It is expected that with the launch of the three-motor and four-motor versions, Rivian's Q4 single vehicle ASP will continue to rise (2Q24 minutes)

The following is a summary of Rivian's second quarter 2024 financial report conference call. For financial report analysis, please refer to " "Will Volkswagen, the "Angel in White", 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 Progress

① Product Portfolio

a. Accelerating the production of the second generation R1, improving design, engineering, and performance, optimizing cost structure.

b. Smooth progress in R2 development, planned for launch in the first half of 2026.

② Vertical Integration and Technological Advantages

a. Implementing a vertical integration strategy, focusing on software, electrical hardware, autonomous driving, and propulsion systems to reduce costs and enhance performance.

③ Cooperation with Volkswagen Group

a. Reached the expected joint venture agreement with Volkswagen Group to expand the market application of Rivian's technology platform.

b. Established a joint venture with Volkswagen, expected to receive a $5 billion investment. Volkswagen has already made an initial investment of $1 billion in Rivian and plans to invest an additional $4 billion, with incremental investments depending on the completion of financial/technical milestones and regulatory approvals. Assuming all conditions are met, the entire $5 billion is expected to be used for Rivian.

c. The funding will support Rivian's operations until the launch of R2 and the Georgia midsize platform (for R2 expansion and R3 production), achieving positive free cash flow and expanding sales scale. The joint venture is expected to be established by the fourth quarter of 2024, significantly increasing the market application of Rivian's software and electrical architecture.

d. Through the joint venture with Volkswagen Group, Rivian expects to obtain more favorable supplier pricing, further reducing hardware system costs such as components and chipsets.

④ Factory Transformation and Production Efficiency Improvement

a. Completed the Normal factory transformation in the second quarter of 2024, introducing new technologies and cost-optimized materials, combined with manufacturing process improvements, expected to shorten cycles, increase utilization rates, and reduce costs.

b. Focused on reducing components, processes, and steps, reducing the complexity and cost of the vehicle body, improving production line efficiency by 30%, simplifying 1500 nodes, optimizing body manufacturing processes, reducing complexity and costs.

c. The new R1 model has undergone hundreds of upgrades in design, engineering, and performance, with the most important being a new regional architecture, a new computing and autonomous driving platform, a new self-developed drive unit, and a redesigned suspension system. The launch of the second-generation R1 platform is expected to significantly reduce material costs. At the same time, the R1 procurement end can also leverage the synergies of material procurement for R2

d. After the transformation and upgrade, the R1 production line adopts a two-shift system, with an annual capacity of 56,000 vehicles; the commercial EDV production line operates on a one-shift system, with an expected annual capacity of up to 15,000 vehicles.

⑤ Second-generation Drive Unit

a. Introducing the all-new second-generation drive unit Ascent motor system, supporting three-motor and four-motor configurations, all designed and manufactured internally by the company.

b. Three-motor R1: equipped with two Ascent motors at the rear and 1 Enduro motor at the front, 850 horsepower, achieving 400 miles of range in energy-saving mode, accelerating from 0-60 mph in 2.9 seconds, expected to be delivered by the end of the third quarter.

c. Four-motor R1: equipped with 4 Ascent motors, 1025 horsepower, accelerating from 0-60 mph in 2.5 seconds, suitable for extreme adventures.

⑥ Cost Optimization and Long-term Planning

a. With the accelerated production of the second-generation R1, it is expected that the cost of the R1 platform will significantly decrease in the second half of 2024; through material and conversion cost optimization, the long-term gross margin target of 25% for the R1 platform will be achieved.

b. Focusing on technological innovation and production efficiency to drive the global transition to a fossil fuel-free future.

2) Financial Performance

① Revenue

a. Produced 9,612 cars in Q2, delivered 13,790 cars, contributing $1.2 billion in revenue.

b. Production was briefly interrupted due to factory transformation and upgrade. Delivery performance was strong, mainly selling off most of the first-generation R1 inventory.

