Earnings Call Transcript - REE Q2 2021

Operator, Operator

Greetings and welcome to the REE Automotive Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Limor Gruber, Director of Investor Relations. Thank you, Limor. You may begin.

Limor Gruber, Director of Investor Relations

Thank you, operator, and thank you all for joining our second quarter 2021 conference call. We hope that you've seen our press release issued earlier this morning at investors.ree.auto. 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 differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Please see our recent filing with the Securities and Exchange Commission, which identifies the principal risks and uncertainties that could affect our business, prospects, and future results. We assume no obligation to update publicly any forward-looking statements. In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, and EPS. Please see our release and filing for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures. Joining me today is our Co-Founder and Chief Executive Officer, Daniel Barel, who will provide an overview of our business and give an operations update, as well as our Chief Financial Officer, Hai Aviv, who will continue with the discussion on our financial results and outlook, before we open up the call for your questions. At this point, I will turn the call over to Daniel. Daniel, please.

Daniel Barel, CEO

Thank you, Limor. Given this is our first earnings release and conference call as a public company, I would like to briefly outline the REE story before we get into the business overview. When we started REE eight years ago, everybody was talking about the future of mobility, yet building cars the same way for over a century. Now approximately two years after we came out of stealth mode and unveiled the REEcorner technology to the world, our EV platform can be used to build zero-emission EVs. This will help create a greener, more sustainable world that will allow our customers and partners to lower the carbon footprint and achieve their financial and environmental goals faster as well as more efficiently. In recent quarters, we are seeing an acceleration in the acceptance of EVs as a sustainable solution, with growing tailwinds coming from governments around the globe. For example, earlier this month, the US government announced a target for electric vehicles to make up 50% of all vehicle sales in the US by 2030, which we believe leading automakers are aligned to meet. Industry experts expect the pace of targets to quicken the adaptation of electric vehicles in the US. Given that REE’s differentiated and modular EV platforms reduce time to market for new EVs, we believe this is yet another driver that supports our ability to grow significantly in the coming years. As I stated earlier, not a lot has changed in the manufacturing process of vehicles, whether that is supported by combustion or electric. Today, vehicles are still being built to original configuration, where the only material difference is the substitution of an internal combustion motor for an electric one. The rest of the vehicle and system are essentially unchanged. The components are still located between the wheels, which constrains modularity and functionality. At REE, we're fundamentally changing the approach of EV design and manufacturing based on a differentiated value-added approach. REEcorner patented technology integrates critical vehicle components such as steering, braking, suspension, powertrain, and control into a single compact module, located between the chassis and the wheel. Our fully flat EV platforms are geared to serve as the underpinning on top of which EVs and AVs will be built. REE’s EV platforms are designed to provide greater interior space and volumetric efficiency than vehicles built on either internal combustion or conventional electric vehicle architectures. REE’s modular EV platforms are capable of carrying more passengers, more cargo, and serving longer, translating into major cost savings, lower total cost of ownership, and even higher revenues to our customers, thanks to their differentiated characteristics. Our technology is future-proof and can be used for building vehicles to serve virtually any application. From delivery and logistics to taxis to passenger shuttles, EVs and AVs powered by REE are agnostic to vehicle size, shape, power source, and driving mode. They can be operated on either battery or fuel cells and in any drive mode, both human-driven and autonomous, while affording complete design freedom. The REEcorner and REEboard are designed to be manufactured using a novel manufacturing model via multiple production lines around the world, feeding our global network of integration centers. We do this by partnering with world-leading Tier 1 suppliers to exclusively manufacture the relevant subsystems we require based on current and available production capacity. This means not only a faster time to market and a significantly lower capital investment required, but also secured supply chain capacity and quality control. Capitalizing on that, we aim for REE to be the standard for the automotive industry, similar to how Intel Inside powers everything from laptops to data centers. Our REEcorners and EV platforms are intended to power EVs in all shapes, sizes, weights, and dimensions. From small short-range delivery vehicles at one end to long-range delivery trucks or mid-sized shuttle buses at the other end. Whatever EV technology wins, REE will succeed. We look at two strategic metrics for deepening our industry penetration as we focus on executing our business plan: one, growing our effective market share; and two, expanding the various vehicle types powered by REE. This process is already underway as we have signed multiple strategic collaborations with OEMs and other leaders across the automotive and mobility sectors. Our approach is to complete, not compete with OEMs by providing critical easy platforms on top of which they can build any type of EV. We are excited that major corporations such as Hino, Toyota Truck Arm, Magna, and JB Poindexter, a global logistics company, are starting to choose our technology and platforms and actively working to build their future vehicles with REE insight. In parallel to deepening our industry penetration, we continue to advance production readiness. We announced five different REEcorner architectures and opened a global Engineering Center in the United Kingdom, which is responsible for engineering design, validation and testing, as well as regulatory compliance. We also recently announced the location of our first commercial production site, which will be our first Integration Center in our North American headquarters in Austin, Texas, allowing us to be close to our partners and customers. With supply chain solidification in mind, we continue to grow our secured global vetted vendors' network built from the world's leading Tier 1 suppliers, such as Musashi, Maxion, and KYB, with which we collaborate on the development and manufacturing of our subsystems, to be integrated and assembled in our integration centers. A good recent example is our agreement to jointly develop a new lightweight and efficient electric propulsion system with American Axle. This will support multiple customer vehicle programs and production goals. We continue to make progress and execute in accordance with our plans by creating a multitude of opportunities that will enable us to become the industry standard as we continue to build long-term value for our stakeholders. With that, I will turn the call to Hai.

