Orbital Infrastructure Group, Inc. (OIG) Q3 2017 Earnings Call Transcript

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

Eric Stine - Craig-Hallum Rob Brown - Lake Street Capital Jon Fisher - Dougherty & Company Glenn Mattson - Ladenburg Thalmann Mike Wallace - White Pine Capital Jeff Bernstein - Cowen & Company

Good day, ladies and gentlemen, and welcome to CUI Global's Third Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will follow at that time. I’d now like to introduce your host for today's conference, Mr. Sanjay Hurry, Investor Relations. Sir, please go ahead.

Thank you, Liz. Good morning, and welcome to CUI Global's third 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 & Presentations page on the Investor Relations section of the CUI Global Web site. With us on the call this morning 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 third quarter and to provide you with management's perspective for the balance 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 November 23. You may also access the archived webcast and accompanying PowerPoint at any time on the Investor Relations section of the CUI Global Web site. 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 the 8th Annual Craig-Hallum Alpha Select Conference in New York City on November 16th. To schedule a one-on-one at the conference, please contact your Craig-Hallum representative or call my office at 212-838-3777. With that, I'd like to hand over the call to William Clough, Chief Executive Officer. Good morning, Bill.

Thank you, Sanjay. Good morning everyone and thank you for joining us on our fiscal third quarter 2017 results conference call. We reported third quarter results this morning in line with our preliminary financial results for the quarter announced on October 16. As part of that announcement, we launched a public offering of common stock to close on October 23 and generated net proceeds of approximately $19 million to CUI Global. Before delving into our results for the third quarter, I’d like to address certain aspects regarding the capital raise. In the spring of 2016, we were awarded the contract for a re-metering project in Italy for Snam Rete Gas. The project calls for the deployment of 3,300 of our GasPT units over three years. In February 2016, we received an initial purchase order of 400 GasPT units to be delivered at a rate of 50 per month. We delivered the 400 units by October of that year and anticipate the receipt of a second purchase order for the remaining 2,900 units to be delivered at a rate of 100 units per month. Delivering GasPT units at 50 units per month gave us an improved net loss of $0.02 per share and positive operating cash flow of approximately $1.5 million for the third quarter of 2016. At that time, the electronics business had just started to move into an up cycle giving us some lift in our Power segment which was approximately two-thirds of our consolidated results. At 50 GasPT units a month, we were almost breakeven on a net income basis and were already generating cash from operations. 100 units per month would make the Energy segment profitable. However, as most of you know, in October of 2016, the regulatory body in Italy suspended Snam Rete Gas project due to a tariff issue completely unrelated to our GasPT. Absent a second purchase order, cash burn increased because we continued to execute on our growth strategy to expand the opportunities set for our Energy products. To close the gap, we did an order flow for GasPT units picked up. We evaluated sources of capital, including a sale and leaseback of our headquarters in Oregon and an equity raise. In the end, we determined that the most efficient, logical and economical avenue for us was an equity raise. The capital raise gives us a bridge to profitability to be derived from a second Snam Rete purchase order, incremental GasPT opportunities from ENGIE and/or others and continued growth in our Power segment. The raise also allowed us to pay down our line of credit and significantly strengthen our balance sheet. Our distribution partner, Socrate, has resumed deployment of our GasPT in Italy and we expect they will work down the 350 units in inventory by the end of the year, after which Snam is expected to place a second purchase order. Now, let me briefly review the results of the third quarter before turning the call over to Dan Ford, our Chief Financial Officer, for a more detailed review. I’ll conclude the call with an update on our opportunity set as we approach 2018. Our financial results for the third quarter reflect continued year-over-year growth in our Power and Electromechanical segment and the timing of orders in our Energy segment that mask a substantial expansion of business development activity over the prior year. Revenue and EBITDA were also negatively affected by Hurricane Harvey which shuttered our facility in Houston for much of September. I’ll start with the performance of our Power segment. Revenue in our Power and Electromechanical segment increased approximately 3% year-over-year and decreased about 8% sequentially. Regarding our distribution channel, we continued to see strong backlog and point of sale results from all of our channel partners. Our direct OEM business remains strong with design activity continuing with a broad mix across our product offering. On a sequential basis, we experienced seasonality inherent in the electronics industry with the inventory build ups peaking in the second quarter and being down over the balance of the year. Power segment backlog was a robust $18.1 million at quarter end. In our Energy segment, revenues declined 28% year-over-year reflecting the suspension of the Italian project and a broader base of opportunities that is yet to convert to contracts. We know our GasPT is a game-changer in the marketplace and faster, more accurate and much less costly alternative to the legacy and more costly gas chromatographs. We also know these prospective customers do not move quickly even for game-changing technologies such as ours. They are methodical in their decision-making process but they are also able to commit in a very substantial way as Snam Rete did. We have been moving to replicate that success with other gas operators. The Energy segment’s performance was also impacted by Hurricane Harvey. Due to the flooding and other damage, we had to suspend work on some of our integration projects and some customers could not accept delivery in the quarter. Our facility was up and running again in a matter of weeks. At quarter end, Energy backlog stood at $13.7 million. Now, let me turn the call over to Dan Ford, our CFO, so he can run through our financial results in more detail. Dan?

