REE Automotive Ltd. Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the REE Automotive Q3 2023 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kamal Hamid, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and thank you all for joining our third-quarter 2023 conference call. I hope that you have now seen our press release and shareholder letter issued earlier this morning at investors.ree.auto. If you haven't, I encourage you to review it as it has additional insights into the topics we will talk about on the call today. I would like to remind you that today's call may include forward-looking statements. Any statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts, and assumptions are forward-looking statements. Please note that the company's actual results may be different from what is anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control, such as the ongoing military conflict in Israel. Please refer to the company's Form 20-F filed on March 28, 2023, with the Securities and Exchange Commission, which identifies principal risks and uncertainties that could affect our business, prospects, and future results. We assume no obligation to publicly update any forward-looking statements except as required by law. In addition, we will be discussing or providing certain non-GAAP financial measures today, including non-GAAP net loss and non-GAAP operating expenses. Please see our shareholder letter for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. I will now hand the call over to Daniel Barel, our CEO and Co-Founder.

Thank you, Kamal. Hello, everybody, and thank you for joining us today. I'm pleased to share that we have had a strong third quarter. We continue to see strong market demand for the P7, which was converted into the expansion of our authorized dealer network and North American footprint, which now stands at 20 partners and more than doubling our initial order book value to $43 million in the last 3 months. As evidenced by our achievements this quarter, we continue to receive strong positive market feedback on our unique P7 vehicle, with the robust feature set, value proposition, and low total cost of ownership. The first batch of customer demo trucks are in advanced stages of build, and we are on track to finalize our FMVSS and CARB certification, which follows our recent EPA approval and x-by-wire certification feasibility. We expect to ship the first demo units to our customers by Christmas. Support is a critical part of commercial trucks. Therefore, we have built a strong customer experience team who will work together with and support our customers as they put our vehicles to the test in their fleet. As we grow our order book, we continue to strengthen our balance sheet with additional selective financing. These efforts are part of our risk-averse plan to secure in advance the working capital funding required to produce the expected binding orders of our growing order book. I'm particularly encouraged by the continued confidence and support from our shareholders, which have resulted in a capital raise of $8 million with favorable terms, led by a long-standing institutional investor in a very challenging environment, as we shared a couple of pages ago. Operationally, we continue to demonstrate strong financial discipline by remaining on track while decreasing our year-on-year GAAP net loss by 28%, partly because of the efficiencies we implemented around R&D and SG&A as well as government grants received. We believe we are scaling up responsibly, building vehicles to order and not for inventory. As we work to bring our production tooling online, we currently plan to have this operational by the end of 2024, which we believe will enable us to reach bill of materials breakeven on the first scale production batch. In line with our philosophy of complete, not compete, we are in advanced stages of nominating a U.S. contract manufacturer to assemble our P7 lineup in the U.S., to help us facilitate economical mass production. We believe we will be able to scale production up to a rate of 4 to 6 trucks a day by the end of 2024, with a maximum capacity of up to 5,000 trucks per year. We look forward to providing you with an update on this soon. Before we open for questions today, I wanted to end with this. In the past 3 years, we've seen a pandemic, challenging market conditions, and now war. But today, more than ever, we are strong, focused and committed to deliver no matter what. It is so inspiring to see our teams around the world working together as one to continue delivering, especially with the recent war in Israel, which affects us all in different ways, but is not expected to have a material impact on our operations. Our teams in the U.K. and the U.S. are supporting our people in Israel, and we are thankful for the hundreds if not thousands of messages of support we have received from our partners, customers, suppliers, shareholders, and even people we have never met or done business with before. Your support is everything. As ever, I thank you all for your continued good wishes. We recently held a very productive Q&A session with our retail investors, so we have invited our retail investors to share their questions for this quarter. Today, in addition to analyst questions, we will also answer several of the retail investors' questions. Therefore, I would like to open the call for questions, where we will be joined by our Chief Financial Officer, Yaron Zaltsman; our Chief Business Officer, Tali Miller; and our Chief Operating Officer, Josh Tech. Operator, you can now open the line for questions.

