Rivian Automotive Inc

NASDAQ:RIVN

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to Rivian's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tim Bei, Vice President of Investor Relations. Please go ahead.

[Tim Bei, VP, IR]

Good afternoon, and thank you for joining us for Rivian's fourth quarter 2022 earnings call. Joining us on today's call, we have RJ Scaringe, our Founder, Chairman and Chief Executive Officer; and Claire McDonough, our Chief Financial Officer. A copy of today's shareholder letter is available on our Investor Relations website.

Before we begin, I would like to remind you that during the course of this conference call, our comments and responses to your questions reflect management's views as of today only and will include statements related to our business that are forward-looking statements under federal securities laws, including, without limitation, statements regarding our market opportunity; industry trends; business operations; strategy and goals; our production ramp and manufacturing capacity expansion; our future products and product enhancements, including R2; and our expectations regarding vehicle production and deliveries.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties in associated with our business, which are described in our SEC filings and today's shareholder letter. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in today's shareholder letter.

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.

[Robert Scaringe, Founder, CEO & Chairman]

Thanks, Tim. Hello, everyone, and thank you for joining us. 2022 is a transformational year for us. We fought through a difficult operating environment to ramp the R1T, the R1S and the EDV, with total production of 24,337 vehicles for the year. Beyond ramp, we focused our product teams on our next generation of in-vehicle technologies in the R2 platform. I want to thank our team, suppliers and partners for their grit and determination in helping Rivian achieve its targets.

In the fourth quarter, we increased production over 10,000 units. This represents a 36% increase over the third quarter of 2022. We maintain a vehicle backlog that provides clear demand visibility well into 2024. We launched our Adventure Network, which gives customers a smoother charging experience. We expanded our service infrastructure to 28 physical service locations in addition to nearly 200 mobile service vans and we pushed a range of major software updates to our customers.

Our core priorities for 2023 are ramping production of our R1 and RCV platforms, driving cost reductions, developing the R2 platform and its future technologies and delivering an outstanding end-to-end customer experience. In my role as CEO, my most important responsibility is to make sure we have the right leaders and the right organizational design in place to drive focus and execute on our priorities. It's great to see the very capable and experienced leaders we've added over the last year.

Equally important to ramping production is our drive towards profitability. We are focused on reducing our bill of materials, conversion costs, logistics costs and overall operating expenses. Core to this is our close work with our supplier partners to lower our material costs through new engineering solutions as well as revisiting some of the customer and commercial negotiations that were agreed to years ago when Rivian was still in prelaunch. In support of these efforts, we held a Supplier Day at the end of 2022, where we hosted over 400 members of our supply chain at the plant to demonstrate the growth and the scale of what we're building. Our supplier partners are engaged and fully understand the benefits of us achieving profitability as quickly as possible.

One of the enablers to reduce our material cost is the introduction of our future technologies. Earlier this month, we started producing saleable units of our in-house Enduro drive unit. Enduro is our single-motor drive unit, and in our commercial van platform, we use it in our front-drive application, and in the R1 platform, as a dual motor setup, we use it for all-wheel drive application. The Enduro drive units are also accompanied by our new lithium iron phosphate battery packs for our commercial van line. These LFP packs are ideally suited for commercial use cases due to their low cost and really the durability of this chemistry.

Another important example of our technology development that I'm excited to introduce is the 390-mile R1S max pack variant. We begin deliveries on this vehicle this fall, and we expect high demand for this new offering. The R1S max pack will launch with the dual motor configuration, leveraging our Enduro drive unit, and will deliver 0 to 60 acceleration in around 3.5 seconds. And when we couple that with our full air suspension and electro hydraulic damping system, it will really deliver incredible on-road and off-road performance.

The purpose of our investments in software, electronics, drive units and batteries is to improve performance and to create long-term structural cost advantages. These technologies will serve as the foundation for our R2 platform. Our production ramp and the introduction of multiple vehicle platforms has equipped our team with valuable manufacturing operations and product development experience in a short period of time. We're taking advantage of these learnings and are aggressively applying this experience to our first mass market vehicle, the R2 as well as to our new manufacturing facility in which we'll build the R2 located in Georgia with the goal of establishing a considerably lower cost structure.

Speaking of R2, we're really at an exciting and defining moment for the program. We have members across our organization, from design to engineering to manufacturing, coming together to develop what we believe is a true category-defining platform. Over the next 6 months, we'll be finalizing the majority of the core engineering and sourcing decisions that will drive how the R2 product line is built and the speed at which we can ramp production to profitability.

We spent years creating our brand and award-winning set of products that drive excitement and attract new customers to what we're doing. The validation received from our customers and media continues to be strong. In fact, the R1T received several new accolades, including being named Best Ownership Experience among Premium Battery Electric Vehicles by J.D. Power.

In addition to its Editors' Choice award, the R1T was also included in Car and Driver's coveted 10Best award for 2023. And along with that, it was praised as being the best driving pickup Car and Driver has ever tested. In consumer reports, customer satisfaction survey, Rivian was rated among the highest across all categories with our R1T being the highest-rated truck. We've also received the highest safety rating of TOP SAFETY PICK+ from IIHS, and that's passing IIHS's new tougher standards for 2023 across all categories.

