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Hello everyone and welcome to Xebec's first quarter 2022 investor webinar. My name is Brandon Chow and I'm the Director of IR at Xebec. I'd like to remind everyone that this webinar is going to be recorded and will be made available in the investor section of our website later today. Please note that we will open the floor to questions after the conclusion of the presentation. If at any time you have a question, you may type it in the console on the right of your screen.
Joining me today will be our President and Chief Executive Officer, Jim Vounassis; and Chief Financial Officer, Stéphane Archambault; and Chief Operating Officer, Mike Munro. Our earnings press release was issued earlier today before our market open. All relevant documents are available for download either from the investor section of our website or see it in our directly. You will also, find later today a copy of today's slide deck on our website's investor section as well. During this call, we'll make forward looking statements about our future financial performance and other future events and trends, including guidance. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks, uncertain needs, assumptions, and other factors that could affect our financial results and the performance of revisits, which we discuss in detail and our filings including today's earnings, press release. Xebec seems 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, quote log. These non IFRS measures are not recognized measures under international financial reporting standards and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. With this, I turn it over to Jim.
Thank you, Brandon. Good morning and welcome everyone to Xebec's first quarter 2022 investor webinar. First and foremost, I want to thank everyone for coming out to our investor day in March. It was a great opportunity to finally meet many of you in person and get to know you. Our investor day, mark, the official opening of our US showroom in Denver, Colorado. And it was a great opportunity for you to tour the facility and learn more about our product such as the Biostream, which was on the shop floor. We were grateful for those of you who joined us that day live and via webinar and had a chance to see us present our financial goals, to help you better understand the overall strategy and how it relates to our different business segments. I look forward to seeing you at next year's investor day, and you never know, and maybe decide one of our Biostreams in field locations. Overall, we kick the gear off strong with solid top line revenue growth and added to our record backlog with the largest order the company has received in its history of $143 million. Our backlog now sits at over $260 million, and it's quite impressive to see how it's almost tripled from $88 million at the same time last year. Great work from all our teams. This backlog ultimately sets us up well to execute on the strategic 3-year plan we presented at our investor date. We aim to become a global powerhouse in sustainable gases, and this plant comes with a financial goal of 40% revenue, KR and adjusted EBITDA margins in the range of 8% to 10% by 2024. We have grown our revenues at a KR of 50 plus since 2016, and as it gets scale, we expect to continually move our bottom line. While the forward outlook remains positive and we are well on our way to achieve our overall goals, on the EBITDA side, we experienced the impact the world's facing on material costs and supply chain disruption, as well as the impact of starting up our final set of legacy R and G projects, which we plan to finalize and complete throughout the course of this year. To address the short-term impacts and strengthen our bottom line over time, we started the execution of our center of excellence framework had pushed us in line with the overall strategy to improve the cost profile of Xebec over the next 12 months. Executing on this framework ultimately means focusing on the right product lines across all our clean tech segments in renewable natural gas, hydrogen, and carbon capture with the appropriate corresponding resources to start toward that. It also, puts us in a position to strengthen our cash generation from our operations. This plant will help us drive 2% to 4% absolute adjusted EBITDA improvement, which Mike will discuss later on the presentation. As I head into my first quarter as Xebec's new President and CEO, I'm excited to kick off this journey with a first quarter webinar and work with our strong leadership team to take this company to the next level. We acknowledge the shortening challenges and by driving our center of excellence framework, this will help us offset the geopolitical stability COVID areas such as China and inflationary pressures. To further strengthen our centers of excellence, I am pleased to announce that Marinus Van Driel, the founder of HyGear and our current EP of Europe and Asia will transition to the role of Senior Vice President of Special Projects, reporting to me with a focus on delivering our distributed hydrogen hub growth plans.
As Mike Munro, our COO regroups all our centers of excellence under his leadership. Overall, we are feeling optimistic about the long term as we have the right people and technologies to address the mega trends like climate change and sustainability is driving worldwide in sustainable with this, I'll turn it over to Stéphane Archambault, our CFO will give you we'll go over the financial highlights. Stéphane?
