Ballard Power Systems (TSX:BLDP) Q3 2021 Earnings Call

0:00 Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q3 2021 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 one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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 third quarter 2021 Financial and Operating Results Conference Call. With us today are Randy McEwen, Ballard's CEO, and Paul Dobson, Chief Financial Officer.

0:48 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. I'll now turn the call over to Randy. Thanks, Kate, and welcome everyone to today's conference call. Given the growing number of research analysts covering the company, we'll keep our prepared marks relatively brief to leave sufficient time for questions. We join today's call with an exciting industry backdrop, including COP26, $9 billion of fresh commitments to hydrogen coming in the United States and a growing global recognition of the important role of hydrogen to achieve deep decarbonization, including hard to abate sectors such as heavy duty mobility.

1:41 We continue to have high conviction in our strategy and growth plan. Our business model has significant leverage and resiliency as we deploy the same core competencies and fuel cell technology across multiple verticals. Bus, truck, rail, marine, off-road, and stationary power, and across multiple regional markets, Europe, North America, and China. We're focused on large market segments where the value propositions for fuel cells are strongest and the barriers to refueling infrastructure are lowest. We made solid progress across our business activities over the past quarter, including in customer programs and deliveries, in our technology and product development programs in strengthening our operating platform in new customer acquisition and in our partnership strategy.

2:34 We also achieved a major corporate and industry milestone. In October, we announced that Ballard's PEM fuel cell technology and products have now powered fuel cell electric vehicles over 100 million kilometers around the globe. Let me repeat this again. Buses and trucks with Ballard technology have now accumulated over 100 cumulative kilometers of real on-road experience. This is a massive differentiator for us and puts us in a different league of demonstrated capabilities compared to any other company that provides fuel cells for medium and heavy-duty mobility. Our proven in-service experience with a track record of safety, quality, availability, and performance continues to be a compelling value proposition for our customers and a strong calling card for Ballard.

3:28 This provides customers with confidence in Ballard technology, product durability, quality, and our total cost of ownership in real-world duty cycles and operating conditions. And we've been very busy on the customer side and with our partnership strategy. On partnerships, we continue to focus on simplifying the fuel cell electric vehicle experience and ease implementation friction points for OEM customers and end users. We are putting the customer at the heart of our strategy and our investments. We believe there's high value to offer our customers integrated fuel cell powertrain solutions that are optimized for performance and cost. We have strengthened our platform to better support our OEM customers, including our recent partnerships with Hexagon Puris and 4C Power.

4:21 California-based Hexagon Purist is a leading hydrogen equipment supplier and integrator. We're planning to work together to develop Class VI and VII fuel cell electric truck markets, incorporating their turnkey electric drivetrain and hydrogen storage solutions with our fuel cell engines. And a few weeks ago, we announced the signing of an MOU with 4C Power, a France-based leader in smart battery systems for sustainable electromobility. Through this strategic partnership, we plan to develop integrated fuel cell and battery solutions optimized for performance cost and installation for heavy-duty hydrogen mobility applications. Now, what does this all mean when you look at the landscape of our strategic partnerships, including Weichai, Mahle, Linamar, Hexagon Purists, 4C Power, and others?

5:12 It means we're positioning Ballard to deliver innovative, high-value, high-performing, efficient, low-cost fuel cell engines that can be produced at scale. We're designing engines that can be paired and optimized with complimentary powertrain solutions and which can be easily integrated into powertrain and vehicle platforms for our OEM customers. So our proven track record of 100 million kilometers, our continued work on product cost reduction, and our strategic partnerships to simplify the fuel cell electric vehicle experience are all leading to increased customer engagement at the very time when end users are demanding zero-emission solutions. This is leading to repeat business with existing customers as well as new customer acquisition.

6:01 On the new customer front, we recently announced an exciting new customer relationship with Quantron, a German-based specialist in electric vehicle integration. The initial collaboration will see Quantron integrate Ballard's FCMOOV family of heavy-duty fuel cell power modules into Quantron's electric drive train and vehicles. The fuel cell electric platforms currently in development include a 7.5 ton delivery truck, a 44 ton heavy duty truck, and a municipal waste collection truck. Initial delivery of Quantron fuel cell electric trucks is scheduled for late next year. We also want to highlight today the growing activity levels for fuel cell buses in Europe.

6:48 We recently announced repeat orders for a total of 40 fuel cell engines from existing bus OEM customers for deployment in new and existing European transit operations. Over the past 12 months, we've expanded our deployment market from 10 European cities to over 25 cities in 10 countries. As of the end of October, there are nearly 160 fuel cell buses powered by Ballard in service across Europe. This is an increase of over 80% from October last year. And in total, there are approximately another 150 fuel cell modules currently on order, which will nearly double the number of fuel cell electric buses driving passengers on European streets.

7:36 A similar growth trajectory is also being seen in the North American markets, particularly in California. as transit authorities make strides towards decarbonizing their bus suites to meet ICT regulatory compliance, which requires all new transit buses in California to be zero emission by 2029 and 50% of new transit buses to be zero emission by 2025. We expect to soon have nearly 80 additional Ballard-powered fuel cell electric buses on California roads, complementing the approximately 50 already in service. We're excited by the pace and scale of fuel cell electric bus implementation across California and are encouraged at the increasing rate of adoption in other states as well.

