Arrival

Good morning, and thank you all for joining us today to discuss Arrival's second quarter 2021 financial results. My name is Mitesh Soni, VP of Investor Relations, and with me today is Dennis Verlof, Arrival CEO, Avinash Raghubur, President, Mike Abelson, CEO of Automotive, and Tim Holbrow, Interim 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. During the call, we also refer to certain non-IFRS financial measures. These 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 Dennis.

Thank you, Mitesh, and thank everyone for joining our webcast this morning. The main message today, Q2, was great for us. We increased number of vehicles inside LAIs by four times during first half of this year. We received two more orders, and we have very strong interest for new microfactories all around the world. Our main activities, like sales, microfactories, procurement, are all on track. We have very strong evidence that our new method works and our customers require more variants of our products. Based on that, we have expanded our R&D and accelerated CapEx for our microfactories. Just an example, one of the biggest challenges we faced was to develop new materials in the production process of body parts. Our first production line of body parts started to work and has already produced more than 500 composite panels at Bisto Factory. I would like to use this opportunity to remind that Rival is a very unique company. We have invented a new method to design and produce vehicles using microfactories. And this is something which has never been done before. As President Biden recently tweeted, the future is electric. And this is something we have believed and been developing for since 2015. We are on a mission to have clean air by replacing all vehicles to electric produced by local microfactories. We are focused on commercial vehicles now, but our method does not limit us. only to commercial vehicles. So we have managed to create best-in-class electric vehicles. We call them devices on wheels. They will have competitive pricing with up to 50% low cost of operations. This radical new method to design and produce electric vehicles using microfactories allows us to avoid stamping, welding, and penships. Our microfactories are rapidly scalable and low complex. We are vertically integrated and have developed in-house tech with a very strong IP portfolio. We witnessed strong demand for our products and we continue to grow our team. Now we have over 2,200 full-time employees. All this will make us high margin business enabled by hardware, software, and next generation robotics, making us one of the largest and fastest growing EV companies globally. This was a brief overview of Q2 results. And now let me hand over to Avinash, President of Arrival.

Thanks, Dennis. In Q2, we've been pushing the accelerator as we get closer to our product launch dates. We continue to execute on our business plan and we are especially pleased with the progress we have made on sales. Since the close of the quarter, we've announced two new orders which demonstrate the momentum of our sales pipeline. The first order from LeasePlan is an initial order for 3,000 vans. LeasePlan is a leading car as a service company and will be the preferred leasing partner for our electric vans. The sales agreement is expected to be completed in Q3 of 2021. The second order is from California's Anaheim Transportation Network, a customer who recently secured a $2 million grant to replace five of their buses with a rival zero emission battery electric buses. This is our first bus order and marks a significant step forward for this vehicle program to add to the two orders that we already have for the van. We have a very strong sales pipeline with LOIs increasing approximately four times since the start of the year to 49,000. We have seen a dramatic increase in potential orders from emerging markets, including India, and we are pleased to announce we'll be opening an R&D center there to meet this demand. This shows the global interest in Arrival's local production method and best-in-class products at competitive prices. A big driver of this strong demand is the continued push in industry and public policy to transition to EVs. I want to highlight the historic US bipartisan infrastructure funding bill that earmarks tens of billions of dollars over the next five years for electrification. We're seeing this trend being replicated in all of our target markets. At Arrival, we are building vehicles and the ecosystem around them. Our strategy is to combine our in-house expertise with high quality partnerships that provide a comprehensive mobility solution. Since Q1, we have announced several partnerships with leaders in their respective fields, including Microsoft, with whom we are collaborating on a powerful open data platform, as well as Hitachi, STM Microelectronics, and Umbrella. Arrival's automated driving system also completed a live demonstration of the Arrival van, without a human driver inside, performing operations at a fully functioning parcel depot, This shows our progress towards our vehicles being depot autonomous ready in the future. Lastly, I want to discuss not only the strategic and financial impacts of our business, but also our community impact. This is a key pillar of our strategy that will uplift the communities in which we operate. This slide shows an independent study of the impact we expect to have in Rockhill alone. We have over 500 direct and indirect jobs created and $159 million added annually to the local economy. We've seen tremendous government interest in our micro factories. And as we scale micro factories across the globe, this becomes a unique advantage of Arrival's ability to positively impact local communities and attract incentives. Our CEO of Arrival Automotive, Mike Abelson, will now give us an update on our program development and microfactory status. Mike.

