Orbital Infrastructure Group, Inc. (OIG) Q4 2017 Earnings Call Transcript

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

Eric Stine - Craig-Hallum Rob Brown - Lake Street Capital Jon Fisher - Dougherty and Company Jeff Bernstein - Cowen Orin Hirschman - AIGH Mike Wallace - White Pine Capital

Good day, ladies and gentlemen. And welcome to CUI Global Fourth Quarter and Year-End 2017 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] I’d now like to introduce your host for today’s conference call, Mr. Sanjay Hurry. You may begin.

Thank you, Kevin. Good morning, and welcome to CUI Global’s fourth quarter and full year 2017 results conference call. A copy of the Company’s earnings press release and accompanying PowerPoint presentation to this call are available for download on the Events & Presentations page of 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 fourth quarter and full year and to provide you with management’s perspective on fiscal 2018. Following management’s remarks, the call will be opened to questions and answers. A telephonic replay of this call will be made available until March 29th. 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, Company’s 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 its 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. With that, I’d like to hand the call over to William Clough, Chief Executive Officer. Good morning, Bill.

Thank you, Sanjay. Good morning, everyone, and thank you for joining us in our fiscal fourth quarter and full year 2017 results conference call. To begin, we are pleased to report consolidated revenue above Street consensus estimate for the year that reflects strong year-over-year growth in our Power and Electromechanical segment. As I’ll discuss shortly, several factors brought the Energy segment revenue below fiscal 2016. Let me first start with our power business. Our power business turned in an outstanding performance in fiscal 2017. Steps taken during the industry’s downturn years to broaden our distribution base and grow our direct sales, paid off as the industry entered an up-cycle. Power and Electromechanical revenues were up over 10% year-over-year or about 2.5 times the global industry average for the electronics industry, as strengthening industry fundamentals drove demand for our products. We attribute this faster than industry performance to double-digit growth across almost all of our product lines. This was due to several factors. First and foremost, a strong commitment to building and maintaining inventory levels by all of our channel partners; second, increasing point-of-sale activity through those distribution partners which along with strong inventory build provided us a stable flow of customers and design wins. Point-of-sale activity in our channel was the highest since 2014, with no cannibalism from adding new partners. In particular, our new relationship with Arrow Electronics, one of the world’s largest electronic distribution companies, has continued to grow at an accelerated pace with considerable acceptance of our product line by Arrow’s large customer base. And third, we won several high production accounts marketed and designed in during 2015 and 2016 that drove an increase in our direct business on top of which design activity was higher in 2017 than in 2016. This in turn has increased our visibility in the marketplace and generated additional customers. Growth through innovation is also a core tenet of our Power and Electromechanical segment and to that end we are quite pleased by the progress of our ICE technology products in setting a new standard for power infrastructure utilization in the data center market. With the need to support explosive growth in IoT and mobile infrastructure, data center power has become a key priority for the industry. In late 2016, we placed 8 beta ICE power solutions with select channel partners and have since received excellent feedback. In 2017, we saw the marketplace’s strong interest in the capabilities of the ICE platform convert into initial orders. Last October, we received an ICE Switch order for almost 1,000 units shortly after securing safety certifications, which we have fulfilled in the current quarter. Just last month, we received our first order for ICE Block valued at $2.9 million before securing UL certification. On Monday, we received and announced receipt of full UL certification for our ICE Block, which now enables us to go to market with the entire ICE package both Switch and Block fully certified. The orders we have received today are reflective of the strong reception the platform is commanding from a data center market focused on finding ways to capture unutilized power capacity without compromising system availability or reliability. We received continued strong interest in the ICE platform from prospective customers as well as from industry participants who want to private label our solutions. We remain convinced that our ICE platform will generate substantial growth for this business segment for a long time. At year-end, Power and Electromechanical segment unaudited backlog stood at $20.2 million. Now, let’s discuss the Energy division. In our Energy segment, revenue and gross margins declined year-over-year due to delay in our Italian project, fallout from Brexit and the recently concluded RIO [ph] initiative in the UK, the effect of Hurricane Harvey in Houston and the general malaise in the energy markets. We continued to execute on business development activities over the course of fiscal 2017, laying the ground work for greater adoption of our gas technology products across all of our key geographies. Let’s first address the status of our Italian project. Last fall, the Italian Regulatory Authority and the national gas transmission company in Italy resolved a yearlong tariff issue that had halted a re-metering project to upgrade the 3,300 largest offtakes on the gas company’s network. The resolution put in place a flat tariff to ensure compliance to the mandate. The resolution went one step further and included a proviso to ensure that future upgrades to Italy’s critical gas structure will proceed unimpeded. The proviso calls for the consolidation of ownership/management of all offtakes on the network that’s approximately 7,000 offtakes in total under the gas transmission company as a matter of law. With the tariff issue resolved, our local distributor anticipated delivery and installation of inventory units to occur late last year. That has not happened yet due to according to our in-country partners, the regulatory authority opting not to issue its final ruling on the ownership management issue ahead of the national elections, which took place on March 4th. While we are frustrated by the slow rollout of our GasPT contract, deployment of our GasPT order remains a matter of when and not if. An equally frustrating consequence of the rollout is that we have had to take an impairment charge against our Orbital UK assets. Dan will address this charge in his remarks. As a reminder, the Italian re-metering project is fully funded. Further, you