Arrival

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. 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 raise 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, 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 CEO, Avinash Raghubar, 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.rival.com. With that in mind, I'll turn it over to Dennis.

Thank you, everyone, for joining us today. In Q2, we hit a major milestone when we achieved European certification. on our bus and van. Now that we have certified bus vehicles, commission of the Bistro Microfactory is on the way to prepare for the expected start of van production in Q3, with the expected start of van deliveries in Q4 to UPS, our first customer. We have also seen in the past quarter the world continue 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 creating the business in a downscaled manner through at least 2023, without the need to raise additional capital other than through the ATM we announced today, while preparing the company for growth when capital markets stabilize. Our proposed plans include the reliance of the organization that we believe would allow us to deliver business priorities through at least 2023, utilizing almost $530 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 WAN platform, which makes up the majority of our MAU and other 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 US to 2023. Our business micro factory in the UK is the first ever micro factory and we will use production learnings we can apply to Charlotte. In addition, we will defer cash spend by keeping one part 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, Dennis. Today, I want to focus on our demand pipeline, customer trials, and startup production. Further to Dennis's 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 FirstBus 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 roadmap 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 organisation is currently focused on van, and since achieving European certification, Arago vans continue to accumulate mileage on public roads in the UK. 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 one microfactory and one 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 Bista Microfactory to ensure a quality, saleable vehicle is produced, while continuing to make any optimizations required. Parts for up to 200 band sets are being delivered now, and we expect to start production in the Bista Microfactory in a matter of weeks. In order to reduce our near-term capital spends, 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 startup production in Charlotte not only reduces our near-term cash spend, it also allows us to take better advantage of the lessons learned at Vista 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 non-binding 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 for 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 with strong customer engagement, as evidenced by our large backlog, we are excited about this next evolution of our pre-order 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 US 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 US dollar financial statements and footnotes for that 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 Bister, deliver our first vehicles to UPS this year, and start production in Charlotte in 2023. Due to the restructuring and a slower ramp in Bister, 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 Vista 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 to 195 million dollars and CapEx between $40 million and $60 million. CapEx will primarily be for some initial high volume tooling and finalizing the commissioning of BISTR. We expect to end the year with approximately $300 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 two 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 Dennis 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 developed incredible enabling technologies. Our own core components and device software that are now certified. Proprietary composite materials that eliminates 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 a microfactory replacing a conveyor belt. Software-defined microfactories which reduces scapics and time to market. We have tested all of the key operations required to assemble a vehicle. We managed to design and certify two vehicle platforms that are currently undergoing road trials. All of these technologies are coming together to achieve something truly unique in the industry, new methods to design and produce vehicles. It means our business can scale very rapidly with fast time to remain. Our ambition is to produce multiple vehicle platforms in hundreds of manufacturers, each producing over 100 million of margin per annum, equating to a million vehicles and target 10 billion margins per year. Our enabling technologies, proprietary hardware, software, materials, and new gen robotics sets us apart from the rest of the industry. The start of our first micro factory is a big step towards achieving our vision. It is the move from zero to one. With that, let's start our fusion.

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 audio. Our first question comes from Steven Fisher at UBS. Steven, your line is open.

Thanks. Good afternoon. I'm 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 could just talk about that a little bit. That would be helpful. Thank you.

Look, actually, many things happened. First of all, we do, like, instead of two factories, we do one. And we do this to save cash. So this is number one. So our capacity is reduced. The second one is actually the supply chain and how we're receiving the parts. 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 it's delayed, I mean, so it just comes later than it should be. And the third one is we actually take a very conservative view, because originally we wanted to make many shifts to push the volumes for the end of the year, but we are switching our modes to more preserving the cash, because anything you do on extreme level, so it just costs more. And we understand that if we will have more shifts, but not fully utilize immediately because of ramp up, we just will waste the cash. So we decided that strategically it's better for us to spend cash much more careful and focus on delivering first vehicles in the 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 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 within the last four months. Actually, in the last... for month of the year. So, any delay with the supply of couple of weeks, it's a big impact on the overall time we have within the year. So, actually, it's like, you know, we... We are extremely happy about Q2, so we achieved amazing things. The first one is certifying our vehicles. We did it much, much quicker than industry does today. So even the organization which were certifying us, they've been very impressed with the efficiency and how fast we managed to do this. It's really important, because it's never been done before in industry. And we do it first time, and from first time we did it right. And we already got the very strong competitive advantage on this stage. So we know how to do this certification and we have all the necessary tools and skills 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 arrival ready, so we go like through the stages of assembly and it works the way we planned. 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's 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 we... In general, we believe that 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 plants 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 installing equipment is related, it's like straightforward. So, our internal plants normally should take us six months from the moment we start to put equipment to the moment factory is ready. And because we are taking the learnings from the Bisco factory, so we don't need to go through the same cycle, 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 to make a promise, but we believe that the shuttle factory is going to be a jewel in our like in our business, in the way that we will, like, we are, as I said, like, extremely pleased, like, what's happening in Bistro, but as I said, we know many things we won't optimize, and the Charlotte will come as a much better version of that. So we cannot wait when we will start.

