Q2 2021 Workhorse Group Inc Earnings Call
[music].
Ladies and gentlemen, greetings and welcome to Workhorse group second quarter 2021 Investor Conference call. As a reminder, this conference is being recorded in the channel.
My pleasure to introduce your host Workhorse group's vice President of Finance Tony theory, Sir you may begin.
Thank you operator, and good morning, everyone.
We appreciate you taking the time to join us for our call.
Before the market opened we issued a press release with our results for the second quarter ended June 32021.
Copy of which is in the Investor Relations section of our website.
We also released our form 10-Q this morning.
I'm going to turn the call over to our CEO worked out in a few moments.
I will give you an update on our business after that our CEO, Steve Schrader will walk us through the financial results for the quarter, but before we begin.
I want to call to your attention our safe Harbor provision for forward looking statements that is posted on our website and as part of our quarterly update.
The safe Harbor provision identifies risk factors that may also.
That may cause actual results to differ materially from the content of our forward looking statements on.
Our 2020 form 10-K, and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.
With that I'd like to turn the call over to our CEO ripped out Rick.
Thanks, Tony and thank you to all who are joining us for today's call.
Let me start off by thanking our board of directors forgive me the opportunity to lead the workhorse team as we take the next step on our journey from Tech startup to a real world real World operating company.
I'd also like to thank my predecessor, Duane Hughes Force leadership the company over the past 2 plus years and his outstanding support of me during our transition process.
As most of you know, while I'm new to workhorse I am not new to the automotive industry EV technology for the last mile commercial vehicle delivery space.
My first day here at Workhorse was August 2nd and as you can see on slide 1 has been a very busy week in.
In the past 7 days, we have conducted board meetings held 3 town hall events with our workforce toward our Union City factory taking.
They can test drive in 2 of our delivery vehicles that are just like the 1 you can see on slide 2.
I've witnessed drone package delivery test slides I've interviewed the entire executive leadership team.
On the introductory calls with our key customers and laid out a plan for me to get fully oriented to the company by the fourth quarter of this year.
We have also secured housing and moved to downtown Cincinnati.
What I have seen heard an experienced in the last week confirms exactly why I decided to get off the bench and joined the workhorse workhorse team.
With that said please turn your attention to slide 3.
As you can see we had a clear technology leaders in the class 3 to 5 last mile delivery segment, both for electrified vehicles and drones.
Our backlog is real and stands today at nearly 8000 vehicles orders that are confirmed with standard vehicle purchase agreements, which includes typical terms and conditions.
Slides 4 and 5 show our metro on data data that we have 381 vehicles on the road and in the hands of our customers operating in 21 states with over 8 million miles of real world driving experience.
Experienced metro and can provide multitude of operating data both to us and our customers that allows us to gain data and provide users with increased vehicle efficiency.
And most importantly, we have a capable team of associates from the C suite to the plant floor, who are dedicated and focused on becoming the unquestioned market leader in the last mile delivery truck and aerospace markets.
That being said, we need to overcome some growing pains as we make the transition from a tech startup to a full blown operating company.
There are a lot of work to do around vehicle designs bill of material cost and efficiency lean manufacturing operations.
Areas, where I spent most of my career over the past 3 decades.
I am excited to be here and look forward to digging in and learning more about our company.
Let me now provide a few quick updates on our business units.
Let me turn on to our truck business first we have made significant improvements in our production process.
Year to date, we have produced over 133 vehicles, both for our own use of the test fleet and for select customers.
14 of those trucks were delivered in the second quarter, and we anticipate the remainder to be leased or sold the niche markets within the next 12 months.
In building. These vehicles, we have learned valuable lessons about what we can do to make our <unk> 1000 series vehicles easier to produce an even better value for our customers.
Our initial production run is confirmed the excitement in the market for our <unk> product, which we have shown to existing customers and dealers and are beginning to deliver in limited quantities.
What is clear from initial customer feedback is that we need to further increase the payload capacity of our vehicles.
Although there are niche market opportunities for the lower payload vehicle those opportunities are limited.
Majority of our customers need a higher payload vehicle, which serves a much larger market segments.
Our engineering teams are already hard at work on the revised designs of the C 1000.
