Q3 2023 Ballard Power Systems Inc Operating Results Call

Thank you for standing by this is the conference operator, welcome to the Ballard power systems third 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.

And 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 Kate Sharpton, Vice President Investor Relations. Please go ahead.

Thank you operator, and good morning, welcome to Ballard's third 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.

I'll 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 will now turn the call over to Randy.

Thank you Kate and welcome everyone to today's conference call.

Began the second half of 2023 with robust revenue growth driven by deliveries and our core heavy duty mobility market.

Our Q3 revenues are up 30% compared to the prior year period, and up 80% compared to the previous quarter.

The same time, our gross margin loss is more than half due primarily to execution and our product cost reduction initiatives and scale benefits from higher revenue.

We continue to track to our full year guidance ranges for operating and capital expenses and have reduced our cash burn in the quarter and year to date compared to the prior year period.

We continue to focus on prudently managing our costs, while making strategic investments in technology and product development programs, including product cost reduction programs as well as advanced manufacturing and manufacturing scaling and customer experience.

Consistent with focused strategic investments in our core business, we initiated a portfolio review of all current products and product development programs.

Flowing this review, we prioritize our investments in our core fuel cell stack and module programs that have leverage across our business model and target markets. We are discontinuing certain legacy products and discontinuing certain product development programs in noncore activities and markets.

We've also discontinued any new corporate development investments.

As part of the streamlining we proposed a further restructuring of Ballard motive solutions, which we no longer view as core resulting in a noncash impairment charge to goodwill and intangible assets.

When we made our investment in BM S. Two years ago.

M customers were less certain on the adoption of hydrogen fuel cells in medium duty and heavy duty mobility applications.

As a result, they weren't making significant in house investments on fuel cell powertrain and vehicle integration.

Therefore, a key objective in acquiring BMS was to offer OEM customers with third party integrations support to remove friction and the adoption of Ballard fuel cell engines into their vehicle platforms. While also working to optimize powertrain performance.

Since that time, the market has made important and exciting shifts.

Many bus and truck Oems have increased their conviction on the adoption of fuel cells and as a result have scaled their in house investments in fuel cell powertrain integration. They now view the scope is core and proprietary to their fuel cell vehicle platforms, including their competitive position.

There's also been a change in the market supply for more advanced vehicle controllers, including power management to support vehicle Oems.

With the benefit of having secured several important customer platform wins over the past two years, we're now seeing scaling leveraged from existing OEM customers that have launched platforms or are working on new platforms with in house powertrain integration.

As we look forward into our growing sales pipeline and opportunity set we still see limited market need for niche third party powertrain integration support as Oems mature their fuel cell businesses. They continue to increase their in house fuel cell capabilities.

I would now like to turn to an update across our verticals, where we continue to make important progress at.

At Ballard, our strategy is to commercialize <unk> fuel cell technology and products that can be applied across multiple market applications, where fuel cell technologies provides the strongest value proposition and where the barriers to hygiene refilling infrastructure, our lowest <unk>.

These markets include bus truck rail and marine as well as select stationary power generation certain off road markets.

We'll provide a brief update for these applications.

In our bus vertical we experienced higher shipments to our customers in Q3 compared to the prior quarter with strength in shipments to U S. Customers. We believe these shipments are early indicator of the momentum shift for fuel cell buses in North America.

For example, the number of transit agencies in California, either operating ordered or how fuel cell buses in their decarbonization plans has increased from three in 2018 to 41 today.

This increase has been driven by greater understanding a fuel cell bus advantages, including range refueling time, an operating rhythm consistent with legacy diesel and.

And a growing recognition of the relative costs and operating advantages for scaling hydrogen refueling infrastructure, rather than battery electric recharging infrastructure.

This is leading to higher sales activity levels in the U S bus market.

We expect this to translate into firm orders in the coming quarters.

We're also increasingly confident in the trend for fuel cell bus deployments in Europe.

Evidenced by the impressive order activity of our key customers Soliris in the European market. Soliris has now ordered close to 350 modules year to date, including our recent orders for 60 and 170 modules. This figures over double the current amount of fuel cell buses deployed by Soliris and shows an improving demand.

