Q3 2020 Ballard Power Systems Inc Earnings Call
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Thank you for standing by this is the conference operator welcome to the Ballard Power systems Q3, 2020 results conference call as.
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 Guy Macri director of Investor Relations.
Just go ahead Sir.
Thanks, very much and good morning, everyone welcome to Ballard third quarter, Twentytwenty financial and operating results conference call.
Today, we've got revenue maturing, our president and CEO, along with 20 limit our CFO on the call 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. So please refer to our most recent annual information form and other public filings for a complete disclaimer.
And related information.
So on todays call Randy is going to review important developments on the policy and strategy fronts during quarter.
Quarter 320 is then going to review Q.
Q3, 2020 financials, and then we'll move into a Q and a.
And ill pass the call now over to Randy.
Thanks, Scott and welcome everyone to today's conference call. We recently held an investor and analyst day event. When we provided the transparent a comprehensive review of our industry and our business.
So we'll keep our comments today relatively brief.
For third quarter financial results Valley delivered revenue of $25.6 million gross margin of 19% adjusted EBITDA of negative $7.7 million and we finished the third quarter with $361.7 million in cash reserves.
I noted on our last earnings call that we are seeing delays in certain programs activities in order intake as a result of COVID-19, and these delays impacted our Q3 results and order backlog.
At the same time, however, we continue to see a significant increase in quoting activity. Indeed by the end of Q2, our sales pipeline had grown by about 50% year to date and by the end of Q3 expanded further up 64% year to date, a record sales pipeline and a positive indicator of growing market.
Interest and engagement.
There were important developments in target geographic markets since our last earnings call.
Let's turn first to China were a four year policy framework was issued by the government in September.
This underpins China school to deploy 1 million fuel cell electric vehicles, and 1000 hydrogen fueling stations by 2030.
The new policy framework has made deployment of fuel cell electric trucks, a priority in China, followed by buses.
Under this framework regional awards will be based on several key factors, including the existing industrial base in a particular region the ability to provide competitive hydrogen energy supply in that region. Prior demonstration of fuel cell electric vehicle fleets and existence of local regional policy to support FCB.
The industries.
At this point 36 regions in China have announced incentive plans for EPS Cvs and for hydrogen fueling stations, representing a potential for more than 100000 fuel cell electric vehicles by 2025.
This alliance with volume targets contained in Chinas, New energy vehicle technology roadmap 2.0, a document released just last week that specifies technology and vehicle performance requirements moving forward.
So as a next step cities and regions must submit the request and plans to the national government in order to ensure eligibility for the new national level subsidy program attainment of demonstration region status.
As a result, it will take some time before we get clarity as to which regions in China will qualify him at this policy framework.
We will need to be patient during this process.
In the interim we continue to make progress of the weight chide valor joint venture, including optimization of our plate stack and module production processes, including on product development work under our technology solutions program.
Including materials and component localization income.
Including engagement with vehicle Oems for platform certifications in on road field data.
We continue to track performance metrics for fuel cell buses in commercial trucks already in the field in China with valid technology.
In the past month valid powered buses and trucks in China have delivered over 98% fuel cell availability representing impressive reliability metrics.
Moving onto Europe in late September we announced our expected collaboration with Mali International to address the fuel cell electric truck market opportunity.
We're pleased to announce that we subsequently signed the definitive collaboration agreement Molly on October Onest. This.
This is a very exciting development with a leading tier one supplier to the commercial vehicle and automotive industry.
Molly is a 100 year old from headquartered in Stuttgart, Germany was 77000 employees working at a 160 production facilities and 16 research and development centers globally.
So 50% of all vehicles operating on the world's roads hub Molly components, its commercial vehicle division supplies a range of key components.
Molly has extensive experience in the commercial truck value chain, including longstanding relationships with multiple commercial truck Oems supply chain muscle high volume production expertise after sales service infrastructure and a highly respected global brand.
Molly also has been supplying components for fuel cell systems for more than 10 years, including complex air intake systems temperature control systems and air filter systems.
So we are delighted now to be working with Mali to design and manufacture fuel cell systems for the $100 billion annual truck engine market with an initial focus in Europe.
And while we're making great progress under this important collaboration.
Ballard has prime responsibility for design of the fuel cell engine, along with the design and through fuel cell stacks sub system.
Molly scope of work includes certain balance of plant components thermal management and power electronics for the fuel cell engines together with engine Assembly.
With ballard's market, leading fuel cell stack technology, including unsurpassed durability and in the field.
Restart capability and high power density.
Together with Molly's market position in the transportation industry and industrialization capabilities, we see this as a powerful union in addressing the zero emission commercial truck engine opportunity.
Now we've also made an important announcement in Q3 related Ballard's high power density stack technology.
This is a particularly important technology feature in the context of commercial trucks.
Were limited engine based space for designs of certain vehicle platforms require high power density fuel cell engine solutions.
Ballard has designed a compelling high power density of fuel cell stack. The FC Gen Hps product in our development program without any.
We previously held certain IP rights to stack for certain market applications, including bus off road vehicles rail marine and stationary power.
As announced in September we signed an Mou with Audi that expanded our rights to use the stack technology in all motive applications, including commercial trucks and passenger cars were.
