REE Automotive Ltd. (NASDAQ:REE) Q4 2022 Earnings Call Transcript

REE Automotive Ltd. (NASDAQ:REE) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Greetings and welcome to the REE Automotive Fourth 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 fourth quarter 2022 conference call. We hope that you have seen our press release and shareholder letter issued earlier this morning at investors.ree.auto. I would like to remind you that today’s call may contain 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 maybe 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 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. Joining me today is our Co-Founder and CEO, Daniel Barel; Tali Miller, our Chief Business Officer; Josh Tech, our Chief Operating Officer; and Yaron Zaltsman, our Incoming CFO, who will join the Q&A session. At this point, I would like to turn the call over to Daniel.

Daniel Barel: Hi, everybody. Thank you for joining us today. We are excited about the opportunities ahead of us. As we look to 2023 and beyond, we have further important milestones to achieve, including the completion of certification activities, the deliveries of initial vehicles and the successful completion of the test fleet phase, which we expect will lead to receipt of additional orders. We continue to see a growing demand for our P7 product line from fleet dealers and OEMs as we are selectively growing our customer base. We are prioritizing customers with significant market share in the U.S. and that are pioneering the transition to electric vehicles. Since November 2022, we quadrupled our customer base from 2 to 8 in different industries, such as vehicle rental and leasing, shipping and logistics and dealers.

In addition to their initial orders, we believe those customers have the potential to order significant volumes of vehicles. We are working closely with those customers who require a testing phase in order to optimize this important process and advance to fleet orders. Let me share some highlights with you. We achieved key development milestones in 2022, with total GAAP operating expenses of $127 million and non-GAAP operating expenses of $101 million on-time and in line with budget. In addition, we delivered two different prototypes to a leading OEM for testing and validation. One of those vehicles is our P7-B, which is undergoing testing and customer evaluation and the other is related to a long-term project. These efforts are being supported by our talented and dedicated tech team, led by Ahishay Sardes, our Co-Founder and CTO.

As you have seen, we are expanding our go-to-market strategy. We now have direct sales to fleet and have begun building out a dealer network. We already have 5 authorized dealers in the U.S. who are accepting orders. I would like to thank Tali, our Chief Business Officer and her team for their tireless efforts to build our order book and expand our go-to-market channel. With that, I would like to hand over the call to Tali. Tali?

Tali Miller: Thank you, Daniel. Interest in our EV solutions continues to be robust that fits both large and small, seek to lower their carbon footprint, and increase efficiency. We continue to conduct additional customer evaluations with prospective fleets, delivery, logistics and e-commerce companies as well as dealers in North America and other major markets around the world. Subsequent to the end of the fourth quarter of 2022, we started establishing a dealership network across the U.S. We have initially entered into an agreement with 5 authorized dealers: Pritchard EV, Tom’s Truck Center, Industrial Power & Truck Equipment, New England Truck Solutions and FMI Truck Sales & Services. Each of these dealers have placed initial orders which are included in our current order book.

We will offer training to authorized dealers to certify technicians to provide service on REE vehicles facilitating the adoption by fleet. Existing orders include both the Class 3/4 P7-B and Class 5 Proxima powered by REE. Orders for the P7-B are for chassis configurations, while orders for Proxima Powered by REE are for strip chassis and a full vehicle via our partnership with body app feature, JB Poindexter & Co. Both the P7-B and Proxima Powered by REE leverage our P7 platform, which features full x-by-wire architecture supporting all-wheel steer and drive adaptive regenerative braking and torque vectoring as standard as well as over-the-air updates. Our vehicles set a new standard in commercial EVs offering the greatest interior space on a given footprint, optimize driver ergonomics and ease of maneuverability.

Photo by Julian Hochgesang on Unsplash

As we seek to further expand our dealer network in the U.S., we can now offer financing solutions to our dealers through an agreement with Mitsubishi Hitachi Capital America, to provide financing solutions to dealers in the REE network. The agreement is designed to streamline the process of obtaining the financing required for the purchase of REE vehicles. We expect to continue to deliver test fleets in 2024 as well as to start converting these test fleets into scale orders in 2024 onwards, subject to successful testing and certification. By bolstering direct sales activities to large fleet owners while also growing our network of dealers, REE now covers the channels through which medium-duty commercial vehicles are acquired. With that, let me turn the call over to Josh.

Josh?

Josh Tech: Having reached a production-intent level, much of the intensive R&D and engineering spending is now complete, in part contributing to the significant decrease in planned cash spending from 2022 to 2023. We are now in the production and certification execution phase and are focused on passing the required testing of our x-by-wire technology. Additionally, we are accumulating durability and validation miles according to plan to support this certification, which is expected to be completed in the second half of 2023. Reaching the production intent phase is an important step in our product maturity. As we continue our validation and verification protocols, we have ordered components for 25 P7 vehicles and submitted production forecasts with our suppliers for our main components through 2024.

During the fourth quarter of 2022, we commenced the build of the first batch of P7 production intent vehicles, which were completed subsequent to the quarter. As previously reported, we finalized the build-out of our integration center in the third quarter of 2022. All major equipment is in place and we have established a production capacity for 10,000 vehicle sets annually. During the fourth quarter of 2022, we validated the assembly process and drive cycle our modular production line comprised of 13 highly automated manufacturing cells. Also, our supply chain is now built out, including the recent announcement of Microvast as our battery supplier. We expect to begin deliveries to customers in the fourth quarter of 2023. We are targeting COGS breakeven in the low hundreds of vehicles.

