TuSimple Holdings, Inc. (NASDAQ:TSP) Q2 2022 Earnings Conference Call August 2, 2022 5:00 PM ET
Company Participants
Ryan Amerman – Senior Director of Investor Relations
Xiaodi Hou – Co-Founder and CEO
Eric Tapia – Interim Chief Financial Officer
Conference Call Participants
Ravi Shanker – Morgan Stanley
Scott Group – Wolfe Research
Ken Hoexter – Bank of America
Colin Rusch – Oppenheimer
Todd Fowler – KeyBanc Capital Markets
Brian Ossenbeck – JPMorgan
Joseph Spak – RBC Capital Markets
Rajvindra Gill – Needham & Company
Operator
Good day and welcome to the TuSimple’s Second Quarter 2022 Earnings Conference Call. All participants are now in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Keep in mind, that this call is being recorded and there will be a replay available at ir.tusimple.com following this call.
I would now like to turn the conference over to Ryan Amerman, Head of Investor Relations for TuSimple. Mr. Amerman. Please go ahead.
Ryan Amerman
Thank you, Howard. Good afternoon and welcome to our second quarter 2022 earnings call. With us today are TuSimple’s Co-Founder and Chief Executive Officer, Xiaodi Hou; and the Interim Chief Financial Officer, Eric Tapia. Xiaodi and Eric will review the operating and financial highlights and then we’ll take questions.
As a reminder, TuSimple shareholder letter and a replay of this call will be available later today on the Investor Relations page of our website. This call is being recorded, if you object in anyway please disconnect now.
Please note that TuSimple’s shareholder letter, press releases, and this call contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors. Please refer to the risk factors detailed in our SEC filings.
We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Please refer to the Safe Harbor disclaimer and non-GAAP financial measures presented in our shareholder letter for more details, including a reconciliation of the non-GAAP measures to the comparable GAAP measures.
I will now turn the call over to Xiaodi to begin.
Xiaodi Hou
Thank you, Ryan. Hello and welcome to our second quarter earnings call. Today, we are excited to update you on the recently announced leadership additions, continuous progress we’ve made with developing our proprietary IP, newly announced partnerships and efforts we’ve made on the regulatory front. The next two to three years are all about bringing efficiency into everything that we do and we are confident in our ability to deliver, advances autonomous trucking at a commercial scale to give a faster, more efficient and sustainable future on the road.
Before we provide an update on the company, I want to spend more time talking about safety. Yesterday, the Wall Street Journal ran an article that questions TuSimple’s commitment to safety. First, I would say that I am extremely proud of all that we have accomplished and are accomplishing at TuSimple. We are the first company in the world to execute a successful driver out test on 80-mile stretch of highway in Arizona and we’ve repeated multiple times this. In the past seven years, we’ve had 8.1 million miles of on-the-road testing and precisely, one incident that TuSimple truck is responsible for. In this incident, an error occurred when the test driver and safety engineer tried to re-enter autonomous driving mode before the system computer was prime to do so and the trucks swirled, making contact with the highway barrier. No one was hurt and the only evidence of the accident were few grips and some minor damages on our truck.
I want to be very clear, while this — what caused that human error, as the CEO of TuSimple, I take responsibility for it. At the end of the day, this kind of traffic accidents are what we are in the business of trying to eliminate from our road to build a safer, more secure and more reliable freight delivery system across America. When this incident happened, the very first thing we did was ground the entire fleet and began an independent investigation to determine what happened. After doing so and determining the cause, we upgraded all of our systems to make sure this could never happen again.
There are some who have questioned how this could have happened in the first place. That’s fair. But it is also important keeping this perspective. Collectively, our engineers have spent millions of hours building a system that has caused one incident in all seven years of operation. No one was hurt. No property damaged. And we reported to the appropriate government agencies as we should have. Considering that Navistar reported 500,000 large truck accidents every year, I think we have a pretty good average and that our technology is working.
With all of this in mind, we are a company in transition as we scale out from the research and development to commercialization. This also caused some questions, attendees have started making as a CEO, and whether we are prioritizing safety. But here’s my commitment to all of you, the stakeholders of TuSimple. We will not achieve commercialization until we are sure we can do so safely. Every decision I make starts and ends with evaluating the safety of our technology. We encourage our incredibly talented team to raise concerns if they have them and come forward with ideas of how to do it better. We have a strong safety record, and we will continue to make it as strong as possible.
