REE Automotive Holding Inc
NASDAQ:REE
Earnings Call Analysis
Q3-2023 Analysis
REE Automotive Holding Inc
The company is experiencing robust demand for its 'Powered by REE' vehicles, with interest expressed by dealers and fleet managers across the U.S. and Canada. The innovative x-by-wire technology offers operational efficiency and safety benefits that are resonating with potential customers.
Government grants have provided a tailwind for the company this year and are expected to continue into the next year. While the exact amounts have not been disclosed, the financial impact is considered to be consistent with current levels. Furthermore, the company reported a strong liquidity position with $100 million in cash, excluding an additional $8 million raised post-quarter.
The company plans to reach low-thousands in vehicle production by 2025, with a corresponding target to achieve breakeven EBITDA by the final quarter of the same year. Certifications necessary for shipping are also slated to be claimed within 2023, setting up the company for a ramp-up in production by year's end.
To support CapEx investment in tooling, the company has earmarked $20 million, which fits within their current financial resources. The aim is to order bonds for production needs and be fully prepared without risk when mass production starts, thus translating to raising funds based on prevailing market conditions but not delaying beyond mid-year.
A strategic partnership with an aerospace company signifies an entrance into a multiyear program, notably in the autonomous sector. This expansion into autonomy reflects the firm's advanced by-wire commercial technology and is indicative of growing interest and successful testing in this domain.
There are aggressive sales targets set by the company, aiming for $1 billion in cumulative sales from 2024 to 2026, with a goal of reaching breakeven gross margins by the end of 2024. These ambitions underscore the company's commitment to scaling efficiently and achieving profitability in a gradual and strategic manner.
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Good day, and thank you for standing by. Welcome to the REE Automotive Q3 2023 Financial Results. [Operator Instructions] 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.
Thank you, operator, and thank you all for joining our Third Quarter 2023 Conference Call. I hope that you have now 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 the call 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 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 on March 28, 2023 with the Securities and Exchange Commission, which identifies principal risks and uncertainties that could affect our business, prospects and future results. We assume no obligation to publicly update any forward-looking statements, except as required by law.
In addition, we will be discussing or providing certain non-GAAP financial measures today, including non-GAAP net loss and non-GAAP operating expenses. Please see our shareholder letter for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.
I will now hand the call over to Daniel Barel, our CEO and Co-Founder.
Thank you, Kamal. Hello, everybody, and thank you for joining us today. I'm pleased to share that we have had a strong third quarter. We continue to see strong market demand for the P7, which was converted into the expansion of our authorized dealer network and North American footprint, which now stands at 20 partners and more than doubling our initial order book value to $43 million in the last 3 months.
As evidenced by our achievements this quarter, we continue to receive strong positive market feedback on our unique P7 vehicle, with the robust feature set, value proposition and low total cost of ownership. The first batch of customer demo trucks are in advanced stages of build, and we are on track to finalizing our FMVSS and CARB Certification, which follows our recent EPA approval and x-by-wire certification feasibility. We expect to ship the first demo units to our customers by Christmas.
Support is a critical part in commercial trucks. Therefore, we have built a strong customer experience team who will work together with and support our customers as they put our vehicles to the test in their fleet. As we grow our order book, we continue to strengthen our balance sheet with additional selective financing. These efforts are part of our risk-adverse plan to secure in advance the working capital funding required to produce the expected binding orders of our growing order book.
I'm particularly encouraged by the continued confidence and support from our shareholders, which have resulted in a capital raise of $8 million, with favorable terms, led by a long-standing institutional investor in a very challenging environment as we shared a couple of days ago.
Operationally, we continue to demonstrate strong financial discipline by remaining on track while decreasing our year-on-year GAAP net loss by 28%, partly because of the efficiencies we implemented around R&D and SG&A as well as government grants received.
We believe we are scaling up responsibly, building vehicles to order and not for inventory. As we work to bring our production tooling online, we currently plan to have this operational by the end of 2024, which we believe will enable us to reach bill of materials breakeven on the first scale production batch.
In line with our philosophy of complete not compete, we are in advanced stages of nominating a U.S. contract manufacturer to assemble our P7 lineup in the U.S., to help us facilitate economical mass production. We believe we will be able to scale production up to a rate of 4 to 6 trucks a day by the end of 2024, with a max capacity of up to 5,000 trucks per year. We look forward to providing you with an update on this soon.
Before we open for questions today, I wanted to end with this. In the past 3 years, we've seen a pandemic, challenging market conditions, and now war. But today more than ever, we are strong, focused and committed to deliver no matter what. It is so inspiring to see our teams around the world working together as one to continue delivering, especially with the recent war in Israel, which affects us all in different ways but is not expected to have a material impact on our operations.
