Nikola Corporation (NASDAQ:NKLA) Deutsche Bank Global Auto Industry Conference Call June 16, 2022 10:25 AM ET
Company Participants
Kim Brady – Chief Financial Officer
Conference Call Participants
Emmanuel Rosner – Deutsche Bank
Emmanuel Rosner
Emmanuel Rosner, I’m the lead U.S. auto and automotive technology analyst here at Deutsche Bank. I’m very pleased to be joined this morning by Kim Brady, who’s the CFO of Nikola. Nikola is — all of you know is a manufacturer of zero emission vehicle for commercial transportation solutions, including a battery electric truck, as well as a hydrogen electric truck. The company is currently in the process of ramping production of it Tre BEV vehicle. And we’re very happy to talk about the progress the company is making. So, thanks for being with us.
Kim Brady
Glad to be here.
Question-and-Answer Session
Q – Emmanuel Rosner
So, maybe, let’s start there in terms of operational progress. Last quarter you began the series production of the Tre BEV. In the second quarter you began shipping some of these trucks to dealers for delivery to customers. How is it going so far? And are you on track for the second quarter, as well as the 2022 delivery guidance?
Kim Brady
Great. As you know, we provided guidance for the full year 300 to 500 trucks. So, we will manufacture three to five and then deliver 300 to 500 trucks. The reason for that range is that we are constrained by supply chain, and we have enough battery cells manufacture up to 500 trucks and all other key critical components. We have confirmation from our suppliers, and we have enough quantity allocated to us to build more than 500 trucks. However, we do have some constraint when it comes to battery modules and packs. So, our supplier who’s providing that for us, they’re having some manufacturing challenges in terms of BOP. And so, we feel pretty confident in terms of staying with 300 to 500 truck guidance that we have provided.
Emmanuel Rosner
In terms of where you’re in the process now, those are rolling off the line.
Kim Brady
Those are rolling off the line. We have started shipping our trucks in April this year and we understand, and that we have a guidance of 50 to 60 trucks for Q2 of 2022. And we have not provided any detail guidance with respect to Q3 and Q4 yet, but we are sticking with our full year guidance of 300 to 500 trucks.
Emmanuel Rosner
Now, how should we think about your daily production rates now and then scaling over the course of the year? And then as — I mean, you addressed the supply chain constraint before, but is your supply able to support this type of run rate acceleration?
Kim Brady
Sure. It’s important to understand that when it comes to actual manufacturing capacity, just for 2022, we have enough capacity to build 2,500 trucks. So, we have completed phase one manufacturing in Coolidge, Arizona. We are beginning phase two manufacturing, which will be completed by beginning of 2023, which will increase our capacity to 20,000 units. The biggest challenge we have is really when it comes to supply chain constraints. Right now, we’re building two trucks per day. And then by end of November, December timeframe, we will increase that to five trucks per day that will give us production run rate of about a 100 trucks per month. And then for next year, we have capacity of up to 20,000 units. So, there’s plenty of manufacturing capacity.
When it comes to supply chain challenges, as I have alluded to earlier, it’s really about battery modules and packs. As you know, we buy cells from LG, and we have allocation up to 500 trucks, and there’s a detailed schedule as to when they will be providing those cells to us. But when it comes to modules and packs, there are some manufacturing challenges that we are working through with our supplier partner. We actually have our personnel on site in terms of manufacturing, as well as engineering support and also supply chain and making sure that we are working with them on a daily basis. So, there’s a schedule in terms of how many modules and packs that they have to deliver each day to make sure that they stay on schedule with our build at Nikola in Coolidge.
Emmanuel Rosner
So, I was gonna ask you which components are you seeing the largest constraints on you? You spoke about the packs, and I guess, the sales first and the packs, anything else that’s sort of you’re monitoring closely.
