Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems First Quarter 2022 Results Conference Call. . I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's First Quarter 2022 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 our complete disclaimer and related information. We will keep our prepared remarks relatively brief to allow sufficient time for questions. I'll now turn the call over to Randy.

Thanks, Kate, and welcome, everyone, to today's conference call. We joined today's call with the continued confidence in our industry backdrop and a growing global commitment to the energy transition. Our climate crisis, coupled with the recent reprioritization on energy security are forcing administrations into action. The European Commission is taking clear action to boost hydrogen technology scale up and deployment. As a continuation to the repower EU announcement earlier this year, which outlined plans to quadruple the EU's previously planned hydrogen supply by 2030. The commission last week announced plans to increase its annual electrolyser manufacturing capabilities tenfold by 2025. This would increase annual green hydrogen production from 1.7 gigawatts to 17.5 gigawatts. We view this as an accelerant to support the adoption of fuel cell electric vehicles across Europe. In the first quarter, Ballard delivered $21 million in revenue, a 19% increase from Q1 2021, while also securing new orders totaling $27.8 million. This activity reflects an increase in our order backlog to $99.8 million at the end of Q1. Our order intake was largely driven by increased customer activity in Europe in both truck and bus markets. Ballard's focus remains on the large addressable markets of medium- and heavy-duty mobility, including bus, truck, rail and marine as well as select stationary power generation markets. These are the applications where our hydrogen fuel cell technology has the strongest value proposition. I'll briefly talk through our Q1 progress and highlights in key applications and regions. We continue to see strong customer engagement in European and U.S. bus markets, driven by repeat orders from key customers, including New Flyer and Solaris. As of the end of Q1 Ballard has deployed fuel cells across 17 different European countries and approximately half a dozen U.S. states. We anticipate increased market expansion as…

. The first question comes from Rupert Merer with National Bank.

Sorry, technical difficulties. With the Wisdom deal that you announced today, can you talk about how that has come together? And is there an existing relationship between Weichai and this group?

Yes, Rupert, thanks for the question. It's actually an interesting context on how this came together. So effectively, we've been looking at the Hong Kong market for some time. And as you know, actually, in your own personal experience previously, Rupert, the Hong Kong market is -- has been looking at hydrogen fuel cell technology for 25 years. And so spending time with the Hong Kong transit operators there, including Bravo, we were introduced to Wisdom as a company that would be very well positioned to be a supplier of fuel cell buses to the Hong Kong market. And so through that introduction, with Temple Water is now effectively a controlling shareholder, both on Bravo and as Wisdom, we saw this opportunity to really embed Ballard fuel cell technology into these platforms that will be designed for buses and trucks by Wisdom for international markets, including Hong Kong. And I think we'll see very important progress in the Hong Kong market in the coming 12 to 24 months.

So is Weichai involved directly in this other than, say, through the Ballard-Weichai joint venture.

Yes. So this is a company Wisdom that manufactures their buses in China. So -- and the founders of the company have prior experience in the Weichai organization. So they're well known to Weichai. And I think this is a great opportunity for the Weichai-Ballard joint venture to have the opportunity through Ballard to effectively see product moving into international markets.

Great. Just one final follow-up on this. What's the time line on this? Do they have any expectations for, say, first deliveries of prototypes and then potential commercial deployment?

Yes. We'll wait for Wisdom to take the lead on their public disclosure, but you'll see, I think, an important demonstration project in 2022.

The next question comes from Aaron MacNeil with TD Securities.

Quick question on one of your bus partners. They recently announced a big reduction to their full year EBITDA guidance and cited issues like shortages of microprocessors. I guess I'm just wondering, is this microprocessor issue pervasive across all of your bus customers or do you see it as an isolated incident? And additionally, like when do you typically recognize revenues? And will this shortage impact your near-term revenue?

