Workhorse Group [WKHS] Conference call transcript for 2022 q3
2022-11-08 13:02:05
Fiscal: 2022 q3
Operator: Ladies and gentlemen, greetings, and welcome to Workhorse Group's Third Quarter 2022 Investor Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.
Stan March: Thank you, Rob. Good morning, and welcome to all of you joining us on today's third quarter 2022 results call. Before we begin, I'd like to note that we've posted our results for the third quarter ending September 30, 2022, via press release. You can find this release as well as the accompanying presentation on the Investor Relations section of our website. We also filed our third quarter Form 10-Q this morning. We will be tracking with the posted presentation during the call today, so please follow along either from the link in the press release or through our website directly. And with that, let's get started. Joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. We have a straightforward agenda today, which is found on Slide 3. Following my opening remarks, I'll hand it over to Rick, who will give you an update on the progress we've made on our strategic and operational priorities for the third quarter of this year. Bob will then walk us through our financial results for the quarter and cover our 2022 guidance. Then we'll take your questions. Our disclaimer can be found on Slide 4. Some of the comments that will be made today are forward-looking, and therefore, are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement in our Form 10-Q and other periodic filings on file with the SEC as well as in today's press release. I'll now turn the call over to Rick Dauch. Rick?
Rick Dauch: Thanks, Stan. Good morning everyone and thanks for taking the time to join us today. We had a very productive third quarter here at Workhorse, and here are some of the highlights on Slide 5. Let me start with a brief summary of our key hires during the quarter. Last quarter, I'd mentioned that hire and experience and capable commercial vehicle sales team was a critical focused area for us and we did just that, and I will cover those details shortly. Additionally, we continue to strengthen our operating teams in both commercial vehicles and aerospace. Hiring a new plant manager at Union City and bringing on board two new Vice Presidents in Aero, one in flight operations and technology and another in manufacturing and supply chain. These individuals each bring more than 25 plus years of relevant industry and technical experience to their roles. We also made important additions to in our finance, IT and HR staffs bring on experienced professionals to improve our back office administration processes and systems. On the product portfolio front, I'm extremely pleased to report that we delivered our first W4 CCs and made progress across our entire product roadmap. Getting safe, reliable vehicles in our customers' hands was an important milestone for the Workhorse team. Importantly, the W56 program remains on schedule and on budget. We also completed necessary preparations for executing the Tropos vehicle launch here in Q4, and we did experienced a setback and testing on the C1000 vehicles and I will provide details about this a bit later. We also made significant strides across several other major initiatives, including upgrading and transforming our facilities while expanding our engineering and testing capabilities. In the aerospace, we're in the process of doing final flight testing for the Horsefly and we developed a new platform for Humanitarian Assistance and logistical operations, what we call HALO, in less than 120 days. We are executing on our government grants and are developing and enquiring the necessary equipment and skills to move into drone production in 2023. Today, we are introducing our Stables & Stalls initiative. We believe this effort is essential for Workhorse to better understand the challenges and needs of our fleet customers as they make the game changing transition to electric vehicles. Finally, we continue to address legacy issues and remove overhang and uncertainty from the business, including the recent proposed settlement of a class action lawsuit, which was announced after the quarter end. This is a very important step for us here at Workhorse. Turning to Slide 6. Throughout this past year, we have been focused on executing our stabilized fixed and grow strategy, which starts with building a capable and experienced leadership team. We have hired nearly 100 associates across all areas of the organization, including sales, engineering, operations, and administrative functions. We believe having a cohesive team of hard working ethical people with relevant industry experience, who are team first players, it's absolutely critical to our transformation and long-term success as a company. To that end, during the third quarter, we hired our new Vice President of Commercial Vehicle Sales and Marketing, Chris Ameigh, simply put Chris is a commercial truck sales professional. She spent the last 13 years with Volvo Truck and is responsible for both the Western region and for electromobility of sales across all of North America. She hit the ground running and has already hired three regional U.S. sales leaders, who bring a combined 50 plus years of commercial vehicle sales experience to Workhorse. We also