Earnings Call Transcript - SPRU Q1 2021

Operator, Operator

Good afternoon and welcome to the XL Fleet Corp. First Quarter 2021 Conference Call. As a reminder today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. For opening remarks and introduction, I'd like to turn the call over to Jim Berklas, General Counsel and Vice President of Corporate Development for XL Fleet. Please go ahead.

Jim Berklas, General Counsel and VP of Corporate Development

Thank you. Good afternoon, everyone, and welcome to XL Fleet’s earnings conference call to discuss our results for the first quarter of 2021. With me today are Tod Hynes, our Founder and President; and Dimitri Kazarinoff, Chief Executive Officer; and Cielo Hernandez, our Chief Financial Officer. Our call this afternoon includes statements that speak to the company’s expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update any forward-looking statements, except as may be required by law. We refer you to XL Fleet’s disclosures regarding risk factors and forward-looking statements in today’s earnings release, our annual report on Form 10-K and our other Securities and Exchange Commission filings. With that, I will turn the call over to Tod Hynes.

Tod Hynes, Founder and President

Thanks, Jim, and thanks to everyone for joining us on the call this afternoon. Before we get into our results for the first quarter, I'd like to begin with the discussion of an exciting acquisition announcement we made this afternoon. We were incredibly excited to announce the acquisition of World Energy Efficiency Services. Our major customers tell us that fleet facility power constraints create a unique and large challenge when trying to charge dozens and even hundreds of vehicles at the same location. The team at World Energy is filled with experts who can help solve this problem by incorporating energy efficiency measures and solar power, while integrating EV charging to increase the amount of energy available for fleet vehicle charging. The company operates across the New England region and has a long track record of delivering value to a strong portfolio of customers and utilities, including their longstanding relationships with Eversource and National Grid. Our acquisition of World Energy is aligned with the clear strategy we laid out when first announcing our business combination last year, and we expect the acquisition to benefit XL Fleet in two key ways. First, this is a highly strategic bolt-on acquisition that expands our charging infrastructure division XL Grid. When we first launched XL Grid, our mission was clear: to make it easier and more cost-effective for companies to electrify their fleets. By removing barriers to adoption and lowering the total cost of ownership, we believe we are well-positioned to provide a comprehensive offering and set of solutions. This is exactly what World Energy provides to its customers. And the combination of our company's complementary capabilities is tremendously powerful. As we said, the acquisition of World Energy will enhance our ability to provide fleet electrification in an even more seamless manner. Second, in addition to complementary capabilities, we've also benefited from a synergistic portfolio of customers. This includes the opportunity to provide XL Fleet solutions to World Energy's strong and deep customer base, as well as accelerating the adoption of XL Grid's offering across XL Fleet's spectrum of customers. Importantly, World Energy is profitable, free cash flow positive and is immediately accretive to XL Fleet. Total transaction consideration was approximately $16 million. The transaction was enabled by our strong balance sheet position resulting from our business combination with Pivotal II in December of last year, including more than $400 million of cash on the balance sheet at the end of the first quarter of this year. We are excited to welcome the World Energy team to XL Fleet and look forward to partnering with them to grow over the long-term. With that, I would like to pass it over to Dimitri to review our first quarter results and an update on our business progress.

