Workhorse Group Inc.
Q3 2017 Earnings Call Transcript

Published: 12 Nov 2017

[Operator:]

Ladies and gentlemen, greetings and welcome to the Workhorse Group's Third Quarter 2017 Investor Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Duane Hughes, President and Chief Operating Officer. Thank you Mr. Hughes. You may begin.

[Duane Hughes:]

Thank you, Danielle, and good morning, everyone. We appreciate you all for taking time to be on our third quarter update call this morning. In a few moments, our CEO, Steve Burns is going to give you a brief update on our business and touch on the highlights from the third quarter. Also joining us for the call this morning is Paul Gaitan, our Chief Financial Officer. As you may have seen, we filed our 10-Q and issued our earnings release before the market opened. For those of you who have not seen our 10-Q report, it is available on our website at workhorse.com. I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and is part of our year-end update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2016 Form 10-K and other specific -- I'm sorry, other periodic filings on file with the SEC, provide further detail about the risk factors related to our business. For today's call, Steve will give you an update on our key strategic priorities. He will then open it up to questions. With that, I would like to turn the call over to Steve Burns. Steve?

[Stephen Burns:]

Thanks, Duane. Good morning, everyone. As Duane mentioned, we're very excited about discussing some of the details relating to our recent company announcements. As a brief reminder for any new comers to our call today, Workhorse is a technology-focused manufacturer, providing sustainable and cost-effective electric mobility solutions for the commercial transportation sector. As an American original equipment manufacturer, we design and build high-performance battery-electric trucks and aircraft. All Workhorse vehicles make the movement of people and goods more efficient and less harmful to our environment. Moving to our results, we achieved several important milestones this quarter as we drive towards commercial scale operations. In the third quarter of '17, we delivered 17 of the 200 E-GEN units that are on order from UPS. We have delivered 143 vehicles from this order to-date, 6 in the second quarter, 73 in the third quarter and 64 units so far in this fourth quarter. Additionally, we delivered more than 300 Workhorse vehicles to all of our customers, including the prototypes to the United States Postal Service. As a result of our increasing volume on both orders and deliveries, we have introduced automation where possible and transitioned to working with more Tier 1 suppliers. Both of these help us improve our manufacturing capacity and margins going forward. Perhaps the most telling metric to show this improved efficiency is the fact that we've already increased our run rate from 0.7 vehicles per day in Q1 of '17, to a current run rate of 3 vehicles per day, a fourfold improvement over that timeframe. An important part of building our operations to commercial scale is our sales and service network. To that end, as many of you know, we've previously announced that Ryder will be the primary provider of distribution, service and support for Workhorse. Ryder has more than 800 maintenance facilities and 600 sales professionals. In fact Ryder has already successfully closed its first Workhorse customer, that's W.B. Mason, as you may have read in an earlier announcement. Moving to the potential 180,000 United States Postal Service vehicles replacement opportunity, as you may recall, we are under specific ground rules that limit our ability to discuss the USPS program in any detail. With this said though we can tell you that we delivered our prototype vehicles for testing on time in mid-September, and have advanced to the program's next phase in our goal to win the USPS replacement program. Some of you may also recall a highly successful unveiling of our W-15 electric pickup truck in May. I'm pleased to report that since then we have secured letters of intent from roughly 20 fleets or more for more than 5,000 W-15 trucks with an average price of $50,000. This quarter, we will formally convene the W-15 Leadership Council, comprised of our LOI partners who will provide an important feedback loop for our engineering team as we continue to advance through development towards production. We continue to receive strong interest from fleets who are interested in purchasing a W-15 when production vehicles are available. In addition to the growing demand from commercial fleets, we have received several thousand inquiries from consumers, actively requesting purchase information. As we have said previously, we are continuing to evaluate the appropriate strategy and timeframe for the launch into the consumer market. For now we remain focused on the commercial fleet market. Today we announced our N-GEN delivery van. We believe this van to be the future of last mile delivery. N-GEN is our new electric delivery platform that incorporates lightweight materials, all-wheel drive, best-in-class turning radius, 360 degree cameras, collision avoidance systems and an optional roof mounted HorseFly delivery drone. This product leverages our existing ultra-low floor delivery vehicle platform that was developed for the Post Office as well as our nearly 2 million miles of experience gained from working with our E-GEN customers. For contracts in 2016, more than 265 vans of this size were sold to commercial fleets. This is the largest growing segment in the U.S. commercial truck market. This N-GEN van will also be HorseFly drone compatible and as this disruptive approach to last mile delivery gains traction with consumers and regulators, we will be well positioned to offer this to our fleets who want to further decrease their operating cost and increase driver efficiency. With our comprehensive W-15 and N-GEN truck portfolio, we are now well positioned as the leading U.S. commercial, electric vehicle OEM. With a defined and systematic and controllable path to volume and scaled production over the next 24 months. We continue to expand our Tier 1 network of suppliers and are in active discussions with our key suppliers to assure that we will have proper capacity in place when needed. Lastly, I want to talk a bit about our SureFly product. SureFly is our electric personal opticopter. SureFly is our entry into the new emerging VTOL market, VTOL stands for vertical takeoff and landing. Since we have previewed our SureFly platform at the Paris Air Show, we have received significant interest from potential partners, customers, the Army, and the media, validating that our platform technologies and our approach to this disruptive market have merit. We're bringing the SureFly to our outdoor booth at the CES show in January. And as we have mentioned previously, we are planning on our first public manned test Huber flight on or about that same time frame. We are working towards experimental certification with the FAA, and we -- and that we expect that to happen in the near-term and we're working towards a late 2019 full FAA certification. Also we have started taking preorder deposits from customers for this exciting new method of electric transportation. Let me now open the line up to questions with Danielle.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jeff Osborne with Cowen. Please proceed, your line is live.

