Ballard Power Systems Inc. (NASDAQ:BLDP) Q3 2023 Earnings Call Transcript

Ballard Power Systems Inc. (NASDAQ:BLDP) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems’ Third Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Kate Charlton: Thank you, operator, and good morning. Welcome to Ballard’s Third Quarter 2023 Financial and Operating Results Conference call. With us on today’s call are Randy MacEwen, 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. I will now turn the call over to Randy.

Randy MacEwen: Thank you, Kate. And welcome everyone to today’s conference call. We began the second half of 2023 with robust revenue growth driven by deliveries in our core heavy-duty mobility markets. Our Q3 revenues are up 30% compared to the prior year period and up 80% compared to the previous quarter. At the same time, our gross margin loss is more than half, due primarily to execution and our product cost reduction initiatives and scale benefits from higher revenues. We continue to track to our full year guidance ranges for operating and capital expenses and have reduced our cash burn in the quarter and year-to-date compared to the prior year period. We continue to focus on prudently managing our costs, while making strategic investments in technology and product development programs, including product cost reduction programs as well as advanced manufacturing and manufacturing scaling and customer experience.

A wind turbine in a rural landscape, highlighting the companies commitment to clean energy.

Consistent with focused strategic investments in our core business, we initiated a portfolio review of all current products and product development programs. Following this review, we’ve prioritized our investments in our core fuel cell stack and module programs that have leverage across our business model and target markets. We are discontinuing certain legacy products and discontinuing certain product development programs in non-core activities and markets. We’ve also discontinued any new corporate development investments. As part of this streamlining, we’ve proposed a further restructuring of Ballard Motive Solutions, which we no longer view as core, resulting in a noncash impairment charge to goodwill and intangible assets. When we made our investment in BMS 2 years ago, OEM customers were less certain on the adoption of hydrogen fuel cells in medium-duty and heavy-duty mobility applications.

As a result, they weren’t making significant in-house investments on fuel cell powertrain and vehicle integration. Therefore, a key objective in acquiring BMS was to offer OEM customers with third-party integration support to remove friction in the adoption of Ballard fuel cell engines into the vehicle platforms, while also working to optimize powertrain performance. Since that time, the market has made important and exciting shifts. Many bus and truck OEMs have increased their conviction on the adoption of fuel cells and as a result have scaled their in-house investments in fuel cell powertrain integration. They now view the scope as core and proprietary to their fuel cell vehicle platforms, including their competitive position. There’s also been a change in the market supply for more advanced vehicle controllers including power management to support vehicle OEMs. With the benefit of having secured several important customer platform wins over the past 2 years, we’re now seeing scaling leverage from existing OEM customers that have launched platforms or are working on new platforms with in-house powertrain integration.

As we look forward into our growing sales pipeline and opportunity set, we still see limited market need for niche third-party powertrain integration support as OEMs mature their fuel cell businesses and continue to increase their in-house fuel cell capabilities. We’d now like to turn to an update across our verticals, where we continue to make important progress. At Ballard, our strategy is to commercialize PEM fuel cell technology and products that can be applied across multiple market applications, where fuel cell technologies provides the strongest value proposition and where the barriers to hydrogen refilling infrastructure are lowest. These markets include bus, truck, rail and marine as well as select stationary power generation in certain off-road markets.

We’ll provide a brief update for these applications. In our bus vertical, we experienced higher shipments to our customers in Q3 compared to the prior quarter with strengthened shipments to U.S. customers. We believe these shipments are an early indicator of the momentum shift for fuel cell buses in North America. For example, the number of transit agencies in California either operating, ordered or have fuel cell buses in their decarbonization plans has increased from 3 in 2018 to 41 today. This increase has been driven by greater understanding of fuel cell bus advantages, including range, refueling time and operating rhythm consistent with legacy diesel and a growing recognition of the relative costs and operating advantages for scaling hydrogen refueling infrastructure rather than battery electrical charging infrastructure.

