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.

Operator, please go ahead with the journey session, please.

If you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star then the number one. And your first question comes from Kevin Chang with CIBC.

Hi, good morning, everybody. Thank you for taking my question here. Maybe if I could just ask on the supply chain disruptions, it looks like you're doing a good job managing through them. I'm just wondering how that potentially impacts, I guess, the profitability of your backlog, of your book of business, to the extent that the supply chain adjustments you're making are inflationary to your cost structures, is that something you can recoup or is that just a margin that you're going to have to take as you kind of work through the backlog?

Yeah, good morning. Good morning, Kevin. This is Mark. Yeah, very good question. Very good question. First, I should say that, you know, the good thing is that our customers are ready to take those units. So even, you know, if the deliveries, I mean, we're not at the level we were expecting, we do have those customers, I mean, waiting for those units, which is great. And thanks for your kind words on the management of the supply chain. Nick, do you want to go through the – Yeah, Kevin, I'd say the measures that we're taking are not inflationary in nature, but we are in an inflationary environment. We haven't seen this in our sort of bill of materials in Q3, at least not materially, but we do see this in the supplier dialogue. I think there are two sort of different things working at the same time. Number one is that inflationary environment, and number two is the cost-out program on which we're working. And so... In the short term, the global supply chain issue causes inflationary pressure. Yes, it does, including on transportation costs. But in the longer term, we're certainly confident in the cost-out program and our ability to reduce the bill of material.

That makes sense. Uh, maybe just my second question here, you know, the third quarry, you had a number of, um, you know, successful commercial agreements, uh, announced, and one of them was the all electric ambulance, um, I guess partnership. And I'm just wondering, you know, it looks like you're contemplating at least 1500 units. Is there a way for us to frame the milestones that you need to hit in order for that 1500 to officially enter your your vehicle order, and I guess if I were to maybe just on semantics, I guess you say at least, does that suggest that if you hit these milestones, it's a minimum 1,500 units, and then you can obviously build off of that?

Yeah, Kevin, yeah, this is what we have in the agreement. This is a minimum of 1,500 units. Obviously, just to be clear, I mean, those units are – it's not a purchase order yet, right? It's a commercial agreement. So we do not have those units in our order book right now, and we will be including them as, you know, we will get the orders from Demers and Demers, you know, from – from their customers. But starting at the date that we will commercialize the electric ambulance, which is in the second half of next year, absolutely we expect a minimum of 1,500 units over the following five years under the commercial agreement with the nurse.

Okay. So just to clarify, the milestone is primarily time, I guess. There's no technology milestones you need to hit in order to – to secure that backlog, just given you're using an existing platform for this vehicle.

Yeah, no, you're right. I mean, you know, the Lion 5 will be launched at the same time, so it's basically a Lion 5 that we will be using. So it's like killing two birds with one stone, basically. Yeah, we're launching the electric ambulance on the Lion 5 chassis, and the MERS also is putting a state-of-the-art body on this electric ambulance. So we wanted to make sure it would be purpose-built, Electric ambulance, including the buddy as well, but in terms of technology and all of that, we will be getting to be at the test phase very shortly, so no major milestone in this regard.

okay and maybe this last one for me and i and i know you're not going to like the question but uh well i mean i suspect you're thinking that you may not even try to answer it but you know you've got the 50 units and with um you know you got about a thousand units you think you'll deliver by end of 2022 is there a way to help us shape the cadence of deliveries over the next four or five quarters or or uh you know is that something that um you know we'll just have to wait and see as you report

Yeah, well, let me start, Kevin, by saying that, you know, obviously we are still impacted by what's happening right now. And, I mean, even if we are, you know, working night and day on fixing, you know, those supply chain issues. And let me say also that, you know, the fix that we are doing right now are long-term fix. So it's not like a temporary fixing that we are doing. It's a long-term fix. And when you're doing those kind of fix, obviously, you know, adding, you know, many, many suppliers, redundancy of suppliers. Now we have over 500 suppliers. This is looking very good for the long term. And also, you know, this is looking very good in terms of, you know, cost add-ups. for the future. So Q4 of 2021 will obviously, you know, be impacted by what we're doing now. Okay.

Okay. I'll leave it there and enjoy building the backlog in the quarter. Okay.

