Q3 2022 Rivian Automotive Inc Earnings Call
Good day, and thank you for standing by.
So the Arabian third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone.
I would now like to hand, the conference over to your Speaker for today 10 Bay you may begin.
Good afternoon, and thank you for joining us for <unk> third quarter 2022 earnings call joining us on today's call. We have <unk>, our founder Chairman and Chief Executive Officer, and Claire Mcdonagh, Our Chief Financial Officer, a copy of today's shareholder letter is available on our Investor Relations web.
Site before we begin I would like to remind you that during the course of this conference call our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward looking statements under federal securities laws, including without limitation statements regarding our market opportunity.
Industry trends business operations strategy and goals our production ramp in manufacturing capacity expansion, our proposed joint venture with Mercedes Benz, our future products and product enhancements, including our two and our expectations regarding vehicle deliveries actual results may differ materially from those contained in or.
Or implied by these forward looking statements due to risks and uncertainties.
Our business, which are described in our SEC filings and today's shareholder letter. During this call. We will discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter with that I'll turn the call over to RJ, who will begin with a few opening remarks.
Thanks, Tim and Hello, everyone and thank you for joining US today, just before the call. We published our shareholder letter, which includes an overview of our progress over the recent months.
Encourage you to read or for additional details around some of the items, we will cover on today's call.
Having just passed the one year anniversary of the start of production for the <unk> team I want to take this opportunity to highlight the progress our team has made this past year.
We launched four variance across our consumer and commercial vehicle platforms were awarded motor trend truck of the year along with other media accolades, we produced more than 15000 vehicles as of September 30, and.
And we continue to ramp our production to fully utilize our normal facility in.
In addition, we also launched our go to market operations and services, which include our physical service centers and mobile service vehicles delivery.
Delivery operations fleet OS financing insurance remarketing in the review and in Metro Network.
Our in house developed and produced network of DC fast Chargers.
It's been rewarding to see the excitement and enthusiasm for our first generation of products.
We believe we are in a unique position during a transformational time for the auto industry production.
Production of our designed and developed products continues to ramp at large at our large scale vertically integrated production facility and normally we.
We have significant demand visibility as evidenced by our consumer and commercial backlog, we have a strong balance sheet with $14 billion of cash that offers us the flexibility to navigate these uncertain economic times and look for capital efficient methods to drive growth. We remained focused on ramping production in a cost efficient manner, and we've seen improvement across our cost of goods.
<unk> operating expenses and capital expenditures over the past quarter.
The third quarter was another record for the <unk> team, we produced over 7300 vehicles across the <unk> and <unk> product lines are key focus remains ramping our normal facility to achieve the targeted annual capacity.
As part of this progress we reached a key milestone recently as our second manufacturing shift started producing vehicles. It takes extraordinary coordination to ramp a highly vertically integrated facility of this size and I'm grateful for all the hard work that's gone into it.
We continue to see strong demand for our products as of November 7th we.
We had over 114000, net preorders and reservations for our own vehicles.
As a reminder, these orders are from the United States, and Canada, only and are net of deliveries and cancellations.
Third quarter was also important for our commercial business in early September we announced the signing of the Mou with Mercedes Benz for a strategic partnership for commercial electric vans in Europe , the worlds largest van market.
We continue deliver etv's to Amazon and expand our fleet of us offering.
Amazon has delivered over 5 million packages with <unk> and is now making deliveries and over 100 cities.
Every two weeks I spend a few days driving the eds My daily driver, it's a great way for me to personally experience what the drivers of these vans actually experience everything from the seating position to the unique pocket door to the overall vehicle dynamics, it's a really exciting package.
And at Stoplights, our parking lots the enthusiasm I can see firsthand from folks that are that are seeing for the first time are asking questions about it.
It's really exciting and we're happy to be able to help raise the bar for electrifying logistics.
As we continue to look for opportunities to scale, our platforms production on technologies and capital efficient ways.
We're strategically investing in our in house technologies, which will enable differentiated product performance and capabilities, while also delivering structural cost advantages.
Our in house software capabilities allow us to be agile and provide customers with an improved experience on the hardware side. We're excited to ramp production of our fully in house drive unit Enduro.
Enduro production lines are coming to life now.
It's great to see not only the vertically integrated motor, but also the design of our manufacturing lines.
In early 2023, we plan to introduce the enduro motor and our first LLP battery pack into the commercial van line in normal. These changes will enable optimized performance at a significantly lower cost. It's imperative that we get the introduction of these new technologies right. So we've allocated meaningful time to quality loops and processed checks in the first quarter.
