Earnings Transcript for SOLO - Q3 Fiscal Year 2021

Operator: Greetings and welcome to the ElectraMeccanica Vehicles Corp. Corporate Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on today's call and webcast, including those regarding future financial results and industry prospects are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the Company's regulatory filings for a list of associated risks. I would also refer you to the Company's website, www.electrameccanica.com for more supporting industry information. I would now like to hand the call over to Mr. Kevin Pavlov, Chief Executive Officer of ElectraMeccanica. Kevin, the floor is yours.

Kevin Pavlov: Thank you, Operator, and good afternoon everyone. I'm pleased to welcome you to today's corporate update conference call, the first in our Company's history. Today, I'm joined by ElectraMeccanica 's CFO, Bal Bhullar. For those of you joining us for the first time to who I have not had the opportunity to meet. I'd like to take a moment to first introduce myself. In September of this year, I was privileged to join the team as CEO during what I believe to be the biggest moment in our Company's history. First deliveries of commercial SOLO EVs. By way of background, that bring automotive experience that has covered large global corporations, private board experience, government affairs, mergers and acquisitions, and relevant experience with startup companies over the course of my career. Most recently, I served as COO and Director of Karma Automotive, where I worked to achieve significant cost reductions and avoidance's through process improvements. Additionally, I've had the pleasure to serve in various senior management roles within the industry, most notably at Fortune 500 Company Magna International, where I was at different points in time the COO of its E-Car Joint Venture, Global President and General Manager of Magna Electronics, an Executive Vice President of Magna's Services, Ventures, and Innovation Group. Additionally, I was also the CEO and Board Director for Eco-Fueling and I was an Executive Consultant at Ricardo inc. PLC. By direct experience, working within the automotive companies at all stages of development will prove to be a critical resource as we accelerate our commercial production and deliveries. Now, given we're at a key inflection point in the Company's evolution, it's worth taking a moment to discuss where we started. We were formed in 2015 and by 2017, we acquired InterMeccanica. A globally respected automotive manufacturer with over 62 years of experience in manufacturing and delivering high-end custom sports cars for select clientele. Leveraging this experience, we set out to design innovative electric vehicles. The goal of which was to revolutionize community, delivery, reach and shared mobility. During this time, we can build 64 prototype vehicles out of our Vancouver facility, refining and improving our design. Early adopters tested the prototypes in day-to-day use and I'm proud to say that some of these vehicles are still in circulation today. With the design finalized, we produced 60 pre -production SOLO s manufactured by our strategic partner, Zhong Chen industrial group in China. Again, we deployed through the U.S., Canada, and China for final on-road validation testing. The vehicles took the form of what is now our flagship vehicle. The innovative purpose built, single seat electric vehicle called the SOLO. This 3 wheeled vehicle engineered for a single person, offers a unique driving experience and is fully highway capable, benefiting from the HOV lane access. The SOLO has features, front and rear crumple zone, side impact protection, roll bar, torque limiting control as well as power steering, power brakes, air conditioning, and a Bluetooth entertainment system with other comforts. It blends to modern look with advanced safety features. It has an accessible price point of $18,500. Most recently in October 2021, we commenced commercial deliveries for early reservation holders and fleet operators, making a transformational milestone not only for ElectraMeccanica, but for the future of the electric vehicle industry as we know it. For the month of October, we delivered a total of 21 vehicles to our customers and fleet operators. By reaching this milestone, we've built out sales, logistics, and service networks to support all near-term delivery targets as we ramp production and sales. As we discussed the ramp in production, I think it's