Q2 2021 Fisker Inc Earnings Call

Moving on.

[music].

Hello, everyone and welcome to the <unk>, Inc. Second quarter 2021 earnings call. My name is breaker and I'll be the moderator for todays guidance if.

If you would like the opportunity to ask a question today. Please remember to press star followed by 1 on your telephone keypad.

And I will now hand over to our host dongles to begin so Dan. Please go ahead when you're ready.

Thanks, a lot and welcome to the preferred on call everyone. Joining me on the call on Henry <unk>, Chief Executive Officer, Dr. Bukhari, Hu, Chief Technology Officer, Dr. Peter <unk>, Chief Financial Officer, and Chief Operating Officer. This quarter. We also have with us, Chris and Marty our VP of European marketing sales and service to talk about on.

A recent investment in partnership with a Lego before turning it over to Henrik be advised we will make forward looking statements within the meaning of the federal securities laws forward looking statements generally relate to future events for future financial or operating performance, our expectations and beliefs regarding these matters may not materialize.

Really far far along the dollar supply change of amount some I think great supply deals lately.

We'll talk a little bit about I also have a lot of confidence in the fact that we are on time and on budget on the Ocean program I know it sounded like a broken record and is boring, but I think in this case the broken record is quite good to be keep on saying that were on time on the Ocean program and we're on budget really really important.

And that really comes down to the execution that our team internal team here and engineering purchasing design finance have done on this program of course together.

Our partner on this program Magna and all of our suppliers.

And also apply a purchasing organization have done a great job to bring in suppliers that is helping us stay on time on this program we.

We've also made tons of progress on the Pier program.

The ability to actually execute 2 vehicle platforms 2 different vehicle platforms in this stage as a.

Startup company is quite unique I think it really validates our strategy.

You think there's any startup ever at least on any U S startup that actually have developed or started to develop 2 platform simultaneously.

Despite probably having some of them having raised more billions of dollars on we have and I think it really shows the strength of our business model the strengths of our team and.

And of course, the strength of on partnerships, because we do have 2 amazing into different partners and I think that really sets us apart.

In terms from off balance sheet, it's really strong.

And of course status, because we have a really strong internal control system.

And new vehicle, most likely that technology was selected 3 or 4 years ago, but in our case reported as closer to 18 months before we launch the vehicle.

Similar to some electronic industries like the smartphone industry. So you will get really the latest technology from Fisker and because we have been able to select some of that new technology and we'll show you that in November. This year. We also have to do some more testing and we have decided to do so.

Some of that testing in house, because we want to make sure that we get the right customer attributes. So that's a really important thing.

For us.

And finally.

Data on Christian will touch on our recent.

Corporation agreement with a large European charging network illegal this.

This will benefit our customers and I think really create.

Competitive advantages from physical on Europe.

They have thousands of charging stations and Christian <unk>, our VP of marketing over in Europe will go into that in a moment.

We of course also will take care on our U S customers as you might remember we signed a deal with Electrify America.

Largest group of independent charging stations in the U S.

And if you think about this it took another pretty famous company, probably about 5 to 7 years to build out a charging infrastructure in the U S and Europe when we start with the fiscal Ocean end of next year, we will offer our customers between Electrify America Lego a larger charging infrastructure Street.

Out of the gate and you don't have to build is up we don't have to spend billions of dollars doing that we will integrate our apps seamlessly.

These 2 chartering groups and I think this will really be a unique experience and a competitive advantage for us.

Finally, let me talk a little bit about in detail on the Ocean program progress update on.

As I mentioned, we are on the track for Sop.

On November 17th 2020, Tuesday November 17 from next year.

All the agreements with Magna for platform sharing development in manufacturing on our final we have gone into a lot of detail on.

Prototyping.

Testing as well as the ramp up phase in those agreements and.

And of course. This also means we have a clear visibility on costs as well.

So thats something thats extremely important.

Model show on step, we called the sport, because we actually quite a lot of equipment in that space vehicle. So we call that the sports <unk> get the sports package with the original price on 37500, then we have 2 more models wherever he off the power and a lot of options a lot of technology to these 2 other options on.

We can announce details of that and price of that in in November. This year, I would expect that our middle vehicles sort of middle price.

Will be the biggest seller of all the vehicles on we have a great profit margin on that vehicle as well.

We have a robust robust process for testing and validation home negation on certification that of course signed off both by faith, <unk> and Mac Mehanna on supply chain and why is that important because of course. If you are a startup company and you just make your own car somewhere you can always decides.

Skip some of the important testing and therefore risk quality, maybe even risk from safety in our case. We're following very type guidelines together was maximum our supply chain to make sure that all miracles are fully tested we get the best safety ratings and right out of the gate.

