Xebec Adsorption, Inc. (OTCQX:XEBEF) Q1 2022 Earnings Conference Call May 12, 2022 8:30 AM ET

Brandon Chow - Director, IR

Jim Vounassis - President & CEO

Stéphane Archambault - CFO

Hello, everyone, and welcome to Xebec's First Quarter 2022 Investor Webinar. My name is Brandon Chow and I'm the Director of IR at 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. [Operator Instructions].

Joining me today will be our President and Chief Executive Officer, Jim Vounassis; and Chief Financial Officer, Stéphane Archambault; and Chief Operating Officer, Mike Munro.

Our earnings press release was issued today before market opened. All relevant documents are available for download either from the Investors section of our website or SEDAR directly. You'll also find later today a copy of today's slide deck on our website's Investor Section as well.

During this call, we'll 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 our financial results and the performance of our business, which we discuss in detail in our filings, including today's earnings press release.

Xebec assumes no obligation to update any forward-looking statements we make on today's call. There may also be references to certain non-IFRS measures such as EBITDA, adjusted EBITDA, backlog, and call log. These non-IFRS measures are not recognized measures under International Financial Reporting Standards and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies.

With this, I turn it over to Jim.

Thank you, Brandon. Good morning, and welcome everyone to Xebec's first quarter 2022 investor webinar.

First and foremost, I want to thank everyone for coming out to our Investor Day in March. It was a great opportunity to finally meet many of you in person and get to know you. Our Investor Day marked the official opening of our U.S. showroom in Denver, Colorado. And it was a great opportunity for you to tour the facility and learn more about our product, such as the Biostream, which was on the shop floor.

We were grateful to those of you who joined us that day live and via webinar and had a chance to see us present our financial goals to help you better understand the overall strategy and how it relates to our different business segments. I look forward to seeing you at next year's Investor Day and you never know it maybe beside one of our Biostream infield locations.

Overall, we kicked the year off strong with solid top-line revenue growth and added to our record backlog with the largest order the company has received in its history of $143 million. Our backlog now sits at over $260 million and it's quite impressive to see how it's almost tripled from $88 million at the same time last year, great work from all our teams. This backlog ultimately set us up well to execute on the strategic three-year plan we presented at our Investor Day. We become a global powerhouse in sustainable gases. And this plan comes with a financial goals of 40% revenue CAGR and adjusted EBITDA margin in the range of 8% to 10% by 2024. We have grown our revenues at a CAGR up 50 plus since 2016 and as we get scale we expect to continually improve our bottom line.

While the forward outlook remains positive, and we are well underway to achieve our overall goals. On the EBITDA side, we experienced the impact of the world space on material costs and supply chain disruptions, as well as the impact to starting up our final set of legacy RNG projects, which we plan to finalize and complete throughout the course of this year.

To address the short-term impacts, and strengthen our bottom line over time, we started the execution of our Center Of Excellence Framework, which puts us in line with the overall strategy to improve the cost profile of Xebec over the next 12 months. Executing on this framework ultimately means focusing on the right product lines across all Cleantech segments in renewable natural gas, hydrogen, and carbon capture with the appropriate corresponding resources to support that. It also puts us in a position to strengthen our cash generation from our operations. This plan will help strike 2% to 4% absolute adjusted EBITDA improvement, which Mike will discuss later on the presentation.

As I head into my first quarter as Xebec's new President and CEO, I'm excited to kick off this period with first quarter webinar and work with our strong leadership team to take this company to the next level. We acknowledge the short-term challenges and by driving our Center of Excellence Framework this will help us offset the geopolitical stability, COVID variants in China, and inflationary pressures.

To further strengthen our Centers of Excellence. I'm pleased to announce that Marinus van Driel, the founder of HyGear, and our current VP of Europe and Asia will transition to the role of Senior Vice President, Special Projects, reporting to me with a focus on delivering our distributed hydrogen hub growth plans. As Mike Munro, our COO regroups all our Centers of Excellence under his leadership.

