Hyliion Holdings Corp.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Hyliion Holdings Q1 '21 Business Update Conference Call. . I'd now like to hand the conference over to your speaker today, Louis Baltimore, Senior Director of Investor Relations at Hyliion. Thank you. Please go ahead.

[Louis Baltimore:]

Thank you, and good morning, everyone. Welcome to the Hyliion Holdings First Quarter 2021 Business Update Conference Call. With us today, we have 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 press release we issued yesterday after the market close.

[Thomas Healy:]

Good morning, everyone, and welcome to Hyliion First Quarter 2021 Business Update call. 2021 is off to a great start for Hyliion as we've achieved some major milestones, most notably around the formation of our Hypertruck Innovation Council, which I'll talk more about today. During the quarter, we continue to make meaningful progress on our mission to bringing electrified powertrain solutions to the Class 8 commercial semi-truck space. I'd like to start off by turning to Page 3. There are a few key topics that I'd like to cover today. I'll be discussing the growth of our team, our continued progress with our hybrid product, including the shipments of additional units and our improvements to the product, our continued progress towards the commercialization of the Hypertruck ERX and some of the key milestones we've achieved. I'll highlight our innovation council and how critical this is for the success and launch of our product and conclude with some important facts and figures around both renewable natural gas and our battery technology. I'll then turn it over to Sherri to address the restatement of our 2020 10-K. One of the key focuses at Hyliion is continuing to grow our talented team. And over the past quarter, we've added an additional 43 employees that span in skill sets from automotive engineering, advanced algorithms and controls engineering to supply chain and operations and other core business functions. I'm continually impressed by the level of talent, enthusiasm and dedication our entire team has demonstrated as we all work to achieve our key milestones. Since we are growing our team at an ever-increasing rate, we are also expanding our headquarters in Austin, Texas and doing a facility redesign to meet both the head count and anticipated customer demand growth. This facility will allow us the production and install space we need to launch both our products as well as handle the significant employee growth planned for the years ahead. We will share more on these improvements in the coming months. Now turning to Page 6. Let's shift to some of the important updates on the Hybrid product. Our goal for this past quarter was to continue to ship out early low volume units of our Hybrid system, and I am pleased to share that we did this by installing our hybrid electric product on an additional 10 trucks during the quarter. By continuing to ship these Hybrid products to fleets, we are laying a strong foundation to be able to ramp up our product volumes. Through our deployment of the units, we are refining our assembly process, improving our installation methods, both internally and with third-party mod centers and growing our field service knowledge and improving our customer experience.

[Sherri Baker:]

Thank you, Thomas, and good morning, everyone. As you've likely seen, in mid-April, the SEC released a public statement highlighting the potential accounting implications of certain terms common to warrants issued and SPAC transactions, especially related to the balance sheet classification of these instruments as equity or an asset or liability. In response to this guidance, similar to nearly 80 other SPACs, we are in the process of restating our 2020 financial statements to change the accounting treatment of our warrants. Consistent with previous practice among SPACs, these warrants have been accounted for as equity. Hyliion now plans to restate its fourth quarter and full year 2020 financial statements to account for the warrants as liabilities that will be mark-to-market with noncash fair value adjustments. On November 30, 2020, Hyliion redeemed its public warrants for cash, leaving no outstanding warrants at year-end 2020. The impacts of these onetime restatements are expected to be entirely noncash and have no material impact on Hyliion's ongoing business operations, future plans or the information that we will now turn to. We expect to file the amended Form 10-K for 2020 and the Form 10-Q for the first quarter of 2021 by May 24, 2021. Now let's talk about revenue recognition. During the first quarter, while we shipped 10 Hybrid units, we did not yet recognize revenue. At this stage in Hyliion's life cycle, we are working with our customers to continually refine and improve our Hybrid product offering. It's still a bit of an iterative process as the real-world on-road use by our customers is the best way to truly understand how these powertrains perform in various conditions on the roads. As we incorporate the learnings from our customers and to feature designs, we are getting closer to the point where we will have a commercially viable product. As it relates to ASC 606, we have outlined in our recent 10-K filed in February the 5 steps that we take to recognize revenue from contracts with our customers. The most relevant steps here to revenue recognition involve the satisfaction of performance obligations in our contracts. Based on our extensive work in building detailed commercialization plans that incorporate key learnings from our current Hybrid offering, we expect to begin delivering units of Hybrid product with rolling improvements that will begin to generate recognizable revenue in the second half of this year. This concludes our prepared remarks. And now I would like to turn the call back over to the operator to open the line up for questions.

