Electric Last Mile Solutions, Inc.
Q3 2021 Earnings Call Transcript

Published: 10 Nov 2021

[Operator:]

Good day. Welcome to Electric Last Mile Solutions Third Quarter 2021 Earnings Conference Call. . As a reminder, today's conference is being recorded. I would now like to turn the conference over to Sam Lee, Director of Investor Relations and Finance. Please go ahead.

[Sam Lee:]

Good afternoon, and thank you for joining us for Electric Last Mile Solutions Third Quarter 2021 Earnings Call. Before we begin, we'd like to remind you that remarks made on today's call may include forward-looking statements. These are based on our predictions and expectations as of today. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and for our most recent SEC filings. Joining me on the call today are James Taylor, CEO of ELMS; Jason Luo, Executive Chairman; Rob Song, CFO and Treasurer; and Jonathan Ballon, Chief Strategy and Digital Officer. Management will deliver prepared remarks, and then we will open the line for your questions. Now I'll turn the call over to James.

[James Taylor:]

Thank you, Sam. And thanks, everyone, for joining us today. I'm so proud of the team we've assembled at ELMS. Despite all the challenges in the auto industry this year, we delivered on our commitments. We posted a historic third quarter in which we began production at our Mishawaka, Indiana plant and posted revenue as we shipped our Class 1 Urban Delivery vehicles. And we intend to continue delivering on our commitments by maintaining discipline in our goal-setting, our follow-through and our transparency going forward. Today, I'll provide a business update with detail about our Urban Delivery launch, plans for the addition of our Class 3 Urban Utility vehicle, our recently announced battery agreement and plans to explore localization of battery assembly in the U.S. and additional insights into our digital strategy development. Lastly, I'll turn it over to our CFO, Rob Song, to discuss our third quarter financials and outlook. Rob joined the company in April and has worked closely with the company's former Chief Financial Officer, Albert Li, as part of an intended succession plan. Rob brings nearly 20 years of diverse finance and capital markets experience, including extensive work with Morgan Stanley, Alphabet and CorePoint Lodging. We're pleased to welcome him officially to the call and his new role within the company. Albert was essential to ELMS becoming a public traded company and expanding its financial operations. We thank him for his important service and look forward to working with him as he transitions into a senior adviser role with the company. Okay. Let's get started. As the first publicly listed electric vehicle company initially focused on the Class 1 to Class 3 commercial segments, we're redefining productivity for commercial vehicle customers and what the industry calls the last mile of delivery. We founded ELMS because we saw an opportunity to rapidly deliver sustainable and intelligent mobility solutions to businesses engaged in moving goods and services to their final destinations. We developed commercial solutions that are profit drivers, not cost centers. We identified an unmet business need, the Class 1 to Class 3 commercial EV segments, where we expect to benefit from several major tailwinds. These tailwinds, by the way, seem to be blowing harder and harder these days, including

[Robert Song:]

Thank you, James. Having been part of the team over the last 6 months, I can tell you what we are doing in key Electric Last Mile is special. It is a once-in-a-lifetime opportunity to redefine the commercial vehicle market. I'm very excited to be working with this talented team. To date, we have delivered on our commitments and are confident we will continue to execute against our business plan. Moving forward to the third quarter results. As of September 30, the company reported its first revenue of approximately $136,000 on delivery of 5 Urban Delivery vehicles. We had a total cash balance, including restricted cash, of $170.9 million. For the quarter, we reported a net loss of $17.8 million or a loss of $0.15 per share. Operating expenses were $22.3 million, consisting of $5.6 million of research and development expenses in development services, testing and prototype expenses; and $16.7 million of general and administrative expenses for personnel, consulting services and marketing expenses. We are on track to beat our initial CapEx guidance for 2021 as well as our initial operating expense guidance. This is primarily due to the close and efficient relationship we had with our key suppliers that enables us to reduce our engineering, design and testing expenditure as we remain on track to deliver the fully certified Urban Delivery vehicle on time and below budget. For the full year 2021, we are revising our projected total operating expense to be in the range of $60 million to $70 million. We estimate total CapEx for the full year 2021 to be in the range of $20 million to $25 million. We have a unique business model that allows us to hold our investment level lower than other EV companies by leveraging our EV-ready production plant and proven components. Finally, we are pleased to deliver on our promise of revenue in the quarter. 2022 is going to be a very exciting year, and we look forward to delivering the next major revenue milestone for the company. We'll be providing production guidance on our next earnings call. This concludes our prepared remarks. We'll now open the line for questions. Operator?

[Operator:]

. And we do have a question from the line of Dan Ives with Wedbush Securities.

[Daniel Ives:]

So in terms of -- obviously, I understand why you're cutting production from a cost perspective, but there's been no changes in terms of like the factory build-out, like just getting everything assembled. I just want to make -- that continues to be exactly on track, right?

