Ballard Power Systems Inc. Q2 FY2023 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2023 Results Conference Call. Please note that all participants are in listen-only mode and the call is being recorded. After the presentation, there will be a chance for questions. I would now like to introduce Kate Charlton, Vice President of Investor Relations. Please proceed.

Thank you, Operator, and good morning. Welcome to Ballard’s second 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. In June we hosted our 2023 Capital Markets Day. During the event, we provided an extensive update on the progress that Ballard has made while also providing additional transparency on our expectations for our business. In case you missed the event, the webinar and presentation are available on the Investors section of our website. Consequently, we have intentionally kept our remarks today brief for this quarter. We will be making forward-looking statements that are based on management’s current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I will now turn the call over to Randy.

Thank you, Kate, and welcome everyone to today’s conference call. We are making important progress on our strategic priorities as communicated at our 2023 Capital Markets Day. During Q2, we grew our order book, invested in next-generation fuel cell products, and continue to drive our product cost-reduction programs. We continue to see growing customer interest across our market verticals, which is reflected in $25.1 million of new orders in Q2 and a growing sales pipeline. Importantly, our power products backlog is now up over 140% compared to the prior year period. We are particularly excited about the growing customer engagement levels in the U.S. and European markets. As a result of an increasingly constructive hydrogen policy landscape and increased market activity in the U.S. and the EU, and given the continued hydrogen and fuel cell policy uncertainties and market delays in China, we are accelerating our work on our local-for-local global manufacturing plan and related future capital allocation plans. Specifically, we are reevaluating our previously announced MEA localization plan in China pending completion of a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the U.S. and/or EU markets. We expect to conclude this important work in early 2024. We continue to track to our full year guidance ranges for operating and capital expenses. Our investments prioritize technology and product development programs, product cost reduction initiatives, customer platform wins, customer experience, and advanced manufacturing. 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 our fuel cell technology provides the strongest value proposition and where barriers to hydrogen refueling infrastructure are lowest. These markets include bus, truck, rail, marine, as well as select stationary power generation and certain off-road markets. We will provide a brief update for each of these applications. In our bus vertical, the tendering activity for fuel cell buses has begun to translate into our order book and backlog. This was highlighted by the 96 engines order from Solaris from three European cities, including Gustrow, Germany, which has ordered 52 fuel cell buses for deployment. We are also seeing exciting activity in the U.S. fuel cell bus market as we recently received significant orders from our customer New Flyer during the quarter. Given the ongoing tendering activity for fuel cell buses, we expect material additional orders for our bus customers over the next 12 months. On the truck market, and as we have discussed before, the truck market is in the early innings of fuel cell adoption with most truck OEMs and integrators focused on developing fuel cell truck platforms. In this regard, we are delighted that Ford Trucks, after a competitive process, has selected Ballard as their fuel cell partner as they develop their hydrogen-powered F-MAX platform with our engines inside. We see this partnership as indicative of our technology capabilities and increasing OEM interest in fuel cells as they understand the value proposition of fuel cell electric powertrains. Our partnership will support Ford as part of the European ZEFES project to demonstrate zero-emission long-haul trucks in major freight corridors from now through 2027. As Ford’s fuel cell F-MAX truck platform matures, we anticipate this partnership evolving into a long-term scaled deployment level module orders and supply arrangement. Despite ongoing challenges in China for the fuel cell market, our partner, Wisdom Motors, recently signed a purchase order for almost 150 fuel cell-powered refuse trucks for delivery to the Australian market. We invested in Wisdom last year to accelerate their efforts to build a portfolio of world-class fuel cell-powered heavy-duty vehicles, including buses and trucks, using engines exclusively supplied by the Weichai Ballard JV. The level of innovation at Wisdom is remarkable as they have announced this deployment scale order only five months after delivering an initial demonstration truck. Wisdom has also signed a cooperation agreement with our Australian customer to deliver 12,000 hydrogen-powered trucks over the next five years. In rail, we received a follow-on order from CPKC to deliver additional modules in 2024 as they expand their hydrogen locomotive project. For our marine vertical, we continue to see growing interest in short-sea container ship, inland cargo, and barge applications, which we anticipate will result in order activity later in the year. The MF Hydra ferry vessel has now operated over 1,500 hours since it began sailing regularly in March and continues to clock about 100 hours of operation per week, validating the performance and reliability of our fuel cells in the marine application. We are also pleased to report that our marine module has received Type Approval from Lloyds, adding to the Type Approval we had received from DNV in 2022. In our stationary power market, we received a $2 million order during the quarter for one of our systems to provide power to an EV charging site in Germany. Separately, after the quarter ended, we shipped our 1.5-megawatt ClearGen-II system to the Microsoft data center in Wyoming, having passed factory acceptance testing with Microsoft and Caterpillar representatives on-site. The system will begin its demonstration in mid-September, and we expect it to be another major proof point of the value proposition of our products in the data center market opportunity. We continue to see interest in our stationary products growth for EV charging, grid balancing, data centers, and mobile power solution applications. We experienced solid backlog in our emerging market segments driven by orders from our customer First Mode, who is deploying ultra-class mining haul trucks for use on Anglo-American's mining sites. Our partners now order close to 100 modules year-to-date, and we expect to realize revenues this year as we ship a portion of this backlog in the second half of 2023 and the remainder into 2024. As we look into the second half of 2023, our investors can look at three key milestones we are set to accomplish: first, we expect to sign material purchase orders with customers in our bus and marine verticals; second, we plan to substantially complete our global manufacturing strategy; and third, we anticipate ending 2023 with a robust 12-month order book to provide a strong coverage ratio for revenue in 2024. We believe Ballard is set up for a strong second half of 2023 with sequential quarterly revenue growth and continued progress on our order book to support 2024 revenue. We also maintain our view that the revenue split between the first half and the second half of 2023 will be roughly 30% to 70%. With that, I will turn the call back over to the operator for questions.

