The Lion Electric Company Common Shares

Good afternoon, ladies and gentlemen, welcome to the Lion Electric's third quarter, 2024 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the call over to Dominique Perrone, chief legal officer and corporate secretary. Please go ahead, Ms. Perrone.

Good afternoon, everyone. Welcome to Lion's third quarter, 2024 results conference call. Bienvenue à la conférence téléphonique sur les résultats financiers du troisième trimestre 2024 de Lyon. Today, I am here with Marc D'Aidor, our CEO founder, Nicolas Brunet, our president, and Richard Coulomb, 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 statement. We invite you to review the cautionary language in this afternoon's press release and in our NDNA, 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.

Thank you, Dominique. Good afternoon, everyone. Thank you for joining us today. Since the last quarter, the team at Lion continued to deploy significant efforts in our relentless march towards improving our liquidity position and build sustainable foundations for both the short-term and long-term success of Lion. As previously announced, we have implemented multiple initiatives to streamline our operations, and we have seen the impact of these on our cash-off flows. We have implemented at-count reductions and initiated other cost reduction initiatives expected to result in annual life-cost savings of approximately $65 million. We have implemented a batch-size manufacturing approach to our truck business, tying production directly to purchase orders in order to minimize expenditures and cash burn while maintaining our leadership in the electric truck market. Finally, we have launched a formal process to sublease a substantial portion of our Jolyette production facility, aiming to reduce expenditures while maintaining current production capacity at the plant. In parallel, we are exploring various alternatives to reduce our facilities-related expenditures across our entire footprint. We continue to execute on our plan to start selling our battery packs to third parties starting in 2025. Despite these initiatives, the challenges that we had signaled in the first half of the year continued in the third quarter to put significant pressure on the company from a cash flow and liquidity standpoint. The continued delays associated with the Canadian Federal ZDTF program, the timing of the rounds in the US EPA program, and our liquidity position impacting our production cadence have negatively impacted our revenues. That being said, we have recently seen positive movements in both the ZDTF and EPA programs that we will be addressing in a few minutes. As you may have seen, our interim financial statements and MDNA signal the existence of uncertainty about the company's ability to continue as a going concern over the next 12 months if no additional funding is raised. The inclusion of a going concern note is a reflection of the challenges we are currently facing, but it does not mean that we are out of options. We continue to actively review and consider different opportunities to secure additional financing and straighten our financial position while working with our debt holders to identify the best path to ensure the long-term sustainability of our business in light of the upcoming period of the COVID relief period and the Finalta CDPQ debt maturity. Turning our attention to some of the third quarter highlights, we are seeing positive momentum with the EPA program. Nick will provide more details shortly. And we also have paid an expensive reimbursement payment totaling $30 million under the grant round and continue to actively work with customers to obtain formal purchase orders and fulfill other requirements to receive payments from the rebate round. We are continuing to work closely with the Canadian government and the operators to improve the timing of the processing of applications under the ZDTF program. And we are happy to note that the recent dialogue has been constructed in this regard as we have been informed by several operators that their applications are being processed. We also continue to execute on our inventory reduction plan with a $15 million reduction in Q3 alone and a $35 million -to-date inventory reduction as of September 30th, the vast majority of which relates to raw materials. We are therefore very well aligned to realize a $50 million inventory reduction in 2024. With respect to vehicle development, we continue to ramp up the production of our Alliance fiscal buses with the Alliance proprietary battery packs and have received positive feedback from our customers on this new platform. Separately, commercial production of the Alliance AT has been pushed to 2025 as a result of account reductions performed and our focus on preserving liquidity and thus allocate resources to producing and delivering existing platforms. Looking forward, it is clear that 2024 is a very challenging year and we will continue to work towards positioning ourselves for the future. With CAPEX span behind us and the significant reduction in development costs as a result of our vehicle platforms being substantially completed, our focus remains on preserving liquidity and straightening our financial position as mentioned earlier. With all the efforts and initiatives taken to adjust our cost structure, we will continue to work tirelessly to position the company to support increasing electric school bus demand and allow us to maintain our leadership position in this segment. I will now turn it to Nicholas.

