Q4 2022 Xos Inc Earnings Call
Greetings and welcome to the ex Us Forest.
Fourth quarter and full year 2022 earnings call.
At this time all participants are in a listen only mode.
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As a reminder, this conference is being recorded.
At this time I would like to turn the conference over to General Counsel of XL Kristen from Merrill. Thank you you may begin.
Thank you operator, and thank you everyone for joining us today hosting the call with me today are Chief Executive Officer Dakota, similar Chief operating Officer, Giordano, Sordoni, Chief Financial Officer, Kingsley, <unk>, and our head of Engineering Scott Zion.
Ahead of this call excess issued its fourth quarter and full year 2022 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investors the excess trucks dot com.
On this call management will be making forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect because of factors discussed in today's earnings news release. During this conference call or in our latest reports and filings with the Securities and Exchange Commission.
These documents can be found on our website at investors not excess trucks dot com.
We do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company's fourth quarter and full year 2022 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial.
Measures.
Participants should be cautioned not to put undue reliance on any forward looking statements.
With that I'll turn it over to Dakota.
Thanks, Kristen and good afternoon to everyone joining our call today to discuss the strategic milestones and successes of 2022 and the key initiatives that better position ex us for significant growth in 2020 three and going forward.
On the call are C. L O G O sordoni will offer insights into the steps, we're taking to deliver gross margin positive units. Later this year next our head of engineering, Scott Zion will provide an update on the cost reduction and performance upgrades of the 2023 step van.
Followed by CFO , Kingsley alchemy, who will share the company's fourth quarter financial performance and expectations for 2023.
I will provide an overview of projected milestones over the upcoming year as well as an update on the commercial traction we are seeing with customers in the field and will detail our progress on the deployment of charging infrastructure.
We have created a strategy that is based on three core tenants to build and sustain our high growth enterprise.
These tenants are first grow demand and deliveries of our products second improve gross margins and third maintain healthy access to capital to ensure we are strongly positioned to fund and scale the business.
I will begin by sharing an update on what we're seeing with customers as the demand for commercial electric vehicles continues to grow.
There are three primary factors that drive demand for excess products and solutions number one fleet replacement levels number two strong interest from a broad set of customers and number three the supportive regulatory environments.
First we will discuss fleet replacement levels.
Industry wide supply chain constraints and delayed vehicle production over the past three years resulted in many fleets being unable to maintain their normal fleet replacement cycles.
As a result, there is pent up demand for new vehicles as many potential customers with designated vehicle purchase allocations have yet to fulfill such targets.
Older vehicles remain in operation beyond typical maintenance thresholds for fleets or in certain cases are noncompliant with newer emissions regulations and this places further incentive for fleet operators to acquire new commercial vehicles.
Second we are experiencing strong demand as a result of the diversification of the wide appeal of our product line to a diverse set of customers, including many large national customers across multiple industries.
While step vans are most associated with parcel delivery with excess serving independent service providers of two of the largest parcel delivery companies in the world. We also now serve four of the top uniform rental fleets as well as two of the largest U S based beverage fleets in the country.
This adoption rate amongst the leaders in their respective segments underscores the value customers see in excess as products.
We are also seeing additional opportunities with new customers and armored transport beverage delivery food delivery uniform rental and ancillary fleet services.
In 2022, we added over 800 sign step van orders to our backlog, including a 30 unit order from uniform rental provider our scope.
Subsequent to year end, we received a 150 unit order from cash transport service provider Loomis, another large scale multinational customer with hundreds of locations across the U S.
We recently unveiled the 2023 model year X, So stfan and have secured multiple orders with deliveries set to take place mid 2023.
These orders serve as proof points for the wide appeal and application of our product line and overtime. The diversification of end market customers will allow us to capture more of the market and better manage seasonal cycles.
With strong demand for our step man, we're seeing growing demand for excess energy solutions, our suite of comprehensive charging infrastructure and services.
We recently wrapped up a charging infrastructure installation with our Chargers for Lewis at their Montebello, California location.
And in infrastructure location with our Chargers for universe in Boston.
Currently our energy solutions team has multiple installation projects in the works for Fedex ground operators across the United States.
Relatedly, we have achieved an incredible milestone in the first quarter of 2023 and delivered our first ex those hub prototype to one of our fortune 100 customers, where it is already in use serving a parcel delivery fleet and collecting real world usage and reliability data.
Ex those hub is a rapidly deployable mobile DC fast charging solution.
Single access hub is capable of charging up to five vehicles in one location and requires minimal to no upgrades to the charging site.
We are confident it will alleviate certain infrastructure delays, we hear from our customers. We currently have engineering builds underway to begin a comprehensive durability tests planned for the hub, where we will cycle, the charging and discharging the system as well as test and validate the hubs ability to perform reliably and the harsh.
It's that a trailer mounted mobile charger is likely to endure.
We expect the hub to begin scaling production at the third quarter of this year and continue to believe that mobile flexible methods of charging like the hub will play a key role in accelerating fleet electrification.
