Rivian Automotive Inc

NASDAQ:RIVN

Earnings Call Analysis

Rivian’s Q2 Progress and Future Outlook

In Q2 2024, Rivian generated $1.2 billion in revenue, delivering 13,790 and producing 612 vehicles. They reported a total gross loss of $451 million, primarily due to efficiency initiatives. However, the introduction of their second-generation R1 is expected to significantly reduce costs in the second half of 2024. Rivian is optimistic about achieving positive gross profits by Q4 2024 and the full year of 2025. Additionally, a new $5 billion joint venture with Volkswagen aims to enhance their technology platform and future scalability. The company maintains its production guidance of 57,000 units for 2024 and foresees more strategic developments to bolster profitability and growth.

Introduction

During the second quarter of 2024, Rivian made significant strides in driving cost efficiency, strengthening its balance sheet, and establishing new business opportunities. Despite planned downtime for retooling upgrades, the company delivered strong performance and expected to ramp up production of its second-generation R1 vehicles to further improve efficiencies.

Production and Deliveries

Rivian produced 612 vehicles and delivered 13,790 vehicles in Q2, generating $1.2 billion in revenue. The majority of inventory of the first-generation R1 was sold, but Q3 deliveries are expected to be below Q2 levels due to low starting finished goods inventory and continued retooling efforts. The company is confident in producing and delivering second-generation R1 vehicles more efficiently in the second half of the year.

Financials

Rivian reported a total gross profit loss of $451 million for Q2, translating to roughly $33,000 loss per vehicle delivered. Depreciation, amortization, stock-based compensation, and cost of revenue efficiency initiatives heavily influenced these figures. Nevertheless, Rivian is on track to achieve a modest positive gross profit by Q4 2024 and aims for a 25% gross profit margin in the long term.

Cost Reduction and Profitability Outlook

As production ramps up for the second-generation R1 vehicles, significant cost reductions are expected. Rivian managed to reduce its gross profit loss per vehicle by approximately $6,000 from Q1 to Q2 2024. Key cost-saving measures include reducing material costs and leveraging fixed costs with an optimized production line. Rivian remains optimistic about turning a modest positive gross profit for the entire year of 2025.

Volkswagen Joint Venture

Rivian's joint venture with Volkswagen Group is expected to bolster its technology platform and cost efficiencies. Volkswagen plans to invest up to $5 billion, subject to milestones and regulatory approvals. This partnership is projected to yield substantial cost savings, operating efficiencies, and new revenue opportunities for Rivian.

Operational Improvements

Rivian improved its cash flow from operations by 41% from Q1 to Q2 2024, reflecting its focus on cost management and working capital efficiency. The company reduced its finished goods inventory and continued to streamline its R1 production line, anticipating further cash usage reductions in the second half of 2024.

Future Guidance

Rivian reaffirmed its 2024 production guidance of 57,000 units, with delivery expectations showing low single-digit growth compared to 2023. The company projects a negative EBITDA of $2.7 billion and capital expenditures of $1.2 billion. For 2025, Rivian expects no vehicle production for one month in the second half of the year as it integrates new equipment and upgrades its plant for the 2026 R2 launch.

Second-Generation R1 Developments

Feedback on the second-generation R1 has been positive, with new design, engineering, and performance upgrades. The introduction of the tri-motor and quad-motor variants is expected towards the end of Q3. The new R1 vehicles promise improved performance, reduced production costs, and enhanced customer experiences.

Customer Engagement and Market Expansion

Rivian continues to grow its service infrastructure and demo drive programs to enhance customer engagement and expand its market presence. The company is also building out its Rivian Adventure Network, a DC fast-charge network, to support both Rivian and non-Rivian customers.

Regulatory Credits

Rivian has over $200 million in regulatory credits under contract for 2024, with additional contracts for 2025 and beyond. The strong regulatory credit market is expected to generate significant revenue, reflecting high demand for Rivian's electrified products amidst a global shift towards electrification.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Rivian Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Tim Bei, Vice President, Investor Relations.

[Timothy Bei, executive]

Good afternoon, and thank you for joining us for Rivian's Second Quarter 2024 Earnings Call. Before we begin, matters discussed on this call, including comments and responses to questions reflect management's views as of today. We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and today's shareholder letter.

During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our shareholder letter. During the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we'll cover on today's call.

With that, I'll turn the call over to RJ who will begin with a few opening remarks.

[Robert Scaringe, executive]

Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments in the quarter and provide an update on the progress we're making against our value drivers. Prior to discussing quarterly details, I want to reinforce the key messages conveyed in depth during our recent Investor Day. To achieve the full potential of our vision, we need to aggressively drive towards profitability. The fundamental levers underpinning this goal include the recent transition to our second generation R1 and the subsequent introduction of our midsize platform, which underpins our too. I'm encouraged by the progress ramping up a second generation R1 vehicles as well as developing R2, which we expect to launch in the first half of 2026.

