Greetings, and welcome to Xos Inc.'s First Quarter 2024 Earnings Call. Please note, this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of Access, Christen Romero. Thank you. You may begin.

Thank you, everyone, for joining us today. Hosting the call with me are Chief Executive Officer, Dakota Semler, Chief Operating Officer, Giordano Sordoni, and Acting Chief Financial Officer, Liana Pogosyan. Ahead of this call, Xos issued its first quarter 2024 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investor.xostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today's earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investors.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company's first quarter 2024 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements. With that, I now turn it over to our CEO, Dakota.

Thanks, Christen, and thank you, everyone, for joining us. On today's call, I will cover highlights from the first quarter of 2024, during which we generated $13.2 million in revenue, delivered 62 units, and achieved record gross margins of 21.2%. Gio and Liana will then provide operational and financial updates, respectively. During the quarter, we closed our acquisition of ElectraMeccanica, which gave us access to more than $50 million in additional cash net of certain costs paid at close. This injection of cash, combined with our improving margins, significantly strengthens Xos' capital base and liquidity. With our improved liquidity, we are taking advantage of opportunities to improve our operations but remain committed to tight cost control and judicious capital allocation. Xos' first priority is becoming a self-sustaining cash-generating company, which we believe will come from continued focus on growing our core StepVan, Xos Hub, and Powertrain businesses. Compared with the first quarter of 2023, revenue is up 180%. However, revenue for the quarter was lower than the fourth quarter of 2023 due to delays in customer infrastructure and at some of our body upfitter partners, causing planned first quarter deliveries to spill into the second quarter. As we mentioned during last quarter's call, we expect 2024 volumes to be back half-weighted like 2023, but meaningfully higher than last year. In the quarter, we delivered StepVans to several of our most committed customers like UniFirst and FedEx Ground contractors. We also made initial deliveries of our StepVan-based powertrains to two new customers, a large on-highway bus OEM and Winnebago. As a reminder, our powertrain offerings provide an opportunity for Xos to monetize our existing commercial EV technology in sectors beyond the last mile fleets that we serve with our complete vehicles. We see significant growth opportunities in our Powertrain business and are looking forward to reporting growing powertrain deliveries in future calls. In StepVans, sales activity during the quarter remained strong, with California's advanced clean fleets compliance increasing fuel bills and aging fleets motivating StepVan customers to transition to EVs with Xos. In support of our vehicle sales, we took steps during the quarter to tackle the charging infrastructure-related delays faced by our customers. In January, we announced the updated Xos Hub, a rapidly deployable charging unit designed to expedite electrification for fleets. The Hub combines 280 kilowatt hours of battery storage with four chargers, allowing each unit to support eight or more StepVans in typical last-mile fleet depot applications. Onboard batteries dramatically reduced peak power drawn from the grid, allowing many Hub customers to skip the lengthy utility upgrade process that frequently impacts EV fleets pursuing charger-only solutions. These upgrades can add 12 or more months to the timeline for permanent infrastructure installation and are hard for customers to predict before purchasing their vehicles. By directly addressing the utility upgrade and charger installation timelines that are the most impactful source of delays for our truck deliveries, we expect Hub deployments to meaningfully improve the predictability of our StepVan volumes. To that end, we are pursuing a range of solutions, including bundling Hubs with StepVan orders to grow our business and minimize the impact of infrastructure constraints on Xos. The Hub is also available as a trailer-mounted mobile charging solution where its four charge heads and internal battery offer a solution for construction sites, remote work sites, or other environments where commercial EVs are deployed without access to permanent charging infrastructure. While enabling greater StepVan deliveries remains the primary purpose of the Hub, strong and broad-based interest from non-StepVan customers has motivated us to offer the Hub more broadly. To that end, we have already signed sales orders and booked production slots for a range of customers, including Xcel Energy, FedEx Ground contractors, and SSA Marine. I look forward to reporting on the growth of the Hub business and its expected strong margin profile in future calls. I'll now hand it over to our COO, Gio, for an operational update.