We will now take the first question from Mike Shlisky from D.A. Davidson & Co.

I'm glad everyone is safe over there in Israel. I want to ask about your comments regarding a third-party contractor handling production. Can you clarify if they will be responsible only for the corners while the actual vehicle assembly takes place at a REE facility, or will they be overseeing the entire process? Could you provide an overview of how this will work?

Thank you for the kind wishes. Yes, on the contract manufacturer, I think it's very simple. The core technology for REE is our by-wire technology, right, the REE corners. That remains within REE and will always remain within REE. The contract manufacturer will be assembling a full truck, whether it's going to be a cab chassis, a strip chassis, or a full truck powered by REE, and that will be in the U.S. So the full assembly will be done in the U.S. The corners will be shipped from the U.K. from our already set integration center.

I see. So it's all the way around. They'll be receiving fully assembled, ready-to-go corners from you, and they'll be the ones.

Correct.

I get it. Perfect. And then I wanted to clarify some of your comments that you mentioned, how you're going to be building to order and not building to inventory. I guess when you say inventory, do you mean you won't be building final products that'll be on REE's books and there will be inventory at the dealership level? Or will nobody have inventory? We won't have inventory in normal dealers unless they're specifically ordered from the customer?

We are building to order, meaning we only manufacture based on the binding orders we receive from customers. While our dealers, especially as our network in the U.S. expands, will maintain some inventory of trucks, REE will not produce stock that sits idle awaiting sale. We will only create vehicles for the orders we accept from customers. Does that address your question?

Perfectly, yes, yes. And maybe one last one for me. Have you got any change in tone from any of your California customers in the last quarter or so? I mean at this point, they're a month away from being forced to adopt EVs. Are they asking you about like January 1 delivery dates, if possible? Or I don't know if you could deliver at that time, but are they asking in a more urgent manner for their vehicles?

Yes. We see very strong demand across the U.S., but of course, also in California. And we've also seen yesterday a change more relevant to smaller fleets in California, on the level of payment that they can receive reimbursement. But maybe, Tali, you want to add something more on that.

Yes, sure. Thanks, Mike, for this question. It's a good opportunity to share with you that we definitely see very strong demand for the Powered by REE vehicles. We see our customers, so the dealers as well as the fleets, are anxious to receive our demo vehicles because they see the advantages of the technology, the Powered by REE, x-by-wire technology with the different advantages of operational efficiency, safety, and others. We see this demand in California, but not only, so across U.S. and Canada.

Okay. I'll leave it there. And again, my best wishes to everyone staying safe. Thank you.

We will now take the next question from the line of Colin Langan from Wells Fargo.

I would like to follow up on the press release where you mentioned a grant that contributed to the Q3 results. Can you share how much of an impact that had? Also, is this sustainable? Will it continue, or is it just a one-time occurrence?

Yaron here. So the grants are following with us this year, and they will be with us also next year. We cannot give too much information about the amount, but it's not a meaningful amount. But it will stay in the same phase as we have right now also in the next quarters going forward.

Sorry, it would be in the next quarters going forward?

So also for next year, we still expect to get the grant from the government.

Sorry, is it continuing every quarter? Or is it just you get once a year, you'll get this grant?

No, no. It's part of the plan that we are getting for this year and also for next year. The payment is depending on the timing. But in general, it's an existing grant that's also following us for next year.

And then the press release also mentioned that you need $20 million of funding to execute your 2024 plan. When do you need to get that funding by? Is that by mid-year next year? Is that by January 1 that you need to get that $20 million? And what are your current options to get that needed funding?

So it's our decision when to take it, right? It's based on the way that we prefer to work. We want to be on the safe side all the time. We reported right now that we have liquidity of $100 million, and that is before the additional $8 million that we raised after the end of the quarter. So it's not that we need money tomorrow morning or we have any issue of liquidity at all. But generally speaking, we want to be always on the safe side when we are planning the next year ahead. And when we want to make sure that we offer all the capital and all the money we need upfront before we are starting the mass production in the U.S.

