Ballard Power Systems (TSX:BLDP) Q3 2020 Earnings Call

0:00 Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q3 2020 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Guy Macri, Director of Investor Relations. Please go ahead, sir. Thanks very much, and good morning, everyone. Welcome to Ballard's third quarter 2020 Financial and Operating Results Conference Call. Today, we've got Randy McKeown, our President and CEO, along with Tony Gugman, our CFO, on the call. We're going to be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events.

0:57 Actual results could be materially different, so please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. So on today's call, Randy's going to review important developments on the policy and strategy fronts during quarter three. Tony is then going to review Q3 2020 financials, and then we'll move into a Q&A. And I'll pass the call now over to Randy. Thanks, Guy, and welcome everyone to today's conference call. We recently held an Investor and Analyst Day event where we provided a transparent and comprehensive review of our industry and our business. So we'll keep our comments today relatively brief. For third quarter financial results, Valor delivered revenue of $25.6 million, gross margin of 19%, adjusted EBITDA of negative $7.7 million, and we finished the third quarter with $361.7 million in cash reserves.

1:56 I noted on our last earnings call that we're seeing delays in certain programs, activities, and order intake as a result of COVID-19, and these delays impacted our Q3 results and order backlog. At the same time, however, we continue to see a significant increase in quoting activity. Indeed, by the end of Q2, our sales pipeline had grown by about 50% year-to-date, and by the end of Q3, it expanded further, up 64% year-to-date. A record sales pipeline and a positive indicator of growing market interest and engagement. There were important developments in target geographic markets since our last earnings call. Let's turn first to China, where a four-year policy framework was issued by the government in September.

2:45 This underpins China's goal to deploy 1 million fuel cell electric vehicles and 1,000 hydrogen fueling stations by 2030. The new policy framework has made deployment of fuel cell electric trucks a priority in China, followed by buses. Under this framework, regional awards will be based on several key factors, including the existing industrial base in a particular region, the ability to provide competitive hydrogen energy supply in that region, prior demonstration of fuel cell electric vehicle fleets, and existence of local regional policy to support FCEV industries. At this point, 36 regions in China have announced incentive plans for FCEVs and for hydrogen fueling stations, representing a potential for more than 100,000 fuel cell electric vehicles by 2025.

3:40 This aligns with volume targets contained in China's New Energy Vehicle Technology Roadmap 2.0, a document released just last week that specifies technology and vehicle performance requirements moving forward. So as a next step, cities and regions must submit their requests and plans to the national government in order to ensure eligibility for the new national level subsidy program in payment of demonstration region status. As a result, it will take some time before we get clarity as to which regions in China will qualify under this policy framework. So we'll need to be patient during this process. In the interim, we continue to make progress with the Wei Chai Ballard joint venture.

4:25 including optimization of our plate, stack, and module production processes, including on product development work under our technology solutions program, including materials and component localization, including engagement with vehicle OEMs for platform certifications, and on-road field data. We continue to track performance metrics for fuel cell buses and commercial trucks already in the field in China with Ballard technology. In the past month, Ballard-powered buses and trucks in China have delivered over 98% fuel cell availability, representing impressive reliability metrics. Moving on to Europe, in late September, we announced our expected collaboration with Malé International to address the fuel cell electric truck market opportunity.

5:17 We're pleased to announce that we subsequently signed The definitive collaboration agreement with Mahle on October 1st. This is a very exciting development with a leading Tier 1 supplier to the commercial vehicle and automotive industry. Mahle is a 100-year-old firm headquartered in Stuttgart, Germany, with 77,000 employees working at 160 production facilities and 16 research and development centers globally. About 50% of all vehicles operating on the world's roads have Mahle components. Its commercial vehicle division supplies a range of key components. Malé has extensive experience in the commercial truck value chain, including long-standing relationships with multiple commercial truck OEMs, supply chain muscle, high-volume production expertise, after-sales service infrastructure, and a highly respected global brand.

6:13 Malé also has been supplying components for fuel cell systems for more than 10 years. including complex air intake systems, temperature control systems, and air filter systems. So we're delighted now to be working with Mahle to design and manufacture fuel cell systems for the $100 billion annual truck engine market with an initial focus in Europe. And while we're making great progress under this important collaboration, Ballard has prime responsibility for design of the fuel cell engine along with the design of the fuel cell stack subsystem. Molly's scope of work includes certain balance of plant components, thermal management and power electronics for the fuel cell engine together with engine assembly.

7:06 With Ballard's market leading fuel cell stack technology, including unsurpassed durability in the field, free start capability and high power density, Together with Mahle's market position in the transportation industry and industrialization capabilities, we see this as a powerful union in addressing the zero-emission commercial truck engine opportunity. Now, we've also made an important announcement in Q3 relating to Ballard's high-power density stack technology. This is a particularly important technology feature in the context of commercial trucks. where limited engine base space for designs of certain vehicle platforms require high power density fuel cell engine solutions.