8:24 In the truck market, our joint development program with Mahle continues to progress as planned. The concept of demonstration module is expected to be in test in Germany by the end of the year. Testing of this 240 kilowatt module is expected to continue into 2022. and commercial prototypes are expected to be ready for initial customer projects by early 2023. And as I've discussed in the past few earnings calls, the long-term outlook for the rail market continues to strengthen with new orders announced for hydrogen-powered passenger train with Talgo in Spain, a pilot with CP Rail Locomotives in Canada and ongoing work with Siemens in Germany.

9:09 As announced earlier this year, Ballard worked with a consortium of other industry leaders to deliver Scotland's first hydrogen powertrain, which is currently being showcased as part of COP26 in Glasgow. This is yet another proof point of the growing global interest in fuel cells in rail applications, where rail operators can electrify and decarbonize their rail lines without the need for costly overhead catenary wire infrastructure and where heavy payload, long range and rapid refueling are key customer requirements. In the marine market, we're seeing a high amount of customer engagement driven by increased pressures for decarbonization. We've continued to progress our work with NORLED to deliver a hydrogen fuel cell powered passenger ferry and expect to deliver the first FC wave modules to NORLED by the end of the year.

10:03 The backup and stationary power opportunities are also gaining traction with about a 90% increase in revenue from Q3 last year. As a proportion of our 12-month order backlog, we've seen a four-fold increase in the past two quarters, surprising to the upside for backup and stationary power. We recently announced the construction of our project with HDF in French Guiana. The Containerized Power Project is the world's first multi-megawatt baseload hydrogen power plant and the largest green hydrogen storage of intermittent renewable electricity sources powered by an on-site solar park. In Europe, we announced a project with Fusion fueled in Portugal to deliver a peak shaving unit also to be fueled by green hydrogen.

10:52 Now, we're also seeing strong initial market uptake for critical zero-emission power for data centers, particularly for backup power. Large format hydrogen fuel cells present an opportunity to produce reliable backup power as a sustainable alternative to incumbent diesel technology. So our core industry-leading PEM technology is being leveraged in a variety of cross-vertical applications as the broad uses of hydrogen as a critical pathway for decarbonization expand. Let's now move to China. China fuel cell policy and the related sales of our Weichai Beller JV have disappointed in 2021. While we've been challenged with the adoption pace of fuel cell electric vehicles in China amid extended policy uncertainty, we've continued to achieve important technical and operational milestones in our joint venture, including in stack and module development, and as part of our technology development program to advance the localization of products.

11:56 As of the end of September, there are over 3,330 fuel cell electric vehicles deployed in China powered by Ballard Technology. Our Weichai-Ballard joint vendors continues to make decisions and investments to have leading market share in the fuel cell truck and bus market in China over the long term. We're focused on developing the right products, localization strategy, cost structure, scaled manufacturing, and market positioning to win in the national China market over the next decade. In the near term, we're interpreting the complicated cluster policies and positioning our platform to target and penetrate the initial cluster regions. So while 2021 has been disappointing and visibility for 2022 remains cloudy, we have high conviction or remain firmly bullish on the long-term market for our technology in China. We expect to be in a position to provide an update during the next earnings call.

12:56 We also want to comment on the supply chain challenges. Throughout 2021, we've been working hard to risk mitigate global supply chain disruptions. We've seen delays in freight shipments and have been moving more inbound products by air, resulting in elevated costs and putting pressure on gross margins. In the fuel cell industry, Ballard is one of the leading customers for many specialized suppliers. As a result, our long-standing relationships with key global suppliers continues to help us navigate these supply chain dynamics. In some cases, we've accelerated the supply of materials to de-risk customer impacts, which has also elevated inventory levels. As we look to next year, we're encouraged by the record levels of customer engagement across all application verticals in Europe and North America.

13:48 We're set up for an exciting 2022 Marked by continued customer wins, product innovation, cost reductions, additional deployment and development of key partnerships and technology, and the start of a long-term revenue ramp. With that, I'll turn the call back over to the operator for questions. Thank you. We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. 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.

14:34 We will pause for a moment as callers join the queue. The first question is from Rob Brown from Lake Street Capital Markets. Please go ahead. Good morning, Randy. Just wondering if you could give some further color on the marine market in terms of the customer engagement. Are customers sort of ramping up their efforts, and is this being driven yet by the IMO kind of discussions around carbon emissions, or sort of where is marine at in the customer engagement efforts? Yeah, Rob, good morning, and thanks for the question. The marine market is a market that, you know, I think we stepped back two years ago and probably wouldn't have forecasted the high level of customer engagement we're seeing at this time. And part of it, you're right, is being driven by, in some cases, targets, in some cases, real mandates, depending on which jurisdiction you're in. So we do, of course, have the International Maritime Organization target to reduce emissions 50% by 2050.

15:42 but we're also seeing a number of jurisdictions look at sensitive waterways where they're looking to protect those waterways and decarbonization is going to play out I think much faster there. We've also seen electrification occurring in marine applications both with battery and fuel cells and we see particularly with 4C Power an opportunity to package an integrated fuel cell and battery opportunity there rather than the current diesel battery packages that are being contemplated for marine. and now with NORLED we will be delivering our first modules to NORLED for I believe the world's first fuel cell ferry. We're pretty excited about this. NORLED is a major player in the marine space for ferries and this is a critical project that we're investing a lot on.

16:29 We launched the FC Wave product last September and already we're seeing a fairly significant order book and interest level develop for that product. Interestingly, that product has application not just in the marine space, but the way it's packaged and containerized, it has application for other verticals as well. I think there's a lot to do to prove out the value proposition in marine, but we are very bullish with the activity levels we've seen with key customers like Norled as well as some partners like ABB. Okay, great. Thank you. And just following up on the European bus market, notice the number of order activities. Is that still being driven by the Jive program, or are you seeing orders starting to flow from cities and regions sort of independent of that?

