Xos, Inc. (NASDAQ:XOS) Q4 2022 Earnings Call Transcript

Xos, Inc. (NASDAQ:XOS) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Greetings and welcome to Xos Inc.’s Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of Xos, Christen Romero. Thank you, you may begin.

Christen Romero: Thank you, operator, and thank you everyone for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Semler; Chief Operating Officer, Giordano Sordoni; Chief Financial Officer, Kingsley Afemikhe; and our Head of Engineering, Scott Zion. Ahead of this call, Xos issued its fourth quarter and full year 2022 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investors.xostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today’s earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission.

These documents can be found on our website at investor.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today’s presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company’s fourth quarter and full year 2022 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on any forward-looking statements. With that, I’ll turn it over to Dakota.

Dakota Semler: Thanks Christen and good afternoon to everyone joining our call today to discuss the strategic milestones and successes of 2022 and the key initiatives that better position Xos for significant growth in 2023 and going forward. On the call, our COO, Gio Sordoni, will offer insights into the steps we are taking to deliver gross margin positive units later this year. Next, our Head of Engineering, Scott Zion, will provide an update on the cost reduction and performance upgrades of the 2023 step van. Followed by CFO, Kingsley Afemikhe, who will share the company’s fourth quarter financial performance and expectations for 2023. I will provide an overview of projected milestones over the upcoming year as well as an update on the commercial traction we are seeing with customers in the field and will detail our progress on the deployment of charging infrastructure.

We have created a strategy that is based on three core tenants to build and sustain a high growth enterprise. These tenants are; first, grow demand and deliveries of our products; second, improve gross margins; and third, maintain healthy access to capital to ensure we are strongly positioned to fund and scale the business. I will begin by sharing an update on what we are seeing with customers as the demand for commercial electric vehicles continues to grow. There are three primary factors that drive demand for Xos products and solutions. Number one, fleet replacement levels; number two, strong interest from a broad set of customers; and number three, the supportive regulatory environments. First, we will discuss fleet replacement levels. Industry-wide supply chain constraints and delayed vehicle production over the past three years resulted in many fleets being unable to maintain their normal fleet replacement cycles.

As a result, there is pent up demand for new vehicles as many potential customers with designated vehicle purchase allocations have yet to fulfill such targets. Older vehicles remain in operation beyond typical maintenance thresholds for fleets or in certain cases are non-compliant with newer emissions regulations and this places further incentive for fleet operators to acquire new commercial vehicles. Second, we are experiencing strong demand as a result of the diversification of the wide appeal of our product line to a diverse set of customers, including many large national customers across multiple industries. While step vans are most associated with parcel delivery, with Xos serving independent service providers of two of the largest parcel delivery companies in the world, we also now serve four of the top uniform rental fleets as well as two of the largest US-based beverage fleets in the country.

This adoption rate amongst the leaders in their respective segments underscores the value customers see in Xos’ products. We are also seeing additional opportunities with new customers in armored transport, beverage delivery, food delivery, uniform rental, and ancillary fleet services. In 2022, we added over 800 signed step van orders to our backlog, including a 30-unit order from uniform rental provider Alsco. Subsequent to year end, we received a 150-unit order from transport service provider Loomis, another large scale multinational customer with hundreds of locations across the US. We recently unveiled the 2023 model year Xos step van and have secured multiple orders with delivery set to take place mid-2023. These orders serve as proof points for the wide appeal and application of our product line and over time the diversification of end market customers will allow us to capture more of the market and better manage seasonal cycles.

With strong demand for our step van, we’re seeing growing demand for Xos Energy Solutions, our suite of comprehensive charging infrastructure and services. We recently wrapped up a charging infrastructure installation with our chargers for Loomis at their Montebello, California location and an infrastructure location with our chargers for UniFirst in Boston. Currently, our energy solutions team has multiple installation projects in the works for FedEx Ground operators across the United States. Relatedly, we have achieved an incredible milestone in the first quarter of 2023 and delivered our first Xos hub prototype to one of our Fortune 100 customers where it is already in use serving a partial delivery fleet and collecting real-world usage and reliability data.

The Xos hub is our rapidly deployable mobile DC fast charging solution. A single Xos hub is capable of charging up to five vehicles in one location and requires minimal to no upgrades to the charging site. We are confident it will alleviate certain infrastructure delays we hear from our customers. We currently have engineering builds underway to begin a comprehensive durability test plan for the hub where we will cycle the charging and discharging the system as well as test and validate the hub’s ability to perform reliably in the harsh environments that a trailer mounted mobile charger is likely to endure. We expect the hub to begin scaling production by the third quarter of this year and continue to believe that mobile flexible methods of charging like the hub will play a key role in accelerating fleet electrification.

