The Lion Electric Company (NYSE:LEV) Q4 2022 Earnings Call Transcript March 10, 2023
Operator: Good morning, ladies and gentlemen. Welcome to Lion Electric’s Fourth Quarter and Fiscal 2022 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.
Isabelle Adjahi: Good morning, everyone. Welcome to Lion’s fourth quarter and fiscal 2022 results conference call. . Today, I’m here with Marc Bedard, our CEO, Founder; and Nicolas Brunet, our EVP and CFO. Please note that our discussion will include estimates and other forward-looking information and that our actual results could differ materially from those implied in the statements. We invite you to review the cautionary language in this morning’s press release and in our MD&A regarding the various factors, assumptions, and risks that could cause our actual results to differ materially from those implied in such forward-looking statements. With that, let me turn it over to Marc to begin. Marc?
Marc Bedard: Thank you, Isabelle. Good morning, everyone. At the beginning of last year, as we were discussing our strategic objectives for 2022 we highlighted the following specific areas of focus that guide our work and investments. Ramping up production at our Montreal plant, building and starting production at our Joliet plant, and our battery factory and accelerating vehicle and charging infrastructure deliveries. I’m glad to report we delivered on our plan for each of these items while maintaining our commanding leadership in the electric school bus space. There are three main elements we will be talking about today. Number one, we continued to increase our vehicle production cadence in Q4, which translated into growing vehicle deliveries and growing revenue, and we expect this trend to continue in 2023.
Number two, we achieved significant milestones in our two growth projects as we assembled our first electric school bus unit at our U.S. manufacturing plant and our first battery pack in our battery factory. And number three, while in 2023 we will continue to invest in our two new manufacturing factories to ramp up production capacity, we will also continue to smartly align capital spend with expected near term demand for our vehicles, and to carefully manage our liquidities. We will provide color on each of these items before we open the line for questions. Let’s begin with deliveries and orders. During the quarter, we delivered 174 vehicles consisting of 139 buses and 35 trucks. This is the fifth quarter in a row of sequential growth in vehicle deliveries.
In fiscal 2022 we delivered 519 vehicles, more than twice the 196 vehicles delivered in 2021. Our PO book currently stands at 2468 vehicles for total order value of $575 million. It includes orders for 2167 electric school buses, including 190 from the EPA program, as school districts that were awarded grants under the program have started to place purchase orders ahead of the April 28th deadline. Speaking of the EPA Clean School bus program, we have already started delivering electric buses funded by this program well ahead of the October 2024 deadline. Also, as per the program rules, we expect the EPA to make upfront payments to program all these after receiving proof of a confirmed purchase order. This will have a significant positive impact on our liquidity by allowing us to invest in upfront procurement cost required to manufacture these vehicles.
Our PO book also includes orders for 301 electric trucks. And last, our line energy PO book amounts to approximately $6 million mostly for charging infrastructure and related services. Beside the EPA, ZTF and many other programs discussed previously, other legislation and funding initiated continue to support this shift to the electrification of the transportation sector, which represents great news for Lion and our customers. For example, the U.S. Federal Government recently published the U.S. National Blueprint for Transportation Decarbonization and signed the Global Memorandum of Understanding on zero emission medium and heavy duty vehicles which commits to 30% of medium and heavy duty vehicle sales being zero emission vehicles by 2030 and 100% by 2040.
In California, the proposed 2023 budget allocated $48 billion to climate change. On the IRS front, Lion was officially approved as a qualifying manufacturer by the IRS, which means that our vehicle sold in the United States starting January 1, 2023 are eligible for tax credit of $40,000 per vehicle. Let me now provide an update on our supply chain. Last year, the supply chain continued to be impacted by several factors, although to a lesser extent than in 2021. As discussed previously, this has generally translated into longer lead times, increased transportation cost, and ultimately higher cost of components for vehicle collection. While supply chain issues are improving, we nevertheless expect continued challenges this year, which may impact our production cadence and vehicle cost.
To mitigate those supply chain impacts, we have successfully put in place several measures which we will continue in 2023, including qualifying additional suppliers and proactively managing inventory for critical components such as batteries and motors. At the end of the quarter, we had approximately 4700 BMW battery packs on hand. This inventory should enable us to gradually convert to Lion batteries as we ramp up our own battery production, which I will address in a minute. As far as battery packs to be supplied by Romeo, the arbitration process is progressing. In addition, we initiated legal proceedings against Nikola Corporation on the basis that it intentionally interfered in our contractual relationship with Romeo and in our business expectancy with respect to our relationship with Romeo.
Photo by Michael Fousert on Unsplash
As you can expect, we will refrain from commenting on this situation. Let me now talk about the development of our different vehicles. We have substantially completed the development work for the Lion8 bus, the LionD bus, the Lion5 truck and the Lion8 tractor trucks, and we expect these platforms to begin commercial production this year. Please note that the timing of the start of commercial production for the Lion8 tractor truck could be impacted by the supply of the Romeo Power battery packs for the reasons I just mentioned. Also, as a reminder, our buses will be manufactured at both the Montreal and Joliet plants, while our trucks will be manufactured in Montreal for the time being, where we have ample capacity to accommodate current demand, which takes me now to an update on the Joliet plant and the battery plant.
