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Edited Transcript of BUS.V earnings conference call or presentation 29-Nov-19 4:00pm GMT

Q3 2019 Grande West Transportation Group Inc Earnings Call

ALDERGROVE Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Grande West Transportation Group Inc earnings conference call or presentation Friday, November 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Danial Buckle

Grande West Transportation Group Inc - CFO

* William R. Trainer

Grande West Transportation Group Inc - Founder, CEO, President & Director

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Conference Call Participants

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* Ahmad Shaath

Beacon Securities Limited, Research Division - Research Analyst

* Amr Ezzat

Echelon Wealth Partners Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the Grande West Transportation Group Third Quarter Financial Results Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, [Joe Bleakley], Capital Markets. [Mr. Bleakley], you may begin.

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Unidentified Participant, [2]

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Good morning, and welcome to the 2019 Q3 earnings call. I'm going to read a cautionary note regarding forward-looking statements.

This conference call contains certain forward-looking information and forward-looking statements within the meaning of applicable Canadian securities legislation. All statements, other than statements of historical fact included herein, including, without limitation, statements regarding the use of proceeds from the private placement are forward-looking statements. Forward-looking statements are frequently, but not always, identified by words such as expects, anticipates, believes, intends, estimates, potential, possible and similar expressions or statements that events, conditions or results will, may, could or should occur or be achieved. Forward-looking statements involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

I'm here today with our CEO and President, William Trainer; our CFO, Dan Buckle. And at this time, I'll now pass off the call to Dan Buckle, our CFO.

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Danial Buckle, Grande West Transportation Group Inc - CFO [3]

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Thanks, [Joe]. Good morning to everybody. I will spend some time going through some specific highlights of our third quarter financial results before Will provides us with an update on the overall business and where things are headed for 2020.

For the sake of this call, I will round figures to the nearest 1,000. I will also make reference to adjusted EBITDA and other non-GAAP measures. For the calculation of adjusted EBITDA and other non-GAAP measures, please refer to the Q3 MD&A, which is available on SEDAR.

Bus, aftermarket parts and other revenue for the third quarter of 2019 was $1,606,000 compared to $13,831,000 in the third quarter of 2018. Our gross margin loss for these sales was $42,000 or negative 3% of revenue for the current quarter compared to a gross margin of $13,830,000 or 14% of revenue for Q3 of 2018.

Adjusted EBITDA loss for the quarter was $1,768,000 compared to adjusted EBITDA of $615,000 in Q3 of 2018. We have a net loss of $2,111,000 for the 3 months ended September 30, 2019, compared to a net loss of $308,000 in the comparative period of 2018. The decrease in adjusted EBITDA and net income was a direct result of lower sales realized in Q3 of 2019 compared to 2018.

While our results represent a temporary softening in the market being realized in our industry in Canada for 2019, they are clearly below our expectations. Although we are disappointed with our sales for the quarter and year, we are happy with the overall fundamentals of our operations. Our margins, especially for buses, have been increasing since 2017 through product mix and cost control and are currently very healthy. Our pipeline for potential sales for 2020 is quite strong, especially in the U.S. market. We are positioned very well for future growth and profitability.

And now, I will pass it along to Will to elaborate on this a bit more and to provide a corporate update and business overview.

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [4]

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Thank you, Dan. Good morning, everyone, and thank you for calling in today. It's been 3 months since I have returned to the position of CEO, and I feel confident that we're moving in the right direction. It just takes a little time. In the past 3 months, I've made significant improvements in the operation of the company by strengthening our core relationships. And this will result in a greatly improved overall performance of the company moving forward. We needed to build a bigger backlog of sales, so I have rekindled and strengthened our relationship with the Alliance Bus Group. This group sells more than 2,000 buses per year. And our Vicinity products are now at the top of their priority list. ABG is now fully engaged in bringing us more sales opportunities daily.

I'm pleased to report more RFP activity in the past 3 months than the past 12 months combined. Our first Buy America orders are now completing the manufacturing process at Spartan Motors and getting ready for delivery to customers. This is a major milestone, and we see it as clearing the path for many, many more Buy America orders. We have 3 state contracts currently in place that allow for all transit authorities across the nation to purchase product without having to issue their own RFPs.

The first delivery of our Buy America-compliant buses will build the confidence in the marketplace and provide assurance to the customers that we can deliver Buy America buses. We will be pushing for major media coverage on this event, and we'll be taking out full-page ads in the appropriate trade magazines for maximum exposure.

