Earnings Call
Workhorse Group Inc. (WKHS)
Earnings Call Transcript - WKHS Q4 2020
Operator, Operator
Ladies and gentlemen, greetings, and welcome to Workhorse Group’s Fourth Quarter and Full Year 2020 Investor Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse’s Chief Operating Officer, Dr. Rob Willison. Thank you. Dr. Willison, you may begin.
Dr. Rob Willison, COO
Thank you, operator, and good morning, everyone. We appreciate you taking the time to join us for our call. Before the market opened, we issued a press release with all our results for the fourth quarter and for the year ended December 31, 2020, a copy of which is in the Investor Relations section of our website. We also released our Form 10-K this morning. I’m going to turn the call over to our CFO, Steve Schrader in a few moments, and Steve will walk us through our financial results for the quarter and for the full year. After that, our CEO, Duane Hughes will give you an update on our business and provide an outlook for the year ahead. Before we begin, I want to call your attention to our Safe Harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2020 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business. And with that, I would like to turn the call over to our CFO, Steve Schrader. Steve?
Steve Schrader, CFO
Thanks, Rob. And thank you to all who are joining us for today’s call. This morning, we issued a press release which discusses the results of our operations for the quarter. Additionally, as Rob just mentioned, our Form 10-K was also filed today. I recommend going through both materials to get more context on some of the information being discussed today. Now to our financial results for the fourth quarter, and full year ended December 31, 2020. Sales for the fourth quarter of 2020 were recorded at $652,000 compared with $3,000 in the fourth quarter of 2019. For the full year, sales were $1.4 million compared to $377,000 in 2019. The increase in sales for both the quarter and the year was due to our higher volume of trucks produced and delivered. Cost of goods sold increased to $7 million from $2.1 million in the fourth quarter of 2019. The full year cost of goods sold was $13.1 million compared to $5.8 million in 2019. The increase was primarily due to a higher volume of trucks produced as well as increased production payroll and warranty expenses. Selling, general and administrative expenses increased to $4.7 million from $3.6 million in the same period last year. The increase is attributable to higher incentive stock compensation and consulting costs. For the full-year SG&A expenses were $20.2 million, compared to $10.2 million in 2019. The increase in SG&A expenses is attributable to higher consulting costs and employee compensation. Research and development expenses were $4 million, which was consistent from $4 million in the same period last year. For the full year, R&D expenses were $9.2 million, compared to $8.2 million in 2019. The increase in R&D expenses for the full year was due to contract labor increases and prototype development expenses. Other income increased to $322.2 million from $15.8 million in the fourth quarter of 2019. For the year, other income increased to $323.1 million from $15.8 million in 2019. The increase was primarily related to an increase in the fair value of our investment in Lordstown Motors, which was valued at $330 million on December 31, 2020. Interest expense net decreased to $4.9 million in the fourth quarter compared to $5.6 million from the same period last year. The decrease in interest expenses is primarily related to the decrease in the fair value of the Company’s convertible notes. For the full year, interest expense net was $190.5 million compared to $29.1 million in 2019. The increase was primarily related to a non-cash change in fair value of the Company’s convertible notes as a result of the increase in stock price throughout the course of 2020. Net income in Q4 2020 was $280.5 million, compared with a net income of $655,000 in the fourth quarter of 2019. For the full year, we had net income of $69.8 million, compared to a net loss of $37.2 million in 2019. While our increased production efforts would likely cause our go forward quarterly results to fluctuate, it is to build a long-term economically and environmentally sustainable organization. As of today’s call, we have approximately $215 million in cash on our balance sheet. Over the course of 12 months, our purchase finance team has executed various agreements to strengthen our balance sheet. Through several capital raises, we have been able to improve our liquidity. This capital infusion represents a greater total amount than our combined fundraising efforts since inception, which speaks to the progress we’ve made over the years, translating to market acceptance and also provides us with the stability and resources to execute on our long-term production goals. While we will continue to focus on building trucks to meet our backlog of orders, we will also evaluate the most efficient and responsible fundraising opportunities to support this mission. This year, we increased our Investor Relations efforts by conducting over 200 one-on-one meetings and taking part in six investor conferences that total more than 810 meetings for institutional funds. This is the first time we’ve concentrated our Investor Relations beyond equity dealerships. This completes my financial overview. I’ll now turn the call over to Duane to discuss operations and outlook. Duane?
