Q3 2024 Rivian Automotive Inc Earnings Call
[inaudible]
Prioritize the survival of the environment, before committing any serious harm to society. Lisbon Bar B instructor
Good day. Thank you for standing by.
Speaker Change: Welcome to Vivian's 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 11 on your telephone. You will then hear an automatic message advising your hand is raised.
Speaker Change: Good afternoon and thank you for joining us for Ribbion's third quarter 2024 earnings call. Today I'm joined by RJ Scaringe, our CEO and founder, Claire McDonough, our CFO, and Javier Varela, our Chief Operations Officer.
Speaker Change: 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.
Speaker Change: Such statements involve risks and uncertainties that could cause actual results to differ materially.
Speaker Change: These results and uncertainties are described in our SEC filings in 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.
Speaker Change: 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.
RJ Scaringe: Thank you, Tim, and thank you all for joining us today. I'm going to start by talking about the R1 and specifically the Gen 2 ramp-up. First, the material costs, the progress we've made, as well as the efficiency improvements within the plant.
RJ Scaringe: are really important and critical for our long-term profitability as a business.
RJ Scaringe: Those changes, and a lot of the changes that went into Gen 2, were focused on cost.
RJ Scaringe: But we also introduced hundreds of other design and engineering changes that enhance the performance of the customer experience in the vehicle.
RJ Scaringe: And one of those is the introduction of a new variant, what we call our tri-motor. It puts a single motor in the front and two motors in the back.
RJ Scaringe: and it delivers really exceptional performance. Performance that's better than our first generation quad, but with a much lower cost in terms of what it takes to manufacture and also with a substantial improvement to efficiency.
RJ Scaringe: And we're seeing a lot of excitement around the tri, and we're excited to also be bringing the quad to market, the updated quad, in 2025.
RJ Scaringe: Now, with that, we had a bunch of suppliers who brought on with the Gen 2. Around 50% of the bill of materials by cost is with new suppliers or new contracts.
And with that, there's been some challenges.
RJ Scaringe: and those have really impacted us in the quarter and this has been, this has been a tough quarter for us because of some of those supply chain or supply ramp challenges.
RJ Scaringe: and one of those flyers in particular has limited our production.
RJ Scaringe: quite substantially and we're working very very hard to address that. This is this is one of our highest priorities in terms of in terms of the business and we're seeing this is really a short-term issue but it certainly introduced challenges as we saw in Q3.
RJ Scaringe: Now, a lot of the learnings that went into the Gen 2 ramp-up, the design of the components, the design of the systems, are underpinning what's going into R2.
RJ Scaringe: From a timing point of view, it's on track, and the product itself is really exciting. It's delivering a level of performance and capability.
RJ Scaringe: in a package that really looks and feels like Rivian, but it's doing it at a substantial reduction in terms of its overall cost.
RJ Scaringe: And a key part of this isn't just the design of the components, it's also all the supplier relationships that we've grown and built.
RJ Scaringe: are aggressive cost targets we've set for the program. We've talked about these at our Investor Day, but this is overall going to be what allows us to reduce the cost of R2 relative to R1 on sort of a like-for-like basis in terms of content by about 45%.
RJ Scaringe: Beyond just the cost focus that's gone into R2, this is also a program that's really been architected around creating something that's special and unique in the marketplace.
RJ Scaringe: and our hope and, of course, what we're targeting is to...
RJ Scaringe: capture that same level of excitement but at a price point.
starting at $45,000 with R2.
RJ Scaringe: The key to liver analysis is, of course, the launch of our plant and the production line here at Normal. And the expansions we're making to the facility are well underway. The grading work at the site level is essentially done.
RJ Scaringe: This positions us to start deliveries of R2 in the first half of 2026.
RJ Scaringe: And so the progress that's being driven into the plant, the learnings from R1, and of course the supply chain relationships we've established and the contracts we're putting in place are really critical for both delivering on the timing but also the aggressive cost targets we've set for this program.
RJ Scaringe: Now, we also announced today the sourcing of battery cells for the program.
RJ Scaringe: And we're using a cylindrical cell, a 4695 cell, so 46 millimeters in diameter, 95 millimeters tall.
RJ Scaringe: And that relationship with LG is something we've been working on for quite some time. And those cells go into a really uniquely designed pack, where the modules and the pack, in conjunction with, of course, holding the cells,
Oh
RJ Scaringe: act as a core structural element of the vehicle. This is a structural battery pack.
RJ Scaringe: We're not just the structure of the pack is part of the body But the top of the battery pack actually forms the floor
of the vehicle.
RJ Scaringe: And so these are the types of decisions we're making across the R2 program to drive cost efficiency through part elimination or part consolidation, which is key for us delivering at the price point we've talked about with R2, but doing that with a healthy positive gross margin.
RJ Scaringe: Now, beyond body structure, battery sourcing, the vehicle architecture, some of the things we've talked about, one of the other really important elements of R2 is leveraging the electrical architecture, our topology VCUs, and the software stack we've developed.
RJ Scaringe: put that into the Gen 2 of R1, is that that platform underpins R2. It's also core for joint venture with Volkswagen.
RJ Scaringe: and the joint venture Volkswagen continues to progress well. We remain really excited about this. Our teams are passionate about the impact we can drive through leveraging and seeing our technology make its way into so many different vehicles.
RJ Scaringe: We have a drivable demonstrator where we've put our hardware and our software into a Volkswagen Group product.
RJ Scaringe: The investments from Volkswagen as part of this joint venture, which we've talked about in the past, these are really important for us. These allow us to not only fund the continued growth of Rivian and through the launch of R2 and Normal, but also allow us to launch our production plant in Georgia.
RJ Scaringe: where that will not only produce R2 but other vehicles on this mid-sized platform.
RJ Scaringe: And ultimately, the capital we have plus the capital provided by the joint venture will take us through a positive free cash flow.
RJ Scaringe: Now, I said it before and I do want to end by just restating the importance of creating highly compelling product in driving the transition to electrification.
RJ Scaringe: We've seen that with R1. The R1S is the most popular SUV over $70,000 in California. That's not just the most popular electric SUV, it's the most popular SUV sold in California. We're hoping to see that level of excitement.
