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spk01: fuel cell buses in Europe, they're expected to close in the first half of this year. These tenders should lead to subsequent order activity in this segment, driving deliveries starting in 2023 and through 2025. As an example, our customer, Solaris, recently announced that it has won an order for 52 fuel cell buses from Gustrau, Germany, which we expect to move in our order book later this year. We're also excited that we've onboarded three new bus OEMs with bus platforms powered by Ballard entering the market. Moving to the truck market, while revenues in this segment were roughly flat from the prior period, declining revenues from China during this period have masked the seven times growth we've seen in our truck market outside of China compared to Q1 2022. The majority of our revenues in the quarter were driven by European fuel cell truck market opportunities. Going forward, we anticipate revenue activity in this segment to accelerate in the second half of 2023 and in 2024, supported by our order book and sales pipeline. To be clear, the truck market is in the very early phases of fuel cell market adoption. However, we've seen a clear shift in the past six months driven by strong end customer interest in decarbonizing freight and a resulting increase in OEM's evaluating development programs for new heavy-duty truck platforms. There's a heightened understanding of the relative merits of fuel cell electric powertrains in meeting duty cycles with high-range, high-payload, or high-energy demand requirements. We believe our track record of proven safety, reliability, and durability, along with our product offering and roadmap, and our ability to support the integration of our products in fuel cell powertrains, position us strongly to bring substantial value to OEM customers and our shareholders. We continue to make important progress in the rail market. We successfully delivered modules to CP Rail for their locomotive projects. Our current order book for rail customers is weighted towards the second half of 2023, including anticipated deliveries to Siemens and Stadler. Additionally, in the near term, we expect a meaningful follow-on order from one of our rail customers as they start transitioning, deploying a greater number of fuel cell trains. Our marine vertical continues to see strong customer interest, and we expect to deliver the majority of our close to $5 million in order backlog this year. While we continue to make steady progress with our partners in the marine market, we also recognize that adoption is still early stage, and this will drive lumpy revenue from quarter to quarter. We're pleased to announce a significant deployment milestone. The MF Hydra, the world's first liquid hydrogen powered ferry, has now entered passenger service in Norway. The ferry is powered by two 200-kilowatt fuel cell FC wave modules and can carry almost 300 passengers, eight crew members, and 80 vehicles at a speed of 10 knots. As a result of the liquid hydrogen storage, the MF Hydra is able to sail up to 21 days before refueling and will decrease carbon emissions for this route by up to 95%. In our stationary power market, we received a follow-on order from a stationary power customer for 3.6 megawatts comprised of 36 100 kilowatt modules. This was the primary driver for our 25% increase in the backlog relating to the stationary power customers. We're very pleased with this order as we supported this customer as they began developing and demonstrating their stationary power units and this customer is now choosing Ballard as their supplier for larger production runs. For our emerging market segment, we note that this segment benefited from the Audi Technology Service Contract throughout 2022, which is now completed, a factor that will be a headwind for comparative periods in 2023. We're optimistic about the rest of year performance supported by a 25% increase in backlog compared to Q4, driven by orders from our off-highway and material handling customers. Of particular note is our customer first mode upsize their purchase order in Q1 from 30 to 35 modules for Anglo mining haul trucks with module shipments expected in 2023. Wrapping up our vertical based discussion, we want to remind everyone of our anticipated revenue split that we see approximately weighted 30% towards the first half of 2023 and the balance in the second half of the year. For the next portion of the call, we'll discuss our key geographic regions, including updates on policy and our performance in each market. Europe has been a consistent proponent of hydrogen policy for the past several years and has continued that support with a number of new developments. Perhaps the most promising development is agreement reached on the alternative fuels infrastructure regulation that will lead to the installation of one hydrogen refueling station every 200 kilometers along the main EU highways and in large European cities by 2030. This target is expected to result in 650 stations built with the support of EU funding, removing a key barrier to the adoption of hydrogen vehicle deployment in Europe. Europe is the largest geographic contribution to Ballard's revenues in Q1, consistent with Ballard's geographic revenue breakdown in 2022. orders from european customers are also the largest component of our order backlog and and order book accounting for approximately 62 of our total order backlog at the end of q1 in the u.s major policy announcements in 2022 will begin to create on the ground changes this year and in the next