Greetings and welcome to Xos Inc.'s Fourth Quarter and Full Year 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.

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; Chief Financial Officer, Kingsley Afemikhe; and our Head of Engineering, Scott Zion. Ahead of this call, Xos issued its fourth quarter and full year 2022 earnings press release, 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 fourth quarter and full year 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 any forward-looking statements. With that, I'll turn it over to Dakota.

Thanks Christen and good afternoon to everyone joining our call today to discuss the strategic milestones and successes of 2022 and the key initiatives that better position Xos for significant growth in 2023 and going forward. On the call, our COO, Gio Sordoni, will offer insights into the steps we are taking to deliver gross margin positive units later this year. Next, our Head of Engineering, Scott Zion, will provide an update on the cost reduction and performance upgrades of the 2023 step van. Followed by CFO, Kingsley Afemikhe, who will share the company's fourth quarter financial performance and expectations for 2023. I will provide an overview of projected milestones over the upcoming year as well as an update on the commercial traction we are seeing with customers in the field and will detail our progress on the deployment of charging infrastructure. We have created a strategy that is based on three core tenants to build and sustain a high growth enterprise. These tenants are; first, grow demand and deliveries of our products; second, improve gross margins; and third, maintain healthy access to capital to ensure we are strongly positioned to fund and scale the business. I will begin by sharing an update on what we are seeing with customers as the demand for commercial electric vehicles continues to grow. There are three primary factors that drive demand for Xos products and solutions. Number one, fleet replacement levels; number two, strong interest from a broad set of customers; and number three, the supportive regulatory environments. First, we will discuss fleet replacement levels. Industry-wide supply chain constraints and delayed vehicle production over the past three years resulted in many fleets being unable to maintain their normal fleet replacement cycles. As a result, there is pent up demand for new vehicles as…

Thanks Dakota. Xos' operational focus remains on achieving our goal to begin shipping gross margin positive units near the end of the second quarter. Through a dedicated cost reduction task force at Xos, we've taken multiple steps over the past year position ourselves to achieve this target in areas such as manufacturing, supply chain management, and the procurement of parts, charging infrastructure, and our systems. As we mentioned during our third quarter call, we've streamlined our manufacturing operations and focused our production at the Byrdstown, Tennessee facility. As a result, we've been able to eliminate unnecessary freight costs and strengthen our inventory management practices. The Byrdstown facility also provides us with the manufacturing capacity to meet our customer needs and continue to grow our business. Our recently introduced Next-Generation 2023 Step van includes several design improvements that Scott will describe in greater detail shortly. These design changes and more focused production plan will have the potential to reduce material and direct labor costs by about $15,000 per step van, with more cost reductions planned in the future. Part of these savings will come from our diversified battery strategy that includes the lithium-ion phosphate cell chemistry. We continue to invest in our in-house developed battery management and control systems, which integrate the battery into the vehicle. Our in house battery and software teams help us react nimbly to a rapidly evolving battery market. I look forward to sharing more details over the coming quarters as we scale our platform and continue our cost saving efforts. As for the supply chain, we've continued to work in tandem with our engineers and vendors on cost reduction efforts and procurement and logistics as key parts of our product. Our growing scale and brand are helping us achieve better terms as we become stronger partners…

