Ballard Power Systems, Inc.'s (BLDP) CEO Randy MacEwen on Q4 2018 Results - Earnings Call Transcript

About: Ballard Power Systems Inc. (BLDP)
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Earning Call Audio

Ballard Power Systems, Inc. (NASDAQ:BLDP) Q4 2018 Earnings Conference Call March 7, 2019 11:00 AM ET

Company Participants

Tony Guglielmin - Chief Financial Officer

Randy MacEwen - President & Chief Executive Officer

Conference Call Participants

Carter Driscoll - B. Riley FBR

Rob Brown - Lake Street Capital Markets

Christopher Souther - Cowen and Company

Amit Dayal - H.C. Wainwright

Craig Irwin - Roth Capital Partners


Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Fourth Quarter and Full Year 2018 Results and 2019 Outlook Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Tony Guglielmin, Chief Financial Officer. Please go ahead.

Tony Guglielmin

Thank you, and good morning, everybody. Welcome to Ballard's fourth quarter and full year 2018 financial and operating results. Joining me on the call today is Randy MacEwen, Ballard's President and CEO.

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 a complete disclaimer and related information.

So on today's call, Randy is going to provide his perspective on the state of the industry and Ballard's positioning within it. I will then review Q4 and full year 2018 financials following, which we will open the call for Q&A. And just a brief note that Ballard will be attending the 31st Annual ROTH Conference in Dana Point California on March – on Monday, March 18, where we will meet with investors to discuss our strategic direction and operational highlights.

I'll now turn the call over to Randy.

Randy MacEwen

Thanks, Tony, and welcome everyone to today's conference call. We start 2018 with high conviction on the future opportunities for Ballard and the creation of long-term shareholder value. There is mounting evidence that the shift to zero-emission transportation is now underway and indeed accelerating. There is also mounting evidence that fuel cell electric vehicles or FCEVs will play an integral role.

At Ballard, we're positioned at the center of this transition with highly disruptive fuel cell technology. 2018 was an important year for Ballard and for the entire hydrogen and fuel cell industry. As commented by E4tech in its 2018 report entitled Fuel Cell Industry Review, a lot of ground work was laid, serious players entered and money came into the sector.

Megatrends that I have discussed before specifically climate change, air quality and electrification are global and converging. But I'd like to highlight a few important industry developments during 2018. Governments across the globe continue to prioritize the de-carbonization of transportation and energy. A number of fuel cell players successfully raised additional equity financing through strategic partnerships including major strategic equity investments by Weichai Power and Broad-Ocean in Ballard and Air Liquide's investment in hydrogenics.

Bloom Energy completed its long anticipated IPO. And automotive OEMs in Tier 1 suppliers such as Audi and Hyundai, Weichai, Bosch, Cummins, Michelin and others took important steps to increase their investment in exposure in the fuel cell industry. In aggregate, industry developments in 2018 paint a clear picture.

Transportation is undergoing fundamental change and major players now view FCEVs as a key part of the long-term solution. With this backdrop, Ballard achieved significant strategic progress during 2018. We advanced our stack and module products. We signed our landmark strategic collaboration with Weichai Power, the diesel engine giant who is now looking at zero-emission powertrains in the large China market. We deepened our important relationships with Audi as the HyMotion program was extended into 2022.

For full year 2018, Ballard generated $96.6 million in revenue exceeding our revised outlook of $90 million to $95 million. We generated 31% gross margin and negative $13.5 million in adjusted EBITDA. Importantly, we ended the year with a very strong cash balance of $192.2 million and no debt.

What I like to do this morning is briefly outline what we see as last year's most significant developments underpinning the pending market disruption. And in the process frame the rapidly evolving hydrogen and fuel cell marketplace.

So during 2018, I believe there were five specific developments that are particularly noteworthy. The five developments are clear examples of how the temperature is being turned up, figuratively, on the climate change challenge. Each has positive long-term consequences with a global approach toward energy production, protection of the environment and by extension for the future of hydrogen fuel cell industry.

The first of these important 2018 developments in my view is an acceleration of the electrification theme, as local governments and cities in Europe, China and North America provide leadership on climate change by announcing their intention to limit or in some cases outright ban diesel vehicle usage within specific time frame. This has hastened the growing acceptance of the need for electric power trains, whether based on battery electric, fuel cell electric, or hybrid configurations.

We also see that significant numbers of operators of mass transit and trucking fleets including Transport for London, Budweiser, IKEA, FedEx, Pepsi and UPS are becoming increasingly interested in electric-powered vehicles. As a result many bus, truck and train OEMs as well as manufacturers of diesel engines are giving serious consideration for electrification strategies. Along with acceleration of the electrification theme 2018 also witnessed a second important development, the widespread recognition of the value proposition of FCEVs in heavy and medium duty motive.