RJ Scaringe: continue and carry through with R2 as I said and ultimately that's what's going to help pull customers
out-of-combustion vehicles, internal combustion vehicles, and then TVs.
RJ Scaringe: as the features and the capabilities of the vehicle being so exciting that it helps draw customers in.
RJ Scaringe: And so that's our focus, that's what has us incredibly optimistic around the future.
RJ Scaringe: And we'd like to thank all those that continue to support this vision. This is our employees, our customers, partners, suppliers, of course our communities, and lastly our shareholders.
So with that, I'll pass the call to Claire.
RJ Scaringe: Thanks, RJ. During the third quarter of 2024, we made progress driving greater cost efficiency and validating the differentiated nature of our technology stack.
RJ Scaringe: During the third quarter, we produced 13,157 vehicles and delivered 10,018 vehicles, which represented the primary driver of the $874 million of revenue we generated.
RJ Scaringe: As mentioned on our second quarter earnings call, we expected Q3 deliveries to decrease on a sequential basis due to the reduced R1 inventory.
RJ Scaringe: We started the third quarter with low finished goods inventory of R1, due to the successful sell-down of our first generation R1 vehicles in the second quarter.
RJ Scaringe: Demand for R1 vehicles was negatively impacted in the third quarter of 2024 by the production disruption and challenging consumer backdrop. The sequential production ramp following the plant retooling upgrade and the part shortage limited availability of specific R1 variants for sale in the third quarter.
Total gross profit was negative 392 million dollars.
RJ Scaringe: Our growth loss per vehicle delivered was approximately $39,100, which includes $18,600 of depreciation and amortization expense and $600 of stock-based compensation expense.
RJ Scaringe: In addition, we incurred approximately $3,700 per vehicle delivered in the quarter related to our cost of revenue efficiency initiatives, which we do not anticipate being part of our long-term normalized cost structure.
RJ Scaringe: The introduction of the second generation <unk> platform combined with the commercial cost improvements in commodity tailwind are expected to enable a 20% material cost reduction when comparing an <unk> dual motor with large packed produced in Q1 2024 first is Q4 2024.
RJ Scaringe: The introduction of the second generation R1 platform combined with the commercial cost improvements and commodity tailwinds are expected to enable a 20% material cost reduction when comparing an R1 dual motor with a large pack produced in Q1 2024 versus Q4 2024.
RJ Scaringe: Importantly in the third quarter, we saw a meaningful reduction in our second generation <unk> material cost as compared to our first generation <unk>.
RJ Scaringe: Importantly, in the third quarter, we saw a meaningful reduction in our second-generation R1 material costs as compared to our first generation.
RJ Scaringe: This is in line with our target and we expect to see this continue into the fourth quarter, we remain focused on driving greater cost efficiency throughout the company and continue to see this result in lower operating expenses, our GAAP operating expenses in the third quarter were $777 million.
RJ Scaringe: This is in line with our target and we expect to see this continue into the fourth quarter.
RJ Scaringe: We remain focused on driving greater cost efficiency throughout the company and continue to see this result in lower operating expenses.
RJ Scaringe: Our GAAP operating expenses in the third quarter were $777 million, which is the lowest level we've had in three years, and a reflection of the cost savings initiatives we've put in place.
RJ Scaringe: Which is the lowest level, we've had in three years and a reflection of the cost savings initiatives, we've put in place.
RJ Scaringe: We are reaffirming our annual production guidance of 47 to 49000 vehicles.
RJ Scaringe: We are reaffirming our annual production guidance of 47,000 to 49,000 vehicles.
We expect to increase our Tri motor and commercial land production and deliveries in the fourth quarter as those variance only require one internal motor.
RJ Scaringe: We expect to increase our tri-motor and commercial van production and deliveries in the fourth quarter, as those variants only require one enduro motor. I want to emphasize we believe this is a short-term obstacle.
RJ Scaringe: Want to emphasize we believe this is a short term obstacle.
RJ Scaringe: We are reaffirming our annual delivery outlook of low single digit growth as compared to 2023, which reflects the range of 50 552000 vehicles.
RJ Scaringe: We are reaffirming our annual delivery outlook of low single-digit growth as compared to 2023, which reflects a range of 50,500 to 52,000 vehicles.
RJ Scaringe: We expect to have a modest GAAP gross profit in the fourth quarter of 2024.
RJ Scaringe: We expect to have a modest gap gross profit in the fourth quarter of 2024.
RJ Scaringe: This is supported by three key drivers first revenue per unit is expected to increase driven by an increase in non vehicle revenues such as regulatory credits service free marketing software and other services.
RJ Scaringe: We now expect to have a total of approximately $300 million of.
RJ Scaringe: A regulatory credit sales in 2024.
RJ Scaringe: We also expect to see an increase in the art one average selling price as we improve our sales mix with more meaningful Tri motor sales in Q4.
RJ Scaringe: Secondly, as part of the transition to our second generation <unk> vehicles, we are seeing an improvement in material costs due to design changes supplier commercial negotiations and lower raw material costs.
RJ Scaringe: We also expect the increased mix of <unk> sales in the fourth quarter will also help to drive down our variable cost per unit delivered.
RJ Scaringe: Lastly, based on changes to the design of our vehicles improvements in the manufacturing process and depreciation of our initial vehicle tooling, we expect to reduce our fixed cost per vehicle delivered in the fourth quarter.
RJ Scaringe: We also expect LC and RV and firm purchase commitment balances to continue to decline in the fourth quarter.
RJ Scaringe: The new technology introduced into our one where strategically designed to benefit <unk> in the long term.
RJ Scaringe: In addition.
RJ Scaringe: Building, the RQ and normal first allows us to best leverage our operations leadership team and existing manufacturing and logistics operations and overhead costs.
RJ Scaringe: Of these benefits in addition to the significant progress. We've made sourcing are too we anticipate <unk> is having a much faster path to profitability as compared to our one.
RJ Scaringe: While we continue to make progress on our <unk> cost structure in the near term. Our team is focused on addressing the component shortage impacting our ability to produce enduring letters.
RJ Scaringe: Due to the lack of fixed cost absorption associated with the lower 2020 for volumes. We are revising guidance for our 2024 annual adjusted EBITDA to between $2 $8 billion to $5 billion loss to it.
