Order Volume Has Significantly Decreased, But Gross Margin Turnaround Plan for 24Q4 Still Maintained (Rivian 4Q24 Summary)
Rivian Automotive Fourth Quarter Highlights:
Below is the summary of Rivian Automotive's 2023 fourth-quarter earnings conference call. For an in-depth analysis of the financial report, please refer to "Facing Pressure on Gross Profit and Sales Volume, Can Rivian Automotive, the 'Tesla Killer,' Survive?"
I. Review of Key Financial Information:
Overall, Rivian Automotive delivered a disappointing performance in the fourth quarter of 2023, with gross profit margin below expectations and sales volume guidance for 2024 significantly lower than market expectations.
The lower-than-expected gross profit margin this quarter was mainly due to seasonal factors affecting the delivery volume of the high-margin EDV (commercial vehicles), as well as temporary impacts from factory shutdowns and the introduction of new technologies to the R1 platform. However, the main issue was the significant reduction in sales volume guidance.
In light of Rivian Automotive's recent actions, including a $3100 price reduction for the still strong-demand R1S, opening up leasing for the R1S (previously only available for the weakening demand R1T), and the early introduction of the lower-priced standard range versions of R1T/R1S, it will drag down Rivian Automotive's gross profit margin in 2024. This has led Dolphin Research to question whether the rapid decline in demand beyond the company's expectations has resulted in a significant reduction in sales volume guidance compared to market expectations.
2024 is a make-or-break year for Rivian Automotive, with both gross profit margin and sales volume facing immense pressure.
a) Sales volume expectations for the first quarter of 2024 continue to decline (10%-15% lower than this quarter), and in 2024 (second and third quarters), Rivian Automotive will face continuous factory shutdowns to improve unit economics, making it challenging to increase sales volume. Rivian Automotive only has four quarters left to meet its sales target:
b) No new models are available; c) The cash burn rate is high. Although Rivian Automotive aims to achieve a positive gross margin in the fourth quarter, the improvement in unit economics faces significant pressure due to lower sales volume leading to fixed cost dilution, as well as the expectation of continued price reductions dragging down the gross margin.
If the progress in unit economics improvement falls short of expectations, and sales do not pick up, financing becomes difficult, 2024 will be a make-or-break year for Rivian Automotive. Winning means being able to secure financing to continue investing in the R2 platform (affordable vehicle platform), while losing could lead to a cash flow crisis.
2. Detailed Contents of the Financial Report Conference Call
2.1 Key Points from Management's Statements:
- Operational Aspects:
a) Workforce changes: 10% workforce reduction as part of ongoing cost efficiency efforts.
b) Product updates: The unveiling of the R2 on March 7 is a strategic move targeting the mid-size SUV segment, utilizing Rivian Automotive's vertical integration technology to provide users with an exceptional experience.
c) Cost reduction from production halt next year: Vertical integration, application of new technology architecture design to the R1 platform, renegotiation of supplier contracts, decrease in raw material prices, and other factors contribute to cost reduction, supporting the positive gross margin in the fourth quarter next year.
d) Weakening demand: High-interest rate environment, geopolitical uncertainties affecting demand. Rivian Automotive's order volume has significantly decreased due to macroeconomic factors and customer-related order cancellations.
e) Introduction of a low-price standard range model
- Financial Aspects:
a) Q4 23 Gross Margin: Total gross margin in the fourth quarter was -$606 million, with a gross profit of approximately -$43,000 per delivered vehicle, mainly due to 1) a negative impact of around $70 million related to the planned production halt in 2024 and costs from design changes. 2) Seasonal factors from Amazon affecting the delivery volume of high-margin EDV models this quarter. b) Plan to turn positive gross profit in 24Q4: 50% of the driving factors are achieved by saving variable costs (mainly introduced by the shutdown in the second quarter of 24 to bring in new technological architecture/contract negotiations/reduction in raw material costs), 35% is achieved by increasing production efficiency to reduce fixed costs: due to the planned shutdown, the utilization rate of R1 capacity will be increased by about 30%, reducing fixed costs. 15% comes from the expansion of non-automotive business revenue (which has higher gross profit compared to automotive business), such as regulatory points/parts/software services.
