Xebec Adsorption Inc. (OTCQX:XEBEF) Q2 2022 Earnings Conference Call August 11, 2022 8:30 AM ET
Brandon Chow - Director, IR
Jim Vounassis - President & CEO
Stéphane Archambault - CFO
Hello, everyone, and welcome to Xebec's Second Quarter 2022 Investor Webinar. My name is Brandon Chow and I'm the Director of Investor Relations 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; our Chief Financial Officer, Stéphane Archambault; and our Chief Operating Officer, Mike Munro.
Our earnings press release was issued today before market opened. And 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.
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, working capital, net debt 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. Please see our disclosures for further information and reconciliations of these non-IFRS measures.
With this, I turn it over to Jim.
Thank you Brandon. Good morning and welcome everyone to Xebec’s second quarter 2022 investor webinar. First, I’d like to thank everyone for taking the time to come out and listen to our investor webinar this morning. It’s certainly has been an action filled quarter given the developments we’ve had to go through, but the team is excited to give you an update on how we are navigating the current environment and where we are headed.
Before we dive into the details, I’d like to remind everyone about what we’re trying to achieve here at Xebec. We are a diversified company with an industrial foundation and firmly believe that Cleantech is our future. What unites the entire company is our aim to drive lower emission gases and everything we do through local production. We are focused on developing technologies and solutions with this mandate in mind and have a dual purpose of not only reducing emissions, but also cost for customers which has contributed to our commercial success.
We ultimately have a unique exposure to three Cleantech verticals; renewable natural gas, hydrogen and carbon capture and sequestration. This combination and flexibility allows our customers to choose from an assortment of options that makes sense for them as well as participate in this accelerating energy transition period. When we combine these verticals with our service network, it provides us with a strong backdrop to manage different economic cycles within the verticals. With that being said, let’s get into the executive summary.
Overall Xebec had to navigate through many different macroeconomic events this quarter as did many other companies around the world. This included the continued inflationary pressures most notably in Europe and supply chain disruptions from different factors. In addition, we delivered some key delivered some key developments under our center of excellence framework which we see as a key tenant in being able to reduce our cost structure as we continue scaling up revenues. As a reminder, the centers of excellence framework revolves around three pillars. One, assessing core versus non-core activities, two, product rationalization and three work force and supply chain synergies. One key development within this framework was dealing with a dry guard legacy RNG contracts had on the financials.
As many of you recall, this has been the most impactful aspect of our financial profile and dates to 2019 before my time here as CEO. As we previously indicated last quarter, we wanted to contain these legacy cost by capturing everything to the best of our ability into a one-time charge to address the remaining cost on the projects and the discontinuation of this product live. As a result, our goal is not to see any further financial impact of these projects and finalize them for our customers within this year.
You will see throughout the presentation our metrics with and without these contracts to give you a clearer view of our business performance from the continuing operating operations going forward. These changes and our recent announcement on workforce reductions ultimately reflect the work the team is doing and will continue to do across the second half to reduce our cost structure and optimize the business with more standardized activities. While at the same time we continue to track towards our revenue goal of targets, I’m happy to report we achieved our second highest revenue quarter ever and our highest Q2 quarter ever and hit an all-time high backlog of $270.2 million and we continue to see growing demand for our products and services in renewable and low carbon gases.
While we still have a lot of work to do, we’re encouraged by the direction things are headed and we have the benefit of being able to draw down on the work we have booked to keep growing our profile and reduce cost at the same time.
Lastly, after the quarter end, we saw headcount reduction of our workforce in North America by 13%, which was a tough decision for the team here to let go of our dedicated and hardworking employees. However, ultimately, we felt it was appropriate to ensure the entire business track towards a more sustainable profile. And as per our framework, we'll continue to review product lines and potential options to enhance our liquidity. This could include divesting of certain non-core assets and entering into potential joint ventures with partners to unlock value.
I'd like to now quickly summarize some points on the quarter, which Stéphane and Mike will cover in more details. As I mentioned in the last slide, we made some key optimizations so far, and we will continue to do so in subsequent quarters as we see fit to ensure we have an improved operating profile going forward. For example, you've seen in this quarter us capture the remaining legacy RNG contracts. We also entered into a workshop program in Germany at INMATEC to our reduced our labor costs, and our recently announced headcount reductions in North America in July. These will offer savings going forward. And we will also explore other options as the team continues on our center of excellence path to reduce costs, and enhancing our liquidity.
Overall, we’re encouraged by the improvements in this quarter over Q1 2022. If you exclude the impact of our special charge from Legacy contracts, the revenues, gross margins, and adjusted EBITDA are all heading in the right direction. We are also working to manage our cash more effectively, and as at the end of this quarter we ended with $50.3 million in unrestricted restricted cash compared to $51.1 million as the end of December 31, 2021.