Kim Brady
So, when it comes to supply chain, this is something that we have to vigorously manage each and every day. While we have a confirmation for all of our key components, and when I think about key components, we are talk about battery cells, modules and packs, inverters, eAxle, E-motor, all those things we’ve got really pretty good idea in terms of what our suppliers have confirmed, but it’s something that we manage every day. Meaning even our suppliers, after they have confirmed, they get surprises from their suppliers. So, essentially almost on every single day is a bit of whack-a-mole.
There are new challenges that surface it may, it may be non-critical component. One day we may find out that we have some harnesses that’s getting delayed. One other day we may see that seat leather that’s supposed to come from China is delayed. And so, these are non-critical components. But with respect to critical components, we have a spreadsheet where we have vehicle one from 100 and we have all the key critical components for each vehicle one day supposed to arrive. So, this is daily heat map that we review on a daily basis and senior management team will review three times a week to understand if any key critical component is getting delayed. And so that we can actually intervene if we need to on a daily basis and weekly basis. This is something that we have to work at it every single day.
Emmanuel Rosner
Right. Now on your last earning call, you had mentioned purchase orders for a total of 134 Nikola Tre electric vehicles that been issued to dealers. Are these purchase orders coming from existing customer announcements you have previously shared or are these new customers?
Kim Brady
Great question. It’s actually both. When we announce those HVIP POS, about 80 of that is actually from new customers and about 50 from existing customers. And while as you know, for commercial vehicles in California with CARB, you can actually receive up to 100 HVIP vouchers, which is around $150,000 for each voucher. That’s available to our dealers for customer orders. And we are trying to work with CARB to actually increase that number.
Emmanuel Rosner
As you received something similar from New York State recently?
Kim Brady
Yes. And that’s been approved. And so, we are excited about that. And I think this will be great for the state of New York.
Emmanuel Rosner
I guess, from your geographic deployment point of view, New York would be further down the line, correct?
Kim Brady
No. Not necessarily. Because we have — as you know, we have a great network of our dealer – dealers in place. And one of the major dealer in Northeast is Alta, is a publicly traded company and Alta is super excited about rolling out Nikola trucks. And so, we are already working with Alta and working with potential customers in this area.
Emmanuel Rosner
Understood. Can you talk to us a little bit about this mid-term or even next year’s volume targets? I guess, you spoke about what you’re able to do this year based on supply constraints, where are you targeting beyond that?
Kim Brady
It’s a bit early to provide any guidance with respect to next year. Having said that, what we have stated is that we have enough battery cells are located to us to build up to 2,300 trucks. But in terms of number of trucks that we will actually produce and deliver to customers, we have not provided that guidance at this point.
Emmanuel Rosner
How we think about the gross margin progression as you scale these volumes? What will be the primary levers for meaningful of bills of material reduction in the coming years and margin improvement?
Kim Brady
Gross margin, the way we want to think about this, as you know, is a very challenging period, especially when it comes to battery cell pricing, it’s not going up. It has been going down for the last 10 years, but then during COVID and in the current environment, battery cell prices are increasing, especially with commodity challenges. And so, any pricing with battery cells that’s already been locked in, in 2021. And so, you are committed to pricing for 2023. However, there’s capacity expansion that’s going in by global battery cell manufacturers, where they are adding capacity in 2024. And so, we anticipate that capacity will be increased significantly in 2024.
Having said that, it is possible that perhaps some of demand/supply balance will be better achieved on battery cells by end of this year and 2023, simply because traditionally battery supply/demand was coming from power supply market, such as Black & Decker and during COVID because of increase in housing sales as well as home remodeling, a significant amount of that capacity was being soaked up by traditional battery cell buyers. And they have already locked up supply for 2023.
But as you know, with increase in interest rate, you are starting to see demand damp and significantly with home sales. And I believe there will be better balance in terms of demand and supply. And when that happens, it is quite possible that we may get some additional battery allocation from LG towards the end of this year, as well as next year. And it’s quite possible that the pricing could soften a bit, but that’s the environment that we’re working on.