The U.S.A. market conditions remain strong. FTA funding for transit organizations remain healthy. Sales of heavy-duty buses are approximately $6,000 per year. And we compete in a segment of approximately 1,200 with our 30- and 35-foot heavy-duty purpose-built buses, and we see this only growing with the pressure for government-controlled transit authorities to reduce fuel consumption and greenhouse gases.

Our Vicinity bus has completed the FTA-sanctioned Altoona testing with an overall best-in-class. With our Buy America deliveries and certifications, we're in a stronger position to capture -- or to compete, and we'll be taking some of this market share next year.

The bigger market in the U.S. for us is in the light- and medium-duty bus market. The light- and medium-duty bus market has an average annual sales of 16,000. Our new Vicinity LT will compete in this market segment of over 5,000 annual sales. It will compete at a comparable price point with a vastly superior product. We believe this will capture a great percentage of this market. We have our first demonstrator units of our Vicinity LT arriving in Q1 of this coming year. This is a big winner, and should be a game changer in this marketplace. This space has an easier target audience as it is mostly private sales, no long RFP processes. So overall, we're confident in our record number of sales and orders for the U.S.A. in 2020.

I was hoping to announce a significant U.S.A. order this week. ABG has been working on it for months, and we feel it is coming soon. Please stay informed. If successful, this will more than make up for our lack of performance.

We are pleased to inform our manufacturing agreement with Spartan is going well. We continue to make improvements and cost-cutting measures on our U.S.A. manufacturing model. Spartan is a world-class organization. We manufacture in Charlotte, Michigan near Detroit. It is on a 160-acre campus, and it showcases extremely well. Doug Dunn, the CEO and President of the Alliance Bus Group, and I toured this manufacturing facility and the overall campus last week. He commented that this is one of the most impressive manufacturing facilities he's ever toured. Our U.S. customers will be very, very pleased with this facility.

Spartan Motors is excited about our future together, and they've been very helpful and supportive in helping driving our costs down to ensure our long-term success. It's our intent to manufacture all of our U.S.A. product from this facility.

On the Canadian side, I have reorganized our Canadian sales team and have them laser-focused on key areas. The Canadian market numbers have been very soft for 2019, for us and our competitors. In 2018, there were 1,788 buses delivered to Canadian transit operations. Data shows that, in 2019, it will only be 514. This is due in part by lack of funding in 2018. But during the fall election, a lot of funding has been released or is in the process of being released. Our new sales team is actively engaged with the transit authorities to ensure that we see our Vicinity buses in this new sales mix.

Overall, I'd say we are positioned well to grow. 2019 is not and will not be a great year for Grande West investors. 2020 is shaping up to be a much better year. If successful on closing on only a portion of our current sales pipeline, 2020 could be a record year for Grande West.

As most of you know, I'm one of the founders. I own a lot of stock. I have not sold my personal position when the stock was performing well. I held it and I will work hard to regain shareholder value.

Now I'll pass it back to [Joe] for Q&A. Thank you.

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Unidentified Participant, [5]

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Thanks, Will. At this time, we are going to go back to the operator into the Q&A, and we'll just leave it open for a few minutes. If there are any questions, please contact the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Ahmad Shaath, Beacon Securities.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [2]

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A bunch of questions here. Let's start, I guess, with the deliveries on this quarter. Maybe help us understand why we haven't seen any deliveries this quarter. And on the inventory buildup that you have, it looks like you guys have actually built them but maybe not delivered them. Are we going to see a big Q4? Or how should we think about Q4 with this inventory buildup? Just help us wrap our head around the deliveries.

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [3]

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Well, as I stated, 2019 really hasn't been that great. We're really looking forward to 2020. That's where we see we'll see some big differences. It's been soft. When I come in here, 2019 wasn't shaping up very well at all. So nothing has really changed in our backlog. We've not really given any guidance on what we're doing going forward here for Q4. As I stated, we're not really looking for any record year this year. But we do have -- our backlog hasn't changed, and we're working hard to deliver the buses that we currently have in our pipeline.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [4]

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Would you be able to give us reasons as to why they were not delivered in Q3, like your customers, like canceling orders? It doesn't look like they're canceling orders. But what is the reason like we're not seeing any deliveries?

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Danial Buckle, Grande West Transportation Group Inc - CFO [5]

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No. Ahmad, it's Dan here. We were trying to get a few orders out the door in Q3 that we were being a little aggressive on trying to get them out. We still are -- well, those orders have slipped a little bit, but they're still well within our customers' expectations of delivery dates. But yes, that's one of the main things that happened in Q3. But we didn't have a lot of orders actually slated for delivery in Q3.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [6]

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Oh, so it's just a scheduling issue.