Thank you, Bill. I'll start with a review of our financial results for the third quarter of 2017 and recap our balance sheet highlights reflecting in light of our recent public offering. Total revenues were $21.8 million, a decrease of 6% from $23.3 million in the third quarter of 2016, reflecting a $500,000 increase in revenues from the Power and Electromechanical segment, offset by $2 million in lower revenue in our Energy segment. Q3 Power and Electromechanical segment revenues were $16.7 million, a 3% increase year-over-year. On a sequential basis, Power and Electromechanical segment revenues decreased 8% reflecting normal seasonality in the industry. The electronics market remains in an up cycle and the broader base of business we have established over the past several years with new distribution partners, new design wins and new product introductions gives us a strong foundation for long-term growth within this segment. In addition, we have seen an investment from the distribution partners in inventory due to an industry-wide demand for more inventory ahead of what the industry projects to be an increased lead-time schedules. To-date, our lead times have not flipped for our product lines. As Bill noted, our direct OEM business remains strong and we are seeing growth areas to those customers, particularly through our DC to BC and powered after lines [ph]. Energy segment revenues were $5.1 million, a decrease of 28% year-on-year due to the timing of customer project delivery schedules, the halt of deliveries of our GasPT units to Snam Rete in Italy and the impact and delays associated with Hurricane Harvey. Consolidated backlog was $31.8 million at quarter end comprised of $18.1 million for the Power and Electromechanical segment that is flat with last year and $13.7 million for the Energy segment compared to $13.4 million a year ago. As a reminder, Energy backlog this year did not include any GasPTs for the Italian project. Rather the increase in Energy’s backlog is attributable to integration orders at both our UK and Houston facilities. Q3 consolidated cost of revenues as a percentage of revenue increased to 66% from 63% last year. For the nine months ended September 30, the consolidated cost of revenues as a percentage of revenue increased to 66% from 62% in the prior year comparable period. This percentage varies based upon the product and project mix within both of our business segments, as well as contract labor costs within our Energy segment and foreign exchange rates. During Q3, the Power and Electromechanical segment cost of revenues as a percentage of revenue was 66% as compared to 65% in the prior year third quarter. In our Energy segment, cost of revenues as a percentage of revenue for the third quarter of 2017 was 66% compared to 60% in the prior year period. For the nine months ended September 30, the Power and Electromechanical segment cost of revenues as a percentage of revenue was 66% compared to 64% in the prior year comparable period. During the nine months ended September 30, the Energy segment cost of revenues as a percentage of revenue was 65% versus 56% for the nine months ended 2016. The Power and Electromechanical segment remained generally consistent for both the three and nine months ended with the changes attributable primarily to product mix. The increase in the cost of revenues as a percentage of revenue for the Energy segment during the three and nine months ended September 30 is a result of less favorable product mix, due to the aforementioned temporary halt of deliveries to our customer in Italy of higher margin technology-based products. Consolidated gross profit in the third quarter was $7.4 million for a 34% margin versus $8.6 million for a 37% margin in the prior year. For the third quarter, our Power and Electromechanical, Energy segments both generated gross profit margins of 34%. This compares to 36% for the Power and Electromechanical segment and 40% for the Energy segment in the year ago period. For the nine months ended September 30, consolidated gross profit was $21.3 million for a 34% margin compared to $25.8 million for a margin of 39% in the prior year. The Power and Electromechanical segment generated gross profit margins of 34% versus 36% last year and the Energy segment generated gross profit margins of 35% compared to 44% last year. We remain focused on improving margins within our Power segment through increasing efficiencies and controlling variable costs at our Canadian manufacturing facility and through continued new product introductions to the Power and Electromechanical marketplace. Through September 30, CUI has introduced more than 900 new products in this segment. Our Energy segment experiences improved margins when it sells more of its leading technology solutions, including GasPT and VE sampling systems which offset lower margin integration type project work. During the third quarter and year-to-date, our Energy segment revenue was more heavily weighted to integration work. We expect margins to improve in our Energy segment upon resumption of GasPT deliveries to the project in Italy and as other GasPT NVE projects begin. During the three and nine months ended September 30, 2017, SG&A was generally flat and $0.8 million lower, respectively, compared to the prior year comparative periods. The decrease in the nine-month period of $0.8 million was due to severance costs incurred in the first nine months of 2016 in the Power and Electromechanical segment for the transition of the R&D team to CUI Canada and for various positions with the Energy segment. In addition, the company began implementing various cost saving measures in Q2 2017 which provided some benefits in Q2 and Q3 and are expected to further improve SG&A going forward. These benefits are partially offset by a $0.2 million increase in advertising costs with the Energy segment during the nine months ended September 30. SG&A as a percentage of revenue increased slightly to 38% from 35% of total revenue during the three-month period ended September 30, 2017 and increased slightly to 41% from 39% for the nine-month period. Both percentage increases are primarily attributable to the decrease in revenues as compared to the prior year, as discussed previously. EBITDA loss for Q3 was $1.2 million compared to EBITDA of $0.1 million last year. For the nine months ended September 30, EBITDA loss was $5.4 million compared to an EBITDA loss of $2.1 million in the same period last year. Net loss for Q3 was $1.9 million or $0.09 per share compared to a net loss of $0.5 million or $0.02 per share last year. For the nine months ended September 30, net loss was $7.3 million or $0.35 per share compared to a net loss of $4.7 million or $0.22 per share in the same period last year. Cash and cash equivalents stood at $0.8 million at September 30, 2017, a decrease of $3.9 million from December 31, 2016. On October 23, 2017, we closed on an underwritten public offering of approximately 7.4 million shares at an offering price of $2.80 per share including approximately 964,000 shares to cover the underwriters’ over-allotments. A portion of the proceeds were utilized to pay down the outstanding balance on our line of credit. Finally, with funds raised from the public offering, the imperative to access other sources of capital has moderated. The sale and leaseback of our Oregon facility remains a fiscally prudent option but one which we now have the latitude to negotiate from a position of strength. This concludes my prepared remarks. I will now turn the call back to Bill.