Ultimately, the most important is understanding our commercial trajectory, which is headed in the right direction for us to continue to get traction. Our backlog hit record highs, we booked record hydrogen PSA sales and are seeing good demand for gas as a service for our hydrogen generation technologies. Our XBC Flow Services brand remains a foundation for us and all this commercial activity could be further accelerated with the passing of the inflation Reduction Act of 2022. You'll hear more about this from Mike later in the presentation.
With that, I'd like to hand it over to Stéphane for his financial summary.
Thank you, Jim. And welcome everyone joining us. Let me start by reviewing our financial results for Q2 2020. Before I get into the details, I'd like to remind everyone that we've isolated the impact of the legacy R&D contracts, which include the special charge we took this quarter to capture those costs.
The special charge had a gross margin impact of $8.3 million and adjusted EBITDA impact of $8.6 million and net loss impact on $11.9 million. As Jim mentioned, the intent was to capture all the expected costs of finishing and discontinuing the product line in one swoop, so we do not have to see the financial impact of the legacy activities going forward. You can also see the impact of these contracts had on the previous year as was shown in the difference as well in this table.
Firstly, we achieved revenues of $44.5 million in the second quarter of 2022 compared to $32.7 million for the same period in 2021. The increase is mainly explained by the integration of newly acquired companies, completion of second generation bio streams and organic growth initiatives in North America.
The increase is partially offset by lower level of sales in Europe primarily attributable to supply chain constraint and reduced sales of oxygen in hydrogen generators. In a reduction, our revenues from the deconsolidation of our Shanghai joint venture last year. Our gross margin was $21.8 million for the first quarter of 2022 compared to $5 million for the same period in 2021. The gross margin was 4%, compared to 15% for the same period in 2021.
If we exclude the impact of the legacy contracts, the gross margin increased to $10.1 million or 23% versus $9.2 million or 29% of revenues. The gross margin percentage decrease from 29% to 23% is mainly related to lower costs, lower margin, on nitrogen contracts and hiring material and supply chain costs.
Research and Development expenses were $1.1 million for the three quarter ended June 30, 2022 and were related to the continued development of our second generation biosphere product in our five stream upgrading and nitrogen technologies.
Selling and administrative expenses were $17.2 million or an increase of $5 million compared to $12.2 million for the same period in 2021. The increase is mainly due to additional SG&A associated with the newly acquired companies. Note that a portion of our SG&A is comprised of depreciation and amortization, which was $3.3 million in the quarter compared to $2.5 for the same period last year.
We expect SG&A expenses to remain around these level as we continue our cost cutting measure and ensure we get the operating leverage of the business we're expecting. We saw negative adjusted EBITDA of $12 million for the second quarter of 2022 compared to a negative adjusted EBITDA at $5.2 from the same period in 2021.
Again, excluding the impact of the legacy contract, the adjusted EBITDA for the second quarter of 2022 was negative $3.4, compared to negative $0.9 for the same period last year. Net loss for the quarter was $23.4, or $0.15 per share, compared to a net gain of $10.2, or $0.07 per share for the same period in 2021. The decrease is mainly due to a $21.1 gain on deconsolidation of our investment in our Shanghai joint venture recorded last year combined with a $2.6 million provision for potential penalties recorded on legacy project contracts foreign exchange loss of $1 million and a settlement and related costs of $1.2 million, which were mostly related to the legacy contracts.
This was partially offset by lower integration in acquisition costs. We had $50.3 million of unrestricted and restricted cash as at June 30 2022, which compared to $51.1, as at December 31, 121. The increase in cash over Q1 22 is reflected by the cash management improvement and we spoke to you about before as we continue to execute the Centers of Excellence Framework.
As Jim mentioned, we will continue managing the level as we see appropriate and may enter into certain activities in order to enhance liquidity to execute our three year strategic plan. Overall, I continue to be pleased with the top line growth, and we will continue working with the coming quarters to improve the bottom line over the long term. There's a clear pathway to doing so and we see -- you've seen the development in this quarter and this will be consistent theme across the entire organization.
Next, I'd like you to help, I'd like to help you better understand our growth profile and improving adjusted EBITDA margins. On the left here, you can see a chart that shows our revenues have evolved. Since Q2 2022, we've seen we've been able to maintain a CAGR of 50 plus 50% plus and we would like to continue this growth trajectory. It is important to understand that that growth is still in the game plan as it allows more overhead absorption of costs as we continue to execute our plan. This road is supported by the backlog which I will go into more details and the recurring revenue run rate of our service organization.
