Good morning, ladies and gentlemen. Welcome to Lion Electric’s Fourth Quarter and Fiscal 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Isabelle Adjahi, Vice President, Investor Relations and Sustainable Development. Please go ahead..

Good morning, everyone. Welcome to Lion's fourth quarter and fiscal 2022 results conference call. [Foreign Language]. Today, I'm here with Marc Bedard, our CEO, Founder; and Nicolas Brunet, our EVP and CFO.

Please note that our discussion will include estimates and other forward-looking information and that our actual results could differ materially from those implied in the statements.

We invite you to review the cautionary language in this morning's press release and in our MD&A regarding the various factors, assumptions, and risks that could cause our actual results to differ materially from those implied in such forward-looking statements. With that, let me turn it over to Marc to begin.

Marc?.

Thank you, Isabelle. Good morning, everyone. At the beginning of last year, as we were discussing our strategic objectives for 2022 we highlighted the following specific areas of focus that guide our work and investments.

Ramping up production at our Montreal plant, building and starting production at our Joliet plant, and our battery factory and accelerating vehicle and charging infrastructure deliveries. I'm glad to report we delivered on our plan for each of these items while maintaining our commanding leadership in the electric school bus space.

There are three main elements we will be talking about today. Number one, we continued to increase our vehicle production cadence in Q4, which translated into growing vehicle deliveries and growing revenue, and we expect this trend to continue in 2023.

Number two, we achieved significant milestones in our two growth projects as we assembled our first electric school bus unit at our U.S. manufacturing plant and our first battery pack in our battery factory.

And number three, while in 2023 we will continue to invest in our two new manufacturing factories to ramp up production capacity, we will also continue to smartly align capital spend with expected near term demand for our vehicles, and to carefully manage our liquidities.

We will provide color on each of these items before we open the line for questions. Let's begin with deliveries and orders. During the quarter, we delivered 174 vehicles consisting of 139 buses and 35 trucks. This is the fifth quarter in a row of sequential growth in vehicle deliveries.

In fiscal 2022 we delivered 519 vehicles, more than twice the 196 vehicles delivered in 2021. Our PO book currently stands at 2468 vehicles for total order value of $575 million.

It includes orders for 2167 electric school buses, including 190 from the EPA program, as school districts that were awarded grants under the program have started to place purchase orders ahead of the April 28th deadline.

Speaking of the EPA Clean School bus program, we have already started delivering electric buses funded by this program well ahead of the October 2024 deadline. Also, as per the program rules, we expect the EPA to make upfront payments to program all these after receiving proof of a confirmed purchase order.

This will have a significant positive impact on our liquidity by allowing us to invest in upfront procurement cost required to manufacture these vehicles. Our PO book also includes orders for 301 electric trucks. And last, our line energy PO book amounts to approximately $6 million mostly for charging infrastructure and related services.

Beside the EPA, ZTF and many other programs discussed previously, other legislation and funding initiated continue to support this shift to the electrification of the transportation sector, which represents great news for Lion and our customers. For example, the U.S. Federal Government recently published the U.S.

National Blueprint for Transportation Decarbonization and signed the Global Memorandum of Understanding on zero emission medium and heavy duty vehicles which commits to 30% of medium and heavy duty vehicle sales being zero emission vehicles by 2030 and 100% by 2040. In California, the proposed 2023 budget allocated $48 billion to climate change.

On the IRS front, Lion was officially approved as a qualifying manufacturer by the IRS, which means that our vehicle sold in the United States starting January 1, 2023 are eligible for tax credit of $40,000 per vehicle. Let me now provide an update on our supply chain.

Last year, the supply chain continued to be impacted by several factors, although to a lesser extent than in 2021. As discussed previously, this has generally translated into longer lead times, increased transportation cost, and ultimately higher cost of components for vehicle collection.

While supply chain issues are improving, we nevertheless expect continued challenges this year, which may impact our production cadence and vehicle cost.

To mitigate those supply chain impacts, we have successfully put in place several measures which we will continue in 2023, including qualifying additional suppliers and proactively managing inventory for critical components such as batteries and motors. At the end of the quarter, we had approximately 4700 BMW battery packs on hand.

This inventory should enable us to gradually convert to Lion batteries as we ramp up our own battery production, which I will address in a minute. As far as battery packs to be supplied by Romeo, the arbitration process is progressing.

In addition, we initiated legal proceedings against Nikola Corporation on the basis that it intentionally interfered in our contractual relationship with Romeo and in our business expectancy with respect to our relationship with Romeo. As you can expect, we will refrain from commenting on this situation.

Let me now talk about the development of our different vehicles. We have substantially completed the development work for the Lion8 bus, the LionD bus, the Lion5 truck and the Lion8 tractor trucks, and we expect these platforms to begin commercial production this year.

Please note that the timing of the start of commercial production for the Lion8 tractor truck could be impacted by the supply of the Romeo Power battery packs for the reasons I just mentioned.

Also, as a reminder, our buses will be manufactured at both the Montreal and Joliet plants, while our trucks will be manufactured in Montreal for the time being, where we have ample capacity to accommodate current demand, which takes me now to an update on the Joliet plant and the battery plant.

As announced, we completed in Q4 the assembly of the first electric school bus unit at our U.S. plant and delivered our first made-in-America electric school buses while we ramp up our manufacturing capacity in Joliet.

In this regard, we expect to manufacture a modest number of buses in Joliet during the first quarter, followed by a gradual increase in production throughout the year. We will continue to invest carefully in the Joliet plant this year with a goal to add an annual production capacity of 2,500 buses by the end of the year.

As for our battery plant, following the completion of the installation of the first portion of our battery assembly line in our battery manufacturing facility, we completed in Q4 the production of our first battery pack at our own battery factory.

Final certification of the first battery pack model is expected in the first half of this year, followed by a gradual production ramp-up in 2023. The first Lion batteries will serve to power the LionC and LionD school buses and the Lion5 trucks.