Duane Hughes, CEO
Thanks, Steve, and good morning to everyone on the call. We appreciate you taking the time to join us today. To start, I’d like to take a minute to directly address something that’s been top of mind for us as well as many of you listening today. I’m speaking of course, about the United States Postal Service Next Generation Delivery Vehicle or USPS NGDV program. As many of you are well aware, last Tuesday, the Postal Service issued a press release announcing that it had made an award under the NGDV contract to a competing finalist. This is not the result we had anticipated or hoped for. And we appreciate the interest of the many stakeholders who’ve reached out to better understand the decision-making process, as well as any potential next steps. What I am able to share with you today is that we have requested pursuant to the publicly provided bid process rules additional information from the U.S. Postal Service and have scheduled a face-to-face meeting with the Postal Service on March 3rd. We understand that many people want answers and information in a timely manner. And we will continue to work with the Postal Service according to the terms of our engagement as we move forward. To be clear, we intend to explore all avenues that are available to us. We appreciate your patience in the meantime, as we allow this process to work through its proper course. Now, I’d like to get into updates from our operations, beginning with a brief look back this past year. The past 12 months have been a remarkable period for our Company and for the world at large. Let me highlight a few items we have been keenly focused on in 2020. We raised $270 million in capital, transforming our balance sheet and giving us the capital to build the trucks in our backlog. We made significant improvements and additions to our leadership team, our Board of Directors and our overall headcount to support production. We achieved sought-after and required certifications with both federal and state regulators, ensuring that our vehicles can be sold in the U.S. and now Canada. Production readiness; we announced major strategic partnerships designed to expand our production capabilities and sales reach by adding boots on the ground with consultants, proven advisors and full-time employees to achieve our goals. We announced several new customer agreements, allowing us to increase our backlog seven-fold over last year. We made tremendous progress with our HorseFly autonomous delivery drone and participated in test deliveries with UPS and others that will ultimately impact the way we deliver packages, medical supplies, and other goods in our new, more distant world. We were approved for the rigorous FAA type certification process. Needless to say, it’s been an incredible year for us, and I’m both proud and grateful for the efforts of our employees, who continue to dedicate themselves to our mission of changing last-mile delivery, even in the face of a pandemic. As noted on our last call, in November, our operations were unfortunately impacted by a COVID-19 outbreak among our staff. Over the period of October 26, 2020 through January 29, 2021, we partnered with the Hamilton County Health Department to contact trace more than 30 confirmed cases of COVID-19. As a result, we were able to safely manage our employees and contractors and get them back into the workplace. We significantly enhanced our daily cleaning and personal protection habits, following all recommended CDC and local health department guidelines, and additionally also participated in a webinar offered by the health department to ensure we had shored up any areas for improvement. Here again, we worked daily on protocols creating a safe environment for our employees and outside individuals. On January 28th of this year, we received a letter from the Hamilton County Health Department informing us that due to no new positive cases for two full incubation cycles, it would be closing our case. I’m pleased to share that in the six weeks since receiving this letter, we have had only one new positive case of COVID-19. As of today, while we believe we are past these issues that were presented by the virus, we are still continuing to take all appropriate measures, following state and federal guidelines, including self-monitoring, taking temperatures, mask wearing, social distancing and routine hand washing, and are adding further procedures as we adapt to this ever-changing environment. These measures include increasing our professional sterilization and disinfection services, as part of our daily janitorial services throughout the day. In the face of these new hurdles, we still continued to make progress on the recruiting front as well. Our large-scale manufacturing plan requires we rapidly increase our workforce to support these efforts. In November of 2020, we had roughly 90 employees. Today, we have almost doubled our employee count to 170 strong, which has been augmented by third-party services, such as Hitachi and Belcan, in addition to our internal hiring efforts. All told, we are 200-plus people strong. Another necessary but important step in our plan to reach scale production is on the regulatory front. In 2020, we were able to successfully navigate through the U.S. Environmental Protection Agency and the California Air Resources Board for our 2021 C-Series vehicles. Our C-Series vehicles, like the vehicles from any commercial EV operator, have to pass a number of regulatory hurdles, both on a state and federal level in order to operate on U.S. and Canadian roads. These certifications, while all meaningful in their own right, represent a significant undertaking on the part of the applicant. Having completed all requirements for nationwide sales and road readiness, we believe our current standing has us firmly in an early leadership position. In July and October, we also received multiple executive orders from the California Air Resource Board, respectively designating different C-Series models as zero-emission vehicles in the state of California. Combined with our Certificate of Conformity from the EPA in March, our Federal Motor Vehicle Safety Standards certifications in June, we were the first medium-duty battery electric vehicle OEM to receive approvals from both the EPA as well as CARB. During the executive order testing process, our C-1000 extended range achieved an urban driving average of nearly 160 miles and an urban highway blended driving range of 149 miles per charge. Obtaining an executive order was only one of the preliminary requirements in order to be considered for