Q4 2021 Ballard Power Systems Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Ballard power systems, Q4, and full year 2021 results conference call.
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I would now like to turn the conference over to Kate Charlton Vice President Investor Relations. Please.
Please go ahead.
Thank you operator, and good morning, welcome to Ballard's fourth quarter, 2021 financial and operating results conference call.
With us on today's call are Randy Macewen, Ballard's, CEO , and Paul Dobson Chief Financial Officer.
We will be making forward looking statements that are based on management's current expectations beliefs and assumptions concerning future events.
Actual results could be materially different.
Please refer to our most recent annual information form and other public filings for a complete disclaimer and related information.
Given the growing number of research analysts covering the company people are going to keep our prepared remarks relatively brief to leave sufficient time for questions I'll now turn the call over to Randy.
Thanks, Kate and welcome everyone to today's conference call.
These are extraordinary times.
As we look back on 2021, the existential threat posed by global climate crisis was building to Decarbonize, our global economy.
With this backdrop there are important developments for the hydrogen sector, including global policy initiatives, increasing net zero targets deeper pools of capital moving to the energy transition in hydrogen and unprecedented market engagement.
And now amidst the atrocities of the war in Ukraine, the geopolitics of energy have profoundly and irreversibly shifted.
The prioritization deck has been reshuffled, both energy security and decarbonization have jointly galvanized.
<unk> World view that we must accelerate the clean energy transition.
Notably last week, the European Commission released a plan to accelerate the development of secure and sustainable energy with a focus on cutting dependence on Russian gas before 2030.
Within this plan is a specific initiative to create a hydrogen accelerator to develop additional infrastructure and significantly increased clean hydrogen production and importation plants.
An increase in clean hydrogen development directly impacts the cost competitiveness and T. C O breakeven thresholds for hydrogen fuel cell applications, particularly in a world of rising hydrocarbon fuel costs.
We see a strong foundation supporting the global energy transition.
And at Ballard, we chew continuing to lay the foundation to be the long term market leader in Penn fuel cells.
Before we talk about 2022 expectations and outlook I'd like to take you through some of Ballard's current focus areas in 2021 highlights.
Our focus continues to be on the medium and heavy duty motive mobility markets of bus truck rail and marine with product leverage in select stationary power market segments.
The total addressable market for these verticals in our medium and heavy duty motive markets continues to grow with the evolution towards a net zero world.
In our 2020 Investor day, we outlined a 2030 estimated tam of $130 billion for the bus truck rail and marine markets.
Based on current estimates, we now estimate this to be over 250 billion.
This does not include the rapidly growing opportunities in the stationary and backup power light duty and off road markets.
We expect these additional markets to account for a meaningful proportion of our near and long term revenue growth. We plan to provide Tam estimates on these additional verticals at our Investor and analyst day. This fall.
I'd like to walk through each of these key verticals and the 2021 highlights.
Throughout the year, we grew our European and U S bus business significantly.
This growth was supported by repeat orders from key customers, including New Flyer, Soliris and Wright bus as well as entrance into the new regional bus markets with Tata in India and global ventures in New Zealand.
In the truck market, we executed against our development programs with Mali, and our wage high Ballard joint venture programs, while also announcing new collaborations with hexagon curious Linda Moore and quadrant.
Regarding the progress with moly, we delivered 120 kilowatt fuel cell engine to the Mali team in December on time with the development schedule. This concept edge and will now be integrated with their components for the next phase of testing.
The parallel go to market strategies of partnering with tier one suppliers and vehicle integrators, not only enables us to spend various classes of trucks, but also address a different market demands and stages of maturity.
The tier one suppliers act as long term channel to global truck Oems, while the vehicle integrators accelerate nearer term demand a fuel cell trucks by bringing early stage fleets to market.
You can expect us to continue to address the truck market with the strategy through 2022 and beyond.
We expanded our opportunity set in rail signing new projects with CP rail Sierra Northern railway and Togo, while transitioning our Siemens development program to initial product sales for train development in Germany.
In the marine vertical we delivered our first FC wave modules to customers in a number of exciting marine applications, including Norwich hydrogen a fairy program.
And stationary and backup power, we increased our we increased our revenue and announced an important new partnership with Caterpillar and Microsoft for the datacenter market, while H D. F announced the start of its multi megawatt baseload hydrogen power plant deploying Ballard large format fuel cells.
On the technology and operational front, we exceeded our internal 2021 goals for our three by three stock cost reduction plan and are on track to achieve our 2024 target.
We also launched our FC move HD, plus fuel cell engine and achieved our fueled experience milestone with vehicles powered by Ballard fuel cell technology aggregating an industry, leading 100 million kilometers of on road service.
In corporate development, the strategic equity investment in <unk> power and the acquisition of our Cola energy are two examples of how we're thinking of expanding across the value chain and increasing our technical capabilities.
With the acquisition of our Cola energy now named Ballard motive solutions, we have in house fuels, our powertrain and vehicle integration capabilities, allowing us to reduce customer adoption friction points, while strategically expanding across our value chain opportunities we.
We ended the year with a strong balance sheet and cash position to further deploy as accretive and strategic opportunities arise.
Now looking at our key regions.
As we highlighted on our Q3 call we continue to see significant growth in the European market.
