Q2 2023 Workhorse Group Inc Earnings Call
Okay.
Ladies and gentlemen, greetings and welcome to Workhorse group's second quarter 2023, Investor call. As a reminder, this conference call is being recorded.
My pleasure to introduce your host Workhorse group's vice President of corporate development and Communications, Denmark, Sir you may begin.
Thank you Kevin Good morning, and welcome to all of you joining us on today's second quarter 2023 results call.
Before we begin I'd like to note that we posted our results for the second quarter ended June 32023 by a press release you can also find this release as well as the accompanying presentation and the Investor Relations section of our website.
Tracking with that presentation during the call. So please follow along needed from the link in the press release or through the website directly and with that let's get started John .
Joining me on today's call are Rick <unk>, our CEO and Bob <unk> our CFO .
Agenda for today can be found on slide three following my opening remarks, I'll hand, the call over to Rick Who'll give you an update on the progress we've made in our strategic and operational priorities. During the second quarter. Bob will then walk us through our financial results for the quarter and cover our revised 2023 guidance. Rick will then wrap up before we take your questions.
Our disclaimer can be found on slide four.
Some of the comments made today are forward looking and therefore subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement and our periodic filings with the SEC as well as in today's press release and in the presentation and with that I'll now turn the call over to Rick <unk>, Rick Thanks, Dan and good morning, everyone. Thank you for taking the time to join.
US this morning.
We're going to use this opportunity to provide an update on the progress we've made in executing our strategic and operational priorities during the second quarter.
And the steps we are taking the position workhorse for long term profitable growth.
Turning to slide five.
Our team is moving full speed ahead, and as intently focused on execution execution and execution.
We have taken decisive actions to build a strong foundation over the past few years here at workhorse I'm confident that we've established an organization the product roadmaps and business systems that position workhorse for profitable growth and value creation for our shareholders and customers.
During the second quarter, we increased production and delivery of our W. For C C vehicles.
Lost production of the W 750, and delivered our first W. Seven, but the step van to an end customer.
Our W. Five six program continued vehicle durability and system CECI ahead of the start of regular production in Q3.
We also received our first orders for the W. Five six which we plan to deliver to customers in Q4.
W. Five six also was on full display for the first time outside of the trade events at our Cal started sponsored event in Washington D C and at select dealer shows on the West Coast, where it received excellent reviews.
We made solid progress expanding our dealer network announcing new certified partnerships during the quarter with Bert E. B C Smyrna and western truck exchange each.
Each of these deals was targeted and selected for their specific regional location reputations with customers and the ability to solve custom bodies on cab chassis units.
In addition, we shipped 53 truck class vehicles as part of our three year contract with the company that were assembled in our world class manufacturing facilities in Union City, Indiana, and we expect volumes to grow in the second half of the year as TRO post continues to build a strong order book.
On the other side of our business, we achieved a crucial milestone in our aerospace business by securing our first commercial drone purchase orders.
This followed several successful demonstrations of our horse fly, including simultaneous package delivery by multiple drones at the same time.
We conducted several horse fly inhaled demonstration flights for the U S government departments.
Built on our success with the USDA and were awarded a new 900000 field scanning grant in support of farmers in Mississippi.
Our staples and solve initiative continues to serve us well and we are well on our way to electrifying, our Fedex ground fleet with five class or E. D units now deployed in Lebanon, Ohio.
We have expanded our delivery route assignments and are now picking up and delivering more volume than we were one year ago.
We are continuing to apply our lessons learned from operating these routes daily to our future product development and marketing plans.
We have been making the necessary facility and system improvements had a future production.
These include the installation of final assembly and paint processing equipment in Union City in time for the W. Five six launch in Q3.
Sharonville, Ohio prototype shop is now in full operation and the team. There has done yeoman's work on early W. Some 50 MW five six program built units.
Having completed our production line installation, we are now ready to for drone Assembly in our Mason, Ohio facility.
Finally.
We successfully completed phase one implementation of our new ERP system without issues and we when we went live in early July .
Again, the foundations for a high Tech manufacturing company are now in place after two years of hard work and the capital investments in production and test equipment hardware and software systems.
Moving to slide six I want to provide some additional details on the important progress, we're making on our commercial vehicle product roadmaps.
We're launching three new vehicles in less than 12 months easier said than done.
We received firm orders for them for 62 vehicles across the portfolio and delivered 42 class four vehicles W. For C. C N W. Some fifties to customers during the second quarter.
Starting with the W. For C. C. We have stabilized production, both at Union city and across our supply base base, including Green power you.
<unk> also secured body build slots for Q3, and Q4 to provide complete ready to used vehicles to our customers. We are now able to build and ship more than 300 W. For cc units in 2023.
Moving onto the W. Subsidy step van we have started production at Union City.
I will say candidly that it was a tough and challenging launch for our team and we took away several lessons learned which I'll touch on shortly the.
The key point is that we now have five W subdivision vehicles in the field, one with a customer and another for its stable installs and another five going through final prep ahead of shipments to customers in Q3.
We also had the opportunity to showcase the versatility of the W. Somebody during a full day infield demo with the city of Los Angeles, We have received supportive responses from our test drivers and are actively quoting several small fleet opportunities.
Now have the capacity to build and ship about 50 W. 70 units in 2023.
The W. Five six which is the first new workhorse fully design and purpose built chassis platform.
<unk> is on track to start production in September of this year.
