Hyliion Holdings Corp. Q2 FY2023 Earnings Call

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

Thank you and good morning, everyone. Welcome to Hyliion Holdings' second 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 that accompanies this conference call 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, as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from forward-looking statements made 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 presentation and press release as well as our filings with the Securities and Exchange Commission. 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.

Welcome to Hyliion's second quarter 2023 earnings call. During the second quarter, we hosted our first ever Investor Day on June 27, in Austin, Texas at our headquarters. We had more than 60 in-person attendees and over 400 viewers on the webcast to learn more about Hyliion's go-forward strategy. We showcased the building of our first production Hypertruck ERX powertrain, as well as unveiled newly planned product offerings and the go-forward market strategy for these products. To start today's call, I'd like to share an update on the market landscape and our perspectives on some recent events that have taken place in the electrification space. As you may be aware, last Monday, another leader in the space filed for bankruptcy, unfortunately, they are one of several companies in our industry that have faced financial and other issues in recent months. We've also seen some providers experience significant losses on their initial units as they assess the market with their products. Hyliion faces many challenges as well, and we are working diligently to avoid the same outcome and to grow shareholder value. Hyliion has been trading near or below our cash value over the last few quarters. However, one of the differences between Hyliion and others in the space is our cash position. In light of this, we continue to assess our business model and strategic priorities to ensure we utilize our capital as effectively as possible. We have seen significant shifts in the electrification space over the past few years that have impacted us and our peers, and we expect that these shifts will continue to affect Hyliion's business model. For example, we continue to see component price increases from our suppliers, have experienced supply chain constraints that have impacted our development timeline, and have seen both positive developments and some potential wavering on regulatory mandates. As a result, we see fleets adjusting their electrification strategies as they move further along the path to adoption. Going forward, we will continue to look for ways to optimize our business, conserve our cash position, bolster our product offerings to help prevent the de-contenting by OEMs, and deliver solutions that meet fleets' needs. We've already executed on opportunities like our acquisition of the KARNO Generator Technology and our development partnership with Hyzon to build a fuel cell-powered vehicle. We will continue to look for ways to strengthen our business model and to optimize our business, conserve cash, and deliver products to customers. Shifting now to the Hypertruck ERX, I'd like to share an update on where we are with respect to launching the Hypertruck ERX powertrain later this year. As just mentioned, we have begun the installation of our first production truck and we plan to ship 30 trucks by the end of the year. On our Hypertruck ERX commercialization timeline that we unveiled seven quarters ago, we had planned to begin extended fleet trials in the second quarter of this year. Unfortunately, we have pushed the start of these trials out into the third quarter due to delays in receiving components needed to build our latest fleet of pre-production vehicles. However, we expect to start these trials in the coming weeks. We're presently working with fleets to confirm orders and delivery timing for their initial production trucks. With the extended fleet trials as the final stage for many fleets in their decision process of procuring our solution, we are presently completely booked through Q4 with trials with various fleets. Given the discussions we have ongoing and the interest we have received from fleets, we are confident in our ability to deliver 30 trucks by the end of this year. As we gather feedback from these fleet trials and initial adoption, we will assess our ramp-up plans for 2024 and come back with further clarity on our projected volume ramp. Even since last quarter when we shared that we would be shifting our delivery ramp and restructuring our founder's agreements, we've seen further unexpected price increases from our supply base. This speaks to how the electrification market is still in its early stages, and the manufacturing supply base and pricing are still being worked out. As we've previously shared, we're working to pass along some of these price increases onto fleets, which will allow us to sell the trucks while reducing the gross loss we expect to realize on the first units. Another milestone on our commercialization journey is to achieve or complete our CARB, EPA, and NHTSA certifications relating to the powertrain. I am pleased to share that we have successfully passed all required Federal Motor Vehicle Safety Standards or FMVSS to satisfy our NHTSA requirements. We also remain on track with CARB and believe we'll have this complete in