Good day, and thank you for standing by. Welcome to the Rivian Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Tim Bei. You may begin.

Good afternoon, and thank you for joining us for Rivian's third 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 proposed joint venture with Mercedes Benz, our future products and product enhancements, including R2, and our expectations regarding vehicle deliveries. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties 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. With that, I'll turn the call over to RJ who will begin with a few opening remarks.

Thanks, Tim. Hello, everyone, and thank you for joining us today. Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we'll cover on today's call. Having just passed the 1-year anniversary of the start of production for the R1T, I want to take this opportunity to highlight the progress our team has made this past year. We launched 4 variants across our consumer and commercial vehicle platforms. We are awarded MotorTrend's Truck of the Year, along with other media accolades. We produced more than 15,000 vehicles as of September 30, and we continue to ramp our production to fully utilize our normal facility. In addition, we also launched our go-to-market operations and services, which include our physical service centers and mobile service vehicles, delivery operations, FleetOS, financing, insurance, remarketing and the Rivian Adventure Network, our in-house developed and produced network of DC fast chargers. It's been rewarding to see the excitement and enthusiasm for our first generation of products. We believe we're in a unique position during a transformational time for the auto industry. Production of our designed and developed products continues to ramp at our large-scale vertically integrated production facility in Normal. We have significant demand visibility as evidenced by our consumer and commercial backlog. We have a strong balance sheet with $14 billion of cash that offers us the flexibility to navigate these uncertain economic times and look for capital-efficient methods to drive growth. We remain focused on ramping production in a cost-efficient manner, and we've seen improvement across our cost of goods sold, operating expenses and capital expenditures over the past quarter. The third quarter was another record for the Rivian team.…

Thanks, RJ. I want to echo your excitement around the third quarter results and the progress the team is making. During the third quarter, we produced over 7,300 vehicles and delivered nearly 6,600 vehicles, which was the primary driver of the $536 million of revenue we generated. We recorded negative gross profit of $917 million in the third quarter. We continue to be impacted by the high fixed cost structure associated with running high-volume production lines at low volumes while we ramp. We recorded a $696 million accounting adjustment in the third quarter related to LCNRV. As discussed on prior calls, the LCNRV adjustment writes down the value of certain inventory to the amount we anticipate receiving upon vehicle sale after considering the future costs necessary to ready the inventory for sale. The increase in our LCNRV charge represents the vast majority of the increase in cost of goods sold as compared to the second quarter of 2022. The increase in LCNRV compared to the second quarter is primarily due to an increase in overall inventory and firm purchase commitment values ahead of the start of our second manufacturing shift. In addition, similar to prior quarters, gross profit for the quarter was also impacted by the inflation of our raw materials as well as supply chain challenges, which caused the need for expedited shipping. Operating expenses grew by an approximate $160 million as compared to the same quarter last year. The primary driver of this increase is stock-based compensation expense, which we did not recognize prior to our November 2021 IPO. When looking at our operating expense this past quarter versus the second quarter of 2022, we saw a nearly $150 million decrease. Our Q3 operating expenses reflect our ongoing prioritization of investment in our core and vehicle technologies and…

[Operator Instructions] Our first question comes from the line of John Murphy with Bank of America. Your line is open.

Good afternoon, guys. Thanks for all the info. A couple of quick ones. That announcement that you're not going to provide on the preorders anymore. I am just curious what the motivation is for that. Are we getting to a point where the preorders are getting so robust or long that ebbs and flows in those relative to production might not actually be that informative? I mean, what's kind of the driving factor in that change in communication?

Thanks, John. This is Claire. As it pertains to the preorders, our sentiment was more so that we're one year post our start of production as an organization. We're starting to really ramp up our production and the deliveries associated with our R1 platform, so don't feel like it's really a meaningful metric for us to continue to provide overall to the market. Obviously, given the 114,000-unit backlog that we currently have, that extends us into 2024 as well, it's a robust backlog of demand that we have for our vehicles. And this is going to be consistent with what you'll see from us on a go-forward basis as it pertains to additional new product launches as well.

