Workhorse Group Inc.
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Ladies and gentlemen, greetings. And welcome to Workhorse Group’s Fourth Quarter and Full Year 2018 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, and good morning to everyone. We appreciate you taking the time to join us for our call. Before the market opened, we issued a press release and filed our Form 10-K with our results for the fourth quarter and full year ended December 31, 2018. Copies of both documents are available in the Investor Relations section of our website.

[Paul Gaitan:]

Thank you, Rob, and thank you to all who are joining us for today’s call. This morning, we issued a press release, as well as filed our Form 10-K with the SEC, both of which discuss in detail the results of our operations from the quarter and year. 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 fourth quarter and full year 2018. Sales for the fourth quarter of 2018 were $21,000, which was down from $5.2 million recorded in the fourth quarter of 2017. For the full year 2018, sales totaled $763,000, which was down from $10 million recorded in 2017. The decrease in sales for both the quarter and year was primarily due to a decrease in volume of trucks delivered. At this particular point in time, I want to stress that we believe year-over-year comparisons should not be considered as meaningful representations of current capacity of our business or potential interest in our vehicles. Selling, general and administrative expenses in the fourth quarter of 2018 increased 80% to $2.7 million from $1.5 million in the fourth quarter of 2017. Expenses in Q4, 2017 were favorably impacted by the reversal of pre-Q4 2017 accruals, excluding the benefit in 2017 of the reversals, spending in 2018 was consistent with 2017. For the full year 2018, SG&A expenses increased 30% to $11.5 million from $8.8 million in 2017. The increase in SG&A expenses for both the quarter and year was primarily related to the reversal of accrued expenses in 2017 that were accrued in prior years and higher spending in 2018 for advertising, investment banking fees and legal settlements.

[Duane Hughes:]

Well done, Paul, and welcome everyone. We appreciate you for joining us on our call this morning. I want to first address a recent change in our management team. As many of you may be aware, we had a formal management change in February, as Steve Burns, our Founder, stepped down as CEO and at Board of Directors request I assumed the role of Workhorse CEO. Before I get into my prepared remarks, I’m taking a moment to acknowledge Steve and his contributions to Workhorse. I’d like to publicly thank him on this call for everything he’s given to this organization over the last 12 years. Steve is both a product creator and an innovator, two ideals upon which Workhorse was founded. His leadership from Workhorse, his very beginning for today has been invaluable to me, as well as many others. Thankfully, he’s not going anywhere in the near-term. We’ve been very fortunate to have them stay on to lead the efforts of our SureFly team, as well as ensuring a smooth transition. On a personal level, I’m both excited and ready to take on this added responsibility, and look forward to leaving Workhorse into the next phase of growth, transitioning from an entrepreneurial development stage company to a highly focused production oriented company. This is not to say we are stepping away from innovation. To the contrary, we are channeling various aspects of both product engineering and manufacturing to provide the finest electric delivery vehicles in the industry. Now, with that explanation behind us, I’d like to spend some time to hit the reset button on a number of fronts. It’s my first call as CEO, so I want to level set here. Our focus in 2019 is to change our culture and concentrate our energy on becoming a world class commercial truck builder. Our mission is to deliver trucks at a profit and we recognize the best way to reward our shareholders is to deliver on this objective. When I finish speaking today, I’d like you to walk away with three reasons why in 2019 we are now ready to execute on our long-term growth plan. The first of these three is the most obvious and the one that has challenged most to-date, capital. While we do like to point out Workhorse has significant real world experience with blue chip customers and our trucks have logged millions of miles across the country, it is important to note we really haven’t been around that long in the grand scheme of things.

[Operator:]

Thank you. Our first question comes from the line of Thomas Boyes with Cowen and Company. Please proceed with your question.

[Thomas Boyes:]

Thank you very much. With the $35 million in financing secured, what type of ramp could we expect from the engine platform? I know in the past -- I think we’ve talked about maybe a 60-day lead time on parts, if that’s the case when should we start to anticipate seeing deliveries flow into the P&L?

