Expected to achieve positive gross profit margin in the fourth quarter and for the full year of 2025 (Rivian 1Q24 earnings call minutes)

Rivian FY24Q1 Interpretation Meeting Minutes:

The following is the summary of Rivian's 2024 first quarter financial report conference call. For the financial report analysis, please refer to " Will the arrival of the affordable car R2 become the savior of "Tesla killer" Rivian? "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Business Highlights:

① Technological and Brand Differentiation: Developed unique technology platform and brand, continuously enhancing product features through vertically integrated hardware and software capabilities, covering multiple areas such as autonomous driving, battery management, and digital experience.

② Network Architecture Optimization: By implementing a new regional network architecture, the company reduced the number of electronic control units in vehicles by approximately 60%, significantly reducing costs.

③ Market Performance:

a. Rivian is considered the most likely car brand to be repurchased by customers, with high market recognition.

b. In the first quarter, Rivian was the fifth best-selling electric vehicle manufacturer in the United States, with a market share of 5.1%.

④ Brand Building: The company's demand generation and brand awareness strategy has been effective, with 28,000 test drives conducted in the first quarter, a 90% increase compared to the previous period.

⑤ New Product Platform: Introduced a new mid-size platform in March, supporting R2, R3, and R3X products. R2 is a versatile mid-size SUV with an expected price of $45,000, scheduled to begin deliveries in the first half of 2026.

⑥ Efficiency Improvement: Rivian focuses on cost control and manufacturing efficiency in the production of R2 and R3, utilizing innovative technologies such as large high-pressure castings and structural battery packs to reduce related costs.

1. Future Outlook:

① Revenue: Anticipates an increase in sales with regulatory credit in the second half of 2024.

② Costs:

a. Factory upgrades completed, expected to significantly reduce costs for the R1 model and production line.

b. Transitioning from a three-shift system to a two-shift system, planning to increase production line speed by 30% under the two-shift system, with an expected annual production capacity of 56,000 units for R1.

③ Gross Profit: Expects significant improvement in gross profit by the end of 2024, achieving positive gross profit in 2024Q4, with a substantial reduction in variable costs as the main driver for gross profit improvement.

④ Inventory: Plans to reduce total inventory by over 25% in the next 18 months. R2 will commence production at the Normal factory, expected to save over $2.25 billion in cash outflowsFinancial Guidance:

Long-term Financial Goals: Achieve approximately 25% gross margin, high EBITDA profit margin, and around 10% free cash flow profit margin.

2.2 Q&A Analyst Q&A

Q: You mentioned some initiatives, including expanding leasing services to more states and introducing new variations of standard packaging, which give you confidence in a slight increase in deliveries this year. Could you elaborate on these initiatives and share why you are confident in this year's growth?

A: Confidence in demand primarily stems from the early results of our marketing initiatives. The launch of R1S leasing services in the first quarter was a significant move, as we have expanded the number of states offering leasing services to 32 and plan to increase it to over 40 in future quarters. Additionally, we have conducted over 28,000 test drives, allowing more customers to experience the driving seat firsthand, which has been a highly effective strategy. Furthermore, the introduction of standard packaging is a key initiative that makes the entry price of R1 products more competitive. Finally, by introducing R2, R3, and R3X, we have enhanced Rivian's brand awareness.

Q: You mentioned again the goal of achieving positive gross margin in the fourth quarter of this year. Could you provide an update on the progress towards this goal and whether there have been any changes compared to the key factors you mentioned in your shareholder letter for the fourth quarter of 2023?

A: The main driver to achieve positive gross margin remains the reduction of variable costs, primarily achieved through improvements in material costs. We expect a significant improvement in material costs for R1, thanks to engineering-driven design changes and cost-focused negotiations with suppliers. Additionally, we anticipate a decrease in raw material prices in the second half of 2024, as well as the introduction of the R2 platform bringing a purchasing premium to the R1 platform. As for semi-fixed costs, we have increased production line rates through tooling upgrades, reducing labor and indirect costs, and we expect depreciation expenses to decrease in the fourth quarter.

