Q2 2021 Lion Electric Co Earnings Call
Good morning, ladies and gentlemen, and welcome to Alliance second quarter 2021 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.
To ask a question during the session you will need to press star one on your telephone keypad.
Minder This conference call is being recorded.
I would now like to turn the call over to you Isabelle Unshaped, Vice President Investor Relations and a sustainable development. Please go ahead Mr. James.
Yeah.
Thank you and good morning, everyone. When it comes to Lyons second quarter 2021 if we sat conference call.
When you and of course, the whole city furniture. So that was just that you don't see it as you can see mess.
Yeah. Thank you.
Why do that when we took this in English we would of course be delighted to answer any question in French during the Q&A session.
Yeah can I produce will be you'll have less if I'm on long Lake.
So I believe you have to have pulled back with guess, Josh I'll say not that I can tell you the biggest jumps.
With me today are Mark <unk>, our seal funder and you collect when they are executive Vice President and Chief Financial Officer.
Before we begin I would like to mentioned that doing so of course, we will make certain forward looking statements regarding our future business expectations, which he was like risks and uncertainties.
Forward looking statements are predictions projections and other statements about future events that are based on current expectations and certain material factors and assumptions and as a result are subject to risks and uncertainties.
Many factors could cause actual future events to differ materially from the forward looking statements for more information about factors that may cause actual results to materially differ from forward looking statements.
Please refer to wife to our findings met today and to the risk factors contained in our final prospectus dated may five 2021.
Finally, with your auto he said I'm not sure if you know Kim.
And it was a registration statement on form F. One.
File with the Securities and Exchange Commission and declared effective on June 14th 2021.
You can also contact or their documents.
That'd be confined with the M. S N P. A C suite.
Forward looking statements.
Speak as I've said that they are met.
Your question not to put undue reliance on forward looking statements and we undertake no duty to update this information unless required by law.
Finally, please note that we report in U S dollars and there I FRS.
How much today may refer to shut the non financial measures such as adjusted EBITDA and certain performance metrics.
Such as the company's order book, which are defined.
Described and in certain cases reconcile you know earnings release and MD&A issued this morning with that I would now and the call over to market leader Mark.
Thank you Isabelle.
Everyone and thank you for joining us this morning.
If I had to provide a title for Q2 conference call it will be despite the pandemic.
Ion is delivering strong results and is executing its strategy plan in a very organized and timely manner.
Let me first remind you rely on it.
We manufacture 100% of the electric trucks and buses no I bridge, we are solely focused on the electric technology no fuel cells notion N G. No propane our vehicles are purpose built for electric we don't do retrofits there.
There are mainly three key elements that I would like you to remember from today's Q2 results announcement number one.
We continue to see great momentum in client dialog, which is translating into accelerated purchase orders and deliveries.
Brian. This is one of the very few companies in the EV industry that is currently delivering vehicles and charging infrastructure, while executing its growth plan and our list of tier one customers.
Such as Amazon Ikea Canadian National Railways, Toby's Con Edison Heritage for student National Express S. P. A L. A unified school district keeps growing and continue to validate our unrivaled leadership in the market.
Number two.
We continue to advance the development and commercialization of new platforms, and we're planning to launch eight new models by the end of 2020 two.
For a total of 15, all electric models, the largest product lineup in the industry.
Number three.
We continue to achieve important milestones on our strategic plan, namely the construction of our Joliet, Illinois manufacturing facility with a capacity of 20000 vehicles per year. The construction of our battery plant, an innovation center as well as multiple irene's across the company all of this within our announced timeline.
Despite the pandemic.
In a nutshell, we are building up the entire organization to continue to execute on our strategic plan all of this while benefiting from an unprecedented favorable legislative backdrop, both in the United States and in Canada.
I will now provide an update on each of these items.
And I will then pass it on to Nicholas who will discuss our financial performance for the second quarter.
Let me start by discussing our deliveries and purchase order book does.
During Q2, we delivered 61 vehicles as compared to 22 last year, an increase of 177%.
These deliveries consisted in 13 trucks and 48 busses 41 of these vehicles were delivered in Canada and 20 were delivered in the U S.
I am pleased to see continued momentum in deliveries despite the impact of the pandemic.
It is important to us as deliveries are purchase orders as they give an indication of upcoming deliveries and related revenues.
As of today.
Our order book totals 965, all electric vehicles, consisting of 703 buses and 262 trucks, representing a combined total order value of over $280 million.
We expect that the majority of these vehicles will be delivered within the next 12 months great.
Great New client wins in the order book include customers, such as Green Mountain Power, then Ross Zoom and Casella waste systems just to name a few.
The order book also includes a new order from Amazon for 15 Lion a tractor trucks. It also includes a repeat purchase order for 35 Alliance. He buses from the Prince Edward Island Provincial government positioning Lion as the lead electrical OEM in this province with a total of 47 Electric school buses, let me be very clear.
Here. This is an order book not a pipeline or a backlog the continued momentum in our order book stems directly from our ability to leverage the full lion ecosystem that is tailored to electric vehicle fleet operators as we have now been doing for many years. This includes.
The direct sales force that is highly specialized the nevis complete infrastructure sales and supports rely on energy as well as leveraging our experience Center network and our Grand team.
Speaking of grants, we continued to see an unprecedented favorable legislative backdrop to promote EV adoption, both in the United States and in Canada with a true desire by government officials to support the cleaner environment through tangible leave you grant programs for example.
Our order book includes numerous school bus orders for which customers have benefited from the $250 million subsidy program launched by Quebec and teach you last April in fact 16 buses have already been delivered under this revised program.
As a reminder.
Under this program customer benefits from the subsidy among thing from $100000 to $150000 per vehicle, what matters to us even more than the amount of the subsidy is the objective set by the government the.
The committed to adding 2600, new electric school buses on the road within the next three years and to electrifying, 65% of Quebec's School bus fleet by 2030 <unk>.
Additionally, starting on November 1st 2021 every new school bus registered in the province of Quebec will have to be an all electric school bus we are convinced.
