Ballard Power Systems Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 13 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2023 Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning. Welcome to Ballard's Q2 2023 With us on today's call are Randy McEwen, Ballard's CEO and Paul Dobson, Chief Financial Officer. In June, we hosted our 2023 Capital Markets Day. During the event, we provided an extensive update on the progress that Ballard has made, while also providing additional transparency on our expectations for our business. In case you missed the event, the webinar and presentation are available on the Investors section of our website.

Speaker 1

Consequently, we have intentionally kept our remarks today brief for this quarter. We will be making forward looking statements that are based on management's current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to

Speaker 2

Thank you, Kate, and welcome everyone to today's conference call. We're making important progress on our strategic priorities as communicated at our 2023 Capital Markets During Q2, we grew our order book, invested in next generation fuel cell products and continue to drive our product cost reduction programs. We continue to see growing customer interest across our market verticals, which is reflected in $25,100,000 of new orders in Q2 2, in a growing sales pipeline. Importantly, our Power Products backlog is now up over 140% compared to the prior year period. We are particularly excited about the growing customer engagement levels in the U.

Speaker 2

S. And European markets. As a result of the increasingly constructed hydrogen policy landscape and increased market activity in the U. S. And the EU And given the continued hydrogen and fuel cell policy uncertainties and market delays in China, we are accelerating our work on our local for local global manufacturing plant and related future capital allocation plants.

Speaker 2

Specifically, we're reevaluating our previously announced MEA localization plan in China, pending completion of a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the U. S. And or EU markets. We expect to conclude this important work in early 2024. We continue to track to our full year guidance ranges for operating and capital expenses.

Speaker 2

Our investments Prioritized technology and product development programs, product cost reduction initiatives, customer platform wins, Customer Experience in Advanced Manufacturing. We continue to see growing customer engagement across our verticals. At Ballard, our strategy is to commercialize hemp fuel cell technology and products that can be applied across multiple market applications where our fuel cell technologies provides the strongest value proposition and where barriers to hydrogen refueling infrastructure are lowest. These markets includes bus, truck, rail and marine, as well as select stationary power generation in certain off road markets. We'll provide a brief update for each of these applications.

Speaker 2

In our bus vertical, the tendering activity for Fuel cell buses had begun to translate into our order book and backlog. This was highlighted by the 96 engines ordered from Solaris from 3 European cities, including Gustrau, Germany, which has ordered 52 fuel cell buses for deployment. We're also seeing exciting activity in the U. S. Fuel cell bus market as we recently received significant orders from our customer New Flyer during the quarter.

Speaker 2

Given the ongoing tendering activity for fuel cell buses, we expect material additional orders for our bus customers over the next 12 months. On the truck market, and as we've discussed before, the truck market is in the early innings of fuel cell adoption, with most truck OEMs and integrators focused on developing fuel cell truck platforms. In this regard, we're delighted that Ford Trucks after competitive process has selected Ballard as their fuel cell partner as they developed their hydrogen powered F MAX platform with our engines inside. We see this partnership as indicative of our technology capabilities and increasing OEM interest in fuel cells As they understand the value proposition of fuel cell electric powertrains, our partnership will support Ford As part of the European ZEDI FES project to demonstrate 0 emission long haul trucks in major freight corridors from now through 2027. As Ford's fuel cell F MAX truck platform matures, We anticipate this partnership to evolve into a long term scale deployment level module orders and supply arrangement.

Speaker 2

Despite ongoing challenges in China for the fuel cell market, our partner, Wisdom Motors, recently signed a purchase order for almost 150 fuel cell Howard refuse trucks for delivery to the Australian market. We invested in Wisdom last year to accelerate their efforts to build a portfolio of world class Powered heavy duty vehicles including buses and trucks using engines exclusively supplied by the Weichai Ballard JV. The level of innovation at Wisdom is remarkable as they've announced this deployment scale order only 5 months after delivering an initial demonstration truck. Wisdom has also signed a cooperation agreement with our Australian customer to deliver 12,000 hydrogen powered trucks over the next 5 years. In rail, we received a follow on order from CPKC to deliver additional modules in 2024 as they expand their hydrogen locomotive project.

