Vicinity Motor Corp (VEV) 2017 Q4 法說會逐字稿

Welcome to the 2017 year-end financials conference call. My name is Adrian, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

This call contains forward-looking statements, which reflect the expectations of management regarding Grande West Transportation Group Inc., the company, the future growth, results of operations, performance and business prospects and opportunities. The word believes, anticipates, plans, expects, intends, projects, estimates and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the management current expectations regarding future events and operating performance and speak only as of the date of this call. Such forward-looking statements are based on a number of material factors and assumptions, including but not limited in any manner to the availability of sufficient working capital to market the company's products and provide after-sales maintenance and support services to the company's customers, access to adequate services and suppliers to operates company's business, economic conditions, commodity prices, foreign currency exchange rates, interest rates; access to capital and debt, markets and associated cost of funds, availability of a qualified workforce, and the ultimate ability to develop, manufacture and sell the company's products on economically favorable terms. This call does not form part of any offer of securities or constitute a solicitation of any offer to purchase or subscribe for securities. The sole purpose of this call is strictly for information.

I'll now turn the call over to William Trainer. William Trainer, you may begin.

Thank you. Thank you, and good morning, ladies and gentlemen. Welcome to the 2017 Fourth Quarter and Year-End Results Conference Call for Grande West. I'm William Trainer, and joining me today on the call will be Jean-Marc Landry, CEO; Aaron Triplett, CFO; [Joe Bleakley] with Corporate Communications; John LaGourgue is off sick today.

I'd like to start off by thanking our customers, our suppliers, our board and the entire team at Grande West. We consider 2017 a pivotal year for Grande West. We continue to be confident in our market position, our strategy, our business plan, and we're excited today to report record performance for 2017.

2017 started slowly with 12 deliveries in Q1, 32 in Q2, an amazing 75 in Q3 and 33 in Q4, for a grand total of 152 buses. This equated to record revenue of $54.7 million, a major increase over the $8 million we did in 2016. With new orders received in Q4, we're now sitting with a current backlog of approximately 300 buses.

We manufactured 217 buses in 2017, and we'll manufacture over 240 in 2018. We have proved that we can build and deliver product, and we are now seeing the average selling price increase and gross margins improve as our legacy orders are now being delivered.

It's important to know that we have many tenders awaiting closure. Some customers have notified us that we're successful, but we have not yet formally received documentation, and therefore, have not added it to our backlog as we only report purchase ordered buses in our backlog.

From an organizational perspective, 2017 was our first full year of continued production and deliveries. With this growth, we encountered many challenges, that is your delayed production or deliveries.

We delivered 75 buses in Q3, and we expected to deliver the same in Q4. Q4 has seen only 33 delivered. This is due to the amount of local-sourced IT equipment that needed to be installed and trying to coordinate customer delivery acceptance during the holiday season. We're now very comfortable that we've worked through the bulk of our startup problems, and we have a strong organization to succeed.

In 2017, we made prudent capital investments to enhance our competitiveness and meet customers' expectations. These range from new product development, facility upgrades, manufacturing optimization, increasing parts support capability, operation and systems upgrade. These totaled over $2.3 million and includes service shop upgrades of $200,000; parts department upgrades of over $100,000; Altoona testing, over $200,000; $300,000 investment into the installation of our Oracle ERP, Enterprise Resource Planning system; over $500,000 invested into developing in the U.S. and setting up production; and completing R&D projects and IQA testing and compliance in over 8 projects, totaling over $1 million. Most of these are one-off capital investments. And although they take away from our 2017 profitability, make us much stronger for 2018.

We now have 50 people in 3 different facilities.

2017 seen the infrastructure put in place to meet the high demand for our award-winning Vicinity buses. Breakdown of our financial statement show that Canadian operations sold and delivered 110 buses and achieved an adjusted EBITDA of about $2 million on these sales. U.S. operations sold 42 buses and achieved adjusted EBITDA, a loss of about $1 million.

It took the Canadian operation over 3 years to achieve positive results. We expect the same success in the U.S. that we've seen in Canada. The U.S. market is 10x the size of Canada. In our investment presentation, we've presented outlook on the size of the market and expected results.

2017 seen Grande West add CNG propulsion to the lineup of our Vicinity buses. We have successfully introduced 14 to the Atlanta Airport, and now we're just beginning to deliver CNG buses in Canada.

Electrification is on our agenda. We have bid a tender in Canada and are awaiting the results. Electrifications of transit and shuttle bus fleet will happen over the long run, and we want to be ready when this change occurs.

As many are aware, we have strong relationships with our overseas partners, and we plan to leverage their purchasing power to keep our Vicinity buses competitively priced and positioned to enhance growth.

I will now take us through the highlights of our financial results in the quarter and year-end. And following that, I'll pass you over to our CEO, Jean-Marc Landry. He'll provide some insight into the -- into our outlook and an update on our market share, and then we'll open the call to your questions.