Heavy and medium duty motive vehicles provide a disproportionate amount of GHG and other emissions including bus, truck, train and marine applications. As an example, it's estimated that 74% of heavy trucks on the road today do not meet existing NOx Emission Standards. Moreover, emissions from heavy duty vehicles grew by 35% in the 20-year period from 1990 to 2010. And with one billion more people living in cities by 2030 and with expected growth in e-commerce freight volumes are expected to grow 40% by 2050, making the emissions from this segment even more severe.

These are good examples of why heavy duty buses and trucks are prime candidates for fuel cell technology. Indeed fuel cells offer a strong value proposition for all vehicles requiring zero emissions, long daily range, rapid refueling, heavy payload and route flexibility. That includes many use cases in the heavy duty bus, truck, train and marine segments all very large and attractive markets.

I've spoken before about the progress in the bus and commercial truck markets, and I'll turn to it again in a moment. But in the past year, we've also seen real signs of progress in Heavy Duty Motive applications where the FCEV value proposition is a strong fit including Ballard's MOU with ABB under which we're collaborating on megawatt scale fuel cell systems initially for cruise ship segment; our three-year program with Siemens to integrate a custom 200-kilowatt module to power the Mireo commuter train; a recent announcement of a contract with Porterbrook to power the U.K.'s HydroFLEX train; and our ongoing work with CRRC on trams in China.

With the growing recognition of the fuel cell value proposition, a third development in 2018 was a significant increase in deployments and announcements for the heavy and medium duty motive applications.

Looking at fuel cell electric buses or FCEBs there are about 50 in service today in Europe and the JIVE programs contemplate a total of 294 additional FCEBs that will be deployed. These deployments will involve more than 20 cities and regions with most of the deployments expected to be completed over the next several years.

Last year we announced an order for Ballard modules to power 40 Van Hool buses for deployment in Germany under the JIVE program. We have shipped 15 of these to-date. We expect additional developments this year in Europe.

I should mention too that in 2018 several of the TFL buses operating in London with older generation Ballard modules and stacks surpassed the 30,000-hour operating threshold, a major performance milestone for our technology and the industry. Furthermore, earlier this year we also announced that 10 Ballard powered buses operating in Aberdeen, Scotland had collectively reached the one million mile mark.

In the U.S. about 40 FCEBs are expected to be operating in service by the end of 2019. And ElDorado National's 40-foot FCEB and New Flyer's 40-foot and 60-foot FCEBs have successfully passed rigorous testing at the Altoona, Pennsylvania facility under an FTA program. As a result these buses are now available for commercial sale in the U.S. with FTA funding support.

Finally, in China, we estimate there are more than 200 fuel cell buses in operation today. As we discussed in our Q3 earnings call not surprisingly the fuel cell industry has experienced some early teething pains in that market, including the relatively slow pace of hydrogen fueling station rollout, evolving government subsidy rules and delays in FCEV certifications.

That said, there has been increased volumes of FCEB announcements that suggest we can expect greater deployments in China going forward. Announcements have included Weichai's commitment to deliver 2,000 fuel cell electric buses in Shandong province; Shanghai's goal of having 30% of its electric fleet powered by fuel cells; and the deployment of FCEBs for the 2022 Winter Olympics.

Looking at fuel cell power commercial trucks, a market considerably larger than the bus market, there were a number of promising announcements in 2018, all pointing to growing traction and deployment albeit still very early. Nikola Motors reports that it has received significant preorders for its hydrogen fuel cell semi-trucks including up to 800 long haul trucks for Anheuser-Busch.

Hyundai announced an agreement to supply 1,000 18 tonne fuel cell trucks to Switzerland by 2024. And at Ballard more than 300 to 500 delivery trucks that are licensed in Shanghai using our stacks are now in operation.

We progress to our trial with Kenworth in the Long Beach in LA Ports. We also contracted with CALSTART to power a UPS delivery vans in a California trial and we're powering capacity yard truck at a trial in the Port of LA. These are all early stage activities, but important work in California across a range of truck classes.

Today Ballard technology is currently powering over 300 commercial trucks and close to 100 buses. The buses alone have accumulated an industry-leading 14.1 million kilometers of on-road experience with 560,000 hours of operating time. In addition to heavy and medium duty motive FCEVs, it's estimated there are as many as 10,000 light duty passenger cars in operation globally today primarily manufactured by Toyota, Hyundai and Honda.

Interestingly, KPMG's recent report entitled Global Automotive Executive Survey 2019 found that high-level auto industry insiders anticipate FCEV propulsion systems to have 23% market share by 2040. I have already referenced our important contract extension with Audi during 2018 in relation to its fuel cell passenger car program. Earlier this week, the Chair of Audi's Board of Management, Bram Schot announced that Audi would be increasing its investment in fuel cell technology. He noted that the fuel cell electric cars offer a more sustainable option for the long-term.

