Q3 2021 Ballard Power Systems Inc Earnings Call

Thank you for standing by this is the conference operator, welcome to the Ballard power systems Q3, 2021 results conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

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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, 'twenty, 'twenty, one financial and operating results conference call.

With us today are Randy Macewen, Ballard's, CEO and hold Austin, Chief Financial Officer.

We'll 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.

I'll turn the call over to Randy.

Thanks, Kate and welcome everyone to today's conference call.

Given the growing number of research analysts covering the company will keep our prepared remarks relatively brief to leave sufficient time for questions.

We joined today's call with an exciting industry backdrop, including cop 26, $9 billion of fresh commitments to hydrogen coming in the United States and a growing global recognition of the important role of hydrogen to achieve deep decarbonization, including a hard to abate sectors, such as heavy duty mobility.

We continue to have high conviction in our strategy and growth plan.

Our business model has significant leverage and resiliency as we deployed the same core competencies and fuel cell technology across multiple verticals bus truck rail marine and off road and stationary power and across multiple regional markets Europe, North America and China.

We're focused on large market segments, where the value proposition for fuel cells are strongest and the barriers to refueling infrastructure our lowest.

We made solid progress across our business activities over the past quarter, including in customer programs and deliveries in.

In our technology and product development programs and strengthening our operating platform and new customer acquisition and then our partnership strategy.

We also achieved a major corporate and industry milestone.

In October we announced that Ballard fuel cell technology and products have now powered fuel cell electric vehicles over 100 million kilometers around the globe.

Let me repeat this again buses and trucks with Ballard technology have now accumulated over 100 cumulative.

Cumulative kilometers of real on road experience.

This is a massive differentiator for us and puts us in a different league of demonstrated capabilities compared to any other company that provides fuel cells for medium and heavy duty mobility.

Our proven in service experience with a track record of safety quality availability and performance continues to be a compelling value proposition for our customers and a strong calling card for Ballard.

This provides customers with confidence in Ballard technology product durability quality and our total cost of ownership in real world duty cycles and operating conditions.

And we've been very busy on the customer side and with our partnership strategy on partnerships. We continue to focus on simplifying the fuel cell electric vehicle experience and ease of implementation friction points for OEM customers and end users we are putting the customer at the heart of our strategy and our investment.

Yes.

We believe there is high value to offer our customers integrated fuel cell powertrain solutions that are optimized for performance and cost.

We have strengthened our platform to better support our OEM customers, including our recent partnerships with hexagon curious and foresee power.

California based hexagon, Paris is a leading hydrogen equipment supplier and integrator, we're planning to work together to develop a class six and seven fuel cell electric truck markets, incorporating their turnkey electric drivetrain and hydrogen storage solutions with our fuel cell engines.

In a few weeks ago, we announced the signing of an Mou with <unk> power, a France based leader in Smart battery systems for sustainable Electromobility.

Through the strategic partnership we plan to develop integrated fuel cell and battery solutions optimized for performance cost and installation for heavy duty hydrogen mobility applications.

Now what does this all mean when you look at the landscape of our strategic partnerships, including wage Hi, Molly Linda Moore, hexagon purists foresee power and others.

It means we're positioning ballard to deliver innovative high value high performing efficient low cost fuel cell engines that can produce at scale.

We are designing engines that can be paired and optimize but complementary powertrain solutions, and which can be easily integrated into powertrain and vehicle platforms for our OEM customers.

So our proven track record of 100 million kilometers our continued work on product cost reduction and our strategic partnerships to simplify the fuel cell electric vehicle experience are all leading to increased customer engagement at the very time when end users are demanding zero emission solutions.

This is leading to repeat business with existing customers as well as new customer acquisition.

On the new customer front, we recently announced an exciting new customer relationship with <unk>, a German based specialist and electric vehicle integration.

The initial collaboration we'll see contra and integrate Ballard's FC move family of heavy duty fuel cell power modules into contracts electric drive train and vehicles.

The fuel cell electric plot.

Platforms. Currently in development include a seven five ton delivery truck, a 40 foot 44 ton heavy duty truck.

And our municipal waste collection truck.

Delivery of Contra on fuel cell electric trucks is scheduled for late next year.

We also want to highlight today, the growing activity levels for fuel cell buses in Europe.

We recently announced repeat orders for a total of 40 fuel cell engines from existing bus OEM customers for deployment in new and existing European transit operations over the past 12 months, we've expanded our deployment market from 10 European cities to over 25 cities in 10 countries.

<unk>.

As of the end of October there are nearly 160 fuel cell buses powered by Ballard in service across Europe.

This is an increase of over 80% from October last year.

And in total there are approximately another 150 fuel cell modules currently on order, which will nearly double the number of fuel cell electric buses driving passengers on European streets.

A similar growth trajectory is also being seen in the North American markets, particularly in California as transit authorities make strides towards Decarbonising their bus fleets to meet ICT regulatory compliance, which requires all new transit buses in California to be zero emission by 2029.

And 50% of new transit buses to be zero emission by 2025.

We expect to soon have nearly 80 additional ballard powered fuel cell electric buses on California roads complementing the approximately 50 already in service. We're excited by the pace and scale of fuel cell electric bus implementation across California and are encourage at increasing rate of adoption in <unk>.

Other states as well.

In the truck market, our joint development program with Moly continues to progress as planned.

The concept of a demonstration module is expected to be in test in Germany by the end of the year testing of this 240 kilowatt module is expected to continue into 2022 and commercial prototypes are expected to be ready for initial initial customer projects by early 2023.