We're excited about the progress our teams are making across future vehicles and technologies as well as improving the performance and cost of our current offerings. While we haven't shown any of our future products, yet I couldnt be more excited about the work happening on an X platform, but smaller size of this platform is enabling some wonderful unique products and we're looking forward to be able to show that.
As to the world.
I want to thank our dedicated team members suppliers and importantly, our customers and communities for the tremendous support you continue to show us with that I'll pass the call over to Claire.
Thanks R. J I want to Echo your excitement around the third quarter results and the progress the team is making.
During the third quarter, we produced over 7300 vehicles and delivered nearly 6600 vehicles, which was the primary driver of the $536 million of revenue we generated.
We recorded negative gross profit of $917 million in the third quarter.
Continued to be impacted by the high fixed cost structure associated with running high volume production lines at low volumes will probably ramp.
We recorded a 696 million accounting adjustment in the third quarter related to <unk>.
As discussed on prior calls the LC and RV adjustment writes down the value of certain inventory to the amount we anticipate receiving upon vehicles sale after considering the future costs necessary to ready the inventory for sale.
The increase in our LC and RV charge represents the vast majority of the increase in cost of goods sold as compared to the second quarter of 2022.
The increase in LC and RV compared to the second quarter is primarily due to an increase in overall inventory and firm purchase commitments values ahead of the start of our second manufacturing shift.
In addition, similar to prior quarters gross profit for the quarter was also impacted by the inflation of our raw materials as well as supply chain challenges, which caused the need for expedited shipping.
Operating expenses grew by an approximate $160 million as compared to the same quarter last year.
The driver of this increase is stock based compensation expense, which we did not recognize prior to our November 2021 IPO.
When looking at our operating expense this past quarter versus the second quarter of 2022, we saw nearly $150 million decrease.
Our Q3 operating expenses reflect our ongoing prioritization of investments in our core in vehicle technologies and customer experience, while continuing to drive additional focus and cost optimization across the business.
We continue to focus on deploying capital in the most efficient way and ensuring that every dollar spent helps us towards our long term financial targets, which in turn helps accelerate the impact we can deliver.
Our adjusted EBITDA for the third quarter was negative $1 $3 billion, which is flat to the second quarter of 2022.
We ended the third quarter with about $14 billion of cash on hand.
We continue to monitor the economic environment and believe we have a high level of flexibility regarding the cadence of our growth investments we remain.
Confident in our ability to fund operations with cash on hand through 2025, excluding the impact of our investment and the contemplated joint venture with Mercedes Benz.
We continue to work with the state of Georgia, and the joint development Authority on our second domestic production facility.
We are adjusting the timeline for launching the <unk> platform and expect it will launch in 2026.
We expect the RQ platform will unlock a massive global market expansion opportunity for Arabian and are excited about the development work that's underway.
We are also reaffirming our 2022 full year guidance of 25000 total vehicles produced the supply chain continues to be our largest source of uncertainty as we continue to ramp production. We've experienced five days of production downtime in October and November due to a lack of supply of a key component which limited.
Our quarter to date production.
In the fourth quarter of 2022, we expect the in transit time from rail shipments coupled with an increase in volumes from the ramp of our second shifts towards the end of the quarter will cause a significant discrepancy between production and deliveries.
In addition, we're reaffirming our 2022 adjusted EBITDA guidance of negative five $4 5 billion.
We are lowering our capital expenditure guidance to $1 $75 billion.
Due to our streamlined product roadmap and the shift of certain capital expenditures to 2023.
As RJ mentioned, we have over 114000 net <unk> preorders as of November 7th.
As we ramp our production and delivery, we believe <unk> will become an increasingly less important measure of our fundamental progress as a business.
Going forward, we no longer plan to provide an updated preorder number during our quarterly earnings calls.
In closing I want to reiterate our confidence in our long term financial targets, we see a clear path to our approximately 25% gross margin target.
Teens, EBITDA target and approximately 10% free cash flow margin target with that let me turn the call back to the operator to open the line for Q&A.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone Thats Star one to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of John Murphy with Bank of America. Your line is open.
Good afternoon, guys. Thanks.
Thanks for all the info.
A couple of quick ones.
That announcement that youre not going to provide the preorders anymore I'm just curious what the motivation is for that or are we getting to a point, where the preorders are getting so robust or long.
It ebbs and flows in those relative to production might not actually be that informative I mean, what's kind of the driving factor in that change in communication.
Thanks, John .
As it pertains to the preorders are sentiment was more so that we are one year post our startup production as an organization, we're starting to really ramp up our production and the deliveries associated with our run platform asset. So don't feel like it's really a meaningful metric for us to continue to provide overall to the market.
