REE Automotive Ltd. (REE) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the REE Automotive Third Quarter 2022 Earnings Conference Call. [Operator Instructions] 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.

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.

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 [judiciously] 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?

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?

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?

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

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?

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.

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?

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.

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?

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.

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.

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?

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.

Got it. And then I didn't know if you could update us on the homologation timing as you move into the second half of production. What are the milestones that we should be watching over the next six to seven months?

That's a good point. So we are on track on homologation, of course, in order to put vehicles on the road in the second half of 2023. Homologation is undergoing for both the P7-B and the chassis for the Proxima Powered by REE, the P7 chassis. I think that the next major milestone you should look for is our winter tests in beginning of the year. And then the certification that will happen towards the second quarter of next year. We should be fully homologated by the third quarter of next year according to plan.

Got it. And then two other quick ones. I know you don't want to give the number of vehicles that you've sold at this point or the number of fleets. Could you give us a sense of scope of the number of fleets that are actually engaged in testing? Is this 10, 20, single –digits? Any perspective would be helpful?

Of course. It's not that I don't want to give those numbers, I just want to make sure that we're concentrating on the important points in my view. And we've been having double digits in the 20s of companies that have evaluated and tested our products both in the U.S. and in Europe. And what we're doing is we're significantly prioritizing our deliveries and significantly prioritizing the order book. I think it's extremely important to emphasize what are those orders. The orders that we are receiving and accepting are orders for production. It's not orders to be put on the shelf or as a headline. It's literally everything we take and move into production. So each of those orders that we just received is going down to the production line to be produced and delivered. This is why it's really, really, really important for us to prioritize our capacity, especially the initial capacity for the leading customers in the world, because I think the most important thing is to deliver on time and on quality, of course, given them the lowest TCO. And in order to do that, you have to be very disciplined in the manner of accepting those orders and then delivering those orders. And this is why I believe that, we want to concentrate on the deliveries and less on the numbers itself. I hope that answers your question.

That's helpful. And the last one I had is just, you didn't really give an update on Austin, but as we think about 2023, should we assume a similar CapEx profile of about $30 million that Coventry cost to you for next year? And then hopefully a bit of a decline in the OpEx and development costs for '23 relative of this year that you guided?

Yes. I think the best way to look at it is, in January when we will give you guys guidance on all of those. When we look at Austin, you should look at it as naturally the second integration center. And I think it's very important for our scalability and unit economics to first spend on stabilizing integration center, delivering from there for those initial orders, making sure that the line operates well with the quality control needed in order to deploy high quality vehicles. And then we'll kick-off Austin, and when we see the relevant demand for it and the level of maturity of the maturity of the UK line.

Thank you. We will now take the next question. It comes from the line of Tyler DiMatteo from BTIG. Please go ahead. Your line is open.

Hi, everyone. Good morning. Thanks for taking the question. Daniel, I wanted to follow up on the comment you just made about prioritizing deep the order book. Can you add some more color to how you are thinking about doing that in terms of like, are there certain contracts that require delivery before? Are those -- or just any other color on how you think about prioritizing the different customer bases? I would appreciate it. Thank you.

Sure. And I think this is a very important question. We are interested in putting our vehicles on the road. And putting an EV on the road is a bit complicated because as you think about it, you need to make sure that you have the infrastructure in place that the customer has a fleet to be able to serve [Technical difficulty] or prioritizing orders that nobody is going to be serious enough to take. Prioritizing only the most serious orders they want that we know the customer we are going to be putting on the road. The moment they get it, we work directly with them, of course of the infrastructure and everything needed in order to do that. And I think the second peak of it is, as we ramp up our production, each vehicle that we produce counts, because we ramp up. Like everybody else, of course, then we want to make sure that they are our largest and most and the biggest customer that we have. Taking -- and last but not least, keep in mind that it's a very big commitment on the side of the customers to deploy test phase. Sometimes it's a very -- the highest levels of decisions taking place. And the reason for that is that it requires a lot of resources, not only financials from the customer when they're adopting a new vehicle and a new fleet. And this is, all those three reasons are behind the fact that we -- I just mentioned that we're prioritizing the orders and the acceptance of them, and with that goal to deliver on time and on quality.

