Workhorse Group Inc. (WKHS) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Workhorse Group Inc. First Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Duane Hughes, President and Chief Operating Officer. Please go ahead sir.

Thank you Kevin and good morning everyone. Thank you for joining our first quarter 2017 call. We are excited to present you with an update on our business, specifically the recent, very successful unveiling of our W-15 pickup truck and as importantly, our strategic partnership with Ryder Systems. I'm Duane Hughes, President and COO of Workhorse Group. Joining me this afternoon to share more details are Steve Burns, our Chief Executive Officer. Julio Rodriguez, our Chief Financial Officer, Tony Furey, our Vice President of Finance and I will be on the call to respond to questions. As you may have seen, we have released our 10-Q and we will update you on our projects and progress as we continue. 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 and quarterly 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 periodic filings on file with the SEC provide further detail about the risk factors related to our business. For today’s call, Steve Burns will provide you an update on our key strategic priorities. He will then open it up to questions. With that, I would now like to turn the call over to Steve.

Thank you Duane and good morning everyone. As Duane mentioned we are excited about discussing some of the details relating to our recent Company announcements. As a brief reminder for any newcomers to our call today, Workhorse is a technology-focused manufacturer providing sustainable and cost-effective solutions for the commercial transportation sector. As an American, original equipment manufacturer or OEM, we design and build high performance battery-electric trucks. We also develop cloud-based, real-time telematics performance monitoring systems and we manufacture ancillary equipment, such as small aviation drones, which are fully integrated with our electric trucks. All Workhorse vehicles make the movement of people and goods more efficient and less harmful to our environment. As a manufacturer, we currently are focused on three primary items, first, growing the step van business that is currently serving UPS and others; second, completing the development and delivery of the United States Postal Service prototype units and third, furthering the development of our W-15 electric pickup truck. I’ll discuss these in reverse order since the latter has been in the national news recently. As you may already know, we had a highly successful unveiling of our W-15 electric pickup truck last week in Long Beach California. As part of the unveiling we also announced, an important, strategic partnership with Ryder Systems, the country’s largest full-service truck lessor, including their letter-of-intent to purchase an initial 2,500 of our W-15 electric pickup trucks. As you may know, Ryder has a national operating footprint and so this relationship will help us across all platforms of our business with emphasis on sales, leasing, supply chain management, and maintenance services. We are pleased to report to you that prior to the unveiling of our W-15 pickup truck on May 2nd, we had secured letters-of-intent for the W-15 from a mixture of top corporate fleets representing the utility, municipalities and automotive logistics sectors. So, together with the Ryder LOI, pre-orders represent about 5,000 units or about $240 million worth of orders at current suggested prices. As a key to receiving these LOI’s, and I point out, these LOIs were received prior to the unveiling of the W-15 last week, is the proven performance of our medium-duty trucks amongst customers such as UPS and FedEx. Our proven capabilities to address the needs of the largest and most demanding delivery fleets in the world has given us the credibility across a wider array of fleets to secure these initial letters-of-intent. The momentum generated by unveiling a drivable W-15 concept cannot be overstated. We are now in an even better position to expand our product lines and position our company for the goal of delivering value to our shareholders. This momentum comes from the well-received performance of the W-15 concept vehicle. We could not have been more pleased by the reception we received from our prospects, our customers and the media at the ACT Expo last week in California. The outstanding reviews from the likes of Car & Driver, MotorTrend, and USA Today are very useful tools in helping us communicate our value to current and future customers for all our products, not just the W-15. Perhaps most importantly in the short-term, the success of the W-15 unveiling gives us even more opportunity to continue driving down our cost in the medium-duty segment. We have expanded our supplier pool now attracting Tier-1 suppliers who have interests in the higher volume, light-duty segment. And remember, higher volume means lower unit costs. Our goal is to set a footprint in the higher volume, light-duty segment that will assist in the smaller volume medium-duty segment and help produce the sort of gross margins that we are currently projecting. Our goal is to enter into initial production of our W-15 electric pick up truck in late 2018. We have designed and engineered this vehicle such that it can be built in our existing facilities with our experienced labor and other vendor-supplied resources. During the development process, our engineers have also considered the opportunities to more readily add automation when and where necessary to accomplish much larger volumes of vehicle builds in the event that demand exceeds our capacity. We have a plan with existing facilities and scalable processes that will enable us to produce high quality vehicles. Our production engineers are busy adding new levels of automation, helping us further improve production methods and reduce costs. We recognize truck manufacturing is traditionally a very capital-intensive business that requires infrastructure, volume and scale. Our goal is to leverage our existing 250,000 sq. ft. assembly plant and our 40,000 sq. ft. battery production facility as we seek to move to production of our W-15 pickup with minimal capital expenditure. We are also designing our proposed USPS the post office vehicles to be built utilizing these same two facilities. To this end, we