Workhorse Group Inc. (WKHS) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, greetings and welcome to the Workhorse Group Second Quarter 2017 Investor Conference Call. At this time all participants are in a listen-only mode. A brief 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, Mr. Duane Hughes, President and Chief Operating Officer. Thank you. Mr. Hughes. You may begin.

Thank you, Adam, and good morning to all. We appreciate everyone for taking the time to be on our Q2 update call this morning. In a few moments, our CEO, Steve Burns is going to give you a brief update on our business and touch on the highlights from the second quarter. Joining us for the call this morning is Paul Gaitan, our newly appointed Chief Financial Officer; Julio Rodriguez, who is taking the reins as Chief Information Officer; and Tony Furey, our Vice President of Finance. We will all be on the call to respond to any questions you may have. As you may have seen, we have released our 10-Q. For those of you who have not seen our 10-Q report, it is available on our website at workhorse.com. I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and is part of our year-end update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2016, Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business. For today's call, Steve will give you an update on our key strategic priorities. He will then open it up to questions. And with that, I would like to turn the call over to Steve Burns.

Thank you, Duane. Good morning, everyone. As Duane mentioned, we are excited about discussing some of the details relating to our recent company progress. As a brief reminder, for any newcomers to our call today, Workhorse is a technology-focused manufacturer, providing sustainable and cost-effective electric mobility solutions for the commercial transportation sector. As an American original equipment manufacturer, we design and build high-performance battery electric trucks and aircraft. All Workhorse vehicles make the movement of goods and people more efficient and lesser harmful to our environment. We achieved several important milestones this quarter as we drive towards commercial scale operations. However, before we get into those details, I'd like to first introduce and welcome Paul Gaitan, our newly appointed Chief Financial Officer. Paul is literally on his first day with Workhorse today and we are excited to have Paul come aboard. Paul is a seasoned financial executive with extensive experience in high-growth stage companies across multiple manufacturing environments. In a few minutes, I will ask Paul to say few words and tell you a little about himself. In addition to Paul, we are also welcoming Julio Rodriguez to his new position of Chief Information Officer, where he will now be responsible for expanding the systems and information infrastructure for global supply chain management and large-scale manufacturing. We thank Julio for his four years of service as our Chief Financial Officer and we are eager to begin his transition. With that, I'll now ask Paul to say a few words.

Thank you, Steve. I'm thrilled and grateful to be part of the Workhorse team. My career over 3 decades has been built on a passion for manufacturing firms and Workhorse certainly fits that profile. I've been a lead financial person for enterprises as small as $ 40 million and as large as $ 600 million. Throughout that time, I developed high-quality reporting systems, developed the management team make better decisions, built robust finance organizations and helped drive improvements in cost structure. I look forward to providing the financial leadership necessary to realize the great potential of Workhorse.