important to take a moment to highlight the $228 million on our Balance Sheet, as of the end of the third quarter. This strong cash position sets the stage for growth as we focus towards production ramp and the build-out of our U.S. base of operations in Mesa, Arizona. Our sales program is grounded by direct-to-customer with retail centers spanning 5 U.S. states and 10 metropolitan areas. We are also showcasing the vehicle at several premier industry events, including the L.A. Auto Show, where we are hosting this call from today, widely recognized as one of the most influential shows globally. And 2 weeks ago, we had presence at SEMA, the world's leading automotive trade event, bringing together manufacturers and buyers and every segment of the automotive industry. While at SEMA, we showcased potential future customization options as well as convertible and performance variance. And we're now rolling out an exciting, integrated brand identity that reflects a forward-thinking, dynamic, growth oriented electric vehicle Company. The ongoing campaign includes building awareness through digital marketing, influencers, revamped website, billboard, trends, and traditional media advertisements. We're now in OEM. In our production phase, we have the current capability of producing up to 20,000 SOLO annually with our dedicated facility through Zhong Chen, our strategic partner. In addition, and as I previously alluded to, to further grow production capacity, we are working to complete a new 235,000 square foot U.S. assembly, an engineering technical center in Mesa, Arizona in the summer of 2022, which we have the ability to produce up to 20,000 vehicles per year by Americans, for Americans. Enabling localized assembly operations within the U.S. target market. This brings up our Zhong Chen capacity, adding the ability to produce at the 40,000 vehicles per year to address additional geographies in the future. Recently, we announced we had completed a migration of SAP S/4HANA Cloud, leveraging the business transformation as a service rise with SAP. The new ERP system integrates the Company's finance, supply chain, manufacturing sales, and distribution operations. This technology foundation will enable us to manage rapid growth for years to come and facilitate an unparalleled level of insight into our vehicle assembly operations. In anticipation of upcoming delivery ramp, we needed a trusted provider to handle any service repairs, or maintenance our vehicles may require. Recently, we announced a strategic agreement with Bosch, a leading global mobility solutions and industrial technology firm to establish a pilot service network of independent automobile repair shops approved by Bosch. The Bosch car service network will support service and maintenance operations for the SOLO, beginning with commercial launch locations throughout the western U.S. and then expanding throughout the rest of the country. Bosch 's technology, innovation and highly skilled technicians make it uniquely equipped for the maintenance and repair of the SOLO. For sales and marketing, production, logistics, and service networks all in place, we're now focused on scaling deliveries, and expediting our path to profitability. We will continue to ramp production at our Zhong Chen partner facility and remain on track to begin production at our U.S. facility in mid-2022. Another focus will be streamlining operations and reducing building materials for future vehicle production lines recouping overhead costs as production volumes increase, and leveraging buying power from suppliers to further improve our cost base. In summary, we are revolutionizing the transportation space by providing consumers, fleets, and ride share users a purpose-built solution to solve today's urban driving challenges. Our flagship SOLO EV is the perfect answer for open-minded drivers that recognize there is a smarter and better way to drive SOLO. We've achieved several exciting key milestones in 2021, and I'm incredibly proud of the work our entire team and partners have put in. I look forward to what future holds as we continue to scale production and strive to create sustainable, long-term value for our shareholders. Before we open the line for questions, I'd like to thank our team for their dedication and tireless efforts and our shareholders for their support. Thank you all for calling in. And now, I would like to hand the call over to the Operator to begin our question and answer session. Operator.

