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

Okay. Good morning. Our next presentation. I'm Brian Markovich, the sector specialist at Credit Suisse. Our next presentation is Archer Aviation. It's a company focused on electrical vertical takeoff and landing aircraft and urban mobility. With me today is Mark Mesler, the CFO of the company. I think Mark is going to go through a 20-, 25-minute presentation overview of the company. And with that, I'll hand it over to Mark.

Okay. Well, thanks for that, Brian, and thanks for attending, everyone. I'm going to talk about Archer Aviation. We're a company in the urban air mobility space that is deploying an aircraft is essentially an all-electric vehicle, electrical vertical takeoff and landing, you probably hear eVTOL is what the market refers to it as. And we're deploying this into what we think is a fairly robust market going forward. The technology itself is electrical vertical takeoff and landing. So it has the attributes of a helicopter during takeoff, and it transitions into forward flights such that lift is being created on its fixed wing. We've designed this aircraft for a specific use case. It is specific to 20 to 50-mile missions. So our technology was developed to service the 20, 50-mile mission. Our battery packs have been developed for the 20- to 50-mile mission and our economics around this are for the 20 to 50-mile mission. We arrived at this use case through data analysis. We've got a data science team that has developed an internal application we call Prime Radiant. That Prime Radiant application is essentially a constrained optimization software that looks at how people move through urban centers daily and where the traffic of those people's lives are taking them. So this is an output of that -- of the 50 million daily trips in L.A., 5 million are 60 minutes plus. If you work in New York, you know when you're going from Newark Liberty International to Downtown Manhattan's now 1.5 hour trip, we think that we can take those -- take a lot of that urban congestion and put it into the sky from the terrestrial buy way. So a lot of these trips that you see are less than 50 miles. And so that's the specific use case that we developed this aircraft around, and all of our thinking goes into how best can we serve those use cases. This is our Midnight production aircraft. So along with those use cases that I talked about, we've designed this to be 1,000 pounds of payload, so 4 passengers plus 1 pilot. Our typical flight, we think is going to be around 10 minutes versus a 60 mile -- 60-minute ground trip. We do have a range of 100 miles with the aircraft, but again, focused on that specific mission in the 20 to 50-mile range. There's no single points of failure in this aircraft, so it's a lot safer than a helicopter, and it's designed to be quiet. So one of the big knocks against helicopter is the noise profile. And so New York City, you'll see helicopters flying along the rivers, they're generally not flying over urban centers. So these are designed to be extremely quiet. So you can see the -- just a little bit more details about the technology we're deploying. This is a picture of our Midnight aircraft at the Palo Alto Airport in New York. We're deploying a 12-tilt-6 propeller technology. So the vertical takeoff and landing is being generated by the 12 propellers in an upward-facing position. And then as we transition into forward flight, the 6 propellers on the front of the fixed wing tilt forward into a fixed position. So all of the lift is being generated from the fixed wing. So it's a very efficient use of energy from the battery. So when it takes off, and lands, that's where most of the energy is being consumed and when it's on the fixed wing, it -- all the lift is being generated by the fixed wing. It's a huge market opportunity. We think we've done some bottoms up with our Prime Radiant. We -- it's like Morgan Stanley because it's probably 1 of the bigger numbers we see out there, $29 billion market by 2030 and a $1 trillion market by 2040. Our bottoms-up analysis of these, and we look at almost like each route that I'll talk through in a second is like a market in and of itself. It does create a very large -- a large and interesting market opportunity for us to address. We're -- our strategy, I think, is unique to the sector, and we believe we're executing the fastest path to commercialization. So in general, I think this sector has talked about commercializing in 2025. And we're part of that as well. So we are working with the FAA on our certification parameters such that we didn't take to the FAA. Here is a technology you guys certify it. We went to the FAA with an idea and help -- and they are helping us design the aircraft or helped us design the aircraft alongside them such that we never had to go back and make massive design changes. It was more of like of an agreement of what the design parameters were along the certification process. So in addition, we took a path of designing and internalizing technologies that we felt were key differentiators to the sector. So we believe propulsion and batteries are the 2 key differentiators in the sector. We didn't want to have to design our own flight avionics system when somebody else in our supply base could do that and already had it certified with the FAA. So we brought the -- our batteries and our engines inside to be developed by a crack team from Tesla, from Apple, from Lucid. We just -- we have a fantastic engineering team with respect to our propulsion systems, both within battery and our powertrain. So by making that decision, we are leveraging a very robust aviation and aerospace and defense supply base that has already got a number of our subsystems previously certified with the FAA. So now when we go to the FAA, we're really not only getting certified the aircraft itself, which you have to, but really focusing on the propulsion, which is the 1 thing that hasn't been certified with that before. So we do -- our momentum coming into '23 has been pretty pronounced. We announced a lot of key engineering milestones last year, we introduced our technical demonstrator maker, it transitioned into forward flight late last year. We've also introduced our Midnight production aircraft, which is the 1 that we're going to be getting certified with the FAA. So this is the time line to commercialization and scale operations. Largely the industry and Archer as well through 2024 are working on that in finalizing the design of the aircraft and getting it type certified with the FAA. That will be the big step for everybody in the sector is that type certification. We've also been building out and thinking about what does this business look like beyond those? Those are table stakes. The technology as well as the certification or table stakes, but what does this