Good day and thank you for standing by. Welcome to the Hyliion’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference call over to Adam Bresser, Hyliion’s Senior Director of FP&A and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings third quarter 2022 earnings conference call. On the call today are Thomas Healy, our Chief Executive Officer; and Jon Panzer, our Chief Financial Officer. A slide presentation 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 and as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from the forward-looking statements 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 earnings press release as well as our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. 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. With that, I'll turn the call over to Thomas.

Hello and thank you for joining us today for our third quarter 2022 earnings call. I'd like to start off by taking a moment to welcome Jon Panzer, who is with me here today as Hyliion's new CFO. Almost two months ago, Jon joined the Company and has already made a powerful impact on the organization. He joins us after a long tenure at Union Pacific and brings a wealth of experience in financial leadership, investor relations, strategic technologies and transportation operations. In addition to leading numerous financial departments at Union Pacific, Jon previously led their IT department as well as their strategic planning. In today's call, we will cover progress and results from Q3 as well as add more color to how we are going to commercialize the Hypertruck ERX system and what we anticipate our initial go-to-market pricing to be. This past quarter has been a very exciting time at Hyliion as we have hit some key milestones on our path to commercialization. I will highlight a few and then provide more details later in the presentation. We started control fleet trials with our Hypertruck ERX system. This includes a trial with GreenPath Logistics and more recently with Wegmans and Detmar. We also closed the acquisition of an innovative fuel agnostic generator technology from GE Additive, which we first announced back in August. We are pleased to share that we closed the third quarter with $455 million of cash and investments on our balance sheet. Finally, on this call, we will be sharing more details on our Founders Program, which is an initiative around the early deployments of Hypertruck ERX powertrain. As I mentioned, we started our controlled fleet trials in Q3 as planned. Our first controlled fleet trial was executed with GreenPath Logistics, one of the leading…

Thank you, Thomas, and good morning, everyone. It is great to be here. Turning to the financial results for the third quarter, we reported revenue of a $0.5 million related to hybrid sales, including a full hybrid truck compared to 200,000 in the second quarter of this year, and no revenue in the third quarter of a year ago. Operating expenses totaled 62.9 million for the quarter inclusive expenses related to the acquisition of KARNO, as Thomas noted. The KARNO purchase was recorded as an asset acquisition with the key financial statement impacts shown in the table on the right side of this slide. The transaction included a cash payment to GE of $15 million and the issuance of 5.5 million highly on shares worth 16.1 million on the day of closing. Hyliion also incurred 1.2 million of direct transaction expenses for a total purchase valuation of 32.3 million. Of this amount, 28.8 million was recorded as research and development expense and 3.6 million as property and equipment. Excluding KARNO, operating expenses were 34.2 million compared to 32.2 million in the second quarter, and 26.8 million in the third quarter of 2021. As Hyliion continues to make progress on our development roadmap, R&D expenses, excluding KARNO, totaled 23.9 million up from 20.1 million in the second quarter of this year, and 18.2 million in the third quarter of 2021. SG&A expenses for the quarter were 10.3 million, down1.9 million sequentially in the second quarter, but up from 8.7 million last year. In total, Hyliion reported a net loss of 63.4 million for the third quarter and 34.6 million excluding KARNO acquisition expenses. This is up about a $1 million compared to the net loss of 33.5 million we incurred in Q2 of this year, and compares to the 26.6 million…

Thanks, Jon. Before we open the call up to Q&A, there are a few more points I'd like to share. First, this past quarter we released our inaugural ESG report. This report can be found on our website and we encourage you to take a look at it. Also, this past quarter, we have the pleasure of visiting the White House for an event celebrating the passage of the Inflation Reduction Act. Under this act, the Hypertruck ERX qualifies for a $40,000 tax credit, which will make the adoption of our technology even that much easier for fleets. Additionally, as some of you may have already seen, we continue to release new educational videos on YouTube and on our website that highlights some of the facts around moving to an electric based future. These videos not only focus on Hyliion, but talk about the shift to electric trucking as a whole by highlighting some other solutions such as BEV plug-in vehicles, as well as fuel cell technology. We encourage anyone who is interested in learning more about what fleets need to know as they look at new technologies to go watch these videos. Lastly, I'd like to close the call by sharing that demand for Hyliion solutions remain strong and continues to increase. We are continuing to hit the milestones we set out a year ago and we remain on time and on budget with the commercial launch of the Hypertruck ERX powertrain. We look forward to giving fleets a viable path to electrification that enables them to reduce their emissions. With that, we will open the call to questions. Operator, please go ahead.

