Q2 2023 Ballard Power Systems Inc Earnings Call
Thank you for standing by this is the conference operator welcome to the Ballard power systems second quarter 2023 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation, there will be an opportunity to ask questions.
To join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference over to Katie Charlton Vice President Investor Relations. Please go ahead.
Thank you operator, and good morning, welcome to Ballard's second quarter, 2023 financial and operating results conference call.
With us on today's call are Randy Macewen, Ballard's, CEO , and Paul Dobson Chief Financial Officer.
In June we hosted our 2023 capital markets day.
During the event, we provided an extensive update on the progress at Ballard has made while also providing additional transparency on our expectations for our business case.
In case, you missed the event the webinar and presentation are available on the investors section of our website. Consequently, we have intentionally kept our remarks today brief for this quarter.
We will be making forward looking statements that are based on management's current expectations beliefs and assumptions concerning future events actual results could be materially different.
Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information I'll now turn the call over to Randy.
Thank you Kate and welcome everyone to today's conference call.
We're making important progress on our strategic priorities as communicated at our 2023 capital markets day.
During Q2, we grew our order book invested in next generation fuel cell products and continue to drive our product cost reduction programs.
We continue to see growing customer interest across our market verticals, which is reflected in $25 $1 million of new orders in Q2, and a growing sales pipeline.
Importantly, our power products backlog is now up over 140% compared to the prior year period.
We are particularly excited about the growing customer engagement levels in the U S and European markets.
As a result of an increasingly constructed hydrogen policy landscape and increased market activity in the U S and the EU and given the continued hydrogen and fuel cell policy uncertainties and market delays in China. We are accelerating our work on our local for local global manufacturing plant and real.
Weighted future capital allocation plans.
Specifically, we're reevaluating our previously announced MAA localization plan in China pending completion of a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the U S. <unk> EU markets, we expect to conclude this important work.
In early 2024.
We continue to track to our full year guidance ranges for operating and capital expenses.
Our investments prioritize technology and product development programs product cost reduction initiatives customer platform wins customer experience and advanced manufacturing.
We continue seeing growing customer engagement across our verticals.
Ballard our strategy is to commercialize <unk> 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 barriers to hydrogen refueling infrastructure our lowest.
These markets includes bus truck rail and marine as well as select stationary power generation and certain off road markets will provide a brief update for each of these applications.
And our bus vertical the tendering activity for fuel cell buses has begun to translate into our order book and backlog.
This was highlighted by the 96 engines order from Soliris from three European cities, including Goose trial, Germany, which has ordered 52 fuel cell buses for deployment.
We're also seeing exciting activity in the U S fuel cell bus market as we recently received significant orders from our customer new flyer during the quarter.
Given the ongoing tendering activity for fuel cell buses, we expect material additional orders for our bus customers over the next 12 months.
On the truck market and as we've discussed before the truck market is in the early innings of fuel cell adoption with most truck Oems and integrators focused on developing fuel cell truck platforms.
In this regard we're delighted that for trucks. After a competitive process has selected ballard as their fuel cell partner as they develop their hydrogen powered S. Max platform with our engines inside.
We see this partnership as indicative of our technology capabilities and increasing OEM interest in fuel cells as they understand the value proposition of fuel cell electric powertrains.
Our partnership will support Ford as part of the Europeans Dirty S. Yes project to demonstrate zero emission long haul trucks in major freight corridors from now through 2027.
As for its fuel cell S. Max truck platform matures, we anticipate this partnership to evolve into a long term scale deployment level module orders and supply arrangement.
Despite ongoing challenges in China for the fuel cell market, our partner Wisdom Motors recently signed a purchase order for almost 150 fuel cell powered refuse trucks for delivery to the Australian market.
We invested in wisdom last year to accelerate their efforts to build a portfolio of world class fuel cell powered heavy duty vehicles, including buses and trucks using engines exclusively supplied by the way <unk> Ballard JV.
The level of innovation of wisdom as remarkable as they've announced this deployment scale order only five months after delivering an initial demonstration truck.
Wisdom has also signed a cooperation agreement with the Australian customer to deliver 12000 hydrogen powered trucks over the next five years.
In rail we received a follow on order from CP Casey to deliver additional modules in 2024 as they expand their hydrogen locomotive project.
