Arrival SA (ARVL) 2022 Q2 法說會逐字稿

Hello, everyone, and welcome to Arrival's Second 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. (Operator Instructions) Thank you for your attendance today, and I will now turn the call over to Arrival.

Thank you all for joining us today to discuss Arrival's second quarter 2022 financial results. Today, we have Denis Sverdlov, Arrival's CEO; Avinash Rugoobur, President; Mike Abelson, 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 could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC and our second quarter 2022 earnings release issued today on the 11th of August.

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'll turn it over to Denis.

Thank you, everyone, for joining us today. In Q2, we hit a major milestone when achieved European certification on our Bus and Van. Now that we have certified Bus vehicles, commission of the Bicester microfactory is underway to prepare for the expected start of Van production in Q3, with expected start of Van deliveries in Q4 to UPS, our first customer.

We have also seen, in the past quarter, the world continues to face a challenging economic environment with both new players and traditional OEMs facing supply chain issues, an ongoing pandemic, geopolitical tensions and rising costs. We must address these challenges now as we approach the start of production, and have made the strategic decision to focus on operating the business in a downscaled manner through at least 2023 without the need to raise additional capital other than through the ATM, we announced it today, while preparing the company for growth when capital market is stable.

Our proposed plans include the realignment of the organization that we believe would allow us to deliver business priorities through at least 2023, utilizing almost $513 million cash on hand as of the end of the second quarter plus the expected proceeds from the ATM. This proposal includes a targeted 30% reduction in spend across the company. The decision has been taken to focus our resources initially on the Van platform, which makes up the majority of our MOU and order volumes, including our contracts with UPS and Leaseplan.

With this in mind, we are deferring further investments in the Bus program, while we secure additional capital. We have also made the decision to move the start of production in Charlotte in the U.S. to 2023. Our Bicester microfactory in the U.K. is the first-ever microfactory, and we will use production learnings we can apply to Charlotte.

In addition, we will defer cash spend by keeping Van parts on soft tooling and choose to strategically spread the investment in production tooling with our suppliers. Today, we are also establishing a $300 million at the market equity offering platform which, together with cash on hand and the cost reductions we have outlined, will allow us to extend our cash runway.

With that, I will pass it over to Avinash.

Thanks, Denis. Today, I want to focus on our demand pipeline, customer trials and start of production. Further to Denis' comments regarding the Bus program, I would like to emphasize that our mission to bring a certified Bus and Van to public roads this year is still being accomplished. The Arrival Bus is already operating on public roads as a shuttle between Arrival sites.

The Bus continues to be an important product for us as a business and our relationship with First Bus remains strong with their management impressed by the product and our achievements to date. As a result, they have committed to restarting the trials once we have a new road map for the platform. We remain excited to support First Bus in becoming a leader in the transition to a low-carbon future and their commitment to operating a zero-emission bus fleet by 2035.

The whole organization is currently focused on Van. And since achieving European certification, Arrival Vans continue to accumulate mileage on public roads in the U.K. This quarter, we plan to start trials in Central London. Trial Vans will be fully integrated in the customer fleet operations, supporting last mile shipments through Q4, and we expect the first deliveries of Vans to UPS to take place before the end of the year.

Right now, we are focusing on 1 microfactory and 1 product running on one shift, which will be a critical enabler to our initial ramp, cost and quality of production. Commissioning has begun in the Bicester microfactory to ensure a quality, salable vehicle is produced while continuing to make any optimizations required. Parts for up to 200 Van sets are being delivered now, and we expect to start production in the Bicester microfactory in a matter of weeks.

In order to reduce our near-term capital spend, we are starting on low-volume tooling and will strategically transition specific parts to high-volume tooling this year to increase production capacity. As we begin to ramp up production, the focus will be on controlling costs and achieving our internal quality targets.

Moving start of production in Charlotte not only reduces our near-term cash spend, it also allows us to take better advantage of the lessons learned at Bicester to further reduce both capital and operational spending in the Charlotte microfactory, where we expect to produce both our L and XL platforms.

We see strong demand for both platforms in the North American market. And with bold policies emerging in the U.S. through the Inflation Reduction Act, we are on the brink of witnessing historic investments into vehicle electrification, including a new commercial EV tax credit. This credit worth up to $40,000 per vehicle for medium- and heavy-duty vehicles, like the delivery vans that Arrival produces, will help reduce the upfront costs of these vehicles. Other provisions of the Inflation Reduction Act will address other barriers to adoption, such as EV charging for commercial vehicles.

Our nonbinding MOUs and orders have continued to grow to 149,000 units, which, if all completed, is over $6 billion in potential revenue. We have moved away from referring to our demand pipeline as LOIs since, in actuality, the demand is captured in the MOUs we have in place with customers that are duly discussed, negotiated and signed by both companies.