On the financial results, I'm just going to give you the highlights and direct you to our published statements and management discussion analysis of financial statements, which are available on SEDAR. Grande West audited financial statements are presented in Canadian dollars. I also want to note that IFRS has made changes that affect our gross margin. Many items that were classified as operational expenditures are now included in cost of goods sold.

In the fourth quarter in 2017, the company generated consolidated revenue of approximately $13 million. This represented 33 bus deliveries, and we had a net loss of about $642,000. But we did see the average selling price increase to about $370,650 per bus.

Aftermarket revenue increased 256% from the past 12 months as we're now seeing the Vicinity fleet numbers increase.

Total revenue for 2017 totaled $54.7 million, and this is up 575% compared to 2016. The company has a loss carryforward of about $15 million, and we'll use this to offset any tax payable in the future years.

Now with that, I'll turn it over to J.M.

Good morning. I've been with Grande West for the last 4 years now as VP of Business Development. Many of you, I've met before, and for those that haven't, hopefully, we'll get a chance to meet soon.

A little bit on the last 4 years. I still remember, when I joined the company, it was a very small company. We had $3 million, $4 million in revenue. When I joined -- my background was with Nova, so when I joined the company, I really saw a bright future for a small, mid-sized, heavy-duty, low-floor bus.

So I think it's very impressive to see how far along we've come over the last 4 years. First couple of years were pretty slow in just trying to establish the company. People really didn't know Grande West. Didn't know much about the Vicinity, it was brand-new. I still remember, we had 2 customers when I started. So to see us today, announcing record results of over $50 million in revenue is pretty amazing. That really was achieved -- those sales really came in, in the first 3 years, so it's quite impressive.

Also, our results, our bottom line is still not quite where we want it to be. But definitely, one of the best years that we've had in the history of the company. So it's all trending in the right direction.

A little bit about the -- my background, before I get into the priorities and 2018. I spent 8.5 years with Nova Bus as VP of Sales. I joined the company in 2004 when it was really going under a major restructuring. The company had some great years and had just gone through some really difficult years, so they needed to rebuild. When I joined the company, it was slightly bigger than, in terms of revenue, what Grande West is today. And within 7 years, we grew the company tenfolds over what it was.

So being here at the head of Grande West today for me is extremely exciting, I've gone through this before. I've had tremendous success at growing a company that was doing exactly the same type of work as we're doing here, so this is all known environment for me. So this is -- yes, the last 4 years were great. The next few years ahead of us are extremely exciting. We started -- when we started, we were only focusing on Canada, the Canadian market. We've established ourselves as the leader in the mid-sized heavy-duty bus market, and we are setting out to do the same in the U.S.

So the next stage of development for Grande West is really -- the priority is on the U.S. market. That means sales, it means Buy America, and it means ramping up production in our Atlanta production facility. It's also maintaining and keep growing our market share in Canada and leadership position in our market. In Canada, we've done extremely well. We want to secure and make sure we keep going in Canada. And we also need to optimize our processes.

When we were smaller, $5 million -- $4 million, $5 million, $6 million, $7 million in revenue, our systems were good for the size of the company we were. At this point, you heard William talk about our ERP system. There is a number of things that we have started to do in 2017 to really set up the company to be able to handle these kind of expansion that we are setting to achieve, and ERP is one of them.

The other thing that we've done that is extremely important is that we had a couple of vacant positions. One was a board position that we filled with Keith Parker, which we're extremely happy to have on board. He's the former CEO of MARTA, that is the Atlanta-based transit authority. He is a very high-profile, highly respected transit executive. Been in the industry a very long time and knows a lot of people, and he'll be extremely valuable with Grande West executive team to really fine-tune our U.S. strategy.

We've also announced this week the addition of a VP of Sales and Marketing for Grande West, his name is Rob Mowat. Rob is someone I've known for many, many years. He is a seasoned sales executive with proven track record of delivering results. He was -- before joining Grande West, he was the Senior VP of Business Development for Transdev. Transdev is a company that is a private operator that does transports -- provides transportation services for public and private transit systems across North America. Very, very large company. So Rob and I go back to the Nova days. When I was at Nova Bus, I hired Rob to lead my U.S. expansion, that was in 2008. Nova opened a brand-new facility in the U.S., wanted to reenter the U.S. market for Buy America, so I hired Rob. And together -- we worked together for 4 years. And we went from a start-up in the U.S., and few years later, we had hundreds of buses on backlog for our U.S. plant. So this is a little bit of a repeat for us. We're extremely -- both of us are really extreme happy to work -- be working together again. And then, we're really setting out to do the same at Grande West. So very excited about that.

So those were 2 key positions that needed to be filled, that is done. The rest of our team is in place and working hard to ramp up our U.S. operation.

