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

Okay. Welcome, everybody, to the session we have here with Archer Aviation. My name is Bill Peterson, the transportation and fuel transformation Analyst here at the firm. Really pleased to have the CEO of Archer, Adam Goldstein; and the COO, Tom Muniz here with us this afternoon. Thanks for joining us. I asked to prepare these guys to give some prepared remarks, so Adam was going to kick us off with that. Exciting announcement if you haven't seen with Stellantis in the last few days. So again, gentlemen, thanks for joining. And if you can maybe just provide a quick overview of the company and maybe just highlight the exciting news with Stellantis.

All right. Thanks, Bill. So I'm Adam Goldstein, the Founder and CEO of Archer. We are building electric vertical take-off and landing aircraft to be used in urban air mobility. So these are vehicles that are really geared to help save people time where they're traveling on the ground in cars, anywhere from 20 to 50 miles where they're spending 60, 90, 120 minutes on the ground, we can replace with trips in the air 5 to 10 minutes. From the very beginning, Archer has always been focused on finding the most efficient path to market. So this is a new product that we're bringing really into service. So it requires lots of different hurdles that we have to get through. And they really revolve around, one, the technology; 2, the path to certification; 3, the manufacturing; and then ultimately standing up the service. And so finding the most efficient path to market, I think, has been one of our core differentiators and really delivering against everything that we've said we're going to do. So we put out a lot of messaging when we went public. And really since early 2021, we've been very clear in our aggressive path, and we've delivered on everything that we've said that we've done that we were going to do. So a lot of that started with the simplicity of the vehicle that was designed around a business case. And so the business case that we've targeted are these 20- to 40-mile trips with a vehicle that has an ability to fly up to 150 miles per hour and a full range of 100 miles. And so we started showing that with our demonstrator vehicle called Maker. And so our path to market really revolved around building this demonstrator vehicle that we could prove the technology with and then ultimately use it as a certification test bed with the FAA to set the rules to which we would certify around. So over the 2021 and 2022 period, we showed that. And so we built Maker, we've gone through the full transition, which is where you're moving from the vertical portion of the flight to the forward cruise portion of the flight. And so we did it in a very, I would say, expeditious period of time and really proved out the vehicle configuration, the arrow model, the tilt propeller system. And basically delivered on everything that we said we would with the technology. After we proved out the configuration, we set up the rules with the FAA to which we were to start the certification process. And so that started with what's called your certification basis, which Tom can talk through here in a few minutes. But basically setting the ground rules with the FAA, and now we're moving into the parts where we're going to start actually testing against that to prove the vehicles are safe as we've said. And so the next big part of the story really had to do with trying to help people understand the use case. And so we did a really big partnership with United Airlines. And United has put in a purchase order for 200 planes, and they put down the first $10 million deposit after we reached a certain maturity in the technology development program. So United has been a really great partner of ours, not only just as an investor and as a company buying planes, but also really helping us think about standing up operations. So we recently announced our first route with United, which will go from Downtown Manhattan to Newark Liberty International. So one of the United's main hubs, and we're working on many other routes with them. So once we have the vehicles through the certification process, we can start deploying the vehicles. And then the other big relationship that we have is with the auto OEM called Stellantis. So we started working with Stellantis back in 2020. We started on several engineering projects. A lot of those engineering projects were around vehicle design and ways to optimize the vehicle around high-volume manufacturing and other ways to make the vehicles better in areas that the autos are very advanced in such as noise, vibration and harshness, so like right quality. So if you think about cars are quiet and planes are generally not that quiet. The autos do a very good. We've also done a lot of work with them on part selection, the material selection to help us think about scaling up those vehicles. So as that relationship matured and the company has really sort of found shared core values, it gave us a chance to prove out all the technology and gain the trust of Stellantis. And we recently just announced a much larger, deeper partnership with Stellantis, where they will be committing capital, personnel, knowledge, expertise; basically everything we could ask for to help us build vehicles. And so the reason why that's important is Archer has done, I think, a great job designing the vehicles and setting us up for success, but there's always been this big question on, well, how are you going to make a lot of them. And it's very expensive to do that, and we've seen all the auto companies get stuck in this production hell concept. And how are you guys going to build a lot of planes? And so Stellantis is actually a really unique company in that regard. It's run by Carlos Tavares, who sat on the Board of Airbus for 6 years. He recently just stepped down this year. And they're one of the largest, I think third largest, auto company by revenue in the world. So they make -- it's around -- and Carlos had said today, 550,000 cars per month. So they understand volume and Carlos, the CEO, understands aerospace. And so there's a lot of components that do cross over like the electric motors, the batteries, wire harnesses. There's a lot of composites, similar type of parts that we're learning together to help really build these vehicles and scale. So the expanded partnership that we announced has several different components. The first one is that they are going to be actually helping us build the planes. And so we have announced a manufacturing facility in Georgia, where we will have a significant presence of Stellantis manufacturing folks that are helping us actually stand up the plan and build planes. And as we're learning together on how to build the early sets of planes, the goal is to hand over the relationship to Stellantis to really scale it. So maybe you can think about it a little bit like Apple-Foxconn, where the devices are designed, the lines are set up and then ultimately mass scaled beyond that. The second component was that they gave us additional access to capital. So what's interesting in today's environment, we don't need money today. So we actually have a lot of capital on the balance sheet, over $600 million at the end of the last quarter that we announced. And so it's one of those things where you never want to raise capital when you don't need it, but we also don't need it today, and we've also seen the way the markets are. So what they actually did was create a pretty unique structure where there's effectively an option, it's Archer's option to be able to take up to $150 million of equity capital from Stellantis between now and the beginning of 2025. So it's really a nice optionality for Archer that have given us access to additional $150 million of capital. The third part of the relationship was they publicly said we're going to -- they're going to be expanding their shareholding in Archer. So they're buying stock. So I think that was just a big sign of confidence all around. And it was, I think, a big move for the industry where you had a major corporate sponsor say, we're going to take a lot of risk off the table here. And so this significantly derisks Archer where there's a group here that can help build the planes, finance them and bring these vehicles to market in mass. So maybe I'll take a pause there and turn it back over to Bill.