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Danial Buckle, Grande West Transportation Group Inc - CFO [7]

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A little bit. I mean that's part of the issue. But at the same time, Q3 wasn't shaping up to be a great quarter, and that's mostly related to the amount of orders that we received in 2018 for delivery in 2019.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [8]

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And Q4, the schedule is looking similar to Q3, more or less, like in terms of just scheduling with customers for them to take over the buses?

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Danial Buckle, Grande West Transportation Group Inc - CFO [9]

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I'd say that Q4 is not going to be a record quarter. That's for sure. But it's -- we're definitely looking at, right now, deliveries into 2020. So Q4 is going to be a huge, huge change that -- it's not going to be -- we're not going to see a massive Q4 compared to Q1, Q2.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [10]

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Got you. That's very helpful. I guess can you give us color on the backlog? How is it looking right now? I mean last -- I think last quarter, it was around $50 million worth in revenue. Like can you give us an update on the backlog not necessarily a time line but quantity or dollar-wise?

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Danial Buckle, Grande West Transportation Group Inc - CFO [11]

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Yes. So the backlog hasn't changed much from last quarter. The big thing that -- well, not big, but we have added a few Buy America orders to the backlog. But that's really the main change right now. So right now, we're not planning on giving too much guidance right now on that. I think once we have our order book firmed up for 2020, we may reassess that and how much guidance we give for 2020. But right now, not too much has changed since what we've reported.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [12]

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So the safe assumption is to take last quarter's backlog and just add the 11 at whatever ASP were put out on assumptions on, and that will be your current backlog. Is that...

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Danial Buckle, Grande West Transportation Group Inc - CFO [13]

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Actually, our backlog should be similar because the 11 orders probably would come out of the purchase order that's already there.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [14]

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Sorry? I couldn't hear that.

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Danial Buckle, Grande West Transportation Group Inc - CFO [15]

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Yes, I would just say that the backlog is similar to last quarter.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [16]

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And those 11 -- why wouldn't we count those 11 buses on it?

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Danial Buckle, Grande West Transportation Group Inc - CFO [17]

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Well, I mean, I don't really want to get into too much guidance here on an exact number for the backlog. The backlog we had at the end of last quarter as well -- we don't like giving out too much detail there on the exact...

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [18]

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So I guess the takeaway from that, there has been some cancellation of orders or because...

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Danial Buckle, Grande West Transportation Group Inc - CFO [19]

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No, no, there's been no cancellations of orders.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [20]

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So the backlog is going up because there are new orders.

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Danial Buckle, Grande West Transportation Group Inc - CFO [21]

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Yes, the backlog is going up.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [22]

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Okay. Got you. And in terms of, I guess, the gross margin loss was just some depreciation for the lease buses in there. That's why there was a gross -- negative gross margin.

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Danial Buckle, Grande West Transportation Group Inc - CFO [23]

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No, that's part of it. We do have some depreciation in there, but we also have fixed costs that get allocated to [cost of sales]. And that's the main reason. When you don't have bus sales coming through to cover those fixed costs, I don't want to allocate that -- those cost inventory that's -- then you'd be overstating your inventory.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [24]

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Got you. Got you. And just remind me again, the ERP system is now -- has been like fully operational for a while. Is that right? And --

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Danial Buckle, Grande West Transportation Group Inc - CFO [25]

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So ERP, from a Canadian perspective, yes, the ERP is working, and we have a very good bus costing and we're able to do some pretty good analysis on the numbers, which is why you can see margins increasing as well just due to increased cost control. We are -- with the new manufacturing in the U.S., there's always going to be work with ERP. So we'll still be implementing new portions of the ERP. But everything we have that's in place right now seems to be working very well. We're always going to be looking for areas of improvement and potential cost savings, and having more data is a great way to do that. So we'll be looking for ways to enhance our ERP system over the next year as well.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [26]

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Great. And I guess maybe this one is more for Will. I guess can you talk to us a little bit more about how has the relationship with Spartan evolved since you joined -- or you came back to management 3 months ago. How have you seen that relationship grow? And what have you been doing to foster that relationship? We're encouraged by the new 11 orders of Buy America. That's a good sign. We're talking a little bit about the big orders coming up out of the U.S. So what is the plan in manufacturing? Are you still doing half in China, half in the U.S.? Like talk to us a little bit more about the strategy of putting these buses together for the American market and the relationship with Spartan?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [27]

