Ballard Power Systems Inc. Q1 FY2021 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Ballard Power Systems Q1 2021 Results Conference Call. Please note that all participants are in listen-only mode and this conference is being recorded. After the presentation, there will be a chance for questions. I will now hand the conference over to Guy McAree, Director of Investor Relations. Please proceed.

Thanks very much and good morning everyone. Welcome to Ballard's first quarter 2021 financial and operating results conference call. With us today are Randy MacEwen, Ballard's President and CEO, and Paul Dobson, our Chief Financial Officer. We'll be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for complete disclaimer and related information. We are going to be changing the structure and format of our results conference calls beginning with the call today. Randy's formal commentary will be fairly brief focusing on important developments and indicators of progress in the execution of the company's growth strategy during the quarter. Randy's comments will then be followed by a few very brief notes from Paul rather than a detailed review of the numbers since those numbers are addressed in our press release and the MD&A. Our aim with this new approach is to leave more time for the growing list of analysts and investors to ask questions and engage in a dialogue with management. So with that in mind, I'll turn the call over to Randy.

Thanks Guy and welcome everyone to today's conference call. In Q1, Ballard revenue was $17.6 million consistent with our internal projections and reflecting a muted China market currently awaiting further policy pronouncements. Gross margin was 15%, adjusted EBITDA was negative $14.0 million, and cash reserves at the end of the quarter were $1.27 billion. Now today I want to share with you how excited we are about the growing market opportunities we have at Ballard. Supported by a strengthening policy backdrop and increased customer engagement we have a clear line of sight on long-term growth in our core medium and heavy-duty motive applications of bus, truck, rail, and marine. Activity levels are at record highs across the entire Ballard organization. Indeed on the commercial front, we're witnessing unprecedented customer engagement across all markets. While we've previously commented on the slow pace of conversion of our sales pipeline to purchase orders primarily as a result of the pandemic, we remain highly encouraged with our sales pipeline. Indeed, our sales pipeline has grown more than 70% over the past five quarters. This reflects the underlying momentum in our business prospects and while the pandemic is still challenging many markets we see encouraging recovery signs including strong order conversion over the past month. Now given this backdrop, 2021 sets up as an important year marked by increased and accelerated investment ahead of market tipping points. Bolstered by a fortified balance sheet will deepen our investments in talent, technology, products, advanced manufacturing, localization, and customer experience. We are already making solid progress on key strategic deliverables in 2021 including on technology innovation, product cost reduction, capacity expansion, our Weichai-Ballard joint venture, and our relationship with MAHLE. Now let me just briefly review some specific details so far this year. We're proud to announce during the quarter Ballard's industry-leading metric of powering fuel cell electric buses and trucks with over 75 million cumulative kilometers, enough to circle the globe 1,870 times. In the fuel cell electric bus market, we continue to be encouraged with progress in Europe. As previously reported, we received several purchase orders from our European bus OEM partners during the quarter specifically from Wrightbus and Solaris. Through last year to date in 2021, we received orders for 135 fuel cell engines for buses in Europe and we've delivered 69% or above 50% of these engines through Q1 this year. We're also excited by our work with global bus ventures in New Zealand to put the first fuel cell electric bus in that country through testing and now with the revenue service with Auckland transport. New Zealand passed its Climate Change Response Amendment Act in 2019 setting that country on a path to net zero emissions by 2050 and also makes it one of the few countries to have a zero emissions goal enshrined in law. Seeing traction in new geographies such as New Zealand is a very positive indicator. In the truck market, our work is progressing to plan with the Weichai-Ballard joint venture in China, as well as with MAHLE on the design of a prototype 240 kilowatt engine for heavy-duty commercial trucks. We continue to expect this product to be ready for testing by the end of the year. And yesterday, we announced an exciting strategic partnership with Linamar for the development and sale of fuel cell powertrains and components for class one into vehicles initially in North America and Europe. In the starting phase of work under the framework agreement, a demonstration platform with a fuel cell powertrain solution will be co-developed with Ballard providing the fuel cell subsystem and Linamar providing the rolling chassis, tanks, enclosures, cradles, and other balance of plant. Following successful testing of the demonstration platform, Ballard and Linamar expect to form a joint venture to sell and support fuel cell powertrains for light-duty vehicles including light trucks and commercial vans. We're thrilled to partner with Linamar, a leading global manufacturer of precision products and powertrain solutions that's leaning into the future of zero-emission mobility. This collaboration is a natural extension for our existing joint working relationship on the recently announced UPS delivery vans trial in California. We're deepening our relationship based on a joint vision to provide zero-emission fuel cell powertrains for light-duty vehicles, particularly those where fleets require extended duty cycles and rapid refueling to maximize utilization. I noted the increased momentum in the rail market on our last conference call including our ongoing important work with Siemens to power the Mireo commuter train. Continued commercial operation on the world's first fuel cell tram line operating in Foshan, China since late 2019. Receipt of a purchase order from Arcola Energy in Scotland, and an announcement of our collaboration with Canadian Pacific to power the first fuel cell freight train in North America. In addition, subsequent to Q1 we also announced that Ballard will be powering the switching locomotive for Sierra Northern Railway in Northern California, another proof point in this rapidly evolving rail market. In the marine market during Q1, we announced the non-binding MOU with Global Energy Ventures in Australia for the development of a new fuel cell powered ship called C-H2 ship designed to transport 2000 tons of compressed green hydrogen. This is a fascinating opportunity with a small sales demonstration of the C-H2 ship expected to require 10 megawatts of fuel cells and the full-scale ship requiring propulsion power of approximately 26 megawatts. In Q1, we also signed a non-binding MOU with Chart Industries to develop a liquid hydrogen storage and vaporization solution for heavy-duty vehicles. Given the high energy density of liquid hydrogen, this will be a potentially strong solution to address the greatest range requirements for heavy-duty vehicles including coaches, long-haul trucks, rail, and marine applications. In other commercial progress during several past weeks, we announced Ballard's membership in the Hydra Consortium focused on enabling heavy-duty mining mobile equipment to run on renewable hydrogen. Other key partnerships in the consortium include Mining3 and ENGIE. As we noted before, off-road opportunities including in mining and construction represent very exciting upside potential for fuel cells moving forward. On the technology and product development front, we continue to make measured progress on our key development programs including ongoing work with our Weichai-Ballard joint venture in China. We're also tracking ahead of our plan on our 3x3 fuel cell stack cost reduction program enhanced by breakthrough design and performance from our new MEA's and bipolar plates, continued progress with our supply chain, and implementation of advanced manufacturing initiatives. We are proud that we have recently published Ballard's second Annual ESG Report demonstrating our strong commitment to transparency, reduced emissions, investment in our employee value proposition, including diversity and inclusion, and strong governance. As a purpose-driven company with a vision to deliver fuel cell power for a sustainable planet, we're making clear progress on our own ESG journey. We continue work toward our mission carbon zero 2030 initiative with a goal of achieving carbon neutrality at Ballard by 2030. As noted in our recent ESG report, beyond the progress we made in reducing our own operational carbon footprint, we completed cradle-to-gate GHG assessments of our key fuel cell products. The Ballard response with highly disruptive leading fuel cell technology from large attractive addressable markets, we believe we're set up for strong long-term growth as a result of accelerated investment we're making this year. We also continue to assess strategic acquisition opportunities, including opportunities that will reduce customer friction points and simplify customer experience. Before finishing, I'd like to formally introduce Paul Dobson, Ballard's new CFO. Paul joined us in late March and has been actively working to fully familiarize himself with the hydrogen and fuel cell industry and with Ballard. Paul's skills and experience will serve Ballard well as we seek to scale our business over the coming decade. And with that, I'll turn the call over to Paul.

