Workhorse Group Inc. (NASDAQ:WKHS) Q1 2023 Earnings Call Transcript May 15, 2023

Workhorse Group Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.18.

Operator: Ladies and gentlemen, greetings, and welcome to the Workhorse Group’s First Quarter 2023 Investor Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse Group’s Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.

Stan March: Thank you, Darryl. Good morning, and welcome to all of you joining us on today’s first quarter 2023 results call. Before we begin, I’d like to note that we’ve posted the results for the first quarter ending March 31, 2023 via press release. You can also find this release, as well as an accompanying presentation in the Investor Relations Section of our website. We’ve also filed our first quarter Form 10-Q this morning. We’ll be tracking to the posted presentation during today’s call, so please follow along either from the link in the press release or through the website directly. And with that, let’s get started. Joining me on today’s call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. The agenda today’s call can be found on Slide 3.

Following my brief opening remarks, I’ll hand the call over to Rick, we’ll give you an update on the progress we’ve made on our strategic and operational priorities during the quarter. Bob will then walk us through our financial results for the quarter and cover our 2023 guidance. We’ll then take your questions. Our disclaimer can be found on Slide 4. Some of the comments that will be made today are forward-looking and therefore are subject to certain provisions, as a results and uncertainties. You can find the full disclaimer statement in our 10-Q and other periodic filings on file with the SEC, as well as in today’s press release. With that, I’ll now turn the call over to Rick Dauch. Rick.

Rick Dauch: Thanks Dan. Good morning, everyone. Thank you all for taking the time to join us today. Before I jump into the details of our Q1 performance, I want to spend a moment or two discussing the primary markets segment that Workhorse services, the North American, Class 4 to Class 6 Commercial, Electric Vehicle Business, true work trucks. These are challenging times for nearly every company competing in this segment, both start-ups and well-established OEMs. The generational technology transition from ICE to EV Powered Commercial Vehicles is a true paradigm shift and it’s not an easy one. The ICE to EV transition will occur over decades and will require significant investment in electric charging infrastructure and power generation, vehicle and component engineering and R&D, supplier tooling, factory conversion or new factory construction.

Not all of those trying to establish themselves in the commercial EV space will make it. There will be casualties along the way and likely a consolidation of competitors in the segment, at both the OEM and supplier levels. Make no mistake; Workhorse is one of the pioneers in the commercial EV industry, specifically in the step van segment. We are not a SPAC fund and start-up company. We are not doing EV retrofits of internal combustion engine vehicles. We are a company of the rich and long heritage in the EV step van space. While the industry transition challenges sound ominous, here at Workhorse we have an executable plan to emerge as winners. First and foremost, we have assembled the right team. We brought in experienced, capable leaders and operators from the automotive, commercial truck and military service, who are armed with a can-do, get-it-done spirit and mentality.

The manufacturing complex at Union City has been upgraded and expanded. It is ready to roll and it’s now in production. We have the foundational plants, warehouse and battery storage facilities capable of producing up to 10,000 vehicles a year by 2025, 2026. Very few of our startup competitors can make that claim or actually show you an operating production facility. Ask them if you can go visit their plant. Our new product roadmap is fully defined. We have a family of industry leading EV powered, Class 4 to 6 Commercial Vehicles being launched over the next three years, with three new products alone in 2023. We have strategically selected proven, financially stable supply chain partners we can count on to supply our critical component needs.

So we have or we will soon have the family of products necessary to compete in the emerging EV Class 4 to Class 6 market. The W56 family of vehicles we are launching in Q3 this year are completely new vehicles from the ground up. Internally designed, tested, tooled and launched in less than two years, with less than 50 engineers and technicians. I’m really proud of them. We are moving quickly to establish a commercial dealer network and secure the necessary manufacturing licenses to serve commercial fleets from coast-to-coast, as they make their own transition to EV powered trucks. These deals are excited by the W56 family of products. We are well positioned to capture the wave of market momentum emerging for commercial EV vehicles. On all fronts we are pushing the boundaries and overcoming real challenges as we create a successful commercial EV OEM.

