Nikola Corporation (NASDAQ:NKLA) Q3 2023 Earnings Call Transcript

Nikola Corporation (NASDAQ:NKLA) Q3 2023 Earnings Call Transcript November 2, 2023

Nikola Corporation misses on earnings expectations. Reported EPS is $-0.3 EPS, expectations were $-0.15.

Operator: Good morning and welcome to the Nikola Corporation Third Quarter 2023 Earnings and Business Update Call. Currently, all participants are in listen-only mode. We begin today’s call with a short video presentation, followed by management’s prepared remarks. A brief question-and-answer session will follow the prepared remarks. [Operator Instructions] As a reminder, this conference is being recorded. It is my pleasure to introduce Dhillon Sandhu from Investor Relations.

Dhillon Sandhu: Thank you, operator and good morning, everyone. Welcome to Nikola Corporation’s third quarter 2023 earnings and business update call. Joining me today are Steve Girsky, CEO; Stasy Pasterick, CFO and Christian Appel, Head of Vehicle Platform. A press release detailing our financial and business results was distributed earlier this morning. The release can be found on the Investor Relations section of our website, along with presentation slides accompanying today’s call. Today’s discussion includes references to non-GAAP measures. These measures are reconciled to the most comparable U.S. GAAP measures and can be found at the end of the Q3 earnings press release we issued today. Today’s discussion also includes forward-looking statement about our future results, expectations and plans.

Actual results may differ materially from those stated and some factors that could cause actual results to differ are also explained at the end of today’s earnings press release and on Page 2 of our earnings call deck and also in our filings with the SEC. Forward-looking statement speak only as of the date on which they’re made. You are cautioned not to put undue reliance on forward-looking statement. After the video presentation, Steve, Christian and Stasy will provide their prepared remarks, followed by analysts Q&A, then we will conclude with questions from our shareholders. Please begin the video presentation. Thank you. [Audio-Video Presentation]

Steve Girsky: Thanks, Dhillon, and good morning, everyone. Welcome to our third quarter earnings and business update call. I’m excited to be here with the team from my first call as CEO. I want to be crystal clear about who we are, where we are, where we’re going, and how we’re going to get there. Who is Nikola? One truck platform, two powertrain options, working towards developing a network of zero emission fueling and charging solutions for Class A trucking. The trucks complement each other, offering differing range, weight and infrastructure solutions, allowing us to better serve customers. Building both products on the same platform allowed us to engineer them faster, be first to market and hydrogen fuel cell electric trucks and helps us drive down costs with scale.

Where are we going? California, California is a state on the cutting edge of technology and has big tailwinds for the transition to zero emissions trucking with both carriage and sticks from government incentives and regulations. To make the Nikola business model work initially, we need to be highly geographically focused and build network density. For example, there are more than 30,000 trucks servicing the ports in California. Beginning of January 2024, all new trucks registered with the California Air Resources Board for port and drainage operations must be zero emissions. With the customer’s duty cycle calls for a battery electric or hydrogen fuel cell electric truck, we will be there to provide it for them. That regulation is one of the sticks.

On the carriage side. California’s offering numerous incentives, including HVIP for up to $288,000 and ISEF for up to $408,000 for hydrogen fuel cell electric truck purchases. We think in the California ports alone, there’s a tremendous opportunity for us to sell trucks and hydrogen at scale. So what’s our plan to focus on California? One, first mover. We believe we are the first OEM in the market with a hydrogen fuel cell electric truck. We believe the competition is well behind us and anticipate there is whitespace for us to capitalize on our first mover advantage. Two, boots on the ground. We have Nikola sales team members supplementing dealer sales teams to find every opportunity there is to sell our trucks. Selling new technology to a long established industry is not easy.

And we are educating customers so they understand and experience how great our technology is, the value it brings, and how we can support their operations, with the fueling and charging required to keep their trucks running. Three chicken and the egg. Providing a fully integrated mobility solution. As transportation and logistics companies adopt this new technology, they want assurance, they will have the energy required to keep their trucks operating. We are in the process of establishing fueling solutions for our customers in Northern and Southern California. In a tough macro environment, working with partners is critical to ensure there is adequate capital to complete these projects. How are we doing on our execution of these initiatives?

