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

Good morning, and welcome to JPMorgan's 51st Annual TMC Conference. My name is Bill Peterson. I cover Clean Tech at the firm, including Archer Aviation. And really pleased to have Mark Mesler, who's the CFO of Archer, join us here this morning. He's going to share some kind of intro comments, introduce himself as well as the company, what they do, and then we'll move on to Q&A, and we're happy to take questions from the audience. We just ask you to use the microphone as this is webcast. But Mark, thanks for coming to our conference. And yes, over to you.

Thanks, Bill. Thanks for everyone for coming out as well. As Bill said, Mark Mesler, CFO of Archer Aviation, I've been with Archer for probably about 1.5 years now. I've spent most of my time -- most of my career in Silicon Valley and hard tech. So Archer Aviation is a natural fit for me. The company itself, Archer Aviation is designing and manufacturing and electric vertical takeoff and landing aircraft. You'll hear eVTOL as sort of the moniker that's given in the market. When we came to market, we wanted to develop the most expeditious path to market. We didn't want this to be a science experiment, and we didn't want to fly the highest or go the fastest. We used a data-driven approach to develop what the use cases are for an aircraft in the market. And we also use that data to inform us on what the design of the aircraft would look like as well. So we're innovating very rapidly at pace to get to market in 2025. Our aircraft is focused on the specific mission, which is in the 20 to 50-mile use case. Again, that was a data-driven decision. We hired some really smart data scientists from Uber Pool early on. We did a lot of analysis of how commuters move through urban areas during the day. And we clearly -- the data showed, as we all feel that there are thousands of commutes in any given city in a day that's less than 50 miles. It probably takes 1 hour to 1.5 hours. And so we use that data to, one, identify what the use cases, which is that 20- to 50-mile mission, but help us inform the technology that we're deploying as well. So the 20- to 50-mile use case for our aircraft also informed the type of batteries that we're putting in there, the passenger and payload size. So we're focused on a 4 passenger plus 1 pilot payload. We're also focused on battery and engine technology to support that mission. Our batteries can charge in 10 minutes to support a rapid back-to-back 20-mile mission. And we've also had some great partners to help us along the way. We are -- have a really good partnership with United. They've given us a $1 billion contract for 200 aircraft that will be deployed within their network. We also have a partnership with Stellantis, who is the manufacturer of Jeep, RAM, Maserati nameplates, produces over 500,000 cars per month. And so they're a very good operational partner. They're also an investor. And then finally, we've been able to track some of the best and brightest talent in the world. This sector not only Archer, but this sector is very well capitalized with the de-SPAC dynamic in 2021, we were able to raise close to $1 billion. And what that did was brought a lot of great talent into the company and into the sector. So we've got some of the best aerospace and defense engineering mines in the world. We've got some of the best propulsion mines in the world. We've got -- our Head of Propulsion came from Tesla. We've got folks from Lucid, Polestar, et cetera. So as we sit here today, we are very focused on getting to commercialization in 2025. We're working through the certification process. And we just shipped our first production aircraft to our test site in Salinas, California, which is going to begin flight testing later this summer. So that's the background.

Yes. Why don't we actually talk -- pick up one of the points you were mentioning. So at an investor event held in Palo Alto last year, the team spend a ton of time talking about the advantages and about the propulsion system, the electric motors that you're designing, the battery technology. What makes this differentiated relative to the competition? And I guess to that point, what are you doing in-house and where are you really leveraging external partners on the build of the plane?

Sure. So as I said, in that quest to develop the most expeditious path to market, we had to quickly make a decision on what we're going to design internally and what we are going to just source from a very mature aerospace supply base. We early on decided that propulsion is a key differentiator. Propulsion enables the vertical takeoff and landing capability and the power that's needed in that vertical takeoff and landing capability, and it also enables payload. So we also believe that for this business to hunt, you need to have a 4-passenger payload type of configuration. So what we're doing is developing -- we decided to develop in-house our propulsion systems and leverage some of the great work that's been done by others in the EV space. So for example, our engine technology is developed in-house. It's a key differentiator versus those that are out there. As an example, a Cessna 172 combustion engine weighs about 135 kilos. It has 29% efficiency. Our aircraft engines weigh about 25 kilos, have 95% efficiency. So the efficiency and the performance of our aircraft engines are enabling that business model. If we were to go out and source something similar just from the aerospace supply base, we'd be -- would have probably 40% higher weight ratio on that -- on those engines. So we're able to save weight in the design of the aircraft. Aircraft weight is everything. I mean we're scraping and scrapping for every gram out of the weight of the aircraft to enable payload. Similarly, with our battery technology, we are sourcing our batteries from a company called Molicel, but they are very high-power batteries, and we were able to configure them into a battery pack. There are 6 battery packs in our aircraft. We're able to configure them such that they were able to be about 30% less weight then would be in a typical off-the-shelf sort of configuration. So those design decisions that we made and sourcing that internally, developing that internally with really, really high-quality folks. Dr. Michael Schwekutsch heads up our propulsion team. He headed up the Tesla Model 3 propulsion team at Tesla. He was at the Apple -- he was with the Apple special projects group as well. And so he's done a great job in designing that tech for us. So that is a key differentiator. We're extremely proud of that. And it does though, get back to that most expeditious path to market, that it does enable our payload and it does support the back-to-back 20- to 50-mile missions and allows us to charge our batteries within 10 minutes.