will recall that the GasPT allows the transmission company to recapture up to 15% of revenue currently lost due to inaccurate billing. In effect, the transmission company is losing money every day it doesn’t have the GasPT deployed. So, while our visibility into the timing of future GasPT orders from Italy is limited, our device remains integral to transmission company’s infrastructure plans, both from an ROI and a technology standpoint. And now, we see a path to substantial expansion of our opportunity. Once the gas company takes over management of all 7,000 offtakes, we are perfectly positioned to grab orders to supply an incremental 3,700 GasPT devices. Now, let’s discuss our other energy products. Our pipeline of potential energy product sales today comprises a larger number of major energy producers than at this time last year. In North America, in conjunction with our long-standing distributor benchmark, we’re spearheading efforts to position GasPT as a fiscal monitoring solution to supplement GasPT for process control applications. Measurement Canada has generally accepted all of the testing and certification for fiscal monitoring we accomplished in Europe and our next step is to secure infield sponsor of field trial, a step in process as we speak. Staying with fiscal monitoring and turning to Europe, we are waiting, ENGIE’s response for a bid to utilize GasPT as analyzer to their biomethane-to-grid build out. We also began to explore Italy biomethane-to-grid needs where the Italian government is already putting euros behind for adoption of biomethane to meet EU requirements to generate 35% of their energy needs from renewable sources by 2022. The gas industry believes that biomethane is likely the biggest beneficiary of this mandate, given it will use the current gas infrastructure, the same pipelines and same delivery system to achieve the goal. We also continued to progress one of our largest opportunities to the GasPT solution, the Future Billing Methodology or FBM project in the UK. OFGEM’s approval last fall of the Stage Gate Report for FBM moved the project ahead to Phase 2. Given the size of the opportunity in the UK alone, we have opted to move forward on our own, designing the solution and proceeding with its development to Phase 3. Concurrently, we are evaluating partner candidates who can help us take the FBM solution to the market. We have held initial meetings with energy providers in Canada, Asia and Western Europe to replicate FBM in those geographies; and to-date, the receptivity has been very encouraging. Formal trials for the new solution are scheduled to begin before year-end with a go-live in 2019 or early 2020. To further expand our footprint in Europe, we are establishing a distributorship with Samson AG, a German supplier of components to the utility industry. Samson complements our direct sales force efforts to natural or otherwise large energy producers with a focus on a very broad array of low-volume opportunities that are large users of natural gas such as glass, ceramic, and steel manufacturers along with certain large food producers. As a process control application, GasPT opted a greenfield opportunity in North America. We recently announced our latest repeat order for GasPT device from a leading U.S.-based power and energy transporter, using it to optimize the efficiency and minimize maintenance on certain of its gas-fired compressor turbines in the northeastern United States. As encouraged as we are about this incremental order, our most advanced process control opportunity is at a standstill as we await our partner completing its certification trials on our GasPT for use as an OEM part or a retrofit in the gas turbines worldwide. Our VE technology saw a significant uptick in interest following last summer’s demonstration at Southwest Research Institute. We are seeing demand build for our sampling probes and systems across a broad array of applications, from thermowells to trace element detection. We are moving forward orders with every major energy producer in attendance at the Southwest demonstration. We have made significant inroads raising this technology’s visibility to other major market participants and are in more, large dollar value bids today. Late last year, we announced the second order for our sampling system for a second ethylene plant, which we have fulfilled in the quarter. In our integration business, late last year, we opened a new and much larger facility with a higher capacity in Houston. In our prior smaller facility, we were growth constrained in a number and scope of work we could bid on. This new facility removes our biggest barrier to larger contracts from energy operators in this region. With crane access throughout our new facility and ability to manage bigger projects, we are already being evaluated for inclusion on the corporate approval [ph] for a large petrochemical company. So, while we saw a downturn in business last quarter due to the impact of Hurricane Harvey, the upturn we are seeing based on repair and other work created by the hurricane will make the disaster a net positive for Orbital. We are winning competitive bids based on our project excellence, reliable performance and quality engineering. And once we are in one project, we have a leg up on additional projects. We are winning in part because internal integration teams don’t have the talent to provide complex integration, but we do and our capabilities have been noticed. To quote one retail customer, “if you want a solution, talk to Orbital”. We also offer turnkey solutions that marry our engineering services to our energy products. Our ability to leverage integration sales to drive for greater adoption of our gas technology products and vice versa became evident in 2017. We recently announced a $2.1 million integration project that was our third from the same customer and the first out of our new Houston facility. This integration award also included the sale of VE sampling system probes. Just yesterday, we announced a $4.58 million Orbital UK integration order, that was a first for us and then it was our first non-biomethane project with GasPT and VE technology stacked into the project. Our VE technology in particular is proving instrumental in establishing Orbital on approved vendors list. This product has opened doors for presenting our integration capabilities to companies where we have little or no traction. By allowing faster, cleaner samples of GasPT provided to any number of analytical devices with no complex extensive calculations required for standard non-VE probes. Our VE technology is a leader in replacing both standard thermowells and sampling probes throughout the natural gas infrastructure. While we saw a stronger business trends from our Houston facility, our Orbital UK facility saw the postponement of bigger integration project in Western Europe due to post-Brexit business uncertainty. In addition, in the UK National Grid, which has historically been a large integration customer, but all infrastructure CapEx plans on hold as it divested its sale of its distribution business. We have engaged the spin off and have recertified ourselves with them and are now waiting for them to develop their capital investment program as a standalone company. At year-end, Energy segment unaudited backlogs stood at $12.6 million. In summary, new technologies, even technologies as disruptive as ours, rarely have a linear adoption rate. We deal with government and quasi government entities and delays invariably occur. It is therefore fortunately that we took a preemptive step in raising capital last fall, ensuing we have the financial resources and flexibility to drive adoption of our energy products. 