Thanks, Avinash. As Dennis mentioned, today we'll be providing more detailed roadmap for our bus and van programs. On this slide, you'll see that we've outlined key milestones for each program, from private and public road trials to final certification validation, to start a production in one of our micro factories. On our bus programs, we've decided to build the buses for customer trials in our facility in Banbury in the UK, instead of Rock Hill, South Carolina. This enables us to serve the UK trial with first bus much more efficiently than shipping buses from Rock Hill. The trial buses will be built between Q4 2021 and Q1 2022 with production intent components, including composite panels and battery modules manufactured with production equipment. We'll start trials at UK Proving Grounds in Q4 of 21. We'll then move to public road trials in Q1 of 2022. By building our trial buses in Banbury, we can ramp up the Rock Hill Microfactory and focus it on saleable builds beginning in Q2 of 2022. This timing will allow us to incorporate any product changes that are required as a result of product validation and certification. This timing is still in line with our original business plan, which expected saleable buses only in the second half of 2022. For our van program, timing is on track with production scheduled for Q3 of next year at our microfactory in Bicester in the UK. We've already started van testing with UPS utilizing our current prototype fleet on proving grounds in the UK. We expect to move to public road trials in Q1 of next year. We then expect to complete certification and type approval of our van in Q2 of next year. Today I also wanted to announce a number of new variants to our van lineup. The pictures and videos of our van that you've seen to date all reflect a high roof walk-in configuration as used by UPS. We'll also offer a variant that's 12 inches lower in overall height. Both these variants will be available in two wheelbases. We'll also offer a cargo van variant in both roof heights. The cargo van will be available with traditional rear doors and side cargo doors. All of the variants I've described are scheduled into production before the middle of 2023. An obvious benefit of our composite panel technology is that the tooling cost of the specific panels for each of these variants is extremely low. The flexibility of our microfactory approach also means we can implement all these variants without modifying the layout or the basic factory equipment in our microfactory. In our discussions with additional potential van customers, we continue to monitor the interest in the different variants of the van and large van platforms. As we described in our Q1 update call, we put both of these products under the same development team. Our ability to continuously evaluate demand and adjust production timing and mix for our product variants is another advantage of our microfactory method. I'd also like to give you a few updates on the progress we're making in developing our microfactors. Our Rock Hill, South Carolina bus microfactory has over 80% of production equipment ordered or delivered. Equipment installation is expected to be complete in Q4 of 2021. Our Bister UK van microfactory has over 75% of production equipment ordered or delivered, with equipment installation expected to be complete in Q1 of 2022. Our equipment capex remains on track to be 50 million or less per microfactory. With the vast majority of equipment ordered, we're now very confident we'll meet this objective. Our Charlotte, North Carolina van microfactory will start production in Q4 of next year. We have identified the site and the building is due to be complete in October of this year. To be clear, we're leasing the site and don't expect to be ordering equipment for the Charlotte Microfactory until early next year. As discussed in our last update, we're pulling ahead equipment spending in our Bistro van microfactory in order to install production equipment there for process validation well in advance of production in Q3 next year. We're doing this work in Bistro rather than Rock Hill or Charlotte due to Bistro's proximity to our R&D facility in London. In Bistro, we've now installed the first of our composite production lines. With appropriate tooling, this line can make parts for any of our products. The first cell in the composite line is an automated kitting cell. This cell takes rolls of our composite material and cuts it into individual plies. The cell uses a robot to then stack the plies one on top of another while dynamically adjusting the fiber orientation of each ply. Picking and placing of the plies is done using an Arrival developed end effector. The cell is controlled by Arrival software that optimizes the nesting of the parts during cutting to minimize waste and also calculates robot trajectories in real time. The composite production line also includes an automated CNC trimming cell for precise post-processing and machining of the composite parts and an automated binding cell for the pre-treating, applying adhesive and then assembling composite panels. All stages of the binding process are completed by a single robot. By changing the end effectors on the robot, we enable multiple processes to be completed in the same cell minimizing our capital investment and footprint, while at the same time increasing our flexibility, modularity, and equipment utilization. This is the same approach we're taking for our technology cells in the general assembly portion of the microfactory. On the battery side, it's important to note that we've already produced 1,432 high voltage battery modules using our production process. I also wanted to speak briefly on an additional arrival developed technology that underpins our microfactory process. autonomous mobile robots, or AMRs. We've developed these robots to replace the conveyors and automated guided vehicles used in the traditional assembly plants. In the microfactory, AMRs will carry both parts and vehicles through the assembly process. These robots operate autonomously in the microfactory. They don't follow a predetermined path or a wire in the floor. Each AMR incorporates two ladder units and four cameras that allow it to accurately map its surroundings. As you can see in the video, they can move in any direction. We'll also be able to virtually connect two or more AMRs in order to coordinate their movement. We'll use this operating mode to move objects that are either too large or too heavy to be handled by a single AMR. The software to control these robots has also been developed in Arrival and is part of our microfactory software system. AMRs will first be deployed in our van microfactories. From the above examples, I hope you can see that we're making substantial progress in validating our microfactory processes. Believe me, we're just as proud of what's going on inside of our microfactories as we are of our vehicles on the road. I'll now turn it over to our interim CFO, Tim Hobrod, to go through the financials.