For our marine vertical we continue to see growing interest in short sea container ship inland cargo and barge applications, which we anticipate will result in order activity later in the year.
DNF Hydra very vessel is now operating over 1005 1500 hours since it began sailing regular regularly in March.
Just the clock about 100 hours of operation per week, validating the performance and reliability of our fuel cells in the marine application.
We're also pleased to report that our Marine module has received type approval from Lloyd's, adding to the type of approval. We have received from DNV in 2022.
And our stationary power market, we received a $2 million order during the quarter from one of our systems to provide power to an EV charging site in Germany.
Separately after the quarter ended we shipped our one five megawatt clear Gen. Two system to the Microsoft data Center in Wyoming, having passed factory acceptance testing with Microsoft and Caterpillar Representatives on site.
The system will begin its demonstration in mid September and we expect to be another major proof point of the value proposition of our products in the data center market opportunity.
We continue to see interest in our stationery products grow for EV charging grid balancing data centers and mobile power solution applications.
We experienced solid backlog in our emerging market segments, driven by orders from our customer first mode, who is deploying ultra class mining haul trucks for use on Anglo American's mining sites.
Partners now order close to 100 modules year to date, and we expect to realize revenues. This year as we ship a portion of this backlog in the second half of 2023 and the remainder into 2024.
As we look into the second half of 2023, our investors can look at three key milestones we're set to accomplish.
First we expect to sign material purchase orders for customers in our bus and marine verticals.
Second we plan to substantially complete our global manufacturing strategy.
And third we anticipate ending 2023 with a robust 12 month order book to provide a strong coverage ratio for revenue in 2024.
We believe Ballard is set up for a strong second half of 2023 with sequential quarterly revenue growth and continued progress on our order book to support 2020 for revenue.
We also maintain our view that the revenue split between first and second half of 2023 will be roughly 30% to 70%.
With that I'll turn the call back over to the operator for questions.
Thank you.
The question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys.
Jay Your question. Please press Star then two.
Quest, all questioners to kindly ask one question and one follow up only.
The first question comes from Aaron Macneil with TD Cowen. Please go ahead.
Good morning, and thanks for taking my questions Randy as it relates to the location of the EMEA manufacturing facility.
Are you essentially just waiting for the IRS rules to be finalized and if I'm on the right track with that line of thinking.
What's sort of the tipping point in terms of the IRS rules.
For you in terms of where Europe or the U S becomes more attractive and maybe I'll sneak one more in just to give us a sense of what youre hearing in terms of where you think the rules will ultimately shake out.
Sure Yes.
And I think it's an important question and certainly that's a key consideration I think just stepping back a little bit.
For us looking which which jurisdictions have the most supportive policies for the adoption of low cost low carbon hydrogen is critical.
And where do we see.
Deployment of fuel cell vehicles. So this is something thats.
Critically important tied to that is we do see a number of these regions that are also looking at how do we support companies who are looking at localizing production across the hydrogen and fuel cell value chain in that jurisdiction.
So there are two aspects to this one is as you point out how would the.
Particularly the details on the IRA implementation.
<unk>.
How the green hydrogen is effectively measured.
But also stepping back into say what policy support with subsidy support is available for manufacturers looking to.
Set up local manufacturing operations. So both of those are considerations that we're looking at in both of those were advancing.
Obviously tracking the first one carefully and advancing on opportunities for funding in all three regions.
So thats important secondly, I think just again stepping back where do we have proximity to customers and users.
Supply errors and key talent.
Whereas the cost structure are going to be competitive and I think also access felt low cost low carbon hydrogen is not just important for our customers, but also to our operations of course, we want to have our operations with low emissions as well. So these are all factors that we're considering.
And it's not just the U S market that has some pacing items in the back half of this year, but certainly activities that we're engaged in in all three markets.
Enable us to have I think a very clear competitive assessment by the end of the year.
Makes sense switching gears a bit.
Thinking about the <unk>.
Soliris order you just announced you mentioned the potential for more bus orders in the next 12 months and then maybe we can throw in the.
The previous Siemens in Kuantan corridors.
These larger batches of orders that you seem to.
Do you think we'll start to observe some scale efficiencies play out in the margin over the next couple of quarters and.
If so how would you characterize it in terms of magnitude.
Maybe just a comment on Soliris and then secondly on the scale efficiencies and the impact on gross margin.
