Greenlane Renewables Inc.

Good afternoon ladies and gentlemen. Welcome to the Green Lane Renewables Incorporated third quarter 2022 results conference call. At this time all participants are in a listen only mode. Following the results we will conduct a question and answer session. To join the question queue you may press star then one on your telephone keypad. Should you need assistance during the conference call you may signal an operator by pressing star then zero. Today's call is being recorded, and a replay will be available on the GreenLane website. I will now turn the call over to Darren Seed from Insight Capital Markets. You may begin your conference.

Thank you, operator, and good afternoon. Welcome to the GreenLane Renewables Third Quarter 2022 conference call. I'm joined today by Brad DeVille, GreenLane's President and Chief Executive Officer, and Monty Balderson, GreenLane's Chief Financial Officer. Before beginning our formal remarks, we'd like to remind listeners that today's discussion may contain forward-looking statements that may reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Green Lane Renewables does not undertake to update any forward-looking statements except as may be required by applicable laws. Listeners are urged to review the full discussion of risk factors in the company's annual information form, which has been filed with Canadian securities regulators. Lastly, while this conference call is open to the public, and for the sake of brevity, questions will be prioritized for analysts. Now, I'll turn the call over to Brad.

Good afternoon. Thank you, everyone, for participating on today's call. I'd like to start off with a few financial and business highlights from the third quarter, as well as provide some industry commentary before I turn the call over to Monty for a more detailed review on the numbers. Greenland delivered another quarter of record revenue generation with $19.9 million in the top line, and we remain optimistic about the growth of the R&D industry and our role in its success. Adding to this top line success, we had a consistent gross margin of 25% in the third quarter alongside an adjusted EBITDA of over $400,000. With increasing global focus on impactful solutions to decarbonize our planet, the RNG industry has experienced significant consolidation this year, together with new support of regulations and funding, pointing to the scale-up of the number of RNG projects. The acquisition by BP of US-based Archea is particularly noteworthy, as several of the energy supermajors have announced decarbonization efforts and have both the capital and the capacity to amalgamate existing RNG development platforms into their business models. It was never a matter of if, it was always a matter of when. We anticipate further consolidation in the sector which together with supportive regulations and policies such as the Inflation Reduction Act and the We Power EU Plan are expected to provide additional capital to help expedite RNG industry's growth. We expect this will have a positive effect on the pace of development for R&D project developers and owners, increasing market strength for project financing, and subsequently new sales opportunities for Greenland. Our success in winning new biogas upgrading system supply awards continued in the third quarter as Greenland announced over $13 million with two new contracts with South America. This highlights not only the competitive advantage of our multiple core technology approach, but also that we are benefiting from our singular focus on the global RNG market, which continues to build momentum and size. We continue to build out our talented GreenLane team and enhance our internal systems and processes that will further position GreenLane for future growth. We maintain a strong financial position with no debt, and over $21 million of cash on hand, which provides us with ample flexibility to invest in our core business, to fund our deployment of development capital program, and to pursue strategic growth initiatives, including evaluating acquisition opportunities that can expand our market presence and technology offerings. As I previously alluded to, the R&D industry has experienced significant consolidation this year, as well as new supportive regulations and funding, which we believe points to a meaningful escalation of RNG projects and production. The BP-Archaea energy transaction for $4.1 billion marks the largest ever RNG transaction, with BP announcing plans to increase Archaea's current RNG production five-fold by 2030. Global Energy Supermajor Shell is rumored to be one of several companies involved in a second-round bidding to acquire one of Europe's largest biomethane producers, Danish-based Nature Energy, in a transaction that could be worth $2 billion. In another highly supportive RMG transaction, U.S. renewable energy leader Nextera Energy recently revealed the acquisition of a portfolio of approximately 30 operating landfill gas to electric facilities in a $1.1 billion U.S. deal. with plans to spend about $400 million US to convert the portfolio to RMG. We are also seeing transactions announced in Europe as global infrastructure player Macquarie announced that its green investment group has acquired German biogas platform BayWa Bioenergy. As we noted in the news release, it is important to highlight the US Inflation Reduction Act, which was signed into law during the quarter and which will provide $369 billion over the next 10 years on spending and tax policies to reduce greenhouse gas emissions and spur the expansion, the expanded production and use of domestic clean energy. This legislation also contains provisions for biogas property, which includes biogas upgrading equipment as qualifying equipment for purposes of the Section 48 Energy Investment Tax Credit, which can reach 40%. Also in the U.S., the whiskey industry is looking to RNG as an important tool to help decarbonize operations, as both Jack Daniels and Jim Beam have announced recent RNG-related projects involving over 429 million. In Canada, a revised legislation in Quebec centered on the minimum RNG volumes in the natural gas grid now require gas distributors like Energier to deliver 5% RNG volumes by 2025 and 10% by 2030. with energyers subsequently openly asking RNG producers across North America for interest in long-term commitments to supply the necessary RNG volumes. In Italy, the European Commission announced that it had approved plans put forward by the Italian government to help increase domestic production of biomethane in the country, backed by funding of 4.5 billion euros. I want to draw your attention to these significant industry developments as Greenland is very well positioned to take advantage of the opportunities they create and the anticipated ramp-up in demand for RNG and related biogas operating solutions. I'd like to thank, once again, to take this opportunity to thank the Greenland team for their dedication and commitment to our mission of helping to decarbonize the world's energy systems, as well as our customers for choosing Greenland as a trusted partner.