Yes. No, that was a great overview of the relationship. I guess the other sort of recent news that came out since the last earnings was the Airworthiness criteria for Midnight has been published in the Federal Register by FAA. I guess, what does that mean? what does the announcement entail? What does it mean for Archer?

Yes, sure. Happy to take that one. And maybe just set the stage on certification before diving in. By the way, my name is Tom Muniz. I'm the Chief Operating Officer at Archer. So my responsibilities are essentially getting the aircraft designed, getting all the parts selected, getting it certified and getting it into production. So, as Bill said, you saw in the public, the FAA published our Airworthiness criteria, which is basically the set of regulations that the aircraft needs to be designed for in order to be certified. And that's putting it into context the big milestone we're working towards, getting a type certificate for our aircraft. But if you put that in the bigger picture, the right way to think about certification is there's essentially 2 main phases; the first phase is setting up all the detailed requirements for what your product needs to go to do and how you're going to show that it meets those requirements. And then it's about building, testing, finding compliance to all those requirements. So essentially, where we are today is the design is in the very late stages. We're approaching critical design for the aircraft, meaning all the drawings are made for all the parts, et cetera, all suppliers are selected -- and in parallel, we're marching through our certification process. So with the announcement of publishing those Airworthiness criteria, you're essentially just seeing like the public progress of all the work we've done with FAA over the last couple of years. The 2 other steps that are coming up on that phase essentially are publishing and finalizing our means for compliance, which is essentially a little more detailed set of requirements that show what we need to do to meet those Airworthiness criteria or essentially show that we satisfy those. And then the final step is what the bulk of the team is working on today, and that's detailing out what are called certification plans, which are the very detailed documents 50, 100 pages each. We've got 18 of them that show, for example, okay, for the low voltage power system on the aircraft, these are all the tests we're going to do. These are all the analysis we're going to do. And once you have that, it's essentially then, okay, go do the work, show that you can check all the boxes and that results in a TC. So this year for us, as a company, it's all about locking down all of those detailed cert plans and then shifting into what's called the compliance signing phase. So you'll see us this year fly our first Midnight aircraft, do a bunch of tests for credit, right? Build conforming hardware show that it meets the requirements, all leading up towards next year 2024, which is about a flying aircraft, showing that it meets all of the highest level of safety requirements, right, demonstrating that the full aircraft is good to go and ready for TC.

And maybe, Bill, if I can just add one more comment. I think what's really interesting and unique about the industry is I can't recall a time where you've seen the FAA be so promotional about a new product. And so the FAA has publicly come out and stated that this is a big priority. And Billy Nolan, the acting administrator went on 60 minutes and said, hey, we are going to certify these vehicles. This is happening. And all the evidence that we've seen beyond that has been just as they've said, which is they are working very aggressively to do this. And so it's become a bit of a kind of a national pride here that we bring the first real electric planes to market. And so I think that's one -- there's a lot of skepticism around will the FAA do this? It always takes longer. These are actually very simple vehicles. These aren't -- this is not like enough -- it's F-35. This is not an [ OSPray ]. These are actually very simple vehicles that are safer than the existing substitute products of helicopters. So I just think that's a really important just mindset to understand when thinking through the cert process.

Okay. And you were speaking kind of primarily about type certifying the aircraft, but the other aspect is things like operations and training and production, where are we in the process there? And what are the milestones we should look out on that side of the certification process?

