Earnings Call Transcript - REE Q2 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the REE Automotive Q2 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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.

Kamal Hamid, Vice President of Investor Relations

Thank you, operator, and thank you all for joining our second 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'll 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 anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. 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. At this point, I will turn the call over to Daniel Barel, our CEO and Co-Founder.

Daniel Barel, CEO and Co-Founder

Thank you, Kamal. Hello, everybody, and thank you for joining us today. Halfway through 2023, we continue to make steady progress, and we remain disciplined, both operationally and financially as we focus on the execution of our P7 program. This morning, we announced that we have achieved one of our most important technology milestones to date following months of testing. We confirm that it is feasible for our x-by-wire system to pass the required FMVSS certification, a key step in our roadmap to delivering certified vehicles. Being the first to market with a full x-by-wire system sets a high bar. So, in order to prove feasibility, we contracted HORIBA MIRA, a world leader in testing, to perform internal tests modeling certain FMVSS certification requirements. We have already started to build our certification in P7 fleet and are on track to initiate the next phase of the full certification process for P7 vehicles. We have progressed with the certification plan and are targeting delivery of our first pilot vehicles by the end of this year, while ensuring they are safe, reliable electric trucks that dealers and fleet owners can depend on. Our confidence in our vehicles, combined with our discussions with dealers and fleet feedback, makes us confident in our business plan, which claims to reach cumulative sales of $1 billion over 2024 to 2026 by executing on our production plan as shown in our shareholder letter. As we continue to build out our dealer network, which now covers the entire U.S., and our recent expansion into Canada, we see demand for our commercial electric trucks coming from both incentivized and non-incentivized states as charging infrastructure becomes more accessible to fleet owners. In addition, in the commercial trucking industry, aftersales service is key, and we also see demand growth from our ability to simplify service with our quick REEcorners swap, which allows fleet and dealers to keep a single service part in their inventory—the REEcorners—aiming to increase uptime of our trucks and lower the cost of customers' inventory and its cost of management. As a customer-centric company, we listen to our current and potential customers to expand our P7 offering with full vehicle solutions, including boxes, service bodies, and platform bodies. Therefore, as we shared yesterday, we are growing our collaboration with market-leading work truck body manufacturers, such as Knapheide and Morgan Truck Body and others, all expected to be available in 2024. We have already delivered our first P7-S prototype to one of our existing U.S. fleet customers for their initial internal closed track tests with the help of our on-site and remote support team as we jointly develop a complete electric pro truck that will pave the way for potential future purchases. The P7 lineup uses a software-based x-by-wire system, which will utilize over-the-air capabilities that allow for continuous vehicle improvements and updates, continuously rolling out new features and options and remote diagnostics, often negating the need to return to a service center to improve off-time in the future. Our system architecture, coupled with data-as-a-service capabilities, is intended to allow customers to manage fleet performance, gather any data required for incentive compliance, and forecast and predict maintenance. We ended the second quarter with liquidity of $105 million, comprised of cash, cash equivalents, and short-term investments. As part of our efforts to secure 2024 capital needs in advance, after the end of Q2, we have established a $35 million ATM program and secured a bank facility of $15 million. Before we open it up for questions, I want to stress that we are aware of the market conditions in general and the EV industry in particular. We see strong demand for electric trucks driven by both organic demand, as well as the federal state incentives throughout the U.S., and we understand our customers and the market expect us to deliver. We are laser-focused on bringing the best commercial EV to market, and we have the right team and technology. We believe our stakeholders, customers, and investors will see long-term value creation because of our unique technology, IP, operational focus, and disciplined approach. Operator, please open the line for questions, and I'm going to be joined by our Chief Financial Officer, Yaron Zaltsman; our Chief Business Officer, Tali Miller; and Josh Tech, our Chief Operating Officer.

Operator, Operator

Thank you. We will now take the first question from the line of Michael Shlisky from D.A. Davidson & Company. Please go ahead.

Michael Shlisky, Analyst

Good morning. Thank you for taking my question. Can you hear me okay?

Daniel Barel, CEO and Co-Founder

Yes, we can.

Michael Shlisky, Analyst

Are you there?

Josh Tech, Chief Operating Officer

Yes, we can hear you fine, Mike.

Michael Shlisky, Analyst

Great. Thank you. Can you maybe take us behind the scenes of the external testing that you did to get to the point where the external firm said that you're ready for FMVSS? I guess, I would like to know if that was a long process. Was it very iterative? Or did you just send in the chassis and you got back a pretty clean report card? I'm curious to see whether there was an expense in that very long process or a lot of short ones?

Daniel Barel, CEO and Co-Founder

I'm not sure I heard the full question. Sorry, the line is a little bit—can you repeat, please?

