Ballard Power Systems Inc. Q1 FY2023 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems First Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's first quarter 2023 financial and operating results conference call. With us on today's call are Randy MacEwen, Ballard's CEO; and Paul Dobson, Chief Financial Officer. 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. As discussed in our prior earnings call, we are excited to welcome our analyst and investor communities to our capital market's day on June 13, 2023. We will be providing an update on our long-term business plan, incoming revenue growth by vertical, gross margin progression, our technology and product roadmap, product cost reduction, capital expenditures, and ESG initiatives. I'll now turn the call over to Randy.

Thank you, Kate, and welcome everyone to today's conference call. We started 2023 on a strong footing in our core mobility markets in Europe and North America. We reported combined revenues in our bus, truck, rail, and green segments up almost 20% compared to the same period in 2022. When excluding revenue from China, we've consistently seen increased revenue diversification throughout 2022 and into 2023 across our verticals, regions, and customers, highlighting the resilience of our business model. Order intake momentum continued in Q1 with an order backlog of almost $138 million as we ended the quarter. Our power products business is unfolding with power products representing over $100 million of our total order backlog, a figure that has doubled compared to one year ago. Our 12-month Orderbook has also trended favorably as it grew nearly 30% quarter over quarter to $74 million, providing us with support to achieve our 2023 revenue plan. With an increasingly constructive policy backdrop, we continue to see growing customer engagement across our verticals. At Ballard, our strategy is to commercialize PEM fuel cell technology and products that can be applied across multiple market applications where fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling infrastructure are lowest. These markets include bus, truck, rail, marine, select stationary power generation, and certain off-road markets. I will provide a brief update for these applications. As an introduction to our discussion on Ballard's key market verticals, we're highlighting the change to our revenue segmentation. Effective in Q1, we will no longer be reporting our revenues in terms of technology solutions and our power base categories of HD mobility, stationary, and material handling. Instead of our prior segmentation, we're reporting our revenues in line with key end markets such as bus, truck, rail, marine, stationary, and emerging markets and others. This change reflects the evolution of the market and our strategy of selling and scaling production of fuel cell products with the expectation that technology solutions revenue, as a percentage of total revenue will continue to increase over time. Additionally, we believe this increased transparency will help highlight specific adoption trends within our investment community and can more effectively align results with their own forecasts of end market adoption of fuel cell products in the medium to long-term. In our bus vertical, quarterly revenue was up sequentially and also quarter-over-quarter, and our order backlog for bus orders is up almost 30% over the same period. Additionally, there are open tenders for close to 500 fuel cell buses in Europe, expected to close in the first half of this year. These tenders should lead to subsequent order activity in this segment, driving delivery starting in 2023 and through 2025. As an example, our customer Solaris recently announced that it won an order for 52 fuel cell buses from Gustavo, Germany, which we expect to move into our order book later this year. We're also excited that we've onboarded three new bus OEMs with bus platforms powered by Ballard entering the market. Moving to the truck market, while revenues in this segment were roughly flat from the prior period, declining revenues from China during this period have masked the seven times growth we've seen in our truck market outside of China compared to Q1 2022. The majority of our revenues in the quarter were driven by European fuel cell truck market opportunities. Going forward, we anticipate revenue activity in this segment to accelerate in the second half of 2023 and in 2024, supported by an order book and sales pipeline. To be clear, the truck market is in the very early phases of fuel cell market adoption. However, we've seen a clear shift in the past six months, driven by strong customer interest in decarbonizing freight, resulting in an increase in OEMs evaluating development programs for new heavy-duty truck platforms. There is a heightened understanding of the relative merits of fuel cell electric powertrains in meeting duty cycles with high range, high payload, or high energy demand requirements. We believe our track record of proven safety, reliability, and durability, along with our product offering, roadmap, and our ability to support the integration of our products in fuel cell powertrains position us strongly to bring substantial value to OEM customers and our shareholders. We continue to make important progress in the rail market. We successfully delivered modules to CP Rail for locomotive projects. Our current order book for rail customers is weighted towards the second half of 2023, including anticipated deliveries to Siemens and Stadler. Additionally, in the near term, we expect a meaningful follow-on order from one of our rail customers as they start transitioning to deploying a greater number of fuel cell trains. Our marine vertical continues to see strong customer interest, and we expect to deliver the majority of our close to $5 million in order backlog this year. While we continue to make steady progress with our partners in the marine market, we also recognize that adoption is still in the early stage, which will drive lumpy revenue from quarter to quarter. We're pleased to announce a significant deployment milestone: the MF Hydra, the world's first liquid hydrogen-powered ferry, has now entered passenger service in Norway. The ferry is powered by 200-kilowatt fuel cell FC wave modules and can carry almost 300 passengers, eight crew members, and 80 vehicles at a speed of 10 knots. As a result of the liquid hydrogen storage, the MF Hydra is able to sail up to 21 days before refueling and will decrease carbon emissions for this route by up to 95%. In our stationary power market, we received a follow-on order from a stationary power customer for 3.6 megawatts, comprised of 36, 100-kilowatt modules. This was the primary driver for our 25% increase in backlog relating to stationary power customers. We're very pleased with this