Exterran Corporation

Welcome to the Exterrin Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Blake Hancock, Vice President of Investor Relations. You may begin.

Good morning. and welcome to Exterin Corporation's third quarter 2021 conference call. With me today are Exterin's president and chief executive officer, Andrew Way, and David Barta, Exterin's chief financial officer. During this conference call, we may make statements regarding future expectations about the company's business, management's plans for future operations, or similar matters. These statements are considered forward-looking statements within the meaning of the U.S. securities laws and speak only as of the date of this call. The company's actual results could differ materially due to several important factors, including the risk factors and other trends and uncertainties described in the company's filings with the Securities and Exchange Commission. Management may refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures in its earnings press release issued yesterday and a presentation located in the investor relations portion of the company's website. With that, I will now turn the call over to Andrew.

Thanks, Blake. Good morning, everyone, and welcome to our third quarter results for 2021. Exterrin performed well in the third quarter as we executed on our global backlog and capitalized on a robust and growing commercial pipeline. Overall, the quarter came in line with our expectations on EBITDA as adjusted basis, net debt decreased by 15 million, and commercially, we achieved success with over 125 million in eco-renewals in Latin America, in addition to closing a long sought after water contract. In regards to the 125 million in extensions, this increases our renewals in Latin America to over 450 million since the start of 2020. Additionally, these extensions have added the benefit of requiring minimal CapEx investment, With our contract operations backlog now over 1.4 billion, the highest in nearly three years, we have excellent visibility to our eco outlook for the next several years. The product sales pipeline remains robust and continues to improve. As I've stated in the past, projecting timing of these awards is challenging given the size and scope of the projects, along with the fact that many projects have multiple partners involved in the decision-making process. We continue to pursue many larger near-term projects, and we anticipate closing in the next several months. As previously announced in September, I'm happy to share an update on the significant contract Exterrin Water Solutions was awarded. This is a long-term, multi-year contract that will treat over 150,000 barrels of water a day, leveraging our gas flotation technology. With this win, Water now comprises over 25% of our eco backlog. This award, along with the prior significant water contract award in the first quarter of this year, underpins our transition as we continue to position ourselves as a fully integrated gas and water solutions company. Moving on to operations, COVID-19 and its variants continue to pose potential hurdles for the industry. The environment continues to remain dynamic and we have experienced some minor logistical challenges in transporting people and equipment to site. However, we continue to make great operational strides and have seen no meaningful delays in the execution of our projects. While we continue to work to mitigate these risks, we anticipate potential challenges through the remainder of this year and into the early part of next. Lastly, over the past few quarters, we have spoken about the capital structure review we undertook to position ourselves to take full advantage of our commercial pipeline. We are in the midst of 2022 planning and continue to feel very positive about the forecast of 15% growth in EBITDA year over year. Additionally, we continue to pursue operational items that can enhance liquidity, leverage, or both. This could include improved working capital, asset sales, or contract renewals. To close in summary, we're performing well today and see significant opportunities to continue growing as we transition to a fully integrated gas and water solutions company. And with that, I'll turn it over to Dave.

