Ballard Power Systems, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems first quarter 2022 results conference call. As a reminder, all participants are in 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 1 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 first quarter 2022 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 our complete disclaimer and related information. We will keep our prepared remarks relatively brief to allow sufficient time for questions. I'll now turn the call over to Randy.

Thanks, Kate, and welcome everyone to today's conference call. We join today's call with the continued confidence in our industry backdrop and a growing global commitment to the energy transition. Our climate crisis, coupled with the recent reprioritization on energy security, are forcing administrations into action. The European Commission is taking clear action to boost hydrogen technology scale-up and deployment. As a continuation to the repower EU announcement earlier this year, which outlined plans to quadruple the EU's previously planned hydrogen supply by 2030, the Commission last week announced plans to increase its annual electrolyzer manufacturing capabilities tenfold by 2025. This would increase annual green hydrogen production from 1.7 gigawatts to 17.5 gigawatts. We view this as an accelerant to support the adoption of fuel cell electric vehicles across Europe. In the first quarter, Ballard delivered $21 million in revenue, a 19% increase from Q1 2021, while also securing new orders totaling $27.8 million. This activity reflects an increase in our order backlog to $99.8 million at the end of Q1. Our order intake was largely driven by increased customer activity in Europe in both truck and bus markets. Ballard's focus remains on the large Addressable markets of medium and heavy-duty mobility, including bus, truck, rail, and marine, as well as select stationary power generation markets. These are the applications where our hydrogen fuel cell technology has the strongest value proposition. I'll briefly talk through our Q1 progress and highlights in key applications and regions. We continue to see strong customer engagement in European and U.S. bus markets. driven by repeat orders from key customers including New Flyer and Solaris. As of the end of Q1, Ballard has deployed fuel cells across 17 different European countries and approximately half a dozen US states. We anticipate increased market expansion as European countries roll out strategies and policies to support energy security and decarbonization. In the U.S., the federal government increased low-no funding for bus fleet operators to $1.1 billion, six times that of the previous year, to support zero-emission bus rollout. In the truck market, we continue to make progress with our partnerships. Today, at the ACT Expo in California, Linamar and Ballard announced the unveiling of our concept hydrogen-powered Class II truck chassis. The technology demonstration platform will be showcased this week and displayed in a Ram 2500 truck chassis. Testing on the new platform is underway and will continue in 2022 and 2023. Our development program with Mahle continues on schedule, with integration of Ballard's fuel cell module and testing on the concept engine ongoing and expected to continue throughout the year. Ballard also continues to invest and partner with geographically diverse vehicle integrators to adjust different market demands and stages of maturity in the truck sector. Today, we announced we've entered into a strategic collaboration with Wisdom Motor, Temple Water Group, and Bravo Transport Services, which is Hong Kong's largest transit operator, to accelerate the adoption of commercial fuel cell buses in Hong Kong. owner of Bravo Transport, together with Ballard, co-invested in funding for Wisdom, a company that designs and manufactures zero-emission commercial vehicles. These funds will support Wisdom's expansion and development of its hydrogen zero-emission fuel cell truck, bus, and special vehicle offerings for international markets. Wisdom's hydrogen vehicle product lines will exclusively deploy Ballard's leading PAM fuel cell technology, with modules supplied by the Weichai Ballard Joint Venture in China. As we discussed on the Q4 earnings call, we continue to look at new routes to market to accelerate adoption, leveraging parallel go-to-market strategies by partnering with both OEMs and Tier 1s on the one hand and vehicle integrators on the second. This collaboration, announced today with Wisdom, is our first investment in a vehicle OEM and positions us to participate in the growing Hong Kong market while supporting demand for products from the Weichai-Ballard joint venture. In rail, we expanded our scope of work with CP in Canada. Ballard will support the expansion of CP's hydrogen locomotive program from one to three locomotives with expected delivery later this year. In Europe, Siemens Mobility completed the production of the purpose-built 400-kilowatt Muriel Plus H train and last week announced its first rollout. The train and its new infrastructure are intended to replace