Thanks, Dakota. Xos' engineering, supply chain, and manufacturing teams remain focused on scaling production to match customer demand and delivering further gross margin improvements. Our engineers continue to develop and implement refinements that contribute directly to our strong gross margins. The supply chain team is collaborating with suppliers and inbound shipping partners to improve competitiveness, expand margins, and ensure the flow of components needed to achieve our delivery ambitions for 2024. As Dakota mentioned, we also began to build and deliver the updated Hub in the first quarter. In response to the demand our sales team is seeing, we're preparing for production rates of up to eight Hubs per month in the second half of 2024. This rate will remain flexible and tied to the signed sales orders we receive. This is possible due to the significant overlap between the Hub and our StepVan platform. From day one, we designed the updated Hub to leverage our existing StepVan design and supply chain as much as possible. For example, by sharing a battery system with our 200-mile StepVan, the Hub was able to reach production many months sooner and with much better margins than is possible with a standalone design. The similarities also extend to the factory floor. Like the StepVan, the Hub is built of major subassemblies and partnered with our suppliers, reducing the capital investments required to achieve our 2024 production targets of less than $50,000. All Hubs are being built in the existing Xos plant footprint in Eastern Tennessee alongside our StepVan production line. And with that, I'll pass it to Liana.

Thank you, Gio, and good afternoon, everyone. For the first quarter, our revenues decreased to $13.2 million from $18.4 million in the fourth quarter of 2023, primarily as a result of our reduced deliveries during the slower time of the year. Our cost of goods sold during the quarter decreased to $10.4 million compared to $17 million in the fourth quarter of 2023. GAAP gross margin during the quarter was a profit of $2.8 million or 21.2% compared to $1.3 million last quarter or 7.2%. Margin improvements were mainly driven by higher average selling price, reduction in overhead costs related to the normalization of a prior quarter change in our allocation and capitalization of freight costs into inventory, reductions in inventory reserves in line with reduced on-hand inventory balances as we continue to focus on prudent supply chain management, and a net benefit from physical inventory adjustments as compared to write-offs during the fourth quarter of 2023 as we continue to focus on improvements in our inventory management processes. It should be noted that GAAP gross margins for a vehicle OEM are impacted by a range of reserves that combined with changes in sales mix between direct dealer and prior model inventory sales introduce higher levels of volatility in quarterly results. For this reason, we continue to share consistent non-GAAP gross margin that you can find in today's earnings press release. Turning to expenses, our first-quarter operating expenses decreased to $13 million from $13.2 million in the prior quarter. As a result of the asset acquisition accounting, the transaction costs associated with the MB acquisition are included in the cost of assets acquired and allocated amongst qualifying assets using the relative fair value basis. Non-GAAP operating loss for the quarter was $9.3 million. We closed the quarter with cash and cash equivalents of $46.2 million compared with $11.6 million at the end of the fourth quarter. As Dakota mentioned, the increase resulted from the acquisition of ElectraMeccanica in March. Inventory decreased to $36.6 million in the first quarter from $37.8 million last quarter. Operating cash flow less CapEx or free cash flow of negative $14.6 million for the quarter was an increase over negative $0.9 million last quarter, largely as a result of our net loss and unfavorable changes in our working capital, including increases in accounts receivable resulting from delivery timing and growth in incentive voucher receivables as well as timing of payments on our outstanding liabilities. Finally, we are reaffirming our full-year 2020 guidance of revenue in the range of $66.7 million to $100.4 million, a non-GAAP operating loss of between $43.7 million to $48.7 million, and 400 to 600 units delivered.

Thanks, Liana. To wrap up, Xos is prepared for the future. The over $50 million of cash that we secured this quarter and our industry-leading gross margins provide Xos with significant advantages over our competition. As regulatory pressure on fleets to adopt EVs grows, we are benefiting from stronger demand for our proven and profitable truck powertrain and mobile charging infrastructure products. As we look to a busy second half of the year, our competitive advantages and direct benefits from EV mandates and incentives keep Xos on a track for long-term success that I look forward to sharing with you in the coming quarters. With that, let's open the line for questions.

Today's first question comes from Donovan Schafer with Northland Capital Markets.

I would like to start by asking about the delays caused by the charging infrastructure. We have encountered this previously. Can you provide more insight into the upfitter aspect and whether it is also related to infrastructure, specifically if they require chargers on their own premises for some of the upfitting? Additionally, what gives you confidence that the orders and deliveries pushed from Q1 to Q2 will not lead to further delays rolling into Q3 and Q4, and that you can maintain your guidance for the full year? Any insights on this would be appreciated.

