The Lion Electric Company - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to Lion Electric's second 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 Isabelle Adjahi, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Adjahi.

Isabelle Adjahi (VP of Investor Relations and Sustainable Development)

Good morning, everyone. Welcome to Lion's second quarter 2024 results conference call. Bienvenue à la conférence téléphonique sur les résultats financiers du deuxième trimestre 2024 de Lion. Today, I'm here with Marc Bédard, our CEO, founder, 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 search statements. We invite you to review the cautionary 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.

Marc Bédard (CEO and Founder)

Thank you, Isabelle. Good morning, everyone. Thank you for joining us today. The challenges that we had signaled at the beginning of the year persisted in the second quarter and continue to put pressure on the company from a cash flow management standpoint. These challenges stem from continued delays with the Canadian Federal ZETF program, as well as a slowdown in deliveries in the U.S. EPA program, as expected, given that we are currently in between funding rounds. Of course, these lower deliveries had an important impact on our revenue, profitability, and liquidity position. Management and optimization of our liquidity, therefore, remains our top priority, and it is critical for Lion to have the right cost structure for today's demand environment. In this context, we are implementing several initiatives to streamline our operations, improve our liquidity, and position us to achieve our goal of being profitable in the foreseeable future.

First, we are adjusting our approach to truck manufacturing to better align with the pace at which truck operators are transitioning to electric. Over the past years, we have built a leadership position in medium and heavy-duty electric trucks. We are one of the few companies having deployed critical massive vehicles in this space. However, while the electric truck market continues to represent a very high potential opportunity for Lion, industry volumes in the near term have been significantly lower than expected. To address this, we are instituting a batch-sized manufacturing approach for our electric trucks, thus directly aligning manufacturing with our order book. This approach aims at optimizing our liquidity profile while maintaining Lion's leadership in electric trucks.

Second, we are transforming our battery operations into a product line, aiming to sell our battery packs to third parties, since we believe our battery packs are well-suited for a lot of different markets. Battery cells are expected to start contributing to revenues and cash flows next year, ultimately better leveraging our current battery manufacturing capacity without any additional capital expenditures. Third, we are launching a process to maximize usage of all of our facilities, since we have significantly more footprint than we need in the current market conditions. This footprint reduction also aligns with the changes to our truck manufacturing operations I just alluded to. Specifically, we are launching a process to sublease a significant portion of our Mirabel plant. Our 900,000 sq ft plant was initially designed and sized for 75% truck production and 25% school bus production.

Given that all truck manufacturing will be performed in Saint-Jérôme for the next few years, we currently have important excess footprint capacity in Joliet. We are therefore aiming to significantly reduce the current rental expense of $5 million per year while keeping the necessary footprint to maintain our production capacity of 2,500 school buses per year at the Joliet plant. Furthermore, we are looking to sublease certain of our 12 experienced service centers and partner with additional service providers in specific regions, thus further reducing our rental expenses while expanding our service coverage. Additionally, we will reduce our total workforce by approximately 300 people across the entire organization to align with the action plan I just mentioned. Many of the affected positions will be in product development, considering that the development of new platforms is now behind us.

This workforce reduction should reduce our payroll cost by approximately $25 million on an annual basis. We are extremely thankful to all of our employees, and we deeply regret the impact that this measure will have on those affected. We are, of course, committed to assist them through this transition. Finally, we are working to also significantly reduce our non-salary cost structure by decreasing our operational expenses in areas such as third-party logistics, consultants, and selling and administrative costs. Our adjusted cost structure will be well aligned to support the increasing electric school bus demand and maintain our leadership position while allowing us to keep supporting truck operators in their electric transition. In Q2, we also made a number of important operational and financial achievements, which I will now highlight. We certified our second model of battery packs, the Lion HD battery.

With all our battery pack certifications behind us, we are now working on integrating these packs on all of our vehicles and selling our packs to third parties. We performed the commercial launch of our Lion 8 Tractor truck, a game changer with its 127,000 pounds GCWR capacity. Equipped with our proprietary LionBattery HD batteries, the Lion 8 Tractor truck is the pinnacle of heavy-duty electric vehicles, tackling the largest addressable market in the truck space. Commercial production and customer deliveries are expected to take place later this year. We reached an important milestone with the EPA Clean School Bus program, having just recently finalized the agreement allowing us to execute formal purchase orders with customers for our EPA grant of 97 units, representing $38 million. Additionally, Lion clients were awarded 127 school bus rebates as part of the latest round of the EPA program, representing $39 million.

