Q4 2022 Ballard Power Systems Inc Earnings Call
Speaker 1: I.
Speaker 2: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems fourth quarter and full year 2022 results conference calls.
Speaker 2: As a reminder, all participants are in listen-only mode and the conference is being recorded.
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Speaker 2: I will now turn the conference over to Kate Charlton, Vice President Investor Relations. Please go ahead.
Speaker 3: Thank you, operator, and good morning. Welcome to Ballard's fourth quarter and year-end 2022 Financial and Operating Results Conference Comm.
Speaker 3: With us on today's call are Randy McEwen, Ballard CEO and Paul Dobson, Chief Financial Officer.
Speaker 3: 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.
Speaker 3: Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information.
Speaker 3: Before we discuss the quarter, I would like to provide an update on our Capital Markets Day. We are pleased to announce that our Capital Markets Day is scheduled for June 13, 2023 in Vancouver and will also be viewable online. We will be providing additional information over the coming months. I will now turn the call over to Randy.
Speaker 4: Thank you, Kane, and welcome everyone to today's conference call.
Speaker 4: With an increasingly constructive policy landscape for hydrogen globally, we're excited by the growing end customer interest to decarbonize mobility and stationary power applications with fuel cells. My dearest friends from California, thanks for watching!
Speaker 4: 2022 proved to be an important year of progress for Ballard as we achieved key customer platform wins across our verticals of bus, truck, rail and marine, along with early traction in select stationary power applications.
Speaker 4: This progress is starting to show up in our order backlog.
Speaker 4: In Q4, we secured new orders totaling $52.2 million.
Speaker 4: This activity improved our total order backlog bringing it to approximately 133 million at the end of Q4.
Speaker 4: As we start 2023, we're seeing continued momentum on customer order intake.
Speaker 4: We expect to see further growth in our order backlog at the end of Q1.
Speaker 4: This strengthen our order backlog as well as a growing sales pipeline reflect progress across all of our verticals.
Speaker 4: And as a reminder, our strategies develop PEM fuel cell technologies 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 are lowest.
Speaker 4: These markets include bus, truck, rail and marine, as well as select stationary power generation off-road markets.
Speaker 4: We'll provide a brief update on these applications.
Speaker 4: Our bus vertical continues to see important progress in Europe and the US.
Speaker 4: In 2022, we received purchase orders for approximately 250 modules for fuel cell buses, including about 100 in Q4.
Speaker 4: This represents a roughly 25% year-over-year increase in new bus module orders in these markets.
Speaker 4: These orders included sales from nine European bus customers, of which four are repeat bus customers and five are now new bus OEM relationships.
Speaker 4: These 250 hydrogen fuel cell powered buses are planned to be deployed across 11 countries over the coming 24 months.
Speaker 4: This will effectively double the number of fuel cell buses operating in Europe and the US kicking the install base from the current 250 buses in operation to about 500.
Speaker 4: As we look forward, we expect to see this order momentum continue over the coming year.
Speaker 4: through 2022 and into early March 2023, there have been announcements by transit operators in European cities with expected tendering activity for an additional 1,000 fuel cell buses to be deployed in Germany, Italy, Poland, Spain and the UK.
Speaker 4: We're also seeing a strengthening of our bus sales pipeline in North America. In 2022, Foothill Transit in the LA area progressed on its procurement of 31 fuel cell buses, representing approximately 10% of its fleet, with New Flyer supplying the fuel cell buses powered by Ballard.
Speaker 4: And now for the first time in US history, an American city has indicated plans to deploy more than 100 fuel cell buses. So this is very, very exciting.
Speaker 4: We believe we're well positioned to participate in supporting the rollout of larger fleet deployments of fuel cell buses.
Speaker 4: Now take a look at the truck market.
Speaker 4: In September of last year, we announced a deeper strategic partnership with Quantron, a global electric vehicle integrator and an emerging specialty OEM, to accelerate fuel cell truck adoption.
Speaker 4: Ballard will serve as exclusive fuel cell supplier to Quantron for their 44 ton fuel cell electric truck platforms. As part of our strategic partnership, Quantron committed to purchase 17 megawatts of modules, which are expected to be delivered over the next two years.
Speaker 4: Beyond Quantron, we're seeing increasing interest from other truck integrators and upfitters to use our products in various truck platforms.
