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

It's great to have Mark Mesler, here from Archer Aviation, Mark. Thank you for coming, Mark is the CFO of Archer. So without further ado, Mark, I think you have some presentation, then we'll do some questions and have a chat.

Yes. Should I stay here or?

You want look to how, whatever you want to do. Whatever you're most comfortable with.

Well, I'll go ahead and start 15 to 20 minutes of just a background of Archer. So Archer Aviation, we're creating as much of a company as an industry as well. So we're in the business of developing and manufacturing in all electric vertical take-off and landing aircraft which you see here. The aircraft is focused on a very specific short-haul mission, 20 to 50 miles for carrying 4 passengers and a pilot. So this essentially is built to displace terrestrial transportation in the high -- the high areas where you have got massive traffic and it takes you 1.5 hours to go 15 miles. So I think seeing is believing. I'd like to show you our latest flight test video from our Salinas, California flight test facility. This is Midnight, our production aircraft going through some flight tests. So you can see it takes off like a helicopter. And then you'll see a transition in the forward flight here using the physics of a fixed-wing aircraft. So very efficient for these 20 to 50-mile missions. And then you'll see it land also like a helicopter. So a big, big value for this type of aircraft is access to places that you otherwise would be able to with a regular aircraft. So a little bit about the company. Yes, we went public on the NYSE in 2021. We've raised over $1 billion of capital. We got a workforce of just over 700 folks, primarily 3 facilities right now. We're headquartered in San Jose, California, right in the heart of Silicon Valley. We got a flight test facility in Salinas, California, and you'll see later, we're building a large high-volume manufacturing facility on 100 acres in Covington, Georgia. We've got a capital light go-to-market strategy, which means we're leveraging a lot of the existing aerospace supply base for the components for our aircraft. We're not really betting on anything new. We have developed internally our powertrain. So powertrain is battery packs and electric engines. We're in the heart of EV land out there with the Teslas, the Lucid and maybe as you can imagine, we've been able to attract some very high-quality people from those to help us build out our powertrain. And the powertrain is really a world-class powertrain. The electric engines are a really elegant solution for our aircraft. We've got really good partners with United as a key operating partner in Stellantis, which we'll talk about later. And yes, the goal of the company is to commence commercial operations in 2025. So let's go a little deeper on Midnight, which is our production aircraft. The specs for Midnight, it has a range of up to 100 miles on the current battery, the battery technology. It speeds 150 miles per hour. The targeted payload is 4 passengers in a pilot. These will get certified with the FAA to commercial airline safety standards, which the industry is going through right now. It's all electric, little noise. It's got a profile of noise. It's 100 times less than that of a helicopter, which makes it a very attractive product for areas that are in high urban areas where noise is not something that folks really want in their backyard. And then finally, cost is -- the cost to operate these things, we're going to be targeting sort of consumer ridesharing pricing. So this will be able to be accessed by the general public [indiscernible]. There are a number of use cases for this technology, as you can imagine. There's aerial ride sharing. There's cargo and logistics. There's emergency response. There's some military applications, non-kinetic, which means non-war vehicles. We will focused on the aerial ride sharing, which we'll talk about later. But -- so the key development milestones here for Midnight, we're in flight test, where as you just saw, we're flying daily. We're preparing for what's called our first big transition flight, which is where most of the Lyft is born from the fixed wing. The video you saw, while we were flying forward, it was still being -- generally Lyft was being generated by the rotors. But when you in full transition, Lyft is being generated from the wing and that will be happening this summer. We've built out our supply chain. We're really getting ready for scale manufacturing right now with our partners Stellantis. The -- in order to operate these commercially, you do have to go through a certification process with the FAA to ensure the aircraft meets the safety standards to fly and move passengers around. That process is a -- it's a very detailed process with the FAA. It was generally an administrative phase where you agree with the FAA on what you're going to certify and the test that you're going to run to get through certification. We're currently -- we've been -- the industry as well as Archer have been going through sort of this administrative phase. And later this year, we are pivoting to testing for credit testing with the FAA. The aircraft that you see here being built is our first conforming aircraft. And a conforming aircraft is one that is being manufactured under an FAA-approved quality management system and the parts that will be put into this are the production intended parts that will be used for FAA certification. So the flight that you saw earlier is a remotely piloted flight. Later this year, we'll have a pilot in this aircraft right here piloting what is called an FAA for credit or conforming aircraft. There's a number of highlights around certification. We could probably spend a full day on certification. But as I said, we're going to be -- the goal is to have a piloted flight of a conforming aircraft later this year. Billy Nolen, the former FAA administrator joined Archer last summer, and he's been very instrumental in helping us think through and get through this process. We'll be building 6 conforming aircraft for FAA certification of which we're building the first 3. In order to fly these, you have to be able to manufacture them. If we think about how do we converge everything into a commercial operation in 2025, our partner, Stellantis is helping us build out our manufacturing capability. This is a rendering of our 350,000 square foot facility that we're building in Covington, Georgia. It will have capacity for up to 650 aircraft per year. It's a very capital light. This doesn't -- it's not an expensive property or facility. This site has been graded and we're starting to stand up the walls. This is the wall of the flight building that this is about 2 weeks ago. So we're -- we've done a lot since then. This is right next to the municipal airport of coming in Georgia to go back. Once you can see in the back, there's an airport to the upper right. The flight building is there on the left, which you just saw us being built. And so that's where we'll conduct flight testing after we build these aircraft. We're also -- we've also stood up a pilot line in Test labs in San Jose right around the corner from us. So the first 6 aircraft where we built in San Jose before we transition into Covington for high-scale manufacturing. Our battery lines and electric engine lines are also being built in San Jose. So this is a picture of our operating battery line. And clearly, batteries are important