The Lion Electric Company - Q3 2024

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to the Lion Electric's Q3 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 Perron, Chief Legal Officer and Corporate Secretary. Please go ahead, Ms. Perron.

Dominique Perron (Chief Legal Officer and Corporate Secretary)

Good afternoon, everyone. Welcome to Lion's Q3 2024 Results Conference. [Foreign Language] Bienvenue à la conférence téléphonique sur les résultats financiers du troisième trimestre 2024 de Lion. Today, I am here with Marc Bédard, our CEO and 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 such statement. We invite you to review the cautionary language in this afternoon's press release and in our MD&A, which contain 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 Bédard (CEO and Founder)

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 outflows. We have implemented headcount reductions and initiated other cost reduction initiatives expected to result in annual lifecycle savings of approximately $65 million. We have implemented a batch-sized 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 Joliet 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, and 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 Q3 to put significant pressure on the company from a cash flow and liquidity standpoint. The continued delays associated with the Canadian federal ZETF program, the timing of the rounds in the U.S. 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 ZETF and EPA programs that we will be addressing in a few minutes. As you may have seen, our interim financial statements and MD&A 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 expiry of the COVID-19 relief period and the final CDPQ debt maturity.

Turning our attention to some of the Q3 highlights, we are seeing positive momentum with the EPA program. Nick will provide more details shortly. And we also obtained expense reimbursement payments 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 ZETF program. And we are happy to note that the recent dialogue has been constructive 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 year-to-date inventory reduction as of September 30, 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 LionC school buses with the Lion proprietary battery packs and have received positive feedback from our customers on this new platform. Separately, commercial production of the Lion8T has been pushed to 2025 as a result of headcount 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 spend 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 the increasing electric school bus demand and allow us to maintain our leadership position in this segment. 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 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 Q3. Q3 deliveries include an additional 11 buses to our customer who obtained funding approval under the ZETF 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 ZETF program, given the uncertainty related to delays in the process of the ZETF application and the March 31, 2026, current timeline for deliveries under the program. The delay in the launch of commercial production of the Lion8 truck has also resulted in the removal of 49 units from our order book.

Separately, we are seeing momentum with the U.S. 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 payment 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 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 Q3, one of our customers, Herscher Community Unit School District 2, led the way in school bus electrification by unveiling a state-of-the-art electric school bus barn for its 25 all-electric LionC 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 LionEnergy order book currently stands at approximately $8 million. I will now turn it over to Richard to discuss our financial performance.

Richard Coulombe (CFO)

Thank you, Nicolas. I will start by commenting on Q3 results and will 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 Marc and Nicolas. These lower revenues, coupled with increased manufacturing unit costs resulting both from the continued ramp-up of our new LionD and Lion5 models and the continued integration of LionBattery onto our vehicles, also impacted profitability. For Q3, gross margins were negative $16 million and EBITDA negative $19.5 million. Nevertheless, we continue to see the positive impact and the materialization 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 CapEx and R&D, which respectively amounted to CapEx 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 30, 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-$75 million previously stated due to lower than expected sales volume. We announced on October 1 additional amendments to various loan facilities, providing for continued relief from certain financial covenants from September 30 until November 15.

We are in continued dialogue with lenders to address the upcoming end-of-release period and the upcoming maturity of the financing CDPQ loan. As stated by Marc, we are also currently seeking potential sources of financing and/or other opportunities to strengthen our balance sheet. I will now pass it over to Marc for concluding remarks.

Marc Bédard (CEO and Founder)

Thank you, Richard. Despite the headwinds Lion 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 2,200 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 our mission and our clients for their trust in Lion for the electrification of their fleet. Let's now open the lines for questions.

Operator (participant)

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 remember to pick up your headset before asking a question. We'll pause briefly here as questions are registered. Our first question comes from Kevin Chiang with the company CIBC. Kevin, your line is now open.

Kevin Chiang (Institutional Equity Research)

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

Marc Bédard (CEO and Founder)

Yeah, well, thank you for your question, Kevin. This is Marc. I think at this point, I think it's too early to say 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 with the new administration as well. There are crucial issues that we're working on right now in terms of energy transition, electrification, obviously. One thing that we should note is that the EPA Clean School Bus Program is working very well.

As you probably know, that was coming from the Bipartisan Infrastructure Law in 2021. It's well underway right now. There was a lot of funding already going to operators, school districts, and also to some OEMs. Something we should note as well is there's a lot of subsidies at the state level. 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.

Kevin Chiang (Institutional Equity Research)

That's helpful. And I appreciate the answer, given it's still early days. It leads to my second question. You talked about some of the moving parts that impacted the order book. And it sounds like a lot of it was stuff that you had actions you had taken. You called out, I think, 515 units that were removed proactively from your end related to the ZETF program. I guess maybe a simple question. What happened to these 515 units? Would you expect that to eventually re-enter your backlog at some point? Or are these 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 90 days?