I’d like to tell our team here at Workhorse that they are true pioneers and that we are on the precipice of success. Moving to Slide 6, the generational shift to EV powered vehicles is now underway and it continues to pick up speed, ramping up specifically in 2024. The easiest way to illustrate this is a quick review of the two pronged regulatory efforts underway in California. The state’s advanced clean truck rule forecast focuses on commercial vehicle OEMs and mandates the percentage of zero emission vehicles that those companies must build and sell in the state by the OEMs. The core layer to the clean truck mandate is the California Advanced Clean Fleet Rule. This new regulatory mandate targets commercial fleet owners aiming for a fully zero emission fleet throughout the state by 2045.

It won’t surprise you that California’s municipal governments with both small and large fleets were common guests in our booth at the ACT Show last week at Anaheim. They have a clear mandate and they have the funding available to move to EV powered vehicle starting in 2024. And we will have the types of vehicles they need across the Class 4 to 6 Segment. These two new CARB generated rules essentially reset the state’s supply and demand minimums for commercial EV requirements over the next two decades and where CARB leads, other states follow. On Slide 7 you can see the graphical version of this regulation which kicks in on January 1, 2024 at 9% in Class 4 to 8 vehicles. As you can see, the requirement ramps to 50% and by 2030 with a 75% requirement for OEM sales percentage of zero emission by 2035.

This is exactly the segment where our products are targeted. On Slide 8 you can see the other States that are following the California mandates. It includes 13 more States and the District of Columbia with five of those states adopting the regulations in the ensuing three years. This is the definition of a target-rich environment for an EV industry pioneer. Turning now to highlights from the quarter on Slide 9. Over the past 21 months we have rebuilt Workhorse’s foundation, following or stabilized, fixed and growth turnaround framework. We completed building-out our experienced engineering, operations, administrative and leadership teams. Transformed our Union City facility into a world-class manufacturing complex, and made tangible progress in our new product portfolio roadmaps.

In 2023 we remained laser-focused on execution, specifically the production and delivery of world-class trucks and drones. We made important progress on all fronts in the first quarter. First, we advanced our commercial vehicle programs. We ramped up production of the W4 CC vehicles. We completed the initial build of the W – the pilot build of the W750-step-van. We successfully unveiled the W56 vehicle at multiple industry events, which was well-received by prospective customers. While behind after Q1, we feel we are on track for our full year W4 CC, and W750 delivery targets, and look forward to be getting production of the W56 in the third quarter. We also assembled a ship 18 Tropos vehicles as part of our three-year contract with our company, and are continuing to wrap-up shipments of these unique vehicles in the coming months.

We also make significant strides in our aerospace business, and saw continued strong interests in both our HorseFly and Falcon drones. We performed a large number of flight demonstrations with prospective government and commercial customers during the first quarter. We are ready to ramp production in the factory, and have the parts on-hand to build initial orders. The Air Force’s North Spark Defense Laboratory, based at Grand Forks Air Force Base in North Dakota, is working to finalize its purchase of one of our Falcon drones and our suite of supporting systems. Qualifying to sell to the United States Air Force is no small thing. We continue to execute our Stables & Stalls package, delivery routes for FedEx’s Ground and we expect to electrify our fleet by the end of the second quarter.

We are also continuing to look at the best options for expansions into a second Stables & Stalls site, in either an incentive base state, and/or possibly at a federal government-owned location. Additionally we complete facility improvements at are drone engineering, technical design and production facility in Mason, Ohio, and we are on track to install the end-of-line dynamometer, assembly and paint line to Union City ahead of the W56 launch in Q3. Turning to Slide 10, I want to provide some additional details on the important progress we are making on our commercial vehicle product road maps, starting with our Class 4 offerings, the W4 CC and the W750. After receiving the Green Power chassis units at the end of December 2022, Workhorse worked hard to modify and upgrade these base units to fully meet Workhorse quality centers in Q1.

