Earnings Transcript for RIDE - Q1 Fiscal Year 2022

Operator: Good day and welcome to the Lordstown Motors First Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Carter Driscoll, Vice President of Corporate Development, Capital Markets and Investor Relations. Please go ahead, sir.

Carter Driscoll: Thank you, operator. Good morning and thank you to all for joining the Lordstown Motors' first quarter 2022 earnings conference call. To supplement today's discussion, please go to our IR website to view our press release and investor deck. 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 as part of our quarterly update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be Lordstown Motors CEO, Dan Ninivaggi; President, Edward Hightower; and CFO, Adam Kroll. With that, I'd like to turn the call over to Dan.

Dan Ninivaggi: Thank you, Carter, and welcome, everyone. To begin with, I'd like to thank the entire Lordstown team for their extraordinary efforts in Q1. I'm pleased with the progress we've made towards launching the Endurance particularly in light of the unprecedented supply chain challenges the industry has faced. Our number one priority of course remains the successful launch of the Endurance full size pickup truck. While we have experienced some delays in building our pre-production vehicles or PPVs, I am pleased to report that final engineering design validation and testing are underway, and we continue to target start-up commercial production beginning in the third quarter of 2022. Edward will provide more detail on where we are and what remains to be done to achieve full homologation and commercial deliveries. In terms of customer demand, we continue to see strong interest in the commercial fleet market for electric vehicles of all types, including pickup trucks. We believe the market will be underserved for the foreseeable future and that demand will be particularly strong among commercial fleet customers, given their focus on total cost of ownership and specific work requirements. The North American BEV full-size pickup truck in van segments are expected to grow at 30% CAGR over the next 10 years. The Endurance will be one of the few full size EV pickup trucks in the market over the next few years. With this in-wheel hub motor design, the Endurance is truly unique and we believe will offer a superior combination of handling, traction control, torque and turning radius. With fewer moving parts than more conventional propulsion systems, we also believe the Endurance will have advantages and overall maintenance costs. Our commercial sales plan will be driven primarily by our respective production volumes. As Edward and Adam will discuss later in the presentation, our bill of material costs at launch will be significantly higher than our anticipated selling price. We have a plan to reduce our BOM costs over time through investments in hard tooling, moving from prototype to production suppliers, VAVE initiatives, and realizing the benefits of the Foxconn transactions. However, at least for the time being, we plan to hold off on the larger hard tooling and other investments in order to manage our balance sheet and limit the amount of new capital needed to achieve or initial production targets. As a result, over the next 12 months or so, we'll be focused on selling vehicles to a relatively small number of strategic fleet partners who offer the best opportunities for long-term relationships. On our last call, we forecasted an initial production run of approximately 500 units in the back half of 2022. We continue to expect to produce the 500 units although some deliveries are likely to occur in the early part of 2023. Following the closing of our transaction, we expect to jointly evaluate with Foxconn, the ramp up plan for the Endurance, the scope and timing of our BOM cost reduction actions, potential supply chain initiatives, and other opportunities to scale production including