Ballard Power Systems Inc. (NASDAQ:BLDP) Q4 2023 Earnings Call Transcript
Ballard Power Systems Inc. (NASDAQ:BLDP) Q4 2023 Earnings Call Transcript March 11, 2024
Ballard Power Systems Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems' Fourth Quarter 2023 Results Conference Call. As a reminder, all participants are in listen-only mode and 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 fourth quarter year and end 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. Our Q4 and full year results demonstrated measured progress against the 2023 milestones we outlined for investors in our 2023 Capital Market's Day. Let me share a few highlights from the year. We shipped 74 megawatts of product in 2023 including 540 fuel cell engines. We grew revenues on a year-over-year and quarter-over-quarter basis by 25% and 130% respectively. We made good progress on gross margins and cash burn which Paul will discuss. We supported numerous customers in maturing their fuel cell platforms while also securing new customer platform wins across our verticals. We've increased our diversification across our business. We launched our next generation bipolar plate project to enable further cost reduction and production scaling.
We signed the UN Global Compact affirming our commitment to integrate universal sustained principles of environment, labor, human rights and anti-corruption in our business and we're now sourcing 100% of the hydrogen used at our Denmark facility from green sources. We'll now zoom-in on our key market verticals for a brief update on each. Activity in our bus vertical indicates increasing acceptance of fuel cell buses for transit operators as a viable option to de-carbonize their fleets. Revenues from bus customers for the year were up almost 20% compared to the year 2022. Even more encouraging, order backlog for bus customers is up 134% compared to the same period last year. Our growth in this market is highlighted by the success of our bus OEM customers including Solaris in Europe and New Flyer in North America.
To illustrate just how far these customers have come in maturing their fuel cell platforms, I'll provide a brief overview of some of the evolution of these relationships. Solaris started its relationship with Ballard in 2013 when it ordered two fuel cell modules. For the next 10 years, Solaris ordered an aggregate of 213 modules or roughly 20 per year. In 2023, Solaris ordered 365 modules from Ballard, more than three times the 98 modules it ordered in 2022. Solaris has developed a strong global position in the hydrogen fuel cell bus market and we believe Solaris is just getting started. For New Flyer from 2014 to 2022, New Flyer ordered a total of 103 engines from Ballard. In 2023, New Flyer ordered 141 modules, surpassing the entire cumulative total of modules ordered prior to the year and also up more than four times the previous year's total.
Similarly, we believe New Flyer is only beginning to scratch the surface of potential in the North American transit bus market. We continue to see growth in the deployment of fuel cell buses in our key regions. According to our recent CALSTART survey on zero-emission buses, the number of hydrogen buses either ordered or deployed in the US increased 76% in 2023. Turning to the truck market, we continue to emphasize the need for patients in this market vertical while tier one OEMs develop truck platforms to bring to the market. However, in the interim, we establish a new partnership with Ford Trucks for the European heavy duty truck platform along with another engine manufacturer in Europe. We believe these partnerships offer routes to scaled commercial volumes in this segment.
We have a double lane focus for the truck vertical. We'll continue to work towards establishing new relationships with truck OEMs and support them through the development phase of their fuel cell truck platforms and on to scale deployment. At the same time, we'll continue to be proactive in working with vehicle integrators and up-fitters and end-users to bring fuel cell truck platforms to the market in advance of the major OEMs. Given an increasingly supportive national and state policy complex in the US for zero-emission trucks and fleets, we believe the US will be a key market for the adoption of hydrogen-powered fuel cell trucks. 2023 was an important year for our rail vertical. Revenues for the segment were up nearly four times from the prior year, and our order book is also up.
We're delighted to see growing market interest from our customers, CPKC, Siemens, and Stadler. We believe that interest from operators in using fuel cell engines to de-carbonize rail lines continues to grow, given the market requirements for high power and long distances and the avoided cost of catenary wire infrastructure. We experienced significant growth in our marine vertical, with revenues in 2023, while still relatively modest, up roughly three times greater than the prior year. We're also pleased with the performance of Norled's MF Hydra Ferry, the world's first liquid hydrogen-fueled powered ferry, as it has now accumulated 4,000 hours of run time in real operation with excellent reliability. Our order backlog for marine customers also experienced growth, has now doubled from the same period in 2022.