Thanks, Randy. And good morning, everyone. It's my pleasure to be with you here this morning. I'm the newest member of the Ballard leadership team having joined the company just five weeks ago. And I can tell you, it's been a busy but incredibly accelerating my educational experience so far. And let me tell you about my background. I grew up in Ontario, Canada, and attended the University of Waterloo and Western University. After graduating from Western, I worked at CIBC for 10 years in different financing business development leadership roles in Canada and the U.S. I'm drawn to new entrepreneurial growth situations. In most of my time at CIBC was spent growing CIBC's fledgling electronic banking business in Canada and the U.S., which was quite new and growing fast. Soon, I then transitioned to Direct Energy which helped deliver natural gas, electricity, and services to homes and businesses throughout Canada and the U.S. that is in the early 2000s when many downstream energy markets were starting to deregulate. And there were tremendous new market growth opportunities. I was with Direct Energy for 15 years including as Chief Operating Officer and then Chief Financial Officer based in Houston. While I was there, I helped grow the company both organically and through M&A from about a $1 billion in revenue to over $20 billion becoming one of the largest energy retailers in North America. I left Direct Energy in 2018 and joined Hydro One, a large utility in Ontario. Initially as a CFO but also subsequently serving as the Interim CEO. In the CEO role, I spent a great deal of my time with the capital market, institutional investors, rating agencies as well as regulators, government, policymakers, and of course the great team at Hydro One. As I said earlier, I'm drawn to entrepreneurial growth businesses but I also want to work with great teams which have similar values and leadership styles and we make the business successful as a team. And so when the opportunity at Ballard came along, it's exactly what I was looking for. I believe that hydrogen is a viable solution to fight climate change and the hydrogen market is poised to take off and become a multi-billion dollar global industry. And of course, the people at Ballard are pioneers and well-respected thought, technology, and market leaders in the hydrogen space. And I can share with you from what I have experienced in the past five weeks and formative conversations with blue chip customers and partners as well as many inbound calls from industry and the capital markets. There is tremendous global support for the hydrogen industry, which I believe reinforces our multi-billion dollar growth forecast for Ballard. Ballard's strategy to focus on the heavy-duty mobility market is strongly supported. Not only very independent research but by customer and market feedback. In my opinion, it’s not a matter of if, it’s only a matter of when. My focus here will be on two things: helping Ballard grow revenues and as importantly scaling the business globally to meet the worldwide demand while maintaining our leadership position and reputation for safety, innovation, quality, and service. I'm committed to making sure that Ballard carves out a prominent place in the market, increasing sustainable long-term value for shareholders. Finally, as many of you know, Tony will be retiring at the end of May. I'm very fortunate that Tony is leaving the whole finance and administration function in such good shape. And what I've seen and heard including from our external auditors, the team here is first-class and the business is well-controlled, exactly what we need to scale up and grow. And of course, having $1.2 billion on the balance sheet is a strong fortified position to work from. So thank you Tony for leading the business in a great position which makes my job so much easier. With that, let me turn the call back over to the operator for questions.