And as I've discussed in the past few earnings calls the long term outlook for the rail market continues to strengthen with new orders announced for hydrogen powered passenger train with cargo in Spain.

Our pilot with CP rail locomotives in Canada, and ongoing work with Siemens in Germany.

As announced earlier this year Ballard work with a consortium of other industry leaders to deliver Scotland's first hydrogen powertrain, which is currently being showcased as part of cop 26 in Glasgow.

This is yet another proof point of the growing global interest in fuel cells in rail applications, where rail operators can electrify a decarbonize their rail lines without the need for costly overhead catenary wire infrastructure and we're heavy payload long range and rapid refueling our key customer requirements.

<unk>.

In the marine market, we're seeing a high amount of customer engagement driven by increased pressures for de carbonization, we have continued.

To progress our work with nor led to deliver a hydrogen fuel cell powered passenger ferry and expect to deliver the first FC wave modules to nor led by the end of the year.

The backup and stationary power opportunities are also gaining traction with about a 90% increase in revenue from Q3 last year.

As a proportion of our 12 month order backlog, we've seen a fourfold increase in the past two quarters surprising to the upside for backup and stationary power.

We recently announced the construction of our project with Hbf in French Guiana. The Containerized power project is the world's first multi wag a lot multi megawatt baseload hydrogen power plant and the largest green hydrogen storage of intermittent renewable electricity sources powered by an on site Solar Park.

In Europe, we announced a project with fusion fueled in Portugal to deliver a peak shaving unit also to be fueled by green hydrogen.

Now we're also seeing strong initial market uptake for critical zero emission power for.

For data centers.

Typically for backup power.

Large format hydrogen fuel cells presented opportunities to produce reliable backup power as a sustainable alternative to incumbent diesel technology.

So our core industry, leading <unk> technology is being leveraged in a variety of cross vertical applications as the broad use of hydrogen as a critical pathway for de carbonization expand.

Let's now move to China, China fuel cell policy and the related sales of our <unk> Ballard JV have disappointed in 2021.

While we've been challenged with the adoption pace of fuel cell electric vehicles in China amid extended policy uncertainty, we continue to achieve important technical and operational milestones.

Our joint venture, including it stack and module development.

And as part of our technology development program to advance the localization of products.

As of the end of September there were over 3330 fuel cell electric vehicles deployed in China powered by Ballard technology.

Our <unk> Ballard joint vendors continues to make decisions and investments to have leading market share in the fuel cell truck and bus market in China over the long term.

We're focused on developing the right product products localization strategy cost structured scaled manufacturing and market positioning to win in the national China market over the next decade.

In the near term, we are interpreting the complicated cluster policies and positioning our platform to target and penetrate the initial cluster regions.

So while 2021 has been disappointing and visibility for 2022 remains cloudy we have high conviction remain firmly bullish on the long term market for our technology in China.

We expect to be in a position to provide an update during the next earnings call.

We also want to comment on the supply chain challenges throughout 2021, we've been working hard to risk mitigate global supply chain disruptions, we've seen delays in freight shipments and have been moving more inbound products by air resulting in elevated costs and putting pressure on gross margins in the <unk>.

Fuel cell industry Ballard is one of the leading customers for many specialized suppliers as a result, our long standing relationships with key global suppliers continues to help us navigate these supply chain dynamics and <unk>.

Some cases, we've accelerated the supply of materials to de risk customer impacts, which is also elevated inventory levels.

As we look to next year, we're encouraged by the record levels of customer engagement across all application verticals in Europe, and North America. We're set up for an exciting 2022 marked by the by continued customer wins product innovation cost reductions additional deployment.

And development of key partnerships and technology and the start of a long term revenue ramp.

With that I'll turn the call back over the operator for questions.

Thank you we.

We will now begin the question and answer session in the interest of time, please limit yourself to one question and one follow up.

During the question queue. You May Press Star then one on your telephone keypad, you will share with Cowen acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

We will pause for a moment as callers join the queue.

The first question is from Rob Brown from Lake Street Capital markets. Please go ahead.

Good morning, Randy.

Just wondered if you give some further color on the marine market in terms of the customer engagement, our customers sort of ramping up their their efforts into this being driven yet by the AML kind of discussions around carbon emissions or or or sort of where's marina and if a customer engagement efforts.

Yes, Rob good morning, and thanks for the question.

The marine market is a market that I think we step back two years ago are probably wouldn't have forecasted the high level of customer engagement. We're seeing at this time and part of it you are right is being driven by in some cases targets in some cases real mandates, depending on which jurisdiction you're in so.

We do of course have the international Maritime.

Organization target to reduce emissions, 50% by 2050, but we're also seeing a number of jurisdictions look at sensitive water ways, where they're looking to protect those waterways and decarbonization is going to play out I think much faster there.

<unk> also seen electrification incurring in marine applications, both with battery and fuel cells, and we see particularly with foresee power and opportunity to package and integrated fuel cell and battery opportunity there rather than the current diesel battery packages that are being contemplated for marine.

And now with Nord lead we will be delivering our first modules to nor led for I believe the world's first fuel cell theory, we're pretty excited about this norland as a major player in the marine space for ferries and this is a critical project that we're investing a lot on we launched the FC wave product.

Last September and already we're seeing a fairly significant.

Order book and interest level develop for that product and that interestingly that product has application not just in the marine space, but the way it's packaged in containerized. It has application for other verticals as well so.

I think there is a lot to do to prove out the value proposition in marine, but we're very bullish with the activity levels, we've seen with key customers like nor led as well as some partners like ABB.

Okay, great. Thank you and just following up on the European bus market Nelson.

