Rivian Automotive, Inc. (RIVN) Q1 2024 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Rivian First Quarter 2024 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 host, Tim Bei, Vice President of Investor Relations. You may begin.

Good afternoon, and thank you for joining us for Rivian's First Quarter 2024 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.

Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments in the first quarter and provide an update on the expected progress we're making against our value drivers. First quarter results exceeded our outlook and set a strong foundation for the remainder of the year as we focus on continued demand generation, delivering cost and plant efficiency improvements, advancing R2 development and driving towards profitability. We continue to make strong progress across each of these goals. Before discussing key developments during the quarter, I want to congratulate the team on producing our 100,000th vehicle at our plant in Normal and successfully navigating our plant retooling upgrade. While we focus on the work ahead, it's incredible to see what our team has accomplished across our consumer and commercial vehicle platforms. I also want to highlight the uniqueness of what we're building at Rivian. We have developed a technology platform and brand that are truly differentiated. Our vertically integrated hardware and software capabilities enable continuous enhancements to the product. Our ability to improve and add features across autonomy, battery management, digital experience, body control, vehicle dynamics and telematics help deliver an elevated ownership experience for both our consumer and commercial offerings. We also recently transitioned to a new zonal network architecture, which reduced the number of electronic control units in our vehicle by approximately 60%, taking substantial costs out of our vehicles. The feedback on our products have been incredible. Since the start of production, we have introduced approximately 30 over-the-air updates and through an owner satisfaction survey conducted by Consumer Reports, Rivian was recognized as the #1 automotive brand with the highest likelihood for customers to purchase again. In launching the R1 platform, our goal is to create a brand that deeply resonates with customers. During the first quarter of 2024, Rivian was the fifth best-selling EV maker in the United States with a market share of 5.1%. Our vehicles have driven more than 900 million cumulative miles and our brand awareness and market position continues to grow. Additionally, the R1T is the only pickup in the United States to receive the Top Safety Pick+ award from the Insurance Institute for Highway Safety. Building on this, the results of our recently implemented demand generation and brand awareness strategies have been encouraging. We hosted over 28,000 demo drives in the first quarter of 2024, an increase of 90% versus the fourth quarter of 2023. We recently launched R1S leasing and grew the number of states with this offering. While the broader vehicle market is still experiencing challenges, we are encouraged by the early results of our initiatives and have confidence in our 2024 delivery outlook. In March, we unveiled our new midsize platform, which underpins the R2, R3 and R3X products. It's great to see the outstanding support for our brand and upcoming products. R2 is our versatile new midsize SUV with room for 5 people. It captures the essence of Rivian. It's built for adventures as well as everyday use with its exceptional utility, performance and capability. We expect the price to start at $45,000, with delivery slated to begin in the first half of 2026. R3 is our midsize crossover. This unique vehicle has tiny end dimensions, but delivers big in terms of performance, passenger comfort and storage. R3X is the performance variant of R3, offering even more dynamic abilities, both on- and off-road. R3 demonstrates the scalability of Rivian across different form factors and segments. It will be priced below R2 and deliveries will start after R2 to ensure a smooth launch and rapid ramp. With these new products, our goal is to take the desirability and brand strength we've established for our R1 products, with the R1S remaining the best-selling EV over $70,000 in the United States, and translate this strength to a much larger addressable market. Our midsize platform leverages key technologies developed for R1, including our in-house software, in-vehicle electronics, propulsion and battery technology and our high-voltage platforms, with a goal to deliver dramatically simplified and lower-cost vehicles relative to R1. Our massive focus on cost and efficient manufacturing for R2 and R3 is achieved by deeply analyzing every system and associated component and asking if it can be simplified or through opportunities for part consolidation or elimination. Use of large high-pressure die castings in the body structure; a structural battery pack whereby the top of battery is the floor of the vehicle; further simplification of the electrical system and associated wiring harness through a focus on electronic control unit design topology are just a few examples of how we're using innovation to drive down cost. Beyond engineering opportunities, when compared to R1, R2 also has significant cost opportunities through competitive sourcing. At the unveil of R2, we announced accelerating the start production in the first half of 2026 and reducing our capital needs for the launch of R2 by starting production of R2 in our Normal plant. This will provide flexibility to manufacture an estimated 215,000 total annual units per year, which includes up to 155,000 units of R2. Starting R2 production in Normal is expected to save over $2.25 billion between now and the start production as compared to the original plan of launching the first line of R2 production at Rivian's Georgia site. Incremental to the $2.25 billion in expected savings, we recently announced an incentive package from the State of Illinois with a value of up to $827 million. We're excited to grow our community in Normal and continue our partnership with the State of Illinois. And turning to our recent tooling upgrades in our Normal facility. The team made meaningful progress, and we're now back to producing R1 vehicles on our production line. The upgrade introduced new technologies and cost-focused material changes into the R1 vehicle platform. The plant retooling upgrade also provided the opportunity to improve manufacturing processes that enable the R1 line to run at approximately 30% higher line rate. And additionally, we improved the flow of materials and inventory within the plant. These changes are expected to improve cycle time, utilization and cost. The opportunity ahead is significant. We hold the deep conviction that the entire automotive industry will electrify over the long term. And we continue to take the necessary steps to best position Rivian as a leader in this transition. We look forward to sharing more details around our strategy, progress and outlook in late June when we host our Investor Day. I would like to thank all those who continue to support our vision, including employees, customers, partners, suppliers, communities and shareholders. With that, I'll pass the call to Claire.

