Q4 2023 Ballard Power Systems Inc Earnings Call
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Powered Systems fourth 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.
Thank you for standing by this is the conference operator, welcome to the Ballard power systems fourth 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'll 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 Kate Charlton Vice President Investor Relations. Please go ahead.
Operator: Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.
Kate Charlton: Thank you, operator, and good morning. Welcome to Ballard's fourth quarter and year-end 2023 Financial and Operating Results Conference call. With us on today's call are Randy McEwen, Ballard CEO, and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I'll now turn the call over to Randy. Thank you, Kate.
Thank you operator, and good morning, welcome to Ballard's fourth quarter and year end 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, we.
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.
These refer to our most recent annual information form and other public filings for our complete disclaimer and related information.
Ill turn the call over to Randy.
Randy McEwen: And welcome everyone to today's conference call. Our Q4 and full year results demonstrated measured progress against the 2023 milestones we outlined for investors in our 2023 Capital Markets Day. Let me share a few highlights from the year.
Thank you Kate and welcome everyone to today's conference call.
Our Q4 and full year results demonstrated measured progress against the 2023 milestones we outlined for investors in our 2023 capital markets day, let.
Let me share a few highlights from the year.
Randy McEwen: We shipped 74 megawatts of product in 2023, including 540 fuel cell engines. We grew revenues on a year-over-year and quarter-over-quarter basis by 25% and 130%, respectively. We made good progress on gross margins and cash burn, which Paul will discuss.
We shipped 74 megawatts of product in 2023, including 540 fuel cell engines, we grew revenues on a year over year and quarter over quarter basis by 25% and 130% respectively. We made good progress on gross margins and cash burn, which Paul will discuss we.
Randy McEwen: We supported numerous customers in maturing their fuel cell platforms while also securing new customer platform wins across our vertical. We've increased our diversification across our business. We launched our Next Generation Bipolar Plate project to enable further cost reduction and production scaling. We signed the UN Global Compact affirming our commitment to integrate universal sustainability principles of the environment, labor, human rights, and anti-corruption into our business, and we're now sourcing 100% of the hydrogen used at our Denmark facility from green sources. We'll now zoom in on our key market verticals for a brief update on each.
Numerous customers and maturing their fuel cell platforms, while also securing new customer platform wins across our verticals, we've increased our diversification across our business.
We launched our next generation bipolar plate project to enable further cost reduction and production scaling.
We signed the UN global compact affirming our commitment to integrate universal sustainability principles of environment labor human rights and anti corruption in our business and we're now sourcing 100% of the hydrogen use at our Denmark facility from Green sources.
Well now zoom in on our key market verticals for a brief update on each.
Randy McEwen: Activity in our bus vertical indicates increasing acceptance of fuel cell buses for transit operators as a viable option to decarbonize their fleet. Revenues from bus customers for the year were up almost 20% compared to 2022. Even more encouraging, order backlog for bus customers is up 134% compared to the same period last year. Our growth in this market is highlighted by the success of our BUS OEM customers, including Solaris in Europe and New Flyer in North America. To illustrate just how far these customers have come in maturing their fuel cell platforms, I'll provide a brief overview of some of the evolution of these relationships. Solaris started its relationship with Ballard in 2013 when it ordered two fuel cell modules. For the next 10 years, Solaris ordered an aggregate of 213 modules, or roughly 20 per year.
Activity in our bus vertical indicates increasing acceptance of fuel cell buses for transit operators as a viable option to decarbonize their fleets.
Revenues from bus customers for the year were up almost 20% compared to 2022, even more encouraging order backlog for bus customers is up 134% compared to the same period last year.
Our growth in this market as highlighted by the success of our bus OEM customers, including Soliris in Europe, and new Flyer in North America.
To illustrate just how far these customers have come and maturing their fuel cell platforms provide a brief overview of some of the evolution of these relationships Soliris started its relationship with Ballard in 2013, one in order to fuel cell modules for the next 10 years Soliris ordered an aggregate of 200.
13 modules are roughly 20 per year in.
Randy McEwen: In 2023, Solaris ordered 365 modules from Ballard, more than three times the 98 modules it ordered in 2022. Solaris has developed a strong global position in the hydrogen fuel cell bus market, and we believe it is just getting started. For New Flyer, from 2014 to 2022, New Flyer ordered a total of 103 engines from Ballard. In 2023, New Flyer ordered 141 modules, surpassing the entire cumulative total of modules ordered prior to the year and also up more than four times the previous year's total.
In 2023, Soliris ordered 365 modules from Ballard more than three times, the 98 modules it ordered in 2022.
Soliris has developed a strong global position in the hydrogen fuel cell bus market and we believe Solaris is just getting started.
For new Flyer from 2014 to 2022, New Flyer ordered a total of 103 engines from Ballard in 2023, New Flyer ordered a 141 modules surpassing your entire cumulative total of modules ordered prior to the year and also up more than four times the previous year's total shouldn't.