We're pleased to announce that last week, we signed the definitive agreements with Audi affirming these additional rights.
In addition to its high power density of 4.3 kilowatts per liter. The Hps stock offers other impressive performance metrics, including high power output with rated power of 140 kilowatts and scalability to multiple Powerblox high operating temperature up to 95 degrees Celsius, which allow.
As for more efficient and smaller cooling systems and rugged cold weather capabilities with minus 28 degrees C. Three start and fast power ramp.
And we're already seeing customer interest for this product.
In another important development in mid October we sold our unmanned aerial vehicle or you Avi business assets in South Central Massachusetts to Honeywell.
This is an interesting transaction for us from a number of perspectives.
We made the strategic determination that our you Avi assets will be better utilized within the Honeywell organization and are pleased to conclude this divestiture.
We see that ballads core technical capabilities and product portfolio are better aligned to provide larger fuel cell propulsion systems for aerospace, including urban air mobility applications areas in which Honeywell is a market leader with deep expertise strong technology and extensive customer.
Yes.
We look forward to building a long term relationship with Honeywell to address these opportunities as hydrogen fuel cells become recognized as a viable path forward in aerospace and under positioned underpinned by honeywell's, leading position in these markets.
Finally, I want to acknowledge totally Google men's plan to retire and valid CFO effective March 30, Onest 2021, after 10 years in this role.
So we will continue in the CFO role through the completion and certification of our 2020 audited financial results and will support an orderly transition.
Tony's leadership and contribution to our business strategy and financial management of valid we will certainly be missed we wish him all the best in his well deserved retirement.
We have retained a leading international executive search firm and expect to have a new CFO in place in an orderly transition completed by the end of Q1 2021.
And with that I'll turn the call over to Tony to briefly review the Q3 financials.
Thanks, Randy and good morning, everyone of topline revenue in the third quarter was $25.6 million up 4% year over year and in the quarter power products revenue was up 94% driven by heavy duty motive, which increased by $7.9 million to 12.9 million.
$1. This was due primarily to higher shipments of fuel cell products, including EMEA use to China.
As a reminder, we only recognize 51% of the revenue at the time of shipment to our we enjoyed valor jvs with 49% recognized once the JV assembles and sell stocks and modules to third parties.
At the end of Q3, the remaining $19 million of revenue yet to be recognized on products that had been shipped through the end of Q3.
Turning to technology solutions, the decline in Ts revenue of $6.5 million to $10.3 million due to three was due primarily to decreases in revenue from the OTI program. The technology transfer program with our weighted tried valor JV and the development program with Siemens.
This reflects the planned completion of activities the impact of customer requested program changes and deferrals, resulting from coated mine team, including the impact of COVID-19 travel restrictions.
As a result, we continue to expect revenue from Ts to be down on a full year basis compared to 2019.
Gross margin was 19% in Q3 down six points year over year. The decline was largely the result of a shift in mix to lower margin product and service revenue, including the lower Ts revenue.
Cash operating costs increased 21% year over year to $10.7 million. This was primarily attributable to increased expenditures in technology and product development related to work on next generation stacks and modules for the bus truck train and marine markets as well as.
Activities related to product cost initiatives.
Adjusted EBITDA in Q3 was negative $7.7 million, an increase in loss of zero point $9 million compared to the same quarter last year. This included dollars $2.8 million share of losses related to the rejoined valor joint venture.
Net loss from continuing operations in Q3 was negative $11.2 million compared to negative $9.3 million in Q3 last year and earnings per share from continuing operations was negative five cents in the quarter compared to negative four cents in Q3 2019 or.
Both the net loss and EPS numbers also include valid share of losses from the re joined Valor JV.
Cash used by operating activities was $11.3 million in the quarter compared to 9.6 million in Q3 2019.
This consisted of cash operating losses of $6.7 million and working capital outflows of $4.6 million.
The increase in cash used by operating activities compared to the same quarter last year was driven by the increase in cash operating losses, partially offset by the decrease in working capital requirements.
In terms of liquidity as Randy mentioned, we ended Q3 with cash reserves of $361.7 million and no debt.
During the quarter, we generated net proceeds of $211.6 million from the $250 million ATM program, we launched on September Onest.
We Subservice subsequently completed the program in early Q4 generating further net proceeds of $32.7 million for total net proceeds of $244.3 million.
We ended the quarter with an order backlog of $128.1 million and a 12 month order backlog of $79.6 million both down from the end of Q2.
The decline in the order backlog reflected lower lower order intake in the quarter, primarily due to ongoing delays associated with Cove in 19, so together with the reduction in the scope of work with Audi through the balance of that program as Randy referenced earlier. Despite this decrease in our order backlog.
As Randy also noted earlier, our record sales pipeline bodes well for potential order intake over the next 12 to 24 months.
I would also like to note that during the quarter valid was named by the Toronto stock exchange to its TSS 30 for the second straight year. This.
This was a result of a 459% share price appreciation second highest on the exchange between July one 2017 and June Thirtyth Twentytwenty.
But before I turn the call over the operator for questions I did want to comment briefly on my decision to announce my retirement first I'd like to thank Randy for the very kind words those was very difficult decision for me I joined Ballard in 2010 in the last decade, it's been exciting to see the lease as it's been an honor and personally professionally.
