Nikola NKLA Stock Conference Call: 2020 RBC Capital Markets Global Industrials Call

Joe Spak: (00:00) Good afternoon, everyone. I am Joe Spak, the lead Auto Analyst here at RBC Capital Markets, and this morning very pleased to be joined by Nikola, a company that's trying to change zero-emission transportation and infrastructure. We're very pleased to have with us today CFO, Kim Brady. The format for today's call is fireside chat. Prepared a number of questions, but I highly encourage investors online to get involved in the conversation. To submit a question, there should be a Q&A box on the webcast window. Please ask those questions, and we will ask them anonymously and integrate them into conversation. Joe Spak: (00:33) So, with that Kim, welcome. Thanks for joining us today. And the first question is obviously to address the elephant in the room, your company has been in the crosshairs last week with the short-seller [inaudible 00:00:45] retention. You put out a response to some of the allegation this morning. Maybe you could let us know your view of the response and really also maybe where the company is today versus maybe some of the things pointed out in the report three or four years ago? Kim Brady: (01:09) Look, I think the response speaks for itself. I think it's comprehensive, and hopefully this will be helpful to investors as we think about what we have in front of us. Significant difference. As you know, many of the allegations on the report was related to pre-Nikola. We are very much focused on moving forward and focused on delivery Nikola Tre, Nikola Two as well the Roughage Truck as well as the Badger. Kim Brady: (01:39) When you think about our world-class partners who have been in with us from the beginning, as well as early-stage investors if you think about Bosch for Series B as well as Series C, they have been partners for the last four or five years, and they understand exactly where we are and we have been to develop some great systems with them, and we feel very confident that we'll be able to deliver vehicles on the target days that we have articulated. Joe Spak: (02:11) Okay. Maybe for some investors in the audience who aren't as familiar with Nikola or maybe made aware of Nikola by some of the media reports last week, can you walk us through how you view your unique business model that allows Nikola to address both short-haul and long-haul commercial vehicle use cases? Kim Brady: (02:34) Sure, and that's a great question. Nikola Tre is a short-haul application. We will sell the truck outright to customers. Nikola Two is actually for medium-haul and long-haul applications, and we have a bundled pricing model for Nikola Two. What that means is that it's a fixed lease over seven years, whichever comes first, and it includes truck, repair and maintenance, as well as fuel. The reason why we are doing that is to address both chicken and the egg problem, and the only way we can advance the hydrogen ecosystem is to ensure in the short-term over the next several years that we are able to control how we actually roll out fueling network, and we can only do that to the extent that we can actually control truck, repair and maintenance, as well as fuel. Kim Brady: (03:32) When you think about Nikola Tre and for short-haul, it's important to understand that this is a pretty crowded market. Essentially approximately 15% of the classic truck segment is short-haul, but the benefit of the short-haul is for trucks that come back to base each night, so this is great for inner city operation, last mile distribution. And what's important is that you have confidence that you have no range anxiety, so if you think about short-haul, essentially, what we have is a highly differentiated product. Kim Brady: (04:15) Nikola Tre is 720 kilowatt hour battery pack. What that means is that it's going to address the high end of the short-haul range. It's a calibrated for European model for better visibility, has a shorter wheelbase for tighter turning radius, so it's a very attractive differentiated product. We think it will resonate very well with potential customers. For medium haul and long-haul, it's important to recognize that you can't get there with battery only, because of the cost, because of the weight, because of charging issues and ultimately you are compromising the hauling capacity of your customer. So we know that it's much better to address it with fuel cell truck. Kim Brady: (05:01) When we think about FCV, we are really targeting what we call dedicated route customers. These are customers that are making a fixed point-to-point route runs. So essentially, there are about 1.8 million Class 8 trucks on the road, approximately 15% to 20% representing what we call dedicated to corporate customers, and they're focused on making daily distribution. So essentially, one point to the next point, and it's a fixed route, making multiple milk runs every single day, and those are the ideal customers that we're focused on for the next 10 years. Because we know that with point-to-point dedicated route customers, we know the routes, we know number of trucks that they have deployed, we know number of milk runs that they make, and that's really important when we think about addressing both chicken and the egg problem. Kim Brady: (05:55) As you know, when it comes to fuel cell, it's not simply about truck. It's also about fueling. Any customers that are looking