Xos, Inc. (NASDAQ:XOS) Q3 2022 Earnings Conference Call November 11, 2022 4:30 PM ET
Company Participants
Christen Romero – General Counsel
Dakota Semler – Chief Executive Officer and Chairman
Giordano Sordoni – Chief Operating Officer and Director
Kingsley Afemikhe – Chief Financial Officer
Conference Call Participants
Donovan Schafer – Northland Capital
Michael Shlisky – D.A. Davidson
Jerry Revich – Goldman Sachs
Operator
Greetings, and welcome to Xos Inc.’s Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded.
At this time, I would like to turn the conference over to General Counsel of Xos, Christen Romero. Thank you. You may begin.
Christen Romero
Thank you, operator, and thank you everyone for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Semler; Chief Operating Officer, Giordano Sordoni; and Chief Financial Officer, Kingsley Afemikhe. Ahead of this call, Xos issued its third quarter 2022 earnings press release and a presentation, which we will reference during this call. This can be found on the Investor Relations section of our website at investors.xostrucks.com.
On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today’s earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investor.xostrucks.com. We do not undertake any duty to update any forward-looking statements.
Today’s presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company’s third quarter 2022 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements.
With that, I’ll turn it over to Dakota.
Dakota Semler
Thanks, Christen, and thank you everyone for joining us today for our third quarter 2022 earnings call. We appreciate everyone joining the call and are excited to share with you the progress made and challenges faced during the quarter. We will also discuss steps made to evolve our organization to respond to the dynamic external environment.
During our call today, I’ll cover deliberate decisions we made as a team to set up Xos for success in the coming quarters. I will then review quarterly business highlights, our new charging infrastructure solutions and other updates since the end of the quarter. Then Gio will provide an update on the manufacturing operation and our supply chain. And to wrap up, Kingsley will provide a detailed review of our third quarter financial results and our outlook for the second half of 2022.
In this uncertain environment, we’ve dedicated considerable time understanding customer demand, our delivery capabilities, the constantly evolving supply chain and the economic environment. We’ve worked diligently over the past two quarters to align our internal plan with these external realities. This has led to several delivery decisions to set the company on a trajectory for future growth and success. These decisions focus on three key metrics: demand, margins and liquidity. We continue to see demand and sales growing triple-digit percentages year-over-year and will capitalize on this growth with our revised plans, which I will share with you now.
First, we’ve received several repeat orders from large national accounts. Customer feedback is positive, and our breadth of customers and backlog has increased substantially. However, the timeline for customer deliveries has increased due to delays in installing charging infrastructure. We’ve implemented an internal project to accelerate the delivery of infrastructure to customers, which I will cover in further detail. We have rightsized the organization to reduce operational expenses. Part of this initiative is focusing R&D in the near-term on products such as the step van and Xos Hub that we believe will help drive profitability next year and in subsequent years.
We have simplified our manufacturing operations and supply chain, focusing efforts on our Flex manufacturing site in Tennessee. These cost-saving measures will also reduce the number of days in in-process inventory and benefit working capital in the future. We have launched an internal project to align the organization on achieving gross margin positivity by the end of the first half of 2023. We believe that we will achieve this goal through a combination of pricing actions, lower product cost and lower overhead costs.
Finally, we continue to have access to capital as we closed two convertible notes with investors during the third quarter, and we expect to access additional debt financing via an ABL and receivables financing in the near future. These decisions better position us to continue growing deliveries, achieve positive gross margins and access capital to scale the business. We are building a robust sales and customer support organization, and we’re seeing continued strong demand for our products. As our revenue for the third quarter of 2022 was $11 million, up 12% compared to the second quarter of 2022.
During the third quarter of 2022, we continued our North American expansion with 88 units delivered across 15 North American cities during the period. These vehicles went to existing customers such as Merchants Fleet and FedEx Ground operators across four states as well as new commercial EV customers. The demand for excess vehicles in last-mile delivery application has not slowed. Although regular seasonality in the last mile delivery sector during the peak holiday shipment season is expected. However, we are reaffirming our half year guidance, which anticipated fourth quarter seasonality.
