Ballard Power Systems Inc

TSX:BLDP

Earnings Call Transcript 2017-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Fourth Quarter and Full Year 2017 Results and 2018 Outlook Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

[Guy McAree, Director of Marketing & Investor Relations]

Thanks very much, and good morning, everyone. The purpose of today's call is to discuss Ballard's fourth quarter and full year 2017 financial and operating results, along with our outlook for 2018. And with us today 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 our complete disclaimer and related information.So this morning, Randy's going to review our strategic progress in 2017, our outlook for 2018, and he'll also provide his perspective on the longer term. Tony is going to review financial results for Q4 and full year 2017, and then we'll open up the call for Q&A.Just before we get started, a brief note that Ballard is going to be attending the 30th annual ROTH Conference in Dana Point, California. We'll be there on Tuesday, March 13, to meet with investors and present investment highlights.And so now, I'll turn the call over to Randy.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Thanks, Guy, and welcome, everyone, to our Q4 and full year 2017 earnings conference call. In 2017, we focused on 2 key objectives: first, to improve our strategic position to support long-term growth, competitiveness and profitability; second, to improve our financial performance. During the year, we delivered significant progress against these 2 objectives. Indeed, 2017 was a milestone year for Ballard on our path to profitability.Financial highlights included record full year revenue of $121.3 million, a 42% year-over-year increase; full year gross margin of 34%, up 6 points; and positive adjusted EBITDA of $3.3 million for the full year. We've now delivered positive adjusted EBITDA in 4 of the last 5 quarters. We believe Ballard is the first publicly traded fuel cell company to achieve positive adjusted EBITDA for an entire fiscal year.In addition, we finished 2017 with $60.3 million of cash and no debt. We have a solid setup for 2018 with $91.4 million of orders in hand for expected delivery this year, coupled with a robust sales pipeline.I'm excited with current customer engagement and quoting activity, and we expect strong, new order bookings throughout the year, including a purchase order from Van Hool for the 40 engines we announced just yesterday, some of which we expect to ship before year-end.Before we discuss our 2017 progress in detail, along with our outlook, I want to briefly address the short-seller report released on January 25. We remain steadfast in our belief that Ballard is uniquely positioned to capitalize on the global trend towards zero-emission transportation and the unique value proposition offered by fuel cell electric vehicles, or FCEVs. Nothing we have seen in the short-seller report fundamentally changes our positive outlook for this business. Let me repeat that, nothing. We want to be very clear, we do not agree with many of the short-seller report's assertions, some of which are demonstrably false, nor do we agree with many opinions expressed in the short-seller report. More importantly, we will not be distracted. Instead, we'll continue to focus on building a great company. We intend to continue demonstrating the strength of our strategy, our people, our partners and our business. We'll let our results speak for themselves, as they clearly did in 2017, and as I expect they will in 2018. So let's drive on. We made important progress against our strategy in 2017. We continue to advance our world-leading technology in products. We made solid progress on the localization of Ballard design stacks and modules in China, and we strengthened our engagement with important customers in key markets and continue to expand the range of FCEV applications. Let's drill down a little deeper into some of the highlights from last year, starting first in China.Ballard made important progress in 2017 with the localization of stack and module assembly operations in China. With respect to stack production, the company supported our Synergy Ballard stack joint venture in Guangdong Province on various aspects of the setup as well as the commissioning of the operations line, which was completed in September. The JV produced 1,145 stacks from September to the end of last year, including 558 stacks in December alone. Our stack JV facility currently has a production capacity of approximately 6,000 stacks per year and a maximum capacity of 20,000 stacks per year. As a point of reference, the 2 stacks integrated in a typical 30-kilowatt engine, the JV's current capacity of 6,000 stacks would roughly translate to 3,000 FCEVs per year. We are now transitioning to supply relationship with the JV based on our take-or-pay agreement for the supply by Ballard of any age to the joint venture.Last year, in April, we closed the technology transfer and localization collaboration with Broad-Ocean, under which Broad-Ocean plans to manufacture Ballard-designed fuel cell modules in 3 strategic locations: Shanghai, Hubei Province and Shandong Province. In December, Broad-Ocean subsidiary, Shanghai Edrive, commissioned a fuel cell engine assembly facility in Shanghai. The facility has the capacity to manufacture and test several thousand engines annually. Broad-Ocean is continuing its planning work for Hubei and Shandong. As discussed before, Broad-Ocean has manufacturing scale, supply chain muscle, operations excellence, bus and commercial vehicle OEM relationships and a strong balance sheet. Ballard will also benefit from Broad-Ocean's demand pull-through of FCEVs for use in their new energy vehicle leasing business.As a reminder, since August 2016, Broad-Ocean has owned approximately 9.9% of Ballard's outstanding shares, strongly aligning its interest with those of Ballard shareholders.In 2017, we also signed a collaboration agreement with Re-Fire, a fuel cells systems integrator based in Shanghai. Under that collaboration, Re-Fire has agreed to use Ballard-designed fuel cell stacks in its fuel cell engines. As part of our collaboration, Re-Fire also agreed to pay certain royalties to Ballard.A few weeks ago, we announced the planned deployment of 500 licensed fuel cell electric commercial trucks, all using Ballard fuel cell stack technology in Shanghai. Each of the 500 Dongfeng special vehicle trucks is now licensed, plated and powered by a 30-kilowatt fuel cell engine designed and integrated by Re-Fire, featuring Ballard-designed fuel cell stacks. Our understanding is that all 500 commercial trucks are planned to be deployed in 2018, and we expect Re-Fire to be an important customer and partner to our stack joint venture and Ballard going forward.Let's pause here for a second. This as an important moment in the fuel cell industry. We believe this is the largest planned deployment of fuel cell-powered trucks anywhere in the world. It's not surprising it's happening in Shanghai, giving that city's leadership in the commercial adoption of FCEVs, including a visionary Shanghai