Ballard Power Systems Inc. (NASDAQ:BLDP) Q3 2023 Earnings Call Transcript

Ballard Power Systems Inc. (NASDAQ:BLDP) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems’ Third Quarter 2023 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Kate Charlton: Thank you, operator, and good morning. Welcome to Ballard’s Third Quarter 2023 Financial and Operating Results Conference call. With us on today’s call are Randy MacEwen, Ballard’s CEO; and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management’s current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I will now turn the call over to Randy.

Randy MacEwen: Thank you, Kate. And welcome everyone to today’s conference call. We began the second half of 2023 with robust revenue growth driven by deliveries in our core heavy-duty mobility markets. Our Q3 revenues are up 30% compared to the prior year period and up 80% compared to the previous quarter. At the same time, our gross margin loss is more than half, due primarily to execution and our product cost reduction initiatives and scale benefits from higher revenues. We continue to track to our full year guidance ranges for operating and capital expenses and have reduced our cash burn in the quarter and year-to-date compared to the prior year period. We continue to focus on prudently managing our costs, while making strategic investments in technology and product development programs, including product cost reduction programs as well as advanced manufacturing and manufacturing scaling and customer experience.

Consistent with focused strategic investments in our core business, we initiated a portfolio review of all current products and product development programs. Following this review, we’ve prioritized our investments in our core fuel cell stack and module programs that have leverage across our business model and target markets. We are discontinuing certain legacy products and discontinuing certain product development programs in non-core activities and markets. We’ve also discontinued any new corporate development investments. As part of this streamlining, we’ve proposed a further restructuring of Ballard Motive Solutions, which we no longer view as core, resulting in a noncash impairment charge to goodwill and intangible assets. When we made our investment in BMS 2 years ago, OEM customers were less certain on the adoption of hydrogen fuel cells in medium-duty and heavy-duty mobility applications.

As a result, they weren’t making significant in-house investments on fuel cell powertrain and vehicle integration. Therefore, a key objective in acquiring BMS was to offer OEM customers with third-party integration support to remove friction in the adoption of Ballard fuel cell engines into the vehicle platforms, while also working to optimize powertrain performance. Since that time, the market has made important and exciting shifts. Many bus and truck OEMs have increased their conviction on the adoption of fuel cells and as a result have scaled their in-house investments in fuel cell powertrain integration. They now view the scope as core and proprietary to their fuel cell vehicle platforms, including their competitive position. There’s also been a change in the market supply for more advanced vehicle controllers including power management to support vehicle OEMs. With the benefit of having secured several important customer platform wins over the past 2 years, we’re now seeing scaling leverage from existing OEM customers that have launched platforms or are working on new platforms with in-house powertrain integration.

As we look forward into our growing sales pipeline and opportunity set, we still see limited market need for niche third-party powertrain integration support as OEMs mature their fuel cell businesses and continue to increase their in-house fuel cell capabilities. We’d now like to turn to an update across our verticals, where we continue to make important progress. At Ballard, our strategy is to commercialize PEM fuel cell technology and products that can be applied across multiple market applications, where fuel cell technologies provides the strongest value proposition and where the barriers to hydrogen refilling infrastructure are lowest. These markets include bus, truck, rail and marine as well as select stationary power generation in certain off-road markets.

We’ll provide a brief update for these applications. In our bus vertical, we experienced higher shipments to our customers in Q3 compared to the prior quarter with strengthened shipments to U.S. customers. We believe these shipments are an early indicator of the momentum shift for fuel cell buses in North America. For example, the number of transit agencies in California either operating, ordered or have fuel cell buses in their decarbonization plans has increased from 3 in 2018 to 41 today. This increase has been driven by greater understanding of fuel cell bus advantages, including range, refueling time and operating rhythm consistent with legacy diesel and a growing recognition of the relative costs and operating advantages for scaling hydrogen refueling infrastructure rather than battery electrical charging infrastructure.

This is leading to higher sales activity levels in the U.S. bus market and we expect this to translate into firm orders in the coming quarters. We’re also increasingly confident in the trend for fuel cell bus deployments in Europe, as evidenced by the impressive order activity of a key customer, Solaris, in the European market. Solaris has now ordered close to 350 modules year-to-date, including our recent orders for 60 and 170 modules. This figure has over doubled the current amount of fuel cell buses deployed by Solaris and shows an improving demand outlook for hydrogen-powered fuel cell buses in Europe. Moving to the truck market. As a reminder, last quarter we announced our partnership with Ford Trucks to supply fuel cells for heavy-duty truck platforms for the European market.

