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Workhorse Group Inc. (NASDAQ:WKHS) Q4 2022 Earnings Call Transcript

Workhorse Group Inc. (NASDAQ:WKHS) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Ladies and gentlemen, greetings, and welcome to the Workhorse Group's Fourth Quarter and Full Year 2022 Investor Call. As a reminder, this conference call 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.

Stan March: Thank you, Darryl. Good morning, and welcome to all of you joining us on today's fourth quarter and full year 2022 results call. Before we begin, I'd like to note that we've posted the results for the fourth quarter and full year ended December 31, 2022 via press release. We also issued a second press release this morning that covers the planned Board of Directors transition for the annual upcoming meeting of shareholders. You can find both of these press releases as well as the accompanying presentation for this call in the Investor Relations section of our website. We'll be tracking to the posted presentation during the call, so please follow along either from the link in the press release or through the website directly.

And with that, let's get started. Joining me on today's call, shown on Slide 2 are Richard Dauch, our CEO; and Bob Ginnan, our CFO. The agenda today is found on Slide 3. Following my opening remarks, I'll hand the call over to Rick, we'll give you an update on the progress we've made on our strategic and operational priorities during the fourth quarter and the beginning of 2023. Bob will then walk us through our financial results for the quarter and full year and then provide our outlook for the year ahead in 2023. After Rick's summary, we'll take your questions. Moving to Slide 4, you can find our forward-looking statement. As you know, some of the comments that will be made today are forward-looking and, therefore, are subject to certain provisions, and as a result, are subject to risks and uncertainties.

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You can find the full disclaimer statement in our 10-K or other periodic filings on file with the SEC as well as in today's press release. And with that, I'll now turn the call over to Rick Dauch. Rick?

Rick Dauch: Thanks, Stan, and good morning, everyone. Thank you for taking the time to join us today and for your continued interest in and support of Workhorse. Over the past 12 months, we've taken decisive actions across the organization to position Workhorse for long-term success. We made great progress in the fourth quarter and are poised for a breakout year in 2023. We're encouraged by the progress we've made and are confident that our stakeholders will see the benefit of these actions in the near future. Let's start with some of our highlights and key accomplishments from the fourth quarter on Slide 5. Giving the right people in the right seats is the foundation of building a company that can successfully make the transition from being a technology start-up into becoming a real commercial EV, OEM.

It takes relevant industry experience, functional expertise and the selfless work ethic to be part of the Workhorse team. Throughout last year, we talked extensively about the key hires we made across our executive leadership, engineering, operational, commercial, administrative and financial teams, all of whom are instrumental in driving our go-forward strategy. We are pleased to have completed building out our strong team, hiring almost 160 people last year, which is the right one to execute our business initiatives and achieve our vision of pioneering the transition to zero emission commercial vehicles. We also need to have the right systems and processes in place, and they need to be operating effective. We have worked diligently on these important basic building blocks from engineering design revision control, fundamental lean manufacturing planning to adopting appropriate human resource systems.

These sorts of things do not sound critical, but they are absolutely critical to running an effective business on a day-to-day basis. In terms of our new commercial vehicle product road maps, in the fourth quarter, we delivered 23 W4 CC vehicles to customers. We resolved our shipping issues with Green Power and now have more than 100 base W4 CC vehicles at Union City ready for production in Q1. As it relates to our W750-step-van, pilot builds are underway right now, and we start regular production of this Class 4 vehicle in Q2 this year. We also, began shipping troubles vehicles assembled at our Union City facility and are looking forward to ramping up production on that vehicle each quarter in 2023. Most importantly, we are on track to unveil the W56 at the upcoming NTEA Work Truck Show and begin production of the same, this game-changing vehicle in Q3 this year.

Launching four new commercial vehicles over the course of 12 months takes a lot of hard work and coordination, trust me. Finally, we are doing the necessary market data analysis for the future design of the W next, which we plan to bring to market in 2025. As you know, in December, we held our first Analyst Day at our revitalized world-class manufacturing complex in Union City, Indiana. We thank those of you who were able to make the chip to Union City back in December, and we were excited to show you the real tangible progress we're making across our electric vehicle and drone product families firsthand as well as show up our transform manufacturing operations and deep bench of talent. We had the facilities outside of the Union City plant.

We have concluded equipping our Wickes Michigan Technical Center. Our Sharonville, Ohio prototype shop is near completion, just waiting for a few key components to hook up some electricity and we are installing production lines in our drone manufacturing facility in Mason, Ohio as we speak. The takeaway summary from all of this hard work on facilities that are, we now have the physical infrastructure and tools in place to design, test and build world-class commercial vehicles, both wheel and rotor-based products. Drilling down a bit more into Aero. We continue to advance our drone technology development and are excited about the tremendous opportunities in this space. We conducted demonstrations of our Horsefly during the first two months of 2023, first, by flying simultaneous package deliveries by multiple aircraft for prospective last-mile delivery customer; and secondly, conducting a successful field test for internal operations of a separate last-mile delivery customer.

