XOS Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

Key Takeaways

  • Exos delivered 38 EV trucks in Q2 but delayed some due to charging infrastructure bottlenecks, leading management to revise 2023 delivery guidance to 250–350 units and higher ASPs driven by the 200-mile step van variant.
  • The company announced the first gross margin–positive shipments of its 2023 StepVan, marking a pioneering milestone in profitable commercial EV production despite legacy inventory weighing on near-term margins.
  • Exos Energy Solutions sees charging rollout improving in 2024 thanks to IRA incentives and clean-fleet rules, while its 2nd-generation portable Exos Hub (5-vehicle charger) offers fleets a temporary solution during permanent infrastructure build-outs.
  • Regulatory tailwinds—California’s Advanced Clean Fleets rule (10% zero-emission mandate by 2025) and pledges from 14 other states—plus up to $40K in federal tax credits and state incentives are fueling demand and lowering total cost of ownership.
  • The firm cut overhead, reduced headcount and insourced manufacturing in Q3 to realize 5–10% savings on contract-manufacturer fees, improve quality control and position itself for scaled growth and sustained profitability.
AI Generated. May Contain Errors.
Earnings Conference Call
XOS Q2 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings, and welcome to Exos Inc. 2nd Quarter 2023 Earnings Call. At this time, all participant lines are in a listen only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note this conference is being recorded.

Operator

At this time, I would like to turn the conference over to General Counsel of Ekso's Christian Romero. Thank you. You may begin.

Speaker 1

Thank you, everyone, for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Simler Chief Operating Officer, Giordano Sardoni and Acting Chief Financial Officer, Liana Logosian. Ahead of this call, Exos issued its Q2 2023 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investors. Excesstrucks .com.

Speaker 1

On this call, management will be making forward looking statements based on current expectations and assumptions, which are subject to risks and

Speaker 2

uncertainties. This will not

Speaker 1

only 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 investors. Exostrucks.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.

Speaker 1

Please refer to the information contained in the company's Q2 2023 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 forward looking statements. With that, I'll turn it over to Dakota.

Speaker 3

Thanks, Kristin, and thank you, everyone, for joining us for our Q2 2023 earnings call. On today's call, I will cover the quarterly business highlights, provide an update on our vehicles and energy solutions deliveries and share the latest on the regulatory tailwinds supporting the industry. Then our COO, Giordano Sardoni, We'll provide an update on our manufacturing efforts. To wrap up, our acting CFO, Liana Pigossian, will share the company's 2nd quarter financial performance. I will begin by discussing our deliveries and the growing demand we are seeing for our vehicles.

Speaker 3

During the Q2, We delivered a total of 38 units, modestly higher than the Q1. Deliveries in the quarter were negatively impacted by customer charging infrastructure delays that push some planned second quarter deliveries into the second half of this year and into 2024. In light of our deliveries in the first half of the year, we have elected to revise our full year 2023 guidance to 250 to 350 units delivered and associated revenue and non GAAP operating loss expectations, which Liana will cover later. The updated ranges reflect both slower than anticipated deliveries and higher than expected ASPs, driven largely by customer uptake of the long range 200 mile step van variant. Our success and generating follow on orders from large national accounts gives us confidence in achieving these targets.

Speaker 3

We are seeing the benefits of our sales approach focused on long term customer relationships with orders like the 30 units for UniFirst that we announced last week as part of a 200 Unit Memorandum of Understanding we signed in 2021. We also expect to deliver between 120 and 150 vehicles to repeat customer Loomis in the second half of this year. Additionally, We are seeing more customers bringing charging infrastructure online. Spurred on by the Inflation Reduction Act and advanced clean fleets rules, Many of our customers began investing in charging infrastructure at the beginning of 2023, and we expect these chargers to come online over the next 12 months. Turning back to the Q2, we successfully produced and shipped our first gross margin positive units.

Speaker 3

These units are the first 2023 StepVans shipped to customers and we expect our financial performance to continue to improve as we scale production. This is an exciting milestone for both Exos and the industry as we are among the first OEMs to demonstrate that commercial EV trucks can be produced profitably. We do still have a number of previous generation trucks in inventory and on their way to customers that will have a negative impact on company gross margin performance through the rest of this year, even as we expect to deliver gross margin positive units throughout the second half of twenty twenty three. Moving now to excess energy solutions and charging infrastructure. As a company, we underestimated the challenges for the EV truck industry and installing new charging infrastructure.