We are also targeting adjusted EBITDA breakeven in the low thousands of equals. In order to achieve that, we are working with our suppliers to optimize production tooling and bill of materials to further reduce the production cost required. We currently believe reaching these margin targets will require tooling investments which we will be able to invest as our business cycle and customer feedback evolves. With that, let me hand the call back to Daniel who will take you through the financial and commercial outlook. Daniel?

Daniel Barel: Thanks, Josh. We ended 2022 with liquidity of $154 million and anticipated non-GAAP operating expenses of $70 million to $75 million in 2023 as we execute on a disciplined approach and CapEx-light model. We achieved key development milestone in 2022 on time and in line with budget with total non-GAAP operating expenses of $101 million, total GAAP operating expenses of $127 million. GAAP net loss was $27.3 million in the fourth quarter of 2022 compared to $33.5 million in the third quarter of 2022 and $46.7 million in the fourth quarter of 2021. The decrease in GAAP net loss compared to the third quarter of 2022 is mainly driven by lower operating expenses, including transaction costs. The year-over-year decrease in GAAP net loss is mainly attributed to lower income from remeasurement of warrant and lower share-based compensation expense.

Non-GAAP net loss was $21.5 million in the fourth quarter of 2022 compared to $27.3 million in the third quarter of 2022 and $26 million in the fourth quarter of 2021. The decrease in non-GAAP net loss versus the third quarter of 2022 is mainly attributed to the decreased operating expenses, including transaction costs. The year-over-year decrease in non-GAAP net loss is primarily related to the decrease of operating expense as the company shifts from ramping up its capabilities and market penetration for its commercial production into certification and testing. As of December 31, 2022, the company had $153.6 million of liquidity, comprised of cash, cash equivalents and short-term investments and no debt. The company anticipates it has sufficient liquidity to achieve initial production of its P7 platform and continue to advance other commercial activities set forth above.

The P7 program is fully funded into commercialization. Our CapEx-light model is designed to support COGS breakeven in the low hundreds of vehicles and adjusted EBITDA breakeven in the low thousands of vehicles. We carefully watch market conditions and explore options of raising debt or equity capital in the right form and time based on the progress in our business cycle and needs. Before we open the call up for questions, I’d like to thank David Goldberg for his contribution in helping building out our finance team, and to Hans Thomas for his dedication, support and belief in our mission. I want to extend a very warm welcome to our Yaron Zaltsman, who we are all excited to work with and to our two new Board members, who will bring vast industry experience to REE.

Operator, please open up the call for questions.

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Q&A Session

Operator: Thank you. We will now take the first question. It comes from the line of Mike Shlisky from D.A. Davidson. Please go ahead. Your line is open.

Mike Shlisky: Yes. Hi, good morning, and thanks for taking my question. Or good afternoon, if you are in Tel Aviv. I guess I wanted to ask about the orders that were in the release and in your comments today. You mentioned 35 vehicles were ordered. Is that irrespective of €“ I guess two things. One, is it just the dealers that have ordered those vehicles? Or are there other customers that awarded them? And secondly, does that reflect the orders that your dealers are taking for the vehicles from the end user, or just what they’re asking for you for either demo or inventory reasons? I guess I expect a dealer ought to be ordering in the hundreds, if not thousands of vehicles, based on what other EVs have been getting from their initial dealer orders business. Just to €“ kind of clarity on what’s going on, what are some of the ins and outs of the order book, whether it’s yours or from the dealers directly. Thank you.

Daniel Barel: Hi, thank you. Good morning. I’ll start by answering your first questions about the orders. So right, as we said, we €“ since November 2022, we grew our order book from 3 to 35 firm per orders. Those orders are coming from eight customers. And that’s compared to two that we had in November. Now these overall numbers represent a substantial growth, right? There’s a much bigger and more important message here, where each of those carefully chosen fleet, logistics and dealers customers has potential to are very large numbers of units for many years. So assuming we receive certification and our platform perform to spec, which we believe it will, then it isn’t a leap to see that how these customers can contribute to very robust order book in the near future. And that’s, of course, as we expect to sign even more customers.

Mike Shlisky: Well, I guess I wanted to clarify, the 35 orders you have so far reflect what you expect to ship for the year? Maybe that question. Or are there more that might come better on €“ over the coming months that will also be shipped in 2023?

Daniel Barel: Can you repeat the question? I’m not sure I understood it.

Mike Shlisky: Yes. I just I’m curious whether the orders you’ve received, that you mentioned, the 35, are reflective of your volume expectations for the full year. Or might more orders come in over the next few months that will also ship this year?

Daniel Barel: Yes. So €“ no, that’s a good question. What we’re doing now is we’re very, very carefully selecting our customer base. We’re doing this on the basis of their market potential and of course their readiness to electrify, if they are fleets, the readiness to accept electric vehicles and if they are dealers, their ability and readiness to sell this to their customers. Because we’re ramping up on production, it’s very important for us to prioritize how many orders and to which we’re delivering first batches. So we would most likely be interested in prioritizing significantly the first batches to certain customers that we believe have the highest potential of growing the business significantly. And we will be ramping up the capacity as we move forward.