The Lion Electric Company Common Shares

Good morning, ladies and gentlemen, and welcome to Lion's Electric second quarter 2023 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. To register for a question, please press star followed by one on your telephone keypad. I would now like to turn the call over to Isabelle Ajahi, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Ajahi.

Good morning, everyone. Welcome to Lions' second quarter 2023 results conference call. Today, I am here with Max Bédard, our CEO funder, and Nicolas Brunet, our EVP and CFO. Please note that our discussion may include estimates and other forward-looking information, and that our actual results could differ materially from those implied in any such statements. We invite you to review the cautionary language in this morning's press release and in our MDNA, which contains important information regarding various factors, assumptions, and risks that could impact our actual results. With that, let me turn it over to Marc to begin. Marc?

Thank you, Izada. Good morning, everyone. Today, we are pleased to share our Q2 2023 results and key updates that will shape our path to continued growth and profitability. First and foremost, we successfully closed, earlier in July, a $142 million financing round, providing us with the flexibility needed to execute our growth plans for the foreseeable future. Second, we posted positive gross margins in Q2, which was largely driven by higher revenues and an increase in average selling prices. our continuous tight control over the bill of material and other expenses. And finally, not only was Q2 a record quarter in terms of revenues, but we also improved truck deliveries. We will now provide color on each of these items before we open the line for questions. Let's start with our recently announced financing transactions. On July 19th, we closed concurrent financing transactions resulting in gross proceeds of $142 million. Simultaneously with these financings, we extended the term of our $200 million senior credit facility to August 2025, and we also canceled our ATM program. With this key liquidity milestone behind us, we now have the required flexibility to execute our growth plans for the foreseeable future and continue our path to achieving profitability. In this regard, We are gross margin positive in Q2, definitely showing that our business model is scaling well and does not need extraordinary volumes to be successful. This positive gross margin is a significant step towards our overall objective of being EBITDA positive and generating free cash flow. Let's now delve into the details of our Q2 deliveries and our purchase orders. During Q2, we posted record quarterly revenue of $58 million, with the deliveries of 199 vehicles, including 33 trucks. 14 of the 33 trucks delivered during the quarter were ordered by Bolt, a leader in sustainable logistics and a repeat customer for Lion. Note that the delivery of 50 additional school buses that were ready to be delivered to one of our customers and which the customer was ready to receive was deferred until the final approval of the ZTF subsidy by the Canadian federal government. Delays were mostly due to this application being the first sizable order under the ZETF program to go through the final application process. We expect the subsidy to be approved and those vehicles to be delivered in the coming months, leading the way for several other deliveries under ZETF. In terms of purchase orders, our PO book consists of 2,559 vehicles, comprising 304 trucks and 2,255 buses, representing $625 million. Worth mentioning is an order from CAFU for five Lion 5 trucks, which we launched in May and is slated for production before year-end. Last, our Lion Energy PO book stands at 275 charging stations and related services, amounting to $5 million. Which takes me to an update on the Joliet factory and the battery plant. On July 21st, we officially inaugurated the Joliet manufacturing plant, the largest electric vehicle plan for medium-duty and heavy-duty vehicles in the United States. We were honored to host more than 500 attendees, including government officials such as Governor Pritzker, Senator Durbin, and Senator Duckworth, as well as customers, analysts, climate change advocates, community and policy leaders. They all reiterated their commitment to Lyon and the EV sector, which is further demonstrated by funding programs such as the EPA Clean School Bus Program. Round two of the EPA program, which consists in $400 million in grant funding, opened last April. We are working closely with school districts and operators to help our clients secure grant funding under this program. This is just one example out of many others, as we are seeing new programs and legislations, including in Texas, Michigan, Illinois, among others. Back to our activities in Julian. During the quarter, We continue to manufacture lines units for customer deliveries and continue the setup of school bus working stations and installation of equipment. Everyone on site at the grand opening was able to realize that the building and all tenant improvements had been completed. We plan to gradually ramp up production in Joliet, including the start of Liongate production this year. Our objective remains to have a manufacturing capacity of 2,500 school buses per year in Joliet at the end of this year. Regarding the Lion Campus in Mirabelle, during the quarter, we transferred and installed an additional portion of the battery production line from JR Automation's facility and continue to ramp up the production of our battery packs. Our objective is to bring production capacity to 1.7 gigawatt hour per year by the end of this year. This will be enough to power approximately 5,000 of our vehicles in a mix of school buses and trucks. Our Line 5 truck as well as our Lion-C and Lion-D school buses, will be the first vehicles to feature our proprietary Lion battery packs. Our goal is to progressively integrate our Lion battery packs into our vehicles and gradually reduce reliance on third-party batteries. At the end of Q2, we had approximately 2,700 BMW battery packs in inventory. Nicolas will now further discuss our financial performance for Q2. Nicolas.

