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Xebec Adsorption Inc. (TSX: XBC) (OTCQX: XEBEF)

 

January 22, 2021 (Investorideas.com Newswire) Xebec Adsorption Inc. EO Kurt Sorschak on Q3 2020 Results - Earnings Call Transcript Q3 2020 Earnings Conference Call November 10, 2020 11:00 AM ET

Company Participants

Brandon Chow - Investor Relations

Kurt Sorschak - Chief Executive Officer

Stéphane Archambault - Chief Financial Officer

Louis Dufour - Chief Financial Officer

Prabhu Rao - Chief Operating Officer

Conference Call Participants

Brandon Chow

[Call starts abruptly]

My name is Brandon and I'm the Investor Relations Manager of Xebec. I'd like to remind everyone that this webinar is going to be recorded and will be made available in the investor's section of our website later today. Please note that we will open the floor to questions after the conclusion of the presentation. If at any time you have a question you may type it in the console on the right of your screen. Joining me today will be our CEO, Kurt Sorschak; and our Chief Operating Officer, Dr. Prabhu Rao; and our soon to be retired CFO, Louis Dufour and our newly appointed CFO, Stéphane Archambault.

Our earnings press release was issued earlier today before market open. All relevant documents are available for download either from the investor relations section on our website or from CDR directly. You will also find later today, a copy of today's slide deck on our website's investors section.

During this call, we will make forward-looking statements about our future financial performance and other future events and trends including guidance. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could affect their financial results and the performance of our business which we will discuss in detail in our filings, including today's earnings press release and the risk factors and other information contained in the final prospectus relating to our recent offerings. Xebec assumes no obligation to update any forward-looking statements as we make on today's call. There may also be references to certain non-IFRS measures such as EBITDA, adjusted EBITDA, backlog and quote log. These non-IFRS measures are not recognized measures under the international financial reporting standards and do not have standardized meaning described by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies.

With this, I'll turn it over to Kurt.

Kurt Sorschak

Thank you, Brandon. And welcome everyone to Xebec third quarter 2020 webinar. Let me start out with a few words on the retirement of Louis Dufour. Louis joined our team as CFO four years ago during a transition period, when we just started to realize the rapid growth phase of Xebec into the renewable gas company that we are today. He was instrumental in building the finance team and supporting our aggressive growth targets. On behalf of the Board and the management team, I would like to give him a heartfelt thank you to Louis for all his contributions to the success of Xebec over his tenure. We all wish him a happy retirement and we appreciate his commitment to ensuring a successful transition to our incoming CFO, Mr. Stéphane Archambault, who has joined us here on the call today.

Stéphane, if you just briefly introduce yourself.

Stéphane Archambault

Thank you, Kurt. Good morning, everyone. I just wanted to say that I'm very excited to join Xebec. I look forward to contribute to the success of the company so we'll be talking very soon. Thank you.

Kurt Sorschak

Okay. Now, let me get into the quarterly presentation and into our prepared remarks. This was a difficult quarter in which we continued to build the foundation for Xebec's future. Despite all the challenges, Xebec was able to display resilience in its business and maintain its gross trajectory. We continued to receive some good purchase orders and close several acquisitions.

As we all know, COVID-19 is still going strong. It continues to have an impact on our revenue and our gross margin generation ability. However, we maintain a positive outlook, on the industry and on our business as we focus on returning to a more normal operating conditions and on rebuilding our economies with clean energy initiatives, which we hope will start next year. We've already seen indications of this in geographies such as Europe, where renewable electricity and renewable gases, especially hydrogen, have come to the forefront of the low carbon energy transition and several countries have announced strong new programs for hydrogen and renewable gases. Furthermore, the election in the U.S. gives us hope as the Biden administration has announced that the U.S. will rejoin the Paris Agreement on January 20. And we look forward to the implementation of all or part of the so-called Green New Deal, which should be very positive for Xebec.

In 2016, Xebec generated revenues of $9.6 million and from there on, we continued to grow every year by about 50%. 2020 is no exception to this. To continue this growth, we have taken significant steps this year to strengthen our organization, and build out our operations, as well as our processes and technologies that will support our growth for years to come. Our organizational buildup includes several senior management hires, the implementation of an upgraded ERP system, the implementation of internal controls according to 52-109, in order to be able to upgrade to the TSX, a process that has taken over 10 months and was accompanied by an external consultant, the implementation of our ESG sustainability reporting that will allow us to measure and report on those important metrics, and we have significantly expanded our staff to be able to deliver future growth.

I can also announce that we've received conditional approval to upgrade from the TSX Venture Exchange to the TSX main board. This is the culmination of a year's worth of hard work from our staff working in the background to ensure that we meet the strict requirements of the exchange. Furthermore, we continue our acquisitions. Despite the physical barriers imposed on us by COVID-19, we have now developed a fully remote M&A process, which continues to give us more reach to explore opportunities, unfortunately, so this new process also leads to higher costs due to outsource nature of most of the due diligence that we are conducting. Additionally, the quarter was impacted by slower deliveries and lower productivity than planned which reduced revenues compared to budget and our gross margin was slower due to higher costs associated primarily with the delivery of that revenue. We are still learning to deal with the reality of COVID-19 and its impact on our organization. But I'm confident that we will see significant growth next year and the return to profitability as a new vaccine becomes available, and COVID-19 runs its course.

With this, I'll turn it over to Louis Dufour, who will go over the financial highlights, Louis.

Louis Dufour

Thank you, Kurt. And welcome everyone joining us. Let me start by reviewing our consolidated financial results for Q3 2020. As Kurt discussed, we achieved revenues of $18.4 million in the third quarter of 2020, compared to $13.2 million for the same period in 2019, a 39% increase. This came in lower than expected, but we're still proud to have been able to continue growing in the current environment. The increase is mainly explained by the higher volume of major clean debt contracts and acquisitions of service companies.