Fuel Cell Vehicle Development Plan, which targets, among other goals, the production of 3,000 FCEVs by 2020. Now to support the deployment of these 500 delivery trucks, 2 recently constructed hydrogen refueling stations are currently operating in Shanghai, with 2 additional stations planned for construction in the first half of this year. The commercial truck market is a critically important market segment globally and in China. And in China, it's forecast to account for approximately 42% of the global production of medium- and heavy-duty trucks in 2020 or approximately 1.1 million units according to LMC Automotive.We also thought it'd be helpful to provide an update on China fuel cell subsidies and fueling station infrastructure buildout in key Chinese markets. The national FCEV subsidies for medium and large bus, medium-duty and heavy-duty truck, light bus and truck and passenger car were released just this past February 14. The state fuel cell subsidy was reconfirmed as a fixed subsidy for medium and large buses and medium-duty and heavy-duty trucks at RMB 500,000, with a minimum rated fuel cell system of 30 kilowatts and a minimum range requirement of 300 kilometers. Interestingly, the minimum operating mileage required before payment of the subsidy was reduced from 30,000 kilometers to 20,000 kilometers.Guangdong Province also issued its new energy vehicle subsidy policies in February. Like the state subsidies, Guangdong Province subsidies were reduced for battery electric vehicles and reconfirmed for fuel cell electric vehicles. Our understanding is that there are currently 13 hydrogen fueling stations now built in China with 7 of them situated with our partners. Our understanding is that there are plans for an additional 10 to 20 stations to be built in 2018, including in Shanghai, Guangdong Province and up to 5 other cities. Chinese government policy targets significant scaling in 2019 and 2020.During 2017, we made a critical investment at Ballard as we built our China platform to support planned market growth, including the registration of our Chinese subsidiary, the setup of our office in Guangzhou, the buildout of our team with capabilities now in business development, account management, application engineering, aftersales support, quality assurance and supply chain management.In terms of 2018 outlook in China, with the completion of the stack and module localization activities, we're transitioning to a business model under which the revenue mix is expected to shift from the sale of modules toward MEA component sales, together with royalties from the sale of locally assembled modules.Let's now turn to Europe. Importantly, given our expectation for growing demand, we shored up our platform in Europe through the acquisition of the remaining interest of our European subsidiary early in 2017. As a result, we now own and control 100% of our European platform based in Denmark, renaming the subsidiary, Ballard Europe. On the commercial side, we made excellent progress in 2017 in European bus and train markets, with the fuel cell bus market in particular showing increasing promise. As I mentioned earlier, yesterday, we announced a letter of intent from Van Hool for a total of 40 fuel cell engines to power buses for deployment in Cologne and Wuppertal, Germany under the JIVE funding program. We expect to receive a formal purchase order and begin shipping these engines in the second half of this year to support initial delivery of Van Hool fuel cell buses in 2019. And to be clear, none of these modules will be reflected in the order backlog we discussed earlier. These 40 buses will be the largest order ever for fuel cell buses in Europe. And you'll recall that JIVE I and JIVE II programs are expected to fund a total of 291 fuel cell buses. We are well positioned to win more business with these programs.The expected deployment of these 40 fuel cell buses is incremental to the LOI we received from Van Hool in September last year for 8 engines to power ExquiCity tram-buses for delivery to Pau France in 2019. I'm pleased to report that since we've received firm orders for these 8 engines, and expect to ship the engines later this year.In the train market, in November we signed a landmark $9 million, 3-year development agreement with Siemens for the development of a 200-kilowatt fuel cell engine for integration into Siemens' new Mireo light rail commuter train platform. This platform's designed for speeds of up to 100 miles per hour. Initial deployments of the Mireo are planned for 2021. Earlier this week, Siemens announced the receipt of approximately EUR 12 million in funding to support the development of the fuel cell Mireo. Work has already started under this landmark development program, and we expect Siemens to be an important long-term blue-chip customer.Also in November, we announced initial collaboration activities with ABB and Royal Caribbean Cruises relating to fuel cells to power cruise ship hotel loads while docked in port.In terms of 2018 outlook in Europe, we expect increased market activity during the year related to fuel cell electric buses, which we expect will result in the growth of purchase orders for modules.Let's now turn to progress over the past year in the U.S. market. We made key advancements in sales, business development and product testing activities for the fuel cell bus and commercial truck markets in the U.S. In 2017, Ballard became a member, along New Flyer, of the Fuel Cell Electric Bus Commercialization Consortium, which received funding for 20 buses. 10 New Flyer fuel cell buses are expected to be deployed with AC Transit in California and the other 10 with New Flyer fuel cell buses with Orange County Transportation Authority. As a result, we expect to ship 20 FCveloCity engines for these buses starting in 2018.In addition, in 2017, we received an order from SunLine Transit Agency for 5 engines to power buses in Palm Desert, and those engines were shipped last year.In the heavy-duty truck market last year, we began a high-profile trial with Kenworth on a hybrid Class 8 drayage truck operating at the ports of Long Beach and Los Angeles. The Ballard fuel cell engine integrated into the Kenworth drayage truck is being used to recharge onboard lithium ion batteries. The truck has a battery-only range of approximately 30 miles. However, the onboard hydrogen fuel cell engine provides sufficient range for a full day of operation in regional haul applications. The heavy trucking application represents a significant addressable market for fuel cells, and we believe the fuel cell value proposition will resonate with customers in this segment as we move forward.In the Material Handling market, as expected, stack sales to Plug Power continued to decline in 2017 as this customer continued movement towards internally manufactured and source stacks for its fuel cell systems integrated into forklifts. However, we've made important progress to position Ballard for long-term success in Material Handling with key technology solution programs that I'll highlight shortly. We expect additional important developments in the Material