Obviously, given the 114000 unit backlog that we currently have that extends us into 2024 as well, it's a robust backlog of.
Demand that we have for our vehicles and this is going to be consistent with what youll see from us on a go forward basis as it pertains to additional new product launches as well.
Okay. That's helpful and then RJ on the Mercedes.
J P. I just wonder if you can give us an update there.
Skeptic could say hey, listen.
You would have been able to enter and be successful in the European market ultimately on your own overtime, just given your product.
To me this might say, hey, listen that opens up that market that much faster and provides more robust growth.
Sooner.
Just curious if you can kind of maybe couch the direction there on Optum Optimus versus skeptic and any other updates you might be able to give us there.
Sure John .
Mercedes is.
In terms of a partner and somewhat to be looking at.
How do we accelerate electrification.
Faster.
There is very much aligned mentality alignment holiday around the need to electrify alignment holiday on.
How we think about products and the <unk>.
<unk> products and the execution of products.
A relationship and a partnership that we're working towards that we think call out both sides to accomplish more together.
Ultimately as we think about this as we look at this market.
It is a it is important and large space for the commercial van space in Europe .
And we felt we felt Mercedes is a great partner to be looking at this list.
Okay, and then if I could just sneak one more in the delta in deliveries versus production clear will that continue to expand over time or are we kind of looking at sort of a onetime gap opening up here in the fourth quarter I'm just trying to gauge the revenue recognition versus the production. So we can think about that for our models go forward.
The Q4 GAAP will be exacerbated here in particular, because we have the second shifted that's coming online and really ramping from a production perspective that back weight at the volumes from a production perspective in the second half of the quarter and then that coupled obviously with the shift that we've had to rail.
And then the holiday periods, where customers are a little bit harder to find in that last week of December that will be a driver of that core shift for us obviously that what we don't deliver in Q4 rolls into the upcoming quarters. So you start to normalize over time as we ramp.
Closer to the installed capacity within the plant and normal so the gap should narrow on a percent basis on a go forward basis.
Okay. That's very helpful. Thank you very much guys.
Yes.
Thank you Lisa.
Please standby for our next question.
Our next question comes from the line of Adam Jonas with Morgan Stanley . Your line is open.
Hi, everybody.
My first question Claire.
If I do the calculation quarter on quarter.
<unk> from <unk> your revenue increased 172 million Bucks.
And your growth.
Loss, if you will improve.
By $182 million, if you exclude LC and RV.
Which.
Which is substantial more substantial this quarter than last quarter. So.
Your improvement in gross profit ex LC and RV was actually greater than your change of revenue now there may be some stuff going on sequentially and maybe there were some really unusual.
Other knocks on gross profit last quarter, but I just wanted to kind of make sure my math is right and the C.
If there was what you could highlight sequentially that got a lot better underlying excluding the LC and RV to draw that improvement of gross profit that actually exceeded the change in revenue. Thanks.
Thanks, Adam So unpacking the question first about LC and RV itself, it's important to understand there are different components.
The way the year calculation, which is.
Entirely excluding it.
It is not necessarily the way that I would direct you to look at it. The thing that you may want to look at instead is really looking in particular at the achieved an increase in <unk> versus the complete exclusion of it the way to think about it is LC and RV is really accelerating the recognition of losses.
As we take in raw materials and have our firm commitments, which were then grossing up to say what is the cost for us to turn these materials into that end state vehicles themselves and so as it pertains to the quarter, we get both the benefit of a reduction of bill of material and conversion costs.
Dated with.
Sort of the base lining of inventory levels inventory were held constant within those two quarters and so that's why we look to that increase.
You look at that calculation in particular.
And so if youre looking based off of your own metrics there right. It's more of an 11% increase in that cost of goods sold.
On a comparable basis versus a 47% increase in deliveries in aggregate.
We've made meaningful progress.
Just sort of close the loop on that front, but wanted to just direct you to some of those nuances.
Okay I appreciate that thanks, and just as a follow up.
On reservations can you tell us where.
Give us an update on where you are getting your customers from what they're what they currently drives and then same thing for your deliveries just to kind of get a sense. How many are coming from Tesla or proper SUV owners and any other color there would be great. Thanks.
Sure Adam.
One of the things, we targeted and developing the products.
Thinking about <unk>. These are really flagship products that.
<unk> introduced the brand really opened the brand umbrella for us to over time add additional products.
Because of that we wanted them to be pulling the target state I should say was to be pulling customers from a broad spectrum of vehicle formats form factors as well as brands.
And sitting here today, we now have the actuals to look at how we did relative to target state and.