Speaker 2

For our marine vertical, we continue to see growing interest in short sea containership, inland cargo and barge applications, which we anticipate will result in order activity later in the year. The MF Hydra ferry vessel is now operated over 1500 hours since it began sailing regularly in March and continues to clock about 100 hours of operation per week, validating the performance and reliability of our fuel cells in a marine application. We're also pleased to report that our marine module has received Type approval from Lloyd's adding to the type approval we'd received from DNV in 2022. In our stationary power market, we received a $2,000,000 order during the quarter for one of our systems to provide power to an EV charging site in Germany. Separately, after the quarter ended, we shipped our 1.5 Megawatt ClearGen 2 system to the Microsoft data center in Wyoming, having passed factory acceptance testing with Microsoft and Caterpillar representatives on-site.

Speaker 2

The system will begin its demonstration in mid September And we expect to be another major proof point of the value proposition of our products in the data center market opportunity. We continue to see interest in our stationary products grow for EV charging, grid balancing, data centers and mobile power solution applications. We experienced solid backlog in our emerging market segments driven by orders from our customer First Mode, deploying ultra class mining haul trucks for use on Anglo American's mining sites. Our partner has now ordered close to 100 modules year to date We expect to realize revenues this year as we ship a portion of this backlog in the second half of twenty twenty three and the remainder into 2024. As we look into the second half of twenty twenty three, our investors can look at 3 key milestones we're set to accomplish.

Speaker 2

First, we expect to sign material purchase orders for customers in our bus and marine verticals. 2nd, we plan to substantially complete our global manufacturing strategy. And 3rd, we anticipate ending 2023 with a robust 12 month order book to provide a strong coverage ratio for revenue in 2024. We believe Ballard is set up for a strong second half of twenty twenty three with sequential quarterly revenue growth and continued progress Our order book to support 2024 revenue. We also maintain our view that the revenue split between first and second half of twenty twenty three will be roughly 30% to 70%.

Speaker 2

With that, I'll turn the call back over to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Speaker 3

Morning and thanks for taking my questions. Randy, as it relates to the location of the MEA manufacturing facility, Are you essentially just waiting for the IRA rules to be finalized? And if I'm on the right track with that line of thinking, What's sort of the tipping point in terms of the IRA rules For you in terms of where Europe or the U. S. Becomes more attractive and maybe I'll sneak one more in, just to give us a sense of What you're hearing in terms of where you think the rules will ultimately shake out?

Speaker 2

Sure. Yes. Aaron, I think it's an important question and certainly that's a key I think just stepping back a little bit, for us looking which jurisdictions have the most supportive policies The adoption of low cost, low carbon hydrogen is critical. And where do we see deployment of fuel cell vehicles. So this is Tied to that is we do see a number of these regions that are also looking at how do we support companies who are looking at Localizing production across the hydrogen fuel cell value chain in that jurisdiction.

Speaker 2

So there are One is, as you point out, how would the particularly the details on the IRA implementation, including how the green hydrogen is effectively measured, but also stepping back and to say what Policy support with subsidy support is available for manufacturers looking to set up local manufacturing operations. So both of those are considerations that we're looking at and both of those we're advancing and obviously tracking the first one carefully and advancing on opportunities for funding in all three regions. So that's important. Secondly, I think just again stepping back, where do we have proximity to customers, end Customers, end users, suppliers and key talent, where is the cost structure are going to be competitive. And I think also access to the low cost, low carbon hydrogen is not just important for our customers, but also to our operations.

Speaker 2

Of course, we want to have Our operations with low emissions as well. So these are all factors that we're considering. And it's not just the U. S. Market That has some pacing items in the back half of this year, but certainly activities that we're engaged in, in all three markets will enable us to have, I think, a very Clear competitive assessment by the end of the year.

Speaker 3

Makes sense. Switching gears a bit, I'm just thinking about the Solaris order you just announced. You mentioned the potential for more bus orders in the 12 months and then maybe we can throw in the previous Siemens and Quantron orders. With these larger batches of orders that you Seem to procure. Do you think we'll start to observe some scale efficiencies play out in the margin over the next couple of quarters?

Speaker 3

And If so, how would you characterize it in terms of magnitude?

Speaker 2

Yes. Maybe just to comment on Solaris and then secondly on the scale And the impact on gross margin. Just as a reminder for listeners, I mean, Solaris is a leading bus OEM. They're based in Poland. They've been a long standing customer with Ballard.

