Lion Electric Struggles To Make EV Buses Profitable (NYSE:LEV)

Summary

· Lion Electric provides multiple all-electric vehicles to school bus and truck fleet owners in the United States and Canada

· The total addressable U.S. market for school buses and medium and heavy-duty trucks is $110 billion annually combined

· Lion Electric is growing rapidly but continues to be highly unprofitable and is burning through its cash

· The company has the backing of some very patient investors.

· If Lion Electric continues to struggle financially, it could become a desirable takeover target for a larger company such as Blue Bird Corp.

Lion Electric $1.38 (NYSE:LEV) manufacturers purpose-built all-electric heavy-duty trucks and school buses. The company has two assembly plants in St-Jerome, Quebec, and Joliet, Illinois. A third battery plant is in Mirabel, Quebec.

The company went public in May 2021 through a combination with Northern Genesis Acquisition Corp., a special purpose acquisition company, or SPAC. The transaction raised $490 million in cash, with $400 million to fund its growth strategy and $90 million to repay its credit facility.

Post-IPO, Lion’s shareholders owned 68.1% of the company, with the remainder held by Northern Genesis’s shareholders and those who participated in the PIPE (private investment in public equity) to raise additional funding.

The company is a leader in the all-electric school bus industry, with over 1,400 deliveries and orders for more than 2,000 as of November 6, 2023. It is looking to attain the same dominance with heavy-duty trucks. Founded in 2008, the company put its first all-electric school bus on the road in 2016. It’s grown significantly in the eight years since.

However, while Lion Electric’s revenues are growing rapidly, its financial losses and negative free cash flow are accumulating, indicating that the balance sheet will need additional capital, debt or equity, to keep it on the pathway to profitability.

Despite the 95% decline in the share price since early 2021, aggressive investors looking for penny stock investments will be intrigued by the company’s long-term potential. The question is whether it will remain in business long enough to reach this potential.

Sales are growing fast, with new models added for school buses and heavy-duty trucks

Lion Electric has two all-electric school buses, the LionC and the LionD. At the end of January, the company began deliveries of the LionD in California. The new school bus model has the capacity for 83 children and a range of 155 miles on a single charge.

The average LionD school bus will eliminate approximately 23 tons of GHG (greenhouse gas emissions) annually, providing zero-emission, safe transportation for schoolchildren in California and elsewhere. The LionD is manufactured at its Illinois factory. Although the plant’s current output is 2,500 vehicles per year, it has a capacity of 20,000. The LionD will help fill this capacity.

The LionD has a driver-centric cockpit with an LCD (liquid crystal display) interface for electric vehicle management. Like the LionC, it has rust-free composite body panels and staircase, a low-voltage battery compartment, a modular lower skirt, and a one-piece seamless fiberglass roof that eliminates thousands of rivets and potential leak points, reducing time spent in the shop for repairs to a leaky roof.

The company is also ramping up production of heavy-duty all-electric trucks. In March 2023, it announced the launch of the Lion5, an all-electric Class 5 truck powered by the company’s new internally developed and manufactured 800V battery packs. The Lion5 has a maximum GCWR (gross combined weight rating) of 30,000 pounds and a maximum payload of 12,500 pounds, with a range of 200 miles. The bus can be charged at 80% in 1.5 hours.

In addition to the Lion5, the company expects to begin production on the Lion8T by the middle of 2024. That will bring its total number of truck models on the road to four.

Growth Strategy

Although Lion Electric has only been a public company for less than three years, it’s been developing all-electric transportation since its founding in 2008. Its first LionC school bus was delivered in 2015, and it launched the Lion8 all-electric truck in 2019. Its focus has always been on building all-electric vehicles designed and assembled in-house.

To create the broadest product lineup of all-electric medium and heavy-duty urban vehicles in North America, it went to work early on, creating the manufacturing capacity to meet the needs of its existing and future customers.

This includes building an ecosystem dedicated to electric vehicle fleet operators.

Lion Electric performs several functions to facilitate sales: educating its direct sales team about the nuances of EVs, creating 12 Experience Centers across the U.S. and Canada to provide potential customers with a test drive, financing solutions to acquire electric vehicles, obtaining grants from government agencies, or providing aftermarket real-time data analytics for scheduling ongoing maintenance.

As a result of its attention to detail, it’s put more than 1,850 all-electric vehicles on the road, with more than 22 million miles traveled by customers’ employees.

