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Edited Transcript of BLDP.TO earnings conference call or presentation 31-Oct-19 3:00pm GMT

Q3 2019 Ballard Power Systems Inc Earnings Call

Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ballard Power Systems Inc earnings conference call or presentation Thursday, October 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Robert Guglielmin

Ballard Power Systems Inc. - CFO & VP

* Guy McAree

Ballard Power Systems Inc. - Director of Marketing & IR

* R. Randall MacEwen

Ballard Power Systems Inc. - CEO, President & Director

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Craig Edward Irwin

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* MacMurray Davidson Whale

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Welcome to the Ballard Power Systems Q3 2019 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

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Guy McAree, Ballard Power Systems Inc. - Director of Marketing & IR [2]

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Thanks very much. Good morning and welcome to Ballard's Third Quarter 2019 Financial and Operating Results Conference Call. Today, we've got Randy MacEwen, our President and CEO; and Tony Guglielmin, our Chief Financial Officer on hand, and they will be speaking during the call.

I'm going to be making -- we will be making forward-looking statements that are based on management's current expectations, beliefs, assumptions concerning future events. Actual results could be materially different, so please refer to our most recent annual information form and other public filings for a complete disclaimer and related information.

Today, Randy is going to comment on important industry events and Ballard's most recent strategic progress. Tony is going to review Q3 financials, and then we'll open the call up for questions and answers.

Over to Randy now.

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [3]

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Thanks, Guy, and welcome everyone to today's call. It's an exciting time in the hydrogen and fuel cell industry. The global focus on electrification and mobility has increased momentum behind fuel cell power, which we anticipate will positively impact our long-term outlook and financial performance. For Ballard, through the first 3 quarters of 2019, we're progressing against our full year plan as set out at the start of the year. For Q3, financial results aligned with our expectations, including delivery of $24.8 million in revenue, gross margin of 25% and adjusted EBITDA of negative $7.2 million. We ended the third quarter with a strong balance sheet with cash reserves of $153.4 million.

With year-to-date results and a significant order book, we are reiterating our previously stated full year 2019 outlook. Importantly, we expect strong growth in 2020 and beyond. We're well positioned to continue our leadership as the market for fuel cell electric vehicles commences commercial scaling.

On our last conference call, I spoke about important policy positions favoring the decarbonization of mobility in both China and Europe along with key industry developments that are building momentum in the fuel cell market. As examples, we highlighted material investments from each of Weichai, Bosch and Cummins.

Since our last conference call, several other notable developments have served to add further momentum. Included among these are CNH industrial, which currently owns IVECO trucks, announced its intention to enter into a strategic and exclusive heavy-duty truck partnership with Nikola and make a $250 million strategic equity investment in Nikola.

Cummins and Hyundai announced an MOU to jointly develop and commercialize battery electric and fuel cell powertrains. They also announced a plan to produce 700,000 fuel cell systems annually by 2030. Daimler trucks CEO announced the company's plan to begin series production of fuel cell-powered trucks by the end of the 2020s.

The California Air Resources Board launched CORE, The Clean Off-Road Equipment Voucher Incentive Project designed to accelerate the purchase and use of zero-emission off-road freight technologies.

Continental, a major global Tier 1 automotive supplier, stated that fuel cells will become increasingly relevant in the auto industry, particularly in long-distance passenger cars and trucks.

And finally, I had the opportunity to present at the Hydrogen Energy Ministerial Meetings in Japan last month, where more than 30 nations, regions and organizations pledged to deploy 10 million fuel cell electric vehicles and 10,000 hydrogen refueling stations globally over the next 10 years.

Now with this backdrop of continued encouraging policy and industry signals in the third quarter, at Ballard we made solid progress in the execution of our corporate strategy. Further to the launches earlier this year of our next-generation LCS fuel cell stack and FCmove power module, each featuring significant improvements in performance and cost, we are now seeing growing market interest in these products following positive product performance in initial bus tests. We are encouraged with market and customer engagement and the positive feedback.

As we look to 2020 and beyond, we expect this to translate to new customer orders and deepen relationship with existing customers and partners. We continue to innovate and make important investments and progress in research, technologies, MEAs, plates, stacks, modules and advanced manufacturing to continue to improve performance and reduce costs.

