© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, everyone, and welcome to Xebec's Fourth Quarter and Year-end 2020 Earnings Investor Webinar. My name is Brandon, and I am 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 Investors section of our website later today. [Operator Instructions] Joining me today will be our President and Chief Executive Officer, Kurt Sorschak; and our Chief Financial Officer, Stephane Archambault. Our earnings press release was issued earlier today before market opened. All relevant documents are available to download either from the Investors section of our website or from SEDAR directly. You will also find later today a copy of today's slide deck on our website's Investors section. During this call, we will make forward-looking statements about our future financial performance and other future events and trends, including guidance. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our business, which we discuss in detail in our filings, including today's earnings press release and the risk factors and other information contained in the final prospectus relating to our recent offerings. Xebec assumes no obligation to update any forward-looking statements we make on today's call. It may also be referenced as to certain non-IFRS measures such as EBITDA, adjusted EBITDA, backlog and quote log. These non-IFRS measures are not recognized measures under international financial reporting standards and do not have a standardized meaning described by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. With this, I turn it over to Kurt.
Thank you, Brandon, and welcome, everyone, to Xebec's Fourth Quarter and Year-end 2020 webinar. 2020 was a challenging year for Xebec where we encountered unexpected operational issues, and we were unfortunately not immune to COVID-19-related impacts. Cost overruns in our RNG business led to a reversal of certain revenues and significantly lower margins in Q4. In addition, we experienced some order cancellation, which led to significantly reduced revenues. Combine this with our increased cost due to our operational ramp-up and acquisition activities, and you get a very unfavorable financial outcome. We have addressed these cost overruns in the last 6 weeks and currently are working through the order backlog that caused the problem. We expect that there will be still some financial impact in Q1 and Q2, mainly because these orders no longer carry any gross margins and, therefore, do not contribute to our SG&A coverage, but we have provided for this in our Q4 results. We have taken steps in early 2020 to standardize our RNG products and have launched late last year our Biostream product line, which we hope will see solid customer demand going forward. And I'm happy to report that already 25% and of our active quote log is related to the Biostream product. Please note that standard products off a much higher degree of cost control and, in addition, standard products can be scaled much more readily than customer engineered systems. In 2020, we were also able to execute 2 strategic acquisitions, HyGear in the Netherlands and Inmatec in Germany. Both are transformative for Xebec and are already delivering a number of exciting developments. To fund these acquisitions, we closed a $143 million bought deal, public offering and $63 million concurrent private placement with the CDPQ as strategic investor. The HyGear transaction closed at the end of 2020 and Inmatec closed in mid-February and both built important product gaps for Xebec by providing us with leading on-site hydrogen, oxygen and nitrogen generators.And I'm also happy to report that we are running at capacity at our German facility providing medical oxygen generators to hospitals and health care facilities worldwide. Overall, you will see throughout the presentation that the outlook for the company remains positive and that the issues we encountered in 2020 and early 2021 are onetime events, which will not impede our ability to execute further down the road. This year, we expect to continue our rapid growth and return to positive adjusted EBITDA. With this, I'll turn it over to Stephane Archambault, our CFO, who will go over the financial highlights. Stephane, please?
Thank you, Kurt, and welcome, everyone, joining us. Let me start by reviewing our consolidated financial results for Q4 and year-end 2020. We achieved revenues of $6.4 million in the fourth quarter of 2020 compared to 13.6% for the same period in 2019. The decrease is mainly due to revenue adjustment in the last quarter due to unusual items in the Cleantech system business segment, resulting from the impact of the COVID-19 pandemic and other operational issues. At the end of Q4 2020 and early 2021, Xebec became a detailed accounting review of its long-term production type contract for its renewable natural gas projects, where revenues are recognized based on the percentage of completion method. As a result of the projected total cost of fulfilling these contracts adding increase substantially, Xebec determined that previously incurred expenses represent a lower percentage of the total cost than previously estimated. As such, revenue recognized to date had to be adjusted by $5.2 million to reflect the revised percentage of completion.Furthermore, Xebec canceled $1.9 million of revenues previously recognized based on the percentage of completion method due to the deteriorating financial position of our clients where the likelihood of payment became uncertain in early 2021. Finally, 2 contracts were canceled by a customer in early 2021 as a result of delivery delays due to COVID-19 and other related disruptions. The impact led to a $5.4 million revenue adjustment.Our gross profit was a negative $11.4 million for the fourth quarter of 2020 compared to $4.1 million for the same quarter in 2019. The gross margin percentage decrease is mainly due to the reversal of revenue described earlier and some of contracts previously estimated to be profitable now projected to result in losses. The percentage of completion method requires that future losses on such contracts be recognized immediately, further impacting the company's gross margin.Moreover, cost for projects in Italy and China, where the COVID impact -- the impact of COVID-19 was particularly felt, also resulted in a gross margin