Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q3 2019 Conference Call. [Operator Instructions]I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

Thanks very much. Good morning and welcome to Ballard's third quarter 2019 financial and operating results conference call. Today, we've got Randy MacEwen, our President and CEO; and Tony Guglielmin, our Chief Financial Officer on hand and they'll be speaking during the call.We will be making forward-looking statements that are based on management's current expectations, beliefs, assumptions concerning future events. Actual results could be materially different. So please refer to our most recent annual information form and other public filings for a complete disclaimer and related information.Today, Randy is going to comment on important industry events and Ballard's most recent strategic progress. Tony is going to review Q3 financials and then we'll open the call up for questions and answers.Over to Randy now.

Thanks Guy, and welcome everyone to today's call. It's an exciting time in the hydrogen and fuel cell industry. The global focus on electrification of mobility has increased momentum behind fuel cell power, which we anticipate will positively impact our long-term outlook and financial performance. For Ballard through the first three quarters of 2019, we are progressing against our full-year plan as set out at the start of the year.For Q3, financial results aligned with our expectations, including delivery of $24.8 million in revenue, gross margin of 25% and adjusted EBITDA of negative $7.2 million. We ended the third quarter with a strong balance sheet with cash reserves of $153.4 million.With year-to-date results and a significant order book, we are reiterating our previously stated full-year 2019 outlook. Importantly, we expect strong growth in 2020 and beyond. We are well positioned to continue our leadership as the market for fuel cell electric vehicles commences commercial scaling.On our last conference call, I spoke about important policy positions favoring the decarbonization of mobility in both China and Europe along with key industry developments that are building momentum in the fuel cell market. As examples, we highlighted material investments from each of Weichai, Bosch and Cummings.Since our last conference call several other notable developments have served to add further momentum. Included among these are CNH Industrial, which currently owns Iveco trucks announced its intention to enter into a strategic and exclusive heavy-duty truck partnership with Nikola and make a $250 million strategic equity investment in Nikola.Cummins and Hyundai announced an MoU to jointly develop and commercialize battery electric and fuel cell powertrains. They also announced a plan to produce 700,000 fuel cell systems annually by 2030.Daimler Trucks CEO announced a company's plan to begin series production of fuel cell power trucks by the end…

Thanks, Randy, and good morning, everyone. Topline revenue in Q3 was $24.8 million, up 15% year-over-year. Power Products revenue in the quarter was down $3.2 million or 28% with technology solutions revenue up $6.4 million or 61%. Within Power Products Heavy Duty Motive was down 21% or $1.3 million due primarily to a year-over-year decline in product shipments to China customers.Portable Power/UAV also declined $1.8 million reflecting the disposition of the Protonex' Power Manager assets in Q4 last year. Material handling revenue was up slightly to $2.8 million with backup power down slightly to $0.2 million.Moving to technology solutions. The increase in revenue to $16.8 million in Q3 was due primarily to increased revenue from the Weichai-Ballard JV technology solutions program. Gross margin for the quarter was 25%, a decline of five points from Q3 last year, but up sequentially from 14% and 23% in Q1 and Q2 this year respectively.The year-over-year decline in Q3 gross margin reflected a shift in product and service revenue mix, including the loss of the higher margin revenues related to the disposition of the Protonex' Power Manager assets last year.Cash operating costs were down 12% in Q3 to $9.3 million due primarily to lower product development costs as we transitioned resources to the Weichai-Ballard JV program along with decreases in sales and marketing and G&A costs. And we do expect an increase in cash operating cost in Q4 and into 2020 as a result of new hires made through the year.Adjusted EBITDA in Q3 was negative $7.2 million, a decline of $3.5 million compared to the same quarter last year. Adjusted EBITDA in the quarter did include Ballard share of losses in our joint venture investments in China of $3.2 million largely related to the 49% investment in the Weichai-Ballard JV as it continue…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning.