Thanks, Mike. Arrivals EBITDA loss for the second quarter of 2021 was €29 million. By comparison, the EBITDA loss in Q2 2020 was €16 million lower at €12 million. After making several adjustments to this number, as set out in our press release, Arrival's adjusted EBITDA loss for the second quarter of 2021 was €35 million, compared to €12 million in the second quarter of 2020. In total, our H1 adjusted EBITDA loss is €62 million. We expect our Q2 EBITDA to be broadly representative of the run rate for the remaining quarters 2021. A large part of this is due to our headcount, which is now over 2,200 employees. Total capital expenditure for Q2 2021 was 65 million euros. This includes costs directly attributable to product development that are capitalised as assets under construction, primarily the cost of staff working on our development programmes. It also includes the cost of assets purchased for these development programmes, such as prototypes, costs relating to the installation of facilities, costs related to robo factoring equipment at our micro factories total capital expenditure for h1 2021 is 106 million euros and we expect total capex spend for h2 2021 to be in the region of 175 to 225 million euros the increase in capex spend is due firstly to capex in our business micro factory that's been brought forward into 2021 in addition to rock hill which we always planned in 2021 We expect total microfactory capex for both Rockhill and Bicester to be around €55 million in H2 2021, with €25 million of this brought forward from 2022 in our original plan. Secondly, it's due to higher production tooling investment of around €50 million into H2 2021. These are related to one-off costs for each vehicle programme as we develop our supply chain ahead of first production. Finally, the remaining €100 million, we aim to continue to invest in R&D in H2 2021 for more variants, for better components and better software. This is a choice. Our spending is headcount focused, so we have full flexibility to wrap up and down as required. However, we believe now is the right time to accelerate our growth. Cash and cash equivalents at the end of Q2 2021 were €445 million, a decrease of €71 million on the balance at 31 March 2021 of €516 million. Net cash inflow in Q2 from the exercise of Arrival's public warrants was 57 million euros, and excluding this cash inflow, Arrival's net cash outflow for Q2 2021 was 128 million euros. A further 60 million euros is expected to be received into our cash balance from the public warrant redemption process, bringing the total raised from the process to 117 million euros. I'll hand back to Avinash for our conclusion.

Thanks for your time today. In conclusion, I would like to summarize. Governments are pushing EV transition and local production, supporting our new method of using microfactories to produce locally. We have strong momentum in LOIs all around the world, driven by both bus and van as we ramp up our microfactories. And based on sales conversations requesting new variants, we have seen the potential to capture a greater market opportunity.

At this time, I would like to remind everyone to ask a question. Please use the raise hand function located at the bottom of your screen.

Probably while we are getting the questions, I also wanted to use this opportunity to announce that we are getting a new CFO to join us. It's John Wozniak. So we'll publish first list today about this. So Tim was our interim CFO from the very beginning. That was the plan. We found a very strong candidate who has joined us from 23rd of August, and I wanted to use this opportunity to welcome John on board. And also, I would like to thank Tim for everything he did for so far. Tim is a very important part of our team. Tim is continuing to be part of the team in Arrival, focusing on what we call strategic finance. And Tim, thank you very much for everything you did so far.

Thanks, Denis. Thanks, Denis. It's exciting to have John joining. And I think he and I have a very complementary skill set. So we're looking forward to working together going forward.

Excellent. Well, your first question comes from Brian Johnson at Barclays. Your line is open.

OK, am I unmuted now?

Yes, we can hear you.

OK, thanks. Two sets of questions. You know, first around the orders and second, just around some of the manufacturing progress you're making. You know, vis-a-vis the orders, can you give us a little breakdown in terms of since the beginning of the year or end of last quarter, kind of what are the big chunks of letters of intent, all orders that came in?

I will ask Avinash to answer this question.

Sure, Brian. So since the start of the year, it's been, I would say predominantly it's been the growth in the van. We have, we're not giving the exact split, but it's driven by also the order from lease plan, the significant other orders that have come in on that. And that's quite well split amongst different industry sectors. So the usual e-commerce, parcel delivery, post delivery, And so that's where majority of the growth is. We still are also growing orders on the bus. You've seen Anaheim. I just want to remind everybody that we also have a first public trial coming up in the UK and early where we start that build of those vehicles already. There'll be more built out of the UK later this year and we'll be running public trials early next year. And a lot of the growth we've seen on bus has been in the UK, Europe, US, but we've also seen some additional interest worldwide on that.