Randy McEwen: Similarly, we believe new flyers are only beginning to scratch the surface of the potential in the North American transit bus market. We continue to see growth in the deployment of fuel cell buses in our key regions. According to a recent CalSTAR survey on zero-emission buses, the number of hydrogen buses either ordered or deployed in the U.S. increased 76 percent in 2023. Turning to the truck market,
We believe new Flyer is only beginning to scratch the surface of potential in the North American transit bus market.
We continue to see growth and the deployment of fuel cell buses in our key regions. According to a recent cow start survey on zero emission buses the number of hydrogen buses either ordered or deployed in the U S increased 76% in 2023.
Turning to the truck market, we continue to emphasize the need for patients in this market vertical while tier one Oems develop truck platforms to bring to the market.
Randy McEwen: We continue to emphasize the need for patience in this market vertical while Tier 1 OEMs develop truck platforms to bring to the market. However, in the interim, we established a new partnership with Ford Trucks for the European heavy-duty truck platform, along with another engine manufacturer in Europe. We believe these partnerships offer a path to scaled commercial volumes in this segment. We have a double-lane focus for the truck vertical.
However in the interim we established a new partnership with Ford trucks for the European heavy duty truck platform, along with another engine manufacturer in Europe.
We believe these partnerships offer routes to scaled commercial volumes in this segment.
We have a double lane focus for the truck vertical will continue to work towards establishing new relationships with truck Oems.
Randy McEwen: We'll continue to work towards establishing new relationships with truck OEMs and support them through the development phase of their fuel cell truck platforms and on-to-scale deployment. At the same time, we'll continue to be proactive in working with vehicle integrators and upfitters, and end users to bring fuel cell truck platforms to the market in advance of major OEMs. Given an increasingly supportive national and state policy framework in the U.S. for zero-emission trucks and fleets, we believe the U.S. will be a key market for the adoption of hydrogen-powered fuel cell trucks. 2023 was an important year for our rail vertical.
To support them through the development phase of their fuel cell truck platforms and on to scale deployment at the same time, we will continue to be proactive in working with vehicle integrators and up theaters and end users to break fuel cell truck platforms to the market in advance of the major Oems.
Given an increasingly supportive national and state policy complex in the U S for zero emission trucks and fleets. We believe the U S will be a key market for the adoption of hydrogen powered fuel cell trucks.
2023 was an important year for our rail vertical.
Randy McEwen: Revenues for the segment were up nearly four times from the prior year, and our order book is also up. We're delighted to see growing market interest from our customers, CPKC, Siemens, and Stadler. We believe that interest from operators in using fuel cell engines to decarbonize rail lines continues to grow, given the market requirements for high power and long distances and the avoided cost of catenary wire infrastructure. We experienced significant growth in our marine vertical, with revenues in 2023, while still relatively modest, up roughly three times greater than the prior year. We're also pleased with the performance of New Orleans MF Hydro Ferry, the world's first liquid hydrogen fueled powered ferry, as it has now accumulated 4000 hours of run time in real operation with excellent reliability.
Revenues for this segment were up nearly four times from the prior year and our order book is also up we are delighted to see growing market interest from our customers see PKC Siemens and Stadler.
We believe the interest from operators and using fuel cell engines to Decarbonize rail lines continues to grow given the market requirements for high power and long distances.
<unk> cost of catenary wire infrastructure.
We experienced significant growth in our marine your vertical with revenues in 2023, while still relatively modest Rus up roughly three times greater than the prior year. We're also pleased with the performance of nor ledge MF hydrous theory, the world's first liquid hydrogen fueled a powered ferry as it is now.
<unk> 4000 hours of run time in real operation with excellent reliability.
Randy McEwen: Our order backlog for marine customers also experienced growth, and has now doubled from the same period in 2022. This growth, combined with our purpose-built marine fuel cell engine that has two type approvals positions us well to work with an increasing number of customers that want to decarbonize their marine air operations. In our stationary power market, we saw revenue grow by 15% in 2023. Revenue growth was driven by shipments to an increasing number of applications that use fuel cells for stationary power. For example, we saw megawatt-scale deliveries for customers using fuel cells to power data centers, EV charging stations, and even to support grid balancing in renewable power projects. We've also seen the emergence of medium power applications where fuel cells are deployed to power construction sites, TV and film production sites, EV charging, and smaller data centers. However, our backlog from stationary power customers declined 36% year over year, reflecting the lumpy nature of this business.
Our order backlogs to link customers also experienced growth is now doubled from the same period in 2022.
Our order backlog combined with our purpose built marine fuel cell engine that has two type approvals positions us well to work with an increasing number of customers that want to decarbonize their marine operations.
In our stationary power market, we saw revenue grow by 15% in 2023 revenue growth was driven by shipments to an increasing number of applications that use fuel cells for stationary power for.
For example, we saw megawatt scale deliveries for customers using fuel cells to power data centers EV charging stations and even to support grid balancing in renewable power projects.