As a reminder for listeners I mean, soliris is a leading bus Oems theyre based in Poland.
We've been a long standing customer with Ballard that even actively promoting both the R 12 meter and articulated 18 meter low floor intercity buses really good partner they have over 110 fuel cell buses already deployed with Ballard engines inside this additional order for 96 is really critical it includes.
Three cities one of which.
In <unk>, Germany with robust as the transit operator there.
And those buses most of them will have our 70 kilowatt engines on the 12 meter buses, but five of them are articulated we will have our 100 kilowatt engines.
So very important customer and have a large or the activity level right now across Europe .
And I think this is just representative that we're seeing cities moving from orders of one and two and five and even turn now to 30 and 50 and in some cases over 100 fuel cell buses for deployment.
So I think this is critically important and as Europe , and the U S and China get access to low cost low carbon hydrogen. We think this is a massive unlock not just for city buses, but for all of the verticals that we're focused on so.
Critically important I do think though the orders we're talking about here.
For Soliris and you rightly mentioned cointreau and Siemens other great platform wins as well those are still relatively speaking modest volumes. So theyre not at the level, yet where you kind of get the major break.
Volume breaks that will impact gross margin. The way we are looking for of course, they'll help it'll be incremental but not not.
Significant material changes that we'll see when we're in the thousands of units as compared to the one hundreds.
That's very helpful. Randy I'll turn it back.
The next question comes from Manav Gupta with UBS. Please go ahead.
Good morning, guys I, just wanted to talk a little bit about the Ford order looks very exciting is this something that could scale up.
At scale across geographies.
And something like this can you talk a little bit about back.
One is youre right on both fronts is very exciting and it indicates scaling in the future I think you're bang on.
Ford trucks, it's the kind of the key the only heavy commercial brand for Ford They have a range of vehicles in their portfolio, including tractors and construction trucks and distribution trucks.
Pretty important player in the truck market effectively what theyre doing manav is developing a fuel cell truck platform based on the S. Max 44 tonnes long haul attractor truck they have.
And after a competitive process selected ballard to integrate their fuel or fuel cell engine. So we've got to 120 kilowatt FC move XD engine. So 240 kilowatts in total and it's part of a very important program in Europe . The <unk> program, which is really designed to provide.
Real world demonstration of long haul zero emission trucks.
And what we see at the conclusion of this project is Ballard being very well positioned with this ford relationship to be a long term supplier to Ford now we have work to do obviously to validate that but.
We're confident in our solutions and in the products that we're going to be offering.
This is another example, as was pointed out by Aaron a minute ago of just work that we're doing to secure platform wins and on the truck side. This is a very important addition to the <unk> and wisdom and other partners that we have on the truck side. So agree with you very exciting and we see scaled opportunity as well.
Validated through the next couple of years.
Good question.
We had started seeing green hydrogen Bud can lead you have now got a European refiner looking to source green hydrogen photos and refining operations yesterday, you had a U S refinery.
Who said look I'm looking to source green hydrogen to make sustainable aviation fuel I'm just trying to understand do you see the seeping through at some point hopefully soon in the transportation market also where companies are Lego kit now I want to switch to fuel cell because now have a much lower carbon intensity green hydrogen.
We've taken source cheaper than I could in the past.
Yeah, So I've been saying this for a while I think green hydrogen supply is going to surprise to the upside. There is just enormous activity going on globally not just our three key markets of North America, Europe and China.
That when you start meeting the companies that are actually working on hydrogen and green hydrogen development programs.
Are in the stages of procuring intellectual iser and planning for offtake, it's very exciting what's happening I think if you step back a year ago, we probably expected somewhere around 150 gigawatts of green hydrogen production by 2030 globally.
I feel like that number could be closer to 250 gigawatts based on the level of activity and engagement, we're seeing in the key markets. So it is very exciting I do think that green hydrogen will be used initially.
To effectively decarbonize existing grade hydrogen applications, so industrial applications of traditional markets for hydrogen which is about a 90 million ton.
Existing market.
And then also I think youre going to see a number of the mobility applications in stationary power applications at Ballard, we're focused on really getting unlocked with its access to low carbon low cost hydrogen and you can see situations, where there'll be off take with a significant portion of the offtake dedicated to gray hydrogen and then a residual.