hired Renee Stevens as our Director of Data Analytics and Field Services, who brings to us more than 30 years of OEM and data analytics industry experience. These positions were essential for us to fill as we continue to build up our team to become true pioneers in the transition to commercial EVs. I would say that for now with the exception of a few specialized position requirements such as warranty and parts and services, we are finished with hiring â the hiring of senior level functional, engineering and operational leaders here at Workhorse. Our focus now shifts to adding to the capable and motivated plant teams at our CV and Aero factories located in Union City, Indiana and Mason, Ohio. Turning to Slide 7, we continue to make excellent progress on our revised product roadmap plans. Start with our Class 4 offerings, the W750 and the W4CC. As a reminder, these vehicles serve to fill a critical gap between our limited production C1000 product and the future production of W56 and W34 platforms. The strong initial customer interest for these vehicles reinforces our belief that our products are differentiated in today's EV market. As I mentioned at the top, we delivered our first W4CCs during the quarter and we are ramping up production and delivery throughout the remainder of 2022. We delivered 10 W4CC vehicles during the third quarter and another 13 so far in the Q4. The W4CCs close cousin, the W75 package delivery van remains on track to complete initial pilot build production builds in Q4. Turning to the W56, which we introduced three quarters ago as the first new Workhorse fully designed and purpose built chassis platform. This vehicle will serve the Class 5 and 6 delivery step van and truck market segments. We are continuing to executing our plans for the W56 program and are on track to begin production of vehicles in Q3 2023. About 90% of the platform bill of materials has already been sourced to proven Tier 1 suppliers, the vast majority located here in North America. Early mules were assembled in Wixom and Sharonville in Q3. We expect production intent vehicles we built in Union City in Q4, customer demo vehicles to be delivered in Q2 2023, and we will complete both FMVSS and durability testing in Q2 of 2023 as well. Moving to the C1000. Last quarter, we completed the redesign of the front suspension, which was intended to resolve the engineering problems on the platform. However, during fully loaded durability testing in the third quarter, a rear suspension component proved to be insufficiently designed. We are now in the process of procuring the redesign part. As a result, we now expect to have durability testing completed during the fourth quarter. Based on testing results, we will then decide by the end of the year as to whether we prepare the existing vehicles and restart C1000 production or not. While this timing delay is frustrating, it's far more important for us to have safe and reliable vehicles on the road that our customers can rely on to do the job every single day. Moving to Slide 8, I think that one of the most significant differentiators in our industry today is the ability to produce OEM quality vehicles at scale from a full size and modern plan. You have heard me speak about our Union City plant improvements for over a year now. Today I am announcing that the renovated and expanded Workhorse Ranch is ready to run. During the quarter, we completed the transformation of the Union City complex, upgrading the warehouse and completing the test track. As we've discussed, we've truly transformed the facility into a world class operation with open, flexible manufacturing space and plenty of room to grow. The plant started initial production of Class 4 vehicles in the quarter. As finalizing layouts for W56 production scheduled to begin in Q4 of 2023, we are actively adding hourly staff each week to meet current and future build schedules. We are also on track to assemble vehicles in Union City for Tropos Technologies as part of a three year contract manufacturing agreement beginning in Q4 of 2022. Volumes for final assembly of these Tropos vehicles for the U.S. market are expected to reach 2000 units per year once production ramp up is complete. I hope that many of you are able to join us for our Analyst Day on December 7, 2022 to see firsthand with the team has been able to do in reinvigorating our foundational asset, the Workhorse Ranch. We have also completed the upgrades to our design and technology center in Wixom, Michigan and have recently moved into the new prototype and testing center here in Sharonville, Ohio. Moving to Aerospace on Slide 9. On last quarter's call, we provided an overview of the aerospace markets where we aim to compete for business, so I won't go into those details again today. I will reinforce though that we remain optimistic about our capabilities and opportunities in package delivery, as well as a mapping and sensor based segments of the rapidly growing commercial market for drones. Our Horsefly platform, which can deliver 10 pounds and 10 miles a payload range capability we believe as market leading is nearing completion of final flight testing and has multiple last mile customer demonstrations scheduled during Q4. We continue to fly in support of the U.S. Department of Agriculture, providing field monitoring, data