Handling segment in 2018.Our Protonex Power Manager business had disappointing 2017 results, driven in large part by a delay in achieving a key procurement milestone by the U.S. Army. That milestone was, however, approved in September. Milestone C is now behind us, and the Protonex Squad Power Manager kit, or SPM-622, can now be ordered in volume. As a result, we expect growth in the Power Manager business beginning in 2018. In January, we announced an initial $1.6 million order from the U.S. Army under Milestone C.While we believe the recent passage of the U.S. federal budget, with a significant increase in planned military spending, is a positive development for our Protonex business, it's currently uncertain whether this will impact our 2018 results.To address the underperformance of our Protonex business in 2017, we implemented certain cost reductions and divested certain noncore assets, which is expected to result in annualized cost savings of $2.6 million. We made meaningful progress at Protonex in the UAV business in 2017, both in the military market and the commercial market. We delivered on important customer fuel trials and business development activities, and we now plan to rebrand the commercial UAV business with the Ballard brand.In December last year, we also announced we developed a next-generation, high-performance fuel cell propulsion system to power UAVs, including a Ballard-designed MEA. Protonex has received a follow-on contract from Insitu, a Boeing subsidiary, for extended durability testing of this next-generation 1.3-kilowatt fuel cell propulsion system to power test flights of the ScanEagle platform. We expect additional developments in the UAV market in the near term.In terms of 2018 outlook in the U.S., we expect increased purchase orders for engines, particularly in California, along with additional orders for Power Manager units from military customers.Finally, over the past year, we've announced a number of positive Technology Solutions developments. As mentioned earlier, in 2017, we secured the Siemens multiyear development program for fuel cell rail. We also delivered against our 2 existing development and supply programs in China with CRRC. CRRC demonstrated the Chinese Railway Headstream Tour tram line in Tangshan City located in Hebei Province. And CSR Sifang of Qingdao, Shandong Province demonstrated their fuel cell power tram in Foshan.We continued our groundbreaking innovation work with Nisshinbo of Japan on a multiyear effort to develop and commercialize stacks from Material Handling, utilizing cost-reducing, non-precious metal catalyst technology. We've also announced a $4.2 million Technology Solutions program with an unnamed customer to develop an ultra-high durability air cool fuel cell stack with a 20,000-hour life target for use in powering Class 3 Material Handling equipment.In the passenger car market, last year, we continued strong execution on our deliverables under Audi's HyMotion fuel cell car program with leading automotive fuel cell stack technology. Last year, we also announced a follow-on Technology Solutions contract with an unnamed leading global automotive OEM. This follow-on contract is focused on advancing our customer's MEA development program for future versions of its fuel cell engine and vehicle deployments.Interestingly, KPMG recently published its 19th consecutive Global Automotive Executive Summary 2018, which noted that FCEVs have replaced BEVs as this year's #1 key trend until 2025. We continue to believe that 4 disruptive trends are fundamentally reshaping the nature of mobility: electrification, shared mobility, autonomous drive and connectivity. We believe these trends are global, secular and converging. For those of you who may be interested in exploring this further, we published a market update in our website on January 23 that provides our perspective on the rapidly evolving FCEV car market.In brief, we believe the increase of shared mobility in urban centers will lead to vehicles having much higher utilization, including higher range requirements and longer operating hours. And we believe these trends favor FCEVs. Earlier this week, in a landmark decision, a German federal court ruled that German cities could ban diesel vehicles from their streets as a way to reduce pollution. We believe this decision has important ripple implications across Europe.In terms of 2018 outlook in Technology Solutions, we expect revenue to be relatively flat, given the significant contribution from the one-time technology transfer projects in China in 2017. We expect the decline in China Technology Solutions revenue to be largely offset by increased project activity with both existing and new customers across a number of sectors, including, of course, our ongoing program with Audi.For our overall 2000 (sic) [ 2018 ] outlook, as a reminder, we don't provide specific financial guidance. In terms of soft directional outlook for 2018, we expect top line revenue to be relatively flat on a year-over-year basis, coincident with a strengthening of our underlying business mix for long-term growth prospects. We believe this outlook represents a conservative and responsible view based in part on the $91.4 million of orders in hand for expected delivery in 2018, which is higher than it was at this time last year. We also have a robust sales pipeline, expect to close important new bookings throughout 2018. These factors give me personal confidence that there's upside to our conservative outlook.As I look beyond 2018 now, we believe our fuel cell value proposition is gaining traction across a broadening array of FCEVs in the key geographic markets of China, Europe and the United States. We believe that FCEVs will become a meaningful portion of the heavy-, medium- and light-duty transport markets, where long range, heavy payload, rapid refueling and route flexibility are customer requirements and define key target markets for our products.A recent report from the Hydrogen Council profiled the development stage of many of these FCEV applications. We believe we're well positioned with highly disruptive and field-proven technology at the convergence of 3 global megatrends: decarbonization, air quality and electrification of propulsion, presenting a compelling future for Ballard.As we look out to 2020, we expect strong growth in FCEV demonstration programs and commercial scaling in certain heavy- and medium-duty applications in China, Europe and the United States. We also continue to advance our Technology Solutions business, which offers significant embedded optionality on longer-term fuel cell motor markets, including UAVs, marine and passenger cars.We remain excited about Ballard's future prospects. We have industry-leading talent, technology, products, intellectual property, customers, strategic partners, field experience and brand. With continued investment in our technology products, customer engagement in our brand, we see Ballard having a leading position in targeted large addressable markets.I'd like to now turn the call over to Tony for his review of 2017 Q4 and full year financial results. Tony?