Similarly on the software side, so what are you doing internally versus externally in areas like avionics or navigation? What -- how do you guys parse that out?

Yes. So if our propulsion team is about 100 of the 600 people that we have on board, our software team is approaching that size as well. So software is focused on those items that are idiosyncratic to our technology. So it's focused on -- our flight controls is focused on our battery management system as well as our engine management system. And then we're able to support some of the more standard commoditized software through the aerospace and defense base such as flight operating systems.

So lastly, on technology, you built out your test labs and capabilities in San Jose in recent quarters. So where does that stand today? What kind of test can you -- will you be performing there? And I guess will that site be used for long term after your Georgia site begins, I guess, or ramps in higher volume.

Yes, sure. So our overall manufacturing strategy has been to get to scale very fast. So we talked about the most expeditious path to commercialization. We believe that commercialization not only is just getting an aircraft to market but getting aircraft at scale to market. So not just tens of aircraft, but hundreds and thousands of aircraft to market, which is why we've partnered with a shop like Stellantis, who manufactures automotive every day at scale. With respect to our strategy, we are building out our San Jose test lab and pilot manufacturing facility. It's actually coming online as we speak. It's right around the corner from us. The strategy around that is that our engineers will be manufacturing tail 1 through tail 6 for our certification aircraft. The test labs there can test raw materials as they're coming in, components as we're developing them as well as full software in the loop type of tests. What we're not doing there are things that are better done outside of us, like crash testing and icing testing and things like that. So we would not do that in San Jose. Our Covington, Georgia facility, which we broke ground on about a month ago is our scale manufacturing facility. So we look at our aircraft manufacturing process as very similar to an automotive manufacturing process. We almost -- we don't look at it as really an aerospace and defense process. We've got carbon. We've got wiring harnesses, we've got batteries. We've got engines very similar to an automotive manufacturing process. So that is coming online. Our partner, Stellantis, is helping us bring that online. And we're using the San Jose facility around the corner from us to do the initial production of our certification aircraft on which we will build 6 of those. Once that process moves to Covington, Georgia, which will be next year, that manufacturing process, we're actually going to take that -- the area of the factory that we're doing, manufacturing the test aircraft and we're going to be moving our -- expanding our powertrain manufacturing there. So that powertrain and propulsion we're going to continue to own that process, continue to own not only the design, but the manufacturing of it. And we'll be able to produce hundreds of aircraft propulsion systems in San Jose.

Great. So moving on to certification, and this is a really critical thing on everybody's mind. So where are you in the certification process what's left to be accomplished and what kind of time frame should investors be thinking about for, in this case, type certification of the aircraft?

Sure. So certification is clearly key to getting to market for any aircraft manufacturer. We've done a lot of -- we've done a lot of work with the FAA to get to where we are, which is we're industry-leading in terms of certification. I think there's one other player, which is very close to us or we're close to them, however you want to look at it. Just to step back there, 2 parts of the certification process. You work with the FAA to generally outline what you're going to test and how you do it. That's a big paper chase. First part is the G-1 where -- which is the means of compliance. That's like 30 pages. Then you get into -- sorry, the certification basis is the G-1, the means of compliance is like 300 pages, then you get into the subject-specific certification plans, which are like 3,000 pages. So we've submitted 15 of our 18 subject-specific certification plans. And that, along with the means of compliance, which we're working on right now, we'll largely tell the FAA what we're going to test. So we're almost through that process of telling the FAA what we're going to test. The conforming aircraft, which we're going to start building later this year are the aircraft that we'll be using to test all of those subject-specific certification plans. I know there's a lot of words I'm throwing around with respect to certification -- sorry, I'm knee-deep in certification. But as an investor, if you're looking at the space, you're going to want to understand where folks are in the certification process. So we're just about through telling the FAA what we're going to test. We've got a couple of final agreements to get with them, alignment on. And then next year, we'll start testing those, specifically the 18 subject-specific certification plans, which we're agreeing to with the FAA currently.

And you guys have talked about the, I guess, the first nonconforming followed by 6 conforming aircraft, first of which later this year. What are these aircraft used for? Would this first aircraft, what will be used for and what will it be different for the conforming aircraft?

