REE Automotive Ltd. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the REE Automotive Fourth Quarter 2023 Full Year Financial Results. 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 fourth quarter 2023 conference call. We hope that you have 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 today's call. 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 those 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 today, March 27, 2024, 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.

Thanks, Kamal, and thank you all for joining us today. 2023 was a pivotal year for REE. We achieved key milestones in line with our original timeline and derisked our go-forward path, all while keeping true to our vision to expedite and solidify the electrification of commercial trucks through a white-label approach. I am happy to report that much of the heavy lifting is behind us on the path to commercialization with a clean-sheet design and unbound by legacy thinking. Our full by-wire technology is mature. I am proud to say that we have created the world's first FMVSS certified full by-wire electric vehicle, allowing us to advance the state-of-the-art in the medium-duty commercial vehicle space by orders of magnitude compared to other EVs and ICE offerings. We continue to push the boundaries of our product testing vehicle dynamics and operations, having successfully conducted our second consecutive year of winter testing under extreme weather conditions. We have also made significant progress on the business side. With the strong demand we see, our order book value grew by more than 900% year-over-year and now exceeds $50 million, and our dealer network continues to expand to 66 points of sales and service in the U.S. and Canada. With CARB certification and the U.S. EPA, our P7-C customers are eligible for federal and state incentives of over $100,000 per vehicle. Our first vehicle was driven off the line and has been upfitted with Knapheide body and delivered to one of our largest commercial vehicle dealers in the country. With the first customer deliveries to our demo fleet completed and more underway, we plan to advance towards scale production later this year while remaining focused on our business plan and the P7 lineup. Alongside our significant progress, we remain financially disciplined with a 25% year-over-year decrease in cash burn with tooling investment for the REEcorners deployed. We ended the year with $86 million in cash, cash equivalents, and short-term investments, including a $15 million credit bank facility. Confident in REE's bright future, our largest institutional shareholder, M&G, has led two successful capital raises for a total of $24 million alongside existing and new investors, and I thank them for their ongoing support and trust. With those behind us, we continue our effort to secure and advance the necessary working capital needed for our first phase of production of low hundreds of trucks. As we remain disciplined and with current market conditions, we decided to temporarily postpone the remaining production tooling investment until we raise the additional required working capital for our production plan. We target completing the remaining tooling investment by midyear in order to scale up production in the U.S. as we build against committed orders and not for inventory. This strategy ensures we do not exceed our available capital by aligning orders flow with production plans for greater capital efficiency. 2023 was a pivotal year for REE because of what we have achieved and because we have accomplished it together despite many of us facing significant geopolitical instability. For that, I am so very proud of each of our great people at team REE. With that, we'll open up the call for questions.

We will take our first question. Your first question comes from the line of Michael Shlisky from D.A. Davidson & Co.

I wanted to ask first about the tooling investments. I guess, first, when you do get them, will they be the exact same tools you had before? And I just want to make sure that the folks who are selling you these tools, I guess there must be some kind of suppliers there. Are you having any contractual changes to what you have to pay them or the payment schedule, if you change the dates, maybe put in the back of any kind of line of other people who need tools, etc. So I just want to make sure that when you are ready for it, you'll get them at the exact time that you need them still, even though you have to push back that date.

Yes, sure. And of course, first and foremost, good morning. This is Daniel. Josh, why don't you start and I'll continue from there?

Okay. Michael, good to talk to you again. So yes, so to answer your question, we're still targeting to have our tooling in place by the fourth quarter. So what we're doing, we're progressing with our previously shared two-phase manufacturing approach and it's related to our investment, and so we're in the final stages to nominate the CM in the U.S., okay? So the tooling for the corners has already been deployed. And then what we're doing, we're targeting to complete the remaining investment of approximately $10 million by midyear, and this is in sync with our capital raising plan. So this will still allow us to scale production in the U.S. with our contract manufacturer by the end of 2024.

Does this answer your question?

I want to ensure there's confidence that you'll receive the tools when you need them, even though the date has changed. Have your suppliers confirmed that they are ready when you are? Or is that still uncertain?

Yes. We work naturally together with them. So no surprises.

