The Lion Electric Company (NYSE:LEV) Q1 2024 Earnings Call Transcript

The Lion Electric Company (NYSE:LEV) Q1 2024 Earnings Call Transcript May 8, 2024

The Lion Electric Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone. And welcome to Lion Electric's First 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, Mr. Adjahi.

Isabelle Adjahi: Good morning, everyone. Welcome to Lion's first quarter 2024 results conference call. [Foreign Language] Today, I'm here with Marc Bedard, 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 such 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 Bedard: Good morning, everyone. Thank you for joining us today to discuss Lion Electric's performance for the first quarter of 2024. Q1 was marked by significant commercial and operational achievements we have been able to accomplish despite important challenges, mostly related to the timing of some subsidy programs. Let me start by aligning some of our achievements in Q1. The Canadian ZETF Fund approved the first sizable application for 200 buses, for which we have delivered 50 buses in Q1. We started delivering our Lion5 trucks equipped with our Lion MD battery packs, and we anticipate a gradual increase in Lion5 production throughout the rest of the year as we fulfill orders and bolster our market presence. We started the deliveries of our LionD school buses manufactured at our Joliet facility.

We are planning the commercialization of our LionA tractor truck this summer, and we will make its formal commercial introduction at the ACT Conference in Las Vegas in two weeks. Our LionA tractor will be equipped with our Lion battery HD pack, a state-of-the-art 105 kWh pack. The commercialization of our LionA tractor truck expected this summer marks the end of our new model development, allowing us to be fully focused on our vehicle optimization, including cost reduction. Q1 was also the first quarter within the last few years with almost no CapEx investment, allowing us to capitalize on our previous investments made in our three factories and be fully focused on manufacturing process improvements and supply chain optimization. Lastly, our expertise has been recognized with the prestigious mHUB, Chicago's Manufacturer of the Year Award, that honors manufacturers and organizations for being innovative and focusing on economic growth.

To date, we are proud to report that over 2,000 of our vehicles are on the road and have collectively driven 25 million miles, metrics that demonstrate Lion's leadership in the medium and heavy duty electric world. On the financial front, Q1 revenues remain steady year-over-year, with margins impacted by initial increased costs related to the introduction of our Lion5 and LionD new models and the integration of our Lion batteries, as previously communicated. While we are pleased with the first ZETF approval and the deliveries of 50 buses in Q1 under this program, revenues in Canada continue to be significantly impacted by the delays and challenges associated with the granting of subsidies related to the ZETF program. This approval of 200 electric buses is a great news and definitely a step in the right direction, but this represents only a fraction of the program's potential.

Revenues in the US were largely impacted by the timing of orders and deliveries tied to the EPA program, being in a transition phase between two funding runs for this $5 billion program that is crucial for advancing electrification in this market. In response to these timing challenges and to safeguard our liquidity, we continue to proactively make difficult but necessary decisions, including implementing additional cost control measures such as rightsizing our workforce. Combined with the measures announced late last year and early this year, we estimate that these initiatives will result in annualized cost savings of $40 million. Going forward, we are confident that the recent announcement of new funding programs, such as the additional billion dollars allocation under the EPA's Clean Heavy Duty Vehicles Grant Program, along with the renewal of Canadian programs such as Ecocamionnage and the Quebec School Bus Subsidy Program will possibly impact orders and deliveries.

For the rest of the year, our focus remains on growing our order book and accelerating deliveries, while diligently managing liquidity and controlling costs, including a significant improvement of our working capital, now that the supply chain crisis is behind us. Nicolas will now provide insights into our commercial performance. Nicolas.

Nicolas Brunet : Thank you, Mark. Let me start by discussing deliveries, then address the order book and conclude with an update on certain subsidy programs. During the quarter, we delivered a total of 196 vehicles comprising 184 buses and 12 trucks. Of these, 165 were delivered in Canada, with the remaining 31 delivered in the US. Notably, this includes 50 buses to one of our customers for which funding approval under the ZETF program was obtained for an order of 200 school buses. While this initial ZETF approval is a positive milestone, these 50 deliveries represent only a fraction of the program's potential, and we look forward to the government accelerating the processing of application. Additionally, we experienced a slowdown on EPA related deliveries as we are currently in between funding rounds.

I will elaborate on this in a moment. In terms of purchase orders, as of May 7, 2024, Lion's vehicle order book stood at 2,004 vehicles, consisting of 1,793 buses and 211 trucks, representing a combined total order value of approximately $475 million. The momentum in the purchase order book and the deliveries for the quarter was impacted by the timing of funding rounds in the EPA's Clean School Bus program. First, the vast majority of awardees in this billion dollar grant round announced earlier this year are not yet able to issue purchase orders and accept vehicle deliveries. As a reminder, the EPA announced in January the awards for the grant round which allocated close to $1 billion of funding for clean school buses and related infrastructure.

As part of this round, Lion was awarded funding of $38 million for 97 school buses. Additionally, we estimate that 70% of the awards were allocated to parties that are not directly associated with the school bus OEM or dealership. We have, over the past month, been proactively working with awardees in this grant round and we are in advanced dialogue with a number of them to potentially purchase Lion school bus. Orders from this grant round are expected to be allowed shortly for deliveries later this year and in 2025. Second, applicants under the latest rebate round of the EPA program, which is expected to allocate $500 million of funding, are still awaiting the result of their allocation. Applications were filed on February 14. We worked with a number of clients to file applications on their behalf and are also in dialogue with a number of potential clients who [indiscernible].

