Vicinity Motor Corp (VEV) 2019 Q1 法說會逐字稿

Ladies and gentlemen, good morning, and thank you for joining us today for the Grande West Transportation Group 2019 First Quarter Results. (Operator Instructions) And now to get us started with opening remarks and introductions, I am pleased to turn the floor to Mr. John LaGourgue. Welcome, John.

Thanks, Jim. Good morning, everyone. I'm pleased to welcome you to our first quarter call this morning. Today, we have our CEO, J.M. Landry; our CFO, Dan Buckle; VP of Sales and Marketing; Robert Mowat; and myself here, for the call.

Before we get started, I need to notify our listeners of the forward-looking statements. 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 performance 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.

I will now turn it over to Dan to review the financial results for the quarter.

Thanks, John. Good morning, everyone. I am very happy to be able to discuss our first quarter financial results. To [sync] this call, I'll round figures to the nearest thousand. I'll also make reference to EBITDA and other non-GAAP measures. For the calculation of EBITDA and other non-GAAP measures, please refer to the [Q1] MD&A.

We had deliveries of 10 Vicinity buses during the first quarter of 2019 compared to 58 buses in Q1 of 2018. Bus, aftermarket parts and other revenue for the first quarter 2019 was $5,733,000 compared to $22,440,000 for 2018. Our gross margin for these sales was $1,340,000 or 23% of revenue for the current quarter compared to a gross margin of $3,020,000 or 13% of revenue for Q1 of 2018. Our margins are positively affected by product mix, average sales price, improvements in cost structure and increased part sales.

Our margins have been steadily increasing since 2017 and they're currently very healthy. Adjusted EBITDA loss for the quarter was $152,000 compared to EBITDA of $1,703,000 for Q1 of 2018. We had a net loss of $680,000 for the 3 months ended March 31, 2018, compared to net income to $420,000 in the comparative period for 2018.

Moving to the balance sheet. I'd like to highlight that our working capital has remained very healthy. At March 31, 2019, we have working capital of $16.4 million with only $2.6 million in long-term liabilities. We're also successful in renegotiating our $20 million credit facility to reduce interest rates from prime plus 1.5% to prime plus 0.75%. Overall, our margins are strong and our balance sheet is very healthy and has us positioned well for future growth.

Now I'll pass it along to J.M. to provide corporate updates and business overview.

Thanks, Dan. Good morning. I'm really excited about today's call. I'd like to start by providing additional information on our Q1 results. In our MD&A, we mentioned that subsequent to March 31, 2019, the company delivered 15 of 19 buses to Quebec public transit customers. Those buses were slated for delivery in Q1, which would have resulted in a profitable first quarter.

Now that being said, this is an important achievement for Grande West. We've been very successful selling buses to private operators in Quebec for a few years now. What makes these 19 buses so special is that they were bought by 3 different public transit agencies in the province. This really positions Grande West as the leader in the mid-sized bus category in Quebec. Also worthy of mentioning is that Quebec is the second largest market in Canada with great potential for additional orders.

Many of you have been asking about our sales outlook and activities. I'm really happy to say that Rob Mowat, our VP of Sales and Marketing, is on the line with us today and will be giving you an update later during this call.

Now about the U.S. manufacturing. We just announced a manufacturing agreement with Spartan Motors headquartered in Charlotte, Michigan. We are proud to partner with Spartan. They are the North American leader in specialty vehicle manufacturing and assembly. Through this agreement, we now have the production capacity and partnerships in place to accelerate our U.S. and Canadian market growth initiatives. In combination of Spartan's well-established American manufacturing capability, best-in-class facilities and skilled manufacturing team, along with its competitive product cost profile enables us to streamline our assembly process and leverage our purchasing. This agreement sets the framework for long-term partnership that can support Grande West's rapid growth and product line expansion plans and reduce our exposure to tariffs between China and the U.S.A.

Now about product expansion and sales. We're making very quick progress on our smaller crossover bus model, and we are in the final stretch for the selection of a partner to provide our turnkey electric propulsion package for our Vicinity buses. To support this effort, we hired a Senior Principal Engineer. This new hire brings extensive bus industry experience including electric bus technology expertise to Grande West and will also assist in optimizing efficiencies and further reducing our long-term manufacturing cost.

