REE Automotive - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the REE Automotive fourth quarter 2023 full year financial results. 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 this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. 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 (VP of Investor Relations)

Thank you, operator, and thank you all for joining our fourth 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 will talk about on today's call. 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, such as the ongoing military conflict in Israel.

Please refer to the company's Form 20-F filed today, March 27th, 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 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. I will now hand the call over to Daniel Barel, our CEO and co-founder.

Daniel Barel (CEO)

Thanks, Kamal, and thank you all for joining us today. 2023 was a pivotal year for REE. We achieved key milestones in line with our original timeline and de-risked our go-forward path, all while keeping true to our vision to expedite and solidify the electrification of commercial trucks through a white-label approach. I'm happy to report that much of the heavy lifting is behind us on the path to commercialization. With a clean-sheet design and unbound by legacy thinking, our full-by-wire technology is mature. I'm proud to say that we have created the world's first FMVSS-certified full-by-wire electric vehicle, allowing us to advance the state-of-the-art in the medium-duty commercial vehicle space by orders of magnitude compared to other EVs and ICE offerings. We continue to push the boundaries of our product testing vehicle dynamics and operations, having successfully conducted our second consecutive year of winter testing under extreme weather conditions.

We have also made significant progress on the business side. With the strong demand we see, our order book value grew by more than 900% year-over-year and now exceeds $50 million. Our dealer network continues to expand to 66 points of sales and service in the U.S. and Canada. With CARB certification and the U.S. EPA, our P7-C customers are eligible for federal and state incentives of over $100,000 per vehicle. Our first vehicle was driven off the line and has been upfitted with Knapheide body and delivered to one of our largest commercial vehicle dealers in the country. With the first customer deliveries to our demo fleet completed and more on the way, we plan to advance towards scale production later this year while remaining focused on our business plan and the P7 lineup.

Alongside our significant progress, we remain financially disciplined with a 25% year-over-year decrease in cash burn with tooling investment for the REEcorners deployed. We ended the year with $86 million in cash, cash equivalents, and short-term investment, including a $15 million credit bank facility. Confident in REE's bright future, our largest institutional shareholder, M&G, has led to successful capital raises for a total of $24 million alongside existing and new investors. I thank them for their ongoing support and trust. With those behind us, we continue our effort to secure in advance the necessary working capital need for our first phase of production of low hundreds of trucks. As we remain disciplined and with current market conditions, we decided to temporarily postpone the remaining production tooling investment until we raise the additional required working capital for our production plan.

We target completing the remaining tooling investment by mid-year in order to scale up production in the U.S. as we build against committed orders and not for inventory. This strategy ensures we do not exceed our available capital by aligning orders flow with production plans for greater capital efficiency. 2023 was a pivotal year for REE because of what we have achieved and because we have accomplished it together, despite many of us facing significant geopolitical instability. For that, I am so very proud of each of our great people at Team REE. With that, we'll open up the call for questions. Operator?

Operator (participant)

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

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Yes. Hello. Good morning. Good afternoon. Thanks for taking my question. I want to ask first about the tooling investments. I guess first, when you do get them, will they be the exact same tools you had before? And I just want to make sure that the folks who are selling you these tools, I guess there must be some kind of suppliers there. Are you having any contractual changes to what you have to pay them or the payment schedule if you change the dates, even puts in the back of any kind of line of other people who need tools, etc.? I just want to make sure that when you are ready for it, you'll get them at the exact time that you need them still, even though you have to push back that date.

Daniel Barel (CEO)

Yeah, sure. Of course, first and foremost, good morning. This is Daniel. Josh, why don't you start, and I'll continue from there?

Josh Tech (COO)

Okay. Yeah. So hi, Michael. Hey, good to talk to you again. So yeah, so to answer your question, we're still targeting to have our tooling in place by the fourth quarter. So what we're doing, we're progressing with our previously shared two-phase manufacturing approach. And it's related to tooling investment. It's we're in the final stages to nominate the CM in the U.S. Okay? So the tooling for the corners has already been deployed there. And then what we're doing, we're targeting to complete the remaining investment, approximately $10 million by mid-year. And this is in sync with our capital raising plan. So this will still allow us to scale production in the U.S. with our contract manufacturer by the end of 2024.