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. Starting with our consolidated results for the fourth quarter. Total revenues were $21.1 million, an increase of 9% from $19.4 million for the fourth quarter of 2016, reflecting a $2.1 million increase in revenues from the Power and Electromechanical segment, offset by $400,000 lower revenue in our Energy segment. Largely as a result of lower contribution from Energy segment, consolidated gross profit margin was 250 basis points below last year at 30.9%, although consolidated gross profit was flat at $6.5 million. Consolidated selling, general and administrative expenses for the fourth quarter were $8.4 million, an increase of $0.5 million or 7% compared to the prior year fourth quarter, reflecting increased activities in support of the increased revenues and marketing efforts during Q4 2017. During 2017, the Company began implementing various cost saving measures, which resulted in a slight decrease in total cost for 2017 and are expected to provide further improvements in 2018. While SG&A expenses increased in absolute dollar terms, as a percentage of revenue SG&A was lower at 40% of revenue for the quarter. Adjusted EBITDA loss for the quarter was $2.3 million, unchanged from last year. For the fourth quarter, we recorded a $3.2 million of goodwill impairment charge associated with our Orbital UK subsidiary to reflect a longer than expected temporary halt in shipping of our GasPT devices under our contract with the natural gas transmission company, Italy, as Bill discussed, and the overall margin in the UK following Brexit including a slow biogas industry during 2017. The remaining goodwill related to the Orbital UK entity amounts to $4.5 million. As a result of this impairment charge, net loss for the quarter was $5.3 million or $0.20 per share compared to a net loss of $2.6 million or $0.12 per share for the same period last year. Turning to our segment revenue and gross margin. I’ll start with our Power and Electromechanical segment. Revenues for the quarter were $15.9 million compared to $13.8 million last year, an increase of 15%. On sequential basis, Power and Electromechanical segment revenues decreased 5%, reflecting normal seasonality in the industry. As has been the case for each quarter this fiscal year, we are benefiting from the electronics market up-cycle, the broader base of business we have established over the past several years with new distribution partners, new design wins and new product introductions. We are pleased that this trend has continued into Q1 2018 as well. Gross profit for the fourth quarter was $5.3 million or 33.3%, a 120 basis-point improvement over last year’s 32.1%, reflecting an improved product mix and the continuing focus on improving margins within our Power segment through increasing efficiencies and controlling variable costs at our Canadian manufacturing facility along with continuing new product introduction to the Power and Electromechanical marketplace. During 2017, CUI introduced more than 1,100 new products in this segment. Our Energy segment produced revenues of $5.2 million, slightly above the third quarter and slightly below last year when we reported revenue of $5.6 million. The year-over-year variance reflects the timing of certain [ph] product schedules and generally the slower UK market during 2017. Revenues for the quarter were more heavily weighted toward lower margin integration projects. As a result, gross margin for the quarter fell to 23.3% from 36.4% last year. As a reminder, our Energy segment experiences the 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. Consolidated backlog was $32.8 million at quarter end compared to $30.2 million at December 31, 2016. Backlog for the Power and Electromechanical segment was $20.2 million, an increase of $2.1 million compared to $18.1 million at December 31, 2016. This reflects the inclusion of the ICE Switch order received during Q4 2017 as well as the continued uptick in the power market. The Energy segment backlog at quarter-end was $12.6 million compared to $12.1 million at December 31 2016. For the year, we generated consolidated revenue of $83.3 million compared $86.5 million for 2016 with increased Power and Electromechanical segment revenue offset by lower Energy segment revenue. Power and Electromechanical revenue grew 10% to $64.4 million from $58.4 million for 2016 while Energy segment revenue was $18.8 million compared to $28.1 last year, a 33% decline. Consolidated gross profit decreased 14% to $27.9 million from $32.3 million for 2016, reflecting unfavorable segment mix associated with lower sales of high-margin products in our Energy segment. Likewise, consolidated gross margin fell from 37.3% to 33.5% on a segment basis; Power and Electromechanical delivered a gross margin of 34%, slightly lower than last year’s 34.8%; and Energy reported gross margin of 31.5% compared to 42.5% for 2016, which benefited from significant GasPT deliveries. SG&A was $33.9 million compared to $34.2 million for 2016, reflecting primarily lower overall severance costs and various cost savings measures begun in 2017. We expect SG&A expenses will improve as a percentage of sales in 2018 through the implementation of these cost saving measures and forecasted revenue growth. Research and development increased 25% to $2.5 million compared to $2 million for 2016 due to higher expenditures on advanced power technologies including ICE as well as on GasPT and VE technologies. We expect research and development will be flat with 2017 as we continue to pursue new technology based product introduction. As a result of the decrease in consolidated gross profit and increase in research and development expenses, adjusted EBITDA loss widened to $7.4 million compared to $3.2 million for 2016. Net loss for the year was $12.6 million or $0.56 per share, compared to a net loss of $7.3 million or $0.35 per share for 2016. As a reminder, net loss for the year included goodwill impairment charge of $3.2 million. In terms of our balance sheet, we ended the quarter with cash and cash equivalents of $12.6 million, up from $4.6 million as of December 31, 2016, reflecting the net proceeds of $18.9 million from the equity raise we closed in October 2017, a portion of which was used during the fourth quarter to repay line of credit and overdraft facility balances and for ongoing business activities. That concludes my prepared remarks. I will now turn the call back to Bill.

