Arrival (ARVL) on Q1 2022 Results - Earnings Call Transcript
Operator: Hello, everyone and welcome to Arrival’s First Quarter 2022 Earnings Webinar. My name is Megan and I will be your operator today. Before I hand the call over to the Arrival team, I’d like to go over just a few housekeeping notes for the program. As a reminder, this webinar is being recorded. After the speakers’ remarks, there will be a question-and-answer session. Thank you for your attendance today. I will now turn the call over to Mitesh Soni, Investor Relations for Arrival. Mitesh Soni: Thank you for joining us today to discuss Arrival’s first quarter 2022 financial results. My name is Mitesh Soni, VP of Investor Relations. And with me today is Denis Sverdlov, CEO; Avinash Rugoobur, President; Mike Ableson, CEO of Automotive; and John Wozniak, CFO. Before we begin, I’d like to remind everyone that certain statements made on this call today are forward-looking statements. These statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and the information currently available to us. Although, we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these factors and other risks that cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC and our first quarter 2022 earnings release issued today on the May 10. During the call, we also refer to certain non-IFRS financial measures. This should be considered in addition to and not as a substitute for or in isolation from our IFRS results. For further information, please refer to our Investor Relations website at investors.arrival.com. With that in mind, I will turn it over to Avinash. Avinash Rugoobur: Thanks, Mitesh and thanks everyone for joining us. The key messages you will hear today are that we have completed bus certification, passed over 70% of certification tests on van, and made significant progress on our Microfactories with our skateboard cabin and hoop structure being assembled. We believe the manufacturer unit economics remain amongst the most compelling in the industry and we continue to expect start of production in Q3. I want to emphasize that bus certification is a key achievement for Arrival and one that the whole team is extremely proud of. This is the critical milestone towards our bus being able to carry passengers on public roads in the EU and UK. We commenced the first phase of our trial program with First Bus and are currently bringing their drivers and service technicians up to speed with our innovative new vehicle before we begin taking passengers on public route changes. The location of this is likely to be announced this quarter. And overall, we expect trials to last 3 to 6 months. Van certification is also progressing rapidly. And we have over 70% of tests already passed. Our target is to complete van testing in Q2 2022 and Mike will go into more detail on the path to certification for the van shortly. Just as significant, we have used the same microfactory technologies previously shown to put together the chassis skateboard to assemble the cabin and hoop structure. We continue to highlight this as it represents the unique design of our vehicles and our microfactory technologies coming together. The progress this quarter gives us further confidence the microfactory method will work at significantly lower CapEx than traditional methods and with increased flexibility. We are excited to lead the changing of the roles of the industry this year. Our customer engagement continues to grow with non-binding LOIs and orders up to 143,000. We are currently showcasing our van customers in the U.S. in a number of different cities. In March, we held a van media showcase in New York to members of the press who got a chance to sit in and interact with our vehicle and we also attended south by Southwest. There is no substitute for potential customers seeing our vehicles in person. And this continues to be a core part of our marketing strategy. Combining these showcases with certification in microfactory progress, the team has turned attention to conversion to binding orders as we start our production ramp later this year. Last quarter, I did a deep dive on the Arrival software ecosystem, which is just one of the amazing enabling technologies that we have developed in-house to bring to life our unique method of production. Today, I want to introduce another of our core enabling technologies, our in-house developed components. Arrival’s vehicles are developed using Arrival’s device framework, a method in which we are able to create smart devices on wheels in a short period of time, utilizing our extensive library of automotive hardware and software elements, designed and delivered using a plug-and-play approach. The method is based on several core principles. One, physical compatibility, all components have been designed using a grid architecture, which ensures simple Q based geometry, specifically created for robotic assembly. This unique hardware and software plug-and-play approach allows us to both upgrade components over the year and replace hardware when needed, driving longer lifecycles and higher residual values. Two, software compatibility. Pieces of software assembled into readymade firmware in just a few short clicks on the engineer’s computer, saving thousands of hours of work for what would ordinarily be the responsibility of multiple team members. And three, electronic architecture. In this case, it’s the framework that combines the elements of software and hardware into a functional vehicle. It is so adaptable that we are able to use the same architecture with only minor changes, but totally different vehicles such as the van and bus. When we populate our library with new components and systems, every