Q3 2022 Ballard Power Systems Inc Earnings Call
Thank you for standing by this is.
The conference operator.
Welcome to the Ballard power systems third quarter 2022 results conference call.
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Zero.
I would now like to turn the conference over to Kate Charlton Vice President Investor Relations.
Go ahead.
Thank you operator, and good morning, welcome to Ballard's third quarter 2022 financial and operating results conference call with US on today's call are Randy Macewen, Ballard's CEO and Paul Dobson, Chief Financial Officer, 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 our most recent annual information form and other public filings for our complete disclaimer and related information.
When we discuss the quarter I would like to provide an update on our investor day.
Scheduling challenges with our current priorities and recent additions to our senior leadership team. We have made the decision to reschedule, our investor day to the first half of 2023.
Additional details early in the new year I'll now turn the call over to Randy.
Thank you Kate and welcome everyone to today's conference call, we made important customer progress across our verticals. During Q3, while also advancing our global manufacturing strategy and product cost reduction initiatives. In Q3, we delivered $21 3 million of revenue with approximately 57% of our revenue.
Coming from heavy duty motive applications. This highlights the ongoing intentional shift in our business towards an increasingly product focused company.
We also know there's been a significant change in our revenue mix by geographic markets in 2022 as compared to 2021.
Continued challenges and delays in the China fuel cell market have adversely impacted 2021, 2022 revenue and if masked the underlying growth we're seeing outside of China.
For the first three quarters of 2022 revenue for Europe , North America, and rest of World is up approximately 22%, while China revenue was down approximately 68%.
In Q3, we secured nerve new orders totaling $31 8 million.
This activity improved our total order backlog, bringing it to approximately $102 million at the end of Q3.
The increase was primarily driven by European orders, which now make up over half of our total order backlog.
Our backlog at the end of Q3 did not include the LOI from Siemens mobility to supply 200 fuel cell engines over the next six years. We're pleased to report that subsequent to the quarter. We've now received FERC P. O from Siemens for 100 fuel cell engines at 200 kilowatts each.
This order will be reflected as a material addition to our Q4 order backlog.
Our strategy is to develop 10 fuel cell technology and products that can be applied across multiple market applications, where our fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling infrastructure. Our lowest these markets include bus truck rail and marine as well.
Select stationary power generation markets will provide a brief update for these applications.
Our bus vertical continues to see important progress in Europe , and the U S. After having secured platform wins with a number of bus Oems over the past few years. We expect these customers to provide sticky repeat sales opportunities as transit operators begin to deploy larger fleets in the face of ing.
Increasing mandates to transition to zero emission buses.
This is now playing out in our sales outlook with multiple cities in Europe , and the U S. Now planning the largest deployments of fuel cell buses in history across these markets.
The remains strong momentum in Europe for adoption of hydrogen fuel cell solutions.
Recent additions indicate larger rollout plans across the continent.
For example, European transit operators in four cities have announced plans to deploy almost 300 fuel cell buses. So lacking carrier D. P. B is rolling out up to 40 hydrogen fuel cell buses and Polish transport, operator, and PK pose then plans to purchase 25 fuel cell electric buses.
These announcements are in addition to the existing plans from Cologne, Germany, and West Midlands U K, well I did deploy 100 and over 120 fuel cell buses respectively.
We're confident Ballard is well positioned to participate in supporting these plants across Europe through our strong OEM customer and end user relationships.
We are seeing a similar transition in the U S, where California initial pilot and demonstration projects are moving to fleet deployment.
An example of this transition is Foothill transit a California bus fleet operator in the L. A area deploying 33 fuel cell buses from bus manufacturer, New Flyer Pollard with Ballard fuel cell engines.
This is an exciting milestone as split here will be the first transit agency in North America to deploy fuel cell buses on a full deployment as a mature product versus a demonstration fleet.
The 33 buses will represent approximately 10% of their overall fleet.
Supported by inflation reduction act and bipartisan infrastructure law Theres been a tangible shift in momentum for hydrogen solutions in the U S.
We anticipate this momentum momentum to continue as initial capital allocations are made in 2023 for the $8 billion of investment in the U S hydrogen hubs now.
Now taking a look at the truck market.
We made exciting progress this quarter at the IAA trade show in September we unveiled our FC move XD concept engine for heavy duty mobility displayed in contrast, 44 ton fuel cell electric truck.
Our new product was met with significant market interest at the show during the quarter Ballard received a purchase order from contract for 140 of these eight XD engines to be deployed over the next two years.
We also had a very busy quarter with respect to the rail market as we see the value proposition of fuel cells and certain rail applications driving long term adoption.
As an example, our fuel cell technology offers a compelling zero emission power solution for commuter trains on non electrified lines.
We'd entered into two new geographic rail markets in Q3, we announced that initial order to train manufacturers Stadler to support the first hydrogen powertrain in the U S and to Med Ah Ah leading rail systems integrator contracted by Indian Railways, the develop India's first hydrogen powertrains.
In addition to finding new rail customers, we made meaningful progress with our multi year collaboration with Siemens mobility as noted earlier.
Over the past four years, we've been developing a fit for purpose fuel cell engine with Siemens mobility for the passenger rail market.
Following the quarter, we announced an order for seven trains in an LOI to supply 200 fuel cell engines over the next six years, including a purchase order for 100 of the engines.
This marks our first commercial commitment at long term supply agreement and rail and we look forward to progressing this market with Siemens mobility as they are now commercially selling more L. Plus eight fuel cell trains to European customers. This is an important milestone for the industry and for Ballard.
