Hyliion Holdings Corp. (NYSE:HYLN) Q1 2023 Earnings Call Transcript May 10, 2023

Hyliion Holdings Corp. beats earnings expectations. Reported EPS is $-0.16, expectations were $-0.18.

Operator: Good day and thank you for standing by. Welcome to the Hyliion Holdings’ First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. I would now like to turn the conference call over to Kellen Ferris, Hyliion’s Director of Investor Relations. Kellen, please go ahead.

Kellen Ferris: Thank you, and good morning, everyone. Welcome to Hyliion Holdings’ first quarter earnings conference call. On the call today are Thomas Healy, our Chief Executive Officer; and Jon Panzer, our Chief Financial Officer. A slide presentation accompanies this conference call and is available on Hyliion’s Investor Relations website at investors.hyliion.com. Please note that during today’s call, we will make certain forward-looking statements regarding the Company’s business outlook. Forward-looking statements are predictions, projections and other statements about anticipated events that are based on current expectations and assumptions, and as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from the forward-looking statements on this call.

For more information about factors that may cause the Company’s results to differ materially from such forward-looking statements, please refer to our earnings press release as well as to our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. You are cautioned not to put undue reliance on forward-looking statements. And we undertake no duty to update this information unless required by applicable law. Now, I will turn the call over to Thomas.

Thomas Healy: Thank you for joining us today for our first quarter 2023 earnings call, as we have a lot of important information to share with you this morning, We will be providing updates on the Advanced Clean Transportation EXPO in Anaheim, California that we participated in last week, News of the issuance of the final Advanced Clean Fleet rule known as ACF by CARB two weeks ago, and some strategic shifts that we are making in our Hypertruck ERX commercialization plans in order to best maintain our strong cash position. I’d first like to start off with an update on our Hypertruck ERX powertrain development and commercialization work. For those of you who are new to the story, the Hypertruck ERX system is a fully electric powertrain for Class 8 semi-trucks that includes a natural gas fuel range extender to recharge the batteries as needed.

When fueled with renewable natural gas, the Hypertruck ERX powertrain offers commercial vehicle owners a net carbon negative capable alternative to battery-only truck, which have limited range and rely on expensive recharging systems that are not yet widely available. I’m pleased to report once again that, we remain on schedule with plans to begin commercialization in the second half of this year. There are no new milestones to check off for the first quarter, but the product validation phase remains on-track as we will begin extended fleet trials later in the second quarter. We are happy to inform that we submitted the required material to CARB in order to obtain our dual executive order with Cummins to certify the powertrain. We expect to complete certification from CARB, the EPA and the National Highway Safety Administration sometime in the third quarter.

We have previously shared that we’d start production of the Hypertruck ERX system in late 2023. But with the progress just mentioned, we now plan to begin production assembly of trucks equipped with the Hypertruck ERX powertrain in the third quarter, ahead of schedule. We have made some other great strides to assist with pulling in the start of production timing. The team has been working diligently on building out our next batch of C sample trucks, which we expect will be the final version of the powertrain design prior to starting production. These trucks are going through continued validation testing and they will be deployed an extended fleet trial starting this quarter. We have also recently obtained ISO 14001, which is an environmental certification as well as ISO 9001, which is a quality process certification.

These ISO standards are expected of and common across the conventional suppliers and OEMs in the space, but are often not obtained by early stage companies or new market entrants like Hyliion. This achievement continues to build confidence and operational excellence as we move into production. Next, I’d like to provide an update on our Hypertruck ERX system commercialization plans and some strategic shifts, we are undertaking that I mentioned earlier. As I’m sure everyone on this call is well aware, the past quarter has been exceptionally challenging time for electrification and technology companies in the public markets. Unfortunately, Hyliion stock has similarly seen a recent decline and it’s prompted us to relook at what is the best strategic path forward for the Company.