[Anthony Robert Guglielmin, VP & CFO]

Thanks, Randy, and good morning, everyone. I'll quickly review our 2017 results before we open the call to questions.Revenue in Q4 was $40.3 million, up 31% year-over-year, and on a full year basis was $121.3 million, up 42% from 2016. And as Randy noted earlier, this was a record quarter and a record full year for Ballard.In terms of the key drivers for growth in '17, the increase reflected 39% growth in Power Products and 47% growth in Technology Solutions. Within Power Products, growth was driven by a 140% gain in Heavy Duty Motive to $63.7 million. This included the delivery of more than 600 FCveloCity fuel cell engines to China and initial MEA sales to our stack joint venture.Within Technology Solutions, we worked on over 30 programs in the year, many of which Randy mentioned earlier. Technology Solutions also benefited from revenue associated with the TS program with partners in China as we implemented key elements of our supply chain strategy for that market.In terms of gross margin, we saw continued year-over-year improvement, with a 6-point improvement in 2017 to 34%. This followed a 10-point improvement in 2016 to 28% and a 3-point improvement in 2015 to 18%. These improvements have been the result of a shift in revenue mix towards higher-margin businesses, including Heavy-Duty Motive and Technology Solutions, as well as gains in operating efficiencies, including greater overhead absorption resulting from higher production volumes.Cash operating cost did increase 30% in Q4 to $11.2 million, and for the full year increased $4.7 million or 14% to $39.1 million. This increase was due primarily to higher investment in technology and product development, including our next-generation liquid-cooled stack technology as well as the increased investments related to our commercial efforts in China. In addition, there was an approximately $1.2 million negative impact of our -- on our Canadian operating cost base as a result of a stronger Canadian dollar relative to the U.S. dollar during the year.Adjusted EBITDA improved 18% in Q4 to positive $2.1 million, and for the full year improved 134% to positive $3.3 million. Net loss in Q4 was negative $2.9 million compared to negative $1.1 million in Q4 last year, and for the full year was negative $8 million, a 62% improvement over last year.Now adjusting for the impact of one-time charges associated with the exit from the SOFC business at Protonex in Q4 and the CHEM transaction in 2016, adjusted net loss was flat compared to 2016 at negative $0.9 million in the quarter, and for the full year was negative $5.2 million or a 73% improvement from 2016.Earnings per share was negative $0.02 in Q4 compared to negative $0.01 in 2016, and for the full year was negative $0.05, a 66% improvement over the prior year. Now adjusting for those same one-time charges in Q4, adjusted EPS was negative $0.01 in Q4 and negative $0.03 for the full year.Cash used in operating activities was $0.7 million in Q4, consisting of cash operating income of $1.7 million and working capital outflows of $2.5 million. For the full year, cash used by operating activities was $9.8 million, consisting of cash operating income of $2.5 million, offset by working capital outflows of $12.3 million. Now the use in working capital was largely driven by lower deferred revenue of $12.5 million, as we fulfilled contract deliverables on certain Heavy Duty Motive and Technology Solutions contracts, for which we had received prepayments in an earlier period, in which we had discussed earlier in the year.In terms of liquidity, we ended 2017 with cash reserves of $60.3 million and no debt. We believe our balance sheet uniquely positions us to support the company's growth trajectory and business plan.And finally, a comment on the order book, which underpins the outlook that Randy mentioned earlier. We ended 2017 with a strong order backlog of $221.4 million, which reflect committed orders on hand. Now this was slightly lower than at the end of Q3, reflecting record delivery of $40.3 million in orders during Q4. At the end of the year, our 12-month order book stood at $73.4 million. And as Randy mentioned, since year-end, we have added additional orders of $18 million such that we now have total committed orders of $91.4 million for delivery in 2018. And as Randy also mentioned, this excludes the LOI related to fuel cell engines for 40 buses in Europe that we announced yesterday.So with that, let me turn the call back over to the operator to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Rob Brown of Lake Street Capital Markets.

[Robert Duncan Brown, Senior Research Analyst]

You talked a little bit about a pipeline that you see is pretty attractive. Could you characterize sort of some of the opportunities and where that pipeline opportunity lies?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. It's difficult to hear you, Rob. I think you're asking about kind of profiling the character of the pipeline?

[Robert Duncan Brown, Senior Research Analyst]

Yes, correct.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So I think one of the things we worked on over the last few years is diversify our business mix. And as I kind of look at the opportunities reflected both in the pipeline -- in the order book as well as the pipeline, we're seeing really a scaffolding effect occur, where we have a lot of traction in the fuel cell bus market in the key markets of China, Europe and the U.S. We're now seeing commercial truck starting to see penetration. Obviously, the rail market is starting to show contribution as well. And then on the Technology Solutions side, we have, obviously, a significant presence there from the auto space, particularly with Audi. But we have other customers from the auto sector, and we're seeing increased activity on the UAV front as well as the marine side. So -- and Material Handling is -- we've worked on this for a few years now as well to reposition the long-term strategy for Material Handling, where we moved from aftermarket sales of stacks to aftermarket systems integrators to a more purpose-built environment for the longer term. And we're seeing that now showing up in real contracts. So as we look at the order book and the pipeline, it's far more diversified than it would've been a couple of years ago. There is some concentration, obviously, in the order book with the long-term take-or-pay contract on the MEAs, and we have some concentration in the order book with Audi and the Technology Solutions. But as you push through those 2, there's a fairly good diversification reflective of the scaffolding effect we believe we get a lot of leverage on with the same core competencies, same technology and same intellectual property portfolio.

