Hyliion Holdings Corp. Q3 FY2020 Earnings Call

Thank you all for joining us, and welcome to the Hyliion Holdings Third Quarter 2020 Results Call. I will now hand it over to Bob Gujavarty, Head of Investor Relations.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings Corp. Third Quarter 2020 Results Conference Call. With me today is Thomas Healy, our Chief Executive Officer; and Greg Van de Vere, 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 that information unless required by law. With that, I'll now hand the call over to Thomas Healy.

Thank you to everyone joining us for Hyliion's first conference call as a public company. Since many of you are new to our story, I want to provide a brief overview of Hyliion's market, our products, value proposition, and our strategic direction. After that, I’ll discuss key developments in the quarter before handing it over to Greg to go over the numbers and our outlook. To begin, I want to share Hyliion's mission, which is to deliver electrified solutions for the commercial vehicle sector. The trucking industry is increasingly shifting toward electrification, with fleets trying to identify the best electrified options for their needs. Currently, the transportation sector is the leading source of global pollution. Our solutions offer net carbon-negative benefits compared to traditional vehicles, meaning our trucks can help improve the environment rather than harm it. Hyliion operates as a powertrain company, utilizing existing chassis from OEMs to deliver our powertrains. Now, let’s discuss the market opportunity. We see an $800 billion global market ahead, with a focus on the long-haul, over-the-road trucking market, which is markedly different from the conventional automotive sales cycle. The commercial vehicle space consists of fleets with hundreds or thousands of vehicles, frequently replacing them to maintain modern operations. This aligns us with fleets that provide recurring revenue streams, as once they choose our powertrain solution, it becomes part of their regular purchasing cycles. Fleets determine their purchasing decisions based on three main factors: operational costs, available infrastructure for seamless adoption, and emissions levels. Now, I'll introduce our two products. Our first offering is a hybrid electric solution that can be fitted on new or existing trucks. This solution enhances fuel economy, provides more horsepower and torque, and reduces idle time for drivers resting in their vehicles. We’re currently shipping this product in low volumes and anticipate ramping up production going forward. Our second product, announced a few months ago, is the Hypertruck ERX, a fully electric powertrain that utilizes an onboard generator to charge batteries while the vehicle is in motion. Our initial version of the Hypertruck ERX uses a natural gas generator, allowing for cost savings and reduced emissions, while leveraging existing natural gas infrastructure across North America. The Hypertruck ERX combines the advantages of an electric vehicle—efficient drivetrain, high power output, and zero tailpipe emissions—while eliminating the downsides of conventional electric vehicles, such as the need for new infrastructure and limited range. There are three vehicle types fleets are considering as they transition to electrification: hydrogen fuel cell, plug-in electric, and our Hypertruck ERX, which uses renewable or conventional natural gas. Our competitive edge lies in our use of fuel with significantly lower costs compared to hydrogen and electricity projections. Additionally, Hyliion can access over 700 natural gas stations in North America, which contrasts with the undeveloped hydrogen and plug-in electric infrastructure requiring substantial investment. Regarding emissions, most hydrogen in North America is produced by steam methane reforming, which can be more polluting than current diesel trucks. Alternative energy sources, like wind and solar, must be pursued to achieve zero-emission electric vehicles. In comparison, our renewable natural gas approach captures methane from landfills and farms, enabling a net carbon-negative profile for our trucks. Ultimately, fleets prioritize cost savings while transporting goods efficiently. As I transition to the next slide, keep in mind that we are comparing future projected costs of hydrogen and electric vehicles against current pricing, which is significantly higher. The vehicles currently on the market primarily run on diesel, while we propose our hybrid electric solution that offers savings over diesel. The future landscape includes three categories of trucks: plug-in electric, fuel cell electric, and the Hypertruck ERX, which stands out as the only option providing substantial savings against diesel. This concludes my overview of Hyliion and our strategy to respond to the ongoing shift toward electric powertrains in the trucking sector. Now, let me discuss the progress we made in the third quarter. Starting with our hybrid solution, I am happy to report that we installed eight hybrid systems across four fleets during the quarter. Four of these installations were completed for CAT transport, a major national and cross-border freight carrier operating over 1,200 tractors across Canada, the U.S., and Mexico. We are collaborating closely with CAT's leadership to ensure successful initial deployments. As fleet utilization remains high towards the end of the year, I expect we will install another seven hybrid systems in the fourth quarter, keeping us on track to meet our 2020 forecast of installing 20 units. We also have a robust pipeline of opportunities and will keep you updated on our progression. I want to highlight our collaboration with Wegmans, a leading supermarket in the Northeast. A few months ago, we delivered a hybrid CNG truck to Wegmans that has achieved significant milestones. We partnered with Volvo for the actual build and installed our system at Fontaine Mod center. The truck has been deployed and shown performance equal to or better than their higher horsepower diesel trucks. Wegmans has remarked that they’ve transformed their most polluting job into their cleanest operation. We appreciate Wegmans for showcasing our collaboration at the New York Stock Exchange last month. To commercialize both our hybrid and Hypertruck ERX solutions, our strategy has included leveraging external resources as appropriate. I am pleased to share that we have initiated collaboration with FEV to enhance our hybrid system and aid in the commercialization of our Hypertruck powertrain. FEV's extensive automotive market knowledge will help us navigate regulatory hurdles and complement our internal engineering resources as we expand our team. Now, regarding the Hypertruck solution, we plan to officially launch the Hypertruck ERX in the second half of 2021, followed by initial customer demonstrations and revenue shipments in 2022. We have made considerable headway in forging key partnerships essential for developing a scaled infrastructure, most notably with American Natural Gas. This partnership will ensure our customers have access to practical and affordable natural gas for their vehicles, with ANG on track to supply fully renewable natural gas by the end of 2021. This agreement highlights advantages of our strategy, covering key components of fueling: affordable fuel pricing, availability of renewable natural gas, and the ability to establish new stations at no upfront cost to fleets. The existing natural gas infrastructure gives our solution a major edge over hydrogen fuel cells or battery electric trucks. Additionally, American Natural Gas has entered a sales agreement that entails a preorder for up to 250 Hypertruck ERX vehicles, securing early access to our fully electric powertrain. Earlier this year, we announced a preorder for up to 1,000 trucks from Agility Logistics, a global freight company. We are collaborating with their sustainability team and major B2C brands they serve regarding the emissions savings potential of our solution and its contributions to their sustainability goals. The initial response from fleets regarding the Hypertruck ERX has been very encouraging. We are working closely with these fleets on cost of ownership models, determining deployment locations for fueling, and identifying how the Hypertruck solution can optimize their operations. Our discussions suggest that fleets consider this solution a practical and logical transition to electric powertrains. Over the coming months, we will continue to engage with these fleets to solidify their commitments for early demo deployments. Our conversations reveal that most fleets have not yet begun deploying zero-emission vehicles due to limited availability, significant infrastructure needs, and performance concerns. Potential customers view hydrogen solutions as too costly, while battery electric trucks are hindered by limited range. We believe the Hypertruck ERX is uniquely positioned to provide an unambiguous solution that combines economic feasibility with performance without needing government mandates or incentives. We do regard hydrogen fuel cells as a viable option for the long-haul market once fuel costs decrease significantly and infrastructure expands. Our design for the Hypertruck powertrain includes the capacity to utilize a hydrogen generator when the industry is prepared for it. Finally, I’d like to address the regulatory environment regarding the ERX. We have proactively engaged with both state and federal regulators. Our focus is to work with them on effectively reducing overall emissions beyond just tailpipe pollutants. We advocate that life cycle emissions are the most important metric to evaluate. We anticipate that the Hypertruck ERX will meet the California Air Resources Board's low NOx standards well ahead of the 2027 deadline. When powered by renewable natural gas, we can achieve significant reductions in carbon intensity. In conclusion, I am genuinely excited about our team's progress despite challenging conditions. The opportunities ahead are substantial, and I'm eager about our prospects to revolutionize the electric powertrain market. As a pre-revenue company, our performance should be judged against key milestones: progress toward commercializing our hybrid solution later this year, customer demo deployments of ERX trucks late this year, design win announcements for both solutions, and filling essential leadership roles at Hyliion. I will now hand the call over to Greg.