Thank you, Marc. I will start with the recent financing. I will then comment on Q2 results, including an update on CapEx, and I will conclude with our liquidity position. After the end of the quarter, we announced and imposed financing transactions resulting in approximately $142 million in gross proceeds. The financing includes a $74 million five-year senior unsecured convertible debenture bearing interest at 13%. For this portion, we have the option to accrue and defer interest payments, such that these payments accumulate to the amount that is owed and convertible into line shares. The debenture is convertible at a price of $2.58 per share, representing a 20% premium for the five-day V1 at the time of transaction announcement. The second tranche consists of a CAD $9 million, or approximately US $68 million, in five-year senior secured non-convertible debentures, bearing interest at 11% that will be paid in cash on a quarterly basis. This group of investors was also issued warrants entitling them to purchase 22.5 million common shares at an exercise price of CAD $2.81 per share, representing the five-day VWAP at the time of transaction announcement. This capital infusion provides us with the flexibility needed to execute our growth plans for the foreseeable future. Of importance to note, There are no additional financial ratio covenants associated with these financing. Concurrently with this transaction, the maturity of our $200 million revolving credit facility was extended by one year to August 2025. And last but not least, the ATM program, which was set to expire in July 2024, was terminated. Moving on to our financial performance for Q2 2023. We achieved record quarterly revenue of $58 million supported by the delivery of 199 vehicles, a substantial increase compared to Q2 2022, when we delivered 105 vehicles. Specifically, we delivered 166 buses and 33 trucks in Q2 2023, with 171 of these vehicles delivered in Canada and 28 in the US. Our average selling price also trended upwards, positively impacting our gross margins. As Mark mentioned earlier, The delivery of 50 additional buses that were ready to be delivered and for which the client was ready for reception was deferred until final approval of the VETF subsidy by the federal government is obtained. We expect the VETF approval to be obtained and the vehicles to be delivered in the coming months. During Q223, we also continued to improve gross margins, reaching 0.7% due to the positive impact of increased sales volumes, product mix, and higher manufacturing troopers. Adjusted EBITDA for the quarter was negative 9.7 million, marking a significant improvement compared to the negative 14.4 million in Q2-22. Addition to intangible assets, primarily related to R&D, decreased to 17.9 million compared to 24.6 million in Q2-22. Our total capital expenditures for the quarter decreased to $19.1 million as compared to $44.3 million in Q2 of 22. $5 million of these expenditures related to the Joliet Manufacturing Plant and $12 million to the Lion Campus. For the remainder of 2023, we expect to incur a total of $26 million in capex related to our two growth projects, namely $9 million for the Joliet Plant and $17 million for the Lion Campus. We want to reiterate that for 2024, our capital expenditures are expected to significantly decrease as our large project-related investments will be completed. Let's now move to liquidity and capital resources. During Q2 2023, we received $8 million in government loans related to the Lyon campus and raised $4 million through the ATM program before terminating it in conjunction with the recent off-race. Approximately 2M of the last ATM raise was settled after the end of the quarter. Furthermore, during Q223, we received initial upfront rebate payments from the EPA of approximately 27M under the first round of funding of the program. As a reminder, we obtained 292 purchase orders in connection with the EPA Clean School Bus Program, most directly through vouchers filed by Lion and To a lesser extent, through applications made by free agents, which were converted into purchase orders applied. These purchase orders represent a total value of $105 million. As applications in respect of other orders are processed by the EPA, we expect to also be able to receive other upfront payments from the EPA. As of June 30, 2023, we had a cash position of $44 million. The borrowing base on our revolving credit facility stood at $124 million, of which $100 million was drawn as of June 30, 2023. Taking into account the required reserves to avoid triggering certain covenants, this translated into immediate borrowing capacity of $8 million, thus bringing our immediate liquidity position to slightly above $50 million at the end of the quarter. As previously mentioned, after the end of the quarter, we received $142 million in gross proceeds from the offering providing us with the required flexibility to execute our growth plan. With that, I will pass it back to Marc for concluding remarks.

