Arista Networks Q1 2024 Earnings Call Transcript

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May 24, 2024

There are 7 speakers on the call.

Operator

Hello, and welcome to the Workhorse Group Q1 20 24 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Stan March, Vice President, Corporate Development and Communications. Please go ahead, Stan.

Speaker 1

Thank you, Kevin, and good morning. I'd like to welcome all of you to our Q1 2024 results call for Workhorse. Before we begin, I'd like to note that we posted our results for the Q1 ended March 31, 2024, via press release earlier this week. You can find the release and a presentation, which was released this morning in the Investor Relations section of our website. We'll be tracking along with the presentation during this call.

Speaker 1

Also joining me on today's call are Rick Daut, our CEO and Bob Kanan, our CFO. For today's agenda, please turn to Slide 3 of the presentation. Following my opening remarks, I'll hand it over to Rick, who'll give you an update on the progress we've made recently on our strategic and operational actions. Bob will then walk us through our financial actions and results of the Q1. Rick will then wrap up with our near term objectives before we open the call to questions.

Speaker 1

On Slide 4, you can find our disclaimer as some of the comments that will be made today are forward looking and are therefore subject to certain provisions and are also subject to risks and uncertainties. You can find the full disclaimer statement in our periodic filings with the SEC, including the 10 Q filed on May 20 as well as the earnings press release also published that day. Now, I'll turn the call over to Rick Dowk. Rick?

Speaker 2

Thanks, Stan. Hello, everyone. Thank you all for taking the time to join us today. As Stan said, this is our call to review our Q1 earnings. But today, we're going to focus most of our time talking about many of our achievements in April May, which have been significant.

Speaker 2

We made positive strides in advancing our product roadmap, executing our strategic plans and shrinking our financial position. These efforts are enabling Workhorse to remain a segment leader in the transition to commercial EVs, specifically in the last mile delivery step van and work truck spaces. Turning to Slide 5, let's talk about our achievements. We have received substantial orders for both our W56 and W4CC trucks. We continue to hold successful product demonstrations with dealers and fleet operators and both groups are affirming the strong market potential of our commercial EV trucks, specifically the W56.

Speaker 2

2nd, we are expanding our commercial network by adding new dealers, including 2 locations in New York City, a critical location for EV adoption and incentives in the near future. We've also added 2 locations in the upper Midwest and Northwest regions and we're on track to hit our target of 15 to 20 nationwide dealers by the end of 2024. 3rd, we have an encouraging path forward for the aero business. As we previously announced in February, our Board of Directors approved a plan to transition exclusively to operating as a less capital intensive drones as a service business. Accordingly, we have halted the production of our drone design and manufacturing business in mothball bed equipment.

Speaker 2

We are now close to completing an agreement to divest the Aero business to a buyer that can invest in its future growth. This move will also provide us with additional financial flexibility here at Workhorse. Finally, over the last several months, we have taken several steps to strengthen and extend our financial runway, preparing Workhorse to emerge as a winner in the EV market as the industry transitions to that technology. That said, I want to acknowledge the Workhorse team and our supplier partners. A number of the difficult but necessary steps we have taken over the last several weeks have impacted our people and some of our stakeholders.

Speaker 2

We've reduced our headcount and had to temporarily furlough our employees our Union City plan. We have incredible respect and admiration for our people and we pride ourselves on being a local employer in our communities. As we navigate the near term and the transition to EVs, we're focused on returning our team to work when additional truck orders are received. I'm confident that we are making progress on the sales front. Moving to Slide 6 and turning to our commercial vehicle programs.

Speaker 2

As I mentioned during the 1st part of the year, we have held a number of successful product demonstrations with last mile delivery companies and have been in constructive and meaningful discussions regarding purchase orders with these customers. They are thoughtfully working through their own capital expense plans in order to make the transition to 0 emission vehicles, which will take multiple years to complete. Remember, it takes time to install the charging system infrastructure before they get the vehicles. That's critical. We'll talk about that in a little bit.

