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

Thanks, and welcome back to Barclays 2023 Global Automotive and Mobility Tech Conference. I'm David Zazula, senior airline analyst covering the EV toll sector. Very pleased to cap off our sessions today with Archer Aviation, relative new comer to the game, but certainly has been making very rapid progress. Mark will talk to you a little bit more about that here in just a second. From Archer, we do have Mark Mesler, Chief Financial Officer, has been with the company since early 2022. Prior to that, he was Chief Financial Officer at Volansi, an aerial logistics and drone company. And before that, Vice President of Finance at Bloom Energy, a company producing solid oxide fuel cells. So a lot of finance experience doing aviation and very engineering intensive work, so a lot he can bring to the table with us. This is his second year with us, Archer's third year. So we're very pleased to have them back. Mark, welcome.

Yes. Thanks for having me, David.

And then one quick bit of housekeeping. [Operator Instructions] I have plenty of questions I could talk to Mark until about 2025. But I think he would much rather take your questions. So if you can -- if you have any, if you submit those at the top right, I'll read them off here from my e-mail. I'll get Mark to answer.

But let's kick it off here with the preplant. I think -- I talked about it a little earlier. A number of competitors have started in this space earlier, yet Archer is basically right there with everyone or ahead of everyone else in terms of actual tangible progress towards certification of an aircraft. So what do you think is it about Archer that's allowed it to make progress in such a short period of time? And is that a sustainable model going forward as you start to get towards the late certification and commercial stages?

Yes, sure. I think there's -- there've been a number of reasons that we've caught up to the pack, so to speak. I think one of them is when we looked at this space early on, we did feel like there wasn't a hard core press to get to market or to get to commercialization. So our overarching strategy from the very beginning was to design an aircraft and a business model to create the most expeditious path to commercialization. And in so doing, we looked at the use case first and then what type of aircraft would we build. Secondly, and I'll get into that in a little more detail. I think secondly, we also recognize that part of the process to get to commercialization was to get through the certification process. So rather than designing an aircraft and taking it to the FAA and saying, "Hey, certify this," we came up with a paradigm to design alongside the FAA. So prior to submitting our G1, our base of certification, we worked alongside the FAA on all of our design parameters such that we're getting real-time feedback and we got conviction around the type of aircraft that we're going to get certified, so that helped us. I think also just the team that we were able to acquire, going public in 2021 for this industry in general, not just Archer, was -- allowed us to bring on a number of very highly qualified folks in -- across powertrain, across eVTOL in general. Two of our first hires were folks who collectively -- Dr. Geoff Bower; and Tom Muniz, our COO, they collectively had designed and built between them, like, up to 12 eVTOL aircrafts. So a lot of the design iterations had already been done in the past and they wanted to get to commercialization. So creating that fast path to commercialization has sort of been our North Star since we started. The decisions we've made around the design of the aircraft are such that we want to design only internally what we think are key differentiating technologies. And for us, that is powertrain. And we're using the existing aerospace supply base for what we think are non-key differentiating technologies like carbon, flight computers, navigation, landing gear, et cetera. So that allowed us to focus on the overall form factor and what we think is the right flight physics to perform 20- to 50-mile back-to-back missions. The current battery technology that's available supports that. Our battery and powertrain team leader came from Tesla. He's designed Model 3 propulsion and manufacturing for the Model 3. That has allowed us to bring that technology in-house. So if you step back and average, distill it all down, I think our overall strategy, trying to create the most efficient path to market, leveraging the existing aerospace defense supply base for noncritical technologies, the fact that we're certifying alongside the FAA and not just introducing a technology that they wouldn't be comfortable with, and the fact that we've just got a world-class team here that's focused on getting the commercialization, bringing all of that together has allowed us to catch up to the pack and I think de-risks our path with the FAA to certification.