In addition, Hyundai made a very exciting announcement last year, rolling out its FCEV Vision 2030. Hyundai plans to invest $6.7 billion in fuel cell technology by 2030. As part of this bold vision, Hyundai projects that 6.5 million fuel cells will be used globally by the year 2030.

While early stage FCEV deployments are primarily focused on fleets and other applications that can take advantage of centralized refueling, mass market applications will require more ubiquitous availability of hydrogen.

In this regard, a fourth key development in 2018 was the growth of the Hydrogen Council. Now, as a reminder the Hydrogen Council was formed in Davos in early 2017 by a group of 16 global players in the energy, transportation, and industrial sectors. It has a view of supporting development and commercialization of the hydrogen and fuel cell sectors.

In the last two years, the Hydrogen Council has comprised now 53-member companies all with CEO-level commitment. These companies provide a total of 3.8 million jobs and generate $1.8 trillion of revenue. These are impressive companies, heavyweights in their respective sectors, and they have commitment and purpose in their involvement with the Hydrogen Council.

So, over the past year, 14 new members joined the Hydrogen Council including Weichai, Cummins, Air Products, Mitsubishi, and Sumitomo. In addition, Mr. Eui-sun Chung, Executive Vice Chairman of Hyundai recently announced CEO of Hyundai has become Co-Chair of Hydrogen Council.

I believe the ecosystem collaboration that's starting to happen driven in part by the Hydrogen Council promises to have a significant and positive impact on their future availability of hydrogen fueling infrastructure in support of serious deployment of fuel cell vehicles.

And the fifth key 2018 development that I want to highlight is initial stages of fuel cell commercialization in China. There continues to be strong support for deployment of new energy vehicles in China.

As Mr. Wan Gang, Chairman of the China Association for Science and Technology recently stated the industry should focus on fuel cells in a timely manner. This is a meaningful statement from the former Minister of Science and Technology. We estimate there are about 1500 fuel cell buses and trucks with valid permits in China today.

Furthermore, 75 different FCEV models or platforms are listed in the MIIT promotion catalog. There are 21 hydrogen fueling stations in operation with another 41 currently under construction.

Furthermore, in 2018, the Hydrogen Council convened a historic meeting in Beijing with 400 key participants. And, of course, the entry by Weichai Power in the fuel cell industry with its major equity investment in Ballard and its commitment to a joint venture with Ballard in China including the manufacturer of next-generation fuel cell products for the China market are strong indicators of their conviction of these opportunities.

As we look to the future, at Ballard, we've developed our own 2030 FCEV Vision, which includes the following expectations. Further legislative restrictions on internal combustion engines, particularly in city centers; improved reliability and significant cost reduction of fuel cell engines and vehicles; significant global volumes of FCEVs in operation, in line with the Hydrogen Council's perspective, which includes 500,000 commercial trucks, 50,000 buses, thousands of trains, one in 12 new passenger cars in key markets for a total of about 10 million to 15 million; scaled deployment of next-generation purpose-built fuel cell powered material handling equipment; and early commercialization of certain off-highway, marine, aerospace, and drone applications.

In the near-term, we'll continue to invest in talent, competencies, innovation, IP, technology, product improvement, cost reduction, advanced manufacturing and customer experience. We want to ensure that our company enjoys high growth and a high market share in the coming disruption.

Now as you'll hear from Tony, our 2019 outlook is for relatively flat top line coupled with increased planned investment. And here I want to emphasize an important point. We're building the company that we believe will enjoy high market share in large and attractive long-term addressable markets. We expect the strategic progress we've made in 2018 and the strategic progress and investments we plan for 2019 to strongly position our business.

So, while we continue to sprint in a long distance race we invite you to measure our performance over the next 20 -- 12 to 24 months based on technology performance improvements, cost reductions, partnerships market, share new contracts, win and growth in our prospects.

For 2019, we plan to launch and secure initial orders of our next-generation stack which we call LCS. We expect LCS to have industry-leading performance for medium and heavy duty motive applications including cost, durability, freeze-start capability, and with approximately 33% greater power density by weight improved tolerances to low humidity as well as higher operating temperature.

The LCS stack will be put into our next-generation power modules for bus and other transport applications which we plan to introduce this year called FC Move. We expect FC Move to set a new standard in the industry for PEM fuel cell engines for medium and heavy duty motive applications. This package will deliver ultrahigh durability, robust restart capabilities, a 40% cost reduction, a 30% weight reduction, and a 50% reduction in the number of components. We also expect to strengthen the existing partnerships and add new ones in 2019 including in key geographic markets and key applications.

Importantly in 2019 we expect to build out our joint venture with Weichai including significant progress on the construction of our JV production facility with stack and module operations. We also expect major customer wins and movement in the order book as we advance to the next level of orders in key markets.

