Q1 2024 Ballard Power Systems Inc Earnings Call
Yeah.
Speaker Change: Thank you for standing by this is the conference operator, welcome to the Ballard power systems first quarter 2024 results conference call.
As a reminder, all participants are in listen only mode. The conference is being recorded.
Speaker Change: After the presentation, there will be an opportunity to ask question.
Speaker Change: 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 that best thing Star Dunhill.
Speaker Change: I would now like to turn the conference over to Kate <unk>, Vice President Investor Relations. Please go ahead.
Kate: Thank you operator, and good morning, welcome to Ballard's first quarter financial and operating results conference call with US on today's call are Randy Macewen, Ballard's, CEO and Paul Dobson Chief Financial Officer.
Kate: Given that our 2023 year end earnings call with only eight weeks ago. We are we'll keep scripted remarks today relatively brief.
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.
Kate: Now I'll turn the call over to Randy.
Randy Macewen: Thank you Kate and welcome everyone to today's conference call in our last earnings call. In addition to providing 2020 for Opex and Capex guidance ranges, we outlined four specific milestones that investors can expect from dollar in 2024.
Randy: We noted the following four milestones first continued growth in our order backlog.
Randy: Second a major order announcement from a bus customer.
Randy: Third a major order announcement from a stationary customer and before the announcement of our next manufacturing facility.
Randy: In Q1, we delivered against each of these four milestones highlighting our continuing journey to a commercial products company.
Randy: I would like to comment on each of them in turn.
Randy: So first on continued growth in our order backlog were encouraged with our progress over the past six months with new order intake.
Randy: After booking record new order intake of $64 $7 million in the fourth quarter of 2023, we booked another $64 $5 million of new orders in Q1, bringing total new bookings over the past two quarters to almost $130 million of Ballard record first six month period.
Randy: Our order backlog grew by 38% since the start of the year.
Randy: Second of all the major order announced her from a bus customer.
Randy: Here, we announced a multiyear supply agreement and the largest order of fuel cell engines in Ballard history.
Randy: I have 1000 engines through 2027 to Solaris for the European bus market.
Randy: This landmark agreement is a testament to our collaborative partnership with Soliris over the past decade, and the progress we've made with our fuel cell engines, we have proven our fuel cell engines at safe reliable and durable. This agreement also reflects an acceleration of adoption of fuel cell buses in Europe.
Randy: Supported by policy tailwind and regulations to Decarbonize public urban transport fleet, the transition to zero emission city buses has accelerated as the value proposition of hydrogen fuel cells is increasingly understood zero tailpipe emissions rapidly fueling long daily arrange an all weather.
Randy: Conditions, and scalable refueling infrastructure as fleet sizes increase indeed.
Randy: Indeed, we believe we're on the road to achieving scale deployment of fuel cell buses in the medium term, which is a critical lever to facilitate economies of scale and cost down initiatives driving improved economics and reduced emissions for fleet operators.
Randy: So I'd like to linger here for a moment on the bus market.
Randy: Over the past five months, we have received orders all repeat orders or orders from existing platform customers for a total of 1200 engines for fuel cell buses in Europe and North America.
Randy: This is very very exciting we see a tripling of the existing operating fleet in these markets over the next two to three years.
Randy: Now, let's move to the third milestone the announcement of a major order in the stationary market, we announced a multiyear supply agreement and the largest order imbalance history for the stationary market in order for 150 engines totaling 15 megawatts of fuel cell systems from a U K based customer special.
Randy: Rising in renewable off grid power generation.
Randy: Again this is a repeat order from an existing customer and reflects a scaling in their market opportunities.
Randy: Our customers targeting the replacement of traditional diesel generators with fuel cell systems that can provide resilient predictable clean and quiet solutions for onsite power generation in a variety of applications, including EV charging filming events and construction.
Randy: The customer also has an option to purchase an additional 296 engines by March 2026.
Randy: Finally to turn to the fourth milestone the announcement of our next manufacturing facility.
Randy: As context as part of our local for local global manufacturing strategy. We conducted a comprehensive comparative analysis. During 2023, a sequence production capacity expansion options in North America, Europe and China.
Randy: Based on our review, we determined to prioritize the U S. As our next market for broad production capacity expansion.
Randy: We announced our plan to build a new manufacturing facility to be located in a parcel of 22 acres of industrial land within the Rockwall Technology Park in Rockwall, just outside of Dallas, Texas.
Randy: The facility is expected to have an initial nameplate production capacity of 8 million <unk> 8 million bipolar plates 20000 fuel cell stacks and 20000 fuel cell engines per year or the equivalent of three gigawatts of fuel cells.
Randy: Dumped Ballard Rockwell Giga, one we plan to manufacture next generation fuel cell products, incorporating the benefits of our work related to technology innovation and design changes supply chain collaboration and the introduction of volume production processes and advanced automation to drive down.
Randy: Costs.
Randy: We also recently announced two separate non dilutive funding awards to Ballard totaling up to $94 million consisting of $40 million of unexpected grants from the U S. D O hydrogen fuel cell technologies office and up to another $54 million in expected advanced energy.
Randy: Project tax credits known as 40 H D funded under the inflation reduction Act.
