REE Automotive Ltd. Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the REE Automotive Q1 2024 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, Brandon Friedman, Capital Markets Council. Please go ahead.

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 on 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 of these 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 financial results press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. Listeners and those on our webcast are invited to follow along with our presentation today, which is available on the Investor Relations portion of our website, or investors may access the link to the presentation directly from today's press release. Today's call is hosted by Daniel Barel, REE's CEO and Co-Founder. Following Daniel's comments, we will be joined for a Q&A portion of our call today by our CFO, Yaron Zaltsman, our COO, Josh Tech; and our Chief Business Officer, Tali Miller. We will start the formal presentation of our first quarter highlights. I will now turn the call over to Daniel Barel, REE's Co-Founder and CEO.

On behalf of everyone at REE, I welcome current and new investors alike to our first quarter 2024 conference call. We started 2024 with strong momentum in catalytic milestones. We believe that this is an ideal time for those new to REE to get involved because the future of trucking is changing today. During the first quarter, we commenced deliveries of the world's first full by-wire, software-driven, certified medium-duty demo trucks to customers across North America, including some of the biggest fleets in the world, namely U-Haul and Penske. Our go-to-market strategy of 'complete not compete,' which has already gained traction in Q1 and continues to grow, includes working with the largest fleet operators in the U.S., working with automotive manufacturers, and selling through our network of 20 dealers and 66 sales and service centers and access to a potential of over 200 fleets. We are proud to partner with Penske, having them starting to offer our electric trucks to their customers and being U-Haul's first solution to support the electrification of their fleet. We believe this demonstrates our leadership in the industry and the value our technology delivers. During Q1, our P7-C became the first full by-wire truck to achieve U.S. FMVSS certification, now eligible for customer incentives of up to $100,000 per truck. This world's first proves we are effectively executing on our aims to expedite and solidify the electrification of commercial trucks through software-driven trucks powered by REE. Beyond trucking, we are very proud that Airbus has selected the powered by REE vehicle to develop and validate fully autonomous driving. We believe the very strong market response to our powered by REE and REEcorner technology demonstrates our potential to lead the commercial vehicle segment, driven by highly favorable economics for our customers and buoyed by the state certification we've received, EV tax incentives, and regulation requiring the electrification fleet. After certifying our vehicles in the U.S., this quarter, we started shipping our demo trucks to dealers. This is a significant milestone for our company. And we want to make it clear how we expect this delivery to translate into further expansion of our $50 million order book, representing orders from dealers and fleets. Subsequent to quarter end, more than 120 demo rides were performed with multiple prospects with the aim to generate follow-on orders based on continued positive feedback received from fleets. REE's total cost of ownership advantages are clear, and we believe it is a core driver for the adoption, augmenting this economic benefit. As more fleets are experiencing our software-driven powered by REE electric trucks, we are hearing great reviews and reactions. We expect dealers to increase their order size as fleets make purchases from them. In addition to our growing dealers network, as we shared last week, Penske Truck Leasing has started to offer REE trucks to its vast customer base. We believe Penske will have a significant effect on our sales. In addition, as we pursue our strategy to complete not compete, we are in discussions with several automotive manufacturers across the transportation ecosystem to incorporate REEcorner by-wire technology into their electric offerings. Naturally, this will take a bit longer to mature as with all strategic partnerships, but we believe this will have the strongest effect on the large-scale adaptation of our powered by REE technology in the industry and will have the potential to expand our product offering across all vehicle categories. A core strength of REE and what we believe to be a key driver of the adaptation of our technology is our high degree of flexibility in how our product is brought to market. Currently, we offer three ways the fleets and automotive manufacturers can electrify their trucks. One, the integration of REEcorners into any existing platform. Two, purchase of a REE stripped chassis, upon which a cab and a box truck can be built and customized; or three, the purchase of a full P7-C cab chassis upon which the box cargo area can be built and customized. On the autonomous driving front, we are very pleased to announce that we have been selected by Airbus to develop and validate a fully autonomous program based on our full by-wire technology. This further solidifies REE's technological leadership and opens REE to the autonomous vehicle driving market. As the autonomous market continues to expand, full by-wire systems for integration and autonomous control systems as well as the development of peripheral systems is expected to become more prevalent. This year, our operational focus is on managing a smooth transition into ramping manufacturing and deliveries to supply against our order book and meet sales goals. As we stated last quarter, we believe that the most of the heavy lifting is behind us. Our efficient CapEx-light operation means we believe we can achieve bill of material parity upon production in the low hundreds of vehicles and EBITDA breakeven when producing in the low to mid-thousands. Our two-step manufacturing approach involves continued production of REEcorners at our automated U.K. facility, which has an annual capacity of 10,000 vehicle sets. We plan to bring U.S. production online by the end of 2024 and through 2025. We are currently evaluating mainly working capital financing options to allow us to scale production. As we execute on the tremendous opportunity to electrify the commercial truck market, we continue to advance our technology application across different vehicles. I'll touch on some financial highlights, and Yaron Zaltsman, our CFO, will be available on the Q&A to elaborate as needed. REE ended Q1 2024 with liquidity of $77.5 million, comprised of cash, cash equivalents, and short-term investments. This includes a $15 million long-term credit facility. Our GAAP Q1 net loss narrowed to $25.2 million, a 29% decrease quarter-over-quarter and a 12% decrease year-over-year. Non-GAAP net loss in the first quarter decreased by 33% quarter-over-quarter to $21.7 million and decreased by 10% year-over-year. Free cash flow burn continued to decrease in Q1 2024 with a 6% reduction quarter-over-quarter, consistent with the trend in full year 2023 when we realized a 25% year-over-year decrease. With a strong start to 2024 and with the majority of the heavy lifting behind us, we believe that our REEcorner technology uniquely positions us in a lucrative portion of the commercial EV value chain. As we said to lead the future of automotive, we are thankful for the support we received from our investors and we are excited to welcome those new to REE. And now let's open the call to Q&A.

