Hyliion Holdings Corp
NYSE:HYLN
Earnings Call Analysis
Summary
Q4-2023
The company ended the shutdown of its powertrain project with an overall cost of $20.4 million; $11.5 million was charged in Q4 2023, and the balance will be recognized in Q1 2024. Q4 operating expenses were $32.6 million, including shutdown costs and $4.5 million in R&D for the KARNO generator. Q4 net loss was $29 million, unchanged from the previous year. 2023 interest income rose to $13.8 million from $5.7 million in 2022, and the net loss improved to $124 million from $153 million the previous year. With successful share buybacks and anticipated initial KARNO deployments in late 2024, which will ramp up in 2025 with revenues in the low double-digit millions and gross margin close to break-even, the company projects a cash burn between $40 and $50 million for 2024, aiming to conclude the year with $220 to $230 million in cash and investments.
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Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines again will be placed on music hold. Thank you for your patience.
Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Hyliion Fourth Quarter Earnings Release Conference Call. [Operator Instructions] I will now turn the conference over to Greg Standley, Chief Accounting Officer. Greg, you may begin your conference.
Thank you, and good afternoon, everyone. Welcome to Hyliion Holdings Fourth Quarter and Full Year 2023 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 investorshyliion.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 on both 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.
Hello, and welcome to Hyliion's Fourth Quarter and Full Year 2023 Earnings Call. On today's call, I am joined by our Chief Financial Officer, Jon Panzer.
Over this past quarter, we have been primarily focused on and have made great progress towards our shift to the KARNO generator. I am pleased to share that we were able to achieve some critical milestones over the past few months and that keep us on track with our previously shared time line. I'll cover this in more detail on today's call as well as share highlights around our product development, sales efforts and an update on our operational plans.
On our last earnings call, we announced the difficult yet necessary decision to wind down our electric powertrain operations and preserve the technology for potential later use or sale. While this was a challenging decision, we continue to believe and we have seen more examples in the market of how this was the correct strategic move for the company and our shareholders. At a high level, the wind down of the powertrain is proceeding as expected, and we continue to look for opportunities to monetize the assets and technology that we developed.
As we mentioned last year, we expect that the reduction in expenses associated with the wind down of our powertrain segment will result in approximately a 70% reduction in cash burn this year compared to last. This leaves us in a strong financial position as we start 2024 with $291 million of capital and expect to utilize about $40 million to $50 million worth of this capital this year for our KARNO development.
Because of the strong financial position, last quarter, we announced a $20 million stock repurchase program. While repurchasing shares is certainly unusual for a pre-revenue company, we thought it was important. The initiation of this program underscores our confidence in the potential of the KARNO generator innovative technology and in our ability to complete development and delivery of initial units later this year and begin scaling deployments with the capital we have on hand.
Our strong capital position affords us the opportunity to further enhance value for our shareholders. Particularly at a time when we believe the market has yet to fully value the company's potential. At the time of the share repurchase announcement, our stock was trading at nearly a 3x discount to the value of our cash and investments alone. Therefore, we believe that a share repurchase program was in the best long-term interest of our shareholders.
On our last earnings call, we showcased the key milestones that remain as we work towards initial deployments of beta design generators with customers later this year. I am pleased to share that we remain on track with these milestones and have made great progress towards them. As a reminder, the KARNO generator is a fuel-agnostic electric generator that is expected to offer significant benefits and advantages over conventional generators in the areas of efficiency, operating costs, emissions, versatility, power density and many other characteristics.
It is enabled by advanced additive manufacturing technology and leverages a linear heat motor to produce electricity. Our primary focus is providing distributed power generation that can operate on various fuel sources, including hydrogen, to address the many challenges facing the electric grid and power consumers today and in the future.
I'll first start with some updates on our product development. As a reminder, the KARNO technology has been in development for over 5 years. The development version of the generator that we started showcasing in 2023 was a 125-kilowatt capable design of the generator that we call Alpha. This design has been in testing and we've been making design changes and improvements to it. We then have our next iteration of the design, beta which is intended to be our production intent design of the generator that will be capable of producing 200 kilowatts of power, although it will be very similar in size to Alpha. It is the beta version of the generator that we expect to deploy with customers later this year.
A few months ago, we shared how we successfully started supplying power back to the Ohio grid with the Alpha generator while running on natural gas.