Good morning, Rob.

Good morning, Rob.

Kind of on your 2020 growth outlook, I know you've got a pretty good order book that gives you some visibility there. What sort of drives that order book and I guess what are the things that could come into drive growth into 2020 that maybe aren't in the order book at this point?

Hi, Rob. It's Tony. Couple of things. First, as you may recall, we announced earlier this year the $44 million order to Weichai for a significant number of parts kits and the like to start assembling in China. Most of those are being shipped in Q4 and into Q1 of next year. So that will certainly help with our Q4 outlook as well as into Q1 of next year. So that's one of the significant items.The second is, we are expecting to see a fairly significant pickup of deliveries into Europe next year as well particularly in the bus market. So those are probably the two key areas that are driving the order book and our outlook. In terms of where some of that upside, certainly we do see some more upside in China. I think Randy mentioned earlier the resolution and announcement on the subsidy. I think, will provide a bit of visibility and stability that could help accelerate some China pickup and as well we do see some upside still in Europe.I think the resolution or pending resolution on the Wrightbus situation will help provide some visibility into the H2 bus consortium. And again, I'm just recalling at this point, we are not putting – there's nothing in our order book related to the H2 bus consortium deal. So we see that as a potential upside for later in the year. Those would be the kind of the key areas that I focus on.

Okay, good. And then on the JV ramp, I think, you said expected shipments to start in this kind of by the second or by the middle of the year. How do you view that production ramping and are you shipping in modules before that and is the production ramp just give us a sense of how that happens throughout the year?

So Rob, just to clarify, I had indicated that by the end of this year we'll actually see some activities at the JV facility, but full commissioning of stack and module production, we would expect to see in the first half of 2020. So that's the reference I was referring to mid-2020 not shipment of product. So that will be occurring in Q4 and into 2020 as well.

Okay, great. Thanks for the clarity there. And then maybe on the Anglo mine truck order. Could you give us a sense of sort of how that program rolls out? And is there, I guess, you said there is an intention to roll that out after the test vehicle, but what sort of the size of that opportunity with Anglo, I guess, the overall market there?

Yes. I think, what we'll see is by the end of 2020, we'll have good data points on how the vehicles operating, and I think we could probably see in 2021 some future orders on that. We've had a long relationship with Anglo. We've done a number of different discrete pieces with Anglo looking at different market opportunities. They are very focused on the opportunity for platinum in the fuel cell market, and so I think is a very credible opportunity we have here with them as we look forward.So I think more important than that is the fact that whether it's construction equipment, mining equipment and other off-road applications, there is a new interest in the opportunity for decarbonizing what would be opportunities that batteries cannot address in my opinion. So what's also interesting as I kind of look at I would say over the last 12 months, as you go to industry conferences and trade shows, there has been a noticable shift in my mind in terms of the focus of attention on heavy-duty motive generally.And I think that's for three key reasons. One is that the value proposition for fuel cells are strongest where you have heavy payload, a need for long range, and a need for fast refueling. Secondly, these are applications where typically you have use cases that enables centralized depot refueling or corridor refueling. So the barrier to entry on the refueling side is much lower than applications like pass car where you need to distribute refueling infrastructure.And also in heavy-duty motive, you're seeing use cases that have a disproportionate contribution to GHG and other emissions. So from an environmental perspective, the CO2 footprint perspective, you're addressing key contributors to those emission. So I think, there is a really a noticable change in the industry and you're seeing that with the companies engaging in heavy-duty motive applications.The near-term focus will be bus. We'll see truck starting to move in the next five years. I think you'll see a lot of progress in the commercial truck market in the key geographic markets, and of course, rail and marine, we're starting to see early applications there. In all cases here, we're talking about new markets with new demonstration program. So they'll take time, of course, but now we're starting to see the signs of additional off-road applications in construction and in mining.

Okay. Thank you. I'll turn it over.