The number of order activity is that is that still being driven by the Jive program or are you seeing orders starting to flow from cities and regions sort of independent of that.

So we have seen a number of projects driven by adoption with Jive support what I do think youre likely to see before the end of this year is the next announcement from Europe on support of fuel cell buses I think we need to be.

Clear that the value proposition still does need some policy nudges with the low level of penetration that we have today it.

It is important for these jurisdictions to get some policy support to help with initial adoption.

But I think the interesting thing is as we look at another 150 buses in Europe, and then behind that real scaling where youre starting to see.

Sites, where we will have.

Quoting activity for 100 to 200 buses right now so I do think as we move from from tens and hundreds to thousands in Europe in North America, and as we've seen in China cost will come down.

Okay. Thanks, I'll turn it over great.

Great. Thanks, Rob.

The next question is from Mac whale from Carmax Securities. Please go ahead.

Hi, Randy when you look at.

Sort of the pace of adoption in China, and just the sort of the.

Delays that we've seen there does that impact your development timeline like your product development timeline I'm trying to get an idea of whether weather.

Gets to the point, where so much there's so much passage of time, you actually skip a generation can you tell us how you would Jeff.

Your development there in China.

Yes, good morning, Mac, Thanks for the question and certainly.

When we entered our collaboration with <unk> back in 2018.

One of the things that was really important to both Ballard and <unk> was to make sure. We had the highest performing products at the right cost structure to have high market share over the long term.

And we spent quite a bit of time at that point talking about the development of the REIT stocks in the REIT modules for the bus and commercial truck market and we laid out a plan the $90 million technology solutions plan to develop those products.

So we've done I think a very good job collaboratively developing those products with a couple of really interesting dynamics I would suggest over the last 18 months one is that.

<unk> and.

In the joint venture has been very effective.

At working to help localize components in the bill of materials for our fuel cell modules in China, and so that has a.

And I would suggest much faster than we expected so I think thats a positive.

And then as we look at the capabilities of the joint venture to take on more module design.

<unk> is an expert at designing high volume engines for the diesel market you pair that up with ballard's ability to designed fuel cell modules. So we're now having next generation modules being developed at the week at the <unk> Ballard joint venture with less contribution from Ballard and <unk>.

Contribution of the <unk> JV level. So there are a number of.

<unk> modules that are currently being developed by the JV, which I think are pretty exciting and just to give you. An example, we've recently deployed at the JV 10, 49 tonne fuel cell trucks.

Two qinhuangdao steel and those are powered by 160 kilowatt fuel cell engines that have been developed.

By the JV for that application.

So when I think about the program we have for the development of the fuel cell stacks at Ballard and the use of those stacks in the joint venture as well as the development of fuel cell engines for the China market I think we're doing a really good job with wage hide understanding the market requirements and then <unk>.

<unk> solutions for those market requirements. So I.

I would say the development program is on pace.

Say skip the generation I feel like we're pushing the boundaries every time that we're releasing our next generation already.

Okay.

And just as a follow up you touched on at power levels like some of those modules are that's a pretty big power level on that whereas in Europe. You didn't go the partnerships you talked about most recently.

Are more of a hybrid type of arrangement should we be thinking up lower per vehicle power levels.

In Europe versus China isn't sort of a bifurcation of the market.

No I don't think so I think if you think about.

Just coming back to the China market. Our JV has also developed a 50 kilowatt module. So it's really very much trying to make sure you have right products for market segments, particularly in the commercial truck market, which is very segmented and of course for the bus market as well. So when you think about the fuel cell engine, we're developing for Molly.

A 240 kilowatt fuel cell engine for the commercial truck market in Europe.

Great. Thanks, Thanks, Randy Yes, thanks, Matt.

The next question is from Chris Souther from B Riley. Please go ahead.

Oh, Hey, guys. Thanks for taking my question here I just wanted to touch on between some of the partnerships you've built out here between mall at Lamar Hexagon quantifying it now.

Are any of those customers currently in the backlog.

And with some of the customers ramping up towards the end of 2022 early 2023.

What the timing of when we start to see that flow into the backlog prior to the revenue ramp with some of them.

Yes, Chris Thanks, very much for the question and I just wanted to clarify an important point. So we're talking about strategic partners that we're looking at.

Module design, improving module design, including in some cases like Molly, bringing some balance of plant components inside of our fuel cell engine.

And then others, who are experts at integrating that fuel cell engine into the powertrain and can offer complementary products. So that we have a solution that is optimized for performance and cost. So the collaborations that we have there those partnerships will actually help drive adoption by the customers that are vehicle Oems.

So I wouldnt characterize those companies you listed as customers.

Quantify and wouldn't be a different example, theyre actually a customer that we will be buying fuel cell modules directly from Ballard.

But the malaise wage highs Linda Mars et cetera the.

And the idea there is to collaborate on the different scope of work, where we have strengths to improve our offering for vehicle Oems.

So if you look at the order backlog today, we're seeing.

A pretty nice trend in terms of the pickup in order backlog for our heavy duty motive and those are the segments that were particularly focused on so we've had about a 30% increase in our order backlog are 12 month order book I should say.

For heavy duty motive.

Throughout Q1 through Q3 of this year and part of that is this emphasis by Ballard on simplifying the fuel cell electric vehicle experience and some of the value that these partners will deliver but most of these partnerships still have work to do in terms of co development activities and I think you'll see the real <unk>.

<unk> of that as we start looking at 2023.

Okay got it and then looking at kind of a China market, where it's been a bit of a pause here for quite a while are you seeing the competitive atmosphere heat up.

Some local players kind of come in or.