Randy: Our capacity expansion plan comes at the very time that platform customers are being clear about what they need from Ballard in the future, they're counting on us to be there for them at volume and at the right cost.
Randy: The belief, Russia demonstrated a clear roadmap to high production volumes are significantly reduce cost is critical to customers transitioning from demonstrations.
Randy: Future skilled deployments.
Randy: With Ballard Rockwell Giga, one we plan to bring scaled advanced manufacturing of next generation fuel cells online in late 2027 at the same time, when we expect to reach capacity constraints of our existing North American production facilities based on our forecasted growth in production volumes.
Randy: We expect to make a final investment decision on this facility later in 2024 pending completion of certain customary conditions, including necessary approvals and definitive Doc documentation, including with Rockwell and with the U S funding sources.
Randy: Accordingly, we will provide a detailed review of the plans of Ballard Rockwell Giggle won during an earnings call later this year.
Randy: We want to also to provide two interesting updates on the rail market so far in 2024.
Randy: First one of our customers and the commuter rail market stadler reveal but its flirt H two train powered by Ballard fuel cell engines has been entered in the Guinness book of World Records for the longest distance achieved by a pilot hydrogen fuel cell electric multiple unit passenger train without.
Randy: Fueling or recharging and impressive 1742 miles.
Randy: Second and importantly on April 16th C. S X unveiled its first fuel cell locomotive developed through its partnership with C. P. Casey where CP KC provides <unk> with a powertrain conversion kit using ballard fuel cell engines to refurbish ease of locomote.
Randy: We this we view this as a very exciting development.
Randy: We believe our hydrogen fuel cells offer the only viable zero emission powertrain solution to replace or refurbish diesel locomotives in North America.
Randy: The total North American fleet is estimated to be around 40000 locomotives are notably C. P. Casey has approximately 2500 diesel locomotives and C. S. X is approximately 3500 user locomotives with high power line hole locomotives using 2.4.
Randy: What's a fuel cells, which is equivalent of amount of fuel cells require to power. A boat 24 buses. We believe this represents a large and attractive addressable market for Ballard.
Speaker Change: Now before I turn the call over to Paul to review, our Q1 financial highlights I'd like to provide a headline summary of Q1 and some commentary on our set up moving forward.
Randy: In Q1, we booked 64 point fill at four 4 million $64 5 million in new orders increased our order backlog by 38% announced total non dilutive funding of up to $94 million for the planned build out of our Rockwell Giga factory grew revenue by 9% improved gross margin by <unk>.
Randy: Five points and reduced cash operating costs slightly while continuing to invest in next generation products and product cost reduction.
Randy: Looking forward in the context of an increasingly constructive policy environment growing order backlog and were sustained investments and product cost reduction and advanced manufacturing capacity expansion, we see an exciting set up for the second half of 'twenty 'twenty four and growth in 2025.
Randy: We are well positioned to enable our customers to compete in the energy transition and the adoption of hydrogen fuel cells to decarbonize heavy duty mobility and select stationary power applications with that I'll turn the call over to Paul to discuss our financials.
Paul Dobson: Thanks, Randy and.
Paul Dobson: In Q1 solar delivered $14 5 million in revenue driven by strong growth in the bus stationary verticals.
Paul Dobson: Heavy duty motive applications accounted for approximately 84% of the total and with added the stationary power our fuel cell products as a whole represented approximately 88% once again, emphasizing our shift into a commercial products company.
Paul Dobson: As a reminder from previous years, we see the downward revenue is typically weighted approximately 30%, 70% between the first and second half of the year and heavily indexed to Q4 2024 looks to be no different.
Paul Dobson: Even with the continued shift in revenue mix to power products and the burden of fixed production overhead costs being spread over seasonally low more seasonally low revenue gross margin of negative 37% showed a five point improvement compared to Q1 2023.
Paul Dobson: We are still anticipating underlying gross margins will breakeven in Q4 as revenue increases and product cost reduction activities have greater impact.
Paul Dobson: We reported total operating expenses of $37 1 million in cash operating costs of $29 8 million, both relatively flat compared to the prior year comparable.
Paul Dobson: Capital expenditures totaled $7 5 million in Q1, we.
Paul Dobson: We are maintaining our guidance ranges for total operating expenses and capital expenditures for the year.
Paul Dobson: Our guidance for 2024 includes capital for the initial design and scoping activities for the Rockwell Giga factory assuming F E.
Paul Dobson: We expect it to U S government funding for the facility would impact our net capital expenditures in subsequent years starting in 2025.
Paul Dobson: We ended the quarter with a strong balance sheet with cash and cash equivalents just over $720 million.
Speaker Change: With that I'll turn the call over to the operator for questions.
Speaker Change: Thank you.
Speaker Change: She joined the question queue you May Press Star then one on your telephone keypad.
Speaker Change: Here at town acknowledging your request.
Speaker Change: Speakerphone, please pick up your handset before pressing any key.
Speaker Change: I would tell me a question. Please press Star then two yeah, Colorado, just kindly limit themselves to one question and one supplemental.
Speaker Change: Our next question comes from Rob Brown with Lake Street Capital markets. Please go ahead.