The subsidy program approach favored by the Quebec government is the right one to accelerate the transition to electric vehicles and that it will have a major impact on many other province, and state legislations, which respect to accelerated <unk> adoption.
We also believe that client is uniquely positioned to deployed school buses as part of this program and.
In other notable EV incentive program. All earned about is the California, HFF, one which opened to new voucher request lately with $96 million for the purchase of commercial electric vehicles to be registered and operate in California, and Alliant is one of the leading applicants into the Agi program earlier this week the U S.
He passed the bipartisan infrastructure investment and jobs Act, which includes $5 billion of funding towards the replacement of existing school buses with clean and zero emissions called buses with this vote.
We are getting one step closer to unprecedented funding for initiative targeting reduction in transportation emissions and charging infrastructures, which is very good news for our industry. Shortly after the end of the quarter, the California legislature and Governor Newsom signed.
Signed a bunch at build to further promote the adoption of zero emission vehicles under this new bill.
The allocation of $2.7 billion for zero emission vehicles in their infrastructure and the state budget in 2021 'twenty 'twenty two with authorized this $2.7 billion in funding.
It is intended to put 1000, new zero emission trucks 1000, New zero emission school buses and 1000, New zero emission transit buses on the state's road and will support the rapid growth of charging stations across California, Hawaiian being the electric School bus leader in California, and then North America.
And also adding and on parallel lineup of electric trucks available now for delivery is very well positioned to tap into this program and continued to deploy electric vehicles in California in a timely manner.
Last only three days ago, the Canadian government further clarified the terms of its previously announced program and confirmed that through the zero emission trends at fun. It will be investing $2.75 billion over five years to support public transit and school bus operators plans for electrification.
Patients.
This much awaited announcement will support among other initiated the purchase of 5000 zero emission buses.
Navigating this trends environments requires a clear menthol room.
Understanding of all the programs available over the years. Our line brand team is established lines of communication with key governmental bodies, providing grants and subsidies, including the M. T. Q, The California Energy Commission and carb to name a few being able to support our clients.
Throughout the old process with our land grant team. It's one of the items that are flying apart from competition.
Let me now spend a minute on other elements of the lion ecosystem.
Our Alliant Energy Division.
Which assists customers with selecting purchasing project managing and deploying charging infrastructure ahead of vehicle delivery also continues to gain momentum in less than a year of operation. It has already generated revenue of more than half a million dollars as of today, the Lion energy order book.
To that seventy-three charging stations and related services, representing a total order value of approximately $1 million. This included an order for 35 charging station from the government of P I, which we announced earlier this week.
As a reminder, we are agnostic when advising customers on their infrastructure needs and we are a reseller for different types of charging stations, including from ABB charge point slow at energy Blink and UV.
With a full lineup of level, two and three charging solutions.
Finally.
A word on our experience centers, which are dedicated spaces, where customers policymakers and other transportation industry stakeholders can drive our electric trucks and buses learn about their specification and advantages meet alliance sales Representatives discuss grant and subsidy assistance.
See vehicle training and have existing vehicles serviced. We currently have eight lion experience centers in operation across North America, and expect for new ones to be in operation in Virginia, Minnesota, Tennessee, and Vermont by the end of the year.
We are also simultaneously working on securing additional facilities to continue to expand our experience Center network.
Let me now provide an update on the execution of our strategic plan first our Joliet, Illinois.
Manufacturing plant I am pleased to report that the shell building of our 900000 square foot facility is approximately 80% completed we have pictures showing the plant.
In our Q2.2021 results slide deck that you can find on our website completion of the construction of the building is still planned before the end of this year, we everything Colliers international unless construction project manager and Mercury as advisors to assist us with global project planning as well as for the selection and commissioning.
Our production equipment.
As a reminder, our highly automated production facility will have a production capacity of 20000 vehicles per year and full operation. It will be the largest dedicated production plant for zero emission Museum Navy duty vehicles in North America and in the Williams biggest footprint in.
In the United States, It will give us the ability to meet the increasing demand in the marketplace for made in America zero emission vehicles.
Everything is going as planned in the initial vehicle production is expected to begin in the second half of 'twenty 'twenty two.
Now turning to our battery plant and innovation Center.
During the quarter, we officially announced that our battery plant and the innovation center will be located at the Y Amex International Air with city of Mirabel, which is about 20 miles from our current manufacturing site near Montreal. This project is well underway works such as geotechnical work environmental studies and <unk>.
<unk> are currently being performed while on site construction has already begun we everything pomerleau a flagship corporation in the Canadian construction industry as project manager and general contractor for the construction of the battery plant an innovation center in parallel we have also retained J our automation.
Apache Company.
For battery manufacturing automation and equipment selection here again.
I wanted to confirm that we are on track with the previously announced timeline and that the initial production of battery modules and packs is planned for the second half of 'twenty 'twenty two once fully operational we expect an annual battery production capacity of five gigawatt hours and up to electrify approximately 14000 of lines electric truck.
And buses producing our own battery modules and packs will be a key tragic differentiator and it should result in significant cost savings provide full control over battery specs and dimensions and remove key supplier dependency.
The third element of our strategic plan relate to DSW team, we continue to improve our team on all fronts. During Q2 as of today, our total head count amounts to approximately 900 employees of which approximately 270 in engineering and R&D.
We also recently started the hiring process for the Georgia manufacturing plant and we'll update you on that process in the quarters to come and our management team Bryan churned join us as our Chief commercial officer Fastweb, all year as our Vice President Chief Information Officer, and that leaves you room joined our leadership team.
As our Vice President Chief people Officer last I will optionally like to welcome Mr. Lorenzo rock him.
Who recently joined <unk> Board of Directors Lorenzo was the chairman of Trans Atlantic Holdings, and International Financial holding company. He also cofound the trends on plant pick power and Skyline renewables one of the largest energy renewable companies in the United States. We are looking forward to benefiting from lorenzo's expertise.
Before turning it to Nicolas.
