Thank you for standing by. This is the conference operator. And welcome to the Ballard Power Systems Third Quarter 2016 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.

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

Thanks very much, and good morning everyone. Today’s call is to discuss Ballard’s third quarter 2016 financial and operating results, and to provide some context on recent strategic developments. With us today we’ve got Randy MacEwen, our President and CEO; and Tony Guglielmin, the Chief Financial Officer.

We are going to 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.

So, today Randy is going to review the Company’s continued progress and the execution of our business strategy this year. Tony is then going to discuss Q3 performance across key financial metrics. And after that, we’ll open up the call for questions.

Just quickly to note the Ballard is going to be attending a couple of investor conferences through the remainder of this year, specifically the LD Micro Discovering Emerging Companies Main Event in Los Angeles on December 6, an event that’s sponsored by Roth Capital Partners; and we’ll also be attending the Fourth Annual ROTH Industrials Corporate Access Day to being held in New York City on December 13th.

There is more information on these on our website. So, I’d now like to turn the call over to Randy..

First, our stack joint venture deal; second, our strategic collaboration with Broad-Ocean; and third, progress on fuel cell bus commissioning.

As you recall, on July 18, we announced a joint venture transaction with Guangdong Nation Synergy for the establishment of an FCvelocity-9SSL fuel cell stack production operation in the City of Yunfu in China’s Guangdong province. I am pleased to report that we announced the closing of this transaction yesterday.

This is a historic milestone in our China strategy. As previously communicated, our localization strategy in China is risk-adjusted, capital-light and IP-protected.

We expect the stack assembly joint venture to deliver a number of high-value benefits to Ballard including attractive near-term and long-term deal economics and cash flows, positive market reception, scaling of MEA production with guaranteed volumes and capital efficiency.

And Ballard is not exposed to any compromise of our core intellectual property since we’ll maintain MEA production at our headquarters in Canada. As of closing yesterday, Ballard has received initial payments totaling $10.9 million, primarily related to the fuel cell stack assembly license and technology transfer agreement.

The transaction has an estimated minimum value to Ballard of $170 million over five years and includes these key elements.

Ballard is expected to receive $20 million in Technology Solutions revenue for technology transfer services, production equipment specification and procurement services, test equipment, training and commissioning support in relation to the establishment of the production line in Yunfu for the manufacturing assembly of our 9SSL self fuel stacks with most of this revenue expected to be recognized in 2017.

The joint venture in Guangdong Synergy Ballard Hydrogen Power Company Limited or JVCo as we’ll refer to it has been registered to undertake the stack manufacturing operations. With JVCo owned 90% by Synergy and 10% by Ballard.

And on commissioning of the stack production line expected in late 2017, Ballard will be the exclusive supplier of membrane electrode assemblies for each fuel cell stack manufactured by JVCo with minimum annual MEA volume commitments on a take or pay basis totaling in excess of $150 million over the initial five-year term from 2017 through 2021.

After commissioning of the operation, the joint venture will have an exclusive right to manufacture and sell Fcvelocity-9SSL stacks in China.

Exclusivity will be subject to certain performance criteria of the joint venture including compliance with the code of ethics, compliance with Ballard’s quality policy, compliance with Ballard’s branding policies and achievement of minimum annual take or pay MEA volumes, compliance with payment terms and compliance with certain intellectual property covenants.

Ballard will have the exclusive right to purchase stacks and subcomponents manufactured by the joint venture for sale outside of China. This provides us with increased optionality on how we address future 9SSL demand needs and related capacity expansion. Ballard will contribute approximately $1 million for our 10% interest in JVCo.

Under the terms of the JVCo agreement, Ballard has the right to appoint 1 to 3 JVCo Board or Directors. I was appointed to the Board effective as of closing yesterday. Ballard has zero rights over certain key JVCo decisions and no further obligation to provide future funding of the JVCo.

On the operation side, I am pleased to report the joint venture is making excellent initial progress. The parties are working well together. The JV production building is constructed. The facility layout has been completed, equipment has been specified and long-lead equipment has been procured.

So, let’s now move to our Broad-Ocean strategic collaboration. And as a reminder, Broad-Ocean is headquartered in Zhongshan and listed on the Shenzhen Stock Exchange with the market cap 28 billion RMB.