Thanks, Andrew. For the quarter, we delivered EBITDA as adjusted of $35 million on revenue of $161 million, which was in line with our guidance. This resulted in an EBITDA margin rate of 22%. From a segment perspective, revenue for contract operations was $83 million, while adjusted gross margin was $56 million, resulting in a segment gross margin rate of 67%. Revenue decreased sequentially, primarily due to the acceleration of deferred revenue in the prior quarter that did not repeat. Eco backlog at the end of the quarter, as Andrew shared, stood at approximately $1.4 billion, driven by the new water booking and the renewals Andrew mentioned. For AMS, revenue was $25 million and adjusted gross margin was $5 million. This resulted in a segment gross margin rate of 21%. Revenue declined sequentially due to the timing of global parts sales, while the margin rate rose slightly from favorable mix. Revenue in the product sales segment was $53 million, an increase of nearly 82% from the prior quarter. An adjusted gross margin was $7 million, nearly tripling from Q2. This resulted in a gross margin rate of 12%. Revenue increase from the prior quarter and significant progress was made on our Middle East project. The gross margin percent improved to double digits as a result of improved volume and lower under absorption. Our product sales backlog was 365 million at the end of the third quarter compared to 411 million at the end of the second quarter. SG&A for the quarter was almost 35 million, a small increase from the 34 million reported in Q2. Moving to the balance sheet, our total debt at the end of the quarter was $573 million, while our net debt was $513 million. Our leverage ratio was 3.6 times, which was flat to the second quarter, and our total available capacity was $143 million. With respect to the fourth quarter, we expect adjusted EBITDA to be in the low to mid $40 million range. We expect continued progress on key projects in the Middle East region, which should drive further increases in product sales revenue, along with the revenue impact from some expected bookings. For the year, our outlook has been adjusted slightly based on Q3 results and the Q4 outlook. This is driven by the timing delay of product sales awards. Therefore, we are modestly lowering our full year guidance for adjusted EBITDA to between $143 and $148 million. CapEx for 2021 is expected to be between $55 million and $65 million, with reimbursable CapEx around $35 million. Maintenance and other CapEx should be approximately $20 million and cash Taxes are forecasted to be around 20 million as well. Lastly, I'd like to provide further insight into current views on the previously announced capital structure review. But before I do that, let's revisit the original driver of this announcement. Earlier in the year, we provided some guardrails for our multi-year forecast, and based on that forecast, there was not a requirement to undertake any capital structure-related actions. The forecast provided ample resources to execute our plan without leverage or liquidity concerns, The purpose of the announcement was to explore opportunities to increase our ability to tackle the $3.5 billion project pipeline we are working, given the amount of ecotype projects that are included in that pipeline, and to make sure we had prudent liquidity cushion. As Andrew shared, we remain confident in the forecast provided, so the focus remains on offensively preparing for customer opportunities. Over the past few quarters, we've also talked about our pursuit of operational projects to improve our balance sheet in the nearer term. We're making great progress on that front with potential opportunities to sell surplus inventory and certain fixed assets. We believe we could begin to see these benefits in Q4. With respect to the longer term, while the capital required to fund the two water orders announced this year was included in our forecast under the assumption that we self-fund those projects, we continue to develop opportunities to partner with third-party capital providers to fund the CapEx needed for future ECO projects. We're fairly deep in exploring the third-party approach and are working on a couple of early-stage projects with this structure in mind. This approach would mean equipment will fall under product sales and we would have AMS contracts for the operational portion. While it would change the P&L geography of these deals, it would mean unlimited growth opportunities for the company. Let me conclude by saying that we are continuously assessing ideas to drive value for shareholders through all available financing approaches, balancing the various factors in such decisions and reviewing any and all opportunities to ensure we have sufficient liquidity to execute our strategy. And with that, I'll turn the call back over to Andrew for his closing remarks.

Thanks, Dave. The commercial activity in the third quarter feels like signs of what's to come over the next several quarters. Improved markets, both in terms of pricing and demand, gives us confidence in more projects to increase supply, as well as a growing focus on improving existing production and reducing emissions. As we look to close the year, we are focused on project execution and converting the robust pipeline that is laid in front of us into backlog, thus setting the stage for our three-year outlook that will not only show remarkable growth, but additional value to our stakeholders. The strategy the company has undertaken over the past several years has started to take a hold, and our leverage to natural gas and water exemplifies our participation in the sustainability movement. And with that, I'll now turn the call back to the operator.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Kyle May with Capital One Securities. You may proceed with your question.

Hi, good morning, everyone. Maybe just a couple questions around the capital structure review. First one, just for clarification, now that you're focused on operational opportunities, is it fair to assume that there's no intent to issue equity, at least in the near term?

Again, maybe the risk of being a little bit repetitive. We are focused on the operational elements we talked about. I think those are basically prudent business opportunities that we have. Again, reflecting a little bit on my comments, there wasn't some pressing need. Maybe we erred in not being clear from the start. The forecast we provided certainly did not indicate any significant pressure points. This is really more about offensively preparing ourselves to take advantage of what we see is a really strong pipeline. So we're going to focus on the operational opportunities we have, and we touched on some of those, both Andrew and I, this call, other calls, can help liquidity, help leverage, help both, and we think those are the most prudent place to have our attention at the current time.

