Despite supply shortages, still maintain the goal of turning positive gross margin in the fourth quarter (Rivian 3Q24 earnings call summary)

The following is the summary of Rivian's Q3 2024 earnings conference call. For the financial report interpretation, please refer to Is Rivian, the Tesla killer, being killed instead, and can Volkswagen not save the shattered Rivian? ****

1. Core Information Review of the Financial Report:

2. Detailed Content of the Financial Report Conference Call

2.1 Core Information Presented by Executives:

1) Business Progress

① R1 Gen 2

a. Cost and Efficiency Improvements: Focus on enhancing material costs and factory efficiency, while introducing hundreds of design and engineering changes to improve user experience.

b. New Model Introduction: Launched the new Tri-Motors model, featuring a front single motor and dual rear motors, outperforming the first-generation four-motor version while having lower production costs and higher efficiency. An updated four-motor model will also be launched in 2025.

c. Supply Chain Challenges: About 50% of material costs come from new suppliers or contracts, but production issues with some suppliers have limited Q3 output.

② R2

a. Product Design and Cost Control: The goal for R2 is to significantly reduce costs while maintaining Rivian's characteristics. 85% of R2 materials have been contracted at cost targets, allowing for approximately a 45% cost reduction compared to R1 for similar content.

b. Market Positioning: R2 is planned for delivery in the first half of 2026, with a starting price of $45,000.

c. Shared Technology: R2 adopts the electrical architecture, topology ECU, and software stack from R1 Gen 2.

③ Factory Expansion

a. R2 production will take place at the Normal factory, where the current facility expansion is nearly complete, laying the foundation for timely R2 delivery.

b. Plans to build a new factory in Georgia, which will not only produce R2 but also other models based on the medium platform.

④ Battery Supply and Design

a. Battery Supply: R2 will use LG's 4695 cylindrical batteries, with the battery pack designed as the core structure of the vehicle, and the top battery pack serving as the vehicle's floor.

b. Cost-effective Design: Improving cost-effectiveness by reducing and integrating parts, laying the foundation for achieving target pricing and positive gross margins for R2.

⑤ Joint Venture Progress

The joint venture project with Volkswagen Group is progressing smoothly, with Rivian's hardware and software currently showcased on Volkswagen vehicles. The joint venture funding supports Rivian's continued growth and R2 production in Georgia.

⑥ Future Outlook

R1S is the most popular in the SUV market above $70,000 in California, with the goal of R2 sparking similar enthusiasm in lower-priced markets, thereby driving the electrification transition

2) Financial Performance

① Production and Delivery

a. Production and Sales: In the third quarter, 13,157 vehicles were produced and 10,018 vehicles were delivered, contributing approximately $874 million in revenue.

b. Inventory Impact: Due to the successful sale of the first-generation R1 inventory in the second quarter, the finished goods inventory of R1 was low in the third quarter, leading to a quarter-on-quarter decline in delivery volume.

c. Demand and Supply Chain Issues: Production disruptions and component shortages affected the saleable quantity of certain R1 models, coupled with challenges in the consumer market, which suppressed demand.

d. Production and Delivery Targets: The annual production is expected to be between 47,000 and 49,000 vehicles, with annual deliveries expected to be between 50,500 and 52,000 vehicles, representing low single-digit growth.

② Cost and Gross Margin

a. Gross Margin Situation: The total gross profit for the third quarter was negative $392 million, with a gross loss of approximately $39,100 per delivered vehicle.

b. Cost Structure Improvement: Through design optimization, supplier negotiations, and declining commodity prices, the material costs for the second-generation R1 have significantly decreased, with further improvements expected in the fourth quarter. The material costs for the R1 large battery dual-motor model are expected to decrease by 20% compared to the first quarter of 2024.

③ Expense Side

Operating Expenses: The GAAP operating expenses for the third quarter were $777 million, the lowest level in the past three years, reflecting the effectiveness of cost-saving measures.

④ Fourth Quarter Financial Guidance

a. Gross Profit Target: The GAAP gross profit for the fourth quarter is expected to achieve moderate positive growth, primarily driven by the following factors:

- Revenue Structure Improvement: Non-vehicle revenue (such as regulatory credits, services, used car sales, software, etc.) is expected to increase, with annual regulatory credit revenue expected to reach $300 million.

- Material Cost Optimization: Design changes for the second-generation R1 and supplier negotiations have reduced material costs.

