Q1 2023 Arrival SA Earnings Call

Participants

Igor Torgov; CEO; Arrival

John K. Wozniak; CFO; Arrival

Michael Ableson; CEO of North America; Arrival

Presentation

Operator

Good afternoon. Thank you all for joining us today to discuss Arrival's First quarter 2023 business update. I'm Annie Wechter, Director of Investor Relations. And today, we have with us Igor Torgov, Arrival Group CEO; Mike Ableson, CEO of North America; and John Wozniak, CFO. Before we begin, I'd like to remind everyone that certain statements made on this call today are forward-looking statements. These statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions and the information currently available to us.
Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. Descriptions of these factors and other risks that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in our filings with the SEC and our first quarter 2023 business update issued today on the 15th of May.
During the call, we also refer to certain non-IFRS financial measures. This should be considered in addition to and not as a substitute for or in isolation from our IFRS results. For further information, please refer to our Investor Relations website at investors.arrival.com. And with that in mind, I'll now turn it over to Igor.

Igor Torgov

Thank you, Annie, and good afternoon and evening, everyone. In Q1, we significantly reduced our cost base through the optimization initiatives we had planned for the quarter, including nearing our target for regular quarterly spend, which excludes settlement of legacy supplier obligations and other restructuring costs. These actions have allowed us to focus the organization on our business plan, which is to deliver a purpose-built Class 4 delivery vehicle for the U.S. market in 2024, which we call the XL Van.
I would like to remind you that we believe we have a clear and compelling business plan focused around our XL Van. The XL Van is a Class 4 commercial vehicle designed specifically for last-mile delivery fleets. Vehicles in this size category are typically too large to be manufactured by traditional automotive OEMs. As a result, the vast majority of vehicles in this class are built using an OEM chassis that is then finished as a complete vehicle through a second stage manufacturing. Our XL Van also shares a high level of commonality with our certified European L Van has a high-margin profile and qualifies for IRA tax credit up to $40,000, making it ultimately a very strong contender for adoption by U.S. fleet operators.
During the quarter, we announced a business combination with Kensington Capital Acquisition Corp. V. Kensington's senior leadership adds decades of automotive and industrial experience as well as access to available customers and supply chain, expertise in building and running vehicle manufacturing facilities and public company leadership in managing and deploying capital. The combination validates Arrival's strategy to bring a purpose-built Class 4 last-mile delivery vehicle to the U.S. market and should provide a meaningful amount of capital for the XL program.
We are looking forward to partnering with Kensington to meet our production goals. Our focus going forward this year is on closing the merger with Kensington and executing our operational milestones, which include: continuing to validate our product and manufacturing method through producing 10 L Vans in Bicester, accumulating 250,000 kilometers in road mileage testing and finalizing our XL Van design. All these efforts will help to inform and approve the design and manufacturing of our XL Van when it enters production in Charlotte planned for next year. I will now hand it over to Mike to elaborate on how we are progressing towards achieving these milestones.

Michael Ableson

Thanks, Igor. The 10 Bicester van builds are progressing well. We've completed the build of 3 vehicles and have a further 5 vehicles in process. To remind everyone, we're building these vehicles to further develop and integrate our manufacturing processes and to then accumulate additional test miles for the vehicle. In Bicester, we now have several stages of our body assembly process running completely automatically with our AMRs integrated to carry both parts and the vehicle to the assembly cell. To date, we're nearing 50% of our design throughput in some of the assembly stages. Because the manufacturing process we're using in Bicester is very similar to what we use in Charlotte, the XL Van, our Bicester development experience will have an enormous benefit for the Charlotte factory next year.
We've also advanced our road mileage accumulation, racking up 90,000 kilometers so far from our L Van fleet. With the goal of accumulating over 250,000 kilometers by the end of the year. Our vans are being driven for multiple hours for almost every day on public roads by Arrival employees and I'm happy to say that the vans are operating reliably and to specification. Due to the reuse of common components and engineering solutions, this mileage accumulation program is continuing to improve our confidence for the XL program. On the XL Van program itself, we completed our fourth round of vehicle simulation and analysis in preparation for release of long-lead structural parts next quarter.
As we further evaluate the XL program business case, we've decided that commercially available systems may present a better alternative than developing and tooling in-house components, especially for those components with a high material cost. Using commercially available components reduces our development cost, program investment and program risk. We'll have more to say around the specific component strategy in the future. That concludes my summary. I'll now turn it over to John to provide our financial update. John?

