The Lion Electric Company Common Shares

At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the call over to Isabelle Arche, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Arche.

Good morning, everyone. Welcome to Lions' third quarter 2023 results conference call. Bienvenue à la conférence téléphonique. sur les résultats financiers du troisième trimestre de l'exercice 2023 de Lyon. Today, I am here with Marc Bédard, our CEO-Funder, Nicolas Brunet, our President, and Richard Coulombe, our Chief Financial Officer. 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 questionary language in this morning's press release and in our MD&A, 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, Isabelle. Good morning, everyone. Today, we are pleased to report that in Q3, we achieved record deliveries, revenues, and gross margins, clearly showing that our focus remains our goal to profitability. Compared to Q3 2022, we basically doubled our revenues with approximately the same SG&E expenses, and our gross margin went from negative 9% to a positive gross margin of over 6%. mostly driven by higher volume, favorable average selling price, and continued cost control. We had a significant EBITDA improvement as well, increasing from negative 15.1 million in Q3 2022 to negative 3.9 million in Q3 of this year. Also, we now have more than 1,600 vehicles on the road with more than 19 million miles driven or 30 million kilometers, a significant achievement demonstrating our leadership position in the EV space. It is also my pleasure to acknowledge recent leadership appointments. Nicholas, who got deeply acquainted with Lion's products, customers, and operations over the past four years, was named president and works with me on the elaboration and execution of all strategic aspects of the business. His main focus being our commercial operations and the acceleration of sales across the United States and Canada. Richard, who has been instrumental in driving our growth projects with a lot of success for the last two years, was appointed Chief Financial Officer. Richard will leverage his 25 years in executive finance roles to support our objectives of profitability and positive free cash flow. I will now provide an update on several key decisions we have made to focus on our profitability objective and optimize capital usage. On the bus side, we will postpone the commercial production of the Lion-A school bus to prioritize the commercial production of our high demand products and the timely integration of our Lion batteries on our existing platforms. On the truck side, the litigation with Nikola Motors and their decision not to supply us with the Romeo Power batteries will result in us using our own Lion batteries on our Lion-A tractor truck, thus postponing its market entry to mid 2024. And finally, we have great news with respect to both the Lion 5 truck and the Lion D school bus as we started commercial production for both of these vehicles and will soon begin customer deliveries. Now turning to our manufacturing plans and operations. In Joliet, we now have the infrastructure in place to reach a production capacity of 2,500 school buses per year. During Q3, we continued to ramp up the production of Lion C buses And as I just mentioned, we have also started the commercial production of Lion D units. At our battery plant, we continue to ramp up production of Lion battery packs during the quarter. The current production line allows us to reach production capacity of 1.7 gigawatt hour per year, enough to power over 5,000 of our vehicles. The certification process for the Lion packs is progressing well, and we expect final certification to occur before the end of the year. With respect to our innovation center, the building is currently being used as a testing and certification center for our vehicles and batteries, as a pre-delivery inspection site, and as a warehouse for inventory. This allows us to leverage space available and optimize operational efficiency. Additionally, we will soon start using the innovation center as a showroom and delivery center for customers to see and test our vehicles on our test track and take delivery. In a nutshell, we have been able to expand our manufacturing capacity to our targeted levels, and the capex investments for our two growth projects will be completed by the end of this year. On that note, I will now ask Nicolas to dive into our commercial operations performance. Before turning it to Richard, we'll discuss the financial highlights of our Q3 results. Thank you, Brett.