Our 2021 European revenue increased nearly 20% year over year and in the power products segment, specifically, we saw an increase of over 50% in fuel cell sales. This was highlighting the continued maturity of the European bus market and the growth in other fuel cell applications of truck rail marine stationary and.
Power.
In North America orders from Cat CP rail and continued follow on orders from new flyer or driving the over 300% year over year growth in the heavy duty motive revenue in the U S and Canada.
Moving to China, our strategy in addressing the China market remains on track and we assess the best routes to market as additional clarity around subsidy frameworks becomes available.
In mid January a second batch of demonstration city clusters was announced in addition to the first batch of three clusters, Beijing, Shanghai and Guangdong, the two new clusters of Hebei and Henan are exciting expansions of the China fuel cell policy.
The Hunt and cluster is led by Jinzhou City, where the way Chi Ballard Joy.
Joint venture bus customer, Utah is located and consists of 17 participating cities.
One of the city's included is Weifang city, where the <unk> Ballard joint venture is located.
The Henan cluster Hasnt released any numbers on fuel cell electric vehicles or hydrogen refueling station deployments as yet.
But the industrial experts forecast more than 5000 fuel cell electric vehicles to be call. It to be deployed in the hunt and cluster during the demonstration period.
While details around the subsidies framework have not yet been published we expect the fuel cell products from the <unk> Ballard joint venture to qualify for the subsidy program at this time.
We continue to evaluate opportunities for Ballard and the <unk> Ballard joint venture to further strengthen our positioning across the cluster regions in the near term and post subsidy adoption in the longer term.
Now shifting to the 2022 outlook.
Supply chain challenges have been globally ubiquitous throughout 2021 and are continuing into 2022 today.
To date, we've been largely able to risk mitigate global supply chain disruptions by increasing supply of materials and moving more inbound products by air.
In 2022, we are anticipating some electronic component supply constraints, but our continue identify alternatives and sign agreements to secure supply continuity.
Regarding the increasingly dire situation in Ukraine.
We have no direct vendors from either Russia, or Ukraine and have not received any identified impacts from discussions with suppliers. So far.
We do have a number of suppliers in Europe in neighboring Ukraine.
So we are tracking open orders and trying to expedite deliveries were possible to avoid material shortages.
More broadly on commodities in component pricing pressure, 40% of Europe's natural gas and 25% of Europe's crude oil is provided by Russia. So pricing pressure is expected on components globally as energy costs for production and transport continue to rise as the conflict continues.
To date, we have not received any price increase notifications from our suppliers.
We are honoring pricing on our existing customer contracts that have already taken action to adjust commercial quoting activities for future orders to reflect the current cost and risk environment.
We've initiated 2022 guidance on total operating costs and capital expenditures to provide clarity on our capital allocation plans and priorities.
Our total operating cost for this year are expected to be between 140 and $160 million.
A 50% increase from 2021.
This increase is largely driven by increasing our investment in technology and product development related to next generation products and component development across our key target markets of bus truck rail and marine as well as increased investments in sales and marketing.
These resources are working to develop additional product capabilities aimed at key growth markets, such as bus truck rail and marine and next generation fuel cell technologies. We're confident investing ahead of the curve and we believe this is critical to maintain technology leadership and market share as a hydrogen growth.
<unk> over the coming years.
Our 2022 capital expenditures are expected to be between $40 million and $60 million. This estimate excludes potential investments a corporate development activities.
We are increasing capital investments on our testing capabilities, adding production lab and engineering equipment and investing in additional prototyping functionality.
Following our investments over the past three years on advanced manufacturing of Maa's, We're now starting investments in advanced manufacturing of bipolar plates.
We are expecting additional pressure on our gross margin outlook for 2022 consistent across the industry key drivers are continued increase in material pricing freight and cost and labor as well as an ongoing shift in the revenue mix to additional power products versus technology solutions.
We are still in the early phase of adoption.
Production volumes and platform acquisitions customer acquisitions, and therefore, the cost of fuel cells are still sub optimize putting pressure on gross margin.
As the industry grows and production volume scale, we expect to see concurrent gross margin expansion.
Corporate development work will continue to be a strategic priority in 2022, including potential acquisitions investments and partnerships to improve competitive positioning expand our product portfolio and solutions across the value chain, simplifying and enhancing customer experience accelerating.
Fuel cell adoption in target markets and accelerating business scaling.
As the energy transition and pace of Decarbonization accelerates globally. We're also focused on reducing our own emissions in 2019, we launched our mission carbon zero initiative to evaluate and steadily reduce the environmental impact of our organization.
In 2022, we plan to complete our roadmap to achieving this corporate carbon zero goal by 2030 through defining long term strategies to reduce and offset our emissions and other impacts.
On the last earnings call, we discussed the significant leverage diversification and resiliency in our business model across multiple regions and multiple verticals. We are already seeing early signs of this strategy and the benefit play out.
While our backlog was down from Q3. This topline number does not tell the whole story and masks key growth signals from underneath.
This diversification in our revenue mix by region vertical and customer is critical as we establish a presence with an increasing number of leading companies in our target markets of truck rail marine and stationary power and continue to build on our bus market.
Our 2020 year and order backlog was made up of 20 customers with meaningful orders, excluding the <unk> Ballard joint venture.
At the year end 2021, just one year later this number grew over 50% to over 30 customers with meaningful orders.