Overall, we are feeling optimistic about the long-term, as we have the right people and technologies to address mega trends like climate change, and sustainability strive worldwide in sustainable gases.

With this I'll turn it over to Stéphane Archambault; our CFO, who will give you -- who will go over the financial highlights. Stéphane?

Thank you, Jim, and welcome everyone joining us.

Let me start by reviewing our financial results for Q1 2022. We achieved revenues of $41.2 million in the first quarter of 2022 compared to $20.6 million for the same period in 2021. Q1 is typically our softest revenue quarter due to seasonality and timing of customer orders and delivery. The increase is mainly explained by the integration of newly acquired companies, delivery of second-generation Biostream and organic growth initiatives. This increase is partially offset by the reduction of revenue from our Shanghai joint venture, which was fully consolidated last year.

Our gross margin was $4.6 million for the first quarter of 2022 compared to $4.2 million for the same period in 2021. The gross margin percentage decreased from 20% to 11% is due to loss provision taken for the legacy RNG contracts currently in the startup and commissioning phase. Lower margin for our hydrogen, oxygen, and nitrogen contracts and increasing material and supply chain costs. Without the impact of the legacy RNG contract, we would have had a gross margin of approximately 17%. And I will go into further detail on this next slide.

Our research and development expenses were $0.7 million for the first three months period ended March 31. And related to continued development of our company's second--generation Biostream product and new hydrogen generation technologies.

Selling and administrative expenses were $16.2 million an increase of $5.5 million compared to $10.7 million for the same period in 2021. The increase is mainly due to additional SG&A expenses associated with newly acquired companies.

We saw negative adjusted EBITDA of $9 million for the first quarter of 2021 compared to a negative adjusted EBITDA at $4.9 million for the same period in 2021. We also wanted to illustrate the impact of legacy BGX activity on the bottom line, which was an adjusted EBITDA loss of $6.4 million compared to a $1.7 million for the same period in 2021.

Net loss for the quarter was $18.4 million, or $0.12 per share compared to a net loss of $10.1 or $0.07 per share for the same period in 2021.

We have $34.7 million of cash as at March 31, 2022, along with access to credit facilities, which gives us flexibility as we continue to grow, pursue our strategic plan and improve our overall profitability. This quarter, we have also shown to be able to manage our working capital, and that an increase in non-cash working capital by $1.8 million versus a decrease of $12.7 million in Q4 2021.

Our most recent contract also includes provision in down payments, which allow us to manage working capital further. This will be important to continue focusing on as a team progresses with our aggressive growth initiatives.

Overall, I'm pleased with the top-line growth that team has been able to achieve, but still have a quite a bit of work on the bottom line. As Jim mentioned, we have a plan for this under our Centers of Excellence Framework.

Next, I'd like to -- you to better understand our gross margin and SG&A changes from Q4 2021. These two waterfalls show the change in gross margin percentage and SG&A from Q4 2021. You can see on the left here that our legacy BGX activities had an absolute margin impact of 6%, while product mix and material impacted our gross margin by 5%. While this is not the gross margin we expected, we see the sector being short-term as the legacy BGX activity will be wrapped up under our framework. In addition, our hydrogen, oxygen and nitrogen businesses were impacted by timing, material costs and product mix. Mike will go into more details on how our Centers of Excellence Framework will address this and we expect gross margins to be better in subsequent quarters.

On the right, you have our SG&A waterfall, where the most of our contribution is from acquisition, depreciation and amortization of assets related to those acquisitions. As we continue our integration of newly acquired company, we will get synergies from them, which will help to improve our cost profile further. This is all in line with the Center of Excellence Framework the team is working on as we continue to grow in line with our strategic plan.