One very clear advantage that Hyliion has is our balance sheet with nearly $400 million in cash. What is also clear is that, the ability to raise additional capital in the stock market has become severely limited without incurring excessive dilution for existing shareholders. Consequently, we need to make sure that, we utilize the cash we have in a focused manner and as wisely as possible. During our last earnings call in March, we shared that we expected to incur gross margin losses on the sale of the initial trucks that are part of our inaugural Founders Program due to startup inefficiencies that we expect to encounter as we go through assembly and delivery of the first powertrain systems. We also shared that we expect to see an increased use of cash this year, compared to 2022, as we purchased production powertrain components for the Founders trucks and for additional trucks that we plan to begin building in the first half of 2024 following Founders deliveries.

In total, full year operating expenses, capital spending, gross losses on sales of powertrain systems and working capital increases, we are expected to consume up to $200 million in cash in 2023, or said differently, about half of our current capital position. If we look back in time, electrification startup companies were encouraged and rewarded by investors for rapidly growing market share and revenue. However, today, the market is rewarding the quicker path to profitability and conservation of cash driven by greater investor skepticism for unprofitable business models. In light of recent capital markets developments and experiences of peer companies, we are taking steps now to better align with today’s market expectations. We will continue to scale and grow the Company, but we will do so with a keen eye for opportunities to reduce the rate of cash burn.

The first area we are going to address is the losses we were anticipating on initial founders deliveries, which are still subject to finalization and definitive terms. Our initial plan was to ship all 210 Founders trucks by the end of Q1 of 2024. However, as we assess the costs we incur by executing this plan, we believe there are more capital efficient ways to achieve similar customer demand in the long-term while consuming less cash in the short-term. As we began procuring the powertrain and truck components, the costs have come in higher than we initially anticipated due to suppliers passing through their surcharges onto us. Thus, we need to pass these price increases along to our customers as well. We are working with the Founders fleet on restructuring initial truck orders as well as simplifying the agreements.

We will see changes to the fleets participating in the program as we go through this process. However, we are confident that we can pull forward other fleets as replacements, if needed. One other objective is to place the initial units with a greater number of customers, as this will allow more fleets to test and validate our powertrain and give them the confidence to place more orders in the near future. We are also planning to scale the ramp up of production volume at a slower pace than we initially expressed. This will allow more time to cure components, which will reduce surcharges we are now experiencing and will give the engineering team an opportunity to implement some cost saving measures in the system design. Our new goal is to begin installing production powertrain systems into trucks in the third quarter and to complete and sell 30 trucks before the end of the year.

We will then continue to evaluate our future truck assembly and delivery plan for 2024, based on modified and simplified Founders agreements. We are also pulling back on our facility renovation that we were planning in connection with a fast buildup of our Founders program trucks. We also anticipate adjusting our rate of hiring and shifting more quickly to being a powertrain provider to the OEMs as opposed to tying up working capital assembling and selling complete trucks. All of these actions will conserve cash, while allowing us to continue our path to commercialization and profitability. Shifting now to an exciting update from the ACT Expo this past week, ACT is the largest trade show that focuses on new emission reducing technology for the transportation space.

In addition to showcasing our Hypertruck ERX powertrain with over 100 ride and drive events, we also unveiled the Hypertruck KARNO solution. We were very pleased with the level of interest and excitement we received from OEMs, partners and fleet customers. With respect to the KARNO solution, it was the first time we publicly showcased the generator and provided an in-depth opportunity to show how the technology works. In our booth, we had a 200 kilowatt size generator, mounted onto a truck equipped with our Hypertruck electric powertrain system. I’d like to share with you some of the highlights that we discussed about KARNO. First, it is a fuel agnostic generator that is expected to be able to operate on over 20 different fuels. The vehicle we had in the booth is equipped to run on both hydrogen and natural gas.