Finally, we anticipate revenue growth from sales regulatory credits, software and service revenue, and an increase in resale sales. We are confident in the path to achieving positive gross margin in the fourth quarter of this year.

Q: Besides providing strategic and technological support, what value does cooperation with Amazon bring?

A: We do not comment on market rumors or speculation. Amazon is our largest shareholder and a close partner. They play a crucial role in driving our commercial sector and currently represent the majority of our commercial vehicle sales. Our company's uniqueness lies in our vertical integration in software and electronic platforms. We have developed various computers, basic software, and operating systems in the vehicles ourselves, giving us a customer-facing advantageAnd created collaboration opportunities.

Q: I want to know if you have also observed the revolution brought by LLM and Gen AI in the ADAS and robotics fields, and whether it will change your capital expenditure allocation, such as directly using NVIDIA GPU clusters like Tesla, or obtaining computing power through partnerships with large-scale computing platform providers to get closer to achieving autonomous driving?

A: Control perception systems are key to building a powerful autonomous driving platform. Through early information fusion, we can optimally perceive the surroundings and make the best responses. Integrating third-party sensors or software would limit the learning loop and full utilization of sensor sets. Therefore, our platform fully controls all data flows and continuously drives progress with a large number of training models. As for training models, ultimately, a large-scale CPU cluster needs to be built to ensure the robustness of the driving model.

Q: We have now launched the 2nd, 3rd, and 3X models, and we are considering launching the 4th to 6th models. How do you plan to manage this product portfolio? Will you continue to enhance the return on the product portfolio and reinvest, or will you continuously improve software-defined vehicles without regular product updates?

A: The R1 platform is our flagship product, key to introducing the Rivian brand to the world. However, due to its high pricing, it cannot reach the mass market, so our mid-sized platform supports R2 and R3 products, which will be launched in the first half of 2026, expanding our market size. We are committed to continuously improving vehicles through software. Since the launch of R1, we have made over 30 updates, creating an active customer community where each update makes the vehicle better and satisfies the owners. This continuous improvement is the foundation of our business and provides owners with a different car ownership experience.

Q: Do you think vehicles can maintain a relatively timeless physical form within a four to five-year cycle? Traditionally, a complete product portfolio is updated every five to six years. What do you think about the current situation?

A: In the past, there was little change in products for a long time after launch until updates were released, usually four to five years later. But we believe that products should get better over time. In addition to software improvements, hardware will also gradually improve, including computing power, sensor components, and improvements in vehicle manufacturing such as cost and efficiency. We emphasize creating timeless designs rather than instantly trendy designs, which allows us to continue improving the internal structure while reducing the need for significant changes in appearance.

Q: The capital investment in the Illinois plant is $2.25 billion lower than the Georgia plant. If you were to make forward-looking plans, how much do you think the capital investment could be reduced? Are there other aspects of funding not only directly used for the plant but for other infrastructure that you think could reduce capital investment?

A: I think the most direct comparison is the upfront cash we received from Illinois, which is approximately $100 million this year. Although both Georgia and Illinois have wage and tax incentive measures, in the short term, I would consider this additional income as an incremental savings of $2.25 billion mentioned when we announced R2Q: If you plan to set the base price of R2 at around $40,000, then in order to achieve a reasonable gross margin, you need to reduce the cost per unit to around $30,000. Can you help us conceptually understand how to reduce the existing cost per unit to the level required for R2? Some reasons may include cost allocation, smaller form factors, and economies of scale, but can you explain these factors step by step, how much can you control? Which aspects are easier? Which aspects are more difficult?

A: For the R1 product, we are taking measures to significantly reduce its sales cost, and we will see progress in this process within this year. The recent shutdown we experienced was to implement changes in the factory, improve processes, and increase productivity by 30%, while also making significant changes to the vehicles, mainly focusing on cost reduction. We have introduced new suppliers, updated component designs or optimized designs, as well as consolidated or reduced components in various areas of the vehicles, and redesigned components with different materials or processes. These changes have already achieved cost reductions in areas such as the body structure of R1.