Now, I'd like to show you how we plan to achieve our 2024 adjusted EBITDA target. This waterfall here helps you walk through the main components we will be executing on to achieve this. Firstly, the Centers of Excellence plan will drive approximately 3% of the goal as we execute that over the next 12 months. Next we have continuous improvement, which we expect to contribute approximately 1%, which is driven by efficiency we gain in our manufacturing and supply chain processes. There's a number of pocket that have room for improvement which Mike will go over later. Third, we have SG&A absorption which is expected to contribute the most at 4%, which is driven by operating leverage we expect to achieve as we spread our fixed costs over more revenues in the next three years. This is important to understand as we have invested heavily in the last year in order to achieve higher revenues and this will be supported by our record backlog. Lastly, we increase the proportion of Cleantech service and improve the margin. This is expected to contribute approximately 1% towards the goal.

With these factors, we end up at 9% EBITDA margin, which is the midpoint of our 8% to 10% goal we presented in March.

Next I'd like to go over our quarterly financial trends. I say this all the time, as I always enjoy showing this graph, as it helps put into perspective where things are headed long-term. As you can see the quarter-over-quarter picture is impressive. And we continue to grow the revenues and we have a 62% CAGR from Q1 2017 to Q1 2022. As I mentioned, the top-line is strong and we'll be working hard to improve the bottom line.

With this, I'll turn it over to Mike who will go over into more detail in his operational update.

I'd now like to actually introduce the Center of Excellence framework that we've been talking so much about in a bit more detail. As Jim and Stéphane both mentioned, the COE framework is really designed to drive improvements in our cost structure as we aim for long-term sustainable growth.

I first introduced this concept on Investor Day in March where we spoke to how the different facilities themselves would play an important role. Ultimately, this framework revolves around three levers.

The first core versus non-core activity, which is assessing the activities that are core to supporting our Cleantech growth and paring down those that are not. Here, we're essentially asking what activities have the highest impact going forward. We recognize that Xebec today is a very diversified business built on a successful industrial foundation, and will continue to leverage this foundation. But we also understand that markets are changing, and we need to adapt in response to them as we continue to seek growth. We draw our inspiration from the old 80:20 rule here and focus on the best of the best.

The second lever is simplifying product lines. You've heard a lot about this in the past as it relates to Biostream and it also applies across our other areas in our product portfolio. For example, one example, we have 352 different vessel configurations in our G2 PSA, which is one of our most popular units, 40 of these configurations have been used recently. We're in the process of standardizing to 24 and keeping eight of these in stock. This level of streamlining will help to improve costs, reduce lead times, improving margin and making us even more competitive. While we undertake these product reviews and standardization activities, we're also taking learning from our legacy activities like the BGX focusing on what we do well and minimizing our future exposure to installation and EPC work.

Thirdly, as we pare down and simplify, there's bound to be some redundancy. What areas of overlap can we address, we need to understand what may not necessarily go-forward, continue to drive manufacturing efficiencies, and leverage the considerable supply chain opportunities that exist within the organization.

Two recent hires in global manufacturing and strategic sourcing will be important drivers in seeing this realize. Rob Carr and Stephen Evans, and we're excited to welcome you both to our senior team.

Everything I've been talking about so far is reaching towards a goal of 2% to 4% in absolute adjusted EBITDA by itself. This will upgrade Xebec's future capabilities as we continue to scale and will help us better manage costs and execution as we churn through our record backlog.

Next, I'd like to touch on the path forward in our RNG segment. As we said, we're working to wind down the legacy BGX activity. This work has persisted a bit longer than we originally anticipated, but we're working on a clear pathway towards a speedy resolution and we're already putting in motion the next-generation of products in the segment, Biostream GEN 2. We've identified and are putting into place action plans with the owners of the remaining BGX projects to transition these to normal operation in the shortest time possible.