Thanks, Paul. Again, we're excited to have you join us. And now I will continue with our Q2 update. In the second quarter of 2017, we started production of the 200 E-GEN trucks that are on order from UPS. We have delivered 42 vehicles from this order to-date, 6 in the second quarter and an additional 36 units so far in this third quarter. We've delivered 195 Workhorse vehicles in all, we've over 100 million customer miles on our trucks, and we have an additional 170 vehicles on backlog. As a result of this volume, we have introduced automation and transitioned to more Tier 1 suppliers, helping us to improve our manufacturing capacity and our margins. We have increased our run rate from 0.7 vehicles per day in Q1 to a current run rate of 3 vehicles today - per day, a fourfold improvement. An important part of building a commercial-scale operation is our sales and service network. We announced Ryder will be the primary provider of service and support for Workhorse trucks. The Ryder relationship further expands our sales and service capabilities to fleets of any size, so that we can now offer all Workhorse vehicles to any fleet operator in North America. Ryder has more than 800 maintenance facilities, nearly 6,000 trained service technicians, 600 professional sales executives and manages more than 234,000 fleet vehicles. Moving to the potential of the 180,000 trucks for the Post Office replacement opportunity. As we've discussed before, we're under specific ground rules that limit our ability to discuss this program. But we do want to say and reiterate that we remain on track for the on-time delivery of our six prototype vehicles that are due in September of this year. You may also recall that we had a highly successful unveiling of our W-15 electric pickup truck on May 2 in Long Beach, California. To-date we have secured letters of intent from approximately 18 fleets for more than 5,000 W-15 electric trucks, with an average price of $ 50,000 a truck. The key to receiving these LOIs is the proven performance of our electric delivery trucks with customers like UPS and FedEx. In addition to the growing demand from commercial fleets, we have received several thousand inquiries from consumers, actively requesting purchase information for the W-15. The W-15 gives us even more opportunities to continue driving down cost by leveraging the volume opportunity of more than 500,000 pickup trucks sold to fleets each year, not to mention the total of 2.7 million pickup trucks sold in the U.S. last year. We have improved our supply chain and now work with even more Tier 1 suppliers who have interest in the higher-volume light-duty segment. But our supply agreements with Panasonic and BMW remain key factors to our success. On June 17 at the Paris Air Show, we launched our multi-copter platform that can carry a pilot and a passenger. This product is called the SureFly. It's meant to be a short-haul, vertical take-off and landing aircraft that is less expensive to buy and operate, much safer and easier to fly when compared to a conventional helicopter. We believe that the typical application would be precision agriculture, packaged delivery and logistics in remote areas, emergency responders. We've had very good response from the military and commuters in highly congested larger cities. We're working with the FAA and hope to have our certification from them for the SureFly in 2019. We also have started taking $ 1,000 deposits for the vehicle and are very happy with the success of the program. Let me now open up the line to questions.

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions] Colin, your line is live.

Thank you so much. So guys it's good to see the progress on the production run rate. I guess I'm curious to see what's happening with the supply chain and working through potential for a redundancy as you scale up. Obviously, you're going to want to make sure that you've got continuity of supply. But could you talk a little bit about the preparedness of your current suppliers to scale up with you and then the potential for redundancy on any parts of that, that may be possible at this point?

This is Steve. I will take first swing at that. Very good question. In this business of producing vehicles, supply chain is key. So you have to do a couple of things. I mean, A, you have to originally design your vehicle, keep your bill of materials as low as you can. That bill of materials is - consists of a lot of parts that you buy from other folks, and you want to try to, of course, keep adjusting time - type of inventory, not hold too much inventory. Yet some of these suppliers are small. So it is an orchestrated dance and we are learning to do that and that's when we say we've already made almost 200 trucks, that's not trivial. And to do 1 truck, you've got to get your supply chain right. In addition to that, what's happened is, the - and I'll tried to discuss this in the prepared statement there. Attracting Tier-1 suppliers, which is what everybody wants in this space, right, because the product is better, terms - they usually give you terms, financial terms, and really better price point, because again they're making a lot of these. As a small manufacturer, we struggle to get Tier-1s. We've got - we're very happy with Panasonic for our cell supply and BMW for our genset supplier, but all the components are - we're starting to reach much deeper into the Tier-1 network, because of the W-15 pickup truck. That kind of volume is enough to start to get their interests. So it's even - and now what's happened is we've said, okay, we can buy this component now for the W-15 from this Tier-supplier, let's see if we can re-engineer that back into the stuff vans to make them even more reliable and more - increase our margins on those trucks. So supply chain is a - and that's where Julio, transitioning him to Chief Information Officer, all that is systems-based. What you need, when do you have it, when do you have to re-order it, what are the terms and with so many parts coming in and out of this place, it really takes systems and that's why we had to have him dedicated to that. So we are moving towards - we just - just to be able to attract these folks and then engineer their products into our products, very, very powerful.

Right. And then the follow-up question is around Ryder's preparedness on the service and kind of the ramp time on that. Obviously the maintenance on these vehicles is dramatically different than the typical fleet at this point and it's going to require different set of tools and space requirements. So how long is that going to take with Ryder and how prepared are they to do that? How much contribution do you have to make in that process?