We're really pleased that we do have a really diverse set of customers. So certainly customers are coming out of.
Some customers who are coming out of test flows.
But really there is no single brand that represents a significant percentage of our overall demand.
I would want to add a couple of really important metrics the first of which is.
The vast majority of our customers.
Close to close to 90%.
Do not currently own an EV, meaning.
Most of our customers are new EV customers, which is really important from emission point of view because it means the brand the products we've created.
It is helping you were helping to create new EV customers were driving that transition.
And the second is the number of customers that are.
Buying an RMT that haven't owned to pick up before.
Well over a majority of the customers, having one to pick up before they're being introduced to it through a very different.
Type of pickup of course, something that's really a lifestyle focus.
And a similar sense.
The rns, it's in many cases folks are moving into it.
As a three row SUV is something they've aspired to but havent been able to make that jump before in many cases because of.
Desires around efficiency and what we can deliver in a full size three row SUV with something Thats, great on road and off road.
It's really pulling in a broad spectrum of customers.
Thanks RJ.
Please standby for our next question or.
Next question comes from the line of Joseph Spak with RBC. Your line is open.
Thanks, Tom Thanks, so much everyone.
Claire I want to go back to Adam's question, but I was sort of point onto similar threat here and I'm trying to sort of update real time for what you just said.
So if I if I just look at.
Auto Cogs divided by <unk>.
Deliveries in the second quarter.
No adjustments and then I do the same thing in the third quarter, but adjust for the increase.
And the inventory adjustment as you just suggested it still seems like.
Cogs per unit, while still obviously above what youre selling the vehicle for did improve like over 30%. So.
Can you just help us understand like is that not right like is there something with the accounting that does not allow you to do that calculation.
Yes, that's absolutely right as I mentioned <unk>.
You factor.
Sort of apples to apples comparison of the way that youre looking at it Joe.
Would see 33% plus improvement on a quarter sequential basis.
Maybe I misheard I thought I thought I heard 11, okay.
So is that the dollar is 11% growth of dollars okay, but.
Off of the fact that we're also increasing 47% on a delivery basis, he really netting the two of them.
Okay, and so that's that's sort of the leverage youre seeing in the plant or is there anything with mix between.
Our ones in the vans in the quarter.
What impact is that.
But the biggest driver that we've seen on a quarter sequential basis is just some of the cost efficiency that we're driving within the plant.
As also moving beyond some of the startup related cost as well that's a key enabler for us as we've seen and continue to moderate down that cost of goods sold per vehicle.
Just to jump in here.
Have.
We've launched multiple vehicles in parallel so the startup costs that Claire referred to we were seeing all of those stacked up on top of each other for different vehicles.
Launching and ramping largely at the same time.
Okay.
And then I guess just the second question.
A couple of quarters ago, you talked about the.
The revised plan some some changes to capex timing et cetera, just wondering in light of IRA and can appreciate youre still probably evaluating that but.
Like does that cause you to reevaluate the plans again, and maybe accelerating or re accelerating some of that in house cell development because I.
I think that was one of the things that maybe had a sort of slight push out but the return profile on that investment seems to be greatly accelerated versus what you were thinking at the time and it obviously also been directly impacts our financials of the rest of your business. So just wanted to get your thoughts on on on that.
Yes, I mean, there is you know there's still some moving pieces with IRA but yes.
We think this is a really.
Powerful step and an important step by the U S government.
Really both create.
Strong tailwind not only for electrification, but also for the build out of a domestic supply base around battery cells and so this is we couldn't be more excited about this.
It's certainly driving.
And how we think about.
The overall battery supply chain and it's not just the cells. It's also the core materials that go into the cells.
Lithium hydroxide or lithium carbonate some of the key precursor materials are areas, we're spending a lot of time focusing on.
And not only making sure we have security of supply.
As we think out through the end of the decade, but making sure that that that supply qualifies for.
All the all the benefits associated with the highway Bill now.
Now at the cell level.
Particularly important for us as we think about our two platform vehicles. This is something that has long been the plan to have domestically produced cells that would go into the vehicle. This just puts.
Greater emphasis and importance on achieving that and achieving that is.
Quickly as possible.
Okay. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Rod Lache with Wolfe Research. Your line is open.
Hi, everybody.
You.
And.
Again that you have that funding through late 2025 with cash on hand.
This JV plant and just wanted to confirm what that means so by late 2025.
<unk> normal and presumably funded most of Georgia Assembly I just wanted to make sure that Thats correct and you didn't mention.
Anything about anything new at least about vertical integration into batteries or cathode active material is that is that part of your funding plan.
To the extent that it is important particularly for the <unk>.
