Thank you for your patience. This is the conference operator. Welcome to the Ballard Power Systems' First Quarter 2024 Results Conference Call. As a reminder, all participants are in a 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 Igbalode, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's first quarter financial and operating results conference call. With us on today's call are Randy MacEwen, Ballard's CEO; and Paul Dobson, Chief Financial Officer. Given that our 2023 year-end earnings call was only eight weeks ago, we will keep scripted remarks today relatively brief. We will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I'll now turn the call over to Randy.

Thank you, Kate, and welcome, everyone, to today's conference call. In our last earnings call, in addition to providing 2024 OpEx and CapEx guidance ranges, we outlined four specific milestones that investors can expect from Ballard in 2024. We noted the following four milestones; first, continued growth in our order backlog; second, a major order announcement from a bus customer; third, a major order announcement from a stationary customer; and fourth, the announcement of our next manufacturing facility. In Q1, we delivered against each of these four milestones, highlighting our continuing journey to a commercial products company. I would like to comment on each of them in turn. So, first, on continued growth in our order backlog, we're encouraged with our progress over the past six months with new order intake. After booking record new order intake of $64.7 million in the fourth quarter of 2023, we booked another $64.5 million of new orders in Q1, bringing total new bookings over the past two quarters to almost $130 million, a Ballard record for a six-month period. Our order backlog grew by 38% since the start of the year. Second, on a major order announcement from a bus customer. Here, we announced a multi-year supply agreement and the largest order of fuel cell engines in Ballard's history. The supply of 1,000 engines through 2027 to Solaris for the European bus market. This landmark agreement is a testament to our collaborative partnership with Solaris over the past decade and the progress we've made with our fuel cell engines. We have proven our fuel cell engines to be safe, reliable, and durable. This agreement also reflects an acceleration in the adoption of fuel cell buses in Europe, supported by policy tailwinds and regulations to decarbonize public urban transport fleets. The transition to zero-emission city buses has accelerated as the value proposition of hydrogen fuel cells is increasingly understood: zero tailpipe emissions, rapid refueling, long daily range in all weather conditions, and scalable refilling infrastructure as fleet sizes increase. Indeed, we believe we're on the road to achieving scaled deployment of fuel cell buses in the medium term, which is a critical lever to facilitate economies of scale and cost-down initiatives, driving improved economics and reduced emissions for fleet operators. Now, I'd like to linger here for a moment on the bus market. Over the past five months, we've received orders, all repeat orders from existing platform customers for a total of 1,200 engines for fuel cell buses in Europe and North America. This is very exciting. We see a tripling of the existing operating fleet in these markets over the next two to three years. Now, let's move to the third milestone, the announcement of a major order in the stationary market. We announced a multi-year supply agreement and the largest order in Ballard's history for the stationary market in order for 150 engines totaling 15 megawatts of fuel cell systems from a UK-based customer specializing in renewable off-grid power generation. Again, this is a repeat order from an existing customer and reflects a scaling in their market opportunities. Our customer is targeting the replacement of traditional diesel generators with fuel cell systems that can provide resilient, predictable, clean, and quiet solutions for on-site power generation in a variety of applications, including EV charging, filming, events, and construction. The customer also has an option to purchase an additional 296 engines by March 2026. Finally, to turn to the fourth milestone, the announcement of our next manufacturing facility. As context, as part of our local-for-local global manufacturing strategy, we conducted a comprehensive comparative analysis during 2023 of sequenced production capacity expansion options in North America, Europe, and China. Based on our review, we determined to prioritize the US as our next market for production capacity expansion. We announced our plan to build a new manufacturing facility to be located on a parcel of 22 acres of industrial land within the Rockwall Technology Park in Rockwall, just outside of Dallas, Texas. The facility is expected to have an initial main plate production capacity of 8 million MEAs, 8 million bipolar plates, 20,000 fuel cell stacks, and 20,000 fuel cell engines per year, or the equivalent of 3 gigawatts of fuel cells. Dubbed Ballard Rockwall Giga 1, we plan to manufacture next-generation fuel cell products, incorporating the benefits of our work related to technology innovation and design changes, supply chain collaboration, and the introduction of volume production processes and advanced automation to drive down costs. We also recently announced two separate non-dilutive funding awards to Ballard, totaling up to $94 million, consisting of 40 million in expected grants from the US DOE Hydrogen and Fuel Cell Technologies Office, and up to another $54 million in expected Advanced Energy Project Tax Credits, known as 48C, funded under the Inflation Reduction Act. Our capacity expansion plan comes at the very time that platform customers are being clear about what they need from Ballard in the future. They're counting on us to be there for them at volume and at the right cost. The ability for us to demonstrate a clear roadmap to high production volumes at significantly reduced costs is critical to customers transitioning from demonstrations to future scaled deployments. With Ballard Rockwall Giga 1, we plan to bring scaled, advanced manufacturing of next-generation fuel cells online in late 2027, at the same time when we expect to reach capacity constraints of our existing North American production facilities based on our forecasted growth and production volumes. We expect to make a final investment decision on this facility later in 2024 and pending completion of certain customary conditions, including necessary approvals and definitive documentation, including with Rockwall and with the U.S. funding sources. Accordingly, we will provide a detailed review of the plans for Ballard Rockwall Giga 1 during an earnings call later this year. We want to also provide two interesting updates on the rail market so far in 2024. First, one of our customers in the commuter rail market, Stadler, revealed its FLIRT H2 train powered by Ballard fuel cell engines that has entered into the Guinness Book of World Records for the longest distance achieved by a pilot hydrogen fuel cell electric multiple unit passenger train without refueling or recharging an impressive 1,742 miles. Second, and importantly, on April 16, CSX unveiled its first fuel cell locomotive, developed through its partnership with CPKC where CPKC provides CSX with a powertrain conversion kit using Ballard fuel cell engines to refurbish diesel locomotives. We view this as a very exciting development. We believe hydrogen fuel cells offer the only viable zero-emission powertrain solution to replace or refurbish diesel locomotives in North America. The total North American fleet is estimated to be around 40,000 locomotives, and notably, CPKC has approximately 2,500 diesel locomotives and CSX has approximately 3,500 diesel locomotives with high-power line haul locomotives using 2.4 megawatts of fuel cells, which is equivalent to the amount of fuel cells required to power about 24 buses. We believe this represents a large and attractive addressable market for Ballard. And before I turn the call over to Paul to review our Q1 financial highlights, I'd like to provide a headline summary of Q1 and some commentary on our setup moving forward. In Q1, we booked $64.5 million in new orders, increased our order backlog by 38%, announced total non-dilutive funding of up to $94 million for the planned build-out of our Rockwall Gigafactory, grew revenue by 9%, improved gross margin by 5 points, and reduced cash operating costs slightly, while continuing to invest in next-generation products and product cost reduction. Looking forward, in the context of an increasingly constructive policy environment, growing order backlog and with sustained investments in product cost reduction in advanced manufacturing capacity expansion, we see an exciting setup for the second half of 2024 and growth in 2025. We are well positioned to enable our customers to compete in the energy transition and the adoption of hydrogen fuel cells to decarbonize heavy-duty mobility and select stationary power applications. With that, I'll turn the call over to Paul to discuss our financials.