This is leading to higher sales activity levels in the U.S. bus market and we expect this to translate into firm orders in the coming quarters. We’re also increasingly confident in the trend for fuel cell bus deployments in Europe, as evidenced by the impressive order activity of a key customer, Solaris, in the European market. Solaris has now ordered close to 350 modules year-to-date, including our recent orders for 60 and 170 modules. This figure has over doubled the current amount of fuel cell buses deployed by Solaris and shows an improving demand outlook for hydrogen-powered fuel cell buses in Europe. Moving to the truck market. As a reminder, last quarter we announced our partnership with Ford Trucks to supply fuel cells for heavy-duty truck platforms for the European market.

We’re pleased also to see the progress of our customer Quantron as they’ve deployed 5 delivery vans powered by Ballard fuel cells in Austria with IKEA as a customer. This vehicle is the first fuel cell-powered vehicle on the road in the European 7.5 tonne segment and is an expansion of the opportunity set in the truck market for Ballard as fleet customers begin to see powertrains with longer range in lower weight classes. In rail, we had a standout quarter for customer deliveries as revenues in Q3 were 9x higher than the amount delivered in Q2. The activity was driven primarily by shipments to our customer CPKC. We anticipate shipment to CPKC of additional modules this year after we announced a follow-on purchase order for further 2.4 megawatts of modules that will power switching and freight locomotives in their fleet.

As a reminder, we’ve received orders for 3.6 megawatts of modules from CPKC prior to our announcement yesterday. We’re increasingly optimistic about the adoption of hydrogen-powered locomotives in North America given the use case dynamics as well as the lack of existing electrified rail infrastructure and given decarbonization drivers from end users and supportive policies. Outside of freight applications, our customer Stadler reached a significant milestone after it announced a firm contract for the sale of 4 hydrogen-powered trains to the California State Transportation Agency after signing an MoU roughly one year ago. Our marine vertical continues to see interest growing in short sea container ship, inland cargo and barge applications. We experienced year-over-year and quarter-over-quarter revenue growth in this segment, resulting in year-to-date revenues that have already surpassed the total reach for all of 2022.

In our stationary power market, revenue activity was slightly lower as a result of lower shipments to North American customers in the quarter. We continue to see growing interest in our stationary products and this growth is coming from data center standby power, EV charging, grid balancing and temporary mobile power solutions for construction, film and TV production and outdoor events. Revenues from our emerging market segments were up modestly compared to the prior quarter, primarily as a result of shipments to customer first mode. These shipments followed the completion of a full year of operational trials in South Africa for the first build of their mining haul truck platform during which the vehicle demonstrated full payload capacity of 300 tons, an increase in efficiency relative to diesel that enabled higher operational speeds and the capability of climbing grades while fully loaded.

We see this successful trial as an additional validation of the value proposition for hydrogen fuel cells in heavy-duty transport. We’re also excited to see our customer, Applied Hydrogen, develop a 30-ton excavator powered by a Ballard fuel cell module to begin trials and testing with one of the Nordic area’s largest construction companies in 2024. Wrapping up our vertical-based discussion and given our performance in Q3, we want to reiterate our expectation of second half revenues for the year to amount to approximately 70% of the full year total. We also want to provide an update on important policy changes in our key regions since our last earnings call. During the last few months, the European Union unveiled policies supportive of hydrogen.

The first of these is an update to the EU’s Renewable Energy Directive that sets the binding target for renewable energy consumption at 42.5% of total consumption, up from 32% previously. The directive also mandates a minimum requirement for 29% of energy used in transportation to come from renewable sources including hydrogen and provides a bonus for using renewable hydrogen in transportation to comply with the renewable energy targets. Additionally, in October, environment ministers from all EU member states agreed on a common position on CO2 emission standards for heavy-duty vehicles. In addition to the 2023 CO2 emissions reduction target of 15% already in force today, member states agreed on a truck decarbonization target of 45% for 2030, 65% for 2035, and 90% for 2040.

