Q3 2022 Workhorse Group Inc Earnings Call
Ladies and gentlemen, greetings and welcome to Workhorse group's third quarter 2022 investor call.
As a reminder, this conference call 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 now begin.
Thank you Rob good morning, and welcome to all of you joining us for today's third quarter 2022 resort resort results call before we begin I'd like to note that we posted our results for the third quarter ending September 32022 via press release.
You can find this release as well as the accompanying presentation on the Investor Relations section of our website.
We also filed our third quarter Form 10-Q this morning.
We will be tracking with the posted presentation. During the call. So please follow along either from the link in the press release or through our website directly and with that let's get started.
Joining me on today's call are Richt out, our CEO and Bob <unk> our CFO .
We have a straightforward agenda today, which is 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 operational priorities for the third quarter. This year.
Rob will then walk us through our financial results for the quarter and cover our 2022 guidance then we'll take your questions.
Our disclaimer can be found on slide four.
Some of the comments that will be made today are forward looking and therefore are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement and our Form 10-Q and other periodic filings.
With the SEC as well as in today's press release.
I'll now turn the call over to Rick <unk>, Rick Thanks, Dan Good morning, everyone and thanks for taking the time to join us today.
We had a very productive third quarter here at workhorse and here are some of the highlights on slide five.
Let me start with a brief summary of our key hires during the quarter.
Last quarter, I mentioned that hired an experienced and capable commercial vehicle sales team with a critical focus area for us and we did just that and I'll cover those details shortly.
Additionally, we continue to strengthen our operating teams in both commercial vehicles and aerospace hiring a new plant manager at Union City, and bringing on board two new Vice presidents in Aero, one in flight operations and technology and another in manufacturing supply chain.
These individuals each bring more than 25, plus years of relevant industry and technical experience to their roles.
We also made important additions to our finance and.
In HR staffs, bringing on experienced professionals to improve our back office administration processes and systems.
On the product portfolio front I am extremely pleased to report that we delivered our first W for Ccs and made progress across our entire product roadmap.
Getting safe reliable vehicles in our customers' hands was an important milestone for the workhorse team.
Importantly, the <unk> hundred six program remains on schedule and on budget.
We also completed the necessary preparations for executing the <unk> vehicle launch here in Q4.
And we did we did experience a setback and testing on the C. 1000 vehicles now I will provide details about this a bit later.
We also made significant strides across several other major initiatives, including upgrading and transforming our facilities, while expanding our engineering and testing capabilities.
In aerospace we are in the process of doing final flight testing for the horse fly and.
And we developed a new platform for humanitarian assistance and logistical operations, what we call Halo and less than 120 days.
We are executing on our government grants and our developing inquired the necessary equipment and skills to move into drone production in 2023.
Today, we are introducing our staples installs initiative.
We believe this effort is essential for workhorse of better understand the challenges and needs of our fleet customers as they make the game changing transition to electric vehicles.
Finally, we continue to address legacy issues and remove overhang and uncertainty from the business, including the recent proposed settlement of a class action lawsuit, which was announced after the quarter and this is a very important step for us here at workhorse.
Turning to slide six throughout this past year, we have been focused on executing our stabilized fixed and growth strategy, which starts with building a capable and experienced leadership team.
We have hired nearly 100 associates across all areas of the organization, including sales engineering operations and administrative functions.
We believe having a cohesive team of hard working ethical people with relevant industry experience to our team first players.
It's absolutely critical to our transformation and long term success as a company.
To that end during the third quarter, we hired our new Vice President of commercial vehicle sales and marketing Chris Amy.
Simply put Chris as a commercial truck sales professional.
She spent the last 13 years with mobile truck and responsible for both the western region and for electric mobility sales across all of North America.
He hit the ground running and has already hired three regional U S sales leaders, who bring a combined 50 plus years of commercial vehicles sales experience to workhorse.
We also hired Renee Stevens as our director of data analytics and field services, who brings to us more than 30 years of OEM and data analytics industry experience.
These positions were essential for us to fill as we continue to build up our team to become true pioneers in the transition to commercial Evs.