The order backlog, combined with our purpose-built marine fuel cell engine that has two type approvals, positions us well to work with an increasing number of customers that want to de-carbonize their marine operations. In our stationary power market, we saw revenue grow by 15% in 2023. Revenue growth was driven by shipments to an increasing number of applications that use fuel cells for stationary power. For example, we saw megawatt-scale deliveries for customers using fuel cells to power data centers, EV charging stations, and even to support grid balancing in renewable power projects. We've also seen the emergence of medium power applications, where fuel cells are deployed to power construction sites, TV and film production sites, EV charging, and smaller data centers as well.
Our backlog from stationary power customers declined 36% year-over-year, reflecting the lumping nature of this business. However, subsequent to the quarter, we received an order for 15 megawatts of fuel cell systems from a UK-based company that specializes in renewable off-grid power generation. We're particularly excited about this repeat customer, as 15 megawatts is more than triple the cumulative amount of fuel cells ordered by this customer previously. This demonstrates substantial momentum with this customer's platform and emerging opportunities for hydrogen fuel cells as a solution in the stationary power markets. In 2023, we completed a successful demonstration of our fuel cell technology, where it provided back-up power for a data center over 48 hours with 99.999% uptime, in partnership with Caterpillar and Microsoft.
This project provides substantial learnings that position us to capitalize on the growing power demand of data centers. The data center market offers considerable opportunities to deploy our products as backup power. As of 2022, data centers consumed 84,000 gigawatt hours of power. To meet future power requirements of data centers, it's estimated that a further 70 gigawatts of renewable power capacity will be needed and added by 2027, and 21 gigawatts of fuel cell power will be needed over the same period. In our emerging markets vertical, revenue declined 27% year-over-year, driven primarily by the conclusion of certain technology solutions programs and lower shipments to customers in the material handling and off-road segments. Our order book was also modestly lower at the end of the year compared to the prior year.
Similar to the truck market, the adoption of fuel cells in key heavy-duty markets like off-road vehicles and construction equipment is still in the early innings. In the near term, we'll continue supporting customers like First Mode as they plan deployments of their new gen solution to power ultra-class mining haul trucks with Ballard fuel cell engines at Anglo-American mining sites. We're also excited to see our customer-applied hydrogen deploy our fuel cell in a 30-ton excavator platform that will begin demonstrations in 2024. Now, looking at our key geographic regions, European revenue grew close to 30% year-over-year and now account for more than 50% of our total order backlog. We continue to see important hydrogen policy developments in Europe.
The EU has agreed on CO2 emission standards for heavy-duty vehicles that will require emissions to be reduced by 45% by 2030 for all vehicles above 7.5 tons and for city buses to be reduced by 45% by 2030. The EU has also unveiled a target to reduce carbon emissions by 90% by 2040 as part of its Fit for 55 legislation, a target we expect will drive further interest in hydrogen fuel cells. Lastly, EU launched its first auction for hydrogen production subsidies valued EUR 800 million in the fall of 2023 and will launch an auction for further EUR 2.2 billion of support in spring 2024. In North America, we see momentum for hydrogen and hydrogen fuel cells accelerating over the past year. Revenue from the region increased by more than 30% in 2023, while the order backlog for North American customers has more than doubled over the past year.
For the US in particular, 2023 was a milestone year from a policy perspective, as seven hubs were awarded $7 billion to support the adoption of hydrogen across the value chain, while the IRS provided guidance for the 45B green hydrogen production tax credit. These policies, combined with electric grid limitations, will provide favorable tailwinds to our industry through 2032. We're also encouraged by continued support at the state level, with California recently announcing close to $2 billion of funding that will be available to support the build-out of hydrogen refueling infrastructure, another key unlock for greater adoption of fuel cell vehicles. We now turn to provide an update on China. And as a reminder, we have a joint venture with Weichai Power based in Weifang, Shandong province that addresses the bus, truck and forklift markets in China.