In the fourth quarter, we also successfully tested flare gas that was collected in the Permian Basin as we ran it through the KARNO generator's reactor and were able to produce heat levels we need to produce electricity. This test highlights the KARNO Technologies' unique ability to operate on various fuels, which is an advantage versus conventional generators.
Since this announcement, we have further analyzed the emissions results of this test and are pleased to share that we expect emissions levels to be below the EPA Tier 4 emission standards by approximately 98% for CO and 76% for NOx when running on this flare gas. One key callout is these expected emissions levels are achieved with no after-treatment and no exhaust catalyst, which would conventionally be needed with internal combustion engines and through additional testing, we expect to further improve NOx emissions.
More recently, we have also begun printing beta design parts of the KARNO generator. Over the coming months, we will begin validating the beta generator design at our facility and then plan to have generators ready to deploy with customers by the end of this year. Our plan is to produce a high single-digit quantity of units for customers this year and then we will begin to scale customer deployments in 2025.
I'd now like to shift and share some updates on the markets we are targeting with the KARNO generator and some customer updates. We are targeting three key markets that we believe the KARNO generator will be able to provide the most benefit, EV charging, the utilization of waste gas and prime power applications.
I'm pleased to share that we secured an LOI with GTL leasing to be a part of our early adopters program. GTL Leasing plans to offer a mobile EV charging solution that can be deployed in areas where adequate grid power is not currently available. Initial units will be deployed in California, and these generators are expected to be capable of operating on both hydrogen and natural gas, enabling customers to choose which fuel best fits their economic and environmental initiatives. In addition to GTL, we are in discussions with numerous other EV charging providers who are facing similar constraints on the available amount of electricity they can receive from the grid.
The second market of focus for us is waste gas. This includes gas that would normally be flared at oil and gas sites or opportunities like using methane from landfills. I'm pleased to announce that we have signed a nonbinding LOI with Detmar Logistics, who is a customer of our powertrain solution to be an adopter of the KARNO technology for the oil and gas space. Detmar is committed to improving emissions in the Permian Basin, which they've accomplished through adopting cleaner trucks and now plan to work with us to utilize flare gas to produce electricity. Detmar has provided us with the flare gas for testing that I spoke about earlier. And after these positive test results, we are now excited to announce that Detmar is committed to an initial KARNO unit and to be part of our early adopters program.
The third focus area is prime power applications. This includes use cases such as powering offices, warehouses, data centers, industrial applications, retail applications and so on. One key benefit of the KARNO generator is not only being able to provide electricity to these facilities, but also to be able to utilize the excess heat from the generator to provide heating to the facility. One customer application that we are pursuing will be to utilize the excess heat from the generator to preheat the water used in their wash base. This combined heat and power process will increase the overall efficiency of the KARNO generator and assist with reducing the financial payback time for customers.
In addition to these three key markets, we will continue to look for unique market opportunities for the KARNO generator. One promising application that we are pursuing is being able to use the generator on Navy vessels. The Office of Naval Research recently presented at the WorkBoat show, and they showcased the promising benefits that the KARNO generator can offer, including its impressive efficiency, limited expected maintenance and fuel flexibility.
As we bring the KARNO generator to market, we plan to price it at a premium to conventional generator cost, but not as expensive as other new energy technologies such as fuel cells. However, our plan is we will initially target customers that are currently adopting more expensive new energy solutions. Then as we scale volume and lower our cost we will plan to target more conventional applications that are seeking some of the unique benefits that the KARNO generator can provide.
As we target initial deployments, we are working closely with our customers to secure subsidies and funding in order to assist with lowering adoption cost. I am pleased to share that under the inflation Reduction Act, infrastructure tax credit the KARNO generator is expected to be treated the same as a fuel cell, which means it will qualify for up to a 30% tax credit for some customers, in addition to the base 30% credit. We also expect to be able to qualify for a bonus 10% credit due to the generator being manufactured domestically. Having an up to 40% tax credit will be a significant advantage for customers who are looking to adopt our solution. These credits will go directly to the customer not to Hyliion, and details on these credits are still being formulated by the IRS, so we will provide further updates and details on them at a later time. The credits can then be utilized by customers or they can be sold or transferred to other organizations.