[Robert Duncan Brown, Senior Research Analyst]

Okay. And then on the stack JV, you gave some color on how that's running now. How do you see that? Or what's the volumes it's running at today? And do you see that sort of stable and growing throughout the year? Or how would you characterize the growth in that production rate?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Right. So in terms of production activity, it's running about 500 stacks per month, which implies 6,000 per year. That's the current run rate. There is an internal plan at the stack JV to scale that up significantly during the year. I don't think we want to a give specific number at this point. One thing that's important this year is, is regardless of the actual production volume, is to validate the production capacity of 20,000 stacks per year. So there's a couple of key things going on there. One is actual volume as well as validating production capacity. So we expect to see that ramping up during the year. But even at 500 per month, it's at a historic rate, obviously, in the fuel cell industry. I just want to punctuate this point. I believe this is the only large volume manufacturer of commercial stacks globally outside of Ballard's production facility here. So we're -- as I look at demand for stacks growing in the China market, this JV is very well positioned with leading technology as well as with scale.

[Robert Duncan Brown, Senior Research Analyst]

Okay, great. That's a good overview. And then switching to the Portable Power market, could you give us a sense of how that Milestone C approval impacts the ramp in that business this year?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

So we were happy, obviously, Rob, to receive the initial order of $1.6 million in January, not just for the order itself, but also to understand how orders get processed under Milestone C, which was a first time for going through that process for us. There's a lot of learning there. What we're seeing is that the procurement will be a little bit different, where there'll be a bundling typically of larger orders together. So that's kind of the trend we see as well as the documentation, which is extensive. Going through that process one time positions us fairly well now with the counterparties on how to process the paperwork. In terms of scaling, we expect to clearly see a growth in 2018. And I think as we move through the year, particularly with September 30 being the end of the U.S. fiscal year-end, is going be important to secure business in Q2 and Q3. And we can provide updates at that point.

[Operator]

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

[Craig Edward Irwin, MD & Senior Research Analyst]

So Randy, first one's a big picture question and something to frame out your progress over the last couple of years. So with Bloom Energy expected to be public before the first half is over, I think there's going to be a lot of conversation about cost-out execution and how challenging it is to actually get cost out. Can you recap for us Ballard's success with cost-out over the last number of years, where you're focused today and how you see Ballard's leadership in this area?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Craig, thanks for joining. First of all, I think for the first time in Ballard's history, cost-out isn't just a theoretical discussion and isn't just a discussion about technology design and product design improvements. So as we look at the past number of years, even going back the last 5 or 6 years, obviously, we've seen significant cost reduction in the range of 67% on fuel cell engines and significant cost reduction on stacks as well. Those evolved and primarily achieved through next-generation design. And we're, of course, working on next-generation design of our liquid-cooled stacks in-house currently as well as the eighth generation of our module, and we expect significant cost reduction as well from a design perspective. Now what's interesting is the last year in particular, we've now started to be able to look at supply chain as an opportunity. And just as an illustrative example, just on the shipments of the 600 engines in Q -- in the last half of 2017 on the supply chain, we're able to squeeze out $1.1 million of cost savings through supply chain. That was through localizing supply of components with high-quality suppliers in China. So we're now starting to see the benefits of some scale occur. And that, of course, helped support gross margin expansion last year as well. So as we look out, I think you're going to see 3 things occurring. You're going to see cost reduction from continued improvement in world-leading technology, both at the MEA level, at the stack level as well as with the modules. And I want to point out the cost isn't just a function of upfront capital cost. What we're seeing with our technology improvement is increased durability, which helps impact overall long-term costs in terms of total cost of ownership. So that's number one, is you'll continue to see, I think, really good improvement. And this year will be -- in 2018, will be a very important year on the development of our next-generation technologies. And then you'll continue to see improvement as scaling occurs and our glocalization efforts independently, as well as with our Chinese partners, continues to show value and realizing cost savings, particularly around the balance of system components for modules. And then, third, we're starting to see scale, obviously. And just something as simple as 500 commercial trucks being deployed in Shanghai, all using the same converters and the same stacks and the same modules is another opportunity where we're starting to see scaling occur. That will occur first in China, but we're just as excited in the long-term market opportunities for the European theater and for the U.S. market as well.

[Craig Edward Irwin, MD & Senior Research Analyst]

Great. So next question I wanted to ask is about the LOI you press released yesterday. I guess, first, I should say congratulations. It's nice to see that basically in the boat here. From your prior calls, commentary around the outlook for the European market and North America, it sounds like there are potentially others that could materialize and contribute to the 2018 revenue number. Can you maybe frame out for us just in loose terms sort of where we should be watching the relative importance of different geographies as we look for potential incremental bus orders for '18?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. I think Europe is going to be a key market long term. I think you're going to see increased order activity in Europe for buses in 2018. So the announcement yesterday really related to the German cluster under JIVE I. We expect to see the U.K. cluster likely in the next 4 to 5 months on the long end, hopefully shorter than that. And we expect to see opportunity to participate in that cluster as well, and then I think you're going to start to see additional JIVE I and JIVE II programs crystallizing. And again, we expect Ballard to have a fairly significant participation rate.