Importantly, we have already sold our first two vehicles to our dealer network, even before we began initial production.
We expect to have production quality demo units delivered a major fleets at early Q4.
As I mentioned earlier, we are also showcased our W. Five six vehicles, the only class five or six vehicle permitted to attend at the driving future electric vehicle that on June 7th in Washington D. C.
E D showcase in the interactive event allowed to members of Congress to learn more about the market readiness and advanced technology, now ready and available to accelerate the transition to commercial evs.
I want to touch on I want to touch on the launch experiences. We have worked through the last couple of quarters. Since they are reminders of why creating a new vehicle OEM is not as easy on Powerpoint slide, but executing the real word is simply hard grinding tough work.
We have assembled an incredibly talented of experienced automotive professionals across several functions.
As a team they have worked to ensure that engineering change management discipline and documentation is complete and accurate they are.
Put in countless hours to ensure multiple software programs, both ours and our suppliers are compatible and fail safe absolutely critical in electric vehicles.
The final bill of materials must be frozen as early as possible and supplier selection and sourcing must be completed on time to ensure part readiness for both pilot and full production builds our team gets dd's task, if the engineers get behind but do not properly document design changes it throws the supply chain and manufacturing teams.
For a loop.
Also experienced this as well.
These ingredients are really put to the test when the first production vehicle moves down the line.
We learned and we grew a lot as a team and successfully got the W. Seven fifth unit production, while launching a new ERP system, but it was a tough challenging learning process.
The good news is that we have developed muscle memory through the WWE the launch process and will be better positioned will need start W. Five six production next month.
Not to belabor the point, but designing testing sourcing parts, and then assembly and launching of new vehicles incredibly hard work for the engineering supply chain and manufacturing teams and it takes automotive industry experience, which we have in depth here at workhorse to get a new vehicle launch on time and on budget.
I'm extremely grateful and proud of our team's hard work and dedication over the past 18 months and bringing not one but three vehicles to market.
A final thought on this subject I personally went to the durability test track in South Bend, Indiana to ride in both our W 750, and Wi Fi six step vans, while on the tests I.
I will tell you that this is a tough and I mean really tough ballroom rallying balanced challenging vehicle tests.
When a truck successfully complete this rigor is ready for service in the field for 15 to 20 years, both our W 750, and Wi Fi six received high praise from a third party test vehicles to drivers as best in class amongst the other EV EV vehicles going through the test cycle up in northern Indiana.
Turning to slide seven as we have mentioned in the past workhorses developing our certified dealer network to meet customer needs across the United States targeting those areas, where carb standards will take effect in 2024 to 2030.
I have spoken about our need to get manufacturing license secured in several states and we are now licensed in and are authorized is shipped 23 states.
Important recent addition being California.
We also expanded our certified dealer network as I mentioned earlier by adding bird truck and trailer sales our first distribution service part and the state of New York and the initial workhorse dealership in the northeast.
E D C. Smyrna truck is our first certified E V dealer and bodybuilder in Georgia, and just last week, we announced our expanded California presence, adding western truck exchange as a certified workhorse dealer.
Adding western truck allows us to grow our dealer network through a trusted operator in the critical southern California end market, which has some of the most favorable government incentives in the country.
The map on the slide shows we are planning to move forward with our plan to onboard six to eight new dealers in 2023, most crucial as our expansion along the I five corridor out west.
I 95, along the eastern seaboard, as well as the southeast and southwest regions of the United States.
Finally, we have strong customer interest in the Wi Fi six and look forward to getting production level quality trucks in their hands for field demonstrations and trials in Q3 and Q4.
Several large last mile delivery component companies in the packaged goods baking industrial supply and food service industries are requesting field W. Five six demonstrations are intended to inform those demos and then secure firm <unk> for Q4, 23, and 24 to 26 by year end.
Moving on to slide eight we continue to execute on our stables by workhorse package delivery routes for Fedex ground.
Based on our field performance, we have expanded our route assignments by about 20%.
We now have five class for E D units and the delivery fee fleet W. Four four W. Some bid these and a W. For C C box truck.
This represents about half of our operating fleet.
We are on track to add W. Five.
Five six vehicles to the fleet in the fourth quarter.
With these additional evs in service, we will gain valuable insight for our white paper on small fleet E V transition we.
We are also continue to review options for our second stables operation location and incentives supported state and.
In summary, we are gaining tremendous rural real world experience to better serve independent contra contracted fleets as they make the transition to evs.
On slide nine our aerospace team has been very active since the beginning of the year.
As a result of the technical progress operational capabilities and the quality of our products, we have been able to earn our first commercial drone purchase orders for our industry, leading horse byproduct. These.
These purchase orders or validate the nearly five years of developmental work and investments. We have made in this product and a testament to the technical prowess of our aerospace team.
We have completed multiple flights in support of our initial USDA grants in Arkansas, Mississippi to support underserved farmers and ranchers in those areas.
Due to the due to the success of these efforts we have received the new 900000 hour grant, Mississippi with scanning operations commencing in the third quarter of this year.
Our humanitarian aid and logistics operations, our Halo aircraft, which was developed at a 142 days perform multiple demonstration U S military and other U S government entities.
We have also successfully field tested the halo internationally and are working hard secure our initial order for the Halo aircraft this year.
We are very excited about the advances we've made in our aerospace business and believe we are well positioned to capture many of the opportunities in front of us in the market and create shareholder value with this business unit.