<unk> outlook for hydrogen powered fuel cell buses in Europe.

Moving to the truck market.

As a reminder, last quarter, we announced our partnership with Ford trucks to supply fuel cells for heavy duty truck platform for the European market.

We are pleased also to see the progress on our customer contract as they've deployed five delivery vans powered by Ballard fuel cells in Austria with Ikea as a customer.

This vehicle has the first fuel cell powered vehicle on the road in the European seven and a half tons segment and is an expansion of the opportunity set in the truck market for Ballard as suite customers begin to see powertrains with longer range and lower weight classes.

In rail, we had a standout quarter for customer deliveries as revenues in Q3 or nine times higher than the amount delivered in Q2.

The activity was driven primarily by shipments to our customers see PK see we anticipate shipment to see PKC of additional modules. This year. After we announced a follow on purchase order for further to four megawatts of modules that will power switching and freight locomotives in their fleet.

As a reminder, we received orders for 3.636 megawatts of modules from CP Casey prior to our announcement yesterday.

We're increasingly optimistic about the adoption of hydrogen powered locomotives in North America, given the use case dynamics as well as the <unk>.

Lack of existing electrified rail infrastructure and given the carbonization drivers from end users and supportive policies.

Outside of freight applications, our customers start of the reached a significant milestone after the announced a firm contract with the sale of four hydrogen powered trains to the California State Transit agents Transportation agency after signing an Mou roughly one year ago.

Our marine vertical continues to see interest growing in short sea container ship inland cargo and barge applications, we experienced year over year and quarter over quarter revenue growth in this segment, resulting in year to date revenues that have already surpassed the total reach for all of 2022.

In our stationary power market revenue activity was slightly lower as a result of lower shipments to north American customers in the quarter. We continue to see growing interest in our stationery products and this growth is coming from datacenter standby power EV charging grid balancing and temporary mobile.

Power solutions for construction film and television production and outdoor events.

Revenues from our emerging market segments were up modestly compared to the prior quarter. Currently as a result of shipments to customer first mode. These shipments followed the completion of a full year of operational trials in South Africa for the first build of their mining haul truck platform during which the vehicle demonstrated full payload.

Capacity of 300 tons, an increase in efficiency relative to diesel that enabled higher operational speeds and the capability of climbing grades was fully loaded.

We see the successful trial as an additional validation of the value proposition for hydrogen fuel cells and heavy duty transport.

We're also excited to see our customer applied hydrogen develop a 30 ton excavator powered by Ballard fuel cell module to begin trials and testing with one of the Nordic area's largest construction companies in 2024.

Wrapping up our vertical based discussion and given our performance in Q3, we want to reiterate our expectation of second half revenues for the year to amount to approximately 70% of the full year total.

We also want to provide an update on important policy changes in our key regions since our last earnings call.

During the last few months the European meeting unveiled policies supportive of hydrogen. The first of these is an update to the eu's renewable energy directive that sets the binding target for renewable energy consumption at 42, 5% of total consumption up from 32% previously.

The directive also mandates a minimum requirement for 29% of energy used in transportation to come from renewable sources, including hydrogen and provides a bonus for using renewable hydrogen and transportation to comply with the renewables renewable energy targets.

Additionally in October environment Ministers from all EU member States agreed on a common position on Cotr mission standards for heavy duty vehicles.

In addition to the 2023 <unk> emissions reduction target of 15% already enforced today member States agreed on a truck decarbonization targets of 45% for 2030, 65% for 2035 and 90% for 2040.

While the current emission regulations apply to trucks over 16 tons. These new proposed rules significantly expanded the carbonation targets for trucks applying the emissions reductions to all trucks over five times.

Integral individualized emission reduction targets will continue to be calculated for each OEM.

And for city buses the agreed the carbonation de carbonization target is 85% by 2030 and 100% by 2035.

But you also announced the first auction of subsidies to the hydrogen bank occurring later this month and voted in favor of the net zero industry Act that aims to spur domestic manufacturing of net zero technologies.

