Lion Electric Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 14 speakers on the call.

Operator

Good morning, everyone, Welcome to Line 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 Isabel Ajay, Vice President, Investor Relations and Sustainable Development.

Operator

Please go ahead, Ms. Ajay.

Speaker 1

Good morning, everyone. Welcome to LION's Q1 2024 Results Conference Call. Today, I'm here with Marc Bedard, our CEOFounder Nicolas Brunet, our President and Jacques 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, Isabelle. Good morning, everyone. Thank you for joining us today to discuss Lion Electric's performance for the Q1 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.

Speaker 2

The Canadian ZDF fund approved the 1st sizable application for 200 buses, for which we have delivered 50 buses in Q1. We started delivering our Lion 5 trucks equipped with our Lion MD battery packs, and we anticipate a gradual increase in Lion 5 production throughout the rest of the year as we fulfill orders and bolter our market presence. We started the deliveries of our Lion Discold buses manufactured at our Giongia facility. We are planning the commercialization of our Lion A tractor truck this summer, and we will make its formal commercial introduction at the ACT conference in Las Vegas in 2 weeks. Our Lion A tractor will be equipped with our Lion Battery HD pack, a state of the art 105 kilowatt hour pack.

Speaker 2

The commercialization of our Lion A 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 Q1 within the last few years with almost no CapEx investment, allowing us to capitalize on our previous investments made in our 3 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 25,000,000 miles, metrics that demonstrate Lion's leadership in the medium and heavy duty electric work. On the financial front, Q1 revenues remained steady year over year with margins impacted by initial increased cost related to the introduction of our LION 5 and LION D new models and the integration of our Lion batteries as previously communicated.

Speaker 2

While we are pleased with the FERC ZET ETS 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 ZEP ETF 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 U. S. Were largely impacted by the timing of orders and deliveries tied to the EPA program, being in a transition phase between 2 funding runs for this $5,000,000,000 program that is crucial for advancing electrification in this market.

Speaker 2

In response to these timing challenges and to safeguard our liquidities, 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 early this year, we estimate that these initiatives will result in annualized cost savings of $40,000,000 Going forward, we are confident that the recent announcement of new funding programs such as the additional $1,000,000,000 allocation under the EPA's Clean Heavy Duty Vehicles Grant Program, along with the renewal of Canadian programs, such as Eco Camionage and the Quebec Gold 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 cost, 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?

Speaker 3

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 U. S.

Speaker 3

Notably, this includes 50 buses to one of our customers for which funding approval under the Z ETF program was obtained for an order of 200 school buses. While this initial ZET ETF approval is a positive milestone, these fifty 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, Line's vehicle order book stood at 2,004 vehicles consisting of 1793 buses and 211 trucks, representing a combined total order value of approximately $475,000,000 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.

Speaker 3

First, the vast majority of awardees in this $1,000,000,000 grant round announced earlier this year are not yet able to issue purchase orders and accept vehicle delivery. As a reminder, the EPA announced in January the awards for the grant round, which allocated close to $1,000,000,000 of funding for clean school buses and related infrastructure. As part of this round, Lion was awarded funding of $38,000,000 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 Myron School Bus.

Speaker 3

Orders from this grant round are expected to be allowed shortly for deliveries later this year and in 2025. 2nd, applicants under the latest rebate round of the EPA program, which is expected to allocate CAD500 1,000,000 of funding, are still awaiting the result of their allocation. Applications were filed on February 14. We work with a number of clients to file applications on their behalf and also and are also in dialogue with a number of potential clients who applied directly. Awards under this round of the EPA program are expected to be announced imminently.