Speaker 3

However, the outlook is improving for last mile fleets we serve, both in growing demand for our suite of comprehensive charging services and in growing infrastructure investments by customers at the time of vehicle purchase. Though charging infrastructure will remain a constraint on EV truck adoption, We anticipate improvement through 2024 will be motivated by incentive capture and emissions mandate compliance. In addition to our permanent charging infrastructure projects, we are also seeing growing interest in the 2nd generation Exos hub. As you may recall, the hub is capable of charging 5 vehicles at the same time from a single power connection, enabling fleet operators to transition to EVs before installing permanent infrastructure. These capabilities are bringing a diverse set of customers to the table from fleet operators to utilities and construction companies looking for off grid power solutions.

Speaker 3

Shifting to the regulatory environment, Recent changes are driving demand for Exos' vehicles. In California, the Advanced Clean Fleets or ACF rule requires medium duty fleets including step bands to transition to 0 emissions vehicles. By 2025, large fleet operators in California will be required to have 10% of their fleet be 0 emission vehicles. This means that thousands of step vans over the next 2 years will be required in order to comply in California alone. Outside of California, 14 other states have signed a pledge for 30% 0 emissions fleets by 2,030.

Speaker 3

The ACF rule is administered by the California Air Resources Board or CARB, which has a history of setting aggressive targets and strictly enforcing them. California fleets experienced a similar event in 2,008 with the passage of CARB's California Statewide truck and bus rule. At the time, the rule required all new trucks to comply with lower particulate emission standards and eventually require the phase out or retrofit of older engines. While most fleets anticipated this landmark to be challenged or delayed, the implementation proceeded as planned with the final phase out of older diesel engines having occurred in 2020 We expect CARB to enforce the ACF rule with the same rigor, including fines for non compliance. Our conversations with customers reflect the seriousness of the new zero emissions mandates.

Speaker 3

We have received orders and are delivering vehicles that will bring a number of California fleets into compliance. Where Step Van fleets are not yet on track to comply, The limiting factor is typically charging infrastructure, which is why ExosEnergy Solutions remains such a focus for us. On the incentive front, we are seeing a strong uptake of the $40,000 IRA tax credit and additional incentives available in 11 states covering 42% of the U. S. Population.

Speaker 3

In some cases, the stackable federal and state incentives bring the cost of an Ekso Step Van meaningfully below the purchase price of a diesel alternative, providing a total cost of ownership advantage on day 1. I would like to stress, however, that we do not need to and are not relying on these incentives to support customer purchasing decisions. Our vehicles already offer a compelling TCO advantage on an unsubsidized basis. Finally, before I wrap up, I would like to discuss our focus on cost efficiency. During the quarter, we set aggressive operational expenditure reduction targets and have made meaningful changes in order to achieve them.

Speaker 3

1st, we reduced our spend on a range of overhead costs, including subscription software, insurance and professional services. 2nd, we made the difficult decision to reduce our headcount during the quarter. We remain committed to building a sustainable business with the appropriately sized workforce. This is never an easy decision to make and I would like to thank every Exos employee for their support in achieving our mission. Finally, heading into the Q3, We prepared to bring our manufacturing in house, which Gio will cover shortly.

Speaker 3

We are confident that these actions and have placed Axos on the right path to profitability without sacrificing our growth targets. With that, I would now like to turn the call over to our COO, Gio Sardoni, who will share an operational update. Gio?

Speaker 4

Thanks, Dakota. As was just mentioned,

Speaker 5

we made the decision to in source our contract manufacturing activities within the Exos organization. This decision was made after the team identified opportunities to significantly lower our costs, improve quality control and simplify inventory management relative to the contract manufacturing agreement. As such, at the beginning of Q3, 33 employees from our former contract manufacturer Formerly joined Exos. All Exos vehicles continue to be manufactured in the same Tennessee facility using the same processes and by the same team. As many of you know, Exos' operational focus remains on delivering gross margin positive units.

Speaker 5

And as Dakota briefly mentioned earlier, We're happy to announce that we've successfully produced and shipped our 1st gross margin positive units. The team has taken meaningful steps in order to achieve this goal. Chief among them, the release of the 2023 Stepan in both 102 100 mile variants. The new vehicle, which began Shipping to customers in the quarter is yielding a COGS savings of over $15,000 per vehicle compared to the prior model. Significant portion of those savings come from design improvements that simplify the assembly process and save time on the production line.