7:51 Ballard has designed a compelling high power density fuel cell stack, the FCGen HPS product, in our development program with Audi. We previously held certain IP rights to the stack for certain market applications, including bus, off-road vehicles, rail, marine, and stationary power. As announced in September, we signed an MOU with Audi that expanded our rights to use the stack technology in all mode of applications, including commercial trucks and passenger cars. We're pleased to announce that last week we signed the definitive agreements with Audi affirming these additional rights. In addition to its high power density of 4.3 kilowatts per liter, the HPS stack offers other impressive performance metrics, including high power output, with rated power of 140 kilowatts and scalability to multiple power blocks, high operating temperature up to 95 degrees Celsius, which allows for more efficient and smaller cooling systems, and rugged cold weather capabilities with minus 28 degrees C, free start, and fast power ramp.

9:02 And we're already seeing customer interest for this product. In another important development, in mid-October we sold our unmanned aerial vehicle or UAV business assets in Southboro, Massachusetts to Honeywell. This is an interesting transaction for us from a number of perspectives. We made the strategic determination that our UAV assets would be better utilized within the Honeywell organization and are pleased to conclude this divestiture. We see that Ballard's core technical capabilities and product portfolio are better aligned to provide larger fuel cell propulsion systems for aerospace, including urban air mobility applications, areas in which Honeywell is a market leader with steep expertise, strong technology, and extensive customer relations.

9:54 We look forward to building a long-term relationship with Honeywell to address these opportunities as hydrogen fuel cells become recognized as a viable path forward in aerospace and underpinned by Honeywell's leading position in these markets. Finally, I want to acknowledge Tony Gugelman's plan to retire at Ballard CFO effective March 31, 2021, after 10 years in this role. Tony will continue in the CFO role through the completion and certification of our 2020 audited financial results and will support an orderly transition. Tony's leadership and contribution to our business strategy and financial management at Ballard will certainly be missed. We wish him all the best in his well-deserved retirement.

10:43 We've retained a leading international executive search firm and expect to have a new CFO in place and an orderly transition completed By the end of Q1 2021. And with that, I'll turn the call over to Tony to briefly review the Q3 financials. Thanks, Randy, and good morning, everyone. Top line revenue in the third quarter was $25.6 million, up 4% year over year. And in the quarter, power products revenue was up 94%. Driven by Heavy Duty Motive, which increased by $7.9 million to $12.9 million. This was due primarily to higher shipments of fuel cell products, including MEAs, to China.

11:29 As a reminder, we only recognized 51% of the revenue at the time of shipment to our OHI Ballard JV, with 49% recognized once the JV assembles and sells stats and modules to third parties. At the end of Q3, there remained $19 million of revenue yet to be recognized on product that had been shipped through the end of Q3. Turning to technology solutions, the decline in TS revenue of $6.5 million to $10.3 million in Q3 was due primarily to decreases in revenue from the Audi program, the technology transfer program with our HIBaller JV, and the development program with Siemens.

12:17 This reflects the planned completion of activities, the impact of customer requested program changes and deferrals resulting from COVID-19, including the impact of COVID-19 travel restrictions. As a result, we continue to expect revenue from TS to be down on a full year basis compared to 2019. Gross margin was 19% in Q3, down six points year over year. The decline was largely the result of a shift in mix to lower margin product and service revenue, including the lower TS revenue. Cash operating costs increased 21% year over year to $10.7 million.

13:03 This was primarily attributable to increased expenditures in technology and product development related to work on next-generation stacks and modules for the bus, truck, train, and marine markets, as well as activities related to product cost initiatives. Adjusted EBITDA in Q3 was negative $7.7 million, an increase in loss of $0.9 million compared to the same quarter last year. This included Ballard's $2.8 million share of losses related to the WHI-Ballard joint venture. Net loss from continuing operations in Q3 was negative $11.2 million compared to negative $9.3 million in Q3 last year. And earnings per share from continuing operations was negative 5 cents in the quarter compared to negative 4 cents in Q3 2019. Now, both the net loss and EPS numbers also include Ballard's share of losses from the wage by Ballard J.D.

14:04 Cash used by operating activities was $11.3 million in the quarter compared to $9.6 million in Q3 2019. This consisted of cash operating losses of $6.7 million and working capital outflows of $4.6 million. The increase in cash used by operating activities compared to the same quarter last year was driven by the increase in cash operating losses partially offset by the decrease in working capital requirements. In terms of liquidity, as Randy mentioned, we ended Q3 with cash reserves of $361.7 million and no debt. During the quarter, we generated net proceeds of $211.6 million from the $250 million ATM program we launched on September 1st.

14:58 We subsequently completed the program in early Q4 generating further net proceeds of $32.7 million for total net proceeds of $244.3 million. We ended the quarter with an order backlog of $128.1 million and a 12-month order backlog of $79.6 million, both down from the end of Q2. The decline in the order backlog reflected lower order intake in the quarter primarily due to ongoing delays associated with COVID-19, together with the reduction in the scope of work with Audi through the balance of that program, as Randy referenced earlier. Despite this decrease in our order backlog, as Randy also noted earlier, our record sales pipeline bodes well for potential order intake over the next 12 to 24 months.