Okay. Perfect. Then I also want to touch on some of the results of some recent trade shows. We had the big Work Truck show. There's a couple of other more regional trade shows that have taken place in the last few months. I'd be curious about the large fleets that are out there and maybe there's half a dozen or a dozen of them that could take a P7 platform. Just give us a sense as to how that went. Did you come out of these shows with any major new orders? I know you have a higher backlog from necessarily from dealers in certain fleets, but did you get anybody new on the roster we should be thinking about here, any names? Just curious if you have new levels you could add to, like a slide, if and when you're allowed to reveal who these customers are?

Yes, those shows have been very successful for us. And we've seen very strong demand there and had a very, very busy booth and a lot of positive meetings. Regarding the fleet that you mentioned, we have seen strong interest from those living fleets as well. And I think it's important to recognize the fact that the demo program is designed exactly to do that, to give those fleets the ability to try out our vehicle, the P7 lineup, and to allow them the confidence to nominate us as an approved supplier to them. So I think in short, the answer to your question, yes, we have come up with new opportunities from that show, with very interesting discussions with many of the fleets and other dealers. And maybe I'll let Tali, Chief Business Officer, continue.

Yes. Good morning. First of all, we are seeing very strong demand and high interest. We have shared the growth in committed orders for the end of this year or quarter, which has resulted in actual orders. Additionally, through our demo program, we have started delivering vehicles in low volumes. We expect to see more fleets that have already shown interest in trying those demo units following the events they attended. We anticipate this will lead to larger orders from those fleets. Specifically, we are set to demonstrate the vehicles to several leading fleets, including Franz Bakery, Canteen, and the City of San Jose, among others.

Okay. I'll leave it there, guys. All the best.

Thank you.

We will take our next question. Your next question comes from the line of Jeff Osborne from TD Cowen.

Daniel, I was just curious on the $50 million order book, that's great to see. How much of that is exposed to California? Can you give us a perspective there? Is it more than half?

Good morning. That's a great question. I'm not sure I have the answer top of mind here, let me look into the numbers. But the majority of our orders is not linked to California in that aspect. We see demand across the U.S. But to your question, linking it to our recent CARB, California air resources board certification, I think that gives us a very strong tailwind in California in general but also in the other states that support California or adopt the CARB certification, mainly around incentives, right? CARB recently that we announced unlocks more than $100,000 in incentives per truck for our customers. So our customers basically see now with CARB, more than 70% of the cost of the truck covered through both federal and state incentives. And I think this is great. We worked very hard to do so. And I think California is, of course, leading it. And as we said earlier in earlier calls, having California dealers and CARB is important for us. Tali, do you have numbers on how many...

Specifically from California, it's approximately one-third.

Got it. How should we think about adding capacity in Texas as capital allows? Is production expected to be more front-end loaded in the spring, specifically in the first and second quarters, while the third quarter serves as a transitional period as you shift from Coventry to Texas, with a strong push anticipated exiting the fourth quarter and into 2025? I know you're not providing official guidance on anticipated production and sales units, but I'm trying to grasp the production trend throughout the year.

No, that's really a great question. Josh?

Yes, I'll provide some insight. It's still a bit early to determine how many we'll deliver this year. As we mentioned to shareholders, the tooling and investments for the REEcorners are currently being deployed in the U.K. We want to avoid over-investing, which we don't need to do, as we have ample capacity. We'll also be bringing the remaining tooling online for the rest of the vehicle and aim to scale up production to a low hundreds of vehicles in the U.S. by the end of 2024. However, this plan depends on us meeting our working capital needs. We won't rush our spending, as we want to ensure everything is perfectly coordinated.

Yes, we will continue to deliver strategic quantities to our dealers and the demo program from the U.K. at full vehicles as we began earlier this year. We have already delivered a few trucks this year, one of which was showcased in Indianapolis, and others are on the way. Once our tooling comes online and the contract manufacturer is operational, we will shift to the U.S. for full assembly production and continue production with components from the U.K. We are implementing this approach and the demo program through dealers because they create a beneficial cycle. These dealers have extensive geographical coverage and established relationships with numerous fleets in their service areas, some of which span decades. Each vehicle we supply will be demonstrated to multiple fleets. We believe that engaging with our dealers, fleets, and others will lead to follow-on large orders. Therefore, our intention is to initiate this process early, and we have already started, rather than waiting for serial production to commence later in the year. We will continue producing a strategic number of vehicles from the U.K. until then.

