Q3 2024 Workhorse Group Inc Earnings Call
Stan March: Greetings and welcome to the Workhorse Group Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Stan March, Vice President, Corporate Development and Communications. Thank you, Stan. You may begin.
Stan March: Thank you, Alicia, and good evening. I'd like to welcome all of you to Workhorse's third quarter 2024 results call.
Stan March: Before we begin, I'd like to note that we've posted our results for the third quarter, and it's September 30, 2024, via press release after the close of the market today. We've also filed our third quarter 10-Q.
Stan March: You can find the release and an accompanying presentation in the Investor Relations section of our website, and we'll be tracking along with the presentation on this call.
Stan March: Joining me on the call today are Rick Dauch, our CEO, and Bob Ginnan, our CFO.
Stan March: For today's agenda, if you turn to slide 3 in the presentation,
Stan March: Following my remarks, I'll hand the microphone over to Rick, who'll give you an update on the successes we've made in our strategic, operational, and fiscal actions during the third quarter, and then Bob will walk us through the financial results for the quarter.
Stan March: Then Rick will discuss our near-term priorities and wrap us up before we open the call for questions.
Stan March: Our disclaimer can be found on slide 4, as some of the comments today are forward-looking and subject to certain provisions and are subject to risks and uncertainties as well. You can find the full disclaimer statement in our periodic filings with the SEC as well as the earnings press release itself today.
Speaker Change: With that behind us, I'll now turn the call over to Rick Dauch. Rick?
Rick Dauch: Thanks, Stan. Hello, everybody. Thank you all for taking the time to join us today.
Rick Dauch: During the third quarter we made important progress along several fronts here at Workhorse. Let's turn to slide 5 and jump right into the presentation.
Commercially, we achieved a critical validating milestone in July.
securing a three-year master framework agreement with FedEx.
Rick Dauch: This is absolutely a game-changing accomplishment for us here at Workhorse.
Rick Dauch: Let me put this accomplishment in a little bit of perspective.
Rick Dauch: This new relationship, like most in business, has been established over an extended period of time.
Rick Dauch: More than two years ago we met with the FedEx EV team in Memphis.
Rick Dauch: A year ago, the FedEx executive leadership team came to our
plants up in Union City.
Rick Dauch: This led to a 50s W5-6 step band demo undertaken down in Memphis in Q2 of this year, which was fully successful.
Rick Dauch: And our truck got one of the highest ratings that FedEx team had ever given to an EV company.
Rick Dauch: This led to negotiations and the signing of a framework agreement for a three-year master supply and service agreement, which was followed immediately by the initial purchase order for 15 W56 step vans that we delivered for upfit in Q3.
Rick Dauch: It's hard to overstate the importance of this agreement for an emerging commercial EV company like ours.
Rick Dauch: to become one of FedEx's approved commercial vehicle suppliers in the EV segment.
Rick Dauch: FedEx has publicly committed to convert their greater than 150,000 unit last mile delivery fleet and ground support fleet to EV vehicles by 2040.
Rick Dauch: A large percentage of those vehicles are what are referred to as P1000 cargo step vans across the industry.
Speaker Change: exactly the segment that we designed our W5-6 step band to replace over the next one to two decades.
Speaker Change: So, we've broken through, we got our first PO, and we hope to keep growing.
Speaker Change: In October, we were selected as a presidential level exhibitor at the 2024 FedEx Forward Service Provider Summit in Orlando.
We had a 56 plan for the ride and drive.
Speaker Change: So rather than drop ship the truck down we drove it to Florida
Speaker Change: The trip was approximately 1,000 miles from our plant, and the truck demonstrated its robust capabilities driving through the remnants of Hurricane Helene.
Speaker Change: across the Appalachian Mountains and through heavy Atlanta rush hour traffic.
Speaker Change: Three unique and challenging tests for any vehicle, not just EVs.
Speaker Change: This showcase event has led to 75 new quoting choirs to date from FedEx ground contractors across the country.
Speaker Change: As we announced a few weeks ago, we now have three firm purchase orders from ISPs for the delivery of seven vehicles in Q4, and we're working on converting some of those inquires to additional orders in the near future.
