Workhorse Group Inc
NASDAQ:WKHS
Earnings Call Analysis
Q4-2023 Analysis
Workhorse Group Inc
Workhorse Group, aiming to cement its position in the commercial electric vehicle (EV) space, has been tenacious amidst obstacles. CEO, Richard Dauch, underscored 2023's breakthroughs including the launch of the W56 step van, signing fleet customers, and ramping up production capabilities for other vehicle models. Efforts to strengthen financial stability were highlighted, with measures such as cost-cutting, deferred executive compensation, and paused drone design in the Aero business to ensure they stay on course with their business plans.
The company showcased commendable progress by receiving key certifications and securing initial orders for its flagship W56 step van and chassis, indicating a solid market uptake. They also managed to grow the Stables business organically, facilitated by conversions to their Class 4 EV units in their delivery fleet. The company was lauded for its achievements at the Union City complex, capable of annually building 5,000 and painting 3,000 vehicles, showcasing a significant leap in their production capabilities.
Workhorse's expansion strategy involved growing their dealer network to 11 with a 12th on the verge of joining, augmenting their coverage nationwide. Fostering partnerships, like those with W.W. Williams and Zeem Solutions, amplifies their service capabilities. Praise from end-users, specifically fleet managers and drivers, bolsters confidence in the company's products, signaling a potentially prosperous future in sales and customer satisfaction.
The fiscal discipline is evident; despite a minimal increase in cost of sales mainly driven by the scale-up for newer vehicle platforms, administrative costs saw a sharp reduction thanks to resolved legal matters. R&D expenses clocked a slight increase, reflecting their investment in product innovation. The net loss widened marginally from $117.3 million in 2022 to $124.6 million for the full year 2023, indicating the company's strategic investments in growth despite market fluctuations. Workhorse also strengthened its position by signing a sale-leaseback deal for their Union City facility, improving liquidity and maintaining cash reserves for sustained operations.
Workhorse is buckled down to boost production in response to customer orders, especially with the W56 step van that's expected to increase in the second half of 2024. The company awaits several product demonstrations hoping to convert these into substantial orders. However, they refrained from providing explicit revenue or unit guidance for 2024, hinting at a strategic stance as they adapt to market dynamics and focus on solidifying their financial position.
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Ladies and gentlemen, greetings, and welcome to Workhorse Group's Fourth Quarter 2023 Investor Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse's Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.
Thank you, Donna. Good afternoon, and thanks to all of you for joining us for the fourth quarter and full year 2023 Results Call. Before we begin, I'd like to note that we posted our results for the fourth quarter and full year that ended December 31, 2023, via press release as well as filed our 2023 10-K. You can find both these documents as well as the accompanying presentation that will form the basis of today's conversation in the Investor Relations section of the website. We track it along with the presentation during the call. . Joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. After my opening remarks on Slide 3, you'll see the agenda for today's call. I'll turn it over to Rick for an update on our strategic and operational priorities throughout 2023 and during the fourth quarter. And Bob will walk us through the financial results for the fourth quarter and full year and provide our outlook for 2024. Then we'll take any questions.
On Slide 4, you'll see our forward-looking statement. As you know, some of the comments that we've made today are forward-looking and, therefore, are subject to certain provisions and as a result, are subject to risks and uncertainties. You can find the full disclaimer statement in our 10-K, which was filed today as well as in today's press release.
And with that, I'll now turn the call over to Rick.
Thanks, Stan. Good afternoon, everyone. We appreciate you taking the time to call in today, and thank you for your continued support of Workhorse. Today, we're going to discuss our fourth quarter and full year 2023 results and also cover the actions we're taking to position the company for success.
During the year, we rolled out our first W56 step van, signed up our first W56 fleet customers and increased our production capabilities for our W4 CC and W750 vehicles. We also expanded our commercial network, adding key dealers and partners in multiple states.