On the right, I've charted our adjusted EBITDA numbers with and without the legacy RNG contracts. You can see the bar on the right in blue is the amount that exclude the impact. As Jim and I mentioned, our intent this quarter was to capture all legacy costs and once, and to not bring it up again going forward. You can see the impact it had on the bottom line and the improvement over Q1 2022 which is important to consider. We're encouraged by the direction things are headed and we expect to see further improvement from cost cutting events that we discussed and new development and there are centers of excellence framework.
Ultimately, it boils down to three things for us. One, continuing to manage costs internally, two continue to price appropriately, and three continue to work in the supply chain. As we continue to progress through the framework, we expect to see more improvement to the bottom line.
Lastly, I'd like to discuss with you in more detail our backlog which is a leading indicator of our growth, as these are firming, contracted orders. As you can see on the left here, we've had tremendous amount of growth in the backlog over the past year. And this is in part due to the record contract we want from Summit Carbon Solution. This is all while we posted a quarter of growth and show that we're able to replace the orders from customers as we execute.
One contributed to the backlog was a record number of hydrogen PSAs we received from new partners such [Indiscernible]. Our diversified nature has benefited us, as our R&D orders have been slower than expected to convert into backlog. I'd like to also point out that the majority of service revenues on their support segment are not derived from the backlog. The amount of this segment fluctuate quarter-over-quarter and this amount has hovered steadily in the past quarter. Lastly, our contract with Summit will begin manufacturing later this year and we plan to execute the full contract by the end of 2023.
I'd like now to pass it along to Mike for his operational update.
Thanks Stéphane. I'd first like to start off by talking about the potential passage of the Inflation Reduction Act of 2022 as it could impact our activities in the U.S. significantly. This historic act was recently passed last week by the Senate and now goes to the house for approval and may be subject to change. This is ultimately a game changing piece of legislation for us, as most of our footprint is in the U.S. and provides another catalyst for domestic renewable energy production. It initially proposes U.S. $369 billion for clean energy investment tax credits; pardon me covering all three of our Cleantech Verticals.
In renewable natural gas, hydrogen and carbon capture and sequestration, and this is really encouraging to see. This tax credit includes new qualifications for biogas to RNG and more importantly, using RNG as a feedstock to qualify for green hydrogen. In addition, it also expands and eases the process for the 45Q credit for carbon capture. Ultimately, we could not be more encouraged if this bill pass is given the U.S. manufacturing strategy we've already implemented alongside our service network to support this.
Xebec has all of the technologies and equipment to qualify for credits to produce RNG from biogas, convert RNG to clean hydrogen and capture carbon for sequestration, unlike anyone else in the space, overall exciting times for the industry and for Xebec.
Now let's take a minute and dive into greater detail into our RNG segment. As Jim and Stéphane made clear, we've addressed the drag from the legacy contracts this quarter. The special charge, we talked for provisions associated with the costs relating to completion of the projects, inventory write downs, potential penalties and warranty claims and legal costs.
We implemented an extensive review to make sure the best to the best of our ability, we captured all of them in one go. We do recognize that orders have been slower to convert into backlog despite quotes increasing considerably earlier in the year. We believe this may be related to factors such as overall economic uncertainty, carbon credit pricing, volatility, and the early adopter nature of the second generation bio stream product. We remain optimistic about this segment, and we'll have to be cautious about the pace of our order uptake in the short term.
Thankfully, our other segments are contributing nicely to the backlog and making up for the shortfall for the time being Our delivery and successful execution of the Brightmark and Chevron Renewable Natural Gas Partnership contract remains a high priority for us and we're on schedule to manufacture and deliver them by year end. This will be an important development ensuring that we cement our leadership in the segment and will create a great number of active RNG references for us in one contract.
We continue to call them Biostream orders and see a clear pathway towards profitability in the segment which is encouraging. Here in this background image, you see our senior RNG Business Development Manager Alan Johnson, who helps spearhead all of our sales efforts in the U.S. His arm was resting on a vacuum pump in our second generation Biostream, which as you can see is quite intricate. So now let's jump over to hydrogen.
Hydrogen overall is showing strong demand and we're encouraged by the pathway towards a more scale in this segment. We booked a record number of Hydrogen PSA orders which was supported by the exclusive supply agreement and initial order with Haffner energy out of Europe. That project in particular is an interesting one, as they're producing very low cost and low emission hydrogen using a pyrolysis process.
Our hydrogen PSA is needed here to purify the hydrogen, the levels usable within a fuel cell application. This plays well into driving volume into our Blainville manufacturing facility, which is rapidly becoming our PSA Center of Excellence as we move integrated systems to our Denver, Colorado location.