What are the things kind of stand from a competition standpoint of people trying to catch up with the capabilities. We're building with <unk>. It sounds like there is continued progress on the tech side with what HIV I'm curious what how does the competitive landscape look today.

Yes, so Chris.

I would say the competitive landscape became very intense a few years ago I wouldn't characterize that as a recent phenomenon. So there are certainly lots of domestic players that are actively.

Trying to find their way in the hydrogen fuel cell market in China trying to find their appropriate positioning in the value chain and ecosystem and of course their number of international players, who like Ballard see a large market, where theres going to be very scaled adoption, let's not forget we're talking about a target here of 1 million fuel cell electric.

Calls by 2030 in 2000 hydrogen refueling station. So it will be the largest market for the adoption of fuel cell trucks and buses in my opinion.

So the competitive dynamics continue.

I think the pause in the China market has and of course, just impacted we try Ballard. It has impacted all the players in that market with relatively.

Slow.

Appointment.

In 2021.

Thanks, I appreciate that.

Thanks, Chris.

The next question is from Michael Glen from Raymond James. Please go ahead.

Yes.

Hey, Randy just on Mali, there has been some management changes take place within the organization. Just wondering if you've had a chance to up to talk to the incoming CEO in SMB and any sort of shift or thoughts on their direction with respect to hydrogen.

Yes, you are right Michael Thanks for the question and this has been known for some time so.

Going back in fact too around last Christmas we knew there would be some change.

At male so the leadership change I don't think is going to translate into any.

Reduction in interest in the fuel cell opportunity with Ballard.

Mike over the last year, what's happened of course is that the demand for hydrogen and the opportunity set for hydro has grown exponentially in during that period male has joined the hydrogen council and now has visibility.

At the council level on the growing market opportunity set that they're seeing.

Not just for commercial vehicles, but in other markets as well so.

We will continue to have discussions with male including with the CEO and really make sure that there is alignment on the future investment cycle.

And timing and piece for adoption of fuel cell electric trucks in the European market.

Okay, and then just following up on China, if we're looking at.

<unk> volumes, our EMEA sales potentially into China.

Any thoughts on timing for the next EMEA order from the JV.

Yes, no nothing we can share today with any conviction, it's still uncertain at this point, so I don't want to overstate.

Overstate, where we are.

Okay. Thanks for taking the questions yes. Thank.

Thank you.

The next question is from Vivek <unk> from National Bank Financial. Please go ahead.

Yeah, Hi, Thank you for taking my questions. This is vivek on behalf of Rupert.

Just wanted to.

Basketball the high cap fund.

The investment in the hydro hydrogen infrastructure could you talk about other opportunities as the team may be considering and hydrogen infrastructure.

Yeah Vivek thanks for the question.

So there are two or three new funds that have formed over the last 12 months and those funds are typically designed to be hydrogen infrastructure funds, where they all support the adoption of hydrogen fuel cell and hydrogen projects, but including hydrogen fuel cell project from ability applications and I think.

One of the real advantages of these funds is that they'll match up the supply, particularly of green hydrogen although blue hydrogen as is in the option as well supply of green hydrogen with demand on the application side and be a finance year for those projects. So Ballard is actually we'll be investing in two of those.

<unk> you mentioned high cap as one of them that we've included in our subsequent event note in our financial statements.

There is a second fund that we're making an investment in as well.

And at the point of these investments for Ballard is really good.

Getting visibility on where these funds see opportunities to invest capital and potentially influencing opportunities by bringing projects to those funds for potential investment.

So we think this is an important way for us to again match ups hydrogen supply with demand applications.

So it's Paul here. So it will be the other thing I think that these funds are really helpful per barrel or two is it gives us a seat at the table and into the deal flow.

<unk> opportunities so we.

We could look at potentially co investing or if the bond is not going to take a pass on it it might be something that knowledge is very interested in some staying current in the deal flow across the whole ecosystem.

It is a good objective for us too as we look for different opportunities to deploy our capital.

Sure. Thank you for that color I'll leave it there.

Thanks Vivek.

The next question is from that foundation.

From Coker Palmer. Please go ahead.

Hey, guys. Thank you for taking my questions.

I guess, maybe if we can set up expectations for them yet.

How should we think about orders level.

Or call. It about 2022 versus this 20 25 million per quarter that we have been seeing so far.

Yes, <unk>. Thanks for the question and I think.

I think.

As we look at 2022, we see clearly that the start of our growth ramp of long term growth ramp developing.

So I'm very excited about the opportunity for 2022 and one of the things we really like about our business model is the ability to leverage our core competencies in technology across multiple verticals and across multiple regions.

And we see strength right now in Europe, and North America, and we see strength.

In most verticals moving forward as well so I think that suggests a strong growth rate in 2022, I think the wildcard to add to that growth rate will be what happens in China in 2022.

Got it.

And maybe we talked about inflation, how you had to do some air listen everything just because of supply chain disruptions.

How do we think that progresses or subsidize subsides as we move into 2022.

And just on operating costs.

How should we think about as the revenues that put out the audits ramp.

Yes, so on the supply chain at a few remarks about it but I would say that the team has done a pretty good job actually and getting ahead of the issues with suppliers. So some suppliers in various regions in APAC and others have had some disruptions that we've been able to manage through them build up some inventory.

Established really good relationships and find alternatives.

Where we've really seen the impact is in the delays in shifting and increasing freight costs as well so for both air freight and with the sea freight.

So the costs are increasing but even just the availability is pushing back the delivery times, which which can impact our deliveries as well. So that's where we're seeing it happening. We've also seen some impact earlier in the year on things like platinum prices and iridium prices.