Rewarding to have been part of the Ballard story through this period.
But also makes my retirement of his time, even more difficult as we now stand at an inflection point in the history of the company in what should be the most exciting time ever in terms of activity and growth opportunities.
However, I have decided to step away now and put more time and energy to other personal interest many of which have gone ignored over the past years I will of course watch with great interest to us dollar grows and prosperous over the coming years.
As Randy mentioned my plan is to stay on three March and I look forward to the opportunity to speak with many of you before then.
And with that let me turn the call back over to the operator for questions.
Thank you Sir.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if.
If you are using a speakerphone please pick up your handset before pressing any key.
And the Guy Your question. Please press Star then.
We'll pause for a moment as callers shine to Q.
The first question comes from Aaron Macneil from TD Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions, you've got around $400 million in the bank and you previously talked about 100 to 120 million of cash needed between now and when.
Salaries intended to generate positive earnings that that obviously the safety with a whole lot of dry powder. I know you mentioned you'd address M&A at a future date, but can you give us a sense of how we should be thinking about that cash balance today in terms of what it can be used for and what the timelines LTE.
Yeah, Erin good morning, and thanks for the question and certainly on.
On the M&A front, we continue to study and consider strategic opportunities across the entire hi, James and fuel cell value chain and ecosystem.
And driven really in my opinion by four strategic considerations. The first is enabling and accelerating customer adoption by improving the customer value proposition. So what this means is really simplifying the fuel cell vehicle experience for customers, so reducing adoption friction points and reducing total costs. So looking.
On opportunities that help us accomplish that objective.
The second would be owning what we call the control points through the value chain. So we believe this will enable technology advantages enable cost advantages and ultimately gross margin expansion.
Third is participating more fully in the entire growth in the hydrogen fuel cell industry, not just related to the growth of fuel cell vehicle deployments in medium and heavy duty motive applications.
And then fourth looking at strategic assets to enhance our market position in key applications and in our key geographies as well.
I think as we kind of look at these footwear considerations.
They help in my opinion to accelerate growth and scale.
Should help to improve our marketing position and improve our financial performance ultimately enhance shore shareholder value, which is really what that extra capital is designed to accomplish.
I'd say right now any kind of consider that the timeline plenty of your question. Aaron We're actively engaged in a number of interesting discussions on potential M&A transactions and I expect to have more to say in the coming quarters.
Okay.
That's helpful and as a follow up are there any financial commitments related to the Mali agreement and we see that agreement and our relationship ending up looking more like a second pillar of the business that might look a lot like the way joint venture.
Yes, so we do see the malia relationship being.
The second pillar in our industrialization strategy, so partnering up and collaborating with a company that has high volume production capabilities experience walking cost down year over year with supply chain muscle and.
And when you look at the complementary balance of plant components and system capabilities and production capabilities. They bring we.
We view this as an attractive long term opportunity so we.
We believe what Weve announced is the first stage of what we expect to be a comprehensive and deep strategic relationship with Molly for the long term focused on the commercial truck market and initially focused on the European market.
So we do view this as an important long term relationship and I believe that relationship will evolve over time as we continue to do work in terms of capital commitments.
There are no formal.
There's no JV for example, structured at this time that might be something we'll consider in the future. So there is no capital call from either party, but we have made.
Commitments in terms of what scope of work, we will be working on and technology and products that will continue to develop and we've actually made quite a bit of progress on that front already in 2020.
I know at the time of this announcement.
There wasn't a whole lot of information from the CCI.
China City cluster fuel cell funding model is there anything you can share this incremental today that you might have learned over the last couple of weeks.
In terms of potential timelines.
For the cash to be deployed and the mechanics of the program.
Like how that actually works and by that I mean, how does government funding actually trickle down from the city clusters to demand for dollars fuel cells.
Yes, we've learned quite a bit in the last month or so.
And of course, we get competing or conflicting information as well, so I'm going to be cautious about commenting with definitive details split on what I would say is I do think we need to be patient care over the coming months and even quarters as that policy framework gets crystallized and as demonstration regions our.
Our awarded.
Then you see ultimately deployments of vehicles in those regions Cascade.
I wish I had more detailed but at the risk of getting it wrong I think we should probably just be patient care.
Kind of like calling the election in some ways.
Fair enough that's all for me Tony Congratulations on your retirement is great working with you even it's all for a short period of time, although thats great well. Thank you Aaron I appreciate it thanks for the question.
Ill turn it over thanks.
The next question comes from Rupert Merer from National Bank. Please go ahead.
Hi, Good morning, I'd also like to start by congratulating Tony on the announcing his retirement all the best.
Thanks, Thank you revert.
Now there are some.
Information in your disclosures about investing into wage high I think Q, you've completed yard 2020 capital investments and you're looking at 3 million contribution in Q4 as part of your 2021 capital contribution.
Give us a little more color on that so as to capital going now assist to funding operating costs or capital expenditures for example.
Yes, thanks for joining us so you're right you've got the number right. In fact, there's a boat we have about 24 million left in total to contribute just to put a number on it over the next two years, so roughly $12 million, including the three that we mentioned in Q4, and then extend through 2021 and another 12 in the second year.