procurement and analytics as part of projects in both Mississippi and Arkansas. We are also actively working in two additional states on different drone applications and expect to announce another new state level grant later this month. Based on strong customer demand, we have also developed a new family of drones to meet emerging customer requirements for humanitarian assistance and logistical operations. This robust drone, which can fly in automatic and manual control is also in the final flight testing. We are in conversation with potential customers about filling this product both here in North America and also in Europe. Moving on to a new initiative here at Workhorse on Slide 10, which weâre excited to announce this quarter. Today, we are introducing Stables & Stalls, a fleet electrification platform that provides charging and services to EV fleets. Fleet electrification is a major unmet need in the last-mile delivery industry. Itâs extremely expensive and difficult for small fleet operators to transition to electric vehicles. Ensuring access to charging infrastructure is a must for them. So rather than joining the vocal crowd complaining about the lack of charging infrastructure, Workhorse has decided to take a more proactive approach and help with this unmet industry need. As part of this platform, we have leased our first stable, a maintenance location here in the Greater Cincinnati area and Lebanon, Ohio. This week we are installing 10 Level 2 chargers, the stalls for use and support of our own last-mile delivery fleet. We believe Stables & Stalls will be an important growth opportunity for us that will support and compliment the work underway across our other family of products. In connection with Stables & Stalls, we have purchased and began operating a FedEx Ground delivery route in the Greater Cincinnati area with the approval of FedEx. We are starting by serving the route with 10 company owned internal combustion engine trucks. Our team has been delivering packages of all shapes and sizes to end customers since July. In the picture on the slide, you will see that we have already started to electrify the fleet. That is our first W750, which was just wrapped with a FedEx logo and colors and had it shelving installed last week. We expect to convert our entire fleet to 100% electric vehicles by the end of Q2 2023. This is an exciting opportunity for us. We have established key business partnerships that will enable us to capitalize on this opportunity and continue expanding in this market. One of our key deliverables from this effort will be â will also be the data collection and field experience that will allow us to develop more efficient business model to enable small fleets to economically transition to EVs in the near future. With that, Iâll now turn the call over to Bob to discuss our financial results.
Bob Ginnan: Thanks, Rick. Letâs turn to Slide 11. Our results demonstrate the steady progress; our team continues to make executing on our objectives to strengthen our financial position and operations. Looking at the income statement, sales, net of returns and allowances, for the third quarter of 2022 were recorded at $1.5 million compared to a negative $600,000 in the same period last year. The increase in net sales was primarily due to an increase in volume of commercial vehicle sales and the launch of the Stables & Stalls initiative. Cost of sales decreased to $9.5 million from $11.5 million in the same period last year. The decrease in cost of sales was primarily due to a $1.4 million decrease in inventory write-downs and a $1.2 million decrease in consulting and warranty expenses. The decrease in cost of sales was partially offset by an increase in costs associated with the vehicles sold during the period. SG&A expenses increased to $34.8 million from $10.6 million in the same period last year. The increase was primarily driven by the net $20 million legal settlement expense, which is net of $15 million in insurance proceeds and an increase of $3.8 million in professional and legal services related to the securities and shareholder derivative litigation. Additionally, there was an increase of $3.1 million in employee compensation and labor related expenses from increased headcount, non-cash equity compensation and the appointments of our new leadership team. R&D expenses increased to $6.1 million from $2.8 million in the same period last year. The increase was primarily driven by an increase of $1.6 million in employee compensation and related expenses due to increased headcount. Additionally, there was a $1.1 million increase in consulting and prototype expenses related to the continued development of the Horsefly, W56, and W750 vehicle programs. Net interest income was $27,500 compared to $18.6 million in the same period last year. The decrease in net interest income was primarily due to $20.6 million increase in fair value of the 2024 notes during the three months ended September 30, 2021, as compared to no debt during the three months ended September 30, 2022. Additionally, contractual interest expense on 2024 notes for the three months ended September 30, 2021 was $2 million, as compared again to no debt for the three months ended September 30, 2022. Other income was $13.4 million compared to a loss of $77.1 million in the same period