Now, moving onto the quarter. In June, we announced several leadership changes. First, Pat Dillon, our former CFO decided to leave the company to pursue other opportunities. Pat played an instrumental role in setting up TuSimple to succeed and I wanted to personally thank him for his contributions. Eric Tapia, who you will hear from later in the call has taken over the role as Interim CFO. Eric has been serving as our Global Controller and Principal Accounting Officer over the past year and came to us from Grainger, prior to that KPMG. Eric’s skillset fits very well with where TuSimple is in our lifecycle and we are fortunate to have him step into the CFO role. We also announced a few additions for our leadership team. Isabella Zhou was promoted to Chief HR Officer. In this role, Isabella will be responsible for organizational planning and ensuring that we identify, develop and retain top talents. Ersin Yumer was promoted to Executive Vice President for Operations. In this newly created position, Ersin will oversee our AFN working, closely with both our technical and operational teams to ultimately support driver out operations and continue our journey towards commercialization. Ersin joined us as Senior Director of Machine Learning and was most recently Vice President of Algorithm [indiscernible] his years of experience in AV industry make him the perfect fit for this expanded role. Lei Wang was promoted to Executive Vice President for Technology. This is also a newly created position. In this position, Lei will take over many of the responsibilities I had as the CTO. Thus [indiscernible] to spend more time on overall strategy of the company.
We are fortunate to have such talented individuals within the organization. These organizational changes are designed to help us achieve the vision that we have for TuSimple. At our Investor Day in May, we discussed that we are in the process of expanding our operational design domain from Arizona to Texas, and from night times to day time. A critical component of this is to building out our physical infrastructure in Texas. Last quarter, we announced additional terminals in the Texas Triangle and our team is busy executing on our plans to continue the build out. What is critical as we migrate to Texas is to ensure we have the ability to create density and scale in our network. This requires a continued investment in our physical infrastructure, trucks and technology and further developing strong partnerships. We intend to further validate the commercialization opportunity by utilizing real world commercial routes to continuously improve our cost per mile metrics and continue our journey towards commercialization.
Next, I’d like to talk about our continuous success in building a valuable patent portfolio. During this past quarter we expanded our portfolio with 37 new patents. As you have heard me say and as I will continue to emphasize, the next two to three year is all about bringing efficiency into everything that we do. So let me provide you a few examples of how we’re doing that with our patent portfolio. The first example I’d like to highlight is a patent that covers automatic traversal of routes that lower fuel consumption to reduce costs. Fuel is a major cost of trucking operation, accounting for roughly one quarter of the truck operating costs. We’ve already shown our AV technology is over 10% more fuel efficient than a human driver. Route optimization on top of improved fuel efficiency has the potential to lower fuel cost even more for our customers.
Next, we issued two patents dealing with sensors. The first patent coverers technology to calibrate sensors while the truck is moving down the road. The second patent coverers sensor cleaning techniques for frozen solids. It is hard to overstate how critical sensors are to any AV platform. Technologies that improve the reliability and reduces maintenance costs is critical in reducing the overall operating cost of TuSimple’s AV platform. We will continue to invest in further expanding our IP portfolio.
In July, we announced our partnership with Hegelmann Group. Hegelmann is the major European transport and logistics provider and we’re excited to be part of their expansion plans in the United States. We believe that this additional partnership is another validation point of the value our purpose- built Level 4 truck will bringing to the trucking and logistics market. We look forward to work with Hegelmann and our many other partners in the logistics ecosystem as we develop and commercialize our technology.
Last but not least, I’d like to spend some time on regulatory update. We are happy to announce that Tom Jensen has joined the company as the Vice President of Governmental Affairs to lead our effort in this very important area. Tom comes to us from UPS where he spent more than 20 years lobbying at both the federal and state level on various issues impacting the transportation industry. We’re happy to have Tom aboard. Welcome. While we are on the regulatory topic, in Q2 we continued to work on building out the state legislative and regulatory environment favorable to commercial AV operations. With Kansas and West Virginia in asking legislation granting Level 4 truck authority, this increases the number of states that permits Driver Out deployment to 28, while 44 states allow driver-in operations.
Additionally, I’m proud to be the signatory on the recent letter sent to Governor Gavin Newsom of California from leaders in autonomous trucking industry. As you know, California, TuSimple home state currently does not allow for AV truck testing despite [indiscernible] that was signed into law intended to begin the rule-making process. We are pushing for a [common sense] (ph) regulation so that California joins the other 44 states in the country that allow for AV testing.
With that, I will turn the call over to Eric to discuss our financial results and updated guidance.
