Archer Aviation Inc. (ACHR) Earnings Call Transcript & Summary

Okay. Welcome back to the Barclays 2022 Global Autos and Mobility Tech Conference. I am David Zazula the senior airline analyst on the eVTOL side. We are extremely pleased to bring on Archer Aviation and CFO, Mark Mesler. Archer was founded in 2017 by Adam Goldstein and Adcock, two entrepreneurs, who had the great idea of bringing urban air mobility to the masses via electric power aircraft. They are what we call laser-focused on that mission and have set a goal of delivering 6,000 aircrafts by 2030. With us today is Mark. Mark has been CFO of Archer since February of 2022. Prior to joining the company, he served as CFO of Volansi, an aerial logistics [indiscernible] Company as well as Head of Finance for Bloom Energy for about a decade providing solid oxide fuel cells. So a lot of energy and finance experience that brings him to be here as well as on the engineering side. So Mark, thanks for coming. I appreciate you being here in chat with us.

Yes, thanks very much for having , David. Looking forward to it.

All right. We'll take straight off although we will start with my questions. [Operator Instructions]. But kicking it off here, Archer started maybe a little later than some competitors. But since you have made up ground very quickly on the certification piece and development pieces that they try to bring this aircraft to market. What has been key to being able to hit milestones so quickly? And why do you think that you'll be able to continue to make a brand in this space.

Yes, I think that's a really good question. There's a number of reasons why we've been able to execute on the pace with which we've executed. I think one, we took a fulsome look at the market and really wanted to design a product that would allow us the fastest path to commercialization. And to do that, we had to look at a number of things. One, we had to look at the technology of the aircraft itself. We have to look at the team that we wanted to assemble. And then we also considered how we want to engage with the certification process with the FAA. So let me just start with the team. I mean the founders here have assembled a world-class team. I mean if anybody gets to look at our open house that we had 2 weeks ago. Look at some video from that. The folks who are manning our engineering programs are just top notch. We have folks who have taken eVTOL, at least 7 to 8 eVTOL aircraft from development to testing as a product. So the team is world-class, and that allows us to execute very well. Secondly, I talked about the fastest path to commercialization. We designed our eVTOL aircraft around the specific mission. That mission is a 10- to 50-mile mission that is -- that will produce rapid back-to-back 20 -- sustained average of 20-mile emissions. And we can -- so we designed the technology to specifically service that space. And that came out of some data analysis that we had done with the program that we have internally called Prime Radiant where we felt that, that was one of the larger markets or probably the biggest market we could address. And so we designed our technology around that. The batteries that are designed are to fulfill that mission, the propulsion system, they're designed to fulfill that mission. And the payload that we have -- that we're that we're developing GBP 1,000-plus payload, which will accommodate a pilot plus 4 passengers just specific to that mission. So when you bring all -- and then the last part that I talked about was the certification piece. So we have engaged with the FAA in a manner that we have been designing our aircraft alongside the FAA certification process, meaning we didn't develop an aircraft, take it to the FAA and ask them to certify it because that would put risk into any of the subsystems, any components that did not meet an FAA requirement, we have to go back and redesign. So we actually -- we designed our aircraft in parallel at certification process. So when you bring all those -- all of that together, it does -- it did allow us to execute in an efficient and expeditious manner to get to where we are today. And we will continue to do that. I mean that's now in our DNA, that's sort of core of the company. We are laser-focused on the end of 2024, getting our certification with the FAA and getting to commercialization in 2025.

Great overview. And I think definitely looking forward to seeing how you progress with this plan, right? If we step back and think about there were a number of different design choices. We're hosting 5 different eVTOL companies at this conference that are all making mildly different design choices, you've chosen to go with an aircraft that is powered by a vector thrust to rotor design that has some stationary rotors in to some non-rotors as well as in the rear that will support the ability to take off at landing. Let me just share a little bit for those that are not in tune with the eVTOL story. How you laid it on that design and how it's well suited to the vision that you're describing just know? Yeah.

