Hyliion Holdings Corp (HYLN) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Hyliion Holdings first quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Kellen Ferris, Hyliion Director of Investor Relations. Kellen, please go ahead.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings first 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 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 to our filings with the Securities and Exchange Commission. Forward-looking statements speak only of the date as 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.

Now I will turn the call over to Thomas.

Thank you for joining us for our first quarter 2023 earnings call as we have a lot of important information to share with you this morning. We'll be providing updates on the Advanced Clean Transportation Expo in Anaheim, California that we participated in last week, news of the issuance of the final advanced clean fleet rule known as ACF, by CARB 2 weeks ago and some strategic shifts that we are making in our Hypertruck ERX commercialization plans in order to best maintain our strong cash position.

I'd first like to start off with an update on our Hypertruck ERX powertrain development and commercialization work. For those of you who are new to the story, the Hypertruck ERX system is a fully electric powertrain for Class 8 semi-trucks, that include a natural gas fuel range extender to recharge the batteries as needed. When fueled with renewable natural gas, the Hypertruck ERX powertrain offers commercial vehicle owners a net carbon-negative capable alternative to battery-only trucks, which have limited range and rely on expensive recharging systems that are not yet widely available.

I'm pleased to report once again that we remain on schedule with plans to begin commercialization in the second half of this year. There are no new milestones to check off for the first quarter, but the product validation phase remains on track as we will begin extended fleet trials later in the second quarter.

We are happy to inform that we submitted the required material to carve in order to obtain our dual executive order with Cummins to certify the powertrain. We expect to complete certification from CARB, the EPA and the National Highway Safety Administration sometime in the third quarter. We have previously shared that we'd start production of the Hypertruck ERX system in late 2023. But with the progress just mentioned, we now plan to begin production assembly of trucks equipped with the Hypertruck ERX powertrain in the third quarter ahead of schedule.

We've made some other great strides to assist with pulling in the start of production timing. The team has been working diligently on building out our next batch of C sample trucks, which we expect will be the final version of the powertrain design prior to starting production. These trucks are going through continued validation testing, and they will be deployed in extended fleet trial starting this quarter. We have also recently obtained ISO 14001, which is an environmental certification as well as ISO 9001, which is a quality process certification. These ISO standards are expected of and common across the conventional suppliers and OEMs in the space, but are often not obtained by early-stage companies or new market entrants like Hyliion. This achievement continues to build confidence and operational excellence as we move into production.

Next, I'd like to provide an update on our Hypertruck ERX system commercialization plans and some strategic shifts we are undertaking that I mentioned earlier. As I'm sure everyone on this call is well aware, the past quarter has been exceptionally challenging time for electrification and technology companies in the public markets. Unfortunately, highly on stock has similarly seen a recent decline, and it's prompted us to relook at what is the best strategic path forward for the company. One very clear advantage that Hyliion has is our balance sheet with nearly $400 million in cash. What is also clear is that the ability to raise additional capital in the stock market has become severely limited without incurring excessive dilution for existing shareholders.

Consequently, we need to make sure that we utilize the cash we have in a focused manner and as wisely as possible. During our last earnings call in March, we shared that we expected to incur gross margin losses on the sale of the initial trucks that are part of our inaugural founders program due to start-up inefficiencies that we expect to encounter as we go through assembly and delivery of the first powertrain systems. We also shared that we expect to see an increased use of cash this year compared to 2022 as we purchase production powertrain components for the founders trucks and for additional trucks that we plan to begin building in the first half of 2024, following founders deliveries.

In total, full year operating expenses, capital spending, gross losses on sales of powertrain systems and working capital increases were expected to consume up to $200 million in cash in 2023. Or said differently, about half of our current capital position.

If we look back in time, electrification start-up companies were encouraged and rewarded by investors for rapidly growing market share and revenue. However, today, the market is rewarding a quicker path to profitability and conservation of cash driven by greater investor skepticism for unprofitable business models. In light of recent capital markets development and experiences of peer companies, we are taking steps now to better align with today's market expectations. We will continue to scale and grow the company, but we will do so with a keen eye for opportunities to reduce the rate of cash burn. The first area we are going to address is the losses we were anticipating on initial founders deliveries, which are still subject to finalization and definitive terms.