deterioration. Selling and administrative expenses were $13.6 million in the fourth quarter compared to $3.6 million for the same period in 2019, a 277% increase. This is primarily due to several expenses that are nonrecurring in nature that have been accounted for in the fourth quarter. One, $4.8 million of transaction costs for the HyGear and Inmatec acquisition and, two, $1.1 million for provision for bad debt related to uncollectible accounts receivable and penalty for a biogas project in Europe. Additionally, $0.7 million of recurring administrative expenses resulted from the acquisition of Titus and ACS. Finally, overall SG&A expenses increased due to an organizational scale-up of employees and associated costs to support the increased level of sales in acquisition and grant of restricted and deferred share units. We had negative adjusted EBITDA at $22.6 million for the fourth quarter compared to positive adjusted EBITDA at $2.1 million for the same period in 2019. EBITDA was most impacted by the reduction in revenue, gross margin and higher SG&A this quarter, as mentioned previously. Net loss for the quarter was $28.3 million or negative $0.26 per share compared to a net loss of $0.5 million or negative $0.01 per share for the same period in 2019. Lastly, we ended the quarter with working capital increase to $171.2 million as at December 31, compared with working capital of $37.7 million on December 31, 2019. We have $168.6 million of cash as of December 31, 2020 as a result of our recent capital raise. This cash position and low debt load give us a strong financial position and flexibility to maneuver the current environment and continue taking advantage of opportunities. Next, I'd like to address our Q4 revenue performance in more details. The recent revenue revision we made earlier this year was a result of cost overruns and cancellation, which caused us to make the adjustment. Firstly, as I mentioned earlier, the total cost of fulfilling the long-term RNG contracts increased significantly due to COVID-19 and operational challenges, which have substantially increased product, operational and installation costs. Second, as we know with POC accounting, the revenue needs to be adjusted when the cost runs higher than expected. This is what is shown in the revenue bridge on the right. Lastly, there were project cancellation, which means that the revenue had to be reversed based on the work completed to date on those contracts. The materials and parts for these are expected to be used for other customers. Had we had not encountered these events, our revenue for the quarter would have been approximately $20.7 million. Next, we have our EBITDA bridge, which shows -- you saw the impact on our EBITDA as a result of recent events. There is a combination of uncommon events and onetime expenses, which are related to things such as our acquisitions. Besides the adjustment to the EBITDA as a result of contract being revised and canceled, there was also the deteriorating of cost of goods sold for projects in Italy and China as a result of COVID-19. Furthermore, when projects becomes unprofitable, accounting rule forces us to recognize future losses. We also saw the provision of bad debt and penalty for customers in Europe. There's also $4.8 million associated with transaction costs for acquiring HyGear and Inmatec. These costs were also higher-than-average because of the outsourced work we needed due to travel restriction imposed by COVID-19. Lastly, we also had SG&A expenses from acquisition, RSU, DSU grants and overall scale-up of employees and SG&A expenses. Had we not encountered these events, our adjusted EBITDA for the quarter would have been approximately $1.5 million.Before I turn it over to Kurt, I'd like to show you this chart, which display the growth we've been able to achieve since 2016, sorry. Growing from $9.6 million in revenue to what we reported in 2020 is quite impressive. In addition, the guidance we're providing today continue this trend. And we expect to improve our profitability over time as we mature and scale the business going forward. With this, I'll turn it over to Kurt to go over our business segments.
Thank you, Stephane. And I'm now going to bring you through our business segments. And for those of you who are not familiar with Xebec, we have 3 core segments which include our Cleantech systems, our industrial service and support segment and our renewable gas infrastructure. As you can see on this graph here, their activities all intersect with each other, and this creates great synergies within our business. We have added HyGear and their hydrogen generation products into the Cleantech systems, and we have put Inmatec and their on-site oxygen and hydrogen generators into the industrial service and support segment. So let's look now at the Cleantech's systems segment in a little bit more detail. As Stephane explained earlier, the Cleantech systems segment for the year was impacted by RNG contracts, which saw increased cost and cancellations that resulted in reduced revenues. The RNG industry in general continues to experience favorable tailwinds and, as a result, we expect order activity to pick up in the coming quarters. The improving backdrop in the U.S. saw RIN prices, and RIN prices are in the form of carbon credits tied to the renewable fuel standard, approach all-time highs in early 2021 and we expect the U.S. to be one of the largest markets for us, especially for our new Biostream products. We are in final negotiations for a number of exciting RNG projects, which we expect will contribute positively, not negatively, positively to order flow and backlog. Our sales focus is on standard products that can be factory produced, tested and shipped and installed in days instead of weeks or months, a huge change from what we used to do. Ultimately, we see the future of the market being fully containerized biogas upgrading units, which is why we've launched our BGX Biostream product last year. And I'm excited to be sharing a key milestone today with you, which is the delivery and installation of our first Biostream unit.Here's a picture -- that's not the picture. Here is a picture of the very first Biostream we've delivered to a customer in California. It's on a dairy farm and it is producing RNG for use in vehicles, which is how you maximize