Workhorse Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, greetings and welcome to the Workhorse Group's First Quarter 2023 Investor Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workforce Group's Vice President of Corporate Development and Communications, end March, sir, you may begin.

Speaker 1

Thank you, Daryl. Good morning, and welcome to all of you joining us on today's Q1 2023 results call. Before we begin, I'd like to note that we posted our results for the Q1 ending March 31, 2023, via press release. You can also find this release as well as an accompanying presentation in the Investor Relations section of our website. We've also filed our Q1 Form 10 Q this morning.

Speaker 1

We will be tracking to the posted presentation during today's call, Also, please follow along either from the link in the press release or through the website directly. And with that, let's get started. Joining me on today's call are Rick Dowk, our CEO Bob Ganan, our CFO. The agenda for today's call can be found on Slide 3. Following my brief opening remarks, I'll hand the call over to Rick, We'll then give you an update of the progress we've made on our strategic and operational priorities during the quarter.

Speaker 1

Bob will then walk us through our financial results for the quarter and cover Our 2023 guidance will then take your questions. Our disclaimer can be found on slide 4. Some of the comments that will be made today are Forward looking and therefore are subject to certain provisions as well as risks and uncertainties. You can find the full disclaimer statement in our Form 10 Q and other periodic filings on file with the SEC as well as in today's press release. With that, I'll now turn the call over to Rick Dowk.

Speaker 1

Rick?

Speaker 2

Thanks, Stan. Good morning, everyone. Thank you all for taking the time to join us today. Before I jump into the details of our Q1 performance, I want to spend a moment or two discussing the primary market segment that Workhorse The North American Class 4 to 6 Commercial Electric Vehicle Business, True Work Trucks. These are challenging times for nearly every company competing in this segment, both startups and well established OEMs.

Speaker 2

The generational technology transition from ICE to EV Powered Commercial Vehicles is a true paradigm shift and it's not an easy one. The ICE to EV transition will occur over decades and will require significant investment in electric charging infrastructure, power generation, Vehicle and component engineering and R and D, supplier tooling, factory conversion or new factory construction. Not all of those trying to establish themselves in the commercial EV space will make it. There will be casualties along the way and likely a consolidation of competitors in the segment at both the OEM and supplier levels. Make no mistake, Workhorse is one of the pioneers in the commercial EV industry, specifically in the step band segment.

Speaker 2

We are not a SPAC funded startup company. We are not doing EV retrofits of internal combustion engine vehicles. We are a company with a rich and long heritage in the EV Step Van space. While the industry transition challenges sound ominous, Here at Workhorse, we have an executable plan to emerge as winners. 1st and foremost, we have assembled the right team.

Speaker 2

We brought in experienced, capable leaders and operators from the automotive, commercial truck and military service who are armed with a can do, get it done spirit and mentality. The manufacturing complex at Union City has been upgraded and expanded. It is ready to roll and is now in production. We have the foundational plants, warehouse and battery storage facilities capable producing up to 10,000 vehicles a year by 2025, 2026. Very few of our startup competitors can make that claim or actually show you an operating production facility.

Speaker 2

Ask them if you can go visit their plant. Our new product roadmap is fully defined. We have a family of industry leading EV Powered Class 4 to 6 commercial vehicles being launched over the next 3 years, with 3 new products alone in 2023. We have strategically selected proven, financially stable supply chain partners We can count on to supply our critical component needs. So we have or we will soon have the family of products necessary to compete in the emerging EV Class 4 to Class 6 market.

Speaker 2

The W56 family of vehicles we are launching in Q3 this year are completely new vehicles from the ground up, Internally designed, tested, tooled and launched in less than 2 years with less than 50 engineers and technicians. I'm really proud of them. We are moving quickly to establish a commercial dealer network and secure the necessary manufacturer licenses to serve commercial fleets from coast to coast as they make their own transition to EV powered trucks. These dealers are excited by the W56 family of products. We are well positioned to capture the wave of market momentum emerging for commercial EV vehicles.

Speaker 2

On all fronts, we are pushing the boundaries In overcoming real challenges as we create a successful commercial EV OEM, I'd like to tell our team here at Workhorse that they are true pioneers and that we are on the precipice of success. Moving to Slide 6. The generational shift to Powered Vehicles is now underway and it continues to pick up speed, ramping up specifically in 2024. The easiest way to illustrate this is a quick review of the 2 pronged regulatory efforts underway in California. The state's advanced clean truck rule forecasts Focuses on commercial vehicle OEMs and mandates the percentage of 0 emission vehicles that those companies must build and sell in the state by the OEMs.

Speaker 2

The corollary to the clean truck mandate is the California Advanced Clean Fleet Rule. This new regulatory mandate targets It won't surprise you that California's municipal governments both with both small and large fleets were common guests In our booth at the ACT show last week in Anaheim. They have a clear mandate and they have the funding available to move to EV Power Vehicles starting in 2024. And we will have the types of vehicles they need across the Class 4 to 6 segment. These 2 new carb generator rules essentially reset the state's supply and demand minimums for commercial EV requirements over the next 2 decades.

Speaker 2

And where CARB leads, other states follow. On Slide 7, you can see the graphical version of this regulation, which kicks in on January 1, 2024, at 9% in Class 4 to 8 vehicles. As you can see, the requirement ramps to 50% by 2,030 with a 75% requirement for OEM sales percentage of 0 emission by 2,035. This is exactly the segment where our products are targeted. On Slide 8, you can see the other states that are following the California mandates.

Speaker 2

It includes 13 more states and the District of Columbia with 5 of those states adopting the regulations in the ensuing 3 years. This is the definition of a target rich environment for an EV industry pioneer. Turning now to highlights for the quarter on Slide 9. Over the past 21 months, we have rebuilt Workhorse's foundation, following our Stabilize, Fix and Grow turnaround framework. We completed building out our experienced engineering, operations, administrative and leadership teams, transformed our Unionsa City Facility into a world class manufacturing complex and made tangible progress in our new product portfolio roadmaps.