- Fixed Cost Reduction: Fixed costs per vehicle have been lowered through vehicle design, production process optimization, and depreciation of initial vehicle tooling.

b. EBITDA: Due to production constraints leading to insufficient absorption of fixed costs, the adjusted EBITDA loss for the fiscal year 2024 is revised to $2.825 billion to $2.875 billion.

c. Capital Expenditure: The capital expenditure guidance for 2024 remains unchanged at $1.2 billion.

2.2 Q&A Analyst

Q: Regarding the unit economics improvement of the R1 model and its impact on gross margin, can I assume that without the contribution of regulatory credits, the gross margin would still not turn positive? Can you explain what stage we are currently at in terms of unit economics improvement? How should we view the fourth quarter's performance in relation to 2025? Additionally, what other levers can continue to drive improvement?

A: We expect one of the main drivers of gross margin improvement in the fourth quarter to be the increase in unit revenue. This primarily comes from the anticipated $300 million in regulatory credit sales this year, as well as an increase in average selling price

Looking ahead to 2025, we will also launch a four-motor version, which will help boost the overall average selling price. In addition, the improvement in variable costs per unit will continue, with the reduction in material costs from the third quarter to the fourth quarter extending into 2025. We also expect to further reduce commodity costs, while the procurement process for R2 will bring about a positive decline in variable costs.

In terms of fixed costs, although this year's production guidance downgrade has had some impact on this part, we have seen a significant improvement in operational efficiency within our production facilities through the transition to the second-generation R1 models. Entering the fourth quarter and into 2025, we will also see a further decline in depreciation expenses, as the major tools from initial production have largely been depreciated.

Q: Do you expect gross profit to turn positive in 2025? Additionally, can you provide some guidance on the expected regulatory credit revenue for 2025?

A: Our goal remains to achieve positive gross profit in 2025. It should be noted that we are currently in a dynamic environment, so we will provide a more detailed outlook for 2025 and formal guidance for the entire year during the fourth quarter earnings call.

Regarding regulatory credit revenue, we have some visibility into future opportunities for credit sales next year and expect these sales to align with the overall level of 2024.

Q: What is the proportion of pre-orders to direct sales from dealer inventory in this quarter? How has this ratio changed? Can you inform us of the proportion of customers who received the full $7,500 tax credit among sales, and what is the proportion of lease sales? Can you confirm that Rivian does not bear any direct residual value risk in these leases?

A: The lease penetration rate in the third quarter reached 42%. We are collaborating with Chase, with both parties sharing the residual value risk of the vehicles, which is part of our leasing program. We assess the expected residual value through third-party evaluations and adjust our reserve levels monthly and quarterly based on market conditions.

Regarding the overall proportion of pre-orders, in the third quarter, the end of the early booking price period led to an increase in overall pre-order volume, primarily benefiting those customers who took advantage of the earlier lower prices by purchasing the first-generation R1 or inventory vehicles.

As for customers receiving the $7,500 tax credit, they mainly belong to the qualifying consumer group. Given vehicle prices and overall income levels, most customers do not qualify for the tax credit for loans or cash purchases.

Q: Regarding the breakdown of unit costs (COGS) for the third quarter, if we exclude the cost improvement measures, the unit cost is approximately $127,000. However, considering the insufficient production efficiency on the supplier side, is there a clearer way to analyze the current unit cost? Additionally, looking ahead to 2025, can you break down which components of unit costs will improve?

A: As we mentioned, we have invested a lot of effort into this issue. The launch of the Gen 2 platform and some changes in supplier relationships in the third quarter have made data analysis complex. We have changed about 50% of our material cost suppliers. In addition, supply chain disruptions have also affected production, thereby reducing output for the season.

Despite these disruptive factors, we have still made significant progress in cost control. If we compare the material costs in the fourth quarter to those in the first quarter of this year, we expect a 20% reduction in material costs for the fourth quarter. This indicates that we have made substantial progress in reducing material costs and optimizing our cost structure. At the same time, we are also improving factory operational efficiency, reducing unit production time, enhancing product quality, and streamlining factory processes.

Although the factors in the third quarter were complex, we still maintain our guidance for achieving positive gross margins in the fourth quarter.

Our current focus is on improving production performance by implementing lean acceleration, optimizing value streams, and empowering the workshop teams. We have recently achieved encouraging results in these areas. Additionally, we are strengthening the Rivian industrial operating system and accelerating the application of lean principles. Cross-functional collaboration among teams is also being enhanced to ensure that the R2 project meets its targets in quality, cost, and delivery time.

Q: What specific benefits will stronger operational performance in 2025 bring? How much room is there for reducing unit product costs (COGS)?