Hai Aviv, CFO

Thank you, Daniel. I will address our financials for the second quarter along with some of the milestones we reached. It is important to remember that REE was not a public company for the entire second quarter, ended June 30th, 2021. I would now like to spend a moment connecting the dots for many of our milestones achieved so far to the drivers of our financial performance over time. In our commercial agreements, we work together with customers to assess the market and determine a potential five-year forecast and forecasted volume. Following the signing, we initiate the program and nominate suppliers from our secure and global verified vendor network. The next milestone is customer evaluation of our prototypes for non-public road tests. Once completed successfully, this is when the customer would place the initial order that will trigger the next milestone of completing successful public road testing. After this stage, we need to receive purchase orders from customers, which lead to commercial production and revenue generation. In February, we opened our engineering centers in MIRA Technology Park in the United Kingdom. The location, on behalf of the British Automotive Industry, allows us to tap into a highly qualified talent pool and grow our local workforce. At the end of June, our Engineering Center was already staffed with 76 full-time employees, mostly engineers. In April, we entered into an alliance with Toyota Truck Arm Hino Motors, advancing from an MOU that we previously signed and strengthening our long-term relationship. This dates back to when we first presented our platform concept powered by REE at the Tokyo Motor Show in 2019. Our strong alliance with major global corporations, such as Hino, is important as we move to enter the light to medium-duty truck market or Class 4 and 5. In addition, we signed a strategic collaboration agreement with Magna International to jointly develop and bring to market modular EVs, as well as establish go-to-market teams to identify vehicle development opportunities, markets, and customers. Our collaboration with Magna advances our commercialization plans in Europe and North America, not only for modular EVs but also in the mobility as a service segment, which is one of the fastest-growing segments in the new mobility market. We also signed a development agreement with Navya, a leader in autonomous vehicles, with operations in 24 countries currently, to develop and manufacture the next generation of autonomous vehicles powered by REE and driven by Navya. Following the quarter end, we established a significant potential foothold in the US walk-in van market with the strategic collaboration with JB Poindexter, EAVX. We closed our merger with 10X Capital at the end of July, and are now listed on NASDAQ. We are well capitalized, even with our capital expenditure-light manufacturing model that utilizes excess manufacturing capacity via an exclusive global network of Q1000 in over 30 countries with point-of-sale assembly at our integration centers. Turning to our second quarter results, as we continue to ramp and invest in our business, our GAAP net loss for the second quarter was $31.2 million, compared to $33.9 million in the second quarter of 2020 and $12.6 million for the first quarter of 2021. The increase is primarily related to $20 million of non-cash stock-based compensation compared to $4.1 million in the previous quarter. Non-GAAP net loss for the second quarter was $11.1 million, compared to $2.5 million in the second quarter of 2020 and $8.5 million in the first quarter of 2021. As we continue to invest in our technological and engineering capabilities with increased investment in R&D, we finished the second quarter of 2021 with cash and cash equivalents of $30 million, compared to $44.7 million at the end of 2020. Following the close of our merger with 10X in July, we received gross proceeds of approximately $348 million, which we expect will fund our accelerated development, support further strategic collaboration, and position us to achieve the start of commercial production in late 2023. We finished the second quarter of 2021 with cash and cash equivalents of $30 million, compared to $44.7 million at the end of 2020. With the July close of our merger with 10X, we received gross proceeds of approximately $348 million, which we expect will fund our accelerated development to support further strategic collaboration and position us to achieve the start of commercial production in late 2023. We are integrating a 35% increase in headcount to achieve a target of approximately 2,050 full-time employees by year-end compared to June 30, 2021, and expect total annual operating and capital expenditures on a non-GAAP basis in 2021 to increase by roughly 25% or $15 million to $16 million. This is compared to our previous expectations of $64 million. The change is attributed to increased engineering spend to support growth in additional customer programs. Total expenditures will continue to ramp as we progress toward our commercial launch in 2023. Regarding our outlook, as provided in our earnings release filed earlier today, we expect to continue to execute on REE's commercial program, including the delivery of the first joint prototypes for non-public road tests. We will expand industry penetration through additional partnerships and expansion of the variety of EV types powered by REE. We will extend supply chain capacity by executing additional collaborations with leading suppliers, growing our global secured vendor network, and we expect to break ground on our US headquarters and Integration Center. With that, we thank you again for joining us. We can now open up the lines for questions, please.

