Orbital Infrastructure Group, Inc. (OIG) Q2 2017 Earnings Call Transcript

Sanjay Hurry - IR William Clough - President and CEO Daniel Ford - CFO

Eric Stine - Craig-Hallum Joe Maxa - Dougherty Rob Brown - Lake Street Capital Amit Dayal - Rodman & Renshaw Glenn Mattson - Ladenburg Thalmann Bill Nasgovitz - Heartland Advisors Mike Breard - Hodges Capital Management

Good day, ladies and gentlemen, and welcome to the CUI Global's Second Quarter 2017 Results Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn to introduce your host for today's conference Mr. Sanjay Hurry. Sir, you may begin.

Thank you, Kelly. Good morning, and welcome to CUI Global's second quarter 2017 results conference call. A copy of the company's earnings press release and accompanying PowerPoint presentation to this call are available for download at the Events and Presentations page on the Investor Relations section of the CUI Global Website. With us on the call today are William Clough, President and Chief Executive Officer; and Daniel Ford, Chief Financial Officer. The purpose of today's call is to review the company's financial results for the second quarter and to provide you with management's perspective for the second half of the year. Following management's remarks, the call will be opened to questions and answers. A telephonic replay of this call will be available until August 23. You may also access the archived webcast and accompanying PowerPoint at any time on the Investor Relations section of the CUI Global Website. As a reminder, this call will contain certain forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in the forward-looking statements. The company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, including among other things, our reliance on third-party manufacturers and suppliers, government agency budgetary and political constrains, new or increased competition, changes in market demand, and the performance or liability of our products. These factors and others could cause operating results to vary significantly from those in prior periods and those projected in forward-looking statements. Additional information with respect to these and other factors, which could materially affect the company and its operations, are included in certain forms the company has filed with the Securities and Exchange Commission. Before starting the call, be advised that management will attend and present at several investor conferences over the next two months. A full listing of these conferences will soon be made available for your reference under the Events and Presentations tab of the CUI Global Website. With that, I'd like to hand over the call over to William Clough, Chief Executive Officer. Good morning, Bill.

Thank you, Sanjay. Good morning everyone, and thank you for joining us on our fiscal second quarter 2017 results conference call. I'll start with a brief overview of our performance for the quarter, after which Dan will review our financial results in greater detail. Once Dan has concluded his remarks, I will provide some additional commentary on some of the key initiatives we working on over the past several quarters, by strategically deepening our penetration of Europe and establishing a wider footprint in North America in our Energy segment and across key partners and customers in both the Power and Electro-Mechanical business, we're setting a stage for a second half of the year. So, let's get started. Our financial results for the second quarter reflects further strength in our Power and Electro-Mechanical as the electronics industry emerges from a down cycle and timing of customer project delivery schedules in our energy segment. Let me address the performance of our power segment first. Revenue increased approximately 33% sequentially driven by increased turnover through our distributors and continued sales to our direct customer base. Of note in the quarter, we saw excellent acceptance of our product line by our newest distributor, Arrow Electronics as part of their initial rollout. Arrow is already reordering product and is looking to increase our presence in its offering. We believe there is much more upside to us in this relationship. Power and Electro-Mechanical backlog was a very strong $19.2 million as of June 30. In our Energy segment, and in another milestone toward broad acceptance of our disruptive GasPT by the gas industry OFGEM, the U.K.'s energy regulator and internationally recognized energy authority formally relaxed its technical requirements for Calorific Value Determining Devices to allow for deployment of our GasPT as a faster, low-cost and highly accurate alternative to the slower more expensive gas chromatographs. Also, DNV GL awarded as a 36-month development contract as part of U.K.'s future billing initiative, using a modified GasPTs product to study the technology and billing consequences of injecting biogas into the gas transition network for residential customers. I'll have more to say on that opportunity and the project future billing project presents to us after Dan's prepared remarks. To continue the process of educating the industry, participants on the value proposition of our products, we held innovative-based seminars in the U.K. and demonstrated our VE-Probe's capabilities in the U.S. that and generating new interest from gas operators. It is clear to me from these engagements that our product are now commanding the attention they deserve. Our opportunity set is expanding but the conversion cycle from opportunity contract remains lengthy. As I've discussed on prior investor calls, decision making on infrastructure projects can be and is deliberating, but when you have a disruptive product set as we do and the industry knows that we do, decision will be made and they will be made for game-changing technologies like ours. At quarter end, the energy backlog stood at $16.4 million. Now let me turn the call over to Daniel Ford, our CFO, so that he can run through our financial results in more detail. Dan?