Thank you, Dan. As we alluded the resumption of the Italian project, we built demand for our Energy products, especially our GasPT across a broader base of prospective customers and geographies, so much so that Snam Rete is today but one of many opportunities ahead of us. From ENGIE and the UK Future Billing Methodology project, the DNV GL, to fiscal monitoring in North America and process control with a global leader in the gas turbine power generation market, each is a testament to a product set that is unmatched in the marketplace. I will focus the balance of my prepared remarks on those opportunities likely to positively affect our financial performance in the near term across both of our business segments. Starting with our Energy segment and Snam Rete, the timing of a second purchase order will be driven by the pace of deployment of the balance of the initial 400 GasPT units. What we know is that Snam Rete is installing the units today and has committed to moving forward with GasPT as part of their re-metering project. For those new to the CUI Global story, I’ll point out that our 3,300-unit contract is fully funded and Snam Rete reaffirmed this commitment to the re-metering project as part of the €310 million loan it secured over the summer to fund part of its €600 million capital infrastructure plan. Our contract covers the 3,300 largest Snam Rete offtakes, but Snam Rete has a total of nearly 7,000 offtakes on which our GasPT could be ultimately deployed. Staying in Europe, we submitted a proposal for 1,000 GasPT units [indiscernible] ENGIE integration ARM for use in their new biomethane-to-grid skids. The single source tender is closed and ENGIE intends to move forward with the build out of biomethane terminals next year. We also continued to progress one of our largest opportunities for the GasPT solution, the Future Billing Methodology or FBM project in the UK. UK’s regulatory agency OFGEM recently approved the Stage 2 Gate Report for the FBM moving the project ahead to Phase 2 while confirming the use of our GasPT as the selected CV analyzer. This positions us to incur [ph] significant research and development contract to redesign our GasPT into a deployable product for this project and develop an implementation format for the rollout of the redesigned solution to the UK gas network’s 23 million users. To remind you, this could lead to the deployment of as many as 45,000 GasPT units within the UK. I should add that ENGIE is closely following the UK’s FBM project with an eye towards replicating it in France with an initial deployment of as many as 100,000 units. In North America, we are moving to replicate GasPT’s success in the fiscal monitoring solution at Snam Rete with gas operators in this geography. We’re delivering field trial units to a gas pipeline company based in Canada that will initiate a 45 to 60-day testing period. Upon conclusion of this trail period, we expect our units to receive certification by measurement in Canada which will then pave the way for negotiations on Snam Rete like deployment with this operator. This template is being replicated with other gas industry participants in different geographies that operates incremental sales opportunities for the GasPT. Turning to our VE technology, we are seeing demand build for our sampling probes and systems across a broad array of applications, from thermal wells to trace element detection. In several instances, we have been written into the specs while in others we are now a preferred vendor. This is a nascent opportunity for us and we are exceeding the market with customers, with the ability to scale their orders is the confidence in our technology build. In that vein, we were recently informed that we will soon receive a follow-on order for our VE sampling system for a second ethylene plant for delivery in the first quarter. This bodes well for future orders with this provider across all of their other plants. Process control is another application suited to our GasPT and to that end we have been working with one of the world’s largest gas-fired turbine manufacturers to certify the GasPT for its turbine. The manufacturer has completed a total of 5,500 hours out of an 8,000 hour testing period which we now expect to conclude by year end. Once complete they will put CUI Global on their preferred vendor list and will certify GasPT and then standardized device to use for process control in lieu of the gas chromatograph. Certification enables us to pursue the retrofit market for these turbines and to be included on new turbine sales. Switching gears from Energy product sales to integration projects, we are seeing increased activity in Houston because of Hurricane Harvey. We’re also starting to benefit from our growing reputation in North America for project excellence, reliable performance in quality engineering. This reputation in our results are translating to more work, including the addition of two new leading energy producers to our client list already in the fourth quarter. We are currently moving to a new much larger facility that allows for crane access so that we can take on much bigger projects including those to repair the damage done in the gas network from Hurricane Harvey. As an aside, we’ll be hosting our upcoming annual meeting of shareholders at the new facility in Houston. So I encourage everyone to join us there on December 1st. Turning to our Power and Electromechanical segment, during October we received a substantial order for approximately 1,000 ICE switches to be delivered in the first quarter of 2018. This order reaffirms our belief that the ICE technology is a revolutionary approach to data center power utilization and [indiscernible] perhaps for a faster rollout than previously anticipated. ICE switch is one half of the ICE solution. We expect the ICE block portion of the technology to receive UL and TUV certification by year-end. ICE technology revenue opportunities are supplemental to the continued strength in our core direct OEM business and distribution channel business. In conclusion, our capital raise enabled us to replenish the balance sheet and move towards profitability without leaving a step in executing on our growth strategy. We’ve expanded our opportunity set beyond Snam Rete and across both our segments grounded in our market changing technologies and growing market adoption. It has taken longer than anticipated but we remain steadfast in our pursuit of greater shareholder value promised by our unique technology portfolio. 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 now open.