With our planned 2023 investments in the battery plant, we are targeting to reach a battery production capacity of 1.7 gigawatt hour by the end of the year. This represents capacity for approximately 5,000 vehicles in a mix of buses and trucks.

As for the innovation cyber building, the shell work is now substantially completed and this building will initially be used this year for test and certification of vehicles and batteries, for pre-delivery inspection of vehicles, and as a warehousing space.

Let me now talk about our recently announced North American agreement with Mitsubishi and EMGS Commercial Finance, to provide financing for all electric buses and medium and heavy-duty trucks through our Lion Capital Solutions offering.

This agreement will allow Lion Capital Solutions to provide our customers with financing solutions specifically designed for Lion school buses and trucks, thereby making it easier and simpler for our clients to secure the financing required for the purchase of their Lion vehicles, all of this without putting in very significant pressure on Lion's balance sheet as we will leverage Mitsubushi's vehicle financing expertise and capital.

This type of product offering should have a positive impact for our customers as it could eliminate or reduce upfront capital requirements for the purchase of Lion vehicles. Nicolas will now further discuss our financial performance for Q4 fiscal 2022, and he will also provide color regarding our CAPEX objectives for 2023..

Thank you, Marc. I will start with the financial highlights of the Q4 and full year 2022 results. I will then cover the 2023 investment outlook for our growth projects and conclude with our liquidity position.

During the quarter, we delivered 174 vehicles, consisting of 139 buses and 35 trucks, which translated into revenue of $46.8 million compared to $22.9 million in Q4 2022, a 104% year-over-year growth in revenue. 160 of the vehicles delivered in Q4 were delivered in Canada and 14 in the United States.

This was our fifth consecutive quarter of sequential growth in vehicle delivery.

We posted gross margin of negative 10%, mostly impacted by supply chain challenges, ongoing inflationary pressures within manufacturing costs, and our conscious decision to continue to invest in plant ramp-up, which is an important part of our growth strategy and our goal to achieve long-term profitable growth.

As previously explained, for the foreseeable future, gross margin should continue to reflect the investments we are making to establish manufacturing operations at our Joliet facility and the Lion campus and to ramp up production at all of our facilities.

As we scale production, we expect margins to improve as fixed costs will be spread over increased numbers of units. SG&A amounted to $15.6 million in Q4. After removing the impact of noncash share-based compensation, SG&A amounted to $13.1 million.

This is a slight decrease versus Q3 expenditure of $14.8 million, again net of noncash share-based compensation. Adjusted EBITDA was negative $13.9 million for Q4 as compared to negative $7.5 million for the same period last year and negative $15.1 million in Q3 2022.

During the quarter, CAPEX amounted to $39.1 million, including $18.9 million incurred for the Joliet plant and $19.6 million incurred for the Lion Campus as compared to $19.2 million during the same period last year.

Capital expenditures for Joliet in Q4 were higher than the previously disclosed estimate of $12 million, mostly due to earlier timing of equipment construction milestones and tooling costs.

Capital expenditures for the Lion Campus in Q4 were lower than the previously disclosed estimate of $35 million due to later timing of construction of the Innovation Center and due to battery plant equipment received in early 2023 as opposed to the end of 2022.

For the quarter, in addition to intangible assets which mostly consists in R&D, amounted to approximately $21.3 million as compared to $9.7 million last year. Let me now make a few comments on selected 2022 full year performance items.

We delivered a total of 519 vehicles during the year, consisting of 409 buses and 110 trucks as compared to 196 vehicles in 2021. 471 of the 2022 deliveries took place in Canada and 48 in the United States. This translated in revenue of $139.9 million for 2022, up $82 million or 142% as compared to $57.7 million in 2021.

Our gross profits were negative $12.9 million or negative 9.3% for the year and adjusted EBITDA of negative $55 million. Most of the CAPEX incurred for the year related to the two growth projects, $72 million was incurred for the Joliet plant and $71 million, including approximately $5 million of R&D, was incurred for the Lion Campus.

Finally, additions to intangible assets stood at $79 million for the year. Let me now spend a minute on capital investments for our growth projects in 2023. As previously signaled, we plan to further invest in CAPEX activity, although at a reduced pace versus what we did in 2022. For Joliet, we expect 2023 CAPEX to amount to $20 million.

These investments should allow us to have the infrastructure in place for an annual production capacity of 2,500 buses by the end of the year. For the battery facility, we expect to incur CAPEX of $23 million in 2023, with the goal of bringing annual production capacity to up to 1.7 gigawatt hours by the end of the year.

In parallel, we expect to incur approximately $22 million in CAPEX for the Innovation Center in 2023. We expect that approximately 55% or approximately $25 million of the $45 million in capital expenditures expected to be incurred in 2023 from the Lion Campus, will be financed through the federal and provincial loans secured for such purpose.

Let me now say a few words on liquidity and capital resources. In Q4, we successfully closed a $50 million offering of units, with each unit consisting of a common share and a warrant to purchase a common share. We also raised $10 million under our ATM program during the quarter.

Finally, we drew $56 million on our debt facilities, including the revolving credit facility, the government loans related to the Lion Campus, and on a new credit facility with Finalta and PDPC, which was used to refinance our previous credit facilities with Finalta. As of the end of Q4, we had a cash position of $88 million.

We were also owed $10 million on the government loans for the Lion Campus for CAPEX incurred in 2022. Shortly after the end of Q4, we announced the exercise of the over-allotment option for the unit offering, increasing gross proceeds by $7.5 million.

We also announced a sale-leaseback transaction for the battery plant building in Mirabel, raising gross proceeds of approximately $21 million. As previously mentioned, we expect that approximately 55% of the CAPEX to be incurred in 2023 for the Lion Campus will be financed through the federal and provincial loans.

At the end of the quarter, capacity of approximately $94 million remained available for issuance under our ATM program. While our balance sheet provides us with flexibility and runway, we will continue to closely monitor our liquidity in 2023 and look to seize opportunities that may become available to raise additional capital.