Got it. Okay, that makes a lot of sense. And Dave, I know you touched on you know, the availability to partner with third-party capital providers. Is there any, and I realize it's, you know, a work in progress or you're exploring all opportunities, but is there any other, I guess, color that you can provide kind of giving us a sense of maybe the range of opportunities that you're considering or maybe things that, you know, you're not considering to kind of narrow down the field?

Yeah, it's really kind of situation specific, I would say, and You know, maybe this has taken longer than it should have, but you're trying to thread, you know, limitations we might have in our current credit agreements or notes. You're dealing with customers. I mean, there's a reason why customers call us and favor the eco approach, favor us, you know, owning that equipment. And then also you, of course, got an accounting, you know, ramification depending on structure. So as you try to kind of weave your way through those, I think a couple things have kind of – come to the top in terms of how we think about this and the potential types of people we could interact with would range from true capital providers, so people that are in the business of providing capital, to even joint projects with other people that might participate in that project that would put their balance sheet to work. So, you know, it really is situational specific and I would say we kind of have elements of all of those as we are looking at, you know, kind of a current project list and where we go in the future. And, you know, there's challenges too. You bid these projects sometimes, you know, a year or two ahead of when they finally are awarded and some of this needs to kind of be laid out at that time for the customer. So, you know, there's a longer lead time as well as trying to kind of, let's say, thread the needle on being successful on every front. Really, it depends on the project, but we're kind of in the mode on different projects with different potential partners on this, which obviously, again, would provide our ability to say yes to every ECO project should we come up with solutions here that make sense and that pipeline becomes fully accessible to us.

Okay, that's helpful. And then maybe shifting gears just a moment, I don't want to say there's a pivot or a change in the business, but it did sense like, um, or maybe it sounded like, I think it was a comment that, you know, the business is now more leveraged to natural gas and water. Um, and, and obviously we've, we've seen this change over the last year or so, especially with, um, the latest project award for the water business in September. But maybe if you could just kind of give us an update on, you know, the, the outlook for the business, you know, kind of how. how the different pieces come together between natural gas and water. And then, obviously, it seems like maybe the other components are going to be a smaller piece of the business. But how should we think about that mix going forward?

Yeah, I think that's a great observation, and I think it starts with the work we've done over the past few years as we've exited some of the non-core, more cyclical-related products with lower margins, as you can see in the financials that we're providing today. we are, by definition, becoming more aligned to natural gas. And we've invested significantly in our water business. And as we outlined in this earnings call, water now represents over 25% of our $1.4 billion of backlog. So it is certainly an area that we're seeing more interest. We're certainly seeing the opportunities to integrate solutions in a broader and a bigger way. I think the expertise of the company is moving from rotating equipment to more of a molecule approach. And so we're adding talent and resources in the areas that can integrate. And both of those commodities have the ability for us to help drive efficiency, productivity, enhance a better environment, sustainability. And those topics that we're talking to our customers is what's differentiating us. So if you look at our pipeline today of the order potential that we have, it's more revolved around those two to structure of businesses. And so we spent quite a bit of time working on how to integrate those solutions, and we're starting to see that pay off. So, you know, much less cyclical once you've booked the backlog, but of course the business that we had with PEQ and some of the assets that we had in North America compression and some of the assets we had in Villele were more oily, and that's now become more of a rearview mirror for us. So it's a natural progression for us. Our customers are taking us there. And we're seeing that become a real key differentiator for us with the technologies that we have in that portfolio.

Got it. Okay. Andrew and Dave, I really appreciate the time this morning. It's great to get an update from all of you. Thanks.

Our next question comes from the line of Doug Becker with Benchmark Research. You may proceed with your question.

Thanks. I just wanted to follow up in the capital structure of you a little bit more. Based on the commentary, it doesn't sound like a facility sale where you keep the aftermarket business is a priority or particular focus at this point. Is that fair to say?

