Rivian Automotive Inc

NASDAQ:RIVN

Earnings Call Analysis

Rivian Aims for Cost Efficiency and Improved Margins in 2024

In 2023, Rivian notably surpassed its production target, delivering over 57,000 vehicles, more than doubling 2022's figures. Q4 saw revenue of $1.3 billion but was marked by a negative gross profit, impacted by costs for upcoming design changes. Despite this, the fourth quarter ended with improved revenue from regulatory credits and strategic delivery shifts. Looking ahead to 2024, the focus is on efficiency and cost reduction, with a production goal set at 57,000 vehicles and a negative EBITDA projected at $2.7 billion. Rivian is preparing for a Q2 shutdown to enhance the R1 platform, which will affect the entire year's output but is expected to significantly reduce material costs. They forecast low single-digit growth in vehicle deliveries while emphasizing the expansion of nonvehicle revenue sources. The long-term outlook remains optimistic with targets of 25% gross margin, high teens EBITDA margin, and 10% free cash flow margin.

Company's Efficiency Drive and Focus on New Revenue Streams

The company has underscored its commitment to improving efficiency, particularly through a 30% increase in its production line rate. This focus is not only internal, as it also looks beyond the manufacturing of vehicles to scale up its nonvehicle revenue, which ranges from regulatory credits to software services. With a growing base of over 70,000 vehicles, they see substantial opportunities ahead. Although adjusted operating expenses have seen only a 2.5% increase in comparison to doubling production volumes, the company acknowledges the need to optimize operational expenditures, including a planned reduction of salaried employees by around 10%.

Guidance on Production, Deliveries, and Operational Transition

For the year 2024, the company is guiding a production of 57,000 vehicles, with deliveries expected to grow by low single digits. They anticipate a transition where the company begins to fulfill orders more rapidly with existing demand, alongside moving vehicles from the backlog. This shift is supported by the introduction of efficiencies in their supply chain and the planned, albeit brief, shutdown to implement cost-saving vehicle technologies. In the first quarter of 2024, approximately 13,500 units will leave the factory, with a slight delay on some due to parts awaited in April, resulting in expected deliveries to be about 10% to 15% lower than the previous quarter's figures.

Financial Outlook for 2024 and Long-term Goals

The company projects a negative EBITDA of $2.7 billion for 2024, a result of continued investments into market operations and new technological integrations. Capital expenditures are estimated to be $1.75 billion, highlighting an ongoing investment in production and next-gen technologies. Despite these substantial numbers, the company expresses confidence in its financial runway, believing they have sufficient cash to sustain through 2025. This is backed by a drive towards improved cost efficiencies and vehicle economics. Moreover, they remain focused on achieving their long-term margin goals, which include a 25% gross margin target, an adjusted EBITDA margin in the high teens, and a free cash flow margin target of approximately 10%.

Strategic Adjustments and Optimization in Operational Expenditures

The company is undertaking a strategic shift towards optimizing its operating expenses as it scales up. This involves building out sales and service networks while aiming to minimize the growth of SG&A expenditures. Over time, they expect the current operational costs, especially within the service network, to transition into cost of goods sold (COGS) and potentially become a profitable segment of their business. By keeping a tight rein on SG&A even as the business grows, the company aims to achieve a leaner cost structure, signaling a mature approach to managing growth and profitability.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Rivian Fourth Quarter and Full Year 2023 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.

[Timothy Bei, executive]

Good afternoon, and thank you for joining us for Rivian's Fourth Quarter and Full Year 2023 Earnings Call. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today.

We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and today's shareholder letter.

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

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

[Robert Scaringe, executive]

Thanks, Tim. Hello, everyone, and thanks for joining us today. During our call, I will highlight key developments during the fourth quarter, provide an update on the progress we're making against our value drivers and discuss steps Rivian is taking to adapt to evolving market conditions in our industry.

Before I dive in, as part of our ongoing focus on driving cost efficiency, we announced internally today the difficult decision to reduce the number of salaried employees by approximately 10%. These difficult decisions, among other initiatives I plan to discuss, enable us to maximize the amount of impact we can have as a company.

We hold the deep conviction that the entire automotive industry will electrify over the long term. This means, as an industry, replacing roughly 1.5 billion internal combustion passenger cars across the planet over the next couple of decades. Rivian's mission is to accelerate this transition. A major goal with the launch of R1 was to build a brand that deeply resonates with customers.

Beyond our active owner groups and the R1S being the top-selling EV in the U.S. priced over $70,000, an owner satisfaction survey conducted by consumer reports showed Rivian as the #1 automotive brand with the highest likelihood for customers to purchase again. We intend to harness this brand strength as we launch R2, which will be unveiling on March 7. R2 represents the essence of our brand while targeting the significant midsized SUV segment, a massive market with limited compelling EV options beyond Tesla.

R2 has been developed with vertically integrated propulsion platforms, electronics and software to create an incredible user experience. Our team is laser focused on the factors within our control that will drive Rivian's long-term value. These include driving cost efficiency, optimizing our production deliveries, investing in differentiating technologies, enhancing the Rivian customer experience and maintaining a strong balance sheet.

The progress we've made ramping production and driving greater cost efficiency was significant in 2023. During the full year, we more than doubled production and deliveries and exceeded our initial production guidance by more than 7,000 vehicles. The team achieved this while also successfully managing complex integration of new engineering design changes, including our in-house drive units for both the EDV and R1 platforms, LFP battery packs for EDV and new vehicle variants such as our Max pack.