With that, I will pass it back to Marc for concluding remarks..

Thanks, Nicolas. Before we open the line for questions, let me conclude by saying that as we start 2023 with a good order book in our three manufacturing plants gradually ramping up, we have everything in place for long-term growth and profitability. Our focus is on sustaining this trend.

Also, you will be able to see all of our improvements yourself, since we will proceed with the official opening of our two new factories this year, starting with the visit of the battery plant this spring. Thank you for your time this morning..

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

[Operator Instructions]. Our first question today comes from Mike Shlisky with D.A. Davidson. Mike, please go ahead. .

Good morning and thanks for taking my question. I know you don't usually give any kind of guidance, but we're already at the last few weeks of March here. Could you give us some kind of directional or range for the production of trucks for at least the first quarter here? I'm sorry. I mean -- I said I mean trucks and buses, of course..

Trucks and buses, yes. Yeah, good morning Mike, this is Marc. Thanks for your question. Yes, absolutely. I mean, we -- yes, we don't give guidance, as you just said, but it's going very well in terms of manufacturing capacity.

Manufacturing capacity in Montreal, just a reminder that we have the manufacturing capacity of 1,000 units, and we're ramping up in Joliet as well. So what I can tell you is that the trend that we've seen, I'm sorry, in the last five quarters, keep growing. This is what we're expecting as well in 2023.

So I've said it several times, I mean, it's a constant growth one quarter to the other, and this is exactly what we think will happen in 2023 from one quarter to the other..

Okay, okay. Another question, I've got a whole bunch, but I'll just go to this other one here. So this week, I was at Work Truck week. I saw the Lion booth. You have a lot of nice signage around the show. And as you kind of walk the show, there aren't really any -- really many other Class 6 trucks. Maybe one or two other Class 5.

There really only really zero Class 6 trucks of any note at the show.

I'm curious, kind of how the show went to your folks? And b) I guess I'm curious, why aren't we seeing a real flow of orders there, if you really can't get an easy Class 6 anywhere else and Class 6s, in general, are in short supply on the ICE side?.

Yes. Well, I think we've said it right at the beginning, Mike. I mean, the Class 6 we have right now is one of a kind. I mean, this is a purpose-built electric truck like everything else we're doing, purpose-built buses or purpose-built trucks. So it's not an after talk for us. I mean that's part of the DNA we're doing. You're absolutely right.

I mean this is a market where there is almost nobody else right now, the Class 6. And you've seen this with some of the partnerships that we -- the partners that we were exposing with at this show. So we feel it's a good market for us. We feel that the truck market is just at the beginning of this. And you see that also with the order book at 301 unit.

To us I mean, it's only the beginning of that, and we feel that the supply chain crisis and the COVID crisis in the last couple of years had basically delayed everything by about two years. And so we feel very good.

And you -- if you walk the floor, you probably saw the number of partners that we have there and also the interest of the operators for our trucks. So that's true for the Class 6, but that's also true for the Class 8, but also for the other models, I mean, that we are launching this year.

Because after all those years of working so hard on those trucks like, for example, the Lion5 and the Lion8 tractor, well finally, I mean, we're launching them this year. And this is exciting. I mean all the operators you've seen on the floor, I mean, they want to see the Lion5. While many of them, I mean, they've seen them already.

They are driving them. And the good thing about those operators, they are looking -- a lot of them, they're looking at electrifying the whole thing -- so the whole fleet. So basically, they are looking at their operations. They have a very good understanding of the total cost of ownership.

And what that means -- and they spend so much money in diesel right now and in maintenance as well that they are excited by the trucks that we have right now and the ones that are coming along. So thanks for your question.

I see -- I think everybody is starting to see the difference between what we're doing and some of the other incumbent OEMs have been doing, which has basically got a retrofit of their current products..

Okay.

Just answer the tail-part of the question, the Astor Work Truck week itself, how do you feel it went, what feedback do your folks on the booth give you as far as you have customer visits, I think on order of speeds, etcetera?.

I'm sorry, Mike, yes. So the Work Truck Show, no it went well. I mean in those shows, it's always like the -- well, we do it. I mean, obviously, to meet some customers but we don't need those shows to meet with the customers. We do that already.

So it's really about -- also about brand recognition and also to expose some of the equipment that the operators can put on the truck. So went very well. I mean, that's part of what we're doing basically on a daily basis. We keep building the brand, we keep building the relationship with all of those customers.

So I think as I said earlier, I think we're just at the beginning of what we will see in the future. But this is the reason, we feel this market is going to be so big at some point. This is the reason why we've reserved three quarter of our capacity in Joliet, I mean, for trucks at some point in a few years from now..

Okay, I appreciate it. I will leave it there. Thank you. .

Thank you Michael. .

Our next question comes from Benoit Poirier with Desjardin Capital Markets. Please go ahead, Benoit. .

Yes, thank you and good morning everyone. If you look -- if we look at the order book, it was pretty stagnant in Q3.

Are you seeing bookings slowdown given the macro environment and higher financing costs, I mean if we look specifically for the truck venture, it has declined over the last two quarters so, what could explain this?.

Yes. Benoit, Nick here. Good to speak to you this morning. No -- to answer your first part of your question, no, we're not seeing a decline. I mean, it's -- there's a number of factors influencing the order book. And when we look forward, obviously, the EPA program we expect will help with the order book momentum.

We always have the smaller orders with a good number of operators that we're working to gain, and there's also the bigger contracts that we're working on. So we continue to feel a bit about the order book going forward. In terms of -- I think Marc addressed the question on trucks, but it's still early stage, but the momentum is building well.

And obviously, what we want to announce there is orders, but we remain excited about that..

Okay, okay. Great color. And just on the liquidity front, you were successful to get over slightly over $100 million of financing in the quarter. If we look at 2023, you provided great color about Joliet also Mirabel.

What about the acquisition of intangible and how should we look at the free cash flow burn for 2023 in light of the ramp-up in investment overall in your plants?.