Thanks, Rob.

The next question comes from Jeff Osborne with Cowen and Company. Please go ahead.

Good morning guys. Maybe just following up on a couple of Rob's line of questioning, I mean broad strokes with Weichai. How do we think about modeling that into this? It sounds like the second half of 2020 would be the revenue ramp and then through 2021, any sense of beyond the commissioning and sort of preparing everything? Is there sales force pre-selling the product. Is there any engagement with potential customers or their own trucking unit? Just how do we think about the revenue ramp?

Yes. So Jeff, good morning, thanks for the question. So I'll ask Tony to comment on the Weichai implications, the JV implications for the financial model. Before we do that, just on the customer side, there is a lot of progress that's occurred already.So there are about 100 Weichai buses that are in operation testing right now in Shandong Province. So there's a lot of work that we've done along with partners to get product in hand, to get systems integrated, platforms on the road, hydrogen refueling infrastructure in Shandong as well.So there's a lot of testing going on already. So that's very encouraging, and some of that testing is with what I'd call captive Weichai subsidiaries including companies like Zhongtong Bus. So we're – I think very encouraged with the progress in 2019 with Weichai with the captive customers they have in the Weichai Group as well as their relationship with the major bus and commercial truck OEMs in China.So in terms of – you also asked about staffing on the sales side. We have a sales team at the Weichai-Ballard joint venture. It's actually being led by the former Sales Manager of Ballard in China.So we have a lot of effort being applied against making sure that as the JV comes up not only where we see opportunity for modules and for stacks with Weichai and their investee companies, but also other companies in the market that are keen to see frankly I think the leading stack in the market with LCS.So I think it's still early, but I think it's going to be a very strong platform, a lot of sales activity occurring marketing activity occurring, a lot of activity occurring on getting vehicles looking at getting vehicles certified in 2020. So there's a lot of work to do, but we are actively working against it. Tony?

Yes. And Jeff just to the cadence or the – of revenue coming associated with the Weichai JV, I'll just refer back to that. The previously announced $44 million purchase order, which is to ship parts kits and modules to the joint venture. There was a modest amount shipped in the quarter. I think is about a little over $1 million. But I would think about that roughly of that about 30% of it is in – will be roughly in Q4 then the other 70% will be spread over the first half of next year.So that's with regard to the $44 million previously announced equipment purchases and then behind that as the JV is up and running, our product shipments will shift rather to MEA deliveries. And so we would anticipate starting in Q3 and Q4 that MEAs will start being shipped as to what the dollar value is.We are kind of assuming it will kind of carry on at a similar roughly flat cadence and potentially pick up obviously as the JVs starts moving more product through its facility. So I hope that's somewhat helpful.

It's very helpful.

Yes. Jeff, I was just going to comment as well. One of the things we see of course is the China market as it move from 2020 and into 2021 and 2022. There's going to be very high growth of course. And for us we've made a lot of investment in 2019, which will continue in 2020 as we build out our MEA production capacity. So we are prepared for this growth and we're excited by it.

That's good to hear Randy. Tony, could you remind us the because it's been a while since synergy and the shift in the types of components, but can you remind us of what the margin differentials are between the kits and modules versus once the MEA start around mid next year. Is there a meaningful difference relative to what you just put up the 25 for the quarter?

In terms of margin Jeff, sorry, was that the question?

Exactly, that the gross margins as that shift to transitions over to MEAs, how do we think about that mix?

Yes. I would say from a margin perspective, not a meaningful difference between on the terms of the margin. So I think probably just leave it like that in terms of let's assume kind of – yes.

Okay.

Yes. Consolidated margin for 2020 you probably be around similar levels and part of that is the fact that pricing is coming down and we of course, our costs are coming down, so we're going to see a few years here where a lot of work going on to reduce costs in advance of ASP erosion as well.

