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spk11: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems third quarter 2022 results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.
spk00: Thank you, operator, and good morning. Welcome to Ballard's Third Quarter 2022 Financial and Operating Results Conference Call. With us on today's call are Randy McEwen, Ballard's CEO, and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. Before we discuss the quarter, I would like to provide an update on our Investor Day. Given scheduling challenges with our current priorities and recent additions to our senior leadership team, we have made the decision to reschedule our investor day to the first half of 2023. We will provide additional details early in the new year. I'll now turn the call over to Randy.
spk01: Thank you, Kate, and welcome everyone to today's conference call. We made important customer progress across our verticals during Q3 while also advancing our global manufacturing strategy and product cost reduction initiatives. In Q3, We delivered $21.3 million in revenue with approximately 57% of our revenue coming from heavy-duty motive applications. This highlights the ongoing intentional shift in our business towards an increasingly product-focused company. We also note there's been a significant change in our revenue mix by geographic markets in 2022 as compared to 2021. Continued challenges and delays in the China fuel cell market have adversely impacted 2021-2022 revenue and have masked the underlying growth we are seeing outside of China. For the first three quarters of 2022, revenue for Europe, North America, and rest of the world is up approximately 22%, while China revenue is down approximately 68%. In Q3, we secured new orders totaling 31.8 million. This activity improved our total order backlog, bringing it to approximately 102 million at the end of Q3. The increase was primarily driven by European orders, which now make up over half of our total order backlog. Our backlog at the end of Q3 did not include the LOI from Siemens Mobility to supply 200 fuel cell engines over the next six years. We're pleased to report that subsequent to the quarter, we've now received a firm PO from Siemens for 100 fuel cell engines at 200 kilowatts each. This order will be reflected as a material addition to our Q4 order backlog. Our strategy is to develop PEM fuel cell technology and products that can be applied across multiple market applications where our fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling infrastructure are lowest. These markets include bus, truck, rail and marine, as well as select stationary power generation markets. will provide a brief update for these applications. Our bus vertical continues to see important progress in Europe and the US. After having secured platform wins with a number of bus OEMs over the past few years, we expect these customers to provide sticky, repeat sales opportunities as transit operators begin to deploy larger fleets in the face of increasing mandates to transition to zero-emission buses. This is now playing out in our sales outlook, with multiple cities in Europe and the US now planning the largest deployments of fuel cell buses in history across these markets. There remains strong momentum in Europe for adoption of hydrogen and fuel cell solutions. Recent additions indicate larger rollout plans across the continent. For example, European transit operators in four cities have announced plans to deploy almost 300 fuel cell buses. Solakin carrier DPB is rolling out up to 40 hydrogen fuel cell buses and Polish transport operator MPK Poznań plans to purchase 25 fuel cell electric buses. These announcements are in addition to existing plans from Cologne, Germany and West Midlands, UK, planning to deploy 100 and over 120 fuel cell buses respectively. We're confident Ballard is well positioned to participate in supporting these plans across Europe through our strong OEM customer and end user relationships. We are seeing a similar transition in the U.S. where California initial pilot and demonstration projects are moving to fleet deployment. An example of this transition is Foothill Transit, a California bus fleet operator in the L.A. area deploying 33 fuel cell buses from bus manufacturer New Flyer powered with Ballard fuel cell engines. This is an exciting milestone as Foothill will be the first transit agency in North America to deploy fuel cell buses on a full deployment as a mature product versus a demonstration fleet. The 33 buses will represent approximately 10% of their overall fleet. Supported by an Inflation Reduction Act and bipartisan infrastructure law, there's been a tangible shift in momentum for hydrogen solutions in the US. We anticipate this momentum to continue as initial capital allocations are made in 2023 for the $8 billion of investment in the U.S. hydrogen hubs. Now taking a look at the truck market. We made exciting progress this quarter. At the IAA trade show in September, we unveiled our FCMove XD concept engine for heavy-duty mobility, displayed in Quantron's 44-ton fuel cell electric truck. Our new product was met with significant market interest at the show, During the quarter, Ballard received a purchase order from Quantron for 140 of these HXD engines to be deployed over the next two years. We also had a very busy quarter with respect to the rail market, as we see the value proposition of fuel cells in certain rail applications driving long-term adoption. As an example, our fuel cell technology offers a compelling zero-emission power solution for commuter trains on non-electrified lines. We'd entered into two new geographic rail markets in Q3. We announced an initial order to train manufacturer Stadler to support the first hydrogen-powered train in the U.S., and to MEDTA, a leading rail systems integrator contracted by Indian Railways, to develop India's first hydrogen-powered trains. In addition to signing new rail customers, we made meaningful progress with our multi-year collaboration with Siemens Mobility, as noted earlier. Over the past four years, we've been developing a fit for purpose fuel cell engine with Siemens Mobility for the passenger rail market. Following the quarter, we announced an order for seven trains and an LOI to supply 200 fuel cell engines over the next six years, including a purchase order for 100 of the engines. This marks our first commercial commitment and long-term supply agreement in rail, and we look forward to progressing this market with Siemens Mobility as they are now commercially selling Moreo Plus H fuel cell trains to European customers. This is an important milestone for the industry and for Ballard. We continue to see high engagement levels in our marine markets, specifically in our current target markets of coastal and inland applications. The achievement of the DNV type approval for FC Wave product is