Platinum has settled back down and Iridium is still high but it's a relatively small percentage of the total of the total bill.

In terms of when the freight when we see these these challenges that subsiding, it's probably going to be later in 2022 or possibly even beyond I mean.

These are this is a global issue the supply chain and the and the shipments and the freight in particular.

So we are.

We are exposed to that to some degree, but so far I think the team has done a pretty good job staying ahead of it and you're really not seen a very material impact in our in our financial results.

From it.

Got it alright, that's very helpful. Thank you for taking my questions.

Thanks, guys.

The next question is from Jonathan Lamers from BMO capital markets. Please go ahead.

Good morning.

Following the recent partnerships that have been established but there is of the powertrain is valid remain interested in acquiring or establishing partnerships to gain access to the technology or simplify that she will sell at auction for the customers.

Jonathan Good morning, and thanks for the question. So the way I would think about it is for a hydrogen fuel cell electric powertrain you need to have storage need to have a fuel cell engine, which is our core competency you need to have power conditioning, typically a DC DC converter.

Youll need to have battery technology, and then a thermal strategy.

And controls and as we look at that powertrain integration.

Also have any integration capabilities and understanding of integration is important too. So as we look at partnerships and M&A opportunities. We're looking at each one of those boxes.

And identifying partners for collaboration partners for potential M&A that helps simplify the fuel cell vehicle experience for customers and I think part of the.

Part of what we're seeing in the collaboration cycle is that there is high high value I think it's white space right now for optimization. So the ability to go to an OEM customer and say here's a total solution that is optimized for performance for your duty cycle is very.

Powerful.

Okay, Thanks, and a follow up question to that.

For the foresee power partnership what markets are Ballard and foresee targeting first.

Yes, the first market with foresee power will be bus truck and rail.

And <unk> has a very strong position in the bus market in fact, Ballard and foresee share a number of same customers already that have been buying.

<unk> fuel cells and foresee battery packs independently separately.

Not optimized.

So thats certainly the nearest term market opportunity and foresee power also has I think a very strong position in the rail market. So they made an acquisition earlier this year of a company that has competencies on battery packs for rail and have counted alston as one of their key customers as well so those stream.

<unk> bus truck and rail and particularly bus and rail they have strong capabilities in today I would characterize them as the market leader in bus and rail.

And a very strong position in truck as well.

I'll pass the line thanks.

Thanks, Jonathan.

The next question is from Aaron Macneil from TD Securities. Please go ahead.

Hey, good morning, all thanks for taking my questions. Randy you referenced it in the prepared remarks, and some of the Q&A, but I'm, hoping you can speak a bit more to the broader partnership strategy specific to the truck market and maybe outside the <unk> JV in China, but I guess, what I find interesting is you've sort of itemize recent partnerships.

Optimizing.

Vehicle profile powertrains, rather than by geography, which seems to be what you've done in the bus market. So I guess, what I'm wondering do.

Do you have an appetite to take on more partners or collaborators or do you think you've sort of hit all the main end markets that you want to pursue with the current partnerships.

And do your existing partners have any sort of exclusivity on the types of.

And products that you're developing.

Yeah, great. Thanks for the question, Eric and I think that there is a couple of key points. There one is do.

Do we have an appetite for more partnerships clearly there's areas that we still think there's opportunity for continued evolution in the powertrain design and so the ability to understand the integration of all these components together into a powertrain solution for customers is something that we think is <unk>.

<unk>.

Particularly as customers think about customers for example in the off road market, where they typically arent doing their own integration.

They're relying on third parties to help them with integration.

So a number of customers that we see increasingly are asking ballard for more support on powertrain integration, maybe they're asking for a DC DC converter solution, maybe they're asking for hydrogen storage solution.

And recommendations on battery packs for example, and so it's really in response to a very clear signal by the Oems, particularly as a starting early adoption that they need help including application engineering. So I do think there'll be additional customers that we end partners M&A opportunities.

That will be looking for to further strengthen these capabilities.

Some of them will have regional capabilities. Some of them will have expertise that is global in nature. So we'll have to watch for that as we look at different collaboration models and different.

<unk> chain positioning.

I'm not sure if you had anything prepared but can you give us an update on the <unk>.

2004, and target to reduce their cost by 70%.

Yes, so we have internally and objective this year to.

For a very significant increase already in 2021.

We will.

Yes.

Not just beat that but beat it significantly in 2021. So we're ahead of plan on product cost reduction for our program installment in 2021, So I think that bodes very well in total for the 70% cost reduction for 2024.

Great I'll turn it over.

Great. Thank you.

The next question is from P. J <unk> from Citi. Please go ahead.

Hi, Good morning, Randy It's Eric Petrie on for P. J.

What do you need to see in China to increase visibility is it.

<unk> costs compared to diesel or is it the cluster program or other incentives and just talk to about the recent spike in diesel and how that might shift your appetite towards fuel cells and fuel cell engine adoption.

Yeah, Erin Thanks for the question I think the key there is really in the very near term, it's actually the application a very complicated cluster region policies.

And how do you ensure you are in the supply chain or how do you have a channel strategy to penetrate those cluster regions. So I think thats part of it and more importantly, and more broadly is how do you have a national strategy in China to win in the long term with the right volume and the right cost structure. The right technology. So those are two things that we.

We're working on in parallel.

And any comment with the adoptions from higher diesel costs.

Yeah, I would say not just the adoption of the higher diesel costs, but also what youre seeing of course in China recently as is power shutdowns.

Shutdowns and really a movement away from trying to import coal and I believe there is very strong very strong.

