Rivian Automotive - Q2 2023

Transcript

Operator (participant)

Good day. Thank you for standing by. Welcome to Rivian's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To remove yourself from the queue, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Tim Bei, Vice President of Strategic Finance and Investor Relations. Please go ahead.

Timothy Bei (VP Strategic Finance)

Good afternoon, thank you for joining us for Rivian's second quarter 2023 earnings call. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and today's shareholder letter. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our shareholder letter. Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months.

I encourage you to read it for additional details around some of the items we'll cover on today's call. With that, I'll turn the call over to RJ, who will begin with a few opening remarks.

Robert Scaringe (CEO)

Thanks, Tim. Hello, everyone, thanks for joining us today. During our call, I will highlight key developments during the second quarter and provide an update on the progress we're making against our core value drivers. Production continues to ramp, which is translating into improved profitability and capital efficiency. We're also driving material cost reductions through commercial and engineering design updates, including the integration of our in-house Dual-Motor into the R1 product line. We remain focused on the customer experience as we expand our physical, digital, and mobile footprint, took important steps during the quarter to improve our charging experience. Importantly, prior to getting into the quarter's details, I'd like to thank our employees, customers, partners, suppliers, communities, and shareholders for their continued support of our vision. Consistent with our last earnings call, Claire and I will be inviting different leaders to join us each quarter.

For this call, I've asked Wassym Bensaid, our Senior Vice President of Software Development, to join, given the critical role software plays in enabling our business and the ever-improving and expanding capabilities and features of our vehicles. During the second quarter, we produced 13,992 vehicles, which represents a 50% increase compared to the first quarter. Importantly, approximately 70% of the R1 units produced during the second quarter were R1S vehicles. This represents the first time R1S quarterly production was higher than R1T production. Our team in Normal has made strong progress through the first half of the year, maturing the manufacturing process of the R1S to the point where the build efficiency is essentially equal to the R1T. It's also important to note the R1S is more profitable than the R1T.

The ramp of our in-house Enduro motor line remains a key enabler to near-term production performance. Due to our progress during the first half of the year, we are increasing our 2023 production guidance to 52,000 total units. Building on the successful launch of the in-house Enduro motors for our commercial vans last quarter, we successfully integrated this motor into the Dual-Motor variant of the R1 platform during the second quarter. This is an important milestone from a cost perspective and will also be instrumental in expanding the consumer market opportunity for our R1 vehicles. We believe the majority of our long-term R1 demand will come from our Dual-Motor variants.

These variants have pricing that starts at just over $70,000, extend up to 400 miles of range, reach zero to 60 miles per hour in as quick as three and a half seconds, tow up to 11,000 pounds, and generate over 800 foot-pounds of torque and 650 horsepower. We believe the Dual-Motor variants offer great value while providing high on and off-road performance. The technology and clean sheet approach we've taken with the R1 product line has really enabled the uniquely differentiated product, the features, the attributes, the way the vehicle feels so, so special. You know, this is the result of thousands and thousands of trade-offs we're making between different pieces of content, the way we think about design, the way we think about technology integrating with that design.

Of course, the R1 product line was intended and is our handshake with the world. It's, it's our flagship product. So as we've now been thinking a lot about how does that brand position that we've created from a product point of view integrate across the mosaic of all the other touch points we have as a company, and then, of course, into R2, those same that same mindset and the same ethos is being applied, of course, in a smaller price-- a smaller form factor and a lower price point.

Having spent a lot of time with the teams and closely coordinating all these different trade-offs and, sort of thinking about how does Rivian manifest at this lower price point with a smaller form factor, I can say we couldn't possibly be more excited about what's to come with R2, and really looking forward to showing that product in the early part of 2024. It represents, in much the same way that R1 rethought a segment, rethought a space, R2 takes that even further and stretches our ideology and our brand ethos really into such a, such a great segment and such a large addressable market. Now on to our second quarter results, which reflect our continued extreme focus on cost efficiency as we accelerate our drive towards profitability.

On a quarter-over-quarter basis, delivered vehicles grew by 60%, while gross profit per vehicle improved by about $35,000. We achieved meaningful reductions in both R1 and EDV vehicle unit costs across the key components, including material costs, manufacturing, labor, overhead, and logistics.

Maintaining our cost reduction efforts through consistent focus and collaboration across all levels of the company, is a core part of the culture we're building. I also wanna take this opportunity to highlight some of the progress we're making through our partnership with Amazon. When designing the electric delivery van, we set out to develop a delivery van which offers a step change in safety, innovation, technology, and of course, driver comfort. As of early July, there were EDVs in operation across over 800 cities in the United States. In addition, we recently initiated deliveries of EDVs to Amazon in Europe. It was a strong quarter, and we remain focused on ramping production, driving cost efficiencies, developing future technologies, and creating an amazing customer experience. With that, I'll pass the call to Wassym to discuss our software development strategy.

Wassym Bensaid (SVP Software Development)

Thank you, RJ. It's good to be here to discuss our software capabilities and the progress we are making. The impact of software is pervasive throughout the company. The most obvious and customer-facing aspects of our software is what customers see and experience through their in vehicle digital experience, our over the air updates, and the Rivian mobile app. Our priority here is to take feedback from our custmers and enhance the customer experience, whether that's through drive modes, comfort features, range efficiency, or addressing other pain points that customers may experience. Over here, I have actually been called the Chief Reddit Officer, given my interaction with customers on the Rivian subreddit. Since launching our R1 platform in the fall of 2021, we have pushed 22 major software updates to our vehicles.