For both of these rounds, we are actively working with customers to obtain formal purchase orders and fulfill other requirements to claim payments from the EPA. Those two rounds together represent a potential of approximately $77 million in upfront payments in the coming months. Additionally, both rounds represent important sources of additional potential purchase orders, since a number of school districts and contractors have been awarded directly and considering doing business with Lion, given our reputation of delivering a complete solution, including the charging infrastructure installation, in a timely manner. We also continue to execute our inventory reduction plan with a $20 million year-to-date inventory reduction as of June 30th. We reiterate our objective to reduce inventory by $50-$75 million over 2024, and we are heading in the right direction, considering the significant decrease of $23 million above our raw material and WIP inventory in Q2.

Looking forward, our priorities for the rest of 2024 are managing and optimizing liquidities, including through our cost reduction action plan I described earlier, as well as opportunities to strengthen our financial position. Growing our order book and increasing deliveries, integrating Lion batteries on our vehicles, and advancing our new battery product line, and working closely with the Canadian government to increase the approval of applications under the ZETF program. I will now turn it to Nicolas.

Nicolas Brunet (President)

Thank you, Marc. Let me start by discussing deliveries, then address the order book. During the quarter, we delivered 101 vehicles, comprising 95 buses and 6 trucks. 84 vehicles were delivered in Canada and 17 in the U.S. The decline in deliveries was mostly the result of persistent delays with the ZETF program, coupled with the timing of EPA-related deliveries, as we are in between funding rounds for the program. Deliveries were also impacted by a slowdown in our production cadence, as we are starting the integration of our Lion MD batteries onto our vehicles. Q2 deliveries include an additional 9 buses to our customer who obtained funding approval under the ZETF program for 200 school buses last quarter, bringing the total buses delivered to this client to 59. 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 July 30th, 2024, Lion's vehicle order book stood at 1,994 vehicles, consisting of 1,804 buses and 190 trucks, representing a combined total order value of approximately $475 million. The momentum in the purchase order book for the quarter was impacted by the timing of funding rounds in the EPA's Clean School Bus program. We, however, expect the purchase orders related to the EPA program to gain momentum, as we have just recently finalized the agreement to be able to solicit formal purchase orders from customers for our grant of 97 units, representing $38 million. Additionally, clients who filed applications through Lion in the latest rounds of the EPA program were awarded 127 school bus rebates, representing $39 million. For both rounds of the EPA program, we are working with customers to obtain formal purchase orders and plan deliveries.

As of July 30th, 66 units out of the 224 awards obtained through the Lion-filed applications were included in the order book. These two rounds of the program together represent the potential of approximately $77 million in upfront payments from the EPA in the coming months. We are working diligently with customers to obtain formal purchase orders and fulfill other requirements to submit payments requests with the EPA. Payment requests with the EPA relating to some of these orders have already been initiated. Important to note, both rounds of the EPA program represent important sources of potential additional purchase orders over the 224 awards from Lion-filed applications, given that a number of school districts and contractors have applied and been awarded directly. We expect deliveries related to these two rounds of the EPA program to start mostly towards the end of the year.

In addition to the EPA Clean School Bus program, under which over $2 billion remain to be allocated by 2026, various other incentive programs targeting electric school buses are expected to further stimulate demand. These include programs such as the EPA Clean Heavy-Duty Vehicles program, which allocates $932 million to replace Class 6 and 7 zero-emission vehicles, including over $650 million specifically for school buses. The California Zero-Emission School Buses and Infrastructure, or ZESB program, which allocates $500 million for the purchase of electric school buses and charging infrastructure. The New Canada Public Transit Fund, announced in July, will allocate up to $3 billion annually, starting in 2026, to respond to local public transit needs, including $500 million per year over 10 years to electrify public transit and school transportation. Altogether, this translates into over $6 billion of funding to be available for school bus and infrastructure purchases.