Yes. I'll take it back here, Benoit. But when you look at the overall balance sheet, we had $88 million of cash on the balance sheet, and that's as of December 31st. And then right after the quarter, we have the sale leaseback of $21 million, another $7.5 million from the over lot option on the December unit offering.

We have the revolving credit facility of $200 million. There was about $7 million of capacity there at the end of the month, but -- at the end of the quarter, excuse me. But we expect the borrowing base to continue to increase as we scale.

And of course, we expect some upfront payments from the EPA for the purchase orders under that program, which will help significantly as we procure for those units. Recall that we had secured 109 of those purchase orders at the end of the quarter. The specific guide that we're giving for 2023 is really on $65 million CAPEX for the growth projects.

Of course, we'll need to continue to fund our operations, and there will be continued investment in R&D or in the acquisition of intangible assets. But with all that said, we feel that the balance sheet provides us with significant runway and flexibility. We will, of course, continue to explore alternatives to raise capital.

We're very mindful of the market conditions, and we'll of course, try to use, as much as possible non-dilutive instrument. And recall, we still have $94 million remaining on the ATM. So that could be one of the tools that we have to fund our operations..

Okay, thank you very much for the time. .

Thank you Benoit..

The next question comes from Chris Souther with B. Riley. Chris, please go ahead. .

Hey guys. Thanks for taking my questions here. Maybe a little bit more on the EPA program, 190 purchase orders. How many of those were applications that you'd file versus some of the free agents that were out there that are filed independently? And obviously, there was a really long waitlist of the program in the first round.

And can you talk a little bit about the discussions with the EPA for what they might be looking for in the next round and the structure and timing that you guys think might be the case for that 2023 round? Thanks. .

Yes. Hi Chris, in terms of the first part of your question, I'd say the majority of those purchase orders that were secured were from the 210, but we are seeing some successes in terms of converting the free agents. So that is going well. And I think more importantly, there's significant dialogue around free agents. So these things take time.

The deadline is April 28th and we will continue to make that, of course, a key priority for the company. And that's the number one.

What was the second part of the question again?.

That was about the further [Multiple Speakers]..

There will be $1 billion we expect allocated next year. We expect that part of it will be via a reimbursement program like the one that's in place today, but there could be a separate component as well.

And we expect to hear more in the first half of this year in terms of timing of the procedure and then the form of essentially the attribution of that $1 billion..

Got it. Okay. That's helpful.

And maybe on the truck side, it sounds like the Romeo outcome is really going to dictate the timing for Class 8, but can you talk a little bit about demand for the other vehicles here, you had a big uptick in orders in the third quarter and then it moderated a bit in this past quarter, I'm curious if you're seeing any momentum or customers that were waiting for kind of the IRA details around some of those subsidies? And what are you seeing kind of now that it is a new year and some of those IRA subsidies are starting to kick in there?.

Yes. Chris, this is Marc. The IRA has gone out, for sure. I mean 40,000 unit, I mean, is good. And as I was mentioning earlier, I mean, the TCO, I mean, this is really the tool that all the operators are using to purchase. And right now, the TCO is favorable in most of the cases. So that's great. I was talking about the Lion5 earlier.

There's a lot of momentum we feel around the Lion5. So obviously, we will be launching this one. This year, the same Lion5 will be used as the electric ambulance under the partnership that we have with Amers [ph]. So this is good. The Lion6, as we were talking earlier, I mean, there's almost nothing else. Nobody else in the market right now.

And this is a big market also. So we're expecting some good results with the Lion6. It's a matter of timing. You mentioned the Lion8 tractor. This one is -- we will be launching by the end of the year. You're absolutely right, I mean this thing with Romeo, I mean, it could have an impact, though on the launching date.

So that could delay the launch of that product. But that being said, though, we have orders for the Lion8 tractor right now, and there's a lot of momentum also with the customers. So we're trying to go as fast as possible, I mean, to launch this product.

And we feel that adding like the full line of products of medium duty and heavy duty also makes a huge difference. Because for most of the operators, they are buying many of those models. So every time we speak to a customer, they can buy like a Lion6, a Lion8 tractor and also a Lion5.

So adding the full lineup is going to be something very specific to Lion that most of the other OEMs will not be providing..

Got it. Okay. Maybe just the last one.

Would you be able to provide any update around either timing or volume do you think we need to hit for positive gross profit and positive EBITDA as you're starting to scale up here?.

Yes, I'd say, Chris, we continue to feel good about the unit level economics. Obviously, we're investing in scaling up right now, and that leads to some drag on the gross margin. As we continue to scale up, we think we're going to improve the gross margins and eventually -- the EBITDA as well.

But I won't provide a specific timing or number at this time..

Okay, thanks..

Thank you. .

The next question comes from George Gianarikas with Canaccord Genuity. George, please go ahead. .

Hi, good morning and thank you for taking my questions. I'd like to ask a little bit about this, the EPA program and obviously, we're very close to orders being concrete manifesting themselves materially and potentially in your order book.

Could you help guide us understand a little bit of what your market share expectations are in terms of conversion?.

Well look, I mean, we're going after all of the markets here. There's a clear list of all the applicants, and it's clear to us which ones are free agents. There are some areas where you see we're having more success in certain regions. But the idea for us is to focus on the regions with critical mass and where we're ready to deploy it.

So unfortunately, I can't point a specific targeted market share, but we've already started delivering some units. We've secured 190 purchase orders so far. And as I mentioned before, we think we have good momentum with the free agent. So we're looking to get as much as we can..

Okay. And then switching to the commercial side. I'd like to ask a little bit about conversion there as well because the inflation reduction and incentives are out. I believe that many of your offerings are eligible.

When do you expect momentum to turn there and to start manifesting itself in orders on your order book because I feel I understand the TCO argument is very compelling, the incentives are very compelling, but when do you think we'd start to see momentum in the P&L? Thank you. .