Now that we have achieved certification and begin production imminently, the sales team is focused on conversion in addition to growth, and we have strong customer engagement as evidenced by our large backlog. We are excited about this next evolution of our preorder sales into revenue. We see ourselves being capacity constrained rather than demand constrained.

And with that, I'll hand over to John.

Thanks, Avinash. First, I'd like to remind you that effective as of the beginning of this year, we changed our reporting currency from euros to U.S. dollars. Tomorrow, we will be filing a document with the SEC to recast our 2021 full year financial statements and footnotes into our new reporting currency. In addition, we will be filing U.S. dollar financial statements and footnotes for the first half of 2022.

Looking at our Q2 2022 financial results. The loss for the quarter was $90 million compared to a loss of $56 million in the second quarter of 2021. The adjusted EBITDA loss for the quarter was $76 million compared to a loss of $41 million in the second quarter of 2021.

Administrative expenses were $82 million and non-capitalized R&D expenses were $33 million in the current quarter compared to administrative expenses of $36 million and non-capitalized R&D expenses of $12 million in the year-ago quarter.

Capital expenditures in the quarter were $95 million compared to $79 million in the second quarter of 2021. CapEx in this quarter included approximately $60 million of capitalized R&D and $35 million of microfactory CapEx and tooling. And we ended the quarter with cash and cash equivalents of $513 million.

Turning to our outlook. We ended Q2 with approximately $513 million of cash and cash equivalents, have begun a restructuring of the business to reduce costs, including a targeted 30% reduction in our global workforce and today are establishing a $300 million ATM platform to sell equity into the market from time to time. These actions will allow us to start production in Bicester, deliver our first vehicles to UPS this year and start production in Charlotte in 2023.

Due to the restructuring and a slower ramp in Bicester, we expect lower production volumes in 2022 than previous estimates. These changes will allow us to operate the business through at least 2023 without needing to raise additional capital, other than through the ATM, and prepare the company for growth. In addition, we will continue to opportunistically consider additional sources of capital to accelerate the business.

We are expecting to start production in Bicester this quarter. And although we have parts to build up to 200 vehicles, some of these sets will be used to build vehicles for internal quality and additional customer trials. We currently expect to deliver a target of approximately 20 vehicles to customers this year. Due to transit times and entering our customers' busy holiday period, we do not expect revenue in 2022.

For the second half, we expect adjusted EBITDA in the range of $175 million to $195 million and CapEx between $40 million and $60 million. CapEx will primarily be for some initial high-volume tooling and finalizing the commissioning of Bicester. We expect to end the year with approximately $300 million to $350 million of cash and cash equivalents, inclusive of expected proceeds from the ATM of approximately $90 million this year and $210 million in 2023.

Finally, I would like to remind you of the unit economics we expect from our microfactories over the longer term. We continue to expect total CapEx to be approximately $50 million per microfactory with a contribution of over $100 million of annualized margin when producing 10,000 Vans per year on 2 shifts. We believe this annualized contribution margin target is achievable by the end of 2024. Our contribution margin target assumes we will continue to optimize the vehicle bill of materials, including Arrival components, and improve the operational efficiency in subsequent microfactories.

I will now turn the call over to Denis for closing comments.

Thank you, John. I would like to remind everyone that what we are doing is very complex and no one has done it before. We have been developing incredible enabling technologies. Our own core components and device software that are now certified. Proprietary composite materials that eliminate expensive paint shops and metal stamping and is designed for production with a Class-A finish.

Autonomous mobile robots to move parts and vehicles in the microfactory replacing a conveyer belt. Software-defined microfactories, which reduces CapEx and time to market, the CapEx of all of the key operations required to assemble a vehicle. We managed to design (inaudible) vehicle platforms that are currently undergoing road trials. All of these technologies are coming together, which is something truly unique in the industry. New method to design and produce vehicles. It means our business can scale very rapidly with fast time to revenue.

Our ambition is to produce multiple vehicle platforms in hundreds of microfactories, each producing over $100 million of margin per annum, equating to 1 million vehicles and target $10 billion margin per year.

Our enabling technologies, proprietary hardware, software, materials and next gen robotics sets us apart from the rest of the industry. The start of our first microfactory is a big step towards achieving our mission. It is the move from 0 to 1.

With that, let's start our Q&A.

(Operator Instructions) Our first question comes from Steven Fisher at UBS.

Wondering if you could just talk a little bit about what happened over the course of the quarter that caused you to take the delivery expectations from 400, 600 down to 20. I'm sure there are a variety of factors there, but maybe you can just talk about that a little bit, that would be helpful.

