Hyliion Holdings Corp. (HYLN) Earnings Call Transcript & Summary

Welcome back. I'm very pleased to welcome with us Thomas Healy and Sherri Baker of Hyliion. Hyliion is a new entrant startup, went out with this back [indiscernible] last year, and is focused really on electrifying trucking in a very kind of unique hybrid way. So they're going to start with the slide show, and then we'll get back and ask them a bunch of questions.

Sounds good. Thank you, Brian, and welcome, everyone. Nice to meet you. As Brian mentioned, we're going to start off with a few slides. And really, we want to start it off with just showcasing a little bit about the landscape of electrified trucking. It's probably something that all of you have been hearing about, you've been following, and it's a pretty unique time in the trucking space where we all know it's going to go electric but we're at this point where we're trying to figure out what is going to be the right electrified solution for fleets and what business model is going to win out. So, for Hyliion, we're a powertrain company. And our goal is to be the leading powertrain provider of electrified solutions for this commercial vehicle space. So we're not trying to reinvent the whole truck. We're working with the existing truck makers and actually being able to provide them a powertrain solution to move into the shift of electrification. And as we look at that, there are really a few things that have stood out to us as key things that we need to keep in mind as we're developing our product to be able to make sure we really check the boxes of what a fleet needs. So the first is, fleets need to see a lower total cost of ownership. When a fleet is going about buying a new truck, this is not an emotional decision, very much like a passenger car is, right? If you go buy a electric car, you're doing it because you want to do well for the planet, you want to reduce emissions. As the fleet is going and buying a truck, it's really about what's the ROI? What's the payback? And that's where we see our solution where we're able to actually reduce operating costs compared to a diesel is a big win. Secondly, the whole reason we're looking to shift to electrification is because we want to reduce emissions. And one of the things that we've really looked at as an organization is well-to-wheel emissions profiles of these trucks as opposed to just looking at tailpipe emissions. And then the last, which is probably and arguably the most important is, infrastructure. And as fleets think about making the shift to electrification, the #1 hurdle is usually actually not what electric truck do I want to use, it's, how am I going to refuel that truck or how am I going to recharge that drop? And how much is that infrastructure going to cost in order to put it in place? So as we go through the next couple of slides here, we'll touch on our business model and some of the key differentiations with it. So, the first is a little background on us and the 2 products that we're bringing to market. The first is our hybrid electric solution, which is on the left-hand side of the screen. The Hybrid -- the best way to think about it is it's like a large Toyota Prius. So we still use a conventional truck, but as opposed to being purely driven off of a diesel engine or a natural gas engine, we now have an electric e-axle in addition as well as a battery pack. And we can take some of the load off of that engine and thus improve the power of the vehicle or reduce the amount of fuel that, that vehicle is consuming. And we really see this product as a great way to start into electrification. But the true backbone product of Hyliion is the Hypertruck ERX. This is a fully electric drive vehicle, but as opposed to needing to plug into the grid like the most electric trucks do, we actually have an onboard generator that will charge the batteries up as the vehicle is driving and going down the road. So this -- going back to the last slide, this really solves that problem of infrastructure because one of the things that we're doing is we're starting with using natural gas, which we'll cover a little more on the next slide. But when you think about moving to an electric semi-truck, there are couple of big hurdles that usually come up. It's, how much weight is going to be in the batteries? What's the cost of the batteries? Well, when you're doing an electric range extender vehicle like this one, we actually can