Will you be able to hit your target of getting capacity ramp by the end of next year without the $20 million?

No. No, no. In order to ramp up to the amount of size that we want to, we will need to raise over the next year the additional funding of $20 million.

Could you provide an overview of the multi-year outlook regarding the volume growth you expect? You mentioned breakeven, which is in the low hundreds, and then an increase to the low thousands over the next few years?

So I think we need to divide it into the breakeven on the gross margin and then positive EBITDA in general. So in order to have a breakeven on the gross margin or on the bond level, we need the low hundreds of vehicles. This is the way that we have planned based on our CapEx slide model. In order to be in a positive EBITDA, which means, in general, a positive cash flow as a company, we'll need to gain low thousands of vehicles in order to be on that phase.

And when you're thinking low thousands will be a couple of years out or?

So I think our plan, as we said to the market, that we plan to be in the low hundreds of vehicles somewhere in the year 2025, which means we are aiming to be in a breakeven EBITDA in the last quarter of year 2025.

We will now take the next question, from the line of Jeff Osborne from TD Cowen.

I was wondering if you could just be more specific on the FMVSS and CARB timing. Is that something you would expect in the next month or 2? And then I'm just trying to understand, once that's achieved, how quickly we should anticipate a final nomination of a contract manufacturer to be named? And then once that is named, how quickly they could ramp up?

Yes, those are two important questions that we received a lot from our retail inquiries, so it's a good chance to address them. Regarding the first question, I'll begin and Josh may have additional insights. We plan to deliver the first pilot vehicles, or demo vehicles, to customers this year. This means we aim to attain certification this year, as in 2023, before we can ship them since shipping requires certification. We are in the final stages of this process, following our recent milestone regarding x-by-wire feasibility and FMVSS feasibility that we announced last quarter. For your second question, we hope to nominate the contract manufacturer early next year, as we want to start ramping up towards the end of the year when production tooling is ready. Josh, do you have anything else to add to that?

Yes. We're in the final stages of negotiations with capable partners to assemble the P7 in the U.S. We are focusing on a capital expenditure-light strategy, both internally and with the contract manufacturer. To reach 4 to 6 trucks a day, it requires a minimal investment. The assembly will still involve a significant manual process, utilizing technical tooling for traceability and quality control. We are confident that if we make the nomination by the first quarter, we can easily meet that goal at the contract manufacturer. We will announce this as soon as possible to everyone.

And then the $20 million of expenditures needed, is any of that for the CM? Or is that once the CM's named, that tooling is put in place that I assume any CapEx was on their dime in exchange for commitment? I'm just trying to understand sort of the timing of when that $20 million is needed, similar to Colin's question.

It's Yaron here again. So the funding of $20 million is mainly for the CapEx investment in the tooling. And in general, we have enough resources to start to make all investment without trading the funding, right? We have $100 million as we just reported. The general issue for us is to raise the additional funding not because we don't have money for the tooling, just because we want to pay also the bond cost upfront and to be always on the safe side and not to get any risk at all when we are starting the mass production. So in general, we would like to do it as fast as we can, but it's always depending on the situation in the market. And it's not that we have any issue that we need to do tomorrow morning. We'll do it over time based on the market condition.

My last question is just as Carlton on the Board and Tali and the team are out speaking to fleets, what readiness do they have on charging? You're hearing stories of 12, 18-month delays and put again charging infrastructure. So it's great that you have all the dealers. But as the dealers look to sell directly to fleets or you're approaching fleets direct as well, are they already going through the process of putting in charging requests with their local utilities given the interconnection delays? Or is that a potential roadblock that might stem growth in the second half of the year?

Yes, great question. And the answer is yes. As I said, we're building to order, which means that all of our very much expected trucks are being awaited for, right? And we make sure that both the dealers and their customers are fully prepared to receive them. It makes no sense for anybody, for any truck, to be sitting idle without the ability to charge. So we are in very close relationship and contact with our dealers and their customers through the dealers, and the fleet customers through the dealers, in order to understand what is their level of readiness. Some have capabilities in-house. Some use our capabilities to connect them to our partners in charging, which we also said publicly a while ago, and we're helping them get the right charges in place. But we're definitely prioritizing predominantly those who are ready to receive EVs.