Your first question comes from the line of Craig Irwin from ROTH Capital Partners.

So Daniel, you're adding names like U-Haul and Penske. Obviously, Pritchard is a leader in the market and Airbus is clearly a Tier 1. But you're adding some really big fleets that could essentially cover all of your demand for the next couple of years. Can you maybe talk about the priorities this year as far as where you want to deliver units? Is your goal to service many different fleets and get the units operating in the hands of a large number of customers? Or are you aiming more to have a handful of units with select fleets where you see the greatest prospect for adoption of REE technology over the next couple of years?

First of all, thanks for the question. It's a good question. I think the answer is, we want to naturally fulfill our order book and according to our production plan. As you mentioned, Penske, U-Haul, Airbus, and of course, Pritchard, and others are very big and have huge potential. We're really excited, for example, about the fact that Penske is starting to offer our trucks and so forth. I believe we want to deliver as many vehicles as we can to all of those with demand, and we see huge demand. The ramp-up is important, and how we ramp it up will depend on the actual orders behind Penske, U-Haul, and others. The potential is huge. We're speaking here about the biggest in the industry. And we feel confident that, like traditionally in the industry, this is going to translate into orders. I believe we're going to see this ramping up over the next few quarters as we move forward.

So one of the biggest catalysts I'm expecting for the stock is follow-on orders and follow-on deliveries from these early customers that you're delivering units to. Can you maybe talk a little bit about the evaluation they're doing of the products? U-Haul is clearly putting this in the hands of customers. Are they looking for certain criteria that you can share with us on overall customer performance, operating uptime hours? How should we expect the customers to evaluate the product to confirm that they want follow-on orders and that we should expect follow-on deliveries later on this year?

The answer for that is that different fleets have different criteria. Some require a few weeks, and some require longer. Some require specific climate conditions, for example, if they're up north or in Canada or in a hot climate, and so on. I think that once—and I think we've seen it very clearly with the demo program in the 120 demo rides that we have already conducted—that when customers sit in the trucks and try them out, the technology and the trucks speak for themselves and show the benefits. Our trucks and our technology address the majority of the benefits like maneuverability, visibility, low total cost of ownership, software-driven over-the-air updates, and so forth, all relevant for those fleets. I agree that follow-on orders would be a very significant and strong sign as we move forward to scale production and deliveries.

Great. And then last question, if I may. Your R&D spending and G&A were really tightly controlled given that you have a revenue ramp and you're serving an increased number of customers this year. Can you maybe talk a little bit about frictional costs this year, the investment needed to execute your business plan?

