Workhorse Group Inc (WKHS) 2018 Q2 法說會逐字稿

Ladies and gentlemen, greetings. Welcome to Workhorse Group's Second Quarter 2018 Investor Conference Call. As a reminder, this 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, Kevin, and good afternoon, everyone. We appreciate all of you for taking the time to join us for our call.

After the market closed, we issued a press release and filed our Form 10-Q with our results for the second quarter ended June 30, 2018. Copies of both documents are available in the Investor Relations section of our website.

In a few minutes, I'm going to turn the call over to our CFO, Paul Gaitan, who will provide a brief Q2 overview as well as walk you through our financial results for the quarter. After that, our CEO, Steve Burns, will come on the line to provide an update on our business and touch on some of our operational milestones and highlights from the quarter.

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?

Thanks, Duane, and thank you to all who are joining us for today's call. This afternoon, we issued a press release as well as filed our Form 10-Q with the SEC, both of which discuss in detail the results of our operations from the quarter. I recommend going through those materials to get more color on some of the information being discussed today.

And now to our financial results for the second quarter of 2018.

Sales for the quarter were $171,000, which was down from $252,000 reported in the same period of 2017. Our net loss in the second quarter of 2018 improved compared to Q2 of 2017 from a loss of $9.2 million or $0.26 per basic and diluted share to a loss of $6.9 million or $0.18 per basic and diluted share. The decrease in sales and improvement in net loss is due primarily to a decrease in the volume of trucks sold.

We believe our year-over-year comparisons should not be considered as meaningful representations of the current capacity of our business or potential interest in our vehicles. As we grow, we recognize the need for our capital structure to evolve. To that end, we are pursuing multiple types of investment.

In the meantime, we've been taking the necessary steps to ensure that we have the required short-term capital available on acceptable terms. For example, a few weeks back, we entered into an agreement with an existing shareholder of ours, Arosa Capital Management, for a $6.1 million term loan. This paid off the secured notes that were issued in December of 2017. The covenants required that we raise $30 million over the next 6 months from a combination of equity and the sale of SureFly. This dovetails with the direction we were heading.

Now with the financial side of things behind us, I want to turn the call over to Steve Burns, Workhorse's CEO, to give an overview of the quarter as well as discuss some of our operational highlights and outlook for the remainder of 2018. Steve?

Thanks, Paul. Again, welcome to everyone.

We're quite excited by our progress since our last call. And I will briefly recap our 5 major initiatives and then open it up for your questions.

First, I'd like to speak about our next-generation electric delivery vans. Our N-GEN family of electric vans represents a clean sheet of paper design, which was developed with a clear goal of being sold to our customers for the same price they would pay for an equivalent diesel truck, and for us to be able to make these vehicles at a positive gross material margin. The N-GENs will be available in 200, 450, 700 and 1,000 cubic-foot versions, starting with the 450 and 1,000 cubic-foot versions this year. These revolutionary vehicles reinvent the last-mile delivery and the urban work van.

We continue our real-world delivery testing of the N-GEN 450 pilot vehicles. And our initial results have demonstrated solid performance in some of the most challenging delivery situations.

First, we had a major achievement in terms of our fuel efficiency. As some of you may know, with electric vehicles the industry standard is to use a metric known as miles per gallon equivalent to function as a proxy for a traditional internal combustion engine. On that comparable basis, our 400 cubic-foot version of the N-GEN achieved an average of 40 miles per gallon equivalent, whilst 200 cubic-foot counterpart is all the way up to 75 miles per gallon equivalent, representing up to a 500% improvement compared to conventional gas delivery vans.

Second, we've now delivered more than 100,000 packages in our manufactured test vehicles. These miles on the road contributing to real-world deliveries have provided us with tremendous insights to optimize our next-generation van.

Finally, I'm also excited to announce that this quarter, we have added 2 blue-chip customers, who have signed on to purchase initial launch quantities of our N-GEN vehicles. While we can't disclose any more at this time, you should see news in the press about these customers in the coming weeks.

Next, our W-15 electric pickup truck. As we've previously stated, we have presold nearly $300 million worth of our range extended electric pickup truck to U.S. fleets. This vehicle is built on the same chassis platform as our N-GEN van and allows us to leverage those economies across our supply chain. We are on track for pilot vehicles at the end of this year, and we continue to receive a tremendous amount of interest in this vehicle from fleets as well as from consumers.

Next Monday, August 13, all day, we will be showcasing the W-15 pickup truck as well as the SureFly in New York City at the Flatiron Plaza. Everyone is welcome to stop by. And you can check our website for more details on that event.

Next, I would like to talk about our SureFly. The SureFly is our electric vertical takeoff and landing, or eVTOL aircraft. We're seeing companies all over the world now racing to develop eVTOL aircraft, as the age of personal electric flight is very much within grasp in the not-too-distant future. We have conducted more than 300 test flights with a pilot on board under an experimental certification from the FAA during the last several months. Last month, we announced that we have initiated our application for full-type certification with the FAA. Our goal is to be the first eVTOL aircraft to receive full-type certification from the FAA.

