Lion Electric Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 29, 2024

There are 12 speakers on the call.

Operator

Good morning, everyone. Welcome to Line Electric's 4th Quarter and Fiscal 2023 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 Ajay, Vice President, Investor Relations and Sustainable Development. Please go ahead, Ms. Ajay.

Speaker 1

Good morning, everyone. Welcome to LION's 4th Quarter and Fiscal 2023 Results Conference Call. Today, I'm here with Marc Bedard, our CEO, Founder Nicolas Brunet, our President and Richard Clon, 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, Isabelle. Good morning, everyone. We will be discussing our Q4 results in a moment, but I first want to address our 2023 performance and highlight some of our achievements. 2023 has without a doubt been a challenging year for the whole lead industry, including for Lion, but it has also been a year of significant progress for our company. 1st, we saw a significant increase in deliveries, resulting in revenue growth of 81% for the year, in addition to achieving positive adjusted gross margins.

Speaker 2

We also completed the construction of our vehicle production facility in Joliet and our battery plant in Mirabel and started production at both facilities. We now have the infrastructure in place, including the production line and equipment to achieve a production capacity of up to 5,000 vehicles per year and battery production capacity of 1.7 gigawatt hour, enough to power 5,000 of our vehicles. With this significant manufacturing infrastructure in place, we do not plan to make any significant investments in gross CapEx for the foreseeable future. We also obtained certification for our MD battery pack, which powers our Lion 5 trucks today and will be integrated shortly on our Lion Cisco buses. This represents a significant milestone in the execution of our vertical integration strategy.

Speaker 2

And last but not least, we started the commercial production of the Lion Disco bus and the Lion 5 truck, and we are planning to start the commercial production of the Lion 8 tractor this summer. With our vehicle lineup nearly completed and with significant production infrastructure in place, we are well positioned to capture market share in the medium and heavy duty EV space. Let me now comment on our Q4 results. During the quarter, we delivered 188 vehicles, leading to 29% revenue growth over Q4 2022. Despite maintaining a positive adjusted gross margin during the quarter, the 188 vehicles we delivered are below our expectations.

Speaker 2

This is mainly explained by two reasons. 1st, we incurred delays in the initial deliveries of the Lion Viscoll buses and the Lion 5 trucks, as we wanted to ensure optimal quality of these vehicles, which were the first ones going to customers. And as a result, initial deliveries were pushed out to Q1 and Q2 of this year. And second, our Q4 deliveries and the pacing of new orders were significantly impacted by the substantial delays incurred by the Canadian government with its 0 emission transit fund program, the ZET ETF, since several Canadian school bus operators are still waiting for an official approval to start receiving our electric buses. The continued uncertainty and delays around the ZET ETF program had a major impact on momentum of electric school bus deliveries in Canada.

Speaker 2

The Canadian federal government and our clients currently work to evaluate and process sizable applications for school buses deployment that were filed several months ago. As a result of these delays and its impact on our world liquidity, we are taking immediate action by temporarily laying off approximately 100 employees, mostly impacting our night shift production workforce in Saint Jerome. We will reassess our production needs on a regular basis in the upcoming months, mainly depending on the pace of the ZET ETF project's approval and deployment. Before turning it over to Nicolas and Richard to provide more detailed insights into our commercial operations and financial performance, let me reiterate that with our 18 50 vehicles on the road that have driven 22,000,000 miles in real operating conditions and considering everything we have achieved over the past 15 years, we believe we are in an exceptional position for continued success. Our main objectives are in effective liquidity management and achieving profitability by remaining agile and actively focused on cost control.

Speaker 2

Further, we will continue to proactively improve the quality of our vehicles and increase our sales technician service coverage to maximize customer experience and uptime with our vehicles. Nicolas?

Speaker 3

Thank you, Mark. I will start by addressing Q4 and fiscal 2023 deliveries, then discuss the order book and conclude with an update on certain subsidy programs. Starting with deliveries, we delivered 188 vehicles in Q4, consisting of 178 school buses and 10 trucks. 107 vehicles were delivered in Canada and 81 in the U. S.

