Ballard Power Systems, Inc.

in 2023. Turning to the truck market, we continue to emphasize the need for patients in this market vertical while Tier 1 OEMs develop truck platforms to bring to the market. However, in the interim, we established a new partnership with Ford Trucks for the European heavy-duty truck platform, along with another engine manufacturer in Europe. We believe these partnerships offer roots to scaled commercial volumes in this segment. We have a double lane focus for the truck vertical. We'll continue to work towards establishing new relationships with truck OEMs and support them through the development phase of their fuel cell truck platforms and on to scale deployment. At the same time, we'll continue to be proactive in working with vehicle integrators and upfitters and end users to bring fuel cell truck platforms to the market in advance of the major OEMs. Given an increasingly supportive national and state policy complex in the U.S. for zero emission trucks and fleets, we believe the U.S. will be a key market for the adoption of hydrogen powered fuel cell trucks. 2023 was an important year for our rail vertical. Revenues for the segment were up nearly four times from the prior year, and our order book is also up. We're delighted to see growing market interest from our customers, CPKC, Siemens and Stadler. We believe that interest from operators in using fuel cell engines to decarbonize rail lines continues to grow given the market requirements for high power and long distances and the avoided cost of catenary wire infrastructure. We experienced significant growth in our marine vertical with revenues in 2023, while still relatively modest, roughly three times greater than the prior year. We're also pleased with the performance of Norland's MF Hydro Ferry, the world's first liquid hydrogen-fueled powered ferry, as it has now accumulated 4,000 hours of runtime in real operation with excellent reliability. Our order backlog for marine customers also experienced growth has now doubled from the same period in 2022. Our order backlog, combined with our purpose-built marine fuel cell engine that has two type approvals, positions us well to work with an increasing number of customers that want to decarbonize their marine operations. In our stationary power market, we saw revenue grow by 15% in 2023. Revenue growth was driven by shipments to an increasing number of applications that use fuel cells for stationary power. For example, we saw megawatt scale deliveries for customers using fuel cells to power data centers, EV charging stations, and even to support grid balancing in renewable power projects. We've also seen the emergence of medium power applications where fuel cells are deployed to power construction sites, TV and film production sites, EV charging, and smaller data centers as well. Our backlog from stationary power customers declined 36% year over year, reflecting the lumpy nature of this business. However, subsequent to the quarter, we received an order for 15 megawatts of fuel cell systems from a UK-based company that specializes in renewable off-grid power generation. We're particularly excited about this repeat customer, as 15 megawatts is more than triple the cumulative amount of fuel cells ordered by this customer previously. This demonstrates substantial momentum with this customer's platform and emerging opportunities for hydrogen fuel cells as a solution in the stationary power markets. In 2023, we completed a successful demonstration of our fuel cell technology where it provided backup power for a data center over 48 hours with 99.999% uptime in partnership with Caterpillar and Microsoft. This project provides substantial learnings that position us to capitalize on the growing power demand of data centers. The data center market offers considerable opportunities to deploy our products as backup power. As of 2022, data centers consumed 84,000 gigawatt hours of power. To meet future power requirements of data centers, it's estimated that a further 70 gigawatts of renewable power capacity will be needed and added by 2027, and 21 gigawatts of fuel cell power will be needed over the same period. In our emerging markets vertical, revenue declined 27% year-over-year, driven primarily by the conclusion of certain technology solutions programs and lower shipments to customers in the material handling and off-road segments. Our order book was also modestly lower at the end of the year compared to the prior year. Similar to the truck market, the adoption of fuel cells in key heavy-duty markets like off-road vehicles and construction equipment is still in the early innings. In the near term, we'll continue supporting customers like First Mode as they plan deployments of their new gen solution to power ultra class mining haul trucks with Ballard fuel cell engines at Anglo-American mining sites. We're also excited to see our customer applied hydrogen deploy our fuel cell in a 30 ton excavator platform that will begin demonstrations in 2024. Now looking at our key geographic regions. European revenue grew close to 30% year-over-year and now accounts for more than 50% of our total order backlog. We continue to see important hydrogen policy developments in Europe. The EU has agreed on CO2 emission standards for heavy-duty vehicles that will require emissions to be reduced by 45% by 2030 for all vehicles above 7.5 tonnes and for city buses to be reduced by 45% by 2030. The EU has also unveiled a target to reduce carbon emissions by 90% by 2040 as part of its Fit for 55 legislation, a target we expect will drive further