last year, which was attributable to unfavorable changes in fair value of the companyâs prior investment in Lordstown Motors Corp, which was sold entirely in Q3 2021. This was offset in 2022 by the gain on the sale of C1000 related inventory. Net loss was $35.4 million compared to net loss of $81.1 million in the same period last year. Loss from operations for the third quarter was $48.8 million compared to $25.5 million in the same period last year driven by the legal settlement. Turning to Slide 12 to discuss our balance sheet. As we mentioned last quarter, we are debt free following exchange transaction in Q2 as of September 30, 2022 the company has approximately $120 million in cash and cash equivalents. Itâs also worth noting that our ATMs in place, though we did not utilize it during Q3. We now expect our capital expenditures to upgrade our facilities in Indiana, Ohio, and Michigan to be between $15 million and $20 million in 2022. This is a $5 million adjustment downward at the top of the range since our last quarter, primarily driven to â by timing and other effective use of capital resources. I do want to call out two additional items on the balance sheet from Q3. First, youâll see weâve recorded a $35 million liability for the legal settlement, which is in part offset by $15 million insurance receivable. This gets us to the $20 million stock portion of the proposed settlement reflected in the income statement. And then Tropos, we have booked a full $10 million equity investment we made in the company and have also reflected a $5 million contribution in a non-cash consideration, represented a deposit from Tropos for future assembly service as deferred revenue. Slide 13 covers our guidance. We are reaffirming our revenue guidance expect to generate between $15 million to $25 million revenue for calendar year 2022. With the C1000 testing situation, we are reducing the number of vehicles and we expect to manufacture and sell for the year to between 100 vehicles and 200 vehicles, assuming current supply chain lead times remain unchanged. With that, Iâll turn now turn the call back to Rick to wrap up.
Rick Dauch: Thanks Bob. I want to briefly discuss our Q4 priorities on Slide 14. First, we must continue to execute on our product program plans. This means completing our W750 pilot builds, keeping the W56 program on time and on budget, completing the C1000 testing and completing the Horsefly and HALO drone flight testing all this year. Operationally, we want to continue to ramp up production for the W4 CC begin manufacturing to Tropos vehicles and finalize plans of startup drone production in 2023. We need to grow revenues and add new customer orders for both wheeled and aerial vehicles. We also need to complete the electrification of the Stables & Stalls facility here in Ohio. Finally, we need to execute on our common systems deployment plans, including kicking off our transition to a new ERP system, which will help us immensely in late 2023. Lastly, we are looking forward to hosting our Analyst Day on December 7 and hope you will join us. Before we turn the call over to Q&A, I want to reemphasize six important points from our call today on Slide 15. First, in less than one year, we have built an incredible team of business leaders, engineers, supply chain and sales professionals, operational managers, plant and back office support staffs that are talented and experienced in their fields. Each of them will play a critical role as we execute on our go forward strategies. We have added over 100 associates in the past year. The right people in the right seats on the bus are the absolute foundation of our company. We are now in production at our fully renovated state-of-the-art manufacturing complex, which we believe get prizes with a true advantage and a big head start on many new EV startup companies who seem to be struggling with building and equipping and staffing their new plants. Building a plan is easy to say, much harder to actually do in real life. We have resolved a number of legacy issues, including recently entering into a proposed settlement regarding our class action securities lawsuits. This is a major milestone for the company that clears up concerns for the stakeholders, and allows us to focus 100% on executing on our business plans. We remain confident in the market opportunities ahead in our industry to deliver value to our customers, shareholders and other stakeholders. The transition to EV powered commercial vehicles, both wheeled and winged, will not happen overnight, nor will it be easy, but make no mistake, the transition to EVs and UAVs is underway and starting to pick up steam. There is a strong market demand and full government support for EVs, UAVs, and the charging infrastructure required to support them and we expect emerge as one of the winners in our segment. And finally, we have the necessary access to cash and capital resources to execute on our go-forward plans. The bottom line is that after a lot of hard work, we are ready to run here at Workhorse. That concludes our prepared remarks. Thank you again for all your time this morning. We look forward to continuing to update you on our progress that our Analyst Day on December 7. Weâre now ready to open the call for your questions, Rob, so please provide the appropriate instructions.