So in terms of Where's Where's that capital going it's going a couple of areas number one is.
We do have our ongoing technology solutions program, that's about $90 million program that was over multiple years that program does extend out into 2020. Two so part of the cash that's going into the joint venture our contribution plus the 51% going in from way to drive fundamental.
Circles back to us partly as payments for the technology solutions works on subs US were part of the capital going and then the other part of it will be to fund working capital loan growth in the company as it ramps up to volume over the next couple of years.
So would you say joint venture is running to plan right now and you have any further visibility on.
Started commercial sales and looking to hit that 2000 unit targeting 2021.
Yes, Rupert Randy here I think if you step back to a year ago, and said where do we expect the joint venture to be I would say that there have been two delays fundamentally in my opinion, there really more market based that have impacted the joint venture. One is we did experience some fairly significant.
Disruption as a result of COVID-19 in China for a couple of key months, they've seen a very sharp recovery in China as as has been widely reported.
From an economic perspective, and work levels are really ramped up there. So that had some disruption but it has had a continued disruption in terms of the ability to provide some of the technology solutions.
Capabilities from Vancouver, including optimization of the equipment. So I would say there's been some delay as a result of COVID-19 on that front and then the second thing is just the the policy landscape. We did expect originally the China fuel cell policy to be in place in the February 2020 timeframe.
And I think initially COVID-19 delayed that out is that became less of a priority obviously and then as we move to <unk>.
The summer time frame as you know there was an expectation the policy would get released and wed have definitive statements on what the demonstration regions would be.
Rather than what's happened where they actually.
I have a process where demonstration regions apply now so thats another loop in the cycle that wasn't originally contemplated so from a market and industry perspective, I would say the industry.
Has really seen a push in some ways for 2020 overall in China. If you look at the number of vehicles deployed in China.
From a macro perspective fuel cell vehicles is relatively modest in 2020.
That being said we've done a lot of work in the background with the joint venture on developing our next generation stack developing our next generation module Valley.
Validating those xactly down stairs yesterday here in our facility looking at a module that was developed by the joint venture in China is here on testing in Burnaby occur.
A collaborative effort between the joint venture and we try and Ballard.
And then you know.
Work Thats been done in terms of getting US initial vehicles on the road in China with multiple end customer Oems. So.
This progress underway in a lot of work done on localization as well, including.
I'll call. It some of the more a plain vanilla bouts of plant components and interestingly a more some of the more strategic balance of plant components more recently, so there's a lot of work going on in on those fronts. I would say there has been very good progress, but on in terms of market adoption. There has been clearly a delay in htwo.
120, driven both by COVID-19, and by the delay in the policy release and the form of the policy release and I think the policy still has a lot of complexity and I don't think its going to get resolved in weeks I think it's going to be measured in months and quarters.
Okay. Thank you and then secondly, with the new agreement you finalize without the.
On the Hps product it sounds like the IP developed for the HP EPS can be transferred into future generations of products, Ken Ken and ultimately be used by your jvs as well if you're looking at that next generation will stack for away CCI or future generations with Mali.
Can you use this IP and would there be any royalty requirements back to Allen.
Yes, so first of all you're Bang on there is quite a bit of IP that we generated in the stack.
Itself.
That we can be using for a variety of application for all applications in all geographies, including with the joint venture and wage hike more.
More fundamentally though Rupert has been a lot of IP developed at the end the level, which weve always owned and.
Ali had no rights to that at all and so on from an IP perspective, when you look at the bipolar plates that had been designed and some of the work we're doing with depending on those plates.
When you look at the EMEA development and now having the stack design as well we have a lot of levers to pull that are informing future.
Future work at the stock at the end the eight plate stack and module level as we work towards not just keeping the high durability and reliability performance that were known for but also improving power density for these applications, where power density is a little more challenging so we're very.
Excited about the opportunity to use us now in markets. We previously Didnt have rights for at the stock level and Thats, particularly around the commercial truck market.
And the passenger car market in the passenger car market I think a lot of people as dismiss that market. There is very high uptake as there should be in my opinion for battery electric vehicles, we think thats a great application for battery electric technology, but long term, we do see and believe they will be very good demand for fuel cell vehicles in the passenger car.
Market as you look at the 2030 and so having these rights now for the passenger car market.
And enabling us to get those rights at a time when Audi who is looking to lower its commitment to the program bits.
Between 2020 today in 2022 in that program and was really.
Opportune for us.
Thanks, Hello altogether.
The next question comes from Rob Brown from Lake Street Capital markets. Please go ahead.
Good morning.
Hi, good morning, Rob.
Just wanted to see.
Give some more color on the sales pipeline.
What sort of areas are you seeing the activity in or these particular programs are they take solutions from its both which is causing the sales pipeline at this point.
Yes, Rob Thanks for the question the sales pipeline is primarily being driven from power products not technology solutions first secondly, as we look at the key applications. We focus on bus truck rail and Marine we're seeing significant interest in all four of those segments. So its not dominate.
By any one segment.
Which I think is as a lot of diversification to our business going forward. We're also seeing interest Rob interestingly in markets outside of those four key.
