Workhorse Group Q4 2023 Earnings Call Transcript

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March 12, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, greetings and welcome to Workhorse Group's 4th Quarter 2023 Investor Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.

Speaker 1

Thank you, Donna. Good afternoon, and thanks to all of you for joining us for the Q4 and full year 2023 results call. Before we begin, I'd like to note that we posted our results for the Q4 and full year that ended December 31, 2023, via press release as well as filed our 2023 10 ks. You can find both these documents as well as the accompanying presentation that will form the basis of today's conversation in the Investor Relations section of the website. We track it along with the presentation during the call.

Speaker 1

Joining me on today's call are Rick Dowc, our CEO and Bob Gennan, our CFO. After my opening remarks, on Slide 3, you'll see the agenda for today's call. I'll turn it over to Rick for an update on our strategic and operational priorities throughout 2023 and during the Q4. Then Bob will walk us through the financial results for the Q4 and full year and provide our outlook for 2024. Then we'll take any questions.

Speaker 1

On Slide 4, you'll see our forward looking statement. As you know, some of comments that we've made today are forward looking and therefore are subject to certain provisions and as a result are subject to risks and uncertainties. You can find the full disclaimer statement in our 10 ks, which was filed today as well as in today's press release. And with that, I'll now turn the call over to Rick.

Speaker 2

Thanks, Dan. Good afternoon, everyone. We appreciate you taking the time to call in today, and thank you for your continued support of Workhorse. Today, we're going to discuss our Q4 and full year 2023 results and also cover the actions we're taking to position the company for success. During the year, we rolled out our first W56 step van, signed up our first W56 fleet customers and increased our production capabilities for our W4CC and W750 vehicles.

Speaker 2

We also expanded our commercial network, adding key dealers and partners in multiple states. At the same time, we've taken actions to strengthen our financial position so that we can continue delivering on our commitment to advancing our commercial EV product roadmap, building demand and selling our trucks. As we disclosed today in our 10 ks, we are in the process of completing negotiations on a financing transaction that along with our pending sale lease back transaction and aggressive cost cutting actions we are taking will position our business to have the financial runway necessary to execute on our business plans. As part of the cost saving actions, we are reducing headcount across the organization, deferring executive compensation and suspending drone design and manufacturing in our aero business, which I will discuss in more detail later in my comments. From a manufacturing and customer service demand perspective, we have built strong capabilities.

Speaker 2

We have had initial successes last year and this year and have had key demonstrations with several large last mile fleet operators as well as state and municipal fleets, which are either already underway or planned to begin in early 2024. We'll talk about all of this in detail in a moment. But I want to pause and acknowledge that I'm extremely proud of the hard work and dedication of our outstanding team here at Workhorse. Our team has overcome every obstacle placed in our path, and I know that every one of us is deeply and passionately committed to success. I'm incredibly proud of the Workhorse team and great for those for the contributions of all of our employees, including those whose jobs are impacted by the difficult, but necessary actions we are taking to reduce our operating costs.

Speaker 2

Moving to slide 5. Let me take a few minutes to address the state of the commercial EV industry from our perspective. The Workhorse leadership and sales team spent the majority of last week at the industry trade show, the NTA trade show in Indianapolis. Every OEM and the major upfidders proudly display their future 0 emission Class 3 to 7 commercial vehicle product lineups. There is no question that the transition to a new generation of powertrain technology is coming.

Speaker 2

The question is really when will it come. The new car fleet clean fleet mandate took effect on January 1 out in California, but it has not yet been enforced. The commercial truck industry is uncertain on how to proceed with the transition to EVs. Most fleets, both big and small, are reluctant to make large investments on the necessary infrastructure to make the shift to either natural gas or electric power vehicles if the CARB mandates might get delayed or revised. Several OEMs are hedging their product development investments and supplier investment plans for EVs pushing out some timing.

Speaker 2

Here at Workhorse, after 2.5 years of backbreaking work, we feel that we are on the precipice of success and we can and we will find a path forward. We have the products, supplier and dealer partners, engineering capabilities, business systems and manufacturing processes in place to emerge as a winner in the Class 4 to 6 segment. But that only happens if fleet customers, both large and small, start buying our products in 2024. In 2023, we continue to advance our product road map, all while navigating and solving challenges, both internal and external, to the company. Progress in this nascent commercial EV industry is not linear, and we know we will need to continue to address challenges as they pop up.

Speaker 2

And while our results for the year were affected by issues that slowed us down, we never stopped driving forward to create a viable and profitable EV OEM company. During the year, we rolled out our first W56 step van, signed up our first fleet customers and established our production capabilities for the W4CC and W750 vehicles. We also expanded our commercial dealer network, adding new dealers and upfitting partners in multiple states. In our Aero business, we continue to expand our relationship with key government agencies and partners. Let's review the key accomplishments and successes we achieved at Workhorse in 2023.