It is difficult to analyze a nascent market. However, prior to the voluntary battery electric recall, we were second in market share for zero emissions vehicles with 21% share of registrations outperforming some of the larger OEMs. That was based on our battery electric truck alone. If you go on the HVIP website and look at voucher data for vouchers requested in 2023 as of October 27, you’d see Nikola has approximately 96% of the created vouchers for the hydrogen fuel cell electric truck tractors and about 50% of the created vouchers for the battery electric truck tractors. We’re also seeing considerable momentum in the northeastern states like New York for up to $185,000 and New Jersey for up to $175,000. In addition, there are a solid movement in Canada, where there are incentives across all provinces, territories, and municipalities for up to CAD200,000 for the hydrogen fuel cell, and CAD150,000 for the battery electric truck.

And in British Columbia, the BC Go Electric Rebate provides another stackable $150,000 incentive, bringing that total to CAD300,000 dollars for a battery electric truck and CAD350,000 for a hydrogen fuel cell electric truck. We are continuing to build sales momentum for both trucks recently receiving wholesale purchase orders for 47 battery electric trucks from one dealer, despite the product and recall status. There are 277 non-binding fuel cell electric truck orders that have been placed from 35 customers with Nikola and our dealers more than we can produce and deliver this year. In fact, if a fleet orders a hydrogen fuel cell electric truck today, they will likely not receive the truck until late Q2 2024, executing on our business plan requires top flight talent.

During the third quarter we announced the hiring of Mary Chan as Chief Operating Officer and Joe Cappello as President of Energy. I previously worked with Mary at General Motors, where she served as President of the Global Connected Services Group. Mary is a recognized automotive leader who also serves on the Board of Magna International. Joe joins us from Iwatani, where he served as Chairman and CEO of Iwatani Corporation of America. Joe and his team bring years of real on the ground knowledge of the hydrogen industry to Nikola. These two hard charging folks have built and scaled businesses in infrastructure, connectivity and technology and their expertise will push Nikola towards even greater success. These are people who don’t need to be here.

They’ve had lots of success throughout their careers. Mary and Joe are here because they want to help make a difference and believe in Nikola’s mission. Let’s move into the business updates. First, the hydrogen fuel cell electric truck. We are incredibly proud of the entire team and all stakeholders playing a part in the development of the hydrogen fuel cell electric truck. We started serial production on July 31 and began delivering the first production vehicles to capture test fleets for commercial operations and customer validation late last month. In parallel, we started running customer demos in Southern California, supported by refueling with mobile fuelers and that existing hydrogen fueling infrastructure. To date, trucks and customer demos have accumulated more than 6000 miles, while achieving 98% uptime, receiving outstanding driver feedback.

On the battery electric front, Nikola is committed to providing customers with a premium trucking experience and safety is always at the top of mind. We issued a voluntary recall for the battery electric truck in August, asking customers and dealers to send their trucks back to Nikola for monitoring and repairs, which also allowed us to investigate the cause of the battery issues. Extensive investigations have been commissioned and are currently ongoing, including assessments from three independent groups alongside their Nikola team. During these investigations, it was discovered that additional process and design changes may be necessary, and that cell level issues may need to be addressed beyond the initially identified coolant manifold replacement.

While we continue to identify the root causes of battery malfunctions, to minimize vehicle downtime, and maximize customer safety and satisfaction, we will retrofit existing customer trucks containing [Indiscernible] designed battery packs with ones from an alternative supplier. Stasy will provide updates regarding how that affects the numbers. Despite the recall, we continue to see increased demand for the battery electric truck. This is happening while the truck is not currently available for sale. A testament to our position in the market is one of the few companies able to provide hardworking zero emissions trucks to fleet customers at scale. We expect to have the first trucks back in customer hands in Q1 2024 and have taken a call it 2.0 because not only will it have improved battery packs, but new features including scheduled departure charging, improved HMI, and Bluetooth functionality at all at a lower material costs.

On the energy side we continue working with industry-leading partners to ensure we have the hydrogen supply, transport logistics, storage solutions and dispensing locations to support the operations of our hydrogen fuel cell electric trucks in customer fleets this year and beyond. We’re pleased to say we have secured enough energy offtake to support customer operations in 2023 and the beginning of 2024. The team is diligently working with partners to secure additional hydrogen offtake to support future sales, alongside securing fueling assets and locations to fuel the trucks. We also continue to see positive momentum on the federal incentive front, with $50 billion allocated from the investing in America agenda and another $7 billion in support from a DOE grants.

This is a massive amount of funding and will accelerate the development of hydrogen infrastructure required to scale and lower the cost of hydrogen. We are excited to demonstrate the fully integrated mobility solution provided to customers with the fuel cell truck and hydrogen fuel and look forward to sharing more progress with you on the Hydrogen Highway as we continue developing the refueling ecosystem. Now I will hand it off to Christian Appel, our Head of Vehicle Platform to provide you a details on a hydrogen fuel cell truck, and then Stasy will share our financials. Christian?