Speaker 4: We are pleased to see a more diverse set of customers interested in our products which complement discussions for longer term supply of modules in heavy duty truck applications.
Speaker 4: We see strengthening market signals that the value of hydrogen-powered fuel cell trucks in certain classes and use cases will achieve high volume given the clear advantages of range, refuel time, and payload.
Speaker 4: There is also a growing understanding relating to the infrastructure challenges associated with electrification of this market.
Speaker 4: We look forward to highlighting our insights and the value proposition of fuel cell trucks
Speaker 4: including the comparative total cost of ownership, which we have a new model for, in June at our Capital Markets Day.
Speaker 4: In the rail market, we end the year with exciting announcement of the first commercial scale order totaling up to 40 megawatts of fuel cell engines from Siemens for passenger commuter rail in Germany. The first 14 fuel cell modules are expected to be delivered on schedule in 2023 for deployment in the Berlin area.
Speaker 4: In 2022, we saw additional progress in the commuter rail market as it received an initial order from Stadler, the California market.
Speaker 4: For freight locomotive applications, hydrogen fuel cells have a unique and compelling value proposition as a zero-emission, one-to-one replacement to incumbent diesel electric power trains.
Speaker 4: With diesel fuel accounting for both the number one operating cost and emissions source, fuel cells offer similar performance for these long, heavy trains without requiring overhead catenary infrastructure. While the freight locomotive market is still early, the freight is still early.
Speaker 4: We expect continued progress in 2023, further illustrating the strong value proposition and technology advantages of Ballard's fuel cell engines.
Speaker 4: In the marine market, we made important progress in 2022. In Q4, we saw almost 40% QoQ backlog growth after receiving an initial order for FC-Wave tools from AmaG and in order for a container ship application.
Speaker 4: It is also an important milestone in late 2022 as Norleds MF Hydra, the world's first hydrogen power ferry, is now on water and expected to be put in service later this year.
Speaker 4: The regulatory environment continues to undergo a change for marine emissions. The current IMO target is to cut maritime CO2 emissions by at least 40% by 2030. And in November the European CO2 emission trading scheme was extended to apply to the shipping sector covering all vessels greater than 5,000 tons.
Speaker 4: starting from 2025.
Speaker 4: Moving to the stationary power generation market.
Speaker 4: While this market for fuel cells continues to be early stage, we received a key new customer wind from Crosswind in the quarter, validating our product for fuel cell power generation from excess wind capacity.
Speaker 4: Early in 2023, we received a follow-on order from a stationary power customer that has a multi-year relationship with Ballard and we expect to lead to higher volume orders.
Speaker 4: We continue to see interest from customers in EV charging, backup power for data centers, peaking and shore power applications. In the mining sector, we recently announced an order from First Mode for modules totaling 3 megawatts to power several hybrid hydrogen and battery ultra-class...
Speaker 4: new gen solution, including a 1.2 megawatt of fuel cells per truck.
Speaker 4: The Ballard fuel cells will be integrated into the next several power plants built by FirstMoe and we look forward to a long-term relationship to help drive decarbonization in this difficult-to-abate sector.
Speaker 4: As noted earlier, our order backlog at the end of the quarter stood at $133 million.
Speaker 4: Of this, close to 100 million are power products orders, which now represents over 70% of the total backlog.
Speaker 4: Throughout 2022, we've seen a steady climb in our power product order backlog, which has more than doubled since the end of 2021, and illustrates our success helping customers begin deploying fuel cells at greater numbers.
Speaker 4: This growth has been masked by the planned and expected backlog decrease in technology solutions.
Speaker 4: Throughout 2022, we also highlighted our increased customer and revenue diversification, demonstrating the value of our regional and applications go-to-market strategy. As compared to Q4 2021, we've seen a 20% increase in customers with orders of over a million dollars.
Speaker 4: Now looking at our key geographic markets.
Speaker 4: In Europe , there's a steady flow of news around continued policy support. Indeed, just yesterday the EU published a raft of new policies supporting hydrogen fuel cells, including the Net Zero Industry Act. The European Commission has also recently agreed on definitions of renewable hydrogen that we expect will translate into higher levels of confidence.
Speaker 4: for developers of hydrogen production facilities. Notably, over 70% of our 2022 order intake was attributed to Europe .