Dimitri Kazarinoff, Chief Executive Officer

Thanks Tod. We remain intensely focused on executing our strategy for long-term success. We continued to evidence our success with a number of recent key announcements, including several since our last earnings call in March. I'd like to highlight a few. First, we announced the key partnership with Dickinson Fleet Services, a leading mobile maintenance provider for medium and heavy-duty trucks and trailers in North America. Under the partnership, we meaningfully expand our service network, including access to Dickinson's base of 700 mobile repair units and 800 repair and maintenance technicians. In addition to scale, we gained even greater regional and geographic diversification, enhancing our ability to service our growing base of customers and their demand. We're already working closely with the Dickinson team to ensure they are trained in servicing our wide range of vehicle applications. Second, we announced an agreement to electrify the pickup truck fleet of Apex Clean Energy, a leading clean energy company that develops, constructs and operates utility-scale wind and solar power facilities throughout North America. Apex turned to XL as part of their comprehensive effort to reduce carbon emissions. The first order, which includes 19 Ford F Series pickup trucks, includes both hybrid and plug-in hybrid systems. Apex is a great example of how commercial fleets providing must critical nature services are turning to XL Fleet to immediately deliver sustainability without compromising performance or reliability. A key part of this strategy is continuing to evolve and transform our business to offer a wider set of applications and solutions to a growing base of customer requirements. This includes our all-electric solutions, including our development agreement with Curbtender for electrified refuse trucks. We remain on track and expect to make volume shipments in 2022 significantly expanding the range of solutions and applications offered to our customers. Together with Curbtender, we have received recent verbal strong expressions of interest to purchase more of these refuse trucks from additional cities in North America. We are also pursuing other EV platforms and applications with our expanded product development team. We continue to expand the XL Fleet team in response to our widening scope of opportunities, and we are planning for growth. We're adding talent across the whole organization, including engineering, sales, marketing, finance, and HR. In fact, our sales team is more than three times larger than it was at the end of last year, meaningfully improving our ability to target and convert market opportunities for growing electrification demand. Importantly, this organizational growth includes the recent addition of Cielo Hernandez, who joined the XL Fleet team as Chief Financial Officer in April. Cielo brings with her more than two and a half decades of public and private company experience. Cielo has already established herself as a valuable asset to our organization, and I look forward to partnering with her over the long-term. With that, it is my pleasure to turn it over to Cielo Hernandez to review our financial performance and our latest outlook.

Cielo Hernandez, Chief Financial Officer

Thanks, Dimitri. I'm excited to be part of the XL Fleet team. Revenues for the first quarter of 2021 totaled approximately $700,000, slightly below the outlook we provided last quarter and compared to $1.2 million in the prior year period. Gross loss for the quarter was approximately $700,000 as compared to a gross loss of approximately $60,000 in the prior period quarter. Research and development costs totaled $1.4 million during the first quarter compared to $1 million in the prior year period. The increase in R&D was primarily driven by the continued expansion of our electrification solutions. We exited the first quarter with cash and cash equivalents of approximately $404 million, up from $330 million last quarter. We continued to be excited about our strong balance sheet, having raised $404 million of net proceeds from the completion of our business combination with Pivotal II in December 2020, including approximately $86 million raised during the first quarter from exercises of our public warrants. We believe that this positions us extremely well to execute on our growth strategy over the next several years, including the potential for a few other strategic M&A. In response to guidance provided by the SEC on April 12, 2021 regarding the accounting and reporting of warrants issued by SPAC, XL Fleet has restated its consolidated financial statements to change the accounting treatment of its warrants. The restatement will be isolated to this change in accounting treatment and has not impacted historical or forward-looking cash flow and operation of the company. The restatement, which the company believes also applies to a significant number of companies, is isolated to XL Fleet's historical accounting for its public warrants and private placement warrants issued in connection with its business combination with Pivotal Investment Corporation and has no impact on the historical or forward-looking cash flow and operations of the company. These warrants had been accounted for as equity. XL Fleet restated its fourth quarter and full year 2020 financial statements to account for the warrants as liabilities, which the company believes to be consistent with the April 2021 SEC guidance. The warrants will be marked-to-market with non-cash fair value adjustments. During the first quarter of 2021, the public warrants were exercised by their holders, and as such, no public warrants remain outstanding at March 31, 2021. The impacts of these restatements were entirely non-cash and are expected to have no impact on XL Fleet’s ongoing business operations or future plans. So now I'm going to talk about our outlook. Before opening the lines for Q&A, I'd like to provide an update outlook for 2021. As Dimitri noted, interest in all divisions continues to grow. However, supply chain friction remains in place across the automotive industry as the market continues to bear the impacts of the ongoing COVID-19 pandemic, as well as a shortage in key production markets. While those factors continue to create uncertainty, we have seen more improvement in our visibility for the second half of the year as customers continue to set their sustainability goals and many of their budgets refresh in July. As discussed in the quarter, commercial fleet orders significantly follow a seasonal pattern that will have both of our shipments in the second half of the year. As a result, we expect our revenue strength to be significant in the second half, with more than 80% of our total 2020 revenue realized in the second half of the year last year. We continue to expect our seasonality to be even more pronounced this year, with a significant majority of our revenue realized in the back half of the year as COVID-related demand impacts stock prices and commercial customer deliveries ahead of 2022. I will now pass it back to Dimitri for a few closing remarks.