Michael Shlisky, Analyst

Yes. Is this a little bit better? Sorry about that. I guess I was wondering if you could take us behind the scenes of the external testing to get the P7 chassis to the FMVSS, kind of the external third-party approval. I guess I'm curious whether that was an iterative process that took a very long time longer than expected? Or did you just kind of send in a chassis and get back a pretty clean report card from a very early stage?

Daniel Barel, CEO and Co-Founder

Sure. Josh, do you want to take this?

Josh Tech, Chief Operating Officer

Yes. I guess, maybe we'll — I'll take that one. So basically, to sum it up. So the P7 lineup is going to be the first by-wire commercial truck out there. And our x-by-wire technology is what makes us unique. And therefore, we've been testing these core systems for months. As we shared today, we've also contracted a third-party to do the tests. The FMVSS standards are generally design-neutral. So different vehicle and vehicle technology designs can be certified if those minimum requirements are met. But some of those standards have test procedures that are written with a traditional vehicle mindset in mind. So the certification and feasibility testing showed that the REE x-by-wire architecture could be tested according to the applicable FMVSS standards. For example, we have the FMVSS105 performance requirements for braking during normal operation and failed injection. Our REEcorners comprehensive architecture goes beyond those requirements and includes multiple redundancies that allow for fail operations. For example, if braking fails on one of the wheel sales, the other corners will allow you to continue to drive the P7 vehicle safely. These feasibility testing also provided a lot of other data that we refined as we tune our calibrations ahead of what we expect our full certification by the end of the year.

Michael Shlisky, Analyst

Okay, great. I also want to ask, you mentioned in your prepared remarks, Daniel, some of the things that were in the press release about your sales outlook for, I think it was 2024 to 2026. Obviously, there's some ramp-up in there between '24 and '25, but could you kind of give us some kind of breakdown of the cadence that the $1 billion plan on the road there in sales, how much might be in the early stages in that 2024 release?

Josh Tech, Chief Operating Officer

I guess, I can take that one too as well. So to answer the question. For Phase 1, we plan to produce from the U.K. facility the minimum number of pilot vehicles that we require to get customer feedback before we begin mass production in the states. This is our intention because the cost reduction towards breaking the gross margin per unit level is expected to start only after we have our production tooling in place. As we build confidence through the positive feedback from the customers over the next few months, we initiated our $15 million production tooling purchase program in July of '23. We believe this will allow us to shorten our Phase 1 and enter Phase 2 by Q4 of 2024. Phase 2 is currently planned to commence in Q4 of ‘24, which is expected to produce up to 300 vehicles during that calendar year, ramping up to low-1,000s in 2025 and then mid-1,000s in 2026. For chassis manufacturing and final vehicle builds in Phase 2, we plan to use a contract manufacturer located in the states, and we'll provide more information on that once we have selected that contract manufacturer.

Michael Shlisky, Analyst

Just to be clear then, the 2024 vehicles that are coming out are going to be prototypes or still low volume and they’ll all be in the U.K. shipped over here, correct?

Josh Tech, Chief Operating Officer

The first half to first three quarters, yes, those will be the pilot vehicles—and then by Q4, we will start to ramp up the remaining, as we said, up to 300 from the U.S.

Michael Shlisky, Analyst

Okay, great. I’ll give others a chance. Thanks so much for the time. Thank you.

Operator, Operator

Thank you. We will now take the next question from the line of Jeff Osborne from TD Cowen. Please go ahead, your line is open.

Jeff Osborne, Analyst

Great, thank you. Thanks for all the detail in the letter. Maybe just a few follow-up questions on some of the points raised. Daniel, I was wondering if you could walk us through the $50 million investment that was flagged. I think Josh just mentioned that you had a $15 million tooling purchase in July last month. Was that part of the $50 million? Or is the $50 million still to come more next year? I'm just trying to get a sense of the cadence and associated cash burn.

Daniel Barel, CEO and Co-Founder

Yes. So these are two different things. I think, if I heard you right. So we initiated the $15 million tooling program ahead of schedule because we have higher confidence ahead of plan so I think good news there. And that would allow us to kick off the tooling programs. We are expected, as Josh said, to enter Phase 1, which is production tooling and scale in the second half of next year as we prepare to ramp up for that. And Yaron can probably add more.

Yaron Zaltsman, Chief Financial Officer

Hi, so most of the $50 million has not been spent yet, but it's part of our business plan, and we share information about the amount of cash that we have right now and the amount of cash that we need in the next 2 years, so you can include that there. We secured a $50 million loan from an Israeli bank, which will fully cover the tooling spend that we…

Jeff Osborne, Analyst

So the cumulative cash burn CapEx is less than $105 million over the next two years? Is that what you're trying to say? And then if you add the ATM and the $15 million?