We also announced the expansion of Xos Energy Solutions with a suite of five new types of Xos DC fast chargers that are compatible with both Xos and other commercial electric vehicles, enabling a wide range of charging applications. Charging infrastructure deployment is the largest hurdle slowing our pace of deliveries. We have expanded the Xos Energy Solutions team, which now uses a robust managed process to help customers secure charging infrastructure as quickly as possible. This team provides turnkey infrastructure, starting with site evaluations, site engineering and design, permitting, planning, construction, installation and commissioning of fleet charging infrastructure. Several customers have made use of these services, including Loomis and UniFirst, which have deployed charging infrastructure at multiple sites across the country. These services are helping improve the pace of customer deliveries and will also improve our margins.
In addition to our infrastructure solutions, I’d like to cover other highlights over the last few months. We announced a strategic partnership to expand our leasing and distribution network with NationaLease, one of the largest full-service truck leasing organization in North America with over 900 locations and over 165,000 vehicles in its fleet. With this partnership, Xos’s vehicles and services will be listed as part of the offerings from NationaLease. Additionally, we also named W.W. Williams as a pilot service provider to support Xos customers with world-class service and maintenance.
Subsequent to the end of the third quarter, we introduced an extended service contract offering in partnership with National Truck Protection Co. Inc., the leading aftermarket truck extended service provider in the U.S. and Canada for Class 2 through 8 commercial vehicles. This extended service contract is expected to help decrease the total cost of ownership, or TCO, for our step vans and create an enhanced overall ownership experience for our customers.
Additionally, we are making several changes to the step van platform, focused on improving both fleets total cost of ownership and Xos’ gross margins. This past quarter, Xos unveiled new features for our advanced driver assistance system, commonly known as ADAS, to all of our step vans. Such features will become standard in Xos vehicles going forward and will help fleets save on insurance, repair, and driver safety costs.
In an effort to further reduce direct material costs, we began work in early 2022 to integrate more cost-effective battery cells into our vehicles. This includes making use of more affordable chemistries such as lithium iron phosphates for less weight sensitive commercial locations such as parcel delivery. This has been part of our ongoing development plans for some time, and we expect to launch multiple new battery configurations in 2023.
We will continue producing our Lyra battery line for powertrain, weight sensitive vocations and service parts. In addition to increased battery options, we’ve conducted value analysis and value engineering activities that have managed to reduce material usage and assembly steps significantly. In some high cost components like high voltage harnesses, this has led to savings of roughly 50% on direct material costs. We are making great strides to help our customers improve safety and consequently lower the total cost of ownership, while also reducing direct material costs.
With that, I’ll now turn the call over to Gio.
Giordano Sordoni
Thanks, Dakota. Our operational focus is to increase delivery volume and begin delivering gross margin positive units by the end of the second quarter next year. We have a robust internal plan to make sure we achieve these goals. This includes the following initiatives: continuing to take price action, the effects of which we’ll begin to see in the coming year, streamlining our manufacturing operation and focusing production in Byrdstown, Tennessee. This will help improve our margins by reducing the overhead costs in manufacturing as well as reducing freight costs.
We’ve established an internal project dedicated to further reducing the cost of our step van platform through design and engineering, while also preserving performance and reliability of our vehicles. These efforts will bring significant improvements to our direct material costs as well as the vehicle performance. The supply chain team has been working in tandem with our engineers as well as their supplier partners to uncover new areas of cost reduction on the step van platform and re-domesticate key parts of our supply chain from Asia to North America.
While we are confident in our ability to execute on these plans, we don’t expect our margin improvement to be linear from here to the end of the second quarter as we work through existing inventory and continue to take steps to optimize our manufacturing and supply chain systems. Achieving gross margin positivity is our core focus, along with continued revenue growth and sufficient access to capital to support such growth.
As Dakota mentioned, many of our customers are continuing to struggle with obtaining adequate charging infrastructure. I’m excited by the progress our team has made with the Xos Hub and Xos Energy Solutions with the aim to alleviate charging bottlenecks. The hub is a mobile charging station that can be used to charge up to five electric commercial trucks simultaneously, while minimizing the power draw from the electric grid. We look forward to providing updates on the Xos Hub in the near future as we begin to roll out the mobile charging station to customers.
