Workhorse Group Inc (WKHS) 2016 Q2 法說會逐字稿

Good afternoon. My name is David and I will be your conference facilitator. I would like to welcome everyone to Workhorse Group's second-quarter 2015 update conference call. This conference call is being recorded at the request of Workhorse. Should you have any objections, you may disconnect at this time. (Operator Instructions). Thank you.

I will now turn the call over to your host, Duane Hughes, President of Workhorse Group Incorporated. You may begin your conference.

Thank you, David, and good afternoon, everyone. Welcome to Workhorse's second-quarter 2016 update conference call. I am Duane Hughes, President of Workhorse Group. Joining me this afternoon are Steve Burns, our Chief Executive Officer; and Julio Rodriguez, our Chief Financial Officer.

Many of you have already seen a copy of our press release from today. For those of you who have not, 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 can be found at the end of our press release. The Safe Harbor Provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2015 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

The format for today's call will be as follows: first, Steve Burns will lead us off with a brief discussion and update of our key strategic priorities. Next, Julio Rodriguez will take us through the financial performance for the second quarter. Lastly, there will be a question-and-answer period.

With that, I'd like to turn it over to Steve.

Thank you, Duane, and good afternoon, everyone. This is our first quarterly update call. And before we dig into the second-quarter highlights, we thought we'd take a brief moment here to introduce Workhorse to those on the call that may not be familiar with our business.

We've been in business since 2007, and we have about 80 employees and contractors. We operate under two major divisions: our truck division and our aerospace division. The truck division Workhorse is dedicated to designing and manufacturing electric and hybrid trucks for fleet customers. Our goal is to be the leading manufacturer of electric and hybrid work trucks for fleets.

We believe that we are currently the only original equipment manufacturer of medium-duty electric trucks in the country. Our main manufacturing plant is in Union City, Indiana, and our R&D headquarters and our battery plant are in Cincinnati, Ohio.

Our premium truck product is our E-GEN electric medium-duty step van with a BMW gasoline range extender. Our E-GEN 19,500-pound trucks are demonstrating north of 30 miles per gallon in the field with customers. This is compared to the 5.5 miles per gallon a comparable gasoline truck would achieve in similar routes.

We have a direct supplier agreement with Panasonic, and we use Panasonic 18650 cells in our battery packs. Our largest customer is UPS and we are currently delivering vehicles to them. In addition to UPS, we are the chassis supplier to FedEx Express for a Department of Energy medium-duty fuel cell project. And we are the provider of E-GEN step vans to the Alpha Baking Company in Chicago.

We also believe that our world-class chassis capabilities, combined with our proven range-extended electric drivetrains, are suitable for additional fleet-based trucking platforms, such as pickup trucks and cargo vans, in the future.

Our aerospace division leverages the battery and motor technologies that we have developed for ground vehicles, and reshapes them for use in battery-electric vertical takeoff and landing aircraft. Many of our fleet truck customers are in the business of delivering goods and services, and we feel that sophisticated manned and unmanned electric aircraft will have a place in the delivery ecosphere.

Commercial use of drones will be permitted in the United States, starting August 29. And we plan on leading the way for drone delivery with our truck-launched HorseFly drone that is designed to operate within the line of sight of the truck operator; and, therefore, complies with the current FAA restrictions for commercial drone use.

Okay, now about the second quarter. We had a very busy second quarter, and we are proud of what we have accomplished. We completed the delivery of UPS's order for Workhorse E-100 all-electric trucks approximately 3 weeks ahead of schedule. We also continued delivering UPS's order for Workhorse E-GEN trucks. These range-extended vehicles are being delivered to 26 UPS depots across eight states.

In addition to the work with UPS, we have completed the first of 20 FedEx chassis in Phase 2 of a FedEx DoE hydrogen fuel-cell vehicle project.

We also delivered the first of five Workhorse E-GEN step vans to Alpha Baking in Chicago, Illinois. We believe this to be the first range-extended, medium-duty step van ever delivered to a baking company in the United States. In the second quarter, Workhorse vehicles were delivered to the locations in Florida, Georgia, Illinois, Ohio and Texas.

