Ballard Power Systems Inc (BLDP) 2024 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator, and welcome to the Ballard Power Systems First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen only mode. The conference is being recorded. After the presentation, there will be an opportunity to ask questions to join the question queue. You may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Kate building Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's first quarter financial and operating results conference call. With us on today's call are Randy McEwen Ballard CEO, and Paul Dobson, Chief Financial Officer. Given that our 2023 year end earnings call was only eight weeks ago, we will keep scripted remarks today relatively brief. 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 in our last earnings call. In addition to providing 2024 OpEx and CapEx guidance ranges, we outlined four specific milestones that investors can expect from Ballard in 2024. We noted the following four milestones. First, continued growth in our order backlog. Second, a major order announcement from Airbus customer. Third, a major order announcement from a stationary customer and for the announcement of our next manufacturing facility in Q1, we delivered against each of these four milestones, highlighting our continuing journey to a commercial products company. I would like to comment on each of them in turn.

So first on continued growth in our order backlog. We're encouraged with our progress over the past six months with new order intake after booking record new order intake of $64.7 million in the fourth quarter of 2023. We booked another $64.5 million of new orders in Q1, bringing total new bookings over the past two quarters to almost $130 million at Ballard record for a six month period. Our order backlog grew by 38% since the start of the year.

Second, on a major order announcement from a bus customer. Here, we announced a multiyear supply agreement and the largest order of fuel cell engines in Ballard history. Supply of 1,000 engines through 2027 to Solaris for the European bus market. This landmark agreement is a testament to our collaborative partnership with Solaris over the past decade and the progress we've made with our fuel cell engines. We have proven our fuel cell engines as safe, reliable and durable. This agreement also reflects an acceleration in adoption of fuel cell buses in Europe, supported by policy tailwinds and regulations to decarbonize public urban transport fleets. The transition to zero-emission city buses has accelerated as the value proposition of hydrogen fuel cells is increasingly understood zero tailpipe emissions, rapid refueling long daily range in all weather conditions and scalable refueling infrastructure as fleet sizes increase. Indeed, we believe we're on the road to achieving scale deployment of fuel cell buses in the medium term, which is a critical lever to facilitate economies of scale and cost-down initiatives, driving improved economics and reduced emissions for fleet operators.

I'd like to linger here for a moment on the bus market. Over the past five months, we've received orders all repeat orders or orders from existing platform customers for a total of 1,200 engines for fuel cell buses in Europe in North America, this is very, very exciting. We see a tripling of the existing operating fleet in these markets over the next two to three years.

Now let's move to the third milestone. The announcement of a major order in the stationary market, we announced a multi-year supply agreement and the largest order in history for the stationary market in order for 150 engines totaling 15 megawatts of fuel cell systems from a UK-based customer specializing in renewable off-grid power generation, again, this is a repeat order from an existing customer and reflects a scaling and their market opportunities. Our customers targeting the replacement of traditional diesel generators with fuel cell systems that can provide resilient, predictable, clean and quiet solutions for on-site power generation in a variety of applications, including EV charging, filming events and construction. The customer also has an option to purchase an additional 296 engines by March 2026.

Finally, to turn to the fourth milestone, the announcement of our next manufacturing facility as context as part of our local for local global manufacturing strategy. We conducted a comprehensive comparative analysis during 2023 have sequenced production capacity expansion options in North America, Europe and China. Based on our review we determined to prioritize the US as our next market for product production capacity expansion, we announced our plan to build a new manufacturing facility to be located at a parcel of 22 acres of industrial land within the Rockwall Technology Park in Rockwall, just outside of Dallas, Texas facility is expected to have an initial nameplate production capacity of 8 million MEAs 8 million bipolar plates, 20,000 fuel cell stacks and 20,000 fuel cell engines per year or the equivalent of three gigawatts of fuel cells.