And before I pass the call back to Tony I want to express our appreciation for the extraordinary efforts and progress of the Ballard team last year and highlight some exciting developments in our organization. At the board level, we had Mr. Jiang Kui or Kevin Jiang and Mr. Sun Shaojun or Sherman Sun join our Board of Directors in January. These two appointees are the Weichai nominees to our board.

Kevin and Sherman both have enjoyed distinguished careers in the Weichai organization for about 35 years each in leadership roles related to general management, engineering and manufacturing and with deep experience in the heavy and medium duty motive power segments in China.

At the Ballard executive team level there are three promotions I also want to highlight in each case a long-serving members of our team. Dr. Kevin Colbow was recently promoted to Chief Technology Officer. Kevin will celebrate his 25th year with Ballard this year and has spent the past three years as our Vice President Technology and Product Development. Jyoti Sidhu was recently promoted to Vice President, Operations following the retirement of David Whyte in that role.

Jyoti has been with Ballard for 19 years, previously serving in management roles in Quality, EH&S and Production. And Jan Laishley was recently promoted to Vice President, Human Resources. Jan has been in the Ballard HR organization for 16 years including the past two years in the leadership role as Director HR.

With these promotions, two of our six executive team members are women adding more diversity to our executive team. We also have two women directors serving on our board. This is something we're passionate about. So as we look to 2019 and beyond, we have confidence, high confidence in our business plan as we move to benefit from the coming disruption.

And with that, I'll turn the call back to Tony to briefly review the financials.

Tony Guglielmin

Thanks, Randy. The top line revenue in Q4 was $28.5 million, down 29% year-over-year and on a full year basis was $96.6 million, down 20% from 2017. For the full-year, Power Products revenue declined 27% and Technology Solutions revenue declined 9% and I'll provide a little bit more detail on both.

Within Power Products, Heavy Duty Motive was down 38% to $39.5 million. Now this was due to a year-over-year decline in product shipments to customers principally in China, partially offset by increases in Portable Power/UAV, Material Handling as well as Backup Power. Now the decline in Technology Solutions to $39.6 million was due primarily to a year-over-year reduction in technology transfer revenue from China, partially offset by increased revenue from the Audi program and other important Technology Solutions programs.

Gross margin was 25% for the quarter and 31% for the full year declines of six points and three points respectively. These declines were a result of the lower revenue contribution from both the higher margin Heavy Duty Motive products and Technology Solutions compared to the prior year.

Cash operating costs in Q4 were flat at $11.2 million and for the full year increased 10% or $3.9 million to $43 million. This was due primarily to higher program development expenses including ongoing work on our next-generation LCS stack and LCS-based module both of which we expect to launch this year.

Adjusted EBITDA in Q4 was negative $5.2 million, a decline of $7.3 million compared to the same quarter of the prior year and negative $13.5 million for the full-year, a decline of $16.8 million.

Net loss in Q4 was negative $11.5 million compared to negative $2.9 million in Q4 last year and for the full year negative $27.3 million, a decline of $19.3 million. Earnings per share was negative $0.06 in Q4 compared to negative $0.02 in 2017 and for the full year was negative $0.15 compared to negative $0.05.

Cash provided by operating activities was $0.2 million in Q4 consisting of cash operating losses of $4.4 million and working capital inflows of $4.6 million. For the full-year, cash used in operating activities was $31.7 million consisting of cash operating losses of $14.4 million and working capital outflows of $17.3 million.

The working capital outflows reflected an increase in inventory balances during the year largely to support Heavy Duty Motive shipments in 2019 and higher accounts receivables resulting from the timing of revenue and related customer collections. In terms of liquidity, we ended 2018 with cash reserves of $192.2 million. This included the net proceeds of $183.8 million received from the Weichai and Broad-Ocean strategic investments.

Finally, we ended 2018 with a total order backlog of $194.8 million. This was an increase of $72.1 million over the order backlog at the end of Q3, primarily the result of the technology transfer contract signed with Weichai in Q4. At the end of 2018, our 12-month order book for deliveries in 2019 stood at $69 million together with a robust pipeline of qualified commercial sales opportunities.

In terms of our outlook for 2019 as Randy mentioned, we expect revenue to be relatively flat compared to 2018. We also plan to increase investment this year including additional capital contributions to the Weichai-Ballard JV of approximately $21 million. This includes $14.5 million contributed in February. We also expect to record equity losses of approximately $15 million to $20 million in 2019 associated with the Weichai JV operation.

So with that, let me turn the call back over to the operator for questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Carter Driscoll of B Riley FBR.

Carter Driscoll

Good morning, Randy, Tony. So maybe we could just talk about the puts and takes as you see the Weichai JV unfold. You've talked obviously about making investment. You just -- Tony, you just gave some guidelines on what the JV equity impact is going to be for this year. Maybe talk about ramp up in developing the facility? Maybe a time line for beginning to ship the new heavy duty stack and module?