We want to deliver the highest quality vehicles.

Now as I mentioned earlier.

This decision on the in house capabilities is something that we are building up because this will be important for the other vehicles that we're going to be launching in the future and as we have accelerated the pier program. We are already using this cross functional ability both on the Ocean program and on the pier per.

And as you know.

We are actually working on 2 more vehicles not as intensively as the ocean on the pair but these vehicles. The 2 next ones will also benefit from this in the household negation testing on validation and ultimate the Devil actually save us money.

Also are already seen benefits between these 4 programs of carrying over parts of physical have uniquely designed.

And that's something that's gonna benefit us.

Later on down and when we start looking at the morning of the building materials higher volume from parts et cetera. So bottom line a lot of work ahead, but pieces on place we have a high level of confidence for the execution phase until production of the Ocean starts next year November 17th.

Let me give it a little bit of a marketing update on though a lot of people asking about marketing and.

Of course, we have actually really really exciting marketing plan.

I don't really want to go out and use up the gunpowder too early so we decided to really kicked off this marketing plan simultaneously with the launch on.

The fifth goes from production vehicles on November Daily Order show and.

And by the way.

For whatever reason, they're low on the shows shouldn't go forward, we already have a plan b. So we will be launching our vehicle in November maybe some open their event for something else. We have a couple of ideas for that.

When we get to November that's when we're actually going to reveal some of these new technical details from that we have.

In terms of the marketing we will start really spending on marketing from November and of course into 2022 will be on opening experience vendors. We attending several other automotive shows event, we are creating some really unique I would say.

Unique partnerships some unique events something that nobody else have done before we're gonna go heavily into a digital marketing.

We have a lot of great collaborative partners from ambassadors are we going to unleash next year, we already have signed up vehicles for a couple of different television Sherry. So we're going to get into so believe me. If we are going to go all out from November this year.

Now 1 of the things that a lot of people asking as well as what are the main reasons for buying a fifth corrosion on what does the advantage over the competition well, let me just sort of maybe go through a few of them here designed we are designed let company and as we move into electrification, let's not underestimate that.

Value of design because in the end of the day when you used to buy gasoline cargo is about how the engine sound how smooth from the gearshift will low things are falling away. So I personally believe design is going to be more and more important and who wants to drive a you know a boring dorky car. If you can get a good looking car from the same price and.

Even faster even better I have more technology. So I think design is going to be 1 of the meeting things specifically in the marketing segments that we're going in I mean, we're not making minivans and we're not making you know.

Delivery trucks, we are making vehicles that people save to all you're making vehicles that people are proud of the people want so I think the sign we are the leader in that sustainability number to sustainability I think coming out of Covid.

He's going to be 1 of the key differentiators for US I think today's consumers want to align with the brands. They buy you're spending a lot of money on the vehicle and if you can get a vehicle that is not just another electric vehicle, but actually 1.

1 of the world's smallest on I believe we can make the world's most sustainable vehicle I think that's a really really strong brand pillar. So sustainability in E. S. T is actually 1 of our highest highest brand pillars. Then of course, there's the value on when you think about your here on electric vehicle likes expensive, we're compared to what.

So you compare electric vehicle in a certain price class what else can I get from my money. If I look at another vehicle either electric or its gasoline and I will say the fifth corrosion without 3 price points that we have in the amount of technology performance. We have on these vehicles.

Paying vehicle that people really want and again, there is zero doubt and data shows that the highest growing segment on the world is is <unk> and I think we have a pretty hot 1 on I think this is a big differentiator.

<unk> is user interface.

We have a.

Great personnel, leading the team on user interfaces interacting with our <unk>.

Engineering team and Theyre working seamlessly together.

Create what I think is going to be the world's best user interface.

Mandate to them was I want to feel when I get in this call. How I felt the first time I got on Apple iPhone in my hand.

It was that moment is this really going to work and then there was while I don't need to read anything it just works seamlessly that's the type of feeling I want into fiscal erosion im sitting in the reviews and I think we're on the way to this.

Not an easy path, we do it in house, we are coding in the house, we are developing in house.

It's going to be fully connected it is going to have a totally different way of using it but I think it's going to be very intuitive and of course, that's going to have a lot of opportunities for over the air updates. So we aren't going to excite people.

With new features as we move along into 'twenty 3 'twenty 4 on to an environment and so on so I think the exciting part is we are going to be able to keep this vehicle fresh and keep updating it with new exciting features and then just a last thing Thats 1 of my favorites.

1 unique feature was we have talked about previously is the California, Mount which create this convertible field by the tough from a button.

It doesn't matter how much money to spend on a car even if you buy a $3 million Supercars no. Other car has that feature.