Doug, first of all, congratulations on your move to a new shop. So look forward to working with you going forward. I would say that falls under the operational side of things. And that is, I think when we mentioned sale of fixed assets, that would fall under that. So we have had over the last 18 months a couple of situations where customers have decided to buy assets, but we retain the O&M side or the aftermarket. And that certainly is, I mean, we have a couple of those. We always have those kind of discussions going on, and there are a couple of those that are kind of in front of us as we talk. Nothing, you know, tremendously significant. They tend to be oftentimes significant. smaller in scope, but no, that would be something that if someone has an interest in some existing assets and it makes sense for them, it makes sense for us, and we retain the O&M contract, that absolutely could fit into our view of operational opportunities.

Got it. And then how advanced are some of the discussions about trying to manage the working capital better, whether vendor-supplier payments versus the milestone payments you might receive.

Yeah, you know, it has been a focus, and I think it's been a focus since the spin. If you go back to the time of the spin and have to go back and see, we probably freed up, you know, a couple hundred million of working capital. So it's been a tremendous focus for the company and continues to be. You know, we're in an industry, as you well know, that cash is king. And so... we're seeing from our customers. I mean, part of the focus on more customers asking about eco is looking for ways for them to offload that capital investment on others. And frankly, you know, we're not a bank. And so we've got to, then our vendor partners have to participate. If they want to participate in this industry, have to also, you know, participate in what's required. And so that continues to be a big focus. And I mentioned some opportunities around inventory, you know, regardless of how good you are, you always have some inventory you can move. We've got a real focus on that and have some good opportunities there. We've focused on fixed assets that are available or could be available. We have things that roll off contract. We're focused on that. And I think our internal teams, both from an operational standpoint, I think the plants have probably never been better run than what they are today. Really impressed compared to where we were at the spin with the way our manufacturing is performing. And then on top of that, I think we've got a tremendous sourcing group, tremendous engineering group, tremendous project management group that all work together to control what we can within our four walls, but also deal with our customers and our vendors to push out terms with vendors and do what we can on the customer side make sure we're taking advantage of the opportunity to get those advanced payments and other things that are important to our cash flow.

Sounds encouraging. And then our last one, just maybe an update on the Middle East project. I know you said it's making progress, but particularly thinking about it in the context of working capital requirements going forward.

Yeah, so that project, as we said, it is really kicked into full gear now. It's a major project, so not only our internal resources, but also vendor partners, a lot going on. It's a global project for us, both in terms of our resources, but in terms of vendors who are involved. So, you know, every day there's challenges. You know, we've got everything from, you know, COVID that springs up in certain geographies and other areas. And so we're actually performing incredibly well considering some of the things that the hurdles that are there. So the project's in full gear. We're on site. We're, you know, concrete is pouring and dirt is moving, and we're gearing up our people on site. Our facility in the UAE is quickly approaching kind of record level of employees on site. So, you know, very, very happy all the way around with how that's progressing. On the timeline, customer seems happy with us, so that's all going quite well. In the structure of the timing of things, no significant change from what we communicated earlier this year. Next year would be a working capital use. And it's primarily, again, related to this project. So no changes to that. We are in the process of developing our 2022 plan. So premature to give you any exact numbers by quarter or even for the year. But I think our view of, as Andrew said, 15% EBITDA growth still in play and leverage kind of flat with where we'll end this year. We're obviously working to take that down, but I would say pretty much on the plan that we laid out earlier in the year.

Got it. Thank you very much.

Our next question comes from the line of Tim Monticello with ATV Capital Markets. You may proceed with your question.

Hey, good morning, everyone. The first question I hear is just around the product sales awards. It sounds like the Q4 guidance change had to do with some movement in your opportunity set. Am I reading it the right way to think that you may have been expecting some projects to convert in Q3, which would have generated revenue in Q4, and now that's perhaps more of a Q4 award story?

