Rivian Automotive, Inc.

Good day. Thank you for standing by. Welcome to Rivian's third quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Tim Bates, Vice President of Investillations. Please go ahead.

Good afternoon, and thank you for joining us for Rivian's third quarter 2024 earnings call. Today, I'm joined by RJ Scurringe, our CEO and founder, Claire McDonough, our CFO, and Javier Varela, our Chief Operations Officer. 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 results 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 R.J., who will begin with a few opening remarks.

Thank you, Tim, and thank you all for joining us today. I'm going to start by talking about the R1 and specifically the Gen 2 ramp-up. First, the material costs progress we've made, as well as the efficiency improvements within the plant, are really important and critical for our long-term profitability of business. Those changes, and a lot of the changes that went into Gen 2, were focused on cost. But we also introduced hundreds of other design and engineering changes that enhanced the performance of the customer experience in the vehicle. And one of those is the introduction of a new variant, what we call our tri-motor. This puts a single motor in the front and two motors in the back. and it delivers really exceptional performance. Performance that's better than our first-generation quad, but with a much lower cost in terms of what it takes to manufacture it, and also with a substantial improvement to efficiency. And we're seeing a lot of excitement around the tri, and we're excited to also be bringing the quad to market, the updated quad, in 2025. Now, with that We had a bunch of suppliers we brought on with the Gen 2. Around 50% of the bill of materials by cost is with new suppliers or with new contracts. And with that, there's been some challenges. And those have really impacted this quarter. And this has been a tough quarter for us because of some of those supply chain or supply ramp challenges. And one of those suppliers in particular has limited our production quite substantially and we're working very, very hard to address that. This is one of our highest priorities in terms of the business. And we're seeing this as really a short-term issue, but it certainly introduced challenges, as we saw in Q3. Now, a lot of the learnings that went into the Gen 2 ramp-up, the design of the components, the design of the systems, are underpinning what's going into R2. And the R2 program is advancing. From a timing point of view, it's on track. And the product itself is really exciting. It's delivering a level of performance and capability in a package that really looks and feels like Rivian, but it's doing it at a substantial reduction in terms of its overall cost. And a key part of this isn't just the design of the components. It's also all the supplier relationships that we've grown and built through R1. And today, as it stands, we've sourced about 85% of the bill of materials on the R2 program. And that 85% that's been sourced is within our aggressive cost targets we've set for the program. And we've talked about these at our investor day. But this is overall going to be what allows us to reduce the cost of R2 relative to R1 on sort of a like-for-like basis in terms of content by about 45%. Beyond just the cost focus that's gone into R2, this is also a program that's really been architected around creating something that's special and unique in the marketplace. And really, our key objective is to make sure we can capture the same level of market share and excitement that we've done with R1, where R1's one of the strongest market share players for flagship vehicles over $70,000. And our hope and, of course, what we're targeting is to capture that same level of excitement, but at a price point starting at $45,000 with R2. The key to delivering all this is, of course, the launch of our plant and the production line here at Normal. And the expansions we're making to the facility are well underway. The grading work at the site level is essentially done. This positions us to start deliveries of R2 in the first half of 2026. And so the progress that's being driven into the plant, the learnings from R1, and of course the supply chain relationships we've established and the contracts we're putting in place are really critical for both delivering on the timing but also the aggressive cost targets we've set for this program. Now, we also announced today the sourcing of battery cells for the program. And we're using a cylindrical cell, a 4695 cell, so 46 millimeters in diameter, 95 millimeters tall. And that relationship with LG is something we've been working on for quite some time. And those cells go into a really uniquely designed pack where the modules and the pack, in conjunction with, of course, holding the cells, act as a core structural element of the vehicles. This is a structural battery pack where not just the structure of the pack is part of the body, but the top of the battery pack actually forms the floor of the vehicle. And so these are the types of decisions we're making across the R2 program to drive cost efficiency through part elimination or part consolidation, which is key for us delivering at the price point we've talked about with R2, but doing that with a healthy positive gross margin. Now, beyond body structure, battery sourcing, the vehicle architecture, some of the things we've talked about, one of the other really important elements of R2 is leveraging the electrical architecture, our topology VCUs, and the software stack we've developed, and put that into the Gen 2 of R1, is that that platform underpins R2. It's also core for our joint venture with Volkswagen. And the joint venture with Volkswagen continues to progress well. We remain really excited about this. Our teams are passionate about the impact we can drive through leveraging and seeing our technology make its way into so many different vehicles. We have a drivable demonstrator where we've put our hardware and our software into a Volkswagen Group product. And the investments from Volkswagen as part of this joint venture, which we've talked about in the past, these are really important for us. These allow us to not only fund the continued growth of Rivian and through the launch of R2 and Normal, but also allow us to launch our production plant in Georgia where that will not only produce R2, but other vehicles on this midsize platform. And ultimately, the capital we have plus the capital provided by the joint venture will take us through positive free cash flow. Now, I said it before, and I do want to end by just restating the importance of creating highly compelling product in driving the transition to electrification. We've seen that with R1. The R1S is the most popular SGV over $70,000 in California, and that's not just the most popular electric SGV. It's the most popular SGV sold in California. We're hoping to see that level of excitement continue and carry through with R2, as I said. And ultimately, that's what's going to help pull customers out of combustion vehicles, internal combustion vehicles, and then TVs, as the features and the capabilities of the vehicle being so exciting that it helps draw customers in. And so that's our focus. That's what has us incredibly optimistic around the future. And we'd like to thank all those that continue to support this vision. This is our employees, our customers, partners, suppliers, of course, our communities, and lastly, our shareholders. So with that, I'll pass the call to Claire.

