Earnings Call Transcript - BLDP Q1 2020

Operator, Operator

Thank you for your patience. This is the conference operator. Welcome to the Ballard Power Systems First Quarter 2020 Results Conference Call. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be a chance to ask questions. I will now hand the conference over to Guy McAree, Director of Investor Relations. Please proceed.

Guy McAree, Director of Investor Relations

Thanks very much and good morning everyone. Welcome to Ballard's first quarter 2020 financial and operating results conference call. With us today on the call we have Randy MacEwen, Ballard's President and CEO; and Tony Guglielmin, our Chief Financial Officer. We're going to 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 a complete disclaimer and related information. I just want to note as well that we are planning an investor and analyst day on September 29 later this year. Our original intent was to hold this face-to-face event in New York City. However, in view of the COVID-19 pandemic, we are now planning to host a virtual investor and analyst day event with a live video stream. We are going to be confirming additional details once arrangements are finalized. On today's conference call, Randy’s going to provide his perspective on the COVID-19 situation and notable industry developments. Tony will then review first quarter 2020 financials and we will follow that by the Q&A session. I’ll pass the call over to Randy now.

Randy MacEwen, President and CEO

Thanks Guy, and welcome everyone to today's conference call. Today I would like to spend some time providing an update on the COVID-19 situation at Ballard, discussing recent notable industry developments and then providing some initial thoughts on longer term structural implications for our industry as a result of the COVID-19 pandemic. I want to start today by commenting on the status of our business and operations in the face of this extraordinary environment. Our top priority always is the health and safety of our people, customers and partners. We continue to monitor and comply with the most conservative public health guidelines. We have taken decisive actions and implemented important measures to mitigate the impact of the COVID-19 pandemic on our people and on our business. We also remain firmly committed to serving our customers and meeting their needs. This means we have taken actions that align with employee safety and risk mitigation while also preserving business continuity to support our customer deliverables. So, while we have about two-thirds of our global workforce working productively from home, we also continue to operate our essential manufacturing and testing operations in Burnaby and continue to provide essential field service support to our customers in China, Europe and North America. In our facilities, we've implemented precautionary and proven measures including relating to hygiene, sanitization, procurement and supply of PPE, temperature screening and physical distancing. We've made certain changes in our facilities and operations in Burnaby and in Hobro, Denmark to support physical distancing and employee safety. We've also been busy stabilizing our supply chain to understand potential disruptions and choke points. While some of our critical suppliers temporarily suspended operations, almost all of them have resumed operations already or expect to be resuming production shortly. We have taken a number of steps to support our supply chain partners and mitigate risks during this period including by increasing certain stock levels, increasing the frequency of deliveries for certain materials, obtaining commitments on supply minimums and delivery timing, flexing our production schedule and accelerating activities to qualify additional suppliers. Based on the information we have at this time, while we see some impacts in Q2, we're not expecting any major supply chain disruptions that should impact our overall expectations for full-year 2020. However, as we've seen the situation remains fluid and geographic specific. We will continue to closely monitor and manage our supply chain. Moving from the supply side to the demand side, we're not seeing any demand pull back as a result of COVID-19. In fact, we're experiencing high levels of quoting activity. Further we believe our long-term markets and business opportunities may be stronger given some of the long-term implications we've seen arising from COVID-19. More on this in a moment. In the near term, there are potential COVID-19 risks on the timing of new deployments for our customers and from end-customers. A number of our customers have had their operations suspended and certain customers remain shut down at this time. Visibility is even murkier and the uncertainties further exacerbated as it moves to the end-customers and try to determine when their operations will stabilize, when hydrogen refueling infrastructure will become available, when deliveries of new zero-emission fuel cell buses and other vehicles will occur. And therefore when deliveries of Ballard modules, our Weichai-Ballard JV modules to customers will be made. While we don't have any information today on material delays, there is uncertainty on the delivery schedule. When taken together the dynamic environment presented by COVID-19, potential customer delays, the potential for additional supply chain challenges and even potential disruption in our own operations, we believe the responsible and prudent approach is to withdraw our 2020 revenue outlook. Now we entered the COVID-19 pandemic from a position of financial strength and we added to that strength in the first quarter. Notwithstanding the COVID-19 backdrop, we delivered record Q1 revenue of $24 million, up 50% from last year, a gross margin of 22% and ending cash reserves of $181.6 million. We further fortified our balance sheet with the execution of an at-the-market equity program. As you would expect in the current environment, we have also been reviewing our cost structure. While adjusting certain costs with market conditions and prudent cost management, we're also continuing to move forward with critical investments for long-term competitive positioning including our people, technology products, product cost reduction, customer experience, advanced manufacturing and our Weichai-Ballard joint venture. We believe this will further strengthen our position as the economy emerges post-COVID-19 and as decarbonization again takes center stage. I want to turn now