Ballard Power Systems Inc. (BLDP) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems' Q1 2019 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead, sir.

Great. Thanks very much and welcome everybody to Ballard's first quarter 2017 results conference call. With us today on the call are Randy MacEwen, our President and CEO; and Tony Guglielmin, our Chief Financial Officer. We're going to 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 a complete disclaimer and related information. So on the call today, Randy's going to provide an update on the execution of our corporate strategy. Tony's going to review our Q1 2019 financials and then we'll open the call for questions and answers. Just a brief note that Ballard is going to be meeting with investors to discuss strategic direction and operational highlights at several upcoming conferences. The Oppenheimer Emerging Growth Conference in New York City on May 14, the 20th Annual B. Riley FBR Investor Conference in Los Angeles on May 22 and 23 and the Cowan 47th Annual Technology, Media & Telecom Conference in New York on May the 30. And I'll now turn the call over to Randy.

Thanks, Guy and welcome everyone to today's conference call. Q1 2019 results were consistent with our expectation for a softer start to the year. We delivered revenue of $16 million, gross margin of 14% and ending cash reserves of $165 million. With a 12 month order book of $76 million at March 31, bolstered by the $44 million deal with our Weichai-Ballard joint venture announced yesterday. And further supported by our sales pipeline, we have a strong set up for the back half of 2019 and forecasted growth into 2020. With an extraordinarily high level of activities, developments and progress bubbling below the surface that are not reflected in our Q1 results. As a result, our long-term outlook is very strong. Our line of sight to commercial scaling and profitability is improving. With a backdrop of continued encouraging policy and industry signals in the first quarter, we made solid progress in the execution of our corporate strategy across key markets. We see clear signs of diesel engine disruption in heavy and medium duty motive applications including bus, commercial truck, rail and marine. We expect fuel cell electric vehicles or FCEVs to offer a compelling zero mission value proposition for use cases requiring long range, rapid refueling, heavy payload and route flexibility and where the barriers to hydrogen refueling infrastructure are lowest, such as centralized depot refueling. As demonstrated at the ACT Expo held in April in Long Beach, there's a fast growing movement towards electrification of commercial trucks. There's also a growing recognition that lithium-ion batteries are too heavy for Class 8 long haul applications and this market is best served by fuel cell electric solutions. Truck emissions typically don't receive the same level of attention as to the emission standards for passenger cars. There is now growing evidence that change is underway. Of course, the global truck market is massive. In 2018 global truck sales were $3.2 million including heavy-duty truck sales of 2.4 million units. Notably, China accounted for 1.3 million trucks sold in 2018 or approximately 41% of the global total and 49% of global heavy-duty trucks sales. In Europe, road transportation accounts for almost 20% of all CO2 emissions with trucks alone, accounting for about 30% of the transportation total. Truck sales in Europe were just under 400,000 units last year or about 12% of global sales. So the issue of truck emissions in Europe will continue to grow and garner significant attention. In February, the EU agreed for the first time to place restrictions on trucks CO2 emissions, setting new limits at a 15% reduction by 2025 and 30% by 2030. In 2022 the rules will also be extended to medium-duty trucks, buses and trailers. As with cars, individual OEMs will be subject to specific EU CO2 emission targets based on their fleet composition. There'll also be financial penalties for non-achievement of the CO2 targets. Globally, we expect other countries to follow this landmark EU legislation. We believe that truck emissions in the future would be more heavily regulated with countries like China, the U.S., Canada, India and Japan currently reviewing the EU measures closely. And we expect CO2 emission targets and resulting fines like those contemplated in Europe to become a key factor in the investment by truck OEMs in zero emission technologies and solutions including fuel cells. I'd like to now provide an update on China where the market for FCEV continues to evolve. Speaking to the Automotive News China publication in March, professor Ouyang, a member of the Chinese Academy of Sciences and Dean of the Department of Automotive Engineering at Tsinghua University forecasted 1 million FCEVs on the road in China by 2030. We estimate there are currently over 2,500 fuel cell electric vehicles deployed in China, about 45% of which are buses and 55% are trucks, with Ballard technology inside roughly 70% of all of these vehicles. Commercial vehicles in China powered by Ballard technology have now driven in excess of 8 million kilometers. Furthermore, we estimate there are now 24 hydrogen fueling stations in operation in China and another 37 currently under construction. Importantly, on March 15, China State Council announced the inclusion the annual government work report of a proposal to promote the development and construction of fueling stations for hydrogen fuel cell vehicles. In March the to Ministry of Technology also announced changes to battery electric vehicle or BEV new energy vehicle subsidies. The national subsidy levels are being reduced by 50% for BEVs with a range in excess of 400 kilometers and being completely eliminated for BEVs with a range of less than 250 kilometers. In addition, local subsidies are being eliminated altogether. On a relative basis, there continues to be strong subsidy support for FCEVs in China and we're awaiting the release of a new subsidy policy for FCEVs expected by the end of June. Also, our progress on the Weichai collaboration is tracking on plan. This work has included key development and testing activities on our next generation LCS stack and next-generation module and early technology transfer activities. Planning