We've also seen the emergence of medium power applications, where fuel cells are deployed power construction sites television and film production sites, EV charging and smaller data centers as well.
Our backlog from stationary power customers declined 36% year over year, reflecting the lumpy nature of this business. However, subsequent to the quarter. We received an order for 15 megawatts of fuel cell systems from a UK based company that specializes in renewable off grid power generation.
Randy McEwen: However, subsequent to the quarter, we received an order for 15 megawatts of fuel cell systems from a UK-based company that specializes in renewable off-grid power generation. We're particularly excited about this repeat customer, as 15 megawatts is more than triple the cumulative amount of fuel cells ordered by this customer previously. This demonstrates substantial momentum with this customer's platform and emerging opportunities for hydrogen fuel cells as a solution in the stationary power market. In 2023, we completed a successful demonstration of our fuel cell technology, where it provided backup power for a data center for 48 hours with 99.999% uptime in partnership with Caterpillar and Microsoft. This project provides substantial learnings that position us to capitalize on the growing power demand of data centers.
We're particularly excited about the strategic customer as 15 megawatts is more than triple the cumulative amount of fuel cells order by this customer previously.
This demonstrates substantial momentum with this customer's platform and emerging opportunities for hydrogen fuel cells a solution in the stationary power markets.
In 2023, we completed a successful demonstration of our fuel cell technology were provided backup power for a data center over 48 hours with $99 99, 9% uptime.
Partnership with Caterpillar and Microsoft.
This project provides substantial learnings that position us to capitalize on the growing power demands of data centers to.
Randy McEwen: The data center market offers considerable opportunities to deploy our products as backup power. As of 2022, data centers consumed 84,000 gigawatt hours of power. To meet future power requirements of data centers, it's estimated that a further 70 gigawatts of renewable power capacity will be needed and added by 2027, and 21 gigawatts of fuel cell power will be needed over the same period. In our emerging markets vertical, revenue declined 27% year-over-year, driven primarily by the conclusion of certain technology solutions programs and lower shipments to customers in the material handling and off-road segments. Our order book was also modestly lower at the end of the year compared to the prior year.
The data center market offers considerable opportunities to deploy our products as backup power as.
As of 2022 data centers consumed 84000 gigawatt hours of power to meet future power requirements of data centers, it's estimated that a.
Further 70 gigawatts of renewable power capacity with immediate and added by 2027 and 21 Gigawatts of fuel cell power will be needed over the same period.
In our emerging markets vertical revenue declined 27% year over year, driven primarily by the conclusion of certain technology solutions programs and lower shipments to customers in the material handling and off road segments. Our order book was also modestly lower at the end of the year compared to the prior year.
Randy McEwen: Similar to the truck market, the adoption of fuel cells in key heavy-duty markets like off-road vehicles and construction equipment is still in the early innings. In the near term, we'll continue supporting customers like First Mode as they plan deployments of their new-gen solution to power ultra-class mining haul trucks with Ballard fuel cell engines at Anglo-American mining sites. We're also excited to see our customer Applied Hydrogen deploy our fuel cell in a 30-ton excavator platform that will begin demonstrations in 2024. Now, looking at our key geographic regions.
Similar to the truck market the adoption of fuel cells in key heavy duty markets like off road vehicles and construction equipment is still in the early innings.
In the near term, we'll continue supporting customers like first mode as they planned deployments of their new Gen solution to power Ultra class mining haul trucks with Ballard fuel cell engines at Anglo American mining sites. We're also excited to see our customer applied hydrogen deploy our fuel cell in a 30 ton excavator.
Form that will be getting demonstrations in 2024.
Now looking at our key geographic regions European.
Randy McEwen: European revenue grew close to 30% year-over-year and now accounts for more than 50% of our total order backlog. We continue to see important hydrogen policy developments in Europe. The EU has agreed on CO2 emission standards for heavy-duty vehicles that will require emissions to be reduced by 45% by 2030 for all vehicles above 7.5 tons and for city buses to be reduced by 45% by 2030. The EU has also unveiled a target to reduce carbon emissions by 90% by 2040 as part of its Fit for 55 legislation, a target we expect will drive further interest in hydrogen fuel cells. Lastly, the EU launched its first auction for hydrogen production subsidies valued at 800 million euros in the fall of 2023 and will launch another auction for further...
Revenue grew close to 30% year over year, and now account for more than 50% of our total order backlog with.
We continue to see important hydroseed hydrogen policy developments in Europe.
The EU has agreed on <unk> emission standards for heavy duty vehicles that will require emissions to be reduced by 45% by 2030 for all vehicles above seven five tons and for city buses.
Should be reduced by 45% by 2030.
Yeah.
The EU has also unveiled a target to reduce carbon emissions by 90% by 2040 as part of its fit for 55 legislation a target we expect will drive further interest in hydrogen fuel cells.
