Earnings Call Transcript - REE Q1 2023

Operator, Operator

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

Kamal Hamid, Vice President of Investor Relations

Thank you, operator, and thank you all for joining our first quarter 2023 conference call. We hope that you have seen our press release and shareholder letter issued earlier this morning at investors.ree.auto. Today, our Co-Founder and CEO, Daniel Barel, will be sharing highlights from the shareholder letter before opening up the call to Q&A, where he will be joined by our Chief Financial Officer, Yaron Zaltsman; our Chief Business Officer, Tali Miller; and Josh Tech, our Chief Operating Officer. 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 refer to the company's Form 20-F filed on March 28, 2023, with the Securities and Exchange Commission, which identifies principal risks and uncertainties that could affect our business, prospects and future results. We assume no obligation to publicly update any forward-looking statements, except as required by law. In addition, we will be discussing or providing certain non-GAAP financial measures today, including non-GAAP net loss and non-GAAP operating expenses. Please see our shareholder letter for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. At this point, I will turn the call over to Daniel.

Daniel Barel, CEO

Thanks, Kamal. Hello, everybody, and thank you for joining us today. I hope that you have seen our press release and shareholder letter issued earlier this morning at investors.ree.auto. If you haven't yet, I encourage you to review it as it has additional information on the topic that we will discuss on this call today. I'm pleased to share that 2023 has gotten off to a great start for REE Automotive. Our first quarter afforded us several exciting opportunities at events like Work Truck Week and ACT Expo, where we were able to interact with influential fleets and dealers, understand their key challenges and showcase REE's unique value proposition. Our team was also able to achieve important milestones like the completion of our winter testing in Sweden, another considerable step on our journey to getting REE vehicles on the road. Our focus remains on a path to certification by the second half of 2023 with initial pilot vehicle delivery by the end of 2023, and we continue to make great progress here. We are working on a two-phase production plan that will allow us to achieve sustainable growth. Phase 1, which is expected to run through 2024, anticipates the pilot production and assembly of vehicles in the low hundreds, targeting breakeven gross margin on a unit level by the end of 2024. Phase 2 targets production in the low to mid-thousands of vehicles with breakeven EBITDA by the end of 2025. More details on our two-phase production plan can be found in our shareholder letter. As you may have seen, we recently announced the introduction of the P7-C chassis cab, which complements our existing product lineup and further emphasizes our near-term focus on zero emission Class 3 to 5 vehicles. The P7-C targets the fast-growing and highly incentivized Class 4 EV market and joins our P7-B, the box truck, and P7-S, the stripped chassis, in the P7 program. We expect significant demand for zero emission Class 3 to 5 vehicles to be driven by the recently adopted California Advanced Clean Fleet regulation, the ACF, which sets ambitious targets for commercial fleets to pursue zero emission trucks. The 2020 MOU signed by 15 states and the District of Columbia is expected to expand the benefits and reach of the ACF throughout the U.S., further driving the commercial EV market. Interest in the P7 program increased as proven by the growth of our dealer network in the U.S., which now includes 8 dealers and 3 fleet customers. Together, these dealers have already placed initial orders of approximately 100 vehicles, which are included in our current order book. From a financial perspective, we ended the quarter with liquidity of $126 million comprised of cash, cash equivalents and short-term investments and no debt. We expect to end the year with $65 million of liquidity, including financing the initial 25 vehicles for internal testing and deliveries for selected customers. We expect to generate sufficient orders to ramp up serious production based on our growing dealer network and fleet customers. We understand that this ramp-up to the low to mid-thousands of vehicles produced will require additional funding before we reach breakeven EBITDA mainly due to the working capital requirements. We estimate that this ramp-up will require $80 million to $100 million. We will explore options for raising debt or equity in the right form, all in line with the progress of our business cycle and need. We will provide more color on our model later this year with the progress of our plan. Before we open it up for questions, I want to remind you to take a look at the shareholder letter that we shared this morning, which discusses all of these highlights in more detail. You can access it on our investor website at investors.ree.auto. I would also like to take this opportunity to thank the REE team across the globe for their continued hard work and dedication, particularly for the milestones they have already achieved this year. I look forward to sharing more of the great work we have accomplished together in future updates. Operator, please open up the call for questions.