Hi, Bill. Hi, Dan.

Hi, Eric.

Just wanted to start with Snam Rete and obviously the deployments have started again. Any thoughts on or any color you can provide on how many of the remaining 350 had been installed? And then also, is there a way we should think about how many can be done per month just trying to get at chances that it is done by the end of the year and also timing of that potential follow on?

I’m actually in Italy right now attending a Shipper’s Day event with Snam and they’re just gearing up. Frankly, it would be a guess for me to say what they’ll be doing as they get going. They’ve just started out. I think they’ve taken a lot of 25 or 30, but I’m not sure how many of those have been installed. But I know they are starting to move forward with installations. I think give me another 30 days when I start to see how they rollout the second delivery and we’ll start to see how they’re moving forward. But I think – it’s not Snam that’s doing it, it’s a third-party contractor. They are paid by the installation. So they have every incentive to install quicker rather than slower. I will say this Shipper’s Day is a big deal for them, it’s their 75th anniversary; 75 years at business. And the keynote address was given by their Chairman by the name of Carlo Malacarne. And he started off with three bullet points about how they’re committed to investing in decarbonizing the grid and moving towards a biomethane solution. So I think for us at least I think it’s going to be a long and great profitable relationship with Snam Rete. They’ve got currently here about $4.75 billion to invest in infrastructure over the next three years, so they’re quite committed to building out, mirroring in the biomethane which of course are two high points. So again, with that in mind, as it develops, I’ll certainly let people know the rollouts coming.

Right. And I know timing of that follow-on, that’s a little uncertain but it does sound like you got high level confidence in having the remaining 350 in place by the end of the year. Is that fair?

Yes, that’s very fair. I see nothing that says different right now.

Okay. I’m interested in the commentary on the ethylene opportunity, the second order. Just to confirm you said in the first quarter, you anticipate an order for a second plant? And then what is key to get through the first one, any thoughts on what this customer is thinking in terms of timing on that second plant? Is it still something where you think they can move across their 50 plus plants with this technology?

Yes, I think the bad news is they haven’t told us anything although they’re not obligated. I think we’ve talked about this. They’re not obligated to tell us anything. They are a very large customer. They had agreed to give us what they’re results were and they just haven’t done that yet. We press them, but we don’t have really any leverage over that. But the fact that they’ve reordered to now do a second plant tells me that they’re obviously having pretty good results. These plants are huge. They are plants that shutdown generally speaking once or twice a year for retrofit of various different elements within the plant. And this one we’ve been told will be shutting down in the first quarter. So we’re putting together a set of probes for that plant to be installed during that shutdown. I don’t have any idea as to when or if they’re going to roll them out across their entire fleet of plants. It is over 50 plants. But again, I think the fact that we’ve gotten a follow-up order tells me that they’re seeing good results from what they’ve got.

Yes, okay, good to hear on that. And last one and just on the OpEx side, clearly you’ve little downtick this quarter. You didn’t get the full impact of some of the steps you’ve taken. I know it’s a key objective. How should we think about that I guess fourth quarter but more importantly kind of a sustainable level in 2018?

Correct. Dan, you want to --

Yes. So Q3 to Q3, it’s not a whole lot changed year-over-year in comparison. But from Q1 and Q2, run rates were down considerably. We’re down 500,000 from Q2 and about 350,000 from Q1. So those costs balance have started taking a – making an effect on the company and they’re going to continue to keep improving the results from that direction. I think where we’re at for Q4 is probably going to be consistent with Q3 from a share standpoint and from D&A and R&D as well. So I think those numbers are going to be fairly consistent through Q4.

And then – 2018, is it something where – because you did have some one-time cost in this quarter that you called out. Is it something where there can be a little bit lower levels as you look to '18?

There could be some improvements. That’s going to depend on how the thing shape up over the next couple of months.

Okay. Thank you.

I think where we’re at; it’s a safe number to be at.

Got it. Thanks a lot.

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

Good morning.

Hi, Rob.

Just wanted to follow up on your – first on your ENGIE comments. You talked about some biogas skids. What’s sort of the opportunity set in ENGIE and how is that developing?

Yes, they’re committed to rolling out a 1,000 biomethane-to-grid skids over the next two to three years. That’s the proposal. They want to go very strong into the biomethane market. And in each of those skids there are planned – before we got involved was for two gas chromatographs; one to measure Calorific Value quality and one to measure odorization. The one to measure odorization we don’t do that. So that will remain. But what they’ve opted to do is replace the quality analyzer with our analyzer. It was a single source tender that they put out. We were the only ones in the spec for that portion of the skid. So we expect to be put into that portion of the skid. We don’t have any awareness to when they’re going to proceed other than the contract closed June 24. Generally speaking, European Union contracts take a much – so somewhere between 90 and 120 days to let after the tender closes, so that would be sometime before the end of the year. To disseminate, it closed June 24, which it did. And I think they are seeing a rollout sometime in 2018. But again, we’ll know more about that build schedule when they actually release the contract. We actually go into negotiations and that hasn’t happened yet.