17:21 So we have seen a number of projects driven by adoption with Jive support. What I do think you're likely to see before the end of this year is, you know, the next announcement from Europe on support of fuel cell buses. I think we need to be clear that the value proposition still does need some policy nudges with the low level of penetration that we have today. It's important for these jurisdictions to get some policy support to help with initial adoption. But I think the interesting thing is as we look at another 150 buses in Europe and then behind that real scaling where you're starting to see sites where we'll have You know, coding activity for 100 to 200 buses right now. So I do think as we move from tens and hundreds to thousands in Europe, in North America, and as we've seen in China, costs will come down.

18:21 I think I'll turn it over. Great. Thanks, Rob. The next question is from Mac Whale from Cormark Securities. Please go ahead. Hi, Randy, when you look at the pace of adoption in China and just the delays that we've seen there, does that impact your development timeline, like your product development timeline? I'm trying to get an idea of whether it gets to the point where there's so much passage of time, you actually skip a generation. Can you tell us how you adjust your development there in China? Yeah, good morning, Mac. Thanks for the question. And certainly, when we entered our collaboration with Weichai back in 2018, one of the things that was really important to both Ballard and Weichai was to make sure we had the highest performing products at the right cost structure to have high market share over the long term. And we spent quite a bit of time at that point talking about the development of the right stacks and the right modules for the bus and commercial truck market. And we laid out a plan, the $90 million technology solutions plan, to develop those products.

19:35 So we've done, I think, a very good job collaboratively developing those products with a couple of really interesting dynamics I would suggest over the last 18 months. One is that Weichai in the joint venture has been very effective at working to help localize components in the bill of materials for our fuel cell modules in China. And so that has gone, I would suggest, much faster than we expected. So I think that's a positive. And then as we look at the capabilities of the joint venture to take on more module design, you know, Wei Chai is an expert at designing high-volume engines for the diesel market. You pair that up with Ballard's ability to designed fuel cell modules. So we're now having next-generation modules being developed at the WHI Ballard Joint Venture with less contribution from Ballard and more contribution at the JV level. So there are a number of modules that are currently being developed by the JV, which I think are pretty exciting.

20:44 And just to give you an example, we've recently deployed at the JV 10 49 ton fuel cell trucks to Tsinghuangdao Steel. And those are powered by 160 kilowatt fuel cell engines that have been developed by the JV for that application. So now when I think about the program we have for the development of the fuel cell stacks at Ballard and the use of those stacks in the joint venture, as well as the development of fuel cell engines for the China market. I think we're doing a really good job with Weichardt understanding the market requirements and then developing solutions for those market requirements.

21:29 So, you know, I would say the development program is on pace. You know, when you say skip a generation, I feel like we're pushing the boundaries every time that we're releasing our next generation already. Okay. And just as a follow-on, because you touched on power levels, Some of those modules, that's a pretty big power level on that. Whereas in Europe, the partnerships you talked about most recently are more of a hybrid type of arrangement. Should we be thinking of lower per vehicle power levels, say in Europe versus China? Is this sort of a bifurcation of the markets? No, I don't think so. I think if you think about, you know, just coming back to the China market, our JV has also developed a 50-kilowatt module.

22:18 So it's really very much trying to make sure you have right products for market segments, particularly in the commercial truck market, which is very segmented, and of course for the bus market as well. So if you think about the fuel cell engine we're developing for Mali, that's a 240-kilowatt fuel cell engine for the commercial truck market in Europe. Great. Thanks, Randy. Yeah, thanks, Matt. The next question is from Chris Souther from B. Reilly. Please go ahead. Hey, guys. Thanks for taking my question here. I just wanted to touch on, you know, between some of the partnerships you've built out here between Mali, Linamar, Hexagon, Quantron, and now 4C. Are any of those customers currently in the backlog?

23:06 And, you know, with some of the customers ramping up, toward the end of 2022, early 2023. I'm curious what the timing is when we start to see that flow into the backlog prior to the revenue ramp with some of them. Yeah, Chris, thanks very much for the question. And I just want to clarify an important point. So we're talking about strategic partners that we're looking at module design, improving module design, including in some cases like MAHLE, bringing some balance of plant components inside of our fuel cell engine. and then others who are experts at integrating that fuel cell engine into the powertrain and can offer complimentary products so that we have a solution that is optimized for performance and cost. So the collaborations that we have there, those partnerships, will actually help drive adoption by the customers that are vehicle OEMs.

23:59 So I wouldn't characterize those companies you listed as customers. You know, Quantron would be a different example. They're actually a customer that will be buying fuel cell modules directly from Ballard. But the Molle's, Wechai's, Linamar's, et cetera, the idea there is to collaborate on the different scope of work where we have strengths to improve our offering for vehicle OEMs. So if you look at the order backlog today, we're seeing, I think, a pretty nice trend in terms of the pickup and order backlog for heavy-duty motive. And those are the segments that we're particularly focused on. So we've had about a 30% increase in our order backlog, our 12-month order book, I should say, for heavy-duty motive throughout Q1 through Q3 of this year. And part of that is this emphasis by Ballard on simplifying the fuel cell electric vehicle experience and some of the value that these partners will deliver. But most of these partnerships still have work to do in terms of co-development activities, and I think you'll see the real leverage of that as we start looking at 2023. Okay, got it.