Thanks Gio. As mentioned earlier, we recently introduced our Next-Generation 2023 model year Step Van, which includes major cost optimization and technology upgrades to our latest generation vehicle; particularly proud of the design improvements for the 2023 Step Van that will deliver the important manufacturing cost reductions that GEO already mentioned. Savings will come mainly from design and sourcing improvements in our battery system, high-voltage distribution equipment, and simplified cable routing with additional optimizations to come as we continue to scale production. Beyond the efforts of the cost optimization team, we were also pleased to release this generation of step van band with greater connectivity, longer range, and a higher payload capacity. Compared to the prior generation, we expect the 2023 Step Van to provide customers with a higher performance vehicle, while also reducing the cost to manufacture and service it. Regarding connectivity, the 2023 Step Van features an enhanced telematics module and over-the-air software capabilities. The updated telematics module enables advanced remote diagnostics for customers with an Xosphere subscription and provides our engineering and service teams with better insight into the real-world performance of our vehicles. The addition of the over-the-year software updates will reduce the service visits and vehicle downtime experienced by our customers, while also reducing the cost of rolling out new features and important software updates. Going forward, our service team will be able to push software updates to all new step van remotely without requiring a visit to a service center. When it comes to range, the 2023 Step Van launched the two battery options, a 100-mile usable range specifications for customers operating shorter routes and looking for the most cost-efficient option and the 200-mile option for applications serving larger routes. The 200-mile step van is already expanding our customer mix to include more cash-in…

Thank you, Scott, and good afternoon everyone. As previously noted, we're making great strides in our path to becoming gross margin positive at the unit level, by the second quarter -- the end of the second quarter 2023, whilst also ensuring we meet the strong demand for our products and solutions. I'll now review our financial performance for the quarter and for the full year 2022. For the full year, revenue grew significantly to $36.4 million from $5 million in the prior year. Revenue was supported by both higher deliveries and average selling prices of our step vans. We increased the average selling price of our step van units by close to 20% over the fourth quarter, which reflects changes in our channel mix and the effects of the price actions we took last year. We expect this trend to continue as we add higher ASP units into our backlog have slowed them into deliveries. For 2022, our cost of goods sold was $66.4 million, up from $7.4 million in 2021. Gross margin during 2022 was a loss of $30 million compared to a loss of $2.4 million in 2021. Non-GAAP gross margin loss for the year was $16.4 million compared to $1.4 million in 2021. Looking at the fourth quarter specifically, our revenue was $8.6 million compared to $11 million in the quarter, which was in line with our expectations and reflects the seasonality we noted in our third quarter call due to the busy holiday season for the last-mile delivery sector. Our cost of goods sold during the quarter decreased to $16.5 million compared to $21.8 million in the previous quarter. Gross margin during the quarter was a loss of $8 million compared to a loss of $10.8 million in the third quarter. As a team, we continue…

Thanks Kingsley. While much has been accomplished, we continue to remain on track for long-term success as we continue to focus on helping commercial fleets seamlessly deploy EVs across their operations. As I mentioned earlier, our strong customer relationships, combined with supportive regulatory tailwinds, are expected to continue to drive growth for Xos. We positioned ourselves for continued sustainable growth in parallel with achieving our goal of becoming gross margin positive at a unit level by streamlining our manufacturing operations taking strategic pricing actions and launching our next-generation step van. As a company, we remain focused on our singular objective, electrifying commercial fleets. We believe our continued mission focus and dedication to fiscally responsible product development will translate to a commercial success. Fleets work with Xos because they see a critical differentiator. They understand we are dedicated to creating the most customer-oriented product on the market and that Xos is building a company to service their needs for the long-term. With that, we'd like to now open the line for questions. Operator?

Hello, it's Kingsley here, apologies. I wanted a note that I misspoke earlier on total use of cash, cash used in operating activities, plus CapEx was $24.6 million over the quarter. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Mike Shlisky of D.A. Davidson. Please go ahead.

Good afternoon and thanks for taking my question. Maybe just to start-off, maybe try to spare us the drama here in the first quarter, we're -- to end in two days. Anything as to how business went here in the first quarter deliveries revenues, operating expenses, et cetera? And if you can give us here, now that we're basically going to the quarter would be appreciated.

Yes. Certainly, Mike, we can absolutely give a little bit of context and thank you for joining the call today. As we've continued delivering vehicles through the quarter, we've continued to face infrastructure hurdles that have played some of our larger customers and that has pushed back some deliveries, but we still have made progress in the quarter in getting trucks out to customers. Some of which we've actually spoke about publicly like our delivery to Alsco as well as some additional deliveries that took place during the quarter. What we see for the year, as Kingsley alluded to, is the deliveries are going to be backend weighted. So, the first quarters -- first and second quarter should be less than the second half of the year, much like we saw in 2022. But ultimately continuing to make progress and as we shared with the backlog, continuing to see increasing growth in demand for the products.

