Ballard Power Systems Inc. (NASDAQ:BLDP) Q1 2024 Earnings Call Transcript

Ballard Power Systems Inc. (NASDAQ:BLDP) Q1 2024 Earnings Call Transcript May 7, 2024

Ballard Power Systems Inc. misses on earnings expectations. Reported EPS is $-0.14 EPS, expectations were $-0.13. Ballard Power Systems Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems’ First Quarter 2024 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Kate Igbalode, Vice President, Investor Relations. Please go ahead.

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

Randy MacEwen: Thank you, Kate, and welcome, everyone, to today’s conference call. In our last earnings call, in addition to providing 2024 OpEx and CapEx guidance ranges, we outlined four specific milestones that investors can expect from Ballard in 2024. We noted the following four milestones; first, continued growth in our order backlog; second, a major order announcement from a bus customer; third, a major order announcement from a stationary customer; and fourth, the announcement of our next manufacturing facility. In Q1, we delivered against each of these four milestones, highlighting our continuing journey to a commercial products company. I would like to comment on each of them in turn. So, first, on continued growth in our order backlog, we’re encouraged with our progress over the past six months with new order intake.

After booking record new order intake of $64.7 million in the fourth quarter of 2023, we booked another $64.5 million of new orders in Q1, bringing total new bookings over the past two quarters to almost $130 million, a Ballard record for a six-month period. Our order backlog grew by 38% since the start of the year. Second, on a major order announcement from a bus customer. Here, we announced a multiyear supply agreement and the largest order fuel cell engines in Ballard’s history. The supply of 1,000 engines through 2027 to Solaris for the European bus market. This landmark agreement is a testament to our collaborative partnership with Solaris over the past decade and the progress we’ve made with our fuel cell engines. We have proven our fuel cell engines as safe, reliable, and durable.

This agreement also reflects an acceleration in adoption of fuel cell buses in Europe, supported by policy tailwinds and regulations to decarbonize public urban transport fleets. The transition to zero-emission city buses has accelerated as the value proposition of hydrogen fuel cells is increasingly understood zero-tail pipe emissions, rapid refueling, long daily range in all weather conditions, and scalable refilling infrastructure as fleet sizes increase. Indeed, we believe we’re on the road to achieving scaled deployment of fuel cell buses in the medium term, which is a critical lever to facilitate economies of scale and cost down initiatives, driving improved economics and reduced emissions for fleet operators. Now, I’d like to linger here for a moment on the bus market.

Over the past five months, we’ve received orders, all repeat orders from existing platform customers for a total of 1,200 engines for fuel cell buses in Europe and North America. This is very, very exciting. We see a tripling of the existing operating fleet in these markets over the next two to three years. Now, let’s move to the third milestone, the announcement of a major order in the stationary market. We announced a multi-year supply agreement and the largest order in Ballard’s history for the stationary market in order for 150 engines totaling 15 megawatts of fuel cell systems from a UK-based customer specializing in renewable off-grid power generation. Again, this is a repeat order from an existing customer and reflects a scaling in their market opportunities.

Our customer is targeting the replacement of traditional diesel generators with fuel cell systems that can provide resilient, predictable, clean and quiet solutions for on-site power generation in a variety of applications, including EV charging, filming, events and construction. The customer also has an option to purchase an additional 296 engines by March 2026. Finally, to turn to the fourth milestone, the announcement of our next manufacturing facility. As context, as part of our local for local global manufacturing strategy, we conducted a comprehensive comparative analysis during 2023 of sequenced production capacity expansion options in North America, Europe and China. Based on our review, we determined to prioritize the US as our next market for production capacity expansion.

We announced our plan to build a new manufacturing facility to be located on a parcel of 22 acres of industrial land within the Rockwall Technology Park in Rockwall, just outside of Dallas, Texas. The facility is expected to have an initial main plate production capacity of 8 million MEAs, 8 million bipolar plates, 20,000 fuel cell stacks, and 20,000 fuel cell engines per year, or the equivalent of 3 gigawatts of fuel cells. Dubbed Ballard Rockwall Giga 1, we plan to manufacture next-generation fuel cell products, incorporating the benefits of our work related to technology innovation and design changes, supply chain collaboration, and the introduction of volume production processes and advanced automation to drive down costs. We also recently announced two separate non-dilutive funding awards to Ballard, totaling up to $94 million, consisting of 40 million in expected grants from the US DOE Hydrogen and Fuel Cell Technologies Office, and up to another $54 million in expected Advanced Energy Project Tax Credits, known as 48C, funded under the Inflation Reduction Act.