15:56 I'd also like to note that during the quarter, Ballard was named by the Toronto Stock Exchange to its TSX 30 for the second straight year. This was a result of a 459% share price appreciation, second highest on the exchange between July 1st, 2017 and June 30th, 2020. Before I turn the call over to the operator for questions, I did want to comment briefly on my decision to announce my retirement First of all, I would like to thank Randy for the very kind words. This was a very difficult decision for me. I joined Ballard in 2010, and the last decade has been exciting, to say the least. It's been an honor and personally and professionally rewarding to have been part of the Ballard story through this period. What also makes my retirement at this time even more difficult is we now stand at an inflection point in the history of the company in what could be the most exciting time ever in terms of activity and growth opportunities.

16:55 However, I've decided to step away now and put more time and energy into other personal interests, many of which have gone ignored over the past years. I'll, of course, watch with great interest how Ballard grows and prospers over the coming years. And as Randy mentioned, my plan is to stay on through March, and I look forward to the opportunity to speak with many of you before then. And with that, let me turn the call back over to the operator for questions. Thank you, sir. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2.

17:40 We'll pause for a moment as callers join the queue. The first question comes from Aaron McNeil from TD Securities. Please go ahead. Hey, morning, guys. Thanks for taking my questions. You've got around $400 million in the bank, and you previously talked about $100 to $120 million of cash needed between now and when. Ballard's intended to generate positive earnings, but that obviously leaves you with a whole lot of dry powder. I know you mentioned you'd address M&A at a future date, but can you give us a sense of how we should be thinking about that cash balance today in terms of what it could be used for and what the timelines might be? Yeah, Aaron, good morning, and thanks for the question. And certainly on the M&A front, we continue to study and consider strategic opportunities across the entire hydrogen and fuel cell value chain and ecosystem, and driven really, in my opinion, by four strategic considerations.

18:38 The first is enabling and accelerating customer adoption by improving the customer value proposition. So what this means is really simplifying the fuel cell vehicle experience for customers, so reducing Adoption Friction Points and Reducing Total Costs. So looking at opportunities that help us accomplish that objective. The second would be owning what we call the control points through the value chain. So we believe this will enable technology advantages, enable cost advantages and ultimately gross margin expansion. Third is participating more fully in the entire growth in the hydrogen and fuel cell industry, not just related to the growth of fuel cell vehicle deployments and medium and heavy-duty motor applications.

19:24 And then fourth, looking at strategic assets to enhance our market position in key applications and in our key geographies as well. And I think as we kind of look at these four considerations, They help, in my opinion, to accelerate growth and scale, should help to improve our marketing position and improve our financial performance, ultimately enhance shareholder value, which is really what that extra capital is designed to accomplish. I'd say right now, when you kind of consider the timeline point of your question, Aaron, we're actively engaged in a number of interesting discussions on potential M&A transactions, and I expect to have more to say in the coming quarters. Okay. That's helpful. And as a follow-up, are there any financial commitments related to the Mali agreement? And do you see that agreement or relationship ending up looking more like a second pillar of the business that might look a lot like the Weichi joint venture?

20:27 Yeah, so we do see the Mali relationship being the second pillar in our industrialization strategy. So partnering up and collaborating with a company that has high-volume production capabilities experience walking costs down year over year with supply chain muscle. And when you look at the complementary balance of plant components and system capabilities and production capabilities they bring, we view this as an attractive long-term opportunity. So we believe what we've announced is the first stage of what we expect to be a comprehensive and deep strategic relationship with Mali for the long term. focused on the commercial truck market and initially focused on the European market. So we do view this as an important long-term relationship and I believe the relationship will evolve over time as we continue to do work.

21:22 In terms of capital commitments, there are no formal There's no JV, for example, structured at this time. That might be something we'll consider in the future. So there's no capital call from either party. But we have made commitments in terms of what scope of work we will be working on and technology and products that will continue to develop. And we've actually made quite a bit of progress on that front already in 2020. I know at the time of its announcement, There wasn't a whole lot of information from the China City Cluster fuel cell funding model. Is there anything you can share that's incremental today that you might have learned over the last couple weeks in terms of potential timelines for the cash to be deployed and the mechanics of the program, like how that actually works? And by that, I mean, how does government funding actually trickle down from the city clusters to demand for Ballard fuel cells?

22:25 Yeah, we've learned quite a bit in the last month or so. And of course, we get competing or conflicting information as well. So I'm going to be cautious about commenting with definitive details. But what I would say is I do think we need to be patient here over the coming months and even quarters as that policy framework gets crystallized and as demonstration regions are awarded. And then you see ultimately deployments of vehicles in those regions cascade. I wish I had more detail, but at the risk of getting it wrong, I think we should probably just be patient here, kind of like calling the election in some ways. Fair enough. That's all for me. Tony, congratulations on your retirement.

23:10 It was great working with you, even if only for a short period of time. All the best. Great. Well, thank you, Aaron. Appreciate it. Thanks for the question, Aaron. I'll turn it over. Thanks. The next question comes from Rupert Mayer from National Bank. Please go ahead. Good morning. I'd also like to start by congratulating Tony on the announcement of his retirement. All the best. Thank you, Rupert. There's some information in your disclosures about investment into wage high. I think you've completed your 2020 capital investments. and you're looking at a $3 million contribution in Q4 as part of your 2021 capital contribution. Can you give us a little more color on that?