Thanks, RJ. During the third quarter of 2024, we made progress driving greater cost efficiency and validating the differentiated nature of our technology stack. During the third quarter, we produced 13,157 vehicles and delivered 10,018 vehicles, which represented the primary driver of the $874 million of revenue we generated. As mentioned on our second quarter earnings call, we expected Q3 deliveries to decrease on a sequential basis due to the reduced R1 inventory. We started the third quarter with low finished goods inventory of R1 due to the successful sell-down of our first-generation R1 vehicles in the second quarter. Demand for R1 vehicles was negatively impacted in the third quarter of 2024 by the production disruption and challenging consumer backdrop. The sequential production ramp following the plant retooling upgrade and the part shortage limited availability of specific R1 variants for sale in the third quarter. Total gross profit was negative $392 million. Our gross loss per vehicle delivered was approximately $39,100, which includes $18,600 of depreciation and amortization expense and $600 of stock-based compensation expense. In addition, we incurred approximately $3,700 per vehicle delivered in the quarter related to our cost of revenue efficiency initiatives which we do not anticipate being part of our long-term normalized cost structure. The introduction of the second generation R1 platform, combined with the commercial cost improvements and commodity tailwinds, are expected to enable a 20% material cost reduction when comparing an R1 dual motor with large pack produced in Q1 2024 versus Q4 2024. Importantly, in the third quarter, we saw a meaningful reduction in our second generation R1 material cost as compared to our first generation. This is in line with our target and we expect to see this continue into the fourth quarter. We remain focused on driving greater cost efficiency throughout the company and continue to see this result in lower operating expenses. Our gap operating expenses in the third quarter were $777 million. which is the lowest level we've had in three years and a reflection of the cost savings initiatives we've put in place. We are reaffirming our annual production guidance of 47,000 to 49,000 vehicles. We expect to increase our tri-motor and commercial van production and deliveries in the fourth quarter as those variants only require one enduro motor. I want to emphasize we believe this is a short-term obstacle. We are reaffirming our annual delivery outlook of low single-digit growth as compared to 2023, which reflects a range of 50,500 to 52,000 vehicles. We expect to have a modest GAAP gross profit in the fourth quarter of 2024. This is supported by three key drivers. First, revenue per unit is expected to increase, driven by an increase in non-vehicle revenues such as regulatory credits, service, remarketing, software, and other services. We now expect to have a total of approximately $300 million of regulatory credit sales in 2024. We also expect to see an increase in the R1 average selling price as we improve our sales mix with more meaningful tri-motor sales in Q4. Secondly, as part of the transition to our second generation R1 vehicles, we are seeing an improvement in material costs due to the design changes, supplier commercial negotiations, and lower raw material costs. We also expect the increased mix of EDV sales in the fourth quarter will also help drive down our variable cost per unit delivered. Lastly, based on changes to the design of our vehicles, improvements in the manufacturing process, and depreciation of our initial vehicle tooling, we expect to reduce our fixed cost per vehicle delivered in the fourth quarter. We also expect LCNRV and firm purchase commitment balances to continue to decline in the fourth quarter. The new technology introduced into R1 were strategically designed to benefit R2 in the long term. In addition, building the R2 in normal first allows us to best leverage our operations leadership team and existing manufacturing and logistics operations and overhead costs. Because of these benefits, in addition to the significant progress we've made sourcing R2, we anticipate R2 as having a much faster path to profitability as compared to R1. While we continue to make progress on R1 cost structure in the near term, our team is focused on addressing the component shortage impacting our ability to produce enduro motors. Due to the lack of fixed cost absorption associated with the lower 2024 volumes, We are revising guidance for our 2024 annual adjusted EBITDA to between $2.825 billion loss to a $2.875 billion loss. CapEx guidance for 2024 is unchanged at $1.2 billion. Looking ahead, we are excited about the significant opportunity of our joint venture with Volkswagen Group. As RJ mentioned, the proceeds we anticipate receiving following the formation of the joint venture and certain milestones together with our $6.7 billion of cash, cash equivalents, and short-term investments are expected to fund Rivian's capital roadmap for growth with the ramp of R2 and normal and build out of R2 and additional variance in Georgia, taking Rivian to free cash flow positive. We are excited to share the cost savings potential, milestones, and other benefits upon closing, which we expect to happen this quarter. I wanted to again thank our team, partners, customers, suppliers, and shareholders for their tremendous support. With that, let me turn the call back over to the operator to open the line for Q&A.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question simply, press star 11 again. In the consideration of time, please limit yourself to one question and one follow-up. please stand by while we compile the Q&A roster. Now, first question, coming from the lineup, Manuel Vassa with Woof Research. Your line is now open.