[Craig Edward Irwin, MD & Senior Research Analyst]

Great. And then last question, if I may. The investment tax credit, it's never been central to your business model the way that Ballard has approached its markets. But Material Handling is a market that does see some material benefits there. Can you maybe talk about your customers in that market, not just the one that people have historically talked about, but other new customers, whether or not there's an increased appetite, an increased tempo of activity as people are looking to capitalize on something that could be nicely profitable over the next couple of years?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. I think the reintroduction of the ITC in the U.S. is an important catalyst. You mentioned the Bloom Energy IPO. No doubt that will help their public market positioning. And it's clearly helpful for our Plug Powers business. I think longer term, there will be other entrants into that Material Handling market space, and we feel we're very well positioned. Some of those entrants will benefit from the ITC. I think -- frankly, I think it's really about strengthening the value proposition with the end customer and enabling finance solutions to come to bear that can use that ITC credit.

[Operator]

Our next question comes from Jeff Osborne of Cowen and Company.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

A couple of clarifications, and then one question on trucking. Randy, I think you said the Synergy facility produced, what was it, 11 -- 1,145 stacks from opening in September through year-end and 558 in the month of December alone? Was that right?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Correct. Correct, yes.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

And then -- so it sounds like just in the course -- if I'm doing the math right, they ran in the month of December above the nameplate capacity, because didn't you say it can produce 6,000 a year, which would be 500 a month. I'm just trying to reconcile that.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

You're correct, yes.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

How did that happen?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Well, there's 2 lines there. The 2 lines, one is I'll call it effectively a copycat line with the Ballard line here. There's a second one that has some automation that's been implemented, next-generation automation steps. So that line was -- it started getting tested last year. Most of the production's been run off the first line so far. Also, when we talk about capacity, they really only ran one shift. And so they're running one 12-hour shift, and there's lots of ability for them to scale it significantly beyond 6,000 per year by moving to more shifts, and also getting that second automated line operational. So when we talk about production capacity for 20,000, I personally believe that's a very conservative production capacity number. And longer term, with the growth in the market demand there, that JV's going to be very well positioned.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

Got it. That's helpful. And then can you -- you may have discussed this or Tony might have mentioned it, but I'm just trying to kind of piece together the flattish revenue on the conservative and responsible side, as you worded it. Could you share with us what the TS transfer -- China-affiliated technology transfer, what revenue was in calendar '17 that won't repeat itself in '18, just so we can look at an apples-to-apples comparison?

[Anthony Robert Guglielmin, VP & CFO]

Sure. Yes, I'm happy to answer that. In fact, let me -- I'll even go a little bit further. We've talked about 2 -- really what I would describe as 2 big China items in the year. One was the Technology Solutions on the China joint venture. We booked $16 million last year specifically related to the completion of that joint venture TS program. The other significant item in China last year, of course, was the delivery of 600 modules and components to Broad-Ocean. That itself was $28 million over the course of the year. So when you look at the contribution from those 2 items alone, that would've been $44 million. So if you kind of -- if one was to just look at those from an apples-to-apples basis, and just to take our 2017 revenue, shall we say, take that out, fundamentally, we'd be looking at over 50% growth in the balance of the business just to remain flat. So whilst we've talked about relatively flat, if you put those aside, we are looking for some very significant growth in the rest of the business just to get -- to fill that gap, for lack of a better term.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So I think what that means, Jeff, and I appreciate the question, is that the underlying business is showing a lot of growth. And we're pretty excited about that. So those 2 one-time transactions position us strategically in China. The underlying growth is showing strength, and the underlying business is showing strength and growth. And we expect to have a good year.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

That makes sense. Can you remind me -- you may have gone over this on prior calls, but why wouldn't Broad-Ocean buy more in calendar '18?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Recall the key transaction there with Broad-Ocean in 2017 was to help them to set up for module assembly in China. So they will start manufacturing modules. They have started manufacturing modules, assembling modules in Shanghai already.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

So offsetting the $20 million loss of the 600 modules, you should have MEA revenue attributable to some extent of the modules that they're producing?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Exactly. It results in demand pull-through to the stack JV of stacks and then to Ballard of MEAs. Exactly.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

So is there like a rule of thumb that you get -- sorry to interrupt, but is there a rule of thumb that you get like $0.10 for every -- for an MEA relative to $1 worth of module sales or how can we look at that 600 if that goes to a couple thousand, whatever the ramp is?

[Anthony Robert Guglielmin, VP & CFO]

Yes. If we look at -- if we think about a module as a -- for an individual slot, it's probably about 20 -- if you look at the MEAs, let's call it about 20% of the value of a module ballpark. And of course, for the -- under the licensing agreement with Broad-Ocean, there's also royalties paid per unit on top of the MEA sales as well. So it will be a combination of that MEA, plus a royalty under that licensing agreement. So absolutely lower dollars per slot, but growing, and volume will increase as we go through. And I will say the margins -- the effective margins as well are at least equally as attractive the way the business is structured with MEAs and royalties relative to module.