Thank you, Dan. From my earlier remarks, I hope to have conveyed that our strategy to drive demand for our solutions across both of our business segments in fiscal 2017 is yielding multiple paths for faster growth in fiscal 2018. We expect continued strong performance in our power business, with the introduction of the new ICE solution, serving the key driver of growth in our Power and Electromechanical segment. In our Energy segment, we are seeing forward movement in integration projects previously suspended in Western Europe; that together with potentially larger dollar value opportunities out of our new Houston facility and the steps we’ve taken to seed the market for additional energy product sales across multiple geographies, put us on a growth path in our Energy segment. Further, we are realizing synergies between our integration and products businesses that should serve as an additional catalyst for energy revenues. These efforts are already yielding positive returns. We are seeing stronger business activity as prospective customers respond favorably to value proposition of our energy products and we have generated almost $7 million in new energy products year-to-date. Finally, our capital raise enables us to replenish the balance sheet without losing a step in executing on our growth strategy. This concludes my prepared remarks. Operator, please open the call to questions?

[Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum.

I just want to make sure I understand what’s going on with Snam Rete, and I understand that timing is very difficult to call here. But, so now that the elections done, you believe that they will -- or put in place the process or start the process of taking ownership of the offtakes and then that opens the door for the installations to start. Is that the way to think about it?