Okay. Okay. And then maybe just a follow-up on that backlog comment you just made there Dakota. You added units during 2022 to the 150 at least that publicly announced here in the first part of 2023. Can you maybe tell us what number of backlogs you have -- what number of units are in the backlog today? And I guess do you already feel good about 2024, assuming that the supply chain cooperates, given what might be a backlog already?

Yes. So, I'll just clarify, the 800 units for -- that we added to the backlog for last year are exclusively step vans. We do have other products that our customers are demanding and wanting those products. We won't be delivering this year that we've continued to grow the backlog on those vehicles as well -- those products as well. When we talk about overall backlog, we don't guide to that metric, but we have seen it sales and demand for the products continue to grow really quarter-over-quarter and year-over-year and we don't anticipate that to slow down this year. The one thing I will say regarding the step van product is that you're seeing several customers responding to a lot of the regulations that are taking place that I spoke about like the Advanced Clean Fleet rule, some of these fleets have thousands of trucks just in California and so hitting those percentage thresholds is going to be critical, particularly when we're one of the few suppliers that's providing an electric step van that will meet the needs of those fleet operators in the state.

Great. And just to follow-up on that last point about the non-step van products. I guess firstly, tell us a little about how it's going with the MDH -- MDXT and HDXT products, is any of that in the sales outlook for 2023? And the same question is for the powertrain business, was that any part of the mix in the fourth quarter? And is there any part of the mix you have here in the 2023 outlook? That would be appreciated.

Yes. So, when we talk about the other products like MD and HDXT and powertrains, those are not factored into the backlog for 2023. We do have orders that are factored into our outlook for the full year revenue guidance that we've discussed previously in this call. And then as we're looking to back to Q4, I'll let Kingsley speak directly to those two business units.

Hey Mike, how are you? So, when you look at our forecast in units for this year, that number includes step vans, powertrains, and also a number of hubs. Primarily the numbers -- the vast majority of it is step vans. In addition, on the backlog number -- backlog additions that we had last year, that number is a net addition, so a net of cancellations and also net of deliveries over the year.

Just wanted to add one more point. As we've continued to focus on cost reduction of our platform, we also want to make sure that most of the vehicles we're delivering this year are gross margin positive and at a point where we're actually generating contribution margin for the business. And so when we look at even back at Q4, we were profitable on a direct material basis with those vehicles and we're continuing to see improvement there that we shared in some of the detail in the call and anticipate further improvement in the quarters to come.

Got it. Maybe one last one for me and maybe just taking a big step back, Dakota. Some of the comments that you made here in your prepared comments, kind of suggest that at this point, with certain customers, you're already beyond the testing phase. In other words, that you've gone through the two unit tests, you've then gone through second 10 units, 20 units test and now customers are coming in saying you are an official supplier of our company. I haven't heard anywhere else in the EV truck space. I don't think it's off the top of my head ever. So, can you comment as to are customers now calling you just a supplier and not just a test program or a fund those experiment at this point? And what number of customers are considering you that and you get a feel for how many might convert to that in 2023?

Yes, absolutely. Mike, you hit the nail on the head and that commercial fleets and large national fleets have a very risk-diverse process to procuring equipment and that starts with a small demonstration, scales up to a slightly larger one in the low tens of units and then scales to hundreds of units. I think Loomis is one of the examples that we can publicly talk about that's done exactly that over the past few years. But we have several other customers that really are coming into that phase of the relationship where they're planning to order into the low hundreds of units and following on and they're either their first or second order. We don't guide to the specific number of customers that are there, but many of them are recognizable Fortune businesses that have sophisticated fleet operations with thousands of vehicles in them. So, I would say that that's one of our proof points as we've talked about creating value for customers. We need to ultimately deliver on a TCO promise, deliver on a reliability promise, which is why they test the vehicles in small scale to start and then ultimately, show them that these unit economics scale across their fleet operations and we're doing it every day.

