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

Hello, everyone, and thank you for joining us today as we're going to be sharing more about a special announcement we made this morning of the acquisition of a KARNO generator technology out of GE's Aviation division. Now before we dive in and share more on how this generator technology works and what are some of the benefits of it, I want to start off with doing a look back on how the energy sector has evolved over the last 50 years. So on the slide here, you can see back in 1971, where the different sources of electricity came from for the electric grid versus where we are today. Now some of the interesting numbers on this slide are that 50 years ago, over 50% of the electricity we utilized was coming from coal-fired and petroleum-based power plants. Fast forward to today, that number is now less than 25%. One of the other interesting things is that we only saw a 3% increase in the amount of renewable electricity. But overall, we have made great strides and specifically around our reduction in utilizing petroleum in order to produce electricity. But unfortunately, this isn't the case with the transportation sector. As we can see on the next slide, almost all of the vehicles that are sold on a yearly basis are utilizing petroleum in order to power the vehicle. So we only have to do a 20-year look back here in the passenger car space to really see when the evolution started taking place. So back in 2001, 99% of the vehicles were petroleum-based and only 1% were utilizing an electric powertrain and that was even a hybrid system. Fast forward to today, now about 10% of the vehicles that are sold have electric drive systems in them. And as we look at the semi truck market, it looks almost identical to where we were 20 years ago in the passenger car space. Almost all the vehicles are powered off of diesel fuel and only 1% of the market is actually using alternative fuels. So as we look about where we're going in this sector, there's an overall shift to move off of petroleum-based fuels. But I don't think anyone can say exactly what is going to be the breakup of the different types of fuels 20 years from now. We suspect there's going to be renewable natural gas, hydrogen, electric vehicles and maybe even others and that's why as we go through today's presentation, we're going to share more on why we're so excited about how the KARNO technology is going to position us well in order to be able to adapt to what fuels are going to be utilized in this sector. Before diving into more on the KARNO, I want to start off with just sharing a little bit about our vision as an organization and how we've laid out a path to hydrogen and broken it down into a 3-stage approach. So the first one is our Hypertruck ERX, which is a fully electric drive range extender vehicle that leverages an onboard natural gas generator in order to charge the batteries. Phase 2 is what we're now going to call the Hypertruck KARNO which is going to leverage the KARNO generator in order to charge the batteries, and this vehicle will be fuel agnostic. And then lastly is a hydrogen fuel cell solution, which will be a purely hydrogen-based vehicle. So the interesting thing with this 3-stage road map is that the rest of the powertrain outside of the generator stays the same. And the only thing that we need to change or evolve as we go forward is the power plant onboard the truck. So with that, we're excited to share a little bit more about the KARNO generator. You can see a picture of what it looks like here on the slide. And throughout today's presentation, I'm going to share more on some of the efficiencies, the emissions as well as different fuels that this generator can use in order to revolutionize this industry. So before we dive in, I want to give a little overview on how this generator was invented. So it came out of GE Aviation, specifically their division around additive manufacturing, where they actually thought about leveraging new manufacturing techniques, specifically 3D printing, in order to make some of the components that go into the generator. So I actually brought one of the parts here in with me today to be able to showcase with you. So this is a 3D printed part, fully metal system. And as you can see from the design of this, it really opens up the ability for us to use new designs that aren't constrained by conventional manufacturing processes. So that's going to allow us to really increase the overall efficiency of the generator because we can rethink how heat is transferred throughout the system and how efficiently we can convert that fuel into electricity. Now GE also leveraged some of their knowledge and learnings from their aviation division, specifically around jet engines and how to best handle fuels going into these type of generators. So to share a little bit about how the generator works. It is a hermetically sealed linear generator system. So some of the details behind it. First is when you take that fuel in, our goal is to convert that fuel into heat, and we actually utilize a flameless oxidation process in order to do that transition. And then that heat drives a sealed linear generator and that linear generator is what produces electricity to charge the battery pack. So now let's dive into a little bit more about the benefits that this generator can provide. So the first is that it's fuel agnostic. It can leverage over 20 different fuel types, whether they're gaseous or liquid form. Second is that we pull forward increased efficiencies. We expect to see over 20% increase in efficiency of the generator. And lastly, we're reducing emissions. So this generator is capable of running on hydrogen and pulling forward the emissions benefits from hydrogen. But it's also capable of running on other fuels. And