Okay, that's helpful. And then RJ, on the Mercedes JV, I just wonder if you could give us an update there. I mean, I think a skeptic could say, hey, listen, you would have been able to enter and be successful in the European market ultimately on your own over time, just given your product. But an optimist might say, hey, listen, that opens up that market that much faster and provides more robust growth sooner. Just curious if you can kind of maybe couch the direction there on optimist versus skeptic and any other updates you might be able to give us there.

Sure, John. Yes, Mercedes is, in terms of a partner and somewhat to be looking at how do we accelerate electrification faster, there's very much aligned mentality, aligned mentality around the need to electrify, aligned mentality on how we think about products and the position of products and the execution of products. So it's a relationship and a partnership that we're working towards that we think kind of on both sides to accomplish more together. Ultimately, as we think about this, as we look at this market, it is an important and large space for the commercial van space in Europe. And we felt Mercedes was a great partner to be looking at this with.

Okay. And then if I could just sneak one more in. The delta in deliveries versus production, Claire, will that continue to expand over time? Or are we kind of looking at sort of a onetime gap opening up here in the fourth quarter? Just trying to gauge the revenue recognition versus the production so we can think about that for our models go forward.

The Q4 gap will be exacerbated here in particular because we have the second shift that that's coming online and really ramping from a production perspective that back-weights the volumes from a production perspective in the second half of the quarter. And then that, coupled obviously with the shift that we've had to rail and then the holiday period where customers are a little bit harder to find in that last week of December that will be a driver of that core shift for us. Obviously, what we don't deliver in Q4 rolls into the upcoming quarter, so you start to normalize over time as we ramp closer to the installed capacity within the plant in Normal. So the gap should narrow on a percent basis on a go-forward basis.

That’s very helpful. Thank you very much, guys.

Our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.

Hi, everybody. So my first question, Claire, is if I do the calculation quarter-on-quarter sequentially from 2Q to 3Q, your revenue increased $172 million, and your gross loss, if you will, improved by $182 million if you exclude LCNRV, okay, which is substantial -- more substantial this quarter than last quarter. So on my math, your improvement in gross profit ex LCNRV was actually greater than your change of revenue. Now there may be some stuff going on sequentially and maybe there were some really unusual other knocks on gross profit last quarter, but I just wanted to kind of make sure my math is right and to see if there was what you could highlight sequentially that got a lot better underlying, excluding the LCNRV, to draw that improvement of gross profit that actually exceeded the change in revenue. Thanks.

Thanks, Adam. So unpacking the question first about LCNRV itself, it's important to understand there are different components. So the way to your calculation, which is entirely excluding it, is not necessarily the way that I would direct you to look at it. The segment you may want to look at instead is really looking, in particular, at the change in increase in LCNRV versus the complete exclusion of it. The way to think about it is LCNRV is really accelerating the recognition of losses as we take in raw materials and have our firm commitments, which we're then grossing up to say, what is the cost for us to turn these materials into that end-state vehicle themselves? And so as it pertains to the quarter, we get both the benefit of a reduction of bill of materials and conversion costs associated with sort of the baselining of inventory levels if inventory were held constant within those two quarters. And so that's why we look to that increase as you look at that calculation in particular. And so if you're looking based off of your own metrics, there, right, it's more of an 11% increase in that cost of goods sold on a comparable basis versus a 47% increase in deliveries in aggregate. So we've made meaningful progress to sort of close the loop on that front, but I wanted to just direct you to some of those nuances.

Okay, I appreciate that. Thanks. And just as a follow-up on reservations. Can you tell us where -- give us an update on where you're getting your customers from what they currently drive? And then same thing for your deliveries, just to kind of get a sense, how many are coming from Tesla or trucker SUV owners? Any other color there would be great? Thanks.

