Vicinity Motor Corp (VEV) 2018 Q2 法說會逐字稿

Welcome to the 2018 second quarter financial results conference call. My name is Jenny, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to John LaGourgue, you may begin.

Thank you, Jenny. Good morning, everyone. It's great to have everybody here for our second quarter financial results conference call. Today, we have our CEO, J.M. Landry, here; our CFO, Dan Buckle; and myself.

Before we get started, I need to present the forward-looking statements for the call. This call will contain forward-looking statements, which reflect the expectations of management regarding Grande West's future growth, results of operations, performance and business prospects and opportunities. The words believes, anticipates, plans, expects, intends, projects, estimates and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect management's current expectations regarding future events and operating performances and speak only as of the date of this presentation. Such forward-looking statements are based on a number of material factors and assumptions.

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.

Dan Buckle, our CFO, will start the call with the financial highlights, and then J.M. will give our corporate update. Dan?

Thanks, John. I'm very happy to be able to discuss our second quarter results. I am actually going to round these numbers to thousands, just to make everybody's life a little easier.

Bus, aftermarket parts and other revenue for the 3 months ended June 30, 2018, was $25,294,000 compared to $11,780,000 for the comparative quarter in 2017. This represents an increase of 115%.

Our net income for the 3 months ended June 30, 2018, was $1,991,000 compared to $221,000 for the 3 months ended June 30, 2017. Adjusted EBITDA for the 3 months ended June 30, 2018, was $2,879,000 compared to $81,000 for the 3 months ended June 30, 2017.

We had deliveries of 61 Vicinity buses during the second quarter of 2018 compared to 32 buses for the second quarter of 2017. For the first 6 months of 2018, we have delivered 119 buses. We also had 6 new leases of Vicinity buses to a Canadian customer during the second quarter.

Moving to the balance sheet, I would like to highlight that we repaid $2 million in short-term, high-interest debt during the second quarter of 2018. We also reduced the company's credit facility by $5,618,000 during the second quarter.

I would like to pass it off to Jean-Marc to discuss the business overview and provide updates.

Thanks, Dan. Good morning, and thanks for joining us on this call. We are very pleased to have delivered our most profitable quarter to date. Earlier this year, we made key additions to our executive team. Dan Buckle, our CFO; Rob Mowat, VP of Sales and Marketing. I'm really pleased to say that they're fully engaged and gaining strong traction in their areas of expertise.

As mentioned in the last conference call, 2018 continues to be an important year in setting the stage for future -- for the future of Grande West. In addition to strong focus on sales in the U.S.A., we continue to focus on opportunities to increase operational efficiencies and cost savings.

So if we look at recent accomplishments. On the Buy America side, we announced on August 28, 2018, that we have successfully completed an independent third-party audit of Buy America assembly and financial bill of material for our Vicinity. Buy America provisions ensure that transportation infrastructure projects meet minimum domestic component content and labor involved in the final assembly process. Grande West utilized third-party Buy America accredited auditors in order to review the company's U.S. assembly process and procedures as well as the bill of material and supplier Buy America certificates for components in the Vicinity product. The American-made components and materials constituted more than the required 65% for Buy America compliance. So we've been talking about this for many months. So now it is done. The assembly process was verified and validated.

I'd also like to remind everybody that the Vicinity has scored the best in class at the FTA Altoona test recently. This Buy America third-party audit is a key milestone in providing our ability to bid on and deliver to U.S. federally funded transit opportunities.

As mentioned before, Grande West has a large pipeline of potential opportunities, many of them in the public transit sector. We expect the U.S. to be our largest opportunity for growth and expect sales to ramp significantly in 2019 as we continue to focus on -- our efforts on U.S. sales.

Our U.S. distributor, Alliance Bus Group, was successful in winning the Georgia State bid for the Vicinity 30- and 35-foot heavy-duty vehicles. The contract allows for all transportation authorities statewide to purchase Vicinity buses with federal funding as well as all public agencies nationally to purchase with local funding. We continue to actively pursue opportunities in the state and will inform with the investors as soon as we receive firm orders.