We believe it's important to recognize that we are at a critical point of transformation where we are transitioning to an OEM ramping up in production mode. We continue to manage the reduction in costs in several different areas. Our efforts are focused not only on engineering out the costs of the medium-duty vehicles, but we are also working on our supply chain to reduce costs for parts and services and we are identifying and enacting manufacturing efficiencies. At the same time, we continue to see our labor rates per vehicle improve.

We continue the work of transforming our business to become a last-mile delivery technology company with the production and delivery of American-made, battery-electric, medium-duty chassis that help delivery fleets achieve greater efficiencies while strengthening their sustainability initiatives.

As our mission of improving fleets' operational efficiencies and addressing their sustainability initiatives to the last mile continues, we are also developing and integrating unmanned aerial vehicle platforms to further reduce delivery costs and provide even cleaner deliveries. Our drone delivery platform, HorseFly, is FAA-compliant and fully integrated with our medium-duty truck chassis.

We've also developed an integrated cloud-based, real-time, proof-of-performance telematics monitoring software. This real-time system provides fleet operators with the ultimate in vehicle diagnostics, energy, and route efficiency. The combined technology of the Workhorse battery-electric powertrain, HorseFly delivery drone, and performance telematics is a unique and powerful solution providing fleets the tools they need to continue to improve their last mile delivery operations.

Beyond the second quarter, delivery of Workhorse vehicles to UPS, customers Alpha Baking and FedEx Express, we also announced the integration of BMW i3 range-extender solution into our Workhorse E-GEN vehicles. This new E-GEN is powered by a two-cylinder gasoline engine that's configured to engage only when the depth of discharge of the battery packs reach a predetermined state of charge.

Acting purely as a generator to produce electricity, Workhorse's technology seamlessly extends the range of the vehicles, enabling drivers to complete their routes using the optimal amount of energy required, and eliminates range anxiety commonly associated with electric vehicles. The BMW i3 generator will add a tremendous benefit to our E-GEN vehicle, our customers, and the communities they serve.

Now I'd like to touch on a future business opportunity and initiative. In April of 2015, the Postal Service announced our selection as one of the 15 pre-qualified suppliers for the Postal Service's next-generation delivery vehicle. The Postal Service operates a fleet of over 200,000 vehicles in all areas of the United States and its territories. Approximately 163,000 of these vehicles are right-hand drive, light-duty, carrier route vehicles purchased between 1987 and 2001. The Postal Service intends to retire this fleet in coming years and to replace them with next-generation delivery vehicles.

The Post Office ground rules restrict us from discussing the NGDV program in detail. For purposes of this call, I can tell you as a pre-qualified supplier, we identified and then completed a partner agreement with a leading body manufacturer to complement our range-extended chassis, enabling our combined team to deliver a complete RFP response to the Postal Service's RFP solicitation. The response was officially received and accepted by the Postal Service's contracting officer. We are currently waiting for the post office to announce the next steps in the process.

Let me turn it over now to Julio, our CFO, to take you through the financial results.

Thank you, Steve, and good afternoon everyone. The second quarter marked the start of commercial manufacturing for Workhorse as we registered $1.2 million in quarterly sales from the delivery of battery-electric Workhorse vehicles. The vehicles delivered were a combination of both range-extended Workhorse E-GENs and the Workhorse E-100 all-electric platform.

As Steve mentioned, the generation of revenue from the delivery of battery-electric Workhorse vehicles signals the transition to an original equipment manufacturer ramping up production mode. We intend to continue to ramp up production and execute delivery of customer orders.

Cost of sales for the second quarter were $2.3 million; and for the six months ended June 30, 2016, were $2.8 million. Gross margin for the quarter was negative $1 million; and for the six months ended June 30, was negative $1.3 million. As manufacturing volume increases, we expect to benefit from volume pricing from suppliers. We are also seeking to reduce costs and achieve manufacturing efficiencies through advanced engineering.