Third, regulations are playing a significant role in driving demand for commercial electric vehicles. Last year, California passed the Advanced Clean Fleet rule, one of the many examples of a rapidly changing regulatory landscape that commercial fleets will need to adapt to in coming years. Beginning in 2024, under the Advanced Clean Fleet rule, several of our customers will be required to remove all internal combustion vehicles from their California fleet at the end of their useful lives and replace 100% of their California-based medium and heavy-duty units with zero emissions vehicles by 2027. Additionally, commercial EV ownership requirements will increase to 100% between 2035 and 2042 depending on the vehicle type. As a result, we anticipate a sustainable increase in demand and purchase volumes in the short and long-term.

Regulatory incentives encouraging electric vehicle adoption amongst commercial fleets expand beyond California. Xos vehicles are approved for incentive programs in several other attractive markets, including Colorado, Massachusetts, New Jersey, New York, Pennsylvania, and Texas. We are already seeing customers across the nation qualify for and receive millions of dollars in state-level incentives. On the federal-level, the Inflation Reduction Act or IRA, passed in late 2022, offers companies a tax credit of up to $40,000 for the purchase of commercial electric vehicles. Under the current regulations, all of Xos’ vehicle models are eligible for the IRA tax credit. We believe that our attractive products and strong customer relationships, combined with supportive regulatory tailwinds, can drive continued growth for the company and the customers we proudly serve.

That said, from our perspective, the truest pulse of our industry is one-on-one conversations with the customers served by our vehicle products. I spent the month of January and February this year on the road visiting over 30 current and prospective customers with members of our business development team. Our customers confirmed our expectations that critical fleet replacement needs, a diversified customer mix, and new EV-friendly regulations will continue to drive demand for the foreseeable future. Now, I would like to walk through how that growth and demand translated into deliveries for 2022. During the second half of 2022, we delivered 146 units to customers. While Xos had ample demand to support our forecasted volumes, transitioning orders to the new step van model, infrastructure delays, and seasonality in parcel delivery resulted in falling short of our delivery guidance.

However, Xos did meet revenue projections with $19.6 million in revenue for the second half. In total, Xos achieved full year unit deliveries of 275 units and $36.4 million in revenue, a substantial increase of 525% in vehicle deliveries and a 620% increase in topline revenue from 2021. Our positive growth in services revenue underscores the continued diversification of our product lines and the growing importance of generalized revenue rather than vehicle sales revenue alone as an indicator of our success. With that, I would now like to turn the call over to our COO, Gio Sordoni, who will share an operational update.

Giordano Sordoni: Thanks Dakota. Xos’ operational focus remains on achieving our goal to begin shipping gross margin positive units near the end of the second quarter. Through a dedicated cost reduction task force at Xos, we’ve taken multiple steps over the past year position ourselves to achieve this target in areas such as manufacturing, supply chain management, and the procurement of parts, charging infrastructure, and our systems. As we mentioned during our third quarter call, we’ve streamlined our manufacturing operations and focused our production at the Byrdstown, Tennessee facility. As a result, we’ve been able to eliminate unnecessary freight costs and strengthen our inventory management practices. The Byrdstown facility also provides us with the manufacturing capacity to meet our customer needs and continue to grow our business.

Our recently introduced Next-Generation 2023 Step van includes several design improvements that Scott will describe in greater detail shortly. These design changes and more focused production plan will have the potential to reduce material and direct labor costs by about $15,000 per step van, with more cost reductions planned in the future. Part of these savings will come from our diversified battery strategy that includes the lithium-ion phosphate cell chemistry. We continue to invest in our in-house developed battery management and control systems, which integrate the battery into the vehicle. Our in house battery and software teams help us react nimbly to a rapidly evolving battery market. I look forward to sharing more details over the coming quarters as we scale our platform and continue our cost saving efforts.

As for the supply chain, we’ve continued to work in tandem with our engineers and vendors on cost reduction efforts and procurement and logistics as key parts of our product. Our growing scale and brand are helping us achieve better terms as we become stronger partners with these suppliers. We’re also benefiting from lower logistics costs as the cost of moving container from China to North America has fallen sharply over the past year. That said, we are still seeing some delays in the sourcing of certain parts, such as high-voltage cables and low-voltage wiring harnesses. With the volume of unit deliveries increased significantly in 2022, we encountered delays in the deployment of charge infrastructure that prevented customers from taking additional vehicle deliveries as Dakota previously mentioned.