Speaker 3

Our school bus deliveries in Canada were impacted by inability to deliver under the Canadian ZET ETF program, for which a number of our clients are in discussions with the government to obtain satisfactory of approval under the program. Furthermore, as previously explained, we experienced some delays in the first deliveries of the Line 5 truck and the Line D school buses, which further impacted results. For fiscal 2023, we delivered 852 vehicles compared to 5 19 in 2022, a 64% increase on a year over year basis. Now shifting our focus to purchase orders. The order book currently stands at 2,076 vehicles, consisting of 1791 school buses and 2.85 trucks, representing approximately $500,000,000 In addition to the challenging economic environment, the decline in the order book is in part attributable to the timing of certain subsidy programs, which are beneficial in the long term, but can cause some volatility on a quarter to quarter basis.

Speaker 3

For example, the EPA awarded in January close to a $1,000,000,000 of grant funding for purchase of clean school buses, but purchase orders cannot yet be placed under the program's parameters and hence are not reflected in the order book. As previously announced, Lion was awarded a grant for 97 school buses and related charging infrastructure in this round, representing a total of CAD38 1,000,000 which we are working with the school districts to obtain formal purchase orders once allowed by the EPA. We see significant potential for additional opportunities for Lion in connection with this round as we estimate that 70% of units were awarded directly to school districts, financial entities and third party contractors. We are in dialogue with a number of these parties towards the potential deployment of Lions School Bus. We are also very encouraged by customer engagement towards applications for the most recent rebate round of the EPA program, which closed on February 14.

Speaker 3

The EPA expects to award at least $500,000,000 under this round, with results to be announced in April. Now that the applications for the EPA's latest rebate round have closed, we are hopeful to see more momentum in a number of state level programs, including in California, Colorado and New York among others. On the truck side, we are particularly excited by 2 trucking programs from the EPA. First, the EPA's Clean Ports program, which was launched yesterday, is expected to allocate up to $2,600,000,000 towards 0 emission port equipment and infrastructure, including drayage trucks. The application deadline for this program is set for May 28.

Speaker 3

2nd, the EPA's Clean Heavy Duty Vehicles program, which is expected to allocate $1,000,000,000 towards the deployment of Class 6 and Class 7 clean trucks is expected to start in early spring of 2024. With the Line 5 and Line 6 in commercial production today and with the start of commercial production of the Line 8 tractor truck scheduled for mid-twenty 24, we believe we are very well positioned for our customers to benefit from such funding. In summary, the grants environment, combined with customers' strong appetite for electric vehicles is very promising for the long term despite causing some volatility in the short term, which we expect to persist for at least the next few months. I will now turn it over to Richard to discuss our financial performance. Richard?

Speaker 4

Thank you, Nicolas. I will start by commenting on Q4 results and then comment on fiscal 2023. I will then discuss our liquidity position and provide color for 2024. Starting with Q4 performance, revenue amounted to $60,400,000 representing a 29% increase year over year. Despite lower than expected sales volume, we posted adjusted gross margin of 1.3%, which excludes the $9,800,000 inventory write down related to the Lion A and Lion M vehicles as compared to an adjusted gross margin that was negative 10.2% for the corresponding quarter in 2022.

Speaker 4

Our SG and A expenses, which amounted to CAD 16,000,000 decreased from 33% of revenue in Q4 2022 to 27% of revenue this year, reflecting our disciplined approach to cost management. Our Q4 results included an impairment of intangible assets and property, plant and equipment of 36,000,000 dollars related to our decision to indefinitely delay the start of our commercial production of the Lion A and Lion M vehicles. We had a significant improvement in adjusted EBITDA, which was negative $6,300,000 for the quarter as compared to negative $13,900,000 in Q4 2022, resulting from improved adjusted gross profits and decreasing costs. Q4 CapEx amounted to 13,700,000 dollars a significant decrease as compared to $39,100,000 in Q4 'twenty two, marking the end of our growth CapEx. On the development front, we continue to see a reduction in spend as we bring new platforms in production.

Speaker 4

Additions to intangible assets, mostly related to vehicle and battery related development, amounted to $17,800,000 down $2,500,000 as compared to $21,300,000 in Q4 2022. Now turning to fiscal 2023 performance. For fiscal 2023, revenue, which amounted to $253,500,000 increased by 81% as compared to 139 point 9 $1,000,000 in 2022. Worth mentioning, revenue generated in the U. S.