We have started taking preorders with a $1,000 downpayment for the SureFly, and we've already received more than 125 preorders. To put this into perspective, there are typically less than 1,000 commercial helicopters sold annually in the U.S. from all manufacturers combined.

As we've mentioned in past calls, we intend on spinning out the SureFly division by the end of the year. We still feel this plan is currently the best way to achieve the most meaningful return for our Workhorse as well as to ensure the long-term viability of the SureFly enterprise.

Moving on to our HorseFly delivery drone, as we've mentioned previously, we have recently been issued a patent for the HorseFly truck-launched delivery drone system from the United States Patent and Trademark Office. The HorseFly delivery drone and electric truck system is designed to work within FAA Rule 107, which permits the use of commercial drones in U.S. airspace under certain conditions.

With that approval, over the past number of months, we've been working in conjunction with the City of Loveland, Ohio, as well as the FAA on a pilot program, making real-world deliveries via a truck-launched drone. We feel this is a game-changing moment to innovate the way packages are delivered for many years to come, by not only reducing the expense of last-mile delivery but also providing the consumer with the ability to opt in, visualize and confirm their packaged delivery on their property via our HorseFly app. We have reimagined last-mile delivery.

USPS, a brief note on the United States Postal Service initiative. We recognize that there continues to be significant amount of interest in this opportunity for us. And we just want to remind everyone that we are under specific guide rules from the USPS limiting our ability to discuss the program in any detail. We still believe that the time frame for a potential decision is by the end of our current calendar year, and we remain very pleased with how our trucks are performing in the testing process. We will provide updates as we are able to do so.

In closing, as I also highlighted in our first quarter call, we believe 2018 will be a year of evolution for Workhorse, evolution that has presented itself in a number of ways, whether that's through our ongoing efforts to properly outfit our manufacturing operations or through the financing side as we continue to address the need for our capital structure to evolve and fit the needs of our current and future business. All that said, we've come a long way with our young company, and we feel there's great cause to look back and evaluate the accomplishments and milestones we've achieved to this point.

With that in mind, we look forward to updating you on our progress in the coming months. We're now ready to open the call up for your questions. Operator, please provide appropriate instructions.

(Operator Instructions) Our first question today is coming from Carter Driscoll from B. Riley FBR.

This is Carson Sippel on for Carter Driscoll. My first question is how are you going about valuing SureFly? And do you think $20 million will be a reasonable valuation, like for full value?

Thanks, Good question. Yes, we want to be clear, $20 million is what we're contractually obligated on the Arosa financing to do as a minimum. We believe that SureFly is worth well north of that. So that $20 million just may be a percentage of the SureFly. We don't have to sell it all, but we have to bring in at least $20 million.

So we've looked at the comparables out there. Worldwide, there's 10, 15, 20 companies doing this. Again, nobody that we know of is trying to go through the FAA certification process, but we do have some comps. It's pretty easy to evaluate. Are they on paper? Are they flying it? Have they had a man in it? Are they trying to get regulated? And based on that, we feel SureFly is worth well north of the $20 million.

Great. Do you know when the next possible test flight would be?

Well, we test flight almost -- well, not everyday, but we're down for about 2 weeks of maintenance and some of it is the downtime to go to New York City event, but we should be testing the week of the 20th, we start testing again.

Are then now switching gears to N-GEN, are you able to produce any N-GEN prior to the equity raise?

No. Still in...

2 we have...

Developed. Other than the 2 that we have out on the road as test vehicles for customers.

Great. And then I had one more. So do you see any other OEMs mimicking UPS' order patterns so, like, acquiring small initial units, then -- in evaluation period and then a larger order to follow on?

Well, first of all, traditionally, that is the course, especially when it's a new kind of vehicle, like all these vehicles are. The 2 new customers that we referenced during the intro there, they are both buying a small subset of them, enough for them to be able to prove for larger buy. So that's typically the way it's done. I can't speak to if UPS is doing other similar deals.

Sure. Sorry, one last one from me. So do you see any other competitors trying to build some more vehicles in the EV space for last-mile delivery or just in general, that worry you?

Yes, we are seeing, I don't want to name anybody specifically, but we see people building kind of the vehicles that we were building 4 years ago. They are essentially the gas or diesel vehicles, slight changes to make them electric or similar. So we -- this -- but we have not seen anybody building a low-floor, tight-turning radius, super lightweight. Our vehicles are about 5,000 pounds lighter than a conventional diesel vehicle for the same size, at least in the 1,000 cubic-foot version. So we have not seen that anywhere. Other than Europe, we have seen a company called Mercedes-Benz has announced an electric Sprinter, something like that, but nothing for over here.

Our next question today is coming from Chris Souther from Cowen.

Just a quick question on -- wanted to see if we can get an update on the ramp that you guys are hoping to accomplish in the second half? Could you comment on that a bit?

Sure. As we forecasted, most of our ramp is back end into the latter part of the year. So you won't see much in just a few test vehicles next quarter and the bulk of it's going to be the fourth quarter. And we're trying to get -- before the end of the year, we're trying to get to 20 to 30 per day. I can't speak to whether that's 5, 6 or 7 days a week, but that is our -- that's the ramp we're trying to get to.