What else do I have here? Yes, so that covers most of that part. Really, now if we get into the 2018 forecast, we're talking about 200 -- we've announced 240 units to be delivered in 2018. We're trying to set as realistic as possible objectives. We have just over 300, or around 300 firm orders or backlog for 2018. If we can deliver some of those units, some of them will carry into early 2019. They might get into 2018, but we prefer to set some realistic numbers, and we'll readjust as we go, if required.

If you look at our U.S. assembly plant, late 2017 is really where we have done all the work to set up the facility. We were hoping to be in production in 2017 in the U.S. on a very, very low volume, that was delayed to the first quarter this year. So basically, if we had to do round numbers, Q4 was setting up the facility in 2017. Q1 2018, we built our first Buy America-compliant bus. It's almost complete as we speak. The process was audited by a third party consultant that we hired to make sure that we were doing everything by the book or into -- in accordance with Buy America requirements. So that's moving along well. It's not quite complete yet, but it's moving quite well.

Second quarter of 2018, basically in April, we'll be setting up for production for 2 buses. So ramping up from 1 bus to 2 buses, and our goal is to ramp up throughout '18 as quickly as we can to get to 10 buses per month being built out of our Atlanta final assembly plant.

Margins for those -- for the 2018. As you've seen in the past in Canada, our margins -- we have some legacy accounts. When you start trying to implement yourself in a market, you have to go in a little bit more aggressive to get some of the orders. We did that in Canada. We've proven that our margins now have gone up. Our prices have gone up as well. We're expecting to get a little bit of a repeat in the U.S. We are still very competitive, but we expect to have strong competition as we're trying to get into the U.S. market. Some of our competitors will be waiting for us, and so we might have to go in a little bit aggressive in the beginning. So we're not expecting some big variances on our gross margin. We're expecting to -- 2018 to look about the same as 2017. And there, again, we're trying to be -- to give you some -- as realistic as possible forecast.

Maybe on the R&D projects. We have talked about a smaller vehicle. We've put that on hold, or any of the major R&D projects that we were working on, we've temporarily put on hold so we can have all our resources focusing on our priorities. And that's -- as I said before, it's setting up our U.S. operations and also optimizing our processes with the ERP system and some of the other things that we're doing.

So that covers that. If -- to summarize, let's say, we have -- the team is in place. We've hired some really high-caliber people that have strong transit industry background. And both of those gentlemen, both Keith and Rob, are based in the U.S. in Atlanta and in Austin, Texas. Rob lives there, and he's going to continue to live in the U.S. And his focus is going to be -- every morning when he wakes up, is going to be the American market. So this is directly in line with our strategy and our focus and our priorities.

2017 was a record year. 2018 is going to also be a very important year because, really, 2018 is going to be a springboard into our next phase of growth. So the quicker we can get the production ramped up in the U.S., the quicker we can deliver more volume. And if -- really, with the additional efforts on the sales side, it's all going to be, how quickly can we get the orders? And that will really determine what '19 and '20 are going to look like.

So at this point, this covers most of what I had to present. We'll open up for questions, Will, at this point.

Yes, let's open up for the question-and-answer period. Thank you.

Thank you.

(Operator Instructions)

And we have Ahmad Shaath from Beacon Securities on the line with a question.

I guess, I'll question first on the delays in Q4 and the spillover to Q1 '18. Can you give us a little bit more color as to why the deliveries were below our expectations? We were hoping to get 200 delivered in 2017 and 81 -- around 81 in Q4. So what is the exact reason for the delays? Is it signing off similar to what we've seen before? Or is it operational or combination of both?

Well -- it's William Trainer here. You know Q -- what we were looking for, for 2017, by the time we got into production and got all our vehicles coming through, as you can see, we had 75 in Q3 and our backlog in Q4 ramped up, and it's just getting customer acceptance. For us, to get the customer acceptance with the requirements, we have to actually have customers delivery acceptance in order to show revenue earned on that. The revenue earned is when, Aaron, help me with this, control on possession's actually passed.

Yes, so the customer has to take control in possession of the vehicle. And we had the vehicles substantially complete, it's just that we just didn't meet the required revenue recognition. So those slid into the -- into Q1 and Q2.

Okay. So you had 81 buses assembled and ready to go but only 33 were accepted, that was the case?

Yes, well, we had 33 buses that were accepted, and we had 63, I believe, buses in inventory. So...

So 63 on top of the 33? So total 96 that were ready to be delivered in Q4?

No, different buses were at various stages. Most were substantially complete. Some buses were shipped to our dealer in the east, some were just getting at our location. But there was a good amount of...

It was just a timing issue. And mainly -- and I must add to this. In the last quarter, a lot of the buses that we had to deliver had needed a lot of local installs then. ITS, intelligent transportation system, equipment put on. So those were things like cameras and CAD/AVL and other systems that were locally installed. Those were relying -- we are relying on some of our suppliers to do that.