Our teams in the U.K. and the U.S. are supporting our people in Israel, and we are thankful for the hundreds, if not thousands, of messages of support we have received from our partners, customers, suppliers, shareholders and even people we have never met or done business with before. Your support is everything. As ever, I thank you all for your continued good wishes.
We recently held a very productive Q&A session with our retail investors. So we have invited our retail investors to share their questions for this quarter. Today, in addition to analyst questions, we will also answer several of the retail investors' questions. Therefore, I would like to open the call for questions, where we will be joined by our Chief Financial Officer, Yaron Zaltsman; our Chief Business Officer, Tali Miller; and our Chief Operating Officer, Josh Tech.
Operator, you can now open the line for questions.
[Operator Instructions] We will now take the first question. It's coming from the line of Mike Shlisky from D.A. Davidson & Co.
I'm glad everyone is safe over there in Israel, at least. And then -- so I want to ask quickly about some of the comments you made about having a third-party contractor doing the production, to start. Can you just clarify, are they just going to be doing the corners and then you'll be building the actual vehicle itself within a REE facility? Or are they going to be doing the whole thing? Can you kind of just give us an overview of how it's going to work at this point?
Thank you for the kind wishes. Yes, on the contract manufacturer. I think it's very simple. The core technology for REE is our by-wire technology, right, the REEcorners. That remains within REE and will always remain within REE. The contract manufacturer will be assembling a full truck, whether it's going to be a cab chassis, a strip chassis or a full truck, Powered by REE, and that will be in the U.S. So the full assembly will be done in the U.S. The corners will be shipped from the U.K. from our already set integration center.
I see. So it's all the way around. They'll be receiving fully assembled, ready-to-go corners from you, and they'll be the ones.
Correct.
I get it. Perfect. And then I wanted to clarify some of your comments that you mentioned. How you're going to be building to order and not building to inventory. I guess when you say inventory, do you mean you won't be building final products that'll be on REE's books? And there will be inventory at the dealership level? Or will nobody have inventory? We won't have inventory in normal dealers unless they're specifically ordered from the customer.
Yes. So when we say we're building to order, it means that we're building only for binding orders that we're receiving. So our customers can have -- of course, they would need to have some sort of inventory, especially our dealer for our growing dealer network in the U.S. They'll have an inventory of trucks. But REE itself is not going to be building inventories sitting up in parking lots waiting for it to be taken. We're building only for the orders that we are accepting from our customers. Did that answer your question just...
Perfectly, yes, yes. And maybe one last one for me. Have you got any change in tone from any of your California customers in the last quarter or so? I mean at this point, they're a month away from being forced to adopt EVs. Are they asking you about like January 1 delivery dates, if possible? Or I don't know if you could deliver at that time. But are they asking in a more urgent manner for their vehicles?
Yes. We see very, very strong demand across the U.S., but of course, also in California. And we've also seen yesterday, a change more relevant to smaller fleets in California, on the level of payment that they can receive reimbursement. But maybe, Tali, you want to add something more on that.
Yes, sure. Thanks, Mike, for this question. It's a good opportunity to share with you that we definitely see very strong demand for the Powered by REE vehicles. We see our customers, so the dealers as well as the fleets, are asking for -- are anxious to receive our demo vehicles because they see the advantages of the technology, the Powered by REE, x-by-wire technology with the different advantages of the operational efficiency, safety and others. We see this demand in California, but not only, so across U.S. and Canada.
We will now take the next question from the line of Colin Langan from Wells Fargo.
Just want to follow up. In the press release, you talked about a grant that helped Q3 results. Any size of how much that helped? And then is that sustainable? Are we going to -- is that going to continue? Or is that just a onetime thing?
Colin, it's Yaron here. So the grants are following with us this year, and they will be with us also next year. We cannot give too much information about the amount, but it's not a meaningful amount. But it will stay in the same phase as we have right now also in the next quarters going forward.
Sorry, it would be in the next quarters going forward?
So also for next year, we still expect to get the grant from the government.
Sorry. Is it continuing every quarter? Or is it just you get once a year, you'll get this grant?
No, no. It's part of the plan that we are getting for this year and also for next year. The payment is depending on the timing. But in general, it's [ an agreed plan ] that's also following us for next year.
Okay. Got it. And then the press release also mentioned that you need $20 million of funding to execute your 2024 plan. When do you need to get that funding by? Is that by midyear next year? Is that by January 1 that you need to get that $20 million? And what are your current options to get that needed funding?
