Arrival (ARVL) on Q1 2021 Results - Earnings Call Transcript
Operator: Hello everyone and welcome to Arrival’s First Quarter 2021 Earnings Call. 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 speaker’s 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: Good morning, and thank you all for joining us today to discuss Arrival’s first quarter 2021 update. 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 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. Denis Sverdlov: Thank you, Mitesh, and thanks to everyone for joining our webcast this morning. The main message today, our business plan remains unchanged, and we are making great progress towards key milestones. Just to remind, Arrival was founded in 2015 with a vision to recognize the electric vehicle space, accelerate the transition to zero-emission vehicle globally and bring cleaner air to our cities by using unique powerful technologies developed in-house. So, why Arrival is different to any other automotive company? First of all, we invented radical new methods to design and produce vehicles through the microfactories. So we use no stamping, no welding, no paint shop and this method is protected by them. The new methods creates best-in-class EVs with attractive value proposition for fleet operators, Our zero-emissions buses, vans and cars are competitively priced to fossil fuel vehicle and no for up to 50% lower cost of operation, the hardware and software upgradable, our components are lighter and more durable than steel, decreasing the maintenance costs and increasing the lifespan of the vehicles itself. Our microfactories are hyper-local. They’re rapidly scalable with low CapEx, for example, our van factories $1,150 million for 10,000 vehicles a year. We are virtually integrated developing parts and components with a very strong IP portfolio. Arrival is a low CapEx and high margin business enabled by hardware, software and next general bodies. We have strong demands and $1.2 billion per quarters. We have the unique culture and top team of more than 1,900 people capable to execute their business plan. And we believe that the purpose of Arrival is to make radical impact. So let’s focus on the results of Q1. First of all, we successfully completed our merger and lifted our shares that are now back in Q1 as planned. Next, very important part of our business are micro factories. So, we made good progress preparing our micro factories. To date, we announced and started to keep micro factories in Charlotte, North Carolina; Rock Hill, South Carolina; Detroit in UK and we announced the fourth of our factory in Madrid in Spain. Mike will talk about this a bit later today. Avinash Rugoobur: Thanks, Tim. In Q1, we continue to execute on our business plan and we are experiencing strong momentum. We are encouraged by our sales pipeline with non-binding letters of intent increasing in Q1 both year-over-year and sequentially for both our bus and van platforms. And we have trial starting with these key customers later this year. Once those trials begin, we expect those letters of intent to be converted, to fully executed contracts before the start of production. Mike Ableson: Thanks Avinash. Arrival’s Microfactories, our unique approach to vehicle manufacturer and enable the production of best-in-class vehicles specific for the market, prices competitive with fossil fuel vehicles. Microfactories are low footprint, rapidly scalable and low CapEx as compared to traditional OEM automotive factories. As we continue to order equipment for first two microfactories, we can confirm that we remain on track to spend less than $50 million in CapEx per factory, specifically for the Rock Hill microfactory, we have over 70% of our production machinery delivered or on order. And for our Bicester microfactory, we have over 60% delivered or on order. We’ve started to install equipment in our Bicester factory that we’re using to confirm the results of the production process analyses we’ve already completed. To this point, our actual results are exactly in line with what we expected. Using the production equipment, we’ve already completed assembly of the van chassis structure and operation that required fitting multiple parts and joining them together with both adhesives and a variety of mechanical fasteners. We’ve also begun producing concept panels at Bicester using production equipment and raw material from our production supplier. In addition to our First Bus microfactory in Rock Hill, South Carolina, we’ve also recently announced our first U.S. van microfactory in Charlotte, North Carolina. The Charlotte microfactory will build vehicles on both our van and large van platforms as vehicles on both platforms are intended to be part of the UPS order. Similar to our Bicester UK microfactory, the Charlotte microfactory will be capable of producing 10,000 vans per year when operating on two shifts. Finally, we’re announcing today that we’ve acquired a location for our first European van microfactory in Madrid, Spain. We’re still in the process of determining a starter production date for this facility. Tim