We also saw growth in European and North American composition of the order book now comprising approximately 60% of the total backlog in contrast, approximately 40% at the end of 2020.
As we have seen the translation of growth with companies like Wright bus fed who'll soliris in new Flyer, we expect a similar growth profile for new customers, making up increasing proportions of our future order book.
With this resilient and diversified business model growing technology capabilities by investing ahead of the hydrogen growth curve.
An increasing partnerships in key verticals and regions. We are excited about the 2022 outlook and long term positioning for Ballard.
This year in the years to come we will continue to set the stage and lay the foundation for years of growth ahead as the energy transition takes hold.
With that we'll turn the call back over to the operator for questions.
Thank you.
We will now begin the question and answer session.
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The first question comes from Michael Glen with Raymond James.
Please go ahead.
Hey, good morning.
Randy maybe just to start you spoke a bit about Molly.
Can you just give us some indication what are.
Our next steps there do you think youre going to look at putting a facility to assemble the module in Europe or are there any should we think about maybe a commercial partnership with an OEM in Europe , just trying to gauge.
What we might see on that particular partnership.
Great. Thanks for the question, Michael and good morning.
So just for the audience of course here Molly and dollar are jointly developing a fuel cell engine platform for the commercial truck market for Europe and this is a multiyear development program. We made I think very significant technical progress on designing and developing a 240 kilowatt.
You'll sell electric powertrain last year.
That's two 120 kilowatts for a total of $2 40.
Our responsibility Ballard in terms of our scope of work is designing the fuel cell stack as well as the system design Molly last year and this year, we'll be working on significant development of key balance of plant components as well as thermal management and power electronics for the complete fuel cell system in powertrain integration.
So as we kind of look at 2022, I think one of the important things we should highlight is that our male has.
<unk> seen a new CEO joined in January .
We actually have a call with that CEO next week.
So that will be important for us to start the development of our relationship with the new CEO at Mali long term, what we see as a market opportunity for moly and Ballard to be co developing fuel cell engines for the commercial truck market I think there'll be leading fuel cell engines with components that have reliability and cost.
Supply chain muscle from the from the male organization.
In terms of whether that's a joint venture and <unk>.
<unk> manufacturing capabilities.
We're still fairly early with the new CEO , So we'll wait to comment on that.
Similarly on the commercial side a lot of important work to continued technical work in 2022. So we really do see a 2023 and beyond is markets, where we're going to see more commercial engagement.
Really about designing the product with the right components, the right cost structure for the long term.
Last year and this year.
Okay.
My follow up on that is when do you think we would actually.
C C.
The entire unit in a truck driving on the road.
Yes in terms of.
Public deployment of that I think 2023 would be a realistic timetable for that to happen certainly.
There are activities in 2020 that will be internal at Ballard and male so.
You can think about that fuel cell engine actually tested in a real powertrain into real vehicle in 2022.
But not publicly with third parties.
Okay. Thanks for taking the questions.
Thank you Michael.
The next question comes from Mac whale with <unk> Securities.
Please go ahead.
Hi, good morning.
Given the Capex and Opex increase I'm wondering if you could give us.
And idea of the nature of those investments for instance, or is it.
Essentially just creating like a bigger head count doing the same or are you really broadening efforts into areas that we may not yet comprehend. So I'm wondering whether you could give us more insight into how you sort of allocate that.
Sure Good morning, Matt could thanks for the question I think it's important to understand kind of where we are we have very attractive partners in each of our verticals now bus truck rail and Marine off road stationery Blue Chip partners Blue chip programs demonstration programs underway and with where we are also in the development.
Of our own technology and products, we're really maturing in some cases from concept level, two prototype et cetera, and as you get deeper into these product development programs. The investments get heavier. So we have a number of programs and that will be.
Effectively investing in both of the stock and module level in stack and module programs, where China focus on core products, where we can rationalize market and product requirements from all of these different verticals and the different geographics by core fuel cell technology Emea's bipolar plates.
<unk> obviously.
And modules, including the module architecture.
And I think it's important that.
The testing and design validation as I said as you get into the maturing from from probe into prototyping even beyond into series.
Just a deeper investment so I think those are important and we are also are I think it's about an 80% increase in research in 2022, and that's continue our investment in core EMEA components catalysts, GDS membrane as well as pretty significant investment in balance of plant components. So HR B <unk>.
Air compressor DC DC converters with with partners in these cases, but it does require investment in Ballard as well.
On the Capex front pretty significant investment coming in our testing capability. So the 22, new test stations in some 48 test stations that are going through upgrades in 2022, so it's a fairly significant investment year on the testing capability side.
And then we have very significant investment on the production equipment. Both for next generation Fleet pilot line project that we're working on as I mentioned earlier as well as continued manufacturing process improvements across EMEA and modules as well.
Significant investment on the Capex side, Bert Laden and engineering equipment.
Upgrades on our facilities.
Tooling and fixtures and on the tooling and fixture side pretty significant investment for balance of plant component cost reduction in some of the tooling. We need also for our U new unit cell designs.
Stock levels. So at the unit cell level, so a pretty significant investment overall, and we're making that investment because all of these different markets that we're involved in again, we are I think going through this process, where we're transitioning from customer acquisition from platform wins to long term supply.
<unk> and we are readying.