year starting with the high the hydrogen hub selections and the awards of low no funding to occur in Q3. Meanwhile, federal government agencies are working on finalizing the implementation of the IRA bill leading to clarity for project developers sometime later this year. To cap these tailwinds off, CARB recently announced its advanced clean fleet policy that will require all California commercial fleets of 50 or more vehicles to purchase 100% of new vehicles with zero emission powertrains by 2036. with initial purchase requirements beginning in 2025. In just over a year, the U.S. has leapfrogged to a leadership position in global hydrogen policies. We now see strong support across the value chain and ecosystem, including substantial support to develop the supply of low carbon, low cost hydrogen, combined with purchase price incentives at the state and federal level for fuel cell powered vehicles. We believe that these policies address many of the friction points in adopting fuel cell vehicles and look forward to the U.S. constituting a greater proportion of our business than in prior periods. An exciting accomplishment achieved in the quarter was shipping the first FCMove HD Plus module manufactured from our newly commissioned Oregon facility. This additional module assembly capability will enable us to better serve this growing American market while enabling our customers to take advantage of federal funding programs with Buy America provisions. We continue to assess opportunities to further strengthen our U.S. platform and what we expect will be a high growth market from 2025 through 2030. And now moving to China. As previously discussed, we believe China's fuel cell electric vehicle complicated policy environment continues to stall development of the fuel cell vehicle industry. And this has been evidenced with a year-over-year decline in sales volumes in China for the first quarter of 2023. We continue to be disappointed with the delayed adoption in the China market and low activity levels at the Weichai Ballard JV, which will weigh on our 2023 results. We are working closely with our Weichai Ballard joint venture to unlock growth in the China fuel cell bus and truck markets. Our management team has begun traveling to China regularly since the country reopened to international travel and will continue to work with policymakers to shape a more constructive environment. I'm personally traveling to China tomorrow and will be there over the next few weeks and will be providing an update on this topic at our Capital Markets Day in June. Now moving to our financials in the quarter. In Q1, Ballard delivered $13.3 million in revenue with approximately 70% of our revenue coming from heavy duty motive applications. While we're just continuing our reporting of technology solutions as a standalone offering, our product revenues represented over 70% of our revenues in Q1, further cementing our strategic shift as a technology products company. As we've discussed in our Q3 and Q4 2022 calls, continued gross margin pressure was partly affected by our pricing strategy to secure customer platform wins. The further downward pressure on gross margins in Q1 was driven by a combination of a shift in revenue mix towards power products, low absorption of our manufacturing overhead costs, increases in supply and labor costs, and inventory adjustments. While we expect challenging gross margin dynamics to persist into 2024 until our volume ramps and our product cost reduction initiatives move into production, We also see this quarter as a low point for the year, subject to one-time charges. We'll provide an update on our gross margin progression at our capital markets day. We reported total operating expense of $37.5 million in Q1 and capital expenditures of $11.6 million for the same period. We expect these levels of spending to be roughly flat each quarter for the rest of 2023, and maintain our guidance for total operating expense and capital expenditures. Given the macroeconomic outlook and rising geopolitical tensions, and in the context of our 2023 annual operating plan, we continue to review our spend carefully to assure we're appropriately investing in our growth strategy while also maintaining a strong balance sheet. We ended Q1 with $864 million in cash and no debt. Ballard is well positioned with industry-leading talent, fuel cell technology, and products for our market applications, key customers and partners across our target markets, a growing product order backlog, 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. And with that, I'll turn the call back over to the operator, Sachi, for questions.
spk08: Thank you. We will now begin the question and 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're 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'll pause for a moment as callers join the queue. First question is from Aaron McNeil from TD Cowen. Please go ahead.
spk04: Good morning, and thanks for taking my questions. Randy, I can appreciate that you're going to get into way more detail on this at the upcoming Capital Markets Day, but I was hoping you could just give us a bit more insights into your pricing strategy, and specifically I'm wondering Are you pricing your products the way you are to compete just against other fuel cell providers or against a broader menu of zero-emission vehicles? And then I'm also wondering what you view as sort of a long-term gross margin target for your power products and what sort of product cost reductions you need to achieve to get there based on the prevailing pricing strategy.