Speaker 2

We will have 4 distinct commercial EV products in production. We have 4 distinct commercial EV products in production. We received important HBIT certification for both our Class 4 and our Class 5.6 vehicles. We secured initial fleet orders for the W56 step band and strip chassis, and we organically grew the stables business. Additionally, we completed the overhaul of our Union City manufacturing complex.

Speaker 2

The Workhorse Ranch is now capable of building 5,000 and painting 3,000 vehicles per year on one shift. Our lean, highly flexible production facility can ramp up staffing and production in line with future market demand. At our Aero business, we sold our first units. We are on track for FAA certification in the Q1 this year, landed several government funded grants, all while we continue to evaluate alternatives for the business. Moving to Slide 6.

Speaker 2

We have stabilized production of both the W4CC and W750 miles and handed those production over to the plant. While continuing dealer programs and field demonstrations for both of these vehicles. Notably, we successfully overcame unexpected issues with California's HVIP program and worked with the California Air Resources Board to list the W-4CC and the W-seven fifty in the HVIP program in a first of its kind program for intermediate vehicle manufacturers. We were able to do this by demonstrating the strength of our service, warranty and delivery network, and complete care options for customers purchasing any Workhorse badge product. With enough finished inventory in place, we have temporarily paused production of these products, shifting our workforce over to focus on up of the W56 production in the Q1.

Speaker 2

As orders materialize, we will add the necessary hourly workforce to meet future customer demand for all of our products. Moving to Slide 7. We received final HVIP certification approval for the W56 step ban in Q4. The final critical milestones of delivering these vehicles to the important California market in advance of advanced clean fleet regulation. We continue to increase our dealer network in California and have adjusted staffing and production in line with market demand over the last few months accordingly.

Speaker 2

Turning to Slide 8. I wanted to share a few pictures with you of what really is being done at the Union City plant to produce our industry game changing step van, which went from concept to production, including passing more than 250,000 miles of validation in less than 22 months. And just in case you are wondering, this is a robust and I mean a really robust vehicle based on the comments we are hearing back from our customers on these field demonstrations. I do not know of any start up OEM that could have delivered this type of product in less than 2 years. Chassis units are moving down the line on a consistent basis.

Speaker 2

And by the end of 2024, there will be 4 variants of the W56 in production. We now have our fixtures and Lift Assist tools in place for both the chassis line as well as the body line shown in the middle of the slide. Finally, we are now painting the step bands in 1 of 3 colors. The Workhorse Ranch is ready to roll and fulfill future customer orders. On Slide 9, we continue to have strong customer interest in the W56.

Speaker 2

This is demonstrated by the receipt of our first 2 15 vehicle unit orders for the step van that we expect to deliver in 2024. As we like to say here at Workhorse, we're 2 for 2. We also intend to introduce a longer wheelbase version of the W56 in the second half of 'twenty four based on the direct request of several of our fleet customers, specifically in the Linen and Industrial Supply segments. The company has multiple product demonstrations already underway or set to begin in early 'twenty four with several large last mile fleet operators as well as state and municipal fleets and other smaller fleet operators. Based on the demos we've had to date, we are optimistic about the prospects for the W56 as well as our W750 and W4CC products.

Speaker 2

We are able to go from order to delivery of a finished step band in 5 to 6 weeks, the shortest lead time for the Class five-six step band market in North America, including custom upfit, paint and branding. We have received extremely positive driver and fleet manager feedback reflecting the vehicle's strong performance in the field as recently as last week at the NTA show in front of the one of the largest package delivery companies in the country. According to customers, the W56 is a superior truck with innovative technology. Turning to slide 10, We continue to build out our commercial dealer and service capabilities to capitalize on our product roadmap. I'm particularly excited by the significant expansion of our dealer network using our strict selection criteria.

Speaker 2

We continue to expand our dealer network with a focus on those regions where carb clean fleet fleet and clean truck mandates will be adopted in 2024 through 2027. We successfully added new certified dealers, bringing our network to 11 dealers nationwide with a 12 pending and soon to be announced. As we continue to actively expand, we have a target number of 15 to 20 dealers by the end of 2024. In addition, we have added 21 upfitting partners in the past 9 months. As we recently shared, we also established partners with W.

Speaker 2

W. Williams and Zeeam Solutions to expand service and support options for customers in the field. On Slide 11, within our stables operations, we continue to electrify our delivery fleet, which is operating multiple delivery routes here in the Cincinnati area for FedEx Ground, organically gaining new route assignments due to our superior performance. We now have 7 Class 4 EV units in the delivery fleet expect the whole fleet to be electrified in 2024. We executed peak season extremely well with Q4 'twenty three revenue up more than 90% compared to Q4 of 'twenty two, including the benefit of organically adding 20% of our assigned routes at the request of FedEx.