Broad-Ocean is a leading, global manufacturer motors, alternators, starters, controllers, inverters, and drivetrain systems for a variety of applications including HVAC, appliances and electric vehicles, including buses, commercial vehicles and passenger cars.

The company produces more than 50 million motors annually for blue chip customers on five continents including King Long, Youtong, Van Hool, BAE Systems, SAIC Motor, FAW, Dongfeng, Cummins, Caterpillar, Carrier, and Trane. Broad-Ocean is a global business with operations in China, the U.S., Mexico, Germany, the UK, Russia and Australia.

Beyond strong organic growth, Broad-Ocean has been very active in M&A activity including the acquisition in 2015 of Prestolite, a U.S. based manufacturer of medium duty and heavy duty starters and alternators.

In 2015, it also acquired Shanghai Edrive, a leading developer and manufacturer in China of motors, controllers and electric drivetrain systems for EV buses and EV commercial vehicles. Broad-Ocean has four business units, electric vehicles; rotating electrical for vehicles; HVAC; and EV operations platform.

Its fourth business unit, EV operations platform operates a commercial vehicle license business in China through which it buys new energy vehicles and subsequently leases these buses and commercial vehicles. Broad-Ocean is now expanding this business to include fuel cell vehicles.

And this is translated in the initial order by Broad-Ocean for 10,000 fuel cell buses and commercial vehicles from OEMs FAW and Dongfeng special vehicles, all of them expected to have Ballard fuel cell technology inside. We saw signed strategic collaboration framework agreement with Broad-Ocean.

We expect to yield additional exciting growth and cost down opportunities. We expect Broad-Ocean to become a manufacturer in key Chinese markets of Ballard designed fuel cell engines. Of course, on August 18th, we closed the $28.3 million equity investment by Broad-Ocean in Ballard.

With this investment, Broad-Ocean holds approximately 9.9% of our outstanding shares and is now our largest shareholder. We’re thrilled that Broad-Ocean is aligned with the interest of all our shareholders and also joined United Technologies, Anglo American Platinum and Nisshinbo Holdings as strategic shareholders.

As I mentioned previously, I believe the strategic partnership with Broad-Ocean is one of the most important developments in our corporate history. I feel even more strongly about this today, given the progress we made over the past few months. We are making good progress with Broad-Ocean on the commercial agreements.

For our third update in China, let’s turn to the status of the fuel cell bus program in Foshan and Yunfu including initial deployments. Just over a year ago, in September 2015, we announced the planned deployment of 300 fuel cell powered buses in Foshan and Yunfu.

Our program consortium [ph] has made considerable progress over the past year including localization of Ballard designed fuel cell engines, establishment of a fuel cell bus manufacturing facility, local procurement activities, development systems integration capabilities, national permitting of a fuel cell bus platform, preparations for hydrogen refueling infrastructure and development of our China’s service team.

Over the past month, 24 fuel cell buses have now been commissioned, 12 in Foshan and another 12 in Yunfu, 10 of which were commissioned at a ceremony held one week ago in Yunfu followed by two additional buses in the days since then.

These deployments marked the largest deployment of fuel cell buses in China’s history and is a largest aggregate fuel cell bus fleet in the world. We’re very pleased with the performance and partnership among the consortium members including systems integration activities and service support.

I’d like to now move to updates on other business activities. We’ve had a few developments in the portable market of our Power Products platform. First, we previously expected to achieve Milestone C in the program of record for our Squad Power Manager or SPM product by September 30th. September 30th of course is the year end for the U.S. government.

Unfortunately, this has been delayed into the next fiscal cycle which has pushed out the timing of expected business for this market. As a result, we now expect Protonex to deliver significantly lower revenue in calendar 2016 than we had previously forecast.

At the same time, given the strength and over-performance of other parts of our business in 2016, we’re still tracking to our planned overall 2016 financial performance. There are two positive developments at Protonex on the UAV front. First, we received notification from the U.S.

Commercial Department that our family of fuel cell propulsion systems are now designated as EAR99 compliant. This expands the market opportunity for fuel cell solutions in UAV applications beyond USA Military and opens the path for commercial export and deployment in a host of civilian unmanned vehicle applications.

I will say, since this designation was achieved, we received significant inquiries globally. And second, our Protonex computer [ph] system is now proceeding into the next phase of qualification by Insitu, a Boeing company in their ScanEagle unmanned aerial vehicle.