Yes. First of all, thank you for recognizing that. We are reducing those spends because we completed the engineering phase as we communicated, and there are several operational efficiencies in place. We can expect, I believe, going forward—Yaron can add on that—a lower spend on a monthly basis, significantly lower, I believe, which is in line with what you've seen up until now, where we reduced the spend significantly quarter-over-quarter and year-over-year. Yaron, would you like to add?

So the cost will continue to go down. We expect it will be not more than $4 million to $5 million per month. We also expect to generate cash in the U.K. from the U.K. government as part of the grand plan of roughly $7 million between Q2 to Q3. So in general, our R&D costs will be going down dramatically during the year.

Shall we go to the next question, operator?

Michael, your line is open.

Yes. Hello, can you hear me okay?

Yes, we can.

Okay. A couple of quick follow-ups from Craig's question. First, on the U-Haul agreement or what they've been taking so far, what they're asking about from you. Do you have to make any major changes to the platform or to the software that runs it to make it user-friendly for someone who might only drive a truck once a year or maybe someone that has never driven a truck before? Anything that needs to change in your product to make it user-friendly, or maybe it's already set up that way from the start?

Yes. I think it's a great question. What we've seen with the demo program and all the people who drove it recently is continued feedback stating that it's a truck that drives like a medium-sized SUV, and it's very easy for everyone, even those who have never driven a truck before, to drive it safely and properly. It is built like that. That's the beauty of our technology, and the by-wire system makes it intuitive for any driver.

Okay. Got it. I wanted to also follow up on the Airbus agreement that you mentioned. This is not news today, but just came out a while ago. I'm curious about the picture on the slides; they almost look like airport support vehicles. Typically, Airbus does not make those vehicles. I'm just curious about the ultimate applications that your product will be in. Is it going to serve as a platform for Airbus's autonomous vehicle? It sounds like maybe you're just providing a vehicle and Airbus will take on all the R&D expenses. Is that the right way to think about that?

Yes. Let's start with what the REE trucks and Airbus have in common, which is by-wire, right? Airplanes are by-wire, and we are by-wire. This is what Airbus found very compelling about our technology, which is a mature autonomous-ready by-wire system. This is why we were selected for this joint program around autonomy. The advantages of our system that we've been saying for a few years now is the seamless connection to the autonomous driver. We aren't developing the autonomous driver; we're providing the platform, by-wire systems to allow for autonomous operation. Addressing your question on expenditure, there is no additional spend or R&D development required for that program. It is ready to go out of the box as it is now, which is a major achievement for us.

Outstanding. Yes, great. And then my last question. You mentioned earlier that you've been talking with OEMs beyond those mentioned, looking to potentially integrate the platform into their products. This isn't new, but I want to clarify: Are those companies currently producing EVs? Are they looking to improve their next-gen versions of existing electric models? Or are they companies that haven't yet released an EV and are looking for a quick way to get into the market?

The answer is both. These are traditional OEMs and new OEMs. Some of them do not have EVs in their offering, while some do. We've stated that there are three ways to upgrade to by-wire technology: you can either buy the REEcorners and upgrade your current platform, buy a full platform and build the rest of the vehicle, like a fully powered vehicle, fully certified to go on the road, and just add a box behind it. I think that following the FMVSS that we have achieved earlier in the year, it provided significant momentum for many players who were still considering to move much faster into exploring and opening discussions with us about how to integrate our by-wire technology, specifically the REEcorners into their offerings. This is part of our strategy of 'complete not compete.'

Sure. Outstanding. I appreciate the clarity. I'll pass it along.

Your next question comes from the line of Jeff Osborne from TD Cowen.

Maybe just following up on that last line of questioning, Daniel. Are the applications for these new partners also in the commercial vehicle space? Or are they more diversified? Any details there would be helpful.

I think that the majority of what we can say is that we're concentrating on commercial vehicles, but there is—it evolves into other categories like private vehicles and heavier duty vehicles. We have seen interest in both directions.

Given that the majority are in the commercial vehicle space, is it right to think that the majority of the R&D has already been done? So the incremental operational expenses for working with these partners would be somewhat limited? How do you weigh the trade-off of potential revenue and margin increases by just selling corners relative to application engineering that would be required for each of these new partners?