order as we support these customers in developing and demonstrating their stationary power units, and this customer is now choosing Ballard as their supplier for larger production runs. For our emerging market segment, we note that this segment benefited from the Audi technology service contracts throughout 2022, which has now completed. This will be a headwind for comparative periods in 2023. We're optimistic about the rest of the year’s performance supported by a 25% increase in backlog compared to Q4, driven by orders from our off-highway and material handling customers. Of particular note is our customer First Mode upsizing their purchase order in Q1 from 30 to 35 modules for Anglo Mining haul trucks, with module shipments expected in 2023. Wrapping up our vertical-based discussion, we want to remind everyone of our anticipated revenue split that we see approximately a weighted 30% towards the first half of 2023 and the balance in the second half of the year. For the next portion of the call, we'll discuss our key geographic regions, including updates on policy and our performance in each market. Europe has been a consistent proponent of hydrogen policy for the past several years, and it's continued that support with a number of new developments. Perhaps the most promising development is the agreement reached on the alternative fuels infrastructure regulation. That will lead to the installation of one hydrogen refueling station every 200 kilometers along the main EU highways and in large European cities by 2030. This target is expected to result in 656 stations built with supportive EU funding, removing a key barrier to the adoption of hydrogen vehicle deployment in Europe. Europe is the largest geographic contributor to our revenues in Q1, consistent with Ballard's geographic revenue breakdown in 2022. Orders from European customers are also the largest component of our order backlog and order book, accounting for approximately 62% of our total order backlog at the end of Q1. In the U.S., major policy announcements in 2022 will begin to create on-the-ground changes this year and next year, starting with the hydrogen hubl selections and the awards of low-no funding expected in Q3. Meanwhile, federal government agencies are working on finalizing the implementation of the IRA bill, leading to clarity for project developers sometime later this year. To cap these tailwinds off, CARB recently announced an advanced clean fleet policy that will require all California commercial fleets of 50 or more vehicles to purchase 100% of new vehicles with zero-emission powertrains by 2036, with initial purchase requirements beginning in 2025. Just over a year, the U.S. has leapfrogged to a leadership position in global hydrogen policies. We now see strong support across the value chain and ecosystem, including substantial support to develop the supply of low carbon, low-cost hydrogen, combined with purchase price incentives at the state and federal levels for fuel cell-powered vehicles. We believe that these policies address many of the friction points in adopting fuel cell vehicles and look forward to the U.S. constituting a greater proportion of our business than in prior periods. An exciting accomplishment achieved in the quarter was shipping the first FC move HD Plus module manufactured from our newly commissioned Oregon facility. This additional module assembly capability will enable us to better serve this growing American market, while enabling our customers to take advantage of federal funding programs with Buy America provisions. We continue to assess opportunities to further strengthen our U.S. platform in what we expect will be a high-growth market from 2025 through 2030. Now, moving to China. As previously discussed, we believe China's fuel cell electric vehicle complicated policy environment continues to stall the development of the fuel cell vehicle industry. This has been evidenced by a year-over-year decline in sales volumes in China for the first quarter of 2023. We continue to be disappointed with the delayed adoption in the China market and low activity levels at the Weichai-Ballard JV, which will weigh on our 2023 results. We are working closely with our Weichai-Ballard joint venture to unlock growth in the China fuel cell bus and truck markets. Our management team has begun traveling to China regularly since the country reopened to international travel and will continue to work with policymakers to shape a more constructive environment; I will be personally traveling to China tomorrow and will be there over the next few weeks. I will be providing an update on this topic at our capital markets day in June. Now, moving to our financials in the quarter. In Q1, Ballard delivered $13.3 million in revenue, with approximately 70% of our revenues coming from Heavy-Duty Motive applications. While we're just continuing our reporting of technology solutions as a standalone offering, our product revenues represented over 70% of our revenues in Q1, further cementing our strategic shift as a technology products company. As we've discussed in our Q3 and Q4 2022 calls, continued gross margin pressure was partly affected by our pricing strategy to secure customer platform wins. The further downward pressure on gross margins in Q1 was driven by a combination of a shift in revenue mix towards our products, low absorption of our manufacturing overhead costs, increases in supply and labor costs, and inventory adjustments. While we expect challenging gross margin dynamics to persist into 2024, as our volume ramps up and our product cost reduction initiatives move into production, we also see this quarter as a low point for the year, subject to one-time charges. We'll provide an update on our gross margin progression at our capital markets day. We reported total operating expenses of $37.5 million in Q1 and capital expenditures of $11.6 million for the same period. We expect these levels of spending to be roughly flat each quarter for the rest of 2023 and maintain our guidance for total operating expenses and capital expenditures. Given the macroeconomic outlook and rising geopolitical tensions, and in the context of our 2023 annual operating plan, we continue to review our spending carefully to assure we're appropriately investing in our growth strategy while also maintaining a strong balance sheet. We ended Q1 with $864 million in cash and no debt. Ballard is well-positioned with industry-leading talent, fuel cell technology, and products for our market applications. Key customers and partners across our target markets, a growing product order backlog, industry-leading deployment experience, and a strong balance sheet. We're confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. And with that, I'll turn the call back over to the operator for questions.