The ability to dramatically reduce costs in a condensed time frame and drive continual improvement in the customer experience is based on our intentional approach to vertical integration. From the beginning, we have vertically integrated certain components of the vehicle, driven by the desire to create superior customer experiences and deliver long-term structural cost advantages. The success of this is demonstrated by a recent J.D. Power appeal study, where Rivian received the highest score and the most satisfying brand across the automotive industry. We spent years developing key technologies such as our software, electrical hardware, autonomy and propulsion. The significant cost of performance benefits from these technologies gives us confidence in our ability to continue developing and building highly desirable vehicles across the R1, R2 and R3 product lines.

As a testament to our industry-leading technology platform, on June 25, we announced the expected joint venture with Volkswagen Group. The announcement validates our technology platform and is expected to substantially expand the market applications for our software and associated Zonal electrical architecture. Rivian's electronics and software platform is expected to serve as the foundation for future software development in the partnership. The technical work stream to prepare the integration of our electric architecture and software technology stack into Volkswagen Group products is moving along very well, and we expect to close the joint venture in the fourth quarter of this year.

As the auto industry transitions to smarter, more connected, more complex, integrated vehicle architectures, we strongly believe our technology is best positioned to deliver a modular and scalable platform to help create highly compelling products and services that we expect will accelerate consumer shift to electrification.

I also want to take this opportunity to acknowledge our team. who has continued to execute on our second-generation R1 ramp of production and deliveries, R2 development and the formation of our joint venture with Volkswagen Group.

During the second quarter of 2024, we successfully completed the retooling upgrade in normal. This is a pivotal operational event for the company. The upper new technologies and cost-focused material changes into the R1 vehicle platform while also incorporating manufacturing process improvements that are expected to improve cycle time utilization and cost. For example, we have reduced complexity and lowered the cost associated with the vehicle body with a heavy emphasis on removing parts, processes and steps. These chains have reduced nearly 1,500 joints and contributed to an expected 30% improvement in the R1 production line rate.

Following completion of the retooling upgrade, we resumed production and are encouraged with the early press of ramping our second-generation R1 variants. The new R1 vehicles have hundreds of design, engineering and performance upgrades with the most significant being an entirely new zonal architecture, new compute and autonomy platform, new in-house drive units and a reengineered suspension system. The introduction of the second-generation R1 platform, combined with commercial cost downs and commodity tailwinds are expected to enable significant material cost reduction.

Importantly, I want to emphasize there is more to go. We are focused on reducing R1 costs beyond 2024 through lower material costs and conversion costs. As we continue to source materials for R2, we are seeing opportunities to further reduce the cost of R1 through additional supplier cost reductions. In addition, we believe the expected joint venture with Volkswagen Group will allow us to achieve more favorable pricing from suppliers. This food components, chipsets, printed circuit board assemblies and all the associated content that relates to those hardware systems.

I want to delve in further new second-generation drive units, which represent a significant change in capability and cost. The second generation R1 includes our Ascent motor system, which underpins our new tri-motor and Quad motor. These motor configurations, in addition to our dual motor released in 2023, mean all motors on all review vehicles are now designed, engineered and manufactured fully in-house. The 850-horsepower tri-motor variants are expected to start deliveries towards the end of the third quarter. The tri-motor variant is with 2 Ascent motors in the rear and one indura motor in the front for a blend of exceptional power and range. The tri-motor R1T delivers 0 to 60 miles per hour in 2.9 seconds, while offering an estimated range in conserve mode of approximately 400 miles.

The quad-motor is designed for peak adventure with 4 Ascent motors. The quad-motor delivers 1,025 horsepower 0 to 60 in less than 2.5 secs and achieved 25-mile in less than 10.5 seconds. Feedback on our second-generation R1 has been very positive. It is a small better vehicle while simultaneously costing less to build. We're excited to get more of our sand generation products to customers and available for demo drives in the coming quarters.

We wake up every day thinking about ways to make our products better. This is based on our sense of urgency in transitioning the world towards a fossil fuel-free future. This is possible by creating products that are deeply exciting to consumers, products that carry attributes and design characteristics that pull people internal combustion vehicles because they're experiencing something that isn't just better for the environment, but also really enjoyable and desirable to use every day. I would like to thank all those who continue to support our vision, including employees, customers, partners, suppliers, communities and shareholders.

With that, I'll pass the call to Claire.

[Claire McDonough, executive]

Thanks, RJ. During the second quarter of 2024, we made significant progress driving greater cost efficiency further strengthening our balance sheet, validating the differentiated nature of our technology stack and establishing new business opportunities. During the second quarter, we produced 612 vehicles and delivered 13,790 vehicles, which represented the primary driver of the $1.2 billion of revenue we generated.

As expected, second quarter production was impacted by planned downtime associated with the retooling upgrade. Our deliveries were strong as we sold through the majority of inventory of our first-generation R1. Due to strong Q2 performance, which led to our lower starting finished goods inventory balance and the continued ramp of production throughout the third quarter, we expect our third quarter deliveries to be below our second quarter results and production volumes to be in line with our first quarter levels.

Total gross profit was negative $451 million. Our gross profit loss per vehicle delivered was approximately $33,000, which includes approximately $15,000 of depreciation and amortization expense and $1,200 of stock-based compensation expense. In addition, we incurred approximately $2,400 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.

