Rivian Automotive, Inc. (NASDAQ:RIVN) Q3 2023 Earnings Call Transcript

Rivian Automotive, Inc. (NASDAQ:RIVN) Q3 2023 Earnings Call Transcript November 7, 2023

Rivian Automotive, Inc. beats earnings expectations. Reported EPS is $-1.19, expectations were $-1.36.

Operator: Good day, and thank you for standing by. Welcome to the Rivian Third Quarter 2023 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 turn the conference over to your speaker today, Tim Bei, Vice President of Investor Relations. Please go ahead.

Tim Bei: Good afternoon, and thank you for joining us for Rivian’s third quarter 2023 earnings call. Before we begin, matters discussed on this call, including comments and responses to questions reflect management’s views as of today. We will also be making statements related to our business operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and today’s shareholder letter. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our shareholder letter.

Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we’ll cover on today’s call. With that, I’ll turn the call over to RJ, who will begin with a few opening remarks.

RJ Scaringe: Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments during the third quarter and provide an update on the progress we are making against our core value drivers. Importantly, I want to take this opportunity to provide some broader perspective on the EV space. There has been a lot of noise and a lot of dialogue recently around EV adoption, and I want to emphatically state just how deeply convicted we are that the entire automotive industry will be transitioning to electric over the next one to two decades. We’ve built and designed our business around this transition. We’ve designed our team structure, our technology stack, the way we’ve approached vertical integration to not only help our business scale profitably, but to ensure we are positioned to be a leader in this generational opportunity.

We believe a substantial competitive advantage is our approach to vertically integrating our in-vehicle computers, software stack and propulsion platform, along with our efficient direct-to-consumer, go-to-market strategy. R2 will benefit from investments we’ve made in R1 and will represent our first global platform. Additionally, Rivian’s production ramp and introduction of multiple vehicle platforms in our Illinois plant has provided significant learnings in a compressed timeframe. Our team will apply this experience to our new manufacturing facility in Georgia with the goal of achieving a considerably lower cost structure. Now, in the short-term, I want to acknowledge the macroeconomic and geopolitical pressures impacting consumers and businesses, most notably the increase in interest rates.

In this context, we remain laser focused on the factors within our control, driving greater cost efficiency, continuing to ramp production, investing in differentiated technologies, continuing to enhance the Rivian customer experience, and maintaining a strong balance sheet. Our financial and operating results during the third quarter of 2023 represent progress on each of these fronts. Before I get into the third quarters milestones of performance, I wanted to touch on an important new development, which was just released. We have amended our Amazon agreement with terms and conditions, which provide the opportunity to sell commercial vans to other customers, helping more companies reduce their CO2 emissions. With more than 10,000 EDVs on the road and 260 million delivered packages, we are already seeing meaningful impact from our initial rollout.

We are excited to continue our work with Amazon to deliver on their initial order of 100,000 vehicles, along with a diverse set of new commercial customers. We are confident in the value of our vans, software and services offerings can provide fleet customers and are in active discussions with a number of large potential fleet customers to launch pilot programs. It’s important to appreciate that the sales cycle for commercial vans typically begins with lower volume pilot programs. The most recent quarter demonstrated sequential production growth, further improvement in our profitability per vehicle, introduction of a new Max Pack variant, with up to 410 miles of range, rollout of multiple over-the-air updates to enhance the customer experience and focused investment on commercial infrastructure to support our expanding fleet of vehicles.

Within the plant, we continue to see progress across our production lines. We produced 16,304 vehicles during the third quarter and continue to ramp our Enduro Drive unit line. As a result of this, we are raising our production guidance for the year to 54,000 total units. Later this month, we plan to take about a week of downtime for validation builds to support the incorporation of engineering design changes into the R1 platform, which will be implemented in the planned downtime in the second quarter of 2024, which we discussed in the last earnings call. These new technologies include our simplified electronic control unit topology and cost reductions across a variety of areas, including the vehicle harness, body structure, and battery pack.

These technology changes represent Rivian’s continued emphasis on driving greater cost efficiency. They will significantly contribute to driving towards Rivian’s long-term gross margin targets. Rivian vehicles have now driven over 490 million miles, which provides us with great data and feedback on how our vehicles perform in different environments and what features can be added or enhanced to improve our customer experience. This past quarter, we pushed major over-the-air updates, which improved ride quality, enhance the towing experience, and offer customers a new way to interact with the different drive modes. Over 90% of our customers update their software within five days of it becoming available. It’s great to see this level of engagement with our software.