These updates have been filled with features such as Bird's Eye View, Drive Cam, snow mode, camp mode, pet mode, and much more, all designed to enhance our customer's experience. Most recently, this included the integration of A Better Routeplanner, which we expect to meaningfully improve our customers' charging and routing experience. This technology will give our customers the ability to plan and compare charging stops along the way. It also provides us data to help with the site selection of our Rivian Adventure Network. The roadmap we have is equally exciting. While I don't want to share too much yet, over the next months, you will see us launch a towing mode update, including trailer profiles, but camera views, adaptive range estimation, and towing charge stations discovery in the navigation app.

We also plan to launch Drone Mode, which will provide an immersive camera experience powered by our computer vision and augmented reality technologies. We believe that our software capabilities are a structural differentiator that will only grow in importance as electric vehicles continue to increase in complexity. Our unique capabilities stem from the intentional decisions we made years ago, when we decided to truly take a clean sheet approach to the software stack and electrical hardware in the vehicle. What this means is that we own the software stack and control nearly every single computer in the vehicle. We designed our software stack to scale to multiple hardware architectures, allowing us to rapidly support three product variants with a high level of code reuse across R1T, R1S, and EDV.

This modular platform approach is also enabling us to prepare rapid migration to our next-gen zonal electrical architecture, which brings increased levels of system integration and will allow us to achieve significant material cost savings, thanks to the hardware consolidation. As I mentioned earlier, at Rivian, software is foundational. It supports and optimizes functions throughout the company. What I just described was on the consumer-facing side of our work. The work my team does behind the scenes is equally important. Our connected software architecture allows us to gather sophisticated data that provide powerful insights, enabling us to improve the reliability and safety of our products and reduce our service costs. It allows our service teams to perform remote diagnostics and assess the issues that customers may be experiencing well in advance.

We can determine when to deploy mobile service vehicles, what parts to bring, and in some cases, even fix the issue through over the air software. This in-house platform also powers our manufacturing operations in the plant, allowing us to have in-line diagnostics that automatically detect potential assembly issues as the vehicle moves through the line, and allows us to perform exhaustive electrical quality checks on our vehicles. This ultimately saves us time, improves quality, and improves efficiency during the manufacturing process. As a team, we're excited about the work we do and the impact we are having. It's not often that you get the chance to redefine how an industry views software. We're encouraged by the work we have done, and even more excited about what's to come. With that, let me turn the call over to Claire.

Claire McDonough (CFO)

Thanks, Wassym. Second quarter results reflect the strong progress our team delivered against the operating plan we outlined earlier this year. As RJ mentioned, we remain focused on the drivers of long-term value for our business, ramping production, driving cost efficiencies, building future technologies, and improving the customer experience. Turning to our second quarter results, we produced 13,992 vehicles and delivered 12,640 vehicles, which was the primary driver of the $1.1 billion of revenue we generated.

Total revenue for the quarter included $34 million of proceeds from the sale of regulatory credits. We expect the sale of regulatory credits to increase over time, but to vary quarter to quarter. During the second quarter, we improved our gross profit per vehicle by approximately $35,000 as compared to the first quarter of 2023, representing a gross margin improvement of over 4,400 basis points. The primary drivers include fixed cost leverage, the change in LCNRV inventory write-downs and losses on firm purchase commitments, material cost reduction, and increased revenue per vehicle delivered. Going deeper into the material cost reduction drivers. After a full quarter of EDV production, with the introduction of the LFP battery pack and our in-house Enduro drive unit, we are now seeing a 35% reduction in material costs for our vans as compared to Q4 2022.

Concurrently, we've seen and continue to see strong progress on our R1 material cost reduction through commercial cost down efforts and a reduction in short-term premiums. Total gross profit for the quarter was negative $412 million, as compared to negative $704 million in the same period last year. Total operating expenses in the second quarter of 2023 fell to $873 million, as compared to $1 billion in the same period last year. The primary driver of the reduction in operating expenses was related to lower levels of stock-based compensation expense. We continued to rationalize our operating expenses despite significant investments in core in-vehicle technologies and the customer experience.

Over the past year, we have expanded our physical and mobile service offerings, increased our demo drive capacity, developed and launched a new motor platform, expanded our Rivian Adventure Network, built a parts distribution center and remanufacturing center, and so much more. All of this was done while lowering our quarterly operating expenses by $131 million, of which $89 million consisted of cash expenses. These are all forward investments that position us to capitalize on our direct-to-customer relationship and enable us to scale efficiently as our car park grows. Our gross profit improvements, coupled with our operating expense rationalization, resulted in $424 million of improvement in Adjusted EBITDA as compared to the prior year. We ended the second quarter of 2023 with $10.2 billion in cash, cash equivalents, and short-term investments.

We continue to believe that our cash can fund operations through 2025, With the addition of our $1.5 billion Green Convertible Notes and the amendment and extension of our $1.5 billion asset-based lending agreement earlier this year, we have strengthened our balance sheet as we approach the launch of R2 in 2026. Turning to our business outlook for 2023, we remain focused on ramping production and driving greater cost efficiency across the company. Based on the progress of our production ramp, including the ramp of our in-house motor, along with the latest understanding of the supply chain, we are increasing our production guidance to 52,000 total units. We have also seen strong progress in our cost down efforts and are improving our Adjusted EBITDA guidance to negative $4.2 billion.