[Operator:]

. Your first question from line of Paul Coster with JPMorgan.

[Paul Coster:]

A few quick ones, please. First of all, when you start to scale this -- the products, how quickly do you believe you will be gross margin positive?

[Thomas Healy:]

Yes. So good to hear from you, Paul. I'll address the scaling of the products first here. So as we mentioned, on the Hybrid side, later this year, we're incorporating some pretty big improvements to the product, which will then allow us to really be able to take that solution and scale it up as well as we'll continue for the years ahead here to continue to iterate and improve that solution. But you're going to see that scale-up start to happen later this year. One of the things that I think is also key to that story is, even in the first quarter here, we already started utilizing mod centers to assist us with the installs on those vehicles. And so that allows us really to have those partnerships in place that allow us to be able to scale. So that's on the Hybrid side, you're going to start to see that scale-up happen later this year, obviously, following into next year. And then on the Hypertruck side, we're going to make the first units available fleet in 2022, but it's going to be towards the latter part of that year. And then after that is when we'll start that scale up. And one of the big things there is that we'll carry forward a lot of those relationships and mod center installs and working with the OEMs, specifically Peterbilt on the Hypertruck, that will be carried forward with what we're doing today into that Hypertruck solution.

[Paul Coster:]

And in terms of -- I mean, just from a variable and fixed cost perspective, you believe you'll be gross margin profitable for H1 or initially, the absorption cost be so high that you'll be negative gross margins on launching one or either of these products?

[Sherri Baker:]

I think upon the initial launch, it would be gross margin negative. But as we are starting to scale up to higher volumes that we would expect to start to see us getting to that gross margin positive. As part of building out the commercialization plans, we're also building on very detailed bill of materials for our products. So once we reach that scalable level, we would expect to be getting to that gross margin positive.

[Paul Coster:]

Sure. Okay. The other thing, Thomas, we're seeing quite a lot of demand for gas powered engines, I guess, in emerging markets, developing nations, Eastern Europe, India, even China. I mean I know that your primary focus is North America, but do these -- does the international market figure into your thinking at all?

[Thomas Healy:]

It definitely does. And in some ways, the international market has some aspects that are even more attractive than the U.S. market, right? You've got higher fuel prices, diesel fuel prices overseas. You also have some areas that are more focused on emission reductions than maybe we are here in the U.S. And so I could give you an example to it. I was meeting with a fleet that is an international fleet, and the first question they ask you is, what are the emission savings from these solutions? And then the second question is, what are the cost savings versus here in the North America U.S.? There's more of a focus on that cost savings, also being coupled with the emission savings. So international is definitely a strong focus, but we are going to launch the product here in North America in the U.S. first because that's where we have the most experience. We have the strongest success for being able to have a robust and successful launch of the product. And then from there, we'll scale international.

[Paul Coster:]

And my last question is you've talked about the battery supply constraints and clearly than others because you're using a much smaller battery. And you're using different chemistry. So you're kind of in a different part of the supply chain. But the question I've got really is, what about the rest of the supply chain, thinking semis and metals, probably other stuff as well, which I can't even think of at the moment. But it feels like everything is starting to get a bit ugly out there. Do you have problems beyond the battery constraint that you referred to?

[Thomas Healy:]

Yes. So it's a pretty interesting time on the supply chain side. I mean we've seen even over this past quarter, some of the major automotive or truck manufacturers have even had to slow down or shut down their manufacturing plants because of supply chain limitations. So we've had a keen focus on this over the last quarter here. And we have seen the lead times of some of the components we're using outside of batteries start to push out. And we've also seen some of the other components that we were planning on using. We've had to shift and start sourcing other components just because of the inavailability of those solutions. So overall, yes, supply chain is an interesting time right now. But I think we've got a good grasp on it, and we're definitely taking into account as we're going to start rolling up these volumes here making sure that we have those strong connections and lead times planned out with the supply chain base.

[Operator:]

Your next question comes line of Steven Fisher with UBS.