Thanks, Randy. In Q1, Ballard delivered $14.5 million in revenue, driven by strong growth in the bus and stationary verticals. Heavy-duty motive applications accounted for approximately 84% of the total and with added stationary power, our fuel cell products as a whole represented approximately 88%, once again emphasizing our shift into a commercial products company. As a reminder, from previous years, we see that Ballard revenue is typically weighted approximately 30%, 70% between the first and second half of the year and heavily indexed to Q4. 2024 looks to be no different. Even with the continued shift in revenue mix to power products and the burden of fixed production overhead costs being spread over a seasonally low revenue, gross margin of negative 37% showed a 5-point improvement compared to Q1 2023. We are still anticipating underlying gross margins will break even in Q4, as revenue increases and product cost reduction activities have greater impact. We reported total operating expenses of $37.1 million and cash operating costs of $29.8 million, both relatively flat compared to the prior year comparables. Capital expenditures totaled $7.5 million in Q1. We are maintaining our guidance ranges for total operating expenses and capital expenditures for the year. Our guidance for 2024 includes capital for the initial design and scoping activities for the Rockwall Gigafactory, assuming FID. The expected US government funding for the facility would impact our net capital expenditures in subsequent years starting in 2025. We ended the quarter with a strong balance sheet with cash and cash equivalents just over $720 million. With that, I'll turn the call over to the operator for questions.