the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project, also known as HVIP, which we also successfully entered in late July. With our eligibility into the program confirmed, Workhorse’s C-Series battery electric step vans are eligible for monetary vouchers of up to $45,000 per vehicle. Workhorse is also eligible to receive 2.07 Zero Emission Vehicle credits for these models. ZEV credits can be sold to other original equipment manufacturers to help them meet hard emission standards. Our eligibility for the HVIP program is expected to help dramatically reduce purchasing costs for California-based potential customers. In October, we also received approval from the New York Truck Voucher Incentive program to offer vouchers for our C-Series battery electric delivery vans of up to $48,328. In support of our greater production efforts, we made meaningful progress on the sales front over the past few months, which has provided us with additional visibility into our production ramp going forward. Thanks to our efforts and expanding our sales channels through dealer networks and other distributors, as well as our attractive financing plan supported by Hitachi, we were able to increase our order backlog from 1,100 units to just over 8,000 units. In November, Pritchard Companies placed a 500-unit order for our C-1000 electric delivery vans, while the Pride Group, headquartered in Canada, most recently placed a 6,320-unit order that includes both C-1000 and C-650 electric vehicles. Combined, the total value of these two purchases equates to over $600 million in sales. We expect the first deliveries to Pride customers by as early as July of this year. In addition, we have forged a close working relationship with Hitachi’s mobility strategy team to develop and expand our dealer sales and support network. HCA has been assisting Workhorse in strengthening a national dealer network and supporting our sales with vehicle financing options for both dealers and fleet customers, including dealer floor plans. We are also benefiting from their manufacturing expertise to further increase our channel sales capacity, along with our assembly and manufacturing process. With that update completed, I’ll now get into operations in our vehicle assembly progress. Limited production of C-Series vehicles continued in both the fourth quarter of 2020 and the first quarter of 2021. Units were delivered to our premier customer base including Pritchard Automotive Companies, and to one of our newer customers, an international home and office retailer, which we were able to garner through our dealer network relationship with Fluid trucks. I’d like to spend a few minutes to talk about Pritchard. Not only have they committed to purchasing 500 vehicles, but they are also playing a key role in creating efficient and cost-effective distribution channels for us. Pritchard provides Workhorse with transportation services for our finished vehicles in Union City through a Pritchard upgrade center in Ottawa, Ohio, where they install value-added products such as custom shelving and racking, vehicle wraps and passive safety systems, like 360-degree camera systems. Their custom built lowboy trailers can transport two Workhorse C-1000 vehicles at the same time, which effectively cuts our transport costs in half. Furthermore, Pritchard is assisting with our branding and marketing efforts, as reflected by our current engagement through the purpose-built national campaign that started in Tampa, Florida, at the Super Bowl, and is planning to continue over the next several months through more than 20 major cities in the U.S. The mission is to bring awareness to companies and cities about the electric vehicle revolution, how it can help reduce greenhouse gas emissions, and how to create a structure that supports the city’s evolution towards electrification, which is aligned with the current administration’s support of the EV industry. We could not be happier with the strategic relationship as it allows Workhorse to focus on scaling the production of our electric vehicles, while Pritchard handles the variability of individual customer needs, as well as the effective distribution of such vehicles throughout North America. During our last call, we also addressed a supply chain constraint with battery packs, and the inability for the current supplier to keep up with the volume requirements. We have addressed this issue in multiple ways, which includes working with our current supplier to overcome the supply constraints we previously identified. We have also collaborated with an additional supplier to further expand our battery pack options. Assuming testing validates our expectations, deliveries with the new packs are set to begin in the second quarter. We’re also working to enter long-term agreements with key suppliers, enabling us to overcome the challenges presented by small volume spot buys and expedited shipments that are sometimes needed for a company just starting production. They discussed our target of 1,800 units for the year, and we are well focused on the requirements needed to make it happen. But we are facing various supply chain challenges, both internal and external, and the ramp up to that goal. While we believe this is a feasible goal, it’s a stretch. Given our backlog, we cannot sacrifice future build volume for current year production, and scaling up manufacturing properly has to take precedence. As of today, we’ve completed the setup of the initial assembly operation and are using roughly 33% of the plant capacity or the total line available to support it. This encompasses much more than basic assembly stations setup. We have new hires in place to support the growing volume of daily vehicle production, and they have upgraded the assembly equipment on the line to make the manufacturing process even more efficient. Next, during the fourth quarter of 2020 and the first quarter of 2021, we continued to work closely with our partners Hitachi and Belcan. The focus of the Hitachi engagement following their operations assessment last year is to accelerate the progression of Workhorse’s factory from an R&D concept to a world-class manufacturer of last-mile mobility solutions. With Hitachi’s 110 years of manufacturing expertise and ours over 60 years of IT leadership, we have made progress on the production front. In addition, Hitachi and Workhorse intend to partner on charging infrastructure capabilities through the Hitachi ABB power grid’s eMotion suite of solutions, benefiting Workhorse customers through holistic EV solutions and accelerating our journey of EV adoption. Our Hitachi partnership has also already yielded considerable results through the dealer development and vehicle purchase finance contracts awarded to Workhorse through Hitachi Capital America’s fleet and dealer partners. We have taken the partnership a step further and have forged a close working relationship with Hitachi’s mobility strategy team to develop and expand our dealer sales and support network. Next, I’d like to quickly touch on gross margin expectations. 