an important differentiator for Ballard. We expect to see demonstration projects starting in 2023, including one of our flagship marine projects with a Norled ferry in Norway. In Q3, we continue to see growing interest in the stationary power generation market. While this nascent market continues to be developed, we expect the segment to become increasingly meaningful to our business over the coming years. Now looking to the key geographic regions. We recently introduced our global manufacturing strategy local for local. We plan to have scaled manufacturing of leading fuel cell engines and components in our core regional markets of North America, Europe, and China to support further and future industry growth patterns and volumes across our verticals. In Q2, we announced our plans relating to U.S. manufacturing capabilities with a new module manufacturing facility which is on track to be in operation in early 2023. We continue to see increased sales in North America with revenue up 80% quarter over a quarter and 40% from Q3 last year. We expect continued demand growth for our technology in the U.S. as previously announced policies such as the IRA materialize over the next 12 to 18 months. In Europe, there's a steady flow of news around continued policy support. Recently, the European Commission announced more than 10 billion euros will be invested in the hydrogen economy in Europe. These projects will catalyze the European market to drive down the cost of low carbon hydrogen, making the total cost of ownership and value proposition of our solutions increasingly competitive. As part of our local for local strategy, we continue to evaluate opportunities for manufacturing expansion in the coming years to align with regional demand trajectories. we remain confident in Ballard's position to take advantage of growing European market opportunities across our verticals. Moving to China, we have high conviction on long-term scaled adoption in China of fuel cell electric vehicles for medium and heavy duty mode of applications. Our Weichai Ballard JV continues to develop fuel cell modules for the bus and truck markets and is ready for high volume production. The JV is starting to see clear indicators of next steps in the China fuel cell bus and truck market from both a policy perspective and a market demand perspective. We expect to see significant growth in the China market in advance of 2025 adoption targets with a major ramp from 2025 through 2030. We recently announced plans to invest approximately $130 million over the next three years in an MEA manufacturing facility and R&D center in Shanghai. This investment is also supported by significant incentives by the local governments. This site is strategically located at the Jading Hydrogen Port, positioned in one of China's leading automotive industry clusters. This facility will enable annual production capacity of approximately 13 million MEAs, which will supply approximately 20,000 fuel cell engines. This is expected to meet market demand in China, including from the Waychai Ballard Joint Venture for bus, truck, and forklift markets, as well as other opportunities outside the Waychai Ballard JV scope. The facility is planned to be in operation in 2025. This facility, in combination with our MEA manufacturing in Canada, is expected to supply our global MEA capacity demand through 2030. Our investment is expected to reduce MEA manufacturing costs align with China's fuel cell value chain localization policy, and position the Weichai Ballard JV and Ballard more strongly to participate in the hydrogen fuel cell demonstration cluster regions and for the post-subsidy market. We're also setting up an R&D innovation center at the same site to engage the emerging China local supply chain for fuel cell materials and components. I want to re-emphasize this point. As reflected in the recent China 20th Congress, energy security is a top priority for China. We see renewables and green hydrogen as key beneficiaries as China accelerates its plan for strong China energy policy. We believe China is a market headed for a significant demand breakout as green hydrogen production and hydrogen infrastructure scales over the coming years and as our new MEA production facility comes online. Shifting to our financials in the quarter, as we discussed last quarter, we continue to see a challenging gross margin picture, which we expect to persist through next year. The further downward pressure in Q3 was driven by a combination of a shift in revenue mix, the impacts of pricing strategy, higher fixed overhead costs, inventory adjustments, and an increased inflationary supply costs. As previously communicated, we continue to see a challenging gross margin picture which we expect to persist through 2023 until volumes ramp and our production cost product cost reduction initiatives move into production. Our 2022 annual total operating expense and capital expenditure guidance remains unchanged from $130 to $150 million and $30 million to $50 million respectively. Our planned capital spend towards the China investment in 2022 is included with our current guidance range. The majority of the capital towards the manufacturing expansion in Shanghai will be distributed between 2023 and 2024. We currently expect to come in at the upper end of our total operating expense guidance range and at the lower end of the range for capital expenditures for 2022. Given the macroeconomic outlook, and the context of our 2023 annual operating plan, we're actively reviewing our go-forward OpEx and CapEx spend to ensure we're appropriately investing in our growth strategy while tightening our overall spend to reduce cash burn. We continue to make meaningful strides against our product cost reduction targets. Our product cost reduction initiative is to reduce our fuel cell stack cost 70% from 2018 by 2024. we're tracking ahead of plan notwithstanding inflationary pressures. We'll continue our work to secure platform wins with customers across our core verticals. We believe Ballard is well-positioned with a strong balance sheet, industry-leading fuel cell talent and technology, and key partnerships and customers across our target markets. We believe we can make a meaningful impact by providing zero-emission solutions for our customers to achieve their decarbonization goals. With that, I'll turn the call back over to the operator for questions.
spk11: Thank you. We will now begin the question-answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We request all questioners to kindly ask one question and one follow-up only. We will pause for a moment as callers join the queue. The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.
spk04: Good morning. Good morning, Rob. Just following up on the Siemens order in the rail market, could you give us some color on what's driving that demand profile and sort of the opportunity in that product category?