And then maybe, regionally, where do you expect to start to see some of these vehicle deploying. I'm assuming it'd be, if anything, late 2019 or probably more likely 2020 before you see material shipments for the JV just kind of probably understand the trajectory over the next four quarters plus?

Randy MacEwen

Yes. So, Carter, good morning. I'll make a few comments and Tony can supplement. First of all, this is a very significant investment strategically for Weichai in China that has a lot of visibility. So there are pretty significant resources that they're putting to work on this.

In terms of the build out of the joint venture, construction of the facility is already underway and expect the facility as well as equipment to be substantially in place by the end of this year with the production starting early next year on the stack front.

We do expect to see module assembly occurring in 2019 at the JV, but it's a very sizable operation. And in terms of the production output and square meters and all that, we'll have a formal announcement and unveiling of the facility with all the details at that time.

In terms of production or supply of materials that you commented or questioned about, this year there will be some materials being supplied from Vancouver. And similarly to past experiences in China, we'll then see a migration to more localization throughout the year and into next year.

So we'd expect to see MEA supply starting to take bite in 2020 as the stack production starts. And in terms of the time line for the actual launch of the stacks and modules, we do expect orders and deliveries of our new LCS and HD V8 or FCmove in China and in Europe in 2019.

Carter Driscoll

Okay. All right. So for Weichai, it's -- the balance of 2019 is largely ramping up for a big push into 2020. Is that a fair characterization?

Randy MacEwen

Yes. And of course there are 2,000 fuel cell buses that are on the table here in the first couple of years that we're working against. There'll be a fairly modest number that'll go out this year associated with that and that will increase in 2020.

Carter Driscoll

Just a reminder where the facility is located?

Randy MacEwen

Yes. So the facility is located in Weifang, Shandong province where Weichai is located.

Carter Driscoll

Okay. Could you -- maybe just shifting gears a little bit. Could you talk about any update to the Synergy JV? I know that you backed out that from expectations into this year. Is there any potential repurpose or restart shipping MEAs into that JV in 2019?

Randy MacEwen

So there are no material developments there to comment on at this time. The Synergy-Ballard JV, we had a recent meeting with Synergy and what I can say is that, the outlook seemed a little bit more constructive than it was a few months ago. But I think the prudent thing to do and taking them out of the order book and backlog was the right thing at the time and there's no information we have to suggest that wasn't correct at the time.

So I think there's still a lot of work going on there to secure additional orders, move out some of the existing inventory they have, which, as that occurs, would potentially enable a restart for MEA supply.

But at this point we're not expecting that in the 2019 plan, so that would be upside if that came in. And they're also pursuing equity financing activities as well. So there's a lot going on there at Synergy, both on the commercial side as well as on the corporate side.

Carter Driscoll

Maybe just one more for me. Just talk about maybe some of the different geographies within Europe that you see potentially contributing? I know you've shipped partially against new orders in Germany. It sounds like U.K. was maybe developing a little bit more slowly in terms of formulating a purchase order. Can you talk about a couple of other geographies and give us an update regionally for the expectations in 2019 from the different drive programs?

Randy MacEwen

Yes. On that front, Carter, I apologize, I'd like to push that one to the end of Q1 if I could, because there will be developments in the coming months and I don't want to get ahead of some partner announcements on that. But the jurisdictions or the regions where you'd expect to see activity consistent with our prior messaging would -- no changes from that. Certainly, the U.K. cluster is kind of next on the table.

Carter Driscoll

Okay, okay. I'll take the rest offline. Thanks guys.

Randy MacEwen

Thanks very much.


Our next question comes from Rob Brown of Lake Street Capital Markets.

Randy MacEwen

Good morning, Rob.

Tony Guglielmin

Good morning, Rob.

Rob Brown

Just wondering if you could give a little further color on the China market. You said there was some additional activity in the station development area, as well as vehicle deployments, but maybe some end-market kind of development color would be great?

Randy MacEwen

Yes. In terms of end-market development, there are a number of cities that continue to look at fuel cells as a viable option compared to battery electric buses, particularly in some of the markets where grid-ability is an issue and cold weather conditions are an issue and where the grids are primarily fossil fuel-based. So there is a lot of intrigue now about looking at different solutions. But there are of course pacing items. Every time you look at a new deployment, you got to make sure your vehicles are certified and they've gone through the appropriate MIIT certifications. You have to ensure that you have the appropriate refueling infrastructure. And a lot of cities are going through for the first time understanding of codes and standards and setbacks and fueling dispenser and pressurized hydrogen gas.

