Ballard Power Systems Inc (BLDP) 2023 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems' Second Quarter 2023 Results Conference Call. (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'll now turn the call over to Randy.

Thank you, Kate, and welcome, everyone, to today's conference call. We're 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're 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 full -- 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 to see growing customer engagement across our verticals. At Ballard, our strategy is to commercialize and 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 in certain off-road markets. We'll 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 ordered from Solaris from 3 European cities, including Güstrow, Germany, which has ordered 52 fuel cell buses for deployment. We're 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've discussed before, the truck market is in the early innings of fuel cell adoption with most truck OEMs and integrators focus on developing fuel cell truck platforms. In this regard, we're delighted that 4 trucks, after a competitive process has selected Ballard as their fuel cell partner as they developed their hydrogen-powered FMX 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 scale 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've announced this deployment scale order only 5 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 5 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 a marine application. We're also pleased to report that our marine module has received type approval from Lloyd's adding to the type of 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 Clear Gen 2 system to the Microsoft data center 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 to be another major proof point of the value proposition of our products in the data center market opportunity. We continue to see interest in our stationery products grow for EV charging, grid balancing, data centers and mobile power solution applications.

We experienced solid backlog in our emerging market segments, driven by orders from our customer first mode, who's deploying ultra-class mining haul trucks for use on Anglo-American's mining sites. Our partner has now ordered 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 3 key milestones we're set to accomplish. First, we expect to sign material purchase orders for 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 and second half of 2023 will be roughly 30% to 70%. With that, I'll turn the call back over to the operator for questions.

(Operator Instructions) The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.

Good morning and thanks or 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'm on the right track with that line of thinking, what's 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'll sneak one more in, just to give us a sense of what you're hearing in terms of where you think the rules will ultimately shake out, at all?

Sure. Yes. Aaron, I think that'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 2 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, what subsidy support is available for manufacturers looking to set up local manufacturing operations. So both of those are considerations that we're looking at and both of those we're advancing and obviously tracking the first one carefully and advancing on opportunities for funding in all 3 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. Whereas the cost structure, are going to be competitive. And I think also access felt 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're 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're engaged in, and all 3 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'm 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 procure, do you think we'll 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?

Yes. 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're based in Poland. We've been a long-standing customer with Ballard that they've been actively promoting both the Urbino 12 meter and articulated 18-meter low-floor intercity buses, 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 3 cities, one of which is in Güstrow, 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 5 of them are articulated, and we'll have our 100-kilowatt engines. So a very important customer and have a large activity level right now across Europe. And I think this is just representative that we're seeing cities moving from orders of 1 and 2 and 5 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're focused on. So critically important.

I do think, though, the orders we're talking about here for Solaris and you rightly mentioned Quantron and Siemens other great platform wins as well. Those are still relatively speaking, modest volumes. So they're not at the level yet where you get the major brake volume breaks that will impact gross margin, the way we're looking for it. Of course, they'll help. It will be incremental, but not significant material changes that we'll see when we're in the thousands of units as compared to the hundreds.

That's very helpful, Randy. I'll turn it back.

Yes, 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 across geographies where they're interested in something like this? Can you talk a little bit about that?

Manav, you're right on both fronts. It's very exciting, and it indicates scaling in the future. I think you're 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're 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 a competitive process, selected Ballard to integrate their fuel -- our fuel cell engines. So we've got 2 120-kilowatt XD move XD engine, so 240 kilowatts in total. And it's part of a very important program in Europe, the ZS 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 this forward relationship to be a long-term supplier to Ford. Now we have work to do, obviously, to validate that, but we're confident in our solutions and in the products that we're going to be offering.

So this is another example, as was pointed out by Aaron a minute ago of just work that we're 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 I agree with you, very exciting, and we see scaled opportunity as we get validated through the next couple of years.

Quick question here is, we have 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'm looking to source green hydrogen to make sustainable aviation fuel.' I'm just trying to understand, do you see the 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 sir because now I have a much lower carbon intensity green hydrogen, which I can source cheaper than I could in the past.

Yes. So I've 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 3 key markets of North America, Europe and in China, that when you start meeting the companies that are actually working on hydrogen -- 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're 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, traditional markets for hydrogen, which is about a 90 million ton existing market. And then I think you're going to see a number of the mobility applications and stationary power applications that Ballard are focused on really getting unlocked with its access to low carbon low-cost hydrogen. And you can see situations where there'll 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 #1 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're 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 where to prioritize your MEA investment, I'm 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 power?

Yes. Great question, Rupert and I think we certainly are committed to the China market. We're 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 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 a deglobalize 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're 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're committed to this market as well. So I 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'll be importing MEAs from outside China to meet your production needs until the production is there. Is that fair?

Exactly. Yes. 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.

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

Could you 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?

Yes. 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're 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 it's going to be very exciting over the next 12 to 24 months, as some of these cities move from tendering activity to actual procurement. And I think we're 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 2/3 market share for city buses in new city transit buses in North America. And they have both a 40-foot and 60-foot articulated bus validated with Altoona testing with Ballard engines inside.

So we're 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 to 24 months at scale for U.S.

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

Yes. I think 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've 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 think feel we're very well positioned. They have a large portfolio of ultra-class trucks to looking decarbonize through 2030. And what's important from a testing perspective is the first -- the famous Truck 74 completed 1 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, a very challenging environment and very good performance. So we're very excited on this relationship we have on this opportunity set, and we feel we're very well positioned.

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

Yes. Randy, thanks for taking my question. I just wanted to -- apologies, I'm a little behind catching up, so apologies if you've already answered this. But can you remind us the schedule on those import duties into China, the potential magnitude in the next 12, 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 seem to be no you can quantify a little bit if the reevaluation were to drag on or anything like that?