[James Taylor:]

That's correct. And there's no restriction in, let's say, our production capabilities, plants staffed up. People have been hired. CapEx is finished, installations, lines running. You're exactly right, Dan. The issue is getting parts to the backdoor, but no issue in the plant.

[Daniel Ives:]

Okay. So let's just walk through like a customer that was preordered expecting to get it later this year and obviously, you cut production. So like how do you think about this for like next year? Like is it just -- is it more mass pan up as we go into '22 in terms of just filling orders production?

[James Taylor:]

I think if I got your question right, it's kind of, call it, a slide where the customers that were looking at them for late this quarter would -- were going to just slide those orders and honor them in the first quarter. And I think -- you're well aware that the backdrop of this is a lot of customers that have been expecting their other commercial vehicles from the traditional manufacturers have all of them put in a spot where they've had to delay their orders, not receive their orders and push those back also well into next year, some of them into the summer. So from a customer standpoint, this is consistent with what's going on in the industry. But our particular case, we've just slid them into the first quarter.

[Daniel Ives:]

Okay. And just final like follow-on. So just when we think about like a "pipeline" or just what you're seeing in terms of backlog and more and more orders like -- can you just compare qualitatively today versus, let's say, 3 months now that you've gotten through a different safety production, you're much more advanced than where you were especially 3 to 6 months, yes.

[James Taylor:]

Well, I think I'll start anecdotally that -- Dan, that by now from 3 or 4 months ago, we've had so many more pilot drives, test drives, demo drives, face-to-face with customers at the plant, in their locations, in various different use cases, as you know. And some of those, both also the Urban Delivery as well as the Urban Utility. So they're seeing our portfolio come at them as well. So we decided to just cut off, let's say, the preorders when we're sitting at that 45,000 number and focus on moving our preorders to final orders going through the bottom of the funnel and execution of these drives of demos and pilots. So I'd say anecdotally, the demand is overwhelming. I was just at Randy Marion this week with Ron at sales and their quotes are all in a category of look, just I'm going to sell everything you give me. Hurry up. So demand is as good as, I'd say, or better than we saw 6 months ago. But from an order standpoint, with the Marion Group already committing to 6,000 of our first 8,000 and then a firm purchase order of the first 1,000, we got our head down to just fulfill those and do conversions, let's say, from interest into full PRs. But we're not taking any new orders unless they're actual orders and POs.

[Operator:]

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

[Michael Shlisky:]

Can you give us like an overview of the types of customers that your dealer partners have marked down as the first takers of your vehicles? I mean you don't have to actually name names, but what kinds of folks are they, large fleet, small fleet, delivery, vocational? And how confident are you that those -- that the first 1,000 will turn into the next 5,000 by the end of February?

[James Taylor:]

Yes. So I think the actual customers said without putting in names, we can lead you to fill in the blanks pretty easily. But the most and biggest and obvious is the delivery companies, the package delivery companies. And I think as you're aware, Mike, a lot of that is in these private owners that have small fleets and are the individual service providers for the big package carrying companies. There's rental companies that you can, again, fill in the blank of the names that rent these box trucks and small vans at locations. There's a service industry seeing really strong interest from, say, telephone companies, service companies that come to your house to do installations and repairs in that kind of category. And of course, this is obvious, but the stated for the other listeners is where the range and the vehicle is less than sort of this 40 to 50 miles that we've talked about. We're seeing that reinforce that our range of 100, 110 is more than adequate for their usage is. There's medical delivery companies who -- large medical supply companies that have headquarters in a zone like the Southeast and deliver products, whether it's drugs or their individual supplies, to large hospital groups. We already mentioned, of course, with our Campus program, these university complexes where it isn't just one campus, can be part of 20 or 30 campuses inside their overall umbrella; cities, just to throw out city, Miami that want very aggressive goals; airport complexes that are trying to accommodate the transformation in the mobility world. So it's -- all of those are different industries that are taking us on. And just to reinforce it, I think the overall efforts that they're seeing out of Washington, the industry picking up volumes, of course, Tesla's success, all these things are contributing to the mindset of these fleet owners being more and more used to the idea that this is happening. It's only a matter of when and that they got to get on with the program and get moving quickly and adopt these. On the other hand, there's a lot of education to be done with these owners. As we go to the fleets and do our demos for many of them, of course, it's the first time they've been in an electric vehicle, So bringing them to the charging solutions, bringing them the telematics solutions and bringing them our vehicles is all part of the final conversion to a sale.

[Michael Shlisky:]

Got it. Then kind of moving on, a quick question about your operating costs or operating expenses, the R&D and SG&A. Is the run rate that we saw this quarter relatively a solid run rate going forward or whether there any unusual, especially on the R&D side, onetime testing costs and can get things finalized here?