The great thing about our dedication to fleets is we can kind of control the work rollout. So if we started this fleet in this locale and they are generally local delivery fleets, so they generally stay in that locale, that enables us to bring up those Ryder - prioritize those Ryder service stations, get their learnings there. So I don't have to have - we don't have to have a national the first day. So Ryder's commitment to train their technicians on our product is really a big commitment on their part and they're doing it because they - again, they can see the volume coming and they are lockstep with us, in that - as we roll out two [ph] fleets. That's why the consumer version of the W-15, we're getting a lot of interest in it, but we want to hold that a little bit until we have the national Ryder network up, because consumers could go anywhere with their vehicles and are going to want that footprint. So that's why we're staggering it, kind of fleets first. And then if we go to consumer, we want to wait till we have a national footprint. But if you think about it, what does it take to have a national footprint of service centers, and that's why it's such a powerful - the Ryder thing is such a powerful deal for us. First is opening up our own service centers across the country, very expensive, very time-consuming and we probably couldn't do a better job than Ryder. So -

And with Ryder, they have experience of having done this in the past on their national footprint with the natural gas rollout. So they worked with alternative fuels in the past, have the ability to adapt into our technology and are already sharing the learnings that we have today, so that they can begin their rollout with our products [indiscernible]. That's right. I was going to say, they are already in the field with us today.

Our next question comes in the line of Jeff Osborne from Cowen & Co.

Steve, I was just wondering, maybe following up on Colin's question if you can just touch on the automation that you've done, is that in Indiana, at the facility there, or more on the battery side. Just want to better understand what you're up to?

It's mostly on the battery side. So what we do is we buy our cells from Panasonic, they're currently on our line in Japan. And then the task of assembling those into our battery packs is ours. So we've been - our facility here in Cincinnati, we purchased it and that's because we're going to start to make capital improvements to it. We were leasing it. And so we've begun - we're welding - the welding of the batteries and the wiring of the battery packs, of course, the design is ours, but physically automating those 2 things, lowers our cost and builds a better product. If there's less handwork always means it's going to perform better out in the field. So we spent quite a bit automating that and we're geared towards - the difficult thing in this business is, what if - when the big order comes, which we work hard on, right, you've got to be able to handle it. And both on our sales and service, which is the Ryder agreement, but you've got to be able to build them and you got to have your supply chain in - at the ready. So we really worked hard to do all that and so we're preparing for - we just don't want to get a choke point where we get the orders we think we're going to get and then we can fill them either in time or economically enough.

Got it. No, that makes sense. Is there any additional - how do we think about the CapEx for that result? What did - what was the CapEx in the quarter and then is there any meaningful expense in the second half?

On the CapEx, most of our expense is R&D at this point. So we don't envision - so what we're doing is, for the pickup trucks we think - we are set for the amount of [indiscernible] we believe, even though it's - we're expecting it to increase about - a bit. We really don't have any CapEx or any heavy R&D for that. The R&D comes from the postal truck and the pickup truck, which are based on the same platform. Those are - and we built those - we design them, so they can be built in our Union City factory. All the vehicles we build, although our postal truck or a pickup truck may seem a lot different than a UPS truck, they are all body on rails, which is different than let's say a unibody of a conventional Savannah SUV. So that factory is built to do 60,000 vehicles a year, body on rails. And so we've designed both the pickup and the postal truck to be able to really run without too much overhead, up in Union City.

Then the last question I had is, can you just talk about the cadence through the year? First of all there were the 6 units, was that what you anticipated or was there any delays, either in siding or vehicle charging infrastructure, the UPS or other partner's experience in the quarter? And then it sounds like things pick up nicely here in the third quarter, so how do we think about the next couple of months and closing out the year?

The cadence - no, the customer - and it - could have taken them earlier, but we were working on our - some supply chain issues. We had a couple of choke points there that we've now got redundant suppliers for those. And so once that - once we got through that then it really started going. And so now we're - 3 a day, that's about where we'd hope to be, now even though we started a little later than we'd hoped. So we're rolling now.

Our next question comes from the line of Brian Kinstlinger from Maxim Group. Please go ahead.

This is actually Josh Seide for Brian. Just to follow on the last question, could you just maybe elaborate a bit on what the particular supply chain constraints were over the second quarter and kind of how those have been resolved going forward?