and construction activity in the joint venture facility in Weifang, Shandong province is tracking ahead of our initial expectations and we're currently anticipating completion and commissioning of the facility later this year. Overall remain bullish on the long-term outlook for the FCEV market in China and we expect our Weichai-Ballard joint venture to become the leading PEM fuel cell platform in this large market. And on that point, yesterday we announced a $44 million agreement with the Weichai-Ballard joint venture for products and services to enable Weichai's initial deployments against its commitment to supply a minimum of 2000 fuel cell modules for commercial vehicles in China by 2021. Moving now to Europe. As we continue to await the late JIVE program orders for buses, key developments during the first quarter related to considerable progress we made in the marine sector. Just a reminder that, at Ballard we're focusing on utilizing the same technology, products and core competencies to address power needs across a range of transportation in motive applications including buses, trucks, trains and now marine. This is an effective strategy to manage costs and leverage our technology advances for maximum advantage in the marketplace. Reduction of pollutants and carbon emissions is a high priority for the marine industry and for port cities around the world. Governments are introducing regulations to restrict diesel emissions, which is contributing to greater interest in zero emission fuel cell technology, having estimated that ships emitted more than 1.1 billion tons of CO2 in 2008 representing 3.5% of the global total that year. The United Nation’s International Maritime Organization subsequently announced a strategy to reduce greenhouse gas emissions from ships including a 50% reduction target in GHGs by 2050, as compared to the 2008 level. Against this backdrop, we expect fuel cells will offer a strong zero-emission value proposition for the marine market in both standalone and hybrid configurations with batteries based on design flexibility, extended range, and total cost of ownership. Last year, we announced our MOU with ABB in relation to the development of a large scale fuel cell system for port-based hotel power in the cruise ship segment. We also announced our work in a consortium to build and launch the HySeas III ferry, which will operate off the coast of Scotland. In Q1 this year, we announced our participation in the H2PORTS project, which is aimed at facilitating a transition at European ports from fossil fuels to low carbon zero-emission alternatives based on hydrogen in fuel cells. The first H2PORTS initiative is the deployment of fuel cell powered equipment and mobile hydrogen refueling station at the Port of Valencia in Spain. Norway has been a leader in regulating movement towards electrification in the car market and more recently in the marine sector, where Norway has close to 200 ferries carrying passengers, cars and trucks through at its extensive coastal networks. Subsequent to Q1, we announced a supply agreement with Norled A/S, one of Norway's largest ferry operators to provide next generation 200-kilowatt power modules for a hybrid ferry that's planned to be an operation in 2021. The Norled ferry will be capable of carrying up to 299 passengers along with 80 cars and would be the first liquid hydrogen fuel cell power ferry in commercial operation globally. And finally, with the increasing pressure on port cities to decarbonize maritime applications, last month, we announced our plan to establish a Marine Center of Excellence or Marine COE at our engineering, manufacturing and service facility in Hobro, Denmark. The Marine COE will design and manufacture heavy duty fuel cell modules to address zero-emission powertrain requirements for the fast emerging marine industry. We have planned a new mode of fuel cell system manufacturing hall that would be constructed and operational at the Hobro location by year end 2019 with expected annual production capacity of more than 15 megawatts of fuel cell modules. Development work at the Marine COE will be based on our new FCgen-LCS fuel cell stack and FC Move HD fuel cell module. All Marine COE development work will be designed to meet European marine codes and standards and other applicable certification requirements. In North America, an exciting development during Q1 was the successful completion of rigorous testing at the Altoona Bus Research and Testing Center by New Flyer’s 40-foot and 60-foot Xcelsior fuel cell-electric buses both powered by Ballard FCveloCity-HD 85 kilowatt modules. As a result, these New Flyer buses now join the El Dorado National 40-foot Axess bus also powered by Ballard in being the only fuel cell buses commercially available for sale utilizing Federal Transit Administration funding in California HVIP funding. Moreover in April, New Flyer announced successful demonstration for an Orange County Transit Authority of 350 miles of zero-emission range with this 40 foot Xcelsior CHARGE H2 bus equipped with Ballard's fuel cell technology. This result exceeds the 300 mile performance target by 17% without refueling. The bus operated for 28 hours with a payload representing fully seated passenger capacity and achieved 10.4 miles per diesel gallon equivalent. This is exciting performance that underscores the capability of Ballard powered fuel cell buses and the value proposition of long range. Also, our Unmanned Aerial Vehicle or UAV team together with Rob Campbell, Ballard's Chief Commercial Officer participated this week at the AUVSI Xponential conference and expo in Chicago, where we launched our 600-watt and 1200-watt FCair fuel cell systems. These systems are used to power fixed wing and multirotor UAVs and what we see as an exciting and fast expanding market opportunity. To conclude, there's mounting evidence that the shift to zero-emission transportation is now underway and FCEVs will play an integral role. And at Ballard, we believe we're positioned at the center of this transition with highly disrupted fuel cell technology. I look forward to our next update call, where we expect to discuss a number of exciting developments that further demonstrate this pending transition. And with that, I'll turn the call over to Tony to briefly review the financials.

