline in operating expenses sequentially, estimated at $599 million. This reduction allows for lower operating expenses in 2024 compared to 2023. As we proceed into Q4, we expect an increase in spending driven by R2-related initiatives and ongoing improvements.

Operator, Operator

Thank you. Our final question is coming from the line of Alex Potter with Piper Sandler. Your line is now open.

Alex Potter, Analyst

Thank you for taking my question. Is the Volkswagen relationship affected by the current restructuring and plant closures at Volkswagen? What impact could this have on our collaboration?

RJ Scaringe, CEO

Our partnership with Volkswagen is structured to be efficient in deploying advanced technology. Product development will provide significant structural cost advantages for both companies. Given this alignment, we don't foresee significant impact from their restructuring. We're excited about the efficiencies and products that will develop through our collaboration. Lastly, our Connect+ services are gaining traction, with high take rates among initial users. The transition towards recurring revenue models in the automotive industry is still being evaluated. We're modeling a combination of both upfront and time-based payments for these services. Thanks, everyone, for joining us today. This quarter has posed some production interruptions and challenges related to the Gen 2 ramp-up. However, we're incredibly optimistic about what lies ahead, not just in Q4 but into 2025 and 2026. The excitement surrounding our R2 program is contagious, and we are fully engaged in bringing this vehicle to market on time while maintaining cost targets. Thank you to our employees, partners, and shareholders. I look forward to our next call.

Operator, Operator

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.