Robert Duncan Brown: Good morning.
Robert Duncan Brown: Good morning.
Robert Duncan Brown: Just wanted to follow up on the Solaris order a good scaling there or are you could you give us a sense of sort of what the rollout schedule is and how.
Robert Duncan Brown: You know how that market is developing and sort of what are the sort.
Robert Duncan Brown: The size of the market as penetration rates you can get to by the end of kind of by the end of the contract.
Speaker Change: Good morning, Rob. Thanks for the question, maybe just to step back a little bit and just remind everyone. We're really seeing the employments of fuel cell electric bus scaling up both in Europe, and North America, driven largely by this transition to zero emission bus fleets and are supported by regulations and strong mandates and of course public funding.
Speaker Change: Just just to give you a sense of kind of where we are right. Now are we at Ballard have about 158 fuel cell buses in operation that have Ballard engines inside in North America.
Speaker Change: And about 398 in Europe in North America, I think we're probably right at 100%, 99% to 100% market share in Europe over 80%. So we have really good visibility on what's happening in this market and what youre seeing is that the proven operational advantages of fuel cell buses, including and a 500 kilometre.
Speaker Change: These are 350 miles a range.
Robert Duncan Brown: The ability to have that range consistent for everyday and every season and the rapid refueling time kind of six to 12 minutes refill time.
Robert Duncan Brown: And then you add in the complexity that comes with deep depot electrification as you scale up we're seeing a lot of operators really revisit their plans going forward is to see a growing number of cities committing to what I would characterize as the larger deployments. So valonia for example, 127 buses Dennis 90 fuel cell.
Robert Duncan Brown: Buses Cologne 150, Santa Cruz 57, you've got many other cities are in North America, as well Oh, Glenn Philadelphia Foothill in the L. A basin area Las Vegas, New York City in Edmonton in Canada, all kind of committing to a fuel cell bus deployment. So we see.
Robert Duncan Brown: Probably going from this situation, where you have roughly five to 600 buses in North America and Europe combined today.
Robert Duncan Brown: <unk> thousands are literally.
Robert Duncan Brown: And there's three or four year period, and so we're tracking a very healthy pipeline and with strong market share with most of the Oems that are offering fuel cell buses in North America and Europe are powered by Ballard. So we feel very comfortable with our position in the market and the growth opportunity, we see with Soliris, specifically I do.
Speaker Change: Want to comment on any one customer and their rollout schedule, we'll let them do that but I would just indicate that we expect those thousand engines to.
Robert Duncan Brown: To be deployed between our 2024 and 2027.
Robert Duncan Brown: Yeah.
Speaker Change: Okay. Thanks for all the color there Randy.
Speaker Change: On the AR on the Rockwell expansion or new facility.
Speaker Change: What's the Capex requirements, there I guess, obviously impacted by the of the government.
Speaker Change: Government funding side, but what's the capex expected on that facility.
Randy Macewen: Yeah, Great question, Rob, So where we're doing quite a bit of work in parallel right now where our polishing.
Randy Macewen: <unk> scoping final budget timeline, there is a lot of work going on completing the facility design the plant layout.
Speaker Change: Looking at the permitting process and are finalizing our land acquisition agreement and our EPC contract there.
Speaker Change: There's still some more work on equipment specification procurement. So what we expect to do Rob probably on the Q2. Our Q3 call is actually provide a fairly comprehensive review of Rockwell once we get through F. D and include our Capex range at that point, we had kind of indicated you know if I would put kind of parameters.
Speaker Change: Beaters on right now I would say in the 100 to 150 million <unk>.
Speaker Change: Net of the funding is kind of the parameters and we'll tighten that up as we get out later in the year.
Speaker Change: Yeah.
Speaker Change: Okay, great. Thank you I'll turn it over.
Speaker Change: Great. Thanks, Rob.
Speaker Change: The next question comes from and Mccann P. D. Cohen. Please go ahead.
Speaker Change: Good morning, Thanks for taking the time to answer questions.
Speaker Change: You highlighted the upfront incentives to build Rockwall, obviously, that's great.
Speaker Change: And a step in the right direction I can also appreciate that a larger update is forthcoming, but I guess I'm just wondering at a very high level are there any production tax credits that you can take of it.
Speaker Change: Vantage oven.
Speaker Change: If the capacity is three Gigawatts do you have any early indications of sort of what sort of sales volume and you think you need out of the facility for it to breakeven and then you know embedded in that to the extent that you can answer what sort of unit cost reductions do you assume.
Speaker Change: Relative to where you are today.
Speaker Change: Yeah. So we we canvass the U S market fairly carefully in terms of incentives and I.
Speaker Change: We actually have other opportunities for this facility beyond the $94 million that we've commented on and of course, there's a package of incentives that comes with the Rockwell Economic Development Corporation. So I think all in will likely be higher than $100 million in total.
Speaker Change: Port opportunities there of course, all non dilutive so that's very powerful for us as we move forward.
Speaker Change: In terms of like kind of unit economics, our volume scale et cetera to get the property would be I think well wait till the upcoming calls to manage those what I would say is just to be very clear. We don't have an order book at this time that satisfies the volume of three gigawatts that we're talking about clearly.