even on those types of fuels, it has an ultra-low emissions profile, thanks to that flameless oxidation process mentioned earlier. So to dive into the actual different fuel types, we've broken down into a few different buckets: The first is hydrogen fuels, whether it's gaseous or liquid; natural gas, we can use the various forms, whether it's renewable, compressed or liquefied; this generator can also run on conventional fuel types, as well as alternative fuel types that haven't conventionally been thought of as being the fuel of choice for the transportation sector going forward. But this generator is capable of running on those. And so going back to that initial slide, where we laid out what is going to be the mix of fuels going forward, this one generator will be capable of running on many of those different fuel types. And it's going to be able to do it in a way where it pulls forward far superior emissions benefits when comparing it to conventional generators today. We actually looked at what CARB, the EPA has already come out with from emission standards as well as what they're expected to come out with in the years ahead. And we're confident that this one generator solution, even when running on conventional fuels, will be able to qualify for all those standards. So next, we want to talk a little bit about the efficiency of this generator. So the importance of efficiency is really if you can convert fuel into electricity more efficiently onboard the truck, you're ultimately going to reduce how much fuel the truck is going to need and then also reduce what are the operating costs for a fleet to actually run this vehicle. So as you can see from the slide, the KARNO generator brings forward a far superior efficiency when comparing it against fuel cells as well as when comparing it against internal combustion engines. And the slide you're looking at here is operating all 3 of these generators on hydrogen. Now not only is efficiency one of the big focuses of the generator, but we want to also pull forward some additional benefits for fleets and for drivers. So first is that this generator is modular, so we can either scale up or scale down the number of linear generators in the power plant in order to be able to optimize the amount of power that the vehicle needs. So if we go into smaller or larger vehicles, we can scale appropriately. The second is that we're going to reduce the amount of noise and vibration out of the vehicle. So when you think about an internal combustion engine, you basically have explosions happening within these cylinders that's driving the pistons. And those explosions are -- they're loud, they create a lot of vibration. Well, since we're using a flameless oxidation process, we don't have that. And so we're going to be able to reduce the noise and vibration out of the truck. And then lastly, we expect to be able to improve maintenance of the vehicle as well. Since this is a hermetically sealed system and there's only one moving part per generator, we envision we'll be able to reduce the amount of downtime of the vehicle and improve the overall maintenance schedule of the truck. So hopefully, you can see by this point why we're so excited about this solution, both from emissions being number one, efficiency as well as kind of staying in a future-proof type of a solution. But we also see that there are other markets or industries we can go after with the KARNO as well. So to share one example, we've heard time and time again from fleets that they struggle with as they think about adopting electric vehicles, plug-in electric vehicles, specifically for short haul and final mile, the grid and the power supply going into their buildings are not able to supply enough electricity to actually charge these vehicles, and they're limited by the number of vehicles that they could actually deploy. Well, with the KARNO, we could actually deploy these in a distributed power application, where we could actually be the provider of electricity to these chargers in order to fuel up these electric vehicles. So this is just one example of where this could be used, but obviously, one that hits close to home for the customers that we're dealing with. And we can also do it in a way where not only are we solving the lack of supply of electricity from the grid issue, but we can pull forward a cost benefit, as you can see on the right-hand side of the screen, to actually do it much less expensive than the conventional electricity that you're buying off of the grid. Lastly, I saw to share a little bit on the actual transaction itself. So this is structured as both a cash and stock acquisition. We're going to be integrating the team who actually developed this technology into being Hyliion employees. We're acquiring the intellectual property around the generator as well as some of the machines needed, some of those 3D printing machines mentioned earlier, in order to continue to commercialize this product. And lastly, I'm excited to share that we'll be opening up a Cincinnati, Ohio Hyliion office where we'll be housing the GE team who developed the KARNO. Now to start, we're going to be keeping them in the same building of where they initially created this, and they'll continue to work on the design, prototyping and testing of the generator in order to get this ready for commercialization. And then they'll work closely with the team here in Austin to actually integrate this into a vehicle in order to create the Hypertruck KARNO. Now that we've shared more about the KARNO generator and some of the innovations it pulls forward, you can see why we're so excited about this solution for the transportation sector. We truly believe this is an innovative, yet practical path to a hydrogen-based future. We'll now open the call up for any Q&A. Thank you.

