Lion Electric Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Line 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.

Operator

I would now like to turn the call over to Isabel Ejihy, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Ejihy.

Speaker 1

Good morning, everyone. Welcome to LION's 2nd Quarter 2024 Results Conference Call. Today, I'm here with Marc Bedard, our CEO, Founder Nicolas Brunei, our President and Richard Colombe, 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 cautionary language in this morning's press release and in our MD and A, which contains important information regarding various factors, assumptions and risks that could impact our actual results.

Speaker 1

With that, let me turn it over to Marc to begin. Marc?

Speaker 2

Thank you, Isabella. Good morning, everyone. Thank you for joining us today. The challenges that we had signaled at the beginning of the year persisted in the Q2 and continues to put pressure on the company from a cash flow management standpoint. These challenges continued delays with the Canadian Federal's EDTF program as well as a slowdown in deliveries in the U.

Speaker 2

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.

Speaker 2

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. 1st, 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 a critical mass of 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.

Speaker 2

To address this, we are instating a batch size 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. 2nd, we are transforming our battery operations into a product line, aiming to sell our battery packs to 3rd parties since we believe our battery packs are well suited for a lot of different markets. Battery sales 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. 3rd, 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.

Speaker 2

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 Joliet plant. Our 900,000 square foot 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 Jerome 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 CAD5 1,000,000 per year, while keeping the necessary footprint to maintain our production capacity of 2,500 school buses per year at the Joliet plant.

Speaker 2

Furthermore, we are looking to sublease certain of our 12 experienced 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 $25,000,000 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.

Speaker 2

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 3rd 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 2nd model of battery packs, the Lion HD battery.

Speaker 2

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 LIONE tractor truck, a game changer with its £127,000 GCWR capacity. Equipped with our proprietary Lion HD batteries, the Lion A 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 DPA 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 $38,000,000 Additionally, Ryan clients were awarded 127 school bus rebates as part of the latest round of the EPA program, representing $39,000,000 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.

Speaker 2

Those two rounds together represent a potential of approximately $77,000,000 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 CAD 20,000,000 year to date inventory reduction as of June 30. We reiterate our objective to reduce inventory by CAD 50,000,000 to CAD 75,000,000 over decrease of $23,000,000 above our raw material and WIP inventory in Q2.

Speaker 2

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 Z ETF program. I will now turn it to Nicolas.

Speaker 3

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.

Speaker 3

The decline in deliveries was mostly the result of persistent delays with the Z ETF 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 ZET ETF program for 200 school buses last quarter, bringing the total of 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 30, 2024, Lion's vehicle order book stood at 1994 vehicles, consisting of 1804 buses and 190 trucks, representing a combined total order value of approximately $475,000,000 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.

Speaker 3

We, however, expect that 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 $38,000,000 Additionally, clients who filed applications through LION in the latest round of the EPA program were awarded 127 school bus rebates, representing $39,000,000 For both rounds of the EPA program, we are working with customers to obtain formal purchase orders and plan deliveries. As of July 30, 66 units out of the 224 awards obtained through the line filed applications were included in the order book. These two rounds of the program together represent the potential of approximately $77,000,000 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 request with the EPA. Payment requests with the EPA relating to some of these orders have already been initiated.

Speaker 3

Important to note, both rounds of the EPA program represent important sources of potential additional purchase orders over the 224 awards from LION filed application, 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 $2,000,000,000 remain to be allocated by 2026, various other incentive programs targeting electric school buses are expected to further stimulate demand. These includes programs such as the EPA Clean Heavy Duty Vehicles program, which allocates $932,000,000 to replace Class 6 and 7 0 emission vehicles, including over $650,000,000 specifically for school buses. The California 0 Emission School Buses and Infrastructure or ZESB program, which allocates CAD500 1,000,000 for the purchase school buses and charging infrastructure the New Canada Public Transit Fund announced in July, which will allocate up to CAD 3,000,000,000 annually starting in 2026 to respond to local public transit needs, including $500,000,000 per year over 10 years to electrify public transit and school transportation.

Speaker 3

Altogether, this translates into over CAD6 1,000,000,000 of funding to be available for school bus and infrastructure purchases. On the truck side, the Line 5 and Line 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 EZ accelerates. Last, a word on Let ETF. 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 $9,000,000 a significant increase from prior quarters.

Speaker 3

I will now turn it over to Richard to discuss our financial performance. Richard?

Speaker 4

Thank you, Nicholas. 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 $30,000,000 driven by lower unit sales due to factor 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.