We expect to see significant cost reductions in our R1 platform during the second half of 2024 as we ramp the production and deliveries of our second-generation R1 vehicles. Additionally, the reduction in our LCNRV write-down for the quarter compared to Q1 2024 reflects the progress we are making in association with our material cost reduction and operational efficiencies associated with our second-generation R1 vehicles.

We remain confident in our path to modest positive gross profit in the fourth quarter of 2024 and for the full year of 2025. Importantly, our team is already focused on driving incremental costs out of our R1 platform to help achieve term gross profit target of 25%. The key drivers of our long-term R1 profitability include reducing material costs, leveraging our fixed costs and scaling our revenues per delivered unit through product mix and pricing, software and services and other revenues.

During the second quarter, we also announced the intention to form equally controlled and owned joint venture with the Volkswagen Group to create next-generation electrical architect and best-in-class software technology. In associating with this deal, Volkswagen Group have made an initial investment of $1 billion with up to $4 billion in planned additional investments for a total deal size of $5 billion. The incremental investments are subject to the completion of definitive agreements, the achievement of certain milestones and the receipt of regulatory approvals. Assuming all criteria are met, we expect that the full $5 billion is intended to flow to the benefit of Rivian.

In addition to the $5 billion of capital to Rivian, we anticipate incremental benefits through cost savings on materials, operating expense efficiencies and future revenue opportunities associated with the joint venture. The initial and planned investments by Volkswagen Group, in addition to our cash, cash equivalents and short-term investments are expected to provide the capital to operations through the ramp of R2 and normal as well as the midsize platform in Georgia, enabling a path to positive free cash flow and meaningful scale. As RJ mentioned, we expect the deal to close in the fourth quarter of this year, and we will provide additional details at that time.

During the second quarter, we improved our cash flow from operations to 41% as compared to the first quarter of 2024. This improvement is reflective of our continued focus on cost and greater working capital efficiency across the business. As compared to the first quarter of 2024, we reduced our gross profit loss per vehicle by approximately $6,000 and made reducing our gross inventory balance. We believe these trends will result in further improvements in our cash usage for the second half of 2024.

As we look ahead, we are reaffirming our 2024 production guidance of 57,000 units, delivery expectations of low single-digit growth as compared to 2023, EBITDA guidance of negative $2.7 billion and capital expenditures of $1.2 billion.

As a reminder, coming out of the retooling upgrade, we are currently operating the R1 line on operation, which results in 56,000 units of annual run rate output. Our commercial van line is currently running on a lid 1-shift operation, which has the potential to deliver a run rail output of 15,000 units.

As we look ahead for 2025, we expect that our normal facility will not be producing vehicles for more than 1 month during the second half of the year as we upgrade and integrate new equipment into the plant ahead of our first half of 2026 or 2 launch. We continue to see a clear path to a long-term approximately 25% gross margin target, high teens adjusted EBITDA margin target and approximately 10% free cash flow margin target.

I wanted to again thank our team, partners, customers, suppliers and shareholders for their tremendous support.

With that, let me turn the call back over to the operator to open the line for Q&A.

[Operator]

[Operator Instructions] Our first question comes from George Gianarikas with Canaccord Genuity.

[George Gianarikas, analyst]

Maybe just to start, can you just please talk about your geographic strategy, particularly in Europe in light of the recent BBE relationship?

[Robert Scaringe, executive]

Thanks, George. As it stands today, the R1 products are being sold throughout the United States and Canada. And our EDD products are primarily -- commercial end products are primarily focused in the United States, but we have made some deliveries in Europe and specifically in Germany.

Now with regards to our future products with R2 and of course, R3, those have been developed really at their core to fit not only the U.S. market but to also fit the European market. And you can really see it as you look at the R2-R3 combination of what we believe capturing a sweet spot in terms of both addressing them for midsize SUVs in both U.S. and European markets, but also with our 3 capturing a smaller crossover market. And so -- as you've heard us talk about many times, this is one of the things we're so excited about with the 2 platform is just the growth in the addressable market for us of the business.

[George Gianarikas, analyst]

And maybe as a follow-up on the VW relationship. I know you're still working through the details you mentioned that. But is there any update on the potential to transfer some of your OpEx into that JV?

[Robert Scaringe, executive]

Yes. As you said, we're -- we haven't announced the specifics around the joint venture, inclusive of any associated cost sharing. But I think importantly, I'd want to call out is how this relationship was formed, and it's really formed on the basis of leveraging the technical platform that we built around our network architecture or topology VC use, and of course, our software stack and allowing and enabling that technology to really well beyond Rivian's product line. And to allow enable us to get to global scale across multiple markets very quickly. So we're ecstatic about the impact that, that can drive in terms of helping to create exciting products that give consumers choices to move towards electrification. We're also excited about the scale that, that provides us from a sourcing point of view and a supply chain point of view as we think about the covenants and the assemblies that go into those systems.

[Operator]

Our next question comes from Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

First, I was hoping to better understand how the company is tracking towards the target of positive gross margin in the fourth quarter? Has the drivers at all, especially as we've seen things like a 2.99% incentive that you're utilizing and perhaps that changes the mechanics to the positive gross profit bridge?