spk01: Yeah, great question, Rob. And effectively what we're seeing in Europe is the operators of commuter rail are looking for decarbonization opportunities. And where you don't have electrified lines and you look at moving away from diesel, the cost of overhead catenary wire infrastructure is quite prohibitive. And so effectively, we see this market with about 15,000 diesel trains in Europe that need to be replaced over the next 15 years, including, I think, about 3,000 in Germany alone. And so we're seeing this transition occur, and Siemens is very well positioned with what they characterize as a next-generation fuel cell train. And this train, the Moreo Plus H, they've been working on developing for about five years. And in parallel, we've been working on developing our fuel cell engine. So having demonstrated that actually about a month ago live at an unveiling of the train, a lot of interest. from the market there and we're expecting to see significant growth. And I think this is what's given Siemens the confidence to enter into LOI with us for 200 fuel cell engines and now a purchase order for 100 fuel cell engines given the sales activity they're seeing in their pipeline.
spk04: Okay, great. And then on the China MEA facility, How do you see that CapEx investment rolling out? Is that weighted between 23 and 24 differently, or is it pretty even?
spk01: Yeah, maybe I'll just offer some initial comments, and Paul can supplement as well. In terms of the CapEx, there's significant orders that need to be placed this year, given long lead times. But actual cash implications, obviously there's deposits on key equipment, but the cash implications really start to hit in 2023 and 2024 materially. There's some that will, you know, show up in 2022, late 2022, obviously, but that's contemplated already in our CapEx spend for 2022. Okay, great.
spk10: Thank you. I'll turn it over. Thanks.
spk11: The next question comes from Erin McNeil with TD Securities. Please go ahead.
spk02: Hey, morning all. Thanks for taking my questions. Randy, as it relates to your MEA facility in China, you noted the capacity, the 13 million MEAs, 20,000 vehicles. I guess I'm wondering what sort of productivity assumptions you think are reasonable once the facility is operational in 2025, and then what sort of data or news should we be keeping an eye out for to refine that view between now and then?
spk01: Yeah, great question, Aaron. I think just with new facilities coming up, you're going to see a period of time where things get optimized. We're pretty excited about some of the initiatives we're planning for that MEA production with some additional advanced manufacturing initiatives. So from a utilization perspective, I'd expect it to be relatively low in 2025. But as I mentioned earlier, we see a significant ramp from 2025 to 2030 in China. And in advance of the 2025 targets that are out there, a number of cities and jurisdictions, provinces, and of course, nationally, there are targets for 2025 adoption. So I think we're going to see a pretty significant ramp from 2025 to 2030. I would expect utilization to be in the you know, lower end of the range in the initial year, but pretty significant adoption after that.
spk02: Okay. Switching gears a bit, Paul. You know, in the past, revenues have typically had a bit of seasonality, you know, higher second-half revenues versus first half of the year. I'm just wondering if that sort of anecdote holds, just given the decline in the 12-month order book this quarter, So I guess I know you don't give guidance on revenues, but even at a high level, you know, should we see that sequential uptick in Q4 like we have in prior years?
spk08: Yeah, we don't. Thanks for the question, Aaron. We don't give revenue guidance. What I would say is sort of the trends that we've been seeing and the change in the mix of our revenue that we've been seeing from, you know, more favoring power products and less on TS, as well as the sort of dynamics of lower revenue from China, I don't think you can count on prior patterns to remain the same, not only in 22, but I think in 23 as well. So we do see those trends continuing into 23. We see higher sales in Europe and in North American power products. We see a shifting in our lesser a lesser proportion of revenue in technology services and even at lower margins. But we're attracting in new customers, new platforms, strategic customers into TS type of contracts with the hope that we're going to translate that into power product sales and longer term revenue opportunities. So I wouldn't say, just to answer your question directly, I wouldn't say you could count on past patterns being the same because I think our revenue mix and how we're changing our revenue mix over time is changing.
spk02: Okay. Makes sense. And I'll jump back in the queue. Thanks. Thanks, Aaron.
spk11: The next question comes from Rupert Mayer with National Bank Financial. Please go ahead. Hi.
spk13: Good morning. Good morning, Rupert. Good morning. With the MEA plant you're building in China, you signed an investment agreement with the local government. And Randy, you highlighted there are some incentives from the local government. Can you give us more color on what those look like?
spk01: Yeah, in aggregate, the incentive package is around 10 million U.S. dollars. And it's focused in a number of areas, as you would expect. CapEx, the cost of land is effectively subsidized. And then, if you look at some of the opportunities for labor support as well, we see basically support across all different cost categories. So, it was a very comprehensive package prepared by the local government there in Jading District and Ting Town in Jading District in Shanghai. And this is the outcome of about a year working with a number of different jurisdictions on subsidy packages. and looking at where to localize based on the policies and the cluster regions. Jia Ding is actually in two of the cluster regions, which is quite interesting, as well as looking at access to talent, including R&D capability, and then the subsidy package as well. And so we had the strongest package here from Jia Ding District.
spk13: Great, thanks. And leading up to 2025, it sounds like you've got a little more visibility on how things can develop in the Chinese market. Can you remind us what the targets look like for 2025 and what needs to happen between now and then to kickstart the market?