[Jeffrey David Osborne, Managing Director and Senior Research Analyst]

Got it. That's very helpful. And then the last one I had is just around the Kenworth project, and especially following the Tesla buzz around electric trucks on the Class 8 side, which certainly have picked up momentum in some of the noise that carve's making. Can you just -- as you or you and/or Kenworth are marketing, testing of this for drayage applications, do you have a rough sense of what fuel cell cost per mile would be or of the hybrid solution of the 30 miles on electric batteries, and then reverting over to the fuel cell? Is that how the buyers are looking at this on a cost per mile? That's certainly how Tesla positioned them. I'm just curious how you're looking at it.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So I think the -- first of all, the work with Kenworth already is quite valuable. They're a very sophisticated organization. And the collaboration on the integration is already showing opportunity for improvements in terms of cost reduction. So we're very excited about that market. The other thing is that this market, when you look at markets where range, heavy payload and fast refueling are critical, we see this as an extraordinarily attractive market, particularly the size of the market, the addressable market for FCEVs. So Kenworth sees that, and we're actually seeing globally a lot of trucking OEMs or truck OEMs are now seeing this is a really attractive market opportunity. In terms of the economics, there are a couple of metrics that these partners are looking at. They obviously look at the capital cost on a cost-per-kilowatt basis, and they're looking at the TCO as well in terms of cost per mile. So we're working with them to refine the economic models and make sure that we have a compelling solution that drives value in this marketplace.

[Operator]

Our next question comes from Amit Dayal of H.C. Wainwright.

[Amit Dayal, MD & Senior Technology Analyst]

Most of my questions have been asked. Just wanted to get some color on the $91 million and change in backlog. How much of that is China, and if you could break that down between technology and bio products?

[Anthony Robert Guglielmin, VP & CFO]

You talk -- yes, so these are $91 million of orders that we have on hand for the year, so this would include -- so yes, these are orders that we have committed orders for delivery this year. Certainly, a significant portion of that will be the MEA deliveries for the balance of the year. Again, recalling, just for those who don't recall this, it's $150 million over 5 years. So simple math. We'd have about $30 million to $35 million of MEAs in that number for delivery this year. So that would be heavy duty revenue, product revenue, MEA revenue that's China. The rest of that, though, is broadly across Technology Solutions. The VW-Audi contract is certainly an important contract, but we also have a fairly diversified delivery. As Randy mentioned, the European bus theater, where there's a portion of that that's included as well. And so I think it's quite diversified when one looks beyond the MEA and the VW program.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. Amit, one piece of color that I would add is that as we look at our expected revenue mix at the end of 2018 for the year, China was slightly over 60% in 2017. I expect probably to be around 45% in that range for 2018. So higher diversification occurring in 2018 with the strength of both the European and the U.S. markets.

[Amit Dayal, MD & Senior Technology Analyst]

Understood. And in terms of the revenue flows for the year, do you expect some variation quarter-over-quarter? Or should we sort of see a steady ramp going into the year on a quarterly basis?

[Anthony Robert Guglielmin, VP & CFO]

Yes. It's going to -- the revenue ramp-up will look very familiar to the last few years, which is we'll be ramping up Q1 through the year. And we would expect a similar contribution in the back half of the year, as we've often seen kind of the sort of 40% in the front end, 60% in the back half type of ramp-up. That's 2 items that are going to drive that. And particularly this year, Randy referred earlier to the Protonex business, that's certainly going to be ramping up during the year, and then the European as we start to deliver in Europe. So I think I would look for a similar kind of ramp-up through the year as we've seen in the last couple.

[Amit Dayal, MD & Senior Technology Analyst]

Understood. And just on the balance sheet side of things, I know you guys are pretty well situated at this point. Are there any plans to strategically leverage that for any acquisitions? What do we do with the $60 million in our balance sheet?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. On a relative basis in terms of the industry, we think we have a very strong position, Amit, and it's something we want to preserve as we go forward. Certainly, we've looked at a lot of M&A opportunities over the last year. Many of them haven't met our financial screening criteria. One of the key considerations is to make sure that we're minimizing the consumption of cash, both from a transaction perspective as well as from a go-forward perspective. So we're trying to look at opportunities that contribute to EBITDA, not drag on EBITDA, and contribute to cash and not drag on cash. So as we look at opportunities, our cash position and the post-transaction cash position is something that we consider fairly carefully.

[Amit Dayal, MD & Senior Technology Analyst]

Great. And you guys touched on the gross margins sort of not changing too much with MEAs now forming sort of most of the sales for -- of China opportunity. I mean, should we expect 30% or 30% to 35% level of gross margins in 2018?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. I think just to be conservative, like our outlook, we've said for a couple of years now that 30-plus percent is kind of where we're targeting. And I think we would set the standard there for now.

[Amit Dayal, MD & Senior Technology Analyst]

Got it. And just one maybe reminder, if you will, the 6,000 stacks per year, how many buses does that translate to, if you could just refresh that for us?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So that's about 3,000 buses within -- assuming 30-kilowatt engines.

[Operator]

Our next question comes from Carter Driscoll of B. Riley FBR.

[Carter William Driscoll, VP & Equity Analyst]

So just getting back to the outlook, and I certainly appreciate being conservative, given the moving parts as you're changing the strategy from shipping directly from Vancouver to ramping the JV. The first question is maybe you could just kind of bracket some of those factors that could lead you off the kind of flattish year-over-year sidelines. I'm assuming that it would be either a greater pull-in of MEA demand than you're currently forecasting, some level of what you just announced with Van Hool maybe being pulled in, in the latter part of 2018, some one-off potential TS contracts. If you could just kind of frame how you get from kind of flattish to exceeding that level, just the top line drivers by category or product?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. I think, certainly, there's potential for potentially higher pull-in, as you referred to, on the MEA side. It's something that we're looking at carefully. I don't think we would expect to see the Van Hool deliveries get pulled in higher than they are. The history of those projects is they take longer, not -- don't get accelerated. But there are TS contracts and TS activities that we're very actively quoting. There are a number of Power Products in Heavy-Duty Motive and medium-duty motive in China, in Europe and the U.S. market that we're quoting. So quoting activity has never been higher. So it's really a function of converting our sales pipeline to orders, and then seeing -- making sure that we have sufficient time in year with supply chain activities and production activities and customer delivery timing. I think there's a lot of opportunity for that. I personally see some upside to our conservative guidance. But I think where we are right now is, with the order book at $91.4 million, that's kind of the responsible position to take.