Our initial plan was to ship all 210 founders trucks by the end of Q1 of 2024. However, as we assess the costs we'd incur by executing this plan, we believe there are more capital-efficient ways to achieve similar customer demand in the long term while consuming less cash in the short term. As we begun procuring the powertrain and truck components, the costs have come in higher than we initially anticipated due to suppliers passing through their surcharges on to us. Thus, we need to pass these price increases along to our customers as well.

We are working with the founders fleet on restructuring initial truck orders as well as simplifying the agreements. We will see changes to the fleet participating in the program as we go through this process. However, we are confident that we can pull forward other fleets as replacements if needed. One other objective is to place the initial units with a greater number of customers as this will allow more fleets to test and validate our powertrain and give them the confidence to place more orders in the near future. We are also planning to scale the ramp-up of production volume at a slower pace than we initially expressed. This will allow more time to procure components, which will reduce surcharges we are now experiencing, and it will give the engineering team an opportunity to implement some cost-saving measures in the system design.

Our new goal is to begin installing production powertrain systems into trucks in the third quarter and to complete and sell 30 trucks before the end of the year. We will then continue to evaluate our future truck assembly and delivery plan for 2024 based on modified and simplified founders agreements. We are also pulling back on our facility renovation that we were planning in connection with a fast buildup of our founders program trucks. We also anticipate adjusting our rate of hiring and shifting more quickly to being a powertrain provider to the OEMs as opposed to tying up working capital, assembling and selling complete trucks.

All of these actions will conserve cash while allowing us to continue our path to commercialization and profitability. Shifting now to an exciting update from the ACT Expo this past week. ACT is the largest trade show that focuses on new emission-reducing technology for the transportation space. In addition to showcasing our Hypertruck ERX powertrain with over 100 Ride and Drive events, we also unveiled the Hypertruck KARNO solution. We were very pleased with the level of interest and excitement we received from OEMs, partners and fleet customers. With respect to the KARNO solution, it was the first time we publicly showcased the generator and provided an in-depth opportunity to show how the technology works. In our booth, we had a 200-kilowatt size generator mounted onto a truck equipped with our Hypertruck electric powertrain system.

I'd like to share with you some of the highlights that we discussed about KARNO. First, it is a fuel-agnostic generator that is expected to be able to operate on over 20 different fuels. The vehicle we had in the booth is equipped to run on both hydrogen and natural gas. The generator brings forward significant efficiency improvements while also reducing emissions and will emit no carbon dioxide when fueled by hydrogen. It is also expected to have almost no routine maintenance as there is only a single moving part per shaft and no oil or other lubricants in the system. Lastly, the generator operates at about 65 decibels, which is quieter than an average conversation between 2 people.

During our press conference at the show, we also highlighted how we will expand our business focus to also offer the KARNO generator solution for stationary power applications. With its high efficiency, low emissions, low noise and minimal maintenance requirements, we see this as a strong solution for powering EV chargers, buildings, hotels, data centers and many other applications that could benefit from a scalable micro grid. We expect to be able to produce electricity at a cost of around $0.07 per kilowatt hour, which is far lower than the cost of grid electricity in the U.S., which ranges from $0.11 to $0.22.

We also expect to host ride and drive events with our Hypertruck KARNO system later this year and begin to establish stationary charging demonstrations in 2024. Shifting to an update on our Hypertruck fuel cell demonstration truck. The development is well underway in partnership with Hizon and I am pleased to share that we are still on track to having the first vehicle complete by end of year. At the ACT Expo, Hizon unveiled their new 200-kilowatt fuel cell, which is a solution that we are integrating into this demo vehicle.

I have just one further update to share, which is around CARB vehicle credits. We previously showcased that vehicles with our Hypertruck ERX system will qualify for 75% of the ZEV credits that OEMs need under the ACT ruling starting in 2024. About 2 weeks ago, CARB passed their latest clean truck rule called Advanced Clean Fleet, or ACF, which is a direct mandate on fleets to begin adopting trucks with electrified powertrains. I am very pleased to share that vehicles with our Hypertruck ERX system will qualify for 100% of the ZEV credits under this ruling. The same as a pure battery electric or fuel cell truck. Passage of ACF will likely produce strong tailwinds for us as fleets look to comply with this new mandate.