Speaker 4

For Q2, gross margin was negative $15,000,000 and EBITDA negative $20,000,000 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 SG and A of $14,700,000 was down over $1,000,000 from prior year. We also saw a significant reduction of CapEx and R and D, which respectively amounted to CapEx of $1,300,000 down approximately $18,000,000 from last year and R and D of $9,400,000 down approximately $8,000,000 from last year.

Speaker 4

Now moving on to liquidity. Despite lower unit sales in Q2, we made good progress with our inventory reduction plan, decreasing inventory by $7,000,000 in Q2 $20,000,000 for the first half of twenty twenty four. Just in Q2, we decreased our raw material and WIP inventory by $23,000,000 We therefore reiterate our objective of a $50,000,000 to $75,000,000 inventory reduction for the year. Separately, we announced on July 2 an amendment to various loan facilities. This agreement with our lenders provides relief for certain financial covenants from June 30 until September 30.

Speaker 4

It also provides for the capitalization of 50 percent of interest payments, a delay of interest payments due under the revolver and the requirement to maintain a minimum liquidity of CAD15 1,000,000 at all times. In parallel, we entered into a new CAD5 million loan facility with Investecin Quebec. As of June 30, we had available liquidity of approximately $25,000,000 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 Mark for concluding remarks. Mark?

Speaker 2

Thank you, Richard. The electric vehicle market has been challenging in many regards in the last few years for EV manufacturers. But 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 28,000,000 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.

Speaker 2

Our objective for the balance of 2024 is to materialize all the measures we announce, 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 scope 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 line for questions.

Operator

Thank you. Our first question goes to Mike Schliske of D. A. Davidson. Mike, please go ahead.

Speaker 5

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?

Speaker 5

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 sale attached to that?

Speaker 2

Yes, good morning, Mike. This is Mark. We have 2 packs. We have the MD pack and the HD pack. 1 is 70 kilowatt hour.

Speaker 2

The other one is 105 kilowatt hour. 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 usage, for example.

Speaker 5

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

Speaker 3

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

Speaker 2

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

Speaker 3

Thank you, Mike.

Operator

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

Speaker 6

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 just wondered, do you think you need to change your sales tactic here or maybe you have and you can speak to that.

Speaker 6

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?

Speaker 3

Yes. 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 are will wait to get those subsidies before purchasing the product.

Speaker 3

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 that's where we're starting to see the dollars being deployed and the latest rebate round.

Speaker 3

And so we have a dynamic sales approach. We sell directly, but ultimately, it is the timing of those programs that dictate the timing of purchases. And we're very focused on not only converting the line 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 ramp. For both, we have line filed applications, again that's 234 units, but we also have a lot of free agents. So that's the focus right now.

Speaker 3

Unfortunately, the timing is what it is. But 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 and a lot of parties that applied directly also got that approval. And then as well, there's the rebate round where there's not only the line applicants, but a number 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.

Speaker 6

Okay. That's great color there. And just maybe my second question. Just wondering if when you talk to customers, how potential change in administration might impact their near term demand intentions like there's a potential change to a Trump administration, I guess some might be was 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 movement might mean in terms of the EPA's own legislation related to or regulations related to EV adoption.

Speaker 6

Just wondering if customers are holding back here just on maybe those two question marks that are up in the air right now?

Speaker 3

Yes. 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's $5,000,000,000 package from the EPA is approved by law today. There's over €2,000,000,000 that remains to be deployed. And on top of that, there's a number of program at the state level by thinking of California, New York, Texas, Illinois, Colorado and a number of other ones.

Speaker 3

So we're not seeing that significantly at least in the school bus space. In the truck space, of course, the truck space, Mark talked about it in his prepared remarks. Their truck demand electric truck demand has been slower than anticipated. The acceleration going forward is in great part related to regulation and incentive program. And certainly, there's a potential change in administration, as you said, can have an impact on that demand.

Speaker 3

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 drug side.

Speaker 6

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

Speaker 3

Thank you.

Operator

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

Speaker 7

Hi, good morning. Thank you for taking my questions. So 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 and I'll have to review the call, right, but the ones that jump out are obviously the reduction in force and the subleasing of the 2 different facilities or floor space at the 2 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?

Speaker 4

I'll take that one. Thank you for the question, Craig. Previously to today's call, we had several round of cost reduction measures that added up to $40,000,000 of savings and we were starting to see, let's say, the impact of all these measures this quarter. So let's call it $10,000,000 of recurring savings starting this quarter. So this is for what was done prior.