Thank you, Mark. Let me start by discussing deliveries, then address the order book. During the quarter, we delivered 89 vehicles, comprising 71 buses and 18 trucks. 45 vehicles were delivered in Canada and 44 in the U.S. The decline in deliveries was mostly the result of delays with the ZETF program, coupled with the timing of EPA-related deliveries. Deliveries were also impacted by a slowdown in our production cadence due to the continued ramp-up related to the integration of our Lion batteries onto our vehicles. Our objective to preserve liquidity also impacted our rate of production and deliveries during the third quarter. Q3 deliveries include an additional 11 buses to our customer who obtained funding approval under the ZETTF program for 200 buses last quarter, bringing the total buses delivered to this client to 70. We expect the remaining units from this order to be delivered over the remainder of 2024 and over 2025. In terms of purchase orders, as of November 6, 2024, Lion's vehicle order book stood at 1,590 vehicles, consisting of 1,455 buses and 135 trucks, representing a combined total order value of approximately $420 million. The decrease in our order book is mainly due to our decision to withdraw 515 bus orders related to the ZETTF program, given the uncertainty related to delays in the process of the ZETTF application and the March 31, 2026, current timeline for deliveries under the program. The delay in the launch of commercial production of the Lion 8T truck have also resulted in the removal of 49 units from our order book. Separately, we are seeing momentum with the US EPA Clean School Bus Program, with over 275 purchase orders related to the program in the order book as of today. We continue to work with a number of school districts and contractors that have been awarded and are considering purchasing Lion vehicles. In connection with the 2023 grant round, we obtained payments of $30 million and additional payment requests under the rebate rounds have been placed with the EPA. We continue to actively work with customers to fulfill the necessary requirements to place payment requests under the latest rebate round. Additionally, a new round was announced in the EPA Clean School Bus Program in September 2024, providing for a funding of up to $965 million. An aggregate total of $325,000 in funding will be available for priority districts for all electric buses and charging infrastructure, and stacking with certain other state programs and federal tax credits will be permitted. Other eligible districts can receive an aggregate total of $170,000 per bus. Applications are expected to be submitted by January 2025 with selectees notified in May 2025. Altogether, the latest three rounds of the EPA Clean School Bus Program, inclusive of the September 2024 rebate round, in addition to the Clean Heavy Duty Program, for which allocations are expected to be announced by February 2025, are expected to result in over 10,000 new electric school buses being deployed until the end of 2027. We are proud of the success achieved by Lion and its customers under the EPA program, with Lion vehicles delivered under the program having now traveled over 1 million miles. During the third quarter, one of our customers, Hersher Community Unit School District, led the way in school bus electrification by unveiling a -the-art electric school bus barn for its 25 all-electric Lion C buses, featuring a solar array to offset the facility's new energy consumption. This initiative is a clear example of the positive impact that dedicated federal investments into clean energy can have. Finally, our Lion Energy Order Book currently stands at approximately $8 million. I will now turn it over to Richard to discuss our financial performance.

Thank you, Nicholas. I will start by commenting on Q3 results and then discuss our liquidity position. In Q3, we recorded quarterly revenue of $30.6 million driven by lower unit sales due to factors already discussed by Mark and Nicholas. These lower revenues coupled with increased manufacturing unit costs, resulting both from the continued ramp-up of our new Lion D and Lion 5 models and the continued integration of Lion batteries onto our vehicles, also impacted profitability. For Q3, gross margins was negative $16 million and EBITDA negative $19.5 million. Nevertheless, we continue to see the positive impact and dematerialization of previously announced cost-cutting measures. Q3 SG&A of $13.1 million was down $3.7 million from prior year and was down $1.6 million over Q2. We also saw a significant reduction of Catex and R&D, which respectively amounted to Catex of $400,000 down approximately $16 million from last year and R&D of $6 million down approximately $9 million from last year. Now moving on to liquidity. As of September 30th, we had available liquidity of approximately $27 million. We continue to make good progress on our inventory reduction plan, decreasing inventory by $15 million in Q3 and $35 million for the first nine months of 2024, the vast majority of which related to raw material reduction. Our full year 2024 objective is now to reduce inventory by approximately $50 million as opposed to the $50 to $75 million previously stated due lower than expected sales volume. We announced on October 1st additional amendments to various loan facilities providing for continued relief from certain financial covenants from September 30th until November 15th. We are in continued dialogue with lenders to address the upcoming end of relief period and the upcoming maturity of the Finata CDPQ loan. As stated by Mark, we are also currently seeking potential source of financing and or other opportunities to strengthen our balance sheet. I will now pass it over to Mark for concluding remarks.