A portion of that offtake being used for merchant market opportunities in transportation and if you think about the customers we have and users we have in our markets bus truck rail and marine.
There are number one <unk> emission is fuel for their transport applications and they have very limited optionality on where they can turn for zero emission and hydrogen will be the big player. In these key markets, we're focused on for medium and heavy duty motive.
Thank you so much for the detailed response.
Thank you.
The next question comes from Rupert <unk> with National Bank. Please go ahead.
As you look at where to prioritize your MAA investment I'm wondering if you could speculate on how this could play out for your partnership in the Chinese market.
If you make the investment outside of China can your Chinese partner participate or is there a chance they might take a lead on our investments in China without power.
Yeah, Great question, Reuben I think we certainly are committed to the China market. We are believers in the long term market opportunity for China. It is the largest market for production and use of hydrogen today and based on my recent visits there I expect that to continue through 2030 in 2050, there is enormous level of activity.
So in my mind, it's not a question of if we have EMEA production in China. It's a question of when and sequencing. So.
So we will.
Like most companies in kind of a globalized world look at this local for local strategy make sure we have the right assets in country in region to be successful.
And clearly <unk> is our partner in the China market for the bus and truck market.
And they are making significant commitments.
The development of fuel cell buses in fuel cell trucks in their portfolio companies a lot of great work, that's been done by weight, China supply chain at the <unk> Ballard joint venture.
They are committed to this market as well so.
Don't view this as a step back from China.
Or a step back from our relationship with Wade shy, but really just an assessment a reevaluation of where to prioritize.
Our next investment.
Okay, great. So if the investments made outside China, the understanding is youll be.
Importing EMEA from outside China to meet your production needs until the production is there.
Sure.
Yes, the challenge just to be open and transparent the challenge with that model.
Is that there we are expecting to see import duties and so that could stress gross margins with that variable.
For EMEA.
Exporting to that market, but we fully expect to have.
EMEA production in China, when the market is at scale.
Great I'll leave it there thank you.
Yeah. Thank you great questions.
The next question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning.
Good morning, Robyn could you sort of update us on the U S plus market. How is how is that developing and how do you see that rolling out over the next couple of years in terms of.
Trials and.
Production rates.
Yes, I think this is going to be a bright spot over the next few years, Rob, particularly as we get this access to low cost low carbon hydrogen coming online, but we're seeing a lot of activity not just in California anymore, but across the U S with cities now looking at.
Over 30 over 50 over 100 buses in some cases, so I think that can be very exciting over the next 12 to 24 months as some of these cities move from tendering activity to actually procurement.
And I think we're very well positioned in the U S market, we have very high market share today, we expect that to continue.
Our key partner in the North American market as new Flyer and they have about two thirds market share for city buses in New City Transit buses in North America, and they have both a 40 foot and 60 foot articulated bus validated with Altoona testing with Ballard engines inside so we're very excited.
About this market.
Nothing I can share in terms of actual sites today.
But based on the quoting activity and engagement, we expect to see some announcements here over the next 12 months to 24 months at scale for U S.
Okay. Thank you and then and then to the my truck market I think you've got an initial strong order that Tony I guess starts this year and it goes into next year.
How does the follow on orders for that project work.
Those are those sort of a next year item or does that play out over a number of years.
Yes, I think.
We should probably think about next orders coming in 2024.
There's a possibility for that to happen earlier, but I think to me what's really important here is we have an end user here with Anglo American that has a very ambitious program to Decarbonize. These ultra class mining haul trucks with only one solution available and they've invested significantly that solution in fact buying the systems.
Integrator.
So this is a very good relationship we have.
Through the value chain effectively.
And we feel were very well position they have.
A large portfolio of ultra class trucks, so look and decarbonize through 2030.
And.
What's important from a testing perspective as the first struck the famous Chuck 74.
Completed one year of testing a couple of months ago.
And very very good performance and you got to think about.
<unk> and grades.
Sand et cetera, very challenging environment and very good performance. So we're very excited on this relationship we have on this opportunity set and we feel we're very well positioned.
Great. Thank you I'll turn it over.
The next question comes from Greg with Makowski Baboon Research. Please go ahead.
Yeah, Hey, Randy good morning, Thanks for taking the question.