And getting towards year-end to try and get all of these supplies and ourselves all synchronized on when they can work on it, and getting closer to year-end was a little bit more challenging than we expected. And then to try and get the customers in here at the 11th hour to try and get the buses inspected and approved and taking delivery acceptance didn't work out quite as well as we were anticipating. So it's not about the buses not being built, it was more about getting the final preparation done so we could get the customers to take delivery before year-end. So between -- it was really between -- the struggle -- the challenge was juggling all those external suppliers with our sales and the customers and year-end was more challenging than expected. So really, it's not a whole lot more complicated than that.

Okay. So if we've seen the spillover of around, let's say, 50 buses to Q1, so we should have expected Q1 deliveries to be substantially above 50? Or is it marginally above 50?

Marginally.

It's marginally over 50. But really, it's -- at that point, what's billed into the new year, we didn't ramp up our staff or -- in any great way to absorb all that in the quarter. So it's really what we weren't able to finish in -- late in the year is getting -- has gotten done early in this year. But it's -- really, it's just pushing out the other deliveries after that. So we're just -- it's just spreading an even load throughout -- beginning of this year. So there's no peak to 100 in the first quarter and then back down to something else. We're just -- we were at 75 in the third quarter. We were under target in Q4. And now we're getting to more reasonable, steady deliveries starting in first quarter.

So -- and my understanding is that Q4 was purely all Canadian deliveries, right?

Pretty much, yes.

Yes.

Okay. So what is the reasonable run rate we should factor in for the Canadian operation in terms of just -- we forget a little bit about final sign off and from the transit agencies, in terms of operations-wise, what is the run rate right now in the Canadian operation for the quarter?

We're saying -- we've said too -- this is Jean-Marc. We have said 240 units is a realistic target for next year -- for this year, sorry 2018. Over 75% of that is Canadian orders and the balance is U.S.

So if I got that right, it's around -- like around -- just shy of 50 each quarter out of the Canadian operation?

Yes, that would be correct.

As I think we've said, it might change a little bit. It might be a -- it might not be an even number every quarter. But it should be -- depending on...

With current operation and the current staffing and with expansion of the facility and the 2 ways and everything, we're looking at just shy of 50. That's a fully ramped up run rate in terms of Canadian operation, right?

It should be close to that.

Yes, okay. And I guess then switching focus to margins and given the -- we've seen some accounting changes with the fully audited statements. Under the new way of reporting, what is the reasonable gross margin we should look at? Because I think 2017 on buses, we're looking at 10.5 percentage points in gross margin and around $6 million of other expenses. So can you give us a little bit more color on where these 2 items are going into 2018? Jean-Marc, you spoke about similar gross margins of 2018. So 10.5 to 12 points on consolidated basis, is that reasonable? And on the sales expense line, $6.3 million. Should we see that with the new hirings ramp up to around $7 million maybe? Is that a reasonable number? Or how should we look at the -- at those 2 items?

Yes, I think that number -- G&A should stabilize at this point. That number will go up as we hire more people to support our revenue. The margins, I think, will be similar to what we've done in 2017. We're always trying to increase our margins with higher selling prices. We did have some legacy orders in 2017, and those -- as we shift through those, now we're trying to increase our margins where -- so I think the number that you spit out there, 10% to 12%, that's probably -- it's probably a reasonable number.

That's on the new reporting, and we'll just back out whatever depreciation and share-based comp you have similar to 2017, right?

Yes, that's correct.

All right, yes. So factoring that in, we're looking at around mid-single-digit EBITDA margin for 2018, is that correct? Like 4% to 6%?

At the -- you're talking about bottom line?

EBITDA?

Okay. Yes, that's correct.

Okay. So on the 250 deliveries. Okay, that's very helpful. And now I guess just switching gears to the U.S. facility, and congrats on getting that ramped up. So I guess you guys -- Jean-Marc, you mentioned that you had 1 bus Buy America-certified, and -- did I get that right? Did you got that audited?

It's going through the process. So what we've done is, we've built 1 bus completely in line with the Buy America requirements. We've had a -- we have a third party consultant that was -- has been working with us for quite some time now to help us and look at what we're doing and make sure that it falls in line with Buy America requirements. We are at the tail end of -- we have a few days left of assembly to do -- to complete the first unit, and then we have a formal audit to go through with all the paperwork. So it's still going to take a little while before we've completely done the entire process, but it is moving along quite well.

And so I can't, at this stage, say it's a Buy America-compliant bus. But I think I've explained before to some of you at least, it's actually a mock audit that we are doing. To get official Buy America certification, you need to have sold a bus to a customer, and the customer will do the audit. At this point, this vehicle was a bus that is not sold to a customer. So we're doing a mock audit, which is the same process, same evaluation criteria and the whole 9 yards, but it's called a mock audit. And at the end of that process, we want to be able to say that this vehicle, as presented, as built, meets Buy America.