Speaker 2

We have received orders for a total of 68 W56 Step Bands a day. We view this in the strong part to growing the sales pipeline for this vitally important product line. We are also working on developing new W56 wheelbase variants, which will launch in 2024-twenty 6, including the new 208 inches wheelbase 1200 Cubic Foot Van, which launches late this year. We also received the purchase order for 141 W4CC chassis from Kingsburg Truck Sales, our dealer of the year in 2023 for delivery over the coming quarters. This is a big milestone as it will essentially clear all of the Class 4 finished goods inventory remaining at Union City.

Speaker 2

We believe the KTS order indicates the initial transition to EV commercial vehicles is slowly starting to take place in California, especially at small work truck fleets. As you will see on Slide 5, we now have expanded our dealer network and service footprint by adding Malya Truck Sales and the Ziegler Truck Group to our certified dealer network. We now have a total of 12 dealer partners strategically targeted in states adopting the CARB clean fleet standards over the next few years. At Staples, we continue to grow our EV fleet and expand our delivery routes with the FedEx Ground here at north of Cincinnati. We have deployed 2 W56 set bands in addition to our 10 W750 step bands.

Speaker 2

We expect the whole fleet to be fully occupied in 2024. And our initial data shows a significant improvement in operating cost savings using the ED powered trucks, which we shared with some of the large fleets in the last 90 days. This week, the annual ACT trade show was held in Las Vegas, and this is one of the reasons we pushed our earnings call to today. I want to share with you our observations from this 4 day event, given the concentration of competitors, partners, suppliers, regulators and customers who attended the event. 1st, significant R and D investments continue to be made in EV technology and vehicles by all major commercial truck OEMs and several remaining startups.

Speaker 2

2nd, the first signs of orders, mostly in California are starting to emerge across both small local and larger national fleets. 3rd, the adoption and enforcement of the new CARP mandates is causing some confusion, especially at smaller fleet customers. In the Class foursix segment, fleets in California must now register their entire fleet with the state and must target a 9% of EV adoption rate by Twelvethirty Onetwenty 4. This is causing some administrative challenges for some of the smaller fleets right now. Finally, I'm sorry, there are 2 or 3 OEMs targeting there are only 2 or 3 OEMs targeting the Class 5, 6 step band market.

Speaker 2

In Workhorse, we continues to be the only OEM that is capable of building both the chassis and full step BAM cab and body under one manufacturing route in North America. Our W4CC continues to be the only Class IV cab and chassis EV offering in full production. Many talk about production, but they aren't in production. It's capable of providing £5,000 of payload and capacity in the range of 150 miles. And finally, what I heard over and over from everybody is charging infrastructure and availability of charging systems remains pacing items across the industry as we make the transition to EVs.

Speaker 2

That's both at the small fleets I've talked to with our dealers and even the largest fleets here in North America. With that, let me turn the call over to Bob to discuss our financial results and the recent steps we have taken to strengthen our financial position.

Speaker 3

Thanks, Rick. Let's turn to Slide 9 to cover some of the recent steps we have taken to strengthen Workhorse's financial position. In March, we entered into an agreement with an institutional investor on the terms of a series of financing transactions that will provide the company with liquidity in both the short term and over time. This financing will support the continued execution of our commercial vehicle product roadmap and business plan in 2024 2025. To date, we have received gross proceeds from this agreement of approximately 15,000,000 dollars before fees, expenses and original issue discount.

Speaker 3

On the cost side, we completed implementation of a reduction in force of approximately 20% of the total workforce, excluding direct labor. We also moved to a drones as a service model in Arrow. We temporarily furloughed the Union City plant workers while we wait for larger backlog of truck orders. However, limited recall of the staff has already begun. Finally, we are also working on the sale and leaseback transaction or alternatives for the Union City facility to further solidify our financial position.