Operator, Operator

Thank you. Our first question comes from Mike Shlisky with D.A. Davidson. Please proceed with your question.

Mike Shlisky, Analyst

Hi. Good morning, and good evening, guys. I want to start with two topics. One is just on the timeline, and the other one is on some cost questions I've got. Just can you clarify the timeline here? I'm trying to figure out, can you give us a sense as to how far away you think your first purchase order is going to be, your first binding purchase order? And in a very similar vein, how far along are you in safety approvals for your initial platforms? Do you need to kind of marry the top with the bottom before you obtain any safety approvals from any government agency?

Daniel Barel, CEO

Sure, absolutely. This is Daniel, and thanks for the question. To answer your first question, then purchase orders or sales orders are two different things, and as Hai explained, that in the outlook, and on the path, we will drive in terms of milestones, purchase orders that you mentioned are usually given six months prior to production as part of the production sequence. Therefore, for every batch that goes to production, there is a purchase order. So we expect those to arrive when we start production towards 2023. As we also described earlier, once we complete non-public road testing, there is a sales order or a global binding order in order to move to the next or second to last phase of public road testing. So I hope that answers your first question. On the second question, again, unfortunately, the answer is it depends. It depends on the type of vehicle; different vehicle types or classes require different regulatory approvals. Some of those regulatory approvals are being achieved prior to the marriage between the platform and the top hat. And some, for example, like crash testing, full crash testing needs to be done with a full vehicle. But naturally, there are elements that can be tested, for example, on our platform itself, and simulated, but you do have to have some seats and body in order to test, for example, crash.

Mike Shlisky, Analyst

I guess I kind of wanted to know, I mean, if you started all that process today for all the crash, the taillight, the headlights, all the different things that have to be homologated in each country. If you started that today, is it a less than two-year process? So, do you think you can get there within two years, your first production date?

Daniel Barel, CEO

Yes, that's a fair point. And listen, we are fully committed to executing our plans. And naturally, this is part of the plan, right? You can't go into production before you get clearance to do so. So, we've taken all of those and more into account, and we're now executing clearly. Let us focus on reaching those milestones that we set out to do.

Mike Shlisky, Analyst

Okay. My other question is about the cost outlook. I'm trying to understand if your recent higher costs, such as salaries and benefits, are driving these expectations or if your increased costs are mainly due to the push to hire people more quickly to accelerate progress.

Hai Aviv, CFO

Yes. So, this is Hai, and Mike, thank you for the question and good morning. So, in terms of the cost, in the first half of 2021, we experienced higher demand, both from our partners and potential customers. And we decided to grow both from the headcount and other disciplines in engineering. And as a result, we increased the expectation — cost expectations by 25% to $80 million, both on the operating expenses and the capital expenditure side.

Mike Shlisky, Analyst

Okay, so it's not because of inflation.

Hai Aviv, CFO

Correct.

Mike Shlisky, Analyst

Okay. Guys, thanks so much. I will leave it there. Appreciate it.

Hai Aviv, CFO

Thank you.

