Q2 2022 Workhorse Group Inc Earnings Call
Ladies and gentlemen, greetings and welcome to Workhorse group's second quarter, 2022 investor call.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Workhorse group's vice President of corporate development and Communications Stan March Sir you may begin.
Thank you Brock good morning, and welcome to all of you joining us on today's second quarter 2022 results call.
Before we begin I'd like to note that we posted our results for the second quarter ending June 32022 via press release.
You can also find this release as well as an accompanying presentation and the Investor Relations section of our website we've.
We've also filed our second quarter Form 10-Q this morning.
We will be tracking with the posted presentation during the call today. So please follow along either from the link in the press release or through our website directly and with that let's get started.
As you can see on slide two joining me on today's call are Rick <unk>, our CEO and Bob <unk> our CFO .
We have a straightforward agenda found on slide three.
Following my opening remarks, I'll hand, it over to Rick who will give you an update on the progress we've made on our strategic and financial priorities for the second quarter of this year.
Bob will then walk us through our financial results for the quarter and cover our 2022 guidance then.
And then we'll take your questions.
Moving to some other important items. Please note that in today's press release, we provided no to specify what we mean when we use the term orders, which refers to our customers' contractual commitment to purchase as well as defining what we mean by a slot reservation, which means a commitment to make a portion of our production capacity.
<unk> and for which is a which is secured by a customer deposit.
Our disclaimer can be found on slide four.
As you know some of the comments that we've made today are forward looking and therefore subject to certain provisions as well as risks and uncertainties you can find the full disclaimer statement and our Form 10-Q, and other periodic filings on file with the SEC as well as in today's press release.
I'll now turn the call over to Rick Dauch, Rick Thanks, Dan and good morning, everyone. Thanks for taking the time to join US today, My one year anniversary as Workhorses CEO was just one week ago on August 2nd.
And what an interesting and challenging 370 days it has been.
On slide five we have identified some of our major accomplishments as the new leadership team here at workhorse over.
Over the past year, we have addressed several issues, while developing a three year business plan to transition from a technology startup company into a full fledged OEM, providing best in class commercial Evs.
An organization's collective success starts with recruiting hiring and retaining experienced professional and capable staff.
I identified the need to reshape the leadership team here at workhorse shortly after I arrived.
There's not one part of the organization, which has not been strengthened over the past year.
From reshaping my direct reports in the corporate staff.
Building, an operations team from scratch to adding the necessary experience talent and depth to our engineering and technical staffs, we have completely rebuilt the organization and more importantly, the capability and skill sets of the workhorse team.
I will not belabor the point further but will simply say this cohesive leadership group is now full of accountable driven and capable individuals who are fully aligned on our critical business initiatives and as a team. We are just getting started on our journey together.
We also undertook a number of critical actions in a timely fashion to strengthen the company in the near term such as grounding and recalling the C. One thousands.
Eliminate all of our debt and drop in the U S. P. S lawsuit.
While painful these were absolutely the harder right decisions to make for our company.
When I got to workhorse, we were a one trick pony from a production parodic perspective.
The only vehicle we could offer customers was the unprofitable C 1000, and we need to ground redesign and repair all of those.
After taking a few weeks to assess the C 1000, the marketplace and our competitors, we quickly pivoted and developed and are now fully executing on a new three year product portfolio roadmap and will be one of the only players in the last mile E V medium truck space with a full lineup of class III through class six commercial products in production and <unk>.
2024.
We've upgraded workhorses facility infrastructure opening them fully staffing the design and technology Center in Wixom, Michigan in less than six months as well as move into our new headquarters prototyping Advanced Engineering Center here in Sharonville, Ohio, just three months ago.
Our manufacturing complex in Union City, Indiana has been expanded basically doubling the available production floor space.
Plant has been completely revitalized is ready for production and now.
We have slimmed down our warehouse locations from three to one and co located on the Workhorse ranch up in Union City.
Our aerospace business plan has been revised product plans developed the team expanded and we also recorded then relocated them into a new site in Q2 as well.
We are now targeting multiple market segments for revenue opportunities and developing unique drones and systems reach.
We're very excited about the revenue and profitability potential of our aerospace business.
All of these initiatives are easy to talk about our show on a Powerpoint slide but trust me there are extremely complicated Super Bowl type challenging to actually execute and less than one year with a team of individuals who for the most part had never worked together in their career.
I could not be prouder of the workhorse team at all levels of the organization, which speaks to my earlier point about bringing together talented southwest leaders and aligning the organization around core values and a common vision.
Finally, we are gaining commercial momentum thanks to all the develops I just referenced.
We have been awarded multiple federal and federal and state government grants for aerospace.
We have signed our first contract manufacturing agreement.
<unk> been able to secure a significant purchase order for our commercial vehicles.
Demos of our last mile delivery vans will be ready in Q4 for the W. $7 50 in the first quarter of 2023 for Wi Fi six both with industry, leading benchmark payload capacities.
I will stop there and move to a specific specifics of our second quarter activities, but make no mistake workhorse is a fundamentally different company today than it was a year ago.
We have a full medium duty EV portfolio, both for wheel and formulated we have rejuvenated our facilities and infrastructure, we have no debt and most importantly, we have a more capable talented and competitive staff and workforce compared to what we all knew one year ago I expect us to continue forward and hit our stride as a team and the year to come.