Speaker 4

This morning, the announcement we made of the CAD25 1,000,000 call it like CAD6 1,000,000 a quarter or so. This we 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 $16,000,000 combined savings that we would see from a baseline of 2023.

Speaker 7

Okay, excellent. Well, I should say congratulations.

Speaker 4

And maybe just to add, maybe this excludes the OpEx savings when we talked about the Juliet facility and so on. Obviously, this could potentially be obviously additional savings right now that are not we're not that's not been quantified so far. Obviously, we talked about the rent of €5,000,000 for Joliet. So we're talking €7,000,000 of additional opportunities that we'll be working on in the next few weeks.

Speaker 7

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.

Speaker 7

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 interest, but what are the other major puts and takes on the liquidity front through the end of the year?

Speaker 4

This is from a CapEx standpoint, the total spend for the first half of the year, we're talking about $1,700,000 as compared to $42,000,000 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 5,000,000, so it should be in that range. R and D, we know we had communicated previously that we're looking at 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 and D front to be higher than 30%.

Speaker 4

So those are the 2 let's say, elements outside of our, let's say, earnings that are cash element. On the inventory front, you mentioned, yes, we did some good progress despite the overall context. We've achieved $20,000,000 of savings for the first half from our inventory reduction plan. We had committed to €50,000,000 to €75,000,000 I believe we're well on track to hit those numbers. When you look at one leading indicator for me is really the raw material and WIP.

Speaker 4

Just this quarter alone, we saw the raw material and width go down by €23,000,000 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 the tuning to achieve those objectives.

Speaker 7

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?

Speaker 3

Craig, Mitra. I'll take this. Look, I mean, we haven't seen this happen, not the infrastructure challenge, but with the reallocation of funding. There has been, as you may know, in the 1st round, a pretty significant amount of funding that was returned. And we're certainly encouraging the EPA to redistribute those vouchers.

Speaker 3

We are equipped to deliver the vehicles and of course the plan, the infrastructure. So it's definitely an opportunity for us if it was to happen, but haven't seen it happen so far.

Speaker 7

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

Operator

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

Speaker 8

Hi, good morning. So I

Speaker 3

know we've gone over this

Speaker 8

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 $25,000,000 of available immediate liquidity. You also talk about your progress around working capital reduction.

Speaker 9

And it looks like you

Speaker 8

have around $50,000,000 left. So can you just kind of walk us between June 30 December 30? 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?

Speaker 8

Thank you.

Speaker 4

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 of roughly 2,000,000 dollars a month starting right away because as I said earlier, most of these layoffs are temporary. So we will see the impact immediately.

Speaker 4

We continue to be very focused. As I mentioned earlier, the inventory story for us is a good one. We've achieved 20,000,000 of savings so far and there's like 30,000,000 to 50,000,000 to go. And again, I believe we have all the right processes in place to achieve those reduction. Collection remains still an opportunity for us.

Speaker 4

We still have quite a few, let's say, amounts to collect and several of these receivable are coming from governments that are taking a bit more time to collect. So we're very focused on that as well. And as mentioned earlier, the EPA program, we talked about the potential of 77,000,000. So we expect to start seeing money flowing our way with those 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 both to our balance sheet.

Speaker 4

So we're actively obviously focused on that in parallel. So I would say these are the 2 streams right now or the 3 streams that are across focus that we're pursuing to address our cash situation.

Speaker 8

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

Speaker 2

Yes, 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 sometimes in 2025. So we're in discussion right now. So there will be no short term result on this.

Speaker 2

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 in 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.

Speaker 2

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

Operator

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

Speaker 10

Hi, this is Daniel on for Dan. Thanks for taking my questions. 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 there's still the ramp with their batteries and your line D and V bottom?

Speaker 10

Thank you.

Speaker 4

Good morning, Daniel. So I'll take that one. Listen, for sure, in 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 Alliance 5, our R and 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 the low volume when we had some under absorption issues in the quarter with lower volume like that.

Speaker 4

So obviously, we don't expect these kind of margins to be to repeat itself in the future as we see our various platform maturing from a cost standpoint as we continue and let's say evolving vis a vis our learning curve for those new platforms. So we believe on a unit basis, we do have some good economics that 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 continue to better margin going forward.

Speaker 10

Great. Thank you. That's my one.

Operator

Thank you. And the next question goes to Rupert Mayer of National Bank. Rupert, please go ahead.