I just want to remind everyone that the micro factories 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 Dennis's point, we're not discussing 23, but we do have a very unique production facility in the microfactory that lets us... Scale in parallel, you know, at 20,000 square meters regular warehouse, like we talked about before, off-the-shelf equipment and all our own internal processes.

Yeah, another comment which I want to give is that right now, like, we are switching from the mode where we have two products, two shifts, two micro factories, to the mode where it's one factory, one shift, one 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 said, like, let's do more. So now, with, again, like, changes on the market, so that the cash standard is much more important than anything. So we believe that this opportunity to switch to the mode where it's one product, one factory, one shift, gives us better chances to be successful. So I think it's something which we're We should go anyway.

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 when is 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 and $350 million of cash. I would expect, you know, 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 – or I'm sorry, Q3 will be more than I would expect in Q4. I don't want to guide ending 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, you know, we're targeting, it's going to be lumpy as we go throughout the year, but somewhere between $100 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 firm next year.

The common 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 with what we achieved. So I don't know 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.

Thank you very much.

Your last question comes from Jeffrey Osborne with Cowan. Jeffrey, your line is open.

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

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

That's helpful. And then either for Avinash or Dennis, in VISTAR today, are all the cells, I forget if it's 12 or 14 production cells, remind me there, but are those set up? Have you produced any pre-production vehicles, you know, 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 tests with the parts we had. Of course, again, we were trying to limit number of sets we were using in the factory for all the commissioning. So we used all of them, like everything that was available. And we ran, like, dry runs and the physical, like, full runs, like, on the factory. so now if you will go to the factory what you will see you will see the parts like a cabin or structure which are actually physically assembling right now it's happening but now today tomorrow like every day AMR is fully working and installed batteries are battery modules are produced from the factory from the production process so like it's we are in 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 just due to battery inflation. I think your prior positioning of the vehicle was more expensive than the incumbent Morgan Olsen UPS vehicle, but less expensive than competitive EV solutions. I'm just curious, has your pricing philosophy changed? The philosophy hasn't changed.

Yeah, the philosophy hasn't changed. We'll remain in line, as you can imagine, with rising inflation and supply chain issues. This is a challenging market for the whole 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.

Got it. That's all I had. Thank you. Thank you, Jeff.

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 Dennis, this is a very big moment where the industry sees the microfactory for the first time producing vehicles coming this quarter. So as Dennis mentioned, this is a zero to one 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... to also give a little comment here, is that I founded this company in January 2015 with a vision that there is a better way of making electric vehicles. And actually, ultimately, we want to see that it's not only electric vehicles, I mean, so anything, I mean, it could be like the other industries as well, like furniture or electronics and many other things. 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, 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 create it, certify, create the software for that. Actually do the full design. If you just take our van, actually in the shape it is now, like better, we call it a better version, second version. First case of this product was radio only, February 2020. So it took us like a bit more than two years from the moment of the first sketch to the moment vehicle was certified. It's never been done in industry before. I mean, so it's like normally takes like at least five years to do that, but we managed to do it within two with much smaller resources like to do that. And then... All the kind of things around what factors we were envisioning that the robots going to be flexible, like one factory can produce many types of models from the same factory. It's something again, like totally new interfaces, which are instead of welding, there's like new materials, which is not standard metal body, but like new type of composites. I mean, so we, all this learning, and then it comes to the point where in Q3 2022, it all comes together. For me, 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 this dart is in the tent. So that was the mission in part we were doing. And I'm so happy that it's happening so that, like, in Q3 of 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, Dennis. This concludes today's conference call. You may now disconnect.