I'll now pass the call over to Mati. Thanks, Brad, and good afternoon, everyone. As a reminder, all figures are in Canadian dollars unless otherwise stated, and all comparisons are for the third quarter of 2022 against the third quarter of 2021. As Brad mentioned previously, GreenLane posted another record quarter. Our revenue in the third quarter was $19.9 million, which represented a 48% increase over the comparative period of 2021, and is the highest quarterly revenue achieved in the company's history. System sales revenue accounted for 94% of total revenue in the quarter, which is recognized in accordance with stage of completion on the projects with the remaining 6% of revenue coming from aftercare services. We delivered a gross margin in Q3 of 25% or $4.9 million compared to $3.4 million or 25% in the third quarter of 2021. Our profitability improved significantly over the comparative period in 2021 as we reported adjusted EBITDA in the third quarter of $400,000 versus $83,000 in the third quarter of 2021. Net income in Q3 2022 was $600,000 compared to $52,000 in the comparative quarter of 2021. During the quarter, the company announced new contracts with a combined value of $13.5 million for the supply of its biogas upgrading technology for two landfill to gas RNG projects in South America. The contracts involved the supply of two water wash upgrading systems the largest in its product line, each capable of processing enough landfill gas to produce up to approximately 850 million BTU annually of pipeline specification RNG for commercial use. Order fulfillment commenced immediately on these contracts. As at September 30th, the company sales order backlog was 36.7 million. And as a reminder, sales order backlog is a snapshot at one moment in time, which varies from quarter to quarter. The sales order backlog increases by the value of new system sale contracts and is drawn down over time as projects progress towards completion with amounts recognized in revenue. Our sales pipeline of prospective projects is approximately $900 million as of September 30, 2022, which was consistent with Q2 and is an increase over the $850 million we reported at the end of 2021. We continually update our pipeline of active system sale opportunities based on code activity, which represents visibility into significant number of opportunities that funnel down through our sales process. And those opportunities successfully are converted into contract wins. They then move into our sales order backlog. In July of 2022, GreenLane increased its credit facility with TD Bank from $12.5 million up to $20 million. and the facility is secured by a guarantee from EDC, which allows Green Lane to enhance sales by providing further guarantees and letters of credit to our customers who require them. Our balance sheet remains robust as we exited the quarter with a cash balance of $21.3 million and no debt, providing ample flexibility for Green Lane to invest in and grow our core RNG business as well as pursue other strategic initiatives. We look forward to keeping shareholders apprised of our progress, and with that, I will open the call to questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone please pick up your handset before pressing any keys. To withdraw your question please press star then 2. We will pause a moment as callers join the queue. Your first question comes from Aaron McNeil with TD Securities. Please go ahead.

Hey, thanks for taking my questions. Rad, you noted the consolidation in the RNG producer space. I guess I'm wondering, do you view the equipment and service providers in the RNG space as fragmented as well? And would you be willing to be part of a consolidation play If the answer is yes, what sort of qualities would you look for in a potential acquisition target?