I will now turn the call over to Jon so that he can share more on our financial and strategic update.

Thank you, Thomas, and good morning, everyone. Turning to our financial results for the first quarter. We reported revenue of $310,000 from hybrid sales, including a full truck equipped with the Hybrid system compared to $340,000 of revenue in the first quarter of a year ago. Operating expenses totaled $31.9 million for the quarter, up from $25.6 million in the first quarter last year. The increase in spending is due to growth in both R&D and SG&A expenses over last year. In total, Hyliion reported a net loss of $28.8 million for the first quarter, which is up modestly from the $27.1 million loss the company reported a year ago, as lower cost of sales and higher interest income this year offset higher operating expenses.

Looking sequentially, first quarter operating expenses and net loss compared to the fourth quarter of 2022 were up only slightly, $300,000 and $600,000, respectively, as spending is beginning to level off as we approach the start of Hypertruck ERX system commercialization. We ended the quarter with total cash, short-term and long-term investments of $385 million compared to $422 million at the end of 2022. We spent $37 million in the quarter compared to $30 million in the first quarter of 2022, and $33 million in the last quarter of 2022. As Thomas mentioned, we are taking actions that will help reduce cash burn and expect that these actions will significantly reduce operating expenses, capital spending, and working capital growth.

Previously, we guided to total operating expenses in 2023 of $130 million to $140 million and cash consumption of less than $200 million. We now expect operating expenses to come in on the low end of that range. While we expect expenses to be reduced from the actions that Thomas noted, some of the savings will be offset by the ongoing expensing of production truck components that have been, or will be received until we have completed all Hypertruck ERX research and development work.

To add some additional clarity on this point, all truck components that we acquired prior to the start of powertrain commercialization or expense to R&D even if those components will be used in protection powertrains that are later sold. We've already started to receive some production components and will receive more in the coming months. We now expect to complete R&D work later this quarter or early in the third quarter. The implication is that operating expenses this year will be somewhat elevated due to receiving and expensing some production components ahead of the start of commercialization.

Note also that these higher expenses will be completely offset by lower cost of goods sold as we sell trucks later this year and into 2024. We don't know the exact impact on operating expenses from this expensing of production components, and it could be higher than we're currently forecasting. Will provide further guidance at the end of the second quarter.

Regarding cash, as Thomas noted, we ended the first quarter with $385 million of total capital, including cash and short and long-term investments. Because of the strategic actions we are taking, we now expect our cash spending to be approximately $150 million this year versus our previous guidance of $200 million. Factors that could drive cash spending higher or lower include the timing of truck sales in 2023 and 2024 as well as powertrain component purchases this year for deliveries in 2024. Actions that we are taking now to reduce cash burn will provide some relief from concerns about the weak stock market. Based on our current projections, we have no plans or need to raise additional capital in 2023 and into 2024.

Finally, as a reminder, we are holding an Investor Day at our Austin headquarters on June 27 that we hope you can attend. Attendees will be able to participate in Ride and Drive events in both our Hypertruck ERX and Hypertruck KARNO that we showcased at the ACT Expo. We will also be exhibiting KARNO generator components and presentations from members of our highly owned leadership team. Registration information for both the in-person event and webcast is available on our website.

With that, I'll turn it back over to Thomas.

Thanks, John. At the ACT Expo, I was given the opportunity to give one of their keynote presentations where I shared 5 staggering stats around electrification. This presentation is on our YouTube channel, but I'll take a second and share the stats here with you as well. STAT1 was that the battery packs on a BEV truck will need to be 330% larger than you'd expect when you take into account things like battery degradation, charge limits, driver behavior and the way to the vehicle.

The second stat is the power consumption of plugging in 10 semi-trucks is equivalent to the same power draw as a Super Bowl stadium during game time. The third stat is that it's expected that the cost to deploy charging infrastructure will be about 1.5x the upfront cost of the vehicles themselves. As an example, if you spend $10 million on trucks, then plan to spend about $15 million on charging infrastructure. The fourth stat is that over the past 50 years, we've only seen a 3% increase in the amount of grid electricity coming from renewables, such as wind, solar and hydro.

