The Lion Electric Company Common Shares

Good morning, ladies and gentlemen. Welcome to LION's second quarter 2021 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question during the session, you'll need to press star 1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Isabel Adjaye, Vice President, Investor Relations and Sustainable Development, Please go ahead, Ms. OJ.

Thank you and good morning, everyone. Welcome to Lions' second quarter 2021 results conference call. Bienvenue à la conférence téléphonique sur les résultats financiers du deuxième trimestre de l'année 2021 de Lyon. While today's call will take place in English, we would of course be delighted to answer any question in French during the Q&A session. Although today's call will mainly be in English, we will be happy to answer any question in French during the Q&A session. With me today are Marc Bédard, our CEO funder, and Nicolas Brunet, our Executive Vice President and Chief Financial Officer. Before we begin, I would like to mention that during the call, we will make certain forward-looking statements regarding our future business expectations, which involve risks and uncertainties. Forward-looking statements are predictions, projections, and other statements about future events that are based on current expectations and certain material factors and assumptions, and as a result, are subject to risk and uncertainties. Many factors could cause actual future events to differ materially from the forward-looking statements on this call. For more information about factors that may cause actual results to materially differ from forward-looking statements, please refer to our filings made today and to the risk factors contained in our final prospectus dated May 5, 2021, filed with the Autorité des Marchés Financiers. and to the registration statement on Form F1 filed with the Securities and Actions Commission and declared effective on June 14, 2021. You can also consult other documents publicly filed with the AMF and the SEC. Forward-looking statements only speak as of the date they are made. You are cautioned not to put on your reliance on forward-looking statements. and we undertake no duty to audit this information unless required by law. Finally, please note that we report in US dollars and under IFRS. Comments today may refer to certain non-IFRS financial measures, such as adjusted EBITDA and certain performance metrics, such as the company's order book, which are defined, further described, and in certain cases reconciled in our earnings release and MD&A issue this morning. With that, I will now hand the call over to Marc Bédard. Marc?

