Arrival

Hello everyone and welcome to Arrival's first quarter 2022 earnings webinar. My name is Megan and I will be your operator today. Before I hand the call over to the Arrival team, I'd like to go over just a few housekeeping notes for the program. As a reminder, this webinar is being recorded. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please use the raised hand function located at the bottom of your screen. If you plan to ask a question, please ensure you've set your Zoom name to display your full name and firm. Thank you for your attendance today. I will now turn the call over to Mitesh Soni, Investor Relations for Arrival.

Thank you for joining us today to discuss Arrival's first quarter 2022 financial results. My name is Mitesh Soni, VP of Investor Relations, and with me today is Denis Fedlov, Arrival CEO, Avinash Raghubur, 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 findings with the SEC and our first quarter 2022 earnings release issued today on the 10th of May. 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 Avinash.

Thanks, Mitesh, and thanks, everyone, for joining us. The key messages you will hear today are that we have completed bus certification, passed over 70% of certification tests on van, and made significant progress on our microfactories with our skateboard, cabin, and hoop structure being assembled. We believe the micro factory unit economics remain amongst the most compelling in the industry, and we continue to expect start of production in Q3. I want to emphasize that bus certification is a key achievement for Arrival and one that the whole team is extremely proud of. This is the critical milestone towards our bus being able to carry passengers on public roads in the EU and UK. We commenced the first phase of our trial program with First Bus and are currently bringing their drivers and service technicians up to speed with our innovative new vehicle before we begin taking passengers on public route journeys. The location of this is likely to be announced this quarter, and overall we expect trials to last three to six months. VAN certification is also progressing rapidly, and we have over 70% of tests already passed. Our target is to complete VAN testing in Q2 2022, and Mike will go into more detail on the path to certification for the VAN shortly. Just as significant, we have used the same microfactory technologies previously shown to put together the chassis skateboard to assemble the cabin and hoop structure. We continue to highlight this as it represents the unique design of our vehicles and our microfactory technologies coming together. The progress this quarter gives us further confidence the microfactory method will work at significantly lower capex than traditional methods and with increased flexibility. We're excited to lead the changing of the rules of the industry this year. Our customer engagement continues to grow with non-binding LOIs and orders up to 143,000. We are currently showcasing our van to customers in the US in a number of different cities. In March, we held a van media showcase in New York to members of the press who got a chance to sit in and interact with our vehicle. And we also attended South by Southwest. There is no substitute for potential customers seeing our vehicles in person, and this continues to be a core part of our marketing strategy. Combining these showcases with certification and microfactory progress, the team has turned attention to conversion to binding orders as we start our production ramp later this year. Last quarter, I did a deep dive on the Arrival software ecosystem, which is just one of the amazing enabling technologies that we have developed in-house to bring to life our unique method of production. Today, I want to introduce another of our core enabling technologies, our in-house developed components. Arrival's vehicles are developed using Arrival's device framework, a method in which we are able to create smart devices on wheels in a short period of time, utilizing our extensive library of automotive hardware and software elements, designed and delivered using a plug and play approach. The method is based on several core principles. One, physical compatibility. All components have been designed using a grid architecture, which ensures simple cube-based geometry specifically created for robotic assembly. This unique hardware and software plug and play approach allows us to both upgrade components over the air and replace hardware when needed, driving longer life cycles and higher residual values. Two, software compatibility. Pieces of software assembled into ready-made firmware in just a few short clicks on the engineer's computer, saving thousands of hours of work for what would ordinarily be the responsibility of multiple team members. And three, electronic architecture. In this case, it's the framework that combines the elements of software and hardware into a functional vehicle. It is so adaptable that we are able to use the same architecture with only minor changes for totally different vehicles such as the van and bus. When we populate our library with new components and systems, every new function can be reused across multiple vehicle platforms, reducing the time to market for future vehicle generations. To achieve such a high level of vertical integration, we have developed and certified the core components line in-house at Arrival, and we have filed over 100 patent assets. There are very specific strategic advantages to this approach. We save on supplier costs normally found in a traditional tier one automotive supply chain. We can control modifications from end to end, speeding up improvements, and we can collect deep telemetry data to optimize vehicle operations and ultimately lowering TCO. overall we estimate approximately 70 of our core systems for the van including the drive unit hmi high voltage and low voltage elements are developed by arrival and many of these can be used across multiple vehicle platforms and with that i'll pass over to michael