Thank you, Jim, and welcome everyone joining us. Let me start by reviewing our financial results for Q1 2020. We achieve revenues of $41.2 million in the first quarter of 2022, compared to $20.6 million for the same period in 2021. Q1 is typically our softest revenue quarter due to seasonality and timing of customer orders and delivery. The increase is mainly explained by the integration of newly acquired companies’ delivery of second-generation Biostream and organic growth initiatives. This increases partially offset by the reduction of revenue from our Shanghai joint venture, which was fully consolidated last year. Our growth margin was $4.6 million for the first quarter of 2022, compared to $4.2 for the same period in 2021. The gross margin percentage decrease from 20% to 11% is due to loss provision, taken for the legacy R and G contracts currently in the startup in commissioning phase. Lower margin for our hydrogen oxygen and nitrogen contracts and increasing material and supply chain costs. Without the impact of the legacy R and G contract, we would've had a gross margin of approximately 17%. And I will go into further detail on this next slide. Our research and development expenses were $0.7 million for the first 3 months period ended March 31st and related to continued development of our company's second-generation Biostream product and new hydrogen generation technologies selling administrative expenses were $16.2 million and increase of $5.5 compared to $10.7 for the same period in 2021. The increase is mainly due to additional SG&A expenses associated with newly acquired companies.
We saw negative adjusted EBITDA of $9 million for the first quarter of 2021 compared to a negative adjusted EBITDA at $4.9 for the same period in 2021. We also, wanted to illustrate the impact of legacy BJC activity on the bottom line, which was an adjusted EBITDA loss of $6.4 million compared to a $1.7 for the same period in 2021. Net loss by the quarter was $18.4 or 12 cents per share, compared to a net loss of $10.1 or 7 cents per share for the same period in 2021. We have $34.7 million of cash as of 30 March 31st, 2022, along with access to credit facilities, which gives us flexibility as we continue to grow, pursue our strategy plan and improve our overall profitability.
This quarter, we have also, shown to be able to manage our working capital and add an increase in non-cash working capital by $1.8 million versus a decrease of $12.7 in Q4 2021. Our most recent contract also, includes provision and down payments would allow us to manage working capital further. This will be important to continue focusing on as the team progresses with our aggressive growth initiatives. Overall, I'm pleased with the top line growth the team has been able to achieve, but still have quite a bit of work on the bottom line. As you mentioned, we have a plan for this under our centers of excellence framework.
Next, I'd like you to better understand our gross margin and SG&A changes from Q4 2021. These 2 waterfalls show the change in gross margin percentage and SG&A from Q4 2021. You can see on the left here that our legacy BGX activities had an absolute margin impact of 6% while product mix and material impacted our gross margin by 5%, While this is not the gross margin we expected, we see this factor being short term as the legacy DGX activity will be wrapped up under our framework. In addition, our hydrogen oxygen and nitrogen businesses were impacted by timing, material costs and products. Mike will go into more details on how our centers of excellence framework will address this and we expect gross margins to be better in subsequent quarters. On the right, you have our SG&A, a waterfall where the most of our contribution is, is from acquisition, depreciation, and monetization of assets related to those acquisitions. As we continue our integration of newly a part company, we will get synergies from them which will help to improve our cost further. This is all in line with the center of excellence framework the team is working on as we continue to grow in line with our strategic plan. Now I'd like to show you how we plan to achieve our 2024 adjusted EBITDA target. This photo file here helps you walk through the main component we will be executing onto achieve this. Firstly, the centers of excellence plan will drive approximately 3% of the goal as we execute that over the next 12 months.
Next, we have continuous improvement, which we expect to contribute approximately 1%, which is driven by efficiency. We gain in our manufacturing and supply chain processing. There's a number of pockets that have room for improvement, which Mike will go over later. Third, we have SG&A absorption, which is expected to contribute the most at 4%, which is driven by the operating leverage we expect to achieve as we spread our fixed costs over more revenues in the next 3 years. This is important to understand as we have invested heavily in the last year in order to achieve higher revenues, and this will be supported by our record backlog. Lastly, we increase the portion of clean tech service and improve the margin. This is expected to contribute approximately 1% towards the goal. With these factors, we end up at 9% EBITDA margin, which is the midpoint of our 8% to 10% goal we presented in Marc. Next, I'd like to go over our quarterly financial trends. I say this all the time, as I always enjoy showing this graph, as it helps put into perspective where things are edited long term, as you can see the quarter over quarter picture is impressive as we continue to grow the revenues and we have a 62% kickoff from Q1 2017 to Q1 2022. As I mentioned, the top line is strong, and we will be working hard to improve the bottom line. With this, I'll turn it over to Mike who will go over into more detail in his operational update.