Speaker 4

More than tripled as compared to 2022 and accounted for over a third of our revenue for the year. We achieved positive adjusted gross margins for the year with adjusted gross profit of 4,300,000 or 1.7 percent of revenue as compared to an adjusted gross loss of CAD 12,900,000 or negative 9.3 percent of revenue in 2022. Adjusted EBITDA amounted to negative $34,300,000 for the year as compared to negative $54,800,000 in 2022. This is a result of our revenue growth and effort in optimizing our cost structure. Turning to our liquidity position.

Speaker 4

We ended the year with $93,000,000 of available liquidity consisting of $30,000,000 in cash $63,000,000 of immediate borrowing capacity on our revolver. It is important to note that inventory investment made over the last 2 years to achieve production ramp up has been a significant driver of cash outflows. With the bulk of our ramp up occurring during the supply chain crisis, we have built significant inventory of raw material on the balance sheet. With supply chain now easing, such large inventory position is no longer required. Further, we have a number of finished vehicles on hand, which could be deployed rapidly, particularly in the event that certain customer obtain satisfactory approval from the Z ETF.

Speaker 4

We therefore anticipate that inventory reduction will positively contribute to liquidity in 2024 with a targeted inventory reduction of 50 $1,000,000 to $75,000,000 Looking ahead to 2024, our focus remains on driving growth in orders and deliveries, while diligently controlling costs. As previously mentioned, the ramp up of the Lion D, the Lion 5 and the Lion batteries as well as the upcoming launch of the Lion 8 tractor will put short term pressure on our gross margin, particularly in the first half of the year. We anticipate that CapEx will be lower than $10,000,000 consisting largely of maintenance CapEx. Similarly, vehicle and battery development spending will be reduced by approximately 30% as compared to 2023 and amount to approximately 45,000,000 dollars as the development of new product nears completion and vehicles are brought to market. We remain committed to tight cost management and a concerted effort to reduce working capital, particularly focusing on reducing inventory levels.

Speaker 4

Last, we will continue to monitor our liquidity requirements, including a significant reduction in our inventory and we'll stay appraised of potential opportunities to strengthen our balance sheet to ensure financial resilience in the face of evolving market conditions. In summary, while we have made significant strides in our financial performance, we remain vigilant in navigating the challenges and opportunities that lies ahead, united by our commitment to sustainable growth and financial cautiousness. Back to you, Marc.

Speaker 2

Thank you, Richard. Before we open the line for questions, let me conclude by reiterating that while we expect the current environment to continue to result in volatile order flow and deliveries for at least the next few months, we remain very enthusiastic about our future and fully committed to leveraging all investments made over the last 15 years to reach our ultimate objective of becoming profitable and free cash flow positive. Until then, we remain fully committed to taking appropriate measures to safeguard our liquidity. Thank you for your attention this morning, and let's now open the lines for questions.

Speaker 1

Operator, we will now open the lines for questions. I just want to ask you to limit to 2, the number of questions asked to allow other participants to ask their questions.

Operator

Our first

Speaker 2

Good morning, Rupert.

Speaker 5

If we can start with

Speaker 6

the ZETF funding, I'm wondering do you have any visibility from the government on the timing for when they could release some of that, say, ETF funding?

Speaker 2

Yes. Rupert, this is Mark. Let me start by saying that the Canadian government has been a great partner over the years, and we all know that they are supporting electrification in Canada. And one example is that their target is to get 35% of the total medium and heavy duty vehicle sales to by 2,030 to be 35%. So that's a lot and it's exactly aligned with what the ZETF is supposed to be doing.

Speaker 2

So there has been a lot of delays. I understand right now there is a lot of ongoing dialogue with the potential customers And we are also in dialogue with the ZDTF at the same time. And as you know, it's a major part of our purchase order book as well. So I think everybody is on the same page and there has been a lot of volume on their end. This is what I'm getting, and there are terms negotiation as we speak.

Speaker 2

But we're very enthusiastic about the outcome of that. We feel this is obvious that this is going to go through some point and we're looking we're really looking forward to that. So we're staying tuned. We're a good partner and we feel that we're well listened as well.

Speaker 6

Do you believe that when they finish this process that they come up with a framework that allows for all of the funding to move forward in a fairly short order? Or is it going to be more of an approval grants on a sort of case by case basis?

