Q1 2024 Workhorse Group Inc Earnings Call

Participants

Stanley March; Vice President - Corporate Development and Communications; Workhorse Group Inc

Richard Dauch; Chief Executive Officer, Director; Workhorse Group Inc

Robert Ginnan; Chief Financial Officer, Senior Vice President; Workhorse Group Inc

Mike Shlisky; Analyst; D.A. Davidson

Jeff Osborne; Analyst; TD Cowen

Craig Irwin; Analyst; ROTH Capital Partners

Presentation

Operator

Hello, and welcome to the workhorse Group Q1 2024 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Stan March, Vice President, Corporate Development and Communications. Please go ahead, Stan.

Stanley March

Thank you, Kevin, and good morning. I'd like to welcome all of you to our first quarter 2024 results call for Workhorse. Before we begin, I'd like to note that we posted our results for the first quarter ended March 31, 2024 via press release earlier this week.
You can find the release and a presentation, which was released this morning in the Investor Relations section of our website. We'll be tracking along with the presentation during this call. Also joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO.
For today's agenda, please turn to Slide 3 of the presentation following my opening remarks, I'll hand it over to Rick, who will give you an update on the progress we've made recently on our strategic and operational actions. Bob will then walk us through our financial actions and results of the first quarter. Rick will then wrap up with our near-term objectives before we open the call to questions.
On Slide 4, you can find our disclaimer as some of the comments that will be made today are forward-looking and are therefore subject to certain provisions and are also subject to risks and uncertainties. You can find the full disclaimer statement in our periodic filings with the SEC, including the 10-Q filed on May 20th as well as the earnings press release also published that day.
Now I'll turn the call over to Rick Dauch. Rick?

Richard Dauch

Thanks, Stan. Hello, everyone. Thank you all for taking the time to join us today. As Stan said, this is our call to review our first quarter earnings. But today, we're going to focus most of our time talking about many of our achievements in April and May, which have been significant.
We've made positive strides in advancing our product road map, executing our strategic plans and strengthen our financial position. These efforts are enabling Workhorse to remain a segment leader in the transition to commercial EVs, specifically in the last mile delivery step van and work truck spaces.
Turning to Slide 5. Let's talk about our achievements. We have received substantial orders for both our W56 and W4 CC trucks. We continue to hold successful product demonstrations with dealers and fleet operators and both groups are affirming the strong market potential of our commercial EV trucks, specifically the W56.
Second, we are expanding our commercial network by adding new dealers, including two locations in New York City, a critical location for EV adoption and incentives in the near future. We've also added two locations in the upper Midwest and Northwest regions, and we're on track to hit our target of 15 to 20 nationwide dealers by the end of 2024.
Third, we have an encouraging path forward for the Aero business. As we previously announced in February, our Board of Directors approved a plan to transition exclusively to operating as a less capital-intensive Drones as a Service business.
Accordingly, we have halted the production of our drone design and manufacturing business and mothball that equipment. We are now close to completing an agreement to divest the Aero business to a buyer that can invest in its future growth. This move will also provide us with additional financial flexibility here at Workhorse.
Finally, over the last several months, we have taken several steps to strength and extend our financial runway, preparing Workhorse to emerge in a winner in the EV market as the industry transitions to that technology. That said, I want to acknowledge the Workhorse team and our supplier partners.
A number of the difficult but necessary steps we have taken over the last several weeks have impacted our people and some of our stakeholders. We've reduced our headcount and had to temporarily furlough our employees at our Union City plant.
We have incredible respect and admiration for our people, and we pride ourselves on being a local employer in our communities. As we navigate the near term and the transition to EVs, we're focused on returning our team to work when additional truck orders are received. I'm confident that we are making progress on the sales front.
Moving to Slide 6 and turning to our commercial vehicle programs. As I mentioned during the first part of the year, we have held a number of successful product demonstrations with last mile delivery companies and have been in constructive and meaningful discussions regarding purchase orders with these customers.
They are thoughtfully working through their own capital expense plans in order to make the transition to zero-emission vehicles which will take multiple years to complete. Remember, it takes time to install the charging system infrastructure before they get the vehicle. So that's critical. We'll talk about that a little bit.
We have received orders for a total of 68 W56 step vans a day. We view this as a strong part to growing the sales pipeline for this vitally important product line. We are also working on developing new 56 wheel-based variance, which will launch in 2024 to 2026, including the new 280-inch wheel-based 1,200 cubic foot van, which launches late this year.
We also received a purchase order for 141 W4 CC chassis from Kingsburg Truck Sales, our dealer of the year in 2023 for delivery over the coming quarters. This is a big milestone as it will essentially clear all of the Class 4 finished goods inventory remaining at Union City. We believe the KTS order indicates the initial transition to EV commercial vehicles is slowly starting to take place in California especially a small work truck fleet.
As you will see on Slide 5, we now have expanded our dealer network and service footprint by adding Milea Truck Sales and the Ziegler Truck Group to our certified dealer network. We now have a total of 12 dealer partners strategically targeted in states adopting the CARB Clean Fleet standards over the next few years.
At Stables, we continue to grow our EV fleet and expand our delivery routes with the FedEx Ground here in North of Cincinnati. We have deployed two W56 step vans in addition to our 10 W750 step vans. We expect the whole fleet to be fully electrified in 2024, and our initial data shows a significant improvement in operating cost savings using the E-powered trucks, which we shared with some of the large fleets in the last 90 days.
This week, the annual ACT trade show was held in Las Vegas, and this is one of the reasons we pushed our earnings call to today. I want to share with you our observations from this sport day event given the concentration of competitors, partners, suppliers, regulators and customers who attended the event.
First, significant R&D investments continue to be made in EV technology and vehicles by all major commercial truck OEMs and several remaining start-ups. Second, the first signs of orders, mostly in California are starting to emerge across both small local and larger national fleets. Third, the adoption and enforcement of the new card mandates is causing some confusion, especially smaller fleet customers.
In the Class 4-6 segment, fleets in California must now register their entire fleet with a state and must target a 9% EV adoption rate by [12,31,24.] This is causing some administrative challenges for some of the smaller fleets right now. Finally 'm sorry, there are two or three OEMs targeting. There are only two or three OEMs targeting the Class five, six, step van market.
In Workhorse, we continue to be the only OEM that is capable of building both the chassis and full step van cabin body under one manufacturing route in North America. Our W4 CC continues to be the only Class 4 cabin chassis EV offering in full production. Many talk about production, but they aren't in production and is capable of providing 5,000 pounds of payload capacity in the range of 150 miles.
And finally, what I heard over and over from everybody is charging infrastructure and availability of charging systems remains pacing items across the industry as we make the transition to EVs. That's both at the small fleets I've talked to with our dealers and even the largest fleets here in North America.
With that, let me turn the call over to Bob to discuss our financial results and the recent steps we have taken to strengthen our financial position.