The generator brings forward significant efficiency improvements while also reducing emissions and will emit no carbon dioxide when fueled by hydrogen. It is also expected to have almost no routine maintenance as there is only a single moving part per shaft and no oil or other lubricants in the system. Lastly, the generator operates at about 65 decibels, which is quieter than an average conversation between two people. During our press conference at the show, we also highlighted how we will expand our business focus to also offer the KARNO generator solution for stationary power applications. With its high efficiency, low emissions, low noise, and minimal maintenance requirements, we see this as a strong solution for powering EV Chargers, buildings, hotels, data centers, and many other applications that could benefit from a scalable micro-grid.

We expect to be able to produce electricity at a cost of around $0.07 per kilowatt hour, which is far lower than the cost of grid electricity in the U.S., which ranges from $0.11 to $0.22. We also expect to host, ride and drive events with our Hypertro KARNO system later this year and begin to establish stationary charging demonstrations in 2024. Shifting to an update on our Hypertruck fuel-cell demonstration truck, the development is well underway in partnership with Hyliion and I am pleased to share that we are still on track to having the first vehicle complete by end of year. At the ACT Expo, Hyliion unveiled their new 200 kilowatt fuel-cell, which is the solution that we are integrating into this demo vehicle. I have just one further update to share, which is around CARB vehicle credits.

We’ve previously showcased that vehicles with our Hypertruck ERX system will qualify for 75% of the ZEV credits that OEMs need under the ACT ruling starting in 2024. About two weeks ago, CARB passed their latest clean truck rule called Advanced Clean Fleet or ACF, which is a direct mandate on fleets to begin adopting trucks with electrified powertrains. I am very pleased to share that vehicles with our Hypertruck ERX system will qualify for 100% of the ZEV credit under this ruling the same as a pure battery, electric or fuel-cell truck. Passage of ACF will likely produce strong tailwinds for us as fleets look to comply with this new mandate. I will now turn the call over to Jon so that he can share more on our financial and strategic update.

Jon Panzer: Thank you, Thomas, and good morning everyone. Turning to our financial results for the first quarter, we reported revenue of $310,000 from hybrid sales including a full truck equipped with the hybrid system compared to $340,000 of revenue in the first quarter of a year ago. Operating expenses totaled $31.9 million for the quarter, up from $25.6 million in the first quarter last year. The increase in spending is due to growth in both R&D and SG&A expenses over last year. In total, Hyliion reported a net loss of $28.8 million for the first quarter, which is up modestly from the $27.1 million loss the Company reported a year ago as lower cost of sales and higher interest income this year offset higher operating expenses.

Looking sequentially first quarter operating expenses and net loss compared to the fourth quarter of 2022 were up only slightly 300,000 and 600,000 respectively, as spending is beginning to level off as we approach the start of Hypertruck ERX system commercialization. We ended the quarter with total cash short-term and long-term investments of $385 million compared to $422 million at the end of 2022. We spent $37 million in the quarter compared to $30 million in the first quarter of 2022 and $33 million in the last quarter of 2022. As Thomas mentioned, we’re taking actions that will help reduce cash burn and expect that these actions will significantly reduce operating expenses, capital spending and working capital growth. Previously, we guided to total operating expenses in 2023 of $130 million to $140 million and cash consumption of less than $200 million.

We now expect operating expenses to come in on the low end of that range. While we expect expenses to be reduced from the actions that Thomas noted, some of the savings will be offset by the ongoing expensing of production truck components that have been or will be received until we have completed all Hypertruck ERX research and development work. To add some additional clarity on this point, all truck components that we acquire prior to the start of powertrain commercialization are expensed to R&D.0020Even if those components will be used in protection powertrains that are later sold. We have already started to receive some production components and will receive more in the coming months. We now expect to complete R&D work later this quarter or early in the third quarter.