Speaker 2

The lessons we are learning at stables are invaluable and give us tremendous credibility to fleets, not only FedEx, but all the fleets we meet with. Moving to our Aero business on Slide 12, we achieved important progress in the last year on drone deployment and delivery to customers. First, we launched production, sold and delivered our first units of the Horsefly unmanned aerial vehicle or UAV. Nevertheless, during the Q1 of 2024, we have decided to suspend drone design and manufacturing and exclusively focus on a less capital intensive drones as a service model and further develop our DAS products and services in this area, where we see near term profitable growth opportunities continuing to expand. Driving this decision was ARO's continued ability to win additional grant awards from the USDA to support National Resources Conservation Service.

Speaker 2

What we do for the USDA? Flying drones equipped with sensors and delivering actionable data is what our drones as a service model is all about. This service has continued to grow over the last 2 years since we first pioneered this capability with the USDA. In January, Workhorse received an additional $500,000 grant and in February, we received a separate $250,000 grant to provide actionable data from sensor scanning to increase the efficiency of underserved farmers and ranchers land use. We are in advanced discussions with government agencies on future scanning and service opportunities at a significant potential grant or contract level.

Speaker 2

More broadly, our strategic view for the Arrow business remains underway to ensure we are unlocking the most value for Workhorse shareholders, while also best positioning our Aero business to capture and fund future growth opportunities as they see them. With that, I'll turn it over to Bob to discuss our financial results. Thanks, Rick.

Speaker 3

Let's turn to slide 13, where I'll cover our full year results. For the year, sales increased $8,100,000 to $13,100,000 for the full year 2023 compared to $5,000,000 in 2022, primarily resulting from the increase in W4CC sales and volumes. The W750, W56 products, which launched in the second half of twenty twenty three, as well as stables by Workhorse and our drone as a service offering also contributed to the increase in revenue. Loss of sales for the full year 2023 increased $700,000 to $38,400,000 compared to $37,700,000 in 2022. The increase was primarily due to increased production and overhead costs to support higher sales volumes related to the new vehicle platforms and an increase in employee compensation related expenses compared to 2022 levels.

Speaker 3

This increase was partially offset by a decrease in inventory reserves, adjustments and disposals, which were driven by the disposition of C Series inventory in 2022.

Speaker 2

SG and A expenses for

Speaker 3

the full year of 2023 were $55,600,000 a decrease of $17,600,000 compared to $73,200,000 in 20 22. The decrease was driven by a $25,200,000 reduction in legal expenses and expenses attributable to the securities and derivative litigation settlements recognized in the prior year. This decrease was partially offset by $3,000,000 increase in employee compensation related expenses, including non cash stock based compensation expense, a $2,100,000 increase in professional and other services expense and a $600,000 increase in corporate insurance expenses. R and D expenses for the full year 2023 were $24,500,000 an increase of $1,300,000 compared to $23,200,000 in 20.22. The increase was primarily driven by an increase of $1,400,000 in employee compensation related expenses and a $800,000 increase in development expenses for new products.

Speaker 3

These increases were partially offset by $1,400,000 decrease in consulting expense. Other loss for the full year 2023 was $10,000,000 compared to $13,600,000 income in 2022. Other loss of 2023 represented the impairment of our investment Tropos, Other income in 2022 represented proceeds from the sale of C Series inventory that was previously fully reserved. Net interest expense in the current year was driven by a fair value adjustment of our convertible notes and warrants of $8,300,000 $2,100,000 fees applied in connection with the securities purchase agreement and the equity line of credit purchase agreement, offset by interest earned on cash balances in our money market investment accounts. Net interest expense in the prior year was primarily related to $1,400,000 of fair value adjustments, dollars 300,000 of contractual interest expense and $400,000 of former convertible notes, which were exchanged for common shares during 2022.

Speaker 3

For the years ended December 31, 2023 and 2022, we incurred taxable losses and thus no provisions for income tax benefits have been recorded. Net loss for the full year 2023 was $124,600,000 compared to a net loss of $117,300,000 in 20.22. Loss from operations for the full year 2023 was $105,300,000 compared to $129,000,000 in 20.22. Turning to Slide 14 to discuss our balance sheet. As of December 31, 2023, we had inventory of 40 net inventory of $45,000,000 as well as 35 $800,000 in cash, which includes $10,000,000 in restricted cash.