to recent notable industry developments. While the world has understandably been focused on the COVID-19 newsfeed, there have been important industry developments in China, Europe and California that we want to draw your attention to. As they've been underreported to date, we want to put a spotlight on these items. Let's start with China where we continue to have conviction that our joint venture partnership with Weichai provides Ballard with a strong competitive advantage in the Chinese market. We believe we're well-positioned in a large China market where there appears to be continued strong government support for new energy vehicles including FCEVs. Although our Weichai-Ballard JV facility in Shandong Province has experienced some construction delays as a result of COVID-19, construction and staffing levels of the JV have resumed to pre-COVID-19 levels. We're making great progress and expect commissioning of stack and module assembly lines around mid-year 2020. Most of the major manufacturing equipment has been installed and is currently undergoing qualification and commissioning. Importantly on April 23rd, China's government announced immediate changes to new energy vehicle or NEV subsidy programs; which include both fuel cell electric vehicles as well as battery electric vehicles. The overarching goal of NEV programs is for 20% of vehicle sales to be new energy vehicles by 2025. NEV subsidies will be extended until 2022 with no decline this year for public transportation vehicles including transit buses and commercial trucks. We expect further favorable policy developments in China with specifics on future FCEV support schemes to be released by Q3. Over the past few months, the Weichai-Ballard joint venture has worked with four vehicle OEMs; Yutong, Zhongtong, Asiastar, Sinotruk to certify new buses and trucks powered by our JV fuel cell new fuel cell module into the China MIIT program promotion catalog bringing the total vehicle models powered by Ballard technology to 55. At this time, Ballard technology can be found in approximately 50% of the 6,300 plus fuel cell electric vehicles registered in China. Vehicles powered by Ballard have now accumulated over 23 million kilometers of service by public transportation and logistics vehicles operators. We expect the deployment of FCEVs to continue to accelerate with 60 new hydrogen refueling stations expected to be put in service in 2020, doubling the current service capacity. Next, let's move to Europe. Since the start of the year, we've been pleased to receive some exciting new orders in Europe including 45 fuel cell modules to power Solaris buses; 25 buses for deployment in Germany; and 20 for deployment in the Netherlands. A few weeks ago, three fuel cell buses started operation in Aalborg, Denmark, which is about 30 minutes from our facility in Hobro. We've also been excited with the European Commission's posture on moving to carbon neutrality and the important role of hydrogen in decarbonizing mobility, decarbonizing industry and serving as an energy storage medium for renewable energy. The European Commission's Green Deal is a set of policy measures and actions with the aim of transforming the EU's economy for sustainable and climate-neutral future by 2050. This is meant to accelerate Europe's 2030 emission reduction targets to at least 50% and towards 55%. There are eight specific priorities including mobilizing industry for clean and circular economy to accelerating the shift to sustainable and smart mobility. On March 4, the EU Commission proposed that EU climate law which would enshrine the 2050 climate neutrality objective in the legislation. On March 10, the EU Commission set out a new European industrial strategy with an aim to maintain European industries' global competitiveness and ensure that industry paves the way to climate neutrality. The strategy expressly includes in its top priorities measures to modernize and decarbonize energy-intensive industries as well as to support sustainable mobility. As part of this strategy, the commission announced the creation of a clean hydrogen alliance to accelerate the decarbonization of industry. The alliance will bring investors together with governmental, institutional and industrial partners building on the successful template of existing industrial alliances and the great work that's been done under the framework of the FCHJU. And finally, let's move on to California. CARB had already set a statewide goal for public transit agencies to gradually transition to 100% zero-emission bus fleets by 2040 and now CARB has released a final draft of the advanced clean trucks standard. The standard is part of California's proposed approach to a large-scale transition to zero-emission medium and heavy-duty vehicles. The proposed regulations have a manufacturer sales requirement and a reporting requirement. Similar to what happens with passenger cars, manufacturers who certify medium and heavy-duty chassis or complete vehicles with combustion engines would be required to sell zero-emission trucks as an increasing percentage of their annual California sales starting in 2024. The final draft is much stronger than previous drafts doubling the number of zero-emission trucks required through 2035. The final draft increased the percentage requirements between 2024 and 2030 and extended the requirements to 2035 and beyond. Zero-emission sales targets were increased across all vehicle categories and now with the continued increases through 2030 to 2030 rather than flattening out in 2030. The final draft is now proposing that for model year 2024, 9% of all on-road Class 4 to 8 truck sales must be zero-emission vehicles; scaling up to 50% of sales for 2030 and 75% for 2035 and beyond. For the Class 7 to 8 tractors group, the requirements are 5% for 2024; 30% for 2030; and 40% for 2035 and beyond. The sales requirement for Class 7 to 8 tractors were increased to better align with the clean air action plan for the ports of Los Angeles and Long Beach which has a goal for a 100% zero-emission tractor population of drainage trucks at the ports currently at about 16,000 expected to increase over time. The zero-emission tractor deployments will also benefit disadvantaged communities burdened by truck and freight emissions. The policy will apply to truck manufacturers that sell more than 500 trucks annually in California and these are the categories of trucks that we're focused on at Ballard; medium and heavy-duty motive. In the December 2019 report, it