Thanks, Randy, and good morning, everyone. Top line revenue in Q1 was $16 million down 20% year-over-year with Power Products revenue down 49% and Technology Solutions revenue up 25%. Within Power Products, Heavy Duty Motive was down 72% or $6.7 million. This was due to the year-over-year decline in MEA product shipments to China combined with portable power UAV down 94% or $2.3 million reflecting the disposition of the Power Manager assets at Protonex in Q4 last year. These reductions were partially offset by increases of $2.8 million in Material Handling and $0.1 million in Backup Power. The increase in Technology Solutions revenue to $9.7 million was due primarily to increase revenue from the technology transfer program related to the Weichai Ballard joint venture, which more than offset relatively minor declines in other projects. Gross margin was 14% for the quarter, a decline of 19 points from Q1 last year. And this resulted from the decrease in high margin revenue from the MEA shipments to China as well as the lower revenues from the disposition of the Power Manager assets as well as some increased cost in a quarter to attain certain milestones in select TS contracts. The overall lower product revenue also had negative impact and overhead absorption. However, we do expect gross margin to improve throughout the year, as the Ballard JV, technology solution program continues to ramp up along with increases in product revenues that will impact overhead absorption as well as the impact of margin of product mix. We're still expecting gross margin for the full year to be in the mid-20% range. Cash operating costs were down 13% in Q1 to $9.3 million, due primarily to lower development costs, as we transitioned resources to the Weichai Technology Solutions program along with decreases in sales and marketing costs. Adjusted EBITDA in Q1 was negative $8.6 million, a decline of $4.7 million compared to the same quarter last year. Adjusted EBITDA in Q1 also included equity investment losses of $1.9 million associated with the Weichai Ballard JV. Net loss in Q1 was $12 million compared to a net loss of $5.5 million in Q1 last year. Adjusted net loss of $10 million in Q1 compared to a net loss of $5.5 million last year. And earnings per share was negative $0.05 in Q1 compared to negative $0.03 in Q1 2018 with adjusted earnings per share of negative $0.04 compared to negative $0.03 last year. Cash used by operating activities was $10.5 million in Q1 consisting of cash operating losses of $5.7 million and working capital outflows of $4.8 million. This used in working capital largely reflects lower accounts payable resulting from the timing of supplier payments and the annual compensation awards. In terms of liquidity, we ended Q1 with cash reserves of $165 million, a 214% increase from the same time in 2018, and a 14% decline compared to the end of 2018. Finally, we ended Q1 with an order backlog of $188.4 million, a modest decrease of $6.4 million to the end of Q4 and at the end of Q1 our order book for deliveries in the following 12-month period stood at $76 million of which we expect to recognize approximately $60 million throughout the rest of this year. Putting this all together, the $60 million in Q1 revenue, when combined with the $60 million of order book, we expect to recognize the remainder of this year and the revenue expected to be recognized this year from the Weichai Ballard JV together our existing sales pipeline gives us confidence in confirming our full year outlook for a relatively flat revenue that in 2019, compared to 2018. And with that, let me turn the call back over to the operator for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning. Thanks for take my call. First on the announcement contract with the Weichai JV of $44 million, just give us further color on what that is in terms of supplying initially to them. Is it modules? Or is that just stacks? And is that the full 2000 kind of vehicle units? Or is there more to come from that?