[Carter William Driscoll, VP & Equity Analyst]

Got it. Okay. Just switching gears a little bit. Can you talk about any particular milestones with the agreement you signed with Siemens that are deliverable in 2018 and maybe expectations if you were to hit the initial, how that could pull through into the product side?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

So I want to emphasize again, this is a really important customer. And already, we've gone through kind of EH&S and quality-type audits with Siemens and ABB as well. And so those have actually been very important milestones from an initial qualification perspective in the last number of months. So that's really important. In terms of the program, we've got a really good jump on this for the Siemens program in 2017. The funding that just came in from Europe to support this for Siemens as well, I think, gives them a lot more confidence and resolve in terms of potentially accelerating activities. In terms of technical milestones and deliveries, it's all subject to NDA, and I don't think we want to get specific on those, given the customer sensitivities. Tony, do you want to add something?

[Anthony Robert Guglielmin, VP & CFO]

Yes. I was just going to add to that. Thanks, Randy. We did -- this contract is somewhat unique in that there are a significant numbers of milestones within the contract, a little different than some of the other ones that we've had that have had very large milestones spread out. This is some 25-odd milestones over the firm, and we delivered 2 of those in Q4. We booked about $700,000 of revenue in Q4. So from a rev rec point of view, we anticipate knocking off milestones fairly regularly over the course of the program. So I think the rev rec will be fairly steady over the course of the 3 years as opposed to waiting for what might traditionally be a large milestone every 6 or 12 months. It's a bit unique compared to some of the other ones.

[Carter William Driscoll, VP & Equity Analyst]

Got it, okay. And then just I think some people don't recognize that you have other opportunities with different OEMs in China. Sometimes, I think people look at the Broad-Ocean relationship and think that's the only vendor you're tied to. Can you talk about some of the discussions you've had with other OEMs outside of the territories that Broad-Ocean has kind of drawn its wall around? And either characterize the type of discussion they are in the scope versus what Broad-Ocean is doing with you and/or the type of customer, at least their primary business?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. I mean, I would say we're actively working with all the key players in the China market right now. So it's a very interesting market. You might be competing in one province and collaborating in another province. So a number of the systems integrators and potential partners in that market, we've had very good progress with over the last 6 months in particular. The other thing that's really important is we've been working fairly aggressively with the bus and truck OEMs for a sustained period here over the last year with symposiums and really getting into customer requirements -- market requirements and customer requirements and making sure that we've got the right product for the long term in that marketplace. And so we've had a high level of engagement from the leading bus and commercial truck OEMs, and are now starting to see demand pull through in terms of those OEMs wanting to make sure they have Ballard technology inside, given the durability and safety profile and other key features. So I think that's important. And as you start to look at vehicles getting registered and certified as a fuel cell vehicle in that marketplace, there are a number of platforms now that have Ballard technology certified. So that's a key metric, I, think in terms of showing opportunity with a number of different bus OEMs and commercial truck OEMs. Tony, anything you want to add on that?

[Anthony Robert Guglielmin, VP & CFO]

No, thanks. That's correct.

[Carter William Driscoll, VP & Equity Analyst]

Okay. Maybe just 2 last quick ones, if I may. So you talked about working on a new liquid-cooled stack. Will that incorporate the new catalyst work that you're doing with Nisshinbo? And/or if so, when you think you might be able to lease a beta of that new stack? And I just have one last follow-up after that.

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So we'll have -- we already have stacks on test right now. So the LCS program is getting fairly advanced. And this is an important year for delivery. We certainly expect to have samples of that product for testing with key customers in select markets later this year. The Nisshinbo non-precious metal catalyst program we'll feather in later on. It won't be featured in the initial. But we have a new MEA that we developed and qualified in 2017 that's going into this new stack, and it provides a much higher level of durability. And so when you look at the current target for the LCS, the liquid-cooled stack, it's 34,000 hours of durability, which I believe is an industry standard. It will be the benchmark.

[Carter William Driscoll, VP & Equity Analyst]

Okay. Maybe just lastly, you talked about -- I know you just won a TS contract to develop a purpose-built product for, I think, the Class 3 Material Handling unit. Is that an existing OEM in the Material Handling field, a new entrant? And how do you plan to communicate any potential updates moving from the TS program into, hopefully, production units on the product side?

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Yes. So a very important customer. They're highly sensitive to public disclosure on the profile of the partner there, so we won't comment on that. I will say that we'll provide updates from a technology perspective from time-to-time. And in terms of market activities or geographic market exposure or a partner name, stuff like that, we'll wait for our partner there to give direction on that.

[Carter William Driscoll, VP & Equity Analyst]

But do you see the trend towards more purpose-built away from the retrofit market? I mean, obviously, it's very small right now, but...

[R. Randall MacEwen, President, Chief Executive Officer & Director]

We clearly see momentum building, and I think there will be other important developments by Ballard in 2018 in the Material Handling segment.

[Operator]

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

[R. Randall MacEwen, President, Chief Executive Officer & Director]

Thanks, Ariel. Thank you for joining us today. We look forward to speaking with you again in early May when we'll discuss results for the first quarter of 2018.Thank you.

[Operator]

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