Speaker 2

In 2023, we remained laser focused on execution, specifically the production and delivery of world class trucks and drones. We made important progress on all fronts in the Q1. First, we advanced our commercial vehicle programs. We ramped up production of the W4CC vehicles. We completed the initial builds of the W the pilot builds of the W750 step van.

Speaker 2

We successfully unveiled the W56 vehicle at multiple industry events, which was well received by prospective customers. While behind after Q1, we feel we are on track full year W4CC and W750 delivery targets and look forward to beginning production of W56 in the 3rd quarter. We also assembled and shipped 18 Tropos vehicles as part of our 3 year contract with our company and are continuing to ramp up shipments of these unique vehicles in the coming months. We also made significant strides in our Aerospace business and saw continued strong interest in both our Horsefly and Falcon drones. We performed a large number of flight demonstrations with prospective government and commercial customers during the Q1.

Speaker 2

We are ready to ramp production The factory and have the parts on hand to build initial orders. The Air Force's North Spark Defense Laboratory, based at Grand Forks Air Force Base in North is working to finalize its purchase of 1 of our Falcon drones and our suite of supporting systems. Qualifying to sell to the United States Air Force is no small thing. We continue to execute our stables installed package delivery routes for FedEx's ground and we expect to electrify our fleet by the end of the second quarter. We are also continuing to look at the best options for expansions into a second stables installed site in either incentive based state and or possibly at a federal government owned Location.

Speaker 2

Additionally, we completed facility improvements at our drone engineering technical design and production facility in Mason, Ohio. We are on track to install the end of the line dynamometer, assembly and paint lines at Union City ahead of the W56 launch in Q3. Turning to Slide 10. I want to provide some additional details on the important progress we're making on our commercial vehicle product roadmaps. Starting with our Class IV offerings, the W4CC and the W750.

Speaker 2

After receiving the GreenPower chassis units at the end of December 2022, Workhorse as we experienced delivery issues on a few key components tied primarily to tooling and production ramp up of a handful of parts, specifically related to light vessels, cab heaters, back panel covers and liners. As a result of these Parts issues, we were only able to deliver 10 trucks during the Q1. However, we expeditiously resolved these issues And the company is currently shipping an additional 40 W4CC trucks to fulfill a fully executed purchase order. With the chassis delivery and W4CC As mentioned earlier, the initial W750 pilot builds are complete. We are working through a handful of design and supplier tooling changes on this vehicle, But initial production remains on track to start in the Q2.

Speaker 2

Turning to Slide 11, the W56, This is the first new Workhorse fully designed and purpose built chassis platform, it remains on track to start production in Q3 'twenty three. Importantly, this quarter we successfully unveiled the new step van vehicle at the NTA Work Truck Show in Indianapolis and had a fully subscribed ride and drive chat session at the ACT Expo in Anaheim, California last week, both of which garnered significant positive feedback from prospective customers. As I have mentioned in the past, the W56 is a foundational lifeblood product for Workhorse. Moving on to the W Next vehicle. This is our longer term project.

Speaker 2

We plan to combine our previous Class III and Class IV vehicle experience Efficient lightweight systems and advanced safety technology. We will focus on prototype design, test and build in 2023 2024 and we expect to begin production of the WNEXT in 2025. Moving to Slide 12. As we announced during the Q1, Workhorse is developing a certified dealer network to meet end customer needs across the U. S.

Speaker 2

As you can see on the slide, we have already identified and begun or have completed the onboarding of dealers in the light blue shaded states. This process includes prospective dealers visiting the Union City plant, meeting with and being trained by our field service and warranty teams. Feedback from these dealer day events has been universally positive. As part of the dealer agreement process, the dealer signed up for initial stocking orders on W4CC and W750s. We plan to onboard 8 to 10 new dealers in 2023, many with multiple locations across 22 states.

Speaker 2

Several states require us to have manufacturing licenses in order to sell vehicles and each state's application process is different And some are quite cumbersome. A few of our officers, including me, have had to go and get fingerprinted and have background checks completed in multiple states in order As of today, we now have 13 of the 22 manufacturer licenses required to sell vehicles in our targeted states. On Slide 13, a few words about our Stables and Solve initiative launched last year. This fleet electrification initiative provides services and charging infrastructure to support We recently renewed our contract to deliver last mile packages for FedEx Ground in Ohio and have continued to execute our package delivery routes throughout the Q1. We expect to electrify the 11 in Ohio fleet by the end of Q2 2, 2023 and are currently exploring opportunities to establish 1 to 2 additional sites in an incentive based state and or federally owned location.

Speaker 2

The staples installs initiative is expected to rise with valuable insights into the owner operator business model and how we can provide a meaningful advantage to further boost the transition to EV platforms, especially for smaller fleets. Moving on to our Aerospace business on Slide 14, which had a very busy start to the year. We advanced the development and testing of our drones to target 2 compelling growing markets, package delivery and agricultural infrastructure data acquisition and data use. We conducted demonstrations of simultaneous package deliveries by multiple Horsefly aircraft to 2 prospective last mile delivery clients and a potential industry partner. In addition, we successfully completed demonstrations of both the Horsefly and the Falcon Drones for the U.

Speaker 2

S. Military, multiple branches. As a reminder, our Horsefly platform is an all electric multipurpose Uncrude aerial system designed to tackle a variety of commercial applications. It uses a winch delivery system to provide safe, reliable and precise Last mile delivery in various conditions and carry up to £10 for 10 miles with a 45 minute flight time. Our other drone is our Humanitarian Aid and Logistics Operations or HALO aircraft, which we've internally called the Falcon.