With a lot of customer interest on understanding how we're scaling to support their expected growth.
Okay, and just as a follow up then looking at you talked about the Tam increasing from $1 30 to $2 50 would you because of these investments is is there a link to that can we draw a line between that and would your piece of market share that with the Pi. Your portion of the pie also be going up because of these.
Investments like what's your thought on that.
Yeah, I don't think the increase in the Tam is really driving this investment in 2022.
Although I will say in my opinion rail and Marine I had mentioned this a few years ago I thought they would surprise to the upside that's what's happening in my opinion on rail and marine with the engagement we're seeing there.
For different customers.
What I also see too on the bus side I think theres been a lot of debate over the last few years about battery electric versus fuel cell electric and we're seeing a number of transit operators, who trial both technologies now, saying increasingly we're going to be moving to.
Deployment of fuel cell buses, rather than battery electric buses.
Let me just give you two examples in North America less so for example in North America AC Transit previously thought they would have 70% battery electric and 30% fuel cell electric and now we see that actually being flipped where theyre forecasting now that 70% of their buses will be fuel cell buses.
Another one we see.
Another California transit, operator, going 100% fuel cell buses. So we're starting to see in my opinion, the bus market opportunity thicken up and.
I do think we're going to start to see orders beyond the tens and twenties into hundreds and multiple hundreds.
Particularly in the European markets, we're getting very excited about the bus market there.
But I think it's just a collection of all these different customer engagement programs that we have where the customers really want to see that as they scale two series and volume deployments that we have the right infrastructure the right quality processes the right manufacturing.
<unk> to be their trusted partner I think they're all there on the technology and it's now about making sure we validate the manufacturing side and we're making investments in both.
Thanks Randy.
Thanks Mac.
The next question comes from Rupert <unk> with National Bank.
Please go ahead.
Hi, Good morning, everyone. Randy you talked about the crisis in Europe , and the plans to accelerate hydrogen infrastructure there or are you involved in any discussions to accelerate plans in Europe or is it too.
Yes.
Morning, and thanks for the question. It is of course very early but this repower EU plan for affordable secure and sustainable energy.
I think is just a start we expect to see similar type of initiatives and in other countries, where energy security is top of mind.
And it's a program that's really focused on accelerating adoption of low cost.
Our renewable power, but also looking at this a hydrogen accelerator program and I think what we're going to see is fairly significant scale up in terms of green hydrogen supply in Europe up a forex.
Acceleration compared to what was previously contemplated.
So I think thats important and of course that green hydrogen is going to be used for a variety of opportunities decarbonize energy industry, and mobility and particularly on the mobility. Once we feel we are very well positioned very well positioned in each of the vertical markets, where you would expect to see green hydrogen uptake in mobility application.
So bus truck rail and marine in Europe , we feel strongly positioned it.
Okay.
So it is it is early but is there any discussion on timeline or are starting to ramp up activities in <unk>.
<unk> of subsidies or or mandates to to accelerate hydrogen.
Yeah, I think this repower EU as you think about it on the heels of the fit for 55, just overall this acceleration from from a energy transition perspective, now energy security.
We will lead to.
Increased order uptake in the 2023 timeframe I think it's going to take some time for that to translate into programs.
Programs and policies and as a reminder of course all of these market applications, where in bus truck rail and Marine These markets do have long lead times in terms of customers getting in some cases financing opportunities support and then of course going through.
Our program, where they put out to tender their bids for.
Whether it's plus or truck et cetera. So it will take time for that to translate to orders, but we're very confident about the positioning we have in these key markets.
Great. Thank you I'll leave it there.
Yes, one thing I'd add too is that I do think we're going to see an acceleration in ports.
Which has been highlighted as a key area, where you can see hydrogen clusters with multiple applications.
Using that same hydrogen refueling infrastructure and I think Europe is going to lead the way.
Great. Thank you.
The next question comes from Aaron Macneil with TD Securities.
Please go ahead.
Hey, good morning, all thanks for taking my questions.
You've referenced 2023 is sort of this kind of growth kickoff.
Here are a few times now.
We've got.
You mentioned long term supply agreements as part of the answer to Max question I guess.
How are you positioning for this.
Very practical level like should we see you start to build inventory staffing.
I know you mentioned the testing expansion or.
Do you feel like you have the capacity to.
Meaningfully grow order flow just based on the staffing and inventory levels you have currently.
Yes. Thanks for the question Erin So that is really part of the reason we're looking at this increased investment both on the operating cost side and the Capex side in 2022, and some of that will.
We will translate into 2023 as well because we see the market engagement, we see the customers wanting to have long term arrangements, but we need to get through these pilot projects, we need to demonstrate very clearly not just the technology from the dependability and reliability and performance perspective.
And the demonstration projects, but show the ability to manufacture at quality in scale at the right cost structure. So our three by three cost program, our manufacturing expansion initiatives our investment in our Resourcing, all very important and I'd highlight we're also increasing the investment in the organization.
Nation in terms of how we're structured to attack the market opportunities. So we have effectively repositioned our organizational structure with a real focus on the different verticals bus truck rail and marine.
And have a strong leadership cascading of course market requirements product requirements into our core product portfolio and global.
Factoring capacity as well so a lot of work in 2022 that will support future growth.