In addition, Grande West is announcing that it did not renew its dealer sales and service agreement with (inaudible). As of September 30, 2018, Grande West sells all Vicinity buses directly to customers across Eastern Canada as well as providing parts and service support for these buses. This structure is often referred to as OEM direct, OEM being original equipment manufacturer. We made this decision in an effort to be closer to customers and optimize all aspects of the relation throughout the life of the bus.

For the remainder of 2018, our focus is on growing our order book. We expect to deliver approximately 200 buses in 2018 instead of the 240 announced earlier this year. The reduction in deliveries during 2018 are due to longer U.S. sales cycles and a Canadian order of 19 Vicinity shifting to the first quarter of 2019.

So the outlook. The demand for transit buses in the U.S. market remains strong, and current federal transit administration funding is in place until 2021. This provides 80% of purchase grants to U.S. public transit agencies. The U.S. Congress in March 2018 passed a fiscal year budget, which included $13.5 billion for public transportation, which is an increase of over $1 billion over the previous year. The American Public Transit Association (sic) [American Public Transport Association] called it a big win for public transportation.

In the first half of 2018, the number of RFPs in our market space was lower than the previous year. Our estimates for active RFPs, particularly in the U.S., are increasing for the second half of 2018 and early 2019. We're also seeing an increase in our parts sales and expect it to continue growing as our business grows. Parts is becoming an important part of our business and contributor to our profitability.

Now about tariffs and cert taxes. There's been a great interest on the impact from tariffs and cert taxes. Management continues to closely monitor NAFTA negotiations and ongoing global trade discussions, which could influence the company. Currently, the company pays immaterial tariffs on non-NAFTA supply. If the changes occur, we are developing contingency plans that would include more U.S.-sourced components. This would reduce our exposure to the foreign components. The company uses steel in the manufacture of bus frames, which comprise less than 3% of total material costs. We currently expect an immaterial impact for the remainder of 2018 for any market increases for our current deliverables. Any future component cost increases should be substantially recoverable through new RFPs through a producer price index mechanism and multiyear contracts, meaning that what we'd be bidding for next year, any cert taxes would be passed on along to the customers in our price.

Now on to the Buy America assembly facility in Atlanta. It's located near Atlanta Airport in Georgia, in U.S.A. As previously noted, we are proceeding carefully in the initial stages of final assembly ramp-up. The first bus has been completed and several non-Buy America Vicinities have been through the line for other assembly requirements. We will ramp up the line progressively as we receive new orders from the U.S. transit customers.

In summary, Grande West has delivered over 350 buses in the Canadian and U.S. markets alike to date. We have maintained approximately 90% Canadian market share in the midsized bus category where we sell Vicinity buses. These are really outstanding results, and we are totally determined to succeed in the U.S. public market as well.

With that, I'll turn it over to John LaGourgue.

That's great. Thanks, Jim. At this point, we'll start our Q&A. And let's take a look here. Jenny, are you there?

(Operator Instructions) And our first question comes from Ahmad Shaath from Beacon Sec.

Just I guess, a couple of other questions, just twofold, I guess. First, on the quarterly numbers, I see your average selling prices came in quite stronger than we anticipated at nearly $400,000. Can you just give us a little bit more color about the drivers behind that? And maybe how many [Vici] transit or buses were delivered during the quarter? We know they're the lower prices. And how should we think about the ASP for the remainder of this year and next -- and for next year as well?

It's Dan. I'll take that first. Sales [price] for the quarter, we had a lot of sales in U.S. dollars for the quarter, and we were helped out by some FX. We can't really give you a breakdown of who we've sold to during the quarter, but that was a big driver. It's related to sales mix. We're not seeing a huge increase in our prices, but we definitely were helped out a little bit.

Okay. I guess, like -- so the majority of it, was it FX? Or was it sales mix?

It was a bit of both, right?

A bit of both?

Yes, when you're selling more in U.S. dollars -- because some customers we sell in Canadian, some we sell in U.S., so if you have a favorable exchange rate, your profitability is going to go up.

And in terms for the remainder of the year, so should we expect this trend to continue if current FX environment holds or based on the delivery schedule you have for the remainder of this year? Or how should we about that going forward?

I would say that the sales price for Q2 was high based on the sales mix. I would expect sales price to be more in line in with Q1 and historical.