In addition, we've had some existing partners such as JNK Heaters continue to give us orders for their own hydrogen generation systems in South Korea. We are quoting a number of key generation projects, which will increase utilization of the floor and our operation in the Netherlands which is important for better cash generation. Ultimately, the key for our hydrogen generation vertical is to develop gases service opportunities, in which we're seeing a great demand to fill our manufacturing capacity further.
The U.S. and Asia have recently shown promise for gas as a service, and we will certainly keep working these opportunities. Ultimately, we expect to benefit nicely from the growing trend of converting RNG into green hydrogen. We have an ideal solution for this application, as most RNG installations in the U.S. are small scale and we have a modular reactor that can efficiently do the conversion using a steam methane reforming process and it's in a shipping container footprint.
On that subject, you can see in the background here one of our newest gases is service hydrogen installations at a flat glass manufacturing facility in Eggborough, United Kingdom. I'm referring to the white shipping containers in the middle, and the storage cylinders just south of them. You can see the tube trailers and connections to the right. The flow rate is approximately seven normal cubic meters per hour, and the hydrogen is used in a float glass manufacturing process as a protective layer. It's quite amazing to see how these projects come together.
Now let's go over our oxygen and nitrogen business. Our oxygen and nitrogen business is ultimately responding to the new demand curve, which is reverting back to long term industry means. The goal here is to supplant record oxygen generator demand that we saw in recent years with industrial nitrogen generation units. We had a new customer this quarter order two large nitrogen generators for an inverting process for specialized high tech metallized plastic hose connections.
Our solution is able to save this customer over 230 Liquid truck shipments per year, approximately 44,000 kilograms per year of CO2. It is quite impressive to see the cost and emission reductions our solutions can have for our customers. As Jim and Stéphane mentioned earlier, we've also implemented a workshare program which will result in an estimated $0.5 million in SG&A savings for the second half of fiscal year 2022. This workshare program is renewable every six months and we intend to utilize it when we can as it allows us to retain key personnel while still reducing costs.
And lastly, as we're doing across all of our businesses we've implemented pricing adjustments and here in the nitrogen oxygen business we've specifically seen them accepted by the market. This will come continue to be a focus across all of our segments as we look to manage costs and continued growth.
Now let's finish off with a look at our foundational support segment. Our support segment continues to deliver solid operational results well within our expectations. Though this segment is still seeing some impact from COVID-19 way on the technician productivity, and the impact of supply and inflation pressures impact margins. We have already begun to address this internally, and will work to improve the margins over time and to price within current market rates. We continue to grow our base of trained technicians, technicians have been difficult to get in this current environment and these are critical employees who are constantly out in the field, generating value add and revenue for both of our industrial and our Cleantech, for both our industrial and our Cleantech equipment.
Our first service location is now running on our global ERP. And we will continue adding new locations as we continue these integration efforts enhancing efficiency and visibility. Our brand transformation efforts continue to be underway and we expect multiple locations to reflect the XBC Flow Services brand by year end. Overall, we would like to characterize our work in this segment is progressing very well. I'd also like to take a second to point out Chris Titus, in this background image, who was recently promoted to serve as an Installation Manager for all of our Biostream units. Please join me in congratulating him on his new role.
And with that update, I'll turn it back to Brandon for Q&A. Brandon is on mute at the moment? So perhaps we'll start off here and then Brandon, you can you can join us as soon as your technical difficulties are over.
Sorry everyone about that. Thank you, Mike and the team for that. We’ll now open up the floor to questions. Please note that you may ask a question at any time in the right of your console. And note that on average, we do receive quite a number of questions. And we will unfortunately not have enough time to get through all them today. However, someone from Xebec will follow up on them. And we thank you for your patience on that. We'll just give a couple of seconds for questions to queue up. And we'll dive right into that.
So our first question comes from Nick Boychuk from Cormark Securities. What drove the sequential drop in the support revenue?
I can take this one. So sorry. So basically, we've seen these revenues are seasonal. And we've had some slowdown in terms of converting some of the material. COVID-19 also did not help in by reducing the productivity. And as I said the extended delivery of capital equipment and related revenue recognition contrary to that. We do not see this as a trend. We definitely are looking forward for the second and the third and the fourth quarter where revenues will become.
Thank you. Our next question comes from Ervin. There was mention of asset divestiture in the MD&A. What assets would you consider?
Yes, I'll take this one Brandon. So, of course, it would be not prudent for us to discuss which assets we would divest or intend to divest at any point in time until there's something concrete and then we'll let everybody know. But it goes back to what we discussed last quarter and what we discussed at our investor day as part of our centers of excellence journey, there's some product lines, for instance, the legacy RNG product line, that we decided to discontinue. This product line there was no value in us looking to divest it to somebody else, because the core technology of that is our PSA technology, which of course we value because we sell it standalone for methane applications, helium applications, hydrogen applications, so we would not want to let go of that technology.
