March 21, 2022 – On today’s podcast we welcome special guests, Eve co-CEOs, Jerry DeMuro and Andre Stein. Eve is a recent corporate carve-out from Brazilian multinational aerospace manufacturer Embraer and a leader in the development of next-generation Urban Air Mobility.
On the podcast, Jerry and Andre discusses:
- Flying cars – Eve’s next-generation Urban Air Mobility solutions
- The corporate carve-out and going-public transaction
- How Eve differs from competitors in the eVTOL space
- The potential $760 billion market they are pursuing
- And more
Transcript:
Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko: Welcome Jerry and Andre of Eve, the co-CEOs. Welcome to the show today. How are you guys doing?
Jerry DeMuro: Great and really a pleasure to be here. Thanks for an invitation again.
Julian Klymochko: Yeah, awesome to have you on, I’m interested in getting into the details regarding Eve’s next generation, urban air mobility solutions known as Evtol vehicles. Super cool. I wish I was riding in one right now. I have yet to try one, but to start, can you tell us about Evtol and how it works and why consumers should love it?
Andre Stein: Thank you, Jerry. When you’re talking about urban air mobility. It’s really a new frontier for aviation, so it’s a whole new ecosystem and you need to create the solutions that will fuel the needs of these ecosystem. Starting to your point with the vehicle. Evtol is lateral, vertical takeoff and land vehicle that leverage a lot of the innovations in the world, and a lot of innovations in mobility, like electrification to create a new type of vehicle. And were going to talk a bit more about our Evtol and why it’s different and why it’s special? But what I can say about it, is that leverage all the know-how that Embraer has accumulated in the last half century, where it has been developed in [Inaudible 00:1:26] and keep aircraft flying just in the last 25 years has developed over 30 different aircraft models, and that’s a record in the industry.
So, you are getting that understanding to create a solution. That’s be spoken, optimize it for air mobility, but not only the vehicle needs to be developed. We need to develop the solutions, the service and support solutions that go along. We need to keep this aircraft flying and having a really reliable solution. So, we need to be thinking about how the maintenance is going to be? We need to be thinking about how the pilot training is going to be. And we need to develop a portfolio of different service, and that’s where one of the opportunities is, not only for the operators of our own vehicle, but for the whole ecosystem. Operators of other vehicles from the other parts of the ecosystem, the airport, and creating this portfolio of service, allow us to really access a constant stream of revenue in the future. To really do it in [Inaudible 00:2:38] way, sorry, say something.
Julian Klymochko: Yeah, I think it’ll help our listeners because you speak of embryo, and we didn’t touch on the fact that Eve went through Embraer accelerator program basically was formed within a much larger entity with decades and decades of experience. So, if you could give us, a bit of the backstory on how Eve came from idea to now a major player in the Evtol space that will really help frame the discussion?
Jerry DeMuro: Well, Julian, you’re talking to the right individual because Stein, as we refer to him has been there since the inception at Embraer X and incubated that. Maybe we can return to this whole ecosystem point that Stein was trying to make, because that entire ecosystem needs to exist for the market to be viable, not just any particular provider of Evtol, but Stein why don’t you talk about just how the concept came about and how it’s been incubated over the last four to five years?
Andre Stein: Sure, and the two things are very interlinked because we have been incubating these different projects inside Embraer, as a set, and more than that, inside Embraer X. Embraer X is Embraer market accelerator that was created to access potential exponential growth. The X of Embraer stands for explanation, and that’s exactly the case of the urban air mobility market, the way you see it. We are talking about three quarters of a trillion-dollar market in the next 20 years. So that was a unique opportunity and we needed different tools to accelerate. We need to really bring the best of both worlds. The best and the know how that existed inside Embraer to address a massive market, leveraging new tools, coming from the Silicon Valley approach, doing minimum viable products, proof of concepts and mature that program all the way to the point where believe it was ripe, to become a separate organization, separate company.
