Earnings Call Transcript - BLDP Q3 2021

Operator, Operator

Thank you for standing by. This is the conference Operator. Welcome to the Ballard Power Systems Q3, 2021 results conference call. As a reminder, all participants are in listen-only mode, and the consent is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Kate Charlton, Vice President, Investor. Mr. Donations, please go ahead.

Kate Charlton, Vice President, Investor

Thank you, Operator, and good morning. Welcome to Ballard's Third Quarter 2021 Financial and Operating Results Conference Call. With us today, Randall MacEwen, Ballard CEO, Paul Dobson, Chief Financial Officer. We will be making forward-looking statements based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I'll now turn the call over to Randy.

Randall MacEwen, CEO

Thanks, Kate. Welcome everyone to today's conference call. Given the growing number of research analysts covering the Company, we will keep our prepared remarks relatively brief to leave sufficient time for questions. We join today's call with an exciting industry backdrop, including COP-26, $9 billion of fresh commitments to hydrogen coming in the U.S., and a growing global recognition of the important role of hydrogen to achieve deep decarbonization, including in hard-to-evade sectors such as heavy-duty mobility. We continue to have high conviction in our strategy and growth plan. Our business model has significant leverage and resiliency as we deploy the same core competencies and fuel cell technology across multiple verticals: bus, truck, rail, marine, off-road, and stationary power. We made solid progress across our business activities over the past quarter, including in customer programs and deliveries, in our technology and product development programs, in strengthening our operating platform, new customer acquisition, and our partnership strategy. In October, we announced that Ballard's PEM fuel cell technology and products have now powered fuel cell electric vehicles over 100 million kilometers around the globe. Buses and trucks with Ballard technology have accumulated over 100 million kilometers of real on-road experience. This is a significant differentiator for us and positions us in a different league of demonstrated capabilities compared to any other company that provides fuel cells for medium and heavy-duty mobility. Our proven in-service experience with a track record of safety, quality, availability, and performance continues to be a compelling value proposition for our customers and a strong calling card for Ballard. This provides customers with confidence in Ballard technology, product durability, quality, and our total cost of ownership in real-world duty cycles and operating conditions. We've been very busy on the customer side and with our partnership strategy. On partnerships, we continue to focus on simplifying the fuel cell electric vehicle experience and ease implementation friction points for OEM customers and end-users. We're putting the customer at the heart of our strategy and our investments. We believe there's high value to offer our customers integrated fuel-cell powertrain solutions that are optimized for performance and cost. We have strengthened our platform to better support our OEM customers, including our recent partnerships with Hexagon Purus and Forsee Power. California-based Hexagon Purus is a leading hydrogen equipment supplier and integrator. We're planning to work together to develop Class 6 & 7 Fuel Cell Electric Truck markets, incorporating their turnkey electric drive train and hydrogen storage solutions with our fuel cell engines. We also announced the signing of an MOU with Forsee Power, a France-based leader in smart battery systems for sustainable electric mobility. Through the strategic partnership, we plan to develop integrated fuel cell and battery solutions optimized for performance, cost, and installation for heavy-duty hydrogen mobility applications. Our proven track record of 100 million kilometers, continued work on product cost reduction, and strategic partnerships to simplify the fuel cell electric vehicle experience are all leading to increased customer engagement at a time when end-users are demanding zero-emission solutions. This is leading to repeat business with existing customers as well as new customer acquisition. Recently, we announced an exciting new customer relationship with Quantron, a German-based specialist in electric vehicle integration. The initial collaboration will see Quantron integrate Ballard's FCmove family of heavy-duty fuel cell power modules into Quantron's electric drive train and vehicles. Initial delivery of Quantron fuel cell electric trucks is scheduled for late next year. We also want to highlight the growing activity levels for fuel cell buses in Europe. We announced repeat orders for a total of 40 fuel cell engines from existing bus OEM customers for deployment in new and existing European transit operations. Over the past 12 months, we've expanded our deployment market from 10 European cities to over 25 cities in 10 countries. As of the end of October, there are nearly 160 fuel-cell buses powered by Ballard in service across Europe, representing an increase of over 80% from last October. We expect to soon have nearly 80 additional Ballard-powered fuel-cell electric buses on California roads, complementing the approximately 50 already in service. In the truck market, our joint development program with Mali continues to progress as planned. Testing of this 240-kilowatt module is expected to continue into 2022. The long-term outlook for the rail market continues to strengthen with new orders announced for hydrogen-powered passenger trains with Targo in Spain and a pilot with CP Rail in Canada, along with ongoing work with Siemens in Germany. In the Marine Market, we're seeing high customer engagement driven by increased pressures for decarbonization. We've progressed our work with Norled to deliver a hydrogen fuel cell powered passenger ferry and expect to deliver the first FCwave modules to Norled by the end of the year. The backup and stationary power opportunities are also gaining traction, and we've seen a fourfold increase in the past two quarters. In Europe, we announced a project with Fusion Fuel in Portugal for a peak shaving unit fueled by green hydrogen. Strong initial market uptake for critical zero-emission power for data centers is also evident, particularly for backup power. Our core industry-leading PEM technology is being leveraged in various cross-vertical applications as the uses of hydrogen expand. In China, while fuel cell policy and related sales of our Weichai-Ballard JV have disappointed in 2021, we achieved important technical milestones. As of the end of September, there were over 3,330 fuel cell electric vehicles deployed in China powered by Ballard technology. We remain firmly bullish on the long-term market for our technology in China. We also want to comment on the supply chain challenges. We've seen delays in freight shipments, resulting in elevated costs. Our long-standing relationships with key global suppliers continue to help us navigate these dynamics. As we look to next year, we're encouraged by the record levels of customer engagement across all application verticals. We're set up for an exciting 2022 marked by continued customer wins, product innovation, cost reductions, additional deployment, development of key partnerships and technology, and the start of a long-term revenue ramp. With that, I'll turn the call back over to the Operator for questions.