But there could be other technologies as Mike, myself, Stéphane and the team go through our center of excellence, analysis of each of the product lines where we may decide that there's better value for somebody else on the market. And if and when we do that, we'll let you guys know.
Thank you, Jim. Our next question comes from Nick Boychuk, again. What caused the increase in working capital, i.e. inventory accounts receivable? And when do you expect that to unwind?
Well, the working capital actually has been affected this quarter by deferred revenues, mainly; we were able to get some traction on the deferred revenue side. And but basically, I mean, we're seeing the inventory and accounts receivable being stable, we are collecting our customers. So that's why we're seeing this table inventory went down because of a special charge that we talked about, on the inventory side related to the legacy systems.
Thank you, Stéphane. Our next question comes from David Quezada from Raymond James, could you comment on margin specifically for the Biostreams units that reduced Chevron’s large Framework, have they come in line with your expectations?
Mike, you want to take this one or you want me to take this?
Right now we're actually progressing really well on this, on this particular contract. We've seen tracking some of the some of the measures we've taken to reduce costs. We've seen a fairly reasonable decrease in overall labor component on the Brightmark project, meaning that we're our margin is expanding in line with exactly what we thought. Of course, the first few units of a second generation aren't quite going to have the same margin as the next. But we're seeing as we've marched through, we produced six units now. A labor drop in a considerable rate and an attendant drop in materials as well. So our margin, our expected margin on Brightmark is in line with what we expected.
Thank you, Mike. Our next question comes from Adam Gill from Paradigm Capital. Excluding the legacy RNG contracts, gross margins did see some pressure quarter-over-quarter. That said, as you start to deliver on the sizable compression unit order, do you expect that gross margins will recover or inflationary pressures still going to depress gross margins?
I can take this one. So just to answer the question, there's no there's no impact in this quarter related to the, to the carbon sequestration project. And then, as we see, the volume will be expanded significantly as you saw in the backlog. And then we tend to have a positive contribution margin from those contracts.
And I would add that as we move as we move forward in time, we will also see the benefits of our Center of Excellence Program, and the moves that we recently made here, post the quarter in July, which would also, which will also contribute to improving our margins.
Thank you, Stéphane and Jim. Our next question comes from Eric Stein, from Craig-Hallum Capital Group. What is your confidence that these legacy RNG issues are falling behind the company and maybe talk a bit more about how that process was underway?
Well, the legacy are what we've done with the with the legacy is to is to ring fence them into essentially what the BGX plant product represented. We, we used to essentially take on the entire project and an end to end very, very similar to an EPC sort of approach. We've changed our product approach on BGX specifically, by no longer supporting that that particular product line, but instead of doing what we know how to do, we know how to do PSAs. We know how to how to do engineering, we know how to produce portable plants. So by sticking with what we know, we know that we're not going to enter into any additional trouble because we're simply not going to quote like an EPC anymore.
As we quote RNG projects, we're making sure that the scope is well within what we know how to do, that the margins are attractive for us to take on. And we have to be perfectly frank, no interest in taking on projects that are at a loss.
And if I may add to what Mike said, I think for the existing legacy pieces, as Mike described going forward, this is a discontinued product line. But for the existing legacy pieces, a couple of key things that were done right first, Mike and his entire team did thorough reviews of each project, what's left to be done, have communicated with the customers we have a good view of the remainder of the work in front of us and then with Stéphane the team was able to capture the costs and then on top of it as we indicate in our MD&A we've also tried to capture future warranty type of exposures etcetera to give everyone a one point in view, which was something that was requested a lot from the investment community. And this is our best estimate of it. And as we indicated, as I stated, Stéphane and Mike we don't expect to revisit this special statement in the future.
Now, we'll take that we're going to take the hit in one swoop as, as Stéphane said, we're not going to enter into these type of agreements going forward.
Thank you, Mike and Jim. Our next question comes from Adam Gill again. With the 4 million in annual cost reductions from the headcount reduction, how much of this will be seen in Q3 given severance costs?
While you can see that as a annual number, so you can take a quarter of that basically. And then, and that's, that's the type of for the event that happened in North America. So that that will be the impact. And as Jim and Jim might mention, I mean, the activities and we already, the actions we took in Germany with the SHARP [ph] program will bring an extra half a million for the for the remaining year. So that's 250. So you can see around 1.21 point 3 million direct impact for per quarter for the remaining of the year.
Thank you, Stéphane. Our next question comes from David Quezada again. Do you still anticipate reaching a run rate of 100,000 units by 2024? And how is this ramp up coming along?
