Workhorse Group Inc. Q1 FY2024 Earnings Call

Hello, and welcome to the Workhorse Group Q1 2024 Earnings Conference Call. This conference is being recorded. It's now my pleasure to turn the call over to Stan March, Vice President, Corporate Development and Communications. Please go ahead, Stan.

Thank you, Kevin, and good morning. I'd like to welcome all of you to our first quarter 2024 results call for Workhorse. Before we begin, I'd like to note that we posted our results for the first quarter ended March 31, 2024 via press release earlier this week. You can find the release and a presentation, which was released this morning in the Investor Relations section of our website. We'll be tracking along with the presentation during this call. Also joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. For today's agenda, please turn to Slide 3 of the presentation. Following my opening remarks, I'll hand it over to Rick, who will give you an update on the progress we've made recently on our strategic and operational actions. Bob will then walk us through our financial actions and results of the first quarter. Rick will then wrap up with our near-term objectives before we open the call to questions. On Slide 4, you can find our disclaimer as some of the comments that will be made today are forward-looking and are therefore subject to certain provisions and are also subject to risks and uncertainties. You can find the full disclaimer statement in our periodic filings with the SEC, including in Q filed on May 20 as well as the earnings press release also published that day. Now I'll turn the call over to Rick Dauch. Rick?