Thank you. The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning. I just wanted to follow up on the Solaris order, good scaling there. Can you give us a sense of sort of what the rollout schedule is and how that market is developing and sort of what the size of the market is and penetration rates you expect by the end of that contract?

Good morning, Rob. Thanks for the question. Maybe just to step back a little bit and just remind everyone, we're really seeing the deployments of fuel cell electric buses scaling up both in Europe and North America, driven largely by this transition to zero-emission bus fleets and supported by regulations and strong mandates and, of course, public funding. Just to give you a sense of kind of where we are right now, we at Ballard have about 158 fuel cell buses in operation that have Ballard engines inside in North America and about 398 in Europe. In North America, I think we're probably right at 99% to 100% market share in Europe over 80%. So we have really good visibility on what's happening in this market. And what you're seeing is that the proven operational advantages of fuel cell buses, including kind of 500 kilometers or 350 miles of range, the ability to have that range consistent for every day and every season and the rapid refueling time, kind of 6 to 12 minutes refill time. And then you add in the complexity that comes with depot electrification as you scale up, we're seeing a lot of operators really revisit their plans going forward. As you see a growing number of cities committing to what I would characterize as a larger deployment. So Bologna, for example, 127 buses, Venice, 90 fuel cell buses, Cologne, 150, Santa Cruz, 57%. You've got many other cities in North America as well, Oakland, Philadelphia, Foothill in the LA Basin area, Las Vegas, New York City and Edmonton in Canada, all kind of committing to fuel cell bus deployments. So we see probably going from the situation where you have roughly 500 to 600 buses in North America and Europe combined today to thousands, literally in a three, four year period. And so we're tracking a very healthy pipeline and with strong market share with most of the OEMs that are offering fuel cell buses in North America and Europe are powered by Ballard. So we feel very comfortable with our position in the market and the growth opportunity we see. With Solaris specifically, I don't want to comment on any one customer in their rollout schedule. We'll let them do that. But I would just indicate that we expect those 1,000 engines to be deployed between 2024 and 2027.

Okay. Thanks for all the color there, Randy. On the Rockwell expansion or new facility what's the CapEx requirements there, I guess, obviously, impacted by the government funding side, but what's the CapEx expected on that facility?

Yeah. Great question, Rob. So we're doing quite a bit of work in parallel right now. We are polishing our project scoping, final budget, timeline. There's a lot of work going on completing the facility design, the plant layout looking at the permitting process and finalizing our land acquisition agreement and our EPC contract. There's still some more work on equipment specification procurement. So what we expect to do, Rob, probably on the Q2 or Q3 call, is actually provide a fairly comprehensive review of Rockwall once we get through FID and include a CapEx range at that point. We had kind of indicated if I would put kind of parameters on right now, I would say, in the $100 million to $150 million net of the funding is kind of the parameters, and we'll tighten that up as we get out later in the year.

Great. Thank you. I'll turn it over.

Great. Thanks, Rob.

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

Good morning. Thanks for taking the time to answer questions. Randy, you highlighted the upfront incentives to build Rockwell. Obviously, that's a great kind of step in the right direction. I can also appreciate that a larger update is forthcoming. But I guess, I'm just wondering at a very high level, are there any production tax credits that you can take advantage of? And if the capacity is 3 gigawatts, do you have any early indications of sort of what sort of sales volume you think you need out of the facility for it to break even? And then embedded in that, to the extent that you can answer what sort of unit cost reductions do you assume relative to where you are today?

Yeah. So we've canvassed the US market fairly carefully in terms of incentives. And we actually have other opportunities for this facility beyond the $94 million that we've commented on. And of course, there's a package of incentives that comes with the Rockwall Economic Development Corporation. So I think all in, we'll likely be higher than $100 million in total support opportunities there, of course, all non-dilutive. So that's very powerful for us as we move forward. In terms of unit economics, volume scale, etc., to get the profit, I think we'll wait until the upcoming calls to manage those. What I would say is, just to be very clear, we don't have an order book at this time that satisfies the volume of 3 gigawatts that we're talking about. Clearly, we are looking clearly at investing ahead of the adoption curve, but of course, we have a sales pipeline that is showing very strong growth indicators across most of our vertical markets and, of course, both for Europe and for North America. So as we look at our scaling over the next couple of years and basically using the existing production capacity and actually some capacity expansion that's ongoing here for bipolar plates in Burnaby, British Columbia, what we see is kind of meeting capacity constraints in that 2027 timeframe based on our sales pipeline and our forecasting for our financial model.