② Gross Profit

a. Total gross profit was -$451 million, with a gross profit loss of approximately $33,000 per vehicle.

b. Per vehicle gross profit loss of approximately $33,000 (an improvement of about $6,000 per vehicle from Q1), including around $15,000 in depreciation and amortization expenses, and $1,200 in SBC expenses; one-time expenses related to the revenue efficiency plan are approximately $2,400 per vehicle, but these expenses are not expected to become part of the long-term cost structure.

c. With the accelerated production of the second-generation R1, it is expected that material costs and operational efficiency of the R1 platform will significantly improve in the second half of 2024, aiming to achieve modest positive gross profit in the fourth quarter.

③ Cash Flow

Operating cash flow in the second quarter improved by 41% quarter-on-quarter, mainly due to higher operational capital efficiency.

④ Future Outlook

a. Production for the full year 2024 is expected to be 57,000 vehicles, with a low single-digit year-on-year growth in deliveries; EBITDA guidance is -$2.7 billion, with capital expenditures of $1.2 billion.

b. It is expected that the Normal factory in 2025 will be shut down for over a month in the second half of the year for equipment upgrades and integration before the launch of R2.

c. Targeting a long-term gross margin of 25%, high double-digit adjusted EBITDA margin, and a 10% free cash flow margin.

d. Production in the third quarter is expected to remain consistent with the first quarter levels, but delivery volume is expected to be lower than the second quarter due to reduced inventory.

2.2, Analyst Q&A

Q: Which countries are the company's products mainly targeted at?

A: Currently, R1 products are being sold in various locations in the United States and Canada, with our EDV mainly focused in the United States, but we have also made some deliveries in Europe, especially in Germany.

Now, regarding our future products R2 and R3, their core development is not only to cater to the American market but also to adapt to the European market. We believe that the combination of R2 and R3 captures the best balance, meeting the demand for mid-size SUVs in both the American and European markets, while allowing R3 to occupy a smaller crossover vehicle market.

Q: Regarding the cooperation with Volkswagen Group, is there any update on potential plans to transfer some operating expenses to the joint venture?

A: Although we have not disclosed specific details of the joint venture, including any cost-sharing arrangements, the foundation of the cooperation is the technical platform we have built on network architecture, ECU topology, and software stack. This technical platform will not be limited to Rivian products but will extend to multiple markets globally. This collaboration will bring economies of scale and supply chain optimization, especially in terms of procurement scale, thereby helping us offer more product choices in our electrification transformation.

Q: I would like to better understand the progress towards the fourth-quarter positive gross margin target, especially considering the recent incentive measures offering a 2.99% financing rate for the new R1S. How might this impact the mechanism for transitioning to positive gross profit?

A: There are three key driving factors to achieving a positive gross margin in the fourth quarter: firstly, 1) improvement in variable costs, where we have detailed the roadmap for material cost reduction related to next-generation technologies on Investor Day, achieved material cost reductions through supplier negotiations, and expect to see more cost tailwinds in the second half of this year and in 2025; secondly, 2) enhancement of fixed cost leverage, which has been achieved through the transformation and upgrade of our Normal factory, increasing production line speed by approximately 30%. Combined with the expected increase in production volumes in the fourth quarter and the reduction in depreciation expenses across the entire business, these will help improve fixed cost leverage; and lastly, 3) increase in revenue per unit delivered, which we will achieve in the fourth quarter by introducing the three-motor R1 model and increasing non-vehicle revenue (such as selling regulatory credits and launching the sale of certified pre-owned Rivians).

We remain confident in the path to achieving a positive gross margin in the fourth quarter. It is important to note that the second-quarter results included very limited sales of second-generation vehicles, meaning the effects of production line and material cost improvements have not yet been fully reflected in the results.

Q: How do you view the material cost improvements you aim to achieve, such as a 20% cost improvement on dual-motor large-capacity batteries in the second-generation R1 compared to the first generation? Do these cost improvements include potential savings through supplier negotiations after the cooperation with Volkswagen? Can you share the scale of potential material cost improvements, especially in the context of leveraging this expansion opportunity?