Thank you. The first question comes from Praneeth Satish from Wells Fargo. Please go ahead.

Thanks. Thank you, good morning. I guess just to start, revenue in the first quarter was down year-over-year and I understand there is a huge sale pipeline here. But I'm just trying to understand for the quarter itself, how much of it do you think was due to some softness in China while you await policy clarification or just lingering kind of COVID slowdown or was there some other driver here?

Yes Praneeth, thanks for the question. I think it's a combination of a couple of factors. One is that we did, of course, see really over the last five quarters or so four quarters we've seen this slowdown in China waiting policy pronouncements and we're expecting to see some developments on that front in the coming months. That's part of it. Of course, last year if you look at Q1, there was no impact from COVID-19 obviously. In Q1, we saw that occurring later in the year Q2, through Q4. And last year in Q1, we did have a fairly large shipment to our Weichai-Ballard joint venture of kits. So I think it was probably a typically strong Q1. If you look at our business historically, almost every year the first half is slower paced typically around 35% to 40% of our business and typically about 60% or so in the second half of the year. So clearly it's softer than the industry would have liked but it was actually consistent with our own internal expectations for our plan for 2021.

Okay, got it. And then second question here, you're making good progress with decarbonization on rail with Canadian Pacific and Sierra Northern. Do you see opportunities to start to maybe announce some more JVs for rail in Europe and how would you compare the two markets U.S. and Europe in terms of rail and opportunities to decarbonize?

I'm really glad you asked about rail. This market has exceeded our expectations over the past six months, showing significant progress. To give some context, by 2030, it's expected that 10% of new trains in key markets will be fuel cell powered. Historically, we started our journey in this area around four years ago in China with CRRC, the world's largest rolling stock manufacturer. Since December 2019, we've had the world's first fuel cell tramline operational, with five trains running on the Guangming line in Foshan, Guangdong Province. I had the chance to ride that tram earlier this year, and it was a remarkable experience. This has provided Ballard with valuable insights regarding rail codes, shock and vibration standards, noise, and packaging, which we've applied to our partnership with Siemens for the Mireo train in Europe. We expect to formally launch the Mireo train this year; it's a noteworthy platform specifically designed for fuel cells, which could be a leading solution in Europe for fuel cell trains. The learning from our experiences in China and with Siemens highlights the differences between markets that focus on passenger transport and those in North America, which primarily focus on freight and goods delivery. In North America, the freight railway profile usually involves long, heavy trains over lengthy routes with fewer but heavier cargo loads and strategically positioned fueling stations. Currently, less than 1% of North America's rail lines are electrified. Therefore, the options for zero-emission solutions either require expensive overhead electrification or rely on hydrogen locomotives, which offer a viable economic alternative. Reflecting on the rail industry's evolution, back in the 1950s, the focus was on transitioning from steam to diesel engines. In the 2020s and 2030s, I believe the narrative will shift to replacing diesel locomotives with hydrogen fuel cell locomotives. Our major project today is with Canadian Pacific (CP), which operates 1,200 locomotives. These locomotives are refurbished approximately every 15 years. This presents an opportunity with CP's fleet to implement a pilot program by the end of 2022, allowing us to validate the benefits of hydrogen fuel cell locomotives and gradually replace the existing diesel units as they undergo refurbishment. Beyond CP, there are 40,000 locomotives across North America. We've also announced a project with Sierra Nevada for a switcher locomotive in California. We're very excited about this market, and I believe that looking towards 2030 to 2040, we'll see significant adoption, particularly in commuter rail and freight delivery sectors.

Okay, thank you.

The next question comes from Aaron MacNeil with TD Securities. Please go ahead.

Good morning, and thanks for taking my questions. In the quarter, there's a nice uptick in press releases, order flow, and other announcements. So surprised to see only 11.8 million in new orders. At the backlog, I think you did a good job of addressing it in your prepared remarks. But can you think about materiality? It's not less than even a lot of the announcements in the quarter like your alliances in one of our home. Longer-term strategic value but maybe you can walk us through a couple of examples of press releases from the first quarter. And from a mechanical perspective, what the near-term order profile might look like from a dollar perspective, what the longer-term strategic value to dollar might be. And so the longer-term stuff maybe could also characterize materiality and timing what future orders might look like? Ultimately what I'm trying to get a sense of is when I see the Ballard press release going forward, maybe give me the two roles to look at how to interpret the press release from a materiality perspective?