Finally, we are reducing our capital expenditure guidance for 2023 to $1.7 billion due to a shift in capital expenditure timing. We continue to believe the average capital expenditures per year between this year and next year will be in the low $2 billion area. In closing, we have seen progress in all three aspects of our path to generate positive gross margin, ramping production, driving material costs down, and increasing average selling price. The substantial reductions in EDV material costs, driven by the introduction of the LFP pack and Enduro drive unit, is reflective of the material cost improvements we expect to experience with our R1 platform following the 2024 shutdown to rerate the R1 line to 85,000 units per year and introduce new technologies. This reinforces our confidence in our long-term financial targets.

We see a clear path to our approximately 25% gross margin target, high teens Adjusted EBITDA margin target, and approximately 10% free cash flow margin target. With that, let me turn the call back to the operator to open the line for Q&A.

Operator (participant)

Thank you. As a reminder, to ask a question, you'll need to press star one one on your telephone. To withdraw your question, please press star one one again. Please wait for your name to be announced. We ask that you please limit your questions to one with one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question comes from the line of Dan Levy with Barclays. Your line is now open.

Dan Levy (Senior Equity Research Analyst)

Hi, good evening, and thank you for taking the question. Wanted to dig in first on the gross margin improvements, and I realize you said that you're making progress on each of the areas that you flagged in terms of improved fixed cost absorption and material cost reduction. Maybe you can, you know, give us a little bit of a voiceover, a little bit deeper color on how this is playing out. You know, how much more ground is there in terms of renegotiating some of your supplier contracts? How much more upside is there on the pricing front? Any color on the path to being contribution margin positive, which is a step in ultimately getting to total gross margin positive.

Robert Scaringe (CEO)

Thanks, Dan. Yeah, this is, this is a major, major focus for us as a business, and something that, you know, across all aspects of, of product development, our quality teams, our manufacturing teams, we're working towards. You know, as we look at unpacking, as your question sort of dug into the, the gross margin improvements, you know, a portion of it absolutely is the fixed cost absorption improvements that, that just are born out of the, the increased volume. I'm, I'm glad you point out a, a, a really important element of this is also material cost improvements, you know, so reductions in our bill of materials. This is, you know, what we're seeing today is, is some of, but not all of the, the improvements that are coming.

As Claire said in our opening remarks, we've achieved roughly 35% reduction in material costs on the EDV program, in conjunction with the shutdown that happened at the beginning of this year. We expect a similar level of reductions on R1, with the shutdown that's gonna be coming next year. Preceding that, there's a whole host of ongoing commercial negotiations, some of which we're already beginning to feel and see on R1, and many of which are going to be coming. I wanna just call out a few of the points that I also made in my opening comments. You know, a lot of the improvements in engineering that are going into the vehicle are to drive cost out.

One of the biggest areas is the improvements we're making to the network architecture and consolidating a number of our ECUs into a smaller number of ECUs, ultimately, a 60% reduction in the number of ECUs in the vehicle. Along with that, roughly a 25% reduction in the wire and harness length in the vehicle. When we look at the, you know, when we talk about the confidence we have around further reductions in cost, this is not, this is not confidence out of thin air. This is confidence that ties to contractual obligations associated with these, these component changes, as well as contractual obligations with our suppliers built into commercial negotiations.

We'll continue to see significant improvements quarter-over-quarter in the cost structure to build our vehicles, ultimately laddering up to the, the margin targets we talked about, the 25% gross margin target for our Normal facility, for our Normal, the vehicles produced in our Normal plant. Claire, do you wanna maybe just talk a little bit about some of the other aspects here around contribution?

Claire McDonough (CFO)

Sure. On a contribution margin basis, given the significant impact to our material costs on the EDV, the EDVs that we're producing today are commercial contribution margin positive. As we think about the R1, the R1 will be contribution margin positive by the end of this year, as you heard from RJ, through continued progress on supplier contract negotiations, as well as some of the upside to price as we introduce the Max Pack variant later this year.

Dan Levy (Senior Equity Research Analyst)

Thank you. That's very helpful. Then just as a follow-up, I think, you know, one of the broader themes in the EV sales landscape today is just around demand. I think, you know, there's questions broadly around some weakness of demand. Maybe you can give us a sense, you know, I know you've taken away the, the order backlog, but what confidence do you have that, you know, your that your backlog will sustain well into 2024, and that, you know, you're going to be supply constrained for the foreseeable future?

Robert Scaringe (CEO)

One of the things we're perhaps most excited about is just how well received the products have been. The level of excitement we see from our customers and the, the folks that are driving our vehicles, and, and we see that manifesting in, you know, J.D. Power awarding us the highest level of customer satisfaction within the EV space, within the premium EV space. Importantly, we see it through the day-to-day interactions we have with, with the owners of our vehicles, and they become the biggest advocates and, and essentially marketers, if you will, for, for our brand and what we're building. With that said, we feel very confident in the continued backlog that we have. We have clear visibility into, deep into 2024, with that, that backlog that's, that's established.

As more and more vehicles are on the roads, you know, we now have, you know, tens of thousands of R1s on the roads, it continues to feed the flywheel of awareness about the brand. As I said, some of our strongest advocates are people that are driving our vehicles every day. We're quite bullish on the continued strong demand we have for our products.