Yes, sure. So we -- as David alluded to, we have a 12 Tilt 6 propeller configuration. And what that means is we've designed an aircraft that is -- has a -- uses those rotors for vertical takeoff, so the 12 propellers are in a vertical position to allow us to take off like a helicopter. And then they will tilt forward as we transition into forward flight. And at that point, when they lock into full horizontal -- sorry, the 12 -- the 6 propellers on the front of the fixed wing. So 12 Tilt 6 means 12 propellers, 6 on the front, 6 on the back of the fixed wing. We transition into forward flight, the 6 propellers on the front tilt forward into horizontal position, much like a regular plane. And that allows us to move and generate lift using the fixed wing versus the rotors in a vertical position we're taking off and landing. We landed on that design configuration because we felt that the mission required -- you get your most efficient energy generation when you're using -- you're generating lift from the fixed wing. We felt that any type of design that only had vertical propeller technology would not be able to suit that mission because you're -- that is massive consumption of power. If you look at how we consume power from our batteries during our flight, it's at the beginning and at the end when we're taking off and landing. So having that type of power consumption using just vertical lift technology, meaning propeller technology pointing upwards, it wasn't the right mission set for us. The other way to solve that problem is to have two separate type of thrust mechanisms. One, for vertical takeoff and then maybe having a separate, what we call, a pusher motor to generate forward flight onto the fixed wing. That, for us, didn't help solve our mission because that's extra payload. That's extra weight. That push remoter whether it's electric or combustion or whatever would generate extra weight for us and the impact our payload. So we settled on this vectored thrust technology. Then we came down to how many propellers do you use, how many rotors do you use? We looked at a number of different configurations. We felt that the 12 Tilt 6 was the right amount to provide redundancy across all the propellers from a battery and propulsion standpoint. And it also generated the right amount of lift in power consumption that would allow us to fulfill our mission. So a lot of words, but that's how we went through the process and introducing the 12 Tilt 6 propeller configuration was right for us. And we did do a lot of testing around all those different configurations I just outlined.

Well, I did attend open house a couple of weeks ago. And I can say that the Midnight aircraft that was out there is beautiful. It's just -- it's stunning artistic piece. So to the extent it flies and operates, that just gives it a look, I think you're in pretty good shape there. You did mention the battery as a key design consideration. I think during the open house, you had framed the battery consideration as kind of finding the right fit on the safety to ensure that you can want passenger trust in the aircraft and you can get to from a regulatory standpoint and also balancing now with trying to get the right performance skills to perform your vision that, I guess. Is that how you were intending to frame it? And how did you land on cylindrical cell, you ended up chasing for this aircraft?

Yes. I mean, for us, safety is clearly paramount. The cylindrical cell for us has a number of physical capabilities beyond safety that allow us to perform our mission. I mean, the power density and the way that we're able to get them configured into the battery packs was clearly one of the reasons. It has history. It has -- there -- it can be manufactured at the gigawatt scale with Molicel who we chose as our vendor that we announced, I think close to the day of our open house. I think separately, is they do have some safety benefits -- others because each one of them are contained -- each one of the cells are managed and contained in a cylindrical container and the thermal runaway and some of the daisy chain things that we would generally worry about in terms of maintaining a safe battery system is -- helps us in that. Because each one of those battery cells can actually contain a thermal event themselves. And when you're putting hundreds of those together, that creates a really good safety infrastructure for us. So I think safety was clearly one reason why we chose that configuration, but I think the power density and the ability to deliver on our used cases for that was also paramount. You saw that Dr. Michael Schwekutsch and others, they've got a history with the Tesla architecture, which had used that technology previously as well.

Very helpful. During the open house I was also able to listen to -- I used the word listen to [indiscernible], the Maker demonstrated aircraft. And it really was a stark contrast between that aircraft and the rotary wing combustion engine helicopter, a couple of hundred yards away, what is the team doing to try to maintain that level of client as you build out and develop the Midnight ultimate production aircraft?

I think we're going to be -- we're going to continue to take that into account as we go from a smaller footprint to a larger footprint. The basic design of the rotors versus the large single rotor of a helicopter is such that we spin them at lower speeds. And so you don't hear that large wop wop noise. You just more hear like wind blowing through the trees or a small fan. We'll be able to continue to do that with the Midnight aircraft because the Midnight -- that's around a 47.5 foot wingspan on that. It's bigger than Maker, but -- and the propellers will be somewhat bigger, but it's really about the speed with which they rotate versus the size. And so we're pretty confident that head step function difference that you hear between the traditional helicopter versus our eVTOL craft is going to probably just improve as well.

Well, if I were a municipality or a helicopter operator, I'd be definitely anxious to get an aircraft to have that kind of noise profile. Just stepping back to the certification piece. There was a shift from the FAA. They broke kind of a best fall of the industry and shift into the 2117 B standard. It seems to me that -- at least it seems to be aligning the industry around is kind of a common time frame based on that. But can you just describe the impact of that shift and how you expect it to affect your time line with certification?