I will say that both of the potential customers are highly impressed with what our Workhorse product and our flight team can do. We also successfully field-tested humanitarian and logistics operations or HALO Drone internationally. The Aero team also want to state a grant to support beyond visual line of sight work in Michigan, and we continue to fly and support of the U.S. Department of Agriculture. We will continue to work on securing additional new federal and state level grants or long-term contracts for our Aero business. We expect to start the production of drones and generate revenue in this business later this year. Our stable installs initiatives, in the fourth quarter, successfully managed deliveries to the peak holiday season, gaining valuable insight into the challenges of running and managing a fleet of the aging ICE vehicles.

We are using our first EV, one of the inaugural W750 in commercial service on a daily basis and expect to fully electrify our stables and sales split by the end of Q2. We continue to explore options to establish a second stable operation in an incentive-based state sometime this year. Finally, we resolved a number of legacy and regulatory issues, which has been critical -- which has been a critical mandate for our new team. This includes proposed settlements to resolve the securities class action lawsuit and related shareholder derivative actions and a notice from the SEC that has previously disclosed investigation concluded with a recommendation not to enforce action against the company. These are important steps that allow us to further sharpen our focus and our resources on our strategic priorities.

In Q4, we made the tough decision to discontinue the C1000 program. Our team did a thorough engineering view and conducted extensive durability testing. However, we decided that platform could not be resigned or repaired sufficiently to safe, reliable and durable vehicle on the road for our customers. Therefore, the best step for our company was to reallocate engineering and supply chain resources towards the development and production of our other products. We expect previously built C1000 units will be decommissioned, disassembled and disposed of by the end of Q1 2023. Turning to Slide 6. We continue to make important progress executing on our commercial vehicle product road maps throughout the fourth quarter with the goal of delivering high-quality, safe and reliable electric vehicles to our customers.

Starting with our Class 4 offerings, the W4 CC and the W750. Our supply pipeline is now functioning much better, and we are buttoning down the manufacturing and quality control processes for both vehicles. As I mentioned before, we are pleased to be able to produce and deliver 23 W4 CC vehicles in the fourth quarter. We encourage -- we are encouraged by the strong customer interest and expect to continue to ramp up production and delivery of this vehicle in 2023. We W750 pilot bills are taking place right now, and the company will start production of that vehicle in Q2. We have plenty of customer interest and the need to field many of these vehicles in our stable installed operations. Turning to the W56, which we first spoke about a little year -- a little over a year ago, as the first new workhorse fully designed and purpose-built Class 56 chassis platform.

This program remains on track, both on time basis and budget basis since its inception, thanks to our engineering and supply chain teams, and we expect to start production in Q3 this year. You can see a rendering image on the lower right-hand side of the slide. It's an impressive vehicle with superior driver visibility and turning radius. Having driven one of the program builds myself, I can tell you it's a serious capable work truck. We plan to showcase the new production intent step band vehicle next week at the NTEA Work Truck Show in Indianapolis to allow prospective customers to see the product firsthand for the first time. Ride and Drives of this vehicle will be offered in May at the ACT show in Anaheim and customer demo vehicles will be in the field starting in late Q2.

Moving to the W next vehicle, which we outlined at Analyst Day. We are combining our previous and extensive Class 3 and Class 4 vehicle field experience, to develop a next-generation vehicle that with an accessible low floor frame, improved ride and handling, efficient lightweight systems and advanced safety technology. We expect to begin production of this vehicle in 2025 and the new vehicle platform will continue to come to market just as the government mandates for Class 4 to Class 6 commercial vehicles start to take effect. Moving to our aerospace update on Slide 7. We continue to make significant progress in advancing development of our drones during the fourth quarter as we target two compelling and growing markets, package delivery and agricultural and infrastructure data acquisition.

Let me start with our Horsefly platform, which can deliver 10 pounds and travel over 10 miles, a payload capability, we believe, is market-leading in the nascent drone industry. In January, we successfully conducted an extensive demonstration for last-mile delivery company. As you can see on the slide, our demo consisted of 50 nonstop deliveries with three drones, two of which were in constant automatic or autonomous flight operational mode. In our second test, we flew a series of demonstrations for a different last-mile delivery company to validate a concept they are considering to support their own internal flight operations. We had a completely different flight team do this demo, and again, it could not have gone any better. We had a third field team travel to Europe to train a foreign flight crew that has significant drone experience and then the newly trained team successfully field tested our Halo drone internationally.