[Duane Hughes:]

Thanks for your question, Thomas. This is Duane. I’ll go first and if Paul or Rob want to jump in, they can as well. I’ll start with first that, in the past and historically we haven’t provided any guidance in terms of the actual delivery time lines and schedules, but I would tell you that, you’re correct as far as the lead time on parts, we’re looking between 60 days and 90 days on the these long lead time items with the ability to begin delivery shortly following receiving those parts. So we do look to ramp up rather quickly from the point we start the ordering process. I mean, as I said in my earlier remarks, we expect to be prepared to have the capacity to produce a volume -- the majority of the trucks on order this year.

[Thomas Boyes:]

Great. That’s very helpful. And then just actually a quick question on the W-15, what are the funding plans for that platform, is it -- should -- could we see a similar financing structure to what you secured for the engine platform? And then also just, do you have a sense of when all the tooling would be in place for that or is that also kind of contingent on the engine platform?

[Duane Hughes:]

Yeah. Everything is contingent upon the engine platform as we really focus our efforts on finalizing the engine and getting it into production giving us the opportunity to reach the profit levels that we talk about. As far as the W-15, a number of things are on the table, including a similar financing. That particular vehicle as you know is a much larger market opportunity or volume of sales vehicle. Clearly, having about 6,000 on pre-order, we are motivated to get into production. But at the same time, given the integration if you will -- the sharing of the parts and the supply chain that we will take advantage of to complete the W-15 engineering to move it into production, we are looking at other potential suppliers and strategic partners who can help us bring it to production more quickly. Do you want to add anything?

[Rob Willison:]

Yeah. Thomas, this is Rob Willison. One thing we’re looking across our platforms is commonality of parts, as Duane had said. And that engineering efforts with the commonality parts comes cost reductions and price advantages, minimizing stock and it’s just good engineering. So we’re going through some of those efforts right now.

[Thomas Boyes:]

Great. That’s also very helpful. If I could sneak one last in there, just given the partnership with Duke Energy, could you give us a sense of maybe the opportunity there? Who are the target customers, is it someone -- is that what was a limiting factor for say FedEx or UPS or is this more targeted towards regional enterprises where they much may have a smaller scale with only half maybe 10, 15 trucks?

[Duane Hughes:]

No. Because of the depth and breadth of the Duke Energy platform, it goes well beyond just battery and vehicle leasing, but providing the behind the meter services. I would think of it more as a larger program that Duke is looking from an eFleet services business perspective and ultimately helping any fleet, large or small, overcome the largest hurdle in rolling out electric vehicles at scale, which is truly the infrastructure needed. You can imagine with 100 or 200 vehicles in a depot, getting that depot electrified to support that number of vehicles is often a challenge. So we expect to see Duke come in from all aspects or all sides customers with the ability to provide a program that allows them to help them overcome those objections of infrastructure, helping us to more quickly delivery our vehicles at scale.

[Thomas Boyes:]

Excellent. I really appreciate it. I will get back in queue.

[Duane Hughes:]

Good job Thomas. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Carter Drisscol, who’s a private investor. Please proceed with your question.

[Carter Drisscol:]

Hey. Good morning. Thanks for taking my question and congratulations, Duane, on the new position.

[Duane Hughes:]

Thanks.

[Carter Drisscol:]

So, just to kind of follow-up on the prior question, is the -- obviously the biggest component of your backlog is the order you have with UPS and kind of concurrent with that roll out, I know you don’t want to talk specifically about the number of vehicles you’re hoping to produce this year, I know you talked about hoping to satisfy the majority in this year. Is the plan by UPS when you get through the file testing and start to ramp production to bunch of those orders at a specific site and does that therefore beget the need for Duke to be involved at that level if they are attempting to put, say, a couple 100 vehicles at a specific spot? Just trying to get a sense of -- is there limiting or gating factor with what you’re trying to pursue with Duke in relationship with the large order you have with UPS and just trying to understand how that should evolve over the course of the year?