And we are incubating both vehicle development, the service and support set of solutions, and even a solution for [Inaudible 00:4:53] air traffic management with some other key aspect of the ecosystem. Can imagine hundreds of Evtol flying over one given city. We need to assure that they’re flying in a very safe way, very scalable way, very efficient way. To do that, we are leveraging the knowhow again, that exists inside the company. Embraer has within its organization, the capacity to provide attract management solutions. It does that for the whole of the Brazilian airspace and export that solutions to other countries like India, other countries in Latin America. One of the few companies in the world that has that technology, and we are leveraging that knowhow to create a [Inaudible 00:5:36] solution, that we are sure that you’ll be able to scale that market. And as I said, in a very are safe and efficient way, and you can even think in new ways to interact with the operators, we don’t intend to be the operator ourselves. That would mean creating the single largest airline in the world, but we can change the way we do business with operators. We can be partners. We can share the risk; we can share the revenue and grow together on that front. So just to finalize, we’ve been incubating that since 2017, inside Embraer X and October 2020 we decide that the projects were mature enough to spin off from the main company and to get all the projects that were related air mobility within one single organization, and that was [Inaudible 00:6:31]
Jerry DeMuro: And really as you think about the current transaction and that we’re contemplating, which is the merger with Zanite Acquisition Corporation it really is a natural follow on as it turns out, I happen to be a member of the Zanite board when we were looking at next generation aviation issues. If you look at the board, it’s made up of number of individuals who spent a lot of time in aerospace and defense, and aviation. And we were looking for something in the next generation, particularly electrification, and a number of members of our board had a long-term relationship with Embraer. So of course, as we went around and did about 20 plus management meeting, I think it was Stein. We really looked at the Eve offering as the most likely to succeed for a couple of reasons.
One, as you might expect from a company with Embraer heritage, it starts with a great aircraft design, really optimized for mission, which we can talk a little bit later about, really optimized for the true urban air mobility mission. It was also optimized to be the lowest cost of total ownership and operating cost of maintenance cost that go into what eventually translates to the cost per seat mile, right. Everything translates to what are you going to charge that passenger. So, it started with a great vehicle. The lifting crew is very simple design, which it doesn’t have some of the moving parts or the complexities of flight control laws that say a tilt rotor does, as we looked at other options, we thought this was the simplest aircraft and the clearest path, not only to type certification, but to actual entry into production, entering service and producing revenue.
So, you know, Stein mentioned the element of our business model, which is really not trying to be vertically integrated and being producer of the vehicle, the operator of the service, the face to the customer, building out our own verta ports, we’re doing it with a partnership model, bringing partners that operate regional airlines. They operate rotary craft; they are ride share operators. We are even bringing [Inaudible 00:8:59] onto our team, so that, as you know about 40% of the aircraft out there are actually lease. So, for our operators that want to be asset light, we’re bringing a partner-by-partner city by city model. That’s going to allow us to scale with a very capital efficient model and also bringing the core competencies in a very diverse set of competencies to bear so that we can bring service successfully into these markets.
So, it was a capital efficient model. And most of all, you’re not trying to compete with your customer, the people you’re trying to sell aircraft too, so that was important. Thirdly, it is this backing of Embraer that is now codified in contract, 15-year master service agreements, where we have priority access to engineering and technical talent. The other back-office support structure and priority access to those resources by contract, and we’re getting them at cost. These are some of the most accomplished aeronautical engineers in the world. We also get access to all the infrastructure that you need, the simulators, the tool sets that engineering uses. The infrastructure for flight test campaigns, we get that for free. Stein mentioned, it’s one thing to produce an aircraft and sell it, but in order for an operation to be successful, you got to sustain it globally.
We also have access Embraer, existing global support network, 80 locations around the world that we can leverage. So, a significant advantage as well with that kind of backing from Embraer. And lastly, I mentioned certification, you know, this is going to be a global market. We often sometimes get North American centric, but there are other locations, these mega urban centers where it may actually Evtol and urban air mobility may take off more quickly, no pun intended. So, Embraer has that global reach, and they are already experienced. Stein mentioned working with, I think over the last asked 25 years, 30 different aircraft certified on a global basis, triple certification. We’re going to be working with Anac, the Brazilian certification authority and pretty much they actually, two weeks ago or a week ago, Stein, they accepted our application for certification, and they have a bilateral agreement with FAA, we’re already discussing it. So, while others, many others will be bringing multiple aircraft designs to FAA for certification, we’ll have priority with Anac in a bilateral agreement with FAA. So, there are a lot of discriminators that we have in the market, but it became the right time. It was the right partner for Zanite. And I think the right partner for Embraer that was going to help further accelerate the development of this by bringing fresh capital, breaking it out. So, you get the best of both worlds, the Embraer support and the agility of a technology disrupter.
Julian Klymochko: So, you mentioned the merger and going public transaction with Zanite Acquisition, which I’m going to get into. But prior to getting into that, I did want to just further look at these Evtol vehicles and to the layman, they’re basically like human size drones. If you imagine the Jetsons. So super futuristic, basically electric powered helicopters that can transport us through the air. So, with that being said, there are some unique aspects with respect to Eve’s Evtol to vehicles. As far as I understand the lift in crews design of the vechile are pretty unique. Can you describe exactly how they work?