That sounds reasonable, and I'm okay with waiting. I understand you prefer not to provide specifics about customers, orders, or pricing. However, you have previously mentioned a price of $1,000 per kilowatt for large orders. Is that still a valid reference point, or are you offering some discounts based on volume?

For lower volume orders, $1,000 is probably a reasonable reference point. In many instances, we are likely below that, but $1,000 serves as a solid benchmark. When it comes to higher volume orders, we are experiencing pricing compression, as expected. Therefore, these types of contracts do not reach that pricing level.

Got it. No, happy to turn it over there. Thanks, Randy.

Great. Thanks, Aaron.

The next question comes from Saumya Jain with UBS. Please go ahead.

How do you guys see Ballard playing out in the U.S. rail market and specifically down the line? And how are you seeing the truck market growth in 2024 as well?

Yeah. So just to clarify your question, I think you're asking about the truck market, is that correct?

Yeah, and the rail market for U.S.

On the rail market, I want to highlight the freight locomotive segment, which is often misunderstood. In Europe, there is a significant commuter rail market, while North America shows modest activity. The volume of commuter rail traffic in North America lags behind Europe. However, in the freight locomotive market, there are around 40,000 diesel locomotives, which are replaced or refurbished approximately every 15 years, leading to about 2,600 locomotives needing attention each year. Assuming an average requirement of 1 megawatt per locomotive, this represents an annual market opportunity worth billions in North America. This presents an exciting opportunity for Ballard. We anticipate a few years of development as companies like CPKC and CSX validate the use of hydrogen for locomotive applications, including hydrogen storage solutions. Decarbonization is crucial here, as diesel fuel typically accounts for about 95% of Scope 1 emissions for these operators. While high volume isn't expected in the next couple of years and validation will take time, we believe we're well-positioned with our solutions and partnerships to make a significant impact in this market. In the commuter rail sector, we've established partnerships with Siemens in Europe and Stadler for both the North American and European markets, which we expect will grow by 2030. We anticipate strong validation in both the locomotive and commuter rail markets moving forward. Regarding the truck market, progress has been slower than desired for various reasons. We focus on opportunities related to truck market applications that involve returning to a base refueling point, such as drayage and regional haul trucks returning to their yards each night, helping to circumvent the need for widespread refueling infrastructure. We foresee several applications across different weight categories where hydrogen fuel cells will be a primary solution, although battery-electric options will also play a role. This sector is evolving gradually, and vehicle manufacturers, who have invested in diverse technologies including autonomy and battery-electric, are also now considering hydrogen fuel cell investments. We're actively engaged with these customers during their RFP and RFQ processes and are noting increased engagement from established truck OEMs looking to introduce solutions between 2028 and 2030. Simultaneously, we're collaborating with entrepreneurial companies addressing market gaps by offering both battery-electric and fuel cell electric options. Thus, we are pursuing two streams of opportunity in the truck market, progressing both, although the timeline is longer than we would prefer.

Got it. Thank you so much.

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

Hi, good morning. Randy, you've highlighted that the last six months have been strong for new orders. I'm curious about your outlook on the variability of that moving forward. In the past, we've seen that large orders can impact activity levels in subsequent quarters. Do you believe we've moved past that phase now with these significant long-term sales agreements, or should we anticipate some potential softness in new orders? What are your thoughts on this?

Yeah. Great question, Mac. What I would say is this is still very much an early-stage demonstration market where some customers are earlier in their processes. But I do see that while there will be lumpiness in some of the market opportunities we are pursuing, like, for example, the back-up power market for data centers or the marine market or even the rail market, you're looking at much larger size applications, power applications. And if you get scale orders there, it's quite different than the type of orders you'd see from the bus market. So I think we're going to continue to see a lot of variability and a lot of lumpiness. It will be based in some part on seasonality and some part, based on when funding sources are available. And of course, a couple of the contracts we've signed are long-term supply agreements with fixed volumes associated with them. So that doesn't happen every quarter. So there will be some variability. But I would see the trend is towards larger order books and the trend is towards getting a smoother cadence of growth going forward. We do see a very strong sales pipeline and expect to see some additional large orders through the year. So our job is to close those out.