spk01: Yeah, Aaron, great thing. Good questions. Just in terms of the pricing strategy, I would say there are three elements to it. I think you've highlighted two of them. One is, you know, the differences between different technologies that are available, including incumbent technology and battery electric solutions. So making sure that we're more competitive absent that type of pricing strategy is important. Secondly, we are seeing a more competitive environment in terms of other companies offering fuel cell products. They don't enjoy the same market position we have and so understandably are being very aggressive in their pricing strategies. But the key one I would highlight, Aaron, is really the fact that in low volumes today and where hydrogen supply costs are today, the customers don't have a strong total cost of ownership economic value proposition at the moment. And so what we're seeing is a timeline where that TCO crossover occurs as the availability of low-cost, low-carbon hydrogen comes online, as our product cost initiatives move into production, and importantly not just Ballard fuel cell products but also other parts of the value chain continue to contribute cost reduction What we see then is effectively a TCO crossover that will really be a catalyst, an enabler for high levels of adoption. So at the moment, with a stretched value proposition and a delta, a gap in that value proposition, we think it's important to be pricing to get market adoption, get deployments, get the field experience, and importantly with these customers, whether it's bus, truck, rail, marine, some of these off-road customers as well, we believe once we're in the platforms, we're very sticky and we have long-term staying power with these customers. So we think the pricing strategy is appropriate given where the market conditions are at and the state of maturity and adoption, as well as some of those competitive dynamics you alluded to. In terms of the gross margin target, I'm going to leave that one for the capital markets today because we'll have, I think, a pretty good commentary on that at that time in terms of long-term gross margin targets. Obviously, they'll be far in excess of the current run rate that you're seeing, particularly as we move to higher volume. I do want to comment, though, on your last point, Aaron, about product cost reduction. We've launched a number of product cost initiatives including reducing the core technology, both MEAs, bipolar plates, leading to much lower costs on our stacks, as well as balance of plant components that appear in our modules and additional items like DC-DC converters. And now with the capabilities we have at BMS at Ballard UK, the ability to help customers integrate the fuel cell into their powertrain more cost effectively and optimize that solution, we think are all going to help contribute to effectively reducing costs for customers, reducing our product costs. So we see a very clear pathway that I have a high confidence in on our product cost reduction that will significantly outstrip pricing reductions that we see between now and 2030. leading to significant gross margin expansion. Again, we'll comment more on that in the capital markets day. Let me just pause there and see, Paul, if you have anything you want to add.
spk14: No, I think that's pretty thorough.
spk04: Yeah, makes sense. Appreciate that. And then as my follow-up, on the recent shelf filing, obviously there's no obligation to go out and raise capital, but based on all the information you have today, like what form of capital do you see is most likely in the event that you would go try to raise capital? And, you know, understanding that the shelf covers a 25-month period, do you think we'll see, you know, a return to the at-the-market equity program or, you know, layering on some debt or some other sort of capital instrument within that time period?
spk01: Yeah, Aaron, thanks for the question. I think the way you should kind of view the shelf filing is very much – housekeeping matter. I think it's important to have that capability to access the capital markets quickly. But absent a significant M&A transaction, we're not actively pursuing corporate development as a priority right now. We think it's important to protect the balance sheet. What we see is it's very unlikely, very unlikely that we would be accessing that shelf during that 25-month period. There'd have to be a very compelling reason for us to do that which we don't foresee today. So I view that very much as housekeeping. We have sufficient capital to take us well past that shelf filing. So it would be kind of an extraordinary circumstance, in my opinion. We would be accessing that in the near term.
spk04: The answer I expected. Thanks. I'll turn it over. Yeah, great.
spk08: The next question is from Michael Glenn from Raymond James. Please go ahead.
spk12: Hey, good morning. Maybe just to start, Randy, when you work through your opening remarks, you highlight these strong points in Europe and the US coming around. I'm just going to come back to you on a question that's come up over a few quarters now. It's just the investments in China. relative to some of the investment opportunities that might be emerging in Europe and North America? Do you think that the company could redirect some of that capital into those markets?
spk01: Yeah, so I think there's a couple of things at play here. One is we still have very strong conviction on long-term adoption in China. And I think as China gets its policy sorted and that market starts to see growth again, and particularly scaled growth, we're going to see all three markets contributing, which we're very excited about that. Effectively, right now, we're seeing the two markets contribute. But I do think, as you heard in the opening comments, we continue to look at how to strengthen our platform in the U.S. We're seeing a lot of, I would say, market opportunities, but also funding opportunities in the U.S., to support manufacturing capacity expansion. We're seeing a similar trend obviously in terms of market adoption in Europe and funding support in Europe as well. So I think as we look at our local for local strategy and global manufacturing capacity through 2030, the US and Europe are certainly top of mind.
spk12: Okay. And then just in terms of the bus order market in Europe right now in the 500, I think you said it was 500 potential orders that are open tender that are outstanding. What would you expect or what would be your target for market share on those bus orders relative to what you would have achieved in the past?
spk01: We're still seeing a very strong market share in the bus market segment. You know, I would expect us to be in the, you know, plus 85, 90% range for market share for bus orders. That might even be higher in the very near term. But I do think we're going to see more competitors with other product offerings coming to market over the next few years. But we're very strongly positioned, not just in Europe, but in the U.S. as well.