Doug Ballard, Rockwell Giga one, we plan to manufacture next generation fuel cell products, incorporating the benefits of our work related to technology, innovation and design changes, supply chain collaboration and the introduction of volume, production processes and advanced automation to drive down costs. We also recently announced two separate nondilutive funding awards to Ballard totaling up to $94 million, consisting of $40 million in expected grants from the USDOE. hydrogen and fuel cell technologies office and up to another $54 million in expected Advanced Energy Project tax credits, known as 40 HC. funded under the inflation reduction. Our capacity expansion plan comes at the very time the platform customers are being clear about what they need from Ballard in the future. They're counting on us to be there for them at volume and at the right cost, the ability for us to demonstrate a clear roadmap to high production volumes at significantly reduced costs is critical to customers transitioning from demonstrations to fuel future scaled deployments with Ballard Rockwell Giga one, we plan to bring scaled advanced manufacturing of next-generation fuel cells online in late 2027 at the same time when we expect to reach capacity constraints of our existing North American production facilities. Based on our forecasted growth and production volume, we expect to make a final investment decision on this facility later in 2024, pending completion of certain customary conditions, including necessary approvals and definitive doc documentation, including with Rockwell and with the US funding sources. Accordingly, we will provide a detailed review of the plans of Ballard Rockwell Giga one during an earnings call later this year.

Want to also provide two interesting updates on the rail market so far in 2024 first one of our customers in the commuter rail market, stotlar revealed that its Flirt H. two train powered by Ballard fuel cell engines has been entered in the Guinness Book of World Records for the longest distance achieved followed by a pilot hydrogen fuel cell electric multiple unit passenger train without refueling or recharging an impressive 1,742 miles. Second and importantly, on April 16th, CSX unveiled its first fuel cell locomotive developed through its partnership with CPKC., where CPKC. provides CSX with a powertrain conversion kit using Ballard fuel cell engines to refurbish diesel locomotives. With this, we view this as a very exciting development, we believe hydrogen fuel cells offer the only viable zero-emission powertrain solution to replace or refurbish diesel locomotives in North America, the total North American fleet is estimated to be around 40,000 locomotives and notably, CPKC. has approximately 2,500 diesel locomotives and CSX has approximately 3,500 diesel locomotives with high power line haul locomotives using 2.4 megawatts of fuel cells, which is equivalent of amount of fuel cells require to power above 24 buses. We believe this represents a large and attractive addressable market for Ballard.

And before I turn the call over to Paul to review our Q1 financial highlights, I'd like to provide a headline summary of Q1 and some commentary on our setup moving forward. In Q1, we booked $64.5 million in new orders, increased our order backlog by 38%, announced total non-diluted funding of up to $94 million for the planned buildout of our Rockwell giga factory grew revenue by 9%, improved gross margin by five points and reduced cash operating costs slightly while continuing to invest in next-generation products and product cost reductions.

Looking forward in the context of an increasingly constructive policy environment, growing order backlog and with sustained investments in product cost reduction and advanced manufacturing capacity expansion. We see an exciting setup for the second half of 2024 and growth in 2025. We are well positioned to enable our customers to compete in the energy transition and the adoption of hydrogen fuel cells to decarbonize heavy-duty mobility and select stationary power applications.

With that, I'll turn the call over to Paul to discuss our financials.

Thanks, Randy. In Q1 delivered $14.5 million in revenue, driven by strong growth in the bus and stationary verticals. Heavy Duty Motive applications accounted for approximately 84% of the total. And with added to stationary power, our fuel cell products as a whole represented approximately 88%. Once again, emphasizing our shift into a commercial products company. As a reminder, from previous years, we see that valid revenue is typically weighted approximately 30%, 70% between the first and second half of the year. And heavily indexed to Q4 2024 looks to be no different, even with the continued shift in revenue mix to power products and the burden of fixed production overhead costs being spread over seasonally low, more seasonally low revenue. Gross margin of negative 37% showed a five point improvement compared to Q1 2023. We are still anticipating underlying gross margins will breakeven in Q4 as revenue increases and product cost reduction activities have greater impact. We reported total operating expenses of $37.1 million and cash operating costs of $29.8 million, both relatively flat compared to the prior year. Comparables. Capital expenditures totaled $7.5 million in Q2, and we are maintaining our guidance ranges for total operating expenses and capital expenditures for the year. Our guidance for 2024 includes capital for the initial design and scoping activities for the Rockwell giga factory, assuming FID. The expected US government funding for the facility would impact our net capital expenditures in subsequent years starting in 2025. We ended the quarter with a strong balance sheet with cash and cash equivalents just over $720 million.