Okay. Related to that, if you look at the 12-month backlog, it has actually returned to the levels we saw in 2021 when there were, if I'm not mistaken, significantly more technology-related sales in the 12-month order book, correct?

Yes. I mean I think that's one thing that's probably been misunderstood in some ways. People kind of look at the revenue as being flat and in some cases, the order book has been flat, which has been true for a number of years, but the composition has changed dramatically. And so we're going to a situation now where we're reaching almost 90% revenue and similar on the order book front and certainly, on the sales pipeline, it's heavily dominated by the sale of fuel cell engines now. So just as an illustrative example, last year, we shipped over 500 fuel cell engines, a record year for Ballard on that front. You know, in the first quarter, we shipped over 100, which is a record for Q1.

Okay. For a second question, shifting focus to the gigafactory in the US, which is now operational. Although it may take a few more years to fully realize its potential, what do you anticipate for the contribution margin? In previous discussions, you've mentioned contribution margin in contrast to the reported margins. Do you expect any changes once it's fully operational?

We expect to see a significant reduction in our manufacturing costs as we move forward. When examining the processes for MEA and bipolar plate production, we are identifying notable cost reduction opportunities through automation and various processes that enhance yield and minimize scrap rates. This will lead to a meaningful difference in material costs, as well as direct material and direct labor costs, particularly as we scale up in a highly automated facility. Additionally, transitioning from contribution margin to gross margin will depend on achieving higher volumes and effectively absorbing fixed overhead across a larger business base. We are genuinely excited about the potential for both contribution margin and gross margin expansion, especially as we begin to realize volume growth in the new facility.

Okay. Great. Thanks. That’s all my questions. Thank you.

Thanks, Mac.

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

Hi, good morning. Thanks for taking the question. I wanted to follow up on the cost reduction and pricing strategy. With the orders you've announced recently, are the prices you've offered for larger volumes out to 2027 representative of prices that are sustainable in the long run or to put that another way, are your prices getting to a level that could be competitive with diesel buses on a TCO basis?

Yes. As we move forward, we will notice similarities to what occurred in the solar and wind industries, as well as in the battery electric market. There is some variability in these markets based on supply and demand but also a significant reliance on rare earth metals and certain commodities. However, I don't anticipate variability in commodity prices going forward. We do expect to see annual reductions in selling prices. Our aim is to ensure that our cost reductions surpass the decline in selling prices, allowing for margin expansion. Currently, we have a plan in place that assumes a certain percentage of cost reduction, which varies by year, but there is a general blended percentage expected by customers. Additionally, in the larger long-term supply agreements we have recently signed, we included assumptions for both cost and selling price reductions, supported by our cost reduction plans.

Great. Thanks. And a follow-up on that. So you've talked about some of the advantages you're going to have scaling up your Bipolar Plate in MEA. Of course, a big part of your cost is coming from the balance of plan. Can you give us an update on the cost reductions you're seeing there and the commitments from your suppliers to bringing their costs down to where they need to be?

Yes, that's a great question. It's important to mention that we are currently working on our ninth generation of fuel cell engine, and we've gained substantial insights from the previous eight generations, particularly those that have been in operation in the field. This experience gives us a significant competitive edge. In the ninth generation, we have adopted what we define as an open architecture, allowing us to integrate the DC/DC component more effectively while also substantially reducing the number of parts, as well as the volume and weight. This approach enhances powertrain integration, simplifies service, and notably decreases manufacturing and assembly times, all of which contribute to lowering costs and improving the total cost of ownership for our customers. The development of the balance of plant components is a key initiative for cost reduction at Ballard. We have a dedicated balance of plant team collaborating with our supply chain daily to enhance performance, reliability, availability, uptime, warranty terms, payment terms, and most importantly, to lower costs. We are seeing significant cost reductions for several components that are set to enter production in 2025. We’re quite enthusiastic about the savings from these balance of plant components and look forward to revealing the ninth generation of our product, which will include several of the improvements we are observing.

That’s great. Thanks for the color.

Yes. Thanks, Rupert.