The additional impact in the quarter that Stéphane was talking about is really us making sure that we get these projects performing in the field, and we can exit the commissioning phase. Wrapping up these activities is a key part in the COE framework, as we don't want to focus our customized projects going forward and have associated overhead tied to these legacy activities that will not be needed once they're complete. Ultimately, this came with a $2.6 million adjusted EBITDA impact in Q1 2022.

Our first-generation Biostream was launched to start to move forward with standardized products back in 2020. As the goal was this equipment come standardized, we've learned not to accept customization past the engineering phase. We've also learned not to act as a full EPC. We've delivered the first batch of them which are operating in the field and use this opportunity to leverage our own service network and create a seasoned team that's able to support our customers and the installation and ongoing service of these products.

The second-generation Biostream is an iteration of the first, one which comes with improved performance and reliability. This is what we're currently manufacturing both in Canada and in our new facility in Colorado. We continue to ramp up capacity and support these new installations with our services brand, XBC Flow Services.

And with that, I'll get a little more specific in the RNG segment. Overall, we continue to see many positive leading indicators for orders. For instance, our quote volume is approximately doubling Q1 this year, over Q1 last year. The team is working to convert these quotes into backlog this year. And this is important for filling our new capacity at Xebec Systems USA formerly known as UECompression. The Biostream has already started being produced at this facility and we've already recognized revenues from some second generation Biostreams this past quarter.

As I mentioned, the completion of Legacy BGX activities is being addressed alongside the transition to focus on selling second-generation Biostreams as turnkey solutions and our standalone PSA units for higher flow RNG going forward. We need to focus on what we do best.

Now let's touch on our hydrogen business. We continue to aim for a long-term approach in our Hydrogen segment where we believe gas as a service will be a key component and as we continue to make inroads with industrial customers. This quarter we commissioned a project with Messer Group in the Czech Republic for both the tungsten manufacturing and photonics application where they're using hydrogen in both processes. It's a unique project for us. And as such, we partnered with Messer, and they're helping transport the hydrogen locally for the installation.

In addition, we saw some impacts on gross margin due to timing of projects and raw materials which we expect to improve in subsequent quarters this year. This whole segment is underpinned by financial partners, we'll aim to build hubs with and have a target of 20 to 25 projects by the end of 2024.

We continue to support mobility at the same time and sold a hydrogen PSA for a refueling station in India, which helps build our references for products in the emerging mobility sector.

Let's touch now on our carbon capture and sequestration business. Carbon capture and sequestration has recently become a new vertical for us as we book the largest order in the company's history to deliver compressors into the world's largest proposed carbon capture and sequestration project. This was a $143.2 million order, which added nicely to our backlog that will also be manufactured out of our facility in Denver, Colorado in 2022 and 2023. We're really excited to see this emerging market develop as we have a number of unique solutions for both addressing source capture of CO2, and the transportation of gas and pipelines.

Our CarbonQuest partnership is another notable example of what we're doing in the field. And we also have goals for other CO2 capture projects in the pipeline, ones that we look forward to updating you more as they mature. Ultimately, our carbon capture solutions have the potential to become a strong, high growth pillar of our Cleantech systems and this is evolving.

So now let's touch on our oxygen and nitrogen businesses. Our oxygen and nitrogen business continues to focus on execution as they came off a record year in 2021 with over 600 units produced. We're working to maintain this momentum and as with other verticals, we're seeing some material costs and logistics challenges weigh a bit on the margins. This is being addressed by our new global manufacturing and supply chain VP hires, who will support this business in driving more efficiency.

I'd like to mention an interesting test pilot project we concluded this quarter, which you can see here in the background. This is a sustainable urban farming project in Wiesbaden, Germany, an onsite oxygen generator was provided to ECF Farmsystems that combines fish and basil production in an urban environment by building atop the roof of the grocery store. This aquaponic farm system grows approximately 800,000 basil plants and 20,000 cichlids per year and requires no fertilizer for the plants.

