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

Okay. Good afternoon, and welcome to the second day of JPMorgan's 52nd Annual Tech Conference. My name is Bill Peterson, U.S. Clean Tech analyst. And really pleased to have Mark Mesler, the CFO of Archer with us this afternoon. We are webcasting this. [Operator Instructions].

Mark, just maybe as just sort of intro, perhaps you can just start off by introducing yourself the company and Archer's position within the Urban air mobility space and how you stack up relative to the competition, I guess, in the U.S. as well as globally.

Yes. Sure. And thanks for having me out here, Bill. So Mark Mesler, CFO at Archer Aviation, been with the company for about 2.5 years now. And during that time, we've actually made a lot of progress. With respect to how we're positioned, I think it gets back to Archer's overarching strategy since the beginning is to create the most expeditious path to market for our EV to aircraft. When we founded the company, it felt like there wasn't a lot of conviction to getting to market. There were some science projects out there. So our founders were really, really focused on creating a path to get to commercialization. What does commercialization mean? So clearly, commercialization is generating revenue from customers, being able to manufacture the aircraft, getting through the certification process, and actually aligning with some partners to help us along the way. So if we were just to look across those vectors, clearly, the technology needs to work. And we're right now flying our midnight aircraft in our Salinas test facility going through an expanded flight envelope. Midnight, you could go out if you haven't seen it fly or if you haven't seen it, there are some really, really cool videos out on YouTube that you can go and see what the aircraft looks like and going through a lot of the test envelopes that we're going through. So the technology is working, not just for Archer, but for the industry, this is a clear and present industry that's going to get to market. With respect to the certification process, we're working very well with the FAA as well as other jurisdictions around the world to get the aircraft certified for safety of flight. And with respect to that, we are actually pivoting into what's called the implementation mode, where we're going to start flying aircraft this fall. We've discussed that we're going to be making our first piloted flight of a conforming aircraft later this fall. And a conforming aircraft is an aircraft that is manufactured under a quality management system that has been approved by the FAA and has all of the parts that are intended to be used and certified with the FAA on us. So that will be a big milestone for the company as well as the industry, I believe. You have to be able to manufacture them as well, right, in order to fly them, you have to be able to manufacture them. We've made tremendous strides in our manufacturing processes and our ability to manufacture at scale. We've got a great partnership with Stellantis, which is the third largest auto manufacturer in the world by revenue. They're helping us stand up a facility in Covington, Georgia. So it's a 350,000 square foot facility, has the capacity to produce up to 650 aircraft per year. And that is where we'll be doing our scale manufacturing. And Stellantis is helping us think through how to move our product from R&D stage into the manufacturing stage. So we are also have a manufacturing facility in California. It's right around the corner from our HQs. We can have our engineers in there helping us build the aircraft that will be used for conforming flights later this year. So we are building there 6 conforming aircraft, of which we're manufacturing 3 right now. And then finally, if you think about what's the final thing you need to be -- where are you going to fly them. So we have a really good go-to-market strategy where it's a little bit of a hybrid approach, where we're selling aircraft, much like an OEM, we call that Archer Direct. But we're also going to be operating these. And primarily, we're bifurcating those between sort of domestic operations, which will primarily be us operating them. We're operating them in conjunction with a partner. United Airlines is a big partner of ours from a commercial standpoint and operating standpoint. We've announced routes with them to operate from City Center in Manhattan, 34th Street Helipad to Newark Liberty International Airport. And our goal is to try to get behind the TSA there, so you can fly from Manhattan to Terminal C. We've also announced routes in Chicago. So that's our domestic strategy. And then internationally, we clearly aren't experts in all of the markets that want this technology. So we've established some really good partnerships internationally in the UAE and India, et cetera. So if you step back with respect to what does all that mean? We are threading the needle to get to commercialization as early as 2025, which we've gone -- which we've talked about on record, which is next year. And those are the primary vectors that we continue to work to get us there.

Yes. And you spoke to it. So I guess the direct model might be more overseas and maybe operate here in the U.S. But I guess, how should we think about the economics -- unit economics for the different strategies between a sale versus an operating model?