Thanks, Nicholas. Before we open the line for questions, let me conclude by saying that with the financing behind us, we now have the required financial flexibility to execute our growth plans and continue to focus on achieving profitability. Last week marked 15 years of existence for Lion. And let me tell you that we are more excited than ever about the opportunities ahead. With now over 1400 vehicles on the road, having collectively traveled over 14 million miles or 22 million kilometers, Lion is in a unique position to continue to capture market share in the medium and heavy duty EV space. Thank you all for joining us today and we will now open the lines for questions.

Operator, we will now open the lines for questions. I just want to ask you to limit to two the number of questions asked to allow other participants to ask that question. You can, of course, go back in the queue if you have any follow-up questions.

Perfect. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. To withdraw your question, please press star followed by two. And also remember to unmute your microphone when you turn to speak. Our first question comes from Mike Slivki from DA Davidson. Mike, your line's not open. Please proceed.

Yes, good morning, and thank you for taking my questions. Maybe I'll start off with a question about bus deliveries and the cadence going forward. I guess, could you maybe give us an update as to how you feel that's going to progress from here? Do you see ongoing increases quarter over quarter for the next couple of quarters, or do you feel like the bus business at this point has decided where it follows the broader bus industry where, you know, in the fourth quarter and then next first quarter, deliveries will taper off given the School's already in session.

Yeah, good morning. Good morning, Mike. Yeah, with respect to the buses, Mike, you've seen the trend, you know, in the previous orders as well. And we've said it. I mean, the goal is to increase the revenues and making sure we make profits. We're very proud of, you know, that we're gross margin positive right now. I think, you know, that's the real goal. That being said, though, if you're looking at the order book, And if you're looking also at the results that we have with respect to the EPA and a lot of Canadian programs as well, we're doing good. We're doing good. So definitely we see an increase in the revenues and the number of deliveries in the upcoming quarters. But that's going to be sequential, though. I've said it several times. It's not a switch that you turn on and off, but we definitely see a growth. within the next quarters.

Okay. Another question was about the experience center comments you had in the release. Opening up Joliet added one more experience center, I believe, to serve that area of the country. How built out is your experience center network at this point? Do you have more you need to build in the somewhat near future, and is there a large cutback for each one as you build them out? Thank you.

Yeah, we have, Mike, we have 12 of them right now. And, you know, for the foreseeable future, I mean, this is good. We do have experience centers in most of the states that, or many of the states that we are targeting, and the same thing, you know, on the Canadian side in many provinces.

And I think your question was also... Yeah, on CapEx, I can take this one. Hi, Mike. I'd say it's quite minimal CapEx to open an experience center, and we should be pretty nimble there. I think that what we need is to rent or lease a facility and have just the required tooling to service the vehicle, so it's certainly not a significant amount of capex when we expand that footprint. Of course, we're very mindful of capital spend, and we'll only do so with material deployments.

Okay, great. Those were two questions. I'll pass it along. Thank you.

Thank you, Mike. Our next question comes from Dan Levi from Barclays. Dan, your line is now open. Please proceed.

Hi. Trevor Young on for Dan today. Thanks for taking my question. And congrats on getting back to positive gross margin. I'm sure you have your sights set on the same for adjusted EBITDA. And I was curious if you could just give some directional indications on the bridge towards it from here. how to think about it in terms of volume versus other factors.