Sure, Adam. One of the things we targeted in developing the products and thinking about R1T and R1S, these are really flagship products that introduce the brand, really open the brand umbrella for us to, over time, add additional products. And because of that, we wanted them to be pulling -- the target state, I should say, was to be pulling customers from a broad spectrum of vehicle formats and form factors as well as brands. And sitting here today, we now have the actual so look at how we did relative to target state. And we're really pleased that we do have a really diverse set of customers. So certainly, customers are coming out of -- some customers coming out of Teslas. But really, there's no single brand that represents a significant percentage of our overall demand. But I would want to add a couple of really important metrics, the first of which is the vast majority of our customers, close to 90%, do not currently own an EV, meaning most of our customers are new EV customers, which is really important from a mission point of view because it means the brand, the products we've created, it's helping -- we're helping to create new EV customers, who’re driving that transition. And the second is the number of customers that are buying an R1T that haven't owned a pickup before. That's well over a majority of the customers haven't owned a pickup before, and they're being introduced to it through a very different type of pickup, of course, something that's very lifestyle-focused. And in a similar sense, the R1S is, in many cases, folks are moving into it as a prelaunch SUV is something they've aspired to but haven't been able to make that jump before, in many cases, because of desires around efficiency and what we can deliver in a full-size 3-row SUV with something that's great on-road and off-road. It's really pulling in a broad spectrum of customers.

Thanks, RJ.

Our next question comes from the line of Joseph Spak with RBC. Your line is open.

Thanks so much, everyone. Claire, I want to go back to Adam's question because I was sort of pulling on a similar thread here and I'm trying to sort of update real time for what you just said. So if I just look at auto COGS divided by deliveries in the second quarter, no adjustments, and then I do the same thing in the third quarter but adjust for the increase in the inventory adjustment, as you just suggested, it still seems like that COGS per unit, while still obviously above what you're selling the vehicle for, did improve like over 30%. So can you just help us understand, like is that not right? Like is there something with the accounting that does not allow you to do that calculation?

No, that's absolutely right. As I had mentioned, right, as you factor the sort of apples-to-apples comparison of the way that you're looking at it, Joe, you would see a 33%-plus improvement on a quarter sequential basis.

Okay. Maybe I misheard that. I thought I heard 11%. Okay. And is that...

Dollars is 11% growth of dollars, but that is off of -- right, the fact that we're also increasing 47% on a deliveries basis. So you're really netting the two of those.

Okay. And so that's sort of the leverage you're seeing in the plant? Or is there anything with mix between R1s and the vans in the quarter that impacted that?

The biggest driver that we've seen on a quarter sequential basis is just some of the cost efficiency that we're driving within the plant, us also moving beyond some of the start-up-related costs as well. That's a key enabler for us as we've seen and continue to moderate down that cost of goods sold per vehicle.

The other thing just to jump in here, Joe that we have is -- we've launched multiple vehicles in parallel. So the start-up costs that Claire referred to, we were seeing all of those stacked up on top of each other, four different vehicles launching and ramping largely at the same time.

Okay. Thanks a lot. And RJ, I guess this is a second question. A couple of quarters ago, you talked about the revised plans, some changes to CapEx timing, et cetera. I'm just wondering, in light of IRA and kind of appreciate you're still probably evaluating that. But like does that cause you to reevaluate the plans again and maybe accelerating or reaccelerating some of that in-house cell development? Because I think that was one of the things that maybe had a sort of slight pushup, but the return profile on that investment seems to be greatly accelerated versus what you were thinking at the time and then obviously also directly impacts the financials of the rest of your business. So just wanted to get your thoughts on that.

Yes. I mean, there's -- as you know, there are still some moving pieces with IRA, but we think this is a really powerful step and an important step by the U. S. government to really both create strong tailwinds not only for electrification but also for the build-out of a domestic supply base around battery cells. And so this is -- we couldn't be more excited about this, and it's certainly driving shifts in how we think about the overall battery supply chain. And it's not just the cells, it's also the core materials that go into the cells, lithium hydroxide, lithium carbonate, some of the key precursor materials are areas we're spending a lot of time focusing on. And not only making sure we have security supply as we think out through the end of the decade, but making sure that, that supply qualifies for all the benefits associated with the IRA bill. Now at the cell level, particularly important for us as we think about our two platform vehicles, this is something that has long been the plan to have domestically produced cells that would go into the vehicle. This just puts greater emphasis and importance on achieving that and achieving that as quickly as possible.

Okay, thank you.

Our next question comes from the line of Rod Lache with Wolfe Research. Your line is open.