Later this quarter, we plan to launch our leasing platform on select R1T vehicles in certain regions. We look forward to offering this as a new way for our customers to take delivery of Rivian and plan to expand the lease offering to additional regions across more vehicles as the program matures. We currently have 45 service centers, along with 408 mobile service vehicles. In addition, we recently opened Rivian spaces, our version of retail stores in Vancouver, Seattle, Chicago, Brooklyn, Nashville, Atlanta, and Denver. Our DC fast-charging network also continues to expand. We currently have 57 Rivian Adventure Network charging sites. Progress continued on the development of the R2 platform, as well as preparing the future production site in Georgia.

I was just there a few weeks ago. It’s great to see the site starting to take form, which is the direct result of a strong collaboration between the state, local community, and Rivian. It was a strong quarter as we continued to deliver on our operational and financial goals. I would like to thank our employees, customers, partners, suppliers, communities, and shareholders for their continued support of our vision. With that, I’ll pass the call to Claire.

Claire McDonough: Thanks, RJ. I would like to reiterate that our team is focused on four key value drivers: driving greater cost efficiency, continuing to ramp production, investing in differentiated technologies, and continuing to enhance the Rivian customer experience. Third quarter results demonstrate advancement in each of these aspects of our business. During the third quarter, we produced 16,304 vehicles and delivered 15,564 vehicles, which was the primary driver of the $1.3 billion of revenue we generated. Total gross profit for the quarter was negative $477 million. We remain focused on improving our gross profit per vehicle delivered. During the third quarter, our gross loss per vehicle improved by approximately $2,000 versus the second quarter.

This improvement would have been approximately $14,000 better, excluding the impact of the change in LCNRV and losses on firm purchase commitments. So therefore, LCNRV and losses on firm purchase commitments more significantly contributed to the improvement in gross profit during the second quarter as compared to the third quarter, highlighting the improvements we have made in ramping production and reducing the material cost of our vehicles. As a reminder, when our LCNRV balance and losses on firm purchase commitments declines, it reduces cost of goods sold and positively contributes to gross profit. We expect by the end of 2024, we will no longer have material LCNRV inventory charges associated with the production at our Illinois plant as we reach positive gross profit.

Our adjusted EBITDA for the quarter was negative $942 million. In October of this year, we raised a $1.75 billion green convertible note, which further strengthens our balance sheet as we approach the expected start of construction of our Georgia plant early next year. By maintaining a strong balance sheet, we are well positioned as we look to start production of the R2 platform in 2026. The offering was not completed until after the quarter end. Accordingly, the $1.6 billion of net proceeds from the raise was not included in our Q3 2023 ending cash balance of $9.1 billion. Turning to our business outlook for 2023. We remain focused on ramping production and driving greater cost efficiency across the company. Based on the progress we’ve seen year-to-date across our manufacturing process and our cost down efforts, we are raising each aspect of our 2023 annual guidance.

We are raising our production guidance to 54,000 units, improving EBITDA guidance to negative $4 billion and lowering our CapEx guidance to $1.1 billion. The improvement in estimated CapEx is driven mostly by timing of spend and by our efforts to reduce costs across the business. As a reminder, because Amazon limits the intake of new commercial vans during its peak holiday delivery period, we expect a more significant gap between production and deliveries in Q4 relative to prior periods. As RJ mentioned, and as we discussed on last quarter’s earnings call, we expect to shut down both the consumer and commercial lines in our Illinois facility in the second quarter of 2024 to introduce a number of new in-vehicle technologies to the R1 platform.

We believe these changes will meaningfully reduce our material costs and position Rivian to exit 2024 with a much improved margin profile. We are planning to adjust the production rate of the lines whereby the planned annual capacity will be for 85,000 units for R1 and 65,000 units for EDV, keeping the total facility at an annual capacity of 150,000 units. Our downtime in Q2 2024 and associated ramp up in Q2 and Q3 2024 is expected to impact roughly two quarters of production. While the incorporation of new design changes impacts near-term production, we are confident it better positions Rivian to be more profitable and competitive over the long-term. Overall, 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.

With that, let me turn the call back 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 the line of Rod Lache with Wolfe Research. Your line is now open.

Rod Lache: Hi, everybody. I have a question on cost and a question on demand. Just first, my impression is that you’re making better-than-expected progress on costs, just simply because you improved your gross loss by $16,000 ex-LCNRV. I didn’t see any average price improvement and presumably volume isn’t helping you just yet because you haven’t gotten the contribution margin positive on the R1. So is that correct? Because it is interesting since you haven’t yet benefited from the new architecture of the Pack and all the other things that are coming into 2024.

Claire McDonough: Thanks for the question, Rod. As you think about the key drivers and the margin improvement that we saw over the last quarter, it was driven by the 23% increase that we saw in delivery volumes. So there was some fixed cost leverage. But we also saw significant improvements in material costs which was driven both by a mix shift to greater concentration of EDV delivery volumes. So roughly about 30% of our revenue in Q3 was from the sales of the EDV itself, which is, as you mentioned, is a higher margin, already contribution margin positive for Rivian vehicle platform for us. But beyond the EDV, we also saw significant material cost savings as well for R1, driven by the continued work of our procurement team as we’ve been renegotiating many of our supply agreements.

