Xebec Adsorption Inc. (XEBEF) CEO Kurt Sorschak on Q1 2020 Results - Earnings Call Transcript

Xebec Adsorption Inc. (OTCQX:XEBEF) Q1 2020 Earnings Conference Call May 27, 2020 11:00 AM ET

Company Participants

Brandon Chow - IR

Kurt Sorschak - CEO

Louis Dufour - CFO

Prabhu Rao - COO

Conference Call Participants

Brandon Chow

Hello everyone, and welcome to Xebec's First Quarter 2020 Earnings Investor Webinar. My name is Brandon, and I am 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 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, on the console to the right of your screen.

Joining me today will be Chief Executive Officer, Kurt Sorschak, our Chief Financial Officer, Louis Dufour, and our Chief Operating Officer, Dr. Prabhu Rao. Our earnings press release was issued earlier today before market opened. All relevant documents are available for download either from the Investor Relations section on our website or from CEDAR directly. You will also find later today, a copy of today's slide deck on our websites Investor 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 our financial results and the performance of our businesses which we will discuss in the 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 we may make on today's call.

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

Kurt Sorschak

Thank you, Brandon and welcome everyone, to Xebec's first quarter webinar. Let me start off by acknowledging the difficult environment we're operating currently. Record numbers of businesses closed in Q1, and record numbers of unemployed or furloughed people.

Despite the COVID-19 pandemic and its disruption Xebec has continued to grow, and Q1 marks the fifth consecutive quarter of year-over-year revenue growth. We generated $12.2 million in revenue for the quarter compared to $9.8 million for the same quarter last year, that represented a 24% increase. This quarter came in weaker than we expected due to the impact of COVID-19, that caused short-term shutdowns and disruptions to some of our manufacturing and service facilities.

For example, our manufacturing in China and Italy were temporarily closed in Q1, but have since restarted. We expect that Q2 will be a more normal quarter with stronger results. And both Louis and Prabhu will touch on this.

Our backlog continues to remain strong at close to $90 million and our quote log remains robust with more than $930 million in quotes outstanding. We are very fortunate to have enough orders on hand to meet our guidance for the year, and we are now cooking new orders for next year.

Let me just remind everyone that in Q1 we received $27 million of orders, a good part from U.S. dairy farmers. This was a significant milestone for the company as it marks a new category of customers for Xebec in North America.

More importantly, I can confirm that we're maintaining our guidance for 2020, which is $80 million to $90 million in revenue, 11% to 13% EBITDA and 7% to 9% net earnings. And this despite the slower start to the year, but as I've pointed out, we have the orders on hand. And all we have to do at this point is deliver on those orders and we will achieve our targets.

Also, the world backdrop continues to be concerning, and the crisis continues to take a considerable health and economic toll, I remain positive and excited about Xebec's opportunities, and all our ongoing initiatives.

We continue to work on our three to four plant acquisitions for 2020. We are also in the final stages for our first strategic partnerships in regards to base to RNG projects in Canada, and we plan to announce more details on this in the coming few days.

With this, I will turn it over to Louis Dufour, our Chief Financial Officer, who will go over the financial highlights.

Louis Dufour

Thank you, Kurt, and welcome everyone joining us. Let me start by reviewing our consolidated financial results for Q1, 2020. As Kurt discussed, we achieved record revenue of $12.2 million in the first quarter of 2020, compared to $9.8 million for the same period in 2019, a 24% increase. The increase is mainly explained by the higher volume of major Cleantech contracts and revenue from the acquisition in California, completed in December 2019.

However, these results came in lower than expected due to the COVID-19 pandemic. The brief business interruptions in our Chinese, Italian and Californian operations in March resulted in shipment delays, and consequently resulted in reduced revenue of approximately $3.8 million to $4 million in Q1, 2020. In addition, Q1 is seasonally our weakest quarter. Now that everything has restarted, we expect subsequent quarters to be significantly stronger.

Our gross profit was $3 million or 25% of revenue for the first quarter of 2020, compared to $3.3 million for the same quarter in 2019, a 9% decrease compared to the same period in 2019.The decrease is mainly explained by a different product mix, an increase in amortization expenses of $0.9 million, the disruptions in the manufacturing operations in China, Italy and California caused by the COVID-19 pandemic and the resulting reduced productivity.

Selling and administrative expenses were $3.9 million in the fourth quarter, compared to $2.5 million for the same period in 2019, a 56% increase. This is primarily due to the organizational scale up to meet the 2020 objectives for the Cleantech industrial and renewable gas infrastructure segments. In addition to increased amortization expense of intangible assets within SG&A.