Selling, general, and administrative expenses during the three months ended June 30, 2016, were $1.6 million, an increase from $969,000 for the three months ended June 30, 2015. The increase in our SG&A expenses consisted primarily in employee salaries and benefits, consulting, and investor relations, due to increased activity in the period.

SG&A expenses during the six months ended June 30, 2016, were $2.7 million, an increase from $2 million for the six months ended June 30, 2015. Increasing our SG&A expenses consisted primarily in employee salaries and benefits, investor relations and travel, due to increased activity in the period.

Research and development costs for the quarter were $1.4 million lower than last year, due to a shift in the available resources towards manufacturing activities. Cash used from operations year-to-date was $2.6 million, which predominantly due to the ramp-up of production, with working capital uses primarily on inventory of $1.8 million, and accounts receivable of $0.5 million.

On financing activities, Workhorse became debt-free as we successfully paid off the Navistar loan related to the Union City plant acquisition of about $2.7 million; and received funds from exercising of covering investor warrants will of around $8 million.

I'll turn the call back to Steve for final remarks and the question-and-answer portion of the call. Steve?

Thanks, Julio. I think that's probably a good time to open it up for questions, if there are any.

(Operator Instructions). Brian Kintslinger, Maxim Group.

Hi, this is actually Josh Seide in for Brian, everyone. Actually, first, would you guys mind just reiterating how many trucks were shipped during the quarter in total, and the split between E-GENs and the E-100s?

Total vehicles shipped in the quarter was -- I believe it was 18 trucks shipped, of which roughly 15 would have been E-100s; 14 or so E-100s, and the rest E-GENs.

Okay. And then you mentioned in the prepared remarks approximately 20 chassis were manufactured for the study and partnership with FedEx on fuel-cell vehicles. Were those shipped as well during the quarter, or are those still in process of being shipped?

We have one that's actually been built and reviewed by FedEx and their hydrogen fuel-cell partner. And the other 19 will be built upon completion of the first vehicle being delivered to the field and approved by the DoE.

Understood, understood, Okay. And all the E1-100s and E-GENs this quarter were to UPS specifically, or were a few to Alpha Baking?

We had one to Alpha in addition to the UPS deliveries.

Thank you, I appreciate it. And then of the 125 initial E-GENs ordered by UPS, can you just give us a sense of how many are remaining on that order, and then kind of the timeline for completing the entire 125-truck order?

Yes, I apologize for not being exact. But we have roughly delivered 33 total vehicles, including the Alpha vehicle, with roughly 100 vehicles in a various production stage. Meaning the chassis has been built; roughly 60 of them have had bodies put on; and powertrains are currently being installed for delivery.

Okay, that's helpful. And then would you mind talking a bit about the UPS -- UPS's initial satisfaction so far, and how discussions are going towards maybe a follow-on contract? And if you have a sense of when that development might occur -- whether it's weeks away, months away, or more longer-term, with UPS specifically?

This is Steve, Josh. I think it's fair to say that they are very pleased with the trucks. We, of course, are -- you know, these early ones going out, really critical to stay close to them. So we have great many conversations with them. And I think it's fair -- I think they would categorize it as they are very, very happy with the trucks. That's the key, right? If they are not happy, there's no follow-on orders.

So we're not giving any guidance, though, on what the follow-up order is, or any of the discussions we're having. We're just too small to give guidance like that, I think.

Understood, thanks. And can you talk a bit more about the FedEx partnership and maybe your expectations for the total trucks? Is it 20 that could potentially be delivered this year? Or is there a potential for additional trucks maybe next year, pending a favorable outcome of that study?

All we're really talking about on that is what's available on the DoE's website, and it's a total of 20. And the one thing I would say that most people don't realize is a fuel-cell truck is essentially a battery-electric truck, with a range-extender. But instead of our BMW that's in our classic E-GEN, you swap that out for a small fuel cell. So it dovetails right into our -- they're battery-electric trucks.