spk01: Yeah, so there are targets nationally as well as by province and by city. You know, typical like Guangdong, for example, will have a certain number of vehicles, particularly trucks and buses that they want deployed by 2025 and 2030, similar in Shanghai, etc. And, you know, what I think you'll see as signposts that that's tracking is actually the hydrogen refueling infrastructure starting to scale in these jurisdictions. We've seen that even during a very challenging COVID period in China in 2022. that fueling infrastructure continues to get deployed, and particularly in these cluster regions. So I think you're gonna see in 24, 23 and 24, significant scaling, both on green hydrogen production, there's a lot of activity going on in China on green hydrogen production and skilled electrolyzer projects, as well as fueling infrastructure getting rolled out to support larger fleets. I think that, in my mind, is important. And then on the commercial side, you'll see announcements in different regions of scaled projects. For example, we're expecting, you know, pretty significant deployment of buses in Shandong. So these are the type of things that I think you can see over the next 24 months.
spk13: Great. Thanks. So we'll leave it there. Great.
spk11: The next question comes from Mac Whale with Cormark Securities. Please go ahead.
spk17: Hi Randy I'm wondering with this local for local strategy whether there's a technology fork occurring like if I'm wondering if you could speak a little bit to whether there'd be a big cost advantage is that what you're focused on and if so can you export if there's going to be sort of a tax impact there?
spk01: Yeah Mac thanks for the question a couple of points there one is that we are trying to design core fuel cell technology that applies across the multiple verticals as well as across the different regions to get leverage and to have not only at the Ballard technology advantage, but a unit volume, therefore a cost advantage. So that's our strategy. In terms of the technology front, we are seeing a very fast advancing China supply chain across the value chain. And so I can give you a couple of examples. for MEAs, plates, and modules for components and materials that we have been testing and validating and introducing into bill of the materials as we go forward as part of our cost reduction initiatives. And so staying on top of that very dynamic market is critical. And I do think that we will see a large part of the bill of materials in engines, fuel cell modules, where you see new compressors and humidifiers and hydrogen recirculation blowers, pumps, valves, sensors, etc., that will be sourced in the China market increasingly going forward. We are identifying the volume in China, both for our MEAs, but also at the JV level, that we have the ability, of course, to, at Ballard, export modules from the JV, as well as to export MEAs globally and use those globally. While we're identifying that this is a satisfying local demand for MEA going forward in the China market, we also have the flexibility to source those MEAs internally from our China operation and sell them globally. There is a duty on importing MEAs into China. That duty will increase over the next number of years. And so as we get to 2025 and domestic
spk17: ballard domestic mea production having uh meas being produced in china will be a significant cost advantage uh you know with the um duties that are that will be introduced there okay great um and then following up i'm not sure if it's that related but perhaps it is um it's been you know a year now with motive solutions um sort of under your management i'm wondering has the capabilities that brought resulted in the benefits you sort of expected a year ago? How is that progressing relative to your original goals?
spk01: Yep, Mac, thanks for the question. I think to understand, too, just as a reminder for everyone, part of what we're looking to do is to simplify the experience for customers and reduce customer adoption friction points by taking fuel cell engines on board their vehicle platforms. And so part of our thesis there is to collaborate with customers Partners that supply different balance of plant components like we're doing with 4c power for battery packs for the same bus and truck applications as an example But also to in-house some capabilities and so acquiring what used to be our cola energy now Ballard motive solutions is really helping us with customers to look at optimization of their powertrain a lot of application engineering and so a couple of customers for example are have already received pretty significant support packages and have engaged with us through Ballard Motive Solutions. Wisdom Motor is a company based in China that's exporting fuel cell buses and trucks globally. We've been supporting them on integration of fuel cell engines into their vehicles. So that's a very powerful example. And similarly with Quantron, providing a lot of support for Quantron as they start deploying, you know, as early as next year, fuel cell trucks into a growing market opportunity. So these capabilities are supporting customers and are achieving the objectives intended at the time of acquisition.
spk17: Great. Thanks, Randy. Those are my two.
spk01: Great. Thanks, Mac.
spk11: The next question comes from Michael Glenn with Raymond James. Please go ahead.
spk16: Hey, good morning. Randy, just in terms of the China investment, if we think about that investment in combination with the JV already in place in China, is the ramp in volume at the JV increasingly dependent on you being able to produce MEAs in China?
spk01: Yeah, Michael, thanks for the question. It's a very important point. It's not by happenstance that our volume capacity at the MEA production facility planned in Shanghai matches very much the volume capacity for the JV from an engine perspective. And so, as I mentioned, the duties on imported MEAs will become a competitive disadvantage if we're not in a position to supply the JV with local MEAs. And so this is a very significant development for the Wai Chai Ballard Joint Venture to have low-cost domestic MEA access to MEAs, as well as doing it in a city, in fact, a district, Ja Ding, that has exposure to two of the cluster regions. So I think this is critically important for the JV, and we're seeing significant improvements and market interest at this time developing across the cluster regions now, as well as in Shandong Province. And we expect the ability to supply low-cost MEAs to help the JV be competitive in the market.
spk16: And thanks for that. And then just on the order book, the number at the end of the quarter was 50. $1 million. This is the 12-month order book. How do we use that number? What type of interpretation should we make about revenue over the next 12 months when we look at that 12-month order book?