Operator: Thank you. Thank you. And our first question is from the line of Jeff Osborne with Cowen & Company. Please proceed with your question.
Jeff Osborne: Yes, good morning. Had a couple questions on my end. I was wondering, first of all on this Stables & Stalls initiative, what the revenue model is there? I think, you mentioned in the prepared remarks that there was some revenue contribution this quarter and it looked like the pricing was a bit higher than anticipated, at least in our model for the 10 units that you shipped?
Bob Ginnan: Yes, Jeff. This is Bob. Right now, the Stables & Stalls revenue just includes the route revenue and I would put that at about 10% of the revenue for the quarter.
Jeff Osborne: Got it.
Rick Dauch: And Jeff, regards to price, weâre not going to go into specific vehicle pricing. But Iâll just say weâre in the early parts of this â early inns of this EV evolution, thereâs still some price elasticity in the market right now.
Jeff Osborne: Got it. That makes sense. And then, the settlement, what are the cash ramifications of that? Iâm sure thereâll be more details in the 10-Q, but you reserved 35 million as the liability. When would that cash potentially be paid and when would you anticipate an insurance piece to come in? Iâm just trying to understand with the 120 million and what the burn rate is and then you throw on top of that the liability potentially a cash payment and the timing there?
Rick Dauch: So if you break it down into two components, thereâs 15 million of cash, which will be funded by the insurance. So, no net cash out of pocket there. And then the 20 million of stocks. So, really the settlement doesnât have a net cash impact on us other than we are â we did spend above and beyond our retention on the legal side, which was the 3.8 million. So really thatâs the net cash impact. Timing wise, itâll still by the time it goes to the process will still be a little while yet probably Q2 of next year, Iâm guessing.
Jeff Osborne: Got it. Thatâs helpful. And the last one is, with the suspension issue in the C-1000 and just hypothetically if you were not to move forward with that vehicle, is there any financial ramifications of that, for people that you had previously delivered to and their expectations of likely remediation of the problems that you had had in the past? Iâm just trying to understand what the P&L and potentially reputational risk there would be?
Rick Dauch: I do not think thereâs any financial risk from our customers. We bought back the vehicles that we had already delivered. We are in discussions with those customers who had done, had placed some orders before about our new portfolio of vehicles thatâll come out primarily the W4CC and W750 through the first half of 2022 â 2023. And then weâll have the W56 available going forward. And I would just say the initial response, weâve gone back and introduced our new team and our new product plans to several customers who had basically written off work course in the past and now weâre having doors open up again for us and at least two of those customers who had written us off before have asked for specifically for one of the first five W56 demos that weâll have in the second quarter next year. So thatâs a good sign for us, I think, Jeff.
Jeff Osborne: Sounds like it. Look forward to seeing you folks on the seventh. Thank you so much.
Rick Dauch: Great.
Bob Ginnan: Thanks, Jeff.
Operator: Our next question is from the line of Chris Souther with B. Riley. Please proceed with your questions.
Chris Souther: Hey, guys. Thanks for taking my question here. So looking at the uptake in revenue, weâre expecting for the fourth quarter. Seems like the bulk is now W4 and that C-1000 inventory clears probably like a 2023 story if you do decide to move forward. So I just wanted to get a sense of whether thereâs anything else in the mix besides W4 and maybe a small contribution from Turbos and that FedEx route. And then, just â go ahead.
