This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: this gradual growth in orders, sales, and production to continue. We will keep building on this momentum and on our objective to achieve profitability. Thank you for your time this morning.
spk01: Operator, we will 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 questions. You can, of course, go back in the queue if you have any follow-up questions.
spk00: Thank you. If you would like to ask a question, please press Start followed by 1 on your telephone keypad. If you would like to withdraw your question, please press Start followed by 2. As a reminder, questions are limited to two questions only, and if you still have a question in the interest of time, we ask you to kindly rejoin the queue. Our first question comes from the line of Chris Supper of B Reilly. Your line is now open. Please go ahead.
spk05: Hey, thanks for taking my questions here. Maybe you could just kind of quantify how many extensions you think are out there for the first round of the EPA that are still kind of free agents that are looking for potential solutions. And maybe just on the EPA strategy for the second round, how you think the bundling of the bus and charging infrastructure Do you think pricing will become more of a factor here where customers will be looking to open up additional funds for charging infrastructure?
spk11: Chris, Nick here. I'll take this one. In terms of the broader extensions as part of the EPA program, it's something we're in the process of trying to find out. We believe it could be a significant number that are still out there, free agents, but don't have all the facts right now. In our case, in the case of the client that we work with, we're talking about a third of the orders or a third of the clients that requested extension. Recall that in total, we're talking about close to 2,400 unit vouchers for electric buses that were awarded. So it's something that we're working on right now. In terms of the second round, what I'd say is the second round is $395,000 of total vouchers for both the vehicle and the charging infrastructure. It's essentially the same amount, but it's not as prescribed, meaning in the first round it was $375,000 for the button and $20,000 for the charging infrastructure. Now there's a little bit more flexibility in terms of allocating the amount. I would also say that it's a completely different program. In the first round, we were talking about a rebate where it was essentially a subsidy to purchase the vehicle. It was targeting a really broad audience. There were over 400 awardees as part of the program, and each applicant was capped at 25 units max in the second round. It's a competitive grant process. There's a pretty detailed scoring system in there. And there's both minimums and maximums for school districts, larger school districts. We're talking about minimum 15, maximum of 50 units. And for the third-party applicants that have to aggregate at least four school boards, we're talking about a minimum of 25 and a maximum of 100. There's also a big focus on leveraging third-party funds as part of this. Overall, and I should also specify that the EPA indicated that they expect to award 25 to 50 applications as part of this competitive grant process. It's a more complex application, but I'd say it's more aligned with what we've done in the past in terms of bidding.
spk05: Got it. Now that's really helpful. And maybe on the path to profitability, we saw some progress in gross margins in the quarter with some additional volumes Can you walk through whether we should expect a cadence of fixed costs over the next couple quarters to come on as you ramp Maribel and Joliet, or whether we could expect continued steady improvements there with some of those additional volumes?
spk11: Yeah, I'd say on that look, we think the model works well at scale. It's something we've said in the past, continues certainly to be the case. There is a... potential improvements related to the unit mix as we deliver more units in the U.S. as we have more of those price increases that come in in the deliveries. We think volume will help on the margin side of things. At the same time, I think you identified correctly, there can be some volatility related to the timing of the cost of the Joliet facility as well as the battery plant, but it's As Mark mentioned, it's clearly a focus for us to continue to improve on the margin side of things.
spk05: Okay. Thank you. Thank you.
spk00: Thank you. Our next question comes from the line of Mike Schalke of DA Davidson. Your line is now open. Please go ahead.
spk03: Okay. Good morning and thanks for taking my question. I'll answer this question real quick about your profitability comments there, Nick. Maybe a better way I can ask it is just more immediately is how far do you think you are, how many quarters where you think you are from being breakeven on a gross margin level? Maybe we can just like start there.