The DoE is trying to determine, I think rightfully so, if the time has come for fuel cells; or at least how far along have they come. But again, if you don't have an electric truck to put it in, you don't have anything to test. We are a supplier to that agreement. I think FedEx is the primary recipient of the DoE grant. But, again, it's all detailed on the DoE's site.

Okay. And then in the prepared remarks you mentioned engineering will ultimately help bring the cost of goods down in coming quarters. But R&D was down quite a bit this quarter over the year-ago period. So are there plans to kind of ramp up the R&D spend in an effort to engineer out some costs from production over the next couple of months or coming quarters?

Yes, I think R&D had to, as we -- and I think this is somewhat common -- when you first start producing, engineers are on the floor helping produce the early ones to make sure everything is going well. So we were using engineers to be out on the shop floor with the assemblers.

So that reduced what was classically refined to as R&D. But that, of course, is what you have to do to make sure you have an early success and continued refinement of the production process. But R&D is a big part of what we do. We are firm believers that if you're standing still, you're falling behind. So we are constantly engineering out costs.

So the way goes is at first, you get them working. And then you continually refine them -- refine them from a quality point of view; from trying to lower the cost, both in volume and engineering. And then the way you lower cost is just spending time on the production facility itself. So some of our best engineers are actually working on the production process.

That's helpful, thank you.

Jay Burns, Investor.

I have two questions. The first one is my understanding has been that the selling costs of the E-GEN trucks is $90,000; and the all-electric trucks, $133,000. If you take 18 trucks delivered in the second quarter at $1.2 million, I come up with like $67,000 each. (multiple speakers) I'm missing something.

Right. Well, you're looking at -- probably on some of the voucher sites -- of what things cost in onesie quantity.

Right.

UPS and folks like that are buying in quantity, so they get a better price.

Okay.

Okay so that's right.

Okay, that makes sense. And the second question was at the end of this second quarter, do we have a total in dollar terms of the backlog of orders?

Julio, do you want to speak to that?

Meaning costs --?

Costs or volume of trucks? We have about 100 trucks to fulfill on the orders we've announced to date.

Oh, okay.

Right.

I was thinking in dollar terms, because some trucks cost more than others but --.

Right, but there's a little blend there. But those are predominantly now straight E-GENs where (multiple speakers) --

Okay, mostly E-GENs, okay.

Yes.

Okay, thank you.

Thank you.

[Ian Gardner, Quatros Capital.]

Congratulations on the progress. All of you guys have done a remarkable job of getting out there in a tough space, with a lot of white space to conquer. You're shipping, it seems, to a pretty broad spread geographically. Can you talk a little bit about how you intend to service the vehicles for these key early sales?

Yes, one of the great parts of the acquisition, when we acquired Workhorse from Navistar, in addition to getting a brand and the factory and the intellectual property, we also got access to the old Workhorse dealers. So there was 440 of those at the time of the acquisition, and so we have access to them.

And what we're doing is as we roll out in some density in a geography, we train those dealers. So like in Houston, where we did 18 trucks, the all electric E-100s, we picked a dealer down there and trained them. Because although they could fix a leaf spring or something conventional that broke; you know, the electric drive, of course, is foreign to everybody. So as we get density, we bring a dealer up to space in the area. And that's kind of how we are going to roll it out across the country.

And the same for the parts that are going to be required to be stocked up? Is there any level of turnaround service guarantee that you provide to the key customer accounts?

No, there isn't a guarantee, other than I think it goes without saying that we cater to the people that deliver things. And if a truck isn't delivering it goes to -- an alarm bell goes off. They demand high, high uptime. And that's part of our selling story is that we will have high uptime, because these trucks are simpler than a conventional internal combustion vehicle, just less moving parts.

So if we -- and that's part of the access to the dealers is the dealer system, and it's called Uptime, which is the Navistar parts system. So for the common Navistar parts that are available they can order through Uptime through conventional channels. And if it's a part specific to us that they don't have, we'll have to overnight it.