Christian Appel: Thank you, Steve. We’re incredibly excited to show the world the model year 2024 hydrogen fuel cell electric truck. We believe this is the first zero tailpipe emissions truck available in North America that is truly capable of servicing the majority of regional and medium haul freight operations. The trucks up to 500-mile range give fleets the flexibility and operations capable of servicing longer range medium and regional deliveries and providing fleets who run slip seed operations, a similar refueling time to diesel caps without disrupting logistic operations. Furthermore, the payload capacity of the hydrogen fuel cell electric truck can be much better than other long range zero emission trucks. And as we continue making enhancements to the product, we expect to continue closing the gap to diesel payload parity.

One of the most critical things to building the best product is that we are vertically integrated with our vehicle controls and software development. This allows us to optimize the operation of the truck across incredibly complex systems, and includes functions such as mountain mode, and in the future predictive energy management. The software under truck can optimize the dry strain to power the vehicle with both the fuel cell power module and the battery or by one system independently of the other. Mountain mode optimizes the battery energy usage on the vehicle, allowing for maximum regenerative braking power downhill and consistent performance uphill. The truck provides drivers with an advanced HMI, a mobile app and comfortable drive while being optimized for performance, efficiency and durability supporting the fleet customers most critical KPIs such as uptime, and cost of operation.

This is merely a bit of what the truck can do. I could speak all day about the truck and I invite you to look at our website, social media channels, and send us questions to learn more. Passing it to Stasy to cover the numbers.

Stasy Pasterick: Good morning, everyone. Huge thank you and congratulations to Christian and the entire Nikola team for officially launching the fuel cell truck. We’ve been developing this truck for many years. And this is a huge milestone for the team turning a new page for the company. Now onto the Q3 results. Despite tackling numerous headwinds during the quarter, I am pleased with the team’s commitment to operate with financial discipline by continuing to reduce cash burn, and focusing our spend on things that matter to our future. We were successful this quarter in accessing capital markets, raising approximately $250 million from early still convertible notes and the ATM thus increasing our unrestricted cash position by $136.2 million from Q2 and nearly tripling unrestricted cash since the first quarter of this year.

We’re making good progress towards their goal of having 12 months of liquidity on hand. Quarterly cash used came in at $111.9 million well below our target of $120 million, reflecting a 25% improvement from Q2 cash used of $148.3 million. The improvement came from $50 million benefits realized from cost cutting initiatives were executed upon in Q2, offset by $20 million use of working capital to scale up hydrogen fuel cell inventory and the impact of slower than expected AR collections, due to the battery electric truck recall, we have a lot more work to do. And we’re always looking to make improvements to our cost structure and cash use. There is a lot to digest this quarter beginning with revenue. Due to the battery electric truck recall withholding delivered in early Q3.

Prior to the recall, we delivered three battery electric trucks to dealers. However, this was offset by the repurchase of seven battery electric trucks due to the cancellation of dealer agreements as we refocus our sales efforts from California as well as dealer rebates and financing charges, resulting in net truck revenue of negative $2.4 million. We generated $636,000 in service and other revenue primarily driven by service revenue, the sale of charging assets and third party hydrogen sales. Cost of revenue in the third quarter was $123.8 million. Cost the revenue includes a $45.7 million write down of access and obsolete inventory, of which $32.7 million is attributable to the write down of battery packs on the 140 battery electric trucks, hauled in Nikola inventory and $13 million for other battery electric truck components including battery cells.

It also includes a $61.8 million warranty reserve to remedy the battery electric truck recalled. This includes the estimated cost to reengineer validate and retrofit the battery electric trucks that were previously sold to customers and dealers with an alternative battery pack solution. To be clear, the warranty deserve an accrued liability. Actual cash disbursements will take place over the next nine to 12 months as we validate the new components and work through the retrofits. We anticipate seeing the majority of that cash spent in the first half of 2024. Our goal is to offset the estimated $61.8 million cash impact with the collection of approximately $10.7 million in accounts receivable and an expected positive cash contribution margin of another $16 million from the sale of existing less trucks in our inventory once those trucks are updated with the new battery packs, resulting in a net cash spent of $38.1 million.

Total operating expenses came in at $100.7 million, including $18.7 million of stock-based compensation expense, and $9.8 million have accelerated battery electric and demo truck depreciation. Absent of the demo truck depreciation, operating expenses fell within the previously communicated guidance range. Q3 operating expenses have improved by more than 27% versus the prior four quarters average, driven by the impact of cost reductions we would have executed in Q2. Other non-operating expenses for the quarter were driven by the loss on the recreation of the conversion features embedded into April 2023 and June 2023 convertible toggled notes partially offset by a gain, due to the changes in the fair value of our common stock receivable as a part of the JV sale to Iveco.