So then my second one here, can you kind of give us an update surrounding where you're seeing the interest from customers, it may be at a regional level in the U.S.? And then also the type of customer. Without getting in any specific numbers or details, just curious given the demand from the commercial side, in general is very strong, just because if you had to kind of weigh and kind of proportion now what would that look like in terms of say logistics or, I get a sense that fleet is obviously probably one of the most important, if not the most? So just any other color on that would be appreciated. Thank you.

So we're working with the largest fleets and dealers in the world and in North America. Therefore, they have a global span, and they're operating all across the U.S. I think it would be right to assume that the first deployment will be in the more easy, friendly states within the U.S., because of the incentive plans and because of their ability to deploy faster the infrastructures, New York, California, Texas and others. And on the second part of your question, I mean, we have a global supply chain, both in the U.S. and in Europe, and we can manufacture -- again preliminary in the beginning in from the UK once we stabilize it and then moving into Austin that can serve the whole of the U.S. So there is not going to be a centralized supply chain, but actually a global display one that allows us to keep our margins according to what we want them to be.

We will now take the next question. It comes from the line of Colin Langan from Wells Fargo.

Just to circle back. I mean, can you provide any broad color on the size of these test fleet orders, are we talking dozens of vehicles, are we talking hundreds of vehicle? It's just -- I don't really have any context there? And you also mentioned, I think over 20 customers have tested, I mean, any color though, in terms of how many have actually taken the test orders? Is that three or is that, or all 20 taken orders? Any sort of guideposts there we could sort of get?

Yes, sure. Good morning. I mean, on the order side, I think we want to be able to control the narrative on those announcements, with whom are exactly that and what is the size. I can say that it is a significant number, for both for us and even more importantly for those customers, that have been, that are ordering. So I think, we will be sharing far more news on that together with our customers and partners in the coming weeks.

So what is significant? Is that hundreds then, is that hundreds of orders?

I mean, that would be a fair assessment. And again, we will….

And what is the timeline between sort of these orders testing and actually getting firm orders? Is that going to be months? What are you expecting in terms of getting those to convert?

Convert to -- I'm sorry, to scale orders you mean?

They were test orders -- yes to scale orders to real orders.

I think you need to look at it in a way that some are for test fleets, [technical difficulty] there are no test fleets and the conversion is based on the customers, right? Because some customers would want to test the vehicle for a few weeks and some would want to test it for more than that. And it depends on the customer themselves. So it's a case by case and I think the moment they are satisfied and happy with the product we are nominated as an approved supplier and then orders start to flow. It's honestly a straightforward process.

Okay. So it's not a -- so it could be weeks, it could be much longer. Okay. And then when you're ordering, is the price the same when you order a test fleet or is it sort of more deliverative cost so they could test it out or should we think about those as being maybe as profitable as your normal vehicles on at least a variable contribution basis?

Yes. Naturally it's a little bit difficult to talk about pricing. Here we do want to be able to keep our negotiation chips with us. I would say that when you look at test fleets, there is an extra cost to the -- and not – that does not include only the vehicle, but the team of product engineers that we deploy together with those test fleets to ensure the successful testing and validation of the product.

I guess I'm saying from a customer's perspective, do I get a discount when I buy a test or am I just kind of getting a sense of their commitment here financially?

No, I'm saying is it's actually as a program a little be more expensive because you are not only paying for the vehicle itself, you're paying for a supporting team.

And they are paying for those supporting team?

Yes, of course.

There are no further questions on this phone at this time. I would like to hand back over to the speakers for final remarks.

Yes. So thank you everybody for joining our call. I want to take this opportunity and thank everybody, of course at team REE for extremely hard work during this quarter, going above and beyond in everything they did in order to make this happen. And of course, I want to be very thankful and appreciative to our customers that have given us their confidence and support in placing orders with us. And with that, I want to thank you all. And have a good day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.