Q3. Thus, we are confident in our readiness to begin shipping trucks in the fourth quarter. Also, during Investor Day, we unveiled that the next variant of the Hypertruck ERX will be the powertrain in a daycab truck. When we initially selected the launch of the Hypertruck ERX on a sleeper truck, we believed fleets would adopt plug-in electric trucks for daycab applications and range-extender electric for sleeper truck applications. As fleets have begun adopting plug-in electric trucks, they are finding that the range is much more limited than they expected, and the charging infrastructure either doesn't exist or is difficult and costly to install. Thus, over the last couple of quarters, we have seen increasing interest from fleets in a Hypertruck ERX powertrain on a daycab vehicle. We are therefore moving forward with initial development and are planning to have the powertrain ready in 2025. As we embark on this development, we also plan to incorporate design improvements to help with cost and weight. We've heard from fleets that the additional weight of the Hypertruck ERX sleeper variant will hinder its ability to operate in weight-restricted hauling applications. Thus, for the daycab, we are exploring ways to reduce battery and tank sizes to decrease weight in addition to the savings of moving to a daycab. In Q2, CARB passed the Advanced Clean Fleet or ACF mandate, which will require fleets to start adopting vehicles that qualify for the ZEV credits in 2027. I'm pleased to share that the Hypertruck ERX powertrain will qualify for the same level of credit as a battery electric or fuel-cell truck will qualify for under this mandate. ACF first regulates the adoption of daycab vehicles and later covers sleeper trucks starting in 2030. This is an additional reason why we plan to add a daycab variant of the Hypertruck ERX powertrain to our product portfolio. We also outlined our development plans around the integration of the Cummins 15-liter natural gas engine. We presently utilize the Cummins 12-liter natural gas engine, which is carbon EPA certified for 2023, but the Cummins 12-liter engine will only be EPA certified in 2024, meaning it can't be sold in California. Thus, we will work to integrate the new Cummins 15-liter natural gas engine into the Hypertruck ERX by late-2024, which is expected to be both CARB and EPA certified. Now shifting to the KARNO, we unveiled a representative model of our plans for the 200-kilowatt stationary power KARNO generator, including approximate dimensions and its small footprint as depicted on this slide. We continue to see strong interest that's exceeding our expectations for a stationary KARNO solution that has the ability to solve various problems. We see it as a fit for prime power applications, as we anticipate being able to produce electricity for less than the cost of grid power in most locations. It could also be used for peak shaving, to help levelize power demand on the grid, and be used to produce electricity in areas where grid power is unavailable. The KARNO generator offers clean, low-cost electricity, has a smaller footprint than conventional generators, requires limited maintenance, and operates at very low noise levels. The KARNO is also fuel agnostic, able to run on conventional fuels like natural gas, propane, diesel, and even on zero carbon emission fuels like hydrogen and ammonia. We also showcased how the KARNO units can be stacked together to produce greater power levels without compromising any of its benefits. For reference, the footprint of a 20-foot shipping container filled with KARNO generators could produce more than 2 megawatts of power output. This footprint is half to one third the size of conventional generators, and even a tenth of the size of some new clean generator technologies coming on the market today. We see the path to the KARNO stationary market as achievable over the next 12 to 18 months, and it broadens our ability to provide electrified solutions to the commercial vehicle market by powering EV charging units. In the slide presentation accompanying this call, you can see that we've showcased what the key milestones will be for both the Hypertruck KARNO and the KARNO Stationary Generator over the next few years. We are planning to begin initial deployments of the KARNO Stationary Generator next year, and we expect that these will be revenue-generating. We are already well underway in discussions with likely customers around their initial deployment of the generator. We are also continuing with the development to integrate the KARNO generator into the Hypertruck powertrain, as we work to integrate and validate the Hypertruck KARNO over the next few years. We plan to be ready for initial fleet trials starting in 2026. The third variant of our Hypertruck powertrain is a hydrogen fuel-cell version. A couple of quarters ago, we announced a partnership with Hyzon, where we kicked off the integration of Hyzon's latest 200-kilowatt fuel-cell technology with Hyliion's Hypertruck powertrain technology on an initial development vehicle. We are pleased to share that this development has been going very well, and this vehicle is up and running now and completed its initial test drive around a test track just a few weeks ago. This project remains on track and will be complete by the end of this year. I will now turn the call over to Jon to share more about the financials from this past quarter.