Okay. And I guess, you can give us any color for the remainder of the year in terms of the delivery mix between U.S. and Canada, at least.

No, not really. But as I said, I would expect it to be more in line with historical.

Okay. And in terms of the slippage into 2019 in terms of deliveries, if I look at the language in the MD&A, I understand from 240 we get around 19 shifting from Canada. So what is the reason behind this shift? And then the second question on that is, that means, 21, if I understand correctly, are related to U.S. sales from that shift. So -- but if sales -- like, the language indicates that it's a longer sales cycle, but our understanding is that all the backlog is firm orders. So can you just give us a little bit of color? I'm quite a little bit confused about if it's a firm order, was it shifted? Or how does that relate to the sales cycle?

Okay. So this is J.M. So the -- maybe to answer the first question, the one that shifted to the first quarter. The contractual delivery dates, actually from the get-go, were set in the first quarter for 2019. We were planning on being ahead of schedule. We actually still are, but the customer just went back. It'd be either very, very late this year or into next year. So customer -- we just decided that they didn't take delivery in the first quarter versus late this year. So that's the one that shifted to next year. So it's nothing that -- really that happened operationally or anything like that. The second question about the firm orders for next year. Some of those firm orders are from our U.S. dealer, Alliance Bus Group, which they have -- they -- it's still a firm order, but it's been a little bit longer to get some of the orders. So we've been flexible on the delivery dates on those buses. So there's this...

Okay. So yes, so ABG is not really able to push through some of that, and they asked you guys to delay deliveries to 2019. That's what's going on?

Yes, the -- based on -- yes, correct. So they've been -- it's a little bit...

Do you have any color as to what's the situation with ABG? Like, what is the reason behind this pushback?

Oh, it's not -- it's the market, it's just we're working both ABG and ourselves, Rob Mowat now, for the last several months as well, has been focusing all efforts in closing deals. As you saw, if we just think of the Georgia state contract that took forever to close, we're just seeing a little bit of that across. Some are coming out a little bit later than expected, some are closing a little bit later than expected. We're not really losing any significant number of bids in the U.S. It's just the ball is in motion and things are going to happen. But they don't necessarily always happen in the month or quarter that we'd like them to. But definitely, we are gaining some strong traction in the U.S. 2019 is looking very good. A lot of the hard work we've been doing this year and in previous years, it's a little bit like Canada. It took a while for those that have been around for -- with us for many years. It takes -- there's a lot of groundwork the needs to be done before we can actually get the needle to move and getting some contracts. So we're seeing the same thing in the U.S., but we're definitely closer than ever to -- and better positioned as well to win some deals in the U.S.

Okay. That's very helpful. And I guess, continuing on this quarterly result, how should we think about the sales and admin line that came in a little bit higher than we anticipated? I think we talked about this before, it should be in the range of $1.7 million, $1.6 million, give or take, but this quarter was a little bit in the $2 million range, excluding any sales-based -- share-based compensation. And now you are going direct to customers in Quebec. Will you require to hire more salespeople? Are you -- yourself are handling that, J.M.? So how should we think about that line with the movement of the relationship in Eastern Canada?

Sure. It's Dan here, again. So yes, the SG&A line was higher this quarter. The main reason for that is commissions. So if you take out the commissions, it's fairly comparable between the quarters. I would still expect, if you took out commissions, we'd see a run rate of between $400,000 and $500,000 a month, so that's $1.2 million to $1.5 million a quarter, and that's in line with where we're at right now.

Okay. And I guess that commission is just tied up to the higher sales price in U.S. dollar. Is that...

Well, no, it depends on where we're selling the buses, right? It depends on the dealer that we're using for the buses. So the external commissions go through that line as well, which is how it's been done historically. So it's difficult to map that out.

Okay. But I guess, since there is a commission component to it, are we at a point in time where we can think about it as a percentage of revenue? Or is it still not stable as a percentage of revenue?

SG&A as a percentage of revenue?

Yes.

I would think that -- I mean, we expect revenues to go up in the future. We don't expect our SG&A to go up at the same speed as our revenues. So I wouldn't consider it a stable relationship between revenues and SG&A.