Lastly, EU launched its first option for hydro production subsidies valued 800 million euros in the fall of 2023, and we will launch an auction for further $2 2 billion euros of support in spring 2024.
In North America, we see momentum for hydrogen and hydrogen fuel cells accelerating over the past year revenue from the region increased by more than 30% in 2023, while the order backlog for North American customers has more than doubled over the past year.
For the U S. In particular 2023 was a milestone year from a policy perspective, our seven hubs were awarded $7 billion to support the adoption of hydrogen across the value chain, while the IRS provided guidance for the 45, the green hydrogen production tax credit these policies combined with electric grids limitations.
We will provide favorable tailwind to our industry through 2032.
We're also encouraged by continued support at the state level with California recently announcing close to $2 billion of funding that will be available to support the build out of hydrogen refueling infrastructure. Another key unlock for greater adoption of fuel cell vehicles.
We now turn to provide an update on China.
And as a reminder, we have a joint venture with wage high power based in Weifang, Shandong Province that addresses the bus truck and forklift markets in China. The JV was established in 2018 is 51% owned by <unk> and 49% by Ballard.
Since that time, we built a new production facility in weifang to manufacture bipolar plates assemble stacks and manufacture fuel cell engines, all based on Ballard's stack designs pellet suppliers any as to the JV and the JV facility is approximately 225000 square feet, including manufacturing lines.
Our annual production capacity of 34000 fuel cell stacks and 20000 fuel cell engines, representing two gigawatts of fuel cells.
Over the past few years <unk> has developed a product suite of fuel cell engines for the China bus and truck market with nominal power ranges of 50 kilowatts 80 kilowatts of 110 kilowatts to 160 kilowatts in 200 kilowatts.
In terms of market adoption, we note that the hydrogen fuel cell industry struggled during the three years of various lockdowns during COVID-19, and 2020 through 2022 and with constrained local government funding coming out of Covid.
We're also seeing a very challenging macroeconomic environment in China as well as continued challenges related to the hydrogen fuel cell electric vehicle policy landscape.
Notwithstanding these challenges the market made measured progress in 2023.
For full year 2003, there were approximately 7500 fuel cell electric vehicles sold in China, bringing total deployments to approximately 21000 fuel cell electric vehicles, including approximately 7300 fuel cell buses and 13700 fuel cell trucks.
Now given that our <unk> joint venture doesn't have a strong exposure to five cluster regions under the national fuel cell policy program. Our market share was adversely impacted in 2023, our <unk> Ballard JV sold approximately 200 modules in 'twenty three primarily for the Shandong bus and truck market.
Importantly, there has been continued investment in hydrogen refueling stations in China.
At the end of 2023 320, Hrs's had been completed in China, which is almost 100 more than the end of 2022. This is also an additional 140 HRS currently under construction, which would bring the total HRS is two 460 in China.
In Shandong Province, there are 29 HRS in operation with another nine under construction.
In a recent important policy development, which we believe is quite favorable to the <unk> joint venture. The Shandong government had issued a new policy on February 29th.
That hydrogen fuel cell trucks will be exempted from paying highway tools in Shandong for two years.
This is expected to provide about a 20% <unk> cost savings for truck operators and should be an important catalyst the adoption of fuel cell trucks in Shandong.
The market is expecting other provinces to follow suit later in 2024.
Our JV is still assessing this new policy, including implications for 2024 and 2025.
Based on current sales activities and this new policy, we're expecting growth in the fuel cell engine sales in 2024 at the <unk> Ballard JV.
We're encouraged to see our business in China recover in 2023 as revenue grew by 30% year over year in line with our key geographic markets.
With that review of the verticals and the regions. We know the consolidated market activity rolled up to a record new order intake of $64 $7 million in Q4.
Let me repeat that we achieved record new order intake of $64 7 million in Q4.
Yes, when we look at our order backlog it stood at $135 million at the end of the year down three 3% compared to the end of Q3.
So there are some important context here.
This new record order intake of $64 7 million in Q4 was more than offset by a reduction of $47 1 million, resulting from record engine shipments during the quarter and the removal of $21 $7 million from our order backlog of previously booked orders from a specific customer now.
<unk> financing and related program delays.
We believe this was the prudent approach at this time, we are working closely with this customer as they finalize their financing plans to enable a return of orders to the order book and a resumption of shipments in later 2024.
Notably, we highlight that orders from power products represent more than 80% of the order backlog, while orders from customers in Europe, and North America represent almost 80% of the order backlog.
With that I'll turn it over to Paul to discuss our financials.
Thanks Randy.
In Q4 dollar delivered $46 $8 million in revenue a record level of quarterly revenues for Ballard and an increase of 132% compared to the same period in the previous year drill.
Driven by strong growth in the bus rail and marine verticals.
<unk> reported a gross margin of negative 22%. Although there is spikier was negatively impacted by noncash inventory provisions.
Adjusting for this noncash inventory charge.