Thank you. [Operator Instructions] Your first question comes from the line of Steve Fisher with UBS. Your line is open.

Thanks. Good morning. But just to start off on the revenue recognition for the first 200 units, I just want to clarify. It sounds like we should assume that it's going to be the full upper $300,000 per unit since you're going to be selling them the whole truck. And if that's correct, I guess your COGS are just going to include whatever the agreement you have with PACCAR?

That's correct. So in the initial vehicles, first 200 and then even after that we anticipate that, we will be recognizing revenue for the entire vehicle. As we shared on the call, as we go forward, as we scale volumes, continue to build the relationship with the OEMs, that's when we will shift into more of conventional powertrain setup where we will be selling the components over to the OEM and they'll do the integration.

Okay, great. And maybe a little bit early for this. But I guess any sense of the split between, what's going to be in the first quarter of '24 versus kind of what's late '23?

So, we haven't added exact specificity to that yet. So what we have said to the fleets and what we are expecting is we will start the production late '23, start shipping units in that time frame. And then by the end of Q1 of '24, we will have all two hundred of those initial Founder Program trucks return to fleets deployed in operations and those will all be being delivered and based out of that Dallas launch facility that we mentioned. So, we haven't given exact color to how many in '23 versus '24, but I would assume that it's heavier weighted in the Q1 than it is in the end of '23 though.

Okay, makes sense. And then how should we think about the quarterly cash burn now that you have KARNO in there and there is more inflation, but obviously making more progress and getting closer to commercialization. I think you mentioned that, it was about $30 million of burn for the core business and they add the $15 million for KARNO. So, what's the right run rate now we should think about for the next a handful of quarters on cash burn?

Yes. Hi. This is Jon. I'll take that question. So as you noted, we are running, I think, just a little bit under 30 million a quarter for the first three quarters this year and it was about thirty in the third quarter excluding the $15 million that we paid to GE. So you got those numbers right. And as you have seen kind of through '21 and '22, we have slowly started to grow expenses and cash flow has been very consistent with that. Fourth quarter, again, we will look relatively similar. So there is not going to be any real step changes that we anticipate in operating expenses and therefore cash burn through the core. I will reiterate as I just mentioned that, on the working capital side, we are about ready to start putting trucks together. So, we are going to be buying components, chassis and batteries and so forth. And just given the supply chain circumstances, we will want to fix some of those up early. So, we'll probably start to see a little bit of impact in the coming quarters. But the core operation, you will probably just see a very slow increase and then we will see some working capital.

Okay. And working capital, are we thinking like single-digit millions of dollars initially?

Well, it's going to grow between now and late next year, when we start to put the trucks on the market. I don't know exactly we have just started to put orders in for components. But I think you'll see a little bit here in the fourth quarter, and then it's a number that's just going to grow and it'll add up time. So, it's going to be tens of millions over the next year or so, single-digit tens of millions somewhere in that range, but it'll be kind of a slow increase, and then we will start delivering trucks.

Your next question is from the line of Andres Sheppard with Cantor Fitzgerald. Your line is open.

Congrats on the quarter. Just a couple of clarifying questions from us. So on Slide 9, it looks like it says that, we should expect 2023 quarterly revenues from the hybrid system to be in line with Q3 results. So does that mean that we should be modeling roughly 2 million in revenue for next year for the hybrid? Thank you.

Hey, Andres. Yes. So, I think that makes sense. So what we're saying is, we did 0.5 million in revenue this quarter, and we're expecting as we go into '23 to the launch of the ERX, it'll be that similar 0.5 million per quarter. So, I think your assessments are in the right ballpark there.