Our gross profit was $4.4 million or 24% of revenues for the third quarter of 2020, compared to $4 million for the same quarter in 2019, a 10% increase compared to the same period in 2019. The increase is mainly explained by the ramp-up in revenues. However, our gross margin as a percentage of revenues came in lower than expected due to continued investment in product standardization, higher cost of materials and higher construction costs for site impacted by COVID health and safety regulations. We continue to address this and have seen improvements, but are aiming to bring the gross margin back to our historical and targeted levels of 30% plus.

Selling and administrative expenses were $5.7 million in the third quarter compared to $2.7 million for the same period in 2019, a 111% increase. The increase is primarily due to the organizational scale of employee and associated costs to support the increased level of sales, order backlog and quote log. Also included are professional fees, I should say very high professional fees for a ramp-up in acquisition activities and higher than anticipated onetime cost of acquisitions due to outsourced due diligence. A financial metric we monitor is our selling and administrative expenses as a percentage of revenue, which was 31% for the third quarter compared to 20% for the same period in 2019, an increase of 1,100 basis point. Ultimately, our long-term target is to have SG&A at 15% to 17% of revenue and we expect to achieve this in the coming years as we gain more operating leverage and growth slows down. We have negative EBITDA at $1.2 million for the third quarter 2020 compared to positive EBITDA at $1.4 million for the same period in 2019. In addition, adjusted EBITDA came in at negative $0.6 million for the third quarter 2020 compared to positive of $1 million for the same period in 2019. EBITDA was more impacted by the reduction in gross margin and higher SG&A this quarter.

Net loss for the quarter was $2.1 million, or negative $0.2 per share compared to net income of $1 million or $0.02 per share positive for the same period in 2019. The decrease is mainly due to lower margins, amortization expenses, and an increase in SG&A expenses as a percentage of revenue. Lastly, we ended the quarter strong with working capital having increased to $81.3 million as at September 30, 2020 for the current ratio of 4.4 to 1 compared with a working capital of $36.9 million and a 3.2 to 1 ratio on December 31, 2019. We have $51.9 million of cash as of September 30, 2020, as a result of our recent capital race. This cash position and low debt gives us a strong financial position and flexibility to maneuver the environment and take advantage of opportunities.

Now, I'd like to bring your attention to this graph, which shows the quarterly financial trends. As you can see, our financial continued to trend in the right direction and demonstrate strong growth. We continue to display resilience and string-based by the fact we are able to maintain our top-line growth. I've not laid off anybody, but contrary add 30 new employees in 2020. We have not cut any salaries or furlough off any employee. The industry trends remain in the positive direction and we expect this to improve as the pandemic moves past us.

For the past three quarters, we have been able to maintain continuity through Xebec and its subsidiary. This quarter in particular, we had a number of key hires that will allow us to scale and further support our revenue trajectory into future years. We expect that future years we'll see a similar revenue growth profile and improve profitability as we gain more operating leverage.

I'll now turn it over Prabhu, our Chief Operating Officer who will provide us an operation update. Thank you. Prabhu?

Prabhu Rao

Thank you, Louis. And I look forward to giving you all an operations and business update. I'd like to start with a slide that I've used before, which defines the framework of our strategy and identifies the synergies between our business segments. The industrial business, which focuses on compressed air products and services, the Cleantech equipment sale business that is focused on RNG upgrading equipment, CNG dryers, and PSA purification carbon capture and gasification and the most recent initiative on our side in terms of renewable gas infrastructure development. As you can see from the graphing the progress in any one segment provides business opportunities for the other segments, and we are beginning to see that synergy this year. I'm also happy to report that we continue to make progress in all our segments, despite the difficult working environments that we are all under.

Now, let's review our Q3 performance and look at each segment in more detail. On the Cleantech business, our Q3 revenues were $10.2 million compared to $10.7 million in Q3 last year. Although this is lower than it was for the quarter, this gap in revenue will be recognized in future quarters as they finish the deployment and commissioning of our plants. Over the next two quarters, we'll be delivering eight biogas plants, and these will be in various stages of commissioning. Given the COVID situation, we have established protocols for our staff to be on-site so that we can accomplish these startups in a safe manner. The higher installation and commissioning costs and associated delays have put downward pressure on margins and we expect that this impact will be lower as we get past the COVID-related delays. On the sales side, although we saw some immediate impact of COVID in Q2, according activity has been very robust in Q3, and we booked multiple biogas and hydrogen orders in Q3 in North America and China. Our backlog continues to be strong at $88 million. And currently, we're in the final stages of contract negotiation on many biogas projects starting position as well for 2021.

In our last quarterly call that introduced Biostream, a small-scale biogas I'm really proud of that is designed for farms and wastewater treatment facilities. The product launch is going well, and we're shipping units in the next few weeks for installation in California. As a reminder, this design incorporates Xebec unique PSA technology, and all critical subsystems are integrated inside or on top of a 40-foot container and can handle bio gas flow rates up to 280 CFM or 450 normal cubic meter per hour. As you can see from the image the product has been designed so that is easy to install and minimizes onsite construction work, which can be a significant cost saving for a project. In addition, the design also allows us to test the system at the factory and minimizes site commissioning time which provides a higher value to the customer who's eager to inject RNG into the pipeline. The feedback from the industry is very positive and our quote for Biostream is in excess of $100 million. Following the launch in North America, we'll be introducing Biostream in Europe in the second f of 2021.