use a very small battery pack because we're constantly recharging it throughout the deck. And then the other big hurdle is usually, with an electric truck, it's, well, what's the range going to be? Can this really drive the 500, 600 miles a day that some trucks will go? And with our solutions, since we actually bring the fuel with us to recharge the batteries, we can drive over 1,000 miles per refuel and that's a game changer as we look at this shift towards electrification. So the next slide here really lays out the landscape of electric solutions. So, there's 3 different types. You've got BEV plug into the grid. You've got hydrogen fuel cell and then you have our electric range extender utilizing natural gas to recharge the batteries. And there's kind of 3 things that we look at when we compare these 3 different types of solutions. The first is, what's the cost? Next is the infrastructure that's out there. And the third is the emissions. And one thing you'll see across all of these buckets when we look at where we are today as an ecosystem, using renewable natural gas as the source to recharge the batteries as you're driving down the road wins out in each category. Today, we've got a fuel cost that's about 1/2 or 1/3 of the cost of where diesel is. In terms of infrastructure, there's over 700 stations in North America already built out where you can pull your truck in and refuel on natural gas versus for electric plug-in as well as hydrogen, we're just at the very start of actually building out that infrastructure. And then the last bucket, when we actually look at well-to-wheel emissions. So, if you think about hydrogen or electricity that comes out of a wall outlet, there is actually -- it comes from a source, right? It's not just magically created, right? There's a way that, that electricity or that hydrogen is produced. In some ways, it's very clean, and it's great for the environment but in other instances, it can actually be very pollutive. For instance, if you produce your electricity using a coal-fired power plant. So what we looked at is, well, what's the normal emissions? What's kind of the normal hydrogen production or electric production or natural gas, renewable natural gas in the U.S? And we found that renewable natural gas is not only great from an emissions profile, but can also go to even net carbon negative or below 0 since we're basically able to take what would have been pollution coming off of landfills and dairy farms and actually use that as a fuel in a vehicle to recharge the battery pack. And then that brings us to what's the road map of Hyliion and how do we kind of -- how do we look at this evolution going forward? So as we look to the last slide, starting with natural gas and renewable natural gas today makes a ton of sense, which is our Hypertruck ERX product. But we do believe that the future will be hydrogen. The big question is just when. And so we laid out this 3-stage road map to where we start with natural gas, then we move to a fuel-agnostic solution, and then we move to a fuel-cell solution. And the one thing to note with this is the powertrain across all 3 of these products doesn't really change. So the battery packs, the axles, those are all the same across all 3 different generators. And we actually see moving to a fuel-agnostic solution as a great way to accelerate the shift to hydrogen because if you think about the infrastructure getting built out, it's not all going to happen overnight, right? We're going to have some stations get built, and then it will evolve into more and more stations. And that's where having a solution that can run on either natural gas or hydrogen is a big advantage. And the last thing I wanted to share before we just move over to Q&A is a little bit about our software that we use on the vehicles. And we see this as a big competitive advantage for us. With the Hybrid trucks that we have out on the road today, these trucks generate over a gigabyte of data per day per vehicle. And we're able to monitor that data, send some of it up to the cloud from some very advanced algorithms on the vehicle. And even down the road, if we look at doing things like predictive maintenance, where we can actually create additional revenue streams for Hyliion from the actual data and analytics that we're running on these trucks. So with that, I'll pause, hand it back to Brian, and I know you've got a handful of questions for us to run through.