Thank you so much. My first question is around the improvements in the gross profit and, you know, implications for the unit economics on R1. Obviously, you expect a fairly meaningful amount of red credits in the fourth quarter, and then it's a modest gross profit. So I would assume without it, it's still somewhat unprofitable. But can you maybe comment on where you are in the path of improvement in unit economics? How should we think about it in terms of how much does a fourth quarter mean for how do we think about it for 2025 and which other levers you have to keep improving in place?

Sure. Thanks, Emmanuel. As you noted, one of the primary drivers of the improvement that we anticipate seeing in our gross profit as we drive to Q4 positive gross profitability is the growth in revenue per unit. And so that's been driven by both the $300 million that I talked about in terms of regulatory credit sales that we anticipate achieving throughout the course of this year and as well as some of the improvements that we'll see in our average selling prices. As we translate that into 2025 as well as on a revenue per delivered unit, in 2025 we'll also be launching our quad motor offering as well. So that will also be a tailwind as we think about overall ASP increase catalyst for the business as a whole. So that'll be another driver as we think about the go forward progression. The next piece is we looked at the variable cost per unit improvement. While we'll continue to see progress in our reduction in material costs from Q3 into Q4, we'll continue to see tailwinds as well as we work our way into 2025. We still have meaningful commodity cost improvements that are still yet to be achieved. And then we've seen and continue to see the R2 sourcing process as another tailwind for us as we look ahead. to continued improvements, especially from a commercial cost down standpoint from a variable cost per unit. The last piece is as we look at overall fixed cost per unit dynamics, clearly the reduction in our production guidance for this year did have an impact on the progress in this category in particular, but we've seen additional operational efficiencies that we're driving within our production plant through the pivot to our Generation 2 R1 vehicles as a whole. And then we'll continue to see, both in the fourth quarter and in 2025, a step down in our depreciation expenses on aggregate as well, given we're now three years into production and we've largely depreciated the majority of our initial tooling from our starter production standpoint as well.

Okay, that's a lot of great thoughts. Just maybe my follow-up would be then, based on all these factors, would you expect 2025 gross profit to also be positive? And can you give us some sort of indication of how to think about direct credits for 2025? Sure.

Our goal remains that we are trying to target a positive gross profit for 2025. I will say that we're operating today in a fluid environment and we'll provide additional details on that outlook for 2025 on our Q4 earnings call when we'll provide our more formalized guidance for the full year as a whole. As it pertains to regulatory credits, we do have visibility into future opportunities for the sale of our credits into next year. And would it expect them to be in line with what we've seen here for 2024 as a whole?

Thank you.

Thank you. Now our next question, coming from the lineup, Adam Jonas with Morgan Stanley. Your line is now open.

Thanks, everybody. So you highlighted a challenging consumer environment. Just wanted to drill in on that. Can you remind us what percentage of your volume in the quarter is pre-ordered versus sold out of a dealer inventory and how is that changing? And I'd also be curious, given events of this week, if you could remind us, what portion of your sales are the customers who realize a full $7,500 tax credit and also what percentage of your sales are leased? And can you confirm how Rivian is, you know, that Rivian is not taking any direct residual value exposure related to those leases? Thanks.

Sure, Adam. As we think, maybe I'll take the second part of your question first on leasing. Overall lease penetration was 42% within the quarter. Chase is our lease partner, and Rivian, together with Chase, shares in the residual values of the vehicles that we have as part of that leasing program. And it's something we utilize in third parties to mark the residual values that we anticipate achieving, and it's something that our team studies carefully and on a monthly and quarterly basis as we adjust our reserve levels accordingly to what we're seeing in the broader market backdrop as a whole. As we think about the overall mix of volume from pre-orders, in Q3, we had the end of our early pre-order pricing volumes as a whole. So we did see an uptick overall in terms of consumers that were those early customers that were utilizing that early lower pricing to their benefit as they purchase a Gen 1 or the remainder of Gen 1 vehicles as a whole in Q3. And then in terms of the percentage of sales that receives the $7,500 credit, it's largely our population of lease consumers that are able to take advantage of that credit, given the price point of our vehicles and the overall income levels most of our customers don't qualify on a financed or cash purchase.