spk12: Okay, and we would see that come through in your order flow, like in your press releases, that we will be able to see that market share?
spk01: Yeah, so I think we will be providing some market share commentary during the capital markets day, but I think the way to think about it is not so much market share, but in terms of when you see that coming through, you do see publicly announced from transit authorities that they're going to fuel cell buses or from the OEMs that they've won awards. So that's one timing data point. For us, the key timing data point is then when that translates to an order to Ballard from the bus OEM. And there can be a lag time there anywhere from three, six months up to 12, 24 months we've seen. So it's very difficult to predict when those public announcements by transit authorities and OEMs translate to orders to Ballard. But in terms of market share, we'll provide more visibility on market share on the Capital Markets Day, but very high market share.
spk08: Okay, thank you. The next question is from Rob Brown from Lake Street Capital Markets. Please go ahead.
spk05: Good morning. Sort of following up on that European bus opportunity, I think 500 units, could you give us context on how that's grown and where that program's going? I know a few years ago it was much smaller, but where is that program at today?
spk01: Yeah, Rob, thanks. You know, there basically are tenders out for circa 470 buses, fuel cell buses in Europe right now. And what's interesting to me is that we used to talk about, you know, deployments of and I'll contrast this with Canada for a second, where we have Edmonton now with two fuel cell buses. So this would be the type of deployment you would typically see in Europe, 2, 5, 10. We're now seeing, you know, larger deployments. There are a number of cities that are still, you know, adopting 10, 16, 7, et cetera, but now we're starting to see these much larger orders. So 25 for a city in Poland, for example, and 31 for a city... in Germany, and you're seeing now this 52 for another city in Germany and two cities in Europe that will be ordering over 100. You know, moving to the U.S., you have Foothill Transit with over 30, and you've got, you know, Phoenix and Okta and Las Vegas and other cities that have large orders that are coming through. So I would say what we're seeing is situations where transit operators have typically trialed both fuel cell buses and battery electric buses in low volumes. They've made a determination based on their range requirements, the total cost of ownership, the duty cycles, access to energy in whatever form that is, whether it's molecules or electrons. And we're seeing cities deploy larger fuel cell buses after having gotten comfortable with the availability time, the uptime. and are now moving to larger orders. And I think this trend will continue, not just through 2023, but 2024 and 2025, particularly as the number of bus OEMs offering a fuel cell bus offering continues to expand.
spk05: Okay, that's good color. Thank you. And then I know you talked about the IRA, and I know it's working through kind of the Treasury process, but what have you seen in terms of OEM response to that and getting vehicles sort of planned and developed and your interaction with them in the U.S.?
spk01: Yeah, what I would say is that whether it's the bus OEMs, truck OEMs, even rail, we're just seeing a lot of eyes that previously were focused outside of the U.S., turning to the U.S., and very much focusing on the U.S. market. And I think you're going to see a number of OEMs announcing fuel cell activities, whether it's development programs or deployments. We have two or three that we're making very promising progress on that have North American exposure, and we expect to have some announcements on that later this year.
spk05: Great. Thank you. I'll turn it over.
spk01: Thanks, Rob.
spk08: The next question is from Rupert Merver from National Bank. Please go ahead.
spk13: Hi. Good morning. Randy, you talked a little about some competition you see in the market and some aggressive pricing from competitors. Can you give us a sense of how you're competitive position is evolving, any competitive threats you see, and is that leading to any changes in your long-term strategic plan?
spk01: Yeah, great question, Rupert. To me, I would say the big change that was impacted in our strategic plan occurred when we acquired BMS. What we were seeing on a competitive front is that a number of companies were that aren't just looking at the fuel cell engine market opportunity. They had capabilities at the powertrain level. So think about companies like Bosch, for example, and Cummings. And so for us, the ability to provide OEM customers with powertrain integration capabilities is very, I think, game-changing for us and really helps us enable us on a competitive positioning front. When we look at the safety record, reliability, uptime, availability, durability, field experience, kilometers driven, no one comes close to Ballard in these verticals in our core markets here in Europe and the US market. So we're very far positioned. And so I do think that the entrants are looking at pricing as a way to secure customers when they're not able to point to some of the other key metrics. The only other thing I would comment on is that, again, this stickiness with platform wins. We've invested a lot with these customers over a long period of time. I'll just use, again, the Siemens example where for six years they worked on a fuel cell train. We worked on the fuel cell engine. They've now launched that train. We have an LOI for 200, a purchase order for 100 engines. A lot of stickiness and expected sales. preferred slash exclusive position based on the investments that have been made by both of us during that period of time. It's the same in the bus market where we've been working with some of these bus OEMs for years and they have gained confidence in their deployments. And I would say the truck market is a newer one, but we're very excited by some of the progress we're seeing. And in that market there, durability is a very significant differentiator.