business look like to generate revenues in 2025 and beyond. So we also are working to build out and look at where our initial launch markets would be. We already announced one, which I'll talk through here later in the presentation. We're thinking about what do those airline operations look like and how do we scale. So from '25 to 2028 is the initial commercialization of the sector of Archer. And then finally, 2028 and beyond is where we believe you're going to start seeing scale operations should consumers start adopting these in the 2025 to 2028 time line. Here is our aircraft. This is Maker, and it's 1 of its flights -- slides, you can see the 12 propellers. And you'll see here the front ones will start transitioning into forward flight such that this would show that this cut off sooner I thought I was going to do with those locked down into forward flight, you see a full transition flight. This is the production aircraft Midnight. This is the 1 we're certifying. We just announced this in the fall of last year, really cool design for passengers -- and this is the 1 that we will start commercializing in 2025. We hope to start building these and having the first test flights of these in the second half of this year. So we believe that to do this, you need some really good partners. And we've got a couple of really good partners that are helping us develop this industry and deploy these aircraft. So the first 1 is United. United is an investor in the company. They're also a really good strategic partner. We have an agreement for 200 aircraft with them. It's a $1 billion contract. So a $5 million per aircraft ASP, there's an option for another $0.5 billion. We received our first $10 million in a predelivery payment from them last fall for their first 100 aircraft. So we're working with them to understand how they're going to deploy these aircraft as well. We did also -- and Oscar Munoz also is on our Board. He's the former Chairman and CEO of United. We did announce last quarter our first -- actually, the industry's first point-to-point eVTOL route. So from downtown New York City to Newark International Liberty International Airport. It's a 15-mile route. But as I said, this generally takes an hour by car. So our goal is to be pricing this very competitive for the rideshare. So every time I fly to Newark, it's $100 to get downtown by a typical rideshare, and that's where we're going to be pricing this largely as well. Our other partner is Stellantis. So Stellantis is 1 of the #3 manufacturer for autos in the world. They're an investor with the company. They're also helping us think about scaling manufacturing and how to manufacture these at scale. So again, we think table stakes is just to get to certification, how do you then manufacture these. And I get that question all the time. So Stellantis is helping us unlock that scale. Our aircraft, we feel are more akin to being manufactured like an auto. You've got wiring harnesses, you've got carbon, you've got engines, you've got batteries. Stellantis manufactures 500,000 cars plus per month, close to 6 million a year. So they're going to help us think about scale in terms of manufacturing these. They've also -- as we stand up our manufacturing operations in Covington, Georgia, is where our scale manufacturing is going to be. They're going to allocate some head count to us to help think about that scale and displays cost for us going forward as well. And then finally, creatively, they've given us an opportunity or an option to draw down about $150 million of incremental equity capital from them when and if and should we need it. So a really creative thinking in terms of financing with them as well. We announced in Q4 of last year, our scale manufacturing in Covington, Georgia, we will be producing in the dozens in California. So we're in San Jose, California. So we've got a low rate introductory plant in San Jose. Covington is where we're going to be manufacturing these in the thousands. And then Stellantis helped us select that site, and they're also helping us stand that up and think about the process steps and how to build these things. So really good partner, both United and Stellantis. We're going to market with 2 lines of business. So some groups will only want to be an OEM selling these to operators. Others just want to operate them. We're a little bit of a hybrid because we think there's value in both. So Archer Air is the aerial rideshare business, where we will be operating these in an urban air mobility environment. Archer Direct is where we're selling the aircraft. And that to the contract with United that I talked about is an example of the Archer Direct. So initially, this will play out organically, but we think it's probably a 50-50 mix in the first couple of years in terms of revenue mix. And largely that we think that the Urban Air mobility revenue will overtake the OEM revenue as we scale. We're targeting around a 40% gross margin on the Urban Air Mobility business. Archer Direct would be a little more at about a 50% gross margin as you're selling those directly to operators, but probably a little more lumpy in terms of revenue because they're generally fleet sales. So that's how we're going to market. And the economics of this, as I said, are very similar to ridesharing. So here's an example that we used in our IPO deck, at $3.30 a seat mile, an average trip 12 minutes, 25 trips per day for your typical aircraft for operating 365-year, that's about $2.5 million per aircraft. If you price it closer to that, what we think is a trunk route from the Newark to the Manhattan is probably close to $6 per seat mile. So you've got a pretty good range of annual revenue from these aircraft over anywhere from a 10- to 15-year life on these things. So just to wrap it up, Archer, we are -- again, we believe we're executing a very efficient and fast path to commercialization, rational -- making rational decisions around the technology, we're deploying with realistic innovation, talked about the key differentiating technologies. One of the things that I think should be a takeaway is we believe to be a viable business, you do have to have 4 passengers. I don't think that you can have a viable business if you're only moving 2, 3 passengers to get -- to be able to cover the cost of operating these vehicles, you need at least 4 passengers. And Archer has largely validated that we're in that 4 passenger range with our critical design reviews. We also have strong partnerships. We talked about United and Stellantis, the 2 revenue streams. And we've got $605 million of cash on our balance sheet at the end of Q2 or end of Q3 last year with another $150 million. So we remain well capitalized to get to our commercialization plan. So -- that's Archer. And I think we were going to open it up to see if anybody had any questions.