Thank you. We will now begin the question-and-answer session. First question is from Aaron MacNeil from TD Cowen. Please go ahead.

Morning, and thanks for taking my question. Randy, I can appreciate that you're going to get into way more detail on this with the upcoming capital markets day. But I was hoping you could just give us a bit more insight into your pricing strategy. Specifically, are you pricing your products to compete against other fuel cell providers or against a broader menu of zero-emission vehicles? And what do you view as your long-term gross margin target for your power products? What sort of product cost reductions do you need to achieve to get there based on the prevailing pricing strategy?

Yeah, Aaron, great questions. Just in terms of the pricing strategy, I would say there are three elements to it, and I think you've highlighted two of them. One is the differences between different technologies that are available, including incumbent technology and battery electric solutions. Making sure that we're more competitive, absent, that type of pricing strategy is important. Secondly, we are seeing a more competitive environment in terms of other companies offering fuel cell products. They don't enjoy the same market position we have, and so understandably are being very aggressive in their pricing strategies. But the key one I would highlight, Aaron, is the fact that in low volumes today and where hydrogen supply costs are today, the customers don't have a strong total cost of ownership economic value proposition at the moment. What we're seeing is a timeline where that total cost of ownership crossover occurs as the availability of low-cost, low-carbon hydrogen comes online, as our product cost initiatives move into production. Importantly, not just Ballard fuel cell products, but also other parts of the value chain continue to contribute to cost reduction. We see then, effectively, a TCO crossover that will be a catalyst, an enabler for high levels of adoption. So, at the moment, with a stretched value proposition and a gap in that value proposition, we think it's important to be pricing to get market adoption, get deployments, and get field experience. With these customers, whether it's bus, truck, rail, marine, or some of these off-road customers, we believe once we're in the platforms, we’re very sticky, and we have long-term staying power with these customers. So, we think the pricing strategy is appropriate given where the market conditions are at in the state of maturity and adoption, as well as some of those competitive dynamics you alluded to. In terms of the gross margin target, I'm going to leave that one for the capital market today because we'll have, I think, a pretty good commentary on that at that time. In terms of long-term gross margin targets, obviously, they will be far, far in excess of the current run rate that you're seeing, particularly as we move to higher volume. I do want to comment on your last point, Aaron, about product cost reduction. We've launched a number of product cost initiatives, including reducing the core technology, both MEAs and bipolar plates, leading to much lower costs on our stacks, as well as balance of plant components that appear in our modules and additional items like DC converters. Now with the capabilities we have at BMS at Ballard, UK, the ability to help customers integrate the fuel cell into their powertrain more cost-effectively and optimize that solution we think will all help contribute to effectively reducing costs for customers and reducing our product costs. We see a very clear pathway that I have high confidence in regarding our product cost reduction that will significantly outstrip pricing reductions that we see between now and 2030, leading to significant gross margin expansion. Again, we'll comment more on that at the capital markets day. Let me just pause there and see, Paul, if you have anything you want to add.