new function can be reused across multiple vehicle platforms, reducing the time to market for future vehicle generations. To achieve such a high level of vertical integration we have developed and certified the core components line in-house at Arrival and we have filed over 100 patent assets. There are very specific strategic advantages to this approach. We save on supplier costs normally found in a traditional Tier 1 automotive supply chain. We can control modifications from end-to-end speeding up improvements and we can collect deep telemetry data to optimize vehicle operations and ultimately lowering TCO. Overall, we estimate ultimately 70% of our core systems for the van, including the drive unit, HMI, high voltage and low voltage elements developed by Arrival and many of these can be used across multiple vehicle platforms. And with that, I will pass over to Mike. Mike Ableson: Thanks, Avinash. Today, I want to focus on our achievements for vehicle certification and our progress towards start of production. As Avinash mentioned, we have now achieved bus certification European requirements. This is a significant accomplishment as it’s our first vehicle program that’s gone through the full process. Many of the Arrival components are shared between van and bus. So, achieving bus certification also gives us a head start on the van process. Our van certification is progressing well, with over 70% of the tests required for European certification already passed, including all crash testing. We anticipate completing the final handful of tests in the coming weeks, after which we will submit our results and wait final documentation for certification. We expect this process to be completed during Q2 of 2022. As the video shows our van development program already includes driving on public roads and we will surely be ramping up our trial activity with UPS. These trials will include testing on behalf of UPS in the EU, the US and the UK on both proving grounds and public roads. As our first van microfactory investor, we have completed installation of all of our production technology cells. Using these cells we have now completed assembly of the cabin and cargo structure to the chassis skateboard. As we expand the range of parts and processes being used in the technology cells, we are progressing through the validation of our microfactory method. Commissioning manufacturing facility is never easy, but we are continuing to make progress towards our anticipated Q3 start of production. For our Charlotte van microfactory, all required long lead equipment has been ordered and we expect equipment installation to start in late summer. The equipment for our Charlotte microfactory is essentially a copy of the equipment in the Bicester microfactory, so we won’t have to develop new processes with new equipment in Charlotte. Taking advantage of this commonality, we will have an accelerated commissioning process in Charlotte during the latter half of this year, leading to our anticipated start of production in Q4. We have also started production of our in-house developed mobile robots and continue to add new capabilities in order to optimize our overall microfactory processes. Most recently, this including adding a lift to the mobile robot, so we don’t have to duplicate lifting hardware across each individual technology cell. It’s another great example of Arrival developed technology enabling more efficient manufacturing processes. With that, I will hand it over to John. John Wozniak: Thanks Mike. First, I would like to note that affected with the first quarter of 2022 we are changing our reporting currency from euros to U.S. dollars, which we believe will provide better comparability of our financial results with our competitors. With that in mind, I would like to cover our Q1 2022 financial results. The loss for the quarter was $10.4 million compared to a loss of $1.2 billion in the year ago quarter. The Q1 2021 loss included a $1.2 billion non-cash charge associated with the merger of Arrival and CIIG. The adjusted EBITDA loss for the quarter was $66.9 million compared to a loss of $31.1 million in the first quarter of 2021. Administrative expenses were $54.2 million and non-capitalized R&D expenses were $27.7 million in the current quarter compared to administrative expenses of $43.4 million and non-capitalized R&D expenses of $11.5 million in the first quarter of 2021. Capital expenditures in the quarter were $99.1 million compared to $49.8 million in the first quarter of 2021. CapEx in the quarter included approximately $70 million of capitalized R&D, $25 million of microfactory CapEx and $5 million of tooling. And we ended the quarter with cash and cash equivalents of $735 million. Turning to our outlook, despite the continued industry wide challenges from inflation and supply chain constraints, we continue to expect to start production in Bicester in Q3 and in Charlotte in Q4 and to produce between 400 and 600 vans across these two microfactories. For the full year, we continue to expect adjusted EBITDA loss of between $185 million and $225 million and CapEx of between $380 million and $420 million. Our full year CapEx guidance assumes approximately $225 million of capitalized R&D, $100 million of microfactory CapEx and $75 million of tooling at the midpoint. We have sufficient capital on hand to achieve our 2022 production volumes and expect to end the year with between $150 million and $250 million of cash. However, we continue to see increases in costs across the business due to inflation. Finally, I would like to remind you of the long-term unit economics we expect from our microfactories. We expect total CapEx to be approximately $50 million for