On the truck side, the Lion 5 and Lion 8 Tractor platforms, which are both available for orders, continue to drive strong interest from potential customers, as demonstrated by demand for ride-and-drives and vehicle demos, which we believe positions us well to serve truck operators when the shift to EV accelerates. Last, a word on ZETF. We are pursuing an active dialogue with Canadian federal officials, and we are hopeful that a satisfactory resolution to allow for additional deliveries under this program can be reached. Finally, our Lion Energy order book currently stands at $9 million, a significant increase from prior quarters. I will now turn it over to Richard to discuss our financial performance. Richard.

Richard Coulombe (CFO)

Thank you, Nicolas. I will start by commenting on Q2 results. I will then discuss our liquidity position and provide color for the rest of 2024. In Q2, we recorded quarterly revenues of $30 million driven by lower unit sales due to factors already discussed by Marc and Nicolas. These lower revenues, coupled with increased manufacturing costs resulting both from the ramp-up of new Lion D and Lion 5 models and the integration of Lion MD batteries into our vehicles, also impacted profitability. For Q2, gross margin was negative $15 million, and EBITDA negative $20 million. That said, our business model continues to show attractive unit-level economics. Our financial performance should therefore be positively impacted by increase in volume. Until then, we will continue to tightly manage liquidity and control costs as we are starting to see the impact of previously announced cost-cutting measures.

Q2's G&A of $14.7 million was down over $1 million from prior year. We also saw a significant reduction of CapEx and R&D, which respectively amounted to CapEx of $1.3 million, down approximately $18 million from last year, and R&D of $9.4 million, down approximately $8 million from last year. Now, moving on to liquidity. Despite lower unit sales in Q2, we made good progress with our inventory reduction plan, decreasing inventory by $7 million in Q2 and $20 million for the first half of 2024. Just in Q2, we decreased our raw material and WIP inventory by $23 million. We therefore reiterate our objective of a $50-$75 million inventory reduction for the year. Separately, we announced on July 2nd an amendment to various loan facilities. This agreement with our lenders provides relief for certain financial covenants from June 30th until September 30th.

It also provides for the capitalization of 50% of interest payments, a delay of interest payments due under the revolver, and a requirement to maintain a minimum liquidity of CAD 15 million at all times. In parallel, we entered into a new CAD 5 million loan facility with Investissement Québec. As of June 30th, we had available liquidity of approximately CAD 25 million. As we look ahead, we will continue to actively evaluate different opportunities that may enable us to improve liquidity and strengthen our financial position, which remains our key priority. I will now pass it over to Marc for concluding remarks. Marc.

Marc Bédard (CEO and Founder)

Thank you, Richard. The electric vehicle market has been challenging in many regards in the last few years for EV manufacturers. Without a doubt, the EV market is here to stay. At Lion, we are very well equipped to support the operators in their transition to electric, as demonstrated by the more than 28 million miles driven on our 2,100 vehicles on the road. Since the pace of electrifying transportation depends on many factors, including the timing of government programs, we believe that all the changes we have made through the last year and the ones we are making today had to be done to successfully align our business model to this reality.

Our objective for the balance of 2024 is to materialize all the measures we announced, to be fully prepared to attack 2025 with a very efficient cost structure, one that can position us to reach our profitability goals with our electric school bus business and can also allow us to grow our electric truck business at the same pace as the truck operators will transition to electric. Thank you for your attention this morning. Let's now open the lines for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press Star, followed by 1 on your telephone keypad. If you would like to remove your question, please press Star, followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question goes to Mike Shlisky of D.A. Davidson. Mike, please go ahead.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Good morning, and thanks for taking my question. I wanted to ask about your plan to sell batteries through the new division. Just a little more detail there. I guess, what types of batteries will you be selling as far as sizes? Is it only going to be the things that you already sell, or do you have the ability to make for smaller vehicles or other sizes? And then, do you intend to sell the BMS software as part of that package? And is there any kind of subscription type of sales attached to that?