Ramping production and introducing new technologies across multiple vehicle platforms has presented challenges, but importantly, our team has gained significant learnings in a compressed time frame. This experience will be foundational as we execute against our 2024 plan.

We took significant steps towards driving greater efficiency in 2023. Gross profit per vehicle improved by approximately $81,000 when comparing the fourth quarter of 2023 to the fourth quarter of 2022. As we start 2024, I want to emphasize our team's continued sense of urgency and ownership mindset in driving further efficiency throughout the organization.

During our second quarter shutdown, we plan to incorporate additional material cost downs with the integration of new design and engineering changes in the R1 platform, deliver further supplier cost reductions, capture the flow-through of commodity price improvements and further optimize our manufacturing expenses. We believe these steps position us to achieve modest gross profit in the fourth quarter of 2024.

As we start 2024, I want to address the broader industry context, which I referred to during our third quarter call. Our business is not immune to existing economic and geopolitical uncertainties, most notably the impact of historically high interest rates, which has negatively impact demand. In this fluid environment, we appreciate the expressed interest in demand visibility from the investment community.

The conversion of orders to sales can be impacted by several factors, including delivery timing, location of order, monthly payments and customer readiness. Our order bank has notably reduced over time as deliveries have more than doubled in 2023 versus 2022, along with the impact of cancellations due to both the macro environment and the customer factors I just referenced.

For 2024, we expect our total deliveries to be derived from our existing backlog as well as new orders generated during the year. Our key focus is on increasing demand to achieve our 2024 delivery targets.

Our go-to-market strategy is built on growing brand awareness, enabling our direct-to-consumer experience and importantly, providing more opportunities for consumers to experience our award-winning R1T and R1S vehicles firsthand. We are scaling our Rivian spaces program, which are equivalent of retail locations. And today, we have 11 sites open across North America, most of which have opened in the last 6 months.

These sites have garnered over 130,000 visitors so far in 2024. Complementing our spaces footprint are more than 50 service centers serve as another location for current and potential customers to experience our vehicles. We provided over 13,000 demo drives already in the first quarter and consider this to be one of our key demand building strategies.

We've also expanded the lineup of our vehicles and recently introduced our standard range variant, which provides an accessible price point for more potential Rivian customers. We're encouraged by the early results.

The steps we're taking in 2024 will be foundational in positioning Rivian as a leader in the transition to electrification. The opportunity ahead is significant. We're taking deliberate action to drive additional cost efficiency as we continue building our go-to-market capabilities and develop our R2 platform. I would like to thank all of 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. I'd like to reiterate our excitement for the long-term success of Rivian. Over the course of 2023, we made significant progress in all 4 key value drivers: driving greater cost efficiency, continuing to optimize production and deliveries, investing in differentiated technologies, and continuing to enhance the Rivian customer experience.

During the fourth quarter, we produced 17,541 vehicles and delivered 13,972 vehicles, which was the primary driver of the $1.3 billion of revenue we generated. Total revenue for the quarter included $39 million of proceeds from the sale of regulatory credits. We expect the sale of regulatory credits to increase over time, but to vary quarter-to-quarter.

For the full year 2023, we produced 57,232 vehicles, which was significantly above our initial guidance of 50,000 vehicles and more than double 2022 production. Total gross profit for the quarter was negative $606 million. Gross profit per vehicle delivered was approximately negative $43,000.

During the fourth quarter, cost of goods sold were negatively impacted by $70 million of costs primarily associated with our planned 2024 shutdown were approximately $5,000 per vehicle delivered. These costs include supplier-related expenses, accelerated depreciation and other expenses related to the new technology and cost savings design changes going into the R1 platform.

While we could incur additional costs associated with the planned shutdown in technology and design changes in the near term, we do not anticipate these costs to be part of our normal course of business in the longer term.

During the fourth quarter, we also delivered a higher proportion of consumer vehicles due to Amazon's expected seasonality. For context, the proportion of our total revenue attributed to Amazon was 8% in the fourth quarter of 2023 versus 30% in the third quarter of 2023.

Given our commercial vans have lower material costs due to the technology changes made in 2023, the lower delivery during the quarter negatively impacted our gross margin. In addition, due to this dynamic, the vast majority of the increase in finished goods inventory in the fourth quarter of 2023 was related to commercial vans. Changes in LCNRV and losses on firm purchase commitments benefited our fourth quarter results by $7 million as compared to $106 million in the third quarter of 2023, a difference of approximately $6,300 per delivered unit on a quarter sequential basis.

Next, I want to help provide more clarity on how we bridge from our fourth quarter 2023 results to where we expect to reach modest gross profit in the fourth quarter of 2024. The largest driver, which represents approximately 50% of the bridge, is our plan to reduce our variable cost per unit. The majority of this will be accomplished through material cost reductions planned as part of our Q2 2024 shutdown. As a reminder, this is through engineering cost reductions such as our ECU and wire harness simplification through our commercially negotiated cost downs and contribution from lower raw material costs.

The second driver, representing approximately 35% of the bridge, is through our focus on driving greater efficiency through our production facility. As part of our planned shutdown, we are increasing the R1 line rate by approximately 30% to more efficiently produce vehicles. We also expect to see a benefit from declining LCNRV and firm purchase commitment balances in 2024.

The final piece of the bridge, which represents approximately 15%, is the scaling of our nonvehicle revenue. With over 70,000 Rivians on the road, we have the opportunity for increased revenue areas such as regulatory credits, accessories, service, remarketing and software-enabled services. These drivers are core to our long-term margin targets, and we expect to continue to drive recurring revenues in these areas as the car park grows and we expand our offerings.