[Operator Instructions] Your first question today comes from the line of Bill Peterson with JPMorgan.

Interesting technology. I guess the first question is when does Hyliion plan to integrate such products into trucks? And then from there, how long does it take before commercialization? And my sense is I think 3D printing in additive is interesting, but we've seen a lot of cases in the past where it takes quite some time to move from sort of R&D phase into volume. If you can share any thoughts on the timing of this, that would be helpful.

Absolutely. Thanks, Bill, for the question. And so first, when are we integrating into a vehicle, we're actually already working on that. And we've already got that truck under development, and we expect it to be on road and going through validation starting in the next couple of quarters. Now to your question, from there, when will we actually move it into commercialization, we expect it to be a couple of years after the launch of the Hypertruck ERX. So as we've shared before, the ERX, which is leveraging a natural gas onboard generator, will go into production at the latter part of 2023, and then we envision this being a couple of years after. Now to your point on the 3D additive manufacturing, this is actually one of GE's specialties. This technology, the KARNO generator, actually came out of the additive group and -- as well as the Aviation division. And so they're using the latest and greatest in additive machines. And they've already been able to prove out making components for automobiles, for aircrafts, through 3D printing. And so we're leveraging that same great technology that GE is producing.

Okay. And maybe sort of a 2-part question on sort of your added cost. I mean, how much should we expect for additional OpEx per quarter per year and the growth of that? And sounds like you're getting some pilot production capability, but how should we think about the long-term volume ramp? Is this something that Hyliion would own as sort of a vertical? Or is it somebody else who will manufacture? What are the potential CapEx implications from this?

Sure. So I'll start with the OpEx then move over to the CapEx. So on the operating expenses side of things, we're expecting about a $75 million to $100 million increase in OpEx from now through the commercial launch of this solution. And as mentioned on the last question, that's a couple of years after when we launched the ERX. So when you think about kind of conventional engine manufacturing, I mean, sometimes it could be extremely capital intensive in the R&D side or even the OpEx can be extremely high. We're not seeing those same sort of levels. That's where we expect $75 million to $100 million of incremental spend over those years in order to commercialize this. And so one of the things we've shared before is we have enough capital on our balance sheet already. As we shared in the past earnings call, we closed last quarter with about $500 million on our balance sheet and that's enough capital to be able to bring us through the commercial launch of the ERX. We've shared that before. And we see that statement is still true even with this acquisition. So we believe we're still in a very strong capital position, which that's one of the reasons why it actually led us to be able to do this transaction because of that strong position we're in.

And on the CapEx and the manufacturing strategy?

Yes, absolutely. So Cheri, do you want to take the CapEx and manufacturing strategy? And by the way, for anyone who's logged in, Cheri Lantz is joining us, our Chief Strategy Officer. She's calling in actually from the Ohio facility.

Hi, everybody. I'm glad you could join today. So when we think about manufacturing, we are with this deal stepping into a handful of additive machines that are going to help us through the prototype and development and, in fact, low volume production with this equipment. But as we move to higher volume production, we're very much planning to take an asset-light approach. So the direction that some of the GE Additive team has taken historically, has been working with external partners that help you go to scale in additive manufacturing. And they're well established already. And our plan is to work with those contract manufacturers to scale in a way that keeps to our strategy.

Your next question comes from the line of Graham Price with Raymond James.

Looking at Slide 5, it looks like the footprint of the KARNO is a little bit smaller than the CNG/RNG generator. I just wanted to see, are you able to see material weight savings from this design and will that have any kind of follow-on to savings when designing the trucks?

