Workhorse Group Inc.
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Ladies and gentlemen, greetings and welcome to Workhorse Group's First Quarter 2019 Investor Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host Workhorse, Chief Operating Officer, Mr. Rob Willison. Thank you, Mr. Willison. You may begin.

[Rob Willison:]

Thank you, operator and good morning everyone. We appreciate you for taking the time to join us for our call. Before the market opened, we issued a press release and filed our Form 10-Q with our results for the first quarter ended March 31, 2019. Copies of both documents are available in the Investor Relations section of our website. In a few moments, I'm going to turn the call over to our CFO, Paul Gaitan who will walk us through our financial results for the quarter. After that our CEO, Duane Hughes will come on the line and provide an update on our business, as well as provide an outlook for the remainder of the year.

[Paul Gaitan:]

Thanks, Rob. And thank you to all who are joining us today for the call. This morning, we issued a press release as well as filed our Form 10-Q with the SEC, both of which discuss in detail, the results of our operations from the quarter. I recommend going through those materials to get more color on some of the information being discussed today. And now to our financial results for the first quarter. Sales for the first quarter of 2019 were $364,000 which was down from $560,000 recorded in the first quarter of 2018. The decrease in sales was primarily due to a decrease in the volume of trucks delivered. At this point in time, I want to stress that, we believe year-over-year comparisons should not be considered as meaningful representations of the current capacity of our business, or potential interest in our vehicles. Selling, general and administrative expenses in the first quarter of 2019 decreased 12% to $2.1 million from $2.4 million in the first quarter of 2018. The decrease related primarily to lower spending in areas such as marketing and employee-related costs, partially offset by an increase in stock compensation expense. Research and development expenses in the first quarter of 2019 decreased 42% to $1.4 million, from $2.3 million in the first quarter of 2018. The decrease in research and development expenses was due primarily to lower prototype expenses related to the U.S. Postal Service, Next Generation Delivery Vehicle or NGDV and SureFly. Total operating expenses in Q1 2019 decreased 27% to $3.5 million from $4.7 million in the same period last year. The decrease in total operating expenses was due to the lower SG&A and R&D spend previously mentioned. Net loss in the first quarter was $6.3 million compared with a net loss of $6.4 million in the first quarter of 2018. The improvement in net loss, was due primarily to the significant reduction in operating expenses previously mentioned, partially offset by an increase in interest expense, due to higher levels of debt, compared to the prior period.

[Duane Hughes:]

Thanks Paul and welcome everyone. We do appreciate you joining us on our call this morning. Generally speaking, the first quarter was another solid data point of progress for Workhorse in our shift from a development-oriented organization to a high-tech production-focused EV company concentrated on finalizing the engineering of the N-GEN and delivering on our orders with our blue-chip customers. For today, my remarks will not be as extensive as they were on our year end call in March. Given that so little time has passed since the end of year call, I'll be limiting my comments to updates on our most recent partnerships. I'll then hand the call over to Rob Willison to give a brief update on the progress with our last-mile delivery next-generation vehicle platform, and we'll then conclude the call with our question-and-answer period. To begin, I will discuss our recently announced alliance with Duke Energy. Duke is one of the largest utilities in the United States and has demonstrated confidence in Workhorse and our go-forward strategy. The alliance is a first-of-its-kind industry-leading transaction for many important reasons. To effectively describe and understand the transaction, my approach is to explain the benefits that the alliance creates. Among the most important benefits of the alliance to Workhorse is how the alliance supports our ability to deploy electric vehicles at scale. Building EVs by the thousands rather than the hundreds gives Workhorse the opportunity to achieve profitability. Workhorse benefits from this alliance by being part of Duke's larger strategy to overcome the most significant obstacles presented by fleets when purchasing EVs in significant quantities. The three most obvious challenges to having fleets adopt e-vehicles -- EVs at scale include; infrastructure needed to support the EVs, the EV's acquisition price, and the battery end-of-life disposition requirements or secondary use options.