Once you try it it's pretty amazing and should be able to get it in this price class is quite unique so I'm excited about that to let me finish with ESG.

It's I've mentioned, an important pillar on the company.

Our brands and I think that I can really feel within fisker that.

We are really we are going to be the best on ESG incumbents about it. So thank you very much we'll take some questions later on details, but I now want to hand, it over to <unk>, Our Chief Technology Officer, who will provide us some detail on how he is directing efforts to develop 2 platforms at the same time not an easy feat.

And something that is only possible through our unique business strategy on partnerships Bucharest.

Thanks average.

You mentioned developing 2 vehicles at the same time on separate platforms is unique for a small early stage company like ours.

No doubt a very challenging but there are a few things.

Highlights that make it possible for us, but likely not for others, but a number of on 2 programs at once would not be possible without our effort.

Pet platform sharing and vehicle development strategy the.

It was specifically developed.

To leverage already developed non customer facing components and to engage with expert partners from engineering and supply chain support.

So each program is strategically directed by us, but with the support of hundreds of engineers purchasing experts from Magna <unk> from 2009 on Fox control payoff in FY 'twenty 8.

And then number 2 geography is on our side the partner from Ocean is in Central Europe and pay in Asia. So we can essentially work around the clock using time zones as an advantage for us.

Let me say number 3 fiscal ocean development because of its of that vehicle.

Eagle Ford ability lays the foundation for the development of affordable vehicles like payout.

In other words, there is less work on the second program when the meaningful number of components and sub systems have already been developed for the first.

Can be shared.

So this would be impossible, if he attempted and mass market vehicles after starting with something in the high end luxury market.

And finally, we have hand selected a brilliant experienced technical team as you pointed out.

That has executed many programs before but not under Osf's path development process now that they have the experience with the ocean under the new process executing the second program a year later efficiency improves due to lessons learned that there are still fresh.

Things and now ill turn the call to detail. Thanks to current and welcome everyone I'm really excited to be talking to you again this guidance on a week and half earlier relative to the end of the quarter as we continue to build our finance processes and look to report on a schedule consistent with more maturing public companies ongoing price develops.

But you think games adapting daily to rapid decision, making executing 2 on aggressive timeline and that sense of urgency within our partners and supply chain and this is the message. We are driving every single day to achieve that target SP on time on budget.

In addition to business development on contract negotiations.

Bags with other entrants in the space now in these situations, we are managing to navigate by agreeing to revisit pricing once we achieve certain volumes.

The comments that Henrik needed by Bridgestone and based on need and a recent joint press release and it called out <unk> mission to make <unk> accessible and our commitment to sustainability highlights that we have seen is an enticing customer a global tier 1 auto suppliers.

We've also made significant progress with suppliers and I believe the perception of Cisco is a compelling partner will only improve as we continue to execute build demand and brand awareness over in the near term beyond the boom Assembly and logistics cost have also gained visibility as expense second quarter nominating several key suppliers and now have more.

Our visibility on pack production locations material labor and local costs Covid related disruptions continue to create a volatility in logistic cost, but we anticipate these costs to normalize when we reach fully ramped up production in excess of 5000 per corrosion units per month during 2023, which will contribute.

Of course to our revenue and our cash flow targets. We also entered into a long term definitive manufacturing agreement with magnify to produce the discussion in Europe.

It's very critical agreement is broad based and very comprehensive it covers planning in launch phases annual volumes complete assembly cost and quality metrics over the program's entire lifecycle. It covers all facility investments a clear path to startup production in November 17, 2022, and a rapid ramp up.

The full run rate production for quality vehicles. In 2023 also in support of an on time launch cadence, we have begun to provide supplier quality assurance of its QE support and embed resident engineers at key suppliers to ensure they meet our program timing and quality standards. We have also made progress on gross.

Work to set our business subsidiaries in India, and China for future sales and in India, specifically for our software development Center in these markets and Theres more to come as we move forward in these countries before getting to the results and outlook I wanted to quickly highlight on exciting activity, we recently announced on the charging side, we subscribed 10 million.

To the pipe associated with a reverse merger of Lego with respect sponsored by Apollo expected to close in Q4 of this year. This was a strategic opportunity for us to invest in the leading European charging network, but more importantly to get access to a unique opportunity that will benefit our European customer substantially now let me.

Quickly turn you over to Christian Marty VP of European sales and marketing can provide a bit more detail Christian.

Thank you Peter.

Yes, we are.

Please for both of those would you reduce our legal is already large pan European charging network with over 12000 locations across European countries.

And there is an improvement on.

The expanding number of innovative fast charging stations.

Key priorities is to provide a frictionless experience to our customers.