Thank you Richard. Despite the headwinds lying in and the whole EV industry is facing, we continue to be very well equipped to support the operators in their transition to electric as demonstrated by the more than 32 million miles driven on our 2200 vehicles on the road. Our objective for the balance of 2024 is to continue to materialize all the initiatives we announced and straighten our liquidity position to be fully prepared to attack 2025 with a very efficient cost structure that will allow us to continue executing on our business strategy. Finally, I would like to thank our team at Lion for your determination and commitment to mission and our clients for their trust in Lion for the electrification of their fleet. Let's now open the line for questions.

Over

here,

we will now begin our question and answer session. At this time if you would like to ask a question please press star followed by one. If you would like to remove that question please press star followed by two. Again to ask a question it is star one. As a reminder if you're using a speakerphone please remove to pick up your headset before asking a question. We'll pause briefly here if questions are registered. Our first question comes from Kevin Chu with the company CIBC. Kevin your line is now open.

Hi, good afternoon or good evening. Thanks for uh thanks for taking my questions here. Maybe just two for me. You know obviously a new administration over in the U.S. just just wondering I suspect it's early days here just how you think that might impact you know some of the programs meant to subsidize the adoption of electric school buses and and commercial vehicles you know some of the stuff we're hearing suggest that maybe they'll lessen some of the regulatory efforts that the previous administration was pushing in terms of converting you know more vehicles to electric. Just wondering what you're thinking moving forward and maybe how that might change your strategy or your sales strategy.

Yeah well thank you for your question Kevin. This is Mark. I think at this point I think it's too early to see what the exact impact is going to be. We will be finding out probably within the next few months. Obviously we're ready to collaborate you know with the new administration as well and there are crucial issues that we're working on right now in terms of energy transition electrification obviously. But one thing you know that that we should note is that EPA Clean School Bus Program is working very well and as you probably know that was coming you know from the bipartisan infrastructure law in 2021 and it's well underway right now and there was a lot of funding already going to operators school districts and also to some OEMs and something we should note as well is the there's a lot of subsidies at the state level and just to name a few there's a lot of them in California, Texas, Michigan, Colorado, Illinois and New York as well in addition to the EPA.

That's helpful and I appreciate the answer given it's still early days. It leads to my second question. You know Nick you talked about you know some of the moving parts that impacted the order book and it sounds like a lot of it was stuff that actions you had taken you called it I think 515 units that were removed proactively from your end related to the ZETF program. I guess maybe a simple question. What happens to these 515 units? Would you expect that to re-enter your backlog at some point? Are these you know lost orders just because of delays in the subsidy program? Just I guess how do you view those 500 units that kind of were removed over the past few days?

Yeah hi Kevin. Yeah let's start by saying that this is not a cancellation by a customer. It really is our approach to disclosing the purchase order book and when we look at the timeline of the ZETF program that's actually the current which calls for delivery before March 2026. We have to make estimates as to what can be delivered over that period and hence we removed that 515 units from the order book. Now to your the second part of your question is the intention to work with clients to bring that back. The answer is of course but you know we're disclosing the purchase order book as of today and hence the adjustment. It's worth saying that we have seen some good dialogue and have seen some good momentum with some of the ZETF processing. So you know all together despite removing that part of the order book we were encouraged by some of the movements that we're seeing in the ZETF.

That's helpful. Thanks and best of luck as you close out this year.

Thank you very much.

Hello. The next question is from Mike.

Hey, it's Mike Schlissel here from Davidson. Thanks for calling on me there Nick. Appreciate it. Hey, I guess I want to follow up with you on the price. Hello, can you guys hear me okay?

We can

hear you

well Mike. Thank you.

Okay great. So just want to get your comments on pricing. It sounds like the sort of planned projections and the prices of the EV spill buses for the EPA program are happening. Prices are coming down in subsequent rounds and that's kind of part of the plan but you also mentioned that there are some things that can be stacked on top of the federal subsidy. I'm just curious whether you are lowering your risk price to match the EPA subsidy or you keep your taxes similar and funding your customer with additional subsidies in elsewhere?