In March 2019, Grande West is pleased to announce a new order from BC Transit for over 30 CNG Vicinity buses for approximately $13 million. As previously stated, our main focus for 2019 and 2020 is on product line expansion and growing our backlog to over $100 million. On that, I turn it over to Rob.

Thanks, Jean-Marc. As mentioned, these are -- as you and Dan mentioned, these are exciting times at Grande West. And in the sales marketing group, we're singly focused on that building the backlog to over $100 million as we move forward.

It's been encouraging times because we've really seen a steady increase in the sales opportunities both in the U.S. and in Canada. And we're seeing this increase and current opportunities for transit agencies, private customers for both more activities currently that we're working on compared to the same time last year, but we're also expanding our sales funnel for 2019, '20, '21 and '22. So it's good to see customers that are seeing the viability of the product and the viability of what we're making every day and saying, "Okay, I like the product, but I'm going to be buying in '20 or '21 and '22." And that's a lot of information we didn't have in the past. And this knowledge base is really allowing us to actively go out and pretty actively perform pretender activities with those customers, whether it be demos and working with specifications and working with the local community to really increase our win probability as we move forward. And I think this expansion of current opportunities and future opportunities also is important to takeaway that these rising opportunities are coast-to-coast in Canada and the U.S. They're with large, small and midsize agencies. They're not just one type of customer and they aren't just in one geographic area and I think that's a positive sign showing that the niche product that we have, the product that is the right fit for the tool, the right tool for the job is the message that's being heard and accepted and people are looking forward to that.

I think there's a couple of things that are really driving that expansion and acceptance as we go through that. One of which is we really increased our connectivity to both of those markets, whether we've hired somebody in Canada as our customer relations manager, which we did and previously announced, that's been going very, very well. Those things are really going well as we move forward and people are seeing that our purpose-built buses message is starting to be accepted by customers as well.

In Canada, the other issue there is early adopters, a few who really were looking for the vehicle in the first place. After they made their big initial purchases of the previous years, we're starting to see they're now looking at the next round of purchases. They've seen the product, they've seen how successful it's been and now they're looking at, "Okay, where else can we put those vehicles." So they're looking at the next round of purchases coming forward as well in the coming years. As well as the people who worked the early adopters in Canada, those customers, they've seen the success of the programs and now we see a lot of agencies that we're talking to are completing service planning studies, are implementing new route designs, all with the benefit for our product offering to fit in that niche. So I think that's another expansion for the Canadian adoption for the right tool for the job message as well.

The U.S. side is still in the early adopter phase. I think that they're looking at from 2 things. One of which is to prove out to them that there's value in the right tool for the job product line and rightsizing their fleets is one. And then two is to gain Grande West as industry viability provider of the tools to do those jobs. I think that those things really come along hand-in-hand very, very well. There's been a lot of hard work done in the last 16 -- 2 years to 16 months. So we're working on that. As we mentioned before, we've successfully completed our Buy America audits. Our mock audits, we've done and completed our compliance testing, we've been awarded a number of state contracts, we've been awarded a multiyear, multi-customer Buy America contract. We're in the middle of it now as well as corresponding Buy America certification that need to be done with their -- beyond the mock audit and then the new manufacturing partnership we just mentioned also strengthens our position. So I think there's a lot of things that are growing that we've done that have built the hard work on the ground for the last 16 months or so and we're really looking forward to the harvest as we go forward.

Good. Thanks, Rob. So before we open it for questions, I'd like to conclude by saying that we expect to maintain our strong market segment leadership position in Canada as we grow our U.S. sales. And after 2 consecutive years of record growth and important milestones reached, like Rob just mentioned several of them, and now we have strong manufacturing capabilities in the U.S., the outlook for Grande West growth is very positive.

So I'll turn it over to John.

Thanks, J.M. Jim, could you open up the floor for questions? We're happy to take questions from the callers now.

(Operator Instructions) We'll go first to the line of Amr Ezzat with Echelon Partners.

Can you share some color on how you see the year evolving in terms of deliveries? I mean, you've delivered 10 in Q1 and you mentioned like 15 deliveries in Quebec in the second quarter. And I think as of March 31, your backlog was at 160 buses. How many are pegged for 2019 and how many for 2020 or beyond?