Underlying gross margins in Q4 were negative 1%, we're very close to breakeven driven by revenue scaling across fixed manufacturing cost and success with our product cost down initiatives, our activity levels and product shipments in Q4 demonstrate our ability to successfully ramp and scale our production volumes improving.
<unk> that we have the capabilities to meet growing customer demand.
For the full year 2023, followed delivered revenues of $102 4 million equating to a 25% annual growth.
We discussed at the capital markets day earlier in the year, we projected margin improvement as revenue scale and cost reduction initiatives were brought to fruition.
<unk> gross margins of negative, 21%, we were impacted by noncash inventory charges, which when adjusted for lead to a full year margin of negative 9% comp.
Compared to negative 10% in 2022, demonstrating progress in achieving gross margin breakeven as our revenue scales.
We do not expect the same level of inventory adjustments to persist in 2024, giving confidence in our ability to achieve our gross margin targets. However, as revenues move up and down by quarter gross margins will vary due to our fixed manufacturing costs.
We reported total operating expenses of $149 million, including expenses for BMS at the upper middle range of our guidance and capital expenditures of $41 4 million at the bottom end of our guidance. Our total cash used in the business decreased by close to $48 million to approximately 163.
Yeah.
We ended the year in a strong financial position with $751 million of cash.
Our financial results were materially impacted by a number of noncash charges in the year. As noted previously we recorded $12 6 million of noncash charges in our cost of goods sold as a result of impairments to inventory of <unk>.
These generations of products. Our net income was impacted by an equity investment impairment charge of $12 9 million, reflecting the compression of general market valuations for zero emission vehicle manufacturers in our portfolio of long term financial investments and intangible asset and goodwill impairments of $2 3 million and 24.
Million, respectively. As a result of our decision to wind up to Ballard motive solutions business.
Assistant with last year, we are now providing our guidance for total operating expense and capital expenditure in 2024.
We anticipate total expense operating expense to be between 145, and $165 million and for capital expenditures to be between 50% and $70 million.
The increase in total operating expense guidance reflects inflationary increases.
And an acceleration of <unk> efforts to develop a family of next generation products for small medium and large power requirements to streamline our product portfolio, thereby advancing product cost down initiatives.
And improving revenue scale benefits for our gross margins.
The increase in capital expenditure guidance reflects the deferral of spending related to Ballard next manufacturing facility from 2023 to 2024.
Given the macroeconomic outlook and in the context of our 2024 operate 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 expect that revenues in 2024 will be backend weighted on a roughly 30 70 basis for H, one and H two similar to 2023.
We also expect that underlying gross margins will follow a similar path in 2024 as they did in 2023 as revenue scale through the year, we expect gross margins will breakeven or turned positive in Q4.
With that I'll turn it over to Randy to wrap up the call for Q&A.
Thanks, Paul in the context of heightened geopolitical risks and continued the globalization with want provide an update on our global manufacturing strategy, which we refer to as local for local.
This is a plan to ensure we have the appropriate manufacturing.
Footprint in assets in each of our three key markets North America, Europe, and China to support expected regional market demand growth through 2030.
In 2023, giving an increasingly constructive hall hydrogen policy landscape and increased market activity in the U S. In Europe and given the continued hydrogen fuel cell policy, uncertainties and market delays in China as well as geopolitical risks, we decided to suspend our EMEA localization plan in China, while we completed our comparative and.
<unk> on manufacturing capacity expansion options impossible sequencing prioritization in the U S <unk> European markets.
We have concluded our comparative review.
Prioritize the U S as the highest priority market for our next manufacturing facility.
We have selected a site and are negotiating our land acquisition agreement as an important part of this process in 2023, and we also submitted certain applications for government funding support in the U S. While we expect to receive a definitive feedback in the near term.
Looking forward, we believe the transition of hydrogen policy announcements to implementation will provide mid term momentum with availability of low cost low carbon hydrogen enabling accelerated adoption of fuel cells.
In the context of an increasingly constructive policy environment.
Boeing sales pipeline and order book, along with our continued investment in product cost reduction in advanced manufacturing, we are well positioned for strong long term market share.
Finally, we expect 2024 will be marked by continued growth in our order backlog major order announcements from customers in our bus and stationary power verticals and the announcement of our next manufacturing facility each of which will serve as important milestones on our journey to scaled adoption of <unk>.
Aggregate fuel cells <unk>.
Ballard is well positioned with a growing product order backlog industry, leading fuel cell technology for our market applications key customers and partnerships across our target markets industry, leading deployment experience and a strong balance sheet. We're confident we can deliver long term shareholder value, while making a meaningful impact.
By providing this zero emission fuel cell power for a sustainable planet.
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.
And the question queue you May Press Star then one on your telephone keypad.
You'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two we request all questioners to kindly ask one question and one follow up only we will pause for a moment as callers join the queue.
Our first question comes from Rob Brown of Lake Street Capital markets. Please go ahead.