Speaker 4: Moving to the US, we expect continued demand growth for our technology in the US as previously announced policies such as the IRA, which is really game changing, materialized over the next 12 to 36 months, particularly as the hydrogen hubs and hydrogen production tax credit programs.
Speaker 4: begin to translate into increase availability of low-cost, low-carbon hydrogen for end users.
Speaker 4: Concurrently, we've seen customer interest, order intake, and revenue generation all increase from North American customers in the past 12 months.
Speaker 4: And North America accounted for nearly a quarter of the 2022 Total Corporate Order intake.
Speaker 4: We made significant progress on the build-out of our previously announced facility in Oregon over the past number of months and we expect to support the assembly of fuel cell engines for the US market operational in the coming months.
Speaker 4: Now moving to China, we continue to be disappointed with the delayed adoption in the China market and with low activity levels at the Wei Cai Ballard JV which weighed on our 2022 results.
Speaker 4: Now we're working closely with our Weichai Ballard JV to unlock growth in the China fuel cell bus and truck markets. And indeed, we're encouraged with some exciting opportunities in the JV sales pipeline for fuel cell buses and trucks. 2022 revenues from China represent one of the smallest proportions of total revenues in recent years.
Speaker 4: driven by the subdued transport activity resulting from COVID policies and a slow rollout of FCEV subsidies.
Speaker 4: Despite the short-term pressures, we maintain our expectation that China will be the largest market for the adoption of hydrogen and for fuel cell vehicles in the mid to long term.
Speaker 4: And our expectations are bolstered by the government's prioritization of energy security in the 20th Congress, a development that's expected to drive additional support for renewables and green hydrogen.
Speaker 4: In 2022, China registered approximately 5,000 new hydrogen fuel cell electric vehicles, predominantly located in the initial demonstration clusters of Beijing, including in support of the 2022 Olympics, and Shanghai, bringing the total number of fuel cell vehicles on road in China to over 12,000. This illustrates the relatively modest
Speaker 4: by China standards but continued growth of hydrogen adoption.
Speaker 4: As at the end of the year, there are now over 200 hydrogen refueling stations in operation in China with an additional 70 under construction.
Speaker 4: To succeed in China will require a local presence, a point we spoke at length about in our Q3 earnings call, where we provided detail on our plan to make a significant investment to qualify as a local manufacturer of MEAs in China by setting up an MEA manufacturing facility and R&D Innovation Center in Shanghai.
Speaker 4: shifting to our financials in the quarter
Speaker 4: In Q4, Ballard delivered $20.5 million in revenue with approximately 70% of our revenue coming from heavy duty mode of applications.
Speaker 4: This is an increase of roughly 10 points from the prior quarter and demonstrates again the continued progress in our planned evolution into a technology products company. Over the past year there's been increasing shift and change in our revenue mix by geographic markets as compared to 2021.
Speaker 4: As we discussed on the Q3 call, continued gross margin pressures was partly affected by our pricing strategy to secure customer platform wins.
Speaker 4: The further downward pressure on gross margins in Q4 was driven by a combination of a shift in revenue mix, higher fixed overhead costs, and inventory adjustment.
Speaker 4: We expect challenging gross margin dynamics to persist into 2024 until our volumes ramp and our production cost reduction initiatives move into real production.
Speaker 4: Now, in Q4 we recognized post-acquisition restructuring charges and costs related to our BMS acquisition.
Speaker 4: And there are two high-value activities for BMS going forward that I wanted to highlight. First, we're using BMS hydrogen fuel cell powertrain integration experience and capabilities to help valid customers, typically vehicle OEMs, integrate valid fuel cell engines into their heavy-duty platforms by providing engineering support for application engineering.
Speaker 4: powertrain integration, and even in some cases, vehicle integration. We're also using the BMS capabilities, the fuel cell powertrain and integration experience, to design a fuel cell controller that will enable optimized hydrogen powertrain solutions for hum investing and fuel systems on the ??? hole of the machine.
Speaker 4: with a battery fuel cell hybrid architecture for improved performance.
Speaker 4: considering safety, reliability, durability, we're also looking at improved fuel efficiency helping overall customer TCO.
Speaker 4: Consistent with our announced guidance on costs for 2022, total operating expense was 146 million in total CapEx expense.
Speaker 4: on costs for 2022, total operating expense was $146 million and total CapEx expense $35 million.