So it's our decision when to take it, right? It's based on the way that we prefer to work. We want to be in the safe side all the time. We reported right now that we have a liquidity of $100 million, and that is before the additional $8 million that we raised after the end of the quarter. So it's not that we need money tomorrow morning or we have any issue of liquidity at all. But general speaking, we want to be always on the safe side when we are planning the next year ahead. And when we want to make sure that we offer all the capital and all the money we need upfront before we are starting the mass production in the U.S.
Will you be able to hit your target of getting capacity ramp by the end of next year without the $20 million or without...
No. No, no. In order to ramp up to the amount of size that we want to, we will need to raise over the next year the additional funding of $20 million.
Okay. And then just in general, maybe you could just remind us how should we think about the multiyear outlook of sort of volume growth you're expecting? So you talk about breakeven, but that's in the low hundreds, so hundreds, and then -- and we kind of progress to the low thousands over the next few years?
So I think we need to divide it to the breakeven on the gross margin and then positive EBITDA in general. So in order to have a breakeven on the gross margin or on the bond level, we need the low hundreds of vehicles. This is the way that we have planned based on our CapEx slide model. In order to be in a positive EBITDA, which means, in general, a positive cash flow as a company, we'll need to gain low thousands of vehicles in order to be on that phase.
And when you're thinking low thousands, it will be a couple of years out or?
So I think our plan as we said to the market, that we plan to be in the low thousand vehicles, somewhere in the year 2025, which means we are aiming to be in a breakeven EBITDA in the last quarter of year 2025.
We will now take the next question from the line of Jeff Osborne from TD Cowen.
I was wondering if you could just be more specific on the FMVSS and CARB timing. Is that something you would expect in the next month or 2? And then I'm just trying to understand, once that's achieved, how quickly we should anticipate a final nomination of a contract manufacturer to be named? And then once that is named, how quickly they could ramp up?
Yes, of course. And these are actually 2 great questions because they also came quite high with our retail question that we received. So good opportunity to answer that as well.
So to your first question on cert. I'll start and probably Josh can step in. But we will be -- we're planning to deliver the first pilot vehicles, demo vehicles to customers, or ship them actually this year. That means we intend to claim cert this year as in 2023, before we ship, right? Because you can't ship them without. So that's how quickly we're talking about. And we're in the very last stages of doing that.
And that's on the heels of the previously announced x-by-wire set feasibility, FMVSS feasibility that was a very big milestone that we had in, I think last quarter. So that's on your first question. On the second one. I think we want to be nominating the CM early next year because we want to start ramping up as we said, towards the end of the year when the production tooling comes online. But Josh, do you want to shed some more color on that maybe?
Yes. We're in the -- so on the CM again, we're in the final stages of negotiations with very capable partners to assemble the P7 in the U.S. Again, keep in mind, we're on a CapEx-light strategy, both internally and with the CM. So to get to 4 to 6 trucks a day, it's very light investment. There's still be heavily manual assembly with the technical tooling for traceability, quality and things like that. So we believe that, as long as we're nominating by Q1, we can easily get up to that plan at a CM. And we'll be announcing that ASAP and to everybody.
That's helpful, Josh. And then the $20 million of expenditures needed. Is any of that for the CM? Or is that once the CM's named, that tooling is put in place that I assume any CapEx was on their dime in exchange for commitment? I'm just trying to understand sort of the timing of when that $20 million is needed, similar to Colin's question.
It's Yaron here again. So the funding of $20 million is mainly for the CapEx investment in the tooling. And in general, we have enough resources to start to make all investment without trading the funding, right? We have $100 million as we just reported. The general issue for us is to raise the additional funding not because we don't have money for the tooling, just because we want to pay also the bond cost upfront and to be always on the safe side and not to get any risk at all, when we are starting the mass production. So in general, we would like to do it as fast as we can, but it's always depending on the situation in the market. And it's not that we have any issue that we need to do tomorrow morning. We'll do it over time based on the market condition.
Got it. My last question is just as Carlton on the Board and Tali and the team are out speaking to fleets. What readiness do they have on charging? You're hearing stories of 12, 18-month delays and putting in charging infrastructure. So it's great that you have all the dealers. But as the dealers look to sell directly to fleets or you're approaching fleets direct as well, are they already going through the process of putting in charging requests with their local utilities given the interconnection delays? Or is that a potential roadblock that might stem growth in the second half of the year?
Yes, great question. And the answer is yes. As I said, we're building to order, which means that all of our very much expected trucks are being awaited for, right? And we make sure that the -- both the dealers and their customers are fully prepared to receive them. It makes no sense for anybody, for any truck, to be sit idle without the ability to charge. So we are in very close relationship and contact with our dealers and their customers through the dealers, and the fleet customers through the dealers, in order to understand what is their level of readiness. Some have capabilities in-house. Some use our capabilities to connect them to our partners in charging, which is also said publicly a while ago, and we're helping them get the right charges in place. But we're definitely prioritizing predominantly the -- those who are ready to receive EVs.