On our go-to-market side of the business, which includes our customer engagement, service, delivery and demand generation teams, we've experienced rapid growth over the past year as we built the foundation for our end-to-end customer experience and software and service offerings. We need to execute against our robust customer backlog and remain focused on our customers as we scale our 150,000 units of annual capacity in Normal into ultimately multiple production plants around the world.

The enthusiasm for our products and our brand, combined with the progress we're making on our future vehicles and technologies along with the strong team that we've built, gives me confidence in our ability to help drive the massive impact we need this planet and the transition to a carbon-free economy. With that, I'll pass the call over to Claire.

[Claire McDonough, CFO]

Thanks, RJ. I want to reinforce the important steps we took during 2022 to drive towards profitability. Our goal is to build Rivian for the long term, to build a company capable of adapting during good times as well as challenging ones. In the last year, we took intentional measures to focus our product portfolio and drive a lower cost structure.

Operating expenses in the second half of 2022 fell 21% as compared to the first half of the year. For the full year 2022, operating expenses were in line with 2021 results, while we continue to invest in and scale our delivery and go-to-market operations and next-generation technologies. In addition, our team was able to reduce our capital expenditures for 2022 to $1.4 billion versus $1.8 billion in 2021 due to the fact that our equipment and facility costs were more highly concentrated leading into our start of production in Normal.

We're encouraged by this progress and recognize there is an additional opportunity to drive greater efficiency. We are concentrating our investments and resources on growing the consumer business while continuing to leverage our existing commercial platform. We believe these core aspects of our company represent the greatest levers to maximize our impact and drive attractive financial returns.

I will now review our fourth quarter 2022 results. The last 12 months were characterized by economic uncertainty as well as significant supply chain volatility across the industry. By focusing on factors within our control, our team was able to achieve meaningful milestones. During the fourth quarter, we produced 10,020 vehicles and delivered 8,054 vehicles, which generated $663 million of revenue. We generated negative gross profit of $1 billion for the fourth quarter of 2022. Gross profit for the fourth quarter was impacted by a lower of cost or net realizable value, LCNRV, adjustment.

As discussed in the past, the LCNRV adjustment breaks down the value of certain inventory and records losses on firm purchase commitments to the amount we anticipate receiving upon vehicle sale after considering the future costs necessary to ready the inventory for sale. As of December 31, 2022, LCNRV was $920 million as compared to $95 million as of December 31, 2021. These charges are expected to continue through 2023.

However, as we reduced cost of goods sold per vehicle by lowering material production, logistics and other costs, we anticipate that the total charge will decline. We forecast reaching positive gross profit in 2024 and therefore expect by the end of 2024, we will no longer have material LCNRV inventory charges and losses on firm purchase commitments associated with the production at our Normal plant.

In addition to LCNRV, there were factors which negatively impacted our cost of goods sold that we do not believe are reflective of our long-term cost structure. The most significant driver continues to be our production levels. Producing highly vertically integrated vehicles at low volumes on lines designed for higher volumes means we currently carry more overhead per vehicle produced. This impact has and will continue to be magnified during the ramp of our second shift in production as we introduce new technologies like our LFP battery pack and Enduro motor, for which we stopped the commercial production line for the majority of the first quarter of 2023.

Additionally, because we are in an LCNRV position, we do not fully capitalize our logistics and conversion costs into inventory, which can lead to volatility in our cost of goods sold based on the amount of inbound materials we received in a particular quarter or the difference between our vehicle production and deliveries as we saw in Q4 2022.

Operating expenses in the fourth quarter of 2022 fell $1.3 billion as compared to the same period last year. Approximately $1.1 billion of this difference was due to higher noncash expenses in the fourth quarter of 2021, including a donation to Forever by Rivian and stock-based compensation in conjunction with the IPO. The remaining reduction of approximately $200 million was due to lower cash expenses associated with the operations of our business. We continue to prioritize investments in our core in-vehicle technologies and customer experience while also driving additional focus and cost optimization across the business.

Our adjusted EBITDA for the fourth quarter of 2022 was negative $1.5 billion, which compares to negative $1.1 billion for the fourth quarter of 2021. We ended the fourth quarter of 2022 with $12 billion in cash, cash equivalents and restricted cash. This excludes the capacity under our $750 million asset-based revolving credit facility. We continue to monitor the economic environment and believe we have a high level of flexibility regarding the cadence of our growth investments.

I want to take this opportunity to highlight important operational changes we're making in Normal. In addition to the commercial van line shutdown during the first quarter of 2023 which we expect to result in a drop in overall production and deliveries relative to Q4 2022, we also expect to be taking both the R1 and EDV production lines down for a week during the fourth quarter of 2023 to prepare for a capacity change which will happen in 2024.

In the first half of 2024, we intend to take production of the plant down for a few weeks to implement new technologies into our vehicles and shift the overall capacity of the plant to be about 55% R1. While the incorporation of these new technologies temporarily impacts production, they are expected to provide improved vehicle performance and range and deliver cost reductions that are critically important to our path to profitability.