Yes Aaron, thanks for that comment. I think a fair comment. In some cases, some of the details aren’t known yet in terms of how it rolled out in terms of volumes and market adoption. I think we still need to take a step back and acknowledge and understand that these markets have bus, truck, rail, and marine still going through transition. Very early stage of market adoption. Today we have about 3,400 buses and commercial trucks in the field. As I mentioned earlier with over 75 million kilometers. That's about 3,300 more than we have say four years ago but it's still the first second of the 24-hour day in terms of market adoption. So I do think that we oversee the number of pilot projects which is different from demonstration projects in my opinion. We're not talking about validating technology anymore, we're talking about validating economic value propositions and making sure that packaging is correct for these different opportunities. So as an example, the relationship with MAHLE is really about packaging the 240 kilowatt engine with a lot of input from MAHLE on things like cooling, on things like optimization of DC/DC inverters. We're looking at the entire powertrain solution. And that's going to take some time before it hits volume. So I think we'll be looking to see that 240 kilowatt engine demonstrated later this year with MAHLE. As we look at some of the programs with CP, as I mentioned, your question was about some of the announcements in the quarter of course. When you think about CP, again this is a demonstration pilot project that would be 2022 when you'll see us get some feedback from the customer on that demonstration. So we are talking about programs that will take some time. I think we've been communicating this really for a number of years. If you look at the regulatory environment and the policy framework and when things like zero-emission vehicles in different markets including California, in Europe, and China take effect. Including in different markets bus, truck, rail, and marine, we do see 2023 and 2024 as those first years for significant market adoption and then a very steep growth curve occurring through to 2030. So, I think your comments are fair one Aaron. And as we look at future announcements, we'll try to offer some additional tools while people can understand what that means for market adoption and timing. In some cases, some of our counterparties understandably are a little reluctant to get ahead of their skis and set market expectations so far. And so I think that's just a reality where we are in the marketplace today. But in terms of the order book, yes, there has been slow conversion of sales pipeline to the order book over the last year, and we saw a very significant step change in the last 30 days on that front. So we're pretty excited about that. And we do expect to see a very high level of conversion throughout 2021 and in early 2022.

And maybe I didn’t want to ask from specific companies to the details you may not want to get into but let's take cities and if you brought it up. Like is there a backlog impact based on that announcement for that one demonstration unit? Or I was just from a purely mechanical perspective like if I compare a right bus, the 50 order announcement. What does that mean for the backlog and then the CP announcement as an example, what does that mean for the backlog?

Yes. I mean, CP was basically 1.2 megawatts of fuel cell engines that we got the first order for, right? And yes, that goes into backlog when we get that that goes into order book. But it's really not reflective of what we're talking about in terms of the long-term opportunity.

Of course. Yes, understood. And then, final question from me. You mentioned in the press release you're adding your prepared remarks, you're tracking ahead of it 3x3 cost reduction program. You mentioned in the prepared remarks breakthroughs in designs, supply chain improvements, etc. But how are you measuring your progress internally and can you give us a specific example of how the timeline shifted since you last described the program in detail at the Analyst Day?

Sure, great question, Aaron. Our goal for 2021 is to achieve a cost reduction of X% for our fuel cell stack in the 3x3 program. In Q1, we have already surpassed our full-year target for that cost reduction initiative. This success is attributed to the significant efforts made in late last year and early in Q1. While I want to be cautious about providing specific figures, we are indeed on track to exceed our expectations for the 70% aspect of the 3x3 program, and we anticipate achieving most of that in 2021.

Okay, great. That's all from me, I'll turn it over. Thanks.

Yes, thank you.

The next question comes from Greg Wasikowski with Webber Research. Please go ahead.

Hey good morning, guys. Thanks for taking our questions. And I just wanted to yes piggyback off the last one and just talk more about the pipeline and conversion to backlog and order book and if we just look at kind of the top of the pipeline and so conversions over the next couple of months. We kind of expect that to be, I know that things were announced but maybe percentage of how much to potentially hit the 2021 numbers versus looking at 2022 and beyond. Is it like could it be like a 50/50% or is it more like a 90/10% 2022 and beyond?

Yes. I think we'll have some limited impact to 2021 in terms of conversion of the sales pipeline to the order book. If you look at the conversion time and then you look at delivery time. It does take a number of quarters typically. It's driven in large part by supply chain as well as the large part by the timing from order and when the customer actually needs the product. A lot of these projects including for example bus programs, they aren’t asking, they don’t submit and then ask for the product delivered three or four weeks from now. They're typically looking at a number of quarters out. So, I would say your 90/10 is probably a better guide rather than the 50/50.

Okay, got it. And then for the next one, on the Weichai JV, on the last call you said the JV could potentially reach breakeven by the second half of this year potentially beginning of 2022. Is that still the goal or have the policy delays on China kind of pushed that timeline further into 2022?