Speaker 2

Well, we all hope the same thing that the grant will be in such a form that it will be very easy for the operators to apply and get their funding and maybe that was part of the issue. So I cannot talk about the future, but I know that $2,750,000,000 is a lot of money to invest for them, understanding as well that transit buses are included in there. But in all the discussions we've had in the past, I mean, it was very clear that a lot of that money will go for digital buses as well. And we have yet to see that. So looking forward to it.

Speaker 6

All right. Very good. Secondly, if we can talk about inventory, it's encouraging to hear that we could bring that down $50,000,000 to $75,000,000 What's an appropriate amount of inventory for the company in the long run? And what are the opportunities to further bring that down and maybe to more of a just in time model? Or if you can discuss what sort of inventory level you think you need to hold in the future?

Speaker 6

Are there any critical components that absolutely you can't move to more of a just in time model?

Speaker 7

It's Richard here. I'll take that one, Rupert. Obviously, we feel, as I said earlier, our inventory in a very challenging supply chain environment. And right now, as I mentioned earlier, we don't need to have or carry buffers that we've been carrying in the last couple of years. So right now, we are very focused on reducing inventory levels to healthier levels.

Speaker 7

Hard to say what is the timing and optimal inventory in the current context that's partly what Mark just described. So our goal is to really monitor our order books, make sure we have the appropriate level of inventory to deliver based on our customer needs. So that's what we're focusing on. Like I said, right now, we are really focused on reducing our inventory. We mentioned $50,000,000 to $75,000,000 This is ISV raw material.

Speaker 7

It's also finished goods that we could deliver quite quickly if some of these as any application in particular are approved. So that's the short term view at 50 to 75 and we'll take it from there afterwards.

Speaker 6

Just a quick follow-up to that. So you're now producing your own battery packs and I know you do have some batteries and battery packs in inventory. With that, do you anticipate that you'll be running your own battery production at a reasonable level in the coming quarters? Or do you hold back on your own battery pack production while you work off the inventory?

Speaker 2

No, we will we are starting to integrate our own battery packs on our vehicles, Rupert. So if you you're going to see some Lion and 5 deliveries, and they are equipped with our Lion battery and the pack. So those are the first vehicles with our battery packs. That being said though, I mean, obviously, using the 1,000 BMW battery packs that we have in stock right now is also top of mind. And this is part of what Richard has been talking about, and we're seeing a lot of the production as well.

Speaker 2

So it's really a mix of taking down this investment and ramp up the manufacturing in Mirabel.

Speaker 6

Okay, very good. I'll leave it there. Thank you.

Speaker 2

Thank you. Thank you, Rupert.

Operator

The next question comes from Kevin Chiang from CIBC. Please go ahead.

Speaker 8

Hey, good morning, everybody. Thanks for taking my question. Maybe I'll ask about, I guess, how you think about your sales strategy as you look to build out your vehicle book. I appreciate you guys have been generally more conservative in you frame the backlog or your order book size versus maybe some of the other companies out there. But it is down 3 quarters in a row.

Speaker 8

You have a significant amount of excess capacity. It seems like it would make sense to find a way to kind of ramp up sales here to leverage better fixed cost absorption. That seems like that could work. And then maybe as a follow on, do you need the freight recession to become more open to buying some of the non school best vehicles you have in the market? Just wondering how much the freight recession might have impacted customer dialogue over the past year, just given where the freight economy was in 2023?

Speaker 3

Kevin, Nick here. Let me start by addressing. I had trouble understanding the second part of your question, but let me start with the first part. On the order book side, obviously the order book is a point in time and it's not reflective of necessarily of really the ongoing client dialogue. And what I alluded to this in the especially on the bus side, there's significant volatility caused by the timing of the subsidy program.

Speaker 2

I mean, when you look

Speaker 3

at it, there are unprecedented amounts being deployed towards electric school buses, Specifically, the EPA, I mean, that's a great example, allocated close to $1,000,000,000 an amount that was doubled from the initial plan in the grant round of the second phase, if you will, of the $5,000,000,000 program that was allocated in January. As we announced, there's about $38,000,000 of units that were directly allocated to our applications for our clients, of course. And there's a really number of dialogues as well as 70% of that round as opposed to 2,000 vehicles are allocated to free agents. But the program does not yet allow anyone to place purchase orders and that won't be available, that won't be allowed until we expect April. And so this is great amounts of money that are coming in the space all for enthusiastic buyers of electric school buses, but they can't show in the order book just yet.

