Ballard Power Systems Inc

TSX:BLDP

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q1 2019 Conference Call. [Operator Instructions]. I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead, sir.

[Guy McAree, Director of Marketing & Investor Relations]

Great, thanks very much and welcome everybody to Ballard's first quarter 2019 results conference call. With us today on the call are Randy MacEwen, our President and CEO, and Tony Guglielmin, our Chief Financial Officer.We're going to 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 the call today, Randy is going to provide an update on the execution of our corporate strategy. Tony is going to review our Q1 2019 financials and then we'll open the call for questions and answers.Just a brief note that Ballard is going to be meeting with investors to discuss strategic direction and operational highlights at several upcoming conferences: The Oppenheimer Emerging Growth Conference in New York City on May 14th, The 20th Annual B. Riley FBR Investor Conference in Los Angeles on May 22nd and 23rd, and the Cowen 47th Annual Technology, Media & Telecom Conference in New York on May the 30th. And I'll now turn the call over to Randy.

[R. Randall MacEwen, CEO, President & Director]

Thanks, Guy and welcome everyone to today's conference call. [ Q1 2019 ] results were consistent with our expectation for a softer start to the year. We delivered revenue of $16 million, gross margin of 14% and ending cash reserves of $165 million. With a 12-month order book of $76 million at March 31st bolstered by the $44 million deal with our Weichai-Ballard joint venture announced yesterday and further supported by our sales pipeline, we have a strong setup for the back half of 2019 and forecasted growth into 2020.There's an extraordinarily high level of activities, developments, and progress bubbling below the surface that are not reflected in our Q1 results. As a result, our long-term outlook is very strong. Our line of sight to commercial scaling and profitability is improving. With the backdrop of continued encouraging policy and industry signals in the first quarter, we made solid progress in the execution of our corporate strategy across key markets. We see clear signs of diesel engine disruption in heavy and medium duty motive applications including bus, commercial truck, rail and marine. We expect fuel cell electric vehicles or FCEVs to offer a compelling zero-emission value proposition for use cases requiring long range, rapid refueling, heavy payload and route flexibility and where the barriers to hydrogen refueling infrastructure are lowest, such as centralized depot refueling.As demonstrated at the ACT Expo held in April in Long Beach, there is a fast-growing movement towards electrification of commercial trucks. There's also a growing recognition that lithium-ion batteries are too heavy for Class 8 long haul applications and this market is best served by fuel cell electric solutions. Truck emissions typically don't receive the same level of attention as do the emission standards for passenger cars. There is now growing evidence that change is underway. Of course, the global truck market is massive. In 2018, global truck sales were 3.2 million including heavy duty truck sales of 2.4 million units. Notably, China accounted for 1.3 million trucks sold in 2018 or approximately 41% of the global total and 49% of global heavy duty truck sales.In Europe, road transportation accounts for almost 20% of all CO2 emissions with trucks alone accounting for about 30% of the transportation total. Truck sales in Europe were just under 400,000 units last year or about 12% of global sales. So the issue of truck emissions in Europe will continue to grow and garner significant attention. In February, the EU agreed for the first time to place restrictions on trucks CO2 emissions, setting new limits at a 15% reduction by 2025 and 30% by 2030. In 2022, the rules will also be extended to medium duty trucks, buses and trailers. As with cars, individual OEMs will be subject to specific EU CO2 emission targets based on their fleet composition. There will also be financial penalties for non-achievement of the CO2 targets.Globally, we expect other countries to follow this landmark EU legislation. We believe the truck emissions in the future will be more heavily regulated with countries like China, the US, Canada, India and Japan currently reviewing the EU measures closely and we expect CO2 emission targets and resulting fines like those contemplated in Europe to become a key factor in the investment by truck OEMs in zero-emission technologies and solutions including fuel cells.I'd like to now provide an update on China where the market for FCEVs continues to evolve. Speaking to the Automotive News China publication in March, Professor [ O. Yung ], a member of the Chinese Academy of Sciences and Dean of the Department of Automotive Engineering at Tsinghua University, forecasted 1 million FCEVs on the road in China by 2030. We estimate there are currently over 2,500 fuel cell electric vehicles deployed in China, about 45% of which are buses and 55% are trucks with Ballard technology inside roughly 70% of all of these vehicles. Commercial vehicles in China powered by Ballard technology have now driven in excess of 8 million kilometers. Furthermore, we estimate there are now 24 hydrogen fueling stations in operation in China and another 37 currently under construction.Importantly, on March 15th, China's State Council announced the inclusion in the annual government work report of a proposal to promote the development and construction of fueling stations for hydrogen fuel cell vehicles. In March, the China Ministry of Technology also announced changes to battery electric vehicle or BEV new energy vehicle subsidies. The national subsidy levels are being reduced by 50% for BEVs with a range in excess of 400 kilometers and being completely eliminated for BEVs with a range of less than 250 kilometers. In addition, local subsidies are being eliminated altogether. On a relative basis, there continues to be strong subsidy support for FCEVs in China and we're awaiting the release of a new subsidy policy for FCEVs expected by the end of June.Also, our progress on the Weichai collaboration is tracking on plan. This work has included key development and testing activities on our next-generation LCS stack next