Ballard Power Systems Inc. (BLDP) Q2 2023 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Thank you, Operator, and good morning. Welcome to Ballard’s second 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. In June we hosted our 2023 Capital Markets Day. During the event, we provided an extensive update on the progress that Ballard has made, while also providing additional transparency on our expectations for our business. In case you missed the event, the webinar and presentation are available on the Investors section of our website. Consequently, we have intentionally kept our remarks today brief for this quarter. 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.

Thank you, Kate, and welcome everyone to today’s conference call. We are making important progress on our strategic priorities as communicated at our 2023 Capital Markets Day. During Q2, we grew our order book, invested in next-generation fuel cell products and continue to drive our product cost-reduction programs. We continue to see growing customer interest across our market verticals, which is reflected in $25.1 million of new orders in Q2 and a growing sales pipeline. Importantly, our power products backlog is now up over 140% compared to the prior year period. We are particularly excited about the growing customer engagement levels in the U.S. and European markets. As a result of an increasingly constructive hydrogen policy landscape and increased market activity in the U.S. and the EU, and given the continued hydrogen and fuel cell policy uncertainties and market delays in China, we are accelerating our work on our local-for-local global manufacturing plan and related future capital allocation plans. Specifically, we are reevaluating our previously announced MEA localization plan in China pending completion of a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the U.S. and/or EU markets. We expect to conclude this important work in early 2024. We continue to track to our fuel -- full year guidance ranges for operating and capital expenses. Our investments, prioritize technology and product development programs, product cost reduction initiatives, customer platform wins, customer experience and advanced manufacturing. We continue seeing growing customer engagement across our verticals. At Ballard, our strategy is to commercialize PEM fuel cell technology and products that can be applied across multiple market applications where our fuel cell technology provides the strongest value proposition and where barriers to hydro refueling infrastructure are lowest. These markets include bus, truck, rail and marine, as well as select stationary power generation and certain off-road markets. We will provide a brief update for each of these applications. In our bus vertical, the tendering activity for fuel cell buses has begun to translate into our order book and backlog. This was highlighted by the 96 engines order from Solaris from three European cities, including Gustrow, Germany, which has ordered 52 fuel cell buses for deployment. We are also seeing exciting activity in the U.S. fuel cell bus market as we recently received significant orders from our customer New Flyer during the quarter. Given the ongoing tendering activity for fuel cell buses, we expect material additional orders for our bus customers over the next 12 months. On the truck market and as we have discussed before, the truck market is in the early innings of fuel cell adoption with most truck OEMs and integrators focused on developing fuel cell truck platforms. In this regard, we are delighted that Ford Trucks after competitive process has selected Ballard as their fuel cell partner as they develop their hydrogen-powered F-MAX platform with our engines inside. We see this partnership as indicative of our technology capabilities and increasing OEM interest in fuel cells as they understand the value proposition of fuel cell electric powertrains. Our partnership will support Ford as part of the Europeans ZEFES project to demonstrate zero-emission long-haul trucks in major freight corridors from now through 2027. As Ford’s fuel cell F-MAX truck platform matures, we anticipate this partnership to evolve into a long-term scaled deployment level module orders and supply arrangement. Despite ongoing challenges in China for the fuel cell market, our partner, Wisdom Motors, recently signed a purchase order for almost 150 fuel cell-powered refuse trucks for delivery to the Australian market. We invested in Wisdom last year to accelerate their efforts to build a portfolio of world-class fuel cell-powered heavy-duty vehicles, including buses and trucks, using engines exclusively supplied by the Weichai Ballard JV. The level of innovation at Wisdom is remarkable as they have announced this deployment scale order only five months after delivering an initial demonstration truck. Wisdom has also signed a cooperation agreement with our Australian customer to deliver 12,000 hydrogen-powered trucks over the next five years. In rail, we received a follow on order from CPKC to deliver additional modules in 2024 as they expand their hydrogen locomotive project. For our marine vertical, we continue to see growing interest in short-sea container ship, inland cargo and barge applications, which we anticipate will result in order activity later in the year. The MF Hydra, ferry vessel, has now operated over 1,500 hours since it began sailing regularly in March and continues to clock about 100 hours of operation per week, validating the performance and reliability of our fuel cells in the marine application. We are also pleased to report that our marine module has received Type Approval from Lloyds adding to the Type Approval we had received from DNV in 2022. In our stationary power market, we received a $2 million order during the quarter for one of our systems to provide power to an EV charging site in Germany. Separately, after the quarter ended, we shipped our 1.5-megawatt ClearGen-II system to the Microsoft datacenter in Wyoming, having passed factory acceptance testing with Microsoft and Caterpillar representatives on-site. The system will begin its demonstration in mid-September and we expect it to be another major proof point of the value proposition of our products in the datacenter market opportunity. We continue to see interest in our stationery products growth for EV charging, grid balancing, datacenters and mobile power solution applications. We experienced solid backlog in our emerging market segments driven by orders from our customer first-mode who is deploying ultra-class mining haul trucks for use on Anglo-Americans mining sites. Our partners now order close to 100 modules year-to-date and we expect to realize revenues this year as we ship a portion of this backlog in the second half of 2023 and the remainder into 2024. As we look into the second half of 2023, our investors can look at three key milestones we are set to accomplish; first, we expect to sign material purchase orders with customers in our bus and marine verticals; second, we plan to substantially complete our global manufacturing strategy; and third, we anticipate ending 2023 with a robust 12-month order book to provide a strong coverage ratio for revenue in 2024. We believe Ballard is set up for a strong second half of 2023 with sequential quarterly revenue growth and continued progress on our order book to support 2024 revenue. We also maintain our view that the revenue split between first half and second half of 2023 will be roughly 30% to 70%. With that, I will turn the call back over to the operator for questions.