We expect flight testing to be completed in the coming months and look forward to providing an update during our year-end conference call. We remain confident in the long-term prospects for growth of the Protonex family of products including both its power managers and UAV propulsion systems.

While the timing issue is impacting the short-term prospects for the Squad Power Manager sales, the U.S. Military is still keen to acquire this capability and remains very bullish on the longer-term opportunities available to Protonex in both areas of its business.

During the third quarter, we also signed a distribution agreement with Toyota Tsusho, the trading giant in the Toyota Group with an annual revenue of approximately $76 billion. Toyota Tsusho will be a distributor of Ballard products in Japan both within the Toyota Group and more broadly to other customers in Japan.

I am pleased to report we are already encouraged with the initial progress made to-date under this distribution partnership with Tsusho. As you can appreciate, there is some market sensitivities on what information we can share at this time but we hope to be able to provide a more detailed update during our next call.

Moving to our Technology Solutions growth platform, we had a major partner development in this business in Q3.

Audi, which is now responsible for the Volkswagen Group’s fuel cell program has issued a purchase order to accelerate certain fuel cell development activities including development of a next generation fuel cell stack, all to advance the timeline for series production.

We’re also seeing extensive coding activity in our Technology Solutions business including for automotive fuel cell stack development programs globally. We expect to have an update for you during our year-end conference call.

So to summarize, we made steady, measured progress in the first three quarters of 2016, both on our strategic positioning and financial performance. I am pleased to report that we expect this momentum and positive trajectory to continue in the fourth quarter. We expect to see strong top line growth and net cash inflows in Q4.

We also expect to exit the year with another record sales order book to support a strong outlook for 2017.

We have high convection and confidence in the quality of our business including our market positioning, our people, our technologies products, and intellectual property, our customers and partners, the strength of our brand and the strength of our financial position.

We are working hard to build and grow our business, to deliver on our customer promises, to build the sustainable platform and to creating shareholder value. And with that, let me now turn today’s call over to Tony..

Thanks Randy, and good morning, everyone. I am going to provide a very brief review of key financial metrics for the third quarter. Top line revenue as Randy mentioned was $20.6 million in Q3, up 29% year-over-year result of 54% increase in power products revenue to $14.7 million.

We did see a slight decrease of 9% in Technology Solutions revenue to $6 million in the quarter but this was due primarily to timing of work on the VW contract. Looking at the Power Products platform in Q3, Heavy Duty Motive revenue improved by 34% to $7.5 million, driven by the delivery of fuel cell stacks and power modules in China.

This represents partial fulfillment of contracts we signed last year and in Q1 this year primarily to support deployment of fuel cell buses. In addition, we shipped 6 heavy duty modules to the U.S. for the start of program during the quarter. Portable power generated revenue of $3.1million in Q3.

As you’ll recall, we acquired our Protonex subsidiary in the fourth quarter last year. So, this was a new source of revenue for us in the quarter compared to the last year. Q3, portable power revenue was driven by Squad Power Manager Special Operations Kits shipments to the U.S. Special Operations Command.

Material handling revenue in the quarter was down slightly by $100,000 or 2% to $3.3 million. Higher stack shipments to Plug in the quarter were offset by a lower average selling prices resulting from a shift in product mix.

Consistent with our repositioning in the Telecom Backup Power marketing in Q2 with the disposition of our methanol fuel cell backup power assets. As expected backup power revenue in Q3 was modest at $0.8 million. This was comprised primarily of revenue from stack shipments to CHEM in Taiwan for use in its backup power systems.

On a year-to-date basis, top line revenue is up 50%. This is underpinned by 78% growth in power products led by an increase in Heavy Duty Motive products of 96%, the addition of $8.5 million in portable power product revenue and 15% growth in material handling revenue. Technology Solutions revenue was also up 13% year-to-date.

Turning to gross margin, gross margin in Q3 was up significantly quarter-over-quarter by 6 points to 31%. This reflected a shift in mix toward higher margin Heavy Duty Motive and portable power products as well as improved manufacturing overhead and related cost absorption as a result of higher unit volumes.

Gross margin for the first nine months also improved significantly year-over-year at 27%. up 10 points versus the same period last year, again due to a shift in product mix and higher manufacturing efficiency.