Meanwhile, we can continue with a limited level of production for customers, where our current payload is adequate for those who want to road test 1 of the few if not only electrically powered commercial vehicles on our market that are available to them now.
As I said earlier workhorse is making the transition from an advanced technology startup to a leading manufacturer of last mile delivery vehicles and that is not always an easy journey.
I've been through many manufacturing transitions in the past and I know what it takes to be successful.
We recognize that there is a lot of work still to be done and likely difficult decisions ahead to position our company for long term success.
Look forward to working with our team our valued customers and industry partners as we take workhorse into the next phase of vehicle development and production planning.
We will have a revised business and operating plan for our commercial vehicle business by the next earnings call.
Let me provide a quick sales and marketing update we have nearly 8000 confirmed orders with customers.
Whom I spoke with last week.
Thankfully they are being quite patient with us as we work through our internal design and production challenges with.
We continue to receive significant customer and market interest due to the recent purpose built tour and the personal efforts on the entire Pritchard family group enterprise and making that cross country campaigns such a success.
Taking full advantage of the increased interest generated we will be launching a rebranding campaign. This quarter, which will include a new website additional showed trucks that will make their way across numerous high visibility events throughout 2021, as well as unveiling our customer experience and training center right next to our manufacturing facility in Union City, Indiana.
Turning to slide 6 our aerospace team has had had a lot to do this quarter and I have a lot of work ahead of me to better understand both the technical and commercial potential of our industry, leading drone delivery technologies.
Our goal is to develop a system that safely and reliably carries a meaningful payload a significant distance and then certify that system under FAA regulations, we are making progress down that design path.
Our team is routinely in the field conducting test flights to validate our designs and those tests are going quite well this.
This quarter, our aircraft demonstrated the endurance, we need and the ability to fly multiple sorties in quick succession.
Safe reliable flying adequate endurance on a flight and the ability to fly many times a day to day on the key elements of any system that supports commercial package delivery service.
In the second quarter, we flew our system more than 20 missions in the duty day, validating our design and our ability to hit the op tempo the market will demand.
Our work with the FAA is moving forward.
<unk> has assigned US a project manager and the team of subject matter experts to work with on the certification process.
There is new FAA guidance, which may stretch certification for some systems in the pipeline, including ours from our point of view. The FAA is working hard to strike a healthy balance between public safety in the field and the new technologies as quickly as possible.
With that I'll turn the call over to our CFO, Steve Schrader to discuss our second quarter financial results Steve.
Thanks, Rick and welcome aboard sales for the second quarter of 2021 were recorded at $1.2 million compared with 92000 in the second quarter of 2020. The increase in sales was primarily related to an increase in trucks delivery.
There was a total of 14 trucks delivered in this quarter compared to 1 in the same period last year.
Cost of goods sold increased to $14.8 million in the second quarter of 2021 compared to $1.5 million in the second quarter of 2020. The increase in cost of goods sold was primarily related to an increase in the volume of trucks shipped.
A write down of work in progress on finished goods inventory to market value and an increase in employee consulting manufacturing overhead and free cash.
Selling general and administrative expenses increased $2.7 million from $3.9 million in the same period last year.
Increase was attributable to an increase in employee consulting legal and marketing expenses.
Research and development expenses increased to $2.1 million from $1.6 million in the same period last year the.
The increase in R&D expenses was due to employee and contract labor issues.
Other loss increased to $11.7 million from no loss in the second quarter of 2020.
Net loss was primarily related to the reduction in the value of the fair market value of the investment and ride this back on our Lordstown Motor Corporation.
Loss is non cash and is determined by the stock price of variety as of June 32021.
Which is $11.6 vs. A price of $11.77 as of March 31.2021.
There is no change in value during the same period in 2020.
Net interest expense decreased to $10.5 million on the second quarter compared to $124.3 million on the same period last year. The decrease in interest expenses, primarily related to the non cash mark to market.
Adjustments related to the convertible debt instruments and warrants in effect during these periods.
Net loss in Q2 of 2021 was $43.6 million compared with a net loss of $131.3 million in the second quarter of 2020, excluding the noncash adjustments operating loss for this quarter was $22.7 million compared to $7 million in the same period last year.