Operator: Thank you, Kevin. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. . One moment, please, while we poll for questions. Our first question is from Bruce Chan with Stifel. Please proceed.

Bruce Chan: Kevin and Bal, good afternoon, and thank you to you both for taking my question on those phenomenal call here. Maybe I could just start by asking for an update on some of the supply chain issues that you gave some right now, obviously they're affecting everybody. But as you think about the deliveries in '22, how do you think those will impact the flow of vehicles? And then maybe just as a follow-up. Any thoughts on inventory and then working capital pinch as a result of the supply-chain issues?

Kevin Pavlov: Thanks, Bruce. So yeah, the supply chain, as you said, it's affecting everybody, but we've been taking extra steps and measures to help our supply chain. We've taken a proactive role to help find chips or chip shortage parts buy them and send them to our Tier 1, Tier 2 suppliers so they can integrate them and get it back to our vehicles. We're trying to take a global approach, I know where a young Company, but in some cases we have to find these parts globally to make sure that we can continue our production flow. Again, logistics is a challenge for everybody, we'll keep fighting our way through that. We've added a couple of additional ports out of our Chinese operations areas, so that we can make sure that flow continues and hopefully the backlog at the U.S. parts will clear up. But we've been keeping our eyes on that and these proactive measures are showing us a good way to manage and handle things for when our next vehicle launches if this supply chain issues continue. We'll have worked out a series of strategies and methods to supply these global parts. So I think your second question you were talking about, I believe it was the capital?

Bal Bhullar: Working capital.

Kevin Pavlov: The working capital. Do you want to touch on that one?

Bal Bhullar: Sure.

Kevin Pavlov: This is a great one Bal Bhullar.

Bal Bhullar: First great to hear from you again and thank you for joining. In terms of working capital as at November 9, we published our financials and at that point in time we had cash of over $238 million. We've got 0 debt in terms of what we've been doing. And in terms of the near-term of our cash burn in budgeting, we've got enough there to essentially take us over the next 4 months.

Bruce Chan: Okay. That's great. So it just sounds like from Kevin, what you're saying, if I'm going to synthesize it with what you're saying, Bal that you don't necessarily expect anything to get materially worse in terms of where the Balance Sheet. You'll think you'll be able to certainly whether the next few quarters, even if we see a full on things.

Bal Bhullar: Yes.

Kevin Pavlov: We're keeping a close eye on our cash burn, we're intelligently investing where we're going, we have 0 debt. So the idea about making sure that the Company's needs are addressed with the Capital that we have on hand is a very close planning exercise, so we're very acute at watching this happen over the next couple of years.

Bruce Chan: Okay, great. And then maybe just one more before I turn it over and hop back into queue. You debuted the cargo version of the SOLO at the Expo, I think it was a couple of months back, which seems like a very exciting product for fleet customers. Can you give us some flavor of what needs to be done to bring that into production and as far as tooling and capacity and validation and maybe just some color on the guideline. Is that a product that's going to have to wait until Mesa is up and running, or can you start to flow that now from Zongshen?

Kevin Pavlov: Yeah, so we have a platform strategy. So we create derivatives off our main platform that comes in from Zhong Chen. The modifications for the cargo vehicles have already been tooled, they are tooled in the U.S. So we'll bring the vehicles in from our Asian manufacturing and in a facility -- a temporary facility that we have in the U.S. will be making the modifications and the updates. So the flow of vehicles coming out of Zhong Chen are really the add-on. So we willl -- we'll delete portions of the cargo to meet our customers needs, but that will be done on -- on the U.S. side.

Bruce Chan: Great, that's super helpful. I'll hop back in the queue. Thank you.

Operator: Our next question is from Andrew Scott with Roth Capital Partners. Please proceed.

Andrew Scott: Good afternoon, and thank you for taking my questions. So my first question is on the retail strategy, I know you touched on this in the prepared remarks. I believe it's 20 locations across 5 states. Can you just speak to whether you're satisfied with the current footprint or are you looking to expand and if so, what the plans are there?

Kevin Pavlov: Yes. So our footprint and there's a two-step process here. The kiosks, the areas that people can come and see and touch the vehicle are primary information centers, while you can get the information off the web and other pieces you can get a hands-on, or put your rear-end in the seat to really enjoy it right there firsthand. So yes, we will be expanding that network so that a majority of the people would be able to -- if they want, we'll be able to step in and see the inside of the vehicle, schedule a test drive. A ton of the key elements that accentuate how you're going to -- go through your buying experience or our customer journey. So our footprint starts on the West Coast and we're migrating East and North. So yes, there will be a continued expansion on that. The second thing I'd like to say about that is we've been really looking at the performance and what -- how these customer kiosks are actually working to an advantage. So we will be modifying the customer experience inside of it as we learn more and more how customers want to experience the car. A schedule in test drive might just be we have the vehicles ready for test drive at any point. But we're looking at those things and we'll probably introduce them as more and more vehicles flow over the next month.