Now turning to our 2023 outlook. We are guiding to 50,000 vehicles produced for the year. This represents a doubling of year-over-year production while also accounting for the risks and uncertainties associated with the supply chain and integration of our new technologies. We expect the ramp of our second shift for the R1 line to continue to progress through the first quarter. We expect full year production to be back-end weighted due to supply constraints we believe will alleviate in the second half of the year and the commercial line downtime we're taking in Q1 2023.

During 2023, our gross margin is expected to remain negative, but we anticipate improving on a dollar basis for the year as we reduce our cost of goods sold per vehicle produced, improve our average selling prices per vehicle and begin to see our LCNRV charge decline. For 2023, total operating expenses are expected to modestly increase as compared to 2022. As a result of these factors, adjusted EBITDA is expected to be negative $4.3 billion in 2023, an improvement of $900 million versus 2022.

We continue to rationalize our capital expenditures due to a greater focus on our core business. Capital expenditures in 2023 are expected to be $2 billion driven by additional investment in our Normal and Georgia facilities, next generation technologies and the continued build out of our go-to-market operations. In addition to our 2023 guidance, I wanted to address the capital needs of the business over the medium term. The largest lever in our forecast is the swing from negative $1 billion of gross profit in Q4 2022 to a step change in positive gross margin in 2024.

There are 3 key levers that enable this improvement. First, the most impactful driver is the per-unit reduction of labor overhead and ramp expenses as our large-scale plant produces a greater number of units. With the addition of our second shift, the plant in Normal is currently staffed to produce a significantly higher number of units than our current run rate. For context, these expenses represent 2/3 of the bridge from our current COGS per unit to what we expect by the end of 2024.

The second area is our material costs. We have a detailed road map of both engineering and commercial cost downs. As RJ mentioned, our recent Supplier Day demonstrated the win-win opportunity for our suppliers to participate in Rivian's growth. The final bucket is price. The implementation of our reservation system in early 2022 provides us the pricing flexibility to accommodate the introduction of new products, technologies and inflationary pressures.

While most of our deliveries today are based on pre-March 1, 2022 pricing, we expect to see a meaningful step change in average selling price over the next 2 years as we introduce new higher-priced variants as well as move to our post March 1 preorders. In addition to the gross profit improvements I outlined, we expect to see significant leverage of our operating expenses over this period as we leverage our R&D and SG&A expenses over a much larger sales base.

We also anticipate being able to maintain our capital expenditures in the low $2 billion area over this time frame. Our objective continues to be driving towards profitability and our prudent deployment of capital. From a cash burn perspective, we expect 2024 to improve versus 2023 by approximately 40%, enabled by the step change we see in gross profit. In 2025, we expect our cash burn to improve meaningfully versus 2024 as we have a full year of production at our new price points and the incorporation of our next generation technologies.

We remain confident that our cash and cash equivalents can fund our operations through 2025. We continue to evaluate a variety of capital markets available to Rivian ranging across the capital structure. We plan to employ a portfolio-based approach as we look to maintain a strong balance sheet position.

In closing, I want to reiterate our confidence in our long-term financial targets. We see a clear path to our approximately 25% gross margin target, high teens EBITDA margin target and approximately 10% free cash flow target. With that, let me turn the call back to the operator to open the line for Q&A.

[Operator]

[Operator Instructions]. Our first question comes from the line of Rod Lache with Wolfe Research.

[Rod Lache, Wolfe Research]

Just a couple of things maybe just to kick things off. Do you have an estimate for the magnitude of the LCNRV losses you expect in 2023?

[Claire McDonough, CFO]

Thanks, Rod. As we think about the LCNRV, as I mentioned in my prepared remarks, right, today, we sit with a $920 million charge, and we expect that charge to be fully offset or out of our P&L in effect as we approach positive unit economics in that 2024 time frame as outlined.

And so what -- the guidance that I would provide for you is as you think about the cadence of that $920 million going to 0 is it won't necessarily be a linear path over the course of the next several quarters, but we will start to see those impacts even as early as Q1 as we start to reduce the material costs within our vehicles, and importantly, as we think about the technology introductions that we have in EDV, for example, where we introduced the LFP pack and Enduro drive unit that drives a material step change in material cost there.

So for example, the marginal unit that we're producing today for that EDV is now profitable due to some of those changes that we've had from a technology introduction perspective. But we'll continue to see what's been a headwind throughout the course of 2022 become a tailwind as we look at '23 and '24.

[Rod Lache, Wolfe Research]

Okay. So it's actually going to decline. So it would be a subtraction from your cost of goods sold, just to clarify that, in 2023?

[Claire McDonough, CFO]

That's correct.

[Rod Lache, Wolfe Research]

Okay. And RJ, I was just hoping maybe you can give us some preliminary thoughts on how different the R2 cost structure will need to be compared to R1 to be competitive when that vehicle comes out? And what's your visibility into achieving those? Maybe talk a little bit about -- we think about batteries primarily when we think about that, but what are some of the non-battery opportunities that you see? Are there any unconventional design or manufacturing innovations that you're looking to implement for that vehicle?

[Robert Scaringe, Founder, CEO & Chairman]

Thanks, Rod. As we think about the R2 platform, it's leveraging a lot of -- some of the technologies we're going to be introducing into R1 in terms of our updated electronics architecture and network architecture where we work to really consolidate a lot of compute functions into a smaller number of ECUs, which simplifies the harness, simplifies the number of compute platforms you have across the vehicle.

