Lordstown Motors Corp. (NASDAQ:RIDE) Q2 2022 Earnings Conference Call August 4, 2022 8:30 AM ET
Company Participants
Carter Driscoll – VP Corporate Development, Capital Markets and IR
Dan Ninivaggi – Executive Chairman
Edward Hightower – CEO and President
Adam Kroll – CFO
Conference Call Participants
Operator
Good day ladies and gentlemen and welcome to the Lordstown Motors Second Quarter 2022 Earnings Call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comment following the presentation. [Operator Instructions]
At this time, it is my pleasure to turn the conference over to your host Carter Driscoll. Sir, the floor is yours.
Carter Driscoll
Thank you, operator. Good morning and thank you to all for joining the Lordstown Motors’ second 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 forward-looking statements that is posted on our website and as part of our quarterly update and included in our earnings release. 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.
Also, during this conference call, we will be presenting certain financial information on an adjusted basis. An explanation of our use of a non-GAAP financial measure and reconciliation to the most directly comparable GAAP measure appear on our earnings release and on our website.
Joining us today will be Lordstown Motors Executive Chairman, Dan Ninivaggi; CEO and President, Edward Hightower; and CFO Adam Crowell.
With that, I’d like to turn the call over to Dan.
Dan Ninivaggi
Thank you, Carter, and welcome everyone. To begin, I’d like to thank the entire Lordstown team for their extraordinary efforts in Q2. Q2 was a very busy quarter and we made significant progress in achieving our strategic and operational objectives. Edward and Adam will review the quarter in detail later in the call.
I’d like to begin though with a few highlights for the quarter and review where we stand on several key priorities. First, two weeks ago we announced three additional senior management appointments and that Edward Hightower, our President would take on the additional role of CEO. This announcement was the culmination of almost a year of recruiting and developing the best manufacturing, engineering, commercial, and corporate talent in the industry. Edward and our three most recent hires alone collectively have over 100 years of experience in the automotive industry, and are truly exceptional leaders.
Second, in Q2, we closed our transactions with Foxconn, providing us with a flexible and less capital-intensive business model, a world-class contract manufacturing partner, and a more scalable vehicle development platform as well as additional capital.
Third, over the past year, our team has implemented a rigorous and disciplined program management process that has significantly improved operational execution. During the second quarter and into July, we conducted a number of constructive and largely positive gateway reviews to assess launch readiness.
Fourth, our business strategy requires strong partnerships, smaller OEMs can’t do without them in my view. In addition to further developing our broad partnership with Foxconn and the MIH consortium, we’re actively seeking partners including other OEMs to jointly scale the Endurance.
As one of the very few full size all electric pickup trucks that will be in the market, the Endurance offers other OEMs the opportunity to enter the market quickly and at relatively low costs since our development work is substantially complete.
We’re also seeking strategic fleet partners for the Endurance and a limited number of anchor customers for the first vehicle to be produced with Foxconn through our joint venture.
Finally, we live in a very difficult capital markets environment and are clearly capital-constrained. We will continue to be disciplined in our spending and manage our liquidity for what we can control.
As Adam will discuss later in the call, our efforts have lengthened our runway and cut our near-term capital needs supply. However, we must continue to pursue capital investments including through strategic partnerships or other transactions to execute our business plan.
In closing, I’m excited about the progress we’ve made during the quarter, but also recognize the significant work we still have ahead of us. In my new role, I look forward to continue to work and support work with and support our outstanding leadership team to bring it home.
With that, I’ll turn it over to our CEO, Edward Hightower.
Edward Hightower
Good morning. I’m delighted to speak with you with you today in my added capacity as CEO of Lordstown Motors, and CEO of our joint venture with Foxconn. I continue to be inspired by a company’s mission to accelerate the transition towards electrification.
Today, I would like to discuss three topics. One the status of the Endurance launch; two, our product development joint venture with Foxconn; and three, our growing and strengthened team.
Firstly, Endurance launch. As I’ve said in previous earnings calls, engineering readiness, quality, and part availability will govern the speed of our launch. We have completed our pre-production vehicle builds on the production line as of now Foxconn plant in Lordstown, Ohio and I am pleased to report that we remain on track to start commercial release production in the third quarter of this year, initially at a very slow rate.