Speaker 3

Just as with the grant now, this funding has not yet impacted our order book. So altogether, close to $1,500,000,000 are expected to soon be available for districts and private operators that purchase school buses in EPA's Clean School Bus Program. Additionally, the recent launch of the EPA Clean Heavy Duty Vehicles Program, which allocates $932,000,000 to purchase Class 6 and 7 0 emission vehicles, including over $650,000,000 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 0 Emission School Bus and Infrastructure or ZESB program, which allocates CAD500 1,000,000 for the purchase of electric school buses and charging infrastructure. Combined with the upcoming EPA round I just discussed, this translates into over CAD2.5 billion of funding to be available for school bus and infrastructure purchase.

Speaker 3

On the truck side, the Line 5 and Line 8 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 debt ETF 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 Eco Camionage 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.

Speaker 3

Richard?

Speaker 4

Thank you, Nicholas. 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 of CAD 55,500,000 up 1% compared to Q1 2023, despite fewer vehicles delivered, dollars 196 compared to $220,000,000 in Q1 2023. Gross margin was negative 20.1 percent compared to negative 4.1% last year.

Speaker 4

As communicated previously, margins were impacted by initial increased manufacturing costs, mostly due to the introduction of Lion D and Lion 5 vehicles and to the initial production of Lion battery packs. Our SG and A expenses stood at $14,500,000 excluding 400,000 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 $17,300,000 compared to negative $14,500,000 in Q1 2023. Our net investments in intangible assets, mostly related to R and D, amounted to $8,200,000 down from $16,500,000 in Q1 2023 as we continue delivering on significant development milestones.

Speaker 4

Total CapEx incurred significantly decreased to $400,000 compared to $23,100,000 in Q1 2023 and mostly relates to maintenance CapEx. We now expect CapEx for 2024 to be approximately 5,000,000 dollars lowering the previously communicated guidance for CapEx. Now moving on to liquidity. At the end of Q1, we had available liquidity of $31,000,000 including $5,000,000 in cash and $26,000,000 in immediate borrowing capacity on our revolver. During Q1, we made good progress with our inventory reduction plan, achieving a $12,000,000 reduction.

Speaker 4

This puts us on track to deliver on our objective of a $50,000,000 to $75,000,000 inventory reduction for the year. Despite this $12,000,000 inventory reduction, several specific factors impacted Q1 and resulted in a negative working capital of 21,000,000 dollars First, accounts payable decreased by approximately $16,000,000 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. 2nd, accounts receivable increased by approximately $7,000,000 largely attributed to overdue amounts mostly owed by government agencies. Substantial amounts were collected since

Speaker 5

and we

Speaker 4

are in active discussions to expedite remaining payments. 3rd, unearned revenue balance with regards to the EPA program represented a net reduction of $5,000,000 for the quarter as we are currently between EPA grant rounds. We are focused on optimizing our balance sheet, which as at March 31, 2024, includes $329,000,000 of current assets compared to $124,000,000 of current liabilities and therefore provides important opportunities to unlock liquidity. As of April 30, our liquidity position is largely unchanged relative to our March 31 position. During the quarter, we also made difficult decisions to streamline our operations by implementing additional workforce and other cost reduction initiatives.

Speaker 4

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 February 2024, these initiatives are expected to result in annualized cost savings of approximately $40,000,000 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 Mark for concluding remarks.

Speaker 4

Mark?

Speaker 2

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 volatilities 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 actively managing liquidity and controlling cost.

Speaker 2

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 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 all the participants to ask their questions.

Operator

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

Speaker 6

Hi, thanks for taking my question and good morning everybody. Maybe I'll start on the liquidity front, dollars 31,000,000 of available liquidity. If I look at some of the moving parts, you have $27,000,000 of debt due this year, about $8,000,000 of lease liabilities due over the next 12 months. CapEx is $5,000,000 I think spending on R and D is probably in the $45,000,000 range this year. So if you kind of add all that up, that's about $85,000,000 spend before accounting for potential operating losses.

Speaker 6

With liquidity at 31%, maybe if you can just help me bridge how you manage that gap, whether it's working capital tailwinds from here on forward, maybe the delivery ramp as we get through the years? Just anything to maybe provide some finer points to you look to manage this as you ramp up deliveries?