Moving to slide six during the second quarter, we continue to make progress executing our product Roadmaps and building a solid foundation based on our stabilized fixed and grow business model.
As I mentioned earlier the foundation of our company is our people at every level of the organization. They are critical to driving our success.
During the quarter, we hired additional highly experienced next level functional engineering and operational staff are critical positions throughout the organization.
The talent that we are tracking is top notch and it reflects the strength of what we're building here at workhorse.
We have hired a new VP of commercial vehicle sales and marketing who will join US next month.
She is an experienced and well respected sales leader with both OEM truck and tier one supplier sales experience in the commercial vehicle and transportation industries and deep knowledge of EV technology.
The engineering, we have now filled five of our subject matter expert physicians and have been continuing to build their teams and.
In commercial vehicles, we have Hadrian Rory body engineering, Kennametal electrical systems, Jason Mcdonell controls in telematics, and Dave read body and chassis.
These engineers collectively bring 134 years of automotive experience on board.
And we're glad to have them.
In aerospace, our new Chief engineer Jared patent brings a broad experience in systems engineering development and testing from both the Air Force and specialized defense contractor roles to drive our UAV product development programs for us.
Yeah.
In operations, we now have experienced in house leaders in place across all of the critical operating functions manufacturing, the corporate staff and plant level and quality systems and across multi functions and supply chain.
These groups likewise bring a wealth of essential automotive experience, especially in lean operating principles as they move to start production here in Q3.
We have also added important skills in our back office and administrative functional groups, including experienced internal auditor, a topnotch paralegal as well as important new it and finance staff capabilities.
I will say that we are about 95% complete and filling out our leadership team.
Looking to the back half of the year, we will focus on rounding out our commercial and aftermarket and service teams.
With our product plans on track and the workhorse ranch ready to produce vehicles. We can now constantly feel our commercial team and allow them to go out and sell our products.
Turning to slide seven let me update you on our major product platforms with.
With the suspension is not complete and do care FM DFS testing underway, we expected returning repaired C. One thousands of customers in September .
Over the past nine months, we have redesigned over 26% of the parts on the <unk> thousand and.
We feel we now have a safe reliable and cable vehicle to sell to our customers.
This took us a bit longer than we expected.
After completion of the final testing next week, we will move to repair and sell the remaining 161 currently manufactured vehicles sitting at Union City.
We then plan to manufacture $50 to 74 additional C 1000 by year end from your inventory on hand.
And of course, we will provide service repair parts support as we retire the model at the end of the year.
Turning to the <unk> 750, MW for Cc vehicles, which youll recall serve as a bridge for the gap between the C 1000 product in the future production of <unk> and <unk> platforms.
We've been showcasing these vehicles across the U S and customer feedback has been strong.
Our products ability to carry 5000 pounds of cargo is a clear differentiator in the market. We are the only truck I think at the ACG show that actually was fully loaded.
The program is on track test shipments of the base vehicles have been received at our plant recently and we will start regular production of the <unk> in Q3, and the W. 750 in Q4 of 2022.
We already have 17 vehicles at Union city today, and multiple shipments ordered and underway for Q3 and Q4 production.
Turning to the W. Five six which we introduced two quarters ago at the FERC as the first new workhorse fully design and purpose built chassis platform.
The Wi Fi six will serve the class five and six delivery step van and truck market segments.
We continue to execute our plan for the Wi Fi six and are on track to begin production for the vehicles in Q3 of 2023.
As a reminder, W. 56 has the shortest path to full Bev platform production leveraging existing workhorse designs and our over $9 million plus miles of service time on the road with the EGF vehicle and will have various wheel based options with a common parts spin.
We have chosen proven tier one suppliers majority located here in North America for this vehicle and have sourcing decisions and contract and contract commitments already in place for about 75% of the platform Bill of materials.
In early meal was assembled in wixom last month, we expect to have production intent vehicles ready for testing in Q4 customer demo vehicles in Q1 of 'twenty three and be in a position to complete testing in the second quarter and start full production on time and the Q3.
Strict production cadence following automotive practices.
I have mentioned that we continue to make major improvements in workhorses facilities.
Our true gem in the company is the transform Union city plant, which is fast becoming a world class manufacturing complex right here at America's Heartland.
You can see from the overhead pictures on slide eight that we have or will soon be completing major improvements to every piece of our footprint there and.
And just you can see it all for yourself, we will be hosting our promise analyst day at the plant on December seven 2022. So please save the date.
In addition to seeing the revitalized the facility and the manufacturing mode. We will also have product ride and drives drone operations and the chance to meet the extended workhorse team we plan to share further details at a later date.
On slide nine we have a few images for you to help visualize what has been accomplished to date, we truly are customer ready.
And those customers that have visited have been very impressed I've met with staff members that have returned after being away from the plant for several years that cannot believe that this is the same facility.
From the outside to the inside with new lighting and pay we are methodically transform the union city facility to a world class operation.
The remaining open items include installing in end of line dynamometer in early Q1, 'twenty three further upgrading our security and it systems and putting our leak tests in paint capabilities in place next spring and summer.
Okay.