Yes. Actually, no, it’s not them making the decision. They are ready to move at a moment’s notice. They have already told us to be prepared to move quickly, but it’s the regulator. The regulatory authority we believe is waiting for a government to be in place -- actually, we don’t believe it, they believe it, is waiting for a government to be in place. And again, the timing is difficult because of the way the government is structured over there. As you may know, there was an election March 4th. If you read anything about that election, you had three parties running; no party received a significant majority. So, now, two of the three have to make a coordinated effort to put together in essence a consolidated government. If they do that which they are attempting to do, then, they will have a government. If they don’t, and I believe it’s about three months that they have to do that, then, they have another general election. So, it’s a matter of really waiting for their political situation just right now. But yes, once it happens, they will have control -- management control of all 7,000 offtakes, which is the good news. And further the good news is, they’re quite eager to get this going. They know that they’re losing money every day by not having it going. So again, -- but, it’s a difficult timing issue.

Right. I get that. And then -- but that is something, once the go-ahead given, then, what is it an additional 350 that Socrate would have in inventory that they would have to get through before, then you would look for a follow on? I mean, does it happen pretty quickly?

Yes. Now, it would be quickly. I think, they would start -- I have already told them, we need time to ramp up and that ramp up is going to take a period of time. So, I’m pushing them very hard. At the moment, they have the ability to move forward. They need to start talking as about scheduling and how they are going to do that and when they are going to need units. And they’re eager to do it. They are quite enthusiastic. They still have the same team in place. The project manager has not been reassigned. She’s in charge of just that project. So again, I think that will move forward quite quickly, once they get this final hurdle taken.

And then, maybe just turning to GE, I mean, just I know that that’s still -- you are waiting there as well, just to confirm, I mean the testing -- has the testing been completed that they needed to see? And then, I think, then, it was just a matter of trying to work towards an initial order. And I think you talked about potentially in the 20 to 30-unit range.

Yes, I think, that’s all true. We’re obviously not identifying GE by name, but yes, I mean, obviously, we are awaiting their response. And again, it’s not something that they said. [Ph] If you look at the press surrounding what’s going on with their power and order division, which is where we are, they have got some things happening that they have to get through.

I guess last one for me just on the ICE Block and the ICE Switch. Now, you’ve got certification. In the past, you talked about certification and a few other hurdles before you go to market. But, I mean, your commentary today and in the release earlier this week would indicate that you’re ready to go to market now. So, I mean, is it kind of all systems goal or are there a few additional steps before you really start to hit the market?

We’re in market. There are no additional steps. We are moving forward in market. We are in market with our partners, both VPS and our channel partners. And we’re quite excited about moving forward. But, it’s full speed ahead for us on that.

The technology is actually being demonstrated at Data Center World this week. So, it is live and out there to the market.

Our next question comes from Rob Brown with Lake Street Capital.

I just wanted to look back at Italy, just I want to clarify how many units are in inventory waiting to be installed? And I guess, I’d like to hear your thoughts on once things start to move forward, when you can get orders? Is this something you get in ‘18, or is this really now pushed out to ‘19?

No, I think once -- first of all, about 350 units are in inventory. But no, I think once they start moving, it will move quite quickly. And again, I don’t want to predict. It will move quickly once they start. I can’t imagine it’s not to going to occur this year. And frankly, we’re hoping that it occurs either late this quarter or in the second quarter. I know that they are quite eager to get things going. I know that they are quite enthusiastic about it, that money is burning a hole in their pocket in the sense it’s already -- it’s sitting there committed to this project. So, again, it’s dependent obviously on them getting a government together. But, once that happens, I think it will move quite quickly. And we expect it to be this year.

We also are still under the understanding from them that their goal is to be doing 100 a month. So that should run through the existing inventory fairly quickly and allow for our billing schedule to ramp up quick as well.

Okay. Thank you. And I just want to ask on the UK Future Billing Phase 3. Could you clarify, did you accelerate something in their project or is that -- is the timing changed there?

The timing is still the same. We’re going to do a deployment. In fact, I believe it will start sometime in the next few months that will in essence be what amounts to a field trial, that field trial will take place through the end of this year, probably into 2019. And then, assuming that everything works the way it has to-date, they want to see deployment in 2019 or early 2020. So, no, there has been no real acceleration. What we have done though is while we’re still discussing partnerships with Italy and with the OFGEM and DNV GL, we’re trying to move forward on a solution front, the R&D front ourselves, actually putting the final solution, which will include both the analytics and power.