We’re pleased also to see the progress of our customer Quantron as they’ve deployed 5 delivery vans powered by Ballard fuel cells in Austria with IKEA as a customer. This vehicle is the first fuel cell-powered vehicle on the road in the European 7.5 tonne segment and is an expansion of the opportunity set in the truck market for Ballard as fleet customers begin to see powertrains with longer range in lower weight classes. In rail, we had a standout quarter for customer deliveries as revenues in Q3 were 9x higher than the amount delivered in Q2. The activity was driven primarily by shipments to our customer CPKC. We anticipate shipment to CPKC of additional modules this year after we announced a follow-on purchase order for further 2.4 megawatts of modules that will power switching and freight locomotives in their fleet.

As a reminder, we’ve received orders for 3.6 megawatts of modules from CPKC prior to our announcement yesterday. We’re increasingly optimistic about the adoption of hydrogen-powered locomotives in North America given the use case dynamics as well as the lack of existing electrified rail infrastructure and given decarbonization drivers from end users and supportive policies. Outside of freight applications, our customer Stadler reached a significant milestone after it announced a firm contract for the sale of 4 hydrogen-powered trains to the California State Transportation Agency after signing an MoU roughly one year ago. Our marine vertical continues to see interest growing in short sea container ship, inland cargo and barge applications. We experienced year-over-year and quarter-over-quarter revenue growth in this segment, resulting in year-to-date revenues that have already surpassed the total reach for all of 2022.

In our stationary power market, revenue activity was slightly lower as a result of lower shipments to North American customers in the quarter. We continue to see growing interest in our stationary products and this growth is coming from data center standby power, EV charging, grid balancing and temporary mobile power solutions for construction, film and TV production and outdoor events. Revenues from our emerging market segments were up modestly compared to the prior quarter, primarily as a result of shipments to customer first mode. These shipments followed the completion of a full year of operational trials in South Africa for the first build of their mining haul truck platform during which the vehicle demonstrated full payload capacity of 300 tons, an increase in efficiency relative to diesel that enabled higher operational speeds and the capability of climbing grades while fully loaded.

We see this successful trial as an additional validation of the value proposition for hydrogen fuel cells in heavy-duty transport. We’re also excited to see our customer, Applied Hydrogen, develop a 30-ton excavator powered by a Ballard fuel cell module to begin trials and testing with one of the Nordic area’s largest construction companies in 2024. Wrapping up our vertical-based discussion and given our performance in Q3, we want to reiterate our expectation of second half revenues for the year to amount to approximately 70% of the full year total. We also want to provide an update on important policy changes in our key regions since our last earnings call. During the last few months, the European Union unveiled policies supportive of hydrogen.

The first of these is an update to the EU’s Renewable Energy Directive that sets the binding target for renewable energy consumption at 42.5% of total consumption, up from 32% previously. The directive also mandates a minimum requirement for 29% of energy used in transportation to come from renewable sources including hydrogen and provides a bonus for using renewable hydrogen in transportation to comply with the renewable energy targets. Additionally, in October, environment ministers from all EU member states agreed on a common position on CO2 emission standards for heavy-duty vehicles. In addition to the 2023 CO2 emissions reduction target of 15% already in force today, member states agreed on a truck decarbonization target of 45% for 2030, 65% for 2035, and 90% for 2040.

While the current emission regulations apply to trucks over 16 tons, these new proposed rules significantly expand the decarbonization targets for trucks applying emissions reductions to all trucks over 5 tons. Individualized emission reduction targets will continue to be calculated for each OEM. And for city buses, the agreed decarbonization target is 85% by 2030 and 100% by 2035. EU also announced the first auction of subsidies to the hydrogen bank, occurring later this month and voted in favor of the Net Zero Industry Act that aims to spur domestic manufacturing of net zero technologies. Consistent with policy momentum in the region, Europe is the largest geographic contribution to Ballard’s year-to-date revenues and represents the largest proportion of our order backlog.

The quarter also brought a landmark milestone on the policy front after the U.S. Department of Energy announced that 7 regional hydrogen hubs have been selected to begin award negotiations for a total of $7 billion in federal stimulus from the BIL. These 7 regions could produce more than 3 million metric tons of low carbon hydrogen contributing 1/3 of the U.S.’ 10 million metric tons target while unlocking more than $40 billion of investments. Of the 7 hubs, 6 have use cases aligned with our target verticals, of which 5 have targeted heavy-duty transport as a priority use case. We’re encouraged by the program’s support for the full hydrogen value chain as it will simultaneously support the availability of low-cost, low-carbon hydrogen and the adoption of fuel cell vehicles and power systems.