Political and economic reasons, why Youll see China become the leading adopter of green hydrogen over the long term as they look to decrease their dependence on imported energy I think this is going to play out very strongly they have massive renewable resources and youre seeing now I think there is an estimate of another it's another one.

One two gigawatts of solar and wind capacity.

That's been identified already recently, so if you look at a number of the companies that are talking about investments in blue and green hydrogen production.

Like Sinopec and bail Fong, an jing Yang and lung GE and Sun grow there are number of companies that are really focused on this opportunity to produce green hydrogen and unit on the refueling side, you've got sinopec announcing a thousand hydrogen refueling stations by 2025. So there are a number of players including.

I think one third of state owned enterprises now reported a plan to invest in the hydrogen industry. So there are a number of players that are looking at the hydrogen supply side, which I think is a very valuable development in that market.

Okay color and then as a follow up you talked about the excitement in development and adoption of Europe fuel cell electric buses and you also talk a little bit about the latest infrastructure Bill and money set aside to replace fleets to zero emission in the U S. I think currently less than 2% of the U S.

So both fleet is based on fuel cell.

Yes, I think we're not just in the U S. But globally. We are at the first second of a 24 hour a day in terms of market adoption.

So you know the $8 billion in.

The U S infrastructure Bill is really around clean hydrogen hubs and again here. This is critically important where youre matching up the supply of low carbon hydrogen.

With demand and particularly including mobility applications. In addition to that there is a $1 billion that have been allocated for R&D and demonstration and commercialization.

Electrolyze, our technologies to effectively reduce the cost of electrolytic hydrogen to $2 per kilogram by 2026, and then on top of that I think the next development out of Washington, our tax credits.

So thats currently in reconciliation right now with.

Different bills.

Evolving, but we do see likely an outcome here, we will have hydrogen production tax credits potentially as high as $3 per kilogram for the cleanest greenest hydrogen. So we're very optimistic moving forward about the opportunity for electrification fuel cell electrification in the U S.

Market, which is a fairly sharp contrast to where we were a year ago.

Thank you Ray.

Okay.

The next question is from Jeff Osborne from Cowen and company. Please go ahead.

Yes. Good morning, I was wondering if we could touch on the warranty charges in the quarter I think the release mentioned.

What was that attributable to.

Okay.

Yes, Hi, Geoff it's Paul here. So yes, we did we did have slightly higher warranty warranty costs as we continue to test our products in some of our newer products. We saw in our in some of our tests that they work.

We're performing exactly as we had thought so we thought it prudent to add a little bit to our warranty.

To ensure that our customers are covered.

We are at the team is working on the issue and we're pretty confident you're already making great progress pretty confident they're going to.

Solve it.

Also in the quarter, though too we had some other warranty provisions for older products, which turned out that we didn't need and so we net those together I think it was around four or $500000 net charge in the quarter, so not hugely material, but we've always taken a very prudent and conservative approach to our.

Warranty provisions because we want to make sure as we are developing these products and getting them to customers.

We stand by them and customers will always be covered.

Got it that's helpful. And then maybe Randy for you and my follow up there's a lot of things that you can't control and there's things you can control and I was just wondering what it would take for Ballard to.

Start to think about giving guidance as it relates to things like Capex and operating expenses just as you gear up in 2022 for this sort of hockey stick that you've been talking about for several years commencing in 2023 should we think about the opex run rate being consistent with what we saw in Q3 or something more meaningfully higher.

Yes, Jeff Thanks for the question and I, certainly think youre going to see a higher opex in 2022 and.

And 2023 compared to 2021, we are making significant investment in the business in people in technology and products in our customer experience.

We're building out capabilities here, including our corporate development office and strategic management office. So theres a lot of activity going on at Ballard and particularly as we focus on these verticals bus truck rail marine and off road stationery et cetera, having the right expertise inside the company that understands these verticals is critically important as well and that comes with a cost structure.

<unk> associated with it so we will be investing in the business and I think your question is timely as well as we start moving towards Q4 and looking at 2022.

We will take your comments into consideration, Jeff as well and think about what type of guidance. We can provide in 2022, whether it's a topline or as you identified maybe some discrete opera operating expense lines.

That would be greatly appreciate it thanks, so much great. Thanks, Jeff.

The next question is from Pearce Hammond from Piper Sandler. Please go ahead, yes.

Good morning, and thank you for taking my questions. The first is on the backlog I was just curious if the backlog included those 40 fuel cell modules for the European market.

Press released earlier this month.

It includes about a half.

Okay, and then just curious on the translation from some of the recent announcements you've made which had been positive and how quickly that kind of manifest itself into the backlog.

Yeah.

Yeah, most most of the customer engagements and strategic partnership engagements take time, so were particularly when were talking about developing solutions and getting into the market. That's typically can be an 18 month to 36 month cycle in some cases.

Where we're talking about new customers for example, like <unk>.

What we're seeing likely deployments by them in late 2022, So I think it varies.

But certainly what we're seeing is that the market interest in fuel cell buses fuel cell trucks rail and marine.

Off road and stationary all of these markets have shown real strength on customer engagement and so I think what we should see as a trend in the right direction on the order book as we move into 2022.

Okay. Thank you Randy and then just a quick follow up on the cost reduction question from earlier.

That's on the reductions that you feel that this year just curious I mean, what are the major kind of levers or drivers.

That led to those cost reductions this year.

It's really a combination of three different factors one is really looking at the materials that we use.

Qualifying new suppliers and new materials.

New chemistries et cetera that could be.

In EMEA, so gas diffusion layers membranes catalysts <unk>.

Materials for our bipolar plates as well so that's number one.