Thanks for the question, Eric. Well, the first thing was the point of noting the consolidation that's happened in the industry thus far. It's really our customer set. And that's positive for a couple of reasons. So one, we see growing scale. We see growing amounts of capital, especially when you have the supermajors come in with full amounts of capital to deploy. And the fact that they aren't participating in this industry as an equipment provider, that's our job. And so those are the people into which we provide capital. Sorry, equipment. Specifically, are we looking for consolidation in the solution provider space or the technology provider space? We do see some fragmentation around. We know that that exists. We aren't looking specifically to be consolidating with someone else, other than we have been very clear that our strategy on the M&A side is twofold. So one is targets like the AIRDEP acquisition that we completed earlier this year, which is to increase the technology portfolio and enhance that within the company. And then secondly, if there are competitors that, you know, part of that fragmentation that we see in certain jurisdictions for us to be the consolidator. So, I mean, that's currently our strategy and we're continuing to look for any and all opportunities that might enhance value for Greenland.

Fair enough. You know, obviously the track record on revenue growth has been consistently good. I guess throughout that time, though, the backlog had also increased in advance of that revenue growth. So I know you're going to tell me that you don't give guidance, but, you know, the backlog sort of peaked in Q4 of 21 or with the results last year. I guess it sort of calls into question if that growth can continue, at least in the next couple of quarters. So I guess my question is, you know, as we're thinking about refining our 2023 expectations, and particularly for the first half of next year, how quickly could you convert a hypothetical new order into revenue in light of, you know, ongoing supply chain challenges and other practical challenges?

Yeah, well, firstly, two things. On the backlog, of course, it is a snapshot in time. It's at one point in the quarter, and the quantum is subject to when exactly you get the order. And also, the backlog has has seen some variability. So it has had ups and downs over time, but our revenue has consistently grown. So, you know, putting those two things together, you know, obviously you're right, I'm not going to give guidance going forward. However, you know, we're confident and comfortable that going forward, you know, we're able to convert the contracts at our normal pace, which is anywhere from nine to 18 months is when that would get deployed. Normally, when we sign a contract, we start executing against it right away, and we start the revenue recognition right away. Given the supply chain challenges, I think we've seen the worst of that. It's not completely solved yet in all circumstances, but I think we've certainly seen in the rearview mirror a lot of the challenges that we had earlier this year. With that clearing up, then we should start to see at some point a shortening of our contract execution duration.

Fair enough. Maybe I'll sneak in one more follow-up if that's okay. How does the backlog inform your staffing decisions, if at all? I guess I'm asking the question in the context of you strategically invested in growing your staff over the last couple quarters and I guess Do you kind of take a pause here and, you know, try to figure out where activity is going or are you confident enough to continue to staff up in advance of what you think is a pretty good outlook?

Yeah, I think, you know, generally we have to look at the underlying fundamentals of the industry and, you know, some of what we saw this past quarter, again, highlighting the consolidation that happened within our customer set. So a lot of activity with our customers buying each other that's keeping them occupied and keeping them busy. But that all holds well for the future of what for, for Greenland in particular. So that gives us the confidence that we need to continue to be ready for when those contracts come in because our past history says they come in in a lumpy fashion. You can't always predict exactly the date upon when you're gonna sign a contract. And then the other thing in the last quarters, and still is part of our plan, is to continue to invest in systems and processes that allow us to scale up. So that's, you know, we've seen significant growth in the business, and now we have some catch-up to do with our systems, processes, and procedures. So that's an area that we continue to invest.

Okay, great. Thanks, guys. I'll turn it over.

Thanks, Aaron.

Your next question comes from David Casada with Raymond James. Please go ahead.

Hey, thanks. Good afternoon, everyone. My first question, maybe just a follow-up here on the topic of industry consolidation. I mean, given that so many of these transactions have happened recently, would you expect that as these larger players are digesting these acquisitions that we might see an inflection point in order activity among that subset of customers? Would that be I guess, sort of consistent with what you would expect? And then maybe kind of like in a related question, do you think the bidding process for upgrading systems with these larger, more sophisticated players will change compared to what you've had in the past?

Good questions, David. Thanks for those. I think some context on these big moves, particularly by BP and possibly by Shell with the nature energy acquisition, If you look at it from their perspective, we know the kinds of discussions they've had, it's all in public domain, but they need to make significant investments to see significant volumes in the marketplace for it to make sense to them. We've seen some of the supermajors invest in wind and solar, which is tangential to their core business of supplying fuels for transportation markets. RMG factors to the heart of their transportation business and that's one key reason why they're interested in this. But also it's a belief that they can scale in this space. So that does suggest that what you just said in terms of an inflection point, that's certainly what they're hoping for and what they're looking for. I think at the surface it's quite obvious what BP was looking for in the Arkea deal was they saw a player that had done some consolidation Before BP purchased them, they had merged with Aria to make them a significant, if not one of the largest in North America. So that's a good starting point for BP, and it's just a starting point. So I think that's kind of the overarching themes for the kind of growth that we might expect. And then, sorry, your second question was around the mix of the customers. Was that it?