With that I'll now turn the call over to Bob to discuss our financial results.
Thanks, Rich, let's turn to slide 10 to discuss our second quarter financial results.
Our second quarter results reflect the team's focus on operational execution and financial discipline, we continued to ramp up production and delivery of our vehicles and expect that to continue throughout the rest of this year, which will drive strong results at the same time, we are taking steps to become more efficient organization and manage our cash burn effectively.
Turning now to our results gross sales for the second quarter of 2023, we recorded a $6 4 million plus an allowance of $2 4 million for potential <unk> voucher impact, while carb finalizes workhorses hbf eligibility.
Sales net of returns and allowances for the second quarter of 2023 were $4 million compared to zero in the same period last year.
The increase in sales is primarily due to sales volume of Adobe for Cc vehicle in the current period.
Just a couple of comments on the Green power H voucher impact Dzhokhar finalizes, our voucher status, we are holding an allowance on the 40% and 40 of the Debbie for Ccs, We sold we.
We anticipate a favorable outcome, but are dependent on the resolution of several factors outside of our control at the moment.
Cost of sales increased to $8 4 million from 3 million in the same period last year. The increase in cost of sales was primarily due to the $4 8 million increase in costs related to the vehicle sales and a $600000 increase in employee compensation and related expenses.
Selling general and administrative expenses increased to $14 million from 13 million in the same period last year.
The increase was primarily driven by a $500 increase in employee compensation related expenses, including noncash stock based compensation expense $400000 increase in professional services and a 500000 dollar increase and other operational expenses the.
The increase was partially offset by a 600000 decrease in legal expenses.
Research and development expenses stay consistent during the three months ended June 32023, and 2022 at $5 1 million and $5 million respectively.
Net interest net interest income was $500000 compared to $100000 of interest expense in the same period last year.
Interest income in the current year period was driven by interest earned on cash of the company's money market investment account.
Net loss for the quarter ended June 32023 was $23 million compared to a net loss of $21 2 million in the same quarter last year.
Loss from operations for the second quarter was $23 5 million compared to $21 1 million in the same quarter last year.
Turning to slide 11 to discuss our balance sheet first of all we continue to enjoy being debt free as of June 32023, we have approximately $262 4 million in cash and cash equivalents.
While our cash burn rate was significant during the quarter, we expect it to decrease overall throughout the rest of 2023, despite increased working capital requirements and R&D activities.
The bulk of the cash flow has been used for working capital both for the Green power chassis, but also the required materials to ensure a smooth launch for the W. 56 next month as.
As you can see we had inventory increased by $25 $8 million year over year. Additionally, through the first half of this year. We have spent $11 4 million on capex to install the necessary production and testing equipment quality control systems and tooling at our manufacturing sites and select suppliers.
To fund these cash needs, we have our at the market program in place during the second quarter, we issued $24 3 million shares under the ATM program for net proceeds of $21 7 million, leaving up to $121 8 million available through the issuance of shares of common stock under the ATM program.
Along with advancing our product roadmap, we are taking steps to ensure we have the financial resources to achieve our goals from a position of strength. We are evaluating a range of options to determine the best path forward to fund our next phase of production and growth.
As part of these efforts, we are contemplating <unk> transactions involving common stock for the issuance of equity linked securities including convertible debt.
These options will only be available to us if we have the flexibility to issue more shares of our stock.
We are asking stockholders to help us build a financial bridge to continued growth and long term stockholder value by voting for the proposal to increase the number of authorized shares of workhorse common stock at the company's upcoming special meeting.
Our plans are very straightforward to use any capital raised to fund the operations of the company, specifically working capital operating expenses and as required capital expenditures.
On July 25, we filed a definitive proxy statement, which outlines additional details regarding the proposal and special meeting.
Turning to slide 12, we are revising our 2023 guidance now expecting generate between $65 million and $85 million in revenue this year.
Driver of this recalibration, that's been the lack of availability of H Pip vouchers in California for the Green power chassis vehicles.
We expect this administrative issue will be resolved quickly, but it has negatively impacted our sales to date, a second driver of the revenue guidance as the W. 56 certification lag of about 45 days.
First establish a product roadmap plan two years ago, we anticipate W. 56 with launch occurred in August we're on track to launch the chassis in August the step van launch at the end of September this.
This is a gating event is getting these production quality demos into the hands of customers is a prerequisite to purchase orders.
I'll also add if there is an EV adoption challenges across the industry that dealers and fleets are working through mostly around infrastructure and technician training the new carb mandated clean fleet regulations, which take effect in California in 2024 will likely force customers to move a bit quicker towards EV powered vehicles in the near future.
See increased sales quoting opportunities, especially from government funded interest in California, and other states across the country.
In that vein I also want to spend a minute on how we're thinking about the importance of vehicle volumes in Union city plant for the balance of the year.
As I've said before our fixed cost of the plant load. In addition, our contribution margin is positive for each EV, we sell well at.
That means in practical terms is that with quarterly vehicle volumes of about 300 trucks, we expect to generate a positive gross margin for the company.
Reaching this threshold is one of our key imperatives and our near term objectives. Either later this year or in early 2024.
One final note our second quarter 10-Q will be filed on Monday August 14th.
With that I'll now turn the call back to Rick.
Thanks, Bob No one said that making the transition from technology startup to becoming a full service is the OEM would be easy.