Your next question is from Brian Johnson with Barclays.

yes i want to talk about a couple things so first can you give us a sense of the pipeline on the truck uh side of the business how the truck order landscape is progressing and anything about where or did the trucks delivered so far to amazon and where those might be going in service and kind of where the discussions with amazon might be as part of that truck Yeah, Brian, let me take that one. First, you know, when we think of the order book and that movement, first and foremost, it was a great order for the order book because of our great momentum in the school bus space and that 1,000-unit order from SCA, which which solidifies our commanding leadership in the school bus space. And the reason that we believe we're able to get these orders, that one and many others, is because we've been selling school buses for a while, many years, and also importantly, we have hundreds of school buses on the road today. So in the truck space, the 10-inch orders for Q3 was not as well below what we want, of course. In some ways, the supply chain issues preventing us from delivering trucks and having them on the road is not helping. But at the same time, we're the few in the industry that are manufacturing trucks today that are delivering them. And ultimately, we feel good that we can replicate the success we've had in the school bus space, in the truck space. Need a bit of time, of course, because the product is new. So that's sort of on the, you know, feel good about the client dialogue. It does take time to convert that into an order book, but it's something that accelerates with time as we're seeing in the school bus. As it relates to delivery, you know, can't comment on the Amazon trucks. I mean, I think we're consistent.

But we've delivered 12 trucks, as you've seen in our results, and it's just the beginning.

Okay. And then on a second question – oh, wait.

If we had more on the truck side, I'd have to hear it. No, sorry. That was it. Okay.

Second question, you know, if we look at the – ASPs per bus, you know, if we, well, two questions, two-step questions.

One, you know, if we just take the revenue and divide by units, it gets close to $290 per vehicle. Is there other revenue that we should be thinking about that would mean that that's not really the price the bus or the people have taken delivery of pay for their vehicles?

Yes.

In there, we have our line energy sales and we have some parts sales. Those are not material, but they are in there. And so they're not at a scale where we dispose of them separately.

Okay.

So if we think about the goal of cost reduction and reducing the gap of the upfront costs to diesel buses and trucks, I guess, one, where are you on that?

journey and two um how do all these supply chains and strengths slow down that or are they affecting uh some of the traditional truck and bus oems equally i can imagine it would on things like steel but maybe things like wiring connectors and battery costs are unique to the electric side yeah and look i alluded to this in the uh

Answering some of Kevin's questions, in the very short term, supply chain issues are causing some inflation pressure on transportation and on some of the additional volunteer costs that our suppliers are incurring. At the same time, we are progressing on the cost side. A big part of this will be having our own battery plant on which we're working and which is expected to start producing batteries at the end of 2022. Overall, Ryan, the unit economics are very good. We're confident that at scale, the model works very well for profitability. And on top of having our own battery supply and having the benefits of scale, we're working for a cost out on the supply chain costs. aspect or with suppliers broadly, and this will include us making long-term commitments to suppliers and having the big multi-year orders like SDA allows us to do exactly that. So it's something on which we're progressing. The supply chain is a little bump in the road there, but we feel very good about the longer-term cost.

Okay, that's super cool.

Thank you. Thank you.

Your next question is from Benoit Portier with Desjardins Capital Management.

Yeah, thank you very much, and good morning, everyone. With respect to global supply chain, could you provide some thoughts around the market dynamics for the sourcing of non-EV components? Would it be fair to say that the lower level of production currently is putting you at some disadvantage versus large legacy players for those non-EV components?

Yeah, good morning, Benoit. No, we don't think so. Even, you know, with what we call the less critical components, I mean, those components, I mean, at some point need to be adjusted for electric vehicles anyway, so we don't... We don't think so. What really happened is that, you know, the overstocking strategy that we have, I mean, was mostly for the critical components. And, I mean, it came to a lot of, you know, our suppliers as a surprise also that those less critical components were also impacted for some other reasons like labor shortage and raw material shortage. But in a nutshell, no, we don't think, you know, that we're at this advantage against the other OEMs.

Okay. And by the way, you did an important order received throughout the quarter, but if we remove that, it seems that the booking was weaker than the previous two quarters. So I'm just wondering how does the global supply chain issues are impacting your ability to significantly increase your booking? And if you could provide some color about your bidding pipeline and maybe comment around potential vehicle sales right now in the pipeline.