to address their medium haul and long-haul, they are willing to do that with a fuel cell truck. However, they are highly interested in how we're going to fuel. By having a dedicated route we can focus on those routes and build that hydrogen station one station at a time, so that we don't speculate, and able to achieve enough density over time, so that 10 years down the road, then we can focus on remaining 80% of the market segment, which would be 3PL customers. But it's important in terms of their progression how we can actually develop and address both chicken and the egg solution, and we believe the only way we can do that is when we are able to control both truck, as well as fuel and repair and maintenance. Joe Spak: (06:53) Yes. You touched on a lot of good points there, Kim, and I want to dive into some of those. Maybe just to start and to address one of the most popular inbound questions we've gotten from investors over the past couple days, which is what does Nikola actually do? What is the proprietary technology? And I find is kind of interesting, because your initial Class 8 truck, as you just mentioned, is always built with IVECO and Bosch initially on some of the fuel cells, right? And then as it relates to the Badger pickup, it was always announced that that would be built with a partner as well. So it seems to me like there's maybe a little bit of a misunderstanding here of the business model opportunity, which I think what you're trying to communicate is really being able to capitalize on the concept of a hydrogen fuel cell truck lease, which is unique and differentiated. But I'd like to hear how you describe, how the Nikola is proprietary and what it is about Nikola that can allow this in the marketplace? Kim Brady: (07:57) That's a great question, because I do think there's confusion in the marketplace. Kim Brady: (08:00) ... in the marketplace. As a new startup, it's important that we capitalize our relationship with world-class partners that we have put together. The reason why we have them is to accelerate going to market as well as leverage technology while we are working with them. What we are great at, is in terms of design and innovation. Our partners bring decades of experience in terms of component manufacturing. When we actually marry those two capabilities, we can move much quicker. We have our own proprietary technologies, as well as we also leverage our partners. Partners know that, and we have always welcomed opportunity to work together with potential partners. The reason why we have been able to be so successful, because our DNA is to work with world-class partners. And think about that. You can do it alone, or you're talking about massive investments in terms of personnel, as well as CapEx. Kim Brady: (09:06) And as a startup, it's difficult to do that. Not only that, you are going to have a very long lead time if you try to do it on your own. So what we do is that we leverage our expertise and then we marry up with partner who can actually deliver their expertise. And this has worked very well for Nikola. Let me give an illustration. For IVECRO partnership. As you know, IVECO, CNH-I, IVECO was our lead investor for Series D round, and they set the valuation and they agreed to invest $250 million, $100 million dollars in cash and $150 million in kind services. With that in kind services, we were able to leverage IVECO's S-WAY, which was the latest homologated Class Eight truck introduced in July of 2019. Kim Brady: (09:56) The benefits are huge. To give you an example, as you know, truck has thousands of components, but not all those components are important. So IVECO, we have access to IVECO's intellectual property with respect to their S-WAY. Not only that, we have access to their validated parts [being 00:10:17]. For example, for Nikola trade, almost 85-90% of the components that represent 15% of value, come from IVECO. And that's a wonderful thing because we don't have to actually validate those components ourselves. Not only that, set up a supply chain. We are leveraging IVECO's supply chain, their costs. And when it comes to most important components, essentially 15% of components that represent 90% of value. So essentially, we're taking IVECO S-WAY, stripping out powertrain, and then we're electrifying it. Kim Brady: (10:56) So Nikola is responsible for the battery, eAxle, eMotor, inverters, VMS system, infotainment system, vehicle control units. These are all critical components for next generation Class Eight truck, and that's what we're good at. And so this is a wonderful partnership, and this is an example of how we utilize and leverage our partnership relationship. This is for Nikola trade, which actually is being built right now and five prototypes will be done by end of September. And it's being built at [home 00:11:34] facility. Joe Spak: (11:37) Thank you for all that color. Maybe to just address the other point of that question, if we wanted to look at your long business plan that you laid out in the go public process, it does seem like the bigger opportunity's are [on the field 00:11:53]? So at least [inaudible 00:11:54] and understand that how electric trucks need [inaudible 00:11:58] for certain applications. I guess the question is why distract yourself with a Badger product or some of the power [inaudible 00:12:08] stuff you've laid out there? Do you think that it's too much to chew on right