Hyliion Holdings Corp. Q4 FY2020 Earnings Call

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. Please follow the operator’s 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 continued 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 commercialization milestones and partnerships that we are 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 the challenges of the pandemic. 2020 brought unforeseeable disruption to the world, but I'm grateful for our team's dedication as we work to revolutionize 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 modification 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. The response to our hybrid solution has been extremely encouraging. Right now, we are focused on letting fleets experience our game-changing product and ensuring 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 improved 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. Regarding 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. For example, yard tractors aim 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 facing an anticipated shortage of battery cells. Hyliion’s focus is to utilize small battery packs that are consistently recharged as the vehicle operates instead of 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, our Hypertruck ERX solution utilizes a battery that has approximately 1/120th the size of a conventional EV truck battery, allowing us to deploy many more units on the road while utilizing fewer 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 further expand 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. 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 at a phase where we are deploying low volumes of units of our current generation product with industry-leading fleets to gauge market interest. In order to scale production, we’ve decided to undertake some design changes and improvements to the system. We plan to launch a next generation of the hybrid solution that will include improved packaging for easier installation and manufacturing, feature our next-generation battery modules, and enhance the software and data analytics surrounding 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 scaling the 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 an industry-leading consulting firm to work closely with us to ensure that we have robust and achievable timing plans in place. We’ve also expanded the engineering team with a significant number of talented team members who possess skills and past experiences 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 are receiving significant support and interest from customers for 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 have selected our initial set of launch partners who will be taking delivery of these initial vehicles. We’ve selected these fleets based not only on the number of trucks that they operate but also because of their focus on improving climate change and their commitment to being early adopters of electrification. We will begin to showcase some of these partner fleets in the near future. Once we begin to deploy these demo trucks later this year and into next year, we will look to begin the commercialization of the product in 2022 for larger quantity deliveries to fleets. For the engineering commercialization efforts that we have underway, we are utilizing our own team, but we have also engaged external 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 the selection of key suppliers who will enable us to meet volume commercialization goals. The next batch of trucks that we are currently building will start hitting the road towards the middle of this year. As we’ve progressed through the commercialization process, we realized that a key factor in deploying our system is to install it on brand new chassis made by today’s truck OEMs. We are excited to announce that the initial Hypertruck ERX builds 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 for trucks through Peterbilt. We will utilize these vehicles not only for our testing and validation but also as we move into customer demonstrations. I’d now like to shift gears and discuss in more detail the roadmap we have previously laid out for the Hypertruck. We see the Hypertruck powertrain as applicable and realistic today, but also one that can evolve with the 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, frequently recognized as the number one hurdle toward adopting electrified powertrains. We previously discussed with a Hypertruck ERX powertrain that leveraging RNG and CNG infrastructure is working to our advantage with over 700 stations already built out across North America and a robust network of natural gas pipelines across the country. Fleets can adopt a solution like this today without worrying about where to fuel their trucks. In contrast, looking at hydrogen, North America is starting from nearly scratch regarding infrastructure. Currently, there are no hydrogen refueling stations for trucks, and existing pipelines and transport of hydrogen are not developed. There is also a limited amount of clean hydrogen produced today. While we believe this market is evolving at an ever-increasing pace, we also believe many years of development lie ahead before volume adoption occurs in the industry. Regarding electric recharging, we already have a robust electric grid established, but we need to improve transmission lines heading into recharging locations as well as build out the stations themselves. While we believe all three solutions will evolve in the years ahead, natural gas infrastructure is available and ready today, while the latter two will take time to establish and still need to achieve significant cost savings to become competitive. An example of this is that only a little over a year ago, the number of available Tesla supercharging stations for passenger cars surpassed the number of existing natural gas refueling stations for trucks. On Slide 13, we share what we believe will be the future of trucking as we shift toward electric. We believe that local delivery and final mile will be the first to adopt BEV trucks, which will transition over time into the regional haul market. However, as mileage exceeds that, the weight, cost, and size of battery packs do not lend themselves to this type of application. Thus, we believe an electric range extender vehicle like the ERX or a fuel cell truck will be applicable. Going back to our previous slide, these vehicles will leverage RNG and CNG as a fuel source to recharge the batteries before evolving into hydrogen over time. So, shifting to Slide 14, what makes the Hypertruck ERX solution unique is that it has the same vehicle architecture as a hydrogen fuel cell vehicle but utilizes a different generator. So in Hyliion’s case, as the market evolves and infrastructure is built out, we will be able to maintain most of our powertrain while merely replacing the natural gas generator with a hydrogen fuel cell, thus being able to compete in this market as well. We believe this presents a key advantage and differentiator for Hyliion, as we can begin shipping units while advancing powertrain technology and generating revenue, while some competitors may be hindered by the lack of hydrogen infrastructure and the time it takes to establish it. Lastly, I'd like to share the approach to the generator solution that Hyliion is pursuing. As technology continues to advance, we plan to progress our powertrain to feature a fuel-agnostic generator that can run on both RNG and CNG as well as hydrogen. This solution will provide fleets with benefits as it allows them to choose the most economical fuel source based on their needs. Ultimately, we see the long-term future as a hydrogen fuel cell solution and, with further technology advancements, this will achieve the greatest performance efficiency. All these solutions will greatly improve emissions compared to trucks currently in operation. As we advance these solutions, Hyliion will collaborate with others while establishing our own technology to ensure we offer the strongest technology available. In summary, 2020 was a transformative year for Hyliion and 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, particularly regarding our expected launch of the Hypertruck ERX later this year. Now, I want to welcome Sherri to lead her first Hyliion earnings call. Sherri has nearly two decades of experience in finance and accounting leadership, accompanied by a strong understanding of investor relations, M&A, and manufacturing operations. Sherri served as CFO of PGT Innovations, a publicly traded company, overseeing the company’s finance function and strategy. With a proven track record of driving profitable growth, she will play a critical role in Hyliion's success. With that, I would like to turn it over to Sherri to review 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 an 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 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. Starting on Slide 17 with the fourth quarter results. Our team continued to invest in R&D while 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 focused on implementing the necessary infrastructure to advance our commercialization activities and the ongoing influx of talent to 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, although 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 of the 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. Consequently, 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. In early January, we announced the results of our public warrant redemption, which helped raise an additional $141 million. This 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 scalable 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 equivalents of $390 million. 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 appropriate updates to our expense estimates and progress against the key commercialization milestones Thomas referred to throughout today’s call. Once we begin deploying these demo trucks later this year and into next year, we will look to begin commercialization of the product in 2022 for larger quantity deliveries to fleets. 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.