I would like to add a bit of color here, is that we were actually, as a team, we're trying to find the right term for this type of documents we're signing, because it's not exactly a letter of intent. It's actually a well-developed relationship with the customers. It's not like a link or the message on our website. It is the sales team working with those customers. They understand their specifications. It's a signed document. So it's like a paper with the signs from both companies. So we see them as a... Why this importance? Because it feels like all customers understand that electric vehicles give them a lot of advantages. It not only comes from the push from governments, but because they see that they can save a lot from their operations. So essentially it's helping them to be more profitable businesses. And the sentiment is that they're going to be a limitation for the supply. So, and that's why these customers are securing their volumes for the future to be sure that they will get those vehicles.

Yeah. I think we mentioned in the last call, you know, demand has not been an issue. Yeah.

Well, let's move on to the second question. And, you know, not to sound like I'm interviewing a manufacturing manager, so I don't know if I want to pick on Mike or Avinash, but certainly good progress in the microfactor, particularly the composite paddles. Can you give us an example of a problem slash iterative learning that came up during the quarters you're producing those panels, kind of what the issue was, what the constraint, how the team attacked it, just to kind of get a little bit under the hood or behind the scenes on what's going on in the factories.

If you don't mind, like, I would like to, before you answer directly that question, I wanted to, I mentioned that in my part of the speech is that one of our biggest challenge was actually everything which relates to body panels, because like this is very new technology. We were, we didn't want to use stamping welding and the, painting because this is a very expensive test of CapEx. It defines your size of the factories. And actually this defines the business model for the automotive companies. And this was one of our biggest enabler for micro factories. And working with the fabric wasn't easy. I mean, so fabric is extremely complex media to work with. And we were showing videos today that we found the solution. So we created our own gripper to work specially with fabric. And we tested it very well because I'm really pleased to say that in Q2, we managed to produce, sorry, in this half of the year, for the first six months, we managed to produce 500 parts using our production line. And we see that this process is very stable, which we are very, very pleased. But I also would like to remind you that we're on this challenge already for more than six years. So it's not something which happened like immediately now. We tried many, many things. So we had the time before to test many things and find what works. So I would say that now we're very pleased with the results. Mike?

No, I was going to use exactly the same example, Dennis, because handling fabric sounds easy, but it's actually very difficult with robotics. So we looked at a number of different technologies for the end effector, and I've settled on one that as Dennis said, now is working very well with the production equipment. So I think that's only one example of the sorts of issues we've been working through with the production equipment in Vista.

Okay, thanks.

Your next question comes from Jeff Osborne at Cowan. Jeff, your line is open.

Yeah, good morning. Thanks for all the detail in the call. A couple questions on my end. Just great to see the progress on the automation. Is there any change in your thinking on the throughput? I think originally you were targeting 10,000 vans and 1,000 buses a year. And your initial work is particularly on the composite side. Any changes to that thought process?

No, no changes at all, Jeff. We still anticipate 10,000 vans a year on two shifts and 1,000 buses per year on two shifts.

Got it. That's helpful. And then can you give us an update? I think last quarter you made reference to a facility in Spain, sort of an undetermined time. Has that been nailed down? I didn't see it mentioned today as to what you're going to be producing and when.

So we didn't announce timing today. We are committed to four microfactories next year. We continue to look at other potential locations. As we look at locations, we look at both demand and whatever government incentives are available. And again, because we can roll out microfactories so quickly, we don't have to make a decision on even now on where exactly that fourth microfactory will be next year. So it will be a van microfactory, but we haven't announced timing yet.

Got it. And then maybe for Avinash or you, Mike, could you touch on India and the scope of the development center, how that complements what's in the UK and Russia for you today? Okay.

Yeah, absolutely, Jeff. So it's a product development R&D center that's looking at a variant of our products that, let's say, suits the emerging markets who have a different price point and different spec. And that's where the engineering effort will be spent. As you know, we are already aiming to be price competitive with diesel, and we think we can potentially go even lower than our current BOM position. in those markets. And so that's really driven by a really significant demand, not just in India, but in markets similar to India that require those products. So hence the R&D center over there.