Sales so our commercial fleet customers are planned in Q4 after full homologation and certification. Our final powertrain calibration is complete and we are in the first phases of EPA certification testing.
Since our last earnings call in May, we have completed all pre-certification tests for emissions, non-crash certification, body and white testing, and vehicle level testing. We have also successfully completed all preliminary crash tests during the development and we’ll conduct our certified crash testing this month.
Our embedded in cloud-based software integration has progressed and we are able to monitor the diagnostics of our Endurance test vehicles from the cloud. We’re also scheduled to conduct our final round of hot weather testing this month in Death Valley, which has been experiencing especially high temperatures this summer.
You might ask what is still to be done and what are the risks? Consistent with our management team’s emphasis on transparency, I will say that we have made significant progress but we are not 100% done. The impact of the supply chain issues on the timing of our PPV builds as discussed on previous earnings calls has set a downstream impact on the completion of our vehicle testing.
The more miles we accumulate on our vehicles, the more we are — the more we learn to be able to deliver the highest quality vehicle to our customers. We intend to complete more test miles and resolve open issues before starting to deliver customers delivering vehicles to our customers in Q4.
In addition to vehicle testing, we also continue to test our software to ensure robustness. As you may know, advanced electric vehicles likely Endurance have dozens of computing modules controlling the various subsystems like powertrain, chassis, safety, HVAC, infotainment, et cetera. These modules must communicate with each other and work together for the proper functioning of the vehicle.
While we may be able to accept software glitches and bugs in our smartphones, the standard for vehicles is much higher. We continue to test all software at the component subsystem and at the fully integrated vehicle level. Our testing is aligned with the top software protocols including the Motor Industry Software Reliability Association, or MISRA and ASPY [ph].
As we have previously disclosed, the BOM cost of the Endurance is materially higher than our anticipated selling price. We’re therefore limiting production of our first batch of Endurances to approximately 500 vehicles. We have a plan to reduce our BOM costs over time through investments in hard tooling, building scale with production suppliers, and VAVE initiatives.
However, we have held 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 our initial production targets. Our timeline for scaling Endurance production will be tied to our strategic partnership and capital raising actions that Adam will discuss later.
Our experienced and capable purchasing team continues to address part availability, part quantity, and part pedigree issues that have impacted our supply chain. With approximately 1,500 parts in an Endurance, it is important to complete each build with the proper pedigree of parts.
Completed the build of a vehicle than having to retrofit it with — add a missing or replace an incorrect part can have a negative impact on quality. Our supply chain team must manage the weakest links.
Our manufacturing partners at the Foxconn plant in Ohio are ready for March. While we are starting commercial release production of the first batch of Endurances in Q3, we are ramping up slowly to mitigate these issues. We expect production to accelerate in Q4 with the majority of the initial 500 vehicles built in the first part of 2023.
Our sales strategy remains focused on the commercial fleet market. The Endurance will be one of the few full-size best pickup trucks in the market this fall and we expect over the next several years. We cannot wait to get the Endurance into the hands of our customers.
With its in-wheel hub motor design, impressive connectivity, agile, responsive handling, and lower total cost of ownership, we think they’re going to love it. We have interest from several fleet management companies and commercial fleets, and plan to concentrate sales of this initial batch of vehicles in strategic markets where we have centers of expertise, including California, Michigan, and Ohio. Our service strategy for the initial batch will align with this customer geography-focused sales strategy.
I’d now like to discuss our growing relationship with Foxconn and our product development joint venture. Our 55/45 joint venture announced in mid-May, in which Foxconn committed an additional $100 million in capital, is another action in support of the EV ambitions of both companies.
Of this $100 million commitment, the first 30 million was funded at the end of Q2. As Foxconn is primary commercial vehicles development partner in North America, the JV will collaborate with Foxconn’s growing global EV ecosystem, including the MIH Consortium to co-develop new EV programs for Lordstown’s commercial fleet customers, and potentially for other OEMs. These new vehicles would be built for North America at Foxconn’s Lordstown Ohio facility at other Foxconn contract manufacturing locations around the world.