Good morning and thank you, Bill. I'll start with a review of our financial results for the second quarter of 2017 and then focus on our balance sheet. Total revenues were $22.5 million, a decrease of 3% from $23.1 million in the second quarter of 2016, reflecting a $2.8 million increase in revenue on our Power segment, offset by $3.4 million in lower revenue in our Energy segment. Power and Electro-Mechanical segment revenues were $18.2 million, an 18% increase year-over-year and on a sequential basis, Power segment revenues increased 33%. Since the end of 2016, the Power segment has seen a pickup in order flow compared to last year as distributors and customers have build inventory, while the electronics industry moves into an upcycle. Energy segment revenues were $4.3 million, a decrease of 44% year-on-year due to the impact of unfavorable exchange rates on our U.K. operations, the timing of customer project delivery schedules and in temporary halt of deliveries of gas related metering, monitoring and control systems, including GasPT units just to name right in. Consolidated backlog was $35.6 million at quarter end comprised of $19.2 million for the Power and Electro-Mechanical segment, which is up substantially over last year and $16.4 million for the Energy segment, compared to $15.7 million at June 30 of last year. Energy backlog this year did not include any GasPTs for Italy whereas last year, the backlog included GasPT for Italy. Instead the increase in Energy's backlog year-over-year is attributable to strong integration orders at both our U.K. and Houston facilities in conjunction with a slower first half of 2017 and deliveries of products due to customer schedules. The second quarter consolidated cost of revenues as a percentage of revenue increased to 63% from 60% last year. For the six months ended June 30, the consolidated cost of revenues as a percentage of revenue increased to 66% from 61% in the prior year comparable period. This percentage varies based upon the product and product mix shift within both of our business segments, as well as contract labor cost within our segment and foreign exchange rates. During Q2, the Power and Electro-Mechanical segment cost of revenues as a percentage of revenue was generally consistent at 64% compared to 65% in the prior Q2 and in the Energy segment cost revenues as a percentage of revenue for Q2 2017 was 62% compared to 52% in the prior Q2. For the six months ended June 30, the Power and Electro-Mechanical segment cost of revenues as a percentage of revenue was 66% compared to 64% in the prior year comparable period. During the six-months ended June 30, the Energy segment cost of revenues as a percentage of revenue was 65% versus 54% for the six months ended 2016. The Power and Electro-Mechanical segment remain generally consistent for both the three and six months ended with the changes that are attributable primarily to product mix sold. The increase in the cost of revenues as a percentage of revenue for the energy segment during the three and six months ended June 30 is result of a less favorable product mix, due to the aforementioned temporary halt of deliveries for our customer in Italy of higher margin technology-based product sales. Gross profit in the second quarter was $8.2 million for a 37% margin versus $9.2 million or a 40% margin in the prior year, reflecting changes in segment and product mix. The Power and Electro-Mechanical segment generated gross profit margins of 36% that was flat with Q2 last year and the Energy segment generated gross profit margins of 39% compared to 48% in Q2 2016. For the six months ended June 30 gross profit was $13.9 million for a 35% margin compared to $17.2 million for margin of 39% in the prior year. The Power and Electro-Mechanical segment generated gross profit margins of 34% versus 36% last year and the Energy segment generated gross profit margins of 35% compared to 46% last year. We are focused on improving margins within our Power segment through increasing efficiencies and controlling variable costs with our Canadian manufacturing facility and to new product and technology interactions into the marketplace. The energy segment experiences improved margins when it sells more of its leading-edge ads technology solutions including GasPT and VE sampling systems which offset lower margin integration type project. During the second quarter, the Energy segment was more heavily weighted to integration as our Italian project for GasPTs remain on hold. We continue to expect margins in both segments to improve during 2017 through the improved product mixed sales in both operating segments and efficiencies at our Canadian manufacturing facility. During the three and six months ended June 30, 2017, selling, general and administrative expenses decreased $0.3 million and $1 million respectively compared to the prior year comparative periods. These decreases are largely due to $0.5 million and $0.8 million in severance costs incurred in the Power and Electro-Mechanical segment for the transition of the R&D team to CUI Canada and for various positions with the Energy segment during the three and six months ended in 2016 respectively. In addition, the company began implementing various cost saving measures in Q2 2017, which provided some benefits in Q2 and are expected to further improve SG&A going forward. SG&A as a percentage of revenue remained constant at 39% of total revenue during the three-month period ended June 30, 2017 and slightly increased to 43% from 42% from the six-month period ended. EBITDA loss for Q2 was $0.9 million compared to an EBITDA loss of $0.5 million last year for the reasons mentioned. For the six months ended June 30, EBITDA loss was $4.1 million compared to an EBITDA loss of $2.2 million in the same period last year. Net loss for Q2 was $1.6 million or $0.07 per share compared to a net loss of $1.5 million or $0.07 per share last year. For the six months ended June 30, net loss was $5.4 million compared to a net loss of $4.1 million in the same period last year. Cash and cash equivalents stood at $1.8 million at June 30, 2017, a decrease of $2.8 million since December 31, 2016. We did not sell any shares under our at-the-market program effective immediately. In terms of financing working capital, as a reminder we have available liquidity from several sources. The potential sale and leaseback of our Oregon property, ability to finance our U.K. facility that we own outright, use of our $4 million line of credit and £1.5 million overdraft facility both at Wells Fargo and our $100 million shelf registration. During the quarter, we placed our Oregon property on the market. After paying off the mortgage note from the expected sale proceeds, we expect to be able to put a substantial amount of cash on the balance sheet. This concludes my prepared remarks. I will now turn the call back to Bill.