Additionally, we have also partnered with the U.S. Department of Agriculture and secured new federal and state-level grants, including Michigan to help accelerate the feeling of this product, and we are actively exploring new opportunities for collaboration with both federal and state government agencies. On Slide 8, as I mentioned earlier, we have completely transformed our Union City manufacturing facility into a world-class operation with open, flexible, space with room to grow. I was amazed yesterday when I was there, watching 4 different vehicles be put together by our new team up at Union City. The plant continues to ramp up production of the W4 CC, the W750 pilot bills, Tropos vehicles and soon the W56-line will open up. I am pleased we are finally getting the plant into production mode.

We will be installing the end-of-line Dino in Q2, our new assembly line and a dedicated paint line is being installed ahead on site of the W56 production in Q3. Additionally, we are in the process of installing production lines for our drones at our engineering technical design and production facility in Mason, Ohio, so we can start regular production in Q2 this year. With that, I'll now turn the call over to Bob to discuss our financial results.

Copyright: andrascsontos / 123RF Stock Photo

Bob Ginnan: Thanks, Rick. I will now cover our financial results for the fourth quarter and full year on Slide 9 and 10. Our results demonstrate the significant work our team has been doing to strengthen our financial position and operations. Sales net of returns and allowances for the fourth quarter of 2022 were $3.5 million compared to a negative $2 million in the fourth quarter of 2021. The increase was primarily due to increased W4 CC sales. Cost of sales decreased to $21.2 million from $99.9 million in the same period last year as the company recorded several noncash charges, including $12.8 million in additional inventory reserves and disposal costs for the discontinued C1000 program compared to $94.3 million C1000 charge in Q4 2021.

Selling, general and administrative expenses decreased to $13.5 million from $15.7 million in the same period last year. The decrease in SG&A expense was primarily driven by onetime contract termination costs recorded in 2021. Research and development expenses increased to $8 million compared to $2.8 million in the same period last year. The increase in R&D expense was primarily related to increased engineering staff related to the design and sourcing of the company's new products including the W4 CC, W750, W56 and two drone product lines. Net interest income was $0.5 million compared to net interest expense of $35.7 million in the same period last year. The change in interest income was primarily driven by the exchange of the convertible notes concluded earlier in 2022.

Net loss was $38.6 million compared to $156.1 million in the same period last year. Loss from operations for the fourth quarter was $39.3 million compared to $120.4 million in the same period last year. As of December 31, 2022, the company had $99.3 million in cash and cash equivalents. Moving to our full year results on Slide 10. Sales, net of returns and allowances for the full year 2022 were $5 million compared to a negative $0.9 million in 2021. The increase in sales was primarily due to an increase in sales volume in 2022 compared to sales net of returns and allowances recorded in 2021 in connection with the recall C1000 vehicles announced in the third quarter of 2021. Cost of sales for the full year 2022 decreased by $94.8 million to $37.7 million compared to $132.5 million in 2021.

The decrease was primarily due to the shift in production to new vehicle platforms at lower volumes compared to the C1000 program in production in 2021. C1000 program incurred $19.5 million increase in the inventory reserve prepaid purchase reserve in 2022 attributable to the discontinuation of C1000 program compared to $105.7 million charge recognized in 2021. SG&A expenses for the full year 2022 increased to $73.2 million from $40.2 million in 2021. The increase was primarily driven by the $20 million legal settlement expense and a $6.5 million increase in professional and legal services, primarily related to the securities and shareholder derivative litigation. The increase was also attributable to an increase of $11.1 million in employee and labour-related expenses, including stock compensation, increased headcount and the appointments of the new executive leadership team during the year.

R&D expenses for the full year 2022 increased to $23.2 million from $11.6 million in 2021. The increase was primarily due to a $6.1 million increase in employee and related expenses, resulting from an increase in headcount, a $2.4 million increase in prototype components and a $2.1 million increase in consulting fees to support the expanding product road map, such as the new W56 and the W Next asset platform and continuing development of the Horsefly and HALO drones. Net interest expense for the full year 2022 decreased to $1.8 million compared to $12.6 million in 2021. The decrease was primarily due to a reduction of $7 million related to fair value adjustments and losses on conversion of the convertible notes and a $6.4 million reduction in contractual interest expense.

Additionally, the company recognized $0.3 million of interest income in 2022. Further, the company recognized a gain of $1.4 million on the forgiveness of the prior PPP term note during the year ended December 31, 2021, compared to no gain recognized in 2022. Other income for the full year 2022 increased to $13.6 million, primarily attributable to gains from the sale of inventory related to obsolete C1000 vehicle parts. The 2021 losses are related to unfavorable changes in fair value and sales of investment in Lordstown Motors Corp., which was sold during the third quarter of 2021. For the years ended December 31, 2022 and 2021, the company incurred taxable losses and less no provision for income tax expense has been recorded. Net loss was $117.3 million compared to a net loss of $401.3 million last year.

