Hyliion Holdings Corp. (HYLN) Q4 2020 Earnings Report, Transcript and Summary

Good morning. My name is Mike, and I will be your conference operator today. Thank you for standing by, and welcome to the Hyliion Holdings Fourth Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would like to hand the conference over to your speaker today, Greg Standley, Vice President of Financial Planning & Analysis. Thank you. Please go ahead.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings fourth quarter and full year 2020 earnings conference call. With me today is Thomas Healy, our Chief Executive Officer; and Sherri Baker, our Chief Financial Officer. During today's call, we will make certain forward-looking statements regarding our future business expectations, which involve risks and uncertainties. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions and as a result, are subject to risks and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements on this call. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to the earnings press release we issued today as well as 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. We undertake no duty to update this information unless required by law. With that, I now hand the call over to Thomas Healy.

Good morning, everyone, and welcome to Hyliion’s fourth quarter and full year 2020 earnings call. During the quarter, we continue to make significant steps forward to advance our mission of bringing electrified powertrain solutions to the commercial vehicle space. I will start off today's call with an update on our key product in commercialization milestones and partnerships that we have developing, touch on some of the key executive hires in this quarter and close with a discussion on our go-forward strategy. First, I'd like to acknowledge our outstanding team at Hyliion and thank our employees for all the progress that we've made while dealing with these challenges of the pandemic. 2020 brought unforeseeable disruption to the world, but I'm grateful for our team's dedication as we work to revolutionizing the powertrain market. Turning to Slide 4, I would like to begin with our hybrid powertrain solution and the progress we have made in the fourth quarter. As a reminder, our hybrid powertrain can be installed on new trucks at the OEM or be retrofitted onto existing vehicles. Over the long-term, we expect installations to be done at the OEM or mod center with new trucks coming equipped with our systems from the outset. And we are making headway in developing important relationships to further our commercialization strategy. Fleet utilization of our hybrid solution in the fourth quarter was strong and I'm pleased to report that we achieved our goal of installing 20 hybrid units on trucks in 2020, with seven of those units installed in the fourth quarter. We continue to target large fleets that are innovative thought leaders and look for us to help them enter the world of electrification. Response to our hybrid solution has been extremely encouraging. And right now, we are focused on letting fleets experience our game-changing product and making sure we are partnering with early adopters that are strong candidates for conversions into larger customers over time. Turning to Slide 5, as we continue to evolve our hybrid offering, we recently announced our next-generation battery module. This battery includes longer life, faster charging rates and improve safety. Our battery pack integrates industry leading LTO cells from Toshiba, which are known for their high quality and safety characteristics. As for longer life, testing has shown that we expect to achieve up to five times as much cycle life compared to other conventional EV batteries, which may allow the batteries to outlive the life of the truck in some instances. With regards to charging rate, our battery is able to recharge in only eight minutes, an unprecedented number compared to most other batteries, which will allow us to rethink asset utilization and uptime. The development of this next-generation battery module represents key milestones in the hybrid commercialization process, further strengthening our overall technology platform as we innovate future solutions. While our initial focus for this battery is internal use. We anticipate that there are other marketable use cases for this battery technology, particularly in applications that don't have a lot of time to recharge. As an example of this, think about yard tractor, their goal is to utilize this asset 24/7, with our battery, you can recharge that unit while the operator is getting a cup of coffee. One additional advantage to our battery system is around utilizing smaller battery packs, which is important right now when the industry is being faced with an anticipated shortage of battery cells. Hyliion’s focus is to utilize small battery packs that consistently get recharged as the vehicle is in operation as opposed to having a large battery pack that gets recharged once a day and carries all that energy around in the battery. By leveraging this strategy and taking advantage of the battery characteristics mentioned above, our Hypertruck ERX solution utilizes a battery that has approximately 120th the size of a conventional EV truck battery, allowing us to deploy many more units on the road while utilizing less batteries. Overall, I’m incredibly excited about our battery technology and what it can bring to the market. Now, let’s turn to Slide 6. On our last earnings call, we expressed that we’d be making some key additions to the Hyliion leadership team over this past quarter and I am pleased to share that we have accomplished this with much success. I’m excited to a further expanded the Hyliion executive team with the hiring of Jose Oxholm, our Vice President, General Counsel and Chief Compliance Officer; Bobby Cherian as Senior Vice President of Sales and Supply Chain; and Matt Loos as Senior Vice President of Marketing. And lastly, I’m thrilled to introduce Sherri Baker as Chief Financial Officer who joins me today on our call. Each of these executives brings decades of industry experience and will be critical to the success and growth of our commercialization strategy. I’d like to now transition to where we are in the commercialization of our core product lines. Let’s start with the hybrid solution on Slide 8. We are in a phase today where we are deploying low volumes of units of our current generation product with industry leading fleets in order to see the market and garner customer interest. In order to scale into production, we’ve decided to undertake some design changes and improvements of the system. We plan to launch a next-generation of the hybrid solution that will include improved packaging for easier installation and manufacturing, it will feature our next-generation battery modules and we are improving the software and data analytics around this generation of the product as well. We have experienced some delays in the commercialization process of this system, but we are on track to be able to deploy units this calendar year. With the onset of this system, it will then allow us to begin to scale volumes of our hybrid systems deployed with customers and truly move into volume manufacturing. To assist with our timing plans and PMO strategy, we’ve engaged one of the industry leading consulting firms to work closely with us to ensure that we have a robust and achievable timing plans in place. We’ve also expanded the engineering team with a significant amount of talented team members who bring skills and past experiences of working in the automotive space. One key addition to highlight is that Cary Gatzke will be joining us starting next month to assist with the commercialization efforts. Cary is a former Chief Engineer for Daimler Freightliner and has brought numerous trucking solutions to market before. Now let’s shift to the commercialization