I would say that for now with the exception of a few specialized position requirements such as warranty and parts services. We are finished with hiring the hiring of senior level functional engineering and operational leaders here at workhorse, our focus now shifts to adding to the capable and motivated plant teams that are CV and arrow factories located in Union City, Indiana.
And Mason, Ohio.
Turning to slide seven we continue to make excellent progress on our revised product roadmap plans.
Some of our class four offerings. The W. 750, <unk> as a reminder, these vehicle served to fill a critical gap between our limited production C 1000 product and the future production of <unk> and <unk> platforms.
The strong initial customer interest for these vehicles reinforces our belief that our products are differentiated in today's EV market.
As I mentioned at the top we delivered our first <unk> during the quarter and we are ramping up production and delivery throughout the remainder of 2022.
Delivered 10, <unk> vehicles during the third quarter and another 13, so far in the Q4.
The <unk> four Ccs close cousin the W. 75 package delivery van remains on track to complete initial pilot build production builds in Q4.
Turning to the Wi Fi six which we introduced three quarters ago is the first new workhorse fully design and purpose built chassis platform.
This vehicle will serve the class five and six delivery step van and truck market segments.
We are continuing to execute on our plans for the Wi Fi six program and are on track to begin production vehicles in Q3 23.
About 90% of the platform Bill of materials has already been sourced to proven tier one suppliers. The vast majority located here in North America.
Early meals were assembled the wix admin sharonville in Q3, we.
We expect production of type vehicles, we built in Union city in Q4 customer demo vehicles to be delivered in Q2, 'twenty three and we will complete both FM DSS and durability testing in Q2 of 2023 as well.
Moving to the C 1000 last quarter, we completed the redesign of the front suspension, which was intended to resolve the engineering problems on the platform.
However, during fully loaded durability test in the third quarter, a rear suspension component proved to be insufficiently design.
We are now in the process of procuring the redesign part.
As a result, we now expect to have durability testing completed during the fourth quarter.
Based on testing results. We will then decide by the end of the year as to whether we prepare the existing vehicles and restarts tier one production or not.
While this timing delay is frustrating is far more important for us to have safe and reliable vehicles on the road that our customers can really rely on the job every single day.
Moving to slide eight.
I think that one of the most significant differentiators in our industry today is the ability to produce OEM quality vehicles at scale from a full size and modern plant.
You have heard me speak about our Union city plant improvements for over a year now today I am announcing the renovated and expanded work horse ranch is ready to run.
During the quarter, we completed the transformation of the Union City complex upgrading the warehouse and completing the test track.
As we've discussed we've truly transformed the facility into a world class operation with open flexible manufacturing space and plenty of room to grow.
The plant started initial production of class vehicles in the quarter aspiring layout finalizing layouts for Wi Fi six production scheduled to begin in Q4 of 2023, we are actively adding hourly staff each week to meet current and future build schedules.
We are also on track to assemble vehicles in Union city for triples technologies as part of a three year contract manufacturing agreement beginning in Q4 of 2022.
Volumes of our final assembly of these troubles vehicles for the U S market are expected to reach 2000 years per year once production ramp up is complete.
I hope that many of you are able to join us for our analyst day on December seven 2022 to see firsthand what the team has been able to do in reinvigorating, our foundational asset the workhorse ranch.
We have also completed the upgrades to our design and technology Center in Wixom, Michigan and have recently moved into the new prototype and testing center here in Sharonville, Ohio.
Moving to aerospace on slide nine.
On last quarter's call, we provide an overview of the aerospace market, where we aim to compete for business. So I won't go into those details again today.
I will reinforce though that we remain optimistic about our capabilities and opportunities to package delivery as well as our mapping and sensor based segments of our rapidly growing commercial market for growth.
Our horse slide platform, which can deliver 10 pounds and 10 miles a payload range capability. We believe is market leading is nearing completion of final flight testing and has multiple last mile customer demonstrations scheduled during Q4.
We continue to fly in support of the U S Department of Agriculture.
