EVgo, Inc. (EVGO) Earnings Call Transcript & Summary

Okay. Good morning and welcome to the second day of JPMorgan's Energy Power Renewables Conference. My name is Bill Peterson, U.S. Clean Tech and Metals and Mne Analyst. And I'm pleased to have Badar Khan, CEO of EVgo, sitting with us for a fireside chat. We've hosted the company, I think, for the last 2 years. So it's good to get an update. Thanks for joining the conference. So maybe it might be good to start off with a brief intro of the company, but also speak to the competitive dynamics we're seeing in the industry today. I'm sure anybody's seen any news, you see news of Tesla, maybe letting go of their entire staff and then hiring back their entire staff, calling it in a growth sector, seemingly deprioritizing it, but maybe talk about the company and the competitive dynamics within the industry.

Yes. Thanks, Bill, for having us. So EVgo is a charging station company focusing on DC fast chargers across the United States. We own and operate our stores. We've got about 3,000 stores across the U.S., added just under 1,000 last year, adding 800 to 900 this year. So in terms of the competitive landscape, in DC fast, there are companies that build the machines, hardware companies, companies that sell them to site hosts whose revenue model is fundamentally an equipment sale, onetime revenue model, and then owner operators like ourselves who -- whose revenue model is revenue from customers charging on the stations. And so that's what we do. Tesla was adding the majority of the charging stations historically with their withdrawal or deprioritization or whatever it is, I think that has fundamentally changed the competitive dynamics in the sector. The market was already one where there was sufficient demand for charging stations to accommodate the supply, and that's why our unit economics have been so strong that we've talked about in our disclosures over the last few months. But with Telsa's withdrawal or deprioritization, I expect that demand supply dynamic to improve beyond where it is today from already a very strong point. And of course, with Tesla withdrawing, we expect that the capital markets that might have been unsure about whether to participate are likely -- we're certainly much more interested in participating in the sector and funding the growth of companies like EVgo.

Yes. And I guess when we think about this move and these changing dynamics, how does this impact the potential for new sites that may be pencil for EVgo? And how does it maybe shape your view of the overall longer-term market growth and opportunity for the company looking at?

I mean, look, the market opportunity is enormous. There's about 40,000 -- roughly 40,000 DC fast chargers in the United States today. Most people expect that to be in the 250, maybe over 300,000 by 2030, forget about 2040 or 2050. So that's a huge rate of growth. We actually have over 100,000 stores that we've identified through our strategic partners. These are site hosts where over 10,000 stores pencil for us today. In other words, they meet our pretty rigorous double-digit return expectation underwriting requirements with Tesla's withdrawal that just gets better. We're adding, as I said, over under 1,000 a year. So there's no issue for us in terms of identifying stores that generate attractive returns. It's just a question of how many stores can you do. And for us, we built a growth engine that we think is compelling, is a competitive moat versus the very large number of smaller players. And again, with Tesla's withdrawal, we expect to be able to add attractive nondilutive financing to accelerate our rate of growth.

Despite clearly decelerating EV sales trends, although at somewhat maybe dependent on the OEM, your utilization trends have actually been creeping up. But can you speak to the trends by market? Where is utilization in some of your mature markets like the Bay Area or places like that versus maybe markets that are relatively new in terms of the EV adoption curve?

Yes. So utilization is indeed creeping up. Utilization tripled, just to be clear, over the last 2 years from 6% to 19%. So it is a tremendous rate of growth. Utilization across our markets, over 50% of our stores are now generating over 15% utilization, we look at markets -- where we look at where the -- we invest a significant amount of energy and resource into site selection. And this is not at a ZIP code level but at a much smaller level. And we look at forecast -- we look at all sorts of factors from forecast EV adoption to current adoption, et cetera. And so the entire curve has shifted up, mature markets, markets that we've been in relatively recently. 20% of our stores now have utilization over 30%. In Q1 last year, we showed that -- in our unit economics webinar, we showed that the top 15% of our stores about 40% utilization. So the only stores, frankly, that are generating single-digit utilization at this point are stores that are very old legacy stores. We've been at this for 13 years, which are systematically being upgraded or removed from the network or stores that have just gone in, in mature markets or newer markets.

Yes. obviously, utilization is one key aspect. And the other aspect is the ability for cars to take on the charge. So your term network throughput, how should we think about a similar type of trends there, given the new vehicles that can accept faster charge or more charge? How about the network throughput trends?

