XL Fleet Corp. (XL) Q2 2021 Earnings Call

0:00 Good afternoon and welcome to the Excel Fleet Corp second quarter 2021 conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. For opening remarks and introductions, I would like to turn the call over to Jim Berklus, General Counsel and Vice President of Corporate Development for Excel Fleet. Please go ahead. Thank you. Good afternoon, everyone, and welcome to XL Fleet's earnings conference call to discuss our results for the second quarter of 2021. With me today are Todd Hines, our founder and president, Dimitri Kizarnov, our chief executive officer, and Cielo Hernandez, our chief financial officer. Our call this afternoon includes statements that speak to the company's expectations, outlook, or predictions of the future, which are considered forward-looking statements.

0:48 These forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, which may cause our actual results to differ materially from those expressed in or implied by these statements. After saving with customized car insurance from Liberty Mutual, I customize everything. Like Marco's backpack. Sick of being ghosted by your sunscreen? Boo! Get ready to turn everything you know about sun care upside down. With Native, simple, clean, mineral sunscreen for your face and your body. Before Native, sunscreen was a pain in the neck. It can be so greasy, stinky, and filled with unpronounceable ingredients. I mean, oxybenzone?

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2:32 With that, I'll turn the call over to Todd Hines. Thanks, Jim, and thanks to everyone for joining us on the call this afternoon. As the global commercial fleet industry continues to express growing interest in electrification, Our team remains focused on expanding our comprehensive set of solutions in ways that eliminate barriers and help customers adopt EVs faster and in larger volumes. I'm proud of our company's track record of delivering innovative solutions to customers across a range of commercial fleet applications to help them save money, reduce carbon emissions, and meet sustainability goals. When we announced our business combination with Pivotal 2 in September of last year, We illustrated that XL grid and electrification as a service would be important parts of our long-term growth strategy for the business.

3:22 This unique approach to the fleet industry focuses on making it easier and more cost-effective for companies to electrify their fleet by eliminating many of the common barriers, including infrastructure, financial, technological, and power constraints, to name a few. At the time, we identified M&A as a key opportunity to add capacity and capability to our platform that we would pursue in advancing this strategy. In the second quarter, we began to follow through on that plan with the acquisition of World Energy Efficiency Services. The highly strategic Bolton acquisition of World Energy expanded our Xcel grid division by adding significant new capabilities to our core business.

4:08 World Energy helps customers address the factors and challenges that can arise when companies transition their fleets to electric power. This often includes facility power constraints at sites resulting from the addition of new charging infrastructure. While many companies don't know where to begin when scoping and planning a charging infrastructure project, World Energy is a proven service provider who can help companies better understand their energy requirements so they can more confidently and efficiently deploy electric vehicles within their fleets. They can also help customers incorporate energy efficiency measures and solar power while integrating EV charging infrastructure at their facilities. We continue to develop other aspects of our Xcel grid division.

4:53 which we expect to serve as a significant driver of opportunity and growth over the near and long term. While this business provides diversification to our platform in the near term, since sales from World Energy are not impacted by OEM vehicle production, more importantly, it helps to round out a comprehensive electrification solution for our customers for the long haul. We were also excited to recently announce an agreement with Enel to supply battery and power systems for the company's electrified refrigerated trailer solution, which enables electrification of class eight refrigerated trailers, which historically run on diesel fuel. The addressable market for refrigerated trailers is significant, with approximately 50,000 new refrigerated trailers sold annually in the United States alone.

5:41 Positioning it as a multi-billion dollar market, However, today's technology utilizes diesel to power the refrigeration unit, and each diesel-powered trailer can burn as much diesel fuel in a day as a delivery truck. Companies are actively looking to drive emission reductions in this part of the market. We believe there are large opportunities to enable emission savings with electrified refrigerated trailers. Under the terms of our agreement, XL Fleet will supply battery and power electronic systems for 1,000 enow units, representing a significant opportunity for continued growth. XL Fleet and enow expect to deliver initial units beginning in 2022 to customers in industries including food, retail, manufacturing, and distribution.

6:32 Additionally, The partnership enhances Xcel Fleet's strategic position to collaborate with important Class A transportation customers, providing potential cross-selling opportunities for Xcel Fleet's integrated solutions offering, including electrified powertrains and Xcel Grid charging infrastructure. With Fundrise, you can invest here, from there, or there, from

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9:31 With that, I would like to pass it over to Dimitri to provide a recent business update. Dimitri Petrovic- Thanks, Todd. I'd like to begin with a review of key highlights from the second quarter and recently. Despite continued supply chain issues and wide-scale shortages of key materials in vehicle production affecting drive system sales, total revenue grew to $3.7 million during the second quarter, up from approximately $1 million in Q1 of this year. The increase versus the prior year was driven by the addition of world energy, partially offset by a reduction in drive system sales. Our world energy business contributed $2.4 million, reflecting approximately a half-quarter contribution following the acquisition completed in mid-May.

10:26 The team successfully executed over 70 projects, helping customers with a wide range of energy solutions. We are excited at the continued opportunities for growth in this business and its significance to our wider Xcel grid offering. We generated growth profit of approximately $1 million, primarily driven by our XL grid division and reflecting margins of approximately 26%. Through the end of the second quarter, we have sold a total of nearly 4,500 hybrid and plug-in hybrid systems and remain on track to deliver our all electric solutions in 2022. We continue to expand the range of systems that we offer to customers and widen their applications, including our recent announcement with Curb Tender to jointly develop electric refuse vehicles, and more recently with Rubicon to more widely deploy these solutions to their customers throughout the waste management industry.