spk11: and uh you know i don't think any company can can show durability numbers that that comes close to ballard great uh that's a lot of detail i know i appreciate it thank you i'll leave it there yeah thanks rupert the next question is from mac whale from coremark please go ahead hey randy um when you talk about that tender increasing in the bus space is that in general leading or lagging the hydrogen infrastructure i'm just wondering did trying to get a sense of whether the infrastructure is getting to the point where it's translating to larger orders?
spk01: It's neither. So these typically are situations where you have on-site refueling at transit depots. And so rather than having a diesel refueling station, they're having hydrogen refueling. So just to be clear, what I'm indicating is this has nothing to do with the rollout of public refueling infrastructure. whether that's for past car for trucks and for other market applications and so again that's one of the we think the key I would say risk mitigation on our on our strategy is initially focusing on these markets where you have centralized depot refueling and tethered vehicles so I do think the the funding though is probably the pacing item for these deployments and the funding is both for buses and for the refueling infrastructure. So that's typically what's the kind of lagging item in terms of when these deployments actually move from concept to order book and deployment. I do want to comment. A number of the countries that we're seeing, I would say, elevated activity in at this time, Germany, Italy, Poland, Spain, many of them also have very robust programs around hydrogen.
spk11: So when you look at that, can you actually use that as a tool for forecasting? Like, can you look at what they're investing and say, okay, these orders they've put out, there's excess fueling capability, like they're going to have or they will likely buy more over time? Or I'm trying to get an idea of which, if it actually helps you knowing where the next orders are likely to come from.
spk01: Yeah, the way I would characterize it is that the availability of low-cost, low-carbon hydrogen in all three markets, China, Europe, and the U.S., is the big unlock that will occur, including for the bus market, because some of the economics on the bus market are stretched with current hydrogen costs, particularly last year when you had elevated natural gas prices, and a number of the supply lines in Europe are still based on natural gas reforming. But as you have renewables generating into low-cost, low-carbon hydrogen, we think that's the big unlock. And I think all of these markets in Europe are expected to see pretty significant scale-up in hydrogen supply between 2025 and 2030. Okay.
spk11: And then when you look at that, I'm wondering in the context of increasing numbers of engine makers talking about using hydrogen in the ICE type architecture. What are your thoughts on that as a threat, or is it helping adoption? Do you think of hydrogen in any way? I'm just curious of your high-level thoughts on that.
spk01: Yeah, the way I would view that is that right now it's a topic that you're hearing from different parties about the ability to use existing internal combustion engines, have them run on hydrogen fuel. It's a topic. It's not actually an offering. So you'd be hard-pressed to point to any deployment of a hydrogen ICE at this time. And I don't see that changing in the very near term. And as you look to the mid and long term, the reality is that you are completely eliminating all emissions by using a fuel cell, and you have much higher efficiency levels. So from an economic value proposition, we believe fuel cells are an absolute winner.
spk11: And just lastly, if I may, one more related. You were asked about competition and you talked about some of these other players. Some of those players you've been competing with in the market for some time now, like decades in some cases, and yet you still have this lead on all those metrics that you talked about. What do you point at for those people that want to understand better or your capabilities, what do you point at as the reason for maintaining that leadership?
spk01: Yeah, fuel cell technology is complicated, and it does require a sustained investment over a period of time to understand the failure modes and work past those failure modes so you have high uptime, high availability, high durability. And a number of those companies have been investing, but at more modest levels historically. Their investments are cycling up, as you would expect, given the market opportunity. But they still have to put in the time to develop the products, test them, validate them, find the failure modes, and work from there. I think the encouraging thing, and this applies to everyone, not just Ballard, is supply chain is really advancing as well. And so the materials available, whether it's for catalysts, gas diffusion layers, membranes, ionomers, whether it's for plate materials, whether it's for balance of plant components, the supply chain is going through a sea change that's going to really have much higher reliability components that today really, if you look at where we do have field issues, almost invariably it's balance of plant components, not the Ballard fuel cell technology. And so, you know, these components, we're going to see much higher reliability, which will lead to higher uptime, higher durability for the long term and a better TCO. All of us are going to benefit from this, but I think we're leading the tip of the spear in terms of working with the supply chain on these material sets.
spk11: Great. Thanks for taking the next question, Randy.