Yes. That's a good point, Randy. I just encourage just to pick up on that. We did achieve 25% gross margin in Q3. And I think that's sort of the – plus that's kind of what we're expecting over the next – I'll say 12 months to 18 months is sort of in that range, unless there's a material change in mix beyond what we currently think. So think about that as a decent sort of range 25 to maybe a couple of points higher.

I just had a two more lines of question. One is on I think two years ago you had a guidance call in December then you decided to cancel that for understandable reasons. Is that still the strategy? Is that the formal outlook for next year would be provided maybe in February or how do we think about that?

Yes. So maybe you're confusing us with another company. We haven't done that. Since I've been here over the last five years, but we will of course in February provide our outlook for 2020.

Got it, okay. My mistake. And then Randy any thoughts on the pass car market, you gave a lot of details on trains, trams and buses and trucks on the call, but any update on how Audi is progressing or other passenger car initiatives you have?

Yes. So it's a very interesting market in my opinion. Longer-term, what I think is very exciting is these – and these well Jeff obviously is the ACES trends autonomy connectivity electrification and shared mobility. And as we look at future cars that are safer and lower cost much higher utilization as you look at autonomy and shared mobility platforms and urban environments.We think the powertrain of the future in those applications are going to require long range in fast refueling. And so we're very encouraged with the long-term outlook. In terms of what does that mean for 2020 and 2021 through 2025, let's say I still think the pass car market will be fairly muted in terms of volumes.With respect to our key customer Audi, they have publicly announced they're looking at their small series production vehicles being launched in the 2021, 2022 timeframe. So we're obviously very well positioned with that partner and supporting them extensively on the stack side.So I think, there are a number of companies, auto OEMs, Tier 1 suppliers as well that are looking at the fuel cell pass car market and I expect to see more announcements likely in 2020 on this front.

Great to hear. Thanks so much for the update.

Thank you.

Thanks, Jeff.

The next question comes from Amit Dayal with HC Wainwright. Please go ahead.

Thank you. Good morning, everyone. Just on the prior line of questioning for the ramp expected – revenue ramp expected in 2020. Are we looking to potentially hit sort of breakeven levels of revenue by the end of the year, next year?

Yes. I mean we typically don't comment on that level of guidance, if you will. So in February we'll provide our outlook for 2020 on the topline. And then of course you can kind of look at what the cost structure looks like and kind of draw your own conclusions.

Understood. And then how should we sort of view the partnership with Weichai impacting maybe other opportunities with global automakers. I know you've highlighted in your prepared remarks Hyundai, Mercedes et cetera or Daimler moving to include more fuel cell vehicles in their portfolio. Is this partnership with Weichai sort of precluding you from those types of deals or opportunities?

Yes. Just to be clear the Weichai-Ballard collaboration is for buses and commercial trucks in China as well as forklifts in China. It doesn't preclude us for example for automotive in China and other opportunities in the China market. It also doesn't preclude us from looking at partnerships and collaborations outside of China, which we've done.Of course in the forklift market Weichai has about a 45% ownership position in KION and is facilitated a very helpful introduction there. And so that's a market that we are looking at longer-term with Weichai. So I would say the Weichai relationship is helping in a number of markets.The other thing is we look at collaboration particularly in the European theater with companies that are now looking at fuel cell commercial vehicles and frankly many of them weren't looking at this market even two years ago or a year-ago.The Weichai relationship we have in China, I think is going to be – is proving to be highly valuable in our discussions with these type of companies. And I think a key other benefit is the scaling effect that occurs in China and the ability to cost reduce balance of plant components and potentially translate the volume cost reductions to the European market as well.

Understood. Just one last one from me, in the press release you talk about potentially new manufacturing layout in Vancouver and cost savings associated with that. Is this coming into play in 2020 or maybe a little further down the line?