through strategic OEM partnerships. As Adam will discuss in more detail, ramping production will be capital dependent, but we will be prepared. Now turning to our long-term strategy, as I mentioned on our last call, the conversion to electrified power trains presents OEM startups like LMC with a very unusual opportunity to penetrate the automotive market and gain meaningful share particularly in certain under the serve segments. But success requires that we deliver scale, a differentiated commercial plan, an innovative product, a competitive cost structure, and a vehicle development platform that brings products quickly and efficiently to market. I believe a partnership with Foxconn can help us achieve each of these objectives. Foxconn has ambitions to capture a significant share of the global EV market, not just in contract manufacturing, but in key components as well. In addition to other strategic benefits, the Foxconn partnership would unlock the full potential of the Lordstown plant by getting it to scale faster. At 6.2 million square feet and 640 acres, the Lordstown complex is one of the largest internal combustion automotive plants in North America that is being converted to a state-of-the-art EV manufacturing facility. Foxconn has an excellent opportunity to fill the plant, LMC and all OEMs whose vehicles are built at the plant will benefit from the increased capacity utilization, use of common components and lower overhead costs. Scaling automotive manufacturing matters, use of shared space together with the mobility in harmony or MIH open source platform that Foxconn has developed, provide smaller and more specialized OEMs the opportunity to achieve the benefits of scale without being a large, fully integrated automaker. The partnership with Foxconn also should significantly reduce our raw material component and other input costs over time. As the largest contract manufacturer in the world, Foxconn has significantly better purchasing power than we would on our own as well as a global integrated supply chain network and the logistics capabilities necessary to help us reduce vehicle production costs and minimize our supply chain risks. We also stand to benefit from Foxconn's expertise in hardware and software integration, critical to EVs, given their expertise as a multinational electronics manufacturer. As we grow together, these benefits should only improve over time. Finally, a partnership with Foxconn would likely extend beyond a contract manufacturing agreement. When we announced the transaction, we stated that Foxconn and LMC would explore a joint venture arrangement for the development of new electric vehicles utilizing Foxconn MIH common platform. This was an important part of the deal, because in our view, LMC requires a scalable vehicle development platform for future vehicles that will allow us to compete with much larger vertically integrated OEMs. The use of common architecture systems and components off MIH would provide us that opportunity. Since our last earnings call, we have made progress on the terms of a contract manufacturing agreement, and an agreement under which we would develop new vehicles in collaboration with Foxconn off of the MIH platform. While definitive agreements have not been reached and may not be reached, I believe we're close and our relationship with Foxconn remains very solid. This past weekend, Foxconn agreed to extend the down-payment repayment deadline under the APA from May 14 until May 18, the day before our annual shareholders meeting to provide a little more time to conclude our transaction. In closing, I'm pleased with the progress we've made on moving the Endurance towards launch readiness and building our relationship with Foxconn. We have a very unique vehicle and notwithstanding tremendous challenges. We're very close to achieving very important milestones. With that, I'll turn the call over to our President, Edward Hightower.