We delivered 245 vehicles in Q3, consisting of 220 school buses and 25 trucks. 132 vehicles were delivered in Canada and 113 in the U.S. This is a record number of overall quarterly deliveries, but also a record for deliveries in the U.S., where we delivered purpose-built EV school buses to several new customers. The vast majority of those U.S. deliveries were part of the EPA's Clean School Bus Program. We are pleased to make prompt deliveries under the EPA program, demonstrating Lions' leadership in U.S. EV school buses. Cumulatively, for the first nine months of the year, we delivered a total of 664 vehicles, almost twice the 345 vehicles delivered over the same time same last year. With respect to the order book, it currently stands at 2,232 vehicles, that's 268 trucks and 1,964 buses, totaling $525 million, with the Lion Energy book at 129 charging stations representing $4 million. Worth mentioning is a conditional order from Highland Electric for 50 Lion C-School buses, which we announced this past Friday. This quarter's vehicle order book was affected by various factors, including the removal of 140 units from the deferral of the Lion A platform discussed earlier, as well as purchase order delays and cancellations related to subsidy programs, mostly stemming from clients awaiting funding decisions. We anticipate a positive momentum in all electric school buses as a result of attractive funding programs, including awards under the $400 million 2023 EPA grant program, which drove significant customer interest ahead of applications in August, and for which customer awards are expected in Q1 2024. Potential orders under the 2023 EPA rebate program, with a budget of $500 million, requiring applications by January 2024, with award announcements scheduled for April 2024. Several appealing programs in states such as Texas, Colorado, New York, Michigan, and California, which could drive school bus demand beyond the scope of the EPA program. and momentum in the Quebec school bus market, where the subsidy program was recently renewed and enhanced with an increase of available funding from $125,000 per bus to $175,000 per bus, depending on battery capacity. This momentum in the school bus space is further supported by an increasing number of states passing laws to accelerate the electrification of the transportation sector. Separately, we are in ongoing dialogue with the Canadian federal government The satisfactory approval of sizable applications for school bus deployments placed under the ZET-ETF program. Successful completion of this process would enable timely vehicle deliveries and could generate further applications for potential new purchase orders. On the truck side, while this market is still at a very early stage with electrification just commencing, we remain very enthusiastic about our prospects in the Class 5 to 8 market. Leveraging our purpose-built truck platform, Lion stands out as one of the few players of critical mass of vehicles on the road, and we expect the upcoming deployment of Lion 5 units to generate significant customer interest. Like in the school bus sector, we are closely monitoring billions in existing and upcoming subsidy programs aimed at accelerating fleet electrification. To conclude, we continue to experience strong customer engagement on fleet electrification, underpinned by societal desire to transition to EV, as well as emerging regulation and attractive subsidy programs, and we believe Lion is very well positioned to address this upcoming demand. On that note, Richard will now discuss our financial performance. Richard?

Thank you, Nicolas. I will start by commenting on Q3 results, including an update on CapEx. I will then discuss our liquidity position. In Q3, we delivered 245 vehicles, resulting in record revenue of $80 million. This represents revenue growth of almost 100% compared to the same period last year and close to 40% versus Q2 2023. This increase in sales volume coupled with favorable product mix and average selling prices as well as continued cost discipline led to gross margins of 6.7% compared to negative 9.3% in the previous year. For the quarter, SG&A before non-cash share-based compensation was $17 million. As a percentage of revenue, SG&A before non-cash share-based compensation decreased from 36% to 21% over the last year due to disciplined cost containment efforts. This is a trend we are looking at maintaining as we continue to focus on reaching our profitability and positive free cash flow objectives. Adjusted EBITDA improved to negative 3.9 million from negative 15.1 million in Q3 2022. Additions to net intangible assets mostly related to R&D, amounted to $15 million, a decrease of $3 million when compared to $18 million in Q3 2022. Capital expenditures amounted to $16 million, including $4 million for Joliet and $8 million for the Lyon campus, a significant decrease as compared to $29 million last year. We anticipate combined capex spend of approximately $12 million in Q4 for the Joliet plant and the Lyon campus, leading us to the conclusion of our main initial investment on these projects. We therefore continue to expect minimal capital expenditures in the foreseeable future, mostly maintenance capex, as our growth projects have reached their targeted capacity level. Now turning to liquidity and capital resources, in Q3, we successfully closed financings, resulting in $142 million of gross proceeds, or $136 million net, which provides us with additional flexibility to continue to execute our plan. As of September 30, 2023, our immediate liquidity stood at $132 million, consisting of $36 million in cash and $96 million in immediate borrowing capacity on our revolver. At the end of the quarter, our debt balance stood at $176 million. Finally, as we move forward with our 2024 budgetary process, We continue to focus on decreasing product costs, optimizing working capital management, and improving our internal cost structure. Back to you, Marc. Thank you, Richard. Before we open the line for questions, let me conclude by saying that we are pleased with our Q3 performance and thrilled about the opportunities unfolding in the EV market and our positioning. Our commitment is to achieve profitability and positive free cash flow, and we are confident that we have the right elements in place, the right focus, and the right strategy to achieve our objectives. Thank you for your attention this morning. Let's 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 their questions. You can, of course, go back in the queue if you have any follow-up questions.