While the current emission regulations apply to trucks over 16 tons, these new proposed rules significantly expand the decarbonization targets for trucks applying emissions reductions to all trucks over 5 tons. Individualized emission reduction targets will continue to be calculated for each OEM. And for city buses, the agreed decarbonization target is 85% by 2030 and 100% by 2035. EU also announced the first auction of subsidies to the hydrogen bank, occurring later this month and voted in favor of the Net Zero Industry Act that aims to spur domestic manufacturing of net zero technologies. Consistent with policy momentum in the region, Europe is the largest geographic contribution to Ballard’s year-to-date revenues and represents the largest proportion of our order backlog.

The quarter also brought a landmark milestone on the policy front after the U.S. Department of Energy announced that 7 regional hydrogen hubs have been selected to begin award negotiations for a total of $7 billion in federal stimulus from the BIL. These 7 regions could produce more than 3 million metric tons of low carbon hydrogen contributing 1/3 of the U.S.’ 10 million metric tons target while unlocking more than $40 billion of investments. Of the 7 hubs, 6 have use cases aligned with our target verticals, of which 5 have targeted heavy-duty transport as a priority use case. We’re encouraged by the program’s support for the full hydrogen value chain as it will simultaneously support the availability of low-cost, low-carbon hydrogen and the adoption of fuel cell vehicles and power systems.

The industry also waits for the IRS to finalize its guidance on the tax credits available on the Inflation Reduction Act, including the 45V production tax credit. We believe these rules will provide the industry with the clarity needed to get projects past the final investment decision stage and into construction. Our business in North America continues to show momentum consistent with the advancement in policy for the region. In Q3, deliveries to customers in North America represent the largest share of revenues among our key geographic markets and we’re over double the amount recorded in Q2 supported by strength in our bus and rail verticals. Our industry is currently experiencing the most supportive policy environment it has ever seen providing us with optimism of the long-term adoption of hydrogen fuel cells.

On China, the overall China fuel cell electric vehicle market continues to lag the national targets set by the policymakers and show declining market activity in Q3. We’ve previously discussed the complicated policy environment, but believe the industry has been further stunted by liquidity constraints at local governments that do not have sufficient funds to order more vehicles and keep payment obligations current. With a total FCEV park in China at approximately 10,000 vehicles, it’s difficult to see how China will achieve its 2025 target for 50,000 fuel cell electric vehicles by the end of 2025. We know there continues to be significant scaling of renewable energy in China with a total of 172 gigawatts of renewable installations through the first 9 months of 2023, accounting for 76% of China’s total newly added power capacity.

We also note there’s a significant hydrogen project development underway in China and electrolysis companies continue to scale production capacity. These factors support our confidence in the long-term market opportunities for hydrogen in this region. By 2030, hydrogen should be a key part of the energy transition road map in China and we expect green hydrogen to play a major role in the decarbonization of transport. I’ll now turn the call over to Paul to comment on select financial highlights.

Paul Dobson: Thank you, Randy. In Q3, Ballard delivered $27.6 million in revenue, with more than 75% of our revenue coming from heavy-duty motive applications. The share of product revenues as a proportion of the total continues to climb as our increased product backlog begins to translate into higher product shipments. Earlier in the year, we outlined what our shareholders could expect from us in 2023, including the Q1 would be the trough for gross margins and we have been executing successfully. This quarter, we saw encouraging progress in our gross margin as it was minus 10% in Q3 or an improvement of 12 points compared to Q2. As mentioned by Randy earlier in the call, this improvement was largely a result of initial success in our product cost-down initiatives, scale benefits from higher revenues and a reduction in inventory provisions.

We reported total operating expenses of $36.3 million in Q3 and capital expenditures of $7 million for the same period. Given the current macroeconomic uncertainty, we have focused on reducing our cash burn as the total use of cash amounted to $34.1 million in Q3 as compared to $48.4 million in the prior year. We are maintaining our guidance for total operating expenses and capital expenditure, but now expect capital expenditures for the year to fall within the lower end of the range. We ended the quarter with $781 million in cash and no debt. In summary, 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 are confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. With that, we will turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Michael Glen with Raymond James.

Michael Glen: Maybe just to start, Randy, can you just give some thoughts on what your market share is right now in the European bus market? And are you happy about where your market share is right now? Is there more you can do to pick up more bus customers in Europe?