Edward Hightower: Thank you, Dan. As we discussed in February, our two immediate objectives at Lordstown Motors are to launch the Endurance in Q3 and to build a product development relationship with Foxconn. I will start by giving you an update on the Endurance launch. Over the last quarter, we have continued to make progress with our Endurance preproduction vehicles or PPV builds on the Lordstown production line. We have also made progress with vehicle testing and manufacturing facility preparations at the plant. Under our Lordstown production system and launch governance structure, engineering readiness, quality and part availability are governing the speed of the Endurance launch. We experienced some supply chain disruptions over the quarter that impacted the rate and completion timing of our PPV builds, the commodities having the greatest impact, including steel and aluminum for our frames, body and battery enclosure, and chips for the various computing modules in the Endurance. Despite these disruptions, as planned, we have completed sufficient vehicles to begin our engineering and validation testing. The performance of the Endurance in these tests to date has correlated well with the performance predicted by our Computer Aided Engineering or CAE analyses. For example, our FMVSS frontal side and rear crash test results have been positive, and we are still predicting 5-star NCAP crash performance for the vehicle. We are currently in the process of building Endurance PPVs for homologation and certification, including tests for the EPA, CARB and FMVSS. Our experienced team of purchasing professionals are working tirelessly to mitigate the impact of supply chain disruptions on our build rate and timing. Finding and resolving issues is normal business for any vehicle launch. Any issues uncovered during the builds or testing are being addressed by our highly capable and motivated engineering and launch teams. We are pleased to reaffirm our plans to start commercial release production CRP in Q3 of this year. Given our expected timeline for certification completion, we anticipate that commercial fleet customer deliveries will start in Q4. Endurance PPVs have been displayed recently at NTEA Work Truck Week in Indianapolis and NAFA in Columbus, Ohio. We look forward to participating in the Advanced Clean Transportation Expo, ACT Expo this week in Long Beach, California. The Lordstown engineering and leadership teams can be regularly found conducting evaluation drive of the latest Endurance PPVs and software updates near our Farmington Hills R&D center. You might also encounter in Endurance at one of the many public level two charging and DC fast-charging stations in the area. With this low center of gravity and in-wheel hub motors, the Endurance continues to show itself to be agile, responsive and maneuverable, all without compromising capability. We cannot wait to get the Endurance in the hands of our customers as we expect that they will love it. Post-launch our future plans for the Endurance will focus on reducing our bill of materials, BOM costs, as Dan previously explained, is significantly higher than our anticipated selling price. Following raising the necessary capital, we have a series of hard tooling investments and value analysis, value engineering projects planned with the intent to significantly reduce our BOM costs. Our timing decision around scaling the production of the Endurance will be tied to the implementation of these projects and realization of the expected savings. Switching to our product development relationship with Foxconn, as Dan mentioned earlier, we have been working on an agreement with Foxconn to jointly design engineered, develop, industrialize and launch battery electric vehicle programs using Foxconn's MIH, Mobility-in-Harmony open platform. Co-developing EV programs is aligned with the EV market ambitions of both companies. We have an experienced and motivated team with the capability to develop new vehicles from concept through launch. If reached this agreement would create an innovative business model where we would develop new vehicles for ourselves and potentially other OEM customers globally. These new vehicles will be built for North America at the Lordstown, Ohio plant, and at other Foxconn contract manufacturing locations around the world. The objective is for OEM users of this flexible MIH platform, manufacturing footprint, and supply chain to achieve production scale at lower volumes with a shorter time to market. For LMC in particular, this agreement with Foxconn will provide a scalable vehicle development platform, reduce our product development costs, and increase the breadth of our product portfolio. As Dan stated, while our discussions with Foxconn have been constructive, at this stage a definitive agreement has not been reached. Thank you. And I will now turn the call over to Adam.