spk08: Hey, Michael. It's Paul here. I'll address that one. First of all, I'll say I think the key point for the quarter is that the total order book increased 11% to $102 million. I think that's quite encouraging and is We mentioned that doesn't include the Siemens contract, which will be announced for the order, the purchase order for Siemens for the 100 fuel cells. That's going to be coming on top of that. So I think that's the first point I think about the order book. On the 12-month order book decreasing to $51 million, so a net decline of 10, what was also included in there was the largest contributor. One of the largest contributors to the drop was shifting out from the 12-month order book the remaining portion of the tech transfer agreement we have with the joint venture. So that was pushed out to the 12-plus month timeframe. We're in the process of renegotiating the scope of that remaining contract, but fully expect to earn this revenue, that revenue going forward. The timing could be adjusted over the next couple of years, so we expect some of that to come into 23. but 23, 24, you know, most likely. So what we're seeing overall is, you know, all of the revenue trends that we talked about earlier in 22, we see that continuing into 23. We are looking to add more strategic platform customers in both TS as well as the product opportunities. And, you know, overall, I think the solid growth in the total order book to me is the most significant point and very encouraging.
spk01: Yeah, I'll just add one point there, Michael. One of the things that's really encouraging to me is the ability of the Weichai Ballard Joint Venture to develop and design fuel cell modules for the bus and truck market. And so that has actually occurred, that ability to do it effectively at the JV level with less support from Ballard has occurred far faster than we had originally envisioned. And so the portfolio of products being developed by the JV has shifted significantly. And so we are in the process of looking at how to support the JV going forward with a growing portfolio of fuel cell modules, a different size ranges, et cetera, and how we can actually incorporate that portfolio into the Ballard product roadmap going forward as well. So a lot of important work to be done here. over the coming months with the JV to streamline the paired portfolios for efficiency, but also, you know, just the capabilities of the JV to quickly design modules is very impressive.
spk10: Okay. Thank you. The next question comes from Alex Kenia with Wolf Research.
spk11: Please go ahead.
spk14: Great. Thanks for taking my question. Maybe could you expand a little bit just on the thoughts on kind of pricing strategy that you mentioned and the prepared remarks and maybe tie that in with just kind of overall how you're seeing competitive forces, competitors developing and maybe the various markets between China, North America and Europe.
spk01: Yeah, it's a great question. Let me comment a little bit and just remind everyone kind of where we are as an industry, right? So there's lots of policy support in Europe, in the U.S., and in China for the adoption of green hydrogen. And the U.S. and Europe particularly, we're now starting to see advancing towards specific support for the applications. And so I think there's a recognition that there's a lot of policy and a lot of emphasis that's been placed on the supply side for hydrogen but not enough emphasis and policy on the demand side. And so as a result of that, the end users still don't have a strong value proposition when you're talking about hydrogen fuel cell engines and battery packs and storage, et cetera, that are in low volume for these applications. So high cost, low volume. So our strategy has been very deliberate to enable the end users to adopt early stage demonstration projects, to enable OEMs to develop their platforms and make investments with their platforms, and effectively all parts of the value chain and the ecosystem really leaning forward on the cost structure in order to get these early vehicles out in the field, accelerate adoption, get field experience, and start moving from demonstration projects to scale deployments, which we're now seeing with our Quantron order and with our Siemens order and with the bus commitments that we're seeing. And so early stage still, but as we move to higher volume and as our product cost initiatives take hold, we see cost reduction in excess of selling price reductions which will translate to gross margin expansion at the same time that we're seeing better absorption of our fixed overhead cost structure. So it's been a very deliberate and strategic pricing strategy in a market where the value proposition is still emerging in low volume at high cost and where competition, who are not as well positioned as Ballard, are very aggressively trying to pursue platform wins. Great, thanks very much. Great, thank you.
spk11: The next question comes from Craig Sher with Tuhi Brothers. Please go ahead.
spk07: Good morning. Thanks for taking my question. So apart from technology advantages, do you have a sense, given your new planned MEA facility in China and your WHI-JV, for just how much of the hydrogen equipment or fuel cell equipment domestic manufacturing you'll be representing in country?
spk01: Yeah, there's been some interesting reports published on the, I'll call it the total production of fuel cell technology globally. at the end of 2021, and we'll expect to see something similar at the end of 2022 and 2023. There haven't been a lot of forecasts on what that will look like in 2025. Obviously, announced projects get put into the mix with some forecast information. But I think in the China market at this scale, we will be, in my opinion, one of the perhaps the largest MEA manufacturer in China announced at this time. for MEAs. And similarly to JV, the largest manufacturer of fuel cell engines announced at this time. There are other companies looking to localize in China. Johnson Matthews made some announcements. Umacore has made some announcements. So different parts of the value chain are coming into the China market as well. But I do think when you look at fuel cell engines and MEAs, this probably represents the largest announced plans for MEAs, certainly from international companies moving into the domestic market. Very challenging to get some of the plans on the domestic companies that are not making similar type of announcements, private companies.
spk07: Understood. That's definitely helpful. And my last question, do you have any rough thoughts or bookend outlook for the progression of perhaps a wind down of technology solutions revenue in the 23 and 24?
spk01: Yeah, if you kind of look at TS revenue over the last number of years, it typically, until recently, has been around the $10 million mark, typically. And you'll see that stepping down in 2022 as some of our key projects shift and in some cases, come to an end of program, like the Audi development work. So I do think you're going to see TS comprising a relative immaterial percentage of our overall revenue as you look out to 2025 and beyond, but an important part of the revenue. And I say that because it's seeding new customer relationships and supporting the fuel cell dreams of customers that are looking to commercialize fuel cell technology and don't have in-house capabilities. And transitioning them over time, like we've done, are doing with Anglo, like we're doing with Siemens, like we're doing with other customers to purchasers of our fuel cell engines, we see as an important seeding opportunity. So, you know, I would expect it to be below $10 million in revenue going forward There may be periods where there are significant activities, but we don't see the size and scope of programs that we've had historically translating moving forward.