These are non-cash P&L items and have no impact on their cash burn. At the end of the quarter, we maintain total cash and access to capital of $705.8 million subject or stock price and market conditions. And given our current cash burn rate, we believe we have adequate cash on the balance sheet to sustain us into 2024 and maintain enough access to capital to continue funding operations and execution of our business plan, including costs associated with the remediation of the battery electric recall. We also have success in strengthening our balance sheet, by reducing total debt by $87.3 million and total liabilities by $67.1 million during the quarter. We have previously indicated we will need to raise approximately $600 million to fund their business to EBITDA positive by the end of 2025.

This long-term thinking to fund the truck business remains the same. During the third quarter we raised approximately $250 million of that. However, we anticipate However, we anticipate increased costs over the next nine to 12 months associated with the battery electric truck recall, which would take the new capital requirement to approximately $400 million. This number also assumes the majority of hydrogen infrastructure will be financed by partners. As we explore opportunities in the hydrogen production and dispensing ecosystem and continue to develop our energy strategy, we may require additional capital in order to participate in hydrogen production and dispensing economics. We may elect to invest into projects where we see a compelling return on investment.

Participating in this project would allow us the opportunity to achieve economies of scale and drive down hydrogen costs. We see a growing opportunity in both hydrogen production and dispensing as we scale truck production and deliveries and other OEMs come to market. Moving to guidance, in Q4. We anticipate delivering between 30 to 50 hydrogen fuel cell electric trucks, for revenues between $11.3 million and $18.8 million. Fuel cell production is currently constrained due to supply chain ramp up. Due to lower production and delivery numbers for the fuel cell, and the path on the battery electric production and deliveries until the recall is remitted, we expect gross loss margin will be outsized between negative 115% to negative 135%. We expect total operating expenses to be between $82.5 million and $92.5 million, including approximately $15.4 million of stock-based compensation expense, and CapEx to be approximately $35 million.

Despite the challenges faced in the market and the business headwinds, we remain focused on achieving profitability, and which are further optimized cost structures and put in place a strong team focused on execution. We are working diligently to find additional cost reduction opportunities without jeopardizing our first mover advantage and monitoring capital markets to raise additional cash. During the third quarter, we beat our cash burn target of $120 million and strengthened our balance sheet raising to $150 million increasing our liquidity runway despite the new expenses for the battery electric truck and hydrogen infrastructure. We maintain strong liquidity in our stock and have continued to demonstrate our ability to raise capital. As new regulations begin to take effect in California, we believe there is demand to scale production on both the battery electric and hydrogen fuel cell electric truck in 2024 and achieve the production and delivery volume scale that is necessary to reach positive gross margins and eventually reach profitability.

I will now pass it back to Steve for closing remarks.

Steve Girsky: Thanks, Stasy. To close the call, I’d like to talk about green shoots a typical sign of a recovering plant and positive momentum for health and life. We told you we would begin hydrogen fuel cell electric truck production in Q3 and we did. We told you we would continue reducing our cash burn and improve our liquidity and we have. We have strengthened our leadership and operational expertise, including adding our COO Mary and President of Energy, Joe and we continue to work diligently to assist our customers with the recall of our battery electric truck and the introduction of our hydrogen fuel cell electric truck. These are all strong signs or green shoots. And if we’re continuing the green chute analogy, we’re getting fed by the momentum of the marketplace in government regulation, especially in California.

There are two sayings that I use repeatedly here at Nikola, which are applicable to our growth. First, our [Indiscernible], it means find a way or make one. The resilience of the Nikola team is unmatched. We have endured plenty and will continue driving forward in our mission to decarbonize heavy duty commercial transportation. We have government regulation, and incentive tailwinds at our back, the first commercially available hydrogen fuel cell electric truck in North America and the team to execute. Second, we say don’t chew on yesterday’s breakfast, and effective way to make sure we can learn and benefit from the past and move forward. Yes, we’ve had setbacks, but we are moving forward. And today we are in an incredibly strong position to capitalize on our first mover advantage with our fuel cell truck and lay the foundation for the Hydrogen Highway beginning in California.

And we will continue to keep bar commitments and remain transparent. This concludes our prepared remarks. Operator, please open the line for analysts questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Jeff Osborne, with TD Cowen. Please proceed.

Steve Girsky : Hi, Jeff.

Jeff Osborne: Hello?