Third regulations are playing a significant role in driving demand for commercial electric vehicles.
Last year, California passed the advanced clean fleet rule, one of the many examples of a rapidly changing regulatory landscape that commercial fleets will need to adapt to you in Paris.
Beginning in 2024 under the advanced clean fleet rule several of our customers will be required to remove all internal combustion vehicles from their California fleet at the end of their useful lives and replace 100% of their California based medium and heavy duty units with zero emissions vehicles by.
2027.
Additionally, commercial EV ownership requirements will increase to 100% between 2035 and 2042, depending on the vehicle type.
As a result, we anticipate a sustainable increase in demand and purchase volumes in the short and the long term.
Regulatory incentives encouraging electric vehicle adoption amongst commercial fleets expand beyond California.
<unk> vehicles are approved for incentive programs and several other attractive markets, including Colorado, Massachusetts, New Jersey, New York, Pennsylvania, and Texas.
We are already seeing customers across the nation qualify for and receive millions of dollars in state level incentives.
On the federal level, the inflation reduction act or I or a passed in late 2022 offers companies a tax credit of up to $40000 for the purchase of commercial electric vehicles.
Under the current regulations all of excesses vehicle models are eligible for the I R. A tax credit.
We believe that our attractive products and strong customer relationships combined with supportive regulatory tailwind can drive continued growth for the company and the customers we proudly serve.
That said from our perspective, the truest pulse of our industry as one on one conversations with the customers served by our vehicle products.
Let the month of January and February this year on the road visiting over 30 current and prospective customers with members of our business development team.
Our customer has confirmed our expectations that critical fleet replacement needs, a diversified customer mix and new EV friendly regulations will continue to drive demand for the foreseeable future.
Now I would like to walk through how that growth in demand translated into deliveries for 2022.
During the second half of 2022, we delivered 146 units to customers well.
While excess had ample demand to support our forecasted volumes transitioning orders to the new step van model infrastructure delays and seasonality and parcel delivery resulted in falling short of our delivery guidance.
However, excess did meet revenue projections with $19 6 million in revenue for the second half.
Total excess achieved full year unit deliveries of 275 units and $36 4 million in revenue.
Substantial increase of 525% and vehicle deliveries and a 620% increase in topline revenue from 'twenty to 'twenty one.
Our positive growth in services revenue underscores the continued diversification of our product lines and the growing importance of generalized revenue rather than vehicle sales revenue alone as an indicator of our success.
With that I would now like to turn the call over to our C. O O G O Sordoni, who will share an operational update.
Thanks Dakota.
Excesses operational focus remains on achieving our goal to begin shipping gross margin positive units near the end of the second quarter.
Through a dedicated cost reduction task force that access we've taken multiple steps over the past year positioned ourselves to achieve this target in areas such as manufacturing supply chain management, and the procurement of parts charging infrastructure and our systems.
As we mentioned during our third quarter call, we've streamlined our manufacturing operations and focused our production at the birds town, Tennessee facility. As a result, we've been able to eliminate unnecessary freight costs and strengthen our inventory management practices. The brookstone facility also provides us with the manufacturing capacity.
To meet our customer needs to continue to grow our business. Our recently introduced next generation 2023 step and includes several design improvements that Scott will describe in greater detail shortly.
These design changes and more focused production plan will have the potential to reduce material and direct labor costs by about $15000 per step them with more cost reductions planned in the future.
Part of these savings will come from our diversified battery strategy that includes the lithium iron phosphate cell chemistry.
We continue to invest in our in house developed battery management and control systems, which integrate the battery into the vehicle.
Our in house battery and software teams helped us react nimbly to a rapidly evolving battery market.
I look forward to sharing more details over the coming quarters as we scale our platform continue our cost saving efforts.
That's where the supply chain, we continue to work in tandem with our engineers and vendors on cost reduction efforts in procurement and logistics of key parts of our crop.
Our growing scale and brand are helping us achieve better terms as we become stronger partners with the suppliers.
We're also benefiting from lower logistics costs at the cost of moving container from China to North America has fallen sharply over the past year.
That said, we're still seeing some delays in sourcing of certain parts, such as high voltage cables and low voltage wiring harnesses.
With the volume of unit deliveries increased significantly in 2022, we encountered delays in the deployment of charging infrastructure that prevented customers from taking additional vehicle deliveries as previously mentioned.
Infrastructure remains a challenge for the industry. However, we're pleased to see increased attention and investment from vehicle Oems regulators and municipalities to overcome this infrastructure hurdle.
That excess we're seeing a growing uptick in demand for our charging hardware and project management services.
Fleet operators are recognizing the value of OEM level support and expertise when planning charter layouts incentive capture permitting and utility upgrades.
The infrastructure factors will likely continue to constrain the commercial EV market, we expect that the impact to our business will improve over the coming year.
State level and federal incentives for charging infrastructure and exiting 2023 will play a large role.
Currently 36 states offer tax credits of rebates, we're charging infrastructure, which can be stacked with 6% tax credit of up to $100000 per item of equipment for new charger installations included in the inflation reduction.