Randy MacEwen: Yes. Thanks, Michael. I think right now we have approximately 370 buses in the European market operating with Ballard fuel cell engines inside. I would say our market share in terms of the total bus installed park right now in Europe — fuel cell bus installed park is probably over 90%. In terms of order intake in 2023, that number would be lower. So I suspect we’re probably around 75% to 85% market share right now for European bus order intake. We do have some new competitors emerging that are using different fuel cell technology, particularly from Toyota. Am I happy with the market share? Of course, we’d love to keep 100% market share like we currently enjoy in the U.S. But I think our long-term targets are to have very high market share in bus, truck, rail and marine.

Michael Glen: And when you look at who you’re competing against in Europe and you’re thinking about where this — what’s going on in the U.S. and the opportunity there, is it the same competitors in the U.S. market? Or is it a different competitor set that you’re up against?

Randy MacEwen: Yes. Today I would say it’s different. It may be — may see some convergence over time. You have different — first of all, different bus OEMs in Europe versus the North American market. In the transit market, New Flyer has a very strong market share, probably about 2/3 market share for the transit bus market in North America and they have the 40-foot and 60-foot articulated buses that are certified with Ballard fuel cell engines inside. And I would say pretty well 100% of fuel cell bus opportunities at this moment are going to New Flyer in North America. Europe, it’s actually quite dispersed. I would say there’s probably about 8 to 10 fuel cell bus offerings in the marketplace there. Solaris clearly is winning the lion’s share, but you have then Hool, Wrightbus, ADL, a few others.

And then there’s a couple — say probably two that are competing with us at this point, but I expect to see more as we move forward. We also have about, let’s say, about four smaller bus OEMs that we’ve signed up new orders and have initial trials in the last year. We haven’t announced them yet, waiting for larger-scale deployments from those bus OEMs, but we’re in their platforms right now. So I think we probably have something like 6 out of 8 bus OEMs that are offering fuel cell buses in Europe.

Operator: Next question comes from Aaron MacNeil with TD Cowen.

Aaron MacNeil: Paul, I’m wondering if you could share some perspective on how to think about gross margin breakeven. And specifically, I’m wondering what sort of revenue level do you require with your current pricing and cost structure to break even on a gross margin basis? And if you have it handy, how do we split that $30.3 million in terms of directly variable cost of product services versus how much is fixed?

Paul Dobson: Sure. Sure. And thanks for the question. So in the Capital Markets Day, what we laid out is that we would expect to be gross margin breakeven at some point in late 2024 sort of on a quarterly basis, not breakeven for the full year. That would be in 2025. I think that guidance, we probably make that more like we’d be breakeven in the quarter — early quarter in 2025 at this point on increasing revenues. We have about $28 million or so in sort of fixed overheads, depreciation and fixed overheads that the gross margin or the contribution margin needs to overcome. And so as we see increasing orders and increasing revenue, that’s when we would expect breakeven to occur at that time frame.

Aaron MacNeil: Got it. In the prepared remarks, both of you mentioned the reduced cash burn in the portfolio review. Can you sort of provide an early indication on what the operating expense and CapEx guidance could be for 2024? And to be clear, I can appreciate that you’re not going to provide a range, but I’m more just looking for directionality.

Paul Dobson: Sure. So for this year, our cash burn, I’ll just talk a little bit about the cash burn this year because I think it’s worth noting. So our total cash burn year-to-date is about $36 million lower or better than last year year-to-date. And that comes from a variety of sources. One is higher interest earned on our cash balance. So with rising interest rates, we’ve been able to earn higher interest. We’ve also scaled back on working capital a little bit. So our operating activities, cash from operating activities is about $25 million better than last year. We have increased our CapEx spending by about $15 million year-on-year, but we have lower — as Randy mentioned, lowered corporate development by about $27 million.

So our total activity from investing activities is down by $12 million. So the $12 million plus the $25 million from operating activities gives us about $35 million, $36 million better year-to-date cash runway. Our guidance — we were to provide guidance for 2024. We’re in the middle of producing our plan and finalizing our strat plan. But broadly speaking, we would expect operating expenses to be largely in line with 2023, I would expect. And then the CapEx guidance to be probably — could be $5 million to $10 million lower than it is this year. Sorry, one quick qualifier on that. So our operating expenses to be broadly in line with this year, with the exception of inflationary increases of about 3%.