Operator, Operator

The first question is from Mike Shlisky at D.A. Davidson. Please go ahead.

Mike Shlisky, Analyst

I guess I just wanted to ask quickly your last comment there about potentially sharing some more capital for production as things ramp up. I guess I'd be curious if you're weighing getting your way equity. I guess I was wondering, do you expect to have orders first before you go to raise the capital because that would make debt a lot easier for REE? Or do you need to raise money before you have any orders to kind of keep the operation going just before you start the heavier production?

Yaron Zaltsman, CFO

It's Yaron here. So I think for us, it will be too early to make a decision about what to do first, right? So basically speaking, we know we have access both to equity and probably also to raising debt even today because we are quite sure that we can achieve our goals here. We'll explore it over time based on the coming months, and then we can make a decision. But for now, it's too early for us to make that direct call whether it is equity or if it's debt.

Mike Shlisky, Analyst

And just a quick product question. You mentioned winter testing, and that was over in Sweden. I guess from that point, what is left to do to ensure that REE has a road-ready vehicle for anyone to purchase and drive? Is there anything major left to do? Or is it going to be a sales and ramp up from that point on?

Daniel Barel, CEO

Josh, do you want to take this one?

Joshua Tech, COO

Yes, I'll take that. This year, the winter test was a significant step for base calibration. We are on track to complete certification activities. We will be preparing our homologation vehicles, which will be ready by Q3. This will enable us to finish all related tasks for homologation and certification by the end of the year. Currently, we do not anticipate any obstacles.

Mike Shlisky, Analyst

And that's all three major P7 products or one of them?

Joshua Tech, COO

No, that's correct. That's the P7-B, the P7-C and of course, the stripped chassis for the classified walk-in van.

Mike Shlisky, Analyst

And then one last one for me. Can you maybe update us on the status of the sort of readiness to produce in both Coventry and Austin? I'm curious if one's way ahead of the other or also just waiting to have that large order to start building? It could be the U.S. at this point.

Joshua Tech, COO

Yes. We plan for 2024 production to be in the low hundreds initially from Coventry, which is intentional. Then throughout 2024, we will work on increasing the U.S. production capacity across the board.

Operator, Operator

This is from the line of Colin Langan from Wells Fargo. Please go ahead.

Colin Langan, Analyst

Great. Last quarter, you talked about you had enough cash to sort of launch the P7. What's changed in the last few months that now you need to raise $80 million to $100 million in capital?

Yaron Zaltsman, CFO

It's Yaron here again. Nothing has really changed. If you look at our projection for the end of the year and the next three quarters, we plan to spend about $20 million each quarter. This is partly because we still need to invest in the NRE, and we will have around 25 first vehicles. The focus is on how to manage things in the next two years since we will be ramping up. For us, ramping up always involves working capital challenges due to the time gap between payment and receiving funds from customers. Therefore, our plan is to raise money. If there were no working capital issues, we probably wouldn't need to raise between $80 million and $100 million. However, based on our current plan for the next two years, I believe we need to secure enough capital to avoid any working capital problems.

Colin Langan, Analyst

Is it an obvious question to ask if needing to raise capital influences your accounting opinion? Liquidity is sometimes a concern that gets flagged. Will this need for capital affect your audit opinion, or since it's still some time away, is it unlikely to be an issue? We just want to know what to expect.

Joshua Tech, COO

So the question is why we are mentioning $80 million to $100 million? Can you repeat the question again?

Colin Langan, Analyst

Does this impact your accounting or the auditor's opinion of your financial situation? It resembles a going concern issue, particularly if you need to raise capital. It appears that this might be necessary for next year, which could present a problem.

Yaron Zaltsman, CFO

Yes. So for now, you see we did not have any going concern paragraph in our report. But again, we need to explore it on a quarterly basis, right? So for now, we don't have any going-concern issue.

