The Lion Electric Company Common Shares

Good morning, ladies and gentlemen. Welcome to Lion Electric's second quarter 2022 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 Ajahi, Vice President of Investor Relations and Sustainable Development. Please go ahead, Ms. Ajahi.

Good morning, everyone. Welcome to Lion's second quarter 2022 results conference call. Bienvenue à la conférence téléphonique sur les résultats financiers du deuxième trimestre 2022 de Lyon. Today, I'm here with Marc Bédard, our CEO, funder, and Nicolas Brunet, our EVP and CFO. Please note that our discussion will include estimates and other forward-looking information, which our actual results could differ from in the future. We invite you to review the cautionary language in this morning's annual release and in our MD&A regarding the various factors, assumptions, and risks that could cause our actual results to differ. With that, let me turn it over to Marc to begin. Marc?

Thank you, Isabelle, and good morning, everyone. We are very proud of our results in the second quarter of this year, both in terms of vehicle deliveries and in the execution of our growth initiatives. As we navigate through those challenging times, we relentlessly focus our strategic activities on accelerating return on investment with the ultimate goal of increasing deliveries to our customers, while at the same time increasing our manufacturing capacity at a pace consistent with the EV market adoption. To do that, we leverage both the strength of our Lion ecosystem An experience we have accumulated over 14 years of operations. This enables us to ensure that our investments are aligned with the underlying fundamentals impacting our industry and operations, as well as our liquidity profile. Today, in addition to discussing our Q2-22 operational and financial performance, we will explain the actions we will implement to support our growth strategy and accelerate return on investment. There are three key elements for today's call. First, as supply chain continues to improve, so does the pace of our vehicle deliveries. We delivered the highest quarterly number of vehicles ever with 105 deliveries in Q2. This is the result of a more stable manufacturing rhythm where we see continued growth in the number of finished vehicles being produced. And we expect our manufacturing operations to continue to improve in the upcoming quarters. Second, our Jolient plant and our battery factory are advancing as per schedule, and we remain on track to start manufacturing U.S.-built vehicles and Lion batteries by the end of the year. That being said, with a view to focus our strategic activities to accelerate return on investment and optimally manage our capital resources, we decided to adjust the cadence of our capital spend for the Jolient facility. Our goal being to align CapEx with projected deliveries. We will reduce 2022 spend to focus on reaching commercial production for the electric bus production lines in Joliet. Third, with many long-time expected EV programs in both the US and Canada now being deployed or to be deployed in the near future, we expect global demand to significantly accelerate and are more than ever ready to support customers in their transition to EV. We will elaborate on each element during the call. Let's begin with vehicle deliveries. We delivered 105 vehicles in Q2, the highest number ever for a quarter. This represents an increase of 72% compared to 61 vehicles in Q2 of 2021. Also, a growing number of our customers in Q2 dealt with Lion Capital, to secure financing solutions, making it easier for them to access financing solutions tailored to the EV product on a timely basis. Let me now provide an update on our supply chain. For both critical and non-critical components, the challenges experienced over the past year are decreasing, even if they have not yet fully reverted to pre-pandemic levels. As we remain extremely vigilant, And to avoid any disruption in this still fragile environment, we continue to proactively seek new alternate suppliers. Specifically, we have increased the number of suppliers from which we source raw materials and components by more than 15% over the last 12 months. One of the biggest hurdles we are nevertheless currently facing is the upward inflation pressure for some of our commodities and for transportation costs. which had and is expected to continue to have a negative impact on our product cost. To that end, we have begun rolling out near-term price increases in certain markets to preserve our unit level gross margins. On the battery front, we have over 3,000 packs in inventory, and we expect to continue to receive additional packs until the end of the year, thus ensuring a smooth transition to our own battery pack production in 2023. Let me now discuss our U.S. factory and our battery plant and our priorities for the foreseeable future. Like most companies, we spent the last few months navigating through the current challenging economic environment and have decided to put additional focus on what will generate revenue in the short term with a goal to accelerate return on investment and optimally