Rivian: Continues to make efforts to achieve positive gross margin for 2024 (3Q conference call minutes)

Management Discussion

1. Modification of the exclusive EDV agreement with Amazon: EDV can now be sold to other customers in addition to Amazon. Currently, over 10,000 EDVs are on the road.

2. Launch of Max Pack version R1T: The range has been extended to 410 miles, and multiple OTA updates have been introduced.

3. Increase in annual production target: The total production target for this year has been raised to 54,000 vehicles, with continued expansion of the Enduro motor product line. This month, approximately one week of downtime will be used to validate the new electronic architecture integration into the R1 platform. This new technology architecture will be launched during the planned downtime in the second quarter of 2024.

The new electronic architecture includes reducing the number of ECUs, simplifying the wiring harness structure, and adjusting the body structure and battery timing to achieve cost reduction.

4. Introduction of leasing services: Later this quarter, plans are underway to launch a leasing platform for R1T vehicles in certain regions, providing consumers with more choices to hedge against the high interest rate environment. Leasing services will be expanded to more areas, offering more vehicles.

5. Service centers and retail stores: Currently, there are 45 service centers and 480 mobile service vehicles. In addition, Rivian Spaces retail store versions have recently been opened in Vancouver, Seattle, Chicago, Brooklyn, Nashville, Atlanta, and Denver.

6. Charging network: Currently, there are 57 Rivian Adventure Network charging stations.

7. Lower of Cost or Net Realizable Value (LCNRV) inventory impairment and purchase commitment losses: LCNRV has made a more significant contribution to second-quarter net profit improvement. It is expected that by the end of 2024, with the realization of positive net profit, there will no longer be significant LCNRV costs associated with normal factory production.

8. R2 platform and Georgia factory: The construction of the Georgia factory is expected to begin in early next year, and the R2 platform will start production and delivery of vehicles in 2026.

9. Changes in full-year 2023 guidance: The production guidance has been raised to 54,000 vehicles, the EBITDA guidance has been raised to -$4 billion, and the capital expenditure guidance has been lowered to $1.1 billion (adjustment in expenditure timing - mainly in the next year).

10. Increased gap between production and sales in the fourth quarter: Due to Amazon's restriction on new EDV imports during the holiday peak delivery period, it is expected that the gap between production and delivery in the fourth quarter will be larger than before. It is expected that there will be a period of downtime in the second quarter of 2024 at the normal factory to introduce new technology architecture on the R1 platform to reduce costs.

11. Production capacity: The planned annual capacity is 85,000 R1 vehicles and 65,000 EDVs, maintaining a total factory capacity of 150,000 vehicles per year.

Q&A Session

Q1. The progress in terms of cost is better than expected, as LCNRV write-downs have reduced the loss per bike by $16,000, but the bike price has not improved, and the contribution margin of R1 has not turned positive yet?

• The improvement in profit margin in the previous quarter was driven by a 23% increase in delivery volume, which diluted fixed costs and significantly improved material costs.
• In the third quarter, there was a more concentrated shift towards EDV deliveries, which accounted for about 30% of third-quarter revenue. EDV sales itself have a higher profit margin and have contributed positive contribution margin to the Rivian vehicle platform.
• In addition to EDV, R1's material costs have been significantly reduced due to renegotiation of supplier agreements and the inclusion of the dual-motor version.

Q2. How to quickly expand RCV to other customers? The current capacity of R1 is 65,000 units, and the capacity will reach 85,000 units by the end of next year. Can we achieve at least 180 orders per day?

• In terms of commercial vehicles, it has been some time since signing the exclusive agreement with Amazon, but we are also establishing relationships with other commercial operators and will soon announce different pilot programs.
• R1 continues to maintain a strong market share in the average price range of over $75,000, and the residual value of R1 used cars is also high, reflecting the strength of pricing and demand.
• Recently, the R1 Max pack (large battery capacity) version was launched, and the dual-motor version was also introduced. A standard battery pack and additional decorative configurations will be launched early next year, so we are very confident in the demand for the R1 platform.

Q3. The annual production forecast shows that the production in the fourth quarter is much lower than that in the third quarter. Why?

• Because of the introduction of new technology, there is a plan to have a longer shutdown in the second quarter of 2024 to implement a series of changes, thereby significantly reducing the material costs of the R1 platform.
• However, before the shutdown in the second quarter of 2024, there will be a one-week shutdown in the fourth quarter for validation, as well as a loss of a few days due to the Christmas-related holidays.

Q4. What are the follow-up actions for the expansion of the physical service network?

• By the end of this year, approximately 50 physical service centers will be established in the United States. The number of mobile service vehicles and mobile service fleets has reached 408 this week and is still growing, which is conducive to providing more convenient customer service.

Q5. The run rate for this quarter is 65,000 units. What is the planned delivery volume for next year?