Thanks Avinash. Today I want to focus on our achievements for vehicle certification and our progress towards starter production. As Avinash mentioned, we've now achieved bus certification to European requirements. This is a significant accomplishment as it's our first vehicle program that's gone through the full process. Many of the arrival components are shared between van and bus, so achieving bus certification also gives us a head start on the van process. Our van certification is progressing well with over 70% of the tests required for European certification already passed, including all crash testing. We anticipate completing the final handful of tests in the coming weeks, after which we will submit our results and await final documentation for certification. We expect this process to be complete during Q2 of 2022. As the video shows, our van development program already includes driving on public roads, and we will shortly be ramping up our trial activity with UPS. These trials will include testing on behalf of UPS in the EU, the US, and the UK on both proving grounds and public roads. At our first van micro factory in Bicester, we've completed installation of all of our production technology cells. Using these cells, we've now completed assembly of the cabin and cargo structure to the chassis and skateboard. As we expand the range of parts and processes being used in the technology cells, we're progressing through the validation of our microfactory method. Commissioning a manufacturing facility is never easy, but we're continuing to make progress towards our anticipated Q3 starter production. For our Charlotte band microfactory, all required long lead equipment has been ordered, and we expect equipment installation to start in late summer. The equipment for our Charlotte microfactory is essentially a copy of the equipment in the Bistro microfactory So we won't have to develop new processes with new equipment in Charlotte. Taking advantage of this commonality, we'll have an accelerated commissioning process in Charlotte during the latter half of this year, leading to our anticipated starter production in Q4. We've also started production of our in-house developed mobile robots and continue to add new capabilities in order to optimize our overall manufacturing processes. Most recently, this includes adding a lift to the mobile robot so we don't have to duplicate lifting hardware across each individual technology cell. It's another great example of a rival developed technology enabling more efficient manufacturing processes.

Thanks, Mike. First, I would like to note that effective with the first quarter of 2022, we are changing our reporting currency from euros to US dollars, which we believe will provide better comparability of our financial results with our competitors. With that in mind, I would like to cover our Q1 2022 financial results. The loss for the quarter was $10.4 million compared to a loss of $1.2 billion in the year-ago quarter. The Q1 2021 loss included a $1.2 billion non-cash charge associated with the merger of Arrival and CIIG. The adjusted EBITDA loss for the quarter was $66.9 million compared to a loss of $31.1 million in the first quarter of 2021. Administrative expenses were $54.2 million and non-capitalized R&D expenses were $27.7 million in the current quarter compared to administrative expenses of $43.4 million and non-capitalized R&D expenses of $11.5 million in the first quarter of 2021. Capital expenditures in the quarter were $99.1 million compared to $49.8 million in the first quarter of 2021. CapEx in the quarter included approximately $70 million of capitalized R&D, $25 million of microfactory CapEx, and $5 million of tooling. And we ended the quarter with cash and cash equivalents of $735 million. Turning to our outlook, despite the continued industry-wide challenges from inflation and supply chain constraints, we continue to expect to start production in Bistro and Q3, and in Charlotte in Q4, and to produce between 400 and 600 vans across these two micro factories. For the full year, we continue to expect adjusted EBITDA loss of between $185 million and $225 million, and CapEx of between $380 million and $420 million. Our full year CapEx guidance assumes approximately $225 million of capitalized R&D, 100 million dollars of micro factory capex and 75 million dollars of tooling at the midpoint we have sufficient capital on hand to achieve our 2022 production volumes and expect to end the year with between 150 million and 250 million dollars of cash however we continue to see increases in costs across the business due to inflation Finally, I would like to remind you of the long-term unit economics we expect from our microfactories. We expect total CapEx to be approximately $50 million per microfactory. We already see that Charlotte CapEx will be lower than Vistar as we make progress towards this target. In addition, we expect a van microfactory to contribute $100 million of margin when producing 10,000 vans per year on two shifts. Our contribution margin target assumes we will continue to optimize the vehicle bill of materials, including arrival components. and improve operational efficiency in new micro factories. I will now turn the call over to Dennis for closing comments.