[Claire McDonough, executive]

Thanks, Mark. There are still 3 key drivers to our path to positive gross profit in Q4. The first is the variable cost improvement. Spent a lot of time at our Investor Day talking about the material cost reduction road map associated with our new Gen 2 technology introductions, material cost reductions that we've had through supplier negotiations as well as the commodity cost tailwinds that we anticipate seeing throughout the course of the second half of this year and into 2025 as well. The second driver is our fixed cost leverage, and this is enabled by the retooling upgrade that we had in normal, which has improved our production line rate by approximately 30%. And this, together with the increased Q4 production volumes, we anticipate seeing as well as our reduction in depreciation expense across the business will help drive this fixed cost leverage. And the last key driver for us, as we talked about in the past, is an increase in revenue per delivered unit. And this we'll see through the introduction of our Tri-Motor R1s that you heard RJ speak about in his prepared remarks, as well as non-vehicle revenue growth from the sale of regulatory credits and the introduction of our preowned com sales. We continue to remain confident in our path to positive gross profit in Q4, it's important to note that our Q2 results had very limited sales of our Gen 2 vehicles. So you're not actually seeing any of the flow-through of the improvements that we've made throughout our production line or our material costs yet flow through the results themselves as we look at the Q2 actions as a whole.

[Mark Delaney, analyst]

My second question was how to better think about the material cost improvement? You're looking to achieve, such as the 20% for the dual motor large pack, second Gen 1 compared to the first Gen. I think those cost improvements did not incorporate some of the potential savings you think you may be able to realize now that you have the VW news out there and some of the response you've seen from suppliers. So I realize it's still somewhat early, but can you share a bit on the magnitude of potential material cost improvements you may see as you're able to execute on some of that expanded opportunity?

[Robert Scaringe, executive]

Yes. Thanks, Mark, for the follow-up. You're absolutely right. There's -- the 20% that we've referenced in cost reduction on the bill materials for a like-for-like vehicle that's based upon technical changes we made to the vehicle and supplier negotiations that we drove over the last 18 months. There's certainly more room to go in terms of applying some of the leverage that we're going to see, not only with the relationship we're building with Volkswagen, but also with the scale that comes with R2. And so we do see continued progress as we drive towards the long-term goal of 25% gross margin for our normal facility. And it's -- these continued cost efforts that we're talking about here on reducing our building materials, we also see improvements happen in our conversion costs at the plant. And those conversion costs are both the continued progress on efficiency improvements within the plant, but also over time, the enhanced fixed cost leverage that's going to come from bringing R2 to production -- to be produced in normal as well.

[Operator]

Our next question comes from Philippe Houchois with Jeffries.

[Philippe Houchois, analyst]

A couple of questions for me. One is Velo mentioned on EV in the release. Could you give us an update on how your customer trials are going on and might have kind of an idea of when you might have first customers outside of the deal?

[Robert Scaringe, executive]

Thanks for the question, Philippe. The EDV program is something that for us is we're really excited about the impact of it in terms of reducing carbon emissions on a per mile basis is outstanding over internal combustion vehicles. And we've been able to really prove the robustness of the platform and the strength of the offering through our relationship and partnership with Amazon. Having a large deployed fleet of these before, we started running the pilot programs we've got in the past with non-Amazon customers was really helpful as we refine, not just the vehicle but also the software surrounding the vehicle.

And so as we've talked about in the past, over the course of this year, we've been running pilots in anticipation of more significant ramp-up in 2025. And this focus on pilots is really reflective of the nature of this business where -- these are large decisions around large numbers of vehicles for a lot of these bigger fleets and it's appropriate that we build effective working models for how the vehicles are serviced, what digital support the vehicles have, what infrastructure changes are necessary for each respective fleet. It's a lot different than adding a single charger in your garage by an R1 when you're thinking about adding many chargers and a lot of new power into, let's say, of a fulfillment center, a distribution center or an operating center, if you're a business that's running 20, 30, 40, 50, maybe 100-plus vans out of it. So these are great learnings that we've been driving off the basis of what we put together with Amazon, and we are looking forward to starting to talk about other customers beyond Amazon.

[Philippe Houchois, analyst]

Right. If I can squeeze another one. On the Volkswagen relationship, did I understand correctly, you expected to close in Q4. And at that point, you will disclose to the extent you are Volkswagen disclose the terms JV, we might be able to get some -- a lot of questions around the accounting and the JV and how much of the cost might be shared with the JV between regions. Will we get that information in the fourth quarter?

[Claire McDonough, executive]

Yes, exactly. So we'll be filing the definitive agreements associated with the Volkswagen technology joint venture once the JV is closed, which we anticipate being in Q4 of this year, and we'll provide additional clarity on some of the financial impacts of the JV to Rivian's longer-term financial forecast and trajectory as pointed to. We do anticipate seeing beyond the capital that the Volkswagen Group will provide incremental benefits, including material cost savings, operating expense efficiencies and future revenues associated with the joint venture.

[Operator]

Next question comes from Dan Levy with Barclays.

[Dan Levy, analyst]

I wanted to go back to Mark's question earlier, and maybe you could just help us unpack some of the ASP dynamics in the quarter because we know that there was some discounting you needed to use to clear out some of the old inventory. And I guess, wondering really what the -- how we should think about the right starting point for where you were on an ASP perspective in the second quarter if we forget about some of those discounts? And just based on what you're seeing, I believe you need to hit flat ASPs from where you were in 1Q to hit the gross margin. So just anything on the right way to look about ASPs and the discounting needed for your targets?