spk08: Thanks, Matt. The next question is from Amit Thakkar from BMO Capital Markets. Please go ahead.
spk03: Hi, good morning. Thanks for taking my question. Just one real quick one for me. I believe the plan was to invest about 47.5% of the $130 million you were planning on investing in the MEA facility in China. Didn't look like there was anything in the cash flow statement for that this quarter. I was just wondering if you could update us on kind of if that's still the plan and what the cadence of that would be throughout the year.
spk01: Yeah, I think we've, you know, just giving geopolitical context, obviously, we're delaying and pushing that cash spend out. But, you know, total year CapEx will be consistent with guidance, and we'll see some of that getting picked up later this year.
spk03: Thank you very much.
spk01: Thanks, Amit.
spk08: The next question is from Chris Souther from B Reilly. Please go ahead.
spk02: Hey, guys. Thanks for taking my question. I understand that kind of new segments and certainly makes sense that the technology solutions continues to kind of wind down. Can you give us a sense as to what the overall, you know, formerly TS revenue was in the quarter? I just wanted to frame what the contribution was just so we have kind of a clean, you know, kind of go forward. Maybe on the backlog as well, I'm curious if you can kind of break that down by the new segments in geography and if there's any technology solutions still in there.
spk14: Yeah, it's Paul here. So the $13 million of revenue, roughly 30% of the revenue was in the TS business with the balance, of course, being in power products. That represents a You know, we're seeing a reduction over time. We have the Audi contract, which we've talked about in prior quarters. You know, it's winding down now. And then our activity with Weichi is also less. We're looking to add another TS contract with Weichi potentially this year. We'll have to see how that goes. But the emphasis is clearly on the power products. We think there's a lot more long-term value in power product sales. repeat orders, service revenue as well from power products versus the TS type of business.
spk01: Chris, this is really what we were hoping for, looking for, for a long time at Ballard, where we're moving from a market where you have large OEMs that want to trial an option, have optionality on fuel cell technology by making some investments. They didn't have the capabilities in-house, so they used Ballard. So Audi is a great example where we developed a fuel cell stack for an Audi passenger car. Now, what you're seeing is a transition in the markets. First of all, a clear recognition that the value proposition is strongly resonant in the medium and heavy-duty motor applications. And also, you're seeing vehicle OEMs looking for a supplier of engines, not looking for a supplier of services to develop a product for in-house capabilities. So this is what we're seeing, a pretty significant shift, and this is where the value always was contemplated in our business.
spk02: No, no, it certainly makes sense. And maybe just a breakdown on kind of the backlog between the new segmentation as well as geographies. I just wanted to get a sense. It sounds like it's very Europe and North America kind of heavy, but bi-segment would be appreciated as well.
spk01: Yeah, just in terms of geography, it's probably around 55% for Europe and about a third for the U.S. and China and the rest of the world would be the remainder. And what's really interesting is when you look at it by application, it's very diversified. It's actually showing up in our revenue, showing up in our order book, showing up in our sales pipeline. You know, this diversification that we talked about that we want to see in 2030 and thinking out to 2030 and even 2035 timetables where we have high revenue being contributed from a number of different verticals, key geographic regions, a number of different customers with a lot of resiliency in our business model. And so, you know, you're about a third in the bus market segment. You know, about a third probably added together for truck and rail, and another third, let's call it, for the remaining segments.
spk08: Thanks a lot. Oh, thank you.
spk01: Thanks, Chris.
spk08: The next question is from Craig Scheer from Tui Brothers. Please go ahead.
spk07: Hi. Good morning. Thanks for taking the questions. Um, so the, the, the breakout, uh, of quarterly breakout of revenue by bus, truck, rail, and Marine, I think is very helpful. Um, and, and it kind of raises, uh, the question we've talked about before about, you know, timing for breakout and different categories. Um, if, if I kind of envision a breakout in a category as consistent, you know, comfortably in the, double-digit quarterly revenue area. Would it be reasonable to think that for buses, we might see that at some point next year? And then how does that look maybe for truck and rail? Is it like the following year and the year after that? How do you think about this?
spk01: Yeah, so first of all, Craig, thanks for the question, and we'll provide a little bit more color on this in the Capital Markets Day, including kind of profiling some of the platform wins we have and how we see that translating moving forward. The way I think I think about it is we've talked about bus, truck, rail, and marine in that order for a long period of time. We picked that order because that's the order of market adoption that we forecasted. So bus first, truck second, rail third, marine fourth. And what's been interesting is that, you know, candidly, I think the bus and truck market have taken a little bit longer than we've expected, but rail and marine have probably been faster than we expected, if you go back three, four years ago. I do think that all four of those market segments are going to see, you know, nice growth rates moving forward. So we're very excited about that. The one thing I want to highlight is that rail, marine, stationary, off-road markets You know, these are larger power applications, and you can see much lumpier, you know, orders in those market segments. So I think we could see a lot of variability in revenue from those segments quarter to quarter, but overall the trend will be for growth. So I think we'll see more of a steady growth in bus and truck, and then rail, marine, stationary, and off-road, we'll see lumpiness quarter to quarter.