Dan Levy (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open.

Adam Jonas (Research Analyst)

Hey, thanks, everybody. My first question is on Tesla charging. As we know, there's a kind of a two-way flow here, where there's power, there's electrons going into the car, but then data coming out of the car, to Tesla. I'm curious, what data are you required to share or planning to share with Tesla as you join their charging network? I have a follow-up.

Robert Scaringe (CEO)

Adam, thanks for the question. Yeah, this is a, I think, an exciting development just around the relationship that we've put together with Tesla, along with, along with other manufacturers, to utilize the North American Charging Standard event as a part of that, access their charging network. We continue to build out our Rivian Adventure Network, and that will also have North American Charging Standard adapters or plugs, I should say, on it. That allows us, with our network, to access a very large car park with the existing Tesla car park that's out there, which gives us much clearer visibility to profitability of our charging network as well. In terms of, you know, specifically what occurs in terms of data transfer, there's not any data transfer built into the relationship.

It's a, it's a charging relationship whereby our customers will access the network and ultimately pay for the charging, and that'll flow from us through to Tesla.

Adam Jonas (Research Analyst)

Okay, thanks for confirming that. Just a follow-up on your ADAS strategy. You have Mobileye today, but we understand you'll be adding your own camera-based ADAS system side by side with Mobileye on the same windshield. I'm just wondering how long you plan on having these two redundant systems together before you substitute out Mobileye and rely on your own in-house system? Thanks.

Robert Scaringe (CEO)

Yeah, as we think about some of the key differentiating, elements of what we're building, of course, you know, Wassym spoke about our, our electronic stack and, and building our own network architecture and, and designing and developing all the core ECUs in the vehicle, which is what facilitates and enables this, this significant reduction in number of ECUs in the vehicle that'll be coming into play next year.

In much the same way, we also deeply believe that controlling the sensor set, the perception stack across the vehicle, and allowing that to feed into our, you know, our Autonomy Compute Module, what that gives us is the ability to have really early fusion of information, meaning we can cross-leverage information across multiple cameras, our radar set, and, and in the future, additional sensors as well, to put us in the best per- position to have high-quality perception information that feeds into our control algorithms. With that as a, as a, I guess, bit of a technical background on it, that's the reason we've taken the, the view of owning the hardware stack and the software stack around our self-driving platform.

It's gonna put us in a position to create long-term, the lowest cost system with early sensor fusion, and therefore, the highest level of confidence from the perception stack feeding into the feeding into the control, into the control system.

Adam Jonas (Research Analyst)

Okay, thanks, RJ.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of John Murphy with Bank of America. Your line is now open.

John Murphy (Managing Director)

Good evening, guys. I just wanted to follow up, and particularly because we have Wassym on the line as well, on that comment you just made. When we think about that next-gen architecture, you know, I can understand kind of what you just talked about. Is there anything else from the software side, or the functionality of the vehicle, from, you know, the powertrain side or the HMI side, that this next-gen architecture allows you to do that you might not be able to do right now and might put you, you know, out in front, in the lead versus other vehicles?

Robert Scaringe (CEO)

Oh, sure. Well, thanks, John. This is something we're, we're super excited about. It's, it's actually the reason we had Wassym join the call today, so he could provide some additional color and commentary on, on the importance of software and, and how this is such a core aspect of our, of our organization and, and been built into every aspect of how we think about our vehicle platforms and architectures. Just to comment on, and I'll pass it to Wassym for some additional, additional comments. Probably, if we wind the clock back many years, we took the decision to develop all the ECUs across the vehicle, and so that's. You know, typically, these ECUs would be coming from tier one suppliers.

Those, those ECUs, typically, when they come from tier one suppliers, the sort of embodied in that ECU is a set of functions, and, and therefore, of course, you know, a set of software applications. That mosaic in a traditional world, that mosaic of third-party, tier one source ECUs has to work together, and it's, it's a very cumbersome network architecture to work with and makes things like over-the-air updates very, very difficult because you have to coordinate across multiple different companies on, you know, on a software platform and software, you know, software stack that, that you, as the manufacturer, would own. We, we felt very, very strongly that this is something that had to be core to us as a business.

We built deep domain expertise in terms of our electronics development capability, of course, our, our software development capability. That, of course, launched into the R1 product, where we, we own the software stack, we own essentially all the ECUs in the vehicle. What that also does, in addition to allowing us to do lots of over-the-air updates, and as you heard Wassym mention earlier, since the launch, we've, we've had 22 major over-the-air updates. Beyond that, it allows us to look at cost optimization in a really unique way, because a specific controller is not tied to a specific sourcing relationship or to a specific set of functions, but rather, we control the controller and we control what's on it. Over time, we're consolidating the number of computers we have in the car to, to be significantly reduced.

You know, next year, that, that first step of that is a 60% reduction in the number of computers in the car relative to today. Now, that doesn't, that doesn't necessarily directly create customer features. Of course, it takes cost out of the vehicle, allows us to operate with, we think, a significant multi-thousand dollar structural cost advantage relative to the traditional approach. Importantly, it also opens up opportunities to do some really amazing features where you can cross-leverage, compute, you can cross-leverage perception, as I referred to in the autonomous, you know, in the with Adam's question. Wassym, maybe if you can talk just a little about this. I know you said in your, your comments, we don't want to give away too much, but, you know, we, we... Until late last night, Wassym and I were reviewing-...

some of our software roadmap, and I am so excited for the world to see the things that we're that we have coming. Claire, maybe talk a bit about that.