Yes. So that's -- you're right. So Bill, the network throughput is our -- in our revenue model, that's the quantity, P times Q, it's throughput that matters. And throughput is driven -- it's the product actually specifically of utilization and charge rate. Charge rate is what you're referring to. It's the speed with which vehicles can take in. The speed with which energy is dispensed from our network and the speed with which vehicles are on the road are able to take energy. That is rising. And that is an enormous tailwind for our business. It's rising because the batteries are just getting faster. In fact, if we assume that vehicle sales in the future are sold with the same mix -- vehicle mix as they were last year, we'd expect to see charge rates broadly double between today and over the next 3 to 5 years. So that's just a tailwind that we're benefiting from. But as a result of that, throughput per store has quadrupled -- where we said utilization has tripled, throughput per store has quadrupled over the course of the last couple of years. And so that the business is doing great. Throughput per store is growing not just because there's more VIO but because of a number of other tailwinds, charge rigs we talked about, vehicles are becoming more affordable. As vehicles become more affordable, it's more likely that customers without a private driveway will buy those vehicles and therefore, they're more likely to be reliant upon public charging. We're seeing tremendous growth in rideshare. Rideshare has gone, so this is the Uber and Lyft folks, have gone -- drivers who have gone from 11% of our network, 2.5 years ago to 25% of our network. That is a tailwind that's just rising. And so throughput per store is rising. If I look at how are we doing this quarter, Bill, we -- throughput per store is up in the month of May by around 15% -- over 15% versus Q1 this year. And so we're very pleased to see that continued strong performance.

So an average level of Q1, the month of May is up 15% over the average level of Q1? Is that...

That's correct.

Okay. All right. One more question in the market environment or I guess, maybe your stall guidance, you talked about 800 to 900 stall additions. How does that -- would you, in your view, support market share retention or maybe even growth. I mean we -- again, we don't know idea exactly what some of your larger competitors may do. But how do you anticipate that's going to either keep your market share flat or maybe potentially even gain share?

In terms of the DC fast owner -- DC fast operators, we have the third highest number of stores in the United States. But we are growing faster recently over the last year or so, that including the first quarter of this year than anybody else in the United States other than Tesla. And so with Tesla's withdrawal, or deprioritization, I expect our market share to continue to rise. And when I think about market share for our business model, which is throughput, as you talked about earlier, it's the energy dispense that's -- that really matters. As I said before, we've invested more significantly in network planning and site selection than anything else that we've done historically. And I think it sets us apart from our competitors, where we place sites to generate and get high utilization and throughput per store. And so as a result, I expect our throughput share, which is not something that's observable in the market to actually be growing quite nicely.

I'm going to kind of talk more about the company initiatives, but I want to pause here and see if there's any questions before moving on. All right. So in terms of customer retention, so I guess, you spoke to like 1 million plus users on the network. What is the -- what share of customers charge in the network consistently?

Yes. So look, as I think about throughput, just over 50% of our kilowatt hours are coming from customers, who either are rideshare or are on our subscription programs. Subscription programs, these customers are charging frequently or they have our -- one of our charging credit programs from the OEMs. And so these are customers that are charging frequently. It's over 50% of our kilowatt hours, and I think it's a very attractive load. I see it as attractive because it provides steady cash flows. On the other end of the spectrum, we've -- and that's a relatively small number percentage of our 1 million-plus customers. On the other end of the spectrum are significantly more infrequent customers. So these are folks who are charging significantly less. They are actually also attractive because these customers are on programs that have undiscounted charging rates. And so I find them attractive. What's interesting and I think positive for our business is that they also represent a fairly significant tailwind, affordable as vehicles become more affordable, which they are. In fact, just on that point, we counted just over 70 battery electric vehicles at the end of 2023. And over the next 18 months, to go to J.D. Power, we estimate over 30 more affordable vehicles being brought to the market. These are vehicles in the $25,000 to $35,000 range. As these vehicles are brought into the market, it encourages not just EV adoption, moving from early adopters to mass market, but folks who are charging on DC fast because they are lucky not to have a private driveway. Those -- that will increase the number of that sort of more infrequent customer usage, which -- both of which are attractive for us.

Yes. Reliability and uptime has been much discussed in public media and even about on earnings calls as well. But I wanted to speak to how uptimes have been trending on a network? Maybe speak to the operational benefits of the renewed program that the team has embarked on, I think, over a year ago. You mentioned earlier, there are some legacy things still out there. So how is that impacting the trends? And how do you see this moving forward?

