Ballard Power Systems, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q4 and full year 2021 results conference call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's fourth quarter 2021 Financial and Operating Results Conference Call. With us on today's call are Randy McEwen, Ballard's CEO, and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for a complete disclaimer and related information. Given the growing number of research analysts covering the company, we will again keep our prepared remarks relatively brief to leave sufficient time for questions. I'll now turn the call over to Randy.

Thanks Kate and welcome everyone to today's conference call. These are extraordinary times. As we look back on 2021, the existential threat posed by our global climate crisis was building to decarbonize our global economy. With this backdrop, there were important developments for the hydrogen sector, including global policy initiatives, increasing net zero targets, deeper pools of capital moving to the energy transition and hydrogen, and unprecedented market engagement. And now, amidst the atrocities of the war in Ukraine, the geopolitics of energy have profoundly and irreversibly shifted. The prioritization deck has been reshuffled. Both energy security and decarbonization have jointly galvanized a global worldview that we must accelerate the clean energy transition. Notably, last week, The European Commission released a plan to accelerate the development of secure and sustainable energy with a focus on cutting dependence on Russian gas before 2030. Within this plan is a specific initiative to create a hydrogen accelerator to develop additional infrastructure and significantly increase clean hydrogen production and importation plans. An increase in clean hydrogen development directly impacts the cost competitiveness and TCO break-even thresholds for hydrogen fuel cell applications, particularly in a world of rising hydrogen carbon fuel costs. We see a strong foundation supporting the global energy transition. And at Ballard, we too continue to lay the foundation to be the long-term market leader in PEM fuel cells. Before we talk about 2022 expectations and outlook, I'd like to take you through some of Ballard's current focus areas and 2021 highlights. Our focus continues to be on the medium and heavy duty motive mobility markets of bus, truck, rail and marine with product leverage in select stationary power market segments. The total addressable market for these verticals in our medium and heavy duty motive markets continues to grow with the evolution towards a net zero world. In our 2020 Investor Day, we outlined a 2030 estimated TAM of $130 billion for the bus, truck, rail, and marine markets. Based on current estimates, we now estimate this to be over $250 billion. This does not include the rapidly growing opportunities in the stationary and backup power, light duty, and off-road markets. We expect these additional markets to account for meaningful proportion of our near and long-term revenue growth. We plan to provide TAM estimates on these additional verticals at our investor and analyst day this fall. I'd like to walk through each of these key verticals and the 2021 highlights. Throughout the year, we grew our European and US bus business significantly. This growth was supported by repeat orders from key customers, including New Flyer, Solaris, and RightBus, as well as entrance in the new regional bus markets with Tata in India and Global Ventures in New Zealand. In the truck market, we executed against our development programs with Mahle and our Weichai-Beller joint venture programs, while also announcing new collaborations with Hexagon Puris, Linamar, and Quantron. Regarding the progress with MOLLE, we delivered the 120-kilowatt fuel cell engine to the MOLLE team in December on time with the development schedule. This concept engine will now be integrated with their components for the next phase of testing. The parallel go-to-market strategies of partnering with Tier 1 suppliers and vehicle integrators not only enables us to span various classes of trucks, but also addresses different market demands in stages of maturity. The Tier 1 suppliers act as long-term channel to global truck OEMs, while the vehicle integrators accelerate newer term demand of fuel cell trucks by bringing early stage fleets to market. You can expect us to continue to address the truck market with this strategy through 2022 and beyond. We expanded our opportunity set in rail, signing new projects with CP Rail, Sierra Northern Railway, and Talgo, while transitioning our Siemens development program to initial product sales for train development in Germany. In the marine vertical, we delivered our first FC Wave modules to customers in a number of exciting marine applications, including NORLED's hydrogen ferry program. In stationary and backup power, we increased our revenue and announced an important new partnership with Caterpillar and Microsoft for the data center market, while HDF announced the start of its multi-megawatt baseload hydrogen power plant deploying Ballard large format fuel cells. On the technology and operational front, we exceeded our internal 2021 goals for our 3x3 stack cost reduction plan and are on track to achieve our 2024 target. We also launched our FCMOOP HD Plus fuel cell engine and achieved a field experience milestone with vehicles powered by Bowerd fuel cell technology aggregating an industry-leading 100 million kilometers of on-road service. In corporate development, the strategic equity investment in 4C Power and the acquisition of Arcola Energy are two examples of how we're thinking of expanding across the value chain and increasing our technical capabilities. With the acquisition of our Kola Energy, now named Ballard Motive Solutions, we have in-house fuel cell powertrain and vehicle integration capabilities, allowing us to reduce customer adoption friction points while strategically expanding across our value chain opportunities. We ended the year with a strong balance sheet and cash position to further deploy as accretive and strategic opportunities arise. Now looking at our key regions. As we highlighted in our Q3 call, we continue to see significant growth in the European market. Our 2021 European revenue increased nearly 20% year over year, and in the power product segment specifically, we saw an increase of over 50% in fuel cell sales. This was highlighting the continued maturity of the European bus market and the growth in other fuel cell applications of truck, rail, marine, stationary, and power. In North America, orders from CAT, CP Rail, and continued follow-on orders from New Flyer are driving the over 300% year-over-year growth in the heavy-duty mode of revenue in the US and Canada. Moving to China, our strategy in addressing the China market remains on track, and we assess the best routes to market as additional clarity around subsidy frameworks becomes available. In mid-January, a second batch of demonstration city clusters was announced. in addition to the first