With the revitalized plant facilities process improvements and high caliber operators that we added to our team we have business opportunities appearing at workhorse did not have in the past.
I've mentioned in the last couple of quarterly calls that we had a number of contract manufacturing opportunities. We are evaluating and we can announce our first major <unk>.
<unk> Award today.
On Slide 10, you can see a couple of images of products that will be rolling out of Union city in the fourth quarter. This year.
We have signed a contract manufacturing Assembly agreement with <unk> technologies.
Beginning in Q4, we will be assembling their sub class one vehicles for distribution in the U S market.
Together with <unk>, we are targeting a volume capability of about 2000 units per year. Once we get through the ramp up phase and have the ability to increase that as market demand dictates.
This is not the only contract manufacturing opportunity. We are pursuing as we are seeing firms outside of the class III six space asking for us to evaluate our own capabilities to support their manufacturing needs stay tuned.
While other EV companies talk about their needs to build plants and less than one year, we have upgraded and doubled our manufacturing floor space and will be in production mode. In August this year.
Moving to slide 11, I want to share a few more pictures of our facility improvements.
We moved the Companys aerospace business into a new facility in Mason, Ohio in Q2. This.
This much larger space, it's about 75000 square feet.
About 15 minute drive from our new headquarters in Sharonville, Ohio.
It gives us the administrative engineering warehousing and manufacturing space, we need since we plan to start prototype drone production in Q3 2022. In fact, we are in prototype drone production.
We have not talked much about the aerospace business and our recent calls given the need for us to focus on our commercial vehicle business and associated product Roadmaps.
I feel very comfortable where we are in the commercial vehicle side and I am spending more personal time, the aerospace business.
But I want to give you a bit of insight into why we find the UAS business, so compelling and exciting.
Moving to slide 12, we present some market data for the most recent <unk> study on UAS trends in the coming years.
Top left plot shows the total estimated Seville civil UAS production growth forecast.
However, if you dig a little deeper into the key segments of the overall U S growth you will see that the delivery forecasts looks a lot like the proverbial hockey stick and that the construction and agricultural uses of drones are also set to increase substantially.
At <unk> projections that I have never experienced in my business career before it is truly exciting.
We are optimistic about the overall U S markets, including both the package delivery as well as the mapping and sensor based segment as our interaction with current and potential customer support with the <unk> study is saying about the market dynamics that significant growth is coming and coming sooner than most realize.
To meet this market trend we have added several key leaders that they have been seasoned by relevant military or airline industry experience. We have doubled the number of certified drone pilots and significantly expanded both our hardware and software engineering staffs.
As we continue to invest in our drone operations, we have achieved several important product milestones shown on slide 13.
I also have been a very important year for our developments efforts as a result, we have begun manufacturing UAS meals in the plant to validate our processes.
The Orange Bert you see in the picture.
We are just beginning the process laid out higher volume manufacturing and supply chain processes or new aerospace provides us with lots of room to grow over the next few years.
Potential aerospace customers continue to affirm that we have a market leading payload and range capabilities.
We believe that our robust and patent protected wench delivery system capable of delivering and if need be retracting 10 pound packages is unique in the industry.
We are continuing to fly almost daily for development and testing purposes. We.
We have made vast improvements in our drones autonomous operational capabilities and have multiple customer demonstrations and tests planned in Q3 and in the fourth quarter. This year, we continue to fly under part 107 certification.
You've also been flying in support of the U S Department of Agriculture provide monitoring data procurement and analytics as part of its demonstration projects were awarded multiple grants to do so we.
We are currently flying in Ohio, North Dakota, and Mississippi to support multiple government programs.
We're excited about our drone operations and are exploring additional projects with federal and state governments as well as large retailers and contractors.
With that I'll now turn the call over to Bob to discuss our financial results.
Thanks, Rick let's turn to slide 14, our results demonstrate the steady progress our team continues to make to strengthen our financial position and drive greater operating efficiencies.
Which will allow us to deliver enhanced value to our customers and shareholders.
Sales net of returns and allowances for the second quarter of 2022 recorded at $12600 compared to $1 2 million in the same period last year. The decrease in net sales was primarily due to a decrease in volume of vehicle sales in connection with the previous recall of our <unk> 1000 vehicles.
Cost of sales decreased $3 million from $14 8 million in the same period last year. The decrease in cost of sales was primarily due to $6 7 million decrease in inventory write downs and 2 million decrease in cost due to reduction in volume of vehicle sales. Additionally, the decrease in cost of sales is due to a reduction in costs associated with the initial production of the.
The C series vehicle platform.
Selling general and administrative or SG&A expenses increased to $13 million from $7 million in the same period last year.
The increase was primarily driven by an increase of $4 8 million in employee compensation labor related expenses from increased head count noncash equity compensation and the appointment of our new executive leadership team.
R&D expenses increased to $5 million from $2 1 million in the same period last year. The increase was primarily driven by an increase of $1 3 million in employee compensation and labor related expenses due to increased head count.
Additionally, there was a $1 1 million increase in consulting and prototype expenses related to the continued development of our <unk> Wi Fi six and W. E 750 vehicle programs.
Net interest expense was $100000 compared to $10 $5 million respectively. The decrease in net interest expense is primarily due to an $8 $5 million increase in fair value of our convertible notes during the three months ended June 32021, as compared to no change in fair value. During the three months ended June 32022.