Thanks, Stan. Hello, everyone. Thank you all for taking the time to join us today. As Stan said, this is our call to review our first quarter earnings. But today, we're going to focus most of our time talking about many of our achievements in April and May, which have been significant. We've made positive strides in advancing our product roadmap, executing our strategic plans, and strengthening our financial position. These efforts are enabling Workhorse to remain a segment leader in the transition to commercial EVs, specifically in the last mile delivery step van and work truck spaces. Turning to Slide 5. Let's talk about our achievements. We have received substantial orders for both our W56 and W4 CC trucks. We continue to hold successful product demonstrations with dealers and fleet operators, and both groups are affirming the strong market potential of our commercial EV trucks, specifically the W56. Second, we are expanding our commercial network by adding new dealers, including 2 locations in New York City, a critical location for EV adoption. We've also added 2 locations in the Upper Midwest and Northwest regions, and we're on track to hit our target of 15 to 20 nationwide dealers by the end of 2024. Third, we have an encouraging path forward for the aero business. As we previously announced in February, our Board of Directors approved a plan to transition exclusively to operating as a less capital-intensive Drones as a Service business. Accordingly, we have halted the production of our drone design and manufacturing business and are now close to completing an agreement to divest the aero business to a buyer that can invest in its future growth. This move will also provide us with additional financial flexibility here at Workhorse. Finally, over the last several months, we have taken several steps to strengthen and extend our financial runway, preparing Workhorse to emerge as a winner in the EV market as the industry transitions to that technology. That said, I want to acknowledge the Workhorse team and our supplier partners. A number of the difficult, but necessary steps we have taken over the last several weeks have impacted our people and some of our stakeholders. We've reduced our headcount and had to temporarily furlough our employees at our Union City plant. We have incredible respect and admiration for our people, and we pride ourselves on being a local employer in our communities. As we navigate the near term and the transition to EVs, we're focused on returning our team to work when additional truck orders are received. I'm confident that we are making progress on the sales front. Moving to Slide 6 and turning to our commercial vehicle programs. As I mentioned during the first part of the year, we have held a number of successful product demonstrations with last-mile delivery companies and have been in constructive and meaningful discussions regarding purchase orders with these customers. They are thoughtfully working through their own capital expense plans in order to make the transition to zero-emission vehicles, which will take multiple years to complete. Remember, it takes time to install charging system infrastructure before they get the vehicle, so that's critical. We have received orders for a total of 68 W56 step vans to date. We view this as a strong part of growing the sales pipeline for this vitally important product line. We are also working on developing new 56 wheelbase variants, which we'll launch in 2024 to 2026, including the new 280-inch wheelbase 1,200 cubic foot van, launching late this year. We also received a purchase order for 141 W4 CC chassis from Kingsburg Truck Sales, our dealer of the year in 2023 for delivery over the coming quarters. This is a big milestone as it will essentially clear all of the Class IV finished goods inventory remaining at Union City. We believe the KTS order indicates the initial transition to EV commercial vehicles is slowly starting to take place in California, especially among small work truck fleets. As you will see on Slide 5, we now have expanded our dealer network and service footprint by adding Melia Truck Sales and the Ziegler Truck Group to our certified dealer network. We now have a total of 12 dealer partners strategically targeted in states adopting the CARB clean fleet standards over the next few years. At Stables, we continue to grow our EV fleet and expand our delivery routes with FedEx Ground here in North of Cincinnati. We have deployed 2 W56 step vans in addition to our 10 W750 step vans. We expect the whole fleet to be fully electrified in 2024, and our initial data shows a significant improvement in operating cost savings using the EV-powered trucks, which we shared with some of the large fleets in the last 90 days. This week, the annual ACT trade show was held in Las Vegas, and this is one of the reasons we pushed our earnings call to today. I want to share with you our observations from this 4-day event given the concentration of competitors, partners, suppliers, regulators, and customers who attended the event. First, significant R&D investments continue to be made in EV technology and vehicles by all major commercial truck OEMs and several remaining start-ups. Second, the first signs of orders, mostly in California, are starting to emerge across both small local and larger national fleets. Third, the adoption and enforcement of the new CARB mandates is causing some confusion, especially among smaller fleet customers. In the Class IV segment, fleets in California must now register their entire fleet with the state and must target a 9% EV adoption rate by 12/31/24. This is causing some administrative challenges for some of the smaller fleets right now. Finally, there are only 2 or 3 OEMs targeting the Class V step van market. In Workhorse, we continue to be the only OEM that is capable of building both the chassis and full step van cabin body under one manufacturing route in North America. Our W4 CC continues to be the only Class 4 cabin chassis EV offering in full production. Many talk about production, but they aren't in production and are capable of providing 5,000 pounds of payload capacity in the range of 150 miles. And finally, what I heard over and over from everybody is charging infrastructure and availability of charging systems remains pacing items across the industry as we make the transition to EVs. That's both at the small fleets I've talked to with our dealers and even the largest fleets here in North America. 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 9 to cover some of the recent steps we have taken to strengthen Workhorse's financial position. In March, we entered into an agreement with an institutional investor on the terms of a series of financing transactions that will provide the company with liquidity in both the short term and over time. This financing will support the continued execution of our commercial vehicle product roadmap and business plan in 2024 and 2025. To date, we have received gross proceeds from this agreement of approximately $15 million before fees, expenses, and original issue discount. On the cost side, we completed implementation of a reduction in force of approximately 20% of the total workforce, excluding direct labor. We also moved to a Drones as a Service model in aero. We temporarily furloughed Union City plant workers while we wait for a larger backlog of truck orders; however, limited recall of the staff has already begun. Finally, we are also working on the sale and leaseback transaction or alternatives for the Union City facility to further solidify our financial position. Moving to Slide 10, let's discuss our first quarter financial results. Sales, net of returns and allowances for the first quarter of 2024 were $1.4 million compared to $1.7 million in the same period last year. The decrease was primarily due to lower W4 CC vehicle sales compared to the same period a year ago, which was partially offset by an increase in other service revenue generated from operating our Stables by Workhorse route, Drones as a Service, and other service revenue. Cost of sales for the first quarter of 2024 were $7.4 million compared to $5.3 million in the same period last year. The increase in cost of sales was primarily due to a $2.2 million increase in inventory reserve expense, a $1 million increase in depreciation expenses, and a $600,000 increase in employee compensation-related expenses to support vehicle production during the period. The increase in cost of sales was partially offset by a $1.2 million decrease in costs related to direct materials and $1.4 million reversal of warranty expenses as previously accrued. Selling, general, and administrative expense for the first quarter of 2024 decreased to $14.1 million compared to $14.7 million in the same period last year. The decrease in SG&A expenses was driven by a $1.7 million decrease in employee compensation and related expenses, primarily due to the decreased headcount, which was partially offset by a $300,000 increase in noncash stock-based compensation expense and an increase of $600,000 in professional and other services expenses during the period. Research and development expense decreased to $3.5 million compared to $7.2 million in the same period last year. The decrease in R&D expense is primarily due to reduced consulting and prototype costs as the company moved into production of W4 CC, W750, and W56 vehicles. Net interest expense was $5.4 million compared to $6 million of income in the same period last year. Net interest expense in the current year was driven by a fair value adjustment of the company's 2024 notes and 2024 warrants, respectively, of $7 million and $1.2 million fees paid in connection with the 2024 notes and 2024 warrants issued during the period. Expense was partially offset by a gain of $2.9 million from the extinguishment of the company's 2026 notes, conversion of 2023 warrants, and $0.1 million of interest earned on cash balances of the company's money market investment accounts. Net interest income in the prior year was primarily driven by interest earned on cash balances in the company's money market investment capital. Net loss was $29.2 million compared to $25 million in the same period last year. Turning to Slide 11 to discuss our balance sheet. As of March 31, 2024, the company had $6.7 million in cash and cash equivalents, accounts receivable of $1.8 million, net inventory of $49.9 million, and accounts payable of $14.2 million. I've already discussed the aggressive actions during the quarter to reduce costs and conserve cash across the organization. Looking ahead, we will continue to focus on extending our operational runway and managing our cash flow efficiently. We have executed successful financings and are working on a sale-leaseback transaction for our Union City facility. The recent purchase orders also reinforce our optimism about our ability to drive additional purchase orders this year and grow our revenues.