We continue to see high engagement levels in our marine markets, specifically in our current target markets of coastal and inland applications. The.
The achievement of the Dnb type approval for FC wave product is an important differentiator for Ballard, we expect to see demonstration project starting in 2023, including one of our flagship marine projects with a Nord lead ferry in Norway.
In Q3, we continue to see growing interest in the stationary power generation market.
This nascent market continues to develop we expect this segment to become increasingly meaningful to our business over the coming years.
Now looking at the key geographic regions we.
We recently introduced our global manufacturing strategy local for local.
We plan to have scaled manufacturing of leading fuel cell engines and components in our core regional markets of North America, Europe , and China to support further and future industry growth patterns and volumes across our verticals.
In Q2, we announced our plans relating to U S manufacturing capabilities with a new module manufacturing facility.
Which is on track to be in operation in early 2023.
We continue to see increased sales in North America with revenue up 80% quarter over quarter and 40% from Q3 last year. We expect continued demand growth for our technology in the U S. As previously announced policies such as the I R. A materialize over the next 12 to 18 months.
In Europe , there's a steady flow of news around continued policy support recently, the European Commission announced more than 10 billion euros will be invested in the hydrogen economy in Europe .
These projects will catalyze European market to drive down the cost of low carbon hydrogen, making the total cost of ownership and value proposition of our solutions increasingly competitive.
As part of our local for local strategy, we continue to evaluate opportunities for manufacturing expansion in the coming years to align with regional demand trajectories, we remain confident balanced positioned to take advantage of growing European market opportunities across our verticals.
Moving to China, we have high conviction on long term scaled adoption in China of fuel cell electric vehicles for medium and heavy duty motive applications.
Our <unk> Ballard JV continuous develop fuel cell modules for bus and truck markets and is ready for high volume production.
The JV is starting to see clear indicators of next steps and the China fuel cell bus and truck market from both a policy perspective, and a market demand perspective.
We expect to see significant growth in the China market in advance of 2025 adoption targets with a major ramp from 2025 through 2030.
We recently announced plans to invest approximately $130 million over the next three years and in EMEA manufacturing facility and R&D Center in Shanghai. This investment is also supported by significant incentives by the local governments.
Decided strategically located at the jogging hydrogen port position, one of China's leading automotive industry clusters.
Facility will enable annual production capacity of approximately 13 million Mbas, which will supply approximately 20000 fuel cell engines. This is expected to meet market demand in China, including from the <unk> Ballard joint venture for bus truck and forklift markets as well as other opportunities outside the <unk> Ballard JV scope.
The facility is planned to be in operation in 2025.
This facility in combination with our EMEA manufacturing in Canada is expected to supply our global EMEA capacity demand through 2030.
Our investment is expected to reduce any manufacturing costs align with China's fuel cell value chain localization policy and position the <unk> Ballard JV and wood and Ballard more strongly to participate in the hydrogen fuel cell demonstration cluster regions and for the post subsidy market.
We're also setting up an R&D innovation center at the same site to engage the emerging China local supply chain for fuel cell materials and components.
I want to reemphasize this point as reflected in the recent China, 20th Congress Energy Security is a top priority for China, we see renewables and green hydrogen as key beneficiaries as trying to accelerate its plan for strong China Energy policy, We believe China is.
The market headed for a significant demand breakout as green hydrogen production and hydrogen infrastructure skills over the coming years and as our new EMEA production facility comes online.
Shifting to our financials in the quarter as we discussed last quarter, we continue to see a challenging gross margin picture, which we expect to persist through next year.
Further downward pressure in Q3 was driven by a combination of a shift in revenue mix the impacts of pricing strategy higher fixed overhead costs inventory adjustments and an increase inflationary supply costs.
As previously communicated we continue to see a challenging gross margin picture, which we expect to persist through 2023 until volumes ramp and our production cost product cost reduction initiatives move into production.
Our 2022 annual total operating expense and capital expenditure guidance remains unchanged from $130 million to $150 million and 30 million to $50 million respectively.
Our planned capital spend towards the China investment in 2022 is included with our current guidance range. The majority of the capital towards the manufacturing expansion in Shanghai will be distributed between 2023 and 2024.
We currently expect to come in at the upper end of our total operating expense guide range and at the lower end of the range for capital expenditures for 2022.
Given the macroeconomic outlook in the context of our 2023 annual operating plan.
We are actively reviewing our go forward Opex and Capex spend to ensure we're appropriately investing in our growth strategy, while tightening our overall spend to reduce cash burn.
We continue to make meaningful strides against our product cost reduction targets.
Our product cost reduction initiative to reduce our fuel cell stack cost, 70% from 2018 by 2024, we're tracking ahead of plan notwithstanding inflationary pressures.
We will continue our work to secure platform wins with customers across our core verticals. We believe Ballard is well positioned with a strong balance sheet <unk>.
Industry, leading fuel cell talented technology, and key partnerships and customers across our target markets. We believe we can make a meaningful impact by providing zero emission solutions for our customers to achieve their decarbonization goals with that I'll turn the call back over to the operator for questions.
Thank you.
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Q.
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The first question comes from Rob Brown with Lake Street capital markets.
Please go ahead.
Hi, good morning.
Good morning, Rob.
Just following up on the Siemens order are in the in the rail market could you give us some color on what's driving that demand.
Profile and how it sort of the opportunity in that in that product category.