A: The 20% cost reduction we mentioned is based on technical changes and supplier negotiations made in the past 18 months. With the development of the cooperation relationship with Volkswagen and the expansion of the R2 scale, we do see further room for cost reductions In the process of driving the Normal factory to achieve a long-term gross profit target of 25%, we have also seen continuous progress. These cost reductions are reflected not only in the material list but also in the improvement of factory conversion costs. The reduction in conversion costs is partly attributed to the continuous efficiency improvement within the factory, and is closely related to the enhanced fixed cost leverage brought by the future R2 production.

Q: Can you provide an update on the progress of EDV (Electric Delivery Van) customer trials and when can we expect the first batch of customers other than Amazon?

A: The EDV project has shown excellent performance in carbon emissions per mile. Through our collaboration with Amazon, we have already validated the platform's robustness and product performance. Prior to the deployment of a large number of vehicles, we have conducted tests on non-Amazon customers through pilot projects, which helps to refine the vehicles and their related software.

This year's pilot projects are aimed at preparing for a larger-scale promotion in 2025. The focus of these projects is on establishing an effective vehicle maintenance model, digital support, and the necessary infrastructure changes, especially when adding a large number of trucks to fulfillment centers or distribution centers. This is different from installing a charging station in a garage for purchasing R1 vehicles, as you are considering adding many charging stations and a large number of new power sources in fulfillment centers, distribution centers, and operation centers for multiple trucks. Through our collaboration with Amazon, we have gained valuable experience and look forward to expanding this product to other customers.

Q: Do you expect to finalize the cooperation agreement with Volkswagen in the fourth quarter and disclose the terms of the joint venture at that time? Will information on the accounting treatment and cost sharing of the joint venture be provided?

A: Yes, that is correct. After the joint venture is completed, we will submit the final agreement documents related to the Volkswagen technology joint venture, which is expected to be completed in the fourth quarter of this year. More detailed information on the financial impact of the joint venture on Rivian's long-term financial forecasts and trajectory will be provided at that time. We anticipate that in addition to the capital provided by the Volkswagen Group, the joint venture will bring incremental benefits, including material cost savings, operational cost efficiency improvements, and future revenue associated with the joint venture.

Q: Could you interpret the dynamics of ASP (Average Selling Price) in the second quarter? To achieve a positive gross margin in the fourth quarter, ASP needs to remain flat compared to the first quarter. How do you view ASP and discount targets to achieve the gross margin goal?

A: The challenge lies in continuing to produce the first-generation products while introducing product updates or second-generation products. We did not immediately stop the production of first-generation products but held a certain amount of inventory simultaneously. Therefore, in the second quarter, we offered attractive pricing for some variants of the first-generation R1 vehicles to clear inventory and make room for the production and delivery of second-generation vehicles. This pricing adjustment is not a long-term price change but reflects the significant improvements in performance and capabilities of the second-generation vehicles. The results in the second quarter were satisfactory, with delivery volume significantly exceeding production volume, mainly due to the clearance of our first-generation inventory.

In terms of future ASP expectations, with the launch of the second-generation vehicles, including three-motor and four-motor configurations, we intend to position the four-motor models towards the higher-end market, while the three-motor models will occupy the price position of the first-generation four-motor models. This allows us to create a wide price range from slightly above $70,000 to over $100,000 to meet the needs of different customers. We have also introduced the new Ascent package, which is a more premium option embedded in both three-motor and four-motor configurations, providing customers with a higher price point as well as more content and features. This further helps in maintaining the increase in ASP. We expect the ASP in the fourth quarter of 2023 and 2024 to remain consistent. Due to seasonal variations, sales in the fourth quarter will lean more towards the R1 model rather than the EDV, which will overall increase the revenue per unit vehicle. Additionally, sales of the three-motor models in the fourth quarter will further boost ASP, supplementing the starting price of $69,900 for the R1T standard package.