Yes. Aaron, thanks for the question. First of all, I think it's important to understand that whether it's bus truck, rail, marine, all the applications, their supply chain impacts -- impacting all verticals. And certainly, Paul and I just spent a couple of weeks in Europe and met with a number of bus OEMs as well as customers in other verticals. And on the bus side, there are 2 key takeaways for me. One was the very strong sentiment that we are seeing from those OEMs for the adoption of fuel cell buses. They're selling both battery electric and fuel cell electric typically, and they're seeing growing demand for fuel cell buses based on real-world experience from some of the transit operators. And I would say the sales activity are at record levels for these bus OEMs as they look to deploy zero emission, particularly fuel cells. So that came through very loud and clear with all of the bus OEMs that we met. The second thing we heard was that they were all struggling with the supply chain. And it's not just microprocessors, it's even in some cases, could be hoses or a very modest part of the bill of material of their bus that we're having impact on delivery schedules. The second part of your question in terms of when do we recognize revenue, we typically for bus customers recognize revenue when we ship the product and the ownership of that asset turns over to that customer. So I would say that there have been delays in the bus market on a couple of fronts. One is just the -- we've seen ongoing delays for transit operators to conclude their tendering processes and their government funding arrangements. And then as the bus OEMs look to deploy, a number of them have had challenges on the timing of the projects with the supply chain. And this could be exacerbated when you look at what's happening in China currently. And many of these customers of ours do have components that they're procuring from China rather than have it being owned by 1 customer and restricting market opportunities. So that's a strategic choice. I do think we're going to see opportunities in what I'll call later-stage markets for example, aerospace, where we don't see near-term deployments of that type of technology. So those are the type of opportunities where I think you can see TS activities being engaged. But I think the trend clearly is towards Ballard moving to a situation where the revenue is dominated and heavily weighted by product sales. And that's always been the plan. And I think the transition of TS as a smaller percentage of revenue, we'll also see a transition of the TS revenue to newer later-stage markets as well.

The next question comes from Craig Shere with Tuohy Brothers.

So Rupert covered a lot on the Wisdom deal. Do you have any indication of total prospective investment?

announcing anything in terms of the size of the investment round that they're completing in things like valuation, et cetera. For us, this is not a material investment, and we're a minority investor here in Wisdom.

Got you. And you made reference to the stationary power sales picking up. I guess your FCwave is moving into that market. It looks to be the best quarter in some time. Do you see this foreshadowing more material, actual commercial traction, not just does this work, but potential to have stationary power lead the charge on the top line over the next 18 months?

Yes. Great question, Craig. And I think there's a couple of things I'd highlight about stationary power. It's the opportunity for us to get more leverage off the same technology and products that we're designing for these medium and heavy-duty motive applications with strong value proposition. So we like that aspect of the business model. The second thing about stationary power is that it can be -- there can be very large deployments of stationary power. So we do see, as we move out to 2025 and 2030, stationary power becoming a significant stand-alone revenue and profit stream for us in the future. So, I do think we will see because stationary projects can be relatively lumpy or large in scale moving forward, we will see some volatility, I think, quarter-to-quarter in the stationary power market segment. But I think the trend we've seen here recently is indicative of new market opportunities where we can deploy this technology. And there's a number of market segments in stationary power that are now looking at hydrogen fuel cells really for the first time. And so it's -- I think it's pretty exciting for us to have this business model. And I think it will contribute significant aggregate revenue, but it will vary quarter-to-quarter.

The next question comes from Leo Mariani with KeyBanc.

Wanted to follow up a little bit on some of the comments around the margins. Historically, I guess, Ballard has had pretty decent gross margins and kind of posted the negative margin here really for the first time in many years. Just I think maybe it came a little -- I was surprised here. And can you maybe just talk a little bit more about your strategy. Sounds like you're kind of selling some of your products below cost in order to kind of grab market share? And maybe just talk about like is that something that's more of a short-term strategy where you do it for a couple of quarters. And do you think that as we get to the end of the year or next year, that kind of flips and you'll start seeing better margins? Just maybe explain that a little bit.