Rick Dauch: Thatâs about right. So basically W4CC production, which weâve already, like I said, weâve already built vehicles. We have a bunch of coming from our supplier that should be arriving here. Some have already arrived, another batch will arrive later this month, then we have some more coming in December. The FedEx route is now stable. I think it took us a while to get that under control. I would say when we first looked at the vehicles that we purchased, it was pretty incredible the number of miles they had, the number of years they have and the kind of maintenance condition theyâre on. If those are reflective of the current contracted last mile deliveries vehicles out there across many customers, thereâs going to be plenty of opportunities for us to replace them with much better and safer vehicles in the future. So Iâd like to say we started to crawl in the third quarter. Weâll start walling a little bit here in the fourth quarter, but we should be running pretty full hard in the first quarter next year so.
Chris Souther: Got it. Okay. And then just maybe this is something for the Analyst Day, but visibility from kind of an order book. Can you just share anything at this point around different models and what that conversion is? Keep in mind that I think youâve said in the past that people want to see the vehicle often before, theyâre going to be making orders at this stage.
Rick Dauch: Yes, good question. Weâre not going to comment an order book today. I see as, if I look back over the industry, lots of people have made lots of promises about order books. But an order book is one thing and having a factory to build them and a team to build them is a different thing, right? So our focus has always been on, get the plant ready to go, get the products right, get the right people on the bus, hire the team, and letâs go out and sell, right? So weâll do that. I think, we will be able to cover a little bit more detail at the Analyst Day and weâll go from there. We do now have W4CCs, we can put in the hands of customers. Weâve had them in demo vehicles already for the last 60 days. Weâll have the pilot builds of the W750 here in the â between now and the fourth quarters. Weâll have some of those vehicles in the hands early in first quarter, and weâll have the demos for the W56 obviously in the second quarter. And weâre going to be very judicious about who we give those W56 vehicles to, right, so.
Chris Souther: Okay, great. And then just to kind of go off of Jeffâs question there, the FedEx program, what is kind of the strategy around purchasing at a route, that route is it just being able to test vehicles, walk through pain points for customers like just higher level? What is the business plan in the charging space? Is it you guys owning the infrastructure, selling â reselling hardware, doing kind of installation, EPC type work like, what is kind of the higher level plan here?
Rick Dauch: Thereâs no better field market research than having our own team drive the vehicles deliver packages day in and day out. Whether itâs the time you get sent over for dispatch to loading the vehicles or unloading the vehicles to fight for the talent who drive the vehicles who have to be licensed to maintaining vehicles that are somewhere anywhere from five to 25 years old with over â some of them have 400,000 miles on them. And doing that without a facility, itâs incredible what weâve learned in the first 90 days. Also, having our engineers actually leave their offices and their computers and get behind the wheel with the driver and seeing how these vehicles get used and where the iPad goes, where the Cup Holder goes, how many times the driver has to step in and out of the truck, either the left side or the back, or out the right side, how the shelving works. All thatâs great and weâre bringing all that information back to the redesign of the W56 in the future W34.
Chris Souther: Okay. Makes sense. I will hop in the queue. Thanks, guys.
Rick Dauch: Thanks. Great questions, Chris.
Operator: Our next question comes from the line of Greg Lewis with BTIG. Please proceed with your questions.
Greg Lewis: Yes, hi, thank you, and good morning, everybody. I did want to touch a little more on the Stables & Stalls initiative. I guess, two questions here. Obviously, FedEx was interested in doing that. What has been the appetite from other potential customers around you doing something similar? And then the other question I have is it doesnât seem like it would be, but would the stables, it seems like the Stables & Stalls is more of a broader network and something not exclusive to Workhorse produced vehicles?