Speaker Change: We are looking clearly at investing ahead of the adoption curve.
Speaker Change: But of course, we have a sales pipeline that is showing very strong growth indicators across most of our vertical markets and of course, both for Europe and for North America. So.
Speaker Change: As we look at our scaling over the next couple of years and basically using the production capacity exists.
Speaker Change: Existing production capacity and actually some capacity expansion that is ongoing here for bipolar plates in Burnaby, British Columbia what.
Speaker Change: What we see as kind of meeting capacity constraints in that 2027 timeframe based on our sales pipeline and are forecasting for our financial model.
Speaker Change: Makes sense.
Speaker Change: Happy to wait.
Speaker Change: I don't want I know you don't want to get specific on on customers.
Speaker Change: And orders and pricing.
Speaker Change: You know, you've you've mentioned $1000 per kilowatt in the past for these.
Speaker Change: Big orders like is that still a good barometer or you know are.
Speaker Change: Are you, giving some discounts in exchange for volume.
Speaker Change: Yeah, Erinn I would say for a lower volume orders.
Speaker Change: No.
Speaker Change: There's probably a good proxy are most cases were probably below that but 1000 is a good proxy as you get the higher volume orders, we are seeing of course pricing compression there as we should be.
Erinn: And so this is not these type of contracts are not at that level.
Speaker Change: Got it.
Speaker Change: To turn it over there thanks, Randy that's great. Thanks, Sir.
Speaker Change: Okay.
UBS: Our next question comes from saw me again with UBS. Please go ahead.
Sam: Hey, how do they see you know dollar playing.
UBS: Playing out in the U S market.
Speaker Change: Specifically about aligning how are you seeing from the truck market growth in 2024 as well.
UBS: Yeah. So just to clarify your question I think you were asking about the truck market is that correct.
Speaker Change: Yeah in the rail market for you Oh, well in rail Okay. Yeah. So just on the rail market.
Speaker Change: We'll start with their first I think one of the market opportunities, that's probably not very well understood is the freight locomotive market. So you have both commuter rail in Europe.
Speaker Change: And I would characterize it as modestly in North America, but certainly Europe, a larger market opportunity. There as you know North America, just the volume of of commuter rail traffic is much later than it is in in Europe.
Speaker Change: But on the free locomotive market as I commented in the opening remarks, basically you've got a market with about 40000 diesel locomotives.
Speaker Change: Those locomotives are refurbished or replaced every 15 years. So roughly speaking you'll have about 2600 locomotives per year. If you look at each locomotive depending on the requirement for that locomotive being up to 2.4 megawatts, let's assume it's about a megawatt now have oh.
Speaker Change: On average per locomotive you're talking about a couple billion dollar a year market opportunity just for that market in North America. So it's a very exciting market opportunity for Ballard we have.
Speaker Change: I would say.
Speaker Change: A couple of year period here over the next few years as customers like CP Casey and we're very excited with the work that <unk> is doing as well.
Speaker Change: As these type of companies continue to validate the use of hydrogen for locomotive applications, including their hydrogen storage tender solutions.
Speaker Change: I think this is the only pathway for Decarbonising and when you look at the admissions and the costs associated with the diesel and the variability of diesel pricing.
Speaker Change: Thank the number one scope scope one emissions is typically around 95% of scope wanted wish missions for these operators is diesel fuel.
Speaker Change: So this is a you know a real priority for these type of operators, who are looking at the future too.
Speaker Change: We look at Decarbonization hydrogen is going to play a big role there.
Speaker Change: I don't think Youre going to see you all kind of high volume in the next year or two this is going to take a number of years to validate what we are very well positioned with the solutions. We have with the partnerships that we have <unk> to play an important role in this market.
Speaker Change: On the commuter rail market, we have a number of partners. There are Siemens that we've announced for the European commuter rail market are they obviously have a an increasing presence in the north American commuter rail market to AR and then Stadler is another customer for the North American and European market as well.
Speaker Change: So we see I would say growth in this market by 2030, I think we're going to see very clear validation bolster the commuter rail.
Speaker Change: And for the locomotive market that puts it on a very strong pathway moving forward.
Speaker Change: For the truck market.
Speaker Change: This market is actually moving slower than I would like and there are variety of reasons for that are.
Speaker Change: We've been focused on what I'll call that the truck market opportunities that we have returned to base refueling. So think about things like drayage trucks, and and regional haul trucks that are coming back to the same base or yard at night. So you can avoid that distributed refilling infrastructure.
Speaker Change: And we see a number of applications in different weight ranges that that will have I think hydrogen fuel cells as the primary solution there'll be some battery electric and some of these weight ranges as well as it can be a mix mixed solution, but.
Speaker Change: But it is taking longer and I think the vehicle Oems who've been investing quite a bit in.
Speaker Change: And yeah, you know different technologies, including autonomy, including a battery electric.
Speaker Change: Our our now looking at the hydrogen fuel cell investments as well so.
Speaker Change: So we see a number of opportunities that are in the.