Speaker 3

Moving to Slide 10, let's discuss our Q1 financial results. Sales net of returns and allowances for the Q1 of 2020 4 were $1,400,000 compared to $1,700,000 in the same period last year. The decrease was primarily due to lower W4CC vehicle sales compared to same period a year ago, which was partially offset by an increase in other service revenue generated from operating our stables by workhorse route, drones as a service and other service revenue. Cost of sales for the Q1 of 2024 were $7,400,000 compared to $5,300,000 in the same period last year. The increase in cost of sales was primarily due to a $2,200,000 increase in inventory reserve expense, a $1,000,000 increase in depreciation expenses and a $600,000,000 increase in employee compensation related expenses to support vehicle production during the period.

Speaker 3

The increase in cost of sales was partially offset by $1,200,000 decrease in costs related to direct materials and $1,400,000 reversal of warranty expenses as previously accrued. Selling, general and administrative expense for the Q1 of 2024 decreased $14,100,000 compared to $14,700,000 in the same period last year. The decrease in SG and A expenses was driven by a $1,700,000 decrease in employee compensation related expenses, primarily due to a decrease headcount, which was partially offset by a $300,000 increase in non cash stock based compensation expense and an increase of $600,000 in professional and other services expenses during the period. Research and development expense decreased to $3,500,000 compared to $7,200,000 in the same period last year. The decrease in R and D expense is primarily due to reduced consulting and prototype costs as the company moved into production of the W4CC, W750 and W56 vehicles versus last year.

Speaker 3

Net interest expense was $5,400,000 compared to $6,000,000 of income in the same period last year. Net interest expense in this current year was driven by a fair value adjustment of the company's 2024 notes and 2024 warrants respectively of $7,000,000 $1,200,000 fees paid in connection with the 2024 notes and 2024 warrants issued during the period. Expense was partially offset by a gain of $2,900,000 from the extinguishment of the company's 2026 notes, conversion of 2023 warrants and $100,000 of interest earned on cash balances of the company's money market investment accounts. Net interest income in the prior year is primarily driven by interest earned on cash balances of the company's money market investment account. Net loss was $29,200,000 compared to $25,000,000 in the same period last year.

Speaker 3

Turning to Slide 11 to discuss our balance sheet. As of March 31, 2024, the company had $6,700,000 in cash and cash equivalents, accounts receivable of $1,800,000 net inventory of $49,900,000 and accounts payable of $14,200,000 I've already discussed the aggressive actions during the quarter to reduce costs and conserve cash across the organization. Looking ahead, we will continue to focus on extending our operational runway and manage our cash flow efficiently. We've executed successful financings and are working on sale leaseback transaction for our unit facility. The recent purchase orders also reinforce our optimism about our ability to drive additional purchase orders this year and grow our revenues.

Speaker 3

With that, let me turn it back over to Rick.

Speaker 2

Thanks, Bob. Let me briefly discuss our near term priorities, which are outlined on Slide 12. Our key strategic priority is advancing our product roadmap, specifically securing new orders and delivering products to more customers. We are engaged in a number of discussions with potential customers and dealers and look forward to providing updates on our new business orders as we move forward. Our operational and financial priorities remain focused on reducing costs and obtaining the necessary capital to execute our plan and meet our current and prospective customer needs.

Speaker 2

We appreciate this continued support of our supplier partners who await the acceleration of our production plans. Finally, I want to start close by emphasizing that transition to EV Technologies in the commercial truck and last mile segment is starting to take place, slower than expected, but it's starting. I won't like any change, it will not happen overnight. While we've experienced some delays across the industry, we can see firsthand in our discussions with fleet and municipal customers, dealers and others that the transition is underway, Slower than we would like, but definitely starting to take hold. We fully intend to emerge as a winner in the Class foursix step band and work truck segments of the market.