Thanks, Rod as we as we've talked about in the past right. We remain confident in our cash on hand through 2025 and.
As we've also spoken about.
Opportunistically evaluate great opportunities for us to invest in high growth high return.
Options for Caribbean on a go forward basis, and as you heard from <unk> last comments there around a lot of the work that our team is doing across the board as it pertains to securing raw materials and the R&D and build out and capabilities that we have in house here. Those are all things that we're currently.
Evaluating and working on as an organization as well and the embedded guidance that we do have does certainly consider often some meaningful investments in that cell roadmap.
As we sit here today and look out at the building blocks for that future state opportunity.
The guidance doesn't include today is really much more of the large scale manufacturing build out of our cells, which would follow obviously the development and build out of our <unk> platform as we've spoken about in the past.
So those are our core items that I just wanted to call out as you think about the building blocks and roadmap to that cash on hand through 2025.
Okay, Alright thats helpful.
Is it possible that that.
Can change prior to.
Prior to the ramp up of the <unk> or is that something that.
Just to.
It takes a longer time to kind of get that.
Pulled together.
No Rod as Claire said.
A lot of what's already built into our plan.
The development and pilot.
The funding for all of the development pilot activities associated with.
Our domestic cells as well as building out some of the raw material cost reductions.
Material supply chain.
But above and beyond that as we think about what the future lines look like.
Part of that planning exercises to create opportunities for us to take a decision with enough time in advance.
<unk> impact in that.
2026 and beyond timeframe.
So those are decisions, we will take and we look at them through the lens of.
Recognizing the need to raise capital for things that we believe have very strong return profiles.
Building domestic battery cells is one of those certainly.
I'd also say that.
This is something that we view as a must have over time. So it's just a question of how quickly those activities ramp up.
In terms of in terms of production.
Okay. Thanks for that and just lastly, youre going to be producing over 10000 vehicles in the fourth quarter and I presume that that benefits to some extent, but not fully from the second shift and youre still constrained by supply chain can you just give us any color you might have on what the.
Where you are in the S curve now what that trajectory might look like from here just because there are obviously there are people are reporting some push out for the <unk> vehicles. So I'm wondering if that has any implications for.
For what the ramp looks like.
Yes.
It can shift is now up and running we're building vehicles on if those vehicles are being delivered to customers which is exciting.
In ramping our second shift.
Of course, it's additional team it's additional.
It's a lot of additional hours every week.
Time building vehicles, but it does have a ramp curve associated with it and now while the ramp curve much faster than what we went through on the first shift as we brought the lineup and brought the plant up.
It's not as if it starts immediately at a 100% output. So we're going through that ramp now it is going well.
As you called out in your question.
We're very much cognizant of the limitations of supply chain and that was as you recall, we talked about this in the last call that was actually what drove the timing of the second shift coming online.
We want to ensure before he brought on.
A large group of additional team members make sure that we would have the parts to build the vehicles.
So as we stand here today that is ramping its going well.
First shifts continues to make improvements as Claire referenced before we're very much focused not just on the ramp but also on.
On operational efficiencies and cost efficiencies.
Of which come.
Implicitly just through achieving higher output of the plant.
And leveraging more of our fixed costs more efficiently across more more volume.
But but but.
We're very much focused on fully ramping the second shifts and going into 2023 strong.
Okay alright, thank you.
Thank you.
Please standby for our next question.
Yeah.
Our next question comes from the line of Charles <unk> with Redburn. Your line is open.
Hi, guys. Thanks for taking my questions.
My first one on the all too.
The delay to 2026 from 2025 previously can you talk a bit about what's changed there and maybe also how this changes if at all your investment plans.
Period up to 2025.
Sure Charles this doesn't represent a material change in the product by any means this is <unk>.
Really reflective of.
Making sure that the production site is prepared we have the appropriate amount of time to go through.
The ramp up phase leveraging a lot of lessons learned as we've gone through the ramp of the RMT. The <unk> 700, Edp 500 over the last 12 months.
So those ramps are informed.
Our thinking on making sure that we.
We have as close to a flawless ramp as possible with our too.
Now in terms of investment dollars.
We're one of the things Clare and I spend a lot of time with our with the teams on as it is working very hard to.
Push off.
Payments on some of the Capex as much as we can but ultimately that some of these things require us to spend over the course next year and of course into into 2024 as well.
Got it thank you and then.
On production, so I think to meet your 25000 targets you need to average about 850 units a week in the final quarter.
Can I ask if you've exceeded that rates and then as the weeks so far in.
Paul.
Missing.
<unk> may have impacted production, so far and then maybe along the lines of a prior question there thinking into next year.