Thanks, Claire.

Thank you. And our next question coming from the line of Dan Levy with Barclays. Yolanda's now open.

Hi. Good evening. Thank you for taking the question. I want to start and just follow up maybe a bit on Emmanuel's question. And just to decompose the third quarter COGS per unit, it was roughly $127,000 if you backed out the cost of revenue initiatives. But recognizing that there were inefficiencies on the volume, on the supplier side, maybe what is a more clean way to look at your current COGS per unit? And then into 2025, you know, if you could maybe just decompose some of the pieces on the COGS per unit that get better, and specifically the cadence of material cost benefits, you know, how that layers in.

Thanks, Dan, for the question. Yeah, this is, of course, something we spend a tremendous amount of time focusing on. And, you know, third quarter was – it's a hard quarter to look through all the noise with – ramp up and bring up of our Gen 2 platform, as Claire said, a number of supply relationships that, you know, either changed or were ended and replaced with new supply relationships. As I said, we replaced about 50% of the bill of materials as measured by cost. And then, of course, the supply interruption that did halt production for some time and overall lowered the amount of vehicles we were able to produce in a quarter had some impacts So you look through all that noise, and I think the important thing to note is if you were to look at material costs in this quarter, in Q4, and you were to compare that to our material costs in the vehicle in Q1 of this year, the Q4 material cost is going to be 20%. We project to be 20% lower than what we saw in Q1. So we're making real meaningful progress in terms of lowering our bill of materials, lowering our cost structure. And in a similar fashion, we're also driving efficiency into how we're running the plant. So the hours per unit that we build is coming down. We're driving more quality into the vehicles. So just the flow of the plant is running smoother. But it's really hard to see through all the different elements that made up Q3. And so we actually talked about this a lot. How do we communicate the progress we're making despite the fact that Q3 makes it hard to see? And I think, you know, in short, one of the most important things to call out here is that we're continuing to guide on Q4 to a positive gross margin overall. With that said, I do want to just invite Javier to have a few comments here. He's joined the team now for a couple of months. Him and I, along with the rest of the leadership team, have been working really closely together, not just on the production of R1 and the continued progress towards positive margin there, but very importantly, on the R2 program, and that's both in terms of the plant but also the supply chain.

Thank you, RJ. Indeed, it's a big focus currently is in improving performance, implementing lean acceleration, if I may call it that way, compressing the value streams, empowering the shop, so unleashing the potential of all our members, team leaders, group leaders, We have started recently with very promising results and really was visiting the line this morning and I'm very pleased to see how people are engaged in improving performance. We are as well robustifying our Rivian industrial operating system or integrated operating system, all our lean principles and again accelerating their implementation and when it comes to the way of working in the teams enhancing an end-to-end cross-functional view and collaboration. The big priorities for that performance is improving in the short term those results, but what's more important is to prepare the plant for landing R2 appropriately at the right levels of quality, cost, and with the right delivery times.

Great. That's helpful.

And if you could remind us on the benefits actually from stronger operations in 25, you know, how much runway there is to drive the COGS per unit down.

Sure, as we think about 2025, one of the core benefits that we'll have is having the Gen 2 in production for the entirety of the year relative to what we had over the course of 2024. And as RJ alluded to, 2024 is also a little bit noisy just given the shutdown that we had to introduce the Gen 2 into the line and ramp up from our production standpoint. So as we look ahead, Javier and team now have the opportunity to really drive many of those core lean manufacturing principles to drive an overall focus around operational efficiency within our manufacturing facility here in normal and ensure we're ready for R2, which is coming next in 2026. We will still have a shutdown as part of our production cadence in 2025. That'll be in the second half of the year, just over a month of shutdown there to do a number of work and a lot of work on many of the shared shops and specifically our paint shop to make sure that we're ready for our tooth starter production.

Thank you. If I could just squeeze in one more. On Volkswagen, you know, we've seen the Scout announcement and it's using the joint electrical architecture. Maybe you could just, and I know we're waiting for the JV to be closed, but remind us,

of where the collaboration currently stands.

As I said, we're excited about our partnership with Volkswagen and looking forward to being able to support developing really compelling products across a portfolio of brands and markets. Uh, as it stands today, we've, we've built, uh, a demonstrator essentially that, that is a driving vehicle that utilizes our electrical architecture, our ECU topology, our software stack. Uh, and it's incredibly encouraging and exciting to our teams on, on both the Rivian side and the Volkswagen group side. And, um, you know, the, in terms of which products our technology is going to go into and what cadence that's not been announced yet. Uh, but of course the nature of the deal and the scale of this partnership in this deal. is such that our technology would be seen across many different products and brands within the Volkswagen Group family.