At the same time, we've taken actions to strengthen our financial position so that we can continue delivering on our commitment to advancing our commercial EV product road map, building, demand and selling our trucks. As we disclosed today in our 10-K, we are in the process of completing negotiations on a financing transaction that, along with our pending sale leaseback transaction and aggressive cost-cutting actions we are taking will position our business to have the financial runway necessary to execute on our business plans. As part of the cost saving actions, we are reducing head count across the organization, deferring executive compensation, and suspending drone design and manufacturing in our aero business, which I will discuss in more detail later in my comments.
From a manufacturing and customer service demand perspective, we have built strong capabilities. We have had initial successes last year and this year and have had key demonstrations with several large last-mile fleet operators as well as state and municipal fleets, which are either already underway or planned to begin in early 2024.
We'll talk about all of this in detail in a moment, but I want to pause and acknowledge that I'm extremely proud of the hard work and dedication of our outstanding team here at Workhorse. Our team has overcome every obstacle place in our path, and I know that every one of us is deeply and passionately committed to success. I'm incredibly proud of the Workhorse team and great for those for the contributions of all of our employees including those whose jobs are impacted by the difficult but necessary actions we are taking to reduce our operating costs.
Moving to Slide 5. Let me take a few minutes to address the state of the commercial EV industry from our perspective. The workhorse leadership and sales team spent the majority of last week at the industry trade show, the NTA trade show in Indianapolis. Every OEM and the major updaters proudly display their future zero-emission Class 3 to 7 commercial vehicle product lineups. There is no question that the transition to a new generation of powertrain technology is coming? The question is really when will it come?
The new car clean fleet mandate took effect on January 1 out in California, but has not yet been enforced. The commercial truck industry is uncertain on how to proceed with the transition to EVs. Most fleets, both big and small, are reluctant to make large investments on the necessary infrastructure to make the shift to either natural gas or electric power vehicles if the CARB mandates might get delayed or revised. Several OEMs are hedging their product development investments and supplier investment plans for EVs pushing out some timing.
Here at Workhorse, after 2.5 years of backbreaking work, we feel that we are on the precise of success. And we can and we will find a path forward. We have the products, supplier and dealer partners, engineering capabilities, business systems and manufacturing processes in place to emerge as a winner in the Class 4 to 6 segment. But that only happens if fleet customers, both large and small, start buying our products in 2024.
In 2023, we continue to advance our product road map, all while navigating and solving challenges, both internal and external to the company. Progress in this [ evasive ] and commercial EV industry is not linear. And we know we will need to continue to address challenges as they pop up.
And while our results for the year were affected by issues that slowed us down, we never stopped driving forward to create a viable and profitable EV OEM company. During the year, we rolled out our first W56 step van, signed up our first fleet customers and established our production capabilities for the W4 CC and W750 vehicles. We also expanded our commercial dealer network, adding new dealers and updating partners in multiple states. In our Aero business, we continue to expand our relationship with key government agencies and partners.
Let's review the key accomplishments and successes we achieved at Workhorse in 2023. We will have 4 distinct commercial EV products and production we have for distinct commercial EV products and production. We received important HVIP certification for both our Class 4 and our Class 5-6 vehicles. We secured initial fleet orders for the W56 step van and Strip chassis, and we organically grew the Stables business.
Additionally, we completed the overhaul of our Union City manufacturing complex. The Workhorse Ranch is now capable of building 5,000 and painting 3,000 vehicles per year on 1 shift. Our lean, highly flexible production facility can ramp up staffing and production in line with future market demand.
At our Aero business, we sold our first units. We are on track for FAA certification in the first quarter this year, landed several government-funded grants, all while we continue to evaluate alternatives for the business.
Moving to Slide 6. We have stabilized production of both the W4 CC and W750 miles and handed those production over to the plant, while continuing dealer programs and field demonstrations for both of these vehicles.
Notably, we successfully overcame unexpected issues with California's HVIP program and work with the California Air Resources Board to list the W4 CC and the W 750 in the HVIP program in a first-of-its-kind program for intermediate vehicle manufacturers. We were able to do this by demonstrating the strength of our service, warranty and delivery network and complete care options for customers purchasing any workforce badge product.