Speaker Change: Our progress with FedEx, both with the corporation and with the FedEx ground contractors, confirms that our product strategy
centered around providing reliable, capable, and well-built products.
Speaker Change: tailored for the class 5 and 6 commercial market, coupled with our engineering, design, supply chain, and manufacturing capabilities, could produce a market-leading EV step-in that would meet the needs of highly demanding and selective customers like FedEx.
Speaker Change: In addition to our breakthrough commercial win at FedEx, we are also seeing increased activity in government-funded fleet opportunities.
Speaker Change: Just last week we awarded a GSA contract following the successful site visit to Union City where the GSA audited and validated our production capabilities, our quality systems, as well as our product testing and inspection processes.
Speaker Change: It opens up yet another important door for our go-to-market capabilities.
Speaker Change: Obviously we are closely monitoring how the recent presidential election may influence or change the mandate to electrify the federal fleet in the coming months and we'll keep you up to date as we learn more.
Speaker Change: At the state levels, the Sourcewell contract for procurement in this category of Class 4-8 chassis and cabs with related equipment, accessories, and services for our W4CC chassis has resulted in a meaningful uptick in quoting activity.
Speaker Change: In the past 90 days, there are now five pending bids out for more than 300 Class IV units at the moment.
Speaker Change: We were also approved by the Florida Sheriff's Association Cooperative Purchasing Program for local government and education entities in the South.
Speaker Change: Finally, we have had successful vehicle demonstrations for two additional major last-mile fleets during the quarter. You would recognize their names, one in the industrial linen business and the other supporting package deliveries outside the United States.
Speaker Change: Despite the need to proactively conserve cash and reduce costs across the organization, which Bob will touch on later, we have managed to continue to expand our product line, to meet our customer needs, and call on more customers.
Speaker Change: A lot of the engineering being completed, it's being driven by direct customer feedback after multi-week and multi-application field demos with our customers, and the customers like the fact that we're very responsive and we give them real support.
Let me shift to slide 6.
Speaker Change: Last quarter I spent a fair amount of time outlining the commercial ED backdrop, corporate ED commitments, California regulatory dynamics, and the like.
Speaker Change: The recent election has understandably focused attention on the clean tech space in general and the ED market in particular.
Speaker Change: So I thought I would spend a few moments discussing why we believe that integrating EVs into commercial last-mile delivery fleets is not a political issue where sides need to be taken.
We know the political landscape around energy is shifting.
Policies and incentives will continue to change.
Speaker Change: But the commercial EV sector, especially in the class 4-6 space, has staying power in terms of shifting to EVs.
Speaker Change: We believe that an all-the-above approach to addressing the future energy needs in our country will prove to be not only pragmatic, but also the optimal way to address the multi-faceted requirements of commercial last-mile businesses.
Speaker Change: around sustainability goals, capital returns, operating cost reduction, and improved operating efficiency.
Speaker Change: Unlike consumer EVs, commercial EVs don't rely on household budgets or access to public charging.
They run predictable routes.
They return to duty stations every night.
Speaker Change: They are measurable benefits from an operating cost, and they keep delivering value even if fuel market costs or EV incentive programs change.
Speaker Change: Route distances are known. Almost all of them are below 150 miles with 85% of all last mile routes operating between 50 to 100 miles.
Speaker Change: Meaning the return to station dwell times for recharging are predictable and allow for the use of cost-effective
Level 2 charging systems.
Speaker Change: We have proven this business by ourselves at Stable's I Workhorse over the past 12 to 18 months as a FedEx ground contractor.
The reduction in operating costs is honestly a no-brainer.
Speaker Change: With miles per gallon equivalents for EVs running about 5 times higher than traditional internal combustion engine results. Older trucks are 5-6 miles per gallon, EVs are running somewhere between 27-31 miles per gallon depending on the route and the payload they carry.
Speaker Change: They also are experiencing greatly reduced maintenance costs. You just don't have as many moving parts in the EV.
Speaker Change: And we see the savings in total cost of ownership generate a payback of between 4 to 5 years without incentives.