Thank you, Thomas. Good morning. I have three items to highlight this morning. First, the successful completion of our business combination with Tortoise Acquisition Corp., followed by the results of our third quarter operations and a quick update relating to our 2021 plans. On October 1, we successfully completed our business combination with Tortoise Acquisition Corp. By combining the funds provided by both the SPAC's IPO and the PIPE raised in connection with our business combination with Hyliion's product development expertise, sales prospects, and operating capabilities, we have enhanced the value of each entity. Together, we have created a combined entity with strong potential to transform the transportation industry. The business combination provided Hyliion with approximately $520 million of proceeds net of transaction expenses. Provided certain share price and share registration criteria are met, Hyliion also has the potential to raise up to an additional $140 million through the outstanding public warrants. This incremental capital would help us to further enhance our efforts to commercialize our solutions and enable us to develop a robust and scaled infrastructure that can meet the demands of the large and growing Class 8 market. Given the October 1 business combination close date, each entity completed Q3 as independent corporations. In addition to the press release filed this morning, we filed a Form 10-Q presenting the SPAC's stand-alone Q3 operating results, and we filed an amended Form 8-K, which includes Hyliion's stand-alone Q3 operating results. These disclosures can be found on the SEC's EDGAR website. As I discuss the third quarter, my comments will be limited to Hyliion's operations. Turning to our results. During Q3, Hyliion began to ramp up R&D spending in anticipation of the business combination funding while also establishing the necessary framework and resources to meet our public reporting and governance responsibilities. R&D spending increased to $2.9 million, up from $2.6 million in Q2 and $2.2 million from a year ago. G&A spending increased to $2.1 million, up from $0.9 million in Q2 and $0.7 million from a year ago. The increased R&D and G&A expenses support our commercialization, product development, and general corporate purposes. Nonoperating expense increased to $4.1 million, up from $0.6 million in Q2 due largely to the revaluation of our convertible debt-embedded derivative liability and to a lesser extent, short-term borrowing required to bridge the company through the business combination closing date. Overall, Hyliion reported a net loss of $9.1 million compared to a net loss of $4 million in Q2 and $3.6 million from a year ago. As Thomas noted earlier, we are currently shipping preproduction versions of our hybrid product. Though we have commercial arrangements with each prospective customer, due to the preproduction nature of the product and the customer evaluation intent behind these shipments, we are currently deferring recognition of potential revenue. We do not expect to recognize revenue relating to these shipments in the 2020 calendar year. Looking ahead, I'd like to highlight that we are in the process of compiling our spending and hiring plans for 2021 and anticipate submitting our plan for Board review and approval in the coming weeks. We'll provide more detail about our 2021 operating plans during our fourth quarter call in February. At this time, we do not expect a significant variance from the June 2020 guidance we provided during our PIPE fundraising process, a copy of which is available for download on our Investor Relations website. As a reminder, in our PIPE investor presentation, we forecast R&D and G&A spending of approximately $137 million in 2021 with over 70% of that focused on our R&D activities. This concludes our prepared remarks, and now we would like to open up the line for questions.

