Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems second quarter 2023 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. 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 and zero. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.
Thank you, operator. 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 investor 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. 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 continued 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 constructed hydrogen policy landscape and increased market activity in the U.S. and the EU. 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 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 seeing growing customer engagement across our verticals.
At Ballard, our strategy is to commercialize PEM fuel cell technology and products that can be applied across multiple market applications, where our fuel cell technology provides the strongest value proposition and where barriers to hydrogen refueling infrastructure are lowest. These markets includes 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 three 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, as we've discussed before, the truck market is in the early innings of fuel cell adoption, with most truck OEMs and integrators focused on developing fuel cell truck platforms. In this regard, we're delighted that Ford Trucks, after a competitive process, has selected Ballard as their fuel cell partner as they develop their hydrogen-powered F-MAX 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 Europe's 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 their 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 Lloyds, adding to the type approval we'd 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 MW ClearGen-II 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 of another major proof point of the value proposition of our products in the data center market opportunity. We continue to see interest in our stationary 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 three 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. 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%-70%. With that, I'll turn the call back over to the operator for questions.
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 request all questioners to kindly ask one question and one follow-up only. The first question comes from Aaron MacNeil with TD Cowen. Please go ahead.
Morning, and thanks for 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? If I'm on the right track with that line of thinking, you know, what's sort of the tipping point in terms of the IRA rules, you know, for you, in terms of where Europe or the U.S. becomes more attractive? Maybe I'll sneak one more in, if 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. Yeah, Aaron, I think that's an important question, and certainly that's a key consideration. I think just stepping back a little bit, you know, for us, looking which, which jurisdictions have the most supportive policies for the adoption of low cost, low carbon hydrogen is critical. You know, where do we see, you know, deployment of fuel cell vehicles? 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 and fuel cell value chain in that jurisdiction. There are two aspects to this.
One is, you know, as you point out, how would the particularly the details on the IRA implementation, including, you know, how the green hydrogen is effectively measured. Also stepping back and to say, what, what policy support, what subsidy support is available for manufacturers looking to set up local manufacturing operations? 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 three regions. That's important. Secondly, I think just again, stepping back, you know, where do we have proximity to customers, end users, suppliers, and key talent? You know, where is the cost structure gonna be competitive?
I think also, access to low cost, low carbon hydrogen is not just important for our customers, but also to our operations. Of course, we wanna have our operations with low emissions as well. These are all factors that we're considering. 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, in all three markets, will enable us to have a, I think, a very clear competitive assessment by the end of the year.
Makes sense. Switching gears a bit, you know, I'm just thinking about the Solaris order you just announced. You mentioned the potential for more bus orders in the next 12 months, then maybe we can throw in, you know, the previous Siemens and Quantron orders. You know, with these larger batches of orders that you've seemed to procure, do you think we'll start to observe some scale efficiencies play out in the margin over the next couple quarters? If so, you know, how would you characterize it in terms of magnitude?
Maybe just a comment on Solaris, and then secondly, on the scale efficiencies and the impact on gross margin. Just as a reminder for, for listeners, I mean, Solaris is a leading bus OEM. They're based in Poland. They've been a long-standing customer with Ballard. They've been actively promoting both the, our Urbino 12 meter and articulated 18 meter low-floor inner city 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.
Those buses, you know, most of them will have our 70 kilowatt engines on the 12 meter buses, but 5 of them are articulated and will have our 100 kilowatt engines. Very important customer and have a large activity level right now across Europe. 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. I think this is critically important. As Europe and the US 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. Critically important.
I do think, though, the orders we're talking about here, for Solaris, and you, you, you rightly mentioned Quantron and Siemens, other great platform wins as well. Those are still, relatively speaking, modest volumes. They're not at the level yet where you get the major break, volume breaks that will impact gross margin, the way we're looking for. Of course, they'll help. It'll be incremental, but not, 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.
Yeah. 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 up 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, it indicates scaling in the future. I think you're bang on. You know, Ford Trucks, it's, 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, 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, tractor truck they have. And after a competitive process, selected Ballard to integrate their fuel-- our fuel cell engine. So we've got 2 120 kW FCmove-XD engine, so 240 kW in total.
It's part of a very important program in Europe, the ZEFES 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 Ford 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, and in the products that we're gonna be offering. You know, this is another example, as was pointed out by Aaron a minute ago, of, of, just work that we're doing to secure platform wins. 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.