From a chartering is 1 of the priority areas.

The gross finding accessing and proof of payment from flow through different networks is currency.

Key points on many of your doctors.

Prior to making this investing.

Entering into a partnership agreement.

So on his own due diligence on the on Lingo network.

We developed a cooperation agreement with <unk> to directly benefit our European customers.

In various ways. This is a huge competitive advantage from Cisco on a more competitive.

On the oilfield operations agreement, we plan to work together to develop a seamless integration.

With me from a.

Onto the Cisco count on.

On other guidelines of the new R&D with current insurance from them.

<unk> expenses to allow our customers.

Tissue and premium recharging their vehicles.

In addition, this view on lines will allow us to offer 12 months of free charging on the legal network with Cisco with some customers that registered vehicles before March 2.

2024.

Thank you and now I'll turn the corner on 2 zero.

Thanks, Christian now turning to our results and outlook.

<unk> results on a cash spending basis were better than our internal expectations and the commentary we provided on the last earnings call. We ended the quarter with $962 million of cash versus our expectations in the $900 million range. This variance was almost exclusively related to capital expenditures, which were minimal.

On the quarter, our Q2 expectations based primarily on projections, which over the last several months turned into nomination letters and purchase orders.

With milestones attached and deliverable based payment terms. This creates a from a cash flow forecast for the program.

Operationally the increase in R&D versus Q1, 'twenty..1 was primarily the result of increased head count and continued kickoff of more and more suppliers.

Drive engineering design and development spending the increase in SG&A expense versus Q1, 2021, as a result of higher headcount costs, including stock based compensation as we ramp up support functions like marketing and after sales in front of fiscal Ocean startup production in 2022.

Turning to our outlook as noted in the press release, we are fine tuning, our operating and capital expense spending plan to a range of $490 million to $530 million up about $30 million at the midpoint with somewhat a tighter range than we previously reported in the last quarter. The increase is largely related.

The incremental prototype and testing spending in 2021.

On a point out that whilst we are incremental we are also narrowing on guidance.

There are really 3 drivers number 1 more advanced technologies, such as Adas and powertrain versus our original plan on driving incremental test and validation work number 2 recently there've been changes to your low end cap in IHS safety regulations, and our platform and technology can support this but the testing process is more intense.

Number 3 we have made a strategic decision to develop internal capabilities for full vehicle test and validation instead of relying solely on third parties. What this will do is allow us to better control per vehicle features on customer expectations. It will also save us money on future programs, but driving incremental spec.

<unk> per virtual validation software tools and head count this year.

As per quarterly cadence given the substantial sourcing activity in Q2, we expect that the balance of 2021 spending will be focused somewhat more in Q3 than Q4 now 1 final comment the company intends to implement an enhanced our goal oriented performance incentive program for all <unk>.

<unk> in connection with our anticipated startup production of the Ocean on November 17, 2022. This is an extremely important driver and incentive to align everyone at fiscal to jointly execute to the ocean S&P date and sub sequential ramp up in 2023. This is a once in a lifetime opportunity.

Trinity for all fiscal stakeholders for all of our employees to be part of our high volume EBIT launch on time, along with a very attractive compensation incentives overall I'm extremely proud of the entire fiscal team for all the accomplishments. So far in 2021, we have a lot of work ahead of us many sleepless nights and for sure we enter into the critical execution.

But we have a lot of confidence in the plants, we've established to execute a fantastic profitable product on time on budget. We're now happy to take your questions.

Yes.

Thanks, Peter BRCA Nucha collect the queue. Please.

And he if he would like to ask a question. Please press star followed by 1 on your telephone keypad if.

If he would like to remove your question on any time, Please press star 2.

When preparing to ask your question. Please ensure your line is on make it lightly.

The first question we have comes from Adam Jonas of Morgan Stanley. Please go ahead.

Hey, guys. This is Evan silverberg on behalf of Adam Jonas.

Quick question on what is the low.

Latest on your battery supplier 1 of the latest this can be locked down without risking the November started production for the ocean. Thank you.

Well, let me just start by saying we already are in prototype development with our battery supplier, we just have on amounts appropriate dilutive.

So its not really labor sitting here on I haven't heard of.

Chosen a better supplier I believe very on the last earnings call. We said, we have I know a lot of our competitors would like to know who it is because I think we will have 1 of the most energy dense battery packs.

All I would say right now is 1 of the 5 largest.

The manufacturers in the world, but we really don't want to elaborate anymore on that.

Yes, I just want to add to <unk> comments there.

We actually sourced on nominated on battery supplier late last year, and we've been working tirelessly with them on both the design and validation of the entire battery pack, we start to build on meals in the coming weeks and in fact, we have a very elaborate plan with them on the entire prototyping and testing phase.