Thank you, Thomas. And good morning, everyone. Turning to our financial results. For the second quarter, we reported revenue of $266,000 from hybrid system sales, compared to $172,000 in the second quarter of a year ago. Operating expenses totaled $38.5 million, an increase of $6.3 million compared to the second quarter of last year. The year-over-year increase in spending is due to growth in research and development costs, partly offset by lower SG&A expenses. Research and development costs were up $7.4 million in the quarter due to higher expenses related to Hypertruck ERX powertrain development and KARNO. Powertrain development costs went up $3.7 million as we expensed production truck components that were received in the quarter. I mentioned last quarter that until we complete R&D work on the Hypertruck ERX system, all component purchases will continue to be expensed even if those parts will ultimately be used in production powertrains that are later sold to customers. The impact of this expensing was partly offset by lower expenses related to other R&D work on the Hypertruck ERX system in the quarter. Going forward, we expect that expensing of production component purchases will have a negligible impact on our R&D costs, as we make progress towards Hypertruck ERX system commercialization. The second driver of higher R&D costs in the quarter was KARNO expenses that we did not have in 2022. As a reminder, we purchased KARNO Technology from GE late in the third quarter of 2022, and therefore, comparisons of year-over-year expenses in the first three quarters of this year need to account for this difference. Total KARNO expenses in the second quarter were $3.7 million. In total, Hyliion reported a net loss of $35.2 million for the second quarter, which is up from the $33.5 million loss the company reported a year ago, as lower cost of sales and higher interest income this year nearly offset higher operating expenses. Looking at year-to-date performance for the first half of the year, revenue was $576,000, compared to $512,000 in 2022. Total operating expenses were $70.4 million, compared to $57.9 million in 2022. Again, the increase in expenses was driven by higher R&D expenses of $12.5 million, of which $5.4 million consisted of the expensing of production component purchases, partly offset by lower costs for other powertrain R&D work. The remaining $7.1 million of higher year-over-year R&D cost was driven by KARNO expenses in the first half. Finally, SG&A expenses in the first half were approximately flat with 2022. Our net loss year-to-date was $64.1 million, compared to $60.6 million in the first half of 2022. We ended the quarter with total cash, short-term and long-term investments of $354 million, compared to $422 million at the end of 2022 and $385 million at the end of the first quarter of this year. We spent $31 million in the second quarter, compared to $37 million in the first quarter and $27 million in the second quarter of 2022. As we discussed last quarter, we are taking actions that will help reduce cash burn and expect that these actions will significantly reduce operating expenses, capital spending, and working capital growth. We continue to hold to the guidance that we shared at our Investor Day back in June of approximately $130 million total operating expenses, despite the unexpected impact of production truck component expensing this year. Also, we continue to project cash consumption of less than $150 million, including cash operating expenses, working capital growth, and capital expenditures. As previously noted, we ended the second quarter with $354 million of total capital, which gives us flexibility to continue Hypertruck ERX commercialization work, including initial truck deliveries, as well as KARNO development work. We expect to finish the year with a total capital balance of around $275 million, which will give us financial flexibility into the future. We have no plans to raise capital this year, but we'll remain opportunistic in 2024 and beyond if market conditions are favorable for raising additional equity capital. With that, I'll turn it back over to Thomas.

Thanks, Jon. As we wrap up this call and move to Q&A, I'd like to encourage anyone who hasn't yet watched our Investor Day video to do so. This presentation offers a great overview of both the Hypertruck powertrain technology and the KARNO generator. The recording can be found on Hyliion's YouTube channel. We will now open the call up to Q&A.

Thank you. The first question comes from Donovan Schafer. Please go ahead.