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, "You know, look, I'm looking to source green hydrogen to make sustainable aviation fuel." I'm trying to understand, do you see this 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 cell because now I have a much lower carbon intensity, green hydrogen, which I can source cheaper than I could in the past?
Yeah. I, I've been saying this for a while. I think green hydrogen supply is gonna surprise to the upside. There is just enormous activity going on globally, not just our, our three key markets of North America, Europe, and in China, that, that, you know, when you start meeting the companies that are actually working on green hydrogen development programs, you know, 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, I, I feel like that number could be closer to 250 gigawatts based on the level of activity and engagement we're seeing in, in the key markets.
It's very exciting. I do think that green hydrogen will be used initially to effectively decarbonize existing gray hydrogen applications. Industrial applications, traditional markets for hydrogen, which is about a 90 million ton existing market. Also, I think you're gonna see a number of the mobility applications and stationary power applications that Ballard are focused on, really getting unlocked with this access to low carbon, low cost hydrogen. 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. If you think about the customers we have, end users we have in our markets, bus, truck, rail, and marine, their number one GHG emission is fuel for their transport applications.
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 Financial. Please go ahead.
As you look at 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. 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 Ballard?
Yeah, great question, Rupert. I, I think we, 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. In my mind, it's not a question of if we have MEA production in China, it's a question of when and sequencing. We will, you know, like most companies in kind of a deglobalized world, look at this local for local strategy, make sure we have the right assets in country, in region, to be successful.
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. 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 investment's made outside China, the understanding is you'll be importing MEAs from outside China to, to meet your production needs and until the production is there. Is that, is that fair?
Exactly, yeah. The challenge, just to be open and transparent, the challenge with that model is that we are expecting to see import duties, and so that could stress gross margins with that variable, for MEA exporting to that market. We fully expect to have, you know, MEA production in China, when the market is at scale.
Great. I'll leave it there. Thank you.
Yeah. Thank you. Great questions.
The next question comes from Robert Brown with Lake Street Capital Markets. Please go ahead.
Good morning.
Morning, Rob.
Could you sort of 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 ramps?
Yeah, I, I think this is gonna be a bright spot over the next few years, Rob, particularly as we get, you know, this access to low cost, low carbon hydrogen coming online. We're seeing a lot of activity, not just in California anymore, but across the U.S., with cities now looking at, you know, over 30, over 50, over 100 buses in some cases. I think it's gonna be very exciting, over the next 12 months-24 months as some of these cities move from, tendering activity to, actual procurement. I think we're very well positioned in the U.S. market. We have very high market share today. We expect that to continue.
You know, our, our key partner in the North American market is New Flyer, and they have about, you know, two-thirds market share for city buses and new city transit buses in North America. They have both a 40-foot and 60-foot articulated bus validated with Altoona testing with Ballard engines inside. 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 12-24 months at scale for U.S.
Okay, thank you. And then, and then to the mine truck market, I think you've got an initial strong order that, 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 are those sort of a next year item, or does that play out over a number of years?
Yeah, I, I think, we, we should probably think about next orders coming in 2024. You know, 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. This is a, a very good relationship we have, you know, through the value chain effectively, and we think feel we're very well positioned. They have a large portfolio of ultra-class trucks, so looking decarbonize through 2030.
What's important from a testing perspective is the first truck, the famous Truck 74, completed 1 year of testing, a couple of months ago, and very, very good performance. You've got to think about, you know, the weight and grades, sand, et cetera, a very challenging environment, and very good performance. We're very excited on this relationship we have, on this opportunity set, and we feel we're very well positioned.
Great. Thank you. I'll turn it over.
The next question comes from Greg Wasikowski with Weber Research & Advisory. Please go ahead.
Yeah. Hey, Randy, good morning. Thanks for taking the question. I just wanted to... apologies, I'm a little behind in 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, I don't know, 12 months-18 months or 2 years or so. Then also with that, any CapEx that you guys have already dedicated to that facility or, you know, what the timing would be on that, just so we know, you can quantify a little bit, if the reevaluation were to drag on or, or anything like that.