Rick Dauch: Thatâs absolutely correct. The number of vehicles we have that are ice powered right now is a smorgasbord, right? Thereâs some Morgan Olson vehicles, thereâs some ship vehicles, thereâs some Nissan vehicles, thereâs some Ford, thereâs some GM. And so weâre not going to be a 100% Workhorse. Weâre going to take an opportunity to buy one or two of our competitor vehicles and put them on the route as well. The routes range from 40 miles a day to 120 miles a day. So that validates what we thought. Most trucks travel less than a 100 miles a day. A few go out to 100, 150. There is an opportunity and we can have other companies or other owners of fleets come and charge at the Stables & Stalls rather than them putting in their own charging systems, which are pretty expensive to think about. Youâve got to install, youâve got to buy, install the charging systems, youâve got to link to the grid. Youâve got to have a place to charge all night long and monitor those fundings. For an independent operator do that, theyâre really operating on a pretty much a shoestring budget, especially with diesel prices up some place of the country, $5 or $6 a gallon. So I think in one month or one week we spent over $8,000 just in fuel running our little 10 trucks, right? And so we are taking all this information, the condition of the trucks, the time itâll take the charge, the cost of fuel, maintenance. Weâve had transmission leaks; weâve had someone run over a fire hydrant. And so this is just a real life of daily operations, right? And so if we can make it, we can help that fleet operator figure away economically to move to EVs, thatâs going to help us sell more vehicles. And in doing so, we can help service our vehicles, change tires, wash the vehicles, repair things that get damaged, right? You watch when you walk around in the city, look at all the vehicles, UPS, DHL, Amazon, FedEx, others that are banged up and damaged. Just step in the truck. Next time youâre at a 7-Eleven or in a downtown store, look at the condition of the trucks. Youâd be amazed.
Greg Lewis: Yes. Thank you for that. And then I had the, another question around the contract manufacturing, pretty exciting to see Tropos getting ready to launch here. As you think about that opportunity, and it seems like that should be a larger opportunity, is it kind of as we think about the road ahead, is it okay, hey letâs, we have our first contract manufacturer, weâre going to bring them in and then as soon as thatâs up and running successful, we then can then bring in another one and then, or could we see I guess, dual contract â dual timing contract manufacturers being brought on, as opposed to a one and then a one and then a one.
Rick Dauch: Iâd say, weâre going to, we have so much floor space up at the ranch. Weâre just under 400,000 square feet right now in two different buildings. We have a separate battery storage building and we have plenty of land. So, we are looking at very judiciously with the finance team and whatâs the best use of our floor space. Weâre obviously going to build our own trucks. Weâve already got those layouts there. We now have room to do contract manufacturing. We have one contract. Weâve entertained RFPs for two others. And as I said earlier, there are some EV companies out there who are struggling with, itâs much different to put a new plant proposal on a PowerPoint that actually go out and acquire land, build the infrastructure, install all the utilities that go with it, bring in the equipment, hire and staff people in a very tight job market. We have that ability already in workforce that would save somebody else about a capital and get them into production much sooner, which is one of the reasons Tropos came to us. The lead time for them to go build or lease a factory, lease if they could find one that was available, was probably minimally three months to six months to build a brand new factory here in North America. Itâs 18 months to 24 months now based on lead time of critical supply chain issues, especially electrical connectors and others.
Greg Lewis: Okay. And then Rick, just so I what kind of I can squeeze one in, clearly you lay out the investment you made in Tropos. Is it, should we be think, could we see contract manufacturers, at the facilities, that are just really, youâre just providing those services, i.e. weâre not making an investment inside the company, or at least for now, just given the opportunity set, youâre more interested in actually participating in the upside of some of these companies?
Rick Dauch: Yes, I think we all learned in school that cash is king. So, weâre going to, conserve our cash and make sure we had the ability to fund our own operations. Tropos was a unique opportunity to get in on the ground floor of a business and take a small stake and partner with them, and weâll take a look at other contract manufacturing opportunities in the future, whether weâre going to put any equity stake into them or cash into them, get an equity stake or just be a contract manufacturers.
Greg Lewis: Okay. Great to hear. Thank you very much.
Rick Dauch: Great.
Operator: The next question is from the line of Mike Shlisky with D.A. Davidson. Please proceed with your questions.
Mike Shlisky: Hello, good morning, and thanks for taking my question. I wanted to follow up once on the earlier questions about the Stables & Stalls program. I know it was 10% of revenues in the third quarter. Iâm not sure if that was a full quarter. You said it started in July, maybe it was a full quarter. But does the percent of revenues go up in the fourth quarter given the holiday is the get deliveries and how much is in the $15 million to $25 million guidance for the full year on that route revenue and give a sense that the, how to kind of model that for next year? Will it be a separate segment? Or is it still going to be very much a de minimis part of your overall business here?