Hi, everyone. Thank you for taking my question. I want to start by discussing the Hypertruck ERX and the goal of producing 30 units. It sounds like you feel confident about being on track. After attending Investor Day and observing the team and their progress, I wonder about the learning curve involved in this process, as it seems to be the beginning of production. Are the teams currently operating at a pace where they can maintain a run-rate to achieve those 30 units? Or is there an expectation that the improvement won't be linear, meaning that as they continue to produce, there will be gradual enhancements over time that will assist in reaching the target? I'm curious to hear more about how this process works.

Yeah, it's a good question, Donovan. You had the opportunity to actually see it all firsthand. But we are in the ballpark right now from a production standpoint to be able to achieve those 30, with no drastic changes, or no big changes at all. From that standpoint, your other comment, we are getting faster at installs every single day. Actually, the times that the teams have been able to improve have been quite impressive, and we don't think we've gotten all the time out of it yet either. So from that standpoint, we have high confidence in the ability with the team that we have and the facility operations setup that we have to achieve those 30 units by the end of the year. The other thing I'll note is we are also in a parallel path teeing up the ability capability to perform Hypertruck ERX installs as well. And so that's going to allow us to scale volume as we have systems from our centers.

Okay. That's helpful. And then the second question is related to the Hypertruck ERX being kind of in the high-300,000s. I'm curious with the cost increases that you've seen, are we moving toward that may crossover to hit that kind of 400,000 mark, or not? And if you can give any color around how we could think about the daycab, as I understand it, you can actually even do a smaller battery and still get the full credit on the daycab. So if you can just, if we can get kind of a rough sense of if it's under 100k lower or 50k lower. How the daycab would kind of compare?

Sure. So let's first start with the sleeper cab variant of it. So, as we mentioned in previous calls, we've expressed high-300,000, and that is still where we're targeting. Now, that is already taking into account the benefit that will be received from the Inflation Reduction Act that $40,000. So we're still on track for that high-300s. With respect to the daycab, it's still too early to put numbers on that in terms of cost and price of that system. As you mentioned, we are targeting some improvements so one is just obviously the shift from a sleeper truck to a daycab. Daycabs are conventionally less expensive in the market. And we are also looking at a smaller battery pack while still being able to achieve that ACF credit, even looking at someplace to push us towards reducing the size of the tanks on the vehicle just because the range of a daycab is less than what a sleeper is. So more to come on what the pricing of a daycab though would actually look like.

Okay. If I could ask one more question about the stationary KARNO generator. In the release, you mentioned having demo sets deployed in '24 and also generating revenue. Are these two separate categories? Do you have one set of demo units and a different set generating revenue? Or are you deploying some of these and calling them demo units because the revenue model involves selling the electricity while retaining ownership of the unit? Is this approach helping to prove out the concept and allows you to showcase it? Would these be the same units or two distinct groups?

I think that's where to look at it will be the same unit. Now obviously, as we go deploy these, and as I mentioned on the call, we are in discussions right now with the likely early adopters. We'll be working with each one of them and looking at what their potential long-term use cases are and then structuring these agreements appropriately. From your standpoint, though, look at them as in the same bucket. Our goal is these early units that we'll be deploying in 2024, we will be able to generate revenue off of those units and then see that as a great kind of, stepping stone into the market to be able to scale volume from there.

Okay, great. Thanks, guys. I'll take the rest of my questions offline.

Your next question comes from the line of Steven Fisher of UBS. Your line is open.

Thanks. Good morning. Just to follow up on that KARNO question. I know you plan to generate revenues in 2024. Can you just give us a sense of the path and timing to gross margin positivity on that KARNO stationary generator, is that something that can be sort of even having your line of sight at this point or is that something that's much further out and you need a bigger scale?

Hi, Steven, this is Jon. Hey, great question. We're excited that next year, even though we just acquired the current technology that we have an opportunity to put some units into demonstration service and even get some revenue from them. We haven't projected yet or shared our expectations in terms of gross margin. But we don't think as we ramp up KARNO, we'll do the demo units. We do expect that we'll be able to ramp up sales in 2025 and beyond, where there's not a long pathway to positive gross margins. But I wouldn't want to give you any specific numbers just yet as we kind of work through the engineering on it. We think KARNO overall is a pretty good story, and that story is not a long one in terms of getting to being able to forecast those things, but we're just not quite ready yet.