Yes, great question, Rob and effectively what we're seeing in Europe is the operators of commuter rail or looking for decarbonization opportunities and where you don't have electrified lines and you look at moving away from diesel cost of overhead catenary wire infrastructure.
Is quite prohibitive.
And so effectively we see this market with about 15000 diesel trains in Europe that need to be replaced over the next 15 years, including I think about 3000 in Germany alone.
And so we're seeing this transition occur and Siemens is very well positioned with what they characterized as a next generation fuel cell train.
And this train the Merial plus H they've been working on developing for about five years and in parallel we've been working developing our fuel cell engine.
So having demonstrated that actually about a month ago, a live at a and unveiling of the train.
A lot of interest from the market there and we're expecting to see significant growth and I think this is what's given siemens the confidence to enter into LOI with us for 200 fuel cell engines and now a purchase order for 100 fuel cell engines.
Given the sales activity, they're seeing in their pipeline.
Okay, Great and then on the other.
EMEA facility, how do you see that Capex investment.
Investment Rolling out is that is that weighted between 23 and 'twenty four differently or is it pretty even.
Yes, maybe I'll just offer some initial comments and Paul can supplement as well.
In terms of the Capex, there's significant orders that need to be placed this year given the long lead times.
But actual cash implications, obviously theres deposits on key equipment, but the cash implications really start to hit in 2023 and 2024 materially there are some that will.
Show up in 2022 late 2022, obviously.
But thats contemplated already in our Capex spend for 2022.
Okay.
Okay, great. Thank you I'll turn it over.
Thanks.
And the next question comes from Aaron Macneil with TD Securities.
Please go ahead.
Hey, good morning, all thanks for taking my questions Randy as it relates to your EMEA facility in China, you noted that the capacity that $13 million as 20000 vehicles I.
I guess I'm wondering what sort of productivity assumptions you think.
A reasonable once the facility is operational in 2025, and then you know what sort of data or news should we be keeping an eye out for to refine that view between now and then.
Yeah, Great question here, and I think just with new facilities coming up youre going to see a period of time, where things get optimized we're pretty excited about some of the initiatives. We're planning for that EMEA production with some additional advanced manufacturing initiatives. So.
From a utilization perspective, I would expect it to be relatively low in.
In 2025.
But as I mentioned earlier, we see a significant ramp from 2025 to 2030 in China and.
In advance of the 2025 targets that are out there are a number of cities and.
And jurisdictions are provinces and of course, our nationally there are targets for 2025 adoption.
So I think we're going to see a pretty significant ramp from 2025 to 2030, I would expect utilization to be in the.
The lower end of the range and in the initial year, but it's pretty significant adoption after that.
Okay switching gears Paul.
You know in the past revenues are typically had a bit of seasonality.
Higher second half revenues versus first half of the year.
I'm just wondering if that sort of anecdote holds just given the decline in the 12 months order book this quarter.
So I guess I know you don't give guidance on revenues, but.
At a high level, you know should we see that sequential uptick in Q4 like we have in prior years.
Yeah, we don't and thanks for the question, Eric We don't give revenue guidance.
What I, what I would say is sort of the trends that we've been seeing and the change in the mix of our revenue that we've been seeing from more favoring.
Power products and less on TFS as well as the sort of dynamics of lower revenue from China. I don't think you can count on prior patterns to remain the same not only in 'twenty, two but I think in 'twenty three as well.
So.
We do see those trends continuing into 'twenty, three we see higher sales in Europe and in North American power products, we see a shifting.
A lesser and lesser proportion of revenue in and technology services.
And even at lower margins, but we're attracting in new customers new platform strategic customers into TFS type of contracts.
With the with the hope that we're going to translate that into into power product sales and longer term.
Revenue opportunities. So I wouldn't say just to answer your question directly I wouldn't say you can count on past patterns.
Uh huh.
Being the same because I think our revenue mix and how we're how we're changing our revenue mix over time is changing.
Okay makes sense and I'll jump back in the queue. Thanks.
Thanks Sarah.
The next question comes from Rupert <unk> with National Bank financial.
Please go ahead.
Hi, good morning.
Good morning, Robert.
With the MAA plant you're building in China, you signed an investment agreement with the local government and Randy you highlighted there are some incentives from the local government can you give us more color on what those look like.
Yes in aggregate the incentive packages is around 10 million U S dollars.
And it's a focus on a number of areas as you would expect our capex.
Some.
The cost of land is effectively subsidized.
And then if you look at some of the opportunities for labor support as well.
<unk> basically support across all different cost categories. So it was a very comprehensive package.
Paired by the local government there in Jordan District, and Ting town, and jogging district in Shanghai and this.
This is the outcome of the Pud a year working with a number of different.
Jurisdictions on subsidy packages.
And looking at where to localize based on the policies and the cluster regions.
<unk> is actually in two of the cluster regions, which is quite interesting.
As well as looking at access to talent, including our R&D capability.
And then the subsidy package as well and so we had the strongest pockets here from Jotting district.
Okay.
Great, Thanks, and and leading up to 25, it sounds like you've got a little more visibility on how things can develop in the Chinese market can you can you remind us what the targets look like for 2025 and what needs to happen between now and then to kick start the market.
Yes, so there are targets nationally as well as by province and by city.
Typical like Guangdong for example will have a <unk>.