Thank you, Isabelle. Good morning, everyone, and thank you for joining us this morning. If I had to provide the title for our Q2 conference call, it will be, despite the pandemic, Ryan is delivering strong results and is executing its strategic plan in a very organized and timely manner. Let me first remind you who Lion is. We manufacture 100% electric trucks and buses, no hybrids. We are solely focused on electric technology. No fuel cells, no CNG, no propane. Our vehicles are purpose-built for electric. We don't do retrofits. There are mainly three key elements that I would like you to remember from today's Q2 results announcement. Number one, we continue to see great momentum in client dialogue, which is translating into accelerated purchase orders and deliveries. Lion is one of the very few companies in the EV industry that is currently delivering vehicles and charging infrastructures while executing its growth plan. In our list of Tier 1 customers, such as Amazon, IKEA, Canadian National Railways, Sobeys, Con Edison, Heritage, First Student, National Express, STA early unified school district keeps growing and continue to validate our unrivaled leadership in the market. Number two, we continue to advance the development and commercialization of new platforms, and we're planning to launch eight new models by the end of 2022 for a total of 15 all electric models, the largest product lineup in the industry. Number three, We continue to achieve important milestones on our strategic plan, namely the construction of our Joliet Illinois manufacturing facility with a capacity of 20,000 vehicles per year, the construction of our battery plant and innovation center, as well as multiple eye rings across the company. All this within our announced timeline, despite the pandemic. In a nutshell, We are building up the entire organization to continue to execute on our strategic plan, all this while benefiting from an unprecedented favorable legislative backdrop, both in the United States and in Canada. I will now provide an update on each of these items, and I will then pass it on to Nicholas, who will discuss our financial performance for the second quarter. Let me start by discussing our deliveries and purchase order book. During Q2, we delivered 61 vehicles as compared to 22 last year, an increase of 177%. These deliveries consisted in 13 trucks and 48 buses. 41 of these vehicles were delivered in Canada and 20 were delivered in the U.S. I am pleased to see continued momentum in deliveries despite the impact of the pandemic. as important to us as deliveries or purchase orders, as they give an indication of upcoming deliveries and related revenues. As of today, our order book totals 965 all-electric vehicles, consisting of 703 buses and 262 trucks, representing a combined total order value of over $280 million. We expect that the majority of these vehicles will be delivered within the next 12 months. Great new client wins in the order book include customers such as Green Mountain Power, Dan Ross, Zoom, and Casella Waste Systems, just to name a few. The order book also includes a new order from Amazon for 15 Lion-8 tractor trucks. It also includes a repeat purchase order for 35 Lion Seat buses from the Prince Edward Island Provincial Government, positioning Lion as the lead electric OEM in this province, with a total of 47 electric school buses. Let me be very clear, this is an order book, not a pipeline or a backlog. The continued momentum in our order book stems directly from our ability to leverage the full-line ecosystem that is tailored to electric vehicle fleet operators, as we have now been doing for many years. This includes a direct sales force that is highly specialized in EVs, complete infrastructure sales and support through Lion Energy, as well as leveraging our experience center network in our grant team. Speaking of grants, we continue to see an unprecedented favorable legislative backdrop to promote EV adoption, both in the United States and in Canada, with a true desire by government officials to support a cleaner environment through tangible EV grant programs. For example, our order book includes numerous school bus orders for which customers have benefited from the $250 million subsidy program launched by Quebec MCQ last April. In fact, 16 buses have already been delivered under this revised program. As a reminder, under this program, customer benefits from a subsidy amounting from $100,000 to $150,000 per vehicle. What matters to us even more than the amount of the subsidy is the objectives set by the government. They committed to having 2,600 new electric school buses on the road within the next three years. and to electrifying 65% of Quebec's school bus fleet by 2030. Additionally, starting on November 1, 2021, every new school bus registered in the province of Quebec will have to be an all-electric school bus. We are convinced that the subsidy program approach favored by the Quebec government is the right one to accelerate the transition to electric vehicles and that it will have a major impact on many other province and state legislations with respect to accelerated EV adoption. We also believe that Lyon is uniquely positioned to deploy school buses as part of this program. Another notable EV incentive program you have all heard about is the California HVIP-1, which opened to new voucher requests lately with $96 million for the purchase of commercial electric vehicles to be registered and operated in California. And Lion is one of the leading applicants into the HVAC program. Earlier this week, the US Senate passed the Bipartisan Infrastructure Investment and Jobs Act, which includes $5 billion of funding towards the replacement of existing school buses with clean and zero-emission school buses. With this vote, we are getting one step closer to unprecedented funding for initiatives targeting reduction in transportation emissions and charging infrastructures, which is very good news for our industry. Shortly after the end of the quarter, the California legislator and Governor Newsom signed a budget bill to further promote the adoption of zero-emission vehicles. Under this new bill, The allocation of $2.7 billion for zero emission vehicles and their infrastructure in the state budget in 2021 and 2022 was authorized. This $2.7 billion in funding is intended to put 1,000 new zero-emission trucks, 1,000 new zero-emission school buses, and 1,000 new zero-emission transit buses on the States Road and will support the rapid growth of charging stations across California. Lion, being the electric school bus leader in California and in North America, and also adding an unparalleled lineup of electric trucks available now for delivery, is very well positioned to tap into this program and continue to deploy electric vehicles in California in a timely manner. Last, only three days ago, the Canadian government further clarified the terms of its previously announced program and confirmed that through the Zero Emission Transit Fund, it will be investing $2.75 billion over five years to support public transit and school bus operators' plan for electrification. This much awaited announcement will support, among other initiatives, the purchase of 5,000 zero-emission buses. Navigating this grant environment requires a clear and thorough understanding of all the programs available. Over the years, Our Lion grant team has established lines of communication with key governmental bodies providing grants and subsidies, including the MTQ, the California Energy Commission, and CARB, to name a few. Being able to support our clients throughout the whole process with our Lion grant team is one of the items that sets Lion apart from competition. Let me now spend a minute on other elements of the Lion ecosystem. Our Lion energy division which has its customers with selecting, purchasing, project managing and deploying charging infrastructure ahead of vehicle delivery also continues to gain momentum. In less than a year of operation, it has already generated revenues of more than half a million dollars. As of today, The Lion Energy Order Book stood at 73 charging stations and related services, representing a total order value of approximately $1 million. This includes an order for 35 charging stations from the government of PEI, which we announced earlier this week. As a reminder, we are agnostic when advising customers on their infrastructure needs, and we are a reseller for different types of charging stations, including from ABB, ChargePoint, slow add energy, blink, and UV with a full lineup of level two and three charging solutions. Finally, a word on our experience centers, which are dedicated spaces where customers, policymakers, and other transportation industry stakeholders can drive our electric trucks and buses, learn about their specification and advantages, meet Alliance sales representatives, discuss grant and subsidy assistance, receive vehicle training, and have existing vehicles serviced. We currently have eight Lion Experience Centers in operation across North America and expect four new ones to be in operation in Virginia, Minnesota, Tennessee, and Vermont by the end of the year. We are also simultaneously working at securing additional facilities to continue to expand our experience center network. Let me now provide an update on the execution of our strategic plan. First, our Joliet Illinois manufacturing plant. I am pleased to report that the shell building of our 900,000 square foot facility is approximately 80% completed. We have pictures showing the plant in our Q2 2021 results slide deck that you can find on our website. Completion of the construction of the building is still planned before the end of this year. We have retained Colliers International as construction project manager and Merkur as advisors to assist us with global project planning, as well as for the selection and commissioning of production equipment. As a reminder, Our highly automated production facility will have a production capacity of 20,000 vehicles per year in full operation. It will be the largest dedicated production plant for zero-emission medium and heavy-duty vehicles in North America and Lion's biggest footprint in the United States. It will give us the ability to meet increasing demand in the marketplace for made-in-America zero-emission vehicles. Everything is going as planned, and the initial vehicle production is expected to begin in the second half of 2022. Now, turning to our battery plant and innovation center. During the quarter, we officially announced that our battery plant and innovation centre will be located at the YMX International Aero City of Mirabel, which is about 20 miles from our current manufacturing site near Montreal. This project is well underway. Works such as geotechnical work, environmental studies and permitting are currently being performed, while on-site construction has already begun. We have retained Pomerlo, a flagship corporation in the Canadian construction industry, as project manager and general contractor for the construction of the battery plant and innovation center. In parallel, we have also retained JR Automation, an Itachi company, for battery manufacturing automation and equipment selection. Here again, I want to confirm that we are on track with the previously announced timeline and that the initial production of battery modules and packs is planned for the second half of 2022. Once fully operational, we expect an annual battery production capacity of 5 GWh, enough to electrify approximately 14,000 of Lion's electric trucks and buses. Producing our own battery modules and packs will be a key strategic differentiator, and it should result in significant cost savings, provide full control over battery specs and dimensions, and remove key supplier dependency. The third element of our strategic plan relates to the Lion team. We continue to improve our team on all fronts during Q2. As of today, Our total headcount amounts to approximately 900 employees, of which approximately 270 in engineering and R&D. We also recently started the hiring process for the Joliet manufacturing plant, and we'll update you on that process in the quarters to come. In our management team, Brian Pearns joined us as our Chief Commercial Officer, François Beaulieu as our Vice President Chief Information Officer, and Natalie Giroux joined our leadership team as our Vice President, Chief People Officer. Last, I would officially like to welcome Mr. Lorenzo Rocchia, who recently joined Lions Board of Directors. Lorenzo is the Chairman of Transatlantic Holdings, an international financial holding company. He also co-founded Transatlantic Power and Skyline Renewables, one of the largest energy renewable companies in the United States. We are looking forward to benefiting from Lorenzo's expertise. Before turning it to Nicholas to comment on our financial performance, I would like to briefly discuss our supply chain. Like many other automotive OEMs, we are currently being impacted by an increase in the cost of certain components required to build our vehicles. This cost increase is mostly due to higher costs in the steel parts and harnesses, and also in the freight costs in general. This increase has had a marginal impact on our bill of materials as of today. We are also impacted by longer lead times on several components. Our approach to minimize delays and limit any cost increases is to overstock several key components, and we are grateful we adopted this philosophy even before the pandemic thanks to our long-term experience in EVs and to our vertical integration strategy. For instance, we currently have inventory on-end of over 1,000 battery packs with numerous additional shipments already scheduled for the rest of 2021 and additional significant quantities reserved for 2022 and also 2023. Additionally, our inventory of battery modules is sufficient to build approximately 240 additional Lion batteries. We also have several long-term agreements with other key suppliers, and in most cases, we have supplier redundancy for critical components. Our strategy of working in two markets, buses and trucks, serves us very well in this regard, given the commonality of many components that can be used on most, if not all, of our models. Altogether, we have been able so far to maintain a good production rate with few production delays, while experiencing a slight increase in our material and freight costs. We are confident in our ability to significantly reduce our cost base when the global supply chain situation returns to normal. With that, let me now turn the call over to Nicolas, who will comment on our financial performance. Thank you, Marc.