Speaker 5

I'll take that one. Good morning, Kevin. Thanks for the question. So liquidity wise, as I stated earlier, we have, I guess, a liquidity position right now of €31,000,000 right, consisting of €5,000,000 of cash and our 26 €1,000,000 available on our borrowing facility. The key element for us in terms of driving liquidity is really right now our balance sheet, our short term assets, right now cash is CHF 323 1,000,000 versus CHF 123 1,000,000 of current liabilities.

Speaker 5

So that's kind of ratio of 2.6 and this is what we're focusing on. Our inventory reduction plan is a key driver in Q1, very happy that we were able to reduce our inventory by $12,000,000 and that quarter was a transition quarter, I can call this. We really worked closely with our supply chain and kind of adjusted the cadences across the board and really align it to our current order book. So really confident that we're going achieve our inventory reductions. As you stated CapEx, right now we spent like only $400,000 this quarter and we're going to remain very disciplined there.

Speaker 5

We believe right now 5,000,000 is a number that we can company work with. And again, we're not going to necessarily commit to that. We're going to really be very disciplined there. R and D, another contributor down significantly year over year. So, SG and A will continue to be very disciplined as well.

Speaker 5

And you see the trend over the last few several quarters, it's really going down as a percentage of revenue. So, I would say those are the elements that will help us navigate through the year. And obviously, as a management team, we continue looking at market opportunities to trend on our balance sheet. But right now, our focus is really driving our working capital initiatives.

Speaker 6

Okay. That makes sense. And maybe my second question, I appreciate some of the moving parts here in growing that vehicle order book just given how dependent these orders seem to be on government subsidies and grants. But at a high level, just given the experience you've had over the past couple of years, any change in your sales strategy

Speaker 3

or any thoughts in changing

Speaker 6

your sales strategy to maybe accelerate some of these purchases to maybe drive more near term order activity? I guess based on your experience with how these government subsidies get rolled out and sometimes some of the timing uncertainty that seems to weigh on your order activity?

Speaker 3

Kevin, Nick here. I'll take this one. Look, obviously, when there are subsidy programs out there that are attractive and they are out there, the buyers for the products want to be able to access that funding. And as you would expect it, of course, we are in somewhat of a unique position particularly in the U. S.

Speaker 3

Right now where there is I'll just take a step back, you'll recall that late last year the EPA announced the award for $1,000,000,000 for school bus and infrastructure under the ground ground of the EPA Clean School Bus Program. And then in February, the 3rd round of the program, which is back to the discount program was all the applications were filed in February. And for that $1,000,000,000 and a half percent, some of the first $1,000,000,000 has been awarded, but purchase orders are not yet allowed. So it's just following its course. And then the second tranche of 500,000,000 dollars the applications were filed and the results are not yet known.

Speaker 3

This is all very attractive for us selling activity. It just hasn't materialized into the order book just yet. For the grant round, we expect that purchase orders will be allowed imminently. And then for the discount round, we expect the allocations to be known imminently as well. So there's a lot coming.

Speaker 7

Of course, when you look at

Speaker 3

the order book, you take a snapshot on a given quarter. Well, yes, those programs can cause volatility, but it's enormous demand that's stimulated out there from these programs. And so that's so I guess no, in terms of changing the sales strategy. We have had we filed some applications directly on both of these programs. You'll recall we had 97 units for $38,000,000 that were awarded directly to us in the grant round.

Speaker 3

And as I mentioned, we filed also a lot of applications for our clients in the discount round. The whole sector filed a lot of applications on their own. So that demand is coming. We expect shortly on both of these programs. Add to that new programs that are being put in place, the clean heavy duty program from the EPA, which allocates $650,000,000 to school buses.