Yes. I think that's a fair comment. The policy delays have frankly been unexpected. But on the policy front, we've actually had a pretty important start to the year in China. The policy front. So you've had the 14th five-year plan was approved in March. And in that plan, the environment has a very significant focus and the shift really is going from cleanup to decarbonization, they call it green ecology. And now, we've got these important milestones or goals for carbon peak 2030 and carbon neutrality 2060. And then, since that time you've had two important announcements, I'm not sure if you're fully aware of these. One of them is the Ministry of Science and Technology and also the Hydrogen Society Program in Shandong Province. We think this will be a major boom for Shandong Province, fuel cell opportunities, and which will of course help the Weichai-Ballard joint venture which is located in Shandong. And also, the Natural Fuel Cell Technology Innovation Center was awarded to Weichai on April 18th. So, this is a very another important development in that market. On the deployments front in China, you're also seeing about 3,400 buses and trucks from Ballard in that market right now with over 70 million kilometers. So, that's a more recent number than the number we provided on our overall global install base of 75. And I just want to highlight just on the joint venture. I'd say there are three key things that have been going on there. One is really kind of optimizing and improving yield improvements as we're waiting for the market to get uncoiled there. And then the second is module development activity. So, and making sure we have the portfolio of modules to satisfy the different market requirements for bus and commercial truck including different market segments. And a lot of work being done on Ballard's plan components by the Weichai-Ballard joint venture including significant work on cost reduction. And then the last one is just the market and customer engagement side. So, notwithstanding a stalled market kind of a waiting for the announcement of the hydrogen cluster program, we are seeing significant customer activity and engagement from the vehicle OEMs. People getting new platforms certified, testing and engagement with end users. So, there's a lot of work going on in the background and I think it's going to be very helpful as a policy kind of gets announced and clarified here over the coming months. So, I think your assessment of a move out with the delayed policy landscape is a fair one.

Okay, thanks Randy.

The next question comes from Rupert Merer with National Bank. Please go ahead.

Sorry about that. Good morning, everyone.

Good morning, Rupert.

You mentioned potential for clarification in the coming months on the hydrogen subsidy in China. So, do you have specific visibility on when we could get more detail on the program? And to your knowledge have any of the demonstration regions in China been outskirt or indicated for the cluster program?

Yes Rupert, great question. So, what's happened is there's been another iteration of the process if you will where it looks like there are five clusters that would be awarded at the Shanghai cluster, the Beijing cluster, the Guangdong cluster, the Hubei cluster, and the Hunan cluster. So, those five clusters will require to resubmit some paperwork as of April 30th. So, that's just occurred. And I think there is additional progress that we made over the next 60, 90 days with the national government and each of these five clusters working through it. So, this hasn’t been announced probably yet but that's our understanding of what's going on in the China markets and those clusters.

And in which regions in China can you participate? You mentioned of course that Weichai is based in Shandong but are you able to participate meaningfully in these other areas?

Yes, we feel we have good opportunities particularly in the Shanghai, Guangdong, and Hunan clusters.

Okay. And just finally on that, is there any more color on how the subsidies could be delivered? Will they be primarily to the vehicle and infrastructure companies or could some of that capital actually go directly to the manufacturers as well?

Yes. So, it's a points-based formula with funding going to different parts of the value chain. I do see that the vehicle manufacturers will likely be participating in that subsidy scheme, not just end users.

Okay. Thanks very much.

Thank you.

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

Good morning. I just wanted to follow up a little bit more on the sales pipeline. Could you kind of characterize the market maybe you just the ones that you see first in terms of the pipeline strengthening and how you see that playing out over the next couple of years?

Yes. Good morning, Rob. Thanks for the question. I think what we're seeing in the last quarter is pretty consistent with the previous quarter as well is that the sales pipeline is actually tracking fairly well to what our goals were as a company from market diversification. So, typically we're looking at China roughly 40%, EU roughly 40%, and then rest of the world primarily California, North America 20%. If you look at the market applications, I think we're seeing new markets coming into the sales pipeline. So bus is clearly the dominant share, at this time is the more mature market. Truck activity is increasing, rail of course and marine. We believe those markets, those two markets will surprise to the upside over the next number of years. But we're also seeing some additional off-road markets starting to play and I'd say a more substantive contributor to the sales pipeline which is very encouraging. So, things like mining, construction, market opportunities and we're seeing some new geographies outside of China, Europe, and North America starting to play a key component of the sales pipeline as well.

Okay, thank you. And then on the Linamar announcement, I just wanted to clarify how you see that playing out. I think you meant JV for a platform for fuel cells. Could you just maybe give us a little color on how that kind of develops in your vision at this point?

Yes. So, the key here is really that, and of course everyone will understand Linamar is a very significant Tier 1 supplier to the automotive space. Strong relationships for these classes of vehicles as we're looking at light-duty vehicles. And our collaboration with Linamar, they are a high precision manufacturer, high volume manufacturer, bringing a lot of capability and supply chain muscles to the table. So, this is a compelling opportunity for us. As we look at that market opportunity, what we've seen is that many of the platforms weighed want to have a fuel cell vehicle in light duty. For example, cargo vans. They just haven’t been OEMs stepping into that market quite yet. And the vision here is to get ahead of that and to offer a fuel cell powertrain system that can be marketed in serious production eventually to the vehicle OEMs in a plug and play format. And so, I think as we look at it, there's market opportunity. We're seeing two phases of activity with Linamar. The first is developing this platform together and Ballard will primarily be responsible for the development of the fuel cell system and Linamar has a scope moving from the fuel cell system to the powertrain including storage tanks, DC/DC converters, and some other key components. And as you look at what Linamar's contemplating here, it's initially validating that system, going through testing, engagement with customers, and then ultimately Ballard and Linamar moving to a joint venture where we design and manufacture our respective components and use the joint venture as a sales vehicle to the channel that Linamar already has strong engagement with. So, this is the two phases of activity. It's obviously early in the relationship and this is the follow-on from the work we're doing with Linamar for UPS delivery vans in California where we've already established a very strong working relationship. So, lots more to be worked on in the coming months and coming years but we're very excited about the opportunity from what I think is one of the leading players that is leaning forward on the future of mobility.