generation module and early technology transfer activities. Planning and construction activity on the joint venture facility in Weifang, Shandong province is tracking ahead of our initial expectations and we're currently anticipating completion and commissioning of the facility later this year. Overall, we remain bullish on the long-term outlook for the FCEV market in China and we expect our Weichai-Ballard joint venture to become the leading PEM fuel cell platform in this large market. And on that point, yesterday, we announced a $44 million agreement with the Weichai-Ballard joint venture for products and services to enable Weichai's initial deployments against its commitment to supply a minimum of 2,000 fuel cell modules for commercial vehicles in China by 2021.Moving now to Europe. As we continue to await the delayed JIVE program orders for buses, key developments during the first quarter related to the considerable progress we made in the marine sector. Just a reminder that at Ballard, we're focusing on utilizing the same technology products and core competencies to address power needs across a range of transportation and motive applications including buses, trucks, trains and now marine. This is an effective strategy to manage cost and leverage our technology advances for maximum advantage in the marketplace. Reduction of pollutants and carbon emissions is a high priority for the marine industry and for port cities around the world. Governments are introducing regulations to restrict diesel emissions, which is contributing to greater interest in zero-emission fuel cell technology. Having estimated that ships emitted more than 1.1 billion [ tons ] of CO2 in 2008 representing 3.5% of the global total that year, the United Nations International Maritime Organization subsequently announced a strategy to reduce greenhouse gas emissions from ships including a 50% reduction target in GHGs by 2050 as compared to the 2008 level.Against this backdrop, we expect fuel cells will offer a strong zero-emission value proposition for the marine market in both standalone and hybrid configurations with batteries based on design flexibility, extended range, and total cost of ownership. Last year, we announced our MoU with ABB in relation to the development of a large scale fuel cell system for port-based hotel power in the cruise ship segment. We also announced our work in a consortium to build and launch the HySeas III ferry, which will operate off the coast of Scotland. In Q1 this year, we announced our participation in the H2PORTS project which is aimed at facilitating a transition at European ports from fossil fuels to low carbon zero-emission alternatives based on hydrogen and fuel cells. The first H2PORTS initiative is a deployment of fuel cell powered equipment and a mobile hydrogen refueling station at the port of Valencia in Spain.Norway has been a leader in regulating movement towards electrification of the car market and more recently in the marine sector where Norway has close to 200 ferry's carrying passengers, cars and trucks throughout its extensive coastal networks. Subsequent to Q1, we announced a supply agreement with Norled A/S, one of Norway's largest ferry operators to provide next-generation 200-kilowatt power modules for a hybrid ferry that's planned to begin operation in 2021. The Norled ferry will be capable of carrying up to 299 passengers along with 80 cars and will be the first liquid hydrogen fuel cell powered ferry in commercial operation globally.And finally, with increasing pressure on port cities to decarbonize maritime applications, last month, we announced our plan to establish a Marine Center of Excellence or Marine CoE at our engineering, manufacturing and service facility in Hobro, Denmark. The Marine CoE will design and manufacture heavy duty fuel cell modules to address zero-emission powertrain requirements for the fast emerging marine industry. We have planned a new motive fuel cell system manufacturing hall that will be constructed and operational at the Hobro location by year-end 2019 with expected annual production capacity of more than 15 megawatts of fuel cell modules. Development work at the Marine CoE will be based on our new FCgen-LCS fuel cell stack and [ FC move HD ] fuel cell module. All Marine CoE development work will be designed to meet European marine codes and standards and other applicable certification requirements.In North America, an exciting development during Q1 was the successful completion of rigorous testing at the Altoona Bus Research and Testing Center by New Flyer's 40-foot and 60-foot Xcelsior fuel cell electric buses, both powered by Ballard FCveloCity-HD 85 kilowatt modules. As a result, these New Flyer buses now join the ElDorado National 40-foot Axess bus also powered by Ballard and being the only fuel cell buses commercially available for sale utilizing Federal Transit Administration funding in California HVIP funding. Moreover, in April, New Flyer announced successful demonstration for Orange County Transit Authority of 350 miles of zero-emission range with its 40-foot Xcelsior CHARGE H2 bus equipped with Ballard's fuel cell technology. This result exceeds the 300-mile performance target by 17% without refueling. The bus operated for 28 hours with a payload representing fully seated passenger capacity and achieved 10.4 miles per diesel gallon equivalent. This is exciting performance that underscores the capability of Ballard powered fuel cell buses and the value proposition of long range.Also, our unmanned aerial vehicle or UAV team together with Rob Campbell, Ballard's Chief Commercial Officer, participated this week at the AUVSI XPONENTIAL Conference and Expo in Chicago where we launched our 600-watt and 1200-watt FCair fuel cell systems. These systems are used to power fixed-wing and multi-rotor UAVs in what we see as an exciting and fast expanding market opportunity.To conclude, there is mounting evidence that the shift to zero-emission transportation is now underway and FCEVs will play an integral role and at Ballard, we believe we're positioned at the center of this transition with highly disruptive fuel cell technology. I look forward to our next update call where we expect to discuss a number of exciting developments that further demonstrate this pending transition. And with that, I'll turn the call over to Tony to briefly review the financials.