Yes, Rob. It’s Tony here. Yes. So the contract that we described, the $44 million is actually a collection of all of the above. There are – and again, just stepping back as Randy alluded to, we've talked about – we're expecting the commissioning of the JV to start later in the year end and be up and fully commissioned in early 2020. So what were this order constitutes is actually a collection of a small number of finished modules, but as well some stacks as well as MEAs, some plates and so forth. So as we start to deliver product, the JV will start doing local assembly initially of modules. And then as we move into 2020, start doing assembly of stacks. So it's a collection of all of the above. In terms of what does that represent? It represents about a roughly about third or so, maybe a little less than a third of the 2000 unit commitment.

Okay, great. That's excellent color. And then just maybe in terms of market demand, Randy, you did a lot of – you went through a lot of areas that are seeing development. I guess just particularly with the EU regulations coming in now, what are you seeing in terms of customer interest and OEM interest in fuel cells and maybe how soon can those sort of turn into product announcements?

Yes. Thanks, Rob. As we look past our order book and backlog to the sales pipeline. For example, as an indicator, we have a very large portion of a large sales pipeline that is focused on Heavy Duty Motive, Medium Duty Motive application. So we see a lot of contribution from the bus market in Europe. And increasingly in the U.S., but I would say, I'm really encouraged with what we're seeing in Europe in a number of key markets. We've obviously highlighted here, the marine sector during this call. And I think it'd be safe to say during the next quarter, we expect to be highlighting the bus market as well, including in Europe. I would say, over 50% of our sales pipeline is Heavy Duty Motive focused and bus and commercial truck will lead the way. As we move out to 2021 and some of our programs with partners both in rail as well as some truck and marine applications, I think we'll start to see higher product sales in those markets as those programs transition from TS work to a product sales.

Okay, good. Thank you. And then lastly on the marine segment, the Denmark facility, are you envisioning that to work similarly to the China facility where you're supplying the MEAs intuit and it's creating the modules or just help me understand kind of the operational structure there?

Yes. Just to remind you, the European facility is 100% owned by Ballard. This is part of our family group obviously. So what we're looking at there is a assembly of modules, but really setting up our European footprint as a Marine Center of Excellence in terms of understanding codes and standards, understanding the market requirements, understanding design considerations, shock and vibe, water, salts, there's a lot of requirements specific to that market. And so we expect our European platform to be a Center of Excellence for this and not only on the understanding and design, but also on the actual assembly of those modules. So we'll see module assembly in that market and as volumes scales in that market, not just from marine but for a number of applications, we'll continue to look at what manufacturing strategy we need to have in that market.

Okay. Thank you. I'll turn it over.

[Operator Instructions] Our next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you. Good morning. And Tony, maybe just for you to begin with on the guidance, you guys are reiterating sort of flat revenue for 2019. Is there's going to be maybe lumpy towards the fourth quarter or could you provide any color on how this will play out in terms of cadence for the rest of the year?

Right, certainly. Yes. So we certainly do expect revenue to kind of wrap up sequentially through the year. And the fourth quarter would be expected to be the highest of the quarters. Part of the reason for that as well as the $44 million Weichai program, deliveries, we've made some and we'll be starting some modest delivery soon. But the bulk of the deliveries and the revenue recognition in 2019 will start principally a little bit in Q3, but principally in Q4. So that's where we'll start to see some of that Weichai revenue hit the book. So think about – just think about as sequentially higher quarter-over-quarter with Q4 certainly being the highest.

