Rivian Automotive, Inc. (NASDAQ:RIVN) Q1 2024 Earnings Call Transcript

Rivian Automotive, Inc. (NASDAQ:RIVN) Q1 2024 Earnings Call Transcript May 7, 2024

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Operator: Good day and thank you for standing by. Welcome to the Rivian First 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host, Tim Bei, Vice President of Investor Relations. You may begin.

Tim Bei: Good afternoon and thank you for joining us for Rivian’s First 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.

RJ Scaringe: Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments in the first quarter and provide an update on the expected progress we’re making against our value drivers. First quarter results exceeded our outlook and set a strong foundation for the remainder of the year as we focus on continued demand generation, delivering cost and plant efficiency improvements, advancing R2 development, and driving towards profitability. We continue to make strong progress across each of these goals. Before discussing key developments during the quarter, I want to congratulate the team on producing our 100,000th vehicle at our plant and normal and successfully navigating our plant retooling upgrade.

While we focus on the work ahead, it’s incredible to see what our team has accomplished across our consumer and commercial vehicle platforms. I also want to highlight the uniqueness of what we’re building at Rivian. We have developed a technology platform and brand that are truly differentiated. Our vertically integrated hardware and software capabilities enable continuous enhancements to the product. Our ability to improve and add features across autonomy, battery management, digital experience, body control, vehicle dynamics and telematics help deliver an elevated ownership experience for both our consumer and commercial offerings. We also recently transitioned to our new zonal network architecture, which reduced the number of electronic control units in our vehicle by approximately 60%, taking substantial costs out of our vehicles.

The feedback on our products have been incredible. Since the start of production, we’ve introduced approximately 30 over the year updates and through an owner satisfaction survey conducted by Consumer Reports. Rivian was recognized as the number one automotive brand with the highest likelihood for customers to purchase again. In launching the R1 platform, our goal was to create a brand that deeply resonates with customers. During the first quarter of 2024, Rivian was the fifth best-selling EV maker in the United States with a market share of 5.1%. Our vehicles have driven more than 900 million cumulative miles and our brand awareness and market position continues to grow. Additionally, the R1T is the only pickup in the United States to receive the Top Safety Pick+ award from the Insurance Institute for Highway Safety.

Building on this, the results of our recently implemented demand generation and brand awareness strategies have been encouraging. We hosted over 28,000 demo drivers in the first quarter of 2024, an increase of 90% versus the fourth quarter of 2023. We recently launched R1S leasing and grew the number of states with this offering. While the broader vehicle market is still experiencing challenges, we are encouraged by the early results of our initiatives and have confidence in our 2024 delivery outlook. In March, we unveiled our new midsized platform, which underpins the R2, R3 and R3X products. It is great to see the outstanding support for our brand and upcoming products. R2 is our versatile new midsized SUV with room for five people. It captures the essence of Rivian.

It’s built for adventures as well as everyday use with its exceptional utility, performance and capability. We expect the price to start at $45,000 with delivery slated to begin in the first half of 2026. R3 is our midsized crossover. This unique vehicle is tidy on dimensions, but delivers big in terms of performance, passenger comfort and storage. R3X is a performance variant of R3, offering even more dynamic abilities both on and off road. R3 demonstrates the scalability of Rivian across different form factors and segments. It will be priced below R2 and deliveries will start after R2 to ensure a smooth launch and rapid ramp. With these new products, our goal is to take the desirability and brand strength we’ve established for our R1 products, with the R1S remaining the best-selling EV over $70,000 in the United States, and translate this strength to a much larger addressable market.

Our midsized platform leverages key technologies developed for R1, including our in-house software, in-vehicle electronics, propulsion and battery technology and our high-voltage platforms with a goal to deliver dramatically simplified and lower cost vehicles relative to R1. Our massive focus on cost and efficient manufacturing for R2 and R3 is achieved by deeply analyzing every system and associated component and asking if it can be simplified or if there are opportunities for part consolidation or elimination. Use of large high-pressure die castings in the body structure, a structural battery pack whereby the top of the battery is the floor of the vehicle, further simplification of the electrical system and associated wiring harness through a focus on electronic control unit design topology are just a few examples of how we are using innovation to drive down cost.