Speaker 5

We expect to continue rolling out cost savings updates over the next year as further improvements are made and we work through the existing component inventories. At the same time, we're building a higher performance and higher quality product for our customers. On the quality front, our team is wrapping up a block of test track time, simulating a 300,000 mile real world lifespan to validate durability. On the production line, we've made improvements to the vehicle design and assembly process that results in a quieter driving experience for the driver. These continuous improvements provide a competitive advantage for EXOS and step down fleets where drivers are regularly subject to high noise levels.

Speaker 5

Elsewhere in the factory, we implemented a new incoming part inspection process to ensure we accept quality parts from our supply base and avoid future inventory write downs. In summary, we remain well positioned to scale our business, expand margins and look towards generating positive cash flow. I'll now turn the call over to our acting CFO, Liana Bogosian, who will cover our financial results for the quarter.

Speaker 2

Thank you, Gio, and good afternoon, everyone. For the Q2, our revenue was $4,800,000 compared to $4,700,000 in the Q1 of 2023. Our cost of goods sold during the quarter increased to $8,500,000 compared to $5,600,000 from the Q1 of 2023. Gross margin during the quarter was a loss of $3,700,000 compared to a loss of $900,000 in the first quarter. This was driven by a lower average selling price due to channel mix, additional reserves recorded during the Q2 and physical inventory and other adjustments.

Speaker 2

Turning to expenses, our 2nd quarter operating expenses decreased to $16,800,000 from $19,200,000 in the Q1 of 2023 and was largely driven by lower general and administrative expenses of $9,800,000 during the quarter compared to $11,600,000 in the first quarter of 2023. Non GAAP operating loss for the Q2 was 17,000,000 As mentioned earlier in the call, we made additional cost cutting changes during the Q2, including bringing our manufacturing in house, reducing our subscription software spend and a reduction of headcount. The outcome of these changes is a more streamlined organization with Exa's resources focused on our top priorities of delivering more units, expanding margins and preserving a healthy liquidity profile. We closed the quarter with cash, cash equivalents and investments of $41,100,000 In addition to cash used in operating activities, we used $7,800,000 during the Q2 in financing activities, primarily related to payments on our convertible debentures with Yorkville and other short term insurance financing notes. Operating cash flow less CapEx Our free cash flow of negative $15,800,000 for the quarter was in line with negative $15,600,000 last quarter.

Speaker 2

We believe that as we grow delivery volumes, build working capital and progress towards positive gross margin, we will have options to raise additional capital and will continue to maintain sufficient liquidity. Looking forward, we're revising our full year 2023 guidance to 250 to 350 units delivered, revenue to be in the range of $36,300,000 to $54,700,000 and a non GAAP operating loss of between $50,500,000 to $61,000,000 The change in our outlook reflects lower deliveries in the first half of the year and a more conservative forecast based on our current backlog orders for the second half of the year as our customers continue to work through infrastructure permitting and delays. Our revised revenue range is supported by stronger than initially anticipated ASPs, and we expect our non GAAP operating loss to improve compared to our and expectations, reflecting the cost efficiency progress we have achieved over the year. I'll now turn the call back over to Dakota.

Speaker 3

Thanks, Liana. We are encouraged by our position at the forefront of the industry with established customer relationships, a second generation vehicle in production and gross margin positive units in customer fleets. The challenges remain we are focused on maximizing our advantage over our competition, most of whom remain in the development phase of a first generation product. Beyond complete trucks, the maturity of our vehicle technology is reflected in renewed interest in EXOS powertrains for use in specialty and off highway vehicles that we hope to share more on soon. As we look towards the second half of this year, Our internal strength and direct benefits from ED mandates and incentives have Exos on track for long term success.

Speaker 3

We look forward to sharing that success with you in the coming quarters and remain committed to cost efficiency and maximize Exos' ability to deliver value to both our customers and shareholders. With that, let's open up the line for questions.

Operator

The first question comes from Donovan Shafer with Northland Capital. Please go ahead.

Speaker 5

Hi, guys. Thanks for taking the questions. I want to start with just the guidance. So you guys did lower it a bit, But it's still it is still quite high given the relatively low levels of deliveries in the first half of the year. So I'm just wondering if you can give us a sense of what kind of visibility you have there, how What the confidence level is that gives you that confidence.