Okay. That's great color. I'll pass along. Thank you.

Thanks Mike.

Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.

Hi. This is Adam Bubes on for Jerry today.

Hi there Adam.

Just wondering -- hey. When you talk about gross profit on a unit-level turning positive, can you clarify, does that mean you expect gross profit for the total company to be positive in mid-2023 or are you maybe excluding overhead in that number? And then just wondering how gross profitability could be tracking as we exit the year?

Yes, absolutely. I can take that. Let me talk about on a unit basis, what we're including there is the direct material costs, so, that's the cost of the chassis, the cost of the bodies, and also the battery systems we have on there, also the direct labor cost and all the indirect costs as well that are linked to the units. So, freight, taxes, rent, depreciation, all that you will expect. What you basically flushing out the inventory through. Over and above that, when you about a unit-level, there are also a number of other accounting adjustments, often there are reserves for particular reasons, including an NRV reserve or an E&O reserve, which you then see recognized on a GAAP basis in your financial statements. And so what we've guided to is being positive on a gross on a unit basis by the end of the second quarter inclusive of those indirect costs that I mentioned. Following up on that, just talking a little bit about how we were trending in Q4. As Dakota mentioned, when you look at pure direct material costs as well as direct labor costs, we were about breakeven on the units -- the step van units we delivered in Q4. And the steps that we've mentioned today, there's $15,000 that we've identified, those are really the first step in a number of other improvements in the direct material costs and the labor cost manufacturing time that we expect to bake-in over the course of 2023 and into 2024. And so where we think about it is achieving gross margin positive is a station on the journey to being cash flow positive, which is our focus as a company in the coming years.

Great. Thanks. That's helpful. And can we shift to cash flow for a second? So, wondering how you're thinking about cash bearing through 2023 in your capital position today?

Yes. No, absolutely. When I look at -- when we look at our operations this year, there are really three lags, as I mentioned, there's costs and the direct material costs, the overhead costs, and also with the pricing action that we've taken. We expect overall as we go towards the journey being gross margin positive as well as being really, really capital disciplined on our operating expenditures, that our operating expenditures will come down significantly this year. We feel pleased that we have ample liquidity to fund operations in 2023 into 2024 and we're scaling as we've guided to.

Thanks so much.

Thanks Adam.

The next question comes from Michael Ward of Benchmark. Please go ahead.

Thanks. Thank you. Good afternoon everyone. I wonder if I could just dig into the production numbers a little bit more. I think you entered 2022 with a significant backlog. And one thing I'm curious about is, is the current backlog on the step vans shifted entirely to the next-generation to the 2023 model?

Yes, Mike. Good afternoon. That's a great question. The entire backlog has not shifted to that model, but as we've started to move customers over to the new model, they've been increasingly interested in it. So, I would say that when we go to those customers, we're giving them a vehicle that's a similar ASP with better performance and better maintenance performance. And so when you go to a customer, offering them something for the same price, but ultimately, going to save them more money and better actual real-world driving performance and range, most of them are not turning it down.

Okay.

And Mike, this is -- sorry to interrupt here. This is Gio. The only thing I'd add to that is with this new model, the 2023 version of the step van, we're also offering a 200-mile range version of the van and that's gotten some customers really excited. We diversified the customer mix away from just parcel delivery folks who are typically only looking for 100 miles. The folks in other industries like uniform services that might be interested in heavier duty step van or longer ranges that might require more kilowatt-hours on board, and that's something this new version of step van enables us to do and that's something we're really excited about.