No, I think that's pretty thorough.

And then there's my follow-up on the recent shelf filing. Obviously, there's no obligation to go out and raise capital, but based on all the information you have today, what form of capital do you think is most likely in the event that you would go try to raise capital? Understanding that the shelf covers a 25-month period, do you think we'll see a return to the at-the-market equity program or layering on some debt or some other sort of capital instruments within that time period?

I think the way you should kind of view the shelf filing is very much a housekeeping matter. It's important to have that capability to access the capital markets quickly. But absent a significant M&A transaction, we're not actively pursuing corporate development as a priority right now. We think it's important to protect the balance sheet. We see it as very unlikely we will be accessing that shelf during that 25-month period. There'd have to be a very compelling reason for us to do that, which we don't foresee today. So, I would view that very much as housekeeping. We have sufficient capital to take us well past that shelf filing. If it would be kind of an extraordinary circumstance, in my opinion, we would be accessing that in the near term.

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

Hi, good morning. Randy, when you worked through your opening remarks, you highlighted the strong points in Europe and the U.S. coming around? I just want to come back to you on a question that's come up over a few quarters now, particularly regarding the investments in China, relative to some of the investment opportunities that might be emerging in Europe and North America. Do you think the company could redirect some of that capital into those markets?

There are a couple of things at play here. One is we still have a very strong conviction on long-term adoption in China. As China gets its policy sorted, and that market starts to see growth again, particularly scaled growth, we're going to see all three markets contributing, which we're very excited about. Effectively, we are currently seeing the two markets contribute. However, as you heard in the opening comments, we continue to look at how to strengthen our platform in the U.S. We're seeing a lot of market opportunities, but also funding opportunities in the U.S. to support manufacturing capacity expansion. We're seeing a similar trend in terms of market adoption in Europe, and funding support in Europe as well. As we look at our local-for-local strategy and global manufacturing capacity through 2030, the U.S. and Europe are certainly top of mind.

And then just in terms of the bus order market in Europe right now and the 500 tenders that are outstanding, what would you expect, or what would be your target for market share on those bus orders relative to what you would have achieved in the past?

We're still seeing a very strong market share in the bus market segment. I would expect us to be in the plus 85%, 90% range for market share for bus orders. That might even be higher in the very near term. I believe we're going to see more competitors with other product offerings coming to the market over the next few years. But we're very strongly positioned not just in Europe, but in the U.S. as well.

Okay. And would we be able to see that come through in your order flow, like in your press releases that we will be able to track that market share?

Yeah. So, I think we will be providing some market share commentary during the capital market day. But I think the way to think about it is not so much market share, but in terms of when you see that coming through. You do see publicly announced from transit authorities that they're going to fuel cell buses or from the OEMs that they've won awards. So that's one timing data point. For us to keep timing data point is when that translates to an order to Ballard from the bus OEM. And there can be a lag time anywhere from three to six months, up to 12 to 24 months we've seen. It's very difficult to predict when those public announcements by transit authorities and OEMs translate to orders to Ballard. But in terms of market share, we will provide more visibility on market share at the capital markets day, but it's a very high market share.

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

Good morning. Just sort of following up on that European bus opportunity. The 500 units could use context on how that's grown and where that program is going. I know a few years ago it was much smaller. But where is that program at today?