23:58 Where's the capital going now? Is this funding operating costs or capital expenditures, for example? Yeah, thanks, Rupert, Tony. Yeah, so you're right, you've got the number right. In fact, we have about $24 million left in total to contribute just to put a number on it over the next two years, so roughly $12 million, including... The three that you mentioned in Q4 and then through 2021 and then another 12 in the second year. So in terms of where is that capital going, it's in a couple of areas. Number one is we do have our ongoing technology solutions program. That's that $90 million program that was over multiple years. That program does extend out into 2022.

24:43 So part of the cash that's going into the joint venture, our contribution plus the 51% going in from wage I fundamentally circles back to us partly as payments for the technology solutions work. So that's where part of the capital going. And then the other part, it will be to fund working capital and growth in the company as it ramps up to volume over the next couple of years. So would you say joint venture is running to plan right now? And do you have any further visibility on the start of commercial sales and looking to hit that 2000 unit target in 2021? Yeah, Rupert, Randy here. I think, you know, if you stepped back to a year ago and said, you know, where do we expect the joint venture to be?

25:30 I would say there have been two delays fundamentally, in my opinion, that are really more market-based that have impacted the joint venture. One is, you know, we did experience some fairly significant disruption as a result of COVID-19 in China for a couple of key months. We've seen a very sharp recovery in China, as has been widely reported from an economic perspective, and work levels are really ramped up there. So that had some disruption, but it has had a continued disruption in terms of the ability to provide some of the technology solutions capabilities from Vancouver, including optimization of the equipment. So I would say there's been some delay as a result of COVID-19 on that front. And then the second thing is just the policy landscape.

26:18 We did expect originally the China fuel cell policy to be in place in the February 2020 timeframe. and I think initially COVID-19 delayed that out as that became less of a priority, obviously. And then as we move to the summer timeframe, there was an expectation the policy would get released and would have definitive statements on what the demonstration regions would be rather than what's happened where they actually have a process where demonstration regions apply now. So that's another loop in the cycle that wasn't originally contemplated. So from a market and industry perspective, I would say the industry has really seen a push in some ways for 2020 overall in China.

27:05 If you look at the number of vehicles deployed in China, from a macro perspective, fuel cell vehicles is relatively modest in 2020. That being said, we've done a lot of work in the background with the joint venture on developing our next generation stack, developing our next generation module, validating those. I was actually downstairs yesterday here in our facility looking at a module that was developed by the joint venture in China and is here on test in Burnaby, a collaborative effort between the joint venture and Weichai and Ballard. and then work that's been done in terms of getting initial vehicles on the road in China with multiple end customer OEMs. So there's progress underway and a lot of work done on localization as well, including I'll call it some of the more plain vanilla balance of plant components.

28:03 and interestingly, some of the more strategic balance of plant components more recently. So there's a lot of work going on and on those fronts, I would say there's been very good progress. But in terms of market adoption, there has been clearly a delay in 2020 driven both by COVID-19 and by the delay in the policy release and the form of the policy release. And I think the policy still has a lot of complexity and I don't think it's going to get resolved in weeks. I think it's going to be measured in months and quarters. Okay, thank you. And then secondly, with the agreement you finalized with Audi on the HPS product, it sounds like the IP developed for the HPS can be transferred to future generations of products.

28:53 Can it ultimately be used by your JVs as well if you're looking at that Next Generation Stack for Wei Chai or Future Generations with Molle. Can you use this IP and would there be any royalty requirements back to Audi? Yeah, so first of all, you're bang on. There is quite a bit of IP that we've generated in the stack itself that we can be using for a variety of applications, for all applications in all geographies, including with the joint venture in Wei Chai. More fundamentally, though, Rupert, there's been a lot of IP developed at the MEA level, which we've always owned, and Audi had no rights to that at all. And so, from an IP perspective, when you look at the bipolar plates that have been designed and some of the work we're doing with thinning on those plates, when you look at the MEA development and now having the stack design as well, we have a lot of levers to pull that are informing Future work at the MEA plate, stack, and module level as we work towards not just keeping the high durability and reliability performance that we're known for, but also improving power density for these applications where power density is a little more challenging.

30:12 So we're very excited about the opportunity to use this now in markets we previously didn't have rights for at the stack level, and that's particularly around the commercial truck market. and the passenger car market. And the passenger car market, I think a lot of people have dismissed that market. There's a very high uptake, as there should be, in my opinion, for battery electric vehicles. We think that's a great application for battery electric technology. But long term, we do see and believe there will be very good demand for fuel cell vehicles in the passenger car market as you look out to 2030. And so having these rights now for the passenger car market and enabling us to get those rights at a time when Audi was looking to lower its commitment to the program between 2020 today and 2022 when that program ends was really opportune for us.

31:06 Thanks, Luke. I'll leave it there. The next question comes from Rob Brown from Lake Street Capital Markets. Please go ahead. Morning. Morning, Rob. First, just wanted to see if you could give some more color on the sales pipeline. What sort of areas are you seeing the activity in? Are these particular programs or are they tech solutions? I assume it's both, but just some color on the sales pipeline at this point. Yeah, Rob, thanks for the question. The sales pipeline is primarily being driven from power products, not technology solutions first. Secondly, as we look at the key applications we focus on, bus, truck, rail, and marine, We're seeing significant interest in all four of those segments. So it's not dominated by any one segment, which I think adds a lot of diversification to our business going forward. We're also seeing interest, Rob, interestingly, in markets outside of those four key medium and heavy-duty motive markets.