As Claire mentioned, our Enduro drive units and the, really, focus on vertically integrating our propulsion platform from a drive unit point of view drives considerable cost changes into R1. But we take those improvements, and we leverage those heavily for R2. And in the case of the vehicle, as you think about body, interior chassis system, we've really learned a lot in developing and launching R1 and the EDV program.

And so the way we've looked at the design of the product is really through the lens of where we can see opportunities to consolidate parts, so larger single piece stampings, use of parts consolidation through extrusions or castings. And that part consolidation not only reduces the number of parts of the vehicle, but as a result, there's less joints, there's less things that need to be attached to one another. It simplifies the assembly process. It simplifies the sourcing process.

And so that's a major, major focus for us with the R2 product. And really the magic of it or the core of it is to ensure that the brand essence and the excitement of what we build is still fully captured in the R2 product line, but of course, achieving it with a meaningfully lower cost structure.

The other thing I'd just point out is, and I noted this in my opening remarks, we're in a very different position with our supply chain today than we were when we were sourcing a lot of our supply components for R1. A lot of the components or a vast majority of them are sourced in 2018, 2019, well before we launched the product, well before we saw the incredible response from customers around the brand.

So today, as we're now making those supplier selections, negotiating the supplier contracts in R2, we're not only using the R2 contracts to help drive better cost into R1, but we're achieving much, much more aggressive cost and much more aggressive pricing with all the various components across the vehicle. So in aggregate, we are going to see a materially lower cost structure for R2, and that's, as I said, that's foundational to how we think about that product.

[Rod Lache, Wolfe Research]

It sounds like, RJ, you're thinking about things like Giga castings and just a lot of innovations in reducing the number of parts in the structure of a vehicle. Do you, at this point, have visibility into that? And are you starting to get visibility into what the component cost structure will be for the R2?

And just lastly, do you have any color on -- as we're sort of bridging to profitability, for gross profit profitability, what kind of volume targets are you thinking about as you look out to 2024? You mentioned the 150,000 units of capacity, but do you think you can get to at least 100,000 in that time frame?

[Robert Scaringe, Founder, CEO & Chairman]

Well, just to your first point on how we're thinking about component design or system design across the vehicle. One of the things we spend a lot of time on across all the different tech layers of the product is looking for opportunities at a holistic level or at a system level to reduce complexity and reduce the parts.

So whether that's in, I'll take, for example, in our Enduro drive unit, we took the gearbox, the motor and the inverter, those are typically 3 different subassemblies that are mechanically fastened together. And in the case of Enduro, those -- we call it 3 in 1, those 3 systems are captured into 1 casting. So we designed this system really holistically to take 3 different parts, combine it into 1, reduce the number of fasteners, of course, increase the assembly and build time, or decrease the assembly and build time for the drive unit.

But that mentality, that mindset we're applying to everything, whether it's a seat frame, whether it's a door system, a drive unit, as I just described, of course, body structure is a big opportunity for this as well. So this is something that we carry into every design review. It's part of the design criteria that we approach the vehicle with, and it's one of the big enablers that we have because we vertically integrated so much of the technology.

I mentioned it before, but the ability to dramatically reduce the number of computers in the vehicle, the number of ECUs through a zonal architecture, we have a computer in the front, the computer in the back, computer in the middle, so to speak, rather than separate domain-based or function-based computers, which is historically how you've seen vehicles done today, and it's largely a result of an outsourced model around electronics. So these are some of the core focus areas where we're leveraging what we've built in terms of capability and what we've built in terms of technology as we go into R2.

[Claire McDonough, CFO]

And Rod, maybe...

[Rod Lache, Wolfe Research]

And the volume?

[Claire McDonough, CFO]

[Indiscernible] directly on the volume question that you have there as well. As I talked about in my prepared remarks, today we have 65,000 units of R1 capacity in the plant at Normal, and we're increasing that capacity so that 55% or call it, 85,000 units will become R1 capacity as we re-rate the lines midyear next year. And so next year, we'll have both the impact of having a multi-week shutdown as we re-rate the plant to add that incremental R1 capacity.

And at that same time, we'll be introducing a number of the next generation technologies that RJ just talked about as well. And so we'll still be in a period whereby we'll be continuing to ramp out of that shutdown in midyear to produce more units in the back half of the year, but it really won't be until full year 2025, where we'll be ramping up the then re-rated capacity from an R1 perspective.

[Rod Lache, Wolfe Research]

So just to clarify what you're saying, are you saying that you're not going to have the 85,000 units of R1 capacity available for 2024? Or will you?

[Claire McDonough, CFO]

It will be available. We're re-rating the lines midyear in 2024. And so from a full year perspective, we won't have the full year impact of that re-rate as we go through the process of a couple of weeks shutdown and then ramps back out of that shutdown in the back half of the year.

[Rod Lache, Wolfe Research]

Okay. But despite that, you're still thinking that you can get to gross profit in 2024?

[Claire McDonough, CFO]

That's right.

[Rod Lache, Wolfe Research]

Okay. Just to clarify that, that's -- I could see -- it looks like you're going to have something like a $2 billion gross profit loss in 2023. Maybe there's half of the LCNRV benefit left from 2023 to 2024. That gives you maybe $1.5 billion, and you have a $13,000 price increase.