Just wanted to apologize I'm, a little behind in catching up so apologies if you've already answered this but can you remind us the.
The schedule on those import duties into China.
The potential magnitude in the next.
I don't know 12 to 18 months or a couple of years or so and then also with that.
Any any capex that you guys have already dedicated to that facility or.
You know what the timing would be on that it should be no yes.
Can you quantify a little bit.
The reevaluation of where to drag on or anything like that.
Yes, Greg Thanks for the questions just in terms of duties that the way I would think about that is very complex and I would say, even some uncertainty in terms of the complexity. The way to think about it is you are kind of in low single digits now kind of 3% to 5% duties are depending on a few variables, but that could get as high as 12% to 15.
8%.
By 2027 2028 timeframe.
So that's an area that we continue to work with our legal counsel on validating what the expectations are in the outer years.
I think that addresses that question.
And the second question.
Let me just.
Just on the Capex and how much we've spent on the project.
But $4 million this year.
Most of that is for manufacturing equipment, which is on order hasnt been delivered obviously, which we will look to where we direct that equipment or most of that equipment at the appropriate time.
So up to a 130 announced only about only about $4 million or so has been has been spent.
Greg maybe just to clarify kind of where we are in the EMEA localization process in China.
While we have signed the investment agreement, we haven't proceeded to the next stage, which really requires capital commitments in the next stage is the actual land acquisition piece. So we're deferring that piece until completion of this comparative analysis.
<unk> lead.
Long lead time equipment.
We've ordered can be used at any site.
So we will require MAA production equipment. The question is where does it go so it's not in any way stranded capital.
Okay, Great. That's helpful. Thanks, guys.
Next one just kind of adding on to your list of criteria for looking at other regions is there any aspect to kind of higher competition and Ballard essentially wanting to.
Elbow out some space.
Maybe have you being competition, playing a higher role than it would have maybe five years ago or so.
Is there any sort of like speed to market are you guys wanting to get a land grab and be there before somebody else comes in to some of these regions that are maybe supporting localized production more of a focus now than it would have been in the past.
I would say that's a lower factor to be honest with you I think the elven load in land grab might be for available support for manufacturing facilities as opposed to customers.
So there is competition for limited funds, where for example, the U S. Dollar has funds available for our companies are looking to localize in the hydrogen fuel cell value chain. Similarly, a similar type of pools of capital available in Europe .
So from that perspective, Thats true, but our approach has always been to be first to market.
And we feel we are pushing that forward regardless of what the competitors are angling for.
Okay, great. Thanks, Randy I'll turn it over.
Thank you.
The next question comes from Mac whale with <unk> Securities. Please go ahead.
Good morning, Randy a lot of talk on the EMEA localization.
Program I'm wondering on the rest of the components, particularly bipolar plates, where you've made a lot of progress that you talked about in the at the capital markets Day I'm wondering what your views are on the localization of those components assembly balance of plant or we should we consider those already local went away or are those.
To follow on after the EMEA localization.
Yes, great question, Mac and what we're looking at for production facilities in the U S and in Europe .
As we're assessing which parts of the value chain should be localized and where's the support for it. So you have different support levels for <unk> for bipolar plates stack Assembly module Assembly. So we're looking at full scope and each of those markets.
And if we're able to get the appropriate support if we're not able to get the appropriate support we will scale back on that scope in market.
With the project that we're working on project forwards, it's designed to have lower cost.
Bipolar plates. This is a significant part of our plan our current plan as we're developing our proposal for the U S market.
So the U S.
Opportunity could be Emea's bipolar plates stack Assembly module Assembly right right, Okay and then.
My second question is around the four trucks.
Initiative.
Ship is.
The.
Is the platform that it does take a different approach than what you've seen with other.
Other partners in the truck market I'm wondering if you can give us some detail perhaps.
Is the performance back to defend his truck integration expected to be different or or do you expect over time that your component will converge to a common.
Module that youll be able to really ship to everybody.
I am.
Just trying to get an idea of what they might be doing the same or differently. Yes. So great question. Matthew Let me just backup earlier I'll just remind everyone. We have this strategy in the truck market to partner with.
Dual stream track basically one stream, where we're partnering with the large truck Oems trying to secure platform wins.
Where they develop their existing.
Platforms with fuel cells inside.