Our adjusted operating expenses for the fourth quarter were $706 million. For the full year, our adjusted operating expenses of $2.7 billion represented 2.5% growth versus 2022 despite our production and delivery volumes more than doubling over the same period.

As RJ mentioned earlier, we are in the process of optimizing our operating expenditures by reducing our salaried employees by approximately 10%, along with a limited number of nonmanufacturing hourly employees. Our adjusted EBITDA for the quarter was negative $1.1 billion. For the full year, our EBITDA was just under our guidance of negative $4 billion.

Turning to our business outlook for 2024. We remain focused on driving greater cost efficiency across the company. We are guiding to 57,000 total vehicles produced for the year. Compared to 2023, we anticipate consumer and commercial vehicle deliveries to grow by low single digits.

As we discussed on last quarter's earnings call, we expect to shut down both the consumer and commercial lines in our normal plant for several weeks during the second quarter to introduce cost savings in vehicle technologies to the R1 platform. We believe these changes will meaningfully reduce our material costs and position Rivian to exit 2024 with a much improved margin profile. While the direct downtime will be over a portion of Q2, we anticipate this to impact all 4 quarters of output as we prepare the facility for the work and then individually ramp each vehicle variant as well as our supply chain following the shutdown.

As for the first quarter of 2024, due to managing changes in our supply chain associated with the introduction of new materials, we expect to factory-gate approximately 13,500 units for the quarter. We expect that there will be a few thousand more vehicles, which are built but not factory-gated as they wait an updated part we expect to receive in April. We anticipate the first quarter total delivery to be approximately 10% to 15% below the fourth quarter 2023 deliveries.

While the incorporation of new design changes impact near-term production, we are confident it better positions Rivian to be more profitable and competitive over the long term. We expect 2024 EBITDA to be negative $2.7 billion as we focus on continuing our go-to-market infrastructure build-out and the development of R2, while also optimizing our costs driven by the integration of key new engineering technology and design changes, negotiated supplier cost downs and a more efficient operating expense structure.

Recently, we have taken measures to rationalize our capital expenditures due to a greater focus on our core business. Capital expenditures in 2024 are expected to be $1.75 billion, driven by additional investments in our production facilities, next-generation technologies and the continued build-out of our go-to-market operations.

We remain confident that our cash, cash equivalents and short-term investments can fund our operations through 2025. We aim to maintain a strong balance sheet position by continuing to drive cost efficiencies and improve our vehicle unit economics while opportunistically evaluating a variety of capital markets available to Rivian ranging across the capital structure.

Over the long term, we continue to see a clear path to our approximately 25% gross margin target, high teens adjusted EBITDA margin target and approximately 10% free cash flow margin target.

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 John Murphy with Bank of America.

[John Murphy, analyst]

Just a question on the downtime relative to -- on the R1 versus the launch of the R2. And RJ, just curious, is it maybe better to focus on pulling forward the launch of the R2 and committing capital, both human and dollars to pulling that forward and getting that high-volume program up and running as opposed to tinkering with the line on the R1 and maybe circling back to that R1 line leader? Is that possible? Or is there kind of constraints or just kind of misguided and these things can both happen at the same time and you can't pull for the R2 forward at all?

[Robert Scaringe, executive]

Yes. Thanks, John. We're certainly working very hard to make sure we deliver R2 on time and to the extent possible, any time we can out of the program. I think what has us so excited about but R2 is if we look at the success of R1 in terms of how the markets responded to the brand and to the product, it's the top-selling EV with a price point of over $70,000. And our hope, of course, is to translate the brand strength that we've demonstrated for Rivian with R1 into the R2 product and into a much lower price segment, which has a very large just market.

I think the key thing, though, to come back to your question, R1, is just recognizing how much of the content that's going into the shutdown in Q2 actually translates to R2. So there's a massive consolidation of our ECUs in the vehicle. So that's all the computers in the vehicle, which we design and engineer in house. We've consolidated them. We reduced the number of computers by about 65%. And that network architecture and associated ECU topology is very closely related to what's in R2. And so it not only derisks R2, but it's part of the development process and development sequence associated with the launch of that product.

Along with that, these changes that we're making to R1 with regards to just the overall changing out of hundreds of components and associated suppliers with those components also corresponds to a number of supplier engagements that we have that linked to R2. And the volume that R2 brings allows us to be more aggressive in pricing with a number of those suppliers that are on the R1 program. So the 2 are very much interlinked. And with that said, as we think about our focus as a business, the shutdown and the updates associated with it in our bill of materials and along with the line really is sort of part 1 to the major focus for us of the business, which is the successful launch and rapid ramp-up of the R2 production.

[John Murphy, analyst]

And just one follow-up. If you think about product cadence in spacing of product, do you feel like the tack that the Tesla is taking of a product launch that's relatively sparse but constant improvement is more appropriate in the direction you're heading? Or do you think something closer to sort of a typical sort of 4- to 5-year product life cycle with many products interspersed is the way you're ultimately going to land as we kind of look 5 to 10 years in the future?

[Robert Scaringe, executive]

Yes. When we think about it from a customer point of view, one of the things we see is most valued is making sure that the platform -- the vehicle platform and architecture allows for a continuous stream of updates. And so in the R1 product, the customer satisfaction is extremely high. The brand strength is high, with the consumer reports rates us as having the highest level of brand equity, if you will, where the likelihood of repurchase is the highest for our brand. And a lot of that is borne out of the continued updates we're making through over the year of software improvements.