c) Outlook for 24:
The total delivery volume in the first quarter of 24 is expected to decrease by 10%-15% compared to Q4 of 23, due to changes in the supply chain caused by the introduction of new raw materials. It is estimated that about 13,500 vehicles will be delivered in 24Q1, with around 1,000 vehicles manufactured but not yet delivered (to be delivered in April).
In terms of costs, the plan is to introduce cost-saving vehicle technology to the R1 platform by shutting down production in the second quarter of 2024, in order to reduce material costs. However, the shutdown in the second quarter will affect the annual production volume because after the shutdown, it will be necessary to ramp up production for each model and the supply chain (possibly due to execution issues).
EBITDA for 2024 is expected to be -2.7 billion USD, with a projected capital expenditure of 1.75 billion USD in 2024, mainly for production facilities, investment in the next generation platform, and continued development of market operations.
The estimated total production volume for 2024 is 57,000 vehicles, with low single-digit YoY growth expected in the delivery volume of To C and To B vehicles.
It is expected that the company's cash and cash equivalents on the books can support operations until 2025.
In the long term, the company's target gross profit margin is around 25%, Adjusted EBITDA high teens growth, and a target free cash flow profit margin of about 10%.
2.2, Q&A Analyst Q&A
Q: Is it better to invest manpower and funds in advancing the production of the anticipated high-volume R2 rather than adjusting the R1 production line?
A1: We will spare no effort to ensure that R2 can be delivered on time, while upgrading the R1 platform in the second quarter (such as streamlining the number of ECUs) and vertical integration also applied to R2, is part of the product release-related development process and sequence to reduce the risk of launching R2.
At the same time, the changes we have made to R1 involve hundreds of components and the overall replacement of suppliers associated with these components, which also aligns with some of the agreements we have with suppliers related to our R2 plans. The potential sales growth brought by R2 allows us to be more proactive in pricing with some suppliers in the R1 plan. Therefore, there is a significant correlation between the two.
Nevertheless, when considering business priorities, we still need to take into account the shutdown and the related updates, including the material list during the shutdown and the updates to the production line. However, our primary business focus remains on successfully launching and rapidly scaling up the production of R2. Q: Let's look ahead to the next five to ten years. Considering the pace of product development and the intervals between products, do you think Tesla's approach to product releases, the TAC (sporadic, continuously improving product releases), is more suitable for your development direction? Or do you believe that a more typical product lifecycle of four to five years with many products interspersed is the way to go?
A: Yes, when we consider the issue from the customer's perspective, we believe the most crucial point is to ensure that the platform, vehicle platform, and architecture can be continuously updated. Therefore, the customer satisfaction for the R1 product is very high, and the brand strength is also significant. Consumer Reports rated us as the company with the highest level of brand assets. Consumers are likely to repurchase our brand, largely due to the continuous updates we make through software improvements. Therefore, we believe this signifies a significant shift in our thinking about products and the entire automotive lifecycle, which will also be reflected in R2. We see R2 drawing from our experience and simultaneously introducing R1S and commercial vehicles. We have truly simplified the product lineup rhythm for R2, only launching one model, with a very limited number of temporary combinations. The focus of the plan is on rapidly improving the supply chain and enhancing the operational efficiency of R2.
Q: In your sales forecast for this year, how much is expected to be pre-orders, and how much is anticipated inventory?
A: There are still backlogged orders and new orders this year. To expedite deliveries, we have created the R1 inventory mall (actually canceled inventory vehicles with fixed configurations, which can be delivered in 1-2 weeks).