With that, I'll turn the call over to the operator for questions.

Thank you to join the question queue. You may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys to withdraw your question, please press star then two. We ask all callers to kindly limit themselves to one question and one supplemental. Our first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Hi, good morning. Why don't I just wanted I just wanted to follow up on the Solaris order a good scaling there. Are you could you give us a sense of sort of what the rollout schedule is and how you know, how that market is developing and sort of what the what the sort of size of the market is and penetration rates you get to by the end of kind of by the end of the country.

Good morning, Rob. Thanks for the question. Nate, maybe just to step back a little bit. And just remind everyone, we're really seeing the employment of fuel cell electric bus scaling up both in Europe and North America, driven largely by this transition to zero-emission bus fleets and supported by regulations and strong mandates and of course, public funding.

I'm just just to give you a sense of kind of where we are right now we at Ballard have about 158 fuel cell buses in operation that have Ballard engines inside in North America and about 398 in Europe in North America, I think we're probably right at 100% to 99% to 100% market share in Europe over 80%. So we have really good visibility on what's happening in this market. And what you're seeing is that the proven operational advantages of fuel cell buses, including a 500 kilometers or 350 miles of range you know, the ability to have that range consistent for every day and every season and the rapid refueling time kind of six to 12 minutes refill time.

And then you add in the complexity that comes with deep, deep electrification. As you scale up, we're seeing a lot of operators really revisit their plans going forward as you see a growing number of cities committing to what I would characterize as larger deployments. So Bologna, for example, 127 buses, Dennis, 90 fuel cell buses, colon 150 Santa Cruz 57. You've got many other cities in North America as well, Oakland, Philadelphia, foot Hill in the LA Basin area, Las Vegas, New York City and Edmonton in Canada, all kind of committing to a fuel cell bus deployment. So we see probably going from a situation where you have roughly 5 to 600 buses in North America and Europe combined today, to a thousands literally in a three, four year period. And so we're tracking a very healthy pipeline and with strong market share with most of the OEMs that are offering fuel cell buses in North America and Europe are powered by Ballard. So we feel very comfortable with our position in the market and the growth opportunity we see with Solaris specifically, I don't want to comment on any one customer and their rollout schedule. We'll let them do that. But I would just indicate that we expect those thousand engines to be deployed between 2024 and 2027.

Okay. Thanks for the color there. Randy, on the on the Rockwell expansion or new facility, what's the CapEx requirements there? I guess, obviously impacted by the of the government funding side, but what's the CapEx expected on that business?

Yes. Great question, Rob. So we're doing quite a bit of work in parallel right now. We are polishing our product project scoping final budget time line. There's a lot of work going on completing the facility design, the plant layout, looking at the permitting process and finalizing our land acquisition agreement in our EPC contract. There's still some more work on equipment specification procurement. So what we expect to do, Rob, probably on the Q2 or Q3 call, he's actually provide a fairly comprehensive review of Rockwell once we get through FIDI. and include a CapEx range. At that point, we had kind of indicated if I were to put kind of parameters on right now, I would say in the $100 million to $150 million net of the funding, it's kind of the parameters and we'll tighten that up as we get out later in the year.

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

Great. Thanks, Rob.

Our next question comes from Aaron MacNeil with TD Cohen. Please go ahead.

Morning. Sorry, Randy, you highlighted the upfront incentives to build wow direction. I can also appreciate a larger update is forthcoming. I guess I'm just wondering at a very high level are there any production tax credits that you can take of that take advantage of if the capacity is three gigawatts? Do you have any early what sort of sales volume you think you need out of the facility for at the breakeven? And then, sir, what sorry?