Consistent with the policy momentum in the region Europe is our largest geographic contribution to ballard's year to date revenues and represents a large proportion of our order backlog.

The quarter also brought a landmark milestone on the policy front after the U S Department of energy announced that seven regional hydrogen hubs have been selected to begin award negotiations for total of $7 billion in federal stimulus from the B I L. B.

These seven regions could produce more than 3 million metric tons of low carbon hydrogen contributing one third of the U S is 10 million metric tons target, while they're locking more than $40 billion of investments.

Of the seven hubs six have use cases aligned with our target verticals of which five have targeted heavy duty transport is a priority use case.

We are encouraged by the program support for the full hydrogen value chain as it will simultaneously support the availability of low cost low carbon hydrogen and the adoption of fuel cell vehicles and power systems.

The industry also waits for the IRS to finalize its guidance on the tax credits available in inflation reduction act, including the 45 the production tax credit.

We believe these rules will provide the industry with the clarity needed to get projects passed the final investment decision stage and into construction.

Our business in North America continues to show momentum consistent with the advancement and policy for the region.

In Q3 deliveries to customers in North America represent the largest share of revenues among our key geographic markets and were over double the amount recorded in Q2 supported by strength in our bus and rail verticals.

Our industry is currently experiencing the most supportive policy environment that has ever seen providing us with optimism about the long term adoption of hydrogen fuel cells.

On China, the overall, China fuel fuel cell electric vehicle market continues to lag the national targets set by the policymakers and show declining market activity in Q3.

We've previously discussed the complicated policy environment, but believe the industry has it been further stunted by liquidity constraints at local governments that do not have sufficient funds to order more vehicles in key payment obligations current.

With a total <unk> park in China at approximately 10000 vehicle, it's difficult to see how China will achieve its 2025 target for 50000 fuel cell electric vehicles by the end of 2025.

We note that continues to be significant scaling of renewable energy in China with a total of 172 gigawatts of renewable installations through the first nine months of 2023 accounting for 76% of China's total newly added power capacity. We also note. There is a significant hydrogen project development underway in China.

And electrolysis companies continue to scale production capacity.

These factors support our confidence in the long term market opportunities for hydrogen in this region by 2030 hydrogen should be a key part of the energy transition roadmap in China, and we expect green hydrogen can play a major role in the decarbonization of transport I'll now turn the call over to Paul to comment on select financial highlights.

Thank you Randy.

In Q3, <unk> delivered $27 $6 million in revenue.

More than 75% of our revenue coming from heavy duty motive applications.

The share of product revenues as a proportion of the total continues to decline as our increased product backlog begins to translate into higher product shipments.

Earlier in the year, we outlined what our shareholders could expect from us in 2023, including the Q1 would be the trough for gross margins and we have been executing successfully.

This quarter, we saw encouraging progress in our gross margin as it was minus 10% in Q3.

Were an improvement of 12 points compared to Q2.

As mentioned by Randy earlier on the call. This improvement was largely result of initial success and our product cost down initiatives scale benefits from higher revenues and a reduction in inventory provisions.

We reported total operating expenses of $36 3 million in Q3 and capital expenditures of $7 million for the same period.

Given the current macroeconomic uncertainty we are focused on reducing our cash burn as the total use of cash amounted to $34 1 million in Q3 as compared to $48 4 million in the prior year.

We are maintaining our guidance for total operating expenses and capital expenditure, but now expect capital expenditures for the year to fall within the lower end of the range. We ended the quarter with $781 million in cash and no debt.

So in summary, Ballard is well positioned with industry, leading talent fuel cell technology and products for our market applications key customers and partners across our target markets are growing product order backlog industry, leading deployment experience and a strong balance sheet.

We are confident we can deliver long term shareholder value, while making a meaningful impact by providing zero emission fuel cell power for a sustainable planet.

With that we will turn the call back over to the operator for questions.

Yeah.

Thank you.

I will begin 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.

Speakerphone, please pick up your handset before pressing any keys to withdraw your question. Please press Star then two request all questioners to kindly ask one question and one follow up only.