Yeah, in the order book, I mean, look, I think, you know, we're quite pleased with the overall increase. I get your point that you carve out our biggest order. At the same time, we did expect, you know, Q3 to be driven more by the larger orders. It is. The start of a school year period, which is always a challenge for operators, but this year even tougher than ever with the measures around COVID and the driver shortage. situation in the school bus space. So no surprise that it's driven by large orders rather than the smaller ones for Q3. As it relates to dialogue, look, there are great programs in place right now in the school bus space, and we are very encouraged by the dialogue we're having With all sorts of operators around deploying on these programs, we feel that the school bus is a product that is certainly among the most advanced in fleet electrification and feel very good about this. So the dialogue is continuing. I talked about the truck dialogue as well. So we're pleased with the current dialogue we're having.

Okay. Any thoughts on whether the global supply chain issues could also impact your ability to ramp up your new production plant in the U.S., but also equipment needed for your battery plant in Mirabel?

Yeah, the good thing, Benoit, is that we've been working on this for years now, and, you know, we will be issuing the orders, so we're in constant dialogue with the equipment suppliers. So, no, with all the delivery dates that are planned right now and confirmed by many suppliers as well, we don't see delays. The good news is that, you know, in those kind of projects, I mean, there's always cushions, And we have, you know, we have cushions in there. So it's great. So, no, we don't see delays. I mean, dates are being confirmed by the suppliers. Some of the new suppliers also that we got on board are also, with respect, I mean, to the Joliet operation, close to the plant we will have. in the United States. So basically, those suppliers are also supplying. I mean, we can take a supplier in Canada and also a supplier in the United States, I mean, to supply both manufacturing facilities, which is great, and this is something we've been doing as well. So at the same time, we're securing the orders for the equipment. We are starting to onboard people in Joliet, and we are planning the start of the manufacturing operations for the second half of next year.

Okay. And last one for me. What about CapEx expectation or cash outflow we might expect for Q4 and maybe 2022?

Yeah, and look, I'd say we remain on track for the project. So we talked about $130 million for Joliet and CAD $185 million, or let's say US $150 million for the Lion Campus, which is the battery plant and generation center here near Bell. We do expect this to be spent from now to the end of next year. We are at a point, as Mark made in his early remarks, that we're going to expect to take possession of the building in Joliet before the end of the year. We expect to place the first orders for larger equipment very soon. Does this hit Q4 or Q1? Don't know yet, but we expect the capex to increase in the coming months for sure. Okay. Thank you very much for your time. Thank you very much. Thank you very much.

Your next question comes from Rupert Murr with National Bank.

Good morning, everyone. You mentioned you've got 50,000 orders in the backlog which could be delivered before the end of 2022. Are any of those orders time sensitive? Do you have flexibility on the delivery schedule? And is there any chance you could lose some orders or pay penalties with late delivery?

Well, there's, well, the... The answer is that those orders are to be delivered in 2022. There's no late penalties in any of our orders. I'll start by saying this. And we're in the environment that we are right now. What we're seeing, for instance, in the truck space, that a lot of orders that are in the case today are to be fulfilled in 2023. That is certainly not the case with us. And so, yeah, so no penalties there. And, you know, there's nothing specifically time sensitive right now that I can point to. Obviously, we need to fulfill the orders and the contemplated timeline as much as possible.

Okay, thank you. If I could dive into the supply chain issue here. I appreciate all the good work you're doing there, but how easy is it to switch suppliers? Do you need to recertify any of the products with the parts that you're changing?

yeah well no you're absolutely right it's not easy especially when uh you know you're we're only dealing with uh with with great suppliers most of them being tier one um suppliers so most of the time i mean we're not replacing suppliers uh but we are finding other uh suppliers so it's really a redundancy of suppliers uh we're we're looking for that being said though when you're looking to when you're going with other suppliers Sometimes you need to change your recipe as well to adapt. And, you know, this is what I was alluding to earlier when I was saying, you know, it takes time. When you're doing the right thing, it takes time when you're onboarding new suppliers. And let me give you an example. You know, when I was saying that our people have been very nimble on what we've been doing, I mean, the kind of things we've been doing, we've been changing connectors. The connectors we were using, there was a major shortage at some point of connectors. Well, when you're changing the connectors, I mean, the wiring harnesses need to be adjusted as well. So sometimes it's another supplier, but it's also another component that you need to change. Well, you know what? I mean, those wire harnesses that fit with those new connectors that we started using were redesigned. during that period of time. So now, I mean, we have like two sources of components and, you know, redundancies of suppliers, I mean, in that case, which is a very good news. Another example will be the PCB, the circuit boards, which is another example as well of some circuit boards that we've decided to redesign to fit, you know, with the technology of some other suppliers. So this is a little bit, I mean, to show you how agile, I mean, we've been. But obviously, you cannot do that, you know, within a few days. It takes months before the time that you get the solution, and then the components will be delivered and installed on your buses. So it's not easy, but this is something we've been doing. And Thank God, Rupert, that we've been doing this for so many years. I can only imagine the OEMs that are trying to start manufacturing. The challenge is very big. We've been manufacturing buses for six years now, and I think it's really helping us.