Okay. And then, one more question of ICE Block. What sort of the sales cycle there, how quickly now the churn market do you sort of expect orders, and can you remind us again, sort of the revenue rate for data center?

Dan, do you want to go through that?

Yes, I’ll take that. So, the sales cycle, it’s a new technology. So, we know that that’s difficult to predict. But, these are going to be part of generally large capital programs where they are either building a new facility or revamping power and hardware in their facility. So, it’s going to be a longer sales cycle. We expect to do somewhere around $3 million to $5 million in revenue this year is our goal. But, really the goal for 2018 is to get sales orders in place for build schedules for 2019 deliveries. So, that’s what we’re looking to. And we’re working through a number of sales channels with EPS and our partners in this space and presenting at key conferences like Data Center World this week, to get out there. We just like with the Switch order last fall, the ICE Block order that has come through this year, in fact before we had certification is, earlier than we expected when we were talking a year ago. So, that’s a good indication of possibly a speed of adoption that could take place. But, revenues this year are going to be somewhat limited due to availability of key components, particularly batteries in the marketplace this year. We do have an allocation that supports beyond our targeted goal for the year. But, batteries are constraint for 2018. And we have that resolved for what we believe is our volume necessary this year and then into 2019, we don’t see it an issue either, so.

Our next question comes from Jon Fisher with Dougherty and Company.

Hey. So, just kind of sticking with the revenue topic here, on power and electro, given the strong year that you had this year, the Arrow [ph] relationship building out, distribution and growing that. Can you grow that business double-digit in 2018 versus 2017, if you exclude kind of 3 to $5 million ICE Block revenues that you’re targeting this year?

I think that business can grow. Frankly, we’ve seen a significant upturn, both in the electronics industry and particularly in our customer base. So, I think yes, it seems to be growing at a double-digit rate during the first quarter, which is historically actually a lower quarter for us after Christmas sales and what not. So, again, I think it’s something that can continue. We again, normally expect somewhere between 4 and 6%. But it could certainly continue this year into double digits. We see some real strength in the electronics market worldwide right now.

Okay. And so, then, the 3 to $5 million, I mean, the ice block momentum and the UL certification all of that momentum would be incremental to what we could call, kind of core organic growth for that segment then, right?

That’s correct.

Okay. Moving on to the expense side of things. When you look at SG&A spend, kind of fluctuated around $8.5 million a quarter excluding Q3 for most of 2017. Is that the right way to think about SG&A expense for 2018 or was some of the cost cutting that you did, could SG&A be running from a spending point at a rate slightly below kind of the $8.5 million rough bogey?

Sure. I believe 8.25, 8.5 is a safe place to build a model based on -- we do see SG&A improving as a percentage of revenues, i.e. we don’t expect that to increase nearly with the rate of revenues. But, I think if you’re in that range, a good target place.

And then, on gross margins, given kind of some of the delays that are continuing to go on, on the energy side and the strong growth that you’re seeing in power, not sure kind of what the margin contribution benefit or dilution is from the ICE Block momentum. But should we expect gross margins to kind of run closer to the low 30s, given the revenue mix is likely to play out here in 2018 or what is the possibility of running closer to mid-30s types of gross margins this year?

Until we have higher value product sales starting to kick through, meaning higher volumes on ICE but most importantly higher volumes on GasPT sales, that’s when we will see that margin start to uptick more and more. Our goal will be to get to the mid-30s this year or higher with higher volume GasPT sales but mid-30s would be our goal for the year.

Our next question comes from Jeff Bernstein with Cowen.

Just a couple of follow-up questions. Can you just talk a little bit more about the North American energy company order for compression related system? Is that for infield compression, is that for fractionation plants or what is that for exactly?

Yes. The infield pipeline compression. It’s a large northeastern compressor group that is a large transporter by natural gas in northeast. They are going to roll the technology out across their entire fleet, which is around 400 compressors, as I understand it. And they have continued doing that on a project by project basis. And this, I think is the fourth order that we’ve taken from them over consecutive months is just an illustration of that. We think if we can make that kind of impression on other compressors and compressor users, there is a very healthy market in the U.S. for that.

And then, on last page here, your presentation, you gave some TAM analysis on ICE technology. The large data center number, obviously big number, 30 million. Is that to you or to you and your partner for a single large data center?

That’s just the hardware for that side of the data center, and that’s a tremendous sized data center being put together.

And I know there has been some press about the product and virtual power and some of the people you guys are talking to et cetera, and some commentary that the big data centers builds are going to be in China and that they are very interested in power saving technologies whatever. How do you sort of navigate the China market?