The first question comes from Michael Glen.

With Raymond James Please go ahead.

Hey, good morning, maybe.

Maybe just to start Randy can you just give some thoughts on what your market share is right now.

In the European bus market and are you happy about where your market share is right. Now is there more you can do to pick up more bus customers in Europe, yes.

Yeah. Thanks, Michael I think right now we have approximately 370 buses in the European market operating with Ballard fuel cell engines inside I would say our market share in terms of the total bus installed park right now in Europe fuel cell buses ballpark is probably over 90%.

In terms of order intake in 2023 that number would be lower so I suspect, we'll probably around 75% to 85% market share right now for European plus order intake, we do have some new competitors are emerging.

That are using different fuel cell technology, particularly from Toyota.

Am I happy with the market share.

Of course, we'd love to keep 100% market share like we currently enjoy in the U S.

But I think our long term targets are that have very high market share in bus truck rail and marine.

And when you look at who you're competing against in Europe in your thinking about where this what's going on in the U S and the opportunity. There is it the same competitors in the U S market or is it a different competitor set that youre up against yes today I would say it's different it may be.

Macy's and convergence over time, you'll have different first of all different bus Oems in Europe versus the North American market in the transit market, New Flyer has a very strong market share probably about two thirds market share for the transit bus market in North America.

And they have the 40 foot and 60 foot articulated buses that are certified with Ballard fuel cell engines inside.

And I would say pretty well, 100% of fuel cell bus opportunities at this moment are going to new Flyer in North America.

Europe, it's actually quite quite dispersed I would say, there's probably about 8% to 10 fuel cell bus.

Our offerings in the marketplace there.

<unk> clearly is winning.

Lion's share, but you have been pool.

Right bus ADL, a few others and then there is a couple.

Let's say probably to that that are competing with us at this point, but I expect to see more as we move forward. We also have about let's say about four smaller bus Oems that we've signed up new orders and have initial trials in the last year, we haven't announced them yet waiting for larger scale deployments from those bus Oems but were.

In their platforms right now so I think we probably have something like six out of eight bus Oems that are offering fuel cell buses in Europe.

Okay. Thanks for taking the questions.

Welcome.

The next question comes from Aaron Macneil with TD Colin. Please go ahead.

Hey, good morning, and thanks for taking my questions.

I'm wondering if you could share some perspective on how to think about gross margin breakeven and specifically I'm wondering what sort of revenue level.

<unk>.

With your current pricing and cost structure to breakeven on a gross margin basis.

If you have it handy.

How do you how do we split that $33 million in terms of you know.

Directly variable costs product services versus how much is fixed.

Sure sure and thanks for the question so in the capital markets day.

When we laid out was that we would expect to be gross margin breakeven.

At some point in late 2024.

Sort of on a quarterly basis not breakeven for the full year.

It would be in 2025, I think that that guidance, we probably make that.

More likely be breakeven in the quarter early quarter in 2025 at this point.

On increasing revenues.

We have about $28 million or so in the in sort of fixed overheads depreciation and fixed overheads.

Scott that the gross margin or the contribution margin needs to overcome.

And so as we see increasing orders and increasing revenue that's when we would expect breakeven to occur at that timeframe.

Got it.

In the prepared remarks, both of you mentioned to reduce cash burn and the portfolio review.

You sort of provide an early indication on what the operating expense and capex guidance could be for 2024 and to be clear I can appreciate that you're not going to provide a range, but I'm more just looking for directionality.

Sure. So for for this year, our cash burn I'll, just talk a little bit about the cash burn this year, because I think it's.

It's worth noting so our total cash burn year to date is about $36 million lower or better than.

Last year year to date and that comes from a variety of sources. One is higher interest earned on our cash balance so with rising interest rates, we've been able to earn higher interest. We have also scaled back on working capital a little bit sore operating activities cash from operating activities is about $25 million.

Better than last year.

We have increased our capex spending by about $15 million year on year.

But we have lower as Randy mentioned lower corporate development by about $27 million. So a total activity from investing activities was down by $12 million. So the 12 million plus 25 from operating activities gives us about 35 $36 million better year to date cash.