So to get some clarity, by mock audit, is this the teardown you were talking about? Or is this like assembly?

No, this is -- it's still -- it needs -- we have to -- the requirements for Buy America are very clear. So we need to do the assembly of a whole list of components. So all of those are done as per Buy America. So the seats, the axles, engine, transmission, a whole number -- a whole list of parts are getting assembled at the factory, at the -- at our final assembly factory. We also need to meet very specific U.S. content requirements, parts contents. So we are going through the process, and proving that we are moving -- we are meeting all of the requirements for Buy America. So we've done it on -- we're doing it on the first unit. Now we're ramping up to 2, and we hope to ramp up to 3 and 5 and up to 10 as quickly as we can this year.

So more to follow in the next months on the Buy America. But basically, the message here is that we are in operation, we are getting the process audited. So then we can tell the industry, our customers and everyone else that we are Buy America-compliant. We've been saying it, now we are getting that audited with an actual bus going through the line. So this is all good news. And yes, now it's just going to the last stages of that audit, and then ramping up our production in the U.S.

But to the audit, to the point of the audit, this is the way the operation would function, right? Remember, we talked about before how the first -- to get the staff trained, you were going to bring a fully assembled bus and reassemble and then redo it again...

Yes. So we've done that. But this is definitely not the business model going forward because that adds -- that would add too much cost.

My question is the one that's right now getting audited is not that one. It's...

Yes, this one -- the first one is a bus that was complete bus that we've taken all the components off. But it's still -- the requirements for Buy America is that we do final assembly there. So as long as we assemble the components that need to go on there, it would meet Buy America. If -- it doesn't make a whole lot of business sense to take a unit that's complete and take all the components off to put them back on. But in order to expedite the process and be able to go through the -- yes, get our production line going quicker and getting the audit done quicker, it was the most efficient way to do it. It was just to -- it adds extra cost in the short term for us to do it that way, but it allows us to go through the process and get ready to do our original plan of Buy America without having to tear down buses.

So now the first one of that process is done, and now you're ramping that up in a similar process? Or you're ramping up in the actual operation, as in shipping this shell and getting stuff done in the U.S.?

Yes. We're just finalizing the details on -- for 2 shelves to come in. We expect that to start happening very soon. So this assembly as we've done on the first unit is a very temporary thing that we're doing. But in the end, what's important is that the Buy America requirements are very, very clear. They're very strict. And there's no bypassing or shortcutting any of the -- of that process. So what we're doing now is -- still is within what is acceptable for Buy America. And that's why we're having the whole process audited by a third-party auditor, to make sure that we are adjusting. We need the first -- the first and few units to go down the line is to learn to adjust and make sure that everything is set up in the most efficient way that we can meet the requirements and also keep our costs in line as much as possible.

Okay, okay. That's very helpful. And from your knowledge in bidding process in the U.S., and -- at what stage of the audit or after what audit do you think that our transit agencies would be comfortable enough to put in an order?

And now -- now because they have to -- if we get awarded any Buy America or FTA funded contracts in the U.S. needs to go to a pre-award audit. So if we assuming let's say this afternoon, an order comes in. We have to show how we're going to meet the U.S. content. We have to show what our assembly process is, that shows that we meet the assembly requirements. So we're prepared to do that right now.

And you think agencies would not -- at this stage in time, you're just going through the first audit of the assembling and reassembling a bus. You think that would it make a difference from a U.S. standard agency perspective to put in an order? Or would they either wait to see the first audit results, then they'll come in and place an order?

Ahmad, there's a different kind -- in Canada or the U.S., there's different kind of customers. Some customers want to be on the leading edge and they want to be -- they're willing to take on a little bit more risk or be the first to go in. Some will be very conservative and say, "Okay, once you've built enough, then I'll decide." So this is one of those. There'll be some customers that will be telling us, "No problem." Others will be a little bit more conservative and that's just nature of business.

That's very helpful. And moving on to the R&D initiatives, I mean what are your view on the medium duty bus, is that fully on hold right now until we get the audit and the biomedical stuff up? Or is it kind of a little bit on the back burner, you're doing some work on it?

No, the main reason we put that on the back burner is that everyone has seen our results, we're putting a lot of financial resources or investments in the U.S. There's some initial start-up cost related to the U.S. operation, there's some start-up cost on the ERP system that we're putting in. So we are really investing a lot in several areas. And to go and stretch our resources, financially and human resources as well, on new projects when we have all of this going at the same time, was just putting -- stretching our resources a little bit too thin. So really, right now, I want every -- all hands on deck. Our priorities, our focus is clear to everybody. Now, as we're trying to get our margins up, we still are investing and we need -- we just need everybody to focus, finish what we started and make sure that we have our U.S., really gaining some more traction, foundation the basis there, everything is moving along. But I don't want -- I'd like to keep everything focused, deliver on the stuff that we say we're going to do. And then, in six months from now, we can reevaluate where we're at and then we're ready, whether it's -- well, William was mentioning electric bus or the smaller bus, these are all things that we're ready for. It's just a question of what's the best timing to really start investing more in those to get them -- those moving.