Thank you, John. Arrival is on a mission to make our clean by replacing all vehicles with equitable electric solutions built by local micro factories. To address a meaningful market share, our products must be great, business must be hyperscalable, and we must radically change how vehicles are designed and produced. This quarter was very successful for us. We have achieved a lot. First of all, we have got bus European certification. It is a testimony to our innovative technologies and our unique new method of design of electric vehicles. Our brand has completed nearly all the tests required, including crash test. Overall, our progress on certification has been a real highlight for us this year. It shows that concurrent vehicle development is made simpler by our software platforms and smart arrival developed components, which are shared across all vehicles. It means that we can design new vehicles much faster than traditional industry. We have achieved significant progress with our own unique production method using micro factories. The core technologies have been commissioned and have been tested in our micro factory at Bistro. We're confident in our plan to start production of van in Bistro in Q3 and Charlotte in Q4 and produce 400 to 600 vehicles this year. With that, let's start our Q&A.

As a reminder, if you want to ask a question, please use the raised hand feature located at the bottom of your screen. Once you've been called on, you'll have the ability to unmute your audio. Our first question comes from Brian Johnson at Barclays. Brian, your line is open.

Yeah, thank you. Thanks for the progress update. A couple of questions. First, what's the remaining 30% in terms of categories of components or certification tests that are needed over on the van side? what led to the bus getting certified faster and these 30%, shall we call it a punch list or is it trying to figure out, is it a punch list, things that need to be worked or just tests that haven't been run yet?

Mike, if you take this question. Thanks, Brian. A couple of things. First, your second question, why was bus certified first? It was always on an earlier timeline. So both programs have been executing their schedule. That was driven by the fact that the bus is a much longer sales cycle. So in order to get vehicles out on trials, we want to get that one done first. To your question about the VAN trials, to be specific, as of today, we've completed 32 of the 41 certification tests required for European type approval. Very importantly, we have completed all the crash testing, which is typically the higher risk testing. So the remaining tests we feel very confident about. And as we said, we expect to complete type approval for the VAN in Q2.

And second question, you know, I'd love to ask.

Oh, go ahead. I just want to be very, very clear here is that we are actually on time of certifying the VAN. So everything goes exactly like we planned. There is no concerns or anything.

This is not reworked. Exactly.

This is just the timeline. The timeline that we achieved what we planned to achieve. And we are on time on our certification and Q2 for VAN. I mean, so as we planned.

Yeah, I'd love to dive into the kind of CAD CAM and it looks like kind of an interesting DevOps environment you're using, but we can do that offline. My bigger question is, as you look at some of the struggles, it's not lost on the world that there was a major lockup expiring at a competitor van maker yesterday. Have you relooked at your economics versus... The economics of both that startup and then, you know, since we've met you in the public markets, most of the major LCB makers have announced plans for not just electric vans, but bed vans on platforms, you know, such as Mike's former firm with Bright Drop Van. So, you know, can you just maybe recap strategically where you think your cost is? I don't know if it's a levelized cost at scale versus either a startup or a new entrant going at it the traditional way of bending metal or a scale LCB player who can share a lot of componentry and factory footprint with their ICE van lines.

I don't know.