spk02: Yeah, good morning, Mike. Well, you know, profitability is really a key objective for all of us at Lion. And the way to get there is, well, the first step is really a positive gross margin and then a positive EBITDA. And the ultimate goal is the free cash flow, right? Free cash flow, positive. So we feel that, as Nick was saying earlier, our model scales very well. And one of the reasons for that is because the models we are building are purpose-built. for electric. So with respect to volume, we don't need a very significant volume to achieve this profitability. So this would be the, and we spoke about the material margins in the past, and they are very healthy. So let's say that this model as we have right now works very well. in Saint-Geron and also the way we're ramping up in Joliet, this is going very well. I think we're very focused on school buses and getting to this first phase of 2,500 school buses of manufacturing capacity, we feel, you know, is pretty wise. And we feel that right now the manufacturing capacity ramp up is very well aligned with the ramping up that we're expecting also, you know, on the purchase order side.
spk03: That's great. And perhaps my other question is also a follow-up on your comment there, Mark. I guess I'd like to know a little bit about the cadence of the wrap-up from here. It sounds like you've got increases in Q2, probably in Q3, Q4, you know, sequentially. But I'm kind of curious, is there a quarter where there's a large step change in the production volumes, either because you're opening up more at Joliet or you've got a large you know, at some point, you know, this year. Just any sense as to how steep the event might be over the next couple of quarters would be appreciated.
spk02: No, thank you, Mike. We feel that it's going to be gradual. This quarter was the sixth consecutive quarter of growth And for us, it's really growing from one quarter to the other. That's the name of the game. We have a very strong foundation, and we will keep building like that. So I don't believe in a switch that you're just turning on and off, and then you can increase by thousands of units. In my mind, this is totally unrealistic. So you can expect this growth. to keep going in Q2 and then to Q3 and to Q4 as well. This is exactly what we're expecting, and this is very well aligned also with our customer request. We need to make sure, you know, delivering electric vehicles, Mike, is something that we need to plan ahead. So you need to plan the delivery of the vehicle at the same time that you are planning the charging infrastructure installations. as well. So all of this is very well aligned with the Lion ecosystem that we have.
spk03: Okay. I appreciate the color. I'll leave it there. Thank you.
spk02: Thank you, Mike.
spk00: Thank you. Our next question comes from the line of Rupert Murrah of National Bank. Your line is now open. Please go ahead.
spk06: Hi. Good morning, everyone. First, just to follow up on that last question, I think you had five deliveries in the U.S. in Q1. How many of those were produced in Joliet? And given that you plan to be at a capacity of 2,500 by the end of this year, is that a number you think you'll physically have the capability to do by the end of this year?
spk02: Good morning, Rupert. With respect to the manufacturing capacity of 2,500 units, the capex by the end of this year, as you know, will have been fully invested. And after that, it's the ramp up of the labor that we need to do. So when we're saying we have a manufacturing capacity of 2,500 units, we do have the equipment to manufacture 2,500 units. And we will make sure that we align the labor with the forecasted delivery. So we're not saying that we will be at that pace before the end of the year, but we will be ready to be at that pace if the order book is there and if obviously the customers are requesting those buses in this period of time as well. So I think we need to be sure to be aligned on this thing.
spk11: Yeah, Rupert, I'll just add, we're still at modest volumes in Q1 as we're ramping up. We're not providing the exact split of the units, but it's still in ramp-up phase, and as Mark mentioned, we expect it to continue to ramp up over the year.
spk06: Okay, great. And can you remind us in your order book how many sales or orders are available for sale this year in Canada and the U.S.?
spk11: Yeah, the order book, the composition, it goes all the way up to 2026. But what we've said in our disclosure is that the bulk or the quasi-totality of that is delivered from now to the end of 2025. Obviously, substantially all of the orders are related to some subsidy programs, some of which include the ZET-ETF. In fact, a big portion includes the ZET-ETF, and some of these applications are still pending approval. So we're working to get those approvals, but I don't have a specific breakdown to give you for this year.
spk06: Okay, great. I guess I'd better leave it there. Thank you. Thank you.
spk00: Thank you. Our next question comes from the line of Craig Irwin of Rolf MKN. Your line is now open. Please go ahead.