For our parts Xebec's oxygen generator ensures the necessary oxygen saturation in the water. This approach to combine fish farming with urban agriculture, closer to consumers has proven to be a more sustainable production -- food production method due to reduced transportation, higher energy efficiency, and resource savings. It's quite an impressive circular economy solution.

And now on to our service business. As you saw, many of you saw during our Investor Day, we've rebranded to XBC Flow Services. This segment saw solid results in the quarter and is sitting on a record backlog. Securing new technicians is a top priority to continue this organic growth. However, the segment was not immune to supply chain constraints, increased logistics pressures, and the continued COVID-19 impacts that we're seeing.

Furthermore, over a 1,000 hours were logged in supporting upcoming Cleantech installations in the quarter. This coincided with the launch of our new cleantech service training program, which will help us to put more train technicians into the field to service more customers and support the growth in our equipment sales. We're really excited to see this develop as finding and nurturing talent is a key issue that many organizations face.

And with that, I'll turn it back to Brandon for the Q&A.

Thank you, Mike. And with that we'll now open the floor to questions. [Operator Instructions].

Our first question comes from Tom. What steps is the company taking to improve revenue per employee?

I can take this one. So we covered a couple of points in our presentation. So as we continuing and grow our and execute our plan, we will delve you more SG&A absorptions. So I mentioned that in my segment. We also have the Center of Excellence Framework that will be all the synergies coming from that, that we expect, which will have a significant improvement for that particular metric.

Perhaps, I'll add to Stéphane comment. Another area that we see is the growth side, for instance, on our service centers. We are now adding technicians, but we have the existing infrastructure already. So these technicians will add revenue, which will help also increase our margin on that side.

Thank you, Jim. Our next question comes from Rupert Merer, National Bank. What were the margins on the Biostream product line in Q1? And where could they end up by year-end? And what are the main drivers for improving the margins?

I can start with this. So, obviously, as expected, the first units that we're delivering have the lower margins. Because, we have the -- we got the economies of scale. We got the learning curve that we got to take into consideration. But as we -- as we continue building those, we will get further gross margin improvement.

Well we're going to lean on lessons learned, we're going to be get more accomplished and more practiced with labor component, we're going to continue to leverage scale on materials. The first units of any brand new product, or -- have a learning curve attendant to them and we expect this to be rapid one, since it's a Gen 2 product.

Thank you, Stéphane and Mike. Our next question comes from Irwin. How long is the anticipated legacy system expenses going to impact future quarters?

Perhaps I take this one, and Stéphane can add some color. So we expect as -- so we transition now to the startup of the existing and final legacy systems, we expect that we'll have wrapped up this entire legacy piece by the end of this year.

Thank you, Jim. Our next question comes from Steve. Give me one moment to load that up here. When is the summit carbon emissions revenues going to be recognized?

So the profile is as follows. We're going to start manufacturing those units in the second half of 2022. And this will be done throughout 2023. So revenues will be recognized as we continue those projects in the second half of 2022 and throughout this 2023.

Thank you, Stéphane. Our next question comes from Adam Gill of Paradigm Capital. How do you see gross margins evolving later this year, as you move past the legacy contracts and start to deliver on units with better margins price then?

So as we mentioned in our presentation, we're going to be implementing our Centers of Excellence Framework. This, as I said, will provide us with some improvements on the gross margin. And that's what we see that in subsequent quarters. And as we wind down those BGX as well, I think this is going to have a significant impact.

Thank you, Stéphane. Our next question comes from Rupert Merer. Disclosure states that the company estimates that execution of the plan over 12 months is expected to drive a 2% to 4% absolute improvement in adjusted EBITDA margin. What is the baseline for this target? Is it 2021 results?

No, it is 2022, 2023 results combined, you know.

Thank you, Stéphane. Our next question comes from Nick Boychuk. Jim, can you provide some color on the number of legacy contracts to be the sale, the size of these projects and the estimated losses. How much of the CapEx has been locked down versus being exposed to ongoing rising costs?