Thank you. And our next question coming from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Yes, good afternoon. Thanks very much for taking my question. I think 2024 production guidance implies that production in the fourth quarter will be a little over 11,000 units or roughly 865 vehicles per week. Maybe you can help us better understand where Rivian currently stands, and I ask to better contextualize where you stand with the supply constraint with the Endura motor.

Thank you, Mark, for your question. We have been working in the last weeks with that specific constraint. I would say that it's a short-term constraint. And the teams have demonstrated a great, enormous sense of urgency, gathering together with the supplier, working cross-functionally, constrained teams on site. And what's more important is that we are now ramping up a new capacity in record time. Last weeks have been very promising, and we see that we are in the right trend to recover the right capacity. Really, really promising. So we think that that problem, or I think, really think that that problem will be over in the very next weeks.

Thank you for that color. My second question was around the regulatory credits. Claire, you said you now expect $300 million for this year. I had thought it was closer to $200 million as an outlook for 2024. Maybe help us better understand what's leading to the upside relative to the prior view. Thank you.

Sure, Mark. As we've gone throughout the course of this year, we have seen an increase in the underlying value of the regulatory credits that we've been selling to many of the OEM counterparties across the board, as well as the opportunity to sell deeper into the overall red credit areas of focus for our core team. This is a highly complex, you know, puzzle as our team, you know, manages our credit portfolio relative to the needs of other OEMs on a, you know, state by state, you know, basis as a whole. And so this is just a demonstration of the progress that our team has been able to make to achieve this great outcome of being able to bring in $300 million of value to Rivian through the sale of these regulatory credits.

Thank you. Our next question coming from the line of Joseph Black with UBS. Your line is now open.

Thank you very much. Claire, you know, just in talking about 2025 a little bit, a couple times on this call, and you mentioned still that gross profit positive target. You, again, just sort of mentioned some downtime later in the year. So just to be clear, when you say gross profit positive, is that for the full year, at some point of the year? Is it like on the R1 vehicle, like X something for R2? And I guess just related to the regulatory credit question, like How do we think about the cadence of that? Like, do you have any recourse in when you recognize that revenue?

Sure, Joe. As we look at 2025 overall, as you roughly pointed out, we will have quarterly impacts. So we don't expect that every quarter in 2025 will be positive gross profit in its own right. Our target is to be positive for the year in its entirety. And so as we think about some of the relative impacts that we'll have next year as a whole, some of that will be driven by the lumpiness of the recognition of our regulatory credits as well that are certainly an enabler of that path to positive gross profit in 2025 in aggregate. And so as we look out into the future, we do have an understanding of timing needs of many of the counterparties that we're working with. In some cases, the timing of regulatory credit recognition is related to government agencies as well. So some of it is a little bit up for understanding the exact timelines that will achieve it. But that's our current view as we think about the overall cadence of recognition of those credits.

But just at a high level, excluding maybe some of the agency stuff, you recognize revenue when someone buys it from you. You can't recognize it on an agreement to buy it from you.

Right. It's not on an agreement. It's when we transfer the credits to that counterparty.

Okay. The second question, I apologize. I joined a little late, right, as you were saying this, but I thought I heard you say van production will be up in the fourth quarter. Is that deliveries too, or are you building some inventory maybe in advance of some actions next year? Because I thought in the past you had mentioned that Amazon doesn't really like to take a lot of vans in the fourth quarter. So did something change with the cadence there?

Yes, as I mentioned in my prepared remarks, we're increasing our production of both vans as well as tri-motors in the fourth quarter. So increasing production as well as deliveries of those units because both of those variants only require one enduro motor. And so from an operational efficiency standpoint, that was the best way for us to increase or maximize our overall production for the year in aggregate. So I would say we do certainly expect that there would be additional Amazon van sales in the fourth quarter of this year.

Thank you. And our next question coming from the lineup, Georgian Rikas with Canaccord Unity, Yolanda Selfin.

Hi, good afternoon, and thank you for taking my questions. I just want to piggyback on a previous question around the relationship with Volkswagen and the Scout vehicle. From what we understood about the relationship, it had to do with electrical and software, but car looks a lot like an r1 and so to what extent can we expect there to be sort of a similar lineup from volkswagen with regard to rivian and how closely will you be cooperating on aesthetics as well as engineering thank you thanks george the the joint venture uh what it encapsulates is uh electrical architecture

our ECUs and the software that's running on those ECUs. And it's really important to recognize that that doesn't mean the UI frameworks, the way the digital screens inside the vehicle look, the number of screens, the shape of the screens, but really the underlying software. And that's going to, you know, that platform, our platform is going to be used across a wide range of products and brands. And each of those products and brands will have decisions around what the vehicle itself looks like, which of course doesn't link to the software, to the electronics, but also decisions around what the UI looks like inside the vehicle and their overall digital design and design framework. So with regards to our role in any design decisions, those decisions remain with the brands, of course, within Volkswagen Group.