Q: Since the IPO in 2021, there have been many changes in the new energy vehicle industry, with demand and competitiveness easing in many aspects, leading to some uncertainties. The economic environment has also changed. Therefore, I would like to understand whether the board of directors and management team are still fully committed to vertical integration, such as building 400,000 vehicles in Georgia at a cost of $5 billion? Or has the board considered any alternative options related to the Georgia greenfield? Have there been any adjustments in scale at least? Or have you chosen to collaborate with partners? Or are you still adhering to the 2021 strategy and pushing forward to 2024?
A: Yes, the construction of our factory in Georgia is divided into two phases. The production capacity does not directly increase to 400,000; the initial plan is for a capacity of 200,000, which will be increased to 400,000 in the second phase.
We believe we are at a very interesting moment. There is a lack of highly attractive electric vehicle products in the price range of $45,000 to $55,000. The average price of new car transactions in the United States last year was around $48,000.
Therefore, when we look at existing competitive products, we are often immediately drawn into direct competition with Tesla. But we need to recognize that only 7% of the market has been electrified, which means what we really need to discuss is how to get the 93% who have not purchased electric vehicles interested in them. To make them excited about the product and R2. We are excited about the layout, packaging, configuration, and technological content of the vehicles. We believe it is a very interesting and unique product with strong demand potential. Of course, we also see the strong resonance that R1 and Rivian Automotive have generated among local consumers.
We remain confident in the R2 market and the R2 product itself. Therefore, we are collaborating with suppliers to ensure effective production capacity improvement. We have also developed a production roadmap, as described in the three stages earlier.
Q: Regarding the layoff issue, it is obviously a difficult decision, but I know you are very focused on gross margin. Perhaps I can shift the focus a bit to operating expenses (OpEx), as cutting 10% of the workforce here, how can you be sure this is the right level?
Operating expenses as a percentage of sales are still several percentage points higher than Tesla in 2015 (at the same sales level). Can you provide more information about operating expenses and future plans?
A: When considering operating expenses, there are many different components that need to be broken down.
First, let's look at research and development. When comparing R&D with sales, general, and administrative expenses (SG&A), we must realize that while comparing with Tesla in 2015 may provide some reference value, we should also consider the current market conditions and the status of competitors when internally reviewing these metrics.
R&D: Emphasis on research and development efficiency, focusing on core areas, and internal vertical integration in several areas (such as ECU, software, high-voltage battery systems) have been decided to achieve differentiation.
Self-development can provide significant cost advantages in ECU integration and the ability to run vehicles with fewer computers. R&D investment also involves development costs with suppliers, such as the seat project for R2 vehicles and R2 headlights.
The success of R1 sales allows us to negotiate with suppliers to reduce procurement costs, while not needing to pay suppliers as much in advance.
SG&A: We are building a service network, establishing sales and distribution networks, some of which are now confirmed as operating expenses. However, over time, our service costs will naturally become part of the COGS structure. In fact, services will eventually become a profitable part of the business.
We are very focused on minimizing the growth of SG&A expenses while expanding the business scale. Therefore, in the coming years, as the number of vehicles requiring on-site support increases with the expansion of the business scale, we are working very hard to truly maintain the company's lean SG&A structure to reduce related costs. These efforts aim to convert some SG&A costs into COGS to achieve profitability. Q: In the discussion of the last quarter, we mentioned that the average capital expenditure for 23 and 24 is expected to be less than 2 billion U.S. dollars. The capital expenditure of 1.75 billion U.S. dollars in 24 is significantly lower than 2 billion. What factors led to this? Has there been any change in future capital expenditure plans?
A: Improving the investment efficiency of capital expenditure and operating expenses, as well as managing sales costs and inventory, are the four key focuses of the business.
Q: In our 2024 forecast, a comment was made about the importance of improving the order conversion rate. Can we reasonably assume that based on the first quarter delivery volume you predicted, it reflects an operating rate of about 12,000 units or 135 units/day for the current quarter? Additionally, what impact will some of the strategies you have announced, such as standard differentiation and leasing plans, have on the order rate? Can you talk about how you will promote or advertise the services you provide in these areas?