Under this innovative business model, utilizing a more flexible development platform and manufacturing footprint, smaller OEMs have the opportunity to achieve the benefits of scale with lower volumes and reduce costs and experiences a faster time-to-market.
As I also serve as CEO of the Foxconn joint venture, I recently spent two weeks in Taiwan with Foxconn Chairman, Young Liu and his team. While in country, we had several meetings on how to best operationalize the JV and leverage our concept through launch vehicle development capabilities in concert with the Foxconn EV ecosystem. We also had several discussions about the first vehicle program of the JV, which we hope to announce in the coming months.
I’m also very excited about the latest senior management appointments as we continue to strengthen our leadership team. Dr. Donna Bell, Executive Vice President for Product Creation, Engineering and Supply Chain joins us with nearly 30 years’ experience in product development and technology innovation leadership primarily at Ford Motor Company.
Donna’s leadership and expertise will be especially valuable as electric vehicle attributes and features become increasingly defined by software. Andrew Reyntjes, Senior Vice President for Sales, Service and Marketing is a 30-year veteran of the automotive commercial fleet business from both the OEM and up-fitter side. Andrew’s leadership will help our team put the customer at the center of our business’ decision-making.
Jill Coniglio-Kirk, Vice President for People and Culture joins us with over 20 years of experience in Human Resources roles and creating high performance work cultures for leading automotive suppliers.
These new leaders will play key roles and our team strive to become a world-class commercial fleet focused EV OEM. I would also like to thank Jane Ritson-Parsons for her many contributions to the company across functions and I look forward to her continued support as an advisor to the company.
I will now I’ll turn the floor over to our CFO, Adam Kroll to present our Q2 performance and financial outlook. Adam?
Adam Kroll
Thank you, Edward. Good morning, everyone and thank you for joining us. I’m enthusiastic about Edward’s expanded role. He has been the driving force behind the engineering results we have seen over the last three quarters.
While the closing of Foxconn transactions were key strategic and financial events this quarter, we have not taken our eye off the ball as our number one priority remains launching commercial production of the Endurance and I remained intensely focused on managing our cash position with discipline spending to preserve as much liquidity as possible, while we seek to raise additional capital.
Before I get into our results, I’d like to review the sale of the Lordstown facility which took place as planned and resulted in the cash proceeds we discussed in May. Recall the headline price was $230 million, plus a reimbursement for certain operating and capital.
The result was total transaction proceeds of $257.5 million inclusive of the reimbursement. The timing of our receipt of the proceeds was $100 million as a down payment in November 2021, and two $50 million down payments in 2022, taking place in January and April.
At closing in May of 2022, we received $57.5 million, representing the remaining $30 million purchase price, $17.5 million for operating expense reimbursement, and $10 million for capital expenditure reimbursement. In summary, our total cash proceeds in the second quarter were $107.5 million.
The accounting for the transaction was a bit complex, so I’d like to break that down for you as well. The $257.5 million of total proceeds are reported as follows. In the P&L, we reflect income of $120.1 million, consisting of a gain on sale of $101.7 million and a reduction in R&D for the associated reimbursement of $17.5 million plus a small additional amount we anticipate receiving as part of the final settlement the third quarter.
In the cash flow statement, which represents the year-to-date period; in operating activities, you will see the add back of the gain on sale; an investing activities, we report $37.5 million in assets sale proceeds; and in finance activities, we report the $100 million from the January and April down payments.
Now, turning to our results for the quarter and starting with cash, I’m pleased with our disciplined expense controls and rigorous program management that meaningfully contributed to our liquidity position exceeding our internal forecasts.
At the end of the quarter, we had cash on hand of $236 million, approximately $32 million higher than the first quarter of 2021. The change in cash reflects $2.4 [ph] million in cash use by operations, which includes $21.6 million for working capital, $18.1 million in capital expenditures, roughly half of which was for tooling for the Endurance, $87.5 million in proceeds from the plant sale and $15.1 million from equity issuances.
Now, shifting to earnings. For the second quarter, we reported income from operations of $61.3 million including $120.1 million in income from the plant sale. Excluding the impact of the sale, our core operating expense totaled approximately $58.8 million for the quarter, down from $88 million in the first quarter of 2022.