And lastly, STAT5 is that it can take upwards of 10 years from start to finish to create a new natural gas power plant. As we stand here today, we are decommissioning power plants in the U.S. and slightly reducing our yearly national electricity production. I shared all these stats in an effort to showcase that BEV solutions are already behind the 8 ball in setting up the infrastructure needed for charging. This also ties into our plans to utilize the KARNO generator as a power source for stationary applications or stated another way, there is a tremendous opportunity for Hyliion's technology in the future of electrification.

To close out, we are excited to start the production stage of our Hypertruck ERX system next quarter. We are taking important steps to reduce spending and extend the runway that our strong balance sheet provides us today. And finally, we look forward to seeing many of you at our investor conference in Austin on June 27.

With that, we will now open the call up for questions.

(Operator Instructions) Our first question comes from the line of Bill Peterson with JPMorgan.

I wanted to dig a little bit deeper on the feedback you're receiving if you think about the fleet operators you were speaking with. Were most of the discussions really centered around Rx or I mean, what was the impression of KARNO at that time? Are there still fleets interested in the hybrid program? If they're going to be looking at putting in some trucks in 2024 and beyond, where do you think the discussions were most focused on?

Absolutely, Bill. And great seeing you out at ACT as well. So I would say the focus from the trade show was both on the Hypertruck ERX and then on KARNO as well. So we had 2 trucks that we're participating in Ride and Drive events that were the ERX truck, and we did over 100 ride-and-drive experiences with those trucks. Actually, there's a video out there online of one of the fleet managers saying that he couldn't even get a ride in it because the line was so long. So no, the interest level was fantastic in the ERX.

A lot of great discussions with fleets who want to be adopters of it, both medium-sized, very large fleets and some smaller fleets as well. And then we heard a lot of buzz around KARNO actually, we heard from numerous people that KARNO was the talk of the show and people didn't really understand it going into the show. And I think we were able to showcase the technology how it really works and get a lot of people excited about it. But the reality is with KARNO it is still a few years away from commercialization into a vehicle.

As we shared on the call today, we are going to put it into initial stationary demos next year in 2024. So we will actually be bringing KARNO forward into stationary first prior to putting it into vehicles. And then the sales team is working with fleets on adopting the Hypertruck ERX, the natural gas range extender. So interest was fantastic from the show.

Our next question will come from the line of Andres Sheppard with Cantor Fitzgerald.

By the way, hopefully, we didn't interrupt Bill, I don't know if you have any other question. But I want to touch on the Hypertruck ERX and the deliveries, Thomas you've mentioned on the call today. I think in the past, the expectation was to deliver those 210 orders by Q1 of '24. Now it looks like we're targeting 30 deliveries in '23.

I guess my first question is twofold. Is that 30 deliveries for this year, is that distributed amongst Q3 and Q4, or is that going to be predominantly Q4? I'm just trying to understand, again, since the production time line was moved up. And then I guess, sorry, the second part of the question is any color on what '24 might look like?

Sure. So let's take Q3 first. So as you mentioned, 23 first. So as you mentioned, we were able to accelerate when we're going to start installing trucks, which will actually start happening in Q3. From actually getting the units back into fleet and that will actually still probably take place in Q4. So as you're thinking about revenue start, look at Q4 for that. But then as we communicated on the call, the goal is deliver 30 of the founders, trucks by the end of this year.

And then to the second part of your question of what's '24 going to look like. So we really need to go back, have the discussions with the founders program fleets that we mentioned as well as other fleets who have been sitting on the sidelines saying they're interested in it. But as we had shared previously, we had booked out all the build slots and the founders program. We need to go back to those fleets and look to pull them in as well.

But I think the overall general message from this earnings call is we're going to start production a little earlier, but our ramp-up growth plans for production are going to be a little slower, primarily driven by we want to be smart with capital, right? So we want to ship less units at a loss, so we'll conserve cash that way. Give our engineering team the time to roll in some product improvements that are going to pull some cost out of the system. Also give the suppliers some time to deliver components to us, so they're not putting as much surcharges on them. And then from there, as we move into having a profitable system look to scale up volume at that time.