As for R2, it has a fundamentally different architecture, built on different requirements, and compared to R1, R2's cost structure has seen significant improvements. We are very optimistic about achieving the cost structure of R2, although this requires us to continue executing throughout the entire project and complete the vehicle procurement. We are making comprehensive changes, including component consolidation, multifunctional component design, electrical system optimization, etc. We are drawing experience from R1T, R1S, EDV, and the recent shutdown to ensure that we can achieve our cost targets.

Q: Placing R2 in the Normal factory instead of Georgia is to improve capital efficiency. But in this strategic shift, have you considered a different level of vertical integration than before? I know vertical integration is very critical to the strategy, but have you considered relying more on partners rather than developing independently as before?

A: One of the key areas for us is controlling the vehicle's electrical architecture, network architecture, and related software. Unlike other vehicle manufacturers, we have adopted a comprehensive approach to controlling all computers and electronic control units, rather than relying on suppliers to provide various controllers. This approach allows us to integrate functions more easily, not only in specific areas but across multiple areas. In this way, we can achieve significant cost savings and greatly simplify the vehicle harness. This not only brings us advantages in cost and production but also provides customers with a better user experience. In addition, our technological investments will be fully reflected in R2, which will inherit R1's network architecture and software stack and leverage our proprietary technology in high-voltage systems, reducing risks and improving cost-effectiveness.

Q: You mentioned in your speech about resuming production lines. I would like to know how the new supply relationships are developing? I know you have decided to change some suppliers, any details you can share?A: In early April, we stopped the production of our first model and walked into the factory to see an empty production line, a scene that felt quite peculiar. Since the start of production, we had never encountered such a situation. During the integration of a large number of new equipment and new process designs, we executed with great precision. Hundreds of new robots and hundreds of updated or modified robots were introduced to the factory, increasing the production line speed by 30%.

We not only coordinated these activities inside and outside the factory but also collaborated extensively with suppliers, bringing in many new suppliers and updating component designs. We went all out to improve factory efficiency and the overall sales cost structure. Seeing the factory back in operation, the changes we implemented resolved issues that existed on the production line before, improving areas where vehicle-level costs were inappropriate. We are looking forward to seeing these changes reflected in the improvement of sales costs and the trajectory of positive gross profit.

Q: Is there a possibility for R2 to be launched ahead of schedule?

A: The decision to launch R2 is driven by many factors. In addition to the $2.25 billion capital savings mentioned earlier, utilizing our existing team and operational capabilities in the Normal factory is also one of them. We have spent a lot of time cultivating a strong leadership team and established a good training mechanism. This accumulation not only reduces the time risk when launching R2 but also allows us to launch the model in the first half of 2026.

Although everyone is working hard to launch R2 ahead of schedule, we also need to ensure that the product performs well at launch, which means we must ensure the robustness of the supply chain and avoid supply issues. Drawing lessons from past experiences, we are gradually improving the quality and efficiency of product launches, and now we are fully committed to ensuring that everything is ready for the mass production of R2.

Q: I would like to know how the Normal factory will be in the next three to six months, now that most of the reinstallation work has been completed. Are there any execution or expansion risks in the factory at the moment?

A: The factory is vibrant, confident in improving quality and shortening cycle times, and we are excited about reducing costs by increasing overall efficiency, improving layouts, and material processes. However, the factory will not immediately restart at full speed but will gradually increase capacity as planned. We are gradually increasing the facility's capacity. At the same time, we need to ensure that suppliers keep up, as many new suppliers are also increasing capacity with us due to changes in our supplier base. In addition, we are also ensuring that the Normal factory is ready to launch R2, so we are making a series of investments to ensure the smooth increase in R2's production capacity and to save capital costs as much as possible.

Q: In terms of operating expenses, it seems that expenses in the second half of the year will be lower than in the first half. I want to know what expenses you are currently incurring. Is it for marketing and promotion, or for research and development? Can you provide more explanation?