spk07: Thank you.
spk01: Yeah, thanks for the question, Craig.
spk11: The next question comes from Jeff Osborne with Cohen and Company. Please go ahead.
spk12: Thank you. Good morning. A couple questions on my end, Randy. I was wondering on the gross margin trajectory, a lot of questions on that, and I'm sure it'll come up at the analyst day as well. Just relative to the targets that you had laid out a year and a half, two years ago at the prior analyst day of 20% to 30%, I was wondering, is the right way to think about the progression towards breakeven and then ultimately those goals out to the end of the decade? I believe it was entirely driven on revenue levels or mix, or is pricing... a bit more of a headwind. I'm just trying to understand, you know, even getting from negative 20% to zero, what that looks like, and is that even achievable in the next 12 to 18 months?
spk01: Yeah, sure. Great question, Jeff. And you're right, we'll have a lot more to show you on the bridge to stronger gross margins in the 2025-2030 time period at the Investor Analyst Day, so look forward to that. Certainly, if you look at gross margins for this quarter, there were some one times, I would characterize them as these type of things, like inventory adjustments when you're in a very dynamic market with product changes and supply chain disruption. It's a difficult fact pattern. That could continue over the next year or two as well, but I do think we're going to see as volume increases and as our product cost reduction starts to translate into production, so not just in the labs and in development activities and qualifying activities for materials, but actually moving those materials into production, we do expect to see significant cost reduction that's going to help significantly. And as those volumes materialize, we're heavily burdened right now with our fixed overhead cost structure relative to low volumes. So we do see a pathway to more exciting gross margins that help imply a sustainable business model. And we'll provide that bridge in more detail as we move out to the call next year, as well as the investor and analyst day. Paul, I don't know if there's anything you want to add to that.
spk08: I think you covered it. Covered all the key points, Randy. I think getting great, strong, strategic relationships with large, high-quality customers and working with them on their programs, when we see the volumes ramp up, we do expect to see when prices will probably still keep coming down, but we expect costs will come down at a quicker pace, and that will expand margins. Some of the other points that Randy made, particularly around inventory management. I mean, it's been incredibly, for all companies, incredibly challenging time managing inventory when you think externally about COVID and supply chain issues and freight costs and even just availability, but leading to much longer lead times. And then combined with that, or on top of that, us strategically investing in new products, new next generation products and moving these customers to those lower cost products, some older parts are going to become obsolete. So that's going to happen. I think the effect is certainly when you look at percentage of gross margin, the effect is kind of amplified when you have lower levels of revenue. I think as we look out further, we would still expect to see some revenue adjustments from time to time. We may even have some at year end in our own business here in the short term. But I think the effect of those on the gross margin will become less and less as revenues scale up.
spk01: Jeff, one thing I want to add, because you did ask about pricing too, is that we are seeing different pricing dynamics in different verticals. And I think that's going to play out significantly as well, particularly as some of the larger opportunities in marine and stationary start to contribute more heavily in the revenue mix in the future.
spk12: Just to follow up on that point, to say that trucking is the most aggressive of everything you focus on? Yeah, you're absolutely right. And then just a nitpick question, but could you quantify what the import duty is of MEAs from Canada into China? I'm just trying to get a sense. It sounded like you were sharpening your pencil on CapEx and OpEx for next year. just in light of everything going on. And so I guess the only pushback I would have is if that's a relatively small number, maybe why not wait to ramp up China in 2026 versus 25, given the past two to three years have been a bit of a disappointment relative to the expense and time that you personally have put into that facility with Weichai.
spk01: Yeah, so fair comment. And it's something we debated a lot, as you might expect, in terms of when was the right time to make this investment. The the duties are relatively modest at this time so kind of and it's as all things are it's very complicated to To give you a number, but I'll just kind of roughly three to five percent right now for imported MEAs But this is going to eight twelve fifteen percent by 2025 Based on the information we have and so that is a major deal when you're talking about you know a very you know, market that is very price sensitive in China. So, you know, bringing this on in 2025 we think is the right timing given what we see on that front.
spk12: Remind me, MEA is what, 40-ish percent of the stack cost, give or take?
spk01: It's about 60% of the stack cost.
spk12: 60, okay. Yeah. Great.
spk01: Yeah.
spk12: Thank you. You're welcome.
spk11: The next question comes from P.J. Juvicar with Citi. Please go ahead.
spk06: Yes, hi. Good morning, Randy. You know, the IRA in the U.S. creates a significant tailwind with the production tax credit and the $8 billion investment in hydrogen hubs. How would Baylor take advantage of that? And were there any plans or strategy that you put in place in last eight weeks since the IRA was passed?