the value of your renewable natural gas in the U.S. This is 1 of 6 units that will be delivered to customers over the next few months. Biostream is the most important product development for us in the last 24 months as it marks our evolution into becoming a more standardized product organization as opposed to custom design and engineered systems. We began developing this product 2 years ago in anticipation of the market trending towards smaller scale projects and are excited to have this first-mover advantage.Let's look at some of the numbers for the Biostream and how they compare. You can see in the table here on your screen that the price point for the product started $1.5 million as opposed to $2 million to $4 million for our custom-designed and engineered turnkey systems. What's interesting to see is how the installation and commissioning time also compares versus our custom design systems, as it comes down to 2 weeks versus the 8 to 12 weeks that we've seen with our existing RNG systems, a significant reduction in installation which has been a challenge for us. And obviously, it's also a challenge for customers if those costs are being rolled over to the customer side.Ultimately, we'd like to get the order lead time to a matter of weeks. Once we've scaled up production, and this is a big improvement from the 7 to 12 months we've historically delivered on. Less time to deliver ultimately increases the value to the customers as they can produce RNG faster and achieve better results on their projects. We aim to produce Biostream units into inventory and sell them throughout the world similar to how, for example, Caterpillar or General Electric containerized their biomass to electricity power generators and sold them. Please also note that the flow rates the Biostream unit can handle versus our turnkey systems. If you need to increase the flow, you just put another container on your side. For us, this means no more design for a specific site. This whole product is standardized, which will be a key driver for improving our gross margins and scaling our manufacturing. It's a plug-and-play product, which ties into the installation and commissioning time. We want to make it as easy as possible for farmers and other customers to use the product and start producing RNG. These are ISO shipping containers, which are easy to transport, and they can be moved from 1 location to another, a big additional benefit relative to our custom engineered systems. Lastly, both of them use our proprietary PSA technology, which is a leading technology in the RNG market, delivering high recovery rates and lowest energy consumption numbers. So far, I've spoken about the big opportunity we are seeing in Biostream and I think it's a huge opportunity for us. But let's go over the addressable market to give you an idea of what we're anticipating here. All the numbers we are showing are for the U.S. market only and illustrates this great market opportunity. We have 2 charts here, which look at the number of active RNG projects by flow rate for both animal manure and wastewater treatment-based feedstocks. We've organized the data points into ranges that the Biostream covers. And you can quickly see that the majority of the market can be covered with our 2 base configurations. This is important as we believe that the future of RNG is in small scale, mainly farm-based production, both in North America and Europe. In fact, the American Biogas Council estimates that there are over 8,500 dairy, poultry and swine farms and over 3,800 water recovery facilities that are primed for biogas and RNG production, most of which can be satisfied with Biostream. We believe this is about 80% that we cover here.Next, I'd like to talk about hydrogen. Hydrogen continues to be an exciting opportunity for us. We spent a lot of time talking about RNG, but our hydrogen business continues to deliver positive developments and we had a transformative acquisition with HyGear. Our hydrogen purification business is seeing more demand as the broader hydrogen tailwinds continue. We have hundreds of hydrogen purifications out in the field and see strong order flow as we benefit from customers who wish to produce high-purity hydrogen from SMR production for fuel cell electric vehicles or for refinery petrochemical off-gas applications. We recently also announced a project with fuel cell energy for the Board of Long Beach project with Toyota, which is like one of the highlight projects in the U.S. at the moment. Overall, the hydrogen business is more insulated from the impacts of COVID that we've seen in the RNG business because the products are already standardized, have a higher gross margin and a price excerpt, so no installation risk involved here. There are a few companies worldwide that have the level of expertise with both PSAs and small-scale SMR technology than us. With the addition of HyGear, which are now contributing to this segment in 2021 and with the steam methane reforming and electrolyzer products, this puts us in a unique position to capitalize on the growing worldwide demand for hydrogen. We are fortunate to have them join us as tapering world-class expertise in hydrogen with over 70 generation units installed in the field, and we can offer the technology, either SMR or electrolysis, that makes most economic things given different customer situations.As you may know, the access to SMR technology enables us to produce green hydrogen from renewable natural gas. We believe that we are the only company in the world that has in-house technologies that allow for a distributed on-site conversion of organic matter into hydrogen. We're excited to offer these options to our customers as the hydrogen economy progresses. We are also signing 15-year Gas-as-a-Service contract. In other words, contracts where we sell the molecule, which we believe there will be a core hydrogen activity going forward. This allows us to offer customers long-term contracts at fixed rates where we sell the molecule and make use of our decentralized hydrogen production hubs.You've seen our recent announcement of our second hub being constructed in the U.K. as a joint venture with Buse Gas. This is the start of our hydrogen supply strategy, and we are aiming to build more decentralized production hubs around the world over the coming years. We