Okay. Thank you. That’s good color. And then the gas turbine opportunity like you said by year-end, the customer would have the hours in place. Can you give us a sense of how that rolls out? What’s sort of the channels to market and timing of order flow into '18?

Yes, we were actually a little disappointed about that. If you recall from previous calls, we had assumed and hoped that this would be done by the end of October. We began the test – 8,000 hours is actually 333 days. So we would have expected it to happen – it happened ultimately which is to show how hiccups can occur in these things. The customer ended up running a noncompliant gas through the device for a period of about 1,000 hours, almost 1,500 I guess at the end of the day. They saw – as we would expect, they saw some deviation. They called our techs out there. They ended up going out to meet with them in Italy for about a week and convinced them that in fact they had been running the wrong gas through the device for this period of time. Due to that rather than starting the test over, which we insisted they not do, they simply eliminated roughly 1,500 hours that had been this inappropriate gap and one is [ph] put it back to 5,000 hours of completed testing. We’ve now continued forward and then we’ve now done another around 500 or 800 hours. So we’re now down to about I think somewhere around 2,200 hours to go. So that’s why I’m still convinced that it will be by the end of the year. They have not seen a single hiccup other than the one they’ve put the out of compliance gas through there. And even then it wasn’t a significant change. It’s just the device drifted more than they wanted it to. But again, I think I’m quite confident that at the end of the 8,000 hours, the machine has performed flawlessly and we will see a joint press release where we will become a vendor. At that point, they’ve asked us for an initial call out purchase order between 20 and 30 units which is I think covered new sales for some period of time. And we will be going aggressively after the retrofit market which is as many as 26,000, 27,000 machines out there in the marketplace and we feel we can attack and these are machines that we can run much more efficiently, much more effectively and I think we can reduce fuel usage by somewhere between 4% and 8%. So that’s going to be a huge savings for those operators. But we can’t do that until we have the certifications. So that’s kind of – I hope that kind of explains where we’re at.

It’s a good review. Thank you very much. I’ll turn it over.

Sure. Thanks, Rob.

Our next question comes from the line of Jon Fisher with Dougherty. Your line is now open.

Thank you. Good morning. I wanted to go back on the SG&A comment. As you explore some of these newer opportunities on the Energy side looking out to next year, I guess what should we expect SG&A spend to look like next year as you pursue and develop some of these opportunities? Can you hold it flat to down or should we expect some sort of meaningful increase?

No, we believe we can hold it flat to down. And I would for my own purposes I would say flat at this stage given the cuts we’ve already done this year. And the reason I can firmly say that is the team that we have in place targeting these large opportunities is already managing those projects across North America, Asia and Europe. So they’ve got the bandwidth to keep doing that. It’s the same team that supported the business Snam Rete, ENGIE and National Grid and so on. So I don’t see that group needing to significantly change in order to manage that. So SG&A isn’t expected to move to support those opportunities. And similarly with the ICE technology, it’s setup similarly to capitalize on the infrastructure and teams we already have in place from the power side also.

Okay. Thank you. And then looking at the power and electrical segment, each of the last two years we’ve seen a pretty significant seasonal step down in revenues from that segment. Would you expect a significant step down this year or as demand in the strong backlog, will that moderate the seasonal sequential roll off in revenues there?

Seasonality in Q4 is an ongoing event. That’s going to consistent even to layer in. Q4 and Q1 always have that impact. Q4 [indiscernible] inventory is in Q2 and Q3 for production and delivery of their own products during the fourth quarter typically and then Q1 is always a little bit lighter following the holiday lag and then also the impact from Chinese New Year. So those impacts we always reflect in our own planning. And I would still expect the same for Q4 this year also.

And then looking out to next year on power and electrical, are you from a demand standpoint given the backlogs and the demand that you’re experiencing now, do you think that’s sustainable through next year or are you expecting some type of slowdown in the demand environment next year?

Based on what we’re seeing right now from a design win standpoint from channel sell-through and distribution and what our direct – already customers in production doing, I wouldn’t expect a slowdown also based on what the industry is forecasting. They industry is really actually very bullish. The one thing they are doing though is building up inventory levels to some degree ahead of expected shortages for certain components. So that’s the only thing that we’re watching to keep an eye on to see how that impacts our own production ability. To-date, we have not had any delays or extended lead times of our products yet. But that’s something that we’re going to continue to watch that will impact how the industry sales flow. But right now we’re very up on what the line is going to do from a continuing disrupt pattern into 2018.

Thank you.

Thanks.

[Operator Instructions]. Our next question comes from the line of Glenn Mattson with Ladenburg Thalmann. Your line is now open.

Hi, Glenn.

Good morning. Hi. I missed what you said on the ICE Block that there would be UL certification by year-end, but what are you guys expecting – how quick can you turn that into actual orders and is it looking to '18?