Me tell you that it's not.
Here at Workhorse, we are taking to technology startups, our commercial vehicles business and our aerospace business through this challenging transition it takes long hours, great teamwork significant capital resources.
<unk> and patients to get the job done.
After two plus years of incredibly tough duty, we're on the precipice of successfully getting workhorse to the starting line in terms of being able to build and ship safe reliable keyboard products to our customers. We are poised to capture demand as the combination of consumer and government regulations continue driving the transition from ice to EV.
Howard technology.
Let me briefly discuss our Q Q3 priorities, which are outlined on slide 13.
We remain laser focused on advancing our product roadmaps According to plan.
We continue to ramp up production of the W. Some 50, while simultaneously preparing for the start of production of the Wi Fi six strip chassis next month.
This also means completing W. Five six step van durability testing as well as installing cab and body process equipment and Union city in Q3.
We also plan to ramp TRO post production to 50 units a month in Q4 to meet accelerated demand for those vehicles.
We must properly grow our CV sales. This means completing the build out of our sales organization for both CV as well as arrow, we must secure carb and EP certifications that W. Five six and secure <unk> vouchers for all of our vehicles.
Spanning our certified dealer network is also necessary, we will continue to showcase our innovative high quality electric vehicles through fleet demonstrations and test drives they get demo trucks in the hands of select fleet customers and dealers to secure Q4, 'twenty three and 'twenty 'twenty four orders.
In relation to our aerospace business, our focus remains on securing additional purchase orders and receiving an earning additional government funding grants. We will continue to carry out flight testing and field demonstrations for industry partners and government officials in the coming quarters and expect to move into low volume drone Assembly in Q4.
Finally, we will execute phase two of our ERP system and begin to exercise the lean systems across our supply chain and manufacturing operations as we move into full production mode by year end.
Before we turn the call over to Q&A I want to touch on slide 14, which is discussed.
Which discussed the shareholder special shareholder meeting that Bob mentioned.
Since I joined workhorse as CEO in August of 2021, we have significantly transformed the business executing a clear strategy to stabilize fixed and ultimately grow workhorse into a viable commercial EV OEM.
We have strengthened the company's financial position, we have addressed balance sheet issues and resolve legacy legal issues.
These actions provide us with the financial flexibility to invest in our turnaround efforts to date and our people our products our plants and our processes.
As I mentioned, our focus efforts have put us on the precipice of success.
We have already emerged not only as a survivor, but as a leader in the transition to commercial EV powered systems, both on the ground and in the air.
That said as we look ahead, we need to ensure we have the necessary financial resources and flexibility to complete our transition.
As Bob said, we are evaluating a range of options to fund our next phase of production and profitable growth.
I want to be clear about what this means that while we are looking for the authority to issue additional equity simply put we will use the additional equity to obtain new financing that we will use to fund our business period end of story.
We've been very strategic in how we have cleaned up our balance sheet and finance our efforts to date.
The financing options that we're looking at require us to issue more shares we are looking to issue a reasonable amount of shares and our goal in all of this is protect our shareholders and build a bridge to long term growth and shareholder value creation.
In order for us to successfully continue on our journey, we need our shareholders to vote for the proposal to increase the number of authorized shares of workhorse common stock.
We have launched a website ww W. Dot vote W. K H S Dot com, which provides additional information for shareholders regarding the special need and how to vote.
In closing being a pioneer in the commercial space is no easy task. It takes hard work courage and some luck to be successful.
Incredibly proud of the progress we are making here at workhorse.
Credibly proud of our team doing all the hard work and I have the utmost confidence in our path forward to deliver growth.
Profitability and stockholder value.
That concludes our prepared remarks. Thank you again for your time this morning and your support.
Now we're ready to open the call for your questions. Kevin Please provide the appropriate instructions.
Certainly, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up.
Before pressing star one one moment. Please while we poll for questions. Our first question is coming from Colin Rusch from Oppenheimer. Your line is now live.
Hey, thanks, so much guidance.
Can you talk a little bit about the dynamics with the customers and causing else certainly there's a number of elements in any given deal, including some of the political subsidies.
Infrastructure and vehicle availability.
Talk a little bit about any sort of.
Anything that's standing out as.
A delay here for you guys in terms of closing closing deals and folks taking delivery.
Sure first and foremost people want to get their hands on the trucks and actually operate and not just look at the Powerpoint slides.
So getting the W 750 to the field.
It's critical we now have three or four of those out with our sales team doing product demos at dealers.
<unk>, we had to go out and secure build slots to put on boxes in the back of trucks, we have some of that being done right now.
And Wi Fi six while we've had a couple of prototypes out in the field water washes and one on the West Coast, Washington D C.
Production quality ready right. They still had some issues we need to get addressed okay.
So the big fleet the ones that really drive this segment of the market class four through six they basically told we're very interested your products.
Products that are production quality off of production tooling.
Finished with testing, we want do demos anywhere from two weeks to four.
Four weeks and then we're prepared to place orders. So that's number one getting real products through testing and through production.
Two the big companies I will say have a pretty solid plan of what theyre going to do over the next five to 15 years to electrify their fleets that includes putting the electrical subs the substations in and connecting to the grid and getting the charging systems and then up very clear cadence.
Of moving their fleets from ice to EV.