will be providing an update on our hydrogen strategy later this year, which will include more information on our decentralized production hubs and how we see the market opportunity evolving in our principal target markets.Next, we have our Industrial Service and Support segment, which continues to grow strongly. As a result of the acquisitions of CDA, Air Flow, Titus and ACS, in addition to the organic growth that we saw, we have triple-digit increases in revenues. We plan to target 20 to 30 companies by 2025, having completed 5 to date, and our ultimate run rate -- revenue run rate for this segment is approximately $200 million to $250 million by 2025. This segment helps support our long-term strategy of becoming more service-based, so moving from an equipment manufacturer to a more service-focused organization. In addition, it helps strengthen our value proposition by being able to offer service and support alongside our Cleantech equipment and helps customer focus on overall solutions other than a focus on the product alone.Inmatec will also start contributing revenues out of the segment in 2021 with their on-site oxygen and nitrogen generators. Inmatec was another solid acquisition for us because it helped complete our product portfolio of proprietary technologies for on-site generation of gases. In addition to hydrogen and renewable natural gas, we now have oxygen and nitrogen in our arsenal as well. On site, distributed generation is a key theme for us going forward because it will be important for reducing cost and emissions as we move towards a sustainable economy. The majority of gases today is centrally produced and transported over long distances. By producing it locally, we can cut out the transportation and to reduce both cost and emissions associated with it. The cost reductions are in the 30% to 50% range. So a significant benefit to our clients, but also the reduction of emissions is quite substantial. By using renewable feedstocks such as renewable electricity or renewable natural gas, all of our gases can achieve a very low carbon or a zero carbon profile. In some cases, they can even be carbon negative if you use renewable natural gas, for example, out of dairy manure. Inmatec ultimately positions us as a worldwide leader in this space. They have over 8,000 units installed worldwide and continue to receive increasing market recognitions. And we are happy that Inmatec offers us the base to expand our Cleantech service network into Europe, and that we can leverage their workforce for both renewable natural gas and hydrogen sales in Germany, Austria and Switzerland.We now have access to their over 40 worldwide distribution partners, which will further help us drive our sales synergies. Many of you might know their exposure to the fast-growing medical oxygen market. The COVID-19 crisis has helped accelerate the adoption of on-site oxygen generators in hospitals, especially in areas with poor infrastructure. Many times, hospitals in remote areas cannot get access to oxygen due to poor roads or being prohibitively expensive. The COVID-19 pandemic has also dramatically increased the demand for oxygen. The company continues to experience record order flow for these generators and is -- and consequently is increasing its market share for on-site generation products.Our last segment is our Renewable Gas Infrastructure segment. Xebec is addressing this renewable gas infrastructural opportunities through GNR Quebec Capital, known as GNRQC, a fund created in partnership with the Fonds de solidarité FTQ, also known as Le Fonds. As a result, all of Xebec's renewable gas infrastructure investment activities were folded into GNRQC last year. Xebec is a leader in -- GNR is a leader in R&G development in Canada. RNG production is supported by both the Québec government through targets and incentives and private corporations who are seeking ESG friendly solutions to reduce their carbon footprints. In the 2030 plan for a green economy announced in November -- on November 16, 2020, the Québec government's budget included $213 million for their PSP CRM program, which will provide financial support for agricultural projects, and the program has already started. Québec is also maintaining its target to increase bioenergy production by 50% and has a target of 10% renewable natural gas in the pipe by 2030. This follows the government's announcement on July 7 last year for its organic material management plan, which basically sets a target to recover 100% organic waste or prohibit landfilling of organic waste by 2030. So a significant opportunity here in Quebec. GNRQC is the leading funding to back for RNG projects, and they now have over 20 projects in their pipeline that they are evaluating for investments. The objective for this year is to move 2 projects with the notice to proceed point. And to remind everybody, Xebec is an equal equity investor alongside the Fonds and will benefit from the sale of renewable natural gas equipment alongside long-term service contracts for the equipment. Our hope is that the fund will help drive more development in RNG projects here in Quebec and grow the market as there are no investment vehicles like it in North America, which are purely focused on RNG investments today. Finally, I'd like to leave you with the last slide, which summarizes our management guidance for 2021. We expect to continue our revenue growth and return to positive adjusted EBITDA. Given the current backlog of over $100 million including projected revenues of HyGear, Inmatec and the Cleantech Service Network, we expect consolidated revenues in 2021 in the range of $110 million to $130 million and adjusted EBITDA margins in the range of 3% to 4%. Ultimately, we are a very different company in 2021 than we were when we ended last year. The opportunities in decarbonizing our world are even stronger today than they were yesterday. We will improve our execution and capitalize on this once-in-a-lifetime opportunity. With this, I'll turn it back to Brandon for the Q&A session. Thank you very much.
Thank you, Kurt. With that, we'll now open up the floor to questions. [Operator Instructions] Our first question comes from Eric Stine from Craig-Hallum Group. On the client canceled projects, are these permanently gone or could these potentially be rebid at different economics?