[Jeffrey Osborne:]

Thanks, good morning. Steve, I just had several questions on kind of bill of materials reductions, I think, certainly the automation that you talked about as well as the Tier 1 suppliers would suggest that you're making some progress there. But I was just hoping you could potentially quantify just on a like-for-like basis the, E-GEN platform. First and foremost what types of cost you've been able to take out of that platform? And then maybe potentially as we look at the N-GEN platform, if you were to migrate folks like UPS and others to that platform over time, just given some of the automation and lightweight materials that you talked about, how much additional cost is taken out of that just as we look at the gross margins trajectory of the company in the future?

[Stephen Burns:]

Great question. Thanks, Jeff. We have announced earlier our goal is after we get through the bulk of these existing orders for the E-GEN, that going forward we expect to be gross margin positive or at least, break even on all our vehicles going forward. That's not to say there's not a lot of R&D and things like that crash testing but on a bill of materials and labor point of view, that's what we have set our sights on. A lot of that comes from Tier 1 suppliers, which we are incorporating where we can even to the existing E-GEN, both because they are less expensive and they are more reliable products in general and just produced at a higher volume, even though we are in a relatively low volume business right now. And so it's a combination of volume like all automotive as you know, getting our margins down is a combination of volume and bill of materials. Bill of materials comes from working deals with your suppliers but it also comes from a lot of engineering efforts where we are constantly saying to ourselves how can we make this more economical for us. And the N-GEN, which there is a lot of light weighting materials in there. And in addition to all of the beauties that come from reducing the mass of the vehicle, it requires a smaller battery because it's lighter and more aerodynamic. So the N-GEN really with a smaller battery and just mass cost money in general terms, we're really expecting even the early versions of these at least on a bill of materials point of view to be cash flow or gross margin positive.

[Jeffrey Osborne:]

So just to following up on that, so we don't have to think about the Indiana facility that you acquired needing several thousand vehicles a year to be gross margin positive?

[Stephen Burns:]

Correct, we changed that. Once we kind of realized that, that was going to be a hard path to get to as far and then really the Post Office would and the pickup truck are really the genesis of this idea that let's start with a blank sheet of paper designed for -- we're trying to make the most efficient delivery machines conceived by man, both from a operator point of view and a fuels and maintenance point of view and emissions point of view. And let's also design it for something that can be built in our factory without major CapEx, so we want to be able to use our existing factory and keep them -- just keep it as light and lean as possible.

[Jeffrey Osborne:]

Good. I just had three other. I think it will be briefer answers, if you may. But on the Postal Service, do you still anticipate that being a spring conclusion of this prototype testing that you've done that you've submitted?

[Stephen Burns:]

Again, we're really restricting what we can say, but I think the Post Office themselves have said that they are expecting to test them through spring.

[Jeffrey Osborne:]

Got you. And the last few is just the W-15 itself, I think, you intended to start production at the end of '18, at this point what percentage of the bill of materials or components have you identified suppliers and entered negotiations with versus I guess, what are the gating factors to start production? Certainly it sounds like the demand side of the equation is there, but more importantly for investors would be the production side?

[Stephen Burns:]

Yes, well all the key parts, again we are trying to leverage across all our vehicles. So one core key component across every vehicle we make, the HorseFly, the SureFly, all the trucks is the Panasonic cells. That we put into our own packs and we control the development of those packs. So that is the primary vendor that we make sure we have our reduction row with and our pricing. The other biggies are the body, the composite body is new to us with the existing vehicles that we bought, we bought Navistar, it's a chassis manufacturer, and didn't do any of the bodies. So the bodies are typically made by the -- the customers cut their deal with the body makers. This is our first control of the body, which gives us more revenue per vehicle and enables us to control our cost more as well because we're not sharing our profit with a body maker. So I guess, the short answer is with all the key vendors required for these vehicles, we have our ducks in a row.