2021 is our first year of scale production. And as with nearly every manufacturing company, whether they are spending on R&D or installing equipment, the transition to manufacturing usually results in negative gross margins for a lengthy period, and we are no exception. As I mentioned earlier, during our battery supplier discussion, we have a roadmap to lower our material costs through competitive sourcing, engineering improvements and adding automation to the assembly line, but it will take time to achieve. Therefore, it is fair expectation to expect substantial negative gross margins for 2021. Our engineering team has continued the development of the C-Series platform, as we identify enhancements and change requests from our blue-chip customer base. Our research and development activity has focused on improving the new model year C-Series, including enhancements needed to support production assembly efficiency, material component availability, cost reduction in customer feedback. These new revisions incorporate an aluminum skateboard chassis, which improves the options we have to expand our production capabilities and our sales growth through expanded channels that include specialty bodybuilders and other third-party outfitters. In addition to the headcount previously discussed, we also added three new members to the executive team: First, John Graber, who leads the development of the HorseFly program. Second, as announced via press release last month, we also brought on Chris Nordh as our new Vice President of Commercial Development. Chris comes to us from Ryder, one of our major sales and maintenance partners where he was Senior Director of Advanced Vehicle Technology and Energy Products. In his new role, Chris will be focused on augmenting and expanding Workhorse’s sales and support infrastructure. He brings deep advanced technology vehicle experience and will be invaluable as we continue to build production of our C-series, all-electric vehicles and expand our reach into new markets. And third is our new Human Resources Director, Susan Pelley. Susan has already established herself as a valuable member of the leadership team, particularly with our emphasis on quality and quantity of new hires. I’d now like to provide an update on our newly-monitored aerospace division and HorseFly drone business. Safe, reliable and efficient operations drive everything we do in the last-mile space. Reducing or eliminating fossil fuels in package delivery is important. But just as important is matching the total energy expended to only that which is required to do the job. As part of our last-mile solution set, four years ago, Workhorse started developing the HorseFly delivery system. HorseFly includes a small unmanned aerial vehicle, a ground control station, customer interfaces and a sophisticated integration system that allows our aircraft to operate indefinitely from our package delivery trucks. Our HorseFly system is a joint venture with Moog, Inc. through a jointly owned enterprise called Certus. Moog has decades of experience in autonomous operations, high-reliability systems, electrification, FAA certification and safety. Our teams work closely with Moog to accelerate our progress in the last-mile space. In 2020, we delivered thousands of packages in tests and demonstrations. Working with the State of Virginia and UPS, we demonstrated how drones can fly, standoff, low-touch deliveries during a pandemic, getting critical material where it needs to be without endangering the people who have to deliver and use it. We also worked with a major international package delivery company, demonstrating the safety and reliability of our ground control station, our winch delivery systems and our aircraft. We demonstrated a system that autonomously flies from a delivery truck to a place of the customer's choosing up to 5 miles away, delivers a meaningful payload and automatically returns to the truck for another delivery. And our system delivers time after time after time, designed for the heavy-duty cycles logistics organizations demand. In the last 12 months, our team more than doubled in size, and our accomplishments grew as the team did. We delivered two HorseFly units and Workhorse trucks with converted rooftops to accommodate the HorseFly for UPS. We performed our first commercial training for the crews of major package delivery company, training both flight and maintenance personnel to use our systems, and we entered the Federal Aviation Administration’s pipeline for certification of our HorseFly system. Though this is a new process for the FAA and the industry, we anticipate completing certification in the next 18 months. The FAA prioritizes drone development through what is called the BEYOND program. The state of North Dakota is a participant in BEYOND, and we have joined with North Dakota as a partner in their BEYOND program. We expect our work in the northern plains test sites to accelerate our work in expanding how our systems can work and where they will be allowed to operate. Verizon’s CEO, Hans Vestberg, gave the virtual keynote address at January’s Consumer Electronics Show, where Workhorse and HorseFly figured prominently in that address. Our package delivery trucks were shown in UPS colors, and our HorseFly delivery drone also in UPS colors delivered packages out of our patented truck-top delivery system. Workhorse aerospace exists to enable our customers to safely, reliably and autonomously fly a practical payload a meaningful distance, making the entire delivery process a more effective and efficient process. In 2021, we will build more aircraft systems than we’ve ever built before. Our plan calls for FAA flight testing in various climates and geographies. We’ll lock the designs of our hardware, firmware and software. In 2020, we created the conditions for providing safe, reliable aerial package delivery. In 2021, we’ll start actually doing it in-service to the public. That concludes my prepared remarks. Thank you all for your time this morning. We look forward to updating you on our progress going forward. And we’re now ready to open the call for your questions. Operator, please provide the appropriate instructions.