As of June 30, we had approximately $156.6 million in cash on our balance sheet. However, we have since sold 72% of our REIT ownership shares and are expecting net proceeds of nearly $79 million.
That concludes my financial overview I'll now turn the call back over to conclude the call Rick.
Steve I am excited to be here at workhorse, where the technology leaders and have a great opportunity to build a profitable company over the next 24 to 36 months.
In a technology pioneer is not an easy path, we readily admit that we have numerous challenges overcome on I am confident that we have the team the product technology and will soon have operating plan and commercial plan that we can execute to be successful.
Let's go to work so operator, please provide the appropriate instructions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star 2 if you would like to remove your question from Q per participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
Archie.
On the interest of time, we ask that participants limit themselves to 1 question and 1 follow up.
1 moment, please while we poll for questions.
Thank you. Our first question comes from Colin Rusch with Oppenheimer. Please proceed with your question.
Thanks, So much guidance could you give us a better sense of what youre going to be working on with this redesign on what's the cycle time is going to be on uncompleted those designs and getting into production, but really love to understand.
Hello elements that you guys are working on.
Yes, Colin I've only been here a week that I've done a lot of diligence before I got here and obviously I've spent time with the team both the factor in Union City, and hence the engineering team.
We have set up the week of August 16th we're going to go through full vehicle design reviews downs of the bill of materials with both our engineering team and our purchasing team.
It seems to me at a high level right now we have zero issues with our electronic and electric powertrain systems to our vehicles on the field and our vehicles. We built our meeting the 100 mile range Thats required for about 96 per cent of the vehicles on the commercial vehicle space, we have the ability to flex up to 150 miles that we add 2 more battery packs on their majority of our issues around vehicle.
Immix around chassis systems, those kinds of things Tayloe, Okay. I won't go on on those details today I would ask for your patience give me 90 days and we'll come back with a detailed plan. The good news at least from an outsider looking in and now a week will be on an insider's those vehicles. Those vehicle dynamic issues are all solvable, we got to get the right engineers working on the right issues and then get the right supply.
Or is there to help us okay now.
I'd say this team has done a great job of putting together those designs, we need to do a better job of involving our supplier partners, who are the experts and some other subsystems and if we do that correctly I think we can be out to market with a damn good vehicles soon.
That's super helpful. And then just as you roll these trucks out into the field and monitor them in terms of the learning cycles. What are you seeing early days in terms of your ability to integrate those learnings quickly into into the operating system and how the vehicles, so actually pro forma net yield.
Yes, 1 of the things I was excited about as part of my diligence and now that I've been here is this medtronic system. We have can track real time, where our vehicles are operating anywhere in the country. When we get an update every 10 seconds on about 500 different data points now.
Since that time digging through that that's 1 of things I wanted to do on the next 30 days to the engineering team the sales team and figure out Okay. What is the data telling us and how do we take that data and bring it back to the design team and get a better vehicle out there.
Okay. Thanks, so much guys.
Carl.
Thank you on our next question comes from Greg Lewis with <unk>. Please proceed with your question.
Yes, Thank you and good morning, everybody.
Rick.
<unk>.
This announcement on the redesign of the payload just I guess happened I guess I'm curious was this something that was being discussed before you came on board and as we think about that.
I imagine it was clearly customer driven does that.
Is that leading to any share.
<unk> into as we think about the existing backlog primarily been for the <unk>. The <unk> hundred 50, and the C 1000 as is.
That kind of morph into maybe we call it a <unk> 10000 plus.
Great Great question Great question.
Some of these issues I found out about as part of my diligence and my diligence basically was meeting with some of the board members actually sat down with Dwayne for 2 or 3 hour meeting before I took the job. So these things are the issues that our team knew about long before I got here.
Here's what I'd say I've got to dig through all the different types of vehicles. We have right now with US is $6.50. The M series with 1000 series, we're going to take a look at what we have on in store here from a raw materials standpoint, what we can build efficiently up at Union City, and then talk to our customers aware, if we build vehicles, they can take them and deploy them in the field.
I had a tremendous call on Saturday with 1 of our largest customers he applauded us and slowing down our production he'd much preferred us to get the vehicle right.
That being said he'd be happy to take some of these lower payload vehicles to get them out on the field for certain applications that whether it's a <unk>.