These upgrades took longer than expected to work through as we experienced delivery issues on a few key components. Type primarily the tooling and production ramp up of a handful of parts, specifically related to light bezels, cab heaters, back panel covers and liners. As a result of these specific parts issues, we were only able to deliver 10 trucks during the first quarter. However, we expeditiously resolved these issues, and the company is currently shipping an additional 40 W4 CC trucks to fulfill a fully executed purchase order. With the chassis delivery and W4 CC supply issues now behind us, we remain on track to meet our full year 2023 W4 CC delivery targets for the year. As mentioned earlier, the initial W750 pilot bills are complete.

We are working through a handful of design and supplier tooling changes on this vehicle, but initial production remains on track to start in the second quarter. Turning to Slide 11, the W56, which is the first new Workhorse full of design and purpose-built chassis platform, it remains on track to start production in Q3 ‘23. Importantly, this quarter we successfully unveiled the new step van vehicle of an NTEA Work Truck Show in Indianapolis, and had a fully subscribed ride and drive-chat session at the ACT Expo in Anaheim, California last week, both of which garnered significant positive feedback from prospective customers. As I have mentioned in the past, the W56 is a foundational life blood product for Workhorse. Moving on to the WNext vehicle, this is our longer term project.

We plan to combine our previous Class 3 and Class 4 vehicle experience to develop the next generation vehicle with an accessible low floor frame, improved ride and handling, efficient lightweight systems, and advanced safety technology. We will focus on prototype design, test and build in 2023 and 2024 and we expect to begin production of the WNext in 2025. Moving to Slide 12. As we announced during the first quarter, Workhorse is developing a certified dealer network to meet end customer needs across the US. As you can see on the slide, we have already identified and begun or have completed the onboarding of dealers in the light blue shared states. This process includes prospective dealers visiting the Union City plant, meeting with and being trained by our Field Service and Warranty teams.

Feedback from these dealer day events has been universally positive. As part of the dealer agreement process, the dealers sign up for initial stocking orders on W4 CC and W750. We plan to onboard eight to 10 new dealers in 2023, many with multiple locations across 22 states. Several states require us to have manufacturing licenses in order to sell vehicles and each state’s, application process is different and some are quite cumbersome. A few of our officers, including me, have had to go and get fingerprinted and have background checks completed in multiple states in order to secure these licenses. As of today, we now have 13 of the 22 manufacturing licenses required to sell vehicles in our targeted states. On Slide 13, a few words about our Stables & Stalls initiative launched last year.

This fleet electrification initiative provides services and charging infrastructure to support small fleet operators with EV powered fleets. We recently renewed our contract to deliver last mile packages for FedEx Ground in Ohio and have continued to execute our package delivery routes throughout the first quarter. We expect to electrify the 11 of the Ohio fleet by the end of Q2 ‘23 and are currently exploring opportunities to establish one to two additional sites in an incentive based state and/or a federally owned location. The Stables & Stalls initiative is expected to provide us valuable insights into the owner-operator business model and how we can provide a meaningful advantage to further boost the transition to EV platforms, especially for smaller fleets.

Moving on to our aerospace business on Slide 14, which had a very busy start to the year. We advanced the development and testing of our drones to target two compelling growing markets, package delivery and agricultural and infrastructure data acquisition and data use. We conducted demonstrations off simultaneous package deliveries by multiple HorseFly aircraft to two prospective last-mile delivery clients and a potential industry partner. In addition, we successfully completed demonstrations of both the HorseFly and the FALCON drones for the U.S. military multiple branches. As a reminder, our HorseFly platform is an all-electric, multipurpose, uncrewed aerial system, designed to tackle a variety of commercial applications. It uses a winch delivery system to provide safe, reliable and precise last-mile delivery in various conditions and carry up to 10 pounds for 10 miles with a 45 minutes flight time.