Medium and heavy duty motive markets. So we're seeing off road applications, and we're seeing stationary power applications as well so I would say from an application perspective, there's pretty good diversification in that pipeline and then from a geographic perspective. It is weighted currently to Europe.
Great. Thank you Thats excellent overview.
Helpful. Thank you and then second on the.
On kind of the steps in China to get away with a way to JV are you are you producing.
Volume there and how do you what are the sort of steps that really the policy clarity that needs to happen to get that volume ramping or or maybe just a sense of the steps that you see going forward over the next 12 to 18 months.
Yes, so I think there will be.
Two important steps one is.
The application by demonstration regions to apply and get accepted as demonstration region. So characterize that as step one and then step two is those operators in those demonstration we regions star.
Starting to look to order product and get vehicles are out in the field and so thats what were going to start to see market uptake.
That will trigger orders to the JV, and which will trigger that orders obviously to value for EMEA production as well.
So it is a step process and we're going to have to be patient as the market moves through that and as I mentioned in parallel is a lot of other work going on to improve our fuzzy.
Positioning in that marketplace long term.
Okay, Great that's helpful and furthering my congratulations to Tony as well thank you.
Thanks, Rob.
Thanks, Rob.
The next question comes from Michael Glen from Raymond James. Please go ahead.
Hey, good morning, and congratulations Tony on the retirement as well.
The first question I have just in terms of the Maliki agreement are you able to provide or works through.
Some of the milestones we can sink it though in terms of that agreement.
Is there is there timing for a specific product developments or timing on when you would like to have a demonstration in the market. For example, any any of those aspects of the of the collaboration.
Yes, I think we've had quite a bit of discussion with Mali about the timelines for commercialization for trucks, particularly in Europe. We're also looking at the North American market as well.
What I would say is we'll we'll we'll pace our development based on the market opportunities and I would say from the time Weve really engage with that which was almost about a year ago. When we first started doing work.
In earnest with Molly on what I would say is that the market has accelerated over that time period and so we're certainly looking at opportunities that are much faster today than we expected even six months ago with Mali.
In terms of announcing what what milestones were looking out in the timeline for those milestones I think we'll have to wait with model led to have some type of joint communication on that and not get ahead of their communications as well there they are conservative organization and not.
Publicly traded and don't have the type of disclosure that we typically have.
Okay and then just.
Looking at Europe, again, and trying to get a sense of the sales pipeline and how that's evolving.
Thinking when you when you think about it.
Items, such as per purchase orders coming in from some of potentially from some of the bus customers that use.
And doing business with up.
Up to now equipment is it are you able to give any ideas on on timing surrounding when we would see those organizations step up their purchase orders.
Yes, I think you will see.
Scaled kind of purchase orders in 2021 on the bus front and I think.
2022 is kind of the timeframe you'll start to see it on the commercial truck front, it's going to take some time on the truck market. I think 2022 2023, you'll start to see scaled orders for rail so I think thats the timeline for those markets.
Marine is.
I think in to be a longer term market as well however, it surprises to the upside in terms of market interest and so I expect.
We'll probably see some good order inflow in the marine market beyond demonstration programs I'm talking about here clearly we are going to have orders in a number of these areas.
Over the next 12 months, but as we move past that and look to larger deployments, you're looking into 2022 2023 timeframe for large larger deployments.
In terms of order intake in over the next six months bus will be the dominant one, particularly we're seeing lots of opportunity in Europe.
For continued work with existing partners, there and potentially some new partners.
Okay and then just finally you spent a lot of time during the Investor day talking about the cost reduction program and aspects of the cost reduction program. When you look at the competitive situation in the market right. Now has have you seen any of your peers I know, there's been a lot of announcements regarding fuel cells.
Element programs in place, but have you seen anybody.
Line the type of cost reduction program that you are pursuing at this time.
No I would say it has been very little public disclosure from companies on the cost Roadmaps, they're looking at.
Ill give credit to Toyota and Honda, who who have been thought leaders in this space for a long time stick on the passenger car market.
And certainly on the passenger car market, they've talked about volumes, there and long term targets for cost reduction.
But beyond that we theres been very little so I think valor probably has thought leadership on cost reduction right now and I think it's because we've done a lot of work on this.
It's either.
The progress that we're making over the last 18 months and over the next.
Say two years is critically important for our success and we're investing in it.
Okay. Thanks for taking the questions.
Thank you.
The next question comes from Abbott dial from H.C. Wainwright. Please go ahead.
Thank you good morning, everyone.
Just to begin with the inventories diamond you'd like and going to surprise so.
But Tony just want to wish you the best with what we have decided to do next.
But you still probably have another call to do so.
Thank you for longer supporting helping us provide coverage et cetera.
Moving on to.
So my questions are the macro my work Tony I think you guys sorry, our non me you guys have been providing.
Good color on the opportunity set flipped in double juxtaposing the long term opportunity was the looks relatively strong.
The near term performance has been sort of flattish through.
No not as.
Healthy growth I guess.
How should we also think about sort of year over the next one or two years, while all these opportunities are building for you.
Douglas.
Topline performance margin performance et cetera, any thoughts on that would be helpful.
Thank you.
Yes, I mean first of all I think your comment is a fair one clearly is an attractive long term growth.
The opportunity set that we're developing and.