Speaker 5

I believe, Dakota, if you could confirm this, if I heard it correctly, you said there were 120 I don't know if it was 150 or something Loomis vehicles that you are sort of committed to delivering in the second half of the year, maybe that's a big part of that. And the UniFirst 30, if that's in there, just in general kind of what the things get included there that give you that confidence?

Speaker 3

Yes, absolutely. Happy to provide more context Donovan and good to connect. So for our revised guidance, We really wanted to make sure that we had 100 percent confidence in achieving the bottom end of that range. So just as you noted, we have Several deliveries that are going to be made to Loomis in the range of 120 to 150 vehicles for the second half of the year. Many of those vehicles are actually already in production and are going to be shipping very soon from our facility.

Speaker 3

We've actually shipped some of them already. And then we have several national accounts, like UniFirst and others that are also going to be shipping, in the very near future, from the facility that we are basically finalizing pre delivery inspections on and expect to go to customers, including folks like Canada Post. But really, we do have strong conviction about being able to achieve those numbers. The other really important dynamic here is that Large national fleets, many of them have been planning for infrastructure for some time now. So while infrastructure continues to be a hurdle In the quarters that we've seen, many of these customers have been installing infrastructure proactively.

Speaker 3

So we know as these trucks Come off the line, they're going to have a home and we can get them into service as quickly as possible.

Speaker 5

Okay. That's helpful. And you actually kind of preempted my Follow-up question there I was going to ask, what is it with given the infrastructure challenges, what is it that enables a company like Loomis to commit to so many vehicles. So I guess if what I'll ask instead then Is just if there are updates for what you're seeing and hearing kind of more directly on the EV infrastructure Challenges, is it primarily, are there equipment shortages? I've heard, I think, like switch gear and like disconnect cabinets that are often required on these sites with the higher voltages.

Speaker 5

Is it kind of Supply chain there and that's where fleets have the larger fleets have been able to get out ahead of that or anticipated or even have Better relationships with vendors to get their hands on product. Is it more just utilities kind of being a stick in the mud, Combination of all of it, just any illumination on kind of trends or developments there and maybe what the kind of More granular on why the fleets, the big national operators can get around it?

Speaker 3

Yes, it's An important question. When we look at the process of deploying charging infrastructure, we start really as soon as we have the purchase order from the customer. And in many cases, we're actually having conversations now with customers that are recurring customers of ours to pre plan more chargers than truck orders than we're receiving And then, just because they know the timeline for getting infrastructure deployed can be a lot longer than actually building a vehicle. The 2 longest tentpoles in the process of deploying infrastructure are the approval and getting permits for a specific site and getting additional power from the utility if there's not currently enough power on-site. And what we do whenever we start with excess energy solutions and deploying charging infrastructure for customers, we actually do site of several of their fleet locations.

Speaker 3

And that will consist of us going out to the utilities, inspecting the sites, seeing what existing power exists on-site and then actually preparing a plan that's going to enable them to maximize their deployments Vehicles in concentrated depots, and also maximize incentives and minimize the amount of time to deploy vehicles in those areas. The several customers, Loomis being obviously a big one of those, we're actually supporting with that infrastructure process. And we've gone through a couple iterations of finding the perfect Sites that can be deployed as quickly as possible. And we work through that with several other customers. In the cases where we can't get around that, We have been deploying hubs to some of those customers.

Speaker 3

So the Exos hub that we've talked about in previous quarters and Also in this quarter is now going out to customers. And what we're doing is we're able to install that hub within about a week on-site and at least get up to 5 chargers to support the vehicles that are already there. And while that Permitting is being permitted, while that infrastructure is being permitted, approved or the utility is bringing additional power or it's being constructed, That hub can provide a small stopgap for smaller depots or depots where you have the power to be able to utilize multiple hubs. That's really a useful tool, as we start rolling more vehicles out to customers in these concentrated locations.

Speaker 5

Thank you. That's helpful. And if I can squeeze just one more kind of detail or question in honing in on the guidance. Do you have a sense for kind of how much if it would be weighted more towards the Q3 or the Q4 kind of between the 2, with push outs from 2nd quarter to 3rd quarter, and you could look at that and think, oh, well, maybe that means The Q3, that's going to be the big one. But you guys ramping, growing quickly and everything, Tendency is going to be to favor Q4 and if there's risks of further push out.