Operator, Operator
Thank you. Our first question comes from the line of Greg Lewis with BTIG.
Greg Lewis, Analyst
Steve, thank you, and Duane, I appreciate your comments. Could you elaborate a bit more on production? It seems like Q1 will resemble Q4 closely. Can you guide us on how to approach the upcoming months, particularly since Belcan's involvement is concluding? What should we expect regarding production as we move forward in the next few months and quarters?
Steve Schrader, CFO
Yes, Greg, thanks for your question. I think you're right in your assessment. We are trying to balance two priorities: getting trucks out the door now while also establishing long-term systems with our partners, Hitachi and Belcan, to fulfill our backlog of orders. With that in mind, our goal is to reach a target of three trucks per day sometime this month and aim for ten trucks per day by the end of June or the second quarter. Currently, we've already sent some trucks out and we plan to deliver more in March. That's the direction we're headed in.
Duane Hughes, CEO
Greg, I would like to add that the key here is ensuring that we have all the necessary production systems and equipment in place as we move forward. This includes the systems and processes that will enable us to scale from three units to ten and beyond in the future, as mentioned by Steve, in order to address our current and growing backlog. During our slowdown in the fourth quarter due to COVID, we focused on what we could do rather than just waiting for employees to return. We accelerated our collaboration with the Hitachi team to develop the systems and processes, allowing us to increase our daily unit production more efficiently than relying solely on a brute force approach to get trucks out the door.
Greg Lewis, Analyst
Okay, great. And then, another question I wanted to pivot a little bit around incentives. And I believe some of your customers are kind of waiting for some of these incentive structures to kind of take hold in some of these states like California, where I believe some of your customers are looking to take some first deliveries of some of their vehicles. Could you talk a little bit about how some of these state incentive structures are looking? And when we think about them potentially being funded, so that as production starts to ramp up here over the next, call, a couple of quarters, how we should think about where we are in the process from the states in terms of being able to actually fund some of these incentives?
Duane Hughes, CEO
Yes. A few questions here, Greg. And this is Duane. I would tell you, first and foremost, our plan going forward, particularly through our sales channels partners, not just Hitachi and Pride and Pritchard but beyond, right, is the ability to provide a price point at these trucks that they actually ROI very quickly in three years or less and then provide that significant total cost of ownership savings, giving us the opportunity, right, to sell more trucks without requiring voucher programs. But to your point, in states that have voucher programs, I mentioned during the talk that California and the C-1000 has as much as $45,000, where we can take advantage of that and increase the number of units we’re delivering in California in this case. I’m sure there will be fleets who want to take advantage of that. To me and from what I understand, that program will be or is anticipated to be funded in the second half of this year. So, we’re making concerted efforts at using our sales channels partners to find those customers that aren’t necessarily in a voucher state where we can deliver these vehicles without requiring that voucher program, which is what you’re seeing in the 8,000 backlog now and what you’ll see in the future as we continue to add new customers. I should say this, right? One of the things that you’ve seen over the last few months is our expansion of the customer base. Rather than relying on 1 or 2 or maybe 3 of the largest logistics and last-mile companies out there, we are now working through channels that allow us to reach, let’s call them, some of the smaller fleets, but also the largest fleets across multiple countries. So, we’re really paying attention to how this voucher money is coming about, how it’s being competed for against the COVID pandemic, the things that are slowing it down and how we can address that market without requiring a voucher.
Operator, Operator
Our next question comes from the line of Colin Rusch with Oppenheimer.