Whether it's <unk> or Fedex or DHL, we've been in discussions with all those guys. They have a clear plan and I think that will become our biggest customers going forward right. The smaller fleets are moving with a little bit of wariness I'll say, they're not convinced about EV. They have range anxiety issues. They have battery liability issues warranty issues et cetera.
They don't like the cost they've got to work your way through the voucher systems, whether that's in California, and New York and New Jersey. So those are a little harder to convince and Thats part of why we do stables is we know that we run our own small fleet. We can go out to show that documents to them by early next year that shows here, we took 10 trucks raggedy old rapid trucks.
100 to 450000 miles that are always down or in repair we talked to one of the large fleets they have over 15% of their trucks down on any given day.
It should be a target rich environment for us where.
Where we're seeing stronger interest and it gets its building almost I'll say every month is in government funded acquisitions of government fleets, whether that's at the state level the county level the city level police departments. The school systems. The money is flowing from the federal government down to states to these entities.
He's made the task to start electrifying their fleet, both the federal and state level and we've added to our sales team and experienced government salesperson with over 18 years selling the governments both here in North America and across the World and we think that's going to help us as well.
Does that help at all along so yep Yep, it's incredibly helpful. I appreciate all the detail.
Then just looking at the testing process with the vehicles can you talk a little bit about where you've been surprised to.
The upside in terms of the performance of the vehicles and where there's some elements that may need some incremental timeframe.
Well first couple of weeks Wi Fi six testing, we had a few brackets break and so that I get a weekly report sometimes a daily report up we've had a failure. So I decided after one of our program used to go up to the test myself I've been a lot of test tracks in my career.
Never been on a test track like that I'm, telling you, maybe I'm getting older but I could barely walk. The next few days. So I had a brace myself the track so rough it's about a four and a half mile long loop.
Cobblestones dirt roads gravel roads.
<unk> broken concrete Belgium.
Rumble strips up and down it was a hell of a test now I understood why we had some brackets break he had a bracket break on one of our thermal management container systems, we had a bracket baked on a rear door.
Here's what I'd tell you our powertrain is performing marvelously alright, we're getting that range. We think we may even exceed some of the range targets I get the final report next week. Our chassis system has done very well we've had to go from <unk> to partial over there now we're running the chocolate is final stages at 10000 pounds fully loaded obviously you learn a few things along the.
Once you get put more load on the truck.
Nothing surprising to me in fact, I'm very happy as I said in my comments I saw four or five of our competitors' trucks up there two of them are down had been down for two weeks one couldn't retain its charging systems. So won't comment on who they were what they were but I know they are in our trucks that performed very well and were probably six.
5% of the way through our testing right now about 30 days behind schedule first couple of weeks a little tough and then we have a one instead, we have to take care of but we are on track to finish that testing as we head into September so.
That's super helpful. Thanks, guys.
Thanks, Tom.
Thank you. Your next question today is coming from Chris Souther from B Riley Securities. Your line is now live.
Hey, guys. Thanks for taking my questions here, maybe just a little more color on the <unk> certification path and anticipate the timing of resolution. There can you give us a sense what kind of the whole back office there.
Any sense as to the mix of sales that were anticipated in California. This year under that program.
Yes, good question Chris.
R. R. W for RCC and our W. Some 50 are built off the green power chassis that we buy from overseas that's called the <unk> Star and the Asian stars on the Carb executive orders are W. For RCC and W. Some fifth youre not so we need to get our vouchers through green power and there is some technical legal issues around the dealerships and Cal.
Before we got that resolved right right now, we're working with both carb and green power to resolve an issue there with those two asset those two entities and we're kind of caught in the middle We think it's an administrative issue and we are working hard to get that resolved, we hope to get that resolved here in August if not early September is critical.
To our success at courses are probably a few dozen orders and shipments.
Second quarter, so we need to get that done obviously.
Fleet mandate kicks in in January and we're starting to see RF queues across up up northern and Southern California everywhere in California for electric vehicles, we've got to get this done and we're working to pass one we get our vouchers as we were supposed to from Green power or we get our own allotment, an executive order from carb.
Bob anything else any.
Color on that so no that covers it.
Okay. Now that's helpful. And then maybe just overall on the customer side can you walk through like where the visibility.
Full year guidance.
And then maybe just additional color around.
It sounds like large clients are moving faster than smaller fleets, who can make sense.
You've called out kind of governments.
Kind of owned fleets is an area that youre, particularly excited about.
Any sense as to kind of what you think that mix is there between.
Public and private fleet for this year.
Although <unk> started on the on the outlook in general.
The it's really kind of predicated on two things one.
Is on the day before Ccs getting build slots and making sure that those can be up fit and delivered to end customers as is the driver there and we see some opportunities in progress on that and then of course the big one is the launch of the <unk> 56 and be able to get those step vans out first in demos.
Two the bigger fleets and then to end customers and those are the drivers of what we see in the in the fourth quarter for the sales side in terms of.
The breakdown in fleets, we started our focus with dealers first.
Now moving two fleets and then just now adding in a government focus as we've seen those opportunities so.
Right now I think it's probably for the rest of this year.
More weighted to the <unk>.
<unk> signed but hopefully we start to make some movements on the fleet in the government side of your quickly because those could turn vehicles very fast.
<unk>.
We originally started down this path, we werent, where kind of novices I'll say about the up fitting and custom bodybuilding segment, how long that takes and how sold out some of those guys were weak.