Yeah, Rob, thanks. There are tenders out for circa 470 fuel cell buses in Europe right now. What's interesting to me is we used to talk about deployments of 2, 5, or 10. We're now seeing larger deployments. There are a number of cities that are still adopting 10, 16, etc. But now we're starting to see much larger orders—25 for a city in Poland, for example, and 31 for a city in Germany. And you're seeing now 52 for another city in Germany and two cities in Europe that will be ordering over 100. Moving to the U.S., you have Foothill Transit with over 30, and there are other cities that have large orders that are coming through. We're seeing that transit operators have trialed both fuel cell buses and battery electric buses in low volumes. They've made a determination based on their range requirements, total cost of ownership, and duty cycles, access to energy in whatever form that is whether it's molecules or electrons, and we're seeing cities deploy larger fuel cell buses after having gotten comfortable with the availability and uptime, and are now moving to larger orders. I think this trend will continue not just through 2023 but also into 2024 and 2025, particularly as the number of bus OEMs offering fuel cell bus options continues to expand.

And I know you talked about the IRA, and I understand it's working through the treasury process. But what have you seen regarding OEM response to that in terms of getting vehicles planned and developed in your interaction with them in the U.S.?

What I would say is that whether it's bus OEMs, truck OEMs, or even rail, we're seeing a lot of eyes that were previously focused outside of the U.S. turning to the U.S. market. I think you're going to see a number of OEMs announcing fuel cell activities, whether it's development programs or deployments. We have two or three projects that we're making very promising progress on, that have North American exposure. We expect to have some announcements on that later this year.

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

Hi, good morning. Randy, you talked a little about some competition you see in the market and some aggressive pricing from competitors. Can you give us a sense of how your competitive position is evolving, any competitive threats you see, and if this is leading to changes in your long-term strategic plan?

To me, I would say the big change that was impacted in our strategic plan occurred when we acquired BMS. What we were seeing on a competitive front is that a number of companies that aren't just looking at the fuel cell engine market opportunity, they have capabilities at the powertrain level. Think about companies like Bosch, for example, and Cummins. For us, the ability to provide OEM customers with powertrain integration capabilities is very game-changing for us and really helps us enable us on a competitive positioning front. When we look at the safety record, reliability, uptime, availability, durability, and field experience, no one comes close to Ballard in these verticals in our core markets here in Europe and the U.S. So, we're very well positioned. While I do think that some of the newer entrants are looking at pricing as a way to secure customers when they're not able to point to some of the other key metrics. I would comment that the stickiness with platform wins is significant. We've invested a lot with these customers over a long period of time. I'll just use the Siemens example again, where for six years they worked on a fuel cell train. We worked on the fuel cell engine; they’ve now launched that train, and we have a letter of intent for 200, with a purchase order for 100 engines. There’s a lot of loyalty and a preferred/exclusive position based on the investments that have been made by both of us during that period of time. It's the same in the bus market, where we've been working with some of these bus OEMs for years. And they have gained confidence in their deployments. I would say the truck market is newer, but we’re very excited by some of the progress we're seeing in that market. Durability is a very significant differentiator, and I don’t think any company can show durability numbers that come close to Ballard.

The next question is from Mac Whale from Cormark. Please go ahead.

Hey, Randy. You talk about that tender increasing in the bus space. Is that in general leading or lagging behind the hydrogen infrastructure? I'm trying to get a sense of whether the infrastructure is getting to the point where it's translating to larger orders.

It's neither. These typically are situations where you have on-site refueling at transit depots. Rather than having a diesel refueling station, they're having hydrogen refueling. To be clear, what I'm indicating is this has nothing to do with the rollout of public refueling infrastructure, whether that's for passenger cars, trucks, or other market applications. This is one of the key risk mitigation strategies in our approach, initially focusing on these markets where you have centralized refueling and tethered vehicles. I do think the funding though is probably the missing piece for these deployments. The funding is both for buses and for the refueling infrastructure. That's typically the kind of lagging item in terms of when these deployments actually move from concept to order book and deployment. I don't want to comment on the number of countries that we're seeing elevated activity in at this time: Germany, Italy, Poland, Spain—all of them have very robust programs around hydrogen.

So, when you look at that, can you actually use that as a tool for forecasting? Can you look at what they're investing and say, okay, these orders they’ve put out indicate excess fueling capability, like they're going to have or will likely buy more over time? I'm trying to get an idea of whether it actually helps you know where the next orders are likely to come from?