Robert Ginnan

Thanks, Rick. Let's turn to Slide 9 to cover some of the recent steps we have taken to strengthen workforces financial position. In March, we entered into an agreement with an institutional investor on the terms of a series of financing transactions that will provide the company with liquidity in both the short term.
And over time, this financing will support the continued execution of our commercial vehicle product road map and business plan in 2024 and 2025 to date, we have received gross proceeds from this agreement of approximately $15 million before fees, expenses and original issue discount.
On the cost side, we completed implementation of a reduction in force of approximately 20% of the total workforce, excluding direct labor, we also moved to a drones as a service model. In Aero, we temporarily furlough the Union City plant workers while we wait for larger backlog of truck orders, however, limited recall, the staff has already begun.
Finally, we are also working on the sale and leaseback leaseback transaction alternatives for the Union City facility to further solidify our financial position.
Moving to Slide 10, let's discuss our first quarter financial results. Sales net of returns and allowances for the first quarter of 2024 were $1.4 million compared to $1.7 million in the same period last year. The decrease was primarily due to lower W4 CC vehicle sales compared to the same period a year ago, which was partially offset by an increase in other service revenue generating from operating our Stables by Workhorse route, Drones as a Service, and other service revenue.
Cost of sales for the first quarter of 2024 were $7.4 million compared to $5.3 million in the same period last year. The increase in cost of sales was primarily due to a $2.2 million increase in inventory reserve expense, a $1 million increase in depreciation expenses and a $600,000 increase in employee compensation-related expenses to support vehicle production during the period. The increase in cost of sales was partially offset by a $1.2 million decrease in costs related to direct materials and $1.4 million reversal of warranty expenses as previously accrued.
Selling, general and administrative expense for the first quarter of 2024 decreased to $14.1 million compared to $14.7 million in the same period last year. The decrease in SG&A expenses was driven by a $1.7 million decrease in employee compensation and related expenses, primarily due to a decreased headcount, which was partially offset by a $300,000 increase in non-cash stock-based compensation expense and an increase of $600,000 in professional and other services expenses during the period.
Research and development expense decreased to $3.5 million compared to $7.2 million in the same period last year. The decrease in R&D expense is primarily due to reduced consulting and prototype costs as the company moved into production of the W4 CC, W750 and W56 vehicles during versus last year. Net interest expense was $5.4 million compared to $6 million of income in the same period last year.
Net interest expense in the current year was driven by a fair value adjustment of the company's 2024 notes and 2024 warrants, respectively, of $7 million and $1.2 million fees paid in connection with the 2024 notes and 2024 warrants issued during the period. Expense was partially offset by a gain of $2.9 million from the extinguishment of the company's 2026 notes, conversion of 2023 warrants and $0.1 million of interest earned on cash balances of the company's money market investment accounts.
Net interest income in the prior year was primarily driven by interest earned on cash balances in the company's money market investment capital. Net loss was $29.2 million compared to $25 million in the same period last year.
Turning to Slide 11 to discuss our balance sheet. As of March 31, 2024, the company had $6.7 million in cash and cash equivalents, accounts receivable of $1.8 million, net inventory of $49.9 million and accounts payable of $14.2 million. I've already discussed the aggressive actions during the quarter to reduce costs and conserve cash across the organization.
Looking ahead, we will continue to focus on extending our operational runway and manage our cash flow efficiently. We have executed successful financings and are working on sale-leaseback transaction for our Union City facility. The recent purchase orders also reinforce our optimism about our ability to drive additional purchase orders this year and grow our revenues.
With that, let me turn it back over to Rick.