Yes. Yes, yes, yes. So we've canvassed the US market fairly carefully in terms of incentives and I we actually have other opportunities for this facility beyond the $94 million that we've commented on. And of course, there's a package of incentives that comes with the Rockwell Economic Development Corporation. So I think all in will likely be higher than $100 million in total and support opportunities. There are, of course, all non-dilutive. So that's very powerful for us as we move forward in terms of like kind of unit economics of volume, scale, et cetera, to get that profitably. I think we'll wait till the upcoming calls to manage those. What I would say is just to be very clear, we don't have an order book at this time that satisfies the volume of three gigawatts that we're talking about. Clearly we are looking clearly at investing ahead of the adoption curve. But of course, we have a sales pipeline that is showing very strong growth indicators across most of our vertical markets and of course, both for Europe and for North America. So as we look at our scaling over the next couple of years and basically using the production capacity, we have existing production capacity and actually some capacity expansion that's ongoing here for bipolar plates in Burnaby, British Columbia, what we see is kind of meeting capacity constraints in that 2027 timeframe. Based on our sales pipeline and our forecasting for our financial model.

Wait, I I know you don't want to and in orders and pricing, but you've you've mentioned $1,000 kilowatt orders? Like is that still a barometer?

Yes, Aaron, I would say for a lower volume orders, you know, 1,000 is probably a good proxy. I see most cases were probably below that, but at 1,000 is a good proxy as you get to higher volume orders, we are seeing, of course, pricing compression there as we should be. And so this is not these type of contracts are not at that level.

Right, great. Thanks, sir.

Our next question comes from Sami Dan with UBS. Please go ahead and

how do you guys see that playing out in the U.S. rail market and US specifically down the line? And how are you seeing truck the truck market growth in 2024 as well yes.

So just to clarify your question, I think you're asking about the truck market, is that correct?

Yes. And the rail market for U.S. oil and rail.

Okay. Yes. So just on the rail market on, we'll start there first. I think one of the market opportunity that's probably not very well understood is the freight locomotive market. So you have both commuter rail in Europe and I would characterize it as modestly in North America, but certainly Europe, a larger market opportunity there. And as you know, North America, just the volume of commuter rail traffic is much later than it is in US in Europe, but on the freight locomotive market, as I commented in the opening remarks, basically you've got a market with about 40,000 diesel locomotives, those locomotives are refurbished or replaced every 15 years. So roughly speaking, you have about 2,600 locomotives per year. If you look at each locomotive depending on the requirement for that locomotive being up to 2.4 megawatts, let's assume it's about an a megawatt and a half on average per locomotive. You're talking about a couple of billion dollars a year market opportunity just for that market in North America. So it's a very exciting market opportunity for Ballard. We have a I would say, a couple of year period here over the next few years as customers like CPKC. and I., we're very excited with the work that CSX is doing as well as these type of companies continue to validate the use of hydrogen for locomotive applications, including their hydrogen storage tender solutions. I think this is the only pathway for decarbonizing. And when you look at the emissions and the costs associated with the diesel and the variability of diesel pricing. I think the number one scope Scope one emissions is typically around 95% of Scope one and which missions for these operators is diesel fuel. So this is a real priority for these type of operators who are looking at the future to really look at decarbonization and hydrogen is going to play a big, big role there. And I don't think you're going to see kind of a high volume in the next year or two this is going to take a number of years to validate, but we are very well positioned with the solutions we have with the partnerships that we have to play an important role in this market.

On the commuter rail market, we have a number of partners there, Siemens that we've announced for the European commuter rail market. They obviously have an increasing presence in the North American commuter rail market too. And then stotlar is another customer for the North American and European market as well. So we see, I would say, growth in this market by 2030. I think we're going to see very clear validation, both to the commuter rail and for the locomotive market that puts it on a very strong pathway moving forward for the truck market. This market is actually moving slower than I would like. And there are a variety of reasons for that. We have been focused on what I call the truck market opportunities, we have returned to base refueling. So think about things like drayage trucks and our regional haul trucks that are coming back to the same base or yard at night. So you can avoid that distributed refueling infrastructure on. And we see a number of applications in different weight ranges that will have, I think, hydrogen fuel cells as the primary solution. There will be some battery electric and some of these weight ranges as well as can be a mix mixed solution, but it is taking longer. And I think the vehicle OEMs who have been investing quite a bit in different technologies, including autonomy, including battery electric. We are now looking at the hydrogen fuel cell investments as well. So we see a number of opportunities that are in the it's, I would say, early stages of validation with these customers as they're going through their RFP and RFQ processes. We're very active on this front. So we are seeing, I think, increased activity from truck OEMs, the large credible ones who are looking to bring solutions to market on the 2028 to 2030 timeframe.