Daniel Barel (CEO)

Does this answer your question, Michael?

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Well, yes. So I just want to make sure there's confidence that you'll get the tools when you need them, even though you've changed the date. Have your suppliers indicated that they are ready when you are, or are you?

Daniel Barel (CEO)

Yeah.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. So that hasn't changed, sounds like.

Daniel Barel (CEO)

Yeah. We work naturally together with them, so no surprises.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. Perfect. Then I also wanted to touch on some of the results of some recent trade shows. We had the big Work Truck Show. There's a couple other more regional trade shows that have taken place the last few months. I'd be curious, of the large fleet that are out there, maybe it's 6 or 12 of them that could take a P7 platform. Just give us a sense as to how that went. Did you come out of these shows with any major new orders? I know you have a higher backlog necessarily from dealers and certain fleets, but did you get anybody new on the roster we should be thinking about here, even if you can't name names? Just curious, do you have new levels you could add to a slide if and when you're allowed to reveal who these customers are?

Daniel Barel (CEO)

Yeah. Those shows have been very successful for us. And we've seen very strong demand there and had a very, very busy booth and a lot of positive meetings. Regarding the fleet that you mentioned, we have seen strong interest from leading fleets as well. And I think it's important to recognize the fact that the demo program is designed exactly to do that, to give those fleets the ability to try out our vehicle, the P7 Lineup, and to allow them the confidence to nominate us as an approved supplier to them. So I think, in short, the answer is to your question, yes, we have come up with new opportunities for that show, very interesting discussion with many of the fleets and other dealers. And maybe I'll let Tali, our Chief Business Officer, continue.

Tali Miller (Chief Business Officer)

Yes. Hi. Good morning. First of all, yes, very strong demand and high interest. We also shared the growth in committed orders for the end of this year or quarter. This translated into orders. But in addition to this, through the demo program, we have initiated the delivery of vehicles in low volumes. We are going to see additional fleets that showed already interest in trying those demo units following the events they saw. We expect this to convert into scale orders from those fleets. Specifically, we are going to demonstrate the vehicles to multiple leading fleets to include, for example, Franz Bakery, Canteen, the City of San Jose, and others.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. I'll leave it there, guys. All the best. Thank you so much.

Daniel Barel (CEO)

Thank you.

Operator (participant)

Thank you. We will take our next question. Your next question comes from the line of Jeff Osborne from TD Cowen. Please go ahead. Your line is open.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

Yeah. Thank you. Daniel, I was just curious on the $50 million order book. That's great to see. How much of that is exposed to California? Can you give us a perspective there? Is that more than half?

Daniel Barel (CEO)

Hey, good morning. That's a great question. I'm not sure I have the answer top of mind here. Let me look into the numbers. But the majority of our orders is not linked to California, to that aspect. We see demand across the U.S. But to your question, linking it to our recent CARB, California Air Resources Board certification, I think that gives us a very strong tailwind in California in general, but also in the other states that support California or adopt the CARB certification, mainly around incentives, right? CARB recently that we announced unlocks more than $100,000 in incentives per truck for our customers. So our customers basically see now with CARB more than 70% of the cost of the truck covered through both federal and state incentives. And I think this is great. We work very hard to come so.

And I think California is, of course, leading it. And as we said earlier in earlier calls, having California dealers and CARB is important for us. Tali, do we have numbers on how many?

Tali Miller (Chief Business Officer)

Specifically from California, it's approximately a third.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

Got it. Thank you, Tali. And then, how should we think about you mentioned adding capacity in Texas as capital permits. How should we think about sort of the cadence of production? Is it a bit more maybe front-end loaded in the spring 1Q, 2Q, and then 3Q is a bit of a transitional quarter as you move from Coventry to Texas, and then you would hit the ground running, so to speak, exiting 4Q and into 2025? I know you're not giving official guidance on how many units you expect to produce and sell, but just trying to understand the sort of slope of production through the year.

