Workhorse Group Inc.
Q4 2019 Earnings Call Transcript

Published: 10 Mar 2020

[Operator:]

Ladies and gentlemen, greetings and welcome to Workhorse Group's Fourth Quarter and Full Year 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, Dr. Rob Willison. Thank you. Dr. Willison, you may begin.

[Robert 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 with our full year results for the period ended December 31, 2019. I want to talk about the progress of our award-winning C Series. We have achieved four certifications and milestones as they relate to our Q1 production activities. I will elaborate.

[Steve Schrader:]

Thanks, Rob, and thank you to everyone joining us for today's call. Before I begin, I just want to say that I'm excited to be part of Workhorse which is clearly at the forefront of commercial electric delivery vehicle space. I've only been on the team for a few months now, I'm incredibly encouraged and excited by the work and the progress we're making against our long-term goals. Going forward my intention is to play an increasingly integral role in helping the company meet it's manufacturing and financial goals. As many of you have been following Workhorse are aware, we are in the final stages of transitioning from our first-generation vehicles to our next new generation vehicles, which are now known as the C Series, the absence of significant revenue is primarily due to our migration to this new platform. Just a minute, Duane will be able to provide the latest update with respect to our production efforts. First, I'll now discuss our financial results for the fourth quarter and full year ended December 31, 2019. Sales for the fourth quarter of 2019 were recorded at $3,000 which was down from $21,000 in the fourth quarter of 2018. For the full year, sales were 377,000 compared to 763,000 in 2018. Decrease in sales for both, the quarter and the year, was wholly due to a decrease in the volume of trucks delivered and the focus on the engineering and design of our C Series vehicles. Cost of goods sold decreased $2.1 million from $11.1 million in the fourth quarter of 2018. The decrease was driven by warranty expense and inventory write-downs in the previous year's quarter. The full year cost of goods sold were $5.5 million compared to $15.9 million in 2018, for the same reason as noted in the fourth quarter.

[Duane Hughes:]

Well done, Steve, and welcome, everyone. We appreciate you joining us on our call this morning. Before I jump into our 2019 discussion, I want to first address the most recent change in our management team. As you just heard from Steve Schrader, he is our CFO, having joined the company in December 2019. And comes to us with many years of experience in CFO positions, perhaps his most significant experience was as CFO of Duke Energy's regulated business with Synergy, which was acquired by Duke Energy in 2006. We are excited to have Steve join the Workhorse management team and fully appreciate his knowledge and experience helping to continue Workhorse's growth. Welcome aboard, Steve. Reflecting on 2019; it was quite a year with a very specific set of goals to be met. As some of you may recall, I took the reins as CEO officially on February 4 and quickly announced Rob Willison as our Chief Operating Officer. Rob and I together spelled out our plan for the remainder of 2019 beyond the all-important vehicle specific engineering and production priorities, we also recognized the need to implement stocks controls, eliminating our previously reported material weakness. As Steve mentioned earlier, our accounting team led the charge and together, we all spent a significant amount of time and energy designing and executing appropriate controls, enabling us to remedy the material weakness previously identified. To reiterate, in February of 2019, we began the transition from an entrepreneurial development stage company to a highly focused production-oriented company. As such, we identified our to-do list designed to help us better manage a smaller portfolio of innovative products and to focus on creating and manufacturing the vehicles our customers have ordered. Our focus was set squarely on our commercial vehicle business, specifically in the last mile delivery segment with our engine platform, now known as the C Series electric delivery vans. As I said then and reiterate today, designing and building electric vehicles is a complex and challenging business. To compete in this space requires meaningful capital, strong partnerships, proven performance and a healthy dose of sticktuitiveness .

[Operator:]

Thank you. Ladies and gentlemen, we will now be conducting the question-and-answer session. Our first question comes from the line of Greg Lewis with BTIG. Please proceed with your question.

[Greg Lewis:]

Yes, thank you and good morning everybody and congratulations on a busy few months. I guess Rob or Duane, you mentioned in the prepared remarks about the last standard that needs to be met in March before you can kind of start ramping up production. Just kind of curious, how we should think about that? Is that going to be impacted by travel bans or anything or is that any kind of color you could give around that I think would be helpful just as this seems like the last piece of the puzzle.

[Robert Willison:]

Sure, this is Rob Willison. The last -- excuse me, the last test that we're doing is a seatbelt pull test validation. It's being conducted currently in Indiana, will be completed at the end of this month or by the end of this month. There was some logistics to getting the vehicle out there but we don't anticipate any issues with it but that is the last of the FMBSS test.

[Greg Lewis:]

Okay, perfect. And then, Duane, you mentioned the two trucks a day up to 5 to 10, and thanks for the guidance of 300 to 400 units this year. I guess what I would be wondering is what do you see as potential hurdles, if any to sort of -- kind of hit that guidance range?