[Robert Scaringe, executive]

Thanks, Dan. The challenge with introducing an update or a second generation to a product, while still, of course, producing the first generation is always exactly what you just referenced, which is we -- it's not as if we stop production immediately start production have no inventory in the system. So there's inventory of our Gen 1 vehicles. And we did have some attractive pricing on some of those variants of our Gen 1 vehicles to essentially, as you said, clear them through the system as we then start producing and delivering our Gen 2 vehicles. We don't look at that as a long-term shift in pricing, but rather reflective of the step change we've seen in the Gen 2 vehicles in terms of performance and capability. And we've been very clear in just talking about the differences between the vehicles. And we're really pleased with the results that we saw in Q2 with all the number of deliveries exceed production by quite a bit, and that was really the burn down or burn through of the Gen 1 inventory.

Now in terms of ongoing expectations for ASP, the other thing I'd want to call out here is that with the introduction of the Gen 2 vehicle, clear references, but we have a tri-motor and we have a quad-motor. And the quad-motor performance is extremely high. It's a big step forward relative to our first generation one. Acceleration is a lot quicker. The range in efficiency has improved. The thermal performance for -- particularly for off-road really intense driving is outstanding and that allowed us to move the quad-motor upmarket in the tri-motor to really occupy the price position of the price space where we saw the first-generation quad operate. And so that was very intentional. And the goal was between the dual-motor, the tri-motor and the quad-motor to rate a wide band of pricing starting at just over [ 70 ] and going up over -- well into over $100,000, that allows us to not only offer vehicles to folks that are very price sensitive, but also to give products to customers that want the best of what we can build.

And so those changes happening at the drivetrain level certainly help maintain ASP. But importantly, we also have a new trim package that we've just launched, which is a more premium trim from what we had originally had. We call this the Antrim. But this Antrim package, which is built into the trial theater configurations is another element of providing customers with a variant or a choice that is at a higher price point, but of course, delivering more content and more features.

[Claire McDonough, executive]

Maybe just having a couple of additional points of color back to prior comments that we've made in the past. In our Q4 earnings call, we had said that we expected that our ASP for the vehicles themselves would be consistent Q4 of '23 relative to Q4 of '24. We still expect that to be the case as we sit here today. And then the other point, as we think about the seasonality of the business is consistent with Q4 of last year, it's far more indexed towards our 1 sales relative to commercial band sales, which, in aggregate, lift the overall revenue per delivered unit because of some of the Amazon-related seasonality that we expect to continue to be the case in Q4 of this year. And then back on RJ's final comments, we'll have sales of our tri-motors in Q4, which will allow us to stretch up the higher end of ASPs to complement our starting price point, which is still $69,900 for standard packs for

[Timothy Bei, executive]

Got it. So it sounds like there's some positive mix assumptions in there. Just as a follow-up, I wanted to go to the VW investment. And wondering from a -- the fact that you got this money and what I think many of us consider to be a more sort of efficient manner than going through the capital markets. What does this allow you to do a product plan or capacity perspective that previously wasn't on the table if you were going to be fully reliant on the capital markets. .

[Robert Scaringe, executive]

Really important part of what this deal represents for us is it really eliminates a lot of the risk that we've seen around our balance sheet and allows us to focus the launch of our 2 still in normal, still using our normal facility. But as you've heard Claire and I both talked about as part of our Investor Day, not only have the balance sheet to support launching 2, but all of the balance sheet to support taking us through positive cash flow. And we recognize the importance of that focus on driving efficiency into the business, both in terms of how we operate the business, but also in terms of how we deploy capital from a CapEx point of view and an investment point of view. And the organization is hyper-focused on driving towards profitability and hyper-focused on the launch of our 2 and what that represents for us in terms of the scaling that comes with it.

[Operator]

Our next question comes from Joseph Spak with UBS.

[Joseph Spak, analyst]

RJ, maybe you could just dive a little bit more what is exactly happening in the plant and what's impacting the R1 line, R2 work doing next year? And then, Claire, can we expect that the given that most of the changes are already done can ramp back up pretty quickly. So we could understand the shape of gross margins next year because it sounds like you guys are planning for maybe some sequential improvement until that downtime maybe down to third quarter and then recover in the fourth quarter. I just want to make sure that's -- we're properly calibrated there.

[Robert Scaringe, executive]

Sure, Joe. So as we think about the operations next year, this is looking '25, we've said we're going to be taking the plant down for roughly a month while we make some of the changes necessary to integrate the R2 production into the plant. Some of that work has already happened. We did some of the preliminary work in the most recent shutdown in conjunction with the move from Gen 1 to Gen 2 on our R1 platform. But the shutdown that's going to happen in the second half of next year will make the splicing together certain parts of the plant possible. That's part of our plan. We'll be working around that, but we've -- as we did with the Gen 1 to Gen 2, we wanted to provide very early guidance around this and make sure expectations are appropriately set for what will have to happen in the plan next year to integrate R2.