I'm sorry, I would like to add here that I think the Indian market is extremely important. It's a very unique market in terms of size from one side, but from other side, pricing for the products and the specification for the product is very much different to what we used to see in Europe or United States. And for us, it's an extremely important step because this enables us to create vehicles which can be successful in countries like in Asia and India and so on. So for us, it's a big, big step. And another very important part of this story is that it's I've seen many companies who are announcing their plans, like new EV companies or the old EV companies, they normally, because of their method, it's normally a huge investment in a huge factory, and that's why it takes many, many years, and opening new countries is always a huge challenge. I would say that we probably have, because of our method, it enables us to make our activities in many countries much easier than other companies. So I would position probably I would probably use this opportunity to position us as a real global player in this way. So this just opens a real market opportunity for us so that we know that the world is not organized in the way that one vehicle can work everywhere in the world. An ability to create new variants which are suitable for particular markets is extremely important. And our method is exactly what's designed for that. And these are our advantages compared to other companies.

Yeah, no, that just I think it's important if we just remind everybody of the modular nature of the vehicles that we've built in the vertical integration. And because that's all our own IP, it allows us to adjust and create new variants much more rapidly than the traditional industries would be able to do. So it's right in line with what we want to do and decentralize micro factories all around the world. Perfect. That's all I have. Thank you. Thanks, Jeff.

Your next question comes from Rob Salmon at Wolf. Rob, your line is open.

Sorry about that. Can you hear me now?

Yes.

One of the big factors kind of with automotive production as well as the broader economy has been inflation. And in an inflation environment, can you give us an update in terms of your thoughts with regard to the expected bomb? And if this is having any impact on the gross margins you expect your vehicles to produce as we look out?

I will probably take this. We definitely see... changes in the cost of metals and uh like we've seen that aluminum price uh price has grown very much compared to what it was but if you've seen percentage uh steel uh grew much more than the uh aluminum so which makes for us i believe a bit better uh situation compared to other companies who are adopting the uh steel bodies bodies um I would say that overall, if you take like the mix of the metal and other things, because we obviously vehicle bomb is very complex element and some parts are becoming more expensive, some parts we are saving. So from the information we have right now, we don't see... So we targeting our profitability the way we were planning because we still can also do it with the pricing as well. So we will... And this is quite important for our method is that we... In our mission, we say that we do affordable electric vehicles. So it means that we expect that our pricing is going to be more competitive compared to other traditional players who are putting the electric vehicles on the market. And because of that, we have a flexibility to control our margins. So we are not pushed from top for pricing. So we still have a room there.

I think that's helpful. And kind of earlier in the presentation, kind of one of the announcements earlier in the quarter was about autonomous testing that you're doing with UPS. Could you talk a little bit about your internal targets for autonomous driving? And, you know, obviously there are several players that are kind of going down this path. And, you know, can you talk us kind of what you feel Arrival is doing differently with regard to autonomous and the amount of resources that you're committing.

Up front, it's important. We're not committing resources like competitors like Cruise and Waymo in this particular space for full driverless autonomy. What we're doing is we're creating an autonomous platform that's, you know, we call our vehicles devices on wheels and they're autonomous ready. And so that means we have a team that looks at full autonomy and depot autonomous, which I'll cover in a sec, and figures out what's the software architecture and hardware components that need to be in the vehicle. So, for example, we have a unified compute platform in the vehicle, which uses blade architecture. As the hardware requirements for autonomy changes, we're able to upgrade the hardware in our vehicles accordingly. So they're essentially autonomous ready. You can add different sensors to it, and it's all sort of plug and play. In terms of our initial rollout of autonomous features, it's around the advanced driver safety systems. And we are, as mentioned, what you saw in that press release is that we're also working on full depot autonomous operations. And that's where our team's focused on in terms of product launch. And that's because depots are an area where you can have safety issues, and it's also more efficient to run autonomously. And so that's a benefit for the operator and the safety of the people in the depots themselves. And so our vans will be equipped with the technology for that, and we'll roll that out over time.

I would probably, and I should know my electoral phrase, that our first focus is depots because it can bring the value. Now, we don't need to wait until the regulations change. we'll change and allow those vehicles everywhere in the cities. We can get the values of that technologies immediately. And this is very, very important. So it means that actually when I'm seeing any other products which are coming on the market in this category, I'm talking about AV vans or buses, we never seen even an idea that those vehicles are autonomous in any form. So what is important about our vehicles is that they're fully drive-by-wire systems with the compute platform inside and the cameras and other sensors already integrated, and utilizing those sensors and all these technologies for the operations, where we're getting this value immediately. But it also means, which we need to explicitly say, is that when the regulation will allow to have autonomous vans on the streets like everywhere, or in the place where we like our customers are starting to operate, our vehicles are extremely easy to, it's extremely easy to integrate autonomous technologies from other players within our vehicles. And what is important to say about autonomous technologies, they normally very, they're super hyperlocal, right? So that's the important part of the story. So, because when... even big guys like VMware is creating their algorithms, it starts to work in a very particular market. And it doesn't necessarily mean that it works in other markets where you have snow or rain or different weather conditions and other things. And so we believe that we will start to see that in each region, there are going to be leaders for the autonomous technologies. And we are ready for integrations so that we can take those autonomous technologies and integrate inside our vehicles because our vehicle is already ready in terms of hardware.