Yaron Zaltsman, Chief Financial Officer

What I'm trying to say is that the $105 million that we have right now, plus additional ATM and the loan security is well enough for the next year. We feel we need to cover 2025 due to working capital; therefore, we need to raise another $50 million for year 2025.

Jeff Osborne, Analyst

Got it. And then the—I apologize for following up on Mike's questions with Josh, but you mentioned pilot vehicles. So I'm just trying to get a sense of the math of the dealers is impressive. You have pilot vehicles being produced and then, at some point in time, late next year up to 300 vehicles. At what point in time will there be vehicles for revenue? Is that Q4 of next year? Or will there be revenue associated with any pilot vehicles before this?

Daniel Barel, CEO and Co-Founder

I think, yes, Yaron will add more color, Jeff, on that. But I think the quick answer for that is all of our vehicles are for revenue depending on where we recognize them, right? But we're being paid for each of those vehicles that we deliver. The difference between the reason we call them, like Josh said, pilot vehicles, is because they're intended to gather customer feedback in order for us to, if needed, make the relevant changes before we initiate our production tooling, because of the cost and time it takes to change production tooling. Once we are very comfortable with this, we'll kick up the production tooling and go to, like we said, about 300 by the end of next year, and then at the low-1,000s and mid-1,000s. But Josh and Yaron, if you want to add?

Yaron Zaltsman, Chief Financial Officer

We are starting to deliver the pilot vehicle by the end of this year. Most of the vehicles that we provide are not pilot vehicles, of course, right? And therefore, all of them will be recognized as revenues. A small amount only in the first part of the year, probably Q1, we still see as pilot vehicles, and therefore, we already gave some guidance about revenue recognition guidance about this specific amount of vehicles, but it's a really small amount only for this year and only for Q1 next year.

Jeff Osborne, Analyst

Sorry for the follow-up. So Q4, Q1, you'll have modest revenue for pilots, and then there'll be a lull in Q2, Q3 and then it ramps back up in Q4?

Yaron Zaltsman, Chief Financial Officer

Yes. Correct.

Josh Tech, Chief Operating Officer

Maybe to add a little color to that. That's very strategic what we did because why we're calling those pilot vehicles is basically to ensure that our dealer network has the units they need to get customers in fees and test the vehicle. This way, we're using that feedback before we start the ramp. As we said, we kicked off the tooling. The key for the ramp isn't just to build trucks; it's to get them where we can start driving towards material margin parity. We want to get the parts down at a lower cost, so as we start ramping, we're actually coming to bump parity and then driving positive material margin as we ramp. So it's very strategic what we did there.

Jeff Osborne, Analyst

Great, thank you. Appreciate the detail.

Operator, Operator

Thank you. We will now take the next question from the line of Colin Langan from Wells Fargo. Please go ahead.

Colin Langan, Analyst

Oh, great. Thanks for taking my questions. Just to follow up on the cash flow needs, so I understand. So you have enough cash to get through the end of '24, but you will need another $50 million as for '25. And one, is that correct? But you still have to use the ATM program, so—because there's $35 million, I think you only used less than $1 million of it. So does that mean more dilution will be coming as you use that program through ‘25? That will give you $35 million, and then on top of that, you go simpler before 2025, you need to raise another $50 million. So there are two pieces, there's $50 million for ‘25 million and the $35 million or $34 million left under the ATM in terms of sort of dilutive impact?

Yaron Zaltsman, Chief Financial Officer

So I think we published last time that we'll need to raise between $80 million to $100 million in equity or in debt for 2024 and 2025. So what we are trying right now is actually to give much more color on that. We are trying to give a breakdown between years 2024 to 2025. For sales in 2025, we'll need $50 million, which means that for 2024, the need is less than $50 million. It's probably around $35 million. How we are going to take this $35 million, we can take it by bank loans or by using the ATMs. We have both options. We are still working on that. So already $50 million out of that has been secured. Based on that, we will not need to use the full ATM of $35 million. And it’s our decision based on the stock price how much we will need to use.

Colin Langan, Analyst

Okay. But still, you still left—so the ATM has not been really used yet at this point?

Yaron Zaltsman, Chief Financial Officer

Correct, the answer is correct.

Colin Langan, Analyst

Okay. And then you have—the 155 orders—how does that compare to the 300 orders? So just the 155 are initial orders that are locked in and then the 300 is the target once they get the first, you're hoping to get a second? Is that the logic so I make sure I'm comparing apples-to-apples?