Dimitri Kazarinoff, Chief Executive Officer

Thanks, Cielo. In summary, we remain focused on executing our strategy, providing customers with reliable electrification solutions that meet their performance and sustainability requirements. Industry challenges remain, but we are not taking our eye off the mission of building the business, innovating new technologies and delivering electrification solutions that reliably meet the needs of the commercial fleet industry. Thanks very much for your time this afternoon. Now, we will open up the lines for questions and answers.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Jed Dorsheimer with Canaccord Genuity. Please go ahead.

Jed Dorsheimer, Analyst

Hi. Thanks for taking my question. I guess, Dimitri, if I look at the cumulative systems, they didn’t change quarter-over-quarter, so were there any systems, new systems sold as part of the $675,000 in revenue?

Dimitri Kazarinoff, Chief Executive Officer

Yeah. Jed, I believe we shipped a little over 30 in the first quarter according to that revenue number and the cumulative statement in our filings just referred to a total of over 4,300. So, it was a modest increase because of the light quarter. But we continue to expand deliveries.

Jed Dorsheimer, Analyst

I suspected that. Thank you for the information. Congratulations on the acquisition as well. From my perspective, it appears that the company is a direct competitor to Ameresco, though I could be mistaken. This leads me to my question: besides EV charging, there are various energy efficiency drivers in their business. I'm interested to know whether this is something the combined entity will pursue or if the focus will solely be on the EV aspect of the business.

Tod Hynes, Founder and President

Jed, this is Tod. One of the advantages of World is that they're focused on higher volume, smaller mid-sized projects where Ameresco might be focused on an entire campus or a bigger project. And so many of the fleet facilities where we see electrification occurring are smaller to medium-sized buildings, maybe 25, 50, or 100 vehicles kind of in that range. And so, they have a very efficient process for implementing those types of projects. And we do see energy efficiency, solar, and on-site storage as key pieces of the fleet electrification process. A lot of these facilities have power constraints. They weren't designed to have 50 vehicles charging at 7 to 20 kilowatts overnight or fast chargers that can add up quite quickly. So, looking at the energy use profile of those buildings, incorporating efficiency, solar, and storage, as well as the charging infrastructure, really enables fleets to electrify faster and at a lower cost than if they were to try and upgrade the power to the building, which can take time and add significant expense as well.

Jed Dorsheimer, Analyst

Got it. That's helpful. Thanks. For my last question, I'd like to get the three of you to frame 2021 in comparison to 2020 with the significant growth in seasonality for the business. Should we expect the growth you experienced year-over-year in 2020 to be similar for 2021? I’m curious if you can share more insights on the framework. I know you gave a lot of details during the presentation regarding the guidance, but without that guidance, I'm wondering how we should approach our expectations for the year.

Dimitri Kazarinoff, Chief Executive Officer

Yeah. Jed, this is Dimitri again. I can take that one. As Cielo mentioned, we expect a majority of the revenue to be back half loaded again this year. In fact, that sort of seasonality or that pattern we expect to be even more pronounced. And that's because of the ongoing COVID and industry related challenges in the first half of 2021. We've seen the OEMs closing their order books early, not even taking orders. So there's been a lot of disruption for our customer's ability to get vehicles. At the same time, we think a lot of those pressures are going to be alleviated over the next couple of months. And we do know that some of our customers who are looking to get a number of our systems and they've had budget issues because of COVID, municipal customers, they're going to see relief with new budgets on July 1st. So, there's a lot of factors at work to help us in the second half of the year. There's still a high degree of uncertainty in terms of the level of disruption that could persist in the industry from things like the chip shortage or rubber shortages and alike. So, it's still an uncertain time, but we do see visibility to a much better second half than the first.

Jed Dorsheimer, Analyst

Okay. I'll jump back in queue. Thanks.

Operator, Operator

The next question comes from Greg Lewis with BTIG. Please go ahead.