Thank you. And as you look at the production ramp, you had a sharp fall off there in the fourth quarter. And was that an additional supply issue? Or I think you mentioned in the release that it had somewhat to do with switching over production 2023 version? And so is that the -- are those the reasons -- maybe it's both as we accelerate production in 2023 and it sounds like you're looking at a similar level of deliveries in Q1 and Q2 that we saw in the fourth quarter. What are the things limiting that delivery? Because it sounds like you're going to have a substantial backlog as you exit 2023 and -- so there's always a risk that customers are going to pull away. So, I'm just wondering what you're going to do to accelerate productions, accelerate deliveries?

Yes, happy to address that, Mike. So, I would say one thing that is common across the entire last-mile logistics industry with Q4 is that it is the peak season in the year. So, some of our customers like FedEx Ground, they'll go for moving 10 million packages the week before Thanksgiving to 20 million packages the following week. And so with a such an uptick in their operations, it becomes difficult to really do anything else in the business like onboarding new vehicles, training drivers on those new vehicles, they really are focused on getting packages delivered to customers. So, when we look at that, really Q4 is the first six to seven weeks or six to eight weeks of the quarter where we can make deliveries to customers. After that, it becomes incredibly busy to try and get vehicles delivered to those customers. Along with all of the holiday days, which folks are either traveling or out of the office. So, it makes it difficult to get the same number of vehicles delivered. So, that's one seasonal factor that always hits during Q4. And by having a diverse -- a more diverse customer mix, we actually are able to mitigate that. Some customers like uniform rental or mobile fleet maintenance company, they aren't going to see that same seasonal peak in Q4. And so we try to slot body builds and vehicle builds for those customers into that that vacancy. It really gives us a -- it will give us a little bit of a smoother ramp, but we do anticipate that the seasonal trend will always continue. The second factor I'd talk about is charging infrastructure. The same reason it's difficult to deliver vehicles in Q4, we also see similar obstacles in getting charging infrastructure delivered. So, offices are shut down for permit approvals, for utility interconnect studies, and ultimately, for construction. People are just working less through that quarter and so when we talk about commissioning and turning on charging infrastructure for our customers, we generally see less there. So, that was one of the obstacles we face and there's a little bit of a lag time that goes into Q1 on that seasonal impact. So, that's where we see it in Q1. Ultimately, the backlog was -- is really growing through those quarters. We're continuing to make sales and seeing sales growth through Q4 and Q1, but we aren't seeing many cancellations. Folks still need to transition to zero emissions vehicles because of the regulatory environment and also they're seeing the incentives of operating a zero emission fleet and how it's reducing their overall maintenance costs and their overall energy costs.

Okay. So, some of that are the industry growing pains, because I assume that the charging of structures in place next year or the year after that that won't be as big an issue?

Absolutely. One of the things we talk about is infrastructure is an issue that we're readily solving today and introducing solutions like the hub. But we believe this problem will continue to expand into the next five and even 10 years. The reason being fleets never convert 100% of their fleet today and so they're not going to build up 100% of that charging infrastructure today. They're going to build it up incrementally year-over-year. We always expect there to be some delay, but the more flexible, adaptable mobile solutions like the hub we can offer, the more we'll be able to smooth that gap and really get trucks delivered per their original plans.

Thank you. And Kingsley, you mentioned in the release that you had a range of options for raising capital. Can you discuss any of those?

Sure, absolutely. If you look on our business as we're scaling, we're investing in operations and also in assets like our inventory and our receivables. We are in a range of discussions with debt providers underpinned by those assets. We want to make sure that we get the right partner for us as we grow and we scale. Over and above that, we still have our equity line of purchase agreements with Yorkville, which is largely untapped. It has an access to capital that we can access. So, the capital is there and operationally, we're really, really focused on growing deliveries, getting positive gross margin, and also making sure we are stewards of the capital to grow.

Mike, the only thing I would add to that is that we have several customers who are large strategic customers. And in many cases, when we take on new product specifications or configurations that we might not already be building, we generally ask those customers to share in some of the expense and bringing those customers on board. And so that also helps. It's not nearly the contribution that any kind of asset-backed financing or an equity line will enable us to tap into. But it certainly does help accelerate those commercial conversations and offset some of the initial engineering costs that goes into those new platforms.