[Anthony Robert Guglielmin, CFO & VP]

Thanks, Randy and good morning everyone. Top line revenue in Q1 was $16 million, down 20% year-over-year with Power Products revenue down 49% and Technology Solutions revenue up 25%. Within Power Products, Heavy Duty Motive was down 72% or $6.7 million. This was due to the year-over-year decline in MEA product shipments to China combined with Portable Power/UAV down 94% or $2.3 million reflecting the disposition of the Power Manager assets at Protonex in Q4 last year. These reductions were partially offset by increases of $2.8 million in Material Handling and $0.1 million in Backup Power. The increase in Technology Solutions revenue to $9.7 million was due primarily to increased revenue from the technology transfer program related to the Weichai-Ballard joint venture, which more than offset relatively minor declines in other projects.Gross margin was 14% for the quarter, a decline of 19 points from Q1 last year. This resulted from the decrease in high margin revenue from the MEA shipments to China as well as the lower revenues from the disposition of the Power Manager assets as well as some increased cost in the quarter to attain certain milestones in select TS contracts. The overall lower product revenue also had a negative impact on overhead absorption. However, we do expect gross margin to improve throughout the year as the Ballard JV Technology Solution program continues to ramp up along with increases in product revenues that will impact overhead absorption as well as the impact of margin on product mix. We are still expecting gross margin for the full year to be in the mid-20% range. Cash operating costs were down 13% in Q1 to $9.3 million due primarily to lower product development costs as we transitioned resources to the Weichai Technology Solutions program along with decreases in sales and marketing costs.Adjusted EBITDA in Q1 was negative $8.6 million, a decline of $4.7 million compared to the same quarter last year. Adjusted EBITDA in Q1 also included equity investment losses of $1.9 million associated with the Weichai-Ballard JV. Net loss in Q1 was $12 million compared to a net loss of $5.5 million in Q1 last year. Adjusted net loss of $10 million in Q1 compared to a net loss of $5.5 million last year and earnings per share was negative $0.05 in Q1 compared to negative $0.03 in Q1 2018 with adjusted earnings per share of negative $0.04, compared to negative $0.03 last year. Cash used by operating activities was $10.5 million in Q1, consisting of cash operating losses of $5.7 million and working capital outflows of $4.8 million. This use in working capital largely reflects lower accounts payable resulting from the timing of supplier payments and annual compensation awards.In terms of liquidity, we ended Q1 with cash reserves of $165 million, a 214% increase from the same time in 2018 and a 14% decline compared to the end of 2018. Finally, we ended Q1 with an order backlog of $188.4 million, a modest decrease of $6.4 million to the end of Q4 and at the end of Q1, our order book for deliveries in the following 12-month period stood at $76 million of which we expect to recognize approximately $60 million throughout the rest of this year.Putting this all together, the $16 million in Q1 revenue when combined with the $60 million of order book we expect to recognize for the remainder of this year and the revenue expected to be recognized this year from the Weichai-Ballard JV together with our existing sales pipeline gives us confidence in confirming our full year outlook for a relatively flat revenue in 2019 compared to 2018. And with that, let me turn the call back over to the operator for questions.

