Workhorse Group Inc (WKHS) 2017 Q4 法說會逐字稿

Ladies and gentlemen, greetings and welcome to Workhorse Group's Fourth Quarter and Full Year 2017 Investor Conference Call. As a reminder, the conference call is being recorded.

It is now my pleasure to introduce your host, Workhorse President and Chief Operating Officer, Mr. Duane Hughes. Thank you. Mr. Hughes, you may begin.

Thank you, Dana, and good afternoon, everyone. We appreciate you all for taking the time to join us for our call this afternoon.

After the market close, we issued a press release and filed our Form 10-K with our results for the fourth quarter and full year ended December 31, 2017.

Copies of both documents are available in the Investor Relations section of our website.

In a few moments, our CFO, Paul Gaitan, will provide a brief update on our financials. And then Paul will turn the call over to Steve Burns, our CEO, who will provide an update on our business, touch on some of our operational highlights from the year as well as discuss some of our recent progress. But before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and is part of our year-end update.

The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements.

Our 2017 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

And with that, I would like to turn the call over to our CFO, Paul Gaitan. Paul?

Thank you, Duane.

Sales for the fourth quarter of 2017 increased 81% to $5.5 million from $3 million in the same period in 2016.

The increase in sales was due primarily to an accelerated rate of fleet conversion to Workhorse vehicles by UPS and the company's increased production capacity. During the quarter, we shipped 121 units.

The net loss in the fourth quarter was $12.5 million compared with a net loss of $7 million in the fourth quarter of 2016, due primarily to higher volume growth in negative margin sales.

Sales for the full year 2017 increased 69% to $10.8 million from $6.4 million in the same period in the prior year. The increase in sales was due primarily to an accelerated rate of fleet conversion to Workhorse vehicles by UPS and the company's increased production capacity. Total shipments for the year are 231 units.

The net loss for the full year was $42.2 million compared with a net loss in 2016 of $19.6 million and was significantly influenced, again, by the higher volume growth in negative margin sales.

Now I'll turn it over to Steve.

Thanks, Paul. The 10-K filing we released today as well as the press release that just went out after the market close, gives a good bit of detail on our business. So with this call, I would just like to give a brief commentary on each of our 5 product lines and then open it up to questions.

The specific goal of all of our products is to provide tools that enable a new way of working for our customers. First, I would like to talk about our N-GEN electric cargo van. N-GEN stands for next generation. And we believe that we've taken all of our learnings from working with the best-of-breed delivery companies, companies like UPS, FedEx, Post Office and Alpha Baking Company.

These learnings and our development in testing of the Post Office vehicles, coupled with the millions of road miles we have on the 316 medium-duty electric vehicles that we currently have on the road, have enabled us to build this truly transformable vehicle -- last mile delivery vehicle. The N-GEN is a breakthrough electric vehicle, capable of up to 60 miles per gallon equivalent. We have been able to engineer it and believe we can sell it in sufficient quantities that we can now offer it to our customers for the same price that they would pay for an equivalent diesel vehicle.

As UPS announced earlier this month with respect to their initial purchase of these N-GENs, we believe that this cost parity threshold is a "game changer." We expect to produce and assemble the N-GEN in our Union City, Indiana, assembly facility and we've been working this quarter to retool our factory, such that it can assemble production-ready N-GENs.

We believe our sales funnel is coming together nicely, as is our ability to assemble and deliver these vehicles at a gross positive margin. We are preparing to start the assembly process early in the second half of this year.

We're also planning to place the first cargo-sized N-GEN into actual delivery service the first week of April in the Bay Area of California. By cargo size, I'm referring to Sprinter, Ford Transit class vehicles.

Our first N-GEN is scheduled to begin delivering packages via an independent delivery service to customers throughout the Bay area. We believe this first N-GEN headed to California represents the first U.S. OEM electric cargo van actually delivering last mile packages in the U.S.