Speaker Change: I'd say early stages of validation with these customers as they're going through their RFP and RFP processes and we're very active on this front. So we are seeing I'd say increased activity from truck Oems. The large credible ones, who are looking to bring solutions to market on the 20, <unk> 28 to 2030.
Speaker Change: Time frame in parallel to that we're working with a number of what I would call. The up Fitters. So you know entrepreneurial companies that see a market gap today and are rushing to market with in many cases, both battery electric and fuel cell electric depending on the use case and are looking to ballard to provide them with fuel cell engines.
Speaker Change: And so that you know up fitter market is a market that we're also working on so we have to.
Speaker Change: Two flows of traffic if you will of.
Speaker Change: Two streams of opportunity in the truck market, we're advancing both of them, but it is taking longer than we'd like.
Speaker Change: Okay.
Speaker Change: Got it okay. So much.
Speaker Change: Okay.
Speaker Change: The next question comes from Mac whale with <unk> Securities. Please go ahead.
MacMurray Davidson Whale: Hi, Good morning, as you've noted Randy strong six months for new orders I'm wondering what are your thoughts on the variability of that going forward I mean, we've seen in the past when you get these big orders and it sort of draw some activity level from the next quarters or do you think you are.
MacMurray Davidson Whale: Through that now with these big long term sales agreements or do you think we're going to see some or we should be sort of expecting maybe a little bit more soft on the new water side what are your thoughts there.
Randy Macewen: Yeah, Great Great question Mac.
Randy Macewen: You know what I would say is this is still very much a.
Randy Macewen: Early stage demonstration market, where some customers are earlier in their processes.
Randy Macewen: But I do see that while there will be lumpiness in some of the market opportunities we are pursuing like.
Randy Macewen: For example will be the backup power market for data centers or are the marine market or even the rail market youre looking at much larger size applications power applications and if you get scale orders there it's quite different than the type of orders you can see from the bus market.
MacMurray Davidson Whale: So I think we're gonna see continue to see a lot of variability in a lot of lumpiness. It will be based in some part on seasonality in some part based on you know when funding sources are available and of course, a couple of the contracts we've signed a long term supply agreements with a fixed volumes associated.
MacMurray Davidson Whale: With them So you know.
MacMurray Davidson Whale: That doesn't happen every quarter. So there will be some variability, but I would see the trend is towards larger order books and the trend is towards getting a smoother cadence of of our growth going forward we.
MacMurray Davidson Whale: We do see a very strong sales pipeline and expect to see some additional large orders through the year. So our job is to close those out.
Speaker Change: Okay, and I guess related to that it gets more and more evidence to support that as if you need to look at the 12 months backlog, it's actually kind of back to where it was in 'twenty 'twenty. One when you had correct me if I'm wrong a lot more technology related sales in New York in the 12 month order book is that correct.
Speaker Change: Yeah, I mean, I think that's one thing that's probably been misunderstood in some ways you know people kind of look at the revenue is being flattened as in some cases. The order book is being flat, which is it's been true for a number of years, but the composition has changed dramatically and so you know we're going into a situation now where we're reaching almost 90% revenue.
MacMurray Davidson Whale: Similar on the order book front.
MacMurray Davidson Whale: And certainly on the sales pipeline.
MacMurray Davidson Whale: It is heavily heavily dominated by the sale of fuel cell engines now so just as an illustrative example, last year, we shipped over 500 fuel cell engines, a record year for Ballard on that front.
MacMurray Davidson Whale: In the first quarter, we shipped over 100, which is a record for Q1.
Speaker Change: Okay and just as a second question was just switching gears on that.
Speaker Change: I kind of addressed this a little bit on the Giga factory in the U S. When that's up and running I know, it's still a few years out.
Speaker Change: Or what is the contribution margin look like in the past you've spoken about contribution margin as opposed to sort of the margins you're reporting.
MacMurray Davidson Whale: Is there any change in what you expect to see when that's up and running.
Speaker Change: Yeah, Yeah, you want to lean back [laughter], yeah, Yeah. So we will see a significant reduction in our costs as we move forward on manufacturing and so when you look at our the processes for EMEA. The processor for bipolar plate production are those are the areas we're seeing significant.
Speaker Change: <unk> cost reduction opportunity with automation.
Speaker Change: And different processes that really helped.
Speaker Change: Help with things like yield and scrap rates et cetera that all go back to cost. So we will see a very significant difference in in immaterial cost direct material and direct labor costs as we scale you know high automated facility.
Speaker Change: And then just from a as you move from contribution margin to gross margin then it becomes a function of getting the volume and getting your fixed overhead absorption across a bigger book of business. So.
Speaker Change: We're actually very excited about the opportunity for both contribution margin expansion and gross margin expansion, particularly as volume hits in that new facility. Okay great.
Speaker Change: Great. Thanks, Thanks, that's all my questions. Thanks.
Speaker Change: Thanks, Matt.
Speaker Change: Okay.
Speaker Change: Our next question comes from Rupert Maryanne National Bank. Please go ahead.
Rupert Maryanne: Hi, Good morning, Thanks for taking the question I wanted to follow up on the cost reduction and pricing strategy with the orders you've announced recently are the prices you've offered for larger volumes out to 2020 seven representative.