Speaker 5

So maybe it's too early to say, but should we sort of be thinking Was was guided for the second half of the year, is it will be more heavy in the Q3 or heavier in the Q4?

Speaker 3

Yes. I think in looking at both of these quarters, it's going to be a significant uptick from the previous two quarters for both of them. While there is still some seasonality because of the peak shipping season in October, November December in Q4, We expect deliveries to carry over into Q4 and to potentially be a little bit higher than Q3. That being said, we're We're taking every possible opportunity to accelerate deliveries before the busy season. And so there's a chance that Q3 could come in a little bit higher if we're able to pull in some of those delivery dates or charging infrastructure commissioning.

Speaker 5

Okay. Yes, that's actually helpful because then it's just sort of like And that's a positive thing. If you can get it all into the hands of everyone ahead of time, fantastic. But there's not like kind of a Downside too if it plays out the other way. Okay.

Speaker 5

That's helpful and that makes sense. I know, yes, holidays that makes it hard for Yes. The shippers are just so busy to take receipt of the equipment in the Q4. So all right. Thank you, guys.

Speaker 5

Well, congrats on the Loomis. The Loomis commitment, that's fantastic. And I'll take the rest of my questions offline.

Speaker 3

Yes. Thanks, Solomon.

Operator

The next question comes from Mike Slusky with D. A. Davidson. Please go ahead.

Speaker 4

Hi, good afternoon and thanks for taking my questions. We want to touch first on some of the comments you made Dakota on the ACF rules. We're 4.5 months away from this becoming something that people are starting to have to follow. I guess I'm curious, I'm not sensing any sort of urgency out there amongst states that are actually trying to meet these rules. Can you give us a sense as to have your customer conversations and actual orders and your backlog increased over the last month or 2?

Speaker 4

It just seems like We're not seeing a lot of backlog change even though they start ordering in only a few months.

Speaker 3

Yes, Absolutely. Happy to provide more context, Mike, and thank you for the question. We have seen an uptick. And just to clarify, The phase in milestone for the ACF rule is actually at the end of 2024. So the requirement date will be January 1, 2025.

Speaker 3

But for large fleets, that still means they need to start planning now at least one purchasing cycle in advance of the phase and date to ensure that they're going to be compliant. And we have started to see an uptick, particularly for those fleets that are going to be subject to the regulations. There's some recurring purchases as well as some new customer purchases that we've seen lately, that have been driving additional demand for the It's to be determined of when those vehicles will actually get delivered, if they're going to be a part of the end of Q4 or if they would be a part of deliveries early next year, but we are seeing an uptick in order demand.

Speaker 4

And just What about the penalties if someone doesn't meet the rule? I mean, if someone has ordered a charging station and PG and E is just so backed up, They can't install it. They don't have a transformer nearby. I mean, it's not the fleet's fault. So I guess, are there exemptions for those that just don't get the infrastructure Looking to out of control?

Speaker 3

We haven't seen any guidance on that from CARB and from the regulatory agencies, but We were remaining on top of it and trying to monitor the situation to make sure we can best inform our customers. If nothing does change, we have solutions like the hub that obviously can be a good stopgap in the short term, at least until customers are able to get the approval from utilities and the permanent infrastructure completely commissioned.

Speaker 4

Okay. And you had mentioned there's potential for 1,000 of units of volume here. And I'm trying to figure out If any other company or the NEXOS on the step band side can fulfill that volume. I mentioned it last quarter, but now we had a major supplier of batteries Proterra off pharmacy This week, I think this only other player I think I can think of in step vans uses Proterra as a battery supplier today. Another step band that's about to be launched also has Proterra specked into their battery.

Speaker 4

So I mean, not that they're going away anytime But if any other companies are having challenges with getting step vans out the door, what's your ability to step in and meet whatever demand they've got out of Your

Speaker 3

factory. Yes. It's a really, really important context. And, you're right in that Several of the or the only other real competitor building step van chassis, an electrified step van chassis, Was utilizing a Proterra battery system, so that'll definitely impact their ability to continue to deliver products. We can obviously ramp production pretty flexibly to support incremental growth and demand.