[Rob Willison:]

Thanks, Duane. I will address our newest platform the NGEN. Current step vans have evolved from 1930s medium duty trucks. They've been body on frame with square size and flat windshields. The floor heights are tall, requiring a delivery driver to take several steps up and down to enter and exit the truck. And, of course, carrying packages puts further stress on the driver's body. The weight of the vehicle approaches 20,000 pounds for 1,000 cubic foot van. And like any vehicle that weight must be propelled down the road, uphills and through the air stream. This weight affects mileage, which in turn affects fuel and operating costs. Though the word is often overused what was needed was a revolutionary change versus an evolutionary change of electrifying a current weighty metal vehicle. The solution is the NGEN family of trucks. Initial configurations will support a variety of cargo sizes. These are all composite vehicles that are lighter with a flat floor; a mere 20 inches from the ground are more aerodynamic and have longer lives than their metal counterparts. It has better site lines than current step vans and because of its construction is inherently safer for the driver. Additionally it can be equipped with a suite of safety items including lane departure warning, pedestrian detection, 360-degree camera and reverse obstacle detection. Several low-cost features will improve the value to the customer. Body panels will be gel coated enabling a robust protective coating for the external body parts. Sacrificial rub rails will be easily replaceable for low-speed scrapes. Bumpers will be spring steel. These design details will reduce traditional costly repairs. The battery pack is actively cooled and heated with a modular approach enabling various range options. We shared this design with our strategic customers including UPS, DHL and others. Drivetrain development mules are currently being tested, followed by additional testing mules. Production-intent mules will allow for the refinement of fit and finish, NBH, assembly techniques and final driver ergonomics. We are on schedule for late fall beginning of production. I will now turn it back to Duane.

[Duane Hughes:]

Thanks, Rob. Of course we will provide more definitive time lines and delivery schedules as the process continues to develop throughout the course of the next several months. We look forward to updating you on our progress in all of these areas as we further our mission of changing the way the world works. We're now ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

Thank you. We’ll now be conducting a question-and-answer session. Our first question today is coming from Jeff Osborne from Cowen & Co. Your line is now live.

[Jeff Osborne:]

Excellent. Good morning. Thanks for the update. Just a couple questions on my end. Can -- how do we think about the Duke -- so two-part question I guess on the Duke arrangement. One is just the modeling of that. Are you going to be recording the revenue on the full truck plus the battery price? Or is there two payments that UPS for example would be making? One is for the upfront purchase and then an ongoing lease that you're not affiliated with. It was just unclear, how we should think about the unit price of the trucks you're delivering to UPS as part of that arrangement?

[Paul Gaitan:]

Thank you, Jeff. This is Paul Gaitan, the CFO. Yes, it would be from the Workhorse perspective a straight full sale, so Duke acting as the lessor. And so the asset completely goes off of our books and it would be just like its getting sold to UPS. Duke then takes that role as a lessor and manages the longer-term cash inflows.

[Jeff Osborne:]

Got it. Okay. That certainly helps as that plays out. Can you talk about how the Marathon financing coupled with the Duke arrangement like when do you expect the first distribution center to be upgraded with that program?

[Duane Hughes:]

This is Duane, Jeff. Again like Paul said, thanks for asking the questions and participating today. Yes I do -- and again I'm speaking on behalf of our clients like UPS. I'll be very guarded here, but it's my understanding that this month there is a kickoff meeting somewhere in Florida. I'm not specific to the location if you will, but there will be a kickoff meeting to initiate the depot-wide electrification for that particular facility. That will include of course the opportunity for all the packaged cars and beyond.

[Paul Gaitan:]

And then Jeff I'll answer the other part of your question about the Marathon credit facility. It's really kind of unique and it works in our favor. So when we present confirmed purchase orders from customers like UPS, we are able to draw on the full price of the vehicle. So in essence, we're getting paid for the profit, the operating expenses, labor overhead, not just material as it would be in a conventional vendor PO financing arrangement.

[Jeff Osborne:]

Got it. No that's helpful. And then just going back to the warranty issue in the fourth quarter, has there been any change in scope of what you're doing in Ohio as it relates to assembly of battery packs? Is that something that you either have started outsourcing? Or are you doing that yourself and change procedures? Or was it actually not a pack assembly issue and something at the cell level? It's just unclear to me following the last call where the actual root cause was of the problem.

[Duane Hughes:]

Jeff, this is Duane and I may throw it over to Rob because he can speak to the details of it, but yes there's a couple things happening. We have made changes to not only the manufacturing and assembly process, but also to the suppliers of the raw materials that ultimately make up our final pack. We started on that process even before the fourth quarter, just from the normal reasons of always looking for ways to engineer out costs associated to total truck production. But to your point as the warranty issue popped its head, a lot of the changes we were making we -- I'll say expedited. So that as we were continuing to fix the existing trucks, we also have built a brand-new if you will design and engineer a new battery pack strategy going forward for the N-GEN program and beyond. And we have a lot of confidence in terms of improving the -- not just the performance, but the ability to not see these types of issues recur. Does that make sense?