Yes, as Marc mentioned we're getting good traction in the discussions. And I'd say that's both discussions with the -- some fleet operators that are trying the units and are looking to eventually convert the full fleet as well as with some larger names that are thinking quite big.

And there were a number of parties we were speaking with a few years ago that were very enthused. And in the last couple of years, the dialogues slowed down and we're seeing that come back in the recent months. And so it's quite promising. I think what's interesting about the IRA $40,000 tax credit is that it applies really broadly.

And so either on its own or in combination with other programs, it's just something that helps scale quite a bit because of how broad the program is. And so we certainly expect to get momentum in the truck space this year. And what we want to announce there is the purchase orders and so obviously, stay tuned for that..

And George, yes, also this is on the U.S. side. And this $40,000 obviously in a way is helping us move the needle. But if you take a look also on the Canadian side, there are many programs out there like the [indiscernible] and also the one that we have in Quebec.

And those are making -- well, those will make, in our opinion, we feel a big difference as well. So there are that type of money right now. But there's also some other programs on the U.S. side as well like HVIP program. So there's like local money in many places.

And this is where we feel like that's what we're doing, like the Lion ecosystem with the Lion Grand, it's really easy because it's not easy to manage through all the money available right now. And this is one thing that we feel we're doing well with our customers. But many of those programs, I mean, just started to apply.

So -- well, we spoke about the EPA obviously on the SCUBA [ph] side, been waiting for a couple of years, and now we'll see the result of that. But we feel the same thing on the truck side as well. So there are some subsidies that just came available to the customers.

So some of that, let's say, new money is something new for the operators, but we're very up-to-date on all of that and we're helping them. But we feel that's obviously going to help because the upfront cost is always a challenge.

I mean, when you're selling electric vehicles, I mean, that's part of the challenge, and that's one of the reason we have this agreement with Mitsubishi and NGS as well because we feel that they can -- they need to finance their product. And this Lion Capital Solutions we feel will really help us move the needle as well..

So it sounds to me like you're saying that some of the bottlenecks are really Red Tape as opposed to anything else at this point in time just because the programs are new and people are still working through the math and the paperwork, so to speak..

Well, there's -- yes, there's a little bit of that, but there's also -- I mean that's a change. I mean, we've always said it, and we can see the difference between the truck business and the bus business right now.

We started selling the buses in 2016 and now when we're selling buses, I mean, question back then is that is this reliable, is it possible to make a living I mean, with those products, with those vehicles. And now, I mean that question, I mean, doesn't exist anymore. And the people, in most of the regions now, they're going full electric.

We feel the same thing will happen on the truck side, but that will not happen like just tomorrow. I mean those truck operators, they're making the calculation with us. They're training the product, and we feel that they will be purchasing a, let's say, modest number of units to start with, a little bit like we saw on the school bus side.

And after that, I mean, they will go with big orders but this is what we're doing now with the truck operators. And obviously, this money that we can use to lower the upfront cost is really going to help. I mean it's helping the TCO, it's helping them with everything, it's helping them making those decisions, yes..

Thank you. .

Thank you..

Our next question comes from Kevin Chiang with CIBC. Please go ahead, Kevin. .

Good morning. Thank you for taking my questions. Maybe you could speak to how you're ramping up labor here. You've provided great color on where Joliet is going to be and where the factor is going to be in terms of production capabilities.

I guess how is your ability to find headcount here in order to match your production targets, I guess, over the next couple of years here? And maybe if you could also comment on what turnover looks like today maybe versus a couple of years ago within your current facilities?.

Yes, good morning Kevin, this is Marc. So if I'm talking about the Montreal factory to start with, the manufacturing capacity for buses is 1,000 units. We add the equipment and we have the people to manufacture those units. So we're -- we have a good pace right now.

And the supply chain has been an issue and as I said just earlier, I mean, it will remain an issue probably for next year, maybe in the next 18 months. But we're able to navigate through that. You saw the Q4 results, and you heard my comments about the trend that we're going through. So is labor a challenge? Absolutely. I mean, are we doing fine? Yes.

We do have the people we need on the bus side. On the truck side, we do have the equipment we need to manufacture the 1,500 units a year, but we are ramping up the labor as need be. Because obviously, the -- well, you saw the order book at 300 units. And also, we need to match this with the timing of the launch of the new products.

So we don't see a specific challenge or with respect to having the right labor on the truck side in Montreal. Right now, let me speak about Joliet. In Joliet, we're doing fine. We have about over 100 people right now and we've invested.

And if you -- in the CAPEX that Nick was mentioning earlier, the manufacturing capacity we will have at the end of this year will be 2,500 buses. So our decision with respect to the trucks is remaining the same.

We will not start investing in more truck capacity, I mean, on a short-term basis because we have manufacturing capacity of 1,500 units on -- at the Montreal factory. So right now, we're ramping up the labor in Joliet as need be, but we have over 100 people right now and we're doing fine. We're doing fine.

And as I said earlier, I mean, we will be doing a modest number of vehicles in Q1, and we will ramping up -- we will be ramping up the output in Joliet throughout 2023. So that's great. We started manufacturing in 2022 and this is going to be a constant ramp-up.

So you're going to see that in our results, I mean, for the whole year, but this is exactly what we're expecting. And you can expect this number to go higher than the over 100 that we have right now. But we -- it's always a challenge to recruit the right people, but we are able to hire the people that we need right now in both countries..

That's excellent. Maybe my second question, the vehicle order book almost 2,500 vehicles. Obviously, some of these orders came in during various points in the cycle in terms of supply chain issues, commodity cost inflation.

And I'm just wondering how you protect the gross margin here as you deliver into that order book? Do you have a -- is there an inflation adjustment factor or some sort of indexing so at the time of delivery or when you put this vehicle into the production line that you get made whole on maybe unexpected costs that may have occurred over the past year or two or are these like fixed price contracts where you essentially have to manage the cost and the price lever is essentially fixed?.