Thank you, Dan. Looking ahead a robust pipeline of energy segment opportunities and recovery in the electronics energy supports our ambitious for long-term growth. Within our Power segment, revenues to direct customers and through our distribution channel continues to increase as the electronics industry moves into an upcycle. Together with a stronger bid pipeline of integration projects in our energy segment, we anticipate that full year sales will be weighted towards the second half. As a reminder, integration projects carry out lower margins than our leading-edge technologies such as the GasPT and VE sampling systems. I started the call by saying that business development initiatives we've pursued over the past several quarters are starting to bear fruit. Demand for our energy projects, especially our GasPT is building across a broader base of prospective customers and geographies. Let me spend a few minutes on our business development initiatives that we believe can lead to greater energy product revenues in the second half of the year and well beyond. For those of you who are new to the CUI Global, our gas technology products are uniquely positioned to address operator's demand for technology solutions that enable sustainable energy, climate change mitigation and the responsible use of resources. Starting with Europe, we have formally submitted a bid for 1,000 GasPTs for deployment by ENGIE integration division for a biomethane integrate applications. We expect to hear back on our bid in the fourth quarter after Europe's August recess. As a reminder Endel intends to construct a 1,000 biomethane integrated and we expect purchase orders to match their build schedule. With ENGIE, ours is a partnership that spans multiple points for revenue across multiple geographies. In addition, GasPT, the product we develop based on ENGIE odorizer technology is quickly gaining traction in the marketplace given its unique delivery method. Having licensed the odorizer technology just five months ago, we were already proceeding to field trials of this product in September. After completing the field trials, we'll be able to start selling to customers. Snam Rete has already expressed an interest in purchasing up to 1,300 of these units and ENGIE has indicated an interest in deploying across its own transmission network. Additionally, and reflective of their aspirations for our odorizer product, ENGIE is folding it into their business development efforts in China and have scheduled meetings with potential customers to take place shortly after we complete the field trials. Staying with Europe, I'll touch briefly on the tariff issue in Italy. As a reminder in regards to the tariff, this refers to the amount that Snam Rete is allowed to bill customer and not taxes. Snam Rete management had a very protective meeting with the regulatory authority in June, but does not expect to hear back into something after the August recess. In the meantime, I want to stress that the tariff issue with Snam Rete is in no way appeals the development of opportunities in other countries in Europe. To learn more about Snam Rete's commitment to our GasPTs, I invite you to visit the Media Room on our website where you'll find a report authored by Snam Rete that details their network upgrade plans including their intention to deploy a total of up to 7,000 units. In a much more important development at the end of July, Snam Rete announced the receipt of a loan from the European investment bank in the amount of €310 million to fund part of Snam Rete's €600 million capital infrastructure plan to upgrade the Italian gas network and to allow for quote "optimization of Snam's finance financial structure". You'll find a link to Snam Rete press release in the Media Room section of our website. In that press release, Snam Rete identifies four specific projects to be funded by its investment plan. We are very pleased to see that two of the project pertains to CUI Global. The first is to the re-metering project for which we already have a contract for GasPTs. The second is for the installation of odorizing systems for industrial customers. Our understanding of the odorizing project is that cannot be accomplished using current odorization technology, which I believe makes our solution with its unique delivery technology, a significant competitive advantage. Most significantly, Snam Rete press release, reaffirms its commitment to moving forward with our GasPTs contract and positions us well for an odorizer opportunity. Now let's turn our attention to the U.K. Perhaps the most compelling evidence of our GasPTs gaining momentum in the industry can be seen in the U.K. Recall we were awarded a follow-on contract is May by DNV GL under the U.K. National Gas Network Innovation Competition as part of project called Future Billing Methodology. This project seeks to unlock the full potential of the gas network to distribute unconventional gases. The distribution of unconventional gases however, requires much more granular and therefore accurate billing, which GasPT can provide. For those of you who aren’t familiar with DNV GL, with $2.77 billion in annual revenue, it is the world's largest technical consultancy and supervisory in the global renewable energy and oil and gas industry. It's 13,000 employees and 3,000 energy experts, supporting global client base and help to establish industrywide technical and regulatory standards. You may remember it was the competent US government ask to investigate the Deepwater Horizon Spill in the Gulf of Mexico. It is no coincidence that the DNV GL is also the company from whom we acquired the GasPT technology. And according to the Future Billing Project, DNV GL seeks to combine its domain expertise with data from our GasPTs to create digital echo systems that enable the building of new data-driven services. In this context, GasPT is the only viable data provider. It uses no service gas, needs no regular maintenance and provides accurate almost real-time data at a very reasonable cost. On our last investor call, I spoke about the network innovation project, deploying a number of our GasPT units wirelessly connected to a sample of U.K. residential customers designed to give homeowners the ability to see what they're spending on energy on a second by second basis. The goal in presenting this data in real time was to encourage conservation. Additionally, the project was designed to accurately allow for broad use of biomethane and other low carbon renewable fuels, while still maintaining accurate billing throughout the network. I am very pleased to report that the initial results of this deployment have been quite positive. The purpose of this R&D project is to prove the broad deployment of an accurate metering system throughout the natural gas network will both encourage conservation and more importantly allow for the broader use of renewable green resources like biomethane, thus reducing pollutants and dependence on nonrenewable resources. For more information, we've provided a link on our website within the Media Room to the Future Billing Project website hosted by DNV GL. As greenlighted that the project will proceed to the next