So I'll start with the first question regarding the upfitter delays. So it's not tied back to infrastructure at the upfitters. When we build a chassis, we're sending it to one of our upfit partners, and that requires very close coordination with them around their production schedule and making sure that we have build slots well in advance of when those need to be delivered to customers. In some cases, those can get pushed back from their own supply chain issues or other challenges that they've had. And so this quarter was one of those times. We don't expect it to happen again. We're taking a much more proactive approach towards planning with those upfitters and making sure that we're looking out about two quarters to plan our production timelines and get build slots scheduled for those deliveries. But that is really something that we anticipate will continue to improve and not be related to charging infrastructure. The second question was really around charging infrastructure and making sure that this pattern from rolling some of the vehicles in from Q1 into Q2, doesn't happen. And we have strong confidence on those vehicles, particularly those that came from Q1 as several of them have already been delivered in Q2 at this point. So it gives us much better confidence in being able to say it's not going to carry on for two or three quarters with those few units that pushed into the second quarter. And we're actually testing out some new temporary charging infrastructure tools that complement the Hub and will allow us to deploy charging infrastructure if we continue to see unanticipated delays either from the utility or from the permitting side when it comes to deploying permanent charging. So this is one of the first quarters where we're going to be deploying Hubs and temporary charging where customers will have temporary charging in place until their permanent charging gets installed. And that should give us a lot more predictability and forecastability and stability in our production numbers and being able to deliver everything that we build in a quarter.

And then turning to the Hub itself, it seems like there's some real positive developments there, which is very interesting, potentially exciting. So Gio you said that you'll have things in place to be able to do eight Hubs per month in the second half of the year. That would be 48 Hubs for the year. I guess the first compound question here would just be is that more of an expectation or just being prepared for it? I mean do you think it is a fairly likely chance that you'll be, say, delivering north of 20, 30 Hubs, something like that? Or is that just you are just gearing up to be ready? And then the other part would be how do they compare from an ASP and gross margin standpoint to the vehicles?

This is Gio speaking. It's more about getting ready for those production volumes. We're not providing specific production guidance or total Hub production for the year guidance, but we are building the production system to be able to handle those kinds of volumes. And I can say that we are actively producing multiple Hubs even now because we're getting a ton of interest and positive feedback from customers and folks placing orders for Hubs. I think your second part of the question was around ASPs, and I'll let Dakota answer more of the margin and ASP questions for the Hubs.

So in looking at the Hub from a commercial perspective, the comparable solution utilizing DC fast chargers can range anywhere from $150,000 to north of $250,000 for an apples-to-apples comparison to four 80-kilowatt DC fast chargers. We fall right into that range kind of in the middle. The benefits of the Hub over four DC fast chargers installed via conventional permanent charging infrastructure is that we are simplifying the installation by standardizing it into a single enclosure. We're reducing CapEx significantly by having one connection point instead of four connection points through various different ways. We're minimizing the amount of conduit, minimizing the amount of cable runs, trenching, site work as well as soft costs and engineering that go into site development. And then we're also adding in an additional nearly 300 kilowatt hours of energy storage combined with that DC charging. So if you were to scope this out for a traditional permanent DC charging infrastructure project with four DC fast chargers and approximately 300 kilowatt hours of energy storage, it would be significantly more than what a Hub costs our customers today. And that's in a fixed amount of application. Obviously, one of the biggest attributes of the Hub that's been so well received by our customers is not just that capital cost savings for permanent infrastructure deployments, but it's the flexibility of our trailer-mounted Hubs that allow them to deploy vehicles in facilities they don't necessarily own, such as a leased building or leased depot or yard, or even deploying them for roadside service or maintenance. Ultimately, this gives fleets a tremendous amount of flexibility. While we have talked a little bit about some of the pricing dynamics in the early stages of production, we're still finalizing what those margins and gross margins will be for the product portfolio. We're confident that they will be at the high end of our product margins, potentially higher than even StepVan or powertrain. That really speaks to the technology we've put into the Hub, the core technology, which includes the energy storage systems, the charging power electronics, and all of the software and energy management planning software we've developed to run the overall Hub.

Yes, there is some variability and some flexibility depending on who's buying the Hub and whether they're bundling it with trucks. Of course, we originally designed the Hub to help customers with some of their infrastructure bottleneck challenges. That was the primary use case we intended for it. We do have customers buying trucks and hubs at the same time, and we can be flexible on pricing in that sense. But we also have interest in the Hub from customers that don't purchase or use StepVans at all, from different and unexpected industries that are looking to use the Hub to charge vehicles but not necessarily delivery vans or walk-in vans.

The next question is from Mike Shlisky with D.A. Davidson.

I want to talk with you on some of your comments you made on gross margin. If you take out some of the one-time items, and again, I'm still going through the press release, it looks like you're around the low teens gross margin in the first quarter. Do you think that's a reasonable sustainable level you can get, taking out all the one-time items and gains and losses, et cetera, for the rest of the year? Or is there a little more volume, which you'll be getting later in the year, that will get you a little bit higher towards the mid to high teens? Maybe that's my first question.