We -- not a whole lot of time has gone by since our last call. We addressed that during the last call really to say that we are not -- we didn't provide much guidance on the year. What we basically -- our message was that '18 -- the order intake in '18 was a little bit -- was less, was slower, so that's impacting our '19. We have some firm orders in hand. The specific timing of delivery of those has not been confirmed or announced. We are still kind of taking the same position to say we're working really, really hard on rebuilding the backlog to $100 million. When the deliveries are going to land this year, I'm not sure if we use the word lumpy, but they'll be -- they won't be super steady, but it is growing. We have some orders that will be spread throughout the year. Some will go into 2020, but we haven't been providing clear guidance on '19 and '20, actually anything in the future. And I think we'll keep going that way. We'll announce as we go. We'll announce news. But that's about the extent right now.

Well, Rob, thanks for the color, I guess, on the sales efforts. If I'm thinking about the current bidding activity level, how does it compare to the past couple of quarters? Like your comments, at least to me, seem to suggest that it's much busier now than a couple of quarters ago. Is that fair?

Yes, that's absolutely fair. Yes. The bid cycle is they're cyclical because a lot of times they're with public agencies which are balanced by their fiscal years. But the volume that we have now and that we've had in the last 4 to 5 months is much higher than we've had in the previous year, same times.

Then like the things that you're bidding on now, they are pegged for deliveries in, what, '21 or '22? Or...?

They're kind of all over the board because some are multiyear contracts. So they have different amounts allotted for each year, so some could be a 5-year contract or a 3-year contract. And so the different amounts in different years, so it's kind of goes up and down. But primarily, what we bid today is to be built next year, yes.

Okay. Jean-Marc, on the agreement with Spartan, are you guys still having like the buses assembled overseas with final assembly at your College Park facility? Or is that's now moved and everything's going through Spartan?

Yes. The intent is to get the U.S. Buy America orders built at Spartan. So we still have our arrangements in place with the overseas partner for Canadian or non-Buy America orders. But Buy America orders, the intent is to build with Spartan.

And that wasn't like initially, I guess, like the routes you guys were going, what -- I guess what caused the change?

We have -- from the get-go, when we talked about Atlanta, we said that was a springboard, it was an easy and low cost entry into assembling in the U.S. We've been very clear from the beginning that this facility had limitations and serves us capacity. So it was -- we even, I think, went as far to say that probably within the 24-month period, we'd probably be facing a situation where we'd have to look at the relocating or an alternate setup. So this was just -- we felt this was just a perfect timing to go and make an arrangement. I think if you look at the setup in Atlanta, it could've worked, but I think Spartan brings so much more. They have -- this is their business. They're a huge company. They have the expertise. They have the facilities. They have other quality controls. They're really well established as a strong, solid manufacturer -- U.S.-based manufacturing company. So it's really leveraging everyone's expertise. ABG so is focusing on growing the pipeline, getting the sales and supporting customers. We work very, very hard on the product design and developments and support. And then we have a very strong partner based in the U.S. to -- that has the facilities and everything -- all the infrastructures in place to help us grow our business. So I think it's a win-win all around. It would be great for customers as well to have a facility and an organization assembling our vehicles of that size and that caliber, and I think is all around win for everyone.

Great. And is there a minimum number or a quota associated with that contract for them to fulfill or a minimum number of orders?

No long-term commitments on quotas or numbers.

Okay. Then perhaps on your electric propulsion and the crossover products, you guys have like a target commercialization date for those or?

Yes. Soon. We -- last call, we said we were fast-tracking those projects. Now the update now is that those projects are moving along really well. We haven't announced a launch date until -- we probably will soon. But that whole -- those 2 projects on a very, pretty short-term fast track. So it's our intention to shortly announce a launch date or what expectation date and when you'll see the first buses completed.

Great. Maybe just one last one and I'll pass the line. I'm just like wondering how do you feel the competitive landscape changed in light of ADL's announced stakeout yesterday? I believe their Enviro200 Buy America product is now manufactured out of Indiana. Do you see their product around at all?

It was always -- it was already there under Alexander Dennis.

The midi?

Yes, the midi. So it was a midi when it was New Flyer and now ADL took it back. So we're quite familiar with the product and we've been competing with them for years now. So we think this is great news; it's a consolidation. And for us, it's business as usual. It's the same products that are out there. Might be a different owner, but we are -- we know New Flyer very well in terms of competing with them. And same was true with Alexander Dennis. So we see this very positive.