Maintenance tools or bread delivery or doughnuts, whatever it's going to be and get the vehicles out there so customers get a feel for the slide to drive the EV.
And in the last 3 years between Delphi and here I go to these these town hall meetings I ask the people in the crowd. How many of you have on electric vehicles less than 5% of the people habit, it's even less on the commercial vehicle space, but once people get on electric vehicle and they feel the power of it and how quiet. It is a like it on Wednesday last week at Union City I got to go through.
About a 15 to 20 mile test drive in 1 of our vehicles on the <unk> thousands and I was dampened price right are strapped in with the seatbelt would go into corn fields on soybean fields on some of that and I was really impressed how the vehicle handled how it took over some of the bumps the railroad tracks et cetera. So we got to get some of those vehicles in the hands of customers when they see it.
And they can bring that vehicle back the station and charged overnight, it's going to be a good solution is going to revolutionize the delivery market.
Okay. Great. Thanks, Thank you for that and then Steve just pivoting over to you on.
Realizing net it sounds like we probably don't have much color until next week. When you go through the vehicle redesign, but as the day kind of had any any way any color kind of how we should be thinking about.
Free cash run rate on a quarterly basis, I guess whats just think about the next may.
Maybe Q3.
Greg share.
So right now I think you saw we had $156 million cash on the balance sheet at June 30, we have monetize 72% of the ride ownership and that gives it gives us a almost another $80 million of cash and some more to come on that so I think we're pretty good from a cash standpoint, I would look at it as maybe 10 million a month 30 million a quarter.
There is kind of the cash burn so I think we've got a pretty good runway in front of us.
Okay, great. Thank you. Thank you for the time everybody.
Thanks, Greg Greg.
Thank you on our next question comes from Jeff Osborne with Cowen and company. Please proceed with your question.
Hey, good morning, everybody a couple of questions on my end 1 Rick I was curious on your views on automation and throughput recognizing that you are experiencing we're going through this redesign process, but just in general the level of automation in Union City is that something that you would want to step up as part of the redesign effort or not necessarily.
But too early to tell Jeff I'd say my experience at a previous company, where I was on the board automation wasn't a big issue for US typically I would like to use automation, where theres 2 or 3 areas..1 there is a safety issue involves lessee with heavy parts or the redundancy, but the build rates on these vehicles.
101 hour 60, now like Youre in the typical automotive side of the house right, but we will look at opportunities as we look for that.
And I'd say, what we're doing right now we're only building about 2 or 3 a day up to 5 a day.
We know our target down in the future will be much higher than that and we probably have some time to lay out the factory I was impressed by the factory.
Not its outward appearance it needed a little bit of spruced up will take care of that but inside we have a lot of capacity in terms of layouts for stations. We GAAP 2 assembly lines. We can probably have 2 assembly line process by now its a 1 shift operation is the sales grows we can always grow to 2 shifts and so we'll bring some more details of that to you in the fourth quarter and probably.
Update that every quarter going forward as the market develops.
That's great and then my follow up on our questions just around.
Internal.
Sourcing on internal development flow vertical integration on battery packs on other things is that something that you intend to do on can you just touch on batteries in general some of your debt.
It's early a chest with kits embedded.
Yes, too early to tell I know, we have a partnership with Catalyzing. The ATL out of China, and we had entered Dallas, we have 2 types of batteries I've seen them on the floor, where we charge them and keep them keep keep on warm and that kind of stuff, we're going to go back.
And look at our what I call make versus buy decisions. What can we do in house most cost effectively what should stay out its suppliers, how we manage our inventory as you guys know if you know me I'm a big believer in the total production system. We've won multiple awards at my plants before and we'll use that same system here at this company.
1 is applicable.
Okay.
Great Thats all I have thank you.
Thank you. Our next question comes from Craig Irwin with Roth Capital Partners. Please proceed with your question.
Hi, good morning, and thanks for taking my.
So Rick Thanks, Greg.
So I wanted to ask if you could frame out for us here.
Experienced in federal procurement and if you could maybe.
Followed through on that.
How your experiences relevant to may be serving a customer like the post office.
And if there is anything philosophically.
You might be different than the team debt over the last couple of years looking to share with that customer and do you sort of.
Endorsed the strategy the way you see it at this point.
