The Lion Electric Company Common Shares

Good morning, ladies and gentlemen. Welcome to the Line Electric's third quarter 2022 results conference call. At this time, all participants are in a listen-only mode. A brief quotation and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would like now to turn to the call that is about Atani, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Atani.

Good morning, everyone. Welcome to Lions' third quarter 2022 results conference call. Bienvenue à la conférence téléphonique sur les résultats financiers du troisième trimestre 2022 de Lyon. Today, I'm here with Mark Bedard, 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 earnings 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. Good morning, everyone. there are three key elements we will be discussing on today's call. First, we are announcing this morning a recurrent number of deliveries, with 156 vehicles delivered in Q3, our highest quarterly number ever, and the fourth consecutive quarter of sequential delivery growth. Second, as announced last week, we have reached a historical milestone as we assemble the first electric school bus unit at our US Joliet manufacturing plant. Third, we continue to see an unprecedented shift to vehicle electrification, both in the bus market, which is supported by the $5 billion EPA program, and in the truck market, a segment where we posted record deliveries with 48 trucks in Q3. We will now elaborate on each of these points. Let's begin with vehicle deliveries and purchase orders. we delivered 156 vehicles in Q3 consisting in 108 buses and 48 trucks. This represents the highest number ever for a quarter and the fourth quarter of sequential growth in a row. This is almost four times the number of 40 units delivered in Q3 of last year and an increase of almost 50% compared to the 105 units delivered in the last quarter. Also, The 48 trucks delivered in Q3 is more than three times the number of trucks delivered in the previous quarter. Year to date, we have delivered 345 vehicles compared to 196 delivered in all of fiscal year 2021. As important as deliveries are the names to whom we either delivered or sold trucks to in Q3. These customers included companies such as DHL, a global leader in the logistics industry, Family Pre, a pharmacy network with over 400 retail locations, Simons, a fashion retailer with department stores in the four biggest Canadian provinces, The Brick, which operates more than 155 retail stores, the Quebec government, and the New York Times. Our PO book is now at 2,408 vehicles consisting of 323 trucks and 2,085 buses, substantially all of them being conditional on the grant of subsidies and incentives. This includes purchase orders for 49 buses from the first round of awards under the EPA program. As of today, the order book represents a total combined order value of $575 million. Let me now discuss our US factory and our battery plant. As announced last week, we completed the assembly of the first electric school bus unit at our US Joliet manufacturing plant, which positions us to deliver made-in-America electric school buses. This is the result of years of innovation and investment in an industry that is a key pillar in the transition to a low-carbon economy. I would like to thank our employees for their hard work and dedication towards achieving this significant milestone and Governor Pritzker and his team for their great support. This is also a timely development, as governments are increasingly supporting the shift to electrification, as demonstrated by the recent awards of the $5 billion EPA program, which we will discuss shortly. Now that our first unit is out of the assembly line, we expect our Joliet plant to produce a few additional electric bus units in Q4 of this year, followed by a gradual ramp up of production over next year. As previously mentioned, production at the Joliet plant will initially be focused on electric school buses with the timing of trucks commercial production to continuously be reassessed based on market demand and factoring our truck production capacity in Saint-Germain. With respect to the Lyon campus, our battery factory is also advancing very well. we expect to reach another important milestone next month with the production of our first battery pack at our battery plant. Construction work for the battery plant building is advancing as planned and is expected to be completed next month as well. In the next few weeks, we will be transferring the battery assembly line, which has been producing batteries at the JR Automation Facility in Michigan, to our Mirabel plant, and we expect to start production of battery packs in Mirabel by the end of the year. This will be followed by a gradual ramp-up of production in 2023 as we complete the integration of our reliant