And so we think that's a really dramatic shift in just how we think about products and sort of overall vehicle life cycle. That will translate, of course, into R2. And as we look at the launch of R2, learning from what we went through in launching R1 with R1T, R1S and also the commercial vans all in parallel, we've really simplified the product portfolio cadence with R2 where there's a single vehicle that we're launching, the number of build combinations and trim combinations is very limited with an emphasis on managing rapid ramp-up of the supply chain and driving operational efficiency into the R2 plan.

[Operator]

Our next question comes from Adam Jonas with Morgan Stanley.

[Adam Jonas, analyst]

My first question is how much of the volume that you forecast for this year is preordered versus what you would expect to be sold out of inventory? And I have a follow-up.

[Robert Scaringe, executive]

Thanks, Adam. The -- our backlog is something that we know there's been questions around just what does that look like? What's the topology of it. One of the things we need to recognize is a lot of the customers that are in our backlog have been there for a number of years. And as a result, it's not as if the moment someone gets to the front of the line, so to speak, and they're -- we're ready to make a delivery to them that they can take delivery at that moment. Life situation in terms of when they're ready to take on a new vehicle, the coordination of that around what their financing expectations are, all of those factors play in.

And so the way to think about our backlog is to recognize that this will be -- this will continue to exist through the remainder of this year. But in parallel to delivering vehicles from our backlog, we'll also be delivering vehicles from newer orders, orders that are happening over the course of this year. And so that for us is a transition as a business where we go from purely delivering from backlog to having folks that are coming in, new demand and having those deliveries happen much quicker. And to help facilitate that transition, we've created a few customer-facing structures that make that a little easier.

We've created something we call the R1 shop, which allows some of the more common build combinations to be put in there to allow customers to get access to those vehicles more quickly. And still, to this day, one of the most common questions we get from customers is how quickly can I get my vehicle. And so managing that dynamic of customers wanting to have the immediate gratification of they buy a vehicle, they get it within a week or 2, along with customers that have been waiting for, in some cases, 2 or 3 years. That balance has been something we're learning to navigate and we do expect to continue to have to manage that balance over the course of the year.

[Adam Jonas, analyst]

Okay. And just as a follow-up, the EV world has changed so much, RJ, since the 2021 IPO in a lot of ways, in a more moderated demand and competitiveness and pretty uncertain economic environment to boot. So I'm just wondering how the Board and the management team, are you still fully committed to that vertical integrated, go to Georgia, 400,000 units, $5 billion on your own strategy? Or has the board consider any alternative to the greenfield option in Georgia or at least some adjustments in terms of the size or whether you go in with a partner? Or is it pretty much the strategy for 2021 that you're kind of going ahead with right now into '24.

[Robert Scaringe, executive]

Thanks, Adam. The way we've approached our Georgia facility is to build out the plant across 2 phases. So it's not a single 400,000 unit block but rather two 200,000 unit blocks. I think the broader point that you raised just around overall demand for electric vehicles, how fast the market transitions to electric vehicles, we do think we're in a very interesting moment in time where there is a lack of choice of highly compelling EV products in that $45,000 to $55,000 price range, recognizing the average price of a new vehicle transaction in the United States last year was around $48,000.

And so when we look at the competition that exists, we often get immediately drawn into competing what's the competition look like directly with Tesla. But we need to recognize only 7% of the market has electrified, meaning really, we're talking about how do we get the 93% of the market that's not buying an EV to get excited about the product. And R2 -- the layout of the vehicle, the package, the configuration, the technology content, we think, creates a really interesting and very unique configuration that we're very bullish in the demand for that product. And of course, recognizing what we've seen in R1 and how strong Rivian has resonated with consumers there.

We remain very bullish on the R2 segment and the R2 product itself. And so the way that we've engaged with our suppliers to ensure that we can ramp effectively as well as laying out the production road map, albeit measured, as I described across 2 phases, has been very much thoughtful of the scale of the opportunity and the scale of this transition that we see happening over the course of this decade.

[Operator]

Our next question comes from Joseph Spak with UBS.

[Joseph Spak, analyst]

Just on the workforce reduction, sort of obviously some tough decisions. But -- and I know, Claire and RJ, you've sort of been really focused on the gross profitability. But maybe if we could just sort of focus a little bit on OpEx because -- and I understand you're cutting the workforce by 10% here, but how do you get comfortable that this is -- that even now that is sort of the right level because ex stock comp in '23, it's just under $3 billion if -- I know it's a different world. But if I look at like where Tesla was at a sort of similar level of sales back in 2015, you're still like 80% above that. So maybe you could just give us a little bit more color on sort of OpEx and the plans there going forward.

[Robert Scaringe, executive]

Thanks, Joe. Yes, when we think about OpEx, there's a number of components here. So just to break apart the big category of it all. If we look first at R&D -- if we at look at between R&D and SG&A, on the R&D side, we have to recognize comparing to Tesla in 2015, while useful -- and certainly when we look at these types of metrics internally as well. We're not competing against Tesla in 2015. We're competing against Tesla and others in 2024. And so we're driving incredible focus on efficiency and how we develop our products.

We talk internally about being the most efficient at turning capital into amazing products. But it does also require us to be spending appropriately in the core areas. And for us, there's a few areas that we've made the decision to develop vertically in-house to create what we believe to be significant structural long-term advantages, and that's really around the electronic stack in the vehicle, so the ECU and computer topology throughout the vehicle. The software, of course, that's running on those computers across the vehicle and then our high-voltage architecture. So that's our high-voltage battery system, all the way through the rest of the driveline, so through the drive unit out to the wheels.