A: We recently launched a standard long-range model, which has driven demand from price-sensitive customers, while demand for the large battery pack version is also increasing. Considering the level of customer satisfaction with the product, the likelihood of repurchase is evidently the highest in the entire automotive industry.
We have also established a lot of infrastructure, with 11 showrooms and over 50 service points. Currently, we provide test drive services through these service points, which will drive conversion into sales.
Q: Given the current situation you are seeing, can you talk about the reasons for expanding production capacity by 30% by the end of this year, and the latest situation of EDV demand outside of Amazon's region?
A: Internally at the factory, we plan to shut down production in the second quarter of the next quarter. A key part of the shutdown is the changes happening in our supply chain. We are adjusting some suppliers, tweaking some components, and also making adjustments to the supply chain to significantly reduce our material costs. These changes in the supply chain require a certain scale and time, and a shutdown of several weeks is needed.
During this period, we are also making improvements to the production line. I want to emphasize that the focus of the improvements is to increase the production line's operating rate, enabling it to operate at a higher speed, thus improving efficiency. With the increase in the production line's operating rate, we expect conversion costs to decrease, and unit hourly output to increase. After the shutdown, we will continue to monitor the factory's operations to ensure that we can effectively resume production.
Q: What about the demand for EDV?
A: As we have discussed before, we are very pleased to have new customers participating in pilot projects. We are seeing more and more pilot projects going live, and this trend will continue to grow. Our commercial vehicles are being adopted by a variety of different companies, which is a positive sign.
However, as mentioned earlier, transitioning to electric vehicles is a complex task for large fleets. We expect these pilot projects to serve as a starting point, gradually transitioning to larger scale orders. We anticipate that demand for electric vehicles from customers other than Amazon will increase significantly, although we approach this with caution and maintain a cautious approach in guiding customers. We expect this growth to manifest in 2025 next year. Q: The delivery volume in the first quarter has seen a continuous decline of 10% to 15%. Can you elaborate on whether the main reason for the decline is supply issues or a decrease in market demand?
A: This quarter, we are undergoing some supplier transition work, and the impact of these changes is gradually becoming apparent. Some one-time costs have already been incurred in Q4 of this quarter, and the impact will continue to be reflected in Q1.
At the same time, we are also building 1,000 cars, but these vehicles will not be delivered this quarter. Although our factory will not stop production this quarter, we will begin to feel the effects of the supplier transition, which will ultimately affect our delivery volume. Therefore, we will integrate components into vehicles and deliver them as soon as possible in the second quarter.
Q: I believe there are over 70,000 vehicles driving on the road today. I am sure you have gained a lot of experience from their actual operation and conducted a lot of data collection. How does this data collection impact the understanding of product performance and the technologies that may be adopted in R2?
A: Yes, there are many noteworthy aspects. One of the most surprising analyses is observing how customers interact with the overall digital experience and digital ecosystem. We closely monitor how customers' in-car interaction experiences translate into the usage of mobile apps and the use of mobile apps in the car. Therefore, we are working to enhance the in-car digital experience, improve the dynamic availability of in-car activities, including some entertainment features. We are committed to making these interactions simpler and more seamless. There is a strategic element in our software roadmap that focuses on how to piece everything together in terms of partnerships and certain functionalities. Additionally, we actively engage in conversations with customers, not only actively within the company but also our user base sends us information. We release updates every three to four weeks and upgrade vehicles over the air, followed by feedback and excitement.