Certain number of vehicles, particularly trucks and buses that they want deployed by 2025 and 2030 similar in Shanghai et cetera, and what I think youll see as signposts that that's tracking is actually the hydrogen refueling infrastructure starting to scale in these jurisdictions, we have seen that even.
During a very challenging COVID-19 period in China in 2022 that are fueling infrastructure continues to get deployed.
And particularly in these cluster region. So I think youre going to see in 'twenty four 'twenty, three and 'twenty four significant scaling both on green hydrogen production. There is a lot of activity going on in China on Green hydrogen production.
And skilled electrolyze, our projects as well as fueling infrastructure getting rolled out to support larger fleets I think that in my mind is important and then on the commercial side, you'll see announcements in different regions of scaled projects. For example, we're expecting a pretty significant deployment.
Buses in Shandong. So these are the types of things that I think you can see over the next 24 months.
Great. Thanks, I'll leave it there.
Great.
The next question comes from Mac whale with <unk> Securities.
Go ahead.
Hi, Randy.
I'm wondering with this local for local.
Strategy, whether it's a technology fork occurring.
I'm wondering if you could speak a little bit too whether there'd be a big cost advantages that what you're focused on and if so can you export if theres going to be sort of a tax impact there.
Yeah, Matt. Thanks for the question a couple of points. There. One is that we are trying to design core fuel cell technology that applies across the multiple verticals as well as across the different regions to get leverage and to have not only of the Ballard technology advantage, but a unit volume therefore, our cost advantage. So that's our strategy.
In terms of the technology front, we are seeing a very fast advancing China supply chain across the value chain.
And so you know I can give you a couple of examples.
Emea's plaids and modules for components and materials.
That we have been testing and validating and introducing into bills of materials as we go forward as part of our cost reduction initiatives.
And so staying on top of that very dynamic market is critical.
And I do think that we will see a large part of the bill of materials in engines fuel cell modules, where you see new compressors, and humidifiers and hydro recirculation blowers pumps valves sensors et cetera that will be sourced in the China market increasingly going forward.
We are identifying the volume in China, both for or any ace, but also at the JV level that we have the ability of course to at Ballard export modules from the JV as well as the export any as a globally and use those globally. So while we're identifying that this is a.
Satisfying local demand for EMEA going forward in the China market. We also have the flexibility to source those maa's internally from our China operation and sell them globally. There is a.
Judy on importing mbas into China light duty will increase over the next number of years.
And so as we get to 2025 and domestic Ballard domestic MAA production having.
EMEA is being produced in China will be a significant cost advantage.
With the duties that are that will be introduced there.
Okay, Great and then just following up I'm not sure if it's that related but perhaps it is it's been a year now with motive solutions.
Sort of under your management I'm wondering has the capabilities that brought resulted in the benefits you're sort of expected a year ago and how is that progressing relative to your original goals.
Yes, Mark Thanks for the question I think to understand too just as a reminder for everyone part of what we're looking to do is to simplify the experience for customers and reduced customer adoption friction points by taking fuel cell engines onboard their vehicle platforms and so part of our thesis there is two collab.
<unk>.
With our partners that supply different balance of plant components like we're doing with foresee power for battery packs for the same bus and truck applications as an example.
But also the in house, some capabilities and so acquiring what used to be our Cola energy now Ballard motive solutions is really helping us with customers to look at optimization of their powertrain a lot of application engineering and so a couple of customers for example.
<unk> already received pretty significant support packages and are.
We have engaged with us through Ballard motive solutions.
Wisdom motor is.
Company based in China, that's exporting fuel cell buses and trucks globally, we've been supporting them on integration of fuel cell engines into their vehicles.
That's a very powerful example, and similarly with <unk>, providing a lot of support for cointreau as they start deploying.
As early as next year.
Fuel cell trucks into a growing market opportunity.
So these capabilities are supporting customers and are achieving the objectives intended at the time of acquisition.
Great. Thanks, Randy those are my two.
Great. Thanks, Matt.
The next question comes from Michael Glen with Raymond James.
Please go ahead.
Hey, good morning.
Randy just in terms of the China.
Investment.
If we think about that investment in combination with the with the JV already in place in China.
Will the ramp in volume is the ramp in volume at the JV in increasingly dependent on you being able to produce emea's are in China.
Yeah, Michael Thanks for the question, it's a very important point.
Not by happenstance that our volume capacity.
Capacity at EMEA production facility planned in Shanghai matches very much the volume capacity for the JV from an engine perspective, and so as I mentioned the high.
The duties on imported Emea's will become a competitive disadvantage.
If we're not in a position to supply the JV with local Mbas and so this is a very significant development for the <unk> Ballard joint venture to have low cost domestic MAA access to EMEA as well as doing it in a city in fact, a district J D.
That has exposure to two of the cluster reagents.
I think this is critically important for the JV and.
We're seeing significant end market interest.
At this time developing across the cluster regions now.
As well as in Shandong Province.
And we expect to.
The ability to supply of low cost <unk> to help the JV the competitive in the market.
And.
Alright, thanks for that.
And then just on the order book.
The number at the end of the quarter was $51 million.
This is a 12 month order book.
We use that number like what type of interpretation should we make a boat revenue over the next 12 months when we look at that 12 month order book.
Hey, Michael It's Paul here I'll address that one so you have the 12 well first of all I'll say I think the key point for the quarters that the total order book increase.
11% to $102 million. So I think that's quite encouraging and as we mentioned that doesn't include the Siemens contract, which will be announced or the order the purchase order for Siemens with 100 fuel cells.
