Yahoo Finance Hyliion Holdings Corp. (NYSE:HYLN) Q3 2023 Earnings Call Transcript
Hyliion Holdings Corp. (NYSE:HYLN) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good day, and thank you for standing by. Welcome to the Hyliion Holdings Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. I would now like to turn the conference over to Kellen Ferris, Hyliion's Director of Investor Relations. Kellen, please go ahead.
Kellen Ferris: Thank you and good morning, everyone. Welcome to Hyliion Holdings' third quarter earnings conference call. On the call today, are Thomas Healy, our Chief Executive Officer and Jon Panzer, our Chief Financial Officer. A slide presentation that accompanies this conference call and is available on Hyliion's Investor Relations website at investors.hyliion.com. Please note that during today's call, we will make certain forward-looking statements regarding the company's business outlook. Forward-looking statements are predictions, projections and other statements about anticipated events that are based on current expectations and assumptions, as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from forward-looking statements made on this call.
For more information about factors that may cause the company's results to differ materially from such forward-looking statements, please refer to our presentation and press release as well as our filings with the Securities and Exchange Commission. You are cautioned not to put undue reliance on forward-looking statements and we undertake no duty to update this information unless required by applicable law. Thank you. And now I will turn the call over to Thomas.
Thomas Healy: Hello, and welcome to Hyliion's third quarter 2023 earnings call. I appreciate everyone joining us today for a business update and third quarter financial report. Last month, we announced that with the support of strategic expert advisers, we were exploring a range of strategic options for our powertrain business including engaging with a number of strategic and private equity partners regarding a possible sale or industry merger. In parallel, we also engaged industry experts to help us evaluate the market opportunity and competitiveness of the KARNO generator. As a result, today, we are announcing that we have decided with the support of our Board of Directors to wind down the powertrain business while preserving the technology for potential later use or sale.
Going forward, we will focus the company's capital resources and efforts on our KARNO generator business, an innovative new generator solution. Although this is a difficult decision to make, it is a decision we believe to be in the best interest of the company and its shareholders. We are proud of the progress we've made with the development of our Hypertruck ERX powertrain. As we have regularly publicized, we have made consistent progress achieving the development milestones that we laid out almost two years ago. In fact, with the recent receipt of CARB certification, the beginning of extended fleet trials with customers and building of production trucks, we have completed all the prerequisite steps on our path to commercializing our Hypertruck ERX powertrain.
Since I founded the company, Hyliion's mission has been to provide innovative solutions that reduce emissions from semi trucks, which was in line with the interest from fleets in adopting electrified trucks and with the development we've accomplished to date. Despite this progress, the environment for companies in the electrified commercial vehicle space has become challenging. Slower than initially expected fleet adoption of electrified vehicles, higher component costs and evolving regulatory frameworks that have put significant pressure on companies like Hyliion. As an example, I was recently speaking with a fleet owner, who shared that the cost to buy a conventional natural gas drop has increased by around 45% in the past few years. We have seen increases for nearly all powertrain parts, some by more than $10,000 each.
While this is partly due to inflation, it is also driven by the limited number of suppliers and low production volumes for key components, as a result of the immature nature of the electrified powertrain market. Last June, at our Investor event, we described additional development work that was necessary to align with changes to the regulatory environment. This included integrating and obtaining CARB certification for the new Cummins 15-liter natural gas engine, developing a daycab variant of the Hypertruck ERX powertrain and reducing the cost and weight of our powertrain. While we believe our electric powertrain is the right solution for long-haul trucking and avoid some of the hurdles associated with other electric solutions, such as charging infrastructure, range anxiety and the high cost of hydrogen.
We are now faced with an adoption cycle that is longer than we expected as fleets are delaying orders until mandates force the adoption of electric trucks. The primary one being CARB ACF, which starts in 2027 and requires additional investment in expense such as integrating into a daycab and a new engine. Given these various reasons, it is clear that further development of our powertrain business would require us to raise additional capital at some point, partly driven by higher interest rates but also due to the recognition of the industry challenges I have described, our third party experts have advised that the capital markets are not currently supportive of additional fundraising by companies developing electric commercial vehicles. This has caused financial difficulties for many companies and some including Proterra, Lordstown, DLMS and recently Volta Trucks have entered bankruptcy.