A: Looking ahead to 2025, one of our core advantages will be the year-round production of Gen 2 models, which will provide a more stable production foundation compared to 2024. There were some fluctuations in production line investments and capacity increases in 2024. The team now has the opportunity to truly drive core lean manufacturing principles in normal manufacturing facilities, fully focusing on operational efficiency to prepare for the upcoming R2 model launch in 2026.

We will still schedule a production halt in the second half of 2025, expected to last for more than a month, primarily to renovate shared workshops, especially the painting workshop, to ensure we are fully prepared for the start of R2 production.

Q: Regarding Volkswagen, we see that you are using a common electrical architecture. Can you briefly update us on the current progress of the collaboration?

A: We are excited about our collaboration with Volkswagen and look forward to jointly developing highly attractive products across multiple brands and markets. Currently, we have built a demonstration vehicle that integrates our electrical architecture, ECU topology, and software stack, and both teams are very encouraged and optimistic about this.

As for which products will apply our technology and the pace of application, it has not yet been announced. However, given the nature and scale of this collaboration, it is foreseeable that our technology will be widely applied across multiple products and brands within the Volkswagen Group.

Q: The production guidance for 2024 indicates that production volume in the fourth quarter will exceed 11,000 vehicles, approximately 865 vehicles per week. What is Rivian's current production situation?

A: We have been actively addressing this specific supply constraint in recent weeks. It can be said that this is a short-term constraint, and the team has demonstrated a high sense of urgency, collaborating with suppliers and organizing cross-functional constraint teams to address issues on-site.

More importantly, we are currently expanding new capacity at a record pace. Progress has been very smooth in recent weeks, indicating that we are moving in the right direction toward restoring normal capacity, and the outlook is very optimistic. Therefore, we believe this issue will be resolved in the coming weeks

Q: You mentioned that regulatory credit sales are expected to reach $300 million this year. Can you help us better understand the reasons for the increase compared to previous expectations?

A: This year, the base value of regulatory credits sold to numerous OEM partners has increased, and our team has also seized the opportunity to deepen sales in the red credit areas that the core team is focused on. This is a highly complex process, and our team manages our credit portfolio based on the OEM needs of each state. Through these efforts, Rivian has successfully generated $300 million in revenue from the sale of regulatory credits, demonstrating significant progress made by the team in this area.

Q: Regarding the goal of achieving positive gross profit for the year. Does this refer to a positive gross profit for the entire year, or for a specific quarter? Does it specifically refer to the R1 model, or does it include the R2 model as well? Additionally, regarding regulatory credits, how should we understand the timing of revenue recognition? Do you have any other recourse, and when will this portion of revenue be recognized?

A: Looking ahead to 2025, as you mentioned, we will experience quarterly fluctuations. Therefore, we do not expect to achieve positive gross profit in every quarter of 2025. Our goal is to achieve positive gross profit for the entire year. Overall, 2025 will be influenced by multiple factors, including the timing of regulatory credit recognition, which will drive the achievement of positive gross profit for the year.

Looking forward, we do understand the timing needs of many counterparties. In some cases, the timing of regulatory credit sales recognition is also related to government agencies. Therefore, some timelines may need further clarification.

Q: The production of vans will increase in the fourth quarter. Does this also include delivery volume, or are you building inventory in advance for certain actions next year? Regarding some customers like Amazon, who typically do not like to receive a large number of vans in the fourth quarter, has the delivery pace changed?

A: We have increased the production and delivery volume of vans and three-motor models in the fourth quarter, as these two models only require one Enduro motor. From an operational efficiency perspective, this is the best way for us to increase total production for the year. At the same time, we expect additional Amazon van sales in the fourth quarter of this year.

Q: Regarding the collaboration with Volkswagen and the Scout model, which mainly involves electrical and software aspects, this vehicle looks very similar to the R1. Can we expect Volkswagen's model design to be similar to Rivian's product line?

A: The core of the joint venture is our electrical architecture, ECU, and the software running on it. It is worth noting that this does not mean that the user interface (UI) framework, the way the in-car digital screens are displayed, the number of screens, or their shapes will be the same; it mainly refers to the underlying software system.

This platform will be widely applied to different products and brands, with each brand deciding the appearance of the vehicle based on its own needs, including the design of the in-car UI and the overall digital design framework. Therefore, design decisions are still made independently by each brand, with Rivian providing technical support, while the decision-making power remains within the various brands of the Volkswagen Group

Q: What is the latest progress of commercial vehicles in the market? When can we expect the mass production of new customers to begin?