Speaker 3

The ZEB program in California that's opening very shortly that's $500,000,000 just for the state of California. And so certainly those subsidies bring a lot of appeal and a lot of incentives for our clients to buy. And if you get a subsidy of as much as $350,000 to purchase the vehicle. Well, yes, it's natural that a lot of the potential buyers will wait to know the results of those programs. Now if we look to Canada, of course, Mark alluded to it in his prepared remarks, the Z ETF is a program that can generate a lot of demand.

Speaker 3

We believe we have over half of our order book that is contingent on Z ETF approval. We've had a first order for one of our customers for 200 units that was approved, which is very interesting. And we know that number of parties have applications that have been filed as well. So it does like I said, it does these programs can create some volatility on a quarter to quarter basis. But if we take a bit of a longer look at things, it's very attractive demand and we think the selling strategy with these programs is the right.

Speaker 6

Thank you for the color there. I appreciate that. I'll jump back in the queue here.

Speaker 2

Thank you, Kevin.

Operator

Our next question comes from George Giannourakis from Canaccord Genuity. Please go ahead.

Speaker 8

Hi, good morning, everyone, and thank you for taking my questions. Maybe just as a follow-up to the last question about these programs and the momentum you see underneath the surface. Can you just help us maybe understand what you think the cadence of vehicle deliveries will be throughout this year? Obviously, it sounds like Q1 started at a low point. Maybe just a little bit of visibility and color as to how you think we should progress over the last three quarters of the year?

Speaker 8

Thank you.

Speaker 3

Yes. Hi, George. Nick here again. Hey, look, we don't have perfect visibility. But when you look at it, we are very well advanced in delivering the units that we were awarded as part of round 1 of the EPA program.

Speaker 3

We are now, as I mentioned before, is $1,500,000,000 that's about to be available for we expect for purchase orders of school buses from the next two rounds. There's obviously a certain time that's required to for the clients that place the formal purchase order as well as the planned infrastructure. And so we alluded to some volatility in the short term that is in part driven by that. What are what we are hoping for is that those that cadence of deliveries under the EPA program will pick up in the second half of the year. Typically, there's about a 2 year window in order for the clients to receive the vehicle.

Speaker 3

We pride ourselves in being able to deliver relatively fast. And so again, we hope and expect that the cadence will pick up in the second half of the year and continue throughout 2025.

Speaker 8

Great. Thank you. And maybe just second question on the commercial market opportunity. Any update on the Amazon relationship and any discussions you've had with them? Thank you.

Speaker 3

Look, by commercial you mean trucks presumably. Look, the truck market, we've said it numerous times, is about 10 times the potential of school bus market. It's got the TCO dynamics that we think are more favorable. There has been continued regulation that is promoting 0 emissions vehicle. But that said, the market is significantly behind the truck market is significantly behind where the school bus market is.

Speaker 3

We see some interesting developments of course. You mentioned Amazon, you saw that they are deploying with another party some tractor trucks. We view this as very positive industry news. And our goal with the trucks is to deliver quality product to get into large fleets and form relationships so that they can adopt and appreciate our product and then scale up this business as the market picks up and that's the interest for us.

Speaker 2

Thank you.

Operator

Our next question comes from Benoit Poirier from Desjardins. Please go ahead.

Speaker 9

Yes. Sorry, good morning, everyone. Just to come back on the ZTS program, you mentioned some delays in terms of funding, and we didn't see any new funding in the Canadian budget. So are there any milestone we should monitor going forward? And I've heard also the word that you have currently a lot of dialogue with customers waiting, obviously, for the €1,500,000,000 funding to come with the EPA.

Speaker 9

How would you qualify your bidding pipeline as of now? And also any thoughts about the upcoming U. S. Election, whether it influenced the dialogue with the customers or the different funding

Speaker 10

agencies? Good

Speaker 7

morning, Benoit. This is Marc. I'll take the one on the ZDF. As you probably know, I mean, it's been going on for almost 3 years now and some operators started that process almost 3 years ago. So the process is obviously a little bit complicated, but we are seeing good movements right now.