Speaker 2

We have proven our product in the marketplace. We have the manufacturing capacity and supply chain partners in place to build trucks. We have the aftermarket and service capabilities in place and we have committed dealer partners in place to continue to advancing our roadmap and capture the significant opportunities ahead as the transition to EV technology curves across the commercial segments. Workhorse is ready to win when the market emerges. Now we'll open up the call for questions.

Speaker 2

Operator, I'll turn it back over to

Operator

you. Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Mike Schliske from D. A.

Operator

Davidson. Your line is now live.

Speaker 4

Yes. Hi, good morning. Thanks for taking my question. Hi, Mike. I wanted to Hello, there.

Speaker 4

I want to start off maybe asking about stables installed here. At this point, you've got DHL out there running EV vans for a couple years now within different sizes. Other FedEx fleets in other states also running EV vans for couple of years now, maybe not Workhorse brand, but other brands of EVs. I guess it seems like it's already been proven that EVs can work in a lot of different situations for a fleet. So kind of wondering whether you've still got the need to continue with this program at this point.

Speaker 4

Dan, I know it's very near and dear to your heart, but I guess why not monetize the fleet at this point and kind of move forward since it's pretty clear that EVs are working for other folks and there's no need to really keep on proving the point over and over

Speaker 2

again? Yes, Mike, we've had those internal discussions. We've only gotten the W56s on to the stables early this year. We really wanted to get at least minimum 6 months on that. But you're probably right.

Speaker 2

It's not our intention to be a long term owner of the stables operation. But we thought it was an important initiative for us from an R and D and from a marketing standpoint and it served its purpose. I can just tell you that in a recent 3 or 4 hour presentation to one of the last large mile fleets, we were able to stand up as a FedEx ground operator with over a year and a half of experience now, what it cost to transition from ICE to EV in terms of charging systems, infrastructure tie ins, what it means to get rid of some of the old trucks and move to the EV trucks. And now we have the documented proof that there is a savings. And I won't go into the total cents per mile, but it's significant.

Speaker 2

And we shared that and that's gotten a lot of attention and we're working hard with at least 2 of the last mile fleets based on that data to help them start their transition over to EVs, okay. And as you know, if you go back and look at the history, there's been some starts and some stops as other companies have tried to bring EVs to market. Trucks have failed. Companies have gone out of business. And so they're looking for people who really have solid bulletproof trucks and we think we have now over 18 months in the W750 and over 4 or 5, 6 months now on the W56 on our own routes with almost 0 flaws.

Speaker 2

And then you think that sends a lot of message about our trucks. As one customer said, you're the only customer that we have or supplier we have right now who actually used to run their trucks for more than 6 or 12 months. Okay. So you're right, longer term, I think stable is probably gets monetized at

Speaker 3

some point.

Speaker 4

Sure. Thanks. I appreciate that, Rick. Maybe turning to some of your more recent data and fixed orders that you discussed today. Are any of those contingent on having a subsidy attached to them?

Speaker 4

Or are they going to be for dealer demo or inventory purposes?

Speaker 2

Great question. Almost every one of the W-4CCs is tied to some kind of California HDIP incentive for sure. On the W56s, there'll be some that are not tied to incentives at all. They're going to larger fleets. And then there are some that are tied to the HVIP credits that are required in California.

Speaker 2

We know that we have one order for a new rental fleet basically in California that was subject to the HVIP vouchers and I understand we got those vouchers in the last 24 hours or that dealer or that customer got them in

Speaker 3

the last 24 hours. So now we

Speaker 2

can ship the trucks and get them upfitted.

Speaker 4

Great. Fantastic. Maybe one last one for me. I saw another I saw a workhorse strip chassis, it must have been a W4CC and it had a dump body on it at a different trade show back in March. I'm curious if you could share with us any progress you've made on non parcel delivery vehicle orders and customer plans for the current orders that you've got out there today?