Your first question comes from Brian Johnson from Barclays.

Thank you. Just want to drill down into the battery pack announcement, which seemed to get the market excited at least briefly, but could have just been 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 do you see this battery going? Obviously, it didn’t come out of nowhere, but do those numbers include the expected benefits of this battery and my first question about improving the TCO for fleets and therefore your sales?

Absolutely. Thanks, Brian. So let me first touch on the battery announcement. We see this new battery module as a continued evolution of the battery solutions we've been developing 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 change the payback period for fleets. It mostly impacts the performance of the product, allowing us to get longer life and better performance out of this solution. Our goal is that these batteries can actually, in some instances, outlive the life of the vehicles. So, we view this as a technological advancement of the existing systems we currently have, rather than a shift in TCO numbers. To the second part of your question, we do see this module as something that we can expand into other markets, as it was initially designed specifically for our solutions. However, going forward, having an eight-minute rechargeable battery while maximizing the longevity of these cells opens up some unique opportunities in various markets, which is something we will be pursuing. To reiterate, the initial focus is on integrating this technology into our current products, but in future years we see the potential for expanding this into other markets. I don’t believe these opportunities were initially assumed in our business plan when we began bringing this to market, but we recognize the potential now and are excited to announce that we will be expanding that market opportunity.

And by the markets, would those be other commercial vehicle markets or light vehicles, or energy storage, and are we looking at industrial uses as well?

I think one of the initial areas we’re looking at is definitely the commercial vehicle space, as this market, which is very different from passenger cars, has a strong focus on asset utilization. The ability to recharge vehicles rapidly keeps them operational for more hours each day. One significant challenge with conventional BEV vehicles using standard batteries is that they often must stay offline for hours to recharge, leading to fleets needing to purchase more assets just to maintain operational capacity during charging downtimes. Leveraging our battery technology enables faster recharging, allowing vehicles to recharge during driver breaks, which creates numerous opportunities for fleets. Thus, we see the primary market opportunity for this being in the commercial vehicle sector.

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 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 becoming ready to move into a volume purchase?

Thanks, Mark. We highlighted in the call that over the past quarter, we've selected the fleets we will be working with to roll out the Hypertruck ERX demo trucks. It's a significant step forward for us as we now have the fleet base to deploy these vehicles. We will share more about these fleets with the market soon. We are excited about the group we’ve engaged with. It wasn’t solely about fleet size; sustainability goals and commitments toward electrification were crucial factors as well. We have a strong foundation with those fleets to progress deployment. In terms of the timeline, we plan to start initial demo deliveries towards the end of this year, rolling into next year. For these fleets, it is typically a three to six-month experience of receiving the trucks, testing them in their operations, and providing valuable feedback we need for our product. We want to ensure the product meets their requirements accurately.

That's very helpful. Thanks for all the details. For a follow-up question, regarding the hybrid product, you mentioned there has been some delay in commercialization, but I see you're working on developing the next-generation version with the new battery module. Could you provide more depth on that? What led to the delay in commercialization, and do you expect the new version will allow you to recognize revenue? If so, do you have a timeline for that?

Yes, absolutely. In terms of the hybrid development for the next generation, some delays arose from our need to enhance the testing and validation plan before launching this solution in the market. We brought in consultants to assess the industry best practices and protocols we need to follow for a fully validated system prior to market entry. The road conditions are tough; vehicles must withstand salt-spray, rain, snow, and other elements. We've revisited our testing and validation plan, expanding its scope and implementing new phase gates that will dictate our rollout. Thus, this wasn’t related to technology risk but to ensuring we have a robust rollout plan that adheres to industry best practices. With the launch of the next generation hybrid system, we will begin recognizing revenue from these solutions. We're also building a strong foundation of fleets that are experiencing our products, which will lead to repeat orders and an increase in volumes over time. We're thrilled about the upcoming next generation hybrid system, as it incorporates significant advancements like the new battery module, a new e-axle, improved software, and enhanced data analytics. The delays we encountered were mainly about the time required for robust commercialization.

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 for our fourth quarter and year-end 2020 review. 2020 was a monumental year for us as we went public and advanced several product developments that we're preparing to bring to market, along with the relationships we've established in this industry. I look forward to an exciting year ahead for us in 2021, and we will reconnect during 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.