[Operator]

[Operator Instructions] Our first question is from Rob Brown with Lake Street Capital Markets.

[Robert Duncan Brown, Senior Research Analyst]

First on the announced contract with the Weichai JV of $44 million. Just a little further color on what that is in terms of supplying initially to them. Is it modules or is that just stacks and is that the full 2,000 kind of vehicle units or is there more to come from there?

[Anthony Robert Guglielmin, CFO & VP]

Rob, its Tony here. The contract that we described, the $44 million is actually a collection of all of the above. There are -- and again, just stepping back, as Randy alluded to we've talked about the -- we're expecting the commissioning of the JV to start later in the year and be up and fully commissioned in early 2020. So what we're -- this order constitutes is actually a collection of a small number of finished modules, but as well some stacks as well as MEAs, some plates and so forth. So as we start to deliver product, the JV will start doing local assembly initially of modules and then as we move into 2020, start doing assembly of stacks. So it is a collection of all of the above. In terms of what does that represent, it represents about a -- [ roughly about 33% ] or so, maybe a [ little less than 33% ] of the 2,000 unit commitment.

[Robert Duncan Brown, Senior Research Analyst]

Okay, great. That's excellent color. And then just maybe in terms of market demand, Randy, you did a lot of -- you went through a lot of areas that are seeing development . I guess just particularly with the EU regulations coming in now, what are you seeing in terms of customer interest and OEM interest in fuel cells and maybe how soon can those sort of turn into product announcements?

[R. Randall MacEwen, CEO, President & Director]

Yes, thanks, Rob. As we look past our order book and backlog to the sales pipeline for example as an indicator, we have a very large portion of a large sales pipeline that is focused on heavy duty motive, medium duty motive applications. So we see a lot of contribution from the bus market in Europe and increasingly in the US, but I would say, I'm really encouraged with what we're seeing in Europe in a number of key markets. We've obviously highlighted here the marine sector during this call and I think it'd be safe to say during the next quarter we expect to be highlighting the bus market as well including in Europe, I would say over 50% of our sales pipeline is Heavy Duty Motive focused and bus and commercial truck will lead the way. As we move out to 2021 and some of our programs with partners both in rail as well as some truck and marine applications, I think we'll start to see higher product sales in those markets as those programs transition from TS work to product sales.

[Robert Duncan Brown, Senior Research Analyst]

Okay, good, thank you and then lastly on the marine segment, the Denmark facility, are you envisioning that to work similarly to the China facility where you are supplying the MEAs into it and it's creating the modules or just help me understand kind of the operational structure there?

[R. Randall MacEwen, CEO, President & Director]

Yes and just to remind you, the European facility is 100% owned by Ballard. This is part of our family group obviously. So what we're looking at there is assembly of modules but really setting up our European footprint as a Marine Center of Excellence in terms of understanding cogent standards, understanding the market requirements, understanding design considerations, [ shock and vibe ], water, salt, there's a lot of requirement specific to that market and so we expect our European platform to be a Center of Excellence for this and not only on the understanding and design, but also on the actual assembly of those modules. So we'll see module assembly in that market and as volumes scales in that market, not just for marine, but for a number of applications, we'll continue to look at what manufacturing strategy we need to have in that market.

[Operator]

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

[Amit Dayal]

Thank you. Good morning and Tony maybe just for you to begin with, on the guidance, you guys are reiterating sort of flat revenue for 2019. Is this going to be maybe lumpy towards the fourth quarter or could you provide any color on how this will play out in terms of cadence for the rest of the year?

[Anthony Robert Guglielmin, CFO & VP]

Certainly, yes, so we certainly do expect revenue to kind of wrap up sequentially through the year and the fourth quarter would be expected to be the highest of the quarters. Part of the reason for that as well as the $44 million Weichai program. Delivery is, you know, we've made some and we'll be starting some modest deliveries soon, but the bulk of the deliveries and the revenue recognition in 2019 will start principally a little bit in Q3, but principally in Q4. So that's where we'll start to see some of that Weichai revenue hit the books. So think about just think about it as sequentially higher quarter-over-quarter with Q4 certainly being the highest.