As part of excess energy solutions, you have a dedicated in house team focused on helping our customers uncover the best fit incentives and credits available to them no matter, where they live.
Finally, we've continued to take steps to advance our internal systems and improve the accuracy of our data help scale our business responsibly.
Specifically, we have invested in better tools and processes for inventory management, releasing new designs manufacturer and production planning.
Overall, we're proud of what the team's been able to accomplish over the last year.
The opportunity for clean fleet and logistics solutions in both the public and private sector remains events and we expect to continue to benefit from the secular shift with net zero carbon economy now.
Now I'll turn it over to Scott.
Engineering to provide an update on his areas of oversight, which include engineering development product testing validation and new product line.
Thanks, Jill as mentioned earlier, we recently introduced our next generation 2023 model years step van which includes major cost optimization and technology upgrades to our latest generation vehicle.
Particularly proud of the design improvements for the 'twenty to 'twenty, three step and that will be.
Deliver the important manufacturing cost reductions that you already mentioned.
Savings will come mainly from design and sourcing improvements and our battery system high voltage distribution equipment and simplified cable routing with additional optimizations to come as we continue to scale production.
Yeah on the efforts of the cost optimization team. We were also pleased to release this generation of step man with greater connectivity.
Longer range, and a higher payload capacity compared to the prior generation, we expect the 'twenty to 'twenty three stepped in to provide customers with a higher performance vehicle, while also reducing the cost of manufacturer and service it.
Regarding connectivity the 2023 step van features and enhanced telematics module and over the air software capabilities.
The updated telematics module enables advanced remote diagnostics for customers with an extra sphere subscription and provides our engineering and service teams with better insight into the real world performance of our vehicles.
The addition of the over the air software updates will reduce the service visits and vehicle downtime experienced by our customers. While also reducing the cost of rolling out new features and important software updates.
Going forward, our service team will be able to push software updates to all new step vans remotely without requiring a visit to a service center.
When it comes to range. The 20th 23 step van launched with two battery options, a 100 mile usable range specifications, our customers operating shorter routes and looking for the most cost efficient option.
And the 200 mile option for applications, serving larger routes.
The 200 mile step van is already expanding our customer mix to include more cash in transit uniform and Linden rentals, and food and beverage fleets that service routes beyond the range of our previous vehicles.
And it's a long run configuration, the 2022 step van offers a useful range among the best available in a comparable commercial EV.
In order to support the larger battery of that 200 mile option without sacrificing payload capacity for our customers.
All 2023 step vans are rated for gross vehicle weight of 26000 pounds up from 23000 pounds in previous models.
In addition, several structural changes were made to the chassis to reduce the weight of the vehicle, enabling greater payloads and creating a more efficient vehicle.
Package, the standard batteries and all high voltage coolant lines within the frame rails, improving the safety of our vehicle.
We also revised the packaging of the high voltage power electronics into a more compact form factor that in.
Allows for the chassis to be used with a wider range of body configuration.
We also centralize the thermal management system and deepened our partnerships with one of our critical suppliers to develop and validate that system.
These improvements mean that even for vehicles with the increased weight from the larger longer range battery pack. The payload in that step van will be able to handle will not be reduced.
In conclusion, we are very excited about the recent advancements we've made to our technology and we continue to make improvements as we look to provide more efficient high quality vehicles to our customers I'll now pass this over to our CFO Kingsley F&B.
Thank you Scott and good afternoon, everyone.
As previously noted, we're making great strides on our path to becoming gross margin positive as a unit level by the second quarter. The end of the second quarter 2023.
Well, it's also ensuring we meet the strong demand for our products and solutions.
I'll now review, our financial performance for the quarter and for the full year 2022.
For the full year revenue grew significantly to $6 $4 million from $5 million in the prior year.
And he was supposed to buy both higher deliveries and average selling prices of our snap ads.
We increased the average selling price of a step down units by close to 20% over the fourth quarter, which reflects changes in our channel mix and the effects of the price actions, we took last year.
We expect this trend to continue as we add higher ASP units in backlog have flowed them into deliveries.
Well 2022 our cost of goods sold was $66 $4 million up from $7 $4 million in 2021.
Gross margin during 2022 was a loss of $13 million compared to a loss of $2 million in 2021.
non-GAAP gross margin loss with EBITDA was six to $16 $4 million compared.
That's a one point for many of those in 2021.
Looking at the full course of specifically, our revenue was $8 $6 million compared to $11 million in the third quarter, which was in line with expectations and reflects the seasonality. We noted in our third quarter call. You said, a busy holiday season for the last mile delivery sector.
Our cost of goods sold during the quarter decreased to $16 $5 million compared to $21.8 million in the previous quarter.
Gross margin during the quarter was a loss of $8 million compared to a loss of time they've been in dollars in the third quarter.
As a team we continue to strive for gross margin positive on a unit basis led by cost optimization steps, including a bespoke devoted team working across the company to achieve this.
The team's efforts are primarily focused in three areas.
First as mentioned earlier, we have implemented strategic pricing action to address ongoing inflation in the cost of building a vehicle.
