The Lion Electric Company Common Shares

Good morning, ladies and gentlemen. Welcome to Lions Electric's third 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. As a reminder, this conference call is being recorded. I would now like to turn the call over to Isabel Adrae, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Adrae.

Thank you and good morning everyone. Welcome to Lyon's third quarter 2021 results conference call. While today's call will take place in English, we would of course be delighted to answer any questions in French during the Q&A session. It will be a pleasure to answer all the questions in French during the question period. 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 risk, 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, they 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 and to the risk factors contained in our Non-Offering 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 with the documents publicly filed with the AMF and the SEC. Forward-looking statements only speak as of the date they are mailed. You are cautioned not to put on your reliance on forward-looking statements and we undertake no duty to update 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 companies or the book which are defined fully described and in certain cases reconciled in our earnings release and MD&A issued yesterday evening. 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. I am pleased to be here with you today to discuss our Q3 performance and provide an update on our business. A lot has happened since we last spoke, and more than ever before, we can feel that the switch to electrification is accelerating, as shown by the growth in our order book. As a reminder, Lion manufactures 100% electric medium and heavy-duty trucks and buses. Our vehicles, which have been on the road since 2016, are purpose-built for electric. We do not do any vehicle retrofitting. We are the leader in electric school buses in North America. We are the only OEM to manufacture purpose-built electric school buses in North America and one of the very few OEMs to manufacture purpose-built electric trucks. Also, we are exclusively focused on electric. We do not do hybrids nor any other powertrain systems than electric. And we have more than 450 all-electric vehicles on the road with more than 8 million miles driven. In addition to the vehicles that we manufacture today, we are currently developing eight new models, which we expect to launch in 2022. Our product development efforts leverage more than 10 years of focused R&D in the EV space. We firmly believe that concurrently manufacturing and distributing vehicles while developing new platforms uniquely positions Lion to leverage its first mover advantage and continue consolidating its leadership in the EV space as the future clearly is electric. Here are the three elements I would like to discuss on today's call before passing it on to Nicolas who will discuss our Q3 financial performance. First, we continue to see strong momentum in the shift to electrification in medium and heavy-duty vehicles, as evidenced by a rapidly growing order book driven by large multi-year orders, an increasing pace of repeat orders from existing customers, and continued very strong unprecedented support from policymakers. Second, the global supply chain challenges have impacted our ability to manufacture complete units and deliver complete vehicles in Q3. While we expect this external pressure to remain well into 2022, we have and continue to undertake measures to mitigate the impact on our production and performance. We will explain what these measures are and why we believe they are the correct ones. Third, we continue to execute on our strategic plan, including our two flagship projects, the development of new vehicle platforms, and the continued build-out of the Lion ecosystem and the Lion team. Let me start by elaborating on point number one, the strong momentum in fleet electrification. We see a clear movement towards fleet electrification, driven by strong societal and corporate will to eliminate emissions and reach carbon neutrality. This is further evidenced by all discussions happening at the COP26 summit, as an increasing number of stakeholders have pledged to reach net zero emissions and to implement initiatives to decarbonize the transportation sector, citing electric vehicles as one of the main tools already available to policymakers, companies and countries to fight the global climate crisis. This is reinforced by attractive policies and programs supporting fleet electrification, as well as by the potential for an attractive total cost of ownership due to significantly lower fuel and maintenance costs. Lion's impact on the zero emission industry in the United States and Canada is unmistakable. We continue to be a driving voice in policy, adoption, and education on the realities of zero emission transportation. Lion has pushed this market by delivering vehicles and removing arguments against this inevitable and history-making evolution in transportation. Whether it is our deployments and commitment to EV or the pressure we have put on the market to develop EV platforms, the U.S. and Canadian governments will not be talking about electric school buses without Lion creating this market in the U.S. and Canada over five years ago. All of these combined show a positive outlook for Lion specifically and for the global leading industry in general. This movement towards fleet electrification has led to an acceleration of customer dialogue and ultimately a rapidly growing order book for Lion. As of today, our order book consists of 2,024 vehicles, more than doubling since our release of Q2 results. It represents a combined total order value of approximately $500 million. Approximately half of these orders are deliverable between now and the end of 2022. Our order book includes 1,000 vehicles related to the conditional purchase order from Student Transportation of Canada. for which a funding application has been submitted under Infrastructure Canada Zero Emission Transit Fund Program, or ZETF, a $2.75 billion program supporting fleet electrification in Canada. These 1,000 electric school buses will be delivered over approximately five years. As we