On the larger plans, we are currently working on the design procurement installation of multiple biogas plants in North America, and continue to strive towards standardizing the design of these plants. The development costs incurred to standardize the plants continue to impact on gross margins. But as we expected this as we finish towards the margins we'll continue to improve. Before I shift to the industrial business a bit, I wanted to mention that we continue to show traction in the sale of PSAs for the hydrogen and fuel cell markets and our projects with CO2 capture are progressing well. And we'll update you once we have the systems deployed on the field.

Now, shifting our focus to the industrial business. In Q3 this year, the revenues increased by 228% compared to Q3 last year. This increase is attributed to both organic growth and acquisitions that have been completed in the last year. In Q3, we announced the acquisition of airflow in North Carolina and applied compression systems in British Columbia. With the airflow team, we are now able to service customers in North and South Carolina, Virginia and parts of West Virginia. ACS based in Cranbrook BC is a leading provider of integrated compression solutions for the biogas industrial energy markets in Canada, and we welcome the team to Xebec.

Our goal is to provide ACS with the necessary investments and infrastructure to grow their business significantly over the next few years. I'm very excited about the potential this team and all our subsidiaries have the capability of quoting package compressor solutions in these industries that they may have passed on before. Earlier this month we also announced the acquisition of The Titus Company based in Morgantown, Pennsylvania. The Titus team provides us service coverage for Pennsylvania, New Jersey, [indiscernible] Maryland and Delaware and also brings some unique product offerings into our portfolio. We welcome them to Xebec.

Our pipeline is strong and we expect to continue to acquire two to five companies per year over the next few years and build our service network. But the current portfolio of companies and Xebec's internal aftermarket business, we are at a run rate of between $50 million to $60 million in annualized revenue going into 2021. Our gross margins for the industrial business should be tracking between 35% to 40% and we expect this to improve as we find synergies in the administrative and supply chain functions across the network of companies. I'm also encouraged to hear from the leaders of these companies that they are beginning to see an improved level of ordering and order uptaken in the business in Q4.

I'd like to end with a few comments regarding the build of what we call the Cleantech service network. Our plan is to develop a well trained and certified team of service technicians that are able to service products in the compressed air renewable gases CNG and industrial gas markets. We currently have about 40 technicians on the network with 10 service centers, and the ability to reach customers in many parts of North America. In addition to the training and certifying these team members, we are also investing heavily in technology tools that they will need to get real-time system data, local parts availability, and service updates, etcetera. We believe that this is a necessary part of our product offering and will provide us with a competitive edge and a pathway for long term revenue generation.

This concludes my update on the Cleantech and industrial businesses. And Kurt will provide you with an update on the infrastructure business with GNR Quebec and some closing comments. Thank you.

Kurt Sorschak

Perfect, Prabhu. Thank you. So let me bring you through the infrastructure segment. As you know, all our Quebec based infrastructure activities have been rolled into our branch GNR Quebec Capital that we created earlier this year with the FTQ. We've made several key hires for the fund during Q2, and Q3, and namely Gérard Mounier who has been appointed as President of GNR Quebec Capital, and we have hired two other senior managers to support him in developing the base to RNG opportunities in Quebec.

We are pleased that a robust pipeline of projects has been developed over the last three to four months and that the team is now evaluating approximately 10 projects in Quebec. We expect that the evaluation pipeline will continue to grow as we explore more opportunities throughout the province. Ultimately, we don't expect any revenues or investment gains out of that investment in 2020 or 2021 because of all of the activities and projects will take time to develop. Typically an RNG infrastructure project takes two to three years to develop, which includes permitting, securing feedstock, offtake agreements, preliminary engineering and so forth.

One catalyst nonetheless, that we are watching very closely in relation to the infrastructure segment is the rollout of the Canadian clean fuel standard. This regulation will mandate 30 million pounds of annual reduction in greenhouse gas emissions in Canada, which will be a positive catalyst for RNG projects. Our internal estimates are that we will need to build 600 to 800 of these waste RNG facilities across Canada in order to achieve a 10% carbon intensity reduction of natural gas being transported by the Canadian gas utilities. All those 600 to 800 facilities GNR Quebec Capital should be able to support the funding of 12 to 15 of these projects here in our home province in Quebec. Obviously, there are significant further opportunities in the rest of Canada if the Canadian clean fuel standard is finally introduced.

Now, I'd like to highlight the strong foundation we're building as a platform for our future growth. As I mentioned earlier, the conditional approval for the uplisting to the TSX main board was a positive development for us. We've been working on this since late last year. The implementation of strong internal controls, according to 52-109 is a significant organizational effort that took a lot of planning, segregation of duties, establishment of documented processes and approvals and many of these processes have been hardcoded into our ERP or enterprise resource planning software. This led us to consequently upgrade to the latest version of our ERP software, a major step for us and as anybody knows whoever implemented an ERP system, this is not straightforward and quite complex. And we expect to go live with this new version of our ERP system in January 2021. This is a key piece of software that essentially runs our business and which will provide the backbone to our streamlined operations. It will help us integrate and manage our acquisitions while supporting the creation of synergies within our business. So quite important, we took a lot of effort, we hired consultants around this, so to be sure that we have a solid and good implementation.

Earlier this year, we launched our first ESG sustainability report and we have been actively working on establishing pathways for data collection of scope 1, 2 and 3 emissions. Several steps have been taken towards improving our in-house environmental sustainability, including the installation of several EV charging stations at our head office here in Blainville, improved lighting in our facility indoors and outdoors, and some other environmentally friendly operational improvements. We have also taken steps towards a more diversified board by naming our first woman board member and we look forward to adding even more diversity to the board and the management team in the coming quarters. As you know one of the most important tasks for me and I've mentioned that on many of the investor presentations is organizational development. That is really what keeps me up at night. If a company grows that quickly, organizational development is key because if we cannot develop sufficiently, we cannot seize the opportunities in front of us.