Yes. So uptime for us is in the high 90s, which is great, and it's gone up over time. But I just want to be clear that uptime is a very -- having run asset-based businesses in my past, uptime is an important metric but it is actually not a -- it is not the most holistic measure. A holistic measure is one or measures or ones that capture the entire customer experience. And so for us -- and we've been very public about this in our disclosures, that means, for instance, specifically, when customers go to a site that there are stores available so we have approximately doubled the number of sites with 6 or more stores over the last year. It means higher power chargers. We've gone from roughly 22% of our stores being 350-kilowatt charger at the beginning of 2023 to almost 40% today, probably 50% by the end of the year. It's only -- it's pretty much only what we're deploying. And so that will get up to 70%, 80%, 90% over the next few years. That's an important metric. The payment process is a super important metric. So being able to pay conveniently and having to avoid credit cards or tapping or whatever, and so we have approximately doubled the number of charging stations over the last year where customers are able to just plug in and walk away where the vehicle starts charging automatically. So the asset component, of course, is an important one, but there are others as well that we've just talked about. On the asset one, the ReNew program that we just talked about just now. We -- these are targeting those underperforming sites, which are becoming a smaller or a smaller percent of our network. Approximately maybe just under 500 stores at the end -- by the end of last year, we had either replaced or upgraded and I expect that to be in the 100 to 200 by the end of this year.

Yes. You guys have a variety of investments, I guess, both on sort of software and hardware. One on sort of more hardware side has been talking about prefabrication to avoid construction costs. Can you -- where is the team on that? And where is the team investing right now in terms of user experience and cost reductions and so forth?

Yes. So look, on our Q1 call, I talked about 4 priorities for the company. We've talked about a couple of them already so capturing high-value customers, the customer experience, and then the 2 others are capital and cost efficiencies and financing. I'm sure we'll get to financing. On the cost efficiencies, we did announce that on the CapEx -- so this is a super important point. On the CapEx per store, we announced in Q1 -- well, prior to Q1 that we are embarking upon these prefab aluminum skids, which I said in the Q1 call, expect to lower the average cost of construction by about 15% at those eligible sites, expect around 30% of our -- the charges that we operationalize next year to be benefiting from that approach. We're also in the Q1 call, I talked about other -- series of other relatively incremental improvements that when you add them together, lower the CapEx per store by around 10% for those stores operationalized in FY '25. The bigger effort, Bill, are -- is a program that we've also been working on for the last 6 to 9 months where we are looking to co-design, jointly design our chargers with one of our leading suppliers. That is an effort that we think we can do uniquely in the marketplace because we have scale. Hardware companies typically don't interface with customers. We bring 1 million customer relationships to that experience. So we understand what the customer frustrations, the pain points are. That codesign is expect -- what I announced on the Q1 call is a reduction in the CapEx per store of about 30% and that will be for stores that we operationalize at the end of 2026. The reason that's important is -- and it just underscores the very compelling returns in this business, which I'll just take a moment to explain. Our CapEx per store today is a net $96,000. So it's -- the investment is roughly $96,000. I'm talking about a program that could lower that by 30%, so maybe $70,000 to $80,000 per store. The cash flow per store that we generate, that I talked about in our unit economics webinar, is already over $30,000 per store annually for the top 15% of our sites. As throughput continues to grow -- throughput per store continues to grow, we expect that to be almost $40,000 per store annually. And if you go out into the future, you can see that getting [indiscernible] numbers that they announced last week, we see that in the $60,000 to $70,000 per store. And so when you look at an investment of, say, $70,000 to $80,000 with an annual cash flow return of $40,000 in 3 to 5 years' time and growing even higher, I think that represents a very compelling investment.

Yes, that captures some of the questions on sort of CapEx later on. But maybe speaking about some of the unit economics, too, when somebody comes to charge, maybe -- may depend on the location, the time of day, you guys have also discussed within that context, dynamic pricing, as one of the tools to help drive the business. So how has programs like that helped in terms of your margin structure? What other tools do you have to, I guess, drive margins higher, given what appears to be rising energy costs broadly that you're passing on and even capturing margin. What other activities you got reserving spots is one, but how do you kind of view the top line drivers of the margin profile?