Cash runway.

Our guidance if we were to prior guidance for 2024 were in the middle of producing our plan and finalizing our strap plan, but broadly speaking we would expect operating expenses to be largely in line with 2023, and I would expect and then the capex guidance to be probably could.

Could be $5 million to $10 million lower than it is this year.

That's very helpful. Sorry, sorry, sorry, one one quick Waller fire on that store operating expenses to be broadly in line with this year with the exception of inflationary increases of about 3%.

Makes sense. Thanks.

Turn it back.

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

Hi, good morning.

Just wanted to follow up on the U S. The U S bus market I think you gave some stats about more transit agencies looking into our working on fuel cell projects just wanted to get your sense of how the U S market develops how you see it in terms of Rollouts are you now and what's sort of the timeline of the U S market at this point.

Yeah, Rob Thanks for the question I think one of the really interesting.

<unk> has been as I mentioned earlier this recognition not just of the range advantages and the refueling time advantages of fuel cell buses, but also the <unk>.

Advantages around scaling infrastructure and there were two recent conferences in the U S plus conferences that really saw a number of transit operators highlighting this wasn't ballard or or new flyer. This was actually the users of the buses highlighting the relative advantage of scaling infrastructure for <unk>.

Fuel cell buses versus battery electric buses as.

As an illustrative example, Philadelphia Transport authority, which has about 1300 buses in their fleet.

A highlight it on two separate slides one slide that showed the.

Availability of fuel cell buses to on a range basis meet all of their routes and it can meet 100% of the routes, whereas the battery electric buses. They were showing can satisfy roughly 20% of the routes and then the other slide that was very compelling was a showing basically a significant significant cost advantage.

For refueling infrastructure as compared to recharging infrastructure for the fleet of buses and this was a.

Pretty interesting case study so to me you've got cities like New York, Chicago, Las Vegas Philadelphia.

We're really talking about fuel cell buses in a way they haven't before.

And I think we are now seeing the.

An inflection point in market understanding that will translate to orders longer term I do think that the.

The hydrogen the available low cost low carbon hydrogen in the U S market will be a massive enabler from a cost perspective with a total cost of us and we see some of these hydrogen hubs potentially being able to contribute.

Likely in the mid term so kind of three to five year timeframe.

In terms of the timing for buses in the U S market I would still characterize it as deployments in the 20% to 120 range per city per announcement of project over the next few years.

But from 2025 to 2029.

We're going to see a very significant shift.

As the California transit buses with the ICT policy are required to.

Affectively go zero emission for all new transit buses by 2029, So I think we're going to see this significant scaling from 2025 to 2029.

And it won't be just in California, it's across the U S now where we're seeing these opportunities emerging.

Okay. Thank you and could you update us on your thoughts about having U S.

Our production capacity.

Are you Where's that at this point.

Yeah, Rob we're still working against that and doing our comparative analysis looking at the European market looking at the U S market looking at the relative <unk>.

Advantages and incentive support that's available in the market.

We expect to conclude most of that work late this year.

But we did indicate we probably would be Q1 next year before we're in a position to make a final determination as you can appreciate there's been a number of companies applying for U S funding opportunities to scale clean energy technologies, including fuel cells intellectuals, there is and the agency.

Does that have funding available to support these type of those manufacturing expansion plans are quite busy managing these applications. So we are in an application process.

Don't know, if we'll be successful or not but we do see that the timing on response for funding agencies has been protracted.

Okay.

Okay. Thank you I'll turn it over.

Thank you.

The next question comes from Mac whale with <unk> Securities. Please go ahead.

Okay.

Yeah.

Please go ahead.

Yes.

Hello can you hear me, we can hear you Matt go ahead, yeah sorry.

I'm wondering.

The backlog or the new orders looks a little bit weak, given where the backlog and where the orders came in is there a shift some of your customers may be doing shorter term focus and because you your guidance on kind of the split first half second half in terms of revenue looks like Youre still expecting some good sequential growth.

Can you kind of reconcile those two those two elements of the of the results.