Thanks Stéphane. I'd now like to actually introduce the center of excellence framework that we've been talking so, much about in a bit more detail as Jim and Stéphane both mentioned, the COE framework is really designed to drive improvements in our cost structure. As we aim for long term sustainable growth. I first introduced this concept on investor day in March, where we spoke to how the different facilities themselves would play an important role. Ultimately, this framework revolves around 3 levers. The first core versus non-core activity, which is assessing the activities that are core supporting our clean tech growth and pairing down those that are not. Here, we're essentially asking what activities the highest impact have going forward. We recognize that Xebec today is a very diversified business built on a successful industrial foundation and will continue to leverage this foundation. But we also, understand that markets are changing, and we need to adapt in response to them. As we continue to seek growth, we draw our inspiration from the old 80 20 rule here and focus on the best of the best. The second lever is simplifying product lines. You've heard a lot about this in the past as it relates to Biostream, but it also, applies across our other areas in our product portfolio. For example, we have 352 different vessel configurations in our [ G2PSA ], which is one of our most popular units. 40 of these configurations have been used recently. We're in the process of standardizing to 24 and keeping 8 of these in stock. This level of streamlining will help to improve costs, reduce lead times, improving margin and making us even more competitive. While we undertake these product reviews and standardization activities, we're also, taking, learning from our legacy activities like the BGX focusing on what we do well and minimizing our future exposure to installation and EPC work. Thirdly, as we pair down and simplify, there's bound to be some redundancy. What areas of overlap can we address? We need to understand what may not necessarily go forward, continue to drive manufacturing efficiencies and leverage the considerable supply chain opportunities that exist within the organization. Two recent hires in global manufacturing and strategic sourcing will be important drivers in seeing this realized, Rob Carr and Steven Evans. And we're excited to welcome them both to our senior team. Everything I've been talking about so, far is reaching towards a goal of 2% to 4% in absolute adjusted EBITDA by itself. This will upgrade Xebec's future capabilities as we continue to scale and will help us better manage costs and execution. As we turn through our record backlog. Next, I'd like to touch on the path forward in our R and G segment. As we said, we're working to wind down the legacy BGX activity. This work has persisted a bit longer than we originally anticipated, but we're working on a clear pathway towards a speedy resolution, and we're already putting in motion the next generation of products in the segment, the Biostream gen 2. We've identified and are putting into place action plans with the owners of the remaining BGX projects to transition these to normal operation in the shortest time possible. The additional impact in the quarter that Stéphane was talking about is really us making sure that we get these projects performing in the field and we can exit the commissioning phase. Wrapping up these activities is a key part in the COE framework, as we don't want to focus our customized projects going forward and have associated overhead tied to these legacy activities that will not be needed once they're complete. Ultimately, this came with a $2.6 million adjusted EBITDA of impact in Q1 2022. Our first-generation Biostream was launched to start the move forward was standardized products back in 2020. As the goal was, this equipment comes standardized. We've learned not to accept customization past the engineering phase. We've also, learned not to act as a full EPC. We've delivered the first batch of them, which are operating in the field and use this opportunity to leverage our own service network and create a seasoned team that's able to support our customers in the installation and ongoing service of these products.
The second-generation Biostream is an iteration of the first, one, which comes with improved performance and reliability. This is what we're currently manufacturing both in Canada and at our new facility in Colorado, we continue to ramp up capacity and support these new installations with our services brand XBC flow services. And with that, I'll get a little more specific in the R and G segment. Overall, we continue to see many positive leading indicators for orders. For instance, our quote volume is approximately doubling Q1 this year, over Q1. Last year, the team is working to convert these quotes into backlog this year. And this is important for filling our new capacity as Xebec Systems USA, formally known as UE Compression. The Biostream has already started being produced at this facility, and we've already recognized revenues from some second-generation Biostreams this past quarter. As I mentioned, the completion of legacy BGX activities is being addressed alongside the transition to focus on selling second generation Biostreams as turnkey solutions. And our standalone PSA units for higher flow RNG going forward. We need to focus on what we do best. Now let's touch on our hydrogen business. We continue to aim for a long-term approach in our hydrogen segment, where we believe gas is a service will be a key component.