Let's talk about the products separately starting with the Hybrid. This is your first product to market, you're starting revenue recognition this quarter, and you have a kind of a new iteration in the Hybrid eX. So what's different about the Hybrid eX versus the initial design when you became public?

Absolutely. So what we did is we took a lot of the learnings from the early systems we have put out on the road, and we incorporated those into the Hybrid eX. So we've made -- now have to make the installation process a lot easier on the trucks. We've been able to reduce some of the weight of the -- of our system so that we're then increasing the payload capacity of the vehicle as well as we've been able to improve some of the efficiencies of the actual system. So overall, like the functionality is very similar, but we've been able to just take it forward to another step in our progression towards having a commercialized product out on the road.

And you have both a Hybrid diesel and a CNG version. How is the interest in the 2 between the fleets?

Yes. So we've seen strong interest from both markets. With the CNG one, it's really a pain point for fleets of taking an underpowered truck of -- normally a CNG truck doesn't have as much horsepower and torque as a diesel and making it perform more like a diesel versus with a diesel-powered truck, the goal is really around reducing how much fuel the vehicle is using. So we've seen good interest in both of those markets. But one thing with the Hybrid is it's really a step into electrification, and it's not a one-size-fits-all solution. With the Hybrid product, you really need to run it in hilly terrain areas in order to have the product, makes the most sense. Versus, as we step back and look at the Hypertruck solution, that's one where it can run on any terrain, it can run in any type of environment. That's where we see that being really the flagship product for our company.

Okay. And let's move on to the Hypertruck. You brought one vehicle to the ACT. You have several drive-alongs scheduled. How many Hypertruck prototype units do you currently have?

Yes. So we're -- right now, we're in low, low volume, early development units, kind of -- you saw one green truck out at ACT or ACT Expo, there's a white truck that we just showed at Wegmans. So we're in the process of building more of those vehicles right now, and we're actually just kicking off our roadshow of those trucks. So, our goal is actually letting people get in the vehicle and experience it firsthand. A lot of people have seen videos of us showcasing the vehicle online. But there's truly nothing like actually getting in the truck, experiencing the acceleration. I think one of the things that surprises people a lot is just how quiet the truck is, right? You can run on pure BEV mode so that the generator is not on at all, and it's basically a silent vehicle. And so, there's some really exciting things that when you actually get in the truck, you get to experience firsthand. And we're seeing that to be really successful with fleets. We've started this showcasing now. The feedback so far has been very, very positive.

You're talking about going through a road show next year. How will that work? How many trucks are you going to take out to demonstrate? And then when does that -- what's the sales cycle in terms of getting orders or at least prototype orders out of that?

Yes. So these vehicles will not be units that we're leaving our fleets and letting them run in their operations. There are more vehicles that we're going to let drivers experience it. For instance, we just did an event at Wegmans. They not only have their executive team take the truck out and experience it, but they also brought their drivers to come experience it as well. So, we plan on hosting many events like that as well as in December, we're going to be hosting events here in Austin, where some of our Hypertruck Innovation Council members as well as other fleets are going to be coming down here to meet the team firsthand and also go for rides in the vehicle. And so, we'll have a handful of trucks that will be out doing these showcases with. And then as we're going forward into next year, we plan on carrying this program through the first half of 2022. And we plan on bringing it to other events as well, whether it be things like trade shows or different areas where people can actually see these vehicles and experience them. So, we'll publicize and showcase every time we're going to be -- or once there are more public events when we're going to have the trucks out and available.

And how are you beginning to think -- how are you thinking and how has that thinking evolved around just the sales cycle for Hypertruck? Could you do the classic sales funnel, prospecting trial, extended trial perhaps? I don't know if those would be revenue-producing units or not. Some of the other new entrants come out with big conditional order numbers. You seem to be going through a different strategy of let's prove to them it works, and then we'll talk bigger numbers. So can you just help us through that sales funnel?

Yes. So I'd say the interest in the Hypertruck -- frankly, it's exceeded our expectations. We've got many fleets who've reached out and said they want to be early adopters. And we've kind of had to say, hey, we'd love to work with you, but we've got a great group of fleets we're already working with to do the rollout of the technology. Last year or earlier -- earlier this year, we put together our Hypertruck Innovation Council, some of the largest fleets in the U.S., fleets like Werner, Schneider, Ryder, Penske, Anheuser-Busch. And these fleets are working with us through the commercialization process as well as they've signed up to be the first ones to actually run the Hypertruck in their operations. And as you said, yes, our goal is really to show the customers a truck and let the technology speak for itself. We found that fleets are at a point today where they just -- they want to see it and experience it. And if it checks the boxes of what we think the truck can do, then it can be a strong powertrain solution for them going forward. And so...

How long would they actually need to run it in a fleet before you get significant order volume?