Over the last few quarters, we saw a number of key hires because of that, including some senior executives. We hired Nathalie Théberge as in-house Legal Counsel. She will help us master our growing business complexity and provide legal guidance. We have also hired Russell Warner, who joins us from a major compressor manufacturer in the U.S. and he is now heading up our industrial business segment. In addition, earlier this year we hired Remy Boulianne who has a strong background in operations, manufacturing and compressed air. And on this call, we have introduced Stephane Archambault, our incoming CFO who brings with him expertise from large public companies. All of these hires and all of these investments we are making are necessary to ensure that Xebec can grow into a leading organization that can become a significant player in the renewable gas market.

Finally, let me summarize and leave you with some of the key takeaways this quarter. First, the pandemic is still running its course and until it is resolved, we will be seeing the impact on revenue and gross margins. However, our growth trajectory remains intact and we are adapting to this environment. Second, we continue to execute on sales and order intake. There are a number of new and exciting projects we expecting in the short term both on the RNG and hydrogen side. These projects will add positively to the backlog and solidify our 2021 revenue targets.

Third, the launch of the new Biostream product has been very promising. Customers who have seen it appreciated the price point and its low operating costs. By mid-next year, we expect this product to be fully standardized and we plan to introduce these bio stream units directly into our inventory so that our lead time will be industry leading. In other words, we're going to ship out of inventory those units.

Fourth, the acquisitions are overall going well. And we are building out our North American Cleantech service network, which we think will be a long-term competitive advantage and create significant shareholder value because they create a lot of recurring revenue. We've been able to transform that acquisition process into a completely virtual one by outsourcing due diligence and legal basically to the third-party service providers, unfortunately at somewhat higher costs which we are seeing is impacting our results to a certain degree.

Fifth, renewable gas infrastructure projects are shaping up nicely and we're excited about the 10 projects currently under evaluation. The key highest we've made in Q2 and Q3 will be instrumental in supporting the funds' initiatives going forward and I look forward to seeing one or two projects move relatively soon.

Sixth, the uncertainty that exists from the pandemic is currently too great at this point to make solid projections. Normally we make our 2021 guidance at this webinar with our Q3 results, but because of the pandemic, we expect to have a much better picture of the economic environment by March next year. And we look forward to providing guidance for 2021 during our Q4 year-end earnings call, which is probably around March.

Seven, this quarter marked an important milestone for investing in our people, processes and operations. My hope is that the foundation we've been building in 2020 will be supportive of our gross income in years. Lastly, 2020 did not turn out as expected. I think none of us expected that. But despite all the upheaval, we will end 2020 with the highest annual revenue in Xebec's history. For 2021, we are planning to generate revenues well into the $100 million dollar range, and the return to profitability. The trend line for us remains unbroken, the opportunity remains as real as ever, and the commitment from the management team and all of us here at Xebec is solid. I look forward to providing you these updates on our progress as we move towards a low-carbon future.

With that, I'll turn it back to Brandon, for the Q&A. Thank you.

Question-and-Answer Session

A - BrandonChow

Thank you, Kurt. With that, I will now open up the floor to questions. Please note that you may ask a question at any time to your right in the console of your browser. We will wait a moment for questions to queue up. Our first question comes from Aaron McNeil from TD securities. Without getting into specifics, can you give us a sense of what the timeline might look like for some of the larger awards and tenders outstanding for the Cleantech system segment?

PrabhuRao

Thanks for the question. In terms of our Cleantech segment, obviously, we have the biogas plants and also hydrogen. Within the biogas we have the larger plants and also the bio streams. So we have a lot of contracts right now on the LOI exclusively with us and also there are a few which we're negotiating the final details of the contract. So we expect that over the next eight weeks or so we should be able to close a bunch of these contracts. And then the hydrogen is always been a steady stream for us. Xebec has a very unique solution for small scale hydrogen solutions, whether it's steam and reforming or whether it's byproduct hydrogen, so we have a constant stream of orders coming both in China, Europe and North America in that space.

BrandonChow

Thank you, Prabhu. Our next question comes from David Quezada from Raymond James. Are you able to provide a bit more color on the operational impact of COVID-19 and how it has impacted revenue specifically? Is it more delays on project sites, manufacturing limitations, or delays or orders or permitting?

PrabhuRao

Let me give you a flavor of what one of the kinds of issues that we face. In some level, I can say it's all of the above, but I think let me get into some details. So for example, on-site where we talked about this in the last call, especially in Europe, there is specific protocols on how many people are on-site, how many hours you can spend on how many people can work together on a specific - in a given distance. So that obviously slows down the installation process, the commissioning process and so as people who have run site installations, you know this that every week you spend on a site, it's just incremental costs, not just for the people, but the overhead associated with that. So that's one bucket of increased costs. Then in terms of the same experience, we're having in North America too. And also, we're being careful with the protocols we are putting with our staff just to make sure that they're safe. On the manufacturing side, there are two buckets there. One is obviously the staff in our production facility, and then our staff in our supply chain. I can give you a good example of one of our critical suppliers in terms of container solutions had a COVID infection on the factory and they had to react to that. That slowed down the delivery of these container solutions for a few weeks. It's the practicality of dealing with COVID that we are definitely facing.

Then in our factory, I think the team's done a fantastic job. I have to acknowledge that Remy and his whole team of directors working with him, they have established a really good protocol in terms of ensuring safety for the staff and the production people. So we've been quite lucky that way but in terms of just effectiveness of the number of people that can be on a given piece of equipment and work around it there's some limitations there. So that creates, I think a more often delay and that's what you're seeing in the revenue numbers. We haven't shipped the product that we thought we would have shipped by the end of Q3 but we're going to catch up on that. It may take us a quarter to catch up on the missed revenue, but we'll get there.