[Amit Dayal]

Thank you. And then on the cash front, cash has dropped from say around $192 million to $165 million between 4Q and 1Q. How much of this was sort of investing activities into your efforts in China versus operating burn and what is your outlook on the cash position by the end of the year?

[Anthony Robert Guglielmin, CFO & VP]

Right. So in the burn for Q1, there was a $14 million -- that included a $14 million payment, which was the second installment, [ but ] the $14 million capital contribution to the Weichai JV. So in the burn in Q1, $14 million of it was there. We also have a -- expect to make an additional $7 million capital contribution likely in Q4 to the JV. So as you think about the total burn for the year, there will be another $7 million and we expect in total, the total burn for the year probably to be in the, you know, including the -- if you included the $21 million, $22 million going into the JV, probably $50 million odd in total. So the other part would be operating cash and some CapEx this year. We expect working capital to be probably roughly flat depending on timing of shipments to the end of the year. So think about $50 million-ish overall. Half of that is the capital. I will say though we could have some working capital payment depending on the Weichai one side. I want to be a little -- hedge that a little bit depending on the timing of invoicing and payments on Weichai, but think something in the $50 million to $60 million range including that $22 million.

[Amit Dayal]

That was helpful. Thank you for that. And Randy maybe for you on the I guess the timeline you guys are indicating for the JV to be fully commissioned is 2020, but in terms of you know sort of the micro-level milestones, what should we expect to be achieved say in the next few quarters for you guys to get there?

[R. Randall MacEwen, CEO, President & Director]

Sure. Good morning, Amit. Weichai has a very clear communication strategy and I certainly don't want to get ahead of their communications on this. There is a lot of sensitivity around this. So what I can say is that construction work is underway. The procurement of key equipment, specification, procurement of key equipment is underway. There is a lot of activity both at Weichai, Ballard and the Weichai-Ballard JV which we staffed up significantly in the last say 90 days. So there's a lot of activity underway and I fully expect late 2019 we'll have very good color and images to provide on this front, but I don't want to get ahead of their communications plan.

[Operator]

Our next question is from Craig Irwin with Roth Capital Partners.

[Craig Edward Irwin, MD & Senior Research Analyst]

So last week at ACT Expo, we had an opportunity to talk to many of the truck buyers in North America, but a number of global guys as well and all anybody wanted to talk about is Nikola Motors and their Nikola World they held the prior week where something like 2,000 people showed up and it's well known that Anheuser-Busch has 800 units on order of the truck. There is several hundred units also on order and it seems like there's actually a willingness to believe on the part of a lot of the buyers, it's not just Anheuser-Busch. Can you maybe talk about whether or not there is a resurgence of the conversation with some of the big trucking OEMs outside of China. Are you seeing interest and conversation rebound with some of these large global OEMs outside of your Weichai relationship that could be sort of confirmatory of some of the things we've been hearing over the last couple of weeks.

[R. Randall MacEwen, CEO, President & Director]

So clearly, electrification is front and center now in the commercial truck market and as we look at the technologies that are available to satisfy the market requirements there, I think it's clear at least in our mind that fuel cells offer a compelling value proposition given the range requirements and the weight restrictions. As we look at what Nikola has done, I've got to credit them for really exciting a lot of people and bring some imagination and some vision and I think they should be applauded for the work they are doing. We did have some people attend the Nikola World event as well and by all accounts, it was a very successful event. So our hope is that they are successful and anything we can do in the marketplace with Nikola and any other industry participants of course we're going to support that. In terms of you characterized it as resurgence, I guess I would characterize it as initial surge. There hasn't been historically a lot of discussions with truck OEMs that has changed significantly in the last, I would say, 6 months, particularly. There are a number of OEMs in all the key geographic markets. You know there's 4 or 5 key OEMs that dominate Europe and the US. There's 4 or 5 that dominate in China and we feel like we have an opportunity to make progress with many of them. The reason is if you look at the validation we have of our technology in the field albeit in the bus application, we have proven durability and as we look at the next generation of stack and look at the next generation of module with cost reduction and performance improvements and as I mentioned earlier even tracking over 8 million kilometers of in-service for trucks and buses now in China as well, we have some very good data points that no other companies have in my opinion with respect to this heavy and medium duty motive applications. So I feel like we're in a very good position from a technology perspective, from a field deployment perspective, from a brand perspective, capital perspective and the level of activity I'm going to say is at record high today at Ballard.