RJ Scaringe: Two $875 billion loss Capex guidance for 2024 is unchanged at $1 2 billion.
RJ Scaringe: Looking ahead, we are excited about the significant opportunity of our joint venture with Volkswagen Group.
Speaker Change: As RJ mentioned the proceeds we anticipate receiving following the formation of the joint venture and certain milestones together with our $6 $7 billion of.
Speaker Change: Cash cash equivalents and short term investments are expected to fund <unk> capital roadmap for growth with the ramp of <unk> and normal and build out of <unk> and additional variance in Georgia.
Speaker Change: <unk> Ruby into free cash flow positive.
Speaker Change: We are excited to share the cost savings potential milestones and other benefits upon closing, which we expect to happen this quarter.
Speaker Change: I wanted to again, thank our team partners customers suppliers and shareholders for their tremendous support.
Speaker Change: With that let me turn the call back over to the operator to open the line for Q&A.
Speaker Change: Thank you ladies.
Speaker Change: Ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Speaker Change: So we try a question simply press star one again.
Speaker Change: In consideration of time, please limit yourself to one question and one follow up.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question coming from the line of Manuel Marci <unk> with Wolfe Research. Your line is now open.
Speaker Change: Thank you so much.
Speaker Change: My first question is on the.
Speaker Change: Improvement in the.
Speaker Change: The gross profit.
Speaker Change: Implications for the unit economics on all one.
Speaker Change: Obviously, you expect a fairly meaningful amount of rent credits in the fourth quarter and then it's a modest gross profit so I would assume.
Speaker Change: Without it is still somewhat unprofitable, but can you maybe comment on where you are in the path of improvement in unit economics, how should we think about it in terms of how much dose fourth quarter mean for how should we think about it for 2025, and which are the levers you have to keep improving in place.
Speaker Change: Sure. Thanks, Daniel as you noted one of the primary drivers of the improvement that we anticipate seeing in our gross profit as we drive to Q4 positive gross profitability is is the growth in revenue per unit and so that's been driven by both the $300 million.
Speaker Change: That I talked about in terms of regulatory credit sales that we anticipate achieving throughout the course of this year and as well as some of the improvements that we'll see in <unk>.
Speaker Change: Average selling prices as we translate that into 2025 as well as on a revenue per per delivered unit in 2020, but we'll also be launching our quad motor offering as well. So that will also be a tailwind as we think about overall ESP increase at catalysts for the business as a whole so that'll.
Speaker Change: Another driver as we think about the go forward progression.
Speaker Change: The next piece is as we look at the variable cost per unit improvement, while we will continue to see progress in or a reduction in material costs from Q3 into Q4, we will continue to see tailwind as well as as we work our way into 2025.
Speaker Change: We still have meaningful commodity cost improvements that are still yet to be achieved and then we've seen and continue to see the RQ sourcing processes. Another tailwind for us as we look ahead to.
Speaker Change: Continued improvements, especially from a commercial costs down standpoint from a variable cost per unit.
Speaker Change: The last piece is as we look at overall at fixed cost per unit dynamics clearly that the reduction in our production guidance for this year did have an impact on the.
Speaker Change: Progress in this category in particular, but we've seen additional operational efficiencies that we're driving within our production plant at through the pivot to our generation two or one vehicles as a whole and then we'll continue to see both in the fourth quarter and in 2025.
Speaker Change: A step down in our depreciation expenses on aggregate as well given we're now three years into production and we've largely depreciated the majority of our initial tooling.
Speaker Change: Our startup production standpoint as well.
Paul: Okay. That's a lot of great. Paul just maybe my follow up would be then based.
Speaker Change: Based on all of these factors would you expect.
Paul: 2025 gross profit too.
Speaker Change: <unk> positive and can you give us some sort of stuff.
Speaker Change: An indication of how to think about Reg credits for 2025.
Speaker Change: Sure our goal remains.
Speaker Change: It remains that we are trying to target a positive gross profit for 2025.
Speaker Change: I will say that we're operating today in a fluid environment and will provide additional details on that outlook for <unk>.
Speaker Change: For 2025 on our Q4 earnings call. When we will provide a more formalized guidance for the full year as a whole as.
Speaker Change: As it pertains to regulatory credits, we do have visibility into future opportunities for the sale of our credits into next year.
Speaker Change: Or do you expect them to be in line with what we've what we've seen here for for 2024 as a whole.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Question coming from the line of Adam Jonas with Morgan Stanley. Your line is now open.
Speaker Change: Yeah.
Speaker Change: Thanks, everybody. So you highlighted the challenging consumer environment.
Speaker Change: Just wanted to drill in on that but can you remind us what percentage of your volume in the quarter.
Speaker Change: Preordered versus sold out of the dealer inventory and how is that changing.
Speaker Change: I'd also be curious given.
Speaker Change: Events of this week.
Speaker Change: Could you remind us what portion of your sales are the customers who realize the full 7500 dollar tax credits.
Speaker Change: And what and also what percentage of your sales are leased.
Speaker Change: And can you confirm how Arabian as you know that really has not taken any direct residual value exposure related to those leases.
Speaker Change: Sure Adam as we think maybe I'll take the second part of your question first on leasing overall lease penetration was 42% within the quarter cases or at least partner and <unk> together with chase a shares and the residual values of of the vehicles.
Speaker Change: We have as part of that leasing program and it's something we utilized third parties to mark the residual values.
Speaker Change: We anticipate achieving in it it's something that our team studies are carefully on a monthly and quarterly basis as we adjust our reserve levels.
Speaker Change: Accordingly to what we're seeing in the broader market backdrop as a whole.
Speaker Change: As we think about that in the overall mix of volume from Preorders in Q3, we had at the end of our early preorder pricing volumes as a whole. So we did see an uptick overall in terms of consumers that were those early customers that were utilizing that early at lower price.
Speaker Change: To their benefit as they purchased a gen one or that remainder of Gen. One vehicles.
Speaker Change: As a whole in in.
Speaker Change: In Q3, and then in terms of the percentage of sales that that receives the $7500 credit. It's largely our population of lease consumers that are able to take advantage of that credit given the price point of our vehicles and the overall income levels most of our customers don't qualify.
Speaker Change: Hi, Ana or financed or cash purchase.
Speaker Change: Thanks Claire.