Thank you. And then on the cash front, cash has dropped from see around $192 million to $165 million between 4Q and 1Q. How much of this was sort of investing activities into your efforts in China was as operating burn? And what is your outlook on the cash position by the end of the year?

Right. So in the burn for Q1, there was a $14 million – that included a $14 million payment, which was the second installment, but the $14 million capital contribution to the Weichai JV. So in that – in the burning Q1, $14 million of it was there. We also have expect to make an additional $7 million capital contribution likely in Q4 to the JV. So as you think about the total burn for the year, there'll be another $7 million. And we expect in total, the total burn for the year probably to be in the – including the – if I included the $21 million, $22 million going into the JV probably, $50 million odd in total. So the other part would be operating cash and some CapEx. This year we expect working capital to be probably roughly flat to depending on timing of shipments at the end of the year. So think about $50 million-ish overall. Half of that, it's the capitol. I will say though, we could have some working capital payment, depending on the way Weichai one side. I want to be a little – hedge that a little bit depending on the timing of invoicing and payments on Weichai. But think something in the $50 million, $50 million to $60 million range, including that $22 million.

Well. That was helpful. Thank you for that. And Randy, maybe for you, I guess the timeline, you guys are indicating for the JV to be fully commission this 2020, but in terms of sort of the micro level milestones, what should we expect to be achieved, say in the next few quarters for you guys to get there?

Sure. Good morning, Amit. Weichai has a very clear communication strategy, and I certainly don't want to get ahead of their communications on this. There's a lot of sensitivity around this. So what I can say is that, construction work is underway. The procurement of key equipment – specification procurement of key equipment is underway. There is a lot of activity both at Weichai, Ballard and the Weichai Ballard JV which we staffed up significantly in the last, say 90 days. So there's a lot of activity underway and I fully expect late 2019, we'll have very good color and images can provide on this front, but I don't want to get ahead of their communications plan.

Understood. I guess that's what I have for now. Now I will follow-up off the call. Thank you so much.

Our next question is from Craig Irwin with Roth Capital Partners. Please go ahead.

Good morning and thanks for taking my questions. Last week at ACT Expo, we had an opportunity to talk to many of the truck buyers in North America. The number of global guys as well. And all – anybody wanted to talk about is a Nikola Motors and their Nikola World there held the prior week, something like 2000 people showed up. And it's well known that, Anheuser Busch has 800 units on order of the truck. There's several hundred units also an order. And it seems like, there's actually a willingness to believe on the part of a lot of the buyers. It's not just Anheuser Busch. Can you maybe talk about whether or not there is a resurgence of the conversation with some of the big trucking OEMs outside of China? Are you seeing interest and conversation rebound with some of these large global OEMs, outside of your Weichai relationship that that could be sort of confirmatory of some of the things we've been hearing over the last couple of weeks?

Good morning, Craig. Thanks for the question. So clearly electrification is front and center now in the commercial truck market. And as we look at the technologies that are available to satisfy the market requirements there, I think it's clear, at least in our mind that fuel cells offer a compelling value proposition given the range requirements and the weight restrictions. As we look at what Nikola has done, I've got to credit them for really exciting a lot of people and bring some imagination and some vision and I think they should be applauded for the work they’re doing. We did have some people attend the Nikola World event as well and by all accounts it was a very successful event. So our hope is that they're successful and anything we can do in the marketplace with Nikola and any other industry participants, of course, we're going to a support that. In terms of you characterize it as resurgence. I guess, I would characterize it as initial surge. There has been historically a lot of discussions with truck OEMs, that has changed significantly in the last, I would say six months particularly. There are a number of OEMs in all the key geographic markets. There is four or five key OEMs that dominate Europe and the U.S., there's four or five that dominate in China. We feel like we have an opportunity to make progress with many of them. The reason is if you look at the validation we have of our technology in the field albeit in the bus application, we have proven durability. And as we look at the next generation of stack and look at the next-generation of module with cost reduction and performance improvements. And as I mentioned earlier, even tracking over 8 million kilometers of in-service for trucks and buses now in China as well. We have some very good data points that no other companies have in my opinion with respect to this heavy and medium-duty motive applications. So I feel like we're in a very good position from a technology perspective, from a field deployment perspective, from a brand perspective, capital perspective, and the level of activity, I'm going to say, that record high today at Ballard.