To comment on our financial performance I would like to briefly discuss our supply chain.
Like many other automated Oems we are currently being impacted by an increase in the cost of certain components required to build our vehicles discussed increase is mostly due to higher cost in the steel parts and ordinances and also in the freight cost in general.
This increase as a marginal impact on our bill of materials as of today.
We are also impacted by longer lead times on several components our approach to minimize the lease and limit any cost increases is to overstock. Several key components and we are grateful we adopted this philosophy, even before the pandemic. Thanks to our long term experience in evs and to our vertical.
<unk> integration strategy for instance.
We currently have inventory O&M of over 1000 battery packs with numerous additional shipments already scheduled for the rest of 2020, one and additional significant quantities reserved for 2022 and also 2023. Additionally, our inventory of battery modules is sufficient to build approximately 200.
40 additional lie in batteries. We also have several long term agreements with other key suppliers and in most cases, we have supplier redundancy for critical components.
Our strategy of working in two markets buses and trucks.
US very well in this regard given the commonality of many components that can be used on most if not all of our models. All together, we have been able so far to maintain a good production rate with few production delays, while experiencing a slight increase in our material and freight costs. We are confident in our <unk>.
Bill teeth to significantly reduce our cost base when the global supply chain situation returns to normal with that let.
Let me now turn the call over to Nicholas who will comment on our financial performance.
You Mark.
Despite a volatile economic environment I am pleased with the progress our team continues to make.
There are a few elements I would like to highlight before I comment on our Q2.2021 financial performance.
First as we close the transaction with Northern Genesys acquisition Corp on May six.
Results presented for the second quarter consolidate those of NGA and are on a post transaction basis.
Second the closing of the transaction has resulted or will result in the elimination of certain liabilities on our balance sheet.
And certain noncash items on our P&L, namely as it relates to retractable common shares convertible debt and share based compensation.
I will further address these items minimal.
Let's now go into the details of our Q2.2021 performance.
As mentioned by Mark we delivered 61 vehicles in Q2, 2021, including 48 school button and 13.
41 of these deliveries took place in Canada 20 in the U S.
This compares to 22 school buses delivered in Q2.2020.
As a result revenues for Q2, 'twenty, 'twenty, one where of $16.7 million compared to $6.1 million.
Yeah.
Our gross profit was up 5% of sale or zero point $9 million down zero point $1 million as compared to $1 million in Q2.2020.
The decrease is primarily due to the impact of increased fixed manufacturing costs related to the ramp up our production capacity for future quarters and to a lesser extent to an increase in raw material costs.
As of course, partially offset by the positive gross profit impact of increased sales volume.
Let me provide more granular information as we believe that over the long term. Once we are ramped up the run rate production. This will be a key indicator to look out.
As previously explained we are significantly investing and preparing for sustainable long term growth and profitability.
Consequently salary.
And other overhead costs have and will continue to have an impact on our gross profit and related margin as we work to increase our capacity.
It will be the case until we reach production levels that are commensurate with our cost base.
The expansion of recurring and increasing demand over the long term.
To give you a better idea, we estimate that our overhead and direct labor costs on a per vehicle basis are currently four to five times higher than the cost per vehicle that we expect to incur once we reach run rate production.
Nicholas Please let me chime in here with a comment on our gross margin we have shown our ability to achieve L. See gross margins in the past with our gross margins amounting to more than 30%.
In 2019, we are confident that we will return to industrial leading gross margins on our production reaches the targeted levels. We are currently investing for.
Thanks Bart.
Continuing with administrative expenses, they have increased by $48.9 million to $50 million, primarily because of the significant increase in noncash share based compensation of $44.5 million and in expenses, reflecting lines transition to being a public company.
Costs related to the expansion of a lion's head office capabilities in anticipation of an expected increase in business also had an impact.
Share based compensation administrative expenses were $5.2 million.
Selling expenses increased to $13.3 million up.
$12.5 million as compared to Q2.2020.
Primarily because of a significant increase in noncash share based compensation of $10 million <unk>.
Expansion of line sales force as well as an increase in expenses associated with lines experienced centers.
Net of share based compensation.
<unk> expenses were $3.3 million net loss for Q2 amounted to $178.5 million inclusive of $99 million in noncash change in fair value of warrants obligation.
$5 million and noncash share based compensation and close to $14 million of transaction costs related to our combination with NGA and related public adjusted.
Adjusted EBITDA was negative $5.5 million compared to negative zero point $1 million in 2020. Adjusted EBITDA include adjustments for certain noncash and nonrecurring items, which I just described namely change in fair value share warrant obligations and share based compensation as well as transaction and other nonrecurring costs as I alluded to.
So at the beginning of my remarks, the closing of the combination with NGA and related public listing has resulted in a number of changes in our financials going forward, which for the most part will simplify our reporting let me take a few minutes to explain these changes the 18 million shares which were previously treated as a liability due to a put right by one shareholder.
Were reclassified to equity as a put right was eliminated upon closing of the transaction.
In relation with the accretion expense related to the <unk>.
Which was included in financing costs up to this quarter will no longer be incurred with the cash settlement option in the company's stock option plans remove that closing the liability for share based compensation was re measured the fair value at May six 2021 with changes in fair value recognized in net earnings this quarter.
The resulting fair value was transferred to contributed surplus within shareholders' equity going forward share based compensation expense for existing options will no longer very sharply and we therefore expect a significant reduction in such noncash expense over the coming quarters.
With our convertible debt and our credit facilities, we made other than an $11 million loan backed by government subsidies for vehicles ordered.
We expect financing costs to decrease significantly in the next few quarters.
Let's now discuss cash flow.
Cash flow from operations for Q2 stood at negative $47 million inclusive of $19.7 million of changes in working capital as we continue to scale the business and overstock to mitigate any potential supply chain issues as Mark mentioned earlier as well as $13.7 million of transaction costs related to the combination with <unk>.
And related public listing.
During the quarter acquisition of intangible assets, which mainly consist of R&D activity.
Now that the $10.7 million up $8.2 million as compared to $2.5 million.
