Rivian Automotive, Inc. [RIVN] Conference call transcript for 2022 q4
2023-02-28 20:45:17
Fiscal: 2022 q4
Operator: Good day, and thank you for standing by. Welcome to Rivian's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tim Bei, Vice President of Investor Relations. Please go ahead.
Tim Bei: Good afternoon, and thank you for joining us for Rivian's fourth quarter 2022 earnings call. Joining us on today's call, we have RJ Scaringe, our Founder, Chairman and Chief Executive Officer; and Claire McDonough, our Chief Financial Officer. A copy of today's shareholder letter is available on our Investor Relations website. Before we begin, I would like to remind you that during the course of this conference call, our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities laws, including, without limitation, statements regarding our market opportunity; industry trends; business operations; strategy and goals; our production ramp and manufacturing capacity expansion; our future products and product enhancements, including R2; and our expectations regarding vehicle production and deliveries. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties in associated with our business, which 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 today's 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: Thanks, Tim. Hello, everyone, and thank you for joining us. 2022 is a transformational year for us. We fought through a difficult operating environment to ramp the R1T, the R1S and the EDV, with total production of 24,337 vehicles for the year. Beyond ramp, we focused our product teams on our next generation of in-vehicle technologies in the R2 platform. I want to thank our team, suppliers and partners for their grit and determination in helping Rivian achieve its targets. In the fourth quarter, we increased production over 10,000 units. This represents a 36% increase over the third quarter of 2022. We maintain a vehicle backlog that provides clear demand visibility well into 2024. We launched our Adventure Network, which gives customers a smoother charging experience. We expanded our service infrastructure to 28 physical service locations in addition to nearly 200 mobile service vans and we pushed a range of major software updates to our customers. Our core priorities for 2023 are ramping production of our R1 and RCV platforms, driving cost reductions, developing the R2 platform and its future technologies and delivering an outstanding end-to-end customer experience. In my role as CEO, my most important responsibility is to make sure we have the right leaders and the right organizational design in place to drive focus and execute on our priorities. It's great to see the very capable and experienced leaders we've added over the last year. Equally important to ramping production is our drive towards profitability. We are focused on reducing our bill of materials, conversion costs, logistics costs and overall operating expenses. Core to this is our close work with our supplier partners to lower our material costs through new engineering solutions as well as revisiting some of the customer and commercial negotiations that were agreed to years ago when Rivian was still in prelaunch. In support of these efforts, we held a Supplier Day at the end of 2022, where we hosted over 400 members of our supply chain at the plant to demonstrate the growth and the scale of what we're building. Our supplier partners are engaged and fully understand the benefits of us achieving profitability as quickly as possible. One of the enablers to reduce our material cost is the introduction of our future technologies. Earlier this month, we started producing saleable units of our in-house Enduro drive unit. Enduro is our single-motor drive unit, and in our commercial van platform, we use it in our front-drive application, and in the R1 platform, as a dual motor setup, we use it for all-wheel drive application. The Enduro drive units are also accompanied by our new lithium iron phosphate battery packs for our commercial van line. These LFP packs are ideally suited for commercial use cases due to their low cost and really the durability of this chemistry. Another important example of our technology development that I'm excited to introduce is the 390-mile R1S max pack variant. We begin deliveries on this vehicle this fall, and we expect high demand for this new offering. The R1S max pack will launch with the dual motor configuration, leveraging our Enduro drive unit, and will deliver 0 to 60 acceleration in around 3.5 seconds. And when we couple that with our full air suspension and electro hydraulic damping system, it will really deliver incredible on-road and off-road performance. The purpose of our investments in software, electronics, drive units and batteries is to improve performance and to create long-term structural cost advantages. These technologies will serve as the foundation for our R2 platform. Our production ramp and the introduction of multiple vehicle platforms has equipped our team with valuable manufacturing operations and product development experience in a short period of time. We're taking advantage of these learnings and are aggressively applying this experience to our first mass market vehicle, the R2 as well as to our new manufacturing facility in which we'll build the R2 located in Georgia with the goal of establishing a considerably lower cost structure. Speaking of R2, we're really at an exciting and defining moment for the program. We have members across our organization, from design to engineering to manufacturing, coming together to develop what we believe is a true category-defining platform. Over the next 6 months, we'll be finalizing the majority of the core engineering and sourcing decisions that will drive how the R2 product line is built and the speed at which we can ramp production to profitability. We spent years creating our brand and award-winning set of products that drive excitement and attract new customers to what we're doing. The validation received from our customers and media continues to be strong. In fact, the R1T received several new accolades, including being named Best Ownership Experience among Premium Battery Electric Vehicles by J.D. Power. In addition to its Editors' Choice award, the R1T was also included in Car and Driver's coveted 10Best award for 2023. And along with that, it was praised as being the best driving pickup Car and Driver has ever tested. In consumer reports, customer satisfaction survey, Rivian was rated among the highest across all categories with our R1T being the highest-rated truck. We've also received the highest safety rating of TOP SAFETY PICK+ from IIHS, and that's passing IIHS's new tougher standards for 2023 across all categories. On our go-to-market side of the business, which includes our customer engagement, service, delivery and demand generation teams, we've experienced rapid growth over the past year as we built the foundation for our end-to-end customer experience and software and service offerings. We need to execute against our robust customer backlog and remain focused on our customers as we scale our 150,000 units of annual capacity in Normal into ultimately multiple production plants around the world. The enthusiasm for our products and our brand, combined with the progress we're making on our future vehicles and technologies along with the strong team that we've built, gives me confidence in our ability to help drive the massive impact we need this planet and the transition to a carbon-free economy. With that, I'll pass the call over to Claire.