Andre Stein: Jerry? You want to?
Jerry DeMuro: Sure. So, I mentioned that, well Stein did that this project has been incubated for about four years and they looked at a variety of different designs and you see them evidence today, not terribly different than in the early days of automotive technology, right. A lot of alternative approaches. We have on one side, if you think of a spectrum, we have on one side, lifting crews, which has its advantages. And some may say, you know, some disadvantages then you have the tilt rotor, you have [Inaudible 00:13:36], which is really a different beast all together and all the way over on the other side, you have, you know, these multiple rotors. And so, when you look at them, very briefly, lifting crews, we think is optimized for the true urban air mobility mission. So, what does that mean? Up to say 60 miles with the initial instantiation, of course, as energy density increases in batteries, we can get further range and speed, but it brings tremendous advantages in efficiency because of the wing and the pushers in the back in the cruise mode.
And it operates very quietly there. Something like the tilt rotor may be a little bit more efficient and faster in the cruise motor, but it comes with greater complexity, both in terms of the build and acquisition cost and certainly maintenance and also tilt rotors are more complex in terms of flight control laws. So, it’s path to certification, maybe a little bit more complicated. It also is going to be have more parts, require more battery power. So, it’s going to be heavier. So, there’s no free lunged there, there’s a tradeoff. I would note that I don’t think there’s been a tilt rotor yet certified for civilian application, but not that it won’t, but you know, there are other complications, and you go all the way over to the multi rotor more efficient in, you know, the vertical access, but much less efficient in the horizontal and the cruise mode, right? So, you see them with very low passenger capacity, shorter range, different speeds. So, you know, there are positives, tradeoffs and negatives in each version. And that’s why we say we’ve optimized for total cost of ownership, efficiency in that true urban mission. Stein, did I miss anything?
Andre Stein: No, no. I think that’s it. There is no free lunged, right? You want to go faster for example, we pay the price, particularly when it comes to the seat mile cost, that Jerry refers to, and we are back to the early days of aviation on that. We have so much more freedom of design choices with electrification. You mentioned about helicopters. This is not a helicopter by any means, right? It flies using wings like our airplane. So that is something that the electrification allows you distributed proportion, something that would not be possible with a turbine. It could not have eight different turbines, that would be too complex, too heavy, with electrification we can do that. And that’s really allows us to find these sweet spots between really embracing complexity and adding costs, adding maintenance issues, even the certification process or to the other extreme being too simple, but not leverage on fixing wings to fly forward. That’s much more efficient way to do. So, it’s up to six, seven times more efficient than if we are hovering like a helicopter or a remote copter without the wings.
Michael Kesslering: And I apologize if I missed this in your discussion, can you go over a little bit more in depth on what the relative costs are with your solution, versus some of the other transportation solutions such as helicopter, ground transportation, things of that nature, and just where it stacks up on that range?
Andre Stein: So, when you’re talking about disruptive innovation, it is about disrupting mainly the cost normally, right? And what that means? Comparing with a helicopter, that would have similar levels of safety. For example, you are talking about reducing the cost for passenger, net to six on the long term, why? Because you are addressing the single largest cost of aviation, that’s fuel, straight away. It is a better, more affordable way to store energy and to buy energy, basically. Maintenance, helicopters are well known for having very high maintenance costs. And in the long term, we can even talk about autonomy as a way to increase the capacity of the vape in terms of seeds, which also reduce costs per seed, and also reducing the overall costs. So, and it becomes a bit of catch 22, because with that, you can add scale and scale by itself, help us to reduce the operational cost. As you fly more, you can reduce the cost of ownership per fly, just to give an example.
So, it becomes a bit of a catch [Inaudible 00:18:26] with that, we can achieve similar costs to RUC on the ground today. The idea here is not to replace the ground transportation, but really to provide another choice. And if you’re getting a cab from say JFK in New York to Manhattan, that got to cost you about a hundred dollars, and that’s the pricing point to believe you can have in the beginning of the operation, even with a pilot on board and on the long term, we can have as much of that, when starting seeing benefits in reducing battery costs, for example, which is one of the costs we’re talking about here and with the autonomous fight. So, it is really something disruptive and can create scale. Why air and mobility is not a big reality today with helicopters? The costs and the noise, with something that we address with this type of configuration will flyover the city, not only it’s a large aircraft, so no turbine noise or anything like that, but also it flies like our airplane. So, it’s really quiet when it’s flying over the city. That’s another roadblock for helicopters to really grow and scale over different cities around the world.