Despite a volatile economic environment, I am pleased with the progress our team continues to make. There are a few elements I would like to highlight before I comment on our Q2 2021 financial performance. First, as we close the transaction with Northern Genesis Acquisition Corp on May 6, results presented for the second quarter consolidate those of NGA and are on a post-transaction basis. Second, the closing of the transaction has resulted or will result in the elimination of certain liabilities on our balance sheet and certain non-cash items on our P&L namely as it relates to retractable common shares, convertible debt, and share-based compensation. I will further address these items in a moment. Let's now go into the details of our Q2 2021 performance. As mentioned by Mark, we delivered 61 vehicles in Q2 2021, including 48 school buses and 13 trucks. 41 of these deliveries took place in Canada, 20 in the U.S. This compares to 22 school buses delivered in Q2 2020. As a result, revenues for Q2 2021 were $16.7 million compared to $6.1 million in Q2 2020. Our gross profit was at 5% of sale, or $0.9 million, down $0.1 million as compared to $1 million in Q2 2020. The decrease is primarily due to the impact of increased fixed manufacturing costs related to the ramp-up of production capacity for future quarters and, to a lesser extent, to an increase in raw material costs. It is, of course, partially offset by the positive gross profit impact of increased sales bonds. Let me provide more granular information on this, as we believe that over the long term, once we are ramped up to runway production, this will be a key indicator to look at. As previously explained, we are significantly investing and preparing for sustainable long-term growth and profitability. Consequently, salaries, benefits and other overhead costs have and will continue to have an impact on our gross profits and related margin as we work to increase our capacity. This will be the case until we reach production levels that are commensurate with our cost base in anticipation of recurring and increasing demand over the long term. To give you a better idea, we estimate that our overhead and direct labour costs on a per vehicle basis are currently four to five times higher than the cost per vehicle that we expect to incur once we reach run rate production.

Nicholas, please let me chime in here with a comment on our gross margin. We have shown our ability to achieve healthy gross margins in the past, with our gross margins amounting to more than 30% in 2019. we are confident that we will return to industrial-leading gross margins once our production reaches the targeted levels we are currently investing for.

Thanks, Mark. Continuing with administrative expenses, they have increased by $48.9 million to $50 million, primarily because of a significant increase in non-cash share-based compensation of $44.5 million and in expenses reflecting Lions' transition to being a public company. Last, costs related to the expansion of Lion's head office capabilities in anticipation of an expected increase in business also had an impact. Net of share-based compensation, administrative expenses were $5.2 million. Selling expenses increased to $13.3 million, up $12.5 million as compared to Q2 2020, primarily because of a significant increase in non-cash share-based compensation of $10 million. Expansion of Lion's sales force as well as an increase in expenses associated with Lions Experience Centers. Net of share-based compensation, selling expenses were $3.3 million. Net loss for Q2 amounted to $178.5 million, inclusive of $99 million in non-cash change in fair value of warrant obligation, $55 million in non-cash share-based compensation, and close to $14 million of transaction costs related to our combination with NGA and related public rent. Adjusted EBITDA was negative $5.5 million compared to negative $0.1 million in 2020. Adjusted EBITDA includes adjustments for certain non-cash and non-recurring items, which I just discussed, namely change in fair value of share warrant obligation and share-based compensation, as well as transaction and other non-recurring costs. As I alluded to at the beginning of my remarks, the closing of the combination with NGA and related public listing has resulted in a number of changes in our financials going forward, which for the most part will simplify our reporting. Let me take a few minutes to explain these changes. The 18 million shares, which were previously treated as a liability due to a put right by one shareholder, were reclassified to equity as the put right was eliminated upon closing of the transactions. In relation with this, the accretion expense related to this, which was included in financing costs up to this quarter, will no longer be incurred. With the cash settlement option in the company's stock option plan removed at closing, the liability for share-based compensation was remeasured to fair value at May 6, 2021, with changes in fair value recognized in net earnings this quarter. The resulting fair value was transferred to contributed surplus within shareholders' equity. Going forward, Share-based compensation expense for existing options will no longer vary with the share price, and we therefore expect a significant reduction in such non-cash expense over the coming quarter. With all convertible debt and all credit facilities repaid, other than an $11 million loan backed by government subsidies for vehicles ordered, we expect financing costs to decrease significantly in the next few quarters. Let's now discuss cash flows. Cash flow from operations for Q2 stood at negative $40.7 million, inclusive of $19.7 million of changes in working capital as we continue to scale the business and overstock to mitigate any potential supply chain issues, as Mark mentioned earlier, as well as $13.7 million of transaction costs related to the combination with NGA and related public listings. During the quarter, acquisition of intangible assets, which mainly consists of R&D activities amounted to $10.7 million, up $8.2 million as compared to $2.5 million last year. CapEx remained low at $3.3 million as compared to $0.4 million last year. We expect CapEx to increase significantly over the coming quarter as we start purchasing equipment for the Joliet vehicle plant and the battery facility. Let me now speak to select balance sheet items. First, we ended the quarter with $364 million in cash and approximately $11 million in debt facilities. As previously announced, we entered after the end of the quarter into an agreement for a revolving credit facility of up to $100 million. Although we do not have immediate need for it, this credit facility is available for working capital, capital expenditure requirements, and general corporate purposes if and when needed. We continue to feel confident about our ability to realize our growth project with the liquidity currently on hand. Separately, we have added on our balance sheet the liabilities related to the NGA warrants, which were converted to line warrants. Altogether, the warrants liability stood at $297 million on our balance sheet. This liability is expected to fluctuate from quarter to quarter based on line share price, with the change in valuation going through the P&L as a non-cash gain or loss. My last comment before turning the microphone over to Mark will be a brief one pertaining to our long-term financing solutions program. We believe that the ability to secure financing for our customers' purchase of our electric vehicles is an important aspect to ease the transition to EV for our customers, as it significantly smoothens the cash flow profile and in many cases allows the customer to benefit from a favorable TTO from day one. We currently have attractive financing options tailored to easy that we offer clients via partnerships with third parties. We are continuing to work on a more programmatic approach, not only for vehicle financing, but also for the monetization of credit on behalf of our clients. We are in dialogue with both the private and public sectors on both sides of the border to that effect. We will update you as we progress towards building the Lion financing solution, which will ultimately aim to further accelerate our purchase order book and pace of delivery. In conclusion, we are pleased by Lion's second quarter results and expect continued growth in purchase orders, production, and delivery.