A financial metric we monitor is our selling and administrative expenses as a percentage of revenue, which was 32% for the first quarter compared with 26% for the same period in 2019, an increase of 600 basis point. This percentage would have been 24% if we were able to recognize the $4 million, an improvement over the same period last year. This increase is also a result of the lower than expected revenue for the quarter and increased costs related to organizational scale up and amortization of intangible assets. Ultimately, our long-term target is to have SG&A at 15% to 17% of revenue.

We had positive EBITDA at $0.8 million for the first quarter 2020, compared to the same amount for the same period in 2019. In addition, adjusted EBITDA came in at $0.4 million for the first quarter 2020, compared to positive $1 million for the same period in 2019.

Net loss for the quarter was $0.7 million or negative $0.01 per share, compared to net income of $4.4 million or $0.01 per share 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 $39.7 million on March 31, 2020 for a current ratio of 2.9 to 1, compared with working capital of $36.9 million and a ratio of 3.2 to 1 on December 31, 2019. We have $23.7 million of cash on hand as of March 31, 2020, and a $10 million loan facility from the Fonds de Solidarité in Quebec, that was recently announced. In addition, Xebec will receive additional funds of approximately $14 million of its outstanding warrants, if the outstanding warrants are exercised by July 4, 2020.

Now I'd like to bring your attention to this graph, which shows the quarterly financial trends. As you can see, our financial continue to trend in the right direction and demonstrate strong growth. Our second quarter is anticipated to be in the range of $20 million in revenue, due to the deferral of revenue from Q1 of this year.

As Kurt mentioned, we continue to maintain our guidance for the year, and the next couple of quarters we'll have to make up for the weaker Q1. An indicator of our strain is the fact that we have not laid off anybody. We have not cut any salaries or furlough any employees. We have successfully been able to maintain continuity throughout Xebec and its subsidiary. This has a cost, but should be considered as an investment for the future months. As opposed to many companies, we will not have to suffer the long-term loss of employees or the cost to reopen the operations.

I will turn it now to Prabhu, our Chief Operating Officer; who will provide us a COVID-19 operational update.

Prabhu Rao

Thank you, Louis, and welcome everybody. I’m operating from my home in Boston. So the weather has been great here, so there's a lot of people going to lawns, so we're hearing loud noises. Just, I apologize for that.

I'd like to start with an update of our global operations since the last call, and discuss the progress we have made over the last few months. As discussed in April, like many companies around the world, we experienced different levels of disruptions in our operations in China, Italy and North America.

I'm quite humbled by the effort put in by our leadership teams in all our facilities. And due to their efforts and that of our staff, we have not experienced a single COVID case illness [ph] in all of our teams. Our priority continues to be the health and safety of our employees, customers and our supplier partners.

Since our last communication things have improved in all the regions, and we are now implementing the necessary precautions to bring the workforce back to the facilities as appropriate. Our operations in China have normalized since mid-March. And we are happy to report that with the exception of some travel restrictions in parts of China, they are fully functional at that location. We are now shipping product to customers and the order intake have also resumed.

Our site construction operations in Italy, which were halted in Q1 have also restarted in early May, and we have begun working at these sites and expect to complete them in Q2 and early Q3. Both our service companies, CAI and CDA Systems, based out of Toronto and Northern California continue to operate, and provide critical service and support while adhering to the local requirements and customer mandated safety protocols.

Thankfully, our main manufacturing facility in Quebec has remained open all along as an essential business and continues to operate at near full capacity. We've been compliant with the latest health guidelines offered by the province and actively monitoring infections in the local areas. Our goal is to keep this operation in Blainville open to ensure business continuity and hit our growth objectives for the year.

Ultimately, we continue to ensure that the health and safety of our employees is secure, and we will comply with all the local public health guidelines in all regions and go beyond. Examples of these include frequent sanitization of high-vector surfaces, mandatory PPE requirements for all the staff. We are reducing the on-site presence of staff and also doing physical distancing on manufacturing floors. We'll continue to monitor the situation carefully and provide any updates as appropriate.

Now I'd like to give you a summary of the Q1 results on each of our business segments and update you on the activities in the current quarter. For our Cleantech segment that include our biogas plants and also PSAs, for both biogas and hydrogen applications, the Q1 results revenues came in lower than expected, as indicated due to the delays in delivering product to customers and disruptions in our site construction work.