microfactory. We already see that Charlotte CapEx will be lower than Bicester as we make progress towards this target. In addition, we expect a van microfactory to contribute $100 million of margin when producing 10,000 bands per year on two shifts. Our contribution margin target assumes we will continue to optimize the vehicle bill of materials including arrival components, and improve operational efficiency and new micro factories. I’ll turn the call over to Dennis for closing comments. Denis Sverdlov: Thank you, John. Arrival is in a mission to build by replacing old vehicles with equitable electric solutions build by local microfactories. To address a meaningful market share our products must be great business must be hyper scalable, and we must radically change how vehicles are designed and produced. This quarter was a very successful for us, we have achieved a lot. First of all, we have got bus European certification. It is a testimony to our innovative technologies and our unique new method of design for electric vehicles. Our van has completed nearly all the tests required including crash test. Overall, our progress on certification has been a real highlight for us this year. It shows that concurrent vehicle development is made simpler by our software platforms and smart Arrival developed components which are shared across all vehicles. It means that we can design new vehicles much faster than traditional industry. We have achieved significant progress with our own unique production method using microfactories. The core technologists have been commissioned and they’ve been tested in our microfactory at Bicester. We are confident in our plan to start production of van in Bicester in Q3 and in Charlotte in Q4 and produce 400 to 600 vehicles this year. With that let’s start our Q&A. Operator: Our first question comes from Brian Johnson at Barclays. Brian, you lien is open. Brian Johnson: Yes. Thank you. Thanks for the progress update. A couple of questions. First, what’s the remaining 30% were up in terms of categories of components or certification tests that are needed over on the van side. What’s – what led to the bus getting certified faster in these 30%, shall we call it a punch list? Or is it – trying to figure out, is it a punch list things that need to be wear or just tests that haven’t been run yet? Denis Sverdlov: Mike, if you take this question? Mike Ableson: So thanks, Brian. A couple of things. First, your second question, why was bus certified first. It was always on an earlier time line. So both programs have been executing on their schedule that was driven by the fact that the bus is a much longer sales cycle. So in order to get vehicles out on trials, you want to get that one done first. To your question about the van trials. To be specific, as of today, we’ve completed 32 of the 41 certification tests required for European type approval. Very importantly, we have completed all the crash testing, which is typically the higher risk testing. So the remaining tests, we feel very confident about and as we said, we expect to complete type approval for the van in Q2. Brian Johnson: And second question, I’d love to ask what you… Denis Sverdlov: I just want to be very, very clear here is that we are actually on the time of certifying the van. So everything goes exactly like we plan. There is no . Exactly. So, we’re just reporting the fact on the time line that we achieved what we plan to achieve and we are on time in our certification in Q2 for van. I mean as we plan. Brian Johnson: Yes. I’d love to dive into the kind of CAD/CAM and it looks like kind of an interesting DevOps environment you’re using but we can do that off-line. My bigger question is, as you look at some of the struggles, it’s not lost in the world that there was a major lockup expiring at a competitor, vanmaker yesterday. Have you relooked at your economics versus the economics of both that start-up? And then since we’ve met you in the public markets, most of the major LCV makers have announced plans for not just electric vans but bed vans on platforms such as . So can you just maybe recap strategically where you think your cost is – I don’t know if it’s a levelized cost at scale versus either startup or a new entrant going at it the traditional way of bending metal or a scale LCV player who can share a lot of componentry and factory footprint with their van lines. Denis Sverdlov: Avinash should take this question. Avinash Rugoobur: So – yes, to a point we’ve seen a lot of new entrants both from the incumbents and new start-ups. With the vertical integration we have done and you’ve seen some of the benefits of that already now as we start to certify our vehicles. We still maintain a strategy that our price point is going to essentially be placed between ICE and other EV competitors. When everybody is following the same method in the industry, it’s really hard to have major breakthroughs in whether it’s the BOM structure or your manufacturing cost per vehicle. And that’s where we believe that our innovations provide us with that competitive advantage. So I would say that our pricing remains exactly how we planned. It’s going to be in between what ICE is and what majority of the competition are doing. We also have the additional benefit of providing our customers all the TCO benefits through the data that we covered in our last earnings call. And of course, the expected lower cost to produce the vehicles with the CapEx of the microfactory. So we maintain that both on the product attributes and price point and the ongoing benefits we can provide customers even with the new entrants. We haven’t seen many folks do things differently. So everybody is all going to sort