Got it. That's helpful. And then in terms of the daycab. How does the development of that product affect your cash burn?

Yeah, I'll start it off. And Jon can chime in more as well. So we'll be utilizing a lot of the same team that we already have in Austin, Texas, taking the knowledge and a lot of the development we've already done on the sleeper truck to carry it over to a daycab. But as we mentioned, there will be some improved cost benefits and weight benefits to that solution, so there still is engineering spend. And, I'll let Jon touch on that.

Yeah, I've been trying to share when we talked about this a little bit at Investor Day around our cash or expense outlook for next year. And I did that in the context of what we spent the last couple of years. I've also looked through the comments that I made today about our expenses with taking out some of the unusual costs related to R&D component expensing. We're flattening out. I projected this at the beginning of the year that SG&A would flatten out. And R&D is looking to flatten out too, even with the addition of KARNO. So as Thomas mentioned, as we complete the R&D work on the sleeper truck, those people will be shifting over, and that money that we had spent over the past towards sleeper truck development will shift over to these other things including the 15-liter and the daycab. So I guess what I'm getting at here is, I don't want to forecast too precisely, but we don't expect a significant ramp-up in spend or a big additional cash burn to get the daycab. It's the next follow-on product that we're really discussing.

Okay, terrific. Thank you very much.

Your next question comes from the line of Bill Peterson of JPMorgan. Your line is open.

Hi, good morning. This is Mihima Kakani on for Bill. Thanks so much for taking our questions. Maybe start, can we get some clarification around what type of component issues you've been seeing that's led to delays in building electrification vehicles? And what the expected, if any impacts would be on your deliveries later this year for the ERX?

Yeah, so I think what we saw was really components that were coming in ensuring that they met the proper quality specifications that we were laying out to our supply base. We saw that there were some deficiencies there. Then we were able to work with the suppliers and make improvements in the products that they were producing for us to be able to meet those standards. Things like sheet metal, making sure that tolerances were correct, the paint specs were correct, as well as wiring harnesses, making sure they were built to the specifications that we had outlined, to meet the harsh conditions of the roads out there. That's really what led to some of those delays. So I think our team had done a great job forecasting when we needed components and supplies. Unfortunately, we just saw that some of the material coming in didn't quite meet the specifications and the demands that we were looking for. The supply chain base worked very well and diligently to correct those issues, and I'm pleased to say that we're now in the process of building out those remaining pre-production development trucks.

That's really helpful color. Thank you. And then maybe a second one. Can you tell us a little bit about your philosophy on building up ERX inventory versus getting these initial 30 trucks to customers? Like is there a certain level of inventory that you feel comfortable having as you ramp up in 2024 and beyond?

Yeah. So the focus right now is obviously those 30, both securing the orders and then getting those trucks built out and in the hands of customers. As we look at 2024, one of the things that we're considering closely is how these extended fleet trials go, how the initial adoption of units goes, and the founders' units later this year, using that input to look at what the 2024 volumes are expected to be. We plan on coming back with further information on that as we get a little bit further ahead. As you mentioned on today's call, we think we are weeks away from being able to start these extended fleet trials, which for many places is the final gating item before making order commitments. This is something that I think the industry is demanding and rightfully so, as they want to experience technology in their operations for a period before they are willing to place order commitments. That is not uncommon at all for Hyliion.

Okay, great. Thanks so much for taking your questions.

Your next question comes from the line of Andres Sheppard of Cantor Fitzgerald. Your line is open.

Great, thank you. Good morning, everyone. Congrats on the quarter and thanks for taking our questions. I just wanted to maybe start off by clarifying the cadence of the 30-unit delivery for this year. Should we expect the vast majority in Q4 or might there be some material deliveries in Q3? Just trying to understand what that breakdown might look like. Thanks.