Yeah, Mike the subsidies from the EPA program are in our views certainly adequate and in some cases generous. As you mentioned the latest round is $325,000 for the vehicle and the charging infrastructure and there's a federal tax credit of up to $40,000 that can be stacked on that. I think our goal with pricing is to be nimble and what we're looking to do is to have pricing that is coherent with volume and with the competitive dynamics in the industry. But all together when you compare to other subsidies including in Canada those are subsidies that are very attractive. Of course as these come down and as there's more of an out of pocket for the operators it's a matter of selling on the total cost of ownership which is really traditionally the basis for purchasing commercial vehicles and there's room for, there's very attractive total cost of ownership for the operators at those subsidy levels. So it's all, our goal is to be dynamic. Our medium to long-term objective remains to over time bring the pricing of the vehicle down but of course there's many dynamics at play and given that we sell directly we're well positioned we believe to adapt to those changes in the market.

Okay, thanks for that. I wanted to ask something about your delivery cadence in the fourth quarter. I can look at your numbers and Richard I appreciate your comments on inventory deductions but I'm just trying to make sure I can see a path to you being able to sustain this delivery cadence

into

the fourth quarter that you had in the third quarter at the very minimum. I guess two questions. You have fewer working days in the quarter so do you plan to have less deliveries? I'm just trying to figure out whether you've got more coming from the U.S. government or other cash coming in that will allow you to build all these budgets. I'm having a hard time with the numbers seeing a cadence increase in the fourth quarter at all.

Mike this was a little difficult to understand on our side but if I got the gist of it what I'll say is you know as it relates to the liquidity and and and info look we provided the updated liquidity as of the NFQ3. We've as mentioned in the prepared remarks our objective right now is to work with our lenders in the context of the expiring flex period and we're also looking at various alternatives to bolster the enhance the balance sheet the financing. We can't speak at this stage of the timing of when subsidies come in and other various funding.

Okay yeah having a hard time hearing you as well. I'll just pass out there. Thank you. Thank you.

Our next question comes from Rupert Murer with the company National Bank. Rupert your line is not open.

Hello everyone thanks for taking the question. I think I heard you say there's potential for up to 10,000 vehicles by 2027 under some of those programs the DOE program. Is that is that right and can you talk about the competition you see in the space and and what what share of that business did you target?

Yeah so the 10,000 vehicles Rupert you heard that correctly is when you add up the what I'd say the three rounds of the EPA that are ongoing right the ground round where funding was allocated where there's starting to be some deployments there the the 2023 rebate round where there's starting to be some certainly been allocated and there's we're starting to see some deployments as well and then there's a current round for 965 million dollars that was allocated or that's not allocated but it was launched and applications are due by January 9, 2025. On top of that there's the clean heavy duty recall that it's close to a billion with 70 targeted for school buses so all that together are at least over 10,000 vehicles school buses to be specific that would be deployed in the next two years or so. In terms of the competitive environment well it's you know I wouldn't I don't think there's been many changes right there's a number of competitors that are incumbents in the space that sell both these mostly really ice vehicles and some EVs and then there are players like Lyon that are that are fully focused on EVs in terms of what we're targeting at market share and yes you appreciate we're trying to obviously get the highest share as possible we're certainly among the leaders today in North America in the electric school buses looking at registrations in terms of market share so we our goal is to obviously continue to increase market share and capture as much volume as we can.

Okay great and with the changes you've made to your production capacity what sort of production cadence you think you could hit if you were to receive orders how easy would it be to adjust your production back up?

Rupert we do have the equipment as you know so it's a matter of having you know the right number of people to be able to manufacture those buses and we were saying earlier I mean we're very cautious about managing liquidity right now and this is really top of mind but obviously we do have the manufacturing capacity to ramp up at some point.

All right thank you and then if I could just quickly follow up on liquidity you are investigating options for improving liquidity can you give us any more color on the options you're looking at and maybe what the front runners would be at this point?

Rupert you know I can only reiterate what we said we're speaking with with our lenders in the context of the expiring flex period we're looking at various options that relates to financing but we can't get into more details at this stage and of course once we have details to share we will share.

Okay very good I'll leave it there thank you. Thank you.

There are no more questions registered in queue at this time I'd like to pass the conference back over to our hosting team for closing remarks.

Thank you everyone for joining the call today we look forward to continuing the discussion and feel free to contact us for any follow-up question you may have have a nice evening.

That will conclude today's conference call thank you for your participation and enjoy the rest of your day.