continue to engage with customers around the ZETF, we expect to see more of these multi-year orders supporting large-scale fleet electrification. Of course, the ZETF is only one example of policies and programs supporting fleet electrification. In the U.S., policymakers at all levels of government are reiterating their commitment to electrification. For example, the infrastructure investment and jobs act which was passed by the house of representatives last week and is awaiting president biden's signature will unlock sizable funding support towards fleet electrification across the united states as it earmarked billions of dollars for electric vehicles and clean energy specifically this program includes a funding of $5 billion for the purchase of zero emission and clean fuel school buses through fiscal years 2022 to 2026. Half of this funding is exclusively reserved for electric school buses. The Act also includes $7.5 billion of funding for the deployment of charging infrastructure for electric vehicles. Although this is only the beginning, This represents the largest federal investment in EV in United States history. During President Biden's recent address to the nation, he specifically called out replacing all these old school buses with battery electric. And there is more. On October 28th, a new funding round of HVAP for an additional $62 million opened to applications, reflecting the enthusiasm of both public and private sector customers. On October 7th, the New York City Council confirmed its commitment to electrify all school buses by September 1, 2035. This applies to approximately 9,500 school buses, and these are just a few examples, among many others. If we specifically look at the Quebec market, the MTQ subsidy program, which we discussed last quarter, also had a very positive impact. Under this program, customers benefit from a subsidy amounting from $100,000 to $150,000 per vehicle. Additionally, since November 1st, 2021, every new school bus registered in the province of Quebec must be an all-electric school bus. To date, orders for close to 400 electric school buses benefiting from this program have already been confirmed as part of our order book. Additionally, The Quebec government announced during COP26 last week that its entire fleet, including heavy-duty vehicles, will be entirely zero emission by 2040, which represents a significant number of vehicles and implies that the province will not be buying other vehicles and electric vehicles starting in 2030. As a reminder, The Lion Grant team is ideally positioned to help our customers navigate and secure funding in this complex environment, as it is highly knowledgeable of existing programs and subsidies available on both sides of the border. Last, a word on our Lion Energy team, which also plays a crucial role for our customers. Selecting and installing charging infrastructure is a critical step in the customer's journey to electrify their fleet. Lion being a magnastic reseller and having secured the high inventory of charging equipment, we are able to offer a wide variety of charging equipment options to our customers, installed in a timely manner, even in the current environment of global supply chain challenges that is also impacting the charging infrastructure manufacturers. As of today, Our order book of 187 charging stations and related services represents a total order value of approximately $2.5 million, more than double the value disclosed last August. Both the Lion Energy and Lion Grand teams are pillars of the Lion ecosystem, which aims to handle all critical aspects of a successful transition to EV. To offer the best service to our clients, We continue to expand our direct service network and expect to have a total of 14 experience centers in operation throughout North America by the end of this year. We also recently announced the first Lion authorized service center that will complement Lion's experience centers for repair and maintenance in regions where a significant number of Lion vehicles are on the road. Last, in line with this approach, we launched a pilot with Dickinson Fleet a mobile service company to increase our service coverage in the Bay Area of California, where we have a large pool of customers. Let's now address the impact of global supply chain challenges on our Q3 manufacturing operations and deliveries. Like many other companies across industries and across the globe, global supply chain challenges impacted our operations and those of our suppliers. and ultimately hindered our ability to manufacture complete units and deliver complete vehicles. Despite our approach to overstock critical EV components, such as batteries and motors, our ability to manufacture complete vehicles became increasingly challenged as we advanced to the third quarter. As a result, we delivered 40 vehicles during Q3 and finished the quarter with 50 vehicles that were substantially completed as part of our work-in-progress inventory. To be clear, although our deliveries for Q3 were a significant increase compared to the 10 vehicles we delivered in the same period last year, this number was significantly below our objective. Let me spend a minute on our supply chain challenges. As mentioned last quarter, we were pleased to have secured inventory for critical components such as batteries, motors, and other more critical components. We were therefore not impacted by shortage for any of these parts. Talking specifically of batteries, we currently have more than 1500 battery packs on end and approximately 600 in transit. The main supply chain challenges we encountered were mostly due to shortage of typically less critical components. such as metal assembly, plastic components, adhesives, and wire harnesses, in addition to extended lead times for delivery of many parts and raw materials. All these parts, regardless of their size, are necessary for us to finalize and deliver our vehicles that include approximately 2,000 parts on each of them. In several other cases, our suppliers were the ones affected by raw material sourcing challenges and production slowdowns caused by labor shortages. The good news is that our teams have found solutions to address the challenges we encountered, and I would like to thank them for their agility