Speaker 9

Hi, good morning, everyone. I'd like to ask a little about the Line 8 tractor. Can you give us a little more color on the rollout of that product? When do you expect the 1st sales? And who are the customers that you're anticipating?

Speaker 2

Good morning, Rupert. Yes, it's going well. We will start selling the L and A tractor before the end of the year. When we were at the actual we did the launch of this tractor and we're doing a lot of ride and drive with the customers, very good feedback. We are receiving so far.

Speaker 2

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 and 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 by clients to take care of all that. But all in all, it's going well.

Speaker 9

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?

Speaker 9

Or are you finding that you're losing to diesel truck manufacturers, for example?

Speaker 3

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 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, we in the vast majority of cases, we lose the status quo.

Speaker 3

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 products within trucks, the Line 8 tractor or I should say the Class 8 is the biggest class of the mall as I'm sure you know, the biggest market opportunity and it's also where we see the most demand within the product suit for our line electric trucks. So we're obviously very excited for the launch of this platform.

Speaker 9

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?

Speaker 3

Well, so I think the word when is the important one in your question here. We are seeing a number of customers that are 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, 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.

Speaker 9

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

Speaker 6

Thank you.

Operator

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

Speaker 11

Yes, good morning and thank you for taking my question. My first one is on truck demand. You mentioned seeing 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 in 2Q?

Speaker 11

And what do you see going forward on market demand for trucks?

Speaker 3

Yes. So we have had some cancellations in your book mostly related for trucks specifically, mostly related to the timing of the platform. I 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.

Speaker 3

And so we still think that this is a very big market potential. As I said before, it's a when, not an if. And 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 manufacturers.

Speaker 11

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

Speaker 11

And maybe how quickly could this materialize?

Speaker 2

I'm sorry, Ethan, we didn't get the question to optimize on what?

Speaker 11

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

Speaker 11

And maybe how quickly could this materialize?

Speaker 2

Thank you, Etienne. Yes, we're having discussions. As you know, the Joliet plant is 900,000 square feet 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 Jerome.

Speaker 2

And the so basically the efficiency of the square footage, I mean it cost us about $5,000,000 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

Speaker 3

to do that in Joliet.

Speaker 11

Sounds good. Thank you for the color on that, Daimak.

Operator

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

Speaker 6

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 $77,000,000 in upfront payments from the EPA programs?

Speaker 3

Yes. Ryan, Nick here. So

Speaker 2

the payment method in the ETA

Speaker 3

upfront payment, it varies between the grant round and the rebate round. Recall, we have 97 direct use or line file applications that were awarded in the grant round and 127 in the rebate round. In the grant round, I mean the big pacer 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 finalize those purchase orders with the awardees under the program and then we will request the payment.

Speaker 3

In terms of the voucher round,

Speaker 6

it's a little more in

Speaker 3

a minutured process, but it requires purchase orders and other aspects of the projects like quotes from contractors and planning for the charge in infrastructure or purchase orders. But it the way the EPA works is that these payments are heard prior to the charging infrastructure installation. So there's no link between the installation itself and the timing of the payment. I'll also point out that those payment requests have started and obviously we're working to accelerate them in the near future.

Speaker 10

Great. Thank you.

Operator

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

Speaker 1

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

Operator

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

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Key Takeaways

  • Addressed ongoing cash flow pressures from Canadian ZETF delays and US EPA funding timing by prioritizing liquidity optimization and realigning its cost structure.
  • Shifting to batch-size manufacturing for electric trucks and transforming its battery operations into a standalone product line to sell Lion MD (70 kWh) and HD (105 kWh) packs to third parties, driving revenue and cash flow without extra CapEx.
  • Optimizing facilities and workforce by planning to sublease most of its 900,000 sq ft Joliet plant (saving CAD $5 M/yr), partnering on service centers, and cutting ~300 roles to save $25 M annually plus additional non-salary cost reductions.
  • Finalized US EPA Clean School Bus program agreements for 97 grant units ($38 M) and 127 rebates ($39 M), representing around $77 M in potential upfront payments, with active purchase order solicitation underway.
  • Key operational milestones include certification of its Lion HD battery, commercial launch of the Lion 8 Class 8 tractor (127,000 lb GCWR) later this year, and a CAD $20 M YTD inventory reduction toward a CAD $50–75 M target.
AI Generated. May Contain Errors.
Earnings Conference Call
Lion Electric Q2 2024
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