Adam Kroll: Thank you, Edward. Good morning to everyone and thank you for joining us. I share both Dan and Edward's enthusiasm for our progress in the first quarter and the real potential of Lordstown. I'm also quite focused on our challenges. As Dan and I had discussed, our progress was in the midst of strong macro and supply chain headwinds. Our number one priority is launching commercial production of the Endurance. As we believe that getting the vehicle into customers' hands will serve as the key catalyst to driving sales and the success of the program. I'm hyper focused on managing our cash position and evaluating the trade-offs required to get there. On our last call, I guided that our business plan required in the area of 250 million of new capital this year, of which a large share was needed in advance of starting commercial production in Q3. As you all well know, the capital markets have not been open for the sector. Notwithstanding, we continue to work with our advisors on available financing alternatives. However, with our options limited at the moment, we are taking a balanced and disciplined approach to allocating our current capital. For now, we are pursuing a business plan that will give us the best opportunity to launch the Endurance and hit our initial production target. As a result, we believe that the new capital required this year is around 150 million, including our minimum year-end cash target. This is in addition to the remaining proceeds from the sale of the plant to Foxconn. We will primarily hold-off on the hard tooling investments originally planned for this year, along with other investments in operating costs that we will defer until we raise sufficient capital. The principal trade-off is a delay in the bill of materials cost reductions resulting from the move to hard tools. Late last year, and in Q1, we kicked off some of the tooling, but as we discussed on the last call, hard tooling generally has long lead times. So other than relatively modest inflation, our BOM cost for 2022 is not meaningfully impacted by the deferral. To be clear, we are not stopping the work we're doing on hard tooling or VAVE. We will have a detailed plan in place to execute if and when we raise sufficient capital. Now I'll turn to our first quarter results. Starting with cash, we ended the quarter with 203.6 million in cash representing a decrease of 40.5 million from 12/31. The high level cash walk is approximately 81 million loss from operations excluding non-cash items of 6.8 million and almost 22 million in CapEx offset by the 50 million down payment from Foxconn under the APA and slightly more than 12 million in working capital benefits. With respect to operating costs, we incurred a total of 87.9 million in the first quarter, a modest 3.2 million increase from Q4 and down from each of the first three quarters in 2021. However, the mix of our spend has changed. Headline total R&D generated the increase as SG&A was essentially flat to Q4. To address many of your prior questions for the first time, we are breaking out costs in R&D associated with manufacturing in the Lordstown facility from engineering expenditures. Our plant costs which includes about two-thirds of our total headcount, along with facility, freight and manufacturing costs were 21.9 million in the quarter, just under half of that is personnel and about a quarter represents freight largely associated with obtaining parts. This compares to our Q4 plant costs of 18.6 million when our employee costs were about 26% higher due to some Q4 year-end accruals and higher stock comp, offset by significantly lower freight and utilities. Directionally, if we continue to own the plan, the operating costs it would be increasing as we get into production for more personnel and the indirect costs rising with activity levels. The engineering testing and other related activities within R&D totaled 20.2 million. As I suggested last time, these costs are expected to increase through launch as we ramp up testing activities, particularly specialty outside engineering services along with other variable costs and decreased thereafter. For comparison, these costs were approximately 36 million, 29 million and 21 million in quarters two, three and four respectively last year. The last major category of R&D spend are the vehicle component costs, totaling 19.7 million in the first quarter, compared to 22 million in Q2 2021, 12.3 million in Q3, and 19.6 million in Q4. Over the course of the last 12 months, there has been a shift in how these components are used. For example, in early 2021, the vast majority of the spend was for design and early testing of those designs. The amounts then shifted toward components for the beta and then prototype vehicles whereas in 2022 the vast majority of the spend went into pre production vehicles as we focus on certification and homologation. After launch, these costs should dramatically decrease to a normalized level for ongoing basic engineering and new vehicle options et cetera. With respect to cash flow, we invested 21.9 million in the business during the quarter, consisting primarily of 10.7 million in the plant to get ready for production, and 10.2 million on tooling for the Endurance. The last thing I wanted to touch on the cash flows associated with the APA with Foxconn. To-date since executing the initial agreement in principle last September, we have received a total of 250 million from Foxconn, consisting of the initial 50 million in common stock and purchase price down payments of 100 million in November, 50 million in January, followed by 50 million in April this year. The 30 million purchase price remaining is to be paid at closing along with an estimated $27 million reimbursement of certain operating expenses and CapEx. So if the transaction closes, our pro forma cash balance as of 331, would have been over 300 million. With the Endurance on the verge of commercial production, we are all very excited. We have almost 700 Lordstown colleagues working tirelessly facing macro headwinds, and the daily challenges that come with designing and delivering an entirely new purpose-built vehicle. I believe in our team, and I'm eager for all our outside stakeholders to see the results of our passion and commitment to achieve our mission. With that, I'll ask the operator to open it up for questions.