Holbrow: Thanks, Mike. The financial information we’re providing today represents management’s expectations of the underlying operational performance of the business during Q1 2021. We expect to provide our full financial results for Q1 when they are available. These Q1 results will include the accounting impact of the merger with CIIG that was completed on March 24, 2021. The merger raises a number of one-off accounting methods. And while Arrival has progressed well in finalizing them, they remain subject to completion of the ongoing audit by our external auditors. As such, in this Q1 report, we’re representing management’s expectations in relation to certain financial highlights prior to the inclusion of these merger-related items. For clarity, the items excluded from today’s reports include but are not limited to the accounting for the CIIG merger itself and any resulting charges from differences between the fair value of Arrival shares and warrants issued and the net assets merged into the group. The accounting for other share exchanges performed in preparation for the merger, the accounting for warrants issued by Arrival at completion and the accounting for one-off transaction costs formed by Arrival and one-off executive transaction bonuses. Excluding these CIIG merger-related items, management expects Arrival’s EBITDA loss for the first quarter of 2021 will be €28 million. By comparison, the EBITDA loss in Q1 2020 was €14 million. Taking into account, the equity settled Share Option Plan costs of €1 million, management expects the adjusted EBITDA loss prior to inclusion of merger transaction costs will be €27 million. The increase in operational expenditure affects the increased activity within Arrival across its portfolio of research and development projects, and the activity in our Automotive and Elements division as we prepare to enter production. This increase can be seen in our average headcount in quarter, which almost doubled year-on-year to 1,714 at the end of Q1 2021. Avinash Rugoobur: Thanks, Tim. In conclusion, our business plan remains unchanged and we made significant progress in Q1. We have a strong demand environment fueled by industry tailwinds, and we have the team and resources in place to execute our vision. Thank you all for joining us today. And now we’ll go to Q&A. Operator: Your first question comes from Jeff Osborne with Cowen. Jeff, your line is open. Jeff Osborne: Hey, good morning, guys. Thanks for all the detail on the call. A couple of questions on my end. One, Mike, I think you alluded to it in the comments about the expectations for throughput for the facilities, but can you give us some comments on the robots in your pre-production facility in the UK and level of comfort with the throughput expectations that you originally laid out in the SPAC merger deck of a 1,000 vans or a 1,000 buses and 10,000 vans per se. Mike Ableson: Happy to do that, Jeff. Thanks for the question. To your point, we’ve designed this facility such that our van microfactories will deliver 10,000 vans when they’re operating on two shifts and the bus microfactory will deliver a 1,000 buses when operating on two shifts. I want to be clear that some of the video that you saw was production equipment that’s now being installed in our actual microfactory in Bicester in the UK. We have production equipment operating in the production environment. So it’s not just being done in R&D facilities at this point. To get specifically to your question on capacity and throughput, we’ve done extensive modeling of all of the processes and the systems in the microfactory. So we have very high confidence in that and the work that we’ve done so far with the actual robotic cells in Bicester confirm that analysis to this point. Jeff Osborne: It’s great to hear. And then maybe a question for Avinash in your segment, you had talked about letters of intent being up sequentially. A common question we get from investors is the bus market domestically in the U.S. in particular, where prior to the SPAC merger, you didn’t have any sort of publicly announced bus backlog relative to the van market. So can you talk about what your level of comfort is of bus demand in North America for that South Carolina facility? I assume a portion of the LOIs for that? Avinash Rugoobur: Yes, you’re right. So we have actually think, LOIs come in for the bus as well. So it is for both bus and van, we’ve got a multiple increase on LOIs year-to-date as I mentioned. And it’s actually quite evenly split between the U.S. and EU. So we actually seeing – I would say a significant increase in demands in the bus segments in particular. Just to remind everybody that the sales cycle for bus typically is going to be trials first before long form orders. And so we have announced the bus trial in the UK with First Bus and that’s happening in the fall of the ship. But yes, to directly answer your question, we have seen LOIs come in for our bus in the U.S. in particular. And we’re quite comfortable with the demand and therefore the forecast that we’ve put out today. Jeff Osborne: Perfect. And few other