Thank you. The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Good morning and thanks for taking my questions. Randy, as it relates to the location of the MEA manufacturing facility, are you essentially just waiting for the IRA rules to be finalized, and if I am on the right track with that line of thinking, what’s sort of the tipping point in terms of the IRA rules for you in terms of where Europe or the U.S. becomes more attractive? And maybe I will sneak one more in just to give us a sense of what you are hearing in terms of where you think the rules will ultimately shake out at all?

Sure. Aaron, that’s a crucial question and an important factor to consider. Taking a step back, we need to identify the jurisdictions with the most favorable policies for adopting low-cost, low-carbon hydrogen and where we see the deployment of fuel cell vehicles. This is critically important. Furthermore, we observe several regions exploring ways to support companies that aim to localize production across the hydrogen fuel cell value chain. There are two main aspects to this. One is the specifics regarding the IRA implementation, particularly how green hydrogen will be measured. The other is understanding what policy support and subsidies are available for manufacturers looking to establish local operations. Both of these are factors we are examining and advancing, while we are carefully tracking the first and pursuing funding opportunities in all three regions. This is significant. Additionally, we need to consider our proximity to customers, end users, suppliers, and key talent, along with ensuring that our cost structure remains competitive. Access to low-cost, low-carbon hydrogen is essential not only for our customers but also for our operations, as we aim for low emissions. All these elements are part of our considerations, and while the U.S. market has some pacing items later this year, our activities in all three markets will provide us with a clear competitive assessment by the end of the year.

Makes sense. Switching gears a bit. I am just thinking about the Solaris order you just announced, you mentioned the potential for more bus orders in the next 12 months, and then maybe we can throw in the previous Siemens and Quantron orders. With these larger batches of orders that you seem to prepare, do you think we will start to observe some scale efficiencies play out in the margin over the next couple of quarters, and if so, how would you characterize it in terms of magnitude?

Sure. I'll start with a comment on Solaris and then discuss scale efficiencies and their effect on gross margin. Solaris is a prominent bus manufacturer based in Poland and has been a loyal customer of Ballard. They have been actively promoting both the Urbino 12-meter and articulated 18-meter low-floor intercity buses, and they are a valuable partner. They have already deployed over 110 fuel cell buses equipped with Ballard engines. This new order for 96 buses is very important and involves three cities, including Gustrow, Germany, where Rebus operates. Most of these buses will be fitted with our 70-kilowatt engines on the 12-meter models, while five articulated buses will have our 100-kilowatt engines. Solaris is a key customer with significant activity across Europe. This illustrates a trend where cities are moving towards larger orders of fuel cell buses, ranging from one or two, escalating to 30, 50, and even over 100 for deployment. This shift is crucial as Europe, the U.S., and China gain access to low-cost low-carbon hydrogen, which we believe will significantly benefit not just city buses but all sectors we focus on. However, the current orders from Solaris, along with the ones from Quantron and Siemens, are still relatively modest in volume. They haven’t yet reached the scale necessary to trigger major changes in gross margin the way we're looking for. While they will certainly contribute incrementally, we won't see substantial impacts until we reach thousands of units compared to the hundreds we're dealing with now.