Thank you. [Operator Instructions] The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Good morning and thanks for taking my questions. Randy, as it relates to the location of the MEA manufacturing facility, are you essentially just waiting for the IRA rules to be finalized, and if I am on the right track with that line of thinking, what’s sort of the tipping point in terms of the IRA rules for you in terms of where Europe or the U.S. becomes more attractive? And maybe I will sneak one more in just to give us a sense of what you are hearing in terms of where you think the rules will ultimately shake out at all?

Sure. Yeah. Aaron, I think, it’s an important question, and certainly, that’s a key consideration. I think just stepping back a little bit, for us looking which jurisdictions have the most supportive policies for the adoption of low cost low carbon hydrogen is critical and where do we see deployment of fuel cell vehicles. So this is something that’s critically important. Tied to that is we do see a number of these regions that are also looking at how do we support companies who are looking at localizing production across the hydrogen fuel cell value chain in that jurisdiction. So there are two aspects to this. One is, as you point out, how would the -- particularly the details on the IRA implementation including how the green hydrogen is effectively measured. But also stepping back and to say what policy support, which subsidies support is available for manufacturers looking to set up local manufacturing operations. So both of those are considerations that we are looking at and both of those we are advancing -- obviously, tracking the first one carefully and advancing on opportunities for funding in all three regions. So that’s important. Secondly, I think just again, stepping back, where do we have proximity to customers, end users, suppliers and key talent, where is the cost structure going to be competitive? And I think also access low cost low carbon hydrogen is not just important for our customers, but also to our operations, of course, we want to have our operations with low emissions as well. These are all factors that we are considering and it’s not just the U.S. market that has some pacing items in the back half of this year, but certainly, activities that we are engaged in all three markets will enable us to have, I think, a very clear competitive assessment by the end of the year.

Makes sense. Switching gears a bit. I am just thinking about the Solaris order, you just announced, you mentioned the potential for more bus orders in the next 12 months and then maybe we can throw in the previous Siemens and Quantron orders. With these larger batches of orders that you seem to prepare, do you think we will start to observe some scale efficiencies play out in the margin over the next couple of quarters, and if so, how would you characterize it in terms of magnitude?