Cash operating costs were up 25% in the quarter to $8.4 million, primarily attributable to the inclusion of operating costs for our Protonex subsidiary. Adjusted EBITDA in the quarter was negative $1.5 million, an improvement of 37%, reflecting a higher revenue and gross margin in the quarter.

On a year-to-date basis, adjusted EBITDA improved 5% to negative $11.6 million. Net income in the quarter was negative $4.2 million, a 1% decrease from Q3 2015 and earnings per share was negative $0.03 in the quarter, unchanged from the same period last year. Cash used by operating activities in Q3 improved 88% to $0.5 million.

This consists of a cash operating loss of $2.4 million, partially offset by net working capital inflows in the quarter of $1.9 million. Finally, in terms of liquidity, cash reserves at September 30th were very strong at $68.1 million. This includes the $28.3 million equity investment from Broad-Ocean that closed in August.

As Randy mentioned, we also received $10.9 million related to our transaction with synergy for the establishment of the joint venture and fuel cell stack manufacturing facility in China. And this includes approximately $9 million in net cash that was received on closing yesterday.

To sum up then, Q3 was another strong quarter in terms of revenue growth, gross margin improvement, cost management and further strengthening of the balance sheet.

With our strong performance year-to-date, on the topline combined with our robust order book, we are anticipating significant full year revenue growth with strong upside potential in Q4 and going into 2017. And finally, just one small housekeeping item I wanted to mention at this time.

Ballard is listed on NASDAQ under the ticker symbol BLDP and on the Toronto Stock Exchange or the TSX, under the ticker symbol BLD. The TSX has offered an opportunity for dual listed companies to move to a four letter ticker and we are planning to begin using the BLDP ticker symbol on the TSX beginning in January 2017.

More information will be issued on this topic in the coming weeks. So with that, let me turn the call back to the operator for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from the line of Rob Brown with Lake Street Capital Markets. Please go ahead..

Good morning. Congratulations on a nice quarter..

Thanks Rob. Good morning. .

Maybe just step back and I’d like to get your overview on the sort of the strategic situation in China.

You gave a good update on the partners you have, but maybe give a sense of do you feel like you’ve got the partners in place to kind of attack that market and maybe get your view on kind of an update on what that market opportunity is, kind of near-term and long-term?.

Sure. And Rob, its’ Randy here. Just a reminder, there are kind of six key macro drivers that are really impacting the market there, the first is climate change, and this is particularly punctuated with China signing on to COP21, so the first time China embracing a global accord like this. The second is air quality.

And of course last year the Beijing red alerts in December really punctuated this issue in China. The third is you’ve got growing urban populations and related to this is the fourth which is a growing need for mass urban transit.

The fifth, you’ve got a situation in China where you’ve got heavy imports of oil that’s adversely impacting the trade balance. And so, there is a impetus for China to lower consumption of oil and address their trade balance issues.

And then six, also important to China, they’re trying to transition of from a manufacturing economy to technology and innovation. All of these macro drivers, Rob, are informing government policy. And so, it’s got 13th 5-year plan, one of the key five elements there is really related to green the economy.

You’ve got new energy vehicle regulations and incentive schemes and particularly fuel cell incentive subsidies.

So, these are all driving market adoption there, and we’re seeing unprecedented activities, both from companies as well as from cities and provinces to position to address these six macro drivers in a way that’s helpful to their own economic development. So, that’s important context to understand, I think first of all.

In terms of market adoption there, we are -- it’s still early of course and we’ve now deployed 24 fuel cell buses, 12 in Foshan and 12 in Yunfu. With those 12 buses in Foshan, we have a systems integrator there, we Re-Fire and the 12 in Yunfu have a different systems integrator HiTech.

[Ph] So, we’ve -- us and our partners have kind of mitigated some risk there. It’s great to have two systems integrators that are now fairly relatively speaking experienced now integrating these.

We’ve built at our own service team in China as well with service representing it from South to North in Foshan, Shanghai and Beijing and as well putting in place inventories, spare parts and preventative maintenance equipment. So, we’ve done the work necessary to help the deployment here of fuel cell buses in China..

Okay, great. Thank you for that overview. That was very good. And then specific to Broad-Ocean, I think you talked about plans to two fuel cell engines.

And I guess if you could update us on sort of the thinking there, how that is deployed and how that looks and for what market?.