Yeah, I think the, you know, we're, I don't think we've been this busy on the commercial front for years. It's hard to remember being as busy as we are globally. So the opportunities are there, the bidding activity incredibly strong, you know, a lot going on. I would say what's not changed materially is the fact that it's still a process to get things, you know, on the customer side from kind of bid to order. So things have slid a little bit to the right. Nothing new. I would say it's not worse by any means. But, yeah, there are some orders. I mean, you know, just this water order we announced, for example. You know, we've been kind of hinting and talking about that for quite a while. And so some things have slid a bit to the right, but all still active projects. It just comes down to Timing and since product sales are percentage of completion accounting, if the order slides to the right, you're going to see a quarterly revenue impact slide to the right as well. But no change in the opportunity set we see. It's just customers are still being incredibly diligent on putting their capital to work. It's still a competitive space. They've got to go through their processes. And frankly, there's been even some cases where you know, COVID, the inability to get in front of people and get documents signed has slowed some things down. But at this point, you know, the commercial pipeline looks incredibly strong and we're just working as diligently as we can and pestering customers as much as they'll take to try to get, you know, quotes and bids turned into orders.

And Tim, one follow up to that. I think what's important that you kind of picture is that as we build this pipeline, we constantly force-rank the pipeline into probability of go and get. And so get means is Xterra going to win, and go is when is the project going to happen. So we're constantly as an organization working through our S&OP plan, identifying the goes and making sure that we're in great position on the get. And so that doesn't mean if you win an order, the whole startup process initiates from that point. You know, we have a lot of application work that's in advance. We invest heavily up front in engineering. Dave alluded to working capital unwind as one of our operational goals. You know, we have inventory aligned to certain projects that can be recognized in terms of revenue fairly quickly should these orders come through at a certain point. And so there is an element here of making sure that we have a good pipeline, we have a good set of activity both from an engineering application work and, in some cases, material that's positioned in our manufacturing facility. We're constantly balancing the overall underabsorption versus taking bets on certain projects. And so, as Dave said, pipeline is feeling good. I'd say North America is probably the noticeable area that's picked up since we last spoke. We've seen a lot more inquiries in North America for our traditional process and equipment. with some of the ancillary equipment and some of the applications, predominantly in the Permian, but also in some other locations. That's the region that we've probably on an absolute value compared to the same quarter last year. I've seen an increase in activity in terms of bid activity, but Middle East still continues to remain strong. Latin America, if you go back to my fourth quarter script, last year we talked about this year was going to be a year of the renewals. And we've demonstrated that with a tremendous commercial team that have done amazing work renewing contracts with really little capital that's required on a go forward. So the billion four of backlog that we've seen just happened to be in the area that we had assets installed, and we've been able to renew them. But since probably the summer, we've also seen a significant increase in appetite for new projects, mostly aligned to our gas processing, and also some water projects in Latin America. We've got some assets that we're trialing right now with a large customer in Latin America on our water side, and we're feeling very good about the get side of certain applications that we're bidding on in LATAM. So across the board, we've seen a really good pickup in commercial activity, and really hoping here in the next couple of months we start to see that come to fruition and have a better position to talk about how we're building for the next couple of years, as we indicated in the earnings script. So hopefully that gives you a little bit more color.

Yeah, no, that was extremely helpful. Um, I guess when you look across the opportunity set and your ability to execute on that and, and also considering the delays that you saw in Q3, I guess, just on around awards, um, is there anything, you know, in terms of what's happening in the global supply chain. Picture that might, you know, continue to impact the ability to both translate bids into awards over the near term or, you know, extend times for delivery on projects just given, you know, issues around supply chain.