Richard Dauch

Thanks, Bob. Let me briefly discuss our near-term priorities, which are outlined on slide 12, our key strategic priority is advancing our product roadmap, specifically securing new orders and delivering products to more customers. We are engaged in a number of discussions with potential customers and dealers and look forward to providing updates on our new business orders as we move forward.
Our operational financial priorities remain focused on reducing costs and obtaining the necessary capital to execute our plan and meet our current and prospective customer needs. We appreciate the continued support of our supplier partners who weighed the acceleration of our product production plans.
Finally, I want to start or close by emphasizing that transition to EV technologies in the commercial truck and last mile segment is starting to take place slower than expected, but it's starting a little like any change, it will not happen overnight.
While we've experienced some delays across the industry, we can see first-hand in our discussions, fleet and municipal customers, dealers and others that the transition is underway slower than we would like, but definitely starting to take hold.
We fully intend to emerge as a winner in the Class four six that band and work truck segments of the market. We have proven our product in the marketplace. We have a manufacturing capacity and supply chain partners place to build trucks. We have the aftermarket and service capabilities in place.
And we have committed dealer partners in place to continue advancing our product road map and capture the significant opportunities ahead as the transition to EV technology curves across the commercial segments. Workhorse is ready to win when the market emerges.
Now we'll open up the call for questions. Operator, I'll turn it back over to you.

Question and Answer Session

Operator

You'll now be conducting a question-and-answer session. (Operator Instructions).
Mike Shlisky from D.A. Davidson

Mike Shlisky

Yes, hi, good morning. Thanks for taking my questions. I want to start off maybe asking about stable installed here. At this point, you've got DHL out there running EV vans for a couple years now in different sizes. Other FedEx fleets in other states also running EV step vans for a couple of years now, maybe not a Workhorse brand, but other brands of EVs. I guess, it seems like it's a proven that EVs can work in a lot of different situations for a fleet.
So, I'm kind of wondering whether you've still got the need to continue with this program at this point. Then, I know it's very near and dear to your heart. But I guess, why not monetize the fleet at this point and kind of move forward since it's pretty clear that EVs are working for other folks and there's no need to really keep on proving the point over and over again.

Richard Dauch

Yes, Mike, we've had those internal discussions. We've only got the W56s onto the Stables earlier this year. We really wanted to get at least minimally six months on that, but you're probably right. It's not our intention to be a long-term owner of the Stables operation but we thought it was an important initiative for us from an R&D and from a marketing standpoint, and it served its purpose.
I can just tell you that in a recent three or four hour presentation to one of the last large mile fleets, we were able to stand up as a FedEx ground operator with over 1.5 years of experience now, what it cost the transition from ICE to EV in terms of charging systems, infrastructure tie-ins, what it means to get rid of some of the old trucks and move to the EV trucks. And now we have the documented proof that there is a savings.
And I won't go into the total sense per mile, but it's significant and we shared that, and that's got a lot of attention, and we're working hard with at least two of the last mile fleets based on that data to help them start their transition over EVs, okay? And as you know, if you go back and look at the history, there's been some starts and some stops as other companies have tried to bring EVs to market. Trucks have failed, companies have gone out of business.
And so, they're looking for people who really have solid bullet-proof trucks. And we think we have now over 18 months in the W750 in over four or five, six months now on the W56 on our own routes with almost zero flows. And I think that sends a lot of message about our trucks. As one customer said, you're the only customer that we have or supplier we have right now who actually used to run their trucks for more than six or 12 months, okay? So, you're right, longer term, I think step vans probably gets monetized at some point.