Should we think that quarter on quarter growth is kind of a linear through next year or whether it be some seasonality to it.
Yeah.
The.
The overall the way to think about the growth as we look at this both week over week quarter over quarter as the symphony of not just what we're doing in our plant, but also of our supply chain as you referenced in la.
Looking into 2023.
We do see healthy growth quarter over quarter.
We do have some planned.
Downtime at the end of the year.
We make some line improvements and capacity increases across the plant. This is the end of 2023, we've talked about this before.
And then in the first quarter of this coming year.
And clear and I both referenced this earlier.
We are.
Integrating our enduro drive unit and our LSP pack into the EV platform and so Thats New battery pack, New drive unit of course with a host of related changes for that introduction.
<unk>.
New propulsion platform, which provides considerable cost improvement.
Which we're really excited about.
That will take some time and we built into the plan for next year really the appropriate.
Time to go through the quality of loops.
And training to make sure that it's at.
A real it's a seamless launch.
Got it thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of George <unk> with Canaccord. Your line is open.
Hey, good afternoon, and thanks for taking my question.
Quickly.
You recently had a recall and I'm curious if you could share your thoughts on how your service Department performed in.
How you see those facilities and personnel ramping over the next 12 months. Thanks.
Thanks George.
Just as a point of background, we had a recall for AR.
Torque fastener.
And one of our suspension components.
And it called for inspection and tightening, which the operation takes a couple of minutes on a vehicle.
And this was a really remarkable opportunity for us to demonstrate the benefit and the value of a direct service network. So we today have completed that operation on 83% of our fleet.
With about 10% line of sight to another 10% Thats currently scheduled.
So the speed at which we were able to very rapidly address this across the entire fleet.
And to do it moments after the decision was made to do this voluntary recall.
Our service leadership immediately working on deploying this and within hours provided.
Performing these first.
First inspections and operations and then as you just heard me say within weeks.
<unk> now over 83% of the vehicles complete is really something we're proud of them and our customers saw that as well.
Is it which of the process.
The process was for customers was great where we could go to their homes, we're going to places of business in some cases, they would come into service locations, but we tried to make it as seamless as possible and then ultimately.
<unk>.
The transparency and which we handled the situation was appreciated by our customers.
Thanks, and just if I could ask one more.
Then some recent high profile missteps and autonomy.
One of your competitors' data and may not be critical for them to develop that technology in house.
Curious whether your view is it updated on that and whether you think it's critical to have you on top of this operating developed in house. Thank you.
Yes.
<unk>.
Within the autonomous space, there is a broad spectrum of.
Ways to approach it and that's it oversimplify.
Hardware heavy systems, where a vehicle will have 100, plus thousand dollars worth of sensors that in compute.
And then you have more hardware constrained systems that are designed to be deployed on vehicles that are purchased by customers where.
You have thousands of dollars of sensing and compute and our approach is to focus on the latter where we're developing.
And in house.
<unk> platform that will grow and capability, but using a more constrained set of sensors in our case, a very camera heavy in radar heavy platform and so this is something that we do believe is really important as we talk about.
Not just.
Highway assist features but growing above above and beyond what we see today and the level two space and this takes time, but it certainly benefits from having a very large deployed fleet.
With vehicles are driving many many millions of miles as of today, our vehicles have driven over $92 5 million miles.
Which is great, but all of those miles.
Contribute to great learning opportunities to build and grow this platform.
Thank you.
Thank you please.
Please standby for our next question.
Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Okay.
Hello, Thank you very much.
Quick question around how do we think about some of the most units and company economics going forward. So I guess in the quarter.
<unk> had quite a bit of improvement in the cash R&D and SG&A.
Spending do you view these as.
A new run rate that is sustainable or.
Especially as the volume increases off should we think about it and then.
Unit level, obviously nice to see the improvements in.
I guess the growths.
<unk>, what would be sort of reflects the.
Run rate production rates or cadence that you need to achieve to survey essentially shrink these losses and bring that more into positive territory as we look at it.
Thank you Danielle.
First off as you noted we're really encouraged with the progress that we've made to prudently manage our operating expenses across the board and you're seeing that now through their performance in our in our Q3 opex itself as it pertains to more so if the baseline our expectation is from an R&D perspective that though.
R&D expenses will increase in Q4 relative to the level of spend in Q3, and that's largely the result of a lot of the development work that work is underway for the introduction of our LSP pack.
<unk> unit in the commercial van program itself. So there is a lot of.