Operator: The next question comes from Rob Brown with Lake Street Capital Markets.

Rob Brown: Just wanted to follow up on the U.S. bus market. I think you gave some stats about more transit agency looking into or working on fuel cell projects. Just want to get your sense on how that — the U.S. market develops, how you see it in terms of rollouts? And what’s sort of the time line of the U.S. market at this point?

Randy MacEwen: Yes, Rob, thanks for the question. I think one of the really interesting developments has been, as I mentioned earlier, this recognition, not just of the range advantages and the refueling time advantages of fuel cell buses, but also the advantages around scaling infrastructure. And there were 2 recent conferences in the U.S. bus conferences that really saw a number of transit operators highlighting — this wasn’t Ballard or New Flyer. This was actually the users of the buses highlighting the relative advantage of scaling infrastructure for fuel cell buses versus battery electric buses. As an illustrative example, Philadelphia Transport Authority, which has about 1,300 buses in their fleet highlighted on 2 separate slides, one slide that showed the availability of fuel cell buses to on a range basis meet all of the routes and it can meet 100% of the routes, whereas the battery electric buses, they were showing can satisfy roughly 20% of the routes.

And then the other slide that was very compelling was showing basically a significant — significant cost advantage for refueling infrastructure as compared to recharging infrastructure for the fleet of buses. And this was a pretty interesting case study. So to me, you’ve got cities like New York, Chicago, Las Vegas, Philadelphia, that are really talking about fuel cell buses in a way they haven’t before. And I think we are now seeing the — an inflection point in market understanding that will translate to orders longer-term. I do think that the hydrogen — the available low-cost, low-carbon hydrogen in the U.S. market will be a massive enabler from a cost perspective for the total cost of use and we see some of these hydrogen hubs potentially being able to contribute likely in the midterm, so kind of 3- to 5-year time frame.

In terms of the timing for buses in the U.S. market, I would still characterize it as deployments in the 20 to 120 range per city per announcement of project over the next few years. But from 2025 through 2029, we are going to see a very significant shift as the California transit buses with the ICT policy are required to effectively go zero emission for all new transit buses by 2029. So I think we’re going to see this significant scaling from 2025 to 2029. And it won’t be just in California. It’s across the U.S. now where we’re seeing these opportunities emerging.

Rob Brown: Okay. And could you update us on your thoughts about having U.S. production capacity? Are you — where is that at, at this point?

Randy MacEwen: Yes. Rob, we’re still working against that and doing our comparative analysis, looking at the European market, looking at the U.S. market, looking at the relative advantages and incentive support that’s available in the market. We expect to conclude most of that work late this year, but we did indicate we probably would be Q1 next year before we’re in a position to make a final determination. As you can appreciate, there’s been a number of companies applying for U.S. funding opportunities to scale clean energy technologies, including fuel cells and electrolyzers and the agencies that have funding available to support these type of manufacturing expansion plans are quite busy managing these applications. So we are in an application process. I don’t know if we’ll be successful or not. But we do see that the timing on response for funding agencies has been protracted.

Operator: The next question comes from Mac Whale with Cormark Securities.

Mac Whale: I’m wondering, the backlog — the new orders looks a little bit weak given where the backlog and where the orders came in. Is there a shift from your customers maybe to shorter-term focus and — because your guidance on kind of the split versus second half in terms of revenue looks like you’re still expecting some good sequential growth. So can you kind of reconcile those two elements of the results?

Randy MacEwen: Yes. I think that’s a fair characterization. We did see weak order intake in the quarter. What I’d point to, though, is the sales pipeline. And if I was to characterize the sales pipeline, Mac, there’s 3 terms I’d use. It’s growth, progression and diversification. We’re seeing, in the quarter, over 10% growth in a very large sales pipeline already. More importantly perhaps, we’re seeing significant progression of opportunities through different stages of the pipeline. And on the diversification front, we’re seeing really significant contributions into the pipeline from all of the different verticals, particularly with bus, truck and rail in aggregate contributing about 75% of the total sales pipeline. So we see a pretty good diversification in that pipeline.