And again, it's all about taking those customers from a to b and ultimately further than that over the next few years and scaling the business critically important that we get the scale as we make these investments in order to drive down our cost for our technology and our products and really see gross margin.
And in the future.
Understood and maybe switching gears a bit.
I just wanted to understand the Chinese city cluster dynamic a bit better you mentioned the 5000 vehicles over the period.
I was curious.
What is the duration of the demonstration period.
Can you qualify for other city clusters, and how might you do that and then specific to the one that you qualify for.
What are the competitive landscape look like in that specific city.
City cluster and how do you feel in terms of your competitive positioning there.
Yes, great Great question, and there's a lot of complexity to this that I think still needs to play out I think given the COVID-19 situation in China right now I would say this is not the top priority for the Chinese government to clarify this but.
It is something that I think needs to get clarified very quickly.
How you operate and one cluster and even the point scheme within that cluster in the value chain participation and how that translates to another cluster still some ambiguity. There. So there's there's work that's being done with the government and industry in parallel working together to make sure that there is a trend.
Currency, though that so that when capital supports a deployment of vehicles. It has clarity on how that return is going to be is going to play out I will highlight though when you look at the five clusters and some of them have announced fairly significant opportunities for vehicles, you've got Beijing that is looking at.
At 5000 fuel cell electric vehicles, Shanghai, another 5000, Guangdong 10000.
And then as we mentioned <unk> five.
<unk> 8000, and you just look at these aggregate deployments over the next number of years.
What we see is is a scaling occurring particularly in the 2025 time frame.
As initial 2025 requirements for.
To try and track to the 2030 goals of a million fuel cell electric vehicles on road and we also see a fairly significant build out of hydrogen refueling stations. So in 2021.
Even absent strong adoption of fuel cell vehicles in 2021, there was another 100 fueling stations built out so it's about 100 over 180 today.
Another 50 plus under construction.
So I think we're going to see over 230 hydrogen fueling stations by the end of 2022 supporting again. These are focused on bus and truck opportunities. These arent for passenger car.
Fueling stations. So I think it's going to take some time to have clarity how these translate within this specific.
The cluster here, where weifang is located we do see a very strong position for the <unk> joint venture.
If you look at the companies that are included in that cluster.
If you look at plate manufacturing stack manufacturing module Assembly. The JV is our largest company in those parts of the value chain in that cluster.
Okay, great. Thanks, I'll turn it over great. Thank you.
The next question comes from Jonathan Lamers, with BMO capital markets.
Please go ahead.
Good morning.
On the backlog.
Is this becoming less of a relevant indicator for revenue over the next 12 months as Ballard transitions to more of a manufacturing business from our consulting business.
And just the second part to that question if I can.
For the <unk> Ballard JV, how far ahead of production do you expect the lead times for the next round of EMEA in plate orders to be.
Hey, Jonathan it's Paul here, So I'll take the first question on the backlog on the order book. So we did see the 12 month and total order book.
Decrease above 15% from Q3 2021.
From last quarter, but what's interesting when you look at the inside the order book you see.
The European and North American composition growing.
We're in Europe , and North America is now 65% of the 12 month order book.
And.
Sure.
The total order book, it's about 60% versus 40% from last year.
So the balance as you can see the movement from from China to Europe , and North America, and we also see increasing in developing markets, including marine stationary and off road.
Increasing as well.
The other dynamic I'd highlight too is the increased customer diversification. So in Q4, we had over 30 customers who had material orders over 250000.
That compares to about 20 in Q4 2020, so a year ago, So thats a pretty good increase in customer diversification overall.
As you mentioned, we did see the decline continue to decline as we've signaled before the wine ntfs's the Audi contract winds down and we also continue to fulfill the $90 million wage higher technology transfer agreement.
So we expect to see that kind of.
Those trends continued with.
Technology solutions leveling out.
So as we as we look forward, we're very confident in our long term prospects.
Still remain constant as Randy mentioned in his in his remarks about the adoption of fuel cell and hydrogen fuel cells per mobility stationary power in particular, but we do expect there could be some volatility in orders in the near term, especially when you consider the inflationary environment and the geopolitical risk that we're in.
We have and we would point to the quality end of the of the large customers all the customers, we have a particularly large customers and the work we're doing with them Siemens smaller Caterpillar for example to develop these products.
And as Randy mentioned, it takes time to develop and.
And thoroughly test and one thing I've learned over the past year now the amount of time it takes to really make sure that product is well understood and tested.
Before we can get to scale production and volumes.
And so we expect to see when we get to that point ever increasing orders and revenue flow.
But we do have good growth in the bus market and expect to see.
The other markets truck rail and marine stationery to follow with some other path as they as they continue to develop and ramp up.
One of the proof points, we point to two is again around the quality of our growing customer base and just look at for example, the Adani group, which we which we mentioned so commercializing fuel cells and various mobility and industrial applications in India, which was not a market. We are looking at 12 to 18 months.
<unk> ago, but certainly made signals that it is going to be.
A very large hydrogen market. So it's a great new partner in a new geography. So.
So to sum up yes, there's going to be some potential volatility in revenues and orders in the near term, but we are very.
Bullish on the long term prospects and Jonathan maybe just a follow up on your question on the EMEA supplier to the joint venture.
There is no material MBA supply in the order book, So I think we just saw this.
<unk> two.