[Jeffrey Osborne:]

Got it. And the last one is just, the R&D expenses this quarter were bit higher than anticipated, is -- was there any one-time items that were flowing through R&D? And just how do we think about the next couple of quarters, with that line in particular?

[Stephen Burns:]

Yes, the R&D, we had a little bit of towards the end, get ready to make the deadline for the Post Office deliveries. There was a spike there, somewhat common probably if you get down to it, a few surprises as we got close to we had to button up quickly. So R&D and expense with third-party vendors is what caused the bulk of that surprise.

[Jeffrey Osborne:]

Is there a normalized level that we should think about, as we kind of go through the testing at the Postal Service and then may be gear up for the W-15? Is it going to be $4 million, $4.5 million a quarter or somewhere in that range or do you...

[Stephen Burns:]

We'll I don't know if we're forecasting that kind of detail. I can say though the USPS program of course, now we have delivered dramatically reduces its R&D. The N-GEN is coming out. That is starting production in first quarter. So that is ahead of the W-15 only because that vehicle is easier to get on the road for us. So there is some R&D for that, but relative to the pickup truck, it's a much less because we're utilizing all the work and time and R&D we put into the Post Office. So that enables that one to come out first. That will have some R&D associated with it, still the largest R&D is the pickup truck and that will probably towards the tail end of the year is where you'll see the -- some of that start to pick up the most. But the big one leveraging the all the time and work over the last few years, on the Post Office into -- it really leverages nicely into the N-GEN because they're both delivery vans and a lot of it goes into the pickup truck. So we're really trying not to waste anything.

[Jeffrey Osborne:]

Perfect, appreciate all the details. Thanks very much.

[Stephen Burns:]

Thank you.

[Operator:]

Our next question comes from Colin Rusch with Oppenheimer.

[Colin Rusch:]

Thanks so much. I've got just a couple of questions around the working capital. So the parts inventory is running at around $6.8 million, can you just talk a little bit about how many vehicles that supports? And then the payables are at pretty healthy level, can you just talk a little bit about the terms that you're getting with your suppliers and how we should think about those 2 numbers unwinding a little bit as we go forward?

[Stephen Burns:]

Paul, you want to take that one?

[Paul Gaitan:]

Yes, sure. I would say on the inventory piece. The best way to look at that is kind of look at our average cost per unit that we've seen for Q3, which had been UPS vehicles and delivering 73 there, you come up with the low of $80,000, a vehicle. So you can take the 80,000 and divide it in the inventory level, and be in the ballpark as a kind of quick back of the envelope way to think about that. And then as far as getting better terms, yes, we are working on that with our suppliers that are kind of taking a pretell [ph] process and the folks who we have the highest cost content in the vehicle, a lot of them have because of our, I'll call it, early development nature, required cash in advance. So as we build up some trust with them and a reliable payment stream, we are pressing them getting off cash in advance to may be a reduced level, say 50%, and then terms on the balance that is continuing to work toward something like 30-day terms or longer.

[Colin Rusch:]

Perfect, that's super helpful. And then with N-GEN platform, which clearly is going to be a material need in the market. Can you talk about customer interest in terms of, integrating potential level 3 to level 5 8S [ph] technology, how easily that's accommodated in the design? And how we should think about your engagement with those sorts of technologies going forward?

[Stephen Burns:]

I guess, I'll start on that one. Duane, jump in, if you like, anywhere. The N-GEN represents what we really think is a quantum leap. There's nothing like it. It stems from the fact that last mile delivery across all sectors is really kind of got enough volume out there that you can warrant its own vehicle, dedicated and design from scratch for that purpose. If you look at a typical let's say, for transit, which is -- or a sprinter, those are vehicles in the N-GENs class they are built for plumbers or cables, bond sellers or last mile delivery folks use it as well. So general purpose vehicles like that it is just what every general purpose vehicle is, it's kind of good for everything. So this low floor platform for example, saves the knees, right, getting in and out 150 times a day, we have seen that to be a huge deterrent with delivery folks. All of the crash avoidance systems that we're looking at, typically vehicle -- that stuff is in luxury vehicles, we're putting it into delivery vehicles because these are pretty heavy vehicles and we consider them to be on the road with the consumer vehicles and we have to do it for our pickup truck, anyway. And so we're putting all that stuff in there, best we can. It's going to initially come out with like, for example, automatic braking as opposed to full-autonomous driving. But autonomous, you can't be an OEM, without looking at the autonomous, autonomous is of course, in our HorseFly already, SureFly is being built for it. Even though it's initially going to be a piloted vehicle and all of our trucks, we are trying -- all of our new trucks, we are trying to put the heavy components in, the steering, the braking, as many as sensors as we can at this -- for what you can see, at this moment in the state-of-the-art in trying to make sure that if we do upgrade, if our customers do ask us to upgrade these vehicles that the bulk of the heavy hardware is in there already.