spk09: Good morning, and thank you for taking my questions. So I wanted to see if we could maybe dive into gross margins a little bit more from a qualitative perspective. So, when we look at the big components and gross margins, materials, labor, and overhead, can you comment whether or not you're still seeing cost escalation on materials, if you're getting more efficiency on your purchases, if that's something that's generally stabilized and materials content per bus or bus and truck is possibly coming down the way one would expect with your volumes? Then on the labor, can you comment about the number of hours per bus to assemble a bus and your proportionate labor versus where you would be, you know, you obviously hired ahead to facilitate a ramp that we expect to go on for a couple of years and to really, you know, train the workforce ideally. But if you could talk maybe the, the man hour approximately um that would be helpful and then the overhead um if we were to look at the overhead for um just the home facility you know would it be fair to assume that those buses are pretty profitably with nice marks and you know do we fully uh does the p l yet like the overhead we'll be carrying for both the mirabelle and julia facilities in the future
spk11: Yes. Hey, Craig. Thanks for the question. Let me just tackle qualitatively those items. In terms of material, I'd say it's a mix in terms of cost pressure. We're still seeing some inflationary pressure, but at the same time, we're starting not only to see some of that ease, but we're starting to see that we have a good eyesight on the the benefits of a cost out program that we've been talking about for a while. So I'd say there's some good opportunities for us to bring the cost down and it's something that we need to achieve and we're working at through the quarters, but it's becoming more and more tangible. And the dialogue with suppliers, whereas it was about containing costs only or containing cost increases in the past, it's become more and more about you know, going back to previous prices and reducing the cost in some instances. In some more sort of technical or technological items, we're eyeing out a more long-term, you know, couple-of-years type thing, significant cost-out opportunity, but that will take some time. But I'd say overall on the material, certainly there's been a change in the dialogue and in the relationships where we see some important opportunities to bring costs down in a number of places. So there's certainly room there. In terms of labor, what I'd say is right now our workforce is not where we want it to be in terms of productivity at the hours per vehicle. One of the principal reasons for that is all the development activities that we have and the new platforms that we're launching and the new production lines that we're ramping up. And so certainly not as important cost-wise as is the bill of material, but there are some opportunities there, but we expect that this will improve really once we've gradually and once we've launched the new platforms that we're bringing to market this year. And then finally on the overhead, look that we've, It's probably the biggest issue in terms of weighing on gross margins, fixed overhead or overhead cost absorption. I would say that we have a cost base today that is reflective of much more than just our St. Jerome plant. And we'll absorb that over more volume as we scale up both St. Jerome and the Joliet plant. There are likely to be some increases in the overhead as we ramp up Joliet, but not anywhere close to proportional to volume, meaning we already incur those costs in great proportion in Saint Jerome to manage the two operations, or the two production plants, I should say.
spk09: Excellent. Thank you for that. My next question is really the velocity of sales into the North American market. So you've done an excellent job capturing vouchers, supporting your customers in the school district out there to procure vouchers from the EPA programs. So can you really talk about the tempo of potential deliveries into the North American market Should we expect things to be back-end loaded for the first-hand browsers to really see those deliveries closer to sort of mid-2024? Or is it possible that we see a rapid uptick on those deliveries, and is that facilitated by some of the heavy pricing we've seen from other OEMs in the market?
spk11: Look, in terms of the EPA units, which is, I think, what you were referring to, and correct me if that's not the case, but the deliveries can go all the way to October 2024. I want to make it very clear that our objective is to deliver those units as soon as clients are ready to take them, and we think we can deliver them well before that. In general, clients are looking to get those units. You know, the first phase of the EPA was about getting purchase orders, and we're still working at that. As I mentioned, I think there's an opportunity to do more, but really what's going to be most important is going to be the cadence of deliveries and the quality of the product that's delivered. And so it's our objective to do much sooner than 2024. At the same time, you know, we use the word gradual quite a lot and expect that the cadence of those deliveries will be gradual, but we do, I mean, We had very few units delivered on the U.S. The purchase order book has proportionately become more U.S.-driven than it was in the past few quarters, and it's our intention for that mix to change over time over the coming quarters.