Operator: [Operator Instructions] First question is from John Murphy of Bank of America Merrill Lynch.

John Murphy: If I didn't start with the Foxconn relationship here, have you guys alluded to a payment that he was going to be made on 514 that got delayed to 518 prior to the shareholder meeting? What is the amount of that payment? What's the nature of that payment? And what gets triggered if that doesn't get me and I'm trying to understand that?

Adam Kroll: Yes, John, it's Adam. The 514 date would be is the date that required us to repay the down payments to Foxconn for the transaction. So that was the date again, if we didn't close by then but as Dan said in his remarks, that date has now been extended to the 18th. So, it's just that was the data which, again, the payments had to be repaid, but we've extended it. Does it make sense?

John Murphy: Okay. So, that means the 250 million that's been paid by them. So far, we need to be repaid if you didn't get close the deal. I mean, that's…

Adam Kroll: It's not all 250.

John Murphy: 200.

Adam Kroll: 200, yes. So, when I said 250, the 250 was 50 of common that they bought last October. So, down payments on the deal or have been 200.

John Murphy: So I'm confused, so why would it be delayed for four days? And what happens if for some reason it's not consummated?

Adam Kroll: Well, the delay, it's a complex deal we've been working on it hard with. So when we originally signed the deal, in November, that was the date that we had set to try to get everything done, and we just haven't gotten everything done.

John Murphy: But I mean, if you had to make that, if you had --it's basically the chicken or the egg, right? If you make the payment, that deal goes to me, if the deal goes through and you make the payments, then you have the 300 million. If it doesn't, you've got the cash on hand and are walking through the rest of this year and raising the incremental 150 million, I think you mentioned, is that viable?

Adam Kroll: No, no. So John, we've said in our public filings, right. If the loan comes due or the down payments come due, because we haven't closed the deal, we wouldn't have the cash to fund it. So we do have to close the deal in order to avoid that. And we expect, like I said, we've had constructive discussions with Foxconn. It's complicated deal. It's not just a simple contract manufacturing agreement. The joint product development agreement is fairly complicated. So it's taken a little bit longer than we expected. But again, I would say we're in good, a constructive dialogue. And I think the fact that Foxconn agreed to extend the repayment deadline, it's a good sign.

John Murphy: And then if we think about the cost greater than the price of the BOM cost greater than the price at the initial point of sale, I mean, I guess that's, given everything's going on with cost inflation and the cost of ramping up, that's probably not too surprising. But as you think about, one, two, three years out, when we kind of reach that crossover point or when you sort of projected reset crossover point, do you actually on a per unit basis, start to turn to breakeven to profitability?

Edward Hightower: John, this is Edward. It's really capital dependent. As we said, we have a plan to bring down the BOM costs through the heart tooling investments and our VAVE projects. We'll continue to work on those, but we have a plan to get there as we raise the capital to invest towards those our tools in those projects.

Adam Kroll: And with the hard tools lead time varies. So, we'd come in on a graduated kind of basis, but in general, it's, what 12 months.

Edward Hightower: Yes, 12 to 18 months, is when we expect all of the projects that we have in our plan to be implemented.

John Murphy: Is that constrained by, I mean, obviously, it's constrained by capital, the moment. If you were completely unconstrained and handcuffed and had all the liquidity, you could possibly want at the moment, could that be sped up? Or is that just a function of the way things work on hard tooling?

Adam Kroll: Some of the longer lead items, as Dan was just saying, have a timeline of about 12 months, but 12 to 18 months, but there are some other projects that we could speed up again, it's capital dependent.

John Murphy: And other than Foxconn, are you have any discussions directly with any other automakers on contract manufacturing, and obviously, it's been rumored that Fisker, not much more than rumor that Fisker would potentially be contract manufacturing with Foxconn at the Lordstown facility. Can you confirm that and are there other automakers that you've had discussions with that have an interest?

Dan Ninivaggi: Yes, we wouldn't comment on that now. I mean, the focus is getting the Endurance into launch and getting the deal done with Foxconn. After that, I think then we'll pursue some of those other opportunities, as I alluded to in my comments.

Operator: [Operator Instructions] And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Dan Ninivaggi: Thanks to all those who participated in the call. I'd like to close by thanking in particular our shareholders for their support. And I'd also like to thank again, the LMC and Foxconn teams for all the hard work that has as to where we are today. I'm very proud of the fact that our core team, manufacturing, engineering and corporate has never let the challenges and distractions overwhelm us. In fact, our program management business processes have never been better, and continue to improve every day. With that, thank you and look forward to speaking with you next quarter, if not sooner.

Operator: Thank you. This concludes today's conference hall. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.