So right now, let's just focus on what we started. We've got a lot of work on our hands and in a few months, we can reevaluate R&D projects, so at least major R&D projects, there's always small things that are still going on, that's not an issue but the major ones that will require a lot of investments and resources, we've just put on hold for few more...

And final question. I have taken a lot of your time. We're still looking for the audit on the U.S. facility, the time line is by the end of first half? Or is that pushed back? Or is it...

Yes. No, I've been saying we should be done in the first half of this year. We're still on track. It's going -- probably going to take the second quarter to get through all of it. But we're still on track to have that completed in the second quarter.

And by that time, we should have expected total output of that facility in like 5 buses or so?

Yes, current plan is, we did one in the first quarter. We're doing -- starting 2 in April. Our current plan is to start 3 in May. So we are ramping up -- planning on ramping up fairly quickly. Obviously, we're not going crazy. Although, we have a plan of the ramp up if -- as we move ahead -- as it's moving along. We're going to readjust the ramp-up period if required, so it doesn't get out of hand. So we want to make sure it's done in a proper, organized and efficient way. So for now, we are going to 2, we are planning on 3, and then we'll see -- but our goal is ideally be by fall or Q3, Q4 be as close to 10 as we can.

And our next question comes from Amr Ezzat from Echelon Partners.

I just want to go back to the cost side. Again, I understand there is noise on the gross margin sides, needs to be restatements, you mentioned. But if I'm looking at the numbers of buses sold in Q4, it's a very similar to what you did in Q2. Yet on the EBITDA side, you're $800,000 below Q2 levels. Just looking to understand or get like more color on what happened there?

Yes, sure, Ahmad. There was -- sorry, Amr. There was higher expenses in Q4 than it was in, I guess, in Q2. There's also additional USA marketing expenses. You remember the after show, that was in our Q4 and we had a -- quite a bit of expenses related to our USA operations that we didn't have. Previously, we also had additional expenses for RBC to get our loan. And that required a lot of resources as well as we added previous letter of credit with HSBC. We had quite of those expenses in deferred, financing cost. We end on expensing those because that loan went off and the new loan came on. So all of that together will create a much higher expenses than you see initially in Q2.

Then -- so maybe you could -- as well like on the headcount like -- what was your headcounts at Q4 then like where do you see that evolving in 2018?

You're talking about staff levels?

Yes.

Well in Q -- I think -- I'd say about 25 to 30 -- 25 more people at least than there was. We hired a lot of people during our Q2, Q3. So I'd say payroll probably doubled in -- during that period. Especially, yes...

And we're not seeing...

Is that for 2018?

I think -- No, I think '18 is stabilized -- Like I said in previous question, the G&A should stabilize at this point now. Yes, there may be change here and there. But it will be a significant material change. But -- and the change will be directly related to our U.S. -- how we sale on the U.S. side.

Can you give us the G&A number for Q4? Because -- I mean, you restated you got like some of your OpEx going up to COGS, but the restatements you gave are on an annual basis. So we don't have like the run rate for Q4, or at least I maybe missed it?

I don't have the Q4 broken out in front of me. But I'm more than happy to get on the call with you after and go over those numbers.

Awesome. Then on the restatements, the OpEx and the COGS, what did you guys mainly move, is it the commissions on the sales?

No OpEx -- yes, so this is a geographical adjustment from OpEx to COGS. It didn't affect the bottom line, but what we -- what moved with insurance, you got rent, there's salaries and then expenses like tools. And then, just some office costs that we allocated to the warehouse -- just general office costs. So those primarily -- and I think, for your -- for you, most of the cost were salaries. It was salary driven, mechanics, parts, people. Yes, that's what drove the number up.

Then, Jean-Marc, you mentioned in the Q&A that 25% of the 240 buses next year are for the U.S. markets, so that's 60 buses. And I'm just trying to reconcile that number with the ABG order you guys received in October for a 100 buses. Some of these buses like I guess -- like are slipping into 2019?

Correct. Correct. Correct, Amr. And...

And then...

Go ahead.

Sorry. Go ahead, Jean-Marc.

Out of those orders, the whole -- Amr, out of those ABG orders, we had 42 buses delivered in 2017. So some of those are in that order book.

Yes, so he's referring to the order of 100 -- you're talking about the 2018...

I'm talking about the October order?