Riding field monitoring data procurement and analytics as part of project and both Mississippi and Arkansas.
We are also actively working on two additional states on different drone applications and expect to announce another new state level Grant later this month.
Based on strong customer demand. We have also developed a new family of drones to meet emerging customer requirements for humanitarian assistance and logistical operations.
This robust drone, which can fly in automatic and manual control is also in the final flight testing we are in conversation with potential customers about building. This product both here in North America and also in Europe .
Moving onto a new initiative here at workhorse on slide 10, which we're excited to announce this quarter.
Today, we are introducing stable to install a fleet electrification platform that provides charging and services to EV fleets.
Electrification is a major unmet need in the last mile delivery industry.
Is extremely expensive and difficult for small fleet operators to transition to electric vehicles and.
Ensuring access to charging infrastructure is a must for them. So.
So rather than joining the vocal crowd complaining about the lack of charging infrastructure workhorse has decided to take a more proactive approach and help with this unmet industry need.
As part of this platform, we have leased our first stable a maintenance location here in the greater Cincinnati area in Lebanon, Ohio.
This week, we are installing 10 level two chargers the stalls for use in support of our own last mile delivery fleet.
We believe stable installs will be an important growth opportunity for us that will support and complement the work underway across our other family of products.
Connection with stable installs, we have purchased and began operating a fedex ground delivery route in the greater Cincinnati Cincinnati area with the approval of Fedex.
We are starting by serving the route with 10 company owned internal combustion engine trucks.
Our team has been delivering packages of all shapes and sizes to end customers as July .
In the picture on the slide you will see that we have already started to electrify the fleet.
It is our first <unk> 750, which was just wrap with a Fedex logo and colors and had its shelving installed last week.
We expect to convert our entire fleet to 100% electric vehicles by the end of Q2 2023.
This is an exciting opportunity for us we have established key business partnerships that will enable us to capitalize on this opportunity and continue expanding in this market.
One of our key deliverables from this effort will be the all will also be the data collection and field experience that will allow us to develop more efficient business model to enable small fleets to economically transition to evs in the near future.
With that I'll now turn the call over to Bob to discuss our financial results.
Thanks, Rick let's turn to slide 11, our results demonstrate the steady progress our team continues to make executing on our objectives to strengthen our financial position and operations.
Looking at the income statement sales net of returns and allowances for the third quarter of 2022 were recorded at $1 5 million compared to a negative 600000 in the same period last year the.
The increase in net sales was primarily due to an increase in the volume of commercial vehicle sales and the launch of our stables installs initiatives.
Cost of sales decreased to $9 5 million from $11 5 million in the same period last year.
The decrease in cost of sales was primarily due to $1 $4 million decrease in inventory write downs and a $1 2 million decrease in consulting and warranty expense.
The decrease in cost of sales was partially offset an increase in costs associated with the vehicles sold during the period.
SG&A expense increased to $34 8 million from $10 6 million in the same period last year.
The increase was primarily driven by the $20 million legal settlement expense, which is net of $15 million in insurance proceeds and an increase of $3 8 million in professional and legal services related to the securities and shareholder derivative litigation.
Additionally, there was an increase of $3 1 million in employee compensation and labor related expenses from increased head count noncash equity compensation.
And the appointments of our new leadership team.
R&D expenses increased to $6 1 million from $2 8 million in the same period last year the.
The increase was primarily driven by an increase of $1 6 million in employee compensation and related expenses due to increased head count.
Additionally, there was $1 1 million increase in consulting and prototype expenses related to the continued development of our horse fly W. 56 W.
The vehicle programs.
Net interest income was 27500 compared to $18 6 million in the same period last year.
A decrease in net income and net interest income was primarily due to a $20 6 million increase in fair value of the 2024 notes during the three months ended September 32021, as compared to no debt. During the three months ended September 32022.
Additionally, contractual interest expense on 2024.
Notes for the three months ended September 32021 was $2 million as compared again to note that for the three months ended September 32022.
Yeah.
Other income was $13 4 million compared to a loss of $77 1 million in the same period last year.