We made great progress in our advanced manufacturing plan in our Vancouver operations, including progress on new equipment, automation and processes. The new manufacturing equipment will significantly reduce cycle time, creating a 5x increase in production capacity to meet the growth of our next-generation LCS platform. Increased automation in the MEA manufacturing process will increase quality, improve yields and combined with design for manufacturability, assembly and service in our FCmove modules will further reduce product cost.

We're also making measurable progress with our technology transfer program to the Weichai-Ballard joint venture. Key deliverables in 2019 have focused on stack and module technology transfer, staffing the JV, training, construction of the JV manufacturing facility, site layout, plant infrastructure build-out, manufacturing equipment specification, procurement and qualification and localizing the supply chain, all to support the JV manufacturer of next-generation LCS stacks and next-generation fuel cell modules for bus and commercial truck markets in China, with certain activities starting late this year and full commissioning scheduled in the first half of 2020.

We are pleased with the strong and transparent collaboration between Weichai and Ballard. We believe the Weichai-Ballard JV will significantly strengthen the China market capabilities for zero-emission PEM fuel cell buses and commercial trucks with forklifts to follow.

We also want to report on recent purchase orders in the marine and mining markets. For 12, heavy-duty fuel cell modules all planned for delivery in 2020. Subsequent to Q3, we received an order from BEHALA, a German ports and logistics specialist for 3 of our FCveloCity 100 kilowatt modules to power what we expect to be the world's first zero-emission push boat, called the Elektra. The Elektra, which is planned to go into service by the end of 2020, will transport goods between Berlin and Hamburg.

We also recently announced an order from Anglo American for 9 FCveloCity 100 kilowatt modules, which will power an Ultra-class mining truck with Anglo American platinum. Anglo American, a strategic investor, intends to run the truck as a 2020 demonstration at one of its South African mining sites. Following this demonstration, Anglo is planning deployment of these megawatt-scale fuel cell-powered trucks at various mining sites around the world. The Anglo American purchase order is the first that we've received for a mining truck application. Notably, Weichai also has other collaborations in this market for hydrogen-powered heavy-duty mining trucks with the carrying capacity of over 200 tonnes. So we're seeing growing market interest in off-road heavy motive applications including mining trucks.

I'll now turn to a brief update on 2 key markets, China and Europe. Let's begin with China, where momentum continues, and we'll start with some industry growth statistics in that market in 2019. There are currently over 4,500 fuel cells, buses and commercial trucks in China and with Ballard technology inside the majority of them. This is up from about 1,500 fuel cell vehicles in China at the start of 2019, and many of these vehicles are undergoing high visibility trials.

In aggregate, the vehicles in China with Ballard technology inside have accumulated more than 13 million kilometers of service. The total number of bus and truck platforms on the Ministry of Industry and Information Technology's list of accredited fuel cell vehicles has increased in 2019 from 75 to 132. And the number of fueling stations has also increased from 21 to 36 with another 38 currently under construction.

Cities such as our Shenzhen and Foshan are starting to establish plans to procure only zero-emission public transit buses going forward.

Importantly, the industry is continuing to await the next phase of the national government subsidies. Based on our information, including discussions with our partners, we expect continued strong support by the China national government for the adoption of fuel cell vehicles and hydrogen fueling infrastructure, including a subsidy program we expect to extend through 2025.

We're also pleased to report that the Gaoming Tram Project, which has been under construction for the past 30 months is now at the commissioning stage in preparation for commercial operation. Phase 1 of the project is now complete, consisting of 6.5 kilometers of track with 10 stations. Phase 2 will ultimately extend the line to a total of 17.4 kilometers with 20 stations.

Commissioning activities began last month. And once complete, the Gaoming line will be the world's first fuel cell-powered commercial tram service. Five trams manufactured by CRRC and powered by Ballard fuel cell modules will be available for commercial service. The project management team, led by Foshan Metro, plans to operate 4 trams during peak hours with departures every 10 minutes. Each tram consists of 3 train bodies, has capacity for 394 people, can travel up to 70 kilometers per hour and can run for 125 kilometers between refuelings.

In terms of the European market, on our last call, we discussed a couple of important developments, including the EU's landmark legislation, restricting CO2 emissions from trucks, buses and trailers as well as our announcement of the new H2Bus Consortium. The H2Bus Consortium represents an exciting step towards large-scale deployment of fuel cell electric buses in Europe.