Eric Tapia
Thank you, Xiaodi. Beginning with our reservation program, this quarter we added 10 new truck reservations ordered by a long time partner. We’re excited to continue working to bring our world-class AV technologies for our partners. Our reservation total at quarter end stands at just under 7,500 trucks. We continue to see significant interest from our fleet partners and continue the hold standards for reservations. We only work with partners capable of implementing our AV technology and those that are ready to make a financial commitment alongside their reservations.
Now shifting gears to our financial results for the second quarter of ’22. We reported $2.6 million of revenue in the quarter, an increase of 70% year-over-year and 30% sequentially. Compared to last quarter, we have kept our revenue fleet relatively flat as new trucks are prioritized and deployed for driver out testing operations. The year-over-year growth was driven by revenue miles, as well as pricing. Sequentially though, revenue was primarily driven by better utilization of our existing fleet, while pricing was flat. We expect to keep our leased and owned revenue fleet flat over the course of ’22 and we’ll continue to improve utilization as needed.
That said, I think it’s important to share our view on revenue miles for the next couple of years. As we gradually transition to driver out commercialization, revenue miles will be generated as to support our technology needs. This will essentially validate and advance our technology as we support our customers through either pilot or revenue generating programs that showcase the benefits of our Level 4 technology.
Moving to expenses. We spent $86 million on total R&D this quarter, including $22 million of stock-based compensation. This compares to $76 million in the same period last year and $78 million in the first quarter of ’22 or up 9% sequentially. Excluding the impact of stock-based compensation, R&D increased 4% sequentially as we continue to invest in our technology, R&D assets and core technology. We will continue investing in commercialization of our world-leading technology and key talent while managing our R&D dollars as efficiently as possible. On the SG&A front, we spent $22 million during the period, including $3 million of stock-based compensation. This compares to $44 million in the same period of last year and $32 million in the first quarter of ’22 or down 32% sequentially.
As a reminder, this quarter we lapped the impact of stock-based compensation related to our IPO last year, which explains some of these deltas. Excluding the impact of stock-based compensation, SG&A was down 19% sequentially. During the first and second quarter of ’22 we had some favorable non-cash accounting true-ups in SG&A of approximately $2.6 million and $4.4 million, respectively, which we do not expect to repeat in future quarters. Excluding these items, SG&A was down 10% sequentially from improved cost leverage. We continue to be highly disciplined in controlling our SG&A expense and prioritizing to spend that really contributes to our technology and commercialization objectives.
Our loss from operations was $111 million in the second quarter of ’22 compared to a loss of $121 million in the same period of last year and $112 million last quarter. Our adjusted EBITDA loss in the second quarter of ’22 was $83 million, which compares to $66 million in the same period of last year and $80 million last quarter. In the second quarter of ’22 we had $3.8 million of CapEx primarily related to equipment and facility investments. We ended the second quarter of ’22 with a cash balance of approximately $1.16 billion, a decline of $81 million versus the previous quarter.
Now turning to guidance for 2022. We are updating our full year guidance, while our revenue guidance remains unchanged, we have updated our guidance for adjusted EBITDA, stock based compensation, CapEx and ending cash balance. This was done to reflect our increased focus on expense control and discipline capital deployment. We now expect to finish the year as follows; our adjusted EBITDA loss to be between $260 million and $280 million versus the prior guidance of $400 million to $420 million; our stock-based compensation to be between $100 million and $120 million versus prior guidance of $155 million to $175 million. And this is a result of hiring slowdowns and stock price impacts. We’re also reducing our CapEx guidance by $10 million. This is primarily driven by a reduction of our investments in administrative facilities. Lastly, we expect to end the year with approximately $950 million of cash on the balance sheet versus the previous guidance of approximately $900 million.
While we do not intend to issue our ’23 guidance until we report our fourth quarter results, I think it’s worth pointing out a few important items as we move through the second half of ’22 and into ’23. First, we are in the process of upgrading most of our older trucks to the newest AV hardware technology. This process will continue through ’23 and together with the physical infrastructure in our partners will help us create the network density that Xiaodi was referring to earlier.
Second, while we plan to introduce some new trucks into the fleet, our ability to add a significant number of truck is difficult given the challenges in purchasing new or even slightly used trucks. Lastly, we plan to continue to invest and add terminals to the AFM, primarily in and around the Texas Triangle. Our intention is to do this in a capital-light manner, partnering when possible. We look forward to updating you on our efforts in the coming quarters.
I’ll now hand it back to Xiaodi for a few last remarks.
