Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems 2014 Q4 and 2015 Outlook Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead sir.

Thanks very much, and good morning and good afternoon to those on the East Coast. The purpose of today's call is to discuss Ballard’s fourth quarter and full year 2014 financial and operating results as well our 2015 strategic focus and outlook. And with us today, we have got Randy MacEwen, our President and CEO; and well as Tony Guglielmin, our Chief Financial Officer. We're going to be making forward-looking statements that are based on management's current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. In terms of the flow of today’s call, Randy is going to provide some additional context on our recently announced $80 million Technology Solutions transaction with Volkswagen Group. He will then provide some summary comments on Ballard’s 2014 performance. And Randy will discuss some specific incremental changes to our strategy, followed by our 2015 outlook. Then, Tony will review Ballard’s 2014 financial results before we open up the call for question-and-answers. So let me turn the call over to Randy.

Thanks, Guy, and welcome everyone to our 2014 year end and 2015 outlook conference call. I’ve been in my role here at Ballard for almost 5 months now and I’d like to begin by confirming at the high degree of enthusiasm I began with last October remains today. It’s clear to me that our company is an industry leader with the most advanced technology and the very best people. I’ve had time to reflect John and make adjustments to our strategic direction and to begin implementing steps that I believe will support long-term growth and an increase in shareholder value. We are focused on executing against a growth, customer centric growth strategy that is built on two platforms, Power Products and Technology Solutions. Today I’d like to discuss a number of specific steps we are advancing in each of these platform areas. Let me first take a few minutes to review our landmark transaction with Volkswagen Group, including both VW and Audi, which closed earlier this week. This is a complicated transaction and we want to ensure you have full appreciation for its nature and scope and what it means for our business in 2015 and beyond. As context, less than a year ago, we acquired from United Technologies Corporation a portfolio of intellectual property related to PEM fuel cell technology. As consideration for this purchase, we paid UTC $2 million in cash and $5.1 million valid shares. Today, UTC continues to hold these shares, representing 3.9% of our issued equity. On February 11 this year, we announced an $80 million Technology Solutions transaction with Volkswagen Group, which includes the following key deal elements. First, we agreed to transfer to VW Group the automotive-related portion of the intellectual property portfolio we acquired from UTC in return for payments totaling $50…

Thanks, Randy, and good morning everyone. I'm going to provide a brief review of our key financial metrics for Q4 2014 and for the full year. Top line revenue was $15.6 million in Q4, down 10% year over year due to declines in telecom backup power and development stage revenue, principally bus revenue, the latter was a large measure to result of recording zero revenue in the fourth quarter from bus licensing agreement in China as compared to $3 million recorded in Q4 of the prior year. On a full year basis, revenue was $68.7 million, representing 12% growth over 2013, driven by the strong growth in material handling and engineering services as Randy mentioned earlier. Overall, in terms of our top line results, although we were disappointed in the lack of progress in telecom backup power last year, our results do highlight that our diversified approach is appropriate for this early stage markets. In terms of gross margin and adjusted EBITDA, Q4 and full-year results were impacted by two key items, warranty claims principally related to our ElectraGen methanol systems in a specific Asian deployment and impairment related to accounts receivable principally associated with the licensing contract that we terminated in China. Gross margin for the quarter was negative 19% and for the full year positive 15%, down 12 percentage points from 2013. However, if not for the aforementioned warranty provisions, gross margin for the full year would have been positive 20%. In terms of cash operating costs, these did increase in Q4 compared to the same period in 2013 to $7.8 million. This increase was due to lower government funding recoveries in Q4 combined with one-time legal cost associated with the breach of licensing contracts in China as well as our recent transaction with Volkswagen. For the full…

[Operator Instructions] The first question today comes from Matt Koranda of ROTH Capital Partners.

Just wanted to clarify the Q4 gross margins to get to underlying gross margins here, even when I adjust out that $3.7 million warranty provision, I’m getting to 4% gross margins, can you just talk about what’s going on here in the quarter particularly?