In parallel to that, we're working with a number of what I would call the Outfitters. So entrepreneurial companies that see a market gap today and are rushing to market with in many cases, both battery electric and fuel cell electric, depending on the use case, are looking to Ballard to provide them with fuel cell engines. And so that upfit market is a market that we're also working on. So we have two flows of traffic, if you will, of two streams of opportunity in the truck market. We're advancing both of them, but it is taking longer than we'd like.

Got it onto Selma. Your next question comes from Mac Whale with Cormark Securities. Please go ahead.

Good morning. As you noted, RANDY strong six months for new orders. I'm wondering what are your thoughts on the variability of that going forward seen in the past when you get these big orders and it sort of draws some activity level from the next quarters? Or do you think you're through that now with these big long term sales agreements are do you think we're going to see some we should be sort of expecting maybe a little bit more soft new orders?

Yes, great. Great question, Mac. What I would say is this is still very much a it's early stage demonstration market where some customers are earlier in their processes. And but I do see that while there will be lumpiness in some of the market opportunities we are pursuing like for example be the backup power market for data centers for the marine market or even the rail market, you're looking at much larger size applications, power applications. And if you get scale orders there. It's quite different than the type of orders you'd see from from the bus market. So I think we're going to see continue to see a lot of variability and a lot of lumpiness. It will be based in some part on seasonality and some part based on when funding sources are available. And of course, a couple of the contracts we've signed are long term supply agreements with that fixed volumes associated with them. So that doesn't happen every quarter. So there will be some variability. But I would say the trend is towards larger order books and the trend is towards getting a smoother cadence of growth going forward. We do see a very strong sales pipeline expect to see some additional large orders through the year. So our job is to close those out.

And I guess related to that, I guess more as more evidence to support that, if you look at the 12 months backlog, it's actually where it was in 2021 when you had it correct me if I'm wrong, a lot more Knology related sales and the yield in the 12 month period looks like.

Yes, and I think that's one thing that's probably been misunderstood in some ways. You know, people kind of look at the revenue as being flat and in some cases, the order book is being flat, which is has been true for a number of years, but the composition has changed dramatically. And so we're go into a situation now where we're reaching almost 90% revenue. And similar on the order book front and certainly on the sales pipeline, I know it's heavily heavily dominated by the sale of fuel cell engines now. So just as an illustrative example, last year, we shipped over 500 fuel cell engines, a record year for Ballard on that front. In the first quarter, we shipped over 100, which is a record for Q1.

Okay. And just as a second question, just switching gears on that kind of address this a little bit on the giga factory in the U.S. when that's up and running? I know it's still a few years out or what is the contribution margin look like in the past, you've spoken about contribution margin as opposed to sort of the margins you're you're reporting. Is there any change in what you expect to see when that's up and running? Yes. Actually, I wanted to reiterate that yes, yes.

So we will see a significant reduction in our costs as we move forward on manufacturing. And so when you look at the processes for MEA, the processor for bipolar plate production. Those are the areas we're seeing significant cost reduction opportunity with automation and different processes that really help with things like yield and scrap rates, et cetera, that all go back to cost. So we will see a very significant difference in material costs, direct material and direct labor costs as we scale in a high automated facility. And then as from a as you move from contribution margin to gross margin, then it becomes a function of getting the volume and getting your fixed overhead absorption across a bigger book of business. So we're actually very excited about the opportunity for both contribution margin expansion and gross margin expansion, particularly as volume hits in that new facility.

Great. Thanks. Thanks. That's all my questions.

Thanks. Matt.

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

Good morning. Thanks for taking the question. I wanted to follow up on the cost reduction and pricing strategy with the orders you've announced recently are the prices you've offered for larger volumes out to 2027 representative of prices that are sustainable in the long run or to put that another way or your prices getting to a level that could be competitive with diesel buses on a TCO basis?