Operator, Operator

Thank you. Our next question comes from Jeff Osborne with Cowen. Please proceed with your question.

Jeff Osborne, Analyst

Hey good afternoon, guys. A couple questions on my end. I was wondering if we could try to be a bit more specific on bridging the gap between now and late 2023. So, is there a timeframe of when we should think about the private road prototypes being on the road? And then when public prototypes would be out there, or at least when the first of each of the five different REEcorners that you have?

Daniel Barel, CEO

Yeah, sure, Jeff, and this is Daniel. Hi, good afternoon. So I think it's quite straightforward. If we look at production at 2023, everything needs to be completed by then, right? Otherwise, we can't meet that. We are executing on that plan. So everything that you mentioned in terms of non-public road and public road testing will occur from basically, I would say, any time prior to production. Now keep in mind that different programs might require different pre-production and testing. Some can be jointly tested and some need to be tested separately. So there is an aggregated timeline to those testing. I'll also point out, you can think sit on our website that we have already demonstrated quite a few non-public road tests that you can find out there.

Jeff Osborne, Analyst

Got it. So do you anticipate any videos or product other than the ones that you're referencing of the videos of you in the desert zipping around? Do you anticipate any other products that would be on private roads that are newly built in calendar 2021 in the second half of the year, or is that 2022?

Daniel Barel, CEO

No, I do hope we don't go to the desert during this early summer because that's beyond hot. But we're completely focused on the plan. As we evolve and as we continue executing, we'll share more of everything that we're doing to make sure that we are as transparent and open as possible about everything that we're doing.

Jeff Osborne, Analyst

Got it, and for Hai, can you just remind me on pre-production prototypes for private roads? Does that trigger a revenue event, or are you producing those costs and giving them away for free?

Hai Aviv, CFO

Yeah, so this is a great question. For pre-production costs, revenues can be recorded in some cases currently, as you can see no revenues were recorded so far.

Jeff Osborne, Analyst

And do you anticipate any revenue in calendar 2021?

Hai Aviv, CFO

Yeah. So we find our projections for the next five years, and of course, we feel comfortable with this projection. Based on our expectations, we can meet the revenues based on these projections.

Jeff Osborne, Analyst

Got it. And then just following up on Mike's question prior on the increase in outlook to $80 million, which is great to hear that the development cycle is accelerating. Can you be more specific as to the CapEx versus OpEx mix within that? And then also, as a separate question, if you have any guidance or commentary on how we should think about stock-based compensation for GAAP results for the rest of the year?

Hai Aviv, CFO

Yes. So for your first question, we haven't disclosed the mix between the CapEx and OpEx. As you can see in the second quarter of 2021, the CapEx share was significantly lower than the operational expenses. We anticipate CapEx expenditures will go up significantly in 2022 when we'll open the integration center in Austin.

Jeff Osborne, Analyst

Got it. And any thoughts on how to think about stock-based compensation for the rest of the year? Is $20 million a quarter a good number, or was that a one-time event in the second quarter?

Hai Aviv, CFO

Yes, stock-based compensation is, of course, a non-cash item. As you see, if you compare the stock-based compensation versus the previous quarter, it's been volatile. We expect it to continue to be volatile in the next quarter. That's why we provide also the non-GAAP net loss, which we believe is more preventative.

Jeff Osborne, Analyst

Got it? That's all I had. Thank you.

Operator, Operator

Thank you. Our next question comes from Igor Levi with BTIG. Please proceed with your question.

Igor Levi, Analyst

Hey, guys. Thank you for taking my questions. Could we just step back a bit from the details and kind of go more at looking at the big picture and go through how the REEcorner technology and the modules flat platform will change the actual EV manufacturing process compared to the conventional EVs? And could you also touch on the time and cost savings in both the manufacturing as well as the reduced total cost of ownership for the end user?