The industry also waits for the IRS to finalize its guidance on the tax credits available on the Inflation Reduction Act, including the 45V production tax credit. We believe these rules will provide the industry with the clarity needed to get projects past the final investment decision stage and into construction. Our business in North America continues to show momentum consistent with the advancement in policy for the region. In Q3, deliveries to customers in North America represent the largest share of revenues among our key geographic markets and we’re over double the amount recorded in Q2 supported by strength in our bus and rail verticals. Our industry is currently experiencing the most supportive policy environment it has ever seen providing us with optimism of the long-term adoption of hydrogen fuel cells.

On China, the overall China fuel cell electric vehicle market continues to lag the national targets set by the policymakers and show declining market activity in Q3. We’ve previously discussed the complicated policy environment, but believe the industry has been further stunted by liquidity constraints at local governments that do not have sufficient funds to order more vehicles and keep payment obligations current. With a total FCEV park in China at approximately 10,000 vehicles, it’s difficult to see how China will achieve its 2025 target for 50,000 fuel cell electric vehicles by the end of 2025. We know there continues to be significant scaling of renewable energy in China with a total of 172 gigawatts of renewable installations through the first 9 months of 2023, accounting for 76% of China’s total newly added power capacity.

We also note there’s a significant hydrogen project development underway in China and electrolysis companies continue to scale production capacity. These factors support our confidence in the long-term market opportunities for hydrogen in this region. By 2030, hydrogen should be a key part of the energy transition road map in China and we expect green hydrogen to play a major role in the decarbonization of transport. I’ll now turn the call over to Paul to comment on select financial highlights.

Paul Dobson: Thank you, Randy. In Q3, Ballard delivered $27.6 million in revenue, with more than 75% of our revenue coming from heavy-duty motive applications. The share of product revenues as a proportion of the total continues to climb as our increased product backlog begins to translate into higher product shipments. Earlier in the year, we outlined what our shareholders could expect from us in 2023, including the Q1 would be the trough for gross margins and we have been executing successfully. This quarter, we saw encouraging progress in our gross margin as it was minus 10% in Q3 or an improvement of 12 points compared to Q2. As mentioned by Randy earlier in the call, this improvement was largely a result of initial success in our product cost-down initiatives, scale benefits from higher revenues and a reduction in inventory provisions.

We reported total operating expenses of $36.3 million in Q3 and capital expenditures of $7 million for the same period. Given the current macroeconomic uncertainty, we have focused on reducing our cash burn as the total use of cash amounted to $34.1 million in Q3 as compared to $48.4 million in the prior year. We are maintaining our guidance for total operating expenses and capital expenditure, but now expect capital expenditures for the year to fall within the lower end of the range. We ended the quarter with $781 million in cash and no debt. In summary, Ballard is well positioned with industry-leading talent, fuel cell technology and products for our market applications, key customers and partners across our target markets, a growing product order backlog, industry-leading deployment experience and a strong balance sheet.

We are confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. With that, we will turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Michael Glen with Raymond James.

Michael Glen: Maybe just to start, Randy, can you just give some thoughts on what your market share is right now in the European bus market? And are you happy about where your market share is right now? Is there more you can do to pick up more bus customers in Europe?

Randy MacEwen: Yes. Thanks, Michael. I think right now we have approximately 370 buses in the European market operating with Ballard fuel cell engines inside. I would say our market share in terms of the total bus installed park right now in Europe — fuel cell bus installed park is probably over 90%. In terms of order intake in 2023, that number would be lower. So I suspect we’re probably around 75% to 85% market share right now for European bus order intake. We do have some new competitors emerging that are using different fuel cell technology, particularly from Toyota. Am I happy with the market share? Of course, we’d love to keep 100% market share like we currently enjoy in the U.S. But I think our long-term targets are to have very high market share in bus, truck, rail and marine.

Michael Glen: And when you look at who you’re competing against in Europe and you’re thinking about where this — what’s going on in the U.S. and the opportunity there, is it the same competitors in the U.S. market? Or is it a different competitor set that you’re up against?