Great, thank you.

[Rick Salmon], Investor.

Great job, and exciting time. We're right at an interesting point in our history. But just one question, and you guys may or may not want to address this. But the press release talks about the potential debt and equity raises. Do you want to talk about the balance sheet in any more detail, or should we just leave it at what the press release says?

That's a tough question, Ricky. I think officially we've said what we want to say. We, as opportunities come across, we want to be prepared to take advantage of them. You can imagine, if we get a giant order that's going to require a lot of moving parts on our side.

So we are trying to do a steady state as we climb. And I think it's important to note -- and we tried to emphasize this in the narrative we just read -- that turning the corner from research and development to production, putting any vehicle on American roads in any kind of volume, even these small volumes that we are just starting with -- just very, very rare air.

And it takes a lot to make consistent vehicles and trying to make them as quickly and as cost-effectively as you can. And we just continue to evolve there, and we're just really excited to turn that corner and start producing. We have a factory that's capable of producing 60,000 vehicles a year. And so we've got a lot of headroom there to grow.

Okay. Thank you.

Brian Kintslinger, Maxim Group.

Congratulations on the commercialization here. So one of the questions that I get from investors in -- and I think we've talked about this, but I'd like you to address it -- is your ability to scale from where you are today to when you receive that first 1,000, whether it's 500,000, a couple of thousand truck order. Could you talk about the ability to hire locally there, and your ability to scale up the operations? I know at the height, you produced a lot more. But maybe talk about how easy it will be to change the scale of your business.

Great, great question. I like the way you think, with the 1,000 or 2,000 order.

Let's hope that's coming soon. (laughter)

But you have to go in preparing that. You wouldn't want to give that order and not be able to fulfill it. So there's a lot of things that have to happen. I mean this is a march of, everybody knows automotive is a volume game. But it's also a supplier -- you have to align all of your suppliers. It's a delicate dance of getting things just in time.

And really the key components that are unique to any electric or hybrid vehicle -- the batteries are number one. So we have Panasonic as our battery supplier. In addition to that we feel they are the best battery, they are making -- I think I'm correct in this -- literally 1 billion of those a year. And so we know there's -- we are still a rounding error to them.

So we have a supply agreement with them and we can get all the batteries we want. So we won't ever get constrained that way. I shouldn't say ever, but in the foreseeable future that we can see. That's number one. And then number two would be our generator for the E-GENs. And again, we are using a BMW generator set, gen set, out of their i3 commercial vehicle, their passenger vehicle.

So both those products, although we are not to volume yet -- what people would call high-volume in automotive space -- we are using volume components where the engineering and the cost is already taken out of those, because they are used for something else in volume. And you are sure to be able to get access to those in the future. So the rest of the components are kind of readily available: leaf springs and tires and rails, and things like that.

So the other point is people. We bought this factory that can do 60,000 a year. And we retained the key management that was doing that for Navistar in the Workhorse plant there. And it's very nice that it's mostly variable cost. We don't have -- if we got a big order, say, do you have to go out and buy $200 million worth of robots -- no, we don't. The factory is already ready for that. And the variable costs are people.

And we have a good line of people, past employees, mostly, that have worked there that want to return to work there. The factory is in a very small town in Indiana. And the work effort of those folks is great, and we're getting calls all the time, people that want to come back.

So it's a variable cost, and the manpower is there. And so we aren't -- sometimes you are worried about getting a big order; we are not worried about it. We are ready.

Great. And then maybe -- you talked about the margins are going to pool over time with scale, better pricing that you are going to get from your suppliers. Talk about maybe when that happens. Is it when you have 1,000 trucks to build? Is it when you have a couple of hundred? Talk about when you're pricing with your suppliers, at what point starts to get optimal for yourselves?

We -- and two things. We might -- everybody thinks okay, you order a lot of something, and you get it for a better price. And that is true. But engineering out costs and making the factory that makes these things more efficient could be more than even supplier agreements that come from volume.

