Q3 2019 Arcimoto Inc Earnings Call
Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcimoto Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00pm GMT
TEXT version of Transcript
* Mark D. Frohnmayer
Arcimoto, Inc. - Founder, Chairman, President & CEO
Conference Call Participants
* Greg Falesnik
MZ Group North America - MD
Greg Falesnik, MZ Group North America - MD 
Good afternoon, ladies and gentlemen, and thank you for standing by.
Welcome to the Arcimoto Third Quarter 2019 Earnings Webcast. (Operator Instructions)
The conference is being recorded today, November 14, 2019, and the earnings press release accompanying this webcast was issued at the open of market today.
At this time, I'll play a brief core product video, and now over to you, Mark.
Mark D. Frohnmayer, Arcimoto, Inc. - Founder, Chairman, President & CEO 
Thanks, Greg. And yes, good morning to everyone, good afternoon, somewhere in the world. And as I usually do on each of these calls, I'm going to play our latest update and then dive into the specific accomplishments in quarter 3 followed by the current state of our product portfolio and the road ahead before I open it up to questions.
Mark D. Frohnmayer, Arcimoto, Inc. - Founder, Chairman, President & CEO 
So it is, I think, hard to overstate the significance of quarter 3 in Arcimoto's 12-year history. The first 7 years of push to define the basic footprint and platform of the product that we were going to build, the development of looks-like, works-like prototypes, the public offering to go build a factory; and then ultimately, the conclusion in quarter 3 of the certification and testing of the Arcimoto Fun Utility Vehicle and the introduction into retail production and delivery to our very first customers.
It has -- in just this last year, we built 35 test vehicles, test chassis and numerous fixtures for various different testing processes. We certified the vehicle to the basic FMVSS standards for motorcycle-class vehicles, and then we did a whole lot of additional testing for all of the voluntarily added components on the vehicle such as the seatbelts, everything from anchorages to sled tests to make sure seatbelts function properly. We tested the roof against the 216a roof crush test for automobiles. We performed with laboratory test partners, FCC testing of the -- for electromagnetic compliance. We tested the -- did ETA testing for range and then just a ton of reliability testing including salt fog, spray and durability, all culminating in the final compliance of the vehicle and its introduction into the market on September 19 of this year.
And what you don't see in just simply the building and the testing of vehicles is just really the build-out of the organization necessary to be -- go from being an R&D, one-at-a-time prototype shop to an actual vehicle production, then ensuring that includes part quality management; materials management; the ability to complete sales orders with full bill of materials; the lot and part tracking for vehicles, communication with customers through refinement of options; delivering products both in our -- from our factory in Eugene and then on the road, primarily up and down the West Coast. And then finally, putting in place the systems for vehicle service, warranty repairs and the ability to do recalls and updates as we go on down the road.
Simply, a massive amount of work that all culminated in the third quarter and resulted in the successful shipment of vehicles to our first customers for the first time. So I'm going to dive into -- at first, sort of the big picture for those of us -- those of you who are joining us for the first time, to give sort of an idea of why of the Arcimoto story, what we're actually going for.
The company exists to help catalyze the shift to clean mobility, and the basic thesis is that the way that we use cars is mismatched with the capabilities of cars. That is that cars technically carry 5 to 7 people, go hundreds of miles and the way that we drive them is typically alone or just with one other passenger and a relatively small amount of stuff on typical daily trips. And so the disruption notion of the company is built around targeting a very affordable price points. So when the automotive world talks about affordable electric vehicles, that number of affordability is $35,000 or around the average cost of a new car. When we think of affordability, true affordability to the marketplace, we're thinking of the cost of a used car. The automotive market in the U.S., about $200 billion of that is new cars, about $500 billion of that is used and leased cars. And so the whole idea behind the company from the very beginning has been in order to truly catalyze this shift to a sustainable transportation system, we need to introduce products that the mass market can afford.
And in doing so, by shrinking -- really shrinking the footprint of transportation, we'll also make something much, much more efficient. So the vehicle market is huge.