Charlie, it's Paul here. So yes, there's a couple of -- a few different dynamics happening, some of which we've mentioned and some perhaps not. But really, the change in revenue -- the revenue mix more towards products and away from TS, that is having some downward pressure on the margin. TS margins, it's got much higher contribution margin than Power Products traditionally. So that's having an effect. There's also pressure on the contribution margin in both actually Power Products and TS as well from some supply chain, higher labor, inflationary pressure, higher materials, costs, freight-in costs. We've talked about these in prior quarters. We're still seeing some of that. I think the team is actually doing quite a good job managing it, and we're building some inventory qualifying new suppliers to help manage through that. So, we've seen some lead times and delivery times get pushed out a little bit and some costs rise, but not by huge amounts. So the team is doing a really good job there. But overall, the biggest impact is really the impact of higher fixed overheads and that increased by about $2.4 million from Q1 '21, which is about 11 points of gross margin. So that is quite consistent with what we've disclosed before about spending overall and spending ahead of the growth curve to scale up production in anticipation of higher volumes. So that's consistent with the guidance we've given on higher spending. So we're seeing getting -- going into the gross margin more upfront investment in people processes in some of our key operational areas to support that growth in advanced manufacturing, in operations in some facilities as well. So that's really the biggest thing. The other half of that sort of increase in fixed overhead, the other half of the fixed overheads is the nonrecurrence, not receiving COVID subsidies, which we received in Q1 last year. There's also a small amount of some rent subleases, which haven't been renewed as well. And that's really the other half. And then there's also a little bit of increased depreciation from more spending on fixed assets. So that's -- as Randy mentioned in his remarks, all of that was as expected. And so given those kind of trends and drivers of that increased investment, we're expecting the gross margin percentage to sort of be in the single digits this year. And so the expansion, we're quite confident is going to come when we see higher sales volumes. And so those costs spread over higher sales. And so we would be confident that, that is going to occur as sales and volumes ramp up.

And Leo, maybe just to address your question on the customer side. And I think it's important to understand kind of where we are as an industry, lots of 50 countries now that have hydrogen strategies and road maps, but that hasn't translated to a clear policy nudges and levers for early adopters to see a value proposition. So there's a gap in the cost structure today and the value proposition in low volumes. And normally, what we've seen in solar and wind and even battery electric in a number of markets is that there have been policy levers that help support early adopters to get their deployments out. And we haven't seen the hydrogen strategies translate yet to those levers. It will happen, but it hasn't happened yet. And so we've consciously over the last 6 months, as we've looked at platform wins and securing customers, key brand customers that dominate the verticals that they're in, we've consciously made decisions to work with our customers who have lean economics on these projects to get these projects on to the road, have their end users experience this technology, have the OEM design their platforms around Ballard fuel cell technology, whether that's in bus, truck, rail and marine, and as we do that we've seen pricing pressure in order to make that happen. So a very conscious decision on our part to do that. I think it's going to benefit us long term with these platform wins. As we've said many times before, believe that once we're in these platforms, we're very sticky.

Okay. That's very good color for sure. And then just with respect to kind of the revenue trend here. Would you all generally expect maybe your first quarter revenue to kind of be the low for the year and you think it kind of slowly creeps up as we get into the second half? Or anything you can sort of comment on kind of qualitatively about your revenue direction?

Yes. I think the history, really, over the last 10 years supports that. We typically have a lower portion of revenue in H1 and a higher portion, usually 40-60, something like that. We're going to see something similar here this year, I think, based on the data points we have. But certainly, we can -- we'll provide additional color at the end of Q2 to see if there's any shift in that.

The next question comes from Jonathan Lamers with BMO Capital Markets.

Randy, on the Linamar-Ballard concept vehicle shown at the ACT Expo this week, what needs to happen next before the partnership can begin a commercial relationship with an OEM to produce vehicles.

Yes. Great question. I think this is a pretty important Expo, the ACT Expo in Long Beach this week where we're going to highlight that Linamar-Ballard concept Class II powertrain in the Ram 2500 chassis. We see the -- that there is a market opportunity for high utilization, light-duty Class 2 trucks and particularly those that return to base and can use centralized depot refueling. We're thinking here about work trucks for tolling and hauling and polling, et cetera. And so I think Linamar has taken a very good look at this market opportunity and is also investing in technology like its conformable hydrogen storage tank technology that's being integrated into this platform. I think what we're going to see is testing in 2022 and 2023, sharing of that testing with OEMs with Linamar and the OEM, particularly led by Linamar and started to look at getting some of these products into the customer hands and looking to design the Linamar-Ballard concept Class II powertrain into a number of different vehicle platforms. That's going to take a number of years, vehicle OEMs. If you look at kind of the design cycle, it's not something that we'll see a quick turnaround. But I think this is a longer-term market opportunity that we see as very attractive and importantly, with a partner that's very committed.

The next question comes from Michael Glen with Raymond James.

Randy, you've spoken in the past about a revenue inflection point for the business taking place, say, 2024 and beyond. When you look at everything taking place right now, has that influenced your own view on when we should think about that revenue inflection taking place?