of the Hypertruck ERX. Our team is progressing nicely with the commercialization efforts of this product and we are pleased to share that we were receiving a significant amount customer support and interest in the solution. As we’ve previously shared, we will be deploying initial customer demonstration units later this year to begin showcasing the benefits of this product. Over the past quarter, we’ve been working closely with fleets across the U.S. and we have selected our initial set of launch partners who will be taking delivery of these initial vehicles. We’ve selected these fleets, not only based on the number of trucks that they operate, but also because of their focus on improving climate change and focus on being early adopters of electrification. We will begin showcasing some of these partner fleets in the near future. Once we begin to deploy these demo trucks later this year and going into next year, then we will look to begin commercialization of the product in 2022 for larger quantity deliveries to fleets. As for the engineering commercialization efforts that we have underway, we are not only utilizing our own team, but we have engaged outside of consulting resources, such as FPV and others to assist as well. We are currently in the process of building more vehicles for testing and validation and going through selection of key suppliers who will enable us to be able to achieve volume commercialization. The next batch of trucks that we are currently building will start hitting the road towards the middle of this year. As we’ve been progressing through the commercialization process, we realized that one of the key factors of deploying our system is to be able to install it on brand new chassis that are made by today’s truck OEMs. We are excited to announce that the initial Hypertruck ERX built will be on Peterbilt chassis. We have been working closely with Peterbilt to establish the chassis specifications that are ideal for the Hypertruck ERX powertrain and we have placed our initial order of trucks through Peterbilt. We will not only utilize these vehicles for our own testing and validation, but then also as we move into customer demonstrations. I’d now like to shift gears and discuss in more detail some of the roadmap that we have previously laid out for the Hypertruck. We see the Hypertruck powertrain as one that is applicable and realistic today, but also one that can evolve with ever-changing technology and infrastructure advancements, especially as we consider a hydrogen future. First, it's important for us to start off by discussing recharging and refueling infrastructure, which is often the number one hurdle towards adopting electrified powertrains. We previously discussed with a Hypertruck ERX powertrain that leveraging RNG and CNG infrastructure is actually working to our advantage with over 700 stations already built out across North America and a robust amount of natural gas pipelines across the country. Fleets are able to adopt a solution like this today and not have to worry about having places to fuel their trucks. As we look at hydrogen, North America is starting from nearly scratch when it comes to infrastructure. Currently, there are not hydrogen refueling stations for trucks and existence, pipelines and transport of hydrogen is not established. And there is not a significant amount of clean hydrogen made today. While we believe this market is evolving at an ever-increasing pace, we also believe that there are many years of development still ahead of us that need to happen before the industry shifts to volume adoption. With electric recharging, we do already have a robust electric grid established, but we'll need to improve transmission lines going into recharging locations, as well as build out the stations themselves. While we believe that all three of these solutions will evolve in the years ahead, natural gas infrastructure is available and ready today, while the other two solutions will take time to establish and still need to achieve significant cost savings to become cost competitive. To give an example of this, it wasn't until a little over a year ago that the number of available Tesla supercharging state locations for passenger cars surpassed the number of already existing natural gas refueling stations for trucks. On Slide 13, we'd like to share what we believe will be the future of trucking as we shift towards electric. We believe that local delivery and final mile will be the first to adopt BEV truck. And that will transition over time into the regional haul market. But as we start looking at mileage greater than this, the weight, the cost and the size of the battery packs do not lend themselves to this type of application. Thus, we believe that an electric range extender vehicle such as the ERX or a fuel cell truck will be applicable. And going back to our previous slide, these vehicles start off by leveraging RNG and CNG as a fuel source to recharge the batteries and then will evolve into hydrogen over time. So shifting to Slide 14, what is very unique about the Hypertruck ERX solution is that it actually has the same vehicle architecture as a hydrogen fuel cell vehicle, but it just utilizes a different generator. So in Hyliion’s case, as the market evolves and the infrastructure is built out, Hyliion will be able to keep most of its powertrain the same and just replace the natural gas generator with a hydrogen fuel cell and be able to compete in this market as well. We believe this is a key advantage and differentiator for Hyliion as we will be able to begin shipping units advancing the powertrain technology and achieving revenue while some of our competitors will be hindered by the lack of hydrogen infrastructure and the time it takes to build out. Lastly, I'd like to share with you the approach to the generator solution that Hyliion is pursuing. As technology continues advance, we plan to progress our powertrain to having a fuel agnostic generator that can run on both RNG and CNG as well as on hydrogen. This solution will offer fleets benefits as it will allow fleets to source the fuel that is most economical and outages for their use case. And lastly, we see that the long-term future as a hydrogen fuel cell solution, and with some technology advancements, it will be able to achieve the greatest performance efficiency. All of these solutions bring forward significant improvements around emissions compared to trucks that are on the road today. As we continue forward with these solutions, Hyliion will be collaborating with others as well as establishing our own technology in order to make sure that we are offering the strongest technology available. In summary, 2020 was a truly transformative year for Hyliion and in turn the EV trucking space. We delivered initial units to key customers, advanced our commercialization strategy and scaled our organization to prepare for growth. We enter 2021 well-positioned with the resources, team and strategy to advance our commercialization goals, and particularly, our expected launch of the Hypertruck ERX later this year. Now, I want to welcome Sherri to having her first Hyliion earnings call. Sherri has nearly two decades of experience in finance and accounting leadership, as well as a strong understanding of investor relations, M&A, and manufacturing operations. Sherri served as CFO of PGT Innovations, a publicly traded company and oversaw the company’s finance function and strategy. Sherri has a proven track record of helping to drive profitable business growth and will play a critical role in Hyliion success. I also want to thank Greg Van de Vere, our former CFO, who recently retired for his role in shaping our business and establishing a first-class team and strong foundation for Sherri moving forward. With that, I would like to turn it over to Sherri, to run through the fourth quarter and full year numbers.