Marc Bédard (CEO and Founder)

Yeah. Good morning, Mike. This is Marc. We have two packs. We have the MD pack and the HD pack. One is 70 kWh. The other one is 105 kWh. The chemistry is an NMC chemistry, and it's coming with our own BMS. And also, the BTMS will be also available. We feel that it could be used in many different markets, including aerospace. Like the HD pack is a very good fit for a lot of those users, for example.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Got it. My other question was, is there a tax benefit or any kind of subsidy that you received at Joliet that would change or be owed back if you reduce or exit your presence there?

Nicolas Brunet (President)

Hey, Mike, Nick here. No, there is no such subsidy that would require a penalty. In fact, all the subsidies are in the form of tax credits related to the number of employees we have there, and we haven't tapped into those at all.

Mike Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. Got it. Thanks so much. I'll pass it along.

Nicolas Brunet (President)

Thank you, Mike.

Operator (participant)

Thank you. The next question goes to Kevin Chiang of CIBC. Kevin, please go ahead.

Kevin Chiang (Director of Institutional Equity Research)

Hi. Good morning, everyone. Thanks for taking my question. I'm just wondering, I understand, and it's been a few quarters now, you've talked about some of the challenges in converting the large market opportunity into your order book, and you've spoken about some of the delays around these government programs. But I'm just wondering, do you think you need to change your sales tactic here, or maybe you have, and you can speak to that? Just is there anything you can do to accelerate that conversion rate versus just being dependent on the pace in which the government rolls out some of these subsidy programs? Because it does seem to, while it creates long-term demand, it seems like it's definitely been a short-term headwind for you. And just wondering if there's anything you can do to kind of hedge against this risk moving forward.

Nicolas Brunet (President)

Yeah, I'll take that one. Look, right now, the demand in the school bus sector is very much driven by the programs that are being put in place. In some jurisdictions, it's through regulation as well. But obviously, when there's significant subsidy opportunities out there, as expected, the buyers of the product will wait to get those subsidies before purchasing the product. The challenge for us has been related to just the timing of the deployments. There's a lot of dollars out there, but it takes time for them to ultimately translate into purchase orders. We've been in between rounds for the EPA program. There's been some attractive announcements, including 234 units that were filed directly by Lion, and a lot of free agents around those programs. Right now, it's the grant round where we're starting to see the dollars being deployed and the latest rebate round.

We have a dynamic sales approach. We sell directly, but ultimately, it is the timing of those programs that dictate the timing of purchases. We're very focused on not only converting the Lion applications into purchase orders, which we just had the approval from the EPA to start doing in mid-July, and as well as converting on the latest rebate round. For both, we have Lion-filed applications. Again, that's 234 units, but we also have a lot of free agents. That's the focus right now. Unfortunately, the timing is what it is. The good news is, since the last quarter, again, we've had the approval to go and solicit formal purchase orders for the grant round. A lot of parties that apply directly also got that approval.

And then, as well, there's the rebate round where there's not only the Lion applicants, but a high number of free agents that we can solicit. So right now, we do feel, Kevin, that this is really the bulk of the demand in the market, and this is our focus.

Kevin Chiang (Director of Institutional Equity Research)

Okay. That's great color there. Just maybe my second question. Just wondering if, when you talk to customers, how a potential change in administration might impact their near-term demand intentions. Like, does a potential change to a Trump administration, who, I guess, some might view as being less supportive of electric vehicles, is that impeding some people's willingness to order trucks? Or even concerns around or questions around what the Chevron ruling might mean in terms of the EPA's own legislation related to or regulations related to EV adoption? Just wondering if customers are holding back here just on maybe those two question marks that are up in the air right now.

Nicolas Brunet (President)

Yeah, Kevin, it's a different story in the school bus and in the truck space. In the school bus space, I just talked about where the demand is coming from, and that $5 billion package from the EPA is approved by law today. There's over $2 billion that remains to be deployed. And on top of that, there's a number of programs at the state level, right, thinking of California, New York, Texas, Illinois, Colorado, and a number of other ones. So we're not seeing that significantly, at least in the school bus space. In the truck space, of course, the truck space, Marc talked about it in his prepared remarks. The truck demand, electric truck demand, has been slower than anticipated. The acceleration going forward is in great part related to regulation and incentive programs.