of cluster in and amongst the same type of vehicles and the same price point. So we could still maintain our strategic advantage there. Brian Johnson: Okay, thanks. Operator: Our next question comes from Steven Fisher at UBS. Steven, you can unmute your line and begin to ask your question. Steven Fisher: Great. Thanks. Just with all the inflationary pressures and John, you made reference to this, can you just give us a sense of your path to positive gross profits that you mentioned kind of at full capacity there and how that’s changing? I guess I’m wondering, are there prices associated with the LOIs and nonbinding orders? Are you able to raise the prices on those before they become binding? How do we think about that, those changing inflationary dynamics and your path to gross profits? John Wozniak: Sure, I – well, let me make a couple of comments on inflation. Number one, it’s an industry-wide obviously, phenomenon. And so we don’t think that inflation is impacting arrival much differently than the overall industry. Clearly, we are seeing increases in costs. But in terms of our relative pricing strategy, we believe that remains intact even in the current environment. Earlier, Avinash referenced that we still expect to price our vehicles between where the equivalent ICE vehicle sits today and where the competitive EV set will be. And we expect that across the industry, prices of vehicles will increase with inflation. And it is important to note that in a number of our LOIs, we have yet to set pricing. And we think that, that gives us an advantage as we go into discussions because other than with a handful of customers, pricing is still an area that we have the ability to negotiate. And so we think we’re in a good spot with respect to inflation, at least relative to the industry as a whole. Steven Fisher: Okay. That’s helpful. And then maybe you could just give us a sense of your cadence of cash burn going from $735 million at the end of the first quarter, down to that $150 million to $250 million. Kind of what do you expect in Q4? And how should we think about the first half of 2023, if you’re kind of burning on average $150 million to $200 million per quarter for the rest of this year? John Wozniak: Cash burn definitely will be lumpy just given the dynamics of the business. We have CapEx that comes in sort of in chunks as we deploy the microfactories. We will be building working capital as we get ahead to start of production. I would expect that Q2 would be sort of our peak in terms of cash burn, and then we would see it sort of level off as we get in the production towards the end of the year. But it’s really because we are going to be building working capital in Q2 getting ready for start of production in Bicester in Q3. Steven Fisher: Great. Thank you very much. Operator: Thank you for your questions. I will now pass the call back to Avinash for closing remarks. Avinash Rugoobur: Thanks everybody for joining us today. As mentioned, we want to reiterate the Bus certification, which is a critical step for the organization. Van testing continues to progress as planned. And the major crush test being completed is at least an internal critical milestone for us. And strong progress in our microfactories, where we are using the same technologies, and now we are adding more and more processes that you will see at start of production, which remains on track for Q3 of this year. So, with that, I would like to say thanks to everyone for joining us today. Denis Sverdlov: I also would like to add just one comment. I really want to use this opportunity to remind how different our company is in terms of our methods to design and produce vehicles. And actually, Q2 was absolutely amazing for us as a company because we achieved major milestones. We proved that our components like working right, so that certification of the bus kind of confirms our assumptions in terms of how vehicles should be produced and the microfactory performance and operations are showing very good results as well. So – but I really would like to raise that point again that we see that probably just to go through a lot of challenges, but our advantages as a company, straightforward here. So, less CapEx than industry does today, we get time to market. Better product in terms of its digital functionality on all the components side, vertical integration. So, all those things gives us a very, very strong competitive advantage. So, we will start to see that actually decline we see right now, so. The inflation – every other topics, which we discussed, I believe that fundamentally, like organization is much more ready for the current situation on the market than any other company in this industry. Just because of the unique method of designing components, vehicles and actually production matters. So, I am enjoying to see like our benefits compared to like our advantages compared to other companies. And I am sure it will unfold with the next quarters as well. Thank you very much. Operator: We do have one remaining question from Berenberg. Michael, your line is open. Michael Filatov: Okay. Hey. Thanks guys. I am glad I snuck in here. So, I will keep it brief. Yes, I was just wondering, you have talked about the 400 to 600 vans for the full year. Obviously, that’s not your typical run rate on a quarterly basis, right, if you are looking at 10,000 per year. So, I am guessing – I just wanted to get your take on what we should expect in terms of production cadence for the Bicester factory and then as well as the Charlotte factory as we maybe move into 2023, right? Will we be at that $10,000 per year run rate, or should we expect sort of a slower ramp-up throughout the course of next year? Avinash