Speaker Change: Prices that are sustainable in the long run or to put that another way are your prices getting to a level that could be competitive with diesel buses on the T. C O basis.
Speaker Change: Yeah, I think what we'll see is that as we move forward, we're going to see and this happened very similarly in the solar industry and wind and happened in the battery electric marketed there are some variability in those markets, particularly when depending on supply and demand balances, but also very high dependency in some cases.
Speaker Change: On a rare.
Speaker Change: We're earth metals, and and a certain commodities I don't see that going forward here on the commodity front in terms of variability, but what I would say as we can expect to see selling price reduction on an annual basis and our job is to make sure that our cost reduction exceed selling price.
Speaker Change: Erosion, so that we're effectively seeing margin expansion and so that's what we currently have in our plan is we're assuming a certain percentage it varies by year, but others are you know kind of an overall blended percentage of cost reduction that customers are expecting.
Speaker Change: And certainly in the in the larger long term supply agreements that we've been signing up recently, we have cost reduction in selling price. We are selling price assumptions are reductions in there and it's supported by cost reduction assumptions that we have in our plan.
Speaker Change: Great. Thanks, and a follow up on that so you've talked about some of the advantages are going to have a scaling up your bipolar plates in EMEA of course, a big part of your your cost is coming from balance of plant can you give us an update on that.
Speaker Change: Cost reductions youre seeing there and the commitments from your suppliers to bringing their cost down to where they need to be.
Speaker Change: Yeah, Great Great question, and you know I think it's worth knowing too like we're working now on our ninth generation of fuel cell engine.
Speaker Change: And you know we've learned a lot through eight generations as you would expect and including a generation's operating in the field. So we have a massive competitive advantage on this front.
Speaker Change: But what I would say as we kind of you know that if you look at the ninth generation, we have more of what we characterize as an open architecture.
Speaker Change: This has enabled us to integrate the D. C D C. But also reduced significantly the number of parts reduce.
Speaker Change: <unk> reduced the volume and the weight and.
Speaker Change: And improve the powertrain integration and ease of service.
Speaker Change: But also significantly reducing the manufacturing time or the assembly time. So this is all going to help reduce cost and improve the total cost of ownership for customers.
Speaker Change: What I would say is a balance of plant component is a very significant cost.
Speaker Change: Cost reduction initiatives at Ballard, we have a fairly large balance of plant team that is working with the supply chain or every day on making sure we're improving performance reliability availability and uptime warranty terms payment terms, but importantly, moving down costs and we've seen step change.
Speaker Change: Cost reductions on a number of components that will be coming into production in 2025. So we're pretty excited about some of the cost reductions we're seeing on the balance of plant components, and we look forward to kind of unveiling the ninth generation of product.
Speaker Change: Including some of the.
Speaker Change: Metric improvements that we're seeing there.
Speaker Change: That's great. Thanks for the color.
Speaker Change: Thanks Robert.
Speaker Change: The next question comes from Jordan Levy, that's true security. Please go ahead.
Jordan Alexander Levy: Good morning, all and thanks for taking my question, maybe just to start on the stationary side nice to see the work and some of the momentum there with your customer in Europe, maybe if you could just talk to kind of be opportunity Sars are over in that market near term and then how you should are progressing over the next couple of years.
Jordan Alexander Levy: Yeah, I would say so far we've been fairly constrained in our view on the on the market opportunity size for kind of the total Tam for the stationary power market, we characterize it kind of around 4 billion I think that's dramatically understated.
Speaker Change: Whats changed in the last year since we kind of assessed that 4 billion Tam market opportunity is really the data center market opportunity and you know obviously, there's a lot of publications out the last six months on the growth and the expected growth of the data center market and you know the number one challenge the day.
Speaker Change: Center operators have particularly the hyperscale or as is the access to green energy.
Speaker Change: And then I would say number two importantly is having.
Speaker Change: The opportunity to get permitted quickly and one of the challenges with permitting us to make sure that you have total clean energy solutions and we're seeing a number of markets that earlier cracking down to make sure that backup power is also clean energy solutions. So we see a very significant market opportunity for data centers.
Speaker Change: And that's a market that I think is going to take that Tam significantly higher. So we have more work to do this year with a couple of key partners that are very.
Speaker Change: Large players in the data center market to kind of validate that that Tam but.
Speaker Change: But I would say this is going to be a market that we're going to see a lot of lumpiness and we expect to see more opportunities. In 2024 are you know, obviously, we've announced the 15 megawatt opportunity.
Speaker Change: <unk> orders, we expect to see more developments in this market in 2024 that will really set us up in 'twenty five 'twenty six.
Speaker Change: To make sure that we have the right partners and customers to really move forward in that market.
Speaker Change: I appreciate that and then as a follow up a separate topic recognized.
Speaker Change: Solid benefits for 40 years.
Speaker Change: Maybe some of the other credits that you can realize from the Rockwell plant, but maybe just talk to how important you see finalize P. T SEC guidance to the to the local market opportunity for that appointment and maybe more broadly the investment case for Rockwell.
Speaker Change: Yeah.
Speaker Change: First of all you know Rockwall is designed to provide us with product that we can use globally frankly, but you know it's going to be used to provide products, primarily for the north American and European market.