Perhaps I'll start then Mike you can add some color. Certainly, from a capacity perspective, we have the space, we have the equipment, and it's just a matter of manpower for Mike and the team to add. For us, the biggest thing that Stéphane Mike and I are looking at is, what's the volume coming in from the from the market right now? And how do we manage the volume? We want to be very prudent with our capital. So we're not into building, 20, 25 units ahead of, of the market, certainly, we're not going to go there. We'll make decisions on how many units will hold in inventory, as we get closer to each quarter going forward? And then, we'll let the market dictate it.
Thank you, Jim. Sorry. Next question comes from Rupert Merer from National Bank. Jim mentioned potential to divest of certain assets or enter into JVs to enhance liquidity. Are there any business lines that stand out as, “noncore” or any particular business lines that could be attractive for JVs?
Yes, so as I mentioned, a little bit earlier in the call, I think there was a similar question. We will not speculate on these calls as to which one of our product lines may have an opportunity for joint venture divestiture, or to be wound down. As we go through our process, which is a quite structured process, like we announced the wind down of the Legacy RNG business when we have all the facts, when we're ready to do so we will let everybody know.
Thank you, Jim. My next question comes from Justin Strong from Scotia Bank. Can you please speak to how Xebec is positioned to take advantage of some of the Inflation Reduction Act provisions versus fears?
Well, we're actually positioned quite well, it's a really exciting thing for us. The acceptance of RNG to produce green hydrogen is a highlight. Of course, we made the move to a large presence in in the U.S. The U.S. made in the U.S. figures in prominently both in our marketing strategy and as a result of this sort of legislation. Tax credits are always welcome. The customers happy with them, they make things a lot more economical. Yes, improvements to the fuel tax credit, makes it easier for taxpayers to utilize 45Q As you heard earlier in the presentation, really, it's there's a there's a lot of upside for us. And we've already established that foothold with our Denver, Colorado location. So, I mean, we're quite excited about the entire thing.
And I'll add one very important point to what Mike said. So beyond extending tax credits, giving extra tax credits for made in North America, which validated Mike strategy of building our capacity in the U.S. Another equally important proposal on the table for us who have the three Cleantech verticals altogether is the fact that they're creating a new clean hydrogen tax credit that allows the use of renewable natural gas as a qualifying feedstock i.e. we will be able to sell SMR technology to our U.S. customers they will be able to buy an RNG contract produced from our Biostreams and that will qualify as a green hydrogen product, which is really exciting for us. And, of course, the extension of credits on carbon sequestration, again, an area where we are in our third vertical, where we continue to look for opportunities to grow the business is another exciting thing for us. So overall, we are hopeful that this bill will pass the House, as I think for it really, really gives us a nice lift in a big market like the U.S.
Thank you, Mike and Jim. Our next question comes from Sanjeev. Your potential permitting delays in Summit carbon pipeline impact the realization of revenues projected for 2022 and 2023. Just trying to understand where its effect deliveries through SES will happen regardless of the ground realities of the project.
As a matter of fact, the way the agreement is set up, delivery will continue. We're not delayed by delays in installation.
That’s the simple one to answer.
Our next question comes from Aaron MacNeil at TD Securities. You mentioned pricing appropriately in your prepared remarks. The Summit carbon award represents a significant portion of the backlog. Can you give us a sense of what you think the margin performance might be for this project?
Hey maybe I'll take it and then -- certainly, we don't talk about specific project margins right. As we go through each one of our projects, because then it's quite competitive information that we don't want to share in this. We're talking about one unique project. What I will say behind that, though, is we have a very thorough review process that Mike spearheads on all our large projects. And we are certainly seeing that between ourselves. And some of the arrangements that we made with summit upfront, we are able basically to sustain the margin that we projected in the project by managing effectively our supply chain, which is always the biggest risk in a large project like this, because we are basically the integrators and the packagers. So we acquire a lot of the components. But I think that the team has done a great job and may perhaps Mike, you want to add a little bit of color with one or two examples.
No, seriously the acquisition of our major materials, including large equipment, large turning equipment, light compressors, all the way down to commodity type materials for skids have come in in lockstep with what we were originally arranging with vendors. And we're quite happy with it. So we know we're going to perform on this particular one exactly in line with what we quoted, and maybe there's a possibility of some additional improvement on top.
Thank you, Jim and Mike. Our next question comes from Rupert Merrigan from National Bank. How will sales unfold under the contract with Sumit? Will we seen much revenue this year?
I can take this one. So the majority of the revenues will happen in 2023. Because this is when the units will be will be shipped. We're going to see some revenues this year, but mainly in the last quarter. But it's going to be very small compared to the bulk of the revenues, which will happen in 2023.