Certainly, the potential change in administration, as you said, can have an impact on that demand. There's, in some places, a more wait-and-see approach. We do feel that in the long term, because of the TCO, the favorable TCO of the product, that it's a when, not if, but for sure there's more impact on the truck side.

Kevin Chiang (Director of Institutional Equity Research)

Perfect. That's it for me. Thank you for taking my questions.

Nicolas Brunet (President)

Thank you.

Operator (participant)

Thank you. The next question goes to Craig Irwin of ROTH Capital Partners. Craig, please go ahead.

Craig Irwin (Managing Director and Senior Research Analyst)

Hi. Good morning. Thank you for taking my questions. I was hoping you might be able to help us quantify the estimated savings from your different initiatives that you put in place, the ones that jump out to me. I'll have to review the call, right? The ones that jump out are obviously the reduction in force and the subleasing of the two different facilities or floor space of the two different facilities. Can you maybe describe approximately what we should expect as far as savings from these different initiatives over the next couple of quarters?

Marc Bédard (CEO and Founder)

I'll take that one. Thank you for the question, Craig. Previously to today's call, we had several rounds of cost reduction measures that added up to $40 million of savings. We were starting to see, let's say, the impact of all these measures this quarter. So let's call it $10 million of recurring savings starting this quarter. So this is for what was done prior. This morning, the announcement we made, obviously, $25 million, call it like $6 million a quarter or so. This will start seeing the impact of that practically immediately. Most of the layoffs will be made on a temporary basis. So we will see the full impact of that kind of starting today. So we're looking at $16 million combined savings that we would see from a baseline of 2023.

Craig Irwin (Managing Director and Senior Research Analyst)

Okay. Excellent. Well, I should say congratulations.

Marc Bédard (CEO and Founder)

Maybe just to add, maybe this excludes the OPEX savings. When we talked about the Joliet facility and so on, obviously, this could potentially be, obviously, additional savings right now that have not been quantified so far. Obviously, we talked about the rent, $5 million for Joliet. So we're talking several million of additional opportunities that we'll be working on in the next few weeks.

Craig Irwin (Managing Director and Senior Research Analyst)

Excellent. Excellent. So my follow-up, I guess I should start by saying congratulations on the reduction in working capital. I know that that's never easy, particularly when you're dealing with deliveries volatility. So that's a big positive. Can you maybe help us understand what the commitments are for CapEx over the next couple of quarters? And you've been able to defer or restructure some of your interests. But what are the other major puts and takes on the liquidity front through the end of the year?

Marc Bédard (CEO and Founder)

This is from a CapEx standpoint. The total spend for the first half of the year, we're talking about $1.7 million compared to $42 million last year. Obviously, a lot of, like we mentioned in previous calls, our strategic CapEx is all behind us. So we expect CapEx for the year to be probably $5 million. So it should be in that range. R&D, we had communicated previously that we're looking at a 30% reduction. We're well on track to meet that commitment of 30%. And with today's announcement, I would expect the savings on the R&D front to be higher than 30%. So I would say those are the two, let's say, elements outside of our, let's say, earnings that are cash elements. On the inventory front, you mentioned, yes, we did some good progress despite the overall context.

We've achieved $20 million of savings for the first half from our inventory reduction plan. We had committed to $50-$75 million. I believe we're well on track to hit those numbers. When you look at one leading indicator for me, it's really the raw material and WIP. Just this quarter alone, we saw the raw material and WIP go down by $23 million. So obviously, we have an offset in the finished goods. So we are carrying a bit more finished goods than what we would like to. And this is directly linked to the lower volume of deliveries this quarter. But for me, all the indicators are trending in the right direction, and we're really focused on continuing to achieve those objectives.

Craig Irwin (Managing Director and Senior Research Analyst)

Okay. Fantastic. And then last question, if I may, related to the subsidies and vouchers that EPA has handed out to date. So we're hearing that a lot of the school districts out there that receive funding are actually having a very hard time arranging necessary charging infrastructure to take delivery of the buses. Do you see potential for some of those funding vouchers to maybe be reallocated or for this to maybe present an incremental opportunity as those vouchers and subsidies are handed off to potentially different school districts?