[Duane Hughes:]

Yes. Like any other type of hurdles in this business from a supply chain perspective, making sure that we have all of our suppliers in alignment with the actual number of units that they need to have in there few, and in their scheduled to deliver us timely. We are effectively trying to do as much as possible as we can, again, to conserve capital and so on with; I'll call it just in time parts and so on. So we don't have a backlog if you will or a shelf full of parts that we can pull-off to build trucks; so we're really dependent on working very closely with our supply chain to have a continual flow of parts coming into meet the number of units that we plan to deliver going forward.

[Greg Lewis:]

Okay, great. And then, just a follow-up -- just to piggyback on that; you kind of mentioned the two trucks a day. I guess, thinking about it a little differently, what type of run rate do you think maybe we could see in the fourth quarter in terms of units per month? Like, how should I be thinking about that just as I think about what maybe 2021 could look like? What that exit rate in 2020 will look like?

[Steve Schrader:]

Greg, this is Steve Schrader. I think the way I would frame it is to some extent is, when you talk about the capacity you're talking more about what we have the ability to do at the plant from an assembly standpoint, that's not really the issue. I think it's more thinking about any kind of production, somebody going from R&D or equipment and putting installing equipment going to mass production. And it certainly is -- you have to kind of ramp it up slowly; so I think you expect the -- the first quarter and the second quarter will be a lot smaller quantities and will be back loaded towards the fourth quarter in the 300 to 400. And then, thinking about steady state; I think what we see from a standpoint to and -- is we have basically -- we think 200 a month, it will be kind of steady state production, that kind of gets us to gross margins that you would expect an OEM to have and also profitable state.

[Greg Lewis:]

Okay, great. Perfect. And then, just one more from me on the LMC timeline. I guess you received the $12 million net income this quarter. I guess as we think about the rollout of that truck; I mean, how -- any kind of guidance you can give around other potential income maybe this year? How you're thinking about additional cash being monetized from those licensing fees?

[Steve Schrader:]

Yes, Greg, again, it's Steve. I think LMC being a private company part of the investment and the value comes from when they actually raise more money, as well as some of the fees that we get. So, I think we don't anticipate in 2020 that we'll receive any kind of fees for the most part, unless they have a big capital raise which will get 1% of that. So, but -- and it's all dependent on when they actually sell the truck too, so some of these other fees going forward from a cash standpoint. And the investment obviously changes when they raise more money at different values.

[Greg Lewis:]

All right, thank you very much of time.

[Operator:]

Thank you. Our next question comes from Jeff Osborne with Cowen. Please proceed with your question.

[Jeff Osborne:]

Yes, thanks guys. I appreciate all the detail on the call. Just a couple of quick ones on my end. Steve, can you talk about what the volumes would need to be per quarter to get to gross margin positive? I'm just trying to triangulate the two OE capacity to 200 a month being the ultimate destination. What sort of bridges the gap to get to breakeven gross margins, is that possible with the guidance that you just gave for the fourth quarter run rate, for example?

[Robert Willison:]

It wouldn't be in the fourth quarter. Most likely, I think we have to get to the 200 a month or 600 a quarter to get kind of the gross margins that you expect a breakeven kind of profitable situation.

[Jeff Osborne:]

That's gross margin breakeven, not net income breakeven. I wasn't sure which breakeven?

[Robert Willison:]

No, that's the gross margin. That's actually -- our target is 15% to 20% gross margin, very similar to other OEMs, so it's more be at 15%, 20% gross margin rate. And then, that will make us profitable too at that 200 a month kind of rate -- 600 a quarter.

[Jeff Osborne:]

Got it. So I was trying to get to, what -- do you have any sense of what the volume will need to be to be a gross margin of zero?

[Robert Willison:]

I think when you look at -- again, I think this year is kind of where most companies when they go from -- again, R&D or building capital and going for mass production, what you're trying to do is get to that gross margin positive. We think at a 100 a month, we think we're pretty close to gross margin positive.

[Jeff Osborne:]

Okay, that's helpful. And then, can you just give us a sense of that -- you mentioned a credit facility that you were pursuing; two part question around that. One, can you give us a sense of scope in potential rates on that? And then, also any sense of what the CapEx needs are of the company to move from 2 to 5 to 10 per week? It sounds like there is some costs involved, so I didn't know what the CapEx budget was for the guidance that you just provided.

[Robert Willison:]

I think what Duane said on the CapEx budget is, it's only above 10 that we actually would need CapEx. So I think from that standpoint, we don't need to really any additional CapEx this year, regarding that the assembly plant. From a standpoint of the capital that we're looking for and the facility we're looking for, probably be in the range of $40 million facility, a credit revolver. I'm not sure that we would need all that initially, obviously, but that's kind of the range. Interest rates, obviously, we're still talking to parties and we'll figure out kind of where that -- where that will be at.