[Claire McDonough, executive]

And then based off of the second part of your question as well, given the shutdown, there will be some chopping the financial goals as we look through not just a quarter sequential improvement in our -- as we look at the gross margin trajectory. As I mentioned in my remarks, we still maintain that we'll be -- have a modest positive gross profit for the entire year of 2025, in particular, but certainly with the shutdown itself in the second half, we'll feel some of the impacts of lower absorption of labor overhead and depreciation like we experienced in Q2 of this quarter, given the lower production volumes that we had in the normal facility itself. But to RJ's point, more akin to the November shutdown that we had to do some of the prework for our Q2 shutdown, we were able to get right back up to line rate based off of the aftermath of that shutdown. So we expect we won't see as sort of stage of a ramp back up from a production standpoint, given the fact that we have already ramped up our supply chain, which is one of the gating factors as we've gone through the course of ramping up new technologies in our redesigned Gen 2 product.

[Joseph Spak, analyst]

Okay. And as a second question, I don't know if you guys really ever you certainly don't talk about -- talk about it this way. I'm curious if you ever look at it or think about it this way. But you called out some of the impacts to the gross loss per vehicle from stuff that's not in the cost structure this quarter. I know that's offset a little bit by regulatory credits. But if we also like take out D&A and stock comp, it seems like you're actually much closer to a cash gross profit breakeven level. Is that something that directionally is correct. And it seems like if that's true, you would actually even hit that before you would hit your modestly gross profit positive number in the fourth quarter?

[Claire McDonough, executive]

Yes, that's absolutely right. And we wanted to call out in my prior prepared remarks, just the impact we had roughly $15,000 of depreciation per unit, $1,200 of stock-based comp per unit and then another roughly $2,400 other cost of revenue initiatives in the quarter. So that was roughly $14,000 of loss per unit if you make those 3 respective adjustments. So we certainly would anticipate hitting sort of a cash breakeven prior to positive gross profit.

[Operator]

Our next question comes from Alex Potter with Piper Sandler.

[Alex Potter, analyst]

Claire, just a quick one following up on that last question. The I guess "other initiatives," the $2,400 a unit, just in layman's terms, what is that?

[Claire McDonough, executive]

In layman's terms, the way I would characterize it is -- as you can imagine, the significant changes we made in suppliers with the introduction of swapping out roughly half of our material cost as we move from Gen 1 to Gen 2. There are certain costs associated with contract modifications or amendments that we've made, and that's largely what is reflected there.

[Alex Potter, analyst]

Okay. Very good. I guess my second question is on the Volkswagen joint venture. So presumably, I know you've got yet some work to do when it comes to hashing out the financial things and will await information on that in Q4. But in the meantime, presumably, you've got engineers, you've got procurement people who are sort of eager to start doing something design or getting supplier negotiations underway. Are they basically being instructed to sit tight and not do anything until the ink is dry? Or are they allowed to sort of go out into the world and start, I guess, restarting supplier negotiations, for instance, with the heft of Volkswagen behind them or working collaboratively with Volkswagen engineers to actually design the platform into Volkswagen vehicles? Or do they basically just have to sit tight?

[Robert Scaringe, executive]

From a supplier point of view, we absolutely are already seeing some of the tailwinds associated with our Volkswagen joint venture and partnership. This is -- you can imagine at the component level and at the electronics level within the vehicle, where we see a lot of the suppliers we have long relationships with that are very excited about this and see this as an opportunity to scale beyond just the Rivian product line for the technology we've developed, but beyond that into the Volkswagen Group product portfolio. So that's been a really encouraging early read-through in terms of how it's perceived and overall looked at by the supply chain.

From a technical point of view, we about this, even with the announcement of the deal, Volkswagen Group CEO and Oliver and I just spoke around how the teams have been working really well together. And this is not -- it's not as if we do a deal of this scale and this magnitude without having done work together and we're not having done a lot of beyond diligence, but into the actual creation of work content or work product, if you will.

And so what seems on the call here, I'm going to invite him to just talk about this, but our software team and our hardware team have been working towards a number of elements that deliver on the first set of products, but the first of which is integrating our platform tactically into Volkswagen Group products. But Wassym, let me talk about this.

[Wassym Bensaid, executive]

Yes. Thanks, RJ. We're actually extremely excited with the progress that we're making in the integration -- electrical architecture integration analysis. Our engineers have been working very closely with the Volkswagen Group, and we actually have a driver with demonstrator now that contains the Arabian electronic components, the Arabian electronic software stack, and we're moving forward really, really well in understanding how our technology will scale up and down and the entire Volkswagen Group portfolio.

[Operator]

Our next question comes from Ben Kallo with Baird.

[Ben Kallo, analyst]

My first question is more near term. Just RJ, if you could talk about demand trends you've seen since the refresh. And then -- my second question is that brand is important to everyone, but to you guys, you've done a good job of building a brand. Can you talk to us about how you measure that internally or any way that you can put context to how you've built your brand, how that extends to future models?