With enough finished inventory in place, we have temporarily paused production of these products, shifting our workforce over to focus on the ramp-up of the 56 production in the first quarter. As orders materialize, we will add the necessary hourly workforce to meet future customer demand for all of our products.
Moving to Slide 7. We received final HVIP certification approval for the W56 step van in Q4. The final critical milestones delivering these vehicles to the important California market in advance of advanced clean fleet regulation. We continue to increase our dealer network in California and have adjusted staffing and production aligned with market demand over the last few months accordingly.
Turning to Slide 8. I want to share a few pictures with you of what really is being done at the Union City plant to produce our industry game-changing step ban, which went from concept to production, including passing more than 250,000 miles of validation in less than 22 months. And just in case you are wondering, this is a robust and I mean a really robust vehicle based on the comments we are hearing back from our customers on these field demonstrations. I do not know of any start-up OEM that could have delivered this type of product in less than 2 years.
Shaft units are moving down the line on a consistent basis. And by the end of 2024, there will be 4 variants of the W56 in production. We now have our fixtures and lift assist tools in place for both the chassis line as well as the body line shown in the middle of the slide.
Finally, we are now painting the step vans in 1 of 3 colors. The Workforce Ranch is ready to roll and fulfill future customer orders.
On Slide 9, we continue to have strong customer interest in the WF6. This is demonstrated by the receipt of our first 215 vehicle unit orders for the step ban that we expect to deliver in 2024. As we like to say here at Workhorse, we're 2 for 2. We also intend to introduce a longer wheel-based version of the W56 in the second half of '24 based on the direct request of several of our fleet customers, specifically in the linen and industrial supply segments. The company has multiple product demonstrations already underway or set to begin in early '24 with several large last-mile fleet operators as well as state and municipal fleets and other smaller fleet operators.
Based on the demos we've had to date, we are optimistic about the prospects for the W-56 as well as our W750 and W4 CC products.
We are able to go from order to delivery of a finished step band in 5 to 6 weeks. The shortest lead time for the Class 5-6 step van market in North America. Including custom upfit, paint and branding. We have received extremely positive driver and fleet manager feedback reflecting the vehicle's strong performance in the field. As recently as last week, at the NTA show and from one of the largest package delivery companies in the country.
According to customers, the W56 is a superior truck with innovative technology. Turning to Slide 10. We continue to build out our commercial dealer and service capabilities to capitalize on our product road map. I'm particularly excited by the significant expansion of our dealer network using our strict selection criteria. We continue to expand our dealer network with a focus on those regions where CARB clean fleet and clean track mandates will be adopted in 24 through 2027.
We successfully added new certified dealers, bringing our network to 11 dealers nationwide with a 12th pending and soon to be announced. As we continue to actively expand, we have a target number of 15 to 20 deals by the end of 2024.
In addition, we have added 21 upfitting partners in the past 9 months. As we recently shared, we also established progresses with W.W. Williams and Zeem Solutions to expand service and support options for customers in the field. On
Slide 11, within our stable operations, we continue to electrify our delivery fleet, which is operating multiple delivery routes here in the Cincinnati area for FedEx Ground. Organically gaining new route assignments due to our superior performance. We now have 7 Class 4 EV units in the delivery fleet and expect the whole fleet to be electrified in 2024. We executed peak season extremely well with Q4 '23 revenue up more than 90% compared to Q4 of '22, including the benefit of organically adding 20% of our signed routes at the request of FedEx. The lessons we are learning at stables are invaluable and give us tremendous credibility of fleets, not only FedEx but all the fleets we meet with.
Moving to our Aero business on Slide 12. We achieved important progress in the last year on drone deployment and delivery to customers. First, we launched production sold and delivered our first units of the HorseFly unmanned aerial vehicle or UAV. Nevertheless, during the first quarter of '24, we have decided to suspend drone design and manufacturing and exclusively focused on less capital-intensive drones as a service model, and further develop our DAAS products and services in this area, where we see near-term profitable growth opportunities continuing to expand.