Yes. I think what we'll see is that as we move forward. We're going to see this happen very similarly in the solar industry in wind and happened in the battery electric market. And there are some variability in those markets, particularly when depending on supply and demand balances, but also very high dependency in some cases on rare earth metals and certain commodities. I don't see that going forward here on the commodity front in terms of variability. But what I would say is we can expect to see selling price reduction on an annual basis. And our job is to make sure that our costs reduction exceed selling price erosion so that we're effectively seeing margin expansion. And so that's what we currently have in our plan is we're assuming a certain percentage. It varies by year, but there's a kind of an overall blended percentage of cost reduction that customers are expecting. And certainly in the larger long-term supply agreements that we've been signing up recently, we have cost reduction and selling price. We have selling price assumptions or reductions in there, and it's supported by cost reduction assumptions that we have in our plan.

Great. Thanks. And a follow-up on that. You've talked about some of the advantages you're going to have scaling up your bipolar plate and MEA course, a big part of your cost is coming from balance of plant. Can you give us an update on cost reductions you're seeing there and the commitments from your suppliers to bringing their costs down to where they need to be?

Yes, great. Great question. And I think it's worth knowing too, like we're working now on our ninth generation of fuel cell engine. And we've learned a lot through a generations as you would expect and including a generation's operating in the field. So we have a massive competitive advantage on this front. But what I would say is we kind of the if you look at the nice generation, we have more of what we characterize as an open architecture. And this has enabled us to integrate the DCDC., but also reduce significantly the number of parts, reduce the volume and the weight and improve the powertrain integration, ease of service, but also significantly reducing reducing the manufacturing time of the assembly time. So this is all going to help reduce costs and improve the total cost of ownership for customers. What I would say is a balance of plant components is a very significant, a cost reduction initiative at Ballard. We have a fairly large balance of plant team that is working with the supply chain on every day on making sure we're improving performance, reliability, availability and uptime, warranty terms, payment terms, but importantly moving down costs. And we've seen a step change cost reduction on and a number of components that will be coming into production in 2025. So we're pretty excited about some of the cost reductions we're seeing on the balance of plant components, and we look forward to kind of unveiling the next generation of products, including some of the metric improvements that we're seeing there.

That's great. Thanks for the color.

Yes. Thanks, Robert.

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

Morning all and thanks for taking my questions. Maybe start on the stationary side and through the work and some of the momentum there with your customer in Europe. Maybe if you could just talk to kind of the opportunity size over in that market near term and then how you see that progressing over the next couple of.

Yes, I would say so far, we've been fairly constrained in our view on the are on the market opportunity size for kind of the total TAM for the stationary power market. We characterize it kind of around $4 billion. I think that's dramatically understated. I think what's changed in the last year since we kind of assess that $4 billion TAM market opportunity is really the data center market opportunity. And obviously, there's a lot of publications out the last six months on the growth and the expected growth of the data center market and the number one challenge the data center operators have particularly the hyperscalers, is the access to green energy. And then I would say number two, importantly, is having the opportunity to get permitted quickly and one of the challenges with permitting is to make sure that you have total clean energy solutions. And we're seeing a number of markets that are cracking down to make sure that backup power is also clean energy solutions. So we see a very significant market opportunity for data centers. And that's a market that I think is going to take that TAM significantly higher so we have more work to do this year with a couple of key partners that are very large players in the data center market to kind of validate that TAM. But I would say you're just going to be a market that we're going to see a lot of lumpiness, and we would expect to see more opportunities in 2024. Obviously, we've been announced this 15 megawatt opportunity. It orders. We expect to see more developments in this market in 2024. That will really set us up in 25 and 26 to make sure that we have the right partners and customers, so really move forward in that market.

Appreciate that. And then as a follow-up, a separate topic, recognize the solid benefits for DHC and maybe some of the other credits that you can realize from the Rockwall plant. But maybe just talk to how important you see finalized PTC. guidance to the local market opportunity for that plan and maybe more broadly the investment case for well, yes.