Xiaodi Hou
Thank you, Eric. The progress we have made over the last few years is significant. We have built a first class team from the ground up and created a safety first culture to develop our industry-leading technology. I am proud of our work at TuSimple and remain completely confident in our progress to deliver advanced autonomous trucking at a commercial scale to build a safer, more efficient and sustainable future on the road.
With that, we’re ready to start the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question or comment comes from the line of Ravi Shanker from Morgan Stanley. Your line is open.
Ravi Shanker
Thank you. Good afternoon everyone. Xiaodi thank you for the details on the accident. Can you share some more details on what changes you have implemented since? Were they on the technology side or were they on the operating procedure side? And also, would you like to refute any details in the WSJ story that came out yesterday?
Xiaodi Hou
Yes. First of all, we have an overhaul of our human machine interface so that we are guaranteeing that human error won’t cause a machine error. That’s on the machine side. And also we have also tightened up our training procedure to make sure that all of the operations are compliant. And in terms of the other aspects of the article, I think there is a lot of misunderstanding of it, especially regarding to our compliance when it comes to reporting this incident to the authorities, aligned to make several points to be clear in here. First of all, we reported the incident to the appropriate authorities and has been in the public domain for more than a month on the NISA website.
And the second is that the truck swirled the median resulting in no injury and no property damage. There were no requirements to contact a law enforcement, but we did report this incident to the Arizona Department of Transportation and NISA on time.
Ravi Shanker
Got it. And so there have been no follow up, like there has been no changes in your ability to run your trucks or do any testing in [indiscernible]?
Xiaodi Hou
No. Neither the FMPSA nor the NISA has asked us to do any changes. And as part of our own review process, we actually had implemented a lot of solutions to prevent this type of things from happening again. And our new fleet with the upgraded software has since then been on the road.
Ravi Shanker
Great. And lastly as a follow-up question. I think this patent that you just received on the frozen sensors is an important one, because I believe that was a major, if not, the only obstacle to you. Actually, you’re running your trucks in the snow. Is that the case? And do you feel like you’re ready to start commencing some snow-belt test this winter?
Xiaodi Hou
This is a complex issue that we are facing to running in snow and ice. We are actually developing a sensor cleaning technology and this is going to be part of our solution that we have to get the patent from. But as of today, we’re still developing this full solution.
Ravi Shanker
Great, thank you.
Xiaodi Hou
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Scott Group from Wolfe Research. Standby, your line is open.
Scott Group
Hey, thanks, good afternoon. I was wondering, given some of the safety concerns out there. I know you guys haven’t given data on disengagements in the past, but I thought maybe appropriate, anything you can share in terms of where that trend is and where it’s been?
Xiaodi Hou
I think in the past we don’t explicitly give out this engagement data. I don’t know where, what exactly of the data are you referring to.
Scott Group
No, I’m saying you — I know you haven’t given it in the past, but I was wondering maybe if you wanted to make some comments on — just given some of the safety concerns that are out there. Maybe if you want to just give some high level comments around where you — where that metric is today, where it was, what kind of progress you’re making?
Xiaodi Hou
Okay. First of all, I think disengagement is not a very useful metric for marking the progress of technology of autonomous driving. Second, our incident, specifically on April 6th is not a disengagement, it’s actually – the issue happened at the engagement phase of the system where the system is not ready.
Scott Group
Is there a better metric that you think is worth sharing with us?
Xiaodi Hou
I would say that, overall — the overall metric would be, that is tangible [indiscernible] read will be cost per mile, but that only covers part of the system. As you know that this is very complicated, I don’t think there is good — easy to read a numerical metric to cover up all of the safety part of it.
Scott Group
Okay. And then just a question on the truck reservations were in the quarter were flat. Are you having dialog, conversations with customers? Do you think that the truck reservation count starts rising again in the near term or is that less of a near-term focus? Thank you.
Eric Tapia
So, great question. I would say, yes, we are still engaging with our partners in — our pipeline for potential orders is pretty healthy at the moment. For me, we are definitely focusing on the customers that have the capabilities right to introduce our technology into their — into their network and their fleets. So that in and by itself tends to be the filter. Just as a reminder, some of these orders for purpose-built Level 4 trucks are — they won’t hit the market until several years from now, right? But again to answer your original question, yes, we’re still seeing momentum, we’re still engaging partners and their interest and the pipeline is healthy.
Scott Group
Okay, thanks for the time guys.
Xiaodi Hou
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Ken Hoexter from Bank of America. Mr. Hoexter, your line is open.