Platform, yeah.

It's a platform.

That's kind of a nice segue into the potential recurring revenue streams. Could you give us an update in terms of your thoughts kind of post-launch with regard to these potential recurring revenues, whether we're talking about fleet management, other SaaS-type solutions?

So nothing to add. announced specifically, but we believe that there are significant future upside potential in the business. So right now, the model is very much on the sales of the vehicles themselves. But to your point, You know, we have a significant portion. We've mentioned before that majority of our staff, 90% are engineers, half are software. So when you think about what that means for SaaS, you know, there's tremendous opportunity for our fleet management tools and vehicle health predictive monitoring to basically move to recurring revenue. But I'd also say that, you know, our components are modular in nature. There's opportunities there. We've discussed autonomy. And I think there's, even with the vehicle, the fact that it's upgradable and it's price point, when you think about factoring in the total cost of operations, you can see a different business model through fleet as a service, mobility as a service. So this vertical integration of tech gives us vertically integrated business models, I would say, and it gives us significant avenues for us to go. But the team, it's very important, you know, the team is heavily focused right now on our key task, which is, you know, getting the bus and the van to our customers over the next six to 12 months.

And I just want to use this opportunity to remind that we have quite a big part of our executive team coming from different industries where the product or telecom, where the recurring revenue is the better. So in this I would like to say it's our bread and butter. So we exactly know what is recurring revenue and we're preparing ourselves for that. And just to kind of spend 30 seconds on this point is that a rival car, which we do together with Uber, is an extremely important product because now there are no vehicles specially made for this sector. And if you start to think about it, even simple things like keys, like how you distribute the keys, physical keys, it's already become a problem. So our vehicles are keyless, right? So the fact that you can start the vehicle using the app or like a different type of authorization is also part of the story. So we, in terms of technologies and hardware, we do everything to be 100% ready for recovering revenue using our products. But we don't factor it in our business plan. I mean, so we, because this there's a bit high level of uncertainty and we didn't want to put this uncertainty in our business plan and our guidance.

Appreciate the thoughts, guys. Thanks, Rob.

Your next question comes from Alex Potter with Piper Sandler. Alex, your line is open.

Alex, you're on the mute.

Great, guys. Can you hear me?

Yes.

Okay. Excellent. Um, so I guess my first question is around supply chain, any risks, um, you know, you've highlighted this, I think several months ago when we were having our first discussions, if you were talking about some of the gating factors that might keep you from hitting your milestones, you know, obviously there's some things that you can control, some things that are, uh, going to be up to your suppliers to, to make sure they're pulling their weight. Um, Anything around battery cell supply or anything else that you would highlight as progressing better than or worse than expected?

Alex, yeah, I would say ironically, the biggest impact for us from the chip shortage has been a delay in getting laptops for new employees. As we outlined last quarter, our volumes are still relatively low, certainly by industry standards in this year and you know, we don't start ramping up to production volumes until the latter half of next year. So I really don't see any evidence that the chip shortage will have an impact on any of our operations here this year and early next year. On the battery cell side, we continue to work with LG. We announced last quarter, we've already got a five-year agreement in place with them with cells that we that covers our initial production ramp up. So on the sell side, we really don't see any risk either.

Okay, great. Probably, Alex, just to give a bit of color. Obviously, we always have some situation where something didn't arrive immediately now like we planned, but one week later or a bit one week earlier. So because we have many parts we're managing, but nothing we can erase as roadblocks. I mean, something which can create a critical... impact on our programs. Okay.

And you mentioned that agreement with LG that covers everything in your ramp, vans, buses. Okay.

We're using the same battery architecture for all our vehicles. And actually, I would like to use this opportunity when you touched at that point to raise that point again, is that if you take bus production, we normally even like super big bus manufacturing in the world, they're talking about like 10,000 buses a year. So it's super big because the market is majority of the small players. And assume that this company goes to buy electric motors, for example, they buy to the producer of the electric motor, so we're buying 10,000 motors a year. So it's very small volume for tier one, tier two companies. That's one of the reasons why buses are expensive. So because you almost can count all of these buses as low volume production products. We managed to create a system where we're reusing all our components from the van, which is mass volume produced product inside our bus. It's just an example. Even steering wheel in our bus is exactly the same as in our van, which was never been done in industry before, because normally for the bus, you need to have a bigger diameter of the steering wheel or stokes and other things. So this carry over kind of model allows us to... make our buses much more cost efficient than other players. And another example is that our motor from the van, exactly same motor, exactly four, like same model, four motors goes to the bus. So it means that in terms of volumes of the motor, we are not talking about only bus volumes. We're talking about all volumes of our products, including batteries as well. So this is very important part of our design philosophy. And I believe it's very strong advantages for us because if you take, even established players, I don't know, like anyone, like I can mention, like Mercedes, for example, you don't see much carryover parts from the passenger Mercedes to the Mercedes bus, right? So it's totally different products. And this is the case for every other company in the industry. So this is, I see it's a very strong competitive advantage for us.