was estimated that America's 28 million trucks and buses make up 10% of all vehicles but are disproportionately responsible for 28% of total carbon emissions in the transportation sector with heavy-duty vehicles contributing 45% of NOx and 57% of direct PM 2.5. So, those are some notable regulatory updates from China, the EU and California. We previously discussed many important commercial announcements that have happened over the past eight quarters including announcements from Weichai and Ballard and subsequent announcements from major players like Bosch, Cummins, AVACO, Michelin and Faurecia to name a few. We can now add two more blue-chip names making highly visible investments in the hydrogen fuel cell industry for commercial trucks. In April, Daimler Truck and Volvo Group signed a preliminary non-binding agreement to establish a 50/50 joint venture focused on developing, producing and commercializing fuel cell systems for heavy-duty vehicle applications, particularly commercial trucks. All Daimler fuel cell activities will be consolidated in the new JV; which has an initial valuation of €1.2 billion. This is an exciting development that will increase momentum in the adoption of fuel cell solutions for the global trucking market. In the press release announcing the deal, the parties noted that CO2 neutral transport can be accomplished through electric drive trains with energy coming either from batteries or by converting hydrogen onboard into electricity. For trucks to cope with heavy loads and long distances, they see fuel cells as an important answer. They noted that electrification of road transportation is a key element of delivering the Green deal. Further they noted that using hydrogen as a carrier of green electricity to power electric trucks in long-haul operations is one important part of the puzzle and a complement to battery electric vehicles and renewable fuels. By forming this joint venture, Daimler Truck and Volvo Group are clearly showing that they believe in hydrogen fuel cells for long-term commercial vehicle applications. We believe this is yet another strong validation of Ballard's strategy to focus on medium and heavy-duty motive use cases. As OEMs and Tier 1 suppliers further develop their strategy to decarbonize their vehicles and powertrain offerings, we believe Ballard will be viewed as an attractive fuel cell technology partner for commercial vehicles. I also want to take a few minutes to discuss possible long-term implications of COVID-19 on our industry. While COVID-19 is the clear priority for governments and corporates at this time, we still see the fundamental drivers of sustainability as motivating change in the background. And while it's still early, we wanted to share some initial thinking on the new normal post-COVID. These are some potential trends to watch for over the next 6 to 24 months. 1) We do not expect any deferrals or softening of CO2 emission targets. We believe the transition to green mobility will forge ahead. 2) Recent studies have found a correlation between long-term exposure to PM 2.5 and COVID-19 mortality rates. We believe this will be another factor pushing cities to aggressively promote and accelerate zero-emission mobility to improve urban air quality including further restrictions and bans on PM 2.5 emitting diesel trucks. 3) The increase in e-commerce during COVID-19 will lead to higher penetration of online shopping in the new normal. We believe this will result in more commercial trucks to support deliveries of online purchases which has traditionally been a challenging segment of mobility for emissions abatement. 4) We're seeing positive signs that stimulus packages in the EU, China and the EU-US will include infrastructure spend. We view hydrogen refueling infrastructure as a potential beneficiary in these infrastructure stimulus and green recovery plans. We may also see new subsidies to support the purchase of zero-emission vehicles as part of the green recovery package. 5) Given the economic strains resulting from COVID-19 and contraction in near-term new vehicle demand, we believe many of the vehicle OEMs and Tier 1 suppliers will have insufficient budgets to continue fully investing in internal combustion engines as well as the ACE trends. This presents opportunities for technology companies. They may continue to invest in battery electrification for passenger cars while seeking to collaborate with fuel cell technology partners for commercial vehicle markets, for example. Additionally, we expect COVID-19 to accelerate industry consolidation among OEMs and Tier 1 suppliers. 6) The long-term growth trajectory for renewables should remain intact with growing support for electrolysis we see continued cost reduction on renewables strengthening the hydrogen opportunity. 7) We do not expect the current temporary low oil prices to present long-term barriers to the adoption of the zero-emission solutions. Interestingly, the current oil stock has laid bare the challenge in the oil industry around storage. We believe with low oil prices, the energy majors will increasingly invest more in low-carbon energy and hydrogen. We know recent announcements by BP and Shell on their net zero carbon targets. And 8) We believe COVID-19 will cause many countries to become more protectionist and reconsider national security, energy security and supply chain security in critical industries not just in food supplies, healthcare and pharmaceuticals. There'd be increased pressure on domestic supply chains with more focus on security and resiliency. On a relative basis, we believe green hydrogen and fuel cells offer important advantages from a supply chain perspective compared to battery electrification. We see a brighter spotlight on the vulnerability of the supply chain for critical minerals and rare earth materials using consumer goods, military applications and electrification. Again, it's still early and these ideas represent some of our initial thinking on potential long-term implications for our industry from COVID-19. Now, let me conclude with two final remarks. First, we believe we're taking the right steps to build a great business that will drive long-term growth, improved financials and value for our shareholders. Second, as a final word, I'd like to thank each of our global Ballard team members who demonstrated true resilience and dedication to safety and our customers during this challenging period. With that, I'll turn the call over to Tony to briefly review the Q1 financials.