The way you want to think about this is that, especially for battery electric trucks for Nikola, we have the longest range of truck. That means we have nine pack battery module design and is 750 kilowatt hour battery packs. So, our BOM cost is most — for battery cells, modules and packs that’s about 60% of our BOM. And for us to reduce our cost, we got to really address that BOM cost of cells, modules and impacts. Two most components really are, is the cell price and the pack price. So that’s what we’re really working on.
So, why don’t we think about in terms of our gross profit margin and bill of materials in terms of long-term, we are really thinking about making sure that we have the number one market share. So, we’re trying to grow revenue. That’s more important to us in the short-term. When you think about value creation, we are thinking in terms of strategically business decision is to become the number one leader when it comes to market share for battery electric truck and as well as our fuel cell truck. And so, the way we think about this is that by 2026, we think of, we can achieve at a steady state volume of around 20% gross profit margin. For this year and first half of next year, we will be negative gross profit margin that we have articulated. Towards 2023, we are looking to get to positive margin territory, and then from then on continue to increase. So, it’s combination of volume.
As we scale, our unit costs will come down because of volume and with our suppliers at certain volume thresholds, we have additional discount. And then strategically on supply chain what we’re trying to do is make sure that we’re localizing our part sourcing as much as possible to North America and to Mexico. Right now, most of our parts are coming from Europe. And so, that’s really important strategy in terms of the localization that we’re working on. And ultimately when it comes to battery pricing, we will likely to consider insourcing part of that solution. Right now, we are using a supplier. And then, we’ve also stated that by end of this year, we will have second supplier Proterra, but ultimately to meet our volume and reduce our pack costs, we think we may need to actually also insource that. So, we are evaluating those options that will take approximately a year. And so, if insourcing opportunity is available to us, and if we decide to execute on that, that will likely be in 2024, because you have to transition.
And when it comes to modules and packs, the most important component of the module is the BMS system, battery management system, and that’s really software related. And so that’s something that we’re looking very closely to ultimately reduce our cost when it comes to cells, modules and packs. And when it comes to cells, as you know, we are looking at all the options, including not just cylinder cells that we are using. And right now that for Tesla uses and they’ve been able to achieve probably the — when it comes to the battery residual value, we think Tesla vehicles have the highest residual price, and that’s a combination of cylinder cells that they’re using as well as software. And so, we’ll look at other sources. And there’s battery pricing that’s actually decreasing when it comes to prismatic cells and other options that may be available that we’re evaluating.
Emmanuel Rosner
Right. Yeah. I appreciate the thorough answer. Let’s shift gears to maybe cash, liquidity, capital needs. So, you guided for CapEx spend of around $300 million this year. How should we think of the cadence of that through the year as your ramp? And what will it be primarily funding?
Kim Brady
Great question. So, the — three part question. When it comes to CapEx, we have stated around $292 million to $300 million, Q1 most of our CapEx we ready to spend yet. And some of the programs were delayed. So, we only spend about $35 million. And the Q2, we will likely spend about $85 million. And then second half of the year Q3 and Q4, we are expecting to spend around $180 million.
Why don’t we think about CapEx? There are three, four major categories. CapEx related to our hydrogen infrastructure and then CapEx related to equipment for manufacturing and then our building for manufacturing. And so between those three categories, that’s about 75% of our CapEx spending. And then there’s additional about 12% with reflected tooling. And so, 50% of CapEx spending this year is for manufacturing equipment and manufacturing building. And when we say manufacturing building, we are talking about phase two of our buildout so that we can increase our capacity to 20,000 units by beginning of next year.
So, how do we think about cash and liquidity? The way we like to manage cash and liquidity is that at any given time, it’s important to us that we have at least 12 months of cash and liquidity available to us. Because as you know, each quarter, we provide going concern analysis to our auditors and we show for the next 12 months we have adequate liquidity and cash. So, what that means, is that at any given point, we like to have at least $700 million to $800 million in terms of cash and liquidity. We stated that, and the Q1 on a pro forma basis, including convertible debt, we had announced which we have closed now that we had about $1 billion in terms of liquidity. And our Board prefers us to have at least $500 million of cash at all times. And so, we try to achieve that. So, you should assume that at this point we have more than $500 million of cash, and we also have enough liquidity in terms of ELOC. And so, we have between cash and liquidity over — between $800 million to $900 million. We plan to achieve a similar liquidity by year-end. That should suggest that there will be some capital that we’ll need to raise.