Steve Girsky : Hi, Jeff.

Jeff Osborne: Curious on your observations in the first quarter on the job as it relates to the interfacing with customers around both the fuel cell and the best, putting aside the recall issues. Great to see the policy moving in the right direction. But what’s the readiness level of some of the fleets that you’re having dialogues with?

Steve Girsky : So good question. The customers are super interested in this. You saw the order bank increased to 277. And I would argue the CRM what’s at the top of the funnel is growing every day. So and I would say it’s two to one hydrogen fuel cell over BEV right now. And maybe even a little more.

Jeff Osborne: Outside of the customers, any other observations first quarter on the job in terms of shipping from an investor role — board member role.

Steve Girsky : So, people laugh at me around here, but you learned pretty quickly in this place that every day is an amazing day at Nikola. And some are good, and some are less so. But the goal when I got here was to not screw up the momentum that was continuing. And I think if you saw one of the slides, the cash is up, the burn is down and the orders are up. Certainly, there’s challenges here like there are being first in anything. But the interesting thing about this place is there’s nobody running away from these challenges. And I would tell you this, Jeff the one of the highlights of the quarter was the events in Coolidge, on the 28th. There were 900 people at that event launching celebrating the launch of the fuel cell truck 900 people.

Suppliers were showing their stuff many of you people with their suppliers were showing their stuff. It was the customers were there the dealers were there was a who’s who of the hydrogen industry was there. And if anything turns the page on the past that Nikola is that event. There is no way a year ago, two years ago, Nikola Tesla hosted an event like that. And it was really just spectacular.

Jeff Osborne: Perfect. Maybe one quick follow up on the on the BEV side, I was surprised to see the orders, what what’s the readiness on the charging side that’s been an obstacle for beyond one or two at a location? So are these the one you’re with the 40 odd units? I think you said 47 is that multiple customers just sort of or are people truly planning for 10, 15 trucks at one depot.

Steve Girsky : So that dealer has experienced around this. So in general, the charging is better than it was but it’s still an issue that customers are going to have to understand and deal with. We can help them with e-stays [ph] and things like that. But that dealer in particular has experience around this and has customers that are up to date on this. And their customers are taking chunks of trucks.

Jeff Osborne: Got it. That’s all I had. Thank you.

Operator: Our next question is from Jeff Kauffman with Vertical Research Partners. Please proceed.

Jeff Kauffman: Hi, thank you very much. Hey, how you doing, Steve? Congratulations.

Steve Girsky : Good.

Jeff Kauffman: And welcome. That you’ve been away from this story? So a question for you. And a question for Stasy. For you, I want to talk a little more about the Hydrogen Highway because you’re not the only one using that phrase. And I think it means different things to different people. But can you talk about the opportunity here not just in California, but as we expand across the country and how you see that developing and how Nikola is going to participate in that not just through the truck sales, but also on the energy side of that opportunity?

Steve Girsky: Sure. So to make this model work, Jeff, we need focus and we density. Okay, this can’t be just blow out a bunch of trucks to wholesale and the dealers and have them jam into the market, we didn’t know where the hydrogen is, where the routes are where the customer who were the customers that were on those routes, and that’s our target market. So California is the most incentive friendly as we said in the video, it’s got carriage and sticks. We are deploying lots of people in California. And it’s not just dealers were deploying our people as well, to educate people, to educate customers how it works. And, this incentive maze is not that easy to navigate. So having people on the ground is super helpful here. So start in California, there’s seven hydrogen hubs that have been funded around the country, those are logical places for us to go.

And it’s about connecting these hubs. In California, it’s South North, and then connect in between, and then we can move all the way up. But right now, the focus is California, we need to be very, super-efficient, super capital efficient, we need to prove the IRR, these first sort of hub, so to speak, and then we could develop more.

Jeff Kauffman: Okay, and then the energy side of the business.

Steve Girsky : Well, the energy, the energy side, in what sense?

Jeff Kauffman: Well, just help us understand how the company participates. I mean selling trucks that’s pretty easy to visualize. But what is the energy business look like as we build out along this highway?

Steve Girsky : So start and then Stasy will chime in. But if there’s, there’s three you can be participate in the in the hydrogen economics, you can transport and you can dispense and you purchase. So those are called four buckets of hydrogen. We are, we’d like to be in the purchase in the hydrogen economic side, we don’t have the capital to be there. As we develop our business, we’d like to work our way back into that. Right now, it’s about acquiring large quantities of hydrogen for our customers, and getting them to where they need to be in dispensing them in an efficient manner. Do you want to add anything to that?