Wassym Bensaid (SVP Software Development)

Yeah, absolutely. I, I think really the, the core strength that we have is we, we own every single computer on the vehicle. We're able to not only update the infotainment or the connectivity, but we can update the vehicle controls, we can update the vehicle dynamics, the energy management, ADAS, the way the vehicle drives, the way the vehicle navigates, communicates with the entire world. We're able to create end-to-end, unique, experiences that really redefine the, the ownership with, with, with our customers and really create that, regular connection with, with our community of, of customers. We have those capabilities to continue enhancing the feature set.

Through that complex integration, we're also able to leverage on those skills so that we can virtually distribute all these different software features into more constrained hardware platforms in the future, which will bring significant cost down and significant bill of materials savings for us for the next generation. I think the last item that I'd really want to highlight, and this is usually not very obvious. I think it's really the role of software behind the scenes. It's the entire connected data infrastructure that we have created, where we not only collect data to help with product improvements, reliability improvements, safety improvements, but we're also able to help with reducing the service costs for the company. We're also helping with the acceleration of the overall manufacturing ramp.

We're also able to help with the improvement from a quality standpoint for our manufacturing.

John Murphy (Managing Director)

That, that's very helpful. Can I just ask one last one, just on the R1S, was it 70% of the R1 mix in the quarter? Yeah, I'm just curious how we should think about mix on the R1s going forward. Is the R1S gonna continue to take a greater portion of the mix, you know, as that's ramping up further and further? Or is this the kinda level set mix we should think about going forward?

Robert Scaringe (CEO)

Yeah, John, it's a great question. As we commented on before, up through the 1st quarter of this year, we've been producing, in any given quarter, the majority of vehicles were produced from R1T. The 2nd quarter, this past quarter, was the 1st time that R1S represented a majority of what we're producing. So, for the next 1 or 2 quarters, we'll be producing greater than, you know, 70%+ of R1S to help address some of the really long backlogs, and this is by far and away one of the biggest customer complaints we have, which is the amount of wait time associated with getting a Rivian today. So to bias a little bit towards addressing some of that, that very long, painful backlog for R1S.

Then with that, steady state long term, settling into about 70% R1S production, with the remaining 30% being R1T.

John Murphy (Managing Director)

Thank you very much.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of Rod Lache with Wolfe Research. Your line is now open.

Rod Lache (Managing Director)

Sorry, I was on mute. Can you hear me now?

Robert Scaringe (CEO)

We can, Rod.

Rod Lache (Managing Director)

Okay, sorry about that. Was hoping that you can give us a sense, first of all, on the BOM advantage that you see from being able to acquire components with your own silicon and software. Presumably, most of your peers are still buying steering systems and braking systems and ADAS systems, and suppliers are generating some additional revenue for the engineering and software that they are adding. Is there a way to maybe talk about what this actually will ultimately mean for an R1 and R2 in terms of $ per vehicle, and when, when you'll be sort of more competitive than them in terms of cost?

Robert Scaringe (CEO)

Yeah, this is a great question. It's a bit hard to speak to from an apples to apples point of view, but what I'd like to do is just maybe look at two aspects of this. The first is, as you said, removing the tier one as an aggregator of features onto an, onto an ECU, what you might often hear called a domain controller. That removes that, that margin stacking effect, but importantly, it allows us to optimize the way we design the hardware around what we're delivering from a feature set point of view. Meaning, we're not taking a piece of hardware that's been developed for a broad application across many, many different vehicles, take, like, a body controller or a powertrain control module.

The first is just the optimization that occurs simply by it being specifically designed for us. The second, and I've, I've spoken to this a couple times here that I think is really, really important and very hard to do if, if you don't control the hardware in its entirety, is the ability to consolidate what are typically separate ECUs that are tied to specific function sets, and to be able to consolidate those ECUs into single computers that are really tying to a zone of the vehicle, like, let's say, a front zone of the vehicle, a middle zone of the vehicle, a rear zone of the vehicle.

That, that massive reduction in number of computers in the vehicle not only simplifies, not only reduces the number of modules, but also simplifies the wiring harness and the electrical architecture in the vehicle. This is an area for us that's been a core focus, and ultimately we're talking about $thousands in savings per vehicle. To be able to build an architecture that has as few of computers, as small number of computers as possible, as simplified of a wiring harness as possible, becomes a massive enabler for cost down. We're gonna see that first in R1 next year with some of the changes I talked about already. Importantly, this forms the basis of what will be going into R2.

You know, R2, from a cost point of view, has very aggressive targets, you know, above and beyond just what we're putting in place with the electrical architecture and the, and the compute stack that's in the vehicle. Also, you know, well into other aspects of body design, which will leverage the opportunities afforded to it through the simplification of electronics and network architecture.

Rod Lache (Managing Director)

Okay, thanks for that. Was hoping you can just separately talk about any progress that you've made in your discussions with Amazon regarding the exclusivity deal, and just thoughts on the outlook for demand for the EDV. Whether some resolution of that is required in order to achieve the target of positive gross profit next year.

Robert Scaringe (CEO)

Sure. You know, we continue to have a great relationship with Amazon. It's a great partnership. I think one of the things I'd, I'd wanna call out is just the complexities of scaling a logistics network, or, or I should say, taking a scaled logistics network and converting it to electric. As I, as I said in my opening comments, we now have EDVs operating in over 800 cities across the United States. We've recently entered Europe with the product, and the feedback we're getting from drivers has been incredible.