Yeah. Maybe just a comment on Solaris and then secondly on the scale efficiencies and the impact on gross margin. Just as a reminder for listeners, I mean, Solaris is a leading bus OEM. They are based in Poland. They have been a longstanding customer with Ballard. They have been actively promoting both Urbino 12-meter and articulated 18-meter low-floor intercity buses, a really good partner. They have over 110 fuel cell buses already deployed with Ballard engines inside. This additional order for 96 is really critical. It includes three cities, one of which is in Gustrow, Germany with Rebus as a transit operator there and those buses, most of them will have our 70-kilowatt engines on the 12-meter buses, but five of them are articulated and will have our 100-kilowatt engines. So very important customer and have a large activity level right now across Europe. And I think this is just representative that we are seeing cities moving from orders of one and two and five and even 10 now to 30 and 50 and in some cases over 100 fuel cell buses for deployment. So I think this is critically important, and as Europe and the U.S. and China get access to low cost low carbon hydrogen, we think this is a massive unlock not just for city buses, but for all of the verticals that we are focused on. So critically important. I do think, though, the orders we are talking about here for Solaris and you rightly mentioned Quantron and Siemens as other great platform wins as well. Those are still relatively speaking modest volumes. So they are not at the level yet where you kind of get the major break -- volume breaks that will impact gross margin the way we are looking for. Of course, that will help, it will be incremental, but not significant material changes that we will see when we are in the thousands of units as compared to the 100s.

That’s very helpful, Randy. I will turn it back.

Yeah. Thank you.

The next question comes from Manav Gupta with UBS. Please go ahead.

Good morning, guys. I just wanted to talk a little bit about the Ford order looks very exciting. Is this something that could scale up, could it scale up across geographies where they are interested in something like this? Can you talk a little bit about that?

Manav, you are right on both fronts. It’s very exciting and it indicates scaling in the future. I think you are bang on. Ford Trucks, it’s the kind of the key, the only heavy commercial brand for Ford. They have a range of vehicles in their portfolio including tractors and construction trucks and distribution trucks, a pretty important player in the truck market. Effectively, what they are doing Manav is, developing a fuel cell truck platform based on the F-MAX 44-ton long haul a tractor truck they have and after competitive process selected Ballard to integrate their fuel -- our fuel cell engines. So we have got two 120-kilowatt FCmove-XD engines, so 240-kilowatts in total and its part of a very important program in Europe, the ZS [ph] program, which is really designed to provide real-world demonstration of long-haul zero emission trucks. And what we see at the conclusion of this project is Ballard being very well positioned with its Ford relationship to be a long-term supplier to Ford. Now we have work to do, obviously, to validate that, but we are confident in our solutions and in the products that we are going to be offering. So this is another example, as was pointed out by Aaron a minute ago of just work that we are doing to secure platform wins. And on the truck side, this is a very important addition to the Quantrons and Wisdoms and other partners that we have on the truck side. So agree with you, very exciting and we see scaled opportunity as we get validated through the next couple of years.

A quick question here is, we had started seeing green hydrogen percolate. You have now got a European refiner looking to source green hydrogen for its refining operations. Yesterday, you had a U.S. refiner who said, look, I am looking to source green hydrogen to make sustainable aviation fuel. I am just trying to understand, do you see this seeping through at some point, hopefully soon, in the transportation market also where companies are like, okay, now I want to switch to a fuel cell, because now I have a much lower carbon intensity, green hydrogen, which I can source cheaper than I could in the past?

Yeah. So I have been saying this for a while. I think green hydrogen supply is going to surprise to the upside. There is just enormous activity going on globally, not just our three key markets of North America, Europe and in China, that -- when you start meeting the companies that are actually working on hydrogen and green hydrogen development programs are in the stages of procuring electrolyzers and planning for offtake, it’s very exciting what’s happening. I think if you step back a year ago, we probably expected somewhere around 150-gigawatts of green hydrogen production by 2030 globally. I feel like that number could be closer to 250-gigawatts based on the level of activity and engagement we are seeing in the key markets. So it’s very exciting. I do think that green hydrogen will be used initially to effectively decarbonize existing gray hydrogen applications. So industrial applications, a traditional markets for hydrogen, which is about a 90 million ton existing market. And then, I think, you are going to see a number of the mobility applications and stationary power applications at Ballard are focused on really getting unlocked with its access to low carbon low cost hydrogen. And you can see situations where there will be offtake with a significant portion of the offtake dedicated to gray hydrogen and then a residual portion of that offtake being used for merchant market opportunities in transportation. And if you think about the customers we have, end users we have in our markets, bus, truck, rail and marine, their number one GHG emission is fuel for their transport applications and they have very limited optionality on where they can turn for zero emission and hydrogen will be the big player in these key markets we are focused on for medium- and heavy-duty motive.