Our capacity expansion plan comes at the very time that platform customers are being clear about what they need from Ballard in the future. They’re counting on us to be there for them at volume and at the right cost. The ability for us to demonstrate a clear roadmap to high production volumes at significantly reduced cost is critical to customers transitioning from demonstrations to future scaled deployments. With Ballard Rockwell Giga 1, we plan to bring scaled, advanced manufacturing of next-generation fuel cells online in late 2027, at the same time when we expect to reach capacity constraints of our existing North American production facilities based on our forecasted growth and production volumes. We expect to make a final investment decision on this facility later in 2024 and pending completion of certain customary conditions, including necessary approvals and definitive documentation, including with Rockwall and with the U.S. funding sources.

Accordingly, we will provide a detailed review of the plans of Ballard Rockwell Giga 1 during an earnings call later this year. We want to also provide two interesting updates on the rail market so far in 2024. First, one of our customers in the commuter rail market, Stadler, revealed its FLIRT H2 train powered by Ballard fuel cell engines has been entered in the Guinness Book of World Records for the longest distance achieved by a pilot hydrogen fuel cell electric multiple unit passenger train without refueling or recharging an impressive 1,742 miles. Second, and importantly, on April 16, CSX unveiled its first fuel cell locomotive, developed through its partnership with CPKC where CPKC provides CSX with a powertrain conversion kit using Ballard fuel cell engines to refurbish diesel locomotives.

We view this as a very exciting development. We believe hydrogen fuel cells offer the only viable zero-emission powertrain solution to replace or refurbish diesel locomotives in North America. The total North American fleet is estimated to be around 40,000 locomotives, and notably, CPKC has approximately 2,500 diesel locomotives and CSX has approximately 3,500 diesel locomotives with high power line haul locomotives using 2.4 megawatts of fuel cells, which is equivalent of amount of fuel cells were required to power about 24 buses. We believe this represents a large and attractive addressable market for Ballard. And before I turn the call over to Paul to review our Q1 financial highlights, I’d like to provide a headline summary of Q1 and some commentary on our setup moving forward.

In Q1, we booked $64.5 million in new orders, increased our order backlog by 38%, announced total non-dilutive funding of up to $94 million for the planned build-out of our Rockwall Gigafactory, grew revenue by 9%, improved gross margin by 5 points, and reduced cash operating costs slightly, while continuing to invest in next-generation products and product cost reduction. Looking forward, in the context of an increasingly constructive policy environment, growing order backlog and with sustained investments in product cost reduction in advanced manufacturing capacity expansion, we see an exciting setup for the second half of 2024 and growth in 2025. We are well positioned to enable our customers to compete in the energy transition and the adoption of hydro fuel cells to decarbonize heavy-duty mobility and select stationary power applications.

With that, I’ll turn the call over to Paul to discuss our financials.

Paul Dobson: Thanks, Randy. In Q1, Ballard delivered $14.5 million in revenue, driven by strong growth in the bus and stationary verticals. Heavy-duty motive applications accounted for approximately 84% of the total and with added to stationary power, our fuel cell products as a whole represented approximately 88%, once again emphasizing our shift into a commercial products company. As a reminder, from previous years, we see that Ballard revenue is typically weighted approximately 30%, 70% between the first and second half of the year and heavily indexed to Q4. 2024 looks to be no different. Even with the continued shift in revenue mix to power products and the burden of fixed production overhead costs being spread over a seasonally low revenue, gross margin of negative 37% showed a 5-point improvement compared to Q1 2023.

We are still anticipating underlying gross margins will breakeven in Q4, as revenue increases and product cost reduction activities have greater impact. We reported total operating expenses of $37.1 million and cash operating costs of $29.8 million, both relatively flat compared to the prior year comparables. Capital expenditures totaled $7.5 million in Q1. We are maintaining our guidance ranges for total operating expenses and capital expenditures for the year. Our guidance for 2024 includes capital for the initial design and scoping activities for the Rockwell Gigafactory, assuming FID. The expected US government funding for the facility would impact our net capital expenditures in subsequent years starting in 2025. We ended the quarter with a strong balance sheet with cash and cash equivalents just over $720 million.

With that, I’ll turn the call over to the operator for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Rob Brown: Good morning. I want to — just wanted to follow up on the Solaris order, good scaling there. Are you — can you give us a sense of sort of what the rollout schedule is and how that market is developing and sort of what the sort of size of the market is and penetration rates you get to by the end of — kind of by the end of that contract.

Randy MacEwen: Good morning, Rob. Thanks for the question. Maybe just to step back a little bit and just remind everyone, we’re really seeing the employments of fuel cell electric bus scaling up both in Europe and North America, driven largely by this transition to zero-emission bus fleets and supported by regulations and strong mandates and, of course, public funding. Just to give you a sense of kind of where we are right now, we at Ballard have about 158 fuel cell buses in operation that have Ballard engines inside in North America and about 398 in Europe. In North America, I think we’re probably right at 100% to 99% to 100% market share in Europe over 80%. So we have really good visibility on what’s happening in this market.