We are pleased with the customer interest we have been receiving and the ongoing discussions we are having with likely early adopters. For 2024, we expect to begin paid deployments with customers. However, the exact timing of payment may be subject to customers' acceptance of the generator, including meeting certain performance requirements. For 2025, we expect to generate revenue in the low double-digit million in sales from the KARNO generator, and we've already begun building a backlog of customers who we expect will purchase these units.
Lastly, I'd like to share some operational updates on Hyliion so that you can have a greater understanding on how we are shaping the organization post this transition. Our headquarters will remain in Texas at our existing Cedar Park facility in the outskirts of Austin. Long term, our plan will be to utilize this 120,000 square foot facility for manufacturing and assembly of the KARNO generator as we move into production. We also have a significant presence in Cincinnati, Ohio, which is where most of the engineering development and testing of the generator is taking place. We now have around 100 people in the company with a little over half of the team in Austin and the remainder in Cincinnati.
In early April, we will be hosting an event at our Cincinnati facility to showcase the KARNO generator and the production of beta generator parts that are underway. In the next few months, we will also plan to begin expanding our production capabilities by installing additive printing machines in our Austin facility. This will enable us to prepare for scaling the growth of deployment in 2025.
I also have a few personnel updates to share. I am pleased to welcome Govi Ramasamy as our Chief Commercial Officer. Govi joins us with a wealth of experience after being at Cummins for the past 17 years in their power generation business. Most recently, Govi was the leader of Cummins' global data center business. He played a key role in positioning Cummins as an industry leader in energy transition through focused customer partnering, prioritization of investments and championing new next-generation technologies. During his tenure, Govi held various leadership roles across China, the Middle East and North America.
As part of our transition of our powertrain business, our Chief Operating Officer, Dennis Gallagher, who led our powertrain operations will be transitioning on from the organization. I'd like to thank Dennis for his continued leadership and contributions to Hyliion even as we have been winding down these operations.
I would also like to share a couple of board updates as Secretary, Andrew Card and Stephen Pang are stepping down from the Board. Mr. Card is pursuing a new leadership role with the George and Barbara Bush Foundation. And Mr. Pang is resigning due to personal reasons.
I would like to thank Andy and Stephen for their dedicated service on our Board. They both have been on the Hyliion board since we went public in 2020 and have been instrumental in the growth of Hyliion and guiding us through this recent transition we undertook. With their departure, we will reduce the Board from 10 directors to 8.
In summary, we made great progress through the last quarter of 2023 and have a very exciting year ahead. For anyone who is interested in learning more about the technology and how it works, I'd encourage you to go to our YouTube channel and watch a technical overview fireside chat that our Chief Technology Officer, Josh Mook, and I recently hosted. I would now like to turn the call over to Jon for some further financial updates.
Thank you, Thomas, and good morning. I will start with a quick update regarding the impact of the shutdown of powertrain on our financial results.
We expect total shutdown costs to be approximately $20.4 million exclusive of any proceeds we may receive from the sale of assets and technology. This includes payments for powertrain assets we previously purchased, including founders trucks, contract cancellation costs accelerated depreciation of certain assets and employee severance costs. Of this amount, we recognized $11.5 million of charges in the fourth quarter of 2023 and the remaining $9 million will be recognized in the first quarter of this year. More detail on our powertrain shutdown costs can be found in our 2023 Form 10-K.
In the fourth quarter, operating expenses totaled $32.6 million, including the $11.5 million of shutdown costs and approximately $4.5 million in R&D costs related exclusively to our KARNO generator business. This compares to $31.6 million in the prior year quarter. Total cash consumed in the fourth quarter was about $33 million, which includes about $8 million of cash that was reclassified as restricted. This restricted cash is related to the $9 million of first quarter powertrain shutdown expenses that I previously mentioned. Excluding this reclassification of cash, we spent about $24 million of our capital during the fourth quarter.
We earned $3.5 million of interest income for the quarter compared to $2.7 million in 2022. Net loss for the quarter was $29 million, which was flat compared to last year. For the full year, our total operating expenses were $136 million, including the $11.5 million in powertrain shutdown costs and $15.3 million in R&D expenses related to the KARNO generator business. In 2022, full year operating expenses were $152 million and included $28.8 million of onetime expenses associated with our purchase of the KARNO generator business from GE.