phase which involves design, deployment, development and planning for implementation. Deployment will begin in 2019 or 2012. To be clear while we are in the very early days of this opportunity, we know two things; one, that our technology cannot be replicated by anyone else and two, to be effective the deployment will call for literally thousands of metering units. I will keep you updated on this substantial opportunity as it progresses. Turning to North America, where we employ a multipronged approach to entity project sales, here the dominant application of GasPTs is as a process control device for big two-stroke gas-fired compressors and the gas turbine power generation market. These are applications that do not require agency certifications beyond those which GasPT already has in place. To this market in a significant way, we are delaying the foundation for a relationship with one of the largest turbine manufacturers in the world. Our goal has been to be included in this group's building materials with their turbines. To that end, the manufacturer has been testing several of our GasPTs continuously. With significant progress made toward the approximate 8,000 hours of total testing time required, we estimate that this process will be completed in the fourth quarter. Our GasPTs have performed as expected and with successful completion of testing, the next step will be certification of our GasPT as a standardized process control device for their large frame turbine applications. This certification opens three revenue streams for us with this customer. One, our GasPT will be included in the bill materials for the large frame turbines manufactured every year. Two, certification enables us to sell to adjacent groups within the manufactured organizations as a preferred vendor with the certified product. New machines totaling several hundred units are manufactured annually by these groups. And three, GasPT will be an improved product -- approved product under a manufacturer warranty with approximately 25,000 of its turbines in the field today, we can approach them all with a manufacturer approved effective method of controlling their turbines. As much as $20 billion to $30 billion are spent annually on maintenance of these turbines and GasPTs can help save on those costs as well as improve upon their environmental impact. Fiscal monitoring with GasPT is another opportunity in North America. We are presently seeking certification from measurement to Canada to sell our GasPT for our fiscal monitoring applications. Concurrently, we're deploying two GasPT units to a large energy delivery company based in Alberta as part of a field trial starting in September as a prelude to a project that could be of similar scope to our Snam Rete contract. These are opportunities that underscore our progress to expand the opportunity set for GasPT. Despite the interruption with Snam Rete, gas operators have moved forward with plans to deploy GasPT principally because it's ROI is very compelling. We have added ENGIE, which gives us multiple points of potential revenue across it's integration subsidiary Endel, where we've already submitted a bit for the 1,000 GasPTs for a biomethane integrated installation. ENGIE also operates a fleet of LNG tankers, storage facilities in Europe and China and pipeline delivery system throughout the world, all candidates for our unique technology. In addition, the future billing project could call for literally thousands of metering units. And finally, this Canadian opportunity is a beachhead to other opportunities there. Our GasPT dominates our opportunity set our VE Sampling system is also making clear headway in North America as well. We are currently in multiple sales cycles for sampling systems with some of the largest energy producers in the world. These opportunities have only increased after our industry demonstration at Southwest research in Texas and through the assistance of our continuing relationship with Daily Thermetrics who continue to penetrate the burgeoning thermal well market. Turning to our Power and Electromechanical segment, we have seen a significant uptick in customer orders and revenues for several reasons. First, all our distribution partners are building inventory in our products. Second, our point of sale activity through those distribution partners are increasing, which along with the investment in inventory provides a stable flow of customers and design wins. Design activity is higher than last year, which makes us optimistic about being able to sustain sales levels and further growth. And third, we won a number of higher production accounts that were designed -- that we were designed in during 2015 and 2016 that are now driving the increase in our direct business. Now let me touch briefly on our key growth driver in the Power and Electromechanical segment, our ICE Technology products. To remind you, our ICE Technology products utilize the virtual power system's intelligent control of energy or ICE software to provide peak shading capabilities and unlock underutilized power capacity in datacenters. Our ICE Technology products are undergoing beta and sampling testing and every tester is reporting good or better than expected results. We are currently seeking product certifications including UL for ICE Block which we are working diligently to obtain in the near future. Just yesterday we announced a major milestone for our second ICE Technology product, the ICE Switch. ICE Switch is a power monitoring and switching system that allows power to be intelligently distributed across racks depending upon need and historical use of patterns. It is a complementary solution to ICE Block that we feel represents the next step in unlocking power capacity in datacenters. In a press release yesterday, we announced the production release of ICE Switch following the receipt of UL/cUL and TUV 60950-1 safety certifications. There is considerable interest from perspective customers for our ICE Technology products as datacenters power consistently emerges with most critical area that needs to be addressed to support the growth of IOT, mobile and supporting infrastructure. Our ICE Technology can be a real game changer. To summarize, our business development initiatives undertaken to drive market awareness and expanded option of our energy products have begun to bear fruit. The opportunities ahead of us are min and substantial born of a product set that is unmatched in the marketplace. Given the totality of the opportunities ahead of us, our strong, sequential, financial performance and continued upturn in the electronics market benefiting our Power and Electromechanical segment, our substantial backlog for both business units, together with the sources of funding available to us as detailed by Dan, effective with our quarterly report this morning, we are immediately rescinding the app of the market portion of our shelf registration. The management team and I continue to focus on executing the opportunities ahead of us, to grow our revenue, to reach our goal of profitability and to enhance shareholder return. This concludes my prepared remarks. Operator, please open the call to questions.