A: The sales cycle for large commercial fleets is relatively long, involving not only vehicle procurement or decision-making but also typically requiring fleet operators to adjust their standard operating procedures. Additionally, this necessitates the construction of charging infrastructure, which is often not straightforward, as their operational locations may not be designed to support such high power demands. Therefore, we have begun to see the efforts made in these areas over the past year gradually yielding results, with more achievements expected in 2025. This is also a key focus for our team, and we are very much looking forward to seeing our vans appear in the market with different logos and brands, helping various fleets move towards electrification.

Q: Based on my understanding of the negative gross profit of $3.92 billion in the third quarter, it is expected that out of the $300 million in regulatory credit revenue, $275 million will be recognized in the fourth quarter? You have only recognized $25 million year-to-date, which means the fourth quarter will bring approximately $117 million in revenue? I believe the change in sales volume is an important factor for the $117 million revenue. However, it seems that the cost improvement from the third quarter to the fourth quarter may not be particularly significant. Can you quantify the specific contribution of cost improvement to this revenue?

A: We have not provided specific details, but aside from the previously mentioned revenue-related factors, the main drivers for this quarter also include a significant increase in average selling prices, especially with the sales of more three-motor models. Additionally, the discounted prices for early reservation customers have ended, so the overall selling price in the fourth quarter will be closer to full price, which will naturally bring an uplift.

From a cost structure perspective, our production guidance is slightly lower than the third quarter level, reflecting the absorption of fixed costs. Specifically, depreciation expenses will decrease, while LCNRV (lower of cost or market) and procurement commitment levels will also decline. Furthermore, we will continue to improve on unit variable costs.

As previously mentioned, there were some fluctuations in the third quarter data, so the fourth quarter will be more representative and lay a more solid foundation for 2025. We expect to continue making progress in terms of revenue per unit, variable cost per unit, and fixed cost per unit.

Q: Regarding the R2 model, I understand that the $45,000 price may correspond to a version with a range of less than 300 miles. In the competitive market environment of 2026, models like General Motors' Equinox will offer over 300 miles of range at a price below $30,000. In this context, how will the R2 maintain its competitiveness? What is the company's analysis of the market competitiveness of this product at this price point and range?

A: The starting price of $45,000 for the R2 model needs clarification; this price corresponds to a lower performance specification version, but the range still exceeds 300 miles. Specifically, this version has a range of over 300 miles, while differing in performance and interior configuration from the higher specification versions

We conducted in-depth research on the market and believe that the key to driving the growth of electric vehicle demand and achieving 100% electrification of new car sales lies in providing more choices for customers. Currently, there are very limited attractive electric vehicle options in the price range below $50,000, and the R2 will become an important addition in this area. It offers consumers more choices with its unique body design, performance, and brand and product characteristics.

Q: Regarding the growth of unit revenue in the fourth quarter, assuming the $275 million regulatory credit revenue is excluded, is this growth based on year-over-year comparisons or compared to the first quarter? Regarding order visibility, can you explain how order visibility is in terms of average selling price (ASP) growth? Additionally, will the increase in EDV (electric delivery vehicle) deliveries in the fourth quarter impact ASP? Can you clarify whether the growth in EDV deliveries is sequential or year-over-year?

A: Regarding the growth of unit revenue in the fourth quarter, as you mentioned, we expect the average selling price of the R1 to increase, but this increase will be partially offset by the higher proportion of commercial vehicle (EDV) sales. Compared to the overall performance in the third quarter of this year, the ASP of the R1 in the fourth quarter will see an increase. At the same time, compared to the fourth quarter of last year, when commercial vehicles accounted for 8% of revenue, this proportion is expected to approach 25% in the fourth quarter of this year. Despite some fluctuations, the overall ASP in the fourth quarter will be higher than in the third quarter.

Regarding order visibility, our marketing team is continuously working to enhance consumer interest in vehicles through more test drive events. For example, the number of test drive events in the third quarter increased by 20% compared to the second quarter. Additionally, we are fully committed to increasing brand awareness and converting more market interest into orders, thereby strengthening support for future sales.

Q: It was previously mentioned that Volkswagen's additional funding will be phased in based on certain milestone achievements. Can you provide more background information on what these milestones might involve?

A: The Volkswagen joint venture project is expected to be officially completed by the end of the fourth quarter. Over the past few months, we have put in a lot of work to define this important and scalable partnership, which includes some key performance indicators (KPIs) we set for ourselves. We have worked closely with the Volkswagen Group team to clarify these milestone goals and are very confident in these goals, as they will determine some of the financing unlock conditions related to the transaction.