Other loss was zero compared to $11 7 million in the same period last year the loss in the prior period is primarily attributable to unfavorable changes in fair value of our prior investment in Lordstown Motors Corp, which was sold entirely in Q3 of 2021.
Net loss was $21 2 million compared to a net loss of $43 6 million in the same period last year loss from operations for the second quarter was $22 1 million compared to $22 7 million in the same period last year.
Turning to slide 15, I wanted to spend just a moment on the balance sheet first I want to emphasize that due to the exchange transaction earlier in Q2, we are now debt free.
This is an important milestone for workhorse.
Also you can see the company had approximately $140 1 million in cash and cash equivalents at the end of Q2. Additionally.
Additionally, I wanted to flag that our down payments to green power for the base vehicles. We are receiving for them had cash cash usage associated with it of $10 6 million, which shows up in the prepaid to the balance sheet.
It's also worth noting that our AGM is in place.
On slide 16, we summarize the cash and debt position I want to add that we currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio, and Michigan to be between $15 $25 million in 2022.
This was downward revision due to timing and more limited robot usage requirements in our plans at Union City.
Slide 17 covers our 2022 guidance with our vehicle redesign effort for the <unk> thousand being more extensive than we first thought.
We lost about 60 days of supply chain response time, which also had a knockoff impact on testing. This is only a timing issue assuming current supply chain lead times remain unchanged, we expect to manufacture.
Between 150, and 250 vehicles and generate between $15 million to $25 million in revenue.
For the rest of the year.
I'll now turn the call back to Rick to wrap up.
Thanks, Bob I want to briefly discuss our Q3 priorities on slide 18, first we need to continue adding depth and specific skills that staffing levels layers in the company with an emphasis on the commercial and aftermarket and service teams.
We need to keep executing on our product Roadmaps and get production started at Union City.
Mainly the Michigan, and Ohio Tech centers up to speed with their full testing capabilities by year end.
We plan to get our ERP planning process has kicked off with the transition to a new fully integrated system in 2023.
Lastly, and most importantly, we need to get out on the road with our demo trucks vans cabs chassis, the drones and some secure further customer orders.
Before we before we turn the call over to Q&A I want to reemphasize four important points from our call today on slide 19.
First.
Through the efforts of our team members, we have built internal engineering and test supply chain and manufacturing capabilities as well as modernize all of our facilities, most notably Union city, providing a rock solid foundation for future leadership, and EV technologies products and processes. We are building a company with a rock solid foundation, that's here to stay in.
When.
We will continue to hire experienced capable employees for critical positions and further strengthen our operational supply chain technical capabilities through hands on and in classroom training.
We expect to hire more than 100, 150 hourly and salary associates in 'twenty three 'twenty four staff, our production and testing sites.
Second our strategic product roadmap plan is on track and on budget, we made important progress during the quarter with initial production to start this month at both the CEB and aerospace.
And third we remain confident in the market opportunities ahead in our industry to deliver value to our customers shareholders and other stakeholders the transition to EV powered commercial vehicles, including Uas's, while still early in the game is in process and we expect to emerge as one of the winners.
Finally, we have the needed access to cash and capital resources to execute our plans.
That concludes our prepared remarks. Thank you all again for your time. This morning, we look forward to continuing to update you on our progress and we're now ready to open the call for our questions. Brock Please provide the appropriate instructions.
Thank you.
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One moment, please while we poll for questions.
Our first question today is from Jeff Osborne of Cowen <unk> Company. Please proceed with your question.
Hey, good morning, several questions on my end I was wondering if we could get a crash course, Rick on how to model both the contract manufacturing piece in the aerospace piece I think most of wall Street's not giving you credit for those two segments and you sort of leaned into those in the prepared remarks that would be helpful to just go over how the puts and takes some modeling both revenue.
Per unit as well as potential margin structure.
Yeah, So Jeff I'm going to defer that over to Bob, but let's say this we're not going to go and do any business that we don't make money I'll start with that as the CEO how is that so good Bob.
Jeff.
I'll start with the contract manufacturing business.
As Rick mentioned up to a couple of thousand vehicles per year.
Our component will be basically the labor to do that so that'll be somewhat.
Minimal there, but we will have a positive margin that we expect.
No. One is you might see in a normal operating margin therefore for contract manufacturing.
So it should be it should be pretty normal in and basic there on.
On the Aero side as Rick mentioned, we're still conducting the prototype builds so we're still finalizing cost. There. However, again, we do believe it to be a very positive margin business and.
It will also come with <unk>.
Follow on parts services et cetera, too so.
We expect that to do very well once we ramp up to full production and start getting the parts that we need to to build the scale yeah, Jeff I think today, we have three or four individuals dedicated to production over at the aerospace business for <unk>.
<unk> one off parts in the open market and so as we look to model that outlet, we have better numbers, probably 40 of the fourth quarter in terms of takes about 70 hours right now to build a drone I'm not sure exactly where our target is.
In the future, but there'll be a lot less than 70 hours and we want to be able to get out and lower our build material costs, even the way we do things today, it's still a very profitable business. So.