Well, I mean, certification, we're definitely going to talk about in quite a bit of detail here in a second. But I think one of the things that's kind of emerged from this con, friends, is the FAA certification, by far, is the most important thing, right? Priorities 1, 2 and 3, but something is going to have to come after that. So as you look to 2024, what is Archer doing from a priority standpoint to try to support that commercial rollout in 2025.

Yes. It's a really good question, and we always discuss that across really 4 vectors. The first one being certification. And as you said, we're going to talk more about that. That is a vector that our team is deeply entrenched in and working. I think the next thing is to be able to sell the aircraft, you have to have -- and operate the aircraft, you have to have routes that you're operating under and you have to have customers to buy them. And so recently, we onboarded a new Chief Commercial Officer, Nikhil Goel, who was one of the original founders of Uber Elevate. You've -- publicly, we've disclosed a number of deals beyond the United deal that we already have. We're putting together a framework and signed some MOUs in the UAE. We announced Air Chateau as a customer, InterGlobe in India. So we're working that commercial aspect. So as a CFO, I'd like to have a nice backlog of aircraft to operate either in our own air mobility networks or sell to operators. So the commercialization piece, we're working. Clearly next, I need to be able to manufacture them. And we announced our factory in Covington, Georgia, that is our scale manufacturing facility. We'll be building the first 6 conforming aircraft here in San Jose at a low-rate introductory plant around the corner. But for scale manufacturing, and to your question, 2025 and beyond, those aircrafts will be built in our Covington, Georgia factory. We just announced the financing of that last quarter. That'll be a 350,000 square foot Phase 1 facility, can manufacture up to 50 aircraft per year. and that will be out of Covington. So manufacturing, we'll get the certificate of occupancy in mid next -- in mid-2024, to set us up for commercialization in 2025. And the last one is just -- the last vector is just continuing to advance the tech itself. And we've been now flying -- we've been flying our technical demonstrator maker for a number of years. And more recently, we discussed that we're starting to fly the nonconforming Midnight aircraft and that we're continuing to expand the flight envelope there and very happy with how that is performing. So those are the 3 areas that we continue to advance such that they all converge. I mean, certification, commercialization efforts, manufacturing and technology all converge to that year of 2025, where we'll be operating these.

So you mentioned Midnight is kind of the new flavor of 2023. Certainly, the videos that you've released have been pretty impressive. I guess, what has that, light of Midnight allowed you to do from a testing standpoint? As well as what does it unlock across the enterprise?

Yes. I mean, because it is the aircraft that we are going to market with, it is now enabling us to unlock that full flight envelope for missions and what those look like. We take it -- safety is key. We have a very descriptive and programmatic way to expand the flight envelope on Midnight. You can imagine, like, the first couple flights were hovers and you're doing some chirps we call them where your yaw, pitch and ascension. That will expand out to a full wing borne flight. So the eVTOL, the big transition is where you transition from power being generated -- or lift being generated from the rotors to lift being generated by the wing in forward flight, which happens at around 90 knots or so. So that envelope is continuing to expand. And then eventually, we'll start mimicking a typical 20- to 50-mile mission with this version of Midnight or this nonconforming version of Midnight where we can run these back-to-back missions. If you recall, the 20 to 50 mile mission is our -- what we think is going to be our bread and butter. So the ability to show that we're -- that Midnight can do these back-to-back 20-mile missions is where we'll eventually get to.

So you mentioned the range there, right? The critical piece in achieving that range is the battery component. When I came out there late last year, there's a great discussion about how you selected the battery, the battery design that you have. Maybe give us a quick overview behind how you made that selection and what it means for the [ UN ] missions that you've selected.