Yes. So let's just take as a context. Charging gross margins in this business have gone from around 15% in 2022 to 40% in Q1 of 2024. And that's not a onetime thing. That is as a result of the tremendous operating leverage that exists within gross margin. As we said in our unit economics last year, around 40% of our cost of sales in charging margin is fixed per store. And so as throughput rises -- throughput per store rises, which we said has quadrupled in the last 2 years, that just results in tremendous operating leverage and growth in gross margin. That is without increasing prices. So that's the backdrop that we're talking about. The unit economics that I talked about going into the future does not assume any upsides from the work that we're doing today. The work that we're doing today is dynamic pricing. This is automated dynamic pricing. I announced on the Q1 call that a portion of -- a relatively small portion, mostly in pilot, we've been rolling that out to our network. We've been very pleased with the results. I expect to roll that out across the majority of our network by the end of this year. That is not a factor that we've included in our unit economics that represents upside. We're also investing and expect to go live with a customer data platform that allows us to identify and target those highest value customers that we've talked about earlier. And I think those 2 things represent further upside on top of the incredibly strong operating leverage that already exists within gross margin.

Yes. I'm going to pause again and see if there's any questions before moving on. Okay, something talked about more about last year, maybe a little bit less so in terms of priorities this year, has been on the eXtend program. You got partners of GM and Pilot Flying J where you're basically building this and operating on -- I guess, first of all, maybe explain what eXtend is? Where does it fit in the priority stack for the company? It was -- like I said, it was kind of considered a growth driver last year, but it feels like it's not as important for the business on a go-forward basis.

Yes. eXtend is effectively -- it's a similar model to other companies in the charge -- some other companies in charging space where we sell our equipment to site hosts. So companies like ChargePoint, for instance, do this. And look, we're doing with our relationship with Pilot Flying J and GM. Overall, the relationship is expected to add 2,000 stores across 500 sites. One of the things I think that sets -- I think sets EVgo apart from others in the space is that we're incredibly disciplined about whether we build a site so the ones that we own, operate. I talked about the rigorous underwriting criteria, but also in how we allocate our resources and people and time. Our -- the economics in owned and operated, that we've just talked through for a little bit anyway, are so superior that we do not -- we are not choosing to prioritize further growth in the eXtend business. That's not to say it's a bad business. It's -- we have a very strong relationship with Pilot Flying J. These stores are -- have an amazing customer experience. These are on long highways with canopies, with WiFi, with lighting. So the PlugScores on those sites exceed pretty much anything else in the network in the United States, including Tesla's Magic Dock sites, just to be clear, the 350-kilowatt charger as opposed to the 250-kilowatt supercharger network that Tesla has. And we think we get a network effect. So from the [indiscernible] for every customer that goes to a Pilot Flying J store that hasn't been to an EVgo location around half go on to an EVgo's location. So it's a good network effect, but the economics are not as attractive as one and operated and that's why we're choosing to focus on that space.

Yes. You briefly mentioned earlier PlugScore. For those who are not aware, they bought a company a few years back before your time, PlugShare, I think there's even some opportunities to monetize that further out. What's the latest on PlugShare in terms of the economics there, how it helps your business and helps, I guess, informs you on your own operations?

Yes, look, PlugShare is a business that we acquired. We keep it completely separate from the EVgo business for obvious reasons. This is like the yelp of charging. And so there's a ton of insights around driver behavior, driver patterns that EVgo and other charging station companies can acquire from PlugShare, and we're choosing to do so, and it's generating some very positive insights in terms of customer behavior?

Yes. It hasn't been talked about as much, but you've had a relationship for over time with General Motors. What is the latest on that in terms of installs and you also briefly mentioned how you get some benefit on a net CapEx basis, I think it was an overall company comment, but how does it work for the ones that are built for General Motors?

It's a great relationship. It's a very strong partnership. GM pays us about $33,000 per store. And so that's very attractive. It makes our net CapEx at the $96,000, I talked about this year, what it is. And we're about half -- I think, just over halfway through the program that we have with them. GM drivers get differentiated benefits on our network.

One thing talked a lot quite a bit, maybe 2 years ago and even more in last year as well has been the NEVI program, but it's kind of gone quiet and it still feels like it hasn't really started. I think your former -- your predecessor has talked about it instead of a tailwind, it's sort of like a tail breeze or something like that. How important is this for the model? Is it more something that you approach with the eXtend model potentially? I mean, again, it doesn't feel as an important driver for your business, but how do you view it?