Thank you, Stéphane. We have another question from Nick Boychuk again. How has the slowdown in BGX about Jim waterflow impacted expected manufacturing of the systems? And will you continue to build new systems to deliver faster when orders convert? And how many orders do you hope to fulfill over 2023 and 2024?
Sure. Okay. So I'll start off and Mike, please feel free to add. I've mentioned a little bit earlier in one of the other questions that certainly between Mike myself and Stéphane, we want to keep the speculative number of, of BGX Biostreams of our second generation product to something that is manageable by the company. So do not think that we would build ahead more than, a handful of units, that that's our internal target. And in terms of where we see the where we see demand, and now at this point in time, in 20 I won't speculate on 2024 because it's a little too far away right now. But certainly with Mike and his strong effort on lead time reduction that we've been doing, it gives us a lot of flexibility. So right now we see the 2023 Biostream market, signaling somewhere in that 20 to 30 type of units. But we'll get closer and we'll firm it up and share with you much more of this as we get into the Q4 timeframe because it could change rapidly.
Thank you, Jim. Our next question comes from Yan [ph]. In your efforts to improve efficiency, including the continuous implementation of your ERP, do you foresee to extend these efforts to sales to accelerate the top line?
We already have a fairly integrated CRM. But yes, I mean, we're implementing standardization and process standardization across the organization. We have really good visibility in our CRM right now to our sales pipeline. And that allows us to be lockstep between functions as we mature these things from opportunities all the way to booked contracts. Did that answer the question?
Yes, I think if I had to make it, it goes back to what I said on the previous question is this CRM technology that's allowing us, to try to make a very opaque crystal ball on the RNG side much more clear for us. And with the quite good lead times that we're getting on the Biostreams right now. It gives us a bit of flexibility to ramp up and ramp down, as quarter-by-quarter.
And we're concentrating on the right opportunities.
Thank you, Jim and Mike. Our next question comes from the Ralph [ph] who firstly would like to wish everyone a good morning and thank the team for taking steps to reduce the cash burn. They want to understand how we see the Canadian climate policy and its impacts on our growth prospects there.
Again, I think we welcome basically every attempt to reduce the impact of our world on the climate. The Canadian policy, we're still working through trying to understand all its aspects, certainly, things like our carbon tax, and the increasing of the carbon tax is something that we can, we can certainly see a benefits for us as we go into the marketplace. I think, the other thing we're keeping a close eye on is what's happening at the provincial level in Canada, because they, the provinces have a lot of sway on this. And we were quite Galactus here yesterday from our own home province, here in Quebec, quite a big commitment towards injecting capital into the renewable natural gas, sphere and influence. So we continue to monitor, certainly the marketplace is not as big as the U.S. marketplace, just like every other product, but there's an important home town market. And what applies to the U.S. market also applies here, right. We have our Canadian facility, our Canadian facility is geared up and is making Biostreams. And we'll make Canadian Biostreams. And, of course, our PSA technology, which we leverage for both helium productions, which a lot of helium production and Canada and hydrogen is, is also made in Canada. So we have a good I think, in both countries, we have a very good footprint to take advantage of anything that comes from the government.
Thank you, Mike and Jim. We have another question from Rupert Merer again. Where do you see the largest opportunities for Xebec in the U.S. with the potential for a $3 per kilogram production tax credit for green hydrogen? Is it electrolysis RNG hydrogen as a service or carbon capture? Have you had any dialogue with potential customers on this?
I'll start and I'll let Mike comment on the customer front. Certainly we see the opportunities as we've laid out, in our presentation, the renewable natural gas and SMR technology to produce green hydrogen from renewable natural gas. I think, these two Cleantech verticals of ours will see some good traction. And perhaps, Mike, I think, if I understand well you've gotten some inquiries already from some customers on this front.
We have actually. We're talking to quite a few. There's been like we said in the presentation, quite a bit of interest along both RNG and hydrogen lines. And we're well poised because we've got modular RNG covered and we've got modular SMR to cover. So we like I like Jim said, we're poised really well to take advantage across our Cleantech offering of everything from RNG generation, RNG conversion to hydrogen and carbon sequestration.
And I would add one final point. I think what we're seeing the big demand is for the green hydrogen from SMRs is in the format of gases a surface so people are looking for the molecule basically.
Thank you, Jim and Mike. Our next question comes from Ken Monroe. What is your current headcount? And is there a clear trend in revenues per employee?
Well, I can take this one. So for us the fact that we have large contracts and then you were executing on those in it's not a metric that we use often, the revenue per employees we do look at it, but it's not like if we would strictly be on a service business, the fact that, you've got those masks on as you ship an equipment, for instance, you've got a lot of revenues, and it kind of skews the matrix a little bit. So now I think, with the reduction that we've made, just to answer the question, I think, we're hovering around 600 employees right now, or a bit less than that. And that's the current situation right now. And as I said, on the matrix, it's a good metric to have but not for us at this point.