That's going to be coming on top of that so I think that's the first point I think about the order book.
On the 12 month order book decreasing to 51 million. So a net decline of 10.
What was also included in there was the largest contributor one of the largest contributors to the drop was.
Shifting out.
From the 12 month order book the remaining portion of the Tech transfer agreement, we have with the with the joint venture so that was pushed out.
So the 12 plus month timeframe, we're in the process of renegotiating the scope of that remaining contract, but fully expect to earn this revenue that revenue going forward.
The timing could be adjusted over the next couple of years. So we expect some of that to come into 'twenty three 'twenty three 'twenty four most likely.
So we're seeing what we're seeing overall is all of the revenue trends that we've talked about earlier in 'twenty. Two we see that continuing into 'twenty. Three we are looking to add more strategic platform customers.
In both <unk> as well as new product opportunities.
And overall I think the solid growth in the total order book to me is the most significant point and very encouraging.
Yes, I'll make sure to add one point there Michael one of the things that's really encouraging to me.
Is the ability of the <unk> Ballard joint venture to develop.
And design fuel cell modules for bus and truck market.
And so that has actually occurred that ability to do it effectively at the JV level with less support from Ballard has occurred far faster than we had originally envisioned.
And so the portfolio of products being developed by the JV has shifted significantly.
And so we are in the process of looking at how to support the JV going forward with a growing portfolio of fuel cell modules, a different size ranges et cetera, and how we can actually incorporate that portfolio into the ballard product roadmap going forward as well so a lot of important work.
To be done here over the coming months with the JV to streamline the paired portfolios for efficiency, but also.
Just the capabilities of the JV to quickly design modules is very impressive.
Okay. Thank you.
And the next question comes from Alex Kania with Wolfe Research.
Please go ahead.
Great. Thanks for taking my question.
Maybe could you expand a little bit just on the thoughts on kind of pricing strategy that you mentioned.
In the prepared remarks, and maybe tie that in with just kind of overall how are you seeing.
Competitive competitive forces competitors, developing and maybe it may be the various their various markets between China, and North America and in Europe .
Yeah. It's a great question, let me comment a little bit and just just remind everyone where kind of where we are as an industry.
So there is lots of policy support in Europe .
In the U S and in China for the adoption of Green hydrogen.
In the U S and Europe , and particularly we're now starting to see.
Advancing towards specific support for the applications and so I think there's a recognition that there's a lot of policy and a lot of emphasis that's been placed on the supply side for hydrogen, but not enough emphasis in policy on the demand side and so as a result of that the end users.
Still don't have a strong value proposition when youre talking about hydrogen fuel cell engines and battery packs.
And storage et cetera that are in the low volume for these applications.
So high cost low volume so our strategy has been very deliberate to enable the end users to adopt early stage demonstration projects to enable Oems to develop their platforms and make investments with their platforms.
And effectively all parts of the value chain.
And the ecosystem really.
Leaning forward on the cost structure in order to get these early vehicles out in the field accelerated adoption get field experience and start moving from demonstration projects to scale deployments, which we're now seeing.
With our contract order and with our Siemens order and with the bus commitments that were seeing and so early stage still but as we move to higher volume and as our product cost initiatives take hold we see cost reduction in excess of selling price reductions.
Which will translate to gross margin expansion at the same time that we're seeing better absorption of our fixed overhead cost structure.
So it's been a very deliberate and strategic pricing strategy.
In a market where the value proposition is still emerging in low volume at high cost and.
Competition.
We were not as well positioned as Ballard are.
Very aggressively trying to pursue platform wins.
Yeah.
Great. Thanks very much.
Great. Thank you.
Yeah.
And the next question comes from Craig Shere with <unk> brothers.
Please go ahead.
Good morning, Thanks for taking my question.
So apart from technology advantages.
Do you have a sense.
Given your new plan.
Any facility in China, and your way charged to J D.
For just how much of the hydrogen equipment or fuel cell equipment.
Domestic manufacturing.
<unk> will be representing in country.
Yes, there has been some interesting reports published on the <unk>.
The I'll call it the.
Total production of fuel cell technology globally at the end of 2021, and we'll expect to see something similar at the end of 'twenty, two and 2023, there haven't been a lot of forecasts.
On what that will look like in 2025.
Obviously announced projects get put into the mix with some forecast information.
But I think in the China market at this scale, we will be in my opinion, one of the perhaps the largest EMEA manufacturer in China announced that this time four mbas and similarly to JV the largest manufacturer of fuel cell engines announced at this time.
There are other companies looking to localize in China, Johnson Matthies made some announcements.
<unk> made some announcements so different parts of the value chain are coming into the China market as well.
But I do think when you look at fuel cell engines in EMEA. This probably represents the largest.
Announced plans for Emea's, certainly from international companies moving into the domestic market very challenging to get some of the plans on the domestic companies that are not making similar types of announcements.
But companies.
Understood.
Definitely helpful.
My last question.
Do you have any rough thoughts or or booked and outlook for the progression of perhaps a wind down of technology solutions revenue in the 'twenty three 'twenty four.
Yeah, if you kind of look at Ts revenue over the last number of years. It typically until recently has been around the $10 million Mark typically.
And youll see that stepping down in 2022 as some of our key projects shear.
Shift.
And in some cases come to end of program like the Audi development work.
So I do think youre going to see TFS comprising a.
Relative immaterial percentage of our overall revenue as you look out to 2025 and beyond.