It's one of the world's big, big markets, multitrillion dollars market, 70 million cars produced each year. And what we have done is build a new vehicle architecture that is going after narrow slices of that overall market focused on winning used cases. So you can think of Arcimoto as a single platform, many products. And in fact the products that we're building on this platform are so similar that you can really almost think of them as the same product. So when we talk about our delivery product or our rapid response product, we're anticipating that around 90%-plus of the parts and the production processes are going to be shared between all of the products in that product family.
We are a consumer-first brand. The company was started out of the search for a vehicle that didn't exist. I was looking for an everyday electric vehicle to go to work, go to the store. I wanted something that was going to be affordable, something that was going to be capable of daily trips, high-quality build and the marketplace in 2007 when we started and the marketplace today still has now only one product that really checks those boxes.
So we want our first consumers to be able to make that choice for themselves and that is what prompted the first introduction of the Fun Utility Vehicle. So in every presentation that I've done before, we have had targets for everything from range to efficiency to price to option configurations. This is the moment where all of those projections become actuals. So we were initially shooting for something that was going to be 230 miles per gallon equivalent. We landed on 173.7 MPGe for city driving. We have an internal philosophy of continuous improvement. And so we're certainly not done yet, but we have introduced a vehicle into the market that is more efficient than, to our knowledge, every electric car on the road today in this market.
The product also has additional features. So we are here in New York City during our first earnings call, a remote from the AMP. And one of the things you realize when you drive the Arcimoto in New York City, a few things. One, you really get the benefit of what we call Rockstar Parking. You can find parking spaces that nobody else can take unless they're on a scooter or a motorcycle, and that in combination with the way that the vehicle moves through the road, moves through traffic, you're centered right in the middle of the vehicle experience. You got plenty of torque, plenty of get up and go and so you can make the moves in traffic you want, and you come to realize that you're just about the only person on the road who's actually enjoying yourself, that everyone else is stuck in gridlock while you're moving more freely. Everyone else is sort -- has a lack of perception about where their vehicles are on the road. You can very clearly see where you are. And so one of the things that we have had a challenge with is really communicating that joy of the Arcimoto experience, that real engagement with the world in terms of something that you really experience when you're in the vehicle. And so what I'm going to play for you next is our very first, sort of, commercial-length video spot, where we aimed to capture, not just the functional characteristics of the vehicle, but really the much more sublime quality of the ride experience.
Mark D. Frohnmayer, Arcimoto, Inc. - Founder, Chairman, President & CEO 
We have continued to increase preorders over time, and this has been largely, almost entirely, organic growth. We have done -- quarter 3 saw us do basically 0 marketing. We were -- the organization was entirely focused on getting the vehicle into the marketplace, getting all of our ducks in a row for our September 19 launch. We saw some preorders drop off, and then with the announcement of the launch, we saw a surge once again in preorders, and that has continued into quarter 4.
And for the first time in the company's history, we now have actual sales. We sold 2 vehicles in quarter 3. We had multiple other vehicles in transit. As of this reporting, we had delivered 21 vehicles, and we're anticipating that we'll continue to build at a rate of about 1 a day -- at least 1 a day through the end of this year.
So it is certainly important for us to believe that we have a compelling product that we have a great offering for the market, but this is actually the first time that we're now seeing response from actual customers. So this final clip that I am going to play for you is of the delivery of our -- a couple of vehicles to just some preorder customers who showed up at the factory to get their vehicles, and I think what this communicates to me more than anything, one, is it's certainly the enthusiasm and the support that we have had from our preorder customers, some of whom have been on our preorder list for a very long time. And the enthusiasm of our team and the degree to which we are bought in on this mission that we find so important.