Yes. So Michael, I think that revenue inflection point, we've seen a number of factors that further support and strengthen that inflection point outlook. When I think about what's happening across all the verticals, bus, truck, rail, marine, now stationary applications that we're seeing and some off-road markets. These -- some of these customers and pilot projects and opportunities are progressing the way we had always contemplated. I'll give you the example of Siemens where for 3.5 years, we've been working very closely to develop this fuel cell engine for the Siemens Mireo Plus H train. It's now launched, and we'll see more activity from Siemens this year on that front. At the InnoTrans conference, they'll be actually visibly demonstrating this train. So I think it's a very, I would say, representative sample of the progress that we expected to see across the different verticals. So we do see the end users with high interest. I can tell you, in the truck market, the end-user demand is much more intense than the vehicle OEMs in terms of the investment they're making. So that's why we're collaborating with these truck upfitters and early-stage partners to accelerate market adoption. So yes, the long -- that's a long version, and the short version is, yes. We see this inflection point occurring in that 2024, 2025 time frame with a very steep growth curve through 2030. And so this is very exciting, in my opinion. And I think the fact that we see this occurring across multiple verticals and multiple geographies with a variety of blue chip customers provides a lot of support to that foundation.

And just to go speak about competition a bit. There have been quite a few companies pursuing fuel cell development programs. So for example, you spoke about the Doosan. When -- can you talk about what that process was like? How many companies you were competing with in terms of aligning yourselves with Doosan? And was that process? Did you see a real step-up in competition versus prior processes you've been a part of?

Yes. So Michael, I think all of these different verticals that we're talking about, the vehicle OEMs are very sophisticated. So think about CP as an illustrative example, as an end user or think about the Cat Microsoft project or think about Siemens that I just referred to our partners in Marine like ABB, almost all the customers that we're working with are very sophisticated and do their homework and diligence on the technology and test product and look at the data on field deployments. Doosan is very sophisticated on fuel cells. And we're very excited about this partnership with Doosan. And yes, they went through their process, assessing Ballard technology against others. I think we'll let them comment publicly on any more details on that process. But what I'd say is, for us, is that this provides a lot of leverage because Doosan is effectively going to be using stacks that we're already designing and manufacturing for our own fuel cell engine. So they'll be designing their engines and the control strategy for their engines in the Korean market, bus market around our stack technology. So it gives us a lot of leverage and it opens a new geographic market. And I think there'll be lots of other opportunities for Ballard and Doosan to collaborate based on, I think, very strong goodwill that is being developed between the 2 companies. So having them as a strong partner in that Korean market, and them validating through a very structured, disciplined process, the Ballard technology and field experience I think, speaks volumes to where they see us. But to your point, it is increasingly a competitive market. We believe we have a lead, and we're working hard to extend that lead with improved technology and lower cost.

The next question comes from Sameer Joshi with H.C. Wainright.

In the press release, I think you talked about development of next-generation fuel stacks and engines for different target markets. Can you speak a little bit more on to that? Are these developments at the stack level, margin level, what are the developments here?

Yes. So we continue to make investments in existing stack and module platforms, while we're also designing next-generation stacks and next-generation modules for these markets that we've talked about, these verticals of bus, truck, rail and marine. And where we see the ability to use that same Stack technology in different verticals, for example, off-road, for example, stationary power, we look for that leverage additionally. So we're just talking here about higher-performing products in most cases, actually higher power output products as well. And we're focused on all the things we always have been. So that's high-power density, high efficiency, the different power ranges across these different market segments and getting leverage off those power ranges across the market segments and more standardized product, including more standardized balance of plant components, things like compressors, humidifiers, et cetera. So that's what we're working on. And we see a product road map, which I think we'll share more on later this year at our Investor and Analyst Day that will position us very strongly across these verticals and across these geographies.

Got it. And then just one on revenues. I think you have around $64.5 million or $65 million of your backlog that you expect to deliver this year. Is there any chance that you may be able to accelerate? Or are there risks of delays because of various issues in Europe?

Yes, Sameer, we see both. We certainly see opportunities to accelerate the order book for deliveries this year. We also see some delays, potential risks as well. So we'll see how the next quarter and the next -- before our call in -- for Q2, we can provide some update there. But both, I think, on the puts and takes, we'll have more to say at the end of Q2. But right now, clearly, there are accelerant opportunities and clearly, there are some risk opportunities as projects invariably are taking longer. And just on that front, I would highlight the supply chain, the lead times for a number of materials have moved out significantly. This isn't just for us across the industry, but also for our customers and their vehicle platform. So I think that's going to be an important fact to watch over the next 3 to 4 months.