Thank you so much for the detailed response.

Thank you.

The next question comes from Rupert Merer with National Bank. Please go ahead.

As you look at where to prioritize your MEA investment, I am wondering if you could speculate on how this could play out for your partnership in the Chinese market. And if you make the investment outside of China, can your Chinese partner participate or is there a chance they might take a lead on investments in China without Ballard?

Yeah. Great question, Rupert. I think we certainly are committed to the China market. We are believers in the long-term market opportunity for China. It is the largest market for production and use of hydrogen today and based on my recent visits there, I expect that to continue through 2030 and 2050. There is an enormous level of activity. So, in my mind, it’s not a question of if we have MEA production in China, it’s a question of when and sequencing. So we will, like most companies in kind of a deglobalized world, look at this local-for-local strategy, make sure we have the right assets in country, in region to be successful. And clearly, Weichai is our partner in the China market for the bus and truck market and they are making significant commitments in the development of fuel cell buses and fuel cell trucks in their portfolio companies. A lot of great work that’s been done by Weichai in the supply chain at the Weichai Ballard joint venture and they are committed to this market as well. So just don’t view this as a step back from China and -- or a step back from our relationship with Weichai, but really just an assessment, a reevaluation of where to prioritize our next investment.

Okay. Great. So if the investments made outside China, the understanding is you will be importing MEAs from outside China to meet your production needs until the production is there, is that fair?

Exactly. Yeah. And the challenge, just to be open and transparent, the challenge with that model is that there we are expecting to see import duties and so that could stress gross margins with that variable for MEA exporting to that market. But we fully expect to have MEA production in China when the market is at scale.

Great. I will leave it there. Thank you.

Yeah. Thank you. Great questions.

The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning.

Good morning, Rob.

Could you just sort of update us on the U.S. bus market? How is that developing and how do you see that rolling out over the next couple of years in terms of trials and production ramp?

Yeah. I think this is going to be a bright spot over the next few years, Rob, particularly as we get this access to low cost low carbon hydrogen coming online. But we are seeing a lot of activity, not just in California anymore, but across the U.S., with cities now looking at over 30, over 50, over 100 buses in some cases. So I think this is going to be very exciting over the next 12 months to 24 months as some of these cities move from tendering activity to actually procurement and I think we are very well positioned in the U.S. market. We have very high market share today. We expect that to continue. Our key partner in the North American market is New Flyer and they have about two-thirds market share for city buses in new city transit buses in North America and they have both 40-foot and 60-foot articulated bus validated with Altoona testing with Ballard engines inside. So we are very excited about this market. Nothing I can share in terms of actual sites today. But based on the quoting activity and engagement, we expect to see some announcements here over the next 12 months to 24 months at scale for U.S.

Okay. Thank you. And then to the mine truck market. I think you have got an initial strong order that drives at 20, I guess, starts this year and it goes into the next year. How does the follow-on orders for that project work? Are those sort of a next year item or does that play out over a number of years?

Yeah. I think that we should probably think about next orders coming in 2024. There’s a possibility for that to happen earlier. But I think to me what’s really important here is we have an end user here with Anglo-American that has a very ambitious program to decarbonize these ultra-class mining haul trucks with only one solution available and they have invested significantly in that solution, in fact, buying the systems integrator. So this is a very good relationship we have through the value chain effectively and we feel we are very well positioned. They have a large portfolio of ultra-class trucks, so looking to decarbonize through 2030. And what’s important from a testing perspective is the first truck, the famous Truck 74 completed one year of testing a couple of months ago and very, very good performance. And you got to think about the weight and grades, sand, et cetera, very challenging environment and very good performance. So we are very excited on this relationship we have on this opportunity set and we feel we are very well positioned.

Great. Thank you. I will turn it over.

The next question comes from Greg Wasikowski with Webber Research. Please go ahead.