Yeah, I think Thats, a fair characterization, we did see weak order intake in the quarter.

What I would point to though is the sales pipeline and if I was to characterize the sales pipeline Mac Theres three terms I'd use its growth progression and diversification.

In the quarter over 10% growth in a very large sales pipeline already.

More importantly, perhaps we're seeing significant progression of opportunities through different stages of the pipeline and on the diversification front, we're seeing really significant contributions into the pipeline from all of the different verticals, particularly with bus truck and rail in aggregate contributing about 75.

5% of the total sales pipeline so.

So we see a pretty good diversification that pipeline. We do see also some very lumpy projects in marine and stationery that could be significant adders to the order book and the revenue outlook as we move forward those are still in earlier stages.

So im actually notwithstanding the weak order intake in the quarter I'm very encouraged by what I'm seeing on the end market interest and on the sales activity and the progression and growth of the sales pipeline I would characterize this more as a timing issue and we see.

Orders coming in in Q4 and into early next year.

Okay. That's helpful.

And then I just thought it would.

Paul mentioned already sort of gave us an update on the breakeven on the margin basis with reference to the September analyst day I'm wondering on what are the other goals in the analyst day that you talked about with <unk>.

Expand across the value chain.

Are you given the write down are you thinking or what are you thinking about in terms of tweaking that expansion like do you are there different areas now that you would need to go into where you think are more likely youll go into versus say third party integration like is there a shift there going on.

Yeah, Mark I think you've highlighted this a couple of years ago, we were investing in a couple of our strategic themes one of them being selectively expanding across the value chain.

And we have seen this shift in the marketplace from a few years ago, where vehicle Oems really didn't have in house, a commitment or in house resources to support Onboarding, a fuel cell engine onto their powertrain effectively when.

We had examples where that didn't go very well.

And so what we've seen though is a very significant shift in understanding of the value proposition for hydrogen fuel cells in medium and heavy duty mobility.

And the strategic importance that vehicle Oems are now placing on.

On powertrain integration and they view this as really part of their core business and in part of their competitive positioning.

So what we've seen is that a number of vehicle Oems many of whom we've on boarded as customers. During the last two years and provided support through that process has really scaled up their in house powertrain integration and vehicle integration services and arent looking to companies like <unk> to provide that third party I'll call it niche.

<unk> service support so we are effectively retrenching and deep prioritizing the selectively expand across the value chain from two perspectives. One is from a corporate development perspective and secondly.

A visit.

A number of programs and the number of engineers, we have working on powertrain integration. So effectively what we're doing is sticking to the knitting in terms of the fuel cell stack and core modules.

And making sure that we protect the balance sheet for long term sustainability.

Okay, and I guess that over the long run that should be a positive right. Like you you were able to focus on things like cost out in and perform acts like you've talked you talked about your the changes that you showed us the changes in the.

Bipolar plates and that type of activity. So I suspect, we should be able to see more of that and maybe accelerate those initiatives rather than sort of handholding. If you will your downtown customer yeah, It's really two things one.

The real advantage that the vehicle Oems are onboarding and in housing more capability and taking that scope and doing it is proprietary so we don't need to provide that to use your language handholding.

And then secondly, as you pointed out to make sure we're focusing our resources and accelerating the activities, where we have core strength, which is the fuel cell stack and fuel cell engines.

Okay.

Yes.

Thanks, Matt.

The next question comes from Rupert <unk> with National Bank. Please go ahead.

Hi, Good morning, everyone and just following up on on the last question for Mac there with some of your customers taking on in house integration I imagine there is some overlap there with what you would consider balance of plant does that introduce any complexity around standards for <unk>.

Connection of your product across multiple platforms.

And maybe force you to have non standard products.

Yes, good question.

A couple of things I'd highlight is one of the things we've done in terms of our own scope of work as we look in our product roadmap moving forward is that we historically didn't include DC DC conversion.

Our scope of work and we have over the last two years really started to include DC DC converters in our scope of work.