Mike Shlisky

Sure. Thanks. I appreciate that. And maybe turning to some of your more recentdefied orders that you discussed today. Are any of those contingent on having a subsidy attached to them? Or are they going to be for dealer demo or inventory purposes?

Richard Dauch

Great question. Almost every one of the W4 CC is tied to some kind of California HVIP incentive for sure. On the W56s, there'll be some that are not tied to incentives at all. They're going to larger fleets and then there are some that are tied to the HVIP credits that are required in California.
We know that we have one order for a new rental fleet basically in California that was subject to HVIP vouchers, and I understand we got those vouchers in the last 24 hours or that dealer or that customer government in the last 24 hours. So now we can ship the trucks and get them upfitted.

Mike Shlisky

Great. Fantastic. Maybe one last one for me. I know I saw another sort of workhorse of script chassis. It must have been a W4 CC, it had a dump body on at a different trade show back in March. I'm curious if you could share with us any progress you've made on non-parcel delivery vehicle orders and customer plans for the current orders that you've got out there today?

Richard Dauch

Sure. All 141 of the W4 CCs that are going to Kingsburg are basically for not last mile delivery either for electric trucks. We talked to Jerry, the dealer principal out there. Majority of those trucks are going to be used in California in either three forms of fashions, a state truck, a dump truck or a utility-type truck, right? Mostly around his dealership is in the covers of San Fernando Valley, a lot of interest there in some of the small agricultural programs and also some of the local distributors out there. So, most of the W4Cs not for last mile delivery.

Mike Shlisky

Great outstanding. Appreciate that. I'll pass it along. Thank you.

Richard Dauch

Thanks, Mike.

Operator

Jeff Osborne from TD Cowen

Jeff Osborne

Good morning. Two questions on my side. I was wondering, does the post the changes in April and May, if you could just discuss what the burn rate is at these levels

Richard Dauch

I'll let Bob take that one.

Robert Ginnan

Yes. So, I think in the first quarter, once you factor out all of the fighting fee-type things, our burn rate was about $5.5 million. However, as we announced earlier, most of the reductions didn't really start until March. So, we expect that to be sub $5 million here in the second quarter.

Jeff Osborne

And then, was there any changes in April or May to lower that beyond that $0.5 million savings there?

Robert Ginnan

I think the changes will be as you get a full quarter of the savings based on timing, the aero stuff we only got about a month's worth of savings and the rest of it, we really didn't get much at all. So, I think that the issue will be, I think the expense will be probably closer to $4 million, but we have to start building back up inventory. So, we'll be in that $4.5 million to under $5 million range.

Richard Dauch

And we need to move finished good trucks with the orders we have to generate cash and then go back and buy parts and we can build more trucks. So pretty clear.

Jeff Osborne

That, but no, I'm a concentrate that leads in perfectly to my next question. I was just wondering if you could just disclose roughly how much inventory you have on hand finished goods and then with the manufacturing staffing reductions, I'm just curious like what is your sort of daily or weekly production capacity. And as we buy that inventory that you just referenced, will you need to rehire these folks back in the third or fourth quarter? And what's the plan there as the business resumes growth?

Richard Dauch

Yes, I'll let Bob cover the financial numbers on the inventory, and I'll come back and take the production ramp back up.

Robert Ginnan

Yes. The finished goods inventory is about $20 million. And I would say for the next round of trucks, probably [3/4] of the inventories in raw materials. So, it won't take much to finish off another 20 to 30 trucks.

Richard Dauch

We have batteries on site right now, I think, for 214 sets of W56 trucks. We have some W4 CC prebuilt chassis available still go through us. So, as we start shipping those trucks to Kingsburg, we can finish those W4 CCs. There's another 40 added supplier that are waiting to come to us, we don't want them right now. So, ramping up, we were only building about one chassis a day.
That's probably where we're going to be probably through the month of June. And then, we'll see as the orders come in if we need to start ramping up. We're prepared to ramp up between now and the year to like four or five a day. But right now, we're at 1%, 1.5%.

Jeff Osborne

So, you could get to four or five with the staff that's on hand today then, Rick?