Yeah. Hey, Randy. Good morning. Thanks for taking the question. I just wanted to -- and apologies, I am a little behind catching up. So apologies if you have already answered this. But can you remind us the schedule on those import duties into China and mag -- potential magnitude in the next 12 months to 18 months or a couple of years or so? And then also with that, any CapEx that you guys have already dedicated to that facility or what the timing would be on that? Just so we know, can you quantify a little bit if the reevaluation were to drag on or anything like that?

Yeah. Greg, thanks for the question. Just in terms of the duties, the way I would think about that it’s very complex, and I would say, it’s even some uncertainty in terms of the complexity. The way to think about it is, you are kind of in low-single digits, now kind of 3% to 5% duties depending on a few variables, but that could get as high as 12% to 15% by 2027, 2028 timeframe. So that’s an area that we continue to work with our legal counsel on validating what the expectations are in the outer years. So I think that addresses that question. And the second question…

Let me, yeah….

Yeah.

So on -- just on the CapEx and how much we spent on the project, about $4 million this year. Most of that is for manufacturing equipment, which is on order, hasn’t been delivered, obviously, which we will look to where we direct that equipment or most of that equipment at the appropriate time. So of the $130 million announced only about $4 million or so has been spent.

And Greg, maybe just to clarify kind of where we are in the MEA localization process in China. While we have signed the investment agreement, we haven’t proceeded to the next stage, which really requires capital commitments and the next stage is the actual land acquisition piece. So we are deferring that piece until completion of this comparative analysis. The long lead time equipment that we have ordered can be used at any site and so we will require MEA production equipment. The question is where does it go? So it’s not in any way stranded capital.

Okay. Great. That’s helpful. Thanks, guys. Next one, just kind of adding on to your list of criteria for looking at other regions. Is there any aspect to kind of higher competition and Ballard essentially wanting to elbow out some space, maybe being -- competition playing a higher role than it would have maybe five years ago or so? Is there any sort of like speed to market, are you guys wanting to get a land grab and be there before somebody else comes in to some of these regions that are maybe supporting localize production more of a focus now than it would have been in the past?

I would say that’s a lower factor to be honest with you. I think the elbowing out a land grab might be for available support for manufacturing facilities as opposed to customers. So there is competition for limited funds where, for example, the U.S. DOE has funds available for companies that are looking to localize in the hydrogen fuel cell value chain. Similarly, a similar type of pools of capital available in Europe. So from that perspective, that’s true. But our approach has always been to be first to market and we feel we are pushing that forward regardless of what the competitors are angling for.

Okay. Great. Thanks, Randy. I will turn it over.

Thank you.

The next question comes from Mac Whale with Cormark Securities. Please go ahead.

Good morning, Randy. A lot of talk on the MEA localization program. I am wondering on the rest of the components, particularly bipolar plates where you have made a lot of progress that you talked about in the -- at the Capital Markets Day. I am wondering what your views are on the localization of those components, assembly balance of plant or should we consider those already local went away or are those to follow on after the MEA localization?

Yeah. Great question, Mac. And what we are looking at for production facilities in the U.S. and in Europe, as we are assessing which parts of the value chain should be localized and where is the support for it. So, you have different support levels for MEAs, for bipolar plates, stack assembly, module assembly. So we are looking at full scope in each of those markets and if we are able to get the appropriate support, if we are not able to get the appropriate support, we will scale back on that scope in market. With the project that we are working on project Ford just designed to have lower cost bipolar plates. This is a significant part of our plan -- our current plan as we are developing our proposal for the U.S. market. So the U.S. opportunity could be MEAs, bipolar plates, stack assembly, module assembly.

Right. Right. Okay. And then my second question is around the Ford Trucks initiative, your partnership. Is the platform that -- does Ford take a different approach than what you have seen with other partners in the truck market? I am wondering if you can give us some detail, perhaps, is the performance spec different, is truck integration expected to be different or do you expect over time that your component will converge to a common module that you will be able to really ship to everybody? What is your -- I am just trying to get an idea…

Yeah.

… of what they might be doing the same or differently.