Speaker Change: Thank you and our next question coming from the line of Dan Levy with Barclays. Your line is now open.
Dan Levy: Hi, good evening, Thank you for taking the questions.
Speaker Change: I wanted to start and just follow up maybe a bit on <unk>.
Speaker Change: Emmanuel question and just to decompose the three third quarter Cogs per unit.
Speaker Change: It was roughly $127000, if you backed out the cost and revenue initiatives.
Speaker Change: Recognizing that there is.
Speaker Change: There were inefficiencies on the volume on the supplier side, maybe what is a more clean way to look at your current Cogs per unit and then into 2025.
Speaker Change: Maybe just decompose some of the pieces on the cost per unit that got better and specifically the cadence of material cost benefits how that layers in.
Speaker Change: Thanks, Dan for the question. This is of course, something we spend a tremendous amount of time focusing on in.
Speaker Change: Yes.
Speaker Change: Third quarter was.
Speaker Change: Hard quarter to look through all the noise with the.
Speaker Change: Ramp up and bring up of our Gen two platform.
Speaker Change: <unk> said.
Speaker Change: <unk> supplier relationships.
Speaker Change: Either changed or were ended and replace with new supply relationships as I said, we replaced about 50% of the bill of materials.
Speaker Change: Sure by cost.
Speaker Change: And then of course, the supply interruption that that did help production.
Speaker Change: For some time and overall lower the amount of extra will produce in the quarter had some impacts.
Speaker Change: So you look through all that noise and I think the important thing to note is.
Speaker Change: If you were to look at material cost in this quarter in Q4, and you were to compare that to our material costs in the vehicle in Q1 of this year.
Speaker Change: The Q4 material cost is going to be 20%, we projected to be 20% lower than what we saw in Q1. So we are making real meaningful progress in terms of lowering or biller materials lowering our cost structure.
Speaker Change: In a similar fashion, we're also driving efficiency tower running the plant so the hours per unit.
Speaker Change: That we build is coming down we're driving more quality into the vehicles. So there's.
Speaker Change: The just the flow of the plant is running smoother.
Speaker Change: But it's really hard to see through all the different.
Speaker Change: Elements that made up Q3, and so we we actually talked about this a lot how do we how do we communicate the progress we're making despite the fact that Q3 makes it hard to see.
Speaker Change: And I think.
Speaker Change: In short that one of the most important things to call out here is that we're continuing to guide.
Speaker Change: Q4 to a positive gross margin on a roll with that said I do want to just to invite Javier to have a few commentary. He is he has joined the team now.
Speaker Change: Now for a couple of months. These M&A along with rest of the leadership team have been working really closely together not just on the production of our one and the continued progress towards positive margin, there, but but very importantly on the <unk> program and that's both in terms of the plant, but also the supply chain.
Speaker Change: Thank you Ajay.
Speaker Change: Indeed.
Speaker Change: Big focus currently is in improving performance.
Speaker Change: Implementing lean exploration, if I may call it that way compression the value streams.
Speaker Change: Empowering the shop so.
Speaker Change: The potential of all of our members suddenly there's group leaders or we Havent started recently with very promising results on really what was visiting the line. This morning, and I'm very pleased to see how people are engaged in and improving performance, we as well.
Speaker Change: Rob just to find our <unk> industrial operating system or.
Speaker Change: Our integrated embraces operating system, all our lean principles and again accelerating their implementation and when it comes to the way of working and the teams enhancing MTM cross functional view and collaboration.
Speaker Change: The big priorities.
Speaker Change: For that performance is improving in the short term that those results, but what's more important is to prepare.
Speaker Change: The plant for London.
Speaker Change: Our two appropriately led to high levels of quality cost and with the right delivery lead times.
Speaker Change: Great.
Speaker Change: Helpful. And then just you could remind us on the.
Speaker Change: Is it the benefits actually from stronger operations and 25, how much runway there is to drive the Cogs per unit down.
Speaker Change: Sure as we think about 2025, one of the core benefits that will have is having the gen. Two in production for the entirety of the year relative to what we had over the course of 2024 and as RJ alluded to 2024. It is also a <unk>.
Speaker Change: Bit noisy just given the shutdown that we had to introduce the gen. Two into the line and ramp up from a production standpoint. So as we look ahead Javier and team now had the opportunity to really drive many of those core lean manufacturing principles to drive an overall focus around operational.
Speaker Change: <unk> within our manufacturing facility here in normal.
Speaker Change: And ensure we're ready for our two which is coming next in 2026, we will still have a shut down.
Speaker Change: Part of our production cadence in 2025 that'll be in the second half of the year just over a month of shut down there.
Speaker Change: To do it a number of work and a lot of work on many of the shared shops.
Speaker Change: And specifically our paint shop to make sure that we're ready for <unk> now started production.
Speaker Change: Thank you if I could just.
Speaker Change: And one more on <unk>.
Speaker Change: Volkswagen we've seen the scout announcement and it's using the joint electrical architecture, maybe you could just I know, we're waiting for the JV to be close but remind us of.
Speaker Change: Sort of where the collaboration currently stands.
Speaker Change: Yes, as I said, we're excited about our partnership with Volkswagen and.
Speaker Change: Looking forward to being able to support that.
Speaker Change: Developing really compelling products across <unk> across our portfolio of brands and markets.
Speaker Change: As it stands today.
Speaker Change: Built a.
Speaker Change: Demonstrator essentially that is driving the vehicle that utilizes our electrical architecture are issued topology, our software stack.
Speaker Change: And it's incredibly encouraging and exciting to our teams on both the revenue side and the Volkswagen group side.
Speaker Change: And.
Speaker Change: In terms of which products or technology is going to go into and in what cadence that has not been announced yet.
Speaker Change: But of course, the nature of the deal and the scale of this partnership and this deal.
Speaker Change: As such that our technology can be seen across many different <unk>.
Speaker Change: Products and brands within the Volkswagen Group family.
Speaker Change: Thank you and our next question coming from the lineup.
Speaker Change: Mark Delaney with Goldman Sachs. Your line is now open.
Mark Delaney: Yes, good afternoon, and thanks very much for taking my question.
Mark Delaney: 2024 production guidance implies that production in the fourth quarter will be a little over 11000 units or roughly 865 vehicles per week, maybe you can help us better understand where Arabian currently stand and I ask.