Tony Guglielmin, CFO

Thanks Randy and good morning everyone. As Randy mentioned, top-line revenue in the first quarter was a Q1 record of $24 million, up 50% year-over-year. In the quarter, power products revenue was up 95%, and technology solutions revenue increased 20%. In power products, heavy duty motive was up $7.8 million to $10.4 million. This was largely due to a year-over-year increase in sales of module parts, kits, and MEAs to the Weichai-Ballard joint venture in China. The increase in technology solutions revenue to $11.6 million was due primarily to the LD program and the technology transfer program with our Weichai-Ballard JV. This was despite the temporary slowdown in China and JV activities in the quarter. Gross margin was 22% in Q1, up eight points year-over-year. The improvement was the result of the 50% increase in total revenues combined with the shift in mix to higher margin product and service revenue. Cash operating costs increased 31% year-over-year to $12.2 million, primarily attributable to increased expenditures in technology and product development. This increase stemmed largely from new hires made throughout 2019 to support investments in our next generation fuel cell products. Adjusted EBITDA in Q1 was negative $9.1 million, an increase of $0.5 million compared to the same quarter last year. This included Ballard's $2.5 million share losses related to the Weichai-Ballard JV. Ballard's net loss in Q1 was negative $13.5 million compared to negative $12 million in Q1 last year, and earnings per share was negative $0.06 in Q1 compared to negative $0.05 in Q1 2019. Both the net loss and EPS numbers include the Ballard share losses from the Weichai-Ballard JV. Cash used by operating activities was $10.1 million in Q1, consisting of cash operating losses of $7 million and working capital outflows of $3.1 million. In terms of liquidity, during March we began executing our $75 million ATM program. During the quarter, this generated net cash proceeds of $52.6 million. We ended the quarter with cash reserves of $181.6 million, 10% higher than the same period last year and 33% higher than the end of the prior quarter. We also added an additional $12.3 million to cash reserves in April under the ATM program. In total, the ATM transactions have added $64.9 million to cash reserves to this point in 2020. This was accomplished with no price discount, relatively modest transaction fees and limited dilution to existing shareholders. Finally, we ended Q1 with an order backlog of $169.5 million and a 12-month order book of $105.8 million. Our sales pipeline remains robust with significant qualified commercial sales opportunities. And with that, let me turn the call back over to the operator for questions.

Operator, Operator

Our first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Rob Brown, Analyst

Good morning. Randy, I just wanted to clarify what you said on the JV operation with Weichai. Did you say that was going to be running kind of mid-year here and then maybe could you clarify the steps that need to happen thereafter to kind of ramp that up?

Randy MacEwen, President and CEO

Great, thanks for the question Rob, and good morning. Yes. So, we had in the last conference call identified we started the JV to start and before the commission mid-year. So, that timeline hasn’t changed. When we had the call last time, we did know that there were some delays that were occurring; we basically had a contractor that was out of Hubei province that was unable to support the JV construction for a period of time. Weichai and the Weichai-Ballard JV has been back to full staffing now for some time. In fact, we have a JV board call tonight. The facility is basically fully constructed; almost all of the equipment has arrived I believe now and is in the process of being commissioned. Achieving mid-year, there are really a lot of fine points in the tent at this point. It's really a matter of optimizing getting equipment fully commissioned and optimizing doing sample runs and stuff like that. So, I think we're in very good shape. In fact, there was kind of a preliminary soft opening of the JV. There are some activities currently underway on some temporary lines. There is a lot of work going on there including with the vehicle OEMs and in terms of qualifying new vehicles and new platforms and on the sales side and we're expecting a good finish to 2020 with the JV as well as a very strong 2021 with the JV.

Rob Brown, Analyst

Okay good, thank you. And then, in the U.S. market you mentioned some pull from California, some movement toward regulatory pull. What are the steps in the U.S. market that you sort of see playing out as a result of that and sort of the timelines you think can develop there?