The company aims to capture significant market share in the school bus and medium and heavy-duty urban truck markets. The annual TAM (total addressable market) in the U.S. and Canada is $10 billion for the former and $100 billion for the latter. Approximately 45,000 school buses are sold each year, and 335,000 trucks.

Lion Electric’s selling proposition regarding its trucks is that they have a lower TCO (total cost of ownership) than conventional diesel-powered vehicles. In the North American truck market, it is targeting the top 150 companies, whose fleets amount to 700,000 trucks. Its clients include Amazon, Ikea, DHL, and the New York Times.

As of February 28, 2024, the company had a total order book of 2,076 EVs valued at approximately $500 million. Of those, 1,791 are school buses, with 285 trucks.

In addition, a part of the business that doesn’t get much attention continues to grow. As of February’s month end, it had $4 million in charging station orders.

Strengthening the balance sheet

Between Q1 2022 and Q3 2023, Lion Electric had six consecutive quarters of sequential revenue growth. That was broken in Q4 2023, with revenues of $60.4 million, down from $80.3 million in the previous quarter. However, its revenue in the fourth quarter was 29% higher than a year earlier.

Revenue generation isn’t the problem. Profitability, or lack thereof, and the strain it puts on the balance sheet is a problem.

The company finished 2023 with a total debt (including lease liabilities) of $317.0 million, a relatively high 84% of its currently depressed market cap. At the same time, it finished the year with just $29.9 million in cash on its balance sheet. Its cash position fell by 66% in 2023, and it’s now one-tenth what it was at the end of 2021.

As a result of the increased debt in 2023, Lion Electric paid $17.9 million in finance costs in the past year, plus an additional $5.0 million in interest paid in kind, which gets deferred until loans mature.

The significant addition to its debt in 2023 was the issuance of $142 million in convertible and non-convertible debentures in July.

The convertible debentures were unsecured, carried a 13% interest rate, and could be converted into shares at an exercise price of $2.58, about $1 above where it’s currently trading. The non-convertible debentures pay 11% interest and are secured. As part of the non-convertible debentures, investors received common share purchase warrants to acquire 22.5 million shares of Lion Electric stock for $2.81 CAD.

If you exclude asset impairments and other one-time items, Lion Electric had an EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $34.3 million in 2023, 37% less than a year ago, on $253.5 million in revenue.

If it continues to generate negative cash flow – it was -$110.0 million in 2023 – it likely won’t matter how great its products are.

Rightsizing the business

Hemorrhaging cash and losing money on every sale has put the focus on lowering operating expenses.

Lion Electric crossed this bridge this past November when it announced the layoff of 150 people or 10% of its total headcount. The company made the cuts across every part of its business in the U.S. and Canada.

“Although this was a very difficult decision and we are sad to part ways with valued employees, this initiative was the right thing to do for the business at this point in time,” said Marc Bedard, CEO-Founder of Lion. “I am confident that the workforce remaining in place is more than capable to continue growing Lion’s leadership.”

According to the company’s 2023 MD&A, Lion Electric incurred $1.4 million in restructuring costs as of December 31, 2023. Approximately $714,865 has already been paid out as severance, with another $711,622 remaining.

In 2023, the company had $51.5 million in administrative expenses and another $19.7 million in selling expenses for its sales force. Those two expenses combined accounted for 28% of its revenue in the past year. It wouldn’t be extraordinary if it made money. However, it had a gross loss of $5.5 million on its record revenue of $253.5 million.

It likely isn’t finished cutting costs.

Suitable for aggressive investors only

Although Lion Electric benefits from a key segment of vehicle manufacturing, with demand only expected to rise as the global economy switches to EVs, ongoing government subsidies for that switch are uncertain, especially as nations continue to grapple with high inflation.

While there is high risk associated with an investment in Lion Electric stock, aggressive investors should be encouraged by the commitment made by Power Corporation (OTCPK:PWCDF) – its Power Energy subsidiary owns or controls 34.5% of the stock. In addition, Investissement Québec, the government agency promoting investment in Quebec-based industry, owns 8.6%.

Patient capital has backed Lion Electric. If the company can figure out how to make money selling EV school buses and trucks in the future, they’ll make out exceptionally well on their investments.

By Will Ashworth for TSI Wealth Network

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.