Q: You mentioned that 85% of the supply chain procurement for the R2 project has been completed. Will potential changes in tariff policies impact cost targets? Or has the procurement strategy been designed to ensure that it will not be affected regardless of which government comes to power after this election?

A: The procurement process for the R2 has been strategically planned, and the potential impact of tariff policy changes was assessed before the election. Our focus is on selecting suppliers that will not be affected by high tariffs and designing contracts and partnerships in regions that may be impacted by changes in tariff structures, thereby minimizing risks

In addition, there are currently many policy factors, and we are closely monitoring their progress, especially their impact on the upstream supply chain. Regarding raw material issues, we, like other manufacturers, are actively considering response plans.

Q: Operating expenses (OpEx) in the third quarter decreased quarter-on-quarter. Can you explain whether there were any additional cost reductions beyond the initial expectations? Additionally, how sustainable is this decrease? What is the trend for operating expenses in 2025?

A: In the third quarter, Rivian's cash operating expenses fell to approximately $599 million, significantly down from the first half of the year, laying the groundwork for the company to achieve cash operating expenditures below 2023 levels in 2024. This improvement is attributed to the collaboration of the entire company team, enhancing efficiency by strategically allocating resources to key business areas while continuing to advance technology investments, service center, and sales space layouts to support market strategies.

Looking ahead, it is expected that spending levels will rise in the fourth quarter, primarily due to R&D investments related to the R2 project and the implementation of market expansion strategies. Additionally, selling, general, and administrative (SG&A) expenses are also expected to see some growth.

Q: Have the recent media reports about Volkswagen's employee layoffs, restructuring, and factory closures affected your collaboration?

A: Regarding the partnership with Volkswagen, Rivian emphasizes that the collaborative relationship designed by both parties efficiently promotes the application of advanced technologies. The collaboration adopts a zoned architecture, significantly simplifying the ECU topology, optimizing software and electrical architecture, and vehicle wiring harnesses.

This design not only reduces costs but also provides structural cost advantages for the business, which is a key reason for the collaboration. Through joint development, both parties are committed to enhancing operational efficiency and producing products that are cost-effective and attractive to customers.

Q: Regarding services like Connect+ and streaming applications, can investors consider them as a quantifiable source of revenue in their forecasts? Or is its scale currently insufficient to warrant special attention?

A: An important question for the future automotive industry is whether future service revenues will be reflected as recurring income or as part of the upfront price. In the Connect+ service, it mainly involves variable costs associated with providing services, such as data costs for streaming music or Wi-Fi hotspots, which are not zero-cost. Therefore, we charge fees through bundled packages that not only cover the costs of connection services but also include some additional features.

We are closely monitoring developments in this area, especially in the context of the growth of autonomous driving platforms, exploring new features, new capabilities, and corresponding charging models. Currently, the entire industry still cannot clearly determine whether users prefer upfront one-time payments or gradual payments over time. Our internal models consider both possibilities, including customers who pay upfront and those who pay based on usage.

Regardless of the payment model chosen by customers, these revenues will ultimately be reflected in vehicle prices, but can be manifested in three ways (upfront payment, gradual payment, or variable model), and we maintain a flexible attitude towards this

Q: From the perspective of consumer demand, when consumers place orders, are they more inclined to choose lower-priced options or models with reduced configurations?

A: Rivian has launched multiple powertrain and battery configurations targeting different customer segments to meet diverse needs. Currently, three power system configurations have been introduced: dual-motor, tri-motor, and a planned updated quad-motor version set to launch in 2025. Additionally, there are three options for battery packs: standard, large, and maximum. Through this combination, Rivian is able to cover the entire demand curve.

Some customers prefer to purchase high-performance models, such as the top configuration that supports acceleration to 60 miles in 2.5 seconds and has a range of 400 miles; while others are more price-sensitive. According to market feedback, the tri-motor and the upcoming quad-motor versions are highly anticipated by customers. This not only enhances the customer experience but also positively impacts the company's profit margins.

Specifically, the response to the tri-motor version has been enthusiastic, with the product selling out almost instantly after its launch. Looking ahead to 2025, the next-generation quad-motor version will significantly enhance performance, including completing a quarter-mile in 10.5 seconds, approaching a 400-mile range, while catering to both daily driving and extreme off-road needs. This model will feature outstanding performance and unique attributes, with pricing reflecting high added value, further driving the company's profit growth.

Overall, through various power and battery combinations, as well as models with different configurations, Rivian has successfully covered multiple customer segments and enhanced its market competitiveness