You know, you can find this, sort of all over the web, and, certainly no shortage of YouTube clips around just the, I'd say, the level of excitement and, and how, you know, the drivers recognizing the amount of, driver focus that went into the design of all the, the touch points, the ingress, egress, the UI. So we're really pleased with that. Now, with that said, as, as we work closely with Amazon to expand, how many of those vehicles are getting out, and of course, that ties to how rapidly we ramp the production of, of the EDV product. We're also, and, and I've talked about this before, actively working with Amazon to allow us, to, to sell vehicles outside of Amazon sooner than what was originally contemplated in our contract. So that work remains ongoing.

We're very optimistic on that work. Again, the close partnership and of course, Amazon's large position in Rivian helps align incentives, to have us solve this year, very shortly.

Claire McDonough (CFO)

Rod, addressing your second part of the question on impacts to gross profit positive in 2024. We haven't contemplated any external sales beyond Amazon from a commercial standpoint in the, the comments that we've historically made.

Rod Lache (Managing Director)

Okay, just, just to clarify, are, are you contemplating Amazon at, at its current run rate, or, or is that a major factor at all, in the, in the, positive gross profit target?

Claire McDonough (CFO)

The way I would characterize it is, as we've talked about in the past, Q4 is always a seasonally low volume quarter for, for Amazon, and so that is also been reflected in, in our gross margin commentary, given the Q4, you know, bridge that we've spoken about in the past.

Rod Lache (Managing Director)

Okay. All right, thank you.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open.

George Gianarikas (Managing Director and Senior Analyst)

Hi, good afternoon, and thanks for taking my questions. Maybe first, to focus on your, your pricing strategy. I know you mentioned earlier that the demand landscape is incredibly strong. I'm curious as to whether you have thoughts on what's happening with some of your competition in the marketplace and whether you feel comfortable with current prices of your vehicles?

Robert Scaringe (CEO)

Thanks, George. We, we've, we take a very methodical and thoughtful approach to how we look at our vehicle pricing. You know, if we look at between the R1T and the R1S, each of those products, when we, we think about a price, there, there's actually a band of pricing that they operate across, and that band is, is enabled or unlocked, if you will, by the introduction of additional variants. The first step in that is introducing the Dual-Motor into the vehicle. As you, as you heard in my opening comments, the Dual-Motor, as our quote-unquote, base powertrain, is, is a really exciting configuration. It's still capable of 0 to 60 in 3.5 seconds, towing of 11,000 pounds. It's, it's really, an enjoyable architecture, and as a base configuration, it's outstanding.

Of course, you know, it doesn't have the same off-road capabilities necessarily as, as the quad motor, but we think for a majority of use cases, it's, it's really a perfect fit. That's the first step in, in providing customers with a lower price variant of, of either R1T or R1S. Then the next step, which is coming here shortly, is the introduction of our Standard Pack. The Standard Pack not only is a, is a lower cost pack for us to build, but importantly allows customers to get into an R1 vehicle at just over $70,000. So as, as we think about the positioning of the product, the capabilities of the product, both on-road, off-road, dynamically, the feature set that's in the vehicles, we feel quite comfortable with the positioning of what we've done.

I'd also wanna just comment, there's lots of ways to try to measure demand, and one of the things we, we look very closely at is, is residual value. Residual value is, is nice because it, it gives us a reflect, it sort of reflects, you know, how our used vehicles are trading, which gives us an indication of, of overall demand positioning. The, the R1 products within the truck and SUV segment are among the best residual values of, of any product in, in those, in those categories, regardless of electric or combustion. Across both combustion vehicles and electric vehicles, our vehicles are maintaining value extremely well. Even so far as a brand, you know, typically, you buy a brand-new car, the moment you quote-unquote, "transact" on the vehicle, you lose roughly 10%-15% of its value.

You know, the, you know, people often say you drive it off the lot, and it loses value. In our case, you know, once the transaction occurs, the vehicle value doesn't really drop. They're, they're maintaining really well. And of course, that's just an artifact of, of the strong demand backdrop, that we have and, the willingness to pay, for, for the products we're building.

George Gianarikas (Managing Director and Senior Analyst)

Thank you. Maybe as a follow-up, you spent a lot of time in the release discussing vertical integration. Maybe relative to your initial plans, you know, a couple, few years ago, the speed at which you vertically integrate maybe has been a little bit slower. I'm curious if there's one key component of your business that you could insource today in a world of infinite capital, theoretically, what would it be? Thank you.

Robert Scaringe (CEO)

Yeah, the, the, we spoke about this a bunch on, on the call today. The, the area that I would say that we've From the very beginning, we knew we, we wanted to completely control, and we, we do completely control and feel very, very good about this, is, is investing in the software and electronics capabilities within the vehicle. I, I would say that's among the most important things to own, in looking at what is a, what is a structurally cost-advantaged vehicle manufacturer look like in the world of today. We've recently vertically integrated our drive unit, and that's with the, the Enduro drive unit, the single motor per axle. You know, Claire commented on this before, but that is creating very meaningful cost advantages relative to, to what we launched with.