Thank you very much.

The next question comes from Donovan Schafer of Northland Capital Markets. Please go ahead.

Hey guys, thanks for taking the questions and I apologize if there's any background noise. We've got some renovations going on right now, either hammering or something else. But -- okay, so for my first question, I want to ask with the new step van model, I saw the mentions of having the centralized liquid cooling system. And I'm just curious, is this a reversal of the kind of prior approach where it was like, -- well, I'm kind of assuming the cooling you're talking about here's for the battery, but maybe I'm wrong on that. So, maybe, there was always liquid cooling for the engine or something like that. So, is it kind of a reversal from -- on the battery side from air to liquid, I guess, just as a starting point there?

Yes. Hi, this is Scott. We are transitioning to liquid cooled batteries. Historically, all of our step vans bands did have liquid cooling for the power electronics that are on the vehicle. So, we basically have three separate cooling loops. Now, we have -- our electronic cooling loop, we also have the battery heating and cooling loop, and then the heating and cooling loop of the cabin. So, that is a big transition from our previous models.

Okay. And then I think Gio made a comment about now you have the 200-mile range and so -- because as I understand it part of the doing air cooling on the battery before was realizing the duty cycle of a parcel delivery vehicle, UPS or FedEx Ground, was quite light, you didn't have aggressive acceleration and deceleration and other things like that, which is what made it kind of appropriate to not do liquid cooling. So, I guess my question is, is it about the kind of change in duty cycle that's leading to liquid cooling on the batteries? Or is there anything you were seeing with the older generation of step vans or maybe you weren't getting as much life and performance out of them using their cooling on those prior models?

Yes. Happy to provide a bit more context, Donovan. So, on the air cooling modules, they actually did really service the use case of parcel delivery quite well and we continue to deliver vehicles as well as powertrain systems with those batteries and that forced air cooling design. One of the things that our design did in order to achieve the air cooling performance was we actually spaced out the cells and that gave us a lower volume metric performance relative to some of the liquid-cooled options. So, what this enables us to do is get a higher gravimetric -- sorry, volumetric performance to enable packaging more vehicle -- more battery onto the vehicle, improve the overall gravimetric performance because of the way we mount the system now, and ultimately deliver on a platform that now has a broader range of use cases. But if somebody does want to run the vehicle on a dual shift, they can now with the liquid cooling performance that the system offers.

Okay, great. Thanks. That's helpful. And then I was looking into the New Jersey VIP Program on their website. And it was interesting to see that you -- I think it must be part of the paperwork and everything that's involved in being included in that program where you actually have MSRPs for the vehicles up on the website. That's not something included in the catalog on like the California HVIP Program. So, I just kind of want to double check here, am I going to leave myself astray if I take the MSRPs from the New Jersey ZIP Program from their website and apply that more broadly? Or is there something -- are there -- does MSRP kind of vary by state and maybe there's a markup there where you're kind of capturing half of whatever the incentive is? Just curious if there's any -- if you can give me a clarification there?

Absolutely. So, in most of these incentive programs, they want to have a standard price level so that folks aren't taking advantage of the program. But as we think about ASPs on the vehicle, there are multiple different factors not just the acquisition cost of the vehicle, but there are delivery fees, tax fees, servicing fees, that all go into the end cost of the vehicle. And there are also factors in terms of our large customers where we may offer price competitive discounts that ultimately get them to a more competitive price level. I would say when the best information to rely on when it comes to ASPs is the ASP guidance that we provide quarterly or the actual reporting. So, if you look back at Q4, you saw ASP performance went up significantly because of the price action we took. And I think that's a good indicator along with the guidance we provided for the full year for 2023 as to where the vehicles will land and where they end up getting net price to a customer.