Hey, Trevor. Thank you for your question. Look, I'd say obviously we had said it in previous calls. It's the number one objective here is to be profitable and get the free cash flow positive. We demonstrated today some significant progress towards this. there remains a lot of room for us to continue to improve on the volume of deliveries, on the ASB, and on the margins. Of course, while we're pleased with the trajectory, there can be some volatility along the way, but we're very pleased with where things are heading. I think you're seeing that in the numbers this morning.

Yeah, we are. That's helpful. Thank you. And then just as a follow-up, I noticed the sequential decline in the Lion Energy order book. And I was just curious if, you know, the extent to which this reflects deliveries on the order book. And then more broadly, how to think about the energy business in terms of how it breaks out between supporting buses and trucks or if it generally matches the vehicle order book.

Let's start with the second part of your question. The goal of the energy business is to make sure that the clients are well taken care of in all aspects of the electrification of their fleet. That's a key component where there can be some issues, not only procuring that equipment, but also installing it and coordinating with the utilities. That's why we handle that for clients. We have quite a good hit rate in some markets, and in other places, in other vehicle classes, clients will procure on their own, and that's fine as long as it's well-coordinated. I would say as part of the order book, this is something that can have some more chunky orders, and so when we make those deliveries or when we get those orders, we see some up or down swings, and this is certainly not, in our view, a testament of the change in the order book for the vehicles or change in the cadence of deliveries. It's just really one snapshot at one point in time, and we've had some sizable deliveries in the quarter for the charging infrastructure.

That's very helpful. Thank you.

Thank you. Thanks. Our next question comes from Rupert Murrah from National Bank. Rupert, your line is now open. Please proceed.

Thank you. Good morning, everyone. Good morning, Rupert. So with the delay on the ZETF funding, how good is your visibility into that approval process? And do you see this impacting any vehicles that you would plan to deliver in Q3?

Well, thanks for your question, Rupert. very cautious about the timing of those deliveries going forward. That was the first sizable order for school buses under ZTF. And this is the reason for this delay right now. So it doesn't put into question the availability of those funds and the willingness of the government to fund those school buses. But it's really a matter of timing. So communication is very good with the Canadian government. And there was a lot of steps, let's say, to go to the final approval. And that's the reason for that. So I think now there's a very good understanding from all the parties involved. So we don't see that as being an issue going forward, but I think communication is key and we're very well aligned with them right now. And we're used to work with the Canadian government and also with the federal government, as you see with the success we're having with the EPA. So going forward, we feel it's going to be a lot smoother. okay but no no visibility on timing at this point well it could take time you know and this is something we cannot uh predict uh but you know for us it's really aligning the the manufacturing schedule uh with the approval of uh of those uh of those uh of those funds so this is the uh this is basically you know what uh with the focus for us going forward okay great and then secondly you highlighted

in your disclosures that some revenues were impacted by continuing global supply chain challenges. Can you give us a little more color on this? How many vehicles were impacted by these issues in Q2? And maybe you can give some color on what the specific supply chain challenges are today.

Yeah, Rupert, it's going a lot better. I mean, a year ago, we were saying, you know, that was the main challenge, right? just trying to manufacture those buses and trucks, it's not. It's not anymore. I mean, we've been able to develop a network of suppliers, tier one suppliers, and a great redundancy of suppliers as well. So we're very proud of that. And no, no big issue. I mean, we're not out of the wood yet, you know, with respect to the supply chain crisis, but it's going very well. So we don't see that as an impact, I mean, for us to be able to manufacture our buses and trucks going forward.

Can you give us a sense on how many vehicles might be impacted by that issue or the issues?

I don't think, you know, it's in the number of vehicles. I think, you know, it's really for us to be able to manage, you know, this overall supply chain crisis. And we're doing pretty good. So, no, there's... I don't think there's any number of vehicles that were impacted by that.

All right. I'll leave it there. Thank you.

Thank you. Our next question comes from Chris Shelter from B. Reilly. Chris, your line is now open. Please go ahead.

Hey, guys. Congrats on the march in progress here. ASP seemed to be a big driver here of the improvement, given volume came down slightly, but we had the revenue improvement. Can you give a margin walk maybe from 1Q to 2Q with some of the puts and takes related to ASPs and efficiency and kind of what's driving the ASP improvement? Is it U.S. versus Canada, incremental trucks, and just that would be helpful there.