Operator, Operator

Thank you. We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. We will pause for a moment as callers join the queue. First question is from Rob Brown from Lake Street Capital Markets. Please go ahead.

Rob Brown, Analyst

Good morning, Randy. Just wondering if you could provide some further color on the Marine Market in terms of the customer engagement or customers ramping up their efforts into this being driven by the IMO discussions around carbon emissions, or where is Marine at in the customer engagement efforts?

Randall MacEwen, CEO

Yeah, Rob, good morning and thanks for the question. The Marine Market is one that I think we stepped back two years ago and probably wouldn't have forecasted the high level of customer engagement we are seeing at this time. Partly, you're right, is being driven by some targets, and in some cases real mandates depending on the jurisdiction. So of course, we have the International Maritime Organization target to reduce emissions 50% by 2050, but we're also seeing a number of jurisdictions looking at sensitive waterways and considering decarbonization. We've seen electrification occurring in Marine applications, both with battery and fuel cells. With Norled, we will deliver our first modules for the world's first fuel-cell ferry. The FCwave product launched last September has already developed a significant order book and interest level. That product has applications not just in the marine space but across other verticals as well. We see a lot to prove out in Marine, but we're very bullish with the activity levels we've seen with key customers like Norled as well as some partners like ABB.

Rob Brown, Analyst

Following up on the European bus market, is the order activity still being driven by the GI program, or are you seeing orders starting to flow from cities and regions independent of that?

Randall MacEwen, CEO

We've seen a number of projects driven by adoption with Jive support. Before the end of the year, you will likely see another announcement from Europe on support for fuel-cell buses. The value proposition still needs some policy nudges. With the current level of penetration, it's important for these jurisdictions to support initial adoption. We're seeing interest in deploying 100 to 200 buses, moving from tens and hundreds to thousands.

Mark Wells, Analyst

Hi, Randy. Regarding the pace of adoption in China, does that impact your development timeline for product development? Is it possible that there's so much passage of time you skip a generation?

Randall MacEwen, CEO

Good morning, Mark. Thanks for the question. When we entered our collaboration with Weichai back in 2018, we focused on having the highest performing products at the right cost structure for long-term market share. We've done a good job developing those products collaboratively. Over the last 18 months, the Weichai joint venture has localized components faster than anticipated. With more module design coming from the joint venture, next-generation modules are currently being developed which is pretty exciting. We see our program for developing fuel-cell stacks at Ballard complementing those being developed in the joint venture.

Chris Shutler, Analyst

Hey guys, thank you for taking my question. Between partnerships built with Marlin Linamar, Hexagon, Quantron, and foresee, do any of those customers exist in the backlog? What's the timing when we start to see the flow into the backlog prior to the revenue ramp for some of them?

Randall MacEwen, CEO

Chris, thanks for the question. Clarifying an important point, the strategic partners mentioned are not customers; Quantron would be the exception. Fifteen percent of our order backlog for heavy-duty motive increased by about 30% throughout Q1 through Q3 this year. The emphasis on simplifying the fuel-cell electric vehicle experience is helping drive adoption. Most partnerships still have work to do in co-development activities before we see tangible leverage in 2023.

Chris Shutler, Analyst

Looking at the China market, with the slow adoption pace, how does the competitive landscape look today?

Randall MacEwen, CEO

The competitive landscape became very intensive a few years ago. There are numerous domestic players actively finding their way in the hydrogen fuel-cell market. Our joint venture continues to work hard to find market positioning amidst this competition. The pause in the China market did not only affect us; it impacted all players.

Michael Glen, Analyst

Randy, regarding Mali, what do you think about the new management, any shifts in their direction with respect to hydrogen?

Randall MacEwen, CEO

The leadership change at Mali is not likely to reduce interest in hydrogen fuel-cell opportunities with Ballard. The demand for hydrogen has grown exponentially, and Mali has joined the Hydrogen Council, showing their visibility in the growing market opportunity.

Vivek Panjami, Analyst

About the high-cap fund and investment in hydrogen infrastructure, can you talk about other opportunities the team might be considering?

Randall MacEwen, CEO

There are new hydrogen infrastructure funds designed to support hydrogen fuel cell and related projects. Ballard is investing in two of these funds to gain visibility on investment opportunities. We aim to match hydrogen supply with demand applications. As we look at 2022, we see a strong growth ramp ahead. Our current positioning allows us to leverage our core competencies across multiple verticals and regions.

Paul Dobson, CFO

On warranty charges in the quarter, we had slightly higher warranty provisions primarily due to performance testing on some of our new products. The net charge was between $400,000 and $500,000, which we consider a conservative approach to warranty.

Randall MacEwen, CEO

Generally, we have not been providing guidance on profitability. However, we anticipate seeing significant revenue growth starting in 2023 and extending through 2030. Our investments today will position us well for long-term growth. Our total addressable market is growing, and we're currently updating calculations to reflect this. Recent engagements and market developments suggest a larger than previously estimated market opportunity ahead.

Operator, Operator

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

Randall MacEwen, CEO

Thank you all for joining us today. Paul, Kate, and I look forward to speaking with you in the New Year when we will discuss results for Q4 2021. Thanks again.

Operator, Operator

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