Hi, good morning.
Morning, Rob.
Hi.
I just wanted to follow up on the stationary market and some of the orders you've gotten there pretty strong demand could you just give us some color on the how the order.
Activity is looking in that in that market and maybe what's driving that.
A bigger order in the U K.
Yes, Rob I'd say couple of things about the stationary power market. One is that we're still learning a lot about this market and particularly where the value proposition for fuel 10 fuel cells, particularly express themselves more slowly.
We're seeing that it's actually.
A diversity of different market applications of the interest in this $1 50 megawatt orders a very good example, it's not specific to one market segment, but actually stationary power markets overall.
And I would say where youre seeing grid.
Grid reliability issues or off grid issues are certainly an area where perm is.
In some cases primary but in many cases as backup power is seeing interest.
The market that I am, particularly interested in is the data center market. We all know about the growth occurring in the data center market.
Hyperscale or as Theyre looking at 10, 20 X type growth here in the next handful of years and the number one barrier. The number one barrier to adoption of new data centers is access to power. So there's a lot of work going on with the Hyperscale is looking at.
Renewable energy Ppas at I would say record scale.
In addition to that there are also looking at their stationary power requirements for backup and we do see that zero mission continues to be an important piece of the puzzle there as many of these hyperscale. There's really do have very strong de carbonization mandates. So that's a market that we're seeing a lot of interest and obviously made some.
<unk>.
Progress last year with Caterpillar Microsoft.
That's a market we continue to learn on it I think will be one that we'll be providing updates as we go forward as well.
Okay. Thank you I'll turn it over.
Our next question comes from Aaron Macneil of TD Cowen. Please go ahead.
Good morning, all thanks for taking my questions. Randy I can appreciate that doesn't directly impact Ballard, but many sada hourly matching requirement for green hydrogen production subsidies under the IR as a potential negative for production levels in the U S. I guess, how did that impact your calculus.
And how do you ultimately get beyond that issue.
As you select the U S is the key market.
Yes so.
Erin Thanks for the question I do think that as you rewind the tape say six or nine months ago. There was a lot of optimism for the interpretation of the hydrogen PTC, which for clean hydrogen the cleanest hydrogen is $3 per kilogram.
So we do have obviously some guidance issued in late December Theres, a lot of work going on the industry Ballard is participating along with associations submitting responses.
The three.
The three pillars as referred to that had been added.
Additionality time matching as.
As well as Regionalisation all have some challenges associated with them.
In my opinion, if theyre all accepted consistent with current guidance, we still have a very robust market for hydrogen the access to low cost green hydrogen moving forward. My view is that some of them I think we will see some difference in the final iterations and I think the hourly matching one in my opinion.
<unk> is the most challenging all of these I think from a technical perspective, it's not viable to to satisfy that one so that's what I expect that we'll see that pushed back I think the concept of hourly who will continue but the implementation time will likely be deferred so whether that's 2028 2032.
32, not sure of what the timeframe will be but I do expect that one to be deferred.
Got it and then maybe I'll just stick with that since we're already on the topic, but what's the sort of timeline for investment ramp up of the facility and you mentioned subsidies so cost.
Estimates, both gross and net of those subsidies.
Yes.
We'll expect to be making announcement fairly imminently on kind of our our U S facility.
We do see that there are opportunities to put some capital to work here and position us strongly in this market.
So we will see in 2024 as part of the Capex of Paul already described in our guidance, we will see contribution of that Capex coming from.
Work for our new U S facility, but I think he is going to have to wait a little bit Erin fairly soon though.
Happy to wait.
Thank you.
Our next question comes from Sarnia Jain of UBS. Please go ahead.
Hi, Glenn Chin your next generation bipolar paint project as part of our cost reduction program is how do you see future development with this opportunity could you provide more color on cost reduction.
In 2024.
Yes, thanks for the question and Youll recall during the capital markets day last year, we announced this new bipolar.
Initiatives and previously we had announced what we call our three by three stack cost reduction program to achieve a 70% cost reduction of our stacks, which.
Last year, we had achieved at least 55% of that are well on our way in my opinion to exceed the 70% probably moving closer to 75% by.
By the end of this year.
Incremental not included in that incremental to that was this new bipolar plate project.
<unk>.
When you look at this project, it's really about looking at the five workstations, we have in our process flow for plate production and introducing.
New equipment and production processes that will dramatically reduce the cost part of that is effectively eliminating all labor. So this will be 100% fully automated as well as importantly dramatically improving yields and reducing scrap.
Rates and reducing tack times.
So it's a very important initiative and we should see.
Substantially.
Fleet that initiative by late this year.
Implications for our cost structure hitting into 2025 time frame.
Got it thank you.
Our next question comes from Duchenne Ollie's Army of Jefferies. Please go ahead.
Hi, Thank you for taking my questions I think my first one is on just trying to understand for 'twenty 'twenty four.