Thank you. If you would like to ask a question, I will remind you that I start followed by one. We will pause for a moment whilst we order today's Q&A oyster.

I think we have a question from George. George, please go ahead.

Hey, good morning, everyone, and thank you for taking my question. Excuse me, and congratulations on a great quarter. I wanted to ask about the sustainability of the gross margin momentum that you showed. How should we think about the next couple few quarters in terms of modeling the gross margins going forward? Thank you.

I'll take that one. Thank you for the question, George. So we achieved a record 6.7% gross margin in Q3, so representing substantial increase as compared to 0.7% in Q2 of 2023 and negative 9.3% in Q3 2022. So sustaining positive gross margin and achieving positive disaster-free cash flow clearly is number one priority at Lion. It will obviously require continued focus on revenue growth and tight management, cost management. We were definitely in the right direction, but we could see some volatility as we continue to ramp up. New platform deliveries on the Lion D and Lion 5 starting this quarter and the gradual integration of our Lion battery into the currency commercial model could temporarily affect our growth margin. We continue to be very focused on driving productivity within the organization and working at reducing our product costs.

Thank you for that. And then maybe just as my second question, again, it's the housekeeping. You mentioned that going forward your growth CapEx is more or less complete. Can you just remind us what the level of maintenance CapEx we should assume for the firm for the next couple few years?

Thank you. Should be pretty minimal. Right now we're really aiming at single-digit CapEx for next year. It's going to be largely, you know, maintenance CapEx.

Single-digit millions is the number you mentioned?

Correct.

Okay. Thank you so much. I'll go back in queue. You're welcome.

We now have Mike Schleske of DA Davidson. Your line is open.

Yes, hello, good morning, and thanks for taking my question. So right now you're up and running with a really nice-looking plant in Illinois, obviously well-established in Quebec. Do you have any view as to when your visibility is going to be good enough at this point to start giving us some guidance about what your deliveries might be, at least one quarter hours? How consistent is your production rate right now?

Oh, hey, Mike. Nick here. I'll take this one. Look, I mean, we're – I mean, we're still in ramp-up mode. The guidance decision is one that we're always assessing internally. We don't have an update to provide this morning, and, you know, when things change, we will, but there's no set timing for us to provide any guidance going forward.

Okay, okay. Maybe you can just talk a little bit about the Lion 8 tractor. I guess I'm curious a little bit behind the scenes as to how you develop the battery, guide it to the truck, and getting that whole project finalized. Was there a high cost there over the last couple of quarters that we should be thinking about? And do you expect to recover most of that from Nicola once that case is resolved?

Well, with respect to Nicola Motors, well, you know that we terminated basically what was going through with them right now, so the proceeding against Romeo, but not when civil proceedings against... against Nikola. But going back to your question on DHT, I mean, we have no choice in using our own batteries. And the HD batteries will be certified early next year. And we will be able to use those batteries on the Lion-8 tractor. This Lion-8 tractor, I need to tell you, Mike, is amazing. And obviously, you know, the home market is uh is expecting it we will be able to put a lot of kilowatt hour on those uh you know on those trucks so we will have a lot of range as well so we're expecting a good very good demand i mean for uh for that product but obviously you know going back to the uh the root of your question on negro motors uh respectfully i mean we'll not we will not be able to come in further because of the proceedings going on right now okay fair enough i'll pass along thank you

We now have Tarora Rebora from Desjardins Capital Bank. Your line is now open.

Yeah, good morning, everyone. Just looking at your truck backlog, if you remove the 140 purchase order, sorry, just looking on the bus side, there was 140 purchase orders removed from the LimeA. but it looks like some booking was lower on the bus side. Could you comment about your bidding pipeline and your ability to secure more momentum on the bus side in 2024?