continue to build and deliver high quality vehicles with proven performance. Now turning to our strategic partnership with Ryder. We are very pleased to have announced this partnership. Our agreement with Ryder unlocks Ryder’s North American network of more than 800 service locations, their network of more than 600 sales professionals, and their position as a leader in integrated logistics and supply chain solutions. We can now address with even more confidence our ability to service and maintain vehicles sold in North America, we can enhance our supply chain opportunities and we can extend our reach and message to even more prospects enabling us to grow our customer base across fleets of all sizes. We expect that our strategic agreement with Ryder will provide additional sales and revenue volumes, enhance our cost-down strategies and address warranty and service claims. Through this strategic partnership, Ryder and Workhorse will work together in promoting energy efficiency and innovation in the industry. Moving on to the second important part of our business: the United States Postal Service opportunity. As you will recall, the USPS is replacing their 160,000 of vehicle fleet with a new technology vehicle. Delivery of our USPS prototype vehicles is due in September of 2017, as one of five remaining contestants in the bid process. In addition to being, we believe, the only electric vehicle manufacturer in the running, we further believe the unveiling of our W-15 pickup truck adds creditability and confidence that we will deliver the best-in-class vehicle to the Post Office. It is also important to point-out the design of all workhorse chassis share many elements and components, including electric motor controls, batteries and software. This gives us better economies of-scale and improved production capabilities and helps us leverage our supply chain and the manufacture of these medium and light-duty vehicles at our same chassis assembly facilities in Indiana and our battery production facility in Ohio. Finally, moving to our step van business: In the first quarter we completed the build and delivery of the remaining 35 units of UPS’s third order for 125 medium-duty electric step vans. We also began production of our current order of 218 units, which includes UPS’s current order for 200 step vans. This is the fourth sequential order UPS has placed with us. Over the coming months, we will complete the build of these units and deliver them to the customer’s body-builder of choice on the customers requested timeframe. Our focus remains on securing additional orders from our existing customers while working with our new partner, Ryder, to close additional orders from their existing customer base. We will also improve our cost-down strategy by leveraging the common parts and components from the much larger volume segment of light-duty vehicles. As we seek to enter the light-duty market, we have a unique opportunity to integrate the parts and components used in the light-duty vehicles into our medium-duty step vans thereby enhancing our ability to reduce costs and achieve profitability in the medium-duty step van market. As an example, pick-up trucks account for more than 50 million vehicles or about 20% of all vehicles on the road in the United States today. In 2016, sales of pick-up trucks in the U.S. exceeded 2.5 million vehicles, with approximately 500,000 pickups sold for commercial-use applications. This is compared to roughly 20,000 step vans sold per year in the U.S. So obviously a much larger market. Our ability to attract Tier-1 suppliers using the higher volumes from the development of the W-15 pickup will be used to improve supplier pricing. Our engineering efforts are focused on the repurposing the W-15 components to our step van platform, as well as recognizing additional cost-down opportunities our engineers have identified with more than 150 Workhorse vehicles that are on the road today. As you can likely tell, we believe our medium-duty step van business is enhanced by our entry into the light-duty segment beginning with the W-15 pickup and we have additional opportunities offered by varying body styles such as putting traditional van bodies on that chassis. Finishing up with activities ancillary to our truck business. We have gained much attention as of late with our HorseFly delivery drone. The HorseFly is a custom designed, purpose-built unmanned aerial vehicle that is fully integrated with our electric trucks. We have a patent pending on this truck-launched unmanned aerial delivery architecture and we believe we are the only company in the world with a working truck-based aerial delivery capability. The truck-launched HorseFly delivery system is designed to work within the current FAA Rules. In February 2017, UPS conducted a successful real world test using our truck-based HorseFly delivery system and it received worldwide news coverage. The knowledge we have gained in building electric delivery trucks for last-mile delivery has led us to believe that a truck-launched UAV delivery system can have significant cost savings in the parcel delivery ecosphere. As stated in UPS’ February press release, a reduction of just one mile per driver per day over one year can save UPS up to $15 million per year. The release went on to add, rural delivery routes are the most expensive to serve due to the time and vehicle expenses required to complete each delivery. In this test, the autonomous HorseFly delivery vehicle made one delivery while the driver continued down the road to make another. This innovative delivery solution can have meaningful cost savings in the last mile delivery marketplace. Okay at this point we should open it up to questions.

Our first question safely from Colin Rusch from Oppenheimer. Please proceed with your question.

Thanks so much guys and congrats on all the progress. You guys work with all of these customers and work through the sale process. Can you talk a little bit about the dynamics of what they're looking for. And are you making a value sale are you just trying to get these folks vehicles or is that their primary concern. Trying to understand some of the nuance around the discussions and is there real competition at this point, because it would seem that you guys have a pretty defensible position in terms of the concept and what you've been able to deliver for folks at this point?