Yes. Suffice to say, though, you saw our backlog go up, and you saw our headcount go down. So, as Stéphane said, it's not the one and only metric we look at for the meetings as Stéphane explained. Sometimes that fits well, with our business, sometimes it doesn't. But we certainly pushed it in the right direction, if that's a metric that people are keen on.
One that we track very carefully project over project is, is margin as quoted versus margin has built. And that gives us a cross view all the way across.
Perfect. Thanks, team. We have another question from Ken Monroe as well. Can you elaborate a bit more on the one of the credit facilities currently being in forbearance? And is it possible for that to be reinstated at the company meets the loan covenants in the future?
Yes, absolutely. This is, this is a temporary thing. We did, we did reach one of the covenant. And that's why we, we had to have that four page letter. We came up with an agreement with the bank, and we're monitoring the situation. So that's the that's the situation right now. And as I said, and then as I pointed out, I mean, we can definitely reinstitute that with no problem as we fix the ratio.
Thank you Stéphane. Our next question comes from Louis Jutras from Desjardins Capital Markets. Can you provide an update on the progress achieved on a decentralized hydrogen production of strategy?
Perhaps I'll take that. So we are continuing, as we mentioned in our investor day, we are continuing to look for the right partner or partners, basically, to help us grow the hub strategy faster than we can because we continue to believe that, the, our use of capital is much better on the equipment side than in on the hub side. And as things evolve, and as we find the right partners, we will let everyone know.
Thank you, Jim. Our next question comes from Andre. With some of the challenges of the legacy RNG contracts, you would like to know what the plan is to win more Biostreams [ph]?
Or putting the horsepower exactly where we need it. We talked about the CRM, we talked about the focus of the team. I know that we spoke about in the last meeting here, the number of opportunities we had for quotation going up. And we and we are addressing those and it has gone up. We've essentially doubled the amount of inquiries over last year, it's the conversion rate that's a little bit slow. That's got more to do with macroeconomics and people's hesitation to commit capital right now than anything else. Because we are on what we're quoting, we are the vendor of choice. So it's a matter of to get it converted from opportunity into through pipeline into backlog. We just need to get it.
And like I said, the messaging here basically is the global conditions are making it so that things are slowing down. But these projects are not getting canceled. They're getting deferred a little bit. So that's kind of what we're, what we're feeling a little bit on that front.
And if I would add, that's why we welcome and truly hope the house in the U.S. passes the IRA, because if they pass the IRA, then the extent tax credits, it allows us to manufacture products in the U.S., it gives our customers you know, up to a 10% boost to if they use, local labor to install the equipment also on their tax credits. And as a policy if I take a step back as a policy we as a company, also across all our verticals, don't announce all our orders, unless they have a strategic value and we never announced orders that we have not received the purchase order on.
That’s Great. Thank you Mike and Jim. Our next question comes from Egydio [ph]. Can you please talk about your plans and and expectations with the operations, particularly in China? And with the Quebec initiative with FSTQ?
Yes, I'll take that. So we're very happy with our Chinese joint venture, we continue to see that the team in China is growing well with our partners there. So our plan right now is to continue to work with our partner there to make sure that we continue to provide some key core technology out of North America, and then that the local partnership in China, builds and makes things for China in in China so to speak. And we'll evaluate this and how it evolves over the next couple of quarters and, and we'll make whatever other decisions we decide, that are the benefit of both Xebec and our JV partnership in terms of technology sharing as an example and anything else.
In terms of our GNR Capital in Quebec, our joint venture with the FSTQ, which is the second largest fund in Quebec employment fund. We continue the two partners continue to look at how we can extract maximum value from GNR capital. Certainly, as I mentioned, a few minutes ago, this recent as this week passage of the Quebec government on supporting RNG projects in the province is something now that we have to digest and we have to look at, and we'll work it with our partner and we'll make decisions that are best for GNR, capital and best for Xebec.
Thank you, Jim. That's helpful. Well, thank you everyone for your questions. And unfortunately, this is all the time we have for, and this wraps up today's webinar. With that, I'll turn it back over to Jim for his closing remarks.
Well, thank you very much, everyone. I think you saw that this quarter was a quarter that we delivered a lot on the items that we talked about in Q1 and we look forward to seeing you again in Q3 and I wish everyone a safe and happy remaining part of their your summer. Thanks a lot and have a great day.
Well, everyone that concludes our webinar. The materials will be posted to your website shortly and you may disconnect at any time. Thank you and we look forward to seeing you next time.