Mark Delaney: Better contextualize, where you stand with the supply constraint with the intermodal.
Speaker Change: Thank you Mark for your question.
Speaker Change: We are.
Speaker Change: Well, we have been working in the last weeks with that specific constraint I would say that this is a short term constraint.
Speaker Change: The teams have demonstrated.
Speaker Change: Great enormous sense of urgency.
Speaker Change: Gathering together with their supplier working cross functionally constrained themes.
Speaker Change: Onsite.
Speaker Change: And what's more important is that we.
Speaker Change: We are now ramping up on new capacity in record time.
Speaker Change: Sure.
Speaker Change: Last weeks have been very promising and we see that we are in the right trend to recover the right capacity.
Speaker Change: Really really promising so.
Speaker Change: We think that that program. So I think that that program will be over in the very next weeks.
Speaker Change: Thank you for that color. My second question was around the regulatory credits.
Speaker Change: You said you now expect $300 million for this year I had thought it was closer to 200 million as an outlook for 2024, maybe help us better understand what's leading to the upside relative to the prior view. Thank you.
Speaker Change: Sure Mark as we've gone throughout the course of this year, we have seen an increase in the underlying value of their regulatory credits that we've been selling to Tim any of the OEM counterparties across the board as well as the opportunity to sell deeper into the overall.
Speaker Change: Red credit areas of focus for our core team.
Speaker Change: Is it highly complex puzzle.
Speaker Change: Puzzle is as our team manages our credit portfolio relative to the needs of other Oems on a state by state basis as a whole and so this is just a demonstration of the progress that our team has been able to meet to achieve this great outcome of being able to bring in $300 million of.
Speaker Change: Our values Caribbean through the sale of these regulatory credits.
Thank you our next question coming from the line of Joseph.
Speaker Change: I'm stuck with UBS. Your line is now open.
Speaker Change: Thank you very much.
Speaker Change: Clear.
Speaker Change: We've just been talking about <unk>.
Speaker Change: 2025, a little bit a couple of times on this call and you mentioned so that gross part gross profit positive target you again, just sort of mentioned.
Speaker Change: Some downtime.
Speaker Change: Later later in the year so.
Speaker Change: I guess just to be clear when you say gross profit positive.
Speaker Change: For the full year at some point of the year is it like on the R. One vehicle like ex something for our two and I guess that's related to the regulatory question like how do we think about the cadence of that like do you have any recourse and when do you recognize that revenue.
Joe: Sure Joe as we look at 2025 overall.
Joe: So you pointed out we will have quarterly impacts to it is we don't expect that every quarter in 2025 will be positive gross profit in its own right.
Joe: Our target is to be positive for the year and it's in is it in its entirety.
Joe: And so as we think about some of the relative impacts that we'll have next year as a whole.
Joe: Some of that will be driven by the lumpiness of the recognition of our regulatory credits as well that are certainly an enabler of that path to positive gross profit in 2025 in aggregate and so as we look out into the future. We do have an understanding of timing needs.
Joe: Any of the Counterparties that we're working with.
Joe: Some cases, the timing of regulatory credit recognition is related to government agencies as well and so some of it is is a little bit up for.
Joe: Understanding the exact timelines that we will achieve it but that's our current view and as we think about that the overall cadence of our recognition of those credits.
Joe: At a high level, excluding maybe some of the agency stuff like you recognize revenue when someone buys it from you like you can recognize you can't recognize it on an agreement to buy it from you.
Speaker Change: Right, it's not on an agreement it's when we transferred the credits to that counterparty okay.
Speaker Change: The second question just.
Speaker Change: I apologize.
Speaker Change: And literally right, what you're saying, but I thought I heard you say van production will be up in the fourth quarter is that deliveries too or are you building. Some inventory maybe in advance of some actions in next year, because I thought in the past you had mentioned that Amazon doesn't really I'd like to take a lot of EMS in the fourth quarter. So did something change with the.
Speaker Change: The cadence there.
Speaker Change: Yes, as I mentioned in my prepared remarks, we are increasing our production of those bands as well as try motors in the fourth quarter.
Speaker Change: Increasing production as well as deliveries of those units because both of those variance only require one in Durham motor and so from an operational efficiency standpoint that was that the best way for us to increase our maximize our overall production for the year and in aggregate.
Speaker Change: So.
Speaker Change: I would say, we do certainly expect that there would be additional Amazon van sales in the fourth quarter of this year.
Speaker Change: Thank you and our next question coming from the line of.
Speaker Change: <unk> <unk> with Canaccord Genuity your line is open.
Speaker Change: Hi, good afternoon, and thank you for taking my questions I just wanted to.
I'll piggyback on a previous question around the relationship with Volkswagen and the Scout vehicle.
Speaker Change: From what we understood about the relationship it has to do with <unk>.
Speaker Change: Electrical and software but.
Speaker Change: Karl looks a lot like an R. One and so to what extent.
Speaker Change: Can we expect there to be sort of a.
Similar lineup from Volkswagen with regard to really and how closely will you be cooperating on aesthetics as well as engineering. Thank you.
Dan Levy: Yeah. Thanks George.
Speaker Change: The joint venture.
Speaker Change: And calculates as.
Speaker Change: Electrical architecture are easy to use and the software that's running on those issues.
Speaker Change: Yeah.
Speaker Change: It's really important to us.
Speaker Change: I recognize that that doesn't mean, the UI framework, so where the digital screens inside the vehicle look the number of screens and shape of the screens, but really the underlying software.
And thats going to that platform our platforms can be used across a wide range of products and brands and each of those products and brands will have decisions around.
Speaker Change: What the vehicle itself looks like which of course doesn't like to the software to the electronics.
Speaker Change: But also decisions around what the UI looks like inside the vehicle and their overall digital design ins design framework.
Speaker Change: So with regards to.
Speaker Change: Our role in any design decisions those decisions remain with the brands of course within Volkswagen Group.
Speaker Change: Thank you and maybe as a follow up just any update on commercial vehicle traction in the marketplace and when we could expect additional customers to ramp volumes. Thank you very much.
Speaker Change: Yeah, as we've said.
Speaker Change: For for a while now.
Speaker Change: The sales cycle on these larger.