[Robert Song:]

Mike, this is Rob here. So the run rate that we should expect going forward is going to be lower than what you saw this quarter. And that's because, as you know, we are going through the development process of homologating and certifying the vehicle for on-road use. So going forward, a lot of the testing costs, engineering costs and prototype costs will not be in our financial statements.

[Michael Shlisky:]

Okay. Maybe one last one from me on the supply chain challenges that you're seeing. Can you give us a little bit more detail on that? Is it that you could get the chassis or the components from China but don't want to pay the freight? It just doesn't make the sense from standpoint? Or is it just challenging to find those or any other components that are sent in Indiana? Like what are some of the details behind why you're seeing these challenges here?

[James Taylor:]

I think it's -- to put that more in the category of -- the one that you mentioned is more availability of containers and getting the parts here rather than the costs, even with the elevated costs were down to single-digit margins. So we're not losing money or negative cash flow. We're not paying money to produce those vehicles. But in reality, it's just the difficulty of them securing containers, us securing boats and then getting them across to our plants. And this is just one supplier. If you take that across our entire supply base and see that we have to solve that equation not just once or twice but through all of that supply community, that's the challenge we run into.

[Operator:]

Our next question is from Greg Lewis with BTIG.

[Gregory Lewis:]

Congratulations. I mean it's been impressive what you guys have been able to do in a short term -- short time. I did want to talk a little bit more about how we should be thinking about your ASPs going forward. I mean you guys have done a lot over the last few quarters but a lot has changed in the market over the last few quarters, right? Inflation is becoming a household name. You touched on supply chain, steel prices. Is there any way to think about maybe like a melt-up in your ASPs in '22 and into '23?

[James Taylor:]

Yes. Well, it's, I guess, a few moving parts. At the high level, Greg, you could say, look, we've got nobody -- no other competition in the segment and appears to be demand way in excess of supply. And then if you switch over to the other traditional suppliers, they're very short. And just to throw more gas on the fire, we've got Nissan backing out of the market, leaving a big void. So all that traditional logic would say that there's plenty of upside pricing opportunities. So as we're finalizing the contracts with the current conversions of these early customers, one, we don't want to be too greedy. We would still want to stick to our principles of making it for the fleets, total cost of ownership savings, 35%, but also landing kind of on the traditional ICE vehicles after incentives. So assuming that these bills go through and some of those incentives get increased, that's certainly going to give us upside pricing opportunity to still land at par with a gas vehicle. And also, just from pure supply and demand, we've been testing that water. We put a couple of thousand more on our first shipments of these first 1,000 vehicles, so far had no pushback. So yes, we are testing the waters. We just don't want to, again, get too crazy here and push for too much upside and push ourselves out where when the fleet owners do the math, that we're out of whack on the TCL.

[Gregory Lewis:]

Understood. That's good to hear. And then, I mean clearly, it looks like you guys really hit a sweet spot here with the Class 1 delivery van. As we think about the utility vehicle the company is planning to roll out, I guess, late next year, early 2020 for a -- is there -- is the company kind of expecting a similar dynamic? Or is that space maybe a little bit more crowded? I'm kind of curious on your thoughts about that.

[James Taylor:]

Yes. Well, if you look at -- first, just to make a minor correction. We're not putting out an exact date yet, but we had said second half of '22. And as I said in my comments, we -- now based on these early exposures we've had when we announced the vehicle and then have gone around with the early test drives, we have a lot of pressure from the customers and large fleets to move that Urban Utility as early as possible because they'd like to get their hands also on that. So it will definitely be in 2022, not '23, as you mentioned. But as it regards to that vehicle, if you see the configuration, Greg, if you go online and look at it, it's kind of a unique configuration, so-called low cab forward. And that -- there is no other announcements. Again, just like the Class 1 of vehicles coming similar to that, you've got Ford and GM coming out with BrightDrop and e-transit that are talking about moving kind of up into that space as they do today with their cab chassis but with significantly large engines and then dual wheels and axles and things like that to try to get into the Class 3 and 4 space. So right now, again, I didn't say we will be the only one to be that definitive. But from what we can see so far, there's no like-to-like products that are coming in, in that segment. We've got potentially arrival too coming down from that Class 3 space. But most of what we've seen is more the vans and walk-in vans as opposed to, say, box trucks like you'd see with U-Haul, a Ryder or Penske in these kinds of users. So again, I'm not going to go as far as saying there's nobody, but in the specific application we're looking at, I think we're still going to be one of the few, if not the only one in that segment.

[Operator:]

Our next question is from Jeff Osborne with Cowen and Company.

[Jeffrey Osborne:]

A couple of questions. I was wondering if we could walk through what's left on the homologation process to hit that for December. What have you done so far? And what still needs to be paying down?