Julian Klymochko: It’s a good point. You made with respect to the noise level of Evtol versus helicopters. Certainly, that is a major consideration when you are in an urban environment. Now transitioning to the recently announced growing public transaction, merging with SPAC Zanite Acquisition. I find this deal really interesting, because it’s one of the first corporate carve out. A SPAC business combination. That being said, I wondering like, the way that I view it is, Eve is basically moving out of its parents’ basement. Going on and having its own life as a new corporate carve out. How is this going to change Eve’s strategy if at all?
Andre Stein: Jerry?
Jerry DeMuro: Yeah, since its inception the strategy has been, eventually Eve will operate on its own. This is an optimum time. Obviously, there’s some market dynamics that made it so, the technology enablers that Stein has talked about, the maturation of that. But the idea was that Eve would be an entity likely on its own at some point in time. This accelerates the process, brings fresh capital and enabling us to get to market a little bit more quickly. And I mentioned that Embraer and a number of the Zanite sponsors had a long-term relationship dating back decade and a half working together in aviation. So, it was a good partnership. The market timing was deemed appropriate. And at some point, Eve was known as a public entity. So here we are roughly 60 days away from what we’re planning is, hopefully the day that we go public
Julian Klymochko: And going through the investor presentation, obviously the urban air mobility solution space still very early stage that you guys have certainly come a long way, but you still don’t expect to be generating material revenue until 2026. In the meantime, how do you get investors to be committed to this long-term play, where you see this massive $760 billion market, but it’ll take a few more years of develop development to get there?
Jerry DeMuro: Yeah, so we are a pre revenue company. Not unusual for market disruptors. And we find that the investor base that we’ve attracted is specifically looking at the downstream opportunity. And this is an early entry point and a very interactive valuation to get into the market, to do something disruptive. And there is an entire class of investors that are looking to be long term holders. And that’s really what we’re focused on this. Isn’t about the retail investment community. It’s someone that’s looking at emerging markets and investing early as those markets develop and waiting for them to mature. Both at the SPAC level and the investors that we’ve talked to. We have something like, geez, about a dozen other investors now in our pipe that we’re talking to. Private investors in the public enterprise, that’s what pipe stands for. So, all looking at it from a long-term horizon if you’re someone who wants to be a retail investor or a day trader, we’re not the entity for you.
Julian Klymochko: And speaking about long term investors. There have been other urban air mobility solution providers that have recently gone public. You did mention a handful of your competitors, why should not only investors, but also customers pick Eve over your competitors? What about your story, the Eve story really stands out?
Jerry DeMuro: Brian, want to take that?
Andre Stein: Yeah, there are a few points here. One, it is out of this different environment and different competitors. We do have the backing of a big aerospace company. Certifying an aircraft’s is not an easy task, a lot of well known companies try in existing markets and fail. So having that leverage, it’s a big differentiator in our story. And that helps even if the product and were talking about why our products different, why we expect really to hit the sweet spot of air and mobility, having the most efficient project out there in terms of Waco. That’s another differential. So, we have what we believe it’s the best solution in terms of Waco, in terms of Evtol. And we have a full SPAC solution. Why I say that because you’re addressing different part of the ecosystem in a very agnostic way.
And with that, we were able to create a clear path towards revenue with the orders of accumulated so far. So, we have the largest backlog we have today, 1,785 orders in different parts of the globe, in different parts of the ecosystem as well, to have orders with airlines, with helicopter operators, with leasing companies, with ride sharing platforms and, in all continents, other than Antarctica. So, as you are having this partnership and that this level of partnership spread throughout the ecosystem, that also creates a differentiation story, minimize risks. So, it’s not one massive single partner, but really partners engaging in different parts of the ecosystem and in different parts of the globe. Anything that I Jerry?
Jerry DeMuro: Yeah. You know, I think you hit most of the strategic points, the Embraer backing, you know, the partnership model but from an economic point of view, that partnership model allows us to be extremely capital efficient through the pipe and the SPAC, we will have a little over a half a billion after the transaction in capital on the balance sheet, which will be sufficient to take us through the R&D phase and certification. Also with the Embraer backing, remember we have a tremendous operating expense that this labor pool will be available to us, and we’re using it already. That labor pool comes over to us at cost. And remember in engineer in Brazil today cost about a third, sometimes even less than what it cost in North America or Europe. So that half a billion dollars is going to go a long, long way, not only just on the labor side, but also all that infrastructure, hundreds of millions of dollars of infrastructure for flight tests and certification programs and OPEX for support. We don’t have to fund that. Lastly, we have an agreement with Brazilian national development bank and contortion of others to do what we’ve done on other Embraer programs. And that’s to fund our Capex through very, very attractive rates on debt. So, as we come into this program, we’ve roughly got a little over a billion dollars that we have access to, and those billion dollars is going to go a long, long way with the operating advantage we have. So, we have that strong backlog, very diverse customer set. We think the most experienced team both from a business point of view, global scaling, and aviation, we have a great design, and we have all these other advantages of the Embraer backing. And I think it’s those five or six things that really distinguish us from many other companies out there.