That’s very helpful, Randy. I will turn it back.

Yeah. Thank you.

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

Good morning, guys. I just wanted to talk a little bit about the Ford order; it looks very exciting. Is this something that could scale up, could it scale up across geographies where they are interested in something like this? Can you talk a little bit about that?

Manav, you are correct on both points. It's very exciting and points to future scaling. Ford Trucks is a key heavy commercial brand for Ford, offering a range of vehicles including tractors, construction trucks, and distribution trucks, making them a significant player in the truck market. What they are doing is developing a fuel cell truck platform based on the F-MAX 44-ton long haul tractor they have, and after a competitive selection process, they chose Ballard to integrate our fuel cell engines. We have two 120-kilowatt FCmove-XD engines, totaling 240 kilowatts, as part of the essential ZS program in Europe, which aims to demonstrate long-haul zero-emission trucks in real-world scenarios. At the end of this project, we anticipate being well-positioned as a long-term supplier for Ford due to our relationship. We acknowledge there is work ahead to validate this, but we are confident in our solutions and the products we will offer. This is another example, as Aaron mentioned earlier, of our efforts to secure platform wins. On the truck side, this addition is very crucial alongside our partnerships with Quantrons, Wisdoms, and others. I agree, it's very exciting, and we see significant opportunities as we validate over the next couple of years.

A quick question here is, we had started seeing green hydrogen percolate. You have now got a European refiner looking to source green hydrogen for its refining operations. Yesterday, you had a U.S. refiner who said, look, I am looking to source green hydrogen to make sustainable aviation fuel. I am just trying to understand, do you see this seeping through at some point, hopefully soon, in the transportation market also where companies are like, okay, now I want to switch to a fuel cell, because now I have a much lower carbon intensity, green hydrogen, which I can source cheaper than I could in the past?

I have been saying this for a while. I believe the supply of green hydrogen is likely to exceed expectations. There is significant activity happening globally, not just in our three primary markets of North America, Europe, and China. When you start meeting the companies involved in hydrogen and green hydrogen development programs, or those in the process of acquiring electrolyzers and planning for offtake, it's exciting to see what's unfolding. If you reflect on a year ago, we anticipated around 150 gigawatts of global green hydrogen production by 2030. However, based on the current level of activity and engagement we're observing in key markets, that number could be closer to 250 gigawatts. It's very promising. I believe green hydrogen will initially be used to decarbonize existing gray hydrogen applications, particularly in industrial sectors, which represent a traditional market of about 90 million tons. We will likely see various mobility and stationary power applications emerge, especially with access to low-carbon, low-cost hydrogen. There will be cases where a significant portion of offtake is dedicated to gray hydrogen, while a residual portion will cater to merchant market opportunities in transportation. The customers we have in our markets—buses, trucks, rail, and marine—identify fuel as their primary source of greenhouse gas emissions for transport applications. They have limited options for zero emissions, and hydrogen is poised to become a major component in these key markets for medium- and heavy-duty transportation.

Thank you so much for the detailed response.

Thank you.

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

As you look at where to prioritize your MEA investment, I am wondering if you could speculate on how this could play out for your partnership in the Chinese market. And if you make the investment outside of China, can your Chinese partner participate, or is there a chance they might take a lead on investments in China without Ballard?

Thank you for the question, Rupert. We are definitely committed to the China market and believe in its long-term potential. China is currently the biggest market for hydrogen production and use. Based on my recent visits, I anticipate this trend will continue through 2030 and 2050. There's a lot of activity happening, so it's not a question of whether we will have MEA production in China, but rather when and how we plan it. Like many companies in a deglobalized environment, we will adopt a local-for-local strategy to ensure we have the right assets in the country and region for success. Weichai is our partner in the bus and truck market in China, and they are making significant investments in developing fuel cell buses and trucks. They have done excellent work in the supply chain through the Weichai Ballard joint venture and are committed to this market too. This should not be seen as a retreat from China or from our relationship with Weichai; rather, it is an assessment and reassessment of where to prioritize our next investment.

Okay. Great. So if the investments are made outside China, the understanding is you will be importing MEAs from outside China to meet your production needs until the production is there, is that fair?

Exactly. Yeah. The challenge, just to be open and transparent, the challenge with that model is that there we are expecting to see import duties, and so that could stress gross margins with that variable for MEA exporting to that market. But we fully expect to have MEA production in China when the market is at scale.