[James Taylor:]

Yes. Thanks, Jeff. Well, as you can tell, it's November and December is not that far away. So we've got a pretty good line of sight. And as we've gone through before, this is a series of engineering tests that we go through, of course, to verify that we're meeting FMBS standards. And so some of those are done virtually in the mat tools. Some of them -- a lot of them have already been completed in -- off of prototype tools. The last step we have is what we really call verification testing. We've seen them already pass the tests. Those have already happened. And -- but now we just have to make sure that those are, call it, repeated or verified or confirmed off production tools, production parts in the same configuration. So we're highly confident these are going to pass because we've already seen them pass once. They just have to pass off this last generation of parts that are coming from our semi line. So those are the tests that we have lined up in the first couple of weeks of December. And as those progressively pass, then we'll be in a fully, fully certified situation to ship in December.

[Jeffrey Osborne:]

Got it. That's great to hear. And just maybe for yourself or Rob, as it relates to the 300 to 500 deliveries for the quarter, will those all, I assume, be the unhomologated? And so should we think about the average price that you had this quarter being $27,000 or so being consistent in Q4 and then back to more normalized levels for 2020 -- or 2022?

[Robert Song:]

Jeff, this is Rob here. The 300 to 500 production of vehicles that we've indicated for 2021, it's actually going to be a mix of EV Campus vehicles as well as the fully homologated vehicles. So the price assumption should be a blended of $27,000 and $34,500 that we have for the on-road vehicles.

[Jeffrey Osborne:]

Got it. And then my last question is just, I think you folks had a social media post on the 5th of November that had an aerial shot of your lot that had quite a few vans out there. Can you just give us any sense of what you've seen in October and November in terms of like weekly build rates? There wasn't a lot on the call as it relates to sort of the staffing and throughput levels. There was a lot of issues around inputs and costs and whatnot, but anything as to the staff and the job that they're doing would be helpful to understand.

[James Taylor:]

Yes. I think it's probably easier just to come into the current tents, Jeff, to say that our build rate next week will be about 40. So that aerial shot you had, it was a large piece of the around 100 that we got in play or on the way out the door. And -- but right now, we've got a sufficient team. It's about 45, 50 people that are in place to be able to build our current rate of about 40 a week. Going into the end of the year, we'll ramp that workforce up to just a little bit less than 100 by the time we hit Christmas, New Year's, 100 people.

[Operator:]

And we have a question from Chirag Patel with Jefferies.

[Chirag Patel:]

If we could just go back to the Urban Utility vehicle. I just kind of wanted to get a sense for some of the milestones that we should be on the lookout for, whether it be testing phases, supply agreements, exact nature as we look into next year.

[James Taylor:]

Sure. Well, just at this stage, the requirements, let's say, milestones, as you called it, are quite a bit different than they were for the Urban Delivery, given it's a Class 3 vehicle. The safety requirements, FMVS, all of that is much less than it is for the Class 1s and 2s. So we have a less cost, less timing and less complexity for us to go through the different hurdles and milestones to hit the start of production. We still have to do some of the retooling, some similarities, for instance. Just one example will be the headlamps where you have to have headlamps that are compliant with the U.S. regulations. That has nothing to do with crash. But as far as airbags, seatbelts and things like that, it's a very different approval process. So we have similar gates, locking up our battery supply with incremental volume. We have the early tooling changes that make us U.S.-compliant on some things that we've all kicked off. This has started months ago. And then it really just be the plant trials that all plants go through and then final certification. So pretty, I'd say, generic or a normal process. The highlight is much shorter and much lower cost than it was for the Urban Delivery.

[Chirag Patel:]

All right. I appreciate that. And then the only other thing I had look at was just the idea of the freight and logistics costs, just trying to get one more handle on that for a second. Is the idea of locking in some of that for 2022. What should we kind of be projecting as far as thoughts on how that's going to impact the margins from what we had talked about as we went through the process of the original launch, the idea of double-digit margins. It's going to be a longer-term playbook? Is that something that we are thinking of high single digits in the near term? And then eventually, as we kind of progress into a more normalized area to achieve those double digits? Or is it maybe even sooner than that?

[Robert Song:]

Yes. It's Rob here. So regarding freight costs, if you think about what the current spot rate is, about $25,000 and what contract prices typically are, which is about 60% of spot rate, assuming we can achieve that type of a discount going forward in 2022, that will equate to about $10,000 per container, lower than what we're currently paying. So that equates to -- if we only -- if we only are able to put 2 vehicles in a container, that's about a $5,000 savings per vehicle. So if you apply that to the $34,000 MSRP, you're probably generating 15% -- up to 15% gross margin on our products. And we expect to be able to get within that range by the second half of 2022, assuming we are able to lock in contracts at that rate.

[Operator:]

And that concludes the questions. Today's call has concluded. We thank you for your participation and ask that you please disconnect your lines.