In summary, we believe that we’re on the right path to scaling our business responsibly. We are proud of the team’s hard work during the quarter and difficult decisions that we needed to make. This includes the decision to reduce employee head count to achieve near-term gross margin positivity as Kingsley will discuss further in a moment. The opportunity for clean fleet and logistics solutions in both the public and private sector remains immense, and we expect to continue to benefit from the secular shift to a net zero carbon economy.
I’ll now pass the call over to our CFO, Kingsley Afemikhe.
Kingsley Afemikhe
Many thanks, Gio, and good afternoon, everyone. Xos is focused on growing deliveries to meet continuing strong demand for our products, achieving positive gross margins and allocating capital prudently. Reviewing our financial performance over the quarter. Our revenue in the quarter increased to $11 million compared to $9.8 million in the second quarter. This is in line with our guidance and was driven by a 21% increase in units delivered to 88% compared to 73% in the second quarter of the year.
We took price actions earlier in the year and expect realized average selling prices to increase as we deliver more of those units. We remain one of the most cost-competitive zero-emission options and plan to take further price action in early 2023. We are excited to see the growth in our fleet as a service offerings, which include logistics, financing, Xosphere, and Energy Solutions. We’ll be talking more about this revenue stream as it grows in 2023.
Our gross margin during the quarter was a loss of $10.8 million compared to a loss of $5.1 million in the second quarter. This is driven by an increase in our cost of goods sold to $21.8 million compared to $14.9 million in the previous quarter. We booked a number of non-cash adjustments in the quarter that materially increased our cost of goods sold. These includes an adjustment for future sales as we work through older lower margin orders in our backlog, adjusting for inventory, which is now obsolete due to improvements of our products due to our continued research and development efforts and other inventory adjustments.
In total, these adjustments were $5.3 million. And without these, our gross margin loss would have been 50%. We believe that these adjustments are largely transitory in nature as we invest in our systems and procedures and continue to add trucks to our backlog with higher average selling prices.
We continue to expect to be gross margin positive at the unit level towards the end of the first half of ’23. As Gio mentioned, we have focused much of our research and development operations on engineering programs to remove costs and the bill of materials and to improve availability by and near-shoring. In addition, as Dakota mentioned, we will significantly reduce freight costs and other overhead by centralizing manufacturing in our facility in Tennessee.
Turning now to expenses. Our third quarter operating expenses fell to $20.4 million from $22.7 million in the second quarter. We made a difficult decision to focus operational efficiency and reduce workforce by 16% from our maximum headcount in May 2022. We value all of our team and I and the managing team wish all those affected well. As a result, we expect both general and administrative expenses and sales and marketing expenses to fall in the fourth quarter. R&D expenses over the quarter were $8.6 million versus $8.5 million in the second quarter. We expect to see the benefits of this activity in reduced material costs of fewer part delays in the coming year.
Turning now to our balance sheet and liquidity. We closed the quarter with cash, cash equivalents and available-for-sale securities of $109.2 million, which includes $3 million of restricted cash. We issued $55 million in convertible securities in the quarter. As of the end of the quarter, reversible debt was $53.7 million, net of debt discount, issuance costs and conversions in our liabilities position. Growth in inventory slowed, and we now record a net inventory position of $66.3 million versus $62.2 million at the end of the second quarter. Both our accounts receivable and payable positions fell despite growing revenue as we continue to fine-tune our systems and processes.
Operating cash flow less CapEx or free cash flow for the quarter was $32.2 million, down from $51 million in the second quarter, and we expect it to fall further over the fourth quarter. Finally, we reaffirm our previous guidance for the second half of 2022. We expect deliveries to be in the range of 150 and 200 units. We expect revenues of between $18.75 million and $25.6 million and non-GAAP operating loss in the range of $43 million to $52 million. We will provide further guidance on 2023 early in the new year.
Thank you very much, and I’ll turn you back over to Dakota.
Dakota Semler
Thanks, Kingsley. Before we open it up for questions, I want to thank our team for their continued efforts to build the best commercial EV company possible. Our team has worked incredibly hard to set Xos on a trajectory for future growth and success. We believe our decision to focus on growing deliveries, increasing profitability and managing liquidity is unmatched in this industry. Our focus is building a sustainable, scalable business model with products that create value for our fleet customers.