Speaker 2

Sure. All 141 of the W4Cs that are going to Kingsburg are basically for not last mile delivery, they're for electric trucks. We talked to Jerry, the dealer principal out there, majority of those trucks are going to be used in California in either 3 forms or fashions, a steak truck, a dump truck or a utility type truck, all right. Mostly around his dealership is in the covers the San Fernando Valley, a lot of interest there in some of the small agricultural programs and also some of the local distributors out there. So most of the W4Cs are not for last mile delivery.

Speaker 4

Great. Outstanding. I appreciate that. I'll pass it along. Thank you.

Speaker 2

Thanks, Mike.

Operator

Thank you. Next question today is coming from Jeff Osborne from TD Callender. Your line is now live.

Speaker 5

Hey, good morning. Two questions on my side. I was wondering just post the changes in April May, if you could just discuss what the burn rate is at these levels?

Speaker 2

I'll let Bob take that one.

Speaker 3

Yes. So I think in the Q1, once you factor out all of the financing type things, our burn rate was about $5,500,000 However, as we announced earlier, most of the reductions didn't really start till March. So we expect that to be sub $5,000,000 here in the second quarter.

Speaker 5

And then was there any changes in April or May to lower that beyond the $500,000 savings there?

Speaker 3

I think the changes will be as you get a full quarter of the savings. Based on timing. The aero stuff, we only got about a month's worth of savings and the rest of it, we really didn't get much at all. So I think the issue will be, I think the expense will be probably closer to 4,000,000 have to start building back up inventory. So we'll be in that $4,500,000 to under $5,000,000 range.

Speaker 2

We need to move finished good trucks with the orders we have to generate some cash and we go back and buy parts and we can build more trucks. So pretty clear. That

Speaker 5

makes a lot of sense Rick that leads in perfectly to my next question. I was just wondering if you could just disclose roughly how much inventory you have on hand on finished goods and then with the manufacturing staffing reductions, I'm just curious like what is your sort of daily or weekly production what's the plan there as the business resumes growth?

Speaker 2

Yes. I'll let Bob cover the financial numbers on inventory. They'll come back and take the production ramp back up.

Speaker 3

Yes. The finished goods inventory is about $20,000,000 And I would say for the next round of trucks, probably 3 quarters of the inventory is in raw materials. So it won't take much to finish off another 20 to 30 trucks?

Speaker 2

Yes, for sure. So we have batteries on-site right now, I think for 2 14 sets of W56 trucks. We have some W4CC pre build chassis available still to go through. So as we start shipping those trucks to Kingsburg, we can finish those W4CCs. There's another 40 at a supplier that are waiting to come to us, but we don't want them right now.

Speaker 2

So ramping up, we were only building about 1 chassis a day. That's probably where we're going to be probably through the month of June. And then we'll see as the orders come in that we need to start ramping up. We're prepared to ramp up between now and the end of the year to like 4 or 5 a day. But right now, we're at 1, 1.5, so.

Speaker 5

So you could get to 4 or 5 with the staff that's on hand today then, Rick?

Speaker 3

We got to bring

Speaker 2

a few more guys back right now. We basically furloughed the plant for a few weeks. We brought a team back in to complete about 25 trucks based on the orders we have. We always continue to have a couple of guys in the plant working through some of the launch issues we have in the paint shop, not the paint specifically, but it's the pre and post paint, takes a lot of work to get that done. So we'll have to bring back probably another 15 to 20 or more in the near future.

Speaker 4

Got it. That's all I have. And the good

Speaker 2

news is and I goodness, I want to say this publicly, right. Our workforce is the best, right. They understand how tough this transition is to EV. Many of them have been in that plant for years or decades. They understand what happens when a plant is idled for a while, not just to the plant, but to the community.

Speaker 2

They want us to win and they're willing to do what it takes to win. And I appreciate their patience, their diligence. We don't control the pace of the EV adoption. That's by the customers and there's a lot of factors that are impacting that right. What I see now is I'm starting to see the cracks in the dam where even the small fleets are starting to understand they have to register their fleet with the California officials.