Andrew Scott: Awesome. Thank you for the color. And second for me before I also hop back into queue, kind of a 2 parter. Can you just provide a bit more color on the timeline for production out of Arizona and also kind of walk through the cost improvements that are expected, and maybe break that out between kind of tariff avoidance versus better component sourcing and more cost-effective manufacturing? Thanks

Kevin Pavlov: Yeah, let me see if I can do this in 2 steps. Let's start with our current production. Right now we have a significant number of activities with the U.S. government. Right now we have our government affairs folks working on elements that are going to help us maybe ease the tariff piece. We've been into a different category. So we're in conversations regarding that side of it that will be ongoing. But our U.S. operations when they come into play, our production schedule -- we're starting out with initial capacity of 20,000 vehicles. This will happen -- we'll get a certificate of occupancy somewhere around the middle of the year. We've been working in parallel with the with another facility to make sure that our cars are being prototyped and produced, and all of that will come in to that facility right afterwards. We have a real hope and a desire and a great plan to introduce a car by the end of 2022 out of that facility. You talked about the cost improvements, we're working on this. We found significant -- I'll call them a supply base that is really willing to help step up on some of our designs. So we can see a significant -- I would say, a 2-digit improvement in our BAM as a percentage wise. So which means that we'll be able to maintain our current price point and then decide what are the features we can put into the car to either maintain that or offer our customers even more.

Andrew Scott: Thank you. And I'll set back in the queue and let others go ahead.

Operator: Ladies and gentlemen, as a reminder, if you would like to ask a question, . Our next question is from Rommel Dionisio with Aegis Capital, please proceed.

Rommel Dioniso: Yes. Good afternoon. Thanks for taking my question. The first, just a follow-up on the supply chain question. Obviously, appreciating your comments, Kevin with regards to components, but just installation machinery and this tooling that can be required to get the facility up -- manufacturing production up and running. Has been delayed at all or would it by shipping our components or anything? And you can also are you facing any sort of labor issues in terms of liberates or difficulty in finding labor, obviously, that's something you will be thinking about here over the next few months in quarters? Thank you.

Kevin Pavlov: So I will start with the first one. So our equipment or the supply chain of getting our manufacturing equipment. We have a light equipment model or light asset model. We don't have a paint booths and other monuments that would be in the plan. So we're leveraging the supply chain as well as the market for people who specialize in that. So our transfer equipment, our convinced lines and the other elements to test are available in the market. We're not seeing a slowdown there. So instrumenting the plant with the right equipment, as well as our engineering center and other tests, and engineering equipment we need are all on track, so we haven't seen any delays there. The idea of having our line and have it be centered around the world-class manufacturing standard is one of our goals. So I wouldn't say there is a delay in any of that because we started in the greenfield site, so we're able to jump right into all of the -- I'll call it best practices in manufacturing. The only delays in those would be getting our certifications. So we want to make sure that we are industry standard certified under all the quality, safety, and environmental pieces. So other than that, we're on track.

Rommel Dioniso: Great. Thanks so much.

Kevin Pavlov: I don't -- I just wanted to touch on the labor side of it. We've started really early. We've got a lot of, I'll call it, people in the Arizona area around our facility. I'll say this is -- we have 2 facilities in Arizona. We currently have a PDI facility, about a 15,000 square foot that we've been hiring folks and bringing them in to do our preparation, delivering, inspection as well as use that as one of our training centers. We have the same PDI center or a mirror of that in the Los Angeles area. So in order to process and flow and prepare our vehicles, both of these vehicles are online. What's nice about the Mesa facility is when we train people, when me interview people, when we bring them in, they can actually see firsthand inside of the PDI center, the vehicles, how we're putting them together. Our plant manager that's going to be in the Mesa facility is actually located in the PDI center. So we do not only a manufacturing and a manufacturing training, but we actually do all the PDI side of it. And when I mentioned the world-class manufacturing, remember we're doing world-class manufacturing standards and applying them to preparation, delivery, and inspection of vehicles that are going to our customer. So I think we've got a -- we're getting good response to our labor requests, and we're also able to go through them and say, hey, here's the first principles we want to start with and actually apply training early before we even get occupancy. So we have a strategic approach to it, it's been working well. Like I said, it's not just applying we actually have about 30 people on our PDI center that are moving forward on this. I hope I answered your question.