Different geographies, China, Europe, and North America across different market applications bus truck rail and marine.
And we think we're very well positioned for those and we believe there's going to be a very steep curve typically 2023 to 2030.
In terms of near term you're right has been flattish and I would suggest this year has been a little flatter than we expected and it really is not not to use it as an excuse but the reality is we have seen customers end market customers and Oems.
Defer orders and so there has been and defer projects. So that's a reality what we haven't seen Fortunately is up projects dropping out of the pool of the sales pipeline. So it's really been more about deferrals. So I think I'm going to ask you to be patient as we kind of work through our 2021 annual.
Operating plan and look for what the growth looks like in 2021 to 2022 will have to come back at that time with more color I think be premature for me to comment today on what that looks like.
Well that's fair this pharmacy and on what your thoughts are on this is a new market does take.
Thanks, Dave.
Yep.
That just was curious to seasonality, we should be thinking about some of these things with.
With respect to the recent already contract I mean is this partly driven by the holiday not really doing much of that.
Which was built and designed et cetera, anew now, taking a little bit more control than.
Putting some.
You don't grow resources behind the business development around all of the work that has been put into developing this technology and you know what should we expect from these efforts CMO. The next one or two years.
Any color on that would be helpful.
Yes, I mean, I think that's a fair characterization, it's been a challenging period for the automotive industry over the past year, particularly in the in the pandemic environment and so.
So I do think we're seeing a number of Oems.
Be cautious about investment the on some of the core.
The electrification activities are focused on for the passenger car market. So.
We do have of course is out a program running through mid 2022 on that program will continue at a reasonable clip, but it's basically at the kind of lower end of the revenue range. We had previously indicated for this program.
So it's not like the program stopped or anything just to be clear and then in terms of the leveraging of that technology, we will see opportunities to use that technology.
I believe in commercial vehicle deployments are early stage as well as in the passenger car market and I believe we'll we'll see that over the next few years.
Got it.
Yep. Thank you Thats all I had on take my other questions offline I appreciate it. Thanks. Thanks summit appreciate it.
The next question comes from Mac whale from Cormark Securities. Please go ahead.
Good morning, guys.
I wanted to go back to that out.
Question.
You could make the argument.
On the sort of bear side that really doesn't have any interest.
And your car market and you sort of touched on on.
You gave some detail on what might be going on there could you elaborate that like what is your interaction with them. What is the nature of the change from their point of view and how does that fit with sort of there maybe their long term commitments to say ease verses versus fuel cells.
Well, Matt Mack I appreciate the question I'm not going to speak for Audi, but I will say generally what we've seen is that the the passenger vehicle Oems are clearly prioritizing battery electric vehicles.
Over fuel cell vehicles for the passenger car market.
For the near term and so thats as a general comment that I think is accurate and we shouldn't be shy about that I think a lot of them have recognized that the technology has a much stronger play and value proposition in the medium and heavy duty motive applications, which we've talked about quite a bit on on the key reasons why that's the case.
So just from a macro industry perspective that would be the commentary and I won't comment specifically on Audi, we'll let them make their own commentary.
Commentary sure and so when you look at the scope of the program. It is continuing as you said, it's it might not be at the high end of the range that you might have thought but where.
Where does it go from here. So if you run it through its course would you normally be expecting in that sort of 2023 timeframe a follow on.
Graben and if so do you think what do you think.
You're aiming at with the remainder of the program then.
Yes, the way we think about it is that we would have expected at the end of that program to be looking at potential stock supply agreement a two hour as a launch initially small series production and then longer term potentially opportunity to support them in a larger deployment of passenger cars.
So that the timeline for them and others to commercialize passenger cars is moved out so we'll still have that opportunity.
When when it occurs if and when it occurs for that particular OEM. What I think is new though is now we now have this technology to use for a variety of Oems, including in the passenger car market. So we have no restrictions and what we are seeing is that in different markets.
Opportunities to work with passenger car Oems as well, so I would I would expect us to have some progress in the passenger car market on that same timeline perhaps.
The different OEM, that's a possibility.
Okay, and I would imagine just as a comment that adds not on like we saw the heavy duty market as as the western Oems to get used to what he the EDI platform can and cannot do the likelihood of.
The passenger car market being open for particular ranges of vehicles or performance levels, we could see that in this timeframe.
Sort of shift right. So you could that you could you can imagine these companies like Audi.
Come back to the sort of the fuel cell value proposition and I'm wondering does this and that links sort of my next question. When you look at the Big issue you talked about this at the beginning the large amount of cash and the desire to lower barriers of adoption is that one of the areas. You can look into in terms of say hybridization.
Dan or rather than just pure fuel cell versus Tvs.
Yes, so there's a couple of important points embedded in there I think your your various do Donna.
Yes.
In terms of what this might look like going forward.
First of all we've always been interested though over the last number of years in hybridization looking at that.
Core competencies are for Ballard around the understanding of fuel cell performance and how you can marry up.
Hi, energy density with batteries and high power density with fuel cells in a solution that no.
Meets the duty cycles of the given vehicle in a way that.
Reduces the.
Okay ill call it stress points on batteries, particularly as you look at state of charge and reduces the stress points on fuel cells, particularly as you're operating at high.