As mentioned earlier by Louis, we expect to make up this revenue shortfall in subsequent quarters, as we, our suppliers and customers figure out ways to operate safely, while minimizing any loss in productivity.

Over the rest of Q2 and Q3, we will be commissioning two biogas plants in Ontario, two biogas plants in Italy, shipping multiple PSA units for biogas projects in Austria and France, shipping Biostream biogas products to dairy farms in California, and hydrogen purification solutions in China and Europe. As you can see, we're going to be very, very busy in the summer and fall, and that will have a positive impact on our results going forward.

In addition, the activity on the site, the sales area have not slowed down by any measure. Our quote log is strong and we have positive indications of order flow. And we expect to make some announcements in the coming weeks in all our operating regions.

On the operations side, our team is focused on improving and harmonizing a supply chain for our biogas business globally, so that they're able to achieve the cost, quality and delivery requirements that are needed to scale the business. While we are not focusing on hydrogen in this call, we are seeing a lot of interest in orders for our hydrogen PSA products by many developers for renewable hydrogen solutions. We expect this to be a meaningful growth opportunity in the coming years, and we'll discuss this more in detail in the future.

Next, our industrial segment showed strength due to a recent acquisition of CDA Systems in California in December 2019. Although, we had a 55% increase in revenue in Q1, 2020 compared to the same period last year, the number is lower than what we had expected. This was driven mainly due to the inability of our team to deliver products to the customers, who were shut down due to the pandemic.

As these customers implement their safety protocols and workspace guidelines for contractors and service technicians to operate on their sites, we are beginning to see the situation improve and we expect to recover the shortfall in Q1 revenue over Q2 and Q3.

A positive indication is that we have not seen a single order cancellation at CDA, CAI or at our Montreal industrial business unit since the start of pandemic. Our gross margins for this segment, this quarter was 37%, which is an improvement and on track towards our target of 40%. We'll continue to review the product mix and reduce our underlying cost structures across the subsidiaries to improve the margins.

The recent weakening of the Canadian dollar will also provide some positive momentum to our industrial products that are manufactured in Canada, and compete with products built in the United States. We are continuing to implement M&A strategy for the year and expect to close two to three acquisitions by the end of the year. Some of these acquisitions will likely be based in the U.S., where we are working to expand our service centers to support our biogas and hydrogen deployments. There are clear indications that more states in the U.S. will be adopting RNG mandates and the incentive programs to support the growth of this market.

Lastly, we're also negotiating a line of credit facility to fund our acquisitions. This is important as it allows us to streamline and speed up the acquisition process, which we would like to fund with the majority of debt and cash flows that come out of the business over time.

Our last segment is our renewable gas infrastructure business which has the potential for being a profitable, recurring revenue business and also provides us the opportunity to sell Xebec equipment and services to each project. Over the last two years we have developed a comprehensive understanding of the complexity of developing biogas projects, the needs and capabilities of the key stakeholders in the value stream, and how to put the right legal structures in place.

We have come a long way and we were happy to announce our first project in Quebec in the first quarter of this year. This project is in its development phase and we are progressing well in lining of the feedstock suppliers, finalizing the permits, site control and off-take agreements with the local gas utility.

Lastly, the most exciting development for this segment is a significant strategic investment partnership that we'll be announcing in the coming days. This will provide a momentum to this industry and outline specifically how Xebec will be playing in this at a larger scale. So stay tuned for this exciting development.

That includes the operational update, and now I would like to invite Kurt for his final comments and conclude the outlook for 2020.

Kurt Sorschak

Thank you, Prabhu. Overall, this was a challenging quarter, but our team has done an excellent job in keeping the boat on course, if I may say so. We experienced unprecedented disruption in both personal and professional lives, and we had to rapidly adapt our operation to this changed reality. We continue to be focused on shareholder returns, while protecting our employees, suppliers and partners.

Our revenue planning for the rest of the year shows a clear pathway for us to achieve our 2020 guidance. Consequently, we are maintaining that guidance, which includes, as I said before, revenues of $80 million to $90 million, EBITDA of 11% to 13% and earnings of 7% to 9%. In the progress to-date, our Q2 will already show a solid acceleration in revenues.

Xebec is well-positioned in the event of future disruptions, with our strong and strengthening balance sheet that currently as we mentioned includes close to $24 million in cash. We have a $10 million loan facility from the Fonds. We have $2.5 million credit facility that is unused. We have a $12 million guarantee facility that is partially used. And hopefully, we will receive additional funds of approximately $14 million over the next 30 days, if the outstanding warrants, which are priced at $1.85 are exercised by July 4.

