(BLDP)
Q1 2023 Earnings-Transcript
Ballard Power Systems Inc. beats earnings expectations. Reported EPS is $-0.11, expectations were $-0.13.
Operator:
Operator: Thank you, for standing by. This is the conference operator. Welcome to the Ballard Power Systems First 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.
Kate Charlton: Thank you, operator, and good morning. Welcome to Ballard’s first quarter 2023 financial and operating results conference call. With us on today’s call are Randy MacEwen, Ballard’s CEO; and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management’s current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. As discuss in our prior earnings call, we are excited to welcome to our analyst and investor communities or capital market’s day on June 13, 2023. We will be providing an update on our long-term business plan, incoming revenue growth by vertical, gross margin progression, our technology and product roadmap, product cost reduction, capital expenditures and ESG initiatives I’ll now turn the call over to Randy.
Randy MacEwen: Thank you, Kate and welcome everyone to today’s conference call. We started 2023 on a strong footing in our core mobility markets in Europe and North America. We reported combined revenues and our bus, truck, rail and green segments up almost 20% compared to the same period in 2022 when excluding revenue from China, we’ve consistently seen increased revenue diversification throughout 2022 and into 2023 across our verticals, regions and customers, highlighting the resilience of our business model. Order intake momentum continued in Q1 with order backlog of almost $138 million as we ended the quarter. Our power products business is unfolding with power products representing over $100 million of our total order backlog, a figure that’s double the amount one year ago.
Our 12-month Orderbook has also trended favorably as it grew nearly 30% quarter over quarter to $74 million providing us with support to achieve our 2023 revenue plan. With an increasingly constructive policy backdrop, we continue to see 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 fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling infrastructure are lowest. These markets include bus, truck, rail, and marine as well select stationary power generation, and certain off-road markets will provide a brief update for these applications. As an introduction to our discussion on Ballard’s key market verticals are highlighting the change to our revenue segmentation.
Effective in Q1, we will no longer be reporting our revenues in terms of technology solutions, and our power base categories of HD mobility, stationary and material handling. In place of our prior segmentation, we’re reporting our revenues in line with key end markets of bus, truck, rail, marine, stationary, and emerging markets and other. This change reflects the evolution of the market and our strategy of selling and scaling production of fuel cell products with the expectation that technology solutions revenue, as a percentage of total revenue will continue to increase over time. Additionally, we believe this increased transparency will help highlight segment’s specific adoption trends in our investment community and can more effectively prior results to their own forecasts of end market adoption of fuel cell products in the medium to long-term.
In our bus vertical quarterly revenue was up sequentially and also quarter-over-quarter and our order backlog for bus orders is up almost 30% over the same period. Additionally, there are open tenders for close to 500 fuel cell buses in Europe, they’re expected to close in the first half of this year. These tenders shouldn’t lead to subsequent order activity in this segment driving delivery starting in 2023 and through 2025. As an example, our customer Solaris recently announced that is one in order for 52 fuel cell buses from Gustavo Germany, which we expect to move into our order book later this year. We’re also excited that we’ve onboard three new bus OEMs with bus platforms powered by Ballard entering the market. Moving to the truck market, while revenues in this segment were roughly flat from the prior period declining revenues from China during this period has masked the seven times growth we’ve seen in our truck market outside of China compared to Q1 2022.
The majority of our revenues in the quarter were driven by European fuel cell truck market opportunities. Going forward, we anticipate revenue activity and a segment to accelerate in the second half of 2023 and in 2024, supported by an order book and sales pipeline. To be clear, the truck market is in the very early phases of fuel cell market adoption. However, we’ve seen a clear shift in the past six months, driven by strong, and customer interest in decarbonizing freight, and a resulting increase in OEMs, evaluating development programs for new heavy-duty truck platforms, there’s a heightened understanding of the relative merits of fuel cell electric power trains in meeting duty cycles, with high range, high payload, or high energy demand requirements.