And we'll take our next question from investor [Jeff Cowall].

A question, a couple of questions for you, J.M. In regards to the Spartan announcement, I know you just mentioned to the previous caller that this was part of the long-term plan to move away from Atlanta. I'm curious, was there any potential customer feedback in the United States that helped precipitate or accelerate or shape this decision to sign this agreement with Spartan?

No. It's not customer specifically motivated. Motivation was really is the capacity, that we have limited capacity in Atlanta. It was everything involved in setting up from the ground up and assembly facilities. So it just made a lot of sense long term because that's what we need. And what we needed long-term was a setup like we currently have with Spartan. We just had, at that time, decided to start slower, smaller, less initial investment. Let's see how the orders come in and then we'll grow from there. So we were taking a little bit smaller approach to that. But really now is a great opportunity before we get to that $100 million and then orders are all over the place. And then we have to change location or change our manufacturing setup somehow because the capacity then -- it's a lot bigger challenge. So it just made a lot of sense to do it now. And it's just that we think that Spartan is just -- with their expertise and everything else that they have to offer was just an incredible opportunity for us to jump on that now. And I think the customers are going to be delighted about this. It just -- you have to go on their website. You have to look up Spartan and their capabilities and the company. It's a very large company. This is what they do. They specialize in assembly of specialty vehicle. So this is a perfect fit and it'll be a win-win for everybody, including the customers.

Yes. And I appreciate that. Getting back to the capacity of Spartan. I mean, is there any sort of top-level commitment that they've made? So if you have a customer come to you with an order for, I don't know, 50 units or 100 units, is that something, in theory, that they could satisfy based on their facilities in the U.S.?

Oh, absolutely. They get contracts. They build fire trucks and delivery trucks. And just to give you an idea, their delivery truck orders, in some cases, they're talking thousands of units or well over 1,000 or 2,000 units. So for them to -- when we're talking 50 or 100, they are very used to some much larger numbers. So it's -- we do not see any issues whatsoever on the capacity side with Spartan. They have all the capacity and the availability or capability of staffing and adjusting to our needs for the short and long term.

So you've already answered the question, J.M., in regards to what prompted the decision that it wasn't customer related to sign this deal with Spartan. I appreciate that. Putting myself or yourself, rather, in a potential customer's shoes, how likely do you think, even if you haven't received feedback on this, how likely do you think that somebody would take a chance that you could deliver 30, 50, 100 units really unproven in the United States, but for sure proven in Canada, at a facility in Atlanta, that wasn't operational? Do you not think that, that has impeded your ability to sign any contracts in the United States up until this point in time?

It probably has. I'm sure it did. Customers don't always express it that way, but I think it probably explains part of the soft start in the U.S. in terms of order intake. We believe that this Spartan facility, the entire setup, I think is going to be a huge boost for customers that might be on the fence just waiting, in some cases, "Do we wait a little bit and do we see -- are these guys ready? Do they have everything in place?" I think that Spartan combination with ourselves I think just takes care of a lot of that. And I think we'll see customers that there'll be much -- that it'll be much easier for them to make that decision to give us the orders based on just that production capacity and expertise that comes with it. So we see a very huge -- we think it's going to be a very, very positive impact.

Yes, that makes sense. I appreciate that. One more question, I'll get back in the queue. Do you have any sort of -- did you get any sort of visibility on what happened with the ADL tie up with New Flyer in a sense of how competitive the process was? Were they -- have you heard if New Flyer was the only party at the table? Do you have any sort of scuttlebutt surrounding that?

No. No, I can't speak to that. I have -- I don't really have information on that. So I'll leave that up to New Flyer to respond to that.

Next, we'll take a question from Ron Kaulbach with Gryphon Investment Counsel.

Jean-Marc, just questioning your full and sort of expanded and maybe now decreased relationship with Weichai going forward and does that revive or does that pick up in the future, if indeed the tariff barriers disappear? The other question I have is there was, I guess, we -- I guess you people alluded to a fairly large contract in 2018, which didn't seem to materialize. I'd like to know more about that. And I think maybe I'm behind the curb, but -- and the previous person on the line mentioned the group going over to New Flyer. I was wondering, what about that relationship that you had with the minimum of 50 buses per annum. So I'll let you answer.