Current consortium members include Ballard, Nel hydrogen, Everfuel, Wrightbus, Hexagon Composites and Ryse Hydrogen. And we're planning the deployment of 1,000 fuel cell electric buses and associated hydrogen infrastructure in European cities by 2023 at commercially competitive rates.

Now since our last call, the consortium had a setback with Wrightbus, where Wrightbus, which is a bus OEM, entered into administration. This has caused some unexpected challenges for the consortium.

Notwithstanding, we're pleased to report that Bamford Bus Company announced last week that it's completed the sales process to formally acquire certain Wrightbus assets in order to continue operating the business going forward. We have a very good relationship with Jo Bamford, and I personally met with him last week in London. He confirmed that Bamford Bus Company is excited to grow Wrightbus and plans to prominently feature fuel cell buses as a key differentiator. Jo Bamford is also Chairman of Ryse Hydrogen, one of the H2Bus consortium partners, that's contracted to provide a hydrogen refueling station to support transport for London fuel cell buses. So there's obviously a synergy here between Bamford Bus and Ryse Hydrogen for integrated bus and refueling offering in the market.

And finally, in Europe, we made great progress during the quarter in establishing our Marine Center of Excellence at our engineering, manufacturing and service facility in Hobro, Denmark. The Marine CoE will design and manufacture heavy-duty fuel cell modules to address zero-emission powertrain requirements for the fast emerging marine industry. We have substantially completed construction of a new motive fuel cell system manufacturing hall with expected annual production capacity of more than 15 megawatts of fuel cell modules. All CoE development work will be designed to meet European marine codes and standards and other applicable certification requirements.

To conclude, the shift to zero-emission mobility is underway and FCEVs will play an integral role. At Ballard, we believe we're positioned at the center of this transition with highly disruptive fuel cell technology. We have a solid setup for Q4 and for strong growth in 2020. Our visibility to long-term commercial scaling in multiple large addressable markets continues to improve. We believe our strategic plan anchored by a vision to deliver fuel cell power for a sustainable planet will deliver significant shareholder value over the long term.

And with that, I'll turn the call over to Tony to briefly review the third quarter financials.

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [4]

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Thanks, Randy, and good morning, everyone. Top line revenue in Q3 was $24.8 million, up 15% year-over-year. Power Products revenue in the quarter was down $3.2 million or 28% with Technology Solutions revenue up $6.4 million or 61%. Within Power Products, Heavy Duty Motive was down 21% or $1.3 million due primarily to a year-over-year decline in product shipments to China customers.

Portable Power UAV also declined $1.8 million, reflecting the disposition of the Protonex Power Manager assets in Q4 last year. Material Handling revenue was up slightly to $2.8 million with Backup Power down slightly to $0.2 million.

Moving to Technology Solutions, the increase in revenue to $16.8 million in Q3 was due primarily to increased revenue from the Weichai-Ballard JV Technology Solutions program. Gross margin for the quarter was 25%, a decline of 5 points from Q3 last year, but up sequentially from 14% and 23% in Q1 and Q2 this year, respectively. The year-over-year decline in Q3 gross margin reflected a shift in product and service revenue mix, including the loss of the higher-margin revenues related to the disposition of the Protonex Power Manager assets last year.

Cash operating costs were down 12% in Q3 to $9.3 million due primarily to lower product development cost as we transition resources to the Weichai-Ballard JV program along with decreases in sales and marketing and G&A costs. And we do expect an increase in cash operating costs in Q4 and into 2020 as a result of new hires made through the year.

Adjusted EBITDA in Q3 was negative $7.2 million, a decline of $3.5 million compared to the same quarter last year. Adjusted EBITDA in the quarter did include Ballard share of losses in our joint venture investments in China of $3.2 million, largely related to the 49% investment in the Weichai-Ballard JV as it continued to establish operations through the quarter. On a year-to-date basis, Ballard's share of losses in our JV investments in China total $8.1 million.

Net loss in Q3 was $9.8 million compared to net loss of $6 million in Q3 last year and earnings per share were negative $0.04 in Q3 compared to negative $0.03 in the same quarter last year.