off the bat? Kim Brady: (12:15) That's a fair question, and we ask ourselves that all the time, as you know. Especially as a startup, what's really important is execution. There are some limited resources, limited personnel. So it's important that we are very much focused in terms of our execution. And it's not simply about what can we do, but what should we do? And so that's something that we are asking all the time. So as you think about the Badger, which is a B2C consumer product, pickup truck, we knew that if we were to build that ourselves, it would actually distract from our primary business focus, which is B2B and Class Eight trucks, as well as building out a network of hydrogen stations. And so that's the reason why we have always stated that we would not go to market for the Badger, unless we found a world-class manufacturing partner, and we have been able to do that with GM. Kim Brady: (13:15) So we recognize that our core business is B2B Class Eight trucks. We have three products for battery products, we have Nikola [inaudible 00:13:27] and Nikola ET1, which is the reference truck that will deliver to Republic Services. For medium haul and long haul, we have Nikola Two, which is a fuel cell truck. And then ultimately we will be building out a network of stations to accommodate customers for our full-self truck. Joe Spak: (13:52) With respect to the Badger deal with General Motors, how should think about the margin profile for selling that vehicle? I know the agreement says they sell it to you at cost plus, but you have to save on... so that's [inaudible 00:14:07] closings and cost of goods, but you get to save on some of the other development costs obviously. When you're seeing other startup [E 00:14:17], consumer Es claim they can get gross margins in a 25 to 30% range, do you think that's applicable for Badger, and of the four billion in savings that you mentioned with that, can you just clarify, is that in relation to what it would have cost you to start that program on itself or reverse your initial plan? Because correct me if I'm wrong, but I don't think the Badger was in some of the initial financials you laid out in [inaudible 00:14:42]. Kim Brady: (14:46) You're right that in our financials that we have laid out, we have nothing in there for the Badger, and that was purposely done because we were still working on a potential relationship with OEMs. We will, in the future, layout in terms of the Badger volume, pricing cost, and what you should expect for CapEx. But if you think about this relationship, it should be in a much broader terms. This is not simply about manufacturing, contract manufacturing. When an EV company have to introduce a new platform for a pickup truck, you will run probably anywhere from three to four billion dollars, which if you think about all the engineering validation testing, homologation, plus CapEx, this project likely will take about four years. So if you think about our partnership with GM, where we are able to leverage GM's manufacturing expertise, and the cost of that, as we talked about, will be three to four billion. If you think about our relationship- Kim Brady: (16:03) ... talked about will be $3 billion to $4 billion. If you think about our relationship with GM, we are issuing $2 billion of stocks, and then we will also be committing to approximately $700 million in CapEx. So ultimately, we are able to reduce our CapEx costs, because if we have to build a separate plant for a passenger vehicle likely will run around billion dollars, and then when it comes to engineering cost, the fact that we can rely on GM's engineer using their existing template and architecture, we can accelerate introduction to market, and that was really important for us. Kim Brady: (16:43) Then on the implication on the commercial truck side for Nikola Tre, if we actually take existing volume that we have forecasted for the next 10 years, we have assumed certain costs for battery, and based on our agreement with GM, we will have access to their OTM battery technology, and that's a JV between GM and LG Chem, and they have represented certain cost targets that they will be able to deliver. If we are able to achieve that, we believe, just the battery savings for Nikola Tre will be approximately $4 billion over 10 years, so what that means is that using our battery cells that we purchase from third party and including our module and pack design, and we know that there will be cost savings over the next two, three, four years. Kim Brady: (17:41) However, what we have assumed in our model is higher than what we believe GM will be able to deliver, and so we have to look at GM-Nikola partnership really in totality in terms of overall opportunity that we have by entering into that relationship. We know it's a win-win, because GM is able to identify potential savings on their end, and we are also able to identify potential savings on our end. When it comes to their CapEx, they're able to allocate portion of their plant to us, which will result in full utilization of the plant, but not only their savings in terms of their CapEx, and we are able to reduce our CapEx if we were to actually build our own plant for the Badger by leveraging GM's existing platform at the plant. So, we think this is a very, very good win-win partnership. Joe Spak: (18:42) Yeah, thanks for that color. I guess is included in some of the savings, is there also