Got it and then just two other quick ones on the can you touch on your battery supply for 'twenty, two and 'twenty three just given the inflation you can walk through how much batteries you have for next year and more importantly, how the prices adjust given the inflation on nickel in lithium that we've seen in recent weeks.
So.
We're locked in on our contracts.
We'll have some some metal modifications to those contracts.
Don't really start getting into.
Full needs until mid year next year.
And of course the.
The source chassis that were getting now come with batteries already in them. So we're locked in there as well.
So it's right.
Right now I feel like we're in pretty good shape there obviously.
Generics change every month, it seems like but right now I think our timing works out well for us.
Got it and the last question I had is just on the revised guidance to 150 to 250, you mentioned supply chain and I think you mentioned.
60 days of lost production can you just flesh that out a bit more was there particular semiconductors are where the chassis is slower to evolve.
Come in than originally planned or was this all due to the <unk>.
1000 redesign taking longer than expected it was a bit unclear exactly why the guidance revised lower.
Yes, it's basically 100% tied to the C. 1000, I think the redesign was more extensive than we thought it was going to be talking about frames full front suspensions.
Well issues that we caught during the FM BSS testing. So we got a we got a large list of probably 30 or 40 different things on the vehicle has to be changed.
Which causes.
Causes lots of parts configuration changes. So first you got to get the Redesigns done you've got to validate that in your on your computers then you've got to go do some testing of parts then you've got to buy parts and youre going to buy some parts from people, who just told were going to kill the vehicle. So theyre not too happy about doing that right. So it took us a while to get some of that resolved we had a couple of battery supply issues.
<unk> battery supplier, we had to get suspensions and then we got backed up bringing those suspensions in from Asia.
Lots of excuses as my Old Man I would say don't give me your excuses just deliver results.
We're going to make up that production and get it done might just takes a little bit longer than we thought so it's still the plan.
Redesign fully test repair and build and sell C. One thousands it might take us a little bit longer than we thought so.
The good news that we've had and then lastly, fruitful we've had fruitful discussions with customers that we think we have a home for every C 1000, we're going to build so.
Got it and the last one the 100.
61 that you are repairing how do we think about the.
The margin profile of that just given you've already written them down. It was unclear. Your guidance is only really based on revenue, but I wasn't sure in particular on gross margins as Union city ramps up but selling a repair vehicle I havent seen that flow through other P&L as in the past.
Yeah, I think I think.
It's pretty much an accounting answer.
We wrote the value down to net realizable value. So the way that all flow out on the P&L.
Is that basically revenue will equal cost more or less and so the margin will be zero on those however, because of the cash was spent last year the cash flow will be pretty substantial on each one of those.
Got it thank you.
Thanks, Jeff.
The next question is from Greg Lewis of <unk>. Please proceed with your question.
Yes, hi, Thank you. Thank you and good morning, everybody and thank you for taking my question.
Rick I was hoping you could talk a little bit more about contract manufacturing.
The opportunity with <unk> I guess those vehicles.
Bit smaller not directly competing with.
Workhorse is going to be producing in the near and longer term it looks like.
I guess in that like are there do you see.
The opportunity for additional contract manufacturing opportunities with other customers and is this something where you've actually been able to kind of just given how you've quickly repositioning the company.
Is there an opportunity for workhorse relates to develop a niche.
And assembly for multiple for other EV.
<unk>.
Yeah. Good question. Thanks first of all remember I consider myself to be an operational animals.
Love being in the factories and I would like to create jobs here in America right. So there is an opportunity here.
We inherited in terms of the Union city.
Plant there was good bones, there alright, most important theres good people there and they had basically been.
Left behind in the last decade as they change their ownerships a few times lack of investment up there. So we've gone up and revitalize that but again the bones were good we expanded and released the warehouse next door, we can convert that into factory space and we lease storage place to put our batteries rather than having two or three different places. So we have a unique situation.
At Union City create a real hub for EV production.
We had the land expand we have the building space to do things it's opportunity. When you look at other EV manufacturers. They talk about we need to build a factory, it's going to take US 12 months or 18 months or some say six months, we already have a factory we already have a workforce we have a plant that used to employ over 200 people. When we got here at less than 100 today, we have about <unk>.
Right now we have a Hungary environment, we've talked to the mayor we talked at the state level in Indiana about how we get some incentives whether that's tax breaks or training money to put people back to work and good jobs, they're not driving 40 or 50 miles away from the farming community view in the city to go find a good paying job and I think that's a good thing to do.
We talked to <unk> I met them in August of 2021, when I first joined the company I didn't think had a fit for US we continue our discussions we met again this year at the.
And Ta show over in Indianapolis, and those discussions continued our team went out and visit where they make them today out in California, and they've got real orders and it's a truck that we want to exercise our muscles are people have been sitting idle basically cleaning up the facility Rehabbing. The facility. It's been a long time since we turned a torque wrench.
Assemble things we want to do some of that this year both on the C 1000, which is mostly repairs and some assembly, but also the <unk> vehicles is something we think we can build efficiently and help them out so and on top of that we have the floor space and other people are calling us right and we're in a good location in the heart belt right in the region of where a lot of the suppliers are.
For specialty vehicles up there in the Elkhart, Indiana area over to Ohio down into Tennessee, Kentucky, Illinois. So it is a great location for us.