Yes, it's a bit of a detail, but it might be of interest. This particular 1 was the wiring harness. So the wiring harnesses in all vehicles are - it's not like a nut or a bolt or something you can buy another manufacturer quickly. Wiring harnesses are, by definition, kind of manual, manually built and we have 1 supplier for it and they weren't able to keep up and we had some quality issues. So we've fixed those quality issues and got a backup supplier now. But wiring harnesses don't come in, you can't build trucks. So we've tightened that up and these are learnings. I mean, producing vehicles, you really work - learn, it is a very daunting task. We are really excited that we're getting on top of it and it's not something that you can just snap your fingers and do. It's - we've been at this for a while and those learnings are invaluable and then we really think it's part of the shareholder value is the ability to produce trucks. I won't, let's say at will, but three a day and we're positioning to do tenfold that.

Great, that's helpful. And can you give us an update maybe on the vehicle run rate that the company needs to achieve to generate gross profitability?

Good. I'm glad you asked that, because we have been stating that it was going to take about 2,000 step van run rate for us to achieve that. But difficult to lose money all the way up to 2,000 vehicles. So the - but we really didn't have any other way to achieve it. The pickup truck has enabled us now, like we said, to attract these Tier-1 vendors for pickup truck parts. We are now working hard to re-engineer and get those into the - what we call the new E-GEN and so it's made it lighter. All the light-weighting that we do, unlike the pickup truck, is completely carbon fiber, the SureFly is completely carbon fiber. Light-weighting - all the things that we've learned on the other vehicles, we are repositioning back into the step van. So I don't know how to articulate it exactly, but after these kind of 200, 300 that we're working on now, we don't expect to lose money on the future step vans and that's a big thing for our company. So we don't have to bear the burden of not making gross margin profit on these step vans all the way up to 2000. And again, people say, well, why couldn't you've done that before? Really, without the volume of 5,000, 10,000, 20,000 pickup trucks, we could not attract these other suppliers. And it just - in addition to - everybody I think realizes automotive in general is a volume game, right. Y You've got a design of a good vehicle, but you've got to make enough of them to make the whole thing work, including our automation, our assembly, but also all the parts we buy. So probably the biggest thing, although it's a little hard to articulate, the biggest thing that's happened to us is the light-duty has enabled us to become profitable on the heavier-duty vehicles much quicker.

Great. And then on the USPS procurement, given that you mentioned in your remarks that you're a bit constrained in what information you can provide. But do you have any increased visibility on how the Workhorse next-gen delivery vehicle will compare to the vehicles being produced by the remaining fur competitors for that procurement? Do you expect competitors are also pursuing hybrid or alternative fuel source technologies in their prototypes as well?

That's a great question. Of course, it's one we wonder about a great deal. I'd like to know what the other people are producing, but just like we're not able to say much about it, the other 4 aren't either, so nobody has - have been able to say that. In September, as they start delivering [indiscernible] if that's the Post Office's goal, then you might be able to see them out on the streets, but other than that we don't have any visibility.

Great. And then just lastly, can you comment on how you think about fleets investment in their charging infrastructure to support more electric vehicles, are you seeing any signs of progression there?

That's another great question. So what happens is, unlike consumer vehicles, fleets, especially the type of fleets we sell to, where you have a lot of vehicles and they come back at night and you park them in a depot, very conducive to charging at night. However, if you get too many vehicles in there, the energy company is going to say you are exceeding the capacity of this depot, because generally the depots weren't built with this in mind. The new depots we're seeing folks build are - do have this charging infrastructure in mind. But charging infrastructure has been kind of a deterrent. What's starting to happen is the people that provide electricity, the utilities are starting to realize, just like they kind of did in the 1950s when suburbia started getting air conditioning and they had to beef up the infrastructure to those neighborhoods, the utility companies did it without charging the customer, because they realized they were going to sell a lot more electricity if air conditioning was a viable thing. Here same type of thing, so we're starting here with the utilities to help or carry the day on the infrastructure build out to these older depots and they just put it back into the rate for the - for our customers. So that could really unlock a huge logjam that's a kind of - it's always been an infrastructure thing. Tesla is building out their own charger network of fast chargers around the country, very expensive, but you can see why they're doing it, because nobody else is going to do it for them. Here if we can - because of the concentration in a building of a lot of electricity going out, the utilities are looking to be able to help with that burden, which makes sense. It's a business decision and it makes sense for them.