Which was attributable to unfavorable changes in fair value of the Companys prior investments in Lordstown Motors Corp.
Each was sold entirely in Q3 2021.
This was offset in 2022 by the gain on the sale of <unk> related inventory.
Net loss was $35 4 million compared to a net loss of $81 1 million in the same period last year.
Loss from operation operations for the third quarter was $48 8 million compared to $25 5 million in the same period last year driven by the legal settlement.
Turning to slide 12 to discuss our balance sheet.
As we mentioned last quarter, we are debt free following exchange transaction in Q2 as of September 32022, the company has approximately $120 million cash and cash equivalents.
It's also worth noting that our Atms in place, but we did not utilize it during <unk>.
Q3.
We now expect our capital expenditures to upgrade their facilities in Indiana, Ohio, and Michigan to be between $15 million to $20 million in 2022.
This is a $5 million adjustment downward at the top of the range since last quarter, primarily driven by timing and other effective use of capital resources.
I do want to call out two additional items on the balance sheet from Q3.
First you'll see we've recorded a 35 million liability for the legal settlement, which is in part offset by $15 million insurance receivable.
This gets us to the $20 million stock portion of the proposed settlement reflected in the income statement.
And then <unk>, we have booked the full $10 million equity investment we made in the company and are also reflected a $5 million contribution noncash consideration represented a positive from truckload for future Assembly service as deferred revenue.
Slide 13 covers our guidance, we are reaffirming our revenue guidance expect to generate between 15% to $25 million revenue for calendar year 2022.
With the C 1000 testing situation, we are reducing the number of vehicles, we expect to manufacture and sell for the year to between 100 200.
Assuming current supply chain lead times remain unchanged.
With that I'll turn now turn the call back to Rick to wrap up.
Thanks, Bob I want to briefly discuss our Q4 priorities on slide 14.
First we must continue to execute on our product program plans.
This means completing our W. 750 pilot builds keeping the Wi Fi six program on time and on budget complete.
Completing the <unk> testing and completing the horse fly and Halo drone flight testing all this year.
Operationally, we want to continue to ramp up production for the <unk> begin manufacturing the triples vehicles and finalized plan to startup drone production in 2023.
We need to grow revenues in that new customer orders for both wheeled and area of vehicles.
We also need to complete the electrification of the stables stalls facility here in Ohio.
Finally, we need to execute on our common systems deployment plans, including kicking off our transition to a new ERP system, which will help us immensely in late 2023.
Lastly, we are looking forward to hosting our analyst day on December 7th and Hope you will join us.
Before I turn the call over to Q&A I want to reemphasize six important points from our call today on slide 15.
First in less than one year, we have built we have built an incredible team of business leaders engineers supply chain and sales professionals operational managers plant and back office support staff that are talented and experienced in their fields.
Each of them will play a critical role as we execute on our go forward strategies we.
We have added over 100 associates in the past year, the right people in the right seats on the bus or the absolute foundation of our company.
We are now in production at our fully renovated state of the art manufacturing complex, which we believe <unk> provides us with a true advantage in a big head start on many new EV startup companies, who seem to be struggling with building and equipping and staffing their new plants.
Building the plan is easy to say much harder to actually do in real life. We.
We've resolved a number of legacy issues, including recently entering to a proposed settlement regarding our class action Securities losses is a major milestone for the company that clears up concerns to the stakeholders and allows us to focus 100% on executing on our business plans.
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, both wheeled and wings will not happen overnight, nor will it be easy, but make no mistake the transition to evs and Uavs is underway and starting to pick up steam there was a strong market demand and full government support for Evs Uavs and the charging infrastructure required.
Support them and we expect to emerge as one of the winners in our segment.
And finally, we have the necessary access to cash and capital resources to execute on our go forward plans. The bottomline is that after a lot of hard work, we are ready to run here at workhorse.
That concludes our prepared remarks. Thank you again for all your time. This morning, we look forward to continuing to update you on our progress at our analyst day on December seven.
We're now ready to open the call for your questions. Rob. So please provide the appropriate instructions.