Okay, Great and then just.
Yes funny.
Thing over dinner and we're talking about <unk>. They are talking about what you guys are kind of in the middle of the country like well actually you can get parks are you pretty quickly income beyond the Saint Lawrence Seaway, you can come up through the southern ports, you can come up the Mississippi River and so we had to get into the geography class.
John and his team of California, Scott not everything has to come through the ports in California, and Washington and Oregon.
And lately its almost better if it's you or not.
And then lapse.
And you did call I guess on the drone opportunity.
I guess for a lot of people that have been following it historically this was going to be something that was going to really be.
Something focused on last mile delivery.
I think you called out some government work.
And as well as slide 12, where you have different segments.
I mean, that's just looking at that it seems like the near term opportunity would be outside the conventional.
I don't know the conventional wheelhouse for how we thought the drone was kind of a horse fly was going to be used is there any way to kind of throw rough.
I don't know.
Pam's around what the drone opportunity could be.
The over the next five years, but even before maybe even outside of say last mile delivery.
Or is it too early.
It's a little bit early but I'll tell you in less than a year I'm more excited than I was when I first got here. Okay. One of the first things I did I think the first 10 days, we had a review of the aerospace business in sight.
And when you pull in and you can't find a parking spot because there's not enough room, because we are growing.
We could do some trainee outside but limited trade outside of flights now we're in a different facility. We have plenty of parking we have plenty of room to grow.
And one of the first question I asked John Greg Lewis, what else could our drone do if we carry a 10 pound package 10 or 12 miles and.
And we came up with some of the ideas about the era of reconnaissance and the mapping that's led to a grant from the USDA, which has led to multiple grants and the USDA, which has led to opportunities that states to do some transport of parts like on the oil fields up in North Dakota.
Around the Ohio, 33 quarter here to move parts, we talk about moving medical supplies between hospitals and blood banks, it's almost endless we've had to actually step back and say hey, let's focus yes, our Burton carry 10 balancing to go 10 or 12 miles basically around trip.
What else can we do and so it's very interesting let's say.
Probably too early to tell you the terms, but I would tell you that we think its pretty robust.
Wouldn't have moved into a 75000 foot space.
Probably triple what we needed from the old space.
But if we can put our supplies in there.
And we can manufacture in volumes.
I think we've said before.
Tens twenties. This year hundreds next year, we're talking thousands of drones by 'twenty four.
Right.
Pretty good pricing and the pricing there, it's a new market is not a lot of players.
There's two opportunities we're talking to very actively about delivery in last mile delivery, one off one off the truck not off the truck and there's other opportunities to deliver packages around the world.
Okay.
Okay, great. Thank you very much for the time.
Yes, Greg we tried it we tried to give some more details over the next few quarters on the opportunity of the drilling business, but it's real.
The next question is from Colin Rusch of Oppenheimer. Please proceed with your question.
Thanks, so much guys.
Start to ramp here can you talk about some of the key manufacturing challenges we've seen certainly.
Any number of folks struggle with some of that initial land, but I'm curious what you guys are seeing given kind of your long history of strong execution in those regards.
Yes. Good question, Colin So obviously the supply chain challenges, whether thats ports that are backed up for the cost of freight coming over from there, but we've got that built into our models and we've looked at bringing some of the trucks from Asia different different ports versus coming into <unk>.
Southern California, So that's number one it's more logistics.
The first trucks, we build the W 15 in <unk>.
<unk> pretty much as simple truck.
<unk> assembled re badge and assemble we'd get those out there. This is strong demand out there right now there's not any other class for truck I know right now that can carry a 5000 pounds. If there is let me know and we'll go find out benchmark for sure.
W. Some 50 is little more complex there we have a tight timing to finish the design.
Of course, all the.
Parts to go ahead and put the debt.
Van backing so it can be it from a delivery van so right one of the things. We're doing is as you know a big practitioner of toilet production system. We've gone through extensive training with our sand consultant I've used that several companies to teach our guys the fundamentals of lean value stream mapping.
Our plan for every part operator balanced charts machine balance charts material flow working capital management, and so we're getting that button down pretty good I'm starting to hear the language. When I go there runners repeaters and strangers not just that the truck business, but also the aerospace business not just the manufacturing people, but the supply chain, but finance people are talking the same language as well so.
Just react teaching people lane exercise in our muscles and working through supply chain logistics I'm not worried about torque tools I'm not worried about getting a dynamometer install all of those things are pretty standard equipment, and we have a workforce that a bunch of young kids up at Union City, we have some experienced manufacturing people.
And they're 30%, 40% 50, who built complex chassis for general Motors and for Navistar in the past so I am confident they know what to do.
Excellent.
You alluded to this a little bit.
The competitive environment, you know there's been a lot of money raised with a number of platforms and there's a limited number of folks that are actually producing vehicles at this point.
You look out at the landscape with the redesign on the platforms and in talking with customers. We can say about the competitive positioning that you are seeing for workhorse in how your trajectory is looking relative to some of your peers.
Yeah. Good question. So I would tell you, it's a wild wild west in the EV space, especially on commercial vehicles, yeah, there'll be some casualties, we've talked about that before even from the first time at ACC show I sat down at lunch I said some of these companies are fake.