We plan to have a ceremony in San Francisco at the end of this month to christen this first N-GEN vehicle prior to it going into service. We'll put out a press release in the next week or so with a specific date and location of that event.

The N-GEN will give us the ability to increase sales by selling into a much larger market than our traditional medium-duty step van market. In 2016 alone, more than 265 of these types of vehicles or vans were sold to commercial fleets, making it the largest-growing segment in the U.S. commercial truck market. This market is at least tenfold the market of our legacy step van market.

Next, I'd like to talk about our W-15 pickup truck. The W-15 electric pickup truck is our entry into the #1 fleet vehicle market in the country. We currently have nearly $300 million worth of preorder letters of intent from fleets. As stated previously, we expect initial production of the W-15 electric pickup truck to start later this year.

Last week at the NTEA Truck Show in Indianapolis, our W-15 pickup truck won the 2018 Innovation Award for a vehicle. Our goal with the W-15 is to build a pickup truck that can match or beat a conventional pickup truck for performance, yet get the equivalent of 75 miles per gallon. This vehicle is built on the same chassis platform as the N-GEN van and thus provides us with the type of economic leverages that enable a small company like us to bring a new entry into the largest vehicle segment in the U.S.

Next, I'd like to talk about the SureFly. The SureFly vertical take-off and landing aircraft is a vehicle that we believe represents a new way of working for our customers and in turn, helping them accomplish their goals. This could be a farmer, an emergency responder, a delivery service, an air taxi or even military operations.

We have received special airworthiness certificate from the FAA allowing us to test and fly the SureFly with a pilot on board. We have been testing as such and expect to present a video in short order that gives some exciting insight to the level of success that we have achieved to date. We believe that our first manned hover test flight will be the first such flight of an electrical VTOL aircraft in the United States that has the approval of the FAA. Further, we are targeting late 2019 for full type certification from the FAA and that should facilitate our first-mover advantage in this exciting new field of hybrid electric flight. If you've been watching the electric VTOL space, you probably noticed significant investment in companies around the globe.

Late last year, we also announced our intention to spin off our SureFly operations into a separate publicly-traded company to be called SureFly, Inc., centered around a $33 million pre-money valuation. Simply put, we believe this spinoff is the best -- it is in the best interest of our shareholders. With SureFly as its own entity, that would make it the first pure-play public entity in the vertical take-off and landing space.

Next, our Horsefly drone. Our HorseFly delivery drone is a custom-designed, purpose-built drone, and it is fully integrated with our electric trucks. We have just recently received our patent for the Horsefly truck-launched drone package delivery system from the United States Patent and Trademark Office. The HorseFly delivery drone and electric truck system is designed to work within the FAA Rule 107 that permits the use of commercial drones in U.S. airspace under certain conditions. To date, we have conducted 2 demonstration deliveries with large multinational corporations, including UPS. UPS conducted a successful real-world test with us in February of '17 and it received worldwide news coverage.

The knowledge that we have gained in building electric delivery trucks for last mile delivery has led us to believe that a drone/truck delivery system can have significant cost savings in the growing last mile delivery market. We continue to work closely with the FAA as we strive to bring the system to the point of daily drone deliveries across America, especially rural America.

Lastly, I would like to touch on our Post Office prototype vehicles. With regard to that potential $6 billion, 180,000 fleet replacement program, at this time, we are still under specific ground rules that limit our ability to discuss the program in any detail. I'd just like to reiterate that we have successfully delivered our vehicles on time for testing and that we remain very encouraged by the progress our vehicles are making during the extensive testing process.

With that, I'd like to open it up to questions.

(Operator Instructions) Our first question comes from the line of Jeff Osborne from Cowen and Co.

Steve, I was hoping you could touch on the gross margin trajectory throughout the year and in particular, in the second half with the shift in production? Can you just talk about what you've been able to achieve in terms of the cost redesigns and what gives you confidence about the price parity and margin profitability?