Yeah, you’re right. It was about 4%, 4.5% gross margin when you back out. There is no question and I think it just highlights – part of this highlights back to Randy’s earlier comment that our product gross margins – we have some work to do to improve those, so part of that of course is, as we described on previous calls, some of the product mix shift, even product gross margins during the quarter did hurt us somewhat. The other thing of course is we didn’t have any licensing revenue in Q4 as we had in prior quarters. So I think it’s a combination of the lack of some of the higher margin business that we enjoyed through the last couple of years as well as the product mix shift. Those were really the key drivers. I will say obviously, goes without saying, that is not at all representative of what would expect to see going forward. I think on a fully addresses, just to give you, if I could, an equivalent, if you will, an adjusted number, as I mentioned earlier, it’s about 20% for the full year and I think that’s probably a bit more indicative of what it should be. So I wouldn’t focus too much on the Q4 number as being any sort of run rate or indicative number.

And then in terms of the fuel processor issue, could you just give a little color and elaborate on what happened there?

As you might expect, there is some customer sensitivity issues around that, so not a lot of information we can share. There was a few processor issue we had in a specific Asian deployment and it was a associated really with very unique operating conditions at the deployment and so we’ve implemented a solution that we believe largely addresses the issue. But beyond that, we don’t see any leakage.

And then in terms of technology solutions, could you help us understand what the pipeline looks like for you guys in terms of other IP related deals? Maybe you could quantify that or at least characterize the nature of any other discussions you may be having with potential customers there, any other deals similar in magnitude to Volkswagen or how can we think about that going forward into 2015?

So what I would say is that the pipeline of opportunities we have today is more diverse and broad and deeper than we’ve ever had obviously in technology solutions. We don’t have anything in the pipeline that is of a similar scale to the Volkswagen transaction we just announced. I would say a number of these customers typically do things in phases and so we’ve seen examples where we will go through maybe a phase one through three in one year and the subsequent year may be we do phase four and five and if things go well through those phases there’s opportunity for us to license technology. And clearly in the portfolio of opportunities that we have, it is contemplated that there may be licensing and what I would like to refer to as opportunities to surface value on our intellectual property portfolio and offer the customer really a bundled solution, not just in engineering services, but access to our know-how, access to our IP and the ability for components supply longer term. So we have those opportunities in our pipeline today. Again, the breadth and depth of the opportunities are I think the strongest they’ve ever been and I’m quite bullish on the outlook for technology solutions.

In terms of the telecom backup power market, can you help us understand the impact of cheaper diesel pricing on overall demand in telecom backup power? I understand a lot of the demand is not really based fully on diesel pricing, but could you just help us understand the impact to 2015 and how you see that playing out?

We still believe and I think it is said, the price of fuel itself is really not a significant factor at all in the backup power telecom issue. Certainly, total life-cycle cost we do factor into it and fuel is a portion of it. But it is very much more related to in fairness the need to get our capital cost down, which we’re focused on gross margin. And I would say as well, the majority of the market we’re going after is more typically battery, diesel is in some unique markets, but that’s really more of a fuel, access to fuel issue. So I wouldn’t focus too much on diesel in that particular market.

The next question comes from Rob Brown of Lake Street Capital Markets.

I just wanted to clarify sort of your thoughts on 2015, did you say overall the top line should grow, would that the net of the VW deal?

Yes, so the outlook for 2015 particularly as we look at each market segment, but for telecom backup power where visibility isn’t as good as the others, is decidedly optimistic. So we do expect to see growth in 2015 on the top line.

And then maybe you could clarify where the Volkswagen IP sales shows up, does it show up in revenue item or did you say it was other income, net of the license fee to UTC?

When we announced the deal, we were a little circumspect about at the time about what the revenue treatment would be and of course having just concluded our year end review, we have concluded that, largely given the magnitude of the transaction, although we view this as part of our normal ongoing business to surface value in our portfolio, we are going to treat this as other income. So it will not flow through the revenue line, it will appear as a one line gain. That will be of course as you say that will be net of the 25% royalty as well as net of the asset that we are taking off the book. So just to give you a ballpark number for that $40 million transaction that was closed in Q1, think about a number of something in the neighborhood of about $13 million roughly would be other income. We are still of course having to find you on that as we get into Q1. But that would be roughly the impact. That will of course flow through net income and earnings per share. But will not flow through revenue.

And then Randy, maybe you could just elaborate on your M&A strategy a little bit, I know you said you wanted to be accretive, but are there technology areas you want to get into, are there product line enhancements, maybe just give us a sense of M&A strategy there and maybe timing?