Yeah, that makes sense. Okay, good. That's helpful. Then the last question I had, it just, Maybe elaborating on India and emerging markets overall, I mean, you mentioned, you know, you generally don't see some of the higher-end European or American OEMs participating in some of those markets because, like you mentioned, it's sort of a bloodbath when it comes to pricing, the components on the vehicle. I mean, you can see very clear decontenting versus what you have in Europe or the U.S., So how will your vehicles be different in India or any other emerging market versus how they are in the US and Europe? And if they're not much different, then why will pricing be different?

So, I mean, you can see us all smiling because, again, we think this is a unique opportunity first. The one thing that everybody is under the same impact is, is the effect of climate change, right? So regardless of the products and which companies are where, we as a society definitely need zero emission vehicles all around the world. And so it would be a failure if we create a two-tier market where only part of the world can move to electrification. So the market is there. And Alex, to your point, it's a bloodbath, but it's also a huge opportunity. This is an underserved segment. Never had the, you know, electrification is new. So when you have a sort of step change in industry, it allows for innovation to go and capture part of that market share. So we can bring local production for our micro factories here. In the case of India and some of these larger emerging market countries' supply chain, there's a significant portion already being purchased from there. So for us, when you think about the cost of our body panels, the shared use of the components that Dennis mentioned earlier, We really think that we can bring vehicles and don't forget our electric vehicles are already tracking towards price competitiveness with diesel in the established markets. So we think there's an opportunity to move that even lower. And also there is things that you can do with the business case when the residual value is, you know, we're not going to disclose what the residual value is. But when you think about the upgradability of the vehicles, there's opportunities there to capture a market that no one's been able to. So we are extremely excited about it. And to prove that, I mean, we have already got, you know, demand and LOIs from India. where we've given early indications of the vehicle. So we're extremely excited about that opportunity. Like you said, no one's touching it. And we think it's a great example of a rival's differentiation.

I also would like to add a different angle here is that we already have the procurement center in India. So we utilizing the local supply chain for our global products as well. And we understand very well like how this market works today there. And also there is an opportunity. So everything we can develop in India, which is much, much cheaper in the near, we can actually, because of our modular nature of our products, we can reuse those components in our European and American version. So it means that actually making the product for India creates for us a cost optimization opportunity for all our vehicles, which will allow us to increase our profitability on the products in other markets.

Okay, great. Very helpful. Thanks, guys.

Thanks, Alex.

Your last question comes from Michael Filatov with Berenberg. Michael, your line is open.

Yeah, hi. Can you hear me? Yes. Great, thanks. Thanks for taking my question. So I guess just going back to some of the topics you touched on already around sort of the pricing of the vehicle, my understanding is you use a lot of aluminum, which is quite expensive. There's the composite materials, which I think are more expensive than traditional steel. But correct me if I'm wrong. I understand that you get scale on the component side because you can leverage it across your vehicle platforms. But I have to imagine competitors, say, in the buses like BYD or Yutong can similarly get that kind of scale given their established players. I guess what else... It gives you that sort of price advantage outside of purely scale on the component side.

Yeah, let me try to answer this question. So the first of all, when we use an aluminum, we need to remember that aluminum is much lighter than steel. So it means that in terms of weight, we're using much less weight. Yes, more expensive material, but less weight. So which is compensating this difference, not fully, but a lot. And the reason why we went with the aluminum route is because it allows us to enable microfactories from one side. And from other side, it also allows us to spend much less on the capital of the tooling. So because we're using extrusions and some other technologies, it allows us to make it much, much cheaper in terms of upfront tooling investment for that. The composite materials is very similar stories that even if material itself is actually, you know, what is interesting is that the numbers I was using before are not valid anymore because steel became much more expensive. So previously it was $700 per ton for the steel. Now it's almost 1,700. And our composite materials is a core kind of number. So we're using very cheap materials, which is polypropylene and aluminum. glass fiber, where the price of those materials are around Euro per kilogram. And composites are cheaper, sorry, lighter. So in terms of weight, we are almost twice lighter than the steel body. So combination of the less weight and actually price didn't grow for the composites the same way as for the steel, makes this model much more... So we're getting advantages here. Plus, what things... Normally, this data is not available to people when they're counting the part. They're counting steel to metal or steel to composite. But in our case, we don't use paint shops, welding, and other technologies in the assembly line. So if you combine all those things together with the cost of equipment for the CAPEX... So the picture starts to look in different ways. So if you take a total cost of the body, including all the processes, so this picture starts to look differently. And so it's not enough just to analyze cost of steel compared to cost of aluminum. So you need to see like a full picture here. But coming back to the components, and that was my topic, actually that was my point, is that even company like Yutong, which produces 10,000 vehicles, there was 10,000 buses like a year, In terms of components, it's a very small volume. So they cannot get right pricing on that. We are getting this because, first of all, we are vertically integrated. So it means that we, instead of paying margins and tooling costs and other kind of things to tier one companies, we're keeping it for ourselves. And so we know in details what is the cost of our competitors on the bus. And we know that many of our components are radically cheaper because of that.