The implication is that operating expenses this year will be somewhat elevated due to receiving and expensing some production components ahead of the start of commercialization. Note also that these higher expenses will be completely offset by lower cost of goods sold as we sell trucks later this year and into 2024. We don’t know the exact impact on operating expenses from this expensing of production components and it could be higher than we’re currently forecasting. We’ll provide further guidance at the end of the second quarter. Regarding cash as Thomas noted, we ended the first quarter with $385 million of total capital including cash and short and long-term investments. Because of the strategic actions we’re taking, we now expect our cash spending to be approximately $150 million this year, versus our previous guidance of $200 million.

Factors that could drive cash spending higher or lower include the timing of truck sales in 2023 and 2024 as well as powertrain component purchases this year for deliveries in 2024. Actions that we are taking now to reduce cash burn will provide some relief from concerns about the weak stock market. Based on our current projections we have no plans or need to raise additional capital in 2023 and into 2024. Finally, as a reminder, we are holding an investor day at our Austin headquarters on June 27 that we hope you can attend. Attendees will be able to participate in ride and drive events in both are Hypertruck ERX and Hypertruck KARNO that we showcased at the ACT Expo. We will also be exhibiting KARNO generator components and presentations from members of our Hyliion leadership team.

Registration information for both the in-person event and webcast is available on our website. With that, I’ll turn it back over to Thomas.

Thomas Healy: Thanks, Jon. At the ACT Expo, I was given the opportunity to give one of their keynote presentations where I shared five staggering stats around electrification. This presentation is on our YouTube channel, but I’ll take a second and share the stats here with you as well. Step one was that the battery packs on a BEV truck will need to be 330% larger than you’d expect when you take into account things like battery degradation, charge limits, driver behavior, and the weight of the vehicle. The second step is the power consumption of plugging in 10 semi trucks is equivalent to the same power draw as a Super Bowl stadium during game time. The third step is that it’s expected that the cost to deploy charging infrastructure will be about one and a half times the upfront costs of the vehicles themselves.

As an example, if you spend 10 million on trucks then plan to spend about 15 million on charging infrastructure. The fourth step is that over the past 50 years, we’ve only seen a 3% increase in the amount of grid electricity coming from renewables such as wind, solar and hydro. And lastly, step five is that it can take upwards of 10 years from start to finish to create a new natural gas power plant. As we stand here today, we are decommissioning power plants in the U.S. in slightly reducing our yearly national electricity production. I shared all the steps in an effort to showcase that BEV solutions are already behind the eight ball in setting up the infrastructure needed for charging. This also ties into our plans to utilize the KARNO generator as a power source for stationary applications.

Or stated another way, there is a tremendous opportunity for Hyliion Technology in the future of electrification. To close out, we are excited to start the production stage of our Hypertruck ERX system next quarter, we are taking important steps to reduce spending and extend the runway that our strong balance sheet provides us today. And finally, we look forward to seeing many of you at our investor conference in Austin on June 27th. With that, we will now open the call up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Bill Peterson with JPMorgan. Please go ahead.

Operator: Our next question will come from the line of Andres Sheppard with Cantor Fitzgerald. Please go ahead.

Operator: Your next question comes from the line of Steven Fisher with UBS. Please go ahead.

Operator: Your next question comes from the line of Luke Horton with Northland Securities. Please go ahead.

Operator: And apologies, Bill Peterson’s line was cut off. We’ll now take your follow-up question. Please go ahead.

Operator: Our next question will come from the line of Mark Delaney with Goldman Sachs. Please go ahead.

Operator: [Operator Instructions] Your next question will come from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.

Operator: Your next question will come from the line of Noel Parks with Tuohy Brothers Investment Research. Please go ahead.

Operator: We have no further questions at this time. I’ll turn the call back over to Thomas for closing remarks.

Thomas Healy: Well, thank you everyone for joining our Q1 2023 earnings call. Lot of exciting developments, I think ACT Expo was a great showing for the organization, both with the Hypertruck ERX and the KARNO. So appreciate you joining the call and we look forward to chatting again next quarter.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.