Speaker Change: Corporate.
Speaker Change: Commercial fleets.
Speaker Change: Take some time.
Speaker Change: Not just the purchase of the vehicles of the decision around vehicles, but it's it often means changes to the standard operating procedure for the fleet operator.
Requires charging infrastructure.
Speaker Change: Which often is not simple because the sites that they are operating out of may not have been designed for.
Speaker Change: That level of that level of power that level of energy.
Speaker Change: And so with that said we are starting to see the beginnings of the efforts that we've had over the last year to put those in place and we will start to see more of that in 2025 and this is a focus for the team.
Speaker Change: We're super excited about seeing our vans out in the world with.
Different logos and different brands on them is different fleets start to start their journey towards electrification.
Speaker Change: Thank you and our next question coming from the line of.
Speaker Change: Tom Narayan with RBC capital. Your line is now open.
Speaker Change: Alright, thanks for taking the question I'm, sorry, one more on the regulatory credits so if I look.
Speaker Change: Look at the Q3 gross profit.
Speaker Change: Mm 392.
Speaker Change: I believe the 300 million of that $2 75.
Speaker Change: Q4 alone I think you did 25 year to date.
Speaker Change: So that would imply like a $117 million benefit in Q4 volumes were depressed in Q3. So you.
Speaker Change: They are coming back in Q4 that should be a benefit or a piece of a big piece of it I think of that 117. It. It just feels like the sequential bridge between Q3 to Q4 on cost improvement sequentially might not be as significant just be helpful clear to just see what the cost.
Speaker Change: Improvement piece of that bridge is if you could quantify that that'd be really helpful. Thanks.
Speaker Change: Sure Tom we don't give specifics, but as we think about the core drivers beyond the.
Speaker Change: The revenue related ones that we talked about there is going to be a significant improvement in underlying average selling prices as we start to sell through additional try motors in the quarter.
Speaker Change: As I mentioned previously as well we ended the preorder holder early pricing and so that would be a natural dues overall as we think about more full.
Speaker Change: Full price sales in the fourth quarter in aggregate and then as you look at the underlying cost structure as a whole.
Speaker Change: And embedded in our production guidance is slightly below our Q3 level as we think about the underlying fixed cost absorptions, so where we're seeing the benefits there as I mentioned are really a step down in depreciation will also we also expect to see our LC and RV and firm purchase commitment levels.
RJ Scaringe: Coming down and then we will see continued progress on our variable cost per unit basis. So as RJ highlighted previously as well there's a bit of noise that you see in the Q3 numbers. So Q4 will be more represent.
RJ Scaringe: More representative of our go forward launching off point into 2025, where we anticipate seeing further progress across each of the three core drivers of our revenue per unit variable cost per unit and fixed cost per unit improvements.
Speaker Change: Got it and my follow up RJ.
RJ Scaringe: Our two I believe the $45000 price a variety is the one that's not the 300 mile range when it might be below.
Speaker Change: Just wondering how competitive that would be.
Speaker Change: $45000 under a 300 mile range vehicle with the in 2026, the competitive environment seems to be.
Speaker Change: We have GM with.
Speaker Change: Equinox sub 30000, with 300 plus miles of range, how does that compete at a different demographic perhaps.
Speaker Change: That makes it different features beyond just battery range, just love to hear how the competitive environment.
Speaker Change: Shakes out with that with that product at that range at that rate.
Speaker Change: Yeah. Thanks, Tom for the question on are we love talking about our two are Super excited about it just to clarify that.
Speaker Change: 45000 aren't starting price for our two corresponds to the lower performance spec on the vehicle relative to <unk>.
Speaker Change: What's possible at our platform level, but the range on that.
Speaker Change: So over 300 miles so it's a 300 mile.
Speaker Change: But we stay for an a plus miles of range, but on a lower performance back in with some of the content levels on the tiers slightly different than the top spec variance.
Speaker Change: And we've spent a lot of time looking at this relative to what else is in the market.
Speaker Change: And one of the biggest unlocks we believe for overall demand of Evs in the path towards ultimately a 100%.
Speaker Change: New vehicle sales being electric is the need for a lot of customer choice and a lot more choice than we have today.
Speaker Change: And there are very very few compelling options in that sub $50000 price range.
Speaker Change: We believe <unk> is going to be an important product for giving customers choice. That's a unique form factor unique performance.
Speaker Change: Brendan and product attributes and having spent a lot of time or in and around the vehicle I can say I've never been as excited as I am.
Speaker Change: For a product that is M for are too.
Speaker Change: Thank you and our next question coming from the line of Jackson.
Speaker Change: <unk> with BNP Paribas. Your line is now open.
Speaker Change: Hi, everybody.
Speaker Change: On the revenue per unit increase for the fourth quarter I assume this.
Speaker Change: It's a $275 million in regulatory credits.
Speaker Change: The increase a year over year reference or compared to the first quarter can you just remind us and then just to echo maybe part of Adam's first question, what's the level of visibility in your order book for such a sizable asps step up.
Speaker Change: And would the increase in Adv deliveries for the fourth quarter weigh on your Asps. So if you could help dimension what the GDP growth is.
Speaker Change: And might look like and whether sequentially or your view of that would be great as well. Thanks.
Speaker Change: As we think about the revenue per unit increase in the fourth quarter and as you rightfully called out will we see an increase in our ones average selling price, which is partially offset by an increase in the sale of commercial land in the fourth quarter and those comments are relative to.
What we experienced in the third quarter of this year as a whole.
And I would say as we look back to last year and in aggregate in Q4, you did see a much lower sort of 8% of revenue being represented by commercial vans I will see that just over about closer to the 25% level in Q4 of this year.
Speaker Change: In aggregate so there will certainly be some some puts and takes there, but that's really the foundational drivers as we think about overall ESP, but on a blended average unit, we'll still see relative to Q3 and an increase from an average selling price standpoint.
Speaker Change: Got it Super helpful.
Speaker Change: And then just.
Speaker Change: <unk>.
Speaker Change: Okay do you have anything yet.
Speaker Change: Okay.
Speaker Change: No I was just going to comment a little bit on order bank.
Speaker Change: But visibility as a whole.
Speaker Change: Our teams App from a go to market standpoint are continuing to drive.