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Yes, okay. Good. Thanks. Thanks, Ahmad. Yes. I think we got a strong relationship down with Spartan. We really treasure that relationship. As I stated, they're such a world class organization, and they've really been helping us. Spartan has a very large buying power, and they've actually helped us reduce some of our costs on some of our major components based on their buying power. They want to see us succeed. It's a good relationship. For them, we want to grow into the U.S. and get it to where we're producing like 1,000 units out of that facility. That's where they see us going. That's where long term, we see ourselves going with Spartan. But just generally, as we want to build our U.S. product down there, having -- you've got some trade issues going on with China and things like that. Our Canadian model, we keep the numbers up pretty good. The Canadian customers are very acceptive to what we're doing overseas. But of course, when you go into the U.S., everybody wants to see you manufacture in the U.S., and that's what I stated. We want to produce all of our U.S. orders out of that U.S. facility. And that's what keeps Spartan engaged. They like the numbers that we're looking at going forward, and they've just been a great partner to work with.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [28]

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Great. And maybe more in depth on that, are you fostering the relationship or are you building the relationship with ABG? And I see you guys landed 2 new transit agencies as well. So talk to me a little bit about maybe how did that come about in the sales process. Has there been any customer visits to Spartan to get them more comfortable with your manufacturing in the U.S.? Just talk maybe a little bit more about that aspect of...

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [29]

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Yes. Okay. Well, when you look at the Spartan facility, where we're manufacturing, we're manufacturing in one of their larger hubs. It's their specialty vehicle manufacturing that's in -- just outside of Detroit. As I stated, Doug Dunn and I did tour the facility, and it shows extremely well. It's our intention that once we're up and running in full capacity there that we actually deliver the units out of there and actually deliver them to the customers. They've got delivery service facilities right on the campus. So it works out -- that works out extremely well for us.

We have our first 7 units of Buy America that are being manufactured there right now. We took a look at how the setup's going, how the buses are getting completed. ABG has scheduled a final inspection for some of the customers slated, I think, for the week of December 9 or 10. He's got good customers going down there to do an inspection on the vehicles. He's also -- after that inspection, he's got a lot of his 8 mega locations. He's brought some of the managers in there from each location to actually have a tour done at the facility so that they understand what we're doing down there and the benefits of working with Spartan. So it's -- I'm very, very pleased with the direction of what we're doing with Spartan. They seem to be pleased as well. We feel we've got enough in the order book that will keep their assembly line building steady for next year. And that focuses into -- when we say we've got a good sales pipeline right now, we've shared that sales pipeline with them, and we want to get their assembly line up and running to full capacity, and going forward, that's what we see. So we're quite happy with it.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [30]

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And just lastly, that's the last one for me. Have you taken any new or potential transit agencies that haven't ordered anything and not on the menu bids for you guys to that facility? Did that help -- is that helping them getting more comfortable giving orders to you guys (inaudible)

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [31]

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Yes. In the U.S., the competition is fierce. It's a lot fiercer in the U.S. than it is in Canada. That's why setting up with Spartan and having a U.S. manufacturing works for us. There has been -- I know that they're using that as a marketing tool to showcase customers where we're manufacturing. And I think that is -- that's the reason we've got some of these new 11 orders that we currently announced based on our capabilities with Spartan. I know that Doug's sales team, they have brought some people or indicated to them that we're manufacturing there and setting up some tours, so it's exciting.

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Operator [32]

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Our next question comes from Amr Ezzat, Echelon Partners.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [33]

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It's Amr from Echelon. Just a couple of quick ones for you. Will, you mentioned in your prepared remarks that you potentially could have a record year in 2020, I guess, if you fulfill on some of the potential RFPs. When you say record, are we talking about deliveries or wins? Or is it EBITDA? Or what are we talking about here?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [34]

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The whole thing. We feel we've got a very strong sales pipeline right now. We've got, as I indicated, we've got an extremely positive order that should be coming out here shortly with that, and given what we feel we've got in the pipeline right now for delivery and what we have in the backlog, we really see 2020 is shaping up to be a record year in revenue, in sales deliveries, in backlog of orders and that all reflects into a positive EBITDA.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [35]

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Understood. Then you spoke, well, to a potential large order in the U.S., and you just alluded to it. And obviously, maybe you can't say like too much. But can you quantify the magnitude of that order? Would it be like the largest order you guys have ever received? How does it compare with the BC Transit maybe orders that you've received, or any color there that you could share with us?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [36]

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I really can't indicate that at this juncture. But as I stated, just stay tuned. We feel very comfortable. We've got some -- a nice order coming and other ones as well. So I don't know, I don't think I can share too much more than that, Amr.

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Operator [37]

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(Operator Instructions) There are no further questions at this time. And I would now like to turn the call back over to William Trainer for closing remarks.

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [38]

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Well, I'd just like to say -- thank everyone for calling in, and we look forward to a great 2020, and everybody, thanks again.

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Operator [39]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.