Thank you, Thomas for the kind introduction, and good morning, everyone. I am thrilled to be joining the Hyliion team at a very exciting time for the company as it revolutionizes the transportation industry. The opportunity to join this high functioning mission-based team is incredibly compelling. And I’ll look forward to working with all of you, our investors and analysts, as we transform the Class 8 market in the months and years ahead. Let’s now turn to our results for both the fourth quarter and full year 2020. After that, I’ll discuss our capital structure and outlook ahead. Starting on Slide 17 with the fourth quarter results. Our team continued to invest in R&D as we continue executing against our product development roadmap. R&D spending was $4.5 million, an increase of $1.6 million sequentially and $1.9 million year-over-year. G&A spending was centered around implementing the necessary infrastructure to advance our commercialization activities and the ongoing influx of talent to further enhance and operationalize the necessary public reporting framework. For the quarter, G&A spend was $5.9 million, an increase of $3.7 million sequentially and $5.1 million year-over-year. Non-operating expense was $10.2 million, up from $4.1 million in Q3 due to a loss on extinguishment of debt of $10.2 million in connection with the business combination offset by a decrease in interest expense of $2.2 million and change in fair value of the convertible notes payable, derivative liabilities of $1.8 million. Overall, Hyliion reported a net loss of $20.5 million compared to a net loss of $9.1 million in Q3 and $4.1 million from a year ago. Turning to our full-year results. While the pandemic presented unforeseen challenges, the Hyliion team continued to press forward with its mission by completing the business combination and becoming a publicly traded company, setting the stage to disrupt the transportation industry. For the full year, R&D expenses were $12.6 million driven by increased expenditures for external consultancy and components utilized in the development process and our efforts to finalize the design of our Hybrid system and continue the design and testing ever Hypertruck ERX systems during 2020. G&A expenses were $9.6 million driven by additional costs incurred to operate as a public company, which includes increased expenditures for personnel and benefits, increased expenditures for directors and officers insurance, increased expenditures for legal and professional fees, and other corporate related expenses. Non-operating expense was $17 million driven by a loss on extinguishment of debt in connection with the business combination and other expenses associated with the convertible debt. As a result, our net operating loss for 2020 was $39.2 million. Turning to our capital structure and balance sheet. On October 1, we completed our business combination with Tortoise, yielding approximately $520 million of proceeds net of transaction expenses. And in early January, we announced the results of our public warrant redemption, which helped its raise an additional $141 million. The sum of its capital provides the company with a strong foundation to execute and deliver against our product development and commercialization goals. We are focused on developing a scale infrastructure, led by an innovative and industry leading team, that will help us capture the robust and growing opportunity within the Class 8 market. As of year-end 2020, we held cash and cash equivalent of $390 million. And turning to Slide 18. While we are not providing formal financial guidance at this time, our previously communicated SG&A estimate of approximately $140 million for 2021 remains largely unchanged. As we continue building out our detailed commercialization strategy, we’ll provide any appropriate updates to our expense estimates and progress against the key commercialization milestones Thomas referred to throughout today’s call. Once we began to deploy these demo tracks later this year and going into next year, and we will look to begin commercialization of the product in 2022 for larger quantity deliveries to fleet. This concludes our prepared remarks. And now, I would like to turn the call back over to the operator to open the line for questions.