That's a good question. So the battery pack is clearly -- and the battery itself is the power generation for the aircraft, so it's clearly a critical component. We felt we had a couple of choices there as -- and the form factor of what we chose is called a cylindrical cell as opposed to a pouch cell. Cylindrical cell looks very similar to a normal battery you buy at the store, a little thinner, a little bigger. The reason we picked that, for a number of reasons. One, it has precedent in being used in applications, terrestrial applications. So the Teslas and others have used them in the past. Two, our ability to manufacture those at scale is available as well. So the company we selected, Molicel, manufacturers hundreds of thousands of these a year and eventually will be manufacturing millions of these cells a year because they're building out a couple of gigafactories to be able to manufacture those. And when we think about unlocking scale, our partnership with Stellantis is helping us do that, but identifying the right partners to continue to be able to support scale. Three, the capacity itself clearly has enough to -- in the form factors that we put together, we've got 6 battery packs that reside in the wing of our Midnight aircraft. So the range and power needed for eVTOL, both take-off and landing as well as forward flight are available with those. And then finally, safety. Safety is actually a big part. And when we think about getting through the certification process, we'll have to prove out the safety of these batteries. We felt that from a safety standpoint, that the cylindrical cell allowed us a greater opportunity to create a safe operating environment. The cylindrical cell has a little vent that if there's what they call a thermal event within the battery, that it vents right specifically in this certain area. So when you're assembling hundreds of these together or 1,000 of these together, you know where that thermal event may happen if there is one, and so you can construct a battery pack around that to contain that thermal event. So one of the things that will be tested with the FAA is thermal runaway, which is the propagation of a thermal event across the entire battery pack. And we just -- when we looked at -- we looked at these cylindrical cells that created -- we felt that, that created a very good, greater opportunity for safety versus others that are out there, like a pouch cell. A pouch is like a baggy with water in it. And so if something -- a thermal event were to happen within that pouch cell, it's less distinctive on where potentially you could have -- or how you'd have to contain that thermal event. So anyway, a number of reasons why we picked those batteries. But when you put that whole portfolio of benefits together, we felt that was the right solution for our aircraft.

Thanks, Mark. Yes, that's very thorough and a lot of thought going into that is -- the purpose behind all of this is to get to certification. You guys have been very good at giving certification updates on your quarterly calls. In this most recent one, it seemed like there was a little bit less quantification of certification plans. We seem to be converging more on looking at certification progress by aircraft. Just maybe walk us through the rationale behind how you're disclosing that and where you think you're heading to on certification in early '24.

Yes. Sure. I mean, when you start looking at all of the outputs or outcomes of some of the details around what we were disclosing, there's the basis certification G1. There's the means of compliance. There's a subject-specific certification plans, and we'll continue to talk about those. I think what -- where all of those ultimately end up to is the piloting conforming aircraft, and we think that, that's the big unlock in 2024. To get to commercialization in 2025, you really have to have a pilot in a conforming aircraft, flying and testing against those administrative agreements that you had with the FAA, meaning essentially your subject-specific certification plans. And we've gone on record, discussed that we have -- we'll be submitting 18 subject specific certification plans, of which we've submitted 15 at my last count. So I don't think we're not -- I think we're just trying to now also get people to start thinking about what ultimately does all of that administrative work with the FAA gets you. And that is, really, you got to start testing these in conforming aircraft. And so I think you'll hear us now starting to talk a lot about -- we talked about on our last call that we will be having a pilot in a conforming aircraft in the first half of next year. In order to do that, we're already starting to procure parts for the conforming aircraft. We've talked on record publicly about building 6 conforming aircraft. And so honestly, this time next year, the goal is to have these 6 conforming aircraft executing against the 18 subjects-specific certification plans that we will get agreement with the FAA.

That's very helpful. So I guess, is that what investors should be looking at on the 4Q call, the 1Q call as they try to monitor how the progress is coming in 2024?

Yes, we think so. We think that the line of sight and tracking towards piloting conforming aircraft in 2024. We'll continue to update on the administrative stuff because we want to be transparent. I mean, I think folks know us by now. We're as transparent as we can be. So we'll continue to update on where we are with means of compliance and subject-specific certification plans. But really, all that leads to a discussion about are we going to be flying conforming aircraft in 2024, and the answer is yes, and that's our goal, with a pilot.

So, I guess, where does for-credit testing start? Can you start that at the component level soon? Or is that later on as you get more towards the full aircraft?