Speaker 2

They've been actively promoting both the Arbino 12 meter and articulated 18 meter low floor intercity buses, Really good partner. They have over 110 fuel cell buses already deployed with Ballard engines inside. This additional order for 96 is really critical. It includes 3 cities, one of which is in Gusto, Germany with Rebus as a transit operator there. And those buses, most of them will have our 70 kilowatt engines on the 12 meter buses, but 5 of them are articulated and will have our 100 kilowatt engines.

Speaker 2

So very important customer and have a large activity level right now across Europe. And I think this is just representative that we're seeing cities moving from orders of 12 and 5 and even 10 Now to 30, 50 and in some cases over 100 fuel cell buses for deployment. So I think this is critically important. And as Europe and the U. S.

Speaker 2

And China get access to low cost, low carbon hydrogen. We think this is a massive unlock, not just for city buses, But for all of the verticals that we're focused on, so critically important. I do think though the orders we're talking about here For Solaris and you rightly mentioned Quantron and Siemens other great platform wins as well. Those are still relatively speaking modest volumes. So they're not at the level yet where you get kind of get the major break, volume breaks that will impact gross margin the way we're looking Of course, they'll help.

Speaker 2

It'll be incremental, but not significant material changes that we'll see when we're in the thousands of units as

Operator

The next question comes from Manav Gupta with UBS. Please go ahead.

Speaker 4

Good morning guys. I just wanted to Talk a little bit about the Ford order, looks very exciting. Is this something that could scale up? Could it scale up across geographies Where they're interested in something like this, can you talk a little bit about that? Manav,

Speaker 2

you're right on both fronts. It's very exciting and it indicates scaling in the future. I think you're bang on. Ford trucks, it's the kind of the key, the only heavy commercial brand for Ford. They have a range of vehicles in their portfolio, including tractors and construction trucks and distribution trucks, and pretty important player in the truck market.

Speaker 2

Effectively what they're doing Manav is developing a fuel cell truck platform based on the F MAX 44 tons long haul A tractor truck they have, and after competitive process selected Ballard to integrate our fuel cell engine. So we've got 2120 kilowatt FC Move XD engine, so 2 40 kilowatts in total. And it's part of a very important program in Europe, the ZEVES program, which is really designed to provide real world demonstration of long haul zero emission trucks. And what we see at the conclusion of this project is Ballard being very well positioned with this Ford relationship to be a long term Supplier to afford. Now we have work to do obviously to validate that, but we're confident in our solutions and in the products that we're going

Speaker 5

to be

Speaker 2

offering. So this is another example as was pointed out by Aaron a minute ago Just work that we're doing to secure platform wins and on the truck side is a very important addition to the Quantrands and Wisdoms and other partners that we have on the truck side. So, agree with you, very exciting and we see scaled opportunity as we get validated through the next couple of years.

Speaker 4

Quick question here is, we have started seeing green hydrogen percolate. You have now got A European refiner looking to source green hydrogen for its refining operations. Yesterday, you had a U. S. Refiner who said, look, I'm looking to source green hydrogen to make sustainable aviation fuel.

Speaker 4

I'm trying to understand, do you see this seeping through at some point, Hopefully soon in the transportation market also where companies are like, okay, now I want to switch to a fuel cell because now I have a Much lower carbon intensity, green hydrogen, which I can source cheaper than I could in the past.

Speaker 2

Yes. So I've been saying this for a while. I think green hydrogen supply is going to surprise to the upside. There is just enormous activity going on Globally, not just our 3 key markets of North America, Europe and in China, That when you start meeting the companies that are actually working on hydrogen green hydrogen development programs are in the Stages of procuring electrolyzers and planning for offtake, it's very exciting what's happened. I think if you step back a year ago, We probably expected somewhere around 150 gigawatts of green hydrogen production by 2,030 globally.

Speaker 2

I feel like that number could be closer to 2 50 gigawatts based on the level of activity and engagement we're seeing in the key markets. So it's very exciting. I do think that green hydrogen will be used initially to effectively decarbonize Existing gray hydrogen applications, so industrial applications, traditional markets for hydrogen, which is about a 90 1,000,000 ton existing market. And then I think you're going to see a number of the mobility applications and stationary Power applications at Ballard are focused on really getting unlocked with this access to low carbon, low cost hydrogen. And you can see situations where there'll be off take with a significant portion of the off take dedicated to gray hydrogen and then a residual portion of that off take Being used for merchant market opportunities in transportation.