Great. Thanks for that intro and overview, Mark. You can come up to here -- we got a mic on. Relax. Maybe I'll open it up before I open up to the floor. I'll ask the first one. Just dig in a little bit more to the milestones to your commercialization that investors should be looking at?

Sure. There's -- to get to commercialization, there's 2 pads of milestones that you want to look for. One is clearly the FAA certification. Without the FAA certifying the aircraft, these things aren't going to fly. So you'll see the different stages of certification that all the groups will go through with the FAA. You'll hear like means of compliance type 135. So you want to understand where everybody is on their certification path. And Archer is right in the middle of that. We're working on what's called our means of compliance that allows that we -- it's essentially an agreement with the FAA on how we're going to certify these with the FAA. So understanding where folks are on the certification road map. I think secondly is one of the things I just alluded to is what technical milestones need to be achieved. I think largely a lot of the industry has done test flights here before, but that doesn't get you to commercialization. You now need to start thinking about producing -- production worthy aircraft. And so you'll see Archer discussing later in the year, manufacturing production worthy aircraft out of our factory in San Jose. So understanding where folks are on those 2 major time lines to get to a 2025 commercialization phase is key. I think the third thing is payload, and I brought it up there, but I wanted to bring it up again because sometimes that doesn't get -- that doesn't get the focus that it should. There are folks out there that are going to produce an aircraft that's going to be able -- and are already that's going to be able to have 1 passenger. I don't know how you build business on 1 passenger. So as you're thinking about a decision around if this space is interesting to you and you're trying to make a bet on an investment, please understand payload as well.

Okay. And then beyond just commercialization, some milestones investors should be looking at and hurdles, getting beyond 2025 as you go to scale?

I think understanding the company's business model as well to get to scale, are they selling aircraft only to get the scale, are they operating them, those are key differentiators. There are 2 different ways to market. There are a lot of groups that have MoUs with operators now. Are they going to be able to manufacture them? That's our -- this is one of the things why I brought up in the general session -- general presentation is it's one thing to be able to have the right aircraft at the right time, but you got to be able to manufacture it. And so understanding what their manufacturing capability is, understanding what their go-to-market strategy is. But I understand, can they also -- if they're going to be operating the aircraft, how are they going to finance them? Because are they going to go out to the equity markets to raise equity to purchase the aircraft to deploy into their own fleet? Or are they going to have a partner through an aviation financing? So distilling that all down, clearly, how are they going to be able to manufacture, how are they going to market, and how are they going to be deploying their aircraft.

Right. Great. I'll open up to the floor. Anybody have a question in the audience? They're shy today. So what's your differentiation versus other technologies, are they competing with you?