[Operator instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Your line is open.

Hey, maybe we can just start with Canada, I guess on the certification front, it sounds like you're working toward certification and I'm wondering is this a different certification other than one you've been working towards in the past? I know that there was some hope that potentially the European Certification would apply to Canada. So maybe some color there and hurdles you need to get passed, but also curious to hear what your thoughts are on timing of those field trials?

Yeah. So, field trials we believe we're going to start early September and these are the same certifications we've been working on. The good news is that we have convinced management to accept the testing and durability, accuracy and repeatability from the towers. So, they’ve accepted those. The only thing they want now is they want two of their devices to run on a Canadian pipeline with a Canadian pipeline sponsor for a period of somewhere between 60 and 90 days. So, it's a very test period. To prove that it works on the Canadian pipeline as it has on Europe, we have a partner who is participating with us. In fact, they're a sponsor partner and they're a large pipeline company in Canada based on Alberta as we mentioned and I guess that we expect to deliver two and it's still like two devices to them, the first part of September.

Okay. But so, the trials that you're mentioning those serve two purposes, that's one for the certification, but then also for that company working towards a larger deployment is that how we should think about it?

Exactly. Exactly. And that actually work to our benefit in a sense that when we finally got measurement to Canada accept the European findings, they actually presented us to this pipeline company as a partner and as a sponsor and the partner company agreed and they yes, you're absolutely right. They're using the test and sharing their measurements to Canada, but using the test internally to make their own decisions.

Okay. Great color there. Maybe just turning to ENGIE quick, so the 1,000 biomethane or the bid that you've made, is it still the same situation where really you're the company that's involved there? Is there any other competition in that or do you expect to win it? And then last quarter you did mention some -- you were expecting some near-term purchase orders. Are those now -- are we talking about the same thing and that those are potentially a fourth quarter event?

Correct and yes, we're expecting, we're a component in this biomethane to a great scale. We're not creating the skids themselves. We do that in the U.K., but in France it's Endel who is going to create the skid, but we've been in as the analyzer portion of it. So, I can't imagine, frankly no one has to meet the spec, the spec is no service gas, low maintenance and a cost structure that only we can really attack.

Got it. Okay. Last question for me this is for Dan, just on the cost savings you mentioned, partial impact in Q2, just more color on those may be what the impact was in Q2 and maybe what kind of run rate we should think about for OpEx going forward?

So, the cost savings in Q2 for the severance packages and everything it was de minimis I was say as less than US$100,000 during the quarter. Long term what that's going to look like is about $1.5 million annually saved in SG&A. So, we're really going to start to see those savings starting to kick in, in Q3 forward. So, they were fully implemented during Q2.

Got it. Thanks a lot.

Thank you. Our next question comes from the line of Joe Maxa with Dougherty and Company. Your line is open.

Thank you. Back on ENGIE in the odorization solutions that you're coming up with and you talked about field trials that when they're going to start, but I am wondering how about those trials go as far as when perhaps you could see some purchase orders?

Yeah. We're just finalizing the testing of the beta product and we hope to get product in the ground probably in the next month or two. We have been told and Snam is the one who is putting them in and Snam has told us that they would like to see deployment the first part of next year. So, I think taking that into account, I think they’ll let it for somewhere around the three-month field trial. It's not extensive. It doesn’t require to be the regulatory certification that the analytics do, obviously because it's not designed to measure durable quantity except we applying an amount an odor into the gas system. So again, I think it will be much less onerous if you will than the regulatory requirements and I suspect it will be something in the three-month range. I'd say they're pretty insistent about doing deployment with this re-metering project, which I think means that they're going to, they're certainly going to be doing something by the beginning of next year.

And then on the -- staying with the energy on the gas turbine opportunities you mentioned, when are you expecting, you said you expected the $8,000 hours to be completed by the end of this year. What will be the timeframe before you would expect to see perhaps some orders come from that

We expect that as soon as it's certified we would see an initial purchase order. We've already been told that we'll get a call off purchase order almost immediately. So, it will be very quick. It could be fourth quarter.

So, after the 8,000 hours are done, you'd expect it to be certified quickly after that.

Yeah, they’ve said that as soon as the 8,000 hours are done, it will be certified. That's the only thing that's being, that's all up now.

I see. Okay. And then more near term on the backlog in energy, how much of that is related to integration projects versus product sales and I'm assuming…

90% of it is integration.

Okay. So that's a longer revenue cycle to turn those projects versus which means that backlog you have to stretch out over how long, couple years?

I think we used to say six to nine months, something like that.

Okay. Gross margin you talked about strength in the second half, are you thinking it will maintain or exceed levels from Q2?

Yeah, absolutely. I think we're going to continue to see strengthening in the Power and Electro-Mechanical on the margins on the energy side. It's going to be -- I think it's going to be consistent is what it looks like right now. It's going to be consistent with where we're out for the first half of the year on the energy side. Depending on timing of products, if one of our large GasPT customers kicks off an order, that will definitely lead to an increase in the gross margin, but at this point, conservatively I would say, it's going to stay consistent on the energy side.

Okay. And I'll just ask one more on the Power and Electro-Mechanical side, order outlook for Q3 must remain pretty strong based on what you've been saying. So, I'm wondering if you'll see -- if you expect sales in that line to exceed Q2 or somewhere along the same lines and if you can keep that margin quarter in that segment?