I think what we prefer to do is work on a transaction and then announce a transaction when you have something. Don’t want to tip our hand necessarily in terms of what particularly areas we are targeting, but again they will be complementary to our current growth strategy and we will be looking for opportunities that accelerate profitability and enable us to have a financially accretive transaction.

The next question comes from Carter Driscoll of MLV.

Just elaborating on – following up on Rob’s question, in terms of maybe specific end markets, are you A, I guess my first question is, do you have a dollar amount in mind, obviously you have lot more flexibility given the transaction with continuing with Volkswagen in terms of what you might be able to [indiscernible] but are they – those end markets similar to the ones that you have pursued from an engineering and services perspective, military, aerospace, along those lines. And then are there specific financial metrics you’re looking at, obviously you wanted to be accretive, but is there a specific size or revenue you’re hoping to bring to the top line, is there a certain margin profile, just some color there? And I just have a couple of follow-ups.

Let me clearly, internally we have a series of financial metrics that we’re looking at when we assess M&A opportunities, revenue and gross margin being critical ones, we do want to get more scale in our business and want to enhance product gross margins and find opportunities for products that have a gross margin profile and looks attractive. In terms of deal size, frankly, we’ve seen a number of M&A opportunities already over the last five months while I’ve been here and they ranged from relatively small bolt on acquisitions to fairly large deals. And I’m not sure where we’ll end up, but certainly we’re looking to do something that is impactful in 2015.

And then maybe just taking a step back and talking to the strategy as it unfolds as you see it Randy, of the different end markets, maybe you could quantify or give some color on what are those you think could result in component revenue in some specific timeframes, so automotive within 2016, 2017 or aerospace in 2020, maybe you can lay out the top three and maybe give a generalized timeframe of when you can materialize from engineering services and natural product?

Clearly, at this stage no clear visibility into when we see component supply in automotive space. But clearly it’s an area that we’re focused on, we think we’ve got that opportunity and optionality in that segment, when fuel cell cars happen in volume, I’m not prepared to speculate on. In terms of other markets, we do see particular aerospace and military applications where we would expect to see some opportunities in 2017 timeframe.

And then just lastly, given the realignment of incentives both from managerial and from sales perspective as well towards gross margin, is there any concern that you might be sacrificing some top line for the margin enhancement, how do you balance those two growth objectives?

It’s a great question. We spent quite a bit of time wrestling with that issue and I think we’ve got the right balance in terms of management objectives looking both at growth, which is critically important and a mantra that I’ve been articulating here very strongly since I joined as well as at looking at gross margin performance. And so I think we have the right blend and I think we’ve got the right incentives in place to drive both growth, but responsible growth.

The next question comes from Les Sulewski of Sidoti & Company.

Just to refer back to the gross margin issue, specifically on next-generation products coming to market, and I understand you want to get the price point lower to the customer, how does that affect the gross margins for you?

One thing we will be doing later this year, as Tony alluded to, is we’re looking to have an Investor and Analyst Day likely in September timeframe and we’re going to be laying out – we expect the layout at that time developments in terms of our technology and product roadmap and where we are seeing cost reduction, both in 2014 where we saw some cost reduction, but particularly in 2015 and beyond where we’re working to seek cost reduction, some of that will be passed on to customers in terms of lower ASPs, but we expect to see gross margin expansion occur there. And we’ll also in that same investor and analyst day spend some time talking a little bit about some of the initiatives we have on the operations side to help improve gross margin, both in terms of supply chain and some production activities that we’re looking at.

And I’ll just add to that, Les, and I think you’ll find this quite wholesome discussion about our plan over the next few years, just a couple of – just in terms of 2015, maybe just to bring it into the plan, if I could, as we have in prior years, we have a number of ongoing programs, I was just going to mention a couple specifically that will help us in 2015 and we talked about one of them previously which is the introduction of HT7 bus module, which is in our plan for a number of – particularly in the European market, again that is about a 30% cost reduction compared to our prior version and some of that of course will be passed along to pricing, but we see a little bit of an opportunity there. On the EGME, on our backup power, our principal backup power, this is the methanol fuel backup power, this year we are looking at an introduction in the second half of the year of a new version of that that could see 15% cost reduction in a year. So there will be some improvement, we expect to see some improvement in margin. And part of that actually relates specifically to the stack or air-cooled stack which is in that product, but we are looking this year as part of that there can be as much as 25% cost reduction in the air-cooled stack. Again, some of that will be passed along, but that is part of what we are looking forward to help the bid on the margin expansion throughout the year, although much of that will be in the second half. So just a couple of sound bites for you about this year, but as Randy was referring to we will have a view that would take us up to 2020 that will give us a much better feel for our overall program as we unfold this year.