Marc Bédard (CEO and Founder)

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, let's just say the current timeline, 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, the second part of your question is the intention to work with clients to bring that back.

The answer is, of course, but we're disclosing the purchase order book as of today, and hence the adjustment. It's also worth saying that we have had some good dialogue, and we have seen some good momentum with some of the ZETF processing. So altogether, despite removing that part of the order book, we were encouraged by some of the movement that we're seeing in the ZETF.

Kevin Chiang (Institutional Equity Research)

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

Marc Bédard (CEO and Founder)

Thank you very much.

Hello?

Operator (participant)

I have a question for Marc Bédard.

Marc Bédard (CEO and Founder)

Yeah, the next question is from Mike.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Yes, hey. Hi, guys. It's Michael Shlisky here from Davidson. Thanks for calling on me there and there. Appreciate it. Hey, I just wanted to follow up with you on the price. Hello, can you guys hear me okay?

Marc Bédard (CEO and Founder)

Yeah, we can hear you well, Mike. Thank you.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Oh, okay, great. So I just want to get your comments on pricing. It sounds like the sort of planned reductions in the prices of the EV school 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 subsidies that can be stacked on top of the federal subsidies. I'm just curious whether you are lowering your list price to match the EPA subsidy, or are you keeping your prices similar and finding your customers additional subsidies from elsewhere?

Marc Bédard (CEO and Founder)

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's $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. Look, 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 altogether, when you compare it 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.

There's room for very attractive total cost of ownerships for the operators at those subsidy levels. Our goal is to be dynamic. Our medium to long-term objective remains to, over time, bring the pricing of the vehicle down. Of course, there's many dynamics at play. Given that we sell directly, we're well positioned, we believe, to adapt to those changes in the market.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. Thanks for that. I wanted to ask separately about your delivery cadence in the Q4. I looked at your numbers, and Richard, I appreciate your comments on inventory reduction. But I'm just trying to make sure I can see a path to you being able to sustain this delivery cadence into the Q4 that you had in the Q3 at the very minimum. I guess two questions. You have fewer working days in the quarter, but you plan to have less deliveries. So I'm just trying to figure out whether you've got more money coming from the U.S. government or other cash coming in that will allow you to build all these buses. I'm having a hard time with the numbers. Seeing a cadence increase in the Q4 at all?

Marc Bédard (CEO and Founder)

Mike, this was a little difficult to understand on our side. But if I got the gist of it, what I'll say is, as it relates to the liquidity and inflows, look, we provided the updated liquidity as of the end of Q3. 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 and 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.

Michael Shlisky (Managing Director and Senior Equity Research Analyst)

Okay. Yeah, having a hard time hearing you as well. I'll just pop out there and pass it along. Thank you.

Marc Bédard (CEO and Founder)

Thank you.

Operator (participant)

Next question comes from Rupert Merer with the company National Bank Financial. Rupert, your line is now open.

Rupert Merer (Sustainable Infrastructure and Cleantech)

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 right? And can you talk about the competition you see in the space and what share of that business could you target?

Marc Bédard (CEO and Founder)

Yeah. So the 10,000 vehicles, Rupert, you heard that correctly, is when you add up what I'd say the three rounds of the EPA that are ongoing, right? The grant round where funding was allocated, where there's starting to be some deployments there. The 2023 rebate round where there's starting to be some certainly been allocated, and we're starting to see some deployments as well. And then there's a current round for $965 million 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 leads to 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, while it's, 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 ICE vehicles and some EVs. And then there are players like Lion that are fully focused on EVs. In terms of what we're targeting as market share, I mean, 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 our goal is to obviously continue to increase market share and capture as much volume as we can.

Rupert Merer (Sustainable Infrastructure and Cleantech)

Okay, great. And with the changes you've made to your production capacity, what sort of production cadence do you think you could hit if you were to receive orders? How easy would it be to flex your production back up?

Marc Bédard (CEO and Founder)

Rupert, we do have the equipment, as you know. So it's a matter of having the right number of people to be able to manufacture those buses. As 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.

Rupert Merer (Sustainable Infrastructure and Cleantech)

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 frontrunners would be at this point?

Marc Bédard (CEO and Founder)

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

Rupert Merer (Sustainable Infrastructure and Cleantech)

Okay. Very good. I'll leave it there. Thank you.

Marc Bédard (CEO and Founder)

Thank you.

Operator (participant)

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.

Dominique Perron (Chief Legal Officer and Corporate Secretary)

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 questions you may have. Have a nice evening.

Operator (participant)

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