Okay. That's helpful. And then with the production facility in Tennessee and kind of doing the new version of the step van and then also talking about maybe doing some more Xos hub trailers, is that something where you do -- like you do it in batches and you kind of overhaul the line? I mean, I can imagine something like even going from the old version to the new version for the step van, having the structural changes, so that everything's in between the chassis rails, that may involve moving some equipment around or training the laborers to say, okay, we did 20 vehicles this way, now we're going to switch over and do 20 this other way, is that kind of how it's done? Or do you run lines simultaneously? And then is there like switching costs or does that impact kind of economics and maybe leads to a few days of reduced production as you're switching things over? Just kind of conceptually trying to think through how you manage the different product lines?

Yes. This is Gio here. As far as the step van goes, the different options in the step van, the 100-mile and the 200-mile versions are really similar platforms. The 200-mile just has some extra batteries on board, so those can actually run on the same line. We do try to batch build as much we can. Then in a given week, we try to build all of the same spec vehicle, but having to switch throughout the week isn't the biggest cost that's something that we can handle. As far as the hub goes, that's built separately. It's quite a different design and that built separately, but also in Tennessee.

Okay. And then if I could just get one last question and just because people -- there's the finance turmoil and all that stuff and people are trying to understand there's the tightening of the credit market and how that would flow through to anything. So, I'm just curious with selling step vans, your primary products and your customer base and everything, what kind of financing is involved in these step van purchases? I mean, I imagine most of them aren't just sitting on large checking account balances or something? And I assume there's a certain amount of financing to purchase step vans? And then do those get turned into commercial vehicle asset-backed securitizations or something -- I mean like who are kind of the main lenders help facilitate that? And any changes, have we seen a flow through in interest rates in that space?

Yes. And a really, really thoughtful question, Donovan. So, I'll break it into two different ways. The first way is financing is offered to our customers. As we announced a couple of years ago, we work with amongst others DLL which is one of the largest asset backed financers, part [ph] of Rabobank, to offer financing to our customers. We also work with a range of other providers as well. We have seen a slight increase in the rates charged. But for most of our customers who are acquiring the fleets with financing, the structured financing, they're acquiring an asset that's a very critical part of their fleet, right? It's a very critical part of their transportation of their assets. As evidenced, there's a couple of percent of increases there in rates that are going to execute the purchase. In many cases, we get a slight financing fee on that. We talked about it in our backlog went public. And the separate to that, what I was talking about is the potential to finance the assets in our balance sheet, which include kind of raw materials with some components of finished goods. We want to make sure that we get the right partner there, right? So, there are a number of different funds using non-banking institutions as well as some bank institutions that play in that space. And we have been in discussions there to find partners that work best for us. Ultimately, when you look at 2023, a couple of things that are really, really clear. First of all, so we expect inventory levels to fall. Definitely relative to revenue over the next couple of quarters, we're seeing supply chain challenges ease and so that was a very significant use of capital for us in 2022 and that's going to reduce a lot this year. In addition, when you look at operating expenditure as well, we are being laser-focused on cost there and we've already guided in the quarter, we expect these levels to come down as well.

Okay.

Donovan, I would just add that as we talk about customer financing, one thing you have to consider is the diversifying mix of customers that we're seeing this year. When we talk about large national fleets, many of them are businesses that utilize their fleet as a delivery service for their own products with their manufacturing. Many of them multi-multi-billion dollar companies have access to capital either through their own lines of credit or their own credit facilities that are well below the equipment lines that are publicly available to smaller and medium sized fleets. And many of them have structures or facilities in place with large FMCs or fleet management companies or banks that specifically focus on equipment financing such as Wells Fargo. And so those customers rarely have access to credit issues where they can't already access credit that's either below market. And in many cases, some of these customers will even finance it off their own balance sheet. So, it's not an issue as our customers continue to diversify to those larger national accounts.

Okay. Thank you. That's very helpful. I'll take the rest of my questions offline.

Thank you.

Those are all the questions that we have today. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.