32:09 So we're seeing off-road applications, and we're seeing stationary power applications as well. So I would say from an application perspective, there's pretty good diversification in that pipeline. and then from a geographic perspective, it is weighted currently to Europe. Great. Thank you. That's an excellent overview and helpful. Thank you. And then second, on kind of the steps in China to get with the Weichai JV, are you producing volume there, and how do you, you know, what are the sort of steps, is it really the policy clarity that needs to happen to get that volume ramping, or maybe just a sense of the steps that you see going forward over the next 12 to 18 months?

32:56 Yeah, so I think there will be two important steps. One is, you know, the application by demonstration regions to apply and get accepted as demonstration regions, so characterize that as step one. And then step two is those operators in those demonstration regions starting to look to order product and get vehicles out in the field. And so that's when we're going to start to see market uptake that will trigger orders to the JV, which will trigger then orders, obviously, to Ballard for MEA production as well. So it is a step process, and we're just going to have to be patient as the market moves through that And as I mentioned in parallel, there's a lot of other work going on to improve our positioning in that marketplace long term.

33:48 Okay, great. That's helpful. And my congratulations to Tony as well. Thank you. Thanks, Rob. Thanks, Rob. The next question comes from Michael Glenn from Raymond James. Please go ahead. Hey, good morning and congratulations, Tony, on the retirement as well. The first question I have just in terms of the Mali agreement, are you able to provide or work through some of the milestones we can think about in terms of that agreement? Is there timing for a specific product development? or timing on when you would like to have a demonstration in the market, for example?

34:33 Any of those aspects of the collaboration? Yeah, I think we've had quite a bit of discussion with Mali about the timelines for commercialization for trucks, particularly in Europe. We're also looking at the North American market as well. What I would say is we'll pace our development based on the market opportunities and I would say from the time we've really engaged with them, which was almost about a year ago when we first started doing work in earnest with Malé, what I would say is that the market has accelerated over that time period. And so we're certainly looking at opportunities that are much faster today than we expected even six months ago with Malé. In terms of announcing what milestones we're looking at and the timeline for those milestones, I think we'll have to wait with Mali to have some type of joint communication on that and not get ahead of their communications as well. They're a conservative organization and not publicly traded and don't have the type of disclosure that we typically have.

35:41 Okay. And then just looking at Europe again and trying to get a sense of the sales Pipeline, and how that's evolving. When you think about items such as purchase orders coming in potentially from some of the bus customers that you've been doing business with up to now, are you able to give any ideas on timing surrounding when we would see those organizations step up their purchase orders? Yeah, I think you'll see, you know, scaled kind of purchase orders in 2021 on the bus front. And I think, you know, 2022 is kind of the timeframe. You'll start to see it on the commercial truck front.

36:26 It's going to take some time on the truck market. And I think 2022, 2023, you'll start to see scaled orders for rail. So I think that's the timeline for those markets. Marine is, you know, I think going to be a longer term market as well. However, it surprises to the upside in terms of market interest. and so I expect we'll probably see some good order inflow in the marine market beyond demonstration programs I'm talking about here. Clearly we're gonna have orders in a number of these areas over the next 12 months, but as we move past that and look to larger deployments, you're looking in the 2022, 2023 timeframe for larger deployments. In terms of order intake, and over the next six months, BUS will be the dominant one. Particularly, we're seeing lots of opportunity in Europe for continued work with existing partners there and potentially some new partners.

37:26 Okay. And then just finally, you spent a lot of time during the investor day talking about the cost reduction program and aspects of the cost reduction program. When you look at the competitive situation in the market right now, Have you seen any of your peers, I know there's been a lot of announcements regarding fuel cell development programs in place, but have you seen anybody outline the type of cost reduction program that you are pursuing at this time? No, I would say there's been very little public disclosure from companies on the cost roadmaps they're looking at. You know, I'll give credit to Toyota and Hyundai, who have been thought leaders in this space for a long time, particularly on the passenger car market. And certainly on the passenger car market, they've talked about volumes there and long-term targets for cost reduction.

38:18 But beyond that, there's been very little. So I think Ballard probably has thought leadership on cost reduction right now. And I think it's because we've done a lot of work on this, and it's, you know, the progress The next question comes from Amit Dial from H.C. Wainwright. Please go ahead. Thank you. Good morning, everyone. Just to begin with, Tony's retirement news was a little bit of a surprise. But Tony, I just want to wish you the best with whatever you decide to do next.

39:06 We still probably have another call with you, so thank you for all your support in helping us provide coverage, etc. Just moving on to some of my questions. At the macro level, Tony, I think you guys, sorry, Randy, you guys have been providing Good call on the opportunity set, but in terms of juxtaposing the long-term opportunity, which looks relatively strong, the near-term performance has been sort of flattish to not as healthy growth, I guess. How should investors think about the next one or two years while all these opportunities are building for you in terms of Top Line Performance, Margin Performance, etc.

