Electric Last Mile Solutions, Inc.

Good day. Welcome to Electric Last Mile Solutions' third quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1, followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Sam Lee, Director of Investor Relations and Finance. Please go ahead.

Good afternoon, and thank you for joining us for Electric Last Mile Solutions' third quarter 2021 earnings call. Before we begin, we'd like to remind you that remarks made on today's call may include forward-looking statements. These are based on our predictions and expectations as of today. Forward-looking statements are subject to risks and uncertainties, that may cause actual results to differ materially from those discussed today. For more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filing. Joining me on the call today are James Taylor, CEO of Elms, Jason Liu, Executive Chairman, Rob Song, CFO and Treasurer, and Jonathan Ballard, Chief Strategy and Digital Officer. Management will deliver prepared remarks, and then we will open the line for your questions. Now, I'll turn the call over to James.

Thank you, Sam, and thanks, everyone, for joining us today. I'm so proud of the team we've assembled at Elms. Despite all the challenges in the auto industry this year, we delivered on our commitments. We posted a historic third quarter in which we began production at our Mishawaka, Indiana plant and delivered hosted revenue as we shipped our Class 1 urban delivery vehicles. And we intend to continue delivering on our commitments by maintaining discipline in our goal setting, our follow through, and our transparency going forward. Today I'll provide a business update with detail about our urban delivery launch, plans for the addition of our Class 3 urban utility vehicle, our recently announced battery agreement and plans to explore localization of battery assembly in the U.S., and additional insights into our digital strategy development. Lastly, I'll turn it over to our CFO, Rob Song, to discuss our third quarter financials and outlook. Rob joined the company in April and has worked closely with the company's former chief financial officer, Albert Lee, as part of an intended succession plan Rob brings nearly 20 years of diverse finance and capital markets experience, including extensive work with Morgan Stanley, Alphabet, and CorePoint Lodging. We're pleased to welcome him officially to the call in his new role within the company. Albert was essential to Elms becoming a publicly traded company and expanding its financial operations. We thank him for his important service and look forward to working with him as he transitions into a senior advisor role with the company. Okay, let's get started. As the first publicly listed electric vehicle company initially focused on the Class I to Class III commercial segments, we're redefining productivity for commercial vehicle customers in what the industry calls the last mile of delivery. We founded ELMS because we saw an opportunity to rapidly deliver sustainable and intelligent mobility solutions to businesses engaged in moving goods and services to their final destinations. We developed commercial solutions that are profit drivers, not cost centers. And we identified an unmet business need, the Class I to Class III commercial EV segments, where we expect to benefit from several major tailwinds. These tailwinds, by the way, seem to be blowing harder and harder these days. including, first, enormous demand for commercial vehicle solutions driven by the rapid increase in e-commerce, companies seeking to meet very aggressive ESG targets, governments at all levels that are driving and, in some cases, mandating the adoption of environmentally sustainable solutions, U.S. policy movement toward enhanced electric vehicle tax credits, including the recently passed U.S. Infrastructure Bill and the pending Build Back Better Bill that includes an expansion of EV tax credits. And within the last two weeks, the new global sustainability commitments coming out of the U.N. COP26 meetings in Glasgow. This is the perfect storm of positive demand catalysts blowing all in our favors. To date, there are few EV options on the market to meet the sudden increase in demand. Our urban delivery van is the first in the Class 1 commercial vehicle segment. The response to its launch has been tremendous. Demand is strong for both the urban delivery vehicle already in production as well as our planned urban utility vehicle. The response has not only been strong here in the U.S. market, but also in Canada. so we've added a regional headquarters in Montreal that materially increases Elm's total addressable market. We see great sales opportunity in Canada where federal and provincial governments have taken progressive actions to support electric vehicle adoption, including offering government incentives that total up to $8,000 Canadian for the purchase or lease of an EV. Canada has mandated that 100% of car and light truck sales be zero emission vehicles by 2035, and has experienced an e-commerce boom similar to that in the U.S. Our opportunity here is to move quickly to be the first mover and take advantage of all these tailwinds. Well, that addresses demand, and now let me turn to supply. we don't see any other Class 1 commercial EV manufacturers getting an EV foothold as quickly as we will. While many new entrants and existing players have announced plans for commercial EV products, for most of them, they remain plans. Based on competitor manufacturers' announcements, we expect to be the only company selling commercial EVs in the Class 1 space for two to three years. We also expect to be one of the first EV movers in the Class III space with a launch of the urban utility next year. The traditional automakers in the Class I market have not made any announcements to electrify, and new EV entrants will launch first in other segments before entering the Class I segment. In addition, they will face regulatory approval hurdles and startup challenges before they reach the market. Elm's key differentiator and enabler continues to be our unique business model. Our business model is built on capital efficiency and a customer focus. We're already achieving capital efficiency by leveraging our existing US EV manufacturing plant and market proven components. This allows us to deliver