Thanks, RJ. I want to start by reiterating the significant progress and strong results achieved during the first quarter. We exceeded our first quarter delivery outlook, successfully completed our plant retooling upgrade and are making progress on our path to profitability. During the first quarter, we produced 13,980 vehicles and delivered 13,588 vehicles, which represented the primary driver of the $1.2 billion of revenue we generated. Our first quarter results did not include any meaningful regulatory credit sales. Based on discussions with potential customers and executed contracts, we expect the sale of regulatory credits to increase in the second half of the year. Total gross profit for the quarter was negative $527 million. Our gross profit loss per vehicle delivered was approximately $39,000, which includes $15,500 of depreciation and $1,700 of stock-based compensation expense. Our results were negatively impacted by approximately $9,300 per vehicle delivered as part of our cost of revenue efficiency initiatives, which we don't anticipate to be part of our long-term cost structure. We continue to move closer to making money on every vehicle we sell. We expect to see meaningful improvement in our gross profit during the second half of this year and believe we will reach a positive gross profit for the fourth quarter. Our confidence is underpinned by the actions we have taken within our control. Specifically, we expect the recent completion of the tooling upgrade in Normal result in meaningful cost improvements in R1 and the manufacturing line. The upgrade includes the integration of R1 engineering design changes and newly negotiated supplier components that will drive significant cost reductions in our bill of materials. Additionally, fixed costs will benefit from improved manufacturing efficiencies, reduction in our loss reserve as well as a reduction in our depreciation expense as we fully depreciate our original tooling for R1 and RCV. Our adjusted EBITDA for the quarter was negative $798 million, which was in line with our expectations. During the first quarter, we experienced elevated cash usage in part due to increased accounts receivable and inventory balances. Consistent with our commentary on our fourth quarter 2023 earnings call, at the end of the first quarter, we had a few thousand vehicles which were built but not yet counted towards our production since they were awaiting parts. These work-in-progress vehicles impacted our first quarter inventory. However, they are now complete and will be counted in the second quarter production. Between this dynamic and our efforts to reduce our raw material inventory balances, we expect to generate a slight cash benefit from working capital for the year. Over the next 18 months, we plan to reduce our gross inventory balance by more than 25%, providing a significant working capital benefit. I want to take a moment to emphasize the significant steps being taken to drive greater capital efficiency throughout the business. These actions include starting production of R2 in Normal, driving material costs down, increasing manufacturing and production efficiency, reducing operating and capital expenditures and optimizing working capital. These actions are expected to extend our existing cash balance to fund operations through the launch of R2 in the first half of 2026. As RJ mentioned, our decision to launch R2 in Normal provides the plant with more flexibility and is expected to reduce our cash usage by over $2.25 billion through its launch in the first half of 2026. We anticipate that most of the work to integrate R2 into our Normal facility will happen in 2025. And as a result, the plant will be down for a few weeks next year. We recently completed the plant retooling upgrade in Normal. This is a pivotal step in driving greater efficiency through a reduction in variable and semi-fixed costs. We expect lower variable cost to be the largest driver of gross profit improvement in 2024. We're also beginning to see some of the benefits from R2 sourcing on R1 and EDV cost downs with strategic suppliers. We are making progress driving greater fixed cost efficiencies by transitioning to 2 shifts from 3 shifts on the R1 line. This is made possible by a planned 30% increase in line rate. On a 2-shift operation, annual R1 capacity will be approximately 56,000 units. While we don't expect to fully realize these benefits until the second half of 2024, we believe these changes position Rivian to exit 2024 with a much improved margin profile. In addition, since the beginning of the year, we've made meaningful progress optimizing operating expenses. We expect our adjusted operating expenses for the year to be down slightly as compared to 2023, with the second half operating expenses expected to be significantly below the first half. We believe this enables Rivian to start 2025 with a more efficient baseline cost structure. We are confident these changes best position Rivian to extend its cash runway, improve long-term profitability and gain market share. We believe that operating Normal at 215,000 units of annual production while executing against our cost efficiency road map will allow the business to generate positive free cash flow, excluding growth capital investments and new production capacity. Turning to our guidance. We are reiterating our 2024 production guidance of 57,000 vehicles. As RJ mentioned, we're encouraged by the early results of our go-to-market and brand awareness activities, which the team has put in place over the past quarter. And I have confidence that total deliveries for the year will grow by low single-digits for both R1 as well as our commercial vans as compared to 2023. We are also reiterating our 2024 adjusted EBITDA guidance of negative $2.7 billion. We continue to look for ways to rationalize our capital expenditures and due to the decision to move the first line of R2 production to Normal, we are reducing our 2024 CapEx guidance by $550 million to $1.2 billion. We expect the savings from this decision will also impact 2025 CapEx, which we expect to be approximately $1.5 billion. Additionally, we plan to receive approximately $100 million in cash proceeds from the State of Illinois this year to help fund our Normal plant expansion. Over the long term, we continue to 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. I want 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.