39:56 Any thoughts on that would be helpful. Thank you. Yeah, Amit, first of all, I think your comment is a fair one. Clearly, there's an attractive long-term growth opportunity set that we're developing in different geographies, China, Europe, and North America, across different market applications, bus, truck, rail, and marine sectors. and we think we're very well positioned for those and we believe there's going to be a very steep curve, particularly 2023 to 2030. In terms of near-term, you're right, it has been flattish and I would suggest this year has been a little flatter than we expected and it really is, not to use it as an excuse, but the reality is that we have seen customers and market customers and OEMs defer orders and defer projects. So that's a reality. What we haven't seen, fortunately, is projects dropping out of the sales pipeline.

40:53 So it's really been more about deferral. So I think I'm going to ask you to be patient as we kind of work through our 2021 annual operating plan and look for what the growth looks like in 2021 and 2022. We'll have to come back at that time with more color. I think it'd be premature for me to comment today on what that looks like. That's fair. I just wanted to see what your thoughts are on this. This is a new market that's building, so it should take some time. I just was curious to see how we should be thinking about some of these things. With respect to the recent Audi contract, is this partly driven by Audi not really doing much with what was built and designed, etc., and you now taking a little bit more control and putting some...

41:44 Thank you for joining us today. So I do think we're seeing a number of OEMs be cautious about investment beyond some of the core electrification activities they're focused on for the passenger car market. So we do have, of course, this Audi program running through mid-2022.

42:31 That program will continue at a reasonable clip. It's basically at the kind of lower end of the revenue range we had previously indicated for this program. So it's not like the program stopped or anything, just to be clear. And then in terms of the leveraging of that technology, we will see opportunities to use that technology, I believe, in commercial vehicle deployments early stage. as well as in the passenger car market. And I believe we'll see that over the next few years. Got it. Yeah, thank you. That's all I have. I'll take my other questions offline. Appreciate it. Thanks, Amit. Appreciate it. The next question comes from Mac Whale from Cormark Securities.

43:19 Please go ahead. Hi, good morning, guys. I just wanted to go back to that Audi question. You could make the argument, some people have made the argument on the sort of bearish side that Audi just really doesn't have any interest in this in the passenger car market. And you sort of touched on, you gave some detail on what might be going on there. Could you elaborate that? Like what is, from your interaction with them, what is the nature of the change from their point of view? And how does that fit with sort of their, maybe their long-term goals? Commitment to say EVs versus fuel cells. Well, Mac, I appreciate the question. I'm not going to speak for Audi, but I will say generally what we've seen is that the passenger vehicle OEMs are clearly prioritizing battery electric vehicles over fuel cell vehicles for the passenger car market for the near term.

44:16 And so that's just a general comment that I think is accurate and we shouldn't be I think a lot of them have recognized that the technology has a much stronger play and value proposition in the medium and heavy-duty mode of applications, which we've talked about quite a bit on the key reasons why that's the case. So just from a macro industry perspective, that would be the commentary, and I won't comment specifically on Audi. We'll let them make their own commentary. Sure. And so when you look at the scope of the program, it is continuing, as you said. It might not be at the high end of the range that you might have thought. But where does it go from here? So if you run it through its course, would you normally be expecting in that sort of 2023 timeframe a follow-on program? And if so, what do you think you're aiming at with the remainder of the program then?

45:16 Yeah, the way I would think about it is that we would have expected at the end of that program to be looking at a potential stack supply agreement to Audi as they launch initially small series production and then longer term potentially opportunity to support them in a larger deployment of passenger cars. So the timeline for them and others to commercialize passenger cars has moved out. So we'll still have that opportunity when it occurs, if and when it occurs for that particular OEM. What I think is new, though, is we now have this technology to use for a variety of OEMs, including in the passenger car market. So we have no restrictions. And what we are seeing is that in different markets, opportunities to work with passenger car OEMs as well.

46:03 So I would expect us to have some progress in the passenger car market on that same timeline, perhaps with a different OEM. That's a possibility. Okay. And I would imagine, just as a comment, that as not unlike we saw in the heavy-duty market, as Western OEMs get used to what EV platforms can and cannot do, the likelihood of the passenger car market being open for particular ranges of vehicles or performance levels could see that in this timeframe sort of shift, right? So you could imagine these companies like Audi come back to sort of the fuel cell value proposition.

46:48 And I'm wondering, and that links to sort of my next question, when you look at the big, and you talked about this at the beginning, the large amount of cash and the desire to lower barriers of adoption, is that one of the areas you could look into in terms of, say, hybridization or rather than just pure fuel cell versus EVs? Yeah, so there's a couple of important points embedded in there. I think you're very astute on this in terms of what this might look like going forward. First of all, we've always been interested over the last number of years in hybridization, looking at the core competencies for Ballard around the understanding of fuel cell performance and how you can marry up high energy density with batteries and and a high power density with fuel cells in a solution that meets the duty cycles of a given vehicle in a way that reduces the, I'll call it stress points on batteries, particularly as you look at state of charge and reduces the stress points on fuel cells, particularly as you're operating at high engine capacity.