Thank you, Nicolas. Before we open the line for questions, I would like to insist on the fact that we are very excited by the trend we are seeing in orders and deliveries, as well as in the timely execution of our strategic plan. We have been able to achieve all of this while working in a very challenging environment because of the pandemic and while becoming a public company. As previously mentioned, in the next few months, we will, first, continue to focus on our customers and on working with fleet owners to provide them a turnkey solution and help them navigate the transition to electric in full confidence. Second, we will keep executing our strategic plan in a timely manner We will finalize the construction of our Joliet Illinois plant and will continue to advance the construction of our 5 GWh per year battery assembly plant and innovation center. Third, we will keep attracting the best talent, make strategic hires, and strengthen the team to successfully execute on our plan to always be better and always go faster. With that, let's now open the lines for questions.

And as a reminder, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question comes from the line of Benoit Poirier with Desjardins.

Hi. Good morning, Mark. Good morning, Nicolas. And congratulations for the quarter and also the ramp up. Yeah. Good morning, Benoit.

Good to talk to you.

Yes. So looking at the current pipeline of deliveries, Ed, would it be fair to expect more deliveries in Q3 and Q4 versus Q2? Or is there some seasonality to take into consideration?

Yeah, that's certainly what we're aiming for then, and we're expecting a continued ramp-up in POs and deliveries as well. So no seasonality to think of right now. We're focused on continuing to grow.

Okay, perfect. And could you talk about the reliability or feedback on the truck delivery so far in Persef? Obviously, the Amazon follow-on order is a very positive sign, but just curious to get the feedback on the truck so far.

Hey, Ben, it's Nick again. You know, related to Amazon, we're going to stick to disclosing the purchase orders and the deliveries, so we'll... You know, we'll keep the dialogue on the trucks between them and ourselves. Obviously, it's an important relationship, and their operations will be about them to disclose. But obviously, we'll please announce the new order for the YAP.

Yeah, and then with respect to the other deliveries, we're getting very good feedback. It's obviously a new product with a technology we've been using for many, many years. You probably remember the commonality we have between our platforms, and I think this is serving us very, very well right now.

Okay, that's great. Then last one for me. In terms of working cap, Nicolas, how should we expect the working cap evolution to evolve in the second half?

Yeah, I mean, we should expect to continue to invest in working cap. As Mark mentioned previously, the way for us to mitigate the current supply chain issues has been to overstock. We've been doing that for a while, and this will continue. And, you know, we're pleased to invest in working cap to allow for more delivery and then to result in more supply. have more sales. So we do expect an increase there in the coming quarter.

Okay, perfect. Okay, thanks for the time, and I'll pass the line. Thank you. Thank you, Manuel.

Your next question comes from the line of Jonathan Lemires of BMO Capital Markets.

Good morning. Hey, Jonathan. Good morning, Jonathan. Yeah, on the recent U.S., state-funded awards, including the California HVIP. How have Lions' win rates been so far? Is that something you can comment on?

Yeah, look, we'll certainly keep the comment high level, Jonathan, that there were two additional rounds of HVIP applications, one in June and one in August. I think they'll publish eventually the applications. We'll let them speak to the members. I would say we had a very good two rounds of applications. We're very pleased. Lots of clients demand, and it's a program that we think works very well, very efficient. And so, yeah, I'm very pleased with the applications.

And do you expect to learn the results of your partner's applications?

In some cases, we have, and some of them have already been approved. And so, yeah, we're, you know, it's an ongoing process. And like I said, we'll, you know, HBIP does publish the vouchers, so we want to, you know, respect their doing that in their timing. But, yeah, I'm pleased with the applications.

Thanks. And in the U.S. Go ahead. Oh. How do you expect orders to build ahead of the new Joliet assembly facilities ramp? And second part to this question, have you had any feedback from customers on the U.S. Senate infrastructure bill? Will customers be waiting until the funds are available before placing second orders?

