Ballard Power Systems, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems third 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 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 Third 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. Before we discuss the quarter, I would like to provide an update on our Investor Day. Given scheduling challenges with our current priorities and recent additions to our senior leadership team, we have made the decision to reschedule our investor day to the first half of 2023. We will provide additional details early in the new year. I'll now turn the call over to Randy.

Thank you, Kate, and welcome everyone to today's conference call. We made important customer progress across our verticals during Q3 while also advancing our global manufacturing strategy and product cost reduction initiatives. In Q3, We delivered $21.3 million in revenue with approximately 57% of our revenue coming from heavy-duty motive applications. This highlights the ongoing intentional shift in our business towards an increasingly product-focused company. We also note there's been a significant change in our revenue mix by geographic markets in 2022 as compared to 2021. Continued challenges and delays in the China fuel cell market have adversely impacted 2021-2022 revenue and have masked the underlying growth we are seeing outside of China. For the first three quarters of 2022, revenue for Europe, North America, and rest of the world is up approximately 22%, while China revenue is down approximately 68%. In Q3, we secured new orders totaling 31.8 million. This activity improved our total order backlog, bringing it to approximately 102 million at the end of Q3. The increase was primarily driven by European orders, which now make up over half of our total order backlog. Our backlog at the end of Q3 did not include the LOI from Siemens Mobility to supply 200 fuel cell engines over the next six years. We're pleased to report that subsequent to the quarter, we've now received a firm PO from Siemens for 100 fuel cell engines at 200 kilowatts each. This order will be reflected as a material addition to our Q4 order backlog. Our strategy is to develop PEM fuel cell technology and products that can be applied across multiple market applications where our fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling infrastructure are lowest. These markets include bus, truck, rail and marine, as well as select stationary power generation markets. will provide a brief update for these applications. Our bus vertical continues to see important progress in Europe and the US. After having secured platform wins with a number of bus OEMs over the past few years, we expect these customers to provide sticky, repeat sales opportunities as transit operators begin to deploy larger fleets in the face of increasing mandates to transition to zero-emission buses. This is now playing out in our sales outlook, with multiple cities in Europe and the US now planning the largest deployments of fuel cell buses in history across these markets. There remains strong momentum in Europe for adoption of hydrogen and fuel cell solutions. Recent additions indicate larger rollout plans across the continent. For example, European transit operators in four cities have announced plans to deploy almost 300 fuel cell buses. Solakin carrier DPB is rolling out up to 40 hydrogen fuel cell buses and Polish transport operator MPK Poznań plans to purchase 25 fuel cell electric buses. These announcements are in addition to existing plans from Cologne, Germany and West Midlands, UK, planning to deploy 100 and over 120 fuel cell buses respectively. We're confident Ballard is well positioned to participate in supporting these plans across Europe through our strong OEM customer and end user relationships. We are seeing a similar transition in the U.S. where California initial pilot and demonstration projects are moving to fleet deployment. An example of this transition is Foothill Transit, a California bus fleet operator in the L.A. area deploying 33 fuel cell buses from bus manufacturer New Flyer powered with Ballard fuel cell engines. This is an exciting milestone as Foothill will be the first transit agency in North America to deploy fuel cell buses on a full deployment as a mature product versus a demonstration fleet. The 33 buses will represent approximately 10% of their overall fleet. Supported by an Inflation Reduction Act and bipartisan infrastructure law, there's been a tangible shift in momentum for hydrogen solutions in the US. We anticipate this momentum to continue as initial capital allocations are made in 2023 for the $8 billion of investment in the U.S. hydrogen hubs. Now taking a look at the truck market. We made exciting progress this quarter. At the IAA trade show in September, we unveiled our FCMove XD concept engine for heavy-duty mobility, displayed in Quantron's 44-ton fuel cell electric truck. Our new product was met with significant market interest at the show, During the quarter, Ballard received a purchase order from Quantron for 140 of these HXD engines to be deployed over the next two years. We also had a very busy quarter with respect to the rail market, as we see the value proposition of fuel cells in certain rail applications driving long-term adoption. As an example, our fuel cell technology offers a compelling zero-emission power solution for commuter trains on non-electrified lines. We'd entered into two new geographic rail markets in Q3. We announced an initial order to train manufacturer Stadler to support the first hydrogen-powered train in the U.S., and to MEDTA, a leading rail systems integrator contracted by Indian Railways, to develop India's first hydrogen-powered trains. In addition to signing new rail customers, we made meaningful progress with our multi-year collaboration with Siemens Mobility, as noted earlier. Over the past four years, we've been developing a fit for purpose fuel cell engine with Siemens Mobility for the passenger rail market. Following the quarter, we announced an order for seven trains and an LOI to supply 200 fuel cell engines over the next six years, including a purchase order for 100 of the engines. This marks our first commercial commitment and long-term supply agreement in rail, and we look forward to progressing this market with Siemens Mobility as they are now commercially selling Moreo Plus H fuel cell trains to European customers. This is an important milestone for the industry and for Ballard. We continue to see high engagement levels in our