Sure. So the difference between a conforming versus a nonconforming aircraft is generally that the conforming aircraft have been manufactured in a space or in a system that has been approved by the FAA for certification. Nonconforming aircraft just means you didn't apply those same FAA principles to the manufacturing process where they weren't in place. So the nonconforming aircraft is the one I alluded to earlier, which is our first production build that we are now testing in our Salinas facility. That is going to do a full flight envelope testing. So it's, for us, a full flight envelope is taking off. It is transitioning from hover into forward flight, and then it will transition from forward flight to hover and then to landing. So -- and then all of the tests in between. So that aircraft the nonconforming midnight is going to be running through those tests. And it's really a prelude to the work that we're going to be doing on the -- with the 6 conforming aircraft. The reason we have 6 conforming aircraft is because we have to get through those 18 subject-specific certification plans. Those 18 specific -- those SSCPs for short, have very specific tests that we're going to be going through, so the propulsion tests, the environmental control system test, the airframe test, et cetera. So those 6 conforming aircraft will actually be checking the box across all of those 18 subject-specific certification plans. And we've got a very experienced team that has gone through this before from the aerospace and defense industry. Our COO and Chief Engineer have both taken each individually 7 eVTOL aircraft from design to testing. So we're excited to get to work later this year and starting to build those conforming aircraft. And then next year, Q1 of next year is where we'll really start the type certification testing process.

Do you have a thought or a view that what would be the largest challenge or challenges to certification? And what gives you confidence that you can achieve certification by the end of the year 2024, early '25?

I'm not sure I'd call it a challenge as when you're representing something in front of the FAA that they haven't seen before. So if you go through those 18 subject-specific certification plans, there's probably 3 that they haven't really seen before, and that's around the electric propulsion system and the battery tech. So we started very early on with them to get them up to speed on how we were deploying, how we were using that battery and propulsion technology. So I think us taking an early run at the FAA with respect to those areas are giving us an advantage or giving us some -- a little bit of a head start in terms of when we get to the actual 4 credit testing. They're going to be very well familiar with our tech, they'll understand how we're deploying it and then they understand the test that we'll be running.

Yes. I want to talk about the partnerships, both on, let's say, the market side and United, but also on the manufacturing side of in terms of Stellantis. First of all, signify the importance of that, again, first on the demand side. And then on the supply side, what is the key about Stellantis as part of your manufacturing strategy?

Sure. So we -- this is a heavy lift. We're creating as much as we're creating a company, we're creating a new industry along with some other players in the industry as well. So we felt it was very important to have some high-quality partners to help us do that. The good news is, early on, we were able to partner with United. United as an investor in the company as well as a really good operational partner and customer. So United has -- as I mentioned earlier, they've given us a large order for our aircraft that as we get through the certification process, they'll start taking delivery of and deploying into routes that we're helping them develop. In addition, they also think about -- help us think about how to operate these things within standard airports, et cetera. So we have recently announced with United -- jointly with United, our first eVTOL point-to-point route is -- was the Newark International Airport to downtown Manhattan. And then about a month ago, we announced the Chicago O'Hare to downtown Chicago route with United. So those will be United branded routes. There -- we will be helping them operate them as we both get up to speed on how to operate UAM networks. And they help us with the day-to-day tactical stuff as well, like if we're landing behind the TSA, which is if you think about what a really good use case for the aircraft is, okay, you hop on an aircraft, you go through TSA in downtown Manhattan. It takes you on to the other -- it flies you out to Newark and you get on the other side of TSA, so you don't have that friction in your commuting process, and you landed a gate very close to where you're going to take your business class or your Polaris class trip elsewhere in the U.S. So they help us think through how are we going to get spots at gates, how are we going to get past TSA. They've also helped us with looking at our aircraft design and saying, you know what, for maintenance purposes, you're going to have to really move that access plate down to the bottom here because your maintenance crew is not going to be able to access the engine there. So they've just been a great partner. And all of that learning that they've had for years in the business, they're helping us where it's needed on our side as well. Stellantis, very similar, awesome operational partner. As I said, they build 500,000 cars a month, 6 million to 9 million a year. They're embedded with us. I walk around my office, and I see guys with Jeep shirts on all the time. I'm a Jeep guy, so I go talk to them. But they're embedded with us helping us think about how to build these things at scale, how to -- what are the right process steps for this assembly process, what are the right ways to think about this subassembly, who should we be going out and talking to about sourcing components for the aircraft. So there they help us think about not only the very tactical day-to-day manufacturing, but then how to design for scale, how to design the factory in Georgia for scale. And they've just been a great partner, too. So again, it's difficult to build an industry with just one person or one company or a handful of companies, but by bringing in really good, high-quality partners to help us do that, it's been invaluable for us. It's been invaluable.