And so what we are looking to do is to make sure. We have a fuel cell module that is applicable to all vehicle Oems without any major deviation or we're looking to standardize yes, there might be some modest application engineering support required by a vehicle OEM which were.

Strongly positioned to support but we're not talking about.

Really substantive changes to the bill of materials.

Okay. All right. Good and then with your focus on cost reduction you'll be able to narrow down to a few areas where you have core expertise you you mentioned you saw some benefits.

The benefits of cost reduction in this quarter, just wondering if you could give us an update on where you're at today and.

And then how you are progressing towards your your ultimate targets.

Yeah, I think there is two areas, where we're seeing.

Really good development on cost reduction.

One relates to the MAA and the second relates to balance of plant components, we have significant efforts organizationally over the last number of years on.

Cost, reducing mbas from a processing perspective, as well as from material perspective, those are starting to show up in their production and we will see I think even more evidence of that into 2024.

And then we have a very significant team that we've built over the last number of years, that's working on balance of plant components, we have particularly five or six really heavy hitters in the bill of materials that we've been working with suppliers on and have seen significant cost reductions on some key balance of plant components some of.

Of which still have not gone into production, yet, but we will see that into 2024. So we're progressing very well as we mentioned at the capital markets day on the three by three program. We had been 55% of the 70% target had been achieved already we're still tracking to that 70% target.

I think more importantly, now is this balance of plant component cost reduction as that is a significant part of the overall fuel cell engine cost structure.

So we're very excited about what we're seeing and I think as we look out to 2025, and 2030 and think about the longer term cost reduction not just with <unk>, but now introducing.

Sure cost bipolar plates under project forged that we have internally and that we talked about a few months ago in June as well as moving forward with balance of plant component cost reduction and some of the advanced manufacturing initiatives.

Looking at <unk>.

Any significant reduction beyond that 70% stack and module cost reduction that we talked about over the last two or three years.

Alright, thanks for the color I'll get back in the queue. Thank you.

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

Good morning Al I appreciate all the color maybe just I know, it's still kind of early for a 2024 outlook, but if you just think about the various segments that you're in and how quoting activity is shaping up can you, maybe just talk to you, which which segments, whether it's kind of rail and bus.

That could kind of flex one way or the other in 2024 that you could see really taking off and surprising us or.

Shifting to the downside or maybe just some of the activity around quota you're seeing right now yes.

Yes. Thanks.

Thanks Jordan.

I think just go back to the 75% of our sales pipeline in bus truck and rail.

I would say the surprise there has been the rail market and I wouldn't mind, just spending a second or two to highlight the rail market, but I'll come back to the overall sales pipeline and outlook for a second but did you ask kind of which wasn't surprised the upside we set a few years ago that rail could be one of those markets that surprised to the upside and I think we've seen that and there are really two core.

Markets are focused on rail what is the European in Northern North America commuter passenger rail market.

And the second is the North American freight market.

And their work to make it a freight market Theres 35000 diesel locomotives that in my opinion must be replaced on a timeline in order to see emissions reduction and.

And I think related to that I just wanted to highlight a both for the North American freight plus the North American commuter rail market no. There are increasing regulations, particularly in California. So, California has implemented a policy passed regulations that really require pretty pretty significant measures to reduce diesel locomotive emissions.

And it will effectively require passenger industrial and switching locomotives built in 2030 or after 2030 to be able to operate only in a zero emission configuration and for line haul locomotives that will be that deadline is 2035, So 2030, and 2035 may sound like theyre pretty far away, but.

Sure.

Line haul locomotives.

Is there typically 15 year life, it's really time for.

The next couple of years for these solutions to start being developed I did want to highlight in the in the rail market, we had just announced.

One of our customers Stadler.

That has the flirt train.

And the first fuel cell flirt train, we showcase that after an important conference in Florida, just last month that train that first fuel cell third train from Stadler going into service at San Bernardino County Transportation Authority in 2024, and the stellar is now just received an order for four.

<unk> fuel cell trains to be operated as part of the Amtrak, California enter inner city service and there is an option.

For another 25 trains to be ordered as well.