And a lot of technology development has been done over the past three years to make that viable today. So thats.

Our return on our investments we've been making for some time to look at these new materials and qualifying new suppliers and actually work with suppliers in some cases, we've we've worked with suppliers, who who knew nothing about the specifications required for fuel cell technology, and we walked them through 11, 12, 13 iterations of their product to get it where it is.

Leads to be.

So that's.

It takes takes time of course, so that's the first point. The second point is how do we look at processing and production and we've invested quite a bit, particularly at the MDA level on advanced manufacturing.

And you've invested over $15 million in Vancouver on the advanced manufacturing not just a six times our capacity expansion, but looking all the process steps were literally from raw materials into finished goods out looking at the process steps.

Mapping those process steps and looking at tack times looking at the.

The tools and the equipment, we use introducing more robotics, more automation and reducing labor hours and reducing tack time. So a lot of work has gone into the advanced manufacturing side, particularly the MBA level. We're now looking at in.

In 2022, and 2023, we'll be spending more time on the plate.

And then the third part is really looking at volume and the opportunity for.

Global customer global supply arrangements as we start to get larger commitments on the customer side and pairing that up with the demand for materials. So we see all three of those coming together most of the technology.

Development work is very late stage or finalized.

And the advanced manufacturing for the 70% cost reduction has effectively been finalized earlier this year.

So we're very bullish on the opportunity to decrease our cost 70% by 2024.

Thank you Randy for the very helpful answer.

Thank you.

The next question is from Craig Shere from Tuohy Brothers. Please go ahead.

Yeah.

Hi, Thanks for fitting me in most of my questions have been asked but what kind of wanted to get a bigger picture.

There's been a lot of unexpected traction and trained stationary power and marine this year.

12 to 18 months ago, we wouldn't have anticipated or baked into the long term total addressable market.

Can you get any sense or color around how you're now thinking about your mid decade and end of decade opportunities then.

More verticals really kicking in.

Craig Thanks for the question. It feels like you must have been in our boardroom yesterday as we were discussing this very topic, our Tam is growing.

Every month it seems and.

These verticals if you go back to September of 2020, when we highlighted we had our investor and analyst day, we highlighted a tam of $130 billion by 2030.

That is significantly underestimating the total addressable market that we see today and so we are in the process of updating that.

Just giving you an illustrative example that included in the rail market just the <unk>.

<unk> opportunity for commuter rail in Europe.

We didn't include China didn't include North America and of course in North America, we're seeing a very significant opportunity for freight locomotives and rail as well. Similarly, we constrained that tam to certain market segments in certain geographies in marine and I can go on it didn't include off road, where were seeing lots of traction right now as well.

And of course it didn't include stationary power, which is by itself a very large addressable market and certainly just backup power for data centers on its own is a large addressable market.

So I appreciate the question, we can be patient with US we'll continue to work through that and provide an update on the expected Tam.

And what the implications are for.

Our cascade of revenue and our stacking of revenue out through 2030.

Okay.

We can have an update by the time, we get.

Some kind of guidance and the point too.

Yes, I think we will provide an update during our next call for sure.

Thank you.

Thank you.

The next question is from Alex Kania from Wolfe Research. Please go ahead.

Thanks very much.

Was curious if you could talk a little bit more about the.

Some of the stationary power potential that you've got I think particularly the HTS project I'm just curious.

If you see that kind of as a one off in terms of thinking about this hydrogen green green hydrogen baseload power generation.

Project.

Do you see do you want to see that.

Work out first before you pursue similar types of opportunities or is there a lot that's potentially out there right now.

Okay.

Yeah, Alex Thanks for the question so a couple of points there.

We see the opportunity in certain stationary power markets again to get leverage off it.

If not the same substantially the same products that were offering in high power mobility applications and certainly when we think about for example, the datacenter market opportunity.

There were seeing a lot of interest from the data Center community.

Our 200 kilowatt fuel cell engine.

That we've designed for the marine market, So our FC wave product in its containerized or it's packaged approach.

So.

We see a lot of leverage there as you know we're in the small hydrogen backup power business and that continues to it is still modest but growing and we see pretty nice deployment happening.

In the Nordic countries at this time, but going to your point about green hydrogen.

Baseload I think what you see micro grid opportunities, where you have renewables.

That are required to supply primary power and of course renewables being intermittent hydron provides a wonderful energy storage vector and the ability then to use that stored hydrogen to redeploy it back as power when needed. So when this when the renewables aren't aren't blowing or the Sun doesn't shine.

Or to use that hydrogen as high value zero emission fuel.

And one area that we see this model very pronounced is in the mining sector, where mining communities typically our remote they have high power requirements at the mines. Many of them are looking at decarbonization strategies, including onsite renewables and including a need to electrify these heavy trucks, which cannot.

Battery.

Great Thanks pretty interesting.

Thank you.

The next question is from Greg Westinghouse key from Warburg Research. Please go ahead.

Hey, good morning, Randy and Paul Thanks for squeezing me in.

I was wondering if you could just refresh us on the timeline for profitability.

The ramp up.

Any notable milestones in China, following some sort of policy clarification.

Just refresh us on our expectations there once once we get over that hump.

Yes, so I think we havent been providing guidance on when we would be looking at profitability, but certainly what we've been indicating for a number of years is Jeff Osborne alluded to a few minutes ago is that we see this curve growth occur starting in 2023.

And really moving through 2030.

So I think it's a few years out from 2023, when we see that crossover because we continue to make significant investment in our business to make sure. We have high market share in these large attractive verticals for the long term.