If you were to ask me this just a little awhile ago, I’d have said that sometime in mid-'18. But quite surprisingly and I think you probably saw the press release, quite surprisingly we almost immediately received an order for almost 1,000 ICE switches from one of our large Asian partners right after the ICE switch received certification. Now they can buy an ICE switch – I’m sorry, they could buy a switch through any number of things. An ICE switch is needed to operate the ICE Block technology. So I have to assume that as soon as we have certification on that ICE Block, the same Asian customer is going to buy a similar number of ICE blocks. Obviously the MSRP is much higher on the ICE Block. The ICE switch is between $700 and $1,000. The ICE Block is between $4,500 and $5,500. So again, a much bigger purchase and it indicates to me at least that certainly this customer has been very satisfied with the results and is rolling out the set of power controls across a large part of their system. So it’s hard to say. But I would still take a conservative approach and say that we don’t believe they’ll be significant revenues from the ICE Block until sometime second, maybe even in the third quarter of 2018. But on the other hand, I can say this development with the ICE switch was quite surprising and that will show how people are looking for this.

Okay. Thanks. And is there an idea – do you know what the Energy segment would have done without the hurricane disruptions? How big of an impact was that?

It was probably between 0.5 million and 1 million in revenue. And then it was also an impact on bookings during the period as well. So it was an across the board impact.

Okay.

The upside is, I would just add, that we have now moved into our new facilities. We’ve had three major customers come through and order that solely. And in each case because of the size of the new facility and their ability to move the projects that need cranes, all three of those have offered us projects that we would not otherwise have gotten. And then in two of those three cases, those projects are repair projects, so damage done by the hurricane. So if there’s a silver lining to this, we are already seeing projects develop that would not have developed without the hurricane. So I think in the future it may be positive when it comes to revenues and earnings. But again, looking backwards, it was definitely a negative.

Lastly on the GasPT, of the 400 units that have been shipped, where do those reside currently? Does Snam Rete have them?

50 of them have been installed – approximately 50 of them have been installed. About I believe 25 or 30 more have been delivered to the third-party installer. And then the other three, three and a quarter or something around that, are at Socrate at our distributor’s storage facility in Milan.

Okay. And I just wonder about the pace of deployment. If they’re just starting now and it’s mid-November, and I guess last year when the project was in full steam in the middle of the year, they only installed 50 over a span of two quarters. I’m just kind of thinking about how far this bleeds into 2018 before you start to see a new order. Maybe some data on how long of a lead time they need to give you for you to produce the units and deliver them?

Yes, I think we talked about that earlier but just to recap. They never got the full steam. They were stopped after installing about 50 units and there was never any full steam. They stopped. They took delivery on all 400 because they issued a purchase order and they had no right not to take it. So the 400 were delivered. We got paid for the 400. But they were stopped short of ever getting up to full speed. So they’ve never been up to full speed. What I talked about earlier is we’ve seen these first group of 25 or 30 delivered to them. I don’t know how fast they’re installing them and I probably won’t know until I see the second order come through or the second demand come through. But the third party vendor who is doing the installation is paid on a per installation basis. So I know that they have every intent to move forward as quickly as possible. I just don’t know at this point what that pace is. But at this point we believe they will be issuing a purchase order sometime toward the end of the year and the purchase order – the lead time, just so you know, because they intend to issue a purchase order when they are down to 100 or less in inventory. So they actually have to get through another 220, 230 units and then they will order. That’s what they’ve told us.

Okay, great. That’s it for me. Thanks.

All right, thanks.

We have a follow-up question from the line of Jon Fisher. Your line is now open.

Thank you. Just following up on the hurricane impact. The delayed orders or delayed business from customers that were impacted by the hurricanes, what kind of lingering impact into fourth quarter or maybe even into next year should we expect, or were the delays such that the turnaround times pretty quickly and they can get back to business with you right in the fourth quarter?

Yes, coming back – go ahead, Dan.

They’ve been coming back. Houston is a resilient community. They were already doing conferences the very week after the hurricane at their convention center of a major gas conference. So they’re resilient. From what is done, it slowed our ability to do integration work about a month’s period as well as to give the customers schedules for when they are taking delivery. So it was really an impact for Q3 primarily. They’ve already picked back up. We’ve seen an increase in ordering already through October. We’ve also seen one of the other things that impacted was there were several projects that customers had us put ahead of integration which was fixing things that had gotten drowned during the flooding. And so that delayed new integration work and had us go and do new service and repair work for them to get them up and running with what they already had. So we think the primary impact of it was in the Q3 period and that’s finished. We’re seeing opportunities now with new projects coming on both from replacements and just continue to increase our work with them as we’ve proven ourselves down there.

Thank you.

Sure.

Our next question comes from the line of Mike Wallace with White Pine Capital. Your line is now open.

Good morning, Bill. Good morning, Dan. How are you guys doing?

Good. How are you?

Good. A couple of questions, first on the ICE Block. What gives you confidence we’re going to get to UL approval by year-end? And then the secondary question to that, can you give us some idea of the economics around the ICE switch and block combination?

I’ll answer the UL and then I’ll toss to Dan for the economics. We’re confident on the certification only because of what we hear from our technical people. The part that’s the most difficult as I understand it for the certification is the battery portion of it. It looks like we’re moving with great progress through that. That’s from our technical people. We have passed a couple of the first phases of the certification testing. And the other issue that they’re doing is, some of the criteria is actually being rewritten. There’s nothing really like what we’re doing. It’s not a battery backup as you know. It’s really more of hedging or leveraging of the battery power. But again, this is coming from our technical people. They feel that things are moving forward efficiently and they’re quite confident they’re going to get it by year’s end. But it comes from them, not from – certainly not from UL or anyone there. But I think my technical people are pretty sharp on this and they’re quite convinced. Then as far as the economics are concerned, Dan, do you want to take that?