But an important part of the revenue and I say that because it's seeding new customer relationships and supporting the fuel cell dreams of customers that are looking to commercialize fuel cell technology and don't have in house capabilities and transitioning them over time like we have done are doing with Anglo.
Like we're doing with Siemens.
Like we're doing with other customers too.
Purchasers of our fuel cell engines.
We see as an important feeding opportunity.
I would expect it to be below $10 million in revenue going forward there may be.
<unk>, where there are a significant activities but.
We don't see that the size and scope of programs that we've had historically translated moving forward.
Yes.
Thank you.
Yes, thanks for the question Craig.
The next question comes from Jeff Osborne with Cowen and company.
Please go ahead.
Hey, Thank you good morning.
Couple of questions on my end, Randy I was wondering on the gross margin trajectory a lot of questions on that and I'm sure it'll come up at the analyst day as well.
Just relative to the targets that you had laid out a year and a half two years ago at the prior analyst day of 20% to 30% I was wondering.
Is the right way to think about the progression towards breakeven and then ultimately those.
It goes out to the end of the decade I believe it was.
Entirely driven on revenue levels or mix or is pricing a bit more of a headwind I'm just trying to understand even getting from negative 20% to zero, what that looks like and is that even achievable in the next 12 to 18 months.
Yes, sure Great question, Jeff and Youre right, we will have a lot more to show you on the bridge to stronger gross margins in the 2025 2030 time period.
The Investor Analyst day, so look forward to that.
Certainly if you look at gross margins for this quarter that there were some one times I would characterize them as these type of things like inventory adjustments. When you were in a very dynamic market with.
Product changes and supply chain disruption.
<unk>.
It's a difficult fact pattern.
That could continue over the next year or two as well.
But I do think we're going to see as volume increases and as our product cost reduction starts to translate into production.
So not just in the labs and in development activities and qualifying activities for materials, but actually moving those materials into production.
We do expect to see significant cost reduction that's going to help significantly and as those volumes materialize.
We're heavily burdened right now with our fixed overhead cost structure relative to low volumes. So we do see a pathway to more exciting gross margins that help imply a sustainable business model.
And we will provide that bridge in more detail as we as we move out to the.
The call next year as well as the Investor and Analyst day.
Paul Paul or if there's anything you want to add to that I think he covered covered all the key points, Randy I think I think getting home.
Great strong strategic relationships with large high quality customers.
And working with them on their programs when we see the volumes ramp up we do expect to see in prices, we'll probably still keep coming down, but we expect cost will come down at a quicker pace and that will expand margins.
Some of the other the other points that Randy made.
Particularly around inventory management I mean, it's been incredibly for many for all companies is incredibly challenging time managing inventory when you think externally about COVID-19 and supply chain issues in freight cost and even just availability.
But leading to much longer lead times, and then combined with that are on top of that us strategically investing in new products.
<unk> next generation products moving these customers to those lower cost products. Some older parts are going to become obsolete.
So that's going to happen I think the the effect and certainly when you look at percentage of gross margin the factors kind of amplified.
When you have lower lower levels of revenue I think as we look out further we would still expect to see some revenue adjustments from time to time, we may even have summit at year end and our in our own business here in the short term, but I think the effect of those on the gross margin will become less and less as revenues scale up.
Jeff One thing I wanted to add because you did ask about pricing too is that we are seeing different pricing dynamics in different verticals.
And I think that's going to play out significantly as well, particularly as some of the larger opportunities in marine and stationary start to contribute more heavily in the revenue mix in the future.
Yes.
So just to follow up on that point, so to say the trucking is the most aggressive of everything you focus on.
I thought my boss and then yes, okay.
And then just a nitpick question, but could you quantify what the import duty of EMEA is from Canada into China, I'm, just trying to get a sense. It sounded like you were sharpening your pencil on Capex and Opex for next year.
Just in light of everything going on and so I guess, the only pushback I would have is it.
A relatively small number maybe why not wait to ramp up China in 2026 versus 25, given the past two to three years had been a bit of a disappointment relative to the expense and time that you personally but into that facility.
Yes, so a fair comment and is something we debated a lot as you might expect in terms of what was the right time to make this investment.
The duties are relatively modest at this time, so kind of it as all things are it's very complicated too.
To give you a number but I will just kind of roughly 3% to 5% right now for imported mbas.
But this is going to 812, 15% by 2025.
Based on the information we have and so that is a major deal when you are talking about.
Very.
Market that is very price sensitive in China. So.
Bringing this on in 2025, we think is the right timing given.
What we see on that front.
And remind me I mean, it's worth 40 ish percent of the stack cost give or take.
It's about 60% of the stock cost fix it okay.
Okay, great yes.
Yes. Thank you.
Yeah.
The next question comes from T. J do you have a car with Citi.
Please go ahead.
Yes, hi, good morning, Randy.
You know the Iot in the U S.
If we can tailwind with the production tax credit and the $8 billion investment in hydrogen hubs.
Good bad or take advantage of that.
Or are there any plans or strategies that you put in place in the last eight weeks since the auditor was passed.
Yeah. Thanks for the question P J and where we're actively working with partners.
In hydrogen hub submissions so were.
We'll see next year, where the hydrogen hubs or announced there's a lot of debate on how many there will be and how those will where they will be and so that might be five six maybe even more than that so we are expecting to see a very.
High level of collaboration engagement here over the next number of weeks.
As you know.
The hydrant hub activity, both in terms of submissions and responses.
And iterations likely get filtered through next year. So we're very active on that front of the collaboration side.