Wonderful. Thanks, Thomas. And then in regards to OpEx. So, you've -- looks like you've lowered your guidance for the year from let's call it 135 million previously as the midpoint to now 130 million. As I look at the past three quarters, you're already pretty close to that annual number. So does that mean that we should expect a lower than usual OpEx number in Q4? Thanks.

Yes. I'll take that one. As I mentioned, just for clarity, a quarter ago when we projected, we projected 130 million to 140 million of total OpEx for the year. That was before we announced the acquisition of KARNO. And so, as I just mentioned in the prepared remarks, that projection is now on the low end, but it does exclude the acquisition accounting entry of writing off the $29 million of R&D. So, I want to clarify that, because it's an unusual item that has come up lately. So again, just to put that in one sentence, our expectation for the full year is to be at the low end of the range that we gave last quarter. So, we expect to be around 130, excluding the 28.8 million R&D expense related to KARNO acquisition that we recorded this quarter.

I see that helps. Thanks for clarifying that. Maybe one last one if I could. In the past you've provided updates on the ERX orders and reservations numbers. Looks like at this quarter obviously you talked about the founders program and having that first 200 orders into production slots. But I'm wondering, are there any changes to the reservations or the number of orders or what was the thought process, I guess it not necessarily quantifying at this quarter? Thank you.

Thanks Andreas. And actually, a question that we figured we would get on this call. So to give a little more color to it, earlier this year, we asked their task, the sales team would go out and fill the first 200 production slots. This was going to be the founders program. It's going to be out of that launch, silly. It's going to have a service element to it, a white-glove service. And so that was the initiative is go fill the first 200. In order to expand past that, we wanted to establish what was our pricing going to be. We've just come out with that on this call. And so, now we're going to ask sales team to continue to go grow that backlog. As we look at the founders program, we were oversubscribed. We had more interest in it than the 200 so that was great to see. But now that we've got pricing out there that we're public with, we'll look to go grow that backlog. And as we've said, I think there's a couple of big milestones here that we're about to hit. So, one is the controlled fleet trials and expanding fleet trials next year. Feedback thus far has been very positive and we're going to look to get it in the hands of more the -- get the truck in the hands of more fleets next year. And I think that's going to give fleets confidence that they'll start placing orders. And then we're going through the commercialization process of certifications and validation of the technology. And that's what fleets want to see. So, we do expect to continue to grow that order backlog, but up through now the focus has been filled that first 200.

Your next question is from Bill Peterson with JPMorgan. Your line is open.

Yes. Hi. Good morning, guys. Thanks for taking the questions. For the control fleet testing, can you share maybe more color on some of the key learnings you have, any areas for improvement? What your plans are for winter testing and what you're looking to achieve there? I guess how many vehicles do you need also to support the testing in total?

Sure. So I'll break that down into a couple things. So first, the controlled fleet trials. So, they've been going very well as we mentioned, GreenPath Logistics, Wegmans, Detmar, we've been able to execute upon in our running. And so from that standpoint, learnings have been really just tweaks to the control algorithms, how to make sure that our powertrain is responding to the driver feedback best possible. We've been very pleased with the reliability and performance of the trucks. We're very pleased with how that's going. So, overall, yes, it's going well and the feedback from fleets has been great. One other thing while we're on this topic, I will add is some of the fleets we've been working with have also had experience with BEV plug-in trucks. And it's been interesting. There's actually, they've been, they've had some BEV plug-in trucks there while they've had our truck there as well. And, happy to say that drivers have spoken very highly of what we're bringing forward. I will say drivers have tremendous range anxiety with BEV plug-in trucks. The range is just not there compared to what a normal diesel truck can get. And frankly even what's potentially being advertised of what the range of the electric truck is going to get, they're not seeing that. And so, we have heard from fleets, they've had instances of these trucks running out of battery power and having to get towed back home to be put on the charger. So that's something that we're not experiencing obviously with the Hypertruck ERX, they have plenty of range. They're using the existing infrastructure out there. So that's been good. And then second part of your question was on numbers of vehicles. So, the batch of vehicles that we're in right now, as we previously shared was going to be in and around that, 10 units out there. That's where we're at right now. And we're just to start about to start the build of the next batch of trucks, which is going to be around 20 more vehicles and then it'll be those vehicles that then bring us into the start of production in late '23. So, we're using the current batch, and we'll use the next batch in these fleet trials. And, yes, as I said, very pleased with how they're going thus far.

