Ballard Power Systems - Earnings Call - Q1 2025

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems first quarter 2025 results call. As a reminder, all participants are in a listen-only mode, and the conference call 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 Mr. Sumit Kundu, Manager of Investor Relations. Please go ahead, sir.

Sumit Kundu (Manager of Investor Relations)

Thank you, Operator, and good morning. Welcome to Ballard's first quarter financial and operating results conference call. With us on the call today are Randy MacEwen, Ballard's President and CEO, and Kate Igbalode, Chief Financial Officer. Given that our 2024 year-end earnings call was only eight weeks ago, we will keep today's scripted remarks 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.

Randy MacEwen (President and CEO)

Thank you, Sumit, and welcome everyone to today's conference call. In the first quarter, amidst an uncertain macroeconomic, geopolitical, and industry context, we made important progress against our controllables, including our customer deliveries, our operating costs, and our product development programs. Compared to prior year, 2025 Q1 revenue increased 6%, engine shipments were up 31%, gross margin improved by 14 points, and total operating expenses were down 31%. We're starting to see the positive financial impact of the corporate restructuring we initiated in September last year. We expect to realize further reductions to our operating costs and reduce cash utilization over the remainder of the year from this restructuring. In addition to realizing the benefits from the 2024 restructuring, we're actively assessing opportunities for deeper cost rationalization in 2025. Now, before we get into the commercial highlights, we'd like to make a few comments regarding tariffs.

While uncertainties around evolving global tariff policies remain, expected policy changes are not likely to materially impact our business in 2025. We're closely monitoring tariff developments that may impact the sale of our fuel cell products, including into the U.S. We've reviewed the bills of materials for each of our fuel cell engines and assessed the potential tariff impact based on the country of origin of each BOM component. We expect sales in the U.S. to represent roughly 20% of our 2025 revenue. Based on current information and following certain mitigation actions, we expect an increased tariff cost of about 20% on products being sold into the U.S. market, for which we expect to fully pass the incremental costs onto our customers. Moving next to bus. We're encouraged with the demand growth in the bus market, which contributed 81% of Q1 revenue, up 41% year-over-year.

We continue to be the market leader for supplying fuel cell engines to bus OEMs in the European and North American transit bus markets. We believe there's a growing recognition by transit bus operators of the value proposition of fuel cell buses. We ended Q1 with an order backlog of $158 million, including a 12-month order book of $92.4 million. As discussed on many previous calls, market adoption remains early in our target applications, with a transition from customer trials to higher volume deployments over time. Accordingly, our business remains project-based. This means new order intake is subject to significant variability quarter to quarter and can be lumpy. After securing record new order intake of $75.4 million in Q4 of 2024, order intake in Q1 was soft.

Notwithstanding, we continue to progress significant sales opportunity, which we expect to convert to closed orders over the coming quarters, including opportunities in rail, stationary, and marine. As we look to the remainder of 2025, we'll continue to navigate uncertainties related to hydrogen policies and trade tariffs. We'll continue to focus on our customers, new order intake, on-time delivery of quality products, gross margin expansion initiatives, and prioritized product development and cost reduction programs. With that, I'll now pass the call over to Kate.

Kate Igbalode (CFO)

Thank you, Randy. In our seasonally slow Q1, Ballard delivered $15.4 million in revenue, up 6%, driven by strong growth in the bus vertical, which increased by 41% in the period, but largely was offset by decreases in other verticals. Our fuel cell product sales revenue made up 94% of the total revenue, compared to 88% in Q1 of last year, once again emphasizing our shift into a commercial products company. Fuel cell engine shipments were up 31% compared to Q1 2024, representing 14 MW of fuel cell deliveries. Similar to prior years, we expect 2025 revenue to be indexed to the second half of the year. Although Q1 gross margin was negative 23%, we realized a 14-point improvement compared to Q1 2024. Gross margin remains negative as we continue to be impacted by relatively low revenue and absorption against our manufacturing overhead costs.

The 14-point improvement was primarily driven by lower manufacturing overhead costs resulting from our 2024 restructuring activities. Total operating expenses of $25.5 million and cash operating costs of $23.2 million were down 31% and 22%, respectively. The reduction in total operating expenses reflects reductions of 28% in research and product development, 32% in general and administrative, and 23% in sales and marketing expenses. Our total operating expenses guidance for 2025 is between $100 million and $120 million, reflecting an approximately 30% reduction at the midpoint compared to 2024. Capital expenditures totaled $2.7 million in the quarter, primarily for planned investments in production and test equipment, including related to Project Forge. Q1 CapEx was 64% lower compared to Q1 of 2024, and our capital expenditure guidance is between $15 million-$25 million for the year, also reflecting an approximately 38% reduction at the midpoint compared to the 2024 guide.