in doing so. Let me take a minute to discuss some of the initiatives we have undertaken. First, we have accelerated the multi-sourcing strategy we already had in place. In parallel, The supplier relationships we have built over the past years have allowed us to quickly react to this uncertain environment and avoid total disruption in our supply chain. Not only did we remain in constant dialogue with our suppliers, but we multiplied and accelerated discussions to onboard new suppliers and increase supplier redundancy for specific parts. Our objective is twofold. Navigate through the current environment while at the same time garner long-term partnerships for ramp-up in production. Today, we are sourcing from approximately 500 suppliers as compared to 430 at the end of the last quarter. We have also increased reliance on local sourcing, which we will continue to do both in Canada and in the United States. Our objective is to keep developing a supply chain that will be as close as possible to our manufacturing plants. In addition to supplier redundancy, we also undertook several initiatives to unclog the supply chain, including sourcing raw materials directly on the app of some of our component suppliers. As an example, we acquired large quantities of specific coil steel used in the fabrication of our vehicles, bodies, and chassis directly from global suppliers and then distributed this material to our supply base. This creative strategy increased our short-term visibility and ultimately reduced our suppliers' lead time. We also increased in-house fabrication and even redesigned certain sub-assemblies to circumvent parts most affected by supply chain challenges, such as connectors used in the fabrication of our low and high voltage wiring harnesses. Our engineering and vehicle integration teams worked in unison to create, qualify, and integrate new and innovative low and high voltage wiring harness designs and control systems using readily available standard automotive components. In a nutshell, all the initiatives I just described enabled us to mitigate the negative impacts of the global supply. therefore keeping our manufacturing operations running, even if we had to delay some of our customer deliveries due to missing components. Many other OEMs could not do so and had to shut down their operations. The last point I would like to comment on in this section is the impact on the bill of materials. Although we have not been materially impacted this quarter, we expect to see some further pricing pressure going forward until the global supply chain situation goes back to normal. While we are confident in our ability to navigate through this challenging environment, we believe that this global supply chain crisis may persist well into 2022. Like anybody else, it is difficult for us to predict the exact moment things will go back to normal, but we will continue to take tangible actions to mitigate the impact of this crisis on our production levels. To conclude on this topic, Focus and agility are integral parts of our DNA. These are some of the elements that have helped us build our company over the last 13 years and position Lion as a first mover in the electric vehicle industry. We are confident that this mindset, coupled to the initiatives I just discussed, will both enable us to maintain production and improve the long-term strength of our supply chain, thus making us a stronger company. Let me now discuss other elements of our strategic plan, including progress on our flagship projects, vehicle development, and the Lion team. First, the Joliet facility. I am pleased to report that the construction of our Illinois plant, the largest factory for medium and heavy-duty electric vehicles in the United States and Canada, is going very well, with 90% of the Shell building now completed. We expect to take possession of the building next month. During the quarter, we also completed the detailed manufacturing layout and selected suppliers for critical equipment to be installed in the first half of 2022, which will trigger important capital expenditures. So far, expenditures towards the project have mostly been incurred by the landlord as building-related investments. We continue to expect vehicles to roll off the assembly line in the second half of 2022. Now turning to the battery facility and innovation center, which we refer to as the Lion Campus. Year two, we are very pleased with Q3 progress. During the quarter, we completed the detailed manufacturing layout and the technical programming of the battery facility and are now focusing on doing the same for the innovation center. We continue to expect the first batteries to roll up the assembly line in the second half of 2022. In conclusion, For both these projects, we are working with our suppliers and vendors to make sure ordering and installation timelines are aligned with our planned start of operations. We will continue to update you to our quarterly calls. On the new vehicle front, our team is making steady progress in the development of eight new platforms expected to be launched in 2022. which will mean that with 15 all-electric models available for sale, we will have the largest purpose-built product lineup in the industry. A few weeks ago, we were pleased to unveil the ESX ambulance developed in partnership with Demers Ambulances, a leading North American manufacturer of ambulance vehicles. This electric ambulance, which will be the first all-electric and purpose-built ambulance, will be mounted on the Lion 5 chassis. It is the result of five years of work between Demers and Lion. Under our agreement, Chansey will be manufactured by Lion and then sold to Demers. Demers will be responsible for the medical compartment, final assembly, and for selling the final product to the end user. The agreement with Demers contemplates the deployment of a minimum of 1,500 all-electric ambulances over the next five years. We believe that this type of agreement aligned with our channel sales model has a potential for significant volume leverage. Our sales strategy is to partner with high-quality equipment manufacturers and outfitters in target market segments that service our customers. Making use of the channel-partnered network can rapidly accelerate sales by