I think I'd alluded on the last earnings call that we actually have a very attractive price per kilowatt hour, where we are in the processes. We are looking at localization of our packs both in Europe, and North America, and we would be revealing more information about our battery supplier wants to be locked down those localized plans.

Okay.

Great. Thank you very much.

Thanks, Kevin.

Thank you. The next question will come from Shred the tail of Wolfe Research Suntrust. Please go ahead.

Alright, Thanks, a lot for taking my question.

And in the press release, you mentioned that you had 17500 reservations.

As of August 2nd and I believe.

On June 2019, you had mentioned you had 17000 so.

That would imply.

On.

Aside from a person increase in reservations over 33 day period, which is about 15 reservations per day and it seems like that number has come down versus the reservations per day that you were seeing yes.

Right.

So what's going on.

Yes.

The only thing going on because.

Yes go ahead.

I can take that question. So basically as you know or may not know we are not spending any dollars on.

Marketing.

We have really not announced any specifications of the vehicle. So I think if I were selling Europe television without filling of the size of it or whether it was black and white or color, we probably wouldn't put a down payment on Assam price surprise that we actually have $716.5 on the reservations.

Remember this is not a $100 fully refundable reservations on the 250 dollar reservation, where we keep 10%. If you cancel so a lot of people I think are taking tremendous risk with us not really knowing what the performance on the <unk>.

Cost of the option is going to be on this vehicle and as I mentioned earlier, we are not planning to start our marketing on some November this year, we don't want to blow in our marketing money.

On getting getting out there at this point in time in the middle of Cora, We believe essentially until 15 months away from launch that is more prudent for us to spend on marketing dollars from November.

Okay.

And then.

I wanted to just understand.

We mentioned the <unk>.

<unk>.

Our low growth.

Okay.

But.

I guess I'm, just trying to understand how that.

Our competitive advantage given that.

Europe has meant open and interoperable charging network.

No.

But he would be able to access electro chargers or is there something exclusive in this agreement.

Yes, sorry, fewer refill agreement you can see that we are offering our customers.

Part of that agreement.

After a year or it's about a year free chart.

I don't think Thats something you can you can just go normally on chart for free. So the fact that we can do that that's a huge competitive advantage that we can offer our customers. The biodiesel just erosion on 1 year free secondly, we are developing a unique.

Her face whether leeco for our App.

And that's something we will reveal a little later, but thats definitely is going to be unique.

Also going to have an advisory board seat. So we can actually guide illegal in the direction, we think is necessary to be successful.

<unk> is going to be others.

So it's going to be able to use these charters.

But I think those conditions for us have been extremely.

Important per Crawford customers and I think maybe.

The last point.

The last 0.1st I just wanted a added plugging charge that we charge is really important for a seamless experience to customers and we are also going to be developing jointly the carrying charge.

Technology with Allegro.

Okay, and maybe he can add on.

Yes, it's really standard in the European market is that you need to identify yourselves within credit cards, we would membership current but sometimes doesn't recognize you and then you have to drive to the next day issue because the destinations that we did in Britain on Gm's potential customer stocking charge allow you a seamless experience to drive from the <unk>.

<unk> vision you plug in over the clouds, you can identify repayment process is automatic from to drive on 1 day update you on tranche.

For the competitive advantage.

Hi.

And just to be clear you would then be compensating on net growth for the 1 year free charging for customers is that how that would work.

No.

Good.

We have as part of our cooperation agreement a benefit to fiscal <unk>, which is passed on to the customers.

This is very low for defense as production ramps up clauses.

On investment in the stack with a lethal. So this could also be a financial upside for us on the buffer I also want to address that we were the sole EV OEM and that is 1 of our conditions. We wanted to have exclusivity as an EV OEM in the deal.

Okay, alright that makes sense.

If I can sneak 1 last 1 and sorry.

And do you think about localization of battery capacity in Europe I believe it's from what we've seen in the industry something like $80 million per kilowatt a gigawatt hour.

In terms of Capex for our battery plant and obviously youre not going to absorb all of that on your own but how are you how are you thinking about.

As you work with from the large battery manufacturers.

The kind of contribution you would have to make to to support on localized plant.

Great question first so we do not anticipate any investment in cell manufacturing, we would leave it to our expert partners, who know how to setup cell manufacturing plants. We also don't believe that we have the capability financially on technically to stay conduct risk.

We leave that to our battery partner, where we come in is to look at battery Assembly, where the financial commitment is much different.

2 cell manufacturing and it is really critical because once you assemble sales into modules into pack. The weight is quite large and if youre transporting them over long distances, there isn't a carbon footprint emissions. There's logistic cost. So that's the part that we want to eliminate that at this point in time, and we will reveal in coming months.