25:12 And then looking at kind of a China market where it's been a bit of a pause here for quite a while, are you seeing the competitive atmosphere heat up with, you know, some local players kind of come in or, you know, where do things kind of stand from, you know, competition standpoint of, you know, people trying to catch up with the capabilities you're building with Waychai? It sounds like, you know, there's continued progress on the tech side, you know, with Waychai, but curious, you know, how does the competitive landscape look, you know, today? Yeah. So, Chris, I would say the competitive landscape became very intense a few years ago. I wouldn't characterize that as a recent phenomenon. So there are certainly lots of domestic players that are actively trying to find their way in the hydrogen fuel cell market in China, trying to find their appropriate positioning in the value chain and ecosystem.

26:06 And of course, there are a number of international players who, like Ballard, see a large market where there's going to be very scaled adoption. Let's not forget, we're talking about a target here of a million fuel cell electric vehicles by 2030 and 2,000 hydrogen refueling stations. So it will be the largest market for the adoption of fuel cell trucks and buses, in my opinion. So the competitive dynamics continue. I think the pause in the China market hasn't, of course, just impacted Weichai Ballard. It has impacted all the players in that market with relatively slow deployment in 2021. Thanks. I appreciate that.

26:54 Thanks, Chris. The next question is from Michael Glenn from Raymond James. Please go ahead. Hey, Randy. Just on Mali, there has been some management changes take place within the organization. Just wondering if you've had a chance to talk to the incoming CEO and has there been any sort of shift or thoughts on their direction with respect to hydrogen? Yeah, you're right, Michael. Thanks for the question. And this has been known for some time. So, you know, going back, in fact, to around last Christmas, we knew there would be some change at Molle. So the leadership change, I don't think, is going to translate into any reduction in interest in the fuel cell opportunity with Ballard.

27:45 Over the last year, what's happened, of course, is that the demand for hydrogen and the opportunity set for hydrogen has grown exponentially. And during that period, Malé has joined the Hydrogen Council and now has visibility at the council level on the growing market opportunity set that they're seeing, you know, not just for commercial vehicles but in other markets as well. So, you know, I think we'll continue to have discussions with MOLLE, including with the CEO, and really make sure that there's alignment on the future investment cycle and timing and pace for adoption of fuel cell electric trucks in the European market. Okay, and then just following up on China, if we're looking at MEA volumes or MEA sales potentially into China, any thoughts on timing for the next MEA order from the JV?

28:44 Yeah, no, nothing we can share today with any conviction. It's still uncertain at this point, so I don't want to overstate where we are. Okay, thanks for taking the questions. Yep, thank you. The next question is from Vivek Panjami from National Bank Financial. Please go ahead. Yeah, hi, thank you for taking my question. This is Vivek on behalf of Rupert. Just wanted to ask about the HICAP fund with the investment in the hydrogen infrastructure. Could you talk about other opportunities that the team may be considering in hydrogen infrastructure? Yeah, Vivek, thanks for the question. There are two or three new funds that have formed over the last 12 months, and those funds are typically designed to be hydrogen infrastructure funds, where they will support the adoption of hydrogen fuel cell and hydrogen projects, but including hydrogen fuel cell projects for mobility applications.

29:47 And I think one of the real advantages of these funds is that they'll match up the supply, particularly of green hydrogen, although blue hydrogen is in the option as well, supply of green hydrogen with demand on the application side and be a financier for those projects. So Ballard is actually, will be investing in two of those funds. You mentioned HiCap as one of them that we've included in our subsequent event notes in our financial statements. There's a second fund that we're making an investment in as well. And the point of these investments for Ballard is really getting visibility on where these funds see opportunities to invest capital and potentially influencing opportunities by bringing projects to those funds for potential investment. So we think this is an important way for us to, again, match up hydrogen supply with demand applications.

30:44 So, yeah, it's Paul here too. So the other thing I think that these funds are really helpful for Ballard too is it gets us a seat at the table and into the deal flow of various opportunities. So we could look at potentially co-investing, or if the fund is going to take a pass on it, it might be something that Ballard is very interested in. So staying current and in the deal flow across the whole ecosystem is a good objective for us, too, as we look for different opportunities to deploy our capital. Sure. Thank you for that, Colbert. I'll leave it on there. Thanks, Vivek. The next question is from Ves Deshna from Coker Palmer.

31:30 Please go ahead. Hey, guys. Thank you for taking my questions. I guess, like, maybe if we can set up expectations for the near term, how should we think about orders level near term or quality for 2022 versus this 20, 25 million per quarter that we have been seeing so far? Yeah, Ves, thanks for the question. And I think... I think as we look at 2022, we see clearly the start of a growth ramp, a long-term growth ramp developing. So I'm very excited about the opportunity for 2022. One of the things we really like about our business model is the ability to leverage our core competencies and technology across multiple verticals and across multiple regions.

32:16 And we see strength right now in Europe and North America, and we see strength in most verticals moving forward as well. So I think that suggests a strong growth rate in 2022. I think the wild card to add to that growth rate will be what happens in China in 2022. Got it. And maybe we talked about inflation, how you had to do some airlifts and everything just because of supply chain disruptions. How do we think that progresses or subsides as we move into 2022? and just on operating costs, how should we think about as the revenues ramp or as the audits ramp? Yeah, so on the supply chain, Randy had a few remarks about it, but I would say that the team has done a pretty good job actually in getting ahead of the issues with suppliers.