Rommel Dioniso: Yes. Thanks so much again, Kevin.

Kevin Pavlov: Welcome.

Operator: Our next question comes again from the line of Bruce Chan with Stifel. Please proceed.

Bruce Chan: Hey, thanks for letting me hop back in here. Now, I know you've been reluctant to give details on the order book and reservations of the function of conservatism. But maybe I can ask about those directionally. Have they been relatively stable here? Have you started to see them accelerate now that you've been delivering vehicles and you've introduced all these new models? I don't know if you can offer any color there.

Kevin Pavlov: Yes, I'll tell you what. I'll address a first piece and then I might even have Bal stepping on one of these. But right now, our ramp up is going to plan and we've been negotiating, like we said earlier, this was supply-chain issues as well as making sure that we get the flow correct. And I mentioned that the logistics side of it is just as important. So as we do these, we are doing a basic linear ramp up for and we're on track for it. As long as we can keep our supply chain loaded and we're running slow in the vehicles, I don't see a problem. We are on track to do these month-over-month continuous improvements in our flow and our delivery mechanisms are being improved every day. We have our direct delivery systems that are going to our customers and they're very appreciative. We -- that journey is really important. So if we just keep our eye on this ball as we're scaling that forward, we're trying to meet our commitments on a month-by-month and you should see those increases. Bal, do you want to add anything to that?

Bal Bhullar: Sure. As Kevin was saying in terms of the journey, we're really focused on the customer journey as extremely important to us, and we are learning as we go. And at the same time, we've set internal target to basically increase the number of deliveries month-over-month, so if 1 month starts as you know we stated in the month of October, we delivered 21 vehicles. The month of November will be higher than that. The month of December will be higher than that. So we're gradually ramping up on a conservative but at the same time, we've got the back orders of the sale.

Kevin Pavlov: The reservation.

Bal Bhullar: -- the reservation, as well as an immense amount of interest in the vehicles, as well. Both from a consumer perspective and also from a fleet perspective, B2B.

Bruce Chan: Okay. That's super helpful color. And I'm just curious, as you've been making progress on these deliveries and the production ramps, have you seen that translate into demand for the vehicles? Have you seen those reservations increased or are they kind of continuing on in pretty steady curve?

Bal Bhullar: Yes. So the demand and the interest level has increased since we've started to deliver to customers. We've got many people that are also coming into studio city, for example, in LA and they're coming in there and wanting to purchase a vehicle right away. Our conversion rates from reservation to order, has also increased substantially since we started deliveries. So it's all a positive trend in the right direction going forward.

Kevin Pavlov: So you had any kind of guidance our orders, our outpacing, our production rates. So the easy part of that problem is just improving our production rates.

Bruce Chan: Okay. That's helpful. And then just the last one here. Though you mentioned some of the fleet sales efforts, Kevin, you talked about them earlier. I know you all have made some moves there in terms of key hires. Can you just give us some updates on where you stand in terms of the B2B strategy on the fleet sale strategy?

Bal Bhullar: In terms of the fleet strategy, we are in talks with a number of fleet, whether they're small businesses or of a larger magnitude, we do have a fleet manager that tease that up, and then we've got other individuals that are on the team that are following up. So we are in talks with governments, we're in talks with delivery, small parcel delivery, companies as well as food delivery companies. There's other utility companies that we're talking to. So there is a huge variety of the type of fleet that are interested, whether they need the cargo version or are they just want the regular version. But there is a significant amount of increased because as Kevin had dated earlier, this is a purpose built vehicle and companies right now from the fleet perspective are looking to see how can we minimize our costs? How can we get a better margin over what we're doing -- what we have been doing previously? So for them, it's dollars and cents, and the best way to look at it, an all electric vehicle that's going to actually be able to serve their needs for these shorter distances.