Hey Kevin, Nick here. To answer your question there, yes, the purchase orders on vast minority were at a fixed price. We have, for sure, seen some inflation in the billet materials over the last year or 18 months, and that's reflected in the gross margins that we're presenting today. We continue to think that the model scales really well.

So the way to protect is obviously to start with a unit level economics that works well, and we think that's the case. That said, you've heard us in the previous quarters talk about some price increases that we rolled out. They are relatively modest price increases, and we're going to gradually start seeing those through the P&L.

And because of our direct sales model, we feel that we're quite nimble in being able to implement those price increases. But the bottom line, it's really starting with a unit level economic that works well and that scales well and we think that's the case today still with the figures in the order book..

I know you're not going to give me the number because I know someone tried to ask it earlier, but maybe just from a qualitative perspective then, do you think the inflation you've seen over the past couple of years here, and maybe some of this is transient over time, but whatever is structural, do you think that materially changed where you thought the breakeven unit number was versus what you -- today versus maybe what you thought a couple of years ago or has inflation been pretty manageable, and that breakeven target is still pretty much the same?.

Yes. For sure, it has an impact. But I'd say scale and unit mix will have -- are more important than just the inflationary pressure. And as I mentioned, going forward, when we think longer term, the price adjustments will sort of reset that. Recall that we've always said that our objective is to bring the price to our customers down over time.

For sure, inflation takes us in a different direction in the very short term. The objective remains that in the longer term. What it does cause certainly a delay in price reductions for us..

Kevin, also keep in mind that the batteries that we're using right now, like the BMW batteries, I mean we had a fixed rate. And we have 4,700 of those in stock as we speak. So this has an impact of about -- the batteries account for, let's say, 30% to 40% of the billet material of an EV.

So this is very significant and also, we're very pleased by the investments that we've made in the battery factory. The battery factory, I mean, this is going to make such a huge difference in terms of costing. I mean, at some point because obviously, we're shaving cost. I mean, when we're comparing to the others.

So we spoke earlier about all the advantages of adding our own battery factory in terms of cooling technology and all of that and better efficiency in all of this, but also better costing, and this makes a huge difference. And this is something we're totally controlling through this vertical integration.

So right now, I mean, for 2023, it's going to be mostly the BMW batteries that we will be using and this cost has not really changed. So that's a big piece of our billet material, and this is something that really helped us manage through this inflation..

Those are great points. And thank you very much. And best of luck in 2023 here. Thank you. .

Thank you..

The next question comes from Dan Levy with Barclays. Please go ahead Dan. .

Hi, good morning and thank you for taking the questions. I just want to go back to your comments on the Joliet ramp and plans to get to a 2,500 annualized capacity by the end of the year.

Maybe you can just talk about some of the gating factors that are required to be met to achieve that capacity? And then maybe you could give us a little more color of how we think about actual -- your run rate of production as that capacity is being unlocked?.

Yes. Thank you, good morning Dan. So yes, in Joliet, what we've been doing and we'll do the official opening within the next few months, so you'll be able to see that yourself as well. We have more working stations than we have at the Montreal factory. So basically, the goal in a few years from now will be to have a capacity of 5,000 buses.

And at the end of this year, it's going to be 2,500 buses. So those structure of what we're doing now with the number of working stations, which is about 70 working stations in Joliet has been planned for this kind of manufacturing capacity. So it's a little bit less labor intensive. We've invested a little bit more in automation as well.

But this was the plan. The good news, though, is that by the end of this year, with the CAPEX investments that we still need to do this year to get there, after the end of 2023, when we're looking at the battery factory at the 1.7 gigawatt hour, when we're looking at the 2,500 units in Joliet. I mean, there we're almost done with CAPEX investment.

I mean those plants -- and the same thing in Montreal, we're already done. So we're kind of done. I mean, this is a big year 2023 for us because this is really the year where we're managing those three manufacturing plants. And one of them, I mean, is already scaled up on basically on the school buses.

And the other two plants, I mean, we're ramping up but they are there. We have the people on site, a lot of the equipment are already there. So it's great. I mean this is -- 2023 is really a big year of, let's say, kind of turning point for Lion.

So basically, by the end of this year, if we hire the labor because we feel that we need to do the 2,500 units, well then, this will be on -- I think you were asking the manufacturing space. So it's basically like 50 units a week that we will be able to do if we decide to hire the labor in Joliet. But you'll see that by yourself.

I mean the equipment will be there. So the equipment will be there and after that, to go from 2,500 to 5,000, the amount of CAPEX needed is absolutely not the same that the amount of CAPEX it took to get to 2,500. So it's a lot more modest than anything we've been spending in the past.

So it will be kind of, let's say, almost easy to double the manufacturing capacity at some point. And we do not expect we will need to do that before probably a couple of years after that. But we are ready to take the market by storm and be even bigger than we are right now when the timing will be right..

Thank you. So just to interpret, it sounds like to unlock further growth, there's not a lot of additional spend required, meaning there's not sort of an underlying desire to manage expenses and to limit volume growth.

The heavy spending is done now?.

Well, I mean, we're very carefully managing the spend. I mean liquidity is top of mind for us, and we're making sure we're aligning the order book, I mean, with our spending. I mean, no doubt. And that's the reason we've decided to go to 1.7 gigawatt hour at the battery factory, and same thing with respect to the CAPEX that we're investing in Joliet.

So yes, we're being very, very careful about that. That being said, though, I mean going from 2,500 in Joliet to 5,000 units is a very minimal, let's say, spending if we compare to everything we've been spending so far. Because everything is in place to get to 5,000, but we will carefully manage.

And when we're saying then like going from 2,500 to 5,000, doesn't mean that we have to go from 2,500 to 5,000. I mean there are steps that we will be taking through ramping up. So if we need to go higher than the 2,500, because we're having a lot of success in getting all of those orders, we will be able to ramp up carefully in the CAPEX spend.

So CAPEX and all those investments are always top of mind in everything we're doing..