Capacity at high end in capacity, so I think there's lots of opportunities for hybridization and control strategies and we're well on our way on that front in terms of a number of studies that we've done is different market applications.
To understand.
How you marry up those two technologies and have an optimized.
Our train solution.
With fuel cells and batteries together, so thats number one number two is I do believe that longer term you will see.
First of all you've got companies like Toyota and high and I that our head down and committed to fuel cell passenger cars.
And I don't see that changing they they've they're making very significant continue to make very significant investments you will see others I believe revisiting fuel cells in a couple of years as their prioritization in developing battery electric technology and platforms.
You know get scaled out enrolled out a lot of that struggled with that are probably a little bit behind on some of those.
So, we'll see them coming back, particularly as vehicles entering new environment, where you have high utilization and I think the if you look at the Mckinsey report that was prepared for the high end Council in January and where they looked at the value proposition for fuel cell electric vehicle.
In the passenger car segments. There are number of segments long term, where you see high utilizations, whether it's corporate fleets taxis and.
And of course shared mobility platforms, and when you layer on top of that autonomous drive vehicles.
Were not only do you have high utilization, but high energy requirements on board, we think fuel cells will offer a compelling solution long term and I think importantly, what we're seeing is massive investment hundreds of billions of dollars of investment being dedicated for green hydrogen production and once that up.
And you have electrolyzer scale down in cost and green hydrogen.
A very attractive cost point, the passenger vehicle market comes squarely back into the opportunity set.
Okay. That's helpful Randy.
I didn't want to let Tony off the hook without a question so what's going on with the gross margin it.
Can you give us some idea about does it stabilize down here or do you think it will start to see that pick up a little bit with volume. So I'm wondering what the volumes the volumes picking up in China. Eventually what that will do with the G with the gross margin.
Yes, Mark its a great question I think you know.
No doubt the some of the pressure on margin that we're seeing this quarter last couple of quarters is very much volume dependent as you recall we have invested.
Fairly significantly over the last 12 to 24 months and capacity, particularly in M&A capacity and so relatively speaking you know we are looking at a higher level of fixed cost and we're just not absorbing that at the volumes that we've seen in the quarter.
So so no doubt.
As we move more product through the system that will absolutely help gross margin for sure.
Then secondly of course is the cost reduction initiatives that we we elaborated on.
As recently as our Investor call those start to manifest themselves as well kind of beginning in through 2021 and 2022 over the next two or three years. So I think it through a combination of the cost reduction starting to get traction and volume will absolutely see gross margin.
Rising I think we talked to even in the investor call that.
I'd kind of put a number of probably about 5%, but <unk> percentage points of gross margin that we think we should pick up just through the volume that we see over the next few years. So to your question have we hit that we've seen the bottom I think you know generally speaking are we were at the low end of the range, where we wanted to be and.
As we go into as Randy said, we will have a little bit more visibility on volumes for next year, but I would expect to see improvement starting to see improvement through 2021, as we move more volume, including as you pointed out just on the.
Is to China will help but also the Europe moving more product through to Europe, Sirota, Burnaby will help as well.
Matt just to supplement that as you look at our contribution margin both for technology solutions and for power products. The contribution margin actually is relatively attractive at this point in the industry maturation process.
It's really as you go from contribution margin to gross margin.
And particularly see the fixed overhead cost structure and cost.
At low capacity utilization.
You know that are impacting so I think you're going to see as Tony referenced as the volume picks up 2021 2020 to 22003, we do see a very significant leverage occurring at that time, yeah, Yeah, Ryan It's a great point to north we don't disclose contribution margins generally, but I was just to give you an order of magnitude were probably.
Obviously, there's the Ts in the product, but we're probably running in the also just generally 35% to 40% contribution margin roughly and so you can see where the drag is on the on the on the gross margin the delta between the two so we're not unhappy with the contribution margin, we just need to move more product through the system as well as getting some of that call.
Cost reduction or urgent.
Yeah, that's good.
Hi, good nuance here to recognize.
Yeah, I just wanted to congratulate you to Tony but before you go could you know you're leaving the company with a big.
A black a cash.
You've seen the company now for 10 years like what what do you think over that 10 year period, what do you think about it really did well on what do you think what do you think kind of Ms Dawn or what the next CFO coming along and it's going to be faced with do you want to address that in a public forum.
Sure.
I have one more call the going back before.
I'll have more to say you know I all kidding. Aside I think you know the one thing you mentioned the balance sheet I think the one thing that value, it's done well through the decade.
I want to take full credit of course for it.
As we have managed to.
Maintain a very very good balance sheet, even during the difficult times when I joined Cheaptickets clean no debt, we've never had any debt on the balance sheet and so I think we from that perspective, we've always been well position to get to grow. So I think thats, probably the one thing on the balance sheet that I feel pretty pretty comfortable.
Of note.
Yeah, and then of course, the other thing I think the company has done well and it's a transition you know we had a call about 567 years ago to focus on heavy duty motive.
So I think strategically.
Again as an organization I think that was the right call for us at that point to kind of focus on heavy duty motive and I think it's taken a while for the.
Market to understand Thats, where fuel cells are best positioned so those would be some of the pluses I think you know as I said I think for the next CFO going forward I think back to the growth opportunities you know this.