I'm just going to put my camera off, because it seems that the internet challenge. So in terms of the CapEx these projects have all been built now. And what we're incurring is, as Mike mentioned, just startup expenses to get them to where we need to for the customers. So there's no risk from a CapEx further exposure and what we've done is we've made sure in our go-forward 2022 plan. We already had an assumption in for the startup costs, and now we've revised this assumption. So we captured all and the goal, as Mike mentioned is for us basically to exit this legacy contract startup and hand them over to the customer by the end of the year. So we expect to basically to wrap up this year.

Thank you, Jim. There's a couple of questions from a number of folks. Have you made any deliveries to Brightmark in this quarter?

Yes, we have. Yes we got, we have two units that were delivered.

Thank you, Stéphane. Give me a moment for questions. Our next question comes from David Quezada from Raymond James. Could you comment on your ability to pass on higher material costs to customers?

Well we're actually looking at that and more and more contracts and Summit is one of the contracts that we were actually quite successful in negotiating that. Materials are pretty turbulent in the current geopolitical climate. And we have to be very careful with vendor costs because in the current situation, some quotes are really good for even though only a week, so we need to share the burden. And this is what we try and do going forward.

I would add to what Mike said, we've also adjusted in some of our more commodity like type of products, we've also adjusted our pricing to reflect the reality of the increase in commodity pricing and the turbulence and there I believe the team has been successful in increasing the charge out rate. So we see the market accepting some of the increases, the question mark is, how much further will the market accept? Right, but right now we've been able to transition pricing.

Thank you, Jim. We have a couple of questions as well from different folks. Can you speak more about the breakdown of the current backlog; do you understand that there is the large Summit carbon decisions or maybe breakdown a bit more in terms of what the other components are as well?

Sure, so as you said, I think a big portion of that backlog is coming from that Summit order we just announced. And then we've got, it is spread out basically, we've got a lot still on the RNG side due to the fact that we've got the major orders that we received last year. We also have some in the hydrogen and oxygen nitrogen businesses. And as Jim mentioned earlier our -- or Mike mentioned earlier, our backlog in the service businesses is quite high also.

Thank you, Stéphane. Our next question comes from Irwin [ph]. How is the company leveraging any indirect or partner channels to scale sales opportunities?

Sure, one of our channels that we've been leveraging recently, obviously has been our Chinese joint venture, for example, this has worked very well for us. Unfortunately, as we look in the first quarter with the Shanghai and a lot of regions in China being impacted due to COVID, their sales have slowed down, but it's definitely one channel that we're leveraging on the joint venture front. We certainly have gone back and are discussing opportunities for example, on the Biostream side with some of our existing customers to see further tranches of product and how we put ourselves on that opportunity.

I think Mike mentioned that we've seen our quotes double from that typical 40 quotations up into that 90 range between last year and this year. And also on the service side, we've been working a lot with our distributors to gain further opportunities within the regions. And as I mentioned, part of our expansion is we're adding more service techs into the service regions to not only cover our Cleantech side, but also to expand our industrial side.

Thank you, Jim. Our next question comes from Ahmad Shaath of Beacon Securities. How should we think about modeling working capital going forward post legacy BGX?

As I mentioned in my presentation earlier, so we're working extremely diligently with our team to just make sure that our new contracts that we signed, and manage our working capital carefully. That means that we are structuring our contract to have to receive down payments upfront. So we can manage our supplier, secured our suppliers and everything. So we will be very careful going forward with all our contracts to make sure that the working capital element is managed extremely tightly.

Thanks Stéphane. We have another follow-up question from Ahmad. What are the key initiatives needed to be done operationally before we can start delivering on the carbon sequestration systems and why will we only start manufacturing these in the second half of this year?