Understood. I appreciate the answer. Very detailed. One last follow-up here. Just in terms of the way you're manufacturing, the manufacturing process, right? I understand it's sort of the cell-based manufacturing process. It's very modular. But you're also making your own components, a lot of your own components internally. So are those being produced in the same factories that you're producing the vehicles? And then how do you sort of sort out the timing of assembling the components versus manufacturing the components so that everything lines up and runs smoothly.

Yeah. Look, so in terms of components, we only assemble battery boxes as a part of our micro factory operations. So cells are coming to the factory and this is the way how we assemble that. But a lot of components like inverters or motors and other things, they come as ready parts to the factories. And we're using tier two, tier three partners who are doing this work. We have service agreements with them where they produce it for us based on our specifications and engineers. So then this just describes the approach, how we work with the components. In terms of logistics and supply chain, we need to remind you that because of our cell-based manufacturing, we don't need to be just-in-time model. So we don't have a conveyor line where you need to be just-in-time. So we deliver parts to our factories in the beginning of the shift. And even if the parts are coming two or three hours later, it still doesn't make impact on our operations in the factory. But we also have a 3PL operators as partners in particular countries where we do operating. So we're creating buffers of the volume for our components that they can be shipped to the right micro factory in the country to produce the vehicles so um and because we build our factories normally in the big metropolitan areas with big cities where the logistics very well developed so think about this as any type of deliveries happening in the cities i mean so because our components are majority of our components are done in the way that you can The analogy here, if I can give us, it's very similar to how I receive my parcels from Amazon every day. I mean, because of the packaging or the size or weight of those components, they're done in the way that it's very easy to handle them.

And one important point, one nuance to your question, Michael, when we designed the components, they're in sync with the Microfactory. So as we showed in the video, you know, we do all of the software in the cells, we understand what that operation needs to be in each cell. And so the components actually designed in a very specific grid architecture so that we know that the Microfactory can build it. If our internal system says it can't be built, then we simplify the components and redesign it. And that simplicity, which takes a long time to engineer, is what enables us to know that the microfactory can build the product with our components alongside supplier parts.

Understood. Thank you. And just one quick one. The Anaheim Award, basically, I guess I assume you would do localized manufacturing for wherever you're basically addressing demand. Does that mean you're going to build a microfactory out west to address demand in Anaheim?

It certainly means that that'll be one of the places we look for one of our next microfactories, but We're not announcing anything today.

Yeah. Just to give you the right feeling about this, I think it's, again, understanding our distributed network means that we have a flexibility. Obviously, if we don't see enough volume in a particular region, there is no need for us to build a micro factory there. We are using the other micro factories in the country. But when we see that demand is growing in a particular region, so we open those micro factories. So this flexibility is part of our business model. And this is very, very important because like we avoiding this situation where you need to invest billions of dollars in the factory and then wait like two or three, probably more years until you will get like full capacity. So all this time, while you're not on full capacity, company is losing money. In our case, like we optimizing that much more based on agile.

yeah we're really bullish i mean it's it's 50 million in capex from microfactory uh you know we've shown the some of the demand that we're getting i mean in in the in the medium term we expect micro factories um you know near every major city so i think there's a there's a huge scaling opportunity our micro factory scaling parallel i think that's an important point too right we're not we don't have to wait three or four years to get the factory ready spend billions of dollars As we see demand such as Anaheim and others, we can put a micro factory down really quickly. And I think that really is an agile and unique aspect of arrival that no one else in the industry has. Understood. Thank you guys. Thanks. Okay. I think that's the close. Someone's going to put up a slide. So I just want to remind everybody why arrival is different as we end the call. Thank you, everyone.

Thank you.

This concludes today's call. You may now disconnect.