Ken Hoexter
Hey, great. Good afternoon. Thanks. Xiaodi, maybe just take a step back and talk to us bigger picture. What’s the status of commercial operations? It seems like you’re expanding from Arizona to Texas. What is changing in the base case here? Is there a timeframe? You had talked about getting more trucks and operating retrofit and getting that up and running before the fully built purpose-built by Navistar in which you would push out from ’24 to maybe ’25, ’26? Maybe just take a step, what is the status of rolling out that commercial capability in ’23, ’24? What are we waiting for now?
Xiaodi Hou
Yes. We are — the team is now waiting for anything. The team is busy every day and we have actually several aspects of it. First, the safety. We are actually having a higher target when it comes to everything about the safety design and the system engineering side. So we’re basically having a more tightened safety standard and the validation process that go through the every corner of the system of the engineering part. And the second is hardware. We are actually introducing new components, for example, the new type of sensors and the more reliable next generation actuation components. So basically, we’re rebuilding the next version, which is getting closer to the production trucks, but still it’s like a prototype type of [cate] (ph). And the hardware team is building on that. And third is that the software and algorithm team is trying to, on one hand, to meet the safety standards set forth by the system engineering team. And on the other hand, utilize the new sensors, a new capability brought by the new OEM and Tier 1s.
Sorry, no new Tier 1 components to run. And on the other hand, the operational side we are actually seeing a lot of little issues, not really issues, like a little opportunities here and there for improving the fleet efficiency. And that is exactly what we — I said earlier, by identifying the scale or identifying the routes and populating more product into a smaller network operation. We have a long to-do list to do. So that’s something that we’re doing right now. And now, we’re targeting at the end of next year, so that you will see some strong results in Texas.
Ken Hoexter
So it sounds like you have to rebuild or you are rebuilding your entire truck specs now, did I hear that right? As far as getting new upgraded sensors on each part of the truck, is that why we should not expect any change in trucks and service. I mean [Multiple Speakers]
Xiaodi Hou
Sorry, it’s more like an upgrade considering all of the Tier 1 hardware, they have new versions and a new kind of LiDAR and the new type of cameras. It’s all like an upgrade.
Ken Hoexter
So upgrade of existing versions? I thought you had to start handing in your final specs to Navistar at this point to be able to get that commercialization or is that pushed out as well?
Xiaodi Hou
No, no, no, this is the different thing. We actually have a lot of older trucks that we purchased several years ago, right? And we have to upgrade them so that they can be aligned with the newest version of the hardware and software.
Ken Hoexter
All right. My last one if I could sneak one more in, is you lowered your spend targets. I just want to understand we’re getting no more additional miles in the interim, what’s the process? Again, I’m going to go back to the first question. What’s the process between here, is it just waiting for Navistar to get the commercial built or is there a reason why you don’t want to put more trucks on the road, you don’t need more, you’re getting enough info, maybe round this out there?
Xiaodi Hou
I think as long as we can mobilize all of our truck assets, our older version of the truck, that is purchased like three years ago and was pretty old hardware and we operate them. And then we have a decent fleet, all of them are running the cutting edge software version. We’re happy with the testing volume of this fleet.
Eric Tapia
And just to chime in. I’m going to refer to some of my remarks. We are also transitioning our entire fleet. When I say entire, when you think about our trucks, we have revenue trucks, revenue generating trucks, holding freight, but we also have testing trucks that are solely used in our testing facility. So what happens from now through the end of the year and beginning of next year is, we’re leveraging the entire fleet, right, to certainly — not necessarily to optimize revenue miles, but really to focus on the efficiency, scale and bringing true cost per mile reductions by testing the technology in real world scenarios.
I think that for me is a pretty strong proof point of our industry. If we can really show true economic scale with trucks that we control and trucks that are really holding freight in the real world, that will be a pretty impactful event. So for me, that’s the focus. Even though, yes, we reduced our targets we are definitely investing in our fleet, we are investing in our technology, certainly in our talent as well. We’ve been very frugal in other aspects of our business, like administrative facilities. But when it comes down to the core assets, that will again show that commercialization opportunity. We’re definitely investing the dollars.
Ken Hoexter
Xiaodi, Eric, thank you. I guess one less thing, somebody just probably at the China sell update. There is no update on the sale process. Is there just because there was no mention of it?
Xiaodi Hou
There is nothing I can share right now.