We have accomplished significantly more in six years than our peers with less capital and less time, and it would not be possible without this team, our external partners and our loyal customers. I would especially like to thank several customers this quarter, including Loomis, UniFirst, Merchants Fleet, FedEx Ground contractors and our new customers that have joined the Xos family in 2022.
I will now turn the call over to the operator to open the line for questions. Operator?
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. Our first question here will come from Donovan Schafer with Northland Capital. Please go ahead.
Donovan Schafer
Hey guys. Congratulations. Thanks for taking the questions. And congratulations on the continued growth and kind of the initiatives you’re taking. I think they’re broadly speaking, the right moves. I want to talk about just sort of kind of the focus on Tennessee and really doubling down on the operation improvements in that area and kind of the headcount reductions. So, do those go together where there’s maybe — is it safe to kind of assume in relative terms, sort of a de-emphasis on Los Angeles as a manufacturing operation to really be pumping things out and a relative increase on focus is Tennessee is the real essential place there?
Dakota Semler
Yes. Thanks, Donovan, for your question and happy to provide more context. I’ll go ahead and start, and then we can certainly follow-up with more details. But I think you’re interpreting it exactly correct. We really want to demonstrate our products can get to gross margin positive and ultimately be very profitable vehicles in the long-term.
And in order to do so, we need to make sure, one, our direct material costs can be profitable, but then any of our associated overhead costs with running a production facility and delivering vehicles are also reduced. And what we’ve decided to do is really center in on Tennessee. It has a great cost structure. It has the ability to scale vehicles. That facility has already produced thousands of vehicles in the previous life. And really, it means less focus on our Los Angeles and Mexico facilities, meaning that all of our energy, all of our efforts from our manufacturing operations team, our quality team, our supply chain team, are centered in on one facility where we can really optimize for process improvements and for cost reductions.
Donovan Schafer
And I’m sort of also guessing and maybe assuming the role, L.A. will still be kind of a meaningful role because of — from sort of an engineering design it’s kind of become an extended Silicon Valley satellite kind of thing, they call it in Silicon Beach and all that stuff. So, as you still — is there still kind of a longer-term commitment to Los Angeles area and meaningful headcount there?
Dakota Semler
Yes, absolutely. So, we’re continuing to maintain our facility here where most of our engineering team is based. And we view this as a core area and resource that we’re going to continue to preserve and maintain to focus our efforts on research and development, on cost reduction within our platforms and on future improvements that are going to be in the vehicle. As you probably know, there is an incredibly good hiring pool within Los Angeles for hiring all of the skills associated for developing our own powertrain, battery and software technology, which are the core intellectual property areas that Xos is focused on and that we build unlike some of our peers.
Giordano Sordoni
Yes. Sorry, Donovan, this is Gio. I would just add to that by saying we have — highlighting what Dakota said and saying that we have deep R&D capability at our headquarters in Los Angeles, not only on developing products, but also testing and validating products. So, that’s where we would take in new cells, for example, from a new cell vendor and do battery cycling and do testing in a thermal chamber and put new components, battery modules or other electronics on a shaker table and really get those deeper insights on the products that we put onto our trucks and the validation really starts there before it goes to Tennessee for production. We also have low volume production or manufacturing capability on the battery side in Los Angeles.
Donovan Schafer
Yes. Okay. That makes sense. I’ve seen this with some solar companies and some other clean energy where you kind of end up with an engineering talent concentration and you have a lot of equipment there, and so, it still has a sort of testing and almost even maybe pilot line-type capability where you can kind of stimulate manufacturing and figure out how that would kind of work and then you take it somewhere else for the scaling.
Giordano Sordoni
That’s exactly the case.
Donovan Schafer
Yes. Okay. And then I want to ask about Merchants Fleet. So, obviously, they have proved to be very good and solid customers of you guys. There — it’s not like you’re sending off vehicles. It’s not like a dealership situation where the revenue recognition can get murky or whatever. But they do — as I understand it, and correct me if I’m wrong on all this, but Merchants Fleet, it is — they’re sort of — they’re almost like a fleet as a service company and leasing it out to other companies.
So, do you get data from them and visibility on if you send them 60 step vans, are you able to see how that gets turned around and whether they actually do sort of resell a vehicle with services attached or whether they are leasing it kind of like what those use cases are? How quickly does it all get deployed instantly. And so, all 60, if you send them 60, that gets kind of gobbled up right away for their uses or do some fraction of that end up sitting on the lot for a couple?