Speaker 4: We are now updating our guidance for total operating expense and capital expenditures for 2023. We anticipate total operating expense to be between $135 and $155 million and for capital expenditures between $40 million and $60 million.
Speaker 4: Given the macroeconomic outlook and in the context of our 2023 Annual Operating Plan, we continue to review our spend carefully to ensure we are appropriately investing in our growth strategy while maintaining a strong balance sheet. We ended 2022 with $914 million in cash and no debt.
Speaker 4: We are making strong progress against our product cost reduction targets, including our target to reduce our fuel cell stack costs by 70% by 2024. We're tracking well against this plan despite inflationary pressures.
Speaker 4: We're also coughing our team's ability to achieve even further cost reductions over the coming few years.
Speaker 4: Ballard is well positioned with a growing product order backlog, industry leading fuel cell technology for our market applications, key partnerships and customers across our target markets, industry leading deployment experience and a strong balance sheet. We're confident we can deliver long term shareholder value.
Speaker 4: while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet.
Speaker 2: With that, I'll turn the call back over to the operator for questions. Thank you. We will now begin the question and answer session.
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Speaker 2: We request all questioners to kindly ask one question and one follow-up only.
Speaker 2: We will pause for a moment as callers join the queue. The first question comes from Erin McNeil with TD Cowen.
Speaker 5: Please go ahead. Good morning all. Thanks for taking my questions.
Speaker 5: Randy, for the backlog, I appreciate the split by Power Products and...
Speaker 5: I know you're not going to provide any revenue guidance, but just given that the balance has moved significantly towards product sales, I think it would be helpful to give us all a refresher on what the typical timeline is from order intake to revenue recognition. From the technology solution side, I was hoping you could give us a sense of what the timeline is.
Speaker 4: how those revenues will trend over the next couple quarters or years. Yeah, thanks Aaron. Certainly the order intake and then the delivery time does vary by market segment, but overall I would characterize it as between three months and 18 months. In terms of technology solutions...
Speaker 4: I think what we'll see this year is again a lower portion of revenue percentage-wise and absolute dollar terms this year for our TS business. And part of that of course is the Audi project, which was substantially completed in 2022.
Speaker 4: We are in the process of putting more of our resources into our product development activities as is reflected in our cost structure as well.
Speaker 5: Thanks for that. Paul, of the $135 to $155 million operating expense guidance you provided, how much is earmarked for R&D? Would you characterize it as elevated in the near term in sort of a final push towards ear?
Speaker 5: of cost reduction initiatives, or should we view that as more representative of a run rate on a longer term go forward basis.
Speaker 6: Yeah, Aaron, I'd say what we've seen in terms of R&D and what we see across all of our OPACs going forward.
Speaker 6: broadly in line with what we have in 2022. So looking to, you know, kind of capitalize on the investments that we've made and see, you know, most of our spending in sort of the production and in the technology investments. So investing in our products.
Speaker 6: going forward. So broadly in line with what we've seen in 2022 across really all of our categories. Yeah, Aaron, maybe just to supplement.
Speaker 4: You know, I wouldn't characterize this as a final push. What I would say is this is going to be a sustained investment for a period of time because not only are we improving performance and driving down costs, we're working on next generation technology as well. One of the keys, of course, is that we're designing and developing stacks.
Speaker 4: including the MEAs and bipolar plates and modules, to be used across multiple verticals. So while it's a significant investment, there's a significant leverage that comes with the business model that we have. Understood. Thanks, I'll turn it over. Thank you, Aaron. The next.
Speaker 2: question comes from Michael Glenn with Raymond James. Please go ahead.
Speaker 7: Randy, maybe just to start, when we're thinking about
Speaker 7: the investment that you're going to be making in China, the $130 million MEA facility, when you're thinking about allocating that capital, given what's happening in Europe , given how your sales has shifted,
Speaker 7: so much, like if you're not going to be putting the money in Europe , is there a risk that you're going to potentially miss some revenue opportunity that's coming in that market?
Speaker 4: Just to clarify, one thing.
Speaker 4: Just to clarify, maybe you can go on mute.
Speaker 4: Michael White, while we respond, just to clarify one thing is that you know while we have MEA production planned for the in China it's not specific to the China market. We have the ability of course to use that volume globally and certainly that's part of our strategy.