In the second half of 2022, we plan on kicking off controlled fleet trials. It's going to start with Green Path Logistics, who is one of our Hypertruck Innovation Council members. We expect them -- this to be multi-month long process, then going into the following year, we'll be expanding trials with fleets. And then -- I think we've heard a mix like some fleets have said they need a few weeks with the truck in order to be able to really garner the experience. Others say they want a handful of months. And so, I think it's just going to depend on kind of the risk appetite of the fleet, but we think that pretty quickly, fleets will be able to say, yes, this works and it says what Hyliion says it's going to do. And then from there, we expect to really work with fleets on, okay, how do you see this being your powertrain of choice going forward.

And let's discuss some of the supply side issues you raised and development issues you raised. There were part shortages common that many of the people have talked to. But maybe particularly to the Hypertruck, longer development and validation time and then winter testing. Can you summarize those delays they may or may not have caused? And then how that affects your second half time table?

Sure. I'd say it's really -- it's 2 main things. One -- the first thing, the chip shortage, which is very prevalent across the entire industry. So that's not unique to Hyliion, but something that's certainly playing a factor. But one of the larger ones is actually just getting the trucks themselves. So a prime example, the time line that we initially anticipated getting the trucks, there is a development and a build time line that we use in order to get through our design verification. And as part of that -- a very critical part of it is winter testing. So we initially thought that we'd have the development of the trucks done in time to actually test this winter. But because the time line was extended, we're actually not going to be able to complete winter testing until the beginning part of the winter in 2022. So that's just an example of how sometimes initial delay may actually have a knock-on effect on the overall time line. So that's, I'd say, the first part. But then the second part is, we've just essentially extended out the additional design and verification and validation testing that we've got. So, what we did on our last call is, we outlined all the key milestones that we expect to complete in 2022, which will be the initial design verification and then also the control fleet demos that Thomas just talked about. And then once we finish those and get the trucks into more and more fleets, we'll complete the final cycles, which would be the product validation, the certification that we'll need to get from EPA, CARB and NHTSA and then that will ultimately lead in to the start of production.

And are there going to be any second half production constraints? Or if there is interest from the Council and other -- for more trial, can you produce more vehicles?

Yes. I think at this point -- so we've actually secured all of the build slots for all of the design trucks that we need for all of '22, and we've secured all the long lead components. So we feel good about that. And at the same time, we're also working on our 2023 supply that we think we're going to need to complete all those milestones that we just talked about and start to get ready for the start of production.

Okay. And in terms of types of fleets they're interested, any sense of their -- are they starting from CNG? Or are they starting from diesel and CNG or some CNG fleet, some diesel fleets? And then are they -- is there more interest on the CNG side or the diesel side around the hypertruck concept vehicle?

I think it's really across the board, honestly. If you look at the Hypertruck Innovation Council members, some run CNG, some don't at all run CNG in their fleet. So, broadly speaking, though, the majority of fleets out there are diesel fleets, right? That's 90-something percent of our market share today in the U.S. is diesel trucks. And I think we -- what we're seeing is, fleets have a very strong interest to move to electrification, and that's unanimous across the board. Whether you're running diesel trucks today or CNG trucks today, you want to move to electric vehicles. And it's kind -- it's interesting to look at because if you're a private carrier, normally, you've actually come out in like companies -- like some of the large organizations here in the U.S. have come out and said, hey, by 2040, we want to be at net 0 emissions. Well, their fleet is a big part of that in order to achieve that goal. Then you look at public carriers, guys that are shipping for other companies, those companies are actually pushing on the carriers to say, hey, we want to see you drive or ship on cleaner technology so that we can count that towards part of our overall emissions profile. And so, with those fleets as well, we're seeing a strong interest because their customers are now demanding that the fleet needs to move to electrification. So, I think the strongest interest we're seeing is just fleets who have that eye on moving to electric but see our product as a very practical way that they can do it without massive infrastructure cost with very strong emissions profiles and an ROI that actually makes sense and be better than diesel.

Okay. And just to kind of close out the Hypertruck and Hybrid current gen production issues. Are you set -- is Meritor going about the Hybrid and Hypertruck? You mentioned the rolling chassis. So I think what I heard you say is that all your supply you need for '22 is lined up across all components.