Full year 2023 interest income was $13.8 million compared to $5.7 million in 2022. Our total net loss in 2023 was $124 million compared to $153 million in 2022. We finished the year with $291 million of unrestricted cash and short and long-term investments on our balance sheet. I want to again remind everyone that we maintain a significant share of our capital and longer-term investments. Our year-end cash balance of $291 million is somewhat better than our previous forecast of $285 million. This difference relates primarily to the timing of some shutdown expenses which were accrued in the fourth quarter of 2023, but will be paid out in the first quarter of this year. Overall, the shutdown of powertrain is proceeding as we expected.
Next, I'll give a quick update on the $20 million share repurchase program that Thomas referenced. We started the program very late in December, and we repurchased 37,000 shares for the quarter. We've been very active in the market since then with repurchase continuing on a regular basis. Beyond that, we'll provide another update during our first quarter earnings call.
Looking forward to 2024, as Thomas mentioned, we expect to begin deploying KARNO generator units to customers late in the year. While these are expected to be paid deployments, the timing of the payments remains uncertain due to the varying nature of the initial deployment agreements and performance criteria. In 2025, we expect to ramp up KARNO generator deliveries and revenue with total sales in the low double-digit millions of dollars.
Gross margin is still somewhat uncertain as we ramp up production of printed parts and suppliers. We estimate that sales in 2025 will have gross margin that is slightly negative to breakeven. Beyond 2025, we don't yet have estimates for sales or gross margin that we are ready to share. We expect to consume between $40 million and $50 million in cash for 2024. This estimate is a little higher than the $40 million we previously projected but also reflects a more rapid ramp-up in additive printer growth investments.
This estimate is inclusive of operating expenses, capital spending and interest income, but excludes cash spent for share repurchases, cash expenditures for powertrain shutdown activities and asset sale proceeds. Regarding the latter two items, we believe that proceeds from asset sales should approximately equal or exceed cash spent for powertrain shutdown activities during the year.
To summarize this point further, we ended 2023 with $291 million of cash and investments. We expect to end 2024 with between $220 million and $230 million of cash and investments with some uncertainty around the timing of KARNO generator sales and also capital expenditures for additive printer machines as I previously noted. We expect that the capital we have on hand today will be sufficient for the foreseeable future, including commercialization of KARNO generator sales.
Next, we will open up the call for questions.
[Operator Instructions] Your first question comes from the line of Donovan Schafer from Northland Capital Markets.
Thank you for the update on the buybacks, just that you've continued to take action on that so far into the year. My first question is with the increase in cash expenditures for 2024 versus what you'd said before and that seeming to come mostly from CapEx for additive manufacturing. Can you give us a sense of how much of that is more just regular operating expense for overhead employees and stuff? And how much of that is the CapEx? Is it the $10 million incremental increases is just sort of the CapEx investment?
And also if you can give a sense of what kind of throughput that translates into for a given number of x number of generators to be able to be made in a year, what's the CapEx that gets you that?
Donovan, this is John. I think I can answer those questions, and Thomas can jump in. But first off, I think we're still on the OpEx component of that $40 million of cash burn. We're still looking at to be largely the same as what we saw before just in terms of labor costs and R&D and so on. It really is that we just added a range to it because we are planning to get some additional additive capacity that will likely hit the capital spending side. And so we just gave ourselves a little upside there, but it is going to increase capacity for both this year and next year.
And then on the second question, I think I'll refer back to the guidance that we gave that we're going to be delivering a handful of units this year and then the revenue guidance for next year kind of drives that volume. So it's all part of that capacity ramp-up plan, but we just saw an opportunity to start ramping it up a little bit quicker.
And then as a follow-up question. So I think it does seem like there's some interesting opportunity on the using the generator for landfill gas or anaerobic digesters or somewhere like that where being able to -- you can really come out ahead economically, if you can cut out some of the processing equipment that would be typically used. So I know by the end of the year, you hope to line up someone for the initial sort of beta deployment. But is that something where you would consider doing like you've done with Permian gas where you could like deploy a unit out there even just on a temporary basis just to kind of prove the concept or demonstrated even if it wasn't going to be a permanent deployment, but just to show to test it, okay, here's a fierce gas from a landfill and it's running and then we're getting the positive results we want to see. Is that something you'd consider doing? .