One other thing, when you mentioned some additions to the headcount, yet your SG&A expense fell year over year, was there any tailwinds from FX rates, stronger US dollar relative to Canadian dollar and how can we look at that and maybe you’ll see some increase in uptick in 2015 in SG&A costs?

That’s a great point. Certainly, as you alluded to, most of our cost base, our labor cost base is indeed in Canadian dollar, so we did benefit through 2014, so some of that was manifested in some of that improvement. We’re seeing a little bit of that benefit this year, but I would expect you will see some uptick, some small uptick in our cost base this year based on the full run rate of the investment that Randy mentioned. And again, government funding, we had a couple of government funding projects, the SGTC that wrapped up , so are expecting to see a little bit of an uptick in our cash operating costs for the first time frankly in a number of years.

One more regarding M&A, is there any possibility that you might be looking outside of fuel cells, is that potential for the company at this point?

Certainly, if the opportunity is complementary to the markets and channel opportunities, we are looking at opportunities that are not squarely in fuel cells today.

Can you provide us some progress on the New York City testing regarding the telecom backup?

We don't have the material development we can share with you today. Our customer that we are working with in New York, we are working with, continuing to work with to look at a small deployment potentially five units in the New York area, but we don't have any timetable set for that at this time.

The next question comes from Jim Mcilroy from Trident Capital.

You mention the cash OpEx going up a little bit in 2015, can you indicate how much that might be, are you talking about 10% increase or less than that?

It would be less than 10%.

And how much did you receive in license revenue from the terminated China agreement in 2014?

The total amount of money we received from both of the licensing agreements was roughly $8 million in 2014.

And was that about equally divided for the first three quarters of the year?

Yeah, pretty much, across the first three quarters and of course there was nothing booked in Q4. So you could assume it's fairly smoothly spread across the first three.

And I just wanted to make sure you're still looking for something in China, so it's possible you would see a resumption of those license revenues, don't want to put a time frame on it, but sometime in the future you are looking to resume those?

Jim, we've made quite a bit of progress, in my opinion, one of the last number of months. I personally have invested a lot of time meeting with the number of different potential Chinese partners and I am absolutely confident that we will have material progress in the China market in 2015, particularly for bus and tram applications.

The next question comes from Jeff Osborne of Cowen & Company.

A couple of questions. I do miss this. But did you folks provide the material handling units in the quarter?

In the quarter, we shipped 1,704 stacks.

1,704, Randy?

Yes.

And then how do we think about the decision to not provide guidance, I understand that was challenges this year and in recent quarters, but in particular, as you look at the end markets, you're looking for bus, tram both in the second half, doesn't sound like you have a lot of visibility on the telco side, and then in materials handling piece, it's in my understanding power is coming out with their own air-cooled stack to potentially use at some point in the middle of the year. Is that one of the factors that may be is limiting the visibility for guidance or is it just being ultraconservative?

So it's a combination of things and I think you've highlighted a few of them. Number one is obviously new CEO and opportunity to rethink about what we've done historically and Ballard, and the industry generally has not done a good job at providing a meeting guidance and so we certainly don't want to be providing numbers that are at risk. And so confident that we're going to have growth year, but to put a pin in it at this time, I didn't have the confidence level to do that without – put an undue risk situation. So that's important to understand. I do think you're right, when you look at some of the markets we have, there is possibility into bus with 31 expected bus deployments. The timing of those deployments, we are confident they will start in the second half of this year, how many then we actually get to roll out in 2015 is not clear today. On the material handling side, you are right, Plug obviously understandably has a diversified supply strategy and has in-house some of their stack supply. And so where volume goes in Q3 and Q4 later this year, we don't have clear visibility. We have a long-term supply agreement, we have quarterly purchase orders, but we don't have the annual purchase orders. So there is some variability and uncertainty and with that we didn't think it was prudent and responsible to provide a number that was at risk.

