REE Automotive - Q1 2023

Transcript

Operator (participant)

Good day. 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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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. Please go ahead.

Kamal Hamid (VP of Investor Relations)

Thank you, operator, 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 be different from other 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 (Co-Founder and 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 1st 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 our 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 one, which is expected to run through 2024, anticipates the pilot production and assembly of vehicles in the low hundreds, targeting break-even gross margin on a unit level by the end of 2024. Phase two targets production in the low to mid-thousands of vehicles with break-even EBITDA by the end of year 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. 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 US, 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 equivalents, and short-term investment and no debt. We expect to end the year with $65 million of liquidity, including financing the initial 25 vehicles for internal testing and pilot deliveries for selected customers. We expect to generate sufficient orders to ramp up series production based on our growing dealer network and fleet customers.

We understand that this ramp up to the low to mid thousands of vehicle produced will require additional funding before we reach break-even EBITDA, mainly due to the working capital requirement. We estimate that this ramp up will require $80 million-$100 million, we will explore option of raising debt or equity in the right form, all in line with the progress of our business cycle and needs.

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 first of all remind you to take a look at the shareholder letter which we shared this morning, which talks to 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 and thank the REE team across the globe for their continued hard work and dedication, particularly for the milestone 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 (participant)

Thank you. As a reminder, to ask a question, you'll need to press star 1 and 1 on your telephone and wait for your name to be announced, and to withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A roster. Thank you. We'll now take our first question. Please stand by. First question is from the line of Mike Shlisky from D.A. Davidson. Please go ahead.

Mike Shlisky (Managing Director and Senior Research Analyst)

Hello, good morning, and thanks for taking my question. I guess I just wanted to ask quickly, Daniel, about your last comment there about potentially securing some more capital for, you know, for production as things ramp up. I guess I'd be curious, you're weighing debt or weighing 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 kinda keep the operation going just before you start the heavier production?

Yaron Zaltsman (CFO)

Hi, good morning. It's Yaron here. I think for us it's a little bit too early to make a decision about what to do first, right? Basically speaking, we know we have access both to equity and probably also to of 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, we can make a decision, but for now it's too early for us to make that direct call, what we are going to do, if it's equity or if it's sell debt.

Mike Shlisky (Managing Director and Senior Research Analyst)

Okay. Okay. 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, you know, road-ready vehicle for anyone to purchase and drive? Is there anything major left to do, or is it gonna be a sales and ramp up from that point on?

Daniel Barel (Co-Founder and CEO)

Josh, do you wanna take this one?

Josh Tech (COO)

Yeah, sure. I'll take that. No problem. Yeah, what we plan on doing is this year, I mean, the winter test was a was a milestone for base calibration, but we will continue to this year we're still on track for completing certification activities. We will be building our homologation vehicles ready for Q3, and that will allow us to complete all those EU-related activities to be homologated and certified for by the end of the year. We do not see any roadblocks there at the moment.

Mike Shlisky (Managing Director and Senior Research Analyst)

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

Josh 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 (Managing Director and Senior Research Analyst)

Okay. Got it. One last one from 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 if Austin's just waiting to have that large order to start building the U.S. at this point?

Josh Tech (COO)

Yeah. What we do, we. I mean, 2024 production is expected to be, as we said, in the low hundreds, and we're gonna initially do that from Coventry, and that's intentional of course. During 2024 we'll plan to build out the U.S. production capacity across the board.

Mike Shlisky (Managing Director and Senior Research Analyst)

Okay. I'll leave it there. Thanks so much for the color. I appreciate it.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Colin Langan from Wells Fargo. Please go ahead.

Colin Langan (Automotive and Mobility Analyst)

Oh, great. Thanks for taking my question. 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-$100 million in capital?

Yaron Zaltsman (CFO)

Hi, it's Yaron here again. Actually nothing changed, right? Basically, if you look at our projection for the end of the year, in the coming three quarters, we are going to spend roughly $20 million per quarter. Part of it is because we still need to invest in the NRE. The question is. We are also going to have like 25 first vehicles. The question is how to work in the coming two years afterwards because we are going to ramp up.

For us, in order to ramp up, it's always a working capital issue because there's always a time gap between the time we are paying to the time that we are getting the money from the customers. For that, it's the plan to raise money. If there was no working capital issue, probably the answer would that we don't need to raise $80-$100. Based on our current plan for the next two years, I think we need to be here a little bit to take another step and to make sure that we have enough capital not to have any working capital issue in the coming two years.