Is there any rough quantification you can give us on how far you are through the process of improving your supply chain? For example, could you say that of all of the parts that you've had issues with, that you are maybe 50% of the way through the process of identifying alternative solutions as far as identifying a supplier and getting that solution? installed or further along than that? And do you have visibility on how long it takes before you have alternatives for all of those pinch points?

Yeah. Well, the good news, Rupert, is that, you know, the challenges that we have, and this is what I said, you know, in the last half hour as well, is, well, they are behind us, behind us in terms of finding solutions. the solutions. And we have many, many challenges, and even a lot of challenges that were not expected, and honestly that were not even expected by the supply chain, by the suppliers themselves. So the good news is that it's behind us. But when I was saying this morning that we feel that the supply chain crisis is might go well into 2022. Well, I mean, this is what we believe. I mean, but we're well-equipped. to uh to deal with this but as we speak right now we were able to find solutions for all the challenges that we have but on a weekly basis on a daily basis as well i mean some you know further challenges are coming and will be coming as well so i mean i think it's more a matter of how you are able to deal with those uh those challenges uh going uh going forward

Allow me one more follow up. So you proactively here, it sounds like you are also going to increase your supplier base to maybe deal with challenges that could arise. How many more suppliers do you think you might need?

Well, that's a good question. I mean, we've added 70 suppliers in the last quarter, and we will add many other suppliers as well for the Joliet operation. We are in negotiation with many, many suppliers, regardless of the supply chain prices. that we're going through right now. So we think that, you know, the John Yen facility will really help us with, you know, everything that's happening right now and the supply chain crisis. But, you know, with the number of suppliers we have right now, we're in very good shape. That being said, though, I mean, we're looking forward at the next year and make sure we have a lot of redundancy for all components and lesson learned, even, you know, with the less critical components.

Thank you, Rod. That's a great comment. I'll leave it there. Thank you, Rupert.

Your next question is from Jonathan Lammers with BMO Capital Markets.