Yeah, great questions, Jonathan. What would you say to the PO's rent? We've hired a few months ago Brian Tern as our Chief Commercial Officer, and it's going very well. You see the purchase, well, you see the order book right now, 965 units, which is quite good, which sells over $280 million. So that's very good right now, and that's despite everything that happened in the last year. Now, with respect to the orders for the trucks, for example, I mean, the people will see more and more of those trucks. on the streets and this is really helping us and this is what happened with the school buses as well. It started slowly and then there was a major ramp up and we see a very serious dialogue with the customers and we see customers that are also very sophisticated in terms of total cost of ownership And we've been doing this for many, many years. And we understand that going electric and having a smooth transition goes with making money with those trucks and buses. And our customers, they get that. And so we are seeing a great momentum in those discussions. So really looking forward to build, I mean, this order book even quicker, you know, than we've been doing in the past. Nick, do you want to take that?

The second question was about the infrastructure bill, Jonathan.

Just how customers are – just if you have any feedback from customers on the bill – I'm curious whether customers will wait until those funds are available before placing follow-up orders.

I don't have any specific customer feedback on those. I think everyone that's in the school bus space and everyone in the public sector around this, it's very clear that there will be very significant amounts deployed towards school bus electrification. And, you know, it's not just the bill. It's the general support and the mission to electrify school buses. So, you know, overall, it's a very positive bill and program. And I'd say that, no, we don't, you know, we're seeing dialogue for electrification now, and you can't just, you know, turn the dial and make it happen at the snap of a finger. So the movement's happening, and parties are engaged now. on electrification.

Thanks. I have one last topic if I can. Just on the battery pack and the new battery plant that's ramping. Mark, can you compare Lion's current small-scale battery pack assembly operations to the more automated operations you're planning for the large new battery plant? Some investors... are concerned about the potential challenges you might face as you ramp that new plant?

Sure. Yeah, we've been doing battery packs, Jonathan, as you know, for the last six, seven years. and uh i think again this is serving us very well and and um many of the you know the key components within the battery pack uh we've been mastering me for many many years and one of those is the bms the battery management system which is like the brain of the battery pack and we have our own uh we've been using our own bms for many many years and uh this is what we will keep doing so obviously you know manufacturing our own battery packs Using our own BMS is kind of the same thing we will be using, but at a very high scale. And the big difference, obviously, it will be the number of units we will be manufacturing, and that's one of the reasons We partner with JR Automation, Itachi Corporation. And if you look at what they've been doing, I mean, most of the major battery plants, the biggest in the world, I mean, they were involved. And at some point, they were doing the project management of those plants. So we decided to partner with the best. people in the industry. And we've been at this for a while now. And this is why we feel so good about the timing of that. So, I mean, it will be something like probably a bigger challenge if we will just start doing battery pack that some people, you know, might be thinking of doing at some point. But since we've been doing this for six, seven years, we feel great about that.

Thanks for your comments. Thank you.

Your next question comes online from Michael Glenn with Raymond James.

Hey, good morning. So I just want to come back to the battery plant discussion because you see news flow regarding some of the investments that are going in right now. I mean, you're talking about billion-dollar investments being made by large companies to build battery manufacturing plants at scale. So how do you think about the cost profile of your facility once it's up and running, do you feel confident that you're going to be able to continue producing at a competitive cost versus some of the new investments that are going in?

No, we do, Michael. And it's a good question. I mean, we've had that question a few times in the past, and I think there's a little bit of confusion between what we're doing and what some other companies are doing. When you're talking about billions of dollars of investments, we're talking about companies investing in themselves. So they will be manufacturing their own cells, which we will not be doing. We are buying the cells and, as you know, putting them into modules and then modules into battery packs, which is quite different. So the budget we have for the automation of this battery facility is quite significant. I mean, as I said just earlier, I mean, we're doing business with the best and state-of-the-art technologies and many of those, you know, technologies are Our proprietary components of Lion. So, yeah, our cost will be very good and obviously will be impacted, you know, by the cost of the cell. The cell is a major part of the overall cost. of the battery pack at the end of the day so we really enjoy uh you know what we've been hearing and some of the investments in the united states in this regard that's going to cost on the on the freight income as well that this is also going to increase the uh the us content into what we are doing and uh we are pleased about that have you indicated at all the

What type of cost savings, have you quantified that at all? What type of cost savings do you expect to achieve once the facility is at run rate capacity?

Yeah, no, absolutely. We did in the past, Michael, and we're thinking about cost saving of about 50%. So major, major cost savings if we do compare with the battery pack that we've been buying from third-party suppliers.

Okay. And just circling in on Illinois, the facility, and you've highlighted some of the supply chain shortages taking place. So we read about these supply chain shortages right now across so many areas. So how do you prepare yourself? I mean, getting this plant up and running is obviously challenging. critically important for you. Do you have any concerns regarding your ability to take possession of the equipment necessary to get that plan up and running in that time? It is a tight timeline that you're talking about. So I just wanted to get some insight into that.

Yeah, good question, Michael. And again, I mean, we've been manufacturing electric vehicles for about almost six years now. And I think, again, this is helping us a lot. I mean, and you, OEM, trying to get into the market and make all the processes to do the EV vehicles, I mean, that will not be easy. Since we've been doing this for many, many years, and since we are doing this, And we are also in a relationship with all of those suppliers, including all the Tier 1 suppliers. I mean, it's – I will not say it's like almost, you know, a slam dunk, but, I mean, obviously those suppliers are really looking forward at Lion running at full scale, and that will be great. So now what we're looking at doing – to cut the freight in as well. And also to be more and more local is to build the local procurement. This is what we're doing now at the Montreal factory, and this is what we will be doing in Illinois as well. So we started that already. We started doing some hires. in Illinois, so we will take the occupancy of the building before the end of the year this year, so this is great. And we are building the workforce at the same time that we are looking at local suppliers. So obviously, it's always a challenge that we don't want to, let's say, underestimate, but this is something we are doing on a daily basis and we've been doing for many, many years. Okay.