So I think 2023, you'll start to see a very significant revenue ramp and youll see that across the verticals and across the geographies with a lot of resilience in our business model.

Okay, great. Thank you and then similar to the last question on stationery stationery power, but with respect to marine.

Just curious like specifically where are you seeing that interest and demand is it just for berries and smaller chips and applications are you starting to get.

Interest from maybe larger groundwater barges or even some sort of blue water larger tonnage.

Yeah. Good question, the marine market like all of the markets are very segmented.

So in the marine space, where we expect to see early adoption.

Between now and 2030 would be ferries tugboats work boats push boats.

River boats. These are all the applications, where if you look at the duty cycle.

For these marine vessels, they're paired very nicely with what fuel cell technology can offer. They also offer the ability to have either return supports or port to port refueling infrastructure. So I think thats very compelling on the fueling side.

I think some of the larger marine opportunities for example, cruise ships and freight going ships.

Much longer market to develop these are all long lived assets. It takes time for these to turn.

Even just to hit the 2050 decarbonization milestones in maritime.

One investment cycle away.

From technology disruption, so I think youll see some of those applications start to see penetration.

2030 onwards.

Okay. Thanks, Randy.

The next question is from Craig Irwin from Roth Capital Partners. Please go ahead.

Alright, good morning, and thanks for taking my questions. So Randy.

I was pleasantly surprised to see the $1 5 million on the P&L from a synergy.

Can you talk a little bit about the products that synergy is taking.

Have they exercise the option for the the next generation stack and.

Yeah.

Where do we stand with synergy they have come on and off over the last stuff over the last couple of years.

Time's up down.

Is this potentially a customer that can rebound nicely in 'twenty two.

Yes, Craig nice pickup and thanks for the question, yes, synergy wasn't a bit of a surprise for us.

Effectively have run run run down their inventory and we're looking for additional purchase of <unk> for the nine SSL stacks and they are producing non SSL stacks.

For some customers that already have nine SSL on their platforms and so.

I Wouldnt I don't think we will see synergy is a high volume long term customer I think many of the <unk>.

<unk> will Oems will be looking for the next generation technology, which is at the <unk> Ballard joint venture.

But synergies also looking at.

Designing other fuel cell stacks independently that could use Ballard emea's, so we'll see that as a longer term opportunity too.

Great and then I was hoping for an update on the.

Audi Volkswagen relationship.

No.

You have a long history of partnering together, we've done a lot of R&D work for them and.

So theyre always was an expectation of a commercial endpoint in there.

Is that still a possibility or do you hold much hope for that at the moment or maybe is it something that should be revisiting it.

Yes, we don't expect to see any small series production of Audi fuel cell cars. So they had been developing the H Tron, which included the stack we've designed for them.

High power density stack for automotive applications.

So I think Audi and VW very much focused on the battery segment at this time and so I don't expect to see any developments there for the passenger car market with Audi in the in the near term.

And our R. R.

Our current relationship with them in terms of the program. We have is expected to complete around August of next year.

Okay. Thank you.

I could squeeze just another quick one in.

Yes.

Backlog total backlog.

As.

<unk> been burning off a little bit over the last couple of years with some very big bookings a couple of years ago.

We're looking at.

Possible revenue inflection really taking shape over the next 12 months.

How far ahead of that revenue inflection should we really see the bookings materialized I know you talked to the customers for years before we see the <unk>.

Bookings as analysts but.

Can you approximate cross business two three quarters ahead or should we have any merit.

For some of these very large programs that youre targeting.

Yes, Great question, Craig and if you look at the total order backlog and even you go back to Q1 of 2020, where the order backlog total order backlog was about $108 million in today.

It's about $57 million and the I'm talking about is for technology solutions by the way not the total order backlog. So it's gone from about 170 at the start of 2020 to about 109 in total.

At Q3, 2021, and the big the Big change there as you point out is the technology solutions has dropped off from about 108 million to $57 million that's really.

The the execution against the wage high technology, <unk> technology solutions program and the execution against the Audi program.

And really what we see going forward is the power products heavy duty motive being the driver of growth.

And you think about all of these markets, we've talked about bus truck rail and marine.

Where we've got bus Oems.

In Europe in nor.

With America and in China, with Ballard products already inside their platforms with truck Oems starting to and the work we're doing on the truck market with <unk> in China and with male in Europe and for light duty truck.

With <unk> as well and so that's.

<unk>.

Passenger van.

And so when you look at a number of these programs, including rail and marine they will take a number of quarters even years before they start to see.

The development in the order book, but again I want to come back to this point if I look at the order book for heavy duty motive from Q1 to Q2 to Q3.

In 2021, it's up 30% since Q1 and to me. That's the real story is that we're seeing the market take up even with China being light, we're seeing the market take up in Europe, and the United States for heavy duty motive, where we expect to see the lions share of growth moving forward.

So I think the question is when we when will we see what's the linkage between when the order book starts to materialize and then subsequently revenue.

<unk>.

A year is about right and some of these cases.

<unk> will take a year to execute against.

As customers go through hydrogen refueling stations as they go through.

Getting the.

Engines into their platforms.

And getting ready for deployment. So we've seen that historically in the bus market I expect to see a similar thing occurring in the truck and marine and rail market, where you've got 12 potentially up to 18 months before projects go from order book to revenue.

Excellent. Thank you very much for that congratulations on the progress.

Great. Thanks, Craig.

This concludes the question and answer session I would like to turn the conference back over to Randy Macewen CEO for any closing remarks.

Great well. Thank you all for joining us today, and Paul Kate and I look forward to speaking with you in the new year. When we'll discuss results for Q4 2021. Thanks again.

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

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