Q: How does Volkswagen's investment help you achieve more goals in product planning or production capacity that cannot be achieved solely relying on the capital market?

A: Volkswagen's investment is significant for us as it alleviates some concerns on the balance sheet (cash flow risks), allowing us to focus more on launching R2 at the Normal factory and supporting the rollout of R2. This investment not only helped us kickstart R2 but also supported us in achieving our goal of positive free cash flow. The focus on driving business efficiency lies not only in how we operate the business but also in how we effectively deploy capital from a capital expenditure and investment perspective. The company can now concentrate more on achieving profitability and leveraging the launch of R2 and its resulting economies of scale.

Q: What impact does the current work at the factory have on the R1 production line? Can R1 quickly recover production volume, and how is the gross margin situation for next year?

A: We plan to halt production for about a month in the second half of next year to prepare for the integration of R2 production, enabling a smooth entry of R2 into the production line in the second half of next year. Some preliminary work has already been completed during the recent shutdown period, especially the transition of the R1 platform from the first generation to the second generation. However, the shutdown in the second half of next year will allow certain parts of the factory to undergo integration, which is part of our plan.

Due to the impact of the shutdown, as the quarters progress, we may see some fluctuations in financial results, especially in the trajectory of gross margin. We still expect to achieve a modest positive gross margin for the full year 2025, but the shutdown in the second half will have some effects, such as reduced absorption of labor, indirect costs, and depreciation due to lower production volumes. Nevertheless, we have conducted some preliminary work during the Q2 shutdown period, allowing us to quickly ramp up production speed post-shutdown, without the gradual increase in output as before, as we have strengthened our supply chain and are no longer a bottleneck.

Q: What is the approximate capital expenditure for 2025?

A: For 2025, we anticipate capital expenditure to be around $1.5 billion

Q: What exactly is the "cost related to income efficiency plan" in the unit cost of 2400 US dollars per bicycle?

A: This is the cost related to the significant adjustments made to suppliers during the transition from the first generation to the second generation, which involved replacing about half of the material costs and incurred significant costs related to contract modifications or revisions due to a large number of supplier changes.

Q: Regarding the joint venture with Volkswagen, although the financial details have not been finalized, have engineers and procurement personnel already started designing and negotiating with suppliers, or are they waiting for the agreement to be signed?

A: From the supplier's perspective, we have already seen early benefits from the joint venture and cooperation with Volkswagen. Long-term cooperating suppliers are excited about this collaboration and see it as an opportunity to expand their technology. In terms of technology, the collaboration between teams is going very smoothly. Our software and hardware teams are actively working to integrate Rivian's platform technology into products of the Volkswagen Group, and there is already a demonstration vehicle using Rivian's electronic components and software stack. The collaboration is progressing well, with engineers closely working with the Volkswagen Group with the goal of expanding our technology across the entire product portfolio of the Volkswagen Group.

Q: Have there been any changes in demand trends recently, especially after product updates? Additionally, how do you measure the success of brand building, especially in extending it to future models?

A: With the launch of the second-generation R1 product, the market and media response has been very positive, with various media outlets recognizing the strong performance of our products. This has laid a good foundation for us to continue developing the brand. Internally, we have a set of metrics to measure the success of brand building, but it is worth noting third-party evaluations, such as our recent ranking first in the JD Power Annual Appeal Study. This recognition of brand strength gives us confidence in the future R2 and R3 products. We plan to extend the brand influence we have established in the high-end market to the R2 priced below $45,000 and the even lower-priced R3 submarkets, which will bring greater sales volume and provide attractive electric vehicle options in the under $50,000 range.

Q: What observations do you have regarding the opportunity of selling regulatory credits? Considering the challenges faced by some traditional automakers, do you see an increasing opportunity in selling regulatory credits?