<unk> builds that are happening in the backdrop that will contribute to that overall increase in R&D that we expect to see in Q4, but we do expect to continue to manage our opex spend in aggregate as we are driving a lot of capital efficiency, while at the same time, we're investing heavily.
In the customer experience.
Ongoing basis, we're continuing to open up additional service centers are charging network things of that nature, which contributes to that overall SG&A balance for us.
But also driving incredible efficiency across every dimension in our control as we're scaling the business on a go forward basis as well.
And then to answer the second question you had on our unit economics, and what that looks like on a go forward basis.
I think one of the pieces Thats most important to first understand is today as you look at our cost of goods sold the majority of that.
<unk> per unit is really fixed costs within the business and so that's the biggest lever. We have is really focused on our ramped from a production perspective.
So maybe one thing that I think would be helpful is really providing you guidance as it pertains to the core inputs and drivers as we take our gross margins from current state to.
The path to positive unit economics in 2024, and as we've talked about in the past, we expect to see a material step change in gross margin in that walk from current state to that 2024 timeframe and the biggest lever not surprisingly is really about fixed cost leverage as well as our operation.
Need to move beyond some of the startup related costs that you heard RJ and myself talk a bit about that we've already seen from a progress perspective Q.
Q3 versus Q2 that reflects about two thirds of the margin walk. So just wanted to make sure that you had a sense for just the magnitude of how important ramp is from an overall.
Economic perspective, the second key driver for us.
David with pricing.
As we've talked about in the past with the.
Post March 1st Shack configured preorders that we have.
In our order book reflect a $93000.
Average ASP.
And we've got a lot of really exciting next generation technologies that will be coming into the fold as well that allows us to believe that that asps could even drive meaningfully higher on a go forward basis as well. So that's the second core lever.
Economic work and then finally last but certainly not least is really all of the core focus and work that we're doing right now around the.
The reduction of our bill of materials. So importantly, the engineering design changes and the roadmap we have in place to drive meaningful cost savings within within that bill of materials over the next couple of years and then finally all of the work that our procurement teams are doing around our commercial cost down opportunities.
And as we continue to scale the business and importantly work hand in hand, with our supply chain partners.
As <unk> continues to grow out ISO and manufacturing capacity and drive better unit economics for the business.
That's incredibly detailed and helpful can I just ask a quick clarification on this and then I have a question on free cash flow.
The fact that you're I guess facing this.
<unk> targets in the work of 2024 does that correspond to match with the specifics of that unit number where you think that economics essentially work with volume is that the right place. So I guess why.
What happens in between I guess.
Sure we will continue to see ongoing performance and improvement as we scale, especially given the magnitude of how important ramp is.
Cross the board.
And so the important piece here is that in 2024, you see each of the key levers really in place as it pertains to our production ramp as it pertains to Arabian moving to post March 1st Preorder base and importantly, as you think about the composition of a lot of that.
Engineering design changes that we had from a roadmap perspective that all come together to drive that meaningful step change in gross profit.
Okay, that's clear.
And then on the free cash flow side.
Some of the efficiencies in Capex this year, but also some of it.
Being I think timing into next year, how should we think about.
Capex going forward I think your previous view maybe.
So $2 billion.
Year in year out should 2000 23 billion ahead of this as a result of some of these movements.
Okay.
We still expect that capex should be in that low 2 billion.
Dollar area as well.
Even despite the fact that there will be some push of of Capex spend from 2022 to 2023.
Okay. Thank you very much.
Thank you please standby for our next question.
Our next question comes from the line of Colin Langan with Wells Fargo. Your line is open.
Thanks for taking my questions.
IRA was pretty new.
When you last reported.
Trying to get your latest thoughts you mentioned the LSP.
And that sort of hitting early next year.
A little uncertainty on how that might impact <unk>, so much a sort of from Chinese suppliers in the world.
A pretty tough there do you still think LSP makes sense.
Longer term.
And also on the commercial credit side I mean, how does that work with some of your customers are they going to capture most of the credit benefit or are you able to kind of get some of that back to your margin.
With regards to LSP.
This is a sell just to speak to a probably.
Chemistry.
Works really well and vehicles that require high cycle life vehicles.
Vehicles, let's see lots of charge discharge cycles.
Relative to a high nickel cell and so commercial applications are really a perfect application from a cycle point of view.
Further.
The lower volumetric energy density associated with <unk>.
<unk> fits nicely into a vehicle that's physically large because you have the space to fit to the.
Pack.
To achieve enough energy storage, but to do it in a slightly larger space. So we're quite bullish on LSP.
Interestingly with regards to IRR.
There is not.
A stringent requirements for commercial applications of source itself.
And so this is this is really important so the 7500 of our credit.