Our strategy remains unchanged. Our targets are very clear, and our team is focused on execution.

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

Question-and-Answer Session

A - Brandon Chow

Great. Thank you, Kurt. With that, we will now open the floor up to questions. Please note that you may ask a question at any time to the right in the console. We'll wait a moment for the questions to queue up. Our first question comes from Amit Dayal from H.C. Wainwright. What is the near-term margin outlook? What is the guidance for the improvement on margins basis?

Prabhu Rao

Thanks for the question. At Xebec, we have -- as you can see a blend of businesses. We have our biogas plants, then we have our PSA products, and then we have all our industrial products and the aftermarket products.

And when you talk about margins, you have to look at each segment separately. Our products in the industrial business, the aftermarket parts and to PSAs, typically we want to target our margins to be around 40% or higher. That's our target to achieve that, and usually we're on track for that.

On the biogas plants, our goal is to be at 30% or higher. So on a blended level we want to be around 32% to 33%. Particularly in the last quarter, as you know, over the last year and a half we've been developing our biogas plants, the designs for them and we're trying to standardize them. So there's a some amount of what I would say non-recurring engineering development costs that’s associated with standardization of these plants. And that cost is capitalized, and then it's amortized over a certain number of units. And Louis can talk a little bit more about how we do that. But that has an impact on reducing some of the margins for the product. As we sanitize this product, I expect that to be minimized and we expect the biogas plant margins also to trend towards 30% or higher. So that's kind of where the team is focused on.

And also, I think the other point is that, if you look at the biogas business as a whole, not just for Xebec, but as an industry as a whole, there's a lot of scope for improvement on the supply chain side. I think as this industry grows, like any other industry, the supply chain will get streamlined. And we are working towards creating strategic partnerships with our suppliers and that will also have an impact on the cost structure for the company. So I expect the numbers to keep improving over the next few quarters.

Louis Dufour

I can add to that [indiscernible] to me for the question of the amortization. For this quarter, we do capitalization for when we do some engineers standardization. And last year we invested a lot of money on that to make sure we were able to supply all the products for our customer for the future.

In this first quarter, the way we do amortization on our product, it's based on the new product that we are selling. And in the first quarter, it's not usual, we sold four new products, at least on a dairy farm. And as soon as we sell these product, we have to take the amortization fully upfront. So for the first quarter we had -- that's why you can see in our presentation, we had a $0.9 million amortization that was used. It's not something usual, it's not something we will see in all the quarters. You may have one unit that we sell and that we put amortization cost to it. But having four at the same time is something very big.

So as an example, we had capitalization at the beginning of the year of $1.8 million. We took a hit of $900,000, so that means that you know we won't have much in the future. So the margin for the Q1 was negatively impact because of that amortization, clearly. And in the future, like in Q2, I don't think we have any new ones or if we have one, it will be just one. So the impact will not be the same, so we should not see that again as strong as what we saw in Q1.

And when we talk about administration also we have amortization on new system. We're implementing a new system, a new ERP system. So there's some capitalized costs to it that we have to amortize, as well as consolidation system, new system that we need to have to be able to do the consolidation of all the new merger and acquisition that we're making.

So these things -- and this is amortized over time life, so that should not be a major impact as what we can see on the cost of goods sold.

Kurt Sorschak

Let me add here, just to this particular question, because our gross margin, especially on the Cleantech side was a very lower than anticipated. If you would add back the amortization, this increased amortization we saw because we had to amortize our cost of our four units, we would have achieved the gross margin over 30%. So I don't expect that either that this will reoccur. And even if it reoccurs, there's only a certain amount of amortization and less over those types of units. So it should normalize as we move forward.

Brandon Chow

Great. Thank you. Our next question and comment comes from Raveel Afzaal from Cannacord Genuity. He says you have a well-defined acquisition strategy on the industrial side. Are there opportunities to compliment your strong organic growth in the Cleantech division with acquisitions? Any color would be helpful.

Prabhu Rao

Yes. Maybe I should just define and try to explain the strategy first and then answer the specific question. One of the key things when you sell these biogas plants or even the hydrogen plants to customers, the most important part is the service once you install the plants. And I think the strategy that Xebec has is the largest selling, cost-effective biogas plant, also providing the service infrastructure beyond that for the next decade. So, what we are doing is basically looking at regions in North America where we expect to sell these biogas plants and then making strategic acquisitions.