Sure. Yes, the shift was to this 2117 B to classify things as vertical lift type aircraft or powered lift aircraft. And it is -- to your point, it's a mechanism through which they're trying -- the FAA is trying to standardize how all the eVTOL manufacturers certify their aircraft. So clearly in support of that. For us, it was largely administrative adjustment for us. There were two things, I think -- so what they did, the FAA went back and looked at everybody's prior G1 and made sure that it was still in alignment with the new regulatory environment. And for us, it was largely the same. I think they had required two incremental items for us. One was like the ability to with standard bird strike. The other was to be able to continue to fly if we lost propulsive power. We had already had those two characteristics designed into our aircraft anyway -- even though before it wasn't a requirement. So it didn't really impact us at all in terms of time line. We satisfy the requirements around the updated regulatory environment. And for us, we're still working on our means of compliance, which we talked about at our open house, which that is clearly largely administrative for us as well. We've completed everything that has been asked here to date for that, and it's largely being reviewed by the FAA at this point. We're continuing to work and parallel all these there's what's called the subject-specific certification plans, which are the detailed plans. We have 18 of them detailed like subsystem and component plans of how we're going to test the different parts of the aircraft. Once you get through sort of those 3 pieces, you've largely told the FAA what you're going to do, right? So that's like tell the FAA what you're going to do and then go do it. So once we get through the subject certification plans, which we think we're going to have those agreed to first half of next year. That still puts us on our path to continue to get to certification by the end of 2024, full type 135. The aircraft certification and we're going to get our 135 certification as well for -- to operate the aircraft.

I'd like to like to touch on two parts on that answer. One, I think you had set a goal or completion of that G2 means of compliance by the end of this year. Is that still looking like it's on the table based on what your dialogue with the FAA is?

It does. We still have a path to do it. As I said, as we sit here today, we have largely completed everything that's been asked for us. It's been -- it's under review and waiting to hear back from the FAA on if they need anything else with respect to it. So I think we've got a path. It's not a slam dunk. And I think we talked about at the open house that there's the current course and speed, we still believe we're on track for it.

Okay. Then you mentioned the Part 135 I think at least during the leaseback process, you've set a time line of that of around 2024. Is that still accurate? And is that going to give the kind of operating commercial teams time enough to have the record levels of planning for the rollout of the aircraft 135?

Yes, it will. I mean we could -- there's a number of ways to do that. You can get the type 135 certification by just -- honestly by buying a plane or renting a plane, leasing a plane and putting it into operations. So you can -- there's like a minimally viable product with the FAA to get the type 135 just to start to get that muscle memory of how you are -- how you're going to potentially operate in that environment. And then once you get the aircraft certified, you layer that into your Part 135. So we're taking steps actually today just to work on getting that 135. Getting in to 2024, I think it will still allow us to engage in our initial launch markets for our urban air mobility networks, pretty confident with that. But there's a lot of things that we will be doing and learning even prior to getting the type 135, which will set us up well for once we get it to launch commercial ops in our launch markets in 2025.

You're ready about 2025 launch. I think we talked earlier, hopefully it's accurate. The goal of the 6,000 aircraft by 2030, that's going to require significant expansion of production facilities. You've selected Stellantis as your major production partner there. What are they providing as far as support to ramp to that goal? How integral were they in the selection of the Georgia test facility? And what do you think that you'll be able to do in that facility that maybe you wouldn't have in others?

All right. Yes, a lot of points there. One, Stellantis has been a great partner for us. I mean they are -- they build millions of cars a year. And we look at the manufacturing process of our Midnight aircraft, very similar to that of an automotive process. It is a heck of a lot more simple than a large 737, 787 typical commercial aircraft, clearly smaller footprint. For instance, I always give the example that to paint a typical aircraft takes weeks, if not up to a month in typical A&D manufacturing, whereas an auto is painted within hours. And that's where we feel -- that's sort of where we feel our manufacturing processes are going to go. So we select -- so they've been -- they did help us run the process. We looked at over 200 cities. They were an adviser to us as we looked at down selecting for our manufacturing footprint. We landed in Covington, Georgia, I guess, no pun intended because of a number of reasons, but they have good access to labor, good access to the colleges and universities there. It's also own an airport, and that helps us with our test. And it's -- that's turning into a little bit of an EV corridor there. I think Rivian is going to be putting a plant down there. I think SK, I heard is putting a battery factory there as well. So it's -- that access the talent, that's turning into a really good technology corridor there. In terms of scaling, as we've said when we announced that, that will be able to scale up to, I think, 2,500 aircrafts a year through phases. we'll start at about 650 aircraft per year out of that factory. And because of Stellantis' experience with this. We will be engaging with them to help us think about all the processes and subsystems that we put in there, right? So there's -- we'll have a manufacturing execution system that goes into, tells all the operators and builders across all the process steps how to manufacture those. We'll get some advisory from them on not only the process steps to manufacture, but also thinking about how to scale beyond to meet that 6,000 per year, which when we get to 2,500 -- sorry, 6,000 by 2030 -- at average of 2,500 capacity per year, we will get there. The specific things that they help us with are thinking about those things that I just articulated. And I'm assuming that we will -- when we break ground, our plan is to have engage with Stellantis to literally be on site with us and help us build out those process steps.