Makes sense. If I could squeeze in two quick ones here. Should we think about the quarterly expense rate, so not the CapEx but the operating expenses, should that stay about the same as the current level throughout 2024? And then Daniel, if you could just make any brief comments on the readiness of your financing and charging partners that you've laid out to meet the demand exiting 2024 and into 2025?

Yes. Maybe we'll start with the first financial bit. Yaron, you should take it.

Yes, sure. Good morning. So I think going forward for year 2024 we should keep seeing actually decrease in our cost. What we are planning to do in year 2024 is to continue on the path that we started in year 2023, where it's including decrease in our operational costs. In year 2023, we decreased our cost by roughly 25% compared to year 2022. And going forward, this process should continue also. And I think we'll also have another decrease of roughly 25% in our burn rate in year 2024.

That's a burn with the CapEx and the OpEx combined.

Yes, that is correct. That is correct. So I think roughly we're thinking about $5 million to $6 million per month on average. It will not be split on the same rate over the quarters. Because in H1, probably we'll spend more as we need to complete the tooling and NRE expenses. And then going to the second half of the year, it will go down dramatically.

Got it. Any brief thoughts on the charging and financing partners you have, Daniel?

Yes. So on the charging front, we're working with several charging partners, one of which is, of course, Hitachi, Hitachi Power, that have a very interesting and compelling offering of large-scale, commercial-grade charging infrastructure. I think recently, they've announced something around that with Penske, which is interesting to look at. And we work with others because some are asking for other solutions, more local solutions. And also on the upfit, it's super important, right? I mean, we showed how we work with Knapheide. And of course, you'll see other upfitters that we work with. Knapheide was very happy, of course, with the process, mentioning that we're able to complete the marriage of the chassis and the body within less than three days, which is a record for them because of the ease of design for REE. The one thing that may be important to know here, Jeff, is we build to order; we don't build for inventory. Therefore, we make sure that when we start building for a customer, we ensure that they have the upfit ready, the infrastructure, the chargers ready, everything ready to receive the vehicle. And I think this is key for us because we're not building for inventory and therefore, we don't get stuck with inventory or with postponed pickups. We deliver only to order. And we make sure that for all of our partners, they have everything they need in advance of us delivering the trucks, so the truck arrives complete and directly goes into service. And we will continue to be very prudent on that approach.

We will take our next question. Your next question comes from Craig Irwin from ROTH MKM.

Can you please talk about the order book? I should say, congratulations on the continued strengths there, building that out. What is the approximate sort of headcount, the number of individual dealers and fleets that have placed orders with you? And if you could maybe talk about how this could potentially be delivered? Do we have a couple of units upfront from one of the fleets followed by follow-on orders? And how much of that, I guess, would be sort of the first unit versus follow-on, I guess, is the question.

Yes, good morning. For your first question, we currently see strong demand for our products and technology, particularly for the by-wire systems. Our dealer network now encompasses 66 points of sale and service, making it one of the largest for EVs in the country. This is achieved through 20 dealers across the U.S. and Canada, giving us a broad presence throughout the U.S. and parts of Canada. The demand we observe in the commercial market is noteworthy as it differs from passenger demand and the way passenger vehicles are deployed in that segment. Tali, perhaps you could provide further insights on this.

Yes, good morning, and thank you for this question. It's a strong one. To build on Daniel's point, having 66 service points is crucial as it allows fleets to access service throughout the U.S. and Canada, which is essential for them. Regarding demand, while we perceive a slowdown in passenger electric vehicles, we are witnessing a steady and even increasing demand in the mid-duty Class 3 to 5 electric vehicle sector, which is our focus area. This demand stems from several factors, including significant federal and state incentives and the zero-emission targets important for fleets. Additionally, electric vehicles offer total cost of ownership advantages over internal combustion engine vehicles. On the topic of charging infrastructure, although it can be complex for passenger vehicles, in the mid-duty space we serve, the driving cycle is relatively short. Drivers typically start their day and return to charge at the depot by the end of the day, making it simpler for them to manage their charging needs.