Capex remained low at $3.3 million as compared to zero point $4 million last year.
We expect capex to increase significantly over the coming quarter as we start purchasing will come in for Julian vehicle Park and the battery.
Let me now speak to select balance sheet items.
First we ended the quarter with $364 million in cash and approximately $11 million in that facility.
As previously announced we entered after the end of the quarter into an agreement for a revolving credit facility of up to $100 million.
Although we do not have immediate need for it and its credit facility is available for working capital capital expenditure requirement and general corporate purposes.
And when needed.
We continue to feel confident about our ability to realize our growth project with the liquidity currently on that.
Currently we have added on our balance sheet liabilities related to the NGA warrants, which were converted the lion warm.
Altogether, the warrant liabilities stood at $297 million on our balance sheet.
This liability is expected to fluctuate from quarter to quarter based on lion's share price with the change in valuation going through the P&L as a noncash gain or loss.
My last comment before turning the microphone over to Mark will be a brief one pertaining to our long term financing solutions program.
We believe that the ability to secure financing for our customers purchase of electric vehicles is an important aspect to ease the transition for easy for a customer.
The smoothing of the cash flow profile and in many cases allows the customer to benefit from a favorable.
Hey, Juan.
We currently have attractive financing options tailored to ease that we offer clients via partnerships with third party.
We are continuing to work on a more programmatic approach not only for vehicle financing, but also for the monetization of credits on behalf of our clients.
We are in dialog with both private and public sector on both sides of the border to that effect if.
We will update you as we progress towards building that lie in financing solution, which will ultimately aimed to further accelerate our purchase order book and pay for delivery.
In conclusion.
We are pleased by line second quarter results and expect continued growth in purchase orders production and delivery.
Thank you Nicholas before we open the line for questions I.
I would like to insist on the fact that we are very excited by the trend we are seeing in orders and deliveries as well as in the timely execution of our strategic plan, we have been able to achieve all of this while working in a very challenging environment because of the pandemic and while becoming a public company.
As previously mentioned in the next few months.
We will first.
To focus on our customers and on working with fleet owners to provide them a turnkey solution and help them navigate the transition to electric and full confidence second we will keep executing our strategic plan in a timely manner, we will finalize the construction of our Joliet, Illinois plant and we will continue to advance the construction of our <unk>.
Five gigawatt hour per year Battery Assembly plant and innovation Center.
Third we will keep attracting the best talent make strategic hires and strain and that the team to successfully execute on our plan to always be better and always go faster with that let's now open the lines for questions.
As a reminder, if you'd like to ask a question simply press star one on your telephone keypad.
Our first question comes from the line of Ben Wyatt point with Desjardin.
Hi, Good morning, Mark Good morning, Nicola and congratulations for the quarter and also the ramp up.
Yeah, Good morning, Chris.
Talk to Ya man.
Yes.
Looking at the current pipeline of deliveries.
Would it be fair to expect more deliveries in Q3, and Q4 versus Q2 or is there some seasonality to take into consideration.
Yes, it certainly would.
We are aiming for a better than we were expecting a continued ramp up in <unk>.
And deliveries as well.
No no no seasonality to think of right now we're focused on continuing to grow.
Okay perfect.
Could you talk about the reliability or feedback on the trucks deliver so far in first off obviously, the Amazon Paul on the order of very positive it's fine, but just curious do you get the feedback on the trucks will fall.
Thanks again.
As it relates to Amazon, where we're going to stick.
This clothing.
Purchase orders and the deliveries so we'll let you know.
We'll keep the.
The dialogue.
The trucks with between them and ourselves obviously.
An important relationship.
Their operations it.
It will be about them too.
But obviously, we're pleased to announce a new order.
For the money.
And then with respect to the other deliveries we're getting very good very good feedback.
It's a it's a new it's obviously a new product with a technology, we've been using for many many years.
You you probably remember the coming out of the way we have between our platforms and I think this is serving us very very well right now.
Okay. That's great and then last one for me in terms of working cap Nicholas how should we expect the working cap evolution two two to evolve in the second half.
Yes, we should expect to continue to invest in working cap.
As Mark mentioned our previously.
Previously the.
The way to address to mitigate the current supply chain initiatives has been to overstock, we've been doing that for a while and this will continue.
And we're pleased to invest in working cap that allow for more deliveries.
There's often more.
I have more.
Sales. So we do expect an increase there.
The coming quarters.
Perfect.
Okay. Thanks for the time and I'll pass the line. Thank.
Thank you thank you Manuel.
Your next question comes from the line of Jonathan Lamers with BMO capital markets.
Good morning.
Good morning, Jonathan.
Yeah on the recent U S State funded awards, including the California H Fib.
How have lines win rates.
And so far is that something you can comment on.
Yes.
We will certainly we will keep the comment high level Jonathan.
Two additional rounds of the HVAC applications one in June and one in August we think build publicly I think they publish eventually the applications, we'll let them speak to numbers would say we'd have we had a.
Very good two rounds of application we're very pleased.
Yes.
Lots of client demand and it's a program that are let.
Let me think of area worked very well very efficient and so yes.
Yes, no very pleased with the applications.
When do you expect to learn the results of your partner's applications.
In some cases, we had them in some of them have.
<unk> already been.
Approved and so Oh, yes, we're.
It's an ongoing process and like I said, we'll hbf does public published the voucher. So we want to.
Respect there they're doing that in their timing.
But yeah I'm pleased with the applications.
Thanks.
And in the U S.
Go ahead.
Sorry, how do you expect orders to build.
Head of the new Juliette Assembly facilities ramp and second part to this question.
Have you had any feedback from customers on the U S Senate infrastructure Bill.
Will customers be waiting until the funds are available before placing second orders.
Yeah, Great Great question Jonathan.
The <unk>.
We.
We are we revised the a few months ago, Brian churn as our Chief commercial officer and.
It's going very well you see the.
The virtue as well do you see the order book right now at 965.
<unk>, which is a which is quite good which sells over $280 million.