For us, it'll be once we have the full aircraft, and we're always doing testing in our labs. So the test labs that are in our LRIP facility around the corner will be used to test component level stuff. But because we haven't achieved -- we haven't got final agreement on our 18 subject-specific certification plans, we wouldn't be getting -- any testing that we're doing now is not for credit testing. But once you get conviction with the FAA and agreement on the means of compliance, the 18 subjects, for us, the subject-specific certification plans, then you can progress and start advancing your for-credit testing at the component level. I think it'll be done in parallel, honestly, with the aircraft. I mean, the aircraft -- the 6 aircraft, some will be system-level tests. Some will be full aircraft level tests. I think you can think about each one of those performing very, very similar, yet in some instances, distinct testing. For instance, there will be system level or level testing for battery packs, right? That's -- there's subject, certification planning around battery packs that's new to the air -- to the FAA. There hasn't really been a battery-powered primary power electric aircraft carrying passengers. So the FAA is going to put a lot of scrutiny on that. There'll be drop tests, thermal runway tests, et cetera. So we'll be doing those types of tests in parallel to the overall aircraft testing as well.

Very helpful. And just in parallel with the type certification, the FAA is going to have to develop and improve operating rules. They have proposed a special federal airline regulation that'll govern those rules. One of the [ points ] that I think you have commented on publicly as well as most of the industry is on the reserve requirements. My interpretation, and correct me if you feel differently, it seems like the energy reserve requirements are built more around a traditional fixed wing type aircraft versus -- it seems like the industry is interested in more performance-based requirements. I guess, one, why do -- if you do, why do you think performance based requirements are right for Archer and for this industry? And two, what would be the ramifications if the operating rules are approved as written right now?

Yes. So, I mean -- and if you talk to Billy Nolen, former FAA administrator who's Archer's Chief Safety Officer currently, I mean he -- we don't expect the -- as far as drafted to be the final product. There's a reason the FAA -- or this is the reason the FAA required by federal statute to solicit industry feedback, which, as you had mentioned, we provided feedback. This helps ensure the safety thresholds are met, but also that the new regulations aren't overly onerous on the industry. We feel that those regulations aren't keeping up with the technology. They're more sort of a traditional type standard aircraft requirement. If you're performing a flight, does it make sense to have a 30-minute reserve against that? So I think that we just don't believe that, that's going to be the final product. I think once we have finalized as far, which should be late fall of 2024, we'll proceed accordingly with the certification process, but we just don't think it's going to -- no pun intended, we don't think it's going to land there. I don't want to speculate on what that means if we were -- if that were to get passed. We just don't think it's going to -- it just technologically doesn't make sense for them to pass it that way.

Okay. You mentioned the former acting administrator is now an employee at Archer. The new administrator also has some experience. What you think the appointment of Michael Whitaker means for the industry broadly and for Archer specifically?

Yes. We clearly think it's a really good outcome for the industry. I think given administrator Whitaker's long-standing industry background and experience, most frankly as the COO of Supernal, we think the Biden administration sent a pretty strong message to Congress, to the industry and to our international stakeholders that the U.S. has no intention of ceding its position as the gold standard for safety of flying public. And the ability to enable new and novel entrants to, I think, to the national -- international aerospace ecosystem will continue to be one of the guiding factors for the FAA. I think that the position that he brings or his disposition that he brings both previously acting in regulatory environment as well as a private eVTOL company, I think he's going to be able to bring some -- the regulatory discipline. But I think perhaps even more a little bit of an entrepreneurial spirit in terms of getting these aircraft certified with the FAA. I think there is a -- the FAA is there for safety and they operate in a manner that requires safety as paramount. I think you can still do that and have an eye on the end product. We've got the Innovate 28 initiative out there that Billy himself had initiated, which is that -- the FAA wants. The goal is to have eVTOL be a meaningful part of the L.A. Olympics in 2028, so Innovate 28 and not just, like, onesie twosies but tens, hundreds of these things operating. And I think Administrator Whitaker is going to -- now has a forcing function with that and we'll hopefully adapt some of the FAA processes to be more entrepreneurial and help enable the industry. So a lot of words, but we think it's a very positive for the industry.

