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Edited Transcript of BUS.V earnings conference call or presentation 29-Aug-19 3:00pm GMT

Q2 2019 Grande West Transportation Group Inc Earnings Call

ALDERGROVE Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Grande West Transportation Group Inc earnings conference call or presentation Thursday, August 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Danial Buckle

Grande West Transportation Group Inc - CFO

* John LaGourgue

Grande West Transportation Group Inc - VP of Corporate Development & Director

* 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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Good day, ladies and gentlemen, and welcome to the Grande West Transportation Group 2019 Second Quarter Financial Results Call. (Operator Instructions)

At this time, it's my pleasure to turn the floor over to Mr. John LaGourgue. Sir, the floor is yours.

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John LaGourgue, Grande West Transportation Group Inc - VP of Corporate Development & Director [2]

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Thanks, Tom. Good morning. I'd like to welcome everybody to our 2019 second quarter results call. Today, we have our CEO, William Trainer; the CFO, Dan Buckle; and myself here.

Before we get started, I need to notify our listeners of 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 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 for information.

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

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

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Thanks, John. Good morning to everyone. I'm very happy to be able to discuss our second quarter financial results. For the sake of 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 our Q2 MD&A.

We had deliveries of 25 Vicinity buses during the second quarter of 2019 compared to 61 buses in the Q2 of 2018. Bus, aftermarket parts and other revenue for the second quarter of 2019 was $11.879 million compared to $25.294 million in the second quarter of 2018. Our gross margin for these sales was $2.342 million or 19% of revenue for the current quarter compared to a gross margin of $4.856 million or 19% of revenue for Q2 of 2018. Our margins, especially for buses, have been increasing since 2017 through product mix and cost control and are currently very healthy.

Adjusted EBITDA for the quarter was $347,000 compared to EBITDA of $2.879 million in Q2 of 2018. We had a net loss of $434,000 for the 3 months ended June 30, 2019, compared to net income of $1.991 million in the comparative period for 2018.

Moving to the balance sheet. I would like to highlight that our working capital has remained very healthy. At June 30, 2019, we had working capital of $16.4 million with only $2.6 million in long-term liabilities. Overall, our high margins and strong balance sheet position us very well for future growth.

Now I'll pass it along to Will 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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Thanks, Dan. Good morning, everyone. It's great to be here for this call. I wish this is more of a feel-good reunion as it's been a bit of a bumpy road as of late. There is a lot to look forward to when we look at Grande West as an involving company. To review the news we put out this week, 18 months ago, I stepped down from my CEO responsibilities. This was due to a family medical emergency with my daughter, and I just could not spend 100% of my time at Grande West. The emergency has passed and the company has not performed well or up to expectations, requiring me to step back into the CEO role.

We wish Jean all the best in his future endeavors and that's really about all I have to say about the CEO position. We are now focusing on the present and the future. I'm fully committed to bringing the company to the next level. Given the financial information Dan has just provided on the margins and the balance sheet, the only thing that is really missing is sales, sales, sales, and to achieve our sales goals.

Now onto a corporate update to address how we're going to get these sales. Canada has always been a strong market for us. Past lack of funding from the government has resulted in a soft market for Grande West and our competitors. 2019 is the election year and funding has now started to be released. Grande West will get its shares of these orders. We are now seeing more tenders and opportunities growing daily. Our business model for Canada is perfected and our margins are good. Vicinity buses have been accepted and are performing with great success across Canada. Customers are reporting that our buses have the lowest cost per kilometer to operate in their fleets. This is great news for the Vicinity bus future.

We are now adding more product, the Vicinity LT, this also will be a winner. The market size in North America for heavy-duty buses is estimated at approximately 6,000 per year. The market size for light-duty buses is 16,000, and specifically, 5,000 for the Vicinity LT market. The LT is really our 27.5-foot Vicinity bus lightened up. Once we introduced the 30-foot 2-door, we've not sold another 27.5-foot 1-door model. So we reconfigured the 27.5-foot to accommodate the cheaper cutaway components such as a GM gas engine, small Allison transmission, standard axles. And in doing so, we've made our 27.5-foot extremely competitive priced in a new 5,000 bus market space.

And we see this as a real game-changer. A prototype was built, tested and verified, and we now have moved it into a production model and we'll see our first demo buses arrive by year-end.

We will produce this product with an engine that can accommodate gas, diesel, CNG or propane. We'll also offer an electric version, which will follow up in mid-to-late 2020. This model is now generating a lot of opportunities.