Speaker Change: In states like California and New York, which have higher fuel costs and strong incentive programs, the payback period drops to less than two to three years, and in some unique situations under one year.
Speaker Change: Financially astute fleet owners and business leaders understand that kind of financial map.
Speaker Change: Incentives are a welcome push. We're not, we're not, we're not the only reason to adopt EDs.
Speaker Change: The facts are clear, EVs are cleaner and cost less to operate.
Speaker Change: Lower maintenance and fuel costs are real advantages that keep fleets running smoothly and improve overall uptime.
Speaker Change: And our electric trucks make the driver's day better, too, with smooth performance.
Speaker Change: Quiet, responsive handling, and vastly improved visibility both during the day and at night.
Speaker Change: and they meet both corporate sustainability and communities benefit from zero tailpipe emissions.
Our trucks are built to last and perform.
Speaker Change: to be assets that companies can rely on whatever the political or economic landscape. In short, the commercial EV sector is inherently more adaptable, delivering tangible benefits to businesses that want to control costs and reduce emissions no matter how the external or political landscapes shift.
Speaker Change: Moving to slide 7 and turning to our commercial vehicle programs.
Speaker Change: We have a track record now of on-time and on-budget product launches and I and I chalk that up to having great people.
Great process discipline.
and Discipline Execution.
Speaker Change: We have an experienced team of automotive engineers, supply chain and manufacturing professionals who know how to get things done, again, on time and on budget.
Speaker Change: We now have six products currently in production with four new models being added next year and a cab chassis version scheduled to start production in 2026 or 2027.
Speaker Change: We have complete coverage of the Class 4-6 step van vehicle market and have more than 30 upfit options available in the Class 4-6 space to our upfitting partners such as Surefitters and Shade, who offer a ship-through solution to commercial EV customers.
Speaker Change: The partnership launched with 13 pre-configured upfit packages available to workhorse dealers.
Speaker Change: specialized for last mile delivery and vocational trays for W5-6 and W5-50 step vans.
Speaker Change: Additionally, full body packages from Tough Lite, CM Truck Beds, and Rugby are included for the W4CC cab chassis, with additional fit packages to be added throughout the remainder of 24 and into 25.
Speaker Change: Turning to slide 8, building on the success of the 178 inch wheelbase W56, we expect to begin delivering a 200 inch wheelbase version of the truck in Q4 of this year. We have already secured orders for the 208 step bands from customers in both the industrial linen and package delivery segments.
Speaker Change: who were impressed by the technical superiority of the W5-6 platform when they had their demos, but need a larger cargo capacity to meet their specific business needs.
Again, sometimes the trucks...
Hube out before they weigh out.
Speaker Change: and this added 200 cubic feet helps some of the linen companies and some of the industrial supply companies.
Speaker Change: The extended wheelbase version of the W5-6 is seen in this slide with a custom version of a workhorse's next generation step van body with a side door.
Speaker Change: It spans 22 feet with a cargo volume of 2,200 cubic feet
Speaker Change: I have mentioned before, but it's worth reinforcing, fleet customers are indicating that the product mix could be greater than 25% for the 1200 cubic feet step bands, which will be built across and on the same assembly line and paint systems that we currently use for the 178 inch wheelbase, 1000 cubic version of the W56.
Ginnan.
Speaker Change: Moving to slide 9, we continue to be strategic in our approach to establishing and developing an optimum dealer and service provider network.
Speaker Change: We are very selective in how we select dealers and match them with customers in EV-mandated geographical regions.
Speaker Change: which vary by state and in some cases by city or even economic zones within a state like California or New York.
Speaker Change: We had a target to reach a total number of 2025 deals in 2024.
Speaker Change: We're going to take a tap the brakes on this numerical goal and focus rather on the best fit for our product portfolio dealer skill match and local market dynamics
Speaker Change: In this market, quote-to-appeal conversion effectiveness is more important than the number of dealer partners.
Speaker Change: We have six to eight of our current 13 dealers who are really starting to understand how to sell into and provide the necessary services.