We do see also some very lumpy projects in marine and stationary that could be significant adders to the order book and the revenue outlook as we move forward. Those are still in earlier stages. So I’m actually — notwithstanding the weak order intake in the quarter, I’m very encouraged by what I’m seeing on the end-market interest and on the sales activity and the progression and growth of the sales pipeline. I would characterize this more as a timing issue. We see orders coming in, in Q4 and into early next year.

Mac Whale: Okay. That’s helpful. And then I just thought I would — I think Paul mentioned already — sort of gave an update on the breakeven on the margin basis with reference to the September Analyst Day. I’m wondering on one of the other goals in the Analyst Day that you talked about was expand across the value chain. Are you — given the write-down, are you thinking — or what are you thinking about in terms of tweaking that expansion? Like do you — are there different areas now that you need to go into or you think are more likely you’ll go into versus, say, third-party integration? Like is there a shift there going on?

Randy MacEwen: Yes. Mac, I think you’ve highlighted this. A couple of years ago, we were investing in a couple of strategic themes, one of them being selectively expanding across the value chain. And we have seen this shift in the marketplace from a few years ago where vehicle OEMs really didn’t have in-house commitment or in-house resources to support onboarding a fuel cell engine onto their powertrain effectively when we had examples where that didn’t go very well. And so what we’ve seen, though, is a very significant shift in understanding of the value proposition for hydrogen fuel cells in medium- and heavy-duty mobility and the strategic importance that vehicle OEMs are now placing on powertrain integration and they view this as really part of their core business and part of their competitive positioning.

So what we’ve seen is that a number of vehicle OEMs, many of whom we’ve onboarded as customers during the last 2 years and provided support through that process, have really scaled up their in-house powertrain integration and vehicle integration services and aren’t looking to companies like Ballard to provide that third-party, I call it niche service support. So we are effectively retrenching and deprioritizing the selectively expand across the value chain from two perspectives. One is from a corporate development perspective. And secondly, from a — the number of programs and the number of engineers we have working on powertrain integration. So effectively what we’re doing is sticking to the knitting in terms of the fuel cell stack and core modules and making sure that we protect the balance sheet for long-term sustainability.

Mac Whale: Okay. And I guess that over the long run, that should be a positive, right? Like you’re able to focus on things like cost-out and performance. So like you talked about your — the changes — that you showed us the changes in the bipolar plates and that type of activity. So I suspect we should be able to see more of that and maybe accelerate those initiatives rather than sort of handholding, if you will, your downtown customer?

Randy MacEwen: Yes. It’s really two things. One, the real advantage that the vehicle OEMs are onboarding and in-housing more capability and taking that scope and doing it as proprietary. So we don’t need to provide that, to use your language, handholding. And then secondly, as you point out, to make sure we’re focusing our resources and accelerating the activities where we have core strength, which is the fuel cell stack and fuel cell engine.

Operator: The next question comes from Rupert Merer with National Bank.

Rupert Merer: Just following up on the last question from Mac there. With some of your customers taking on in-house integration, I imagine there’s some overlap there with what you would consider a balance of plant. Does that introduce any complexity around standards for interconnection of your product across multiple platforms and maybe force you to have nonstandard products?

Randy MacEwen: Yes. Good question. A couple of things I’d highlight is one of the things we’ve done in terms of our own scope of work as we look in our product road map moving forward, is that we historically didn’t include DC/DC conversion in our scope of work. And we have, over the last 2 years, really started to include DC/DC converters in our scope of work. And so what we are looking to do is to make sure we have a fuel cell module that is applicable to all vehicle OEMs without any major deviation or we’re looking to standardize. Now there might be some modest application engineering support required by a vehicle OEM, which we’re strongly positioned to support. But we’re not talking about really substantive changes to the bill of materials.

