Rod Lache: Great. Thank you.
Operator: Thank you. One moment for questions. Our next question comes from George Gianarikas with Canaccord Genuity. You may proceed.
George Gianarikas: Thank you for taking my questions. I’d like to just to go back to one of the previous questions, just to understand the Q1 delivery cadence of down — you said down 10% to 15% sequentially. Can you just kind of help us understand the reasons behind that? Is there anything to do with just the supply, or was it informed by the comments you made around demand? Thank you.
RJ Scaringe: Thanks, George. Claire referenced in her opening remarks, during this quarter, a lot of the — some of the supplier changeovers that we’re working on, we’re going to start to feel the impact of them. And we saw it in some of the one-time charges that we accumulated already in Q4. We’re going to feel more of that in Q1. And along with that, we’re going to be building several thousand vehicles that won’t be deliverable to consumers. So, we won’t be factory gating those vehicles in Q1. And so that’s the reason you see the production guide lower in Q1 than what it was in — than what we achieved in Q4. And so, while the plant won’t be shut down in Q1, we are going to start to feel the impacts of the scale of the supplier changeover that we’re making.
And that ultimately is going to translate into our deliveries as well. So, with that said, we’re going to be doing everything we can to, once the parts are available, to get those vehicles built and then make those deliveries as quickly as we can in the second quarter.
George Gianarikas: Thank you. Maybe as a follow-up, just to understand, you have, I think, over 70,000 cars on the road to-date, and I’m sure you’ve learned a lot from them being on the road, a lot of data collection. What has that data collection informed you about product performance and maybe what you’re going to put into the R2? Thank you.
RJ Scaringe: Yeah, it’s a — there’s a lot. One of the things that’s been most surprising us is just watching how customers are interacting with the overall digital experience and digital ecosystem of the vehicle. And we track really closely how the experience of interacting in the vehicle translates into the mobile app and the use of the mobile app within the vehicle, and — or I should say, to access and work with the vehicle. And so, as we look at some of the features that are coming, even in this year, it’s to enhance the digital experience in the vehicle, around dynamics, around usability, around activities that you can do in the vehicle, so some of the entertainment functions, and continuing to make those interactions easier and more seamless.
And the way we build our software roadmap, there’s a strategic, just call it, long-form element that looks at how everything puzzles together in terms of partnerships, in terms of some of the capability that goes in. But then there’s also a very active dialogue with customers, where we’re not only active on forums, but we have user groups that send us feedback points and we address those. And I get a lot of joy out of our release notes that go out every three, four weeks with every over-the-year update that we drop, and then the feedback and the excitement that comes with that. With all that said, a lot of the learnings of what’s gone into R1 beyond software, around drivability, around how the vehicles are being used, around the importance placed on safety, have played into really helping to shape how we’re prioritizing cost of goods sold spending, if you will, on R2.
And we’re very excited to show the R2 product. We think it really captures the most important sort of elements or the essence of Rivian as a brand and as a product, but in a smaller form factor package, and of course, at a lower price point. But it’s still very much a Rivian. And we’ve had lots and lots of debates over the last 24 months around what the content needs to be in the vehicle to deliver on that Rivianness, if you will, while at the same time recognizing that certain trade-offs need to be made to achieve the lower price point.
George Gianarikas: Thanks.
Operator: Thank you. One moment for questions. Our next question comes from Dan Levy with Barclays. You may proceed.
Dan Levy: Hi, good evening. Thank you for taking the questions. Wanted to just start with a question on your bridge to gross margin breakeven. And I wanted to just contrast that versus the prior commentary you gave, which is that half of the improvement would come from volume, just cost absorption, a quarter from cost improvements, and a cost from — and a quarter from price. I recognize the starting points are different, but given a seemingly weaker volume environment, and I think maybe some questions on the pricing, what are the incremental offsets that you’re seeing that still enable you to get to this gross margin breakeven? Is it just further improvements or breakthroughs on price than what you previously anticipated? And maybe if you could just comment for a second if you reached variable margin breakeven in the fourth quarter on R1, which was something that I believe you previously targeted? Thank you.