interest in hydrogen fuel cells. Lastly, the EU launched its first auction for hydrogen production subsidies valued 800 million euros in the fall of 2023. and will launch an auction for further €2.2 billion of support in spring 2024. In North America, we see momentum for hydrogen and hydrogen fuel cells accelerating over the past year. Revenue from the region increased by more than 30% in 2023, while the order backlog for North American customers has more than doubled over the past year. For the US in particular, 2023 was a milestone year from a policy perspective. as seven hubs were awarded $7 billion to support the adoption of hydrogen across the value chain, while the IRS provided guidance for the 45 green hydrogen production tax credit. These policies, combined with electric grid limitations, will provide favorable tailwinds to our industry through 2032. We're also encouraged by continued support at the state level with California recently announcing close to $2 billion of funding that will be available to support the build-out of hydrogen refueling infrastructure, another key unlock for greater adoption of fuel cell vehicles. We now turn to provide an update on China. And as a reminder, we have a joint venture with Weichai Power based in Weifang, Shandong Province, that addresses the bus, truck, and forklift markets in China. The JV was established in 2018 as 51% owned by Weichai, and 49% by Ballard. Since that time, we built a new production facility in Weifong to manufacture bipolar plates, assemble stacks, and manufacture fuel cell engines, all based on Ballard stack designs. Ballard supplies MEAs to the JV, and the JV facility has approximately 225,000 square feet, including manufacturing lines for annual production capacity of 34,000 fuel cell stacks, and 20,000 fuel cell engines, representing 2 gigawatts of fuel cells. Over the past few years, the Weichai Ballard JV has developed a product suite of fuel cell engines for the China bus and truck market with nominal power ranges of 50 kilowatts, 80 kilowatts, 110 kilowatts, 160 kilowatts, and 200 kilowatts. In terms of market adoption, we note that the hydrogen fuel cell industry struggled during the three years of various lockdowns during COVID-19 in 2020 through 2022, and with constrained local government funding coming out of COVID. We're also seeing a very challenging macroeconomic environment in China, as well as continued challenges related to the hydrogen fuel cell electric vehicle policy landscape. Notwithstanding these challenges, the market made measured progress in 2023. For full year There were approximately 7,500 fuel cell electric vehicles sold in China, bringing total deployments to approximately 21,000 fuel cell electric vehicles, including approximately 7,300 fuel cell buses and 13,700 fuel cell trucks. Now, given that our Weichai-Bala joint venture doesn't have a strong exposure to the five cluster regions under the National Fuel Cell Policy Program, our market share was adversely impacted in 2023. Our Weichai Ballard JV sold approximately 200 modules in 23, primarily for the Shandong bus and truck market. Importantly, there's been continued investment in hydrogen refueling stations in China. At the end of 2023, 320 HRSs had been completed in China, which is almost 100 more than the end of 2022. There's also an additional 140 HRSs currently under construction, which would bring the total HRSs to 460 in China. In Shandong Province, there are 29 HRS in operation with another nine under construction. In a recent important policy development, which we believe is quite favorable to the Weichai Valley joint venture, the Shandong government had issued a new policy on February 29th that hydrogen fuel cell trucks will be exempted from paying highway tolls in Shandong for two years. This is expected to provide about a 20% TCO cost savings for truck operators and should be an important catalyst to the adoption of fuel cell trucks in Shandong. The market is expecting other provinces to follow suit later in 2024. RJV is still assessing this new policy, including implications for 2024 and 2025. Based on the current sales activities and this new policy, we're expecting growth in the fuel cell engine sales in 2024 at the Weichai Bellar JV. We're encouraged to see our business in China recover in 2023 as revenue grew by 30% year-over-year in line with our key geographic markets. With that review of the verticals and the regions, we note that consolidated market activity rolled up to a record new order intake of $64.7 million in Q4. Let me repeat that. We achieved record new order intake of $64.7 million in Q4. Now, when we look at our order backlog, it stood at $130.5 million at the end of the year, down 3.3% compared to the end of Q3. There's some important context here. This new record order intake of $64.7 million in Q4 was more than offset by a reduction of $47.1 million resulting from record engine shipments during the quarter, and the removal of $21.7 million from our order backlog of previously booked orders from a specific customer now experiencing financing and related program delays. We believe this was a prudent approach at this time. We're working closely with this customer as they finalize their financing plans to enable a return of orders to the order book and a resumption of shipments in later 2024. Notably, we highlight that orders from power products represent more than 80% of the order backlog, while orders from customers in Europe and North America represent almost 80% of the order backlog. With that, I'll turn it over to Paul to discuss our financials.