manage our capital resources. The concrete actions we are putting in place are the following. We adjusted the planned cadence of our capital spent at the Jolient facility to align it further with projected deliveries and therefore decided to initially focus exclusively on bus production. Trucks will continue to be manufactured in Canada in the near term, where we have ample capacity to meet near-term demand. As a result, the installation of some of the equipment and other capital expenditures at the Jolient facility has been pushed beyond 2022. This includes equipment aimed at supporting truck production or further increasing bus capacity towards full-scale production. Specifically, we are reducing the amount of total capex expected to be insured for the full year in the Joliet plant in 2022 by $35 million from $115 million to $80 million. While the estimated cost to build out the Joliet facility to its full capacity remains at $150 million, the timing of the full build-out will be continuously reassessed. In the same line of thought, staffing of the Joliet plant is being adjusted to align our focus on short-term production needs. Most of the management and back-office employees have been hired, and on the manufacturing front, we will hire the number of employees required to begin our bus production ramp up towards the end of 2022. We will then scale the account over time based on demand for our vehicles. With respect to the Lion Campus, with a view to better leverage our available space and maximize cost efficiency in this environment of very expensive and rare square footage renting cost, we have decided to use a portion of the Innovation Center That was initially planned for engineering offices for warehousing capabilities on a temporary basis starting early next year. A portion of the Innovation Center will still be used as planned for tests and certification of our vehicles and batteries, as well as for vehicle prototype production. While there are no changes to the expected capex of approximately $100 million to be incurred in total in 2022 for the Lion Campus, We will here again focus on the battery plant, which will have a significant impact on our short-term revenue and accelerate return on investment. The timing of the full build-out of the Innovation Center will therefore be continuously reassessed. I will now discuss the advancement of each plant in detail, starting with our U.S. manufacturing plant in Joliet. The construction work is progressing well during Q2 We continue to install school bus assembly stations and manufacture Lion's Sea units for the purpose of working station setup and employee training. We expect the installation of school bus production stations to be substantially completed near the end of the year. And we remain on track to start the commercial production of buses also by the end of the year. This will enable us to meet the demand for our electric school buses coming in part from the $5 billion EPA program. Let me stress that while our current focus is on ramping up near-term production in a capital efficient manner, our long-term expected annual capacity in Joliet remains unchanged at 20,000 vehicles per year. Now turning to the Lyon campus. During the quarter, we substantially completed the shell of the battery plant building. We expect the interior work to be largely completed by the end of Q3 and production of battery packs to begin towards the end of the year. For the innovation center building, foundation work has been completed and the steel structure is advanced to approximately 90% completion. In parallel, testing of both our battery packs and assembly line are progressing as planned. We continue to produce additional prototype battery packs at JR Automation Facility in Troy, Michigan, where the prototype line has been in operation. The battery packs are currently undergoing testing and certification, and we expect the certification of packs, factory acceptance of production equipment at JR Automation Facility, as well as production of our battery packs at the line factory to be completed by the end of this year. Now turning to orders. Our PO book amounts to $590 million, consisting of 286 trucks and 2,071 buses for a total of 2,357 vehicles, substantially all of them being conditional on the grant of subsidies and incentives. Long-awaited subsidies, which are finally being launched on both sides of the border, should accelerate the transition to EV, and we believe that this momentum will positively impact our book. On that note, we are pleased to announce that our order book includes a first order for four Lion ambulances, a vehicle we developed in partnership with Demers and for which we see great potential. With respect to electric buses, we are seeing more and more interest from Canadian customers, as reflected by recent orders, including several repeat orders during Q2. The Canadian ZTS program continues to generate increased interest from large school bus fleet owners. As a reminder, under this program, the federal government is dedicating 2.75 billion Canadian dollars to support public transit and school bus electrification. Most