No, it was more just like around how will these larger players, how do you expect they'll go about procuring equipment? What will bidding on those new projects be like? Will it change at all?

Yeah, well, they've already been involved. So I think what we're seeing here is a doubling down or more involvement. So we've had experience supplying several of the supermajors already, either directly or through their joint ventures. um and you know i guess from where we sit we're not expecting too much change we know that they're going to retain um much of the uh the infrastructure the people that are in these exact positions to be able to keep business as usual because you know there's been some some good success and and no doubt they'll they'll uh how should i say this they're going to want to manage this delicately they're not going to want to bring the full force on half of their you know their processes for deep water drilling, for example, into the RNG space, because that's not really appropriate. So I think they're trying to capture the learnings that have existed in these organizations, which does suggest that we'll see much of the continuance of the same kind of buying practices that we have seen in the last couple of years.

Okay, great. Thanks for that, Brad. And then maybe one, just thinking about among the RNG equipment or upgrading system suppliers today. Curious if you could just touch on maybe the competitive dynamics you're seeing in North America and Europe. I'm just curious if anything has changed there. Has there been any change in some of the other competitors that you're potentially bidding against on projects? Just wondering if your positioning competitively feels like it's the same as it has been

We think generally. Our position has probably increased a little bit. Obviously, within the last quarter, we did see one of our competitors leave the picture. So we've had some increased interest as a count of that. And other than that, we continue to have good success in the marketplace against many of the competitors that we continue to see. still some of our competitors are battling long lead times that's somewhere we've been able to compete effectively um you know we've continued to compete effectively on our multi-core technology strategy which many of our customers find appealing in terms of when they talk to green lane they know that it's an unbiased opinion that they're getting and we're not selling what we have just because that's all we have um so those are you know the kind of dynamics that we've seen that if uh created our success thus far over the last couple of years. I think we're still seeing those same effective dynamics right now.

Okay, awesome. Thank you. Maybe I'll just get one more in if that's okay. Your commentary around the whiskey industry is interesting. I'm just curious if there is anything special about that particular industry that makes it amenable to looking to source RNG or would there be other I guess call it like food and beverage and markets that could be similarly interested in procuring RNG or getting involved there?

Yeah, I guess it was not necessarily obvious in the material, but yes, there is some special nature to that industry. The feedstocks, they're in volume, so it's large, it's targeted, it's homogeneous. But what may not be obvious on the surface is the degree that's been happening in Scotland, the Scotch whisky industry. And that's something that Greenland participated in in the early days, some years ago, when that was getting going and taking those feedstocks. So this is the waste products coming out of the distilling process and turning that into energy. So there's a good precedent in one of the largest whisky industries in the world. And it's taken a little bit of time for that to translate into the North American context. We're starting to see it now, but we have seen it successful in other markets. So I guess that's maybe why we highlighted it, but failed to connect the dots with some of the other markets where that's had success previously.

Great. Thanks, Brad. Appreciate the call. I'll turn it over.

Your next question comes from Nick Boychuk with Cormac Securities. Please go ahead.

Thanks. Good afternoon, everyone. On the M&A angle, we've seen public valuations in space obviously come down quite a bit. Have you seen anything privately that would suggest any of the other tech or consolidation opportunities you're looking at are becoming a little bit more attractive on the valuation front?

Firstly, hi, Nick. Thanks for the question. Have we seen anything privately? Nothing's coming to mind. You know, some of the, not all the companies out there are public, or certainly the competitors that we have, they're either, you know, part of a much larger company. We can think of Arrowkey or Wartsilla. They're two very large companies with, you know, by comparison, relatively small in the grand scheme of things. about, I guess, upgrading divisions. So that's not something that, unless you peel that apart from the larger company, is an opportunity.

Yeah, there's a few, I guess, in the private space, but we haven't seen a ton of activity there.

Okay, I guess I'll frame it a little bit differently. The silos of the world, there are smaller divisions that are baked inside of a larger conglomerate. Are you seeing more or less interest from the parent code to operate in RNG with those divisions now than previously?