Sure. What we’re targeting is mid-30s gross margin on this including a piece of the software company when we’re up and running at full speed. And that’s based on the price points that Bill mentioned earlier, Snam Rete gave $1,000 for the switch and $4,500 to $5,500 for the ICE Block and the pricing on those varies depending on the configurations and requirements there. That’s the general economics there. The key though for the company on those two technologies is they’re both being built at our CUI Canada facility and because of that, that’s going to continue to improve our efficiencies out of that facility, increase our turnover and further covering our overhead cost that go into housing that factory and place. So it’s going to have a real compounding improving effect on the whole organization.

Is it one switch to one block or can one switch control several blocks?

It’s one to one; one switch per block. And then the block can’t run without a switch but the switch can do other things without the block. But each block requires a switch.

All right. And can you guys talk a little bit about the manufacturing plant, you mentioned it just briefly there for the ICE block and switch, but also for the GasPT device? As you look out into '18, any parts or any other issues that you see that you’re worried about?

From the GasPT perspective, there’s really nothing exotic about the device. It has no exotic materials, it has no exotic pieces. The long lead time items really are machine parts that have to get done, but nothing that requires any unusual acquisition or procurement. To create efficiencies we have now began producing the boxes for the GasPTi and the GasPT boxed devices, not the device that the Italians are using. We’re creating those boxes in Houston because of efficiencies in cost. It’s much cheaper to brew [ph] frankly in the U.S. than it is in Europe or in the UK. We are still producing the GasPT in our UK facility. We’ve got a very nice, very efficient operation going now. We, as I mentioned, can produce and calibrate approaching now 200, 250 a month if we need it. We have produced the backlog, so we’re ready to move forward immediately on the Snam Rete order once we get it. And so again I think we’re quite confident that we have a real handle on production. It would be very easy to ramp up by simply adding more calibration units, which we can do quite quickly. They’re not particularly expensive. They’re about $60,000 a piece, so it’s not a big CapEx expansion, simply something we can go out and get. So again, I think we’re in pretty good shape. We are pretty happy with that. As far as ICE block and ICE switch, Dan, do you want to talk a little bit about that?

Sure. The key on that is really lead times on certain components which we’re already been planning around. And so the more insight we get from our customers about the volumes and the schedules they’re going to have, the better we can plan ahead. But that’s already being factored into the production plant and the procurement team’s plans. So we’re keeping an eye on that and managing that with our vendor relationships also which we keep close.

Any unique parts in the block or the switch that concern you?

They’re not necessarily unique, inherently unique. The battery packs that we’ve got getting sourced from a company that we’ve worked with closely to get them exactly how we want the battery and then the battery pack itself put together. The other components though that goes into it are all – the components themselves are fairly standard. It’s a matter of how they get put together in software behind them and a design of the board itself. So nothing that is like a rare component or anything like that that’s going to be an issue necessarily.

Okay. Are your suppliers ready to go?

Yes.

Yes, most definitely.

Okay. How many GasPT devices do you have in inventory that you could ship, start shipping immediately?

I think we have just under 200 and we will have --

200 ready to go, okay.

Yes, ready to go. I think we’re planning to have a total of 400 ready to go at the end of the year so that we can ship – we can drop-ship those immediately once they’re ordered.

Then you [indiscernible] on shipment or accepted from the other side?

Yes, correct. But again, understand that the last time they did this, they took 50 a month. This time they’re intending to take 100 a month, so we wouldn’t drop-ship the whole – the purchase order would be for 400 or more because that’s their price break. But the shipments would be 100 a month.

100 a month, okay. We’ve already flushed the cost through to produce those I assume right?

Yes, the value is in inventory right now.

Okay. And then the issue around this noncompliant gas, can you give us a little more color on that and how it was detected?

Yes, they were running a gas through that, as I understand that had a very, very high CO2 content that was out of spec for any – what would be defined as natural gas. So it was not a natural gas. It was something else. Why they had run it through, I have no idea. How it happened, I have no idea. But what happened is we started getting reports from that of a drip. They were seeing a drip in the machine. So we tried various remote fixes and were unable to correct it. So I actually sent a technical team out there. They got out there, were in the process of attempting to rewire, do some other things they thought might be the problem. When they discovered, hey, wait a minute, the gas that you’re putting through, that’s not one of the natural – that’s not a natural gas, number one. And secondly, it’s not one of the gases we’re designed to test with. The Italians – I never got an explanation as to how or why that happened other than the fact that they admitted that it was in fact out of spec gas and that it was in fact not what would be considered a “natural gas” and they agreed that – during the time period the test results would not be counted at all. They simply start at where that gas – where they identified that gas problem occurring which is at approximately 5,000 hours is the credit for the 5,000 hours and started going again, which is exactly what they did. And I guess I think we’ve got another 500 to 700 or 800 hours now. But again, I will tell you that my understanding from our Italian distributor is that they’ve been involved in testing procedures with the same customer for something like that has happened. Totally their fault, totally on their side and they’ve said, oh, well, start over again. We were quite adamant about the fact that we weren’t going to start over again. We’ve been through so much of this customer anyway and they were cooperative. They admitted it was their issue and they said it occurred on their side. And they opted to again give us credit for the 5,000 hours and start at where we had stopped. It’s just I think an illustration from our perspective of how difficult it is to get certified on these natural gas operators’ machines whether it be turbines, whether it be process control, whether it be pipeline, they are very, very slow to move, they are very, very particular. They’re conservative. They never make mistakes frankly at all. And it’s something you just have to work with and that’s what we’re doing now. We’re at a point where we’ve got a lot of credibility ourselves. My engineers are quite respected because of what they’ve done in the industry. And I think that respect and that credibility allowed us to recover from that in a much faster, more efficient way than we might otherwise have. But again, it has delayed the process.