Dakota Semler
Yes, it’s a great question. Merchants Fleet, as you mentioned, has been an incredibly great customer of ours and continues to be a good customer as we deliver more vehicles to them. Around the customer deliveries, Merchants Fleet is an FMC or a fleet management company. So, they do keep that customer data confidential. But they do share data with us around utilization, around their expectation for delivering these vehicles such that we can continue to improve the product. And then the second point I’ll make is all of our vehicles out there in the field have telemetry on them. So, they have our Xosphere platform.
So, we can track and monitor those vehicles for service purposes and assess how well they’re performing in the field, how they’re being charged, where they’re getting delivered, all the particulars that are more specific to service and maintenance and fleet management. So, we still do have visibility on those vehicles in the field for customers.
Donovan Schafer
Okay. That’s helpful. And then just the last question, if I can sneak one more in. Just for supply chain, — there was last — I think it was last quarter. It might have been one before that. Gio made a comment about wire harnesses is just an example of something where there’s supply chain hiccups. Now this time you kind of mentioned some improvements to help maybe on material costs. But then also with going from putting more of the emphasis on Tennessee versus Los Angeles, that price sends more product through maybe Gulf Coast or Savannah, other ports. So, just curious if there’s kind of an update on just supply chain dynamics, given those changes and things you guys have made?
Dakota Semler
Yes, the team has done a lot of work in this area to improve the supply chain situation, but those improvements aren’t all across the board. You mentioned wire harnesses. That’s an example of a component that we mainly relied on sourcing from Asia that we’ve actually domesticated to North America. That’s an example of the change that we’ve made to make our lives easier from a supply chain perspective. As far as the ports during the supply chain crisis, we did divert some of our supplies coming in from Asia to ports other than L.A. and Long Beach, and that helped alleviate some of the pain. I think we’ve been doing less of that now, and freight prices have fallen a bit over the last couple of months as well. So, moderate improvements, but there are still difficulties in sourcing things like PCBs. We’re certainly not out of woods yet when it comes to supply chain crisis.
Donovan Schafer
Okay, very helpful. I will take the rest of my questions offline. Thank you guys.
Dakota Semler
Thank you.
Operator
Our next question will come from Mike Shlisky with D.A. Davidson. Please go ahead.
Michael Shlisky
Good afternoon and thank you for taking my questions. One thing you didn’t mention at all in the prepared remarks, Dakota, was the MDXT and HDXT products. Are those products on ice for now, continued, still going forward in the whole new plan you’ve got in place? What is going to come of those products?
Dakota Semler
Yes. Thanks, Mike. I appreciate the question. We continue to make progress on the MDXT and HDXT platforms, but as a part of our focusing and alignment plans for 2023, we really want to center in on the vehicles that are going to be able to — the platforms that are going to be able to generate meaningful volume and profitability in 2023 and the step van and the Xos Hub are those two platforms. So, we do continue to make headway, and we’ll bring those vehicles to market. We’re continuing to showcase them and demonstrate them for customers out in the field. But the vast majority and focus of Xos is going to be centered in on the step van and Xos Hub in 2023.
Michael Shlisky
Okay. And then looking at what’s implied for the fourth quarter for deliveries, it’s still a pretty wide range, and I’m not even sure how many build days are left in the year given some of the holidays that are ahead of us. Maybe just give us some of the key factors, which would put you at the low end of $150 or high end for $200 million. Perhaps that’s more like what’s in your inventory today, kind of a question, but just some thoughts after you are confident that left to one end of that guidance range or the other at this point in the quarter would be appreciated.
Kingsley Afemikhe
Sure, absolutely. We’ve made a lot of really good progress in manufacturing and getting trucks ready for customers. The key thing that drives that range are two real factor, the first factor is — It’s Kingsley, hey, Mike. The first factor is customers’ ability to take trucks, specifically charging infrastructure. And we’ve spoken a lot about some of the solutions that we’re bringing to help our customers take our trucks. And then secondly, the other factor is just the normal seasonality you see in the fourth quarter, also by our customers are the parcel delivery companies, and they’re very, very busy with the holiday season. But like I said, we’ve reaffirmed our guidance and we’re focused on delivering on that.