First of all, a rock wall is designed to provide us with product that we can use globally, frankly, but a EO it's going to be used to provide products primarily for the North American and European markets, and that will take us in my opinion, likely through to at least 2030. So we have very good kind of capacity coming out of Rockwall and very cost effective and efficient additional incremental phasing if we wanted to scale that up in the future.

And so in terms of the PTC., we have the guidance that was published in December. The whole industry has provided feedback. I personally have talked to the US DOE recently about the volume of feedback they've received and the kind of the nature of the feedbacks. And there's a lot of work going on there with the IRS. and DOE., looking at the feedback to kind of square and the objectives of making sure that they have the right incentive mechanisms to support the growth they want while also trying to make sure that the hydrogen that is produced has the, you know, a clean hydrogen attributes that the policy is targeting. There's a lot of debate around the regionality, the additionality and the time matching. And I think regardless of how this gets settled, there's really no major impact to us from the sales opportunities that we see through 2030 for Rockwell, really, I think the on the cost and availability of hydrogen with the PTC., even in the constrained case where they take the most onerous or their most restrictive interpretation of the PTC. still provides us with the cost of hydrogen that is significantly lower than it is today.

I think with $3 per kilogram production tax credit for clean hydrogen. As that's defined, you're probably looking at around 50% of the cost of green hydrogen being subsidized. So for us, we view this as a really significant enabler to the market. Of course, we'd like to see the most yet on flexible interpretation of PTC., but we'll see how that shapes up, we've submitted our response to the guidance and are waiting to see how that data.

Thanks, super helpful.

Thanks so much. Thank you.

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

Good morning. Thanks for taking the question. On to start with Tom, give or take you're bleeding about $20 million cash a quarter in operating cash flow on. And I understand you're saying that your margins will gross margin will approach breakeven by the fourth quarter on higher volume on, but higher volume can have a working capital impact. And then you've already alluded to cyclical seasonal seasonal seasonality like the first half of next year, Mike might then return to lower volumes and negative margins. So just in terms of this $20 million cash burn from operating cash flow, do you have any any trends, color expectations heading into the fourth quarter and first half next year about what we might anticipate?

Yes, sure. So so thanks for the question. And it's something that we look at all the time is this is still a relatively immature market on the impact on our on our cash flows, and we've looked at different scenarios all the time. Look, we, but we have to factor into that, though, is balancing our code of what's in our sales pipeline and talking to customers their expectations. They want a supplier that is going to be able to grow with them as they deploy these various fleets and various applications also are causing our investments in products and to reduce the product costs. As we've talked about, not only decreased the unit costs but increase the performance and quality and the investment in manufacturing to enable the scale, benefits and grow, and you're balancing all of that against the cash on hand. And I think we've said in the past that we're looking at our funding and seeing all of these coming together and seeing that, it'll we're going to need funding additional funding probably in the 26, 27 timeframe. And so we're looking at various ways of doing that. We are very fortunate to announce the DOE grants and the investment tax credits, as Randy alluded to, there are other things that we're looking at as well, non-dilutive financing that is going to be helpful there. And we're also having a hard look at all of our activities across the business in there where we're doing business in various locations and finding ways of redirecting spending and reducing overall spending at both OpEx and CapEx to kind of rationalize the product set and add the rest of our costs. You saw in our in the Q one, as we said in the Capital Markets Day, our costs were relatively flat, lower lower CapEx spending and operating costs that were relatively flat and that's bumping up against relatively higher inflationary environments as well. So we are looking very hard at our at our all of our costs and focusing the Company on where the market opportunities are, and we'll be able to as we explore these other financing options that particular emphasis on and on the non-dilutive funds, we'll bring out more information as those become more solid.

Fair enough. And just on that first question to finish this point, Ernie, you had a very strong fourth quarter and sales seasonally fell and you had a working capital benefit on, is it unreasonable to think that heading into a fourth quarter surge that there'd be a working capital drain?