So if we think about overhangs coming into 2023, if there was some uncertainty around certification, how that process was going to play out, it seems like you guys have progressed pretty well along that path relative to what you had set out at the beginning of the year. There was also legal risk from a lawsuit that have been filed by Wisk. Are you able to resolve that? Maybe just walk us through moving parts of how that agreement is structured, what does each party kind of bring to the table and what are you guys getting out of that.

Yes. I think the -- I mean, there were a number of benefits for us to partner with Boeing. I mean, not at least which clearly, there was some history there with respect to the legal issues that you had brought up. I think the partnership does fit well within the strategy they outlined at the very beginning of creating the most expeditious and expedient path to market. One of the big things that Boeing has been working on it might be one of the leaders in the industry is autonomy. They have a -- they are leaning very forward in autonomy. Wisk was one of the -- it was an eVTOL company that they had acquired that was essentially an autonomous eVTOL company. I think Boeing also has a number of other autonomy programs that they're working. So when we think about when the industry is ready for autonomy, we've got the benefit now of partnering with Boeing to potentially deploy some of their autonomy technology in Archer's Midnight aircraft. So we have been investing in autonomy modestly, moderately, as we're developing Midnight, knowing that at some point, we would have to invest more. What this does is position us to potentially save tens, hundreds of millions of dollars in -- not in having to invest in an autonomous technology to deploy within Midnight, but leveraging what our partner, Boeing, is developing. So I think it's a -- that's probably the largest longer-term benefit for us. I think for them, it's the same thing. They can -- one, they get rid of the overhang that was over them with respect to some of the legal issues as well. But now it has -- this has a real -- in addition to Wisk, there is another platform with which to prove out some autonomous technology, and so it's a real benefit for them as well. And the fact that they also invested in our pipe was a nice outcome as well.

Well, the stock has performed pretty well. So you have to mark that investment up.

Fair enough.

Well, I guess the party line -- or not party line. It seems like most of the experts we talk to think autonomy is at least medium to long range. Is it your opinion that maybe we see that sooner than others might expect?

I wouldn't handicap it that way. I mean, I do think that we have a lot of work. The industry has a lot of work just to prove safety with a pilot on board for an aircraft that could be called an air taxi, 4 passengers plus a pilot. I think the public has to get confidence around that as well. I think technologically, you could deploy an autonomous aircraft and it would work very well, but I just -- I'm not sure the FAA or the public is -- I mean, if you look at aviation today, most of that is fly-by-wire anyway. Ours is a fly-by-wire system as well. But I do -- my opinion, this is just CFO, Mark Mesler. This is a technology that's probably 8 to 10 years away before, I think, you start getting meaningful interest in operating a fully autonomous aircraft with passengers on board. I mean, I think consumers have to get there as well. And so that's just -- again, that's just Mark Mesler, CFO's opinion on where I think it is.

So while we have CFO here, you received an initial payment for services to U.S. Air Force in October. So positive in the bank account for you. How should we think about payments in the future? When should we think about aircraft ultimately being delivered to the Air Force?

Yes, I think there is an expectation that we'll continue to deliver milestones quarter-over-quarter and that we would expect to get payments against those milestones. So that'll continue to manifest itself. In terms of when aircraft would be deployed, I mean, we've talked about delivering our first aircraft to the to be tested late this year, early next year to the Air Force. I think in meaningful scale, I mean, we have to get through a lot of the milestones that are agreed to in the contract. I mean, there's pilot training. There are simulators that we have to deliver. So, I mean, we haven't publicly talked about when we would achieve those milestones, but they're definitely over the course of the next coming years.