Just as a reminder, what we launched with, we, we did the inverter in-house, the gearbox in-house, the assemblage in-house, but we, we purchased the rotor and stator from a supplier. You know, on, on our dual motor setup, that's now come in-house, and that's the strategy we'll continue to pursue with the propulsion platform. We're working very hard to continue to advance that, given the cost efficiencies and cost advantages that, that, you know, clearly is driving in the business.

George Gianarikas (Managing Director and Senior Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Mark Delaney (Managing Director and Senior Equity Analyst)

Yeah, good afternoon, and thank you very much for taking my question. I was hoping to better understand the financial outlook and the updated EBITDA guidance for 2023. I believe it implies a slightly larger EBITDA loss in the 2nd half of this year relative to the 1st. I was hoping to better understand what the drivers of that may be.

Claire McDonough (CFO)

Mark, one of the key drivers embedded within that second half guidance is a more conservative outlook around the magnitude of, of tailwinds that we ascribe to the unwind or, or reduction in our LCNRV charges on a go-forward basis. That's a, a little bit of color as you think about the fact, excluding LCNRV, we expect to make significant progress against our improved gross margins. As we, you know, track throughout the, the second half of the year, we begin to introduce the Enduro drive units that RJ just spoke about into the R1 vehicles.

That'll be a material cost reduction there, the continued progress from a commercial, cost down vantage point, as well as some of the increases that we'll continue to see as we, ramp up production in the, the course of, of Q3, and importantly, as well, drive towards higher average selling prices through the introduction of our, Dual-Motor Max Pack in the, the end of this year as well.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thanks for that, Claire. Then my, my other question was just on the opportunity for Rivian to sell products beyond the vehicle. I mean, you, you spoke a bit already around software, but I think there's other services and accessories that are an important part of the long-term opportunity for Rivian in terms of profitability. So things like insurance and, and, and selling, you know, some of the gear and, and, and camping accessories. Curious if you could share an update around where the company stands on providing some of those products. Thanks.

Robert Scaringe (CEO)

Thanks, Mark. When we think about the, the, the overall revenue opportunities we have as a business, of course, the, the obvious place for us to all sort of our minds to go to is the vehicle. There's a whole ecosystem of products and services that surround the vehicle that we think represent significant opportunities, both in terms of alleviating customer pain points, but also in terms of creating, really exciting and sort of joyful, customer experiences. You know, that starts with the purchase process and, and, simplifying what a digital transaction looks like, which we've done through our platform as we continue to, to push ourselves hard to, to improve that further. That immediately connects into the insurance platform.

We've not announced any of the specifics on the returns for our insurance platform, but it's a profitable part of our business, and it's, the attach rate on this is quite high. We're very bullish on the long-term potential of our insurance offering. Then, as you called out, what we think of as our adventure products, so the gear that goes with the vehicle, this is a huge opportunity and something that, particularly as we look at the R2 product line, there's some really exciting, intentionally thought out opportunities that, you know, sort of as the vehicles are being architected,...

We're putting some of these really, fun personalization items into this contemplated adventure products offering, where it also moves cost out of the core vehicle and into the accessories, which allows us to achieve a baseline vehicle with, with very aggressive, cost structure. Then last, but certainly not least, is, is the role that software can play. There's, there's a host of ways this has been talked about and looked at. I think often this is, this is sometimes oversold.

I'd say in the space where we, we sort of imagine these very, very large revenue numbers or companies often imagine these, I, I wanna call out that we believe table stakes are gonna be, is going to require a very robust, very thorough, software platform, but that it still provides opportunities for very specific, unique, highly differentiated, highly complex features to be sold as an additional service or subscription. We've seen this play out in the autonomy space, but we see, and where we certainly, have plans for ourselves, but there's, there's a host of other areas. Wassym, if you can just talk about this for a moment, 'cause this is something I know you and I spend a lot of time on.

Wassym Bensaid (SVP Software Development)

Thanks, RJ. I mean, first of all, we are developing and expanding software and services for our commercial business. Every EDV that we sell today comes with a subscription for FleetOS. We continue to enhance that roadmap and add, more features and more services to it. On the consumer side, as RJ mentioned, we are being really extremely thoughtful about which features could become paid options. We believe that there is an opportunity in a specific subset of features. Those features need to meet certain criteria. This is features that require a very high level of complexity from a development standpoint, or features which require, high compute, whether it's in the vehicle or, in the cloud.

We, we have internally, a roadmap that, that, we will, communicate, as, we, we, basically, build it with, with ou r customers.

Mark Delaney (Managing Director and Senior Equity Analyst)

Thank you very much.

Operator (participant)

Thank you. One moment for our next question, please. Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is now open.

Emmanuel Rosner (Auto Technology Analyst)

Oh, thank you very much. It sounds like the factory rerate for the plan for next year is very important, step in towards reaching your goals. Can you maybe just help us understand, again, the timing of it, and importantly, what sort of available capacity it would leave you with on the other side of it, but also effective capacity for 2024 as a whole?

Robert Scaringe (CEO)

Yeah. Thanks, Emmanuel. The updates we're making to the line next year, I'm glad you asked the question the way you did. They have really two core purposes. The first is, as you called out, it's a capacity increase for the R1 line, where we effectively grow the capacity of R1 from 65,000 units on an annual basis to 85,000 units. I'd say more importantly, in the area that we believe we're gonna have, certainly, there'll be lots of interest in over the next few quarters, is what that represents in terms of a step change in our cost structure.