And it's in those areas that we see both technical differentiation that creates really a consumer experience that's markedly different and better than what we believe a sourced third-party strategy will deliver. But it also provides meaningful cost advantages. And in the compute stack and ECU topology front, the biggest opportunity here is ECU consolidation and the ability to have a much smaller number of computers that run the vehicle. And of course, because we control and design those computers, it allows us much more seamlessly to do that. So that's first on the R&D front, a big focus, as I said, has been on driving efficiency into that.

Now we think of R&D as entirely spending within our employee base, but a big portion of this is also with suppliers. And it has to do with the supplier development costs associated with, let's say, a seat program for the R2 or headlights for the R2. And so a lot of the negotiations that are being driven, I referenced this earlier, around R1 supply also linked to much more strategic long-term relationships with our suppliers that will feed into R2, where we're asking those suppliers to treat us much more like partners where instead of having to pay the suppliers so much upfront, which is a lot of what we've dealt with historically to those suppliers recognizing and clearly seeing the market strength that we have.

I mean these suppliers are providing all of our competitors, and they see our volumes relative to our competitors, especially with R1 seeing it's really dominant position from a market share point of view. That's helped a lot. And completely changing the nature of those discussions with suppliers, which -- of course, we think about it. We talk about a lot in the context of COGS, but it really does impact us on the OpEx side through the prelaunch development costs.

Now with that said, I do want to just spend a moment here on SG&A because it's the other big driver of our OpEx, of course. And on this front, we're at a point where we're building out a service network. We're building out good sales and distribution network. And a number of these areas today are recognized as OpEx. In particular, on the service side, almost all of this is OpEx. But over time, of course, our service costs become part of our COGS structure. And in fact, service will ultimately be a profitable part of the business.

And so Claire referenced this, and we can certainly speak to it more here. We're very focused on not minimizing the growth of our SG&A spend as we continue to scale the business. So while the business is scaling and the number of vehicles we're supporting in the field grows dramatically over the next couple of years, we're working very hard to really maintain a lean SG&A side of the organization, and that has the tailwind of a lot of those costs that are embedded in SG&A today, as I said, becoming COGS and actually becoming profitable.

[Joseph Spak, analyst]

Okay. And then maybe just on CapEx. I think last quarter, you sort of talked about a '23, '24 average, below $2 billion. And I guess that's technically true, but it's pretty significantly below $2 billion now with the 175 guidance. So was there -- is there sort of a further shift in capital spending? And if so, what does that relate to?

[Claire McDonough, executive]

Sure. As we think about the broader context, first and foremost, as you heard RJ talk about, we're focused on driving efficiency across the entire company as a whole. And so as we look at what we've been able to achieve, given these efforts across the company, it's allowed us or enabled us to not just shift out CapEx, but dramatically reduce the required CapEx within the business as a whole. And so that's by pressurizing the areas of investment, whether it's how efficient we're able to invest in some of the rerate activities in normal and taking CapEx out there, whether it's, as RJ mentioned, engaging with suppliers around product tooling investments, whether it's continuing to tweak around the efficiency of all of our go-to-market operations' investments between sales and service locations as well as all of our enterprise tech and logistics infrastructure as well.

And so I think what you're seeing from us is, it's really just continuing to drive that mentality of efficiency and culture of efficiency across not just CapEx, but really our operating expenses, how we're managing our cost of goods sold and equally as we're thinking through the way in which we'll manage our inventory balances as well, which are our 4 key focuses across the business.

[Operator]

Our next question comes from Rod Lache with Wolfe Research.

[Rod Lache, analyst]

There's a comment in your release about the 2024 forecast requiring an improvement in the order rate and you said it's going to be driven by planned go-to-market strategies. I wanted to ask about that. Is it reasonable to assume that the Q1 deliveries that you're projecting here is kind of reflective of the current order run rates, around 12,000 or 135 a day. What is the impact that you're seeing from some of the strategies you've unveiled like the standard variance in leasing? And can you talk a little bit about how you're going to get the word out or advertise what you're offering?

[Robert Scaringe, executive]

Sure. Well, thanks, Rod. Yes, you referenced it, but it's important to note here, we've just recently launched our Standard pack variant, which we've long talked about, but ultimately, it's now available to customers. And we're really encouraged by the reaction to that and some of the early read through on just what that does in terms of demand generation.

It's also worth noting and implicit in your question is a key element here, which is the Center pack has not only driven demand for our more price-sensitive customers, but it's actually increased. We've seen an increase in demand for our Quad Large pack as well. And that really links to the continued growth and awareness for what we're building.

And when we think about how strong our customers like the product and how the brand excitement for customers has been so high with the likelihood of repurchase being by significantly the highest across the entire auto industry. It's really a key element for us in terms of driving knowledge of the brands, knowledge of the products and driving awareness up. And so with that said, a lot of the investment that I was referring to in the letter and in my opening comments has to do with building out more of our go-to-market infrastructure.

Today, we have 11 spaces. We have just over 50 service locations. We're now offering test drives through our service locations along with some of those spaces, but getting customers in our vehicles is by far, the way -- the most effective way to not only drive brand awareness but to convert that brand -- that experience into actual vehicle orders and vehicle sales. And so a lot of activity is going to be playing out over the course of the next few months to continue building up these functional capabilities within the business and also the infrastructure associated with supporting physical interaction with the products.