Earlier in 2019, we did receive purchase orders from Wrightbus to power buses for deployment in London and Aberdeen under the JIVE funding program.

Adjusted EBITDA, net loss and EPS in Q3 did include an impairment loss on accounts receivable of $1.5 million in relation to power modules that had been shipped to Wrightbus as partial fulfillment of these POs.

Cash used by operating activities was $9.6 million in Q3 consisting of cash operating losses of $2.4 million and working capital outflows of $7.2 million. The increase in working capital outflows was largely attributable to higher accounts receivable of $6.5 million as a result of timing of revenue and customer collections and higher inventory of $6.1 million to support shipments in Q4 and into 2020.

In terms of liquidity, we ended Q3 with cash reserves of $153.4 million. And we ended Q3 with a strong order backlog of $199.6 million, a decrease of $12 million from the end of Q2. And our order book for deliveries in the next 12-month period at the end of the quarter stood at $123.6 million, down $3.1 million from the end of Q2.

Now the decreases in order book and order backlog also reflect the removal of $1.8 million related to power modules built but not shipped to Wrightbus as expected in Q3 against purchase orders already mentioned.

I'd also like to note that effective September 23, Ballard is now part of the S&P TSX Composite Index. Approximately 240 of the 1,500 companies listed on the TSE are included in the composite index. And in addition, in Q3, Ballard was named to the inaugural TSX30, a new program recognizing the top 30 performing shares listed on the TSX over the 3-year period from mid-2016 to mid-2019. Both of these represent important capital market milestones for Ballard.

With that, let me turn call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Rob Brown with Lake Street Capital Markets.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [3]

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Rob, it's Tony. Yes, a couple of things. First, as you may recall, we announced earlier this year the $44 million order to Weichai for a significant number of parts, kits and the like to start assembling in China. Now most of those are being shipped in Q4 and into Q1 of next year. So that will certainly help with our Q4 outlook as well as into Q1 of next year. So that's one of the significant items.

The second is we are expecting to see a fairly significant pickup of deliveries into Europe next year as well, particularly in the bus market. So those are probably the 2 key areas that are driving the order book and our outlook. In terms of where some of that upside, certainly, we do see some more upside in China. I think Randy mentioned earlier, the resolution and announcement on the subsidy, I think, will provide a bit of visibility and stability that could help accelerate some China pickup. And as well, we do see some upside still in Europe. I think the resolution or pending resolution on the Wrightbus situation will help provide some visibility into the H2Bus Consortium. And again, just recalling, at this point, we're not putting -- there's nothing in our order book related to the H2Bus Consortium deal. So that -- we see that as a potential upside for later in the year. Those will be the kind of the key areas that I'd focus on.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [5]

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

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [7]

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Yes. I think what we'll see is by the end of 2020, we'll have good data points on how the vehicle is operating. And I think we could probably see in 2021 some future orders on that. We've had a long relationship with Anglo. We've done a number of different discrete pieces with Anglo looking at different market opportunities. They're very focused on the opportunity for platinum in the fuel cell market. And so I think it's a very credible opportunity we have here with them as we look forward.

So I think more important than that is the fact that whether it's construction equipment, mining equipment, other off-road applications, there is a new interest in the opportunity for decarbonizing what would be opportunities that batteries cannot address, in my opinion.

So what's also interesting is I kind of look at, I would say, over the last 12 months, as you go to industry conferences and trade shows, there has been a noticeable shift in my mind in terms of the focus of attention on Heavy Duty Motive generally. And I think that's for 3 key reasons. One is that the value proposition for fuel cells are strongest where you have heavy payload, a need for long range and a need for fast refueling. Secondly, these are applications where typically you have use cases that enable centralized depot refueling or corridor refueling. So the barrier to entry on the refueling side is much lower than applications like pass car, where you need to distribute refueling infrastructure. And also in Heavy Duty Motive, you're seeing use cases that have a disproportionate contribution to GHG and other remissions.

So from an environmental perspective and CO2 footprint perspective, you are addressing key contributors to those emissions. So I think there's really a noticeable change in the industry and you're seeing that with the companies engaging in Heavy Duty Motive applications. The near term focus will be bus. We'll see truck starting to move in the next 5 years. I think you'll see a lot of progress in the commercial truck market in the key geographic markets. And of course, rail and marine were starting to see early applications there. In all cases here, we're talking about new markets with new demonstration programs. So they'll take time, of course. But now, we're starting to see the signs of additional off-road applications in construction and in mining.