And now onto the U.S. operations side. The U.S. has been very slow to penetrate the U.S. market. Competition is fierce. In order to win over the U.S. market and gain market share, we need to prove we can deliver a Buy America compliant bus. Our business model has always been to contract manufacture. We have engaged Spartan to be our contract manufacturer for the USA. We are the original equipment manufacturer, an OEM. We purchase all the parts needed to assemble our Vicinity bus. The bill of material parts must have at least 70% made in America parts, and we comply with the 70% as it must be audited. We ship the parts to Spartan, who is a world-class manufacturer in Detroit, Michigan. Spartan, under contract, assembles our Vicinity buses for the USA. We then deliver a U.S.-manufactured bus with our USA VIN plate to customers.

We now have our first orders of Buy America buses in Spartan starting to be assembled. Once delivered to our USA customers, we will have proven to the market that Grande West can deliver Buy America compliant buses. This is big news as it's been the #1 reason for customers not purchasing our U.S. -- not purchasing our bus in the USA. This will open the floodgates for our USA orders. We're very excited to get to this milestone.

Having said that, we have reorganized our USA sales distribution model to penetrate the market more effectively. And business looks great for 2020. Activity is up, pipeline of opportunities is growing, and we have some large orders we've been working on with the Alliance Bus Group, and I'll report that they are looking very good.

Electric buses are now starting to enter the market, and customers are now seriously looking for change. Grande West will introduce electric options for our Vicinity HT models next year. We don't expect large orders of electric buses, but the feel -- but feel the timing is now appropriate to enter this market space. As many of you know, I'm a large shareholder of BUS. The original partners and founders are also large shareholders, and as such, I'm very committed to see the success of Grande West.

I'll now turn it back to John to open up for questions. Thank you.

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John LaGourgue, Grande West Transportation Group Inc - VP of Corporate Development & Director [5]

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Great. Thanks, Will. Tom, can you open us up for questions, we'll take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Ahmad Shaath with Beacon Securities.

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

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Will, welcome back. Good to have you at the helm.

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

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Thank you, Ahmad.

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

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I'm glad everything is going well with you and the family. Just my first question is the last point you touched upon in the U.S. operation in terms of reorganizing the sales distribution model. So can you talk a little bit more about that? And what's the approach there? And what's especially with the Rob Mowat's involvement as the VP of sales, how is that going to work in terms of the U.S. side of things?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [5]

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Well, we're just reorganizing as I stated, I'm not really -- what we're looking at to do in the U.S. is getting more penetration in areas that we don't have. If you look at the Alliance Bus Group, they are very centrally located. I think they've got 8 large locations, they're generally more in the Southern area. And we really need to penetrate more in the Midwest and out on the West Coast. So that's really -- our direction is try to put some more, perhaps, dealers in place. We're formulating that plan as we speak, but we really want to hit the market and penetrate it a lot more.

As stated, once we get these first Buy America buses delivered to the customers, that really gives the confidence in the marketplace that shows we can deliver the buses and we just want to penetrate the market a lot more than we have in the past.

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

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Great. And just to clarify, ABG still have exclusivity on distribution? Or is it regional? Or is national-wide exclusivity on distribution of Vicinity buses?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [7]

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Well, right now, as we speak, yes, Ahmad. But I have been working with the Alliance Bus Group to open that up and get us some better coverage as I stated. So I'm not really -- want to talk about that in greater detail at this point. In the next couple of weeks, I think we'll unveil what really -- what we're doing there. So just stay tuned, really, thanks.

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

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Yes. Fair enough, fair enough. You just got back a few days ago, so that'll take time, that is understandable. And on those buses that are going to production with Spartan, can you give us a little bit more color on timing, quantity? And when do you expect to give us an update on how is that operation going?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [9]

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Well, that -- the quantity coming through there was a small quantity. We got some orders from some small, I believe they were in the Mississippi state area, and really there were 7 buses that we're going through. We feel that this is really good for us because it's a small organization that we can look after extremely well, get the buses in there, show them that the expertise that we have to look after them, but really, it's getting those first 7 out to the marketplace.

Once that, we are working on a considerable -- on a lot more Buy America orders, but the U.S. customers, they've been reluctant to give us the orders because they want to see that you can deliver the Buy America compliant. And that's what I stated. I think that's just a huge milestone for us to get to and I think it will push the other ones that are sitting off. We have some large contracts in the U.S. that allows customers to buy off of. Our state of Georgia contract, that contract allows customers right across the USA to buy off of our -- couple of our other contracts as well. So I think, like I said, the most important thing is just get these first buses delivered, and we should see some more orders roll in right after them.