So it's a great question. I've been listening to a lot of our peers and some others in the industry that have talked about this, and I think we've got a little bit of a unique situation. Two things. First of all, a few quarters back, we talked extensively about the fact that we were maintaining a critical workforce, and we weren't going to allow expertise to simply leave because we had shortfall in volume. And we've seen that with some areas in the industry where talent has been a challenge and people are struggling with some execution because they let critical talent go. We decided this cycle, certainly in our North America and our P&T and just globally in some of the areas, particularly in water where we've been adding talent, we maintained a very healthy set of expertise and utilize them in ways that help us drive productivity. We've had a lot of projects internally of how we design cost out of various applications. And so we've been focusing the resource on areas of productivity, health efficiency, quality, and even designing more efficiencies into our safety. And all those metrics we're seeing coming through in a great way. What we're seeing in terms of supply chain, I think my biggest concern is just a little bit more of the unknown when it comes to logistics. We've seen it in North America. We've seen various reasons why the North America supply chain has been challenged. We've seen pictures of the ports. We're seeing similar challenges in other markets but working alternative routes. We're having to work through tradeoffs between overland, on sea, or maybe air. And so we're constantly working on those three areas to make sure that the components and the products can ship. In the case of our larger projects, one of the big changes that we made a number of years ago was to manufacture in the closest country to origin of where the products are being shipped to. So Dave talked about our Han Maria facility, pre-spin of the existing extern and really in the first year or two, Hamaria was a Bulali facility manufacturing a very different product, and we've invested and developed the capabilities there. So what you see today in our Hamaria facility is large infrastructure that's already built, tested, equipped, almost modular-like, that then can be shipped to the destination without having the worry of shipping components from all over the world to central locations somewhere in the middle of a, of a customer location and then working through the supply chain and logistics. So I think part of what I'm describing here is a little bit of self-help operationally. The manufacturing teams have done a really great job this last 18 months preparing for this. COVID has allowed us to reflect and stand back and really get into the heart of the operations. Whilst at the same time, Tim, I think you're aware we've been significantly investing in a new Oracle program. taking all of our business to the cloud. And so it's really allowed us as a company to focus on the basic processes along with the specifics of how we were able to improve and have the flexibility and ability to see some of the bottlenecks. So a lot of investment in that area, focusing on productivity, driving efficiencies with our engineering, all of which has allowed us to kind of get our arms around some of the supply chain issues that the industry has faced That doesn't mean to say we're out of the woods, but I think you'll get a sense from this discussion, we have our arms around it, and we can forecast better than we ever have in terms of being able to predict the challenges ahead.

Okay, that's helpful. Next one is just on, it was nice to see that the net debt came down quarter over quarter this first time we've seen that, and probably since the beginning of 2020. was there anything that was, I guess, abnormal in the quarter that drove that? Did you have any prepayments or was that a result of operational?

No, it was strong. Yeah. Nothing, no one timers or anything. So nothing out of the ordinary. It was just, you know, I think we've described a lot of efforts going around in the company and, and one that hasn't stopped and it's people's part-time job or full-time job is focusing on, you know, running the business and working capital and, You know, getting customer payments on time and so forth, and just a lot of hard work around the world by everyone to make sure that we're performing as well as we can in the environment we're in. So nothing out of the ordinary.

So on that front, Dave, when you look out, you know, maybe next few quarters, how do you see that net debt progressing?

Yeah, I think, as I mentioned, the project in the Middle East is running well, so we're starting to really get into the meat of that project, so that working capital investment is really underway, I would say. I think this year we said we'd finish the year 60 to 70 million negative free cash flow, and we're hedging something slightly better than that, probably more in the 50, 60 million range. And so I think that's, you know, we're obviously continuing to work on ways to improve even upon that. And then as we move into next year, you know, we'll be in the heart of that project. So again, the business plan isn't done, so I really can't yet give you, as Doug asked, you know, what's the progression on working capital investment, but we'll be making that investment, you know, next year and being in the heart of that project the majority of that next year. We also have the two water projects. So there's capital involved in those, which was included in the forecast we provided earlier this year. And those projects are moving quickly from engineering stages into procuring and building equipment and so forth. So that CapEx will start picking up next year as well.

Got it. And then just following up on some of the questions on the capital structure review. I guess this question has a few parts to it, but it seems that the options that you're pursuing right now in terms of, you know, using project financing partners and some asset sales, you know, wouldn't result in, I guess, a finite end to this capital structure review. It would just be sort of a change of strategy around financing. which would probably be on a project-by-project basis and opportunities, I guess, to sell some assets that you would deem non-core over the next couple of years. Is that the right way to think about it?