Rupert Merer: Okay. Very good. And then with your focus on cost reduction, you’ll be able to narrow down to a few areas where you have core expertise. You mentioned you saw some benefits of cost reduction in this quarter. Just wondering if you can give us an update on where you’re at today and how you are progressing towards your ultimate targets?

Randy MacEwen: Yes. I think there’s two areas where we’re seeing really good development on cost reduction. One relates to the MEA and the second relates to balance of plant components. We have significant efforts organizationally over the last number of years on our cost-reducing MEAs from a processing perspective as well as from a material perspective. Those are starting to show up in the production and we’ll see I think even more evidence of that into 2024. And then we have a very significant team that we’ve built over the last number of years that’s working on balance of plant components. And we have typically 5 or 6 really heavy-hitters in the bill of materials that we’ve been working with suppliers on and have seen significant cost reductions on some key balance of plant components, some of which still have not got into production yet, but we will see that into 2024.

So we’re progressing very well, as we mentioned at the Capital Markets Day. On the 3×3 [ph] program, we had been 55% of the 70% target had been achieved already. We’re still tracking to that 70% target. I think more importantly now is this balance of plant component cost reduction as that is a significant part of the overall fuel cell engine cost structure. So we’re very excited about what we’re seeing. And I think as we look out to 2025 and 2030 and think about the longer-term cost reduction, not just with MEAs, but now introducing lower-cost bipolar plates under Project Forge [ph] that we have internally and that we talked about a few months ago in June as well as moving forward with balance of plant component cost reduction and some of the advanced manufacturing initiatives.

We’re looking at pretty significant reduction beyond that 70% stack and module cost reduction that we talked about over the last 2 or 3 years.

Operator: The next question comes from Jordan Levy with Truist Securities.

Jordan Levy: I appreciate all the color. Maybe just — I know it’s still kind of early for a 2024 outlook. But if you just think about the various segments that you’re in and how quoting activity is shaping up, can you maybe just talk to which segment, whether it’s kind of rail and bus or that could kind of flex one way or the other in 2024 that you could see really taking off and surprising us or shifting to the downside and maybe just some of the activity around quoting you’re seeing right now?

Randy MacEwen: Yes. Thanks, Jordan. And I think just go back to the 75% of our sales pipeline in bus, truck and rail, I would say the surprise there has been the rail market. And I wouldn’t mind just spending a second to highlight the rail market, but I’ll come back to the overall sales pipeline and outlook for a second. But if you ask kind of which one to surprise the upside. We said a few years ago that rail could be one of those markets that surprised to the upside. And I think we’ve seen that. And there are really two core markets we’re focused on in rail. One is the European and northern — our North America commuter passenger rail market. And the second is the North American freight market. In the North American freight market, there’s 35,000 diesel locomotives that, in my opinion, must be replaced on a time line in order to see emissions reduction.

And I think related to that, I just want to highlight, both for the North American freight plus the North American commuter rail market, there are increasing regulations, particularly in California. So California has implemented a policy past regulations that really require pretty significant measures to reduce these locomotive emissions and it will effectively require passenger, industrial and switching locomotives built in 2030 or after 2030 to be able to operate only in a zero-emission configuration. And for line haul locomotives that will be — deadline is 2035. So 2030 and 2035 may sound like they’re pretty far away, but for line haul locomotives, this is — they’re typically 15-year lives. It’s really time for the next couple of years for these solutions to start being developed.

I did want to highlight in the rail market, we had just announced one of our customers Stadler that has the FLIRT train and the first fuel cell FLIRT train was showcased at APTA, an important conference in Florida just last month. That train, that first fuel cell FLIRT train from Stadler is going into service at San Bernardino County Transportation Authority in 2024 and the Stadler is now just received an order for 4 fuel cell trains to be operated as part of the Amtrak California intercity service. And there’s an option for another 25 trains to be ordered as well. And that FLIRT design includes 6 Ballard fuel cell rail HD plus engine, so 100 kilowatts each. And we don’t have the orders for those 4 yet, but that’s certainly our expectation as we’re the supplier of fuel cell engines to Stadler.