Mark D. Frohnmayer, Arcimoto, Inc. - Founder, Chairman, President & CEO 
So it is all well and good and certainly necessary to have our earliest adopters be enthusiastic product supporters. Although, it was pointed out to me yesterday that there may be some bias baked in there that after waiting for something for a number of years, you're inclined to be truly enthusiastic about it. And so I think it's just as important that our very first actual media reviews of the vehicles have also been incredibly positive, and I -- some -- the -- Ed Niedermeyer The Drive has covered the company multiple times, actually since our original prototype unveiling in 2009 and was, I would say, rightly highly sceptical of a new electrical vehicle start-up making a unconventional three-wheeled vehicle. And in his latest piece, driving the actual production vehicle, I think recognized and in some senses really updated his perspective on the company as a result. And so we'd encourage any and all of you to look at some of the early press that we have had for the vehicle launch as it relates to our plans going forward and our intention to grow to a true large-scale vehicle production venture. This is such a critical time for the company in terms of the public reception of the product and the media reception of the product. And to date, it has been universally overwhelmingly very positive.
We are excited about that. We think that bodes well for the future. So the Arcimoto products family, as we have laid it out to date, is composed of 3 products. 2 of -- 1 of those is the Fun Utility Vehicle now in production. We announced 2 more products earlier this year. The Rapid Responder, which is designed for emergency services, law enforcement, campus security. Really anywhere -- any application where you would need to -- for a first responder or an incident responder get to an incident more quickly. We had an experience driving in Manhattan earlier this week where we were driving on a crowded road behind an ambulance trying to make its way up 8th Avenue, and it was completely blocked in traffic. And we all just sort of thought one, how horrible would it be to be on the other end of that call and have your life-saving support be blocked on the road; and then two, just how much better it would be for those very first responders to be able to move through traffic more quickly where, like, the yellow cabs in your way don't have to get out of the lane, they just merely need to move to the edges of their own lane in order to create a pathway that the Arcimoto vehicle would be able to get through. So we have had enthusiastic interests in this product in our own hometown of Eugene, Oregon. We're planning on launching our first pilot of the Rapid Responder in quarter 1 and aiming for actual production of the vehicle in 2020.
And likewise the Deliverator. So the same platform that makes for a very fun, very nimble ride through the city that you can park just about anywhere. Those features are great for commuters. They're great as a -- it's great as a station car, it's great as a vacation vehicle. But we see a real dollars and sense application in last-mile delivery. We're seeing that delivery market for food, for example, because of the perfusion of apps like Grubhub and Uber Eats That market is expected to grow from a $30 billion market today to a $350 billion market in the next 10 years. If you caught the article in The Times a couple of weeks ago, New York as just one example is being simply crushed on the road in terms of traffic by the perfusion and increase in parcel delivery. And so we see the Deliverator like by virtue of having Rockstar Parking, by virtue of being able to maneuver more effectively through the city and yet still have around 20 cubic feet of storage, more than you would have in the trunk of a full-size car. That combination of lots of storage, very maneuverable, very easy to park has real dollars and sense implications for both delivery fleet operators and delivery gig drivers. So like Rapid Responder, we're planning on piloting the Deliverator in quarter 1 next year and then aiming for a production in 2020 as well.
Finally, in terms of developments in Q3, we had significant advancements in our market-entry strategy. So unlike traditional vehicle makers, we don't sell through franchise dealerships, we sell direct to our consumers online. And then like as with Tesla that provide -- sort of introduces an additional problem, which is how do we get customers or potential customers to have an experience of the vehicle in the market, and that is really where we look to rental.
The Fun Utility Vehicle is a somewhat unique mix in that it makes for a fantastic vehicle -- fantastic destination, sort of, a tour vehicle where you really have just a spacious view of everything going on around you. It's a delightful ride, quite electric drive. You can converse very easily with the person in the vehicle with you. At the same time that it makes for, we believe, a fantastic consumer product.
And so that intersection of opening rental outlets in key destination markets, we think, will allow people to have a much deeper experience of the vehicle and then we think that by the time -- once you have rented it for half a day or a day and had a chance to really tour around that you will have come up with a lot of reasons why you should have one in your own driveway. And so of significance, we signed our first rental franchise agreement in quarter 3 with a -- for a rental operation that will spin up in Key West Florida, and we delivered our very first vehicle to a rental operation, our partner down in San Francisco, GoCar Tours. And as you saw in the company update video, the advantage of the FUV for GoCar is that it actually opens up whole new area of the San Francisco Bay area to their clients, their previous vehicles that you can see in the background of this image are not able to make it over the Golden Gate Bridge and so the Fun Utility Vehicle will open up the Muir Woods, Headlands and really let them expand the sort of service area that they have, and we see that same advantage applying in any number of vacation destinations all over the country and, ultimately, all over the world.