Randy MacEwen, President and CEO

Yes. I think the highlight that we wanted to focus on with the clean truck standard and we've been actively involved in helping kind of shape this legislation in California as well, and still up for in a final drop. So, it's not all out, of course, but I think the direction we're seeing in the change from the previous version to this final draft is, I think, supportive of a strong outcome. Moving to a regime in some way similar to what Europe did last year where you have very clear emission reductions for Class A trucks in California, now we're talking from Class 2B all the way up to Class A trucks. We see this annual increase from 2024 through to 2035 as a very powerful requirement. Companies like Daimler and those involved with these type of announcements are while they're initially going to be focused, I think, on Europe, that is clearly a requirement for these truck OEMs to meet the requirements that are coming in California. What we've seen in the U.S. of course while you don’t necessarily have good visibility about what's going to happen at the national level, what we see is that California is a very significant influence on climate policy and air emission policy in the U.S. Typically, some of the good regulatory work that's done in California is adopted eventually in other states. So, we think it's really important what California is doing. We're very supportive of the activities there. I believe we'll likely see a favorable outcome on this front in 2020, starting to get very clear requirements for these truck OEMs to start decarbonizing their platforms for 2024. If we look at the timeline of 2024 to 2035 and you look at the increasing percentage requirement each year, not just for the Class 7/8 tractors but Class 4 through 8. We see lots of opportunity there for fuel cell technology that uniquely satisfies the requirements particularly for long-haul, long routes and heavy payloads. We believe Ballard is very well positioned and we need to continue great work on collaboration as well as continuing to progress the technology and the products including importantly product cost reduction, which is a big emphasis for us here in 2020.

Operator, Operator

Our next question comes from Amit Dayal with H.C. Wainwright & Co. please go ahead.

Amit Dayal, Analyst

Great. Good morning, everybody. And then, with the environment shaping up, Randy. Could you talk about how difficult it may be from the end of this market to go down your IP and your history in this space?

Randy MacEwen, President and CEO

Yes. Good morning, and thanks for the question. I apologize, maybe I'm going to ask you to repeat the question, and it was very difficult to hear you.

Amit Dayal, Analyst

I was just asking how you are positioned competitively with the positive long-term developments in the industry. How difficult would it be for you?

Randy MacEwen, President and CEO

The fuel cell technology work is no small undertaking for any company. We've had this for a lot longer and they highlighted they have a history of a couple of hundred past cars and some buses. And kind of millions of kilometers driven. Just in China alone, we have over 23 million kilometers of service with vehicles that have Ballard technology inside and outside of China. We have a long history and the largest fleet of fuel cell buses. So, I think from a competitive positioning, when you look at Ballard, and when you look at technology leadership whether it's durability and power density, reliability, uptime and availability in the field. When you look at product offering, the characteristics required to meet the market requirements. When you look at service support that we have, we have high uptime and availability of our vehicles in the field, and we do an excellent job on the service side as well. And then when you look at brand reputation, and importantly partnerships along the supply chain side, we've been working with many key partners there to qualify materials, and we're very encouraged with the opportunity for product cost reduction going forward at this system level at the stack level, at the MEA level, and plate level. So, a lot of work being done with the supply chain. When you think about market access side and strategic partners like Weichai, we have I believe the strongest possible platform in the China market and a huge competitive advantage because of our relationship in our joint venture with Weichai. It's a very compelling company. They continue to prove that every week. Overall, we have a very strong position aligned with a lot of these long-term implications for structural industry change as a result of COVID-19. We believe that decarbonization will be front and center. We are very well-positioned; we've been talking about the medium and heavy-duty motive industry for years now. We've always highlighted three key reasons that we focus on that industry: 1) value proposition for fuel cells are strongest where you have long range a need for fast refueling and heavy payload. 2) These markets typically have opportunities for return to base refueling. So, solving the refueling side is much easier than say on the passenger car market. 3) You're hitting a market segment that's very difficult to update. I don't believe batteries are going to satisfy the use cases for a number of these class, heavy-duty trucks. Fuel cells offer the only viable solution for zero-emission decarbonization of these vehicles. These are vehicles that have a disproportionate contribution to emissions. So, I think we're very well-positioned. We still have lots of work to do. We're continuing to improve our operations, and we're investing in advance manufacturing. At the end of this year, I hope some of the travel restrictions will abate. However, we are making great changes in our facilities in terms of how we manufacture our products, increasing robotics, shrinking tag times, compressing steps, expanding capacity and lowering costs. We're very excited about what's going on, not just technology improvement but advanced manufacturing and operations side as well. A lot of work needs to be done to meet the demanding requirements for these markets in high-volume commercialization. We believe we're making the right investments and engaging the right partnerships to make it happen.

Amit Dayal, Analyst

Let me say that there, Randy, regarding the environment. We've seen these developments still in the early stages of taking shape. But are you seeing a big change in inbounds you're getting with your quest to test pilots some of your offerings?