Thanks, Bob. Let me briefly discuss our near-term priorities, which I outlined on Slide 12. Our key strategic priority is advancing our product roadmap, specifically securing new orders and delivering products to more customers. We engaged in a number of discussions with potential customers and dealers and look forward to providing updates on our new business orders as we move forward. Our operational and financial priorities remain focused on reducing costs and obtaining the necessary capital to execute our plan and meet our current and prospective customer needs. We appreciate the continued support of our supplier partners who await the acceleration of our production plans. Finally, I want to close by emphasizing that the transition to EV technologies in the commercial truck and last mile segment is starting to take place, slower than expected, but it's starting. Although like any change, it will not happen overnight. While we've experienced some delays across the industry, we can see firsthand in our discussions with fleet and municipal customers, dealers, and others that the transition is underway, slower than we would like, but definitely starting to take hold. We fully intend to emerge as a winner in the Class IV step van and work truck segments of the market. We have proven our product in the marketplace. We have the manufacturing capacity and supply chain partners in place to build trucks. We have the aftermarket and service capabilities in place, and we have committed dealer partners in place to continue advancing our roadmap and capture the significant opportunities ahead as the transition to EV technology occurs across the commercial segments. Workhorse is ready to win when the market emerges. Now we'll open up the call for questions. Operator, I'll turn it back over to you.

Our first question today is coming from Mike Shlisky from D.A. Davidson.

I want to start off maybe asking about Stables installed here. At this point, you've got DHL out there running EV vans for a couple of years now in different sizes, other FedEx within other states also running EVs, step vans for a couple of years now, maybe not a Workhorse brand, but other brands of EVs. I guess, it seems like it's proven that EVs can work in a lot of different situations for a fleet. So I'm kind of wondering whether you've still got the need to continue with this program at this point. Then, I know it's very near and dear to your heart. But I guess, why not monetize the fleet at this point and move forward since it's pretty clear that EVs are working for other folks and there's no need to really keep on proving the point over and over again.