So we see vacation rental as sort of the first low-hanging fruit. But ultimately, we believe that the Fun Utility Vehicle will also would make a fantastic vehicle-sharing vehicle, ridesharing vehicle platform for urban environments and for gig economy drivers. So I'm about to open it up to questions. I realize I have been going on here for a bit. It has been a big quarter. If you have questions, use the Q&A interface at the bottom of the screen.
So last thing, the road ahead and this is just our -- sort of our key focus areas over the next coming months. One, we want to make sure that we have very happy customers, that our customers, that our early ride experience of vehicles on the road -- that our customers feel very well taken care of, that our early media in the vehicle, media experiences are very positive because that is going to have a multiplicative effect throughout the market. We are just about to launch a referral program where people who have purchased FUVs can refer other potential customers and at some point down the road, gain some benefit for doing so. Over the coming months, we're aiming for significant market deployments in key markets. So we are going to continue for the next several months to focus very heavily on the West Coast of the U.S., particularly, in the tastemaker zones of San Francisco Bay area and Southern California. We'll also have a few scattered deployments around the country and actually even around the world -- we as -- for those who've been following us closely, you noticed that 3 of the vehicles that we delivered went to our first international partner in New Zealand. We have -- we are actually leaving 2 vehicles with a very early customer and investor here in New York, and then I will be traveling to Florida to making the first delivery next week to our Florida franchisee of a couple of the Evergreen Fun Utility Vehicles for them to begin seeding the market down there. But the bulk of our Evergreen customers are on the West Coast, and we're going to continue delivering to the West Coast until we've -- until the organization is ready to begin expanding that market area, which we expect to happen in the first half of next year.
So the -- the goals for this coming time period. Rental operations opened so that we can get actual financial data on the rental model. We believe that it will be in the right markets, the rental operations will be profitable. That is that our in-market experience will be a profit center rather than a cost sink. But we -- there's something we need to prove, obviously, for that business model to work. So that is a very high priority for us in terms of the deployment outside of the deployment to our early customers who have been patiently waiting, some of them, for a very long time.
As we begin to scale up production, cost reduction is obviously a huge priority and cost reduction is going to take several forms. One is simply that with increased scale of production, we as an organization have increased purchasing power and that will drive cost down, in some cases, very significantly. We plan to improve our production processes as we continue and that's going to mean a reduction in assembly time and an increase in vehicle throughput. And then finally, we're going to continue to do value engineering, both on the component sourcing side and then on the simplification combination front to drive significant cost out of the vehicle drivetrain and the electronic system.
We are aiming at -- sort of, as a conclusion of that work, although we'll see benefits of that cost-reduction process over the course of the next year. We're anticipating that we will have a step change in production within the next 10 to 16 months. So basically 12 to 18 months from the launch of production. A step change targeting 200 units per week. That is our 10,000 units per year, sort of, near-term objective of being a reasonable-scale manufacturer. And at that point, we are aiming for a 20% or greater gross margin target at that production rate. We see that as a near-term intermediate step on a much larger growth curve, but that really solidifies the venture, provides positive cash flow from production operations and so on.
So with that, I'm sure there are -- I'm seeing the question light start to blink. So I'm going to open it up to questions and then we'll wrap this up.
Questions and Answers
Mark D. Frohnmayer, Arcimoto, Inc. - Founder, Chairman, President & CEO 
So first question is, what is the expected cadence of deliveries through 2020?
It's a good question. The -- and it's going to be dependent in part on how quickly we complete that value engineering for the step change. So we plan to keep the production rate at a relatively modest level. Somewhere in the vicinity of 100 to 150 vehicles per month through most of 2020 and then a rapid ramp to that next major anchor point up to 200 a week. And so that -- we're not giving any guidance beyond Q4 of this year, just simply because there are, quite literally, a bunch of moving parts in the process, and we want to wait for some of those to solidify before we give more concrete guidance.