Next year, we need to introduce new technology to the R1 platform to achieve the goal of cost reduction and positive gross margin. This will require a shutdown for a period of time. In Q1 of next year, we will start at a similar operating speed as the current one, and Q2 will require several weeks of shutdown time, which will affect the production in Q2 and Q3.

Q6. What work has been done to reduce costs and balance pricing?

The platform currently offers both a four-motor version and a dual-motor version built around the Enduro motor. It has also introduced a max pack (high-capacity battery version) and will launch a standard battery pack (the smallest battery pack) next year. It also offers various decoration and configuration combinations to provide consumers with a wider range of price options.

Despite offering both low-priced and high-priced versions, the overall average selling price (ASP) has continued to rise due to price increases since March 1st of last year.

Material costs have decreased significantly, with the largest decrease expected to occur in the second quarter of next year. The renegotiation of procurement contracts can also take advantage of the expected launch of the R2 platform and the continuous increase in delivery volume/brand strength in the past few quarters to achieve procurement premiums.

Q7. How will the target of positive gross margin by 2024 be achieved?

1. Increased production will dilute fixed costs.
2. Renegotiation of procurement contracts with suppliers to reduce material costs.
3. Introduction of new technology architecture in the second quarter of next year, resulting in cost reduction through simplification of ECU/wiring harness/body structure design.
4. Introduction of Enduro motor and LFP battery to reduce EDV material costs by 35%. Introducing them to the R1 platform will bring similar material savings.
5. ASP growth, introduction of Max pack will increase selling price, and new configurations will also increase ASP.

Q8. There was an expectation of positive contribution margin for R1 last quarter. Is the expectation still the same?

• We still expect R1 to have a positive contribution margin this year.

Q9. The gross loss per vehicle this quarter is $30,000. Can we expect a linear improvement in gross margin as production ramps up in the fourth quarter and the first quarter of next year?

• EDV is an important contributor to the improvement in profit margin in the third quarter, but looking ahead to the fourth quarter, production will be affected by the seasonality of the Amazon business, resulting in a linear improvement in gross margin from Q3 to Q4.
• However, looking ahead to Q1 next year, new technology will be introduced in R1, and the advantages of Max pack will be seen throughout the Q4 and Q1 process, which will benefit the cost reduction of R1.
• By the second half of 2024, as each new technology that will be launched also begins production on the production line, significant improvements in material costs will be seen. Therefore, in terms of gross margin improvement, this will be a step change.

Q10. The capital expenditure guidance for this year has been significantly reduced again. How will capital expenditure be adjusted for next year?

• The previously discussed average capital expenditure for 2023-2024 is around $2 billion. However, considering the significant reduction in capital expenditure for 2023, the average capital expenditure for 2023-2024 will be slightly lower than $2 billion.
• The reduction in capital expenditure is influenced by improvements in long-term payment terms and whether equipment is purchased. The largest impact comes from factory closures and the introduction of new technology, which will also result in reductions in the early stages of 2024. Q11. The gross profit margin for bicycles (excluding the impact of LCNRV) is -38,000 yuan, which has improved significantly compared to the first quarter, but there is still a considerable gap to achieve positive profitability. In terms of the breakeven point, the main driving factors are pricing and cost reduction through technology. Does the leverage effect of increasing production still exist?

The gross profit margin continues to improve due to:

• The dilution effect of fixed costs brought about by the increase in production volume has always been present, and the production volume will further increase in 2024.
• At the same time, material costs and average selling prices have improved. The introduction of single motor + LFP battery in EDV reduces material costs by 35%, and the introduction of dual motors in R1 will also bring about a decrease in material costs.
• Progress made in existing procurement contract negotiations, hoping to make progress before 2024Q2.
• Larger changes such as the second-generation technology architecture, integration of SKUs, and reduction of 25% wire harness length. These involve new suppliers and completely new procurement contracts, and the changes in bicycle costs of thousands of dollars will take effect from April next year.

Q12. When will R2 be launched?

• R2 will be launched in 2026, with a price much lower than the pricing of R1 (40,000-60,000 USD), targeting a broader market. Currently, there are not many options for SUVs priced at 45,000-50,000 USD in the market.
• Tesla's market share is highly concentrated. However, Rivian believes that there is a need for alternative vehicles such as R2, which can be achieved through vertically integrated software and electronic devices, high-quality user experience, and user interface.

Q13. Monetization opportunities in the software field?

• The most direct one is autonomous driving, which can be charged one-time or subscribed monthly when higher-level autonomous driving is achieved.

Q14. Is there a possibility of internal production of batteries? And is there any change in the battery strategy, with a current preference for LFP batteries?

• It was not answered whether there is a possibility of internal production. The R2 platform, considering IRA subsidies, will pay more attention to upstream battery supply.

Q15. How many orders from before March this year are still in backlog?

• There are still backlog orders from before March, as well as new orders. However, the dual motor version configuration that was launched is no longer applicable to pre-order orders before March, and new versions will still be launched in 2024.