As announced, we completed in Q4 the assembly of the first electric school bus unit at our U.S. plant and delivered our first made-in-America electric school buses while we ramp up our manufacturing capacity in Joliet. In this regard, we expect to manufacture a modest number of buses in Joliet during the first quarter, followed by a gradual increase in production throughout the year. We will continue to invest carefully in the Joliet plant this year with a goal to add an annual production capacity of 2,500 buses by the end of the year. As for our battery plant, following the completion of the installation of the first portion of our battery assembly line in our battery manufacturing facility, we completed in Q4 the production of our first battery pack at our own battery factory.
Final certification of the first battery pack model is expected in the first half of this year, followed by a gradual production ramp-up in 2023. The first Lion batteries will serve to power the LionC and LionD school buses and the Lion5 trucks. With our planned 2023 investments in the battery plant, we are targeting to reach a battery production capacity of 1.7 gigawatt hour by the end of the year. This represents capacity for approximately 5,000 vehicles in a mix of buses and trucks. As for the innovation cyber building, the shell work is now substantially completed and this building will initially be used this year for test and certification of vehicles and batteries, for pre-delivery inspection of vehicles, and as a warehousing space. Let me now talk about our recently announced North American agreement with Mitsubishi and EMGS Commercial Finance, to provide financing for all electric buses and medium and heavy-duty trucks through our Lion Capital Solutions offering.
This agreement will allow Lion Capital Solutions to provide our customers with financing solutions specifically designed for Lion school buses and trucks, thereby making it easier and simpler for our clients to secure the financing required for the purchase of their Lion vehicles, all of this without putting in very significant pressure on Lion’s balance sheet as we will leverage Mitsubushi’s vehicle financing expertise and capital. This type of product offering should have a positive impact for our customers as it could eliminate or reduce upfront capital requirements for the purchase of Lion vehicles. Nicolas will now further discuss our financial performance for Q4 fiscal 2022, and he will also provide color regarding our CAPEX objectives for 2023.
Nicolas Brunet: Thank you, Marc. I will start with the financial highlights of the Q4 and full year 2022 results. I will then cover the 2023 investment outlook for our growth projects and conclude with our liquidity position. During the quarter, we delivered 174 vehicles, consisting of 139 buses and 35 trucks, which translated into revenue of $46.8 million compared to $22.9 million in Q4 2022, a 104% year-over-year growth in revenue. 160 of the vehicles delivered in Q4 were delivered in Canada and 14 in the United States. This was our fifth consecutive quarter of sequential growth in vehicle delivery. We posted gross margin of negative 10%, mostly impacted by supply chain challenges, ongoing inflationary pressures within manufacturing costs, and our conscious decision to continue to invest in plant ramp-up, which is an important part of our growth strategy and our goal to achieve long-term profitable growth.
As previously explained, for the foreseeable future, gross margin should continue to reflect the investments we are making to establish manufacturing operations at our Joliet facility and the Lion campus and to ramp up production at all of our facilities. As we scale production, we expect margins to improve as fixed costs will be spread over increased numbers of units. SG&A amounted to $15.6 million in Q4. After removing the impact of noncash share-based compensation, SG&A amounted to $13.1 million. This is a slight decrease versus Q3 expenditure of $14.8 million, again net of noncash share-based compensation. Adjusted EBITDA was negative $13.9 million for Q4 as compared to negative $7.5 million for the same period last year and negative $15.1 million in Q3 2022.
During the quarter, CAPEX amounted to $39.1 million, including $18.9 million incurred for the Joliet plant and $19.6 million incurred for the Lion Campus as compared to $19.2 million during the same period last year. Capital expenditures for Joliet in Q4 were higher than the previously disclosed estimate of $12 million, mostly due to earlier timing of equipment construction milestones and tooling costs. Capital expenditures for the Lion Campus in Q4 were lower than the previously disclosed estimate of $35 million due to later timing of construction of the Innovation Center and due to battery plant equipment received in early 2023 as opposed to the end of 2022. For the quarter, in addition to intangible assets which mostly consists in R&D, amounted to approximately $21.3 million as compared to $9.7 million last year.
Let me now make a few comments on selected 2022 full year performance items. We delivered a total of 519 vehicles during the year, consisting of 409 buses and 110 trucks as compared to 196 vehicles in 2021. 471 of the 2022 deliveries took place in Canada and 48 in the United States. This translated in revenue of $139.9 million for 2022, up $82 million or 142% as compared to $57.7 million in 2021. Our gross profits were negative $12.9 million or negative 9.3% for the year and adjusted EBITDA of negative $55 million. Most of the CAPEX incurred for the year related to the two growth projects, $72 million was incurred for the Joliet plant and $71 million, including approximately $5 million of R&D, was incurred for the Lion Campus. Finally, additions to intangible assets stood at $79 million for the year.