Yes. Again, look, it's -- for us, we focus on sites with the highest utilization and the highest throughput restore. And the fact is highway locations tend not to have the best utilization. So that's why for those locations that we own and operate, we focus on urban locations, high traffic, close to rideshare, close to multifamily, people that don't have private driveways, highway locations don't have those benefits. So yes, we are -- together with our partners, we are winning awards. We've actually won 50 NEVI Awards. That's the $35 million -- between ourselves and our partners, $35 million, 250 sites. And the program isn't as slow as I think some people say. Just to be fair, there have been 600 sites that have been awarded in the NEVI program broadly across the United States. That's $400 million. It's 3,000 stores. If I look at the last couple of years in 2023 of the 600, just under 250 were awarded in 2023. This year, first 6 months or 5 months of this year, we've already seen 350 awards. And so the pace is picking up. It takes time to build. We actually had the first site -- first and third site that we're energized with NEVI program were EVgo locations because we've been doing this for so long. We know how quickly to get this stuff deployed and not everybody else does.

Yes. Want to spend some time and you were alluding to it earlier, but the path to positive EBITDA. So you've talked about the gross margin drivers, maybe you could speak as well to the efficiencies on the operating expense. How should investors think about the various aspects, revenue growth, gross margins and OpEx trajectory to get to that goal?

Yes. Look, the economics in this business are actually -- for an owner operator are actually quite simple. I've -- we have tremendous operating leverage. I talked about the operating leverage and gross margin. We also have tremendous operating leverage in SG&A. So roughly -- last year, roughly 70% of our G&A is fixed. These are costs for corporate overhead, like myself, cost for expanding the network, that's $70 million, $30 million last -- roughly, last year, are sustaining costs. These are costs to support the existing network. And so to get to EBITDA breakeven, it's simply a question of throughput per store, which is rising. We've just been talking about that. It's quadrupled. It's not going to quadruple again, because we've had such strong growth. But throughput per store, multiplied by the number of stores, that generates a certain amount of cash flow per store. As I said on the unit economics webinar, in Q4 last year, the top 15% of our sites were already generating over $30,000 per store. So that is going to grow. That cash flow, when it covers fixed costs, we breakeven and you can clearly -- together with the EBITDA from our eXtend business. You can clearly see how that breaks even in 2025. We're at -- we'll be between 4 to 5 -- if we're continuing to grow at 800 to 900 stores a year, which is the growth rate that we're currently at, we will breakeven quite clearly next year. I think the more attractive thing is what happens after that. Once we've covered our fixed costs, that store-based cash flow goes straight to the bottom line. And so if -- and we talked about generating $40,000 a store in 3 to 5 years, if I'm adding 1,000 stores a year -- only 1,000 stores a year, then that's $40 million that goes straight to the bottom line. That's how you get to, in 3 to 5 years, roughly 7,000 stores, if I'm only adding 800 to 900 a year. 7,000 stores, times $40,000 -- almost $40,000 a store, minus $70 million fixed cost, it's $200 million in EBITDA. I think that is the incredible EBITDA generation potential of an owner-operator business with the site selection focus that we have.

Maybe spending my last question on sources of cash. If you could speak to, if the company were to return to capital markets, if there's a preference. But one thing that's been kind of intriguing across a number of companies we talk with and cover has been potential DOE loans, be the loans program office. So how would something like that potentially fit in from a source of cash?

It's a great question. So we have $175 million on the balance sheet at the end of last quarter. That will get us -- that allow us to continue to growing at 800 to 900 stores a year, well into next year. We are pursuing a number of nondilutive financing options. I have no interest in issuing equity to accelerate the growth of this company at today's prices. The DOE LPO program is a Title 17 program. So these are typically very substantial loans. We are unaware of anybody with our track record, our credibility or our scale, looking for funding from the DOE LPO program for charging infrastructure. And so if we're successful, I'd expect that to allow us to materially increase our rate of growth to capture the -- to your first question, the opportunity being left behind by Tesla -- by Tesla's deprioritization. We've also -- with the unit economics that we've been very transparent about, we've been getting a lot of inbound from commercial banks on similar kinds of structures. So project finance, nonrecourse project finance, which may not be on the same terms as a DOE LPO loan, but I think represent very strong opportunities to, again, accelerate the rate of growth and generate these very strong returns.

Well, Badar, I really appreciate your insights here this morning and look forward to following the progress. Thanks for supporting the conference.

Appreciate it. Thank you.