[Operator Instructions] Our first question comes from Mark Delaney with Goldman Sachs.

Claire, you said you have confidence that there could be some growth in deliveries this year, and you talked about some good traction that you've seen from some of the initiatives, including rolling out leasing to more states and also the new variants like Standard pack that have become available. Wonder if you could elaborate a bit more on some of those items and share what's giving you the confidence to guide for some modest delivery volume growth this year.

Thanks, Mark. As we think about our broader confidence around demand, it's really driven by some of the early results that we've seen from our go-to-market initiatives, including the launch of leasing. Q1 was the first quarter that we introduced leasing for R1S, and we've now been able to expand the number of states that we offer leasing up to 32 and we'll be adding that to north of 40 over the coming quarters as well. As evidenced by some of the inclusion on the 28,000 test drives that we've had over the course of this quarter, getting more customers into the driver seat has certainly been a compelling tactic for us as well. And then as you noted, the introduction of Standard pack and our ability to stretch the bottom end of the entry price point of the R1 product itself was another key initiative that we launched over the course of Q1. And I think the last but certainly not least was the opportunity that we had to grow broad-based brand awareness through the launch of the R2 reveal and R3 and R3X as well that generated significant interest in Rivian as a whole.

That's helpful. My next question was around the target to reach a positive gross profit in the fourth quarter of this year, which you reiterated today. Can you share a bit more on how the path is tracking in order to get to that level and to the extent it changed at all in terms of some of the key inputs needed to reach that relative to what you put in your 4Q '23 shareholder letter.

The largest driver for us in our path to positive gross profit remains the improvement in variable cost reduction. And within this category, it's predominantly driven by material cost reduction. In Q1, we saw material cost improvements for each of our vehicles, the R1T, the R1S and EDV. And we expect to see a step change in our R1 material costs driven by the introduction of engineering-driven design changes as well as cost-focused material changes that we've already negotiated with suppliers. We also expect to see commodity tailwinds in the second half of 2024 as well as the added benefit from R2 sourcing on our ongoing commercial cost downs. Next, turning to our semi-fixed costs. There are 2 key drivers for the improvement: the tooling upgrades we made in the Normal plant enable us the ability to increase our line rate by roughly 30%, which reduces our per-unit labor and overhead costs. And we also expect to see depreciation expense decline by Q4 as we fully depreciate some of our original tooling and moved past the accelerated depreciation we incurred in Q1. The final lever, as we've talked about in the past, is an increase in our revenue per delivered unit due to the increased sales of regulatory credits, software and services revenue as well as remarketing sales. So in summary, we have a detailed road map that we're executing against and continue to feel confident in our plan and our path to achieve positive gross profit in Q4 of this year.

Our next question comes from Adam Jonas with Morgan Stanley.

So RJ, I'm going to assume you're not going to comment on the widespread story today of a large maker of loans potentially collaborating with an electric vehicle start-up, unless you want to. But what would be in it for a player of that ilk work with you? Or let me put it this way, what would be worthwhile to Rivian to benefit from a player like that, that Amazon doesn't already strategically and technically provide support to you already? And I have a follow-up.

Thanks, Adam. Yes, we don't comment on market rumors or speculation. But as you alluded to, we have a history of partnership, and of course, Amazon, who's our largest shareholder today and a very close partner across a variety of avenues, has been really a foundational element of the business. They were core to launching the commercial arm of the business and today represent the vast majority of our commercial vehicle sales. But as we think about what we've built as a company, one of the core elements that makes this unique is just the level of vertical integration around our software and associated electronics platforms. So the ECUs in the vehicle and essentially the various computers across the vehicle and then the base software, the base operating system all the way up through the applications layer, creating those ourselves without the need to rely on Tier 1 suppliers gives us a lot of customer-facing strength but also creates opportunities for partnership certainly.

Just then as a follow-up to that, if I focused on your vehicles' ADAS and data collection capabilities, Driver+, 10 exterior cameras, 12 ultrasonic sensors, 5 radars. You got compute, you mentioned the vertical integrated, your custom ECUs and architecture. I think you -- your fleet drives more in 5 hours than Apple did in all of last year with their autonomous car program before it was canceled. And we're hearing from people in that field of ADAS and robotics that there's been a real revolution due to LLM and gen AI on bringing forth end-to-end learning and neural net training. I'm curious if you have also witnessed that, you and your autonomy team can concur with that. And if so, does that then change your CapEx profile of how you allocate it to super compute, either directly through NVIDIA GPU clusters as part of your CapEx the way your rival Tesla is doing or otherwise working through partners and hyperscalers and Amazon in order to get access to that compute to get closer to achieving autonomy?