Thank you. And maybe as a follow-up, just anything update on commercial vehicle traction in the marketplace and when we could expect additional customers to ramp volumes? Thank you very much.

Yes, we've said for a while now, the sales cycle on these larger commercial fleets takes some time. It's not just the purchase of the vehicles or the decision around vehicles, but it often means changes to the standard operating procedure for The fleet operator, it requires charging infrastructure, which often is not simple because the sites that they're operating out of may not have been designed for that level of power, that level of energy. And so with that said, we are starting to see the beginnings of the efforts that we've had over the last year to put those in place, and we'll start to see more of that in 2025. And this is a focus for the team. We're super excited about seeing our vans out in the world with different logos and different brands on them as different fleets start their journey towards electrification.

Thank you.

And our next question coming from the line of Tom Narion with RBC Capital. Your line is now open.

Hi. Thanks for taking the question. Sorry, one more on regulatory credit. So if I look at the Q3 gross profit at the negative 392, I believe the 300 million of that, I think 275 hits in Q4 alone. I think you did 25 year to date. That would imply like 117 million benefit in Q4. Volumes were depressed in Q3, so uh you know they're coming back in q4 that should be a benefit of a piece a big piece i would think of that 117 it just feels like the sequential bridge between q3 to q4 on cost improvement sequentially might not be as significant just be helpful claire to just see what the cost improvement piece of that bridge is if you could quantify that that'd be really helpful thanks

Sure, Tom. We don't give specifics, but as we think about the core drivers beyond the revenue-related ones that we talked about, there is going to be significant improvement in underlying average selling prices as we start to sell through additional tri-motors in the quarter. As I mentioned previously as well, we ended the pre-order holder early pricing And so that would be a natural boost overall as we think about more full price sales in the fourth quarter in aggregate. And then as we look at the underlying cost structure as a whole, embedded in our production guidance is slightly below our Q3 level as we think about the underlying fixed cost absorption. So where we're seeing the benefits there, as I mentioned, are really a step down in depreciation We also expect to see our LCNR V and firm purchase commitment levels coming down. And then we'll see continued progress on a variable cost per unit basis. So as RJ highlighted previously as well, there's a bit of noise that you see in the Q3 numbers. So Q4 will be more representative of our go forward, you know, launching off point into 2025 where we anticipate seeing, you know, further progress across you know, each of the three core drivers of revenue per unit, variable cost per unit, and fixed cost per unit improvements.

Got it. My follow-up, RJ, on the R2, I believe the $45,000 price variety is the one that's not the 300-mile range one. It might be below. You know, just wondering how competitive that would be, you know, a $45,000 under 300-mile range vehicle with the, in 2026, the competitive environment seems to be, you know, we have GM with the, you know, Equinox sub 30,000 with 300 plus miles of range. How does that compete? Is it a different demographic perhaps that makes it, you know, different features beyond just battery range? Just love to hear how the competitive environment, you know, shakes out with that product at that range, at that price. Thanks.

Yeah, thanks, Tom, for the question on R2. We love talking about R2. We're super excited about it. Just to clarify, the $45,000 starting price for R2 corresponds to a lower performance spec on the vehicle relative to what's possible at a platform level, but the range on that variant is still over 300 miles. So it's a 300-plus miles of range, but on a lower performance spec and with Some of the content levels on the interior are slightly different than the top spec variants. And we've spent a lot of time looking at this relative to what else is in the market. And one of the biggest unlocks, we believe, for overall demand of EVs and the path towards ultimately 100% of new vehicle sales being electric is the need for a lot of customer choice and a lot more choice than we have today. And there are very, very few compelling options in that sub $50,000 price range. And we believe R2 is going to be an important product for giving customers choice. That's a unique form factor, unique performance and brand and product attributes. And having spent a lot of time in and around the vehicle, I can say I've never been as excited for a product as I am for R2. Thank you.

And our next question, coming from the lineup, Jigsaw with BNP Paribas. The line is now open.

Hi, everybody. On the revenue per unit increase for the fourth quarter, I assume this excludes the $275 million in regulatory credits. Is the increase a year-over-year reference or compared to the first quarter, if you just remind us? Just to echo, you know, maybe part of Adam's first question, what's the level of visibility in your order book for such a sizable ASP step-up? And would the increase in EDV deliveries for the fourth quarter, you know, weigh on your ASP? So, if you could help to mention what that EDV growth is, you know, might look like and, you know, whether sequentially or year-over-year, that'd be great as well. Thanks.

Sure. As we think about the revenue per unit increase in the fourth quarter, As you rightfully called out, we see an increase in R1's average selling price, which is partially offset by an increase in the sale of commercial vans in the fourth quarter. Those comments are relative to what we experienced in the third quarter of this year as a whole. And I would say as we look back to last year in aggregate, In Q4, you did see a much lower, you know, sort of 8% of revenue being represented by commercial vans. We'll see that just over, you know, about closer to the 25% level in Q4 of this year in aggregate. So there will certainly be some puts and takes there, but that's really the foundational drivers as we think about overall ASP. But on a blended average unit, we'll still see relative to Q3 and increase from an average selling price standpoint.