Colin Rusch, Analyst
Could we just get a little bit more detail about some of the elements in the supply chain that are proving cumbersome for you guys? I wanted to get a sense of how much of a bottleneck that might be on a go-forward basis?
Duane Hughes, CEO
Yes. During my earlier comments, I mentioned the supply chain challenges we're facing. One significant issue is the microchip shortage, which has affected all other manufacturers and has impacted several segments, including steering racks and body control modules—essentially components that require microchips. However, we've successfully identified alternative sources to mitigate these shortages. I also discussed internal challenges, which relate to implementing systems and processes in our facility to enhance our capacity to increase daily production. Although there are components in short supply, particularly microchips, and visibility on these parts can be limited, our current production volume allows us to continue shipping trucks without shutting down operations entirely. Once we have established the necessary systems and processes, we aim to adapt more swiftly to produce trucks while minimizing supply chain disruptions.
Colin Rusch, Analyst
Excellent. And then, just in terms of the sales process, obviously, there has been a handful of announcements from some larger OEMs moving into the delivery van space. But, can you talk a little bit about some of the sales dynamics in terms of time to actually contracting volumes, some of the discussions around pricing, now that there’s just a bit more competition in the space?
Duane Hughes, CEO
Yes, that's a great question, Colin. There are multiple things happening. I'm referring to our Purpose Built National Tour, which begins in February with the Super Bowl and is set to travel through 20 different cities with our partner Pritchard. They will be showcasing 2 Workhorse C-1000 vehicles in these cities, conducting various campaigns. For instance, they are currently in Charlotte and will be in Minneapolis later this week before moving on to Cincinnati, DC, California, and others. This initiative allows us to spread our message and provide demonstrable proof of performance by delivering actual products. If you check out some videos related to this campaign, you'll see how it's helping to raise awareness of the Workhorse brand and what we do in the last-mile delivery sector. Additionally, the unique features of our vehicles significantly aid in attracting last-mile delivery fleets. These features include a low floor, strong vehicle performance, and mileage. Importantly, the HorseFly delivery drone further reduces the total cost of ownership by enhancing our electric vehicle with an electric delivery drone. This allows fleets to differentiate themselves, lower costs, and expand their market share by leveraging advanced technology to meet the increasing consumer demand for faster product delivery in a more environmentally friendly and cost-effective manner.
Operator, Operator
Our next question comes from the line of Craig Irwin with Roth Capital Partners.
Craig Irwin, Analyst
President Biden has been clear about his priorities, especially regarding the transition of the federal fleet to electric vehicles over the coming years. Most federal agencies must work through the Office of Management and Budget when they have significant capital programs or policies that need to be published for regular reinstatement in the federal register. However, the Postmaster General appears to have a different situation, as he is not directly accountable to the President like other agencies; the Post Office has to file a 10-K and reports to a board. Could you discuss the accountability structure within the Post Office in terms of adhering to federal rules and presidential priorities? Any insights on this would be helpful.
Duane Hughes, CEO
I might not be able to provide as in-depth an answer as others might. However, I can say that the Postmaster General is accountable to a Board of Governors. Currently, I believe three members of that Board were appointed by former President Trump, and I recently read that President Biden appointed three new members, which will complete the Board with nine members. In my view, the decision to transition the Post Office fleet to combustion engine vehicles, alongside Biden's executive order for an all-electric fleet of 645,000 government vehicles, indicates that President Biden is working to shape the Board of Governors in a way that aligns with his future plans. I'm receiving updates from the same public sources as you about the current situation and our efforts to stay informed. You are correct that the Postmaster General does not take direct orders from the President; rather, he is guided by the Board of Governors, which can be influenced by the President's appointments to it.
Craig Irwin, Analyst
My next question is about DeJoy's recent testimony where he appeared somewhat confused. He stated that electric vehicles do not offer a maintenance advantage over combustion engine vehicles, which seems quite absurd to me. Most electric truck platforms are expected to see maintenance cost reductions of between 50% and 75%, typically around two-thirds. Where do you believe DeJoy is sourcing his information? And do you think he is correct at all?
Duane Hughes, CEO
Thank you for the question, Craig. I value your inquiry. From what I've gathered directly from our customers, the comparison of fuel and maintenance costs between an electric vehicle and a traditional combustion engine is not at all comparable. The electric vehicle clearly outperforms the combustion engine. However, I heard Mr. DeJoy mention in his testimony that if we consider the infrastructure needed to charge these vehicles overnight, it levels the playing field. I would argue that this comparison is also not fair. While it does add to the costs, it doesn’t affect the total cost of ownership comparison between an electric vehicle and its combustion engine equivalent. Additionally, if I owned a fleet and was purchasing tens of thousands of these vehicles with the intent to switch to electric in the future, the infrastructure costs would already be offset. I don’t think his response was well thought out; it seemed to be more of a reactive statement. It's also unclear whether they were discussing a 10, 15, or 20-year total cost of ownership. But what we know is that we have been designing vehicles for over 20 years, so the comparison needs to be made over a 20-year span.