Yes, it's a good question because I find that investors are starting to really dig into the unit level economics over the past year. And so the simplest form is when we're selling the aircraft, it is just like a direct sale. There -- you sell the aircraft and you have some repair and overhaul that you can sell after that. But it's -- we've been targeting the economics show that we get about 50% gross margin on the sale of the aircraft. That's assuming an ASP of around $5 million, which is what our agreement with United and a couple of the other operators are. So a $5 million ASP, 50% gross margin is the target on that. When you're operating them, clearly, it's a little bit more of a complex system. You have -- it really starts looking like ridesharing economics at that point. You've got a cost per seat or potentially cost per seat mile, however you choose to look at it. And then there's operating costs that you have to incur as well. So at a high level, our model show that we can get to around a 40% gross margin operating at the -- operating lease in networks. So picture network in New York City or in Miami or somewhere else, where you're charging like rideshare. Now clearly, we want to charge to what the market will bear. But we don't want this to be sort of a wealthy person's mode of transportation. We want this to be very ubiquitous and have folks who are used to using rideshare can use Archer as an aerial rideshare. So initially, if you look at ridesharing, if you take a cab and this is crazy, I just took a cab from Manhattan to Newark. It was a fixed $130 fare. And then you had tolls on top of that, another $30, you're already at like $160, you throw a tip. You're like you're approaching blades $195 price point where you could take a helicopter. So if you do the math on like $180 or like a $200 flight, that's about $20 per seat mile, which is way above what a typical rideshare would be. So I share that with you, so you can understand when you start getting to unit level economics, that $6, $7, $8 a seat miles is your typical rideshare, if you take an Uber, et cetera. And we should be able to make money. My goal is to make money below that. But translating that into what is that cost per passenger. You recall that we have a -- the aircraft is a 4 passenger plus a pilot aircraft. So it's $6 a seat mile on a 20-mile trip you're looking at $120 per seat. Honestly, in New York, L.A., other areas, that's probably a minimum cost. I think folks would pay a lot more than that. You layer on. So that's the top line. Thinking through the unit level economics, you've got pilot cost, you've got the amortization of the aircraft, you've got landing fees, insurance, et cetera. So the economics are very different because, one, it's a more complex system, you're operating them. You have more costs to operate them versus just a direct sale.

Yes. Thanks for that. I mean, as this is a tech conference, I guess, how is Archer planning to develop its customer interface using tech to enable fair pricing, passenger point, accessibility. I mean how is your sort of customer-facing tech look like?

Yes. So we hired early on some smart folks data scientists from Uber Pool and they've helped us think through a couple of things around the go-to-market. One is just what do these networks look like and we're able to model what these networks look like using their data. But two, is putting together an app to do just what you just said. There's an Archer app that we're actually starting to test internally right now, which customers keep on their phone. You could also with our partners, you think about United, this could be integrated with the United apps. So if you're a United customer or Global Aviation or a [ Oneka ] and you want to book an Archer on top of your regular flight, there's going to -- we're trying to work with them to have that type of interface as well. So try to make it seamless and as part of the customers daily lives as we can.

We look forward to that in a few years. Well, maybe to that point, let's move to certification. So over the last maybe few months or quarters, Archer and others, frankly, have talked about the importance of the UAE as a launch market, perhaps in '25, as you said. It seems like there's some good financial incentives as well as a parallel pathway to type certification, which is the key milestone you need, especially from the FAA. But I guess, how have the conversations gone with UAE certifying body the GCAA? And how has that been supportive of a 2025 potential launch?

Yes. So what we've observed is that outside the U.S., there is an increasing amount of interest in the tech primarily because some jurisdictions or some countries don't have the infrastructure that we have with respect to terrestrial transportation and specifically in the UAE is one of them. The UAE has leaned into this space. We've also -- as I said, we've deals in India. So it's a global phenomenon. UAE though has identified eVTOL as a strategic industry for them. And they have leaned into providing a number of a number of support systems to commercialize eVTOL within the UAE. I mean we've struck deals with 2 operators there. One is called Falcon Aviation. The other one is called Air Chateau. These are operators within the ecosystem there. ADIO, the Abu Dhabi Investment Office has -- 2 weeks ago, we announced a multi-$100-million-dollar investment by them to help set up this ecosystem there. So I look at that as a ready-made investment for vertiports, for training, for R&O facility -- repair and overhaul facilities that they're willing to invest in. And then finally, we announced yesterday a pilot training program with Etihad. And so they've really forward leaned, and 2025 for them is a clear and present path that we could potentially take advantage of.

Investors may ask like how -- or what enables this GCAA to certify an aircraft ahead of the FAA?

Yes, it's a good question. I think that regulatory bodies around -- the federal regulatory bodies around the world are trying to align their pace of certification operations with the pace that the industry is moving. We're seeing that with federal regulators that we're talking to outside the U.S. You're also seeing it with the FAA itself. The recent reauthorization of the FAA Act called for an establishment of a steering committee to ensure that the U.S. maintains its global leadership in Advanced Air Mobility or AAM. So I think that there is a motivation amongst all parties to move at pace. The next level down is just to level set that what we're certifying is not a complex system like a narrow-body or wide-body jet airliner, right? This is an order of magnitude, a lot simpler of a product than a jetliner. We are sourcing close to 80% of our components and parts from the existing aerospace supply base. And that supply base has a certification heritage, meaning that it has parts and/or companies have gone through the certification process with regulators before. So I think that's a good setup to then look at what is the internal capability of the regulatory agency to get through the certification process. The GCAA, which is the General Civil Aviation Authority in UAE has a well-established track record of certification. They're nimble, and they have -- they're well-staffed to do this. So I think they set themselves up pretty well to potentially get through a 2025 certification.