Speaker 3

Same time, the EPA just closed on Feb 15 applications for again $500,000,000 of back to the voucher round this time. And this is another situation where we see a lot of client enthusiasm towards applying under the program and ultimately looking to purchase with EGA subsidy electric school buses, but not yet reflected in the order book. Same you look at the ZET ETF, right, there's clearly a lot of enthusiasm in the program. Half of the order book for us is tied in there. There's a big number of applications that we know of that are the clients are making on their own and they're awaiting the outcome of that.

Speaker 3

And so these subsidy programs, when you take a, let's say, a medium term timeframe, they're very exciting. They will drive very significant volume, we believe, but in the short term, they cause the volatility that we're discussing this morning.

Speaker 2

So things are going in

Speaker 3

the right direction without a doubt, but there is volatility in the short term caused by really the specificity of those subsidy programs.

Speaker 2

I appreciate it. You don't mind, Kevin? Yes.

Speaker 8

For sure. So if I look at some of the products you've launched like the Line 5, Line 6, those seem to be a little bit more maybe tied to the freight economy, people using those vehicles to deliver goods. And last year and parts of 2022, we did go through and are going through a freight recession. Just wondering how much that might have impacted customer dialogue, right? Like if a shipper is facing 10%, 15% decline in volumes, are they at the table also talking about transitioning their fleet to electric?

Speaker 8

Or is that a conversation that might have gone pushed out until the freight economy looks a little bit better?

Speaker 3

Yes, that's a good question. Without a doubt, we're operating in a more challenging economic environment for the purchasers of trucks for shippers as you said. At the same time there is we see the clients are increasingly realizing they will need the transition to 0 emission. The dialogue is really split, I would say, between some of the smaller operators looking to do a few handful of units to try out the product. They will benefit of course from some of the subsidies particularly here in Canada.

Speaker 3

And we also have dialogue with much larger players that are looking to figure out the solution at scale. That's what I mean when I say they realize they will need to do this transition. And certainly during the most active years of shipping itself like this dialogue was a little pushed aside because of the need to focus on current operation maximize profitability. And so we've seen a return of that dialogue. It's not tomorrow demand, but it's the big demand that will drive the market.

Speaker 3

When you think about it, the truck the electric truck market, it's still at its total infancy. There's less than 1500 all electric trucks registered in North America as of December 2023. We're one of the few players that has critical scale. We're part of this dialogue with the large and the small operators. And actually we're the 4th largest player when you look at the registration.

Speaker 3

So we're encouraged by the dialogue. Subsidies will help. We don't think they're as needed in the truck as they are in the school bus space, but they will help. And as I mentioned this morning, the EPA is stepping things up quite big with a $2,600,000,000 funding program for port that opened yesterday and for which applications are due by the end of the year. We're still running in the early spring with EPA this time for the Class 6 and 7.

Speaker 3

Obviously, the ports is for Class 8 tractor. So all in all, there's certainly good movement there.

Speaker 8

Okay. Maybe just a clarification question on the inventory comment, the $50,000,000 to $75,000,000 Was that a kind of a net number? So accounting for what inventory I suspect there would be a headwind to inventory as you ramp up production? Or was that somewhat of a gross comment that today you're setting at $50,000,000 to $75,000,000 and you could take that out, but the offset potentially the offset to that as you ramp up production that would obviously be a working capital headwind as it is?

Speaker 7

No, no. We're really looking at a net reduction in our 50,000,000 to 75,000,000 dollars considering the growth like that's all factored in like we finished the year with 250,000,000 of inventory. Like I said earlier, we have some finished goods there that we're we know we are going to move in a short period of time. And then we're very focused on again discipline on raw material and the current context right now allows it. So we're really trying to bring our hearts in more of

Speaker 2

a just in time approach. So that's going

Speaker 7

to be the focus and the 50 to 70 is going to be net.

Speaker 8

In that number, perfect. That's very helpful. Thank you very much and best of luck in 2024.

Speaker 2

Thank you, Kevin. Thank you.

Operator

The next question comes from Mike Schlosky from D. A. Davidson. Please go ahead.

Speaker 9

Hi, good morning. Thanks for taking my questions. I think they ask this every quarter, so I'll ask it again here. Do you feel like 2024 will be a year of growth for deliveries overall? Maybe perhaps we're seeing a challenge 1st few months here, but do you think net net you'll be growing this year?