Speaker 2

It has the same airframe, propulsion system instead of navigational capabilities as the Horsefly, but has a longer A lower gross weight, so it can carry more payload across a longer distance. This drone is designed to be used in austere difficult training conditions. We are about to secure our first purchase order for the Falcon from the U. S. Government and are close to landing additional new orders for this tough duty drone.

Speaker 2

Our team has another large demo with the U. S. Government agencies next week and we hope to build on our success with the U. S. Air Force.

Speaker 2

We completed scanning land in Arkansas and Mississippi with the U. S. Department of Agriculture's Government's 2nd grant in support of underserved farmers and ranchers. We are actively exploring additional opportunities for collaboration with both the federal and state government agencies. The initial feedback we are receiving from USDA is very encouraging.

Speaker 2

In their words, the data we are providing is game changing in terms of detail and timeless versus the current data collection methods employed across not only farmland, but other larger federally owned areas across the country. Overall, we are pleased with our progress in Arrow and look forward to announcing additional appeals or government grants the coming months. With that, I'll now turn the call over to Bob to discuss our financial results for the quarter.

Speaker 3

Thanks, Rick. Let's turn to Slide 15 to discuss 1st quarter financial results. Our Q1 results demonstrate the team's focus on operational execution and financial discipline. As Rick stated, we are ramping up the production delivery of vehicles and expect that to continue throughout the rest of the year. We expect this will generate significant revenue growth in 2020 3, at the same time, we are managing our cash burn well and enhancing our back office systems to make us an even more efficient organization.

Speaker 3

Turning now to results. Sales net of returns and allowances for the Q1 of 2023 were 1,700,000 compared to 14,000 in the same period last year. The increase in net sales is primarily due to sales volume of the W4CC. As Rick explained earlier, getting suppliers tooled up and launched on key components required to upgrade the W4CC product took longer than expected and impacted our throughput in sales Q1. We expect to make up those units across the balance of 2023.

Speaker 3

Cost of sales increased to $5,300,000 from $3,900,000 in the same period last primarily due to the $900,000 increase in costs related to direct materials and a $1,100,000 increase in employee compensation and related expenses to for vehicle sales during the period. The increase in cost of sales was partially offset by a $400,000 decrease in inventory reserve expenses and a $200,000 decrease in Other related overhead costs. Selling, general and administrative expenses increased to $14,700,000 from 11,900,000 same period last year. The increase in SG and A expenses was primarily driven by a $3,100,000 increase in employee compensation and related expenses primarily increased headcount in non cash stock based compensation expense. Research and development expenses increased $7,200,000 compared to 4,000,000 same period last year.

Speaker 3

The increase in R and D expense was primarily driven by $1,700,000 increase in prototype expense related to the continued development of the company's Expanded product roadmap including the Horsefly, Falcon, W56 and W750 vehicle programs. An increase of 700,000 employee compensation related expenses as the company increased headcount and a 300,000 increase in consulting expenses. Net interest income was $600,000 compared to a negative $2,200,000 in the same period last year. Net interest income in the current period is driven by interest earned on the cash in our MoneyMark investment account. Net interest expense in the prior was primarily related to fair value adjustments, contractual interest expense and a loss in the conversion of the company's former convertible notes due 2024.

Speaker 3

The entire outstanding aggregate principal of these notes were exchanged for the shares of the company's common stock during 20212022. Turning to Slide 16 to discuss our balance sheet. We are continuing to operate debt free and as of March 31, 2023, had approximately $79,100,000 in cash and cash equivalents.

Speaker 2

In addition,

Speaker 3

we have our at the market program in place and during the Q1, we issued 14,400,000 shares under the ATM for net proceeds of 18,600,000. You might have noticed that we recently filed $150,000,000 shelf registration statement with the SEC. I just want to point out that this was a normal renewal of the former shelf's 3 year term was expiring. The former shelf had approximately $143,000,000 remaining on it. We believe our existing capital resources and capital availability sufficient to support our current and projected funding requirements through 2023.

Speaker 3

If the opportunity arises and market conditions are appropriate, we will raise additional financing in We are reaffirming our guidance as we expect to ramp up production delivery throughout the rest of the year. We are now shipping W4CC vehicles to customers and production is ramping up to 5 units per day by the end of Q2 as component suppliers stabilize their own production. Start of W750 production is on track to begin later this quarter And the W56 is on schedule to launch in Q3. We continue to expect revenue to be in the range of $75,000,000 to $125,000,000 for calendar year 2023, Assuming current supply chain lead times remain unchanged, securing state manufacturing license and onboarding our new dealers is critical to our success over the next two quarters. At the same time, we are managing our cash burn well and enhancing our systems internally to make us even more efficient organization.

Speaker 3

We are Confident the actions we are taking now will allow us to deliver on our goals and generate value for our shareholders. I'll now turn back

Speaker 2

to Rick to wrap up the call. Thanks, Bob. I want to briefly discuss some of our key second quarter priorities, which are outlined on Slide 18. Above all else, We are focused on advancing our product new product roadmaps and keeping them on time and on budget. Specifically, we are continuing to ramp up production and delivery of our W4CC in the 2nd quarter and expect to deliver significantly more vehicles than in Q1.

Speaker 2

Are on track to begin production of the W750 vehicles in Q2. The W56 program remains on track as well and we will continue to showcase the new vehicles to prospective customers ahead of starting production in Q3. These trucks are now in the critical vehicle durability, PONET and system testing phase which we expect to complete in June July timeframe. When the testing is complete, we will put safe, Reliable demo trucks in the hands of our large last mile delivery fleets and work to secure future purchase orders for Q4, 'twenty three and 'twenty four and beyond. We're also continuing to electrify our fleet under our stables installers program, first with the W750 in the second quarter and then with the W56 bands in the 3rd quarter.