And then just some insight into the experience centers. You're talking about four additional, like what exactly will these look like? How many square feet will they be? Will they include things like service bays? Like what are these strictly sales centers? Just trying to get a sense of what they'll look like.

yeah yeah absolutely that and i mean we are expanding uh quite quite quickly right now we have eight we will be uh to 12 uh before the end of the year and we're looking at many many other states as well so we're basically you know following our our customers you you know we're doing b2b and the b2c so the uh you know A lot of the work, the maintenance work, the customer's request is being done by the mechanics of the customers. And any specialized work, we're doing this at the Experience Center. So all the Experience Centers are EV-focused only. So that's the first thing with all the technicians and the mechanics having experience in EV. We are doing ride-on drives. At the experience centers, we are doing the service as well. We're doing this kind of specialized service also. Let's say, you know, if anything happens, you know, with the battery packs or, you know, a specialized component, we are doing this as well. And it's also a place where you can see all the models. So you can ride a Lion 8 truck, a Lion 6 truck. You can ride, you know, the buses as well. So even if you are in there, I mean, by a bus, but you're looking, you know, at the trucks, and this is the kind of momentum we are building. So when you're going into those places, it's really a place where you can drive all those vehicles. And obviously, you know, when you are putting a truck and a bus on the road, you need to do some specialized maintenance at some point, especially, you know, with EV. I mean, you know, you need to take care of that if anything happens at some point. And we want to make sure that this bus and truck will be back on the road within a few hours. And this is what we have been doing for many years right now, and this is what we will keep doing.

Okay. Thanks for the insights. I'll leave it there.

Your next question comes from the line of Rupert Mario with National Bank.

Good morning, everyone.

Good morning.

So the order book grew this quarter and could sustain a higher rate of deliveries. Can you comment on what drove the pace of deliveries in 2020? In Q2, is it customer schedule or is it your production capacity? And if it's production capacity, how do you see that changing over the next few quarters and what's going to pace the increase in your capacity?

Let's talk about that. In terms of production capacity, we have a manufacturing capacity in Montreal of 2,500 units per year right now. You know that there are mainly two things. driving the manufacturing capacity. So it's a good thing. It's a great thing, I think, that we can manufacture 2,500 units per year. And it's in terms of equipment. So there's two things. It's really equipment and all of the infrastructure and also the labor. needed to do that and obviously we are ramping up the labor as need be with the orders coming in and the schedule of deliveries you know with the the dialogue we have with our customers then we're ramping up the uh we're ramping up the number of people we need to do that and you probably remember at the beginning of the year we had 450 people at Lyon right now we're at 900 people And we are ramping up pretty fast right now, 10 to 30 people a week, basically. And with the number of people that we have right now working in manufacturing, we're two-thirds of the way to reach the goal of 2,500 units. So I'm very pleased to say that we can manufacture those vehicles, and that we have two-thirds of the labor force to get to that 2,500 units capacity. So I think it's a great news. I think that I don't know any other OEMs, you know, that can say something like that. Now, in terms of deliveries, I mean, yeah, there have been, you know, a couple of challenges, as you guys have seen. you know, been seeing everywhere in the marketplace. To give you an idea, we have about 2,000 components on an electric bus, and you need all of those components to deliver the buses and trucks. The good thing is that what we've been doing for many years, that we've been overstocking. because EV is still at the early stage. So we've suffered a little bit from that, but it's very well under control. Now, everything else we're doing around manufacturing those buses is cheap, and this is why we call it the Lion ecosystem. because we need to make sure also that the charging infrastructure will be in place. And the pandemic had an impact on all of that, not only on the supply chain, but also on, you know, the charging infrastructure manufacturing. And, well, I mean, the good thing is that, you know, we are also overstocking the charging infrastructure so we can deliver in a timely manner And once you are controlling all of that, obviously the client dialogue and making sure this is the right timing for the customer. Well, everybody knows that a lot of the school districts were still closed in the last few months, so we had to deal with that. But, I mean, I think we were able to do very well having a very close communication with our customers. So despite this pandemic, despite all of the issues I've been talking about, we've been able to deliver those 61 units despite probably, you know, the worst crisis of the last 50 years.

Great. Thank you. And you talked about your gross margins improved quarter over quarter, and you are going to look to drive those much higher in the future, of course. And I realize the company is going to look very different in a few years. But I'm wondering if you can comment on your cost structure today. How much of your cost of goods sold is fixed operating costs? How much is variable? And what does the trajectory look like from here to get to your target margins? Do we see step changes, or is this going to be more of a gradual evolution?

Yeah, I can comment on this. Definitely gradual changes that we see. The biggest cost items in the COG is obviously the materials, but there's quite a bit of overhead in there. As I mentioned before, we're on a per-vehicle basis. The the overhead and the labor is much higher than where it will be at run rate. And so gradually that'll... And that's because we're investing in the future, of course. So, you know, at the detriment of current margins, we're wrapping up for future production, which is the end goal for us, right? That's future production and much higher ability. So, yeah, expect gradual changes and just a better absorption of our fixed cost base as we go over time.

What percentage of your costs today would be fixed versus variable, just roughly?

Yeah, on a sort of yearly basis, we pointed to that in the past. We talked about about 25%. Now, the thing to keep in mind is obviously we're growing the fixed cost portion right now in investing in the people in the overhead. So, you know, the mix of both growing the fixed cost base and at the same time growing the delivery, then ultimately increasing we expect that this will result in a much better absorption.

Great. And then just one more quick one. You talked about momentum in your client dialogue, and we have seen the order book grow, of course, but you mentioned that the backlog in the pipeline is also evolving. I'm wondering if you can give us some color on how the backlog and pipeline is evolving and any numbers you can give us maybe on how that is going relative to the order book.