Notably, we are actively reviewing and considering various options to reduce both our operating cost structure and our capital expenditure plans for 2025, which may result in revisions to our guidance ranges. Importantly, we ended Q1 with $576.7 million in cash, no debt, and no requirements for near or midterm financing. We will remain disciplined, but we will maintain disciplined spending and balance sheet strength for long-term sustainability. We believe our balance sheet strength represents another significant competitive advantage for Ballard compared to other pure-play PEM fuel cell competitors. With that, I'll turn it over to the operator for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We ask callers to kindly limit themselves to one question and one follow-up. We will pause for a moment as callers join the queue. The first question will come from Saumya Jain with UBS. Please go ahead.

Saumya Jain (Equity Research Associate)

Hey, good morning. Do you have any update on the Caterpillar and Microsoft collaboration or any future data center partnerships in sight?

Randy MacEwen (President and CEO)

Yeah, Saumya, first of all, thank you for the question. I would say that's still kind of in WIP. Cat and Microsoft had some announcements related to that last year, including winning a DOE award. I think converting it from a first trial to next stage is going to take likely a year or two before we see some progress against that.

Saumya Jain (Equity Research Associate)

Got it. Thank you. How is the cost per kilowatt sold to customers looking, and I guess what's impacting that specifically?

Randy MacEwen (President and CEO)

Yeah. The cost per kilowatt, there's two variables that I want to highlight. First is the sales price, and then the second is the cost. On the sales price, I would say there's, particularly in the China market, a lot of pressure on the selling price in the China market. I would say in Europe and North America, we're seeing pressure there as well, both from a value proposition for the customer as well as competitive pressures. On the cost side, the key variables there for a fuel cell engine relate to the fuel cell stack plus the balance of plant components. We continue to do a lot of important work on reducing the cost of the stack and reducing the cost of the balance of plant components for a full engine.

We have talked about some of the product cost reduction initiatives we have been engaged in over the last number of years. One of the key ones, in my opinion, on the stack side is Project Forge, as Kate alluded to, in terms of the investment we are making there. We expect to see pretty significant reductions in our bipolar plate costs, and that project should be fully implemented by the end of this year. We expect to see some enhancement there. As a trend, I would say the overall selling price is relatively flat this year compared to the prior year, and we expect to see the cost coming down later this year.

Saumya Jain (Equity Research Associate)

Okay. Thank you.

Operator (participant)

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

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Good morning. On your sales pipeline, where are you kind of at this point? Where are you seeing the most activity, and how do you sort of see that playing out throughout the year?

Randy MacEwen (President and CEO)

Yeah, Rob, thanks for the question. Certainly, I would say where we see the most consistent and repeat business opportunities is in the bus segment, for sure. Both in Europe and North America, we see customers there with repeat orders over the last year or two, but going forward as well. In fact, just about two weeks ago, we had an end user, a transit operator in our office here in Vancouver. They have a pretty significant deployment in the U.S. market and are looking to add a significant number of fuel cell buses to their fleet, which is very encouraging. The bus market is certainly a key contributor in the sales pipeline. We do get significant lumpy projects in rail, in stationary, and I would say kind of distant third would be marine.

Rail and stationery, we see lots of opportunity there for validating value propositions with customers and longer-term moving to a more consistent cadence, but right now very lumpy. On the rail side, we continue to see opportunity in the freight locomotive market in North America, as well as some commuter rail opportunities in the North American market as well. Stationery, a number of different applications we're seeing interest in, and particularly some what I call off-grid or weak-grid scenarios, where customers are looking for remote sites or construction or event-type power requirements or even EV charging. Those are the applications we're seeing kind of the most uptake in our sales opportunities right now.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Great. Thank you for the color. On the bus market that's got the most sort of maturity of deployments, are you starting to see cases where you can get the value proposition economics and kind of value proposition sketched out? I guess where do you see the most sort of functional deployments and the most data?

Randy MacEwen (President and CEO)

Yeah. We have just under 600 fuel cell buses operating today in Europe and North America, with very good data coming back from the field in terms of uptime, availability, reliability, safety, all those metrics, of course. What I'd say is that, and by the way, there are quite a few buses that will be entering into service over the coming 12-18 months. That is very encouraging to see. There what we're seeing effectively is that the key variable on customers having an improved total cost of ownership is really the cost of the fuel. That is a variable we do not have a lot of control over.

We do expect to see by 2030 more access to low-cost, low-carbon hydrogen in both the North American and European markets at a price approaching kind of TCO parity, but it still is a premium compared to diesel buses today.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

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

Randy MacEwen (President and CEO)

Thank you.

Operator (participant)

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

Rupert Merer (Managing Director, Project Finance)

Hi, good morning, everyone.

With the restructuring you have gone through, can you talk about the process and what compromises you have had to make to achieve your targets? Have you had any impact to your product cost reduction initiatives, or have you given up any fundamental R&D initiatives?

Randy MacEwen (President and CEO)

Yeah. Great question, Rupert. I think anytime you look at a cost reduction, the biggest question is, what are you going to stop doing, and what are you compromising, or what are the puts and takes and the trade-offs? We certainly believe that much of the value creation that occurs at Ballard is in our technology and our engineering. We have tried to, as much as possible, protect the core IP and obviously the core roadmap that relates to our core products. Basically, we have prioritized and sequenced product development programs. I would say previously you would have seen us doing a number of different programs in parallel, and now we are going to more of a sequential approach.