Thanks Colin, I think it's really important for folks to understand although our vehicles are naturally green, right zero to no missions, selling in the volumes we're selling at are only achievable if a fleet recognizes the economic benefits of the vehicle. So we sell strictly on economic benefits and the reason, we deal with fleets primarily is because a fleet operator will look at total cost of ownership over the life of the vehicle. So if they're going to own a truck for ten years, they say okay how much all in for ten years, initial purchase price of the vehicle, ten years of fuel, and ten years of maintenance. And what we’ve been able to prove in the medium duty business and extract over to the light duty business is that our vehicles are dramatically less expensive, over the life of the vehicle. So for example, I think we've published that in the medium duty delivery truck space, where they keep their vehicles for 20 years typically, we will save a customer at least $160,000 over the course of that 20 years. So essentially you could say, our trucks are $160,000 less expensive than a conventional gas or diesel truck. They were extrapolating that same, the reason we've been able to get $240 million worth of preorders on the pickup truck is we use those same curves. And if you can show a fleet operator that you basically have a less expensive solution, than a gasoline truck and they are convinced that it's a solid vehicle and we're solid company to support it and that's where rider really helps come in as well. Then you can sell them talks.

Perfect you know taking a look at the fuel cell tranche that you are working with on plugged power, are you guys involved at all on the supply chain for fuel there in terms of those negotiations or is that something that your partners are really dealing with themselves.

Yeah we're strictly the vehicle builder.

Okay, perfect and then the last question for me. Is this your own growth, obviously there's a lot of activity right now. You've gotten a lot of orders and you’re going to have to grow the organization. Can you just walk us through what your cadence is to be as we go through the balance of 2017 and beyond in terms of engineering talent and sales folks that you’re going to have to add to the team.

Good, great question. So what we try to do position as, that our growth is variable and in other words we have the large factory. So we bought in assembly factory from Navistar. We had to build up our own battery assembly, battery pack assembly plant because you know those just aren't available. So we are positioned such that most of our growth is engineering talent and all the production is a variable cost as we as get orders and make them more and more. You don't have a big joint CapEx out in front of us, which I think we wanted to convey to folks because traditionally that, you've got to build your factory and do all that. So we are the engineering are indeed that we did. To bring the W-15 the concept vehicle to fruition and now the next engineering, exercise is to pre-production vehicles on the road for validation and with some of our early customers. And then you enter into production. A lot of the sales effort is now going to be taken over by Ryder. So that's the beauty of that. So we can focus on in sales and support of the vehicle. So we can focus on building them and engineering them.

Okay thanks a lot guys will hop back into queue.

Thanks

Your next question today is coming from Brian Kinstlinger from Maxim Group. Please proceed with your question.

Great, get a host of questions. The first one is more is than 5000 preorders the W-15 when does the company plan to start re-tooling its facilities for production. And how long might this take.

Hi Brian this is Steve. Again we we've designed from it from the get go, knowing that we're going to build it on our existing facilities in Union City and use the battery plant here in Cincinnati. So very little retooling for initial production and we try to convey that in the talk today. The only – and we also don't want to be caught by surprise, if we sell ten times as many as we think right. So we have ability to add automation as fast as we can if we see demand tick up. But very little is in the way, the only - it’s mostly regulatory at this point. You have to get crash tested, you have to get EPA approval and all that kind of stuff. So very little, that's the main thing and why it's going to take a year and half to get there.

And so with the two facilities, manufacture of step vans, pickup trucks, and potentially the USPS vehicles.

So the facility has the capability to do 60,000 vehicles a year, and if we see that we've got 47 acres there, we can add to it.

That's on two shifts.

And then you'll have three different lines of vehicles, being manufactured at the same facilities.

Correct, they might not be, I mean we're trying to make the light duty, the Post Office and W-15 be on the same line.

Got it. And then can you talk about how soon the medium duty trucks might see better supply pricing with the addition of Ryder as a partner.

Well what we put out there is that we believed, the old model was before we have the success of the pickup truck the old model was really it takes about 2,000 trucks a year run rate to be able to break even on the medium duty. And we’ve always forecasted is that's going to be mid-2018. So we haven't, put any forecast out there other than I can tell you that the cost down by using components off W-15 that we're buying, A better components because they're coming from tier one suppliers and B they are less expensive. So the cost down will occur sooner than we anticipated but we haven't put an exact time on it yet.

But the Ryder relationship does expanded our ability with current suppliers as well as new suppliers to take advantage of their supply chain and their logistics business to allow us to also capture some savings through their working through Ryder.