batteries on our vehicles, thereby gradually transitioning from the BMW batteries we are currently using. Last, the shell work of the Innovation Centre building should be substantially completed by the end of the year, as previously announced. Let me now provide an update on the EPA program and the IRA, the U.S. Inflation Reduction Act, which should both positively impact our industry in the near term. First, the EPA program. Late October, the EPA announced recipients of the first round amounting to $913 million of federal funding under the Clean School Bus program. If you recall, this program was part of the bipartisan infrastructure law to allocate $5 billion from 2022 to 2026 for the purchase of clean school buses. As part of this first award, we were pleased that 41 school districts across 16 US states for which applications were filed through Lion were awarded vouchers to purchase 207 electric buses for a total of $82 million. As mentioned earlier, to date, We have already received purchase orders for 49 electric school buses and we are confident that this number will increase between now and next April, the deadline to place purchase orders. In parallel, we are in active discussions with other school districts and operators that have directly submitted and received vouchers, which we are hopeful will translate into additional purchase orders. As a reminder, Mayor Mrakas, Priority districts were eligible to receive $375,000 per electric school bus and up to $20,000 for charging infrastructure and all buses need to be delivered before October 2024. Mayor Mrakas, The first round of awards is very timely, with the start of manufacturing of our joining a plant. Mayor Mrakas, which we believe is essential to support our strategy to seize maximum opportunities on their the existing EPA around the funding. and any subsequent fraud. Now a few words on the IRA, the Inflation Reduction Act, which was signed into law last August and that we are also closely monitoring. Here again, this could have a significant impact to boost the execution of our growth strategy. The Act includes a tax credit of $40,000 for electric commercial vehicles over 14,000 pounds, which will reduce the upfront purchase cost for customers thereby decreasing the total cost of ownership for electric trucks. It also includes multiple incentive programs with billions of dollars of budget, which could potentially be used for the purchase of medium and heavy duty zero emission vehicles. The IRA also includes other programs which could serve to fund parts of future CapEx at our Joliet facility, either through investment tax credits or loans. We will of course continue to monitor closely the upcoming announcements and guidelines that should be released in the next few months. Let me now provide an update on our supply chain. For both critical and non-critical components, we continue to see improvements as compared to the peak of the pandemic, even if we still experience continued challenges at both the supplier and sub-supplier levels, which is causing disruptions for some parts. We do not expect those supply chain challenges to disappear in the short term, and expect to continue to see challenges at least through 2023. We have been able to reduce the impacts of this supply chain crisis by putting in place many creative actions, including creating both supplier and component redundancies, and also integrating longer lead times from our suppliers for the majority of our components in our manufacturing processes. As far as batteries, we have over 5,000 battery packs on hand. This is enough battery pack inventory for us to gradually transition to our Lion batteries starting early next year. Therefore, we are not planning to purchase any additional BMW batteries packs at this time. Now turning to new vehicle models. We continue to progress with the launch of new vehicle platforms. Among other things, we plan to deliver our first customer unit of the Lion 8 refuse truck and the Lion-8 bucket truck before the end of this year. As for the Lion-8 tractor, we intend to launch it in H1 of next year. However, short-term deliveries of the Lion-8 tractor are dependent upon battery packs to be supplied by Romeo Power, which was recently acquired by Nikola Motors. To date, we experienced delays in the deliveries of packs, and we have received indications that they may not comply with their obligations on their hour contract. As a result, we have initiated arbitration proceedings to enforce the terms and conditions of the contract. Finally, the Lion-A commercial production is now planned in 2023 from our Joliet factory, and timing of the Lion-M shuttle bus, which leverages the Lion-A platform, will be reassessed based on future purchase orders. Nicholas will now further discuss our financial performance for Q3.