Speaker 2

And if you think about the customers we have, end users we have in our markets, Bus, Truck, Rail and Marine, their number one GHG emission is fuel for their transport applications. And they have very limited optionality on where they can turn for 0 emission and hydrogen will be the big player In these key markets, we're focused on for medium and heavy duty modem.

Operator

The next question comes from Rupert Merer with National Bank. Please go ahead.

Speaker 6

As you look at where to prioritize your MEA investment, I'm wondering if you could speculate on how this could I hope for your partnership in the Chinese market. And if you make the investment outside of China, can your Chinese partner participate? Or is there a chance they might take a lead on investments in China without Ballard?

Speaker 2

Yes. Great question, Ruben. I think we certainly are committed to the China market, we're believers in the long term market opportunity for China. It is the largest market for production and use of hydrogen today. And based on my Recent visits there, I expect that to continue through 2,030 and 2,050.

Speaker 2

There is enormous level of activity. So in my mind it's not a question of if we have MEA production in China, it's a question of when and sequencing. So we will, like most companies in kind of a de globalized world, look at this local for local strategy, make sure we have the right assets In country, in region to be successful. And clearly, Weichai is our partner in the China market for the bus and truck market, And they're making significant commitments in the development of fuel cell buses and fuel cell trucks in their portfolio companies. A lot of great work that's been done by Weichai in the supply chain at the Weichai Ballard joint venture, and they're committed to this market as well.

Speaker 2

So I just don't view this as a step back from China and or a step back from our relationship with Weichai, but really just an assessment, A reevaluation of where to prioritize our next investment.

Speaker 6

Okay, great. So if the investments made outside China, the understanding is you'll be importing MEAs from outside China to meet your production needs until the production is there. Is that fair?

Speaker 2

Exactly, yes. And the challenge just to be open and transparent, the challenge with that model is that there we are expecting to see import duties. And so that could stress gross margins with that variable for MEA export into that market. But we fully expect to have MEA production in China when the market is at scale.

Speaker 6

Great. I'll leave it there. Thank you.

Speaker 2

Yes. Thank you. Great questions.

Operator

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Speaker 7

Good morning. Could you sort of update us on the U. S. Bus market? How is that developing?

Speaker 7

And how do you see that rolling out over the next couple of years in terms of trials and production ramp?

Speaker 2

Yes, I think this is going to be a bright spot over the next few years, Rob, particularly as we get this access to low cost, low carbon hydrogen coming online. But we're seeing a lot of activity not just in California anymore but across the U. S. With cities now looking at Over 30, over 50, over 100 buses in some cases. So I think it's going to be very exciting over the next 12 to 24 months As some of these cities move from tendering activity to actually procurement, and I think we're very well positioned in the U.

Speaker 2

S. Market. We Very high market share today. We expect that to continue. Our key partner in the North American market is New Flyer, And they have about 2 thirds market share for city buses in new city transit buses in North America.

Speaker 2

And they have both a 40 foot and 60 foot articulated bus validated with Altoona testing with Ballard engines inside. So we're very excited about this market. Nothing I can share in terms of actual sites today, but based on the quoting activity and engagement, We expect to see some announcements here over the next 12 months to 24 months at scale for U. S.

Speaker 7

Okay. Thank you. And then to the mine truck market, I think you've got an initial strong order that drives 20, I guess, starts this year and it goes into next year. How does the follow on orders for that project work? Are those sort of a next year item or does that play out over a number of years?

Speaker 2

Yes. I think we should probably think about next orders coming in 2024. There's a possibility for that to happen earlier, but I think to me what's really important here is we have an end user here with Anglo American that has Very ambitious program to decarbonize these ultra class mining haul trucks with only one solution available and they've invested Significant in that solution, in fact, buying the systems integrator. So this is a very good relationship we have Through the value chain effectively and we feel we're very well positioned. They have a large portfolio of Ultra class trucks are looking to decarbonize through 2,030.

Speaker 2

And what's important from a testing perspective is the first truck, the famous 74 completed 1 year of testing a couple of months ago and very, very good performance. And you've got to think about The weight and grades, sand, etcetera, very challenging environment and very good performance. So we're very excited On this relationship we have, on this opportunity set, we feel we're very well positioned.

Speaker 7

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

Operator

The next question comes from Greg Wysakowski with Webber Research. Please go ahead.