The way I would characterize it is that the availability of low-cost, low-carbon hydrogen across China, Europe, and the U.S. is the big unlock that will occur, including for the bus market. Some of the economics in the bus market are stretched with current hydrogen costs, particularly in the last year when you had elevated natural gas prices, and a number of the supply lines in Europe are still based on natural gas reforming. However, as renewables generate low-cost, low-carbon hydrogen, we think that's the big unlock. All these markets in Europe are expected to see pretty significant scale-up in hydrogen supply between 2025 and 2030.

And when you look at that can you are concerned with the increasing numbers of engine makers talking about using hydrogen in the ICE architecture? What are your thoughts on that as a threat? Or is it helping adoption? What is your high-level view?

The way you might view that, it’s a topic that you're hearing from different parties about the ability to use existing internal combustion engines running on hydrogen fuel. It’s a topic, not actually an offering. You'd be hard-pressed to point to any deployment of a hydrogen ICE at this time, and I don't see that changing in the very near term. Looking to the mid and long term, the reality is that you are completely eliminating all emissions by using fuel cells, which have much higher efficiency levels. So, from an economic value proposition, we believe fuel cells are an absolute winner.

Lastly, if I may, one more related question. You were asked about competition, and you talked about some players. Some of those players you’ve been competing with in the market for some time now, for decades in some cases, yet you still have this lead on all those metrics you mentioned. What do you attribute that to for those who want to understand better your capabilities? What do you see as the reason for maintaining that leadership?

Fuel cell technology is complicated. It requires a sustained investment over a period to understand the failure modes and provide a reliable, high uptime, high availability, and high durability product. A number of those companies have been investing at more modest levels, historically, and their investments are cycling up as expected given the market opportunity. They still have to put in the time to develop the products, test and validate them, find the failure modes, and work from there. The encouraging thing here is that the supply chain is advancing significantly. The materials available, whether for catalysts, gas diffusion layers, membranes, ionomers, or plate materials, have improved as well. The balance of plant components is going through a major change that will have much higher reliability components. If we look at where we do have field issues, they almost invariably relate to balance of plant components, not the Ballard fuel cell technology. These components will lead to higher reliability, uptime, and durability for the long term, which is good for us all. But I think we're leading the charge in working with a supply chain on these materials.

The next question is from Ameet Thakkar from BMO Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my question. Just one quick one for me. I believe the plan was to invest about 47.5% of $130 million in the MEA facility in China. Yet there was nothing in the cash flow statement for that quarter. I was just wondering if you could update us on that plan and what they would like to achieve throughout the year?

I think we're just giving geopolitical context. Obviously, we're delaying and pushing that cash spend out. Total year CapEx will be consistent with guidance, and we'll see some of that getting picked up later this year.

The next question is from Chris Souther from B. Riley. Please go ahead.

I understand that the new segments and structure makes sense as technology solutions continue to wind down. Can you give us a sense of what the overall previously TS revenue was in the quarter? I just wanted to frame what the contribution was for a clean go forward? And then maybe on the backlog as well. Curious if you can break that down by the new segments and geographies and if there's any technology solution still in there?

Yeah, it's around $13 million of revenue, roughly 30% of that was in the TS business with the balance being in Ballard products. That represents a reduction we've seen over time. We've had the Audi contract that you've talked about in the prior quarters winding down now and our activity with Weichai is also less. We're looking to add another TS contract with Weichai potentially this year. We'll have to see how that goes. But the emphasis is clearly on the power products. We think there's a lot more long-term value in power product sales, repeat orders, and service revenue from power products versus TS types of business.

Chris, this is really what we've been hoping for looking for a long time at Ballard, where we're moving from a market where you have large OEMs that want to trial and have optionality on fuel cell technology by making investments. They didn't have the in-house capabilities, so they used Ballard. Audi is a great example where we developed a fuel cell stack for an Audi passenger car. Now, what you're seeing is a transition in the markets. First of all, a clear recognition of the value proposition that is strongly resonant in the medium and heavy-duty motive applications. You're also seeing vehicle OEMs looking for a supplier of engines, not simply a supplier of services to develop a product for in-house capabilities. So, we're seeing a pretty significant shift, and this is where the ongoing long-term value has always been contemplated in our business.