And the question really becomes not can we raise capital in this environment? We have shown that we can raise multiple debt. We also are ATM eligible. We have ELOC in place already, but it’s a matter of how much cash do we want to raise in this environment? Because essentially our stock price is low and we feel like we’re giving away the company for free. At the same time, we’re trying to balance in terms of cash needs with minimizing dilution. So that’s really the debate. And that’s what we think about. We like to think that capital allocation decision is something that we spend a lot of time thinking about. And we want investors to recognize that this is precious capital coming from you. And so, we need to be really thoughtful. And so, to the extent that there are OpEx or CapEx that we can defer or reduce without impacting our program milestones, we are going to do that. And then we’re going to see what we may have to raise. When it comes to timing, we’re going be opportunistic because we want to make sure that we do minimize dilution.
Emmanuel Rosner
That’s great color. And just in terms of the math, then that’s — we’re running through. So to finish the year with — about 12 months of, I guess, cash needs. If you do not moderate down the CapEx or the cash spending this year, you would to raise about $400 million, $500 million between now and year-end?
Kim Brady
I would say our spending can be anywhere from $50 million to $60 million per month in terms of burn, including OpEx and CapEx. And you should assume that if we have $800 million to $900 million of liquidity, and if we want to end this year with, let’s say, at least $700 million to $800 million, then you can do the math. When we think about next year, so with cash and liquidity, we have by end of this year, we want to make sure that we are able to cover next year’s spending.
And when it comes to next year’s spending one thing that we can do minimize our spending is defer phase three of our manufacturing expansion. That is not a problem simply because we anticipated that we would actually start our manufacturing expansion for phase three second half — second quarter of 2023. And finish that by end of Q1, 2024. That expansion really is to increase our capacity from 20,000 units to 40,000 units. As we think about 2023 and 2024, and our volume protections is well within 20,000 units. And so, it’s not going be a problem for us to actually defer CapEx next year into 2024. It will not impact meeting our volume targets.
Emmanuel Rosner
Now, shifting through some of the upcoming milestones, how are you progressing towards establishing your first hydrogen production hub in Arizona?
Kim Brady
So, we’re pretty excited about that, and this is something that investors do not fully appreciate. And we probably haven’t done a good job in terms of fully articulating this. And we will have chance to do that in the second half the year. As you know, Nikola, when you think about our value proposition, we manufacture battery electric truck for a short-haul segment of the market. That’s only about 20%. When it comes to medium-haul and long-haul, you really need hydrogen fuel cell trucks. Nikola Tre fuel cell truck, which we will produce second half of next year, that will have range of up to 500 miles. And the medium-haul segment represents about 35%. So, we have products that can address 55% of the market right now, and then ultimately our gen two, which will be available in late 2024, early 2025 will be able to address long-haul, which is 45% of market segment.
When it comes to fuel cell trucks, though, you got to make sure that you have fueling infrastructure available. So, you can only sell fuel cell truck to the extent that you can also deliver fuel. That’s why our go-to-market strategy when it comes to fuel cell truck is to make sure that we bundle fueling with selling of our truck. That’s our go-to-market strategy. And so, when you think about progress on our infrastructure, that’s critical as we think about selling trucks in 2004/2005 timeframe, our fuel cell truck. And so, we have already announced when it comes to our first hub in Arizona, our partner is TC Energy. TC Energy will be a fantastic partner. We are looking at several hub opportunities. One that we have announced is in Arizona. We have already — we have a PSA for land and we have gone through engineering study, which will be completed soon. That’s reviewed with TCE. We have actually reviewed all the liquid action equipment purchases jointly, and we will be breaking ground shortly.