Speaker Change: filed the proper paperwork required to win and secure orders in the commercial EV segment.
Speaker Change: California by far remains the most critical and commercially ready market for all of our trucks.
Speaker Change: as the W-5-6, the W-7-50, and the W-4-C all qualify for incentives offered by H-VIP and ISIP programs.
Speaker Change: Through HVIP vehicle purchasers and participating dealers are eligible to apply for a base voucher of $85,000 per W5-6 purchase.
Speaker Change: If the vehicle is based in an ISIP zone, fleet owners can get additional incentive vouchers. In some cases a fleet owner can get enough incentive money to generate a payback of less than three to six months on their EV investment.
Speaker Change: With that, let me turn the call over to Bob to discuss our financial results and the recent steps we have taken to strengthen our financial position.
Thanks, Rick. Let's turn to slide 10.
Bob Ginnan: Before jumping into the financial details of the quarter, I want to briefly review all the measures we have taken in 2024 to conserve cash and reduce costs across the organization.
Bob Ginnan: As previously disclosed, we also undertook other cost-savings initiatives into the third quarter, delayed the W56 cab chassis launch, and completed the divestiture of the company's aero business along with other cost-savings measures.
Bob Ginnan: To put a finer point on the impact of these actions and other reductions, we have reduced the cash burn rate is now about three and a half million per month.
Bob Ginnan: We had additional successful financing this quarter and continue our discussions with the parties related to the sale of leaseback transactions for our Union City facility.
Bob Ginnan: Recent activity reinforces our optimism about our ability to drive additional purchase orders this year and grow our revenues.
Bob Ginnan: Importantly, we continue to have significant capacity remaining in our financing facility.
Turning now to highlights from the quarter on slide 11.
Bob Ginnan: The decrease in sales was primarily due to the non-recurrence of a $2.3 million sales allowance reversal related to W4CC vehicle sales recognized in the prior period of 2023 and an increase in W4CC and W56 truck sales in the current period of $1.8 million.
Bob Ginnan: If you might recall, in the second quarter of 2023, we recorded a 2.3 million reserve, and then we were able to reverse it in the third quarter of 2023. Without the reversal last year, 2023 third-quarter revenue would have been $700,000.
Bob Ginnan: As a result, five of the W56 we sold and delivered in the quarter did not record net revenue and now have a full return allowance recorded until they are delivered to an end customer or the upfit process is initiated.
Bob Ginnan: Future sales will be evaluated similarly, and we establish a reasonable history of sales and no returns.
Bob Ginnan: You can actually see the 1.1 million reserve in Note 6 and 10-Q we filed today. We expect this reserve to be converted to revenue as the trucks are sold to end users.
Bob Ginnan: Cost of sales was $6.6 million in the third quarter compared to the same amount in the same period last year. Cost of sales were primarily flat as increased costs related to direct materials to higher truck sales.
Bob Ginnan: We're offset by lower inventory reserves and lower direct and indirect labor costs of 1. million primarily due to lower headcount as a result of employee furloughs during the period.
Bob Ginnan: Selling general administrative expenses decreased to $7.7 million in the third quarter compared to $11.8 million in the same period last year.
Bob Ginnan: The decrease was primarily driven by a $1.8 million reduction in employee compensation and related expenses due to lower headcount.
Bob Ginnan: A decrease of $1.1 million in consulting expenses and a $300,000 decrease in legal and professional expenses and lower corporate insurance of $300,000.
Bob Ginnan: So you can see in the third quarter, we had a full quarter of the cost savings as total operating expenses were down $7.5 million versus the third quarter of 2023.
Bob Ginnan: Net interest for the three months ended September 30, 2024 was $8.3 million, compared to net interest income of $4 million for the three months ended September 30, 2023.
Bob Ginnan: 5 million in fair value adjustments and this is offset by an increase of $400,000 in actual interest income in the previous period.
Bob Ginnan: Net loss is $25.1 million compared to $30.6 million in the same period last year.
Bob Ginnan: Turning to slide 12 to discuss our balance sheet, as of September 30, 2024, the company had $3.2 million in cash and cash equivalents.