On the service side, which is completely aligned with our industrial service business that we have. So we are making good progress on that. This year we are again targeting to have two to three acquisitions done before the end of the year. We are in active discussions with many companies. And we are very confident that we will probably complete at least two or maybe three of these acquisitions this year.

Kurt Sorschak

Yes. I would add, obviously there will be opportunities. I mean, when you look at it, if our warrants get exercised, we’re going to have close to $50 million of cash by the end of July. So that's an enormous amount of cash, and we obviously want to deploy it. As Prabhu mentioned, we're in discussions for a line of acquisitions so that those service company acquisitions can actually be funded relatively quickly, so that they don't go through an individual approval process. And we want to use [indiscernible] and the cash flow out of those companies basically to fund those acquisitions if we can.

And now that means we have money left over for strategic acquisitions, and obviously we are looking this recession that will hopefully offer opportunities, as we move forward into Q3, Q4, Q1. Next year, we will see what comes up. But, clearly we want to position the company to be able to take advantage of upcoming opportunities.

Prabhu Rao

Just one more quick note on this, just to give you a sense of why this is advantageous for Xebec. For example, we are now finishing our work and starting the commissioning of a plant in Ontario. And given the COVID situation, we are not able to send people, especially a few weeks ago, we could not send people from Quebec to Ontario, but given the fact that we had CAI in the Greater Toronto Area, we could send our technicians from CAI to a site and they're actually doing the work.

So there are many advantages that come by having this network of service providers around North America. So we're looking forward to bringing on more companies and growing the company.

Brandon Chow

Thank you. Our next question comes from Craig Irwin from ROTH Capital Partners. Can you talk about the updated timing from the Canada Clean Fuel Standard business push the development activity into 2021? Or do you see several parties already developing renewable natural gas projects in 2020?

Kurt Sorschak

Yes. So, I can take that question. The government has pushed back the development of the Canadian Clean Fuel Standard into the fall of this year. So, about a six, not quite a six months delay. They're still committed to passing all the required legislation to make it happen. So we will see and hopeful that it happens.

What needs to be remembered Craig is that two provinces already have a renewable gas mandate in Canada. British Columbia which 15% by 2030 and Quebec 5% by 2030. So projects are actually developing, because 15% in British Columbia is about 27 million gigajoules, so that's about a million BTUs the same amount. And here in Quebec 5% is about 10 million gigajoules worth of energy.

So there's a significant amount of demand for the development of those projects. They will continue. I think once the Canadian Clean Fuel Standard is passed, it will create an additional incentive, because the timeline will become clear as to how many facilities will have to be constructed over the next 10 years to meet those goals in the Canadian Clean Fuel Standard.

Brandon Chow

Thank you. Our next question comes from Eric Stine from Craig-Hallum Capital Group. How has COVID-19 impacted the outlook for the three to four plant acquisitions in 2020? Has it slowed down the process? Or could this work to your benefit in terms of being more opportunistic with prospective targets?

Prabhu Rao

So, in terms of the process, clearly, it has an impact in the speed at which we can do the due diligence. And I think companies all over the world have transitioned to a virtual setting. And we are engaged with multiple companies in due diligence right now and we are making it work.

In terms of looking at the documentation and looking at their numbers, it's all possible virtually, but it's really the missing piece is being able to be on-site and meeting their employees. And that's hopefully something that we can start relatively soon as the travel restrictions are limited.

In terms of opportunities, absolutely, I think it creates some unique situations. As Kurt mentioned, we are in a good position from a cash perspective. So we can be opportunistic in terms of making strategic acquisitions, a larger ones that may be available at the stage. So it's a good environment for us to operate in and I think our financial strength is giving us some momentum behind it.

Brandon Chow

Great. Our next question is in regards to the hydrogen market. Prabhu, this is for you. Can you talk about what growth opportunities you see in there?

Prabhu Rao

Yes. Hydrogen is quickly evolving as the -- everybody talks about the next thing, but it's quickly becoming the thing now right? I mean, you see a lot of activity in the hydrogen space. I think the big change that has happened over the last couple of years is the focus on heavy-duty trucking, and the need for hydrogen infrastructure for heavy-duty trucks.

I think when it comes to passenger car vehicles, battery electric vehicles tend to compete reasonably well with fuel cell cars. But as you transition to medium and heavy-duty trucks, fuel cells have a distinct advantage. And I think as the mandate for zero emission trucks is being developed in places like California, you're going to see a lot of momentum behind that fueling infrastructure. The other benefit of this trucking is that you have a dedicated customer, you have a capital customer who is going to consume a lot of fuel.