The other side of this is these initial units that we're shipping, we will place them in the hands of more fleets than we initially anticipated. That way, we can hopefully convert them into placing larger orders as they actually experience the technology and then they'll be ready to receive those vehicles as we're moving into being profitable on the system. So this is really just an effort to optimize or preserve cash, right, and shipping units out of loss, let's minimize that as much as we can and move towards profitability.

Got it. That makes sense. And so is it still fair for us analysts to assume the 210 orders will be delivered by the end of '24. Just trying to get for modeling purposes, trying to better understand that.

Yes. Our goal will be we're scaling into the hundreds of units as we get into '24. So still planning on growing volumes with everything we just haven't given. We're not ready to share exact numbers yet of what '24 is going to look like.

Okay. Fair enough. And sorry, one last follow-up for us. In the past, you had disclosed some tentative, I guess, ASPs for the ERX, I think in the high $300,000s. Any sense of what gross margins may look like either in Q4 '23 or '24 again? I know you're not disclosing any specific numbers, but how should we be thinking about those?

Yes. So I'll take the first part and then have Jon take the second there. So in terms of the pricing, as you mentioned, we had previously shared MSRP or pricing on the Hypertruck ERX would be in the high $300,000 after we took into account the IRA benefit of $40,000. So we're still looking at being in that same ballpark, but it's going to be in the higher 3s or closer to 4% as we go into production here. And then, Jon, you want to take the profitability question?

Yes. And if you listen to what Thomas had mentioned on the call, the actions that we're taking now are helping us get closer to not having a negative gross margin. And we noted last quarter that we did expect the first trucks to be sold at a slight loss just due to start-up and logistics and so on. So these actions will help. And maybe if I can just put a little bit of clarity on this, we've been seeing some companies that are selling full trucks selling them at negative hundreds of percent.

And we're not talking anything like that. We're talking excluding overhead, which is a little bit of a wildcard at low volume. We're talking about minus 10%, plus or minus. So it's not a big number, and it's something we think we can close to the actions that we talked through. So initially, we're still probably a little upside down, but this puts us in a better position, and we expect to be able to reach that positive gross margin more quickly this way.

Got it. Okay. Congrats on the quarter. I'll pass it on.

Your next question comes from the line of Steven Fisher with UBS.

Just to follow up on that last point there. And I know a lot is in flux and things are changing all the time. But would you envision that somewhere within those first 210 units or so, there will be positive gross margins? Or is it still likely sometime after that first batch?

Yes. I think it's still a little early to tell. As Thomas mentioned, we're expecting to ramp up production as we begin into 2024. Again, we're seeing great interest from fleets. It's just really all about what's the best start-up strategy that maximizes the use of our cash and minimizes the potential for margin loss. So volume will help. Time will help chances to get some of these design changes and will help. So we're just starting off a better foot here, and it will help us ramp up.

Okay. That's helpful. And then just in terms of the cash burn, I mean, it looks like the burn you had in this quarter, it would leave you with about 10 quarters worth of cash, and I know you took out $50 million of burn from this year. So are the broader plans that you have to flow that pace of burn extending that 10 quarters by years or by quarters? And then what would you have to see in order to kind of curtail spending further? And would sort of the KARNO be the obvious place to trim back if you need to do something further?

Yes. Let me address cash. So it's a great question, Steven. If you look at where we ended last year, we had $422 million. Our outlook this year being around $150 million, that leaves us somewhere around $275 million which puts us in a position that we're not needing to raise any money this year, gives us the flexibility not to raise money next year and into 2025, the unknown is, of course, what we're going to spend after this year. We haven't given an exact forecast, but we are an asset-light company. We don't expect to need a lot of capital spending. We're doing what we're doing now to reduce working capital as we build up.

Let me comment on expenses a little bit. I mentioned, I think, at the end of last quarter, we're leveling off the growth in spending. If you look at us this quarter compared to the fourth quarter that it really is leveling off. And that leveling is really driven by the powertrain side of it as we finish up R&D and move on to commercialization. KARNO is not a big part of our organization yet, but I will say it is growing, and we intend to grow it more. So we're certainly not going to back off in any way on KARNO just given all the interest and opportunity with that product.