Great, thank you. And then just as a follow-up, you were talking about supply constraints still as an issue. Maybe you could just provide a little more color on those underlying constraints and you said you're taking action to mitigate that, what are those actions? Thank you. .

I'm sorry, I didn't get that....

The supply chain? Yes, well, that's exactly what we've been doing in the last couple of years, Dan. I mean, we -- one of the things we've been doing is the supplier redundancy, and it's going very well.

And also it's kind of -- it's almost natural that supplier redundancy, especially with what we're doing now, like we're the only OEM on the school bus side with factories on both sides of the border. So we're having suppliers on the U.S.

side, we're having suppliers on the Canadian side, but there's nothing that prevent us from using one supplier in one country and using it on the other side. I mean, it's need to be. So that's one thing we're doing.

At some point also what we did, a little bit like -- I don't like to say overstocking, but this is a little bit what we've been doing in the past. And I think it served us well. And one good example is the number of batteries we have now. 4,700 batteries, I mean, is great and the price also was fine.

We did the same thing with some critical components as well. So that's what we've been doing. Are we like out of the wood on all of those supply chain issues? Absolutely not. Can we manage and navigate through that? Yes. And we feel we're getting better and better from one quarter to the other.

Honestly, I feel that the worst is behind us, but we're very well equipped for any other headwinds in this regard going forward. And we feel there will be headwinds in the supply chain. Supply chain crisis, I mean, obviously, we've been talking about the war also that mean impact -- that's been impacting all of us. So there's a war.

There was a supply chain crisis for a lot of other reasons, including COVID and all of that. But I feel good that we're well equipped to protect Lion and our customers in those difficult times..

Okay. Thank you very much..

Thank you Dan..

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

Hi, good morning everyone. So on the call so far, we talked about supply chain, and it does seem to be limiting your production run rate, and I think you mentioned these issues could be around for another 18 months or so. But in Joliet, you believe you could have capacity to do 50 units a week by the end of the year, if you hire enough people.

So it sounds like you think the supply chain may not be a limitation for Joliet by the end of the year, is that a fair comment?.

Well, we feel that it's under control. It's more and more under control, Rupert. Let's put it this way. If you -- the discussions we had like a year ago, I mean, the tone was totally different. Right now, I mean, we feel better and better about the supply chain.

We still feel this is going to be an issue, but this limiting factor we feel is going to go away within the next 18 months. You're absolutely right. So hopefully, I mean, in a year from now, supply chain, I mean, will be something that will almost not be a limiting factor anymore, yes..

And are there any other limitations to the production, we know the order book is big enough, but are there enough of those orders that you could deliver on this year, let's say, to produce that kind of run rate?.

Well, there's always the final approval of the subsidies and all of this, but it's going well because most of the orders that we have always rely on subsidies. But absolutely, no red flag. It's going well, but we're aligning obviously, the subsidies, I mean with the delivery schedule.

And also when I was talking about our ecosystem in the past, making sure that the customers are very well equipped in terms of charging infrastructure to receive the buses and that they are being trained, is always something that is top of mind for us. So thank God that we had this Lion energy that we've launched several years ago.

We feel this is making a huge, huge difference, I mean, in terms of -- for the operations of the operators. So I would say for them, it's really receiving the buses and trucks when they need them, but they need to be fully prepared to receive them to make sure that it's going to be a very, very efficient operation.

And I feel this is something that throughout the years, we became very, very good at doing. So you heard me talk a lot of time about this ecosystem. I think it makes a huge difference. And I think it's one of the big advantage we have when we're comparing to some of the other OEMs that are selling to dealers.

Not easy for dealers to take, let's say, the EV turn and equip themselves with everything that they need to do that. And that's one of the reasons we've decided to sell direct. And I think it's serving us very well..

Great, thanks for that. And then secondly, on the battery plants. So you believe your capacity could be 1.7 gigawatt hours. I think you said that's enough for 5,000 vehicles. So obviously, by the end of the year, the battery plant capacity could be greater than what you need for your internal uses.

Are you contemplating using any of that capacity to sell to third parties or are there any other ways you can optimize those operations for say, improving your margins?.

It's always an option, Rupert, because this capacity is going to be there. And the reason we're scaling up to 1.7, I mean it's a matter of automation. Almost everything is automated. You'll see that, I mean we'll do an opening probably in April, and you'll be able to see that. It's a very exciting operation.

So it's a matter of automation, it's a matter of purchasing the right robots. So we felt the 1.7 gigawatt hour was the right number. Yes, you're right. I mean if we're selling only trucks, I mean, that will be like 2,500 trucks like if we're selling only like Lion8 tractor. If it's only buses, it's like 10,000 buses.

So we do have ample capacity in this regard. We're not planning on selling our battery packs to anybody else right now because time is -- time to market is of the essence as well right now. And doing this for other OEMs, means a lot more. If you want to do it right, I mean, this means a lot more than just selling a battery pack.

That will mean integrating this -- the battery pack with their current trucks or buses. So we're talking years for those OEMs to integrate those packs. This is something that many incumbent that we have through the years have been, I would say, understating, but it takes a lot of time to integrate a battery pack on a truck or on the bus.

So we're not thinking about any like short-term option like that because we don't feel it's going to serve us well. We want to keep this capacity because we feel that we will need it on a short or medium-term basis. And we want to make sure that we're fully focused on selling the Lion products and getting the better costs. So not an option for now..

Thanks. So just one final follow-up on that battery plant.

Are there any other limiting factors on the capacity of that plant, do you have any supply chain concerns for the battery plant or I know it's mostly automated so I imagine a few labor concerns, any other concerns you might be able to hit the run rate?.

Yes. No labor concern. You're absolutely right. I mean labor is not -- let's say, it's not a challenge. Supply chain is always a challenge. So I should say that we have the same supply chain challenges than we have for the rest of our operations. So we do -- we know the lead times of all of our suppliers.