Yes, thanks for asking, Cowen -- Jeff, sorry. Two things that enabled us to do it. We were able to engineer a lot of the cost out by using extreme lightweighting, which in addition to everything else, reduces the size of the battery pack. And then also, we've been able to garner volume orders such that in the end, automotive is a volume game and even though we deal in relatively small volumes, we've been able to get the volumes up high enough from our customers such that we're able to offer it at a diesel-comparative pricing. And again, that threshold, although these vehicles, I think everybody is aware that these vehicles over time more than pay back any cost premium that we might charge for them, it was still a deterrent. And we really started to realize that we weren't going to really replace diesel and then eventually, gasoline, unless we could be on initial par with them. And then plus all the enjoyment of cost and maintenance savings in the future. So for our purposes, we've made the conscious decision that we are not building any trucks in 2018 at a gross margin loss. And that's a big turn for us and I think it's a big turn, I'm sure we're the first electric truck builder to do that. So that comes from having a mature factory. We've retooled it so that it can start to build these new vehicles. We're able to do that with very little CapEx and now we're able to -- and command the volume we've hinted towards aspirationally, we'd like to do 2,000 vehicles this year, 10,000 next year. At 2,000, our margin is going to be pretty close to breakeven, but it will be positive, and then it really starts, of course, go up when we're in the 10,000 volume. I think the ultimate is a 25% margin, is about the best we can hope for in the 10,000 type of volumes.

So just as you talk about units and then looking at the press release itself, I want to be clear, so when we move from the E-GEN to the N-GEN, it sounds like just the delivery of vehicles in the first half of the year will be kind of sluggish? And then should we think about a ramp in the second half? And then second part on that line of questioning, is the 2,000, when you were talking about that, that's referring to orders, right? So not actually physical deliveries of vehicles for revenue itself?

Yes, while we are -- we feel confident in those orders, but we are actually going to try to deliver that many vehicles this year. It's a little hard to forecast, we might miss it by a month or 2, but we're in that type of time frame. And yes, it's going to be heavy in the latter part of the year. We hope to get up to about 30 vehicles a day towards the latter part of the year and this year -- our first part of the year will be some legacy vehicles, some E-GENs that were on order from last year or early this year and then a few N-GENs. We had forecasted that the N-GEN initial production would start this quarter and just towards the end of the quarter here, and that's what we're bringing to San Francisco to start to place into service.

But no formal guidance, Steve, as it relates to shipments here, at least in the first half, just as we have this transitional period for the company? Any thoughts on trying to nail that down? My sense is the estimates will probably be all over the map.

Yes, we don't generally forecast, but I think it's fair to say that the bulk of those 2,000 are going to be in the second half.

Got it. And then the last question is just as we think about the E-GEN ramp in the -- or N-GEN ramp, sorry, in the second half of the year, how do we think about the cash needs for either retooling in Indiana or ramping up the battery capacity that you have in Ohio?

Yes, we've already put a lot into our battery plant, we're good battery plant-wise. Which is not a trivial statement. I think people kind of can imagine what a battery plant takes and so for our purposes, we have the battery plant sufficient to be able to meet our current projections without any more tooling. And then on the factory side, for at least the N-GENs, we believe we have the bulk, all of our CapEx is about done. Some of our vendors we're still paying R&D so that they can get their stuff done so they can ship it to us and we assemble it in the factory, but we have almost no CapEx required for -- in our factory, both the assembly factory in Indiana and the battery pack factory here in Cincinnati, which is very [good news.]

Our next question comes from the line of Carter Driscoll from B. Riley FBR.

Just following up on Jeff's question, is there a type of blended unit or product mix you could talk about that would get you to that 25% gross margin you talk about, some time potentially in 2019, that you could share?