Yeah. So, great question, Mac. And let me just back up a little and just remind everyone, we have this strategy in the truck market to partner with dual-stream truck. Basically, one stream where we are partnering with the large truck OEMs trying to secure platform wins, where they develop their existing platforms with fuel cells inside or develop new platforms of fuel cell inside. The second stream is kind of more the upstart or up-fitters that are taking chassis or gliders from the large OEMs and effectively retrofitting those instead of a diesel engine putting in a fuel cell hybrid architecture. So we have partnerships now with both these streams. Ford Trucks is clearly in the first stream, a truck OEM that is designing their truck platform and very thoughtfully looking at their powertrain solutions. So in my mind that’s the big difference is they are using their own chassis. It’s not a retrofit of a third-party chassis and we see this as longer term, the volume scaled approach will likely -- those companies will be winners at volume.

Do you think -- as a follow-up to that, do you think that eventually the up-fitters -- does the OEM solution find its way into the package at the up-fitter eventually just buys or do you think those up-fitters also want some customization of what the powertrain portion of it looks like?

Yeah. I think it works two ways actually. I think you could see some up-fitters piggybacking on what the larger truck OEMs are doing for niche specialized markets. And then you could see, also some of the large OEMs piggybacking on some of the learnings from the up-fitters, some of their integration approaches. So I do think that long-term, post-2035, -2040, the major truck OEMs that have volume in, particularly the long-haul truck market, I think, we will be very well positioned. In the markets where you have smaller specialty trucks, I think, the up-fitters will compete very effectively in those markets. So for example, the refuse truck market, I would characterize as a specialty truck market. Wisdom is very well positioned to enjoy success in that market based on their work in Australia.

Okay. Great. Thanks, Randy.

Yeah. Thank you.

The next question comes from Jordan Levy with Truist Securities. Please go ahead.

Hey and appreciate all the details. To go back to the IRA and treasury guidance, recognizing giving guidance is going to be important for all the players in the U.S. market, just to try and get a sense of where the current market stands. Are you seeing any difference in the conversations you are having with customers in each of your major segments be it bus, rail, marine, truck, stationary in terms of their willingness to go forward with more serious programs and contracts ahead of IRA guidance?

Yeah. I would say, the market is certainly waiting to see what the guidance effectively will -- how that result will play out. I would say, in North America, the bus and truck market are certainly the leading markets. We are seeing lots of activity on rail both in passenger commuter rail, as well as in freight locomotives and we recently announced obviously our expanded relationship with CPKC. However, the marine market is, I think, very early in North America. It’s certainly a much stronger market opportunity currently in Europe. So I would say, less dialog in the U.S. on the marine space. And then on stationary power, these datacenters. This is I believe and the growth in datacenters is going to be exponential, continue to be exponential, particularly with generative AI and the data requirements there. So this is going to be a high growth market for the foreseeable future. It requires a lot of primary and tertiary or backup power and this is a market that we are focused on as well. But in the very near-term, yes, I would say, all the markets are certainly looking to see what the treasury guidance is going to be. I think there’s a very strong expectation based on the BIL investments, based on the IRA investments that the guidance will get finalized in a way that supports market adoption.

Appreciate that. And maybe just to follow on to focusing on what you mentioned with the CPKC announcement. Maybe just remind us and give us a sense of momentum in the rail segment and the opportunity over the near-term that you see there?

Yeah. Rail has been really a pleasant surprise over the last number of years with the progress we are making there. I do want to profile CPKC, because it’s just a great, great company and over the past two years, they have taken the 20 fuel cell engines from Ballard and they have -- which is 4-megawatts and they have integrated those into their hydrogen locomotive program and they have been field testing over the last year and a half or so, line-haul locomotive shunter and switcher. This was another 3.6 megawatts, 18 fuel cell engines they have ordered. What’s also interesting, you kind of look at CPKC’s disclosure record on their hydro locomotive program. I mean they, in June, announced a joint venture between CPKC and CSX to build and deploy the hydro locomotive conversion kits for diesel-electric locomotives. They announced in May, the pilot program with tech resources were effectively, they are bringing these fuel cell locomotives to support steel making coal supply chain. And in their Capital Markets Day in June, they really profiled this as a key part of their strategy long-term to decarbonize diesel fuel. So it’s -- I think a very committed company looking for emissions reduction and is making the investments necessary to see -- to validate the technology to validate the opportunity, and I think, is leading in this space right now. So to me, a great opportunity there. We are seeing opportunities for larger orders in the commuter rail market in the U.S. market and hopefully, more on that to come in the next 12 months.