So there is a lot of work going on in a number of jurisdictions. A couple that I'm particularly excited about is Shandong province of course where Weichai is based. And Shandong province has announced a hydrogen and fuel cell valley or community effectively. And we expect to see a lot of activity in three cities in Shandong province including Laoshan and Jinan and Weifang.

And I think when I look at the deployment in larger scale for fuel cell buses I believe Shandong province will lead the charge here over the next number of years. Of course Guangdong province has invested significantly in the hydrogen fuel cell space as well with a number of different fueling stations. Shenzhen is starting to see increased penetration. Foshan and Yunfu, obviously, have fueling station infrastructure and there's more to come including on the rail side not just on the bus side.

And then there are other markets as well Shanghai, Beijing and the usual markets that look at promotion of new energy vehicles. Wuhan is a final market. So I believe there'll be a number of new developments in 2019 that indicate adoption of fuel cell electric buses beyond one or two demonstrators to a little more scale in the demonstration fleets. But I would still characterize 2019 very much as a demonstration year.

Rob Brown

Okay great. Thank you. That was excellent review. And then in terms of the kind of the Weichai JV accounting you gave some numbers for 2019. But just sort of conceptually how will that accounting work? Is that starts to ramp just pretty quickly, what the profitability? I assume it’s non-cash, but just some color on how that JV accounting below the line works?

Tony Guglielmin

Sure thanks. It's Tony Rob. Yes, so we are picking up. I mentioned a number in my script. I said we're going to pick up something we expect something in the neighborhood of $15 million to $20 million of losses. What that reflects is our 49% share of the expected joint venture losses -- net income losses during 2019. And it is very much reflective of 2019 being a ramp-up year. So on the JV side of things, there's two significant items going on in the JV in 2019. One of course is the technology solutions program that Ballard -- for which Ballard is the customer of the JV. So there is -- recall it's a $90 million program over roughly three years. So the expenses that the JV is incurring on the technology solutions program that forms part of their P&L.

And the other one of course is the ramping up of the people. So they are very aggressively hiring and building the facility. So in the aggregate, we expect as I say something in the neighborhood of $15 million to $20 million of which is the 49% share. And that will follow through the P&L as a one line item as our minority interest gains and losses.

In terms of our funding requirements, we do have an obligation to fund capital over the term of the agreement. It's in our notes just to point a number out. We do have total capital contributions to make up approximately $64 million through 2019 and beyond. I mentioned the number of about $21 million of that will be made this year. We've already made $14 million of it, so there is another $7-odd million that will be made later in the year.

And fundamentally that capital contribution, that cash going in is fundamentally to fund our proportion of the losses. So we've funded a little bit as well in December. So I would say look for that. That's kind of how 2019 looks. And then as we drift into 2020, Randy talked earlier about we'll start generating revenue there. We will be shipping some product later this year we anticipate and into 2020 so that -- their business plan and their losses should start to reduce going into 2020 offset by revenue in the year. And again we'll pick up our 49% of any gains and losses going forward.

Rob Brown

Okay. And then just to clarify on the 40 unit share in order for the JIVE program and 15 you shipped, what's the thing -- should those all ship in 2019 rest of them?

Tony Guglielmin

Yes, yes, we would expect those to ship this year.

Rob Brown

Okay, great. Thank you. I’ll turn it over.

Randy MacEwen

Thanks Rob.


Our next question comes from Christopher Souther of Cowen and Company.

Christopher Souther

Thanks for taking my question. Just to kind of follow up on the Weichai. I was trying to get a sense of -- it seems like it's mostly going to be kind of Technology Solutions that kind of flow through your P&L in addition to the equity income losses. I was just trying to figure out like what percentage of your $69 million or like 12-month backlog is coming from Weichai?

Tony Guglielmin

Yes it's a good question. I don't have the number right in front of me. Let me grab it and I'll come back to that. But if I said around $20 million that would be a bit of a guess, but it's probably in that range. But let me -- if it's anything much different than that I'll -- we'll try to get that number in a minute.

Christopher Souther

Okay, got it. And then looking at -- just kind of shifting gears towards the Audi HyMotion projects, seems like there has been seen good progress there. I just want to get an idea of what steps you guys needed to kind of take -- to kind of get those to the next steps as far as the low volume vehicles that I believe you discussed as part of the extension? And then what are the additional steps from there to get to kind of a higher volume type vehicles?

Randy MacEwen

Right. So this is a confidential program that Audi has and they don't disclose a lot of details on their program, including launch time and numbers.

What I can tell you is that we've been at this now since 2013 initially. So it's been a long-term investment by Audi and a long-term collaboration with Audi. We do believe that their stack technology that we developed here at Ballard for Audi is industry leading. We believe that Audi's platform that they launch, which they've announced should be around the 2021 time frame 2021-2022 area that platform will be very attractive vehicle. It is a small series launch that they have described. They haven't given specifics on numbers nor have they provided publicly details on the subsequent volume launch after that.