Over the past two years costs have risen sharply due to increases in raw materials logistics entire costs as well as higher labor costs to assemble that batteries of vehicles.
That's a growing company, we elected to build customer goodwill by all the RIN pricing with minimal material surcharges being passed onto our customers in 2022.
This decision helped drive follow on customer orders and increase our customer loyalty.
We have since taken price action to ensure the sales prices enabled us to reach our gross margin goals, whilst continuing to maintain the loyalty of our customers.
Secondly, our skills how to find the lowest about 'twenty two 'twenty three Stefan brings with it a number of design improvements.
And that will meaningfully reduce the direct material costs and the cost of manufacturing the units.
Our immediate cost cost optimizations of over $15000 20, twenty-three stuff and as a first step in further material cost reductions, which will deliver over the rest of 2023.
The 2024.
These efforts have caused this you said the bulk of our R&D spending.
Spending for 2022.
Finally, the steps, we took last year and centralizing manufacturing, Tennessee will materially reduce our overhead costs as we ramp throughout this year.
These costs include taxes freights indirectly by production of supplies.
Slide 22, these costs made up roughly 15% of our cost of goods sold.
Spec these to reduce our suite focused manufacturing on a centrally located and highly operationally cost competitive plants in east Tennessee.
We believe our continued laser focus on expanding margins, which puts us in a strong position going forward and demonstrates existance unique ability to innovate across engineering supply chain managers and sales to achieve success in this rapidly growing unexpired the industry.
In part due to the release of a new step and we expect deliveries to be weighted towards the second half of 2023.
To maximize the effects of all steps.
Turning now to expenses.
Fourth quarter operating expenses fell to $17 $9 million from $24 million in the third quarter and this was driven by a reduction in our R&D expenses to $6 2 million versus $8 $6 million in the third quarter and those sales and marketing expenses of $1 $7 million of pets T plus $3 million.
These lower expenses were partially offset by higher general and administrative expenses of tempering woman told as compared to $9 $5 million.
Water.
Our non-GAAP operating loss for the second half of the year was $44 $1 million, which is near the bottom end of our guidance range.
We expect to continue to have very strong expenditure discipline of a 2023 let's see I'll proceed expenses, reducing further yeah.
We closed the quarter with cash cash equivalents and marketable debt securities available for sale of $89 $3 million, which includes $3 million of restricted cash.
Compared to 2021 inventory has increased and we recorded a net position of $57 $5 million versus 39 at the end of the fourth quarter of 2021.
On a quarter by quarter basis inventories declined during the quarter from $62 million at the end of the third quarter.
We expect inventory levels to remain at or below the current level for the first and second quarters as we see supply chain disruptions continue to ease.
As expected total use of cash cash used in operating activities, plus capex improved to $18 $3 million for the quarter versus $32 $2 million in the third quarter.
We closed the quarter with ample liquidity to scale. Our operations. We are confident as we grow volumes and get the positive gross margins will have options to raise additional capital.
Pardon me.
Wrapping up with our business outlook for 2023.
We expect to deliver between 450 and 600 units.
We expect to generate switching $58 $5 million and $84 million in revenue.
And we forecast an operating loss of between $52 8 million and $18 million.
With that I'll now turn the call back to the Covid just wrap up thank you.
Thanks, Kingsley, while much has been accomplished we continue to remain on track for long term success as we continue to focus on helping commercial fleets seamlessly deploy E vs across their operations.
As I mentioned earlier, our strong customer relationships combined with supportive regulatory tailwind.
I expect it to continue to drive growth for access.
We've positioned ourselves for continued sustainable growth in parallel with achieving our goal of becoming gross margin positive at a unit level by streamlining our manufacturing operations, taking strategic pricing actions and launching our next generation step van.
As a company we remain focused on our singular objective electrifying commercial fleets.
We believe our continued mission focus and dedication to fiscally responsible product development will translate to a commercial success.
Fleets work with ex us because they see a critical differentiator. They understand we are dedicated to creating the most customer oriented product on the market and the ex US is building a company to service their needs for the long term.
With that we'd like to now open the line for questions operator.
Oh It was kings of her public shakes out when it's a notes that I misspoke earlier and tasteful use of cash cash used in operating activities plus capex was $24 $6 million pivotal quarter. Thank you.
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At this time, we will pause momentarily to assemble our roster.
And our first question will come from Mike Smith.
D. A davidson. Please go ahead.
Good afternoon, and thanks for taking my question.
Can we maybe just start off maybe China experienced the drama I'm here in the first quarter and in two days.
As to how business went here in the first quarter deliveries revenues.
Getting expensive et cetera, you can give us here now that we're basically at the end of the quarter would be appreciated.
Yeah, certainly Mike we can absolutely give a little bit of context.
And thank you for joining the call today.
You know as we've continued delivering vehicles through the quarter. We've continued to face infrastructure hurdles that have plagued some of our larger customers and that has pushed back some deliveries, but we still have made progress in the quarter and getting trucks out to customers some of which we've actually spoke about publicly.