recently, on the truck side, the Canadian federal government announced the launch of the incentives for medium and heavy duty zero emission vehicles program, dedicating 547.5 million Canadian dollars over the next four years. The objective of this program is to promote the adoption of medium and heavy-duty zero-emission vehicles. Under this program, electric truck buyers can receive up to $150,000 in subsidy per electric truck. Even more interesting is that this funding can be combined with provincial incentives. As an example, by stacking both the federal and provincial incentives, such as Quebec's Eco-Communash program, a Line 6 truck is eligible for subsidies of up to $244,000, which has a material positive impact on the TCO. Since launch, many trucks have benefited from this program, and we continue to see increased interest from customers. In the US, the $500 million first phase of the announced $5 billion EPA program opened in May, translating into unprecedented customer interest and dialogue. We are confident that the positive impact of this program will materialize on the order book once orders can formally be placed by the operators and school districts starting next October as per the program rollout procedures. In the meantime, many U.S. customers are putting orders on hold, awaiting final grant allocations. As a reminder, this program will award up to $375,000 per zero-emission school bus in priority districts while other school districts can receive up to $250,000 per school bus. As per the rules of the program, infrastructure installation and vehicle delivery must take place no later than October 2024. We believe that we are ideally positioned to serve eligible customers. Given our leadership in the industry, our Lion ecosystem, our close relationships with the largest operators and school districts, and of course, our upcoming Joliet plant, where we will manufacture made-in-America electric vehicles. Still in the U.S., we were also pleased to see that the Inflation Reduction Act is on its path to passage in the next couple of weeks. This legislation, once voted, will significantly increase federal funding to clean OEMs, and it will represent the single biggest climate investment in U.S. history. The Act currently includes over $60 billion to increase domestic production of clean energy and transportation technologies, and $1 billion specifically for clean heavy-duty vehicles, including school buses and garbage trucks. Last, on the Lion Energy front, our order book consists of 226 charging stations, representing a total order value of approximately $3 million. Our order book has also been impacted by the postponement of commercial production and delivery of some of our models, mostly the Lion-A and Lion-D models. This resulted in some POs being canceled due to funding being expired and in the removal by us of certain orders from our order book. Given that the postponement might create uncertainty relating to the payment of subsidies. That said, we are in dialogue with customers and agencies to find alternative arrangements to be able to preserve those orders. Let me finish by providing an update on our vehicle rollout. As we look back into the last few months, supply chain challenges put pressure both on manufacturing and development activities. We achieved some important milestones this quarter in the development of new models, including the first prototype units of the Lion-A school bus, the Lion-D school bus, the Lion-A bucket truck, and the Lion-A tractor truck Despite this important progress, supply chain challenges and delays incurred at the test centers impacted our commercialization timeline, mostly for the Lion-A and the Lion-B models, and to a lesser extent for certain other platforms that will be commercialized in the first half of next year instead than by the end of this year. This is further detailed in our MD&A. With respect to the Lion team, Our headcount now amounts to approximately 1,300 employees, including more than 300 engineering and R&D professionals. Recent key hires include Cindy Dunn as Vice President Truck Sales for the U.S. market, and Dominic Beckman as Vice President Marketing and Communication for the U.S. as well. Cindy brings 20 years of sales and operations leadership experience to Lion, including at Electromechanica and General Motors, while Dominic joins us from Eno Trucks, a Toyota Group company. Before turning it on to Nicholas, I would also like to officially welcome Ms. LaTasha Koma and Mr. Dane Parker, who recently joined Lions Board of Directors. LaTasha is the operating partner at GenEnix 360 Capital Partner. She previously held several executive leadership positions at Arlie-Davidson and Chrysler. As for Dane, He was Chief Sustainability Officer and Vice President of Sustainable Workplaces at General Motors. He also held several leadership positions at Dell and Intel Corporation. They both have been appointed to the board as independent directors, and we look forward to working with them. Nicholas will now further discuss our financial performance and our expected spending for the remainder of 2022. Thank you, Martin.