Okay. Thanks for the color, I'll turn it over.

Thanks, Rob.

The next question comes from PJ Juvekar with Citi. Please go ahead.

Hi, good morning Randy. It's Eric Petrie on for PJ. There's been some mention of hydrogen in the Biden infrastructure bill but really the focus seems on EVs kind of build these. So, is that a small step back for the hydrogen economy?

Yes. And great question, Eric. I think what we've seen is that there are two key themes at the moment that we think really help the hydrogen fuel cell opportunity in the U.S. market. One is decarbonization and the U.S. getting back into the Paris climate accord obviously looking at net carbon zero by 2050. That's a major initiative. The only way to achieve that is to include hydrogen. In my opinion, you cannot achieve the Paris climate objectives but for the inclusion of hydrogen as a key part of the decarbonization strategy. The second, as you point out, is infrastructure. And what we see is convergence of hydrogen and of decarbonization in any infrastructure leading to an environment where we see battery electric vehicles working in the use cases and opportunities where they have a compelling response. And likewise, fuel cell electric vehicles seeing success in the markets where fuel cell electric vehicles have a strong value proposition. Let me highlight again, if you look at the California market as an illustrative example, I think of what you'll see eventually across the U.S. is in California for buses, all new transit buses, let me say this again, all new transit buses must be zero-emission by 2029 and 50% of them must be zero-emission, not low-emission by 2025. So, it's a very clear pathway and that important policy-making state on zero-emission vehicles in buses. Similarly on the truck side, we've got the clean truck standards that was passed last year and that clean truck standards is effectively by 2024 a certain portion of all trucks of all classes must be zero-emission starting at 2024 and scaling up to very high penetration by 2035 and 100% by 2045. And so, we see the policy shaping in California on zero-emission buses and trucks will be key drivers we believe, not just in California but as other markets look to adopt similar types of decarbonization of mobility policy where fuel cells will play I think the dominant share role particularly in these heavy trucks.

Okay, thank you. And then, when you take a look at some of these deals and announcements with the MEA hydrogen hybrid consortium and tied industries. How do you feel the timeline or which is most advanced in terms of translation into orders as well as earnings?

Yes. Pretty clear on that front. Anything to do with bus is earlier. And will translate to larger orders initially. Truck will come second. Yes, we try to call this our stack or revenue scaling effect where the bus market starts to grow significantly. On top of that the truck market starts to see penetration and grow significantly. As those two markets grow, the rail market will add and as those three markets grow, then the marine market will add on top of that. And we see those four markets aggregating to about a $130 billion revenue opportunity by 2030. And I do believe adoption will be in that sequence: bus, truck, rail, and marine.

Thank you.

Okay.

The next question comes from Michael Glen with Raymond James. Please go ahead.

Good morning. Thanks for taking the question. Randy, can you talk about the evolving competitive dynamic in the industry? Clearly, we're seeing quite a few announcements take place from peers in the fuel cells space. Are you seeing any changes take place in terms of your positioning versus others in the market and how do you see that evolving?

Yes, Michael. Thank you for your question. The competitive landscape has been changing, and I expect it to continue evolving over the next several years. In the coming 24 months, there will be a race to deliver top-tier technology that meets market needs for performance, durability, reliability, safety, and efficiency. Cost reduction will also play a significant role. Recently, we've observed major players in the mobility sector entering this space, such as Bosch, which announced a billion-dollar investment in fuel cells for the next decade. Similarly, at Ballard, we have over a billion dollars in cash that we intend to invest in talent, technology, and products. This will create a competitive environment. Over the past three months, I believe our competitive position has strengthened. The validation of our technology with 75 million kilometers of operation in the field is crucial, as customers are increasingly focused on safety, quality, and reliability. The branding on these trucks, buses, rail, and marine vehicles is important, leading customers to seek partners perceived as low risk. Ballard is well-positioned. We are on our 13th generation of fuel cell stack and 8th generation of fuel cell engine, with plans for further innovations. I doubt anyone else is matching our level of product development, particularly in the heavy-duty motor sector, as opposed to the passenger car market where Hyundai and Toyota have some advantages. Additionally, the collaborations we've announced, such as with CP Rail and the rail market or Sierra Nevada, as well as ongoing work with Wrightbus and Solaris in Europe, highlight our progress. We are seeing advancements in the four sectors of bus, truck, rail, and marine with long-term commitments from recognized companies, all aiming to scale over time. The market will remain competitive, with an emphasis on technology, product quality, cost, and performance, which is our primary focus.

Thanks. And just on commercial trucks. So, you talked about being ready for testing by the end of this year. Does this mean you will have a pilot out there in say early '22 and what would be realistic to think about from an actual commercial product perspective, when would an OEM be able to actually buy your module, your solution?

Yes Michael, we're not quite at the point of identifying when a pilot will be on road and when we'll be available for selling. We do think that 2023 is a timeframe we expect to see earnest market adoption of this product. That could be 2024. That's the time that we're looking at. But in terms of piloting and pretty serious production, etc., there's a lot of work that will happen in 2021 and 2022 on that front. And you'll just have to provide more visibility as we meet some of those milestones. We don’t want to get ahead of our skis on and announcing things early.