How was it discovered also?

I don’t know who it was in particular. They went out there – I don’t know whether it was their tech or our tech --

The signal for – it was missing. Something was going wrong with the drift coming out of the GasPT device.

Right. It was drifting further than it should have. So we tried several fixes remotely which we thought it might be some electronic problem, might be some wiring problem, because we assumed obviously they were running the right gas through it. We sent a technical team out there because I was concerned about what was happening. As I understand it from them, they were in the process of trying to figure out how they could rewire it to maybe affect the remote nature of the power supply or the thing that they were looking at. And somebody, either their technician or our technician said, wait a minute, this gas is – this is not natural gas. What are you running through this? At which point everybody kind of looked at it and agreed somehow it had been running gas that was very, very high in CO2. I’m talking like 40% or 50% CO2, very high CO2 and it was not an appropriate gas. It was not something that we would be expecting to --

So basically the PT device, the tech of it.

Yes, exactly --

And by the drip.

That’s what you just said. Through this out of compliance and just alarm bells went off, so you guys got technicians on it. But why did it take so long?

Because first and foremost, they didn’t notify us about it for a period of time. And then when did notify us – obviously we tried to fix it remotely because we assumed it was the right gas other than an electronic problem. By the time we got to the problem, we couldn’t fix it remotely. Now I’m sending people out there to get them out there to actually go and figure out what’s going on, it’s 1,000 hours. And the next thing you know, you’re looking at 1,200 hours.

All right. Well, you detected it and fixed the problem, that’s good.

The silver lining is we got it fixed and we got it identified. The cloud is it set us back 1,000 hours.

Okay, all right, good stuff. Thank you.

Thanks, Mike.

All right, no problem.

And we have a question from the line of Jeff Bernstein with Cowen & Company. Your line is now open.

Hi, guys. Just a couple.

Hi, Jeff.

Can you give us an update on what’s going on with that gas ordorization technology that you guys got?

Yes, I think we talked about this. We got the mechanicals from the French and they were absolutely inadequate. We ended up putting our electronics in and we [indiscernible]. The proposal was always that the French would build the mechanical portion of it, we would provide the electronics and then productize it and take it to market. We had to send it back to them and tell them, look, you’re going to have to do a number of different things to make this mechanical work the way it needs to work and they’re now deciding whether they’re going to pay us to do that or whether they’re going to do that themselves. And frankly, they just haven’t made a decision yet. But we still have confidence that it can be done. We still have confidence that it will work. We still have Snam Rete looking to deploy 1,300 units if we can get it. But it’s going to be up to the French as to whether they’re going to try and do the mechanicals or they’re going to pay us to do it and they just haven’t made that decision.

Got you, okay. And any update on ENGIE and any kind of channel plans?

Yes. It’s my understanding that our sales guys are going to be meeting with ENGIE and PetroChina before the end of the year. I don’t have an exact date yet but it’s definitely going to be before the end of the year.

Great, sounds good. And then lastly, this crazy new Italian incentive for burning waste, what’s the fallout of that or is it too early to tell?

Yes, that’s exactly what I was talking about this morning with this Chairman who was doing the opening key address on the Shipper’s Day. He talked extensively about that. They are really going to start underwriting, much like the UK has, biomethane fuel. They want to go heavily into biomethane fuel. Apparently, according to him, they’re the third largest producer of biomethane fuel in the world; second in Europe and they have about 8 billion cubic meters a year that they’re losing right now. They have one very large plant that they’ve developed that started processing fuel in June. They’re very happy with that. But they know it’s too big to deploy across the nation. So they’re looking for a plan very similar to the UK where they would deploy the skids and we have made a proposal to their technical team regarding our ability to put together the components that would have these skids workable. And I think it’s going to be a big opportunity for us. I don’t have a timing on it or anything yet, but I do know that they’re quite anxious to do it. They are very much looking at a plan like the French rolling out a 1,000 or more biomethane-to-grid skids [indiscernible] capture most if not all of that 8 billion cubic meters a year.

Terrific, sounds good.

All right. Thanks, Jeff.

And that concludes today’s question-and-answer session. I’d like to turn the call back to Mr. Clough for any closing remarks.

Just in closing, I would thank all of you for your patience and your support of the company. I can tell you that management are very excited about the opportunities ahead of us. We’re confident that we’re going to move diligently forward and create the benefits that will increase the value for the shareholders. And just thank you for your continuous support. And reemphasize that if you have questions or we can supply information, Dan and I will always make ourselves available to you as long as you give us enough notice. So again, thank you again. That’s the end of the call, operator.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.