Your first question comes from Mark Delaney with Goldman Sachs.

I was wondering, since this is your first call as a public company and Hyliion has recently started trading, can you share any changes in your customer discussions? Are you noticing increased interest or better conversations? You mentioned the additional 250 preorders. Any insights on how customer discussions have evolved since going public?

Thanks for the question, Mark. This is Thomas. So what we've experienced since going public is that customer sentiment has really increased in a very positive way, and the level of interest from fleets has also increased. I think some of this is just being driven by more publicity of Hyliion out there in the news and also being driven by the fact that we've announced the Hypertruck ERX. But what we've seen is that we've kind of shifted our sales cycle from doing outreach to customers to trying to get them excited about what we're doing to actually now we're having some of the largest fleets here in North America proactively reaching out to us, wanting to engage and learn more about our solution and really being willing to dive into having those deep discussions around, 'How is this going to add value to my fleet? What's the actual payback metrics that we're looking at? And how can I realistically deploy these vehicles in my operations?' which we've been thrown through those discussions. And as we noted through the script, we've kind of heard some of the battle wounds that some of these other fleets have experienced with looking at electric and looking at hydrogen and fuel cell and how they've seen some hurdles that have made it impractical to really roll out in their fleet today.

That's helpful. And Thomas, you spoke about the agreement that was announced recently with American Natural Gas and potentially discounted pricing on RNG. Can you be any more specific about what types of RNG prices you would expect customers to be able to get?

So RNG pricing and natural gas pricing as a whole does vary across the U.S. What we put in our presentation that we put out there publicly was that $1 per diesel gallon equivalent is a good number to reference. We've got some fleets that we're working with that are already buying natural gas for under $1 per diesel gallon equivalent as well as some areas of the country where you're going to be over that number as well. So I think that's a fair metric. Now that doesn't include having credits associated with that fuel. There are many credits across the U.S., including LCFS and RIN credits that we are able to take advantage of when using RNG.

Got it. And then I just wanted to better understand the sales cycle for the hybrid solution, and nice to hear about the units that you did in the most recent quarter. I think the investor presentation had talked about doing 20 units for 2020 overall. And I realize it was half the year when Hyliion was private, so maybe there was already some shipments in the first half of the year. But I'm just trying to think about where do you stand with the 20 units for the full year. Is that still your expectation? You talked about these being pre-revenue, and we certainly understand that's the life cycle where the company stands. But you talked about $1 million of revenue in 2020, and just curious if that's still your expectation to get the $1 million of revenue recognition this year. And if it's changed, why has it changed?

Yes. So in terms of unit shipments, we are still on track to do the 20 units. So far this year, we've installed 13 units up through Q3, and we plan to be able to achieve the last seven units in Q4 here. So we are on track to be able to achieve the unit shipment numbers. One of the things that we've decided is to consider all of these units as pre-revenue. So that will impact that projection of being able to do $1 million in revenue this year. But that decision was really based off of when we looked at the actual shipments that we're doing, there are the ability for fleets to be able to return those units if they're not satisfied with them for any reason just because we are in that stage where these are early deployments. And so from a financial standpoint, we've decided to consider these units pre-revenue as opposed to accounting them as revenue for this year.