Certainly, Ben, I'll take this one. There were a number of moving parts in the order book during the quarter. As you mentioned, the most important one was the removal of the 140 Line A units related to the postponement. But there's also some volatility caused by the timing of the subsidy programs and that's expected as customers await to know what their allocations are, what the programs that are being put in place are renewed before they're placing the order. I think it's important to re-emphasize that we continue to see strong engagement from the customers towards fleet electrification and we see some upcoming catalysts in the order flow. I mentioned earlier the EPA rounds two and three. for which allocations to customers are expected, allocations of awards are expected early next year. That's $900 million of school bus funding that's coming in the U.S. federally somewhere in between end of Q1 and beginning of April. In the Quebec market here, which is obviously a big market for us, there was a positive in the subsidy program as it was being extended and renewed and the good news is that the subsidy that previously paid $125,000 per school bus was extended and it was increased where now the operators can obtain up to $175,000 per bus based on depending on battery capacity. There's the ZETEF program that we talked about that could lead to Of course, near-term deliveries for us when we hopefully get the approval, but also that will drive more purchase order flows, we believe. And then there's a number of various funding alternatives as well at the state and at the provincial level. So overall, we continue to feel very good about the demand environment, but those subsidy programs can create some volatility in the order book on a quarter-to-quarter basis.

okay and with respect to the 50 bus order from island which is conditional what is the timing with regard to the final approval uh for the kingdian ztf subsidy yeah i mean it's uh we have a number of uh orders that are in the queue for the the zet etfs

It's tough to point to specific timing of each, but we say on the larger orders we're progressing well in the dialogue. We hope that it's in the near term, but obviously difficult to pinpoint the specific time. But it's live right now in the dialogue, very live.

Thank you very much for your time. Thank you, Benno.

Thank you. We now have Ben.

Hi, Josh on for Dan's line today. I had a quick question on if we're getting any mixed benefits from increasing U.S. sales. I saw that the U.S. volumes ticked up quite a bit this quarter and ASPs also went up accordingly. I was wondering if there's any correlation of potential benefit from increasing sales into the U.S. versus Canada.

Yeah, I'll take this one. The short of it is yes, typically in the U.S. market, We tend to sell units with more onboard energy, higher battery capacity, more options. The U.S. market is a more intricate market relative to the Canadian market where there's less differences in between province. In the States, obviously, the regulatory environment is different. And so we do tend to sell vehicles with more options that are more custom in the U.S. and have a higher average selling price. Obviously, keep in mind the U.S. market is about 10 times the Canadian market, and it's our goal to match that over time.

Thank you. And as a follow-up, we're seeing somewhat slower EV uptake among the medium and heavy-duty trucks. And I was wondering if you have any inclinations on whether maybe like some of the states, like California, or any of those other states on the advanced clean fleet will potentially consider bumping up the potential regulatory credits to spur some more demand there.

Let me start by saying that in the truck space, the truck EV market for the Class 5 to 8 is really still at its infancy. If you look at as of June 30th this year, there were less than 1,000 vehicles registered. And based on this data line would be the fourth player in the space So one of the we're one of the very few players with critical mass and importantly with a purpose-built product out there There we have seen some You know positive legislation you talked about California that's complete. That's certainly positive development This is more on the regulation side and typically. Yes. We've seen that following regulation is the bonification, if you will, of the subsidy programs. We don't have direct visibility into that, but we've seen it in other markets, and we're certainly hoping it will be the case as well. Altogether, you know, again, the market is just at the beginning, and we have the product and the manufacturing capacity to accommodate clients as things ramp up, and we're very hopeful for this market to increase significantly over time exactly when, you know, remains to be determined.

Thank you.

We have our next question from Tammy Chen with PMO Capital Markets.

Hi, good morning. Thanks for the question. Can we go back to the Canadian subsidy program, the ZETF? What's causing, again, some of the delays? Is it just the application, there's additional nuances or revisions required, and so there's just been a delay from an administrative perspective? I'm just trying to understand what's going on there.