That makes sense. Could we get a breakdown on kind of the backlog between the new segmentation, as well as geography? I just wanted to get a sense. Sounds like it's very Europe and North America heavy, but a breakdown by segment would be appreciated as well.

In terms of geography, it's probably around 55% for Europe, about a third for the U.S., and China and rest of the world would be the remainder. What's interesting is when you look at it by application, it's very diversified; it's showing up in our revenue, order book, and sales pipeline. This diversification that we talked about is what we want to see through to 2030 and even 2035, where we have high revenue being contributed from various verticals, geographic regions, and customers with a lot of resiliency in our business model. It's about a third in the bus market segment, about a third combined for truck and rail, and another third for the remaining segments.

The next question is from Craig Shere from Tuohy Brothers. Please go ahead.

The quarterly breakout of revenue by bus, truck, rail, and marine is very helpful. It kind of raises the question we've talked about before about timing for breakout in different categories. If I envision a breakout in a category being consistent comfortably in the double-digit quarterly revenue area, would it be reasonable to think that for buses, we might see that at some point next year? How does that look for truck and rail? Is it the following year and the year after that? How do you think about this?

We'll provide a bit more color on this capital market day, including profiling some of the platform wins we have and how we see that translating moving forward. The way to think about it is we've talked about bus, truck, rail, and marine in that order for a long period of time because that's the order of market adoption we forecasted. Bus first, truck second, rail third, marine fourth. What has been interesting is that the bus and truck market have taken a bit longer than we expected, but rail and marine have probably been faster than expected over the last few years. I do think that all four of those market segments are going to see nice growth rates moving forward, so we're very excited about that. I want to highlight that rail, marine, stationary, and off-road segments are larger power applications, meaning we'll see much lumpier orders in those market segments. I think we could see a lot of variability in revenue from those segments quarter-to-quarter, but overall, the trend will be for growth. So, we expect steady growth in bus and truck, while rail, marine, and stationary will see lumpiness quarter-to-quarter.

That's helpful. You mentioned a few times about geopolitical tensions and that you're trying to conserve cash and delay some of your originally front-loaded CapEx in your latest China investments. Are you still committed to what you had announced in China? Are you in a position where you might make similar size announcements somewhere in the U.S. or Europe? Or do you feel, as you mentioned in some quarters ago that your global manufacturing is mostly covered, with your needs primarily addressed through Canada and China?

I do think Craig there's clearly deglobalization and decoupling occurring. There’s a strong push in the U.S. for U.S. manufacturing, and a similar trend exists in Europe. Of course, China has local policies that require several parts of the value chain to be localized to avoid import duties. There does seem to be a bifurcation occurring among these markets. There are areas where we see the need for additional investment. One of them currently involves a significant part of our announced CapEx plan focused on next-generation bipolar plate manufacturing to dramatically lower costs. We've done important work over the past few years on MEA cost reductions, and you'll see that moving into production in the coming years. We’re also working on bipolar plate manufacturing and meeting U.S. manufacturing requirements at top of mind for us. In terms of additional investments in those markets, we're carefully studying opportunities in both Europe and the U.S., including what type of investment size makes sense. I don't foresee a scenario where the investment size is similar to what we've profiled for China, given the many different variables involved. We remain committed to the China market and continue pushing forward as we see it being the largest global market for fuel cells between 2025 and 2030. However, we're tracking developments carefully each week.

The next question is from Kashy Harrison from Piper Sandler. Please go ahead.

Using Europe and the U.S. as frame references, can you speak to what the delivered liquefied fuelling cost of hydrogen would need to be to make the TCO map work in your various segments: bus, truck, rail, and marine?

The way to think about it is that a total cost of hydrogen delivered—this isn't just hydrogen production, but delivered to the vehicle at $5 per kilogram or €5 per kilogram—effectively unlocks half of the global market. That's a target the industry is moving towards. With the subsidy support both in the U.S. market and a similarly aggressive policy posture in Europe, we're seeing comparable outcomes. We expect to see hydrogen fuel cell availability below $5 with that $3 PTC. This aligns very well with a hydrogen price that unlocks the markets we focus on.