[Colin Rusch:]

Excellent, that's also very helpful. And just a final one, the only thing that we've really seen on the market, in this area with any real innovation has been from Mercedes and they really were focused on the load-in of the packages and whatever was being delivered. Can you talk a little bit about any work that you've done in that area with your customers? I know you've got a close working relationship with a number of these folks.

[Stephen Burns:]

Yes, that's the low floor, if you're looking at the back of it. In addition to be low, it's completely flat. From -- so from the back tailgate, all the way to the steering wheel, it's just completely flat. So it's great. Some people want to roll carts in, we have all the shelving different options in case you want shelving or a mix of shelving and carts. The main thing is when you drive this vehicle, you are like you are sitting high so you're half kind of half sitting half standing. Getting up from a full sitting position, 150 times a day is very, very difficult. So it's all geared towards all the learnings that we've done just from having a couple of million miles on our existing vehicles and talking to a lot of new customers that are just getting into this space and their wish list. So we just thought it was time for a -- a from scratch design. Luckily we had the bulk of the work done from the Post Office, which has basically the same needs.

[Colin Rusch:]

Okay. Excellent, thanks guys.

[Stephen Burns:]

Thank you.

[Operator:]

Our next question comes from Carter Driscoll with B. Riley. Please proceed.

[Carter Driscoll:]

Hey, good morning. Thanks for taking my questions. I wanted to ask a couple of questions about HorseFly, in particular if you could talk about where you see the higher value of the typical use case and how you think about the economics, is it a payback model that you're working in terms of savings on the delivery route and fuel cost or improving route efficiency to, I think, I'm trying to get a sense of that? And maybe just the competitive landscape because layout where you see your greatest competition coming as you're looking to launch product?

[Stephen Burns:]

Great question, because the HorseFly it's really exciting because essentially, I think, since the invention of the internal combustion delivery truck, 100 years ago, it's essentially been a person driving door-to-door. Naturally that's been optimized, the route has been optimized as much as you can optimize it, internal combustion has been optimized about as much as you can do it. So we have spent the last 10 years building drive chains and now full vehicles that reduce emissions and more importantly are more economical for our fleet customers to use. And the economics come from reduced fuel and maintenance and that's what we sell our trucks on. However, it kind of occurred to us maybe, we are working on the wrong problem all this time, because typically, and again, we are focused on this last mile delivery segment. There is more driver cost per package than there is in fuel and maintenance. So while we're very excited that we have eliminated or dramatically reduced emissions and we are 5 times as efficient, fuel efficient as the best internal combustion engine, helping the driver being more efficient can bring more cost effectiveness to our fleet customers. So the SureFly, I think of it as just a long elastic arm, a mile and a half arm that the driver has and can plop something down in parallel while the driver is walking to another delivery for example. And so it has to be completely automated, it has to be super easy to use, it has to be really robust. We deal with folks that -- our DNA is coming up through these delivery folks and up time is critical ease-of-use driver training and all that. So that's where we have developed that the HorseFly, it is of course, a from scratch developed vehicle. Battery is a key component, battery is what we do, motor control, having it redock, automatically, on top of the vehicle, very, very difficult, took us a couple of years to get that. All the sensors on it to make sure it doesn't hit, even if a bird crosses its path, it freezes in flight and waits for the driver to unfreeze it. So really trying to comply with the current 107 regulations, which it does, and now, I don't know, if you've been following it in the last couple of weeks, it looks like those might be even getting looser and we will be -- as we're permitted, we will open up the envelope of further and further that this HorseFly can help. But right now, launching on top of the truck, trucks are kind of ubiquitous throughout America, they are within line of site of every business and home in America, sometime during the day and this represents really the first new way to deliver something. Again, we think in a 100 years. So quite excited about it.

[Carter Driscoll:]

Thank you for that. And maybe just a couple of words on the competitive landscape in terms of true competitors versus a lot of the noise that we're hearing from some potential other competitive people that might be not as far along in the path of development as you are?

[Stephen Burns:]

As far as we know we are the only one that can launch and take off from a truck currently. I think, Mercedes has said they'd like to do that, but I don't think they're doing it yet. We have a patent pending for that process that we think is pretty strong, it's not granted yet, but we are progressing through that. There are a lot of folks wanting the line of sight restriction from the government to be removed. So they can fly it from a warehouse, 30 miles out to suburbia to drop a package and come back. We don't -- we think that's a bit away. So we don't know that anybody, we believe we'll be the first in America to do active deliveries, actual package deliveries. There's been some medicine kind of test runs and things like that but we built this specifically to comply with the 107, and we are not aware of anybody, at least, in the United States that is doing that.

[Carter Driscoll:]

I'm sorry, if I missed it, did you talk about timeframe for the first customer delivery?

[Stephen Burns:]

We have stated that we're going to try to do it this year during the Christmas season. If not, we'll do it early next year.

[Carter Driscoll:]

Got it. Okay, I’ll get back in queue. Thanks gentlemen.