We will now take the next question from the line of Andres Sheppard from Cantor Fitzgerald.
Daniel, congrats on the quarter and again, I echo everyone's best wishes. Just maybe quickly, you mentioned in here, you have -- you were chosen for a multiyear program with an aerospace company. Just wondering if you might be able to give us a few more details there as to what it entails and how you see that one ramping up.
Of course. So we can't provide any more details than what we should, and I am looking forward to sharing more soon. I can say that we have seen -- I can say it's an autonomous program, and we've seen an uptake in autonomous program that we're looking into recently. I think that being the -- I would say, to our best knowledge, the most mature by-wire commercial player out there gives us the ability to support autonomy very well through our by-wire system.
And through those -- a few tests that we've run recently with several parties, I think the feedback is that -- they like what they see. The testing is successful. The implementation of by-wire and AD is successful. The integration is rather straightforward, which is important. And I think that speaks volumes by itself, and we'll share definitely more when we can. We're very excited by that.
Got it. That's very helpful. And maybe as a second question, I wanted to come back to the road map, the 2 phases road map that you provided last quarter. I just wanted to confirm, you are still targeting about $1 billion in cumulative sales between '24 and '26. And is the goal there, I think in the past, you had mentioned targeting breakeven gross margins by the end of 2024. So I just wanted to see if any changes there or if that's still the case.
It's Yaron here again. So currently, we are not changing the target. We don't see any reason to change any information we give until now for the market, and we are working based on the plan. Just as a reminder, when we are talking about $1 billion revenues, we are talking about thousands of vehicles. This is what it needed in order to reach that amount of sales. And when we are talking about breakeven, it's on the low hundreds of vehicles, and we plan to start the mass production in the U.S. by the end of year 2024. When we started already on the first batch, we should have a breakeven in gross margin. And as we are increasing the production going to year 2025 onwards, we'll go also to be in a -- we are aiming to be in also a positive EBITDA in the last quarter of the year 2025.
Yes. Maybe I'll add to that -- thanks, Yaron. Maybe I'll add to that, just 2 things, 2 points. We see very strong demand. And I think being able to demonstrate that we more than doubled our order book value in just 3 months speaks for itself. But the fact that it is very strong demand actually make it -- we believe it makes it even more important to scale up responsibly and do it in a very deliberate manner. So the idea is that we want to go and start a demo program and make sure that we've reached and touched the right points with the voice of the customers and the customers have the ability to try it and like it, right? And we feel confident that they will from the relationship that we have.
And then we're going to ramp up towards the second half of next year and the last quarter where our production tool comes online. And again, that's deliberate, as we said earlier, because this is -- that we expect would allow us to reach material breakeven, which is important because it means that we are not losing money on the production of each vehicle from the beginning. And if we're doing low hundreds in a quarter, that naturally means we can do low thousands with more or less the same production rate over a year, right, in 2025. And that would allow us, we believe at this point in time, that by end of 2025 to get to, like Yaron said, EBITDA breakeven and generating cash flow.
Got it. That's very helpful, guys. And maybe one last one for me. I know we touched on this before, but the $20 million in external funding, any sense of whether that will be something to do in the first half versus the second half of next year? And how are you thinking about it in terms of equity or debt opportunities?
It's Yaron here again. So it's our decision what kind of funding to make. And I think we are in a situation that we can elaborate and choose whatever we think is the best for our existing shareholders. So when to raise that funding, in what kind of source, we will explore -- we will look on it probably in the next few months. And then we'll make a decision based on the terms of the market.
The intention for us is to do it -- not to delay it to the second half of next year because as we said, in order for us to ramp up by the end of next year, we need to have everything in place and also all the bonds that we need to be ordered as well. And therefore, the aim is to do it the latest by half of this year.
Got it. Congrats again. I'll pass it on. Thank you.
Thank you. I would now like to turn the conference back to Daniel Barel for closing remarks.
Thank you, operator. So first of all, thank you, everybody, for taking the time, and thank you for the great questions. I'd like to thank, I think, start by thanking our retail shareholders for their questions they submitted over, say, technology platform over the past week. And I believe we addressed most of them during this Q&A session. Thank you, guys, for the continued support.
I want to end today's call with a final word of thanks, really heartened thanks to our teams around the world, continue to deliver even in the most challenging situation. I'm very proud of you guys, all team REE, for doing that, and excited to bring the hard work and dedication to fruition in the coming days. So looking forward to sharing updates with everybody soon, and thank you again for joining. Goodbye.
This concludes today's conference call. Thank you for participating. You may now disconnect.