You asked about the federal procurement experience is that you said federal procurement post office.
The move to.
To litigate and and work on a on a regulatory solution rather than <unk>.
The traditional channel.
Yes, we're not going to make any comments today about the USPS lawsuit. Let me just make that comment I have had limited experience. We did some work on as a accuride working with the department of defense on some advanced technology.
Theres a combination so you have to understand the right channel on the sourcing process on the specification process to you got to work through the different budget cycles of the federal government, which happens every year and all of the dynamics that go around there between Democrats republics Republican So let me take a look at that a little bit on the team at the end of the day This administration.
<unk> has talked about upgrading our infrastructure you can read that in the paper, there's a move towards electrification.
What I do hear what I've seen both in Europe at Delphi on here in North America. There is a huge move driven by the government China, 25% of vehicles will be electrified.
Every 1 of the major cities in Europe is driving towards electrification, so how you're going to service all the pubs in downtown London or Paris in those kind of places if you can't bring.
Combustion engine there so there's going to be on market there for us and here in North America, Obviously, California and Carb leads so we got to make sure. We understand all those policies first year in North America and make sure. We're ready to go so to answer the question I got a lot of work to do here on this company here I have got to understand what happened on the USPS I read everything I talked to the board members about a debt that will make them.
Decisions here in the next quarter.
Great. Thank you. So for my follow up is really just a clarification so the payload issues.
Youre moving proactively to solve on your on your trucks can you clarify for US does this impact all of the vehicles in the lineup the <unk> hundred and <unk> thousand or is there possibility for maybe more.
A more aggressive move on the on the <unk> hundred 50 side.
Given the payload differences of last mile delivery versus the people that need 1000 cubic foot.
Of capacity.
Yes, Craig let me dig into more on the details like I saw on mineral we'd give me a little bit I think primarily it's around the <unk>. It's something we can work on it's on.
Not going to go on too many details right now how is that but I will give you more details by the time, we come out in November with our revised plan.
Thank you.
Thanks for your questions.
Thank you. Our next question comes from Chris Souther with B Riley. Please proceed.
Hello, Thanks for taking my question here, maybe just I wanted to kind of clarify.
Design changes that's something you expect to have completed by the time you provided the updated timeline here and the roadmap on the next earnings call here.
Yeah, I'll know a lot more.
Basically Chris after I do with the design and reuse of the team on the 16th 17th and 18th and I am sure that will lead to a whole bunch more questions I can't commit to have all the design plans, specifically button down by the November but we will have a general direction, where we want to do and that will drive in terms of designs.
Utilization that will drive the sourcing with customers when they have their parts fully validated source and then we got time debt to when we want to really launch production in a big way in 2022. So we will give you. The best we can by November, but I won't commit to having 100% done them.
Okay. That's helpful and then.
<unk> purchase orders.
How many do you think are good with the current specs and would move forward in may interim production.
It is kind of waiting it sounded like 1 of the big customers.
Find waiting for the most part taken kind of small volume just kind of curious the mix of customers that have already ordered that are okay with the current.
The current next year.
Yes, I don't know the details of the 8000.
The good news for this is 1 of those customers I talked to last week was ready to drop another 500 to 2000 unit order and I said hold off for now right, let's let's get the designs right, let's get our production right that will come back and tell you when we're ready to actually make those orders. Okay. So don't know yet right now.
Got it okay.
Hey, write downs there.
<unk>, we're talking about there.
Say that again.
Inventory write down during the quarter.
Oh, yes. So this is Steve Chris So the inventory write down on the quarter is that we had many trucks that were either in work in progress or finished goods in the accounting standards require you to write that down to basically cost our market. So obviously and I mentioned this in the past that.
This year, we're going to have gross margins that are going to be significantly negative and.
So basically that's what it was as Youre, writing it down from the cost actually the market and so.
In essence, we are pulling kind of gross margin to negative up to the second quarter here versus kind of when they are sold that makes sense.
Timing more than anything else.
Understood. Thanks, guys.
Thanks, Chris.
Thank you. Our next question comes from Mike <unk> with D. A Davidson. Please proceed with your question.
Yeah, Hey, good morning, guys.
Thank you.
So I don't know that.