They could potentially be rebid. There were discussions around that we have to wait and see. But there is no damage to us because, as Stephane said, the material was re-inventory and should similar projects come up or the same projects come up, we can definitely reuse the material and rebid.
Our next question comes from [ Randy McNunn ]. Can you comment on the progress that has been made to find a new Chief Operating Officer?
Absolutely. We're in the process, I would say, probably in the last third of finding a new COO. The search is going very well. And I expect that we have a new, depending on the start date of that person, a new COO in place before June this year.
Our next question comes from Eric Stine again. Do you have any examples of internal measures that were put in place with what happened in Q4 in terms of it being in the rearview mirror?
Stephane, do you want to take this?
Yes. I'll take this one. So yes, I mean, we are -- as we were before evaluating all the projects in details. We got -- we did a project review. We have meetings regularly. And we are -- if we had adjustments to be made, and then they will be made as we see them. So it's exactly what happened in the last quarter, as we saw that some adjustment needed to be done, we made those.
Let me just add here. The challenges we ran into basically were around predicting the cost for installations. And clearly, I think one of the items that we need to track much more closely is a cost going forward to conclusion of the individual projects. But there have been a number of steps taken to measure the progress of the project as we move those projects forward.
Our next question comes from Aaron MacNeil from TD Securities. As it relates to the quote log, can you elaborate more on what the 439.6 million quotes being actively pursued means?
So there's an overall quote log. As you know, quote activity spells out over like 2 to 3 years before you basically see an order coming. And we have now divided the quote log in the overall quotes that are outstanding and which we believe are still active and then quotes that are being actively worked on. So where we have interactions with customers for their follow-ups and basically where we can see that the project is a much -- at a much further advanced stage. So all of those $400-some million that we are working on at the moment, we believe, they'll be moving forward and become real projects. Out of the $1 billion that we are having, not everything will probably become a project, some will be abandoned along the way.
Our next question comes from [ Stephen Renal Jones ]. Are you able to provide some comments on the lawsuit coming out of Québec and its potential outcomes?
Yes, absolutely. The class action lawsuit is in a very early stage, and the outcome and impact are uncertain at this stage. We are collaborating with our ensurers and our external counsel and are assisting in defending the class action. Given the early stages and uncertain outcome, the company is currently not in position to quantify any exposure.
Our next question comes from Mike. Can you also provide some color in terms of Dr. Prabhu Rao departure?
Now we announced Prabhu departure in February, and we have no further comment on that.
Thank you, Kurt. Our next question comes from Ahmad Shaath from Beacon Securities. Are you able to provide any color on HyGear and Inmatec's expected growth in terms of how it's implied in the guidance for 2021?
Yes. We haven't broken out the individual growth of the companies. But I can confirm that the growth, both on the hydrogen side with HyGear will be substantial this year. And Inmatec at the moment is working, as I've indicated, at capacity. So until we can expand the capacity, I would think Inmatec will only grow marginally because we are at capacity at this point.
Thank you, Kurt. Our next question comes from Lars. The first part is, what percent of revenue do you expect to come from the Cleantech Service Network by 2025?
So when we look out, I expect that we're going to have about 50% revenues out of the Cleantech Service Network, and about -- depending on how the hydrogen and RNG market will grow, about 25% to 30% in each hydrogen or RNG segment.
The next part is, do you have any targets for EBITDA long term?
Yes, we do. Obviously, I believe, over the long term, a well-run company needs to achieve EBITDA targets closer to the 12% to 15% range. But we are, at this point, having a lot of work to do to get there. And please also remember, we are a quickly growing company. We constantly have to scale. So when you scale, you make pre-investments into this scaling and that obviously impacts your EBITDA generation capacity.
Thank you, Kurt. We have another follow-up question from Lars. Is it reasonable to estimate that your listed backlog is work that will be completed within the next year?
Can you repeat the question, please?
Is it reasonable to estimate that your listed backlog is work that will be completed within the next year?
The majority of it, yes. Within this year, not next year, within this year, I would assume the question is.
Perfect. We have another question from Aaron MacNeil. What steps have you taken to address counterparty credit risks and are customers with high credit risk included in your quote log?
I can answer that question. So we are conducting -- whenever we enter into a new agreement, we are conducting credit risk for clients. We have instituted that. Also, we are working extremely hard to get a milestone payment schedule that will allow us to mitigate the risk going forward. So try to be always positive on the project as possible. And that's what we've been doing in the last -- since I joined, basically.
Thank you, Stephane. Our next question comes from Pamela. Can you speak to the potential of the Biostream product in the European markets?