leveraging established distribution networks in very specific verticals. In parallel, Lion will continue to use its direct sales team which will create a push-pull sales model to increase brand awareness and drive volume in target markets. As with other platforms, we expect the Lion 5 to be available by the end of 2022. Let me now provide a brief update on the Lion team. As of today, we have approximately 950 employees. As previously discussed, we currently have two-thirds of the required labor to manufacture 2,500 vehicles per year. During the quarter, the cadence of our recruitment efforts has been aligned with our production levels as we manage through supply chain challenges. As far as recruitment for the Joliet plant is concerned, we are finalizing the analysis of requirements and ramp-up based on our business plan and strategic dates. We expect hiring to accelerate in the first half of 2022. We are working with a similar timeline for the battery plant, for which critical positions and priorities have been identified. There again, we expect an acceleration of the hiring process in the first half of 2022. In conclusion, as you can see, we continue to make significant progress, even if supply chain challenges are currently creating temporary headwinds. We are optimistic that by focusing on building a solid order book, straightening our long-term relationships with our suppliers, being agile in our manufacturing process, and executing on our strategic projects, we are solidly anchoring the foundations of sustainable long-term growth. With that, let me now turn the call over to Nicholas, who will comment on our financial performance. Thanks, Mark. As Mark mentioned, although more affected by global supply chain challenges than we and our suppliers had expected, our teams continued to focus on the manufacturing and delivery front. During the quarter, we delivered 40 vehicles, including 28 school buses and 12 trucks. 28 of these deliveries took place in Canada and 12 in the US. This compares to 10 school bus deliveries in Q3 2020. As a result, Q3 2021 revenue was $11.9 million, up $9.3 million as compared to $2.6 million last year. Our gross profit amounted to negative $1.2 million, down $0.7 million as compared to negative $0.5 million a year ago. This quarter, the decrease in gross profit was mostly due to an increase in fixed manufacturing costs related to the ramp-up of production capacity, namely salary, benefits, and other overhead costs. Continuing with administrative expenses, they amounted to $10 million, including $4.5 million in non-cash share-based compensation, a decrease of $16.7 million as compared to $26.7 million in Q3 2020. This was mainly the result of significant decrease in non-cash share-based compensation of $20.8 million partially offset by an increase in expense and expenses reflecting our transition to being a public company and the expansion of our head office capabilities in anticipation of an expected increase in business. Selling expenses amounted to $5.2 million, including $1.5 million in non-cash share-based compensation, a decrease of $3.9 million as compared to $9.1 million in Q3 2025. The decrease in non-cash share-based compensation of $6 million was partially offset by the impact of the expansion of Lion's sales force, as well as an increase in expenses associated with experience centers. In Q3, we posted net earnings of $123 million. This was mainly as a result of the decrease in the fair value of share-warrant obligations related to the lower Lion share price at the end of the quarter. Adjusted EBITDA was negative $8.8 million for Q3 compared to negative $2.8 million in 2020. Adjusted EBITDA includes adjustments for certain non-cash and non-recurring items, namely change in fair value of share-warrant obligation, share-based compensation, and other non-recurring expenses. Let's now discuss cash flow. Cash flow from operations for Q3 were negative $30.7 million, inclusive of $22.8 million of changes in working capital, as we continue to scale the business and overstock critical components that mitigate global supply chain challenges. During the quarter, acquisition of intangible assets, which mainly consist of R&D activity, amounted to $9.5 million, up $5.1 million as compared to $4.4 million last year. CapEx increased to $5 million as compared to $0.7 million last year. We expect CapEx to increase significantly after we take possession of the Joliet Illinois building in the fourth quarter and start installation of critical equipment, as well as continue to build our battery and innovation centers. Last but not least, our balance sheet remains solid. We ended the quarter with $318 million in cash and access to a committed revolving credit facility in the maximum principal amount of $100 million, as well as support by the Canadian federal and Quebec governments of up to $100 million in connection with the planned construction of our battery manufacturing plant and innovation center, which we refer to as the Lion Campus. In conclusion, although Q3 deliveries were below our objective, we will continue to take tangible action to mitigate the impact that global supply chain challenges will have on our production, and we will continue to focus on purchase orders, production, and delivery. Back to you. Thanks, Nicolas. Before we open the lines for questions, let me conclude by reiterating that agility and flexibility are what has helped us during the last 13 years to build the strong company we are today. Although currently impacted by elements outside of our control, our focus has enabled us to be a leader in the commercial lead industry and one of the only companies with 100% electric vehicles on the road as we speak. I can assure you that, as a team, we will continue to focus on what we control namely executing our strategic plan and on putting in place all the elements for long-term, sustainable, profitable growth. As the 2021 United Nations Climate Change Conference comes to an end, it is crucial that we collectively continue and accelerate the decarbonization of transportation. The positive trend to electrification which is an underlying condition to that successful shift, clearly is happening now as we speak, and we will continue to support this forward momentum.