A: The current regulatory credit market is very strong, providing us with more revenue opportunities than expected. The strength of the market reflects reduced investments in electrification by many companies or a lack of electrified products in multiple submarkets, creating strong demand for credits. Most importantly, we believe the demand environment in 2026 and 2027 will be very favorable, with many potential demands in the market waiting for suitable products with the right form factors, product positioning, attributes, and features. However, they have not seen these products yet, so they continue to purchase internal combustion engine vehicles or hybrid vehicles. We believe there is a significant amount of demand waiting in the market, and we believe that the product they are waiting for is likely the R2

Q: Considering that your software architecture is almost entirely developed internally, this is obviously a huge competitive advantage. Now that the public can access your software platform, how do you view the long-term software advantage? Do you believe this advantage can be maintained, or will the industry eventually catch up? Are there monetization opportunities through this asset to help the industry transition to software-defined vehicles?

A: From multiple perspectives, our software architecture does provide significant advantages. Firstly, in terms of product differentiation, simplifying the number of Electronic Control Units (ECUs) is a key advantage. Traditional cars may have 50 to 100 ECUs, while we have reduced this number from 17 to 7, bringing significant cost advantages and simplifying the internal wiring and connection infrastructure of vehicles. Our collaboration with Volkswagen will extend this cost advantage to their products and reduce costs through economies of scale.

From a consumer perspective, having comprehensive hardware and software control, developing software around a highly optimized architecture allows us to continuously improve and enhance the functionality of vehicles. We can make rapid adjustments in vehicle performance, charging configurations, and battery management systems, whereas traditional methods may take months to coordinate with multiple suppliers. This integration enables us to maintain a leading position in customer experience, digital environment, user interface, and user experience design.

Through our collaboration with Volkswagen, we hope to introduce this powerful platform into their product line, filling the gap in the market for EV choices. This is not only to enhance our products but also to drive the entire industry towards a comprehensive transition to 100% electrification, as the current choices in the EV field are still far from sufficient.

Q: You mentioned before that when Rivian launches products in new regions, order intake accelerates. Could you share any new launch plans for the upcoming quarter or the second half of this year, especially considering the importance of demand for bridging gross profit in the fourth quarter?

A: In the next 6 to 12 months, we will have some new showrooms and service centers opening, providing consumers with the opportunity to experience our vehicles firsthand. They can sit in, touch, and test all the features. We have also been aggressively expanding service infrastructure over the past six months to support test drive programs. Currently, we have over 60 service locations, which are increasing monthly, not only providing services but also supporting test drives, deliveries, and other sales-related activities.

Additionally, we are continuing to build the Rivian Adventure Network, our DC fast charging network, which is a crucial touchpoint for consumers to experience the Rivian brand. This network is currently only available to Rivian customers, but later this summer, we will open the network to non-Rivian customers as well, providing an important opportunity for more people to experience the Rivian brand and learn about our products and company.

Q: Does the $17 million in revenue from credits this quarter fully reflect your achievements in zero-emission vehicles, or are there more revenues to come in achieving gross profit balance in the second half of this year? A: $17 million is just the tip of the iceberg for opportunities in 2024. We have already signed regulatory credit contracts worth over $200 million, with additional contracts for 2025 and beyond. Therefore, there may be more revenue contributions in the second half of the year.

Q: Regarding the progress of gross margin and expectations for the fourth quarter and beyond, you mentioned three key points. Is there one of them that you currently have more or less confidence in, and is it more visible?

A: We have clear visibility on all three driving factors:

• Variable cost improvement: Contracts with suppliers have been signed, and the trajectory for material cost reduction is very clear.
• Fixed cost leverage: Increased production in the second half of the year and reduced depreciation expenses (due to full depreciation of initial tools) will drive the realization of fixed cost leverage.
• Increase in revenue per unit delivered: Acceleration of the Ascent drive unit production line will support sales of three motors and increase the proportion of the product portfolio. In addition, the signed regulatory credit contracts also enhance our confidence in the performance for the second half of the year.

Risk Disclosure and Disclaimer for this article: Dolphin Research Disclaimer and General Disclosure