Colin Langan, Analyst

That's what I was getting at. Okay. And then just lastly, so you have 76 orders now. How should we think about those coming in? Because I remember last year, I think you had a big event in July. Are those still potentially coming in? Are the new events going to drive new orders? How should we think about the cadence of the orders from here?

Tali Miller, Chief Business Officer

This is Tali speaking. Regarding the growth of our order book, we believe that the potential from our existing customers is very significant. We are carefully expanding with a selected customer base, focusing on those with substantial market share, particularly those dedicated to electrification. We anticipate continuing to develop our authorized dealer network from the increasing pipeline of dealers.

Colin Langan, Analyst

Okay.

Tali Miller, Chief Business Officer

Yes. And actually, maybe to complete that, although we don't have a formal number, I can tell you that with the conversations held with our dealers, the indicative sales of magnitude of 50,000 vehicles per year and generating over $1 billion annually.

Operator, Operator

We'll now take our next question. This is from the line of Jeff Osborne from TD Cowen.

Jeff Osborne, Analyst

A couple of questions on my end. I was curious on the Phase 1 and 2. Is all of the Phase 1 2024 expected to be produced for final assembly in Coventry? Or can you give us an update on how Austin is progressing?

Joshua Tech, COO

This is Josh. I'll address that. Right now, our focus is on deliveries from the U.K. We have the necessary infrastructure in place there. As we develop our U.S. operations throughout 2024, we'll make a sensible decision regarding when to transition. Regardless, we will make sure that we deliver the vehicles to our customers at the appropriate time.

Jeff Osborne, Analyst

And then, Josh, as you get into the thousands, would Phase 2 be done in Austin? Or would that be done at a partner's location? I thought that was one of the angles that you had?

Joshua Tech, COO

I mean, yes. Keep in mind, our approach is always the CapEx-light approach. It's part of how we are differentiating ourselves from the other main factors, right? Our approach is always to build the vehicle beside the corner, obviously, with partners.

Jeff Osborne, Analyst

What is the remaining amount related to the $20 million burn? Should the R&D spending remain at similar levels to Q1 for the rest of the year? Can you also explain what the remaining capital expenditures are for your capital-light approach?

Yaron Zaltsman, CFO

So this year, the $20 million per quarter roughly is, of course, included heavy R&D, but lower than R&D that we have already until now. Next year, of course, we still have R&D because we want to explore other opportunities. But the major R&D investments already have been taking place in our reports.

Jeff Osborne, Analyst

Might be an unfair question just because the news was yesterday, but I think the loan that your battery partner, Microvast, received from the DOE was pulled. And so I was just curious, does your relationship or contract with them involve domestic manufacturing that might be at risk? And do you have a backup plan if so?

Daniel Barel, CEO

Yes, it's Daniel. I think we just had this discussion yesterday. There are many conversations to be had. At the moment, we do not see any risk to the supply chain or deliveries.

Jeff Osborne, Analyst

But none of your potential customers or dealers are expecting an American-made battery? Is that a safe assumption as well as my understanding for the credits, you don't need that?

Daniel Barel, CEO

Yes. I think you should differentiate between the short term of the low hundreds in 2024, which are test leads as to the ramp-up of the low to mid-thousands in 2025, which is the follow-up deployment. So for the test fleets, there is more flexibility in terms of sourcing and design naturally. Remember, we keep the voice of the customer very close to us. So you can expect that once we deliver to customers, they would want to test it. They will be, as we said earlier in previous calls, we are deploying product teams together with the test fleets to the customers to work together with them side by side and evaluate and help them to explore the vehicle better. So naturally, also, we would take into account the voice of the customer. But as I said to your question, it's too early to tell.

Operator, Operator

There are no further questions coming through at this time, so I will hand back to the speakers.

Kamal Hamid, Vice President of Investor Relations

Thank you all for joining us today, and feel free to reach out if you have any follow-up questions or would like to speak with management. Thanks again.

Operator, Operator

Thank you. This does conclude today's conference call. Thank you for participating, and you may now disconnect. Speakers, please stand by.