Infrastructure remains a challenge for the industry. However, we’re pleased to see increased attention and investment from vehicle OEMs, regulators, and municipalities to overcome this infrastructure hurdle. At Xos, we’re seeing a growing uptake in demand for our charging hardware and project management services. Fleet operators are recognizing the value of OEM level support and expertise when planning charger layouts, incentive capture, permitting, and utility upgrades. Though infrastructure factors will likely continue to constrain the commercial EV market, we expect that the impact to our business will improve over the coming year. State-level and federal incentives for charging infrastructure are enacted in 2023 will play a large role. Currently, 36 states offer tax credits or rebates for charging structure, which can be stacked with a 6% tax credit of up to $100,000 per item of equipment for new charger installations included in the Inflationary Reduction Act.

As part of Xos’ Energy Solutions, we have a dedicated in-house team focused on helping our customers uncover the best fit incentives and credits available to them, no matter where they live. Finally, we’ve continued to take steps to advance our internal systems and improve the accuracy of our data to help scale our business responsibly. Specifically, we have invested in better tools and processes for inventory management, releasing new designs to manufacture, and production planning. Overall, we’re proud of what the team has been able to accomplish over the last year. The opportunity for clean fleet and logistics solutions in both the public and private sector remains immense and we expect to continue to benefit from a secular shift with net-zero carbon economy.

Now, I’ll turn it over to Scott Zion, Head of Engineering to provide an update on his areas of oversight, which include engineering development, product testing, validation, and new product lines.

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Scott Zion: Thanks Gio. As mentioned earlier, we recently introduced our Next-Generation 2023 model year Step Van, which includes major cost optimization and technology upgrades to our latest generation vehicle; particularly proud of the design improvements for the 2023 Step Van that will deliver the important manufacturing cost reductions that GEO already mentioned. Savings will come mainly from design and sourcing improvements in our battery system, high-voltage distribution equipment, and simplified cable routing with additional optimizations to come as we continue to scale production. Beyond the efforts of the cost optimization team, we were also pleased to release this generation of step van band with greater connectivity, longer range, and a higher payload capacity.

Compared to the prior generation, we expect the 2023 Step Van to provide customers with a higher performance vehicle, while also reducing the cost to manufacture and service it. Regarding connectivity, the 2023 Step Van features an enhanced telematics module and over-the-air software capabilities. The updated telematics module enables advanced remote diagnostics for customers with an Xosphere subscription and provides our engineering and service teams with better insight into the real-world performance of our vehicles. The addition of the over-the-year software updates will reduce the service visits and vehicle downtime experienced by our customers, while also reducing the cost of rolling out new features and important software updates. Going forward, our service team will be able to push software updates to all new step van remotely without requiring a visit to a service center.

When it comes to range, the 2023 Step Van launched the two battery options, a 100-mile usable range specifications for customers operating shorter routes and looking for the most cost-efficient option and the 200-mile option for applications serving larger routes. The 200-mile step van is already expanding our customer mix to include more cash-in transit, uniform and linen rentals, and food and beverage fleets that service routes beyond the range of our previous vehicles. In its long range configuration, the 2023 Step Van offers a usable range among the best available in a comparable commercial EV. In order to support the larger battery of the 200-mile option without sacrificing payload capacity for our customers, all 2023 step vans are rated for a gross vehicle weight of 26,000 pounds, up from 23,000 pounds in previous models.

In addition, several structural changes were made to the chassis to reduce the curb weight of the vehicle, enabling greater payloads and creating a more efficient vehicle. We have packaged the standard batteries on all high-voltage and coolant lines within the frame rails, improving the safety of our vehicle. We also revised the packaging of the high-voltage power electronics into a more compact form factor that allows for the chassis to be used with a wider range of body configuration. We also centralized the thermal management system and deepened our partnerships with one of our critical suppliers to develop and validate that system. These improvements mean that even for vehicles with increased weight from the larger, longer range battery pack, the payload in that step van will be able to handle will not be reduced.

In conclusion, we are very excited about the recent advancements we’ve made to our technology and we continue to make improvements as we look to provide more efficient, high-quality vehicles to our customers. I’ll now pass this over to our CFO, Kingsley Afemikhe.