Turning to Slide 11 to discuss our balance sheet for the year ended 2022. As we mentioned last quarter, we are debt-free following exchange transaction in Q2. As of December 31, 2022, the company had $99.3 million in cash and cash equivalents. We also, continue to have our ATMs in place and use it judiciously in Q4. You'll also see that we recorded a $35 million liability for the shaver lawsuit offset by a $15 million insurance receivable. The other item of interest on the balance sheet is a $10 million investment in Tropos, and the related $5.4 million of deferred revenue. We currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio and Michigan to be between $15 million and $25 million in 2023. We believe our existing capital resources and capital availability will be sufficient to support our current and projected funding requirements through 2023.

If an opportunity arises, we will raise additional financing in 2023, including through a continuance of our at-the-market offering. Moving to Slide 12, which covers our guidance. We had positive momentum coming out of 2022 and took the necessary steps to prepare for expanded operations in 2023. Looking ahead, we will focus on manufacturing, operational excellence and financial discipline as we ramp up sales, production and deliveries of commercial vehicles and drones. We expect to generate significant revenue growth in 2023 and with revenue expected in the range of $75 million to $125 million based on the current supply chain lead times. We believe we have the resources to ensure the financial position to execute our strategic plan will allow us to deliver on our goals and generate value for our customers and shareholders.

I'll now turn the call back to Rick, who will wrap up the call.

Rick Dauch : Thanks, Bob. I want to briefly discuss some of our key Q1 priorities, which are outlined on Slide 13. Above all else, we are focused on advancing our new product programs. We are now in pure execution mode on all four programs. Specifically, we expect to ramp up production of our W4 CC in the first quarter, targeting 40 to 50 trucks per month by Q2. W750 builds are underway right now, and we will start regular production of that vehicle in Q2 and deploy several of them to electrify our stable installs also in 2Q. Final testing is underway on the W56 program at multiple locations, and we will begin showcasing the W56 to customers in March, both at trade shows and with personal demonstrations at key customers. Horsefly and HALO testing is now complete, validation is complete and both drones are now available for sale to our customers.

We are in the final stages of expanding our certified dealer network, ensuring we have commercial business partners, capable of serving both niche regional and national fleet customers. We are quickly building a nice backlog of orders first for the W4 CC and W750 and soon for the W56 vehicles. Finally, we will execute on our common systems deployment plans in 2023, including transitioning to a new ERP system, QAD, which will help drive operational efficiencies as we ramp up production of our products. We expect to complete this ERP transition in Q3 this year. On Slide 14, making the transition from a technology start-up to be in a real OEM is not easy nor is it for the faint of heart. It takes time, a great team of dedicated people, significant capital and capable back-office systems that make the transition a reality.

Before we turn the call over to Q&A, I want to reemphasize five key takeaways that I'd like you all to walk away with today, and I will use stabilize, my stabilized fix and grow slide as a backdrop. First, we have built an incredible team of leaders, engineers, supply chain and sales leads, operational experts, hourly and back office staff that are experienced in their respective fields. Every team member contributes to our success. I will put up our team against any commercial EV start-up company in the world. Second, we have real tangible progress. We have made real tangible progress on our new product road maps and are now well positioned to ramp up production in 2023 through 2025 on multiple Class 4 to Class 6 commercial vehicles. We continue to advance our drone development efforts and believe that there are tremendous revenue opportunities in this segment, both in the commercial and government segment areas.

Third, our facilities have been completely transformed and modernized, and we now have state-of-the-art capabilities to design, test and produce our vehicles and deliver high-quality products and services to our customers. Coupled with our process and IT system improvements, we have the necessary tools in place are underway to become a leading commercial EV, OEM. We are not talking about building and tooling plants in the future. Our plants are production ready now in 2023. Fourth, we have resolved our legacy legal and regulatory issues, which allows us to focus our time, resources and efforts on advancing our product road maps and delivering high-quality, safe, reliable and durable products for our customers. We remain confident in the market opportunities ahead in our industry and know that we have the right team, right products and right production plans in place to deliver significant value to our customers, our shareholders and other stakeholders.

There's a strong market demand and governmental support for commercial EVs, UAVs and enabling infrastructure. And finally, we have the financial strength to support our business strategy. While others continue to struggle for survival, we fully expect to emerge as a winner in the nascent commercial EV market. That concludes our prepared remarks. We're now ready to open the call for your operators. Daryl, please provide the appropriate instructions.

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