an assumption that you will use a GM fuel cell for the commercial vehicles in the North America theater? Kim Brady: (18:58) Yes, and we have been very transparent that the fuel cell system that we have co-developed with Bosch, that Bosch has the utilization right, and we have been working with Bosch. The reason why it's important that Bosch was able to commercialize this is that Bosch is looking to own next generation powertrain. It's a very important key strategic initiative for the company, and what we have agreed with Bosch is with respect to meeting certain efficiency, reliability and uptime, as well as warranty. Now, we have actually two world class suppliers, Bosch for Europe, and then GM for North America. We think this will only make Nikola stronger, because now we have two suppliers that are world-class that have some of the best fuel cell systems. Joe Spak: (19:54) Great. Post the GM announcement, it did get me thinking a little bit because for the Nikola Tre, right now you're using the Iveco to start. For the Badger, you're having GM help you contract manufacture those vehicles, and I know Iveco I think is helping you set up or stand up the Coolidge, Arizona factory as well. But can you just walk us through the rationale as to why you think you need to build that vehicle in the U.S., or is there an opportunity to contract manufacturing the truck here as well? Kim Brady: (20:33) As you know, our commercial trucks is our core business, and if you think about the market size, it's about the same in the U.S. as well as in Europe. In Europe, we wanted to make sure that originally in terms of our sequencing, the U.S. was going to be our primary focus and Europe the second. However, with the Iveco partnership, we are able to accelerate our joint venture manufacturing. That's what we have in Europe with Iveco. As you know, we have a facility that's being repurposed as well as being refurbished at Iveco campus, and there is a building that's being refurbished now. It will be substantially complete by 2020, and then by May 2021, the facility will be ready for manufacturing. And so for six months or so, we will likely manufacture trucks in Iveco campus and then export that to the U.S. for 2021 volume. This is purely a bridge solution. Kim Brady: (21:45) In the U.S., we have a Greenfield manufacturing facility. We think that's actually important and key to ensure that we have manufacturing available for Nikola Tre as well as Nikola Two. The plant will be up in running by end of 2021 for Phase I. We have broken ground in July, and Phase I is for low volume manufacturing. It will cost approximately $125 million, and we believe that it will be completed by beginning of Q4 of 2021. And so we'll be able to manufacturer BEV trucks in 2022 from our Greenfield manufacturing facility. Kim Brady: (22:33) Phase II manufacturing will be in around early 2022, and it will be completed by mid-2023. Phase II will likely cause approximately $500 million if you include the paint line. Once Phase II is completed mid-2023, our capacity will increase to approximately 35,000 units per year running two shifts manufacturing both BEV trucks as well as fuel cell trucks. Ultimately, we can run three shifts and increase the capacity to about 50,000 units. Just so that you are aware, as you know, we recruited some of our best manufacturing talent. Our head of global manufacturing comes from Toyota; he was there for 20 years, and then he was the Head of Manufacturing at Tesla. And then last few years, he spent three years in China, building a Greenfield manufacturing facility for [inaudible 00:23:33]. And so we think we got the right talent. We are moving aggressively, and we feel confident that we can deliver our timeline with respect to manufacturing facility. Joe Spak: (23:41) Great. We may need to, as we sort of approach the end of the session here, just focused on what I think is one of the sort of the crucial elements of the Nikola, which is this concept of two maps, right? One being where are these dedicated routes, where I think you said 25% of trucks are used for dedicated routes today. And the ... Joe Spak: (24:03) Right. I think you said 25% of trucks are used for dedicated rest today. And the second, being where you can get cheap electricity in order to produce hydrogen at the levels, you said you can. So the overlap of those two maps is to me, it seems like where your opportunity is. And I really want to sort of focus on, as we sort of close here, just the electricity map, whether it's three and a half cents cost of electricity, or hydrogen at $3 per kilogram, what gives you confidence that you'll be able to achieve that rate on a [inaudible 00:24:32] basis? And what are some of the methods and ways that Nicola thinks they can procure electricity that inexpensive? Kim Brady: (24:42) Great question. When it comes to operating stations, the number one variable that represents about 80 to 85% of the cost is related to electricity costs. Kim Brady: (24:54) And we believe that we can achieve a target rate of around three and a half cents per kilowatt hour. That's including transmission and distribution. And this is important because if we cannot achieve that, we believe we can achieve generating hydrogen onsite for approximately, let's say around $2.85-2.90, including depreciation, amortization, assuming cap bags can be achieved at around 16 and $17 million. We feel very