spk02: Hey, Craig, was your question only on school buses, or were you alluding to trucks as well?
spk09: It would be useful to know on trucks, but on school buses as well. you know, that's what everybody's watching right now. My next question is going to be on trucks, so. Okay.
spk11: And you talked, Craig, I think there was another part to your question on pricing. Look, I mean, I'd say we think we could be very competitive when we need to. It'll apply, it can apply well to that second round of the EPA, which talks about leveraging sort of third-party funding. Essentially, we feel the EPA is asking for groups to do more with less and we can do well we've done competitively quite well in the canadian market as well um it probably hasn't been as much of a factor in the in the first round though yeah so we expect it to become an increasing focus and we think we're well prepared for that thank you and if i could ask the truck question that i that i have so you're now please go ahead
spk09: The line six and the line eight are both shipping and in customers' hands. That's usually a pretty good thing for the pipeline, the potential orders. And real-world experience tends to change the quality of those customer interactions. Could you maybe give us some color around that? You know, IRA, it seems that class four could have outsized stimulus funding, looks like a subsidy, to use a less attractive word. But class four is not in your plan. You've got both class five and class eight planned for this year. Could you talk about flexibility to address this substantial support for Class 4 out there? It's something you would consider. Thank you for taking the question.
spk02: No, thank you, Craig. Class 4 is not in our plan for now. Craig, we feel that Class 5, which is a medium duty and where we have many options for the customers, will cover a lot of the market. For most of those operators, what really matters is that they can drive those trucks without the special driver's license and they can do a lot with this Class 5 and it's also the payload. that matters and you can have a lot of payload with this Class 5. So we've decided to go with the Class 5 for now. Class 4, I mean, you're getting very close to the market of, you know, the lighter chalk and, you know, where it's really crowded right now and this is a market that we've decided to stay away from. And we feel that the medium duty and heavy duty is really a market where there's a lot of potential and very few OEMs that are proposing purpose-built trucks right now. So we're one of the only OEMs out there that are proposing to our customers purpose-built electric trucks. So huge market on Class 5. You're absolutely right. We delivered Class 6 and Class 8. And for many of those operators, they are looking at electrifying the whole fleet or most of the fleet. And it's almost, let's say, a pilot for them right now. But this is going well. I mean, discussions with the truck operators, I mean, we really see in increased interest and Craig, you probably saw as well the ACF that we were talking about earlier. We feel this is a game changer. New regulations in California and when we're looking at the past, like with the ACT, a lot of states and a lot of Canadian provinces will follow. what California is doing. And with the ACF, it's a major game changer where the starting in 2024, so it's really tomorrow, I mean, it's early next year, the operators will have to start buying electric trucks in California. We were expecting this to happen, and this is finally happening and we feel this is a real game changer. So when you're looking at the product lineup we have, the Class 5 that we unveiled last week and the Class 8 tractor that we will be unveiling by the end of the year, as well with the Class 6 and the Class 8 Street Buddy as well, we have a full lineup of products for those operators and we feel it's very promising.
spk09: Thank you. I could just squeeze one in on the truck. Can you remind us the approximate number of customers that are operating your Line 6 or Line 8 trucks and the total size of the fleet that's rolling right now?
spk11: Yeah, we have about 125 to 150 trucks out there with clients. I mean, the bulk of clients have purchased less than 10 units.
spk09: Thank you very much. Well, congratulations on the progress here. I'll back in the queue.
spk02: Thank you, Craig.
spk00: Thank you. Our next question comes from the line of Tammy Chen of BMO Capital Markets. Your line is now open. Please go ahead. Great.
spk04: Thank you. Good morning. First question I had is related to the Clean Bus Program. So you said of the 298 purchase orders, about a third are requesting some delays with the EPA. Do you know what length of delays we're talking about here? Do you know what amount they're requesting for?