Growth within your sub segments, where do you see the most I think you've talked about Boston stationary, but what about the others. If you could kind of just break it down.
Yeah. Thanks for the question I think one of the things that we're really happy about is the diversification, we're seeing across our revenue base from a vertical perspective from a geographic market perspective from a customer perspective, we're seeing that play out in our order book, we're seeing that play out in our sales pipeline.
Do think in the very near term. The next few years plus will continue to be the largest market. We're seeing a lot of activity there in the European and North American bus market thousands of buses are currently being quoted in the marketplace.
I think there is a very significant transition there I think one of the key drivers there by the way is really not just moving past the advantages the operational advantages of range and refuel time, but also the challenges seen with scaling of recharging infrastructure and I think the ability to scale hydrogen.
We fueling infrastructure showing significant capex advantages.
So the bus market is clearly one where we're going to see grow in the coming years, you didn't mentioned stationery stationery rail and marine our highlight all very similar in that they're larger power requirements for these markets.
And it means particularly in early stages of market adoption youll see lumpiness from quarter to quarter.
We've mentioned a few times that the rail market has surprised to the upside we have I think some good news coming in the U S market for rail as well.
But I would highlight.
Of those markets. The one market that I think will continue to see some delays on is the truck market, but long term in my opinion in the truck market is very compelling, particularly in the U S commercial vehicle market where.
Transportation is now displaced electric power generation is the largest contributor to ghd emissions and we're class seven and class eight trucks disproportionately contribute almost half of GHT emissions and Nox emissions in the U S marketplace and when you look at the policies that are in place at the <unk>.
Federal level, we just talked about for example, the production tax credit for hydrogen.
There's also some incentives in place for <unk>.
Zero emission battery electric and fuel cell electric trucks, and then you move to.
And the state level, and particularly you've got the advanced clean trucks regulations in California, the advanced clean fleets and those are by the way for regulating.
Truck Oems, you've got advanced clean fleets, which are regulating fleet operators. When you put all these together I think from 2024 through 2035, there is a massive change coming in the U S market from diesel to zero emission.
And I think hydrogen fuel cells will play a very important role and I just want to highlight again here, we're seeing that in the truck market, particularly heavier trucks, the barriers for recharging infrastructure and the capacity requirements for large fleets of large trucks and.
The implications and costs and.
And availability of power as well as the lead times for theater upgrades and substation upgrades ranging from anywhere from 12 to 48 months.
We see this as a very large market opportunity for hydrogen.
While we won't see the coming back to your question near term growth in the truck market. We're very bullish about the long term growth market for trucks in our three key regions, but im just profiling there the U S in particular.
Brilliant. Thank you so much for the detailed response and my next question was.
I think you talked about some project delays from one of your customers.
Are you hearing similar conversations from other customers or was this just a one off thing could you give them a little bit more details around that and where that kind of falls within the segment.
Yes. This is I would characterize very much as a one off.
Many of the customers we have we've got good visibility into their plans good visibility into their balance sheet et cetera.
This is a situation that is unfortunate, but we are working with our customers expect them to get back on track here in 2024.
Thank you I'll turn it back thank you.
Our next question comes from Jordan lever of true Security. Please go ahead.
Good morning, all thanks for all the details I just wanted to get a sense I know that you said.
Kind of towards the end of the year similar to the trajectory of gross margins as you get towards the end of the year kind of getting to that breakeven to positive gross margins.
I just wanted to get a sense as sort of <unk> level, we saw.
Volumes are going to be slightly higher sort of breakeven level right now adjusting for inventory improvements and that sort of thing that contributes to it.
Because of this year.
Yes.
So Paul here John Thanks for the question, Yes, I would say that that sort of level of revenue and scaling may possibly a little bit higher is indicative of where we think.
Gross margin breakeven you have to bear in mind, though that our revenue has been shifting.
And as well more towards in favor of products product sales versus our technology solutions and product sales has a lower contribution margin. So as that shift is going to happen.
As well, but as we said in the comments, we don't expect the level of inventory provision that we took and I think we're being somewhat conservative in Q4 on our inventory provisions. We don't expect that same level to continue.
Every year every certainly every year and have your fourth quarter more historically, our inventory provisions have been in kind of a six 6% range or six points of margin and we would see it sort of being in the 3% to 5% range going forward.
Just for inventory provisions.
Subject to scaling of revenue. So so we do expect.
30%, 70% revenue split the gross margins will go down again in Q1, and Q2 because of lower revenues and the scaling effect, but should be higher than H. One of 2023, Similarly age to two.
2024 should be higher than 2023 adjusting for the inventory.
Got it Super helpful. Thanks, so much.
Our next question comes from Kashi Harrison of Piper Sandler. Please go ahead.
Hi, good morning, everybody and thank you for taking my questions.
Good morning.
First one for me Randy in your closing section of your prepared remarks.