Claire McDonough: Thanks, Dan. As you heard in my prepared remarks, the bridge — the largest piece of the bridge left from Q4 ’23 to Q4 2024, in which we expect to be modestly positive in gross profit, is variable cost. And so that is enabled by, as you heard RJ speak about, the continued opportunity we have to renegotiate prices with suppliers. We now have the carrot of R2, which is coming next, which has been an enabler for us to get to lower material costs across the board from a commercial context. We also have, which is largely unchanged, the planned engineering design changes that drive ample cost efficiency that will go into the product as part of the Q2 shutdown. And then, the areas where we’ve seen incremental opportunities is really what we’ve seen across the board from a commodities context, where lithium prices have continued to soften across the board and have been more of a tailwind today in this bridge relative to the last bridge that we provided a year ago on our Q4 2022 earnings call as well.
As we look at the other elements, as you rightfully noted, the lever of fixed cost absorption is a smaller bucket for us today as we think about the continuation of driving more operational efficiency as the lever versus a massive step change in the underlying volumes associated with our 2024 guidance. And then, the last element on ASP, you’ve seen us take an incremental $12,000 of revenue per delivered vehicle, Q4 over Q4 from 2022 to 2023. And so, we’ve already made very significant progress against a lot of the ASP side of the equation. And so, what we indicated in our prepared remarks was really more directed on some of the non-vehicle related services revenue opportunity. So that’s continuation of sales of regulatory credits. RJ spoke about the service opportunity just now as we build the car park, and more of what’s today is sitting in SG&A, starts to become COGS or warranty expense.
That’s another key enabler for us, as well, as will the opportunity for Rivian to continue to offer additional software-related revenue streams in the future, that will add to that broader ASP driver within the business as a whole. Onto your second question around the contribution margin of the vehicles. We were very close in achieving positive contribution for current priced vehicles in Q4 and see direct line of sight, as is evidenced by our continuation of committing to our Q4 positive gross profit as we look to the future and the impact that the material cost reductions will have driven by our shutdown in Q2.
Dan Levy: Great. Thank you. And then maybe if we could just have a follow-up on the demand side, and specifically, how do you think about elasticity of demand here? And I get it that most of the incremental volume you’re looking at beyond the order book is coming from the go-to-market strategy. But beyond that, if that doesn’t materialize as planned, how do you think about the pricing? Are you looking to hold firm on the price and maybe limit some of the volume upside, or do you think that there would be potential for pricing actions? Thank you.
RJ Scaringe: Thanks. We’re constantly monitoring and looking at the pricing environment and understanding really what the overall macro environment is looking like and how to manage that. To-date, we’ve just recently launched our lowest price variant of R1 with the Standard pack. And as I indicated, we’ve seen very encouraging reaction to that. So, there is demand elasticity as a function of price, for sure. But at this point, we feel comfortable with that pricing on the Standard pack and this — but again, this is something in this environment we have to go on eyes wide open and recognize how the rest of the market is reacting and how the rest of the market is behaving.
Dan Levy: Thank you.
Operator: Thank you. One moment for questions. Our next question comes from Mark Delaney with Goldman Sachs. You may proceed.
Mark Delaney: Yes, good afternoon. Thanks for taking the question. I think first, something to better understand your drivers around the software and services part of the business. I think about 15% of the gross profit improvement by the fourth quarter of this year is coming from software and services. You’ve got a number of offerings there that you’ve spoken about, things like insurance, charging and regulatory credit sales. Maybe you can rank order for us what you see, some of the largest drivers are, in terms of getting to that 15% coming from software and services this year?
Claire McDonough: Sure. The biggest driver there is driven by the increases that we saw in regulatory credits in aggregate. And so, for us, we had $73 million for the entire year in sales of regulatory credits, and Q4 alone had $39 million, and that was the largest driver. But beyond that, we’d continue to see growth across the maintenance and repairs, from a service standpoint, our continued efforts in remarketing, and over the longer term, the opportunity to sell Rivians in the resale market as well, which we think is an important value driver for the business overall. We’ve also been encouraged by the financing revenue streams, as evidenced by both the ongoing straight financing of our vehicles, in addition to the introduction of leasing, which we launched in November of this year, which has been a key enabler for us to driving greater share of our financing penetration across all Rivians sold as well.