marine markets, specifically in our current target markets of coastal and inland applications. The achievement of the DNV type approval for FC Wave product is an important differentiator for Ballard. We expect to see demonstration projects starting in 2023, including one of our flagship marine projects with a Norled ferry in Norway. In Q3, we continue to see growing interest in the stationary power generation market. While this nascent market continues to be developed, we expect the segment to become increasingly meaningful to our business over the coming years. Now looking to the key geographic regions. We recently introduced our global manufacturing strategy local for local. We plan to have scaled manufacturing of leading fuel cell engines and components in our core regional markets of North America, Europe, and China to support further and future industry growth patterns and volumes across our verticals. In Q2, we announced our plans relating to U.S. manufacturing capabilities with a new module manufacturing facility which is on track to be in operation in early 2023. We continue to see increased sales in North America with revenue up 80% quarter over a quarter and 40% from Q3 last year. We expect continued demand growth for our technology in the U.S. as previously announced policies such as the IRA materialize over the next 12 to 18 months. In Europe, there's a steady flow of news around continued policy support. Recently, the European Commission announced more than 10 billion euros will be invested in the hydrogen economy in Europe. These projects will catalyze the European market to drive down the cost of low carbon hydrogen, making the total cost of ownership and value proposition of our solutions increasingly competitive. As part of our local for local strategy, we continue to evaluate opportunities for manufacturing expansion in the coming years to align with regional demand trajectories. we remain confident in Ballard's position to take advantage of growing European market opportunities across our verticals. Moving to China, we have high conviction on long-term scaled adoption in China of fuel cell electric vehicles for medium and heavy duty mode of applications. Our Weichai Ballard JV continues to develop fuel cell modules for the bus and truck markets and is ready for high volume production. The JV is starting to see clear indicators of next steps in the China fuel cell bus and truck market from both a policy perspective and a market demand perspective. We expect to see significant growth in the China market in advance of 2025 adoption targets with a major ramp from 2025 through 2030. We recently announced plans to invest approximately $130 million over the next three years in an MEA manufacturing facility and R&D center in Shanghai. This investment is also supported by significant incentives by the local governments. This site is strategically located at the Jading Hydrogen Port, positioned in one of China's leading automotive industry clusters. This facility will enable annual production capacity of approximately 13 million MEAs, which will supply approximately 20,000 fuel cell engines. This is expected to meet market demand in China, including from the Waychai Ballard Joint Venture for bus, truck, and forklift markets, as well as other opportunities outside the Waychai Ballard JV scope. The facility is planned to be in operation in 2025. This facility, in combination with our MEA manufacturing in Canada, is expected to supply our global MEA capacity demand through 2030. Our investment is expected to reduce MEA manufacturing costs align with China's fuel cell value chain localization policy, and position the Weichai Ballard JV and Ballard more strongly to participate in the hydrogen fuel cell demonstration cluster regions and for the post-subsidy market. We're also setting up an R&D innovation center at the same site to engage the emerging China local supply chain for fuel cell materials and components. I want to re-emphasize this point. As reflected in the recent China 20th Congress, energy security is a top priority for China. We see renewables and green hydrogen as key beneficiaries as China accelerates its plan for strong China energy policy. We believe China is a market headed for a significant demand breakout as green hydrogen production and hydrogen infrastructure scales over the coming years and as our new MEA production facility comes online. Shifting to our financials in the quarter, as we discussed last quarter, we continue to see a challenging gross margin picture, which we expect to persist through next year. The further downward pressure in Q3 was driven by a combination of a shift in revenue mix, the impacts of pricing strategy, higher fixed overhead costs, inventory adjustments, and an increased inflationary supply costs. As previously communicated, we continue to see a challenging gross margin picture which we expect to persist through 2023 until volumes ramp and our production cost product cost reduction initiatives move into production. Our 2022 annual total operating expense and capital expenditure guidance remains unchanged from $130 to $150 million and $30 million to $50 million respectively. Our planned capital spend towards the China investment in 2022 is included with our current guidance range. The majority of the capital towards the manufacturing expansion in Shanghai will be distributed between 2023 and 2024. We currently expect to come in at the upper end of our total operating expense guidance range and at the lower end of the range for capital expenditures for 2022. Given the macroeconomic outlook, and the context of our 2023 annual operating plan, we're actively reviewing our go-forward OpEx and CapEx spend to ensure we're appropriately investing in our growth strategy while tightening our overall spend to reduce cash burn. We continue to make meaningful strides against our product cost reduction targets. Our product cost reduction initiative is to reduce our fuel cell stack cost 70% from 2018 by 2024. we're tracking ahead of plan notwithstanding inflationary pressures. We'll continue our work to secure platform wins with customers across our core verticals. We believe Ballard is well-positioned with a strong balance sheet, industry-leading fuel cell talent and technology, and key partnerships and customers across our target markets. We believe we can make a meaningful impact by providing zero-emission solutions for our customers to achieve their decarbonization goals. With that, I'll turn the call back over to the operator for questions.