[Operator Instructions] Your first question comes from Brian Johnson from Barclays.

Thank you. Just want to drill down into the battery pack announcement, which seem to get the market excited at least briefly, but could have just been in a press release triggered by. I think the more fundamental question is what does this due to the TCO for a fleet operator versus the prior battery? That’s one. And kind of two, when you put together the midterm outlook for commercialization and the sales numbers, where you see this battery got, obviously, didn’t come out of nowhere, but with those numbers include the expected benefits of this battery and kind of my first question, improving the TCO for fleets and therefore your sales.

Absolutely. Thanks, Brian. So maybe the first touch on a little bit of the battery announcement. So, we see this new battery module is a continued evolution of the battery module, in fact, designs that we’ve been doing here at Hyliion, and in terms of how that’s going to affect the TCO numbers of our Hybrid and Hypertruck products, it doesn’t necessarily affect the payback numbers for fleet. It really just affects the performance of the product and allows us to get longer life, better performance out of the solution and make sure that our – as mentioned during the call, our goal is that these batteries can actually in some instances outlive the life of the vehicles here. So, we’re really seeing this as a technology that is an advancement of the existing systems that we have today, not necessarily changing the TCO numbers. But to the second part of your question, we do see this module as something that we can expand into other markets as well. And initially, it was designed specifically for our solutions, but going forward here, obviously having an eight-minute rechargeable battery, being able to really push the life of these cells that opens up some really unique opportunities into other markets. And that’s something that we are going to be pursuing and exploring as well, going forward here. But just to reiterate, the initial focus really is on integrating this into our own product. And then in out years, we see that being able to be applicable for other markets. I don’t believe that those were initially, kind of assumed in our business plan as we were bringing this to market is, it was something that we knew that there was an opportunity here to be able to sell our batteries into other markets. but it’s the first time that Hyliion is coming forward and announcing that we will be expanding that market opportunity.

And by the markets, would those be other commercial vehicle markets or light vehicle or energy storage, and this is beyond our industrial uses?

I think one of the initial areas here is definitely in the commercial vehicle space, because this space, which is very different than passenger car has a strong focus on just asset utilization. And so as we can look at really being able to recharge these vehicles fast, that allows us to keep the trucks or vehicles up and running for more hours of the day. One of the challenges with conventional BEV vehicles with conventional batteries is that you’ll have to down that vehicles in some instances for hours a day, just to be able to recharge it. And that has a cascading effect, right. That means that fleet today; I’m going to have to go buy more assets in order to be able to have vehicles for their drivers to be able to drive while other vehicles are getting recharged. So, it kind of has a cascading effect, if we can pull in our battery technology, have that fast recharge, as mentioned earlier, you can recharge that vehicle then when drive is on a break, grabbing a cup of coffee, which really opens up a lot of opportunities for fleet. So, I think we do see the initial market opportunity here really being in the commercial vehicle space.