Two cluster regions announced just a number of weeks ago. So it's still very early to see how that's going to play out but I think we will have more visibility on the next EMEA order from the JV to Ballard later this year.
Okay. Thanks, and just one follow up if I can.
Like quite a step up in sales.
Sales by the JV in Q4.
Looking at the industry data it looks like the.
Semi tractor production in China really stepped up in Q4.
With some of that.
Sort of like.
Like lumpy one time orders ahead of the Olympics or can you can you just kind of give us any.
Color on what happened in Q4 and sort of.
What cadence you would expect over the coming year, if you can.
Yeah, I don't think.
We're going to see kind of a smooth pattern of order flow out of China or really any market in the very near term. It is very much a project based business with lumpiness for a quarter.
I don't think we could translate Q4 to what that will mean for the coming quarters in China. I think we will have to wait and see how the policies unfold I do think overall in the China market.
You are right there was a.
A tick up in Q4 ahead of the Olympics, we didn't have a significant presence at the Olympics. Most of these were Beijing based companies that were providing primarily fuel cell buses. There was a wage high truck at the Olympics with our <unk> Ballard JV engine that was actually doing waxing of.
Snowboards and skis. So it was a pretty interesting truckload heavily visited at the Olympics, but didn't relate to the Olympics. This is more about.
The Shandong market opportunities.
Thanks for your comments Greg.
Alright, thank you.
The next question comes from Robert Brown with Lake Street capital markets.
Please go ahead.
Hi, good morning.
Randy just wanted to get some more detail on the marine market. You had you had a nice order here recently, how is that market developing do you see that's on pilot orders are you seeing sort of a broader.
Okay.
Good morning, Rob and thanks for the question.
Marina is one of those markets, where we've seen the total addressable market increased significantly from our early initiatives or a review.
It's a $40 billion Tam, we now see for marine.
We have recently announced with ABB there are approval in principle and working towards what we call type approval, which would give our fuel cell module for marine with <unk> FC wave.
A global first milestone for type approval.
And again in the Marine segment. We're initially focused on what I'll call. Some of the work boats. So ferries cargos tugboats work boats river boats et cetera. Some of these market segments.
And initially we see it very focused on our concentrate on the European market and one of the partnerships I do want to highlight I mentioned in the prepared remarks was nor led which is one of Norway's largest ferry and express boat operators that they own around 80 vessels currently in operation actually there are two or three videos on Youtube.
Of the.
What's called a Hydrea hydro. This is the first fuel cell ferry some very cool videos on Youtube that nor latest posted with this five year boat.
And so the.
<unk>, Norway in particular has the world's highest conscience concentration of George and Theres, a very strong support there.
For these environmentally sensitive waterways to be protected and so nor led is launching this world's first liquid hydrogen powered ferry, which I think is an important development.
Vessel itself I think it's around 80 83 meters long about capacity for up to 300 passengers 80 cars.
Travels around 17 kilometers an hour and so we have now supplied 200 to 200 kilowatt FC wave module. So that's 400 kilowatts of power that.
Will help that vessel on propulsive power and the liquid hydrogen is being supplied by Linda and a production facility with a 24 megawatt <unk>.
So theres a lot of pieces that have been put in place to support the world's first.
<unk> fuel cell ferry and we're pretty excited about this opportunity and I think in la.
Later, 2022 people or in Norway, we will have the opportunity to to sale on this ferry on its roots. So.
We see these type of market opportunities, where carbon emissions are being reduced by 95% for that type of application.
It's pretty compelling.
ABB is another important partner for us in the marine market I, just had an opportunity to meet with them at the Cera week Conference last week in Houston and <unk>.
Continue to explore collaboration opportunities with ABB. So this is a market that I think we're very well positioned for with our Marine Center of excellence in Denmark very close to these markets.
Okay, great. Thank you for that overview I'll turn it over.
Thank you.
The next question comes from P J <unk> with Citi.
Please go ahead.
Yes, hi, good morning.
I know you gave some encouraging numbers about bus our targets in different cities in China.
How many <unk> modules.
Ballard joint venture actually sell in 2021.
And then how do you see that ramp up in 'twenty, two and beyond.
Production testing capabilities improve.
Yeah. So.
In terms of deployments in the China market I would say it was fairly muted deployment activity overall in the China market in 2021.
And particularly on the bus market side very limited numbers from the JV.
In 2021.
You asked about the ability to.
Look at a ramp up there we've invested a lot with <unk> over the last few years on the development of that joint venture. So we have a.
The world's largest manufacturer of bipolar plates and assembly of stacks and assembly of modules for these target markets of bus and truck with.
With about production capacity annual production capacity of over 34000 stacks to support 20000 fuel cell engine. So think about that as 20000 buses <unk> trucks I do think in the long term, we will see a heavier weighting in the China market on trucks is going to be a lot of fuel cell buses for <unk>.
Sure, but we do see a heavier weighting likely on the truck side.
So those are two markets set the joint venture is actively working against I think it is important to understand that within the <unk> group as well they have two bus Oems Joan Tong bus and Asia Star bus who have both.
<unk> incorporated the fuel cell modules from the <unk> Ballard joint venture into platforms have now tested and run them in real life circumstances with real passengers over the last year I think somewhere around 150 buses that.
We've got good traction against.
With those two bus Oems within the <unk> group.