Yes. The by-wire technology is the same for both passenger and commercial vehicles. The time to market is naturally shorter for commercial vehicles because the corners are already built and ready. Some adaptation, mainly mechanical adjustments, would be required to make it suitable for passenger vehicles or other applications, for example, aviation. However, we don't see this as a heavy investment or R&D burden on us. To the contrary, our capabilities are already in place. Regarding margins, we can discuss this in detail, but our core technology, the REEcorner, tends to have the highest margins when we only provide the corners and control. Our CapEx for the REEcorners has been fully deployed and they are ready for commercialization at scale.

Got it. And then maybe just a few housekeeping questions. With the revenue in the quarter, was that from the sale of one truck that was a demo vehicle? I just wanted to clarify where the $160,000 came from.

Yaron, please.

So the sale was from a platform and not from demo vehicles.

Got it. And then when would you expect first revenue from the vehicles through the variety of partners that you've laid out over the last 6 to 9 months? Is that still in the third and fourth quarter?

I don't think we can provide that information today, okay? The only thing that we can say is that after we start scaling, we can recognize revenues of all the order books, which is roughly $50 million, probably in a few months' time.

Got it, and then maybe just the last one: either you or Daniel, how many vehicles have thus far been produced and are currently out there in the field for people to test drive?

We've delivered up until now five vehicles. We've mentioned them all. You've got Penske, U-Haul, Airbus, Pritchard, and Tom’s Trucks. We'll continue to deliver more as we ramp up production.

Your next question comes from the line of Amit Dayal from H.C. Wainwright.

Thank you. Hello, everyone. Good to see all of the business development efforts ramping up. You indicated $4 million to $5 million spend per month going forward, which is a little bit lower than the $6 million you highlighted last earnings call. This $4 million to $5 million, can you break out how much is CapEx within this and how much is operating costs?

Sure, Yaron, would you mind?

So CapEx is roughly $1 million per month. The rest is operational costs.

Okay. Understood. The autonomous vehicle platform, you indicated everything is ready. Airbus might ask for certain modifications, etc. Will that be on Airbus in terms of contributing to any features or development activity, or will that kind of be on your shoulders to meet whatever requirements they may have for the vehicle?

We delivered the truck; we've fulfilled our part of the agreement. The rest would be software-related. No changes are needed. The truck is fully capable and ready.

Interesting. So from here on, basically, we are waiting on the customer book to bill. Based on that, you will then make decisions on the financing side regarding how you can meet the working capital requirements. Is that the setup and execution right now?

I believe so. Traditionally, in the industry, right, fleets conduct demos, test the vehicles, and then they provide orders. Initial orders are usually smaller and ramp up depends again on the fleet. At the moment we have clear visibility on what we need to build, the specifications, and timing. We'll start integrating that into our production plan. Remember, we currently have just over 350 trucks, worth about just over $50 million in order book value, and that's before players like Penske, U-Haul, and others started offering our trucks to their customers. We expect that to significantly impact this growth.

Understood. Just one last one at a high level: recent sentiment around adoption for hybrid vehicles in the passenger market. How is that translating into the fleet side of things? Is there interest on the hybrid side? If that emerges, how do you think you are positioned to deal with that type of development?

Yes. We see a very strong demand in the market, and that demand keeps growing. The demand for commercial vehicles is much lower compared to private vehicles. We see a lot of demand for EVs; however, we have not noticed a significant demand for hybrids within the categories we work with. We generally work in the 3 to 5 class range, and we don't see any effect on the demand at this point.

Your next question comes from the line of Craig Irwin from ROTH Capital Partners.

Your adjusted EBITDA was clearly just a little bit ahead of what we were looking for. But adjusted EPS, the biggest delta came from a $1.4 million tax provision. Can you maybe give us a little color on what the tax provision was? Do you have any visibility on what tax levels could be over the next few quarters?

It is Yaron here. The tax provision is an accounting provision due to the regulations we have in the U.K. as part of the R&D plan. So it's not a cash movement, it is only accounting, and it's probably a one-time accounting provision.

So it's a one-time non-cash accounting provision?

That is correct.

Thank you. There seems to be no further questions at this time. Please continue.

I want to thank everybody for taking the time to join us here today. And of course, I want to commend and thank the REE team across the world for their excellent work in the first quarter of this year, kicking it off strong and proud. Thank you all so much. Have a great day.

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