That's good to hear. That's good to hear. So one of the things that we've heard from speaking with multiple vendors of either refueling stations themselves or different components that go into refueling stations is that the regulations in China are changing such that you have to drive a minimum number of miles before you can pull down to related subsidy and people are hoping for visibility there by the end of June. Does it concern you that maybe, the chicken and the egg or sort of reversing directions here? Is this something that you've heard? Do you expect your customers in China to be able to build the trucks first and then the stations? Or is this something that's going to be sort of holistic moving forward at once and we're not likely to see the limitations of – I guess, there's only about 10 or 12 existing hydrogen stations that are working in China right now. Does that really limit us over the next several quarters?

Yes. So a good question. Just to clarify, there were 24 fueling stations in service today in China and 37 under construction. I think one thing that's important to understand, you mentioned the number of kilometers that vehicles need to drive in order to get subsidies. It used to be 30,000 kilometers, it's been reduced to 20,000 kilometers about a year ago. There will be changes at the end of June. I'm not necessarily expecting that to be a change. But I think one of the key changes that we're seeing, we saw this obviously just recently in March in the battery electric market is a focus on infrastructure. The focus on infrastructure in battery electric and now hydrogen fuel cells and particularly in March with the central government announcing in their working paper to focus on hydrogen refueling infrastructure. My expectation is that, there will be a lot of activity over the next 24 to 36 months in China that support high volume adoption in that marketplace. It doesn't mean there won't be challenges, either on storage or transportation. And also looking at ways to secure green hydrogen as well. So there's still a number of challenges to focus on. But I think the China government, you'll see a pivot here shortly that I think really focuses on addressing the infrastructure challenge. Now of course the applications we're focused on here, buses, city buses typically and commercial trucks, including delivery trucks that return to base at night have a lower barrier to entry here. As you can see, we have a situation today where the number of vehicles in the field, we have just kind of around, just under 1800 vehicles that have Ballard technology in the field today and they're all being fueled fine.

Thanks. That’s all – the end of my questions.

Thanks, Craig.

Our next question is from Jeff Osborne with Cowen & Company. Please go ahead.

Yes. Good Morning, guys. Most of them have been asked, but maybe just one falling up on Craig's line of questioning on the Class 8 side in Europe and U.S. Randy, can you talk about who in the public domain you've done testing with, I think it was Kenworth, but I forget with one of the port programs. But what's your sort of go to market strategy in terms of leveraging bus into the heavy-duty side in particular?

Yes, so I appreciate it. Thanks for the question, Jeff. The announced project we have is with Kenworth and you're right, it's at the port of LA in Long Beach and there's testing – field testing underway now with that truck. We do have some other applications underway as well, including UPS. So, your question was focused on Class 8, of course, our other classes of trucks that we're doing some early demonstrations with. What I would say is that, the OEMs Class 8 recognize that, kind of legacy lithium-ion battery is not going to fit the bill. And I think that's part of the reason why a number of people are excited by the nickel opportunity. But that's really causing a lot of the OEMs to rethink their long-term strategy in terms of transitioning from diesel to zero mission. And obviously the EU legislation is a very good helpful driver on that front. In terms of go to market strategy, we've looked at the different parts of the value chain and looked at where we should be marketing our offering. We think there's value in working directly with the OEMs. In some cases we're obviously trying to engage end users as well to get a demand pull through. We're also focused on engine and powertrain system designers and manufacturers as well. So there's different parts of the value chain we're attacking to set. And I do believe that our work in the bus market well not a full fit is very leverageable in terms of – in gender and confidence with those customers on the performance and durability as well as our service strategy. In some cases the power density requirements for truck are different than the bus market. And that's why – part of the reason why we're working on the LCS and HDV8 generation and we'll continue to improve power density over time as well. So that we have products that really meet the market requirements. One thing, I want to highlight, I just spent about 10 days in China and we had the opportunity to meet with Weichai and brought Ocean Synergy refire number partners there. And a few weeks ago we held a market requirements session, a Voice of Customer session in China with about eight to 10 commercial truck OEMs, and received an extraordinary amount of very valuable feedback on the requirements. Obviously for the China market but some of these companies have exposure to international markets as well. And the work we're doing in the U.S. and some of the activities we have underway in Europe coupled with this Voice of the Customer feedback in China are all I think, allowing us to make sure we have a product offering that's going to hit the bullseye.