Speaker 3

Well, in fact, Mike, hey, Dix here speaking. There's a lot of moving pieces in 2024, but the short of it is, yes, we are aiming for a year of growth in delivery. When I say the moving pieces, obviously, half the order book is tied to ZATF application. And so that I mean is a big driver of our deliveries for the upcoming year. As we mentioned in the prepared remarks, we see some volatility in the next few months, again, driven by these subsidy programs.

Speaker 3

But without a doubt, we're aiming for 2024 to be a growth a year of growth in the Littles.

Speaker 9

Great. I also want to ask about market share, especially in school buses. There's been a large supplier of batteries go bankrupt recently. They supply at least one of the bus makers on the EV side. I'm curious if you thus far have seen some expansion in your share and expect more in 2024, more than you would have expected given perhaps there's at least one company not delivering right now.

Speaker 9

Just curious whether there's been a lot of brand switching out there in your opinion?

Speaker 3

Yes. Look, we're on the market share front, we're looking to capture all the market share that we can. We just like I alluded to in trucks, when we think market share, we'd like to stick to the facts and we look at registrations. And by the stats that we see, we are the number one player in all electric school buses in North America and I'm talking specifically Type C and D combined. We of course, we saw that bankruptcy as well.

Speaker 3

Are we seeing a shift in applications? Not yet. But at the same time, one of the things that I think will distinguish us is the extent to which we are delivering on the program, 1st round. And we think as the program moves forward, the OEM's ability to deliver rapidly will be an important factor.

Speaker 9

Okay. I'll pass it along. Thank you.

Speaker 3

Thank you, Mike.

Operator

Our next question is from Georgi Gianuricos from Canaccord Genuity. Please go ahead.

Speaker 10

Good morning and thank you for taking my questions. I'd like I know it's a volatile environment. You mentioned some issues with allocations of orders. But I was wondering if you mentioned liquidity. If you could give us sort of in broad strokes what you're expecting 2024 to look like from an EBITDA perspective and maybe a gross margin perspective, just so we can kind of compartmentalize what your cash needs will be throughout the year?

Speaker 10

Thank you.

Speaker 7

Hi, George. It's Richard. Listen, right now we don't provide any guidance. I can maybe comment on the liquidity front. We like I said earlier, we closed the year with $93,000,000 $30,000,000

Speaker 3

in cash,

Speaker 7

dollars 60,000,000 on our revolving facility. We believe we have sufficient run rate for the year. Key drivers for us in terms of liquidity, obviously, we're coming towards the end of our investment cycle, right. This year we're looking at CapEx

Speaker 8

that's going to

Speaker 7

be lower than $10,000,000 We talked about the inventory reduction plan between $50,000,000 $75,000,000 We continue to be very focused on overall cost control, cost reduction, SG and A. We expect the trend to continue with the percentage of sales, you saw the improvement year over year and that's going to continue. We have a lot of initiatives on product cost savings. So that's our another focus area for us. And R and D, same thing as we introduce new products in the market, we see the R and D spend going down.

Speaker 7

We're looking at a 30% reduction this year. So those elements makes us feel really comfortable with our cash position. Hey, George, maybe one additional comment as well. Obviously, the growth CapEx being behind us is

Speaker 2

a big, big thing, right? And you don't see that very often in the E and E space. So I think it's great. And also, what we did this morning, like letting go 100 people, obviously, this is not the kind of thing that we want to do, but we're taking the action to make sure that we're protecting our liquidity without a doubt.

Speaker 10

Thank you. And maybe as a follow-up, the previous question was about market share. Excuse me, one of the larger competitors in this space has talked about expecting to order about 30 to win, excuse me, about 30% of orders related to at least round 2 of the EPA Clean School Bus Program. Maybe again in broad strokes, what would be satisfactory for you in terms of just a market share win rate for those 2 programs? Thank you.

Speaker 3

Yes. Hey, look, we for us, George, expectations of winning in a program that's lottery driven, right, because that's what it is, is more speculative than we're going to be here. And so I'm not going to comment about specific numbers. I will say, we are number 1 player in this space by registration today by market share. Our market share has been more weighted in Canada relative to the U.

Speaker 3

S. And we expect to we're hoping to see continued improvements in the proportion of our wins under the EPA program. The dialogue with the customers is very constructive, but ultimately we'll want to talk with purchase orders and not with these types of forward looking estimates.