Craig Irwin, Analyst
It's great to hear. Good luck with the challenge regarding the interesting award from the Post Office. I also wanted to discuss the new customer opportunities. You've seen some solid traction with different names. Now that the C-1000 vehicles have been on the road for several months, there is potential for others to connect with those initial operators, learn from them, and see the validated economics. Can you provide us with an overview of how your customer pipeline looks and what your expectations are for the order pace of the C-1000 in the upcoming quarters?
Duane Hughes, CEO
Yes, I appreciate that. I think we're already seeing progress in our sales pipeline ahead of where we currently stand. I want to be cautious here since I haven't disclosed anything publicly. For instance, I'm referring to the 20-city national tour we're conducting with our partner Pritchard, where they are taking two vehicles to various cities to showcase real-life deliverables and performance, along with ride-along experiences that help prove our performance capabilities. This is significant. Additionally, our partnership with Hitachi, which has dealers nationwide, adds value. In a recent survey conducted in five states regarding EVs, Workhorse ranked highest in proof of performance due to the number of vehicles currently on the road in this sector, as well as having the most electric delivery vehicles before the C-Series was introduced. We have substantial data that enables us to continually demonstrate this proof of performance, especially through our differentiators previously discussed with Colin. I believe we will continue to see an increase in orders as we enhance our production to keep pace with demand. We are very excited about the pipeline we are witnessing and how it is being expanded primarily through the sales channels I have mentioned.
Steve Schrader, CFO
I would like to add that our primary objective is to generate profit from truck sales. However, there are numerous after-sale opportunities related to infrastructure, financing, and service. This is why leading companies recognize the potential for profit in these areas. They also acknowledge that we have a product that customers appreciate and that we are a few years ahead of the competition. This alignment with companies like Hitachi, Ryder, Pritchard, Pride, and Duke further supports our position. Therefore, we anticipate receiving more orders this year.
Craig Irwin, Analyst
Okay, excellent, excellent. Last question is actually a question I’ve had from a couple of clients. So, let me just frame it out, right? So, everybody has been pretty much shocked by the Oshkosh award, and I’m guessing your customers are, too. Can you comment maybe whether or not this is impacting your customer relationships, or what are your customers saying about this award with the Post Office? Does this really impact you guys from a competitiveness standpoint on the C-1000 core offering going forward?
Duane Hughes, CEO
What I can tell you, Craig, is that we are hearing a lot of the same frustrations from our customers that you're hearing from the public and the Democratic senators, which simply increases support for Workhorse. Our customers are coming back to us and encouraging us, saying that we have the best product and that they are with us all the way. In fact, many of them are even more motivated to affirm that the EV strategy, particularly Workhorse's EV strategy, is the right path forward. This sentiment is not isolated to just one customer; we are receiving similar feedback from multiple clients. I've always believed two things: first, that regardless of the Post Office situation, we have a viable business to focus on building. If the Post Office deal comes through, it will certainly be a game changer. However, I've been pleasantly surprised by the number of customers who are actively supporting us and promoting how well we are performing. Overall, I can confidently say that our customers have been overwhelmingly positive about their support of Workhorse, our vehicles, and our future technology roadmap.
Craig Irwin, Analyst
Okay. And then, last question is really just the confirmation. Do we know for a fact, in black and white, somewhere maybe that there was no other EV or hybrid submitted in the entire RFP, RFQ process for this procurement at the Post Office and then for a fact that the addition was last minute from Oshkosh?
Duane Hughes, CEO
I can only address that we are still under NDA with the Post Offices. Based on reports from various media sources, we know there were the Oshkosh, Morgan Olson hybrid, the Oshkosh combustion engine Ford transit, and our vehicle. We are not aware of any other vehicles that participated in the durability testing process. I cannot comment on the RFPs that were submitted. I am not aware of any additional RFPs delivered to the Post Office, nor do I know the specifics of the competitors’ RFPs. However, I can confirm that our RFP reflected our approach and the outcomes of the durability testing. While we might make some enhancements based on those learnings or new technology available to us now, we adhered to our original plan and submitted an RFP based on the six prototype vehicles we provided back in 2016 or 2017.