too and we'll have high scale in our electric vehicles. I encourage you to go out if you're interested. We just posted a video, a 5-minute video of a tour of this facility. It's pretty impressive. I would equate it to sort of like a Lucid or a Tesla battery line, highly automated and assembling thousands of little cells of batteries into these battery packs. So I think this is a little something that doesn't get as much discussion in the industry, but being able to fly these, you got to be able to build them as well. And Stellantis has done a really good job in helping us do that. Speaking of Stellantis, great strategic partner with them. They've been an investor. They've been an operating partner. I've got dozens of Stellantis employees who are running around Archer's HQ, really helping us think about moving the aircraft from the R&D phase into the manufacturing phase because if you think about where some of the stumbles in the electric vehicle industry weren't attack, it was really the manufacturing of that. And so Stellantis builds up to 500,000, 600,000 cars a month. Scale is something that they always think of and they're really helping us think about scale in that factory in Covington, Georgia. And actually, the goal is from a relationship standpoint to have them be our contract manufacturing partner at some point. And we've talked about that publicly, and we're in active conversations of what that relationship could look like. They've also been very creative in terms of providing us some financing vehicles last year. We aimed to deal with them for a forward equity purchase agreement for $150 million. So we were able to draw down tranches of capital when we needed it at favorable terms. We still have $55 million left on that $155 million facility with them. Commercialization. So we've talked about the tech, we've talked about the certification process. What does commercialization look like? Commercialization is monetizing and turning into revenue the use case that I talked about, aerial ridesharing. So aerial ridesharing as briefly touched on at the beginning, if you think about what your commute from city center of Manhattan to one of the airports is, it's generally 1 hour, 1.5 hour trip in traffic. We can do that in 7 to 10 minutes. And that's really the goal in market entry points throughout the world as well as the U.S. is finding those high-volume routes where we can displace terrestrial traffic and take it from an hour to a 2-hour trip to make it 7 to 15 minutes. The timeline to commercial operations. The industry as well as Archer is sort of in the build-out phase of this through 2025. We're working on significant certification efforts with the FAA. We're also inking deals around the world with operating partners in the UAE, in India, and there will be other areas that we're announcing throughout the world. Domestically, we'll talk more about it. We've got a partnership with United. You can imagine we're working with other domestic partners to build out air mobility networks domestically as well. So 2025 to 2028, we'll see those early commercial operations and start scaling really. I think the industry starts scaling in 2027 and 2028 once we start getting through the initial build-out of the operations. So Archer, we're going to market with a dual-pronged strategy where we're selling the aircraft through what we call Archer Direct. And then we're also going to be operating the aircraft in certain locations around the U.S. So you think of Archer Direct is more like an OEM. So we've got partnerships with the UAE with InterGlobe in India, United is a big partner. We're always actively looking for partners to sell to. And that will generate an upfront revenue stream. So revenue recognition is essentially when you sell the aircraft. From a ridesharing standpoint, we do believe that the customer experience is something that we want to own and be able to influence, and that's a big part of the Archer brand. And so the ridesharing business here in the U.S. will largely start taking root in some of what we call trunk routes, the city center to airport, city center to like the Greenwich's, high-volume throughput routes that will be priced based on standard ridesharing and or more price to what the market will bear, but at a minimum, at what ridesharing costs are. And those are the 2 revenue streams. So domestically here, we've got a really deep relationship with United. They've been an investor as well as an operating partner, thinking about how these routes work, how do I get behind security. So I think that's the big advantage here is if you took a flight, an Archer flight from 34th Street Helipad to Newark Terminal C, you'd actually be able to land on the other side of security. So you can clear security TSA in Manhattan and then just get to your United flight at Terminal C. That's the goal. That's what we're working through with United on that concept of operations. United, Oscar Munoz former CEO and Chairman of United, he sits on our Board. We've announced routes in New York, in Chicago with United. United put a $10 million deposit on the first 100 aircraft last year. So that is really the route and the nascency of building out our domestic commercial operations. These are just some renderings of what a typical egress area would look like? We call them vertiports, rendering of San Jose Airport, which is a great hub to other parts of California. Santa Monica, L.A. is a classic example of where Urban Air Mobility could take root because of the traffic and the time it takes to get from one side of L.A. to the other. Miami, New York Street, that's the heliport there. So just to give you an idea of sort of what a future state of what these vertiports could look like. Internationally, as I said, we have a really -- we've started developing a really deep partnership with the UAE. We announced 2 weeks ago that the Abu Dhabi Investment Office has committed multi hundreds of millions of dollars to the company in terms of helping build out infrastructure and the ecosystem of UAM, urban air mobility in the UAE, I think like vertiport investments, repair and overhaul investments and Aero Chateau is an operator as well as Falcon Aviation in the UAE. We've agreed to the purchase of aircraft with them. And then we've also got a partnership with InterGlobe and Rahul Bhatia, who is the large operator of Indigo in India. So as much as we're focused on domestic operations, we are building out our international capability as well. Last couple of slides. We've got an indicative order book for those first orders at a $5 million ASP, roughly a $3.5 billion order book across the U.S., UAE and India with Aero Chateau, Falcon Aviation, as I said, United and targeting commencement of commercial operations, we would endeavor to start delivering against this order book internationally. Finally, we do have an agreement or a contract with the DoD as well through Air Force's AppWorks program, working on use cases for this within the military. It's up to $142 million contract. We're working with them on identifying use cases, pilot training, simulation, et cetera. So as we sit here today, I think that we've put -- the company has really done a great job in terms of thinking about the 3 or 4 vectors that we have to execute on to get to commercialization as early as 2025. And the engineering team, the business development team and everybody has been doing a great job. So that's -- those were my prepared remarks and happy to get into Q&A.