In summary, in addition to the R1 product focusing on software around driving capabilities, vehicle usage, and safety emphasis, we have gained a lot of experience that helps us prioritize the sales cost of the R2 product. We are excited to showcase the R2 product because we believe it truly captures the essence of Rivian Automotive as a brand and product. Of course, it is priced lower, but to a large extent, it is still a Rivian Automotive product. Over the past 24 months, we have had extensive discussions on what the vehicle needs to embody to achieve this goal. At the same time, we also realize that in order to offer more competitive prices in the market, Rivian Automotive may engage in certain transactions or adjustments. Q: You mentioned the issue of achieving a breakeven gross margin. Previous comments indicated that half of the improvement would come from sales volume growth and cost absorption, one quarter from cost improvement, and one quarter from price improvement. Considering the seemingly weak production environment, what incremental factors will enable you to achieve a breakeven gross margin?
A: As you heard in my prepared remarks, from the fourth quarter of 2023 to the fourth quarter of 2024, we expect a slight increase in gross profit, with the majority coming from variable costs. With the upcoming launch of the R2 product, it is a driving factor for us to comprehensively reduce material costs from a business perspective. Additionally, we have some ongoing plans. As part of the second-quarter shutdown, we plan to make engineering design changes to enhance the cost efficiency of our products. Furthermore, we see more opportunities, as the price of lithium continues to soften overall, which is positive news for us. Compared to the report provided during the fourth quarter earnings call in 2022, today's report is similar. As you pointed out, considering other factors, the absorption of fixed costs has a relatively minor impact on us. We are more focused on driving higher operational efficiency rather than solely relying on significant changes in baseline production in the 2024 guidance.
The final element is ASP. As everyone has seen, from 2022 to 2023, quarterly revenue per delivered vehicle increased by $12,000 compared to the fourth quarter, so we have made significant progress in ASP. Therefore, we will focus more on revenue opportunities from non-vehicle-related services, which is an extension of regulated credit sales. We previously discussed service opportunities as we are building parking lots, and more SG&A is now shifting to COGS or warranty costs, which is another key driver for us. Rivian Automotive will have the opportunity to continue to provide more software-related revenue, which will enhance the broader ASP driving factors across the entire business.
Regarding your second question about the profit contribution margin of vehicles, we are very close to and have achieved a positive profit contribution margin for currently priced vehicles in the fourth quarter. Looking ahead, the reduction in material costs driven by the second-quarter shutdown will have an impact.
Q: Perhaps we can follow up on the demand side, especially how do you view demand elasticity here. I know besides orders, you expect most of the incremental growth to come from marketing strategies. But if this situation does not materialize as planned, how do you consider pricing? One scenario is to stick to prices, even though it may limit some sales growth; another is to consider lowering prices?
A: We continuously monitor and understand the pricing environment, as well as the overall macro environment, and have insights into this. So far, we have just launched the lowest-priced R1 standard range version. Therefore, demand elasticity is indeed a factor in pricing, but equally important is the need to remain vigilant in such an environment, understanding the reactions and performance of other markets.
Q: I believe that it is essential to better understand the driving forces behind your software and service business. By the fourth quarter of this year, about 50% of the gross margin improvement came from software and services. You offer many products such as insurance, charging, regulatory credit sales, etc. Perhaps you could prioritize for us, what do you think are the most important driving factors in achieving this 50% improvement?
A: The biggest driving factor among them is the growth we have seen in regulatory credit sales. For us, the annual regulatory credit sales reached $73 million, with regulatory credit sales in the fourth quarter alone reaching $39 million, which is the primary driving factor.
In addition to this, we continue to see growth in maintenance and repair services, our ongoing efforts in marketing, and the long-term opportunity to sell Rivian Automotive vehicles in the secondary market, which we believe is a significant value driver for the business.
We are also pleased with the financing lease income, not only reflected in the continued direct financing of our vehicles but also in the leasing business we launched in November this year, which plays a crucial role in driving the financing penetration rate for all Rivian Automotive sales.
Similarly, when we consider the insurance business, it is a pension-type business because we see very high renewal rates among existing customers who are now entering the second year. At the same time, we are also able to attract a large number of new customers to our insurance business.
Therefore, we continue to gain strong momentum from various key driving factors, looking forward to having more software-supported services in the future and expanding our service offerings.