Yes, Greg, thanks for the question. Just in terms of duties, the way I would think about that is very complex, and I would say even some uncertainty in terms of the complexity. The way to think about it is you're 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 time frame. 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...

Yes. So 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'll look to where we direct that equipment or most of that equipment at the appropriate time. So up to 130 million announced only about $4 million or so has been spent.

Yes and Greg, maybe just to clarify kind of where we are in the MEA localization process in China. While we've 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're deferring that piece until completion of this comparative analysis. The long lead time equipment that we've 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. Next one, just adding on to your list of criteria for looking at other regions. Is there any aspect to higher competition and Ballard essentially wanting to elbow out some space. Maybe you being competition playing a higher role than it would have maybe 5 years ago or so? Is there any like speed to market are you guys wanting to get a land grab and be there before somebody else comes into some of these regions that are maybe supporting localized 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 Albanian 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, 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.

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'm wondering on the rest of the components, particularly bipolar plates, where you've made a lot of progress that you talked about at the Capital Markets Day. I'm wondering what your views are on the localization of those components, assembly, balance of plant, are we -- should we consider those already local in a way, or are those to follow on after the MEA localization?

Yes. Great question, Mac. And what we're looking at for production facilities in the U.S. and in Europe, we're 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 or bipolar plates, stack assembly, module assembly. So we're looking at full scope in each of those markets. And if we're able to get the appropriate support. If we're not able to get the appropriate support, we'll scale back on that scope in market.

With the project that we're working on, Project Forward, it's designed to have lower cost bipolar plates. This is a significant part of our planned -- current plan as we're 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 4 trucks initiative or partnership, is the platform that -- does Ford take a different approach than what you've seen with other partners in the truck market. I'm 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'll be able to really shift to everybody? What is your -- I'm just trying to get an idea of what they might be doing the same or differently.

Yes. So great question, Mac. And let me just back up and just remind everyone, we have the strategy in the truck market to partner with dual stream track. Basically, one stream where we're 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 more the upstart or upfitters 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're 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 upfitters does the OEM solution find its way into the package that the upfitter eventually just buys, or do you think those upfitters also want some customization of what the powertrain portion of it looks like?

Yes. I think it works 2 ways, actually. I think you could see some upfitters 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 upfitters, some of their integration approaches. So I do think that long term, post 2035, 2040, the major truck OEMs that have volume in the -- particularly the long-haul truck market, I think we'll be very well positioned. In the markets where you have smaller specialty trucks, I think the upfitters 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.

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

Hey, all and appreciate all the details. To go back to the IRA and treasury guidance, I'm recognizing getting 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're having with customers in each of your major segments, be it a bus, rail, marine truck stationary in terms of their willingness to go forward with more serious programs and contracts ahead of higher at guidance?

Yes. 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're 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 dialogue in the U.S. on the marine space. And then on stationary power, these data centers, this is -- I believe, the growth in data centers 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're focused on as well.

But in the very near term, yes, I would say all 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 a follow-on to focus in on what you mentioned with the CPKCs 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?

Yes. Rail has been really a pleasant surprise over the last number of years with the progress we're making there. I do want to profile CPKC because it's just a great, great company. And over the past 2 years, they've taken the 20 fuel cell engines from Ballard and they've -- which is 4 megawatts. And they've integrated those into their hydrogen locomotive program. And they've been field testing over the last 1.5 years or so, linehaul locomotive, shunter and switcher. This is another 3.6 megawatts, 18 fuel cell engines they've ordered.

What's also interesting is you kind of look at CPKC's disclosure records 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 where effectively, they're bringing these fuel cell locomotives to support steelmaking coal supply chain. And in their Capital Markets Day in June, they really profiled this is 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 the 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.

The next question comes from Brett Castelli with Morningstar.

I wanted 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 how you see that as a potential competitor over the medium and long term?

Yes. I think we're going to see a portfolio of different solutions. Obviously, we're going to see battery electric. We're going to see fuel cell electric. We're going to see 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's opportunity for it, but I haven't seen it really take major traction. And if you just look at the bus market, which is the most mature market of all of our markets, there are 0 hydrogen internal combustion engine buses currently operating and closing in probably within 2 years, I would say, over 10,000 fuel cell buses.

Thanks, Randy. That's helpful context. Maybe my other question was just on data centers, and just obviously, that's a potential large long-term market for fuel cells. What should we expect over the next 12 to 18 months in terms of activity in that market?

Yes. I think this is a period over the next 12 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 a larger deployment. So that market, in my mind, is still very much in the development and now starting in the demonstration phase. I think there'll be a number of years before we see 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 the market that fuel cells will have a value proposition, and we need to validate that with the customers over the next 12 to 24 months.

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

Actually, my question has already 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.

Thanks for taking the questions. Just a few housekeeping ones for me. You've 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 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. Yes. It's Paul here. So yes, we said in Q1 that we expected that to be the low point in our gross margin percentage. And so we're seeing higher gross margins still negative in Q2. But what's interesting about that is when you look underneath and you look at the contribution margin, the pricing and direct costs, we see good strength there and improvement of where we were even last year. Some of that is 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'll 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 by -- with breakeven, or do you think we're still negative in the second half of the year?

No, I think we'll still be negative. I think in the Capital Markets Day, we said we would expect to get to breakeven gross margin at some point in 2024, maybe not for the full year, but it's in some quarter in '24, but for '25 and beyond.

Got it. That's helpful color. And then just for my second question, there's 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.

Yes. The bulk of it would be in '25 with some residual in '26.

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.