Next question is, when will the San Diego rental location be opened?
We don't have a fixed opening date for that. But we will be delivering San Diego vehicles some this year, and then into Q1 of next year. So we're going to be pushing to get that location opened, likely in the first quarter of next year.
So hello, and good morning to you all. Great presentation, very excited about the future. Can you please talk when you expect production to hit 10 per day? And when it shall hit the optimal rate and what rate is that?
That's a number of questions in one question. So 10 per day is like -- the 10 per day target is going to happen within the step change. So that would be within that 10 to 16-month time frame. In terms of when it will hit the optimal rate, we're -- the vision that we have for this product family over the long-term is in the hundreds of thousands of units delivered per year. So that -- when will it hit that optimal rate? That's a ramp that we're going to continue to build up over the next -- basically, over the next 8 -- 6, 8, 10 years and on. The optimal rate, in some senses, will be when do we sort of hit a steady plateau of production. But I would say that, that is years away, if the -- if we achieve the objective that we are shooting for. And so ultimately, the company's mission is to make a significant impact in terms of reducing climate change emissions, and we only do that if we just make a whole lot of vehicles.
So the question, 64 units seemed to have been delivered thus far?
Actually 21 units have been delivered so far.
So the -- what is the revenue generated?
21 units, I mean, it's right around $400,000. The -- we'll have, obviously, precise numbers at the -- in the Q4 update. A number of our early customers have chosen to option up, and that's by everything from paint to custom decaling to custom stitching, but a lot of folks are taking the base $19,900 price.
Another question. This is -- what is the target for the $11,900 base model option?
Just to be very clear. $19,900 is our market entry price. It is what we are charging for the entry model products when we are at a very low rate of production. We absolutely are committed to pushing towards what we consider a very affordable vehicle price point, and $11,900 is even simply a milestone along that pathway. We don't have firm timing at this point for when that will be, as I outlined in the call. Cost reduction is going to be a continuous process and -- but I would expect the $11,900, sort of, very base model option to still be at least a couple of years out, maybe a few years out.
Tesla recently said that they would -- this is a question, Tesla would -- recently said that they would be willing to consider supplying other automakers with batteries and related technology. Have you had any discussions with Tesla? Or would you consider using them as a supplier at the cell or even the module level.
We are not -- we don't, as a general rule, talk about any conversations that are premature, that have not resulted in any sort of an announcement. But I would say that, to us, local sourcing makes a huge amount of sense. The Nevada Gigafactory is the closest scaled production battery plant to our manufacturing headquarters, not to mention that it's -- they also make the world's best batteries and at significant scale and low cost. So I think if Tesla is actually -- at the point that they are actually interested in truly exploring and selling into the much wider market, that's obviously something that -- a conversation that we'd be interested in engaging at.
You mentioned recently on a YouTube interview that the factory production rate of 10,000 per year will be based on a factory run time of 4 days per week. Is there anything preventing the factory from running 24/7. There was actually a -- when I was stating 50 vehicles per day, that was an estimate of 50 vehicles per day at a 4-day build week would be 200 units per week. We're anticipating in the current space that we would actually need to be running 2 shifts full-time to get 10,000 units out of our current space. So that would be truly, we think, maxing out production for the footprint that we have right now is going to cap at around 10,000 units a year. Some of the equipment that we have can produce at a much higher rate than that. So for example, the tube and sheet laser that we have can cut around 25,000 vehicles worth of metal every year. But in order to actually produce the vehicles on the other side of that, we would need additional square footage of assembly space and manufacture of other components.
Next question is, what year do you think you will come to Europe with your FUV?
So we have not yet dug into the compliance requirements for Europe, that is really, actually next up for our regulatory compliance department now that we're certified on-road in the U.S. European compliance is -- we believe that the product and the whole product family will be a great fit for the roads of Europe, narrow streets, crowded cities, areas that have introduced congestion pricing for nonelectric vehicles are a no-brainer for the Arcimoto. And so as we proceed down that pathway, we'll give more firm guidance.