Speaker 2

They understand and they have to show their plans to get to that 9% target by Twelvethirty Onetwenty 24. So we're starting to see some small fleets make orders. That's what you're seeing with the W4CCs. And you're starting to see the big guys realize they have to make transition and they are making a transition, but it costs money. I was with 1 large fleet at ACT for about an hour and a half and they laid out depot by depot how they're going to electrify across the I-five corridor over the next 3 years from California up to Washington.

Speaker 2

They know exactly how many trucks they need to buy in California and then Oregon and Washington. It's a mix of Class 4, 5, 6. So it's not just a workhorse issue. This is a major capital investment that's in the 1,000,000,000 of dollars by that fleet to go to electrification starting in 'twenty four out through 2,040. And our truck fits perfectly the W-five specifically for their needs.

Speaker 4

Excellent. Good luck. That's all I had. Appreciate it.

Speaker 2

Yes. Thank you very much.

Operator

Thank you. Next question is coming from Craig Irwin from Roth Capital Partners. Your line is now live.

Speaker 6

Craig, perhaps your phone is on mute. Hey, good morning. Thanks for taking my questions. So Rick, at ACT Expo, the big conversation with all the EV truck guys was the impact on the battery tariff, right? A lot of people planning for changes, either changed vendors or different cost structure.

Speaker 6

Can you maybe update us on what you see for Workhorse from the implementation of the battery tariff? What do you think a probable outcome is for you? And do you see this as something that is going to have a minor impact on business or potentially something that could help you in the longer run?

Speaker 2

Short term is minor. Like I told you, we have 2 14 sets of the cattle batteries on-site at Union City. So that's about just short of what we need to build the W56s this year based on orders that we expect either have in house or expect to come in house between now and the end of the year. We do see the tariffs. We're assessing that.

Speaker 2

One of the challenges here in North America, there just is not the installed capacity that we know of. And we went out and looked at all the potential battery suppliers that have North American factories back in 2022 in order to be ready for the 'twenty three launch of the W56 and we couldn't find 1. So we stuck with cattle and CSI and they've been good partners for us. They've been very patient with us as we go through our slow launch. But we are doing the work right now.

Speaker 2

That's all I'll say is what are the long term impacts. As you know, not in our segment, but in the big automotive, they're spending 1,000,000,000 of dollars to create their own battery plants. But at the end of the day, the tariffs will have an impact. We've already talked to our friends at Green Power and see what we can do there from that truck. They have other sources outside of China to build that similar truck and so we'll talk about that in the future.

Speaker 6

Great. And then if I could ask for just a little bit more color. So some of the guys out there that are using cattle were saying that there are anticipated changes as far as the way cattle will serve the market here in North America, particularly the trucking market. Do you believe that there is a credible path to sufficient Buy American content on the pack or similar pack to what you've been having from the same vendor or you would be looking just at global sources?

Speaker 2

I won't comment on cattle specific plans to either localize here in North America, but I'll tell you that we've had discussions with both cattle and their distributor about their future plans and we're confident they have a plan. Let's see if they execute it. If not, we'll look at alternative plans. We know there's a couple of new plants. There is one at BorgWarner under Akasol.

Speaker 2

There is a couple of other ones that are being built. And as those plants come online and the capacity ramps up, we'll take a look at it. But right now, we're going to stick with our cattle as long as they continue to execute it for us and they're doing a great job for us.

Speaker 6

Great. Well, thank you for that. I'll hop back in the queue.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Rick for any further or closing comments.

Speaker 2

No, I appreciate that. I appreciate the questions. I appreciate the patience of our all of our stakeholders, including our shareholders. This is not an easy transition. We're prepared for it.

Speaker 2

Our people are being patient. Our suppliers are being patient. Our shareholders are being more than patient. I appreciate that. We're committed to win and we're going to find a way to do so.

Speaker 2

Thanks and have a great Memorial Day weekend.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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