Yes, again, we haven't -- when we say 10,000 vehicles, when we say 2,000 this year, those are almost all N-GENs, some pickup trucks towards the end, but basically all N-GENs, a few E-GENs brought in there. By 2019, no E-GENs at all is our goal -- is our premise. And the bulk of those 10,000 will be pickup trucks. Again, the 6,000 we've already presold and we stopped the pre-selling process months ago, so that's why that number's locked there. The next set of orders we take for the pickup truck will be actual orders, not preorders. So we have a minimum of 6,000 we have to build '19 and let's say at least 2,000 N-GENs in '19 and then a little squishiness there for the other 2,000.

Okay. But it's fair to say, at least in 2019, overwhelming majority would be the pickup truck in, at least in sales?

Yes, yes.

Okay, and then how does...

Unless -- and I have to say, Carter, unless we win the Post Office, of course.

That was my next question. The Post Office, how does that, obviously a high-class problem if you were to win that contract. But just lay out the steps. Let's say it comes in 4Q this year, you win it and even if it's not sole sourced, let's say it's heavily dominated by you guys. Then what would be the next steps? I mean, obviously, you would need some level of external capital, but how does this change the plans at either Cincinnati or in Indiana? How quickly could you get to do so? What is the type of time frame to satisfy the 180,000 unit order? Just trying to get a sense, longer term, how this could be disruptive, in a positive way, for your CapEx and cash needs in particular?

Well again, just to put it in perspective, if the Post Office award goes electric, right, it's a game changer for us and really, the whole industry, right? If the largest fleet in the world goes electric, that's such a significant thing. To get this far, to be 1 of the 5, you had to show capacity to build. They -- the 180,000, they would like over 4 to 5 years, right? So that kind of gives you a time frame of -- and again, I think they stated that, so I'm under this heavy gag order, so I'm really cautious to say anything there, but it -- the main thing I think for your purposes and what -- are that we have built the N-GEN and the pickup truck were both born of the Post Office. So we had to make the conscious decision to build a vehicle from scratch, complete white paper design, blank sheet of paper design. To justify the cost to do that on a contest that we might not win, we said, "Well, we've got to leverage that across other vehicles." And that's how the N-GEN and pickup were both born. So the good news is, so since we are building the N-GEN and pickup truck, and it's essentially the same as the Post Office. So if we get the Post Office, it's no radical change, it's the same beast, however, I would say we would bring more automation in. What we kind of do is we automate to the level of the orders that we can see in front of us. If we were Tesla and we had the 400,000 orders in front of us, like they do for the Model 3, maybe we would tool up, way in advance, full automation, like they are, right? But we tool up for 10,000 next year. If we start to get -- if we get overwhelmed that way, our factory, by the way, can produce 60,000 vehicles a year. If we exceed that, we could run another third shift and exceed it, but we think we've got plenty of land and we would just add on to the factory if we have that good of a -- that's a nice problem to have. But the good news is, it isn't like it's because they're all built and they're all cousins, it's very straightforward for us. And then we have a partner in that, the body partner is VT Hackney, so it's a little -- we're building the bodies for the N-GEN and the pickup truck. For the Post Office, we have a partner there. So that takes a little bit of the onus off us, as far as execution.

Okay. That's very helpful. Maybe -- is there any way you could talk about maybe a blended ASP, as you ramp anywhere from the 2,000 to 10,000 units? I realize it's quite a product mix shift there, but just trying to get a sense of where you think it goes from maybe say, second half of this year to second half of 2019?

Right. Well, again, the Post Office is pretty specific in their price range that they'd like to see. So we designed everything for that price range. Now at 180,000 vehicles, it's easier to hit that price range. But I think everybody can imagine it's pretty conservative, and the Post Office doesn't want to pay an arm and a leg for vehicles, so targeted for that price and as such, those savings have kind of pushed through to the N-GEN and pickup truck. What we've announced is that the pickup truck's street forward selling price is $52,500. Of course, if you buy a lot of them, you get a discount, like any fleet buying in volume. The N-GEN is in the comparable range of that. It's a little less, the N-GEN isn't required to do all the things a modern-day pickup truck is required to do. And the N-GEN comes in different sizes. Think of a Ford Transit you can buy in multiple sizes, high roof, different weights and different cubic capacities in the back, so it varies a lot. The first pickup truck has 1 bed configuration, 1 cab configuration and 1 trim configuration, right? And we sold this, all 6,000 of them, on that 1, just because that is a lot more expensive for us to change than a cargo van. A cargo van is just a simpler beast, much more utilitarian than a pickup truck. So -- but I think if you averaged our vehicles at $50,000, you'd probably be in the ballpark.