Just in the nature of the question, you made a point that we've made for a while, which we really agree with, which is a key element to deliver really strong autonomy platform and something that continues to grow and get better over time is controlling the perception stack. And by controlling the perceptions to access the cameras and radars, in particular, it allows us to have early fusion of that information. And the early fusion of that information allows us to not only best perceive the situation around the vehicle, but to create the best response, the best controls for what the vehicle should do next. And the challenge with systems that are built through a collection of third-party sourced sensors or third-party sourced software is that, that learning loop and the opportunity to leverage the entirety of the sensor set and the perception stack becomes far more limited. And so we've architected our autonomous platforms and, in particular, what's to come on our future platforms, around really controlling the entirety of all of the data coming in and then also really control how we use a lot of training models to continue to drive progress into the platform. Now as you point out, the training models, there's lots of ways to run them, but ultimately, it requires a build-out over time of a large -- very large clusters of CPUs to help train and build the robustness into our driving models.

Our next question comes from John Murphy with Bank of America.

Just a first question, RJ. Now that we've got the 2 and the 3 unveiled and the 3X, we're kind of at a point where we're looking at a 4- to 5- to probably maybe a 6-vehicle portfolio. I'm just curious as we get through the ramp of the 2 and then the 3, the 3X, how do you think you're going to manage this portfolio? Is it just going to be a portfolio of churns over time and is reinvested in? Or is it going to be something that's sort of continuous improvement in software-defined vehicles and there's not going to be these refreshes over time? I'm just curious how you kind of see managing of what's becoming a pretty robust and complete portfolio at this point.

Yes. Thanks, John. The R1 platform really represents the flagship product for us as a company and was our handshake with the world as -- in terms of introducing Rivian as a brand to customers. But importantly, because of its position as a flagship product, its price point is such that it doesn't allow us to access the largest part of the market. And so our midsize platform, which underpins the R2 and R3 products, is really important for us as a company. And the launch of that platform with R2 in the first half of 2026 represents a step change in the scale of the addressable market we can go after as a business. And what we've demonstrated so far and what you'll continue to see from us, for our products, whether that be R1, R2 or R3, is a really heavy focus on using software to continue to make the vehicles better and better over time. And so as I noted in my opening remarks, we've had over 30 over-the-air updates on the R1 platform since we launched the vehicle. And this has led to a really vibrant customer community that there's a number of folks online following these releases that track every detail. And it creates a moment of excitement for our owners when they see the vehicle get better every couple of weeks. And so this is something we're absolutely going to maintain and is foundational and core to us as a business and we think creates a very different type of ownership experience relative to what we've historically known as owning a car.

And maybe if you could just follow up on that. I mean there's folks that make phones that, in the case of BlackBricks, change the form factor and the look on a product cycle basis. That's 1 to 2 years. I mean do you think that the vehicles can really stay somewhat static in physical form and not be updated sort of in a 4- to 5-year cycle? I mean I'm just -- I mean that's kind of where the question, where I'm trying to get. A vehicle product portfolio, traditionally the churn can average 5 to 6 years. Do you believe that is very different? But we're also seeing this with BlackBricks that they realize that actually in terms of form factor that Rivian, you think, can apply them. It's early days for the product portfolio, but I'm just curious about the philosophy there.

I think this is a nuanced element here. But historically, when we thought about a product life cycle, a product would launch and it really wouldn't change much until the update came out, which would be, as you said, often 4, 5 years between product launching and its update coming out. And what we believe is the product needs to get better over time. And I talked a moment ago about software, but there's also going to be hardware improvements that occur over time. So that's compute, that's sensor set and also, of course, improvements in how we build the vehicles, so cost and efficiency improvements. It's already realizing that today. We don't think of the vehicles as a static product, but rather something that continues to get better, continues to improve on cost structure. And really, the nature of what the vehicle looks like has a lot to do with just the approach of the company and the brand. And for us, we've really emphasized building a timeless design that's not something that's of the moment or something that feels old 6 months after it's released. And we think that timeless element of the design actually provides us the opportunity to make less significant exterior design changes while we continue to make progress with what's under the skin.

Okay. And if I could just ask one follow-up on the $827 million from the State of Illinois. The $2.25 billion lower capital for the Normal plant versus the Georgia plant, it doesn't sound like you're changing that even though you're getting $827 million from Illinois just yet. But if you were to pro forma how much lower capital pro forming for that, what would you roughly think it would be? I mean it sounds like there's other things where that capital is not going just directly to the plant, but it goes to other infrastructure. But how much do you think can lower that capital?

John, I think the most direct comparison is, as I mentioned in my prepared remarks, is the upfront cash that we'll receive from State of Illinois, which is roughly $100 million this year. Both Georgia's incentive package as well as Illinois' had payroll incentives, tax incentives associated with each of them. But in the near term, I would pinpoint that as being incremental to the $2.25 billion of savings that we communicated when we revealed R2.

Our next question comes from Dan Levy with Barclays.