Speaker 4: I think the real question is, you know, given geopolitics, you know, we do have a local-for-local strategy where we will have increased production capabilities in not just China, but in Europe , as well as the U.S. marketplace, and this increasing support, as we saw yesterday in Europe and we saw recently in the U.S.
Speaker 4: to support companies who are looking at localizing hydrogen and fuel cell related production activities in these markets.
Speaker 4: So I think the question is will we see some restrictions in those markets that require in-country, you know, domestic production?
Speaker 4: If I just take for example the announcement in the EU yesterday where they announced eight strategic net zero technologies and part of their policy was to look at manufacturing capacity to cover over 40%
Speaker 4: other annual deployment needs for hydrogen fuel cells. So there's an indicator of the potential need for production capacity in the European market as well.
Speaker 4: So we did scale the MEA production facility phase one there designed for the China market. We have the ability to use that capacity for global markets. But if we see a need and market demand that justifies investment in other markets, we'll certainly be looking at that very carefully in 2023.
Speaker 7: Okay, and then just on the addition, I believe you said it was in China this year there was 5,000 new fuel cell vehicles put on the road.
Are you able to indicate what your market share is with those additions? Who is supplying fuel cells into that market?
Yeah, so you know, you may recall there were two different tranches of cluster regions announced and the first tranche included Beijing and Shanghai and Guangdong province. So, mostly adoption in 2022 happened in those initial clusters, specifically in Beijing and Shanghai and a big catalyst for that was the Beijing...
terms of additional clusters. And then of course localizing in Shanghai, specifically in Jia Ding, which has exposure just for that district for two of the five cluster regions now. And then of course Weifang, where Weichai is located in our Weichai-Balard JV is also included in a cluster region now as well.
So I would say it was more a pacing of the initial cluster regions, and I think the Beijing Olympics was a strong catalyst. But to be clear, we had very, very modest market share in 2022.
Okay, thanks for taking the questions. Yeah, you're welcome. The next question comes from Mac Whale with Coremark Securities.
the questions. Yep, you're welcome. The next question comes from Mac Whale with Coremark Securities.
Hi Randy, good morning. When you look at the outlook for increasing year-over-year sales given that the higher backlog, is the gross margin sort of hit a low point at this point? Like is there contribution margin that we should expect from higher revenue or should your sort of
investment in bigger headcount and production capacity sort of outweigh that? Yeah, you know, I think for 2022 we saw clearly signs of that with some of the investment we've made in production capacity where the volume hasn't caught up with that investment yet. We're going to see that through 2023 as well and into 2024.
But I do think when we look at the order backlog activity and the sales pipeline, which is really swelling with a lot of great opportunities and some scale in some of these opportunities, we do see the opportunity to move from contribution margin to gross margin.
where that fixed overhead cost structure gets absorbed over a larger book of business. It's going to take some time to move through that. I do think your characterization of gross margins kind of hitting a trough or a low point here is probably directionally accurate. So I do think we're going to see expansion as we move forward.
But I would look for the big leg up in gross margins, particularly as we look at 24, with some of that backlog translating to orders and some of our cost reduction initiatives translating to production.
Okay, that makes sense because we see the difference in the 12-month order book and the backlog. There's a difference in the year-over-year. So obviously there's a lot of back and waiting here. Is that the way the way to read that? And I'm wondering, should we, should we be just waiting? Like should we be expecting higher individual order?
sizes or more frequent because we haven't really seen like a big 50 or 100 unit sort of order or consistency in those like what are your thoughts on order size? Yeah I do think as we know the bus market is the most mature of the markets that we're looking at and now we're seeing as I mentioned earlier we've seen three different cities in Europe and now the first in the US planning to deploy
but also a lot more small orders from a number of different customers across the different verticals. But certainly as we go from early demonstration programs to larger deployments, the scale is going to be driven. I'd also highlight a number of the verticals that we're focused on.
like rail, like marine, like stationary, do have higher power output requirements. You can also look at the off-road market for the hauling trucks is another example. In some of these cases, like freight locomotives, you are looking at 1.2 MW.
power. You need, you know, effectively kind of 12, 15 buses to satisfy that type of power requirement. So, you know, as we get some of the larger orders in marine and stationary and off-road, I think this is really going to see some lumpy orders as well.
Thanks Randy, I'll jump back in the queue.