If that was applied this year, that would have been $650 million better. So that would have gotten you to maybe an $850 million gross profit loss. I guess the rest of it is whatever volume you're expecting plus lowered component costs. Is that fair as we think about the bridge to next year?

[Claire McDonough, CFO]

As we think about that 2024 bridge, right, it's a combination of increased volumes that are driving significant fixed cost leverage within the business as we're continuing to ramp up production levels in the plant in Normal.

And then the next 2 core drivers for us is the reduction in our material costs, which you heard RJ talk a bit about, is really delivered through both the combination of engineering design changes in the vehicle through the introduction of these next generation technologies and then the commercial cost-down efforts that we have underway overall.

So I would guide you to about a 50-50 split as we think about the core drivers between commercial cost downs and engineering changes to drive the material cost reduction. And then at the same time, we have both the step change in pricing as we move past the pre-March 1, 2022 preorders, and then we also introduced some of the newer higher-priced variants into the fold as well that also further improves or increases ASP in 2024.

[Operator]

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

[John Murphy, Bank of America Merrill Lynch]

Just a first question around what's going on with suppliers. It sounds like there's still a fair amount of bottlenecks there. Just curious if you could sort of elucidate where those specifically are, how much they're holding you back. And I mean I kind of applaud you, RJ, for having that Supplier Day.

It sounds like it's a good thing to build those relationships, but it sounds like you felt like you needed to do that both for sort of comfort on their part, but also for you to get maybe closer to them and pull them along. So I'm just trying to understand what those constraints are at the moment, how much they're holding you back in 2023 and why you need to kind of get in there and kind of do that bear hug on that Supplier Day.

[Robert Scaringe, Founder, CEO & Chairman]

Yes. Thanks, John. As we look at 2022, there's a lot of challenges just with some of the surprises and the things that we didn't expect in terms of supply interruptions and component availability. Now as we look at 2023, we have much better visibility and a much clearer picture of access to supply and where there are going to be challenges or constraints. And very different than where we were last year. That visibility allows us to focus on exactly what will go wrong or what will be a gap.

And as I said today in the numbers that Claire referenced earlier in terms of guidance, it really reflects supply constraint, in our case, around power semiconductors. And this is being addressed through working hard with suppliers, but also as I talked about bringing up the new driving at the Enduro drive unit, we've sourced the power semiconductors for this in a way that allows us to have multiple to continue to ramp.

So we have a different set of power semiconductor suppliers for our existing driving unit as a quad motor from what we have in the dual motor and in the single motor for the commercial van. So those changes of the new technology, along with the supplier relationships we've built, allow us to alleviate some of that constraint, but it will be the ultimate limiting factor for us this year.

And fortunately, unlike last year, we can plan around it. We have this building into what those constraints look like. So it's not going to be a surprise, which is why we're wanting to be thoughtful on how we guide here.

[John Murphy, Bank of America Merrill Lynch]

RJ, there's a lot of people that want to understand what is sort of -- I mean, it's certainly not onetime because this is not going to ease that quickly, what's happening because of the supply chain side and what's happening because of what is not getting done sort of internally on a micro basis.

So is there a way to tease that out and say, hey, listen, if we had all the semis that we could get, we can actually be 100,000 units as opposed to 50,000 units this year, right? I mean is there a way to tease that out? Or is that getting too cute?

[Robert Scaringe, Founder, CEO & Chairman]

Well, I think the issue we have is that the supply constraint is, by far and away, the biggest constraint. We talked about our second shifts coming online and the ramp of our second shift. We didn't really talk about why it's -- what's constraining that ramp, but it's ultimately -- it is component supply. And that's on the R1 line today. If you think about the commercial vehicle line, we're still running a single shift there.

So it's -- we wish we could have the components still to fully run the plant across all lines, across multiple shifts, but that's not the case. And as I think about power semiconductors, in addition to having multiple sources of supply, we also have different types of technologies. So we use both silicon carbide and silicon IGBTs, and we have some level of fungibility in how we apply those across the vehicle sets.

But it's -- I think you understand very well that some of the constraints that exist in silicon carbide are going to be challenging over the next year, and so we've worked really hard to set up our supply chain so as we come out of this year and into 2024, we're positioned to really grow. And of course, as we think about R2, this is a major consideration from a power module point of view.

[John Murphy, Bank of America Merrill Lynch]

Okay. And then just lastly, real quick. CapEx at $2 billion is a little bit lower than we would have expected. Claire, is that the kind of thing that you can kind of run with as you're launching Georgia and the R2 and ultimately maybe the R3 at some point? Or could there be a significant step-up as that plant ramps in '24, '25, and we see the R3 come on there as well?

[Claire McDonough, CFO]

Sure, John. As I talked about, our expectation is that we'll maintain our CapEx in the low $2 billion area over the next couple of years and the guidance reflects the continued build-out of our facility in Georgia, continued investment in our plant in Normal and then the continued investments that we have across our go-to-market operations as well as across the business in aggregate. So the way I would characterize it is that the $2 billion per year certainly sets us up in a position to launch R2 in Georgia in 2026, as we've talked about in the past.

[Operator]

Our next question comes from the line of Doug Dutton with Evercore ISI.