Perfect. A couple of quick ones for me. One quick one for me and then one more longer-term view. FedEx, maybe an update on what are some of the pilot trials that has been running around the Albany area for a while now. Any type of feedback you can provide in terms of what they have told you?

On the FedEx DOE hydrogen fuel cell project?

Yes.

Right. So we have a partner in that, it's kind of a three-way deal, it's us and a company called Plug Power and FedEx. And then of course, the DOE is sponsoring it and watching over it all. So we're just aware that it is operating. We are watching it on our telematics, we can see it. And if we get a call, we get out there and service it. But it's essentially our same electric truck, but instead of the BMW range extender, it has a fuel cell charging the batteries. So for our purposes, and we're the truck OEM of record for that vehicle, it is our VIN number and Plug Power serves as a component manufacturer to put the fuel cell in there. So we're cautiously optimistic. It looks very good.

Okay. Truck replacement opportunity. Maybe on a unit basis, what do you think about, I would think maybe a kind of a 10% replacement. Is that a reasonable percentage for how often the fleets are replaced?

I think good fleet practices are generally in the 5% to 10%, you want to refresh that much of your fleet. The Post Office, of course, doing an all at once, every 25 years, is unusual, but I think that's the nature of their funding and all the complexities of that entity. But what we have seen is fleets are a little bit like a normal person in some respects. They only replace their vehicles -- because there isn't a lot of innovation in this space and a vehicle 10 years old, it doesn't really have any -- you and I buy a new vehicle every 3 or 4 years because there's something that's attracting us to it, right? Some new technology or safety or coolness factor and since the trucks they haven't really changed much. And that's the key thing. We're operating in a space with very little innovation over the years and so we're coming in there with extreme innovation as a new entity on the block. And what we've seen is, if you can prove to a fleet manager that, let's say they normally keep their trucks 20 years and they replace 5% to 10% per year. If you can show them that you crunched the numbers, and given the fuel and maintenance savings that our vehicles are, they can't justify not taking them off at 14 years, right, or whatever it is, earlier. So they're very open to if something on paper can be proved to them that it's more economical to not go the whole 20 years on that vehicle and get a new one in there, they will do it. So we are expecting some early bumps and then it will level back out to the 10% per year. But if you come with something really good that gets 5x the gas mileage, I think we're hoping to see an influx in early years, to level that out a little bit and then settle down to the traditional replacement rate.

The last one for me. In terms of -- at looking at like Duke Energy and some of the preorders they have, I've got to imagine, just with the disruption that is facing all the traditional utility models, moving more towards distributed gen, that the infrastructure is a big issue, if they're going to really swap out their fleets and move to electric. Is there a potential business opportunity that you can help them with on the infrastructure side, whether from a planning perspective, or I mean, is that an entirely new potential business opportunity for you? Just trying to think outside of the box about how that type of relationship might expand?