Great. I will leave it there. Thank you.

Yeah. Thank you. Great questions.

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

Good morning.

Good morning, Rob.

Could you just sort of update us on the U.S. bus market? How is that developing and how do you see that rolling out over the next couple of years in terms of trials and production ramp?

Yeah. I think this is going to be a bright spot over the next few years, Rob, particularly as we get this access to low cost low carbon hydrogen coming online. We are seeing a lot of activity, not just in California anymore, but across the U.S., with cities now looking at over 30, over 50, over 100 buses in some cases. I think this is going to be very exciting over the next 12 months to 24 months as some of these cities move from tendering activity to actual procurement, and I think we are very well positioned in the U.S. market. We have a very high market share today. We expect that to continue. Our key partner in the North American market is New Flyer, and they have about two-thirds market share for city buses in new city transit buses in North America, and they have both 40-foot and 60-foot articulated buses validated with Altoona testing with Ballard engines inside. So we are very excited about this market. Nothing I can share in terms of actual sites today. But based on the quoting activity and engagement, we expect to see some announcements here over the next 12 months to 24 months at scale for U.S.

Okay. Thank you. And then to the mine truck market. I think you have got an initial strong order that drives at 20, I guess, starts this year and it goes into the next year. How does the follow-on orders for that project work? Are those sort of a next year item, or does that play out over a number of years?

Yeah. I think that we should probably think about next orders coming in 2024. There’s a possibility for that to happen earlier. But I think to me what’s really important here is we have an end user here with Anglo-American that has a very ambitious program to decarbonize these ultra-class mining haul trucks with only one solution available, and they have invested significantly in that solution, in fact, buying the systems integrator. So this is a very good relationship we have through the value chain effectively and we feel we are very well positioned. They have a large portfolio of ultra-class trucks, so looking to decarbonize through 2030. What’s important from a testing perspective is the first truck, the famous Truck 74, completed one year of testing a couple of months ago and very, very good performance. You got to think about the weight and grades, sand, etc., very challenging environment and very good performance. So we are very excited about this relationship we have on this opportunity set and we feel we are very well positioned.

Great. Thank you. I will turn it over.

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

Good morning, Randy. Thank you for taking my question. I apologize for being a bit behind and if you have already addressed this, could you remind us about the schedule for the import duties into China and the potential impact over the next 12 to 18 months or a couple of years? Additionally, could you provide details on any capital expenditures that have already been allocated to that facility and the expected timing? It would be helpful to understand the implications if the reevaluation were to extend.

Yeah. Greg, thanks for the question. Just in terms of the duties, the way I would think about that it’s very complex, and I would say, it’s even some uncertainty in terms of the complexity. The way to think about it is, you are kind of in low-single digits, now kind of 3% to 5% duties depending on a few variables, but that could get as high as 12% to 15% by 2027, 2028 timeframe. So that’s an area that we continue to work with our legal counsel on validating what the expectations are in the outer years. So I think that addresses that question. And the second question...

Let me, yeah....

Yeah.

We spent approximately $4 million this year on the project, primarily for manufacturing equipment that is on order but has not yet been delivered. We will determine how to allocate that equipment at the right time. Out of the $130 million announced, only about $4 million has been spent so far.

And Greg, maybe just to clarify kind of where we are in the MEA localization process in China. While we have signed the investment agreement, we haven’t proceeded to the next stage, which really requires capital commitments and the next stage is the actual land acquisition piece. So we are deferring that piece until completion of this comparative analysis. The long lead time equipment that we have ordered can be used at any site, so we will require MEA production equipment. The question is where does it go? So it’s not in any way stranded capital.

Thank you for the information. I have a follow-up regarding your criteria for evaluating other regions. Is there an increased level of competition now compared to five years ago? Are you looking to establish a presence in these areas quickly to secure a position before potential competitors enter, especially with a greater emphasis on localized production than there has been in the past?

I would say that’s a lower factor to be honest with you. I think the elbowing out a land grab might be for available support for manufacturing facilities as opposed to customers. There is competition for limited funds where, for example, the U.S. DOE has funds available for companies that are looking to localize in the hydrogen fuel cell value chain. Similarly, a similar type of pools of capital available in Europe. So from that perspective, that’s true. But our approach has always been to be first to market and we feel we are pushing that forward regardless of what the competitors are angling for.

Okay. Great. Thanks, Randy. I will turn it over.

Thank you.