33:10 So some suppliers in various regions and APAC and others have had some disruptions, but we've been able to manage through them, build up some inventory and established really good relationships and found alternatives. Where we've really seen the impact is in the delays in shipping and the increasing freight costs as well. So for both air freight and with the sea freight. So the costs are increasing, but even just the availability is pushing back the delivery times, which can impact our deliveries as well. So that's where we're seeing it happening. We've also seen some impact earlier in the year Things like platinum prices and iridium prices. The platinum has settled back down. Iridium is still high, but it's a relatively small percentage of the total bill.

34:00 In terms of when we see these challenges subsiding, it's probably going to be later in 2022 or possibly even beyond. This is a global issue, the supply chain and the shipments and the freight in particular. We are exposed to that to some degree, but so far I think the team has done a pretty good job staying ahead of it, and you're really not seeing a very material impact in our financial results from it. Got it. All right. That's really helpful. Thank you for taking my questions. Thanks, Bob. The next question is from Jonathan Lammers from BMO Capital Markets. Please go ahead. Good morning.

34:46 Following the recent partnerships that have been established, what areas of the powertrain does Ballard remain interested in acquiring or establishing partnerships to gain access to the technology or simplify the fuel cell adoption for the customers? Jonathan, good morning and thanks for the question. So the way I would think about it is, you know, for a hydrogen fuel cell electric powertrain, you need to have storage, you need to have a fuel cell engine, which is our core competency. You need to have power conditioning, typically a DC-DC converter. You'll need to have battery technology. And then a thermal strategy and controls. And as we look at that powertrain integration, also having integration capabilities and understanding of integration is important too.

35:35 So as we look at partnerships and M&A opportunities, we're looking at each one of those boxes. and identifying partners for collaboration, partners for potential M&A that helps simplify the fuel cell vehicle experience for customers. And I think part of what we're seeing in the collaboration cycle is that there is high, high value. I think it's white space right now for optimization. So the ability to go to an OEM customer and say, here's a total solution that's optimized for performance for your duty cycle is very powerful. Okay, thanks. And a follow-up question to that.

36:23 For the 4C Power Partnership, what markets are Ballard and 4C targeting first? Yeah, the first markets with 4C Power will be bus, truck, and rail markets. and 4C has a very strong position in the bus market. In fact, Ballard and 4C share a number of same customers already that have been buying Ballard fuel cells and 4C battery packs independently, separately, not optimized. So that's certainly the nearest term market opportunity. And 4C Power also has, I think, a very strong position in the rail market. So they made an acquisition earlier this year of a company that has competencies on battery packs for rail and have counted Alstom as one of their key customers as well.

37:14 So those three markets, bus, truck, and rail, and particularly bus and rail, they have strong capabilities in today. I would characterize them as the market leader in bus and rail and a very strong position in truck as well. I'll pass the line. Thanks. Thanks, Jonathan. The next question is from Aaron McNeil from TD Securities. Please go ahead. Hey, morning, all. Thanks for taking my questions. Randy, you referenced it in the prepared remarks in some of the Q&A, but I'm hoping you can speak a bit more to the broader partnership strategy specific to the truck market and maybe outside the Weichai JV in China. But I guess what I find interesting is you've sort of itemized recent partnerships to optimize different partnerships. vehicle profiles and powertrains rather than by geography, which seems to be what you've done in the bus market.

38:07 So I guess what I'm wondering, you know, do you have an appetite to take on more partners or collaborators? Or do you think you've sort of hit all the main end markets that you want to pursue with the current partnerships? And do your existing partners have any sort of exclusivity on the types of end products that you're developing? Yeah, great. Thanks for the question, Aaron. And, you know, I think that there's a couple key points there. One is, you know, do we have an appetite for more partnerships? Clearly, there's areas that we still think there's opportunity for continued evolution in the powertrain design. And so, you know, the ability to understand the integration of all these components together into a powertrain solution for customers is something that we think is important.

38:58 Think about customers, for example, in the off-road market where they typically aren't doing their own integration. They're relying on third parties to help them with integration. So a number of customers that we see increasingly are asking Ballard for more support on powertrain integration. Maybe they're asking for a DC-DC converter solution. Maybe they're asking for hydrogen storage solution. and recommendations on battery packs, for example. And so it's really in response to a very clear signal by the OEMs, particularly as they start in early adoption, that they need help, including application engineering. So I do think there will be additional customers and partners, M&A opportunities that we'll be looking for to further strengthen these capabilities.

39:48 Some of them will have regional capabilities, Some of them will have expertise that is global in nature. So we'll have to watch for that as we look at different collaboration models and different value chain positioning. I'm not sure if you had anything prepared, but can you give us an update on the 2024 target to reduce your cost by 70%? Yeah, so we have internally an objective this year for a very significant increase already in 2021. We will not just beat that, but beat it significantly in 2021.

40:34 So we're ahead of plan on product cost reduction for our program installment in 2021. So I think that bodes very well in total for the 70% cost reduction for 2024. Great. I'll turn it over. Great. Thank you. The next question is from Pija Juvakar from Citi. Please go ahead. Hi. Good morning, Randy. It's Eric Petrion for Pija. What do you need to see in China to increase visibility? Is it You know, production costs compared to diesel, or is it the cluster program or other incentives? And just talk, too, about the recent spike in diesel and how that might shift the appetite towards fuel cell engine adoption.