Speaker 10

Okay. Appreciate it. Thank you.

Speaker 3

Thank you.

Operator

Next question comes from Dan Levy from Barclays. Please go ahead.

Speaker 8

Good morning. Trevor Young on for Dan and May. Thanks for taking the questions. So looking at the order book, I can appreciate that the timing of the awards under the under your major loss programs are significantly impacted by the timing of I guess the government subsidy programs. But we're looking I guess we're looking for a sort of inflection in the order book.

Speaker 8

And I was just curious if you could I know you can't guide to it, but could you quantify like what we could expect as these programs acting the timing aligns and would these jumps in order books be larger than some of the larger sequential jumps you've seen in the past?

Speaker 3

Look, could they I guess they could, Dan. If I'm if you look at it essentially, again, there was $1,000,000,000 allocated in the ramp round, right, the round with the 2nd round of the EPA program. And as I mentioned, 70% of that is allocated to what we call free agents, meaning it's not Lion, it's not other OEMs, it's not their dealers. That's so as close to 2,000 units that are we believe up for grabs by everyone including us and we're working hard at it. And then there's a $500,000,000 in the rebate program that is that just closed in on Feb 14, right.

Speaker 3

And so and that will be allocated in April. So when you look at it starting in April in the next few months, there will be a lot of funding that can result in purchase orders for the next few months. And so yes, the junk could potentially be bigger than we've seen in the past. I also mentioned that when these programs come out, it really is the OEM like us certainly we do make the promotion of these programs and make sure that the clients are aware. We filed a lot of applications on behalf of clients, but more and more that program gains maturity and the school districts and operators are aware of the program and file on their own and then pick an OEM.

Speaker 3

So there will be a lot of dollars out there dedicated to bus purchases that are up for grabs. So technically speaking, absolutely, yes, the jumps in the future could be higher in the order book, when obviously it starts in potentially in April and then in the subsequent months.

Speaker 8

That's very helpful. Thank you. Then there's a follow-up. We've seen these reports coming out about the finalized EPA targets for light vehicles specifically. It sounds like the emissions targets might get softened a little bit at least through 2,030.

Speaker 8

And I was just curious if there was any meaningful reads here for your end markets. I appreciate that light vehicle is a different world, but is there any reason to think that the sentiment might translate over into your realm as well for EPA rules?

Speaker 3

From our standpoint, we've seen no change. First of all, especially when you look in the school bus space, I don't I think we're past the point of convincing customers and in general society around the benefits of electric school buses relative to diesel for a school bus application. On top of EPA targets really there are state level, provincial level regulation that's coming into place. And so know what's happening in the light vehicle sector hasn't impacted us. And in the truck space, we've said it in the past, the truck space, medium heavy duty here is a few years behind the school bus for sure, but much bigger market.

Speaker 3

As I mentioned earlier, there really is it's a discussion topic that has been more active with the large operators that really have these targets out there. There's regulation, there's targets as well, right? Then and with these large companies that essentially need to figure out the solution going forward. And so in short, Dan, no impact as it relates to the light duty.

Speaker 2

And Dan, also with respect to the greenhouse gas emissions, if you want to lower them, one of the best ways to attack the medium and heavy duty trucks and buses. For every bus that you're doing, it's like taking off basically at least 5 cars from the street. So that's really the best way to get to your goals of bringing down the greenhouse gas emissions. And when you're looking in Canada, like the 35% target that they have for 2,030. 2,030 is tomorrow.

Speaker 2

So we do not see how this could decrease. And we really see that that will be the best way to achieve their goals. And that's exactly what we echo on the U. S. Side and in Europe as well.

Speaker 8

That's really helpful. Appreciate it.

Operator

Our next question comes from Chris Souther from B. Riley. Please go ahead.

Speaker 5

Hey, guys. Good morning and thanks for taking my questions here. Would you be able to quantify the impact on the delays for the initial Line D, Line 5 vehicles in the Q4 there, like versus how much you were expecting versus kind of the push out there, I think would be helpful.

Speaker 2

Yes, Chris, I mean, obviously, we cannot provide the exact figure, but that was significant, right? Some of it is explaining the difference between what the Street was looking at and the final number that we got at $188,000,000 which was clearly below our expectations. So that was a mix of that and the Z ETF. But for us, I mean, quality is always number 1 and not easy to bring any new product to market. We see that.