Yeah, look, the VET ETS program is one that is very specific application by application, and so every approval is different. The orders that we have in the queue are, we believe, the first big ones for the school bus, because recall that the program is both for transit and school buses, and those are the first big ones for the school bus, and so there's dialogue between the federal government, ourselves, and our clients to find the appropriate, to get the appropriate terms I need to point out that the asks of our clients sit directly within the parameters of the program. So we're hopeful that we'll get a good resolution. And again, it's very bespoke application by application. And obviously, yes, there is an administrative burden to that. We believe that once the first large ones are hopefully approved, that things can accelerate from that on.

I see. Okay. And the line eight bus, the school bus, so I just want to make sure I understand. The 140 units deferred in your order book, is that on the line eight school bus? And so was that the customer that deferred or you made the decision to prioritize other higher demand products? I just want to make sure I understand that aspect correctly. Thank you.

Yeah, good morning, Tammy. Yeah, this is related to the Lyon A school bus, and it's a matter of focus. We're strong believers in focus, as you know, and we decided to focus on the commercial production of the high-demand products, as you were saying. So it's the Lion C, and it's also the Lion D coming to market, the Lion 5, and the Lion 8T a little bit later. So all a matter of focus and cost control.

And if I just address the order book part, you know, it was us removing those units from the order book as we're undertaking dialogue with the customers to see if there's a desire to defer to the longer period the order or to convert it to a line C or line D order. But just in our review, we felt prudent to remove those from the order book.

Understood. Thank you.

Thank you, Tammy.

We now have Chris Suter of B Reilly Financial who may proceed.

Hey, guys. Thanks for taking my question and congrats on the progress here. I just wanted to touch a little bit on kind of the production mix between the two facilities. Could you give us any sense of what the kind of output is starting to hit out of Juliet here? And then I have a follow-up.

Yeah, good morning, Chris. Yeah, the cadence is going well. You will probably remember we have a manufacturing capacity of 1,000 buses in Montreal, and we have a manufacturing capacity of 2,500 buses in Joliet. And in Montreal, we also have capacity for 1,500 trucks on an annual basis. So the cadence is going very well, and there was no question yet on the supply chain But, you know, supply chain is getting a lot more stable and that was a discussion we had, you know, probably for the last two years. So it's getting a lot more stable and we've been working a lot of, you know, on the redundancy of suppliers as well. So it's going quite well. So our goal is really to increase the pace as needed and the, you know, that the goal is also to manufacture in the country where, you know, the buses are being being delivered. And we're getting there. So obviously we're doing less buses in the U.S. right now than we're doing on the Canadian side. But as Nick was saying earlier, I mean, the U.S. market is 10 times bigger, the Canadian market, and with the manufacturing capacity of 2,500 buses on the U.S. side, we're very, very well equipped to increase the pace as we get more orders we'll be able to deliver.

Just to clarify then, so in the third quarter, the deliveries by country kind of matched up with the geography of the manufacturing facility, or are we not quite there yet on the U.S. school bus side?

By and large, yes, closer to that.

Got it. Okay. And then, you know, if I'm kind of looking at, you know, the margin increase, you know, I think pricing had a big piece to do with that. You know, as we kind of trend higher with, you know, can you just kind of talk through what that premium in the U.S. should be that we can kind of, you know, bake in as we have U.S. kind of ramping up more? I just want to get a sense, you know, how much continued, you know, opportunity of price increase, you know, on the ASP side we have and

um you know is there any kind of delta on the production cost side between the two at this stage and then i'll help you yeah you know chris as i mentioned earlier it really is about selling it's about the the onboard energy that we have in the in the vehicles it's about the the options that we have in there um you know for uh for an equal um build, there's no price difference or at least no material price difference between producing in Canada and producing in the US. So it really is about mix and options on the vehicle more than anything else. And I couldn't point to a rule of thumb of US versus Canada.

We now have the next question from Rupert Murrah.

of National Bank.

Hi, good morning. On working capital, your working capital increased a little bit in the quarter. I'm wondering if you can give some color on what drove that. I imagine a combination of batteries and vehicles. How do you see that evolving over the next few quarters?