Sure. So, the strategic framework agreement we signed back on July 26, contemplated a number of different commercial activities.

One of the key ones, the prioritized one was to effectively do a license and technology transfer for module assembly, very similar to what we did with Zehe [ph] in Rugao very similar to what we did with Synergy in Foshan, Yunfu.

The five markets we’re targeting there are Shanghai, Beijing, Chongqing, and two prioritized markets of Wuhan and Shandong province. So, those five markets have been targeted.

We’re advancing discussions with our partner Broad-Ocean on the deal structure, the terms and conditions and as we commented early, we expect to have the conclusion on that late this year or early 2017. .

Okay. And then last question on gross margin, you got nice trend there.

What’s sort of your view of gross margin going forward, sustain here or move around depending on mix and I guess what’s the ultimate gross margin target you are thinking?.

See, as we sit here today with the Q3 results and as we look forward into 2017 with the signing of the JV agreement, particularly that has a meaningful technology transfer component to it as well as potentially the Broad-Ocean transaction that Randy mentioned that should enable 2017 margins to continue to fairly robust level with the growth in Technology Solutions including some non-China opportunities.

So from that perspective, I would expect that we would going into the year maintain similar levels that we’re seeing now with even some potential upside. Longer term, of course it is very much a function of mix and the increased manufacturing productivity. So, we said in the past, our goal was to achieve 30%.

I think we’re obviously successful in achieving that. But we’ll probably have a bit more to say about that as we get into the outlook call next year. But I would feel pretty comfortable we’re at a fairly sustainable rate going into 2017..

The next question is from Carter Driscoll with FBR. Please go ahead..

Maybe just shifting gears a little bit, and realize there’s not a lot you can say about this issue but do you envision at least attempting to approach that market in the similar fashion to China in terms of potentially establishing local distribution or how important, let me ask it different, would be the establishment of the distribution channel that you have in China in terms of supplying the Japanese market or would you like to replicate that? And I have a couple of follow-ups..

Yes. Good morning Carter.

And just to clarify, was your question how are we approaching the Japanese market in terms of the go to market strategy?.

Yes, really, I guess I am just trying to get a sense and I realize that you said in your prepared remarks, you are somewhat limited on what you can say today.

But I am trying to just get a framework, how important is it to have local distribution? It seems to be a fairly close market to the foreign companies in a lot of cases, similar to the Chinese market.

I am just trying to envision from a high level whether it’s a similar type of strategic approach to Japan that you envision the recent distribution agreement with them? And then the second part is if it is not that case, would you look to supply potentially the market from the Chinese manufacturing facility that you hope to have up and running at the end of 2017..

Okay, great. So, thanks for the clarification. I appreciate the question. So, Japan, like China, like Europe, like the U.S., all different markets need to be looked at independently.

And I agree with your sentiment that Japan is sometimes part of it as a close market; and it’s very important to have strong local partners there that understand the market dynamics and are able to distribute it. You know there are number of large trading houses that typically dominate the market.

We’re fortunate not to be aligned with I think one of the key brands, not just in Japan for industrial applications but particularly for applications that are relevant for fuel cell motive. And so, we obviously announced the distribution with Toyota Tsusho. They are very excited about this opportunity.

We see opportunities across a number of applications including material handling, Heavy Duty Motive, some new applications that we haven’t talked about. And of course there is a still stationary applications in Japan which unlike other markets have seen a much higher penetration rate.

So, we think we have the right partner there; we’re seeing very strong initial signals. We were hopeful to have something to announce before this call, but the sensitivity in that market dictated that we hold some discussion there until later on as things get a little more evolved.

In terms of the model, right now we contemplate selling equipment into that market through that channel that’s manufactured here in Vancouver. It’s possible that may change in the future but nothing definitive today to comment on..

Okay. Thank you for that. May be just a clarification with Broad-Ocean.

Is there a target number of cities once you go beyond these -- the initial, I guess five, I guess there are some cities and regions as you’re talking about; is there a second phase plan there or is that -- is the 10,000 targeted those first five opportunities? I am just trying to get a sense of if you’re successful where you can expand within China specifically with Broad-Ocean?.

Sure. These are manufacturing locations we are referring to. Of course, the sales from those manufacturing bases will be in appropriate areas around those manufacturing sites. So, when you’re in Shandong province for example, you’re covering the entire province, not just the key cities there; similarly in Chongqing.