We purposely pivoted in the second quarter to identify those dealers who have either in house or affiliated custom bodybuilders in their region.
And so you'll see us moving away from more class six eight type dealerships over to these work type truck dealerships.
The Pritchard family, who have been very supportive of us for since the day I got here and I appreciate that very much they've done a yeoman's work helped us identify that and build a secure build slots.
Also the other thing I'd say is there are some dealers who are a little bit gun shy right.
There's a concern about how fast the transition to EV vehicles will actually happen in the industry.
I think the clean fleet mandate that California Carb passed earlier. This year is really going to change the game for us from a supply and demand standpoint out in California that is it moves up the five quarter north.
And I think there's also as you know read the industry. There's been a lot of Evs I Havent made it and so there is concern about viability of the EV companies right and are you going to be here to service your truck and warrants Youre Chalking continued production. It's one of the reasons, we're going out for the share issuance that we can make sure. We can tell the customers we have a clean clear path forward to financial viability and as Bob.
<unk> said, we built this company from a cost structure that doesn't take a lot of trucks across our fixed assets to get the growth.
Positive margins gross margin positive.
Alright, we got some work to do you get for a positive free cash flow because we have an overhead cost structure here, but we will adjust that over the next 18 months.
Thanks, Paul.
Okay great.
Thank you next question is coming from Jeff Osborne from TD Cowen. Your line is now live.
Thank you and good morning.
Couple of questions on my end I think you folks mentioned 300 units to get the gross margin part.
<unk> been hoping to get there in Q4 Q1 can you talk about what the volumes would be needed to get to cash flow breakeven.
Well Jeff.
We're kind of starting with gross margin here, we think with our cost structure and the contribution margin that that's why we're confident in this this 300 number as we move forward. Obviously it is dependent we have multiple vehicles is dependent on mix and all of those things but.
Assuming a normal average mix, that's what we anticipate.
A little bit further out to get to total as Rick said, we have we have a <unk>.
Operating expense cost structure to cover so we really haven't gone out that far and ready to talk about that just yet but.
But the first step is always been positive gross margin, but the first step was actually positive contribution margin are there. So now the next step is positive gross margin and then we'll we'll keep going in terms of what we talk about.
Yes, we've done some math.
Jeff.
We will talk about that later this year next year.
Okay look forward to that Tom just two other quick ones.
Not looking for you endorsed consensus for 'twenty, four, but I think wall Street has around $200 million give or take.
What level of sales.
Do you anticipate from California is that sort of half the mix I just would have thought with the IRA.
Having a nationwide credit.
The <unk> program wouldn't have been as impactful as it was to the revised guidance for 'twenty three so I'm just trying to get a sense of perspective as you look out over the next 12 to 18 months.
The state of California, being half the mix or bigger or smaller.
I think the key there Jeff is the incentives are only part of the story.
I think if you look at the three legs of this you've got incentives you've got adoption and then you've got what's driving urgency and while they exist in fact incentives in New York for example, or greater.
California's driving the urgency by some of the new rules that really take effect in 2024. So.
The urgency is much greater there. Therefore, we think that's where the preponderance of the opportunities exist in terms of percentage, we haven't really calculated but it's significant.
Yes, I think that the clean fleet rule says that 9% of your new vehicle purchases need to be electric.
Whether you are Ryder Penske Fedex U P. H U P. S D H L.
Cintas Pepsico.
All of those fleets in California, Youre going to see a 9% penetration next year electric vehicles ramps up that to that so I do expect California to carry the bulk of the early EV adoption, but we're seeing some pretty aggressive.
Grams in and around the New York City area down in Florida, with some of the state governments and across our school systems.
One of the things we learned it from Troll Bose is they've had good success.
At some of the school systems out West University of Arizona Schools, and University, California School system, where the schools are adopting the electric vehicles that we're following right behind their footprint there to bring our trucks to the market.
Got it and just one last follow up on that Chris others question.
On the HVAC program.
Does the revised guidance.
Essentially mandates that you resolve that in August or what's the risk that we don't see a resolution this month I would say that.
I'd say, it's sooner, but the sooner we get resolved with the better we have we have one customer out there one dealer who has told US based on the inquiries. He has he thinks he can sell 15 to 20 trucks a month right now the only Hasnt 10, he hasnt made a second order yet because he's waiting for to get the HB vouchers, we just signed up western truck.
There's a lot of demand in the La County area for sure. So it's pretty critical for us. So I'd say, that's something they'll be on our radar screen and that's something we won't wait for quarterly earnings once we get that resolved that would be something we'd get out there.
But if you don't and you hit the high end sorry, the low end of guidance and if you could hit the high end I'm just trying to understand the $20 million range I would say there is if we don't get it I'd say there is some risk to us in the low end of the guidance. If we get it then I think we might have a better shot at the top end of our guidance How's that.
So it is probably the number one on my whiteboard in my office number one is get Karp executive order and vouchers.
Three or four people includes a couple of people on the outside helping us do that so as you know when you work through.
Governments.
Organizations, sometimes things move a little slower than you'd like in the business world of that will be a nice.
I understand good luck in Sacramento.
Yeah on the way there in a few weeks here so for sure so.
Thank you next question is coming from Greg Lewis from <unk>. Your line is now live.
Thank you and good morning.
Thank you for taking my questions, Bob I was hoping to get a little more color on I don't know how granular we want to be but as we think about this year guidance. When we think about the buckets, let's call. It your vehicles.