BrandonChow

Thank you, Prabhu. Our next question comes from Craig Erwin from Roth Capital Partners. Can you comment on the new China fuel cell vehicle subsidies? And if these are leading to greater customer activity? Does this help you in Q4 of 2020 and 2021?

Kurt Sorschak

I can take this. Definitely, those subsidies in China will help our business. As you know, we have this joint venture with energy in China. Synergy is responsible for the build-out of the hydrogen refueling infrastructure and we are already seeing because of those subsidies, increased activity on the infrastructure build-out of the refueling stations, but also on the production of hydrogen itself. We are primarily active from the refinery off gas side where we basically take off-gas streams and purify the hydrogen out. And I think we've been seeing significant increases in our hydrogen business in China. And I expect this to continue into next year. Unfortunately, we haven't been able to go to China for almost a year now. So I look forward to going back and getting a closer look at what is really happening there but we understand from our general manager, that hydrogen is really gaining traction in China.

BrandonChow

Thank you, Kurt. Our next question comes again from David Quezada from Raymond James. It sounds like you're seeing significant opportunity in the small-scale containerized units. Do you think this is where the industry is going?

Prabhu Rao

Let's talk about the industry in two regions. If you look at two segments, and also regions. If you look at Europe, for example, in Italy and France and other regions there, the typical size of their biogas plants are below 500 normal cubic meter per hour. So if you look at Xebec's performance in Europe for the last few years, we have done quite well in terms of market share when it comes to 500 normal cubic meter per hour or higher. That's about 280 CFM. So what we missed in the last few years for the small-scale plants, and they've been a lot of these plants, and almost, I think between 50 to 60 of these projects in Italy and France over the last few years. And we missed that. The reason being is mostly because we didn't have a very small-scale solution and the bio stream that they're introducing now is a compelling solution for that. And I think we are very competitive in terms of pricing and performance. When it comes to North America, again, there's lots of opportunities in wastewater treatment and farms.

The other thing that is unique about bio stream and I think this is what the customers like is that when you're designing a biogas plant, you're always projecting the amount of biogas that you're going to have because you don't know that its prairie. So what the biostream does is it allows you to plan your upscaling of biogas planning modules. So you can start with one biostream or two biostreams and then if you realize that the capacity of your plant is higher, the digestor is higher or you're producing more biogas, you can add an additional unit so you don't have to make significant cost commitments upfront. I think people like that out that flexibility that we provide. So we expect to see a lot farm areas and all wastewater treatment facilities and I think we are seeing that level of response from the customers.

BrandonChow

Thank you. Our next question comes from Rupert Merer from National Bank. What does the M&A pipeline look like today? Will investment activity levels remain strong in the next few quarters?

PrabhuRao

The pipeline's very strong. Despite the COVID situation, we are pleasantly surprised that the pipeline's good. As you saw we've been announcing an acquisition every six weeks or so. So we are currently looking at multiple acquisitions in North America in the compressed air business. I think this will continue on and the premise that we had when we started this M&A process a few years ago is that there's a whole segment of entrepreneurs or whatever the baby boomers are retiring, and they want to exit the business. We're seeing that play out like a plant so expect to see more of this in the next 6 to 12 months.

Kurt Sorschak

Let me add here. Obviously, as Prabhu says there is a good pipeline of projects. But we are also looking now at the size of the acquisitions. With the incoming Biden administration, the Democrats have historically been more protective than the republicans in their trade policies. So I expect a quite a strong resurgence by America regulations. Clearly, with all those acquisitions we're doing in the U.S. we have a good ability to provide service. But we now need to also look at acquisition opportunities that will provide us with some manufacturing capabilities or assembly capabilities. So should there be a stronger by America mandate, through the Biden administration, that we can basically build those products found in the States and circumvent that? I think, in the U.S. it would play very well if we could manufacture those products in the U.S. and the engineering is the same since we have the engineering products, I think that would be a very doable pathway for us. So we are looking at that as well.

BrandonChow

Thank you, Kurt and Prabhu. We have another follow-up question from Craig Irwin from Roth Capital Partners. Do you expect the Canada low carbon fuel standard to drive greater activity in 2021? Or do you see customers already actively developing projects since they can bank compliance as soon as the final rule is published?

Kurt Sorschak

The development is somewhat slower here in Canada than we anticipated. There certainly projects out in British Columbia and here in Quebec because those two provinces have an ongoing program for renewable natural gas. As you know 15% in BC and 5%, here in Quebec, that most likely will increase as we move forward. Now, the Canadian clean fuel standard has been in limbo now for over a year and a half. There is no firm commitment from the Liberal government even so on their website, they are talking about releasing something they were supposed to be releasing by now and it hasn't come out. I think investments are a bit hesitant outside of British Columbia and Quebec. What you see is, for example, that under our investment frontier, we obtain projects under evaluation. So projects are out there, projects are moving but only four days of support. TLB has more clarity on the federal level, I don't think you're going to see a lot of projects come out of Ontario or around anywhere else.

BrandonChow

Thank you, Kurt. Our next question comes from Eric Stein from Craig Allen Capital Group. Can you handicap a win rate on the $100 million and Biostream quotes that are outstanding and comments on the outlook in Europe when that product is introduced in 2021?