Got it. Super helpful. And then just for the... Go ahead. Do you have anything else to say?

No, I was just going to comment a little bit on order bank or order book visibility as a whole. Our teams, from a go-to-market standpoint, are continuing to drive... and push for more consumers to get behind the wheel of our vehicles. We saw that demonstrated by the 20% increase in our demo drives that we had in Q3 relative to Q2 levels. And we're continuing to drive brand awareness as a whole to build up more and more interest in Rivian and have that interest translate into orders.

Thank you.

And then just on the VW-JV, is it expected to close before year-end? My apologies if I missed confirmation or clarity on that. And just associated with the JV, I believe there were going to be certain milestone achievements associated with VW's additional funding tranches. So can you provide any color at all on just what the context of those milestones might entail? Thanks.

Hi, Jake. The Volkswagen joint venture, we expect it to fully close certainly before the end of Q4. A lot of the work that's gone into defining such a significant and scaled partnership has played out over the last few months. Part of that is some of the KPIs, if you will, of the targets that we're setting for ourselves. We've worked really closely with with the team at Volkswagen Group to define those and we're very comfortable with those in terms of milestones that unlock certain portions of the financing associated with the deal.

Thank you. And our next question coming from the line of Edison Yu with Deutsche Bank. Your line is now open.

Hi, thank you so much. This is Winnie Dong for Edison. You guys have mentioned that, you know, 85% of the sourcing of all two bonds is already done. Could the potential tariff that, you know, take place under the administration play a role in the cost target? Or have you sort of designed the sourcing such that it, you know, wouldn't matter which administration wins the election capacity?

The R2 sourcing process is something we've looked at very strategically and certainly have contemplated even prior to the election, just what the impact would be should the overall approach to tariffs change. And so a lot of our focus has been on sourcing suppliers that are not going to be subject to large tariffs and in places where we have source suppliers that are overseas that could be subject to changes in tariff structure, designed the contracts and designed the relationships in such a way that we're not carrying much of the risk. Now, with that said, there's a lot of policy elements here that are in play and we're watching it very closely. I think what's going to be interesting is how far this reaches into the upstream supply chain. So as we think about raw materials, that's something that every manufacturer, certainly ourselves included, are thinking about.

That's very helpful. And then I think in Q3, we did see sort of like an annual decline in OPEX sequentially. Can you remind us if there was any sort of extra reductions that went through versus initial expectation and then how sustainable that is and how we should be thinking about that for 2025?

Sure. As we think about the underlying reductions that we've seen in our cash operating expenses, we were able to bring that level to about $599 million for Q3, which is a significant step down from where we were in the first half of the year. We've talked about the second half as being lower than the first half in aggregate, which will unlock our ability to be able to have lower cash operating expenses in 2024 relative to what we had in 2023. And this is the collective efforts of many members of the Rivian team across the company continuing to focus on driving efficiency so that we can strategically invest in the most critical areas of the business as we think about many of our differentiated technology investments, as we think about the continued rollout of our service centers and spaces to support our go-to-market efforts and strategy. And so very much proud of the work that our team has done to enable this level of improvement. We do expect, as we look to Q4, that we will see an uptick in terms of our spend. That's really driven by additional R2-related spend that we'll begin to see from an R&D standpoint, and then the ongoing build-out of our go-to-market strategy, which will have some limited growth in our SG&A line as well.

Thank you. And our next question coming from the lineup, Alex Potter with Piper Sandler. Your line is now open.

Perfect. Thanks. So I had a question on the Volkswagen relationship. There's obviously been, I don't know, a fair amount of intrigue in the media regarding headcount reductions and restructuring and plant closures and things going on at Volkswagen. And I just wanted to I guess, get some clarity on whether any of the teams that you've been working with may or may not be impacted. I don't know, obviously, you maybe can't put words in their mouth, but has this impacted you in any way, or are there ways that it could potentially impact you, you know, looking ahead?

Alex, thanks for the question. The nature of what we're building today with our Volkswagen relationship and the partnership that's been designed, provides a really efficient way for them to deploy advanced technology. So it's a zonal architecture, which brings massive consolidation to the ECU topology, dramatically simplifies not only the software architecture, but also the electrical architecture as it pertains to the vehicle harness as well. So ultimately, this is just as it is within Rivian. This is going to drive structural cost advantages into the business. And this is, I think, a core reason as to why this partnership and this deal has happened. So I think in the context of driving greater efficiency into their business, what we're building with the joint venture absolutely aligns with that and is really important for not only creating products that are really compelling to customers, but to to create those products in ways that are highly cost efficient.