The JV was established in 2018 as 51% owned by Weichai and 49% by Ballard. Since that time, we built a new production facility in Weifang to manufacture bipolar plates, assemble stacks and manufacture fuel cell engines, all based on Ballard stack designs. Ballard supplies MEAs to the JV and the JV facility has approximately 225,000 square feet, including manufacturing lines for annual production capacity of 34,000 fuel cell stacks and 20,000 fuel cell engines, representing 2 gigawatts of fuel cells. Over the past few years, the Weichai Ballard JV has developed a product suite of fuel cell engines for the China bus and truck market with nominal power ranges of 50 kilowatts, 80 kilowatts, 110 kilowatts, 160 kilowatts and 200 kilowatts. In terms of market adoption, we note that the hydrogen fuel cell industry struggled during the three years of various lockdowns during COVID-19 in 2020 through 2022 and with constrained local government funding coming out of COVID.
We're also seeing a very challenging macro-economic environment in China as well as continued challenges related to the hydrogen fuel cell electric vehicle policy landscape. Notwithstanding these challenges, the market made measured progress in 2023. For full year '23, there were approximately 7,500 fuel cell electric vehicles sold in China, bringing total deployments to approximately 21,000 fuel cell electric vehicles, including approximately 7,300 fuel cell buses and 13,700 fuel cell trucks. Now, given that our Weichai Ballard joint venture doesn't have a strong exposure to five cluster regions under the National Fuel Cell Policy Program, our market share was adversely impacted in 2023. Our Weichai Ballard JV sold approximately 200 modules in '23, primarily for the Shandong bus and truck market.
Importantly, there's been continued investment in hydrogen refueling stations in China. At the end of 2023, 320 HRSs have been completed in China, which is almost 100 more than the end of 2022. There's also an additional 140 HRS currently under construction, which would bring the total HRSs to 460 in China. In Shandong province, there are 29 HRSs in operation, with another 9 under construction. In a recent important policy development, which we believe is quite favourable to the Weichai Ballard joint venture, the Shandong government issued a new policy on February 29th that hydrogen fuel cell trucks will be exempted from paying highway tolls in Shandong for two years. This is expected to provide about a 20% TCO cost savings for truck operators, and should be an important catalyst for the adoption of fuel cell trucks in Shandong.
The market is expecting other provinces to follow suit later in 2024. Our JV is still assessing this new policy. Our JV is still assessing this new policy, including implications for 2024 and 2025. Based on current sales activities and this new policy, we're expecting growth in the fuel cell engine sales in 2024 at the Weichai Ballard JV. We're encouraged to see our business in China recover in 2023, as revenue grew by 30% year-over-year in-line with our key geographic markets. With that review of the verticals and the regions, we note that consolidated market activity rolled up to a record new order intake of $64.7 million in Q4. Let me repeat that. We achieved record new order intake of $64.7 million in Q4. Now when we look at our order backlog, it stood at $130.5 million at the end of the year, down 3.3% compared to the end of Q3.
There's some important context here. This new record order intake of $64.7 million in Q4 was more than offset by a reduction of $47.1 million, resulting from record engine shipments during the quarter, and the removal of $21.7 million from our order backlog of previously booked orders from a specific customer now experiencing financing and related program delays. We believe this was a prudent approach at this time. We're working closely with this customer as they finalize their financing plans to enable a return of orders to the order book and a resumption of shipments in later 2024. Notably, we highlight that orders from power products represent more than 80% of the order backlog, while orders from customers in Europe and North America represent almost 80% of the order backlog.
With that, I'll turn it over to Paul to discuss our financials.
Paul Dobson: Thanks, Randy. In Q4, Ballard delivered $46.8 million in revenue, a record level of quarterly revenues for Ballard, and an increase of 132% compared to the same period in the previous year, driven by strong growth in the bus, rail, and marine verticals. Ballard reported a gross margin of negative 22%, although this figure was negatively impacted by non-cash inventory provisions. Adjusting for this non-cash inventory charge underlying gross margins in Q4 were negative 1%, or very close to break even, driven by revenue scaling across fixed manufacturing costs and success with our product cost down initiatives. Our activity levels and product shipments in Q4 demonstrate our ability to successfully ramp and scale our production volumes, proving that we have the capabilities to meet growing customer demand.