Yeah, Rupert, as you know, we cannot give any specific numbers. I can tell you, I mean, the momentum is very good. And you saw probably the list of the tier one customers. we are dealing with. And it's so great, great customers that have a major impact on other customers as well. So we cannot give that number. We like to give real numbers. As I said at the beginning, this is really an order book. A pipeline or a backlog could happen or could never happen. And what we like about the order book is that, you know, this is confirmed. And we will be making those deliveries. And so this is a real number. So, you know, every time we're talking about pipeline and backlog, I mean, you never know what might happen. That might happen in a few years. So basically our job is to convert that discussion with the customer into a purchase order and report, you know, this in the order book that we can communicate with you on a quarterly basis. All right, very good.

I'll leave it there. Thank you very much.

Thank you.

Next question comes from the line of Naman Sati with Loreton Bank.

Hi, good morning, everyone.

Good morning.

So my first question is on your, it's more like a clarification question, but just ask your order book. Mark, did you say that this is going to get delivered over the next 12 months, or is that going to take longer than to fill this order book?

I said that most of the order book will be delivered within the next 12 months. Okay. The majority of it, yeah.

Okay. Okay, that's perfect. And secondly, just going back to the supply chain and delays in pricing pressure, I'm just wondering, the new plan that you're coming up with in Illinois and in Quebec, has any pricing or your cost estimates changed when you guys were getting into it and how sort of the market is evolving? Or is that something that you're protected with your partners?

Well, let me maybe start with this. I think, Norman, the fact that we've been detecting a lot of the major components that have been really helping us in terms of cost. So not only being able to make the deliveries to customers, but also in terms of cost, because we were kind of protected from some of this... of this crisis right now. And also, we do have a long-term relationship with those tier one suppliers. So they have an idea of where we are going. We are securing prices and pricing for the future as well. So we see our tier one suppliers as being very good partners of us.

Okay, that's fair. And just maybe a last one that's on the cost side. I know there is an element of operating leverage that's going to come in eventually, but just on the product side, when you guys are investing in R&D, has there been any progress apart from battery within your trucks where you've sort of reduced the cost or they're pretty much going to come from operating leverage only?

You're absolutely right. Obviously, it comes from scaling up, but it also comes from the R&D we're doing. I think the number of people we have right now, like 270 over the 900 people we have, and we will keep growing that. Also, you know what they're doing? Obviously, we're doing some product development, but most of the components we're using, even on the new products, are taking the benefit of what we've been doing in the last few years, but also always improving quality and always, you know, bringing down the cost. And those costs will be going down because of all the R&D that we are doing and using state-of-the-art technologies that we are developing. So you are absolutely right. And also it's going to be coming from what we're doing in the battery plan. So the battery plan we will be opening next year will be a major cost saving, as we said earlier, because basically we're taking control over the module. And there's a lot of cost in the cell in the module. We're taking control over the module. So not only is it like better quality, but also we're bringing down the cost and we are managing the shortage of cells as well because we're going to the you know as you know we're going to the 21 700 cylindrical cells and uh we're getting right now into long-term you know supply agreements in this regard so it's really a mix of all of that securing the supply getting better products but also shaving the cost and this is what we're doing on a daily basis and this is what we've been doing for many years

Okay. No, that's great. And maybe I'll just ask one more. This is about line energy. So you guys are reselling some of these charges. I'm wondering if when you think of that part of the business, is that just to build up your order book and fasten that sort of transition to EV, or is that a business where you guys are making some profits as well?

Well, it's a mix of both because we are making profit. We are definitely making profit in this division, no doubt. And you're also right. I mean, the first goal of Lion Energy is to smoothen the transition for the customer. So to make sure that the charging infrastructure, I mean, will be the right one, first of all, at the right price. for the customer and also installed in a timely manner. And for any new coming OEM or dealer in the marketplace, that's a huge challenge. Just getting the charging infrastructure in time is a major challenge. So at Lion, we've been able to secure a lot of stock from many of the key suppliers for our customers, and our customers are pleased with that. So we do have the stock. We do have also the charging infrastructure to secure the deliveries, I mean, to make sure we will be able to – to deliver in the uh in the next 12 months as well and this is making a huge huge uh huge difference so lion energy yeah we're making profit but also we're smoothing the transition okay makes sense that's it for me and uh congrats on the good work that you're doing thank you thank you so much your next question comes from lana john lopez of vertical group hi good morning thanks very much for taking the questions good morning

Hi. So I just had a couple quick ones if I could. The first one, your CapEx was quite meaningfully below our model. It sounded in your prepared remarks like some of this is perhaps timing related, but excuse me, could you just speak to CapEx needs in the second half of this calendar year and then in 2022 as you ramp Joliet and as you ramp the battery factory in Quebec? Yeah, yeah, John. We're reiterating the same figures we put up before. So $130 million for the Joliet plant and CAD 185 for the battery plant here. Recall that out of this CAD 185, 100 is to come from the battery plant. government debt that we secured here. So call it on a net basis 70 million U.S. tier net of that debt for the plant. Now the capex has been low. Yes, it is a timing issue. So the capex you see there is really around the plant here in St. Jerome. We expect that in Q3, Q4, the CAPEX will start on both plants. It'll be a mix of deposits and commitments and expect that to be, you know, obviously lumpy given the type of equipment that will last, but those will be the big victories. Okay. Thanks, Alex. And sorry, just is it conceptually right to assume that $200 million will be spent between now and the end of 2022, just given the factory timings?

Yeah, that's absolutely right.