Well, I guess I can take the second part of the question, so the manufacturing is in the second half, but we will be securing some of the -- our -- the main components of the contract in the second quarter. So there'll be some activities in the second quarter in the first half, basically, but the majority of the manufacturing will start in the second half.

Yes, in terms of what do we need to do beyond lead times, as Stéphane was mentioning, the facility in Denver is well equipped to produce these type of products. So we don't foresee that we will need to add any CapEx into the facility, it's a simply a matter of lead time for orders and then dedicating the manpower to do the work.

Thank you, Stéphane and Jim. Our next question comes from Zach. Can you comment a bit more about how the company is planning to finance its future growth?

I can take this one. So obviously, cash management is a very important subject for us. But basically, what we're looking at is to pull on three levers. So first, as I mentioned is optimizing our contract. So there's no cash burden associated with those contracts. Second, obviously, we will be working on expanding our debt facilities, right. And the third one is we will be tapping into the equity markets.

Thank you, Stéphane. We have another question from AJ. Are you seeing any interests from carbon capture solutions from new industries like in Summit, and others that are related to that?

It's a brand new space for us. But actually, we are starting to quote on some different applications for carbon capture, and sequestration.

Thank you, Mike. Can you maybe talk a bit more along those lines as well in terms of what we're doing with CarbonQuest because that also relates to that question as well?

Sure. On the CarbonQuest side, as we've indicated in our Investor Day, we continue to grow the relationship, but we're actually working on delivering to them our second units from our end, and they're working on their second unit installation. We see together with CarbonQuest, great opportunities in this marketplace. Certainly, as New York City starts increasing this as a progressive tax, as the tax rate starts increasing from 2024, up to 2030, we expect to see more demand there. And we also understand that cities such as Chicago, Los Angeles, Boston, are also starting to look at this type of approach for their products. So it's an exciting business for us, and we continue to support CarbonQuest in its growth.

Thank you, Mike and Jim. We have another follow-up question from Nick Boychuk at Cormark. Can we get some color on the exposure to rising input costs?

Sure. I'll take a first pass out and then Stéphane please feel free to add. Certainly when it comes to long lead time items on our major contracts, we've done a lot of work. For instance, the second-generation Biostream we secured a lot of the long lead time items last year to not feel the impact so much in terms of the front end of this year with regards to the second-generation Biostream.

On our project with Summit, as Mike said, we worked very well with the customer to have a balanced approach. So therefore there's mechanisms in the contract where we share ups and downs in the journey with regards to inflation

For us, I think the areas that we're keeping a very close eye on is when it comes to the smaller components, things that are going into, for example, into our oxygen and nitrogen generators, which are lower cost items, where the team in Germany has been working to secure again, yearlong contracts. But we're also seeing the inflationary pressures in Europe coming from the fact that Russian raw materials have been excluded not completely from the marketplace, as well as we're heading down the path of energy being excluded from there.

So for us, I think this year is kind of a mixed year, certain product lines were sheltered from the inflation, because we've gone long, and other product lines, which are faster turning product lines like oxygen generation nitrogen generation, as well as our services business in the U.S., this is where we're seeing some of the pressure coming sooner than later on us this year. And that's where we've been focusing also on the pricing side, making sure that we transition as much as possible onto the pricing side of the equation.

So if I can add to that, and that's exactly why we said earlier that managing our contracts, going forward, managing our working capital is extremely important. This is to find that right balance, where we can protect our prices, our costs, at the same time manage our balance sheets accordingly.

Thank you, Jim and Stéphane. The next question comes from David Quezada of Raymond James. Is it fair to say that much of the material input cost inflation you have seen has occurred in Q4 2021? Do you think the impact of this has peaked or will improve going forward?

I think this is a million dollar question, and all honestly, for us to answer and it's very difficult for us to answer, because the challenges we're seeing I think the Ukrainian war has really added a dimension to the inflation that none of us expected in terms of fields out of Russia being excluded -- energy out of Russia being excluded and the ongoing severe COVID lockdown of China, which has put a lot of inflationary pressure on the freight side and the logistic side of the house.