And as we continue to make inroads with industrial customers. This quarter, we commissioned a project with [ Messer ] group in the Czech Republic for both the manufacturing and platonic application where they're using hydrogen in both processes. It's a unique project for us and as such, we partnered with Messer and they're helping transport the hydrogen locally from the installation. In addition, we saw some impacts on gross margin due to timing of projects and raw materials, which we expect to improve in subsequent quarters this year. This whole segment is underpinned by financial partners we'll aim to build hubs with and have a target of 20 to 25 projects by the end of 2024. We continue to support mobility at the same time and sold a hydrogen PSA for a refueling station in India, which helps build our references for products in the emerging mobility sector. Let's touch now on our carbon capture and sequestration. Carbon capture and sequestration has recently become a new vertical for us as we book the largest order in the company's history to deliver compressors into the world's largest proposed carbon capture and sequestration project. This was a $143.2 million order, which added nicely to our backlog. That will also, be manufactured out of our facility in Denver, Colorado in 2022 and 2023.
We're really excited to see this emerging market develop as we have a number of unique solutions for both addressing source capture of CO2 and the transportation of the gas and pipelines. Our carbon quest partnership is another notable example of what we're doing in the field. And we also, have quotes for other CO2 capture projects in the pipeline ones that we look forward to updating you more as they mature. Ultimately, our carbon capture solutions have the potential to become a strong high growth pillar of our clean tech systems and this is evolving. So, now let's touch on our oxygen and nitrogen businesses. Our oxygen and nitrogen business continues to focus on execution as they came off a record year in 2021 with over 600 units produced, we're working to maintain this momentum. And as with other verticals, we're seeing some material costs and logistics challenges way a bit on the margins. This is being addressed by our new global manufacturing and supply chain, VP hires, who will support this business in driving more efficiency. I'd like to mention an interesting test pilot project we concluded this quarter, which you can see here in the background. This is a sustainable urban farming project in Wiesbaden, Germany. An onsite oxygen generator was provided to ECF farm systems that combines fish and basal production in an urban environment by building on top the roof of a grocery store.
This aquaponic farm system grows approximately 800,000 basal plants and 20,000 CDs per year and requires no fertilizer for the plants. For our part Xebec's oxygen generator ensures the necessary oxygen saturation of the water. This approach to combine fish farming with urban agriculture closer to consumers has proven to be a more sustainable production food production method due to reduced transportation, higher energy efficiency and resource savings. It's quite an impressive circular economy solution. And now onto our service business. As many of you saw during our investor day, we've rebranded to XBC flow services. This segment saw solid results in the quarter and is sitting on a record backlog securing new technicians is the top priority to continue this organic growth. However, this segment was not immune to supply chain constraints, increased logistics pressures, and the continued COVID 19 impacts that we're seeing.
Furthermore, over a thousand hours were logged in supporting upcoming clean tech installations in the quarter. This coincided with the launch of our new clean tech service training program, which will help us put more trained technicians into the field to service more customers and support the growth in our equipment sales. We're really excited to see this develop as finding and nurturing talent is a key issue that many organizations face. And with that, I'll turn it back to Brandon for the Q&A.
Thank you, Mike. And with that, we'll now open the floor to questions. Please note that you may ask a question at any time to the right of your console. Note that on average, we receive over a hundred questions, and we will unfortunately not be able to answer them all today. However, someone from the company will be able to follow up on your questions later on. We'll wait a moment for questions to queue up.
Our first question comes from Tom. What steps is the company taking to improve revenue per employee?
I can take this one. So, we covered a couple of points in our presentation. So, as we continue and grow and execute our plan, that will be more SG&A absorption. So, I mentioned that in my segment. We also, have the center of excellence framework that will be all the synergies coming from that, that we expect will have a significant improvement for that particular matrix.
Perhaps I may add to Stéphane's comment. Another area that we see is the growth side, for instance, on our service centers. We are now adding technicians, but we had the existing infrastructure already. So, these are technicians will add revenue which will help also, increase our margin on that side.
Thank you, Jim. Our next question comes from Rupert Merer at National Bank. What were the margins on the Biostream product line in Q1 and work? Could they end up by year end? And what are the main drivers for improving the margins?
I can start with, with this. So, obviously, as expected the first units that we're delivering have a lower margin because we got the economies of scale. We got the learning curve that we got it take into consideration, but as we continue building those, we will get further growth margin improvement.
Well, we're going to lean on lessons learned. We're going to be getting more accomplished and more practice with the labor component. We're going to continue to leverage scale on materials. The first units of any brand-new product have a learning curve attendant to them. And we expect this to be a rapid one since it's a gen 2 product.