I think there is going to be right around Q2's levels, maybe just slightly less based on the backlog schedule right now, but the ordering pattern has continued to be an increase each of the last 12 months we've had increased orders compared to the I guess comparative trailing 12 months period. So, it's been a really good trend and that's continuing right now. We continue to see as Bill mentioned good sell-through, through distribution and through new direct orders and we're getting new design wins on a regular basis as well. So, the trend is very good, but I think it's going to be at about the same as Q2 or maybe a little bit less.

Okay. Thank you.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital Markets. Your line is open.

Good morning. Just going back to the ENGIE bid for the skids, back that you'll see…

Hello?

Hi, can you hear me?

Yeah, I can hear you.

Yeah. So, on the ENGIE, the 1,000-unit order for ENGIE or bid for ENGIE, what the per-unit revenue potential or order revenue potential for that contract?

There's actually two components that are meaningful. One is the RTU, the telemetry system and one is the analyzer GasPT and we haven’t specifically revealed any of the pricing that we're doing with that on a customer basis and I would tell you that we're bidding on a while for this point. They're going to certainly want a discount based on volume, but I think you're going to see something in for just the analyzer something in the €17,000 to €20,000 range and a similar pricing for the RTU portion of it.

Okay. Great. That's helpful. Thank you. And then on your facility discussion you said it was on the market. Could you just outline the cash potential from that and the timeline you're thinking?

Dan, do you want to take that?

Absolutely. So, we're being advised the selling price range is somewhere between $7.5 million to $8.5 million. I know it's a wide swath, but that's the range that we're looking at. On that we owe about $3.4 million in our mortgage for that. So, the net proceeds somewhere in the neighborhood of $4 million plus to the company after paying the mortgage off.

Okay. Thank you. I'll turn it over.

Okay. Thank you.

Thank you. Our next question comes from the line of Amit Dayal with Rodman & Renshaw. Your line is open.

Thank you. Good morning, guys and congrats on the strong quarter. Just touching on the backlog. Is most of this concentrated especially on the energy side. It’s concentrated amongst a few customers, this backlog in the energy side?

I think you're correct. Is it concentrated among a few customers? Generally speaking our energy, our future energy opportunities are with big large pipeline companies. And so, by their very nature, there is not a lot of them. There are a significant number in certain geographic areas, there is for example, 210 pipeline companies in the U.S. But generally speaking in Europe, there is one pipeline company for each country, they are nationalized or semi-nationalized. In Canada, there is really only two large companies. So, again you're right, it’s a small customer set, but they are very, very large customers.

Understood. That's helpful. And in addition to small Snam Rete this recent news definitely since many positive things seem to be on track except for USB’s bureaucratic delays. Now, when you look at the odorize opportunity is that also sort of red table potentially moving forward independently of the GasPT project you have with them?

I will tell you that my understanding of the deployment of the odorizers is that those are going to go into many of the same off takes that the re-metering project is addressing. I believe that, that was confirmed with their press release regarding the loan as well where we talked about odorizing certain large industrial customers and that is exactly what they're doing with our re-metering project there. They're re-metering their 6,800 largest industrial customers, that’s what they're doing and I think that their plan is to roll out the odorizer with not all of those, but I think a similar type of deployment.

Understood. Thank you. And then in regards to the ICE Switch and you guys coming out reiterating a lot of interesting things and there is a lot of buzz it seems in the industry around this. Can you give us some color around how you're seeing this scale up in terms of potential revenues etcetera and will you be relying on Arrow for this in terms of distribution or are you doing this organically?

Yeah. We’re doing it organically, actually between ourselves and VPS, but Dan, do you want to talk about that, the opportunity with ICE.

Yeah. So, we think we’ll get immaterial revenues this year during Q4, particularly ones the other ICE product becomes certified, we can go to market with both of them. We are gaining traction, our interest already on the ones that we’ve press released this morning or yesterday morning. So, we think we’ll get some revenues in Q4 this year, but really we see a pickup in 2018 and then really adoption in 2019 on a larger scale. So, it’s a big opportunity, but the way we’re going to market is actually going to organic and it’s going to be lot through the partners that have it in the beta sample testing right now. They are going to be doing a lot of the ground work sales because part of the sales actually installation and that’s not something that we do. So, it’s going to be VPS and us in support of those entities. Which are again, as we talked about those five we can’t name them all. But we can again name Intel since they self-identified at the OCP conference. But those companies will be targeting their customers with regards to either their server infrastructure that they are selling to those entities. When they are doing installations, we’ll be including this a power system or it will be through other large power system providers to datacenters that will be actually doing installation sale and we’ll be selling to and through them to the end customer.

Understood.

Thank you. Our next question comes from the line of Glenn Mattson with Ladenburg. Your lines open.

Yes. Most of my questions have been answered already. But curious on just you mentioned the ICE Switch and the UL Certification that we just received, wondering why the time where that came out first at ICE BLOCK and how much longer do you expect. ICE BLOCK and you know just what the process is for that?

Sure. So, ICE Switch is a complex device, but it is - certifications for it or for that type of product exits today with UL and other agencies. The ICE BLOCK however is an entirely new certification and entirely new device. And so, any of the incorporated batteries which have a longer certification period to get through the process. So, we do respect that to come through later Q3, is in the schedule I’m hearing right now. But again, it’s mostly due to the battery, batteries require a lot of extra safety testing and work, and there is different groups within the certifying agency that certify each piece of it. And it goes through the consolidated certification as well. So, there is a three or four steps to getting that through because of the really battery -- the batteries, batteries to us complexity in power systems.