[Operator Instructions] Your next question comes from Mark Delaney from Goldman Sachs.

Yes. Thanks very much for taking the questions, and good morning. I was hoping to ask on the ERX, you talked about continuing your plan to bring that product to market and you articulated a plan to start to having some initial target fleet customers in mind for that product. Can you talk a little bit more about how long you think it may take to go through that process where customers have the ERX, how long based on your conversations with customers do you think they'll want to go through sampling before, and then maybe be ready to move into a volume purchasing?

Thanks Mark. So one of the things that we had highlighted in the call is just that, over the past quarter here, we have actually selected the fleets that we're going to be working with to be able to roll out the Hypertruck ERX in the demo trucks here. And so, that's obviously a huge progression forward for us, because now we have the fleet base that we can really work with in order to deploy these vehicles. In the near future here, we will be sharing more about that to the market, who some of those fleets are that we're working with. But we're really excited about the group of individuals that we've been able to pull forward. And as mentioned before, it wasn't really just about what the fleet size was, while that was a factor in kind of joining with these fleet, it was also looked at as to, what are the sustainability goals that these fleets have and what's their goals in terms of moving towards electrification. So right after that, we’ve got a strong foundation here, fleets that we can be deploying these solutions with. And then also we see those fleets as being the ones that will be able to scale volumes with. In terms of the time it's going to take them, we'll be starting to do initial demo deliveries towards the end of this year and then rolling into next year. And I think for fleets, they really look at this as, it's probably a three to six months experience for them of actually taking delivery of the trucks, trying them out in their own operations, our goal is also to garner feedback from these fleets as well, right. We want to make sure that this product is meeting their use cases and applications and needs. And so, three to six months of going through that cycle and then being able to come back and starting to deliver more units into their operations.

That's very helpful. Thanks for all the details. And follow-up question was on the hybrid product, you mentioned there has been some delay in commercialization of that, but I'll see you're working to develop a new – the next generation version with the new battery module. Maybe you could go into more depth on that. So what led to the delay in commercialization and as you introduced this new version, do you think that will be one that will allow you to recognize revenue? And if so, did you have any timeline you can provide on that?

Yes, absolutely. So in terms of the hybrid development of the next generation, some of the delays just came from really expounding and making a more robust testing and validation plan before rolling this solution out to the market. We brought in some consultants over this past quarter that I'm been assisting us really looking at what are the industry best practices and protocols that we need to follow to make sure that these systems are fully validated and ready for this market. As I'm sure you get, you know, well, I mean, this is – the road conditions out there are tough, right. I mean, you got salt-spray, you have rain and snow, and there is a lot of elements that these products needs to be developed for. And so, one of the things that we've done is gone back and looked at that testing and validation plan, we've expanded the scope of that sum, as well as implemented new phase gates of when we're rolling the product out different stages that we're going to go through. And that's really what led to the delay of the development of it. It's really not a technology risk or material change to the product or anything like that, it was more just having a robust rollout plan here that follows the industry's best practices. Then, as we go forward with launching the next generation hybrid system, that is when we'll start recognizing revenue on those solutions. And one of the things that we're doing with the products we're shipping today is we're starting to build that strong foundation of fleets that have experienced the product, we're going through getting some repeat orders with those solutions, and then we'll be able to scale that over time with these fleets and adopt more of them into their operations. So we're really excited about the next generation hybrid system coming to market here, we see that there is some huge advancements in it, around the new battery module, having a new e-axle, some bruised software and data analytics, the one delay that we're just experiencing is the – the time it takes to get the product commercialized and ready for the market.

And that was our last question. At this time, I will turn the call back over to Thomas Healy for closing remarks.

I appreciate everyone joining us on our fourth quarter and year end 2020 review. 2020 was obviously a monumental year for us, as we took highly on public and have made some great advancements in the products that were announced, that we're going to be bringing to market here and some of the relationships that we've been able to build in this industry. I look forward to a very exciting year ahead for us here in 2021, and we'll be chatting again in the next quarter's earnings call. I hope everyone has a great day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.