multiple-unit diesel trains in commuter and regional transport and bring rail-related CO2 emissions to zero. As a two-car train, the Muriel Plus H has an operating range of up to 800 kilometers as powerful as its electric multiple-unit counterpart, and a top speed of 160 kilometers per hour. One key element needed to make hydrogen technology competitive with diesel fuel in daily operation is a fast refueling process. Deutsche Bahn, who has been identified hydrogen trains as an important technology in achieving climate neutrality, has developed a new method that for the first time enables a hydrogen train to be refueled as fast as a diesel-powered train. The fast refueling of hydrogen trains will make the technology competitive in daily operation, particularly the demanding timing of regional passenger service. The Morale will begin operational testing on rail this year and is expected to enter demonstration service in Bavaria in 2024. We continue to see exciting momentum in the marine market, specifically in our current target markets of coastal and inland applications. In the quarter, we saw growth in our maritime customer base as we received orders from new customers and a project expansion with an existing customer. We also announced DNV type approval of our FC Wave module just after quarter end. This marks a significant milestone for us as Ballard is the first to receive type approval for a hydrogen fuel cell from DNV. This classification removes a significant roadblock in helping the marine industry deploys zero emission technologies and meet global emission reduction targets. This lengthy and technically onerous approval process gives confidence in our product safety, performance, and durability for marine applications and will accelerate our customer approval time for proposed maritime projects deploying Ballard's fuel cell engines. In off-road, a key milestone was also announced by Anglo American, launching the world's first hydrogen-powered mining truck. The first of four 290-ton class hydrogen fuel cell mining trucks has now been launched at their Molokwana platinum mine in South Africa. Each mining truck employs a 2 megawatt hydrogen battery hybrid drivetrain, including 800 kilowatts of fuel cell power. Each of these trucks, when operating with a diesel drivetrain, use 3,000 liters of fuels per day. Converting these trucks to green hydrogen results in a significant reduction in fossil fuel consumption and emissions, particularly when extrapolated amongst full mining fuel cell truck deployments. As a part of this project, on-site green hydrogen production, storage, and refueling infrastructure has been developed, including the largest electrolyzer in Africa and a solar plant to support the operation of the haul truck. Years in the making, this key project milestone is illustrating the importance of hydrogen in decarbonizing heavy-duty mobility and help companies like Anglo achieve their carbon neutrality goals. With a goal of carbon neutrality at their operations by 2040 and haul truck diesel emissions accounting for about 10% to 15% of their total Scope 1 emissions, Anglo plans to expand this initial pilot of four trucks to the entire fleet of 40 trucks at the mine over the coming years. In stationary power generation, we increased our revenue 450% from Q1 last year. For select stationary power applications, we're able to leverage our FC Wave technology. While initially designed for the marine market, our FC Wave module is also being deployed in multiple stationary power applications. Increased demand from the stationary power market resulted in the largest number of FC modules shipped in a quarter. Now looking at other key geographic regions. Sales in the European market remained strong, accounting for 45% of our quarterly revenue. In North America, we continue to see an increase in sales, up 47% from Q1 2021. Strength in both Europe and North America is primarily driven by follow-on orders from key bus customers. In Q1, we saw a decrease in revenue contribution from China compared to Q1 last year. The lack of policy clarity for the implementation of the demonstration city clusters is being exacerbated by COVID restrictions and lockdowns. As has been widely reported, many areas of China are seeing another wave of COVID. The recent lockdown in Shanghai and other key centers across the country have impacted business. While our manufacturing facility in Weifeng has not been shut down, day-to-day business operations amongst companies and governments are seeing significant delays. We're also experiencing shipment delays on our supply chain, but are working to mitigate the impact. We continue to evaluate opportunities for Ballard and the Weichai-Ballard joint venture to further strengthen our long-term positioning across the coastal regions in the near term and post-subsidy in the long term. We've also noted an increase in interest and opportunity in emerging markets outside of Europe, North America, and China. Following the end of the quarter, we signed an MOU with Doosan Fuel Cell to accelerate fuel cell bus adoption with initial market focus in South