[Jeff Osborne:]

Certainly does. That's helpful. And then is there any more granularity, you can provide just about the sort of second half of the year? I'd assume based on what was stated before around still testing and validation that the second quarter results will likely be fairly similar to the first quarter especially given that Duke is still being specked out if you will. But as you think about the third and the fourth quarter, how do we think about the trajectory of you delivering against the backlog that you have with some of your key partners?

[Duane Hughes:]

Okay. Good question and appreciated. We're looking at actually initiating full production in Q4. Of course, we have our Marathon covenants and so on that also, I'll say give us a particular level of discipline, to make sure that we get there. The way, we're marking our path forward is we do have a couple of vehicles that are in testing today. We expect two more vehicles somewhere around the end of summer that will continue through testing and regulatory, so that we are prepared for full production mode going into the fourth quarter. And by the end of the fourth quarter, we will be ramped up to where we can maintain a consistent flow of deliveries on a routine basis throughout 2020 and beyond.

[Jeff Osborne:]

Got it. And then the last question, I had just in light of the Q4 ramp. Should we think about the OpEx level in Q2 and Q3 being similar to what we just saw? Or is there more room to run in terms of reducing that now that some of the prototyping has been finished as well as it sounds like HorseFly has been scaled back maybe?

[Paul Gaitan:]

Yeah. This is Paul Gaitan,

[Jeff Osborne:]

…or SureFly – I'm sorry. Yeah, go ahead.

[Paul Gaitan:]

No problem. Yes we expect in general the operating expense to be pretty flat. The one notable exception will be for the certification and testing of the vehicle. Other than that we do not expect any significant change in personnel or SG&A for example. Really just certification related to the vehicle.

[Duane Hughes:]

But as you alluded to earlier you talked a little bit about SureFly. We do anticipate finding the partner in SureFly so that we are looking at a reduction and – small relative to the overall scheme but a reduction.

[Paul Gaitan:]

Correct, that will help on our burn rate probably about 15% improvement there.

[Jeff Osborne:]

Got it. That's all I had. Thank you.

[Duane Hughes:]

Thank you, Jeff.

[Operator:]

Thank you. Our next question is coming from Michael Brcic from National Securities. You line is now live.

[Michael Brcic:]

Hi. I just want to go into the rollout of the N-GEN let's say with UPS or whatever what their plans are. You talked about the electrification of the facility. How do I – I assume they're going to roll that out one facility at a time. And what percentage of the vehicles at their facility is supposed to be EVs as opposed to traditional? Do you have any color on that?

[Duane Hughes:]

Not a ton of color. What I would say is historically at least with Workhorse and our rollout of vehicles with those types of fleets, they typically spread them across many different depots for multiple reasons. One is to allow the adoption of these vehicles to be accepted by a wider group of their fleet managers and drivers across the country. Of course, when you're a fleet with this size where you have vehicles in every city and every state you want those guys to get familiar with, begin the training process, and use the vehicles that are in place to start training many different drivers. Okay? There's also the ergonomics and other issues associated to that. So commonly on any given order the fleet customer will have identified the number of depots or locations that they plan to deliver them to based on x-number per location again to accommodate all those things we just talked about. Given that, we're looking at if you will depot-wide electrification, that's more in my mind a long-term support goal of saying each time a fleet introduces electric vehicles into their depot they typically are limited to the number of vehicles they can put in any given depot, because the electrification needs aren't in place to support depot-wide electrification. I would say that the indication here is that as electrification becomes more prominent and more a reality, now they're looking into how do we prepare for our future where the vast majority if not all of the vehicles in the depot will be electrified even if we spread it across many depots across the country as we populate them. Makes sense?

[Michael Brcic:]

Yes. Now I read recently Amazon got some news about them using drones, et cetera. How does that impact you guys if at all?

[Duane Hughes:]

That's a good question also Michael. I would say in general drones over the last few years have been seen in some ways as a little bit of a science project and other ways as how in the world does all of this drone technology going to come together and work. Anyone who is demonstrating any type of performance or proof-of-performance in the drone world is similar to how we approach demonstrating proof-of-performance in our truck world, right? We differentiate our drone technology by being integrated with a delivery truck because on any given day, you have all kinds of interferences, I'll call them with the possibility of delivering drive by drone. So for example, UPS is out on the road every day making package deliveries. If they were to go dependent upon drones to get that done and there is a bad storm where you can't fly that day, they still need the ability to deliver those packages. So our approach to the drone side of the technology integrated with the vehicle platform is to, if you will supplement what the driver is doing today not replace that driver, but ultimately provide stronger economics so that our fleet customer can be more effective in their mission. The other thing I would talk about is something to this effect is how I would phrase it as you can imagine the number of gas and diesel vehicles that are going up and down our city streets every day, delivering packages to our houses with kids riding around on their bikes and big wheels and so on. So if we can help by using drone technology to I'll say reduce the number of trucks or the number of miles those trucks are driving, we're actually offering a safer alternative as to this polluting vehicle driving up and down the streets at the risk of harm I'll say. Ultimately, we view that Horsefly-integrated drone technology and the patent we have with our trucks as an advantage to us to helping us sell more trucks. It's not as much about just the drone technology and trying to sell drones for package delivery, as it is to support our core truck business.