Yes. Absolutely, Donovan. This is Thomas. You hit the nail on the head of what we're looking to do. So I think our first showcase was with Detmar logistics. Now that was an oil and gas focused one where Detmar was able to provide us with gas from the Permian Basin. On today's call, it was the first time that we actually shared some of the emissions results from that, which came out very, very positively as you heard on the call. . And so as we think about the waste gas or even as you mentioned, the anaerobic digester, we actually already have a partner in place on that one, working through the exact same process, right? We're going to test the gas first, make sure that it works through the reactor as we would anticipate. And then as you mentioned, we'll get a unit actually deployed out at one of their locations and running on that gas.
And I think while they're very similar at a high level from the standpoint of it's taking what would have been waste gas and being able to make electricity out of it. The value propositions are slightly different, right, because in the -- more of the landfill situation, you're taking what would have been just waste and making it electricity in the oil and gas space, there's actually an opportunity to eliminate the need for a virtual pipeline and for anyone who isn't familiar with that. So that's basically where they need electricity at oil and gas sites.
And what they actually do is they truck in purified natural gas in order to run generators and produce electricity. We see the KARNO as an opportunity where you can actually eliminate that need for trucking in purified natural gas. And just use what's coming straight out of the wellhead. So kind of similar segments, but a little bit different value opportunities in each one.
And then just my last question would be as I think there's been a little bit of softness in the EV space. And with ramping up battery production and stuff, there's a lot of speculation or potential movement in commodity prices. And I know cobalt is an important part of NMC battery, lithium-ion batteries. Your primary kind of additive material is the cobalt -- chrome and cobalt kind of mixture combination. So -- and those prices are actually quite -- certainly cobalt is very, very low right now.
Going forward, as you get to talking about like gross margins being maybe breakeven in '25. I believe you said -- how sensitive is that to these input prices? Or does a lot of the cost actually come through from the investment in the additive manufacturing equipment as opposed to material costs. Just trying to understand how much of an impact movement from those prices can have?
Yes. So at least at today, the buildup of the build material into the generator, there's -- it's kind of a spread between -- some of it is the actual powder cost. And as you're mentioning, there's cobalt chromium that we're using for some of the components, then you have the actual linear motor side of it. You have all the balance of plant components. And then there's a pretty sizable amount that's actually in the cost of running that additive machine. So while there is an aspect of if cobalt prices go up, then that will impact our powder costs. We're not in a situation, though, where it's like 90% of our [ BOM ] is based on one of these components or something like that. So it could have some impact, but we don't see it as a material amount.
With that being said though, even just for the very initial production units, these beta parts that we're producing, we've actually already started shifting some of the components off into other materials. So for instance, the chiller side of it, we're actually shifting that to using aluminum, which is a lower cost solution than some of the other powders out there. So we are being cost conscious in that way of making sure that we're selecting the right materials to meet the performance but also have a solid build material cost.
[Operator Instructions]. Your next question comes from the line of [ Bruce Gillixan ]. Please go ahead. .
Thank you very much. Old-time structure here was really excited about the hybrid truck. Is the KARNO Energy machine going to be incorporated into the truck or is the truck line shelved for now? And why would we shelve it when there was so much potential for it? .
Yes. So I appreciate the question. So as we shared last quarter, we are taking the powertrain technology that we developed and stopping the development, putting that technology on the shelf. As we mentioned on today's call, we are looking at, are there still ways to potentially work with others, sale of the asset sale of the -- some of the technology or royalties, things like that, to see if there is still a way to leverage that technology. But we do see potentially long term that there is the ability that we could even bring that back.
However, the reason really for driving that shift last quarter was because we saw a lot of challenging economics facing the EV trucking space. And even since last quarter, we've continued to see it probably even get worse, at least sustain kind of but probably even get worse. And so from that standpoint, we are confident that the shift we made was the right shift for shareholders.
And we're excited to get the KARNO commercialized as we shared on today's call, a lot of positive progress being made towards that and then we'll assess as we go forward if there is an opportunity to bring the powertrain solution back. And as you mentioned, potentially couple that with the KARNO as the range extender.
We have no further questions in our queue at this time. Thomas Healy, I'll turn the call back to you for closing remarks.
Well, thank you, everyone, for joining today's call. As we highlighted today, we have a lot of exciting development plan for 2024. Most notably is actually getting units out deployed these early field units and getting feedback from those customers and establishing those partnerships to really bring us into 2025 and start scaling the ramp-up of the delivery of KARNO generator. So thank you for joining today's call, and we look forward to chatting with you again soon.
This concludes today's conference call. Thank you for your participation, and you may...