spk11: Yeah. When you say a third of clients, I'm really referring to the number of units, Penny. and um and the delays go all the way to the latest dpa allowed it's august 15th um and some of the clients have uh they don't all go to august 15th and those delays were largely related to uh having the appropriate uh contracts for the installation of charging infrastructure uh so it's just a matter of of uh of figuring that out and and so i'd say the extensions go anywhere from sort of end of May all the way to August. Yeah.
spk04: Got it. Okay. And then my last question is, apologies if I missed this earlier. But were any of the bus deliveries in this quarter from what you've been awarded so far from the first round? And can you talk a little bit about how you expect your bus deliveries to unfold over the rest of this year as it relates particular to the Clean Bus Program? Thank you.
spk11: Yeah, really just a very small number of units from the EPA program. So it hasn't, you know, kicked in materially. What you may have heard me answer before around the timing of the program, the program allows for delivery and all other requirements around the scrapping or selling a diesel bus and whatnot to be done by October of 2024. We're working with clients to time those deliveries, but our objective is to deliver faster than the deadline. I mean, as I mentioned in one of the prior questions, The first phase of this was about getting the purchase orders. The second phase is about timely deliveries of quality vehicles. At the same time, a client has to be ready to take on the vehicle, and we want this to be a positive experience. But the bottom line is we're going to look to do these deliveries as rapidly as possible.
spk04: Got it. Okay, thank you.
spk11: Thank you, Demi.
spk00: Thank you. Our next question comes from the line of Stan Levy of Barclays. Your line is now open. Please go ahead.
spk08: Hi. Good morning. Thank you. And apologies if I missed this earlier. I jumped on late. But just wanted to ask on the CapEx side, I think recently the Canadian government's budget is allowing for some additional tax credits for cleantech manufacturing. which would be a pretty nice offset on the CapEx piece. So maybe you can just talk about if there's any further clarity here and what offsets you might have on CapEx.
spk11: Yeah. Hey, Dan. Yes, so in the federal budget, there's discussion of an investment tax credit, I believe, of 30% for investments related to EV manufacturing, battery manufacturing. And the version that we've seen, it refers to investments that take place after January 1st, 2024. So it's something, as you would imagine, we're very much looking into. At the very least, it could be an option for future expansion. At the same time, one thing we've made very clear this morning is that Post our 2023 CapEx plan, our intention is to drastically reduce CapEx, and we don't plan to build capacity expansions until, number one, it's justified by the order book, and number two, importantly, that it works with our liquidity situation. And so it's something we're looking into right now. We would want this to apply, of course, to our current investments, but they're not a program that we're counting on just yet, given the timing restrictions I just talked about.
spk08: Got it. Thank you. And then, again, apologies if you mentioned it earlier, but if you could just address within the order book, you know, obviously buses are up, but trucks are down. So maybe you could just talk about some of the movements within the order book on the truck side.
spk02: Yeah, good morning, Dan. Yeah, it's slower than expected, to be honest. But at the same time, what we're seeing right now is very exciting. We have trucks out there, we have customers, and we do have a full lineup of purpose-built trucks. And with the unveiling last week of the Lion 5, we see increased interest. And we feel it's going to be exactly the same thing with the Lion 8, tractor as well a lot of the market is expecting the lion a tractor trunk to be uh to be uh to be launched before the uh the at the end of the year so we feel you know the timing is um is finally working for us right now and um if you remember how it's worked you know on the school bus side it took about you know five six years to really take off and um with the uh the the supply chain crisis and the covid you know and all this crisis within the last few years We feel that, you know, this period is starting now. And we think this is exciting. And I was referring to the ACF earlier. And as I was telling Craig, I mean, this is really a game changer in our opinion. So there's some subsidies out there. There's some subsidies on the US side. There's a lot of subsidies on the Canadian side. And now we're seeing this new regulation taking off. as well and this is great and this is really going to help us i mean only in california where where carb is is saying that the acf rules they are expecting to have over 500 000 zeds on the road just in california by 2035 and over 1.7 million zeds by by 20 by 2050 so now the oems don't have any choice than offering a ZEV in California. And a ZEV is really, it's going to be electric or it's hydrogen. And with respect to electric, with the purpose-built full lineup of trucks that we have right now, we feel we're very well positioned to capture some of this market.