Richard Coulombe (CFO)

Craig, next year, I'll take this. Look, I mean, we haven't seen this happen, not the infrastructure challenge, but the reallocation of funding. There has been, as you may know, in the first round, a pretty significant amount of funding that was returned, and we're certainly encouraging the EPA to redistribute those vouchers. We are equipped to deliver the vehicles and, of course, to plan the infrastructure. So it's definitely an opportunity for us if it was to happen, but haven't seen it happen so far.

Craig Irwin (Managing Director and Senior Research Analyst)

Understood. Well, hey, congratulations on the progress. I'll hop back in the queue. Thank you.

Nicolas Brunet (President)

Thank you.

Operator (participant)

Thank you. The next question goes to George Gianarikas of Canaccord. George, please go ahead.

George Gianarikas (Managing Director and Senior Analyst)

Hi. Good morning. So I know we've gone over this a couple of times, but I'd just like to sort of understand the liquidity ladder between now and the end of the year. You mentioned in your presentation that you have $25 million of available immediate liquidity. You also talk about your progress around working capital reduction. And it looks like you have around $50 million left. So could you just kind of walk us between June 30th and December 30th and what your approach is to maintaining cash on the balance sheet? I understand the cost reductions, but I'm assuming there'll be some severance involved in that as well. So just kind of step by step on how you plan to sort of continue in operations between now and the end of the year. Thank you.

Marc Bédard (CEO and Founder)

Okay. Thanks for the question, George. Obviously, we're highly focused right now on our cost structure with the announcement this morning. We will see some savings, roughly $2 million a month starting right away because, as I said earlier, most of these layoffs are temporary. So we will see the impact immediately. We continue to be very focused, as I mentioned earlier. The inventory story for us is a good one. We've achieved $20 million of savings so far, and there's like $30-$50 million to go. And again, I believe we have all the right processes in place to achieve those reductions. Collection remains still an opportunity for us. We still have quite a few, let's say, amounts to collect, and several of these receivables are coming from governments that are taking a bit more time to collect. So we're very focused on that as well.

As mentioned earlier, the EPA program, we talked about the potential of $77 million. So we expect to start seeing money flowing our way with those POs that have been placed. And obviously, it takes probably 60 days before we start seeing the money flowing, but this will be definitely a contributor in the second half of the year. Obviously, we mentioned as well, in the meantime, we are looking at various financing opportunities to bolster our balance sheet. So we're actively, obviously, focused on that in parallel. So I would say these are the two streams right now, or the three streams that are cost-focused that we're pursuing to address our cash situation.

George Gianarikas (Managing Director and Senior Analyst)

Maybe just to change the topic for a minute, you mentioned, obviously, this opportunity to sell battery packs modules on the merchant market. Can you please help us understand what any initial indications of interest there and whether or not those indications of interest could, should, will lead to sort of larger strategic discussions, meaning strategic investments into the company, etc.? Thank you.

Richard Coulombe (CFO)

Yeah. George, this market, we feel, is huge, and there are very few battery OEMs out there that are providing a complete solution with the BMS and also with the BTMS. We've received many phone calls, many requests from potential buyers in this regard. So we feel this could become a pretty significant market. And we will start selling those batteries sometime in 2025. So we're in discussion right now. So there will be no short-term result on this. But obviously, we're setting the foundation for this commercial success. We feel that also we are becoming like a strategic partner for many of those suppliers for them in achieving their goals. So could that lead to anything else? I don't know. But I feel very strongly that we're offering a very state-of-the-art solution right now for those companies. And many of them are very big companies to achieve their goals.

Most of them are not looking to do full vertical integration of those technologies, but obviously looking for a very strong technology and a very good partner in line. That's what we're shooting for.

George Gianarikas (Managing Director and Senior Analyst)

Thank you.

Richard Coulombe (CFO)

Thank you, George.

Operator (participant)

Thank you. The next question goes to Daniel Allen of Barclays. Daniel, please go ahead.

Daniel Levy (Senior Equity Research Analyst)

Hi. This is Daniel on for Dan. Thanks for taking the question. So could you unpack your gross margin and cost dynamics in the quarter? I know you've mentioned in the past that we should expect some margin volatility in the near term, but how should we think about your cost trajectory in the coming quarters given that they're still the ramp with their batteries and the Lion D and Lion 5 model? Thank you.