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

Good morning, all and thanks for taking my questions. Maybe just to start on the stationary side, as you see work and some of the momentum there with your customer in Europe, maybe if you could just talk to kind of the opportunity size over in that market near-term and then how you see that progressing over the next couple of years?

Yes. I would say so far, we've been fairly constrained in our view on the market opportunity size for kind of the total TAM for the stationary power market. We characterize it kind of around $4 billion. I think that's dramatically understated. I think what's changed in the last year since we kind of assessed that $4 billion market opportunity is really the data center market opportunity. Obviously, there's a lot of publications out the last six months on the growth and the expected growth of the data center market. And the number one challenge the data center operators have, particularly the hyperscalers, is the access to green energy. And then I would say, number two, importantly, is having the opportunity to get permitted quickly. And one of the challenges with permitting is to make sure that you have total clean energy solutions, and we're seeing a number of markets that are cracking down to make sure that backup power is also clean energy solutions. So we see a very significant market opportunity for data centers. And that's a market that I think is going to take that TAM significantly higher. So we have more work to do this year with a couple of key partners that are very large players in the data center market to kind of validate that TAM. But I would say, this is going to be a market that we're going to see a lot of lumpiness, and we expect to see more opportunities in 2024. Obviously, we've announced this 15-megawatt opportunity orders. We expect to see more developments in this market in 2024. That will really set us up in 2025 and 2026 to make sure that we have the right partners and customers to really move forward in that market.

Appreciate that. And then as a follow-up, a separate topic, recognize the solid benefits for the FC and maybe some of the other credits that you can realize from the Rockwall plant. But maybe just talk to how important you see finalized PTC guidance to the local market opportunity for that plan and maybe more broadly the investment case for Rockwall?

Yes. Firstly, Rockwell is intended to provide us with products for global use. However, it will mainly cater to the North American and European markets, and I believe this focus will last at least until 2030. We have strong capacity coming from Rockwell, with the option to efficiently scale up production in the future if needed. Regarding the PTC, we are following the guidance published in December. The entire industry has given feedback, and I have recently engaged with the US DOE about the volume and nature of that feedback. There is plenty of ongoing work with the IRS and the DOE to ensure they create the right incentive mechanisms to support desired growth, while also ensuring that the hydrogen produced meets the clean attributes targeted by policy. There are many discussions about regionality, additionality, and timing. Regardless of the outcomes, I don't foresee any significant impact on our sales opportunities through 2030 for Rockwell. Even in scenarios where the PTC is interpreted in the most restrictive manner, we still expect hydrogen costs to be significantly lower than they are today. With a $3 per kilogram production tax credit for clean hydrogen, we anticipate about a 50% reduction in the cost of green hydrogen due to subsidies. We see this as a crucial market enabler. Naturally, we would prefer the most flexible interpretation of the PTC, but we will wait to see how that unfolds. We have submitted our response to the guidance and are awaiting further developments.

Super helpful. Thanks so much.

Thank you.

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

Good morning. I appreciate the opportunity to ask a question. To begin, it seems like you are experiencing a cash outflow of about $20 million per quarter in operating cash flow. I understand you expect that your gross margin will nearly reach breakeven by the fourth quarter due to increased volume, but higher volume could also affect working capital. Additionally, you've mentioned a seasonal trend where the first half of next year may see a drop in volume and negative margins. Regarding the $20 million cash burn from operating cash flow, do you have any insights or expectations as we approach the fourth quarter and the first half of next year?

Thank you for your question. We continually assess the dynamics of this relatively immature market and how it affects our cash flows. We regularly evaluate various scenarios, ensuring we consider our sales pipeline and customer expectations. Customers are looking for suppliers that can grow alongside them as they deploy their different fleets and applications. Additionally, our investments in product development aim to reduce costs while enhancing performance and quality, as well as scaling our manufacturing capabilities. We must balance these factors with our current cash reserves. In previous discussions, we mentioned that we forecast needing additional funding around 2026 or 2027, and we are exploring different avenues for this. We are pleased to announce the Department of Energy grants and investment tax credits, and we are also considering non-dilutive financing options. We are thoroughly reviewing all our business activities and expenditures to identify ways to reduce overall spending on both operating and capital expenses, as well as rationalizing our product offerings. In the first quarter, as we indicated during our Capital Markets Day, our costs remained steady, with lower capital expenditures and relatively flat operating costs despite facing higher inflation. We are closely examining our costs and concentrating on market opportunities. As we look into these financing options, particularly the non-dilutive ones, we will provide more information as they develop favorably.