Rugoobur: Go ahead, Denis. Yes. Denis Sverdlov: Yes. Michael, I don’t think that like you can make any judgment on this number from 400 to 600 to kind of to make the judgment for how it’s going to be like next year. So, actually, what is important here is that the part of our, like, so we have achieved like long-term investment plan for the company. Everyone, like including like everyone on this team rules here. And 50% of that motivation is based on the performance. And we have two performance metrics. Half of the performance is linked to production rate, so our production rate target is 20 vehicles per shift from one factory and another half is linked to the margins we are getting from one microfactory. So, those two key metrics for like our business model are built in within our . So, we are pushing hard as a management team to achieve these 20 vehicles per shift, and we expect to see, like, I don’t want to kind of promise expectation. But believe me, this is number one focus for all of us in the company to make it happen. So, after that, when we reached it first time like 20 vehicles per shift per factory, with – that’s already like we – you just multiply it by 150 days and two shifts, you get 10,000 per year. So, we are confirming those numbers. And actually, all the simulations, which we have done like within our software shows those numbers are like – not only achievable. So, this is the way how the factory was built, especially for those numbers. So, for that reason, we really see that 2022 for us is the year when we prove all our development and the engineering and other things. And we see 2023 already businesses like when we start to produce in volumes and getting the right margins and so on. Avinash Rugoobur: Yes, I would just remind you that on the Q4 call, we said we would ramp up production in those two factories through the first half of next year. I don’t think the limitation on our ability to ramp as the production method itself. We will have to keep a very close eye on supply chain, just given a lot of the constraints that we see out there. I think if anything is going to limit our ability to ramp up in those factories, it will be supply chain and not the production method itself. Michael Filatov: Yes. Fair enough. Just one quick follow-up as well, I noticed your LOIs in orders increased to 143,000, which I think is slightly up from the last quarter when it was 134,000, still a very robust number in an aggregate. But I noticed last quarter, it jumped up quite meaningfully from the quarter before. So, I am just curious as to why maybe this is such a step down in terms of the cadence of order growth and LOI growth relative to the last quarter? Avinash Rugoobur: Yes. I think what you are saying is… Denis Sverdlov: I will probably start this answer. I am not – like very quickly and then you will. So, first of all, you need to remember that we are focusing on the business customers. So, for – like for us, it’s not like opening the reiteration of website and then customers economic. We didn’t do that part of the retail side. So, it’s mostly focused on the particular companies. And actually, if you see the number, it’s already so big that we need to build more factories than we plan and can produce a lot of vehicles to supply that already realized the demand, which we receive from our customers. So, yes, Avinash, if you want to add here. Avinash Rugoobur: Yes. And to Denis’ point, you saw a large jump in the last earnings. And essentially, that was driven as we started to get the vans out in front of customers. What you are seeing this quarter is as we are approaching certification, and you will see this throughout the year. The attention is going to turn into conversion of those LOIs into binding orders. And certification really becomes sort of that critical milestone for that to occur. So, our sales team has already started shifting focus. So, going through different driver training, for example, potential customers, going through different product attributes, the software stack, etcetera, is becoming the focus of the sales team rather than simply going out and increasing LOI. Right now, as we have said before, I think everyone is very impressed by the product. And we are capacity limited, not demand limited. And I think it’s very important for us to get the first new microfactories going and it starts scaling from there because the demand is already there. Michael Filatov: Absolutely. Understood. Thanks a lot guys. Avinash Rugoobur: Thank you. Denis Sverdlov: Thank you. Have a good day. Operator: Thank you for your questions. This concludes today’s call. You may now disconnect.ARVL Ratings Summary
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Berenberg Bank Started Coverage on Arrival With Buy Rating and $17 Price Target
Analysts at Berenberg Bank initiated coverage on Arrival (NASDAQ:ARVL), an electric commercial van and bus manufacturer that de-SPACed in March 2021, with a buy rating and a $17 price target.
According to the analysts, the company is differentiated by its innovative new approach to manufacturing electric vehicles through a highly automated and vertically integrated microfactory model. The Arrival micro-factories will require less CAPEX, lower operating costs, and a shorter time to produce than traditional plants while enabling production flexibility and localizing the manufacturing footprint.
While there is an inherent risk associated with a pre-revenue and pre-production company, the company has spent years developing its vehicle architecture and microfactory model and has visibility to several key milestones over the next 12- 18 months with the potential to disrupt the legacy automotive model.