Speaker 3

The biggest thing we want to ensure for customers for their own success as they deploy these vehicles is that they've got that charging infrastructure ready to roll and ready to go. And while we don't like to see any failures within this industry, the fact that we are going to be one of the few vendors that are going to be able to provide solutions for step van fleets, Obviously, bodes well for us as the demand and regulations continue to advance the need for our vehicles. It also is a potential expansion for us as we think about our powertrain business powered by Exos. We've been continuing to grow that business and actually are selling into some off on highway specialty vehicle applications now as well that could supplement and continue to build out our growth in the Powered by Axis business too.

Speaker 4

Okay. Maybe one last one for me. Can you maybe put some brackets around where you think your cash Earn is going to be over the next 12 months. Just trying to get a sense obviously for when and if you may have to access any additional capital or whether you're okay for the foreseeable future.

Speaker 2

Thank you for the question. Happy to provide additional context. As we previously mentioned in our prepared remarks, We do have sufficient capital to go into 2024 and we also have made various cost reductions that we continue to evaluate and are also pursuing additional funding opportunities in the quarters to come.

Speaker 4

All right. Fair enough. I'll leave it there. Thank you.

Operator

Our next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Speaker 6

Good afternoon and good evening everyone. Dakota, in terms of your cost of goods sold, so that was up sequentially More than unit shipments. I'm wondering, can you just talk about what proportion of that is overhead and any moving pieces From here because it looks like the COGS per unit was up sequentially.

Speaker 2

Happy to provide additional context on that. So, the primary drivers of why cost of goods Sold was up sequentially this quarter was just overall lower average selling price, as well as additional Inventory write downs and reserves that we took this quarter, that was more as a part of standard course of business and specific to this quarter.

Speaker 6

And thank you for the context. How much was the write down?

Speaker 2

The write down was for the quarter was approximately 1,100,000.

Speaker 6

Okay. Okay. Thank you. And then In terms of the transition to new truck production in the back half of the year, out of the guidance for back half deliveries, what Portion are going to be the new truck where you expect positive gross profit contribution versus the Previously priced, 1st generation truck.

Speaker 3

Yes. We don't have a specific split between older inventory and the newer inventory, but the majority of vehicles will be the newer inventory That is positive gross margin. And the other thing that we noted, which is really important as we look at the back half of the year and as part of the revised guidance, As we're delivering a significantly larger proportion of our long range vehicles, including the long range strip chassis for Specialty vocational applications as well as long range step vans. And those actually are higher ASP vehicles because of the larger battery size. They're double the battery that's on board a 100 mile range vehicle.

Speaker 3

So it drives higher ASPs and it helps also lower our inventory levels for the tail end of the year. Those platforms are also higher gross margins than our typical 100 mile range vehicle.

Speaker 6

Okay. And I'm wondering if you folks wouldn't mind just Expanding on your prepared remarks comments on transitioning production in house, what exactly The timeline looks like and what are the steps in that process and just a few more words on what's driving the change in the profile? Thanks.

Speaker 5

Hey, Jerry. This is Gio. I appreciate the question. The transition has been complete as of the end of Q2, start of Q3. And so that's just taking the employees that were previously on our Contract manufacturers payroll over to EXOS payroll, and assuming that responsibility.

Speaker 6

Andrew, can you just say more about the rationale or just expand on what's driving the change, please?

Speaker 5

Yes. So we've been working with them for a few years now.

Speaker 7

And I think we just got to

Speaker 5

a place where the Exos team was deeply involved in the factory and the operation already. We had our own quality folks on-site, Manufacturing engineering folks on-site. And it just made sense to streamline and simplify by bringing those folks onto the Exos team rather than having that sort of arm's length contract manufacturing relationship in place. And it's made things run a bit more smoothly and it's also an opportunity to reduce costs as well.

Speaker 6

And the magnitude of cost reduction that you're anticipating 3Q versus 2Q as a result?

Speaker 3

From a manufacturing standpoint, our manufacturing costs will see savings of fees that are around 5% to 10%. But there's probably additional operational savings that come from improved communications and improved timeline to get Vehicles assembled and delivered.

Speaker 6

Appreciate it. Thanks.

Speaker 3

Thanks, Sherry.

Operator

Our next question comes from Sherry El Shabaugh with Bank of America, please go ahead.

Speaker 7

Hi, good afternoon. So just staying with the change In bringing production in house, have you begun to produce packs internally or are all the packs on the new vehicles still coming from

Speaker 3

We are producing both packs. So we're producing the excess packs for vehicles as well as utilizing packs from CATL.