48:05 So I think there's lots of opportunities for hybridization and control strategies and we're well on our way on that front in terms of a number of studies that we've done with different market applications to understand how you marry up those two technologies and have an optimized powertrain solution with fuel cells and batteries together. So that's number one. Number two is I do believe that longer term you will see First of all, you've got companies like Toyota and Hyundai that are head down and committed to fuel cell passenger cars, and I don't see that changing. They continue to make very significant investments. You will see others, I believe, revisiting fuel cells in a couple of years as their prioritization in developing battery electric technology and platforms.

49:01 get scaled out and rolled out. A lot of them have struggled with that and are probably a little bit behind on some of those. So we'll see them coming back, particularly as vehicles enter a new environment where you have high utilization. And I think if you look at the McKinsey report that was prepared for the Hydrogen Council in January and where they looked at the value proposition for fuel cell electric vehicles in the passenger car segments. There are a number of segments long-term where you see high utilizations, whether it's corporate fleets, taxis, and, of course, shared mobility platforms. And when you layer on top of that autonomous drive vehicles, where not only do you have high utilization but high energy requirements on board, we think fuel cells will offer a compelling solution long-term.

49:52 And I think, importantly, What we're seeing is massive investment, hundreds of billions of dollars of investment being dedicated for green hydrogen production. And once that's up and you have electrolyzers scaled down in cost and green hydrogen at a very attractive cost point, the passenger vehicle market comes squarely back into the opportunity set. Okay. That's helpful, Randy. I didn't want to let Tony off the hook without a question. So what's going on with the gross margin? Can you give some idea about, does it stabilize down here, or do you think we'll start to see that pick up a little bit with volumes? I'm wondering what the volumes picking up in China eventually, what that will do with the gross margin.

50:40 Yeah, Mac, it's a great question. I think, you know, no doubt some of the pressure on margin that we're seeing this quarter, last couple of quarters, is very much volume dependent. As you recall, we have invested fairly significantly over the last 12 to 24 months in capacity, particularly in MEA capacity. And so relatively speaking, we are looking at a higher level of fixed cost, and we're just not absorbing that at the volumes that we've seen in the quarter. So no doubt, as we move more product through the system, that will absolutely help gross margin for sure. And then secondly, of course, is the cost reduction initiatives that we, you know, we elaborated on, you know, as recently as our investor call.

51:28 You know, those start to manifest themselves as well, kind of beginning in, you know, through 2021 and 2022 or the next two or three years. So I think it's through a combination of the cost reduction starting to get traction and volume, we'll absolutely see gross margin increase. I think we talked even in the investor call that, you know, if I kind of put a number, it's probably about 5%, you know, percentage points of gross margin that we think we could pick up just through the volume that we see over the next few years. So, you know, to your question, have we seen the bottom? I think, you know, generally speaking, we're at the low end of the range where we wanted to be and You know, as we go in, as Randy said, you know, we'll have a little bit more visibility on volumes for next year, but I would expect to see improvement, you know, starting to see improvement through 2021 as we move more volume, including, as you pointed out, just, you know, on the MEAs to China will help, but also, you know, moving more product through to Europe here out of Burnaby will help as well.

52:27 Yeah, Mac, just to supplement that, as you look at our contribution margin, both for technology solutions and for power products, the contribution margin actually is relatively attractive at this point in the industry maturation process. It's really as you go from contribution margin to gross margin and particularly see the fixed overhead cost structure and costs at low capacity utilization that are impacting. So I think you're going to see, as Tony referenced, as the volume picks up 2021, 2022, 2023, We do see a very significant leverage occurring at that time. Yeah, right. It's a great point, too. We don't disclose contribution margins generally, but just to give you an order of magnitude, obviously there's the TS and the product, but we're probably running in the, I'll say, just generally 35% to 40% contribution margin, roughly. and so you can see where the drag is on the gross margin, the delta between the two. So we're not unhappy with the contribution margin, we just need to move more product through the system as well as getting some of that cost production I referred to.

53:38 Yeah, that's a good nuance there to recognize. Yeah, I just wanted to congratulate you too, Tony, but before you go, you're leaving the company with a big whack of cash and you've seen the company now for 10 years. What do you think Over that 10-year period, what do you think Ballard really did well, and what do you think it kind of missed on, or what the next CFO coming along is going to be faced with? Do you want to address that in a public forum? I have one more call to go, Matt, before I go on. Maybe I'll have more to say. All kidding aside, I think the one thing, you mentioned the balance sheet. I think the one thing that Ballard's done well through the decade, and I won't take full credit, of course, for it, is we have managed to maintain a very, very good balance sheet, even during the difficult times when I joined. Kept it clean, no debt. We've never had any debt on the balance sheet.

54:36 And so I think from that perspective, we've always been well-positioned to get the growth. So I think that's probably the one thing on the balance sheet that I feel pretty comfortable about. Yeah, and then, of course, the other thing, you know, I think the company's done well, and it's a transition. You know, we made a call about five, six, seven years ago to focus on heavy-duty motive. So, I think strategically, you know, again, as an organization, I think that was the right call for us at that point to kind of focus on heavy-duty motive, and I think it's taken a while for the Market to understand that's where fuel cells are best positioned. So those would be some of the pluses. I think, you know, as I said, I think for the next CFO going forward, I think back to the growth opportunities. You know, this company needs more scale. I think we need, we recognize we need more scale.