41:27 Yeah, Aaron, thanks for the question. You know, I think the key there is really in the very near term, it's actually the application of very complicated cluster region policies and How do you ensure you're in the supply chain or how do you have a channel strategy to penetrate those cluster regions? So I think that's part of it. And more importantly and more broadly is how do you have a national strategy in China to win in the long term with the right volume, the right cost structure, the right technology? So those are two things that we're working on in parallel. And any comment with the adoption from higher diesel costs? Yeah, I would say not just the adoption of the higher diesel costs, but also what you're seeing, of course, in China recently is power shutdowns and, you know, really a movement away from trying to import coal.

42:23 And I believe there is very strong, very strong political and economic reasons why you'll see China become the leading adopter of green hydrogen over the long term. as they look to decrease their dependence on imported energy. I think this is going to play out very strongly. They have massive renewable resources, and you're seeing now, I think there's an estimate of another 1.2 gigawatts of solar wind capacity that's been identified already recently. So if you look at a number of the companies that are talking about investments in blue and green hydrogen production, you know, like Sinopec and Baofeng and Jing Nang, and Long Ji, and SunGrow.

43:08 There are a number of companies that are really focused on this opportunity to produce green hydrogen. And on the refueling side, you've got Sinopec announcing 1,000 hydrogen refueling stations by 2025. So there are a number of players, including I think one-third of state-owned enterprises now reported a plan to invest in the hydrogen industry. So there are a number of players that are looking at the hydrogen supply side which I think is a very valuable development in that market. As a follow-up, you talked about the excitement and development and adoption of Europe fuel cell electric buses. Can you also talk a little bit about the latest infrastructure bill and money set aside to replace fleets to zero emission in the U.S.? I think currently less than 2% of the U.S.

43:59 municipal fleet is based on fuel cell. Yeah, I think we're not just in the U.S., but globally. We are at the first second of a 24-hour day in terms of market adoption. So, you know, the $8 billion in the U.S. infrastructure bill is really around clean hydrogen hubs. And again, here, this is critically important where you're matching up the supply of, you know, low-carbon hydrogen with demand, and particularly including mobility applications. In addition to that, there's a billion dollars that have been allocated for R&D and demonstration commercialization for electrolyzer technologies to effectively reduce the cost of electrolytic hydrogen to $2 per kilogram by 2026.

44:44 And then on top of that, I think the next development out of Washington are tax credits. And so that's currently in reconciliation right now with different bills evolving. but we do see likely an outcome here where we'll have hydrogen production tax credits potentially as high as $3 per kilogram for the cleanest and greenest hydrogen. So we're very optimistic moving forward about the opportunity for electrification, fuel cell electrification in the U.S. market, which is a fairly sharp contrast to where we were a year ago. Thank you, Randy. Thank you. The next question is from Jeff Osborne from Cowan & Company. Please go ahead.

45:31 Good morning. I was wondering if we could touch on the warranty charges in the quarter I think the release mentioned. What was that attributable to? Hi, Jeff. It's Paul here. We did have slightly higher warranty costs as we continued to test our products and some of our newer products we saw in some of our tests that they weren't They weren't performing exactly as we had thought, so we thought it prudent to add a little bit to our warranty to ensure that our customers are covered. The team is working on the issue, and we're pretty confident. They're already making great progress. Pretty confident they're going to solve it. Also in the quarter, though, too, we had some other warranty provisions for older products, which turned out that we didn't need, and so when we net those together, I think it was around... Got it. That's helpful.

46:44 And then maybe, Randy, for you, my follow-up is there's a lot of things in life that you can't control and there's things you can control. And I was just wondering what it would take for Ballard to start to think about giving guidance as it relates to things like CapEx and operating expenses just as you gear up in 2022 for this sort of hockey stick that you've been talking about for several years commencing in 2023. Should we think about the OpEx run rate being consistent with what we saw in Q3 or something more meaningfully higher? Yeah, Jeff, thanks for the question. And, you know, I certainly think you're going to see a higher OpEx in 2022 and 2023 compared to 2021. We are making significant investment in the business, in people, in technology, in products, in our customer experience.

47:33 We're building out capabilities here, including our corporate development office and strategic management office. So there's a lot of activity going on at Ballard, and particularly as we focus on these verticals, bus, truck, rail, marine, off-road, stationary, etc., having the right expertise inside the company that understands these verticals is critically important as well, and that comes with a cost structure associated with it. So we will be investing in the business, and I think your question is timely as well as we start moving towards Q4 and looking at 2022. We'll take your comments into consideration, Jeff, as well, and Think about what type of guidance we can provide in 2022, whether it's a top line or as you identified, maybe some discrete operating expense lines.

48:19 That'd be greatly appreciated. Thanks much. Great. Thanks, Jeff. The next question is from Pierce Hammond from Piper Sandler. Please go ahead. Yeah, good morning, and thank you for taking my questions. The first is on the backlog. I was just curious if the backlog included those 40 fuel cell modules for the European market that you press released earlier this month. It includes about a half. Okay. And then just curious on the translation from some of the recent announcements you've made, which have been positive, and how quickly that kind of manifests itself into the backlog. Yeah, most of the customer engagements and strategic partnership engagements take time. So particularly when we're talking about developing solutions and getting them to market, that typically can be an 18-month to 36-month cycle in some cases.

49:18 Where we're talking about new customers, for example, like Quantron, we're seeing likely deployments by them in late 2022. So I think it varies, but certainly what we're seeing is that the market interest in fuel cell buses, fuel cell trucks, rail and marine, off-road and stationary, all of these markets have shown real strength on customer engagement. And so I think what we should see is a trend in the right direction on the order book as we move into 2022. Thank you, Randy. And then just a quick follow-up on the cost reduction question from earlier. Congrats on the reductions that you've yielded this year. Just curious, what are the major levers or drivers that led to those cost reductions this year?