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Operator [8]

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

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

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Maybe just following up on a couple of Rob's line of questioning. I mean, broad strokes with Weichai, how do we think about modeling that into -- it sounds like the second half of '20 would be the revenue ramp and then through '21. Any sense of beyond the commissioning and sort of preparing everything? Is their sales force preselling the product? Is there any engagement with potential customers or their own trucking unit? Just how do we think about the revenue ramp?

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [10]

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Yes. So Jeff, thanks for the question. So I'll ask Tony to comment on the Weichai implications, the JV implications for the financial model. Before we do that, just on the customer side, there is a lot of progress that's occurred already. So there are about 100 Weichai buses that are in operation testing right now in Shandong province.

So there is a lot of work that we've done along with partners to get product in hand, get systems integrated, platforms on the road, hydrogen refueling infrastructure in Shandong as well. So there's a lot of testing going on already. So that's very encouraging. And some of that testing is with, what I'd call, captive Weichai subsidiaries including companies like Zhongtong Bus.

So we're, I think, very encouraged with the progress in 2019 with Weichai with the captive customers they have in the Weichai group as well as their relationship with the major bus and commercial truck OEMs in China.

So in terms of -- you also asked about staffing on the sales side. We have a sales team at the Weichai-Ballard joint venture that's actually being led by the former sales manager of Ballard in China. So we have a lot of effort being applied against making sure that as the JV comes up, not only will we see opportunity for modules and for stacks with Weichai and their investee companies, but also other companies in the market that are keen to see frankly, I think, the leading stack in the market with LCS.

So I think it's still early, but I think it's going to be a very strong platform, a lot of sales activity occurring, marketing activity occurring, a lot of activity occurring on getting vehicles -- looking at getting vehicles certified in 2020. So there's a lot of work to do, but we're actively working against it. Tony?

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [11]

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Yes. And Jeff, just to the cadence of revenue coming associated with the Weichai JV, just I guess, refer back to that -- the previously announced $44 million purchase order, which is to shift parts, kits and modules to the joint venture. There was a modest amount shift in the quarter, I think, about a little over $1 million, but I would think about that roughly of that about 30% of it is in -- will be roughly in Q4 and then the other 70% will be spread over the first half of next year.

So that's with regard to the $44 million of previously announced equipment purchases. And then behind that as the JV is up and running, our product shipments shift -- will shift rather to MEA deliveries. And so we would anticipate starting in Q3 and Q4 that MEAs will start being shipped. As to what the dollar value is, we were kind of assuming it will kind of carry on at a similar roughly flat cadence and potentially pick up obviously as the JV starts moving more product through its facilities. So I hope that's somewhat helpful.

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [12]

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

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

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

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [14]

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In terms of marketing, Jeff? Sorry, was that the question?

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [15]

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Exactly. The gross margins. As that shift transitions over to MEAs, how do we think about that mix?

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [16]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [17]

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

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [18]

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

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Is that -- two more lines of questioning. One is on -- I think 2 years ago, you had a guidance call in December and then you decided to cancel that for understandable reasons. Is that still the strategy? Is that -- the formal outlook for next year would be provided maybe in February or how do we think about that?

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [20]

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Yes. So maybe you're confusing us with another company. We haven't done that since I've been here over the last 5 years, but we will of course in February provide our outlook for 2020.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [22]

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Yes. So it's a very interesting market in my opinion. In the longer term, what I think is very exciting is these and you know these well, Jeff. Obviously, as the [V Asus]trans autonomy, connectivity, electrification and shared mobility. And as we look at future cars that are safer and lower cost, much higher utilization as you look at autonomy and shared mobility platforms and urban environment. We think the powertrain of the future in those applications are going to require long range and fast refueling. And so we're very encouraged with the long-term outlook.

In terms of what does that mean for 2020 -- 2021, 2022 through 2025, let's say, I still think the pass car market will be fairly muted in terms of volumes. With respect to our key customer, Audi, they have publicly announced they're looking their series -- small series production vehicles being launched in the 2021, 2022 time frame. So we're obviously very well positioned with that partner and supporting them extensively on the stack side.