Speaker 7

Understood. And are you able to get a sense of Are the CATL packs covering the majority of the new product platform versus the legacy, if you

Speaker 3

can give a breakout there? Yes. We don't have existing breakdowns of how many are utilizing for our packs or how many utilizing the LFP packs. But we're continuing to utilize both of the systems and we're seeing strong performance across different applications and use cases that are more suitable to the different chemistries, NMC or LFP.

Speaker 7

Understood. And Just with vehicles that have been produced but not delivered, are you able to give us a sense of the scale of how much you've produced year to date?

Speaker 3

We don't actually guide to that, but we have been moving through inventory and continuing to move into our 20 23 step van model, which is going to be the positive gross margin model that will be the majority of shipments for the second half of the year. Thank you. Thanks, Sherry.

Operator

The next question comes from Mike Schulinski with D. A. Davidson. Please go ahead.

Speaker 4

Yes. Hi. Thanks for taking my follow ups here. I just got 2. 1, in the transition to in house manufacturing, we confirm there's no additional CapEx or other costs that have to take place.

Speaker 4

It's It's just where they get their paycheck from. Is that basically

Speaker 2

the idea?

Speaker 3

There was an incremental CapEx investment that was made in Q1 and Q2, Very nominal amount. We bought some fixtures and equipment associated with the facility, but I believe it was less than $1,000,000 in incremental CapEx.

Speaker 4

Okay, got it. I just wanted to ask, the folks who have actually received the 2023 truck model, Have you gotten any feedback as to how they're performing compared to the previous year's model as far as range, reliability, etcetera? Anything that you can give us on How different the product is in the field would be appreciated.

Speaker 3

Yes, there's been several improvements, Mike. First Which is one you mentioned, which is the range increase. So we have an incremental 20 kilowatt hours on board of energy storage as well as a different software package and different sub ranging the battery system, which means a longer range vehicle. And that really is important for the extreme climates. So in parcel delivery where they typically still do under 100 miles a day, We are seeing in some of the extreme range climates or extreme climate areas where we have vehicles deployed like in Canada In northern climates, they are utilizing their heater systems really for the full length of their routes during the day.

Speaker 3

So that has an incremental weight on the battery, but we're still able to achieve that 100 mile range with this new PAC system. The other improvements Really center around a lot of the driver comforts and driver drivability of the vehicle. So our new cooling system on the vehicle has a much more robust HVAC system, which is already being noticed by the drivers. We also have our new cluster and new software package on this vehicle, which is being appreciated by the drivers. And with the capability to do over the air updates on this platform and flash new software releases, We anticipate continuing to improve the software and efficiency of the vehicle as well as releasing several incremental hardware improvements to this vehicle over time that customers will get the benefit of and ultimately will accrue to the drivers and fleet operators in form of reduced TCO.

Speaker 5

Yes. And I would just add to that and double click on what Dakota said as far as over the year updates. This is a huge deal to our customers having the ability to not only monitor their fleet remotely, but also push software updates when needed. This is a really unique capability in the commercial vehicle space. I think we might be one of the only if not the only commercial truck provider that is offering over the air update capability in our vehicles.

Speaker 5

I'll also mention that in addition to customer feedback and customers being excited about the new platform, these vehicles also went through a very intense Battery of tests, both in thermal chambers as well as durability. Completed thousands of miles of real world durability testing anecdotal, but the folks at the durability track, Technicians and drivers, who test commercial vehicles all day long mentioned that this is the highest quality EV they've seen that's come through their facility, in terms of the build quality and the performance on the durability course.

Speaker 4

Great. Thanks. It's interesting. I'll pass it along. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference over to Dakota Semler for any closing remarks.

Speaker 3

Thank you, operator, and thank you everybody for joining us today. We appreciate all of these insightful questions and inputs. And as we continue to deliver vehicles through the second half of the year, We want to reiterate the 3 core tenants that we've been focused on over the last year, which is growing the demand and the deliveries of our products. We expect to see that in the 3rd Q4 improving gross margins, which we also expect to see as we launch the new platform of our 20 And maintaining healthy access to capital to ensure we are strongly positioned to fund and scale the business, which we see into 2024 and continue to work with the capital markets to find other sources of capital to help grow the opportunities that we have within Exos. Thank you everybody for your questions and your time today.

Speaker 3

Looking forward to catching up with you on our next earnings call.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now

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