I just also want to better understand the gross margin commentary around how your sales force is compensated and if I heard you're right, your bonus, from a performance perspective, and looking through the financials, to me it's a bit unclear what actually the product gross margin are, so as outside investors, how should we assess your – hitting those targets and improving product gross margins, can you give us a sense of what they are today? And more importantly, where you think you can head in terms of having the sales force compensated and your bonus as well?

Sure. If you could wait till the first quarter, I think we can offer more visibility on how we plan to provide transparency on our technology solutions and power products performance and I think that will provide more visibility with product gross margin going forward. But we are not quite there yet.

I would just add, Jeff, I would say that just to put more specificity, the way we are treating, working with the sales plan, of course we have our own internal targets and our ALP for gross margins. So what we are looking and incenting our sales folks to do is to exceed those internal targets through the year, whether it's through pricing combined with what we can achieve on the cost side. So rest assured, we have those targets, but at this point they're internal.

Couple of other quick ones here, Tony, tax impact from other income line, is that tax free on the $13 million or is there a hit on the tax base?

It would be taxable if we were in a tax paying position and of course we have the benefit, Jeff, of tax loss carry-forwards, so there won't be net-net any impact of tax.

Okay. I was unsure carry-forwards were applicable to that given the one-time nature. Is there a way – I appreciate the context as well about the patents that you have versus what UTC and having the VW contract prior, but just to put in perspective I guess I want to understand two things. One, how many patents does Ballard pre-UTC or now that don't include UTC, for many automotive patents or automotive related patents be have and how many did you acquire from UTC? And I guess more importantly, your engineering services team has been engaged with some of these three other folks, perhaps is they're designing something if there is a better way to do it that would have used the UTC patent portfolio which now you can't do, I guess that for me – extra options would have been the benefit, but again not being internal, maybe I'm not understanding the exact dynamics.

So just to provide some numbers there for you, Jeff, in terms of the patent portfolio today, the Ballard proper portfolio around 200 patents, so it is a sizable patent portfolio in the PEM fuel cell market. In terms of the acquisition of the UTC portfolio, that was around 800 to 900 patents. Substantially the bulk of those have been transferred as part of the transaction, but we have licensed back rights for more non-automotive basically stationary applications as well as for bus as well as for pre-commercial auto. So we still have lots of opportunity to leverage that patent portfolio. Any other commentary on that?

No, and again, I think other than, Jeff, just as we start today and move forward of course we are constantly innovating, constantly designing and certainly as we develop – we have a very active internal program for filing invention memos, we are continuously looking to expand our existing patent portfolio, so this isn't a combined item yet, and we'll continue to build out a new portfolio as we move forward. And I think it's safe to say whether it's the Ballard, or UTC or otherwise, and there's an expiry to all of those, it's important that we continue to replenish and rebuild our core IP on a go forward basis and those – and we will continue to be aggressively doing that.

Let me add a few comments there, because I think – relatively new to the company and having been in prior engineering-based organizations, we are expert in my opinion at capturing innovation and making sure that we're surfacing value from designs through to invention discloses and ultimately to patents and we have a very robust invention disclosure programs here with annual recognition and annual rewards. So it's a program that is fairly vibrant and I think the technology solutions work that we're doing offers some extraordinary opportunity to find new ways to do things and surface value. In some cases is going to be for the benefit of the customers and in other cases it's going to be opportunity for us to use innovation across other opportunities. And so it's going to be very case specific depending on the arrangements we have with the customers there.

The last one I had, Randy, is the telco weakness in the fourth quarter on a year-on-year basis, can you just talk about geographically where you saw that and then more importantly in the first half, where are the weaknesses, is it Japan, or Southeast Asia, India, just my memory, US never really picked up, there's been some puts and starts and discussion about it, but I just want to get a sense of where the weakness is in the first half in particular?

I would say primarily the weakness we saw in the last quarter of 2014 and as we start 2015 is as a result of – in this particular field issue we had and so that caused our customer there who had some – obviously experienced some challenges to wait till we get some corrective actions in place before they can continue with their program. So I would say that was the key driver for weakness in Q4 and the lack of visibility in the first.

Was that a IT tech product or methanol, hydrogen, any detail on the fuel itself?

It’s an EGME original IT technology and relates to the fuel processor.

This concludes the time allocated for questions on today’s call. I’ll now hand the call back over to Randy MacEwen for closing comments.

Thank you for joining us today. We look forward to speaking with you again in April when we’ll discuss results for the first quarter of 2015.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.