I just want to add something to what Stephane said about the credit risk. The credit risk is very often associated to custom engineered projects. As soon as you start standardizing your product, the credit risk reduces because the payment terms are different for standard products than they are for custom engineered products. So I hope, and that is one of the drivers to go to a standard product because the credit risk profile also changes. So that's important to recognize.Now in relation to the Biostream in Europe or North America, in Europe, this is where we originally got the idea from. The European market is for small-scale systems. From the numbers we have, both in France and Italy, we would believe that the market size is a couple of thousand units. And Germany, depending on what will happen in Germany now, Germany, as everybody -- most of you probably know, has over 9,000 biogas installations, most of them producing electricity. Those are those Caterpillar and General Electric containerized electricity generators. But those generators are operating for the last 30 years. So the tariffs that have come with the initial biogas boom in Germany and now have run out or will be running out shortly. So there will be a significant opportunity hopefully in converting those electricity generators and displacing them with our RNG product. So a significant opportunity for Biostream in Europe as well as in North America.
Maybe we have another part from Pamela as well. Can you talk about the competitive landscape of the Biostream unit in the different markets?
No. There is no competitive product. The only other product that is simulate a membrane-based system where the membranes are being containerized, but the membranes need 2 containers instead of 1. We have basically put everything into 1 container and the membrane suppliers need 2 containers plus probably an external pretreatment. So no competitive product on the market at this point.
Thank you, Kurt. We have a question from Douglas. Will insiders be buying at the current price levels?
Can you repeat that question, please?
Douglas has a question in regards to insiders and managing buying after the black out ends.
I cannot confirm for anybody else other than myself, but I can confirm that I will be buying some stocks probably Monday or Tuesday next week.
Our next question comes from Aaron from Craig-Hallum Group. Can you provide a split between organic and inorganic growth for the Industrial Service and Support segment in 2020 and outlook in 2021?
Yes. The organic growth is a little bit different across the companies. I would say, on average, we see about 10% to 15% organic growth in those companies. But we've seen on individual comp, in particular, we've seen basically over the last 2 years a 50% increase in revenue. So there's quite a bit of potential on organic growth there, depends on the location and also a little bit difficult to say because of COVID. Like our operation in California was quite significantly impacted by COVID. They had to shut down for a couple of weeks and had restrictions, stay-at-home orders. So but overall, I think about 10 to 15% is a good guideline if you look at the numbers.
Our next question comes from Craig Irwin from ROTH Capital. Can you give a more precise range for gross margins expected in the first or second quarter of this year?
I'll let Stephane answer that question.
So as Kurt mentioned before, some of the projects, we had to take the loss in Q4. And therefore, we'll -- on the RNG side, well, the profit margin -- the gross margin is expected to be at 0%, the fact that we've taken the losses. But the rest of the business is pretty healthy. And then we look between the range of 30% to 40% depending on the business units or the segment.
Our next question comes from Gabriel. Can you talk about the company's reporting on Scope 1, 2 and 3 emissions?
I can. We're obviously going to come out with our ESG report, annual ESG report again. We are currently finalizing it. We'll be reporting primarily on Scope 1 and 2, not scope 3 yet. But obviously, that would be a goal further down the road. It's a little bit more difficult to achieve that. But yes, our ESG report will be coming out, and you're going to see some numbers in it.
Our next question comes from David Quezada from Raymond James. Do you expect that the GNRQC RNG projects will use the Biostream system?
I would assume that most of the GNRQC projects will use our either Biostream or one of our systems. Yes, absolutely. And as with the general market, also here in Quebec, you will find that most projects fall within this Biostream category, either 1 or 2 containers will cover probably about 80% of the market requirements.
Thank you, Kurt. Our next question comes from [ Jaeger ]. Can you talk about what being more services-oriented looks like and how this impacts both hydrogen and RNG?
Yes, absolutely. Clearly, being an equipment manufacturer has its own challenges as we've seen last year. And last year, about 65-or-so percent was still equipment sales. As we look forward, and with the acquisition of HyGear and Inmatec, we will have an opportunity to transform our business more into a service-based operation. So what we are looking at over time is, HyGear, for example, is offering Gas-as-a-Service where we sell the molecule, much more stable revenue, higher gross margin. We can do the same, for example, oxygen generators at hospitals. Hospitals are -- notoriously have no money to spend on anything. So if you can put an oxygen generator there and basically sell them the oxygen at a lower cost, they will go for that.Then our decentralized production hubs are basically a service-type business where we generate hydrogen on-site on our hub and then basically fill for third parties, cylinders or deliver trailer loads of hydrogen or nitrogen or oxygen to clients. Then we have our service and support segment, which is primarily service and support and then operation and maintenance. So when you see, when I break down as to how I look at the business, equipment sales, Gas-as-a-Service, decentralized production hubs, service and support and operation and maintenance, only one is an equipment sales segment. The other one, all are service-related. So clearly, I believe that over time, our business will shift much more to a service-type business with a recurring revenue model than on an equipment-based business.
Thank you, Kurt. We have another follow-up question as well from [ Jaegar ]. Can you speak about the hydrogen infrastructure that's needed for fuel cell electric vehicles and how Xebec plans in playing in that?