Speaker 2

During the Q2, we intend to earn more customer orders, grow our sales and further build out our CB dealer network. We are making steady progress 2, 3 weeks meeting with targeted dealers and fleets around the country and we have our 3rd dealer day set up at Unicity later this month on May 31. On the Aerospace front, we are excited to be on the cusp of having our initial purchase order from the U. S. Air Force and we'll continue completing flight testing and demonstration with with customers.

Speaker 2

We expect to earn additional significant work with the USDA also in the Q2. Finally, we will continue executing on our common systems plans in the Q2, including transitioning to a new ERP system, which will help drive operational as we ramp up production of our products. We expect to complete the ERP transition in Q3 this year. Before we turn the call over to Q and A, I want to reemphasize a few important takeaways from our call today. First, with few exceptions, Most notably transitioning to the new ERP system and establishing a nationwide dealer network, we have completed rebuilding the foundations of our company.

Speaker 2

We have an incredibly talented team of functional experts and business leaders with extensive automotive, commercial vehicle and aviation industry experience. Great team here at Workhorse. 2nd, we have state of the art manufacturing engineering facilities and equipment in which to execute our new product roadmaps for both our commercial vehicles and aerospace Drones. We are focused on execution, execution and execution. We are finishing the design and testing phase, ramping up production Shareholders and other stakeholders.

Speaker 2

The transition to EV Powered Commercial Vehicles is significantly progressing and there is strong market demand and government support for EV, UAVs and infrastructure to make them work. And finally, we have the necessary access to cash and capital resources to execute on our go forward plans. We will continue to monitor our financial position, investments and future capital needs to support our business strategy. The workforce team is highly experienced. We know that we still have significant work ahead of us and we are ready to meet head on the challenges we will encounter on our EV journey.

Speaker 2

We are encouraged by the progress we are making, the solid foundation is now in place and the positive feedback we are receiving from our current and prospective partners. We're confident in our portfolio of EV products. After almost 2 years of hard work, Workhorse is ready to run and established ourselves as a winner in the transition to commercial electric vehicles, both on the ground and in the air. That concludes our prepared remarks.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Colin Rusch with Oppenheimer. Please proceed with your questions.

Speaker 4

Thanks so much guys. Congrats on getting the trucks out. Can you talk a little bit about how much rework you had to do on those vehicles Before you got them out and how the operating software is performing now that you've got them on the road?

Speaker 2

Yes, a couple of things. I think when we initially started the process with GreenPower, We were talking about putting 14 or 15 parts on the trucks. I think we're now up to 75 to 90 parts on the trucks. There were a couple of parts That required us to go out and tool up some suppliers. I think we told you in the last earnings call that we put out a few trucks in December.

Speaker 2

Got some initial feedback both from the dealer customers and the upfitters that are putting the backs or custom bodies that they wanted a different back panel. That was our biggest challenge in the Q1. We had to go out, tool up a supplier in North Carolina, design the part, tool it up, Get the prototypes and then we had to change the liners. That was the big issue for us in the Q1. We got that done towards the end of the quarter and that's now in production.

Speaker 2

So A little longer than we thought for sure, but based on that, that's how I guess I would say, while that's disappointing to us in the Q1, it does show how fast Our team was able to turn on a dime and go find a solution in less than 75 days, not 6 months, 75 days from the time we Identified the issue in early January to the time we had parts going on trucks in the middle of March. So I want to thank our CTO and our engineering team and our supply chain team. They did cartwheels to get that done in the Operating systems, so far so good. We've done a lot of testing of the truck. Up at Union City, we don't see any issues.

Speaker 4

Okay, perfect. And then with the drone, I'm just trying to get a sense of how close you guys are to like material revenue for the company. Should we be thinking about that revenue opportunity for you guys, particularly on the agriculture side?

Speaker 3

So on the agricultural side, I think we were progressing pretty quickly there And have some good programs in place and I think we'll continue to see that growth. So I feel like that's on track. On the drone side, obviously, it's a Tough market and bringing it to market has been longer than we had hoped, but I think we have the technological breakthroughs And now it's about building that market network and distribution so that we can start selling those in the latter half of the year.

Speaker 2

Yes, I'll add some color too. I think the commercial part that the last mile delivery of packages is we got to get through with the FAA We got to make sure that UPS and FedEx and others really want to use these drones. We bounce back and forth from taking them off the trucks to doing it from ground stations and warehouses. We have some more demos we're going to do here in the quarter, Q2. I think a good decision we made over 18 months ago is can we go after the use of the LiDAR systems And camera systems.

Speaker 2

We're finding our traction with the USDA, which also owns the Forest Department or Forest Natural Resources. So There's opportunity. There's a lot of land that needs to be scanned. The way they're doing things right now is with horses and 4 wheelers, right? And we can scan Literally, 100 of acres in just a few hours.

Speaker 2

And then DoD, we've taken the Falcon out to multiple branches and we think there's an opportunity there too. So I think we're going to grow faster on the Government side, then we are on the commercial side. And hopefully, we'll get that ramped up faster.

Speaker 4

Okay. Perfect. Thanks, guys.

Speaker 2

Thanks, Collin. Thanks, Collin.

Operator

Thank you. Our next questions come from the line of Jeff Osborne with TD Cowen. Please proceed with your questions.

Speaker 5

Hey, good morning. A couple of questions on my side. Rick, I think one of the themes of both the Work Truck Show and the ACT Show was the challenges with trucking Being integrated with charging and the time to get the charging infrastructure in place, what level of confidence Do you have in terms of the ability to work with the dealers to with potential customers to sort of push that along and avoid an air pocket between Expected delivery of the trucks and when that infrastructure is in place?

Speaker 2

That's a good question. The larger dealers we're meeting with have already started in their own charging systems at their locations. Several of these dealers run large rental fleets. And so they're looking at some of the areas where they use the W4CC or the step band specifically where they're using that. We've gone out to a couple Interesting locations, 1 in LA, a company.