John K. Wozniak

Thanks, Mike. In March, we outlined our priorities for this year, which are to raise the capital required to operate the business into late 2023 and to raise sufficient funds to bring the XL Van to market next year. I would first like to comment on our initiatives to improve our liquidity position this year. We ended March with $130 million of cash on hand. The change in cash of $75 million from Q4 included a $25 million receipt from Antara and use of cash of approximately $60 million for restructuring-related costs and legacy supplier payments.
In April, we entered into a business combination agreement with Kensington Capital Acquisition Corp. V, which provides us access of up to $283 million upon closing of the transaction, subject to redemptions. The business combination remains subject to shareholder approval. In addition, we are working diligently to complete our annual report on Form 20-F for the fiscal year ended December 31, 2022. In summary, we believe our business plan is sound, and we are working diligently to bring the necessary capital to meet our 2024 production goals.
Our top priority remains closing our transaction with Kensington and the entire leadership team is focused on making that happen. We are still very optimistic that we have the IP, the talent and the know-how to bring Arrival's purpose-built vans to market, and we believe we will succeed improving our revolutionary new method of production. In these challenging market conditions, it will require a great deal of discipline, perseverance and support from our partners but we are confident that we will meet those challenges head on and emerge as one of the leaders in the rapidly growing commercial EV market.
We want to thank our shareholders, investment partners, customers, suppliers and most importantly, our employees who have stayed loyal to Arrival over the years and continue to root for us every step of the way. And with that, we can move now to Q&A.

Question and Answer Session

John K. Wozniak

So we have 2 questions here from Jeff Osborne from Cowen. The first question, Can you expand on the design readiness of the XL program? What technical progress has been made thus far and what is left to do? Mike or Igor, do you want to take that question?

Igor Torgov

Yes, John, I think, Mike, in a better position to answer this question.

Michael Ableson

All right. Thanks very much. As I said in my comments, we've just completed our fourth analysis iteration on the XL Van. These are simulations that are done based on the digital design of the product, which is well along and as I mentioned, we're getting ready to release our production intent designs for long lead parts next quarter.
Long lead refers to the fact these are parts where the tooling times are some of the longest in the program. And then we will stagger the release of the remaining parts through the rest of the year, shortly and medium lead parts will be later in the year. We expect to be doing physical testing early next year in preparation for building preproduction vehicles in Charlotte around the middle of next year, leading, of course, to start our production at the end of next year in Charlotte. So we're on schedule. We're making good progress. And again, because of all the testing that we're doing around the L Van that we -- the L Vans we built in Bicester we have a lot of confidence that what we're doing with XL Van is going to be successful.

Igor Torgov

Okay. Thank you, Mike. And we have another question from Jeff Osborne from Cowen. Can you please give us your thoughts on when you think the Kensington transaction might close? How should we think about the risk of elevated redemptions and your ability to move the ball forward on the XL program and (inaudible) Charlotte.
I think, John, you should answer this question.

John K. Wozniak

Sure. Thank you, Igor, and thanks, Jeff, for the question. I'm going to take the second part of that question first. around the redemption risk. Obviously, I don't want to predict the redemption rate for this transaction. But what I would say is -- not only have we structured the transaction to provide a significant premium to the Kensington shareholders. We also believe that the Arrival business case, which is building a purpose-built vehicle for the North America market in the XL class, which as we've mentioned, carries significant incentives under the Investment Reduction Act. So we believe that business case is compelling. We believe that the return on investment is compelling. And with the Kensington team, we'll have a number of months to sell this transaction to our investor base, and we believe that we will be able to bring a significant amount of capital to the business.
Which will allow us to start investing in the XL program. With respect to the timing, obviously, Jeff, as you know, there's a number of factors that impact timing that aren't within our control. Like the SEC review process. But we're moving as quickly as possible to close the transaction, and we're going to work diligently with the Kensington team to get this done as quickly as we can. As you know, the SEC review process can take a couple of months. We also have the shareholder vote, which we have to schedule as well, and that's typically about 30 days from when the SEC review process is complete.
So a normal merger process does take anywhere from, I would call it, 3 months or more. And we're just going to work as hard as we can to get this closed as quickly as we can. Thanks for the question.

Igor Torgov

Okay. And, do we have any other questions?

John K. Wozniak

Okay. It looks like we have no further questions.

Igor Torgov

Yes. It looks like we do not have any other questions. So thank you all for attending this earnings call and thank you. Goodbye.