Marc Bédard (CEO and Founder)

Good morning, Daniel. So I'll take that one. Listen, for sure, on the current volume level that we had in the quarter, obviously, that had some impact on our margin. We had indicated previously that the introduction of our Lion 5, our R&D, the incorporation of our own batteries into our different platforms would be kind of a headwind from a margin standpoint. So this is what we've experienced, added to the low volume where we had some under-absorption issues in the quarter with lower volume like that. So obviously, we don't expect these kinds of margins to repeat itself in the future as we see our platform maturing from a cost standpoint as we continue, let's say, evolving vis-à-vis our learning curve for those new platforms. So we believe on a unit basis, we do have some good economics.

We showed in the past that with the maturity of our platforms, with volume, that we can get decent margins. So we expect to go back to profitable margins in the foreseeable future. So that's what we're focused on. We're very focused on cost reduction, and the initiatives that we announced this morning will also contribute to better margin going forward.

Daniel Levy (Senior Equity Research Analyst)

Great. Thank you. That's my one.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question goes to Rupert Merer of National Bank. Rupert, please go ahead.

Rupert Merer (Managing Director and Senior Equity Analyst)

Hi. Good morning, everyone. I'd like to ask a little about the Lion 8 Tractor. Can you give us a little more color on the rollout of that product? When do you expect the first sales, and who are the customers that you're anticipating?

Richard Coulombe (CFO)

Good morning, Rupert. Yeah, he's doing well. He's doing well. We will start selling the Lion 8 Tractor before the end of the year. As you know, when we were at the ACT show, we did the launch of this tractor, and we're doing a lot of ride-on drives with the customers. Very good feedback we are receiving so far. We don't disclose the names of the customers. We have the good order book for the Lion 8 Tractor right now. And we're discussing with the customers right now to make sure they have the right charging infrastructure in time, depending on, obviously, what's their own duty cycle. And as you know, each case is very different, and we're very well equipped at Lion to take care of all that. But all in all, it's going well.

Rupert Merer (Managing Director and Senior Equity Analyst)

Great. And then on the competition, how are you finding that the Lion 8 competes with other offerings? And maybe if you could comment on the competitive environment, how it's evolving. And how are your discussions with potential customers? And when you lose a customer, are you losing to other EV manufacturers, or are you finding that you're losing to diesel truck manufacturers, for example?

Nicolas Brunet (President)

Hey, Rupert. Nick here. Look, to address the, well, let's say, the first part of your question, we feel the product compares very well from a GCWR standpoint, from the fit and finish, and most importantly, from a powertrain integration standpoint. This goes to the good feedback that we've had from the customers that Mark alluded to. Now, to your second point, I think it's an important one. When we lose, in the vast majority of cases, we lose the status quo. And this goes again to the electric truck volumes not being where we thought they would be and where, frankly, the industry thought they would be a few years ago. That said, of all the product suite within trucks, the Lion 8 tractor, or I should say the Class 8, is the biggest class of them all, as I'm sure you know.

It's the biggest market opportunity, and it's also where we see the most demand within the product suite for our Lion electric trucks. So we're obviously very excited for the launch of this platform.

Rupert Merer (Managing Director and Senior Equity Analyst)

Are you seeing any change in your potential customers or prospective customers? And how many of them are absolutely looking for an electric vehicle, and how many are, you think, testing the market and still trying to determine when they're going to make that shift?

Marc Bédard (CEO and Founder)

Well, so I think the word when is the important one in your question here. We are seeing a number of customers that know that they will have to make this shift. They are not looking to make it tomorrow, but they want to plan to do it right in, let's call it, the medium to long term. This has really resulted in us shifting our sales attention to those larger fleets that are well equipped to go through this transition, that are serious about it, and that are looking now, yes, at smaller volumes in the short term, but that represent a very high potential in the longer term.

Rupert Merer (Managing Director and Senior Equity Analyst)

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

Nicolas Brunet (President)

Thank you.

Operator (participant)

Thank you. The next question goes to Étienne Larochelle of Desjardins. Etienne, please go ahead.