Some of these companies are real which are the ones, who our biggest competitors. We've narrowed down who we think are going to emerge as the real competitors in our space. We're not worried about people doing big trash trucks or stuff like that we're worried about who's going to try to compete with us in the class III for $5 six delivery last mile delivery.
There, we think we're well positioned we lost about 12 to 18 months with our misfire on the C 1000, but we have quickly pivoted and we feel really good position with the W. 750, the Wi Fi six is coming down the road those will be benchmarked vehicles, and we can go out win our share of the market. We don't have to win a huge percentage of the <unk>.
Sure to be a successful profitable company.
Right.
Said in the past some of the space has been a duopoly for a long time, a duopoly in chassis, which are restricted in a duopoly in body outfitters, which is somewhat restrictive with capacity. So the market need someone like us to come in and not everybody is happy were coming in.
We're going to come in and we're going to win.
Great. Thanks, so much guys.
Thanks Colin.
The next question is from Chris <unk> of B Riley. Please proceed with your question.
Hey, guys. Thanks for taking my question here, maybe on the Wi Fi 670.
75% of materials.
What are the critical components are still looking to dial in.
Over the rest of the year here could you maybe walk through vehicle vehicle pricing shaken out is because we're getting a better clarity on the supply chain would be helpful.
Yes, we're basically 85% 90%.
<unk> sourced.
The key chassis components, the brake suspension batteries I should say powertrain as well the last things to really source are going to be the cap in the body.
Some of the interior and that stuff has shorter lead time, so I think we're still within our lead time targets.
We have a very disciplined process, we put in place here now where we track.
The timelines and the data we have to meet so we don't get behind schedule and two we have budgets right and so that's something that was new here I think at workhorse you just can't design a truck that works you have to design a truck that works is safe is reliable and makes money and so we're trying to put that discipline and here I said that so I think we're good shape you ask the question would you asked about.
Specific part or you say breaks or what would you say I can't remember what you said.
No I was asking first where there's critical close which you just and then just the vehicle pricing, how we see that kind of shaking out and so we're getting better clarity on the supply chain.
It sounded like previously.
You talked about you thought there was kind of room upwards from where do you see 1000, we've been pricing.
The entire kind of fleet given the competitive landscape I just wanted to get a sense.
Five states.
Any sense of pride senior from so too early to tell there.
No no.
Bought a couple of the current competitor vehicles, non EV and we've torn those down and so we know what they cost from a frame and body standpoint, we've seen some of the pricing from some of our competitors out in the marketplace, whether that someone like Sos or bright drop in others. So we feel like we have a good handle on where we need to come in.
To be competitive and where we need to make money and we rolled that down to our manufacturing team from a labor standpoint, we laid it down to our supply chain team from a from a component standpoint, So I think we're confident so Bob.
His team is right in there with us and all of these reviews and making sure. Our models are right and then we'll see what happens now one of the one of the Wildcards is the money that the governments are going to put forward, whether that's in California. The <unk> program.
Or if this inflation reduction act actually gets past youll see the significant incentives there to move towards EV type vehicles, not just passenger cars and trucks, but also commercial vehicles and so we'll take that into account as well at the end of the day.
You have to go get an EV powered that can allow the final customer to make money and what they do with these trucks whether that's.
Taco trucks or delivering bread or living uniforms are delivering groceries are delivering packages to our houses right.
Electric vehicles based on the models, especially with diesel at 5% to $7 a gallon higher than that in California, right now the T. C O calculation gets pretty good and we've done some work with one of our customers on drone deliveries and it's even better in terms of the cost of delivering a package, especially a small package, especially to a rural area or somewhere you had.
Across heavy congested traffic or river ways.
Okay, and then maybe just.
It sounds like the guidance.
Potential thousands being pushed into early next year.
So I just wanted to get a sense of.
If that was the case versus <unk> 50.
Expectations remaining pretty pretty similar.
And then.
As we're looking at kind of that order book conversion for folks who had previously been waiting for this tier one thousands and can you just talk a little bit about what the customer discussions are peer either.
The Nextgen <unk> 56 versus <unk>.
750.
Where those discussions are kind of shaking out at this point.
Greg Good question. So yes on the <unk> on the <unk> thousand is it basically is we're going to slide a little bit to the right.
The guys maybe no one goes home for Christmas unless they're all repair to built I think they're confident it's all about getting the parts and okay and so we lost some time as Bob said, we lost about six days and some of the redesign and testing and then it took us a while to get some of the parts and we're just finishing up the due care testing actually this week. So so that's C 1000, but as I said, we think we have a home for ever.
One of those and we've adjusted some of the pricing to cover some of the repairs as well.
<unk> and <unk> 75 zero the order we talked about today basically was a combination of Stan said earlier, it's a combination of purchase orders and build slot reservations. If you take a look at the build slot reservations for almost 40% of the trucks, we're bringing in with Green power. So we feel that's a good start now we've got to convert those reservations to firm orders.
Which we tend to do but the customer that we've been working with on that program is very bullish about the EV space has a lot of knowledge in the EV space and thinks he can sell a lot of these trucks. Some of them will have to be van version and some will be just go out to the market like Mitsubishi or zuzu work truck that gets a different package on the back you can go to a lot of outfitters there. So.