Yeah, yeah, 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, in terms of the complexity. The way to think about it is you're kind of in low single digits now, kind of 3%-5% duties, depending on a few variables. But that could get as high as 12%-15%, you know, by 2027, 2028 timeframe. So that's an area that we continue to work with our legal counsel on, on validating what the expectations are in the outer years. So I think that addresses that question. The second question-
You want me?
Yeah.
Just on the CapEx and how much we've spent on, on the project. About $4 million this year. Most of that is for manufacturing equipment, which we know, you know, is on order, hasn't been delivered, obviously, you know, which we'll look to, you know, where we direct that equipment, or most of that equipment at, at the appropriate time. Of the 130 announced, only about, only about $4 million or so has been, has been spent.
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. We're, we're deferring that piece until completion of this comparative analysis. The long lead 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, that's helpful. Thanks, guys. Next one, just kind of adding on to your list of criteria for looking at other regions. Is there any aspect to kind of higher competition and, you know, Ballard essentially wanting to, you know, elbow out some space, maybe being competition playing a higher role than it would have maybe five years ago or so? Is there any sort of like, speed to market? Are you guys wanting to, you know, 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, a lower factor, to be honest with you. I think the elbow and load and land grab might be for available support for manufacturing facilities as opposed to customers. There, there is competition for limited funds where, you know, for example, the U.S. DOE has funds available for companies that are looking to localize in the hydrogen fuel cell value chain. Similarly, a similar type of pools of capital available in Europe. From that perspective, that's true. Our, our approach has always been to be, you know, first to market, and we feel we, we are pushing that forward regardless of what the competitors are, are angling for.
Okay, great. Thanks, Randy. I'll turn it over.
Thank you.
The next question comes from MacMurray 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 in the 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?
Yeah, great, great question, Mac. What we're looking at for production facilities in the U.S. and in Europe, is we're assessing which parts of the value chain should be localized and, and where is there support for it. You have different support levels for MEAs, for bipolar plates, stack assembly, module assembly. 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, on that scope in, in market. You know, with the project that we're working on, Project Forge, it's designed to have lower cost bipolar plates. This is a significant part of our plan, current plan, as we're developing our proposal for the U.S. market.
The U.S. opportunity could be MEAs, bipolar plates, stack assembly, module assembly.
Right. Right. Okay. Then, my second question is around the Ford Trucks initiative or partnership. 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? Do you expect over time that your component will converge to a common module that you'll be able to really ship to everybody? I'm just trying to get an idea of what they might be doing the same or differently.
Yeah. Great question, Mac, and let me just back up for a minute and just remind everyone, we, we have this 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, their existing, platforms with fuel cells, inside, or, or develop new platforms with fuel cell inside. The second stream, is kind of 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. 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. 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. We see this as, you know, longer term, the volume of 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?
Yeah, I think it works two ways, actually. I think you could see some upfitters, you know, piggybacking on what the larger truck OEMs are doing for niche specialized markets. Then you could see also some of the large OEMs piggybacking on some of the learnings from the upfitters, some of their integration approaches. I do think that long- term, you know, post 2035, 2040, the major truck OEMs that have volume in the particularly the long-haul truck market, I think will be very well positioned. In the markets where you have smaller specialty trucks, I think the upfitters will compete very effectively in those markets. For example, the refuse truck market, I would characterize as a specialty truck market.
Wisdom is very well positioned, you know, to enjoy success in that market based on their work, in Australia.
Okay, great. Thanks, Randy.
Yep, thank you.
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 that getting guidance is gonna 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, bus, rail, marine, truck, stationary, in terms of their willingness to go forward with more serious programs and contracts ahead of IRA guidance?
Yeah, I, I would say, the market is certainly waiting to see what the guidance effectively will how that result will play out. I, 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, in passenger, commuter rail, as well as in freight locomotives. We recently announced, obviously, our, 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. I would say less dialogue in the U.S. on the marine space....
On stationary power, you know, these data centers, this is, I believe, the growth in data centers is gonna be exponential, continue to be exponential, particularly with, you know, generative AI, and the data requirements there. This is gonna 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, we're focused on as well. In the very near term, yes, I would say all markets are certainly looking to see what the treasury guidance is gonna 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. Maybe just to follow on to focus in on what you mentioned with the CPKC 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.