Étienne Larochelle (Equity Research Associate)

Yes. Good morning, and thank you for taking my question. My first one is on truck demand. You mentioned seeing a lower than initially expected market demand for electric trucks in the press release. And also looking at the results, we calculate that the implied truck bookings were minus 15 units this quarter. What explains the negative booking into Q, and what do you see going forward on market demand for trucks?

Marc Bédard (CEO and Founder)

Yeah. So we have had some cancellations in the order book, mostly related for trucks, specifically mostly related to the timing of the platform. But I would say we still continue to see strong interest in ride-and-drive customer demos, learning more about the product, the infrastructure, the transition to electric from large fleet owners. Obviously, again, we've announced some changes to how we're manufacturing trucks to better align with demand because we see that the demand in the short term is not where we thought it would be, and that's industry-wide. But as I just mentioned, our focus is to really work with the larger fleet owners, those that are serious about the transition to electric and have the means and the resources to go through it properly. And so we still think that this is a very big market potential.

As I said before, it's a when, not an if. The objective is for us to be there alongside large fleet owners as they go through this transition and at the same time minimize the cost and working capital impact of the truck manufacturer.

Étienne Larochelle (Equity Research Associate)

Got it. Thank you. Maybe as a follow-up, you announced also as part of your action plan that you're in the process to optimize usage of the facilities. I'm just curious on what are your views on this. Are you having discussions already, and maybe how quickly could this materialize?

Marc Bédard (CEO and Founder)

I'm sorry, Etienne, we didn't get the question. To optimize on what?

Étienne Larochelle (Equity Research Associate)

Yes. So basically, you're in the process to optimize the usage of your facilities, so basically by listing your Joliet facility. I'm just curious, what are your views on this? Are you having discussions already with people, and maybe how quickly could this materialize?

Marc Bédard (CEO and Founder)

Thank you, Etienne. Yes, we're having discussions. As you know, the Joliet plant is 900,000 sq ft, and 75% of that was for truck manufacturing and 25% for school bus manufacturing. So we're leaving the 25% for school bus manufacturing. But because of everything we've discussed earlier, we are basically delaying the truck manufacturing in Joliet because we have a lot of manufacturing capacity in Saint-Jérôme. And so basically, the efficiency of the square footage, I mean, it costs us about $5 million a year right now. And basically, we're intending of recouping this amount or a lot of this amount on a short-term basis. So the goal is to make this happen before the end of the year, but obviously, need to find the right partner to do that in Joliet.

Étienne Larochelle (Equity Research Associate)

Sounds good. Thank you for the color on that.

Operator (participant)

Thank you. Our final question goes to Ryan Pfingst of B. Riley. Ryan, please go ahead.

Ryan Pfingst (Senior Equity Research Analyst)

Hey, good morning. Thanks for taking my questions. Just one for me, actually. Understanding there's a lot of uncertainty around timing, could you just remind us what needs to happen? Maybe what are the steps between installing charging infrastructure and other pieces ahead of receiving the expected $77 million in upfront payments from the EPA programs?

Nicolas Brunet (President)

Yeah. Hey, Ryan, Nick here. So the payment method from the EPA upfront payment, it varies between the grant round and the rebate round. Recall, we have 97 direct or Lion file applications that were awarded in the grant round and 127 in the rebate round. In the grant round, I mean, the big piece there was the agreement with the EPA that allowed us to go and solicit formal purchase orders. That is now behind us. And so we're working to solicit those to just finalize those purchase orders with the awardees under the program, and then we will request the payments. In terms of the voucher round, it's a little more of an administrative process, but it requires purchase orders and other aspects of the project, like quotes from contractors and planning for the charging infrastructure or purchase orders.

The way the EPA works is that these payments occur prior to the charging infrastructure installation. So there's no link between the installation itself and the timing of the payments. I'll also point out that those payment requests have started, and obviously, we're working to accelerate them in the near future.

Ryan Pfingst (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. We have no further questions. I'll hand back to Isabelle for any closing comments.

Isabelle Adjahi (VP of Investor Relations and Sustainable Development)

This concludes the call for today. Thank you all for joining, and we wish you a nice day. Thank you.

Operator (participant)

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