Speaker Change: And then and that will take us in my opinion likely through to at least 2030. So we have very good.
Speaker Change: Kind of capacity is coming out of Rockwell and very cost effective and efficient additional incremental phasing. If we wanted to scale that up in the future.
Speaker Change: So in terms of the PTC you know we have the you know.
Speaker Change: Guidance that was published in December the whole industry has provided feedback I personally have talked to the USDA recently about the volume of feedback they've received and the kind of the nature of the feedback. So there's a lot of work going on there.
Speaker Change: You know with the IRS and the D O looking at the feedback too to kind of square.
Speaker Change: The objectives of making sure that they have the right incentive mechanisms to support the growth. They want while also trying to make sure that you know the hydrogen that that is produce has the you know a clean hydrogen attributes that the policy is targeting.
Speaker Change: There's a lot of debate around the Regionalisation additionality and the time matching.
Speaker Change: I think regardless of how this gets settled theres really no major impact to us.
Speaker Change: From the sales opportunities that we see a 300 2030 for Rockwell.
Speaker Change: Really I think the the cost and availability of hydrogen with the PTC, even in a constrained case, where they take the most onerous or their most restrictive interpretation of the PTC still provides us with the cost of hydrogen that is significantly lower than it is today.
Speaker Change: I think with $3.
Speaker Change: Per kilogram production tax credit for clean hydrogen as that's defined.
Speaker Change: You're probably looking at around 50% of the cost of green hydrogen being subsidized so for US we view this as a really significant enabler to the market of course, we'd like to see the most Ah Yeah you know.
Speaker Change: Flexible interpretation of PTC, but we'll see how that shapes up we've submitted our response.
Speaker Change: Two the guidance that are waiting to see how that shakes out.
Speaker Change: Super helpful. Thanks, so much.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Craig Shere Tuohy Brothers. Please go ahead.
Craig Kenneth Shere: Good morning, but thanks for taking the question.
Craig Kenneth Shere: With.
Craig Kenneth Shere: Take your bleeding about $20 million in cash a quarter in operating cash flow.
Craig Kenneth Shere: And I understand you're saying that your margins will gross margin will approach breakeven by the fourth quarter on higher volume.
Craig Kenneth Shere: But but higher volume can have a working capital impact and then you've already alluded to cyclical seasonal seasonal seasonality like the first half next year and my my son returned to lower volumes and negative margins. So just in terms of the 20 million cash.
Craig Kenneth Shere: Burn from operating cash flow do you have any any trends color expectations.
Craig Kenneth Shere: Heading into the fourth quarter and first half next year about.
Craig Kenneth Shere: What we might anticipate.
Speaker Change: Yeah sure. So so thanks for the question, it's something that we look at all the time as this is still a relatively.
Speaker Change: Immature market.
Speaker Change: You know on the impact on our on our cash flows when we look at different scenarios. All the time, what we have to factor into that.
Speaker Change: Balancing our whats in our sales pipeline and talking to customers their expectations. They want a supplier that is going to be able to grow with them as they deploy these their various fleets in various applications.
Speaker Change: Also our call our investments in products and to reduce our product costs as we've talked about.
Speaker Change: Not only decrease the unit costs, but increase the performance and quality.
Speaker Change: And the investment in manufacturing to enable.
Speaker Change: Due to scale benefits and grow and.
Speaker Change: And you're balancing all of that against the cash on hand, and I think we've said in the past that we were looking at our funding and seeing all of these coming together.
Speaker Change: And seeing that you know, we're gonna need funding additional funding probably in the 26 27 time frame.
Speaker Change: And so we're looking at various ways of doing that we were very fortunate to announce now.
Speaker Change: The Doa grants and the investment tax credits as Randy alluded to there are other things that we're looking at as well non dilutive financing that is going to be helpful. There.
Speaker Change: And we're also having a hard look at all of our activities across the business and are you aware we're doing our.
Speaker Change: Business in various locations and just finding ways of.
Speaker Change: Redirecting spending of reducing overall spending in both opex and capex kind of rationalize the product set and.
Speaker Change: The rest of our costs you saw in our Q1 as we said in our capital markets day, our costs were relatively flat.
Speaker Change: Lower lower Capex spending and operating costs were relatively flat.
Speaker Change: And that's bumping up against our.
Speaker Change: A relatively higher inflationary environment as well. So we are looking very hard at our at our all of our costs and focusing the company on where the market opportunities are and will be able to as we explore these other financing options with particular emphasis on the non dilutive ones.
Speaker Change: We will bring out more information as those become more solid.
Speaker Change: Fair enough just on the first question to finish this point I mean.
Speaker Change: You had a very strong fourth quarter and sell seasonally fell and you had a working capital benefit.
Speaker Change: Is it unreasonable to think that heading into a fourth quarter surge that there'd be a working capital drain.
Speaker Change: Yes, Yeah, we would expect that as sales come up.
Speaker Change: Receivables and inventories building throughout the year, our receivables will be building and then we will see.
Speaker Change: <unk> inflow.
Speaker Change: In Q1, as we did this Q1.