So I would not hazard to say that Q4 was the peak of this. I think we're in sort of a plateau with slightly increasing until we have some resolution out of the Ukrainian war and also some resolution out of the severe lockdowns in China. I think the longer these continue, the more pressures being put on all the other global supply chains in the rest of the world to basically cover for the lack of the input coming from these regions.

And it's really hard to guess because the bottom line is the inputs that we're -- the influences that we were seeing across the last couple of years in wrapping up in Q4 with COVID. The supply chain and logistics have now been replaced with new levers from the current geopolitical situation and material instability. So we wish we had a crystal ball. We don't know.

Thank you, Jim and Mike. We have another question from Irwin. What is the status of the building [ph] operating opportunities with our JV in Quebec? And what is the realistic timeline for initiating the first project?

So as we've been reviewing these projects with our joint venture GNR in Quebec. We're looking at a timeline. There's a handful of projects that I would say are in the advanced stage. So we're looking at a timeline of about 12 months before we see something officialize and concrete out there. So it's a journey to get into these types of projects.

As you guys all know that the Quebec marketplace has some unique peculiarities. It is supported by the government now who put a mandate out there for the utility to increase the RNG content of the products. This is driving activity into the marketplace. So we expect to see something transitioning on the positive side in the next 12 months.

Thank you, Jim. Just give a moment for questions to queue up here.

Just one additional comment on that previous supply chain question. We have Stephen Evans on board now as VP of Supply Chain, who has already almost deep and working to stabilize some of these costs and give us leverage over our new global footprint, but also purchasing in time helping to ease some of that thing.

Thank you, Mike. Our next question comes from Ken. Can you elaborate a bit more on the legal expenses that were incurred in this quarter?

Yes. So yes, obviously, there's been some resolution on some litigation. And that's what we are seeing in expense added to this line.

Thank you, Stéphane. We have a couple of questions from different folks again. Can you talk more about the different Cleantech segments and which areas you think are going to be the highest growth in the short-term, let's say over the next year?

Sure, I mean, I think if we look at our Cleantech segments, I think hydrogen is a product line for us that's steady and growing in the next year at a steady pace. I don't see hydrogen being one that would explode rapidly, it's kind of steady and growing as mobility comes in and as more and more industrial customers look for the security of supply basically, that's coming from our hydrogen hubs.

In terms of RNG, here we see a lot of activity as Mike mentioned earlier in terms of the quotation, so we expect to see that RNG activity will continue to pick up. Now the big question mark there is financing and how the financing will come in for on the customer end. So far what we're seeing is that customers have access to financing. Now, none of us have the crystal ball and nobody knows with inflationary pressures well this may go. But our personal view right now is that the RNG markets will be robust and continue to grow.

In terms of carbon sequestration, this is a new market for us. I think we won basically, as Mike said, what's the largest order out there, right now what we see on the horizon are smaller orders, nothing in the order of magnitude of the carbon solutions project. And again I think this one will be probably choppy this in the next 12 months as we stabilize our order intake, so there will be things that will come in midsize to small sized projects, which will help us grow.

And then of course, there's our services side where here we see as inflationary pressures go up as people perhaps slowed down their CapEx investment, here's where we see the opportunity for our business to grow on the services side quite significantly, as people tried to maintain and service units to last longer in the field. So this is the way our crystal ball is shaping things up for us right now.

Thank you, Jim. I guess that's very helpful. Well, unfortunately, that's all the time we have for questions today. And thank you everyone for submitting the ones that you did. Just a reminder that we will reach out and answer the outstanding ones in due time.

And with that, I'll turn it over back to Jim for his closing remarks.

Thank you, Brandon. I just want to thank everybody for joining us today and we look forward to seeing you in the near future. And I wish you all a great day.

Thank you everyone. And that concludes today's webinar.