Let me now spend a minute on capital investments for our growth projects in 2023. As previously signaled, we plan to further invest in CAPEX activity, although at a reduced pace versus what we did in 2022. For Joliet, we expect 2023 CAPEX to amount to $20 million. These investments should allow us to have the infrastructure in place for an annual production capacity of 2,500 buses by the end of the year. For the battery facility, we expect to incur CAPEX of $23 million in 2023, with the goal of bringing annual production capacity to up to 1.7 gigawatt hours by the end of the year. In parallel, we expect to incur approximately $22 million in CAPEX for the Innovation Center in 2023. We expect that approximately 55% or approximately $25 million of the $45 million in capital expenditures expected to be incurred in 2023 from the Lion Campus, will be financed through the federal and provincial loans secured for such purpose.
Let me now say a few words on liquidity and capital resources. In Q4, we successfully closed a $50 million offering of units, with each unit consisting of a common share and a warrant to purchase a common share. We also raised $10 million under our ATM program during the quarter. Finally, we drew $56 million on our debt facilities, including the revolving credit facility, the government loans related to the Lion Campus, and on a new credit facility with Finalta and PDPC, which was used to refinance our previous credit facilities with Finalta. As of the end of Q4, we had a cash position of $88 million. We were also owed $10 million on the government loans for the Lion Campus for CAPEX incurred in 2022. Shortly after the end of Q4, we announced the exercise of the over-allotment option for the unit offering, increasing gross proceeds by $7.5 million.
We also announced a sale-leaseback transaction for the battery plant building in Mirabel, raising gross proceeds of approximately $21 million. As previously mentioned, we expect that approximately 55% of the CAPEX to be incurred in 2023 for the Lion Campus will be financed through the federal and provincial loans. At the end of the quarter, capacity of approximately $94 million remained available for issuance under our ATM program. While our balance sheet provides us with flexibility and runway, we will continue to closely monitor our liquidity in 2023 and look to seize opportunities that may become available to raise additional capital. With that, I will pass it back to Marc for concluding remarks.
Marc Bedard: Thanks, Nicolas. Before we open the line for questions, let me conclude by saying that as we start 2023 with a good order book in our three manufacturing plants gradually ramping up, we have everything in place for long-term growth and profitability. Our focus is on sustaining this trend. Also, you will be able to see all of our improvements yourself, since we will proceed with the official opening of our two new factories this year, starting with the visit of the battery plant this spring. Thank you for your time this morning.
Isabelle Adjahi: Operator, we will now open the lines 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 come back in the queue if you have any follow-up questions.
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Q&A Session
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Operator: . Our first question today comes from Mike Shlisky with D.A. Davidson. Mike, please go ahead.
Michael Shlisky : Good morning and thanks for taking my question. I know you don’t usually give any kind of guidance, but we’re already at the last few weeks of March here. Could you give us some kind of directional or range for the production of trucks for at least the first quarter here? I’m sorry. I mean — I said I mean trucks and buses, of course.
Marc Bedard: Trucks and buses, yes. Yeah, good morning Mike, this is Marc. Thanks for your question. Yes, absolutely. I mean, we — yes, we don’t give guidance, as you just said, but it’s going very well in terms of manufacturing capacity. Manufacturing capacity in Montreal, just a reminder that we have the manufacturing capacity of 1,000 units, and we’re ramping up in Joliet as well. So what I can tell you is that the trend that we’ve seen, I’m sorry, in the last five quarters, keep growing. This is what we’re expecting as well in 2023. So I’ve said it several times, I mean, it’s a constant growth one quarter to the other, and this is exactly what we think will happen in 2023 from one quarter to the other.
Michael Shlisky : Okay, okay. Another question, I’ve got a whole bunch, but I’ll just go to this other one here. So this week, I was at Work Truck week. I saw the Lion booth. You have a lot of nice signage around the show. And as you kind of walk the show, there aren’t really any — really many other Class 6 trucks. Maybe one or two other Class 5. There really only really zero Class 6 trucks of any note at the show. I’m curious, kind of how the show went to your folks? And b) I guess I’m curious, why aren’t we seeing a real flow of orders there, if you really can’t get an easy Class 6 anywhere else and Class 6s, in general, are in short supply on the ICE side?
Marc Bedard: Yes. Well, I think we’ve said it right at the beginning, Mike. I mean, the Class 6 we have right now is one of a kind. I mean, this is a purpose-built electric truck like everything else we’re doing, purpose-built buses or purpose-built trucks. So it’s not an after talk for us. I mean that’s part of the DNA we’re doing. You’re absolutely right. I mean this is a market where there is almost nobody else right now, the Class 6. And you’ve seen this with some of the partnerships that we — the partners that we were exposing with at this show. So we feel it’s a good market for us. We feel that the truck market is just at the beginning of this. And you see that also with the order book at 301 unit. To us I mean, it’s only the beginning of that, and we feel that the supply chain crisis and the COVID crisis in the last couple of years had basically delayed everything by about two years.