We believe our track record of proven safety, reliability, and durability, along with our product offering and roadmap and our ability to support the integration of our products in fuel cell power trains position us strongly to bring substantial value to OEM customers and our shareholders. We continue to make important progress in the rail market. We successfully delivered modules to CP rail for the locomotive projects. Our current order book for rail customers is weighted towards the second half of 2023, including anticipated deliveries to Siemens and Stadler. Additionally, in the near-term, we expect a meaningful follow-on order from one of our rail customers as they start transitioning deploying a greater number of fuel cell trains. Our marine vertical continues to see strong customer interest, and we expect to deliver the majority of our close to $5 million in order backlog this year.
While we continue to make steady progress with our partners in the marine market, we also recognize that adoption is still early stage and this will drive lumpy revenue from quarter-to-quarter. We’re pleased to announce a significant deployment milestone; the MF Hydra the world’s first liquid hydrogen powered ferry has now entered passenger service in Norway. The ferry is powered by 200-kilowatt fuel cell FC wave modules, and can carry almost 300 passengers eight crew members, and 80 vehicles at a speed of 10 knots. As a result of the liquid hydrogen storage, the MF Hydra are able to sail up to 21 days before refueling and will decrease carbon emissions for this route by up to 95%. In our stationary power market, we received a follow-on order from a stationary power customer for 3.6 megawatts, comprised of 36,100-kilowatt modules.
This was the primary driver for our 25% increase in the backlog relating to the stationary power customers. We’re very pleased with this order as we support these customers, they began developing and demonstrating their stationary power units in this customer is now choosing Ballard as their supplier for larger production runs. For our emerging market segment, we note that this segment benefited from the Audi technology service contracts throughout 2022, which is now completed a factor that will be a headwind for comparative periods in 2023. We’re optimistic about the rest of your performance supported by a 25% increase in backlog compared to Q4, driven by orders from our off-highway in material handling customers. Of particular note is our customer first mode upsize their purchase order in Q1 from 30 to 35 modules for Anglo mining haul trucks with module shipments expected in 2023.
Wrapping up our vertical-based discussion, we want to remind everyone of our anticipated revenue split that we see approximately a weighted 30% towards the first half of 2023 and the balance in the second half of the year. For the next portion of the call, we’ll discuss our key geographic regions, including updates on policy and our performance in each market. Europe has been a consistent proponent of hydro policy for the past several years, and it’s continued that support with a number of new developments. Perhaps the most promising development is agreement reached on the alternative fuel’s infrastructure regulation. That will lead to the installation of one hydrogen refueling station every 200 kilometers along the main EU highways and in large European cities by 2030.
This target is expected to result in 656 stations built with supportive EU funding, removing a key barrier to the adoption of hydrogen vehicle deployment in Europe. Europe is the largest yet geographic contribution to knowledge revenues in Q1 consistent with Ballard’s geographic revenue breakdown in 2022. Orders from European customers are also the largest component of our order backlog and order book, accounting for approximately 62% of our total order backlog at the end of Q1. In the U.S. major policy announcements in 2022 will begin to create on the ground changes this year and in the next year. Starting with the hydrogen hubs selections, and the awards of low no funding to occur in Q3. Meanwhile, federal government agencies are working on finalizing the implementation of the IRA bill leading to clarity for project developers sometime later this year.
To cap these tailwinds off carb recently announced advanced clean fleet policy that will require all California commercial fleet of 50 or more vehicles to purchase 100% of new vehicles with zero emission power trains by 2036 with initial purchase requirements beginning in 2025. Just over a year, the U.S. is leapfrog to a leadership position in global hydrogen policies. We now see strong support across the value chain and ecosystem, including substantial support to develop the supply of low carbon, low cost hydrogen, combined with purchase price incentives at the state and federal level for fuel cell powered vehicles. We believe that these policies address many of the friction points in adopting fuel cell vehicles and look forward to the U.S. constituting a greater proportion of our business than in prior periods.