Yes, yes, we would expect that as sales come up, our receivables and inventories building throughout the year, our receivables will be building, and then we'll see the receivable inflow in Q1 as we did this Q1. And so we expect that that pattern to continue. We are though, also as part of what we're looking at our cash flows and and as we come up to scale, looking at all aspects of working capital, customer terms, inventory reduction, inventory management, tighter on that and payment terms with our suppliers as well. So all of it is is a big focus of mine.

Right? And I wanted to get a little glass.

Sorry, Craig, I might just add to that. When we kind of look at 2023 last year, we really implemented a number of activities really sharpen the focus to make sure that we have this right balance of investing for the future, making sure we have competitive products, not just today, but five years from now and 10 years from now and at the right cost structure, et cetera. And so, you know, we rationalized the product portfolio. Last year, we reduced the number of active product development programs. We dropped corporate development investments and discontinued certain legacy non-core activities. So we're taking a very careful look to make sure that we are investing resolutely kind of on the long term like protecting the balance.

Okay. That's very helpful. And it feeds right into my second question, which also digs into the answer to Roper's. First question on and that related to this, you know, multiyear contracts and providing your customers lower lower pricing on an annual basis and planning to kind of leg into that. What's even more reductions on your internal costs on that it feels like that is and a challenging effort, I think very hard to predict with certainty time timelines for these things when the market will scale. And if you have you know a growing order book with falling annual pricing of the ultimate market, scaling takes whatever another 12 or 18 months for various reasons beyond anyone's control that that may be. I'm just saying it is that very challenging in your mind, is there a risk that if things turn dramatically different than anticipated for any macro reason that you could suddenly find yourself leaving a lot more cash in 18 months than expected?

Yes. So Craig, everything about the hydrogen fuel cell industry is challenging, right? This is not for the faint of heart, but what I would say is when we sign a long-term agreement and we're committing to future forward pricing, we have very high probability on what our costs are. We're not taking risk on that, right? So there is some development risk and there's some very modest volume risks, but not not kind of what you're talking about. And so I feel very confident very confident that our cost reductions will exceed our selling price reductions based on the work that we're doing. And based on the supply chain visibility, I don't view that you don't there's lots of risks I think about at night. That's not one of them.

It's good to hear. Thank you.

Our next question comes from Vikram Bagri with Citi. Please go ahead.

Hi, there.

A couple of questions on gross margin. Could you just remind us if there are any impairments this quarter? And then just looking at the the Power Products backlog on the slide that ticked up this quarter. How should we be thinking about that going forward? And how does that impact on your outlook for the fourth quarter for that for that breakeven targets. Is that mix consistent with the next 12 month, whatever you see if it comes?

So just on the gross margin question, so we as we stated, we've had a gross margin of minus 37%, which was a five point improvement from Q1.

And then looking underneath the gross margin, if we just talk about contribution margin, so price minus the direct labor and indirect materials. It was broadly the same quarter to quarter, but both products contribution margin as well as TS improved. So we are starting to see some expansion in the products as we become more of a commercial products company, but it was flat overall because the mix of products we have more products with generally lower contribution margins than our technology solutions. So overall, it was it was flat, but underneath the product contribution margin is expanding. And then looking at our fixed and other costs, including the fixed overheads, warranties and other provisions that improved by about six points overall. And we had a net reduction in our warranty accruals as certain warranties expired and that provided that benefit a net benefit. The we also had a few other very small inventory write-down in the quarter, but nothing nothing like what we saw in Q4 of last year. So overall, as we've continued to invest in our products, we continue to expect to deliver product cost reductions. And when combined with the increasing sales volume and spreading that sales over our fixed costs, we expect to see gross margins improving over time.

Got it. Okay. That's that's very helpful. And just one follow up. Last quarter, there were some customers that had impacted the backlog. I think their project was being delayed. And could you just talk about if there's any update there on? Could we expect to see that customer reenter the backlog at some point? Or just any update would be would be helpful.

Thanks. Yes, we're staying very close to that situation literally almost daily. So we have very good visibility on what's happening there. And they've made a lot of progress since December, and we'll we're expecting them to get resolved likely in the next quarter, let's call it, but we'll wait to see that, and we'll see at that time what the impact is to the order backlog.

Got it. Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Randy McEwen 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. Thank you.

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