confident over the next three or four years on the CapEx side, the electrolyzer costs will be dropping 30 to 40%. If you talk to anyone in this space, as capacity is increasing, [we 00:25:38] we know, we feel confidant that cost can be achieved. We believe that's already happening likely in China because our hydrogen ecosystem is much more advanced than in the Western world when it comes to electricity price. There's couple of things that we need to understand. Kim Brady: (25:56) Number one, if you think about renewable PPAs, there are several examples of renewable PPAs that have been executed early part of this year, all solar, running anywhere from, for a kilowatt hour to about 2.3 cents per kilowatt hour, when it comes to wind, especially in the Midwest, you are able to enter into a long-term PPA anywhere from 15 to 25 years or below two cents per kilowatt hour. And so we know for certain, in the current environment, you can actually enter into renewables at two cents. Now when it comes when we have conversations with utilities, as well as system operators, the value that we bring are three things. One because of the amount of power that you need for each station is substantial approximately 19 to 20 megawatts of power. And the fact that we generate hydrogen at least 21 hours a day. And as you know, this electrical [inaudible 00:27:03] are designed to run 23 hours, 23, 24 hours a day. Kim Brady: (27:07) What that means is that we have constant load is it's really beneficial for utilities. So what we do is that about half the time we're generating power overnight, what that means is that when we take power overnight, those rates are about half the rates of day rates. And so essentially we are helping utilities generate incremental revenue. Right now they have excess capacity and they have very little demand doing overnight. And so they're happy to provide power overnight. Number two, we can help balance the grid. The reason is that during daytime, at the peak of power generation, there's not enough demand. So you've got excess supply during noon. We take power because we have costs load. And then in doing four to seven, o'clock when there's peak demand, but not enough supply, we can actually curtail power. So what we do is then we are willing to take the incremental power. Kim Brady: (28:09) We help balance the grid and we help utilities generate incremental revenue. That's the reason why we actually have discussions with utilities. We are not looking for simply best retail rates or industrial rates. We're looking for best wholesale rates. And when we have this discussion, they understands that we bring significant value. For example, in terms of current discussions that we're having for four station that will go up in Phoenix and the city period will be in Southern California. The conversations that we're having with local utilities, essentially, approximately three cents per kilowatt hour delivered. And so we know that those solutions are available. We recognize that we're not going to have onsite hydrogen generation at every location. But if you think about the best way to advance hydrogen economy is by actually focusing on dedicated routes, because ultimately you want to focus on customers first and make sure that you lock in that demand so that there's high utilization. Kim Brady: (29:14) And then you start developing stations one station at a time. So it's not a speculation. We believe by doing that over the next five to six years, we will likely have a network. It's a skeleton network of around 75 stations. And then over time, we are going to fill in the network such that after 10, 12, 13 years, do you have enough density network that you can focus on the remaining percentage of the market. And so that's really our strategy and we feel confident that we can build over that. Joe Spak: (29:51) Great, just one more question as we end the session here. You know, you talked about the importance of building these strategic partners, how have conversations over the past couple days gone with them? Do they support it or do you see sort of any, any risks or [inaudible 00:30:11] along with partnerships? Kim Brady: (30:13) Look, they're offended. The fact that you have a short seller publishing to support essentially pointing out that they're being hoodwinked. That's ridiculous. I can tell you that BOSH is incredibly thoughtful when they invested in us for serious BNC round. I can tell you that they had number of engineers involved in depth due diligence over several months when CNHI made an investment in Nicola, I can tell you that some of their advisors that Goldman Sachs for financial evaluation, for business strategy they had Mackenzie, for accounting due diligence they had the Lloyd and for legal they had Sullivan and Cromwell. I think it's offensive to our strategic partners, that you have a short seller who keeps doing a hack job and essentially pointing fingers that are strategic partners, that they don't know what they're doing. I would suggest that it's ridiculous to think that they haven't done a deep dive, much more deep dive than what any third party short seller would have been able to perform. Joe Spak: (31:27) Great. Ken, I really appreciate you taking the time today and responding to the questions we've been getting from investors. So thank you very much for your time. Thanks everyone for joining us. Kim Brady: (31:39) Thank you, Joe.