So what I can say is that the announcement earlier this week by the Audi Chair was a very significant indicator of the importance and prioritization for fuel cells. And it looks to me like the messaging there was about higher confidence increased investment and acceleration on the fuel cell program. And we feel very blessed to be partnered with such a strong capable company that sees the vision.

Christopher Souther

Okay. That's helpful. And then just thinking about the Weichai JV, selling over the next two years or so 2,000 modules to Weichai who is going to build buses. I just want to figure out where Broad-Ocean fits into that picture? I know that they -- now they've made the additional equity investments there was a possibility of them also getting access to the liquid cooled stacks. So I wanted to figure out if there would be potential for incremental orders for next round of either stacks or modules coming through there?

Randy MacEwen

Yeah. So Broad-Ocean was very active in the fuel cell market in 2017 and 2018 and I talked about the number of vehicles in the marketplace in China today and Broad-Ocean is a very significant contributor to that. You'll see that again in 2020. So for them, fuel cells are highly strategic. They have a very tight relationship with Ballard not just the equity investment but also their -- use of our technology including stacks.

And so we expect to see Broad-Ocean to continue to progress in the fuel cell industry in 2020. We have discussed with Broad-Ocean potentially them joining as an equity investor the Weichai-Ballard joint venture, so those discussions continue. We expect those to conclude in the coming quarter or two. And we'll see whether or not they join the joint venture, which they are invited to do.

So they're just going through the due diligence process they'll make a decision. It's really about how they want to shape their strategy going forward and where they want to put their investments.

Christopher Souther

Perfect. Congrats on a progress. Thanks, guys.

Randy MacEwen

Thank you.

Tony Guglielmin

Hey, Chris, Tony here. Just wanted to confirm. That's about 20 -- pardon me about $22 million of backlog associated with the Weichai JV, which is the order of -- pardon me, that's the 2019 order of about $22 million and that's all related to the Technology Solutions program.

Christopher Souther

Okay, perfect. Thank you.


[Operator Instructions] Our next question comes from Amit Dayal of H.C. Wainwright.

Amit Dayal

Good morning, Randy and Tony.

Randy MacEwen

Good morning, Amit.

Amit Dayal

The background on the fuel cell space was very helpful. Thank you for that in your prepared remarks. Just going back to Weichai again, could you specify maybe some of the key milestones the JV hopes to accomplish this year? I know you've made the initial capital contribution that probably sets the stage for everything to start knocking through the roof, but what do you expect to specifically achieve this year? If you could outline that it would be very helpful. Thank you.

Randy MacEwen

Sure. So there are a number of JV I'll call it technical and operational milestones that we expect to see accomplished in 2019. The JV has been incorporated. Their staffing occurring, funding has occurred, facility is under construction there, very impressive facilities incidentally. I think when it's all done hopefully people will have an opportunity to come and visit because it's going to be exceptional in my opinion.

But in terms of actual what will the JV be doing operationally in 2019, we do expect to see module assembly start to occur. We do expect to see significant progress made against fleet assembly and significant progress made against stack assembly in 2019.

So those will be key milestones to look for. Of course that is preceded by technology transfer. And so as we look to do a technology transfer on the next-generation modules and the next-generation stack there is a number of milestones that will occur. They get reflected through the technology solutions payments throughout the year.

I think the other thing is that commercially Weichai is already very active in the marketplace. And the 2000 fuel cell buses are the initial launch of fuel cell buses. That will not be the end of that of course. And there is a lot of work going on to position much higher volumes sustained over a long period of time because the production capacity we're looking at for the JV is significant.

Those are the key in my opinion. The technology transfer, obviously, staffing and management decisions have been made already and -- so the stack assembly, module assembly, technology transfer, localization of some components, these are all things we expect to see happen. And we've had extraordinary transparency and collaboration between the Weichai and Ballard organizations.

Tony Guglielmin

Just to add just if I could Tony here just to add to the ramp up, it is quite extraordinary. So the work that's going on literally today is the construction of the facility. Obviously, having to invest in capital to acquire the assembly equipment, the test stands all of that is occurring. And as Randy said the expectation is that they will be ready in the second half of the year perhaps moving into late Q3 and Q4 to do preliminary assembly work. So it's happening at quite a remarkable pace, which is very much consistent with the level of our capital contribution that's taking place. Both us and Weichai are very much front-end loaded.

Randy MacEwen

And if you look Amit, at the complexity and the diversification and vertical integration within the Weichai organization, there are assets in that group that are -- they own a bus OEM. They own a key percentage of forklift OEMs. They have effectively control over a truck OEM. So, there's lots of opportunity as they start moving initially to, I'll call it, captive customer base for initial deployments and plans. But there are other markets that are highly interested in. We focused on the bus, commercial truck and forklift market. They have significant assets in the off-road market as well longer term that they are interested in exploring.