Speaker 7

And I think the first approval for the 200 buses is a major step. So we are very satisfied with this at this point with obviously the approval of this order and we were able to deliver 50 of those buses as well. So with respect to the ZET ETF, we see good momentum right now. We see good dialogue as well. As you know, the operators are discussing with the ZET ETF and we're basically supporting the operators in their request.

Speaker 7

And we know that some operators are still waiting for the formal offer from the ZSTF. One thing I can tell you though is that the operators, they are looking forward to electrify their fleet. And this is a great step. I mean, they are trying to slow down their diesel purchases right now, waiting to receive a green light from the Z ETF. So this is with respect to the Z ETF, we see that as very good news right now.

Speaker 7

And I'll turn it to Nick to talk about the EPA.

Speaker 10

Yes. In terms of the EPA

Speaker 3

bidding pipeline, Ben, I described it as very healthy. Look, when this first round was announced, the subsidy amount were the highest. The objective of the program was to spread out across all states as much as possible. Now the amounts are gradually lowering. They remain in our view very attractive.

Speaker 3

But more and more it's about to selling into larger school districts, served by larger operators and sort of more at scale deployment, which I think plays better into our selling activity. We also have, of course, now the factory in Joliet that's up and running that we can showcase. So I described the pipeline as very healthy. In terms of your third question on the elections, of course, we don't know what we don't know. But a few facts I'd point out, the $5,000,000,000 EPA program is something that's approved, that's being deployed as you can see quite rapidly on top of the $1,500,000,000 that I mentioned just now and the $930,000,000 from the clean heavy duty program.

Speaker 3

We expect there will be another funding round this year somewhere in the fall under this program. And so the dollars are getting deployed pretty rapidly. And we'd add that in terms of school buses, it's a societal view in our opinion that school buses that emissions in school buses should be eliminated. It's a use case that makes a lot of sense both in terms of health for the children, but also operationally speaking. And so feel pretty good about that.

Speaker 3

And I'll add that on top of the federal money that we see coming in the space. I mentioned like the debt fee program $500,000,000 in California. There are other examples in Colorado, in Texas, in Illinois. And so there's quite a lot at the state level. And on top of subsidies, there's regulation also with a number of states that are making it mandatory over time for school buses to be electric.

Speaker 9

Okay. Thank you very much. I apologize for the long list of questions and I'll get back in the queue. Thanks.

Speaker 10

No problem. Thank you.

Operator

Our next question comes from Rupert Merer from National Bank. Please go ahead.

Speaker 5

Hi, good morning everyone.

Speaker 3

Good morning Rupert.

Speaker 11

Coming back to the liquidity, it seems like the biggest moving part over the next couple of quarters is going to be the level of inventory. Can you talk about the cadence of the drop in inventory, that $50,000,000 to $75,000,000 reduction that you're looking at? Can that be front end loaded this year? And do you have opportunities to reduce inventory by more than that level if needed?

Speaker 5

I'll take that one Rupert. Listen, as I said earlier, Q1 for us was a quarter where we really work with our supplier base and we kind of realigned our approach and shifting from a build to stock, build to order approach. So Q1 was like a transition quarter. Some of our suppliers had already built some inventory for us, had already bought some raw materials. So Q1 despite, I would say, all of the alignment that let's say that occurred during the quarter, we accepted some inventory in exchange for prepayment terms and so on just to again get through

Speaker 4

that transition phase. And despite all

Speaker 5

of that, we managed to reduce the venture by $12,000,000 So I anticipate that Q2, Q3, we will continue seeing an improvement of that inventory reduction. So I do see the numbers increasing in the next few quarters and internally for sure we're driving a higher number. We'll see how things play out. Obviously, a lot of it is connected to the order book and how many orders we're going to secure from the ETA round as Nick pointed out and the ETF. So there's a lot of moving parts, so it's hard

Speaker 4

for me to at this point to talk about a

Speaker 5

different set of numbers, but I feel very confident with the $50,000,000 to $75,000,000 and we should see I'm expecting Q2 to be another good quarter in terms of inventory reduction.