I'm not sure. Again, maybe our issue, it feels like a bit of an overstatement of where we are. Again, when we started this, it was really about offensively position in the company as best we could to take advantage of opportunities where customers tend to be looking for more eco, not less. And so I would say the change of strategy may be more around the project financing, where it used to be a hallmark of this company for a long time to use our balance sheet. And so that's probably the piece of the change of strategy. I would say everything else is just running the company. we're always going to look for opportunities that are accretive to value, whether that's selling an asset that's been deployed for a long time that a customer now wants to buy, looking for opportunities to monetize inventory. Those kind of things are just how we run the company. I think going forward, it's probably more important in this environment, I think, obvious to To folks that understand this industry and some of the others that serve it, it's a changing world. Financial markets tend to be a little more volatile. They can be widely opened and closed, and your industry can be in favor and then out of favor. Traditional lines of financing like banks can love an industry, and a year later they hate it. And so a lot of that's just running the company, and that's why we're going to focus on the things we can control first, but always keep our head up around what's going on in the world that we need to anticipate. So we spent a lot of time trying to project, you know, a year from now, two years from now, the purpose of developing this long-range forecast and sharing, you know, some elements of it was around, you know, the main purpose of that forecast was us looking forward and making sure we're prepared to take advantage of opportunities and frankly head off anything that could be a challenge. You know, there's not really in many ways, it's not a change in strategy other than this idea of bringing project financing to a company that's never significantly been involved in that in the past, although we have some history, you know, way back.

Okay. So I guess more specifically on the project finance side, like I guess an example would be you would sign a contract to the customer, a typical customer for a D-Boom contract. You would sell the project. that contract basically to a third party and then you would build it and then operate it on the AMS side after that, their capital would be used to finance the build. Now, how would that translate to returns on those projects compared to historical returns? I would imagine that the capital that they would provide would be a higher cost capital than you would get from a bank line or one of the other ways to finance it today.

Yeah, and so, as I said, you know, the equipment would, 10 to 1, we would have a partner from the start. I think that's one thing we've seen. We've looked at, to an earlier question, we looked at, you know, is there ability kind of once you're up and running to do something to monetize a contract? Those are difficult for lots of reasons. This is more of an approach where we would have, I'll call them a partner and use that kind of term loosely, from the start. We've got to go I think, in at the bid time, and that's part of the reason for the timing of this. We really need to go in front of the customer at the time of the bid and say, here we are, we're bidding this project, and oh, by the way, here is our partner that may be financial only or may have some operational role as well. And so it would be likely from the start that we would head into that. So it would be a product sale, recognized as a product sale up front, so it does change the I'll call it the distribution of revenue. So it's not like we don't have that element anymore. It's just a product sale, and then we would have a long-term contract which shows up in AMS, where today the equipment, call it lease, and the O&M effectively shows up in the eco. So I think, yes, we wouldn't be capturing the economics from, I'll call it the lease side of that, like we traditionally have done. When you look at a pipeline of $3.5 billion and the potential capital, we could do it all anyway, and our goal is to figure out how we can do it all. And so will there be some projects we've self-fund? Sure. I'm not going to say that there wouldn't be, but we certainly want to take an opportunity where the economics permit it to get a long-term AMS contract, get a product sale deal and not have to carry that capital on that project.

And perhaps your cost capital is too high anyway to justify the lease out of the economics anyway. I guess, and last one for me, I guess, is just around that. Are you planning to find one partner or a couple of partners that would sign like an MOU and say, you know, we'll finance any project that meets these sort of specifications or would you have to seek out project partners on an individual basis?

I would say it's a combination. We're talking to some folks that have, you know, I mean, one of the challenges when you look at the 25 plus countries we're in, it's hard to find someone that covers all that, you know, that overlap of the footprint, but there are people. So we're talking to some people that could be more of a global partner wherever we go, but I would say the highest degree of success so far and where we're probably further along is more regional or country where people, that's where they operate. So they're comfortable in that space where they may not be, you know, someone that has the global footprint to deal with a project on the other side of, you know, the globe.

Got it. Thanks so much. I'll turn it back.

At this time, we have reached the end of the question and answer session. I'll now turn the call back over to Andrew Way for any closing remarks.

Thank you, operator, and thanks, everyone, for participating today. We look forward to updating you after our fourth quarter earnings. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.