Craig Irwin, Analyst
Great. Well, thank you. Good luck with your meetings this week. I’m sure our representatives are going to work hard to do the right thing here. So, thanks.
Duane Hughes, CEO
I appreciate that, Craig. Thank you.
Operator, Operator
Thank you. Our next question comes from Mike Shlisky with Colliers Securities.
Mike Shlisky, Analyst
I want to follow-up quickly on the postal service contract. I mean, Oshkosh has made an investment in an EV battery supplier, Oshkosh is working with Ford, which is going to be introducing the transit in a couple of months. I guess, if USPS does ask for this whole to go EV or mostly EV in the future, do you think Oshkosh can deliver an EV, if they were asked to do so?
Duane Hughes, CEO
I can't comment on Oshkosh's capabilities specifically. However, I can say that as a defense contractor, they are quite proficient in their field. That said, I firmly believe we are currently the leading electric vehicle manufacturer in the last-mile delivery market. The last-mile delivery sector is unique and differs significantly from deploying other types of vehicles. Vehicles in this space may travel anywhere from 18 to 300 miles a day and make hundreds of stops during that time, which creates different requirements compared to military vehicles, fire trucks, or ambulances. Our extensive experience working with top-tier clients has provided us with vital insights that enable us to design last-mile delivery vehicles that not only outperform our competition but are also future-ready, adapting as needs evolve. For instance, we've integrated technology such as autonomous delivery drones. We are confident that we offer the best solution for anyone seeking to transition their fleet to all-electric, especially in last-mile delivery.
Mike Shlisky, Analyst
I wanted to ask about the California program, which has a fixed amount of funding available. There are limits on the funds, and eventually, the deposits will run out. With more competitors entering the EV market and adoption increasing, I'm curious about how much funding will be allocated to the HVIP program this year and next. Will they be increasing it given the number of competitors currently in the EV market?
Duane Hughes, CEO
This is Duane, thanks for the question. I don't have a clear idea of what the funding will be. If you look back historically, that could serve as a reference. However, the COVID pandemic has affected these programs as funds are being diverted for other needs. For instance, parts are currently piling up at ports because it's more critical to prioritize pandemic-related shipments over essential components like microchips. What I can say is that while I don’t know the exact funding amount, the program has been modified. Instead of having 100 units assigned to a fleet, there will only be 30 units per fleet. Therefore, our focus is on ensuring that our plans do not depend on needing a voucher to make financial sense, provide the right return on investment, and achieve significant total cost of ownership savings. Additionally, whenever funding is available, whether we can obtain it on behalf of our fleet customers or they do so themselves, we will take advantage of that. However, we are developing a business plan that does not rely on the voucher.
Mike Shlisky, Analyst
Got it. And maybe just one last question from me. Between Pride and Pritchard, the 6,820 units that have been ordered, can you provide us with an overview of the most recent quarter and the sell-through? Specifically, how many of those units have been ordered by end users? Also, what is your timeline for delivering those units?
Steve Schrader, CFO
Sure, you’re interested in first quarter deliveries, and we will have those. We will discuss the first quarter results in May during our next earnings release. Pride is not looking for any deliveries until July. They have placed an initial order of about 20 units, with 10 each of the 650 and the C-1000 models over the past six months. They are proceeding with their order of 6,320 units, planning to take 600 units each year for 2022 and 2023, followed by 5,000 units for the last three years. Pride is also focused on establishing the necessary infrastructure in Canada and ensuring that demand exists. I hope that clarifies your question, Mike.
Duane Hughes, CEO
Well, I would add...
Mike Shlisky, Analyst
Actually, I was asking whether they were spoken for yet by end users.
Duane Hughes, CEO
I would tell you that we don’t know all of the end users in the group, but they have identified specific end users, and we’ve actually delivered a few that we can’t name because they have plans in the upcoming months to make significant announcements in their marketplaces regarding their electric vehicle initiatives. I mentioned one of those earlier, an international retailer. However, they have identified their initial fleets to begin deliveries with, but it’s not something we can discuss on today’s call.
Operator, Operator
At this time, this concludes the Company’s question-and-answer session. If your question was not taken, you may contact Workhorse’s Investor Relations team at WKHS@gatewayir.com. I’d now like to turn the call back over to Mr. Hughes for his closing remarks.
Duane Hughes, CEO
Well, thank you again for joining us on our call today. I especially want to thank our employees, our partners, our investors and all of our support folks behind us. We appreciate your continued interest in Workhorse, and we look forward to updating you on our next call. Thank you, operator.
Operator, Operator
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.