Good morning. On the truck market, I'd like to ask the truck question a different way. So the order book showed no new truck orders since August. Can you tell if that's a comment on the current state of the U.S. truck market or if that's a comment on YM's competitive position in some respect? I know you have some industry data that you look at. Yeah, so I'll just correct one thing. We deliver trucks, and so the gross order book did grow, so we did get some new orders, but not much more than we delivered. Okay, so I'll start by saying this. And no, I addressed it the same way. So I'd point more to the broader market. The The electric truck market, in our view, is less mature than the electric school bus market. I think it's consistent with what we've said in the past. It's a market that is... literally 10 times the PAM of the electric school bus. And it's a market that we feel can entirely move rapidly. But, you know, it takes time to get started. As I mentioned, we're not aware of many players, many OEMs delivering all electric, medium and heavy duty trucks. And we think we're well positioned competitively by having product being part of the dialogue and we think that the competitive positioning will improve once we have more trucks on the road and once we're able to show the trucks to the potential clients more broadly. Thanks. Mark, you mentioned the upcoming U.S. bid competitions including the recently announced additional round for the California HVIP and in New York. Were there any learnings about the U.S. truck market from the early California HVIP programs this year? And anything you can kind of tell us about the outlook for your participation in the upcoming rounds? Yeah, well, yeah, maybe I can take that one. Look, HVAC is an excellent tool to get funding for clients to deploy early trucks. We've always been of the view that the subsidies are excellent tools to get the wheel going. We do not have a business model that relies on subsidies in the long term, but, you know, CARB in California are dedicated to fleet electrification, and we're leveraging these tools. In terms of learning, I wouldn't say, Jonathan, that they're learning to raise the market until we're better and better at leveraging the HBIS platform and getting those applications in. But what we need in the truck space is time, continued dialogue, and product on the street. So I'm coming back to the same point, but these are really the ones that we think will be the drivers ultimately. we're looking to replicate what we've done in the school bus space. And we've talked about this in the past, the concept of getting the first orders, right, the first product, which is, you know, a trial, then the repeat order, which is very important, and then moving to large orders where we're talking about multi-year fleet electrification. We are in the process of doing that in the school bus space, and, you know, ACIP and other tools allow us to get the wheel going in the truck space. Yeah, Jonathan, let me... I'll also say that in the truck space, I mean, the total cost of ownership is so good that the discussions we're having right now with the customers is for very, very large orders. Let's put it this way. So you're right that, you know, it's been a little bit slow in the last few months, but the dialogue with the customers is very good. When we're talking to customers who have very big fleets, And some of them are really looking at electrifying the old fleet over a period of years. So I will say the subsidy on those programs, especially in the truck market, is not the first priority. It's really the business model, how it's going to work, the operation, the total cost of ownership, the charging infrastructure, which we do very well with the Lion Energy team. But that takes time, though. That takes months. to go through all of that. So the sales cycle, I mean, with those people, let me say maybe is a little bit longer, but they're very sophisticated and very serious about getting into electric. So, yeah, absolutely. I mean, we will keep, you know, filing applications for HVIP and all the other subsidies, you know, out there, which is great because this is helping the operators, but those people are not relying on subsidies to electrify their fleet. Thank you. And, Mark, just to pull on that a little bit more, You mentioned that the conversations were around very large orders. Would you put one of those very large orders into Saint-Jerome over the next six months, let's say, given all the supply chain challenges? Or are those really for Joliet post-production ramp? Yeah, well, Jonathan, it's really a mix. um it's really a mix obviously you know in uh in saint jerome i mean we are manufacturing trucks right now and uh this is what the customers like i mean they can do ride and drive they can try you know the uh the the uh the trucks and buses so they can feel you know the the advantage of you know our our purpose-built uh trucks so uh yeah we can build you know those trucks in saint jerome right now we do have you know, some Lion 6, Lion 8, as you know, but starting, you know, in the second half of next year, they could be built in Joliet as well. So the idea for us is really to get the best, you know, truck possible for the customer from the best place and saving on freight cost as well as much as possible. So right now we have one option from Saint-Jerome, but we're going to have both options before long.

Thanks. Last topic on production. Mark, on the last call, you said that St.

Jerome had enough labor to achieve two-thirds run rate capacity. I mean, in Q3, Lion produced about 90 vehicles, including the ones in WIP. I understand the component shortage issue. My question is, could you update us on daily production rates or labor capacity today, now that the supply chain solutions have been implemented? Well, just one thing though, Jonathan, let me start by saying that, you know, when we were talking about the 50 units, we were talking about the units that were almost finished goods. So obviously, you know, we're manufacturing more than that, like in the whips and all of that. I mean, you know, getting the labor, and we saw that with the supply chain prices right now, is always a challenge for everyone. So we were able, I mean, to onboard people. uh, those, uh, those people and, uh, and we're proud that we, uh, we did that. So we have still, you know, enough people, but as I said, you know, earlier this morning, though, I mean, we, uh, we slowed down the, uh, the recruitment because, you know, of, uh, of, uh, of what's happening. Obviously we don't want to get, you know, to the full, uh, full capacity. And as we said, you know, in the last quarter, uh, Jonathan, I mean, when you have the right number of people, it takes some time to ramp up. the capacity. So we do have the equipment, we do have the people, and we're making a smart usage of those people. Now to your question, I don't know if we can get more detail.

Thanks for your comments.

Thank you, Jonathan.

Your next question is from Norman with Laurentian Bank.

Hey, good morning, everyone. Good morning. So just going back to the truck side of your business, I'm just wondering if you could give us more color on how the sales team has built up. And if I remember on the investor day, you guys had mentioned that you're trying to reduce the conversion cycle from first point to meet a client and then the eventual sales happen. So I'm just wondering if if that has sort of reduced or if there is something happening there. And maybe just to add on there, are you guys adding seven new experience centers or eight new by the end of this year?