Speaker Change: So we expect that that pattern.
Speaker Change: To continue we are though also is part of what we're looking at all of our cash flows and.
Speaker Change: And Oh, it would come up to scale looking at all aspects of working capital customer terms.
Speaker Change: Inventory reduction and inventory management tighter on that and our payment terms with our suppliers as well. So all of it is a big focus of mine.
Speaker Change: Right and I wanted to get rid of it.
Speaker Change: Oh, sorry, Craig I might just add to that when we kind of look at 2023 last year, we really implemented a number of activities really sharpen the focus to make sure that we have this right balance of investing for the future, making sure we have competitive products not just today, but five years from now and 10.
Speaker Change: Years from now and at the right cost structure et cetera, and so you know we rationalized the product portfolio last year, we reduced the number of active product development programs, we dropped corporate development investments and discontinued certain legacy noncore activities. So.
Speaker Change: We're taking a very careful look to make sure that we are investing resolutely kind of on the long term, but protecting the balance sheet.
Speaker Change: Okay, that's very helpful and it feeds right into my second question, which also digs into the answer to your first question.
Speaker Change: And in that related to this you know multi year contracts and providing your customers lower lower pricing on an annual basis and planning to.
Speaker Change: No you know leg into that was even more reductions on your internal costs.
Speaker Change:
Speaker Change: It feels like that is.
Speaker Change: And a challenging effort.
Speaker Change: It's very hard to predict.
Speaker Change: With certainty the timelines for these things when the market will scale and if you have.
Speaker Change: Oh, a growing order book with with falling annual pricing.
Speaker Change: But the ultimate market scaling takes whatever another 12 or 18 months for various reasons beyond anyone's control.
Speaker Change: That that maybe I'm just.
Speaker Change: It is.
Speaker Change: Very challenging in your mind is there a risk that if things turn dramatically different than anticipated for any of macro reason that you could suddenly find yourself bleeding a lot more cash in 18 months and expected.
Speaker Change: Yeah, So Craig got everything about the hydrogen fuel cell industry is challenging right. This is not for the fate of heart or what I would say is when we sign a long term agreement and we're committing to future forward pricing, we have very high probability on what our costs are we're not taking risk on that right. So there is some development risk and theres some very.
Speaker Change: The modest volume risk, but not not kind of what you're talking about.
Speaker Change: So I feel very confident very confident that our cost reductions will exceed our selling price reductions based on the work that we're doing and based on the supply chain visibility I don't view that you know there's lots of risks I think about at night, that's not one of them.
Speaker Change: Good to hear thank you.
Speaker Change: Our next question comes from Nick come back to me.
Nick: Citi. Please go ahead.
Nick: Hi, there a couple of questions on gross margin could you just remind us if there are any impairments this quarter.
Nick: And then I'm just looking at the the power products backlogs.
Nick: That ticked up this quarter.
Nick: How should we be thinking about that going forward and how does that impact your outlook for the fourth quarter for that for that breakeven targets is.
Nick: Is that mix consistent with the next 12 month order book that you see.
Speaker Change: So just on the gross margin question. So as we as we stated.
Nick: The gross margin of minus 37%, which was a five point improvement from Q1.
Nick: And then looking underneath the gross margin if we just talk about contribution margin so price minus the direct labor indirect materials. It was broadly the same quarter to quarter.
Nick: But both the products.
Nick: Contribution margin as well as PFS improved so we are starting to see some expansion in the products as we become more of a commercial products company, but it was flat overall because the mix of products, we have more products with generally lower contribution margin spend and our technology.
Nick: Allergy solutions. So overall it was it was flat, but underneath the product contribution margin is.
Nick: Is expanding.
Nick: I've been looking at our fixed and other costs, including the fixed overhead warranties and other provisions that improved by about six points.
Nick: Overall, we had a net reduction in our warranty accruals as certain warranties expired.
Nick: And that provided a benefit a net benefit.
Nick: We also had a few other very small inventory.
Nick: Right down in the quarter, but nothing nothing like what we saw in Q4 of last year. So overall you know as we continue to invest.
Nick: And our products, we continue to expect to deliver product cost reductions and when combined with the increasing sales volume and spread in <unk> sales over over our fixed costs, we expect to see gross margins improving over time.
Speaker Change: Got it okay. That's that's very helpful and just one follow up last quarter. There was a customer that has impacted our backlog am I think their project was being delayed.
Speaker Change: Could you just talk about if there's any update there could we expect to see that customer reenter the backlog at some point I'm just any update would be would be helpful. Thanks.
Speaker Change: Yes, we're staying very close to that situation literally almost daily. So we have very good visibility on what's happening there.
Speaker Change: And they've made a lot of progress since December and we will we're expecting them to get resolved likely in the next quarter.
Speaker Change: Quarter, let's call it but.
Speaker Change: But we'll wait to see that and we will see at that time, what the impact is to the order backlog.
Speaker Change: Got it thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Randy Macewen for any closing remarks. Please go ahead.
Randy Macewen: Thank you for joining us today, Paul Kate and I look forward to speaking with you next quarter. Thank you.
Speaker Change: This concludes the question and I.
Speaker Change: Concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yeah.