The reason why this is really important is that when you think about hydrogen ecosystem, this energy transition, massive energy transition, this is 20-year, 30-year growth story, and it will take billions and billions of dollars. However, our model is to be asset-light and capital efficient approach. That means the hub will be owned by SPV. And typically this hub will be financed 60% equity, 70% equity, 30 — I’m sorry, 60% debt, 40% equity, maybe 30% equity and TCE will fund most of the equity. So, they actually want to own the hub assets. What we want to own is molecules. And so, ultimately, we will be the single offtaker of those hub where we will buy a hydrogen being generated from this hubs.
And so, when you think about the progress that we’re making, we feel pretty confidence. Second half we’ll be able to announce and tell you where the hub is going be located and our construction timetable. But also I think we’ll be in a position where we can talk more fully about our hub partner, TCE and the depth and breadth of this partnership. Now, TCE is not going to be the only partner when it comes to hubs. There will be other partners. We are currently having discussions.
And at some point, once again, in the second half of the year, I think we’ll be able to announce who those partners are. And so, you will be pleased that this are a global players. For example, TC Energy, as you know, they are midstream players, but they can no longer build pipelines. And so, they are looking to actually deploy capital into owning energy transition assets, such as hydrogen hub. They generate the $13 billion in revenue, 80% gross profit margin, 50% EBITDA. They generate $6 billion of operating cash flow that they have to deploy somewhere. And so, the reason why they’re partnering with us is that ultimately we bring the demand when it comes to hydrogen trucks.
Emmanuel Rosner
So, let’s talk about the fuel cell truck then and where you are in the product development. What were the results of pilot testing that you had with Anheuser-Busch? Do you expect similar results from testing with TTSI?
Kim Brady
Yes. So, we completed our pilot testing with Anheuser-Busch. This is for Nikola Tre fuel cell alpha. So, it’s an early prototype. Yet, it’s not an early prototype, it’s actually a mature alpha, because it shares same platform with Nikola Tre BEV and the testing with Anheuser-Busch, we achieved 12,000 miles and then over 200 — over 2 million pounds in terms of freight hauling. And we achieved objective in terms of upcoming liability. We expect that to actually increase with TTSI. Any learnings that took place, we will be building that into beta trucks. We are building around 17 fuel cell beta trucks right now, which will be completed. We will continue with validation and testing beginning of next year. We’ll build gamma trucks, which will be used for additional customer testing and then going to production in second half of next year.
It’s important that you understand that will likely be about year and a half to two years ahead of any of our competitors, including incumbent OEMs, as well as new insurance. And this will have range of up to 500 miles.
Emmanuel Rosner
So, you’re on track to begin production of the fuel cell by second half of 2023?
Kim Brady
Yes. That’s what we are looking to achieve. We are on target in terms of our timeframe, and this will be an important milestone. At the same time, we are building out infrastructure with our partners, so that fueling will be available. At first, we will have mobile fueling trucks available because our demand and trucks that will produce second half of 2023 will be somewhat modest for fuel cell trucks. And then it starts to increase significantly. And so, we want to make sure that we have fueling infrastructure available for our fuel cell trucks in 2024.
It’s important that you understand that this is — this will be concentrated in certain geography. This is not simply buildout the infrastructure and it will come. You have to orchestrate this in terms of where you are selling your trucks. We’ll focus into California market first, and then think about Arizona, Texas going to Florida, and then up the LA and Coast to New York area, we already have access in the Midwest, it is not a hub, but it’s actually repurposed petcoal plant that will be generating hydrogen where carbon will be captured and flustered. And we actually have an agreement, and we own 25% of that asset. So, we have an offtake agreement for 25% of hydrogen that will be generated about 50% [ph] a day. And we believe we can purchase this blue hydrogen for below dollar per kilogram at the gate, including liquid faction and transportation. We think we can deliver this to dispensing locations in Midwest for under two bucks.
Emmanuel Rosner
So, was my question, how should we — should investors think of the economics of the supply company model where Nikola controls the hydrogen molecule?