So that's that's very good right now and Thats, despite everything that happened in the in the last year now with respect to.
The orders for the trucks.
For example, I mean, it's.
People will see more and more of those trials.
On the Street and this is really helping us and this is what happened.
School buses as well it started slowly and then there was a major ramp up and so we see a very serious dialogue with these customers and we see customers.
That are also very sophisticated in terms of total cost of ownership.
Our analysis and we've been doing this for many many years and we understand that.
Going electric and adding a few transition goes with making money with those with those trucks and buses and you know our customers to get them and.
So we are seeing great momentum in those discussions so really looking forward to build this disorder book.
Even even quicker than we've been doing in the past Nick do you want to take the second part of the question second question was about the infrastructure Bill Jonathan.
Just how customers are.
Just just if you have any dis got feedback from customers on the Bill I'm curious whether customers will wait until those funds are available before placing follow up orders.
Well I wouldn't speak I don't have any specific customer feedback on the deal, but I think everyone you know.
That's in the school bus.
And everyone in the public sector around this is it.
Very clear that there will be very significant amounts.
Deployed toward school bus.
<unk>, So we're pleased and it's.
Not just the bill with the <unk>.
General support in the mission to Electrify school buses. So overall, it's a.
Very positive.
Bill.
And program and I'd say that.
We don't we.
We're seeing dialogue for electrification now and you can't just turn the dial and make it happen as kind of a finger so.
The movement is happening and parties are engaged now on electrification.
Thanks, I have one last topic, if I can just on the battery pack.
And the new battery plant that's ramping.
Mark can you compare lyon's current.
Small scale battery pack Assembly operations.
To the more automated operations, you're planning for the for the large new battery plant.
Some investors are concerned about the potential.
Challenges you might face.
As you ramp that new plant.
Sure Yeah, I mean, we've been doing battery pack battery packs that Jonathan as you know for the last six seven years and.
I think again this is serving us very well and in many of the.
Key components within the battery pack.
We've been mastering and me for many many years and one of those.
The BMS the battery management system, which is like the brain of the battery pack and we have our own.
We've been using our own DNS for many many years and this is what we will keep doing so obviously you know manufacturing our own battery packs using our own our own BMS is you know kind of the same team we will be using.
But at the very high scale and the big difference obviously it will be the number of units, we will be manufacturing and that's one of the reason.
We partner with GE our automation.
Actually Corporation and.
If you look at what they've been doing I mean, most of the major battery plants in the biggest in the world I mean D. We're involved and at some point that we're doing the project management of those up those plants. So we decided to partner with the best.
People in the industry and we've been at this for for a while now and this is why we feel so good about the timing of that so I mean, it's it won't be something like probably a bigger challenge. If we will just start doing battery packs as some people might be thinking of doing at some point, but.
We've been doing.
This for six seven years, we feel great about that.
Thanks for your comments thank.
Thank you.
Your next question comes from the line of Michael Glen with Raymond James.
Hey, good morning.
So I just wanted to come back to the battery plant discussion because you know.
You see news flow regarding some of the investments that are going in right now I mean, you're talking about billion dollar investments being made by.
Large companies to build battery manufacturing plant is scale so.
How do you think about the cost profile of your facility.
Once it's up and running do you do you feel confident that youre going to be able to.
Continued producing it at a competitive cost versus some of the new investments that are going in.
We do have we do Michael and it's a good question I mean, we've had that question a few times in the past and I think there's a little bit of confusion between what we're doing and what some other companies are doing when you were talking about billions of dollars of investments we're talking about <unk>.
Companies investing in discounts so they will be manufacturing their own cells of which we will not be doing we are buying the cells and as you know putting them into modules and then modules into battery packs.
She is quite different so the budget we have.
For the automation of this of this battery.
T is quite significant I mean, as I said just earlier I mean, we're doing business with with the best in state of the art technologies and many of those you know.
Technology or proprietary proprietary components of of.
Alliance, so yeah, our cost will be.
Very good and obviously will be impacted by the cut of the cells.
The Saudi is a major part of the overall cost of the battery pack at the end of the day, So we really enjoy what.
What we've been hearing and some of the investments in the United States. In this regard that's going to cost on the on the freight and cost as well that this is also going to increase.
The U S content into what we are doing and we are pleased about that.
And have you indicated at all the.
Like what type of cost savings have you quantified that at all what type of cost savings you expect to achieve once the facilities at a at run rate capacity.
Yeah, No absolutely we did we did in the past that Michael and we're thinking about you know cost saving of about 50.50.
50% and so major major cost savings if.
If we do compare with the battery pack that we've been buying from third party suppliers.
Okay, and just circling in on Illinois.
The facility so.
And you highlighted some of the supply chain shortages taking place so.
We read about the supply chain shortages right now across so many areas.
So how do you prepare yourself I mean, this that getting this plant up and running is obviously critically important for you do you have any concerns regarding your ability to take possession of the equipment necessary to get that plant up and running in that in that time and that it is a tight timeline that you're talking about so I just wanted to.
To get.
Get some insight into that.
Yeah, No. Good question, Michael and again, I mean, we've been manufacturing electric vehicles for us.
For about for.
For about almost six years now and I think again. This is this is helping us a lot.
OEM trying to get into the market and you know make all the processes to do the EV vehicles, I mean that will not be easy since we've been doing this for many many years and since we are doing this and we are also in the relationship with all of those suppliers, including all the tier one.
Liners.
I mean, it's.
I will not say its like almost a slam dunk, but I mean, obviously those suppliers are really looking for words that Brian.
Running running at full scale and that would be great. So now what we're looking at doing to cost.
To cut the freight in as well and also to be more and more local is to build.
The local procurement. This is what we're doing now at the Montreal factory and this is what we will be doing in Illinois as well. So we started that already we started doing some hires in the in our in Illinois. So we will take the occupancy of the.
The building within the before the end of the year. This year. So this is great and we are building the workforce at the same time net we are looking at local suppliers. So obviously, it's always a challenge that we don't want to let's say underestimate, but this is <unk>.