Yeah, so later this year, our Q4 target will be around getting those trucks sold. We actually started the first build of a production truck during Investor Day, and we're looking at more Q4 timing of when deliveries will start taking place. Just to walk through the process, we've lined up sourcing the content to chassis from PACCAR Peterbilt. We will be then doing the upfit of our powertrain technology in Austin. As I mentioned going forward, we will also have the ability to do that at Mod Centers as well as in Austin. That vehicle will go back to PACCAR, go through final end-of-line certification, the VIN will be put on the vehicle, and then it would be ready to go out to customers. This will enable these vehicles to also achieve that ACT credit that we've been talking about. So that's the process. But in terms of when these deliveries will be completed, we're looking at Q4.

Got it. Okay, that's what I thought. Thanks, Thomas. And maybe a question for Jon. In terms of gross margins, I know we're not providing too much visibility around those but is it realistic to target positive gross margins at some point throughout 2024 or is this perhaps more of a 2025 story? Thank you.

Yeah, I think it is still a little bit early to tell. As we noted, we're still working on our order book for next year, and that's contingent upon these extended fleet trials that we're about ready to kick off. Volume drives costs, and so getting that order book in place as well as some of the design changes we're working on, and also getting the powertrain to the point where we're selling it, all factor into our expectations for timing on gross margin. As we noted, we're not expecting big losses right out of the gate, but we do expect some ramping. So it's a little bit early for us to share expectations there because of all those factors. But you can be assured we're working on it very hard.

Got it. Okay. Thanks, Jon. And maybe just one last one, if I may. You mentioned, given your current liquidity, you don't anticipate any capital raises this year, but that you would remain opportunistic for next year. So I'm just wondering if you can elaborate a little bit further as it pertains to next year. How are you thinking about potential capital raises? Are you leaning towards equity or debt, or one more than the other? Just trying to better understand how you are thinking about it as it pertains to next year? Thank you.

Yeah, sure. I've shared at Investor Day that we're slowing cash burn. We've reduced our estimates for this whole year by $50 million from where we started the year, down to an expectation that it would be no more than $150 million. We still feel good about that. We're trying to keep it as low as possible to extend our options. You could extrapolate what we've shown on the slides and say that we don't really need to raise capital next year in addition to this year. The point about being opportunistic is if the opportunity arises, and we've seen some companies increase a lot due to better prospects and so on. If that were to show up, we would probably look to the capital markets; I don't see that being more of an equity play rather than anything else. The whole idea is to give us some flexibility to execute our strategy. As Thomas outlined, we see big opportunities out there. There's a bit more work to do to get a daycab and get the KARNO opportunities, and figure out the best way to build the sleeper cab ERX. All of those things, along with the other strategic opportunities that we hinted at today, play into our capital forecasts. The good news is, we have a lot of flexibility. We've created that flexibility and runway for ourselves and we're not just assuming that things are going to turn around in six months or so. We're being very strategic about how we think about using our capital and how that aligns with our strategic plan. So again, we've got flexibility, we are really watching it carefully, and we'll just see how things go.

Got it. Okay. No, that's super helpful. I appreciate that. Thanks again. Congrats on the quarter. And I'll pass it on. Thank you.

Thank you.

Your next question comes from the line of Mark Delaney of Goldman Sachs. Your line is open.

Good morning. Thank you for taking my questions. And thanks for all the details on the KARNO. I believe you mentioned in your prepared remarks that some suppliers have been increasing prices and therefore the bond cost of the ERX could be higher than you've been thinking earlier this year. I'm hoping if you could clarify a bit more on that topic. Are you able to give us a better sense of the magnitude of the increase that you're now thinking about in terms of the ERX costs? Maybe give us a sense of the breadth of suppliers doing this as a single component or two, or is it a broader base set of changes?