We integrate with that shutdown, a host of product-level improvements that simplify, simplify the vehicle and remove considerable costs, consistent with what Claire and I both spoke about before, that we saw with, associated with the shutdown in EDV. That's not to say, and I wanna be very clear, that's not to say cost improvements aren't happening leading up to that. We have a very clear roadmap with, you know, contractually set up agreements with our suppliers, some of those being commercial, some of those being technical changes preceding this, this batch, if you will, of changes, coordinated changes that are happening with the shutdown. In terms of the timing of the shutdown, it'll be happening mid next year.

We are doing everything we possibly can to minimize the amount of time we need to have the line down to make those changes and improvements, but it will have a, an impact as a result of the line being down on the R1 output during that timeframe. We haven't provided guidance in terms of 2024 production volume yet, but, but certainly that will play into ultimately the guidance we do provide.

Emmanuel Rosner (Auto Technology Analyst)

Okay, that's very helpful. Let me, let me ask you about your balance sheet. Claire, you made comments in the prepared remarks that you've obviously strengthened it, and you still have $10 billion in cash, and it will take you to, I guess, you know, operationally through, you know, 2025. How are you thinking about additional needs for, for capital raise and potential timing of it, and, you know, modalities of it? Like, is it, is it something that you could, you would think of doing short, sooner rather than later, or to the extent that you have room until 2025, it will be later on or, or more opportunistic?

Claire McDonough (CFO)

Thanks, Emmanuel. As you mentioned, we remain confident in our cash balance and the fact that it can fund our operations through 2025. As I spoke about in my prepared remarks, with the addition of the convertible notes that we raised and our ABL, that further de-risks the launch of R2 as we think about the, you know, $10.2 billion of cash and equivalents we have on the balance sheet today. With that said, our priority is to maintain a strong balance sheet. For us, it provides a safeguard during volatile industry conditions and mitigates risk while scaling important growth capital projects, such as the investments that we're making into R2 and our facility in Georgia as well.

With that in mind, we'll, you know, continue to evaluate a variety of capital markets available to Rivian across the entirety of the capital structure. As, as we've spoken about and exemplified by, by our actions in the first half of, of this year, we'll continue to employ a, a diversified approach as we look to maintain that strong long-term balance sheet position.

Robert Scaringe (CEO)

Great. Thank you.

Operator (participant)

Thank you. One moment. Our final question will come from the line of Benjamin Kallo with R.W. Baird. Your line is now open. Mr. Kallo, your line is now open. Our next question, one moment. Comes from the line of Chris Pierce with Needham. Your final question.

Chris Pierce (Senior Research Analyst)

Oh, hey, can you guys talk about the mechanics and the plumbing behind the one-day sale, in the sense that, are these new customers or existing reservation holders that are kinda willing to swap out of a current reservation versus waiting for a reservation? Or is this kinda, you know, to get flexibility to have the, the vehicle sooner, or do customers tend to want what they want, and this gives you the opportunity to kind of find new customers? I just wanna get the sense of, you know, how it went. Will we see more of them, that type of thing?

Robert Scaringe (CEO)

Thanks, Chris. I think you're referring to an event we did in Normal and where we had.

Chris Pierce (Senior Research Analyst)

Yes.

Robert Scaringe (CEO)

-on-site sale. Yeah, I think this has gotten so much more attention than we ever could have imagined. This was an artifact of us looking at some of the vehicles that are coming off the line and the potential where those vehicles were sort of late on matches, where a customer changed order configuration or changed color combination, whatever the case may have been, where they were available to be matched locally and essentially provide a bypass on having to ship the vehicles. It was something we did more as an experiment to look at. I, I would say it, it's sort of one of many types of experience we, experience we, we run and conduct, being, you know, direct to consumer and having the ability to do things like that.

Chris Pierce (Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. At this time, I'd like to hand the conference back over to Mr. RJ Scaringe for closing remarks, please.

Robert Scaringe (CEO)

Well, I wanted to thank everybody for joining today. We're, we're really excited about the progress we're making and, and hopefully reflected in, collectively in our comments and, and discussions today. It's clear that our, our focus very much remains on not only ramp, continuing to ramp production in our Normal production facility, but importantly, driving costs down across the business on our path to profitability. And we see that manifesting in, in significant progress between Q1 and Q2, in, in our overall gross margin structure, and we intend to continue to make that type of progress as we approach the, the long-term target for the Normal facility of 25% gross margins.

I'd say the other point I'd, I'd wanna call out, and, and this, again, evidenced by, by Wassym joining us here on the call, is just the importance that we place on the technical differentiation of our products and our platform. In not only enabling us to run and manage our operations more effectively in terms of over-the-air updates, continued progress, or continued features that, that make their way into vehicles, but importantly, actually simplifying the vehicle architecture because of the control of these core technology stacks around electronics, software, and, and associate network architecture. That really forms the basis or the foundation, if you will, for what's to come with our R2 platform.

And this is, this is so foundational to, to what we're building, and obviously it takes a lot of work on the front end to build all this capability, and, you know, both on the hardware side and the software side. But, but we're gonna start to see the benefits of that being realized in the immediate term through the cost savings and the significant improvements we'll see quarter over quarter. Importantly, we'll see it when we reveal and show the products for R2 and, and the level of content and, and what will be available at the price points we'll be talking about for R2 when we show that product early next year. With that, thank you everyone for joining, and look forward to our next call. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.