Our other drone is our Humanitarian Aid and Logistics Operations or HALO aircraft, which we’ve internally called the Falcon. It has the same airframe, propulsion system and set of navigational capabilities as the HorseFly, but has a longer, a lower gross weight, so it can carry more payload across a longer distance. This drone is designed to be used in austere, difficult training conditions. We are about to secure our first purchase order for the FALCON from the U.S. government and are close to landing additional new orders for this tough duty drone. Our team has another large demo with the U.S. government agencies next week and we hope to build on our success with the U.S. Air Force. We completed scanning land in Arkansas and Mississippi for the U.S. Department of Agricultural’s Government second grant in support of underserved farmers and ranchers.

We are actively exploring additional opportunities for collaboration with both the federal and state government agencies. The initial feedback we are receiving from the USDA is very encouraging. In their words, the data we are providing is game changing in terms of detail and timeless versus the current data collection methods employed across not only farmland, but other larger federally owned areas across the country. Overall, we are pleased with our progress now and look forward to announcing additional appeals or government grants in the coming months. With that, I’ll now turn the call over to Bob to discuss our financial results for the quarter.

Bob Ginnan : Thanks, Rick. Let’s turn to Slide 15 to discuss our first quarter financial results. Our first quarter results demonstrate the team’s focus on operational execution and financial discipline. As Rick stated, we are ramping up the production and delivery of vehicles, and expect that to continue throughout the rest of the year. We expect this will generate significant revenue growth in 2023. At the same time, we are managing our cash burn well and enhancing our back office systems to make us an even more efficient organization. Turning now to results, sales net of returns and allowances for the first quarter of 2023 were $1.7 million, compared to $14,000 in the same period last year. The increase in net sales is primarily due to sales volume of the W4 CC.

As Rick explained earlier, getting suppliers tooled up and launched on key components required to upgrade the W4 CC product took longer than expected. It impacted our throughput in sales in Q1. We expect to make up those units across the balance of 2023. Cost of sales increased to $5.3 million from $3.9 million in the same period last year, primarily due to the $900,000 increase in costs related to direct materials and a $1.1 million increase in employee compensation and related expenses to support vehicle sales during the period. The increase in cost of sales was partially offset by a $400,000 decrease in inventory reserve expenses and a $200,000 decrease in other related overhead costs. Selling, general and administrative expenses increased to $14.7 million from $11.9 million in the same period last year.

The increase in SG&A expenses was primarily driven by a $3.1 million increase in employee compensation in related expenses, primarily due to increased headcount in non-cash stock based compensation expense. Research and development expenses increased to $7.2 million compared to $4 million in the same period last year. The increase in R&D expense was primarily driven by a $1.7 million increase in prototype expense related to the continued development of the company’s expanded product roadmap, including the HorseFly, FALCON, W56 and W750 vehicle programs. An increase of $700,000 in employee compensation related expenses as the company increased headcount and a $300,000 increase in consulting expenses. Net interest income was $600,000 compared to a negative $2.2 million in the same period last year.

Net interest income in the current period was driven by interest earned on the cash in our money market investment account. Net interest expense in the prior period was primarily related to fair value adjustments, contractual interest expense and a loss on the conversion of the company’s former convertible notes due 2024. The entire outstanding aggregate principle of these notes were exchanged for the shares of the company’s common stock during 2021 and 2022. Turning to Slide 16 to discuss our balance sheet. We are continuing to operate debt free, and as of March 31, 2023 we had approximately $79.1 million in cash and cash equivalents. In addition, we have our at-the-market program in place, and during the first quarter we issued 14.4 million shares under the ATM for net proceeds of $18.6 million.

You might have noticed that we recently filed $150 million shelf registration statement with the SEC. Just want to point out, this was a normal renewal of the former shelf’s three-year term was expiring. The former shelf had approximately $143 million remaining on it. We believe our existing capital resources and capital availability will be sufficient to support our current and projected funding requirements through 2023. If the opportunity arises and market conditions are appropriate, we will raise additional financing in 2023, including through a continuance of our at the market offering. Turning to Slide 17, we are reaffirming our guidance as we expect to ramp up production and delivery throughout the rest of the year. We are now shipping W4 CC vehicles to customers, and production is ramping up to five units per day by the end of Q2, as component suppliers stabilize their own production.