We intend to have localized plan. We're also looking at doing this with some really exciting deep pocketed partners. Thanks Travis.

I wanted to clarify the 1 data set battery assembly. She was referring to battery pack assembly because to be super clear because it's less confusing sometimes.

Break on I'm, just going to jump in and ask a few questions that we've received from retail investors and then we'll get back to the queue.

The first 1 is how are you planning to align the mutual interest between plus current box con since the business model is different from Magna are you planning to take investment from Foxconn as well.

No.

We actually do not intend to take any equity investment from Fox Con, we believe that our partners interest should 100, SMB align with ours financially and Fox current interests are 100% aligned with ours and the reason is we have a very unique deal structure with foxconn to the core invest on the program.

And they are taking on investments in areas of manufacturing and taking over the technology supply chain, where we are taking a lead on design on product definition on product development and of course marketing and sales and as a result, we have both joined owners of the program. We don't think that we do.

You need to take any investment from both from Fox Con interest since they are investing directly in the program and have equal skin in the game.

Thanks, Peter Second question is initial press release of your Ocean vehicle included many interior photos. However, since then there are no traces of the interior and your social media campaigns are on your website is this an indication that your company is scaling back on the interior aesthetics Mouser is an indication on scaling forward on this verdict.

And the technology, so I'm really excited about showing an unveiling the new interior at the Los Angeles on.

Auto show in November it is a complete no interior we had just so many ideas and we also had some new technology, we want to incorporate and ensure that drove a bit the design and I can promise you what we're doing even with the screen is unbelievable is actually something we're filing a patent.

Right now and I think it is going to be super exciting the quality of the interior I think it's just going to be spending out between any other vehicle in this class the quality field to design very very clean modern.

But yes, you are going to have to see it.

Just wait until November on China.

Breaker.

That's it for the retail investor questions can you can you go back to the analyst <unk>. Please.

Thank you so the net.

Question comes from Brian Johnson Barclays Day, Brian. Please go ahead your line is open.

Yes, Hi team. This is Steven Hempel on for Brian Johnson.

Thanks for hosting the call just had a couple of questions.

Wondering on the R&D expenses.

Just a little more color around the reasoning behind the increased R&D expense versus the original plan.

As we think about the midterm economic operating model, how this fits into battery going on.

Potentially see higher Asps or is this just a reflection of.

Competitive dynamics and overall regulations in the industry driving increased.

R&D upfront.

That's a great question. So if you actually look at the guidance what we've done is built up.

<unk> by 30 million. So we had $4.90 to $5.20 million and we also narrowed it if you look at the last guidance now there are 2 dynamics that are playing here. So the increased R&D expense is of course as we mentioned a couple of earning calls ago that we are adding new content the set.

<unk> part is that we do have more expenses when it relates to prototypes and testing and we believe it's actually a really good thing that we're doing that because we need to put it.

New technologies like Adas powertrain technology and that is resulting in improved performance and features.

A few months ago, we actually brought in a new VP, who is in charge of Homologation and certification who comes in Super experienced in fact, he certified the fiscal Karma almost 11 years ago.

Electric vehicles, we're not I think now what we've also decided to do is.

Do more prototyping and certification in house, we need to spend more money on virtual validation tools on certain other tools, but we can of course use these technologies across different vehicles.

The thing I want to point out is that we of course have more hiring we've hired many more people to visit on incremental head count as well.

Okay.

And then the other 1 is related to the.

It sounds like you could develop an extensive marketing plan for the U S and Europe.

Starting with November 2020 on it the only auto show.

Just wondering can you remind us what how youre thinking about unit volumes in the kind of demand split.

As well as the rollout of this discussion between the U S.

On Europe over the midterm.

Yeah. So.

I won't get back off the reservation on our target is still to get at least 25000 reservations by the end of this year and that's part of our detailed marketing plan and we're going to be tracking that so thats going to be quite a bit of acceleration from November into.

In December and then in 2022, our goal is to get 50000 reservations up to 50000 reservations. So we will be sold out for 2003 in terms of our production.

We are starting production as we mentioned in November we expect to do a few deliveries both in Europe and in the U S. In the next year.

And as we get into 'twenty, 3 I would expect that about 75% of the vehicles, we're going to go towards U S. We have seen us acceleration on orders in Europe. While of course, the first orders came out of the U S. So first come first serve.

We expect also to.

To get up to over 5000 units per month in 'twenty 3.

I think we're going to be easily able to kind of beat sort of our forecast of around 40000 vehicles in 'twenty 3.

If we can get maybe an extra shift then.