Korea. Doosan, active in developing solid oxide fuel cells for stationary and marine applications, recognizes PEM fuel cells as a technology of choice for mobility applications and a new growth engine for their organization. Under the MOU, Doosan will integrate Ballard's PEM fuel cell stacks in its hydrogen fuel cell bus powertrain in South Korea, with an aim to have fuel cell buses on the road in the next two years. Doosan is an experienced and capable organization with strong market position in Korea, opening a new geographic opportunity for Ballard with a strong partner. Doosan's decision to utilize Ballard's PEM technology is a strong endorsement of our industry-leading position capabilities underpinned by leading on-the-road experience. We continue to deploy, develop, and prioritize strategic partnerships to expand our market penetration and accelerate the adoption of fuel cells across our medium and heavy-duty mobility and stationary power market opportunities, shifting to more color on our financials. In Q1, we experienced continued downward pressure on our gross margin. This compression is consistent with our 2022 plan, reflecting expected changes in our revenue mix, selling prices, and cost structure. On revenue mix, we have a heavier weighting of module product sales, including some new modules that are early volume production. On selling prices, we've been pricing certain low-volume customer pilot projects based on securing platform wins with strategic accounts. On cost, fixed overhead costs are elevated as we invested in advanced manufacturing and production capacity expansion. Like others, we've also seen some inflationary cost pressures in our supply chain and freight costs. While we expect compressed gross margins in the near term, we're confident in margin expansion in the mid to long term, driven by important progress on our product cost reduction program. Also, as higher production volumes and customers transition from pilot projects to commercial deployments, and we continue our progress on our product development cost reduction program, we expect to see concurrent gross margin expansion. We ended the quarter with a strong balance sheet and cash position of $1.1 billion. Last quarter, we initiated 2022 guidance on total operating costs and capital expenditures to provide clarity on our capital allocation plans and priorities. Our guidance remains unchanged and on track to spend between $140 and $160 million in total operating expenses this year, and between $40 to $60 million in capital expenses. Our strategy is to invest ahead of the curve in talent, technology, products, capabilities, and customer experience. We believe this will position the company for significant market share as the adoption of hydrogen accelerates over the coming years. And on the technology and operational front, we continue to make important progress on our three-by-three stack cost reduction plan and remain on track to achieve our 2024 target. Corporate development work continues to be a strategic priority in 2022. We are evaluating potential acquisitions, investments, and partnerships to improve our competitive positioning, expand our product portfolio and solutions across the value chain, simplify and enhance customer experience, accelerate fuel cell adoption target markets, and facilitate business scaling. Ballard's business model is designed to leverage our core fuel cell technology across multiple large and attractive, adjustable applications in medium and heavy-duty mobility, including our key use cases in bus, truck, rail, marine, and off-road, as well as stationary power market opportunities. We believe this business model will provide us with a long-term scale and unit volume advantage, which will translate to a cost advantage and complement Ballard's technology leadership and vertical integration. We believe this business model provides Ballard with a compelling revenue scaffolding effect, as well as diversification and resiliency in our revenue streams for the long term across products, applications, regions, and customers. So where are we today? Ballard sits at the convergence of highly supportive drivers with a disruptive fuel cell technology. We see a context with powerful market drivers, increasingly supportive policies, the continued and expected growth of secure and low-cost renewables, an encouraging outlook for the adoption of green hydrogen, growing market and customer engagement as all stakeholders lean into the energy transition, improving customer economics given higher costs for carbon-based fuel, platform wins and progress on pilot projects with strategic accounts across all of our verticals, growing fuel deployments, leading fuel data, complementary strategic partnerships, and a strong balance sheet supporting our increased investments. It's an exciting context as we continue to make important progress across our business to fully realize our purpose to deliver fuel cell power for a sustainable planet and create value for our stakeholders, including shareholders, customers, and employees. And with that, I'll turn the call back to the operator for questions.