Daniel Barel (CEO)

No, no. That's a great question. Josh?

Josh Tech (COO)

Yeah. Put some color on it. So maybe for this year, it's a little like you said, it's a little too early for us to answer the question of how many we'll deliver. But as we said in the shareholder letter, the tooling and the investment for the REEcorners already been deployed, which we said we will continue to build those in the U.K. We don't want to overinvest. We don't need to. So we have plenty of capacity there. And then we, again, will bring the remaining tooling online for the rest of the vehicles and scale up the production up to low hundreds of the vehicles in the U.S. by the end of 2024. But again, the plan's linked to us completing the working capital needs, right? We're not going to spend too soon. So we want to make sure everything's timed perfectly together, so.

Daniel Barel (CEO)

So basically, Jeff, we will continue delivering strategically quantities to our dealers, to the dealer to the demo program from the UK as full vehicles as we've been started to do earlier this year, right? We already delivered a few trucks to customers this year, one of which people got to see in NTEA, Indianapolis, and now these are on the way. And the reason we're using that approach, sorry, and then, of course, once tooling comes online and the contract manufacturer is up and running, we'll move to the U.S. for full assembly production and continue the production of the corners from the U.K. But the reason we're doing this and the reason for the demo program through the dealers is that our dealers provide us with a flywheel effect, right?

These dealers have a large geographic footprint and long-standing and trusted relations with multiple fleets in their service area. Some of those relationships are decades old, right? Each vehicle we deliver will be demonstrated to multiple fleets. Now, we believe, speaking to our dealers and to those fleets and others, that this will result in follow-on scale orders. So the idea is that we want to start this process early, or we have started this process early, not waiting for the serial production to come online later in the year. We will be producing a strategic amount of vehicles out of the UK until that comes online.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

Makes sense. If I could squeeze in two quick ones here. Should we think about the quarterly expense rate, so not the CapEx, but the operating expenses? Should that stay about the same as the current level throughout 2024? And then, Daniel, if you could just make any brief comments on the readiness of your financing and charging partners that you've laid out to meet the demand exiting 2024 and into 2025.

Daniel Barel (CEO)

Yeah. Maybe we'll start with the first financial bit. Yaron? Yeah, you can take it.

Yaron Zaltsman (CFO)

Yeah. Hi. Good morning. So I think going forward for year 2024, we should keep seeing actually decrease in our cost. What we are planning to do in year 2024 is to continue on the path that we started in year 2023, where it's including decreasing in our operational cost. In year 2023, we decreased our cost by roughly 25% compared to year 2022. And going forward, this process should continue also. And I think we'll also have another decrease of roughly 25% in our burn rate in year 2024.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

That's a burn with the CapEx and the OpEx combined, correct?

Yaron Zaltsman (CFO)

Yeah. That is correct. That is correct. So I think roughly we are speaking about $5 million-$6 million per month on average. It will not be split on the same rate over the quarters, because in H1, probably we'll spend more as we need to complete the tooling and the NRE expenses. And then going to the second half of the year, it will go down dramatically.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

Got it. Any brief thoughts on the charging and financing partners you have, Daniel?

Daniel Barel (CEO)

Yes. So on the charging front, we're working with several charging partners, one of which is, of course, Hitachi, that have very interesting and very compelling offering of large-scale, commercial-grade charging infrastructure. I think recently, they've announced something around that with Penske, which is interesting to look at. We work with others because some are asking for other solutions, more local solutions. Also on the upfit, it's super important, right? I mean, we showed how we work with Knapheide. And of course, you'll see other upfitters that we work with. Knapheide were very happy, of course, with the process, mentioning that they were able to complete the marriage of the chassis and the body within less than three days, which is a record for them because of the ease of design for REE. One thing maybe important to know here, Jeff, is we build to order.

We don't build for inventory. Therefore, we make sure that when we start building for a customer, we make sure that they have the upfit ready, the infrastructure, the chargers ready, everything ready to receive the vehicle. And I think this is key for us because we're not building for inventory. And therefore, we don't get stuck with inventory or with postponed pickups. We deliver only to order. And we make sure that for all of our partners, they have everything they need in advance of us delivering the truck. So the truck arrives and directly goes into service. And we will continue to be very prudent on that approach.

Jeff Osborne (Managing Director and Senior Equity Research Analyst)

Perfect. Thanks so much.

Daniel Barel (CEO)

Pleasure.

Operator (participant)

Thank you. Once again, if you wish to ask a question, please press star 1 and 1 on your telephone. We will take our next question. Your next question comes from the line of Craig Irwin from Roth MKM. Please go ahead. Your line is open.

Craig Irwin (Managing Director and Senior Equity Research Analyst)

Good afternoon or good morning, I guess, for those of us in New York. Can you please talk about the order book? I should say congratulations on the continued strength there, building that out. What is the approximate sort of headcount, the number of individual dealers and fleets that have placed orders with you? And if you could maybe talk about how this could potentially be delivered, do we have a couple units upfront from one of the fleets, followed by follow-on orders? And how much of that, I guess, would be sort of first unit versus follow-on, I guess, is the question?

Daniel Barel (CEO)

Yeah. Hey, Jeff. Good morning. Good early morning over there. So for your first question, we currently see strong demand for our by-wire and for our technology, for the by-wire. And our current dealer network now covers 66 points of sales and service, I think one of the largest for EVs in the country. And we do this through 20 dealers, both in the U.S. and Canada. And that gives us a very broad footprint across the whole U.S. and parts of Canada. And I think what we see in the commercial market in terms of demand is interesting because it's different than passenger demand and how you deploy passenger vehicles in that segment. Maybe, Tali, you can add more color on that.

Tali Miller (Chief Business Officer)

Yeah, sure. Good morning. Thank you for this question. It's a strong question. So first, to add on Daniel's point, the importance of having these 66 service points allows fleets to receive service across U.S. and Canada, which is what fleets are looking for. And this is very important for us to achieve. Second, we see with respect to the demand, unlike I think what we see in the slowdown of the demand on the passenger EV, we do see a continuous and actually growing demand in the mid-duty Class 3 to 5 EV space. This is the space we currently serve. We believe this demand is driven by several reasons, for several reasons. Of course, the mandates and very strong incentives, both federal and state. They are very strong. The zero-emission goals are very important for fleets.

And of course, the TCO advantages of electric vehicles versus ICE vehicles. And moreover, I would say that from a charging infrastructure perspective, which might be a complex one on the passenger vehicles, the space we are at, the medium-duty, and also the feedback of the fleets we work with, actually, the driving cycle is short. So basically, the driver would start in the morning, end in the day, and at the end of the day, and charge at the depot. So from the charging infrastructure, it's easier for them to be served.

Daniel Barel (CEO)

And to your last point, yes, I think your approach to how to roll out the fleet is correct. We are starting to ramp up later on the year. Then we will start providing a few trucks to every fleet and then ramping it up through 2025 when we ramp up towards the low to mid-thousands of vehicles in production. I think it's very, very important to deploy a few, to run the demo program, receive the voice of the customer, which we are very attuned to, and listen to any changes or modifications they still want, although we've been developing those vehicles together with them for a long time. So this is why you see the high level of satisfaction there. But we always remain attuned to the voice of the customer.

We would like to expose as many fleets as possible to our vehicles in the coming months, providing them with vehicles and then ramping them up towards 2025.

Craig Irwin (Managing Director and Senior Equity Research Analyst)

Understood. Thank you. So Daniel, we had an opportunity recently to meet with the customer that took your first commercial delivery of a commercial vehicle here in the U.S. They're obviously very big supporters. Actually, we got to tour the vehicle with them too. So it seemed to generate quite a lot of excitement. Can you maybe share with us what you're learning from these early deliveries? What are customers saying? Is this maybe shifting your understanding of what the priorities are for investment and purchase decisions on the part of customers out there? What are you learning from these early deliveries?

Daniel Barel (CEO)

Yeah. It's a great point because, as you mentioned, we had the chance to talk to a customer, to a very large customer. And I think it's key to hear it from them. And I think what we're learning from the first deployment is, first and foremost, that we get an overwhelmingly positive feedback for the design, for the spaciousness, and the ergonomic advantage of our cabin, of the low floor, the very center-driver-centric cabin that we offer, and the performance of the truck. That's one. Second, a lot of the fleets like our ability to work with multiple upfitters and to offer multiple applications for different use cases due to our modularity approach and low flat floor.

Another point that they all mention is the data we have to back the offering, for example, the extensive winter tests that we are just concluding for the second year in a row. So for example, we don't have to guess what is the range in extreme conditions, like -30 degrees, and what is the performance, which is good, just saying. And I think all of that, the ability to provide data behind our trucks and to showcase the offering, and that leads to our customers being able to calculate their future-going TCO expectations. And it makes the transition towards electrification easier for them. Last but not least, of course, chargers are very important. And as previously asked, we're working closely with charging partners to ensure that they have the adequate infrastructure to support the trucks.

Craig Irwin (Managing Director and Senior Equity Research Analyst)

Excellent. Then last question, if I may, is actually a pretty basic question. FMVSS, the Federal Motor Vehicle Safety Standards certifications, is this a gating factor that is necessary for commercial deliveries? How long did it take you to achieve FMVSS with your certification partner? If someone was to start today, is it logical for them to take a similar amount of time with a different technology or a competing technology? If you could help investors understand a little bit better the significance of FMVSS and how this is such a big accomplishment.

Daniel Barel (CEO)

Yeah, of course. I mean, it is a huge accomplishment, first and foremost, because we were the first, we still are the only one in the world to be able to certify and put on the road a fully by-wire vehicle. There are some vehicles out there that are partially by-wire, mainly steer-by-wire, like the Tesla Cybertruck, right? And we see more and more OEMs trying to adopt more and more by-wire technology slowly because it's a very heavy lifting to do by-wire, especially when you do a full by-wire. Therefore, redundancies and control and stability and maturity of the software is critical. So definitely, we see more and more players out there, like Tesla, like Lexus, and others that offer partially by-wire system only around steering. But we are the only one that has been able to do a full by-wire vehicle.

It took us years, years of testing and validating the technology. It's not just the hardware, mainly, as I'm sure people understand. It's mainly around software and running algorithms and AI and others to ensure that we have all the abilities and the machine learning needed to run in real-time our by-wire capabilities with all the redundancies. As you fairly mentioned, once we decided to take it to the market, it is, a you can't put a vehicle in the U.S. without FMVSS cert, and EPA, by the way. But the FMVSS cert is a critical one. We decided to go and pursue this with a third party that helped us to ensure the validation process correctly and run those tests in a manner that is as perfect as possible, right?

Because being the first one, we believe that it is critical to ensure a very high level of performance. Should anybody else try to do it? I mean, I'm not sure the phrase should them. I mean, everybody should. And I think they are all trying. But I think currently, with FMVSS, we opened a gap in size of magnitude with everybody else in the industry being able to do that. And keep in mind that as more of our trucks are on the road, the more data we collect from our by-wire technology. But we've been working on by-wire for 10 years now. So one should assume there is far more coming in the future.

Craig Irwin (Managing Director and Senior Equity Research Analyst)

Excellent. I'll take the rest of my questions offline. Congratulations on the progress.

Daniel Barel (CEO)

Thank you so much.

Operator (participant)

There seems to be no further questions. I would like to hand back to Daniel Barel for closing remarks.

Daniel Barel (CEO)

I want to thank everybody for taking the time and joining us today. I want to thank our investors for their strong, great support. I want to say thank you again for everybody on Team REE for a phenomenal year overcoming so many challenges and driving strong results. Thank you, everybody, and stay safe.

Operator (participant)

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