So, we're seeing a lot of interest in renewable hydrogen projects, either through RNG or through gasification. So, we're selling a lot of PSAs in that space today. But we're also focused as a company beyond RNG, we will have a portfolio of products for hydrogen in terms of hydrogen production and also hydrogen dispensing. So that's a strategy that has been developed and hopefully we will be able to discuss that more in Q2 and Q3 of this year.

But we see that as a big opportunity for on the transportation side, but also there's a demand for green chemicals and green fertilizers. That may be a few years away, but I think renewable hydrogen will become a key part of Xebec strategy going forward.

Brandon Chow

Great. Our next question is from James Ray [ph]. Can you talk a bit more about the acquisitions? And how that revenue will be translated into the year? And how you currently are thinking about the breakdown and guidance?

Prabhu Rao

In terms of acquisitions as our guidance was that we expect to have $30 million to $35 million from our industrial business, and about half of that would come through acquisitions. Our base industrial business, the CAI, CDA and the Xebec business in Blainville, we are trending between $5 million and $6 million per quarter, so we expect that with those businesses we will be close to $20 million to $24 million for the year. And then in the second-half of the year, as we said, we are looking to two to three acquisitions.

And so with the targets that we have, we should be able to do between $8 million and $12 million. So that puts us right in the middle of $30 million to $35 million for the industrial business. So as long as we close these acquisitions in the next eight to 10 weeks, I think we're in good shape.

Brandon Chow

Great. Our next question is from Sameer Joshi from H.C. Wainwright. Are the amortization cost expected to be elevated for the rest of the year? How does this affect the GAAP gross margins? And what is the effect on GAAP operating costs?

Louis Dufour

Well, the amortization cost from the first quarter we invested something like $167,000 in terms of capitalization. There will be some but we see now it's reducing at every quarter. We invested lot of last year, so this year, we don't expect to see any increase but more a decrease, I would say. So we don't see something major in terms of increasing the amortization, the capitalization. So we should see the outstanding amount that is a $1.1 million. We should see it getting down over the next two years, but not at the speed that we saw in the first quarter.

As I said, these amortization are done based on the unit that we are selling. And it was very -- something unusual to sell for items in the first quarter. So we may see some reduction in the future. So the impact should be less in the next quarters and it should be less in the next years also, I would say.

Prabhu Rao

Yes. Also I want to talk a little bit about the product strategy, because I think that has an impact on what Louis is talking about. The goal of the company is to standardize products and also modularize subsystems within the standard. So, we are working on a 500 normal meter cube for our biogas plant a 1,000 normal meter cube. And mainly for the European markets and then in the U.S., we have the Biostream product plan that we're introducing for small scale farms. And then we have a 1,500 SCFM plant for landfills.

So, we are trying to standardize these designs, and also the subsystems within these designs so that we can then avoid doing new engineering every time we have a sale. So I think that's a big part of the investment we made over the last year. And hopefully, we're coming to a closure. By midyear, we would have made some progress on that.

Brandon Chow

Great. Thank you, Prabhu. Our next question comes from John. Can you describe and explain sort of the dynamics in the Quebec renewable natural gas market? We understand that there is a 1% and up to 5% of renewable natural gas mandate there, but energy is not specifically required to purchase old RNG in order to get to that percentage. Can you describe a bit more about the dynamics and what you think the drivers will be to drive the demand in RNG and as well as hydrogen?

Kurt Sorschak

Yes. So I can take that. Clearly, in Quebec there is a significant interest in renewable gas. But you need to remember renewable gas is just a consequence of organic waste treatment activities. So Quebec is also driving a diversion of organic waste away from landfills toward treatment facilities.

So as Quebec continues this drive you will see the creation of organic waste treatment facilities. And with those organic waste treatment facilities the integration of renewable natural gas and bio fertilizers. The government has a program under which it subsidizes through grants, the establishment of those renewable of those organic based facilities and that obviously helps. In the last budget they also announced that they’re going to be subsidizing renewable gas production, and they made an amount of $70 million available for that.

On top, the Quebec government made available $14 million for renewable hydrogen development. So there's quite a lot of activity. I'm quite positive about the Quebec market. I think it will continue to develop rapidly. It's only one of two markets in Canada that has a renewable gas target. And I think the demand for renewable gas is going to increase. So from a customer side it will increase.