Okay. Thanks for taking the questions.

Sure, thanks.

The next question comes from Christopher Souther with B. Riley. Please go ahead.

Hey guys, thanks for taking my question here. I just want to touch on the Weichai visibility again here. I think the long-term opportunity there is pretty apparent. But with coming below activity we saw in the first quarter, I just want to get a sense of until we get maybe some of these cluster announcements over the next 60, 90 days. Do you expect this kind of low activity we saw in the first quarter to be pretty consistent in sales until some kind of policy announcement comes? Understand there's been a couple of incrementally positive things on the five-year plan in Shandong Province. But is the cluster kind of the key thing you think OEMs are waiting for? And if we do get an announcement in 90 days on that, does that come in translated into fourth quarter revenue or early next year? It's starting to kind of ramp up, I just want to get a better idea of the visibility you guys are starting to hopefully see there?

Yes. I mean, I think I would just characterize the market is in some way it's frozen over the last number of quarters, that's what we were waiting for these policy clarifications. And I think you're right, that we'll continue until those announcement occurs. So if it takes longer than 60, 90 days, it takes longer. So I think we'll, what we'll likely see is that the impact will be disproportionally weighted for 2022.

Okay, got it. And then, the European bus opportunity has appeared to be accelerating based on some of the order book. Can you give a sense of what the mix in the backlog is with those three key customers there?

Well, I think there's about 60, 70 modules that we currently have in the order book backlog for delivery. Most of them hopefully for this year in some cases they'll be depending on the end users and when they want to take delivery of these buses. We have seen delays over the last number of quarters on this market segment in terms of customers taking product with COVID-19 challenges at their location. So hopefully that doesn’t impact later this year. We'll see more importantly though I think is that what we're seeing behind that order book, the sales pipeline for bus is very, very encouraging. And I think the European bus market is going to show very strong growth for fuel cells and for Ballard. I think we'll see a lot of perhaps more important than orders converting to revenue in 2021. We're going to see sales pipeline converting to orders. And I think that to me is the more interesting dynamic.

Okay. And then, just on the, would you scope with Audi. Is this kind of current run rate you saw in this quarter, the baseline we should use throughout the year for technology solutions or are any of the recent announcements with when the MAHLE, charter, multiple rail customers likely to have seen as opportunities you think?

Yes. So what we're seeing is we're actually investing more in our own corporate balance sheet on some of these strategic programs that make sure we have full IP rights and able to prioritize the investment spend. I do think what you've seen in terms of Q1 cadence is be fairly consistent through the rest of the year on that Audi program.

Okay. Any other kind of programs though we should kind of flag there might be kind of on the cusp or is kind of the overall revenue rate probably pretty consistent?

Yes. I would use kind of Q1 revenue rate and look at that over the course of the rest of the year. That being said, there are a number of exciting opportunities in the sales pipeline that could have some fairly significant implications going forward.

Okay. And it's helpful. I'll hop in the queue. Thanks, guys.

Yes, thank you so much.

The next question comes from Pearce Hammond with Simmons Energy. Please go ahead.

Good morning. And thanks for taking my questions and then helpful color on the call here. My first question pertains to the cost reductions that you highlighted earlier on the 3x3 plan. So congrats there. But just curious, when do you expect there at the start to flow through gross margin and see some improvement there?

Yes, great question. The 3x3 plan still has more work to do in terms of translating some of the development changes into manufacturing and with new products. You obviously have to sequence the customers onto that new products. So there is some work to do. So I will look at 2022 as a timeline when we'll start to see some of that gross margin pick up.

Okay, great. And then my follow up. You've talked about and you've highlighted in the release the potential for acquisitions if you look at the ecosystem to where you could help reduce customer friction points. How are the opportunities looking now? Are there a good number or are they priced at a more rich level? Or given the equities have been coming down here recently in the sector. Are they getting more interesting? Just like a quick update on what you're seeing on the acquisition front to strengthen the company?

Hi, Pearce this is Paul here. Since I've been here for past five weeks, there's been a tremendous amount of activity and looking at different opportunities, corporate development. There are different products, different markets, and looking both downstream and upstream across the whole ecosystem to help expand our capability. So there are different files that we're actively working. Not sure when we'll actually see one come through, could be this year, could be in 2022. We also hired a new VP of Business Development. He has a very strong background in M&A. Who is also helping us, they would be coming with speed on all the different files. So we are putting a lot more emphasis on this area. And like I said expect to see something probably either later this year or into 2022.

Okay, thank you very much, Paul.

Thanks, Pearce.

The next question comes from Jonathan Lamers with BMO Capital Markets. Please go ahead.

Thanks for taking my question. On the Linamar demonstration partnership, what products would the joint venture potentially produce? Is it the interchangeable chassis with the fuel cell system including stacks supplied by Ballard?

Yes. Hi Jonathan, thanks for the question. What we're expecting is that most of the product that will be produced will be the respective scope of work done individually at Ballard and Linamar for our respective supplies go. We then would see the integration of that product like we at the JV. And I think the interchangeable chassis they're referring to is the likely point. I think there's still a lot of work to do to understand the most effective way to structure this from an efficiency perspective. What we're trying to do of course is avoid unnecessary CapEx spending on facilities, etc., and trying to utilize existing capacity that we have both at Linamar and at Ballard.