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

Randy. My question is on the CP Rail project expansion. How is that sort of -- what's the expansion kind of trying to address? And what drove that expansion? And sort of how is the next steps on that project development effort.

Rob, thanks for the question. And so when we started out with CP, they started out looking at what I'd call line freight locomotives, actually transporting goods on long lines. What they've added is 2 additional, I'll call them, market segments, so switchers and shunters. So they now have 3 different locomotives, all diesel powered that they're transitioning to hydrogen fuel cell technology. And so I think it will be important in 2022 and 2023 as they validate that technology in these 3 different locomotive designs to look for an opportunity to start displacing what would typically be a diesel refurbishment with a hydrogen fuel cell refurbishment. So that's kind of the expansion and CP has a very high level of commitment to look at how to decarbonize, I would say that the #1 GHG emission profile they have, and that's the use of diesel fuel. So we're very excited about this market opportunity, and I believe this is a market that can only be served by hydrogen fuel cells.

Okay. Good. And then in terms of the EU market development, I know you've got your partners and you're working towards things. But when do we sort of start to see the next steps in terms of demonstration vehicles and then ultimately, OEM kind of product rollout. How does that time line look at this point?

Yes. Great question. We're seeing pretty significant activity, I would say on bus, truck and rail. I think you'll see developments this year in terms of additional market opportunities and translate into order book. What I think is really exciting is the very strong posture from the bus OEMs and their long-term market opportunity as well as near term some projects that we're seeing that have over 100 fuel cell buses being planned for deployment. So we do see this moving to hundreds and thousands in the sales pipeline and eventually to the order book and eventually to revenue. And again, that posture that we're seeing is stronger than it's ever been. So we're very encouraged by what we're seeing on the market front. And similarly, on the truck market, I think -- in 2022 and 2023, you're going to see a number of first-time fuel cell truck deployments in Europe with Ballard technology with a number of different partners there. So we're pretty excited about the market opportunity on the truck side. That's going to take longer than the bus market to move to scale, but we've got to get these demonstration projects out. And I think you'll see more announcements from Ballard and partners on this front in 2022.

. The next question comes from Alex Kania with Wolfe Research.

Just a question maybe thinking about the European opportunities here. I know that they due for a, I guess, a more detailed update on this Repower EU strategy that they kind of came out with a couple of months ago. Are there other things that are most important to you that we should be looking at or most focused on with respect to maybe the hydrogen components of that policy statement.

Yes. So Alex, a couple of points. This RePower EU plan for affordable, secure and sustainable energy has some very interesting levers in there, not just around hydrogen, but also around acceleration of permitting of renewable energy projects. And you just think about the trend of the adoption of renewable energy. Obviously, this has scaled significantly over the last decade. But it's still, I would say, very low volume compared to what we're going to see going forward. And so renewable energy in many jurisdictions is the lowest-cost new electric power going on to grids. It's supporting the greening of grids and supporting the opportunity for electrification and mobility as well for battery electric. So I think the opportunity on renewable energy is critically important. Of course, you need high-volume storage to support renewable energy. And we see hydrogen playing a very key role there. What I would say about the Repower EU on the hydrogen front, is that the hydrogen accelerated program to accelerate the adoption of green hydrogen. In my mind, we've been talking over the last year really about somewhere around 100, maybe even 150 gigawatts of green electrolysis-based hydrogen production by 2030. And the 2025 numbers would have been fairly modest. What we're seeing is an acceleration for 2025. In my mind, the most important variable that can help the adoption of fuel cell vehicles in volume is access to low-cost green hydrogen. And the developments here are very encouraging. And I've been saying this for some time to investors that I believe we will see green hydrogen production at volumes much higher than our contemplated and planned currently, just given the level of activity that's occurring across the hydrogen industry globally and that's going to decarbonize industrial applications, decarbonize some energy market opportunities, but I think going to provide a lot of green hydrogen capacity for the deployment of fuel cell vehicles in Europe. So in my mind, that's the most important lever that we can see is to remove this chicken and egg conundrum that's been talked about for 20 years. And of course, we're focused primarily on applications we have returned to base or centralized depot refueling. But the opportunity for long-haul truck where you have fueling quarters that will be required and the support for green hydrogen production and the support for build-out of hydrogen refueling infrastructure, I think, will support that longer truck market, freight truck market that we're very excited about as well.

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

Great. Thank you all for joining us today. And Paul, Kate and I look forward to speaking with you next quarter. Thanks again.

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