Thank you, Stéphane and Mike. Our next question comes [ Irvin ]. From how long is the anticipated legacy system expenses going to impact future quarters?
Perhaps I take this one and Stéphane, you can add some color. So, we expect as we transition now to the startup of the existing and final legacy systems, we expect that we'll have wrapped up this entire legacy piece by the end of this year.
Thank you, Jim. Our next question comes from Steve. Just give me one moment to load that up here. When is the summit carbon solutions' revenues going to be recognized?
So, the profile is as followed. We're going to start manufacturing those units in the second half of 2022, and this will be done throughout 2023. So, revenues will be recognized as we complete those projects in the second half of 2022 and throughout 2023.
Thank you, Stéphane. Our next question comes from Adam Gill at Paradigm Capital. How do you see gross margins evolving later this year, as you move past with legacy contracts and start to deliver on units with better margins priced in?
So, as we mentioned in our presentation, we are going to be implementing our, our centers of excellence framework. This, as I said, we'll provide us with some, some improvement on the gross margin and you know, and that's why we see that in subsequent quarters. And as we wind down those BX as well, I think this is going to have a significant impact.
Thank you, Stéphane. Our next question comes from Rupert Merer again. Disclosures state that the company estimates that execution of the plan over 12 months is expected to drive a 2 to 4% absolute improvement in adjusted EBITDA margin. What is the baseline for this target? Is it 2021 results?
No, it is 2022-2023 results combined.
Thank you. Our next question comes from Nick Boychuk. Jim, can you provide some color on the number of legacy contracts to be fulfilled the size of these projects and the estimated losses? How much of the CapEx has been locked down versus being exposed to ongoing rising costs?
I'm just going to put my camera off, because it seems to have an internet challenge. So, in terms of the CapEx, these projects have all been built now and what we're incurring is, as Mike mentioned, just startup expenses to get them to where we need to for the customers. So, there's no risk from a CapEx, further exposure. And what we've done is we've made sure in our goal forward 2022 plan we've we already had an assumption in for the startup costs and now we've revised this assumption. So, we captured all and the goal as Mike mentioned this for us basically to exit this legacy contract startup and hand them over to the customer by the end of the year. So, we expect basically to wrap up this year.
Thank you, Jim. There are a couple questions from a number of folks. Have you made any deliveries to bright mark in this quarter?
Yes, we have. We have 2 units that were delivered.
Thank you. So, just giving a moment for questions. Our next question comes from David Quezada for Raymond James. Could you comment on your ability to pass on higher material cost to customers?
We're actually looking at that in more and more contracts and summit is one of the contracts that we were actually quite successful in negotiating that in on. Materials are pretty turbulent in the current geopolitical climate. And we have to be very careful with vendor costs because in the current situation, some quotes really good for even only a week. So, we need to share the burden, and this is what we try and do going forward.
Thank you, Mike.
I would add to what Mike said. We've also, adjusted in some of our more commodity, like type of products. We've also, adjusted our pricing to reflect the reality of the increase in commodity pricing and the turbulence. And there, I believe the team has been successful in increasing the, the charger rate. So, we see the market accepting some of the increases. The question mark is, how much further will the market accept, right. But right now, we've been able to transition pricing.
Thank you, Jim. We have a couple questions as well from different folks. Can you speak more about the breakdown of the current backlog? They understand that there is the large summit carbon solutions, but maybe break down a bit more in terms of what the other components are as well.
Sure. So, as you said, I think a big portion of that backlog is coming from that summit order. We just announced and then it's spread out basically. We've got a lot still on the R and G side to the fact that we got the major orders that we received last year. We also, have some in the hydrogen and oxygen androgen businesses. And as Jim mentioned earlier or Mike mentioned earlier, our backlog in any service businesses is quite high, also.
Thank you, Stéphane. Our next question comes from [ Irvin ] again. How is the company leveraging any indirect or partner channels of scale sales opportunities?
Sure. One on one of our channels that we've been leveraging recently obviously has been our Chinese joint venture. For example, this has worked very well for us. Unfortunately, as we looked in the first quarter with the Shanghai and a lot of regions in China being impacted due to their sales have slowed down, but it's definitely one channel that we're leveraging on, on the joint venture front. We certainly have gone back and are discussing opportunities, for example, on the Biostream side with some of our existing customers to see further tranches of product and how we put ourselves on that opportunity. I think Mike mentioned that we've seen our quotes double from that typical 40 quotations up until that 90 range between last year and this year. And also, on the services side, we've been working a lot with our distributors to gain further opportunities within the regions. And as I had mentioned, part of our expansion is we're, we're adding more service techs into the service regions to not only cover our Cleantech side, but also, to expand our industrial side.