And is Ryder taking over sales for example to UPS as well.

No, we did carve out a number of house accounts and this is Duane I apologize. Part of a number of house accounts for both the medium and light duty and turned everything else over to if you will Ryder and there are 600 sales person there.

Now the, I mean you're on pace to deliver somewhere like 250 trucks maybe for the year I mean to get to 2018 to 2000 that's ten times before that W-15 comes, where is that coming from, all from one customer do you think or several customers.

I would say first of we will be north of that 250 plus number. Of course 253 units this year is already on pace to put us more than 135 units over 2016 but again if you consider our relationship with Ryder and their existing customer base as well as our ongoing solid discussions with our existing customer base, we will continue to add units this year.

And so have you seen orders first of all the 200, do you expect that is going to be delivered to UPS this year, all 200?

Absolutely, I would tell you that our current production schedule is based on if you will in UPS’s their time lives for delivery to the body builder as well as based on their time frames to on board the vehicles. So that particular schedule has been set and will be complete before the end of the third quarter.

And so when do you expect Ryder to begin having an impact on your sales is it the current quarter we’re in or is it the third quarter, just give us a sense about when that ramp begins?

Given we've been in conversations with Ryder, for a while we are – where we are next week we will have our first kickoff meeting, if you will to get them engaged.

Lets talk about the sales cycle, I mean if Ryder is selling it do you expect sales will be immediate or do you think that like you've seen with UPS and some of your other customers that it could take some time.

I would say this, in the case of a Ryder if you will we have already spoken with a number of clients that already that are already their clients. So they're already ahead of starting coal right. So they have the ability to put us in front of decision makers that can make a decision very quickly. And it's simply a matter of the closing the business. So I expect it to be sooner rather than later.

Great and then can you talk about the total number of step vans you have delivered to date, total like you did last quarter.

Sure we've delivered over roughly 153 or 154 units to date. And again we have the 218 units that we are currently in production with beginning to be delivered.

Is it 153 at quarter-end, isn't that the March quarter-end, but we're into the quarter already.

I'm sorry. Say that again.

Unless I'm mistaken, isn't a 153 through the end of March.

153 is on the road today, yes through the end of the first quarter.

Yes, I'm wondering to-date, today – just so we can get a sense like last quarter how the beginning of quarter started.

No, no. We have vehicles in our production facility. They're built, or being built, but those won't start delivery until the end of this month.

Got it, okay. And then lastly we saw inventory pick up significantly obviously as you have production needs to meet. Will we see inventory continue to scale like it did in the first quarter or even more so.

Yes. This is Julio. We're just seeing all the inventory that we need to produce the orders that we have on hand. So all that inventory if they are currently being used to build the 200 order.

To fulfill the current order, so what you'll see Brian is, as we close more business, we're trying to – I won't call it just in time, the worst thing close to as you know we've purchased most of our parts up front with an order, because we have to pay up front. So we manage our cash flow that way, right. So as we get an order we've placed orders for inventory. So I would fully expect us to increase our inventory needs as the year continue.

And you will see right in the balance sheet we have prepaid increased to $1.5 million. And that’s mostly inventory that we have to prepaid and that’s – we're being – we're receiving it this quarter.

Great. Lastly, my last question is on receivables. Now that Ryder is going to be the primary seller of your trucks. What is down the road a normal DSO that your Company might look like when you start beginning to ramp sales?

That’s part of the kickoff meeting next week and beyond we'll be discussing these things, because what writer Ryder also offers the opportunity, Brian is from a leasing perspective, right, which really changes the return on investment if you will to these fleets. So our ability to ultimately close the business through Ryder and shorten the delivery cycle of – from the time they place the order to redeliver to the bodybuilder. All intent is on reducing that timeframe, because of the cash outlays and so on.

Okay, thank you.

Thank you. Your next question today is coming from [indiscernible]. Please proceed with your question.

Okay. There we go. Congratulations on the tremendous success that you’ve been experiencing. I was wondering if you can go into the process of an order going from in a letter of intent to an actual sale and also when did you expect to deliver the vehicle step vehicles to the post office?

Thanks, Scott. This is Steve. On the first issue of course, we have – when we take these preorders in the contract there talks about when as a preorder changes over to a solid order. And the premise there is – as we get the prototypes on the road and some of them will not get the prototypes, but once the prototypes are on the road, we go ahead and change it over to a solid order.

Okay.

And the post office question is a very defined, all five of us that are remaining in the in the running deliver our prototypes to the post office in early September.

Okay. And how long will the post office do you anticipate then tested, this is a year or…

You can only go on the guidance they given which is they've publicly stated this, they expect to pass through by about six months.

Okay, all right, thank you.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

No. I think that's good. We appreciate all of our investors and in the interest you have in our firm. And we're excited about the future.

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