[Operator:]

Our next question comes from Bill Moon with Hart Capital Management.

[Bill Moon:]

Hey, guys. I have a few questions, if I may. First, in regards with the cash burn rate and how much cash you have on hand? You guys indicated that you should be good to go from cash level until March. Can you explain the factors that get you to March with your current cash on hand?

[Stephen Burns:]

Duane and Paul, you guys want to take that one?

[Paul Gaitan:]

Duane, you want to take that?

[Duane Hughes:]

You'll start, I'll jump in if I need to.

[Paul Gaitan:]

We've done a pretty detailed analysis to figure out, kind of what our floor level of burn is. And then, of course the overlaid on top of that are specific -- are continued development programs as amongst all the different platforms, Postal Service W-15 opticopter and what not. So it all depends how much we overlay on that and how quickly we want to move those projects forward, and at what pace based on market demand and how we see the strategy of the company evolving.

[Bill Moon:]

Okay, but you guys -- that is still a logical timeframe for you guys. You have enough cash on hand until March?

[Paul Gaitan:]

I think that changes as opportunities present themselves. Obviously, Steve mentioned earlier, the Postal Service, we're fully committed to that and with the approach of getting to spend whatever is that necessary. And I'm not aware that we had any premeditated number how much that was going to cost us. But we certainly didn't -- had a decent level of spending during the quarter to support that and carried over a little bit into October.

[Bill Moon:]

Okay. And then next, it looks like you guys are delivering 64 quarter-to-date on that current order. Are you guys expecting to complete that? I mean given your current run rate, that seems to be pretty well completed by the end of Q4.

[Stephen Burns:]

Yes. I am sorry, Paul jumped in there, but we will build them all. We're expecting to build them all this quarter. We -- I have to put a little -- we have to put a little asterisk on there because our customers, because their delivery folks get really, a little swamped during the end of the year, that's their busiest time. So we're assuming they can absorb all we build like they are now. But -- so if it bleeds a week or 2 into January, but we'll have them all built. But we have to put a little asterisk that if our customer can absorb all of them, those last couple of weeks.

[Bill Moon:]

Okay, great. And then kind of just talking about conversations with current or prospective customers. You guys have over 2 million miles on the road now, so it seems like you can prove your worth with your efficiency and have numbers to back that up. Can you kind of just, on a high level, walk through how conversations with the new and existing customers are transforming from, are these vehicles viable to, kind of, what the conversations are now? And what these customers are looking for in order to finally kind of sign on the dotted line?

[Stephen Burns:]

Duane, you want to take that one.

[Duane Hughes:]

Sure, thanks Bill. I will tell you that signing on the dotted line, if you would, one of the biggest obstacles is still infrastructure as we talked about in the past right because as these fleets are determining the locations where they want to deploy these assets, they have an internal process, they're sending out plan engineers and so on and defining how many vehicles can go on each depot, et cetera. So currently the vehicle as you say with over 200 -- over 2 million miles. These vehicles are well proven. The fleets tell us they are well proven. They don't have any concerns, I'll say, in terms of the vehicles and their performance themselves. The real key is adapting to the speed in which they need to put the infrastructure in place to support many vehicles. So to that end we have been, I'll say, partnering or coordinating with the number of utilities who're also W-15 pre-order customers and putting conversations together with our fleet customers and from the delivery market as well as the utilities in order to create incentives, financial as well as operational value to being able to put the infrastructure in place on a more rapid basis, which will help us ultimately close more sales more quickly. I should touch on Ryder as well. Of course, Ryder having just closed their first customer, W.B. Masons, with our vehicles. We are in the -- we are well in line with the path of a sales people training at Ryder. So we expect to see Ryder's pace pickup on additional sales as well.

[Bill Moon:]

Okay. So you guys have -- you guys strongly believe that you guys will have the backlog once this last order is complete with UPS?

[Stephen Burns:]

Yes.

[Duane Hughes:]

Yes, we will generate -- go ahead Steve.

[Stephen Burns:]

Again, N-GEN starts next quarter. There will still be some trailing E-GENs, but again with our commitment not to lose any money on -- gross margin wise on vehicles going forward, right, even those E-GENs. We have to be really specific on how we build those so they are profitable. But yes, we're not worried about keeping our factory busy.

[Bill Moon:]

That’s great to hear. Thank you, guys.

[Operator:]

Our next question comes from Brian Kinstlinger with Maxim Group.

[Brian Kinstlinger:]

Thanks so much. A follow-up on the gross margin. If I take that cost of goods divided by 73, I got $104,000, which is a significant drop but different than you calculated versus the average sales price of $43,000. So I'm just curious that you mentioned you'll still sell some E-GENs and if a new order comes in for them, you'll be profitable. So talk about where the target cost per vehicle is and then what will you do on the price side, as I think, a year ago, I know outside of UPS, you were talking about $50,000 $55,000 per vehicle. So maybe talk about the economics there and how it will change?