Okay, very good.

And then maybe lastly, there was a fair amount of verbiage in the shareholder letter on Connect Plus streaming apps and things of this nature. I mean, it sounds sort of compelling. It sounds like the take rates are pretty high among people who have been trying it. Is this something that you know, is modelable, something that investors should be including in their own forecasting, or, you know, is it not quite material enough to call that out?

Thanks.

Yeah, this is sort of one of the big questions, I think, being asked broadly around automotive industry is, you know, to what level do future services show up as recurring revenue or do they show up first, you know, price on the front end? And, you know, in this case, the Connect Plus, what that's, you know, that's relating to is there is a variable cost associated with providing the services. So the data costs to, let's say, stream music or to have a Wi-Fi hotspot are non-zero. And so this reflects us capturing that in a bundled package that brings along with it not just the price that covers the cost for us to be providing the connectivity, but also some additional features. And, you know, we're watching this very closely and in particular thinking about it in the context of the, the growth of our autonomous platform and what that provides in terms of new features, new capabilities and how to appropriately charge for that. And I think it's too early to tell, uh, for us as an industry, to say whether customers are going to prefer to pay for things up front or whether they'll like to pay for them over time. And the way we've at least modeled it internally is we've looked at the likely existence of both models, where you'll have some customers that prefer to pay up front and others that would rather pay on a more variabilized basis. And we sort of look at it with some indifference, meaning ultimately it's going to get captured in the price of the vehicle, but it can be captured in all three different ways.

Thank you. One moment for our next question. And our next question coming from the line up. Mike with DA Davidson. Your line is now open.

Yes, hi. Thanks for taking my question. I guess given some of the challenges you mentioned, the consumer challenges you had mentioned earlier just with some of the demand impacts that that's been having, I've heard about these kind of new variants that might have higher price, and you've got a higher price assumption in the fourth quarter. But I'm curious if you're seeing on a like-for-like basis when people are making orders, are they trying to look at cheaper options or maybe fewer features? Has that been a trend at all?

It's important to recognize there's really a broad spectrum of customers. And because of that, we've launched now three different powertrain configurations. So we have a dual motor, a tri-motor, and in 2025, we'll be launching our updates to the quad motor. And then we have a couple of different battery pack sizes. We have a standard of large and what we call our max pack. And effectively, that's us... trying to populate the demand curve where we know some customers have a want, you know, the best thing they can possibly buy. So they're willing to pay to get the two and a half seconds, zero to 60 and 400 miles of range. And others are going to be more price sensitive. I think what, what Claire's referring to and what we're excited about is just the level of customer excitement we're seeing for, for the try and for our quad. And that of course is, is positive for us from a margin point of view. But these are hard things, you know, you can imagine we tried to model this, predict this, and these are hard things to accurately predict and to now have the try on the market and to see how customers are reacting to it, see the, you know, when we put a tri-motor variant into our shop, how quickly, you know, it's there for, you know, but a moment, it disappears very quickly. The level of excitement and demand for that vehicle is high. And so thinking or looking into 2025, The, our next generation quad motor vehicle is really, I mean, it's just exceptional. It's, uh, the first gen quad was great, but this is a whole nother level. It's, you know, it's a vehicle that can do the quarter mile in less than 10 and a half seconds. It's incredibly smooth and refined. It can go into almost any imaginable off-road environment. Um, and you can use it as an everyday driver, uh, while in conserve mode, getting close to 40 miles of range. So it's just a very unique combination of attributes. And of course, it'll be priced as such and therefore drive a healthy margin to the business. So this is the reason we have this different topology of motor battery combination and trim combinations to allow us to sell into multiple different customer types.

Thank you. And I'm showing up for the questions. I will now turn the call back over to RJ Scourge for any closing remarks.

Thanks, everybody, for joining us on the call today. As you heard me say in our opening remarks, this is a challenging quarter with some of the production interruptions we had around supply and some of the nuanced complexities associated with transitioning into the Gen 2 vehicle and ramping our Gen 2 R1. But we are incredibly excited about what lies ahead, not just with Q4, but thinking into 2025 and, very importantly, into 2026. The excitement around the R2 program, both internally and externally, but from customers, but also just with the teams that are developing the product and preparing it for launches is contagious internally. And every time I'm in or around it, I think to myself, I wish this was available today. So we are fully embodying that and doing everything we can to get that vehicle to market, both on time, but as Javier said, also really excited about how we're maintaining the the program around its cost targets, which is such a significant focus for us with that program. And with that, it's exciting to have Javier join us on this call today. He's been a great partner to me as we're continuing to build Rivian for the next stage of growth and really focus on preparing ourselves for a significant ramp up in volume with R2 and along with that considerably lower cost to produce our vehicles. So with that, thanks everyone for joining the call and look forward to our next one.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.