Ken Hoexter
Okay. Thank you. Great, thank you for the time
Operator
Thank you. Our next question or comment comes from the line of Colin Rusch from Oppenheimer and Company. Mr. Rusch, your line is open.
Colin Rusch
So I’m curious about talent acquisition here. You put together how all the team has been robust. But in terms of attracting talent and maybe upgrade in certain areas. I’m curious what those prospects look like for you at this point?
Xiaodi Hou
First of all, I think we are pretty proud that we do not currently have a hiring freeze. However, we have slowed down hiring — I’m pretty proud that we do not currently have a hiring freeze. However, we have slowed down hiring from what we have planned at the beginning of this year. And we’re very judicious when it comes to backfill of the vacant positions. So overall, we are becoming more careful given the general economic situation right now, but we’re not shy in hiring the top talents.
Colin Rusch
Okay. And then in terms of some of the vendors that you guys are working with, there is certainly some technology development that’s still going on in terms of sensor, sensor fusion. Can you just give us an update in terms of how you’re seeing that progress relative to the time frames and commercialization that you guys are targeting with some of those elements that maybe aren’t completely finished at this point?
Xiaodi Hou
Yeah. I think the most exciting things that I see from the sensor development is actually not about the sensor capability development, but rather the sensor reliability development. And this is something that we need exactly to conduct more driver out events and in the very end commercialization of the system. And this is very encouraging. You see many of the components are maturing from A samples to B samples and the timeline of this, the buyers, they actually get pretty clear and they stick with their timeline, which is also encouraging for us.
Colin Rusch
Perfect. Thanks so much.
Xiaodi Hou
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Todd Fowler from KeyBanc Capital Markets. Mr. Fowler, your line is open.
Todd Fowler
Great. Thanks, and good evening. So Xiaodi, on the path to commercialization by the end of ’23, kind of have five milestones laid out in the newsletter tonight. Can you give us a sense as we sit here kind of looking at the second half of ’22 and then into ’23, what’s realistic here for the rest of this year and then what we should expect into ’23?
Xiaodi Hou
Yeah. From all of those metrics, I would say, by removing the support vehicles is the biggest — are the biggest two and in order to be able to remove support vehicle we need to operate our hardware, so that we can improve the reliability, just as I was — as what I have just said that the sensors are getting more reliable and we’re very happy that it happens as we planned. And we are currently building this new type of trucks that is taking — normally taking a very long time, but we’re doing our best to shorten the time. We do not anticipate — therefore, we do not anticipate to reduce or remove the support vehicle in this year because probably by the end of the year we’re barely finished the build-up of the hardware. And while at the same time, the system engineering team working with the algorithm team are working on strengthening the system from every corner.
This is what we’re doing right now and this is also what you will see in a later on the plan. The Union Pacific driver out commercialization run. That is something that we will be basically having shown as intermediate stop of our [system software] (ph) for this year.
Todd Fowler
So is it fair to ask about, I mean what percent of the fleet needs to be upgraded and what percent of the fleet has been upgraded, because when I square kind of the comments that you made to Ken and your comments at the end of the prepared remarks, it really sounds like that this is very critical for ’23. So is that something that you plan on sharing where you’re at with the fleet upgrade or how can we kind of track where the progress is with that?
Eric Tapia
Let me chime in. So just to put numbers behind that response. So we have 100 trucks to go, of which 75 of them are in the US and those 75, they’re split between revenue and testing. So a number of trucks that need to be upgraded is on the 35 to 38 unit range. And from an incremental CapEx, incremental OpEx, it’s definitely reflected on the updated guidance. These are amounts that — they’re not immaterial, but they were primarily funded through savings in other areas. So we feel very comfortable supporting and completing those upgrades by the end of the year for, again, that testing in revenue fleet.
In ’23, we’ll continue that upgrade and the investment on the trucks, again, to ensure that they are running real commercial routes. But we don’t expect to start seeing cost per mile improvements likely until the second half of next year, which for me, that’s the biggest metric that we’ll use to show progress, right? We can show and share updates as we go. But for me, quantitatively, we will need that true cost per mile improvements to show that the improvements are paying off.
Todd Fowler
Yeah. Okay. That makes a lot of sense. Thanks for the time. I’ll turn it over.
Xiaodi Hou
Thank you.
Operator
Thank you. [Operator Instructions] Our next question or comment comes from the line of Brian Ossenbeck from JP Morgan. Mr. Ossenbeck, your line is open.