So if you're thinking forward looking, we haven't put a number on it, but we wouldn't expect cash used to likely grow. This year is probably a target that we work around plus or minus. It might be a little bit lower might be a little higher. But the balance that we have now gives us a lot of runway to be able to get to the point that we're generating gross margins and also Thomas mentioned starting KARNO stationary demonstrations next year. That gives us a good launch pad for getting that product to the point where it could be generating gross margins, too. So I think I would just put a point to it by saying, hey, these actions that we're taking give us a lot of time such that we're not really at the near-term mercy of the markets if we needed to raise cash.

Your next question comes from the line of Luke Horton with Northland Securities.

I'm on for Donovan Schafer. We had a couple of overlapping calls and as do a little delight and conquer. But I just wanted to touch on revenue recognition with the first 30 trucks and going forward as well. Will these be clean sales and title transfers? Or will there be some kind of financing or deposit or any sort of other arrangement where it's not just a matter of multiplying units by that high 300,000 ASP to get the revenue number?

Our plan would be for these to be straight sales to the fleets, such that they can recognize, for example, the IRA credit, and therefore, we could also recognize the cash from those sales. So the expectation is we're trying to get them to be pure sales versus any kind of financing arrangements from Hyliion. That's certainly not our intent.

Got it. And then just touching on the winter testing. Were there any key takeaways from the completion of this? And have you guys closed out all phases of this winter testing?

Yes. So winter testing on well. We've checked the boxes on what we needed to do through the cold months, which included putting truck in some thermal chambers that are bringing it down to like negative 40 degrees. So pretty robust testing. We're pleased with how it went. Obviously, there were learnings that did come out of it, some design changes, modifications that we wanted to make, and we'll roll those into the product. But overall, we're pleased with how the testing went and don't see it changing our commercialization plan.

Actually, as we shared on the call, if anything, we're pulling up the commercialization plan of getting into production. So all went well there. Obviously, as we continue to build the last batch of systems here before we go into start of production, we'll continue to test those and look for areas to optimize. And that does lead into some of the cost savings opportunities as I mentioned. We found through testing and validation.

Some things are overengineered or designed to be more robust than they need to be, so we can scale some things back in order to still be able to hit all the requirements of the industry still have a strong product that meets the life requirements, but isn't overengineered and then that will help us pull some costs out as well. And that leads into some of the cost-saving efforts we mentioned.

Got it. That's good to hear. And then just last one here on the regulatory landscape. So any updates or pending determinations that could impact you guys coming out of the treasury department on the IRA bill or anything similar along those lines, where there rulemakings or guidelines and process that could have a positive or negative impact?

Yes. So I think right now, at least from what we're seeing, it's positive impact. So IRA is a $40,000 tax benefit. ACT, which is the mandate that card put on the we're going to qualify for 75% of the ZEV credits that a normal BEV or fuel cell truck will qualify for that we announced probably close to a year ago. The announcement just recently from a couple of weeks ago was that ACF, which is now the mandate being put directly on the fleets telling them how many of the vehicles they buy need to be electric.

We're actually going to qualify for 100% of the ZEV credits that a conventional BEV or fuel cell truck will qualify for us. So I think this is going to be a great tailwind for us, right? I mean fleets are now going to be mandated that the trucks they buy need to a certain percentage going into car following states are going to need to be credit-generating vehicles and will be just as good as a bed in a fuel cell truck. So I think it's a big positive what we're seeing from a regulatory standpoint.

Apologies, Bill Peterson line was cut off. We'll now take our follow-up question.

I wanted to come back to the fuel cell program, and you -- I think you mentioned the integration if you'll sell later this year or early next year. If we took your time frame of the ERX where you started in the second half of '21 and carrying that through the second half of '22, something like a 2, 2.5-year time frame. Is that the right way to think about that program? In other words, from a starting point to an end point or are there areas that would basically be already done because you've done the work on the ERX program and you're primarily just changing out the power source.