Speaker 2

I won't mention their name right now, but they put in a large charging A station area, they've got multiple EV trucks they purchased and they're leasing them to the little fleets in LA right now. And they're going to expand that program to multiple cities across United States including New York, Houston, Atlanta, etcetera, and Florida. So some people are out there on the cutting edge, I'll say. On the backside, last week in Indianapolis, we met with a distribution company, he has 800 trucks and he said basically, I need help. Can you help me chart the path to EV?

Speaker 2

I need your kind of trucks Class 4 and Class 5, 6 step vans specifically. He's got 800 He needs an education on Fast charging, slow charging, how often you charge them, what's the route availability, how does the batteries handle The charging in the cold weather, hot weather, that's exactly what we're learning on stables and stalls. We can give you a lot of data For over a year of how to run an ICE fleet with old trucks, but it costs to repair them, fuel them, staff them and we're going to soon have that same data for the EVs when we electrify the stables installed. So we'll be able to help those fleets that need to make the conversion. I'll also tell you that that distribution company is owned by a European company and he was given a mandate to convert at least 50 of his 800 trucks this year EV before the end of the year.

Speaker 2

That wasn't a choice. He's got to go do it. Now he's got to find the right OEMs, The right charging systems. So we do get a lot of questions about who are the right charging partners. We've done some work with ChargePoint.

Speaker 2

We've done some the ABB, we've done some work with Shell, so we have some good information about that. So but I do think it's going to take time, right? So the federal government has put the money behind, putting in the charging infrastructure and then the big fleets are starting to put their own money into it as well. And there's a cottage industry, Jeff, there's popping up of people who can go in and help secure the land and tie the grids in there. And there's programs specifically in California with SDG the San Diego Power and Light And the guys out west are doing some charging systems there.

Speaker 2

So lots of work to be done, that's for sure.

Speaker 5

Got it. And then just 2 other quick ones here. The other revenue broken out of roughly 339,000 is the majority of that Affiliated with the 18 Tropos vehicles that you assembled or is there something else moving that line item?

Speaker 3

No, the majority of that's going to be the revenue from The Stables installs, and package delivery, little bit of a tropos, but most of it Stables installs.

Speaker 5

Got it. And then Rick, in your concluding remarks, you made reference to positive contribution margins with every vehicle delivered going forward or produced going forward, How you phrased it? Were you intending to say that in 2Q you would be gross margin positive or that's just the objective?

Speaker 3

That's a little bit early. Go ahead, Bob. Yes.

Speaker 6

No, I think

Speaker 3

at a truck contribution level, they are positive. But positive gross margin will be a factor of volume as we start to cover the fixed cost. So that no, that will not be the case in Q2.

Speaker 2

Yes. This company has a history of designing some pretty unique trucks and selling them for about half of what they put So we put an eDIC out when we got here and say we're going to design, test and build trucks that we can make money. We're a publicly traded company, got to have Path toward a profitability. Just designing and building and selling cool trucks are lost, puts you out of business long term.

Speaker 5

Is there an annualized run rate that you would hit that or units delivered of the 750? I assume the 4CC wouldn't get you there, but should that be something to think about Spring of 'twenty four?

Speaker 3

Yes, we really haven't put together any guidance on that. But I will say that overall, Our fixed costs on the manufacturing side are relatively low. So with a fair amount of volume, we should be able that positive gross margin.

Speaker 2

Yes. I think one of the things, Jeff, we talked about in a couple of calls is that we're early still in the very early innings of this ICE to EV transition. There's still some price elasticity, which is a good thing for those of us who are out in the cutting edge, right? And so I'm sure We'll all have to ramp down costs in the future specifically on batteries, but for now the market demand based on the California mandates alone 9% of the fleets have when they buy trucks next year 9% of the buys have to be EV. That's 1 out of every 10 almost, right?

Speaker 2

So Sat with one big dealer last week and said, hey, in order for me to sell these big ICE trucks, I got to sell some EV trucks now too. That's real bite in the regulatory laws out there in the clean fleet, advanced clean fleet.

Speaker 5

Absolutely. That's all I had. Thank you. Appreciate

Speaker 2

it. Great.

Operator

Thank you. Our next questions come from the line of Chris Souther with B. Riley. Please proceed with your questions.

Speaker 7

Hey, guys. Maybe just a little bit on the sales pipeline and backlog. How those are picking up at this stage? You called out 500 to 600 chassis you're expecting to receive this year for so maybe just Visibility of either W-four or seven fifty on that and then what are we getting is kind of an early sense Of the 56, as far as kind of backlog building would be helpful for folks?

Speaker 2

Yes. We don't really publish right now the backlog. I think that's a fool's errand. I've seen a lot of that in the last couple of years of companies quoting all kinds of backlog, yet they don't have a factory, so how the hell are they going to produce them? So we are building it from the ground up.

Speaker 2

Part of our dealer agreements as we sign up dealers they agree to take stocking orders. So typically that's 10 per dealer. Some dealers have multiple sites. 1 dealer has 35 locations and other one has 21. Not every location is an EV target area.

Speaker 2

So I'd say that as we build up our dealer network, you'll see the backlog of our W4CC and W750s grow. I'm going down to see a dealer tonight and tomorrow down in the Southeast region. They have a real strong interest in W750. I go to other locations with the sales team, they only want W4CC, so it's kind of jumping around. But we're confident that we have the balance right in terms of Supply and demand, we know how many chassis we've ordered from GreenPower and are being delivered.

Speaker 2

We have over 500 chassis on order right now And on their way into us, we had our 200 in the Q1 and we think we'll be able to sell all those between now and the end of the year, early Q1 next year.

Speaker 7

Got it. Okay. That's real helpful. And then maybe just on the drones. You asked about Yes, 66 as well would be good.

Speaker 7

Yes. Thank you.