But this will be a significant year of investment. And this has high, high strategic visibility and importance at Weichai, including with Chairman Tan who personally is very involved in this.


Our next question comes from Craig Irwin of Roth Capital Partners.

Craig Irwin

Hi. Good morning and thanks for taking my questions.

Tony Guglielmin

Good morning.

Randy MacEwen

Good morning, Craig.

Craig Irwin

So, the first thing that really jumps out to me is Audi seems to be increasing their overall level of activity. Some pretty nice press out there. Almost $9 million in revenue this quarter, quite a lot higher than what we've seen looking backwards. Would you expect the tempo of activity at Audi to remain similar to what you saw in the fourth quarter? And maybe you can share with us what the backlog is from Audi or the 12-month backlog contribution is from Audi at this point?

Tony Guglielmin

Yeah. Sure, Craig. It's Tony here. So, yes, Q4 was a little bit higher than the run rate, but not much. So, we're looking for a pretty active year through 2019. So, I would expect that the total level of revenue will be something approaching $25 million to $30 million for the full year.

Craig Irwin

Okay. Excellent. Next thing I want to ask about is the gross margins. Can you maybe bridge for us sequentially what happened on the gross margin side? And when we look at 2019, are we looking more something consistent with sort of what you saw in the first nine months of 2018 and maybe over the last couple of years on average, or will we see something more consistent with what was delivered in the fourth quarter?

Tony Guglielmin

Yeah, so just to pick up on a couple of key issues that occurred later in the year that will impact us going into next year. A couple of things. Number one is the disposition of the Power Manager business, that was a high margin -- albeit, substantial amount of revenue was relatively high margin revenue. Of course, that isn't repeating this year. And the MEA sales to the Synergy JV were relatively high margin as well. So, going into 2019, we have a bit of a gap associated with those two items.

I would say as well that just looking at our product mix this year, we do have a reasonably large number or at least the mix is probably tilting a little bit to some lower margin business than we experienced in 2017 and in 2018. So, when you put all -- and then, of course, offset by the technology transfer with Weichai. So, I'd say, as you put all that back together this year, based on our outlook for relatively flat revenue, we would be looking for some compression in gross margin, Craig, to be honest. So, I think we'll likely dip down below the 30% for the full year. But we would expect that to start to pick up again as we move into the latter part of the year.

So, I would to be very honest, I think we'll look for some -- something that looks a bit more in the mid to high 20s would probably be a more reasonable estimate based on the lack of the Power Manager and MEA. And as Randy said earlier to the extent that Synergy does put some orders and that will be upside to both revenue and margin.

Randy MacEwen

Yeah -- and Craig, I'll just add to that. One of the things that we saw about 18 months ago was the fact that some of the bus sales were starting to be transacted at lower pricing and there needed to be price compression to the value chain. And that was a pretty significant catalyst for us obviously to continue on the next-generation module development program. And so that's why there was a heavy emphasis on cost reduction in the module program you know, 40% in that range for FC Move. And as that starts to see higher shipments in 2020 and 2021, even though selling prices will continue to compress as well, we expect to see some better contribution that we're seeing from HDV7 modules this year.

Tony Guglielmin

Yeah, that's a great point, Randy. I should have mentioned. Thanks for taking it up. As we talked about the LCS, Randy, we talked about that last year the introduction of the LCS stack and LCS module. We do anticipate starting to bring that product into the new -- into our existing product portfolio, but that will be taking place much -- towards the end of the year. So, we are being -- we are seeing some compression on our margins, because we're still shipping our current version, but we're being very aggressive on our selling prices. But as the LCS modules and the LCS stack get into our core portfolio which really we're talking about into 2020 with the significant cost reduction we're seeing in the LCS, we would expect to see some improvement in margins. That's what I was referring to earlier by going into 2020.

Randy MacEwen

Yeah, I mean, this is going to be a significant priority in 2019 and moving forward is continued cost reduction. And for the first time with Weichai in China, we start to see the volumes that can really help here and the supply chain strength that can really help here. So, we're pretty excited about the cost down related to design improvements. And when you're taking 50% components out into module, you'd expect to see pretty significant cost reduction. But we're also interested to see the opportunity that's going to come with the supply chain strength from Weichai, as well as the volume pickup as their orders start to bite.

Craig Irwin

Great. Thanks again for taking my questions.

Tony Guglielmin

Thanks, Craig.

Randy MacEwen

Thanks, Craig.


This concludes the question-and-answer session. I would like to turn the conference back over to Randy MacEwen, CEO, for any closing remarks.

Randy MacEwen

Thank you for joining us today. We look forward to speaking with you again in early May when we'll discuss first quarter 2019 results. Thanks again.


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