Really interesting. Thanks for taking my questions.

Yeah. Thanks, Jordan.

The next question comes from Brett Castelli with Morningstar. Please go ahead.

Hi. Thank you. I want to ask about, there’s been some talk of internal combustion engines running on hydrogen, say, in the truck market. I just want to get your thoughts sort of how you see that as a potential competitor over the medium- and long-term. Thank you.

Yeah. I think we are going to see a portfolio of different solutions, obviously, we are going to see battery electric, we are going to see fuel cell electric, we are going to see a hydrogen internal combustion engine. I think many people have viewed hydrogen internal combustion engine as a possible transition technology. It still doesn’t have full zero emissions and has lower efficiency than fuel cells. So I do think there is opportunity for it, but I haven’t seen it really take major traction. And if you just look as the bus market, which is the most mature market of all of our markets, there are zero hydrogen internal combustion engine buses currently operating, and closing in probably within two years, I would say, over 10,000 fuel cell buses.

Thanks, Randy. That’s helpful context.

Yeah.

Maybe my other question was just on datacenters and just, obviously, that’s a potential long -- large long-term market for fuel cells. What should we expect sort of over the next 12 months to 18 months in terms of activity in that market?

Yeah. I think this is a period over the next 12 months to 18 months for a lot of learning, not just for Ballard, but for partners like Caterpillar and Microsoft. And so I think it’s a market that the fuel cell value proposition needs to be validated and then we can move from -- once that value proposition is validated, we can move to larger deployment. So that market in my mind is still very much in the development and now starting in the demonstration phase. I think it’s going to be a number of years before we see kind of deployments at a high level. But this is a market that we feel very passionate about, because it is a large attractive addressable market with high growth and we think it’s a market that fuel cells will have a value proposition and we need to validate that with the customers over the next 12 months to 24 months.

Thanks, Randy.

Yeah. Thank you.

The next question comes from Craig Shere with Tuohy Brothers. Craig, please go ahead.

Hi. Actually my questions already have been asked and answered. Thank you very much.

Thanks, Craig. Have a good day.

The next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Good morning and thanks for taking the questions. Just a few housekeeping ones for me. You displayed a nice sequential improvement in gross margins from negative 30% to negative 20% and it sounds like second half revenues are going to be higher than the first half. And so can you just maybe give us some commentary on how you think about gross margins into the second half of the year? And then I have a follow-up question.

Sure. Yeah. It’s Paul here. So, yeah, we said in Q1 that we expected that to be the low point in our gross margin percentage and so we are seeing higher gross margins, still negative in Q2. And -- but what’s interesting about that is, when you look underneath and you look at the contribution margin sort of the pricing and direct costs. We see good strength there and an improvement of where we were even last year. Some of that’s due to the product mix, but also our costs of our products coming down as well. So we do see some improvement there. We did have a few inventory adjustments. As we continue to develop and invest in new products and technologies, some of our older products that might be sitting in inventory taking an obsolescence charge on those, so we had some of that which drove our margins negative. We will probably have a little bit of that still in the second half, probably, $1 million to $2 million in provisions, I would estimate in the second half, but anticipate growing revenues and expanding margins in Q3 and Q4 as well.

And do you think we exit the year with breakeven or do you think we are still negative in the second half of the year?

No. I think we will still be negative. I think in the Capital Markets Day, we said we expect to get to about breakeven gross margin at some point in 2024, maybe not for the full year, but in some quarter in 2024, but for 2025 and beyond.

Got it. That’s helpful color. Thank you. And then just for my second question, there is a $60 million delta between the total backlog and the 12-month backlog. Can you give us a sense of how far the backlog extends beyond the 12 months, is that -- does that $60 million represent backlog through 2025, 2026, just trying to get a sense of backlog duration.

Yeah. The bulk of it would be in 2025 with some residual in 2026.

Okay. Helpful. Thank you. That’s it from me.

Yeah.

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

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

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