And what you’re seeing is that the proven operational advantages of fuel cell buses, including kind of 500 kilometers or 350 miles of range, the ability to have that range consistent for every day and every season and the rapid refueling time, kind of 6 to 12 minutes refill time. And then you add in the complexity that comes with depot electrification as you scale up, we’re seeing a lot of operators really revisit their plans going forward. As you see a growing number of cities committing to what I would characterize as a larger deployment. So Bologna, for example, 127 buses, Venice, 90 fuel cell buses, Cologne, 150, Santa Cruis, 57%. You’ve got many other cities in North America as well, Oakland, Philadelphia, Foothill in the LA Basin area, Las Vegas, New York City and Edmonton in Canada, all kind of committing to fuel cell bus deployments.

So we see probably going from the situation where you have roughly 500 to 600 buses in North America and Europe combined today to thousands, literally in a three, four year period. And so we’re tracking a very healthy pipeline and with strong market share with most of the OEMs that are offering fuel cell buses in North America and Europe are powered by Ballard. So we feel very comfortable with our position in the market and the growth opportunity we see. With Solaris specifically, I don’t want to comment on any one customer in their rollout schedule. We’ll let them do that. But I would just indicate that we expect those 1,000 engines to be deployed between 2024 and 2027.

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

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

Rob Brown: Great. Thank you. I’ll turn it over.

Randy MacEwen: Great. Thanks, Rob.

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

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

Randy MacEwen: Yeah. So we’ve canvassed the US market fairly carefully in terms of incentives. And we actually have other opportunities for this facility beyond the $94 million that we’ve commented on. And of course, there’s a package of incentives that comes with the Rockwell Economic Development Corporation. So I think all in, will likely be higher than $100 million in total support opportunities there, of course, all non-dilutive. So that’s very powerful for us as we move forward. In terms of like kind of unit economics, volume scale, et cetera, to get the profit, I think we’ll wait until the upcoming calls to manage those. What I would say is, just to be very clear, we don’t have an order book at this time that satisfies the volume of 3 gigawatts that we’re talking about.

Clearly, we are looking clearly at investing ahead of the adoption curve but of course, we have a sales pipeline that is showing very strong growth indicators across most of our vertical markets and, of course, both for Europe and for North America. So as we look at our scaling over the next couple of years and basically using the production capacity — existing production capacity and actually some capacity expansion that’s ongoing here for bipolar plates in Burnaby, British Columbia, what we see is kind of meeting capacity constraints in that 2027 timeframe based on our sales pipeline and our forecasting for our financial model.

Aaron MacNeil: Makes sense, happy to wait. I don’t want — I know you don’t want to get specific on customers and orders and pricing. But you’ve mentioned $1,000 per kilowatt in the past for these big orders? Like is that still a good barometer? Or are you giving some discounts in exchange for volume?

Randy MacEwen: Yeah, Aaron, I would say for lower volume orders 1,000 is probably a good proxy. In most cases, we’re probably below that, but 1,000 is a good proxy. As you get to higher volume orders, we are seeing, of course, pricing compression there, as we should be. And so this is not — these type of contracts are not at that level.

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

Randy MacEwen: Great. Thanks, Aaron.

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

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

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

Saumya Jain: Yeah and the rail market for U.S.

Randy MacEwen: Oh and rail. Okay. Yeah. So just on the rail market, we’ll start rail first. I think one of the market opportunities that’s probably not very well understood is the freight locomotive market. So you have both commuter rail in Europe and I would characterize it as modestly in North America, but certainly, Europe, a larger market opportunity there. As you know, North America, the volume of commuter rail traffic is much later than it is in Europe. But on the freight locomotive market, as I commented in the opening remarks, basically, you’ve got a market with about 40,000 diesel locomotives. Those locomotives are refurbished or replaced every 15 years. So roughly speaking, you have about 2,600 locomotives per year.

If you look at each locomotive, depending on the requirement for that locomotive being up to 2.4 megawatts, let’s assume it’s about megawatt and half on average per locomotive. You’re talking about a couple of billion dollar a year market opportunity just for that market in North America. So it’s a very exciting market opportunity for Ballard. We have, I would say, a couple of year period here over the next few years as customers like CPKC, and we’re very excited with the work that CSX is doing as well, as these types of companies continue to validate, the use of hydrogen for locomotive applications, including their hydrogen storage tender solutions. I think this is the only pathway for decarbonizing. And when you look at the emissions and the costs associated with diesel and the variability of diesel pricing, I think the number one — Scope 1 emissions is typically around 95% of scope 1 and emissions for these operators is diesel fuel.