That's correct. Yes. So for what we need through the development phase 22, we've ordered everything, and we have line of sight on the deliveries of when they should be here, and it matches up with the time line that we recently just came out with on our last earnings call. And that's why we really focused on a 12-month window here because we're really confident that we can hit that just based on the discussions we've been having with our partners and suppliers. And then from there, we will continue to update the market as we get through that phase on just kind of what the timing will be on those next key milestones.

Okay. So let's discuss the competitive landscape. When you came out a year -- over -- about a year or so ago, you're well positioned with both Dana and Meritor on the drivetrain. -- not clear, obviously, with the Hypertruck you don't really need the traditional transmission. At that time, Cummins was relatively quiet on the alternative engine, especially electrification front. However, investors raise them as a potential threat, just given their dominance of Class 8 truck -- power engines. You actually mentioned their 15 liters CNG engine on the call, which reduces some of the torque difference or the problem with their smaller engine. It's going to affect -- are you -- can you talk about first, how it might impact adoption of your Hybrid? And then second, could that same thing come and affect Hypertruck.

Sure. So one of the things we did mention on our last call is, we do see the 15-liter potentially having an impact on hybrid adoption because as you just mentioned, it kind of overcomes that torque deficit that is there. So, that is something that we're looking at, how is that going to impact the volume ramp-up and adoption of hybrid. The other thing that we mentioned on the call with Hybrid is we are seeing more and more fleets gravitate to wanting to move to a full electric solution as opposed to a hybrid system like the Hybrid eX, and really, the push for that is just because there's so much of a tailwind that's going towards moving to full electric right now. For instance, when we came out to market a year ago, became public, we were -- the electrification discussion was really just kicking off. We now have a lot more players in the space, a lot more people focus on, whether it be BEV trucks or fuel cell trucks and that's causing a lot of the shippers to realize that, yes, we need to move to full electrified solutions. So we do see that as an impact to the Hybrid. Now, we don't really see it as an impact to the Hypertruck because the Hypertruck is -- it's an electric truck that happens to use natural gas to recharge the batteries to start as opposed to being a natural gas truck. And there's some big benefits that come with that. You've got the ability to drive with zero tailpipe emissions when you've got the generator turned off, you can qualify for ZEV 0-emission vehicle credits with the Hypertruck. Those are things that a normal natural gas truck are not able to do.

And I guess it gets to the bigger picture around Hypertruck. -- but plug in hybrids and light vehicle are seen as a transitional -- some OEMs like GM are just spurning it to go right to EVs. Now, what gives you confidence that there's a role for essentially a plug-in hybrid or a rechargeable hybrid in the Class 8 truck space?

So we see it as -- it's a very easy way for a fleet to step into electrification. Now, as we're saying, it's not that full step in, right? But with a Hybrid, you still use the same truck that you had before, you're just replacing one axle with an e-axle. If there is a problem with the electric system, you can actually drive the truck still and just drive it off of pure diesel power from the engine under the hood. So it's a pretty low-risk way of stepping into electric. Now for us, it's actually been a pretty invaluable thing because it's allowed us to really work through some of the normal hurdles that companies will face with bringing a new technology to market. So for instance, we've had the opportunity to actually start working with our supply base, working with wiring harness suppliers or sheet metal providers that are building these components for us to make sure that it really meets the specs and requirements of a Class 8 heavy-duty truck. That's something that if we had never shipped a product before, we would not have those learnings or those experiences. So we actually see the Hybrid as a great way for fleets to step into electrification, but it's also a great way for us to learn how do we ship a reliable product to fleets and really work in this Class 8 space. And that all carries into the Hypertruck product as well.

And back to Cummins. Do you see them investing further in electrification in a way that might challenge not just the Hybrid, but actually the Hypertruck? And if they set a team of engineers to tear apart one of your trucks, I assume they can get their hands on that. Could they recreate your design? What's patent protected, what's trade secrets embedded in the software? Or do they -- will they be happy just selling you their engine as a generator rather than doing it themselves?