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

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And just timing-wise, when do you expect these to get on the manufacturing line, is it Q4 still?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [11]

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Yes. They're actually -- the buses are there starting to get assembled as we speak right now. We do have our production manager down there this week, working with them, getting them set up, and we need to deliver those buses to the customers really before the end of the year or as soon as possible. But they are down there now, and contractually, we will deliver them before the end of the year.

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

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And on the average selling price, it's been strong for the first half. I'm just wondering I guess that's a lot of CNG buses. So how should we think about the ASP towards the second half of this year and next year as well? If you can give us any color on that.

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [13]

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Well, CNG is becoming more popular, particularly, here in Canada as well. I think we -- the order book pricing or the price per bus should stay up pretty good. Dan, do you have any comment on that?

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Danial Buckle, Grande West Transportation Group Inc - CFO [14]

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Yes. No. That's correct. We definitely are selling more CNG units. The average sales price, we expect to remain fairly high. We did have -- Q1 specifically was very high average sales price, but Q2 was less CNG buses. We just have a higher sales price for those products coming through.

The margins are still very, very healthy. What we would expect to see in the future is, obviously, as we've stated before, the first few buses coming out of America for Buy America, they'll have high average sales prices, the margins will be lower than we're seeing right now, but that's similar to how we began our business in Canada. The margins will increase fairly quickly after that once we get to producing more buses and just institute more cost-control measures and cost-savings measures and put everything in place. But for an average sales price, yes, we expect to see it strong, not quite as strong as Q1, but in Q2, that's pretty realistic.

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [15]

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Good. Thanks, Dan.

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Operator [16]

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(Operator Instructions) We'll go next to Amr Ezzat with Echelon Partners.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [17]

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Will, it's good to have you back, at least on the conference calls. Can you, I guess, like share some color to the extent that you can on how you see the next like 2 or 3 years evolving in terms of sales? I know you guys like refrain from sharing like targets or a guidance for this year, but you guys like have a 2- or 3-year target that you could speak about?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [18]

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We do. We see the market really picking up for us. As I stated earlier, the Canadian market went soft. I think you will see there from our competitors as well based on some fundings coming out now. 2 to 3 years, we need to add more product as we've been doing and just really penetrate the market a little bit better. So we're seeing some pretty good growth range for the next 2 to 3 years. We haven't modeled that out as of yet, but to be clear, we really look at the next 2 to 3 years to be definitely a whole lot better than this year.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [19]

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Understood. Then are you guys like planning I guess like to give a delivery target again at some point? Or what's the thinking there?

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Danial Buckle, Grande West Transportation Group Inc - CFO [20]

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Yes. It's Dan here. I think that definitely, right now, we're in the mode of building up our order book. So eventually, we will start giving a little bit more guidance. But right now, we see a pretty big pipeline. But once we start getting orders on that pipeline, we'll give a little bit more guidance than we have definitely this year. But at this point, we're not ready to give guidance on 2020 or 2021 at this point. But yes, as Will said, it will definitely be better than this year.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [21]

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On the crossover products, LT I think you called it, how should we think about the margins there relative to your current product line?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [22]

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Well, actually, we produce that bus to come out with some really, really good margins to be truthful on it. When we look at that product, all our R&D money was already spent upfront on that product. That was really original product that come out. So to configure it into what we needed to do with this is relatively very inexpensive, and the components that are going into it is very inexpensive.

To give you clarity on, our bus -- our heavy-duty buses really -- the heavy-duty models are 12-year model or 12-year life cycle buses. These small cutaway-type buses, well, they exchange them every 5 years. Some areas are 3 years, most people are changing them up in 5 years. We are extremely competitively priced. We've priced this bus to come in head-to-head with the competitive cutaway product in that market space with a low-floor configuration. It's -- I really think this is going to be a big revenue booster for the company. And as we're speaking, this isn't a product that's just coming out now and hitting the market. We developed this product quite some time ago, the 27.5, and then built that -- built the prototype, sent it around, got feedback on it, and as we speak, we have some large customers that are just waiting for the demos to come in. So we really think this is going to be a great product for us.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [23]

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Is it fair to assume that it's going to be a larger, I guess, like aftermarket sales cycle for you guys like for that product relative to the legacy product?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [24]

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Well, the small product line turns over much quicker. So yes, you're going to -- we should see some pretty good revenue in that product line, and we should see some great margins in it. When you first produce a bus, you've got to take your R&D cost and put it over in the cost of the bus in order to be profitable. This one, the R&D costs have already been set forth in it.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [25]

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No, I was talking about the aftermarket parts. Should...