Wanted to start with a question on COGS trajectory. And specifically, if you're doing -- if you're planning on doing, call it, a mid-$40,000 base price for R2, it means that to get any sort of a decent gross margin, you need to get probably COGS per unit in the high $30,000 range. You just did, call it, like mid-120s. So we're talking about almost $100,000, a little less of improvement in COGS per unit. So maybe you can just help us conceptually or directionally understand how we bridge from COGS per unit today down to where you need to be on R2. I understand it's partially decontenting, partially it's smaller form factor, there's scale. But maybe you could just walk through the pieces how much is in your control, what's easier, what's a bit trickier. Any sort of framework would be helpful.

Thanks, Dan. First, I just want to reiterate what Claire said before, which is, on the R1 product, we are on a life cycle to materially improve its cost of goods sold. And so we're going to see that play out over the course of the year. The reason for the shutdown that we just went through was to implement not only changes in the plant to improve process flow and increase the production rate by 30%, but also to integrate a very large number of changes into the vehicle that are focused on costs. So those are new suppliers, with updated part designs or designs that have been optimized around cost, areas of vehicle where we've actually consolidated parts or eliminated parts. And without going through all the examples, even on this changeover, there are areas of the body structure, for example, where the cost reduction was well in excess of 50%. And that's through part consolidation or part elimination or redesigning a part using different materials or different processes. So as we wind that forward into R2, R2 is a fundamentally different architecture. It's built to a different set of requirements. R1 has a very extreme set of requirements in terms of on- and off-road capability, whereas the R2 product will still be very capable of on- and off-road, but not to the true extreme that the flagship product has. And every decision we take, that's every part, every system, every component, it goes through the lens of, is the part needed, can the part be consolidated, can the function of that part or system be performed by another part or system? And it's leading to a materially different vehicle architecture from a body structure point of view and vehicle integration point of view. But it's also supplemented by a very different supplier relationship or set of supply relationships than what we have when we negotiated cost on R1 years ago. And so we remain very bullish on our ability to deliver on the R2 cost structure. It, of course, requires us to execute as we pull the full program together and complete the sourcing on the vehicle. But it is a significant set of improvements. And I called out a few of the examples, but just to reiterate those, part consolidation, it can come in many forms. Use of high-pressure die casting is one way to achieve it. Another is to have parts to do more than one thing. So the use of the top of the battery pack as the floor of the vehicle as an example. We have massively simplified closure systems in the doors for R2 versus R1. And then not often appreciated, but really significant is just the opportunity from an electrical point of view in the vehicle to minimize the number of ECUs and optimize the location of those ECUs as well as whatever they're actuating or sensing to minimize the harness design. And so across the board, holistically, we're making all those types of changes, leveraging the learnings from R1T, R1S, the EDV and the most recent shutdown, which is leading to the significant cost reductions in R1 as we roll those into the R2 program to make sure we can achieve, as you said, aggressive but necessary COGS targets.

That's helpful. Maybe just a follow-up on vertical integration. And so I understand that the move to put R2 into Normal instead of Georgia was one of capital efficiency. But just amid this pivot and strategy, maybe you can give us a sense that if you're thinking any differently about your level of vertical integration. I understand vertical integration is obviously still very key to the strategy, but are you thinking any differently about the level of vertical integration that you're pursuing, maybe relying on partners a bit more versus what you maybe would have done in-house in the past?

Sure. I just referenced it a bit, Dan, but one of the really key areas for us is controlling the electrical architecture in the vehicle, the network architecture and then the associated software that's running across all those platforms. And what that -- versus what the vast, vast majority of vehicle manufacturers pursue, essentially the exception of one other manufacturer, which is a Tier 1 heavy approach where Tier 1 suppliers provide a variety of controllers that they control a function within the vehicle. By controlling all those computers, all those ECUs, it allows us to much more easily consolidate functions not by the domain, but rather across zones. So we can set up what we call a zonal controller, that's in an area of the vehicle that controls all functions across that area. And the amount of savings that's possible by doing this is not measured in hundreds of dollars, but measured in thousands of dollars and the simplification of the vehicle harness that results from that is also quite significant. And that's all Rivian-facing advantages in terms of cost, simplification. It simplifies the build process. But it also creates a lot of advantages for customers. We've already seen this from the launch of R1 where the control of those -- all those platforms allow us to do deep over-the-air updates. When I say deep, I mean real over-the-air updates. We're not just changing a color on the screen, but rather introducing real features, changing the way the vehicle drives, improving the battery performance, improving thermal performance, things that are meaningful to the ownership experience of the vehicle. And that we remain very convicted on and, in fact, the benefits of the heavy investment necessary to build up all that capability will really be realized with R2, where R2 will leverage the network architecture, the ECU topology, of course, the software stack that's been developed in R1 and the changes that we've just made as part of the cost-down process with R1, that architecture will be going into R2. So we can look at this also as a derisking of the launch of R2. And while I've talked about software and electronics, it's important to note that this also extends to the way we've approached the high-voltage systems. So our batteries or battery packs, battery modules, drive units, inverters, these are all areas that we've developed in-house technology around. And of course, at the scale of R1, it has a high fixed cost associated with it. But with R2 coming online, we really see significant structural cost advantages by owning these areas and by building these areas in-house.

Our next question comes from George Gianarikas with Canaccord Genuity.