Randy MacEwen, President and CEO

Yes. So, what's been surprising frankly is that we knew for a long time that the bus and truck markets were going to be very important markets. They are large addressable markets, and we have good positioning in these markets. What surprised me frankly is the activity levels we're also seeing in some of the other market segments. So, rail, marine, forklift, but also even stationary power; increasingly there is more activity on the DG side. I think there are a number of markets that are very surprising to the upside; I would probably put a spotlight on. Each of these markets will take time. You're not going to see high revenue values next quarters from these markets to be clear. However, the level of quoting activity and the proposals that we're looking at and the customer collaboration opportunities we're negotiating are very exciting, and we're seeing new geographic markets pop up as well. I think there's a lot happening that has been accelerated. I don’t know if it's COVID-19 necessarily, but we started feeling this just before late 2019 and early 2020, and it's really accelerated in the last few months as well.

Amit Dayal, Analyst

Thank you, Randy. And thanks a lot and I’ll turn it over.

Operator, Operator

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

MacMurray Whale, Analyst

Hi, good morning. When you mentioned, Randy, about the hydrogen programs in China expecting some developments to be revealed in Q3. Can you speak first of all whether there is any involvement of Ballard at Weichai or the JV in shaping that program and whether there's any sort of insight you can provide in terms of the size of the timing of the types of stimulus?

Randy MacEwen, President and CEO

Good morning, Mac, thanks for joining and thanks for the question. I think what we'll likely see and it could be as early as June or July. We're always reluctant to give a time, particularly when talking about regulatory environments. They seem to take longer. We expected these to be in place earlier this year but, of course, COVID-19 has caused some delays on that front. I suggest thinking about it as June through July. That's the timing in terms of the announcement. A lot of discussion is happening in the markets about what the new fuel cell subsidy scheme may look like. I believe a number of parties have been influential in helping shape this, including industry groups and companies that have access to regulatory authorities at the national and provincial level. I don’t want to get into detail of how we get to influence this or how our partner influences this, but I believe that Weichai has a very loud voice in the market. They're the largest manufacturer of diesel engines in China. The fuel cell platform that they're building out with Ballard is I believe going to be the leading fuel cell business in the country. A lot of support exists for Weichai in transitioning their portfolio to provide zero-emission solutions. In terms of what the scheme might look like, we understand that there may likely be five or six key regions identified for significant policy support, and subsidy support. These regions are clusters that will both support the adoption of fuel cell vehicles, particularly in heavy-duty motive bus and truck, as well as hydrogen refueling infrastructure. We’re going to need to wait to see this come out. I believe it will be highly supportive of long-term growth in this market, and we believe there will be long-term visibility. I don’t think this is something where every six or twelve months we need to wonder what the policy is going to be. I anticipate sufficient visibility for companies to invest appropriately. I believe it will be highly supportive, and I'm quite excited about it. Additionally, I believe there will also be cascading provinces that come out with cascading subsidy announcements that will be very supportive too.

MacMurray Whale, Analyst

Okay. And then just following up on visibility. On the 2000 unit committed by Weichai, do you have any additional insight into where they'll be deployed or by whom or what the plan is there?

Randy MacEwen, President and CEO

We do. We're going to follow Weichai's lead on our communications on this, Mac. They have commented publicly that they expect these primarily to be buses. There will be some trucks as well, and there are different regions that they'll go into, primarily in Shandong province.

MacMurray Whale, Analyst

Okay. And then just a couple of things perhaps from Tony. Just in terms of modeling over the next couple of quarters, if we would see revenue pushed out, can you remind us of the stakes versus variable overhead in sort of the cost to goods sold, whether we'll see a big jump in the burn rate because there will be fixed overhead not being covered? I'm wondering about that. And then second question is just can you go over the anti-dilution rights that Weichai has given the 8(a), how that works with the aftermarket financing?