Very helpful. I think you had identified in the most recent shareholder letter, that it was, I think, 64% of the suppliers have been identified and you talked also at the open house about this. What are the key systems left at the remaining 36% that you're looking at?

We really haven't given -- we've announced -- you can see the ones we've announced, right? We've announced our carbon, we've announced the battery manufacturer, we've announced like landing gear. The ones that are left are -- I don't have them off the top of my head, candidly, David, but they're -- I'd say they're not like -- we've announced most of the major ones. The ones that are left, I don't know see a perfunctory, but there are ones that will -- that aren't heavy lift to close, right? There -- we've sort of been working in a pecking order for how we're bringing on vendors. So I'd say we've checked off all of the more complicated ones and the ones that are left or more, I'd say, more standard commercial type relationships.

Okay. One relationship you definitely talked a lot about is the United relationship, announcing Newark as the launch market with you having the business model as an operator as well as an aircraft provider to commercial operators. It seems to be like the rollout of the launch market is going to be substantial. How are you planning to roll that out? And are you planning to engage both kind of network operations as well as direct sales to United as part of the Newark?

Yes, yes, we do. We think -- we've talked about this in the past. We think our hybrid approach to commercializing is the right path for us. We look at -- the urban air mobility and the operating of urban air mobility networks is going to move at the pace at which we can get consumer adoption and at the pace which we can build out infrastructure. So the consumer adoption piece, we think, is the clear and present markets are those -- we call them the trunk routes, the ones we're working on with United from Newark Liberty International Airport to Manhattan and back. Those have clear demand. They have clear ability to pay, and we think those are immediate commercialization opportunities for us. In addition to that, though, we do believe that there are a number of operators around the world as well as operators of like helicopters or helicopter replacements that we could sell our aircraft to as well. And what that does is that provides us a revenue stream, it provides us a cash flow stream that can feed back into and help fund the urban air mobility networks, too as that builds out. So United is clearly a big partner of ours. We've got a contract with them for 200 aircraft. It's a $1 billion contract. There's an option for another 100 -- $1.5 billion from them. But we're also looking for other partners as well. And we haven't announced any here recently, but we do plan to continue to engage on that what we call the OEM side of the business or the direct sale, Archer direct sale to unearth opportunities and announce opportunities in the future of partners that will be signed directly to. But we think those 2 businesses augment each other very well, and it allows us to engage and get early revenue while still building out, we think is the larger value proposition, the urban air mobility networks.

So with that, target market in place and certainly with target routes in place, you put out on the last earnings call, some base operating parameters, base fare parameters that you think you're kind of guiding to? Can you just discuss a little bit of what went into how those numbers came about and why are you confident in it?

Yes. So I think what you're saying is we talked about potentially like a $6 per seat mile revenue rate that could get us, I think, roughly $3.2 million of revenue per aircraft per year. Honestly, we came up with that rate because every time we fly to New York -- to Newark. My Uber charge is about $90, which is exactly a 15-mile trip. It's $6 per mile. I think we can price that and probably even price up to like an Uber Black and maybe even higher on certain routes. I think on average, we continue to model that probably in that $3 to $4 per seat now. But specific to the routes that we had talked about with these trunk routes, we probably think they're close to $6 per seat mile in the math, and you want me to walk through the specific math of them how we get to the $3.2 million, is that what the question is?

Yes. To the level that you think it would be helpful.

Yes. I mean just so you understand the economics so everybody on the call can understand the economics. So we've got 4 seats per plane. The math that we did on that, we assumed 100% capacity, but that was for easy math. And if you do -- if you're doing roughly 25 flights per day, that's back-to-back flights at $6 per seat mile. You get $90 per seat. There's 4 seats, that's $360 per flight, and you can do the math. Operating 365 days to get to $3.2 million. But that's more just to think about to understand the math of how the economics work. Clearly, there's going to be -- when we start really diving into this, we should all know that there's going to be capacity factors, certain routes may not have 4 passengers per trip, maybe on average 3 per trip. And we'll fine-tune those as we get into the building out our economic model. But I think that for easy math, that's how the folks should understand it. Honestly I do believe the $6 per seat mile is supportable by the way, just because that's what everybody is paying right now on those routes.