Okay, that's very helpful. And on the 6 leased buses, can you give us a little bit more color about the reason behind that? Is that an arrangement we should expect more of? Or how should we think about those 6 leased buses?

No, this is not necessarily something that's going to happen on a regular occurrence. We had 1 customer that needed an 18-month lease for 6 buses, and we just -- the terms and conditions were very favorable. So we decided to take it.

Okay. That's great. And Jean-Marc, how are you viewing the Eastern Canada market? Now you're going direct to customers, and there has been recently good traction with the electric buses out of Quebec going to the -- one of your bigger competitors is breaking through finally there. So has that been a driver of your decision to go direct to customers? Or like, what has been the big driver and how are you thinking about that going forward? Because we talked about this before, that should be one of the areas of growth you're expecting within the Canadian markets. So just help us understand how should we look at that going forward.

Sure. Main driver is really -- our business model in Western Canada has always been OEM direct, meaning that we sell directly to customers. We have our own staff doing the support, the technical support. Parts sales go directly through us, so no dealers involved. Eastern Canada, we started with a dealer 5 years ago, so in the very, very early stages of Grande West. So it made total sense back then to have that type of arrangement. And now we just -- for the Canadian market, Canada overall is a smaller market than the U.S. It's closer to us in many different ways. We just decided that was -- it was better to do for us to just keep the same business model as we have in Western Canada and go direct, have a closer, direct contact and relationship with customers, whether it be from -- really from start to finish throughout the life of the bus. So we'll be doing the sales ourselves, supporting the customers ourselves with our own staff and selling parts direct. So we feel that overall it's a -- it was the right thing to do.

And is there an investment associated with that? Are you going to set up shop there? Or how's that going to evolve?

No. Nothing substantial. We'll be hiring some new staff, but overall, there's -- there were some commissions that go with the dealership distribution agreement. So those go away. So we'll have some extra expenses on our side, but they're definitely offset from the new arrangements and new [sales].

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

On your outlook, I guess, as we enter September and look into '19, you spoke to the backlog being at 180 buses with 80 buses to be delivered for the balance of the current year, so that leaves us with 100 buses for '19. I guess, I was wondering if you can provide us with some high-level commentary on the growth expectations in light of your comments on the lower number of Canadian RFPs but as well as, like, a more constructive U.S. market.

Okay. You're looking for a forecast guidance, probably a little a bit more?

No. Well, no, not necessarily. But like the language suggests that Canada is a little slower than what you had initially anticipated in terms of RFP activity. Whereas the U.S. markets, like you're talking about the Georgia state bids without providing much color as to how large that could be and when do you expect orders to materialize. So it's kind of the biggest chunk, I guess, of your sales. So just like some high level commentary on what to expect for 2019.

Yes. So I mean, just quickly on the Canadian side, we're -- although there's been fewer RFPs out, we're holding our market share. So we're not losing grounds in Canada, and we expect that to continue. On the U.S. side, there's just so many things happening. We have a growing pipeline of opportunities. Our probability of close is going up as quick -- almost at the same rate as our pipeline is growing. So we're -- we definitely see a lot of opportunities. We -- maybe the difference between now and maybe some of the previous calls that we've done, we're being a little bit more cautious about how much information we share on these calls. A lot of our competitors are all over us, looking at every single move that we make. So we are being cautious. We're not mentioning customer names anymore. We're trying to stay away from too much information on pricing just for competitive reasons. This is, as I said before, 2018 is a very important year for us. What happens this year really sets the stage for 2019 and beyond. We're very, very pleased and happy to see the progress we're making. Obviously, we'd like to -- we'd like that progress and all these efforts and momentum that we have to turn into sales and actual deals a little bit quicker than it has to date, but we're definitely very optimistic and realistic that we are going to get some sales in the U.S. public sector, mostly where we see the biggest potential. And then beyond that, we've -- I think every quarter that goes by, the next 2, 3 quarters, we expect to have some tangible information and results that we can share with you. But beyond that, for now, we don't want to make promises, overpromise, and then we're trying to be as realistic as possible. We're positive about the future, but the next little while is going to be really -- is going to be determining about our 2019 results. But we are definitely optimistic.

Okay. Was the mock audit like a prerequirement for, I guess, the...