Can you just go back to the last question? I got your first question with Weichai. Second one was the 2,000 large potential order in 2018. The third one about 50 -- can you just -- 50 buses?

Well, you had a relationship in the past of marketing and your marketing group in the States gave you guys a commitment, I believe, of 50 buses per -- minimum per year. And I just wondered where that was -- where that stands?

Okay. Got it. So to the, just say, 2018 order you're referring to, we were at that time I think talking about Atlanta, the City of Atlanta with subsequent orders, is that the one you're referring to?

I believe so, yes.

There was about -- there were so -- we were working a lot of potential deals at the same time. So I'll try to start from the beginning, the Weichai. So our relationship with our overseas partner that's been assembling our buses for years now, that relationship really has been extremely good for Grande West. It dates -- it is now, what, it has been 10 years. That had really allowed us to adjust our production levels to demand over the years. They've been great. They're still, to date, they've been part of the discussions. They know that we were -- we had to -- we were looking at making some changes in the U.S. and they're very supportive of it. They understand that Buy America requirements means we need to assemble in the U.S. They also understand that their government is fighting with the U.S. government and we have -- that this is just the reality and there's tariffs with it. So they understand we need to increase our U.S. content or reduce our exposure to that. So even -- those are all things that we don't -- they don't -- none of us control. It's just the reality, that's what it is. If you want to grow your business in the U.S., they still want to keep their relationship with us, and we're the same. So we're seeing this Spartan will be an excellent U.S.-based assembly with a lot of expertise. Weichai is -- we're still working with Weichai on a number of other fronts. So we see this is going to be -- we're just leveraging all -- everyone's expertise. And I think it's going to -- it's looking very good. If the tariffs go away one day and the situation change and we'll see where we go from there. But for now, there's -- our agreement with Weichai is still in place. We now have an agreement in place with Spartan and we still have our agreement with ABG for the distribution, and we're pushing that along as fast and as strong as we can. So we're seeing this -- all of this combination actually probably gives us even more strength because we have so much -- so many resources coming from different places. Does that answer that question?

Yes. Just the ABG, is that still minimum 50 a year?

That was question #3. So that was question #1. Yes. ABG is still -- ABG gave us 3 years, probably let's say, a couple of years ago, they gave us an order for 50 buses. They took all their buses. Then they gave us a firm order for 100 and they still haven't taken all of them. We've been flexible with them on the delivery. But it's still a firm order. And we -- with the pipeline, everything Rob just explained, what we're working on, we have lots of opportunities. We believe that they're going to go through that PO. And those buses, well -- we're shooting for it as soon as possible. But we're definitely -- we're very confident that they will -- that will all materialize. And so that's 50 -- that answers the 50 question or 100.

And then for the larger order, you were talking -- referencing for 2018. We had, I'm assuming, it's Atlanta, and that one, we delivered 10 buses to -- it's called MARTA, the transit system in Atlanta. Those buses are going very, very well. They've been on the road, I can't remember, probably close to 18 months now, performing very well. They had indicated that they had to replace -- they've been through different numbers. I think we talked about a little bit on our last call or the previous call. They threw numbers, we were hearing numbers of 30, then 80, then over 100, then 50. So it was substantial numbers for smaller vehicles. They have since postponed some of their plans, they've taken some of their spare units or some of the routes where they had less ridership. They shuffled things around and really reassigned some of their existing fleet to the areas where they needed to expand. So really, they haven't really gone out. They postponed those clients to purchase. So that was one of them that was really high on the probabilities list a year or 2 ago or even half ago. That kind of pushed out to later. But I can tell you -- assure you that it's been -- there's a bunch of other really nice opportunities, either bigger bag or small, but there's -- the pipeline is growing, and so that probably answers the question on that one.

(Operator Instructions) And John, we have no signals from the phones at this time. I'll turn it back to the leadership team for any additional or closing remarks.

Thanks, Jim. Well, I'd like to thank everybody for joining us here today on the call, and if you need to reach us, I'm easy to find, and we look forward to being in touch with the investment community.

Thank you very much.

Ladies and gentlemen, this does conclude today's meeting, and we thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day.