Greg Lewis, Analyst

Yeah. Hi. Thank you and good afternoon, everybody. And congrats on the acquisition. I guess I just wanted to dig in a little bit there. I guess you mentioned 2020 revenue, is there any way to think about how that's trending or tracking in 2021? Obviously on the EV side, your core business, there's some supply issues, et cetera. But as we think about the pace of EV charging, that seems to really be accelerating. I don't know if you want to kind of talk a little bit about XL Grid as a whole, or just this acquisition. But any kind of color how you're thinking about the opportunity in 2021? And then, maybe expanding on that a little bit, how you think about that opportunity in 2022 or beyond 2021, just as given some of the expectations around the EV charging build-out.

Dimitri Kazarinoff, Chief Executive Officer

Sure. Greg, this is Dimitri. In terms of the acquisition, World Energy has a very strong business, really solid relationships with a wide customer base and utilities in the regions they operate. So, we think the momentum they have to sustain what they did last year and keep moving forward is very exciting. And we think the business combination offers potential upside, especially as it relates to XL Grid. We've got a widening suite of opportunities on the XL Grid side. And there is a lot of energy in that sector. Tod can give a little more color on some of that opportunity space that we've been pursuing.

Tod Hynes, Founder and President

Thank you, Dimitri. We definitely view the XL Grid segment of our business as a valuable investment. We developed this plan when we launched the business, and it focused on the right timing and resources. With the closing of our stock transaction in December, we gained significant resources and quickly brought in experienced leadership to oversee that division. We have been building our team, primarily targeting larger infrastructure projects. The internal capabilities and products we are developing are akin to the UBS Arena project we announced, which includes a thousand charging stations. These are substantial deals, but our World team also brings in experts who can assist us with smaller to medium-sized facilities, which are where we expect the majority of long-term demand to arise. Fleet electrification is going to be a long-term process spanning multiple decades, involving numerous facilities and potentially hundreds of thousands of charging stations, with an administration aiming for over 500,000. We believe this will become a key part of our business. Additionally, it provides diversification against supply chain and market risks, as it involves a different process compared to our electric powertrain segment. Together, these aspects create a strong foundation for us to facilitate comprehensive electrification programs for both small and large fleets.

Greg Lewis, Analyst

It seems that the company used to focus mainly on the New England region. Now that it is part of the XL Grid family, are there expectations to expand that part of the business or leverage their expertise on a national level?

Tod Hynes, Founder and President

This is definitely a national and ultimately international opportunity. So, they've built a great business on a regional basis. We already have a good national footprint in the U.S., as well as Canada. And we will leverage their capabilities to expand and bring in more business across the U.S. and Canada.

Greg Lewis, Analyst

I have one more question. In your prepared remarks, you mentioned that some demand has started to appear on the municipal side, and in the press release, you referred to the potential for delivering the first all EV systems. Regarding lead times, whether for a municipality interested in your plug-ins or a new company considering an EV solution, what kind of notice should I give XL to prepare for converting my vehicle? Additionally, does this differ between the all EV solution and the current options available?

Dimitri Kazarinoff, Chief Executive Officer

The EV solutions are still in product development, so they aren't currently available for production deliveries. Consequently, the lead times are definitely longer. We already have some orders in hand, which is very exciting. We've received strong interest from additional cities in North America for the classic refuse offering we're developing with Curbtender, which has been announced, but those deliveries are expected to happen in 2022. Therefore, significant lead times are ahead. For the existing products we've released, the hybrid and plug-in hybrid systems typically have a lead time of about 10 to 14 weeks, which is also the standard for orders and deliveries from the OEM to the upfitters and fleets. Currently, the overall lead time situation with the OEM is somewhat disrupted and can be substantially longer. However, we are also working to improve our response time, especially for customers who already have vehicles on the ground. Our business model allows us flexibility to do retrofit and upfit, and in some cases, particularly with the disruption in new vehicle deliveries for some customers, that can be a practical option. This summarizes the current lead time situation.

Greg Lewis, Analyst

Okay. Great. Thank you all very much for the time. Have a good night.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Mr. Dimitri Kazarinoff for closing remarks.

Dimitri Kazarinoff, Chief Executive Officer

Thank you very much for participating in today's call and for your interest in XL Fleet. Have a great day.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.