And then additional customers outside bus customers outside the <unk> group, including Utah, the world's largest manufacturer of buses and as I mentioned earlier strategically located in Zhengzhou. So we're very excited about the long term bus market opportunity in China.
And on the truck side as a reminder, within the <unk> group.
One.
Yeah.
One of the one of the largest truck Oems in China.
I know truck number two or number three depending on which metrics do you look at.
They have incorporated a number of fuel cell.
Platforms into the into different classes of trucks.
At Sino truck and so as an example of last June I was in China attending the <unk> Conference, where we had I think four different buses and trucks at that conference.
With <unk>.
<unk> Ballard joint venture modules powering those vehicles.
Still early in terms of market adoption, given the policy uncertainty, but very well positioned to support the scaling to occur in the coming years.
Great and then you have this mou with Adani and India.
And what the scope of that project and when you combine that with your talk a bus.
Neil how big the India market could be for you and sort of what timeframe. Thank you.
Yes P. J, we're very excited about the recent developments in India, you think about.
Not just the green hydrogen policy at the announce but really our push on renewables there and it really a focus on not just addressing climate change and air quality, but now energy security and economic development.
In February India did analysis green hydrogen policy, focusing on encouraging really either the purchase or build out of renewable capacity specifically for green hydrogen production.
And the policy provides open access approval I think this is really important within 15 days without central surcharge and zeros Interstate transmission charge for 25 years. So there is some very strong incentives to certainly before June of 2025 to get green hydrogen production.
Online.
And benefit from these subsidy supports and I think.
On top of that what we're seeing is a very compelling partner with Dani when you think about the different attachment points. They have across the adani business with poor trucks and airport buses and rail opportunities in off road vehicles, including mining power generation of ports.
It's a very exciting company and we're looking as we've identified in our press release with <unk> the opportunity to manufacture fuel cells for these market applications in the Indian market. So we see a donnie as a compelling long term partner and I want to highlight this is coming directly from <unk>.
<unk>, the founder and share CEO of Adani group.
So we've had the opportunity to meet with him in person and get his vision for a movement in an energy transition in India and I think its very compelling what Adani group is trying to accomplish as the number one renewable player in India and now looking at.
How do they translate that to green hydrogen and the applications that have attachment points across their industrial diversified business.
Thank you.
The next question comes from Leo Mariani with Keybanc.
Please go ahead.
Hey, guys I was hoping you could talk a little bit more about gross margins I think in your prepared comments you did talk about continuing to see some margin pressure in 2022. However, it looks like your margins were up a little bit here in the fourth quarter to kind of around 13%. So maybe you could just provide a little bit more color.
<unk> on perhaps what we should expect in terms of gross margins as 22 evolves.
It's Paul here so.
So yes, we did see margin increase from Q3 into Q4 on a couple of points, but when you look year on year, we saw decreased gross margin by about seven seven points.
The largest contributor to that is along the same lines of what we've been talking about already is the shift from.
Technology services, which is Scott a traditionally has had a bunch of larger contribution margin to power products, which has a smaller contribution margin and not mix accounts for about five points of the gross margin decline. We also saw some pressure on material costs and freight which.
Each were about a point.
As well as an incremental warranty provision of about one point, which was offset by some subsidies for COVID-19 from the Canadian government by points, So about seven seven points overall.
As we go forward into 2022 that that shift in mix in favor of power products. We expect to continue and that's going to put some pressure on gross margins. We also talked earlier about the the volatility inflationary environment, we're in and the volatility in cost and when we talk to our suppliers.
Whether it's energy costs or where commodities metals those are all going to filter through into cost that ultimately will come our way as well.
So we do expect that trend.
As well as shipping I should mention too some shipping costs have increased year on year, and we expect that to continue so we do see that downward pressure continuing somewhat.
As we go into 2022.
We do also expect though that as volumes ramp up we'll be able to amortize, our increasing costs and scale over.
Over higher volumes and that will have an increasing impact on gross margins as we go forward into 2023 and beyond so.
We expect the downward trend.
In 2022, but see some expansion as we get as we get volumes ramping up.
Okay. That's helpful for sure.
And I guess, just wanted to kind of circle back a little bit on that the way shy JV there in China.
If I kind of heard you all right in terms of some of the comments you made it sounded like we really shouldnt expect much in the way of revenue from that in 'twenty two at least certainly not at the beginning of 'twenty two as I know, there's some policy initiatives that you still need to be cleared up is that a reasonable way to think about it.
Yes, I think the situation just doesn't have the clarity at this time that enables us to have a confident posture on it. So I think we're going to have to wait and be patient and as circumstances policy market demand and end market demand that understands the policy.
Landscape and is confident in committing capital as that gets more clarity that will trickle to the <unk> Ballard joint venture orders, which will then trickle to Ballard for orders, but at this time, we just don't have the clarity and visibility to give us that confidence level.
Okay. Thanks, everyone.
Do you.
Once again, if you have a question. Please press Star then one.
The next question comes from Craig Shere with Tuohy Brothers.
Please go ahead.
Good morning, Thanks for taking my question.
Our first.
You have quite a strong.
A strong balance sheet dry powder.
But given the growing organic opex and Capex investment as well as near term pressure on gross margins.
Do you want to stay on the safer side as far as liquidity do you have some upper limit on what you are willing to consider for M&A.