Richard Dauch

We got to bring a few more guys back right now. We basically furloughed the plant for a few weeks. We brought a team back in to complete about 25 trucks based on the orders we have. We always continue to have a couple of guys in the plant who can do some of the launch issues we have in the paint shop, not the paint specifically, but it's the pre and post paint takes a lot of work to get that done.
So, we'll have to bring back probably another 15 to 20 or more in the near future the good news is, I want to say this publicly, right? Our workforce is the best, right? They understand how tough this transition is to EV. Many of them have been in that plant for years or decades. They understand what happens when a plant is idle for a while, not just for the plant, but to the community. They want us to win and they're willing to do what it takes to win. And I appreciate their patience and their diligence.
We don't control the pace of the EV adoption. That's by the customers and there's a lot of factors that are impacting that right now. What I see now is I'm starting to see the cracks in the dam where even the small fleets are starting to understand they have to register their fleet with the California officials, so they understand and they have to show their plans to get to that [9% target by 12%, 31%, 24%.]
So, we're starting to see some small fleets make orders. That's what you're seeing with the W4 CCs. And you're starting to see the big guys realize they have to make the transition, they are making a transition, but it costs money. I was with one large fleet at ACT for about 1.5 hours.
They've laid out depot-by-depot how they're going to electrify across the I-5 corridor over the next three years in California up to Washington. They know exactly how many trucks they need to buy in California and then Oregon and Washington.
It's a mix of Class [four, five, six]. So, it's not just a workhorse issue, this is a major capital investment in the billions of dollars by that fleet to go to electrification starting in '24 out through 2040. And our truck fits perfectly, the W5 specifically for their needs.

Jeff Osborne

Excellent. Feel like that's all I have appreciate..

Richard Dauch

Thank you very much.

Operator

Craig Irwin from ROTH Capital Partners.

Craig Irwin

Hey, good morning and thanks for taking my questions. So, Rick, at ACT Expo, the big conversation with all the EV truck guys was the impact on the battery tariffs, right? A lot of people planning for changes, either changed vendors or different cost structure. Can you maybe update us on what you see for Workhorse from the implementation of the battery tariff? What do you think a probable outcome is for you? And do you see this as something that is going to have a minor impact on business or potentially something that could help you in the longer run?

Richard Dauch

Short term is minor, like I told you, we have 214 sets of the CATL batteries on site at Union City. So that's about just short of what we need to build the W56s this year based on orders that we expect either have in-house or expect to come in-house between now and the end of the year. We do see the tariffs. We're assessing that.
One of the challenges here in North America, there just is not the installed capacity that we know of. And we went out and looked at all the potential battery suppliers they have North American factories back in 2022 in order to be ready for the '23 launch of W56, and we couldn't find one. So, we stuck with CATL and CSI, and they've been good partners for us. They've been very patient with us as we go through our slow launch.
But we are doing work right now, that's all, I'll say, is what our long-term impacts. As you know, not in our segment, but in the big automotive, they're spending billions of dollars to create their own battery plants. But at the end of the day, the tariffs will have an impact. We've already talked to our friends at GreenPower and see what we can do there from that truck. They have other sources outside of China to build that similar truck. And so, we'll talk about that in the future.

Craig Irwin

Great. And then if I could ask for just a little bit more color. So, some of the guys out there that are using CATL were saying that there are anticipated changes as far as the way CATL will serve the market here in North America, particularly the trucking market. Do you believe that there is a credible path to sufficient buy American content on the pack or a similar pack to what you've been having from the same vendor? Or you would be looking just at global sources?

Richard Dauch

I won't comment on Catalyst specific plans to either localize your North America, but I'll tell you that we've had discussions with both cattle and their distributor about their future plans, and we're confident they have a plan mostly if they execute it. If not, we'll look at alternative plant that we know there's a couple of new plants as one at BorgWarner AKASOL, there's a couple of other ones that are being built. And as those plants come online and the capacity ramps up, we'll take a look at it. But right now, we're going to stick with our CATL as long as they continue to execute it for us, and they're doing a great job for us.

Craig Irwin

Great. Well, thank you for that. I'll hop back in the queue.

Operator

They do. We reach the end of our question-and-answer session. I'd like to turn the floor back over to Rick for any further or closing comments.

Richard Dauch

I appreciate that appreciate the questions. I appreciate the patience of our all of our stakeholders including our shareholders. This is not an easy transition. We're prepared for our people are being patient and our suppliers would be in patients who are shareholders have been more than patient I appreciate that we're committed to win, and we're going to find a way to do so. Thanks and have a great Memorial Day weekend.

Operator

Thank you. That does conclude today's teleconference. And webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.