spk01: Yeah, thanks for the question, PJ. And we're actively working with partners in hydrogen hub submissions. So we're, you know, we'll see next year where the hydrogen hubs are announced. There's a lot of debate on how many there will be and where they will be. And so there might be five, six, maybe even more than that. So we are expecting to see a very high level of collaboration engagement here over the next number of weeks as, you know, the Hydrogen Hub activity, both in terms of submissions and responses and iterations likely get filtered through next year. So we're very active on that from the collaboration side. You know, we have a strong track record. for delivery of fuel cell technology and modules in a variety of applications. And I think the bus market is one where people are focused on, but the truck market is another one. We're seeing a lot of interest in activity and we're very engaged on as well. Of course, we're not involved in the actual production of hydrogen or hydrogen refueling stations, but all of these applications require offtake. And so there's a significant, I would say more activity than ever at this time, both in Europe and the U.S. on matching up hydrogen supply and application demand. So there's off tank commitments and that's where Ballard fuel cell technology can play a very material role.
spk06: Thank you. And secondly, you know, your strategy was to make MEAs in Canada. and then export them around the world, including Europe. And now that you will be exporting out of China, what is the competitive situation or where does Canada fall on the cost curve for MEAs? Thank you.
spk01: Yeah, just to be clear, we have a lot of flexibility in our MEA supply after 2025. So today through 2025, 100% of our MEA demand comes out of our MEA production capabilities here in Vancouver. After 2025, we have the option to supply global demand, not just China demand, from our Ballard MEA facility in China as that comes up. We also, of course, have the continued capacity here in Vancouver. So I think this provides us a lot of resilience. Some markets may have preferences for local demand. And we'll have to see how that plays out as we move out to 2025 to 2030. But we think we have the right volume, aggregate volume, as well as the right flexibility in our business model as we move out from 2025 to 2030 and the scaling that will occur across the verticals, across the regions during that time period.
spk06: Randy, I guess my question actually was would Vancouver be much higher cost in terms of manufacturing compared to China?
spk01: Oh, sure. Okay. Yeah, sorry. I apologize. I didn't appreciate that the point you're making. Certainly Vancouver is not a manufacturing center. You know, if you had a white piece of paper and you're starting things anew, you likely wouldn't have, you know, the type of footprint we currently have in Vancouver. So, we will continue to have what I would call prototype manufacturing capabilities in Vancouver. And as we look for scale, you know, our advanced manufacturing initiatives that we're doing in Vancouver will apply to that scale in lower cost regions. So, we are seeing both in plate production and MDA production significant lines of sight on, you know, not just material cost reduction, but labor cost reduction as well. As we look at MEA localization in China and some of the advanced manufacturing initiatives there, we're talking about very automated MEA production facility, which will see some cost benefits, of course. Most of the costs for MEAs are materials. Labor is a relatively modest portion, but when you get to a point in your product lifecycle and your cost structure where you need to you know, break pennies in half, we're going to be very well positioned with this MEA manufacturing facility. Great. Thank you.
spk06: Thank you for the color. Great. Thanks, PJ.
spk11: The next question comes from Greg Waszkowski with Weber Research. Please go ahead.
spk15: Hey. Good morning, guys. Thanks for taking the questions. Randy, you mentioned that the – and correct me if I misheard you here, but You mentioned that your combined capacity from the facilities in Vancouver and Shanghai will support your projected NEA demand through 2030. But then you guys are also doing the local for local, looking for potential facilities in Europe would probably seem to make sense. I'm just curious, if you go through with that, if we see some announcement on a facility in Europe, how should we think about that effect on kind of all three presumed facilities there, whether it's kind of lower utilization across the three or maybe a later production target in Europe or a smaller facility in Europe or something. Just curious how we should think about that if it's kind of extra capacity, if you will.
spk01: Yeah, Greg, thanks for the question. Let me be very clear that we at Ballard are fairly vertical integrated in our manufacturing. So we design and manufacture the MEAs we just talked about. We design and manufacture the bipolar plates. We design and manufacture our fuel cell engines. So as we look at markets, one of the key questions we look at is what scope of work, what scope of manufacturing needs to go into that specific region? So as we look at Europe, you know, I think our current model is looking at manufacturing of fuel cell engines in Europe. I don't see a need from a volume perspective, absent any mandated local MEA policies in Europe. I don't see a need for us to scale MEA manufacturing capacity in Europe on top of our current plants. What we are looking at for Europe is a much lower CapEx investment around the fuel cell engines. for the key markets where we're seeing demand in Europe. So bus, truck, rail, and marine are the four markets. So we're doing that already today with some investment in our existing Denmark facility for the marine space. And as we look at the bus, truck, and rail markets start to scale in Europe, we'll look at other markets, low cost, access to high talent, access to end customers, access to OEMs, access to supply chains. and strong policy support and subsidy support from local governments, those will be the variables we'll look at as we determine the right scope of manufacturing and the right location and timing.
spk15: Okay, that makes sense. Thanks for that clarification, Randy. And then for my follow-up, you mentioned you're seeing pretty strong demand on the marine side. Is that purely from boats and vessels, or does that include some of the clustered infrastructure in the ports as well, like support vehicles or hoteling, et cetera? Or does that kind of roll into stationary power? I'm just curious how you're seeing those demand clusters kind of develop and evolve here and how you ultimately bucket them and plan on organizing them in your financials.
spk01: Yeah, I would say the answer is yes across all those different opportunities, there's a lot of interest. And I want to caution, of course, it's early stage interest, right? So we still need to get marine vessels on water where we're providing propulsive power. But we do see applications for onshore power. This is a number of different regions that are expressing interest in this. So there's a lot of engagement right now. This cool ironing opportunity, as it's sometimes referred to as, is something that we see growing you know, from 2024, 2025, onwards through 2030. But there's a lot of work that has to happen with these ports and with these clusters in Europe and in the U.S., for that matter, and in China, where we expect to see a very large fuel cell marine market as well, by the way. So I think we're going to see marine applications develop in a number of market segments, and we're going to have to be very selective in which market segments our products apply to and our sales qualification process to make sure we're pursuing the high value opportunities.