[Rod Lache, analyst]

Okay. just given what you're seeing right now, can you discuss the rationale behind expanding the capacity by 30% and -- at the end of this year? And any update on EDV demand outside of Amazon?

[Robert Scaringe, executive]

Yes. And within the plant, the shutdown we have coming in the second quarter -- next quarter, I think a lot of the thinking around that tends to drive towards what's happening in the plant. And I said it before, but just to repeat here for clarity.

One of the most important parts of the shutdown is actually what's happening within our supply chain. So we're making a number of supplier changes, a number of component changes along with supplier changes that lead to significant reductions in our material cost. And the scale and amount of change in our supply chain and through our bill of materials means that the coordination of the restart of the plant and winding down of the existing inventory, bringing up of new inventory requires that multiweek shutdown. And with that multiweek shutdown, we are making improvements to the line as well. I do want to make that very clear.

And the improvements are really focused on line rate and the ability to run the line at a higher speed and therefore, a more -- in a more efficient manner. And that increased line rate will ultimately translate to lower conversion costs, reduced hours per unit within the plant as we look at operating post shutdown through the rest of this year.

[Rod Lache, analyst]

Okay. And the EDV demand?

[Robert Scaringe, executive]

Yes, this is something we've talked about in the past. We're really excited to have new customers running pilot programs. We have more of these pilot programs coming online. There's more and more images of our commercial vans being spotted with different logos on the side. But as we've said in the past, for these large fleets and the complexities associated with transitioning to an electric vehicle fleet, we expect these to start as pilots. And then over the course of this year, transition into larger scale orders. And we don't anticipate. And we've been careful to guide to say that -- really the significant step-up in demand associated with non-Amazon customers, we'll see that next year in the 2025 time frame.

[Operator]

Our next question comes from George Gianarikas with Canaccord Genuity.

[George Gianarikas, analyst]

I'd like to just go back to one of the previous questions. Just to understand the Q1 delivery cadence of down -- that you said down 10% to 15% sequentially. Can you just kind of help us understand the reasons behind that? Is there anything to do with just the supply? Or was it informed by the comments you made around demand?

[Robert Scaringe, executive]

Thanks, George. Claire referenced this in her opening remarks. During this quarter, a lot of the -- some of the supplier changeovers that we're working on, we're going to start to feel the impact of them. And we saw it in some of the onetime charges that we accumulated already in Q4. We're going to feel more of that in Q1. And along with that, we're going to be building several thousand vehicles that won't be deliverable to consumers. So we won't be factor-gating those vehicles in Q1. And so that's the reason you see the production guide lower in Q1 than what it was than what we achieved in Q4.

And so while the plant won't be shut down in Q1, we are going to start to feel the impacts of the scale of the supplier changeover that we're making. And that ultimately is going to translate into our deliveries as well. So with that said, we're going to be doing everything we can to, once the parts are available, to get those vehicles built and then make those deliveries as quickly as we can in the second quarter.

[George Gianarikas, analyst]

Maybe as a follow-up just to understand. You have, I think, over 70,000 cars on the road to date, and I'm sure you've learned a lot from them being on the road, a lot of data collection. What has that data collection informed you about product performance and maybe what you're going to put into the R2?

[Robert Scaringe, executive]

Yes, there's a lot. One of the things that's been most surprising to us is just watching how customers are interacting with the overall digital experience and digital ecosystem of the vehicle. And we track really closely how the experience of interacting in the vehicle translates into the mobile app and the use of the mobile app within the vehicle and -- or I should say, to access and work with the vehicle.

And so as we look at some of the features that are coming even in this year, it's to enhance the digital experience in the vehicle around dynamics, around usability, around activities that you can do in the vehicles, so some of the entertainment functions and continuing to make those interactions easier and more seamless. And the way we build our software road map, there's a strategic, let's call it, long form element that looks at how everything puzzles together in terms of partnerships, in terms of some of the capability that goes in.

But then there's also a very active dialogue with customers where we're not only active on forms, but we have user groups that send us feedback points and we address those. And I get a lot of joy out of our release notes that go out every 3, 4 weeks with every other update that we drop and then the feedback and the excitement that comes with that. With all that said, a lot of the learnings of what's gone into R1 beyond software around drivability, around how the vehicles are being used, around the importance placed on safety have played into really helping to shape how we're prioritizing cost of goods sold spending, if you will, on R2. And we're very excited to show the R2 product.

We think it really captures the most important sort of elements or the essence of Rivian as a brand and as a product, but in a smaller form factor package and, of course, at a lower price point. But it's still very much a Rivian, and we've had lots and lots of debates over the last 24 months around what the content needs to be in the vehicle to deliver on that Rivian-ness, if you will, while at the same time recognizing that certain trade-offs need to be made to achieve the lower price point.

[Operator]

Our next question comes from Dan Levy with Barclays.

[Dan Levy, analyst]

I wanted to start with a question on your bridge to gross margin breakeven. And I wanted to just contrast that versus the prior commentary you gave, which is that half of the improvement would come from volume, just cost absorption; a quarter from cost improvements; and the cost from -- a quarter from price. I recognize the starting points are different. But given a seemingly weaker volume environment, and I think maybe some questions on the pricing, what are the incremental offsets that you're seeing that still enable you to get to this gross margin breakeven? Is it just further improvements or breakthroughs on price than what you previously anticipated? And maybe if you could just comment for a second, if you reached variable margin breakeven in the fourth quarter on R1 just something that I believe you've previously targeted.