Start of W750 production is on track to begin later this quarter, and the W56 is on schedule to launch in Q3. We continue to expect revenue to be in the range of $75 million to $125 million for calendar year 2023, assuming current supply chain lead times remain unchanged. Securing the state manufacturing license and onboarding our new dealers is critical to our success over the next two quarters. At the same time, we are managing our cash burn well and enhancing our systems internally to make us an even more efficient organization. We are confident that the actions we are taking now allow us to deliver on our goals and generate value for our shareholders. I’ll now turn back to Rick to wrap up the call.

Rick Dauch : Thanks Bob. I want to briefly discuss some of our key second quarter priorities which are outlined on Slide 18. Above all else, we are focused on advancing our product – new product roadmaps and keeping them on time and on budget. Specifically, we are continuing to ramp up production and delivery of our W4 CC in the second quarter and expect to deliver significantly more vehicles than in Q1. We are on track to begin production of the W750 vehicles in Q2. The W56 program remains on track as well and we will continue to showcase the new step-van vehicle to prospective customers ahead of starting production in Q3. These trucks are now in the critical vehicle durability component and system testing phase, which we expect to complete in June and July timeframe.

When the testing is complete, we will put safe, reliable demo trucks in the hands are our large last mile delivery fleets, and work to secure future purchase orders for Q4 ‘23 and ‘24 and beyond. We’ll also continue to electrify our fleet under our Stables & Stalls program, first with the W750 in the second quarter, and then with the W56 vans in the third quarter. During the second quarter we intend to earn more customer orders, grow our sales, and further build out our CV dealer network. We are making steady progress building out our CV dealer network, with plans to onboard eight to ten new dealer groups in 2023. I’ll be on the road myself the next two, three weeks, meeting with targeted dealers and fleets around the country, and we have our third dealer day set up at Union City later this month on May 31.

On the aerospace front, we are excited to be on the cusp of having our initial purchase order from the U.S. Air Force, and we’ll continue completing flight testing and demonstration with prospective customers. We expect to earn additional significant work with the USDA also end of Q2. Finally, we will continue executing our common assistance plans in the second quarter, including transitioning to a new ERP system, which will help drive operational efficiencies as we ramp up production of our products. We expect to complete the ERP transition in Q3 this year. Before we turn the call over to Q&A, I want to reemphasize a few important takeaways from our call today. First, with few exceptions, most notably transitioning to the new ERP system and establishing a nationwide dealer network, we have completed rebuilding the foundations of our company.

We have an incredibly talented team of functional experts and business leaders with extensive automotive, commercial vehicle and aviation industry experience, a great team here at Workforce. Second, we have state-of-the-art manufacturing and engineering facilities and equipment in which to execute our new product road maps, for both our commercial vehicles and aerospace drones. We are focused on execution, execution and execution. We are finishing the design and testing phase, ramping up production for our vehicles, trucks and drones, and delivering safe, reliable and efficient vehicles to customers. Most importantly, we expect to generate profitable contribution margins on every vehicle we produce and ship going forward. We remain confident in the market opportunities ahead in our industry to deliver value to our customers, shareholders and other stakeholders.

The transition to EV powered commercial vehicles is significantly progressing and there is strong market demand and government support for EV, UAVs, and infrastructure to make them work. And finally, we have the necessary access to cash and capital resources to execute on our go-forward plans. We will continue to monitor our financial position, investments and future capital needs to support our business strategy. The Workforce team is highly experienced. We know that we still have significant work ahead of us, and we are ready to meet head-on the challenges we will encounter on our EV journey. We are encouraged by the progress we are making, the solid foundation is now in place, and the positive feedback we are receiving from our current and prospective partners.

We are confident in our product portfolio of EV products. After almost two years of hard work, Workforce is ready to run and establish itself as a winner in the transition to commercial electric vehicles, both on the ground and in the air. That concludes our preparatory marks. Thank you all again for your time this morning. We are now ready to open the call for your questions. Darryl, please provide the appropriate instructions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is coming from the line of Colin Rusch with Oppenheimer. Please proceed with your questions.