spk07: Gotcha. That's helpful. And on the question, you mentioned two or three times about east-west tensions and that you're trying to conserve cash and delay some of the originally front-loaded CapEx in your latest China investments. Are you still committed to what you had announced in China and You know, as far as similar investments, would you be potentially in a position where you might make similar sized announcements somewhere in the US or Europe? Or do you feel as it sounded like some quarters ago that your global manufacturing is pretty covered with your needs through late decade, just with, you know, mostly Canada and China?
spk01: Yeah, I do think, Craig, that there's clearly, you know, deglobalization, decoupling occurring. And there's much stronger impetus in the U.S. to see U.S. manufactured product, similarly in Europe. And, of course, China has local policies that effectively require several parts of the value chain to be localized to avoid import duties. So, you know, there does seem to be a bifurcation occurring among these different markets. There are some areas where we see the need for additional investment. One of them we're currently investing quite a bit in part of our announced CapEx plan is on next generation bipolar plate manufacturing to dramatically lower the cost on bipolar plates. We've done a lot of important work over the last number of years on MEA cost reduction that we'll see moving into production in the next number of years. We're doing the same thing on the bipolar plate side. And so where we scale production on bipolar plate manufacturing and meeting U.S. manufacturing requirements are all something that we're looking at and top of mind for us. In terms of to make an investment in that market, this is something we're studying very carefully, both Europe and the U.S. market, looking at different opportunities in these markets, including what type of investment size. I don't envision a scenario where the investment size is similar to what we've profiled for China, just given the different, a number of different variables. And then in terms of just addressing your question, you know, are we still committed to China market? We are. We continue to push forward and see a very large market in China, certainly between 2025 and 2030. We think this is going to be the largest global market for fuel cells. But every week, of course, there are dimensions to this, and we track it very carefully.
spk07: Great, thank you.
spk01: Thank you.
spk08: The next question is from Kashi Harrison from Piper Sandler. Please go ahead.
spk06: Good morning, and thanks for taking the questions. So maybe using Europe and U.S. as frame of references, can you speak to what the delivered liquefied fueling cost of hydrogen would need to be to make the TCO map work in your various segments, bus, truck, rail, marine?
spk01: Yeah, the way to think about it is that when you have a total cost of hydrogen delivered, this isn't just hydrogen production, but delivered to the vehicle, $5 US per kilogram or 5 euros per kilogram effectively unlocks 50%, half of the global market. So that's the target the industry is moving towards. I think with the subsidy support, both in the US market And increasingly, I would say, aggressive policy posture in Europe to have a similar type of outcome that the U.S. is going to experience. We expect to see hydrogen availability below $5 with that $3 PTC. So I think this lines up very well with a hydrogen price that unlocks the markets that we're focused on.
spk06: Got it. That's very helpful. And then maybe just circling back to your prepared remarks on the guidance, you indicated that first half would represent 30 percent of full-year revenues. How should we think about Q2 revenues? And then does your guidance contemplate a return to growth this year in China, or do you assume a return to growth occurs in subsequent years?
spk01: Yeah, so I think Q2, I don't think we're going to see a significant leg up in Q2. It is very back-end loaded. And our revenue plan for 2023 doesn't contemplate significant additional activity in China. So there's no risk on China market adoption in any material way for our 2023 plan. There's a small amount of revenue contemplated there, but it's very manageable.
spk14: I think also I would just add that as we look forward to Q2, 3, and 4, we look at what's in the order book and the backlog, we're fairly confident we should see some increasing revenue, certainly in the near term. And that's going to have an effect on the gross margin. So part of our gross margin reduction in Q1 is because it's a lower amount of revenue spread over fixed overhead costs. So as revenues rise, that'll have a that'll naturally have an impact on the gross margin rising as well. And so that's what we would expect to see. Again, a bit more color on that probably in our capital markets day.
spk06: Got it. That's helpful. Thanks. And it actually was a segue to my final question, which is, so if effectively the gap between, you know, the actual gross margins and, you know, your expectations in the last call that 4Q would be the trough, is really just the lower revenues and less fixed cost absorption on that front?