We are partnering with some companies with companies to do the right installations around the globe that have capabilities of projecting their hardware. And it’s a key technology; it’s also protected by the software component that goes with it. So, without the software relationship and the component within our devices which is quite unique [indiscernible] I would say. It will be difficult to replicate, if not impossible for a very long time. So, I think we are very well protected from hardware standpoint as well as the software. We are also going like I said with large partners into those places that have been mentioned in press releases. So, we are pretty well backed up in going into markets around the globe.

So, no issue with getting distribution into the Chinese market?

We see no issues with that.

And then, lastly, could you just walk through a little bit FBM? And it sounds like you’re proposing something similar in other countries et cetera. Could you just flush that out a little bit more?

Sure. We’ve taken the concept now to Canada and most particularly into Japan with Osaka Gas and Tokyo Gas. And in fact in 2019, Japan is broadening quite significantly their CV range. They have been a very narrow range country up until just recently but they are going to broaden that range quite significantly because they think they have an opportunity to actually become a domestic producer of biomethane gas which of course would be great for them because they have no domestic energy production to speak of. So, because of that they are quite interested in the Future Billing Methodology, because that’s the way they could deliver that biomethane gas to the end user. We’ve had good response from couple of our contacts up in Canada as well. And so, we’ve presented it. And we’re making the presentation obviously across Western Europe to our partners in Italy, to the French and others. So, we just think this is -- as alternative energy becomes big issue, primarily now in Europe, but it’s going to be across the world, we think that biomethane gas is going to be the response, and the need for Future Billing Methodology becomes now much more significant. And I think we’re at the leading edge of that. So that’s the deal that we’re presenting it everywhere we can present it and we’re seeing some great interest both in Canada and in North America and in Japan and Asia.

So, this would be sort of the Phase 3 integrated skid with all the equipment and analytics et cetera that you’re proposing that this is how other guys should do it?

Yes. It’s not even a skid, it’s actually the downstream billing, the fiscal monitoring. It’s a solution that will provide an analytic, a flow meter and a power device that would allow the billing to be done much closer to the customer. So, in the case of the UK, it would be in essence within almost a mile of the customer. So, you have about one of our devices for every 500 customers. That’s how you get the rollout of your 23 million customers, about 45,000 units. But because you’re so close to the customer, you can put almost anything you want upstream because the customer is being built accurately downstream. And that’s the key. That would work the same in Japan, it would work the same in North America and Canada, it would work the same in Italy and in France. So, that’s the deal. It’s not preparing the gas like a biomethane skid for delivery; it’s actually building the customer in an accurate basis for what they’re getting.

Got you.

The key for that doing though, Jeff, just to be clear is, it allows the producer to not have to inject dirty gas or propane to enrich that gas coming from the biomethane facility. So, it allows the true naturally occurring biogas to enter the grid without being enriched and essentially made new complex carbon thereby get the environment…

Got you. And then, just lastly, in terms of the U.S., I know Florida now has got I think some feed-in tariffs for biogas going, things are moving there. What’s happening in other states in the U.S.?

Actually the biggest opportunities we see right now are in California and Oregon. Those two states are quite aggressively moving forward as probably again it’s big press. They do not recognize the withdrawal from the [indiscernible]; they are still going to move, and if we are participant. And we actually have some pretty significant bids outstanding right now. And I think there may be some nice announcements over the next few weeks and months regarding biomethane to grid hookups that we’re going to be doing in the U.S. But again, I think, our target markets right now are predominantly California and Oregon. I think, we also have a bid out or a couple of bids out in Canada, I think one in Toronto and one in some other province in Canada. But again, I think California and Oregon are both moving forward.

[Operator Instructions] Our next question comes from Orin Hirschman with AIGH.

Could just recap again, there actually was revenue recognized this past quarter that you reported on the ICE shipments, the first ICE shipments?

No, the first ICE shipment is delivering in Q1 of this year. We got our first order received in Q4 of ‘17 for delivery in Q1 of ‘18.

Okay. And that’s the one, that one specific data center order that was described before?

ICE switch was 950 units, press release I believe was in mid October, describing that one.

Okay. I guess, my question is, when does the next order flow? Do you have the next order in hand yet?

So, we just got the order for the ICE Block and that’s going to be delivering -- is currently scheduled to deliver in late 2018.

That’s the same customer though?

It’s a mix of customers; it’s through the same channel though.

Through the same channel, okay? What do you think that really make the difference in terms of trying to get -- you mentioned there were lots of test sites, what’s going on with some of those beta sites.