Oh, yes, we do have.
We do have some dry powder as you say and looking to deploy that both organically and Inorganically Randy talk a lot about the.
The increase in Capex, and Opex that where we've had this year as well as going into next year.
Our strategic plan, we look out five years at least five years and have a capital allocation plan that we're satisfied with that we can get to where we need to be.
Within that timeframe.
We could though.
To raise more capital market conditions warranted, it and we have a larger.
M&A transaction of course with our balance sheet size of it is there is a there is an upper limit.
But we would look at market conditions at that time, and then see about raising more capital.
Perhaps.
Again, if conditions were more favorable.
Got it.
There was a reference to doing better than expected in 'twenty one.
Cost reductions and moving well on your way towards $2 24 target could you opine about perhaps.
Achieving that earlier.
<unk> mid decade targets more like 2023.
What goes into that.
Yes.
Craig I don't think we see that happening earlier theres a number of <unk>.
Different elements that are coming together on a sequence time basis.
So we're very pleased with the progress in 2021, we need to duplicate that progress now in 2022 and again in 2023.
So.
Lots of work to do.
I think most of the I'll call it technology risk we've worked through.
So now a lot of it is more on the side of vendors that we've transitioned to new materials and now we've qualified those materials and we've done them in small samples is getting the scale up on the vendor side as well.
Supplier side, and then also on the advanced manufacturing initiatives.
The volumes.
To drive those improvements that we've that we expect to see on on costs and therefore gross margins as well as in the managed manufacturing side.
I think we're on track and we're sticking with that plan and I don't see a pull in of it.
Very good.
Very quick follow up to the first question if youre getting close to commercialization you think all of those cash flows are within year two around the corner.
At some point you would consider some some leverage instead of just equity all the time.
Yes, yes, we would we wouldn't look at that though of course, we would want to have a.
A steady stream positive stream coming in and we would certainly look at perhaps some leverage.
But that's that's into the future.
Not in the near term.
Yes, Craig I think as we think about the capital stack just to follow on Paul's point.
We have sufficient capital to get us.
To where we need to be from a business perspective, a cash flow perspective.
What we're talking about is in the event of a larger M&A transaction.
Particularly if we're not able to use paper for part consideration. That's the type of circumstance, where we may need to look at raising capital.
But as the business mature of course in terms of the capital stack, we look at the introduction potentially of green bonds or.
Or other debt structures that made sense.
In the markets at that time.
Great. Thank you.
The next question comes from Jeff Osborne with Cowen and company.
Please go ahead.
Yes, good morning, Randy and thanks for all the details on the call in terms of Opex and Capex that's very helpful.
Two quick questions on my end on the Tech solutions side for 2022 is that still a headwind from a gross margin perspective, I think you alluded to five points of pressure for 'twenty, one and I was just curious how to think about the mix shift in 'twenty two itself.
So so so Jeff protect solutions.
Margins did compress a little bit in in 'twenty, one versus 'twenty by a couple of points, but we would see the margins being fairly steady maybe we might lose another point or two in 2022, but but not beyond that the mix change really is the sort of relationship the increasing revenue from power products.
<unk> versus <unk>.
Tax solutions and so the impact on the impact of mix on the on the blended gross margin is what we're trying to express there.
Got it and then.
Any thoughts Randy on Electrolyze or applicability to your your Perm development is that.
Something that youll be working on this year as part of the increased R&D.
Yes, great question Jeff.
We feel like we have a lot on our plate with just the fuel cell applications here and customer requirements and market opportunity. So.
<unk> are not something we would do in house organically at this time.
Got it. Thank you thank you Jeff.
The next question comes from Greg Wassa Koski with Weber research.
Please go ahead.
Hey, Randy Good morning, just one for me here to end it.
Can you comment a little bit more on component and raw material availability in 2022.
Kind of where your concerns maybe and then particularly related to year palladium supply chain and whether or not current events in eastern Europe .
Affect it Eric or to what degree that it could potentially affect that thanks.
Yes, Greg Thanks for the question.
So if you kind of look at our products, where we do see some exposure is aluminum aluminum accounts for I think about less than 5% of the total module cost.
And actually it's a significant part of our ghd cost as well in our module. So it's something we're looking to.
We continue to reduce the amount of aluminum we have so there is an area, where we could see some commodity exposure in 2022.
Platinum accounts for I think about less than 5% likewise.
5% of our total module cost as well so that's something that we're tracking obviously tracked.
Our entire our entire life.
A lifecycle here at Ballard, we do have multiple suppliers for platinum with sourcing outside of Europe .
So that's important.
Iridium is another area, but this is now less than 1% of the module cost. So I think relative to some of the other technology like battery technologies.
We do have less exposure to volatility to some of the supply chain inputs in commodity cost.
But of course this.
We are going to see I think cost increases across all.
Activities in commodities and of course energy is going to impact all companies operations and so I do think we're going to see pressure and I think this is just a geopolitical risk that every company every industry has a challenge within 2022.
Alright, Thanks Randy.
This concludes the question and answer session I would like to turn the conference back over to Randy Macewen CEO for any closing remarks.
Thank you for joining us today, Paul Kate and I look forward to speaking with you in May when we'll discuss results for Q1 2022. Thanks again.
This concludes today's conference call you may disconnect your lines.
You for participating and have a pleasant day.
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