Like our delivery to al Scho AR as well as some additional deliveries that took place during the quarter.
What we see for the year as Kingsley alluded to as the deliveries are going to be backend weighted.
So the first quarters in first and second quarter should be less than the second half of the year much like we saw in 2022.
But ultimately continuing to make progress and as we shared with the backlog continuing to see increasing growth in demand for.
For the products.
Okay. Okay, and then maybe just a follow up on that backlog comment you just made there to Kona.
You are unit during the during 2022 and the 150 at least publicly announced here in the first part of 'twenty three.
Can you maybe tell us.
What number of bank loans, you have with.
One of our units are in the backlog today.
Yes, you know you already feel good about twice a week or so we might be supply actually cooperates given what might be in backlog already.
Yeah. So I'll just clarify you know the 800 units for our that we added to the backlog for last year are exclusively step vans, where do you have other products that our customers are demanding and wanting those products, we won't be delivering this year that we've continued to grow the backlog on those vehicles as well those.
<unk> as well.
When we talk about overall backlog, we don't guide to that metric.
But we all have seen it.
Sales and demand for the products continue to grow really quarter over quarter and year over year, and we don't anticipate that to slow down this year.
The one thing I will say regarding the step van product is that you're seeing several customers responding to a lot of the regulations that are taking place that I spoke about like the advanced clean fleet rule.
Some of these fleets have thousands of trucks just in California.
And so hitting those percentage thresholds is gonna be critical, particularly when we're one of the few suppliers thats, providing an electric step van that will meet the needs of those fleet operators in the state.
Great and just to follow up on that last point about the nonstop mountain products.
First can you tell us a little about how it's going with the M. D. H M. D. S. T E T X T pilots.
And even that in this downtown look between 'twenty three.
Any questions for the powertrain business or was that any part of the mix in the fourth quarter and is there any part of the mix you have here in the 2023 younger.
Yes, so when we talk about the other products like M D and H T X T and powertrains those are not factored into the backlog for 2023, we.
We do have orders that are factored into our outlook for the full year revenue guidance that we've discussed and previously in this call.
And then as we're looking to back to Q4, I'll, let kingsley speak directly to those two business units.
Hey, Mike how are you.
So when you look at our full cost and units for this year that number includes step vans powertrains and also a number of hubs.
Primarily the numbers are but you know the vast majority of it is.
Defense. In addition on the backlog number backlog additions that we had last year that number is the net additions.
That's what cancellations SNS deliveries every year.
Oh Wow.
Just wanted to add one one more point you know as we've continued to focus on cost reduction of our platform. We also want to make sure that most of the vehicles. We're delivering this year are gross margin positive and how to a point, where we're actually generating contribution margin for the business.
And so when we look at even back at Q4, we were profitable on a direct material basis with those vehicles and we're continuing to see improvement there that we shared some of the detail on the call and anticipate further improvement in the quarters to come.
Got it.
One last one for me and maybe just taking a big step back Dakota.
One of the comment that you made here in your prepared comments kind of suggest that at this point with certain customers, you're you're already beyond the testing phase in other words.
You've gone through the two unit tenants you've been gone through its Nick intending between U S and now customers are coming in and saying you are an official supplier with my company I hadn't heard that anywhere else in the heavy truck space.
Oh, Thanks milk top of my head. However, no can you comment as to you know our customers now calling you just the supplier and not just the test program, where it's fun Little experiment at this point in what number.
Customers are.
Considering you that and can you get a feel for how many might convert into that 2023.
Yeah, absolutely Mike you hit the nail on the head in that commercial fleets and large national fleets have a a very risk averse process to procuring equipment and that starts with a small demonstration scales up to a slightly larger one in the low tens of units and then skills to to hundreds of units.
I think Loomis is one of the examples that we can actually publicly talk about that.
It's done exactly that over the past few years, but we have several other customers that really are coming into that phase of the relationship where they're planning to order into the low hundreds of units.
And following on in their either their first or second order.
We don't guide to the specific number of customers that are there.
But many of them are recognizable fortunate businesses that have sophisticated fleet operations with thousands of vehicles and then.
I would say that that's that's one of our proof points as we've talked about creating value for customers, we need to ultimately deliver on a T. C O promise deliver on our reliability promise, which is why they test the vehicles and small scale to start and then ultimately show them that these unit economics scale across their fleet operations and.
We're doing it every day.
Okay, that's great color I'll pass it along thank you.
Thanks, Mike.
Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Hi, This is Adam <unk> on for Jerry today.
Yeah.
I was just wondering hey, where when you talk about a gross profit on a unit level turning positive can you clarify does that mean you expect gross profit for the total company to be positive in mid 2023 or are you maybe excluding overhead in that number.
And then just wondering how gross profitability could be tracking as we exit the year.
Yeah, no absolutely I can I can take that when we talk about on a unit basis, where we're including there is the direct material costs to that is the cost to the chassis.
The faster the bodies and also the battery systems, we have on the.
Also the direct labor costs and all the indirect costs as well that are linked to the units. So freights taxes rent depreciation although you would expect.