Yes, Mike, we've had those internal discussions. We began using the W56s on the Stables earlier this year and initially wanted to have at least six months of data. However, you're probably right that we don’t intend to be a long-term owner of the Stables operation. We viewed it as an important initiative for both research and development and marketing, and it has achieved its objectives. In a recent presentation lasting about three to four hours to one of the last mile fleets, we highlighted our experience as a FedEx ground operator of more than 1.5 years, detailing the costs associated with transitioning from internal combustion engines to electric vehicles, including charging systems and infrastructure integration, as well as the impact of replacing older trucks with EVs. We have documented evidence of cost savings, which we shared, and it generated significant interest. We are actively collaborating with at least two last mile fleets to assist them in transitioning to electric vehicles based on this data. Historically, there have been various attempts by other companies to introduce EVs, some of which failed, and they are now looking for partners who offer reliable trucks. We believe our experience with the W750 for over 18 months and the W56 for about four to six months on our own routes with nearly no issues sends a strong message about the quality of our trucks. One customer remarked that we are the only supplier they work with that has operated their trucks for longer than six or twelve months. While you are correct that in the long term, we will likely look to monetize the Stables at some point, we are still in the process of proving the value of our fleet.

I appreciate that, Rick. Maybe turning to some of your more recent orders that you discussed today. Are any of those contingent on having a subsidy attached to them? Or are they going to be for dealer demo or inventory purposes?

Great question. Almost every one of the W4 CC is tied to some kind of California HVIP incentive for sure. On the W56s, there'll be some that are not tied to incentives at all. They're going to larger fleets and then there are some that are tied to the HVIP credits that are required in California. We know that we have one order for a new rental fleet basically in California that was subject to HVIP vouchers, and I understand we got those vouchers in the last 24 hours or that dealer or that customer got them in the last 24 hours. So now we can ship the trucks and get them up-fitted.

Great. I noticed a Workhorse script chassis at a different trade show back in March, likely a W4 CC with a dump body. Can you update us on the progress of your non-parcel delivery vehicle orders and the current plans for those orders?

All 141 of the W4 CCs being sent to Kingsburg are primarily not for last mile delivery, especially for electric trucks. We spoke with Jerry, the dealer principal in that area. Most of these trucks will be utilized in California in three main categories: as state trucks, dump trucks, or utility-type trucks. His dealership is situated in the San Fernando Valley, which has generated significant interest in various small agricultural initiatives and local distributors. Therefore, the majority of the W4 CCs are not intended for last mile delivery.

Next question today is coming from Jeff Osborne from TD Cowen.

Two questions on my side. I was wondering just as opposed to changes in April and May, if you could just discuss what the burn rate is at these levels.

I'll let Bob take that one.

Yes. So I think in the first quarter, once you factor out all of the financing fee-type things, our burn rate was about $5.5 million. However, as we announced earlier, most of the reductions didn't really start until March. So we expect that to be sub-$5 million here in the second quarter.

And then was there any changes in April or May to lower that beyond that $0.5 million savings there?

I believe the changes will reflect a full quarter of the savings. Due to timing, we only realized about a month's worth of savings from the aerospace aspect, and we didn’t see much of a benefit from the rest. Therefore, I anticipate the expense will be closer to $4 million, but we need to begin rebuilding our inventory. So, we will be in the range of $4.5 million to just under $5 million.

We need to move to finish good trucks with the orders we have to generate some cash, and we go back and buy parts and we can build more trucks, so pretty clear.

Rick, that leads perfectly to my next question. I was just wondering if you could just disclose roughly how much inventory you have in hand of finished goods and then with the manufacturing staffing reductions. I'm just curious like what is your sort of daily or weekly production capacity. And as you buy that inventory that you just referenced, will you need to rehire these folks back in the third or fourth quarter? Or what's the plan there as the business resumes growth?

Yes. I'll let Bob cover the financial numbers on the inventory, and then I'll come back and take the production ramp back up.

Yes. The finished goods inventory is about $20 million. And I would say for the next round of trucks, probably 3/4 of the inventory is in raw materials. So it won't take much to finish off another 20 to 30 trucks.

We have batteries on site right now for 214 sets of W56 trucks. We have some W4 CC prebuilt chassis available still to go through us. So as we start shipping those trucks to Kingsburg, we can finish those W4 CCs. There's another 40 at a supplier that are waiting to come to us; we don't want them right now. So ramping up, we were only building about 1 chassis a day. That's probably where we're going to be, probably through the month of June. And then we'll see as the orders come in if we need to start ramping up. We're prepared to ramp up between now and the end of the year to like 4 or 5 a day. But right now, we're at 1, 1.5.