A – Rick Dauch: So on the agriculture side, I think we’re progressing pretty quickly there and have some good programs in place, and I think we’ll continue to see that grow, so I feel like that’s on track. On the drone side, obviously it’s a tough market and bringing it to market has been longer than we had hoped, but I think we have the technological breakthroughs, and now it’s about building that market network and distribution, so that we can start selling those here in the latter half of the year.

A – Bob Ginnan: Thanks Colin.

Operator: Thank you. Our next questions come from the line of Jeff Osborne with TD Cowen. Please proceed with your questions.

A – Rick Dauch: That’s a good question. The larger dealers we’re meeting with have already started putting in their own charging systems at their locations. Several of these dealers run large rental fleets, and so they are looking at some of the areas where they use the W4 CC or the step van, specifically where they are using that. We’ve gone out to a couple interesting locations, one an LA company. I won’t mention their name right now, but they put in a large charging station area. They’ve got multiple EV trucks they purchase, and they are leasing them to the little fleets in LA right now, and they are going to expand that program to multiple cities across the United States, including New York, Houston, Atlanta, etc. and Florida.

So some people are out there on the cutting edge I’ll say. On the backside, last week in Indianapolis we met with a distribution company who has 800 trucks and he said, basically I need help. Can you help me chart the path to EV? I need your kind of trucks, Class 4 and Class 5/6 step van specifically. He’s got 800 trucks, 100 above the in Canada and 700 in the United States at multiple locations. He needs an education on fast charging, slow charging, how often do you charge them? What’s the route availability? How does the batteries handle the charging in the cold weather, hot weather? That’s exactly what we’re learning on Stables & Stalls. We can give you lots of data now for over a year of how to run an ice fleet with old trucks, what it costs to repair them, fuel them, staff them and we’re going to soon have that same data for the EVs when we electrify the Stables & Stalls.

So we’ll be able to help those fleets that need to make the conversion. I’ll also tell you that that distribution company is owned by a European company, and he was given a mandate to convert at least 50 of his 800 trucks this year to EV before the end of the year and that wasn’t a choice. He’s got to go do it. Now he’s got to find the right OEMs, the right charging systems and we do get a lot of questions about who are the right charging partners. We’ve done some work with ChargePoint, we’ve done some work with ABB, we’ve done some work with Shell, so we have some good information about that. But I do think it’s going to take time, right. So the federal government’s put the money behind, put it in the charges infrastructure, and then the big fleets just started to put their own money into it as well.

And there’s a cottage industry Jeff that’s popping up, of people who can go in and help secure the land and tie the grids in there. And there’s programs specifically in California with the San Diego Power and Light, and the guys out west, they are doing some charging systems there. So lots of work to be done, that’s for sure.

A – Rick Dauch: Now, the majority of that is going to be the revenue from the Stables & Stalls, package delivery. A little bit of it Tropos, but most of it is Stables & Stalls.

A – Rick Dauch: That’s a little bit early. Go ahead, Bob?

A – Rick Dauch: Yeah. This company has a history of designing some pretty unique trucks and selling them for about half of what they put into them. So we put an EDIC out and we got here. Say we’re going to design, test and build trucks that we can make money. We’re a publicly traded company. Got to have a path towards our profitability. This designing, building and selling cool trucks at a loss puts you out of business long term, so.

A – Rick Dauch: Great.

Operator: Thank you. Our next questions come from the line of Chris Souther with B. Riley. Please proceed with your questions.

Operator: Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.

Operator: Thank you. Our next question has come from the line of Mike Shlisky with D.A. Davidson. Please proceed with your questions.

Operator: Thank you. Our next question is coming from the line of correct Craig Irwin with ROTH MKM. Please proceed with your questions.

Operator: Thank you. There are no further questions at this time. I would now like to hand the call back over to management for any closing remarks.

Rick Dauch : Well, I appreciate your questions and your interest in the Workhorse and we’re going to go back, put our nose in the grindstone and kick some ass in the second quarter and get ready to build and sell some trucks and drones. Thanks a lot and have a great day!

Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.