Yes. So we already play in it. I mean, we operate a refueling station in the Netherlands that we own. We are providing hydrogen to refueling stations in the Netherlands. The hydrogen refueling infrastructure will take many years to be built. We still need to assess how this will play out. But through our decentralized production hub strategy where we basically, our strategy is globally local. We basically want to produce the hydrogen locally, either through steam-methane reforming or electrolysis. We will have an opportunity to help develop the refueling infrastructure.And to give you an example, in the Netherlands, what they have gone to, because hydrogen refueling stations are very expensive if you produce on-site, the hydrogen, but you have no cars come by. So what they are doing is they basically have only hydrogen dispenser and behind the wall, they have a cylinder rack full of hydrogen. That cylinder rack can fill 5, 6 cars a day. That's sufficient in the beginning. If you have more, you put 2 cylinder racks or 3 cylinders racks there. But if it then increases, you put a trailer load of hydrogen there. And if this increases, then you start producing on-site. So I think there will be a slower evolution towards hydrogen refueling infrastructure. And given our business model, I think there's a great opportunity for us to become a hydrogen supplier locally at a lower cost with a lower emission profile.
Thank you, Kurt. Our next question is come from Jeff Fetterly from Peters & Co, as well as Rupert Merer from National Bank. Can you talk about how the guidance for this year is broken down in terms of the other segments?
Stephane, do you want to take this?
Yes. From -- I think Kurt mentioned that before. So on the revenue side, I think we expect, again, great revenue coming from the RNG sector less than 50%. And that includes also our PSAs. Also, we're having the full effect of HyGear, obviously, this year. So that will have a significant impact in the tune of around 15% to 20%. Same thing on Inmatec and also we're going to continue taking advantage. We're going to have to pull numbers for our Cleantech Service Network as for the acquisition that we made last year, and that will represent also another 20% to 25%. So overall, I think we're pretty diverse in terms of revenues that will allow us to mitigate the risk going forward.
Thank you, Stephane. Our next question comes from Paul. Can you talk about how the shift to more services-based revenue would impact the margins of the business on a gross margin and EBITDA basis?
I can talk. Both will be impacted positively, let's put it this way. But clearly, a service-based business has a higher gross margin. If we sell gas as a molecule, we make a better margin. If we provide the service and support, let's say, service equipment, normally, our gross margins in the 40% to 50%. If we do operations and maintenance, our margins are higher. So if you move from an equipment business, which is very often competitive and surprisingly, even in an emerging market like renewable natural gas, it's relatively competitive, even so it's still a small market. But as soon as you move to service, you can create a lot more margin. That is part of the reason why we are creating this Cleantech Service Network. Because what we are doing is if you have a competitive equipment business, if you can capture all the aftermarket and the service associated with your equipment sale or with a third-party equipment sale, obviously, the mix margin is much, much better. And that is the idea behind the Cleantech Service Network, that we can support the customers, but that we also capture all the aftermarket associated with those systems that are out there that are going to be running for the next 15, 20, 25 years. So look at the car industry, they hardly make any money on the cars. But on the aftermarket parts, that's where all the money is generated, very similar, I think, a situation we have.
Our next question comes from Fred Tremblay from Desjardins. Does the revenue guidance include other announced acquisitions, for example, in the service segment?
No. The revenue guidance includes the business that we hold, no further acquisition included.
Our next question comes from Paul, again. Can you give us some color on the importance of the Chinese market and its impact on Xebec going forward and maybe speak to the joint venture that we have with Shenergy there?
Yes. So we've changed our setup with our Chinese partners Shenergy, which is the largest gas utility in Shanghai. As Shenergy increased the investment in Xebec Shanghai. We now own 60%. We've made arrangements so that the Board makes the decisions locally for Xebec Shanghai, which means we are no longer consolidating the results into our financials. But we will only bring our profits or losses that are generated there. I expect that Xebec Shanghai will grow significantly over the next coming years because there's so much going on, on the hydrogen side. And we are also seeing a renewed interest in renewable natural gas projects. So I think there will be a positive impact on the business in China, and the result will be that we're going to be booking earnings from China into our balance sheet.
Thank you, Kurt. Our next question comes from Rupert Merer, again. Do you have any plans to expand the capacity at Inmatec this year?
Not this year, but ultimately if this continues, we will have to look at capacity expansion. We are already looking now as to how we can produce more products. Inmatec has not been selling products into North America because of their lack of service support here because customers always want service. And now with us owning Inmatec, we are obviously looking at bringing the Inmatec product here, producing it here, and that can help also potentially increase sales of the Inmatec products worldwide.
Thank you, Kurt. We have another question from Aaron MacNeil at TD Securities. Can you provide any quarterly commentary on either revenue progression or on the margin side, specifically as it relates to margins? Can you disclose how much revenue in both Q1 and Q2 will relate to R&D projects that have zero or little associated gross margin?
Yes, I can take this one. Yes. So obviously, as Kurt mentioned before, we're going to still see impact of the review that we conducted earlier this year, and we'll see -- we're going to continue to see the impact in Q1 and Q2. And then Q3 and Q4, this is where we will be at a better level in terms of both revenues and also margins.