And equally as we think about the insurance business, that’s an annuity type business, as we’ve seen very strong renewal rates for existing customers that are now entering their second year, while we’re also able to capture a significant portion of new customers as well. And so, we’re continuing to see strong tailwinds from each of the key drivers across the board, and are excited to have a broader roadmap of more of these software-enabled services in the future.
Mark Delaney: That’s helpful, Claire. My second question was trying to understand how fixed the input cost environment might be for 2024 at this point. I mean, you spoke about some changes in things like lithium and battery pricing, that can move around a little bit throughout the year. I mean, have you already gotten firm commitments on some of these materials? And similarly with suppliers, oftentimes there’s a volume requirement in order to get a certain price. You spoke around a partnership approach that some of the suppliers are taking and wanting to be involved with the R2 and some of the longer-term opportunities with Rivian. But to the extent your volumes end up less than the 57,000 production target, is there some risk as well around what the input costs you’ll be paying? Thanks.
RJ Scaringe: Yeah, Mark, you referenced already, but I mean, the raw material costs within the battery supply chain have changed dramatically in the last year. Specifically, lithium hydroxide is down by about 4x from north of $80 a kilogram to just over $20 a kilogram today. So that has a very significant impact on our overall cost structure. But getting into just thinking about the overall supply chain sort of health for us and overall material cost, we’re just seeing a dramatically different environment for sourcing than what we had previously. And when we think about when we sourced R1, a lot of the bill of materials that we’ve been operating off of and the contracts we’ve been operating off of to date, those are contracts that went in place in 2019, 2020, where Rivian was in a very different negotiating position with those suppliers, and where the industry was in a very different position to be making commitments to us.
Fast forward to today, those same suppliers are highly engaged, very enthusiastic about the product, and they’ve experienced very much firsthand some of the challenges of supplying other products, and some of the products from large established OEMs have not done nearly as well as what they thought they would or what those other manufacturers thought they would. And on a relative basis, looking at those and comparing it to us, they now see us as a large customer, and they see what’s coming with R2. And that gives us really meaningful negotiating leverage. And in many cases, we’ve been able to negotiate with our existing suppliers meaningful cost reductions that remove any the price premium that we would have been paying before associated with us being a new company.
But in cases where we haven’t been able to do that, we’ve been very active on resourcing suppliers and bring on — ending supplier relationships and bring on new suppliers. And we have a relentless focus on driving our cost of goods sold down through those activities. Now, in cases where we’re either changing the part design or changing out a supplier, it’s not as if we can press a button and it happens immediately. There’s both the tooling time, there’s the bring-up of the supplier, and then there’s the coordination of the transition. And the shutdown as I said, this is — this will be the single largest consolidated set of supply chain changes that we’ve had by far since we started production. And we had a similar set of changes we made on EDV early part of 2023 when we shut the line down.
And out of that, we achieved a material cost reduction of 35%. But the scale of the changes we’re making on R1 is meaningfully bigger in terms of number of suppliers and number of components with the shutdown that we’re planning here in the second quarter of this year.
Mark Delaney: Thank you.
Operator: Thank you. One moment for questions. Our next question comes from Emmanuel Rosner with Deutsche Bank. You may proceed.
Emmanuel Rosner: Thank you very much. I was hoping you can help me understand better how the introduction of the Standard packs helps with your targets and strategy. I think the previous plan I think you may have shared with us was perhaps to introduce it once you’ve actually had a chance to incorporate some of the cost savings and potentially lower battery packs and efficiencies, et cetera. But I guess by doing it now, the price point is probably like $9,000 below the large pack. But the battery pack is not that much smaller, like 14 kilowatt hours smaller. So it feels like it’s a large price cut without much of a cut to the bill of material of it. And so, I’m curious, does it help you with volume scale in terms of getting to that breakeven gross margin. Where does it fit in the equation?