Therefore, we believe it is important to act now while we are in a position of financial strength to discontinue spending on the powertrain segment of our business. John will discuss the impact of the wind down of powertrain later in the presentation but I want to shift to discussion now on our KARNO generator business and the go-forward plan. Our goal with KARNO has been to develop and commercialize the generator to address the growing demand for electricity with a distributed generator solution that offers clean, efficient and cost-effective electricity. KARNO is an innovative new solution that is powered by a linear heat generator and enabled by recent advancements in additive manufacturing. When we initially acquired the KARNO technology, we saw it as a strong solution for both our Hypertruck powertrain as well as the stationary market.
Our team has successfully showcased both the vehicle integration and the KARNO's ability to work in a stationary application by providing power back to the grid. As we look at the opportunities ahead, the KARNO generator in the stationery market has become even more compelling due to its stand-alone nature and ability to address customers' ever-increasing electricity needs. Commercial fleets that have expressed interest in BEV vehicles are discovering that they are not able to secure sufficient electric power for their recharging infrastructure. And when they do, they are faced with significant capital investments, long lead times and often encounter above-market electricity rates and incremental demand charges. Our KARNO generator is currently being configured to solve each of these issues.
It is important to highlight that the KARNO generator is unlike conventional internal combustion or gas turbine-driven generators, powered by a heat engine the KARNO generator has distinct benefits compared to its conventional counterparts. These benefits include greater efficiency across a broad range of power output levels, lower maintenance costs, high power density, less noise and vibration, and the ability to operate on a broad range of fuel sources, including hydrogen, natural gas, ammonia, propane, and conventional fuels. KARNO utilizes a proprietary flameless oxidation technology that results in significantly lower emissions compared to conventional generators. We expect its efficiency to surpass conventional generating systems when employing various fuel sources and even outperforming fuel cell efficiency when operating on hydrogen, while generating no carbon emissions.
We believe the KARNO generator can compete across a broad range of prime power applications operating as a substitute for or as a supplement to grid power. We also believe it can compete in markets providing supplemental or backup power, such as peak shaving, electric vehicle charging or renewables matching. Its ability to operate on a range of fuels, fuel mixtures, or even fuels with impurities is another advantage that enables it to convert waste gases such as flare gas or landfill gas into usable electricity. Over the past couple of years, we have made significant advancements in its development as we prepare for initial commercial deployments later next year. Recently, we highlighted a major achievement of successfully returning power back into the electric grid from our facility in Ohio using a KARNO generator unit.
In recent months, we have been showcasing KARNO technology to potential customers. Through these discussions, we are garnering valuable insights on how the KARNO generator can address many of the pain points customers face with grid power. One example is maintenance costs. Internal combustion generators require frequent maintenance like oil changes that require downtime and technician support. In contrast, the KARNO generator has no oil or lubricants and with only one moving part per shaft, we expect maintenance to be significantly reduced. As we continue these customer showcases, we expect to announce soon that several of these companies will take deliveries of initial KARNO units next year. As we wind down the powertrain business and preserve the technology for potential later use, we have an opportunity to shift certain employees and technology to KARNO development.
As an example, the cloud and infrastructure we have developed to capture and analyze vehicle data is readily adaptable for use in system supporting KARNO generator controls and monitoring. The Hyliion Drive Processor, which is used on the vehicle for connectivity and advanced algorithms can similarly be adapted to the KARNO technology. We also see significant overlap in electric architectures and battery systems. We plan to maintain operations in Austin, Texas and Cincinnati, Ohio. Austin will remain our headquarters and will assume more activities related to the industrialization of the carnal generator and software development. The Ohio team will maintain its focus on R&D technology. As we transition the focus on KARNO, we will be able to significantly reduce the amount of cash spent on the business.
John will provide financial details, but I want to highlight our initial expectations. We continue to have a strong balance sheet with $324 million of available capital at the close of the third quarter. Our projection for the full year is to have spent $137 million in 2023, leaving us approximately $285 million at year-end. For 2024, we expect our cash burn to be reduced to approximately $40 million or a 70% reduction. Our strong capital position gives us financial flexibility well into the future as we begin commercial deployments of our KARNO generator technology next year. I will now turn the call over to Jon to provide a financial update.