Thank you, Marlon. During the third quarter, we continued to post record deliveries and revenues. Not only did we post growth as compared to last year, but we also posted sequential growth in deliveries for the fourth quarter in a row. In Q3, we delivered 108 buses and 48 trucks for a total of 156 vehicles, translating into revenues of $41 million for the quarter. 140 of those vehicles were in Canada and 16 in the U.S. The average selling price of these vehicles was slightly lower than in Q2, mostly as a reflection of the weakening of the Canadian dollar. For the remainder of the year, we expect this gradual sequential growth in the number of units delivered to continue, even if not at the same level as that experienced between Q2 and Q3, mostly because of lingering supply chain challenges. Last, in Q3, our line capital solutions continued to gain momentum as an increasing proportion of our clients chose to finance their vehicles through those solutions. We posted gross margin of negative 9%, reflecting higher raw material and commodity costs, production ramp-up costs, as well as higher logistical costs. As previously explained, for the foreseeable future, gross margins should continue to reflect the significant investments we are making to ramp up production. Over the long term, as we scale production, we expect margins to improve as fixed costs will be spread over increased number of units. Continuing with SG&A costs, they amounted to $17.4 million, and after removing the impact of non-cash share-based compensation, they were essentially flat as compared to Q2 2022. Now turning to adjusted EBITDA, it was negative $15.1 million to Q3 2022. Adjusted EBITDA for the quarter was mostly impacted by gross margin and was essentially the same as compared to Q2 2022. R&D costs for the quarter amounted to approximately $18 million. Let me now provide an update on our CapEx. During the quarter, CapEx amounted to $29 million, including $17 million for the Joliet plant and $11 million for the Lion Campus. The spending for the Lion Campus includes R&D related to the project. We estimate a remaining approximate $50 million to be spent on our two growth projects by the end of the year. This would bring our total 2022 spend on the project to approximately $150 million, which is $30 million less than our previously disclosed estimate. The reduction is a result of the continued optimization of our capital plans, including certain changes in the timing of the spend to ensure we align our capital outlays with the growth of our order book and, ultimately, vehicle delivery. We expect that approximately $35 million of the total 2022 spend on the Lyon campus will be financed via the related federal and provincial loans. The decrease relative to the amount of $40 million disclosed in Q2 is related to the lower expected 2022 spend for the project. Let me now take a minute to discuss our balance sheet and liquidity profile. During Q3, we secured important amounts of capital via various instruments. We performed an initial drop $37 million on our revolving credit facility. We drew an additional $7 million on the government loans related to the Lyon campus. We secured a $10 million equipment financing facility for some of the equipment at the Joliet plant, and we raised $20 million under our ATM program. At the end of the quarter, our total debt amounted to approximately $57 million. As of September 30, 2022, we had a cash position of $67 million in addition to additional borrowing capacity of over $40 million on our revolving credit facility. And we were also owed $11 million under the government loans for spending incurred on the Lyon campus up to the end of Q3. In addition, as of September 30, an aggregate growth sale limit of approximately 105 million remained available for issuance under our ATM. Shortly after the end of the quarter, we secured a $30 million Canadian dollars revolving credit facility with Sinaloa and CDPQ, which was fully drawn and closed. This served in part to refinance an existing $13 million Canadian dollar facility with Sinaloa, with the remainder of the drawn amounts going on our balance sheet. We are very pleased to welcome CDPQ, a world-renowned fund manager, as part of our capital providers, and we are thankful for their desire to support us in the execution of our growth strategy. We are also very thankful to Finalta for their continued support. As mentioned in the past, as we reach important milestones and are preparing to scale production at both the Joliet plant and the Lyon campus, we will look to seize opportunities that may become available to raise additional capital. With that, I will pass it back to Marc for concluding remarks.