Daniel Barel, CEO

Yes, sure, Igor. Thanks for the question, it's Daniel. Well, that's a bit long of an answer. So I'll try to get through it, and if I miss something, please let me know. The whole idea of the REEcorner is that we've taken everything off the chassis, right? By taking all the driveplan steering, suspension, motors, braking, all that off the chassis, we're allowing for far better modularity. Why is that important? Because as you try to build different kinds of vehicles faster to the market, you have to invest billions and billions of dollars and sometimes 8 to 10 years in developing each platform. Every time you want to change it by six or seven inches, you need to build a new platform altogether, with that same investment both in time and resources. And once the REE technology and REEcorner start, it's completely agnostic to any dimensional change, any change in battery technology or fuel. So it could be autonomous or manually driven, so full future proof, if you'd like, agnostic to any dimensional changes of that sort. So it allows us to address a much broader array of vehicles currently developed to future possibilities, giving our partners and customers complete freedom of design because it's very flat and modular to build any type of vehicle and service they want on top of that, and we do it at a fraction of the cost. Now that's the first part of your question. And by the way, we do it faster, significantly faster than 8 to 10 years. I think we've recently demonstrated quite a few platforms out there in different sizes, shapes, and kinds over the past few years. So that's the first part of your question. And the second part regarding TCO. This is a very, very strong key component of ours, and a very good question, because at the end of the day, TCO is our ability to compare apples to apples, right? It is the ability to compare one vehicle to the other over time. And it takes into account quite a lot of things; among others purchase cost, residual value, operating costs, maintenance, etc. This is where we excel dramatically because we do quite a few things that take the total cost of ownership significantly down. We've talked about this quite a lot in recent announcements that we've made, and also on our deck that we presented as we went through the merger with 10X. I'll just note a couple of those now. One, we extend the life cycle of the vehicle significantly and prolong its ability to serve by not only being able to replace those corners that are basically the whole vehicle in less than an hour, but we keep them upgraded over time, both mechanically and throughout the year, allowing for better functionality and capabilities over time, allowing our customers to use them for longer. Second, our repair time and downtime are extremely low since, as I said before, we can change a corner in less than an hour. So there's no more lengthy repair time where somebody needs to order a part or understand what's wrong with the system. Think about it like a Formula One pit stop; you come in, you change your corner, and you go out in less than an hour, which is very significant. Last but not least, for some of our customers, our ability to take more on that vehicle is dramatically important. Think about, let's say you're doing deliveries and you put in packages on the vehicle. Because of the low center of gravity that we allow due to the REEcorner technology, we can pack sometimes 32% to 36% more, so the volumetric efficiency goes up. Meaning you can deliver far more, let's say packages on the same route with the same driver on the same CapEx investment of the vehicle, increasing your top line without increasing the cost to the COGS. So these are just a few examples of how we innovate and what's the value proposition of using our technology, and I do hope it answers your question.

Igor Levi, Analyst

Yes, great. Thank you. That definitely answers my question. I wanted to follow-up on some discussion earlier about the milestones. Would you be able to touch on what are the most important milestones we should be watching for over the next year and a half before commercial production starts? And then until production starts, what is your expected cash burn per quarter?

Daniel Barel, CEO

All right, so these are two different questions. The first question is, I think what we really tried to do recently is give a very clear understanding of the milestones—we laid them out very clearly, and I think I covered that earlier today, and it's on the website. So you should look at, of course, new agreement signing, which represents additional growth; you can look at non-public road testing, nomination of suppliers from our global vendor network, and of course, public road testing. All those in different paces as per each different program would lead to production, and this is exactly what we're trying to communicate. We are totally fully focused now on executing and executing on the plan, getting to production. Naturally, there are so many different milestones, but those that we mentioned are, I think, very good points to look out for as you progress and assess our advancement.

Igor Levi, Analyst

Great. And the second part of the question regarding the cash burn?

Daniel Barel, CEO

Yeah, so on the cash burn, we haven't disclosed the quarterly cash burn, only the annual one, which is still the same. We’re keeping the same projections both on the revenue side and the cost side. That's on an annual basis. If you're looking at quarter-to-quarter, if you compared Q2 2021 to the last quarter, the previous one, of course, the operating expenses were higher because we are increasing our headcount and growing.

Igor Levi, Analyst

Okay. Thank you, everybody.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the call back over to management for any closing comments.

Daniel Barel, CEO

Yes. Thank you, operator, much appreciated. I would like to say that both Ahishay and I, as Co-founders, are fortunate to have this amazing and highly devoted team with us around the world. I firmly believe in the power of our organization and our ability to deliver strong long-term value creation for our stakeholders. I look forward to continuing our progress in 2021 and beyond, as we focus on reaching our milestones, both near-term and in the future. Thank you, everyone for joining us today. We appreciate your support of REE Automotive and look forward to updating you on our progress.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.