One thing we are doing on the daily basis, and we've been doing for many many years.
Okay.
And then just some insight into the experience centers.
You are talking about for additional like what exactly will these look like how many square feet will they be.
Will they include things like service bays like like what are what are the are they strictly sales centers, just trying to get a sense of whats what they'll look like.
Yeah, Yeah associated asking I mean, we are expanding.
Quite quite quickly right now we have eight we will be up to 12.
Before the end of the year and we're looking at many many other states as well. So we're basically following are our customers. You you know, we're doing b to b and at the BTC. So.
A lot of the work the maintenance work at the customer's request is being done by the mechanics of the customers and Amy specialized work, we're doing this and the experience centers. So all the experience centers.
R. R E D.
Focused only so that's the first thing with all the technicians and the mechanics, having experience.
In EV, we are doing right and drive as the expert in centers, we are doing the service as well as we're doing this kind of special special lines.
Service also lets see if anything happens with the battery packs or specialized components.
We are we aren't doing it.
This as well and it's also a place where you can see all the models. So you can ride a lion a truck alliance six truck.
You can write you know the buses as well so even if you are in there I mean to my above but youre looking at the trucks and this is the kind of momentum. We are building. When you were going into those those places it's really a place where you can drive all of those.
And obviously you know when you are putting a truck and bus on the road you need to do some specialized maintenance at some point the special, especially you know with the.
With with EV.
You need to take care of that if anything if anything happens at some point and we want to make sure that this bus and truck will be back on the road.
Within a few hours and then this is what our what we have been doing for many years right now and this is what we will keep doing.
Okay. Thanks for the insights.
I'll leave it there.
Okay.
Your next question comes from the line of Fitbit Loria with National Bank.
Good morning, everyone.
Morning.
So the order book grew this quarter and could sustain a higher rate of deliveries can you comment on what drove the the pace of deliveries than in Q2 as it is a customer schedule or is that your production capacity and if its production capacity, how how do you see that changing over.
The next few quarters and whats going to pace the the increase in your capacity.
Yeah, let's let's talk about that I mean in terms of.
In terms of production capacity I mean, we.
We as a manufacturing capacity in Montreal of 2500 units per year right now as well.
Well you know that.
There are mainly two things driving the manufacturing capacity. So it's a good thing it's a great thing I think that we can we can manufacture.
In fact, her 2500 units per year and it's in terms of equipment. So there's two things, it's really equipment and all of the infrastructure and also the labor needed to do that then obviously, we are ramping up the labor as need be with the orders coming in and the schedule of deliveries you know with the dialogue we have with our customers then.
We're ramping up.
We're ramping up the number of people, we need to do that and you'll probably remember at the beginning of the year, we had 450 people.
Right now we're at 900 people and we are ramping up pretty pretty fast right now, 10% to 30 people a week basis.
Basically and.
With the number of people that we have right now working in manufacturing.
There were two third of the way.
Two to reach the goal of 2500 units. So I'm very pleased to see is that we can we can manufacture.
Those are those vehicles and that we are two thirds of the labor force to get to that 2500 units capacity. So I think it's a it's a.
Great News I think that I don't know any other Oems you know that can see.
They can see something like that now in terms of.
Deliveries I mean, yeah. There is there has been you know a couple of the challenges as you guys have.
<unk> been seeing everywhere.
In the marketplace to give you an idea we have about 2000 components on the on an electric bus and you need all of those components to deliver the buses and trucks. The good thing is that what we've been doing for many years now we've been overstocking.
Inventory because of the because he's still at the early stage. So we suffered a little bit from that but it's it's very well under control now everything else. We're doing around manufacturing those buses is key and this is why we called it the the alliance ecosystem.
Because we need to make sure also that the charging infrastructure will be in place and depend dimmick had an impact on all of that not only on the supply chain, but also on the charging infrastructure.
Manufacturing and well.
I mean, the good thing is that you know we are also overstocking the charging infrastructure. So so we can deliver in a timely manner.
And once you know you are controlling all of that.
Obviously, the client dialogue and making sure. This was the right timing for the customer.
Well everybody knows that a lot of the school districts were still closed in the last in the last few months. So we have to let's.
That said, we have to deal with that.
But I mean, I think we were able to do very well, adding a very close communication.
With our customers. So despite this pandemic despite all of the issue that <unk> been talking about.
We've been able to deliver those those 61 those 61 units. Despite probably you know the worst crisis over the last 50 years.
Alright, Thank you and you talked about your gross margins improved quarter over quarter and you are going to look to drive those much higher in the future of course.
And I realize the company is going to look very different than a few years. So I'm wondering if you can comment on Europe cost structure today, how much of your cost of goods sold is fixed operating costs. How much is that is variable and.
And what does that trajectory look like from here to get to your target margins do we see a step changes or is this going to be more of a.
A gradual evolution.
Yes, I can comment on this.
So definitely a gradual changes that we see.
The biggest cost items in the.
The problem is obviously the materials, but there is quite a bit of overhead in there as I mentioned before we're on a per vehicle basis.
The overhead and labor is much higher than where it will be at run rate and so gradually and that's <unk>.
Because we are investing in the future of course, so you don't have the detriment of current margins were ramping up for future production.
The end goal for US right now as future production in China.
So, yes, I expect gradual changes.
And just a better absorption of our fixed cost base as we go.
But what percentage of your cost today would be fixed versus variable just roughly.
On the on that sort of a yearly basis, we pointed to that in the past we've talked about about 25% now.
The thing to keep in mind is obviously, where we.
Growing the fixed cost portion right now.
Nothing in the people and the overhead so.
The mix of both growing the fixed cost base at the same time growing the deliveries and ultimately we expect that this will result in a much better absorption.
Great and then just one more quick one you talked about momentum in Europe client dialog and we have seen the the order book.
Grow of course, but you mentioned that the backlog in the pipeline.
It is also evolving I'm wondering if you can give us some color on how the backlog and pipeline is evolving if any.