Yeah, certainly. Hey, Chris. Nick here. Look, every quarter, the delivery is a mix of big orders that we deliver into as well as vehicles with different options and in different markets, be it Canadian, U.S. And this quarter was certainly that we demonstrated an improvement in the ASP by a number of things, having a more diversified full of clients that we delivered to. by improving our delivery count in the US and improving our truck deliveries as well. So I'd say that's a bit of all of the above in what you said. As you see, though, we still have a delivery count that's significantly weighted towards the Canadian market. We've talked about delivering vehicles with more options, more energy in the US market, including the EPA program. There's a lot of room to continue to grow that. And as well, there's a lot of room to continue to grow on the truck count. So, we feel good about the ASP, but our goal is to continue to improve it.

Okay, got it. So, it's something that should continue to improve as the UX mix continues to grow in the near term. You know, is there kind of a cadence of incremental fixed costs around Joliet and Maribel that step up that could impact the gross margins on 3Q, 4Q? I just wanted to get a sense of what you were looking, what you were talking about with some of the potential volatility on the margin front.

That's exactly it. Look, let's be clear that our goal is to continue to improve gross margin, but, you know, all margin and profitability. But the reason I pointed to some potential volatility is, you know, on the other side of what I just mentioned around the ASP improvement and the volume, the potential volume improvement as well. There are also more costs that we're undertaking with the Joliet plant ramps up, as the battery plant ramps up. These are, you know, I don't expect those to impact the long-term trajectory, but in the short term they can cause some volatility.

Perfect. I'll hop in the queue. Thanks.

Thank you. Thanks.

Our next question comes from Craig Irwin from Ross MKM. Craig, your line is now open. Please proceed.

Thank you. So it looks like EPA is going to only issue $400 million worth of vouchers this year. Last year, they did well over $950 million. So the total number of school bus orders seems to be contracting, right? Or at least the financial subsidy for U.S. school bus orders seems to be contracting. How do you think that's likely to impact the order book you develop over the next year? And is the U.S. market as important for your business as the subsidies from the Canadian authorities and other programs across the U.S.? ?

Hey, Greg. Nick here. So, yes, we're very focused on round two of the EPA program, which is for $400 million. We talked about it in the past. It's a different approach to it. It really is a RFP-type application. That is going well. We're having some good dialogue, and this round is closing late August with some indication of who will be awarded in Q4 and then formal awards in Q1. At the same time, it is our expectation that there will be another EPA round in the tune of $600 million for this year. They are talking about $1 billion a year, and the $600 million we expect would be in the form of a rebate program, pretty much in the same form as we've seen in round one. So we think there is more coming there. And there are more programs that are opening in a number of states, including in Illinois, for example, but it's just one among others. And so just to wrap up on this, the U.S. side of the business is a very important one for us. We view it as a very strong area of growth potential, and we're very focused on it.

Thank you. That's all my questions.

Thank you, Greg. Our next question comes from Leanne. I see from Canaccord Genuity. Leanne, your line is now open. Please proceed.

Good morning, everyone. Thanks so much for taking my question, and congrats on the quarter. Just a couple questions from me. To start, can you discuss any opportunities that you see to acquire battery and or module assets in the marketplace?

You mean, Leigh Ann, you mean from third parties?

Yes, correct.

Well, we are, as you know, we do have our battery factory, and basically our intention is to rely less and less on the third-party battery packs or modules. We're building our own modules, and we are buying cells from Tier 1 cell OEMs, so that's the goal outlined. We do have a capacity of... 0.6 GWh right now. We're going, you know, to 1.7 GWh by the end of the year, and it's enough to put batteries on about approximately 5,000 of our vehicles on an annual basis. So we're good for now.

Okay. Okay. That makes sense. And then just one more from me. Can you provide any comment that can help us understand your updated strategy around continuing to bolster your liquidity position?