50:12 It's really a combination of three different factors. One is really looking at the materials that we use, qualifying new suppliers, thinning materials, New Chemistries, etc. That could be in the MEA, so gas diffusion layers, membranes, catalysts, ionomers, materials for our bipolar plates as well. So that's number one. And a lot of technology development has been done over the past three years to make that viable today. So that's a return on our investments we've been making for some time. to look at these new materials and qualify new suppliers and actually work with suppliers. In some cases, we've worked with suppliers who knew nothing about the specifications required for fuel cell technology, and we walked them through 11, 12, 13 iterations of their product to get it where it needs to be.

51:07 So that takes time, of course. So that's the first point. The second point is how do we look at processing and production? and we've invested quite a bit, particularly at the MEA level, on advanced manufacturing and have invested over $15 million in Vancouver on the advanced manufacturing, not just a six times capacity expansion, but looking all the process steps. We're literally from raw materials in to finished goods out, looking at the process steps, mapping those process steps and looking at tack times, looking at the tools, and the equipment we use, introducing more robotics, more automation, reducing labor hours and reducing tack time.

51:53 So a lot of work has gone into the advanced manufacturing side, particularly the MEA level. We're now looking at in 2022 and 2023, we'll be spending more time on the plate. And then the third part is really looking at volume and the opportunity for global Thank you very much. Thank you. and so we're very bullish on the opportunity to decrease our costs 70% by 2024.

52:53 Thank you, Randy, for the very helpful answer. Thank you. The next question is from Craig Scheer from Tooley Brothers. Please go ahead. Hi, thanks for fitting me in. Most of my questions have been asked, but I kind of wanted to get a bigger picture. There's been a lot of unexpected traction in train stationary power and marine this year that, you know, 12, 18 months ago we wouldn't have anticipated or baked into the long-term total addressable market. Could you give any sense or color around how you're now thinking about your mid-decade and end-of-decade opportunity set given more verticals seemingly kicking in?

53:40 Craig, thanks for the question. It feels like you must have been in our boardroom yesterday as we were discussing this very topic. Our TAM is growing every month, it seems. And these verticals, if you go back to September of 2020, when we had our Investor and Analyst Day, we highlighted a TAM of $130 billion by 2030. You know, that is significantly underestimating the total addressable market that we see today. And so we are in the process of updating that. You know, just giving an illustrative example, that included in the rail market just the opportunity for commuter rail in Europe. So, you know, didn't include China, didn't include North America.

54:26 And of course, in North America, we're seeing a very significant opportunity for freight locomotives in rail as well. Similarly, we constrained that TAM to certain market segments and certain geographies in marine, and I could go on. It didn't include off-road, where we're seeing lots of traction right now as well. And of course, it didn't include stationary power, which is by itself a very large addressable market, and certainly just backup power for data centers on its own is a large addressable market. So I appreciate the question. You can be patient with us. We'll continue to work through that and provide an update on the expected TAM and what the implications are for our cascade of revenue and our stacking of revenue out through 2030.

55:11 Do you think that we can have an update by the time we get some kind of guidance into 2022? Yeah, I think we will provide an update during the next call for sure. Thank you. Yeah, thank you. The next question is from Alex Kenia from Wolf Research. Please go ahead. Thanks very much. I just was curious if you could talk a little bit more about some of the stationary power potential that you've got, I think particularly the HDF project. I'm just curious if you see that kind of as a one-off in terms of thinking about this, you know, hydrogen-green, green hydrogen baseload power generation scenario. Project, or do you want to see that work out first before you pursue similar types of opportunities, or is there a lot that's potentially out there right now?

56:06 Yeah, Alex, thanks for the question. So a couple of points there is that we see the opportunity in certain stationary power markets, again, to get leverage off if not the same, substantively the same products that we're offering in high power mobility applications. And certainly when we think about, for example, the data center market opportunity, there we're seeing a lot of interest from the data center community in our 200 kilowatt fuel cell engine that we've designed for the marine market. So our FC Wave product and its containerized or its packaged approach. So we see a lot of leverage there. As you know, we're in the small hydrogen backup power business, and that continues to, it's still modest, but growing. And we see pretty nice deployment happening in the Nordic countries at this time. But going to your point about green hydrogen baseload, I think where you see microgrid opportunities, where you have renewables, that are required to supply primary power and, of course, renewables being intermittent. Hydrogen provides a wonderful energy storage vector and the ability then to use that stored hydrogen to redeploy it back as power when needed, so when the renewables aren't blowing or the sun isn't shining, or to use that hydrogen as high-value zero-emission fuel.

57:39 One area that we see this model very pronounced is in the mining sector, where mining communities typically are remote. They have high power requirements at the mines. Many of them are looking at decarbonization strategies, including on-site renewables and including a need to electrify these heavy trucks, which cannot go battery. Great. Thanks. Pretty interesting. Thank you. The next question is from Greg Wasikowski from Weber Research. Please go ahead. Hey, good morning, Randy and Paul. Thanks for squeezing me in. I was wondering if you could just refresh us on the timeline for profitability, the ramp, any notable milestones in China following some sort of policy clarification, just to refresh us on our expectations there once we get over that hump.

58:38 Yeah, so I think we haven't been providing guidance on when we would be looking at profitability, but certainly what we've been indicating for a number of years, as Jeff Osborne alluded to a few minutes ago, is that we see this growth curve starting in 2023 and really moving through 2030. So I think it's a few years out from 2023 when we see that crossover because we continue to make significant investment in our business to make sure we have Thank you. And then similar to the last question on stationary power, but with respect to marine, I was just curious, specifically, where are you seeing that interest and demand?