Prabhu Rao

I guess in terms of when you look at the $100 million and where they are in the sales funnel in terms of - we feel very confident that over the next quarter, we will see a good uptake in Biostream. We are deploying four of these units over the next two quarters and some will go live in a few weeks. Having this operating in California, and being able to expose that to the customers I think would make a big difference. In terms of Europe, like I mentioned earlier, majority of the projects in southern part of Europe are the smaller scale solutions. They're below 500 miles per hour. Typically you see anywhere between 30 to 50 projects being commissioned per year. So you can imagine that if we had 10%, 15% of the market share, at least, we can see a reasonable revenue uptake in Europe starting with the second half of next year. Then we also have obviously, our largest biogas project still going on there. We talked last quarter, we were commissioning two plants. Those are towards the end of commissioning, and we're handing it over to the customer in the next week or so. And we are looking forward to starting new projects there.

BrandonChow

Thank you, Prabhu. We have a couple of questions from David Edrove in terms of the CarbonQuest partnership, can you provide any additional color and commentary on that?

Prabhu Rao

Yes, that's a very exciting project and a partnership there. I think we talked about this in the last call. So the team at CarbonQuest is making good progress and integrating our PSA into their system. Our engineering teams are working together almost on a weekly basis and we expect that the unit's going to be installed at the customer site in New York relatively soon. I think we're already in discussions with them about what is called the next generation of the product. Especially with the new administration, that's coming into play. I think those regulations probably will stand in New York and that provides a tremendous business opportunity for Carbon Quest and also for Xebec. So if you recall the numbers, the number of buildings affected by this regulation is about 60,000 buildings in New York. So even up 5% or 10% uptake in that business will be fantastic. So it's all the progress so far and hopefully, when we talk next time, we'll be able to give you more data in terms of the performance of the units and the feedback from the customers.

BrandonChow

Thank you, Prabhu. We have another question from Rupert Merer from National Bank. Can you give us an update on the partnership with JNK heaters and the potential for selling SMR technology?

Prabhu Rao

Yes, I think JNK - Korea is an exciting market for hydrogen so they're doing a lot. Just like China, I think Korea has also established a clear roadmap for hydrogen. You see a number of stations coming into play. So JNK they have two SMR products. One is at 250 kilograms a day, other one is 500 kg a day. So they've deployed both the products in the marketplace and they're going through the testing of the technology. So we expect that there'll be more uptake of our pieces going into the reservoirs. And we still have a partnership with them to bring in hydrogen technology into North America as we need. We're basically waiting for the testing to be completed and that being secure. And as we introduce our hydrogen products, we'll definitely look at JNK.

BrandonChow

Thank you, Prabhu. Our next question comes from Paul Petroski from M partners. Have there been any order cancellations in the Cleantech segment?

Prabhu Rao

We have had no our cancellation of the Cleantech, no. We didn't expect any because our customers are always doing investing when they invest in a biogas plant or facility, you're investing for the next 15, 20 years. So I think we'll be able very fortunate that way.

BrandonChow

Thank you, Prabhu. Our next question comes from Jeff Bernstein from Cowen. Have deliveries in Italy resumed, is there more business to come there?

Prabhu Rao

Yes, as we said earlier, we are finishing the commissioning of the plants. Our team is actually at two of our sites today finishing the testing. We're also working with a partner in Italy, Sapio as you know, to start looking at 2021 deliveries and 2021 orders so we are having ongoing discussions with them.

BrandonChow

Thank you, Prabhu. Our next question comes from Bob McWhorter from Selective Asset Management. The service business provides stable recurring revenue, what percentage of it at the trailing 12 months sales is associated with that?

Prabhu Rao

I can tell you in terms of the year-to-date 2020, about $32 million of the $50 million is from the Cleantech side, and about $18 million is from service. But now as we acquire more and more companies that percentage will change. I expect that you'll probably get to 50% from the service business in the next year, which is good. I mean, which is also has good a gross margin potential. And as we work on our standardization of our Cleantech products and introduce new products, we expect that gross margin also to come up but the industrial business at 35% to 40% gross margin it helps us significantly. And I think the one on the previous question I just wanted to answer on the sales in Europe, but also doing hydrogen PSA sales in Europe. So those projects, we signed some contracts there in the hydrogen PSA side.

BrandonChow

Thank you, Prabhu. Our next question comes from Ken Monroe. When will infrastructure projects generate measurable incremental recurring revenue streams?

Kurt Sorschak

I'll take that question. I would think as probably starting sometimes in 2022. At this point, some of the activities here in Quebec has also been impacted by COVID. So project development is definitely slower. The deployment of resources into this has also been slower. I mean, permitting via working, as I say, we've been working directly when we did it under SIBEC [ph] we've been working on a number of projects, but everything really slowed down. And since we rolled it into [indiscernible] capital, we've seen more activity because more people know that there's money available to help them fund their projects. But I do not expect that permitting or anything like that it's going to be a faster process. So not before 2021, now, let me point out and I think I mentioned that the last time the Quebec government came out in the summer is their organic waste diversion plan, which mandates that 70% of all organic waste needs to be diverted away from landfills by 2025, and 100% by 2030.

So, there is definitely a significant need for infrastructure investment in organic waste treatment facilities to RNG. That it's real and that needs to be addressed relatively soon, I mean, 70% of organic basis, a huge amount of raise. And I think you're going to see a ramp up over the next 18 to 24 months on the project or potential projects that are going to be out there.

BrandonChow

Thank you, Kurt. Our next question comes from Greg Silver from Silver Advisors. Do you have an estimate for what percentage of future hydrogen refueling stations that will require on site PSA or other types of Xebec products?