I'd say we haven't really seen much change. We still, of course, buy Pure Gas two or three years ago, three years ago maybe, and they've been happy with that acquisition as far as we know. Arrow Key has been at it for a while, and we've had good success competing against them in North America. which is largely where they compete. But we haven't seen much change in those key competitors or any new ones that are a new big company starting a division or buying a smaller player.

We haven't seen that. Okay, got it. Just shifting to margins, you mentioned an encouraging comment that the supply chain issues you guys were experiencing seem to be kind of relieving or at least the worst of it has. Is there any read-through in the margin profile that we should be thinking about for the product gross margin coming back up towards that 25% consistently moving forward?

Well, it was 25% consistently again this quarter. I think your question is, would we see it increasing over time? We hope so. We'll see how that plays out. We are still, some of the supply chain challenges are electronic components. That's not a big surprise to anyone. So that's still a lingering element. Some of the other ones that were tough to come by parts, that's certainly working its way through the system. But over time, with cleaner and freer flowing supply chains, that is an opportunity to do some margin enhancements. However, remember that our business model is such that by the time we sign a contract with our customer, we have, loosely speaking, maybe 80% of our costs locked in with our supply chain partners on the other side of that. So I don't think we would expect to see a dramatic shift as a consequence of any supply chain disruption issues clearing up, just because we've been pretty much successful through navigating through the challenges of the supply chain and pulling our gross margins at a consistent level.

Okay.

And then the last one, just shifting a little bit of a different angle here. You've got more deployment that you've made into development stage projects. Can you just remind me what the timing is when you might see a system sale come from one of those arrangements? Like from the time you guys start to deploy a couple hundred thousand dollars to site Roughly how long do you think it takes from then until you actually recognize the full water watershed PSA system?

Yeah, that's a good question. We don't talk enough about that. So when we would be at a stage to deploy development capital, the development cycle, you know, it can be anywhere from, you know, on the longer side, more than two years. On the shorter side, it's unlikely to be less than six months. You know, so we think that entering at the two-year time horizon is probably – too long, too far away. So probably the way to think about it would be we would expect to deploy development capital for deals that would result in equipment sales, which would equate to project financing coming into the project maybe a year or six months ahead of FID or the point at which the project finance comes in and the order comes in for the system sale.

Okay, got it. That's really helpful. Thank you.

Our next question comes from Colin Healy with Haywood Securities. Please go ahead.

Hey, guys. I'm just looking at the kind of nine-month numbers here, year over year. And, you know, obviously revenue up 42%, very good. You know, the investment in selling and sales and other initiatives capturing more of the market. But I'm not seeing a lot of... margin improvement. I'm not expecting to see much on the growth profit side. I know that the margins are kind of what they are. But, you know, as you do more business, I was kind of hoping to see bigger, you know, even the margin improvement, you know, and some more operating leverage in the business. So I'm just wondering what the inflection point is going to be for Greenland. You know, if you double revenue, where do you, How should we expect to see margins improve? We've seen you double revenue. We've seen margins stay relatively static. We're seeing slight positive EBITDA. But what would be kind of the turning point for the company in terms of revenue when you can generate some kind of material, higher single-digit EBITDA margins?

Yeah, great question, Colin.

So for us, and we talked about it in prior quarters as well as today, so In order to see that leverage, and this is really the EBITDA margins that you're referring to, would be some of the scalability of the business. So we do know we're in a phase right now. We grew extremely quickly over the last two years, and our systems and processes hadn't kept pace with that. So we do have to reinvest into some of those, both from a headcount perspective and, you know, system implementation perspective. So once the benefits of those investments come into the business, that gives us a more scalable approach in the business, as well as all the normal kind of rationalization and productization of our product line, then that's the point at which we would expect to see some leverage at the even margin level. Now, you're next going to say, well, when's that going to happen, Brad? Well, I'll give guidance personally, but Give us some time to work through that. It is going to be a bit of an effort. We have been investing. We have more investment to do in that regard. It's also how quickly we're growing because the fast pace of growth is, to be honest, we have to put our energies there over the system implementation side of things. We'll move as quickly as we can on that front, but we've also said that our investments will be paced prudently. We're trying to have an investment profile or reinvestment back into the business where we keep even the margins in and around breakeven or hopefully on the positive side of that, just recognizing that we have to pace those investments as the business generates the cash.