quick ones, one of the Madrid site, great to hear, is that going to be for bus or van or is it still TBD? Mike Ableson: That’ll be for van, Jeff. It’ll be our first van Microfactory on the continent. Jeff Osborne: Got it. And then, well, last one back to the bus side and van in South and North Carolina, where do we stand on sort of a timeframe for Altoona testing for buses and any other certifications that are needed on the van side so that we can start selling roadworthy vehicles that have all the safety certifications. Mike Ableson: So the Altoona testing, as you know, is particular to sales to transit agencies in the U.S., they use federal money to purchase the buses. And we will be putting one of our very early bills from Rock Hill onto the Altoona test. So that will run beginning very early next year. On the van side, the key certifications are meaning both FMVSS and EU certifications were well along on meeting those, and I don’t foresee any difficulties there. Now, since you asked about Altoona testing, I also want to emphasize that our sales team in North America is talking to people in Canada and Mexico, outside of the U.S. and obviously any sales there would not require the Altoona certification. So as Avinash said, we’re feeling very comfortable about our bus demand in North America. Jeff Osborne: Got it. And then just very quickly, Tim, no changes to the modeling in terms of cash burn or CapEx expectations. It sounds like everything’s in track with what you previously disclosed, but I just wanted to confirm. Tim Holbrow: Yes, that’s right. That’s right. Yes. We – obviously, we recently announced our full as part of exposure of the measure we did see guidance. Thanks. Jeff Osborne: Perfect. That’s all I had. Thank you guys. Avinash Rugoobur: Thanks, Jeff. Tim Holbrow: Thanks, Jeff. Operator: Your next question comes from Rob at Wolfe. Rob, your line is open. Rob Salmon: Hey, good morning. And thanks for taking the question. In light of your comments – in light of, I guess, rising inflation, you talked about having a line of sight with supplier readiness for 2022. Can you give us a sense if there’s been any changes in your overarching BOM expectations or kind of through 2022, as well as looking out beyond 2022? Mike Ableson: I would say, Rob, we have not seen an impact on any of our negotiated pricing with suppliers at this point. Obviously, we can’t predict exactly what’s going to happen with inflation rate, but to this point, we haven’t seen any impact. Rob Salmon: That’s helpful. And then, just as we’re getting closer to the service centers becoming production ready. Can you give us a sense of the status of your suppliers with the components that you’re outsourcing in terms of their readiness for the fourth quarter of this year, and then looking out to the second half of 2022? Mike Ableson: So I didn’t mention it explicitly in the remarks, but at the same time, obviously, we went out and looked at all the chip availability for our in-house components. We also surveyed our Tier 1 suppliers as far as their readiness and their availability and everything looks to be on scheduled out. I want to mention Rob we’re operating in much lower volumes than traditional OEM. So the number of – in the case of chips, number of chips we’re trying to secure is relatively small, which I have committed is probably one of the reasons we don’t see the same difficulties that some of the larger OEMs are seeing. Rob Salmon: That’s very fair. And I guess, in the early forecasts that you had your bus, which obviously is going to be the first product that’s coming to market. Your pricing is kind of meaningfully below kind of what industry averages are today for the electric bus. Have you guys thought – have you made any tweaks to kind of what your go-to-market strategy is from a bus perspective, just given underlying demand and industry pricing dynamics in North America? Mike Ableson: We haven’t seen anything as far as pricing dynamics in North America that would modify our initial approach to pricing here. To your point, as far as we can tell, we can still comfortably price below our competition, our EV competition here in North America. Denis Sverdlov: I just wanted to add a very important point is that obviously it’s not all on our ability to make bus pricing much better than other players in the market. So I think the major question is why? Why is it like this? And the reason for this is because, there are a few reasons. One is that we were using quite many components from demand. So it means that we taking high volume products and putting them in the bus. So the good example here that biggest bus producer today is like probably they’re producing 15,000 units a year, like a Chinese company. But still for the market, when you buy 15,000 motors, it’s very small volume. And that’s why the prices for those components are very high. In our case, because we were using components from the van, and as an example, we have four motors, exactly the same as van is using in our bus, so this is one of the reasons why our buses are so much cheaper. And the other important