Brandon Chow

Perfect. Our next question comes from Ahmad Shaath from Beacon Securities. What do you expect the organic growth rate for the industrial segment to be?

Prabhu Rao

Yes. So our targets internally are between 15% and 20% for each subsidiary every year. So, with CAI, which we acquired early last year, January, I think in 2019, the growth was, I think it was much higher. I think it was close to 30% or 30% to 35%. So organically we want to grow them on 20%. This is by a combination of things.

One is obviously more of an execution side in terms of capturing market share, but also introducing new product lines, because we are acquiring this portfolio of companies and we have a portfolio of product lines that are now we're able to sell through different subsidiaries. So, there's a lot of work to be done on the industrial side in terms of harmonizing the product lines, improving the supply chain. It's going to be a very exciting time over the next few years.

And I think a 20% organic growth is a good target, and obviously through acquisitions, the number goes up quite high.

Brandon Chow

Great. So our next question comes from David Quezada. Do you get the same sense of some of your customers are delaying decisions on ordering large capital items?

Prabhu Rao

It's a mixed bag. So if you look at the biogas market, you can look at it in three segments. One is you have individual developers who are trying to develop projects and working with technology providers and customers. Then you have private companies that are trying to do projects and trying to do RNG projects for multiple reasons. One is to monetize the gas that they have, the other is for environmental reasons. And then you have the third category, which is municipalities and government facilities that need to do projects like Kurt mentioned earlier in Quebec.

So you see different dynamics with each cluster of customers. So with municipalities you don't see a slowdown, the slowdown is more from a -- if there's any slowdown is more from a logistics perspective in terms of getting together and negotiating contracts and things like that.

For private customers, I would say, as long as the mandates are in place, as long as they can get the long-term off-take contracts, there's no slowdown in that. And we are actively in negotiation and multiple customers in that space.

The developers, it's a mixed bag. Some of them have the funding secured and some of them don't. And so, obviously we have a portfolio of quotes with different types of customers. And in general, I can tell you that our sales team and our application engineering team are working harder than before. So the quote activity has not slowed down. And as I indicated in my discussion that we are seeing good traction in terms of being able to close some sales in the near-term, and we hope to announce some of them in the near future.

Brandon Chow

Great. Thank you. So this kind of segues into another question that David had. How are you feeling about the capacity in the Quebec manufacturing facility? When could you look to be expanding that footprint?

Prabhu Rao

It's a good question. We are looking at that very carefully, we have now at least as under the smaller building. There are two parts to that. One is just from an office space itself, we are maxed out in our facility there. So we have a smaller facility that we leased. Some of our SG&A functions will move there. But also in the same facility, we have some storage space for some inventory. So that gives us a little bit more breathing room in our facility in Quebec.

We're also looking at the entire value stream and I've talked about the supply chain in my presentation. There are some core technologies that we develop which is the rotary valve PSA, which is the core capability of Xebec. We also currently valved all our pressure vessels and tanks at our location there. It's an important piece of our product, but it's probably not as core as probably the valve. So we'll be looking to maybe bring in some supply chain partners to help in that.

I would say, for the next one and a half to two years, we're probably okay with the facilities we have, but longer-term looking into two years and beyond, we'll have to make some decisions about that.

Kurt Sorschak

Yes. We also have the opportunity obviously to put on evening shift. I understand parts of the operation now are going on an evening shift, because we are so busy here in Blainville. But at one point, yes, there will be a more fundamental review. But I think over the next 12, 24 months, we should be still fine, hopefully.

Prabhu Rao

As Kurt mentioned, we are very busy. And the summer and the fall are going to get extremely busy for us. And so we are expanding our operations in terms of the shifts. And I think that should help, obviously that should help in near term.

Brandon Chow

Great. We have a couple questions from Andrew Hood at M Partners and Jean Finnigan [ph]. Are you able to provide some more details on the partnership in terms of what type of partner this would be, timeline and markets and the type of investment vehicle?

Kurt Sorschak

Yes. I would suggest, we wait for the next webinar that will be early next week, once we announce that partnership. I think this is now a little bit premature. But as we said in our presentation, this is only base of a -- now, I would have liked to have that transaction closed for this webinar here. But it was too tight, so going to happen early next week.

Brandon Chow

Thank you. We have another question from Fred Tremblay from Desjardin. Can you share additional details on the visibility into new order flow and potentially break it down in terms of the different industries? And how certain ones might be impacted as well?