Yeah. Rail's been really a pleasant surprise over the last number of years with the progress we're making there. I, I do wanna profile CPKC because it's, it's just a great, great company. You know, over the past two years, they've taken the 20 fuel cell engines from Ballard, which is 4 MW, and they've integrated those into their hydrogen locomotive program. They've been field testing over the last year and a half or so, line haul, locomotive, shunter, and switcher. This is another 3.6 MW, 18 fuel cell engines they've ordered. What's also interesting, you kind of look at CPKC's disclosure records on their hydrogen locomotive program.
I mean, they, 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 Teck Resources, where effectively they're bringing these fuel cell locomotives to support steelmaking coal supply chain. In their Capital Markets Day in June, they really profiled this as a key part of their strategy long term to decarbonize, diesel fuel. It's a, 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 this space right now. To me, a great opportunity there.
We are seeing, opportunities for larger orders, in the commuter rail market, in the US market, and, and hopefully more on that to come in, in the next 12 months.
Really interesting. Thanks for taking my questions.
Yeah. Thanks, Jordan.
The next question comes from Brett Castelli with Morningstar. Please go ahead.
Hi, thank you. I wanted to ask about, there's been some talk of internal combustion engines, running on hydrogen, say, in the truck market. I just wanted to get your thoughts, sort of how you see that as a potential competitor over the medium and long term. Thank you.
Yeah, I, I think we're gonna see, you know, a portfolio of different solutions. Obviously, we're gonna see battery electric, we're gonna see fuel cell electric, we're gonna 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. I do think there's opportunity for it, but I haven't seen it really take major traction. If you, you know, just look as, as the bus market, which is the most mature market of all of our markets, there are zero hydrogen internal combustion engine buses currently operating. You know, closing in probably within 2 years, I would say over 10,000 fuel cell buses.
Thanks, Randy. That's helpful context. Maybe my other, my other question was just on data centers and just obviously that's, that's a potential long, large, long-term market for fuel cells. What should we expect sort of over the next 12 months- 18 months in terms of activity in that market?
Yeah, I, I think this is a, a period over the next 12 months- 18 months for a lot of learning, not, not just for, for Ballard, but for partners like, like Caterpillar and Microsoft. I think it's a market that the fuel cell value proposition needs to be validated. Once that value proposition is validated, we can move to larger deployment. That market, in my mind, is still very much in the development and now, starting in the demonstration phase. I think it'll be a number of years before we see kind of deployments at, at a high level.
This is a market that we, we feel very passionate about because it is a large, attractive, addressable market with high growth, and we think it's a market that fuel cells will have a value proposition, and we need to validate that with the customers over the next 12 months- 24 months.
Thanks, Randy.
Yeah, thank you.
The next question comes from Craig Shere with Tuohy Brothers . Please, please go ahead.
Hi. Actually, my question's 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.
Good morning, and thanks for taking the questions. Just a few housekeeping ones for me. You know, you, you, displayed a nice, sequential improvement in gross margins, from, you know, -30% to -20%. It sounds like second half revenues are gonna be, you know, higher than first half. So, you know, can you just maybe give us some commentary on how you think about gross margins into the second half of the year? Then I have a follow-up question.
Sure. Yeah, it's, it's Paul here. Yeah, we, we said in Q1 that we expected that to be the low point in our, in our gross margin percentage, and so we're, we're seeing higher gross margins, still negative in, in Q2. But what's interesting about that is when you, when you look underneath and you look at the contribution margin, sort of the pricing and, and direct costs, we see, you know, good strength there and, and improvement of where we were even last year. Some of that's due to the product mix, but also, you know, our costs of our products coming down as well. 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, you know, taking an obsolescence charge on those. 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-$2 million in provisions, I would estimate in the second half. You know, anticipate growing, growing revenues and expanding margins in Q3 and Q4 as well.
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, in the Capital Markets Day, we, we said we expect to get about breakeven gross margin at some point in 2024. Maybe not for the full year, but in some quarter in 2024, but, you know, for 2025 and beyond.
Got it. That's, that's, that's helpful color. Thank you. And then, just my... for my second question, you know, there's a $60 million delta between the total backlog and the 12-month backlog. You know, can you give us a sense of how far the, you know, the backlog extends, you know, beyond the 12 months? You know, is that, does that $60 million represent, you know, backlog through 2025, 2026? Just trying to get a sense of backlog duration.
Yeah. The bulk of it would be in 2025, with some residual in 2026.
Okay, helpful. Thank you. That's it for me.
Yep.
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 blessed day.