Yes. Good question. So there's 2 or 3 other areas of certification that we'll need to actually launch a service level with the product, right? One is what you're getting at, which are the operational requirements. So actually, earlier today, I was in industry roundtable with representative from the FAA. The update I got from them was they're actually ahead of schedule, publishing their SFAR. That's an acronym for -- that stands for Special Federal Aviation Regulation, that's going to essentially codify all the rules for how aircraft like ours would be operated. So what the FAA said is they're on track to get all those rules finalized by Q3 2024. So our goal is to get our type certificate by Q4 or end of the year, next year, 2024, which means that shouldn't be getting item for us. And the person today from FAA confirmed, oh, yes, we'll be ready for you guys, just go get the aircraft certified. But beyond those 2 things there's also the manufacturing side. So we also need a production certificate, which is essentially the FAA's way of saying they trust Archer to manufacture aircraft safely and repeatedly. So we've submitted our application for our production certificate to the MIDO, that's the manufacturing arm of the FAA. We're working with them to get all of our quality systems approved, et cetera, so we're ready to launch into manufacturing post TC. And then the other piece here is essentially the operational side as an airline. So Archer's plan is to both sell aircraft as in our relationship with United. We also want to operate the service. So you can think of that as standing up an airline, if you will. We're not going to be a scheduled airline like United is, but we're going to be offering flights on demand similar to how you look at Uber today. So for that, there's another certification that's required. We're going to operate under what's called Part 135, which is the regulations for these on-demand air travel services. So all 4 of those pieces need to be in place. We're making good progress on each of them. Everything is kind of on track as it needs to all come together to launch the service in 2025.

I guess piggybacking on the last point, let's pivot the business model and some of the choices that you've made, first off, the payload and passengers. That's enabled by technology, of course, but -- and then you have sales and operating the aircraft. Maybe you could just start off with the strategy on what you took to define that business model as you see it today? And what -- how do you find it to be differentiated?

So even as recent as 3 years ago, there's still a pretty big debate on where batteries would go. And would batteries be good enough to have vehicles without wings, which are much more energy and power intensive because you're just hovering the whole time and what the design configuration should look like. But the tricky thing about aircraft design is it takes several years to design an aircraft. So the decisions you make several years ago stick with you throughout the life of the program. And then you typically will keep these aircraft for a decade. And so you can imagine there are really big decisions that you have to make and some of them are just guesses. And so the way that we went about it was we actually took a very kind of statistical approach to looking at this. And so we built this big system simulation, which we call Prime Radiant, where we studied mode choices of people basically moving on the ground and where they were going to and from. What we saw was there was this massive amount of people moving on the ground in cars, very short distances. And L.A. is probably like the best example of that. And so there are million one-way trips every day in L.A. that are 20 miles or less in a car that take longer than an hour. And so if you can imagine just the size of like one city like L.A., right, if you did move all those people into the air, it would literally be -- you'd have a bigger business than basically every airline combined. But that's probably unrealistic to think you can move everybody into the air. But just to give you a sense for how much congestion there is. And I think we've all experienced that from most of the big cities in the U.S. but even globally. And so we really started to think about that business that we wanted to build a vehicle for. So it's very tempting as an engineering company to try to build the highest flying, farthest flying, fastest flying vehicle. That's what all the engineers want to do because that's fun. But we took a very pragmatic approach where we said we're going to design around this very specific business model and then cut risk everywhere. And so when you take a step back and look at the industry, it looks like Archer is leading the industry and maybe tied with 1 or 2 other groups, but that's just a really zoomed in snapshot. If you zoom back out, Archer has actually moved very, very quickly. And the reason we've moved quickly is because we designed the vehicle around the business case and just reduced risk everywhere. So we're very limited in our vertical integration as an example. Again, super tempting to want to go out there and vertically integrate all the parks because aviation parts are extremely expensive because they're typically uncertified vehicles. And they're not even difficult things to necessarily build. But all of those choices that you make add risk. And so we said we're not going to take the risk, compounded risk of doing things like vertical integration where we don't have to. There's a great supplier, we'll go use that supplier, even though it might be more expensive because the goal is just get to market. So we looked at Tesla and you said, okay, well, there's really cool cars out there today, the Model X and the Model S and the Model Y. Wow, those are really great. But they didn't start there. They started with a Roadster. And the Roadster was just an okay product. And so what we joke about is the product we'll bring to market will be the worst product that we ever make. And the reason is batteries will get better. And as batteries get better, we'll just upgrade the batteries. It's no problem, which will increase our payload, increase our performance be it range -- speed and range. And so that's been our philosophy, and it's the reason we've moved so quickly is that I think we've taken the lowest risk approach to bringing a vehicle to market versus anybody out there in the industry, probably by a big factor.

And just to chime on -- Adam one thing there. It's not just that we've chosen this lowest path, but we've done it in a way that is getting us our first product that's still really compelling from a business perspective. So key metrics like the payload, right? Our vehicle will be a true 4-passenger aircraft. We did the economics and it turns out it's a really big deal, whether you can carry 2, 3, 4 people, right? So we're looking today like we'll be able to go to market with around 1,000 pounds, maybe a little over 1,000 pounds of payload. It's a big deal. Also the range of the aircraft that Adam talked about earlier, that's essentially the optimal value for the market that we're trying to go after. On top of that, we've designed the aircraft to go back and forth as many times as possible being in the air generating revenue as much as possible. So like another joke that somebody made is, oh, it sounds like you guys are designing like the Toyota Camry instead of a Ferrari. And like our design guys were like, oh, no, don't say it, right? It's not a Camry, but like I think that's great. Like we're just trying to build something robust. It works really well and make some money.

Well, I guess a Camry doesn't have still good [ gap ] batteries and also a unique motor, which you guys have designed. So maybe you can speak to the technology that's enabling these payloads in the ranges you're speaking to?