An exciting accomplishment achieved in the quarter was shipping the first FC move HD Plus module manufactured from our newly commissioned Oregon facility. This additional module assembly capability will enable us to better serve this growing American market, while enabling our customers to take advantage of federal funding programs with Buy America provisions. We continue to assess opportunities to further strengthen our U.S. platform and what we expect will be a high-growth market from 2025 through 2030. And now moving to China. As previously discussed, we believe China’s fuel cell electric vehicle complicated policy environment continues to stall development of the fuel cell vehicle industry. And this has been evidenced with a year-over-year decline in sales volumes in China for the first quarter of 2023.
We continue to be disappointed with the delayed adoption to China market and low activity levels at the Weichai-Ballard JV which will weigh on our 2023 results. We are working closely with our Weichai-Ballard joint venture to unlock growth in the China fuel cell bus and truck markets. Our management team has begun traveling to China regularly since the country reopened to international travel and will continue to work with policy-makers to shape a more constructive environment are personally traveling to China tomorrow and will be there over the next few weeks. I will be providing an update on this topic at our capital markets day in June. Now moving to our financials in the quarter. In Q1 Ballard delivered $13.3 million in revenue with approximately 70% of our revenues coming from Heavy-Duty Motive applications.
While we’re just continuing our reporting of technology solutions as a standalone offering, our product revenues represented over 70% of our revenues in Q1, further cementing our strategic shift as a technology products company. As we’ve discussed in our Q3 and Q4 2022 calls continued gross margin pressure was partly affected by our pricing strategy to secure customer platform wins. The further downward pressure on gross margins in Q1 was driven by a combination of a shift in revenue mix towards our products, low absorption of our manufacturing overhead cost, increases in supply and labor costs, and inventory adjustments. While we expect challenging gross margin debt dynamics to persist into 2024. Until our volume ramps in our product cost reduction initiatives move into production.
We also see this quarter as a low point for the year, subject to one-time charges. We’ll provide an update on our gross margin progression at our capital markets day. We reported total operating expense of $37.5 million in Q1 and capital expenditures of $11.6 million for the same period. We expect these levels of spending to be roughly flat each quarter for the rest of 2023 and maintain our guidance for total operating expenses, and capital expenditures. Given the macro economic outlook and rising geopolitical tensions. And in the context of our 2023 annual operating plan, we continue to review our spend carefully to assure we’re appropriately investing in our growth strategy, while also maintaining a strong balance sheet. We end in Q1 with $864 million in cash and no debt.
Ballard is well positioned with industry leading talent, fuel cell technology, and products for our market applications. Key customers and partners across our target markets, a growing product order backlog, industry-leading deployment experience, and a strong balance sheet. We’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. And with that, I’ll turn the call back over to the operator [indiscernible] for questions.
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Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question is from Aaron MacNeil from TD Cowen. Please go ahead.
Operator: The next question is from Michael Glen from Raymond James. Please go ahead.
Operator: The next question is from Rob Brown from Lake Street Capital Markets. Please go ahead.
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Operator: The next question is from Ameet Thakkar from BMO Capital Markets. Please go ahead.
Operator: The next question is from Chris Souther from B. Riley. Please go ahead.
Operator: The next question is from Craig Shere from Tuohy Brothers. Please go ahead.
Operator: The next question is from Kashy Harrison from Piper Sandler. Please go ahead.
Operator: The next question is from Jordan Levy from Truist Securities. Please go ahead.
Operator: Next question is from Greg Wasikowski from Webber Research. Please go ahead.
Operator: This concludes a question-and-answer session. I’d like to turn the conference back over to Randy MacEwen, CEO for any closing remarks.
Randy MacEwen: Thank you for joining our call today and we look forward to speaking with you in June at our capital markets day.
Operator: This concludes today’s conference call you. May disconnect your lines. Thank you for participating and have a pleasant day.