Total our total reported R&D expenses were $10.5 million, which you should think of as $28.9 million gross expenses, less $18.4 million in expense reimbursement from Foxconn as part of the sale of the plan. The reimbursement represents total estimated recovery of operating expenses covered by Foxconn under the APA, which will be finalized following Foxconn post-closing review period.
Recall the last quarter we broke out plant and vehicle component costs from engineering testing and other related activity. Cost to operate the plant, along with other manufacturing related costs were $10.7 million in the second quarter, down 51% sequentially due to the elimination of a majority of the plant operating costs beginning on May 11th, when the sale close to $10.7 million consisted primarily of [indiscernible] million in personnel costs, $2.1 million in freight, and $4 million of other facility manufacturing costs.
We expect a similar decrease in the third quarter as we realize the full benefit of our new cost structure. As we guided prototype components been decreased due to less activity as we approached commercial production, our spend was down 93% or $18.2 million from the first quarter to $1.5 million.
All other costs and R&D in the second quarter totaled $16.7 million, a decrease of 17.7% or $3.6 million versus the first quarter of 2022 and down 19% versus the fourth quarter of 2021.
Outside testing expenses represented the largest decrease, lower by $4 million versus the first quarter of 2022 due to cost controls. The supply chain headwinds and other factors, Edward mentioned, causing some of the testing ramps to shift into the third quarter.
Personnel, [technical difficulty] as we add permanent town to reduce reliance on third-party contracts. SG&A was up 15.1% in Q2 compared to Q1, due primarily to a non-cash charge to reflect the net realizable value for inventory, partly offset by lower legal and professional fees. The latter was down as we reduce outsourcing with new hires.
Turning into our outlook for the rest of the year. I will begin by saying that we continue our intense focus on prudent cash management as we execute our plan with limited capital, resulting in day-to-day capital allocation decisions based upon our outlook and liquidity.
Hard tooling investments for the Endurance remain largely on hold. We expect our second half of 2022 total operating loss and capital expenditures combined to be between $140 million and $150 million excluding — liability.
Our operating expense for the plan other than freight reduces to essentially nothing as I described. Prototype component costs are likely to be minimal. We anticipate all other R&D will increase as we execute the final testing and certifications of the Endurance in the third quarter and into early Q4 before [technical difficulty].
We expect SG&A to be up slightly in the third and fourth quarters versus the second quarter, excluding the timing impact of any charges to adjust the carrying value of inventory.
Furthermore, we anticipate capital expenditures in the second half of the year to be down just under 50% versus the first half as we no longer own the plant and we make some smaller investments in IT tooling and other general corporate needs [ph].
In the fourth quarter, we would anticipate the remaining manufacturing costs will move up the cost of goods sold and incorporated direct material costs, the contract manufacturing fee, warranty, and other sales related costs.
Finally, as we are modulating our production schedule and exercising discipline cost management, our capital need this year will lessen significantly from the $150 million we had stated previously.
I anticipate our cash need for the remainder of 2022 will be closer to $50 million to $75 million. However, this amount will depend on our production schedule and excludes contingent liabilities.
The guidance also reflects our targeted ending cash level of $50 million to $75 million. However, for us to execute our plan to deliver 500 units to the Endurance, we will need to raise substantially more capital to cover operating costs and the remaining working capital in 2023.
In summary, the strong program management mentioned by Dan and Edward combined with discipline spending activity, have enabled us to finish the quarter with significantly more cash than our internal forecasts.
Our strengthened leadership and incredibly dedicated teams are committed to achieving a successful launch of the Endurance and announcement of the first vehicle program out of our joint venture with Foxconn. We are committed to our mission to accelerate EV adoption, replacing internal combustion engines with clean EVs. We are all in this together and I’m excited for what’s to come.
Thank you. Operator, we’ll now take questions.
Question-and-Answer Session
Operator
At this time, we have no signals. We turn to Edward Kroll [ph] for closing remarks.
Edward Hightower
Thank you operator. In summary, I would like to thank the team for their tireless work and significant progress towards the upcoming Endurance launch. I would also like to thank our shareholders for their continued support. I believe we have great potential opportunities ahead of us with our growing relationship with Foxconn and I look forward to our team executing and realizing them. Thank you.
Operator
Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.
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