spk15: Got it. Okay. Thanks, Randy.
spk10: Thanks, Greg.
spk11: The next question comes from Kashi Harrison with Piper Sandler. Please go ahead.
spk05: Good morning and thank you for taking the question. So just first one for me, with respect to the Siemens announcement, can you give us a sense of how to think about the dollar value of the purchase order and then part and parcel with that when you expect to convert that backlog into revenue?
spk01: Sure. So I think kind of an easy way to think about Akashi is that the metric that's used in the industry overall is roughly speaking $1,000 per kilowatt. What I would say is this is a real application. This rail application has very onerous codes and standards, you know, the shock and vibration requirements, packaging, etc. So the rail market, you see a significantly higher selling price as a result of that. There's obviously significant higher costs associated with that as well. So, you know, if you just did a crude kind of $1,000 times 200 kilowatts per module, times 100 engines, you end up in the $20 million range. This is significantly higher than that.
spk05: Got it. We'll look for that in your report next time. And then just maybe a question about the strategy with opening an MEA facility in China. How do you think about just the risks surrounding IP? And then maybe just more broadly, how are you thinking about the geopolitical risk of opening a facility in China, given the globalization trends we're currently seeing and rising friction between the East and the West?
spk01: Yeah, I think that's a very important question, something we spent a lot of time, as you might imagine, assessing the geopolitical risk. And it's actually in some ways the geopolitical risk that's really entrenching on the China side. Their clear mandate to reduce dependence on imported goods energy and certain imported technologies, et cetera. And so we do see renewable energy playing a very large portion of the grid mix in China increasingly as you move forward. And we see hydrogen as a very key enabler for China to promote energy security. And so we do see China as a long-term largest market for hydrogen and for fuel cells. And in order to play in that market, you need to make investments in country. As we look at our ability to assess kind of what the geopolitical implications are with assets in China, we got comfortable as many other international companies are as well at this time. I mentioned a few that are also investing at this time. You also have other companies like BASF, a large chemical company that's making significant investments in China. So it is a risk and something we considered and something that as we think about our other markets as well, having production capacity in multiple locations, we think is going to be a very important risk mitigator to our business plan in the future in ensuring we have business continuity is critical. And so I think this idea of having local for local with the right scope of work in country and making sure we have the opportunity to supply local demand with local production will be quite valuable.
spk10: Thank you.
spk11: The next question comes from Craig Irwin with Roth Capital Partners. Please go ahead.
spk03: Good morning and thanks for taking my question. So Randy, you guys have done a really good job on cost out over the last many, many years, right? Led the industry because of that, right? The technology and the approach. Can you maybe talk a little bit about the go forward on your 70% cost reduction goal? How much of that is dependent on further refinements to things like system design versus component selection and component sourcing? and volume, which seems to be the emphasis of the conversation today as you look at building out some new, very large, highly automated facilities.
spk01: Yeah, we're well along on this, Craig, and thanks for the question. We have invested significantly historically in product improvements while at the same time reducing product costs. And I think the work that's happened over the last few years and will happen over the next few years will be the most important in the company's history, both from a performance perspective as well as from a cost reduction perspective. And we see very encouraging new developments that were never contemplated in our 70% cost reduction that I think will be very additive, not just at the MEA level, but as we look at modules as well, we're seeing significant development in the supply chain there for balance of plant components. We're very optimistic all around there. We have the 70% three by three program, Craig, that you're referring to. 55 of that 70% is already realized. So we have a very small portion to go here over the next period. So we see a lot of confidence on getting beyond that 70%. We're certainly tracking ahead of program at this time. And also with some of these additional developments in 2022 that could have major cost implications for us, you know, as we move forward, as I said, that were previously contemplated. I think this is going to be one of the strongest stories that, you know, the industry will have with this cost reduction of fuel cell technology.
spk03: Excellent. Excellent. So my follow-up question then is $1,000 a kilowatt was a sort of rule of thumb you used earlier in the call. And that's the number we've been tossing around, gosh, I think around 10 years at this point. Can you maybe talk about, you know, the opportunity for that to come down over the next couple of years as you maybe use a little bit of strategic pricing and balance the improvements in cost for margin versus customer price?
spk01: Yeah, and to be very clear, it's come down below that materially in the bus market already and in the truck market. So the strategic pricing that we talked about earlier isn't at those historic elevated levels. So it's happening already, but we do see, and we'll talk about this in detail in the Investor and Analyst Day, a really compelling pathway below possibly some of the DOE benchmark expectations for the truck market as an illustrative example. So we're very encouraged by what we see, and this will translate to not only pricing reductions for customers over the coming years, but more importantly, higher cost reductions that will enable, I think, material gross margin expansion.
spk03: Great. Well, thanks again for taking my questions. We look forward to this analyst day. Thank you.
spk01: Great. Thank you, Craig.
spk11: This concludes the question and answer session. I would like to turn the conference back over to Randy McEwen, CEO, for any closing remarks.
spk01: Well, thank you for joining us today. We look forward to speaking with you next quarter.
spk11: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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