Kingsley Afemikhe: Thank you, Scott, and good afternoon everyone. As previously noted, we’re making great strides in our path to becoming gross margin positive at the unit level, by the second quarter — the end of the second quarter 2023, whilst also ensuring we meet the strong demand for our products and solutions. I’ll now review our financial performance for the quarter and for the full year 2022. For the full year, revenue grew significantly to $36.4 million from $5 million in the prior year. Revenue was supported by both higher deliveries and average selling prices of our step vans. We increased the average selling price of our step van units by close to 20% over the fourth quarter, which reflects changes in our channel mix and the effects of the price actions we took last year.

We expect this trend to continue as we add higher ASP units into our backlog have slowed them into deliveries. For 2022, our cost of goods sold was $66.4 million, up from $7.4 million in 2021. Gross margin during 2022 was a loss of $30 million compared to a loss of $2.4 million in 2021. Non-GAAP gross margin loss for the year was $16.4 million compared to $1.4 million in 2021. Looking at the fourth quarter specifically, our revenue was $8.6 million compared to $11 million in the quarter, which was in line with our expectations and reflects the seasonality we noted in our third quarter call due to the busy holiday season for the last-mile delivery sector. Our cost of goods sold during the quarter decreased to $16.5 million compared to $21.8 million in the previous quarter.

Gross margin during the quarter was a loss of $8 million compared to a loss of $10.8 million in the third quarter. As a team, we continue to strive for gross margin positive on a unit basis led by cost optimization steps, including a bespoke devoted team working across the company to achieve this. The team’s efforts are primarily focusing three areas; first, as mentioned earlier, we have implemented strategic pricing action to address ongoing inflation and the cost of building a vehicle. Over the past two years, costs have risen sharply due to increases in raw materials, logistics, and tariff costs, as well as higher labor costs to assemble our batteries and vehicles. As a growing company, we elected to build customer goodwill by honoring pricing with minimal material surcharges being passed on to our customers in 2022.

This decision helped drive follow-on customer orders and includes our customer loyalty. We have since taken price action to ensure that our sales prices enable us to reach our gross margin goals, whilst continuing to maintain the loyalty of our customers. Secondly, as Scott outlined, the launch of our 2023 step van brings a number of design improvements that will meaningfully reduce the direct material costs and the cost of manufacturing the units. There are immediate cost optimizations of over $15 per 2023 step van as a first step in further material cost reductions, which we will deliver over the rest of 2023 and into early 2024. These efforts have constituted the bulk of our R&D spending over 2022. Finally, the steps we took last year in centralizing manufacturing in Tennessee will materially reduce our overhead costs as we ramp throughout this year.

These costs include taxes, freight, indirect labor, production supplies. Over 2022, these costs made up roughly 15% of our cost of goods sold and we expect these to reduce — to refocus manufacturing on our centrally-located and highly-operationally cost competitive plants in East Tennessee. We believe our continued laser-focus on expanding margins will put us in a strong position going forward and demonstrates Xos’ unique ability to innovate across engineering, supply chain management, and sales to achieve success in this rapidly growing and expanding industry. In part, due to the release of our new step van, we expect deliveries to be weighted towards the second half of 2023 to as to maximize the effects of our steps. Turning now to expenses.

Our fourth quarter operating expenses fell to $17.9 million from $20.4 million in the third quarter and this is driven by a reduction in our R&D expenses to $6.2 million versus $8.6 million in the third quarter and lower sales and marketing expenses of $1.7 million compared to $2.3 million. These lower expenses were partially offset by higher general and administrative expenses of $10.1 million compared to $9.5 million in the third quarter. Our non-GAAP operating loss for the second half of the year was $44.1 million, which is near the bottom end of our guidance range. We expect to continue to have very strong expenditure discipline over 2023 and see operating expenses reducing further over the year. We closed the quarter with cash, cash and equivalents, and marketable debt securities available for sale of $89.3 million, which includes $3 million of restricted cash.

Compared to 2021, inventories has increased and we recorded a net inventory position of $57.5 million versus $30.9 million at the end of the fourth quarter of 2021. On a quarter-by-quarter basis, inventories declined during the quarter from $62 million at the end of the third quarter. We expect inventory levels to remain at or below the current level for the first and second quarters as we see supply chain disruptions continue to ease. As expected, total user cash, cash used in operating activities, plus CapEx improved to $18.3 million for the quarter versus $32.2 million in the third quarter. We closed the quarter with ample liquidity to scale our operations. We are confident as we grow volumes and get to positive gross margins, we’ll have options to raise additional capital.