So you could get to 4 or 5 with the staff that's on hand today then, Rick?

We need to bring back a few more team members. We essentially paused operations at the plant for a few weeks, but we've since recalled a team to finish around 25 trucks based on existing orders. There will always be a few staff at the plant to address certain launch issues in the paint shop; the pre and post paint processes require significant effort. We anticipate needing to bring back an additional 15 to 20 people soon. I want to publicly acknowledge that our workforce is exceptional; they grasp the challenges associated with the transition to electric vehicles and many have lengthy tenure at the plant. They understand the implications of a plant being idle, not only for the facility but also for the community. They are committed to our success and willing to do what is necessary, and I value their patience and hard work. However, we do not dictate the pace of EV adoption, as that is influenced by customer actions and several other variables. Recently, I've noticed smaller fleets beginning to realize the need to register their fleets with California officials to demonstrate their plans to meet the 9% target by the end of 2024. As a result, we are starting to see orders from smaller fleets, which is reflected in the W4 CCs. Larger fleets are also recognizing the necessity of the transition and are taking action, although it entails significant costs. I spent about 1.5 hours with a major fleet at ACT, where they detailed their electrification strategy for each depot along the I-5 corridor over the next three years, extending from California to Washington. They have a specific understanding of how many trucks they need in California, Oregon, and Washington, encompassing Classes 4, 5, and 6. This isn't just a challenge for Workhorse; it represents a considerable capital investment, amounting to billions of dollars for that fleet as they move toward electrification beginning in 2024 and continuing through 2040. Our W5 truck is ideally suited to meet their requirements.

Your next question is coming from Craig Irwin from ROTH Capital Partners.

So Rick, at ACT Expo, the big conversation with all the EV truck guys was the impact on the battery tariffs. A lot of people planning for changes, either changed vendors or different cost structures. Can you maybe update us on what you see for Workhorse from the implementation of the battery tariff? What do you think a probable outcome is for you? And do you see this as something that is going to have a minor impact on business or potentially something that could help you in the longer run?

Short term is minor, like I told you, we have 214 sets of the CATL batteries on-site at Union City. So that's about just short of what we need to build the W56s this year based on orders that we expect either have in-house or expect to come in-house between now and the end of the year. We do see the tariffs; we're assessing that. One of the challenges here in North America, there just is not the installed capacity that we know of. And we went out and looked at all the potential battery suppliers. They have North American factories back in 2022 in order to be ready for the '23 launch of W56, and we couldn't find one. So we stuck with CATL and CSI, and they've been good partners for us. They've been very patient with us as we go through our slow launch. But we are doing work right now, that's all, I'll say, is what our long-term impacts. As you know, not in our segment, but in the big automotive, they're spending billions of dollars to create their own battery plants. But at the end of the day, the tariffs will have an impact. We've already talked to our friends at GreenPower and see what we can do there from that truck. They have other sources outside of China to build that similar truck. And so we'll talk about that in the future.

Great. And then if I could ask for just a little bit more color. Some of the guys out there that are using CATL were saying that there are anticipated changes as far as the way CATL will serve the market here in North America, particularly the trucking market. Do you believe that there is a credible path to sufficient local content on the pack or a similar pack to what you've been having from the same vendor? Or would you be looking just at global sources?

I won't comment on CATL specific plans to either localize here in North America, but I'll tell you that we've had discussions with both CATL and their distributor about their future plans, and we're confident they have a plan; let's see if they execute it. If not, we'll look at alternative plants. We know there's a couple of new plants. There's one at BorgWarner under Akasol; there are a couple of other ones that are being built. And as those plants come online and the capacity ramps up, we'll take a look at it. But right now, we're going to stick with our CATL as long as they continue to execute it for us, and they're doing a great job for us.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Rick for any further closing comments.

No, I appreciate that. I appreciate the questions. I appreciate the patience of all of our stakeholders, including our shareholders. This is not an easy transition. We're prepared for it. Our people are being patient. Our suppliers are being patient, and our shareholders are being more than patient. I appreciate that. We're committed to winning, and we're going to find a way to do so. Thanks, and have a great Memorial Day weekend.

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.