[Robert Scaringe, executive]

Thanks, Ben. Ultimately, our general -- our first set of products on R1 was our handshake with the world. And they received really positively. This is 2 years ago and it was exciting as we introduced the Gen 2 of our R1 products to see how strong the media action was to those products. And recognizing we took a great fee made it even better. And -- that is something that we saw echoed across a variety of different media outlets from lifestyle to automotive to more pure technology, Alex, but recognizing the strength of what we've built. And that really serves as a wonderful foundation for the continued growth as you put it, of how we're building into our brand and how we're perceived. And there's lots of ways for us to measure that. We certainly look at things internally. We have a whole host of internal metrics that we track regularly. But I think important for the analyst and investor community, is to look at ways that third parties would look at our brand.

And most recently, actually, consent, J.D. Power does a number of ways where I look at the strength of a brand or the strength of a product offering in the market, and we've in the past done extremely well in this -- and most recently in their annual appeal study that looks at a combination of vehicle prints and its overall packaging we came out #1, and that's the #1 rated brand in their study. And to do that after having had previous #1 performance in previous years, is really exciting and it's incredibly encouraging. And we think bodes really well for what's to come with R2. If we can carry the same brand strength and the same market share penetration that we have at the premium segment where we're continually one of the best-selling veil over $70,000 today in the U.S. If we can take that market share strength and brand strength and apply it with our R2 product into the sub-$50,000 price category with R2 starting at $45,000 and our 3 pricing not yet announced, but going to be lower than R2. We're really bullish on what that represents in terms of volume. But importantly, answers a real need in the market where there's a -- I'd characterize it as a pretty severe gap in product choice for great, highly compelling EVs under $50,000.

[Operator]

Our next question comes from Shreyas Patil with Wolf Research.

[Shreyas Patil, analyst]

First of all, curious what you're seeing in terms of opportunities in the sale of regulatory credits. I appreciate it can be lumpy. It was $17 million in the quarter. But are you seeing growing opportunities to sell right credits at this point, just given some of the struggles that we're seeing with the legacy OEMs?

[Robert Scaringe, executive]

And the clear reference that just in regards to our top line in terms of revenue. But the regulatory credit environment is certainly very strong right now. Yes. And practically speaking, that means we have the potential to generate more revenue around our credit market than what we had originally planned or anticipated. But I think more importantly is the fact that the credit market is so strong is a reflection of the -- I'd say the decision that we have a number of companies that are going to be investing less into electrification or have less product and electrified product across multiple segments and then across different price points. And so that void of products actually creates this strong credit environment. And for us, I think the most important read through is the demand environment we see coming into 2026, 2027 is going to be very, very advantageous for us, where there's a lot of latent demand. There's a lot of demand that's sitting, waiting for the right type of product, a product that has the right form factor, product positioning, attributes and features, but folks have been siting hetero but haven't seen us, so they continue to buy an internal combustion vehicle or continue to buy a hybrid vehicle, we see this really large pool of demand on the surface that's just waiting. And we believe waiting for something that's very much like what an R2 is.

[Shreyas Patil, analyst]

Okay. Great. And my second question is, in thinking about the -- your software architecture, one of the defining elements is that it is almost entirely built in-house from the baseline operating system to the middleware hypervisor application layers. You've talked before about legacy automakers, not really having this level of vertical integration. So clearly, this is a big competitive advantage. But with VW now able to access the software platform, I'm curious how you think about the long-term advantage in software. Do you still see potential to maintain an edge here over most legacy OEMs, even those that may want to replicate your approach, or do you feel that the industry will eventually catch up and essentially, this is -- essentially, this is now an opportunity for you to monetize this asset and help the industry make the transition to software-defined vehicles?

[Robert Scaringe, executive]

There's a few ways to speak to this. I think first, before we get to product differentiation or customer-facing advantages, building and neck architecture and a electronic stack that allows for significant consolidation of ECUs and therefore, simplification not only of the number of ECUs, but also of the harness and associated wiring infrastructure within the vehicle, that creates meaningful cost advantages relative to a traditional platform, which will have call it to 100 VC within the vehicle. And so we've talked about this, our Gen 1 vehicle at 17 in-house ECUs, we reduced that down to 7. And so it is a significant multi-thousand dollar structural cost advantage to have a network architecture and topology of computers that's far simpler and far lower cost than traditional approach. So first and foremost, there's a real cost advantage. Now of course, our partnership with Volkswagen will extend that cost advantage into their respective products as well and bring with it scale and volume, which will in turn allow us to source those components and systems at a lower cost.

But from a consumer-facing point of view, what it represents owning not just the hardware but owning the software and owning it around a really optimized architecture, as I described, is the ability to continue to make offer a lot better. So the features can not only become more rich and more robust, but they can truly improve more than just surface level skins and let's say your cluster or your center for me in display. But into like deeply into the vehicle and changing the way the vehicle performs dynamically changing the way it's charging profile set up changing battery management system characteristics, so you can have the vehicle get better and better and better over time. In a way that's very difficult when you rely on third parties to produce this complex lab rate of ECUs and all the associated software, where even small changes require coordination amongst many different players. And so things that can take us minutes can take months for attritional approach.