And then it also incorporated some of the early sales of our dual motor to consumers as well that benefited the reduction in material costs. In addition to those two key levers, we also saw continued softening in the broader logistics market and space. And so that was also a contributor to the improvement that we saw on a per unit basis for Q3.

Rod Lache: That’s helpful. So yes, the contribution margin must be on the RCVs. On the demand side, could you talk about how quickly you can expand the RCV to other customers? I understand that there’s a process with pilots and planning with these fleets. But any thoughts on how we can think about RCV sales into 2024 or 2025? And on the R1, you’re currently on – at 65,000 units, you will be at 85,000 units at the end of next year capacity presumably, you’d need at least 180 orders per average day just to meet like your current capacity. Maybe you could talk a little bit about whether you’re seeing convergence to that kind of a number. What’s the trajectory of demand that you’re seeing in the orders?

RJ Scaringe: Hi, Rod. Thanks for your question on the commercial vehicle and R1. Just to speak first on the commercial vehicle side. Of course, we’ve been working on the exclusivity agreement with Amazon for a while, and we’ve talked about this in past earnings calls. So it’s not as if we were surprised by that this morning. And with that, we’ve been building the relationships with a diverse set of commercial operators, and that’s everything from last mile to retail, to a wide variety of industrial or commercial business cases which require – businesses that require commercial vans. And while the fleet and the use cases are diverse, the one element that’s very common for these large fleets is the necessity of running pilots as a way to prep the network or prep the system to ingest a completely different type of vehicle in terms of its need for charging infrastructure, and as well as changes to the standard operating procedure for those respective businesses.

And so what we’ll be announcing soon is a range of different pilot programs that will perceive much larger orders, as these large fleets start to plan the electrification of their infrastructure. As it pertains to R1, of course, you can see in the numbers for Q3, we continue to maintain an extremely strong market share position at the price points at which the R1 platform operates. So as you think about volume of vehicles, electric vehicles sold, let’s say, at over $75,000 price point. We’re a very significant market share player, that the brand is connected incredibly well with consumers. And we’re seeing that translate to not only continued excitement for the brand, but we see that really manifest as really strong residual values and in particular, really strong used vehicle pricing.

So Google search of used Rivian R1S will just reveal just how robust the pricing and therefore, the demand for these products are. So with that said, this is before we’ve even launched a number of additional variants that are going to be coming online. We’ve just recently launched Max Pack. We’ve launched the Dual-Motor. But early next year, we’ll be launching our standard battery pack. We’ll be launching additional trim configuration. And importantly, starting now or starting later this month, we’re going to be launching, on select models as you heard Claire and I described in the opening statements. Select model is a leasing program, and that leasing program creates a different way for customers to access the product, which is really helpful in an environment with interest rates as we see them today.

So we remain very bullish on R1 program and its long-term demand, and as I indicated, I think the RCV platform, our commercial van platform really is in our view, the best commercial van option available for fleet of for any sort of large fleet, and we’re working very hard to translate that into volume over the course of the next several quarters with these pilot programs that I referred to at the start.

Operator: Thank you. Our next question comes from the line of John Murphy of Bank of America. Your line is now open.

John Murphy: Good evening, guys. Just a quick question on the fourth quarter implied volumes. It looks like they’re a fair amount lower than what you did in the third quarter on production. I’m just curious, is this is a question of days in the calendar? Or is there something else going on sort of in the plan? Is it what you mentioned on the Amazon deliveries where you might downshift the EDV a little bit? I mean what’s going on there?

RJ Scaringe: Yes. Claire spoke to this in her opening statements, but we have – we’re planning a longer shutdown in the second quarter of 2024, to implement a whole host of changes that introduced a dramatic reduction in our material costs of building materials for the R1 platform. But those changes also improve the operations of the plant and allow us to produce vehicles with less labor per vehicle, and therefore, less cost per vehicle. Preceding that shutdown in Q2 2024, we have a one-week shutdown in Q4. And that’s planned to do some of the longer lead changes in the plant, and it requires us to shut down all production for approximately a week. So you’re certainly seeing that in the numbers. And then I’d say broadly, we’re also recognizing some of the days lost around the holidays associated with Christmas and, of course, the New Year holiday.

John Murphy: Okay. And then just one follow-up on the physical service network build-out. RJ, how are you sizing that at the moment? Because I mean that’s obviously something that you’re getting way ahead of the customer needs there. How you’re locating, deciding on locations, what’s the cost of those, and how are you sizing those?