That's a good question. So I think the key differentiators, everybody are going to be able to move aircraft -- or move people, right? Whether it's 3, 4, 6 people, it's -- then the question is like, well, how are they doing that? Is it through the direct customer experience? Or did they just design an aircraft by mathematics. So I think one of our key differentiators is customer experience. If you look at the Midnight aircraft, it was designed by a VP of design from Mazda. And so when we look at this -- we didn't look at it just as a mathematical problem to solve. We looked at it as an organic human and it sounds strange coming from a CFO, but an organic human problem to solve. And the design of the Midnight aircraft is an elegant design. It is one that is a very customer centric. And so not just moving people from point A to point B, but what's that experience getting through the check-in and then exiting the aircraft. And so I think that's something that's going to be a key differentiator for us as we go forward. There's a whole -- there's a whole vertical experience that we didn't talk about yet, but the experience from when a customer enters into the -- and enters the aircraft when it exits. And we -- I just don't think that the larger industry has thought about that whole ecosystem yet. And so I think our ecosystem is going to be a key differentiator as well as our payload.

Okay. One thing that struck me in your cover -- in the presentation was you're pricing yourself against rideshare, but you've got a 10-minute ride versus a 60- to 70-minute ride or more. Now I guess there's the time it takes you to get to the Heliport maybe. But just kind of talk about how you kind of thought about your pricing and your thoughts on getting to your cost estimates and cost targets too?

That's a really good question as well because -- we don't want this to be a technology that's only available to sort of the wealthier class of folks. We wanted to democratize the skies with folks. So if you can take a rideshare, you can take a -- you can take an Archer flight. So when we looked at the -- we're going to price to what the market will bear. There's no doubt. But we've designed the aircraft to be able to turn a profit at the $3 to $4 per seat mile because that's a typical rideshare -- rideshare cost. So when we look at the use case for the customer, we look at the folks that we think are going to be the first to adopt this. We look at forward-leaning technology savvy folks who are willing to take on a new experience, and we believe that, that rideshare price point will offer broader adoption than just having a very limited scope for -- if we were to price in the $10, $15 per seat mile. So in terms of scale, that was another reason when we thought through our pricing is to enable scale, we will be able to price it at a rideshare cost.

Okay. And then you've got a deal or agreement partnership with United and doing Newark into Manhattan and I live there, so I get that case. But what other areas are you -- like where are the next low-hanging fruit areas that you're thinking about?

So how we think about the market is, if you just look at the top 50 MSAs throughout the U.S., we are -- because we're getting certified with the FAA, we are looking at the U.S. first. Think about New York, L.A., L.A. is a great use case for our technology. There are multiple routes that we could take with L.A., Chicago, Miami, et cetera. What we do is we look at what that city center to airport route looks like. We call that a trunk route. We think there is clear demand and clear ability to pay on those trunk routes. So as we deploy across the U.S., we will anchor on and try to identify where those key trunk routes. Then there's branch routes that come off of that. So an example would be in New York Greenwich to Downtown or Greenwich to the airport, we picture the trunks being the anchor points for those cities, and then we'll build off of those trunk routes, branch routes, such that we could have with any given city, our goal is to have in the 20s plus routes, not just one. And -- but the strategy would be to do the trunk and branch route deployment strategy for that. Again, ability to pay and a clear demand as we see it.

Okay. Have I spread any interest on any deeper question. Upfront here. Do we have a mic? But you can just say it, and I'll repeat it.

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So the question is kind of threefold. It's your battery, your EV battery, I think sizing possibly. And then can you go possibly a longer route? And would that expand your addressable market? And what's your addressable market now? I think maybe someone that was in the presentation. And then the last -- your carbon footprint of the -- your e-vehicles versus the alternative with the cabs.

So the first 1 on the battery. So there's 6 battery packs. They're sized -- we haven't talked about, they generate 800 volts, but they're sized, they're a little bigger than a Model X. I think a Model X produces about 100 kilowatts -- 100 kilowatt hours. Ours are bigger than that, but we haven't publicly disclosed how big, but they're not much bigger than that. In terms of -- the second question was -- yes. We think that -- we designed the aircraft specifically to that mission, and we think that's a large enough market to address. But that said, as battery technology gets better, we'll have a trade-off of whether we take -- we put less batteries into the aircraft or we extend the range of the aircraft. So I think right now, we don't have a desire to extend the range. We want to continue to focus on that 10- to 50-mile, a 20- to 50-mile mission. But that doesn't say that we can't address that increased range as battery technology gets better. The third, the -- we've done a lot of work around the carbon footprint displacement, and we haven't shared publicly what we think is being displaced. We are going to do that, especially as we address more ESG as investors, but we haven't -- I don't have data on what that carbon displacement is, but it is meaningful. And I'm happy to follow up if you're interested on that.

Okay. Great. I think with that, we'll wrap it up. I know we started a couple of minutes late, I don't want to keep this on schedule. So with that, thanks a lot, Mark, for being here. And thanks for everybody being in the room.

Thank you. Thanks.