[Stephen Burns:]

Hi, Brian, this is Steve. Good question, so again with this internal mandate not to lose money, so that means E-GENs as we continue to refine the bill of material for that layering in things from the Post Office, the pickup truck and the N-GEN, it brings bill of material down. But we're also going to now that it has got 2 million miles on it and we can prove the economics to fleets, we believe we can command a higher price. So those two things on the E-GEN kind of cross and we're expecting to be profitable in those. But I do want it to be clear, we believe our mainstream horse that we're going to ride is going to be the N-GEN as far as vans and then of course, W-15 towards the end of the year with the pickup truck.

[Brian Kinstlinger:]

Great. So then maybe a similar question on N-GEN. What is the target price initially you're looking at and what do you think, as you look at next year will be the average cost per vehicle as you see it today?

[Stephen Burns:]

I don't know that we've stated it, but I think I can do a broad stroke and say $50,000 for the N-GEN. Now you say while your chassis -- your former chassis, E-GEN chassis, used to be in that range as well, but what's important to keep in mind is that is for the total vehicle including the body. So in the E-GEN world let's say our chassis was $50,000, just to use a round number and then they'd have to put a body on top of it, which was anywhere between $20,000 and $25,000. So we're expecting the N-GEN because it's so much lighter and uses such a smaller battery and less physical materials, we expect to be profitable gross margin profitable, selling it at that rate.

[Brian Kinstlinger:]

$50,000 to sales right not delivery cost? Is that what you were saying?

[Stephen Burns:]

Correct.

[Brian Kinstlinger:]

Great. And then you mentioned in the past talks with an e-retailer, there's been a ton of discussion about lowering delivery cost to Amazon and Wal-Mart. And it seems to me like buying five trucks for them is pocket change. So can you talk about where discussions are about maybe piloting these trucks or the N-GEN trucks for e-retailers or any retailer for that matter?

[Stephen Burns:]

Well, I don't know how specific I can be, but I can tell you that the e-retailers, right, that all the -- these are Fortune 10 companies, right, or Fortune 100 companies, and they are -- everybody kind of realizes logistics is changing. So we want to cater to both the conventional players that have been doing it for a long time because they really know their business and they really understand and appreciate the changes that an N-GEN or an E-GEN bring in a HorseFly. However, we also have garnered as we discussed, a great deal of interest from some of these new players in the marketplace. And although it seems like pocket change to order five trucks, it's much more than the cost of the truck, right? It's all the infrastructure of placing a new vehicle into their logistics system. So -- but we -- I think it's fair to say we announced that we are -- we've signed a test agreement for a couple of cities with this new vehicle and we're very, very excited about it. I mean it is -- there's just nothing like it ever been built. The low floor and the light weight and the cost and the safety systems and the all-wheel drive and an integrated drone and telematics system. And those aren't afterthoughts since this was a from scratch build, those are all tightly integrated into one system. And I can tell you, just from customers of old and new folks getting into this business, we're receiving interest across the board.

[Brian Kinstlinger:]

So then a good follow-up to that question would be if you look at the e-retailers, e-tailers and if you look at your customers other than UPS are those companies significantly building out infrastructure? Or has that not really begun to occur in a significant level yet?

[Stephen Burns:]

Do you mean like logistics infrastructure or charging infrastructure?

[Brian Kinstlinger:]

Charging infrastructure, right. They can't accept, they're not going to accept trucks if they can't have the infrastructure to charge them, so I'm curious, has that process begun for either your customer base outside of UPS or the e-tailers that you're trying to sell into?

[Stephen Burns:]

I can tell you that all our customers that we're trying to sell into, infrastructure comes up, of course. They're all like, where are we going to plug these in? Right? That's why a lot of people like the range extender option because it lets them have a smaller infrastructure and not worry about a brownout or anything like that. Let's them put these vehicles, plug them in or put them in their system now and add infrastructure as you go. But as Duane was discussing, that's kind of the number -- because the infrastructure is slow to follow and we don't want to wait for infrastructure to catch up. So we're trying to build vehicles that -- like if you bought a Chevy Volt right now, right, you could run it, plug it into 110, if you wanted to, right, but of course you get the best out of it if you plug it into a 220 so it can charge faster. But if you didn't charge it at all, you can run it on gasoline, right? And even there, it's a very efficient vehicle. So we're kind of taking the same approach to that because we just don't want to wait for infrastructure. We don't want that to hold us back and so that's why we build the different -- the all-electric and the range extender versions. But infrastructure is the number one question a logistics person asks when you say electric vehicles.

[Brian Kinstlinger:]

Yes. Just a couple of more. First of all, earlier this week, Ryder purchased 125 EVs from Chanje. I may have pronounced that wrong, sorry. First, what is the primary use of their vehicle? I know it's 3 times the weight of yours. Second, is Ryder -- does Ryder need to purchase any inventory from Workhorse as well? I mean, maybe go through that please.