Got it. And then kind of looking at the cost-reduction efforts, can you walk us through some of the opportunities and potential obstacles as you begin to scale?

Yes. So again, just to reiterate, we, for several years, were making vehicles to perfect our craft while our customers tried to depend on us. And then -- but it was very difficult to make a profit on these vehicles, which we accepted as an exchange work coming out of the new vehicle.

So 2 things had to happen, we had to say to ourselves I think we've made enough that we don't have to keep making them at a loss, and how are we going to get to a material margin? And that comes in the flavor of 2 things: a, volume, of course, right? Volume floats all boats, right, in this business. And so I think in the press release we did at 4:00 today, we talked about 1,100 units in back order, and that starts to get enough where we can work with our Tier 1 suppliers to start to get very favorable pricing.

The other thing is, we engineered the cost out. So the key thing we did was make the vehicles -- we just really maniacally focused on lightweighting. And -- if we can take like 5,000 pounds out of a conventional step van, then we can put smaller batteries in it. And I think everybody is familiar, the batteries are the most expensive component, so less batteries, then less charging infrastructure for the customer because vehicle is using less.

So in the end, just like volume helps, mass always wins, right? And so if you can reduce weight in that kind of capacity. So we had to make vans lighter than it's just ever been made. And then the last thing is, the Post Office is a very large opportunity. I think they've expressed that it's 160,000 to 200,000 vehicles for the winner and that has enabled us being in the finalist for that, it has enabled us to attract Tier 1 discounts, and so that's -- all those combined is how we got there.

That's very helpful. And then congrats on the progress with some of these other customers beyond UPS. Can you give us any sense of kind of the timing of those deliveries?

They're this year. So again, I think, latter part of the year, but I can say that most of the deliveries will be -- you know, Christmas gets pretty crazy for most of our customers. So it won't be right up against the end of the year there, but October is what we're shooting for.

Okay. And then is there any update on the hybrid program, the FedEx program? How's that going and what are kind of the next steps you guys need to hit towards securing kind of more meaningful orders there?

I'll let Duane speak to that one.

Hi, Chris. This is Duane. Appreciate the question.

Yes, we're still working through all of the sales process, if you will, with FedEx. They've given us good indicators on their specifications and their requirements. They have a number of our vehicles on the road today where they've already experienced the performance for it. So we have a number of opportunities there.

Now in addition to that, we have the Plug Power hydrogen fuel cell vehicle also with FedEx that's en route in New York. And they're keeping a close eye on that as well as they look to I'll say evolve their fleet to electrification. They want range-extended opportunities as well as all-electric. So they have a couple -- a number of our vehicles and a couple of different versions, including the Plug Power with which we're continuing discussions to move forward.

(Operator Instructions) Our next question is coming from Justin Long from Stephens.

So I wanted to ask first about your partnership with Ryder. Just curious if you could provide an update on that front and how things have been playing out in terms of the level of success you've had marketing your product through their retail channel?

You probably read a few months ago, we've delivered the first set of vehicles to one of their larger customers called W.B. Mason out of the Northeast. So from a launch perspective, as we bring Ryder up to speed not just from a maintenance perspective on our vehicles, but across all of our platforms, which beyond just the step van that gets into our next-generation category in our W-15. We worked very closely with them in identifying potential customers in fleets that are viable candidates.

So 2 things come to mind. You look at the FedEx ground group. They have several thousand FedEx ground independent contractors, which represents about 44,000 delivery vans in that fleet. Ryder is a good channel partner to FedEx, a graph in that perspective, which helps us tremendously, say, herd all those cats.

Perhaps most importantly, I'd say, Justin, is our W-15 progress out of the roughly or just under 6,000 units on preorder, Ryder represents 2,500 of those orders. So they are a significant player, if you will, in the Class 1 or pickup truck space that we expect to extend that relationship even further.

Great. That's helpful color. And then secondly, you announced a partnership with Dana back in May. I think it was just before your prior earnings call. But I was wondering if we could kind of circle back to that opportunity and maybe you could speak about the financial and strategic opportunities that creates for your business.

Good. This is Steve, Justin. So great question. Really in the end, as good a recipe as you get, this business really kind of boils down to a supply chain and then building them quality, consistently, and so supply chain is a super important to a small company like us. And Dana, Panasonic, partners like that are everything, right?

So we use several different -- you know, Dana makes everything from axles to differentials, to electric motors now. And so they are moving towards supplying parts for electrification of vehicles. And so we're really happy to have them as a partner. And they are going to be -- their parts are all over our N-GEN and our W-15 pickup truck.

Our next question is coming from Carter Driscoll from B. Riley FBR.

I think we already had him.

Kevin. He was the first. That was Carson that was on for Carter.

Right.

(Operator Instructions) At this time, this concludes 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 would now like to turn the call back over to Mr. Burns for his closing remarks.

Good. Just like to thank everyone, again, for joining. I'd like to thank our team that's worked so hard to make all this stuff happen, and appreciate your continued interest in Workhorse and look forward to updating you on our next call.

Thank you. That does concludes today's teleconference. You may disconnect your lines at this time.