I mean, there is a number of cities in the Sichuan province area that are available for that market as well.

So, in each one of these cases, you have many cities that are strengthening the same challenges of air quality, the same challenges of growing need for mass urban transportation and incentives that are promoting new energy vehicles and new energy transportation.

And so, we see lots of opportunity for these five manufacturing bases in a number of different cities and provinces..

Okay. And then, maybe just the last question before I turn it over. Can you give us an update on the progress in Europe, maybe some of the funding initiatives that are helping to move some of the HD Motive opportunities that you have here? It sometimes falls under the radar screen. So, any update there would be appreciated. Thank you. .

Yes. So, I think we’ll have more to comment on the next call on this front. I’ll make two comments. We’ve seen very good progress on the funding side and very good progress on the OEM side.

So, very pleased with the work our European team is doing; and Karim Kassam, our VP, Commercial has been heavily engaged on this front as well with the OEMs, the bus OEMs in Europe. And I feel like we’ve made very significant progress there. And as commercial deals get finalized, we’ll be able to provide more details..

The next question is from Craig Irwin with Roth Capital Markets. Please go ahead. .

Good morning and thank you for taking my questions. So Randy, recently, one of your senior sales people gave a presentation where they said, there’s about 300 fuel cell buses shipped to-date and that Ballard expects that over the next 18 months, you’ll ship a similar number, something in the range of 300 fuel cell buses.

Can you may be shed a little bit more light on the markets you expect to drive these kind of volumes and the relative mix of units going into your Chinese JV versus fuel cells that are stacks or completed engines with the most sort of dollar value on them? Thank you..

So first of all, the reference of 300 I assume was to the 300 fuel cell bus program in Foshan and Yunfu. We commented on the initial 24. I do want to be a little cautious to make sure people understand. This is still early. We’ve got 24 fuel cell buses operational today.

Those buses have gone through a 2000-hour test trial and are now entering in revenue service. We’re tracking daily availability of these buses and so far the numbers have been very strong, very encouraging.

But like all global deployments, we need to make sure that there is a break-in period and that the learnings from initial systems integration activities and initial commissioning inform the next tranches. So, we think this is a thoughtful way in terms of providing visibility on when x number of buses are commissioned in each market.

I think we prefer to comment after commissioning, just given that it’s still early. And as this becomes a bit more predictable, we can get a little more advanced forward-looking..

Okay. So, maybe just to ask a question slightly a different way.

Would you expect essentially all of that 300 to come from your Chinese relationship or would you expect increasing activity in the North American and European markets to make a contribution towards that number?.

Yes, again, my expectation would be just 300 fuel cell buses was related to the Foshan and Yunfu program.

We have provided modules for that program; going forward modules would be assembled locally in Yunfu and Foshan for that program where Ballard is providing stacks and then ultimately the stacks supply will transition to the joint venture and Ballard will provide this. We’re also seeing though an increase in activity in Europe and in the U.S.

And I think we’ve commented a little bit historically -- previously on some of the opportunities we see there. There is no material update from the last time we had the discussion, but things are progressing and we expect to see those programs both in Europe and U.S. yield some results that are very favorable to Ballard..

Great.

And then, just to be perfectly clear, it’s 300 plus then, given the activity in the North American and European markets, right, just so I understand?.

Yes, absolutely..

That’s a very, very strong number. Randy, one of the things you’ve spent a lot of time with the team in the last year just really figuring out where you’re going to take out cost, how you’re going to pull forward the timeline to profitability and you’ve taken a lot of actions there that have made a real impact on the P&L.

Can you maybe describe the scope of available things in the future, how broad you see it is right now, whether or not this is as much of a priority as before and if you could please update us on the basic metrics and timeline for Ballard to achieve profitability?.

So, we’re a still relatively early staged company and not comfortable providing guidance yet, obviously. But, you can look at the numbers and see that revenue is scaling, gross margin is improving, and we’ve been very disciplined on the cost side.

All those are pointing to an acceleration from where were a year ago to achieving initially EBITDA positive and longer term profitability. So, we’re very pleased with the trends, and we expect those trends to continue. And I think we’ll see very good progress in the fourth quarter and very good progress in 2017 as well.