59:38 Is it just for ferries and smaller ships and applications, or are you starting to get interest from maybe larger brown water barges or even some sort of blue water, larger tonnage? Yeah, good question. The marine market, like all of the markets, are very segmented. So in the marine space where we expect to see early adoption between now and 2030 would be ferries, tugboats, workboats, pushboats, riverboats. These are all the applications where if you look at the duty cycle for these marine vessels, they're paired very nicely with what fuel cell technology can offer. They also offer the ability to have either return to port or port-to-port refueling infrastructure.

1:00:31 So I think that's very compelling on the fueling side. I think some of the larger marine opportunities, for example, cruise ships and freight-going ships, there's a much longer market to develop. These are all long-lived assets. It takes time for these to turn. Even just to hit the 2050 deadline, Decarbonization milestones in maritime, you know, we're one investment cycle away from, you know, technology disruption. So I think you'll see some of those applications start to see penetration in, you know, 2030 onwards. Okay. Thanks, Randy. The next question is from Craig Irwin from Ross Capital Partners.

1:01:20 Please go ahead. Good morning, and thanks for taking my questions. So, Randy, I was pleasantly surprised to see the $1.5 million on the P&L from Synergy. Can you talk a little bit about the products that Synergy is taking? Have they exercised the option for the next generation stack? And where do we stand with Synergy? They have come on and off over the last... over the last couple of years, several times up, down. Is this potentially a customer that can rebound nicely in 22? Yeah, Craig, nice pickup, and thanks for the question. Yeah, Synergy was a bit of a surprise for us. You know, they effectively have run down their inventory, and we're looking for additional purchase of MEAs for the 9SSL stacks.

1:02:16 And, you know, they are – producing 9SSL stacks for some customers that already have 9SSL on their platforms. And so I don't think we'll see Synergy as a high-volume, long-term customer. I think many of the vehicle OEMs will be looking for the next-generation technology, which is at the Weichai-Beller joint venture. But Synergy is also looking at, you know, designing other fuel cell stacks independently that could use Ballard MEAs. So we'll see that as a longer-term opportunity too. Great. And then, you know, I was hoping for an update on the Audi-Volkswagen relationship. You know, you have a long history of partnering together.

1:03:01 You've done a lot of R&D work for them. And there always was an expectation of a commercial endpoint in there. You know, Is that still a possibility, or do you hold much hope for that at the moment? Or maybe is it something that should be revisited a few years from now? Yeah, we don't expect to see any small series production of Audi fuel cell cars. So they had been developing the H-Tron, which included the stack we've designed for them, a high power density stack for automotive applications. So, you know, I think Audi and VW very much focused on the battery segment at this time. And so I don't expect to see any developments there for the passenger car market with Audi in the near term.

1:03:50 And our current relationship with them in terms of the program we have is expected to complete around August of next year. Okay, thank you. If I could squeeze just another quick one in. Backlog, right? Total backlog has been burning off a little bit over the last couple of years with some very big bookings a couple of years ago. We're looking at possible revenue inflection really taking shape over the next 12 months. How far ahead of that revenue inflection should we really see the bookings materialize? I know you talked to the customers for years before we We see the bookings as analysts. But, you know, can you approximate for us, is this, you know, two, three quarters ahead, or should we have it a year ahead for some of these very large programs that you're targeting?

1:04:47 Yeah, great question, Craig. And if you look at the total order backlog, and even you go back to Q1 of 2020, where the order backlog, total order backlog was about 108 million, and today it's about 57 million. and I'm talking about for technology solutions, by the way, not the total order backlog. So it's gone from about 170 at the start of 2020 to about 109 in total at Q3 2021. And the big change there, as you point out, is the technology solutions has dropped off from about 108 million to 57 million. That's really... you know, the execution against the Weichai Technology, Weichai Ballard Technology Solutions Program and the execution against the Audi Program.

1:05:35 And really what we see going forward is the power products heavy duty motive being the driver of growth. And, you know, you think about all these markets, we've talked about bus, truck, rail and marine, you know, where we've got bus OEMs in Europe, in North America and in China with and many others. When you look at a number of these programs, including rail and marine, they will take a number of quarters, even years, before they start to see development in the order book. But again, I want to come back to this point.

1:06:31 If I look at the order book for heavy duty motive from Q1 to Q2 to Q3 in 2021, it's up 30% since Q1. And to me, that's the real story is that we're seeing The market take-up, even with China being light, we're seeing the market take-up in Europe and the United States for heavy-duty motive, where we expect to see the lion's share of growth moving forward. So I think the question is, when will we see, what's the linkage between when the order book starts to materialize and then subsequently revenue? I think a year is about right in some of these cases. projects will take a year to execute against as customers go through hydrogen refueling stations, as they go through getting the engines into their platforms and getting ready for deployment. So we've seen that historically in the bus market and I expect to see a similar thing occurring in the truck, marine and rail market where you've got 12, potentially up to 18 months before projects go from order book to revenue.

1:07:43 Excellent. Thank you very much for that. Congratulations on the progress. Great. Thanks, Craig. This concludes the question and answer session. I would like to turn the conference back over to Randy McEwen, CEO, for any closing remarks. Great. Well, thank you all for joining us today, and Paul, Kate, and I look forward to speaking with you in the new year when we'll discuss results for Q4 2021. Thanks again. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.