Well, the key was to be able to go to mark where we had to get the certifications from the safety agencies. So, we have those in place now and we can go out. They can put them in a live test environment, not just in a lab environment or safety environment, so they can now test in a live server data facility. And they can decide how they want to run a CapEx program around that or a new development program on that. So, how we go to market with that is we’re working with a number of partners to do that. Like I mentioned earlier, we’re at Data Center World presenting to the largest data center companies with the technology. And it’s going to be about getting in their capital -- CapEx programs and upgrade systems and working with them on those programs. So, I mentioned earlier in the call, it’s a longer sales cycle. It’s not delivering power supplies for a product around this year. It’s delivering actually hardware to operate the server facility. So, we see 2018 being revenues around or slightly more than the volume of purchase orders we’ve received so far. And then, the key is getting orders and schedules for 2019.

[Operator Instructions] Our next question comes from Mike Wallace with White Pine Capital.

Good morning, Bill, good morning, Dan. Couple of questions on EBITDA margins and maybe give us some thoughts in both segments as the ICE technology gets out in the market, what sort of impact is that going to have on the EBITDA margin and power and mechanical segment.

As the year progresses, it should have a strong benefit. This first run, I’m not expecting a significant contribution from income standpoint. The further order, the second order that we got, I am expecting margins to pretty good on that, probably low to mid-30s on that. So, that should fall down to earnings later this year. And then, our next order -- our all order subsequent I would expect similar margins on so that. So, that’s how we see that coming through the year and through the EBITDA and earning plans.

So, on the gross line, what would be reasonable on EBITDA line and then and how many sales uptick could we see as we go through the year?

Yes. So, the contribution from that is going to be pretty similar to the gross margins on ICE, once -- there’s not a lot of additional SG&A frankly beyond -- actually I don’t expect any additional SG&A beyond we already have in place right now to support those sales. So, it should continue to flow through. And that’s in large part because of the partnerships that we have in place for doing distribution and installation of that, where we’re not building out a team to go out and do installs or go out globally and market on our own. We’re teaming up with partners to do that.

So, would it be in a range of like 200 to 400 points this year of improvement in margin there?

Yes, this very well could be. Yes.

Okay. And then, looking at the energy side, excluding any of the PT devices, what can we expect to see in terms of margins on that segment?

So, for the integration segment, we are looking to be in 32% to 35% range on integrations, and continue to work to improve margins in that area. It is a highly competitive space. So, some jobs we do hit mid-20s but the goal is always to be in the 30s range, which is our target. And then, with GasPT that can obviously go up -- that can then bring the saving [ph] up dramatically as it did in 2016.

But is that a gross margin number down or EBITDA…

Sorry, those are gross margin numbers.

And if you drop it down to an EBITDA given the write off at Orbital and some things, how should we think about that margin?

Well, I think, the way to think about that is the SG&A is not going to change a whole lot is our current plan. We expect revenues to pick back up and margins to improve. So, with those two things, I think we’re going to see an improvement in the bottom line. Obviously, the goodwill is a onetime item is -- our expectations on that, as we see a strengthening in the business right now and forecasting for the year. And I don’t want to give -- I’m not going to be able to give a number to you or forecast number for you right now. But I see it improving during the year with revenues being the primary driver for that.

Will it be breakeven or profitable on an operating line, EBITDA line or 2018 excluding all the PT stuff?

It has -- not excluding the PT stuff. I’d not expect that this year.

So, we need a PT to come in to get that positive?

Yes.

Okay. And essentially, Italy is going to have a government. So, that’s the turning point.

Well, Mike, we certainly hope…

I just want to make it clear that once the government is formed, Bill, that’s the trigger point for the rest of it to go?

It might be even before that. The bottom line is the regulator has already closed everything to public comment. They have already got the regulation written. The whole thing is in place. It’s just their -- and to some extent Snam is in a position we are. They are trying to predict something and they really don’t have the insight to be able to say it. So, it could happen even without or absent this government being resolved. But, I think it’s more likely, once the resolution occurs than not. But again, I know that they want to move this forward. And it’s strictly following money. I mean, they can make more money with this and that’s what they want to do.

Ladies and gentlemen, this does conclude the Q&A portion of today’s conference. I’d like to turn the call back over to our host.

In conclusion, I want to thank everybody for their time and attendance. Again, we are moving forward on all fronts and we’ll look forward to talking to you in the next couple of months with our first quarter results. Thank you and thanks to everybody.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.