Julian Klymochko: Yeah. A couple things really stand out about the Eve story. Number one, you mentioned that backlog, a 1,785 orders that would really give investors the confidence to have that long term outlook to, you know, give it a number of years until we start generate material revenue. And then, you know, the strong balance sheet and the partner, and that’s really what it takes to be long term successful in a highly innovative space. Now thinking about the future of urban air mobility, I was wondering, what’s your vision of this future? Will we all be using Evtol vehicles? And, and how is the urban air mobility market going to play out? You mentioned it’s three quarters of a trillion dollars. Can you describe how we can think about that?
Andre Stein: So, when you look what aviation has done for transportation in general, right. The fact that today you can cross a whole ocean, a whole continent, in just a few hours at a very affordable price point. What you want is to bring that in a very little way, closer to people, we can provide that same type of benefit within an urban air environment or any other type of shorter type of range mission and give people back their time. So, it’s not a question of replacing the cars, all the cars, or all the ground transportation, different solutions for different applications. What you can do, it’s really provided another choice to the mobility, add in a very literal sense, another dimension to urban air mobility. So, when you need it, it’s there. And you’re looking at doing that in a very affordable and accessible way, and that address that point of capturing, and it’s just a teeny fraction of the ground transportation.
No need to really rethink all the ground transportation, but just capture a teeny faction. The day that you need to catch a flight. And you need to be there on time, that you want to go back home earlier because your kid’s birthday. And particularly in this new world, this new normal, where we do a lot of what we’re doing here, if you do conference and people working from home often. People are moving away from downtown sometimes to a bigger house, down skirt of the city, and not everybody can do that. So, the traffic congestion’s still going to be there, right? The people still need to go to the bakery shop and so on. So, the traffic still there, but with people doing that, it makes even more sense to go to the house once a week, twice a month. Flying from a more distant part of the town. To put in a very interesting way. Imagine also what the internet has done to us, right. You see data and content moving from A to B in a very streamlined, in a very integrated, seamless, and affordable way. And that did change our lives, our vision for the future. It’s nothing short of bringing that to the physical world with people and goods going from A to B in a very affordable, integrated, seamless way.
Jerry DeMuro: I would just add that the factors that are driving this, if you think about urban congestion. I think the UN has estimated that 50% of the world’s population lives in urban centers and of the 84 mega cities or urban centers around the world represents about 150 cities and 80% of the GDP. That congestion that exists in those cities or those urban centers is only going to give worse over time. And the daunting cost of upgrading ground transportation systems, which by 2040, I think I saw an estimate that said to build a mile of a subsurface railway is going to cost a billion dollars. It’s going to cost you tens of millions of dollars to build a mile of interstate highway as we would call it in the United States. So those imperatives are not going away. The social imperative also to green our transportation systems and decarbonize is there. So, all of these factors I think, are going to help accelerate acceptance. It will take some time as you pointed out for the market to mature, but those factors are not going away. And the cost of doing it another way is incredibly daunting.
Julian Klymochko: Yeah. It’s quite the incredible vision for the future in which perhaps we’re flying around in Evtol vehicles. So, I’m certainly looking forward to that. For investors interested in looking more into the story. The ticker symbol is Zanite, ZNTE, and then you indicated you expect the merger to close within 60 days, and then Eve will be up and trading on the market, so I wish you, Jerry and Andre, the best of luck. Thank you so much for coming on the show, sharing the Eve story with us, really exciting stuff.
Jerry DeMuro: Julian and Michael, thank you for having us.
Andre Stein: Thank you. Always a pleasure to talk about Eve and what you’re doing.
Julian Klymochko: All right, guys. Well, wish you the best of luck and we’ll be following it closely. Thank you.
Jerry DeMuro: Thanks for the opportunity. Very nice to meet you.
Julian Klymochko: You as well.
Michael Kesslering: Thanks guys.
Julian Klymochko: Bye, bye.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