Fair enough. Just on that first question to finish this point, I mean, you had a very strong fourth quarter and sales seasonally fell and you have a working capital benefit, is it unreasonable to think that heading into a fourth quarter surge that there would be a working capital drain?

Yes, we anticipate that as sales increase, our receivables and inventory will also grow throughout the year. Our receivables will rise, and we expect to see that inflow in the first quarter, similar to what occurred last quarter. We believe this trend will persist. Additionally, as we evaluate our cash flows and scale up, we are examining all aspects of working capital, including customer terms, inventory management, and payment terms with our suppliers. This is a significant focus for me.

All right, go ahead.

Sorry, Craig. I might just add to that, when we kind of look at 2023 last year, we really implemented a number of activities really sharpened the focus to make sure that we have this right balance of investing for the future, making sure we have competitive products, not just today, but five years from now and 10 years from now, and at the right cost structure, etc. And so we rationalized the product portfolio last year. We reduced the number of active product development programs. We dropped corporate development investments and discontinued certain legacy noncore activities. So we're taking a very careful look to make sure that we are investing resolutely kind of on the long term, but protecting the balance sheet.

That's very helpful and it relates directly to my second question, which also connects to Rupert's first question. This is about the multiyear contracts and offering your customers lower pricing annually while planning to implement further reductions in your internal costs. It seems like a difficult challenge. It's tough to accurately predict the timelines for these situations, especially when considering how the market will develop and if you have an increasing order book with decreasing annual pricing. If market scaling takes another 12 to 18 months due to various uncontrollable factors, could that be very challenging for you? Is there a risk that if unexpected macroeconomic changes occur, you might end up holding onto much more cash in 18 months than you initially projected?

Yeah. So Craig, everything about the hydrogen fuel cell industry is challenging, right? This is not for the faint of heart. But what I would say is when we sign a long-term agreement, and we're committing to future forward pricing, we have very high probability on what our costs are. We're not taking risks on that, right? So there is some development risk, and there's some very modest volume risk, but not kind of what you're talking about. So I feel very confident, very confident that our cost reductions will exceed our selling price reductions based on the work that we're doing and based on the supply chain visibility. I don't view that there's lots of risks. I think about it at night, but that's not one of them.

All right. Good to hear. Thank you.

Our next question comes from Vikram Bagri with Citi. Please go ahead.

Hi, there. A couple of questions on gross margin. Could you just remind us if there are any impairments this quarter and then just looking at the Power Products backlog that was picked up this quarter. How should we be thinking about that going forward? And how does that impact your outlook for the fourth quarter for that breakeven target? Is that mix consistent with the next 12-month order book that you see?

Hey, Vikram. Regarding the gross margin, we reported a gross margin of minus 37%, which is a 5-point improvement from the first quarter. When we examine the gross margin closely, the contribution margin, calculated as price minus direct labor and direct materials, remained relatively stable quarter-over-quarter. However, both the contribution margins for products and technology solutions showed improvement. We are beginning to see an expansion in product margins as we transition to a more commercially focused product line, although overall it remained flat due to the product mix. We have more products with generally lower contribution margins compared to our technology solutions. Additionally, our fixed and other costs, including overhead, warranties, and provisions, improved by about 6 points overall. We experienced a net reduction in warranty approvals as some warranties expired, providing a net benefit. We also had a few minor inventory write-downs this quarter, but nothing significant like what we experienced in the fourth quarter of last year. Overall, as we keep investing in our products, we anticipate achieving further product cost reductions. Coupled with increasing sales volume and spreading that sales over our fixed costs, we expect to see improvements in gross margins over time.

Got it. Okay. That's very helpful. And just one follow-up. Last quarter, there was a customer that impacted the backlog. I think the project was being delayed. Could you just talk about if there's any update there? Could we expect to see that customer re-enter the backlog at some point? Just any update would be helpful. Thanks.

Yes. We're closely monitoring the situation on a daily basis, which gives us good visibility on developments. They have made significant progress since December, and we expect the issue to likely be resolved in the next quarter, but we will wait to see the outcome. At that time, we will assess the impact on the order backlog.

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. Thank you.

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