Yeah, just well, in terms of liquidity, the short of it is we believe we have the required flexibility to execute our plan for the foreseeable future with the rate that we just did. When you look at what we said about the quarter, we had over $50 million of immediate liquidity at the end of Q2. That's our cash position and the availability on the revolver. We closed a financing right after the quarter for $142 million. In gross proceeds, we have other sources of liquidity that include upfront payments from the EPA, our government-owned facilities. And in terms of just the CapEx program, what's really important here is that we have a remaining $26 million to incur on the growth project for the rest of the year. That leads us, as Mark was mentioning, to 5,000 vehicles of capacity, both on the vehicle side and on the battery side. We're very firm on that. The intention is to drastically reduce the capex in 2024. We do not plan to invest in further capacity growth. And so the short of it, again, is that we believe we have the required flexibility to execute the plan, and that's why we shut down the ATM program.

Got it. Okay, great. That's all from me. Thanks so much.

Thank you. Our next question comes from Tien La Rochelle from Bez Garda. Tien, your line is now open. Please proceed.

Hey, good morning, and thanks for taking my question. I'll be speaking on behalf of Benoit. First, regarding the certification of your first battery pack, you previously expected it would be completed in two weeks, but now it's all for final certification in the coming months. Can you please provide more color on what caused the delay, and also, once it will be out of the way, what are the next steps in terms of Yeah, good morning, Tien.

We're at the end of the test and certification process, you know, on our battery pack. And it will be certified within the next few months. So we're still good. I mean, we're aligning with the need for our battery packs. And as you probably know, we will start installing them on the Lion 5. And after that, also on the Lion C, on the Lion D, and also on the Lion A tractor. So time-wise, I mean, when we're aligning the need for those battery packs with the launch of our vehicles. The timing works perfectly, so no issues.

Perfect. That's helpful. Thanks. And maybe recently the news was announced that you're going to start liquidating the assets of Romeo Power. I don't know if you wish to comment on it, but there are some developments on the arbitration process regarding the battery pack contract that you had with Romeo. Does the liquidation change anything whatsoever?

Well, it doesn't. As you know, at this stage, both the arbitration process with Romeo and the court case against Nicolas Mothers are following their course. And you're right, Nicolas just announced on June 30th that Romeo is liquidating its assets. And basically, they're transferring the ownership of all of its assets And there's some exclusions in there though, and they did that to a third party assignee for the benefit of the creditors. And right now we're basically evaluating all of our options in light of what happened. So basically those two processes are just following their course right now as we speak.

Perfect. Thank you very much for the cover.

Thank you, Dan. Our next question comes from Sarah Deer from BML. Sarah, your line is now open. Please proceed.

Hi, everyone. Good morning. Just want to understand, like, what trends are you seeing in the commercial truck market as in discussions with the customers? And the second one is we recently saw JB Hunt placing Class 8 commercial truck orders with Nicola. And were you involved in those discussions at any time?

Yeah, let me start with the first fold of your question. your question. We have 33 trucks delivered in this quarter, so obviously this is going in the right direction, which is good. And the 14 of those 33 trucks were both. And so it's more trucks than basically what JB Hunt just announced a few days ago. But also if you're looking at our customer list, you will see both in there and also DHL Ikea, Dollarama, Amazon, and many others as well. So a lot of those truck operators, they see the benefit of the total cost of ownership, and they're starting with a few trucks. We still feel that it's going to go faster than it did with school buses. And school buses, it took about five years to really take off. And we feel that trucks is going to be a little bit faster, but obviously with all the crisis that we saw in the last couple of years, there was a little bit of a step back on this side, but we feel now a good momentum with the truck operators, the discussions are very good as well, so we're kind of Well, let's say we're kind of excited that we feel that, you know, the number of deliveries will keep increasing. And with respect to your question with GB, obviously, you know, all those communications are very confidential. So I don't think, you know, we can comment on any of those. I mean, we're keeping the relationship with our customers very confidential.

Got it. Thank you so much. Those were my questions.

Thank you. We currently have no further questions, so I would like to hand the floor back to the management team for closing remarks.

Thanks, everyone, for joining the call today. We really look forward to continuing the discussion, and feel free to contact us for any further questions you may have. Have a nice day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.