Speaker 7

Also, Rupert, this is Marc. With respect to the current assets, I mean, Richard referred

Speaker 5

to that earlier.

Speaker 7

We have $329,000,000 of current assets and $124,000,000 of current liabilities. So that gives us almost a $200,000,000 of unlock of liquidity that we can unlock as well. And obviously, it's mostly inventory, as Richard just mentioned, but it's also accounts receivable. There's a lot of accounts receivable in there and there's a lot of accounts receivable coming from the governance. So good accounts receivable and then just a matter of timing before getting those and it's an area where we will unlock we will be unlocked.

Speaker 7

We will I'm sorry, we will be able to unlock some liquidity going forward.

Speaker 11

So liquidity, I believe you say it's the same today as it was at the end of March. Do you have a forecast where that could end up the end of Q2 with all of the initiatives that you're looking at?

Speaker 5

Listen, I'm not going to get into forecasting cash flow. I can just tell you, we're highly focused on our working capital initiatives. As I pointed out earlier, our April 30th balance is more or less the same as March. And as we drive our initiative, confident it's going to be a key contributor for liquidity.

Speaker 7

Rupert, we also need to keep in mind, I mean, the rightsizing that we've done. We feel that was necessary and very responsible from us. And this is $40,000,000 in annualized savings. And a lot of this was coming from the overhead as well. So you will start to see the result of this rightsizing going forward, but there was a major decrease obviously in the burn rate.

Speaker 7

And you can add this also to what we've been doing with respect to CapEx, which is less than $5,000,000 for the whole year and 400,000 dollars I mean, in the Q1. Just keep in mind that last year during in Q1 of last year, we had CapEx of 23 $1,000,000 and we had R and D of $16,500,000 and in Q1, our R and D was $8,200,000 So I think all of this is going in the right direction.

Speaker 11

Great. And then as a follow-up on the supply chain, can you talk about how the supply chain is progressing? Are you seeing any further relief on prices for key items like your battery cells or other critical parts?

Speaker 7

Yes. Well, that's a good question. I mean, obviously, with the technologies evolving, I mean, we absolutely see some reduction in cost at some point. What is top of mind for us is bringing down the inventory, but at some point, we will start to see some results in those costs going down. So it will not be a short term thing because of the inventory.

Speaker 7

I mean, we are consuming right now. But yes, absolutely, I mean, going forward and I would say on the medium term, there where we are absolutely expecting some costs going down.

Speaker 10

Yes.

Speaker 5

And I can add maybe a lot of it is going to be on the new platform, right? So that what you saw Q1, obviously there was some pressure on our margins coming from the Line 5 introduction, Line D, the introduction of our own battery. So obviously, as we see volume growing on those platforms and then as we continue building more of our own batteries, we definitely going to see cost going down. So there's a lot of effort on that front.

Speaker 11

Great. Thank you. I'll leave it there.

Speaker 12

Thank you.

Operator

The next question comes from Daniel Lai at Barclays. Please go ahead.

Speaker 12

Hi, this is Daniel on for Dan. Thanks for taking my question. To start off, help us understand the gross margin dynamics in the quarter. Could you provide us with some color on your visibility to future product launch headwinds and any other sets of puts and takes we should be aware of? And how much of a drag were product launches on gross margins in 1Q?

Speaker 5

Well, listen, on gross margin, we already communicated previously that there would be some volatility in the short term as we introduce the new platform. So definitely this quarter, that's about a couple of things, right? It was a quarter with relatively low volume. We introduced the Line 5, Line D started and we started introducing our own batteries on our platform. So obviously, all of this impacted the margin in the quarter and we had several quarters where our margin was positive and this quarter, as I said, we were expecting to go back into negative territory given what I just mentioned.