The <unk> six and the <unk> 750, <unk>, our customers want to see that working prototypes. They have seen a couple of display vehicles on the W. 750, that's out running around right now, but they haven't seen the real production version, yet and the W. W. <unk> six we just did our mule chassis built 10 days ago, we'll have our first program builds here.
October November so it will be in a position by Christmas to get out on the road and start seeing the customers are thrilled vehicles. So we're talking about I won't say the name that some of the biggest truck dealers in North America that own more than 100 trucks. Some of the biggest fleets in America, who buy the sand the trucks and then lease them. The people you can start figuring out who I'm talking about they're anxious to get there.
Hans on the trucks and see what we do okay.
Real secret in the marathon Theres a short.
The shortfall of work custom.
Work truck chassis right now alright.
The Big Oems, who make those are going to put their electric chips and the big class eight rigs or big Suvs that make a hell of a lot more money than I do on the commercial vehicles right and so that's straining the industry a little bit right now our ability to design and build our own chassis will differentiate us from a couple of other players in this last mile delivery space.
Okay. Thanks for the color I'll hop in the queue.
Thanks.
The next question is from Mike Schilsky of D. A Davidson. Please proceed with your question.
Good morning, and thank you.
I wanted to start off with a few follow up questions and details on the <unk> agreement.
Can you give us a sense as to the tenor of the length of that agreement how long will that go for and are they building their own facility and will this year.
In fact in when there is ramps up and maybe secondly.
What's the <unk> supply chain and their order book look like do you feel confident that they will have.
2000 units a year starting next year.
So the agreements for three years I think they will continue to look for ways to enhance their their production capabilities, but they but they really like our facility in location as a.
Key spot for the U S market.
In terms of their supply chain and customer book.
Been very impressed that's why we wanted to do this deal we think.
I think they've got not only a good supply chain, but a good supply chain strategy and.
Absolutely have.
Customer book and demand.
Yes.
One of the nice things about <unk> is they are out talking to some customers.
That would not be our first targets from our last mile delivery, but their institutions or organizations, we're fully committed to going green.
<unk> already ordered some of the <unk> vehicles, and we want to come in behind them with <unk> and say Hey, Let me also introduce you to a class five truck.
<unk> van so you're going to do your whole University campus.
Or in some states your whole state University system is going to go Green you got the small trucks, whether ambulances are shovels or whatever but you need some trucks to go service the cafeterias and the sports facilities et cetera, and we think Thats a target rich environment, and we think Thats triples team has been out ahead of us on that is probably 12 to 18 months.
Okay.
Got it.
<unk>.
Hello are you there.
Yes, we're here.
Oh, sorry.
I wanted to also ask quickly about about.
About your SG&A and R&D spend there was a slight increase.
<unk> been happening obviously everywhere.
I just want to get a little sensitive the trajectory on SG&A and R&D going forward should we expect to see a little bit more increases in Q3 Q4 as you make those last few few hires and some more investments in the C 1050.
Things Tamped down a little bit next year as some of those expenses roll off.
Yeah.
You know I think I think we're getting we're getting pretty well filled out on the teams, but I will remind you as you think about modeling out third and fourth quarter that.
As Rick mentioned, we have a new VP of sales starting here, we've not really had a full sales function and will want to round that team out with some expertise on the selling side. So we still have that to add into this.
So I think I think if you think about your model I think you'll still see somewhat of an increase in third and fourth quarter before we're fully loaded leveled at that point.
But as Bob said, 95% full now tweaking a little bit and then it kind of stabilizes and we got to drive the volume is up across the fixed assets. So a lot of expenses to pick up and relocate one two teams recruiting fees the higher the talented people out there on boarding costs.
Just getting basic fundamental systems in place but.
We understand where we're going.
Okay. Okay.
Maybe lastly, I wanted to touch on charging real quick.
A few companies we heard from this quarter have discuss charging has been a sticking point and the customers want vehicles, but they haven't put all the effort and all the thought into how they're going to charge them once they get them.
With workhorse.
Second by the Apple here Youre kind of starting with some brand new platforms, New vehicles, you had a chartering strategy in the past.
I'm wondering if you're making any changes to how you help customers make sure that they are ready to take these vehicles and charge them, assuming they get them or is your old strategy.
For the time being.
Mike That's a great question.
I'm still relatively new to this industry I continue to hear infrastructure infrastructure infrastructure right.
Obviously, the federal government is putting money forward, whether it's through the D O T infrastructure bill for charging systems.
The inflation reduction act add some more money for our investments in EV infrastructure.
<unk> put forward some grants to allow companies like ours to transform old ice related factories over to EV. So there's lots of opportunities there.
We have a partnership that we signed up with charge point, we think that the leaders here you've been out checked out their hardware and their software I'll just say stay tune. We are working on some things, we'll probably talk about later this year.
Okay. Thanks for that color I appreciate it I'll pass a law alright.
There are no further questions at this time I'd like to turn the call back to Rick Doyle for closing comments.
Thanks, Brock Thanks, again, everybody for calling in and your interest in workforce. We have a good team. We've got solid products, we've got great facilities, and we need to put our nose to the grindstone work kick some <expletive> have a good day and talk to you later bye.
<unk>.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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