And your next question comes from Paul Coster with JPMorgan.

Welcome to the public equity markets, Greg and Thomas. I have a few questions. First, has the S-1 been declared effective yet? When do you expect that to happen? Also, how much cash do you anticipate raising from warrants once that occurs?

Yes. Thank you for the question. This is Greg. The S-1 has been filed and is currently under review with the SEC. We cannot predict the exact timing of when they will submit their questions or when we will provide our responses, but we do not expect it to take a long time. As you know from the PIPE transaction, we committed to a registration rights agreement with the PIPE investors, and we are fulfilling that commitment. There are certain conditions we need to meet for the warrants, one of which is the registration of the S-1, and the other is the price per share. We are currently on track to achieve both of those, and the Board will make a decision in the coming weeks on whether to call the warrants due and if so, when to do it. If we call all the public warrants and each participant exercises their warrant, that would raise approximately $140 million.

Got you. Thomas, could you explain how the preorder activity may ultimately translate into revenues? Perhaps you can discuss a scenario where the hybrid product starts generating revenue within a specific fleet.

Certainly. First, regarding preorders, we announced two significant ones: the Agility preorder for up to 1,000 trucks and the ANG preorder for up to 250 trucks. Looking at the next couple of years, we anticipate shipping 2,500 units in 2022. In the latter half of next year, we will begin shipping early demo units to fleets. We are currently working with these fleets on the initial units, as we need to ensure we can meet the target of 2,500 units for the following year as we roll out these trucks. It's important to understand the typical fleet adoption cycle; fleets want to see and experience the truck in their operation to determine its reliability, performance, and cost benefits. This demo release in the latter half of next year is crucial. We have received strong interest from fleets for these demo units, and we are now in the process of finalizing contracts and commitments before announcing the early deliveries. For the hybrid system, we expect to project 300 units for next year, primarily in the latter half, and that’s when we’ll transition to recognizing those as revenue units and achieving volume shipments.

Got you. My last question really is on the hydrogen front. And I hear you on every point you made, and they're all really excellent points. But there's also a scenario, I suppose, where perfection is the enemy of the good, right? And Europe, for instance, you could imagine essentially a switch being flipped and gas and diesel perhaps being sort of really pushed out of the picture by regulations. In such circumstances, if you see the opportunity in hydrogen, how long will it take for you to take the Hypertruck and convert it for an alternative generator using hydrogen?

The impressive aspect of the Hypertruck's engineering is that when we transition to a hydrogen fuel cell, the only components we need to change in the powertrain are the generator and the hydrogen storage tanks. Hydrogen tanks share many similarities with natural gas tanks, so our main focus is on the generator. From our perspective, once hydrogen is market-ready, the necessary infrastructure is established, and costs reduce to a level that allows fleets to adopt it economically, we will have a solution ready to transition to hydrogen fuel cells. I read in a report about Hyliion from a reputable analyst who projected that hydrogen costs won't achieve parity with natural gas until around the middle of the century. Therefore, we are still approximately 30 years away from a time when fleets can economically adopt hydrogen fuel cells. We view natural gas as the most logical option until we reach that point.

Your next question comes from Dayton Dabbs with Lone Star.

My question is about the Hypertruck ERX. I understand that the hardware used in the Hypertruck is sourced entirely from third parties and does not include any proprietary components. Could you clarify this for me, as well as any patents that might prevent competitors from entering the market after you complete the product's research and development?

Absolutely. So as we look at the Hypertruck solution, we are using some components from other suppliers. For instance, the actual drive motor of the vehicle is coming from Dana. We publicly announced that we've got a great partnership with Dana. They're one of our early investors in Hyliion. So that is a component we're sourcing as well as the battery pack. We are sourcing that from Toshiba as well. Now one thing to note on that is we're really just sourcing the cells from Toshiba, and then we are doing all the module, the battery management system. All the cooling and controls of it are being done by Hyliion. So that is all proprietary to us. And then also all of the system integration, all the software that controls the vehicle, all the algorithms in order to be able to improve the efficiencies of the vehicle, all the data capturing and being able to use that to continue to drive better algorithms for the performance of the truck, that's all developed and owned by Hyliion from an IP standpoint. And in terms of patents, we filed numerous patents both on hybrid and on Hypertruck. Some of the Hypertruck patents are still at a point where they haven't hit the actual patent office website yet just because of the date of when they were filed. But we do have patents filed around those, and we plan to continue to file around those as we move forward here.

There are no further questions in queue at this time. I would now like to turn the call back over to management for any closing remarks.

I appreciate everyone joining the call today here and look forward to a great rest of the year and chatting again in the early months of next year. Thank you.

All right. Thank you all.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.