[Duane Hughes:]

Great question. And I don’t want to speak for UPS in terms of their delivery schedule specifically. I would say that it’s a combination, Carter, where they -- I know that the relationship between Duke and UPS as it’s filtered through Workhorse, is to identify locations where they can electrify entire depots to support a large number of vehicles in those depots. But at the same time, UPS looks at their business and says, where can we most effectively put the electric vehicles as they are delivered by Workhorse, to give us the biggest bang for our buck. So, the answer is really both of what you said. They will be spread out across multiple depots, but I would expect that there will be select depots likely in the Duke service territory that will be built out to support the larger number of vehicles in a depot. So we’ll see a combination of both that in the 1,000 plus units we need to deliver to UPS as soon as possible.

[Carter Drisscol:]

Okay. And just a quick second question if I may. In terms of, obviously, restriction from covenant perspective and the timeframe of monetizing SureFly, I think in the past you talked about maybe a possibility of regaining some level of ownership. Is it the -- is it your plans to fully monetize and divest these assets? And maybe talk about some of the natural buyers or the discussions among the different groups of buyers that you’re engaged with in terms of what they find attractive relative to the other competitive VTOL entries out there today?

[Duane Hughes:]

Sure. And another good question Carter. I really appreciate that. So we -- as you can imagine in the numbers of potential prospects that we have talked to in the past and continue to talk to. They are variety of those who want to have an investment in and allow the SureFly team if you will to continue to develop and other, which would lead to where Workhorse would maintain a minority ownership through, yeah, a minority ownership. But primarily we’re really focused on finding an owner priority -- a majority owner, ultimately 100% owner of SureFly where we can, as you said monetize, the SureFly product to allow us to bring that in as money that we can use to capitalize our truck building and go-to production process, including the W-15. So ideally we’ll find a partner who wants to take the SureFly product on -- in 100% and move towards certification and all things that they need to do, maximizing our ability to monetize it. In the event that other partners who are very strategic in nature, who we’re talking to, come in and say, we’ll take 51% or more. If the opportunity exists we will certainly consider that and bring it to the Board for consideration.

[Carter Drisscol:]

Then maybe just competitively, could you highlight where you think you’re differentiated versus whether it’s a hybrid approach or were you on the certification process…

[Duane Hughes:]

Yeah.

[Carter Drisscol:]

… vis-à-vis some of the exorbitant private round evaluation that’s been out there today and maybe expectations of what you think a realistic to…

[Duane Hughes:]

Right.

[Carter Drisscol:]

[Duane Hughes:]

Right. I would tell you another good question. You’re correct. The exorbitant, market caps that these companies are getting, the amount of money they’re bringing in is astounding if you will in that space. And why we think we lead in that position is number one, to your point, is our priority one status through the tight certification process where we’ve been working with the FAA since late 2017 very closely and have an approved plan to get through certification. That approved plan came with what we have said in the past as priority one status, which gives us a unique position within the FAA to be first two tight certifications. But above and beyond, that most important aspect is the machine itself which does have a hybrid capability. Of course, eGen trucks that we delivered which were range extending hybrid vehicles, give us an extreme amount of experience and understanding how to generate electricity to keep those batteries charged to keep that machine flying and we believe with the state of batteries where they are today, even where we expect them to be in the in the near-term gives us a complete leading position as what we believe is the only hybrid VTOL at least in the FAA certification process to bring this vehicle to market ad generate revenue more quickly than our competitors big or small.

[Carter Drisscol:]

I appreciate you guys taking all the questions. Again, I thank you.

[Duane Hughes:]

No. Thank you, Carter. Appreciate it.

[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’ 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 again everyone for joining us on our call. I especially want to thank our employees, our partners and our investors for their continued support. We appreciate your continued interest in Workhorse, and of course, we look forward to updating you on our next call as we continue to move forward. Operator?

[Operator:]

Thank you for joining us today for Workhorse’ Groups fourth quarter and full year 2018 earnings conference call. You may now disconnect.