Yes. 100 buses. Yes. So correct. Yes, we -- as I said before -- we're -- as we're ramping up our final assembly in the U.S., that number -- the total deliveries for 2018 might change a little bit. They're not going away. Some customers that they're looking at, what -- whose been taken longer. Some of the bids are taking forever to close. And those that are close, some are taking forever to be awarded. So we've or trying to show a realistic number. And hopefully, as things move faster, get back on track in terms of when the orders actually come in, then that will be great news. And if not, we're hoping that we feel pretty confident that the numbers we presented this morning are realistic numbers.

Understood. So it's a buffer that's built-in really, which...

No. We are trying to be as realistic as possible. And then, yes.

And then on that order again. Like I'm just wondering, like how many of these buses do you have a home, like how much -- like how many did ABG presell already?

We haven't announced that yet, because we have our order is -- we've received our order. Where his bus -- where the buses are going, he -- I can tell you that he's got a lot more opportunities than he's got buses confirmed right now, that is just a timing -- it's just a question of timing and when those orders come in. Some are -- he's selling buses at different times. I hate to commit right now, I'm giving a whole lot more information other than there is a nice pipeline of opportunities for him. They felt confident that they could give us that PO. And we're confident in that PO. So now it's up to them to just close those deals and deliver them where they feel they need to go. So we still -- we still have that PO, that was just going to be -- really, it is the deliveries, is when do they get delivered the buses that are built, and they are taking deliveries. The buses that are not built yet, we have a little bit of flexibility to move them on the schedule. And this is really what's happening for the difference between the 300 and the 240. It's just -- we're just moving them a little bit on the schedule.

And the next question comes from [Jeff Kyles] from -- a private investor.

Jean-Marc, can you talk a little bit about -- there seems to be -- my perception is there seems to be some concern in the marketplace, surrounding your opportunity in the United States since New Flyer has announced the acquisition of ARBOC can you maybe talk a little bit about that under the size of the opportunity? And timing on when you think you're going to be able to compete in that space? And maybe just a little bit of color on the ARBOC offering, I personally seen it down at APTA in Atlanta, but maybe for people that haven't, if you can talk about some of the differences between what you're going to provide and what they are moving forward?

Sure. But first, maybe I'll answer real quick. The high-level answer to that is -- and then I'll get a little bit more detail after. At high-level, if you look at the mid-sized bus market in North America, I really think it was underrepresented up to this -- up to now. And I believe, still is. When you look at the smaller -- the really smaller cutaway bus market, there's a lot of product, there's a lot of offering. The heavier, bigger buses, there's a good supply in that segment. And really, when you get into a midsize, especially in the heavy-duty side, there's really not that much. So I think, it's great that we have that competition and we have products in the midsize. I think, having some competition in that sector is going to help everyone. And as I said, I still think it's underrepresented. So there's should be plenty of opportunities for all those that decide to play in that market segment.

In terms of product specific, ARBOC has a smaller, lighter duty vehicles, maybe not smaller in length, but they do have smaller bus, the cutaway type that ARBOC is well known for. They have been getting bigger buses into their lineup over the last couple of years. I still believe that it's a little bit lighter duty. But that will see over time. So for us, it's -- we're okay, with that. They'll be selling -- there'll be some overlap with them, but not all of it is an overlap, just like we're overlapping with the 40-foot buses out there, if not on every deal that there's a little bit. And that's okay.

So Flyer is a great company, and we have other good competitors out there. We're just -- it really doesn't change our business plan at all, it's just different ownership now, product is the same. And there's a need for our bus and there's room for our competitors as well. So no big changes on our side. So I'm not sure if this answered your question, or if you're looking for a whole lot more than that.

And your next question comes from (inaudible).

My question is, what effect does tariffs and the trade war with China and the U.S. have or will have on the facility in Atlanta?

_

Do you want me to take that?

Sure.

Sure.

Well, it's William Trainer here. When we look at the U.S. market in the trade war. The trade war as outlined as we see it, it's more towards -- geared towards intellectual property. It's not unfinished bus products. So they just published this week, where that $50 billion or $60 billion targets were, and it didn't reflect into our sector at all. So we don't see it as being that material to us. There is a qualification on the steel. The steel that is coming into United States is -- has duty on it. As of today, they have not place that duty on the finished products, it's on raw material coming in which will be pipes and steel I-beams and things like that. So as of today, it's not affecting us.

Great, that's good to hear because it was a concern of mine with a man in Washington, with the way he changes his mind from day to day, you never know.

I think we're down to our last question.

Our next question comes from Quynh Pham, Delafield.

It's Quynh Pham from Delafield Hambrecht. I just wanted some more clarity on...

Yes, go ahead.

Just wanted some more clarity on the bus shipments in the fourth quarter. I know you mentioned customers are actually being able to accept the buses itself, but you also mentioned local installs as a part of the delay. Can you give us a little bit more clarity on what percentage of those 75 buses that were expected to be delivered in the fourth quarter? What was due to local installs versus customers accepting time of delivery?