Bob Ginnan: Total receivables of $3.7 million, net inventory of $43.2 million, and accounts payable of $10.5 million. So far this year, we have invested $3.9 million in capital expenditures, primarily for the Union City Plan.
Bob Ginnan: Note that there was $3 million in other receivables at 9.30 that converted into cash the next day on October 1st.
Bob Ginnan: As we mentioned, we are taking diligent steps to strengthen our balance sheet and liquidity position so that we can execute on a product roadmap and deliver for our customers.
Bob Ginnan: Looking ahead, we are confident in our ability to generate additional purchase orders and revenue from our customers while strengthening our financial position.
With that, let me turn it back over to Rick.
Rick Dauch: Simply put, our key strategic priorities remain as follows. One, securing new orders.
2, delivering world-class products and services to more customers.
Rick Dauch: and three, advancing our product roadmap and expanding our product portfolio.
Rick Dauch: To do that, we need to continue to find ways to effectively and efficiently finance the company until we can reach volumes that allow us to achieve break-even pre-cast flow in the future.
Rick Dauch: We do believe that at least one or two larger National Last Mile fleets are fully committed and have board-approved CapEx plans to move forward on their EV transition plans.
Rick Dauch: specifically in California and along the I-5 corridor up to Seattle in 2024 and 2025. We are in contact with those customers and we understand their plan and we intend to earn their business.
Rick Dauch: In addition, we believe that government-funded fleets in California, the Pacific Northwest, and select cities in the Northeast are looking to place orders yet this year or in early 2025 for their first tranche of Class IV-VI commercial EV trucks.
Rick Dauch: Finally, we continue to have meaningful discussions with federal government agencies on both product demonstrations and pilot purchase orders.
Rick Dauch: Securing the GSA registration will help move these discussions towards purchase orders sooner rather than later we hope.
Rick Dauch: As I have said before, to generate revenue and establish a viable business here at Workhorse, we need fleet customers, whether they're commercial, private, or government, to buy trucks. And we are making progress in this pursuit.
Rick Dauch: We continue to see increased interest in the W5-6 and the W4-CC as more and more of our vehicles are hitting the road, demonstrating in real-world environments to new and existing customers the value and reliability of Workhorse products.
Rick Dauch: how they compare to earlier visions of EV products from other startups and even established OEMs that have disappointed early EV customers.
The W5-6 is a true workhorse, no pun intended.
Rick Dauch: designed to withstand the workload placed on them over a 15 to 20 year lifespan.
Rick Dauch: Our near-term challenge is convincing and converting potential customers' interests into net tangible firm purchase orders.
Dauch.
Rick Dauch: As we navigate the current market environment, we are focused on extending our financial runway in order to emerge as a leader in the Class 4-6 segment.
Rick Dauch: ATW has been an excellent financial partner for us as we work through our extended startup period and as we work through the slower than expected but eventual transition ramp up in future EV commercial demand.
Rick Dauch: With the recent presidential and congressional elections now behind us, and with expected clarity around both federal and state-level AC mandates in the near future, we can and we will adjust both our business and operating plans accordingly. Stay tuned.
Rick Dauch: As we look ahead to the remainder of the year, we will continue to advance our ED product roadmap and work diligently to gain momentum on the revenue side of the business.
Rick Dauch: We look forward to providing updates as we make progress on the sales side of our business.
Rick Dauch: Being a pioneer in the commercial EV space is hard work and we need both industry and government leaders to live up to their public commitments on energy policy and fleet transition to clean technologies.
Rick Dauch: We firmly believe that EVs are going to be part of all of the above environmental and greenhouse gas emissions and energy policy options as we look ahead.
Rick Dauch: The sooner large blast mile fleets make the hard yet financially smart decision to start their transition to EV commercial vehicles, the better. Now we'll open up the call for questions. Operator?
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
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One moment, please, while we poll for questions.
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Speaker Change: Sounds like all the investment bankers are already at home, so we'll talk to them next time. Thanks for your interest in Workhorse and we'll talk to you in the future. Bye.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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