Yes. Maybe coming back to an earlier thread, you just mentioned. So you've chosen to primarily source components and systems from the supply chain, from the established aerospace supply chain to minimize risk. What are the benefits -- we already stick to one benefit. If the Board of the benefits or say trade-offs are pursuing this approach?

Yes. We feel there's -- the benefits are many. So the 2 big ones are using an existing aerospace supply base that has certification heritage, we think derisks our path through the certification process with the FAA and other regulatory body. So if I have a flight computer that I'm sourcing from Safran, out of France. The FAA has seen those before. So it's not like they have to relearn the technology or look at it and dig through every nook and cranny. They've seen this before. And so Garmin Navigation, Actuators from Honeywell, Sidestick from Crouzet. All of these have prior certification heritage. So we feel that on that overarching strategy that I discussed at the beginning to create the most expeditious path to market, that strategy, we think, enables that with the FAA. We chose to integrate with what we call key differentiating technologies, which for us would be powertrain. We think the key differentiator is how your electric engines and your battery packs operate together. And so we chose to develop those internally. So using that supply base to help us get through the SIR Process, we think, derisks our path. The second key benefit to that is that I don't have to make investments in those subsystems to develop them internally, either from an R&D standpoint or from a future manufacturing standpoint. So you think about production health, right now, my manufacturing processes are essentially going to be an assembly and test process. We've got a battery pack line. We've got an electric engine line, which we are manufacturing, but coming to Georgia is essentially bringing all those components that are sourced from the existing aerospace supply base together and selling them into an aircraft. So that -- we feel that, that's going to derisk scale. It's going to derisk our ability to get to market. But also from a capital standpoint, it is a capital-light strategy because I don't have to make investments in capacity to manufacture those components in the future. I don't have to make investments in the people to manufacture those, and I don't have to make investment in the R&D folks to manufacture those. For instance, our Sidesticks, these are -- these have been used on the -- Sidesticks are the two sticks that we used to fly the aircraft, one is for altitude and -- one is for altitude gain and loss, and one is for forward motion, et cetera. And those are sourced by a company called Crouzet. Crouzet has over 4,000 employees. I might be able to afford to put 5, 10, 20 people on that. It might take me 3 to 5 years to develop that. I'm able to develop in a really short timeline with Crouzet. So I think the strategy is largely paid off for us. And if you think about it, it really just becomes a make versus buy decision once you get to market. And that's a decision that I make as a CFO every day. I get to market manufacturing -- if I can just pecking order go down my supply base and decide whether want to manufacture those in-house or externally. But the key thing, again, is to get to market. Once you get to market, you got a completely different valuation, you've got a completely different ballgame.

So just to sum up here, what do you view your core IP? I mean, you kind of mentioned electric motor and things like that, but maybe just what do you view as your core IP and your core value add?

It's an interesting question because I think you have to look at the use cases for the aircraft. We specifically designed our Midnight aircraft for the 20- to 50-mile mission. And so every design decision that we made with respect to battery charging time, the battery packs, the size of the engines, et cetera, are idiosyncratic to that use case. We've got 12 propellers across the fixed wing and the front 6 tilt forward into forward flight. There are 6 battery packs in the wing. We think that's an optimum configuration to fly safely, to perform the 20- to 50-mile use case to charge in a 10-minute charge time to get ready for the gondola-like 20-mile missions, which we'll do 20 to 25 of those a day. So that is the use case that we designed it for. I do believe that our core IP is in our powertrain. So -- and we early on identified that as a key differentiating technology. So our electric engines and our battery packs. So the batteries come from a company called Molicel that have been manufacturing these in the millions and millions for a number of years. It's a cylindrical cell. But we assemble those into a battery pack. And that battery pack has to be able to contain what's called thermal runway. It has to operate at our operating parameters. And the electric engines are sized for our specific aircraft, the weight, the torque and everything is sized for our aircraft. We were able to develop those because we're right in the heart of Silicon Valley. We got a bunch of smart folks that came from Tesla, Apple Special Projects Group, the Lucid's of the world that really designed an elegant electric engine for us. It's 7 moving parts, and it works perfectly for us. If you held a gun to my head, I would say that is our core IP, but I also think that the whole configuration for the aircraft is very -- it is an idiosyncratic to our use case and others may not have that same type of use case.

Yes. Coming back to certification and when we think about the balance of the year, what sort of milestones should we investors be monitoring? Once we think about piloted flight, transition to the full wing-borne flight? What are these expected to happen?