Randy MacEwen: Yes. Today I would say it’s different. It may be — may see some convergence over time. You have different — first of all, different bus OEMs in Europe versus the North American market. In the transit market, New Flyer has a very strong market share, probably about 2/3 market share for the transit bus market in North America and they have the 40-foot and 60-foot articulated buses that are certified with Ballard fuel cell engines inside. And I would say pretty well 100% of fuel cell bus opportunities at this moment are going to New Flyer in North America. Europe, it’s actually quite dispersed. I would say there’s probably about 8 to 10 fuel cell bus offerings in the marketplace there. Solaris clearly is winning the lion’s share, but you have then Hool, Wrightbus, ADL, a few others.

And then there’s a couple — say probably two that are competing with us at this point, but I expect to see more as we move forward. We also have about, let’s say, about four smaller bus OEMs that we’ve signed up new orders and have initial trials in the last year. We haven’t announced them yet, waiting for larger-scale deployments from those bus OEMs, but we’re in their platforms right now. So I think we probably have something like 6 out of 8 bus OEMs that are offering fuel cell buses in Europe.

Operator: Next question comes from Aaron MacNeil with TD Cowen.

Aaron MacNeil: Paul, I’m wondering if you could share some perspective on how to think about gross margin breakeven. And specifically, I’m wondering what sort of revenue level do you require with your current pricing and cost structure to break even on a gross margin basis? And if you have it handy, how do we split that $30.3 million in terms of directly variable cost of product services versus how much is fixed?

Paul Dobson: Sure. Sure. And thanks for the question. So in the Capital Markets Day, what we laid out is that we would expect to be gross margin breakeven at some point in late 2024 sort of on a quarterly basis, not breakeven for the full year. That would be in 2025. I think that guidance, we probably make that more like we’d be breakeven in the quarter — early quarter in 2025 at this point on increasing revenues. We have about $28 million or so in sort of fixed overheads, depreciation and fixed overheads that the gross margin or the contribution margin needs to overcome. And so as we see increasing orders and increasing revenue, that’s when we would expect breakeven to occur at that time frame.

Aaron MacNeil: Got it. In the prepared remarks, both of you mentioned the reduced cash burn in the portfolio review. Can you sort of provide an early indication on what the operating expense and CapEx guidance could be for 2024? And to be clear, I can appreciate that you’re not going to provide a range, but I’m more just looking for directionality.

Paul Dobson: Sure. So for this year, our cash burn, I’ll just talk a little bit about the cash burn this year because I think it’s worth noting. So our total cash burn year-to-date is about $36 million lower or better than last year year-to-date. And that comes from a variety of sources. One is higher interest earned on our cash balance. So with rising interest rates, we’ve been able to earn higher interest. We’ve also scaled back on working capital a little bit. So our operating activities, cash from operating activities is about $25 million better than last year. We have increased our CapEx spending by about $15 million year-on-year, but we have lower — as Randy mentioned, lowered corporate development by about $27 million.

So our total activity from investing activities is down by $12 million. So the $12 million plus the $25 million from operating activities gives us about $35 million, $36 million better year-to-date cash runway. Our guidance — we were to provide guidance for 2024. We’re in the middle of producing our plan and finalizing our strat plan. But broadly speaking, we would expect operating expenses to be largely in line with 2023, I would expect. And then the CapEx guidance to be probably — could be $5 million to $10 million lower than it is this year. Sorry, one quick qualifier on that. So our operating expenses to be broadly in line with this year, with the exception of inflationary increases of about 3%.

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

Rob Brown: Just wanted to follow up on the U.S. bus market. I think you gave some stats about more transit agency looking into or working on fuel cell projects. Just want to get your sense on how that — the U.S. market develops, how you see it in terms of rollouts? And what’s sort of the time line of the U.S. market at this point?

Randy MacEwen: Yes, Rob, thanks for the question. I think one of the really interesting developments has been, as I mentioned earlier, this recognition, not just of the range advantages and the refueling time advantages of fuel cell buses, but also the advantages around scaling infrastructure. And there were 2 recent conferences in the U.S. bus conferences that really saw a number of transit operators highlighting — this wasn’t Ballard or New Flyer. This was actually the users of the buses highlighting the relative advantage of scaling infrastructure for fuel cell buses versus battery electric buses. As an illustrative example, Philadelphia Transport Authority, which has about 1,300 buses in their fleet highlighted on 2 separate slides, one slide that showed the availability of fuel cell buses to on a range basis meet all of the routes and it can meet 100% of the routes, whereas the battery electric buses, they were showing can satisfy roughly 20% of the routes.