Brian Ossenbeck
All right. Thanks for taking the question. Xiaodi you mentioned all the steps as required and even some that are may be not required when reporting the accident — the incident, is there — as the leader in the industry, do you think or maybe the industry in general has to be more proactive as there are more miles and more potential incidents that happen rather than relying on the government and posting on their website? Do you think there is room for you to do more [indiscernible] more on that upfront? But I guess not waiting for the government to put it on their website and for something like this to happen again. Just wanted to get your thoughts on that.
Xiaodi Hou
Yeah, I would say that there is a kind of a general dynamics. If there are certain regulations, like certain common practice for every player in this field to be more open and transparent, definitely we’re all for that. I would say that there is a recent change from the NISA website that we were getting everything publicized. And first of all, I think we are not shy of being transparent and we actually reported to all of that and you know what, in this call we also shared even more information to that.
For example, we told you our total mile, which by the way is not included in the NISA reports. And on the other side, I think we strive to keep our partners and stakeholders informed as possible about our progress. With this — this was an incident with a correctable flaw, not a material change to our business model.
Brian Ossenbeck
Okay, understood. And then on the [UNT] (ph) process with the driver out run, can you just give us an update on that? It sounds like that’s going to be something going on later this year. And then just, I guess, more broadly speaking, now that the first wave of ghost rider is done, could you just comment on driver out applications at this point in time and what’s planned for the rest of the year?
Xiaodi Hou
Sure. Yeah. The overall framework of the 50 cases there, but we’re actually substantiating this with a lot of more stronger requirement that makes the honorable behavior, where all of the operational aspects is even more safer. So that’s what keeps us busy. And in terms of specific, the Union Pacific driver out run, we unfortunately have encountered a complete road closure in front of the distribution center at our destination point. So we are actually actively looking for adequate solutions. But that means that the complete road closure delayed us for a couple of weeks, not months, but a couple of weeks.
And within that, the Union Pacific run, UP run, we actually not only strengthened our system, but also we adopted new type of trailer with unknown loads and this is actually adding quite a bit of the new elements into our safety case that we have to validate through the unknown ways of — unknown new type of trailer and we have actually conquered that part of the test. We’re still finalizing the tests. You will hear us in the near future about the run.
Brian Ossenbeck
Okay. And then just maybe to touch on the comments made earlier to the previous questions. It sounds like all in, there is clearly some other challenges that maybe have popped up in the supply chain. It sounds like in terms of the upgrading the trucks, not getting as many as perhaps you might have thought, but is it still safe to assume that you’re on track for the wider commercial rollout at the end of ’23 or maybe some of that buffer is since been impacted by these events? If you could just clarify that, please. Thank you.
Xiaodi Hou
Sure. Yeah, of course, there are challenges here and there, but I think when we do the design, we are very cognizant of all of the changes and the team is doing a terrific job in keeping our timeline still on track and we’re still confident of all of the promise that we have made on the Analyst Day.
Brian Ossenbeck
Okay. I appreciate it. Thank you.
Xiaodi Hou
Thank you.
Operator
Thank you. Our next question or comment comes from the line of Joseph Spak from RBC Capital Markets. Standby.
Joseph Spak
Thanks everyone. Just — I mean quickly follow up on that timeline comment also goes for the production trucks timeline in 2025 or is there any change there?
Xiaodi Hou
So far there is no changes on that.
Joseph Spak
Okay. One, I guess quick clarification and then I guess one bigger picture question. You mentioned the truck reservations, which I think you had 10. But then you also sort of detailed the Hegelmann partnership. And it sounds like there were some initial reservations, but that happened after the quarter closed. So that’s not in that number, is that the right interpretation?
Eric Tapia
Yeah. Hegelmann, it is in our backlog.
Joseph Spak
It is. Okay. Because that was — and you reported an end of quarter and that happened. I thought that came out in July. So I just wanted to understand that, but okay. And I guess going back to the accident and again this is understandably a big question. But look, I think even you would acknowledge, even when the system is “ready accidents are going to occur”. So how are you going to communicate to your partners and to your stakeholders like what is the definition of safety you’re striving for? Like how do we know when it’s safe enough for you, safe enough for your partners and safe enough for regulators, all sort of constituents, what should we really be looking for?
Xiaodi Hou
I think we will, like basically by definition, no one is omnipotent or being able to have a like a strong — clear — 100% statement about safety. It is more like we show transparency and we show our methodology and we have evidence to prove to our customers and our OEMs about our safety principles and concepts. And the thing is that for driver out we do have that thing very well prepared. But [indiscernible] the incident that’s shown up here is more of the operational safety. But nevertheless, I think as I said in the beginning, I take the responsibility of this incident, I think the company needs to be more — putting more efforts in the operational safety aspects, especially given the fact that we’re not going to have all of our truck driver out tomorrow. There will be always the human machine interface out there and there will be also the operational elements in the system, therefore this is the area we’re definitely — we are strengthening right now, we have done a lot of efforts since the incident and we are going to be more cautious and be more [indiscernible] in that aspect.