Okay, thanks for the additional color. I don't know if you mentioned, I might have missed it, but thanks for kind of providing some pricing. But how should we think about the margin structure, I guess under sort of the two forms? One would be your sort of first, your first go to market strategy, and then how we should think about it when it's actually being built by the OEM directly?

Yes, I'll take that one. We've, we have some pretty good ideas of, what costs are going to look like. We're getting ready to put together the first trucks. There is some, a little bit of unknowns in the component costs, but we're starting to narrow in on what those numbers are. As you would expect initially that putting together a new product, the first costs are going to be higher than what you hope your long range expectations are because you're, you know, we mentioned, Thomas mentioned we'll be putting together the units, some here and some in mod centers. So, we do expect that that cost will come down over time as we get efficiencies from volume purchases and eventually on the OEM assembly line. So yes, we expect to be a little upside down to start off with to be straight up with it, but certainly have a line of sight to get costs out of it, as we grow volumes and we can get some better insights into component pricing and things like that.

Your next question is from the line of Mark Delaney with Goldman Sachs. Your line is open.

Yes. Thanks for all the details provided today and thanks for taking my questions. I guess first in terms of the payback period for ERX, and I know that you are communicating pricing. Maybe you can share what you're hearing from some of the customers in terms of how long it'll take for them to make up for any premium compared to buying a more traditional truck? You talked about the fuel savings. How many years before they made breakeven now that we know the pricing please?

Absolutely. So, this is one of the things that we believe we have a strong value proposition, to the fleet. So when we look at the ROI, we are going to be able to offer fleets a positive ROI. If you look at that upfront vehicle cost, then you look at the cost of the fuel overtime comparing that to a diesel, we are expecting a payback in just under three years to the fleet. And then if you look at kind of the normal operating duration for a fleet, that's in the five to seven years for a truck that can give them a north of $100,000 in savings over what a conventional diesel would be. Now I'll preface all that would, it obviously varies based on what conditions the fleets are running in, how many miles they're putting on per year, how long a whole day, right? But hopefully that kind of gives you a general sense. What I will say is, when we are talking about fleets about what they're hearing with BEV plug-in, what hearing with fuel cell vehicles is, they are not seeing the opportunity to recoup those costs, those high upfront costs at least for kind of longer miles over the road type applications. And so, we see that as a strong advantage for us because not only could pull forward that ESG benefit, the climate change benefit, reduced emissions for fleets. But then, we are also giving them the ability to actually have a truck that can return a positive ROI for them.

That's really helpful. And the kind of relates to my second question was, the competitive pricing you were showing at potential prices for a BEV or fuel cell. I don't know if you could elaborate a little bit more on the specs you were looking at. I mean, are those BEV or fuel cell trucks that could do the same kind of range as the ERX or is it more of kind of average cross market? I know some of the competitive offerings maybe go a lower range just to trying to understand how you incorporated that into the comparisons? Thanks.

So the pricing we gave on BEV of what we are hearing from fleets are more vehicles that are being advertised in that kind of 200 mile range. So, I guess to your point, we are pulling forward that 1,000 miles range. So obviously the BEV has much lower range than that. We have heard some BEV trucks having the opportunity of being up in the 300 mile kind of a range. I expect those prices could even potentially exceed what we just mentioned for BEV pricing. But one thing that I think is really key to note and I think this is kind of a notorious thing with BEVs as someone who drives a BEV, what it says on your dashboard of what you're going to get for range is not really what you're going to get for range and we're hearing that is true in the trucking industry as well. When fleets actually put these trucks in operation, they're climbing hills, they got heavy loads it's draining the batteries quickly. And so from that, fleets are actually telling their drivers reduce the number range -- the expected range of the vehicle for BEV plug-in just because in real world conditions that come back less. And I think just to close on that note, I mean, that's going to cause fleet staff to buy more assets, more trucks, just to be able to move the same amount of goods. And that's going to even further make it a tougher value proposition for BEV plug-in.