Our next question comes from the line of Stephen Weber from Bentley Capital [ph].

Couple of questions. Just following up on the cadence question. Could you give us an idea of how many vehicles you'd expect to deliver in Q3 and Q4, given your production ramp? That's the first question.

Well, we don't give forecast. We announced the 36 we've done this quarter so far, just because it's a fact type of thing. But I think if you extrapolate out, assuming worst case of 3 a day, I think you can probably get a good idea.

Okay. Then on the light trucks, could you talk about the timing for delivering those and can you also talk about [indiscernible] mentioned that you're looking for - I forgot whether it was 1,000 or 10,000 or whatever consumer is to put down a deposit. Have you already started a program where they can do that or how are you planning on...

Good question. So the truck itself is - initial production is late 2018. And that - that's all the crash test, all the development, all the things you got to do to bring a modern-day vehicle out. We're only able to do it at that breakneck speed, because we're using carbon fiber parts and kind of non-traditional parts there, that are great for us because they're lighter, stronger and they require less tooling. So with that kind of cadence and with already the 5,000 fleet orders, which at $ 50,000 per truck, you can see the dollar volume of those orders. The consumers, we hadn't anticipated this, to be honest with you, because of the price point of this truck $ 50,000, you can buy a bare-bones gasoline pickup truck, I think for around $ 30,000, and that's what fleets usually do, bare-bones type of things. So we are charging a premium. The great thing about our business is we can command that premium, because fleets look at total cost of ownership. So they say, I'm going to keep this truck 8, 10 years, what's my price, my initial purchase price, my fuel for 8 to 10 years, my maintenance for 8 to 10 years and in the end that's your total cost and we think it's just so exciting that we did this with the UPS trucks, which is why they're continuing to order more, is because we are dramatically, dramatically less expensive, if you look at total cost of ownership. We did not think consumers would think that way necessarily. We didn't think people are buying Teslas to make it up on gas savings. But for whatever reason, because - well, first of all, you can't pay $ 50,000 for a conventional gasoline pickup truck, if you like. So $ 50,000 doesn't seem to be a premium to consumers and probably it's very good-looking truck, and it's very strong and fast and [indiscernible] extremely green. So what we said ourselves is, okay, if we get enough consumer interest, and the interest has been super-strong, but to really gauge interest you kind of say, okay, will they put down $ 1,000. And again we're using that $ 1,000 - I need to mention Tesla so much on this call, but they are the leaders out there and they've been very successful doing this, so we watch how they do it. And I think $ 1,000 is a good indication of somebody's seriousness. So at some point when we get enough interested consumers, we will ask them to put $ 1,000 down and if we get - let's use a round number of 10,000 or some number like that then we will pull the trigger and go ahead. And by that time, we're hoping the Ryder network is fully up to speed across the country and we can launch into consumer build. Again, pickup trucks are the number 1 vehicle in United States, right. And there's not even a mild hybrid out there of a pickup truck right now. So coming out with an electric with a range extender, carbon fiber, good-looking truck, now in hindsight we say, of course, it's attractive to consumers, especially at that price point. So we're pretty excited about it. But we don't have it completely nailed down yet.

[Operator Instructions] Our next question comes from the line of Tom Henrick [ph], a private investor.

Thanks for the update that was on the subject of the W-15, it was great at the annual meeting to actually see and touch it and you've described it exactly right. It's a pretty exciting truck. The question I had actually is about your trucks that are on the road, but I think it crosses over to the W-15. Can you comment on the overall reliability of the trucks that you've had on the road for many miles now?