Got it. That’s helpful. Maybe just two quick ones for Tony. As you look at the backlog that's remaining for the rest of the year, and clearly got the cadence from Amit's question about that ramping up into the fourth quarter. How do we think about the different segments and the margin trajectory through the year in terms of the end markets that that backlog is – what end markets are contributing to the backlog?

Yes. Thanks, Jeff. Yes, so as was mentioned, so there's $76 million currently in the order book of which $60 million is roughly – $60 million for delivering this year. I would say about $50 million of that is in TS. So between the Weichai – the Weichai TS program and Audi. So you can think about – call it roughly $60 million of that order book is that fairly high and typical TS margins. And then the remainder of that backlog is largely in heavy-duty motive. And then again, the part that's not in there of course is whatever we're able to ship and deliver into the Weichai order that we announced yesterday. So by enlarge, most of what's in the order book is relatively high margin and that's gives us the confidence to still push – to be able to say that we feel comfortable at gross margins. We'll end up the year it indicated earlier.

Yes. And I might just add two points, Jeff. For the material handling market, we typically don't carry a large order book there. It's usually quarter-by-quarter Pos, so that doesn't get fully reflected in our outlook for the full year. The other aspect is, my expectation is that you'll see a significantly increased order book in the next three to four months as some of the work that we're working on closes.

I got it. Okay. It was helpful. And maybe same line of questioning, any meaningful change in the OpEx run rate as the year progresses for all of these new initiatives and then sort of gearing up for the growth in 2020.

We have certainly quite an ambitious hiring program this year, which did start in Q1. I'd say, Q1 was slightly lower than probably the run rate for the full year. So I would expect a slight bump up in Q2 and Q3 but once it - once we kind of – I'd say, once we hit those levels by Q2, Q3, it should levelize from that point forward, meaning we should be fully staffed up going into the latter half of the year and into 2020. So bit of a bump up in the next quarter or two but levelized from there.

Yes. And Jeff, I would just add to that. If you think about some of the work we're doing, obviously with the Weichai JV in China, with the build out of the Marine Center of Excellence in Europe, and very significant staffing adds this year all on relatively flat revenue year-over-year. I think, they're all indicators of the growth we see coming.

Makes Sense. Can you put the head count increases Tony in perspective? How many people do you have fulltime today and many open spots you have?

Yes. We have about 650 employees today and for 2019, we're looking at a hiring plan of just under 120.

So it's 650 and we're about half way through the hiring plan, Jeff. So maybe another 50 odd to go before year end. So kind of end the year around 700 give or take.

Okay, that's helpful. I appreciate it. That's all I had.

Thanks, Jeff.

Thanks, Jeff.

Our next question is from Amit Dayal with H.C. Wainwright. Please go ahead.

Yes. Thank you. Just wanted to touch on your migration to the LCS stacks and modules. How are you looking to manage sort of two generations of products beyond say, 2021? Are you completely just going to migrate to LCS now or are you also going to have a presence in the older generation version of the product?

Yes. Amit, thanks for the question. A couple of things to point out. The LCS is actually our 13th generation of stack and the HDV8 is our 8th generation of engine. So we have a lots of experience in terms of migrating from one generation to another and thinking about, how to do that in effective way with the customer base as well as the supply chain. We do see continued need for non-SSL based products for the foreseeable future. There are a lot of customers that have that spect in and have done some work to design that into their engines. And we want to make sure we're supporting them. But we're very careful a plan here in 2019 as we introduce it both in terms of customer expectations as well as inventory and supply base.

Understood. Thank you for this. That’s all I had.

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

Thank you, Sabus and thanks everyone for joining our call today. We look forward to speaking with you again at the beginning of August where we will discuss our second quarter 2019 results.

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