Claire McDonough: Thanks, RJ. I want to reinforce the important steps we took during 2022 to drive towards profitability. Our goal is to build Rivian for the long term, to build a company capable of adapting during good times as well as challenging ones. In the last year, we took intentional measures to focus our product portfolio and drive a lower cost structure. Operating expenses in the second half of 2022 fell 21% as compared to the first half of the year. For the full year 2022, operating expenses were in line with 2021 results, while we continue to invest in and scale our delivery and go-to-market operations and next-generation technologies. In addition, our team was able to reduce our capital expenditures for 2022 to $1.4 billion versus $1.8 billion in 2021 due to the fact that our equipment and facility costs were more highly concentrated leading into our start of production in Normal. We're encouraged by this progress and recognize there is an additional opportunity to drive greater efficiency. We are concentrating our investments and resources on growing the consumer business while continuing to leverage our existing commercial platform. We believe these core aspects of our company represent the greatest levers to maximize our impact and drive attractive financial returns. I will now review our fourth quarter 2022 results. The last 12 months were characterized by economic uncertainty as well as significant supply chain volatility across the industry. By focusing on factors within our control, our team was able to achieve meaningful milestones. During the fourth quarter, we produced 10,020 vehicles and delivered 8,054 vehicles, which generated $663 million of revenue. We generated negative gross profit of $1 billion for the fourth quarter of 2022. Gross profit for the fourth quarter was impacted by a lower of cost or net realizable value, LCNRV, adjustment. As discussed in the past, the LCNRV adjustment breaks down the value of certain inventory and records losses on firm purchase commitments to the amount we anticipate receiving upon vehicle sale after considering the future costs necessary to ready the inventory for sale. As of December 31, 2022, LCNRV was $920 million as compared to $95 million as of December 31, 2021. These charges are expected to continue through 2023. However, as we reduced cost of goods sold per vehicle by lowering material production, logistics and other costs, we anticipate that the total charge will decline. We forecast reaching positive gross profit in 2024 and therefore expect by the end of 2024, we will no longer have material LCNRV inventory charges and losses on firm purchase commitments associated with the production at our Normal plant. In addition to LCNRV, there were factors which negatively impacted our cost of goods sold that we do not believe are reflective of our long-term cost structure. The most significant driver continues to be our production levels. Producing highly vertically integrated vehicles at low volumes on lines designed for higher volumes means we currently carry more overhead per vehicle produced. This impact has and will continue to be magnified during the ramp of our second shift in production as we introduce new technologies like our LFP battery pack and Enduro motor, for which we stopped the commercial production line for the majority of the first quarter of 2023. Additionally, because we are in an LCNRV position, we do not fully capitalize our logistics and conversion costs into inventory, which can lead to volatility in our cost of goods sold based on the amount of inbound materials we received in a particular quarter or the difference between our vehicle production and deliveries as we saw in Q4 2022. Operating expenses in the fourth quarter of 2022 fell $1.3 billion as compared to the same period last year. Approximately $1.1 billion of this difference was due to higher noncash expenses in the fourth quarter of 2021, including a donation to Forever by Rivian and stock-based compensation in conjunction with the IPO. The remaining reduction of approximately $200 million was due to lower cash expenses associated with the operations of our business. We continue to prioritize investments in our core in-vehicle technologies and customer experience while also driving additional focus and cost optimization across the business. Our adjusted EBITDA for the fourth quarter of 2022 was negative $1.5 billion, which compares to negative $1.1 billion for the fourth quarter of 2021. We ended the fourth quarter of 2022 with $12 billion in cash, cash equivalents and restricted cash. This excludes the capacity under our $750 million asset-based revolving credit facility. We continue to monitor the economic environment and believe we have a high level of flexibility regarding the cadence of our growth investments. I want to take this opportunity to highlight important operational changes we're making in Normal. In addition to the commercial van line shutdown during the first quarter of 2023 which we expect to result in a drop in overall production and deliveries relative to Q4 2022, we also expect to be taking both the R1 and EDV production lines down for a week during the fourth quarter of 2023 to prepare for a capacity change which will happen in 2024. In the first half of 2024, we intend to take production of the plant down for a few weeks to implement new technologies into our vehicles and shift the overall capacity of the plant to be about 55% R1. While the incorporation of these new technologies temporarily impacts production, they are expected to provide improved vehicle performance and range and deliver cost reductions that are critically important to our path to profitability. Now turning to our 2023 outlook. We are guiding to 50,000 vehicles produced for the year. This represents a doubling of year-over-year production while also accounting for the risks and uncertainties associated with the supply chain and integration of our new technologies. We expect the ramp of our second shift