Hi, everybody. You mentioned again that you have the funding through late 2025 with cash on hand, excluding this JV plant. And just wanted to confirm what that means. So by late 2025, you will have ramped up Normal and presumably funded most of Georgia assembly. I just wanted to make sure that, that's correct. And you didn't mention anything about -- anything new at least about vertical integration into batteries or cathode active material. Is that part of your funding plan just to the extent that it's important, particularly for the R2?

Thanks, Rod. As we've talked about in the past, we remain confident in our cash on hand through 2025. And as we've also spoken about, we will opportunistically evaluate, right, opportunities for us to invest in high-growth, high-return options for Rivian on a go-forward basis. And as you heard from RJ's last comments there around a lot of the work that our team is doing across the board as it pertains to securing cell raw materials and the R&D and build-out and capabilities that we have in-house here. Those are all things that we're currently evaluating and working on as an organization as well. And the embedded guidance that we do have does certainly consider some meaningful investments in that cell road map as we sit here today and look out at the building blocks for that future state opportunity. What the guidance doesn't include today is really much more of the large-scale manufacturing build-out of our cells, which would follow, obviously, the development and build-out of our R2 platform as we've spoken about in the past. So those are our core items that I just wanted to call out as you think about the building blocks and road map to that cash on hand through 2025.

Okay, all right. That's helpful. Is it possible that, that can change prior to the ramp of the R2? Or is that something that just it takes a longer time to kind of get that pulled together?

Rod, as Claire said, a lot of what's already built into our plan is the development and pilot -- the funding for all the development pilot activities associated with our domestic cells as well as building out some of the raw material cathode active material supply chain. But above and beyond that, as we think about what the future lines look like, part of that planning exercise is to create opportunities for us to take a decision with enough time in advance to have impact in that 2026 and beyond time frame. So those are decisions we'll take. And we look at them through the lens of recognizing the need to raise capital for things that we believe have very strong return profiles. Building domestic battery cells is one of those certainly. I'd also say that this is something that we view as a must-have over time, so it's just a question of how quickly those activities ramp up in terms of production capacity.

And just lastly, you're going to be producing over 10, 000 vehicles in the fourth quarter. And I presume that, that benefits, to some extent, but not fully from the second shift and you're still constrained by supply chain. Can you just give us any color you might have on what the -- where you are in the S-curve now, what the trajectory might look like from here just because there are -- obviously, there are people who are reporting some push-out for the R1S vehicles. So wondering if that has any implications for what the ramp looks like.

Yes. The second shift is now up and running. We're building vehicles on if those vehicles are in delivered to customers, which is exciting. In ramping a second shift, of course, it's additional team, it's additional -- it's a lot of additional hours every week of time building vehicles. But it does have a ramp curve associated with it. And now while the ramp curve is much faster than what we went through on the first shift, as we brought the lineup and brought the plant up, it's not as if it starts immediately at 100% output. So we're going through that ramp now. It is going well, as you called out in your question. We're very much cognizant of the limitations of supply chain, and that was -- as you recall, we talked about this in the last call, that was actually what drove the timing of the second shift coming online. It was we want to ensure before we brought on a large group of additional team members, make sure that we would have the parts to build the vehicles. So as we stand here today, that is ramping. It's going well. The first shift continues to make improvements. As Claire referenced before, we're very much focused not just on the ramp but also on operational efficiencies and cost efficiencies, many of which come implicitly just through achieving higher output of the plant and leveraging more of our fixed costs more efficiently across more volume. But we're very much focused on fully ramping the second shift and going into 2023 strong.

Thank you.

Our next question comes from the line of Charles Coldicott with Redburn. Your line is open.

Hi, guys. Thanks for taking my question. My first one, on the R2 and the delay to 2026 from 2025 previously, can you talk a bit about what's changed there, and maybe also how this changes, if at all, your investment plans for the period up to 2025?