Okay. Great. That’s helpful. That’s it for me. Thanks.

Thank you. Our next question comes from the line Bill Nasgovitz with Heartland. Your line is open.

Yes, good morning. Bill for you, as we’ve been hearing about the great potential for these products and it’s quite exciting. Just have two questions really. First on the ICE BLOCK, ICE Switch area. How large is this market and what is the conservative -- what’s your conservative view of the potential share of which CUI could possibly garner? And then secondly…

I’ll let Dan address.

Secondly, the same for the energy side. What’s the size and total, the markets that you’re addressing and what’s the conservative view of, we’re talking about multi-year possible conservative share that CUI could garner?

Let me start with ICE BLOCK and let Dan handle that and I’ll come back for the energy. Go ahead Dan?

I am pulling that up, rig now. It is quite large. So, the market today, frankly it’s a multi-billion-dollar area because of power is the largest cost other than actual hardware within data centers. So, the market - hand on, I am pulling that data up right now. Where we’re at right now, there is no competing technology for it right now. So, from the standpoint of actually doing peach shaving, there isn’t competition, but there are other ways of managing power obviously in datacenter. Whether they choose to adopt it. And we are seeing the smallest - small side scale up for data center, we are seeing in the three quarters of the million-dollar opportunity for that facility. We’re seeing average data center facility about $2 million opportunity from economics to CUI revenue wise. And the largest scale one of assumes $30 million project all based on how many megawatts the facility will require us though out how big is the industry is a multibillion-dollar So how big is the industry, it’s a multi-billion-dollar opportunity or a multi-billion-dollar target market. How much of that we can land I think is going to depend on getting this out this to market as soon as we can and with the right partners, which I think we have. But the multibillion is going to take -- it’s going to be -- that's over a number of years to do the installation. But it's on an annual basis, I think we've got in the early years a few million dollars revenues, up to $15 million to $20 million in revenue and then from there it'll - I think it will ramp quite high from there provided it is adopted by the industry.

So, in terms of energy, it is -- I think we’ve been really upfront about this. We are introducing to the energy market a totally new and different way of monitoring power to value or quality of the gas in the pipeline. The first proof of concept if you’ll, was our winning of the Italian contract. The outgrowth of that is that we’re not doing it with ENGIE, but I think to give you some idea of what’s available, the DNV GL project which you can look at their project we’ve given you a link to it on our website, it’s called the Future Billing Methodology and what it’s designed to is, to allow European pipeline companies to inject low carbon, methane largely. But low carbon alternatives into the pipeline system, to do that economically and to build accurately in a small pipeline like the U.K would call for the deployment of as many as 45,000 gas metering devices. In France, that same system would deploy over 100,000 devices. Currently, there is only one device on the market that can do effectively what's needed and that is our advice. The gas coming out of that is wholly inadequate. It's too expensive. It’s too high maintenance. It require service gas. You cannot deploy thousands of gas coming out of that across any network, you just can't do it. So, what has to happen is, it has to be a device that does not use service gas, that is not $200,000, $300,000 or €100,000 to deploy and that can be deployed on a maintenance free concept. So again, I think if you look at the market without even taking into account that, if you look at what's happening in Italy, Italy if the deployment is the full 7,000 units that we expect, it will be around €120 million to €130 million project for us, that’s money to us. It will be around $280 million project totally or million-euro project totally. And that is a large pipeline company in Europe. But frankly ENGIE is bigger. Germany is about three quarters of the size and the Norwegian countries are about half the size combined. So again, if you look across Europe, you’re looking at a significant opportunity for just the Snam Rete style deployment, which is taking a large industrial users and applying accurate billing to them, which creates a significant increase in revenues for these pipeline companies because they begin actually billing the gas, they are delivering. If you multiply that out to a residential customer base, like we’re talking about with the U.K. and DNV GL. And if you look at DNV GL that certainly plans on taking that future billing methodology and has every intention of moving it across the entire future of Western Europe, you’re talking about billions of dollars in revenues. How much of that we capture, currently there is no competing technology. There is no one else can do what we do. So, anything they are going to do in that regard is going to be ours. The issue of course is, as you identified in the beginning of your question Bill, the adoption cycle is long. There is no doubt about it. You are doing with large companies, government and quasigovernmental agencies. They take long times to make decision. On the other hand, the contract that we signed as we did the Italian, are huge contracts for a company our size. And I think as we can see with that the press release, the recent press release with [the amaretto] where we borrowed, they are now borrowing €310 million to complete these projects. They are quite intent on delivering biomethane and green gases to their customers and they are willing to pay us a pretty steep price to do that, and I think we're in the forefront of that. So, I think again, for me to quantify the opportunity is difficult, other than to say, it’s very, very large. I can't say thought that, from our perspective there currently is no other technology that they can do or we can do. So, whatever they do, they have to use us. Does that answer your question?

Thank you.