reliable products at an exceptional speed and at a fraction of the cost compared with the traditional automotive business model. We're also differentiated from other manufacturers by our singular focus on commercial customers' needs. This allows us to provide what we believe will be one of the lowest total costs of ownership, up to 35% less than internal combustion engine vehicles. And as a solutions provider, we're not just delivering the hardware, but also the customization and digital solutions that enable our customers to increase the productivity of their fleets. Our ELMS air data and connectivity solutions will help our customers optimize their fleet's efficiency, resulting in reduced emissions, best use of EV charging infrastructures, lower vehicle maintenance costs, and lessen unscheduled downtime. The result is significant differentiation and a competitive advantage for ELMS. and we intend to build on it. One example where we're building on our competitive edge is the launch of our EV Campus Program. We're engaging with colleges and universities to address their sustainability goals and on-campus clean transportation needs. We launched the EV Campus Program in October to help U.S. universities forge an achievable pathway to a zero-emissions future. We are introducing our EV solutions to a large and untapped market that is very supportive of a transition to a clean and sustainable transportation fleet. Already tested by a half dozen colleges and universities, the EV Campus Program allows schools to test, recharge an urban delivery van, and experience trial installations of ELMS telematics devices in their existing fleets, of also internal combustion engine vehicles. We see universities using the vans for on-campus transportation, landscaping, maintenance, moving, and more. They're seeing opportunity to use our vehicles and data to achieve more sustainability and also their financial goals. And we're seeing opportunity to expand our outreach to other potential clients, such as airports, corporate office complexes, and industrial facilities as well as the future on-road needs of those organizations. That's why we're really excited about this program. We estimate all of these campuses together could comprise a half million unit market segment. An excellent opportunity to demonstrate how transitioning fleets, large and small, to ELMS vehicles and data solutions can help organizations achieve their sustainability goals and lower fleet costs. It's also an excellent opportunity for Elms to test our production systems and capabilities on smaller orders, refining our processes and protocols before we ramp up the full production capacity, while allowing us to recoup these early stage costs. We see our EV campus program affecting positive change on university campuses and producing direct sales for our currently available on-campus fleet vehicles. We also see it highlighting a variety of ways our vehicles can be put to use to radically improve business and environmental results. As we've said previously, we expect to meet our commitment to launch our fully homologated urban delivery vehicles in December, certified for on-road use in the U.S. market, and begin delivering against the 6,000 vehicle firm order commitment we have signed. Engagement with our customers continues at a rapid pace with customer demos targeting such end customers as FedEx and Amazon delivery service partners and on-demand cargo van rental companies. We expect to convert many of these product tests into future sales. In addition to engaging customers directly, we also continue to work with numerous fleet management companies as an important go-to-market channel in the commercial vehicle industry. Unlike the relatively simple distribution model of retail sales, commercial fleets engage very differently. Relationships with large distributors and FMCs, as they're called, are what are required to be a player in a commercial vehicle business. The top 10 U.S. FMCs manage fleets of more than 1.9 million vehicles. Another essential requirement for success in the commercial vehicle market is is establishing critical relationships with upfitting partners. We've executed more than 20 non-disclosure agreements and are working with them to develop specific upfits for our vehicles covering a broad range of market use cases. We'll continue to provide updates on upfitting as we finalize arrangements with our partners. Demand for our vehicles and solutions remains high and production has so far launched very smoothly. We want to recognize at the same time that we had planned a slow controlled startup to manage normal issues that come up with any new model introduction. Our experienced team has hundreds of vehicle launches under its belt. Our slow ramp up is intentional. When issues come up, our team is able to address them and solve them. However, as is happening globally throughout the industry, and as we have discussed On our last call, our suppliers are experiencing challenges sourcing raw materials in managing COVID-19 disruptions, and we are facing rising transportation and logistics costs. We ordered more than enough materials for our initial production targets this year and through actually early 2022, but the global shipping container shortage has significantly increased the cost of moving components to our manufacturing facility. Our spot rate shipping costs are running as high as $25,000 per container, which is over five times higher than the traditional pre-COVID rates. These elevated shipping and logistics costs have cut our margins per vehicle from double digits to low single digits. In light of these unprecedented global supply chain challenges, we made the decision to lower our production to 300 to 500 vehicles for the year down from originally 1,000. We're confident our team of experienced and skilled professionals are well equipped to manage this short-term cost challenge. After all, this is a team of top supply chain and logistics managers, engineering and manufacturing professionals, sales and dealer network experts that worked with our global supply base to bring our urban delivery to fruition in a short amount of time at far lower cost than any competitor has achieved. This same team has the necessary skill to manage the current market issues with our short-term and long-term financial