Beyond engineering opportunities, when compared to R1, R2 also has significant cost opportunities through its competitive sourcing. At the unveil of R2, we announced accelerating the start production in the first half of 2026 and reducing our capital needs for the launch of R2 by starting production of R2 in our normal plant. This will provide flexibility to manufacture an estimated 215,000 total annual units per year, which includes up to 155,000 units of R2. Starting R2 production in normal is expected to save over $2.25 billion between now and the start of production as compared to the original plan of launching the first line of R2 production at Rivian’s Georgia site. Incremental to the $2.25 billion in expected savings, we recently announced an incentive package from the State of Illinois with a value of up to $827 million.

We’re excited to grow our community in normal and continue our partnership with the State of Illinois. Turning to our recent tooling upgrades in our normal facility. The team made meaningful progress and we are now back to producing R1 vehicles on our production line. The upgrade introduced new technologies and cost focused material changes into the R1 vehicle platform. The plant retooling upgrade also provided the opportunity to improve manufacturing processes that enable the R1 line to run at approximately 30% higher line rate. In addition, we improved the flow of materials and inventory in the plant. These changes are expected to improve cycle time, utilization and cost. The opportunity ahead is significant. We hold the deep conviction that the entire automotive industry will electrify over the long-term and we continue to take the necessary steps to best position Rivian as a leader in this transition.

We look forward to sharing more details around our strategy, progress and outlook in late June when we host our Investor Day. I’d 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.

Claire McDonough: Thanks, RJ. I want to start by reiterating the significant progress and strong results achieved during the first quarter. We exceeded our first quarter delivery outlook, successfully completed our plant retooling upgrade and are making progress on our path to profitability. During the first quarter, we produced 13,980 vehicles and delivered 13,588 vehicles, which represented the primary driver of the $1.2 billion of revenue we generated. Our first quarter results did not include any meaningful regulatory credit sales. Based on discussions with potential customers and executed contracts, we expect the sale of regulatory credits to increase in the second half of the year. Total gross profit for the quarter was negative $527 million.

Our gross profit loss per vehicle delivered was approximately $39,000, which includes $15,500 of depreciation and $1,700 of stock based compensation expense. Our results were negatively impacted by approximately $9,300 per vehicle delivered as part of our cost of revenue efficiency initiatives, which we don’t anticipate to be part of our long-term cost structure. We continue to move closer to making money on every vehicle we sell. We expect to see meaningful improvement in our gross profit during the second half of this year and believe we will reach a positive gross profit for the fourth quarter. Our confidence is underpinned by the actions we have taken within our control. Specifically, we expect the recent completion of the tooling upgrade in normal result in meaningful cost improvements in R1 and the manufacturing line.

The upgrade includes the integration of R1 engineering design changes and newly negotiated supplier components that will drive significant cost reductions in our bill of materials. Additionally, fixed costs will benefit from improved manufacturing efficiencies, reduction in our loss reserve, as well as a reduction in our depreciation expense as we fully depreciate our original tooling for R1 and RCB. Our adjusted EBITDA for the quarter was negative $798 million, which was in-line with our expectations. During the first quarter, we experienced elevated cash usage in part due to increased accounts receivable and inventory balances. Consistent with our commentary on our fourth quarter 2023 earnings call, at the end of the first quarter, we had a few thousand vehicles, which were built, but not yet counted towards our production since they were awaiting parts.

These work-in-progress vehicles impacted our first quarter inventory. However, they are now complete and will be counted in the second quarter production. Between this dynamic and our efforts to reduce our raw material inventory balances, we expect to generate a slight cash benefit from working capital for the year. Over the next 18 months, we plan to reduce our gross inventory balance by more than 25%, providing a significant working capital benefit. I want to take a moment to emphasize the significant steps being taken to drive greater capital efficiency throughout the business. These actions include starting production of R2 in normal, driving material costs down, increasing manufacturing and production efficiency, reducing operating and capital expenditures and optimizing working capital.