Thank you.
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One moment. Please we poll for questions. Thank you.
Thank you and our first question is from the line of Jeff Osborne with Cowen and company. Please proceed with your question.
Hey, good morning, a couple questions on my end I was wondering first of all on the stables installs initiative, what the revenue model is there.
You mentioned in the prepared remarks that there was some revenue contribution this quarter and it looks like the pricing was a bit higher than anticipated at least in our model for the 10 units that you shipped.
Yes, Jeff this is Bob.
Right now you know that.
The stables installs revenue just includes the route revenue.
And I would put that at about 10% of the revenue for the quarter.
Got it.
With regards to pricing, we're not going to go into specific vehicle pricing, but I'll just say we're in early <unk>.
Parts of the early ends of this EV evolution, there is still some price elasticity in the market right now.
Got it that makes sense.
And then the the settlement.
What are the cash ramifications of that I'm sure there'll be more details in the 10-Q, but your reserve $35 million as a liability when would that cash potentially be paid and when would you anticipate an insurance piece to come in Im just trying to understand with the $120 million and what the burn rate is and then you throw on top of that the liability.
Essentially the cash payment the timing there.
So if you break it down into two components, there's $15 million of cash which will be funded by the insurance. So no net cash out of pocket. There and then the $20 million of stock. So so really the settlement doesn't have a net cash impact on us.
Other than we are we did spend above and beyond our retention on the legal side, which was the $3 8 million. So really that's the net cash impact.
Timing wise it it'll still by the time it goes through the process, we will still be a little while yet.
Probably Q2 of next year I'm guessing.
Got it that's helpful and the last one is.
With the suspension issue on the C. 1000, just hypothetically if you were not to move forward with that vehicle is there any financial ramifications of that.
People, who had previously delivered to an.
Our expectations are.
Likely remediation of the problems that you had had in the past I'm just trying to understand.
What the P&L and potentially Reputational risks there would be.
I do not think there is any financial risk from our customers. We bought back the vehicles that we had already delivered.
We are in discussions with those customers, who had done pad placed some orders before about our new portfolio of vehicles that will come out primarily the <unk> hundred 50 through the first half of 2022 23, and then we'll have the Wi Fi six available going forward and I would just say the initial response, we've gone back and introduced our.
<unk> team and our new product plans to several customers with basically written off workhorse in the past and now we're having doors open up again for us at least two of those customers who had written solved before vascular specifically for one of the first five W. Five six demos that we'll have in the second quarter next year. So that's a good sign for US I think Jeff.
It sounds like if I look forward to senior folks in the seventh thanks much.
Great. Thanks, Jeff.
Our next question is from the line of Chris <unk> with B Riley. Please proceed with your question.
Hey, guys. Thanks for taking my question here.
So looking at the uptick in revenue we are expecting for the fourth quarter. It seems like the bulk is now W. For C 1000 inventory clears, probably like a 2023 story.
You do decide to move forward. So I just wanted to get a sense as well.
Whether there's anything else in that exercise before it.
Got it.
Fedex routers now stable I think it took us a while to get that under control I would say.
We started to crop we started at <unk> in the third quarter.
I'll start wallet will be here in the fourth quarter, but we should be running pretty full hired in the first quarter next year. So.
Yes. Good question, we're not going to comment on order book today, I see as I look back over the industry lots of people have made lots of promises about order books, but an order book is one thing and having a factory to build them and the team to build them as a different thing right. So our focus has always been on getting the plant ready to go get the products right get the right people on the bus hire the team.
Kind of go off of.
Whether it's the time that you get sent over for dispatch to loading the vehicles are unloading the vehicles the fight for talent, who drive the vehicles, who have been licensed to.
And doing that without a facility. It is incredible what we've learned in the first 90 days.
The shelving works all Thats, great and we're bringing all that information back to the redesign of the W. 56 in the future W. Three four.
Our next question comes from the line of Greg Lewis with BTG. Please proceed with your questions Hi, Thank you and good morning, everybody.
But would the stables and it seems like the stables installs as more of a broader network and something not exclusive to workhorse produced vehicles.