Sure, Charles. This doesn't represent a material change in the product by any means. This is really reflective of making sure that the production site is prepared. We have the appropriate amount of time to go through the ramp-up phase, leveraging a lot of lessons learned as we've gone through the ramp of the R1P, the R1S, the EDV 700 and the EDV 500 over the last 12 months. So those ramps have informed our thinking on making sure that we have as close to a flawless ramp as possible with R2. Now in terms of investment dollars, we're -- one of the things Claire and I spend a lot of time with our -- with the teams on is working very hard to push off payments on some of the CapEx as much as we can. But ultimately, some of these things require us to spend over the course of next year and, of course, into 2024 as well.

Got it. And then on production, so I think to meet your 25,000 target, you need to average about 850 units a week in the final quarter. Can I ask if you've exceeded that rate in any of the weeks so far? Or that a missing component may have impacted production so far? And then maybe along the lines of a prior question, thinking into next year, should we think that quarter-on-quarter growth is kind of linear through next year or will there be some seasonality to that?

The overall -- the way to think about the growth as we look at this both week-over-week, quarter-over-quarter is it's a symphony of not just what we're doing in our plant but also of our supply chain, as you referenced. And looking into 2023, we do see healthy growth quarter-over-quarter. We do have some planned downtime at the end of the year as we make some line improvements and capacity increases across the plant. This is the end of 2023. We've talked about this before. And then in the first quarter of this coming year, and Claire and I both referenced this earlier, we are integrating our Enduro Drive unit and our LFP pack into the EDV platform. And so that's new battery pack, new drive unit, and of course, with that, a host of related changes. So that introduction of a new propulsion platform, which provides considerable cost improvement which we're really excited about, that will take some time. And we've built into the plan for next year really the appropriate time to go through the quality loops and training to make sure that it's a real -- it's a seamless launch.

Perfect. Thank you.

Our next question comes from the line of George Gianarikas with Canaccord. Your line is open.

Good afternoon and thanks for taking my question. Just quickly, you recently had a recall and I'm curious if you could share your thoughts on how your service department performed and how you see those facilities and personnel ramping over the next 12 months?

Thanks, George. Just as a point of background, we had a recall for a torque fastener in one of our suspension components. And it called for inspection and tightening, which the operation takes a couple of minutes on a vehicle. And this was a really remarkable opportunity for us to demonstrate the benefit and the value of a direct service network. So we, today, have completed that operation on 83% of our fleet, with about 10 -- line of sight to another 10% that's currently scheduled. So the speed at which we were able to very rapidly address this across the entire fleet and to do it moments after the decision was made to do this voluntary recall, to have our service leadership immediately working on deploying this and within hours, provide -- performing these first inspections in operations. And then as you just heard me say, within weeks, to have now over 83% of the vehicles complete is really something we're proud of and our customers saw that as well. The ease at which the process was for customers was great, where we could go to their homes, where we can go to their places of business. In some cases, they would come into service locations, but we tried to make it as seamless as possible. And ultimately, I think the transparency in which we handled the situation was appreciated by our customers.

Thanks. And just if I could ask one more. There's been some recent high-profile missteps in autonomy. And one of your competitors stated that it may not be critical for them to develop that technology in-house. I'm just curious as whether your view has been updated on that and whether you think it's critical to have your autonomous offering developed in-house.

Yes. There's a -- within the autonomous space, there's a broad spectrum of ways to approach it. And I'd say to oversimplify, you have very hardware-heavy systems where a vehicle have $100-plus thousand worth of sensor set and compute. And then you have more hardware constrained systems that are designed to be deployed on vehicles that are purchased by customers where you have thousands of dollars of sense unit compute. And our approach is to focus on the latter, where we're developing an in-house autonomous platform that will grow in capability but using a more constrained set of sensors, in our case, a very camera-heavy and radar-heavy platform. And so this is something that we do believe is really important as we talk about not just highway assist features but growing above and beyond what we see today in the Level 2 space. And this takes time but it certainly benefits from having a very large deployed fleet with vehicles that are driving many millions of miles. As of today, our vehicles have driven over 92.5 million miles, which is great, but all those miles contribute to great learning opportunities to build and grow this platform.

Thank you.

Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.