Speaker 5

And there will be a bit of volatility again in the short term as we continue ramping up on those new platforms. But again, as we see volumes picking up in the second half and as we continue, we don't see maturity in those platforms, again, the plan is to go back into positive territory as soon as possible. So a lot of efforts there. And as Mark pointed out, we did take a lot of costs out and over the 3 rounds of restructuring, we're looking at $40,000,000 of savings on an annual basis. We're going to start feeling the full effect of those savings, let's say, it's going to be about £10,000,000 a quarter in Q3.

Speaker 5

So we should see roughly $5,000,000 of tailwind in Q2 and then the full impact that will be seen in Q3, Q4. So that's also going to help our margin going forward.

Speaker 12

Thank you. That's very helpful. And just a quick follow-up on your commentary on the workforce reduction. What sorts of offsets are there to a reduced workforce? And are you currently comfortable with the current size of your headcount, your workforce?

Speaker 7

Yes. Daniel, yes, we are. Basically, I mean, we've most of the adjustments was done with respect to the overhead. So there was almost no direct labor with the recent move that we've done. And you probably remember also that the second wave in February of this year

Speaker 2

was basically taking out the 2nd shift for now.

Speaker 7

So that was mostly direct labor at this point, but we had to adjust to the reality of some incentive that we're late. With what we are seeing now, feel pretty good that we have the right size for what we can expect for the foreseeable future. So we've been growing a lot within the last few years. And 2024 is really a year of adapting to those conditions. And it's also a year of launching new products.

Speaker 7

The Lion 5, the Lion Z, the Lion MD batteries, the Lion HD batteries and in Q3 of this year, the Lion 8 tractor. So obviously, all of this has an impact on the gross margin. But at the same time, I mean, we're going to the market, I mean, with a great lineup of products and that will bring volume over time. So to go back to your question, feels very good about the rightsizing we're doing. I feel very good that the growth CapEx that we've been investing within the last few years are behind us because it's not only a matter of like investing that money, but controlling those projects as well.

Speaker 7

And this is all behind us. And after Q3 of this year, we will also be done with any new product development, which is amazing and this is going to drive down obviously the R and D cost going forward. So it's all about focus. We're very focused on growing the pipeline. And our real goal, as

Operator

I said

Speaker 7

earlier, is to go back to having a positive EBITDA and generating free cash flow. And this is what everybody at the line is focused on.

Speaker 12

This is very helpful. Thank you, guys. Thank you.

Operator

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

Speaker 5

Yes. Hi, good morning and thanks

Speaker 10

for taking my question. I want to ask about the lining that's coming out soon. I don't want to jump the gun here, but I think one of your comments earlier, Nick, Amazon has just placed an order for like 14 of another brand's Class 8 EVs for use in the ports. I guess at this point with a couple of the models that are already on the market of Class A EVs, could you give us a sense as to update us as to what the differentiators are of the Line 8 and kind of what value you think you'll get there over the next, let's say, 18 months or so?

Speaker 7

Yes. No, I feel there's Mike, I feel there's many differences there. But we're as Nick was saying earlier, I mean, every time that there is a good news in the EV space, this is good news for the whole EV market. I think right now, the battle is more about EV against the ICE market. So in some markets that could be a resistance to change than anything else.

Speaker 7

So we're glad when the other companies are adding the news as well. We feel this is good for the OLED market. That being said though, I mean, we feel very good about our products. And our DNA is really about adding purpose built school buses and purpose built trucks. So those trucks were we had the operator in mind the first day we started thinking about those.

Speaker 7

So that's going to generate a lot of cost savings going forward. And this is great for the operator. So we feel the total cost of ownership is very good. And the Line A tractor will be launched, I mean, in 2 weeks in Las Vegas at the actual. And we feel this one is a game changer.

Speaker 7

And we can see that great momentum with the Line 5 as well. The people are driving the Line 5. We started the deliveries. As you know, those trucks, we feel will really respond, I mean, to the needs of the operators. And this is all that matters.