Speaker 3

We are operating efficiently and selectively resizing our team here at Workhorse, while maintaining the necessary resources and skills on the team to continue to design, test and build world class commercial trucks. Importantly, we are taking major strengths to strengthen our financial We entered into a sale leaseback agreement for Union City Manufacturing Complex in January. The agreement we entered strengthens Workhorse's financial position and reflects the investments and work our team has put into refurbishing the plant and turning it into a 1st class manufacturing facility. Workforce continues to support the activities of the purchaser and closing is expected in May of 2024. Turning to slide 15 in our 2024 overview, Given the number of key customer demonstrations underway in Q1 and Q2, we intend to report on progress when it occurs.

Speaker 3

As a result, we will not be providing specific annual revenue or unit guidance at this time. Workhorse is entering 2024 with a strong production delivery capabilities as well as discipline and cost control. As we speak, we are working hard to resolve our short term liquidity issues described in our 10 ks. Over the year, we will maintain our focus on operational excellence and cost reduction as we increase production and expand delivery of our commercial vehicles to meet our financial targets for 2024. At the same time, we will continue to evaluate opportunities to strengthen our financial position.

Speaker 3

With that, I'll turn it back to Rick now to conclude.

Speaker 2

Thanks, Bob. To wrap up the call, I want to discuss our key near term priorities, which are on slide 16. Our focus is on strengthening our financial position, while we continue advancing our product roadmaps and ramp up production as we secure orders for our commercial EVs. In plain and simple terms, we want to make sure we have the financial runway to build and sell trucks and provide drone services to our customers. Achieving our goal of pioneering the transition to 0 emission commercial vehicles is no easy feat and it's definitely not for the faint of heart.

Speaker 2

We believe we can. We believe we will emerge as a segment winner in this once in a generation powertrain technology transition. The pace of the transition to EVs is unpredictable, and we cannot predict the speed at which the transition will occur. What we can control is to ensure we are 100% ready to meet the needs of our customers. We are prepared for the transition from every touch point of the delivery process.

Speaker 2

We have the people, products, processes, supplier and commercial business partners to meet the needs of the market when this EV transition hits its stride. We need our customers to start ramping up their own transition to EV Powered Vehicles and believe that 2 or 3 of the largest fleets here in North America are ready to do so hopefully soon. Our team's perseverance in the face of market and regulatory challenges is commendable and we remain determined and optimistic. The groundwork is done and the foundations are in place for us to be the Class 4six segment leader in the commercial EV segment. We expect to emerge a winner in the space and we look forward to continue to do the work to get ourselves there.

Speaker 2

Now, we'll open the call for questions. Donna, I'll turn it back over to you.

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. Today's first question is coming from Sharif Almagarabi of BTIG. Please go ahead.

Speaker 4

Hey, everyone. Thanks for taking my questions. So first, I want to start with how do you prioritize orders between the W56, 750 and the W4CC this year? How are you managing that capacity?

Speaker 2

We have 2 separate lines we actually have 3 separate lines. We have a dedicated chassis line for the W56, which has a corresponding cab and box line. So that's a separate line and we can do about 5,000 vehicles a year there. We talk to our suppliers and they can ramp up to that level as well. We then have 2 separate lines.

Speaker 2

We have the W4CC line, which we were building at about 4 a week 4 a day, sorry, before we put it on pause. And that leads into a separate W750 line, which we can build 1 or 2 a day there, okay? So, if you were at our plant, you'd see very distinct assembly lines. And it still leaves about a third of the plant open for future products if we want to do something there.

Speaker 4

That's helpful. And then on the CARB mandate, can you tell us what you're hearing regarding its enforcement or revision?

Speaker 2

That's like the $1,000,000 question. We've heard both sides of the equation in terms of the California Trucking Association taking exception with CARB. And CARB is saying that they're very firm and they're going to put it in place this year. We just don't know the timing. I'd be guessing if I try to guess right now.

Speaker 2

So we hope sooner rather than later. And we've talked to many fleets and many fleets in California. They have a very good handle on how many trucks they have in the state. They know what they have to do to meet the CARB mandate by the end of the year. And that gets kicked in.

Speaker 2

It's a significant demand. And we're not sure there's a whole lot of people left to fill that demand. We want to be one of them.

Speaker 4

All right. That's helpful. Thanks for taking my questions. Welcome.

Operator

At this time, I would like to turn it back over to Mr. Dowk for closing comments.

Speaker 2

Well, it must be lunchtime on the East Coast, and we appreciate it. Hopefully, if you have any questions, reach out to Stan, and we'll do that. And hopefully, we'll be able to report some good news on our demos and that turn into orders. We'll get our plant working and staying busy. Thanks a lot for your interest in Workhorse.

Speaker 2

Thanks. Bye.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log up the webcast at this time and enjoy the rest of your day.

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Workhorse Group Q4 2023
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