You said that you expect the order book to grow in 'twenty, four and that we should look out for some major announcements as well and so I'm. Just wondering is this 16, sorry, six zero 60 million dollar order intake quarter is that indicative of the new run rate moving forward I'm, just I'm just trying to get a sense of how your.
Thinking about your year end 'twenty four backlog under conservative assumptions.
Yes, cashing, what I'd say is that.
When you look at our revenue as Paul alluded to last year and this year typically 70% weighted in the second half of the year.
It was around 45% in Q4.
We see a similar pattern on order intake as well where order intake is typically weighted to the back part of the year.
There are a couple of reasons for that but so I don't think you can expect to see a $60 million run rate, particularly early in the year.
Got it got it but is there any way.
Can you give us maybe a conservative view on how much order growth, we should be looking for in 2024.
Yes, no I think right now with where we are.
Robert.
Not prudent for us to do that.
We'll kind of report the quarter intake quarter to quarter and if if we have good visibility on that later in the year, we can revisit that.
Okay Fair enough and then.
Then my follow up question.
The simple one.
Is there a simple way to reconcile the year end order book, whether whether it's.
The 12 month, one or the total one two.
12 months of revenues like do you have a simple rule of thumb for how we should be thinking about translating the order bookings revenues and thats. It for me. Thank you.
I think you could probably use 2023 is a bit of a fight where in 2023.
Our order book was roughly 65% of the revenue that we actually recognized so in other words, we had order books support coming into the year of in that 60% to 65% range for full year revenue.
Sure.
Thank you.
Okay.
Our next question comes from Vikram <unk> of Citi Capital. Please go ahead.
Hi, there I was wondering if you could just share a bit more detail on the orders that you received in <unk>.
Was there anything that kind of surprised to the upside there or maybe it was even below what you said expected.
And then as you look out into the pipeline of orders you had given some color on gross margin drop a year, but.
Just any color on kind of the.
The margin profile of these abuse.
Potential orders that you see coming in would be helpful.
Yes, I don't think Theres anything that was surprising because.
<unk>.
When we're working on sales opportunities. They typically don't come into the pipeline and get converted within a month. They are typically anywhere from six to 18 months of lead time and work with the customers So and many of the customers. While we had some some new customers a lot of this is repeat business with customers that we have good customer <unk>.
Missy and have visibility on where their plans are.
But I do think the stationary power market was probably the big surprise in terms of the aggregate.
Hi.
Order entry not just in Q4, but obviously here in Q1 as well.
If you if you went back a year or two I, probably wouldn't have been as bullish on the stationary power market showing that level of support.
And by contrast, it in fairness I would say the truck market is probably where it's been slower than what I would've expected.
And then in terms of gross margins you know when we look at pricing and look at our cost.
Paul kind of profile that we expect each one 2024 to be a modest improvement over <unk> 2023, and similar for the back half of 'twenty four compared to the back half of 'twenty three on an underlying basis.
Got it okay. Thank you.
Our next question comes from Brett <unk> of Morgan Stanley. Please go ahead.
Alright, thank you.
Just on the stationary market.
Wanted to get your thoughts.
All of a sudden what do you think is a realistic timeline for orders.
From data center customers.
Specifically.
Yes, I think mid 'twenty five.
Onward is probably a realistic time I don't expect to have any material orders. This year, what I will say is there a number of <unk>.
Very incredible partners that have great visibility into the data center market that were working with and exploring different business models different value chain positioning as a way to look at long term high value capture for this market. So theres a lot of work we'll be doing in 2024, it may not translate to.
Orders, but it certainly will translate to positioning and then orders to follow in that 2025 time frame.
Okay.
Thanks, Randy and then on the ICT.
Regulation in California.
Kind of a similar question when do you think you start to see meaningful orders.
Maybe in the truck vertical.
As a result of that regulation.
Yeah. So I mean, just as a reminder for everyone. Both advanced clean truck and advanced clean fleet regulations require a certain portion of vehicles to the zero emission not low emission and this is a really important point is that the policies are really focused on zero emission in the U S not low emission.
<unk>.
Starting to see.
2024 is the first year, where a portion of trucks need to be zero emission.
This is very heavily weighted in terms of larger proportion.
The lighter vehicles initially and as you start moving out to 'twenty five 'twenty six 'twenty 728 et cetera, the heavier vehicles start to see a larger penetration of new vehicles coming to the market that must be zero emission.
We're probably realistically two three years away from seeing kind of beyond demonstrations and.
Okay.
Kind of larger scale deployments in the truck market I think the really good news is that beyond California. There are now 13 additional states that are basically adopted and are hearing to California's rule on the commercial vehicle initiatives. So this is very much in my opinion, a U S story not just.
California store.
Really helpful. Thanks, Randy Yes.
Yes. Thank you.
This concludes the question and answer session I would like to turn the conference back over to Randy Macewen for any closing remarks.
Yes. Thank you all for joining us today, Paul Kate and I look forward to speaking with you next quarter. Thanks again.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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