Speaker 8

Yes. Hey, Randy. Good morning. Thanks for taking the question. I just wanted to apologies, I'm a little behind and catching up, so apologies if you've already answered this.

Speaker 8

But can you remind The schedule on those import duties into China, the potential magnitude in the next 12, 18 months or a couple of years or so. And then also with that, any CapEx You guys have already dedicated to that facility or what the timing would be on that just so we know you Can you quantify a little bit if the reevaluation were to drag on or anything like that?

Speaker 2

Yes, Greg, Just in terms of duties, the way I would think about that is very complex and I would say even some uncertainty in terms of the complexity. The way to think about it is you're kind of in low single digits now kind of 3% to 5% duties depending on a few variables. But that could get as high as 12% to 15% by 2027, 2028 timeframe. So that's an area that we continue to work with our legal counsel on validating what the expectations are in the outer years. So I think that addresses that question.

Speaker 2

And the second question

Speaker 9

Ramin, yes. So just on the CapEx and how much we spent on the project, About $4,000,000 this year. Most of that is for manufacturing equipment, which is on order, hasn't been delivered, obviously, which we'll look to where we direct that equipment or most of that equipment at the appropriate time. So of the $130,000,000 announced, only about $4,000,000 or so has been spent.

Speaker 2

And Greg, maybe just to clarify kind of where we are in the EMEA Localization process in China, while we've signed the investment agreement, we haven't proceeded to the next stage, which really requires capital commitments. And the next stage is the actual land acquisition piece. So we're deferring that piece until completion of this comparative analysis. The long lead time equipment that we've ordered can be used at any site. And so we will require MEA production equipment.

Speaker 2

The question is where does it go. So it's not in any way stranded capital.

Speaker 8

Okay, great. That's helpful. Thanks, guys. Next one, just kind of adding on to your list of criteria for Looking at other regions, is there any aspect to kind of higher competition and Ballard essentially wanting to Now elbow out some space, maybe being competition playing a higher role than it Would have maybe 5 years ago or so. Is there any sort of like speed to market or you guys wanting to Get a land grab and be there before somebody else comes into some of these regions that are maybe supporting localized production more of a focus now than it would have been in the past?

Speaker 2

I would say that's a lower factor to be honest with you. I think the Elba mode and land grab might be for available support For manufacturing facilities as opposed to customers, so there is competition for limited funds where For example, the U. S. DOE has funds available for companies that are looking to localize in the hydrogen fuel cell value chain. Similarly, similar type of pools of capital available in Europe.

Speaker 2

So from that perspective, that's true. But our approach has always been to be first to market And we feel we are pushing that forward regardless of what the competitors are angling for.

Speaker 8

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

Speaker 10

Thank you.

Operator

The next question comes from Mac Whale with Cormark Securities. Please go ahead.

Speaker 10

Good morning, Randy. A lot of talk on the MEA localization program. I'm wondering on the rest of the components, particularly bipolar plates, where you've made a lot of progress that you talked about in the At the Capital Markets Day, I'm wondering what your views are on the localization of those components, assembly, balance of plant. Should we consider those

Speaker 2

And what we're looking at for Production facilities in the U. S. And in Europe is we're assessing which parts of the value chain should be localized and where is there support So you have different support levels for MEAs, for bipolar plates, stack assembly, module assembly. So we're looking at full scope in each of those markets and if we're able to get the appropriate support, if we're not able to get the appropriate support, we'll scale back on that scope in market. With the project that we're working on Project Forge, it's designed to have lower cost Bipolar plates, this is a significant part of our plan, current plan, as we're developing our proposal for the U.

Speaker 2

S. Market. So the U. S. Opportunity could be MEA's bipolar plates, stack assembly, module assembly.

Speaker 10

Right, right. Okay. And then my second question is around the Ford Trucks initiative or partnership. Is the platform that does Ford take a different approach than what you've seen with Other partners in the truck market, I'm wondering if you can give us some detail perhaps, is the performance spec different? Is truck integration It should be different or do you expect over time that your component will converge to a common module that you'll be able to really ship To everybody, what is your I'm just trying to get an idea of what they might be doing the same or differently?