for the R1 line to continue to progress through the first quarter. We expect full year production to be back-end weighted due to supply constraints we believe will alleviate in the second half of the year and the commercial line downtime we're taking in Q1 2023. During 2023, our gross margin is expected to remain negative, but we anticipate improving on a dollar basis for the year as we reduce our cost of goods sold per vehicle produced, improve our average selling prices per vehicle and begin to see our LCNRV charge decline. For 2023, total operating expenses are expected to modestly increase as compared to 2022. As a result of these factors, adjusted EBITDA is expected to be negative $4.3 billion in 2023, an improvement of $900 million versus 2022. We continue to rationalize our capital expenditures due to a greater focus on our core business. Capital expenditures in 2023 are expected to be $2 billion driven by additional investment in our Normal and Georgia facilities, next generation technologies and the continued build out of our go-to-market operations. In addition to our 2023 guidance, I wanted to address the capital needs of the business over the medium term. The largest lever in our forecast is the swing from negative $1 billion of gross profit in Q4 2022 to a step change in positive gross margin in 2024. There are 3 key levers that enable this improvement. First, the most impactful driver is the per-unit reduction of labor overhead and ramp expenses as our large-scale plant produces a greater number of units. With the addition of our second shift, the plant in Normal is currently staffed to produce a significantly higher number of units than our current run rate. For context, these expenses represent 2/3 of the bridge from our current COGS per unit to what we expect by the end of 2024. The second area is our material costs. We have a detailed road map of both engineering and commercial cost downs. As RJ mentioned, our recent Supplier Day demonstrated the win-win opportunity for our suppliers to participate in Rivian's growth. The final bucket is price. The implementation of our reservation system in early 2022 provides us the pricing flexibility to accommodate the introduction of new products, technologies and inflationary pressures. While most of our deliveries today are based on pre-March 1, 2022 pricing, we expect to see a meaningful step change in average selling price over the next 2 years as we introduce new higher-priced variants as well as move to our post March 1 preorders. In addition to the gross profit improvements I outlined, we expect to see significant leverage of our operating expenses over this period as we leverage our R&D and SG&A expenses over a much larger sales base. We also anticipate being able to maintain our capital expenditures in the low $2 billion area over this time frame. Our objective continues to be driving towards profitability and our prudent deployment of capital. From a cash burn perspective, we expect 2024 to improve versus 2023 by approximately 40%, enabled by the step change we see in gross profit. In 2025, we expect our cash burn to improve meaningfully versus 2024 as we have a full year of production at our new price points and the incorporation of our next generation technologies. We remain confident that our cash and cash equivalents can fund our operations through 2025. We continue to evaluate a variety of capital markets available to Rivian ranging across the capital structure. We plan to employ a portfolio-based approach as we look to maintain a strong balance sheet position. In closing, I want to reiterate our confidence in our long-term financial targets. We see a clear path to our approximately 25% gross margin target, high teens EBITDA margin target and approximately 10% free cash flow target. With that, let me turn the call back to the operator to open the line for Q&A.
Operator: [Operator Instructions]. Our first question comes from the line of Rod Lache with Wolfe Research.
Operator: Our next question comes from the line of John Murphy with Bank of America.
Operator: Our next question comes from the line of Doug Dutton with Evercore ISI.
Operator: Our next question comes from the line of Dan Levy with Barclays.
Operator: Our next question comes from the line of George Gianarikas with Canaccord Genuity.
Operator: Our next question comes from the line of Colin Langan with Wells Fargo.
Operator: Our next question comes from the line of Ryan Brinkman with JPMorgan.
Operator: Our last question comes from the line of Mark Delaney with Goldman Sachs.
Operator: Thank you. I would now like to turn the conference back over to RJ Scaringe for closing remarks.
Robert Scaringe: All right. Well, thank you, everyone, for joining the call, and thanks for the questions. As I said in my starting comments, we're really excited about what we see in front of us. 2022 was an important year for us. It was a critical year where we launched and ramped 3 different vehicles between the R1T, the R1S and the EDV platform. And as we look into this year, more than doubling the overall output, but importantly, getting a lot of customers or a lot of vehicles into a lot of customers' hands. We'll start to see a lot more of these on the roads, whether that's the commercial vans or the consumer vehicles, the R1T and the R1S. And as that ramp continues and as we start to see more and more of our vehicles on the road, as Claire and I both described, the core focus for us is driving cost down across the business. Some of that will happen naturally as volumes go up when we get the fixed cost leverage that Claire described in some detail, but that's also happening through the engineering changes we're making and this really heavy focus on the commercial relationship with all of our suppliers. So with that, we're very excited about the year ahead and looking forward to getting a lot more vehicles on the road and our path towards profitability. Thank you, everyone.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