I'm very comfortable.

We're going to be sold out for 23 on of course people, it's going to be waiting for the vehicles.

So we're going to try and see how we can.

Feed up.

The ramp up but obviously the ramp up is a ramp up but over 5000 vehicles from months already in the first year I think that would be a record.

Among any startup company.

Thank you taking my questions.

Next question breakup on key.

We now have John Murphy with Bank of America. So John Please go ahead.

Good evening, everyone. On this is aileen Smith on for John a bit of a bigger picture question and apologies if you've touched on it but I'll go hopped on the call. The fleet when we consider the Biden administration announcement from earlier day, 50% EV sales target in the U S by 2030.

Do you think about the impact of that would you lean in the direction of the government question being a positive on a catalyst for the industry towards evs or potentially a negative enforcing from automakers to respond perhaps more aggressively and competition across the industry broadly increasing and would you view it in any way as a catalyst for Pittsburgh internally as maybe pushing fast.

On some of the product.

So I can take that 1 so I think it's going to be incredible positive for fiscal <unk> I mean, let's not forget it takes still the traditional automakers at least 4 years to make a vehicle. So even if somebody started to day to say, okay. We're going to go full speed on Evs as Youre looking at probably 2012.

6 onwards, we have already announced that we're going on for vehicles on the market before 2025, I would also expect to bite and administration to really put a lot of effort in that over the next 4 years from epic sector. When we're launching all vehicles I would expect some too.

Put a forward incentives for customers hopefully it goes directly to the sales price about 1 of the advances we have which is very unique is our price points from our vehicles. The first vehicle is sold on the premium segment, but really start with $37.5 up to 69 and of course, even if we.

So sort of the average vehicle per 50, 55 was where we're going to make a lot of money.

With a good incentive for that vehicle, we're going to reach pretty high volume market. The average vehicle on the U S about $40000 per average per.

<unk> price per vehicle, but they need to think about the per program that vehicle was back on the $30000 from if you imagine there still is a $7500 discount on that vehicle will now think about having a vehicle with $22500 I mean, you're talking about moving.

Million volume segment, there and I quite frankly don't believe that a lot of automakers would have reached this price point before 2025.

1 of the weeks things that some of the larger Oems are facing is that they have the business simply their gasoline plans before they can through high volume Evs. They also have no record of high volume Evs or even a huge client tilda once evs, so it's very difficult for.

Them to broaden on our parks for 1 million Evs, if they don't see.

Likely end of the channel to be able to sell them because let's not forget they make money on the gasoline cars in our case.

To have 17.5 on our orders 2 years can fall launch.

I don't know how many gasoline vehicles that have even 5000 orders 2 years before launch so I'm very comfortable that business is going to be a huge advantages for us on a big expectations for the buys and government.

They actually will put a lot of incentives forward as well as building out the chart from infrastructure in the U S. I just wanted to add 1 more.

Point to that debt.

Personally I think there is a lot of customers, who still are sitting on defense and Theres a lot of education that needs to be done about electrification startups like us who don't have billions of dollars to spend we rely on such a great initiatives, where the entire country unites and it puts us in the forefront as the leading EV brand.

Fantastic that's very helpful color.

And then I wanted to follow up on how the supply chain for the Ocean is developing and specifically in reference to maybe some of your expectations on what is in source versus outsource on if I remember correctly in your margin merger presentation from last year. I think you identified design, obviously, but then also software and user interface that areas that you wanted to enforce.

On the vehicle, but that you would rely on the supply chain for connectivity and AI technology among other components.

Is your thought process around what gets in sourced versus outsourced changed at all over the past 3 to 6 months as you're getting closer to a production vehicle and are you finding more component areas, where you can leverage the supply base rather than trying to rebuild the wheel so to speak.

Well, let me first day on a low end roads to get us since he is running.

Supply chain.

Wanted to say from a larger perspective that we are facing a huge revolution in.

Automotive industry and the Revolution is also partly to do with supply chain.

A future vehicle is going to be sourced more like a tech device.

On automotive component and what I mean by that axles.

Sam CEO and stuff like that is going to be less and less important that's going to be other things that where the consumer really is going to find value. So we have not changed our mind. We are not trying to build axles in house or still seeding frames on other components like that which we think have a.

Absolutely zero value as a company or zero value for our consumers. So we are focusing on developing as much technology on software as we absolutely can.

But I'll, let you just speak a little bit more on supply chain generally so I think the first thing I want to say there is really no OEM, who does all the components in house. So it really vertical integration is really hard and I think in the past Oems have done it but then the divested so really there is no OEM, who develops and we think the vehicle in house, especially as you go.