These actions are expected to extend our existing cash balance to fund operations through the launch of R2 in the first half of 2026. As RJ mentioned, our decision to launch R2 in normal provides the plant with more flexibility and is expected to reuse our cash usage by over $2.25 billion through its launch in the first half of 2026. We anticipate that most of the work to integrate R2 into our normal facility will happen in 2025 and as a result the plant will be down for a few weeks next year. We recently completed the plant retooling upgrade in normal. This is a pivotal step in driving greater efficiency in R1, through a reduction in variable and semi-fixed costs. We expect lower variable costs to be the largest driver of gross profit improvement in 2024.

We are also beginning to see some of the benefits from R2 sourcing on R1 and EDV cost downs with strategic suppliers. We are making progress driving greater fixed cost efficiencies by transitioning to two shifts from three shifts on the R1 line. This has made possible by a planned 30% increase in line rate. On a two shift operation, annual R1 capacity will be approximately 56,000 units. While we don’t expect to fully realize these benefits until the second half of 2024, we believe these changes position Rivian to exit 2024 with a much improved margin profile. In addition, since the beginning of the year, we’ve made meaningful progress optimizing operating expenses. We expect our adjusted operating expenses for the year to be down slightly as compared to 2023, with the second half operating expenses expected to be significantly below the first half.

We believe this enables Rivian to start 2025 with a more efficient baseline cost structure. We are confident these changes best position Rivian to extend its cash runway, improve long-term profitability and gain market share. We believe that operating normal at 215,000 units of annual production, while executing against our cost efficiency roadmap will allow the business to generate positive free cash flow excluding growth capital investments in new production capacity. Turning to our guidance, we are reiterating our 2024 production guidance of 57,000 vehicles. As RJ mentioned, we’re encouraged by the early results of our go-to-market and brand awareness activities, which the team has put in place over the past quarter, and I have confidence that total deliveries for the year will grow by low-single-digits for both R1 as well as our commercial vans as compared to 2023.

We are also reiterating our 2024 adjusted EBITDA guidance of negative $2.7 billion. We continue to look for ways to rationalize our capital expenditures and due to the decision to move the first line of R2 production to normal, we are reducing our 2024 CapEx guidance by $550 million to $1.2 billion. We expect the savings from this decision will also impact 2025 CapEx, which we expect to be approximately $1.5 billion. Additionally, we plan to receive approximately $100 million in cash proceeds from the State of Illinois this year to help fund our normal plant expansion. 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.

I want to again thank our team, partners, customers, suppliers and shareholders for their tremendous support. With that let me turn the call back over to the operator to open the line for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney: Yes, good afternoon. Thanks very much for taking the questions. Claire, you said, you have confidence that there could be some growth in deliveries this year and you talked about some good traction that you’ve seen from some of the initiatives, including rolling out leasing to more states and also the new variants like Standard pack that have become available. Hoping you could elaborate a bit more on some of those, some of those items and share what’s giving you the confidence to guide for some modest delivery volume growth this year.

Claire Mcdonough: Thanks, Mark. As we think about our broader confidence around demand, it’s really driven by some of the early results that we’ve seen from our go-to-market initiatives, including the launch of leasing Q1 was the first quarter that we introduced leasing for R1S, and we’ve now been able to expand the number of states that we offer leasing up to 32 and we’ll be adding that to north of 40 over the coming quarters as well. As evidenced by some of the inclusion on the 28,000 test drives that we’ve had over the course of this quarter getting more customers into the driver’s seat is certainly been a compelling tactic for us as well. And then as you noted, the introduction of Standard pack and our ability to stretch the bottom end of the entry price point of the R1 product itself was another key initiative that we launched over the course of Q1.