Joseph Spak
Can you maybe share — and I understand different partners might be — might have different requirements, but can you share anonymously, of course, like what a partner — like how are they defining safety? Like what’s going to give them enough comfort to say we’re ready to go?
Xiaodi Hou
Because the customers are, I’m mainly talking about like the hardware related partners. The partners are — this is Level 4 autonomous driving is a new thing for everyone. The partners are open to us to hear about our safety case and basically, as long as we show them the safety case at a high level, of course, if it goes to really detailed level, that’s a proprietary thing that we would not share. But the high level safety case, once we share with them, they are on board with the principles and the structure of it and with the evidence that can show the overall safety. And that is how we are collaborating with our partners.
Joseph Spak
But I guess I meant the freight partners, what gets them comfortable — what gets them over the hump?
Xiaodi Hou
I think the period is the same, but the granularity is probably 1 or 2 tiers less because the freight customers are less technical than the hardware partners.
Joseph Spak
Okay. Thank you.
Xiaodi Hou
Thanks.
Operator
Thank you. Our next question or comment comes from the line of Rajvindra Gill from Needham and Company. Standby.
Rajvindra Gill
Yes, thank you for taking my questions. And apologies if this question was already asked, but just joining from another call. Just following up on that, how do you think that the National Highway Traffic Safety Administration is going to, I guess, adjust their view on what conditional automation is versus, say, Level 4 automation? Do you anticipate that they will provide more stringent requirements between the different levels of autonomy to prevent future accidents like this in the future? I’m just wondering if you’ve had feedback from the NHTSA as a result of this particular accident and what’s been their feedback?
Xiaodi Hou
Yeah, sure. First of all, I don’t think I have any views of how the NISA would in the future modify their regulations. But what I can tell you is that, NHTSA and NISA comes to TuSimple, they did their thorough analysis of our process, of our every step that we do and all our independent investigation results. There is nothing that they thought anomaly were inappropriate they gave us. So far, we implemented the solution on our own and they do not give us any further recommendations on how to change that or order that. And of course, the investigation is not completed, we remain confident about the investigation.
Rajvindra Gill
Right. I think it goes to the heart of the technology and of the business model where the goal essentially is to remove the driver in order to save cost and efficiencies and there is an impression that a Level 4 autonomy is going to happen in freight faster than passenger vehicles. So I’m just curious if that gets pushed out or if that gets installed in any way, how would you kind of react as a publicly traded company at that if there are new rules or new legislation that would prevent that from happening?
Xiaodi Hou
Yeah, I would say that at first, we don’t really see any signal of that happening or about to happen. And the second is that, of course, we are not going to break the law. And lastly, I think we’re going to demonstrate transparency and adherence to the right protocol to demonstrate to the government — government agencies that — basically to give them confidence through our process.
Rajvindra Gill
And has this investigation affect your rollout, your anticipated plans of future driver out programs? Again, you might have answered this with previous questions, but my sense is that this year, there is going to be several driver out programs [indiscernible] Texas Triangle, for instance, is that being delayed or pushed out because of this crash? Thank you.
Xiaodi Hou
Yeah. First of all, I think the promise is about Union Pacific driver out run. For Texas, our deadline is set for next year, by a lot of other improvement removing the support vehicles and holding commercial runs day and night. Yeah, so those are for next year. I don’t think that we have [indiscernible] this year and all of the driver on activities and preparation or driver tests are not affected by this incident.
Rajvindra Gill
Thank you.
Eric Tapia
And as mentioned, I think the fact that when this event occurred, we stopped our fleet and root caused what really occurred and really applied and fixed and now we’re testing our current bots using this. We feel very confident that this is an isolated event. And this has not had any impacts to our plans. And again, we’re in the same behavior or reaction that we had on previous events and we take it seriously and we’ll do that as expected going forward and we feel confident that the issue that created the accident has been solved.
Rajvindra Gill
Thank you.
Operator
Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.
Ryan Amerman
Thank you for joining the call and we look forward to attending many conferences this quarter and giving you another update next quarter. Thank you.
Operator
Thank you for attending today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.
Be the first to comment