spk08: Great. And if I could just squeeze a follow-up on that, just to clarify, what is the typical timing of an order cycle from a fleet? Meaning, we've seen ACF pass, and just how long does it typically take for fleets to then flow in orders and for those orders to eventually convert to production?
spk02: It's always the first order that takes a lot of time. And especially on the truck side, I mean, the fleet operators we're talking to, a lot of them, they are very large fleets. And, well, it takes a lot of planning to electrify your fleet. And it's really a teamwork between the operator and the OEM to make sure that, well, the right specs are on the vehicles, but also the right charging infrastructure are being selected and they are being installed in a timely manner as well. So it takes some time, I mean, to do a good job and you probably remember, I mean, our way of thinking, it's really, I mean, for us to adapt to the operator and not the other way around. So the first order takes always a lot longer, and that's one of the reasons you see so many repeat orders on the school bus side, and that's the reason why the order book is growing very well also. We expect the same thing to happen on the truck side, and we are working on the initial order for a lot of those truck operators as we speak right now.
spk08: Great, thank you.
spk02: Thank you.
spk00: Our next question comes from the line of Michael Caprios of West Jordan Capital. Your line is now open. Please go ahead.
spk10: Good morning, and thank you for taking my question. On the supply chain issues, your press release mentioned that you still had some continued issues. maybe just an update versus last quarter, what sections have improved, what has gotten more difficult and any updates on that front. Thank you.
spk02: Yeah, good morning, Michael. Thank you. Yeah, still, you know, supply chain challenges, I mean, we're not done with those challenges at this point. It's a lot better than it was in the past. We're still expecting to have those supply chain issues for the rest of the year, you probably remember the way we've been able to deal with this and one thing we've done I think very well is the redundancy of suppliers. We've been doing this because of the supply chain crisis but we've also been doing that because of our expansion into the United States. So right now we have a lot of suppliers on both sides of the border and for most of the components we have at least two suppliers and sometimes more than two suppliers as well. So we feel that this will still be a challenge for the remaining of the year, but it's becoming less and less of an issue.
spk10: Perfect. That helps a lot. And maybe just on the liquidity front, your cash did drop in the quarter. And if the timing on the upfront payments for the EPA lasts until August and maybe some other delis from Canadian stimulus, what would you say would be your pecking order of priorities in terms of liquidity? What would you prefer in terms of maybe issuing shares, the ATM, or the other options that are available? Thank you very much.
spk11: Yeah, look, I'd say just first on the liquidity, Michael, we finished at $57 million at the end of the quarter. That was a 36 of cash and a $21 million available on the credit facility. We were owed $10 million on the government loans for the campus as at the end of the quarter, and that's since collected half of that. We received 10 million in EPA payments. We've also collected $7 million as part of an R&D subsidy program. Certainly, the EPA orders are expected to help. It's $105 million in value in total. Recall that for a third of those, the clients have requested extensions that can go all the way to August. We expect to continue to receive some of those payments. You asked about specific timing. The EPA stated in the program an objective to fund 60 days after they process the order. It usually takes a little bit of time to get these programs going, so we're pretty happy that it has started already. And then in terms of additional sources, we have, as you mentioned, the CAD 100 million government loans. which we expect to fund about $25 million USD of our Lyon campus this year, and then we have about $90 million remaining on our ATN program. I said that during the prepared remarks, we will continue to monitor market conditions, our liquidity, our capital requirements, and we'll evaluate different financing opportunities with a view to raise some capital and strengthen the financial position in the upcoming months. That said, I can't give you a precise answer on I will say we feel we have a significant runway, but we'll be mindful of dilution. We'll be mindful of flexibility, but I can't be more precise than that. At this stage, there's going to be a lot of varying factors.
spk10: Thank you very much for the call. I much appreciate it. Thank you, Michael.
spk00: Thank you. As there are no additional questions waiting at this time, I'll hand the conference back over to Ms. Isabel O'Hare for closing remarks.
spk01: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.
Disclaimer