Well, thank you for the question. I'll take that one. So obviously there's a portion of the working capital increase that's directly connected with the growth in our production, but also the introduction of the Line D, the Line 5, and also we're preparing for the integration of our own batteries into our platform. So this is somewhat driving some of the increase. I can tell you we're very focused on working capital. One strategy we have in place with overstocking of inventory given the spiking prices that we went through in the last year or so. And today, as Mark pointed out, we don't necessarily need this strategy anymore. So right now we're very focused on really reducing working capital and we expect to see working capital turning around in the next two quarters.

Is there much in inventory related to vehicles that are awaiting ZETI-TF funding? And when you get funding, could you see some of that working capital coming out?

Yes, well, as Nick pointed out earlier, there's a couple that we're awaiting ZETI. approval. There's one that has been lagging from last quarter. There's 50 of them that are definitely just waiting to be delivered. So yes, there are some and we will see some uptake there as we get the approval.

Great, thanks. And then secondly, you talked about the fact that the supply chain is easing. And earlier on in your prepared comments, you talked about focus on cost reduction. Wondering if you can give us some color about where we are today in the costs and where are the opportunities to drive out cost in the future and also if you can give a comment on inflation and if you're seeing now a reduction in the inflation that we've seen over the last few years.

Yeah, good morning, Rupert. This is Mark. Yeah, we're focused on reducing the cost, as you know. So there's many places where, you know, there's going to be, there will be savings in the future. Obviously, you know, the inflation didn't help. I mean, still, you know, hitting us, the inflation rate now as we... as we all know. But there are a lot of places where we see a lot of benefits. First of all, I need to tell you that our manufacturing processes are a lot more stable. And this is good. We've been doing this for many, many years and we see the benefits of that. Obviously, with volume going up, then the amortization of the fixed cost is getting better. One place where we will be reducing significantly, and this is starting now, it's also in R&D. I mean, we've invested a lot in R&D in the past. And in the future, the R&D investments will be going down. And speaking of cost control, you probably saw also that the SG&A has been very stable. And we are looking at reducing the percentage of SG&E over sales in the next quarters as well. So, for example, we've been able to double the sales this year compared to last year with about the same amount of SG&E expenses. So it's all about the focus on our products. It's about the focus on the on the margin, bringing down those costs. And you probably saw as well that in Q3 of last year, Rupert, we sold 156 vehicles and we had a negative EBITDA of $15 million. This year, We had a negative EBITDA of $3.9 million with 245 vehicles. So you can do the math. I believe that everyone can see that the business model is scaling very well, and we said that in the past, but I think this is the proof that you're seeing now. It's scaling very well, and the good thing is that we don't need very high volume to reach profitability.

Great. Thanks for the color, Mark. Yeah, definitely solid margins this quarter. Congrats. I'll get back to you. Thank you.

Thank you. We have the final question on the line registered from Abney Sina with Northland Capital.

Yeah, hi. Thanks for taking my question. Just wondering, in your gross margin, you have two consecutive quarters of gross margin. So I understand the margins could be lumpy during the nature of the business, but Can we assume that the margins would be positive from here on, going forward, given your ramp-up in US and higher ASPs and whatnot?

Yeah, as it was mentioned earlier, we're going to see some movements in gross margin. So obviously, with undervolume, I mean, the margin is, this is really helping the margin, as I was just saying earlier. But the launch of the new platforms, though, and we're talking about the Lion 8 tractor, and next year we're talking about the Lion 5, that we are starting the deliveries, I mean, in Q4 of this year, and also the Lion D. Well, it's obvious that, you know, the gross margin at the beginning on those products is not as good as the one it's going to be in the very near future. So we expect some volatility in the gross margin for the next two or three quarters because of those items.

Sorry. Could you comment on the M&A landscape in the sector? I mean, we see some of the peers are under stress. Just wondering how you guys are evaluating any such opportunity or mostly just focus on organic growth from here on.

Yeah, we're fully focused on managing our business. We're increasing our margin. I mean, we're commercial, you know, the meetings, you know, with customers and, you know, uh having a very efficient operation as well i mean this is uh this is uh this is our focus so we're we're 100 percent focused on uh on those items right now so we're not looking at this that's right thank you mr okay thank you thank you we have no further questions on the line so i'd like to hand it back to miss argy for any final remarks

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

Thank you for joining. I can confirm this does conclude today's conference call. Please have a lovely rest of your day, and you may now disconnect your lines.