Speaker Change: And push for more consumers to get behind the wheel of our vehicles. We saw that demonstrated by the 20% increase in our demo drives that we had in Q3 relative to Q2 levels.
Speaker Change: And we're continuing to drive brand awareness as a whole to build up more and more interest in radian and and and have those that interest translate into orders.
Speaker Change: Thank you.
Speaker Change: Then just on the <unk> JV.
Speaker Change: <unk>.
Is it expected to close before year end and my apologies, if I, if I miss confirmation or clarity on that and just associated with the JV I believe they were going to be certain milestone achievements associated with vw's additional funding tranches. So can you provide any any color at all on just what the context of those milestones.
Speaker Change: Might entail thanks.
Speaker Change: Hi, Jake.
Speaker Change: The Volkswagen joint venture.
Speaker Change: We expect it to fully close certainly before the end of Q4.
Speaker Change: And you know a lot of the work that's gone into defining such as.
Speaker Change: Significant and scaled partnership has played out over the last few months and part of that is some of the key.
Speaker Change: <unk>, if you will of the targets that we're setting for ourselves and so we've worked really closely with the team.
Speaker Change: Volkswagen group to define those and we're very comfortable with those in terms of milestones that.
Speaker Change: Unlock certain portions of the financing associated with the deal.
Speaker Change: Thank you and our next question coming from the lineup.
Speaker Change: Medicine, you with Deutsche Bank. Your line is now open.
Speaker Change: Hi, Thank you very much.
Speaker Change: We don't honestly.
Speaker Change: You guys had mentioned that 85%.
Speaker Change: We're about to bomb.
Speaker Change: Thank you Don.
Speaker Change: Could be potential tariff that take place under the new administration play a role in that.
Speaker Change: Hawkins.
Speaker Change: The design.
Speaker Change: That's right.
Speaker Change: Would you be station.
Speaker Change: All right.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Our two sourcing processes, something we've looked at very strategically and certainly have contemplated even prior to the election, just what the impact would be.
Speaker Change: Should the.
Speaker Change: So the overall approach to tariffs change.
Speaker Change: And so a lot of our focus has been on <unk>.
Speaker Change: Sourcing suppliers that are.
Speaker Change: Not going to be subject to large tariffs and in places where we have source suppliers that are overseas that could be subject to changes in tariff structure.
Speaker Change: Uh huh.
Speaker Change: It's designed to the contracts and design their relationships in such a way that we're not carrying.
Speaker Change: Much of the risk.
Speaker Change: Now with that said, it's there's a lot of policy elements here that are in play and we're watching it very closely I think what's going to be interesting is how farthest reaches into the upstream supply chain. So as we think about raw materials.
Speaker Change: And Thats something that every manufacturer certainly ourselves included are thinking about.
Speaker Change: Okay. That's very helpful. And then I think in Q3.
Sort of like a meaningful decline in opex sequentially and can you remind us.
Speaker Change: There was an extra.
Speaker Change: That's a reduction from a flow through.
Speaker Change: Transportation and then.
Speaker Change: Well that isn't how we should be thinking about that.
Okay.
Speaker Change: Sure as we think about the underlying reductions that we've seen in our cash operating expenses.
Speaker Change: We were able to bring that level to about $599 million for for Q3, which is.
Speaker Change: Against stepped down from where we were in the first half of the year.
Speaker Change: We've talked about the second half as being lower than the first half and in aggregate.
Speaker Change: Which will unlock our ability to be able to have lower cash operating expenses in 2024 relative to what we had in 2023 and this is the collective efforts of many members at the Meridian team across the company are continuing to focus on driving efficiency. So that we can strategically.
Speaker Change: In the most critical areas of the business as we think about.
Speaker Change: Many of our differentiated technology investments as we think about the continued rollout of our service centers and spaces to support our go to market efforts and strategy and so very much proud of the work that our team is John.
Speaker Change: Enable and this level of improvement we do expect as we look to Q4 that we will see an uptick in terms of our spend.
Speaker Change: That's really driven by additional <unk> related spend that will begin to see from an R&D standpoint, and then the ongoing build out of our go to market strategy, which will have.
Speaker Change: Some limited growth in our SG&A line item as well.
Thank you.
Speaker Change: Next question coming from the line of Alex Potter with Piper Sandler Your line is now open.
Speaker Change: Perfect. Thanks.
Speaker Change: Had a question on the Volkswagen relationship there has obviously been.
Speaker Change: I don't know a fair amount of intrigue in the media regarding.
Head count reductions in restructuring and plant closures and things going on at Volkswagen and I just wanted to.
Speaker Change: I guess get some clarity on whether any of the teams that you've been working with may or may not be impacted I don't know obviously, maybe you can put words in their mouth, but has this.
Speaker Change: Impacted you in any way or are there ways that it could potentially impact you.
Speaker Change: Looking looking ahead.
Alex Potter: Alex Thanks for the question.
Alex Potter: The nature of what we're building.
Alex Potter: With our Volkswagen relationship and the partnership that's been designed.
Alex Potter: Provides a really efficient way for them to deploy advanced technology. So it's zonal architecture, which brings massive consolidation to.
Alex Potter: So the issue topology.
Alex Potter: Dramatically simplifies the not only the software architecture, but also the electrical architecture as it pertains to the vehicle harnessed as well. So ultimately this is <unk>.
Alex Potter: Just as it is within <unk> and this is going to drive.
Alex Potter: Structural cost advantages.
Alex Potter: The business.
Alex Potter: This is I think a core reason as to why this partnership and this deal has happened.
Alex Potter: So I think in the context of driving greater efficiency into into their business.
Alex Potter: What we're building with the joint venture absolutely aligns with that and is really important for not only creating.
Alex Potter: Products that are really compelling to customers, but to create those products in ways that are highly cost efficient.
Okay very good.
Alex Potter: And then maybe.
Alex Potter: Lastly, there was a fair amount of verbiage in the shareholder letter on.
Alex Potter: Connect plus.
Alex Potter: Streaming apps and things of this nature.
Speaker Change #101: I mean, it sounds sort of compelling it sounds like that take rates are pretty high amongst people who have been trying it is this something that.
Speaker Change #101: His model something that investors should be including in their own forecasting or is it not quite.
Speaker Change #101: <unk> enough to call that out.