11:33 We formally opened our Michigan Fleet Electrification Center and we're pleased to be joined by Governor Gretchen Whitmer and other officials to commemorate this exciting event. The center is home to our growing base of engineering talent, including over two dozen Michigan employees who are already working in the facility. Its strategic location in the Metro Detroit region provides us access to a wealth of automotive and commercial vehicle talent. In June, we were pleased to gain current product CARB executive order approval enabling new sales for our hybrid electric Ford Transit systems in the California market, where we continue to see very strong interest.

12:20 We expect additional CARB approvals for other applications over the coming months, further extending our set of solutions we are able to offer into this very attractive market for fleet electrification. While we continue to see strong interest across the industry, OEM vehicle availability resulting from chip shortages and other key materials continues to drive an unprecedented interruption in the ability of our customers to secure new vehicles on which our electrified systems are installed. We believe that XL Fleet is very well positioned to capitalize on an eventual market rebound.

13:07 However, given an increase and likely extension of this industry disruption, we have challenged our team to identify and uncover ways to leverage our flexible business model. One such opportunity includes actively targeting opportunities to retrofit our systems on existing vehicles. We believe this represents a significant opportunity to drive activity particularly during this period of supply chain disruption that continues to significantly impact our product sales. A substantial portion of our Q2 revenue from drive system sales was from retrofit, so this is a proven ability of our business. With that, I'll turn it over to Cielo for a more detailed review of our financial performance.

14:19 Thanks, Dimitri. Revenues for the second quarter of 2021 totaled $3.7 million, up from $1.9 million in the prior year's period. Key drivers behind the annual growth was the recent acquisition of World Energy. Revenue in our XL grid division totaled $2.4 million, which was primarily comprised of our partial quarter contribution from World Energy. We completed our acquisition of World Energy on May 17. And so, this represents approximately half of the business performance during the quarter.

15:09 We generated gross profit for the quarter of approximately $1 million, up from approximately $40,000 in Q2 of last year, versus a gross loss of approximately $700,000 last quarter. The improvement was given by contribution from World Energy in our XL Group business. Adjusted EBITDA total negative $11.4 million compared to negative $3.5 million in the prior year quarter. Research and development costs total $2.8 million.

15:58 SG&A totaled $10.8 million compared to $3.3 million in the prior year quarter and approximately $8 million in Q1. The increase was primarily driven by the continued expansion of our team, technology, and facilities to support our growth strategy and meet new obligations as a public credit company. This also includes SG&A expenses associated with the addition of work energy. As of June 30th, we had cash and cash equivalent of $384 million compared to $404 million last quarter. Our balance sheet remains strong following the capital raise as part of our business combination completed in December 2020 and exercises of our public warrants earlier this year.

17:06 We believe that our balance sheet strengths position us with flexibility and a competitive advantage as we continue to execute on our growth strategy over the next several years. including the potential for further strategic M&A. I will now pass it back to Dimitri. Thank you. Thanks, Cielo. Before opening up the lines for Q&A, I would like to provide an updated outlook for 2021. Overall interest in our solutions remains strong as companies and fleets continue to pursue new and immediate ways to allow electrified. The range of solutions we've developed positions us to meet this growing demand from our expanding base of commercial fleet customers.

18:00 However, challenges resulting from very limited new vehicle availability and other shortages continue to impact the market for our drive systems, limiting our ability to meet some of this demand in the near term and resulting in continued uncertainty in our outlook. Recently, OEMs have pushed out the opening of new orders and increased delivery lead times when orders will be taken, indicating the shortage of new vehicles is likely to extend into 2022. In addition, as the Delta variant has fueled a new spike in COVID-19 cases, we cannot rule out continued pandemic impacts as we go forward. Despite these industry-wide challenges, our business model positions us to remain nimble. As noted earlier, we've expanded our XL grid division through the acquisition of World Energy, and we continue to actively pursue and win opportunities to retrofit our systems on existing vehicles, and have increased our resources and effort around this approach.

19:11 We are expanding the drive system solutions we offer to our customers through new partnerships and collaborations that have opened new markets for XL Fleet, including waste management, low floor buses for wheelchair accessible travel, and refrigerated trailers. We are confident these solutions and execution of our long-term strategy will position XL Fleet for even greater success once conditions normalize. We continue to develop new electrification solutions across a broader range of chassis options and expand our energy management and charging infrastructure capabilities while also pursuing exciting new opportunities outside of North America. While the lack of commercial fleet availability is unprecedented, we remain focused on executing our strategy and leveraging the operational and financial flexibility of our business model. We are armed with more than $375 million of cash on our balance sheet, which positions us to remain aggressive in finding creative new ways to grow the business in the long term while riding out the storm created by the current market conditions.

20:24 With that, we'd now like to open up the lines for Q&A. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star then one. Ladies and gentlemen, we have reached the end of the question and answer session.

21:23 I would like to turn the call back to Mr. Dmitri Kazarinov for any closing remarks. Thank you very much for participating in today's call and for your interest in Xcel Fleet. Have a great day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.