Right. When you start to really think about putting many, many electric vehicles in a depot or in 1 spot, right? Infrastructure starts to creep up as one of the things you've got to conquer. And just like in the '50s when air conditioning became prevalent and all the residential houses had to be kind of upgraded their box to be able to do a little more to accommodate that. And of course, the end game is since those houses were going to use a lot more electricity, the utility companies were happy to accommodate. And we're starting to see that here as well. It's very easy to calculate, especially with a fleet, they know how far they go every day, it's very -- and we know how much energy we use per mile, so it's very easy to calculate how much electricity this company is going to buy from you over time. So we have got something that we have seen change a lot in the last few years is kind of the utility company stepping up to help our customers with infrastructure. What we can do from a technical point of view is automatically stagger charging during the night, things like that, fast charging where appropriate. So we can do, from our side, things that help ease the infrastructure problem, but in the end, it is wires running under the road into a depot and into a service panel and then out to chargers. We have seen some of our customers are contemplating building new depots, wiring them from scratch, each stall having electric outlets. So it's -- you really feel a movement coming there.

Our next question comes from the line of Justin Long from Stephens.

First question I had, I was wondering where you stand on potentially looking at the consumer market for the W-15? Is that a route you're planning to explore? And is that something that's contributing at all to the 10,000-unit delivery expectation for next year?

Justin, this is Steve. Well, our mission is to fleets, right? But we have noticed that if you build a -- let's say, a rough and tumble 75-mile per gallon pickup truck, that consumers are going to want it, to some capacity. So our mentality is we build and sell to fleets. But of course, we can't ignore it if too many customers are wanting it, and we have a partner called Ryder, with a national footprint of service. So that really enables us, if we wanted to, to go consumer route.

But it is not contributing to...

But it isn't the major -- our major focus is fleets and a new way to work. And I might let -- I'll let Duane expand on that a little bit.

I would just say, to your point is, we have several thousand consumers who have shown a significant amount of interest in being able to get in line to purchase pickup trucks. So what we've said was quietly, as again, to repeat what Steve said, we are commercial fleet focused but to let them feel a little bit of the love, we've allowed them to get into a preorder process that when and if we do go to the consumer market, they would be in the front of the line.

Okay, great. That's helpful. And then maybe following up on the $300 million of preorders for the W-15, could you give us a sense for the number of fleets within that order book? And maybe provide some color on the size of those fleets?

Yes, first, is the number of fleets. It's roughly about 20 fleets that make that up. Primarily those fleets are utilities such as Duke Energy, as we mentioned before, and AEP out of Columbus, Ohio, Portland Electric, et cetera. They are -- they range in size. They may have as few as 1,000 or 2,000 vehicles and as many as 5,000 or more. A number -- also, some of the fleets includes some smaller fleets that are aggregated through the Clean Fuels cities such as Clean Fuels Ohio and so on. So as small as 1,000 units and higher.

Okay, great. And I think my last question was on UPS, you continue to make positive strides with that relationship. But I was wondering if you could provide an update on how you think that relationship could continue to evolve going forward? And just kind of thinking about their appetite to buy and a potential blue sky scenario?

And that was UPS, right, Justin?

Right. That's correct, UPS.

And this is still Duane. What I would tell you is, as the press release demonstrated and talked about, is they have identified, we'll say, the 35,000 units in their total fleet that would be vehicles that are of comparable size and mission, in terms of the duty cycle that the new N-GEN 1,000-cubic-foot vehicle that we are collaborating with them on would replace. I can tell you that currently, we do have a contract that even though the first portion of it is to deliver the first 50, already called for the first 1,000 units of that 35,000 unit picture.

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

Duane, could you just highlight what you -- what did you say, there was 50, obviously, they've talked about. What was the 1,000 you mentioned of the UPS deliveries of N-GEN?

Yes, well, basically what I said was in the press release, we talked about the 35,000 that meet the criteria. But the contract, just goes back to, they made a statement in the press release that said they understand that to get the price point, scale and volume is part of that, right? So the contract actually calls for up to 1,000 units as part of that 50-unit order.

Got it, okay, great. So back to the margin question, with the weaker volumes and higher mix of E-GENs in the first half of the year, should we expect a similar loss per vehicle in the first quarter? And in the second quarter, we'll see that loss per vehicle become more modest before we see positive gross margin in the second half of the year? Is that how we should think about it?