We have a strong track record for delivery of fuel cell technology and modules in a variety of applications.
I think the bus market is one where people are focused on but the truck market is another one we're seeing a lot of interest in activity and we're very engaged on as well.
Of course, we're not involved in the actual production of hydrogen or hydrogen refueling stations.
But all of these applications require offtake and so theres a significant I would say more activity than ever at this time, both in Europe , and the U S on matching up.
Hydrogen supply and application demand so.
So theres offtake commitments and Thats, where.
Ballard fuel cell technology can play a very material role.
Thank you and secondly, you know your strategy was to make EMEA is in Canada, and then export them around the world, including Europe and know that he will be exporting out of China, what is the competitive situation.
Situation or where does it get it up all in the cost curve.
Yes.
<unk>.
Yeah, just to be clear, we have a lot of flexibility in our EMEA supply. After 2025. So today through 2025, 100% of our EMEA demand comes out of our EMEA production capabilities here in Vancouver. After 2025, we have the option to.
<unk> global demand not just China demand from the <unk> from our.
Our Ballard EMEA facility in China as that comes up we also of course have the.
Continued capacity here in Vancouver.
So I think this provides us a lot of resilience some markets may have preferences for local demand.
And we'll have to see how that plays out.
As we move out to 2025 to 2030, but we think we have the right volume aggregate volume as well as the right.
Flexibility in our business model as we move out from 2025 to 2030 of the scaling that will occur across the verticals across the regions during that time period.
Okay. I guess my question actually was wood Vancouver, it would be much higher costs in Pennsylvania manufacturing compared to China, Oh sure. Okay, Yes, sorry, I apologize I didn't I didn't appreciate that the point, you're making certainly Vancouver is not a manufacturing center.
If you had a white piece of paper and you're starting things a new you likely wouldn't have.
The type of footprint, we currently have in Vancouver.
So we will continue to have what I would call prototype manufacturing capabilities in Vancouver, and as we look for scale.
Our advanced manufacturing initiatives that we're doing in Vancouver will apply to that scale in lower cost regions. So.
So we are seeing both in plate production and MBA production significant lines of sight on.
He know not just material cost reduction, but labor cost reduction as well.
As we look at EMEA localization in China, and some of the advanced manufacturing initiatives. There, we're talking about very automated EMEA production facility, which will see some cost benefits of course, most of the costs for EMEA as our materials labor is a relatively modest portion.
Every.
When you get to a point in your and your product lifecycle in your in your cost structure, where you need to.
Break pennies and half were going to be very well positioned with this NDA manufacturing facility.
Alright. Thank you. Thank you for the color great. Thanks P J.
The next question comes from Greg West Koski with Weber Research.
Please go ahead.
Hey, good morning, guys. Thanks for taking the questions.
Randy you mentioned that the and correct me if I'm, if I misheard you here, but.
You mentioned that your combined capacity from the facilities in Vancouver, and Shanghai will support your projected NDA demands through 2030.
But then you guys are also doing the local for local looking for potential facilities.
Europe would probably would seem to make sense I'm just curious if if you go through with that if we see some announcements.
On a facility in Europe , how should we think about that effect on.
Kind of all three presumed presented facilities there, whether it's kind of lower utilization across the three year, maybe a later production target in Europe for a smaller facility in Europe or something just curious how how we should think about that if if it's.
Kind of extra capacity, if you will.
Greg Thanks for the question, let's let me be very clear that we at Ballard are fairly vertical integrated in our manufacturing. So we design and manufacture the mbas. We just talked about we designed and manufactured the bipolar plates, we design and manufacture our fuel cell engines. So as we look at markets one of the key.
Key questions. We look at is what scope of work.
What scope of manufacturing needs to go into that specific region. So as we look at Europe I think our current model is looking at manufacturing of fuel cell engines in Europe , I don't see a need from a volume perspective absent any.
Mandated local NDA.
Policies in Europe , I don't see a need for us to scale EMEA manufacturing capacity in Europe on top of our current plants.
What we are looking at for Europe is a much lower capex investment around the fuel cell engines for the key markets, where we're seeing demand in Europe . So bus truck rail and marine are the four markets. So we're doing that already today with some investment in our existing Denmark facility for the merge.
<unk> space and as we look at the bus trucking and rail market start to scale in Europe , We will look at other markets low cost access to high talent access to end customers access to Oems access to supply chain.
And strong policy support and subsidy support.
Some local governments those will be the variables, we will look at as we determined the right scope of manufacturing and the right location and timing.
Okay that makes sense. Thanks, thanks for that clarification, Randy I'm sure and then for my follow up you mentioned, you're seeing pretty strong demand on the marine side is that purely from boats in vessels or does that include some of the clustered infrastructure in the ports as well like support.
Kohl's or hotels et cetera, or does that does that kind of roll into stationary power just curious how how youre seeing those demand clusters kind of develop and evolve here and how you ultimately.
Bucket them in and plan on organizing them in your financials.
Yeah, I would say the answer is yes.
Across all of those.
Different opportunities there is theres a lot of interest and I want to caution of course, it's early stage interest rate, so we still need to get.
Marine vessels on water, where we're providing propulsive power, but we do see applications for onshore power. This is a number of different regions are expressing interest in this so there's a lot of engagement right now.
Cool ironing opportunity is it some time referred to us is something that we see growing.
From 2020 for 2025 onwards through 2030, but Theres a lot of work that has to happen with these ports.