Driving this decision was [ Arrow's ] continued ability to win additional grant awards from the USDA to support National Resources Conservation service. What we do for the USDA, flying drones equipped with sensors and delivering actionable data is what our drones as a service model is all about. This service has continued to grow over the last 2 years as we first pioneered this capability with the USDA.
In January, Workhorse received an additional $500,000 grant. And in February, we received a separate $350,000 grant to provide actionable data from sensor scanning to increase the efficiency of underserved farmers and ranchers land use. We are in advanced discussions with additional garments on future scanning and service opportunities at a significant potential grant or contract level.
More broadly, our strategic view for the Aero business remains underway to ensure we are unlocking the most value for Workhorse shareholders while also best positioning our Aero business to capture and fund future growth opportunities as they see them.
With that, I'll turn it over to Bob to discuss our financial results.
Thanks, Rick. Let's turn to Slide 13, we will cover our full year results. For the year, sales increased $8.1 million to $13.1 million for the full year 2023 compared to $5 million in 2022, primarily resulting from the increase in W4 CC sales and volumes. The W750,W56 products, which launched in the second of 2023 as well as stables by Workhorse and our Drone as-a-service offering also contributed to the increase in revenue. . Cost of sales for the full year 2023 increased $0.7 million to $38.4 million compared to $37.7 million in 2022. The increase was primarily due to increased production and overhead costs to support higher sales volumes related to the new vehicle platforms and an increase in employee compensation related expenses compared to 2022 levels. This increase was partially offset by a decrease in inventory reserves, adjustments and disposals which were driven by the disposition of C Series inventory in 2022.
SG&A expenses for the full year were 2023 were $55.6 million, decrease of $17.6 million compared to $73.2 million in 2022. The decrease was driven by a $25.2 million reduction in legal expenses and expenses attributable to the securities and derivative litigation settlements recognized in the prior year. This decrease was partially offset by a $3 million increase in employee compensation-related expenses, including noncash stock-based compensation expense, a $2.1 million increase in professional and other services expense and a $0.6 million increase in corporate insurance expenses.
R&D expenses for the full year 2023 were $24.5 million, an increase of $1.3 million compared to $23.2 million in 2022. The increase was primarily driven by an increase of $1.4 million in employee compensation-related expenses and a $0.8 million increase in development expenses for new products. These increases were partially offset by a $1.4 million decrease in consulting expense.
Other loss for the full year 2023 was $10 million compared to $13.6 million income in 2022. Although loss in 2023 represent the impairment of our investment [ tropos ], Other income in 2022 represented proceeds from the sale of C Series inventory that was previously fully reserved.
Net interest expense in the current year was driven by a fair value adjustment of our convertible notes and warrants of $8.3 million and $2.1 million fees applied in connection with the securities purchase agreement and the equity line of credit purchase agreement offset by interest earned on cash balances in our money market investment accounts.
Net interest expense in the prior year was primarily related to a $1.4 million of fair value adjustments $0.3 million of contractual interest expense and $0.4 million on loss on conversion of former convertible notes, which were exchanged for common shares during 2022.
For the years ended December 31, 2023, and 2022, we incurred taxable losses and thus no provisions for income tax benefits have been recorded.
Net loss for the full year 2023 was $124.6 million compared to a net loss of $117.3 million in 2022. Loss from operations for the full year 2023 was $105.3 million compared to $129 million in 2022.
Turning to Slide 14 to discuss our balance sheet. As of December 31, 2023, we had inventory of -- net inventory of $45 million as well as $35.8 million in cash, which includes $10 million in restricted cash. We are operating efficiently and selectively resizing our team here at Workhorse, while maintaining the necessary resources and skills on the team to continue to design, test and build world-class commercial trucks.
Importantly, we are taking major strength to strengthen our financial position. We entered into a sale-leaseback improvement for Union City manufacturing complex in January. The agreement we entered strengthens workforce's financial position reflects the investments and work our team has put into refurbishing the plant and turning it into a first-class manufacturing facility. Workforce continues to support the activities of the purchaser and closing is expected in May of 2024.