So we are confident in those gross margins continuing to stabilize and grow even further. We are now almost completely through some of that legacy inventory that had lower or negative gross margin. We're moving into our 2024 model year vehicles, which are in the high teens and low 20s range. There's always going to be some variability based on product mix and customer incentives that we might do with various customers or specific markets that we're targeting. But we are confident that this will continue to improve at the product level.

I think with respect to the one-time transaction costs, those have been normalized. We took additional capitalized freight costs as a result of the change in methodology in the fourth quarter, and those have been normalized and reflected in our results. We are also seeing overall lower inventory reserves based on our overall improvement in our inventory processes that we expect to sustain. So all of that gets us to a positive direction and we feel confident in the outlook of our margins going forward.

And then turning to operating expenses, if you cut that year-over-year by almost one-third. Do you think about $13 million a quarter is a reasonable way to go? And you can probably see I'm trying to figure out when you get to EBITDA positive here. But is on the operating margin side $13 million in teens right now?

Just to highlight a couple of important factors on the operating expenses for this quarter. A lot of the EMV acquisition-related transaction costs have been capitalized based on accounting rules. We did record about $2 million of severance-related costs that's reflected in operating expenses. But as far as the normal cadence on what we expect moving forward, while we don't necessarily guide to that, directionally, we might see some increase in operating expenses in future quarters as we continue to wind down the EMV operations and some of the operating costs we assumed, mainly related to the two leases that were actively subleasing. Overall, we have significantly cut our operating costs, and we feel comfortable that we'll maintain that cadence to help us get to free cash flow positivity.

Also, I want to get a little more information on the EV bus and Winnebago customers. Do deliveries that you've done so far this year, were those actually part of sales? Or were they more demos? And do you think those will be a material amount of the revenues this year? I'd love to hear a little commentary on what might be in the cards for 2025 from those two business shifts?

Yes, absolutely. So I'll speak to our powertrain business in general and not speak to specific units or customers, but we did deliver some powertrain units in Q1. It was a relatively small number compared to the total overall deliveries, but we do anticipate those will grow pretty significantly in Q4 and well into Q1 of 2025. Those sectors, both the on-highway commercial vehicle that we're building with Winnebago as well as some of the bus applications and even the off-highway powertrains are growing, and we're seeing demand for those products increase since we've made some of those announcements earlier this year with Winnebago, and we have forthcoming announcements this quarter with some of our other partners. So we do anticipate that being a bigger mix of overall deliveries this year. That being said, it's still one of our secondary business units, and we anticipate trucks will be the majority of the volume that we're delivering this year.

Average price in the quarter looked pretty solid. I think you're over $200,000 just dividing revenues by units. There is some mix in there, but is that a good assumption going forward to be above $200? Am I missing something on your top line?

So this quarter, we saw a lot more long-range vehicles being delivered with that higher range battery pack, and that's really why the higher ASPs were reflected in the quarter. We don't anticipate that sustaining into the rest of the year. We will have quite a bit of deliveries with those longer-range battery packs, but it will be a more even mix of short-range and long-range options. We do anticipate it will grow slightly from last year, but not to the extent that we saw in Q1 where we had significant volume of deliveries of those 200-mile range vehicles.

The next question is from Stephen Gengaro with Stifel.

Two things for me. The first, can you just remind us of the impact that mix has on margins and how we should think about that going forward?

So when we're looking at product mix today, a typical StepVan on our short-range 100-mile configuration is generally going to be in the low teens range of gross contribution margin. When we're looking at some of our longer-range vehicles with specialty configurations, whether it be lift gates or power export or specialty bodies, those can get into the mid-20s range. So it varies again quarter to quarter depending upon what's in our customer delivery schedule and what's in the pipeline. But ultimately, we've really thought about a two-thirds to one-third ratio with two-thirds being that 100-mile short-range vehicle and one-third being the longer-range vehicle with some of those specialty upfits or configurations on them. And when we're looking at powertrains and some of our other ancillary businesses such as Xos Energy solutions, those are generally in the higher range. So when we're looking at services, anywhere from the 20% to 30% gross margin range. And then on the powertrain side, anywhere from the mid-teens into the high 20% gross margin range on those product mixes. But both of those businesses make up less than 10% of revenues today.

The other question, just from a market perspective, what are you guys seeing in the market from a demand perspective and inquiries? And what confidence does that give you as you look at the rest of this year, your guidance, and even into next year?