You know what you physically flushing out the the inventory through.
Over and above that when you talk about a unit level, you're also a number of other accounting adjustments often their reserves for particular reasons, including in N V reserve or an E N. A as of which you then see recognized on a GAAP basis in your financial statements and say, what we've guided to is being positive on a gross and a unit basis.
We ended the second quarter inclusive of those indirect costs that I that I mentioned.
Following up on that just talking about a bit about that.
How we were trending in Q4, that's the case you mentioned when you look at you know pure direct material costs as well as direct labor costs were about breakeven on the units. The stepper units were delivered in Q4 and the steps that we've mentioned today. This 15000 that we've had.
Densify those are really the first step in a number of all the improvements in the direct material costs into the labor cost manufacturing time that we expect our bacon over the course of 2023.
2024.
So where do we think about it is that the achieving gross by the positive is our is the station on the journey to being cash flow positive, which is our focus as a company.
Yes.
Great. Thanks, that's helpful and can we shift to cash flow for a second so wondering how you're thinking about cash burn through 2023, and your capital position today.
Yeah, no absolutely I mean, when I look at.
When we look at our operations. This year there are really three legs as I mentioned his name.
And the direct material costs, the overhead costs and also the pricing action that we've taken we expect overall as we go through the journey being gross margin positive as well as being really really capital discipline on our operating expenditures that opens the expenditures will come down significantly. This year, we feel piece that we have.
Ample liquidity to fund operations to thrive through May three into 2024, and you know we're scaling as we've guided to.
Thanks, so much.
Thanks, Adam.
Our next question comes from Michael Ward of Benchmark. Please go ahead.
Thanks. Thank you good afternoon, everyone I wonder if I could just dig into the the.
Production numbers, a little bit more.
Thank you enter 2022 with a significant backlog.
And once.
One thing I'm curious about is is the current backlog on the step vans shifted entirely to the next generation to the 23 model.
Yeah, Mike Good afternoon, that's a great question the entire backlog has not shifted to that model, but as we've started to move customers over.
Through the new model they've been increasingly interested in it so I would say that when we go to those customers, we're giving them a vehicle that's a similar a S. P.
With better performance.
And better maintenance performance and so when you go to a customer offering them something for the same price, but ultimately going to save them more money and better better actual real world driving performance and range most of them are not turning it down.
Okay.
This is a sorry to interrupt here. This is Jeff the only thing I'd add to that is with this new model. The 2023 version of the step down. We're also offering a 200 mile range version of the band and that's gotten some customers really excited we diversified the customer mix away from just parcel delivery folks are typically only looking for 100 mile.
The folks in other industries like uniform services that might be interested and heavier duty step down or a longer ranges that might require more kilowatt hours on board and that's something that's new version of the step that enables us to do and that's something we're really excited about.
Thank you.
And as you look at the production ramp you had a sharp fall off there in the fourth quarter.
Yeah.
Was that an additional supply issue, where I think you mentioned in the release that it has somewhat to do with switching over.
Production to the 23 version.
And so is that the are those the reasons, maybe it's both as we accelerate production in 2023 and it sounds like Youre looking at a similar level of deliveries in Q1, and Q2 that we saw in the fourth quarter what are the things limiting.
Delivery and because it sounds like youre going to have a substantial backlog as you exit 2023, and so there's always a risk that customers are going to pull away. So I'm, just wondering what youre going to do to accelerate production to accelerate deliveries.
Yeah happy to address that Mike. So I would say one thing that is common across the entire last mile logistics industry with Q4 is that it is the peak season in the year.
So some of our customers like Fedex ground they'll go for moving 10 million packages the week before Thanksgiving to 20 million packages. The following week.
And so with a such an uptick in their operations.
It becomes difficult to really do anything else in the business like Onboarding, new vehicles training drivers on those new vehicles are.
They really are focused on getting the getting packages delivered to customers.
So when we look at that are really Q4 is the first six to seven weeks or six to eight weeks of the quarter, where we can make deliveries to customers. After that it becomes incredibly busy to try and get vehicles delivered to those customers along with all of the holiday days, which fell.
<unk> are either traveling or out of out of the office. So it can make it difficult to get the same number of vehicles delivered them.
So that's one seasonal factor that always hits during Q4 and by having a diverse a more diverse customer mix, we actually are able to mitigate that some customers like a uniform rental or.
Mobile fleet maintenance company, they arent going to see that same seasonal peak in Q4, and so we try to slot body builds and vehicle builds or those customers into that that vacancy and really gives us it'll give us a little bit of a smoother ramp, but we do anticipate that this seasonal trend will will always.
Continue the second factor I'd talk about is charging infrastructure.
The same reason it's difficult to deliver vehicles in Q4, we also see similar obstacles in getting charging infrastructure delivered.
Our offices are shut down for a permit approvals or utility interconnect studies and ultimately for construction people are just working less through that quarter and so when we talk about commissioning and turning on charging infrastructure for our customers. We generally see less there. So that was that was one of the obstacles we face.