batch of three clusters, Beijing, Shanghai, and Guangdong. The two new clusters of Hebei and Henan are exciting expansions of the China fuel cell policy. The Henan cluster is led by Zhengzhou City, where the Weichai Ballard joint venture bus customer, Yutong, is located, and consists of 17 participating cities. One of the cities included is Weifang City, where the Wei Chai Ballard Joint Venture is located. The Hunan Cluster hasn't released any numbers on fuel cell electric vehicles or hydrogen refueling station deployments as yet, but the industrial experts forecast more than 5,000 fuel cell electric vehicles to be deployed in the Hunan Cluster during the demonstration period. While details around the subsidies framework have not yet been published, we expect the fuel cell products from the Wai Chai Ballard Joint Venture to qualify for the subsidy program at this time. We continue to evaluate opportunities for Ballard and the Wai Chai Ballard Joint Venture to further strengthen our positioning across the cluster regions in the near term and post subsidy adoption in the longer term. Now shifting to the 2022 outlook. Supply chain challenges have been globally ubiquitous throughout 2021 and are continuing into 2022. Today, we've been largely able to risk mitigate global supply chain disruptions by increasing supply of materials and moving more inbound products by air. In 2022, we're anticipating some electronic component supply constraints, but are continuing to identify alternatives and site agreements to secure supply continuity. Regarding the increasingly dire situation in Ukraine, we have no direct vendors from either Russia or Ukraine and have not received any identified impacts from discussions with suppliers so far. We do have a number of suppliers in Europe and neighboring Ukraine, so we are tracking open orders and trying to expedite deliveries where possible to avoid material shortages. More broadly on commodities and component pricing pressure, 40% of Europe's natural gas and 25% of Europe's crude oil is provided by Russia. So pricing pressure is expected on components globally as energy costs for production and transport continue to rise as the conflict continues. Today, we have not received any price increase notifications from our suppliers. We are honoring pricing on our existing customer contracts but have already taken action to adjust commercial quoting activities for future orders to reflect the current cost and risk environment. We've initiated 2022 guidance on total operating costs and capital expenditures to provide clarity on our capital allocation plans and priorities. Our total operating costs for this year are expected to be between $140 and $160 million, a 50% increase from 2021. This increase is largely driven by increasing our investment in technology and product development relating to next generation products and component development across our key target markets of bus, truck, rail, and marine, as well as increased investments in sales and marketing. These resources are working to develop additional product capabilities aimed at key growth markets such as bus, truck, rail, and marine, and next generation fuel cell technologies. We're confident investing ahead of the curve, and we believe this is critical to maintain technology leadership and market share as the hydrogen growth accelerates over the coming years. Our 2022 capital expenditures are expected to be between $40 million and $60 million. This estimate excludes potential investments in corporate development activities. We are increasing capital investments on our testing capabilities, adding production, lab, and engineering equipment, and investing in additional prototyping functionality. Following our investments over the past three years on advanced manufacturing of MEAs, we're now starting investments in advanced manufacturing of bipolar plates. We are expecting additional pressure on our gross margin outlook for 2022, consistent across the industry. Key drivers are continued increase in material pricing, freight in cost, and labor, as well as an ongoing shift in the revenue mix to additional power products versus technology solutions. We are still in the early phase of adoption and production volumes and platform acquisitions, customer acquisitions, and therefore the cost of fuel cells are still sub-optimized, putting pressure on gross margin. As the industry grows and production volumes scale, we expect to see concurrent gross margin expansion. Corporate development work will continue to be a strategic priority in 2022. including potential acquisitions, investments, and partnerships to improve competitive positioning, expand our product portfolio and solutions across the value chain, simplifying and enhancing customer experience, accelerating fuel cell adoption in target markets, and accelerating business scaling. As the energy transition and pace of decarbonization accelerates globally, we're also focused on reducing our own emissions. In 2019, we launched our mission carbon zero initiative to evaluate and steadily reduce the environmental impact of our organization. In 2022, we plan to complete our roadmap to achieving this corporate carbon zero goal by 2030 through defining long-term strategies to reduce and offset our emissions and other impacts. On the last earnings call, we discussed the significant leverage diversification and resiliency in our business model across multiple regions and multiple verticals. We are already seeing early signs of this strategy and the benefit play out. While our backlog was down from Q3, this top line number does not tell the whole story and masks key growth signals from underneath. This diversification in our revenue mix by region, vertical, and customer is critical as we establish a presence with an increasing number of leading companies in our target markets of truck, rail, marine, and stationary power, and continue to build on our bus market. Our 2020 year-end order backlog was made up of 20 customers with meaningful orders, excluding the Waychai-Beller joint venture. At the year end 2021, just one year later, this number grew over 50% to over 30 customers with meaningful orders. We also saw growth in European and North American composition in the order book, now comprising approximately 60% of the total backlog, in contrast to approximately 40% at the end of 2020. As we've seen the translation of growth with companies like RightBus, FedHool, Solaris, and NewFlyer, we expect a similar growth profile for new customers making up increasing proportions of our future order book. With this resilient and diversified business model, growing technology capabilities by investing ahead of the hydrogen growth curve, and increasing partnerships in key verticals and regions, we're excited about the 2022 outlook and long-term positioning for Ballard. This year and the years to come, we'll continue to set the stage and lay the foundation for years of growth ahead as the energy transition takes hold. With that, we'll turn the call back over to the operator for questions.