Awards under this round of the EPA program are expected to be announced imminently. Just as with the grant round, this funding has not yet impacted our order book. So altogether, close to $1.5 billion are expected to soon be available for districts and private operators to purchase school buses in the EPA's Clean School Bus program. Additionally, the recent launch of the EPA's Clean Heavy Duty Vehicles program, which allocates $932 million to purchase Class 6 and 7 zero-emission vehicles, including over $650 million specifically for school buses, is expected to further stimulate demand for electric school buses. We are also excited for the upcoming opening in California of the Zero-Emission School Bus and Infrastructure, or ZESB program, which allocates $500 million for the purchase of electric school buses and charging infrastructure.

Combined with the upcoming EPA rounds I just discussed, this translates into over $2.5 billion of funding to be available for school bus and infrastructure purchase. On the truck side, the Lion5 and Lion8 tractor platforms continue to drive strong interest from potential customers, which we believe positions us well to serve truck operators when the shift to EV accelerates. Finally, 65 truck purchase orders were removed from our PO book relating to a client that filed for creditor protection. In Canada, we remain hopeful that more applications under the ZETF program will be approved, which would have an impact on both our upcoming deliveries from existing orders, as well as drive momentum in the order book. Last, in Quebec, the extension of both the Ecocamionnage program for trucks and the Quebec School Bus Subsidy Program until March 2025 represents a favorable development as both of these programs offer very attractive subsidies.

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

Richard Coulombe : Thank you, Nicolas. I will start by commenting on Q1 results. I will then discuss our liquidity position and provide color for the rest of 2024. In Q1, we recorded quarterly revenue at $55.5 million, up 1% compared to Q1 2023 despite fewer vehicles delivered, 196 compared to 220 in Q1 2023. Gross margin was negative 20.1% compared to negative 4.1% last year. As communicated previously, margins were impacted by initial increased manufacturing costs, mostly due to the introduction of LionD and Lion5 vehicles and to the initial production of Lion battery packs. Our SG&A expenses stood at $14.5 million, excluding $0.4 million of non-cash share-based compensation. This represents 26% of revenue in Q1 2024 compared to 28% in Q4 2023.

In Q1, adjusted EBITDA was negative $17.3 million compared to negative $14.5 million in Q1 2023. Our net investments in intangible assets, mostly related to R&D, amounted to $8.2 million, down from $16.5 million in Q1 2023, as we continue delivering on significant development milestones. Total CapEx incurred significantly decreased to $400,000 compared to $23.1 million in Q1 2023, and mostly relates to maintenance CapEx. We now expect CapEx for 2024 to be approximately $5 million, lowering the previously communicated guidance for CapEx. Now moving on to liquidity. At the end of Q1, we had available liquidity of $31 million, including $5 million in cash and $26 million in immediate borrowing capacity on our revolver. During Q1, we made good progress with our inventory reduction plan, achieving a $12 million reduction.

This puts us on track to deliver on our objective of a $50 million to $75 million inventory reduction for the year. Despite this $12 million inventory reduction, several specific factors impacted Q1 and resulted in a negative working capital of $21 million. First, accounts payable decreased by approximately $16 million, driven by non-recurring payments to suppliers for purchases made prior to the launch of our inventory reduction plan and strategic CapEx incurred in 2023 for which payments were made this quarter. We do not anticipate this trend to persist as we continue working closely with our suppliers in optimizing our supply chain management. Second, accounts receivable increased by approximately $7 million, largely attributed to overdue amounts mostly owed by government agencies.

Substantial amounts were collected since and we are in active discussions to expedite remaining payments. Third, unearned revenue balance with regards to the EPA program represented a net reduction of $5 million for the quarter as we are currently between EPA grant rounds. We are focused on optimizing our balance sheet, which as at March 31st, 2024, includes $329 million of current assets compared to $124 million of current liabilities, and therefore, provides important opportunities to unlock liquidity. As of April 30th, our liquidity position is largely unchanged relative to our March 31st position. During the quarter, we also made difficult decisions to streamline our operations by implementing additional workforce and other cost reduction initiatives.

These decisions were necessary to safeguard our liquidity and ensure our long-term sustainability, considering the significant delays encountered in some of these subsidy programs. Combined with the measures announced in November 2023 and February 2024, these initiatives are expected to result in annualized costs savings of approximately $40 million. As we look ahead, we anticipate persistent volatility in the short term. Our focus will remain on growing our order book and accelerating deliveries, while closely managing our liquidity, driving our inventory reduction plan, and controlling our overall costs. In parallel, we stay appraised of potential opportunities to strengthen our balance sheet and ensure financial resilience in the face of evolving market conditions.

I will now pass it over to Marc for concluding remarks. Marc?

Marc Bedard : Thank you, Richard. Let me conclude by reiterating that despite having to navigate through the delays in the granting of some subsidy programs, we are very excited by the many opportunities that lie ahead. The shift to electrification might have taken a little longer than initially expected, but it is clearly happening and Lion is playing a key role in it, as demonstrated by our leadership in the electric school bus market. While we expect volatility in the short term, we are confident in the decisions we are making for our company, and we will remain agile and proactive to maintain stability and forward momentum, which is part of our DNA. We will also maintain our steadfast focus on optimally managing liquidity and controlling costs, our ultimate objective being to generate EBITDA and free cash flow, key milestones of our financial stability and sustainable growth. Thank you for your attention this morning. Let's now open the line for questions.

Isabelle Adjahi : Operator, we will now open the line for questions. I just want to ask you to limit to two the number of questions asked to allow other participants to ask their questions. You can, of course, go back in the queue if you have any follow-up.

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