Speaker 2

W56, I'd say, is early. We've had some excellent preliminary meetings in Indianapolis with some of the big companies. We had additional needs of those exact same companies. Now this time in California, they're able to actually ride and drive the W56. It got very strong reviews Most everybody who drove it on Tuesday, Wednesday Thursday.

Speaker 2

I was surprised or we were surprised how much attention our W56 chassis, the Strip Chassis, Guy. I came in 1 morning on Thursday, a little bit early this show, and I found 4 people on our truck with Take measures and taking photos of our chassis, so there's an interest there. As you know in the step van space, it currently It's basically either a Freightliner custom chassis or a Ford chassis with an engine in it and it goes to either Utilimaster or Morgan Olson for the body, Right. We're kind of a disruptor here. We're going to be able to come in and build a chassis and put a body on or we can sell our EV chassis to somebody.

Speaker 2

If they want to put a Morgan Great. They want to put a utility master body on it. That's great. We'll be able to play in all three areas there. So I would say it's a little early.

Speaker 2

I think they're reticent To give us orders until they get a demo on their hands, we have one customer who wants one for a minimum of 2 weeks, one wants it for a month and one wants it for 6 months. And one of those customers is a large linen company that wants a special truck in the back, and we'll see. And I'd say we had multiple meetings in California with Either linen companies or bakery companies, which are very interested in W56. And those are big target rich environments. One California Lending Company said they have over 1,000 trucks and they are in their mandate now to convert at least 9%.

Speaker 2

That's 90 trucks alone In 1 year, in 2024. So I think hopefully we'll give you a more clear picture as we move through the year here in the 3rd Q4.

Speaker 7

Okay. That's super helpful. And then on the drone side, can you talk a little bit about kind of the production path? It seems like the Customers are getting pretty close to moving forward here on the government side. Just what are the production rates you guys We'd be targeting and be able to kind of hit what are any incremental capital needs we should expect to kind of flow through.

Speaker 2

Yes. We've built the assembly lines in there to build somewhere between 500 to 1,000. I'm not sure we'll build that many this year. We'll see. I think the customers

Speaker 5

are being very cautious to make sure they

Speaker 2

want to get their hands on the vehicle. They're being very cautious to make sure they want to get their hands on the vehicles, the drones and actually put them to their paces. We expect to get 3 or 4 well, I'd say 2 or 3 more POs in the quarter, early Q3. And they'll be like maybe dozens of birds Total. Once we get that, I think we get through all their internal testing.

Speaker 2

I think you can see some bigger orders as we head out in the year.

Speaker 3

And I would add that the capital requirements for the production lines are pretty minimal.

Speaker 2

Yes. Our guys actually guys Standard Equipment built their own substations. They've done some modifications. We have the substations built. We have the final assembly line built.

Speaker 2

We've staffed Very lightly right now to make sure we can build some there, but I think we have like, I don't know, 15 or 20 birds on the shelf right now ready to go. So we've worked through our little pilot builds and that kind of stuff.

Operator

Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.

Speaker 8

Yes. Hi. Thank you and good morning, good afternoon, everybody. Yes. Rick, I was hoping for a little bit more color around the fix for the cabin chassis.

Speaker 8

And really what I'm wondering is, Yes. It seems like from the start, you knew there'd have to be some upgrading of the chassis. I guess it was more than you thought about. Is any of that stuff where we can go back to the supplier and have those Some of those changes fixed before you take delivery or is that something where We know what we're getting now on an ongoing basis, and we're just going to have to do all these fixes ourselves.

Speaker 2

Great question, Greg. So I'd say a couple of things. 1, we've already talked to our friends at Green Power and their supplier To make some permanent changes, one of the changes is on the lights. We thought we could get that done by February or March. Turns out they couldn't get their suppliers tooled up until September, so we had to go out and pivot.

Speaker 2

We had tooled up a small Prior to handle 25 or 30 that we shipped back in December and that was okay. But when you're starting to bill up to 80 to 100 a month, you got to do something different. So we had that's one of the gaps we had to fill And we've worked that out both engineering wise, supply chain wise and financially with GreenPower. The back panels, I think, was one that think we thought we'd sell more of the step vans, etcetera. When it came in and the customer started saying, no, no, we want more cab chassis.

Speaker 2

We had a pivot to come up with that. That's something we haven't finalized yet. We've got a nice supplier that can keep up with us at the current build rates and want to make a decision whether we keep that here or we have to put that in coming in from China, so we'll see.

Speaker 8

Okay. And then you mentioned the customer, where the 40 deliveries Kind of highlight that, hey, we're getting things going. Was that a total 40 delivery order? Or was that actually larger?

Speaker 2

That's a currently, it's a one it's a PO for 40. It's part of if you remember last year, we talked about a reservation over 1,000 vehicles, that's a conversion of some of those reservations into a real purchase order. We're talking to that same And tooled up and secured build slots at custom bodybuilders for different versions, specifically a dry van, a reefer and a flatbed. And they have some large quote activities they're working on right now with some large fleets that are in the 100, I'll say, right? So if they're successful in land debt, As they like to say to us, you're the only Class 4 pure EV truck in the market today.

Speaker 2

If you go

Speaker 5

to the

Speaker 2

last two shows, last two shows I've been to I see a lot of introductions of other people's chassis but most of them come From the market in 2025 or 2026, specifically Isuzu and a couple other people like that, right?

Speaker 8

Yes. No, definitely in a good spot. And then Bob, as I think about R and D, realizing we're still doing some things in development on the drone side, the existing Volley rolling out the next. As I don't know, any kind of way for us to think about R and D on an ongoing basis At least for the rest of the year?

Speaker 3

I think probably the easiest way to think about it is Our run rate captures our spend. And as we move to roll out on the W56, we'll reallocate I don't see big lumpiness in R and D spend. I think it will continue on its pace.

Speaker 6

Great. Thanks.