Bob Ginnan: Hi, Mike, this is Bob. I think, in terms of the quarter, the fourth quarter, you have pretty much most of a quarter in there. Packages are generally up in the fourth quarter, so there could be some in there, but it still will be as you said, compared to truck sales, itâll be de minimis. Itâs, about the process and what weâre learning and the opportunities and we get paid doing it. So itâs not a huge part of our revenue goal, but itâs a very important part.
Mike Shlisky: Okay. And then just kind of similarly, I see your investment in Tropos on the balance sheet at quarter end. What I donât see is the investment in these route and the trucks at quarter end. Was that also de minimis, is it other category on your assets?
Bob Ginnan: Itâs just part of normal assets for the trucks and, as Rick said, may be these trucks are pretty old, so itâs not a ton of value on the trucks themselves. And those are the trucks that weâll be looking to convert over to electric here.
Mike Shlisky: And the route itself was purchased at like an auction or was it a private sale? Those were often auction office.
Bob Ginnan: It was a private sale. Yes, thereâs the active market for FedEx routes out there right now. Itâs one of the things we learned as well. Canât remember how many whole routes out there, but thereâs a hell of a lot of vehicles I know that. Soâ¦
Mike Shlisky: Got it. And also it is going to see that thereâs, a lot of strides being made in the kind of W56 step van products. Iâm curious do you have a body partner for that step van and is that body partner providing the distribution for that product? Or are these early units going through the Workhorse your new hires and Chrisâs team?
Rick Dauch: Thatâs a great question. Weâre going to build both the stripped chassis version. So if an end customer wants a Workhorse chassis versus the other chassis in that space, they can choose a body supplier at their choosing, right? Typically in these step vans, that means itâs either a shift body or a Morgan Olson body, so, and been around that before. We are also going to provide full step vans. So, weâll have our own body and weâll have our own body suppliers that work with us, right? As we start to ramp up production here on the W4CC chassis. One of the things weâve discovered is that thereâs a lack of capacity in some areas of the back end of the truck, whether thatâs boxes or flatbeds or dry vans, reefers, et cetera. So thatâs an opportunity for us to either find a partner out there in the future or do some things in house as well, something weâre studying right now.
Mike Shlisky: Okay. Okay. Thatâs great. Great color. I appreciate it. Iâll pass it along.
Rick Dauch: Good question, Mike.
Operator: Our next question is from the line of Jeff Osborne with Cowen and Company. Please proceed with your questions.
Rick Dauch: Jeff, youâre back?
Jeff Osborne: Sorry for the follow up and I would be remiss if I didnât say I donât want to beat a dead horse given all of your analogies with horses on the horses or Stables & Stalls program. But I just want to be crystal clear that this isnât a precursor or you foreshadowing that youâre intending to go into a capital intensive fleet business in terms of producing trucks and then bidding on routes or, owning the asset yourself and showing growth that way. Do you intend to be completely an OEM and selling trucks to third parties? Or do you have ambitions of being a capital intensive fleet industry yourself?
Rick Dauch: I think we donât have those ambitions. Our intent was to better understand how these independent contractors who make up a huge population of the work trucks and the Class 3 through Class 5 space or even Class 6 space, how theyâre going to make the transition from traditional ICE powered vehicles to EVs. EV vehicles are much more expensive than traditional ICE vehicles. You donât have the government subsidies that are coming through like the HVIP PRAC program in California, or the 14 other states who have it programs right now. Itâll be hard for them to make that transition. On top of that, you have to put in the infrastructure for the charging systems, whether thatâs slow chargers or fast chargers and all that works. So this is one of our ways to study how to best do this and then target our vehicles and our sales to specific customers.
Jeff Osborne: Got it. That makes perfect sense. I just want to make sure going to be covering a fleet as a service company. Thank you.
Operator: Thank you. Ladies and gentlemen, this will conclude todayâs conference. Thank you for your participation. You may disconnect your line at this time, and have a wonderful day. Thank you.