Thanks, Nicolas. Before we open the lines for questions, let me conclude by stressing our favorable legislation increasing levels of government incentives and a growing number of companies committing to electrifying their fleet should further accelerate the transition of the commercial vehicle segment we believe that the trend towards fleet electrification is gaining momentum and we are optimally positioned to respond to the expected surge in consumer demand operator we now open the line for questions i just want to ask you to limit to two

the number of questions asked to allow other participants to ask their question. You can, of course, go back into the queue if you have any follow-up questions.

Thank you. So if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is on mixed mode. Please press star followed by one on your telephone keypad. The first question comes from Mike Shulsky from GA Davidson. Mike, your line is open.

Okay, good morning, and thanks for taking my question. Maybe I'll start with just kind of the near-term outlook here. Do you anticipate having higher deliveries in Q4 versus Q3? And I guess there's two areas I just want to make sure I understand. One, in the school bus business, that's often a seasonal business. with most school years underway at this point. However, you know, other school bus companies are saying that they have such a big backlog, they want to deliver as many as they can, as fast as they can, so seasonality is out the window this year. And then secondly, are there any major holiday shutdowns, et cetera? That typically happen every year in the truck industry. Is that the same for Lion Electric here?

Oh, hey, there's Mike, Nick speaking here. Yeah, the same for us. Obviously, we want to maximize deliveries, but we... We experienced the same thing as it relates to holidays, and Mark mentioned some issues with the supply chain. And so what we said this morning is we expect to see continued growth, but not at the same level as what we experienced from Q2 to Q3. And the seasonality, given our volume and our ramp-up, is not typically something that impacts us. But, you know, availability of customers to take deliveries during the holiday period is a reality that we all face, obviously.

Okay. Okay. Thanks for that. My other question is about the Lion 8 and the battery contract. You said you're going into arbitration or just kind of starting out that process. Can you just give us some sense as to how that could play out? could Nikola be compelled to deliver batteries just under the contract that you've got? Is there a possibility that you could be seeing a financial settlement instead? And would that settlement cover the cost difference between the contracted value of the batteries and what you might have to go out and get, as well as the cost to have the truck recertified?

Good morning, Mike. This is Mark. I'm sure you will understand that since we are into the arbitration proceedings. This is very confidential, so we cannot get into any details with respect to this relationship at this point.

Oh, okay. No problem, guys. I'll pass it along. Thank you so much.

Thank you, Mike.

The next question comes from Chris Soto from .

Hey, guys. Thanks for taking my question here. Maybe we could talk a little bit more about the EPA program. About 10% of the awarded were applications that you guys submitted for clients. But about half the program was submitted directly by districts themselves. Could you provide any update on the process in trying to win some of those districts who did file themselves? And I'm curious if any of the 49 school buses that you've gotten orders for or ones where you didn't file the application for them?

Yeah, good morning. Good morning, Chris. Yeah, Chris, so you probably saw the results of, you know, the OEMs that were allocated the orders. So I think your question was really on the other orders that were gained by the school districts and the operators, right? yeah exactly okay now that's fine chris so yeah so basically you know those uh those buses were allocated to them you probably remember i mean they need to uh to take the buses and the oems they need to deliver the buses before october 2024 uh which is great for us because you know we have the capacity to deliver uh a lot as as you know and uh the the school districts and those operators uh they are in the in the process of you know allocating the orders to the OEM. So we're in discussion with them right now, and they have until April of next year to make their decision on what OEM they are going to do business with.

And I'd just add that we've started to see some success with the names that didn't apply through us yet. We're at the very beginning of this process, but we're hopeful we'll do more than than just those who applied to us.

Got it. No, that's helpful and good to hear. Maybe on the truck momentum, so we saw a nice uptick in deliveries. The backlog also grew. Could you give us a sense around where the decision process stands as far as, you know, investment plans for the truck lines? How big does that backlog and visibility have to be before we get the go-ahead for that decision would be helpful?

Yeah, I'll take that one on. Look, what I'd say to that is we're going to remain nimble around investing in the truck line in Joliet. For the time being, the Joliet plant is focused on school bus production, and we have ample capacity here in Saint-Jerome to meet the order book. And we want to be mindful, of course, of capital outlay. And so for the time being, those trucks are to be produced from here, from Quebec. Okay. okay maybe just as a follow-up how would that impact the overall kind of spend plan at juliet if we decided to continue to produce uh up north in in the current plan and the capex figures that we provided for this year that's the school buses only um we don't we don't have any capex guidance out beyond this year um so you know there's no impact to the figures that we put out there because it is current intention to produce only school buses right now in Jogia.