Jim: Yes. This is Jim.
Speaker Change #103: One of the big questions I think being asked broadly around.
Jim: The automotive industry is.
Jim: To what level the future services show up as recurring revenue or do they show up versus price on the front end and in.
Jim: In this case.
Jim: The connect plus what that's that's relating to is there is a variable cost associated with providing the surfaces services. So the data costs.
Jim: Until let's say stream music or two.
Jim: Have a wifi hotspot are non zero and so this reflects us capturing that.
Jim: In a bundled package that brings along with it.
Jim: Not just the.
Jim: Price that covers the cost for us to be providing the connectivity, but also some additional features and we're watching this very closely and in particular I'm thinking about it in the context of.
Jim: The growth of our autonomous platform and what that provides in terms of new features new capabilities and how to appropriately charge for that.
Jim: I think it's too early to tell.
Jim: For us as an industry to say whether customers are going to prefer to pay for things upfront or whether they would.
Speaker Change #104: I'd like to pay for them over time.
Speaker Change #104: The way, we've at least model it internally as we've looked at.
Speaker Change #104: The likely existence of both models, where you'll have some customers who would prefer to pay upfront and others that would rather pay on a more variable basis.
Speaker Change #104: And.
Speaker Change #104: We sort of look at it with someone difference meaning.
Speaker Change #104: Ultimately, it's going to get captured in the price of the vehicle, but it can be captured in a multitude of different ways.
Speaker Change #105: Thank you one woman for next question.
Speaker Change #105: Okay.
Speaker Change #105: And our next question coming from the line.
Speaker Change #105: Michael <unk> with D. A Davidson your line is now open.
Speaker Change #106: Yes, hi, thanks for taking my question.
Speaker Change #107: I guess Steven filling their challenges you mentioned the consumer challenges you had mentioned earlier.
Speaker Change #106: And.
Speaker Change #106: Impact that's having.
Speaker Change #106: <unk>.
I've heard about this.
Speaker Change #106: They might have higher pricing.
Speaker Change #106: Price assumptions in the fourth quarter I'm curious, if you're seeing on a like for like basis, when people are making orders or they're trying to look at cheaper.
Speaker Change #106: Cheaper options or maybe fewer features.
Speaker Change #108: As Doug mentioned at all.
Speaker Change #108: It is important to recognize there is.
Speaker Change #108: But really a broad spectrum of customers and because.
Speaker Change #108: Because of that we've.
Speaker Change #108: Launched in our three different powertrain configurations. So we have a dual motor a tri motor.
Speaker Change #108: And in 2025 will be launching our updates to the quad motor.
Speaker Change #108: And then we have a couple of different battery pack sizes, we have a standard of large in what we call our Max back.
Speaker Change #109: Effectively that's.
Speaker Change #109: Trying to populate the demand curve, where we know some customers have a want.
Speaker Change #109: First thing they can possibly biased but are willing to pay to get the two five seconds or 60, and 400 miles of range and others are going to be more price sensitive I think what clothes, referring to and what we're excited about is just the level of customer excitement, we're seeing for the try and for our quad.
Speaker Change #109: And that of course is positive for us from a margin point of view, but these are hard things you can imagine we tried to model. This predict this and these are hard things to accurately accurately predict.
Speaker Change #109: And to now have the try in the market and to see how customers are asking to see the when we put a trimotor variant into our shop.
Speaker Change #109: How quickly.
Speaker Change #109: It's there for.
Speaker Change #109: But a moment it disappears very quickly if it would be a level of excitement and demand from for that vehicle is high.
Speaker Change #109: And so thinking or looking into 2025.
Speaker Change #109: Our next generation Quad motor vehicle is really I mean, it's just exceptional it's the first Gen Quad was great. But this is a whole another level.
Speaker Change #109: Its a vehicle that can do the quarter mile and less of a $10 five seconds, it's incredibly smooth and refined it can.
Speaker Change #109: Go into almost any imaginable off road environment.
Speaker Change #109: And you can use as an everyday driver.
Speaker Change #109: While in conserve mode getting close to 40 miles of range. So it's just a very unique combination of attributes and of course.
Speaker Change #109: It'll be priced as such and therefore drive a healthy margin to the business.
Speaker Change #109: So these are this is the reason we have this different topology of of motor battery combination and trim combinations to allow us to sell into multiple different customer types.
Speaker Change #110: Thank you Kim.
And I'm showing no further questions I will now turn the call back over to al <unk> for any closing remarks.
Speaker Change #111: Thanks, everybody for joining us on the call today is as you've heard me say in our opening remarks. This was a challenging quarter with some of the.
Speaker Change #111: Production interruptions, we had around supply and some of the.
Speaker Change #111: Nuanced complexities associated with with transitioning into the Gen. Two vehicle on ramping our gen two or one.
Speaker Change #111: But we are incredibly excited about what lies ahead not just with Q4, but thinking into 2025 and very importantly into 2026.
Speaker Change #111: The excitement around our two program.
Speaker Change #111: Internally and externally, but from customers, but also just with the teams that are developing that.
Speaker Change #111: Product and preparing for launches is contagious internally and every time I'm in around it.
Speaker Change #111: Thanks myself I wish this was available today so.
Speaker Change #111: So we are fully.
Speaker Change #111: Fully embody that and doing everything we tend to get that vehicle to market both.
Speaker Change #112: On time, but as Javier said also really excited about how we are maintaining the.
Speaker Change #112: The program around its cost targets, which is such a.
Speaker Change #112: A significant focus for us with that program.
Speaker Change #112: And with that it's exciting to have Javier joined US on this call today. He has been a great partner to me as we're continuing to build for the next stage of growth and really focus on preparing ourselves for a significant ramp up in volume with our too and along with that considerably lower cost to produce our vehicles so with that thanks.
Speaker Change #112: And for joining the call and look forward to our next one.
Speaker Change #112: Yeah.
Speaker Change #113: Ladies and gentlemen, does conclude our conference for today. Thank you for your participation you may now disconnect.
Speaker Change #113: Okay.
Speaker Change #113: Okay.
[music].
Speaker Change #113: Okay.
Speaker Change #113: No.
Speaker Change #113: [music].
Speaker Change #113: Yeah.
Speaker Change #113: Yes.