It's definitely the latter of what you expressed, Bill. So we're carrying over all of the testing, validation learnings that we had through the Hypertruck ERX development, and we'll be able to apply those to both the Hypertruck KARNO and to the Hypertruck fuel sell. So as we think about let's take the fuel sell, for example, taking that into a commercialization effort, there's less validation that would need to happen on the powertrain.

And then similarly, Hizon is doing their own validation on the fuel sell as well. So it's bringing 2 things together as opposed to building an entire new product. Not saying that there won't be testing and validation. It's a more accelerated time line. The other thing is to benefit with a fuel cell truck is it does not need to go through the conventional CARB EPA testing like what our Hypertruck ERX is having to go through.

So as I mentioned on the call today, we have submitted all the documentation we need to carve, that's a dual executive order process that we're doing joint with Cummins. So all that has been submitted, and we're on track to, we believe, receiving certification in Q3. That's a process that we would actually just forgo or not even need to do with the fuel cell development.

Our next question will come from the line of Mark Delaney with Goldman Sachs.

You have [Brian] on the line speaking on behalf of Mark Delaney. So the first question is, first, congratulations on putting for the time line for the powertrain system. But could you provide some additional color, what are some key things that need to be done to make sure that we get to that launch in the third quarter?

Sure. So first thing is we're building out our final batch of development vehicles. We have the initial ones already built. We're building out more right now. And those are the trucks that will go through extended fleet trials, and those will be happening starting this quarter in Q2 and we'll carry those forward even through start of production, we'll be doing the fleet trials. So we'll be deploying those and that will allow us to get more customer interest.

And then I think the big milestone that we need to go through is just getting that CARB BPA, NISA certification that I mentioned earlier. And gating item might foresee is really the CARB certification. And the big milestone there was submitting everything we needed to in partnership with Cummins, to CARB and that happened in the first quarter. So we think we're on track and in good shape for Q3 launch.

And my second question for you the floor is just how far along are you all with negotiating terms with the founders customers? And what has the response been? And additionally, are there any customers who are lowering purchasing plans at all?

Sure. So we're still at the early stages of those discussions. We just recently kind of got all the final pricing of what component costs were going to be for building out the systems. And as we mentioned on the call, it has come in higher. So we're going to look to pass through some of those incremental charges onto the fleet. That is a customary thing to do in this industry.

Usually, if you go buy a brand new truck from an OEM, there's usually a line item on your invoice that surcharges. So we don't suspect that, that's going to be a surprise having those sort of discussions with fleets. But with that being said, these fleets put those initial orders together about a year ago now. So there are going to be changes to the fleets that are in that mix.

And then we're going to also look to pull in additional fleets. So when we set up the Founders program, it was structured with, I believe, 11 fleets. And so we're going to look to add more into that so that we can place these initial units with more when more fleets a wider variety and then look to build the backlog even further. So as we go into higher volumes of production, we have greater commitments from a wider variety of fleets as well.

(Operator Instructions) Your next question will come from the line of Jeff Kauffman with Vertical Research Partners.

Just 2 short questions. When we speak to fleets about EV infrastructure is a big issue, fuel cell infrastructure is a big issue. Are there additional infrastructure requirements that you're going to need geographically as these ERX units start to be run publicly? And then I guess secondarily, following up on that. Thank you for the info on the ACF and ACT availability. Are a majority of the sales you're talking to in California, do you need other states to adopt MOUs on the card mandates to incentivize the sales there? Or are you looking pretty much nationwide at this point on the IRA credit?

Appreciate it. Let me break the question down into a few different points there, and once again, great seeing Expo. Sorry, I know I had to run and cut our conversation short. But in terms of the ERX needing more infrastructure. So there's about 700 public stations in the U.S. That is plenty to get started with a vehicle that has 1,000 miles range or up to 1,000 miles range that we're in good shape there.

So the goal is more to get these units out there, let's use existing infrastructure. I will say one of the common themes that we saw at ACT Expo is people are getting much more concerned about BEV infrastructure as well as fuel cell or hydrogen infrastructure. I shared it in the keynote presentation. But when you start thinking about plugging in 10 trucks consumes the same power as the entire Super Bowl stadium consumes during game time like this is problematic for fleets or when they get quotes from their utilities, it's the quotes are 1.5x the cost of the actual trucks, right?