Yeah, and Matt, I'll just supplement you. You also highlight a little bit of the weighting of revenue when revenue occurs. I would highlight, you know, we're in this cycle, continue to be in this cycle where traditionally we have a heavier weighting of revenue in the back half of the year and I would kind of think about something like a 70% split in the back half of the year this year compared to the first half.
Okay, that's helpful. Thanks. The next question comes from Rob Brown with Lake Street Capital Markets.
Please go ahead. Good morning. Good morning, Rob. The drivers for the bus market momentum, is it really that market maturing or are there other sort of drivers?
Caught in the order.
I think it's a couple of things, Rob. One is obviously we have, you know, demonstration programs that have been underway for a number of years in some cases and those customers have now seen the technology first and they have confidence in the uptime and availability and reliability. So that's translating to, you know, confidence to move forward.
from say 5, 3, 5, 10 buses, you know, to deployments of a much larger portion of their fleet. So that's a very encouraging sign. And in many cases, those transit operators have been very loud proponents in the industry talking to other transit operators who are frankly struggling with their zero-emission strategies. And of course, as we know, I'll use the US as an example where you've got...
a requirement of 50% of all new transit buses required to be zero emission, not low emission, but zero emission starting in 2025 and 100% in 2029. And so they have to have plans. They've been looking at different technologies. I think some of the transit operators have trialed battery electric buses as well, and have found in some cases that that technology has struggled to achieve.
the range and the performance they're looking for depending on the duty cycle and climatic conditions of those transit operator experiences. So I think there's a variety of factors that are leading to this, but it's very clear it's frankly taking a little slower than we would like, but it's very clear to us that the scaling is occurring and I lay on top of this.
As you think about the progress that's going on on the policy side for green hydrogen production, so the availability of low carbon, low cost hydrogen in the US and in the European markets, as you look out 2, 3, 4, 5 years from now, this really game changes the opportunity for the deployment of fuel cell vehicles.
Because many of these applications fuel is a very significant part of the overall total cost of ownership. In some cases between 30 and 60%.
And so as that fuel becomes available and is decarbonized and is low cost, we think this fuel cell opportunity, not just for buses but for all of these mobile applications, are really going to see significant growth. Okay, thank you.
don't have an economic value proposition, you know, that's really strong today. They're adopting in low volumes and demonstration projects where the economics are challenged and where we're in low volume and not offer, not able to really support the type of economics that drives the higher adoption. And so these customers are taking on risk, they're taking on as early a time as
future with and how can we support the success of these early deployments to validate the technology for them for that application and to validate the longer-term TCO including based on the hydrogen fuel assumptions.
So we've been making those strategic decisions. It's translating to relationships that we think have a lot of stickiness going forward but this is also reflected in the financial results including the strain gross margin.
So, you know, I think in terms of how they're structured, you know, the way I would characterize them, not so much time-based but more volume-based. So specific projects and programs and also cases we have cured structures where customers, you know, purchase X number of units, they get a certain price.
And if they want to be more aggressive in their early adoption, we're there to help them and we can give them a more attractive price. And so we do see tiered pricing as well based on volume.
Great, thank you for the call. I'll turn it over. Great, thank you, Rob. The next question comes from Justin Strong with Scotiabank. Please go ahead.
Hi guys, thanks for taking my call. Just a quick question here. So is your CapEx profile and timeline for the upcoming Shanghai investment changed at all recently? And if not, what do you see as the biggest risk to these plans?
Yeah, Justin, first of all welcome and thanks for the question. Yeah, so you know from a geopolitical perspective and also you know wanting to see more progress in the China market, we're really pacing our investment in that market to defer to raw &
spend in the China market as long as possible. So you know, we have pushed back some of the spending. So some of the spending that we would have originally expected to materialize in 2023, we've pushed into 2024 to be prudent and that's something that we're tracking literally every quarter on whether or not we cut-
spend occurs.
Great, and then maybe just like...
I guess you mentioned geopolitical risk. Do you think that would be the result of?
I guess trade or tariff changes or what do you think drives that?
Yeah, what I've learned is that it's very difficult to guess or speculate on these types of things. There's a lot of variables and we've seen that in 2022 with Putin's invasion of Ukraine as an illustrative example. So we have a number of variables that we have in our risk register that we track.
What I would say is that right now, what I've seen over the last number of months is that geopolitical tensions continue to be strained and are trending in our opinion in the wrong direction. I think what's important is to understand that the China market is a large market, so largest market for buses, largest market for trucks, largest market for trains, largest market for marine vessels.