55:24 And I think, you know, Randy touched on M&A as a potential opportunity. So, you know, I think there's a lot, that'll be a kind of, this job will be fun for the next CFO because I do think there'll be a fair bit of activity in that area over the next, you know, few years. So that's, One of the reasons why, as I say, it was a hard decision to leave because that's the kind of stuff that I like doing as well, but we'll let the next CFO have some fun with that. Great. Well, good luck, and thanks again, Tony. Thanks, guys. Thanks. Thanks, man. The next question comes from Craig Irwin from Roth Capital Partners. Please go ahead. Hi. Good morning, and thanks for taking my question. So now that we have the Chinese subsidy program out there with a little bit more visibility, let's just say that it's increasing and improving rapidly, what do you think we need to see to have improving visibility both on the UK subsidy program that's been actively discussed over the last number of months and then the German program, given that that's supposed to be a key part of their stimulus spending over the next few years? Do you see specific items we need to watch for on the horizon likely to happen within the next six months?

56:41 Do you have sort of a rough feeling for when those programs could support new fuel cell trucks and buses on the road? How soon? Any color would be helpful. Yeah, Craig, first of all, thanks for the question. And there's been a lot of announcements in Europe, obviously, over the last six months with Germany, France, Norway, the Netherlands, Spain, Portugal, all announcing hydrogen plans and strategies. So, you know, many of them have highlighted the need to decarbonize heavy-duty mobility as well with buses and commercial trucks and, in some cases, marine and rail as well. What I would say to point to address a question specifically on the UK, it is a market I'm really excited about. We have some really compelling partners in the UK, including Wright Bus. They're very active and lobbying for a 3,000 fuel cell bus program in the UK. And we're going to be highly supportive of Wright Bus to make that happen.

57:46 So the UK is a market we're quite interested in. And we think... The government there has focused on going new energy buses for 5,000 buses, and so we're trying to get, as an industry, a good allocation of those to the fuel cell side. So I think that's something to look for. I think you will see a UK strategy, hydrogen strategy announced, and you will see a focus on the buses as well. And then I think the other thing that's interesting, as we look at Germany, is they've really put a very heavy emphasis on Green Hydrogen. And I think that's going to be a key market where we're going to see scaling of electrolyzers to drive down costs of green hydrogen, which will help quite a few markets. So I think Germany is going to, I think, show a lot of leadership on the policy front, but a number of the countries in Europe will be right there with similar-sized programs.

58:42 They're all kind of in the $7 billion to $9 billion range allocation. for the hydrogen fuel cell strategy, including green hydrogen production and deployment of fuel cell vehicles. So we have to wait and see. And then I think you'll also see likely within the next weeks, or if not the next month, a hydrogen fuel cell strategy in Canada as well. Great. And then just to talk a little bit about China, the applications for the subsidy. are due within the next 10 days, actually the next nine days. Can you maybe share with us if you've been asked for supporting material or other contributions that could be used by different cities in their applications?

59:31 Have you seen increased interest in potential bid activity out of these cities and city alliances as they prepare these grant applications for submission? Yeah, so great question. We haven't seen bid activity at this stage. What we have seen is a lot of work in terms of providing supporting materials and supporting letters for demonstration region submission. And, you know, in large part working with Weichai on this as well. Great. Well, good luck. And, Tony, you're going to be missed. It's been good working with you over the last many years. So thank you. Thank you, Craig.

1:00:17 The next question comes from Greg Wesikowski from Weber Research. Please go ahead. Hey, good morning, everyone. Thanks for squeezing me in. Just one quick one from me. Just jumping back to your comments on M&A from before, could you see Ballard getting more involved on the hydrogen supply side, specifically thinking about the opportunity and the need for electrolytic capacity in Europe? or is that something you could see fitting into Ballard's portfolio in the near term or is that kind of maybe too far outside of the fairway? Yeah, Greg, first of all, thanks for the question. We're getting that question from many investors over the last number of months as well. And what I would say is that particularly as we look at, and there's different types of electrolyzer technology, but particularly as we look at PEM electrolyzer technology, we see a lot of Synergy between the work that Ballard has done, the good work in my opinion, for a long time on developing PEM fuel cell technology.

1:01:20 When you look at things like the use of gas diffusion layers, the use of membranes, the use of catalysts, and how that can be applied to electrolyzer stack technology, we believe there's a lot of synergies there. I personally believe we're very advanced, perhaps a number of years ahead, of a number of electrolyzer companies that work on things like electrolyzer MEAs. So I believe there's a lot of leverage there that we can provide to the PEM electrolyzer opportunity. And if you look at the cost of a PEM electrolyzer stack, about two-thirds of that cost is the MEA. So we think there could be not only a technology advantage but potentially a cost advantage if we're able to translate our This concludes the question and answer session.

1:02:32 I would like to turn the conference back over to Mr. Randy McEwen, CEO, for any closing remarks. Thank you for joining us today. We look forward to speaking with you again in March next year when we'll discuss results for the full year 2020. Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.