[Doug Dutton, Evercore ISI]

So given the target for positive gross margins in '24 and what we've heard about the road to reach this goal with the LCNRV phaseouts and rerates at the factory, in your mind, can '25 approach a normalized gross margin profile, assuming full capacity at Normal and price to normalization on the R1 platform prior to sort of R2 coming online? And a follow-up there, is that target still 15% to 20%?

[Claire McDonough, CFO]

Sure. Our long-term vehicle gross margin target is 20%. And then through the introduction of additional software and services, we've guided to a long-term overall aggregate gross margin target of 25%. Our expectation is through the continued ramp of the R1 and EDV in Normal, we can certainly arrive at our target vehicle margins, and 2025 becomes really that sweet spot as volumes come together and we have our first full year production with the integration of our next generation technologies and price points as well.

So I have a lot of confidence around the cash flow generation that Normal can provide Rivian, and believe that Normal can support our operating expenses as a company as we continue to invest in the build-out of the R2 platform and get ready to start to launch that platform in Georgia in '26.

[Doug Dutton, Evercore ISI]

Okay. That's helpful. And then just an accounting question for me. Could we have a brief description or explainer on the CapEx and liabilities bucket at the bottom of the cash flow statement?

[Claire McDonough, CFO]

We can follow up with you with some details there.

[Operator]

Our next question comes from the line of Dan Levy with Barclays.

[Dan Levy, Barclays Bank]

Wanted to ask about the commentary on the preorders, and I see the comment that, that lasts into 2024. Maybe you can provide any additional voiceover. How have preorders trended year-to-date? And specifically, maybe you can -- you mentioned pricing as a tailwind. You have the higher pricing flowing through eventually. But given the price cut that we saw from one of your large EV competitors, how does potential for price cuts eventually factor into your calculus?

[Robert Scaringe, Founder, CEO & Chairman]

Thanks, Dan. As you think about the R1 product line, this is really our flagship product line. It's -- we've built it and launched it to establish the brand and as part of that. The pricing levels and the segments through which these products are going to compete in, it's a larger set of vehicles, the 3-row SUV and 3-row pickup. The pricing levels really need to be compared to things that are in those segments, and we feel very strong about where we position the products.

The R1T, we bring online our standard pack, we'll start at $73,000, and the R1S is just around $80,000, 3-row SUV with very, very strong performance. So the positioning there, we feel confident. We made pricing adjustments in 2022, and we haven't further adjusted from there.

Certainly, as Claire noted, our reservation process now gives us more flexibility to make adjustments to pricing over time, but we do see the introduction of some of the new technologies and some of the new features to allow us to actually grow ASP, as Claire said, with not only the new prices coming on for post-March 1 orders, but also to reflect some of the new technologies that are going to be in the vehicle.

[Dan Levy, Barclays Bank]

Great. And as a follow-up, I wanted to ask about the direction of some of the material costs. And I know you mentioned on your end, some initiatives to drive cost down. But I want to just ask about the raws because we've seen some cost moderation on the raws.

So maybe you can just talk about whether some of the raw material costs are coming down? Or I know there's a dynamic of contract resets. And so those might be higher year-over-year. So maybe you could just talk about the underlying BOM given the movement in some of the raw material costs.

[Claire McDonough, CFO]

Sure. Today, we haven't seen those actually hit our financial statements because many of our contracts are actually backwards looking as it pertains to inflation index prices that are embedded within those contracts. And so we'll begin to see some of those benefits as we progress throughout the course of 2023 itself.

I would also say that embedded within our guidance, we've been a bit conservative of not forecasting really significant reductions in those material costs overall. So much more projecting more of the status quo of what we're seeing today on a go-forward basis.

[Operator]

Our next question comes from the line of George Gianarikas with Canaccord Genuity.

[George Gianarikas, Canaccord Genuity]

I'd just like to piggyback on the previous demand question, that preorder question. I know you're not disclosing the preorders, but given there have been so many high-profile admissions of a weakening environment for demand, particularly for EVs, I'm curious as to whether you could shed any light or color as to how your net preorders have been tracking?

[Robert Scaringe, Founder, CEO & Chairman]

Certainly what we're witnessing in the macro and what we're seeing in terms of interest rate is, I think, across the industry, having an effect of moderating overall demand. But what we would say is, and as we think about it, the demand backlog that we have is very robust. It gives us a clear line of sight until well into 2024.

And with that, it really focuses the attention of the organization on satisfying this large backlog and ensuring that we can get customers vehicles. One of the biggest complaints, in fact our customer team tells me this every week, is around delivery timing. How can I get my vehicle sooner? Is there a way to get ahead in the line? So this is our core challenge today.

Now with that said, it's really important to note with the R2 program, we made comments on this earlier, the focus on cost and the focus on engineering the vehicles really to achieve a materially lower price point is key. And as we look out into middle of the decade, 2026 and beyond, this cost structure, we believe, is going to be really important. And some of the areas we've invested in terms of vertical integration, we think, will be foundational for delivering on those costs.