[Operator Instructions] Your next question is from Donovan Schafer with Northland Securities. Your line is open.

Hey guys, this is Luke on for Donovan. I just wanted to follow up on the ERX testing with those three fleets with GreenPath, Wegmans and Detmar. I was just wondering what the range of use cases that these testing sites are representing with long haul, short haul, freight, et cetera, or just kind of the day-to-day in the life of one of these trucks? And how it varies between these three occasions?

So, we've approached it with going to the fleet, and kind of letting them choose how they want to run it. So, we've seen 100 of miles being put on the vehicle in a day. It has been a situation where the vehicles have been coming back to a home base. So it's probably been more operated like a regional as opposed to a true just over the road drivers sleeping in the trucks. But not regional type ranges in like a 100 miles a day. I mean, they've been going out and putting miles on the trucks. But that's really up to the fleet's discretion. One thing you that you'll see coming out shortly here is that initial movement of freight with GreenPath, we actually moved some cargo for Shell, some of their lubricant products and the video will be coming out on that soon here. And you can see, I mean, these structures are being put into just normal standard operation and letting the drivers work the trucks. And for us, we're taking that feedback and then looking at how can we continue to make the product better.

Your final question comes from the line of Noel Parks with Tuohy Brothers Investment Research. Your line is open.

Just a couple things. Looking at the KARNO acquisition, I'm just curious whether the expense outlook and the capital that you anticipated before the deal are in reality tracking to your expectations pretty much?

Yes. They are, as far as we know. I think we said, back during the acquisition that we thought we would spend around 75 million to 100 million over the time it would take to develop the KARNO ERX. And so from what we've learned so far, we're still think that's a reasonable number. Again, as we look kind of into this quarter, and next quarter, they're fully integrated highly on employees and their impacts of their spend capital, and operating expense are kind of reflected in our outlook. So, we feel confident in it, and the numbers are still pretty solid.

Great. I don’t know if this is something you've touched on before, but as far as your incorporation of the KARNO technology is there anything in the recent government incentive packages that stands to benefit in particular from that?

So, we do see that there are government opportunities out there for the KARNO actually potentially great government opportunities, right? If you think about being able to deliver them a truly fuel agnostic generator that they could throw jet fuel in it, they could throw diesel in it, gasoline you name it, they could put it in the generator and it's going to use it. I think that opens up a lot of opportunities. Just kind of being energy independent, if that makes sense. So, strong opportunities there, we will be pursuing and looking at government funding opportunities to assist with the KARNO and also speaking with the government about how they could potentially use it. While we're on the KARNO topic, I'll just share, I was up, up at the Ohio facility recently here, spending time with the engineering team and it's some truly innovative solutions. Like, just to touch on, we've shared this flameless oxidation process that converts the fuel into heat. They had it set up on a test bench up there. Got to see it where, you're -- you're bringing fuel in. You, you're looking at it through a clear chamber, you can't see anything happening, but yet all around it all the metal parts are glowing red because it's producing heat. And so really, really neat stuff and something that we see as being truly innovative for the trucking industry, but then also, as you were mentioning, potential other industries as well.

This concludes the question and answer portion of today's call. At this time, I would like to turn the call over to Hyliion’s CEO, Thomas Healy for closing remarks.

Well, thank you and we appreciate everyone joining today's call. As I mentioned during the Q&A, stay tuned for a video that we'll be putting out here to showcase the control fleet trials with GreenPath Logistics and that movement of freight for Shell. One other thing to note is if any was on the line today and didn't get an opportunity to ask a question, we will be posting on Twitter shortly here seeking any additional questions and then Jon and I will do a quick video answering some of those. So please join in on that as well. But otherwise, thanks for joining and hope everyone has a great quarter.

Ladies and gentlemen, this does conclude today's conference call. You may all disconnect and have a wonderful day.