A: During the factory upgrade period from the beginning of the year, we incurred more research and development expenses. Due to the production halt in April and the additional expenses required for the rapid recovery of the production line, we expect an increase in expenses from the first quarter to the second quarter. Looking ahead to the second half of the year, our research and development focus will be more on the development of R2, rather than simultaneously focusing on R2, R1, and commercial vehiclesIn addition, we continue to improve efficiency throughout the organization, striving to reduce general and management expenses in order to invest in the sales and service teams. This effort is expected to lower annual operating expenses, especially in the second half of 2024.

Q: Can you help quantify the expected benefits for us? How much improvement can the completed upgrades bring to costs or material lists? How much can fixed costs per vehicle be reduced? To achieve positive profit per vehicle, how much pricing or additional revenue do we need to assume?

A: Looking back at the detailed analysis provided during last year's fourth quarter earnings conference call, we see the execution roadmap to achieve these results. One of the biggest variables is the reduction in material costs, similar to when we introduced the new Enduro drive unit and EDB's LFP battery pack in the first quarter of last year, where we expected a 35% reduction in material costs. Through engineering-driven changes to the R1 and some material changes, we expect significant cost savings. We will also see improvements in operational efficiency, with increased production line rates leading to reduced labor and indirect costs per unit.

Furthermore, as the factory upgrades are completed, this will accelerate depreciation, but it will gradually diminish, and we expect depreciation expenses per unit to decrease as well. We anticipate additional non-cash net income in the second half of the year as we strive to ensure profitability per vehicle.

Regarding the basic assumptions for sales volume and pricing points, we do not anticipate significant growth compared to the fourth quarter of last year. Revenue will mainly come from non-vehicle revenue streams, such as regulatory credit sales, software and service revenue, and marketing revenue, allowing Rivian to achieve positive gross profit.

Q: With the two-shift operation, will Rivian's future annual production remain at 56,000 R1 vehicles before the launch of R2, plus some level of EV demand growth? Is 56,000 R1 vehicles the production capacity limit?

A: With the long-term introduction of R2, we are targeting a total production capacity of 215,000 vehicles. Among these, the maximum capacity for R1 is 85,000 vehicles, EVs are 65,000 vehicles, and R2 is 155,000 vehicles. Within this framework, we can flexibly adjust production to ensure a total capacity of 215,000 vehicles. Based on the two-shift operation, the production volume for R1 will be 56,000 vehicles.

Q: Regarding achieving mass production speed after the launch of R2, although it is still early, considering many innovations that have been discussed, such as large die-casting and structural battery packs, and a new simplified ECU architecture, how should we view this?

A: There are three important aspects to emphasize. Firstly, our company's experience and growth in product release management and operations, our team's strength has significantly improved, especially in product release and iteration. Secondly, ensuring the health of the supply chain and support capabilities, we have established a strong supply base and supply chain team. Lastly, the efficiency of product design allows us to easily ramp up production quickly, and we have learned many lessons from the experience with R1Q: Achieving positive gross profit in the fourth quarter of this year, first of all, is this an annualized figure for Q4? Secondly, does this exclude various cost improvement measures you mentioned?

A: We expect that there will be no similar expenses in the fourth quarter as in the first quarter of this year, which are mainly related to the closure of Peregrine and changes in supplier contracts. Therefore, we expect to achieve a positive gross profit in the fourth quarter, laying a good foundation for us to achieve positive gross profit for the full year 2025.

Q: I understand that achieving a total capacity of 215,000 requires adding a paint workshop, is this statement still accurate? What is the timeline for this workshop? Will it be added before or after the release of R2?

A: When considering the total capacity of 215,000 vehicles, we are evaluating different strategies, including utilizing existing paint workshops or adding additional capacity. We are still studying this issue, and currently the existing capacity is still 150,000 vehicles.

Q: Test drives are an effective demand generation strategy. Can you share some information about conversion rates? Or how should we interpret the figure of 28,000 test drives?

A: Test drives are very important for us, as they can increase brand awareness, attract potential customers, and drive orders. In the fourth quarter of 2023, we conducted 28,000 test drives, an increase of about 90% compared to the previous quarter. This is a significant growth, and we conducted a large number of test drives through our service network. But this is just one of our many initiatives, as we continue to expand our leasing program, now including R1S, and introduce R2 and R3, greatly enhancing brand awareness.

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure