REE Automotive Ltd. (NASDAQ:REE) Q3 2022 Earnings Call Transcript

REE Automotive Ltd. (NASDAQ:REE) Q3 2022 Earnings Call Transcript November 16, 2022

REE Automotive Ltd. beats earnings expectations. Reported EPS is $-0.09, expectations were $-0.1.

Operator: Greetings, and welcome to the REE Automotive Third Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Kamal Hamid, Vice President of Investor Relations. Thank you. You may begin.

Kamal Hamid: Thank you, operator, and thank you all for joining our third quarter 2022 conference call. We hope that you have seen our press release and investor presentation issued earlier this morning at investors.ree.auto. We will be referring to the presentation during the webcast 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 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, 2022, 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 adjusted EBITDA, non-GAAP net loss and non-GAAP EPS. Please see our earnings release for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures. Joining me today is our Co-Founder and CEO, Daniel Barel, who will provide a commercial update; Josh Tech, our Chief Operating Officer, will update you with on operations; and our Chief Financial Officer, David Goldberg, who will conclude the company’s prepared remarks with a discussion on our financial results and outlook and additional margin guidance. At this point, I will turn the call over to Daniel.

Daniel Barel: Thank you, Kamal. Good morning and welcome to our third quarter 2022 earnings call. I will begin the call with an update on the progress we’re making towards commercialization of our multiple P7 programs as we focus on converting our pipeline into backlog. We are operating in a challenging, unpredictable and very dynamic macroeconomic environment that requires us to double down on our focus and discipline, as we continue to execute our business plan both operationally and financially. We have grown our headcount and have been sticking to our game plan and we believe that we will continue to achieve multiple milestones on time and on budget. We believe we have a winning strategy, designing native modular EV platforms that allows us to address multiple use cases.

Not only we have not deviated from this strategy, our CapEx-light model and the favorable unit economics of the segments we are targeting mean that our P7 platform and its class 3 and 5 variants are fully funded through commercial production, with the global market of medium-duty commercial vehicles of approximately 1.4 million vehicles annually and approximately 600,000 vehicles annually in the U.S. and Europe. The classes we are initially targeting with our P7 programs represent immense opportunities for REE. As is customary in the commercial vehicle segment, REE is offering Powered by REE vehicles directly to potential fleet customers. In distinct product offering ranging from a car chassis EV based on our P7-B box truck or a stripped chassis be completed to a full vehicle via partnership with body upfitters such as Proxima Powered by REE.

We believe pursuing this distinct go-to-market path will significantly accelerate the adaptation of EVs by commercial fleet owners and operators. The company’s approach is a strong competitive differentiator, allowing it to address a larger market and bring superior commercial EV solutions with a CapEx-light manufacturing approach. During our last earnings call, I made it clear that we would only be announcing firm customer orders. And I’m pleased to be in the position to share with you that we have received our first contractually binding order. Importantly, we have received orders for each of our vehicle. Unique to REE, we have been able to leverage the technology platform, the P7 to develop two vehicle variants with distinct use cases in a fraction of the time and cost that developing unique vehicles has taken historically.

These initial orders are validating in two distinct, but related ways. First, the vehicles themselves are performing to our expectations and are being received very positively by both new and prospective customers. This is of course essential. Just as importantly, customers have the confidence in our ability to deliver on-time and with competitive pricing. Purchasing decisions have not been made simply on the back of test drives. There is significant due diligence that goes into these decisions. To put a finer point on it, customers need to have confidence that we cannot just deliver an initial batch of vehicles, but can deliver them at scale. These are decisions that often require the highest level of approval by a customer. I will briefly share our progress on current P7 programs, Proxima Powered by REE and the P7-B.

As I just mentioned, we recently received our first orders for Proxima Powered by REE class 5 walk-in step van and P7-B class 3 box trucks. These orders follow successful demonstration event held in the past few months in the U.S. and Europe, and extensive due diligence by our customers. REE has commenced building its production intent P7 chassis. And together with EAVX, we intend to deliver Proxima Powered by REE test fleet as a fully homologated vehicle for use on public roads in the U.S. We will also be providing test vehicles to some of the world’s largest rental fleet and commercial truck retailers in North America. We believe that these orders will be the first in a series that we expect to announce in the coming months, as discussions continue with multiple delivery, logistics and e-commerce prospective customers.

The importance of test fleet orders. I mentioned during our last call, some of our prospective customers have very large fleets that will not be electrified all at once, and without significant testing. We believe these initial orders will mark the beginning of multiple long-term relationships, and that REE will receive larger orders after customers collect validating data and positive driver feedback. Delivering these initial fleets to customers is a crucial milestone on the task to scale adoption of Power by REE vehicle. Commercial owners and operators are highly sensitive to vehicle uptime, durability and efficiency. Introducing new vehicles into fleet has to make sense from a business perspective. And the only way to reach scale adoption of a new vehicle is by introducing test fleet.

And have these test fleets operate as well or better than current options. To be very clear, we’re not talking about prototypes. These are road-worthy vehicles that customers will be putting to the test in their duty cycles. Our customers will be devoting significant time and resources to understand how our technology fits into their fleet and overall operations. And we will be working alongside them to ensure we are meeting their requirements. I look forward to sharing more updates with you as we head towards commercialization. With that, I would like to pass on the call to Josh, who will describe how we are getting there from an operational and engineering perspective. Josh?

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Josh Tech: Thank you, Daniel. And good morning, everyone. As Daniel mentioned, we are moving quickly to have expected capacity established by the end of this year. After finalizing the build out of our first engineering and integration center in the third quarter 2022, I’m pleased to report that all major equipment is in place. Also our core engineering competencies have been built out with all functions in place at the required capacity from both a products and process standpoint. As a reminder, we’re deploying robotic assembly cells, end-of-line electrical tests and auto-boxing stations in these assembly cells. An assembly cell is an alternative strategy used in manufacturing that can provide much greater flexibility and scalability than a traditional production line.

These cells will make up our REEcorner production line in our facilities where autonomous guided vehicles will move the work and processed products between stations for both automated and manual assembly, while autonomous mobile robots will bring sub-assemblies to the line. There are several advantages to this approach. First, it provides the ability to validate all assembly cells quickly by testing and optimizing one cell and then implementing best practices across all the others, which reduces the time to design and develop these assembly lines. Second, the modular production line is also highly automated and flexible, meaning that we can scale up or scale down on a future variant’s end demand. Finally, assembly sales and production lines can be efficiently lifted and installed at future integration centers as required as we apply one global standard using the plug and play format.

We are working with top supplier partners on the assembly line and line-side controls. This allows us to use cloud-based solutions, giving us complete visibility into all production operations and enabling us to scale manufacturing locally and across global integration centers. These integration centers will be linked to our central control, where we can achieve an overarching view from a build perspective along with full traceability of our REE solutions. Unlike many other companies, to optimize the size and requirements of our facility, we are deploying our production line to integrate preassembled subsystems provided to us by our third party partners, such as American Axle and Brembo. It’s a CapEx-light approach that significantly de-risks execution and allows for a far greater degree of flexibility.

As we shared before, REE is establishing itself as a manufacturer of record for vehicles making us responsible for the homologation and certification of the electric platform. Homologation and certification activities are progressing on track at the vehicle level. Additionally, core control system software and functional safety development key elements for the development of mission-specific variations enabled by REEcorner are progressing according to plan. In the meantime, our engineering test fleet in the UK continues to accumulate testing and validation miles in anticipation of the start of design intent production in the fourth quarter. In addition to actively running our test fleet through complete vehicle test levels, REE is currently building winter test vehicles for validation in early 2023, which will take place in Sweden.

Our winter test vehicles are production intent and will be the first vehicles produced on REE’s modular production line comprised of 13 automated manufacturing cells. We’re excited to be able to begin to validate our assembly line as we remain on track to commence scale production in the second half of 2023. In order to ensure a highly efficient assembly line that meets quality, safety and financial expectations, we plan to methodically ramp production as we evaluate and optimize processes with the end goal of operating a highly efficient and safe integration center at capacity. I would like to thank the REE teams across the world for their hard work and dedication towards making this a more sustainable carbon-neutral world as we rapidly move towards a fully-electric vehicle future.

With that, I will hand the call over to David Goldberg, REE’s CFO to discuss our financial results. David?

David Goldberg: Thank you, Josh, and good morning. Before reviewing the company’s financial results for the third quarter and reiterating our expectations for 2022, I’d like to briefly provide you with expected initial unit economics and give you a sense of the production volume required to reach breakeven gross margin, as this is a question that has come up in recent investor and analyst discussions. With our input costs largely known, production plans ready and positive pricing discussions for our initial vehicle orders, we are able to share guidance for unit economics for when we achieve scale production. With competitive prices for the Proxima Powered by REE and P7-B box truck, we believe that we can achieve a breakeven contribution margin with production in the low thousands of vehicles at our Coventry Integration Center.

Remember, this facility has a designed annual capacity of 10,000 vehicles. It is our intent to provide the market with 2023 volume guidance early next year. Now turning to our results for the quarter. The company reported a GAAP net loss of $33.5 million in the third quarter of 2022 compared to a net loss of $25.2 million in the second quarter of 2022. The increase is mainly related to lower income from warrants re-measurement along with higher operating expenses. Non-GAAP net loss of $27.3 million in the third quarter of 2022 increased compared to $21.3 million in the second quarter of 2022, primarily due to the timing of expense recognition related to development and production capacity costs. During the third quarter of 2022, the company completed its previously announced exchange offer related to its public and private placement warrants to purchase Class A ordinary shares of the company and issued 3.1 million Class A ordinary shares in exchange for all the outstanding public and private pricing warrants.

The warrant exchange both simplified the company’s capital structure and reduced potential dilutive impact of the warrants. Finally, REE filed a Form S-3 shelf registration and allocated a portion of the shelf to an aftermarket equity program that allows the company to raise up to a total of $75 million at the company’s discretion. REE did not issue any shares under the ATM program in the third of 2022. We intend to use the ATM program opportunistic and do not currently plan to issue shares under the program. The ATM program provides us with additional financial flexibilities based on our own business milestones. As of September 30, we had approximately $185 million of liquidity comprised of cash and short-term investments, and no debt. We continue to have sufficient funding to take the P7 program through to commercial production.

We remain on-track to meet our guidance for cash spending in 2022 at a range of $130 million to $150 million inclusive of both capital and operating expenses. Investments of approximately $30 million in 2022 are included in this range. These investments are mainly related to establishing our UK integration center. This portion of the budget is effectively committed and is largely being incurred in the second half of the year. I note that some of the expenses related to the establishment of initial production capacity may not be capitalized and will be recorded as operating expenses. Our OpEx plan is mostly comprised of technical and engineering spend required to execute our P7 programs according to the timelines we have communicated. It is important to remember that our costs will mirror the execution of our product milestones.

For example, MOUs or/and other pipeline opportunities convert to firm commitments or existing programs expanding in scope, our spending may accelerate. The company may require additional liquidity to deliver those opportunities. Today, we remain focused on executing our clearly defined business plan. While we believe a significant opportunity exists for REE beyond the markets we are targeting today, the vast majority of our budget has been allocated towards executing the commercialization of the P7 platform in the U.S. and Europe. Before I conclude and we open up the call for Q&A, I’d like to remind you that we have a CapEx-light business model. As Josh described earlier, this is a very different framework than a company that builds large factories with multi-thousand full vehicle production lines.

Our liquidity needs are therefore very different than many of our peers. Additionally, we have grown our headcount responsibly and are committed to retaining our lean profile without compromising on the quality of the product we deliver to our customers. With that, we would like to open up the call to questions. Operator?

Q&A Session

Operator: We will now take the first question. It comes from the line of Mike Shlisky from D.A. Davidson & Company.

Mike Shlisky: Just a couple of finer points and some of the order commentary that you made, Daniel. Can you tell us approximately what number of B boxes have been ordered? And what number of customers for each of the model?

Daniel Barel: Hey, good morning. Of course. So, we’ve received orders for both vehicles, right? For both the Proxima Powered by REE, and the P7-B. These are orders from several customers that are the largest fleets in the world with significant volumes. And these orders are the largest EV orders they’ve ever placed. Now, I don’t think it’s the initial order size that matters but it’s the long-term opportunity here of putting vehicles Powered by REE in their fleet, which gives us the ability to be the validated supplier for EVs for them, and ramping it up over the years. That I think what is extremely important with the magnitude and scale of those customers.

Mike Shlisky: I also saw that EAVX announced an additional Proxima vehicle over the last couple of days. This one a class 2 model I believe with a different platform manufacturer. Were you looking at that model? And were you hoping to be a part of that? Or do you plan to let that company fight it out with the Fords and GMs in the class 2 space?

Daniel Barel: The P7 platform is aimed or is designed for class 3s to 5. So it’s not built for class 2s. And of course, I mean EAVX and JB Poindexter Group is a great company, largest, top hand builder in North America. And of course the relationship is exclusive between us and them, both sides. I would imagine that we would be looking at class 2s later down the road, but currently we’re totally laser focused on P7, which is class 3 to 5.

Mike Shlisky: And then maybe one last one for me. I’ve started to see other EV companies who plan to use a third-party platform in their vehicles use a REE chassis in their artwork that’s around their vehicles that they plan to offer in the coming years. Can you just help maybe how many other companies you’re talking with outside of EAVX eventually in the future to add? I would imagine it’s still the P7 or a similar platform. Just some number or commentary about other companies that you’re also chatting with beyond EAVX at the current time?

Daniel Barel: Yes, so it would be right to assume that we’re speaking to quite a few companies on the market and we are looking to collaborate with them as we want to be able to offer Powered by REE vehicles, right? The whole complete, not compete strategy is built exactly for that, where we would want to have a REE chassis under any brand out there. And of course there are a few OEMs and top hand manufacturers that are looking — actively looking and exploring Powered by REE chassis in order to move faster on their path towards electrification. So naturally we will update you guys when the time is right on those. But I can say that there is active discussions on the matter.

Operator: Thank you. We will now take the next question. It comes from the line of Jeff Osborne from Cowen and Company. Please go ahead. Your line is open.

Jeff Osborne: Okay, great. Thank you. A couple of questions on my end if you don’t mind, Daniel. I was curious on the orders. Are you taking deposits and where would those show up on the balance sheet?

Daniel Barel: So first of all, good morning, Jeff. We’re not taking deposits. We’re taking payments on deliveries of our orders. And I would assume they would be recognized accordingly –according to the financial requirements upon deliveries.