Next question comes from Ahmad, Beacon Securities. How should we think about modeling working capital going forward post legacy BGX?
As I mentioned in my presentation earlier, so, we're working extremely diligently with what our team to just make sure that our con new contracts that we manage our working capital carefully. That means that we are structuring our contract to have to receive down payments up front so, we can manage our suppliers, secured our suppliers and everything. So, we will be very careful going forward with all our contracts to make sure that the working capital an element is managed really tightly.
Thanks, Stéphane. We have another follow-up question from Ahmad. What are the key initiatives needed to be done operationally before we can start delivering on the carbon sequestration systems? And why will we only start manufacturing these in the second half of this year?
Well, I guess I can take the second part of the question. So, the manufacturing is in the second half, but we will be securing some of the main components of the contract in the second quarter. So, there'll be some activities in the second quarter, in the first half basically, but the majority of the manufacturing will start in the second half.
Yes. In terms of what do we need to do beyond lead times as Stéphane was mentioning the facility in Denver is well equipped to produce these types of products. So, we don't foresee that we will need to add any CapEx into the facility. It's simply a matter of lead time for orders and then dedicating the manpower to do the work.
Thank you, Stéphane and Jim. Our next question comes from Zach. Can you comment a bit more about how the company is planning to finance its future growth?
Yes. I can take this one. So, obviously cash management is a very important subject for us. But basically, what we are looking at is to pull on 3 levers. So, first as I mentioned, is optimizing our contract. So, there's no cash burden associated with those contracts. Second, obviously we will be working on expanding our debt facilities, right. And the third one is we will be tapping into the equity markets.
Thank you, Stéphane. We have another question from AJ. Are you seeing any interest from carbon capture divisions from new industries, like in cement and others that are related to that?
It's a brand-new space for us, but actually we are starting to quote on some different applications for carbon capture and sequestration.
Thank you, Mike. Can you maybe talk a bit more along those lines as well in terms of what we're doing with carbon quest because that also, relates to that question as well?
Sure. On the carbon quest side, as we've indicated in our investor call, we continue to grow the relationship, but we're actually working on delivering to them our second unit from our end. And they're working on their second unit installation. We see together with carbon quest, great opportunities in this marketplace. Certainly as New York city starts increasing this as a progressive tax as the tax rate starts increasing from 2024, up to 2030, we expect to see more demand there. And we also, understand that cities such as Chicago, Los Angeles, Boston are also, starting to look at this type of approach for their product. So, it's an exciting business for us and we continue to support the carbon quest in its growth class.
Thank you, Mike and Jim. We have another follow up question from Nick with Cormark. Can we get some color on the exposure to rising input costs?
Sure. I'll, I'll take a first pass out and then Stéphane, please feel free to add. Certainly, when it comes to long lead time items on our major contracts, we've done a lot of work. For instance, the second-generation Biostream, we secured a lot of the long lead time items last year to not feel the impact so, much in terms of the front end of this year, with regards to the second-generation Biostream on our project with summit as Mike said, we worked very well with the customer to have a balanced approach. So, therefore there's mechanisms in the contract where we share ups and downs in the journey with regards to inflation for us. I think the areas that we're keeping a very close eye on is when it comes to the smaller components, things that are going into, for example, into our oxygen and nitrogen generators, which are lower cost items, where the team in Germany has been working to secure again yearlong contracts. But we're also, seeing the inflationary pressures in Europe, coming from the fact that Russian raw materials have been excluded now completely from the marketplace, as well as, you know, we're heading down the path of energy being excluded from there. So, for us, I think this year is kind of a mixed year, certain product lines. We were sheltered from the inflation because we've gone long and other product lines, which are faster turning product lines, like oxygen generation, nitrogen generation, as well as our services business in the US. This is where we're seeing some of the pressure coming sooner than later on us this year. And that's where we've been focusing also, on the pricing side, making sure that we transition as much of this as possible onto the pricing side of the equation.
So, if I can add to that and that's exactly why we said earlier that managing our contract going forward, managing our working cap is extremely important it to find that right balance where we can protect our cost at the same time manage our balance sheet accordingly.