Operator

Thank you. Our next question has come from the line of Mike Schibbe with D. A. Davidson.

Speaker 6

Just a couple of follow-up questions here. First, on the Tropos, of your earlier questions on Tropos. Is there a sense do you have a cadence

Speaker 9

as to when that might ramp

Speaker 6

up to a number of deliveries that Shows up in a material way your numbers or at some point is there a point where you can tell us when you might get to that full 2,000 rate?

Speaker 2

Yes, I'd say right now we just like other companies, we've had some supply chain delivery issues there. We got our initial kits and I think we got 56 kits in. Unfortunately, some of those kits were incomplete or some of the parts came in with quality issues. We took a we put a production pause in place for like 5 or 6 weeks. We asked the guys at Tropos to go to their supplier, a company called Cebic and get their act Together, they have committed to do that.

Speaker 2

They're making an investment. And so we think we're now starting to flow the right kind of parts here. So we get a box out, we get to build a full truck. I'd answer your question that I think it's going to take us to balance the second quarter to get that supply chain under control probably late Q3, Q4 rate we should have a run rate there. They're having some good success commercially with selling the trucks to some of the bigger name companies, especially in education systems on the West Coast Specifically, so I think there's a market there for that truck and we're prepared to build them.

Speaker 6

Great. Thanks for that. And I wanted to also ask about some more details on the dealerships we've got signed up or talking with at the moment. You guys mentioned they want to have inventories of demo units. You think you said something like 10 or a modest number for each facility that will have them available for sale.

Speaker 6

Do they also at this point, do you do you also have kind of long term minimum take rates? I remember The old Workhorse management team had several dealerships signed up for thousands of units and things like that. Obviously, they weren't necessarily guaranteed commitments, but There were guidelines and there were some take rates there. Is that how your new dealership agreements are kind of structured at this point?

Speaker 2

I'd say slightly different. When I got here, I think we had 8,032 orders from 3 different customers, 500 from the Pritchard Group Out of Iowa, 1,000 from UPS and 6,000 some north of the border up in Canada, okay? When we went back to those guys and said, hey, first of all, the old C1000, we only carried £3,000 that out that ruled out The UPS order. When we told them that the cost was a hell of a lot more than $75,000 or $80,000 that ruled out the Canadian guy. And I give the Pritchard family a lot of credit for sticking with us.

Speaker 2

They helped they gave us a lot of feedback on the C1000. They helped guide us on the W4CC and W750. And so they stuck with us and they are the ones who gave us a 1,000 reservations. To come to specific dealers, all these dealers are putting their toes in the water too on the EV space, right? And so they're learning how what it takes to become an we don't want every commercial dealer.

Speaker 2

We don't we want a handful of dealers that we can serve with trucks, so we don't get an allocation type situation. There's some that are very, I'd say, forward in the saddle looking at their areas. They know the Programs in their states, places like New Jersey, New York where there's great incentives for Class 4, 5, 6 up to $100,000 a truck. Texas, not a you would think of that as an EV friendly state, but they've got a lot of ports down there and there's a lot of money coming in from the federal government to electrify the ports. So there's a need down there along the Charleston, the South Carolina, Florida borders and stuff like that where the ports are as well.

Speaker 2

So the demos I talked about, We have each one of our field sales team now has at least 1 W4CC or W750 demo they can take around the different trade shows with dealers. There's one going on next week in California. The ones I was talking about were the W56 demos. We're going to put those in the hands of 5 of the biggest companies In the last mile delivery space, you can you know they are 3 letter initials in a couple of places, big leasing companies, big linen companies, Big bakery companies. They're the ones who will buy thousands of trucks a year, right?

Speaker 2

I've watched it before as a board member at a previous company. They buy 5,000 trucks a year. They split it among 2 or 3 players, right? So that's where the W56 will get sold, right? That will be direct to those big guys through a dealer somehow.

Speaker 2

So that's where we got to work out right now. But hard to sell and convince them to spend Upwards of $200,000 on a truck that they've never ridden on before, right? So they want to make sure it's real. And so One of the good things we have here is we have those 280 eGens out in the field mostly with UPS with almost 9,000,000 miles on it. They know we stand behind our products.

Speaker 2

No, those products run pretty good. They're still out there since 2017. So we can build on that with people like UPS. So When I got here UPS said, if you can't carry £8,000 quit talking to me. And now they're talking to us.

Speaker 6

Got it. Got it. That's great color. Maybe one last one for me and this is on Stalls and Stables. So, Sam, you just kind of want to hear.

Speaker 6

It appears that some of that excludes the already gone electric or partially electrified elsewhere in the country. And I'm curious whether you've compared notes with any of them. Are they conquest businesses for you that are clearly open to being to having EVs in their fleet? Or do you plan to at least when you're up and running with your EVs Compare and contrast your results to theirs, either privately or publicly, once that's available?

Speaker 2

I would tell you that Dan is working closely. We're in constant discussions with the team at FedEx and the West Coast, where they've had some success in putting some bright drop vehicles out there in the West Coast and some of their locations. They're anxious to get some of our vehicles in there as well, then we can kind of compare and contrast. And they're different. We're learning on stables installs.

Speaker 2

Some trucks are just Class 3 trucks that we deliver certain routes, small packages to houses. Then we have some Class 4, 5 and 6 big step bands. We're delivering appliances, tires, lawnmowers. Those have to have a better, bigger payload. And it's interesting for me being new to the segment is that the UPS model and the FedEx model are totally different, same as DHL.

Speaker 2

Different sized trucks, some own their fleets, some don't own their trucks, Some owned and have their drivers work for them, they're unionized, some are not. So there's a lot of different dynamics we're working through. What we want to be able to do is we want to be agnostic and say, you want to order a brown truck, we'll build your brown truck. It can carry £8,000 You want to have a white truck with a purple and orange label or a green label on it, it Carry only £2,000 £3,000 we can do that as well. The common theme is they have all committed To meet the Paris Accords of being 0 emissions by 2,040.