Okay, thanks. I'll hop in the queue.

Thank you. Thanks, Chris.

The next question comes from Rupert Murrah from National Bank. Rupert, your line is now open.

Hi, good morning. So just a quick follow-up on Joliet. Given the new CapEx plan you have there, what is your ultimate production capacity on school buses, just given the physical infrastructure and staffing that you plan to have there by the end of the year?

Yeah, good morning, Rupert. Yeah, we're ramping up right now. Basically, I mean, we're following the order book So in Joliet, the goal is to get to the manufacturing capacity of 5,000 units when needs be for school buses only to start with. And so we have a lot of capacity. We have the working stations are being installed right now with all the CapEx that we need as well to be able to ramp up. So right now we have like 75 employees. We will hire probably another like 15, 20 before the end of this year. So we're able to have a great start to next year as well. So everything is in place, Rupert, right now to be able to ramp up to the level of, you know, obviously orders we will be getting on the U.S. side. So the idea has always been the same. What we sell on the U.S. side, we're manufacturing from our U.S. factory, and what we sell on the Canadian side, we're manufacturing from the St. Jerome facility.

Is the setup in Joliet much different from St. Jerome, and how do you anticipate those differences could impact the learning curve?

Well, it is different, and the big difference, Rupert, obviously you guys will will be invited to visit at that at some point we have about 70 working stations for school buses and it's it's about three times the number of workstations that we have in Saint Jerome and that that you saw so that the why are we doing this basically to go to go faster so the the fact time is are lower, meaning that this is going faster, and there's also more automation as well in the Joliet factory. So there is a knowledge transfer rate now as we speak. Some employees from Montreal are already working in Joliet, and basically we're transferring the knowledge, but it's really the same recipe. that we are using, the big difference is really that, you know, we're using 70 working stations instead of 20. So that's the huge difference, and the idea is to go faster.

Great. Thank you. I'll leave it there.

Thank you, Rupert.

The next question comes from Craig Aaron from Rooftop Support. This is Craig.

Good morning, and thanks for taking my questions. So I wanted to ask about the 48 trucks that were delivered in the quarter. Can you maybe break that down for us a little bit and talk about the number of customers that took trucks? Are these customers that maybe have vehicles already taking follow-on units? And were there any large deliveries in that 48-unit total? Hey, Craig, maybe I'll take that on.

By and large, new customers, no customer that took on a very significant chunk of that, I'd say. I'd have to double-check, but I don't even think there's a double-digit order in there. And the bulk of deliveries would be the Class 6 truck, which is the one that we produce the most right now.

OK, excellent. So then the two other School Bus guys that I cover, are talking about some optimism out there, right? That school districts wanna get their orders in quickly so that they can be at the front of the line for deliveries. The superior economics are indisputable and people wanna see that cost savings for the 23 calendar year. Is this something you're seeing with the customers you're in dialogue with? Is this something you think could actually drive a little bit of a rush to get orders in. Is that something that maybe can get us real activity before the end of the calendar year?

Absolutely, Greg. This is Mark. Good morning. Yeah, we see exactly the same thing. I mean, there's a lot of optimism out there, and we see that the market is really getting there. I mean, we do have a lot of buses out there. We're the leader in electrical buses, and it's very clear that it's being proven that our electric school buses are very reliable, which is great. So you're absolutely right. I mean, you know, the momentum is great. The EPA program that's being, you know, out there is also great. And there's, we see the school districts and also, you know, the contractors. in a rush, I mean, to put in those orders and to get those buses. This is what we feel as well. That being said, though, I mean, it needs to be very well structured. And this is how, you know, we work, as you know, with the customers, because they need the whole solution, right? Starting with the charging, the right charging infrastructure as well, which is, you know, covered in the EPA program as well. But we do see that right now. And this is why, you know, in a very short period of time, we've been able to take 48 orders under the EPA just within a very limited number of days. So we fully share what you just said.