Any any numbers you can give us maybe on on how that is growing relative to the order book.
Yes, <unk> as you know, we can we get enough, giving any specific numbers.
I can tell you I mean, the momentum is.
Very good.
In Houston, probably the list of the tier one customers.
We are dealing with and.
So great great customers that have a major impact on other.
Customers as well so we cannot give you that number we like to get real numbers.
As I said at the beginning this is really an order book.
Pipeline are at the back of our backlog.
Could happen could never happen.
The what we like about the order book is that you know this is confirmed and we.
We will be making those deliveries and so this is not this is a real number. So you know every time, we were talking about pipeline.
And backlog.
You never know that might happen that might have been in a few years. So basically our job is to convert that discussion with the customer in Q a purchase order and reports you know this in the in the order book that we can communicate with you on a few other Lee on a quarterly basis.
Alright, very good I'll leave it there. Thank you very much thank.
Thank you.
Your next question comes from the line of Nam and said he was alright on bank.
Oh, hi, good morning, everyone.
Good morning.
So my first question is on Europe.
Like a clarification question with regards to your order book Mark did you say that this is going to get delivered over the next 12 months or is that going to take longer to fill that order book.
No I said that most of the order book will be delivered within the next 12 months.
Okay. The majority of it yes.
Okay, that's perfect and secondly, just going back to the supply chain.
Delays in pricing pressure I'm, just wondering the new plant that you're coming up with in Illinois and in Quebec.
Has any pricing or are your cost estimates changed when you guys were getting into it and how it sort of the market is evolving or is that something that you are protected with your partners.
Well, let me maybe start with this I think.
Newman the the fact that we've been talking a lot of the major components had been really helping us in terms of costs, so not only being able to make the deliveries to customers, but also in terms of costs, because we were kind of protected from some of this.
This.
This crisis right now.
And also we do have a long term relationship with both tier one suppliers. So with the other you know an idea of where we are going we are securing.
Prices and pricing.
Yeah.
In the future as well so we see our tier one suppliers as being as being very good.
Very good very good partners of us.
Okay, That's fair and just maybe the last one that that's on the cost side I know there is an element of operating leverage that is going to come in eventually, but but just on the product side. When you guys are in Westin in R&D.
Is there been any progress apart from battery within your trucks, where you have sort of reduce the costs are.
Pretty much when it come from operating leverage on me.
I don't know Youre absolutely right. It comes you know obviously it comes from scaling up.
It also comes from the R&D, we're doing I mean, I think you know the number of people we have right now like 270 over the 900 people we have and this is we will keep growing that.
Also well there you know what they're doing obviously, we're doing some product development.
But most of the components, we're using even on the new products are taking the benefit of what we've been doing in the last few years, but also always.
Opening next year is.
One.
We will be you know a major cost saving as we said earlier because basically we're taking control over the module and Theres a lot of cartoon to sell in the model, we're taking control over the module. So not only is it like better quality, but also we're bringing down the cost and we are managing the shortage.
Sounds as well because we're going to do as you know we're going to the 21.700 cylindrical cells and.
We're getting right now into long term supply agreements in this regard so it's really a mix of all of that securing the supply getting better products, but also shaving that cost and this is what we're doing on a daily basis and this is what we've been doing for many years.
Okay. No that's great and then maybe I'll just ask one more this is about not an allergy. So so you guys are reselling some of the charges I'm wondering if when you think of that out of the business is that just to build up your order book and Boston that sort of transition to EV or or is that the business. That's the way you guys are.
We're making some profit as well.
Well, it's a mix of both because we are yes, we're making profit.
We are definitely making making making profit in this division no down and.
And you're also right I mean, the first goal of Lion energy is to smooth the transition for the customers. So it's to make sure that the charging infrastructure will be the right one.
First of all at the right price.
For the customer and also installed in a timely manner and.
For all you know any new new coming OEM or dealer in the marketplace. That's a huge challenge just getting the charging infrastructure in time is a major challenge so I, Brian we've been able to secure.
A lot of stock from many of the key.
The key suppliers for our customers and our customers are pleased with that so we do have the stock we do have also the.
The the charging infrastructure secure the deliveries I mean to to make sure we will be able to.
So the liver in the in the next 12 months as well and this is making a huge huge huge difference. So alliant energy, yes, we're making profit, but also were smooth <unk> transition.
Okay makes sense, that's it from me and congrats on the goodwill SEC you're doing thank you. Thank.
Thank you so much.
Your next question comes from the line of John Lopez with vertical group.
Hi, good morning, Thanks, very much for taking my questions.
Good morning, John.
Hi.
I just had a couple quick ones if I could the first one your capex.
It was quite meaningfully below our model it sounded in your prepared remarks like some of this is perhaps timing related.
It gives me could you just speak to Capex needs in the second half of this calendar year and then in 2022 as you ramp Joliet and as you ramp the battery factory in Quebec.
Yes, John.
We were reiterating the pain.
Hey, guys, we put before the $130 million for the Italian plant in Canada 185 for the.
Battery plants here to call that out of this CAD 185 to 100 has to come from the.
Government depth that we secured here so call. It on a net basis 70 million U S year, none of that debt and therefore, the black now the <unk>.
Capex has been low it's yes. It is a timing issue. So the capex you see there is really around the plant here.
Central.
We expect that in Q3 Q4.
The Capex will start on both flat it'll be a mix of deposits and commitments and.
Expect that to be.
Obviously lumpy given the types of equipment that we're buying those would be the big victory.
Okay. Thanks, and sorry, just is it conceptually right to assume that $200 million will be spent between now and the end of 2022, just given the factory timings.
Yes, that's conceptually right, yes, okay.
That helps and then secondly, and I guess somewhat relatedly it sounds like the filings that most of the cost.
Like in Joliet in particular are not yet.
Flowing through your financial statements.
How do we think about that.
Opex profile changes, perhaps in the second half of the calendar year like what are the line items, we should look for and what kind of relative increases would you expect.
Yes.
As much as it relates to <unk> that this will be capital expenditures I mean, we do have.