[Claire McDonough, executive]

Thanks, Dan. As you heard in my prepared remarks, the bridge -- the largest piece of the bridge lasts from Q4 '23 to Q4 2024, in which we expect to be modestly positive in gross profit is variable cost. And so that is enabled by as you heard RJ speak about the continued opportunity we have to renegotiate prices with suppliers.

We now have took care of R2, which is coming next, which has been an enabler for us to get to lower material costs across the board from a commercial context. We also have, which is largely unchanged, the planned engineering design changes that drive ample cost efficiency that will go into the product as part of the Q2 shutdown.

And then the areas where we've seen incremental opportunity is really what we've seen across the board from a commodities context where lithium prices have continued to soften across the board and have been more of a tailwind today in this bridge relative to the last bridge that we provided a year ago on our Q4 2022 earnings call as well.

As we look at the other elements, as you rightfully noted, right? The lever of fixed cost absorption is a smaller bucket for us today. As we think about the continuation of driving more operational efficiency as the lever, versus a massive step change in the underlying volumes associated with our 2024 guidance.

And then the last element on ASP, you've seen us take an incremental $12,000 of revenue per delivered vehicle Q4-over-Q4 from 2022 to 2023. And so we've already made very significant progress against a lot of the ASP side of the equation. And so what we indicated in our prepared remarks was really more directed on some of the non-vehicle-related services revenue opportunity. So that's continuation of sales of regulatory credits.

RJ spoke about the service opportunity just now as we build the car park. And more of what today is sitting in SG&A starts to become COGS or warranty expense, and that's another key enabler for us as well, as will the opportunity for Rivian to continue to offer additional software-related revenue streams in the future that will add to that broader ASP driver within the business as a whole.

On to your second question around the contribution margin of the vehicles. We were very close in achieving positive contribution for current priced vehicles in Q4 and see direct line of sight, as is evidenced by our continuation of committing to our Q4 positive gross profit as we look to the future and the impacts that the material cost reductions will have driven by our shutdown in Q2.

[Dan Levy, analyst]

Great. And then maybe if we could just have a follow-up on the demand side. And specifically, how do you think about elasticity of demand here? And I get it that most of the incremental volume you're looking at beyond the order book is coming from the go-to-market strategy. But beyond that, if that doesn't materialize as planned, how do you think about the pricing? Are you looking to hold firm on the price and maybe limit some of the volume upside? Or do you think that there would be potential for pricing actions?

[Robert Scaringe, executive]

Yes, we're -- thanks, George (sic) [ Dan ]. We're constantly monitoring and looking at the pricing environment and understanding really what the overall macro environment is looking like and how to manage that. The -- to date, we've just recently launched our lowest price variant of R1 with the Standard pack. And as I indicated, we've seen very encouraging reaction to that. So there is demand elasticity as a function of price, for sure. But at this point, we feel comfortable with that pricing on the Standard pack and this -- but again, this is something in this environment, we have to go and eyes wide open and recognize how the rest of the market is reacting and how the rest of the market is behaving.

[Operator]

Our next question comes from Mark Delaney with Goldman Sachs.

[Mark Delaney, analyst]

Yes. I think, first, I was hoping to better understand your drivers around the software and services part of the business. I think about 15% of the gross profit improvement by the fourth quarter of this year is coming from software and services. You've got a number of offerings there that you've spoken about, things like insurance, charging, regulatory credit sales, maybe you can rank order for us what you see some of the largest drivers are in terms of getting to that 15% coming from software services this year?

[Claire McDonough, executive]

Sure. The biggest driver there is driven by the increases that we saw in regulatory credits in aggregate. And so for us, we had $73 million for the entire year in sales of regulatory credits; and Q4 alone had $39 million. That was the largest driver. But beyond that, we continue to see growth across the maintenance and repairs from a service standpoint; our continued efforts in remarketing; and over the longer term, the opportunity to sell Rivian in the resale market as well, which we think is an important value driver for the business overall.

We've also been encouraged by the financing revenue streams as evidenced by both the ongoing straight financing of our vehicles, in addition to the introduction of leasing, which we launched in November of this year, which has been a key enabler for us to driving greater share of our financing penetration across all Rivian sold as well. And equally, as we think about the insurance business, that's an annuity type business as we've seen very strong renewal rates for existing customers that are now entering their second year, while we're also able to capture a significant portion of new customers as well. And so we're continuing to see strong tailwinds from each of the key drivers across the board and are excited to have a broader road map of more of these software-enabled services in the future.

[Mark Delaney, analyst]

My second question was trying to understand how fixed the input cost environment might be for 2024 at this point. You spoke about some changes in things like lithium and battery pricing. I mean that can move around a little bit throughout the year. I mean have you already gotten firm commitments on some of these materials? And similarly, with suppliers, you oftentimes, either there's a volume requirement in order to get a certain price. You spoke around a partnership approach that some of the suppliers are taking and wanting to be involved with the R2 in terms of the longer-term opportunities with Rivian. But to the extent your volumes end up less than the 57,000 production target, is there some risk as well around what the input cost you'll be paying are?

[Robert Scaringe, executive]

Yes, Mark, you referenced already, but I mean the raw material costs within the battery supply chain have changed dramatically in the last year, specifically lithium hydroxide is down by about 4x from north of $80 a kilogram to just over $20 a kilogram today. So that has a very significant impact on our overall cost structure.