So if a fleet is going to buy 50 trucks, that means they're going to be spending could be in the range of $30 million to $40 million in charging infrastructure. That usually, at least from what we've seen, prohibit seats are moving forward with that opportunity. So we think infrastructure is a huge advantage we have with the Hypertruck ERX. Now let's shift to the second part of your question of ACF, ACT credits. So California has adopted those standards. You're on the correct thought process there that additional states are coming forward and saying that they're going to follow similar or the same mandates as what CARB is pulling forward.

Now they might be doing in a slightly different time line or some slight modifications to it, but generally, they're going to be following what CARB is doing. And I believe there's been 14 states plus D.C. that have confirmed that they're going to be following a similar format as CARB. So over the years ahead, we suspect that, that's going to be, as I mentioned before, just a great tailwind for us in getting fleets to adopt this solution.

Your next question will come from the line of Noel Parks with Tuohy Brothers Investment Research.

Just a couple of things. I was wondering, as you've done a little bit of adjusting to one, which fleets will see units you broaden the set that we'll see get the chance to time them out. Do you anticipate any fresh competitive pressure from other OEMs on just general time to delivery? Or are there customers still pretty firmly focused in sort of a technology-first manner that they're most concerned about performance and not as concerned about timing, for instance?

I think fleet are concerned about both, right? They want to be on the front end of adopting new electrified solutions. In terms of fresh competitive pressure, I think ACT Expo is a great showing of it, right? I mean all the main players were there showcasing their solutions. We did not see anyone else doing a similar solution to what we are bringing forward with the Hypertruck ERX. We did see a lot of discussion on BEST. We saw a lot of discussion on fuel cell trucks. But I think to the points we were talking about earlier around infrastructure, that's what's really concerning fleets about adopting those solutions.

So I actually think as fleets get more into their cycle of trying out be vehicles, trying out fuel cells, yes, there are going to be some applications where they work, but then they look at the Hypertruck ERX and see this as something that's more prudent or applicable to more of a nationwide type of a solution. And I think just even to give you an example on the beds, there was a ton of BEV solutions out at Act expo. They need to bring in a diesel generator in order to actually charge those vehicles.

So those trucks are sitting down in the parking lot, running on a diesel gen set. Obviously, that was a trade show and charging of structure wasn't deployed there. But that's not the first time we've heard of that. We've even heard of fleets having to bring in diesel generators in order to power up their EVs. So I think that talks to just kind of the problems that are going to be faced with BEV adoption.

Wow, okay. That is surprising doesn't seem a whole bit counter to the decarbonization spirit.

That's our thoughts.

And you mentioned the topic of comments that your next batch trucks should be sort of your last design upgrade. And I just wondered, I guess in your, say last 6 months of tweaks to the product, what sort of things have you been adjusting? What sort of things are going to happen in this last go round.

Yes. So thankfully, it hasn't been major, major tariffs. I mean we've done some changes over the past couple of years to optimize where weight is distributed on the vehicle. We've done things to improve the rugged ability of our painting stack on wiring harnesses and making sure they can really withstand the harsh conditions on the road. We've done improvements to cooling loops and systems.

It wasn't like we had to take a pause and say, "Hey, we need to go back to the drawing board and rethink things, right? Everything has been kind of going down the right path, just making optimizations to make sure this product is going to be robust and reliable.

Some of the changes that we'll make in order to improve some cost downs, we see that there's opportunities in kind of the structural design, sheet metal design of some systems. We see that our cooling system it provides more cooling, more robust than what's needed. So we'll look to skinny that down and there's optimizations and mounting and things like that. So that will not only pull cost out, but it will pull weight out of a vehicle as well. So those will be some of the things we look to optimize as we continue to go forward.

We have no further questions at this time. I'll turn the call back over to Thomas for closing remarks.

Well, thank you, everyone, for joining our Q1 2023 earnings call. A lot of exciting developments. I think ACT Expo was a great showing for the organization, both with the Hypertruck ERX and the KARNO. So appreciate you joining the call, and we look forward to chatting again next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.