Super helpful. I think you had mentioned the -- I think you guys are less open to announcing every commercial agreement that you have than maybe others, but you did announce the Air Chateau International contract. How should we think about that contract, specifically the pre-delivery payment portion of it? What does that say about the confidence that some of your customers are starting to see in Archer?

I think it's a good question you bring up. I mean, I think the industry initially came out of the gate and companies were announcing large MOUs, but you could debate on the veracity of those and whether they were actually going to be delivered. So we've been -- we're fairly conservative in terms of how we look at orders, and we want to be very sure that it's a high-quality order for us to announce it. I mean, I think your discussion around our Air Chateau, the reason we announced it is, one, we do think that, that's going to manifest itself into -- although it was an MOU, we think that will translate into a real agreement with them, and we will have pre-delivery payments against though just as there is precedent in this industry. We did get a $10 million pre-delivery payment against the first 100 aircraft from United. We would expect orders that we're selling to an operator where we will see that as well. So I think the Air Chateau agreement is going to be typical of ones that you would see where we will require predelivery payments, and those will be nondilutive capital injections into the company. I think in terms of what does that mean in terms of progress to the company, I do believe it continues to validate the progress that we've made. We've caught up to the industry. We're executing very well since I've been here. We've delivered on all the major milestones that we have communicated externally. We continue to do that. We're right in the mix in terms of the certification. It's probably going to come down to maybe a 2-horse race at some point, if it's even a race. It's more of both of us getting to market. And the confidence that we're seeing, we've not only announced air charter -- or sorry, Air Chateau. We've announced InterGlobe in India. We've announced this relationship with the UAE and some partners there. We've hired a new Chief Commercial Officer with Nikhil Goel, as I mentioned at the outset. So you're going to see more and more of those. And I think when you think -- when we announce those, we believe that they will enter into backlog at some point, right? We put backlog as a very high threshold. There's a number of boxes you have to check that have an accounting backlog, but you could expect that these will be in -- more likely than not, be in an accounting backlog at some point.

Yes. If I could finish up with the CFO stuff real quick. Your last filing that I saw, about 600 personnel net asset for 2024 guidance you had certainly. But how should we think about the puts and takes, at least, of the personnel into 2024? Is there more hiring that you're going to need to do to support facilities buildout and the final testing things?

Yes. I mean, there's -- we're essentially staffed right now, clearly, to support a large research and development program, which is the commercialization of the Midnight aircraft. With the build-out of Georgia, our high-volume factory, we will be investing in people and expertise to bring up that factory, to your point, flight testing. We have a number of flight test leaders on board. We'll continue to invest in those. We'll be investing in the materials to build out the 6 conforming aircraft. But I wouldn't sit back to perceive -- we haven't provided guidance, but I wouldn't, like, assume we're having, like, step function increase in spending. As I discussed on the last call, there's a core component of our spending, which is the ongoing R&D and people operations, et cetera. In 2023, we're also investing in our supply chain as part of our strategy, and I communicated that if my -- using loose numbers, if my guidance for the quarter was $75 million or if I achieve $75 million of non-GAAP operating expenses in Q2 time line, $15 million of that was roughly nonrecurring costs with our vendor base, supporting tooling, supporting engineering programs there. Those will -- those types of expenses will start to tail off in 2024, which gives me an opportunity to use those funds as they scale off into other areas of the business. So we don't provide forward guidance, but I wouldn't expect -- I don't think anybody on this call should expect I'm doubling my cost in 2024, I mean, not even 1.5x. There'll be a modest increase in spending to support the business, but a lot of that's going to be funded by the NRC that's trailing off and nonrecurring costs that's trailing off as I build out my vendor base. So hopefully, that's helpful.

Okay. Yes, I guess that takes us to time. I wish we had another 20 minutes, but alas, we'll have to stop it there. Mark, so, thank you so much for stopping by. And hopefully, you'll come back and tell us about your conforming aircraft next year.

Excellent. Well, again, thanks for hosting David. It's been a really good event so far, so thank you.