Yeah, so with respect to the experience centers, I mean, we do have seven right now, and we will be opening seven additional experience centers. uh, before the, uh, the, uh, the end of the year. So we will have a total of 14 experience centers by the, uh, the, uh, the end of the year. Yeah. And with respect, look, I hate to be repetitive, but with respect to the truck sales, I mean, it's the same thing I said before, we're, we're, we're in the customer dialogue. Of course, we're looking to reduce the time between, you know, initial meeting and, and order, but you have to keep in mind that, you know, in, in, in some cases you're having the, uh, fleet electrification uh discussion at the c-suite and in other words it's at the procurement level and so there are different sales cycles for different uh types of organizations i think you know the the mass agreement is also a good example of how we can expand the model because this is really a win in the context of The channel sales model that we talked about, if we can leverage channel partners to sell more chassis, and especially in the model, it's so simple where we just sell a chassis and they upfit it, and the sale is done once we get We sell it to the channel partner. That's a good model for us. It's continuing to progress. We're looking to reduce lead time, but even in the bus space today, some clients are much longer lead time. Others, because they've been part of the repeat order cycle, they can move the dollar very fast because we've been in a relationship with them for a number of years. Hopefully I'm addressing your question, but it's sort of the same as the questions that were asked before on the truck side.

OK, no, that's fair. And just maybe I may have missed it, but do you break the trucks in class? Like, was it class six trucks that you sold, or was it class eight trucks this quarter?

We don't break it, no. But right now, what we're doing is some classics and some classics.

OK, that's good. And just maybe one last one. With all these supply chain issues and the problems that you have highlighted, do you think it's still the right time to launch these new vehicles that you plan to do in 2022? Or do you think that may get delayed because of these challenges?

The question, will the R&D pipeline be delayed? Is that the question?

Yes. Yeah, which is the new models, right?

Yeah, your first announcement was about the new models, right?

Yes, so essentially, I think by 2022, you have to launch like six or seven new vehicles, right?

Yeah, and it's looking good. I mean, you know, the R&D is going full throttle with, you know, those new models. As you know, I mean, there's a lot of commonality between our platforms, and this is why, you know, we're able to do all of that. We've been working on this, you know, for years. It doesn't mean that we don't have to deal, I mean, with the supply chain challenges, but really supply chain is more affecting us. right now with respect to our current deliveries than with respect to the development of the other product. That being said, you know, absolutely it only adds to the challenge for Lion, but also, you know, for everyone right now in the industry. But, I mean, all the dates that we're looking at with the forecasted, you know, dates of commercialization, no, we're good. We're still good, you know, before the end of 2022.

Okay, that's great. And maybe just one last one. I see you've mentioned it in your slide as well, but for the Illinois facility, once you get it, what are some of the additional or future milestones that we should look at for you guys to eventually ramp up production there? What is it that we should look at for now?

Well, the first thing is take possession of the building. So if you look on our website right now, I think you'll be very excited about where we are, 90% complete. So honestly, it's going very, very well. We are starting to order the equipment, but we've been in a long-term dialogue with those equipment suppliers. And, yeah, so at the beginning, obviously, you know, we are starting slowly, and then, you know, we will ramp up, so we will start installing some equipment. In the first half of next year, we are onboarding people, and we do have people, you know, from Saint-Jerome that will be doing, like, a knowledge transfer. Also, so we've been working on this as well. I mean, the IT team also has been, you know, everywhere on this, you know, all the cables that we needed, you know, in this factory. This is part of the 90% completed. We need all of that. We will be ordering the EGBs very shortly as well. So now it's mostly take possession, receiving the equipment, we're onboarding the people, and we'll be hiring additional people as well. Okay, that's a good color.

That's it from me. Thank you. Thank you.

Your next question is from Michael Glynn with Raymond James.

Hey, good morning. So just a couple for me. So Canadian bus market, school bus market, can you speak to what your market share is and what's taking place from a competitive perspective in the Canadian school bus market?

Yeah, good morning, Michael. I mean, I think, you know, in Quebec, I mean, we haven't seen really any other buses so far on the road. So, I think we've been doing very, very well. As you know, the MTQ has issued this policy that starting on November 1st, nobody could register another bus than an electric bus. which is good. And there is also a Made in Canada clause, I mean, you know, for the MPQ. So Lion is very well positioned. We do have buses in Ontario as well. And with the ZEPF, you know, the $2.75 billion investment in electric school buses and electric transit buses as well. Well, you know, this is part of this program that we filed, you know, with STA or STC. And, well, that's going well. And let's see, you know, the dialogue with the customers. So it's mostly, you know, outside of Quebec. In that case, it's also going very well. So I think, you know, the customers, what they like about our buses, obviously not only is it, you know, purpose-built, but, you know, it's very efficient in the cold also because we've been dealing, you know, with those temperatures, I mean, for many years. many years, so they like the fact that we've been manufacturing those buses for many, many years, so they can talk to each other, they can talk to other customers as well, and this is why we see a lot of repeat orders and very significant orders now coming in.