I think you mentioned in your prepared remarks that you're bringing the lines back up. Curious as to what you can share in terms of the experience there and also how the new supply relationships have gone. I know you've decided to switch out some suppliers, and any detail there would be appreciated.

Thanks, George. It was interesting. We -- at the start of the month, at the start of April, we stopped production of our launch vehicle and walking through the plant and seeing it without a single vehicle on a line was a unique feeling. We hadn't seen that since we started production and sort of gave you a bit of a feeling in your stomach as you walk through. And the precision in the execution of integrating so much new equipment, new process design, as you saw in the letter, hundreds of new robots and hundreds of updated or modified robots into the plant, to allow the plant to run at a 30% higher line rate. And to have the orchestra of all those activities, both in the plant and then across our supply base; to have a very large number of new suppliers come on board and a significant portion of the bill of materials change over to these new suppliers, and updated part designs; to have executed that full effort with the intensity and the focus to drive that efficiency into the plant and into our overall COGS structure, it was really -- it was an exciting April to say the least. And it's amazing to see the plant running again, to see the changes we put in place, solving some of the challenges that existed in the line before, solving some of the areas where we felt the costs were not appropriate at the vehicle level. And we're excited to see those changes manifest in the improvements in our cost of goods sold and of course, in the road map to our positive gross margin.

Great. And maybe as a follow-up, I know you mentioned that R2 is coming in the first half of '26. So what are the opportunities to potentially pull that forward in terms of timing?

The decision to launch R2 out of Normal was to -- there's many things that drove it. Claire talked before about the $2.25 billion in capital savings associated with it. But beyond that, and what's harder to measure in the numbers, was just the ability to leverage the existing teams and the operations that we have in Normal. And those teams -- it's taken us a lot of time, but we've built strong teams, strong leadership at the shop level. And I spend a lot of time at the plant, a lot of time on the floor with the -- with our team members. And that buildup of training capabilities, learning capabilities, leadership at the team leader, group leader, manager and director level across the plant, is something we'll now be able to leverage, and it takes not only risk out of the R2 timing, but allowed us to pull R2 into the first half of 2026. Now there's not a single person within Rivian that isn't trying to find ways to pull R2 forward, but we would love to see R2 sooner. The amount of excitement for the product is palpable, notwithstanding the excitement that we all have for it on our own. But we also want to ensure that the product when it hits the market is exceptional and making sure our supply base is robust, making sure there aren't supply issues as we launch is really important to ensure we have as smooth of a launch as possible, of course, learning from the R1T launch, the R1S launch, the EDV launch, the relaunch of EDV with post cost downs and now the relaunch of R1 post cost downs. We've gone through a number of launch events with each one getting better and stronger. And the clarity we have on the importance of robustness of the supply chain, both from a quality point of view, but also from a ramp efficacy point of view, is driving us to make sure that as we think about that 2026 launch, it's not just what we can control in our plant, but it's through all the many relationships across our supply base to ensure we are ready to step from not producing R2 at scale to producing at scale very quickly.

Our next question comes from Alex Potter with Piper Sandler.

Perfect. So I'm wondering if you could talk about what the next, call it, 3 to 6 months, in Normal will look like now that you've gone through a lot of the heavy lifting with the retooling. To what extent is there any remaining execution or ramp risk with the plant as it exists right now?

Thanks, Alex. Coming out of a launch, and I was just online with the team going through how things are running post relaunch. The energy within the plant is palpable, the excitement to deliver on improved quality and improved cycle time is real. And with the changes we made around the overall efficiency to lay out, the efficiency and material flow, we're really excited to see that pull forward into reduction in cost of goods sold. Now with that, it's not as if the plant turns back on immediately at full rate, so there is a ramp associated with it. We're following a prescribed and planned ramp of the facility. And that, as I said in my previous discussion, that ties to the suppliers. So we also need to make sure our suppliers are ramping at the same rate. And given the number of changes we've made with our supply base, those suppliers, in many cases, new suppliers, are ramping along with us. And so that -- as that's all happening, we're also really remain focused on ensuring that the plant in Normal is also getting ready to ingest R2. And so there's a number of investments we're making into Normal to ensure the R2 ramp is seamless and as capital efficient as possible as well.

Okay. Perfect. And then I wanted to go back to something Claire mentioned regarding OpEx. It looks like second half OpEx spending is going to be down relative to the first half. Just wondering what it is that you're spending on now or what you did spend on in the first half that you won't be spending on in the second half. Is this marketing and outreach? You mentioned a lot with test drives and things of that nature after the R2 and R3 unveiling. Just -- or maybe it's R&D, just any additional clarity on that would be helpful.

Sure. So the first point is, in the first half of the year in the buildup to the tooling upgrades that we made in Normal, there were higher levels of R&D spend associated with that. We'll see that increase as well Q1 into Q2 based off of the shutdown time that we took throughout the course of April and the incremental contractors and support that we had to bring back the lines up in short order and succession. And so as we look to the second half of the year, as RJ mentioned, the pivot and focus from an R&D perspective starts to focus around more of the R2 development work versus the focus on both R2 as well as R1 and our commercial vans that you're seeing in the first half results and figures. And then beyond that, we're constantly driving incremental efficiency across the organization as a whole. And so that until finding ways in which we can reduce expense in other areas of SG&A to make room for the investments that we're making in our go-to-market teams between sales and service as a whole. And so that intensity and focus is what's enabling our path to reduce our operating expenses overall for the year, but also importantly, seeing that second half 2024 step change reduction in OpEx.