Tony Guglielmin, CFO

Sure. So, let me, and thanks Mac. Let me deal with the second question first. This is regarding the Weichai anti-dilution rights. Weichai does have the right to top up with regard to any new financing, whether public market or private financing we do to top up to 19.9% related to the financing. So, regarding the ATM specifically, the $75 million program, Weichai has indicated to us they do intend to top up to maintain the 19.9%. So, that would be off of thus far about $16 million relative to what we did thus far. If we complete the program, that might move that $16 to $17 or $18 million of addition. This will now be funded under a private placement with Weichai. They have indicated they will top up; it's just a question of timing. We expect that to close sometime but likely in the second quarter, but at this point we don’t have a firm window on it. So, that's the anti-dilution rights specifically that they have, and we do expect them to exercise. Now, for your other question regarding the cadence of revenue and fixed and variable overhead. I have to admit, I don’t have the numbers in front of me right now, Mac. However, Q1 is somewhat illustrative at a revenue number of around $24 million, as was highlighted or as you've seen. We did see a pump-up in gross margin from Q4 last year, particularly when we had a lower level of revenue and certainly Q1 of 2019. So, with that 22% gross margin in Q1, we're already starting to see that type of absorption of the overhead. I could find the numbers, I'll certainly get back to you on the call. If not, we'll take it offline. But as we think about Q2 and the rest of the year, we had signaled that we expected to see a decent Q1 which we believe we've seen a little bit below $0.02, all things considered. We are expecting to see some improvement into the second quarter notwithstanding some of the delays that Randy mentioned. Of course, we would expect, as we signaled in the past, a fairly strong second half of the year of course assuming that there isn’t a sort of a round two of any COVID situation. Let me get back to you on the numbers, but I would expect to see the gross margin that you saw in Q1, at that revenue level will likely improve slightly as revenue goes up when you absorb more.

MacMurray Whale, Analyst

Okay, yes we can do that offline. And just as well I probably have a question about the pricing that Weichai will get, whether they will match the average sort of prices that the market was buying in?

Tony Guglielmin, CFO

Yes. I could touch on that quickly, just that is an important point. They get it all; it all ties into the timing. Weichai has the right to top up. In our investor rates, we've offered them the ability to top up at the end of the quarter or at the end of the ATM program. Depending on which option they choose, yes, they do get the benefit of the weighted average price under the ATM, but there is a TSX restriction on pricing. So, if they close, they get that VWAP, but if the closing is delayed and the stock price rises appreciably, then they will be subject to whatever restrictions the TSX has on maximum allowed discount to the closing date. In theory, they would get the benefit of the VWAP, and if the number is to be figured out, the VWAP for the ATM shares that we issued thus far is a bit over $8, about $8.13 if I recall was the VWAP under the shares issued today. In order to get that, we'd have to close fairly quickly. So, whether they enjoy that or not is dependent on the function of our closing.

Randy MacEwen, President and CEO

Yes, Mac, it's Randy. I wanted to add to that. I believe Weichai will increase their investment, whether it’s at the $8.13 VWAP or a higher price due to TSX restrictions. I see it as a strong signal. Consider that they invested back in late 2018 at $3.54 U.S. Their decision to add to their investment at these levels indicates the value they see in Ballard.

MacMurray Whale, Analyst

Okay. Excellent, thanks.

Operator, Operator

Our next question comes from Jeff Osborne with Cowen and Company. Please go ahead.

Jeff Osborne, Analyst

Yes, thanks. What it's been discussed, Randy. But maybe just on China. Is there any update outside of Weichai and the JV to share with any other potential customers or avenues to revenue growth?

Randy MacEwen, President and CEO

Thanks for the question, Jeff, thanks for joining. Yes, so on the rail side, it was just late December early January when the first tram line in the world started commercial operation on the Gaoming line in Foshan in Guangdong Province. There has been some disruption to the operation of that tram line during the COVID-19 situation. The activities from CRRC have been kind of on pause. We want to get data off the first deployments there. So, I think there's increasing investment likely to occur in China on the rail side and we see zero-emission rail as a key component of that. I do believe there's lots of opportunity not just in Europe with Siemens but also in China with CRRC on the rail side. Then the pass-car market is another market that we've been looking at and we've had discussions with a number of different vehicle OEMs and Tier 1 suppliers on the opportunity for the Chinese passenger car market. It's evolving slowly, particularly in the last few months, but we’ll see how that shapes. We believe there are opportunities in that market. Another interesting point in my mind, this is within the joint venture; the material handling market is a market segment that we're seeing some interest in, globally. We have three key projects in the fuel cell-powered forklifts segment. I believe that China is a market longer-term where we're going to see some traction for fuel cell forklifts, especially as we become increasingly important there. Those are key markets I see, along with our legacy nano-fuel cell technology being used at the Synergy Ballard JV; there are continuing sales by the JV to users of the nano-fuel cells stack. That's another revenue opportunity we've identified going forward as well.

Jeff Osborne, Analyst

Got it. And that was very detailed. A real quick, with the Green Deal in Europe and obviously a lot of moving parts there. But is there any risk to the JIVE program maybe slowing down and then things like that that are one-off game rolled into a broader infrastructure package or vision?

Randy MacEwen, President and CEO

There's a possibility. I think what we've seen is that every time there are European bus demonstration programs, it always takes longer than we would typically hope. We're seeing progress, of course; we have now some of the orders over the past 120 days particularly with Solaris. We're seeing lots of opportunities in the European market that are bubbling below the surface where volumes look to be next stage on the bus side. Of course, the commercial truck market is going to be a huge market I believe in Europe. We expect to see more announcements both in mainland Europe and in the UK.

Joseph Osha, Analyst

Hello everybody, long time, Randy.