<unk> stables installs and drones is there any kind of way to think about the revenue contributions maybe.
If you could just think about how youre thinking about vehicles versus.
Or however, you. However, you want to think about that just trying to get a better sense for.
Were those drivers of the revenue and the high end and the low end, they're going to be.
Sure. So, let's let's start at the bottom and work up here on the <unk> side you know.
It's been a challenge on the supply chain getting the kits in so we can turn around and finish them that that's not once we get them, we can turn around very quickly.
And get them out the door, we do expect it to ramp up in the third quarter versus the fourth quarter versus the second quarter.
But not to the point, where it's game changing on the revenue remember one of these trucks because it's we're assembling them is dramatically different revenue convert compared to one of our trucks. So we do expect continued growth there, but in terms of modeling out it's not it's not.
Huge dollars their next up the list is we've broken through on on our first drone sales, but really getting those to scale.
While I think it'll be significant progress this year, it's not a big contributor to your revenue model.
Now it gets us into the trucks in there.
You'd think about.
For really four versions, where focus on you've got the class III for a cab chassis.
The step van in the class III for step van in the class five six and then the strip chassis on the <unk>.
Class five six.
And as we start to turn the cab chassis as build slots become available and credits et cetera, we expect that to be a significant contributor and then of course the step van W. 56 is to be the real linchpin. So those are the two keys those two vehicles and then the.
750, and the <unk>.
Strip chassis will be important but not as important as the other two.
Yes, so Greg I throw some color in there I think in my remarks, we've talked about we can build and ship up to 300 W. For Ccs yet this year.
About 50 up to 50 on the W. Some 50, that's a much more complex product a lot more part numbers a lot more work at our manufacturing facility.
Wi Fi six will start rolling chassis is down the line. We've got a couple of pieces of equipment due in the next two weeks, we will start rolling chassis. This month in advance next month, assuming we get through all the final testing and certification. There. So vehicles is the bread and butter for this company stable installs makes a little bit of money for us and profitable money.
<unk>, we've gone through the growing pains as Bob said with their kit suppliers, we actually took a pause for almost six weeks till they got their act together you've got the new kits in July they were about 90% accurate versus about 50% accurate before we're building. Those every day basically probably ramped up from 16% to 32% to 50 a month.
On pace and arrows, both a combination of drone sales, which as you know we're still the very cost of the early of the.
Drones for delivery the drones for scanning which is mostly drones as a service for us as a big opportunity and we do think the halo. After it gets through a few more tests in a couple of tough situations environments I should say, we should pick up some orders that we can announce later this year.
Okay, Great Super helpful. Thank you very much.
Thanks, Greg.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Mike <unk> from D. A Davidson your line is now live.
Yes, Hello, good morning, and thanks for taking my questions.
If we can start off with some of the news that happened today in the space.
You know one of the one of the large memory makers in the heavy truck space.
The bankruptcy.
In my knowledge workhorse is not using that company I guess first can you just confirm that for any of your models and then secondly.
<unk> been an expert or have been talking about supply chain.
Quite some time can.
Can you give us a sense as to how you plan.
He doesn't sees in the battery supply chain.
It's hard to get one certified to kind of figure. It out do you have just in case, you're providers casually, but do you have a backup plan.
For workhorse whenever it is time to get production ramped up I appreciate the color. Thank you.
Yeah, we don't have any exposure to pro Terra from a chapter 11 standpoint, I got that notice what I was driving home from a customer dealer event last night and so we got we have no exposure there supply chain. We have written guarantee of our battery suppliers for this year next year from our current supplier we're confident there's a lot.
As battery manufacturer in the world today I think.
And we have taken a look at them all.
Other sources some in North America that are coming online in 'twenty four 'twenty five and we have other ones and our current suppliers talking about building his own factory here in North America. So we have our supply chain team has a very detailed outlook of where we can get batteries for and at what price per kilowatt hour and the one we have right now is the best.
We could do we think we're competitive on battery costs, where some of our peers or competitors and we have looking at different options out in the future.
That's great I appreciate that color.
I also want to get some feel for the change in guidance and some of the.
<unk> got kind of the rollout here on the Wi Fi six I guess, it's a two part question first do we just push.
The difference in the midpoint call. It timeline on this lower revenue into the first quarter of next year and does that Shouldnt anything in the first quarter with the second quarter of next year and then more broadly speaking Rick you've been in this space for quite some time and you share with US do you think it's the issue with some of the fleet is beyond just getting the charging interest.
But also.
Just hesitant to two advanced e-commerce isn't a tougher spot right now Mr. Statistic curious as to the broader capex thoughts.
From what you're hearing from us is nowadays.
I'll, let Bob talk about guidance, but let me I'll go I'll Peel the onion backwards I do think there is some.
I guess my experience from heavy truck industry, when I was at Accuride Abbvie.
Heavy truck experiences recession first.
<unk> see it in the volumes go down and freight momentum they stop ordering trucks. They stop ordering trailers I do see and I've talked to some of my friends in the industry that they're starting to be some caution on the fleet operators of how much capital Theyre going to outlay going forward you saw the big notice last week yellow freight went down chapter 11 30000 jobs.
Right that will ripple across the industry.
There is concerns up in Detroit about the UAW put in a very tough demand.