So we've done an extensive amount of work in 2019 in Vancouver preparing for this. So we have specified and ordered a number of different pieces of new equipment that really look at tach time for each process step in our manufacturing process overall for MEAs, for plates, for module assembly and certainly by early next year.If you come and visit us in Vancouver it would look quite different in our manufacturing environment than it would have a year-ago and so a lot of upgrades and automation and in some cases moving for example one up procedures to two up and eight up.So we are seeing very significant improvement in our processing times in the capacity we have in the quality we recently installed a new ceiling process. And it's very, very recent literally a few weeks ago and I know in the last week, for example, we had two shifts that had a 100% yield using that processing equipment.So there's a lot of work that's occurred already in 2019. So I think, amidst that's happening in 2020 would be the wrong characterization. So a lot of investment on the CapEx side and process engineering and we'll see more of that in 2020, which is going to set us up very strongly as we look at growth in the European market and the China market.

Thank you. That's all I have. I appreciate it.

Yes. I mean it's Tony. Just to add to that, if you've had a chance to dive into the numbers. You'll see we've invested year-to-date a little over $8 million this year in CapEx, which is generally quite a bit higher than our normal run rate.Much of that CapEx is exactly in the area of our advanced manufacturing that Randy is referring to when you expect probably another odd $5 million that we'll invest between now and the end of the year. So that investment is being made this year and it partly explained some of the cash use over the course of 2019 as well.

Understood, Tony. Thank you.

The next question is from Craig Irwin with ROTH Capital. Please go ahead.

Hi, good morning, and thanks for taking my questions.

Hi, Craig.

So Randy, China Daily and some of the other Chinese language media have a less optimistic take on the subsidy changes for fuel cells in China than what you shared today on the call. Can you maybe help us close that gap or share some color with us on the perspective you bring to give the optimistic outlook as far as this being a positive for the industry?

Yes. Good morning, Craig and thanks for the question. So I think there has been some confusion over the last two or three weeks or how long it's been. Given a letter that was published in the China market, and I think some people have misinterpreted the letter in my opinion, which was indicating that the fuel cell subsidies would be finishing at the end of 2020 for fuel cells that's always been the case.The fuel cell subsidies were planned originally to conclude at 2020. Our intelligence suggests that there will be a new subsidy scheme introduced and that will be highly supportive of fuel cells and hydrogen refueling infrastructure. There will be a number of key regions that will be highlighted initially and we believe this need to be confirmed of course, but our intelligence suggests it will run through 2025.

Great. Thanks for taking my questions.

Thanks, Craig.

The next question is from Mac Whale with Cormark Securities. Please go ahead.

Hi, good morning, guys. Just following up on some of the preparations for the JV ramp-up, are you supplying the MEAs at the same facility that you supply all your various activities or is that something you're going to create a dedicated line for seeing if it's more commercial production?

Yeah, good morning, Mac, and thanks for the question. So to be clear of course the MEA production is occurring here in Vancouver and we have invested significantly in 2019 and upgrading our MEA processes to as I mentioned we reduced cycle time, reduced cost, increased capacity. So while it's not, the MEA production is not dedicated just to the JV. It's all of our consolidated global MEA production, a very significant portion of that will be allocated to the JV starting in 2020.

Okay. So it's still following the same path of development. There is not a – when you're trying to drive down costs on something that's more commercial, there's different things you would focus on, but in your view the – is it that the MEA is at the point now where you consider it commercial or is it I'm just trying to separate out what other program something that will go stay into a passenger car product versus something that's going into a product into China whether there are significant differences there or how your development of a product differs from something there's more research.