Or develop new platforms of fuel cell inside the second stream is kind of more of the upstart are up theaters that are taking chassis our gliders from the large Oems and effectively retrofitting those instead of a diesel engine, putting in a fuel cell hybrid architecture.
So we have partnerships now with both these streams Ford trucks is clearly in the first stream of truck OEM that is designing their truck platform.
And very thoughtfully looking at their powertrain solutions assets in.
In my mind, that's the big difference is they are using their own chassis.
Not a retrofit of a third party chassis.
And we see this as well.
Longer term the volume of scaled approach will likely those those companies will be winners at volume.
Do you think.
As a follow up to that do you think that.
Eventually the up Fitters.
Does the OEM solution find its way into the.
The packaged at the up fit are essentially just buys or do you think those outfitters also want some customization of what the powertrain portion of it looks like.
I think it works two ways actually I think you could see some up fitters.
Piggybacking on what the larger truck Oems are doing.
<unk> niche specialized markets.
And then you could see also some of the large Oems piggybacking on some of the learnings from the outfitters.
Are there integration approaches.
I do think that long term.
Post $2035 40, the major truck Oems that have volume in the particularly the long haul truck market I think will be very well positioned.
In the markets, where you have smaller specialty trucks I think the outfitters will compete very effectively in those markets. So for example, the refuse truck market I would characterize as a specialty truck market.
Wisdom is very well positioned.
To enjoy success in that market based on their work.
Australia.
Okay, great. Thanks, Randy yes. Thank you.
Okay.
The next question comes from Jordan Levy with tourists Securities. Please go ahead.
Hi.
Appreciate all the details.
To go back to peer.
The IRS and treasury guidance recognizing.
The guidance is going to be important for all the players in the U S market.
Try and get a sense of where the current market stands.
Are you seeing any difference in the conversations youre, having with customers in each of your major segments.
Yes.
Marine trucks visionary in terms of their willingness to go forward with more serious programs and contracts ahead of us.
Guidance.
Yeah, I would say.
The.
Market is certainly waiting to see what the guidance.
Effectively we will how that results.
Play out.
I would say in North America, the bus and truck market are certainly the leading markets. We're seeing lots of activity on rail bolt in passenger a commuter rail as well as in freight locomotives and.
We recently announced obviously our expanded relationship with CP Casey.
However, the marine market is I think very early in North America, It's certainly much stronger market opportunity currently in Europe .
So I would say less dialogue in the U S on the marine space.
And then on stationary power. These data centers. This is I believe the <unk>.
Growth in data centers is going to be exponential continued to be exponential, particularly with.
Generative AI and the data requirements. There. So this is going to be a high growth market for the foreseeable future.
<unk> a lot of primary and tertiary backup power and this is a market that we're focused on as well.
But in the very near term, yes, yes, I would say all markets are certainly looking to see what the treasury guidance is going to be I think there is a very strong expectation based on the <unk> investments based on the investments.
The guidance will get finalized in a way that supports market adoption.
I appreciate that and maybe just a follow on to <unk>.
Focusing on what you mentioned.
So the announcement, maybe just remind us and give us a sense of momentum in the rail segment.
Opportunity over the near term that you see there.
Rail has been really a pleasant surprise over the last number of years with the progress we're making there.
I do want to profile CP Casey because it's just a great great company and.
Over the past two years, they've taken the <unk> fuel cell engines from Ballard and <unk>, which is four megawatts and they've integrated those into their hydrogen locomotive program and they've been field testing over the last a year and a half or so line haul locomotive shunts or an switcher.
This is another three six megawatts 18 fuel cell engines they've ordered.
What's also interesting you kind of look at sea Pkc's disclosure records on their hydro locomotive program.
In June announced a joint venture between C. PKC NCS acts to build and deploy the hydro locomotive conversion kits for diesel electric locomotives.
The announced in May the pilot program with Teck resources were effectively.
They are bringing these fuel cell locomotives to support steelmaking coal supply chain and.
And in the capital markets day in June they really profiled. This is a key part of their strategy long term to Decarbonize diesel fuel so I think a very.
Committed company looking for emissions reduction and is making the investments necessary to see to validate the technology to validate the opportunity and I think is leading in this space right now so to me a great opportunity. There we are seeing opportunities for larger orders.
The commuter rail market in the U S market and hopefully more on that to come in the next 12 months.