Look, actually, many things happened. And first of all, we do -- like instead of 2 factories, we do one, and we do this to save cash. I mean so this is #1. So our capacity is reduced. The second one is actually supply chain and the -- how we're receiving the parts. It's -- you know that all market is impacted. So it's nothing particular, complex there. So it's not about that we're not receiving something. It's just sometimes -- it's delayed. I mean that it just comes later than it should be.

And the third one is we've actually taken very conservative (inaudible) we wanted to make many shifts to push the volumes for the end of the year, but we are switching our mode to more preserving the cash because like anything you do on extreme level, so it just costs more. And we understand that we will have like more shifts, but not fully utilize immediately because of ramp up. It just -- we just will waste the cash.

So we decided that strategically, it's better for us to spend cash much more careful and focused on delivering first vehicles in a perfect condition to our customers and then scale from that point. Because materially for us as a company, there is no big difference between, I would say, like 400 vehicles or like 20 because number is small anyway. I mean so we wanted -- like our factories are designed to produce 10,000 vehicles a year.

So we will produce them, obviously, but a bit later. And the fact why it's happening because if you plan 400 to 600 vehicles from the beginning of the year, you still have a lot of buffers like inside. So if something didn't happen within a couple of weeks in the beginning, so you still have time until the end of the year to address that. In our case, everything is happening with the last 4 months of the -- actually, like, yes, in the last 4 months of the year.

So any delay with the supply of a couple of weeks, it's a big impact on the overall time we have within the year. So actually, like we are extremely happy about Q2. I mean so we achieve amazing things. I mean so first one is certifying our vehicles. Like we did it much, much quicker than industry does today. So even the organizations which were certified, they have been very impressed with the efficiency and how fast we managed to do this.

It's really like important one because it's never been done before like in industry. And we do it first time. And from first time we did it right. And we already got a very strong competitive advantage on this stage. So we know how to do this certification, and we have all the necessary tools and skills like to do that. So this is a big, big event for us.

The second one is that actually factory works. So we installed all the equipment. Parts are -- like all the parts which are like (inaudible) we go over through the stages of assembly, and it works the way we plan. Again, we do it like first time. It's never been done before. It's something which like we were planning and predicting, but we're so pleased that it happened actually the way we planned.

Even like world around us is very distracted like with everything, but we managed to keep us on track. So in general, we believe that -- like our results of Q2 are remarkable and amazing. So we're extremely pleased with that.

That's helpful. And I guess when in 2023, at this point, do you expect to start production in Charlotte? And just latest thoughts on how quickly you think you could ramp up to that 10,000 unit production at both locations.

Look, I really don't want to speculate on that particular question because, of course, we have our internal plans, and we believe that our method, because it's not a complex factory, it's a very small factory, 10,000 square meters as assembly line. Only assembly line is 10,000 square meters. So that it's not so many people who we need to train and organize kind of things. And we found [like equipment is] relatively straight forward.

So our internal plans is normally it should take us 6 months from the moment we start to put equipment to the moment factory is ready. And of course, we are taking the learnings from the Bicester factory. So we don't need to go through the same stack. So we're expecting that Charlotte will be much quicker in terms of ramping up because we will take all the learnings from the first factory.

I don't want to give you a particular number that -- to make a promise, but we are -- we believe that the Charlotte factory is going to be a jewel in our -- like in our business, in the way that we will -- like we are like extremely pleased with what's happening in Bicester. But as well, we know many things we want to optimize. And the Charlotte will turn out as a much better version of that. So we cannot wait when we will start it.

I just want to remind everyone that microfactories are essentially, they're built to scale rapidly with faster time to revenue. So I think that's getting the first one right. We'll be able to scale microfactories rapidly, of course, depending on access to capital.

So -- again to Denis' point, we're not discussing '23, but we do have a very unique production facility in the microfactory that lets us scale in parallel at 20,000 square meters regular warehouse like we've talked about before, off-the-shelf equipment and all our own internal processes.

Yes. Another color which I want to give is that right now, we are switching from the mode where we have 2 products, 2 shifts, 2 microfactories to the mode where it's 1 factory, 1 shift, 1 product. And I want to say, as the CEO of the company, I would say that we should do it before, but we've been so much focused on the growth so that we felt like let's do more.

So now with again like changes in the market so that the cash spend is much more important than anything. So we believe that this opportunity to switch to the mode where it's 1 product, 1 factory, 1 shift gives us a better chance to be successful. So I think it's something which we should do anyway.

And I think it's a level of flexibility that the rest of the industry doesn't have.

And John, maybe just lastly for me. What's your expected ending cash at the end of Q3? And I know you intend to draw the $210 million next year, but what's the -- when does that draw expected? And what do you expect your end of '23 cash balance to be?

So I expect us to end '23 with cash in the bank currently. I think I referenced that we would end Q4 with between $300 million and $350 million of cash. I would expect -- just given the fact that we're in the middle of executing right now the cost reduction initiatives that we've announced, I think the cash burn in Q4 -- I'm sorry, Q3 will be more than I would expect in Q4.