It is today the largest user of hydrogen and their policies are effectively designed to promote companies, inter-multinational companies, to locate parts of the fuel cell value chain into the China market. And so we've seen, I'll just highlight a number of others, we've seen Cummings
As an example, we've seen Umicore, we've seen Johnson-Mathy, and recently Plastic Omnium, all announcing their investments in China, and in some cases, including in the same Jia Deng district as we're localizing in the hydrogen fuel cell cluster, the investments they're making in their parts of the value chain in China.
There are a number of companies that are tracking to the same path that we're on to localize the value chain in China to make sure you have access to that large market, not just for the China market, but of course the ability to use that material globally.
companies that are tracking to the same path that we're on to localize the value chain in China to make sure you have access to that large market not just for the China market but of course the ability to use that material globally. That's great thanks for the color.
Thank you. The next question comes from Manav Gupta with UBS. Please go ahead. My first question is we have had IRA pass, you know, last year and again Treasury Department is working through the Kings, but you know Biden had had his administration is.
spending a lot of money or giving out a lot of money for the development of hydrogen in the US. I'm just trying to understand from your perspective, have you started seeing a change happen as it relates to building the necessary infrastructure so hydrogen can penetrate the mobility market on a go-forward basis? Yeah, Manav, great question. Last week I was in Houston attending the Zero Week conference.
And you could feel at that conference, which I think is the largest energy conference in the world, the primacy of the discussions at the conference on hydrogen and specifically the opportunity set that's presented with a very compelling $3 PTC production tax credit.
for green hydrogen. And so what I would say is that infrastructure, you know, this policy, these levers haven't translated to build out of infrastructure yet.
What we are seeing is a swelling pipeline of projects that are now bidding, that have been submitted for hydrogen hubs.
And I think it's been publicly announced by the US DOE that originally they thought there'd be maybe four or five hydrogen hub sites, maybe six. That number now is expected to be possibly seven or eight hydrogen hubs in the US. And we're seeing a lot of activity by major energy players, by industrial gas companies, by renewable energy companies as they all look to participate in what...
likely will lag a little bit compared to decarbonizing industry applications, but we're seeing a lot of discussion about how to build out hubs that can support mobility applications as well as, you know, corridor refueling opportunities in the US. So I think this is something that's going to take some time and off to roll out, but it is in my opinion a matter of time only.
Perfect. My very quick follow-up here is it looked like there were some one-time items because your gross margin came in lower than expectations. Your gross margin is generally better than that. So help us understand those two line items so we can be sure that the gross margin is not what we saw in the fourth quarter. Thank you. Sure. It's Paul here. So there's a number of factors.
a little less activity with the joint venture technology, that lowered our margins. And some new customers coming on again with the pricing strategy at lower margins or lower price for TS type business.
And then some of the one times that you mentioned include some inventory right off source of obsolete equipment.
for discontinued products. And then we also booked an owner's contract provision. So having some customers you know with increasing orders, repeat orders tipping into lower tiers and causing those contracts at the moment to be onerous. And so under accounting rules you have to book the provision.
on that. And that was about in total about 8 points of the difference. And then finally, as we talked about earlier, with the lower amount of revenue not absorbing all of our net fixed overhead, so the manufacturing overhead, and that was about 7 points.
of that. That is very helpful. Thank you so much for giving my questions.
The next question comes from Greg Wasikowski with Weber Research. Please go ahead.
Hey, good morning guys. Thanks for taking the questions. First one, just thinking about the next 12 months here, what are primary objectives for Ballard? And obviously it's a pretty tough question because everything is so important obviously, but between sales, margins, backlog, China policy, etc., you name it, if we jump ahead one year from now and look back, Randy, what would be your number one milestone?
platform wins, repeat business getting to larger orders and that backlog growing so that we have better visibility not just for you know one quarter out or even the next four quarters but for subsequent years as well. So that to us is very important is getting those customers to longer-term relationships where we're embedded and sticky with those customers.
reduction and this is a critical thing because we need to in the future be able to ensure we're offering that value proposition for customers to unlock the scaling effect but also to make sure that we have gross margins that enable a sustainable business. So you know we think the gross margin line and your income statement is critically important it's something we're focused on for the long term.
And so those would be the two highlights, I would say, for both in cost reduction.