And I think the last, but certainly not least was the opportunity that we had to grow broad-based brand awareness through the launch of the R2 reveal and R3 and R3X as well that generated significant interest in Rivian as a whole.

Mark Delaney: That’s helpful. Thank you for that. My next question was around the target to reach a positive gross profit in the fourth quarter of this year, which you reiterated today. Can you share a bit more on how the path is tracking in order to get to that level and to the extent, it’s changed at all in terms of some of the key inputs needed to reach that relative to what you put in your 4Q ’23 shareholder letter? Thank you.

Claire Mcdonough: The largest driver for us in our path to positive gross profit remains the improvement in variable cost reduction. And within this category, it’s predominantly driven by material cost reduction. In Q1, we saw material cost improvements for each of our vehicles, the R1T, the R1S, and EDV and we expect to see a step change in our R1 material costs driven by the introduction of engineering driven design changes as well as cost focused material changes that we’ve already negotiated with suppliers. We also expect to see commodity tailwinds in the second half of 2024 as well as the added benefit from R2 sourcing on our ongoing commercial cost downs. Next, turning to our semi-fixed costs. There are two key drivers for the improvement.

The tooling upgrades we made in the normal plant enable us the ability to increase our line rate by roughly 30%, which reduces our per unit labor and overhead costs. And we also expect to see depreciation expense decline by Q4 as we fully depreciate some of our original tooling and move past the accelerated depreciation we incurred in Q1. The final lever, as we’ve talked about in the past is an increase in our revenue per delivered unit due to the increased sales of regulatory credits, software and services revenue as well as remarketing sales. So in summary, we have a detailed roadmap that we’re executing against and continue to feel confident in our plan and our path to achieve positive gross profit in Q4 of this year.

Mark Delaney: Thank you.

Operator: Thank you. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open.

Adam Jonas: Hi. Thanks. Good afternoon, everybody. So, RJ, I’m going to assume you’re not going to comment on the widespread story today of a large maker of phones, potentially collaborating with an electric vehicle startup, unless you want to. But what would, what would be in it for a player of that ilks work with you or let me put it this way, what would be worthwhile to Rivian to benefit from a player like that, that Amazon doesn’t already strategically and technically provide support to you already? I have a follow-up. Thanks.

RJ Scaringe: Thanks, Adam. Yeah, we don’t comment on mark rumors or speculation. But as you alluded to, we have, we have a history of partnership and of course, Amazon who is our largest shareholder today and a very close partner across a variety of avenues has been really a foundational element of the business. They were quarter launching the commercial arm of the business and today represent the vast, vast majority of our commercial vehicle sales. But as we think about what we’ve built as a company, one of the core elements that makes this unique is just the level of vertical integration around our software and associated electronics platforms. So the ECUs in the vehicle and the essentially the various computers across the vehicle and then the base software, the base operating system all the way up to the applications layer, creating those ourselves without the need to rely on Tier 1 suppliers gives us a lot of — gives us a lot of customer facing strength, but also creates opportunities for partnership certainly.

Adam Jonas: Okay. Thanks, RJ. Just as a follow-up to that. If I focused on your vehicles and ADAS and data collection capabilities, Driver +, 10 exterior cameras, 12 ultrasonic sensors, five radars, you got compute, you mentioned the vertical integrated, your custom ECUs and architecture. I think your fleet drives more in five hours than Apple did in all of last year with their autonomous car program before it was canceled. And we’re hearing from people in that field of ADAS and robotics that there’s been a real revolution due to LLM and Gen AI on bringing forth end-to-end learning and neural net training. I’m curious if you have also witnessed that, you and your autonomy team have — can concur with that. And if so, does that then change your CapEx profile of how you allocate it to supercompute either directly through NVIDIA GPU clusters as part of your CapEx the way your rival Tesla is doing or otherwise working through partners and hyperscalers in Amazon in order to get access to that compute to get closer to achieving autonomy.

Thanks.