Yeah, Brian. So, yeah, to your point, we've seen a lot of new entrants, both from the incumbents and new startups. With the vertical integration we have done, and you've seen some of the benefits of that already now as we start to certify our vehicles, we still maintain the strategy that our price point is going to essentially be placed between ICE and other EV competitors. You know, when everybody's following the same method in the industry, it's really hard to have major breakthroughs in whether it's the bomb structure or your manufacturing cost per vehicle. And that's where we believe that our innovations provide us with that competitive advantage. So I would say that our pricing remains exactly how we planned. It's going to be in between what ICE is and what majority of the competition are doing. We also have the additional benefit of providing our customers all the TCO benefits through the data that we covered in our last earnings call. And of course, the expected lower cost to produce the vehicles with the CapEx of the microfactory. So we maintain that both on the product attributes and price point and the ongoing benefits we can provide customers, even with the new entrance. We haven't seen many folks do things differently. So everybody's all going to sort of cluster in and amongst the same type of vehicles and the same price point. So we still maintain our strategic advantage there. Okay, thanks.

As a reminder, if you'd like to ask a question, please use the raise hand function located at the bottom of your screen. Once you've been called on, you'll have the ability to unmute your video. Our next question comes from Steven Fisher at UBS. Steven, you can unmute your line and begin to ask your question.

Great, thanks. Just with all the inflationary pressures, and John, you made reference to this, Can you just give us a sense of your path to positive gross profits that you mentioned at kind of at full capacity there and how that's changing? I guess I'm wondering, are there prices associated with the LOIs and non-binding orders? Are you able to raise the prices on those before they become binding? How do we think about that, those changing inflationary dynamics in your path to gross profits?

Sure. Well, let me make a couple of comments on inflation. Number one, it's an industry-wide, obviously, phenomenon. And so we don't think that inflation is impacting arrival much differently than the overall industry. Clearly, we are seeing increases in costs. But in terms of our relative pricing strategy, we believe that remains intact, even in the current environment. Earlier, Avinash referenced that we still expect to price our vehicles between where the equivalent ICE vehicle sits today and where the competitive EV set will be. Expect that across the industry, prices of vehicles will increase with inflation. And it is important to note that in a number of our LOIs, we have yet to set pricing. And we think that that gives us an advantage as we go into discussions. Because other than with a handful of customers, pricing is still an area that we have the ability to negotiate. And so we think we're in a good spot with respect to inflation, at least, you know, relative to the industry as a whole.

Okay, that's helpful. And then maybe you could just give us a sense of your cadence of cash burn going from 735 million at the end of the first quarter down to that 150 to 250. Kind of what do you expect in Q4 and how should we think about the first half of 2023 if you're kind of burning on average 150 to 200 million dollars per quarter for the rest of this year?

Cash burn definitely will be lumpy just given the dynamics of the business. We have CapEx that comes in sort of in chunks as we deploy the micro factories. We'll be building working capital as we get ahead to start of production. I would expect that Q2 would be sort of our peak in terms of cash burn. And then we would see it sort of level off as we get into production and toward the end of the year. But it's really because we're going to be building working capital in Q2, getting ready for start of production in Bistro in Q3.

Great. Thank you very much.

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

Thanks, everybody, for joining us today. As mentioned, we want to reiterate the Bus certification, which is a critical step for the organization. Van testing continues to progress as planned. And the major crash test being completed is at least an internal critical milestone for us. And strong progress in our microfactories. We're reusing the same technologies and now we're adding more and more processes that you'll see at start of production, which remains on track for Q3 of this year. So with that, I'd like to say thanks to everyone for joining us today.

I also would like to add just one comment. I really want to use this opportunity to remind how different our company is in terms of our methods to design and produce vehicles. And actually Q2 was absolutely amazing for us as a company because we achieved major milestones. We proved that our components work right so that certification of the bus confirms our Assumptions in terms of how vehicles should be produced and the micro factory performance and operations are showing very good results as well. So, but I really would like to raise the point again that we see that the whole industry goes through a lot of challenges, but our advantages as a company are straightforward here. So less capex than industry does today, quicker time to market. better product in terms of its digital functionality and all the components inside, vertical integration. So all those things gives us very, very strong competitive advantage. So we will start to see that actually the time we see right now, so uh, the inflation, every other topics, which we did discuss. Um, I believe that fundamentally, uh, like our musician is much more ready for the current, uh, uh, situation on the market than any other company, uh, in this industry, just because like of our unique method of designing components, uh, vehicles and, uh, actually production methods. So I'm enjoying to see. like our benefits compared to like our advantages compared to other companies. And I'm sure it will unfold with the next quarters as well. Thank you very much.