Yes. So okay, I understand the question. So a couple of things that I want to highlight is that we have just in buses operating globally right now. We have about 16 million kilometers of in-revenue service. When you add the China buses and trucks here you're probably close to 25 million, 30 million kilometers of in-revenue service using Ballard modules and stacks, and MEAs.So we have really proven out the durability of our MEAs and in London for example, we have stacks that have now been operating for about 37,000, 38,000 hours of operation. So our MEAs are very well proven out. However, there is significant opportunity still at the MEA level for cost reduction. So whether you're looking at membrane, whether you're looking at GDL, whether you're looking at catalysts reducing platinum loading or going to non-precious metal catalyst.There are lots of opportunities and we're working on all of these fronts. So while we have a commercialized highly durable, I think world leading MEA, world leading plates, world leading stacks and modules. There is continued work on cost reduction both at the material level as well as supply chain and as we move from the MEA to the stacks and the modules significant work on balance of plant components as well.So I would characterize our MEA today as commercial, but in terms of cost reduction, the cost reduction isn't just going forward coming from scaling and volume and process improvements in the production facility. It will also be coming from a number of other levers.

Okay. And just remind me what the total capacity for MEA. Is it the current operation?

Yes, Mac. It's Tony. So we've been producing over the last couple of years though it's been a bit up and down somewhere around 1 million MEAs a year. We had over the course of the next sort of six to 12 months as we complete this capital expenditure on capacity will be up around 5 million MEAs in terms of capacity by the end of the year.

Okay.

I was just going to add to Randy's earlier point. You were asking about by the MEAs and balance of plant. I think we're the joint venture in China initially and to the extent we have a similar opportunity in Europe. It's really the balance of plant where the Weichai JV can make the most significant impact in terms of procuring supply chain.Right now we, as you know, we make MEAs here. But fundamentally the balance of plant is, we buy it from our current existing supply chain and we're expecting that the Weichai JV will add significant value and driving down costs particularly in the balance of plant that's where we see the synergy between us and the JV will drive MEA costs down here. They'll take care of the balance of plant to the extent they can use their supply chain particularly in China.

Okay. And so you don't, and I guess part of the question is around evolution of the components that you're not expecting that with something that's essentially commercial that you start making commercial related adaptations to say the MEA, which don't find their way into the other products.You've got one MEA in effect and you're going to advances in that offset through all your products whether they'd be something commercial buses or into the marine, which might be or rail, which might be more early stage?

So I think you could see a scenario in the future where we have perhaps two different MEAs. One is standardized across all the heavy and medium-duty motive applications. And one is focused on the pass car market.

Okay.

I think that's the likely outcome, you'll see, but there'll be a lot of synergies between the two.

Absolutely.

Okay. Sorry I get too technical on that, but I'm just curious because you're at the beginning of it. You are in this sort of phase we are moving from a lot of a bunch of smaller projects that is something that could be much more – will be larger over the next few years.So I'm wondering your sort of strategic view on how you actually ramp that. Turning to those other smaller projects or earlier-stage projects, there was – last time I went through the plant there were a lot of projects that were sort of behind protected from for IP reasons. It was pretty packed in there.What level of capacity do you have to add more partnerships, where you would require that sort of space? Are you tapped out in that facility? Is that part of what's going on in this reorganization?

Yes. So thanks for the question. There are about five facilities that we're using here in the Burnaby-Vancouver area. One of the things we're doing is re-configuring space in the two key facilities, which are about 115,000 square feet each to actually see a little bit of consolidation from the five into the two. We also last year had a sub tenant move-out of the facility.So that gave us a lot of additional space that we're using, we've grown a lot as well. So it's not just projects, but you need people to staff those projects and globally we're probably around 950 people globally at Ballard now. So it's a very sizable employee base.And when you look at our space here, there is no doubt we're constrained. But there's a lot of work going on in 2019 and 2020 to optimize our space, particularly for production and scaling of production.So we're used to take us a certain amount of footprint for processes, we're reducing and shrinking that footprint, but if we had a white piece of paper with the new facility, we probably would have things a little bit differently. So we've had to accommodate the space we have.

Great, thanks. That's all my questions. Thanks.

Yes.

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 and we look forward to speaking with you later in Q1 next year when we discuss fourth quarter 2019 results and 2020 outlook.

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