For low G VW commercial vehicles low gross vehicle weight commercial vehicles.
Stands regardless of source of cell.
And as we talked about in the last call.
Size of those incentives grow as you move into higher gross vehicle weight classes.
Now the second thing I'd point out is we also do believe that the supply chain will evolve the inherent benefits.
You referenced at a high level of and LSP chemistry for high cycle life applications are real.
There are meaningful advantages and so we see a lot of a lot of opportunity to make sure. There is a domestic supply chain for both the production of <unk>, but also for.
The cathode active material and as well as some some of the other precursor materials.
Above and beyond that of course about the nature of an LLC. So you remove nickel and you remove cobalt.
So from a and I are a compliance point of view.
<unk> easier chemistry to achieve compliance on notwithstanding the fact that theres not as you've already pointed out <unk> supply chain for building the cells in the U S. Today, but certainly from a from a raw material supply point of view it as an easier sell long term to maintain that compliance.
And on the commercial credits.
Okay.
Thank you your customers will get that benefit because I'm not sure. If some of that second pillar I might've been cost plus arrangements for some of the vehicle.
Do we believe.
Our customers and specifically our large commercial customer that we're launching our commercial business with <unk>.
We'll see some of those credits Theres also credits that are.
Manufacturer facing with IRA. So we're very cognizant of managing both sides of those credits, both the consumer or the customer facing as well as the manufacturer fishing.
Got it and just last question on the joint venture with Mercedes How does the production split work is there a fixed amount.
Because I mean is there any concern because Mercedes obviously has an established footprint there so.
Is it just sort of you each have an allocation of production or if theres demand you could take over most of the production how does that sort of work under the agreement.
At this point, we're still working through a lot of the specifics of our agreement.
And we've signed and announced an Mou around this joint venture, but theres still a lot of work to be done in terms of defining exactly how it will work.
Okay, alright, thanks for taking my questions.
Thank you please standby for our next question.
Our final question comes from the line of Ryan Brinkman with Jpmorgan. Your line is open hi.
Great.
For taking my questions, maybe just a couple around the planned increase in production here in <unk> I think squeezing from your reiterated full year outlook it implies about a.
A 45% sequential growth on top of <unk>, I think 67% improvement. So firstly, you mentioned being short of specific component in <unk> are you able to share what that component is or if you've cycled past.
That shortage and what has been your experience so far here in <unk> in the first five weeks of the quarter et cetera, maybe with regards to the second shift too. Thanks.
Brian .
Talked about before just the improvement we're seeing broadly within the supply chain.
In particular relative to the first half of this year, which we've spent some time talking about just how challenging that was.
So that improvement, we're absolutely seeing and continue to see.
But.
With a vehicle that has hundreds of suppliers and thousands of components coming from our suppliers.
Only takes one part from one supplier to stop the line is quite referenced earlier.
We had five days, we lost already this quarter because of a single component supply shortage now.
That component and the supplier of that component is something we spent a lot of time working really closely with them to avoid having this happen again and have built robust.
Contingencies to manage this risk going forward.
And we do believe there's going to continue to be challenges certainly with supply chain, but we do believe with this specific instance that we've settled it.
To allow us to continue to to ramping without those types of interruptions.
Okay very helpful. Thank you and then just lastly, I think last quarter you had talked about.
Preserving free cash outlook by deferring some capex spending that was discretionary into next year now with the push out of our two debt.
How are you thinking about that are you may be looking to.
Trim capital expenditures next year relative to what might have otherwise been the plan.
As you heard we both took down our guidance from a capex perspective, this year and so part of that is a shift into next year and then next year does have some incremental benefit in that we're not spending at the same capacity towards the plant build out in Georgia.
But in aggregate is as I mentioned, we still expect to be in that low $2 billion area, even with those events.
Okay very helpful. Thank you.
Thank you.
I would now like to turn the call back over to Andre for closing remarks.
Thanks, everybody for joining the call.
Great to have such a broad spectrum of questions here today.
To reiterate some of the points clarinet, both made throughout the call were.
Really looking forward to the continued ramp of our of our production line. The impacts this has not only on the economics of our business, but very importantly on ensuring we deliver to customers.
Cited customers that.
Help us to bring.
Bring them bring them their vehicles get them get them in there or when theatre rns as soon as possible. That's a critical focus for us.
And as we look out into 2023, the continued ramp and continued growth in deliveries as our core core focus.
And with that of course, driving efficiency into and across the business not just on <unk>.
Our cost of goods sold but across our operating expenses as well as how we deploy capital from a capex point of view.
So with that thank.
Thank you everybody for joining.
We look forward to our next earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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