We do have one remaining question from Barenberg. Michael, your line is open.

Oh, hey, thanks, guys. I'm glad I snuck in here. So I'll keep it brief. Yeah, I was just wondering, you know, you talked about the 400 to 600 bands for the full year. Obviously, that's not your typical run rate, you know, on a quarterly basis. basis, right, if you're looking at 10,000 per year. So I'm guessing, I just wanted to get your take on what we should expect in terms of a production cadence for, you know, the Bister factory and then as well the Charlotte factory as we maybe move into 2023, right? Will we be at that 10,000 per year run rate or should we expect sort of a slower ramp up throughout the course of next year?

Yeah.

Oh, go ahead, Dennis.

Yeah.

Yes, yes. Michael, I don't think that you can make any judgment on this number from 400 to 600 to make the judgment for how it's going to be next year. So actually, what is important here is that a big part of our... So we have a long-term incentive plan for the company. Everyone, including myself, everyone on the same rules here. And 50% of that motivation is... based on the performance. And we have two performance metrics. Half of the performance is linked to production rate. So our production rate target is 20 vehicles per shift from one factory. And another half is linked to the margins we're getting from one micro factory. So those two key metrics for our business model are built in within our motivation system. So we are pushing hard as a management team to achieve this 20 vehicles per shift. And we expect to see it like, I don't want to kind of create like a promised expectation, but believe me, this number one focus for all of us, like in the company, to make it happen. So after that, when we reached first time, like 20 vehicles per shift per factory, That's already, you just multiply it by 250 days and two shifts, you get 10,000 units per year. So we're confirming those numbers. And actually all the simulations which we've done within our software shows that those numbers are not only achievable, so this is the way how the factory was built, especially for... for those numbers. So for that reasons, we really see the 2022 for us is the year when we prove all our development and engineering and certification and other things. And we see 2023 already businesses, like when we start to produce in volumes and getting the right margins and so on.

And I would just remind you that on the Q4 call, we said we would ramp up production in those two factories through the first half of next year. I don't think the limitation on our ability to ramp is the production method itself. You know, we'll have to keep a very close eye on supply chain, just given a lot of the constraints that we see out there. I think if anything's going to limit our ability to ramp up in those factories, it'll be supply chain and not the production method itself.

Yeah, fair enough. Just one quick follow-up as well. I noticed your LOIs and orders increased to 143,000, which I think is slightly up from the last quarter when it was 134,000. Still a very robust number in an aggregate. But I noticed last quarter it jumped up quite meaningfully from the quarter before. So I'm just curious as to why maybe there's just such a step down in terms of the cadence of order growth and LOI growth relative to the last quarter. Yeah.

I will probably start this answer very quickly. So first of all, you need to remember that we are focusing on the business customers. So for us, it's not like opening the reservation website and then the customers are coming. We didn't do that part of the retail side. So it's mostly focused on the particular customers. And actually, if you see the number, it's already so big that we need to build more factories than we planned and produce a lot of vehicles to supply that already lies in demand, which we receive right now from our customers. So, yeah, I don't know if you want that here.

Yeah. And, you know, to Dennis's point, you saw a large jump in the last earnings and essentially that was driven as we started to get the vans out in front of customers. What you're seeing this quarter is as we're approaching certification and you'll see this throughout the year, the attention is going to turn into conversion of those LOIs into binding orders and certification really becomes sort of that critical milestone. for that to occur. So our sales team has already started shifting focus. So going through different driver training, for example, potential customers, going through different product attributes, the software stack, et cetera, is becoming the focus of the sales team rather than simply going out and increasing LOI. Right now, as we've said before, I think everyone is very impressed by the product and we are capacity limited, not demand limited. And I think it's very important for for us to get the first few micro factories going and then start scaling from there because the demand is already there.

Absolutely understood. Thanks a lot, guys. Thank you.

Thank you. Have a good day.

Thank you for your questions. This concludes today's call. You may now disconnect.

Thanks, everyone.