Got it. Okay, cool. Thank you, Randy. And then for follow-up, just on EV charging, can you talk a little bit more about that opportunity for hydrogen in fuel cells within that segment and geographically where are you seeing the initial demand now and where do you expect to see pickup in demand for that application?
in the next year or couple years? Yeah, great question. So what I would say is that as EV infrastructure or EV adoption goes from, let's call it, less than 1% in some markets to 5% and 10% and much higher in market.
you really start to see the strain on grid infrastructure and recharging capabilities. And so we do see this opportunity initially in the US, but this is not a phenomenon that's unique to the US. There will be grid infrastructure challenges in the US and in the European theater.
So we expect to see lots of opportunity for these applications going forward. Okay, cool. Thank you guys. I'll turn it over. Thanks, Greg.
The next question comes from Cashy Harrison with Piper Sandler. Please go ahead.
Good morning and thank you for taking the questions. So the first one for me, just a quick clarification on the heavy duty Chinese revenues in Q4. Was the softness there mainly associated with COVID or was that due to nuances surrounding the initial clusters being in Beijing or was it driven by some other...
of the year in 2022 for sure. You know we didn't really see an unlocking in China until late 2022 and of course travel resumed in early 2023. But I think more fundamentally it's the complexity of how the policies in China have been adopted and how the application processes work and the you know points.
point scheme, you know with the seven parts of the hydrogen fuel cell value chain. It's a very complex policy scheme that many many organizations are struggling to understand and importantly for capital to have certainty that if they invest
in a scale deployment that the subsidies that are available are actually paid out. So to me that's the bigger challenge is that the policies need continued clarity. Not people are commenting on this, but I'm going to make a bold prediction here. I do think there will be more policy clarity in 2023.
perspective.
So I think we're going to see continued progress on the policy front on all three of these markets that will translate to future value for valid shareholders.
Thanks for that explanation there. And just for my follow-up question, can you either remind us or perhaps provide a framework to help us understand the revenue potential of the business once that MEA facility in China is operating at your targeted utility?
to understand what we're looking at is really the ability to manufacture MEAs in that facility that supports effectively 20,000 fuel cell engines. And so the way I think about the levers there is obviously the revenue on MEAs selling that to the Waitai-Ballard JV.
and also the ability for us to use those MEAs globally for a variety of applications. But then the next leg of that is for the JEV using those domestically produced, low-cost, high-performing MEAs for the sale of modules into that market. So I see a leveraging effect.
that occurs by having this MEA production facility there. In terms of MEAs, we typically see when we sell MEAs as a stand-alone material, a very high gross margin on those sales. So the utilization rate for that facility is about
I don't have the exact number, but I think even at 50% utilization rate there, we would see a very successful economic return.
The next question comes from Craig Shear with Tuhi Brothers. Please go ahead.
Hi. Thanks for taking the questions. With the Audi roll-off, can you opine on prospects for quarterly cadence of technology solutions revenues in 23 and prospectively into 2024?
And there's a lot of discussion about, you know, potential growth in the order book this year and how that could be saved anywhere from three to 18 months between book to bill. But is it fair to say that the bus fuel cell orders should be on the...
and therefore the ordering timing to the bus operator can vary and even when they do get the order sometimes there's delays in hydrogen refueling infrastructure. So I think relative to the segments, the bus one, when we have the order in hand you can see realization in the three to six month time frame that's very reasonable.
But sometimes that can take longer. I just want to flag that. And then some of these other marks, particularly when you're talking about larger applications, you know, one megawatt type systems typically take longer for not just for production, but for those customers to be ready for either the vehicle or site infrastructure requirements.
Thank you.
Yep, thank you.
The next question comes from Brett Castelli with Morningstar.
Please go ahead. Yeah hi, just a question on longer term gross margins. Should we expect gross margins by end segment or vertical to be pretty comparable or are there certain end segments that would be maybe higher or lower across the portfolio?
Great question. We are expecting to see certain verticals that have a better gross margin performance. And it's all a function of, you know, the various options that those verticals have to achieve their decarbonization goals and the total cost of ownership for those market segments. So as an illustrative example, we would expect to see the marine market to be a higher gross margin segment.
Thank you for joining us today. Paul, Kate and I look forward to speaking with you next quarter. We also look forward to the Capital Markets Day in June . Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.