I think we came at it independently. And use -- we had put in a note recently if anyone hasn't seen it, but we got to very similar operating brand that what you guys have had and happy to talk to anyone about that. I'll let you put the CFO hat on even a little firmer after growing on you on the engineered questions earlier. You talked about on the recent call, $70 million to $80 million expenses coming up. A little bit of an expansion. What is the driver behind expense expansion and how we should think about expense expansion into 2023, specifically, I guess, around headcount or are you thinking the headcount is going to expand from where you are right now?

Yes. So I look at expense expansion in 2 ways. One, there's structural expense expansion, meaning we've put things in place that are going to be in place in perpetuity. That is incremental headcount. There's also expenses that occur that are periodic or project-driven. And that's what you're seeing, you're seeing a combination of both of those in the expansion of the $70 million to $80 million estimates that we gave for Q4. A preponderance of that is because of our business model where we're not vertically integrating out across all the major subsystems and we engage high-quality suppliers to help us develop some of our subsystems. We also -- when we do that, they're oftentimes where we have to provide them monies for tooling or for engineering efforts, et cetera, and those are called nonrecurring engineering or nonrecurring costs. And a preponderance of that uptick from last quarter to this quarter, I talked about on the call, is due to that. I mean I think we've got about 2 to 3 quarters of increased project type expenses with our foundational vendors. And then a smaller portion of that increase, let's just say, I mean, maybe 25% of that is -- this is directionally 25% to 30% of that is for standard like structural changes in spending. And that would be for headcount for incremental expenses of a public company, et cetera. So that's how I would look at that expense increase. And I do think after the next 3 quarters that our expenses will moderate and probably even drop. We haven't given that forward guidance, but just think about directionally how those [indiscernible] expenses are going, that you'll see it moderate when we just start investing in structural versus programmatic or project-driven expenses.

If I could squeeze one more in here. We did see a capital raise in the industry this year. You guys are in a position where you could be a little bit more flexible going forward, just with what you've acquired during the prior raises. But how are you thinking about kind of longer-term capital needs as to be building out your Brazil in the year -- in the next couple of years?

Yes. So there's a -- I am looking at financing across 2 or 3 primary vectors. The first of which is the capital required to get to certification in 2024. And that's what we've -- on the earnings calls -- we're pretty comfortable with where we are from a cash standpoint in getting the certification. I think there's two other vectors that the industry has to start thinking about as well as we do, and we are. That is the financing or the capital required to build out the business or the fleets. That's one. And I think there's also going to be some capital required to build out vertiports and just that infrastructure piece. So I'm already doing work on fleet financing. I come from -- as you are earlier, I come from a clean energy background. And when I was at Bloom Energy, we deployed most of our assets using a third-party financing company. And I do plan to do that here for at least the UAM sale of things, right? There are high-quality financing partners that are already in the industry for the typical direct sale. But for the UAM fleet itself, I will be looking for high quality and have already started talking to people, a number of people about how to finance that fleet because I don't want to -- I really don't want to have all of that sitting on my balance sheet or financed off my balance sheet. I want to find it properly through some mechanism. So we're working on that. I think the infrastructure piece as well, there are some creative things that we're discussing and potential partners to help us build out that infrastructure because I think the infrastructure is still a TBD, like who owns what. What's a brownfield versus a greenfield? Could you get some municipalities to invest in a vertiport, if it brought traffic into their municipality or if it was a benefit for the residents there. So I think that is -- that's -- we have a gentleman that we hired from WeWork, who has spent 9 years that WeWork building out complicated infrastructure that's helping us think about that as well. So as an investor, I am thinking about what is a company, like Archer look like in 2030, 2040, in addition to getting to just the certification of the commercialization path, those are the other two financing vectors I would think about. You did bring up the factory. We are -- we signed an LOI with Synovus Bank out of Georgia, one of the -- I think it's the largest Georgia-based bank, and they are going to be providing some financing for us for that factory and some capital equipment to put in there as well.

Awesome. Very helpful. I much appreciate it. I could go quite a bit longer, but we're out of time. So Mark, thanks so much for coming and joining us. And hopefully, you'll come back again and do this next year for us.

Thanks, David. Really appreciate it. Talk soon.