[George Gianarikas, Canaccord Genuity]

Just as a follow-up, great segue into my question about vertical integration. I mean I'm sure you've read the same press releases that I have that some of your peers are getting incredibly deep into that. I mean they're partnering with mines, buying mines, buying stakes in mines and doing things that seem to be a little bit far field. I'm curious as to how much vertical integration in your opinion, is too much vertical integration? Do you think that longer term, that might be something that you might explore as well?

[Robert Scaringe, Founder, CEO & Chairman]

Yes. Well, George, I think the core of the question is sort of pointing towards lithium. And your previous question talked about raw material costs, and this has certainly had the most outsized impact across the EV industry, with lithium hydroxide spot market price hovering around $80 a kilogram, up 4, 5x relative to what it was a year, 1.5 years ago.

So this is a real consideration as everyone, certainly ourselves included, thinking about what's the right sourcing relationships for lithium in lithium hydroxide, lithium carbonate, and we're certainly in midst of a lot of those discussions. And I think it's causing the material sources and, in our case, the manufacturers, the OEMs, to think about deal structures that are very different than what existed 2 years ago, 3 years ago, 4 years ago.

That could involve ownership positions, but I think for the most part, the opportunities lie just more in unique structuring. And so we haven't announced anything on that front, but it's something I spend an enormous amount of time on and work very closely with some of the very large players in this space.

[Operator]

Our next question comes from the line of Colin Langan with Wells Fargo.

[Colin Langan, Wells Fargo Securities]

You're burning through -- this year, you burned through over $6 billion in cash. You have $12 billion. So you have a couple more years of cash at this rate. I mean if I look at the guidance, adjusted EBITDA is supposed to improve a bit, the CapEx is higher, so it sounds like free cash flow may be modestly better this year, but not massively. What are your thoughts on the potential need to raise capital? When do you start making those decisions? Or should we see a pretty massive inflection in a couple of years?

[Claire McDonough, CFO]

On -- we'll continue to look at a variety of capital market solutions to maintain our strong balance sheet position. We plan to execute a portfolio-based approach for our capital raising across the entirety of the capital structure. And as I mentioned in my prepared remarks as well, we expect to see pretty significant moderation from a cash burn perspective in 2024 relative to 2023 as gross profit or the movement from negative gross profit to positive gross profit is a key lever in that walk of improvements. And then as we talked a bit about as well, 2025 is significant improvement from there as well.

[Colin Langan, Wells Fargo Securities]

Got it. I think in the last call, you mentioned you're planning an LFP plant. That's not actually in the near-term horizon. Any thoughts on raising capital to accelerate that given the health at a higher rate that might apply there?

[Robert Scaringe, Founder, CEO & Chairman]

Yes, Colin. As I referenced in the context of lithium supply, if you move slightly downstream from a battery supply point of view and thinking about IRA, there's going to need to be investment in new capacity. And the types of structures and arrangements to achieve that dedicated capacity, there's lots of different ways to look at that.

That's something, certainly, that's part of our plan and something that we're spending time on. We haven't announced anything on that front either, but it is a very important aspect of what we're doing in terms of creating new supply, creating supply that's IRA compliant, both in terms of raw material but also in terms of cell production.

[Colin Langan, Wells Fargo Securities]

And you have your own LFP chemistry? Or do you have a partner for it? Or you had your own?

[Robert Scaringe, Founder, CEO & Chairman]

So we've -- when we think about the build-out of our battery, overall battery portfolio, we have an internal team that's developing chemistry, and it's working to really understand across a variety of trade-offs how we think about what's the right cell for different duty cycles and for different applications. And that internal team also works very closely with some of our key partners to make sure that we can achieve the scale very quickly that we need to.

So in the case of what's in our vehicles today, it's a high nickel chemistry. That's something we've worked very closely with our supplier partner to develop that and to refine that to achieve the performance in our vehicles today. With the LFP that we're going to be launching shortly first in the commercial vans, that's in close partnership that we haven't yet announced, although those vehicles in the form of the vans will be on the road here very soon.

And then as we look forward, there's going to be portfolio of different partners and different approaches to achieve the scale we need across different cell form factors and cell chemistries, both high nickel and lithium iron phosphate.

[Operator]

Our next question comes from the line of Ryan Brinkman with JPMorgan.

[Ryan Brinkman, JPMorgan Chase & Co.]

I wanted to get your thoughts on any impact to Rivian you see from the Inflation Reduction Act. I remember as that bill was being written, it was speculated it could have been various different proposals. But in the end, it only subsidized the lower-priced vehicles, right, and benefits those manufacturers that are making the batteries that are vertically integrated or partnered, which you have yet to do.

So do you see any benefit in charging or other tailwinds? And how do you expect or hope to or plan to position the company to better benefit from that act as the next several years play out?

[Robert Scaringe, Founder, CEO & Chairman]

Yes. So I think the IRA bill, I've said this before, I think it's incredibly aggressive and appropriate to drive a broad scale shift towards electrification and to build out a supply chain within the U.S. And with that, in the case of our R1 product line, there's some tailwind, some benefits that it provides largely in the form of -- because we build modules in the U.S., we have a $10 per kilowatt hour benefit that's derived from IRA on the R1 platform. That's a manufacturing-facing benefit. But in terms of the consumer-facing credit, our vehicles aren't really applicable on the R1 platform.