Tali Miller, Chief Business Officer

Yes, sure. So again, as we reported in the shareholder letter, the production plan targets to accumulate $1 billion for the years 2024, ‘25, and ‘26. The plan is expected to reach production of up to 300 vehicles in '24 and then low-1,000s in '25 and mid-1,000s in 2026. Now we continue to grow our authorized dealer network. We disclosed that we had one dealer at the end of last year, and now it has grown to 12 dealers currently, covering the U.S. and Canada. In the previous earnings call, although we don't have formal numbers, conversations held with our dealers suggest that they sold over 50,000 vehicles a year, which generated over $1 billion, and therefore, we feel confident in our ability to execute this business plan of ours. This is in addition to the previously announced three large fleet customers. These dealers and fleets are committed to electrification, and they've already placed these orders of 155 P7 vehicles. This initial order book is similar to the number of initial deliveries by market leaders, and these numbers reflect initial orders and support the growing pipeline. We believe that these dealers and fleets could purchase hundreds and thousands of units per year, and we also continue to see strong demand for the entire P7 product line.

Colin Langan, Analyst

And the 155 orders you have, do you get paid when you deliver, or do you get paid when they actually deliver it on to a customer since they’re dealers?

Yaron Zaltsman, Chief Financial Officer

They're getting paid when they are delivered.

Josh Tech, Chief Operating Officer

To the dealership not to the customer.

Yaron Zaltsman, Chief Financial Officer

Correct. Yes, correct.

Colin Langan, Analyst

Okay, alright. Thanks for taking my questions.

Operator, Operator

Thank you. We will now take the next question from the line of Andres Sheppard from Cantor Fitzgerald. Please go ahead.

Andres Sheppard, Analyst

Hi, good morning, everyone, good afternoon. Congrats on the quarter, and thanks for taking our questions. I was wondering if you could maybe remind us where ASPs stand? Just curious with the inflation and the rise in interest rates whether you may have—whether you may expect some differences in your selling prices.

Daniel Barel, CEO and Co-Founder

Sorry, probably our line. Can you repeat? Sorry, Andres.

Andres Sheppard, Analyst

Yes. No problem. The question is, if you can maybe remind us where you expect the average selling prices of either the corners or the platforms to be? Just wondering if those may have changed given the inflationary environment? Thank you.

Yaron Zaltsman, Chief Financial Officer

No, I think we cannot share the exact price that we are selling to the dealers. One thing that we can share is that we do believe that we can have a better vehicle compared to the others. And therefore, over time, we can increase prices and get better prices than maybe others. But this is over time.

Daniel Barel, CEO and Co-Founder

I’ll add, Andres, that our business model does not take into consideration the evergreen IRA or any other incentive plan in place, meaning the business plan, prices and margins are built from the bottom up, where we believe we have competitive market pricing that is sustainable and also acceptable by the industry, even without incentives. It’s actually supported by the fact that we see demand for our vehicles both from incentivized and non-incentivized states. So please don’t misunderstand; the incentives help a lot, but I look at them more as fire starters than continuous support.

Andres Sheppard, Analyst

Okay. And maybe a different way of asking is, can you give us the sense of what kind of gross margins we might expect for next year or between 2024 and 2026? As we look at that new sales guidance that you've mentioned, just wondering when we could see positive gross margin? Is that something that you expect from the production of the 300 vehicles in 2024, or perhaps is that more likely in 2025?

Yaron Zaltsman, Chief Financial Officer

So we mentioned that we will get to breakeven costs by the end of next year when we have 300 vehicles. Going forward from that, when we're having higher production, of course, we have a positive gross margin. We also mentioned that we'll go to positive EBITDA in year 2025. Therefore, the gross margin should reflect all of the costs that we have in the company, and we'll share more information about that next year.

Andres Sheppard, Analyst

Got it. Okay. And maybe the last question is, can you just remind us where you stand with all of the integration centers? You've mentioned the U.K., but just remind us maybe the future plans and kind of where those stand?

Josh Tech, Chief Operating Officer

Yes. I got this. Right now, as we said, we're going to—our intention is also to use the manufacturer of the corners and then work with partners for platform and full vehicle integration. The corner is our core competency and the value add remains there. As we launch the contract manufacturer in the U.S., that—we'll do that in the second half of next year; we have the option. We will continue to build the corners in the U.K. for at least the beginning of Phase 2. As we ramp, we have the option—we have already secured the Austin facility to start that up at any time when it makes sense. Obviously, we don't want to overinvest until we need that part. So we'll make sure that we're not really dropping excessive amounts of capital before it's needed.

Andres Sheppard, Analyst

Okay, thank you.

Operator, Operator

Thank you. I would now like to turn the conference back to Daniel Barel for closing remarks.

Daniel Barel, CEO and Co-Founder

Thank you. I would like to thank and acknowledge our teams around the world for their devotion and dedication to bring the P7 lineup to market. We're getting closer every day, and I'm confident that we have what it takes to deliver the best electric trucks available on the market. So thank you, everybody, for taking the time today to listen to our call. Have a good day.

Operator, Operator

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