And so all that being said, what the customer experience, of course, beyond the vehicle performance and the way it drives and behaves, is what they see the digital environment. It's also something that the UI framework, the approach to digital design, the user experience design something that we've spent an enormous amount of time on. And we believe we'll continue to be differentiated and is facilitated and enabled by our platform, but it requires both. And we hope that by bringing this strong platform to our joint venture with Volkswagen that allows them to create products that are also really compelling and answer some of the points I made before around there is a real lack of choice. There's a -- I would characterize it as like a pretty extreme lack of consumer choice around EVs and products in the space. And in order for us to really scale towards 100% electrification, we need to have more than just a couple of highly compelling vehicles. There needs to be essentially mirror the amount of choice that we have in the combustion world, which we're not even remotely near in the EV space today.

[Operator]

Our next question comes from Ron Jewsikow with Guggenheim Securities.

[Ronald Jewsikow, analyst]

RJ, you've talked in the past about as Rivian opens new spaces, order intake in those geographies accelerates. I know you've laid out the plan to 2025 for spaces. But is there any way to think about what is launching in the coming quarter or the second half of this year just to think about demand being an important part of your bridge to gross profit in the fourth quarter?

[Robert Scaringe, executive]

Yes. So we have -- as you called out, we have a number of spaces that are going to be launching over the next 6 to 12 months. And those spaces are great ways for consumers to get a chance to experience our vehicles firsthand to sitting them to touch them and play with all the features. But beyond just our spaces, we've also really over the last 6 months begun activating our service infrastructure to support expansion of our demo drive program. And so we have over 60 service locations that month-over-month, quarter-over-quarter, we're growing a number of those locations that do more than just service and they not only provide service, but they support test drive and demo drives as well as, of course, delivery and other sales-related activities.

And then beyond, our service infrastructure, we're also continuing to build out our Rivian a venture network. That's our DC fast charge network. And that's another touch point for customers to experience the brand. Today, that network is close to being for Rivian only. But later this summer, we'll be opening our network up. So it will allow non-Rivian customers to use the network as well, which is a great way for folks to experience even as a brand and get exposure to the products and the exposure to us as a company.

[Ronald Jewsikow, analyst]

Yes. And maybe just a follow-up on question on credit revenues. Is -- do you feel like the $17 million this quarter or I suppose you probably know this, it's the $17 million this quarter kind of fully encapsulates or values your zero-emission vehicles? Or is there kind of more to come as we model towards the back half of this year in gross profit breakeven?

[Claire McDonough, executive]

Yes, Ron, as we mentioned at Investor Day, we have over $200 million of regulatory credits under contract right now for 2024 itself. And there are additional contracts in place for '25 and beyond as well. So $70 million is really just the tip of the iceberg as we think about the opportunity for 2024 and the sale of our regulatory credits.

[Operator]

And our next question comes from Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

I think two for me. The first, when we talk about gross profit progression and the expectations for the fourth quarter and beyond, the 3 kind of key points that were laid out, Claire, can you just talk about are there any that you have more or less confidence in and are more or less visible at this point?

[Claire McDonough, executive]

Sure. As we think about the visibility that we have into the 3 drivers, which for everyone's benefit is variable cost improvement, fixed cost leverage and increase in revenue per delivered unit. On the first piece, and that one, as we sit here today, the contracts with our supplier partners are under contract. So we have clear visibility into the cost-down efforts that we'll see from a material cost trajectory there. Similarly, as we think about the fixed cost leverage that will be enabled by our production ramp in the second half of the year as we increase volumes. And then the other component is the reduction in depreciation expense. As RJ alluded to earlier in the call, we're now anniversarying our 3 years post starter production. And so part of the reduction in our depreciation expense is related to fully depreciating some of our initial tooling associated with our launch. So again, we have clear visibility into the trajectory on that component of it as well. And then the final component as you think about the increase in revenue per delivered unit. On this end, again, we're ramping right now our set drive unit line that will enable sales of our tri-motor that allow us to skew a little bit higher from a mix perspective. And then I just referenced the regulatory credits again, that are under contract for this year as well. So we have a lot of visibility as we look into the second half performance.

[Stephen Gengaro, analyst]

Great. That's good color. I appreciate that. And the other quick one, and I'm not sure if you comment on this or not, CapEx for '25, any parameters we should be thinking about?

[Claire McDonough, executive]

Yes. So as we think about CapEx for 2025, as we've mentioned in the past, we estimate that spend to be roughly in the $1.5 billion area.

[Operator]

Thank you. I would now like to turn the call back over to RJ Scaringe for any closing remarks.

[Robert Scaringe, executive]

Yes. Thank you, everyone, for joining us today. We're really excited with the progress we're making the transition to our second generation R1 vehicles and the associated cost structure that, that drives both at the bill of materials level, but also within our operations within our plants, is a really important stepping stone for us as a business. And the efficacy through which that launch occurred really reflects the growing capability for us of the business. I'm also really excited to see what we're -- help customers have continued to track to the product and seeing how favorably the second-generation R1 was seen and continues to be seen really sets up well for us with what's to come with R2, where R2 leverages a lot of the content, particularly around the network architecture, the issue, topology, the software stack, and even beyond that into some of the componentry architecture that we've laid out with the updates to the R1 platform.

So again, thanks, everyone, for joining. We're looking forward to continued progress and continued efforts to drive to profitability and look forward to speaking to everybody soon.

[Operator]

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.