From ice to EV, there is no OEM, who makes battery or drive units in house that you have to go to supply chain. So that's the first thing the second thing I wanted to talk about it if you focus on engineering services again.

This is an area, where we kept certain things in house as we said in our asset light approach something like design something like UI UX something like software development something like product attribute all of the things everything is done in house and then of course, we leverage supply chain from up.

Design from engineering perspective, which currently translate into.

The components that can be manufactured with a bond targets 1 critical item I want to mention that really isn't talked about in the industry as vehicle integration, which is the most critical area and this is an effort that we jointly with our partner Magna is so critical because it relates to manufacture ability of the car. So this is an area where we can.

Together, we do design freeze together, we do feed releases together and vehicle integration is something where we have joint capability with Magna and then finally as we alluded to multiple times prototyping testing is something that the skill set that we're developing totally in house.

Thanks, a lot alien BRCA, we have time from 1 more question. Please.

Thank you.

Final question from the sidelines comes from Jon Lopez <unk> co great.

John Please go ahead been ready.

Hi, Thanks, so much I appreciate you taking the questions I tried a couple of quick ones I apologize I know were getting late here, but the.

The first 1 is just on the R&D spend I wanted to come back to that for a second because.

I'm just trying to think about the practical sort of application here like you spent let's call it $35 million a little bit more on average in the first 2 quarters of this year.

We're going to have to spend 100 in each of the last 2 quarters to do the revised number.

I know part of this is payments here from manufacturing partner, but how much of it is that versus just ongoing run rate and what does this tell us if anything about 2022 Pori our R&D Brent.

So the first thing I want to start by saying as ocean will be under $1 billion.

So the quondam fundamentally hasnt changed and its pretty common when you start a program. The first few quarters could be lumpy, but let me spend a little bit of time clarifying guidance for this year. So last earnings call, we increased $30 million, which is about a 7% increase in R&D spending.

That's 100% related to project, there and that spending we forecast will be in 2021, it's a combination of in house hiring it's a combination of bringing in new suppliers.

Now of course, there is a completely new program and it was excluded from our prior guidance now in today's increase be increased 9% at the low end for percentage of the high end to $4.90 at the at the low end <unk> 20 at the high end and it's again directly related to incremental prototype activities. We're doing in 2020.

And again, that's a result of activity.

Capability, we want to develop in house, rather than spend the money outside now of course, if you are building in house capability, you need to spend a little bit more because you need head count you need tools software tools, you need hills et cetera for certain components in <unk>.

And as I mentioned earlier, we also brought on a VP in charge.

In charge.

There are certain expenses that are driven by new regulation changes in your in the eurozone.

Safety, so that did drive an incremental spending but again.

The overall quantum on spending it doesn't fundamentally change it just gets either let another quarter shifted to another quarter.

Understood. Okay. Thanks, and then my second question is just about the production targets, which I think maybe that's the first time do you share this with us at least formally I guess my question is what is the what's.

What's the period to ramp so its 5000 it sounds like maybe a monthly average or perhaps is not perhaps as a target for some point in the year. I guess my question is as you move from zero to 5000 per month kind of how long does that take and at what point would you expect to be at that steady state ramp level.

Yeah.

Yes. So the 5000 is not average bet my life.

Comment there was we are reaching over 5000 vehicles per month in 2003, and I'm a little reluctant to give you the exact date of that right now.

There is some different factors that could drive a change on that but the good news here is that when I say over 5000, we have the capability wound back on to do a lot more than 5000. So if we for whatever reason would be a couple of months later during <unk>.

On catch up later on the year, which is why I'm very confident in our first year volume target of well over 40000, I think actually might get closer to 50000.

So I think in any case.

We may not catch up within the beginning of the year, we can catch up later in the year, because again Mac that has put us into their largest hall at Magna, where we ultimately are able to do well over 100000 vehicles a year. They have a super skilled labor force they have an amazing preproduction.

<unk>.

They have a paint booth there can serve as multiple different vehicles. They have an inbound on.

Outbound logistics system, that's already set up so we're not facing the typical.

Difficulties that any startup would have starting from making car.

Cars on the on factory with average trained people that used to flip burgers are they have to like suddenly create on infrastructure of suppliers et cetera, that's not the case with Mac they are producing.

Premium cars from other carmakers already on that have this entire infrastructure. They have the skilled labor, which we're going to take advances on why we are so confident.

Alright, Thanks, very good 1 for joining thanks for the thoughts.

Thanks, a lot on and thanks breaker for running the call we really appreciate it.

Anyone who joined the call today, and we'll talk to you next quarter. Thank you. Thank you everybody. Thank you very much.

Thank you. This does conclude today's call you may now disconnect your lines and have a lovely day.

Yeah.

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