Next question is, are you expecting to deliver against the preorders? How are you managing that process? Have you started collecting additional amounts from these folks?
So the way that the preorder process works is a little bit -- it's a little bit byzantine just as we are getting going because we are delivering by region, by deposit and by preorder. So as we open up new market regions, preorder customers in those regions have the opportunity to place a much more significant nonrefundable deposit for the vehicles, and then will be delivered in the order of deposit. So the preorder stage saves your place in line. It gives you the opportunity to buy in -- on whatever product offering we have in that region. So as we -- for example, we have some customers who would prefer a more stripped-down, lower-cost base model, their position in the preorder queue is still saved. And then at the point that they elect to put down a deposit, that's when they go into the actual production queue. And so we opened up deposits for our first 100 Evergreen depositors. And in the next couple of weeks, we'll be opening up deposits for the next tranche of vehicles that will be coming in early 2020.
Next question is, what is the expected cadence of deliveries through 2020?
I think I already touched on this on the call where in terms of we're going to have a relatively flat plateau once we get into the 100 to 125 units -- or excuse me, 150 units a month, somewhere in that range. And we're going to stay there as we drive down cost, get early experience with the vehicles on the road and prepare for that stepped-up rate of manufacturing that is coming, we are pushing for late next year.
So next question is any issues with vehicles delivered so far?
Yes, there -- and this has been absolutely anticipated. If you -- you can check our recall log with NHTSA, we've had a number of issues with both mechanical systems and the electrical system. This is something that we have anticipated was going to happen as we began production and get a lot more real-world miles on the vehicles. And so we have been -- it's one of the reasons amongst many why we're staying judicious about early vehicles in the marketplace to make sure that we can absolutely stay on top of all of those issues as they manifest. And that, again, paves the way for really having -- and we saw this with -- I mean, with basically every new electric vehicle introduced into market from -- going all the way back to the early experiences with BMW, the Tesla Roadster. So we're anticipating that we're going to have many of those same considerations, but that our goal is after the first couple of hundred vehicles on the road that is -- we just really have a true turnkey solution.
Next question is, can you walk us through what factors will decrease the cost of producing the FUV as volume increases?
I touched on that a little bit on the last slide. So the main -- I really see 3 big areas: One is that actually as volume increases, price goes down from parts that we purchase. So as we scale up every order of magnitude, one rule of thumb in manufacturing is that each order of magnitude is around a 30% cost reduction. I don't think that's going to hold all the way up chain, but it is -- we are seeing that particularly on the electronic components that as we begin to order in quantities 500 and 1,000, we see significant price drops for some of our very expensive components in the vehicle.
And the other 2 areas are one, is going to be process optimization so that is as we are -- we have adopted the Toyota way of continuous improvement, which means simply that as we are building the product, we are examining those production processes and optimizing time out of the process. So process optimization results in lower assembly cost.
And then finally, we're going to see some big wins on -- in the electrical system and in the battery system as we do component combination and simplification. And that's an effort to one, get a lot of stuff on the same board, and then ultimately reduce the cost of wiring inside the vehicle.
On behalf of investors and the plant, thanks for your efforts, Mark.
You're welcome. And I would say, on behalf of actually the entire team, you have a team of people here at Arcimoto who believe strongly in what they do every single day when they go to work. We are doing this because we see a pressing problem and I would say likewise to you and to everyone else out there who has bought in, we cannot do what we are doing without the support of a fantastic investor base. And so really, really appreciate all of the support over the many years to get us from really a napkin sketch and a dream into a vibrant production venture.
And with that, I am going to wrap up the call. I really appreciate you all taking the time out of the morning. For those of you on the West Coast, my apologies for the premarket call. When we are back in Oregon, we'll be back to our regularly scheduled time. And until then, we will soon have this presentation up on our investor page, arcimoto.com/investor. You can of course send any further questions and inquiries to firstname.lastname@example.org. And the videos will be posted on the website as well. Thanks a lot.