[Steven Fisher:]

Wondering if you could just give a little more color on the revenue recognition. I know it's going to be still pretty small numbers as we get started here, but should we assume more Q4 than Q3 in the context of that second half? And then, I guess, just maybe bigger picture, how does that revenue recognition evolve as the units start to grow on the hybrids? Will there be an ongoing lag between delivery and recognition? And then how would we think about the revenue recognition on the Hypertruck?

[Thomas Healy:]

Yes. I'll take those in the individual components. So from a timing perspective, we'll be launching the product as we move throughout the quarter and the scale-up of that will depend on the timing of that launch. So it will essentially ramp up as you're moving throughout the second quarter. From a Hypertruck perspective, we expect to be delivering the demo units in '22 to our customers, and then revenue recognition would follow after we complete the launches of those demo units.

[Steven Fisher:]

Okay. And then in terms of the cash burn, how should we think about that over the balance of this year and into next year, I guess, with a bit of a slower ramp up? How does that cash burn evolve? When do you envision being cash positive? And what's your confidence you don't need to raise more capital?

[Sherri Baker:]

Yes. At this point, just due to the fact that we have the pending restatement of our 2020 financials, I'm unable to really comment on any of the financials at this point in time. But once we were able to restate both the 2020 financials and file our 10-Q later this month, we'll be able to provide more color commentary in there.

[Steven Fisher:]

Okay. And then just lastly, nice to see the team growing. How did that 43 people you've added to the team compare to what you're hoping for? Obviously, with COVID times, it's still maybe not the easiest for hiring, but how did that compare to what you were targeting? And what do you hope to achieve in the second quarter and the rest of the year?

[Thomas Healy:]

Yes. So the 43 number was slightly less than what we were hoping to achieve. I mean I think it's still a significant growth for the organization. And from my aspect, it's been fun to see just without many people coming into the organization. How much that's been able to accelerate the development of what we're doing, which is obviously the goal, and it's great to see that taking place. But the hiring continues to ramp up and continues to step on the gas there. There's no slowing down of hiring, we're still trying to scale out the team. And I think in the Austin market here, we're seeing it be a really great place to have the company located. As I'm sure you've been following, I mean, there's a lot of organization moving headquarters here. The Austin area, a lot of people moving to this area. And I think as people look at Hyliion, this is a really exciting opportunity and one that is on the cutting-edge and forefront of a new technology, a new -- changing the landscape of trucking. So we've seen that on the recruiting side, we've been able to be able to bring in top talented individuals into the organization.

[Operator:]

Your last question comes out to Brian Johnson with Barclays.

[Brian Johnson:]

A couple of questions. First, just in terms of the milestone for revenue recognition on the hybrid trucks that are out there on the roads. Can you give a sense of how many trucks are out? And then what the specifics you can be, the technical milestone they have to achieve to have revenue recognition? And then I guess, finally, was there already cash put upfront for those trucks from the potential customers, and it's an event that will just bring it into GAAP revenue? Or will there actually also be payments for the trucks cash coming in from the customers?

[Thomas Healy:]

Yes. And Brian, just to clarify, were you referring to Hybrid or Hypertruck?

[Brian Johnson:]

Hybrid, Hybrid.

[Thomas Healy:]

Hybrid. So at this stage, it's going to be those units that we start shipping in the second half of this year, which will be the ones that we start recognizing revenue on. And the reason for that is really around -- there's been some pretty significant product advancements and improvements that we're rolling in there. And as Sherri mentioned, that's what's kind of classifying it as those units being able to recognize revenue on those. And then going forward, obviously, we'll continue to recognize revenue on those Hybrid systems. So it's really the second half of this year, where you're going to see those new shipments starting to take place, which will be the ones that we'll have rev rec on.

[Brian Johnson:]

Okay. And are those already orders, firm orders? And secondly, is there any kind of technical hurdle to shipping those other than just the norm production ramp in terms of, for example, fuel economy levels they have to hit or other metrics that make the customer payments contingent?