Confuse you guys. So you've got 8000 orders here, so 8000 folks on in the case of Pritchard or product group 8000.
Orders worth of people.
<unk> seen the trough as seen this next year that you didn't before this test drove on the truck and they said, yes, I want to I want to drive that Linda case of Pritchard price.
I can definitely sell that as you put it to me now.
And now you are saying that.
That's not the case, what they signed binding waters to take these vehicles.
On a little bit confused as to how.
So kind of what has changed since May has actually signed a binding orders.
I'm not going to get their orders in Amsterdam.
And totally different products.
Have any other.
To put those out there put out a much higher payload vehicle. That's on the same class as for a class III.
Alright, Thank you guys.
On having a great payload.
It's not 1 of the best moved out there today, so what's changed.
Cause you to make this.
Because on switch here.
Yes, Mike Good question. So that's 1 of the things I'm going to clarify with the team with this with customers like I've had introductory calls with pride and pitcher couple of others. This week talk.
Chris our head sales and also the factory I need to understand that mix okay.
We will see okay at the other day the vehicle that we have designed doesn't quite meet the specs, we want to get from a payload so little heavy versus what we can carry okay. So we got to figure out just how big the market is for lower payload right now on how fast we can then tweak our designs and improve our vehicle dynamics to me.
The higher payload requirements right.
So this is like you said, who else is out there I don't know anybody else's out there.
With a fully electric powered vehicle.
It is a space that has been typically a duopoly between the shift group and the Morgan Olson group.
We're the first ones come on the market with electric powered vehicles as I said earlier, we have the powertrain down now we have to get the <unk> dynamics on the payload stem.
That I'm much happier to get that fixed those things can be fixed with good supplier coordination and good designs. Okay. We.
We will come back to you when we come back in November is just what we can build on go forward. So Steve any comments on Mike what I might add too is a couple of things I think we admitted that we didn't hit the design goals. So we anticipate that we wanted to hit from a payload standpoint, but I think the same time in the market probably changed a little bit too in the pandemic I think not only are they getting more packages by.
Heavier packages and more than anticipated. So I think yes, we didn't hit our design goal, but at the same time in the market.
Hearing a lot more than they anticipated just a year ago too. So I think thats part of it right there.
Got it that's great color. Thank you.
For my follow up I wanted to ask about orders could you maybe outline how many origin have gotten during this past quarter and whether if the process of having to redesign for higher payload do you anticipate not having many.
Till you get that design retested homologate, it et cetera.
Are we going on.
On a pause here for a quarter or 2 at the very least.
Yes, let's take a look I'm going to take a look at the 8000 back order what we can serve in the next 2 quarters or 3 quarters and buildup at Union city, which ones, we need to delay until we have the right designs going forward as I said over the over the weekend when I had a phone call 1 of the when the customer is ready to drop of 500 to 2000 unit order.
And I just saw on pulled off lease.
Let me figure out what we can build where the materials, we have the build with getting our people handle it and then can we build a good truck. Okay. So we got some work to do for sure on the next 90 days.
Please give me the.
3 months to get that on a control how's that.
Police navigating Gerald let me understand that.
Don't know exactly on the orders came in in the second quarter, but I know there's a the market is there and the demand is growing so it's a really a race to get the right vehicle that meets the customer specs powertrain as I said 90.696 per cent of the vehicles on the last mile delivery for class III 4.5 only travel lessor.
Her miles a day.
More of that go out to $121.50, we can handle that powertrain Im sure we had to do a little bit of tweaking and cold weather environments. When the super cold up in calendar northeast and that kind of stuff I don't know enough about the technology, but we'll get there I'm confident about that.
Alright, thanks, so much and that's the good news on that hopefully pending order. Thanks, so much for the help.
At this time. This concludes the company's question and answer session. If your question was not taken you may contact workhorses Investor relations team at <unk>.
The U K H.
Cape Gateway IR Dot Com I would now like to turn the call back over to Mr. Dock for closing comments.
Thanks for joining us on today's call I want, especially want to thank our employees our business partners on our investors for their continued support of workhorse.
We appreciate your interest in workhorse and I look forward to updating you on our next call operator that ends our call.
Thank you for joining us today for Workhorse group second quarter 2021 earnings Conference call you may now disconnect.