Kim Brady
So, the way — you want to think about that is that, we talked about production hubs and dispensing locations. In the middle is our distribution company. We will own that 100%. Production hubs, we may own very little, but it will be owned by our partners that we will orchestrate the development together. We will buy that hydrogen at certain price. We believe without incentives available, we can generate hydrogen at around, let’s say, $3.5. And then we will buy that. And then we’ll deliver to dispensing locations that could be owned by us or by our partners or third-party investors. It will be an SPV and we’ll sell that hydrogen depending on the location anywhere from, let’s say, $4 to $5, $5.5.
What gets really exciting is that as you know, in certain states you have LCFS credits available for dispensing locations. That’s up to about $2 per kilogram. And then, right now, in triple B legislation, there’s hydrogen production tax credit, or up to about $3. We believe ultimately that will pass. It’s good for the country. Good for the world. And the reason why, when you think about solar and wind for the last 10 years, the price coming down significantly is all due to production tax credit. And two, most important senators who are supporting hydrogen production tax credit is mentioned in cinema. So, we do think this will ultimately pass and that production tax credit at the federal level is up to about $3.
So, all of a sudden when you combine those two is possible. You got tax credit and incentives anywhere from $3 to $5. So, you could almost generate hydrogen for free. We think that will happen. That’s a game changer folks when you think about that in terms of opportunity in this energy transition. And we’ll be selling it for $4.5, $5 depending on the locations. And so, we kept that margin because we will be the sole owner of the supply coal in the middle.
Emmanuel Rosner
Just finally for me, so on infrastructure front, can you just walk us through what you need to do in terms of the hydrogen ecosystem between now, and I guess, start off production or deliveries in, in the second half of 2023 some of the trucks?
Kim Brady
Sure. So, we are working on infrastructure side. We have partners on production hubs. We have announced TC Energy, and we will be announcing more partners. Likely on the hub, you should assume that there will be three to four partners, potentially even more. And these are major global players.
On the dispensing side, meaning stations and locations. Just in California, we have actually several conversations ongoing right now, where we will be in a position to disclose where we are locking up land or we’re in a partnership discussion with some players, we’ll be able to build the stations. And so, why don’t we say building stations? There’s land part, permit part, and then really the equipment part. Equipment, potentially, we could finance if we decide to own it ourselves, because big part of CapEx is related to equipment at the dispensing locations and equipment providers, and [indiscernible]. And so, we’re going to be capital efficient when it comes to building out our stations. And we’ll also be able to announce number of those partnerships in the second half the year.
So, once we do that, I think you will clearly see in terms of how we’re executing our hydrogen infrastructure partnerships. Right now, when you think about Nikola, especially in the current environment, what we suggest is that essentially a stock price represents just our battery electric vehicle business. So, essentially, you’re picking up our hydrogen truck business as well as fueling business for free. The way you should think about hydrogen fueling side, because that represents 80% of commercial truck market in the states. As we continue to sell trucks, then you will have cumulative of volume and revenue being generated from fueling. Ultimately, hydrogen fueling business will generate more revenue than our hydrogen truck sales annually. And our fueling business, we believe will be in high 20% in terms of margin, especially when we think about all the incentives, as well as mandates, that’s coming into picture with respect to hydrogen energy transition. This is — this really is a 20, 30-year growth story that you are thinking about.
And so, what we suggest is that think about which company will be able to get through this time and will be the market leader. And we would submit to you that if you look at all the companies that are available that’s out there, Nikola the only company that has products to address both short-haul and medium-haul, as well as ultimately long-haul. And we’re building out the infrastructure on hydrogen side, which will give us long-term competitive advantage as well as a wide mode, because you really have to think about when it comes to fuel cell truck, you have to address both chicken and the egg problem. You have to solve that together in the next 10 years.
Emmanuel Rosner
That’s a great place to conclude. I think we’re fresh out of time. So, Kim, thank you so much for being with us and thanks everyone tuning in.
Kim Brady
Thank you.
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