This is Steve Burns. No, I think what you're going to see is, even E-GENs, we're charging more for them so that we can be gross positive margin. What you're going to see is, of course, our general expenses and R&D and everything, amort-ed across a lower number of vehicles. So not gross margin, but just general cost of doing business versus doing less vehicles, that will go up. But we are not selling, even E-GENs, we're not selling this year without gross margin positive. (inaudible)

So let me make a clarification. So are you saying, as the first quarter is about to close, 2 weeks, you'll have a narrow but positive gross margin in the first quarter, you think?

It's a relatively small number of vehicles and it might not be, but for sure, starting next quarter...

The vehicles that are in backlog and that we have the press release amount and so on, those have the gross margin positive. Our focus on the sales -- the markets, the opportunities and with Ryder has been on making those vehicle -- these future vehicles sales, the ones that are in backlog today and going forward, gross margin positive.

So relatively small number of vehicles first quarter, might not be, but everything post today, well, let's just say for next quarter, gross positive margin. So the ones, everything we've announced, all the vehicles we've announced, that $7 million order we announced the other day, is gross vehicle positive.

And related to that $7 million order, what is the time frame you expect to deliver? I assume it's about 140, 150 vehicles. Is that over the first half of the year? Is that over a longer period? How do you think about that?

When does it deliver?

Yes, that is a little tricky for us, only because we have to buy the parts up front and we are working to secure that funding. The customer would take it tomorrow if we could deliver them. So we expect to be ordering parts here soon and start getting them in the second quarter and finishing in the third quarter.

Great. And then the 2,000 vehicles you expect for '18, will the super majority still come from one customer?

No, not a super majority. A majority, but not as biased as they've been.

Okay. And then in the past, we've talked about Amazon and Walmart to the world being able to leverage your vehicle. Where are discussions there? I know there has been some discussion in blogs and things like that, so maybe you can provide an update on the opportunities there and where things are going?

Don't read those blogs, Brian. I think it's fair to say that our business to date has been with kind of the incumbents that are in the delivery business, that deliver all sorts of things: Bread, packages, everything. So however, I think everybody is aware that last mile -- I mean, today for example, Walmart announced in 100 cities, they're going to start delivering groceries right? And so last mile delivery is, we think, extremely topical, everything, everybody expects everything to be delivered. I'd say as far as we know, we're the only vehicles in the United States delivering things electrically and that's a pretty strong statement. So when you hear that anybody is starting to consolidate last mile deliveries of any sort, I think it's fair to say they're using traditional tools. And when I say traditional tools, I mean gasoline and diesel vehicles, and probably not with a drone on the top and probably not with a sophisticated telemetry system like we have with Metron. So we feel that we want to work with all folks that want to optimize last mile delivery, both economically and reduce emissions. So we're expecting to play with all folks doing that.

Okay. Last question, that I think some of the analysts have skirted around is, clearly, there is going to be a little bit more burn, at least in this first half of the year, if not a little bit longer, and there will be some financing needs. Can you -- you've talked about it in the past, shared some details about where maybe the financing might come and how you are thinking about financing going forward?

Good. Good question. Of course, we're a capital-intensive business. We're very proud that what we do, without the traditional hundreds of millions of dollars that it takes to be in these businesses, right? And most of the time, that's billions with a B. So we are going to need financing. We are striving to do it. Even though, one of the reasons you're a public company is to be able to rely on public markets if you need it as a backstop, but we've been really -- we try not to do that, every time we go to the public markets, it's pretty ugly. So we are -- the reason we spun SureFly off, right, one of the reasons was focus. The other reason was it was not getting its true valuation underneath the Workhorse umbrella. We believe that our Workhorse investment in SureFly, when it's its own Nasdaq company, will be a very valuable asset to Workhorse, right? We also have other things internally to the company, that if we have to, we feel like we could spin out to generate capital. We also are knee-deep in strategic discussions. We have not been able to find a great strategic partner yet, but with all the things we've been working on, we are in discussions with a couple of good ones that we hope to get strategic funding as well. And as a last, last resort, we go to capital markets, but that is not our plan.