Speaker 2

I mean, there's very few new EV products coming to market. And when you do that, you need to take your time. So our goal was really to start delivering them by the end of the year. But I mean, we've had a few challenges like in terms of software updates and those kind of things where we felt that since those will be the first deliveries, the customers deserve the best. And so we will catch up.

Speaker 2

I mean, what we lost at the end of Q4 is going to take us 2 quarters to catch up. But we feel good though about the quality of the product we're bringing to market and you probably saw some feedback also on some of the customers that started to receive the line in the end. It's very, very positive.

Speaker 5

Okay. Maybe just if we take out the DTS and kind of look at the backlog, how many of the kind of remaining school all electric school buses are Y and D? And can you give us any sense around breakdown of expected timing excluding that kind of Canadian program that is obviously out of your control? I just want to get a if we could get a better feel for other timing delays beyond that one that we're seeing here. I think you called out a little bit with the EPA for April for this past grant one, but kind of a broader peak of the order book, I

Speaker 6

think, would be helpful for folks.

Speaker 3

Yes. So the majority, more than half of the order book, right, is in the with the ZET ETF and conditional to that. The rest, Chris, is I'd say still the majority of that is in the Type C market. We have a good amount of demand for the Type B in the order book, especially for a product that we hadn't delivered yet. But the bulk of it is in the Type C.

Speaker 3

Nonetheless, we you generate the most demand with a vehicle when you put it on the street, which is what we're doing now. And so we expect production of the Type D to ramp up and demand to ramp up concurrently.

Speaker 5

Okay. Thanks. I'll hop in the queue here.

Speaker 3

Thank you. Thank you.

Operator

Our next question is from Etienne Larochelle from Desjardins. Please go ahead.

Speaker 11

Hey, good morning and thank you for taking my question. My first question is on the headcount that you announced this quarter. I'm just curious if you could provide more color on how much in OpEx savings it could translate to and if you will ensure any charges for this in the upcoming quarters?

Speaker 2

Yes. So, It's in the morning. The account number is 100 people that we've let go. And most of them are on the night shift. So basically, at this point, we're temporarily eliminating the night shift.

Speaker 2

And a lot of them are manufacturing people, but some of them are overhead as well. So basically, we're reducing the overhead at the same time. So is that your question? I missed part of your the second part of your question.

Speaker 11

Yes. So I was just curious if you could provide more color on how much in OpEx savings this could translate to and if it will incur any charges in the coming quarters related to that and the $150,000,000 you previously announced back in December?

Speaker 2

Yes. Well, the 150 we're already obviously benefiting from this cut. I mean, there's some with in addition to the savings, obviously, we're making on a temporary basis because the goal is to for those employees to go back to work as soon as we get approvals from ZBTF for the delivery of our vehicles. So we still hope that this will be the case. If not, the annual saving that we're looking at with this is around $8,000,000 So that's the kind of saving we're looking at when you're including the payroll and obviously the other expenses related to the night shift, but the real goal is to get great news from the ZET ETF and bring back our people.

Speaker 8

Got it. Thank you for

Speaker 11

the color. And maybe as a follow-up, with supply chain issues and shipping costs easing over the last couple of months, I'm just curious if you've seen a reduction in your deal of material costs?

Speaker 2

Well, we saw some reduction a lot because of all the initiatives we have that Richard was alluding to in the past. He was saying that we're working a lot on the bill of material, I mean, savings. So there is some of that. Obviously, with the amount of inventory that we have, it could take a little while as well to start seeing the benefit of those cost savings because we have $250,000,000 of inventory and the real goal is obviously to use that inventory as soon as possible to get the benefit of the $50,000,000 to $75,000,000 inventory reduction that Richard was talking about. But this is top of mind for us to keep reducing the cost of the bill of material, and we have people working full time on that without any compromise on quality.

Speaker 11

Got it. Thank you for taking my questions. I'll pass the line.

Speaker 2

Thank you.

Speaker 1

Thank you, everyone, for joining the call today. We really look forward to continuing the discussion, and feel free to contact me for any follow-up question you may have. Have a nice day.

Operator

Thank you. This concludes today's conference call. You may now disconnect your lines.

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Earnings Conference Call
Lion Electric Q4 2023
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