And with these clusters.
In Europe and in the U S for that matter and in China, where we expect to see a very large fuel cell marine market as well by the way. So I think we're going to see marine applications developed.
In a number of market segments, and we're going to have to be very selective in which market segments, our product supply to <unk>.
And our our sales qualification process to make sure we're pursuing the high value opportunities.
Got it okay. Thanks Randy.
Thanks, Greg.
The next question comes from Kashi Harrison with Piper Sandler.
Please go ahead.
Good morning, and thank you for taking the questions.
So just first one for me with respect to the Zemin's announcement can you give us a sense of how to think about the dollar value of the purchase order and then.
Pardon parcel about when you expect to convert that backlog into revenue.
Sure. So I think kind of an easy way to think about our Kashi is that the metric that you use in the industry overall is roughly speaking $1000 per.
Kilowatt.
What I would say is this is a rail application. This rail application has very onerous cogent standards.
The shock and vibration requirements packaging et cetera. So the rail market you see significantly higher selling price as a result of that there's obviously significant higher costs associated with that as well so.
If you just did a crude kind of thousand dollars times 200 kilowatts per module times 100 engines, you end up in the $20 million range. This is significantly higher than that.
Got it.
We'll look for that when you report next next time and then just maybe.
A question about the strategy with opening in EMEA facility in China.
How do you think about just the risk surrounding IP and then maybe just more broadly how are you thinking about the geopolitical risk.
Of opening a facility in China, just given the globalization trends. We're currently seeing in rising friction between the east and the west.
Yeah, I think that's a very important question is something we spent a lot of time as you might imagine assessing the geopolitical risk and it's actually in some ways. The geopolitical risk that's really entrenching on the China side is there a clear mandate to reduce dependence on imported <unk>.
<unk>.
And certain imported technologies et cetera, and so we do see renewable energy playing a very large portion of the grid mix in China increasingly as you move forward and we see a hydrogen as a very key enabler for China to promote energy security.
So we do see China as a long term.
Largest market for hydrogen and for fuel cells and.
And in order to play in that market you need to make investments in the in country.
There.
As we look at.
Our ability to.
Assess kind of what the geopolitical implications are with assets in China, We got comfortable as many other international companies are as well at this time I mentioned a few that are also investing at this time you also have other companies like BSF, a large chemical company, that's making significant investments in China.
So it is a risk and something we considered and something that as we think about our other markets as well.
Having production capacity in multiple locations, we think it's going to be a very important risk mitigate or to our business plan in the future.
Ensuring we have.
Business continuity is critical and so I think this idea of having local for local with the right scope of work in country and making sure we have the opportunity to supply local demand with local production will be quite valuable.
Yeah.
Thank you.
The next question comes from Craig Irwin with Roth Capital Partners.
Go ahead.
Good morning, and thanks for taking my questions. So Randy you guys have done a really good job on cost out over the last many many years right led the industry.
Because of that right the technology and the approach.
Can you maybe talk a little bit about the go forward on your 70% cost reduction goal.
How much of that is dependent on further refinements to things like system design versus component selection and component sourcing and volume, which seems to be the emphasis.
Of the conversation today as you look at that you know building out some new very large highly automated facilities.
Yes, we're well along on this Craig and thanks for the question, we have invested significantly historically.
<unk> product improvements while at the same time, reducing product cost.
And I think the work that's happened over the last few years and will happen over the next few years will be the most important in the Companys history, both from a performance perspective as well as from a cost reduction perspective, and we see very encouraging.
New developments that arent, even that were never contemplated in our 70% cost reduction that I think will be very additive.
Not just at the NBA level.
But as we look at modules as well, we're seeing significant development in the supply chain there for balance of plant components. So we're very optimistic all around there.
We have the 70% three by three program, Craig that you're referring to.
We're 55 of that 70% is already realized.
So we have a very small portion to go here over the next period. So we see a lot of confidence on getting beyond that 70%. We're certainly tracking ahead of program at this time and also some of these additional developments in 2022.
That could have major cost implications for us.
As we move forward as I said that were previously contemplated.
I think this is going to be one of the strongest stories.
The industry will have with this cost reduction of fuel cell technology.
Excellent excellent. So my follow up question then is.
$1000 a kilowatt.
Sort of rule of thumb you used earlier in the call and that's the number we've been tossing around.
Gosh I think around 10 years at this point.
Can you maybe talk about.
The opportunity for that to come down over the next couple of years as you maybe use a little bit of strategic pricing and balance the the <unk>.
Movements in cost.
Margin versus customer price, yes.
And to be very clear, it's come down below that.
<unk> in the bus market already and in the truck market. So the strategic pricing that we talked about earlier.
Isn't at those.
Historically elevated levels.
So it's happening already but we do see and we will talk about this a detail in the investor and analyst day.
A really compelling pathway below possibly some of the D bench.
Benchmark expectations for the truck market as an illustrative example, so we're very encouraged by what we see and this will translate to not only pricing reductions for customers over the coming years, but more importantly, higher cost reductions that will enable I think material gross margin expansion.
<unk>.
Great well, thanks again for taking my questions. We look forward to to this analyst day. Thank you.
Thank you Craig.
Okay concludes our question and answer session I would like to turn the conference back over to Randy Macewen CEO for any closing remarks.
Well, thank you for joining us today, and we look forward to speaking with you next quarter.
This concludes today's conference call.
You may disconnect your lines.
Thank you for participating and have a pleasant day.
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