And if I can follow up, one on the strategic. I've asked this before on a call. You've got some great names, right? You've got -- you're working with Panasonic, you're working with Ryder, you're working with UPS, a lot of great companies, VT Hackney, that can see the value. What has been the pushback that you have been unable to find a strategic partner to invest at the terms maybe that you're looking for? What are they pushing back against?

Well, I think first, it should be said, we have had offers from strategic partners, we just -- they weren't to our acceptable -- what we thought was acceptable. So there is strategic outreach to us. We live in a world that had a lot of carnage in the first generation, right? I don't know if everybody on this call knows, but except for us and Tesla, we are the only public electric vehicle makers standing, right? There was a lot of carnage, people that went through a lot of money and that has made -- and it's traditionally a very capital expensive business. So that makes a strategic hesitant, right? And so the more risk we can reduce, and by reducing risk, I mean the more customers that we can have; the more trucks we get on the road so you can see that they can work; the further we are with the Post Office; the further we are along with SureFly certification from the FAA. As we just continue to put meat on the bone, it reduces risk and at some point, we feel that we will find a good strategic partner. And we are actively seeking one. So -- but it is -- just has not been available to us to date and I -- we really -- most people that are interested in us were interested in the same space 5 or 10 years ago, and most of them saw that everybody, and I mean everybody, got completely wiped out. So we're hoping our shareholders -- we are really indebted to our shareholders that invested in us, in our placements and believed in us and could look past kind of the first generation stuff, so.

Brian, I do want to clarify, this is Duane. Based on your capital question, when we were talking about gross margin positive in 2018, what we're talking about there is gross margin positive at the vehicle level, not at the company level.

Okay. So when you say that, so we're more clear, for 2018, if you do 2,000 vehicles, the gross margin will not be positive. Is that right? It will be slightly negative?

The gross margin for the company will still be negative, but the gross margin positive on each vehicle -- we are focused on selling vehicles only at that gross margin positive number.

Okay. What else goes into the gross cost? I would think everyone else goes into overhead? What else goes into the gross cost that -- in addition to, in the gross margin?

I should probably let Paul answer the question, but he's going to say overhead, is that correct?

Yes, so it's overhead. Obviously, when we're running at we have pretty low volumes, I think if you look at our cost per unit in the first half versus what we did in the fourth quarter, it was really a significant improvement. So we'll make some headway there, but -- and there was a reference earlier in the call to improvements in material costs and we've seen that very, very drastically on some of our key components from the UPS prior order of 125 to the order we just finished up of 200. So we're coming down a really rapid cost-down curve and help -- we'll continue to see that, not only on the existing E-GEN units we produce, but as we make the next step into the N-GEN units.

One last question, just because that information I thought changed, but maybe how people might think about it, what is your actual gross margin breakeven where all-inclusive, how many vehicles do you need to be at?

You mean for company positive?

Company positive, gross margin, I mean -- yes and [debt], too.

We haven't said it yet.

We've got models, but we haven't said it.

Yes, I think there are really too many variables at play to hang it on one number.

I mean, you've got Post Office in or out and all that kind of stuff. It varies.

Of course, not with the Post Office, I'm talking about with your N-GEN being the majority and then ultimately, the consumer product in the W-15, are you actually gross margin positive in 2019?

We haven't positively said it. We know it, but we just -- that's a little -- we're just a little too early to forecast that.

At this time, this includes the company's question-and-answer session. If your question was not taken, you may contact Workhorse's Investor Relations team at WKHS@liolios.com. I'd now like to turn the call back over to Mr. Burns for his closing remarks.

Just like to thank everybody for listening and for supporting us, and we're hoping to have a great 2018.

Thank you for joining us today for Workhorse Group's Fourth Quarter and Full Year 2017 Earnings Conference Call. You may now disconnect.