Randy MacEwen, President and CEO

Hi Joe, how are you doing?

Joseph Osha, Analyst

Just fine. I'm curious about what you think on some of the, I'll call them the soup to nuts competitors. Nikola brings to mind. There are some others that seem to believe they can do everything from the fueling to the heavy truck to the power train to the fuel cell. Did those companies ultimately represent potential customers or do you see them sticking with kind of not-in-my-backyard mentality?

Randy MacEwen, President and CEO

Yes. I won't comment specifically on Nikola, but just that overall model we are seeing others potentially talk about these models where you basically offer transportation based on mileage driven or a lease rate and say we'll take care of designing and manufacturing the vehicle, we'll take care of supplying the hydrogen refueling infrastructure and we'll take care of the financing. It takes a lot of capital and a lot of business complexity to deal with all those variables. Partnering is a key way to mitigate that risk and will drive whether or not that type of model is going to be successful. As companies look at this space, technology on fuel cells is not easy. If it was easy, it would have been commercialized a long time ago. Ballard is in a leadership position on the technology front, and I think as companies scratch the surface and invest time understanding where the challenges are on commercializing high durability, high power density, and high performing fuel cell technology, I believe they're going to need partners, whether it's vehicle OEMs, trucks, buses, passenger cars, and Tier 1 suppliers for all of these markets. A number of them are going to be looking at Ballard as a company that has technology, making it a viable partner rather than attempting to do it all in-house. Particularly as they look to invest in autonomy, connectivity, electrification, the battery side of things, shared mobility, and even continued investments in internal combustion engines. Companies will recognize collaboration as a more powerful model than trying to do it all yourself. Even those organizations that believe they can accomplish everything internally, I think Ballard will have opportunities within those companies. The number of kilometers we're accumulating increases every day in the field. Our uptime availability rates are improving, our technology is maturing, our products are becoming more robust. For customers who have their brand on the front of a truck or bus or their brand on service delivery for materials or people, durability and reliability are paramount.

Joseph Osha, Analyst

Thanks. And then just a follow-on. I'm wondering if you've had any conversations with some of the folks looking at electrolysis. In particular, I'm hearing from say New Fortress Energy and then some other folks about this idea of hydrogen production with zero or even negative cost wind power in particularly in the middle of the day. What potential exists for your business to cooperate with some of the fueling infrastructure businesses? Thanks.

Randy MacEwen, President and CEO

Yes. So, great question. We've long considered the potential of electrolysis technology. We see two homerun opportunities in the hydrogen fuel cell trigger, and there are others in addition. The two opportunities are 1) fuel cell technology for medium and heavy-duty motive applications and 2) electrolysis to generate green hydrogen, supporting the Paris climate accord objectives. We follow the electrolysis closely and are aware of all of the companies in this space. It's been interesting to see positioning in the last year where those requiring hydrogen not just for the fuel cell technology but for the hydrogen production have also seen investment. Linde and other gas companies are on the rise, making investments in electrolysis companies and establishing joint ventures. I'd say the gas giants are increasingly getting more invested in electrolysis and see opportunity there. Jurisdictions like Australia, and Saudi Arabia are really looking at electrolysis and green hydrogen as ways to decarbonize and see economic development opportunities. I mentioned earlier BP and Shell looking at net carbon zero mandates long-term. Ramco is starting to join this type of course looking at hydrogen roadmaps in the future; electrolysis will be critical. We don’t have proprietary technology at Ballard focused on electrolysis, and there's been the theory that fuel cell technology and electrolysis is a reversible technology that hasn't really proven out to be that way. Practically, there are many challenges. There is core competency and significant technology knowhow directly relevant to both, and it is a strategic area of opportunity as we think about M&A opportunities that we frequently examine. I do think we've been focusing on partnering for that part of the ecosystem and notably the e-mobility ecosystem to bring not just fuel cell technology but solutions for end-customers. For example, last year we announced the H2 Bus year program which brought together a consortium of tank provider, hydrogen fuel cell technology from Ballard, as well as electrolysis technology in hydrogen refueling infrastructure solutions. We do partner and collaborate, and this is a strategic area with substantial emphasis. A McKinsey report came out with the Hydrogen Council in January forecasting a 40 to 50 times increase in electrolysis over the next four to five years with most of that already accounted for in identified projects. Electrolysis will scale up over the next five plus years, and we will see massive cost reductions. I believe those with leading electrolysis technology will have significant market value.

Joseph Osha, Analyst

Excellent, thanks for the insight.

Randy MacEwen, President and CEO

Thank you, Joe.

Operator, Operator

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

Randy MacEwen, President and CEO

Great. Thank you for joining us today. We look forward to speaking with you again in August when we have the results for Q2 in 2020. Thanks again.

Operator, Operator

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