No, this was a decision that we made ourselves to verify our entire assembly process and also our U.S. content -- local content. This is something that we need to go through when we actually have a federally funded deal. Then we need to go through our preaudit, which is -- would be exactly the same as what we just did. And then before delivery, we'd have to go through another predelivery audit to make sure that what we said we'd do, we actually did. So this really just was for us to confirm that everything that we've put in place and our material content is where it needs to be. And that's what -- that just confirmed.

Understood. So to avoid, like, surprises, I guess.

Correct. Correct.

Okay. Just maybe a housekeeping item for Dan. You spoke to the lease revenues. Where are these like flowing through, the bus sales or the other segments?

No, it's flowing through other. It's being treated as an operating lease. So the balance sheet side of that is the leases. The buses move from inventory to property, plant and equipment, and the lease revenue flows through other revenue.

Understood. Then maybe just to circle back on City View. I think congrats on that. When I started to cover the name, it was -- I think the commissions you guys were paying were atrocious. But like when I'm thinking about the 80 buses that you're going to deliver from here until year-end, or more specifically, it'll impact, like, Q4 going forward, are there any deliveries expected for Eastern Canada? Like, I'm just wondering if it impacts, like, the numbers right away.

Yes. No, our -- the orders, yes, we do have some deliveries in Eastern Canada. So there are some commissions that are going to be paid for those buses. We should probably see the biggest impact in 2019 and onward to our bottom line.

(Operator Instructions) And we have Ahmad Shaath from Beacon.

Just a couple of follow-up questions on the U.S. now that we are done with 1 mock audit, and I think you guys indicated that you went through a few other buses for different exercises. So just talk to us a little bit about what -- how has that been an experience for you, what you learned from it? And how has it tracked in terms of potential costs? And is it tracking according to expectations? Or have there been some surprises that are causing some cost issues there? Or -- and how are you thinking about the potential for margins there going forward once it's ramped up?

Okay. So this is J.M. The buses that went through the line was for a few different reasons. One was in the very early stages to balance the line and just all the theory of where components should go on and how we assemble it needed to be validated. That was one aspect. The second aspect was tooling. Different types of tooling and equipment is required to do the work throughout the assembly process. So we -- it was validation of all of that. It was also line balancing. And finally, it was all about being able to measure the time. We had set standards -- assembly standards time, and it was just to put it through the line and make sure that we can actually meet those assembly times. So that was the -- that's basically the overview of what we've done with those buses and the purpose for doing that. And what we found is that we were pretty much dead on to our estimates. And so there was no surprises in terms of timing or tooling or any of that. Obviously, the first buses will take longer. We have already planned for that. And we -- when we do the -- when we did the final assembly or the assembly of some of those components, we were on target. And we said in our release here that we've put multiple units through the line for different aspects. Some of the -- some of those components installation we've done multiple times, and we've seen some improvements on time. And those improvements were also in line with our estimates. So no big surprises on the assembly side.

And was that -- so how are you thinking about margins there long term in terms of just directionally from what we've seen in Canada? Assuming the same number of deliveries, let's say, 200 out of the U.S., like, are margins going to be consistent with what we've seen in Canada? Or lower? Or higher? Just directionally speaking at the same run rate at least.

We don't expect big changes from our historic numbers. We do expect the first -- probably the first couple of quarters of building buses or a certain number of buses, there's a ramp-up period, those will be a little bit higher cost. But we expect that to come in to normal levels fairly quickly. So we don't think this is going to be 2- or 3-year kind of improvement cycle. We expect that learning curve to be quite quick and our numbers to come in line with our standard cost structure.

Okay. That's very helpful. And just final housekeeping item. Like, do you -- would you be able to give us any color on deliveries Q3 versus Q4 for the remaining 80 buses we have?

Not really. We had -- yes.

Yes, not really. I mean, you kind of know the numbers. It was kind of 75 buses that we still expect for the year. And it's difficult for us to -- things shift from month-to-month, for sure. So I mean, they'll be spread over the last half of the year.

We have no further questions at this time.

Okay. Well, this is J.M. On behalf of all of us, thank you very much for joining the call. We appreciate your questions, and we'll be talking again soon. Thank you. Have a great day.

Thank you, J.M.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.