That’s very helpful. Circling back to your prepared remarks on guidance. You've indicated the first half would represent 30% of full-year revenues. How should we think about Q2 revenues? Does your guidance contemplate a return to growth this year in China, or do you assume a return to growth occurs in subsequent years?

I don't think we're going to see a significant leg up in Q2. It is very back-end loaded in our revenue plan for 2023. It doesn't contemplate significant additional activity in China, so there’s no risk on China market adoption in a material way for our 2023 plan. A small amount of revenue is contemplated there, but it's very manageable.

As we look forward to Q2, Q3, and Q4, we consider what's in the order book and backlog. We're fairly confident we should see some increasing revenue in the near term, and that will impact our gross margin. Part of our gross margin reduction in Q1 is because of a lower amount of revenue spread over a fixed overhead cost. As revenues rise, that will naturally impact gross margin positively as well. We would expect to provide more color on that during our capital markets day.

Got it. That’s helpful. So, effectively, the gap between the actual gross margins and your expectations, as stated in the last call that Q4 would be the trough, is really just the lower revenues and less fixed costs absorption on that front?

That's certainly a significant part of it. The gross margin from Q1 last year was minus one versus minus 42. The lower revenue spread over the same amount of fixed costs accounts for roughly 16 points of the difference. In addition, we had a shift in the product mix more in favor of power products, the pricing strategy to secure more platform wins, as well as a few other adjustments for higher material costs and some inventory adjustments that we don't expect to be recurring. While there are revenue increases, we expect that gross margin will almost certainly rise this year, overall.

The next question is from Jordan Levy from Truist Securities. Please go ahead.

Thanks for taking my question. On a high level one for me. Just thinking as you continue to shift toward products from tech solutions, are there any strategic changes in how you're thinking about your sales and marketing efforts over this year?

I wouldn't say there's any change in how we're thinking about our sales and marketing efforts for these verticals. The significant change, in my opinion, is our ability to offer powertrain integration. That's a significant development in how we’ve been offering our products, not simply the product itself but also the integration of that product. Also, I expect that our product will evolve with different components coming into it over time, which will make it a more comprehensive solution for customers.

The last question is from Greg Wasikowski from Webber Research. Please go ahead.

Hearing a lot of momentum in the EV charging space using hydrogen and other alternative fuels for other similar off-grid or micro-grid type solutions. I know you aren’t in the business of hydrogen production, but most of those solutions would require a fuel cell. What are the inbound inquiries been like, and how do you think about that within your plans for stationary power?

Great question. We profiled a bit earlier the order for 3.6 megawatts, which reflects what you're referring to. Off-grid opportunities, micro-grid opportunities, and cases where you have recharging tied to the grid but face grid congestion or unreliability. We’re seeing many applications for fuel cells—data centers, EV charging requirements, construction sites, and all are examples where PEM fuel cells offer compelling value propositions. I believe we’ll see a growing sales pipeline translating to order books within this category over the coming years.

Thanks, Randy. Following up, I know we've talked about competition and more fuel cell stack providers. But I guess I’d ask, with new entrants, has it been easier or harder for you to demonstrate your quality, reliability, and durability? It could be interpreted both ways. More competition can make differentiation easier, but also muddy the water. Part two: Is there a risk or should concerns over faulty or inferior tech arise that might reflect poorly on the industry as a whole as adoption scales?

When you have early market adoption and new players entering the market, there’s always a risk of safety issues or reliability concerns appearing in the field. Many companies prioritize their brand's reputation, particularly vehicle OEMs with their badges on the front of buses and trucks. They care deeply about safety and reliability, which is why Ballard is well-positioned. Many new businesses are entering the market and are increasingly offering products, but one can expect to see high safety and reliability from reputable suppliers like Cummins, Bosch, and Toyota. You may, however, see lower reliability with smaller companies deviating from that standard. The battery space, for example, has seen many battery packs with safety or quality issues coming to light. It's critical for customers to thoroughly qualify who they’re working with, and we believe we stand out clearly due to our track record.

This concludes the question-and-answer session. I'd like to turn the conference back over to Randy MacEwen, CEO, for any closing remarks.

Thank you for joining our call today, and we look forward to speaking with you in June at our capital markets day.

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