Excellent. Well, congratulations on the progress. I'll hop back in the queue.

Thank you very much, Greg.

Next question comes from George Gianarica from Canada Community. George, your line is now open.

Hi, good morning, everyone, and thank you for taking my question. I'm just sort of curious, if you're looking out into 2023 and the capital allocation decisions you have to make, when you have this huge opportunity with the EPA in front of you, you also have the new Inflation Reduction Act incentives kicking in for commercial vehicle production. How do you decide where the incremental dollar goes? I'm curious as to how you kind of look at the field. Thank you.

Oh, hi, George. Nick here. Look, we're going to be consistent with the approach that we put forward a couple of quarters ago, which is to allocate capital where it helps us make more deliveries, especially where we have orders and can fulfill those orders. So we plan to be disciplined around capital. You mentioned the IRA. I mean, look, let's just start with the EPA. I mean, we'll be in a very good position to deliver on the EPA contracts out of the Joliet plant, and we'll share more details around 2023 CapEx in the context of Q4 results. but uh but yeah so we'll be well positioned for from the epa standpoint to the ira uh there's a great number of opportunities of what seems like good opportunities in there the details are not out yet but you know when you think of uh for instance the investment tax credits on the build out of a factory we believe we can qualify for that and that may obviously change things if uh if part of the capex can be financed that way but we don't know the details yet and so we'll remain very nimble And, yeah, so I guess bottom line, we'll stick to the principle that we've put out there.

Thank you. And as a follow-up, you mentioned this near-term issue with Romeo and the Line 8. Are there other vehicles in the commercial lineup that are using Romeo packs that we should think about potentially being impacted by this decision from Romeo? Thank you.

George on you know as we as we said in the previous quarters as well I mean we're really focused on the the integrating the the Romeo packs on the line a tractor to start with so we spent you know a lot of money invested a lot of money with Romeo power for the integration of those of those packs so that was really the focus to start with that being said you know we could be using the Romeo packs on other models as well but that was not a in the plan at the beginning just to make sure that we were, you know, fully focused. And we are fully focused on getting those packs, you know, from Romeo and integrating those packs on the eighth tractor. Thank you.

Thank you, George.

The next question comes from Liam Bergevin from .

Thank you and good morning. Congrats on the results. I'm filling in for Ben and for my first question, essentially I wanted to know a little bit more about the biting pipeline and the timing of delivery for the current backlog. As I believe it was previously mentioned in the past that approximately over 50% of the backlog would be delivered over the next 12 months.

Yeah, Heidi, in terms of the timing of the deliveries for the order book, or I should say the timing of the orders, the order book includes orders that are fillable from now to the end of 2025, things of some of the ZETF orders that we've announced. We are not disclosing the specifics of, you know, the timing of each order. Yeah, and I'll leave it at that as it relates to the split of the order book. There's a good description of the approach in the NDA.

Thank you. And maybe as a follow-up, I would like to know a little bit more. I know that you guys don't provide guidance, but how will the investment in working capital evolve going into 4Q next year?

yeah so we've obviously invested in uh in working capital uh including inventory we mentioned this morning that we have over 5 000 bmw battery packs uh in in inventory today that's secured the pricing is secured of course as well um and so you know we invested in quite a bit in inventory for the ramp up um we uh when you look at the last quarter the you know the changes and payables and receivables pretty much offset each other I'd say going forward, it's our intention to continue to grow into that working capital level. There will be continued investments in working capital, and there is likely to be some volatility from a quarter-to-quarter basis.

Perfect. Thank you. I'll pass the line on.

It appears you have no questions at this moment, so I'm going to hand it back to Thibabela Adhani for any final remarks.

Well, thanks, everyone, for joining us today. We really look forward to continuing the discussion. And feel free to contact me for any further questions you may have. On this note, you have a nice day. Thank you.

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