[Stephen Burns:]

Sure. I think they call it Chanje, probably. I think so. With a twist, with a J in there. I wouldn't want to compare our vehicle. We believe ours to be vastly superior. But Ryder as you may or may not remember, bought 2,500 -- preordered 2,500 W-15s. So a lot more than the 125 Chanje they bought. The reason they're preorders and not orders is because we don't have the vehicles yet. But we expect, as we rollout in first quarter and start initial production of the N-GEN, we're expecting to have Ryder either sell those to their customers or take inventory of some like they did to Chanje vehicles, from what we understand. But we kind of -- Chanje has an electric van, so I think that somebody else has seen that, that's a valid marketplace. But we believe we've come in with a very modern lightweight version of that.

[Brian Kinstlinger:]

Great. Last question I have, I don't think anyone can argue that you are further along the path of development of all these different EVs than most others in your space. I guess, I think one of the questions I often get is what is holding a strategic partner back from making an investment, as financing has been your hardest part. So what has for the last year and a half years, because I think you've probably seek out strategic partners, what has been the push back? Why have they elected not to invest in Workhorse?

[Stephen Burns:]

Well, I think it's important to say, I mean, we have said this several times, right? Obviously, a strategic partner would be very valuable to us, right? And we have had offers from strategic partners that we have turned down, right, that we're not -- we didn't feel attractive. So it's not like we've never had an opportunity to close one of those deals. We -- it is a very -- automotive is very tricky business, it's typically thought as a very capital intensive business. That scares a lot of strategists away, right? We have somehow been able to do this for a penny on a dollar compared to your conventional automotive cost. And a lot of folks feel that, that's a miracle, good job, but sooner or later, it's going to become a more expensive process. So as we make these milestones and people see that we are producing, right, we are entering in exciting new markets like SureFly, right. Vertical takeoff and landing vehicles are getting funding far exceeding what we've raised in 10 years for all Workhorse. Startups are getting that kind of funding for the VTOL market. So I think every vehicle we put on the road, every mile we put on the road, every happy driver and happy customer, it all lends itself to finding the right strategic that it's just not as risky for them. We believe we are lowering the risk for a strategic, and we are actively in discussions with some that we are really hoping to get.

[Brian Kinstlinger:]

Okay, thank you.

[Operator:]

Our next question comes from Paul Largo with Wells Fargo.

[Paul Largo:]

Hey Steve, Paul, Duane, thank you for taking my questions. Regarding the N-GEN, there's a recent news piece that came out, and then, I believe, it was in article with an interview with you Steve that you mentioned a large e-commerce provider getting involved as soon as Christmas or next year with those drones. And I know it was touched on a little bit, but did we miss the press release on anything more specific than that?

[Stephen Burns:]

No, we were at a drone conference, a Pack Expo conference earlier in the year. And we said we believe we will start delivering via drone towards the end of this year. And we have not stated who that is, and it will be -- in all likelihood, it will be us delivering for someone because we want to make sure our people are actively involved as we work it through its early deliveries. So we still believe that a white Workhorse truck will pull up and start delivering via drone, real deliveries, in the U.S. tail end of this year, maybe. Again, Christmas just -- it gets so busy in our whole space, but certainly, early next year if we don't make it this year.

[Paul Largo:]

Okay, thank you. And in terms of Union City, when I think about that for next year, you touched on the N-GEN ramp up. Is it safe to say that you envision Union City developing all these products in your portfolio or the majority of them as time evolves? And at this point, your ramp up has been significant, particularly in the past few months. It looks like, maybe, you're currently at 120 units a quarter, and I guess, it was probably the E-GEN. So is that in line with the order flow or have -- once the UPS orders are completed, will there potentially be a gap that we need to close with some sales?

[Stephen Burns:]

Well, that's what every manufacturer has to balance, right? You got to keep your folks busy and you've got to keep sales coming in and revenue coming in. And here, we've added the extra complexity of crossing the line over to gross positive margin on these vehicles. And so we intend to keep Union City. Union City is our gem, right? That's going to assemble our vehicles, even the SureFly. The only thing that's assembled here in Cincinnati, at the headquarters, are the battery packs, which is not trivial, I don't mean to minimalize that, we're adding a lot of automation towards that end. But Union City is key in every vehicle we make. And we also try to design our vehicles so that they can be made at the Union City facility with as little CapEx -- additional new CapEx as possible, which we're really happy that we've kept that to a minimum.

[Paul Largo:]

So when we look out for next year and products -- units being completed out of Union City, what percentage would you estimate might be the N-GEN versus the E-GENs and any other product?

[Stephen Burns:]

I think until the late in the year, when the W-15 initial production starts, and again, it'll just be initial, N-GEN will be our number one vehicle in '18 as far as volume is our prediction.