Sure. So we are targeting not only a reduction in size of the generator compared to the one that we use today, but we're also expecting a reduction in weight. Now, we haven't come out with exact numbers yet because, as we shared on the call today, we are still going through the commercialization phase of the generator technology. As mentioned before, the initial one will be in a vehicle out on the road in the next couple of quarters here. So the development is well underway, but we're not ready at this point to kind of put out exact numbers around weight and size of the generator. But as you're thinking about it, you are correct on what you mentioned, this is going to be smaller, lighter than what we're presently pursuing with the conventional natural gas generator.

Okay. Got it. Understood. And then I guess for my follow-up, given the heat requirement that you talked about, do you see the same efficiency gains at all temperatures? And then I guess, also on that, are there kind of optimal operating temperatures for this? Or is it -- is it pretty agnostic there?

Yes. I believe it's pretty agnostic and I'll let Cheri chime in more on this, but we see that we'll be -- those efficiencies will be able to be achieved in the standard operating temperatures of trucks, whether it's kind of your -- it's cold outside or it's hot outside, we would still be in those same ballpark efficiencies. Maybe Cheri, if you want to just share a little bit more on kind of how the tech works as well just to highlight that.

Yes, I think that would be helpful. So let me just take a step back and then I'll come back to that. So how this engine is different. So the basic principle is that the fuel is oxidized to produce heat, then we use the heat to pressurize a linear motor to create electricity. And that's different than a traditional internal combustion engine in that the fuel oxidation doesn't directly drive the linear motor. It's separated and the linear motor is sealed, which, one, gives us the flexibility that we've talked about with the different fuel sources because you really just need heat to drive this motor. And the second thing that's different is the flameless oxidation process. which is a sensitive control over the oxidation process that leads to really low emissions. And the way that this generator operates is it's a continuous operation. So it doesn't need to go up and down with transient response with the truck, different from a generator that's coupled to the wheels. So this is really an optimal operating characteristics for this generator. And in fact, we like to keep it -- we can keep it at consistent temperatures because we recirculate the heat to the hot side consistently. So it is kept constant versus the ambience in the vehicle. So we do expect that the efficiencies are very consistent across the entire power cycle. That's actually one of the benefits of this heat cycle generator and we expect some nice gains on efficiency in our application.

Your next question comes from the line of Noel Parks with Tuohy Brothers.

Just a couple of things. Did you have your eye on KARNO for some time? Or were there similar technologies that you evaluated?

Yes. That's a great question. And so we had kind of seen for a while that going into a fuel-agnostic solution is the right way to go to a hydrogen-based future. If you can actually deliver a truck to a fleet that's future-proofed, that opens up kind of a new world of opportunities. And so we kind of had this fuel agnostic concept, but where this actually drives was, close to a couple of years ago, GE actually reached out Hyliion. They were working on this generator internally. It was a stone torch program. It hadn't been publicly announced. And up until today, actually no information on this KARNO generator has been publicly announced. And so this is something they've been working on for a while, coupling additive manufacturing with the aviation division and jet engine technology division. And so they reached out to us saying, "Hey, the Hypertruck platform is a perfect fit for this KARNO generator." We've actually been working together for a while now, actually integrating this into a vehicle. That's why I mentioned in the first lead into this that we're only a couple of quarters away from actually having this out in the road for initial testing. GE has already had this on dyno and testing it. So it's been well under development already. And as we were working with the GE team and we saw the benefits of the KARNO generator, it sparked our interest to say, well, why don't we actually look at making this a part of Hyliion because it's such a perfect fit for our business plan, and we had already told the world that we were going to have a fuel-agnostic generator, and that's what led to the acquisition.

Got it. That does sort of fill in that gap of how you got to the fuel agnostic sort of philosophy. And just curious, as far as the -- I mean, what you anticipate for the ultimate manufacturing, are you aware of any particular supply chain implications or challenges? I'm just curious whether you think it will be more challenging or less challenging to develop this outside GE's umbrella? Because at -- with GE, it would give you clout with suppliers, but on the other hand, must be -- must have been more bureaucratic.