And our next question comes from Emmanuel Rosner with Deutsche Bank.

My first question is now that the shutdown is completed and the upgrades completed, could you help us quantify some of the benefit that you're expecting that are in your control? So there, I was hoping to understand it better. So you had this $39,000 loss per vehicle in Q1, $9,000 of that may be sort of like not a run rate. So call it maybe a $30,000 loss per vehicle starting point. How much is realistic for your cost of goods sold or bill of material to improve as a result of the actions that you just completed? How much per vehicle could we see in terms of reduction on the fixed cost? And how much do we have to assume or do you have to assume in terms of pricing or sort of like extra revenues essentially to get towards that positive gross profit per vehicle?

Emmanuel, as you look back at our Q4 earnings call, we provided a detailed bridge and we continue to see line of sight into -- at the execution road map to achieve those results in aggregate. As I mentioned in one of my responses, the largest variable that we have ahead of ourselves is the reduction in our material costs. And similar to what we saw when we took downtime in Q1 of '23 to introduce our new Enduro Drive Unit as well as our LFP pack in the EDV itself, where we saw a 35% reduction in material costs. There's significant cost savings coming through the introduction of engineering design-driven changes into the R1 as well as some of the material changes that we're making to conserve costs as well. So I have clear visibility into those reductions on a go-forward basis. And similarly, as I mentioned, the improvements in operational efficiency that we'll see with reductions in labor and overhead cost per unit given the increase of 30% in our line rate is also going to help enable the semi-fixed cost improvements that we anticipate throughout the course of this year as well. And then there's dynamics with our depreciation and the fact that this quarter, we had accelerated depreciation going into our retooling upgrade in the plant itself, that will start to lap and will come off as we also begin to fully depreciate some of our original tooling that we'll see a material decrease in that depreciation expense per unit as well. Beyond that, we'll see some additional LCNRV benefits in the back half of the year as we drive towards making money on every single vehicle that we sell. And then in terms of the underlying assumptions for both volume as well as price points, as we mentioned on our last earnings call, our anticipation is not a significant increase in overall volumes associated with Q4 '24 relative to Q4 of 2023 and equally a similar price point from an ASP perspective. So that the revenue per unit driver is really driven by non-vehicle revenue streams, predominantly the sale of regulatory credits. We've seen a really robust appetite for our regulatory credits in the market, especially with many OEMs stepping back away from some of their electrification plans and then equally the ongoing sales of software and services revenues as well as our marketing revenue streams that will enable Rivian to achieve a positive gross profit in the fourth quarter.

Okay. That's helpful. And then just one follow-up on the volume side. I think you made a comment in the prepared remarks that now that the shutdown is completed, you have 56,000 units of annual capacity for R1 on 2 shifts. Is this sort of like the right value to think about now on a go-forward basis for Rivian, all the way until R2 launches in the first half of 2026? So essentially, a maximum of 56,000 units of R1 minus any shutdown impact that you may have, let's say, next year, plus some level of growth in EVDs. But is that 56,000 essentially be the max you'll see in terms of annual R1 capacity, and then it's R2 that comes on top of it?

Sure. So there's a couple of points I want to make. First, as we think about the longer-term introduction of R2 in Normal, we're building capacity towards 215,000 units in aggregate. And that can shift between R3 vehicle lines where we'll have 85,000 units of maximum capacity for R1, 65,000 units of capacity for commercial vans and 155,000 units of capacity for R2. So within that matrix, we'll have the ability to flex volumes to stay within the balance of the 215,000 units of total maximum capacity. And so that could be achieved, for example, running 2 shifts on R1, full 3 shifts on R2 and a single shift on commercial vans. So there's flexibility as we think about the longer-term volumes. But it is accurate, as you noted, that the R1 volumes will be 56,000 units based off of the 2-shift operation.

And our next question comes from Shreyas Patil with Wolfe Research.

RJ, I'm just curious how we should think about the speed at which you could ramp up R2 as we move into '26. I know it's still early, but with a lot of the innovations that you've already talked about around giga castings and structural battery packs, the need to simplify the ECU architecture. Just how should we think about the pace at which you could get to volume production once R2 gets going?