Speaker 7

So great quality products, real EV products that are fully purpose built and also all the software and all the communication tools that we have benefit from the last 8 years that we've been selling EV in the school bus space as well. So we feel that those trucks that we're putting to market will be a great game changer in the space.

Speaker 10

Great. And then my follow-up question was just on the Q1 numbers here, real quick one. Just the average price per vehicle was a bit higher this year over last year. Is that a function of just the mix between buses and trucks? I'm just trying to figure out whether any credit revenues from environmental credits or other things in there that we should be aware of or is it just purely all vehicles this quarter?

Speaker 3

All vehicles and charging infrastructure, no nothing unusual there.

Speaker 10

So it's just mix was the reason for the average

Operator

for pricing?

Speaker 5

Yes, yes,

Speaker 3

yes, yes, yes, yes, correct.

Speaker 10

Okay, perfect. Thanks so much everybody.

Speaker 8

Thank you, everyone.

Operator

The next question is from Chris Souther from B. Riley. Please go ahead.

Speaker 13

Hey, thanks for taking my question. Maybe just on the truck order book, it looks like it was reduced during the quarter beyond what the sales were during the quarter. Can you comment on what the moving pieces were there?

Speaker 3

Yes. As I mentioned in the prepared remarks, we had an order of 65 units in the truck order book that was for a client that filed for creditor protection. And so in light of that, we took out those 65 units from the order book. That is

Operator

the bulk of it, Chris.

Speaker 13

Okay. Got it. Thanks. I missed that. And then obviously a lot of moving pieces on some of the subsidy programs.

Speaker 13

But as it said today, if we're looking at the current order book and the visibility on deliveries, could you give us a refresh on the current order book between the ETF, EPA, other orders that are customer dependent on the timing and orders that are maybe less constricted on the delivery times?

Speaker 2

Yes, over

Speaker 3

half of the order book, Chris, it's conditional on that ETF approval. As we mentioned this morning, first approval for an order of 200 units was obtained and we started delivering on that. As it relates to the EPA, there is very, very little in there, only what remains from the first round. And as I mentioned, there's $1,500,000,000 that we expect will be imminently available for orders and we're having a very healthy encouraging client dialogue for that. But there's close to nothing in the order book as it relates to the EPA.

Speaker 13

Yes. Okay. Got it. And then just maybe last one, a little more clarity on the ETF process to get subsequent orders. Do you have any sense as to like what made the 200 bus order that you recently received get through all the red tape and the lights like and where the other orders stand as far as that similar process.

Speaker 13

I just wanted to see if we can get some better sense of where we are with that the rest of

Speaker 11

that piece of the order book?

Speaker 7

Yes. So with respect to the 200 orders, we are in discussion with the operators. Well, the and it's a matter of putting in the infrastructure and delivering those buses. So the there will be deliveries obviously this year and we're coordinating with the operator to make sure that we please them and we deliver as soon as possible. As I said earlier, we see very good dialogue right now between the operators and the ZDF.

Speaker 7

Many of those have been in discussion for more than 2 years with the ZDF. It's a process where there are many steps and many of them are getting to the last steps. And hopefully, I mean, that will conclude into an approval of those files. But we see a good momentum right now. And we see a lot of willingness also from the operators to get their electric buses to carry the kids to school, which is great.

Speaker 7

So we feel that this order of 200 buses and this approval is a very good sign of where it's going.

Speaker 13

Thanks.

Speaker 2

Thank you.

Operator

We have no further questions on the call. So I will hand the floor back to management to conclude.

Speaker 1

Well, thank you everyone for joining the call today. We look forward to continuing the discussion with you. So feel free to contact me for any further questions you may ask. You have a nice day.

Operator

This concludes today's conference call. Thank you all very much for joining.

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Earnings Conference Call
Lion Electric Q1 2024
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