Really interesting thanks for taking my questions, yes, Thanks Jordan.
The next question comes from Brett <unk> with Morningstar. Please go ahead.
Alright, thank you.
Wanted to ask about there's been some talk of internal combustion engines.
Running on hydrogen sand the truck market.
Just wanted to get your thoughts sort of how you see that as a central competitor over the medium and long term.
<unk>.
Yes, I think we're going to see a portfolio of different solutions, obviously, we're going to see battery electric we're going to see fuel cell electric we're going to see hydrogen internal combustion engine I think many people have viewed 100 internal combustion engine as a possible transition technology.
It still doesn't have full zero emissions.
And has lower efficiency than fuel cells. So I do think there's opportunity for it but I haven't seen it really take major traction and if you just look as the bus market, which is the most mature market of all of our markets. There are zero hydrogen internal combustion engine buses currently operating.
And.
Closing in probably within two years I would say over 10000 fuel cell buses.
Thanks, Randy that's helpful context.
Maybe my other my other question was just on data centers and just obviously that that's a potential along.
Large long term market.
For fuel cells.
What should we expect sort of over the next 12 to 18 months.
In terms of activity in that market.
Yes, I think this is a period over the next 12 to 18 months for lot of learning not just for Ballard, but for partners like Caterpillar and Microsoft.
So I think it's a market that you will sell value proposition needs to be validated.
And then we can move from what's that value proposition is validated we can move to larger deployments. So that market in my mind is still very much in the development and now starting in the demonstration phase I think it would be a number of years before we see kind of deployments at a high level, but this is a market that we feel very passionate about because.
It is a large attractive addressable market with high growth.
And we think it's a market that fuel cells.
We'll have a value proposition and we need to validate that with our customers over the next 12 to 24 months.
Thanks Randy.
Thank you.
The next question comes from Craig Shere with Tuohy Brothers.
Please go ahead.
Hi.
My questions have already been asked and answered thank you very much.
Thanks, Greg have a good day.
The next question comes from Kashi Harrison with Piper Sandler. Please go ahead.
Okay.
Good morning, and thanks for taking the questions just.
Just a few housekeeping ones for me.
You displayed a knife.
Sequential improvement in gross margins from negative 30 to a negative 20.
And it sounds like second half revenues are going to be higher than first half and so can you just maybe give us some commentary on how you think about gross margins into the second half of the year and then I have a follow up question.
Sure, Yes, it's Paul here so yes.
We said in Q1 that we expected that to be.
The low point in our in our gross margin percentage and so where we're seeing higher gross margins still negative in Q2.
But what's interesting about that is when you when you look underneath and you look at the contribution margin sort of the pricing and direct costs.
See good strength, there and an improvement of where we were even last year. Some of that's due to the product mix, but also our cost of our products coming down as well.
So we do see some improvement there we did have a few inventory adjustments as we continue to develop and invest in new products and technologies some of our older products that might be sitting in inventory.
Making it an obsolescence charge on those so we had some a bot which drove our margins.
Negative, we will probably have a little bit of that still in the second half.
Probably $1 million to $2 million in provisions I would I would estimate in the second half, but anticipate growing growing revenues and expanding margins in Q3 and Q4 as well.
And do you think we exit the year with breakeven or do you think were still negative in the second half of the year.
I think it will still be negative I think in our capital markets day, We said, we would expect to get to breakeven gross margin at some point in 2024, maybe not for the full year, but at some quarter in 'twenty four.
But for 25 and beyond.
Got it.
That's helpful color. Thank you.
Just for my second question.
There is a $60 million delta between the total backlog and the 12 month backlog.
Can you give us a sense of how far the.
Uh huh.
The backlog extends beyond 12 months.
That's about $60 million represents backlog through 2025, 2026, just trying to give them just trying to get a sense of a backlog duration.
Yes, the bulk of it would be in 25 with some residual in 2006.
Okay helpful. Thank you that's it for me.
This concludes the question and answer session I would like to turn the conference back over to Randy Macewen for any closing remarks. Please go ahead.
Thank you for joining us today, Paul and I 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.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
[music].
Yes.
[music].
Okay.
Okay.
Okay.
Sure.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
Yeah.
Okay.
Yes.
Yeah.
Yeah.
Yes.
Yes.
Okay.
[music].
Okay.