Thank you very much. First, a quick question around how do we think about some of the units and company economics going forward. So I guess in the quarter, you've had quite a bit of an improvement in cash, R& D and SG&A type of spending. Do you view these as a new run rate that is sustainable or especially as volume increases? Or how should we think about it? And then at the unit level, obviously, nice to see the improvement in, I guess, the gross losses. What would be sort of like the reflect the run rate, production rate or cadence that you need to achieve to sort of essentially shrink these losses and bring that more into a positive territory as we look at it?

Thanks, Emmanuel. First off, as you noted, we're really encouraged with the progress that we've made to prudently manage our operating expenses across the board, and you're seeing that now through the performance in our Q3 OpEx itself. As it pertains to more so of the baseline, our expectation is from an R&D perspective, that those R&D expenses will increase in Q4 relative to the level of spend in Q3. And that's largely the result of a lot of the development work that is underway for the introduction of our LFP pack and Enduro Drive unit in the commercial van program itself. So there's a lot of development builds that are happening in the backdrop that will contribute to that overall increase in R&D that we expect to see in Q4. But we do expect to continue to manage our OpEx spend in aggregate as we're driving a lot of capital efficiency, while at the same time, we're investing heavily in the customer experience. So on an ongoing basis, we're continuing to open up additional service centers and our charging network, things of that nature, which contributes to that overall SG&A balance for us but also driving incredible efficiency across every dimension in our control as we're scaling the business on a go-forward basis as well. And then to answer the second question you had on unit economics and what that looks like on a go-forward basis, I think one of the pieces that's most important to first understand is today, as you look at our cost of goods sold, the majority of that COGS per unit is really fixed costs within the business. And so the biggest lever we have is really focused on our ramp from a production perspective. So maybe one thing that I think would be…

That's incredibly detailed and helpful. Can I just ask a quick clarification on this and then I have a question on free cash flow? But the fact that you're, I guess, facing these targets and walk on 2024, does that correspond or match with the specifics of that unit number where you think that these economics essentially work with the volume is at the right place. So I guess what happens in between, I guess?

We'll continue to see ongoing performance and improvement as we scale, especially given the magnitude of how important ramp is across the board. And so the important piece here is that in 2024, you see each of these key levers really in place as it pertains to production ramp, as it pertains to Rivian moving to those post-March 1 preorder base, and importantly, as you think about the composition of a lot of the engineering design changes that we have from a road map perspective, that all come together to drive that meaningful step change in gross profit.

Okay, that's clear. And then on the free cash flow side, so with some of the efficiencies in CapEx this year but also some of it being, I think, timing into next year, how should we think about CapEx going forward? I think your previous view was maybe low $2 billion year in, year out. Should 2023 be ahead of this as a result of some of these movements?

We still expect that CapEx should be in that low $2 billion area as well, even despite the fact that there will be some push of CapEx spend from 2022 to 2023.

Okay. Thank you very much.

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

Thanks for taking my question. IRA was pretty new after the -- when you last reported. Just trying to get your latest thoughts. You mentioned LFP and that's sort of hitting early next year. There's a little uncertainty around how that might impact LFP insomuch as sort of from check suppliers and the rules are pretty tough there. Do you still think LFP makes sense longer term? And also on the commercial credit side, I mean, how does that work with some of your customers? Are they going to capture most of the credit benefit or are you able to kind of get some of that back to your margin?

With regards to LFP, this is a cell, just to speak to it probably as a chemistry, it works really well in vehicles that require high cycle life, so vehicles that see lots of charge/discharge cycles relative to a high nickel cell. And so commercial applications are really a perfect application from a cycle life point of view. Further, the lower volumetric energy density associated with an LFP cell fits nicely into a vehicle that's physically large because you have the space to fit the pack to achieve enough energy storage but to do it in a slightly larger space. So we're quite bullish on LFP. And interestingly, with regards to IRA, there's not a stringent requirement for commercial applications of source to cell. And so this is really important. So the $7, 500 credit for low GVW commercial vehicles, low gross vehicle weight commercial vehicles stands regardless of source of cell. And as we talked about in the last call, the size of those incentives grow as you move into higher gross vehicle weight classes. Now the second thing I'd point out is we also do believe that the supply chain will evolve. The inherent benefits I referenced at a high level of an LFP chemistry for high cycle life applications are real. There are meaningful advantages. And so we see a lot of opportunity to make sure there's a domestic supply chain for both the production of LFP cells but also for the cathode active material as well as some of the other precursor materials. Above and beyond that, of course, by the nature of an LFP cell, you remove nickel and you remove cobalt, so from an IRA compliance point of view, it's actually an easier chemistry to achieve compliance on, notwithstanding the fact that there's not, as you already pointed out, LFP supply chains for building the cells in the U.S. today. But certainly, from a raw material supply point of view, it is an easier cell long term to maintain that compliance.