We will now take the next question from the line of Andres Sheppard from Cantor Fitzgerald.

Congratulations on the quarter, and I echo everyone's best wishes. I noticed you mentioned that you were selected for a multiyear program with an aerospace company. Could you provide us with more details about what this involves and how you anticipate it will progress?

Of course, we can't provide any more details than what we should, but I look forward to sharing more soon. I can say that we have seen an increase in our autonomous program recently. Being, to our best knowledge, the most mature by-wire commercial player gives us the ability to support autonomy effectively through our by-wire system. The feedback from a few tests we've conducted with several parties is positive; they appreciate what they see. The testing has been successful, and the implementation of by-wire and autonomous driving is going well. The integration process is quite straightforward, which is essential. I believe that speaks volumes on its own, and we will definitely share more when we can. We're very excited about this.

And maybe as a second question, I wanted to come back to the roadmap, the 2 phases roadmap that you provided last quarter. I just wanted to confirm, you are still targeting about $1 billion in cumulative sales between '24 and '26. And is the goal there, I think in the past, you had mentioned targeting breakeven gross margins by the end of 2024. So I just wanted to see if any changes there or if that's still the case.

It's Yaron here again. Currently, we are not changing the target. We don't see any reason to alter any information we have provided until now for the market, and we are proceeding according to the plan. Just as a reminder, when we mention $1 billion in revenues, we are referring to thousands of vehicles, which is necessary to achieve that sales figure. When we discuss breakeven, it pertains to the low hundreds of vehicles. We plan to begin mass production in the U.S. by the end of 2024. Once we commence with the first batch, we expect to achieve breakeven in gross margin. As we increase production into 2025 and beyond, we are aiming for a positive EBITDA by the last quarter of 2025.

Yes. I would like to add two points. We see very strong demand, and our ability to demonstrate that we more than doubled our order book value in just three months speaks for itself. This strong demand makes it crucial to scale up responsibly and deliberately. Our plan is to initiate a demo program to ensure we gather feedback from our customers, allowing them to try our product and hopefully enjoy it. We are confident in this based on our existing relationships. We plan to ramp up production in the second half of next year as our production tool comes online. This approach is intentional because we expect it to help us reach material breakeven, which is significant as it means we won't be losing money on each vehicle from the start. If we can produce low hundreds of vehicles in a quarter, it naturally sets us up to produce low thousands at a similar production rate over the course of a year in 2025. We believe that by the end of 2025, we will achieve EBITDA breakeven and start generating cash flow.

And maybe one last one for me. I know we touched on this before, but the $20 million in external funding, any sense of whether that will be something to do in the first half versus the second half of next year? And how are you thinking about it in terms of equity or debt opportunities?

It's Yaron here again. We have the authority to determine our funding strategy. I believe we are in a position to consider and select the best options for our existing shareholders. We will assess when and from what sources to raise this funding over the next few months, and our decision will depend on market conditions. Our goal is to avoid postponing this until the second half of next year because, as mentioned, we need everything in place to ramp up by the end of next year, including ordering the necessary bonds. Thus, we aim to finalize this by mid-year at the latest.

Thank you, operator. So first of all, thank you, everybody, for taking the time, and thank you for the great questions. I'd like to thank, I think, start by thanking our retail shareholders for their questions they submitted over, say, technology platform over the past week. And I believe we addressed most of them during this Q&A session. Thank you, guys, for the continued support. I want to end today's call with a final word of thanks, really heartfelt thanks to our teams around the world, continuing to deliver even in the most challenging situation. I'm very proud of you guys, all team REE, for doing that, and excited to bring the hard work and dedication to fruition in the coming days. So looking forward to sharing updates with everybody soon, and thank you again for joining. Goodbye.

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