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

Good morning, Randy. A lot of talk on the MEA localization program. I am wondering on the rest of the components, particularly bipolar plates where you have made a lot of progress that you talked about at the Capital Markets Day. I am wondering what your views are on the localization of those components, assembly balance of plant or should we consider those already local once away or are those to follow on after the MEA localization?

We are currently evaluating production facilities in the U.S. and Europe to determine which parts of the value chain need to be localized and where we can secure support. Different components such as MEAs, bipolar plates, stack assembly, and module assembly have varying levels of support. We're examining the full potential in each market, and if we can’t secure the necessary support, we will reduce our scope in that area. The project we're focused on, project Ford, aims to design more cost-effective bipolar plates, which is a key aspect of our strategy as we formulate our proposal for the U.S. market. Thus, the opportunities in the U.S. may include MEAs, bipolar plates, stack assembly, and module assembly.

Okay. My second question is about the Ford Trucks initiative and your partnership. Does Ford take a different approach compared to what you've experienced with other partners in the truck market? Can you provide some details on whether the performance specifications are different, if truck integration is expected to vary, or if you anticipate that over time your components will converge into a common module that you can ship to everyone? I'm just trying to get an idea.

Great question, Mac. Let me take a step back and remind everyone about our strategy in the truck market, which involves partnering with dual-stream trucks. The first stream focuses on working with large truck manufacturers to achieve platform wins, either by integrating fuel cells into their existing platforms or developing new platforms that feature fuel cells. The second stream involves partnerships with upstart companies or up-fitters that take chassis or gliders from large manufacturers and retrofit them with a fuel cell hybrid architecture instead of a diesel engine. We currently have partnerships in both streams. Ford Trucks exemplifies the first stream, as they are designing their truck platform and carefully considering their powertrain solutions. The key difference here is that they are using their own chassis rather than retrofitting a third-party chassis. We believe that in the long term, the companies that scale their volumes effectively will likely be the winners.

Do you think that eventually the up-fitters will incorporate the OEM solution into the package they purchase, or do you believe the up-fitters will still desire some customization in terms of the powertrain design?

Yeah. I think it works two ways, actually. I think you could see some up-fitters piggybacking on what the larger truck OEMs are doing for niche specialized markets. And then you could see also some of the large OEMs piggybacking on some of the learnings from the up-fitters, some of their integration approaches. I do think that long-term, post-2035, -2040, the major truck OEMs that have volume in, particularly the long-haul truck market, I think we will be very well positioned. In the markets where you have smaller specialty trucks, I think the up-fitters will compete very effectively in those markets. For example, the refuse truck market, I would characterize as a specialty truck market. Wisdom is very well positioned to enjoy success in that market based on their work in Australia.

Okay. Great. Thanks, Randy.

Yeah. Thank you.

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

Hey, and appreciate all the details. To go back to the IRA and treasury guidance, recognizing giving guidance is going to be important for all the players in the U.S. market, just to try and get a sense of where the current market stands. Are you seeing any difference in the conversations you are having with customers in each of your major segments, be it bus, rail, marine, truck, stationary in terms of their willingness to go forward with more serious programs and contracts ahead of IRA guidance?

I would say the market is certainly eager to see how the guidance will play out. In North America, the bus and truck markets are leading, and there's a lot happening in rail, notably in passenger commuter services and freight locomotives. We recently strengthened our partnership with CPKC. However, the marine market in North America is still in its early stages, and it has a stronger opportunity at the moment in Europe. There's less conversation in the U.S. regarding the marine sector. As for stationary power, I believe the growth in data centers will be exponential, especially with the demands of generative AI. This will be a high-growth market going forward, requiring substantial primary and backup power, and we are focusing on this area as well. In the short term, all markets are looking to see what the treasury guidance will entail. There's a strong expectation that, based on the BIL and IRA investments, the guidance will be finalized in a way that encourages market adoption.

Appreciate that. And maybe just to follow on to focusing on what you mentioned with the CPKC announcement. Maybe just remind us and give us a sense of momentum in the rail segment and the opportunity over the near term that you see there?

Rail has been a positive surprise over the last few years with the progress we've made. I want to highlight CPKC because it's an outstanding company. Over the past two years, they have taken 20 fuel cell engines from Ballard, integrated them into their hydrogen locomotive program, and have been field testing them for about a year and a half in line-haul locomotive shunter and switcher applications. They've also ordered another 18 fuel cell engines, which provide an additional 3.6 megawatts. Notably, CPKC has disclosed its hydro locomotive program, announcing a joint venture with CSX in June to create and deploy hydro locomotive conversion kits for diesel-electric locomotives. Additionally, in May, they launched a pilot program with tech resources to bring these fuel cell locomotives into the steelmaking coal supply chain. During their Capital Markets Day in June, they highlighted this initiative as a crucial part of their long-term strategy to decarbonize diesel fuel. This shows a strong commitment to reducing emissions and the company is making the necessary investments to validate the technology and seize the opportunities in this field. I see significant potential here. We are also observing chances for larger orders in the U.S. commuter rail market, and we hope to have more updates on that in the next year.