Thanks, Randy. In Q4, Ballard delivered $46.8 million in revenue, a record level of quarterly revenues for Ballard and an increase of 132% compared to the same period in the previous year, driven by strong growth in the bus, rail, and marine verticals. Ballard reported a gross margin of negative 22%, although this figure was negatively impacted by non-cash inventory provisions. Adjusting for this non-cash inventory charge, Underlying gross margins in Q4 were negative 1%, or very close to break-even, driven by revenue scaling across fixed manufacturing costs and success with our product cost-down initiatives. Our activity levels and product shipments in Q4 demonstrate our ability to successfully ramp and scale our production volumes, proving that we have the capabilities to meet growing customer demand. For the full year of 2023, Fowler delivered revenues of $102.4 million, equating to a 25% annual growth. As we discussed at the Capital Markets Day earlier in the year, we projected margin improvement as revenue scaled and cost reduction initiatives were brought to fruition. Reported gross margins of negative 21% were impacted by non-cash inventory charges, which when adjusted for, lead to a full year margin of negative 9%. compared to negative 10% in 2022, demonstrating progress in achieving gross margin breakeven as our revenue scales. We do not expect the same level of inventory adjustments to persist in 2024, giving confidence in our ability to achieve our gross margin targets. However, as revenues move up and down by quarter, gross margins will vary due to our fixed manufacturing costs. We reported total operating expenses of $149 million, including expenses for BMS, at the upper middle range of our guidance, and capital expenditures of $41.4 million at the bottom end of our guidance. Our total cash used in the business decreased by close to $48 million to approximately $163 million. We ended the year in a strong financial position with $751 million of cash. Our financial results were materially impacted by a number of non-cash charges in the year. As noted previously, we recorded $12.6 million of non-cash charges in our cost of goods sold as a result of impairments to inventory of previous generations of products. Our net income was impacted by an equity investment impairment charge of $12.9 million, reflecting the compression of general market valuations for zero-emission vehicle manufacturers in our portfolio long-term financial investments. and intangible asset and goodwill impairments of $2.3 million and $24 million, respectively, as a result of our decision to wind up the Ballard Motive Solutions business. Consistent with last year, we are now providing our guidance for total operating expense and capital expenditure in 2024. We anticipate total operating expense to be between $145 and $165 million, and for capital expenditures to be between $50 and $70 million. The increase in total operating expense guidance reflects inflationary increases and an acceleration of Ballard's efforts to develop a family of next-generation products for small, medium, and large power requirements to streamline our product portfolio, thereby advancing product cost and initiatives across margins. The increase in capital expenditure guidance reflects a deferral of spending related to Ballard's next manufacturing facility from 2023 to 2024. Given the macroeconomic outlook and in the context of our 2024 annual operating plan, we continue to review our spend carefully to ensure we are appropriately investing in our growth strategy while maintaining a strong balance sheet. We expect that revenues in 2024 will be back-end weighted on a roughly 30-70 basis for H1 and H2, similar to 2023. We also expect that underlying gross margins will follow a similar path in 2024 as they did in 2023 as revenues scale through the year. We expect gross margins will break even or turn positive in Q4. With that, I'll turn it over to Randy to wrap up the call before Q&A.

Thanks, Paul. In the context of heightened geopolitical risks and continued de-globalization, we want to provide an update on our global manufacturing strategy, which we refer to as local for local. This is a plan to ensure we have the appropriate manufacturing footprint and assets in each of our three key markets, North America, Europe, and China, to support expected regional market demand growth through 2030. In 2023, given an increasingly constructive hydrogen policy landscape and increased market activity in the US and Europe, and given the continued hydrogen fuel cell policy uncertainties and market delays in China, as well as geopolitical risks, We decided to suspend our MEA localization plan in China while we completed a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the US and or European markets. We've concluded our comparative review and have prioritized the US as the highest priority market for our next manufacturing facility. We have selected a site and are negotiating our land acquisition agreement. As an important part of this process, in 2023, we also submitted certain applications for government funding support in the US, and we expect to receive definitive feedback in the near term. Looking forward, we believe the transition of hydrogen policy announcements to implementation will provide mid-term momentum for the availability of low-cost, low-carbon hydrogen, enabling accelerated adoption of fuel cells. In the context of an increasingly constructive policy environment, a growing sales pipeline and order book, along with our continued investment in product cost reduction and advanced manufacturing, we're well positioned for strong, long-term market share. Finally, we expect 2024 will be marked by continued growth in our order backlog, major order announcements from customers in our bus and stationary power verticals, and the announcement of our next manufacturing facility, each of which will serve as important milestones on our journey to scaled adoption of hydrogen fuel cells. Ballard is well positioned with a growing product border backlog, industry-leading fuel cell technology for our market applications, key customers and partnerships across our target markets, industry-leading deployment experience, and a strong balance sheet. We're confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. With that, I'll turn the call back over to the operator for questions.