[Thomas Healy:]

Yes. So in terms of the orders first, so what we've actually started doing is, even in the second quarter here, we started kind of pulling back on some of the deliveries of units and actually pushing those out so that we're incorporating them into the improved version of the Hybrid system in the second half of this year. So we're kind of slowing down and building up that demand for that improved Hybrid, but then we have a jump-start to those units that are going to have revenue recognition to them. So in terms of the second part of that question, though, the technical hurdles, some of these units are going to be going to fleets that have already been experiencing the technology and then other ones are going to be going to new fleets as well. And what we've seen taking place is a significant amount of interest in the CNG hybrid solution. And that's very easy for a fleet to be able to experience that benefit, right? It's -- you put this hybrid system on a CNG truck, overnight you're taking it from an underpowered vehicle to one that has power levels that are much more comparable to a diesel truck, and it's much easier for a fleet to be able to kind of validate those improvements very quickly. And so from that standpoint, while we will still have some new fleets coming into the mix or a lot of new fleets coming into the mix, that will want to experience the technology kind of first before being able to recognize revenue on it. We see that on that CNG application, it is a quicker process to do that.

[Brian Johnson:]

Okay. And it almost sounds like what's given then the difference between the customer, taking -- you're implying you are going to take an existing CNG truck and you'll retrofit it with a Hybrid solution. I'm trying to get a sense of that and the future Hypertruck, which will actually have the CNG engine from the get go?

[Thomas Healy:]

Yes. So on the Hybrid side, we can either do it as a retrofit to an existing truck that a fleet operates or a brand-new vehicle, right? So we can do either versus the Hypertruck will be more focused on brand-new vehicles. And when you compare the differences between the 2, the Hypertruck bring forward -- brings forward a series of additional benefits and improvements for the fleet, right? You've got significantly more horsepower and torque performance than a diesel truck. You've got the ability to drive that vehicle on purely EV, so you have zero tail pipe emissions coming out of that truck. So if it's operating in cities or in port applications, you can have that zero emissions standing. And that's what we see really being the attractive side of the Hypertruck. And I think over this past quarter, especially with the announcement of the fleet council and pulling in some of the industry-leading fleets, you've got the Anheuser-Buschs, the Penskes, the Ryders of the world that are saying they're going to be the first to really experience this Hypertruck solution. We've really seen the interest increase from fleets over the past quarter. And I don't envision that slowing down at all. I think the market sees this as a really practical and logical way to start moving into electrification and one that they can do with producing costs and not having a disruption and needing a bunch of infrastructure within their operations in order to deploy it. So a lot of strong customer interest has been coming forward over this past quarter.

[Operator:]

. Your next question comes from Mark Delaney with Goldman Sachs & Company.

[Mark Delaney:]

First question was on the operational milestones for the Hybrid product, thinking for the update about doing the cold weather testing and having moved past that issue. Maybe you can talk about what additional milestones the Hybrid products still needs to go through in order to meet that second half of this year delivery time line for the next-generation product?

[Thomas Healy:]

Yes. So it's really continued validation internally and getting some miles on the system to really make sure that it is fully vetted before we're going to be putting it out into customers' hands. And one of the things that we highlighted during this call is we're going to be implementing also a rolling improvement to that hybrid system. So we got a bunch of improvements that are going to be coming forward in the second half of this year. And then those will carry forward to the years ahead of further improvement. So in terms of what further validation needs to happen, there's a myriad of things, right, more on-road testing, software bring up and validation. The cold weather testing that we mentioned, great learnings came from that. And at this stage, I think the team has very high confidence that the second half of this year, we are going to be in a good shape to be able to launch that improved Hybrid version. And then from there, continuing to make improvements going forward.

[Mark Delaney:]

Understood. That's helpful. And then second question, trying to better understand the spending commentary. I believe the company had previously guided for about $140 million of operating expenses. I know you're not giving quantitative guidance at this point. But maybe you can talk a little bit more qualitatively, how to think about what's changing, if anything? And you talked about a number of hires and -- but also some timing changes for certain products. So just trying to think some of the puts and takes relative to how the company is perhaps managing its operating expenses for this year?

[Thomas Healy:]

Yes. So as I alluded to earlier, just due to the pending restatement, I'm really unable to provide any of the financial metrics that we would typically cover. However, we will have all of those metrics and the color commentary provided in the Q that we will be filing here in a couple weeks.

[Operator:]

There are no further questions. I would now turn the call over to Thomas Healy, Founder and CEO, for closing remarks.

[Thomas Healy:]

Well, terrific. Well, I appreciate everyone taking the time today to join us on our business update call. As I hope you saw throughout the presentation, a lot of exciting things happening within the organization right now, a lot of great progress being made towards bringing these electrification solutions forward and look forward to much more exciting times to come and continue to have you be a part of this journey, and we'll chat again next quarter. Thank you.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.