Speaker 2

Yes. So great question, Mac. And let me Just back up earlier and just remind everyone, we have this strategy in the truck market to partner with dual stream track. Basically, 1 stream We're partnering with the large truck OEMs trying to secure platform wins, where they develop their existing platforms With fuel cells inside or develop new platforms of fuel cell inside, the second stream is kind of more the up Start or upfitters that are taking chassis or gliders from the large OEMs And effectively retrofitting those instead of a diesel engine putting in a fuel cell hybrid architecture. So we have partnerships now with both these streams.

Speaker 2

Ford Trucks is clearly in the first stream, a truck OEM That is designing their truck platform and very thoughtfully looking at their powertrain solutions. So in my mind, that's the big difference is they're using their own chassis. It's not a retrofit of a third party chassis. And we see this as longer term, the volume scaled approach will likely those companies will be winners at volume.

Speaker 10

Do you think, as a follow-up to that, do you think that eventually the upfitters Does the OEM solution find its way into the package that the upfitter eventually just buys? Or do you think those Upfitters also want some customization of what the powertrain portion of it looks like?

Speaker 2

Yes, I think it works Two ways actually. I think you could see some upfidders piggybacking on what the larger Chuck OEMs are doing for niche specialized markets. And then you could see also some of the large OEMs piggybacking on some of the learnings from the up Some of their integration approaches. So, I do think that long term, post 2,035, 2,040, The major truck OEMs that have volume in the particularly the long haul truck market, I think will be very well positioned. In the markets where you have smaller specialty trucks, I think the upfitters will compete very effectively in those markets.

Speaker 2

So for example, the refuse truck market I would characterize as a specialty truck market. Wisdom is very well positioned to enjoy success in that market based on their work in Australia.

Operator

The next question comes from Jordan Levy with Truist Securities. Please go ahead.

Speaker 5

Hey, all and appreciate all the details. To go back to the IRA and Treasury guidance, Recognizing that getting guidance is going to be important for all the players in the U. S. Market, just to try and get a sense of where the Are you seeing any difference in the conversations you're having with customers in each of your major segments, be it Bus, rail, marine, truck, stationary in terms of their willingness to go forward with more serious programs and contracts ahead of the IRA guidance?

Speaker 2

Yes, I would say the market is certainly waiting to see what the guidance effectively will how that results I would say in North America, the bus and truck market are certainly the leading markets. We're seeing lots of activity on rail both in passenger commuter rail as well as in freight locomotives. And we recently announced obviously our expanded relationship with CPKC. However, the marine market is I think very early in North America. It's certainly much stronger market opportunity currently in Europe.

Speaker 2

So I would say less dialogue in the U. S. On the marine space, and then on stationary power, these data centers, this is, I believe, The growth in data centers is going to be exponential, continue to be exponential, particularly with Generative AI and the data requirements there. So this is going to be a high growth market for the foreseeable future, It requires a lot of primary and tertiary tobacco power and this is a market that we're focused on as well. But in the very near term, yes, I would say all markets are certainly looking to see what the treasury guidance is going to be.

Speaker 2

I think there's a very strong

Speaker 5

Appreciate that. And maybe just a follow on to Focusing on what you mentioned with the CPKC announcement. Maybe just remind us and give us a Sense of momentum in the Rail segment and the opportunity over the near term that you see there?

Speaker 2

Yes. Rail has been really a pleasant surprise over the last number of years with the progress we're making there. I do want to profile TPKC because it's just a great, great company. And over the past 2 years, they've taken the 20 fuel cell engines from Ballard and they've Which is 4 megawatts and they've integrated those into their hydrogen locomotive program and they've been field testing over the last year and a half or so, Line haul locomotive shunter and switcher, this is another 3.6 megawatts, 18 fuel cell engines they've ordered. What's also interesting, you kind of look at CPKC's disclosure record on their hydro locomotive program.

Speaker 2

I mean, they in June announced The joint venture between CPKC and CSX to build and deploy the hydro locomotive conversion kits for diesel electric locomotives. They announced in May the pilot program with Teck Resources were effectively, they're bringing these fuel cell locomotives And in their Capital Markets Day in June, they really profiled this as a key part of their Strategy long term to decarbonize diesel fuel. So it's, I think, a very committed company looking for emissions reduction And is making the investments necessary to see to validate the technology, to validate the opportunity, And I think is leading in the space right now. So to me, great opportunity there. We are seeing opportunities for larger orders In the commuter rail market, in the U.

Speaker 2

S. Market and hopefully more on that to come in the next 12 months.

Speaker 5

Really interesting. Thanks for taking my questions.