Right, and I appreciate all that and full marks for the growth in revenue. I guess maybe a different way to phrase it would be, since I'm trying to get an idea of what margins could be, for the amount that you've scaled up, the amount that you've invested in staff and so on, how much business could you handle based on the current operating expenses? Based on the current staff, all the overheads, what's the maximum revenue that you could do?

Good question.

The idea of that question is to say, okay, that will tell me what EBITDA margins could look like. I know that your operating margins are going to be approximately what they are for the business that you're mainly doing. I'm just trying to say, these guys can do this much business and generate these EBITDA margins, and we don't care that EBITDA margins are low because they're growing.

Yeah. Well, we add headcount in two areas. So one is direct that hits the COGS line. So that's necessary to grow the business. But I think you're referring more to the G&A line. So that we have a certain amount of fixed that doesn't necessarily need to grow as we add new contracts because the addition of headcount will be charged against the projects that we execute. So that's kind of piece one. And then piece two is we have a certain headcount in the business now. We probably need to add a little bit more to be able to implement the systems and processes. And with those implemented, that should allow us to grow significantly higher revenues without adding more overhead costs to the business. That's the concept. That's what we're working through now. And that's the track for us.

Okay, thanks. I appreciate that, you know, trying to answer that. I'll step out of the queue.

Once again, any analyst who wishes to ask a question may press star, then 1. Your next question comes from Adam Gill with Paradigm Capital. Please go ahead.

Good afternoon, gentlemen. Just in terms of competitive environment, you guys have been pretty consistent with your gross margins. But obviously we saw one of your competitors who maybe wasn't as astute in pricing their contracts run into some trouble earlier in the year. Just with that, you highlighted a $900 million pipeline. I guess a two-part question on that. One, how many competitors are you against in that pipeline? And two... Do you think there's a risk of guys that are just going to go out there and try to grab revenue growth and not really worry about bottom line continuing to be a factor in the space and that potentially be a bit of a risk for you guys who obviously are pretty good at pricing out your contracts?

Yeah, well, thanks for the question. So first thing, we don't always know in our pipeline. So we have sometimes an idea sometimes of the degree of competition, sometimes we can get surprised and with new information to say, oh, really, they were quoting too? So that's not always something that's fully transparent in that process. What we can say for certain, of course, is that we're engaged with that particular project opportunity and then we capture it accordingly. The issue that you raised around competitors buying business, that's not new. We've battled that forever, I'd say, practice that was common in Europe for quite some time for years still is to a certain degree we do see some of that in North America we did see that with the competitor that you referenced you know they went in with some aggressive pricing and that didn't work out so well for them so it is it is something I wouldn't say it's certainly not a new threat to our business so you know despite that being an ongoing dynamic in the marketplace, we've been able to successfully compete against that sort of pressure.

Great. Thank you.

Your next question comes from Ahmad Shah with Bacon Securities. Please go ahead.

Hey, Brad. A couple of questions. First, I think you guys touched on it on the GNA line. I see there was some nice reduction, at least sequentially, And that's even more impressive despite the growth in revenue. So any color on that front? Any things you guys have done to cut some costs or some synergies from the AirDev acquisition maybe? Because I know you guys are ramping up some of the hiring. So any color on that?

It's Monty. I wouldn't read too much into the sequential number going down slightly. Obviously, there's timing, let's just say, of when people and systems and costs occur, so there's a little bit of lumpiness in it that perhaps Q3 was a little bit better than Q2, but I would expect Q4 to kind of have a consistent run rate. We are Still in, I don't want to call it early days, but we're definitely not through adding the necessary resources, be it people, be it systems, to scale the business, and we're going through that process right now. So I wouldn't read too much into it with it dropping quarter over Q2.

Fair enough. That's very helpful. And then secondly, on the ghost margin side, side of things. Remind us again, like what is the split between labor and sort of parts and materials? Just trying to think, looking ahead into the next kind of 12, 18 months, if prices of materials and parts start coming down slightly year over year, how much of a potential benefit to the gross margin we could see?

Well, you know, I don't want to say all, but I mean, The material portion in our COGS is clearly equipment. It, by far, is the overall driver. Obviously, we have hours that go into the project and stuff like that. But on an absolute scale, the material portion of our costs is materials.

That's very helpful. Thanks a lot. And congrats on a solid quarter. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Darren Seed for any closing remarks.

Thank you for participating on today's call. We appreciate your questions as well as your ongoing interest and support and look forward to seeing you on the next conference call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.