RJ Scaringe: As I spoke to before, the sales process for commercial customers really, is that relatively long sort of lead time process whereby it’s important for these large fleet operators to run pilot programs, both to understand the unique idiosyncrasies of the vehicle, but also to understand what changes are necessary from an infrastructure point of view. And as is often the case, where the vehicles will be based out of their “hub”, wasn’t originally designed with a lot of power. So it doesn’t have necessarily power to support daily charging or night charging of the vehicles. And that takes time to install that. We’ve learned this – some of the challenges associated with converting existing facilities to support large EV fleets.
We’ve learned this through the lens of our relationship with Amazon very clearly. And so those pilot programs, which will be kicking off, we’ll be announcing a number of them shortly, will lead to larger volumes, but we want to be careful to just set expectations in the right way that these pilot programs will take some time. And so we think of this as some volume associated with both the pilots and orders that come following the pilots in 2024, but the significant opportunity really starts to kick in, in 2025, as these larger customers transition from pilot to at scale development.
Emmanuel Rosner: Okay. That’s helpful. And then my second question is on CapEx. So obviously, quite a big cut again to this year’s guidance. I think you’ve mentioned among other factors, timing delays. I guess historically when you’ve lowered the CapEx over the last few quarters or so, there was no real increase in CapEx for the future periods. But how should we think about this particular cost? Like, are you going to see something next year in terms of CapEx at higher than what you previously contemplated or in the end, leave it at your regular framework?
Claire McDonough: So Emmanuel, what we’ve talked about in the past has been approximately $2 billion or on average, between 2023 and 2024. I’d say that we’ll be in a position to be below that average, just slightly below that average, if you think about the trajectory and the significance of cuts that we’ve had in 2023 itself. It’s really been driven by both some improvements that we’ve had in terms of longer-dated payment terms, on some of the work that we’re doing within our production facility and with our equipment purchases, as well as the episodic nature of some of our investments, predominantly surrounding the shutdown and introduction of new technologies that’s really the largest contributor to the reductions that we’ve made this year that will hit in the early part of 2024.
Operator: Thank you. Our next question comes from the line of Colin Langan with Wells Fargo. Your line is now open.
Colin Langan: Oh, great. Thanks for taking my questions. If I look at gross profit ex the LCNRV, it’s trending, I think, close to $38,000 a vehicle, and that has improved a lot from Q1, where I think it was close to $80,000, but still quite a big gap to get to the gross profit. I mean I think in Q1, you kind of framed like a certain percent was leverage, certain price, service engineering, certain price downs. Any sort of framework how we get from the sort of $38,000 today to the breakeven, what are sort of the main drivers from here? Is it mostly the pricing and engineering at this point? Or is there still some leverage or?
Claire McDonough: So the three drivers remain as you think about them being the fixed cost leverage that we’ll get from increased volume from current state to the end of 2024, as well as the material cost down trajectory and improvements in average selling price as a whole. As you look at the progress that we’ve made over the course of this year, that’s largely been driven by the improvements that we’ve seen in fixed cost leverage from the production ramp, as well as the progress that we’ve been making on material costs, given the technologies we’ve introduced in EDV, which RJ referenced, resulted in a 35% improvement in our material cost in the EDV itself, and then continued progress against, both the introduction of new technologies such as the Dual-Motor introductions that we’ve had in R1.
And then beyond that, we’ve also continued to see progress, as RJ mentioned, in the visibility that we have today in our contractual agreements with supplier partners that are continuing to come down as we look both to the business in the future. The other key that we’ve seen has been around the commodities environment and backdrop. And to date, you’re not really seeing the softness in some of the key battery cell raw materials are reflected in our current results. So some of that trajectory is still to come as you think about impacts for the end of this year and into 2024 as well.
RJ Scaringe: I think Claire and I both spoke to this, but it’s important to call out, when we talk about material cost reductions and pulling overall our BOM costs down, These are contractual, meaning, this isn’t like, us sitting over here, hoping that this is going to come down. These are detailed contractual negotiations, part by part, supplier by supplier, and the effectivity data in some of these where it’s, let’s say, just a pure negotiation on a part that’s not going to change or on a supply that’s not going to change, we’ve been able to accelerate the effectivity date to have already happened or to be happening prior to the shutdown in Q2 of 2024. But for some of the larger changes and things like, let’s say, for example, the significant consolidation of ECUs that were driving or the massive refactoring harness that takes roughly 25% of the harness length out.
Those involve engineering changes that involve new suppliers and completely new supplier contracts. And so the bundling of some of those big multi-thousand dollar changes that have effectivity dates in April, it’s – we have the 100% confidence those are going to occur. Those are, again, I’m using the word here is – clearly, again, these are contractual agreements. But the contractual agreements have an effectivity date and they tie to when we start production with those new components. So as we look at this transition, the continued ramp, as I said earlier, that’s – we understand the – that’s just the numerics of fixed cost absorption. And on the BOM cost side, it’s just understanding what – I understand it’s hard for all of you to see, but very clear for us to see the contractual obligations that we’ve negotiated with all of our suppliers.
Colin Langan: I guess I think in Q1, you had kind of indicated half of the gap was leverage and then it was like a quarter price, and then 1/4 is supplier and engineering. At this point where you have already cut it in half, I mean how should we think between those three items? Is it now equally 1/3, 1/3 each of what’s going to drive that closing that gap? I guess I was trying to gauge the size of what’s left.
Claire McDonough: Colin, we’re not going to provide an update specifically to the bridge that we had commented on. But as I mentioned, the significance in the progress that we’ve seen to date has really been driven by fixed cost leverage from production ramp and some of the progress in our material cost-down trajectory. So you can extrapolate that to understand those sort of relative reweighting of those three key drivers for us.
Operator: Thank you. Our next question comes from the line of Jordan Levy with Truist Securities. Your line is now open.
Henry Roberts: Hi, all. It’s Henry on for Jordan here. Just had a quick one around some of the current micro news on EV demand. I just want to get a sense of any small changes in your thinking around the launch of R2, timing, et cetera, due to this? Or do you think the backdrop for EV is, be substantially improved by the time it rolls out in 2026? Thanks.
RJ Scaringe: Ultimately, as we look at, I’d say, broadly beyond even R2, just at the space, I think there is an overreaction to some of the short-term headwinds, short or medium-term headwinds we see between interest rates being at record high levels. And of course, those aren’t going to drop down anytime in the next month or two, but this is something that will recover over time, and some of the geopolitical challenges that we have across the world. So if you look at R2 launching in 2026, everything about our R2 in terms of its ability to – and our deep confidence in its ability to capture the essence of our brand. We’re enormously excited about the product, but to do it at a price point that’s considerably lower than what we have in R1 and at a form factor, a size that makes it sort of fit from an addressable market point of view, fit the largest segment in the United States.