Q: Regarding materials such as lithium and battery prices, these prices may fluctuate within a year. Have you already reached definite agreements on some of these materials? After all, familiarity with suppliers usually requires a certain amount of orders to obtain a certain price.
You mentioned the partnership approach taken by some suppliers, hoping to participate in R2 and have the opportunity to cooperate with Rivian Automotive in the long term. However, if your production volume ultimately falls below the production target of 57,000 vehicles, does this mean that there may be some risks in reducing procurement costs?
A: In the past year, there have been significant changes in the raw material costs in the battery supply chain. Specifically, the price of lithium carbonate has dropped from over $80 per kilogram a year ago to just over $20 today. Therefore, this has had a significant impact on our overall cost structure.
When it comes to the overall health of the supply chain and the overall material costs, we have found that the procurement environment is completely different from before. Considering our procurement of R1 and most of the material lists and contracts we have followed so far, these contracts were signed in 2019 and 2020 when Rivian Automotive had completely different negotiation positions with suppliers, and the industry was in a completely different position, unable to make commitments to us. Fast forward to today, these same suppliers are highly engaged and very supportive of this product. They have experienced some challenges in supplying other products, and products from large traditional automakers have not performed as well as they had imagined.
Relatively speaking, they now see us as an important customer and see everything that R2 brings. This gives us a very meaningful bargaining leverage in negotiations, and in many cases, we have been able to negotiate with existing suppliers, significantly reducing costs, eliminating any price premiums we as a new company have paid.
But in cases where we cannot do this, we have been actively looking for new suppliers, terminating relationships with suppliers, and always focusing on reducing our sales costs through these activities. In some cases, either changing part designs or changing suppliers, this is not something we can achieve immediately by pressing a button. This involves the start-up of new suppliers and transitional coordination. As I said, this will be the biggest supply chain change we have made since the start of production.
We made a similar change to EDV at the beginning of 2023 when we closed the production line. Through this change, we achieved a 35% reduction in material costs. However, the scale of changes we made on R1 is significant in terms of the number of suppliers and parts, and we plan to shut down in the second quarter of this year.
Q: I hope to better understand how the introduction of standard battery packs contributes to your goals and strategies. I think the plan you may have shared with us before was to introduce it after you actually had the opportunity to integrate some cost savings and potential efficiency improvements in the battery pack, but I guess doing so now would result in a price about $9,000 lower than the large battery pack, with little difference in battery pack size, about 14% smaller. So, it seems like a significant price reduction without much material cost reduction. So I'm curious if it helps you scale up, what role it plays in achieving breakeven gross profit, and its position?
A: As you said, the standard battery pack has always been part of the strategy, with the aim of having three different battery pack sizes, ultimately helping us reach customers who are most price-conscious. We have included it this quarter primarily in response to the actual customer demand we have seen and the expectation of many customers for this configuration. As we look at the different configurations we offer, we can also take this opportunity to better understand the overall demand curve.
When considering the trend towards breakeven in gross profit margin, I am wondering if there are any risks of downward pricing pressure in existing businesses. Specifically, I am concerned about the introduction of standard packages. Since standard packages are obviously cheaper than previously sold vehicles, this could potentially put pressure on pricing under similar conditions. Is there any reason why this pressure may not be reflected in the trend of gross profit margin?
When we consider the annual ASP, we will see fluctuations that will reflect our production growth. Therefore, we will start producing a full range of standard package vehicles after the shutdown in Q2. By next year's Q4, with more Max Packs available during that period, we will see a higher ASP. You will see some fluctuations throughout the year. However, by Q4 next year, we will have a complete product lineup, allowing us to achieve a more balanced ASP level across the R1 product portfolio, which is also implied in the plan for Q4 2024. As I mentioned, future growth will mainly come from many non-vehicle revenue streams, which will be value-added as we serve a larger group of car owners in the market.
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