Turning to Slide 15 and our 2024 overview. Given the number of key customer demonstrations underway in Q1 and Q2, we intend to report on progress when it occurs. As a result, we will not be providing specific annual revenue or unit guidance at this time.
Workforce is entering 2024 with the strong production and delivery capabilities as well as a keen focus on financial discipline and cost control. As we speak, we are working hard to resolve our short-term liquidity issues described in our 10-K. Over the year, we will maintain our focus on operational excellence and cost reduction as we increase production, expand delivery of our commercial vehicles to meet our financial targets for 2024. At the same time, we will continue to evaluate opportunities to strengthen our financial position.
With that, I'll turn it back to Rick now to conclude.
Thanks, Bob. To wrap up the call, I want to discuss our key near-term priorities, which are on Slide 16. Our focus is on strengthening our financial position, while we continue advancing our product road maps and ramp up production as we secure orders for our commercial EVs. In plain in simple terms, we want to make sure we have the financial runway to build and sell trucks and provide drone services to our customers. . Achieving our goal of pioneering the transition to zero-emission commercial, vehicle is no easy feat, and it's definitely not for the faint of heart. We believe we can, we believe we will emerge as a segment winner in this once-in-a-generation powertrain technology transition. The pace of the transition to EVs is unpredictable, and we cannot predict the speed at which the transition will occur. What we can control is to ensure we are 100% ready to meet the needs of our customers. We are prepared for the transition from every touch point of the delivery process. We have the people, products, processes, supplier and commercial business partners to meet the needs of the market when this EV transition hits its stride.
We need our customers to start ramping up their own transition to EV powered vehicles and believe that 2 or 3 of the largest fleets here in North America are ready to do so, hopefully soon.
Our team's perseverance in the face of market and regulatory challenges is commendable, and we remain determined and optimistic. The groundwork is done, and the foundations are in place for us to be in the Class 4, 6 segment leader in the commercial EV segment. We expect to emerge a winner in the space, and we look forward to continuing to do the work to get ourselves there.
Now we'll open the call for questions. Donna, I'll turn it back over to you.
[Operator Instructions]. Today's first question is coming from Sherif Elmaghrabi of BTIG.
So first, I want to start with how do you prioritize orders between the W56, W750 and the W4 CC this year? How are you managing that capacity?
We have 2 separate lines -- we actually have 3 separate lines. We have a dedicated chassis line for the W56, which has a corresponding cab and box line. So that's a separate line, and we can do about 5,000 vehicles a year there. We talk to our suppliers and they can ramp up at that level as well. We then have 2 separate lines. We have the W4 CC line, which we were building at about 4 a week -- 4 a day, sorry, before we put it on pause. And that leads into a separate W750 line, which we can build 1 or 2 a day there, okay? So if you add our plant, you'd see very distinct assembly lines. And it still leaves about 1/3 of the plant open for future products if we want to do something there. .
That's helpful. And then on the carb mandate, can you tell us what you're hearing regarding its enforcement or revision?
That's like the million dollar question. We've heard both sides of the equation in terms of the California Trucking Association taken exception with CARB. And CARB saying that they're very firm and they're going to put it in place this year. We just don't know the timing. I'd be guessing if I try to guess right now. So we hope sooner rather than later. And we've talked to many fleets. And many fleets in California. They have a very good handle on how many trucks they have in the state. They know what they have to do to meet the car mandate by the end of the year. And that's -- that gets kicked in. It's a significant demand. And we're not sure there's a whole lot of people left to fill that demand. We want to be one of them. .
[Operator Instructions] At this time, I would like to turn it back over to Mr. Dauch for closing comments.
Well, it must be lunchtime on the East Coast, and we appreciate it. Hopefully, if you have any questions, reach out with Stan, and we'll do that. And hopefully, we'll be able to report some good news on our demos and turn into orders. We'll get our plant working, staying busy. Thanks a lot for your interest in Workhorse. Thanks. Bye.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.