For the full year of 2023, Ballard delivered revenues of $102.4 million, equating to a 25% annual growth. As we discussed at the Capital Markets Day earlier in the year, we projected margin improvement as revenue scaled and cost reduction initiatives were brought to fruition. Reported gross margins of negative 21% were impacted by non-cash inventory charges, which when adjusted for, lead to a full year margin of negative 9%, compared to negative 10% in 2022, demonstrating progress in achieving gross margin break even as our revenue scales. We do not expect the same level of inventory adjustments to persist in 2024, given confidence in our ability to achieve our gross margin targets. However, as revenues move up and down by quarter, gross margins will vary due to our fixed manufacturing costs.
We reported total operating expenses of $149 million, including expenses for BMS, at the upper middle range of our guidance, and capital expenditures of $41.4 million at the bottom end of our guidance. Our total cash used in the business decreased by close to $48 million to approximately $163 million. We ended the year in a strong financial position with $751 million of cash. Our financial results were materially impacted by a number of non-cash charges in the year. As noted previously, we recorded $12.6 million of non-cash charges in our cost of goods sold as a result of impairments to inventory of previous generations of products. Our net income was impacted by an equity investment impairment charge of $12.9 million, reflecting the compression of general market valuations for zero-emission vehicle manufacturers in our portfolio of long-term financial investments and intangible asset and goodwill impairments of $2.3 million and $24 million, respectively, as a result of our decision to wind up the Ballard Motive Solutions business.
Consistent with last year, we are now providing our guidance for total operating expense and capital expenditure in 2024. We anticipate total operating expense to be between $145 and $165 million, and for capital expenditures to be between $50 and $70 million. The increase in total operating expense guidance reflects inflationary increases and an acceleration of Ballard's efforts to develop a family of next generation products for small, medium, and large power requirements to streamline our product portfolio, thereby advancing product cost down initiatives and improving revenue scale benefits for our gross margins. The increase in capital expenditure guidance reflects a deferral of spending related to Ballard's next manufacturing facility from 2023 to 2024.
Given the macroeconomic outlook and in the context of our 2024 annual operating plan, we continue to review our spend carefully to ensure we are appropriately investing in our growth strategy, while maintaining a strong balance sheet. We expect that revenues in 2024 will be back-end weighted on a roughly 30-70 basis for H1 and H2, similar to 2023. We also expect that underlying gross margins will follow a similar path in 2024 as they did in 2023 as revenues scale through the year. We expect gross margins will break even or turn positive in Q4. With that, I'll turn it over to Randy to wrap up the call before Q&A.
Randy MacEwen: Thanks, Paul. In the context of heightened geopolitical risks and continued de-globalization, we want to provide an update on our global manufacturing strategy, which we refer to as Local for Local. This is a plan to ensure we have the appropriate manufacturing footprint and assets in each of our three key markets, North America, Europe, and China, to support expected regional market demand growth through 2030. In 2023, given an increasingly constructive hydrogen policy landscape and increased market activity in the U.S. and Europe, and given the continued hydrogen fuel cell policy uncertainties and market delays in China, as well as geopolitical risks, we decided to suspend our MEA localization plan in China while we completed a comparative analysis on manufacturing capacity expansion options and possible sequencing prioritization in the U.S. and or European markets.
We've concluded our comparative review and have prioritized the U.S. as the highest priority market for our next manufacturing facility. We have selected a site and are negotiating our land acquisition agreement. As an important part of this process, in 2023, we also submitted certain applications for government funding support in the U.S. when we expect to receive definitive feedback in the near-term. Looking forward, we believe the transition of hydrogen policy announcements to implementation will provide mid-term momentum with availability of low-cost, low-carbon hydrogen, enabling accelerated adoption of fuel cells. In the context of an increasingly constructive policy environment, a growing sales pipeline and order book, along with our continued investment in product cost reduction and advanced manufacturing, we're well positioned for strong, long-term market share.
Finally, we expect 2024 will be marked by continued growth in our order backlog, major order announcements from customers in our bus and stationary power verticals, and the announcement of our next manufacturing facility, each of which will serve as important milestones on our journey to scaled adoption of hydrogen fuel cells. Ballard is well positioned with a growing product order backlog, industry-leading fuel cell technology for our market applications, key customers and partnerships across our target markets, industry-leading deployment experience, and a strong balance sheet. We're confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. With that, I'll turn the call back over to the operator for questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Rob Brown of Lake Street Capital Markets. Please go ahead.
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