Colin Langan (Automotive and Mobility Analyst)

Got it. Just, maybe it's an obvious question, but does this affect your accounting opinion? Because you're saying you need to raise capital. I think liquidity is one of those things that they sometimes flag. Does it affect your audit opinion that you need to raise capital? Or is this, since it's so far out, it's not going to be an issue? Just so we could know what to expect.

Yaron Zaltsman (CFO)

The question is why we are mentioning 80 to 100. Can you repeat the question again?

Colin Langan (Automotive and Mobility Analyst)

Does it affect your accounting, you know, the auditor's opinion of your financials?

Yaron Zaltsman (CFO)

So, so-

Colin Langan (Automotive and Mobility Analyst)

There's like a going concern, I believe, is sometimes what they refer to it as if you need to raise capital. It sounds like maybe this is next year, that would be an issue.

Yaron Zaltsman (CFO)

Yeah. For now, you see, we didn't have any going concern paragraph in our report. Again, we need to explore it on a quarterly basis, right? For now, we don't have any going concern issue.

Colin Langan (Automotive and Mobility Analyst)

Got it. That's what I was getting at. Okay. 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 gonna drive new orders? How should we think about the cadence of the orders from here? Thanks.

Tali Miller (Chief Business Officer)

Hi, this is Tali speaking. Good morning. With respect to how do we see our order book growing, I can say that we believe that the existing customers' potential is very significant. We constantly growing carefully and with a selected customer base and prioritizing those with significant market share, especially those that are committed to electrification. We expect to continue to build our authorized dealer network from the growing pipeline of dealers.

Colin Langan (Automotive and Mobility Analyst)

Okay. All right. Thanks for taking my questions.

Tali Miller (Chief Business Officer)

Yeah. 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, they indicative sales of magnitude of 50,000 vehicles per year and generating over $1 billion annually.

Colin Langan (Automotive and Mobility Analyst)

Okay. All right. Thank you.

Operator (participant)

Thank you. We'll now take our next question. Please stand by. This is from the line of Jeff Osborne from TD Cowen. Please go ahead.

Jeff Osborne (Managing Director and Senior Research Analyst)

Yeah, good morning. A couple of questions on my end. I was curious on the phase one and two. Is all of the phase one in 2024 expected to be produced for final assembly in Coventry? Can you give us an update on how Austin is progressing?

Josh Tech (COO)

Yeah. Hey, this is Josh again. I'll take that one. At the moment, we're again, we're going to focus on those deliveries from the U.K. I mean, we have the infrastructure and everything set up there. As we build out our U.S. structure over 2024, we'll make a logical decision when we make that breakpoint. Either way, let's be honest, either way, we're gonna ensure that we get the vehicles at the right time to the customers as needed.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. Josh, as you get into the thousands, would phase two 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.

Josh Tech (COO)

I mean, yeah. Keep in mind, our approach is always the CapEx light approach. It's part of how we are differentiating ourselves from other, let's say, other manufacturers, right? Our approach is always to build the vehicle besides the corner, obviously, with partners.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. What is the remaining, you mentioned the $20 million of burn? Should the R&D be at the similar levels to Q1 for the rest of the year? Can you just touch on what the remaining CapEx is for your CapEx light approach that you have?

Yaron Zaltsman (CFO)

This year, the $20 million per quarter roughly, it of course, included heavy R&D, but lower than R&D that we have already until now. Next year, of course, we still have an R&D because we wanna, you know, explore other opportunities. The major R&D investment already have been taking place in our reports.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. It 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. I was just curious, does your relationship or contract with them, you know, involve domestic manufacturing that might be at risk? Do you have a backup plan if so?

Daniel Barel (Co-Founder and CEO)

Yeah. Ed. Hey, Jeff, it's Daniel. I think that we still, you know, it just happened yesterday. There's a lot of discussions to be made. Currently, we don't see any risks to the supply chain at this point or to the deliveries.

Jeff Osborne (Managing Director and Senior Research Analyst)

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 (Co-Founder and CEO)

Yeah. I think you should differentiate between the short term of the few, of the low hundreds in 2024, which are test fleets as to the ramp-up of the low to mid thousands of 2025, which is the follow-up deployment. For the test fleets, there are more flexibility in terms of sourcing and design, naturally.

Remember, we keep the voice of the customer very close to us. You can expect that once we deliver test fleet to customers, they would wanna test it. There 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. Naturally, also we would take into account the voice of the customer. As I said to your question, it's too early to tell.

Jeff Osborne (Managing Director and Senior Research Analyst)

Understand. That's all I had. Thank you.

Daniel Barel (Co-Founder and CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can press star one and one again. Once again, that's star one one if you would like to ask a question. There are no further questions coming through at this time, so I'll hand back to the speakers.

Kamal Hamid (VP 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 (participant)

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