This company needs more scale I think we don't we recognize we need more scale and I think you already touched on M&A as a potential opportunity. So.
I think there is a lot of that will be a kind of this job will be fun for the next CFO because I do think it will be a derivative activity in that area over the next few years. So thats one of the reasons was saying it was our decision to leave gives us the kind of stuff that I like I like doing as well, but we'll let we'll let the next CFO.
Have some fun with the.
Great well good luck and thanks, Tony Thanks, Capex estimate.
The next question comes from Craig Irwin from Roth Capital Partners. Please go ahead.
Hi, good morning, and thanks for taking my questions.
So now that we have on the Chinese program.
Subsidy program out there with a little bit more visibility, let's just say that that is increasing and improving rapidly.
What do you think we need to see to.
As improving visibility both on the UK subsidy program. That's been actively discussed over the last number of months and then the chairman program given that that's supposed to be a key part of their stimulus spending.
The next two years.
Do you see specific items, we need we need to watch for on the horizon likely to happen within the next six months.
Do you have sort of a rough feeling for when those programs could cut.
Could support.
New fuel cell trucks and buses on the road how soon.
Any color would be helpful.
Yes, Craig first of all thanks for the question so thats been a lot of the.
Announcements in Europe, obviously over the last six months with Germany, France, Norway, The Netherlands, Spain, Portugal, all announcing hydrogen plans and strategies.
So.
Many of them have highlighted.
Decarbonise heavy duty mobility, as well with plus as a commercial trucks and in some cases marine and rail as well.
What I would say to point to address a question specifically on the UK is this a market I'm really excited about we have some really compelling partners in the UK, including right plus.
They're very active and lobbying for 3000 fuel cell bus program in the UK.
And we're going to be highly supportive of right plus to make that happen.
So the UK is a market we're quite interested in and we think.
You know the.
Government there has focused on going new energy buses for 5000 buses and so we're trying to get it as an industry. Good allocation of those to the fuel cell side. So I think thats something to look for I think you will see a UK strategy hydrogen strategy announced and you will see a focus on the buses as well.
And then I think the other thing that's that's interesting.
As we look at Germany is they really put a very heavy emphasis on green hydrogen and.
I think thats going to be key market, we're going to see scaling of electrolyzers to drive down costs.
Green hydrogen, which will help quite a few markets. So I think on Germany is going to.
I think show a lot of leadership on the policy front, but a number of the countries in Europe will be right. There with similar sized programs are all kind of in the seven to 9 billion dollar range allocation for the hydrogen fuel cell strategy, including green hydrogen production and deployment of fuel cell vehicles.
So we have to wait and see and then I think you'll also see likely within the next weeks or if not the next month.
A hydrogen fuel cell strategy in Canada as well.
Great and then just to talk a little bit about China. The applications for the subsidy are due within the next 10 days actually the next 90 days.
Can you maybe.
Share with us if you have been asked for.
Supporting material or other contributions that can be used by by different cities and their applications have you seen.
Increased interest in potential bid activity out of these cities in city alliances as they prepare these these grant applications for EPS for submission.
Yes. So great question, we haven't seen bid activity at this stage. What we have seen is a lot of work in terms of providing supporting materials and supporting letters for demonstration region submission and.
In large part working with weight shy on this as well.
Great well good luck and Tony you are going to be missed its been its been good working with you over the last many years. So thank you.
Thank you Craig.
The next question comes from Greg Rakowski from member Research. Please go ahead.
Hey, good morning, everyone. Thanks for squeezing me in.
Just just one quick one from me.
It's jumping back to your comments on M&A from before could you see Bauer getting more involved on the hydrogen supply side.
Specifically thinking about the opportunity for and the need for electrodes or capacity in Europe.
Or that is is that something you could see fitting into dollars portfolio in the near term or is that kind of maybe too far outside of the fairway.
Yes, Greg first of all thanks for the question and where we're getting that question from many investors over the last number of months as well and what I would say is that particularly as we look at in this different types of Electrolyzer technology, particularly as we look at PEM Electrolyzer technology, we see a lot of synergy between the work at Ballard has done the good work in my opinion.
In.
First for a long time on developing PEM fuel cell technology. When you look at things like the use of.
Gas to fusion layers, the use of membranes, the use of catalyst and how that can be applied to electrolyzer.
Stack technology, we believe there is a lot of synergies there I personally believe we're very advanced perhaps a number of years ahead of the number of Electrolyzer companies that work on things like Electrolyzer NVH. So I believe there's a lot of leverage there that we can provide to the PEM electrolyzer.
Opportunity if you look at the cost of the panel Electrolyzer stack.
About two thirds of that cost is the M&A. So we think there could be not only a technology advantage, but potentially a cost advantage. If we are able to translate our.
10, and the technology into an Electrolyzer a company, it's not an area. We would look at doing a stand alone.
Buildup of a business, but it is an area, we would potentially consider for M&A and we're certainly studying that area.
Okay, great. Thanks, a lot guys Thats all I got.
This concludes the question and answer session I would like to turn the conference back over to Mr., Randy Macewen CEO for any closing remarks.
Thank you for joining us today, we look forward to speaking with you again in March next year, when we discuss results for the full year 2020.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Okay.
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