In terms of cost down you mentioned, there are two aspects to that of course, one relates to operating costs. We obviously had an increase in our operating cost with the acquisition of Protonex. However, we made significant reduction in our cost this year.

It’s no coincidence that our gross margin is stronger and our cost base is better positioned since our repositioning of the backup power business as an illustrative example. So, we’re being disciplined in all of our markets and product activities to make sure that our cost structure is appropriate.

On the product costs side, we continue to make very good progress there and I am very pleased with the work we’re doing on the supply chain side with the work we’re doing on -- now starting to see some scale and the efficiencies we’re seeing, improvements we see in first half yield.

[Ph] So, there a lot of metrics that we’re tracking internally here that our not only supporting gross margin expansion that we’ve seen but we expect to see improvement going forward as well..

Great. And then, last question if I may, I guess Plug probably has what 13,000 plus stacks out in the field today.

This has to be setting off alarm bells across the entire electric lift truck industry, the people better getting to action and have a product for this market, because the market looks like it could very easily convert with large percentage over the next couple of year.

As incumbent supplier to Plug, can you may be frame out for us the level of activity that you’re seeing from traditional forklift vendors, electric lift truck vendors and show us the approximate number of customer relationships you have in that area, entities that you ship product to and your vision for how Ballard participates in this market over the next couple of years?.

Maybe let’s start with the latter part, the vision. So, we see two streams of activity here. One is where you have systems integrators and Plug dominates this segment obviously that take effectively a forklift, remove the battery and put in place a fuel cell system.

And Plug’s done extraordinary job there building very exceptional market position there with as you mentioned a very high installed base. So, Plug dominants that segment; we’ve been fortunate to be a supplier to them and continue to be a supplier to them on the stack side.

The second stream of activity we see, as you mentioned is that there is opportunity for forklift OEMs to start looking at purpose-built forklift. We’ve had one illustrative example of that occur with Hyster-Yale engage this market.

And early for them currently but they’ve done fairly good job here already to start looking at not just the product but market penetration trials. So, in terms of market opportunity, we expect to participate in both those opportunity, both systems integration activities as well as forklift OEM.

I think we’re better positioned than anyone to participate on the forklift OEM opportunities, including stack and potentially system supply. And we’re not going to comment on the number of parties that we’re talking to at this point. But, I will say, you’re right, the market activity has increased.

There is heightened interest because of the great job Plug is doing with market penetration and that’s causing other forklift OEMs to carefully review this marketplace, understand their strategy and start to make investment..

The next is from Amit Dayal with Rodman & Renshaw. Please go ahead. .

Just a follow-up on your commentary on these 200 power modules that you’re shipping to Synergy for the initial deployments in Foshan.

Do you think Synergy sort of continues to take delivery on a timely basis; so will they probably wait till the production facilities on the ground are completed and then speed up production of those modules?.

So, just to clarify, what we’re referring to here is 300 fuel cell buses in Foshan and Yunfu. Some of those buses will include Ballard assembled engines but almost most of them, the lion share of them will be assembled at the manufacturing facility in Yunfu.

And that’s what we spent the last year supporting Synergy on a technology transfer to enable them to do that. So that manufacturing line is up today. Right beside that line is a fuel cell bus assembly line that’s been erected in the last year as well. So, there is a lot of activity that’s occurred there.

And we’re going to start to see modules and buses assembled in Yunfu that start to move out into the marketplace. They are moving very quickly, as they do in China. And as I mentioned, the systems integration activities and the service support is already in place. So, we expect to see a scaling of that activity in 2017..

Got it.

So, this 300 becomes part of the 150 million that is part of the take or pay agreement you have with them?.

No. So, the 150 million is a supply of any aids to our joint venture company with Synergy that will produce stacks. The 300 modules is different and the modules ultimately may secure sourcing of stacks from the joint venture but that won’t occur until the joint venture is up..

That’s helpful actually, that really clarifies things for me.

Then in regards to the 10.9 million received from the closing of the JV agreement, how will this be recognized? Will this be sort of Technology Solutions revenue that you will see in the fourth quarter or maybe in 2017, any color on this? And if any of this is baked into consensus estimates for you guys for the fourth quarter?.

Yes. So, the transaction that you referred to you that amount will be booked -- of the 20 million that will be booked as technology; the bulk of that will be Technology Solutions revenue. Again, it’s across -- it’s a technology transfer, this in test stand and other technology solution related revenue in there.