And is the large order from student transportation, is that concentrated in Quebec and Ontario, or is it spread throughout the country?

No, there's nothing in Quebec. Nothing in Quebec. So it's outside Quebec, and I think it's mostly in Ontario.

Mostly in Ontario. And how do you, in terms of the duration of that contract, is there pricing embedded, like the cost declines that you're thinking about in terms of your deliveries? Is there some anticipated price declines embedded in that contract?

Yeah, correct, which is exactly aligned with our strategy to bring pricing down over time. So that's – yes, they are pricing down over time.

Okay. Thanks for taking the questions. Thank you, Michael. Thank you, Michael.

Our next question is from John Lopez with Vertical Green. Hi.

Thanks so much. Sorry, I had three hopefully relatively quick ones.

The first one, just following up on that last topic, the vehicle ASP in your backlog looks like it dropped about 15% this quarter versus last.

Was the STA order the driver there?

Yeah, the STA was a driver. It's a multi-year agreement, so you have to take that into context, of course. There are other drivers, but the bottom are changing the order book for the course. Gotcha. Thank you. That helps. Secondly, I guess I just wanted to talk conceptually about orders. And as you mentioned, the discussions around FTA in Canada are pretty highly conditional. I think their own press release suggests they haven't really started dialoguing with school districts yet. So I guess my questions are, A, are you including anything within that program for your 2022 delivery commentary? And secondly, can you maybe just clarify how you're defining orders so we can just gauge how that may look versus Pearson? Yeah, so the answer to your first question is yes. Those orders in the order book, we have SDA, and we've been very transparent that it's a conditional order, and it's conditional on obtaining the ETF funding, and we're working with them on that. The deliveries on that contract are scheduled to commence in 2022, so we do expect that to be the case. When we think about orders, obviously we include in there firm purchase orders in hand, and in some cases we include joint applications for subsidies like this one, where the application is obviously mutually exclusive. In other words, it's not an application for any OEM to fulfill. And where we have a high degree of confidence that it will change into or convert into an order and delivery. So yeah, so just want to make that clear. Everything that is in the order book, as we stated, we expect to deliver. You know, Mark alluded earlier on the MAP side. We have an agreement with them that compensates the delivery of 1,500 units because those are not orders yet. We did not include those in the book for that. Gotcha. Understood. Okay, that helps. And the last topic I wanted to touch on is battery sales. So more and more of your peers are securing long-term purchase orders commitments or agreements for cell supply that generally come with some kind of prepayment. Last I recall, you guys were not planning to go that route. So, A, is that still the case? And, B, do you remain comfortable that you won't, you know, find yourself with a supply issue or a cost issue as you start to bring the module factory online? Yeah, well, to answer your first question, no, that's not the case. We're not planning on doing any kind of, you know, prepayment and, you know, some other companies, as you were saying, in the EV space. Some of them, they did that. We are in negotiation, you know, with many, many companies. It's a matter of price. It's a matter also of availability of the product. It's a matter of chemistry also that the suppliers will be doing for us. For Lion, it's also a matter of being agnostic. Being agnostic to the chemistry as much as possible, but being agnostic to the supplier as well. And this is the reason why we're doing this battery factory, by the way. You probably remember the rationale around it when you were saying, you know, we will be going with 21,700 cells. We decided to do that, not to be captive to one supplier that will be supplying a module. And when they are supplying a module, this is where you're becoming captive. So by going through the... At the level of the 21,700 sales, we are able to remain agnostic and not have to do those prepayments that some others have been doing. Understood. Thanks very much for the thoughts. I appreciate it. Thank you, John.

There are no further questions at this time. I will now turn the call back over.

Well, thanks, everyone, for joining the call today. We really look forward to continuing the discussion, and feel free to contact me for any follow-up questions you may have. Have a nice day. Thank you.

Thank you for joining today's conference call. You may now disconnect.