Finally, wrapping up with our business outlook for 2023. We expect to deliver between 450 and 600 units. We expect to generate between $58.5 million and $84 million in revenue, and we forecast an operating loss of between $52.2 million and $80 million for the year. With that, I’ll now turn the call back to Dakota to wrap-up. Thank you.

Dakota Semler: Thanks Kingsley. While much has been accomplished, we continue to remain on track for long-term success as we continue to focus on helping commercial fleets seamlessly deploy EVs across their operations. As I mentioned earlier, our strong customer relationships, combined with supportive regulatory tailwinds, are expected to continue to drive growth for Xos. We positioned ourselves for continued sustainable growth in parallel with achieving our goal of becoming gross margin positive at a unit level by streamlining our manufacturing operations taking strategic pricing actions and launching our next-generation step van. As a company, we remain focused on our singular objective, electrifying commercial fleets. We believe our continued mission focus and dedication to fiscally responsible product development will translate to a commercial success.

Fleets work with Xos because they see a critical differentiator. They understand we are dedicated to creating the most customer-oriented product on the market and that Xos is building a company to service their needs for the long-term. With that, we’d like to now open the line for questions. Operator?

Kingsley Afemikhe: Hello, it’s Kingsley here, apologies. I wanted a note that I misspoke earlier on total use of cash, cash used in operating activities, plus CapEx was $24.6 million over the quarter. Thank you.

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Q&A Session

Operator: We will now begin the question-and-answer session. And our first question will come from Mike Shlisky of D.A. Davidson. Please go ahead.

Michael Shlisky: Good afternoon and thanks for taking my question. Maybe just to start-off, maybe try to spare us the drama here in the first quarter, we’re — to end in two days. Anything as to how business went here in the first quarter deliveries revenues, operating expenses, et cetera? And if you can give us here, now that we’re basically going to the quarter would be appreciated.

Dakota Semler: Yes. Certainly, Mike, we can absolutely give a little bit of context and thank you for joining the call today. As we’ve continued delivering vehicles through the quarter, we’ve continued to face infrastructure hurdles that have played some of our larger customers and that has pushed back some deliveries, but we still have made progress in the quarter in getting trucks out to customers. Some of which we’ve actually spoke about publicly like our delivery to Alsco as well as some additional deliveries that took place during the quarter. What we see for the year, as Kingsley alluded to, is the deliveries are going to be backend weighted. So, the first quarters — first and second quarter should be less than the second half of the year, much like we saw in 2022. But ultimately continuing to make progress and as we shared with the backlog, continuing to see increasing growth in demand for the products.

Michael Shlisky: Okay. Okay. And then maybe just a follow-up on that backlog comment you just made there Dakota. You added units during 2022 to the 150 at least that publicly announced here in the first part of 2023. Can you maybe tell us what number of backlogs you have — what number of units are in the backlog today? And I guess do you already feel good about 2024, assuming that the supply chain cooperates, given what might be a backlog already?

Dakota Semler: Yes. So, I’ll just clarify, the 800 units for — that we added to the backlog for last year are exclusively step vans. We do have other products that our customers are demanding and wanting those products. We won’t be delivering this year that we’ve continued to grow the backlog on those vehicles as well — those products as well. When we talk about overall backlog, we don’t guide to that metric, but we have seen it sales and demand for the products continue to grow really quarter-over-quarter and year-over-year and we don’t anticipate that to slow down this year. The one thing I will say regarding the step van product is that you’re seeing several customers responding to a lot of the regulations that are taking place that I spoke about like the Advanced Clean Fleet rule, some of these fleets have thousands of trucks just in California and so hitting those percentage thresholds is going to be critical, particularly when we’re one of the few suppliers that’s providing an electric step van that will meet the needs of those fleet operators in the state.

Michael Shlisky: Great. And just to follow-up on that last point about the non-step van products. I guess firstly, tell us a little about how it’s going with the MDH — MDXT and HDXT products, is any of that in the sales outlook for 2023? And the same question is for the powertrain business, was that any part of the mix in the fourth quarter? And is there any part of the mix you have here in the 2023 outlook? That would be appreciated.

Dakota Semler: Yes. So, when we talk about the other products like MD and HDXT and powertrains, those are not factored into the backlog for 2023. We do have orders that are factored into our outlook for the full year revenue guidance that we’ve discussed previously in this call. And then as we’re looking to back to Q4, I’ll let Kingsley speak directly to those two business units.