Michael Shlisky
Okay. Great. Thanks for that. And to get to a positive gross margin at the unit level next year and you seem to have a trimmed down cost structure as well, can you help me, Kingsley, on what time frame or at least what volume level per month you might see the company becoming EBITDA positive?
Kingsley Afemikhe
Yes, absolutely. When we think through about the factors that get us to EBITDA positive is driven by their operating capital to inflection. We haven’t guided to that specific point. And that’s another core focus for us soon after that. And what drives that there are a couple of things. A, volumes of units, which we’ll talk more about early next year, but also the growth in our non-step van revenue. So, I was speaking a lot about our fleet as a service offering, which is growing. Those are high-margin service offerings, and we expect those to grow significantly in 2023 as well.
Michael Shlisky
So, that’s some of the other Xosphere items that you and Gio have been working on?
Kingsley Afemikhe
Yes. So, just Xosphere, the Xos Energy, the Xos Hub, some of the other logistics offerings that we have, it’s something that we see as a very critical part to help our customers electrify and also a very important part of our revenue stream and something we’ve spoken about very consistently. We spent a lot of the year launching the different aspects of it. And next year, we’re really driving that through with our customers.
Michael Shlisky
Okay. Great. Maybe just squeeze one last one here. Maybe just give us some of your thoughts, guys about how you feel about 2023 shipments at this point? Are you looking at continued quarter-over-quarter improvement after the fourth quarter here? Obviously, assuming that the supply chain conditions don’t deteriorate substantially, is it safe to assume gradual increases going forward?
Dakota Semler
Yes. We remain really confident in the demand that continues to exist within the market. As we shared, we’ve seen triple-digit percentages in sales demand and sales growth year-over-year from 2021 to 2022. We don’t anticipate that the volume of demand will slow down as there’s a backlog in replacement vehicles that has existed for the last two years because of the supply chain glut. We haven’t guided specifically to volumes for the full-year next year. But given a lot of the indications and conversations we’ve had with customers, we’re confident that the sales demand will continue to be very strong and that our internal initiatives to improve the delivery and time lines for delivery of charging infrastructure will also dramatically improve in the year, further enabling growth in our deliveries.
Michael Shlisky
All right, well, thanks for that color. I appreciate. I will pass it along.
Dakota Semler
Thanks, Mike.
Operator
Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.
Jerry Revich
Hi, good afternoon. Good evening everyone.
Dakota Semler
Hi, Jerry. Good evening.
Jerry Revich
Dakota, I’m wondering if you could talk about the cost per truck. So, we’re running at about $200,000-some odd per truck today. To get to the gross profit positive targets that you spoke about, what’s the gross profit per truck need to get to? And what’s the path to get there? So, I appreciate the pricing part of the lever. Can we talk about the build materials part.
Dakota Semler
Yes, I’m happy to detail kind of the buckets that we have basically established of cost reduction in the areas we’re really focusing on. And then Kingsley, we can follow up and provide a little bit more detail in each of these areas. But first, as you mentioned, is price action and taking price action. We’ve already made some price increases earlier this year, and we’re going to continue to increase prices at the beginning of 2023 as well, which will have an impact on our ASPs and overall, our ASPs per quarter.
The second area that has been a significant area of focus for this entire year has been value analysis and value engineering in the platform that we build our step van on, our MDX platform, and reducing the overall direct materials cost. And there are several activities that are taking place on this front, including some of the battery changes, our high-voltage harness and high-voltage architecture changes as well as some modifications to cooling system, level to electrical and chassis components. And each of those areas, while they may be small contributors, that incremental compounding effect of each of those vehicle subsystems adds significant savings to our direct materials or our bill of materials costs.
And then the third area is really streamlining our operations. So, focusing in on one production facility in Tennessee. It’s going to keep manufacturing operations there, keep our quality operations there, improve our costs and reduce shipping and logistics on the freight side and ultimately centering on building an incredibly efficient operating machine outside of that — in that Tennessee location.
And that will reduce our overheads and ultimately, our allocated overheads that get factored into our gross margin calculation. The other thing we’ve done is we’ve taken other areas of the organization and the reduction in force that we implemented earlier this year were noncritical resources, some of which were allocated to that overhead, which will further improve the gross margins. So, that’s — those are the buckets, but I’ll let Kingsley touch a little bit on the detail and how we’ve removed some of those costs and how we continue to remove them in future quarters.