part is that the robotic assembly parts as well. So it means that, there are not many companies in the world for assembling buses using robotics. And this is another reason why, like, we can price our buses better than other players. Avinash Rugoobur: And I think we’re also very comfortable with the product position in our conversations with operators around the world. We’re not comparing apples-to-apples, when we look at the Arrival Bus and benefits the background there and the technology that’s going inside that bus. And when you compare it to what’s available from many players who are taking potentially diesel buses and saying those electric. It’s just a very strong product proposition with a fairly attractive price point. Rob Salmon: Appreciate the time. Avinash Rugoobur: Thanks, Rob. Operator: Your next question comes from Brian Johnson of Barclays. Brian, your line is open. Brian Johnson: Thank you. A couple things, first, when you talked about the build-out of the first plants site, Mike, you had mentioned that so far it’s tracking simulation models. So how much, what percent of the assembly line is actually finished, and then when do you think not so much job one, but kind of the first end-to-end validation of the production process should be coming? Denis Sverdlov: Mike, one moment. I would like to go to answer this question, just want to give an important angle is that we need to remind you that like our matters of assembly is not the conveyor line, so it’s not operations in sequence. So it means that we don’t need to build all factory before we know all the operations. So we have a few cells installed already and permissions, and those cells are capable to do a majority of operations within the vehicle. So we’ve made that. As person, I’m not that allows us to know earlier – much earlier than the way that you like all the improvements look to be installed. Mike Ableson: And Brian, to your question about end-to-end builds, we intend to be building some of our late stage prototypes of the vans through the production process that Denis talked about later this summer. And that’ll be after registered. Brian Johnson: Okay. And second question, while I recognize that the subsidies for buses and school buses in the U.S. is still very much in draft legislation form. What’s your thinking on the six centers going to be Buy America provisions there, and then how the South Carolina, North Carolina factories will fit into the potential into that – into those, whatever boundaries lawmakers may put on the subsidies? Mike Ableson: Yeah. So there are, to be clear, there are already Buy America requirements in place or transit buses that are purchased using federal money. And the requirement is already 70% of the contents has to be made, and we will meet those requirements with the Rock Hill assembly plant or microfactory with buses. There is nothing established yet on the van side, but obviously because we shared so many components between the bus and van, as we established the U.S., bus supply chain, it gives us the ability to go to a very high level of U.S. content on the van side as well for the vehicles we’re building in the Charlotte microfactory. Brian Johnson: Okay. Thank you. Operator: Your next question comes from Joseph Spak with RBC Capital Markets. Joseph, your line is open. Joseph, your line is open. Joseph Spak: I’m sorry. Can you hear me now? Denis Sverdlov: Yes. Yes. Joseph Spak: Thanks. Just some questions on the Uber announcement. One, I guess is it exclusive with Uber? Are you allowed to work with other ride sharing companies? And two, is the vehicle design that you were working with a Uber, also to the Uber or can elements of that sign Avinash Rugoobur: So on that partnership, the emphasis of both of the notice, no exclusivity. We’ve asked only Uber. We’re working several on the vehicle design, but that vehicle design is for a ride sharing vehicle. And also we are already in discussions with several of a ride hailing operators on the Arrival Car platform. So there is no exclusive agreement between us. Joseph Spak: Thank you. Denis Sverdlov: And just to add to this point is that you all know that companies like Uber and Uber explicitly announced their plans about execution. There’s a huge push on those types of companies to bring electric vehicles to the cities. And we know that there are not many options actually for well for this market is that, we already know that just taking the vehicle with traditional standard mechanical design, especially the cars. It’s not enough to create the right user experience for customers. And they were not designed to operate in this conditions as well. And it’s – and probably it happened that the industry didn’t use the vehicle for that market yet. That’s the reason we’re focusing on that. These our focus because the company – we didn’t commercial vehicles and this is the with example where our tech technologies and microfactory assembly is in microfactories enabling business for the scenario. Joseph Spak: Okay. On the microfactories, in a part of the strategy there is to be able to build locally – supply