Yes. So I don't want to speak for Cummins directly, right, in terms of their plan on investments and things. But I think it's true that a lot of the players in the space are investing into electrification. Now, in terms of how does that create the competitive landscape for Hyliion, one is, this is a huge market. And one of the things that we've kind of said from day 1 is all boats rise with a high tide, right? And so when we look at people that are playing in the fuel cell space or people that are playing in the plug-in electric space, we're cheering for them, we're routing for them. We want them to be successful because this is a huge market opportunity we're going after. And the more and more we can shift this market to alternative fuel solutions, that's great for everyone. Now, in terms of how would someone come in and compete with us, we have done the -- a really strong job on doing filing patents to be able to protect our system. As I mentioned before, we also see the software as a big competitive differentiator for us. And then I think another differentiator is, we've laid out that road map of how do we move into hydrogen, which I haven't seen others really focusing on a fuel-agnostic solution that really creates a logical way to step into a hydrogen-based future as opposed to just making a full step into fuel cells.

And let's move on to -- well, also, as you kind of talk to your innovation truck members, what are they seeing versus just a pure electric EV as the advantages of Hypertruck? And in the EV space, how do they compare you to the -- so far on paper, Tesla Semi? Or could the kind of products that we see like Daimler and others bringing up?

So I'd say it's range of the vehicle, cost of the vehicle and infrastructure. So range -- a lot of the electric prototype trucks that are on the road today, and we're talking there are dozens of them out there. There's not hundreds of thousands, right? But they're usually -- they have 100 to maybe 150-mile range versus our truck is going to have over 1,000-mile range, right? And that's -- so we're going after the majority of the trucking market versus BEV plug-ins is kind of trying to address a small part of it right now. Then in terms of cost, we're using that low-cost renewable natural gas, which is -- right now, we're seeing fleets buying at $1 some instances even less than $1, some instances a little bit more per gallon equivalent. And so that's a lot less expensive than diesel is today which allows fleets to have that line of sight to how do I provide a strong ROI on this product. And then infrastructure. Put a story to it, there is a fleet here in Texas that wanted to move one of their terminals of about 150 trucks over to pure BEV plug-in. And the quote from their utility provider came back at about $30 million just to set up that charging infrastructure. And at that point, it was like, look, that just doesn't work for our operations. We can't spend that much on electric chargers. And so I think we've got a massive issue ahead of us in terms of the grid being able to support putting a ton of electric vehicles, specifically commercial vehicles on it. And so that's where the infrastructure problem -- we see natural gas in the existing stations out there as a way to leverage what we already have and let's get started there, and then eventually we can evolve it to hydrogen.

Okay. And on the fuel [Technical Difficulty] Can you maybe talk about how you could incorporate fuel cells down the line? And since you're not building the fuel cells, the kind of partnerships the developments you would need to make that part of the field-agnostic hypertruck a reality?

Yes. So really neat thing with the way that the Hypertruck is engineered and developed, the vehicle architecture almost looks identical to a fuel cell truck. So the electric drive in the axles, the battery packs, even the software that's being used, the tank structure on the back of cab, whether you're running a fuel cell or you're running a natural gas engine, there are a lot of similarities. Now granted, some things do need to change, you need different tank ratings and things. But what we're able to do is really just replace that gen set under the hood with a new generator, right? So today, we're using a natural gas engine then we'll move to a fuel-agnostic engine, then we'll move to a fuel cell. And so, that allows us to keep a lot of our powertrain solution the same but continue to evolve as infrastructure gets built out, which I think is going to be a big competitive advantage for us because by the time we do have hydrogen infrastructure built out, Hyliion will already have millions of miles proven out on the natural gas range extender vehicle that then can be carried over into a fuel cell solution.

Okay. So with that, we've actually run a minute over. A lot of talk about -- lot to talk about Hyliion. Thank you very much, Thomas. Thank you much, Sherri, and look forward to keeping in the dialogue going.

Thank you. Appreciate it.

Thank you.