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [26]

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Oh, aftermarket parts. Our aftermarket parts for a 12-year bus. We're just starting to see that come into where we need it to be. Some buses are out there, 3- to 5-years old now and that's where you need to have the aftermarket come in. Aftermarket parts is a great, great continuous revenue builder for you. This little bus, yes, it will have some because not as much as the big bus because of the components you find. The components are really off-the-shelf standard GM-type components. And I don't know if we can be competitive as we can in them aftermarket but when you look at the product itself, windshields and side panels and things like that, that's where the -- that's where you get to -- your best margins is in your parts that are -- that you're the only one providing. So yes, we look at it as a really, really good product to bring out.

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Amr Ezzat, Echelon Wealth Partners Inc., Research Division - Analyst [27]

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Just maybe like a last one on the electric propulsion. Do you guys -- I guess, like what's the update there? And do you guys have a target commercialization date for those?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [28]

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We do. Well, I've said before, when you look at the electric market, the electric market is starting to pick up. Definitely -- you look at Asia, there is a lot of electric buses coming out. Europe is starting to see electric changing over very rapidly. North America has been very slow to adapt to the electric product. Sales in electric right now are less than 1% of what the market is. So it's not -- that's what I was saying earlier in my comments, it's not a big market that's going to come out, but the customers now are looking at it as an alternative to buy. So we need to be in that market space.

Fortunate for us, we did start developing electric bus probably 5 years ago and had a little bit of a prototype model come out that earlier ago, but there was just no market for it. So for us to bring it out now, I think, we'll gain some traction in that market space, but I don't see it as -- we're not going to have hundreds of buses of electric coming out right away. You need to enter the market, show that you've got the product and be there as the customers convert over. We've got a very good following of our Vicinity buses across Canada. So it's just a natural that you introduce the electric version of it, and as they start to turn to electric, we'll turn the lines to electric that's what we see, but it's a buildup of product that needs to gain some traction.

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Operator [29]

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(Operator Instructions) We do have a follow-up from Ahmad Shaath.

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

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Will, just back on the Vicinity LT quickly. Is the target for that bus is public market? So would you have to go through an Altoona Test for it? Or are you targeting the Canadian market and the U.S. private market only for that product?

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

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No. We're going to go all out with that one as well. We've got some demo buses that are coming in. One is scheduled to go to Altoona as soon as it comes in late this year, so we'll apply to Altoona and try to get it in their first quarter of next year or as early as they can accept it. But that market is really -- initially, the Canadian sales should pick up on it, and the private U.S. sales should pick up right away on it. We can make it Buy America compliant. It's got a lot of GM parts and pieces in it, so it fits in there very easily to convert to Buy America. But initially, no. It will be Canadian market and private sales in the U.S. and focus on the Buy America buses.

But the -- as I stated, the market for that is pretty big just on the private side alone. And here, if you look at the Canadian market, where we get excited about that is we target that to go after the high-end cutaway, the low-floor cutaway market and high-end cutaway market. To give you an example, I think in BC alone, the company's here are running -- I think BC Transit runs around 350 and Translink runs about 350 of those type models alone. And then if you look at Alberta, it's got similar numbers. So if you look at that, you've got over 1,000 or 1,500 units just here. And I'll just use the 2 provinces, BC and Alberta, and they are turned over every 5 years. So it's a large market that, I think, we're going to penetrate rather quickly.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [32]

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That's great. And maybe a follow-up on that. So what is your target ASP for that? So who are you trying to compete with, are you trying to compete with the low-floor, high end of the market? Or are you trying to compete with lower end of the market, the 5 year sort of lifetime buses? Or what is...

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [33]

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No, if you look -- Ahmad, if you look at the market on that, that's what I said, it's about 16,000 units per year in that light market. Out of that light market, I think you've got roughly -- almost 10,000 of them are the very, very low-end cutaways. We don't want to enter that market space. That's not where we're going with this. And as you look you've got about 5,000 in that upper-scale cutaway market. That's the market that we're going to penetrate and that's what we're targeting hard that marketplace. And that marketplace, I really think is just perfect to get into and gather some quick sales in that market.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [34]

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And when we speak about a healthy margin profile for this product, how much of a discount or a competitive pricing do you factor in compared to those higher-end units?

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William R. Trainer, Grande West Transportation Group Inc - Founder, CEO, President & Director [35]

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We are -- I think we can go on head-to-head in price range for the high end one. And then if you look at that, we've got a low-floor, purpose-built monocoque body in at the same price range. It's a winner.

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Operator [36]

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And ladies and gentlemen, at this time, there are no further questions in the queue. We'd like to thank you for joining us today on today's conference call. We appreciate your participation. You may disconnect at this time, and have a great day.

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Danial Buckle, Grande West Transportation Group Inc - CFO [37]

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Thank you.