We're going to see on the balance sheet.
And asset and liability related to the lease engagement that we have there.
But we don't expect.
But it will be open opex until the plant operator, so don't expect much by way of Opex. This year.
Okay understood.
And the last one I just wanted to come back to the gross margin quickly I apologize because I know you've talked to this a little bit, but I want to ask it this way and perhaps you could help us tease it apart <unk>.
Deliveries.
Were up like three <unk> year on year.
Gross profit is down a couple of hundred thousand dollars a year on year.
Even if we assume 25% is fixed and that is up a lot. It seems sort of tough to square so just.
Perhaps could you tease those theres various factors apart again and what do you think is just the fixed cost side, perhaps anything on the inflation side and then is there perhaps.
On a per vehicle basis are there any pressures that you would call out to us as we think about this period versus a year ago.
Yes, a couple of things.
25% that we've talked about is really on the on a full year basis and as I mentioned, we're rolling that fixed cost fixed cost component last year, we were not in the.
The growth investment mode, and so it really is a big big part.
The fixed component and the absorption of both overhead and labor I would say John as well you talked about inflation. So they didn't have an impact yet, but we are qualified.
A marginal impact.
So it's not very significant.
I'd also say that where the.
The.
The what has an impact as the ASP and the mix of.
A vehicle that we're selling.
We tend to sell more Gardner.
More onboard energy vehicles in the U S than we do in Canada, and we had a more Canadian mix in this quarter relative to last year. So there is there is there.
There has improved.
Improvement potential at the FDA level, and then at the volume level, but by and large the biggest aspect right now is this investment in.
In capacity.
Second gross margin, both overhead and the quantity of and the bill related to labor.
Okay understood. Thank you very much for all the thoughts thank.
Thank you John Thank you John.
Your next question comes from the line of NOI, Jorge with Deutsche Jordan.
Yes, so just looking at the product launches.
Tend to introduce eight new models to be commercialized by the end of 2022 could you maybe talk about the timing for those product launches.
Whether it's more skewed towards the back half of 2022.
Yeah. Thank you. Thank you Ben.
Always said that we will be launching three additional models this year and five models in 2022, and we're still we're still.
Online too with this timing and so we're talking about the <unk> bucket trucks.
At the end of the year the alliance six utility and also the lion aide tractor and.
We are still looking at this at this timing.
To start delivering those those trucks. So that's great news, we're working full scale on this and you probably remember also that in 2022, we're talking about the alliance the alliance seven the Lions need a boon trying the ambulance as well, it's going very very well some of them.
We'll be we'll be available earlier in.
The year I can report that we've made significant progress on.
On the on the alliance five and also on the ambulance, which is which is a very good well in fact all of them. So some of them will be launched at the beginning of next year and some of them will be mostly in the second half of 2022. So we're exactly.
Despite everything else you know that happened independent bank and everything I mean, we're still online with the timing we've announced earlier.
Okay.
Mark could you maybe provide additional details on their refuse truck.
Sure.
I know, you're having a competitive advantage, it's a it's a pretty strong market there as well so maybe just color on the used truck market.
The pipeline is unfortunate.
That would be great.
Yeah, we're getting good orders, but why we add some lately with capella.
That we've announced.
So this.
This morning. So as you know this is this is an electric buddy that is installed on our electric truck and.
Many Oems are finding this right now I mean, the challenge before the outfitters is quite is quite significant to to integrate them.
The <unk> technology on the on the electric trucks. So we've been working on this for many many years and it makes a huge difference because you can do the full the hub operation on a single charge and also with the same energy system and this is what the operators are looking for they're not looking them into F. Two charging.
Patients to operate.
They refuse truck or any other truck as well the only one to plug in.
What's one charging station and they want to make sure that when they started in the morning, they can do to fully.
Of operation with the energy that they do on board.
And the electric but the operational and our electric truck is is very very efficient and that's one that's one of the reasons why the operators can can do over 1000 stops.
In one day and then they can do the fully operational in this so it is going is going very well and those those trucks.
We will begin to deliver.
Delivering those trucks very shortly.
Okay. Thanks again.
Thank you very much.
Your last question will come from the line of Jonathan <unk> with Bam BMO capital markets.
Thanks, a follow up on the near.
Near term order trends and the school bus business.
Mark you mentioned a lot of school bus districts have been closed over the past two months.
Has that had an impact on on school bus orders do you expect the school bus orders to trend up sequentially over the next couple of quarters and is there any seasonality on the order side, there that we should be aware of over the coming quarters.
Not really.
And then and that's really Jonathan.
The impact was more on the on the delivery side.
Because at some point there was no.
There was nobody had the school district really.
Need to be respectful of the.
The customer needs with this crisis I mean, the priority was really safety of the people.
So it was more.
And impact on delivery on the order side.
Not a lot of impact.
Well, it's clear that everything you've seen Canada, and the United States right now.
The whole market is going electric usage, you saw what happened in Quebec, starting in November of 2021, you will not be able to two.
To register a bug that is not an electric bus and we feel this is going to have major impact everywhere.
You probably heard the also the announcements from announcement from Mr. Trudeau.
This week with the amount of money they are investing in buses and in school buses.
Same thing on the U S side with Mr. Biden, So very promising there is a lot of money out there. So for those who were still thinking at some point that electric might not happen.
Not hearing this anymore it seems like the.
We have a kind of a consensus.
This is absolutely happening and now we have the dialogue.
With the customers on the timing of those orders deliveries and <unk>.
No. It's very very promising we're proud and we're glad that we made that decision of starting our business with the electric buses by Fitch.
Years ago, we felt that was a pretty smart choices magna.
Okay. Thanks for your comments.
Thank you Jonathan.
And this is all the time, we have for questions I'll turn it back over to Isabella <unk>.
<unk> comments.
Well, thanks, everyone for joining to put today. This is all the time.
But we are.
Looking forward to continuing this discussion.
I invite you to get in touch with me for any follow up questions that you may at.
Have a nice day.
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