We have a solid agreement for the cells, which is keen in what we're doing. So we've announced that last year. So this is in place and this is very strong. And we have a long-term relationship with most of those Tier 1 suppliers as well. So we then start -- with most of the suppliers, we then start building this relationship just lately.

I mean many of them, I mean we had them as suppliers for many, many years. So it's a very good relationship. It's almost partnerships that we have with those suppliers. So I would say in all the comments I've made earlier about the supply chain and the challenges for the next 12 to 18 months are the same, but we're -- we navigate with those.

And we manage those supply chain challenges the same way we're doing for the rest of our operations..

Great, thank you very much. I will leave it there. .

Thank you Rupert..

The next question comes from Michael Glen with Raymond James. Please go ahead Michael. .

Hey, everything has been answered. Thanks..

Okay. Thank you, Michael..

Our next question comes from Abhi Sinha with Northland Financial. Abhi, please go ahead. .

Yeah, thanks for squeezing me in. So just one question on supply chain, just last one. I know you have answered a lot.

Is there any way you can quantify the impact, whether on revenues or in terms of number of units, what the exact impact could have been -- was there, there was no supply chain impact, what the revenues or the units could have been?.

Yes, Abhi, I mean, well not easy to say. Obviously, we've been managing those supply chain challenges. So we've been hiring the people we needed accordingly with our production schedule. So the good news is that we have a good, solid order book and this is where it starts.

And when you're looking at the number of buses and trucks we can do, we're very well equipped to do that. But I spoke about this earlier. I mean, I think part of -- we're being very careful with the capital spend. And capital spend is not only CAPEX, it's also about OPEX.

It's also about operation and making sure you're making money on every single buses and trucks that you're selling, and this is what we're doing. So we align all of our spending according to the economic conditions, including everything. So not easy to answer.

I mean, if there was no supply chain challenges, I mean, units we could have done, but obviously, we could have done a lot more units than the ones that we did last year..

And did you face more issues on the Canada side or the U.S.

supply chain?.

Well, I would say it's on both sides of the border. I mean we have a lot of suppliers on both sides of the border. So we're trying to be as local as possible. But we're -- it's really like the landed cost and the quality, that's always top of mind for us. So we have suppliers in Canada. We have suppliers in the United States.

We have suppliers in some other countries as well. We're trying to avoid any authoritarian countries, and we will not -- as you know, we will not be doing business with authoritarian countries in a few years from now. But I won't -- I don't think there's any significant difference between Canada and U.S. right now.

I think it's really a matter of understanding and really knowing your supplier because they have their own challenges. Sometimes, they will be manufacturing in some other countries as well for some components that they're putting into the components that the they are selling us.

So our game is really to stay very close to them and make sure we understand their business and we understand their lead times and we have a full transparency on when they will deliver the products. But I don't see any significant difference between the two countries..

Sure, thanks for that. Just one last, if I could. On the batteries, if I understand that you switched to BMW because looking for more robust, more powerful battery.

When you are making your own, I'm trying to understand like if you could provide some color on what's the differentiating factor, I know you talked about the cost, is there anything else that adds on with this charging speed, more power? And what does it do to the margin -- immediate margin impact for you guys in terms of any kind of quantification, how accretive would that be?.

Well, Abhi, there are so many differences between our packs and any packs that an OEM can -- could be buying from battery pack suppliers. First of all, I mean those packs are, let's say, custom made for the Lion products. So it's a perfect weight and balance of our trucks and buses.

And the operators are saying they're seeing a huge difference because of that. So not only, I mean, it's a better driving experience, but it's also safer for them. And it's also a way to put more kilowatt hour if needed. Like we do have a modular approach. And we are selling in multiple of 70-kilowatt hour or 105-kilowatt hour as well.

So basically, the customer can buy and invest the money in the number of kilowatt hour they need for their operations. So that's a huge difference. In terms of technology as well, I mean, wow, it's like night and day. The efficiency we could get from our batteries is better than most of the technology that we see out there right now for many reasons.

I mean the BMS is really state of the art, the battery management system, but also the BTMS, the thermal management system, state-of-the-art, fully custom made to the Lion batteries as well and the users that we're doing with the Lion trucks and Lion buses.

But also, I mean, the way you charge, like the speed -- the charging speed for the customers or for the operators, it makes a huge difference. So now most of the operators and all of the operators on the truck side are using Level 3 charging stations, and we became very, very good at all of that with respect to the Level 3.

So right now, I mean, we're at 350-kilowatt, but we're working on getting a lot more than that in the short-term future. So for a lot of operators that are using our trucks like 20 hours a day makes a huge difference. So charging speed as well, but also, I mean, the cooling system will affect the efficiency of the battery.

It will affect the charging speed for the batteries as well, but also the life cycle. So when you are able to cool your batteries in a timely manner, well, you're helping your life cycle. So your life cycle is getting better also and we feel that all of those factors are making a huge difference. Now you've been asking about the gross margin.

Nick, I don't know if you want to comment any more on this?.

Yes. Look, I'd just say that we're -- we expect to get margin improvements over time from switching to our own batteries. Obviously, we're supplying at the commodity level. We're cutting in terms of the areas. We're reducing, obviously, the profit that we're paying to third parties.

There is some ramp-up in terms of getting there, but that's one of the key components that will certainly help..

Sure, thank you. That’s all I have. Thanks. .

Alright, good morning Abhi. .

Our final question today comes from Craig Irwin with Roth Capital. Craig, please go ahead. .

A very simple question. So you guided for $20 million and then what was it, $45 million for CAPEX.

Is there any other CAPEX or are we looking at total CAPEX this year at $65 million?.

No, there is some other CAPEX that qualified, Craig, at sort of maintenance and procurement CAPEX, etcetera. Over the last year, that CAPEX was about $10 million. That's in 2022..

Okay, thanks Nick. Thanks guys. .

Thank you Craig..

Thanks. Those are all the questions we have time for today, so I'll turn the call back to the management team for any concluding remarks..

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

Thank you, everyone for joining us today. This concludes our call, and you may now disconnect your lines..