So I think there are a number of companies, auto OEMs, Tier 1 suppliers as well that are looking at the fuel cell pass car market. And I expect to see more announcements likely in 2020 on this front.

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Operator [23]

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The next question comes from Amit Dayal with H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [24]

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Just on the prior line of questioning for the ramp expected -- revenue ramp expected in 2020, are we looking to potentially hit sort of breakeven levels of revenue by the end of the year next year?

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [25]

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

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [26]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [27]

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Yes. Just to be clear, the Weichai-Ballard collaboration is for buses and commercial trucks in China as well as forklifts in China. It doesn't preclude us, for example, for automotive in China and other opportunities in the China market. It also doesn't preclude us from looking at partnerships and collaborations outside of China, which we've done. Of course, in the forklift market, Weichai has about a 45% ownership position in KION and has facilitated a very helpful introduction there. And so that's a market that we're looking at longer term with Weichai.

So I would say the Weichai relationship is helping in a number of markets. The other thing is when we look at collaboration particularly in the European theater with companies that are now looking at fuel cell commercial vehicles and frankly, many of them weren't looking at this market even 2 years ago or a year ago. The Weichai relationship we have in China, I think, is going to -- is proving to be highly valuable in our discussions with these type of companies. And I think a key other benefit is the scaling effect that occurs in China and the ability to cost reduce balance of plant components and potentially translate the volume cost reductions to the European market as well.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [28]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [29]

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So we've done an extensive amount of work in 2019 in Vancouver preparing for this. So we have specified and ordered a number of different pieces of new equipment that really look at tach time for each process up in our manufacturing process overall for MEAs, for plates, for module assembly. And certainly by early next year, if you come and visit us in Vancouver, it would look quite different in our manufacturing environment than it would have a year ago.

And so a lot of upgrades in automation and in some cases moving, for example, 1 up procedures to 2 up and 8 up. So we are seeing very significant improvement in our processing times, in the capacity we have, in the quality. We recently installed a new sealing process and it's very, very recent, literally a few weeks ago. And I know in the last week, for example, we had 2 shifts that had 100% yield using that processing equipment.

So there's a lot of work that's occurred already in 2019. So to think -- amid to that's happening in 2020 would be the wrong characterization. So a lot of investment on the CapEx side and process engineering and we'll see more of that in 2020, which is going to set us up very strongly as we look at growth in the European market and the China market.

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [30]

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

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Operator [31]

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The next question is from Craig Irwin with Roth Capital.

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Craig Edward Irwin, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [32]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [33]

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Craig, thanks for the question. So I think there has been some confusion over the last 2 or 3 weeks, or however long it's been, given a letter that was published in the China market. And I think some people have misinterpreted that letter in my opinion, which was indicating that the fuel cell subsidies would be finishing at the end of 2020 for fuel cells. That's always been the case. The fuel cell subsidies were planned originally to conclude at 2020.

Our intelligence suggests that there will be a new subsidy scheme introduced and that will be highly supportive of fuel cells and hydrogen refueling infrastructure. There will be a number of key regions that will be highlighted initially. And we believe -- this needs to be confirmed, of course, but our intelligence suggests it will run through 2025.

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Operator [34]

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The next question is from Mac Whale with Cormark Securities.

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MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [35]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [36]

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Mac, thanks for the questions. So to be clear, of course, the MEA production is occurring here in Vancouver and we have invested significantly in 2019 in upgrading our MEA processes to, as I mentioned, reduce cycle time, reduce costs, increase capacity. So while it's not -- the MEA production is not dedicated just to the JV, it's all of our consolidated global MEA production. A very significant portion of it will be allocated to the JV starting in 2020.

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MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [37]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [38]

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Yes. So -- okay. I understand the question. So a couple of things that I want to highlight is that we have -- just in buses operating globally right now, we have about 16 million kilometers of in-revenue service. When you add the China buses and trucks, you're probably close to 25 million, 30 million kilometers of in-revenue service, using Ballard modules and stacks and MEAs. So we have really proven out the durability of our MEAs. And in London, for example, we have stacks that have now been operating for about 37,000, 38,000 hours of operation.