Prabhu Rao

I think, again, it's a good question, because we look at different segments within our business. As I said, on the biogas plant side, the visibility is quite good. We expect to announce a few things as I said, in the upcoming weeks. And it's a good mix of orders we are seeing and a good diversity in terms of applications.

When it comes to the PSAs themselves, which again, they go into the hydrogen market and they go into the biogas market. We also sell these PSAs into other gas purification, like the helium market, the argon purification. There's a whole bunch of -- I would call -- we call it specialty gases that we sell this PSAs into. And we've seen some good traction there.

When it comes to small scale PSA or hydrogen purification, I would say below 10 tonnes a day or so, Xebec has an extremely competitive and a very innovative product. So we're seeing a good traction there.

In terms of our industrial businesses, which comes into compressors and dryers and aftermarket parts, it's a mixed bag. I mean, there are some -- our service activity is, I mean, you would think the service activity would be much higher, but because a lot of our customers our facilities are shutdown that activity is impacted. But it's probably less than 20% of the overall industrial aftermarket business. So the impact on our numbers is not as high.

And also as the customers are putting in their protocols in terms of safe operation, we're seeing the loading of our service technicians going up week-by-week, which is a positive indication. So overall, I think we talked about -- I think in Q1 of this year, we had obviously the big order on the biogas plants. I think in Q2, the order intake would be reasonable. But I think we are picking up on the biogas side and I'm looking forward to announcing some orders in the near future.

Brandon Chow

Great. Our next question comes from Bob McWhirter from Selective Asset Management. What is the typical selling price of a Biostream unit? And how did those margins compare to the historical larger biogas products? And what do you estimate the market size for those units to be?

Prabhu Rao

Yes, I'll take the question backwards. So, the market size is quite large. And as we have talked about in the previous conference call, when you look at the portfolio of products that Xebec has. When it came to 500 SCFM or say, a 500 normal meter cube per hour and higher we had a very competitive product. And we had a product portfolio to address that.

When it came to the small scale solutions at 200-300 normal meter cube per hour, we were challenged there and that's why we developed the Biostream product line. And we're going to launch this obviously in North America. Now it's shipping in Q3. And early next year, we'll be introducing the product in Europe, especially in France where there's a lot of -- most of the plants there are within 200, 300 normal meter cube per hour. So Biostream is perfect for that market. So that will happen in Q1 next year.

And on average in France itself, we're looking at the market size for a product like that is between 50 and 60 units a year. So, if given a relatively a decent market share, you could see us selling 10 plants a year or 10 to 15 plants a year in France, then it will eventually mature into Italy right after France. So I think the Biostream at a run rate in a few years, we can see doing 20 to 30 of these units a year. And that's why we are focusing and standardizing the product so that we can go into a production line instead of making one unit at a time.

In terms of pricing, we price this competitively with our competitors in terms of membranes. And the gross margin as you can imagine, if you standardize the product and you go in from all in, we will be trending a higher -- we had a target of 30% or higher and that's still our goal.

Brandon Chow

Our next question, we have a couple actually in regards to the quote log. Can you talk about what the quote log is currently made up of, the different types of applications and what kind of conversion you are expecting over the next couple of years and months?

Prabhu Rao

Yes. The quote log, I think we put a number, it's about $930 million or so. I think in terms of conversion we are seeing good traction in terms of the biogas side. Obviously, the impact of COVID is more from a logistics point of view, the ability to meet with people and negotiate the contracts. And that's, I think everybody is making out a way to overcome that logistics hurdle. So we are back to negotiating contracts at this stage. So hopefully, we'll close some of them in the near future and then announce those.

In terms of the PSAs and small scale PSAs, our hit rate is very high. We usually -- 50% conversion of our PSA course that we put out there. So we are feeling quite positive about that. And I think as the industry start opening up again, we'll be quite above there.

Brandon Chow

Great. So our last question comes from Kevin Berner from Bard Associates. Have any of the U.S. acquisitions qualified for PPP funds from the U.S. government?

Prabhu Rao

Yes. Our facility in California -- a little more in California CDSS sums as qualified for that.

Brandon Chow

Great. Well, thank you everyone for attending the webinar. I will now turn it over to Kurt for closing remarks.

Kurt Sorschak

Yes. Okay. Thank you everybody for joining today. Keep safe and we’ll speak to you probably sometimes early next week when we make an announcement in regards to our infrastructure partnership. Thank you very much and all the best.

Prabhu Rao

Thank you.