[Craig Edward Irwin, MD & Senior Research Analyst]

That's good to hear. That's good to hear. So one of the things that we've heard from speaking with multiple vendors of either refueling stations themselves or different components that go into refueling stations is that the regulations in China are changing such that you have to drive a minimum number of miles before you can pull down the related subsidy and people are hoping for visibility there by the end of June. Does that concern you that maybe the chicken and the egg are sort of reversing directions here. Is this something that you've heard? Do you expect your customers in China to be able to build the trucks first and then the stations or is this something that's going to be sort of holistic moving forward at once and we're not likely to see the limitations of the, I guess there is only about 10 or 12 existing hydrogen stations that are working in China right now. Does that really limit us over the next several quarters?

[R. Randall MacEwen, CEO, President & Director]

Yeah, so good question. Just to clarify, there are 24 fueling stations in service today in China and 37 under construction . I think one thing that's important to understand, you mentioned the number of kilometers that vehicles need to drive in order to get subsidies. It used to be 30,000 kilometers, it's been reduced to 20,000 kilometers about a year ago. There will be changes the end of June. I'm not necessarily expecting that to be a change, but I think one of the key changes that we're seeing, we saw this obviously just recently in March in the battery electric market is a focus on infrastructure and the focus on infrastructure in battery electric and now hydrogen fuel cells and particularly in March with the central government announcing in their working paper to focus on hydrogen refueling infrastructure. My expectation is that there will be a lot of activity over the next 24 months to 36 months in China that support high volume adoption in that marketplace. It doesn't mean there won't be challenges either on a storage or transportation and also looking at ways to secure green hydrogen as well. So there's still a number of challenges to focus on, but I think the China government you will see a pivot here shortly that I think really focuses on addressing the infrastructure challenge. Now, of course, the applications we're focused on here, buses, city buses typically and commercial trucks including delivery trucks that return to base at night have a lower barrier to entry here. As you can see, we have a situation today where the number of vehicles in the field -- we have just kind of around just under 1,800 vehicles that have Ballard technology in the field today and they're all being fueled fine.

[Operator]

Our next question is from Jeff Osborne with Cowen and Company.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Most of them have been asked, but maybe just one following up on Craig's line of questioning. On the Class 8 side in Europe and the US, Randy, can you talk about who in the public domain you've done testing with. I think it was Kenworth, but I forget with one of the port programs, but what's your sort of go-to-market strategy in terms of leveraging bus into the heavy duty side in particular?

[R. Randall MacEwen, CEO, President & Director]

Yes. So I appreciate. Thanks for the question, Jeff. The announced project we have is with Kenworth and you're right, it's at the Port of LA in Long Beach and there's testing -- field testing underway now with that truck. We do have some other applications underway as well including UPS. So your question was focused on Class 8, of course, there are other classes of trucks that we're doing some early demonstrations with. What I would say is that the OEMs on Class 8 recognize that kind of legacy lithium-ion battery is not going to fit the bill and I think that's part of the reason why a number of people are excited by the Nikola opportunity, but that's really causing a lot of the OEMs to rethink their long-term strategy in terms of transitioning from diesel to zero-emission and obviously the EU legislation is a very good helpful driver on that front. In terms of go-to-market strategy, we've looked at the different parts of the value chain and looked at where we should be marketing our offering. We think there's value in working directly with the OEMs. In some cases, we're obviously trying to engage end users as well to get a demand pull through. We're also focused on engine and powertrain system designers and manufacturers as well. So there's different parts of the value chain we're attacking this at and I do believe that our work in the bus market, while not a full fit is very leverageable in terms of engendering confidence with those customers on the performance and durability as well as our service strategy, in some cases, the power density requirements for truck are different than the bus market and that's why -- part of the reason why we're working on the LCS and HDv8 generation and we'll continue to improve power density over time as well so that we have products that really meet the market requirements. One thing I want to highlight you know I just spent about 10 days in China and we had the opportunity to meet with Weichai and Broad-Ocean, Synergy [indiscernible] partners there and a few weeks ago, we held a market requirement session, a voice of customer session in China with about 8 to 10 commercial truck OEMs and received an extraordinary amount of very valuable feedback on the requirements obviously for the China market, but some of these companies have exposure to international markets as well and the work we're doing in the US and some of the activities we have underway in Europe coupled with this voice of the customer feedback in China are all I think allowing us to make sure we have a product offering that's going to hit the bullseye.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Got it, that's helpful. Maybe just 2 quick ones for Tony. As you look at the backlog that's remaining for the rest of the year and clearly got the cadence from Amit's question about that ramping up into the fourth quarter, how do we think about the different segments and the margin trajectory through the year in terms of the end markets that that backlog is --what end markets are contributing to the backlog?Yes, thanks, Jeff. So the -- as it was mentioned, so there is $76 million currently in the order book, of which $60 million is -- roughly $60 million for delivery this year. I would say about $50 million of that is in TS. So between the Weichai TS program and Audi. So you can think about. Recall roughly $60 million of that order book is at fairly high and typical TS margins, and then the remainder of that backlog is largely in Heavy Duty Motive and then again, the part that's not in there of course is whatever we're able to ship and deliver into the Weichai order that we announced yesterday. So by and large, most of what's in the order book is relatively high margin and that gives us the confidence to still push -- to be able to say that we feel comfortable that gross margins will end up the year where we had indicated earlier.