locally and I know you’ve mentioned a number of times that they can each have around 10,000 capacity on two shifts. But I guess what I’m curious about is like is it – if the demand is eventually there, what’s the – what do you think that like the functional or economically viable area of a given microfactory conservatives before you need to open another one like closer to the factory. Mike Ableson: Again, to be clear, our strategy on micro factories is we’re going to be expanding the number of micro factories very quickly. And so, we’ll move briskly, I would say to add additional micro factories. To your question, the sizing and the micro factory capacity, one way to think about it is we think it’s roughly sized so that it could supply a city of a million inhabitants in a very rough basis. So that can give you some idea, I guess. Joseph Spak: Okay. Thank you. And then final question is, I know you mentioned van trials this summer. How long are your customers telling you that they need to really try all these vehicles in the fleet before they have competence to place a larger procedure… Mike Ableson: So the trials encompass several different kinds of trials. They’re obviously trials with drivers that you saw. We’ve already started in the Camden Depot, outside of London, where we get driver feedback. Then there are operational trials where the vehicles will be going out on actual routes later in the year. And then typically the large commercial fleet operators also have some sort of durability testing that they require, and that varies from company to company, but we’re aware of those testing requirements and we’ve got them built into our schedule. Avinash Rugoobur: I would also just add on the van, what we see is that, that’s really just an early part of the process given where we are. Obviously, once the van is in production and all the certification is done. We expect very short, if not, no trials before the patches off the vehicles. On the bus, as we approach new operators that will consistently be a trial period. And on that, it can be a month. It can be a quarter. So that’s what we’ve seen so far. Mike Ableson: And I think Avinash makes a very important point as we think about moving into the small and medium enterprises. We think that the fact that we’ve passed all this testing with the large commercial operators will give them the small and medium fleet, a lot of confidence to order the vehicles. So it’s just one of the several reasons we’ve decided to start with the large commercial fleet operators. Joseph Spak: Yes, that’s fair point. Thank you very much. Mike Ableson: Thank you. Avinash Rugoobur: Okay. So I think that was the last question. So we’d just – we’d like to, before we leave just reiterate the key points. I think there is a… Denis Sverdlov: Avinash, on the – and before you open the slide, I think one slide, I think one comment, the point is that we actually gave two very important numbers on this call today. So which is our cost, which we pivoted in Q1 and like our cash used, and I think it’s quite important guys to mention that we are like 1,900 people organization. And, if you just compare like our numbers with like other players in the markets, I’m sure that you will see that how efficient we are in the way, how we use funds, actually preparing many factories in parallel, but also, not one vehicle program, but four vehicle programs at the same time. Avinash Rugoobur: Which is enabled by the… Denis Sverdlov: Which, actually the secret sauce here is our new method, actually it’s technologies and the new method of making design and – some of the vehicles. So this is the – actually the first fruit we’re getting out of this method, which we achieved, we made proved numbers. Avinash Rugoobur: Thanks, Denis. So if you can just show the slide. Thank you. So just to reiterate our business plan remains on track. As Denis mentioned, we have the four vehicles under development in market by the end of 2023, upcoming later this year and the two van variants, the large van and the small van – and the full-time van in the second half of 2022 and the car in Q3 of 2023. We have four microfactories being built, two in the U.S. and one in the UK, and we announced Spain today and Madrid. We have the strong demands with tailwinds, we have obviously the government policies, but also we have a private company’s commitments to transition to being electric. We announced our arrival car partnership with Uber, and that is a very large market at 30 million units. And we’ve secured our battery supply from LG Energy Solution. As Denis also mentioned, we have a 1,900 employees, we have the talent resources to execute. And really this is enabled by our new method and its live, we believe arrival is unique with our microfactories, our vertical integration on hardware, software materials, next-gen robotics, our unique assembly process, and most importantly, our vehicle attributes and price. So with that, thanks everyone for joining and see you next quarter. Operator: This concludes today’s conference 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.