But getting into just thinking about the overall supply chain sort of health for us and overall material costs, we're just seeing a dramatically different environment for sourcing than what we had previously. And when we think about when we source R1, and a lot of the billing materials that we've been operating off of and the contracts we've been operating off of to date, those are contracts that went in place in 2019, 2020, where Rivian was in a very different negotiating position with those suppliers and where the industry was in a very different position to be making commitments to us.

Fast forward to today, those same suppliers are highly engaged, very enthusiastic about the product. And they've experienced very much firsthand some of the challenges of supplying other products, and some of the products from large established OEMs have not done nearly as well as what they thought they would or what those other manufacturers thought they would. And on a relative basis, looking at those and comparing it to us, they now see us as a large customer, and they see what's coming with R2 and that gives us a really meaningful negotiating leverage.

And in many cases, we've been able to negotiate with our existing suppliers meaningful cost reductions that remove any of the price premium that we would have been paying before associated with us being a new company. But in cases where we haven't been able to do that, we've been very active on resourcing suppliers and bring on -- ending supplier relationships and bringing on new suppliers. And we have a relentless focus on driving our cost of goods sold down through those activities.

Now in cases where we're either changing the part design or changing out a supplier, it's not as if we can press a button, and it happens immediately. There's both the tooling time; there's the bring up of the supplier; and then, there's the coordination of the transition. And the shutdown, as I said, this will be the single largest consolidated set of supply chain changes that we've had by far since we started production.

And we had a similar set of changes we made on EDV early part of 2023 when we shut the line down, and out of that, we achieved a material cost reduction of 35%. But the scale of the changes we're making on R1 is meaningfully bigger in terms of number of suppliers and number of components with the shutdown that we're planning here in the second quarter of this year.

[Operator]

Our next question comes from Emmanuel Rosner with Deutsche Bank.

[Emmanuel Rosner, analyst]

I was hoping you can help me understand better how the introduction of the Standard packs helps with your targets and strategy. I think the previous plan, I think you may have shared with us, was perhaps to introduce it once you've actually had a chance to incorporate some of the cost savings and potentially lower battery packs and efficiencies, et cetera. But I guess by doing it now, the price point is probably like $9,000 below the Large pack, but the battery pack is not that much smaller, like 14-kilowatt or smaller. So it feels like it's a large price cost without much of a cost to bill of material of it. And so I'm curious, does it help you with volume scale in terms of getting to that breakeven gross margin? Where does it fit in the equation?

[Robert Scaringe, executive]

Yes. Emmanuel, as you said, Standard pack has long been part of the strategy to have the 3 different battery pack sizes. And ultimately, it helps us access the most price-sensitive customers. We pulled it into this quarter really with the intent of answering what we were seeing as a real customer request and a lot of our customers looking forward to that configuration. But we also are able to use this as a chance to really better understand the overall demand curve.

And when we look at the different configurations that we offer, up until recently, we really had our -- we had our Large pack with Quad motor and then our Max pack. So we were -- we've built out the high price side of our portfolio, but we hadn't brought in the more affordable variants of R1. And so what we're really encouraged by is not only the excitement around that for, as I said, our most price-sensitive customers, but the fact that it's driving awareness, which somewhat may be not immediately obvious.

But what it is driving is more demand for our Quad motor Large pack as well. So we've seen a step-up in new orders for the Quad Large, which is supported by folks that are becoming aware of the vehicle or becoming aware of the brand, getting drawn in by Standard pack, but then recognizing that they'd actually be willing to pay for the upgraded range or the upgraded performance that comes with either the Large pack or the quad Motor.

[Emmanuel Rosner, analyst]

Understood. And then as a follow-up then, staying on the topic of pricing. If I'm looking at your gross margin walk towards breakeven in the fourth quarter, obviously, the only piece about pricing there is sort of like this adjacent revenue and it's a positive one. I don't -- is there any risk of downside risk from pricing on existing vehicle?

I mean I'm thinking about specifically the introduction of the Standard pack. This is obviously cheaper than the vehicles you were selling before. And so to a certain extent, all else equal, that would put some pressure on pricing. So any reason why that would not be part of the walk?

[Claire McDonough, executive]

Emmanuel, as we think about the ASP lever throughout the course of the year, we'll see fluctuations that will mirror our production ramp. So we'll start, following our shutdown in Q2, with production of our Standard pack vehicles across the board. So while you see higher ASPs in Q4, driven by a higher concentration of Max packs that were available in that period, you'll see some fluctuations throughout the course of the year. But by the time we get to Q4 of next year, we'll have that full suite of offerings as a whole that allows us to drive more equal levels of ASP on the R1 portfolio as a whole, which is embedded within that Q4 2024 bridge. And then as I spoke about, the increase from there is really driven by many of the nonvehicle revenue streams, which will be additive in aggregate as we're servicing a larger car park within the market.

[Operator]

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

[Robert Scaringe, executive]

Well, thanks, everyone, for spending the time with us today and the thoughtful questions and discussion we were able to have. We're incredibly excited about the strength of customer excitement for our brand and for what we're building as a company, and with that, looking forward to continue to make progress on our drive towards profitability as a business. And an important component of that is, of course, the unveiling and showing of our R2 product line, which will be showing on March 7. And that will embody a lot of the learnings that we've talked about in the context of launching and ramping R1, in a product that we think really fits the market and really fits the largest segment of demand that's available today.

So with that, thank you, everyone, for the time and look forward to our next call.

[Operator]

Thank you for your participation. You may now disconnect.