[Michael Brcic:]

Right. Have you -- I've seen in the video and it's impressive, et cetera. But have you done the studies of do the drones on your trucks actually make a typical delivery more efficient? Or does it just take more time than a traditional delivery?

[Duane Hughes:]

That's a great question. And here's what I would tell you is we've done a lot of real-life analysis along with third-party people involved in the analysis where we have done -- for example, most recently we did a delivery program over a three-month period with the City of Loveland Ohio and the FAA where we were delivering as many as five packages a day, every day to gather the data and the analytics that you're talking about in terms of understanding what the model is. In our world, again the idea here is to help reduce the number of miles we're dragging a 20,000-pound truck around to do delivery. So to -- part of your question, let me give you this. A gasoline vehicle today is basically -- between fuel and maintenance alone costs about $1 per mile, again in fuel and maintenance to do a delivery. A electric truck that we deliver is in that $0.40 or just below $0.40 range and going further down with the N-GEN platform. And the drone technology, because it's leaving a truck doing a short distance, something less than two or three miles and back to the truck, we're able to perform that at less than $0.04 per mile. So financially or economically speaking, the drone is a much more economically -- is a better economic vehicle for that delivery process. But again, ultimately, the idea here is to supplement what the driver is doing not necessarily replace that driver to allow for ultimately more efficient deliveries overall.

[Michael Brcic:]

Got it. Finally, with the drones do you need FAA licensing? And does it cover a certain region? Do you have to -- I assume you don't have to file to be an airline. But how does that work with the FAA and the amount of drones entering the sky?

[Duane Hughes:]

Great question. So I would tell you that first is yes, you have to have regulatory approvals much like you do in the automotive or the truck world to put vehicles in the air and fly. Those rules were originally introduced -- I think it was either late 2016 or 2017, when the FAA first made the use of drones for commercial purposes actually legal in the U.S.. Prior to that, any enthusiast could get a drone under their tree Christmas tree go out and fly it under certain rules, but who was dictating what those rules were and making sure those rules were followed for example flying a drone above 400 feet? Following that, the FAA, they -- then they created a set of rules which included line of sight, not flying over people and no fly zones and so on, which then made the use of drones for commercial purposes legal in the U.S. We -- again by, that program I talked about where we delivered every day for a three-month period with the FAA and with the City of Loveland, we continue to go through the appropriate processes to make sure that we are FAA-compliant with the way we go about our drone deliveries. We handle that -- we are I'll say we are differentiated by leaving a truck to do a delivery where we can stay within line of sight and things such as that to I'll say make the FAA comfortable that we have a safe and effective approach to the use of drones. You can imagine and I think you mentioned becoming an airline it was in the news recently that Google actually received their --I'm going to call it their airline worthiness -- airworthiness to fly their drones for delivery purposes. Because you can imagine they may be leaving a single warehouse location perhaps flying as many as 20, 30, 40 miles and having to return to that location to do another delivery. So our differentiator here by having the patent for truck-launched integrated drones gives us the ability to achieve some of the FAA regulatory or overcome some of the FAA regulatory challenges that you would otherwise have if you were leaving a warehouse.

[Michael Brcic:]

Got it. Thank you very much.

[Duane Hughes:]

Thank you, Michael.

[Operator:]

Thank you. 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 [e-mail]. I'd now like to turn the call back to Mr. Hughes for his closing remarks.

[Duane Hughes:]

Thank you, Kevin. We really appreciate you guys participating in our call today. The number of questions the valid questions that you asked and we look forward to giving you further updates in the future. And I especially want to thank our employees, our partners and investors for their continued support and look forward to our next call. And any questions in the meantime feel free to reach out to the company. Thank you very much.

[Operator:]

Thank you for joining us today for Workhorse Group's First Quarter 2019 Earnings Conference Call. You may now disconnect.