I don't want to guide and -- in Q3 cash. I think we're on track to hit our Q4 cash guidance. And I do expect to end '23 with cash in the bank. I think looking sort of out beyond 2022, we're targeting, it's going to be lumpy as we go throughout the year, but somewhere between $100 million and $150 million of cash a quarter depending on which quarter that we're in and sort of how we're looking at the cash burn next year.

To comment here that we were saying that we are saving -- we're planning to save up to 30% of the spend, but it's not because we've been not efficient in cash spend before. So we're extremely efficient. I mean so if you just see how much cash we spend so far in the history of organization, like what we achieved, so I don't know a more efficient organization than we are in this industry.

And what happened right now is that we are reducing the scope. So because scope is becoming smaller, we need to have less people to do that and our spend is going to be less as well. So that's our exercise we do here.

Your last question comes from Jeffrey Osborne with Cowen.

Just one clarification on the cash, and then I have a couple of questions for Avinash. On the cash, John, do you expect any cash restructuring costs in Q3 or Q4?

It's -- it is included in our expectations of year-ending cash. Our current view on restructuring is it will be approximately $25 million. Most of that will occur in Q3.

Got it. That's helpful. And then either for Avinash or Denis. In Bicester today, are all the cells, I forget it's 12 or 14 production cells, remind me there, but are those set up? Have you produced any preproduction vehicles in series with all of those? Or give us an update on if I walked in the factory, what I would see, would be helpful.

Look, we did everything we could in terms of test with the parts we have because, again, we're trying to limit number of sets we're using in the factory for all the commissioning. So we used all of them, like everything that was available. And we run like dry runs and what physical full runs like on the factory.

So now if you will go to the factor, what you will see, you will see the parts like a cabin or a structure, which are actually physically assembling right now, it's happening. But now today, tomorrow, like every day.

AMRs fully working and installed...

Battery models are produced from the factory from the production process. So like it's -- we are in a very good shape now.

That's great to hear. And then I was just curious, many of your peers in the EV space have been raising prices to fit a battery in place and I think your prior positioning of the vehicle was more expensive than the incumbent Morgan Olson UPS vehicle, but less expensive than competitive EV solutions. I'm just curious, has your pricing philosophy changed?

The philosophy hasn't changed. Yes, Jeff. The philosophy hasn't changed, will remain in line. As you can imagine, we have rising inflation and supply chain issues. This is a challenging market for all the industry where generally prices are going upwards, but our philosophy to be competitively placed between ICE vehicles and competitive electric vehicles remains the same.

And just to be clear, we expect our ASPs to increase with the industry.

Thank you for your questions. I'll now pass the call back to Avinash for closing remarks.

I'd like to thank everyone for joining. As mentioned by Denis, this is a very big moment where the industry sees the microfactory for the first time producing vehicles coming this quarter. So as Denis mentioned, this is a 0 to 1 moment. This is, we believe, fully transformative in how the industry will operate going forward. So thanks, everybody, for joining.

Yes. And I would like to also give a little bit of comment here, is that -- like I founded this company in January 2015 with a vision that there is a better way of making electric vehicles. And actually, ultimately, I want to see that it's not only electric vehicles. I mean it's for anything. I mean it would be like the other industries as well, like furniture or electronics and many other things. So we will see that. We just decided in the beginning to do it with electric vehicles, and this is our focus to do commercial vehicles.

And then it was like planning for like what should come together. I mean so all those technologies, which were never existed on the market before, it's not something you can come and buy on the market. So we needed to develop a lot of components, create the team which is capable to (inaudible) create the software for that. Actually, do the full design.

If you just see our Van, actually in the shape it is now better, what we call it a better (inaudible) only in February 2020. So it took us less -- like a bit more than 2 years from the moment of the first stage to the moment vehicle was certified. It's never been done in the industry before. I mean so it's -- like normally it takes like at least 5 years to do that, but we managed to do it within 2 with much smaller resources like to do that.

And then all the kind of things around what factories, they were envisioned that the robots is going to be flexible, like one factory can produce many type of models from the same factory. It's something, again, like totally new interfaces, which are instead of welding -- like new materials, which is not standard metal body but like new type of composites.

I mean so we -- all this planning is -- and then it comes to the point where in Q3 2022, this all comes together. And for me, it's the moment almost like assume you're in the dark room, you're like hitting the darts, and then like the light goes on and the dart is in the (inaudible). So that was the mission impossible we're doing. And I'm so happy that it's happening so that like in Q3 this year, we already know it works exactly the way it was planned in 2015. So watch this space, many things are going to happen here.

Thank you, Denis. This concludes today's conference call. You may now disconnect.