Sure. So I'll first start with the overall theme for maybe it's even more than a year, a couple of years, which is just significant component price increases. What we shared on the last earnings call was, that was one of the reasons that drove us to go back and revisit our Founders' agreements. We need to pass some of those price increases on to customers, as we shared on today's call. Even since then, we've seen some more component increases; those are in the thousands of dollars range. What we're seeing is that the price increases from suppliers are not lightening up just yet. I don't see that this will change our pricing at this stage, but we just wanted to add that color to the market of still seeing price increases. This is not unique to Hyliion. We've seen others report earnings, and some are taking very significant losses on shipping out vehicles. As Jon touched on that a little, we don't see that we're in the same boat. We are going to be operating at a loss on these initial trucks, but we will be working diligently to pull that cost out of the product as we go forward here and then we see daycab as another market opportunity for us to pursue as well.

Mark, I might add to that. As people would expect, when you have a new industry forming, especially in the Class 8 market that doesn't have a lot of volume, and you're talking about things like battery systems and E-Axles and so forth. The industry really needs to mature and reach higher volumes. I think naturally, you'll see pricing come down over time. It's just that we haven't yet reached that volume-driven inflection point on pricing, and we're dealing more with inflationary sides of it that are working the other way. So those are the things that are affecting us.

Yeah, that all makes sense. I appreciate the color. I guess to follow up on that topic, as you're thinking about price cost, in terms of some of these factors, what you can pass on and what Hyliion may have to absorb? Do you think that price cost dynamic gates production in 2024? I realize you're still formulating the exact build plan, as you said in your prepared comments. But I'm curious if the potential losses limit how many ERX units in '24 you may want to manufacture and sell?

Yeah, Mark. That's a great question. We've actually addressed this a little bit in the past. Just recently that, as you think about the changes in cost, the shift in strategy that we outlined a quarter ago, where we said, hey, we really want to control and meter the ramp up of this product because of all of these challenges. You add to that, we see all the other opportunities around the daycab and KARNO and so forth. That we definitely want to get our trucks out there, get miles on them, improve our powertrain technology and reliability. We do have this change where the 12-liter engine that we have won't be certified in California next year. That doesn't mean we can't sell trucks; we'll continue to sell them. But we're not rushing to put out trucks as quickly as we were maybe a year ago or even further back because that's not necessarily going to get where we want to be, which is to have, like I said, the daycab truck, working on design changes that will take cost and weight out. So, 2024 will be a year where we're going to continue to sell, but it's not a strategy where the more we get out there, the better. We want to be very thoughtful about the volumes and the ramp-up as we work on these other things that we've outlined today. That would kind of help us really in all areas of proving up the product, managing our capital, cash flow, and those types of things. So, yeah, you might say there could be some metering of that just depending on the factors, the interest level, the price level, component level, and so forth as we get through next year.

Understood, thank you.

Your next question comes from the line of Chris Fibs of CP Investments. Your line is open.

Hey, guys, can you hear me okay?

Yeah.

All right, thanks. Regarding sales as far as your plan for the market. Are you guys planning on having field sales reps in the field or mostly working with OEMs, or doing more of an online presence or a combination of all?

Sure. So it's definitely not an online presence type of a market. The commercial vehicle space is very used to in-person, face-to-face discussions about how they are going to be specifying their trucks. What's conventional for Tier 1 suppliers in this space is that you do have a field sales team, but you're also working closely with the OEM. You want to go out and educate the fleet on your technology and on your solutions. So that then, as they go in placing brand new truck orders through their dealers, they're specifying your product. That will be our goal as we move to that model of being a powertrain provider as opposed to the full vehicle seller. That is customary in the industry and a model that we look to slot into.

And do you guys currently have any reps in the field? Or when would you start actually ramping up sales reps?

We already have sales representatives who are performing the tasks I just outlined. For now, we will handle the entire truck sale, but we plan to quickly transition to selling just the powertrain instead of the complete vehicle.

Awesome. All right. Thank you.

There are no further questions at this time. I will now turn the call over to Thomas for closing remarks.

Thank you everyone for joining today's call. I also appreciate everyone who attended in person or virtually during Investor Day. For those of you who haven't, I strongly encourage you to go to our YouTube channel and watch that presentation. It's a couple hours long, but it gives you a great amount of detail on both the Hypertruck powertrain solution as well as the KARNO generator. Thank you for joining today's call.

This concludes today's conference call. You may now disconnect.