Romeo Power, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

Operator:

Ladies and gentlemen, welcome to the Romeo Power First Quarter 2021 Financial Results and Webcast Call. My name is Charlie and I will be coordinating your call today. I will now hand it to your host, Sam Dunn, VP, Strategic Finance to begin. Sam, please go ahead.
Sam Dunn:

Thank you, operator and good afternoon, everyone. And thank you for joining us today for Romeo Power's Q1 earnings call. Before we begin, I want to remind everybody that this conference call will contain forward-looking statements including our expectations of future results, sales, cost of inputs, market dynamics, et cetera. Our actual results may differ materially from those projected in these forward-looking statements.
Lionel Selwood Jr.:

Thank you, Sam and good afternoon to all. With me today is Lauren Webb, our Chief Financial Officer. As it has only been about six weeks since our last earnings call, we'll focus today's call on the latest updates since then. To start off, I'm sure it won't surprise anyone on this call to hear that the demand for vehicle electrification continues to grow. Our vehicle OEMs are subject to regulatory and consumer pressures to reduce CO2 emissions. Romeo Power is well-positioned to capitalize on that growth. We're continuing to leverage our advanced engineering expertise and the partnerships we have established with key industry leaders like Paccar, Heritage and Republic, among others to develop and commercialize safe, doable, cost-effective battery pack solutions. We are proud to have earned the trust of leaders like these, who faced one of the most difficult electrification challenges; electrifying long-haul trucking in a cost-effective manner. Our technology advantages make us well-positioned to execute our long-term agreements with leading OEMs and fleet managers. Our technological mode remains second to none, as evidenced by a continued diversification and quality of our order book. Customers are realizing that the most effective path forward to an ultra-competitive long range electrified commercial vehicle goes through Romeo Power. However, the near-term challenge is the limited number of battery cell providers producing safe high performance cells suitable for the commercial electric vehicle market. We are attacking this problem head on by broadening our engagement with battery cell providers. We are taking key strategic steps to reduce the risk over the medium and long-term. This has become one of the most critical issues facing our industry and we are doing everything in our power to help ease supply constraints and improve the number of qualified cells for ourselves and for the industry broadly.
Lauren Webb:

Thanks, Lionel. For the many reasons, Lionel just articulated, 2021 is expected to be a very heavily back end loaded year for us. We posted first quarter revenue of 1,054,000, which compares to 2,522,000 in the year ago quarter. Approximately another 1 million in revenue for prototypes shipped in Q1 is deferred in accordance with our accounting policy to recognize revenue at the point in time delivery of the final prototype occurs. Despite the delay in our revenue generating capabilities caused by current constraints on cell supply, we've continued to optimize our product for large scale manufacturing and build out our manufacturing capability. As a result, our cost of sales in the first quarter were $4.8 million. We are managing expenses as prudently as possible without risking our ability to be prepared for a smooth production ramp when the time is right. In addition to scaling up the labor force, we have refined our raw materials inventory, which resulted in some adjustments and increases in reserves. We are keenly focused on optimizing solutions for the specific OEMs we've chosen to supply to date, and we are working closely with their internal teams to be in a position to deliver the safe, durable power solutions they need as soon as possible.
Operator:

Our first question comes from Gabe Daoud of Cowen. Your line is open. Please, go ahead.
Gabe Daoud:

Thank you. Good afternoon, Lionel and Lauren, and everyone. Thanks for taking the question. Maybe Lionel, could you start with the -- Hey, Lionel. Could you just start with the -- on the supply side of the equation? I understand you're still in negotiation. Last quarter, you mentioned maybe you'd have an update to give you maybe a little bit of confidence on hitting the $80 million number for revenue for this year. Just -- there'll be some good visibility into that number and you have sales on hand that could help you achieve that number. Just curious how we should think about revenue for the rest of the year.
Lionel Selwood Jr.:

So, I'll have -- Lauren, can you give some color on the revenue outlook and then I'll give some color around where we're at with our negotiations.
Lauren Webb:

Sure. Hi, Gabe. Thanks for the question. We are not making any changes to the numbers that we provided previously. We are optimistic that we will be in the range of 18 to 40 as communicated. Until final allocations are announced and our final agreements are done with the cell supply, we won't provide more specifics, but we are very optimistic in the range that we gave.
Lionel Selwood Jr.:

And then, Gabe, the important thing to note, as I said in the opening remarks, is that we're well positioned to enter a long term agreement for multiple gigawatt hours with one of our key partners. We're in active negotiations with another two. And we expect to start our negotiations with the fourth in this summer. So in aggregate, if we're able to execute upon, what we have in front of us, we'll be able to have adequate supply to satisfy our long-term production goals.
Gabe Daoud:

Great. Thank you guys, that's helpful. And then, maybe just following up on the demand side of the equation, obviously, a nice announcement in April with Paccar, could you maybe shed a little bit of light on the agreement and the revenue potential through 2025? I know it's restricted to just the two Peterbilt trucks. But I think it has been some, we have put out some numbers that could suggest, that could be a nice revenue opportunity for you. But so any color around, I guess, first revenue from the contract when you expect meaningful revenue to show-up, and then just total revenue potential from the opportunity.
Lionel Selwood Jr:

Sure. Lauren, can you five some color there?
Lauren Webb:

So as you know, we defined backlog very specifically. So Paccar is not in our backlog. But we believe that the revenue potential from this agreement is it could be very significant to our long-term revenue plan, especially given the fact that the 579 and the 520 trucks together have about 10% of the market share for the class-8 truck market. So we do not have specific numbers to provide. But we see this as a very significant development. And we expect it to start generating revenues gradually and hit its stride around 2023.
Gabe Daoud:

Got it? Thanks, Lauren. And then just finally, the BorgWarner and AKASOL they were pretty complimentary of AKASOL on their conference call and just curious if there's been just any update on the partnership there. And just wait to work together. And you kind of coexisted with AKASOL. Is there any update on the partnership generally?
Lionel Selwood Jr:

Look, our joint venture remains in place with BorgWarner. Nothing has changed on that front, where ahead we don't drive into good order book, a joint venture with them. And we value the partnership, and nothing more to announce at this point.
Gabe Daoud:

Okay, thanks, Lionel.
Lionel Selwood Jr:

You're welcome, Gabe. Thank you so much for the questions.
Operator:

Our next question comes from Steven Fox of Fox Advisors. Your line is open. Please go ahead.
Steven Fox:

Thanks. Good afternoon. First question, I was just curious, based on what you said about your cost of goods sold and building out the manufacturing? Can you give us a sense for the pace you're building out capacity right now? Is it in line with the 18 to 40 million in revenues doing? Are you trying to get ahead of the equipment side, relative optimism around cell supply, or just any color on how the manufacturing has been affected by some of the other delays? And then, I had a follow-up?
Lauren Webb:

Sure. So the manufacturing capacity built out that we're doing is in line with what we originally planned in the sense that, we always knew that this year's revenue would be heavily back end loaded. And we are spending carefully as we're waiting to finalize negotiations and see what the final details of the sell agreements are. But there's not a substantial slowdown in our preparations, because our objective is to be prepared to meet the production ramp as soon as the time is right, and not to have any delay at that point in time. So we're spending very methodically. We have already brought in some additional waivers to be prepared and smooth out the manufacturing process, as well as put equipment on orders to have those lines in place. And yeah, it is in line with 18 to 40.
Steven Fox:

Great, that's helpful. And then, just in terms of the negotiations, which you know – thanks for the detail. And then obviously, you don't want to sacrifice quality. But can you give us a sense for just the ability to close some of these in the current environment? It seems like you know, your suppliers have a bigger pencil. You have huge opportunities in front of you. But how do you manage that with the idea of just sort of maybe sacrificing a little bit upfront to sort of get that revenue stream going versus cutting me like perfect deal?
Lionel Selwood Jr.:

Hey, Steven and good afternoon, nice to talk to you again. From our value partner standpoint, quite frankly, battery cell providers want to work with us and Romeo Power is a clear leader and provider of leading edge battery technology in Class 6, Class 7, Class 8 trucks. Therefore what – what we've been doing is just ensuring our long-term outlook, walking down the supply, as we talked about last time through 2028. This shows our vigor and conviction in our long-term outlook. And quite frankly, our order book, especially the last year that we announced is very, very impressive for battery partners. So I'm highly confident in our ability to bring these deals over the line. So that's what I'm saying, the first deal we're right there. We will be given updates in the summer, as well as we have the other two, that's right behind it and afford to start negotiation in the summer. And let me be clear, we will not sacrifice safety or quality to make numbers. That's not who we are. What we've done is we've leaned on our extensive library of battery cell test data, to identify and priorities the top four partners that will get us to execute on our long term business plan.
Steven Fox:

That's really helpful color. And then real quick, just clarification on the backlog. It doesn't include Heritage or how much is included with the Heritage, since you now announce who the OEMs are?
Lionel Selwood Jr.:

There is nothing for the Heritage Electrification Program included in there now, since those are up – there is a pilot program in advance of the orders. So that's not included right now.
Steven Fox:

Okay, thanks for the color. Thank you very much.
Lauren Webb:

Sure.
Lionel Selwood Jr.:

Welcome, Steve. Thanks for the questions.
Operator:

Our next question comes from Greg Lewis of BTIG. Your line is open. Please go ahead.
Greg Lewis:

Yes. Okay. Thank you, and good afternoon, Lionel and Lauren, thanks for taking my question. I was hoping for a little bit more color around, how we should be thinking about the backlog. I mean, you mentioned that PACCAR is not in the backlog, but it's just kind as we think about hurdle rates and trying to going forward. Should we be thinking about new customers getting signed off and building out that backlog, or is it going to be a mix, where some customers go into backlog and others just kind of have purchase agreements that kind of show up, just kind of curious, just as we think that number should be building, how do you think about?
Lionel Selwood Jr.:

Hey, Lauren, can you give some color, and then I'll follow up.
Lauren Webb:

Sure. Again, we are defining backlog very specifically in accordance with SEC guidelines and with GAAP. So there will be agreements that we signed that don't go directly in the backlog. But the important thing that we will continue to highlight there is the duration of the agreement and the number of trucks or the number of vehicles that are included there. Because the important thing to understand is the size that they have in the market, as well as the validation of our technology that customers are showing, as they agree – as they execute these agreements with us. So wherever possible, we would, of course, love to have minimum commitments and add directly to our backlog. But that won't always be the case.
Lionel Selwood Jr.:
,:
Greg Lewis:

Okay. Great. And then as we think about the new hire of Dr. Shi, name obviously, very well-renowned cell engineer. You know, just as we think about that opportunity, I mean, for him and you, for him and the company. Is this something more where we're going to, -- it's about using existing supply chains to source cells, or is it potentially about creating new supply chains to source cells for Romeo?
Lionel Selwood Jr.:

Greg, great questions. Look, it's all of the above. Like I said before, we're committed to driving innovation along all the battery technology pillars, and this includes down at the cell level. So again, I'm excited for Dr. Shi to start anything from validating or evaluating our novel technology partners externally. Whether he is validating and driving the cell specific items that we have on our innovation roadmap or even taking a heavy hand in continuing to add additional suppliers into the demand pillar, if you will as well as just making sure from a quality standpoint, manufacturing standpoint, et cetera that we have adequate supply to support the long-term business plan that we have. So we're not taking anything off the table. Like you said, he is a 30-year veteran, and we're so excited for him to get started. We're committed to being the premier North American provider of long range battery technology for years to come.
Greg Lewis:

Thank you very much for the time.
Lionel Selwood Jr.:

You're welcome. Thank you so much, Greg.
Operator:

Our next question comes from Jon Lopez of Vertical Group. Your line is open. Please go ahead.
Jon Lopez:

Hi, guys.
Lionel Selwood Jr.:

Hi, Jon. Good afternoon.
Lauren Webb:

Hi, Jon.
Jon Lopez:

How are you? And you -- I'm sorry, I have a couple of, I guess, clarification or cleanups. And then kind of the main question. The first one, Lauren, I think you've mentioned a couple of add backs on sale and marketing side. Outside of the stock comp board was there anything else in there?
Lauren Webb:

So one of the big drivers for SG&A in Q1 is the investment that we're making into improving our infrastructure, looking at our IT systems, just adding to some of our efficiencies and infrastructure as a newly public company. And that does include some legal and accounting fees as well as IT consulting, et cetera. So I would expect that there may be another quarter or two of continued spend in SG&A that is outside of what may otherwise be normal.
Jon Lopez:

Okay. I got you. That was actually my follow-up. But the first one is just on the reconciling items. I think you mentioned there's like $6 million to some change. Most of which sounded like it was stock comp. Is there anything else from like the GAAP number that you would adjust to get to a non-GAAP number?
Lauren Webb:

No. There's nothing material there. Stock base..
Jon Lopez:

Just stock comp -- stock com. Okay. Okay, I got you. And then my second one, just to the R&D side, are you giving us a range last quarter, like 20 to 30 for the year? Does that still hold as well because things have to ramp-up quite a bit to get to that number?
Lauren Webb:

It does. We are at this point continuing to spend and invest in the R&D. But while we've been negotiating the sell/supply agreements, we've been planning carefully and spending carefully, just as there have been a lot of variables at play, but our intent is to continue ramping to that R&D number as well as manufacturing capacity.
Lionel Selwood Jr.:

And then Jon, I'll just like to add some color there. As we've talked before, we refuse to yield a leak to anyone, okay? So from our research and development standpoint, we will continue to be aggressive there to ensure our technology will continue to be wide and actually expand, okay? So we'll continue to give you updates in that regard.
Jon Lopez:

Got you. That's really helpful. So the last one, I thought the backlog when you guys updated us last time was still 544 -- 555 today, do I have one of those two numbers wrong? And if it's changed, like, what was that little marginal change?
Lauren Webb:

It is 555. And that is from some changes in pricing in a couple of our contracts and couple of small additional orders, but no other customers to announce. Those are just some immaterial changes in existing contracts.
Jon Lopez:

Okay, I got you. And then just to come back to the slope of the year here. I guess, the way I want to frame this is, do you guys feel like you've got like a garden, regardless the wrong word, but do you feel like you have comfort in at least doing an $18 million? And then depending on how the negotiations shake out, perhaps going above that, or I guess, ask differently, is there a chance that the $18 million doesn't come to fruition, depending on how these negotiations shake out? Could you just talk through those dynamics?
Lauren Webb:

We can yeah. So we are very confident in the $18 million to $40 million, we built that range for our last call based on information available at the time. And that is still the number that we intend to achieve and expect to achieve for this year.
Lionel Selwood Jr.:

And Jon, one thing, and I appreciate we focused on a short-time here. But I want to reiterate these negotiations that we're talking about and we’re highly confidence of being over the finish line are short, medium and long-term in nature. So, I just want to be clear about that point.
Jon Lopez:

I got you. I just wanted to get a little bit better sense of the case here. I think I got it. Okay, that's it for me. Thanks very much guys.
Lionel Selwood Jr.:

Thank you so much Jon.
Operator:

Our next question comes from Adam Jonas of Morgan Stanley. Your line is open. Please go ahead.
Adam Jonas:

Hey, everybody. So Lauren, can you remind us your company's targeted minimum cash balance?
Lauren Webb:

We didn't provide a minimum cash balance, and it's too early to do that based on where we stand with the self negotiations that we have now.
Adam Jonas:

Okay, I respect that. And I'm just thinking, given the capital commitments and the arms race nature of battery supply, securing and procurement in what seems to be ever larger players getting into the business, I mean, it's a sign that you're in the right business clearly. How would you, Lionel, how would you say, your company, say, contemplates strategic alternatives to give the company ballasts. So that, again, if you're trying to optimize secure production, medium and longer term, so you can really eliminate the lack of -- potential lack of capital, limiting your ability to really thrive in the market that you're addressing. I mean, you've seen again, Borg is an example of what they've done with AKASOL. There seems to be, you're in a hot area. And I would imagine there would be at the right price strategic interest in your company. So obviously, without announcing anything on the call, I'm not trying to get you to do that, but just how should we think about strategic alternatives from a fiduciary context or context? Thanks.
Lionel Selwood Jr.:

Hey, first of all, good afternoon, Adam. Nice to talk to you again. Again, what you should think about is…
Adam Jonas:

Thank you.
Lionel Selwood Jr.:

…we're focused on being the premier provider of leading edge battery technology to the Class 6, 7 and 8 realm. Okay, so from the customer standpoint, that's what we're focused on bringing additional customers and board, high quality customers who continue building and qualifying the order book. Again, from a battery sell standpoint side, the strategy there is lacking in supply, short, medium, or long-term, which will give you updates on summer, as well as the high end of that machine gives us a lot of different realms and arenas that we can play in before to diversify ways to ensure supply, okay. So I don't want to speculate our strategy remains the same, which is to become one of the largest green energy companies that was ever seen.
Adam Jonas:

Great. And if I could just sneak one more in, you said you're continuing your hiring, right? I don't know if you could tell us how many employees you have right now. But again, between your role is an important high tech manufacturer in an important part of the country and important industry. That seems to be an increasing priority with a new administration. Could you update us on the landscape or the opportunity of any possible grants or government loans that could help you be even better position of having the capital and balance to execute on your strategy in good environments and in difficult environments? Thank you.
Lionel Selwood Jr.:

So thanks, Adam. So let me unwrap that a little bit. So we're currently above 200 dedicated team members and growing really weekly. We're really focused on expanding not only our engineering team, but our operations, technicians team. Look everybody loves what we're about at Romeo. And we really have lines out of the door interviewing and bringing people in. Now from the incentive standpoint, I have talked about in the past, we're not focused on building a business with incentives. We're focused on actually making sure that we deliver products and make our customers business plans make sense. What I will say, though, is, as you know, the government incentives will accelerate demand. And we are what I would say properly positioned to really capitalize on that accelerated demand. So on that front, we've had accelerated discussions, accelerated interest with some pretty cool partnerships that we'll be announcing throughout 2021, where Romeo will be a benefactor, because again, we're the leading edge provider and will provide superior profit per mile ROI and uptime.
Adam Jonas:

Thank you Lionel. Thanks, Lauren.
Lionel Selwood Jr.:

Thank you, Adam.
Operator:

Our next question comes from Noel Parks of Tuohy Brothers. Your line is open. Please go ahead.
Noel Parks:

Good afternoon.
Lionel Selwood Jr.:

Good afternoon.
Noel Parks:

Just got a couple things. And one thing that you have been talking about for some time is that you've been seeing more inbound inquiries from potential customers kind of above and beyond the established base you already have. And I noticed of course, waste management seems to be sort of like a sweet spot as an entry point, just kind of an intuitive value proposition. Just curious, over the last – since last call you kind of characterize, what sort of inquiries you're getting? Kind of what sort of timeframe, size or verticals that you might be hearing more from?
Lionel Selwood Jr:

Joe, hi. Good afternoon, again. So, you’re absolutely right there. The inbound inquiries have been phenomenal, not only from the OEM standpoint, but as you pointed out from the fleet manager standpoint. So actually, we get in anyone that's serious about electrification, so anywhere from -- again, severe duty vehicles, over the road vehicles, medium duty vehicles, school buses, etcetera, right. So all of the above, really people are coming in the door because they know that Romeo gave them the best path forward to bring that electrification plan to life. So that's what we're focused on. We're focused on just translating those engagements into actual contracts, which we're highly confident we'll be able to announce additional production deals for 2021. As well as really continuing to solidify our fleet manager partnerships, as you know, push and pull from a demand standpoint. I think the Heritage program is a perfect example of this, you know, announcing the participants there, that's an awesome program where we're starting with 500 vehicles, and as a potential to expand. So our OEM partners in that, you know, congratulations to them. We're so excited to continue to partner with them on a fleet manager side. But what I'll say is additional fees, I can't call the names now. But our fleet interest and fleet partnerships are growing. And you'll see us in short, medium and long term leveraging those fleet management partners just to continue onboarding additional OEMs.
Noel Parks:

Great. And just talking about those different sort of business lines, severe -- the over road etcetera. With any of those who you have a sense might -- you might enjoy a little bit shorter, more condensed or more decisive field sales cycle in landing them?
Lionel Selwood Jr:

I'm not going to speculate in between. But what I say again, that we provide flexible solutions. So, what you'll see, really the customers that make a myriad of vehicles, maybe close faster. Why? Because under one roof at Romeo, they find a partner that can satisfy anywhere from their Class 6 offerings out to their Class 8 offerings. So, the aggregate package deal customers are really the ones that, I would say maybe that that may go faster because of everything that we offer and bring to the table with them. But with that said, our solutions are great. I would have bet what Alita on any of these segments.
Noel Parks:

Great. And sort of a – little bit of a housekeeping item, you made a comment about doing some refining of your raw materials inventory. I am just wondering is that just sort of a step change you're making for upcoming business. And I'm just wondering, going forward, sort of what might be the drivers for estimating that as something that might correlate to backlog and looking out across the quarters or -- just any detail you can give them that would be great?
Lauren Webb:

There's not a specific correlation to backlog for upcoming quarters. But as we've been moving from prototype phase to production ramp and maturing the product over the last year, there were some items that we didn't think were optimal for large scale manufacturing, as we move into that phase. So, we've just been very diligently making sure that we have the best components, the most efficient from both across standpoint and also a manufacturability standpoint. And that was really a product of the reserves and the reduction, there was just a function of moving into that full production sampling.
Noel Parks:

Got it. And just for -- keep working out ways, hopefully into the post COVID era. Any of that procurement impacted significantly, just by showing the contraction of last year, does that sort of figure into what you had to reassess or is it more just forward looking as you said, you're moving to the production ramp and so it's, you have more visibility about what you need?
Lauren Webb:

It's primarily forward looking. But there have been instances over the last year when there were difficulties in obtaining our top choice for certain components because of COVID disruptions. So, it's true that in the last year, we have been agile and secured components from multiple suppliers to meet the needs that we had. And they weren't always our long term plan. That's true.
Noel Parks:

Got it. Okay, thanks a lot. That’s all for me.
Lauren Webb:

Thank you.
Lionel Selwood Jr.:

Thank you.
Operator:

This concludes the Q&A section of the call. I will now hand back over to your host, Sam Dunn.
Sam Dunn:

Thank you all. Thank you all for listening today and attending on his call. We hope that you are excited for the demand for battery packs. What I want to say is, Romeo power, we are heads down executing on our business plan, where we look forward to giving you updates on the cell supply negotiations that we currently have in motion. And also, we look forward to continue giving updates on the commercial agreements that we potentially have coming down the pipe. It's an exciting time at Romeo. And I want you to know that our technology mode stays wide. It remains second to none. Our company about onboard and high quality OEMs as well as high quality fleet managers going forward. So with that, talk to you in a few months and thanks so much for giving us your time today.

Romeo Power, Inc. Q1 2021 Earnings Call Transcript

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