With the push out in the timeline for adoption, particularly in the truck market, we've deprioritized investment into fuel cell engines at this time that relate to the truck market. Our focus is very much on making sure we have higher-performing, lower-cost modules for the bus market, a market that we're winning in, and a market we plan to continue to win in. Winning in the bus market is critical. As some of these other markets start to scale longer term, we'll be taking the products that we're developing for the bus market, applying them to some of these other markets. Similarly, as we kind of look at the larger products for stationery and rail and the truck market, making sure that the balance of plant components to the extent that can be harmonized with the smaller products, there's some leverage there.

There certainly has been some reduction in R&D, and I think we've focused on making sure we're preserving the core MEA R&D activities where we think we have a competitive advantage, and less activity perhaps on things like the balance of plant components where we think the supply chain has been a little bit more matured over the last two years than previously. There certainly have been some compromises. One of the key ones, though, is really focusing the product roadmap and doing fewer programs and looking at sequential product development programs rather than in parallel.

Rupert Merer (Managing Director, Project Finance)

Would you still be on track with your cost reduction plans from a few years ago?

Randy MacEwen (President and CEO)

Yeah. So that's one of the areas we think we've made a lot of progress on. Certainly on the MEA front, we've realized pretty significant reductions there. Project Forge, as I mentioned earlier, will come online. It's pretty well almost finished installation right now, and that will dramatically reduce the cost of the bipolar plates. Just as a reminder for people, Project Forge is kind of this really important plan where we look at not only materially reducing the cost, but also scaling the production of kind of next-generation graphite plates. It kind of reduces the cost of the plates by about 70% and increases the production capacity by about 10x, while also significantly reducing production tack times. Really, the throughput is enhanced, but some additional things like kind of reduced energy demand and elimination of wastewater consumption from plate manufacturing.

There are a lot of benefits from this project. We expect to see kind of a step change in our plate production starting next year. After MEAs, bipolar plates are the next largest cost item in the fuel cell stack. From an MEA and a bipolar plate product cost reduction perspective, no impact from our program plans there. I think the balance of plant components, much of those have been specified not just for products that we have in the field, but for our next generation, what we call our small core product that will significantly lower the cost of engines and enhance our margins.

Rupert Merer (Managing Director, Project Finance)

Thank you, Randy. I'll leave it there.

Randy MacEwen (President and CEO)

Yep. Thanks, Rupert.

Operator (participant)

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

Hi all. It's Henry on for Jordan here. Thanks for taking my questions. I guess just understanding that the TER situation remains very fluid. I'm just curious if there are any actions or updates we should be looking for from you all later on this year with regards to supply chain movement or material sourcing.

Randy MacEwen (President and CEO)

Yeah. Henry, first of all, thanks for the question. There are a bunch of mitigation actions we've already taken into account. Just as a couple of illustrative examples, kind of as a one-time measure, we did accelerate the movement of some components and materials into the U.S. market before the tariffs were implemented. Secondly, of course, there are suppliers that we're looking at transitioning. Some of that comes with some complexity and some timing, of course. I do not think there's any one change that's material by itself, but a couple of them together will be quite helpful. Of course, I think the key is the whole market just understanding that there's going to be some pass-through here of tariffs, costs through the value chain. I do not expect to have any major update on this front later this year.

I expect it to be kind of more of the same that we've profiled here today.

Gotcha. Understood. Thank you for that. Maybe just a quick housekeeping one for me. Looking at the relatively light CapEx spend for the first quarter here, I guess how should we think about the cadence of that kind of moving through the remainder of the year? Yeah. Thank you.

Yeah. Maybe I'll just make a comment, and then Kate can follow up as well. I think one of the things to understand as well is we did go back a few years ago when we first started talking about Project Forge. This is an $18 million program. We're just now seeing the trailing cost of that occurring in 2025. And just from a as you look forward for the foreseeable future, in my opinion, at least through 2030 and beyond, we really don't have any material kind of one-time CapEx spend during that time period. So there's really kind of a burn-off, if you will, of this Project Forge in 2025, and that's really front-end loaded. And then as well as typical maintenance CapEx that we have here for our facilities in Vancouver. Kate, I don't know if there's anything additional you want to add to that.

Kate Igbalode (CFO)

No, I think, Henry, for the purposes of kind of modeling an outlook for the year, I think taking kind of the midpoint of the guidance range would be a reasonable expectation and just sort of run rating that across the quarters. To Randy's point, there really isn't any kind of material expectations for outside spend in one quarter versus the other.

Operator (participant)

Again, if you have a question, please press star, then one. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Randy MacEwen for any closing remarks. Please go ahead, sir.

Randy MacEwen (President and CEO)

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

Operator (participant)

This brings today's meeting to a close. You may disconnect your lines. Thank you for your participation and have a pleasant day.