I'd say, I mean the quick answer is, all of the above. Really -- once you get and once we get closer to December, you're trying to get people to come over and inspect buses or even we saw that starting to happen in late November. We are trying to schedule customers to come in. Not necessarily very easy to do. And the other challenge was just on the buses came in. We have some work that we need to do ourselves. And then, we need to coordinate some of our suppliers to come in and do their installs. And we are not the only one who's out there trying to get our buses through, our equipment through, delivered by year-end. So we're probably pulling on the same resources that New Flyers and Nova and other companies are pulling up the same time, possibly. And then, it doesn't all line up exactly the way we want, and all of a sudden you're a couple of weeks off and you just kind of messed up your quarter.

So there's really no scientific answer to this. It was pretty simple just coordinating between ourselves and our suppliers and the customers. And if we're late installing the equipment, then we're changing the date on the customer on the inspection date they can't and all of sudden it doesn't get delivered.

So what did you guys done to kind of rectify these local installs to make the estimated profits for 2018?

If you look at our third quarter, we've delivered 75 buses. So every order that we get, every customer has different levels of local installs that we need to do. Some have very little, some have had a lot. And between, there are what we do and what our suppliers do. So in third quarter, if there's not a whole lot to be installed in great, we can deliver more buses. If we have a lot of local work to do then, every bus takes longer to get through the delivery process. And then, obviously, we're not delivering as many buses. So we've proven when the workload is lighter, in terms of final installs, then we get higher volumes. We don't readjust just to beat one quarter. If we get lot of installs, like the last quarter, we don't ramp up staff just to get the buses out. We just even -- we have pretty steady capacity of how many buses we can get through our installations to get delivered. And depending on workload, I think the last quarter and the first quarter -- part of first quarter, we still had a lot of local work to do on those customers. And that's what really impacts the number of buses that we delivered in the quarter.

But -- so they can understand this. So you see -- you can understand how many local installs -- how much local installs you have as the orders comes through. So how do you plan for that in the future as your production ramps up? And then if you have more local installs, how do you make the process smoother?

Local installs has always been around. So it's not -- this is not new for -- in the last quarter. We've doubled this for -- we deal with this all the time. It's just a question of the dates coordinating, make sure it arrives on -- buses get here when they're supposed to get here, the customers -- the suppliers. So there's not -- there's no big magic to it. Once everything is here on time, and then, we can coordinate it. It just happened that way in the last quarter. And there's really -- I wish I could give you, really, the answer you're looking for. But there's nothing scientific to it. That's just it. And local installs are local install, you planned for them and then, all of a sudden, if the buses comes in here, and I'm not saying this is what happens, but if the bus is here and we're one week late, and we have somebody else who plan for that week to come in and install something on our bus and we're not ready, then we have to reschedule with them. And even if we are -- let's say we were a week late doesn't mean that they can come in the week after, they might say, I'll be there in 3 weeks. And then, the customer is supposed to be here in 3 weeks and he's post out. So all of a sudden, it kind of snowball. So this is -- on the most part, we've been -- it's been working very well. We get the buses here on time, we get them delivered, through our system on time and we don't have to make changes too often on -- we're really -- it works out pretty good. Sometimes it doesn't work as well and then we're dependent on all -- everyone scheduled to be able to line up. And they can quickly get into a few weeks delay or more when we start changing schedule on people. So I don't know what...

Does that happen more in the fourth quarter than any other quarter in the year? Or that can happen any time in the year?

No, no, no. It doesn't -- there's no time -- it's just the last quarter, if most people don't want to -- its either their year-end or they get closer to holidays and they don't want to travel or catch up.

And then my -- so I'm going to -- I'll move on to my next question. With regards to Buy America, you're getting that one bus, it's been marked audited, you need a formal audit done. What can hold up this process at this point?

I think it's -- really it's just getting through the rest. The assembly is on the most part done. Now we're pulling all -- we're doing all the paperwork. There's really -- there's not -- it should be moving, they should move well. Again, in this one, our auditor -- talking about the scheduling again, he's been to our facility several times. We've had numerous conversations and trying to get him in the next quarter to come in at the date that we want is a struggle. But that's probably nothing that we can't work with. It's moving along and I know, there's nothing on our radar, really it's just -- this is something that needs to be done. We're going through the process, we still have a quarter left to go through the process and according to our plan, we should be pretty close to that. We'll see. We'll definitely -- if something comes up that's worthy of mentioning, we'll definitely bring that up in our quarterly calls. But for now, it's -- this is part of normal business and where things are moving on.

That's it for questions?

Thank you.

Good. Well, thank you very much, everyone. On behalf of Aaron, and William and myself. And John that couldn't be here. Thank you very much. Those were great questions. We appreciate your time, and we look forward to our next call. Thank you very much, everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.