So our MEAs are very well proven out. However, there's significant opportunity still at the MEA level for cost reduction. So whether you're looking at membrane, whether you're looking at GDL, whether you're looking at catalysts, reducing platinum loading or going to non-precious metal catalysts, there are lots of opportunities and we're working on all of these fronts.

So while we have a commercialized, highly durable, I think, world-leading MEA, world-leading plates, world-leading stacks and modules, there is continued work on cost reduction both at the material level as well as supply chain. And as we move from the MEA to the stacks and the modules, significant work on balance of plant components as well.

So I would characterize our MEA today as commercial. But in terms of cost reduction, the cost reduction isn't just going forward coming from scaling and volume and process improvements in the production facility. It will also be coming from a number of other levers.

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MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [39]

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Okay. And just remind me what the total capacity for MEA is at the current operation?

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [40]

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Yes. Mac, it's Tony. So we've been producing over the last couple of years, although it's been a bit up and down, somewhere around 1 million MEAs a year. We -- over the course of the next sort of 6 to 12 months as we complete this capital expenditure on capacity, we'll be up around 5 million MEAs in terms of capacity by the end of the year.

I was just going to add to the Randy's earlier point. You were asking about the MEAs and balance of plant. I think where the joint venture in China initially and to the extent we have a similar opportunity in Europe, it's really the balance of plant where the Weichai JV can make the most significant impact in terms of procuring supply chain.

Right now, we -- as you know, we make MEAs here. But fundamentally, the balance of plant is -- we buy it from our current existing supply chain and we're expecting that the Weichai JV will add significant value in driving down costs particularly in the balance of plant. That's where we see the synergy between us and the JV will drive MEA costs down here. They'll take care of the balance of plant to the extent they can use their supply chain particularly in China.

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MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [41]

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Okay. And so you don't -- and I guess part of the question is around evolution of components. Like you're not expecting that with something that's essentially commercial that you start making commercial-related adaptations to say the MEA, which don't find their way into the other products. You've got 1 MEA in fact and you're going to -- advances in that are fed through all your products, whether they be something commercial in buses or into the marine, which might be -- or rail, which might be more early stage.

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [42]

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So I think you could see a scenario in the future where we have perhaps 2 different MEAs. One is standardized across all the heavy and medium duty motive applications and one is focused on the pass car market. I think that's the likely outcome you'll see, but there will be a lot of synergies between the 2.

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Anthony Robert Guglielmin, Ballard Power Systems Inc. - CFO & VP [43]

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Absolutely.

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MacMurray Davidson Whale, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [44]

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Okay. Okay. So you get so technical on it, but it's -- I'm just curious because you're at the beginning of it. You're in the sort of phase where you're moving from a lot of -- a bunch of smaller projects that -- something that could be much more -- will be larger over the next few years. So I'm wondering your sort of strategic view on how you actually ramp that.

Turning to those other smaller projects or earlier stage projects. There was -- last time I went through the plant, there were a lot of projects that were sort of behind -- protected from for IT reasons. It was pretty packed in there. What level of capacity do you have to add more partnerships where you would require that sort of space? Are you tapped out in that facility or is that part of what's going on in this reorganization?

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [45]

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Yes. So thanks for the question. There are about 5 facilities that we're using here in the Burnaby, Vancouver area. One of the things we're doing is reconfiguring space in the 2 key facilities, which are about 115,000 square feet each to actually see a little bit of consolidation from the 5 into the 2.

We also, last year, had a subtenant move out of the facility, so that gave us a lot of additional space that we're using. We've grown a lot as well. So it's not just projects, but you need people to staff those projects. And globally, we're probably around 950 people globally at Ballard now. So it's a very sizeable employee base.

And when you look at our space here, there's no doubt we're constrained, but there's a lot of work going on in 2019 and 2020 to optimize our space particularly for production and scaling of production. So where it used to take us a certain amount of footprint for processes, we're reducing and shrinking that footprint. But if we had a white piece of paper with a new facility, we probably would have things a little bit differently. So we've had to accommodate the space we have.

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Operator [46]

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

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R. Randall MacEwen, Ballard Power Systems Inc. - CEO, President & Director [47]

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Thank you for joining us today, and we look forward to speaking with you later in Q1 next year when we discuss fourth quarter 2019 results and 2020 outlook.

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Operator [48]

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