[Paul Largo:]

Great. And last question regarding analytics and selling back to customers, maybe just to help with Alpha bakeries, when they increase their orders. How much of your data crunching of the efficiencies in supporting your value proposition are being confirmed by your customer's data so that when you meet up to do a review and potentially get new orders, are they confirming your numbers of where you think the efficiencies are? Are they coming up even more efficient? Less?

[Stephen Burns:]

Yes, actually better than we had hoped. We have two metrics we follow. Our telematics, our Metron Telematics, which is our in-house developed telematics, it's in every truck. That feeds us and the customer every 10 seconds data on the vehicles. So we have these large 19,500-pound vehicles getting better fuel economy than a Toyota Camry, right, quite remarkable. And that is -- that's instantaneous. You can't fool it, right? Mass is mass, and moving that kind of mass 65 miles during the day, stopping and going, you prove that very, very readily. The additional part of our savings comes from maintenance savings, right? And I think, we've told our customers they likely will not change their brakes in the entire time they own our vehicles. And I think things like that are coming true naturally. We don't have a transmission, so we've told them that they'll never build another transmission that's 100% percent true. All of our gas engines are holding up, they're great BMW engines and they're performing as required. The chassis are rock solid. Those existing E-GEN chassis, a lot of that is from the Navistar pedigree, so those are rock-solid. So I think, it's fair to say -- again, maintenance, we kind of have to prove over time. But directionally, it is right where we had hoped or better. Teething problems in systems aside, where we believe that we have built a vehicle that will save, if somebody keeps our trucks 150 years, these large trucks -- I'm sorry, not 150 years, 20 years, we believe it will save them $150,000 over the life of that truck, and we believe that's a conservative number.

[Paul Largo:]

And one more question. Regarding UPS, I think, last year it was 125 trucks, this year it was 200 trucks. I think we all like to see a bigger order, whether it comes from them in the form of the E-GEN or the N-GEN. Is there a tendency to wait until the completion of the current order before allowing you guys to post a press release on the new order?

[Stephen Burns:]

I think I will position it this way. Since we have this ever increasing -- we want ever increasing larger orders, right, and UPS is probably -- I think, it totals up about 350 vehicles from us, right? And again just to put that in perspective, we don't know any other company worldwide that has that kind of vehicles on the street running electric, medium-duty delivery vehicles. So just to put it in perspective, although we constantly need and want new orders and the ever increasing size of the orders, we lead the planet right now, right? Although 350 seems like just a drop in a bucket, but it is still world-leading, as far as we're aware. We're for sure leading in the United States, and we've never seen any announcement anywhere in the world of anything that size. The other thing that comes from those kind of miles and the number of packages delivered from that kind of volume, leading volume, the learnings that come out of it are how you keep your competitive edge. So we worked with all of our customers to say what's the ideal vehicle for you, and that's what we call now the N-GEN. So although it's new and we don't want to have to start with -- and we've told them we really can't do tiny orders to say let's test that like we did the E-GEN back then. So we're putting a lot of pressure on our customers to say larger orders and we think they're all attainable. When I say pressure, it's pressure because a lot of these folks have legacy vehicles, tens of thousands of them. And once you start getting -- let's say somebody was going to give us an order for a 1,000 vehicles. That is essentially a -- they don't buy 1,000 vehicles just to test, they don't buy them to orphan them later. That is a major change in how things are delivered in America, if anybody were to order that size. And really, I mean, even the orders we have, we think is an outside change. So it's not trivial what we've done. We're very happy with our progress. And again, we're world-leading. And we don't feel like anybody -- the experiences we have on the road in those miles are going to enable us to stay in front of everybody. And the N-GEN is a result of that effort. So we're expecting to sell more N-GENs than we've ever sold of anything. But we don't give -- we just don't give predictions. We feel we're too small, the industry is too new to give financial predictions.

[Paul Largo:]

Thank you very much.

[Operator:]

Ladies and gentlemen, this is all the time we have available for Q&A today. I would now like to turn the floor back over to management for closing comments.

[Stephen Burns:]

I'd just like -- this is Steve, I'd just like to thank everyone for listening, for following us. I'd like to thank all of our employees that have worked so hard to make this happen. We have an incredible group that enables us to do great things and fight above our weight class. And so I want to make sure I thank everybody, investors that have hung with us early on. Investors that saw the vision early and are starting to see it realized, as well as our workers. Duane, do you have anything you want to say?

[Duane Hughes:]

Sorry, I was on mute. No, I think you covered it, Steve. We're very excited about the opportunities ahead of us, continuing to get everybody work as hard as we can to deliver the best product out there.

[Stephen Burns:]

Okay, Danielle. I think we're good here.

[Operator:]

Excellent. Thank you, ladies and gentlemen. This does conclude our conference for today. You may now disconnect your lines. Thank you all for your participation. Have a wonderful day.