A smorgasbord right.
There is some Morgan Olson vehicles, there is some shift vehicles, there's some nissan vehicles as board, there's a GM and so.
We're not going to be 100% workhorse, we're going to take the opportunity to buy one or two of our competitor vehicles from other route as well the routes ranged from 40 miles a day to 120 miles a day, so that validates what we thought most trucks travel less 100 miles a day a few go out to 150.
Got to have a place to charge all night long and monitor those fundings for an independent operator do that theyre really operate on a pretty much a shoestring budget, especially with diesel prices up some places of the country five or $6 a gallon. So I think in one month or one week, we spent over $8000 just in fuel running our little 10 trucks right.
So we are taking all of this information the condition of the trucks the time it'll take the charge the cost of fuel maintenance.
The damage to step into truck next time, you're at a 711 or in a downtown store look at the condition of the trucks you'd be amazed.
As we think about the road ahead is it okay, Hey, let's have our first contract manufacturer, we're going to bring them in and then.
All contract.
Okay.
We're just under 400000 square feet right now in two different buildings, we have a separate battery storage building and we have plenty of land.
Entertain rfps for two others and as I said earlier, there are some EV companies out there who are struggling with its a much different to put up new flat proposal on a powerpoint that actually go out and acquire land.
The lead time for them to go build a lease of factory lease if they could find one that was available was probably minimally three to six months to build a brand new factory here in North America. It's 18 to 24 months now based on lead time of critical supply chain issues, especially electrical connectors and others.
Okay, and then Rick just on what can if I can squeeze one and clearly you lay out the investment you made in <unk> is it should we be think could we see contract manufacturers.
Yeah, I think we all learn in school that cash is king so we're going to.
Fund our own operations troubles was a unique opportunity to get in on the ground floor of our business and take a small stake and partner with them and.
Great.
I wanted to follow up once when the other questions about the stables installs program.
Hi, Mike This is Bob I think.
Packages are generally up in the fourth quarter. So there could be some in there but.
The process and what we're learning in.
And the opportunities that we get paid doing it so.
It's not a huge part of our revenue goal, but it's a very important part.
De Minimis as kind of other category on your on your assets.
It's just part of normal assets for the trucks and.
And the REIT itself was purchased sounds like an auction or was it a private sale.
The active market for Fedex routes out there right now is one of the things we learned as well I can't remember how many coal routes out there, but there's a hell of a lot of vehicles I know that so.
And also just going to see that there is a lot of strides being made.
Without products or are these early units going through the workhorse.
Theyre choosing right typically.
And then around that before we are also going to provide full step vans. So we'll have our own body and we'll have our own body suppliers that work with US right as we start to ramp up production here on the W. For Cc chassis one of the things. We've discovered is that there is a lack of capacity in some areas of the back end of the truck whether it's boxes.
Or flat beds or drive vans, reefers et cetera, So that's an opportunity for us either find a partner out there in the future or do some things in house as well something we're studying right now.
Good question Mike.
Our next question is from the line of Jeff Osborne with Cowen and company. Please proceed with your question.
I just wanted to be crystal clear that this isn't a precursor you foreshadowing that you're intending to go into a capital intensive.
Fleet business in terms of producing trucks, and then bidding on on routes or owning the asset yourself and.
Showing growth that way do you intend to be completely.
I think we don't have those ambitions, our intent was to better understand.
How these independent contractors, who make up a huge population.
The work trucks in the class III through five space or even six space.
How theyre going to make the transition from traditional ice powered vehicles to.
You don't have the government subsidies are coming through like the HVAC Frac program in California, or the 14 other states who have programs right now it'll be hard from the make that transition on top of that you have to put in the infrastructure for the charging system.
Whether that's slow charge of fast Chargers and all of that works. So this is one of our ways to study how to best do this and then target our vehicles and our sales to specific customers.
Thank you.
Ladies and gentlemen, this will conclude today's conference. Thank you for your participation you may now disconnect. Your lines at this time and have a wonderful day. Thank you.