Yes, sure. Maybe I'll kick it off, but then open it up with some questions on the road too. One thing you didn't mention that potentially could be, I guess, another market, how do you think about managed repair overhaul service and support for the aircraft that you sell through Archer direct.

Yes. Yes. So we do believe that that's a -- clearly, that will be a revenue stream. We'll have a service P&L that will service that. The battery packs need to be replaced a minimum of once per year. Your standard upkeep on the aircraft. So we do think about that. We've got a whole airline operations team, led by a gentleman by the name of Tom Anderson, who is with JetBlue, he was with Breeze. He's been with Virgin Atlantic and help them build out those capabilities. And so we work with him into building out those concept of operations of what does the R&O piece look like. But that will be a part of our P&L, and it will be a meaningful portion of our business going forward as well. I don't think it's going to be as skewed as it potentially is with the current paradigm within aviation, where a lot of the margin is generated from the R&O facilities. I still think that for now, initially, in the first couple of years, my opinion is a lot of the margin we generated from the aircraft itself, but that R&O capability will be -- start becoming a more meaningful part of the business as we get through operations.

Got it. And when you think about the -- I'll just ask one more and then I'll go right to you. The business model on the non-Archer-direct side, effectively, you'll be building the aircraft and operating the aircraft. How do you think about that? I mean, that's just a lot to take on -- so it's being the OE and the airline kind of, right?

Yes, yes. It's a lot, but there's nobody else right now that can do that. I mean we know the aircraft. We know what the concept of operations are? Internationally, we do think we couldn't do this ourselves internationally, which is why we're partnering with the Falcons, the Interglobes, et cetera. So we can get access to the markets and help them actually partner with them what is an urban air mobility market, how would that operate. So -- but I also think that because of -- it's not a lot of infrastructure, but that's an organic growth vector as well. that will -- initially, when we think about UAM, we're going to be repurposing general aviation assets, think municipal airports, think heliport. So it's not a lot of the investment that needs to go into it, but charging infrastructure has to be put in place. So how -- why we've taken this dual-pronged approach is because we believe that the cash flow generated from the OEM side of the business will help support and build out that UAM side of the business. So I think it's a pretty good hybrid approach to the market.

David?

I had 2 quick questions. You said the battery packs have to get changed out every year. If you could just clarify that and also how much do the tax cost and who owns the packs? And secondly, I wasn't clear from this slide. Are you saying you will be doing commercial passenger flying in 2025? And if so, when do you think you'll be doing commercial passenger in the United States?

So with respect to the first question, yes, battery packs, they will have a life of about at least a life for us. They have a second use, but for us will be about 1 year to 1.5 years. During natural maintenance operations, they will be swapped out wherever they're being used. The good news is battery packs have a -- our batteries themselves have about a 5% to 7% improvement every year. So it's almost like a technology upgrade. Those will generally be owned by the operator. And so that will be part of the repair and overhaul process to upgrade those.

And how much are you going to charge per pack?

We haven't disclosed that publicly on cost on that.

I mean, is this like $1 million, $500,000?

No, no, no. These are like tens of thousands. They're not millions of dollars or hundreds of thousands of dollars. So that's ...

And how many I'm sorry, and that's for the entire -- that's one pack for the entire...

There's 6 battery packs in aircraft in the fixed wing.

And all 6 will have to be replaced annually?

Yes. Yes. With respect to your second question -- I'm sorry, your second question was commercial operation...

Passenger commercial.

Yes, yes. So the goal is we will have a commercial-ready aircraft in 2025. And the goal would be to operate those in the U.S. It depends on where the FAA is. So far, the FAA has been cooperating, but we don't control the FAA. But the goal would be to operate commercially in the U.S. or outside the U.S. in 2025 under the assumption that we've got safety of flight and the aircraft, which currently -- current course and speed, that's our goal.

And if you look at the milestones you still have to hit for certification, what else has to be done?