Thank you, Jim. The next question comes from David Quezada, Raymond James, is it fair to say that much of the material input cost inflation you have seen has occurred in Q4 2021? Do you think the impact of this has peaked or will improve going forward?
I think this is a million-dollar question in all honesty for us to answer. And it's very difficult for us to answer because the challenges we're seeing, I think the Ukrainian war has really added that dimension to the inflation that none of us expected in terms of fields out of Russia being excluded energy out of Russia, being excluded and the ongoing severe COVID lockdown of China, which has, you know, put a lot of inflationary pressure on the freight side and the logistics side of the house. So, I would not hazard to say that Q4 was the peak of this. I think we're in sort of a plateau with slightly increasing until we have some resolution out of the Ukrainian in war, and also, some resolution out of the severe lockdowns in China. I think the longer these continue, the more pressure is being put on all the other global supply chains in the rest of the world to basically cover for the lack of input coming from these regions.
Yes, it's really hard to guess. Because the bottom line is the inputs, the influences that we were seeing across the last couple years in wrapping up in Q4 with COVID and supply chain and logistics have now been replaced with new levers from the current geopolitical situation and material instability. So, we wish we had a crystal ball. We don't.
Thank you, Jim and Mike. We have another question from [ Irvin ]. What is the status of the build and operate opportunities with our JV in Quebec and what is a realistic timeline for initiating the first project?
So, as we've been reviewing these projects with our joint venture GNR in Quebec, we're looking at a timeline there's a handful of projects that I would say are in the advanced stage. So, we're looking at a timeline of about 12 months before we see something officialized and concrete out there. So, it's a journey to get into these types of projects. As you guys all know that the Quebec marketplace has some unique peculiarities, it is supported by the government now who put a mandate out there for the utility to increase the R and G content of the products. This is driving activity into the marketplace. So, we expect to see something transitioning on the positive side in the next 12 months.
Thank you, Jim. Just give a moment for questions to queue up here.
And just one additional comment on that previous supply chain question. We have Steven Evans on board now as VP of supply chain, who's already elbows deep in working to stabilize some of these costs and give us leverage over our new global footprint, but also, purchasing in time helping to ease some of that pain.
Thank you, Mike. Our next question comes from Ken. Can you elaborate a bit more on the legal expenses that were incurred in this quarter?
Yes. There's been some resolution on some, some litigation and that's why we are seeing an expense added to this line.
Thank you, Stéphane. We have a couple questions from different folks again. Can you talk more about the different clean tech segments in which areas you think are going to be the highest growth in the short term? Let's say over the next year.
Sure. I mean, I think if we look at our clean tech segments, I think hydrogen is a product aligned for us. That's steady and growing in the next year at a steady pace. I don't see hydrogen being one that would explode rapidly. It's kind of steady and growing as mobility comes in and as more and more industrial customers look for the security of supply, basically that's coming from our hydrogen hubs in terms of R and G here, we see a lot of activity as Mike mentioned earlier in terms of the quotation. So, we expect to see that R and G activity will continue to pick up. The big question mark there is financing and how the financing will come in on the customer end. So, far, what we're seeing is that customers have access to financing. Now, none of us have the crystal ball and nobody knows with inflationary pressures, where this may go, but our personal view right now is that the R and G market will be robust and continue to grow in terms of carbon sequestration, this is a new market for us. I think we won basically, as Mike said, what's the largest order out there right now. What we see on the horizon are smaller orders, nothing in the order of magnitude of the carbon solutions project. And again, I think this one will be probably choppy this in the next 12 months as we stabilize our order intakes.
So, there'll be things that will come in midsize to size projects which will help us grow. And then of course, there's our services side, where here we see as inflationary pressures go up. As people perhaps slow down their CapEx investment. Here's where we see the opportunity for our business to grow on the services side, quite significantly as people try to maintain and service units to last longer in the field. So, this is the way our crystal ball is shaping things up for us right now.
Thank you, Jim and Mike. That's very helpful. Well, unfortunately that's all the time we have for questions today and thank you everyone for submitting the ones that you did. Just a reminder that we will reach out and answer the outstanding ones in due time. And with that, I'll turn it over back to Jim for his closing remarks.
Thank you, Brandon. I just want to thank everybody for joining us today and we look forward to seeing you in the near future and wish you all a great day.
Thank you everyone and that concludes today's webinar.