PrabhuRao

It's a very interesting question where it gets. So if you look at hydrogen fueling stations, and you had to look at the market segmentation. So if you have passenger cars, was its heavy-duty trucking and different market segments, even within the hydrogen fueling. I would say that and again. So you have two options, you have on site generation of hydrogen at the gas station, or you have delivered hydrogen at the gas station. And when they talk about delivery of gaseous hydrogen, it's very inexpensive way to do it. So I think any hydrogen refueling station, that's, let's say, less than 500 kilograms a day, probably would have an onsite hydrogen generation solution. Maybe it's one time, but 500 kg a day, it's better to generate hydrogen on site. And so you would do that through steam methane reforming or do through electrolysis, but given the price of electricity in most parts of North America, or even Europe, steam methane reform, the way to go. And obviously, blue hydrogen with carbon capture is one way to address that. Or you can take renewable natural gas and make hydrogen out of it.

So in all of those applications, there's an opportunity to sell a PSA are in someone. And that's a market that obviously Xebec has a presence. So, when you go to a much higher capacity like two times and three times. Then the question comes up is do you have, do you provide liquid at that site? Or do you providing large scale steam methane reform at the site and deploy that hydrogen there or dispense the hydrogen. And we do hear a lot of our truck, heavy duty trucking and trucks coming to truck stops with and filling with hydrogen. If you have enough space in the truck stop, you could put in a two-ton steam methane reform or make the hydrogen. And it's probably much cheaper than delivering liquid to site. So this is the dynamic that's going to play out over the next, I would say, five to 10 years. But in terms of smaller scale solutions, I think PSA based estimates and reformers are the way to go. And I think you'll see a lot of traction there.

Kurt Sorschak

Yes, and let me add here that again, it's a very interesting question. It's also from a business opportunity point of view, probably a very relevant question. There worldwide currently, as far as I know, less than 500 hydrogen refueling stations in operation. And the forecast is for there to be about 5000 by 2030. Now, electrolyzers will definitely play a certain role. But given that, when you produce green hydrogen, out of electricity, that electricity is the input, it requires relatively low cost of electricity $0.02 or $0.03 per kilowatt hour to be competitive with steam methane reforming. So I think their electricity built out is large enough to provide low cost electricity. Electrolyzers will not be a profitable business to produce green hydrogen for refueling.

Now, if it's subsidized, you have a business but if it's not subsidized not and I think, and that's where both Prabhu and I here believe that steam methane reforming or on-site steam methane reforming of natural gas can provide a low-cost source of hydrogen, either green or blue. And I think there's a significant opportunity there for us.

BrandonChow

Thank you, Prabhu and Kurt. Our next question comes from Fred [ph] Capital Markets. Can you comment on the organic growth performance of your recent service acquisitions so far? Is it mainly coming from their legacy activities? Or are you starting to see momentum from training their technicians to service in tech installations?

PrabhuRao

There are two parts of the question for that and let me address both of them. In terms of service technicians being trained to operate our Cleantech projects that started. We have a facility in Ontario that we have commissioned, unfinished the commissioning and that facility is now the service technician from our company CAI the one who was on site. And he will be the one maintaining that facility. And so that transition of our service technicians in our subsidiary companies taking care of our cleaning tech products is starting. But there's a lot of work there. And I don't want to downplay that. Because what we need to do is, as I said, we have 40 service technicians right now. We need to train all of them on operating these plants and servicing this plant. So that's 2021, we're going to spend a lot of time what we call creating the Xebec academy to train these people and make them fully capable.

In terms of the growth of the companies, like I said, I talked to these general managers of these companies every week, and we'll be talking about the business and the backlog and revenues and all of that. And I can say that the last in Q4 things seem to pick up again, I think that's great news for us. But in terms of the performance level the last year, I think there's been, I think quite, I'm quite encouraged to see the level of engagement by them and there's some organic growth that we've seen in this companies that probably even some of them did not project. So I'm quite excited about what they're doing. And we also have now with Russell joining on board, he has the functional expertise and the capability that we did not have before off the compressed air business. And we're beginning to explore the synergies between these companies and how we can leverage that.

And I did talk about ACS which I want to repeat that again, ACS is a very unique company, they do integrated compressor solution. So a lot of us subsidiaries will probably not take those orders before in their regions. But now with ACS being a part of the family now they can actually accept those orders and have that work done. So I see a lot of synergies and leverage coming from this portfolio of companies that we have.

Kurt Sorschak

I want to just add one thing that people might not think about those companies initially are industrial compressed air service companies. You hear a lot about bringing manufacturing back to North America, and making sure that they have manufacturing capabilities here locally and not sourcing everything from China or India. So if that trend should continue, every one of those factories, every one of those manufacturing facilities will require compressed air. So I'm quite positive about their traditional business. In addition to as more and more clean tech installations get out there, be it renewable natural gas systems, be hydrogen refueling station speed electrolyzer speed fuel cells, we have the technical capabilities of training those folks to be able to service maintain, and potentially also operate some of those systems. And that will create, I think, a unique opportunity for those companies to expand the day from their traditional industrial business that I think will grow over the next decades if this secular trend continues of reshoring but also continue to grow into this new evolving technology segment of renewable energy technologies that need to be serviced and maintained.

BrandonChow

Thank you, Kurt and Prabhu. We have a couple questions from Ken Monroe again, and Alan Jacobs in regards to the headcount. Can you speak about what the headcount currently is? How it compares to a year ago and how that might relate to the increase in SG&A?

PrabhuRao

Yes, it's a good question. And as Kurt said, we were at $9.6 million in revenue in 2016. And I still remember, we were 16 people in the company at the time between China and North America. And now I think we are close to 260 is the total number with the acquisition of [indiscernible]. And in terms of, so I think, obviously, if this all start that coming from the acquisitions, but in terms of SG&A, I think Kurt talked about this and is an extremely important point to be made. We have obviously added leadership management team members that are critical for the growth of the Xebec. And in addition to Russell and Remy, and Natalie and Stefan coming on board, we also have added a director of our supply chain, also director on service side. So this all, I would say kind of very, very critical hires, that the company that is growing at 50% in terms of revenue, it has always increased the machine a little bit from a staffing point of view. But in terms of capabilities and ability to deliver in future years, I think it's very fundamental.