[R. Randall MacEwen, CEO, President & Director]

Yes and I might just add 2 points, Jeff, for the material handling market, we typically don't carry a large order book there, it's usually quarter-by-quarter POs. So that doesn't get fully reflected in our outlook for the full year. The other aspect is my expectation is that you'll see a significantly increased order book in the next 3 months to 4 months as some of the work that we're working on closes.

[Jeffrey David Osborne, MD & Senior Research Analyst]

I got it, okay. That is helpful and maybe same line of questioning, any meaningful change in the OpEx run rate as the year progresses for all of these new initiatives and then sort of gearing up for the growth in 2020?

[Anthony Robert Guglielmin, CFO & VP]

We have certainly quite an ambitious hiring program this year, which did start in Q1. I'd say Q1 was slightly lower than probably the run rate for the full year. So I would expect a slight bump up in Q2 and Q3, but I'd say once we hit those levels by Q2, Q3, it should levelize from that point forward, meaning we should be fully staffed up going into the latter half of the year and into 2020. So, a bit of a bump up in the next quarter or 2, but levelized from there.

[R. Randall MacEwen, CEO, President & Director]

Yes and Jeff, I would just add to that, if you think about some of the work we're doing obviously with the Weichai JV in China with the build-out of the Marine Center of Excellence in Europe and very significant staffing adds this year, all on relatively flat revenue year-over-year. I think they are all indicators of the growth we see coming.

[Jeffrey David Osborne, MD & Senior Research Analyst]

Makes sense. Can you put the head count increases, Tony, in perspective, how many people do you have full time equivalents and how many open spots you have?

[R. Randall MacEwen, CEO, President & Director]

Yes, we have about 650 employees today and for 2019, we're looking at our hiring plan of just under 120.

[Anthony Robert Guglielmin, CFO & VP]

So we’ve covered about halfway -- and so we -- yes, so we're at 650. We're about halfway through the hiring plan, Jeff, so maybe another 50 odd to go before year-end. So kind of end the year around 700 give or take.

[Operator]

Our next question is from Amit Dayal with H.C. Wainwright.

[Amit Dayal]

Yes, thank you. Just wanted to touch on your migration to the LCS stacks and modules. How are you looking to manage sort of 2 generations of products beyond say 2021. Are you completely just going to migrate to LCS now or are you also going to have presence in the older generation version of the product?

[R. Randall MacEwen, CEO, President & Director]

Yes, Amit, thanks for the question. A couple of things to point out, the LCS is actually our 13th generation of stack and the HDv8 is our eighth generation of engine. So we have lots of experience in terms of migrating from one generation to another and thinking about how to do that in an effective way with the customer base as well as the supply chain. We do see continued need for [indiscernible] cell based products for the foreseeable future. There are a lot of customers that have that specced in and have done some work to design that into their engines and we want to make sure we are supporting them, but very careful plan here in 2019 as we introduce it both in terms of customer expectations as well as inventory and supply base.

[Operator]

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

[R. Randall MacEwen, CEO, President & Director]

Thank you, Savis and thanks everyone for joining our call today. We look forward to speaking with you again at the beginning of August when we'll discuss our second quarter 2019 results.

[Operator]

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