Yeah. Okay. That helps. And then secondly, and I guess somewhat relatedly, it sounds like in the filing that most of the costs, like in Joliet in particular, are not yet flowing through your financial statements. How do we think about that as the OpEx profile changes perhaps in the second half of the calendar year? Like, what are the line items we should look for and what kind of relative increases would you expect? Yeah, not much of this relates to the job. This will be capital expenditures. I mean, we do have what you're going to see on the balance sheet is an asset and a liability related to the lease engagement that we have there. But we don't expect that it will be OPEX until the plant is operated. So we don't expect much by way of OPEX this year. Okay, understood. Thank you. And the last one, I just wanted to come back to the gross margin quickly. I apologize because I know you've talked through this a little bit, but I want to ask it this way, and perhaps you can help us tease it apart. Deliveries were up like 3x year on year. gross profit is like down a couple hundred thousand dollars year on year. Even if we assume 25% is fixed and that is up a lot, it seems sort of tough to square. So just perhaps could you tease those various factors apart again? And what do you think is just the fixed cost side, perhaps anything on the inflation side? And then is there perhaps on a per-vehicle basis, are there any pressures that you would call out to us as we think about this period versus the year ago? Yeah, a couple of things. The 25% that we talk about is really on a full-year basis. And as I mentioned, we're growing that six-cost component. Last year, we were not in the – growth investment mode and so it really is a big in big part uh the the sixth component and the absorption of both overhead and labor i'd say john as well you've talked about inflation so that it had an impact yes but it's we've qualified as a marginal impact uh so it's not very significant um i also say that where you know the the What has an impact is the AFP and the mix of vehicles that we're selling. We tend to sell more garnished, more onboard energy vehicles in the U.S. than we do in Canada. And we had a more Canadian mix in this quarter relative to last year. So there's improvement potential at the ESP level and then at the volume level. But by and large, the biggest aspect right now is this investment in capacity that's affecting gross margins, both overhead and the quantity of the bill related to the labor market. Okay, understood. Thank you very much for all the thoughts. Thank you, John. Thank you, John.

Next question comes online with Benoit Poirier with Desjardins.

Yeah, so just looking at the product launches, you intend to introduce eight new models to be commercialized by the end of 2022. Could you maybe talk about the timing for those product launches, whether it's more skewed toward the back half of 2022?

uh yeah thank you uh thank you benoit so uh you know we've always said that we will be launching three additional models this year and five models in 2022 and uh we're still uh we're still uh online too uh with this timing and uh so we're talking about the uh the lion 8 bucket truck At the end of the year, the Lion 6 utility and also the Lion 8 tractor. And we are still looking at this timing to start delivering those trucks. So that's great news. We're working full scale on this. And you probably remember also that in 2022, we're talking about the Lion 5 truck. the Lion 7, the Lion V, the Boomtron, the ambulance as well. It's going very, very well. Some of them will be available earlier in the year. I can report that we've made significant progress on the Lion 5 and also on the ambulance, which is very good. Well, in fact, on all of them. So some of them will be launched. at the beginning of next year, and some of them will be mostly in the second half of 2022. So we're exactly, despite everything else, you know, that happened and the pandemic and everything, I mean, we're still online with the timing we've announced earlier.

Okay. And Mark, could you maybe provide additional details on their refuse truck venture? I know you're having a competitive advantage. It's a pretty strong market as well. So maybe just color on the refuse truck market and the pipeline of opportunities. That would be great.

Yeah, we're getting good orders, Benoit. We had some lately with Casella that we've announced also this morning. As you know, this is an electric buggy that is installed on our electric truck. Many OEMs are finding this right now. I mean, the challenge, you know, for the outfitters is quite significant to integrate, I mean, the current technology on the electric truck. So we've been working on this for many, many years, and it makes a huge difference because you can do the full day of operation on a single charge and also with the same energy system. And this is what the operators are looking for. They're not looking to have two charging stations to operate their refuse truck or any other truck as well. They only want to plug in with one charging station, and they want to make sure that when they start in the morning, they can do the full day of operation with the energy that they do have on board. And the electric buddy operation on our electric truck is very, very efficient, and that's one of the reasons why the operators can do over 1,000 stops in one day, and then they can do the full day of operation on this. So it's going very well, and we will begin delivering those trucks very shortly.

Okay. Thanks again.

Thank you very much.

Your last question. I'll come from the line of Jonathan Lemires with BMO Capital Markets.

Thanks. A follow-up on the near-term order trends and the school bus business. Mark, you mentioned a lot of school bus districts have been closed over the past two months. Has that had an impact on school bus orders? Do you expect school bus orders to trend up sequentially over the next couple of quarters? And is there any seasonality on the order side there that we should be aware of over the coming quarters?

Not really, Jonathan. I mean, the impact was more on the delivery side because at some point there was nobody at this whole district really. So we need to be respectful of the customer needs with this crisis. I mean, the priority was really safety of the people. So it was more, you know, kind of an impact on delivery. On the order side, not a lot of impact. It's going well. It's clear that everything you see in Canada and the United States right now, The whole market is going electric. You saw what happened in Quebec. Starting in November of 2021, you will not be able to register a bus that is not an electric bus, and we feel this is going to have major impact everywhere. You probably heard also the announcement from Mr. Trudeau. This week, you know, with the amount of money they are investing in buses and in school buses, Same thing on the U.S. side with Mr. Biden. So very promising. There's a lot of money out there. So for those who were still thinking at some point that elections might not happen, we're not hearing this anymore. It seems like we have a kind of consensus that this is absolutely happening, and now we have a dialogue with the customers on the timing of those orders. And, no, it's very, very promising. We're proud and we're glad that, you know, we made that decision of starting our business with the electric buses five, six years ago. We felt that was a pretty smart choice back then.

Okay, thanks for your comments. Thank you, Jonathan.

And this is all the time we have for questions. I'll turn it back over to Isabel Ajay for closing comments.

Well, thanks, everyone, for joining us today. This is all the time we have, but we are really looking forward to continuing the discussion, and I invite you to get in touch with me for any follow-up questions that you may have. Have a nice day.

Thank you.