Kevin Pavlov: Maybe I can just put a little more color into that. We delivered 4 vehicles to 4 fleet customers on October 4th. Since then, those are really the first stepping stones. We've had phenomenally good response from these fleet owners, Skechers and Ruby's diner and Cyber yogurt, and Faction. The interesting part is the ramp up could come quickly if they decide to put a lot of vehicles in quickly, that'll be their choice. But I'm sure that when those pop up, we'll definitely let everybody know. So those are kind of a step function when they occur. And remember that's our current conversations. The background conversations could follow the same trend where they start with the vehicle. They could follow a group of vehicles when they start investigating things. So I think the important part of it is if that continues to unfold and more and more of these customers have more and more ideas what they want to do with the SOLO. It's very utility side of it. Since we have 2 different capacities in the back, they actually have a series of choices that they can choose from, right? So I think that addressed it. I think -- is there some other piece that we can help you with on the net Bruce?

Bruce Chan: No. That's great. Thank you both for the time and congratulations on all the progress.

Bal Bhullar: Thank you.

Kevin Pavlov: Thank you.

Operator: Our last question will be a follow-up from the line of Andrew Scott with Roth Capital Partners. Please proceed.

Andrew Scott: Hey. Thanks again. First one for me here, just in the near term with all these expansion plans in the 2022. May you provide some color on kind of that CapEx tempo we can expect throughout the year?

Kevin Pavlov: I think there is a good one for you to fill, is that okay?

Bal Bhullar: Hey, Andrew. In terms of our CapEx as Kevin has mentioned already, we're an asset-light model, which means that we're not going to be putting heavy capital expenditures or assets into the facility. We're actually an assembly, so an assembly facility that we'll be looking at and means of reducing any of the larger overheads that you would typically see from some of the other EV companies that are out there. So I would say that the CapEx that we're looking at is going to be significantly lower than the traditional. We will be putting up a vehicle line, it's more a flex line that we've been looking at. But again, that line is going to be very functional in terms of what we're trying to do with the other derivatives of the SOLO and in any other models that we're looking at. Does that address the answer in terms of your cash outside?

Andrew Scott: Thank you very much. And then last 1 for me here, kind of more forward-looking. Can you just provide a little bit more thoughts on the Trofino and the E - Roadster, and kind of just where you guys see them fitting in within the long-term timeline?

Kevin Pavlov: Sure. The Trofino, the Roadster, those vehicles and others that may be in that category fit under our Specialty Vehicles Group. And our Specialty Vehicles Group was designed to take the benefits that we've put into the SOLO, the electrical backbone, the power, the power train systems, and the individualized or the customized ideas and put those into the Specialty Vehicles. So if there's 1 or 2 people in the vehicle, each one of them feels the enjoyment of a car that purpose-built around them. So I would say that you're asking for a timeline on our future side of this, we definitely have that platform, the eRoadster platform is in the works. It's very likely we'll see it in the '20 -- '23 timeframe. And which quarter I'll leave that up to the reader, but the Tofino is not far on the heels. I'd also like to say that there's another vehicle in the SOLO category that's in the works and you'll probably see that around the '23 time frame also.

Andrew Scott: Awesome, and thanks for the color and just to echo what everyone else has been saying there, congrats on the progress.

Bal Bhullar: Thank you.

Kevin Pavlov: Thanks everyone.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Kevin Pavlov for any closing remarks.

Kevin Pavlov: Thank you, Operator. I'd like to thank each of you for joining our conference call. We look forward to continuing to update you on our ongoing progress in growth. If we are unable to answer any of your questions please reach out to our IR firm, MZ Group, we would be more than happy to assist you. Thanks everyone.

Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for you participation. You may disconnect your lines at this time and have a wonderful day.