<unk> on the big three and how that's going to ripple across the automotive industry and the supply chain right talking about taken the industry back 20 years, when GM and Chrysler went bankrupt. So I guess they want a bankrupt again I don't know I got to be careful what I say, yes, but at the end of the day, it's an interesting time.
I think I've talked to multiple dealers I've talked to multiple fleets they've had multiple EV companies come pitch them and then that EV company doesn't deliver on their promises whether that's whoever how many trucks are going to build how many plants are going to build and now they have nothing to show for it right.
One of the few EV companies that has a world class factory, where one of the few EV companies in the commercial space that has products running down the production line not at the volumes. We want we're not the sales we got a button down the in the air.
The dealer network and get the trucks in the hands of the people then I think it will start going okay.
Everybody believes the EV world is going to turn overnight, we said from the day I got here. This is a multi decade transition to Evs. We're building the foundations were going very slow very methodical probably slower than our investors want slow then we want some days, but we are building a rock solid company, that's going to be here to stand the test of time so.
I will talk about guidance, yes, I'll talk a little bit about that so.
So basically when we look at this.
We look at our reduction as <unk>.
Somewhat internal somewhat external whether it's H.
Vouchers or the delay the roughly 45 delay on the Wi Fi six internal and then you've got infrastructure and adoption that we'd also talked about as well.
But all of those things combined all suggest timing versus demand. We don't look at this as a demand change we look at this as a timing to get those things worked out and flowing through the the process correctly. So.
To kind of.
Simplify that down to your question.
At far more as a push then than a reduction.
As it is.
Ex military Guy we know what our objective is the.
The battlefield little tougher than we thought we're learning lessons as we move across the.
The zone there right. So we had logistics issues, we had import issues, we had quality delivery issues, we had tooling issues.
Engineering tests issues, we're working through them one at a time fighting the battle of fighting the battle of moving the ball down the field eventually will get the Enzo Okay. So zero sales last year's 6 million. This year, we took a reserve because of the carb issued an hour ago resolve the card issue, we get that resolved via Wi Fi six and we've got it we have product.
That I can put our name on behind it safe reliable capable trucks that do the job.
When I got here two years ago, our friends at one of the customer said your truck you have is not anywhere close to being viable for us it can't carry our payload and it wont last more than two years that same customer Zhao and discussed with us about buying trucks that have a life of 15 to 20 years or carry 10000 pounds.
And we're really proud of that I was out in our prototype center. This morning, I think theres 14, or 12 vehicles up there W. For Ccs W. <unk> W. Five six old <unk> being retrofitted and a couple of Youll see one thousands were still taking some of the lessons learned out there software engineers are out there wiring guys are out there, it's like a business out of activity out.
There okay.
That's great I really appreciate the color. Thank you.
Thanks, Mike.
Thank you next question is coming from Craig Irwin from Roth on can your line is now live.
Hi, Good morning, Thanks for taking my question. So most of the things I wanted to ask it.
We already have already been addressed but I was hoping you could give us a little bit more color.
Duration calendar.
This is obviously something thats going to play an important role as far as how the second half comes together and then ill.
And then 'twenty four.
How scheduled argue at the moment for demonstrations.
On your different vehicle platforms.
Do you feel that there is an opportunity for.
Fleet trades in their hand, now to come in and get the appropriate amount of time on vehicles and <unk>.
Do you maybe need to grow the demonstration fleet over the next couple of quarters.
Great question, we've had that debate in our biweekly program reviews, we started with like maybe three years or five program vehicles. I think we're now up to eight to 12 that comes down to part availability you know in terms of launching.
I think were settled in right now between eight to 12 I've got we've got a program with you next week I think.
The button that down I do think we will have to add a few more to our.
Build schedule okay.
One customer who wants to trucks.
Want to strip chassis with somebody else's body on that he currently uses in the field then he wants our strip chassis with our van configured to his demands which is different than what we build today. So we've got a lot of moving pieces. There we're talking about the big guys right. We're talking about UBS their truck is slightly different than a fedex truck.
Fedex fleet is very diverse between the Fedex ground Fedex Express vehicles, some of our own somewhere owned by contractors DHL has a different demand.
Working with one of the large retail companies are now on the order for 100 300 trucks. They are trying to decide between a W. Some 54 MW for CEC with a different backing on the back.
Both those vehicles go into that customer for about a two week.
Trials August 14th so, we're basically managing customer by customer one customer wants a six month trial.
Before he plops down a bunch of investments right. So.
So that's kind of where we've shifted to.
I am very confident in the plan.
What the lessons we learned on the W. For C C much little more difficult than we expected when we got the green power vehicles.
W. Some 50 was I'll say some self inflicted wounds on some late design changes I think we dealt with almost 200 design changes from our first pilot build through our first production build that's a hell of a lot of engineering work a hell of a lot of supply chain work that people really can't appreciate lesser actually in the mix right now.
Five six so I'm confident by first quarter were running in production and now it's our job for sales team to go lock up the vouchers and go get the dealers lined up and sell some trucks, that's kind of where we are here at workhorse.
Great well congrats on the progress there and I'll hop back in the queue. Thanks.
Thanks, Greg Thanks, Greg.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
I just wanted to say, thanks again for your interest and workhorse.
For those shareholders listening, we do need your vote for the shareholder proposal.
Trusts us to use those shares wisely and as effectively as possible. Our goal here is to create a company can be proud of and that can create shareholder value going forward over the next few years. Thanks for your interest and well see on the road somewhere.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.