Thank you, Stephane. Our next question comes from Ahmad. How is the M&A pipeline in 2021? And how much M&A-related costs should we expect in 2021?
The pipeline looks good. As you know, we have 2 M&A firms work with us for bringing us the opportunities. We are looking at a number of potential acquisitions. And I would think that other than the Inmatec and HyGear transaction, which were larger, more strategic transaction, the cost for those acquisitions are in the similar range as we had previously when we acquired the other service companies in the U.S.
Thank you, Kurt. Our next question comes from Ian. Has the recently announced collaboration between Canada and Germany on hydrogen projects present any opportunities for Xebec?
Not yet. This has been a very recent announcement. This collaboration is more for a large-scale hydrogen production. I'm not quite sure we will be an immediate beneficiary of that. But clearly, our strategy, as I outlined it before, is to -- this globally local strategy, where we want to produce -- you need to recognize how hydrogen is produced today. At central facilities, liquefied, then transport it very often over long distances. And then again, vaporized on-site -- stored in liquid on-site, vaporized on-site. It's an expensive process to distribute hydrogen today. And the distribution is the biggest cost for hydrogen.Now if you produce it locally, you can reduce the cost significantly. As I said, 30% to 50% lower cost. But more importantly, you also reduced the emission significantly, because you avoid all the liquefaction-related emissions, you avoid all the transport-related emissions. And this is a significant argument. So price is one thing, but emissions is another. And a lot of industrial clients today are looking at ESG factors. So they want lower cost and lower emissions. And this is where I think we'd be playing. We'll not be playing in billion-dollar projects. This will be the domain of Air Products, Air Liquide, Linde, and BP and Shell and other big players. We're going to have our own niche. But in that niche, we want to make sure we have a strong foothold.
Thank you, Kurt. Our next question comes from Ahmad Shaath again. How much of additional sales costs do you think you will need as you switch focus to Biostream?
Not much at the moment, because the industry set up, there are so few players that if there is a project, you automatically get the quote -- the quote request. So what will happen is since it's a standard product, we have a price list, the salespeople sell off a price list. And that's it, there's no more engineering. I mean, it simplifies our operations significantly, derisks everything. So I'm clear that investors are concerned about the risk going forward. Will the company execute on future RNG projects appropriately? And is there still risk in the execution, can they manage it?One of the main reasons why we are switching to Biostream is clearly, there's a risk reduction. I mean it's a factory produced product and once you do this, you have a bill of material, you know your cost, you test the system in the factory, you know it works, and then you deliver it and you know what the delivery time, the installation time is and the startup time. So everything becomes a lot more predictable.And in addition, to answer Ahmad's question, you have a price list. The salespeople have a price list. They know for what they have to sell the product, and that's it. There's no more drawing up preliminary bill of materials to estimate what it will cost to build a project. Take it or leave it. Here's the product. You need two, buy two. Here is the price, and that's it. It's very straightforward. It's a much better business model.
Thank you, Kurt. We have a couple of questions from Rupert and some others in regards to M&A for this year. Can you talk about which areas you expect to be active in and if there's a target for this year in terms of the number of opportunities?
As we announced previously, we want to get to about 20 to 30 acquisitions by 2025. We've done 5 so far. So let's say, we are between 20 and 25 short of where we want to be. And given that we have a 5-year time frame, we are looking probably at about 4 to 5 acquisitions. It's also a matter of how much money we have to spend on this and how we're going to finance it. I mean, we are looking at all of this in the context as to what has happened to us in 2020. How can we finance acquisitions going forward? And that is something Stephane is evaluating at the moment.
Thank you, Kurt. Our next question comes from Nicolas. When do you anticipate to see normalized gross margins in the RNG segment?
I think, Stephane, if you want to answer this one.
Yes. Can you just repeat the question. Sorry.
When do you anticipate to see normalized gross margins in the RNG segment?
Okay. As we mentioned before, I think we are finalizing those contracts where we got most of our trouble, obviously. So I would think that starting second half of the year and next year, this is when we're going to start having a more normalized gross margin. We're not going to enter into some contracts with a low margin. I think we're going to be, as Kurt mentioned, we're going to be disciplined enough not to get into those. And -- but by the time that they get rolled out into our P&L, it will probably be at the end of the year and obviously next year.
We'll just give a moment for questions to queue up. Our next question comes from Paul. Can you talk about the revenue split that you expect between service and hardware sales over the next 3 years?
No, I can't. I don't have that number. I can tell you that I expect service and support to be about 40% to 50% of total sales and the rest is basically equipment sales, either on the renewable natural gas or hydrogen side.
Yes. That's correct.
Perfect. 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 to Kurt for his closing remarks.
Yes. Thank you very much for everybody coming out, listening to us. I hope we could give a good overview as to what has happened in 2020 and how we're going to see 2020 progress. With that, I thank you very much, and have a good day.
Thank you.