Great. And to Aaron's earlier question about quantification. I realize the sensitivity is around this question. But are you able to provide us with any sense of how large the market for commercial pickups and vans powered by fuel cells could be? I'm kind of imagining that there could be a chassis plant with volumes in the 1000s and this could result in revenue in the 10s of millions potentially for Ballard a decade out.

Yes, I would think that there's a multiple of that. I think Jonathan, that number is quite light. So if you look at this opportunity on light-duty vehicles we will initially focus on cargo vans and applications where we see taxi fleets and other opportunities. We are looking at fleets where you have high utilization. This opportunity though will enable us to have an offering for the passenger car market long term as well. So obviously, there's a very large addressable market and one that Linamar is very well positioned in.

Thank you. And just to circle up on China. What would be the earliest the joint venture could need more MEAs and kits at this point? Is it fair to say that that's a 2022 dynamic at this point before we see another order?

Yes, I would think 2022 is the clearly the safe bet and if there's upside might be some opportunity later this year. It's all going to be dependent on how the existing inventory gets released as the policy landscape changes and we move from waiting to execution.

Thanks. And on the three by three cost reduction program, if you've already achieved your full year 21 target, does that shift the prior timeline for, I believe it was 70% reduction in stack cost by 2024? Is it fair to say you could now hit that by 2023?

I think that's a fair assumption. We'll have to look at that carefully. It's not just the work that's done in 2021. Some of it will be time-based in 2022 as well. There are three different phases or packages of work we're doing with different time horizons that the package of work for 2021 that cost reduction were as I mentioned, certainly tracking ahead against. There is more work to do in 2022 in order to bring out that full 70%. Where we're sitting today, I expect us to achieve a number higher than the 70% cost reduction and likely we'll be able to pull that time in, but it might only be a quarter or something like that.

Okay and on rail Randy, I appreciate your efforts working directly with the rail operators. But is Ballard also engaging in any activities with the rail OEMs, the Caterpillar's and lab techs of the world?

Yes. So there are three or four key rail OEMs and I would say until recently, they've been fairly quiet on this file. That's changed significantly over the last few months and some of these announcements have really caught their attention. And so there are activities underway right now and I think there will be more developments on that front in the next 12 to 24 months.

If I may ask one more question? On the heavy-duty truck market, I look at the TAM that Ballard has identified I think roughly three quarters of that is medium and heavy-duty trucks globally. So it's pretty significant and battery electric trucks are an emerging competitive alternative. For example, there was an academic study recently, they argue that payload is not impacted by the battery as much as we previously thought. Randy, I believe you have a view on this issue. Have there been any real technology developments recently that have changed the window of opportunity for fuel cell trucks in the long haul market or does that continue to look like a great opportunity?

Yes. I think it is a fantastic opportunity and I don't see today or in the near future at all any changes in battery technology that will help it expand its addressable market from light-duty into really heavy-duty applications. I think this is a market that is very clearly going to be fuel cells.

Okay. I really look forward to the prototype. Thanks for taking my questions.

Thank you, Jonathan.

The next question comes from MacMurray Whale with Cormark Securities. Please go ahead.

Hi, Randy. I'm just wondering you've shipped a lot of equipment, a lot of work in progress or components to China in advance of the rollout. Is there a risk in behind this you've been continuing to change the module technology and work on various initiatives? Is there a risk that that work in progress needs to be replaced before it actually gets shipped in modules? Like, is there a worry at all that there's a write-off coming associated with that?

Yes. That's certainly not in our plans and if you look at the activity levels we have at the Weichai-Ballard joint venture with a customer base we are seeing the engagement around the existing product we have. There haven't been discussions with the end customers about looking at next generation but that's always a theoretical risk I suppose, Mac.

Okay. Regarding the launch announcement and its public disclosure, do you anticipate a ramp-up in demand or at least an increase in shipments? There may be some pent-up demand since you’ve been engaging with customers. Therefore, you should be able to ship significantly more products compared to the original plan, which I would expect would have been a more gradual ramp-up. Can you discuss how you plan to effectively start once it’s activated?

Yes. I think this is a coil that is spring-loaded and ready to unravel. I do think though, we'll have to wait and see what the final policy arrangements are and what kind of behavior that suggests. Our expectation is a kind of the first to post type of approach where higher points will be awarded for projects first in the field. And if that's the case that would certainly see a lot of pressure on customers to get products out as soon as possible. But we'll have to see what behavior, how the policies end up being shaped and what behavior that implies.

Okay and just my last question is just the clarification that the technology that would go into the Linamar initiative that is directly related to the work you did with Audi, I would imagine, is that fair?

Yes. There is a lot of learnings obviously on a high power density, high performance stack for that market application and of course we have rights to that stack including for the passenger car market. So yes, that will be a safe assumption.

Okay, great. Thanks, Randy.

Thanks, Mac.

This concludes the question and answer session. I would like to turn the conference back over to Randall MacEwen, the CEO for any closing remarks.

Great. Thank you for joining us today. Paul and I look forward to speaking with you in August when we discuss results for Q2, 2021. Thanks again.

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