Speaker 2

Yes. Thanks, Jordan.

Operator

The next question comes from Brett Castelli with Morningstar. Sir, please go ahead.

Speaker 11

Hi, thank you. I wanted to ask about there's been some talk of internal combustion engines Running on hydrogen, say in the truck market. I just want to get your thoughts sort of how you see that as a potential

Speaker 2

Yes. I think we're going to see a portfolio of different Solutions, obviously, we're going to see battery electric, we're going to see fuel cell electric, we're going to see hydro internal combustion engine. I think many people have viewed Hydro internal combustion engine as a possible transition technology. It still doesn't have full 0 emissions and has lower efficiency than fuel cells. So I do think there's opportunity for it, but I haven't seen it really take Major traction and if you just look as the bus market, which is the most mature market of all of our markets, There are 0 hydrogen internal combustion engine buses currently operating and closing in probably within 2 years, I would say over 10,000 fuel cell buses.

Speaker 11

Thanks, Randy. That's helpful context. Maybe my other question was just on data centers and just obviously that's a potential long large long term market for fuel cells. What should we expect sort of over the next 12 to 18 months in terms of activity in that market?

Speaker 2

Yes, I think this is a period over the next 12 to 18 months for a lot of learning, not just for Ballard but for partners like Caterpillar and Microsoft. And so I think it's a market that the fuel cell value proposition needs to be validated. And then we can move from once that value proposition It's validated we can move to larger deployment. So that market in my mind is still very much in the development and now starting in the demonstration phase. I think it'd be a number of years before we see kind of deployments at a high level.

Speaker 2

But this is a market that we feel very passionate about because it is a large, attractive addressable market with high growth and we think it's a market that fuel cells will have a value proposition and we need to validate that with Thank

Operator

you. The next question comes from Craig Shere with Tuohy Brothers. Please go ahead.

Speaker 9

Hi. Actually, my question has already been asked and answered. Thank you very much.

Speaker 2

Thanks Craig. Have a good day.

Operator

The next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Speaker 12

Good morning and thanks for taking the questions. Just a few housekeeping ones for me. You displayed a nice sequential improvement in gross margins from negative 30 to negative 20. And it sounds like second half revenues are going to be higher than first half. And so can you just maybe give us some commentary on How you think about gross margins into the second half of the year?

Speaker 12

And then I have a follow-up question.

Speaker 9

Sure. Yes, it's Paul here. So yes, We said in Q1 that we expected that to be the low point in our gross margin percentage. And so We're seeing higher gross margins still negative in Q2. And but what's interesting about that is when you look underneath and you look at the contribution margin, sort of the pricing and direct costs, Margins, sort of the pricing and direct costs, we see good strength there and improvement of where we were even last year.

Speaker 9

Some of that's due to the product mix, but also our costs of our products coming down as well. So we do see some improvement there. We did have a few inventory adjustments. As we continue to develop and invest in new products and technologies, Some of our older products that might be sitting in inventory, taking an obsolescence charge on those. So we had some of that, which drove our margins negative.

Speaker 9

We'll probably have a little bit of that still in the second half, Probably $1,000,000 to $2,000,000 in provisions, I would estimate in the second half. But We anticipate growing revenues and expanding margins in Q3 and Q4 as well.

Speaker 12

And do you think we exit the year by with breakeven? Or do you think we're still negative in the second half of the year?

Speaker 9

No, I think we'll still be negative. I think in the Capital Markets Day, we said we would expect to get the Breakeven gross margin at some point in 2024, maybe not for the full year, but in some quarter in 2024, but for 'twenty five and beyond.

Speaker 12

Got it. That's helpful color. Thank you. And then just for my second question, There's a $60,000,000 delta between the total backlog and the 12 month backlog. Can you give us a Sense of how far the backlog extends beyond the 12 months, Does that $60,000,000 represent backlog through 2025, 2026, just trying to get a sense of backlog

Speaker 2

Yes. The bulk of it would be in 2025 with some residual in 26.

Speaker 12

Okay, helpful. Thank you. That's it for me.

Speaker 4

Yes.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Randy McEwen for any closing remarks. Please go ahead.

Speaker 2

Thank you for joining us today. Paul, Kate and I look forward to speaking with you next

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Earnings Conference Call
Ballard Power Systems Q2 2023
00:00 / 00:00
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