Jon Panzer: Thank you, Thomas, and good afternoon. Starting with our financial results for the quarter, we reported $96,000 in revenue from sales of hybrid systems. Operating expenses totaled $33.3 million compared to $62.9 million in the prior year quarter, which included a onetime charge of $28.8 million related to the purchase of KARNO last year. Excluding this charge, expenses in 2022 were $34.1 million. Using this more comparable basis, total expenses were down about $1 million in the third quarter, driven by a $2 million reduction in SG&A expenses partly offset by $1 million increase in R&D expense. Total cash consumed in the third quarter was about $31 million compared to $45 million in the third quarter of 2022 including $15 million of cash that was paid as part of the KARNO acquisition and compared to cash spend of $31 million in the second quarter of this year.
We finished the third quarter with $324 million of cash, short-term and long-term investments on our balance sheet. I want to remind everyone that we maintain a significant share of our capital and longer-term investments to take advantage of higher interest rates on longer-dated securities. For example, we currently have about 43% of our capital or $141 million categorized as long-term investments. For the first nine months of 2023, revenue from hybrid-related sales was $672,000, down about $300,000 compared to the first nine months of 2022. Year-to-date operating expenses in 2023 were $103.7 million compared to $120.8 million for the same period in 2022 or $92 million, excluding the KARNO acquisition charge. Year-to-date, SG&A expenses were down about $2 million, and R&D expenses, excluding the KARNO charge, we're up about $14 million.
This increase is entirely due to the expensing of powertrain components that were purchased for the first 30 production trucks that we previously planned to sell to customers this year. Most of the cost and cash expenditures we expect for the wind down of powertrain will be incurred in the fourth quarter of this year, including payments made for truck chassis and other components for the initial 30 production trucks. We estimate that total expenses for the fourth quarter will be around $35 million, including expenses that will be incurred to recognize future payments for contractual component purchases employee severance agreements and other expenses related to the wind down of the powertrain business. Total operating expenses for the year will be approximately $140 million, including expenses for discontinued operations.
This is a little higher than our previous guidance of $130 million because of the additional powertrain wind-down costs. We expect to finish the year with a total cash and investment balance of around $285 million or about $10 million higher than our previous guidance, even though we expect no revenue from Hypertruck ERX or hybrid systems for the rest of the year. We expect to begin receiving payments from customers for early KARNO generator stationary deployments in late 2024. And as Thomas noted, we expect a significant decrease in our cash spending after we wind down powertrain operations. We estimate that total cash expenditures will drop from approximately $137 million this year to approximately $40 million next year. This amount excludes some cash expenditures for powertrain wind-down activities that we will incur in 2024 and potential proceeds from powertrain asset sales.
It is important to know that with the cash and investments we have on hand today, along with a slower burn rate for KARNO development, we expect to be able to commercialize the KARNO Generator business without the need to raise additional capital. To provide investors with more details on our future plans, we will be hosting a technology fireside chat later this quarter to further highlight the unique capabilities of the KARNO Generator, business opportunities for near and long-term deployments and key development milestones. We will update you about this event in the coming weeks. With that, I will turn the call back over to Thomas for closing remarks.
Thomas Healy: I want to express my sincere appreciation and gratitude to the entire Hyliion team that has worked tirelessly and passionately on our powertrain solutions. The development of these products is taking great effort, many long nights and exceptional dedication from our extremely talented team. We take great pride that trucks outfitted with our Hypertruck ERX powertrain have been on the road logging thousands of miles with great success. During extended fleet trials, we received overwhelmingly positive feedback about our powertrains performance. We have not had a single truck breakdown and a fleet was able to drive over 1,000 miles in a day, which speaks to the great potential of this technology and the robustness of the product.
This is the reason we plan to maintain the technology for potential later use or sale. Although, we are confident that the winding down of the powertrain business is the right move at this time, we are preserving the technology such that if the opportunity arises in the future, it may be reintroduced and utilized to its full potential as the industry matures. For now, we look forward to the great potential of the KARNO Generator. Now, we will take your questions.
See also 30 Best Whiskeys Under $30 and 15 Best Gins Under $50.
To continue reading the Q&A session, please click here.