That’s a pretty compelling train, by the way, it’s got a maximum speed of about 80 miles per hour and a range of about just under 300 miles. So pretty significant, I think, compelling opportunity there. So that’s the market that I view as showing significant upside in North America and along with this freight locomotive market and we’ve made some announcements with CPTC. And I think they’ve ordered somewhere in the range of about 30 fuel cell engines year-to-date from Ballard for mainline, switcher and shunter applications and are looking at a very progressive plan as they move forward for decarbonization. So that would be the upside market. I would say I’ve talked a little bit earlier about the transition that we’re seeing in the bus mark and the inflection point where we’re seeing more transit operators understanding the advantages of range, fast refueling as well now — and by the way, range in all weather conditions as well as the opportunity for recharging versus refueling infrastructure.

So I think bus will be the lion’s share of the order inflow, but the bus market typically are smaller engines compared to rail and marine and stationary. So those are markets that could be very lumpy and could really in any one quarter be a higher portion of revenue than we’ve seen historically.

Jordan Levy: That’s super helpful. And then just as a quick follow-up, you mentioned stationary. I know that it’s kind of early in the progression there, but certainly a big market. Maybe if we could just get an update on what you’re seeing there and how you’re thinking about that segment?

Randy MacEwen: Yes. I think this is a market we’re still learning quite a bit about. I personally have spent a lot of time learning about the data center market with our team as well as the market for what I’d call temporary power applications where you have filming sites or construction sites, et cetera. What I would say is that the data center market is one of those secular growth trends that we think could be very compelling and open a market opportunity that we, a few years ago, hadn’t really seen. The data center market is just growing exponentially. You’re seeing now what, 20, 40 megawatts and now 200, 400 megawatts for data center sites. So what we’re looking at here is standby power. And I visited a customer recently that is demonstrating their solution for a complete standby power application for data centers.

They’re one of the leaders in the data center market. And they have at their headquarters an installation that they’re showing to their end-users, companies like Amazon and Microsoft as illustrative examples, that are increasingly looking at challenges of getting permitting for data centers in cities. And that challenge from permitting is coming from the use of diesel engines in their standby power applications. So we do see this opportunity. It’s still to be proven out, but this opportunity for fuel cells to enable permitting for large data centers, including standby power. So this is a very interesting market opportunity. And again, this is strong secular growth. These data centers need now gigawatts of power moving forward in aggregate and this is going to be a pretty significant market opportunity and we’re looking to validate fuel cells and the value proposition from a TCO perspective for fuel cells in this market.

The other market in stationary that we’re seeing these, I’ll call it, temporary use applications. That’s an emerging market opportunity. Just visiting one of our customers, GeoPura and saw them at their site where Siemens Energy is — they’re a contract manufacturer building a number of units for deployment of their — what’s called their HPU, their hydrogen power units. And they have a number of different exciting opportunities you can see on their website, some of the opportunities they profile there. And then we’re seeing also opportunities for challenges where you have grids that don’t have resiliency or don’t have the power that they need to supply basically recharging for electric vehicles, battery electric vehicles. And so ironically, where we see these markets where battery electric or fuel cell electric might win, if battery electric wins, perhaps we still get the fuel cells for providing backup power.

So there’s some opportunities there as well.

Operator: The next question comes from Manav Gupta with UBS.

Manav Gupta: I just had one question. Can you help us understand over a longer term how the development of hydrogen hubs in the U.S. can be a tailwind for your business?

Randy MacEwen: Yes. It’s really about the availability of low-cost, low-carbon hydrogen in the marketplace. So these hydrogen hubs paired with the production tax credit — and we should be getting guidance from Treasury on the interpretation of the production tax credit by the end of this year. Those two measures together, the hydrogen hubs plus the $3 per kilogram for emissions that are less than 0.45 kilograms of CO2 per kilogram of hydrogen really are the enablers and unlockers for the hydrogen market broadly, including fuel cell mobility applications and fuel cell stationary applications.

Operator: This concludes the question-and-answer session. I would now like to turn the conference back over to Randy MacEwen for any closing remarks.

Randy MacEwen: Thank you for joining us today. Paul, Kate and I look forward to speaking with you next quarter. Thank you.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.