So for example, a wiring harness -- and if it's got 100 wires in it, and engineering can figure out how to do it with 88, that's just savings right out of thin air. We didn't even have to negotiate for those 12 wires, a better price from that supplier.

But all things in the mix, we think we have a remarkably low breakeven point, volume-wise, that we would require to start breaking even. Normally in automotive, you've got $1 billion investment you've got to amortize across your vehicles. And we don't have that because we do all of our own software.

We have been engineering our drivetrain internally for eight years. We bought a factory at a very attractive pricing with all the things needed to produce these. And then our battery plant here, we are constantly improving as well. So, it's not -- it's remarkably low. I think I can tell you it's in the 2,000 vehicle range a year, and we hope to do far beyond that, as time goes on. But it's not like we've got to make 90,000 vehicles a year to break even.

Great. And then maybe talk about [an adjustment] in this inventory perspective. How stocked you up on batteries? Do you have to stock up or order ahead longer? And maybe how many batteries do you have today?

Right, well as you start to get into this business, you realize that everybody would love just-in-time inventory, whether it's just enough coming from suppliers in semi trucks into the back of the building so your vehicles are going out that day.

So we have to continually -- we have to err on the side of safety there. So we would probably stock more than we would like. But we have a clear path to getting it down to really -- I think it's fair to call it just-in-time. The batteries come from Japan. So that requires a boat, and you've got to time all of that. There's customs and everything. But we've really kind of refined that process down so there's no surprises.

Our engines are coming from Germany, same type of thing. So again, we are working with two giant companies: Panasonic and BMW for our main cost components. And really the only thing that where we would be worried about, as far as running out of, or having just-in-time.

So those folks are pretty -- being the size of the companies they are, it's pretty buttoned down for them. So we're trying to -- as we grow, I think every day is better. Vehicles are better. We're making them for less money, and just getting our ducks in a row.

And really as I do it, I would have thought the recipe for the vehicle was the key value, and it is. But making them efficiently is a great intrinsic value to any company doing that. And again, you've got to get through all of the regulatory hurdles.

The reason there are no small manufacturers of automobiles and trucks in the United States is the barrier generally is incredibly high: the giant factory, all the R&D, all of the testing, all of the regulatory issues. And to be able to accomplish that as a small vehicle company and attract the likes of the largest commercial fleets in the United States, UPS, I think that shows our chops.

Yes. Last question I've got. You've got UPS as a customer who seems to be satisfied. It sounds like you established a relationship with Federal Express. You've got two of the behemoths in the industry. I'm just curious how you think about timing now from other customers. And what, if any, is there [reluctancy] while two of the large players are moving forward with it, to them to sell this and move forward with a truck from you?

You know, in this space, there isn't really a Consumer Reports, like in the passenger vehicle space where you can find out a lot about any car you're thinking about buying. In this space, there isn't that. So everybody kind of looks to the leaders. And it's almost incumbent on the big guys to be able to test, try new things, work through them. Even the order of 125 E-GENS was the largest electric truck order in the United States, maybe in the world. So although it seems small, it's a big first step.

So attracting the big guys first so that everybody else can follow. So that's why traditional users of these vehicles, as even gas and diesel vehicles are parcel delivery, bakery, uniform delivery, restaurant services. And we have Alpha Baking that we've announced. They're very happy with their truck.

We are pleased to see that all of the traditional users, all of the different industries that use these trucks are contacting us about having electric versions of them. So we think we're going to be able to really completely change medium-duty delivery for all of those industries.

Great. Looking forward to some stronger quarters even ahead.

Okay, thanks.

Thanks, Brian.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

Now I would like to turn the call back to management for closing remarks.

I think we would just like to thank you all for coming to our first call. Hopefully, we did okay. I think it's a learning experience to do these calls. But we're super-excited about our Company, and we hope that comes through. And thanks for everybody that's invested in us and placed their faith in us, and we'll continue to work hard for you.

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.