Let me add to ICE opportunity, I’ve data that I can give it to you now. I had to call for the right information. So, as back on data centers, $22.8 billion market annually today and that’s with power management of the data centers is about $12.3 billion 12.3 billion of that cost each year. In North America, data consume 25,000 Megawatts annually and that’s increasing 10% to 15% per year. Really, it’s increasing because of Internet of things and just the really use of handheld devices continue to increase data being used. The ICE device can unlock 10% to 20% of power capacity and so, what we see in North America alone is a $700 million to $1.4 billion total addressable market, and then currently we’re estimating the global TAM to be about five times the size of North America. So, given that ICE can reduce CapEx by 40% to 60% an increased efficiencies and power usage and we have the exclusive rights to this device with VE software. We’re in the leading position to capture that. Right now, we’re just pushing together to market as quick as we can with our partners.

Have you publicly discussed your partners?

The only one we can name is Intel because of the self-addressing themselves at the OCP. The other ones we have not been able to NDAs. As soon as it goes to market though that'll be - should be publicly known and we can share that at that point.

Thank you.

Thank you. Our next question comes from the line of [indiscernible]. Your line is open.

Good morning. Thanks for the update. Question on the new directive to replace flow computers, does that apply across the board across Europe or is it just an Italian thing. And if it is apply you across the board, why are the utilities not moving on this.

No. It’s just Italian. I can’t give you a - really a detail answer on flow computers because we don’t do flow computers. But I know that’s part of their project.

In Europe, GRTgaz through the ENGIE connection. What’s the status on their boom and towards getting GasPT units deployed on this?

We are in discussion with them right now to put some field trial unit in with GRTgaz. We have arranged to do that actually through ENGIE, but they subsequently separated. The government recently separated them and made two different companies out of them. So, GRTgaz is no longer a part of ENGIE. So, because of that we have to do a different application process with this new group with group within GRTgaz, who we expect to move forward. They won’t need to do any more testing. They'll accept the testing with two times just as ENGIE did. But we do have to go through a different application process because they are no longer a part of ENGIE.

So, do you have a sense on the timeline for those bids or what’s the…

It’s not a bid. They certainly have something in the ground this year, I just don’t know when.

I’ll ask a question, in terms of, I guess longer running products that have big potential, you've worked with LNG customers on the throb for couple of years now, maybe bit more than some instances. What’s the update? Are anybody showing interest and if so why or if not why?

We have significant interest. We’re still delivering product into Gorgon for example, down in Australia. We have had numbers included now from some very large producers and transporters as a result of the test that we did with Southwest Research. We had - to be frank with you, some of the top - in fact four of the top five gas producers and transporters in the world, who present at that Southwest Research facility, when the test were conducted. And we have in fact seen a significant amount of interest. It’s just does not yet result in a purchase orders. Again, these are big companies, they take time to move. There is no two ways about it. The other thing that when you do it with LNG terminals especially, for example in Gorgon, there is a number of different projects were involved in. But these projects generally have to occur when they have scheduled plant shutdowns. And those shutdowns occur, generally speaking on an annualized basis. So, for example, we might be doing with projects in Gorgon now that won't be seen to come to provision till 2018 when the plant shutdown occurs, the scheduled plant shutdown in 2018, or for that matter in 2019 because they do plan several years ahead. But again, there is definitely significantly interest.

Along those lines, we’re in early stages with companies that are looking to build new facilities of well, from LNG facilities to ethylene plant. But those are from the time they start planning those, it’s a four to five-year process before they start construction, if they do start construction. So, we’re front of those opportunities, that’s a big reason why we opened up our Houston office in 2015 to get in front of those guys. And we are actively doing that. But it’s not a matter of jumping and getting right to ahead of the line. We got to be part of a CapEx program and project whether it’s new build or a shutdown in installation for upgrades. So, the team is front of very major pipelines and producers for those purposes.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Breard with Hodges Capital. Your line is open.

Hello, Mike.

How are you?

Doing good.

In the South Texas, you sold a product to -- I believe it’s a ethylene plant last fall and there is six-month test period ought to be over with, have you take more from there?

We have not and actually we've made soft inquiries. You're absolutely right. They were supposed to tell something end of June, first of July. We have not -- I guess the best thing I can tell you is that, no news is good news. If there've been a problem with that, I know we would have heard. We have simply not gotten anything formal back from. We have done some back channel, in essence increase the- we know that the product has been installed. We know that it is done very well. But again, it’s the kind of customer as you might imagine, that's very large and they're going to talk as when they want to talk to us, but our understanding is that it's worked and worked well. We just have not heard anything bad from them yet. Just as an aside, we are pursuing other ethylene opportunities. We have got a number of different opportunities in that regard and have some project that we think we'll be announcing in the next while. So, we have some good -- we've had some success getting in front of people.

Okay. Thank you.

Thank you. And I am showing no further questions at this time. I'd like to turn the call back to Mr. Clough for closing remarks.

Thank you, Kelly. In conclusion, I just want to thank everybody for attending the conference this morning. As always, Dan and I are available for follow-up. If you would like to talk to us, please contain Sanjay at the scheduled time to speak. Thank you again. I look forward to speaking with all of you -- to all of you of any of you get a chance at our upcoming conference presentation, and obviously at our conference call next quarter. Thank you for your continued support and that should end the call Kelly.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a wonderful day.