Really interesting. Thanks for taking my questions.

Yeah. Thanks, Jordan.

The next question comes from Brett Castelli with Morningstar. Please go ahead.

Hi. Thank you. I want to ask about, there’s been some talk of internal combustion engines running on hydrogen, say, in the truck market. I just want to get your thoughts sort of how you see that as a potential competitor over the medium and long term. Thank you.

Yeah. I think we are going to see a portfolio of different solutions, obviously, we are going to see battery electric, we are going to see fuel cell electric, we are going to see a hydrogen internal combustion engine. I think many people have viewed hydrogen internal combustion engine as a possible transition technology. It still doesn’t have full zero emissions and has lower efficiency than fuel cells. I do think there is opportunity for it, but I haven’t seen it really take major traction. If you just look at the bus market, which is the most mature market of all of our markets, there are zero hydrogen internal combustion engine buses currently operating, and closing in probably within two years, I would say, over 10,000 fuel cell buses.

Thanks, Randy. That’s helpful context.

Yeah.

Maybe my other question was just on data centers and just, obviously, that’s a potential large long-term market for fuel cells. What should we expect sort of over the next 12 months to 18 months in terms of activity in that market?

Yeah. I think this is a period over the next 12 months to 18 months for a lot of learning, not just for Ballard, but for partners like Caterpillar and Microsoft. I think it’s a market that the fuel cell value proposition needs to be validated, and then we can move from once that value proposition is validated, and we can move to larger deployment. This market, in my mind, is still very much in the development and now starting in the demonstration phase. I think it’s going to be a number of years before we see kind of deployments at a high level. But this is a market that we feel very passionate about, because it is a large attractive addressable market with high growth and we think it’s a market that fuel cells will have a value proposition, and we need to validate that with the customers over the next 12 months to 24 months.

Thanks, Randy.

Yeah. Thank you.

The next question comes from Craig Shere with Tuohy Brothers. Craig, please go ahead.

Hi. Actually, my questions already have been asked and answered. Thank you very much.

Thanks, Craig. Have a good day.

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

Good morning and thanks for taking the questions. Just a few housekeeping ones for me. You displayed a nice sequential improvement in gross margins from negative 30% to negative 20%, and it sounds like second half revenues are going to be higher than the first half. So can you just maybe give us some commentary on how you think about gross margins into the second half of the year? And then I have a follow-up question.

Sure. Yeah, it’s Paul here. So, yeah, we said in Q1 that we expected that to be the low point in our gross margin percentage, and so we are seeing higher gross margins, still negative in Q2. What’s interesting about that is, when you look underneath and you look at the contribution margin, sort of the pricing and direct costs. We see good strength there and an improvement of where we were even last year. Some of that’s due to the product mix, but also our costs of our products coming down as well. We do see some improvement there. We did have a few inventory adjustments. As we continue to develop and invest in new products and technologies, some of our older products that might be sitting in inventory are taking an obsolescence charge on those, so we had some of that which drove our margins negative. We will probably have a little bit of that still in the second half, probably, $1 million to $2 million in provisions, I would estimate in the second half, but anticipate growing revenues and expanding margins in Q3 and Q4 as well.

And do you think we exit the year with breakeven or do you think we are still negative in the second half of the year?

No. I think we will still be negative. I think in the Capital Markets Day, we said we expect to get to about breakeven gross margin at some point in 2024, maybe not for the full year, but in some quarter in 2024, but for 2025 and beyond.

Got it. That’s helpful color. Thank you. And then just for my second question, there is a $60 million delta between the total backlog and the 12-month backlog. Can you give us a sense of how far the backlog extends beyond the 12 months? Does that $60 million represent backlog through 2025, 2026? Just trying to get a sense of backlog duration.

Yeah. The bulk of it would be in 2025 with some residual in 2026.

Okay. Helpful. Thank you. That’s it from me.

Yeah.

This concludes the question-and-answer session. I would like to turn the conference back over to Randy MacEwen for any closing remarks. Please go ahead.

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

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