Shreyas, there's just 3 elements I'd call out. The first is, just our experience in learning and growth as a company in terms of managing and running a launch. And if I wind the clock back when we first launched R1T relative to where we are today, the strength of our operations organization, the strength of our launch teams and then the strength of our entire development process as that blends into the launch process is so much higher given the number of products we've launched and the number of iterations we've gone through there. So with that said, key enablers for a smooth launch are, first and foremost, making sure the supply base can support the launch. And so we've built a robust supply base -- a supply chain team that not only is responsible procuring those supplier relationships and putting in place those contracts, but importantly, also ensuring the development of those components and the launch of those components are at the quality levels that will support the rapid ramp-up of our plan. And of course, it's in the interest of the suppliers also have a rapid ramp up. Everybody wants to ramp as quickly as possible. So the health of not only our process, but the health of the way we're managing the supply base for R2. And I should say that should be evidenced by what we will see and what we'll demonstrate here with the reramp post this launch. We've also seen it with the ramp of our in-house drive units. We've seen it with the reramp of our EDV program. But the last item I'd call out is, just the nature of the product has been designed from the get go to also ramp for easily. So really heavy focus on an efficient design and a design that allows us to very easily put the vehicle together and takes away any of the risk items that we've either encountered on R1 or have addressed on R1 over the last 2 years.

And maybe just a point of clarification for Claire. When you talk about reaching gross profit in the fourth quarter of this year, first, is that a run rate figure for Q4? And then secondly, does that exclude the various cost of revenue efficiency initiatives that you talked about? It looks like that's been excluded from the EBITDA calculation. I just wanted to make sure if that's also excluded from the gross profit target.

Sure, Shreyas. As we look to Q4, we don't expect there to be some of those similar charges as we had in Q1 of this year that were really predominantly related to the Peregrine shutdown and some of the changes in supplier contracts that we mentioned itself. So we do expect Q4 to be gross profit positive for the quarter, and that sets us up nicely as we think about achieving positive gross profit for the full year of 2025 on a go-forward basis as well.

And our last question comes from Joseph Spak with UBS.

Claire, I just want to go back to the capacity commentary because I know you said after launch you had plant changes. My understanding was that, that 215,000 requires an addition -- an additional paint shop. Is that still accurate? And like what's sort of the timing for that? Because I -- like is that going to be in advance of the R2 launch? Or are you going to sort of wait to see how the R2 launch is going before you start adding some of that capacity?

Sure. Joe, as we look at the paint shop capacity in the plant, we're evaluating a number of different strategies to achieve the 215,000 units of total capacity. And so that could be within our existing paint shop that could be adding additional capacity beyond that. So it's something we're actively looking at and studying.

[indiscernible] rate in the paint shop or the current capacity of paint shop then. Is it below that 215,000?

The current capacity is 150,000 units in the paint shop.

Okay. And then RJ, just on the demand generation activities, like the 28,000 demo rides, a 91% increase. Like that feels significant. You mentioned that's an effective demand generation strategy. Obviously, getting potential customers of the vehicle is great. Is there anything you could tell us, though, about conversion? Or like how should we like measure that? Like what context should we take the 28,000 demos? Because last quarter, you mentioned, right, the guide is dependent on improvement in the order book, and it seems like this is what would help drive that. So I think it's important to understand how -- like either conversion or what sort of context we should take that number.

Yes, Joe, as I said in my opening remarks, demo drives is a really critical focus for us in terms of expanding awareness of the brand, top-of-funnel demand and then translating that top-of-funnel demand all the way down through purchase. And so that 28,000 test drives or demo drives that we gave in Q1, that's roughly a 90% increase over what we did in Q4 of 2023. So it's a significant step-up and it was -- the result of us also leveraging our service network to administer a lot of those test drives, and we're really encouraged by the results of that program. But it's one of many initiatives we have. And I do want to just make sure I call out, we've also continued to expand our leasing program, which now includes R1S. We launched the R2 and the R3, which had an outstanding effect of just creating awareness around the brand, and we're encouraged by the early results that we're seeing.

So you're satisfied with that improvement in the order book to hit the guidance for the year?

Yes, we're -- as I said, we're encouraged with what we've done so far. And of course, it -- satisfy is a funny word, I'd say. My job is to never be satisfied, but I'd say we're very encouraged.

That's all the time we have for questions. I'd like to turn the call back over to RJ Scaringe for closing remarks.

Well, thanks, everyone, for joining us on the call today. We've talked, Claire and I, for the last few quarters about the shutdown that we've just completed and are now reramping R1 production following that. This is a really important step for us. It was a critical step in order to achieve the long-term gross margin potential of the R1 platform. And of course, therefore, the normal site. The execution that went into that from our teams and the precision through which that was pulled off, we're proud of, and we look forward to starting to see the numbers from that body of work flow into the financials and be able to talk about it in the context of these calls. But with that, we're also happy to now have a physical and visual representation of our future products when we talk about R2. So it's not just an esoteric idea of a future product, but actually, you can see very specifically how we see Rivian expanding to more addressable markets and lower price point vehicles. And the team is incredibly focused on driving efficiency and driving cost effectiveness into the business across every aspect of what we do. What we'll see the most of is the improvements we're making in COGS, and that's bill of materials, that's conversion costs. As Claire talked about, that also ties to even starting to realize some of the benefits of our accelerated depreciation of equipment, but we'll see that heavy focus continue. It's a cultural drive within the entire business. And we are excited about going through the rest of this year and the path to demonstrating that through the gross margin profitability of R1. And then, of course, as that translates to R2 launching in early 2026. So thank you, everybody, for joining and look forward to our next call.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great evening.