And that flirt design includes six Ballard fuel cell rail HD plus engine. So 100 kilowatts, each and we don't have any orders for those four yet, but that's certainly our expectation is we're the supplier of fuel cell engines to Stadler has a pretty compelling trained by the way. It's got a maximum speed of about 80 miles per hour.

Sure.

The range of about just under 300 miles so pretty significant.

And I think compelling opportunity there. So that's the market that I view as showing significant upside.

In North America, along with US freight locomotive market and we've made some announcements with <unk> and I think they've ordered somewhere in the range of about 30 fuel cell engine is year to date from Ballard for mainline switcher and Chunter applications and are looking at a very progressive plan as they move forward.

For decarbonization.

That would be the upside market I would say I've talked a little bit earlier about the transition that we're seeing in the bus market and the inflection point, where we're seeing more transit operators understanding the advantages are.

Range fast refueling as well now and by the way range in all weather conditions as well as the opportunity for recharging versus refueling infrastructure.

So I think bus will be the lion's share of the order inflow, but bus the bus market typically are smaller engines compared to rail.

And Marina and stationary so those are markets that could be very lumpy and could really in any one quarter be a higher portion of revenue than we've seen historically.

That's super helpful. And then just as a quick follow up you mentioned each station area.

It's kind of early in the progression there, but certainly a big market, maybe if we could just get an update on what youre seeing there and how youre thinking about that segment.

Yeah I think this is a market we're still learning quite a bit about I personally spent a lot of time learning about the data center market with our team as well as the market for what I would call temporary power applications, where you have.

Filming sites are construction sites et cetera, what I would say is that the data center market is one of those secular growth trends that we think could be very compelling and open a market opportunity that we a few years ago hadn't really seen.

The data center market, which is growing exponentially and youre seeing now what 2040.

Megawatts and now 200 400 megawatts for data center sites. So what we're looking at here is standby power and I visited a customer recently that is demonstrating.

Our solution for a complete standby power application for data centers, one of the leaders in the datacenter market.

And they have at their.

Headquarters.

And installation that they're showing to their end users are companies like Amazon and.

Microsoft is illustrative examples.

That are.

Increasingly looking at challenging challenges of getting permitting for data centers in cities.

And that challenge from permitting is coming from the use of diesel engines in their standby power applications. So we do see this opportunity it's still to be proven out, but this opportunity for fuel cells to enable permitting for large data centers, including standby power. So this is a very interesting market.

And again this is strong secular growth.

These data centers need now gigawatts of power moving forward.

In aggregate and.

This is going to be a pretty significant market opportunity and we're looking to validate fuel cells and the value proposition from a tcl perspective for fuel cells in this market.

The other market and stationary that we're seeing this these I'll call. It a temporary use applications, that's an emerging market opportunity just visiting one of our customers GOP.

And saw them.

At their site, where Siemens energy is there a contract manufacturer building a number of units for deployment of their what's called their HBU their hydrogen power units.

They have a number of different exciting opportunities you can see on their website and some of the opportunities the profile there.

And then we're seeing also opportunities for.

Challenges, where you have grids that don't have resiliency or don't have the power.

That they need to supply basically recharging for electric vehicles battery electric vehicles, and so ironically, where we see these markets where battery electric fuel cell electric might win if battery electric wins, perhaps we still get the fuel cells for providing backup power. So.

There are some opportunities there as well.

Super interesting thanks for taking my questions.

Yes. Thank you.

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

And I just had one question can you help us understand over the longer term how is the development of hydrogen hubs in the U S can be a tailwind for your business.

Yes, it's really about the availability of low cost low carbon hydrogen in the marketplace.

So these hydrogen hubs herd with the production tax credit and we should be getting.

Guidance from <unk>.

Treasury on the interpretation of the production tax credit by the end of this year.

Those two measures together the hydrogen hubs plus the $3 per kilogram for emissions that are less than five kilograms of cotwo.

Per kilogram of hydrogen are really are the enablers that are all <unk> for the hydrogen market broadly.

<unk> fuel cell mobility applications and fuel cells stationary applications.

Thank you.

Thank you.

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

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

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

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