And on the commercial credits, I mean, do you think your customers will get that benefit? Because I'm not sure some of us think I feel like there might have been cost-plus arrangements for some of the vehicles.

Do we believe the -- our customers, specifically, our large commercial customer that we're launching our commercial business with will achieve some of those credits. There's also credits that are manufacturer-facing with IRA. So we're very cognizant of managing both sides of those credits, both the consumer or the customer-facing as well as the manufacturer-facing.

Got it. And just last question. On the joint venture with Mercedes, how does the production split work? Is there a fixed amount? Because I mean, is there any concern because Mercedes obviously has an established footprint there. So is it just sort of you each have an allocation of production? Or if there's demand, you could take over most of the production? How does that sort of work in the agreement?

At this point, we're still working through a lot of the specifics of our agreement. We've signed and announced an MOU around this joint venture, but there's still a lot of work to be done in terms of defining exactly how it will work.

Okay. Thanks for taking my question.

Our final question comes from the line of Ryan Brinkman with JPMorgan. Your line is open.

Thanks for taking my questions. Maybe just a couple around the planned increase in production here in 4Q. I think squeezing from your reiterated full year outlook, it implies about a 45% sequential growth on top of 3Q's, I think, 67% improvement. So firstly, you mentioned being short a specific component in 3Q. Are you able to share what that component is or if you've cycled past that shortage? And what has been your experience so far here in 4Q in the first 5 weeks of the quarter, et cetera, maybe with regards to the second shift, too?

Ryan, we've talked about before just the improvement we're seeing broadly within the supply chain, in particular, relative to the first half of this year, which we've spent some time talking about just how challenging that was. So that improvement, we're absolutely seeing and continue to see. But with a vehicle that has hundreds of suppliers and thousands of components coming from suppliers, it only takes 1 part from 1 supplier to stop the line. And as Claire referenced earlier, we had 5 days we lost already this quarter because of a single component supply shortage. Now that component and the supplier of that component is something we spent a lot of time working really closely with them to avoid having this happen again and have built robust contingencies to manage this risk going forward. And we do believe that there's going to continue to be challenges certainly with supply chain, but we do believe with this specific instance that we've settled it to allow us to continue to ramping without those types of interruptions.

Okay, very helpful. And then just lastly, I think last quarter, you had talked about preserving free cash outlook by deferring some CapEx spending that was discretionary into next year. Now with the pushout of the R2 a bit, how are you’re thinking about that? Are you maybe looking to trim capital expenditures next year relative to what might have otherwise been the plan?

As you heard, we both took down our guidance from a CapEx perspective this year. And so part of that is a shift into next year. And then next year does have some incremental benefit in that we're not spending at the same capacity towards the plant build-out in Georgia. But in aggregate, as I mentioned, we still expect to be in that low $2 billion area even with those movements.

Okay, very helpful. Thank you.

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

Thanks, everybody, for joining the call. It was great to have such a broad spectrum of questions here today. Just to reiterate some of the points Claire and I both made throughout the call, we're really looking forward to the continued ramp of our production line. The impact this has not only on the economics of our business but very importantly on ensuring we deliver to customers, excited customers that help us to bring them their vehicles, get them in their R1T, their R1S as soon as possible, that's a critical focus for us. And as we look out into 2023, the continued ramp and continued growth in deliveries is our core, core focus. And with that, of course, driving efficiency into and across the business, not just on our cost of goods sold but across our operating expenses as well as how we deploy capital from a CapEx point of view. So with that, thank you, everybody, for joining, and we look forward to our next earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.