Thanks, Tom. Yes. As we said, we have over a million miles, customer miles. And I think it's fair to say - I think it's fair to put the word rigorous on there. These are people delivering things, hustling all day to make those deliveries and that causes - that's a difficult duty cycle. And so they have a million miles of that, very valuable to us. We've learned a ton during that, really no other way to learn it. Even on test tracks and everything we did, until you experience the actual rough and tumble of this delivery world, where people depend on these trucks, these delivery companies, the truck is their livelihood. And so we have to extremely high uptime. And we've learned a lot. And at this point, we are very comfortable that we have a super-reliable - now these trucks, these current trucks typically are in the fleets for 20 years. So that is an even higher bar. When somebody buys something that they have to believe last 20 years, they've got a feel it. And UPS, for example, kind of 2 trucks and 18 and 125 trucks, 200 trucks, they had to be shown. And I think those reorders, even today we announced a bakery in Chicago. And we've survived Chicago cold winters, which is traditionally very difficult for electric vehicles. And when somebody is reordering, that's just a great indication of their reliability.

Yes, just following on that, I saw their comment about how pleased they are with the trucks they've been driving. Just to follow on that question and just to comment really. So given that reliability, which I think is stellar given the start-up phase that you're really in, and I fully appreciate that you want to have a fully built out network of service centers for consumers before you take deposits. I think it's an amazing track record and I think - I do hope you get quickly to the point where you take deposits for the W-15, because as you said, it's a couple of years out or over a year out before people take receipt. And I think with the reliability we've demonstrated and the Ryder relationship, I'm pretty sure you're going to be ready when consumers really want the truck.

Yes, absolutely, with full agreement.

Our next question comes from the line of Bill Moon from Hart Capital Management.

I just had a quick question regarding the preorders for the W-15. It sounds like the 5,000 is roughly the same number as the Q1 call. Can you talk about the cadence and timing there with the Ryder relationship, and when can we expect that number to grow, whether it would be in 2017 or 2018?

Okay, good. Yes, we stopped the preorders. Those are called preorders. Again, we use it as a gauge before we - we kind of really afford to build it and how they come, we had to make sure there was customers to justify the build. And so we've stopped those preorders that was a limited-type thing. So the next orders we get will be real orders. And we'll do another round of that. And I think what we want to do is make sure we can, in good faith, show people the concept vehicle that we've been using really shows what the truck is. But I think before we take hard orders from additional fleets, we want to them to see - what's called the - near production vehicle. So sometime early next year, we expect that to happen. And then we want to just do real orders from here on out.

Okay, great. And can you walk through - you said early 2018, what does that entail? Are you guys going to put more prototypes on the road, ship them out, they need to see it, or can you just walk through that process and how we're going to transition from these preorders to real orders?

Yes, we're pretty traditional there. That's a tried and true thing in automotive world. So we will - you'll start to see - and we want to keep it front-facing to fleets and consumers I guess. So you'll see cold weather testing in Canada in snow and in - what's called [mules] they'd probably be in full camera, that type of thing. But testing drivetrain. The body, although it's carbon fiber and that makes it new, it's still a cab in a bed and bumpers. So that part is pretty traditional. We don't want to change that part. Again, it's just been time-honed to what workers need and what fleets need. But the drivetrain is the whole thing. So this is a four-wheel drive, electric drivetrain with a range extender in it. And so that's a very sophisticated vehicle, much more sophisticated than a - just an electric vehicle, adding another powertrain in there. And again we use it kind of as a - we keep that generator set as light as we can, because most days we're just carrying it around. So it's kind of an insurance policy to a fleet that they will always complete their rounds. So that's why BMW makes a very tight and reliable and lightweight genset that we use. And so all that has to be really tested out. I think early '18 is when we'll have something - we might be able to give to a fleet to put on the road for a little bit, so they can start to feel it. And we're looking for any feedback. If we've missed something, we want the fleets to be able to tell us about it.

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

Just like to thank all our investors. We couldn't do this without you. We try to do this as frugally as we can. We think we're making incredible progress. There aren't many start-up automotive companies and vehicles on the road, blue-blood customers like UPS and FedEx. Just incredible things that you can't do any other way than doing it. So learning to do supply chain all that. We appreciate you staying with us and watching us grow.

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.