And theres, a little bit of a lag time.
It goes into Q1 on that seasonal impact.
So that's where we see it in Q1.
Ultimately the backlog was is really growing through those quarters, we're continuing to make sales.
And seeing sales growth through Q4 and Q1.
But we aren't seeing many cancellations folks still need to transition to zero emission vehicles because of the regulatory environment and also theyre seeing the incentives of operating a zero emission sleep and how it is reducing their overall maintenance costs in their overall energy cost.
Okay. So some of that or the industry growing pains, because I assume if the charging infrastructure is in place next year or the year after that that won't be as big an issue.
Absolutely you know one of the things we talk about it infrastructure is an issue that were readily solving today and introducing solutions like the hub, but we believe this problem will continue to expand into the next five and even 10 years. The reason being fleets never can convert 100% of error.
<unk> today, and so they're not going to build up a 100% of that charging infrastructure today, we're going to build it up incrementally year over year, we always expect there to be some delay, but the more flexible adaptable mobile solutions like the hub, we can offer the more we'll be able to smooth that gap and really.
Get trucks delivered per their original plans.
Thank you Anna Kingsley you mentioned in the release that you had a range of options for raising capital can you discuss any of those.
Sure absolutely.
You look at our business as we're scaling we're investing in operations and also in assets like our inventory and our receivables.
We are in a range of discussions with our debt providers underpinned by those assets, we want to make sure that we get the right partner for us as we grow and we scale over and above that we still have our equity line of purchase agreements with you will which is largely untapped.
And access to capital that we know we can access.
So the peso does that and operationally, we're really really focused on green deliveries.
As opposed to the gross margin and also making sure. We are stewards of the capital is it Gregg.
Yeah, Mike the only thing I would add to that is that you know we have several customers who are large strategic customers.
In many cases, when we take on a new product specifications or configurations that we might not already be building, we generally ask those customers to share in some of the expense and bringing those customers on board and so that also helps it's not nearly the contribution that.
Any kind of asset backed financing or.
Our equity line will enable us to tap into but it certainly does help accelerate those commercial conversations and offset some of the initial engineering costs that goes into those new platforms.
Thank you very much.
The next question comes from Donovan Schafer of Northland Capital markets. Please go ahead.
Hey, guys. Thanks for taking the questions and I apologize if there's any background noise.
Got some renovations going on right now.
Hammering or something else, but.
Okay. So my first question I wanted to ask with the news that then model.
I saw the the.
Mentions of having a centralized liquid cooling system.
Just curious yeah. This is this.
Is this a reversal of your kind of prior approach where it was like Eric will that I'm kind of assuming the cooling you're talking about here is for the battery, but maybe I'm wrong on that.
So maybe it was always liquid cooling for the engine or something like that.
Is it kind of a reversal from on the battery side from air to liquid.
I guess, just as a starting point there.
Yeah, Hi, this is Scott.
We are transitioning to a liquid cooled batteries historically all of our step vans did have liquid cooling for like the power electronics that are on the vehicle.
So we basically have three separate cooling loops now we have a power electronics cooling loop. We also have the battery heating and cooling loop and then the heating and cooling loop of the cabin. So that is a big transition from our previous models.
Okay, and then you.
You know I think Jim made a comment about you know now you have the 200 mile range.
So because as I understand it part of the M D.
Doing air cooling on the battery before was realizing.
The duty cycle of parcel delivery vehicle.
So Fedex ground was quite light you didn't have aggressive acceleration and deceleration and other things like that which is what made it kind of appropriate to to not do.
Liquid cooling. So I guess my question is is it about the kind of change in duty cycle, that's leading to liquid cooling on the batteries or is there anything you were seeing with the older generation of step vans, where maybe you weren't getting as much life and performance out of them using the air cooling.
On those prior models.
Yeah happy to provide a bit more context Donovan so on the air cooling modules. They actually did really service the use case of parcel delivery quite well and we continue to deliver vehicles as well as powertrain systems.
With those batteries and not a forced air cooling design one of the things that are design did in order to achieve the air cooling performance was we actually spaced out the cells and that gave us a lower volumetric performance relative to some of the liquid cooled options.
What this enables us to do is get a higher gravimetric, sorry, volumetric performance to enable packaging more vehicle more battery onto the vehicle improve the overall gravimetric performance because of the way we Mount the system now.
And ultimately deliver on a platform that now has a broader range of use cases, but if somebody doesn't want to run the vehicle on a dual shift.
They can now with the liquid cooling performance that this system offers.
Okay, great. Thanks, that's helpful and then.
I was looking into the New Jersey VIP program on their website and it was interesting to see that you know you I think it must be part of the paperwork and everything that's involved in being included in that program, where you actually had you have MSR piece for the vehicles up there on the website.
It's not something included in the catalog.
The California <unk> program.
Just kind of want to double check here.
Or am I gonna leave myself astray, if I take the MSR piece from the New Jersey ZIP program from their website and apply that more broadly or is there something are there does the MSRP kind of vary by state and maybe there's a markup there where do you kind of capturing.