Kingsley Afemikhe
Sure, Jerry. I think the one thing to note is when you think about the cost of our trucks, there are a number of different buckets, as Dakota spoke about, sort of direct material cost, the battery costs, the chassis costs, and as we mentioned, we have these recent development efforts give us the confidence in reducing those direct costs. But there is also an element of fixed costs that we have from having the two facilities, one in Mexico and also having production in Tennessee. And just being through the level of freight between making the battery packs here in L.A., shipping them over to Tennessee and maybe having a chassis that’s manufactured in Mexico then moved to Tennessee for final PDI.
So, we’re seeing a very significant reduction in our overhead costs, our freight costs and other indirect costs as well. And when you look through — also for the direct material costs, a large amount of the reduction we’ll see is from a reduction in the battery cost and also in the chassis cost as well. So, Point A and then Point B, as you mentioned, also the pricing actions we’ve taken because we have a lot of detail about the individual customers and the times of delivery and we can look into the points in the future where the price we expect to realize in ASPs will be increased it gives us that confidence of being positive gross margin on a unit basis second half of next year.
Jerry Revich
And I just want to say on the cost part of the equation for a lot because the really interesting part about your initial vision for the business was to deliver EVs at a modest premium to diesel and step vans are $80,000 trucks. And so, our cost per truck is over $200,000 today. So, I’m just wondering, based on these actions, does this get us to $150,000 per truck, $125,000 per truck in costs, just so we can assess for how we’re doing relative to that value proposition that you folks have been focused on.
Dakota Semler
Yes, Jerry, it’s a great question. So, the way we started the business and what our focus has always been is on delivering a package to a customer that’s ultimately going to reduce their total cost of ownership. And we always have factored in the overall cost of acquisition of the vehicle, the cost of fueling that vehicle and the cost of maintenance and service. And one of the things that has happened is we start to see some of the fuel markets have gone up significantly in the past year or so, particularly in 2022, the cost of operating in diesel has also gone up considerably, particularly for fleets that are operating these trucks eight to 20 hours a day sitting there idling and utilizing more of that fuel.
So, we do have more flexibility to be able to price them competitively still as compared to a diesel vehicle and obtain a TCO savings within the first three to five years of the vehicle. And even though we are taking price action, we still see several customers that are passionate advocates of adopting electric vehicles because of the volatility that they’re seeing in the fuel and broader energy market.
Our goal has always been to price them as competitively as possible while still building a profitable and sustainable business. And so, we’re going to take and modify the business as much as possible to make sure we can achieve strong gross margins in the future and also deliver something that’s of value to our customers. So, the value engineering and the value analysis that we do internally and the continued cost reduction efforts isn’t going to stop when we are profitable on vehicles. It will continue to be introduced, and we’ll continue to initiate cost savings in various areas of the direct materials of the vehicles.
Kingsley Afemikhe
And Jerry, just to add on that, even with our forecasted price action next year, we still remain one of the most cost competitive zero-emission options on the road. And in fact, one of the few zero-emission options on the road. And we have been taking price actions throughout the year, and we’ve had minimal pushback from our customers and excitement from them to take our trucks.
Jerry Revich
Yes, sorry Dakota, I didn’t mean to cut you off. Please?
Dakota Semler
No, I think the price competitiveness point is a really important one that we remain still one of the most price competitive options in the market of folks that are actually shipping vehicles. And if you look at some of our peers in the industry, their pricing is a representative increase of 40%, 50% above where we price. So, it doesn’t nearly provide the TCO savings that customers are excited about making the transition in.
Jerry Revich
Appreciate it, thanks.
Operator
Those are all the questions that we have today. I will now turn the conference back over to Dakota for closing remarks.
Dakota Semler
Thank you, operator, and thank you, everybody, for joining us today to discuss our third quarter results. We are making tremendous progress towards our objective to build the fleet of the future with innovative solutions to produce new platforms that go farther, last longer and provide a more cost-effective platform for our customers. We look forward to keeping you updated on our progress, and we hope to see many of you at some of the upcoming conferences. Thank you, and have a great day.
Operator
Ladies and gentlemen, thank you very much for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful evening.
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