spk14: Yeah, that's certainly a big part of it. So, yeah, the gross margin, you know, from Q1 last year is minus 1 versus minus 42. The lower revenue, just over the same amount of fixed costs, and fixed overhead costs are roughly the same. So that, of that 41 point difference, 16 points of that is just from that alone. And then as we talked about the change in the product mix, more in favor of power products, the pricing strategy to get more platform wins, as well as we did have a few other adjustments for higher material costs, slightly higher material costs and some inventory adjustments, which we don't expect to be reoccurring. But those things really is what drove that. But as revenues increase, we do expect that gross margin is going to increase and for the full year, roughly in line with where it was last year, probably within a range.
spk06: Got it. Thank you.
spk08: Thanks, Kashi. The next question is from Jordan Levy from Chua Securities. Please go ahead.
spk10: Appreciate you all taking my questions in for all the color. Just a high-level one for me. Just thinking as you kind of continue this shift toward products from Tech Solutions. Just thinking if there's any strategic change in how you're thinking about your sales and marketing efforts there and any sort of strategic priorities on that front as you move through 2023.
spk01: I wouldn't say there's any change in how we're thinking about our sales and marketing efforts for these verticals. The big change, in my opinion, really is the ability for us to have offer powertrain integration and so you know that's something that we're adding to the discussion that's kind of the significant change that we've seen in how we've been offering not just our product but now our product and integration of that product and then I think also as you look out a few years you're going to see our product evolve with different components coming into the product again to make it a more comprehensive product that offers a simplification for integration for customers.
spk10: Appreciate that.
spk01: Thanks, Jordan.
spk08: Next question is from Greg Wesikowski from Weber Research. Please go ahead.
spk09: Hey, good morning, guys. Thanks for fitting me in here. a lot of momentum in the EV charging space and using hydrogen and other alternative fuels for other similar off-grid or microgrid type solutions. I know you guys aren't in the business of hydrogen production, but most of those solutions would require a fuel cell. So just curious, what have the inbounds been like there and how do you ultimately think about that within your plans for stationary power?
spk01: Greg, great question. You know, we profiled a little bit earlier the order for 3.6 megawatts. And, you know, this type of order is reflective of exactly what you're talking about. So off-grid opportunities, microgrid opportunities, opportunities where you've got recharging connected to the grid, but there's grid congestion and unreliability. So we are seeing a number of different applications, whether it's data centers, EV charging requirements, construction sites, all as examples where fuel cell, PEM fuel cell in particular, are going to offer a very compelling value proposition. And I think we're going to see a growing sales pipeline translating to order book over the coming years in this category.
spk09: That's great. Thanks, Randy. Thanks, Randy. And then for the follow-up, I know we've talked about competition and more fuel cell stack and fuel cell providers out there, but I guess I'll add on to that with a little two-parter here. So I think it's clear that Ballard's main competitive differentiator is quality, reliability, and durability of the tech, proven miles and hours of operations over X number of years. But with the new entrants, Has it been easier or harder for you guys to demonstrate that? I could kind of see it going both ways. And then just part two of that is more of an industry question. Is there risk or should there be concerns over either faulty or inferior tech out there that may end up reflecting poorly on the industry as a whole as adoption scales, just kind of quality standard issues?
spk01: Yeah, I think when you have early market adoption and new players to the market, you always run the risk of safety issues or reliability issues in the field. And, you know, I think most companies are very conscientious about their brand. And certainly the vehicle OEMs are, you know, with their badge on the front of these buses and trucks, et cetera, care deeply about safety and reliability and uptime. And that's why Ballard is so well positioned. So I do think that many of the companies that you see entering the market and have been, you know, starting to offer product, I'll use Cummings and Bosch and Toyota and Hyundai as examples. You know, I don't expect to see those type of issues from those type of suppliers. I think, you know, you're going to expect to see a product that has high safety and high reliability coming to market. Durability might be another question. But there are smaller companies that come to market, and it's not just, you know, we've seen this in the battery space as well, right, where you've seen a number of battery packs that have had, you know, either safety or quality issues. So as the smaller ones come to market, I think it's going to be very important for customers to really qualify who they're working with. And for us, we think there's a very clear contrast with our track record.
spk09: Yeah, that's a good comparison. All right. Thanks, Randy.
spk01: Great. Thanks, Greg.
spk08: This concludes the question and answer session. I'd like to turn the conference back over to Randy McKeown, CEO, for any closing remarks.
spk01: Great. Thank you for joining our call today, and we look forward to speaking with you in June at our Capital Markets Day.
spk08: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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