Now in the case of R2, it's a very different story. In the case of R2, as alluded to in previous questions, it's really important that we ensure that the vehicle and the way we manufacture the vehicle and the batteries in the vehicle ensures IRA compliance. The price points need to be considerably lower and fall really right into the sweet spot as contemplated by IRA, and the sourcing of the critical materials plus the build of the cells, the manufacturing of the cells needs to be done such that we qualify for the $7,500 credit that is consumer-facing. So that's foundational to how we're thinking about the R2 program and platform and certainly plays into sourcing decisions and engineering decisions.

[Ryan Brinkman, JPMorgan Chase & Co.]

Okay. Great. And also just a follow-up on that earlier Q&A around pricing, the up to 20% price cut on -- some of the Tesla models, Ford and some of the others, et cetera. But I'm sure there's passing along of lower input costs in all the battery metals, but is there anything else? It just seems like a large reduction, right? So how are you feeling about the demand, the new order intake level or whatnot for the prices that you're currently charging?

[Robert Scaringe, Founder, CEO & Chairman]

I think as I was describing before, in the case of R1, we feel confident in the value proposition of what we're delivering at our pricing levels today. And if you were to compare, take, for example, the R1S to other 3-row SUVs that offer the level of range and performance that the R1S is delivering, it's really -- we think of it as it's a really good deal.

Of course, we get biased here, but 0 to 60 in 3 seconds, well over 300 miles of range. As we just announced today, we have a max pack range with 390 miles of range, which when coupled with the Enduro dual motor configuration delivers 0 to 60 in 3.5 seconds. And to be able to deliver that at the types of pricing that we're talking about relative to the competitive set, it's positioned quite well.

Now as you said, there's been price reductions that we've seen on the order of 20% in vehicles that are more in the R2 market basket, if you will. And a lot of that segment has seen significant price inflation in the first half of 2022, and I think we saw the prices go up very rapidly.

And we, of course, saw the other side of that, which is the prices come down very rapidly. I think what we're seeing today is reflective of a more stable and sustainable long-term pricing model for vehicles that are in the sort of midsized crossover and SUV segment versus what we were seeing in the mid -- early parts of 2022 into middle late part of 2022.

[Operator]

Our last question comes from the line of Mark Delaney with Goldman Sachs.

[Mark Delaney, Goldman Sachs Group]

One for me, please, was about the re-rating discussion and specifically around the timing and how much of the capacity is being shifted towards R1. I had thought that R1 capacity might be adjusted to something like 2/3 of the facility and perhaps that might be taking place later in 2023. So maybe you could update us on what may have changed in terms of the timing in '24 and the 55% that you spoke about today.

[Claire McDonough, CFO]

Sure, Mark. As we looked at the re-rating process within the plant, we really tried to optimize around the level of investment that would be required to increase that re-rate capacity. And as we've talked about in the past, desiring today to maintain the 150,000 units of installed capacity in Normal, but just slightly tweak that more towards the consumer side of the business today.

And so that was really the way that we calibrated around the trade-offs on how deeply we would have to disrupt the line or the level of downtime that would be required to make a more material increase in the production capacity of the R1 line as we thought about this re-rate process itself. So those are some of the core considerations that we went through as we evaluated the re-rate opportunity for us. And after we sort of go through this re-rate, we'll obviously think through additional opportunities to increase that potentially over time as well.

[Mark Delaney, Goldman Sachs Group]

That's helpful, Claire. And on the IRA, thanks for all the comments you made already so far. But in terms of demand from commercial customers, including for the delivery van, have you seen any change in terms of customer interest levels and when they may be able to or may be interested in taking vehicles?

[Robert Scaringe, Founder, CEO & Chairman]

Thanks, Mark. I should have actually commented on that in the context of IRA. Just to be clear, the -- for commercial vehicles, the requirements of domestic cell production are much different. And so in the case of our commercial vans, they're applicable. And in the case of R1T for commercial applications, it's also applicable.

So we do see that, and we see that's something that certainly, some of the business owners that are buying R1Ts are leveraging. And then in the case of the commercial vans, this is something that we think is going to be very important. And we're seeing that as we talk to customers outside of Amazon, we see this as a very important enabler, and it helps ignite this large-scale transition of our commercial vehicle fleet towards electrification.

[Operator]

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

[Robert Scaringe, Founder, CEO & Chairman]

All right. Well, thank you, everyone, for joining the call, and thanks for the questions. As I said in my starting comments, we're really excited about what we see in front of us. 2022 was an important year for us. It was a critical year where we launched and ramped 3 different vehicles between the R1T, the R1S and the EDV platform.

And as we look into this year, more than doubling the overall output, but importantly, getting a lot of customers or a lot of vehicles into a lot of customers' hands. We'll start to see a lot more of these on the roads, whether that's the commercial vans or the consumer vehicles, the R1T and the R1S.

And as that ramp continues and as we start to see more and more of our vehicles on the road, as Claire and I both described, the core focus for us is driving cost down across the business. Some of that will happen naturally as volumes go up when we get the fixed cost leverage that Claire described in some detail, but that's also happening through the engineering changes we're making and this really heavy focus on the commercial relationship with all of our suppliers.

So with that, we're very excited about the year ahead and looking forward to getting a lot more vehicles on the road and our path towards profitability. Thank you, everyone.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.