goals and to continually adjust and adapt to changing macroeconomic environment. We also are working closely with our suppliers to ensure timely delivery of parts and subsystems and to firm up a production estimate for 2022. More details will be provided on our next earnings call. Still, I can share that once. we're finalizing long-term shipping and logistics contracts for 2022 to avoid paying the current spot rates. We expect to significantly lower our current shipping costs. Rob will expand on this later, and we aim to provide an update on this in early 2022. In addition, based on historical trends, shipping spot rates should soften after the holidays. Despite the macro headwinds, we're positive there's an end to these challenges in sight for Elms. As we begin to capture market share in both the Class 1 and Class 3 commercial EV segments next year, something no competitor can yet claim, we expect our vehicles to generate meaningful gross profit by the second half of 2022. Now, back to product. In response to strong customer demand, our board has formally approved production of our next vehicle, the urban utility vehicle. The Board has also directed us to explore opportunities to advance the urban utility's time to market. Our current timing is to launch the vehicle in the second half of next year. Like our urban delivery van, the urban utility vehicle will be assembled in Mishawaka, Indiana, and is highly customizable. We anticipate working with partners to upfit it with customized dry boxes and special use flatbeds in many cases. And we expect to be a first mover, if not the first mover in this category. Now let me switch gears and talk about the battery agreement we signed and potential localization. In October, we announced a deal with CATL that secures the battery supply for the urban delivery through 2025. PHL is the leading and largest supplier of battery systems globally. Securing our battery cell and pack supply is an important milestone and a tremendous achievement for our company in an extremely challenging supply environment. Yelm's battery is the lithium iron phosphate or LFP chemistry. This type of battery is rapidly gaining popularity because it's less costly than the other alternatives, is viewed as a more stable power source, than the other chemistries, and it doesn't use the scarce and price volatile raw materials nickel and cobalt. Given these attractive qualities and growing demand for LFP batteries from competitors, we feel especially fortunate to have locked in our supply from a large and well-established battery maker. We're also collaborating with several potential partners to localize production of our battery packs in the U.S., we can envision several paths to success, including building the battery packs on a manufacturing line in our plant in Mishawaka. In the future, we are planning for the localization of about half of our vehicle content, starting with the battery, which alone comprises 30% of the production costs. We expect localization to significantly reduce our costs over time. In other important milestones, we open an Asia-Pacific Operations Center, or APOC, in Shanghai and an urban mobility lab in San Francisco. Our APOC further expands Elm's global footprint and will serve as a hub for engineering operations, project management, and supply chain management. As you know, the EV industry in Asia has a several-year head start on the U.S. industry. We will tap into that expertise in the OEMs, the suppliers, and talent pool. AIM in Shanghai will be fully integrated with the company's global headquarters and work to improve supplier engagement, increase our speed to market, and efficiently execute our unique business plan. We expect APOC to exceed 100 employees by the end of the year. We anticipate the Urban Mobility Lab in San Francisco to benefit from the large pool of talented hardware and software engineers, as well as application developers in the Bay Area. The lab will serve as our tech hub for exploring and developing innovative electric vehicle solutions that improve fleet productivity and lower total cost of ownership. The lab is building out our data services and working with technology partnerships that are crucial to expanding in-vehicle technology, data intensive applications, and machine learning capabilities. To that end, we are taking a portfolio approach to building a charging ecosystem that serves Elm's customers' needs. One example is our partnership with EVgo. We're working with EVgo to develop a bundled turnkey fleet charging program for Elm's customers. We anticipate that our growing charging ecosystem will include additional partners to ease customers' transition to our EVs and speed their time to realizing improved productivity and lowered fleet costs. Elms intends to continue to discover and develop applications, data analytics, and telematics that speed our customers' achievement of sustainability and financial goals. Currently, Elms vehicles launch with unit tracking, EV charging station locators, and telematic capabilities. As we build out our Elms Air telematic solutions, we anticipate adding fleet utilization, predictive maintenance, delivery management, and advanced driver safety applications to our vehicles. So, in summary, we're very proud to see our unique business model come to fruition. Our EV-ready plant and the market-tested components enabled us to get far ahead of a crowded space full of new entrants, while a need for Class 1 and Class 3 commercial EVs is at its greatest. As a result, we delivered our first urban delivery vans and are engaging potential customers in pilot programs all across the country. We expect fully certified urban delivery vehicles will be shipped in December. We've secured our battery supply for urban delivery through 2025 and are pursuing U.S. localization. And we reported revenue in the third quarter as promised. I just want to repeat that. We are now a revenue-generating company, not a pre-revenue company, and we will continue to generate revenue. In response to strong customer demand, our board formally approved production of our second vehicle, Class III Urban Utility, and encouraging advancing the time to market. I look forward to continuing the conversation and updating you on our progress. Now, I'll turn it over to Rob to go through our financials. Rob?