Speaker 2

And so they have to convert these fleets. These fleets are huge 100,000, 120,000. One Bakery has 66,000 delivery trucks for their baked goods here in North America and Europe. Other companies have tens of thousands of trucks as well. So there's going to be plenty of opportunities for us.

Speaker 2

As we said, we're ramping up this year our factory. Eventually we'll get to a 5,000 run rate per shift probably by 25. And then if we need to we'll go to 2 shifts and that'll be 10,000 trucks a year. That's a real company, right? 10,000 trucks, dollars 150,000 to $220,000 per truck, that's a big number, right?

Operator

Thank you. Our next question has come from the line of Craig Irwin with ROTH MKM. Please proceed with your questions.

Speaker 9

Good morning and thanks for taking my questions. So most of my questions actually have been pretty thoroughly answered. But I was hoping maybe we could dig in just a tiny bit on the expense side. And the 10 vehicles you got out in the quarter, can you maybe just give us color on one time expenses As far as identifying those suppliers and engineering and integrating these new solutions into the vehicle And how that benefits you as you move to the 40 that you deliver, I guess, in the current quarter? And would you Some of these early setup and startup expenses to have a material impact on margins.

Speaker 3

I think overall, Craig, I don't expect them to have a material impact on margins. I think my previous comment on the R and D side kind of applies there that We'll just move those into the building of the next vehicles. Don't think it's substantial. I think the biggest issue for what you're trying to get at is, as we talked last year, we've maintained our workforce in at our plant. And so obviously with the smaller volume, we've got those everyone's working on other stuff.

Speaker 3

And as we ramp up volume, They'll be reallocated to the direct production vehicles. So I think that's probably the biggest issue that's kind of getting that what you're trying to get to is you look at the workforce, they'll become more fully productive as we ramp up volume.

Speaker 2

Yes, we made a conscious decision when we had to shut down production at UNC not to lay off Our hourly workers, right? I've said it before, they didn't make a mistake, right? Why should they be punished? In a very tight labor market, we want to make sure we keep our skilled workers. There's some expense that we have right now.

Speaker 2

As we get production going on, that'll be better. We had to move locations. We opened up Wixom. We moved Aerospace. We moved headquarters, we had to upfit those offices.

Speaker 2

There's some expense there that's going to be behind us as well, right, I think. We're putting in all the test equipment in the prototype center up in Wixom, so Pretty

Speaker 3

good. So we have a pretty tight handle. Bob's got a tight control on the reins there. So keeps the purse nice and tight. I think first quarter is Pretty good window into your expense structure.

Speaker 9

Excellent. It's good to hear Bob's got that strong grip. Just to pivot a little bit, the W56 you guys disclosed 8 of the 12 build programs are complete. I guess that's as of this call, not as of the end of the quarter. So if you could maybe clarify that.

Speaker 9

And then if you could maybe talk a little bit more about the remaining 4 build Programs and what initial production would look like there? Are we starting with 1 a week? Are we starting with a couple of week? What should we expect?

Speaker 2

Yes, great question. Dave Berkey came to us, 40 years plus experience in the industry building unique vehicles. He laid out very quietly for us how many trucks he wanted to get built. Number 1 was just let's build it, just come together, right? And we had a team at Union City putting the parts together.

Speaker 2

And one of them I'm really proud that the engineers, supply chain, the manufacturing and sometimes the suppliers are sitting right on line as we build We're not building them at prototype shops. We're doing it right in the factory and we're learning a lot. So that means you have fit up issues, torque, you can't get that bolt touched, that kind of stuff like that, wires crossing over. So we're now in the stage. The first four, I think, were basically just chassis to make sure we could build the chassis, right?

Speaker 2

What Then we started getting into the full vehicle. We had one built in time for an NTA show. I think we now have 3 full vehicles out at test, 1 in thermal testing, 1 in brake testing and 1 in durability testing. Those tests take anywhere from 2 weeks The 40 days, 40 workdays, you start the truck without a load, in about a week you put it in the half load and then basically towards the end of the test you put it in 100 percent load. So W56 can carry £10,000 of payload.

Speaker 2

So we'll load that thing up with £10,000 of Water basically, big totes. We've learned a lot already. So we've learned a lot. There's a lot of software configurations that we've done. So we'll do that and then we'll go in right now.

Speaker 2

The next two big ones we do are actually slow walk manufacturing. So we actually build Pull chassis and turn around to the dyno and we go build the bodies to make sure we have all our work instructions, our process control charge done. And then the last 3 or 4 trucks will be the ones we're going to send out to the customers. That means we'll build those towards the end of June July. They should be in the hands of the customer early July.

Speaker 2

And then we'll probably have a slow ramp. We'll start in August. We'll build chassis, get the chassis down the line, 14 stations across the Dyno. Then we'll start coming back. I think we have 14 stations for the bodies as well.

Speaker 2

So we haven't defined the exactly daily build rate. It's probably like 1 a week For a while until we get all the bugs worked out, make sure all suppliers are there, and we'll just gradually ramp it up. But we know how many we want to build this year and sell in our budget, And we have expectations we'll be able to build all those trucks and chassis.

Speaker 9

Excellent. Well, thank you very much for taking my questions. Congrats on the progress.

Speaker 2

Thanks, Greg.

Operator

Thank you. There are no further questions at this time. I would now like to hand the call back to management for any closing remarks.

Speaker 2

Well, I appreciate your questions and your interest in Workhorse. And we're going to go back, put our nose to the grindstone and kick some ass in the Q2, get ready to build and sell some trucks and drones. Thanks a lot, and have a great day.

Operator

Thank you. This does conclude today's teleconference. We appreciate your

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Earnings Conference Call
Workhorse Group Q1 2023
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