[Jeff Osborne:]

Got it. And then is there any sense -- sort of three different interrelated topics here, but can you give us a sense of the UPS order book where that stands? Where the Duke relationship -- is that going to be -- I assume UPS is the initial customer receiving the deliveries; will that be using the Duke facility or not? Anything you can share about the order book more broadly post the show last week as well, would be helpful.

[Duane Hughes:]

Yes. This is. Duane, and I appreciate the question, Jeff. Yes, so as you know, UPS being our customer of record for the last several years, they have 1,060 units on order that we are beginning to deliver in anticipation in late Q2 or Q3 this year, followed by a couple of other customers with some simultaneous deliveries that include DHL, Ryder and anticipating additional customers that we are expecting to close in short order, not just from the NTA show but other work that we've been doing, leading up to this point of production. So we have clearly a number of prospects in the queue that we think we can flip to closed orders pretty quickly. With that said, to your question about -- I guess timelines, again, this all goes towards building out to that 100 to 200 units a month where we have a consistent run rate going into 2021 so that we can reach those gross margin positive numbers as well as maintain and increase the run rate from month to month. But UPS is clearly still, an all important customer to us because they have the highest volume currently, and we expect that they will continue to be excited by the trucks that we're delivering. The feedback we've received from them from the early pilot reviews has gone quite well and given us good constructive feedback for how we can configure these vehicles with additional options that all net-net involved, collision mitigation type features, as well as configurable battery packs; the different things that we've designed, the truck to be able to do so that we can offer them trucks in a more configurable and dynamic mode, so they even -- they fit better on each individual route based on the duty cycle for that route.

[Jeff Osborne:]

Makes sense. And then, the Duke part of the question. Duane, are you going to be using their involvement that you had press release maybe six to nine months ago at all or no?

[Duane Hughes:]

Yes, I think the Duke partnership is very helpful from a standpoint of customers and they may want to have a battery leasing as an option, and also from a standpoint of the infrastructure. So, we're currently -- we're working with customers right now, they're dealing with their infrastructure and waiting for delivery of trucks from that standpoint with Duke. So that is another important relationship we have.

[Robert Willison:]

It's interesting, Jeff, and I'll elaborate a little bit, is that we as part of the process. We're introducing our customers to Duke, if you will, from the perspective of building out, infrastructure battery leasing and so on. So it's a direct relationship between Duke and that customer of ours, but all three of us working together in terms of how that meets with delivery needs. The number of units going to which locations etcetera, so it's progressing forward as we anticipated.

[Jeff Osborne:]

That's good to hear. Last question I had for you, Steve, is just a housekeeping one. I'm sure it's in the 10-K but I missed it in the press release today. Do you happen to have the share count?

[Steve Schrader:]

I think it's -- I don't know if I have the exact amount. I think it's 70 million or so.

[Jeff Osborne:]

Got it.

[Steve Schrader:]

71.

[Jeff Osborne:]

71. All right, thank you.

[Operator:]

Thank you. Our next question comes from the line of Jay Burnham with Armory Advisors. Please proceed with your question.

[Jay Burnham:]

Yes, hi guys. A quick question on the senior secured convertible note. I see that there is a mandatory conversion provisions in there where you're required to convert a certain amount of it by February 1 and a certain amount by April 1. Can you go over where you stand with those conversions?

[Robert Willison:]

Yes, we'll decide kind of whether we convert those or not. When we do convert them, they're going to be converted for stock. We also have the option to kind of make those conversions later as a catch-up in other quarter as well.

[Jay Burnham:]

So am I reading the provisions incorrectly because they're called mandatory provisions, and it says you're required to convert 2.5 million principal amount by February 1 and 5 million by April 1?

[Robert Willison:]

Yes. We've done the 5 million already, that things converted.

[Jay Burnham:]

Okay. That's my question.

[Robert Willison:]

Okay. Sorry purpose of that.

[Jay Burnham:]

Thanks. And then, on the Lordstown Investment. How much will you have that value debt on your 12/31 balance sheet?

[Robert Willison:]

It's 12.2. It's already valued out there. It's in the balance sheet on the press release.

[Jay Burnham:]

Got you. Thank you.

[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 over to Mr. Hughes for his closing remarks.

[Duane Hughes:]

Well, thank you everyone for joining us on today's call. I especially want to thank our employees, partners and our all-important investors for their continued support. We appreciate your continued interest in Workhorse and look forward to updating you on our next call. Operator?

[Operator:]

Thank you for joining us today for Workhorse Group's fourth quarter and full year 2019 earnings conference call. You may now disconnect.