The other increase in SG&A that you're seeing is with the M&A activity. Obviously, at the pace at which we are doing our M&A, we need to make sure we have a very competent M&A team. So we have made some additions there. And then due to COVID, we are unfortunately not able to be on site as much as we want. So a lot of the due diligence is being outsourced to local companies there. And that's creating an incremental cost that it's our SG&A today. So hopefully, that'll we will see it by middle of next year.

BrandonChow

Thank you, Prabhu. Our next question comes from Ahmad Shaath from Beacon Securities. Are there any new pockets demand for RNG systems in terms of geographies that you're currently evaluating?

PrabhuRao

I would say Spain is scenario where we are looking at and also, we see Australia as another region that's developing. So we have some activity there. We are doing some hydrogen projects in Australia, but we're also getting a lot of interest for RNG there. So these are the two that in addition to obviously, Europe, North America, Australia is one area that you're looking at carefully and then we obviously do RNG, also in China.

Kurt Sorschak

I would add to this new pocket the US now. I mean clearly in the US you have so far seen certain states that have a program, and they've been actively working on renewable gas facilities and implementation of renewable gas into their systems. But I think with the Biden administration, I'm hopeful that we're going to see a lot more activity in the US. The US has the potential for about 14 according to the American Biogas Association, to about 14,000 installations. I mean, there's an enormous number, right? And that's consists of dairy farms, spine [ph] farms, cattle farms, landfills, all kinds of different opportunities [indiscernible] treatment plants, but the potential is very, very large. As the US rejoins now the Paris Agreement and starts to tackle seriously climate change, I think there's a unique opportunity also in the US.

BrandonChow

Thank you, Prabhu and Kurt. Our next question comes from Sean Bowers from Epic Capital Management. I understand it's difficult to get revenue guidance for next year. But I was wondering if you could clarify expected growth from M&A versus organic growth for 2021? As a follow up, do you expect to continue using external advisors to complete M&A as well?

PrabhuRao

Let me answer that. So we're going to be using, we have our own, we created our own M&A team. Obviously, if you want to do four or five acquisitions a year it starts paying if you have your own setup. Unfortunately, we cannot conduct the due diligence at this point in time. I think till about middle of next year, our expectation is that we will not be able to conduct the due diligence in person by us, but probably they'll be outsourcing. So at least for another six to nine months, I think we will be using consultants to help us achieve our M&A target. Now from a revenue perspective, obviously, if you assume that each one of those acquisitions is $7 million to $8 million, and we're doing four to five a year, you can calculate how much is going to be inorganic growth be expected, our organic growth is about 10% to 15%. That's what we asking our companies to achieve.

So there's going to be a ramp up on the revenue side on those industrial service companies for sure. And then, we've not been providing guidance, because there's uncertainty as to how this pandemic will run around but clearly, we expecting that next year, we're going to be valued into the $100 million range on revenues. Given what we're seeing is a run rate for the acquisitions we are having, given the backlog of over $88 million we are having. So I think it's fair to say that we're going to end up somewhere in good range. And historically, as I said, we've been growing about 50% that year, so it gives you a bit of a guideline.

BrandonChow

Our next question comes from Samir Joshi from HC Wainwright. In terms of the service company roll up strategy, can you give some visibility on what investors should expect in terms of size and number of companies that are being targeted during the next 18 to 24 months?

PrabhuRao

The size, we have guided basically between three to five companies a year. I think that's probably a fair number. In terms of size, we would like to anywhere between I would say, between 7 million and 10 million is probably a reasonable number for us. Obviously, the amount of work done to acquire a larger company with a smaller is not much different. So I think we are targeting around seven to 10, and about three to five companies per year.

BrandonChow

Thank you, Prabhu. We have another follow up question from Aaron McNeil from TD Securities. Can you quantify the amount of non-recurring and non-operational costs that were incurred in the quarter? In other words, what could EBITDA have been this quarter if some of the unusual items are removed?

PrabhuRao

Well, I would say the nonrecurring cost, I would just call probably the migration to the TSX, where we have incurred a lot of professional fees to do that. So the project was probably something over 150,000 for the year with the consultant, so it's probably a 40,000 or 50,000 that will be as reduction. The RPA implementation, while there are some costs, but in the 2021 we will always have the integration of all the subsidiaries and all the companies that will be acquiring, but definitely there will be some reduction in terms of cost maybe another 50,000. So but that's for all the other professional fees are all related to the acquisitions basically, and we will continue to insure them, we may have a reduction in terms of cost in the sense that we should be more effective if we do it more internally speaking.

BrandonChow

Thank you. Our last question comes from Ahmad Shaath from Beacon Securities again. Can you provide us with a rough breakdown of your Cleantech backlog right now, in RNG versus hydrogen and other gases?

PrabhuRao

Ahmad, I think in terms of the backlog of - I think in terms of RNG, I would say 80% of that is RNG and 20% of that is the hydrogen. And a lot of we do with the hydrogen pieces out of China and also some in Europe. And that's what a bulk of that is coming out of China in terms of hydrogen PSA orders and 80% of our Cleantech backlog is based in RNG.

BrandonChow

Thank you for your questions, everyone. And unfortunately, this is all the time that we have. And this wraps up today's webinar.

With that, I'll turn it back over to Kurt for his closing remarks.

Kurt Sorschak

Thank you, everybody, for joining today. I hope we could give you a good update. We look forward to the next update in March, by which time we're going to be having graduated to the TSX, and - so the quarterly report will be somewhat quicker than when we're on the Venture Exchange. I wish you all a good day and keep safe. Thank you.

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