Half of whatever the incentive is just.
Just curious if there's any if you can give me any clarification there.
Absolutely so in most of these incentive programs.
Want to have a standard price level, so that folks aren't taking advantage of the program, but as we think about asps on the vehicle. There are multiple different factors not just the acquisition cost of the vehicle, but there are delivery fees tax these.
Servicing fees that all go into the end cost of the vehicle.
And there are also factors in terms of our large customers, where we may offer price competitive discounts that would ultimately get them to a more competitive.
This level I would say when the best the best information to rely on when it comes to Isps.
Is the E. S. P guidance that we provided quarterly or the actual reporting. So if you look back at Q4, you saw S. P performance went up significantly because of the price action, we took and I.
I think that's a good indicator along with the guidance we provided for the full year for 2023.
As to where the vehicles will land and where they end up getting net price to a customer.
Okay. That's helpful and then with the production facility in Tennessee, and kind of doing the the new version of the step Van and then also talking about maybe doing some more excess hub.
You know hub trailers is that something where you do like you do it in batches and you're kind of overhaul the line.
Yeah, I mean I can imagine.
Something like even going from the old version to the new version for the step van having the structural changes that everything's in between you know the chassis rails that may involve moving some equipment around or training.
You know our training the laborers to say, Okay. You know we did 20 vehicles. This way and now we're going to switch over into 'twenty. That's otherwise is that kind of how it's done or do you run lines simultaneously and then there is there like a switching cost or does that impact kind of economics.
You know maybe leads to a few days of reduced production measure switching things over just kind of conceptually I'm trying to think through how you manage the different product lines.
Yeah. This is Joe here.
As far as the step van goes the different options and step out in 100 mile. In a 200 mile versions are really similar platforms. The 200 mile just had some extra batteries on board. So they can actually run on the same line, we do try to batch build as much as we can in a given week, we tried to build all of the same spec vehicle.
But you know having to switch throughout the week isn't the biggest the biggest cost is something that we can handle that.
The hub goes that's built separately, it's quite a different design.
And in that built separately, but also in Tennessee.
Okay, and then if I could just get one last question then just because you know people.
There's the financial turmoil and all that stuff and people are trying to understand.
You know cause the tightening of the credit market and how that would flow through to anything.
I'm just curious with selling step vans you know your your your primary products in your customer base and everything you know what kind of financing isn't involved in these step van purchases I mean, I imagine most of them aren't just sitting on large checking account balances or something.
And I assume there's a certain amount of financing to purchase step vans and then do those get turned into commercial vehicle asset backed securitizations or something I mean, like who are kind of the main lenders to help facilitate that.
And any changes have you seen that flow through in interest rates in that space.
Yeah, and it really really thoughtful question none of them say.
I'll break it into two different ways. The first way is <unk>.
Financing is offered to our customers as we announced a couple of years ago, we work with amongst others D. N L, which is one of the largest asset backed finance is part of Rabobank, that's off of financing to our customers. We also work with a range of other.
A range of other providers as well we have seen a slight increase in the rates charged but for most of our customers who are acquiring as fleets with financing. This trucks with financing. They are acquiring an asset that is a very critical part of their fleet Rice is a very critical part of their transportation of the assets, let's say, even if there's a couple of percentages increases there in.
Right, they're still going to execute the purchase.
In many cases, we get us like financing fee on that that would be talks about it you know definitely went public.
And a separate to that.
We're talking about is the potential to finance the assets on our balance sheets, which include kind of raw materials with some components or finished goods and we want to make sure that we get the right partner that right. So there are a number of different funds, usually non banking institutions as well as some bankruptcy issues that play in that space.
We have been in discussions there to find partners that work best for us.
Ultimately when you look at when we look at 2023 and a couple of things that are really really clear festivals, we expect inventory levels to two full definitely relative to revenue over the next couple of quarters, we're seeing supply chain challenges ease and so that yeah. It was a very significant use of capital for us in 2022, and that's going to.
These a lot. This year. In addition, when you look at operating expenditure as well we are being laser focus on cost there and we've already guided in the quarter. We would expect these levels to come down as well.
Donovan I would just add that as we talk about customer financing.
One thing you have to consider is the diversifying mix of customers that we're seeing this year.
When we talk about large national fleets many of them are businesses that utilize.
We utilize their fleet as a delivery service for their own products that Theyre manufacturing.
Many of them multi multibillion dollar companies have access to capital either through their own lines of credit or their own credit facilities that are well below the equipment lines that are publicly available to smaller and medium size fleets.
And many of them have structures or facilities in place with large fmc's or fleet management companies or banks that specifically focus on equipment financing such as wells Fargo and so those customers are rarely have access to credit issues, where they can't Rd access credit that's either below market.
And in many cases some of these customers will all even finance it off their own balance sheet. So it's not an issue is as our customers continue to diversify to those larger national accounts.
Okay. Thank you that's very helpful. I'll take the rest of my questions offline.
Thank you.
Those are all the questions that we have.
Good day, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
[music].
Okay.