So I think there's been a tone across the industry that's been particularly set by the passenger car sector around growth potentially waning or the market slowing down. We have not seen that whatsoever. Our sales for Q1 this year versus last year were up significantly. And as we're tracking today, sales orders signed for Q2 are tracking very similar to Q1. We're continuing to see strong interest driven by a few key tailwinds, one of which is still the California ACF for advanced clean fleet regulation, prompting a lot of fleets to be proactive about their transition to EVs. Another is the cost of fuel, which still remains quite high in a lot of our key metro markets. Customers are looking for fuel savings that are afforded by our vehicles. Finally, customers that have already deployed many Xos vehicles are placing recurring orders because they're seeing maintenance costs come down, and they're taking advantage of many of the incentives that exist within the market today. These incentives come from state-level regulations and municipal incentives that exist in places like New York, Texas, and Oregon, as well as the federal incentives provided by the IRA. There's tremendous tailwinds in the commercial sector right now, and we have not seen any growth slowdown. Obviously, going from a converted sales order to a delivery and recognizing revenue and getting that truck on the road is still a process, and we're trying to streamline that and improve our infrastructure deliveries to make that happen quicker, but there has been no shortage of demand for our products this year.

The next question is a follow-up from Donovan Schafer with Northland Capital Markets.

I would like to revisit the issue of delays to understand your internal capabilities in managing such situations. You have taken over the facility in Birdstown from Gio. In instances where there are delays in customer deliveries, can you maintain the same operational pace at that facility, or do you encounter issues with storage or warehousing capacity? I'm considering how fluctuations might affect you, but as Dakota indicated, deliveries have already occurred this quarter. Does this enable you to operate more normally, even if your GAAP accounting might show some irregularities? Are you able to keep everything running smoothly in that scenario? If you could provide more details, that would be appreciated.

Donovan, this is Gio again. Yes, we're able to keep humming along. This was one of the main design goals when we switched over from the previous version of the StepVan to the one that we're building today. A lot of the StepVan is built in subassemblies. So if we have a blockage in one of the areas, we can continue to build ahead on subassemblies so that when that bottleneck gets unlocked, we can continue building trucks. We've not had to send people home or had massive lumpiness due to some of these issues. We've been able to keep building consistently. Now we are adding another product or we've added another product to the same facility, which is the Hub. We are also able to cross-train folks on building StepVan chassis as well as hubs.

And then for the hubs, so I think the standard configuration, I believe, is for chargers. You can charge four vehicles at once from the Hub. Is it safe to take that as like the rule of thumb? I'm getting at the bundling here. So when you bundle and I understand some vehicles are long-range, some are shorter-range, so on and so forth. But hypothetically, if we were modeling or looking forward and suppose the bundling became a regular thing or maybe, say, 20% or something of vehicles or full part of like bundling. Then is it a 4:1 ratio generally? Or does that sizing in terms of just the capacity for the vehicles versus the capacity of the Hub, it may actually be better to size like 3:1? I think is there kind of a rule-of-thumb ratio where you landed?

Getting into a lot of the nuance with deploying the hubs, it actually works the other way in our favor. With most of our shorter-range vehicles, our customers are driving an average of 50 to 80 miles a day, utilizing the range of kind of 40 to 80 kilowatt hours per day. What we see is that you can actually support quite a few more vehicles and run a dual charge cycle per day with the Hub. This allows customers to charge up to eight trucks per Hub in a bundled environment. It really makes a lot of sense for them because if you think about their operations, being able to charge eight of these vehicles quickly and getting them back on the package line or the delivery dock to be loaded for the next morning, it's really not disruptive to their operations and ultimately allows them to deploy charging infrastructure incredibly quickly without waiting for that site infrastructure or power upgrade that a lot of times four or even eight chargers would necessitate.

So if in that case, if you can sort of enable or facilitate the delivery of eight vehicles, is that something where you would look at offering the Hub like at cost for that type of a situation or part of bundling it? Or would you just go for like a lower margin? Just trying to think about how to think about how you would look at that?

We have a range of different customer incentives. It really depends on the customer profile and the lifetime value of that customer. But ultimately, we're focused on getting as many trucks out there as possible in a sustainable manner with our customers. Some customers will require different loading configurations or they need more energy storage or less if they're running higher longer-range vehicles that might only be able to get four charge cycles off of a single Hub. So it's really nuanced and dependent upon the customer, but we are really focused on getting as many trucks out there as possible. If the Hub can support quicker deliveries, we're going to deliver them.

This concludes our question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a great day.