And to your last point, yes, I think your approach to how to roll out the fleet is correct. We are starting to ramp up later on the year. And then we will start providing a few trucks to every fleet and then ramping it up through 2025 when we ramp up towards the low to mid-thousands of vehicles in production. I think it's very, very important to deploy a few to run the demo program, receive the voice of the customer which we are very attuned to, and listen to any changes or modifications they still want, although we've been developing those vehicles together with them for a long time. So this is why you see the high level of satisfaction there, but we always remain attuned to the voice of the customer. So we would like to explore as many fleets as possible to our vehicles in the coming months, providing them with vehicles and then ramping them up towards 2025.

Understood. So Daniel, we had an opportunity recently to meet with your customer that took your first commercial delivery of a commercial vehicle here in the U.S. And they are obviously very big supporters. And actually, we got to tour the vehicle with them, too. So it seemed to generate quite a lot of excitement. Can you maybe share with us what you're learning from these early deliveries? What are customers saying? Is this maybe shifting your understanding of what the priorities are for investment and purchase decisions on the part of customers out there? What are you learning from these early deliveries?

Yes. It's a great point because, as you mentioned, we had the chance to talk to a customer, a very large customer. I think it's key to hear from them. And I think what we're learning from the first deployment is, first and foremost, that we get overwhelmingly positive feedback for the design, for the spaciousness and the ergonomic advantage of our cabin, of the low floor, the very driver-centric cabin that we offer and the performance of the truck. That's one. Second, a lot of the fleets like our ability to work with multiple upfitters and to offer multiple applications for different use cases due to our modularity approach and low flat floor. Another point that they all mentioned is the data we have to back the offering, for example, the extensive winter tests that we just concluded for the second year in a row. So for example, we don't have to guess what is the range in extreme conditions, like minus 30 degrees, and what is the performance, which is good, just saying. And I think all of that, the ability to provide data behind our trucks and to showcase the offering allows our customers to calculate their future going TCO expectations and makes the transition towards electrification easier for them. Last but not least, of course, charging is very important. And as previously asked, we're working closely with charging partners to ensure that they have the adequate infrastructure to support the trucks.

Excellent. And last question, if I may, is actually a pretty basic question. FMVSS, the Federal Motor Vehicle Safety Standard certifications, is this a gating factor that is necessary for commercial deliveries? How long did it take you to achieve FMVSS with your certification partner? If someone were to start today, is it logical for them to take a similar amount of time with a different technology or a competing technology? If you could help investors understand a little bit better the significance of FMVSS and how this is such a big accomplishment.

Yes, it’s a significant achievement. We were the first and still are the only company globally that has certified and put a fully by-wire vehicle on the road. While there are some vehicles that are partially by-wire, like the Tesla Cybertruck, more manufacturers are slowly adopting this technology, particularly for steering. Developing a full by-wire system involves considerable effort, especially regarding redundancies, control, stability, and software maturity. We see competitors like Tesla and Lexus offering partial systems, but we are the only ones to launch a complete by-wire vehicle, which took us years of testing and validation. This involves not just hardware, but also a robust software system with algorithms and AI to ensure real-time operation with all necessary redundancies. As you noted, bringing a vehicle to market requires FMVSS certification, which is crucial. We worked with a third party to ensure a rigorous validation process and accurate testing, which is vital for performance as the first player in this space. I believe that should anyone else attempt this, it is essential, and many are trying. However, with FMVSS, we have established a significant lead in the industry. As our trucks gather more data from the by-wire system, we can enhance it further. While everyone has seen the initial version of our technology, we have been developing by-wire capabilities for a decade, so much more is on the horizon.

Excellent. I'll take the rest of my questions offline. Congratulations on the progress.

Thank you so much.

There seems to be no further questions. I would like to hand back to Daniel Barel for closing remarks.

So I want to thank everybody for taking the time and joining us today. I want to thank our investors for their strong, great support. And I want to say thank you again for everybody on team REE for a phenomenal year, overcoming so many challenges and driving strong results. Thank you, everybody, and stay safe.

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