The vast majority, the bulk of that will be 2017 now. So, I wouldn’t be looking for much in the fourth quarter. It’s really a 2017 revenue item. So, I think about it for next year as opposed to for Q4..

And maybe, Randy, just a last question with all of this catch now, maybe it’s too soon to ask but what are the plans to potentially leverage all of this to continue diversifying the portfolio? Are we thinking of any initiatives organically, acquisitions, how do we plan to take advantage of our strong position now and continue to grow the Company?.

So, we think we’re in a fairly unique position in the industry with not just the improving financial performance and strategic positioning, but a very strong cash position we have with no debt and a fully funded business plan. So, this does allow us opportunities to look at M&A and other investment activities.

We do that as an ongoing review of our business; we’ve had a number of different opportunities we’ve looked at and passed on in a number of cases because it didn’t meet our M&A selection criteria. There are some candidates in the portfolio right now that we’re looking at, but nothing to comment on at this time..

The next question is from Anne Crowe with Edison Investment Research. Please go ahead. .

I’ve got a couple of questions, one related to the Toyota relationship, and I appreciate they are commercial sensitivities surrounding that. So, I don’t mind if you push me back and say we can’t really talk about that. But I was wondering about the application that you’re looking with regard to new applications.

You referred to stationary applications in Japan.

And I was sort of thinking, does that mean possibly going slightly underground [ph] and residential projects or would this be something totally different, if you can comment?.

So, I think we’ll push back on you as you suggested, and we’ll wait. There are a new motive and new stationary applications that we’re seeing interest in, in that marketplace. We need to let the process work itself out and be able to provide an update on appropriate time..

I was just going to add just to remind as well, we talked about the repositioning of our existing business. Of course, we exited the methanol; we still do retain the hydrogen backup power product that was previously the Dantherm, now Ballard Europe product. So, there is obviously an opportunity with our existing product, both in Japan and elsewhere.

That’s the hydrogen, the 2 and 5 kilowatt. But what Randy alluded to is, there are other opportunities beyond our existing product in the stationary power as well..

Okay. Thank you. My second question was related to the hydrogen backup power. It’s clearly all the excitement about the buses in China, very easy to have a look at.

But I was wondering what demand, what like at the moment and whether telecom tower operators will anymore response to the opportunities presented by that?.

Yes. So, as we reviewed the strategic positioning last year, the one market that found the most challenging was the telecom. The traditional cell phone sites and the take-up on that market was much slower than expected. So that was one of the reasons we stepped away because that was the traditional market, particularly for the methanol fueled one.

The hydrogen backup power market, the biggest opportunity that we see for that product still remains in Europe and the Scandinavian countries. And it’s less about cell -- traditional telecom and more about broadband, emergency network where we’ve had some success with Dantherm Power, or when we acquired Dantherm Power.

So, I would say in the near-term, most of the opportunity will be in the critical infrastructure opportunities in the Scandinavian, European markets. That’s where we’re focusing. Telecom I think is a longer term play but it’s been a much, much slower market to develop and really an area of focus right now, particularly having stepped out of methanol..

The next question is from Jeff Osborne with Cowen & Company. Please go ahead..

Hey, good morning guys. And nice to see the results improve here. Randy, I was wondering, you’ve talked about the fourth quarter picking up momentum.

Can you just kind of walk through the difference pieces, the segments as you report the revenue where you see the strength?.

Yes, I think we’re going to see a strength in the Power Products platform, particularly Heavy Duty Motive, our Technology Solutions business is going to be very strong in Q4. So, those will be the two areas I’d highlight..

And is the tax solutions all just a rebound at Audi, given the extension or the acceleration there or is there some of the 10.9 million that Amit has asked about? I am just trying to get which particular programs within Tech Solutions actually are picking up steam..

Yes. So, certainly, the Audi program will see heightened activity in Q4. We’ve already seen that and there may be opportunity as well for some of the joint venture revenue to come into the $20 million to come in Q4. We’ll see how that plays over the next month or two, still too early to know for certain.

So, I would say those are probably the key areas..

Got it. And then how do we think about the margin profile of that $20 million that comes through? It’s not really a license fee, it’s my understanding but I assume it’s not a 100% margin.

But how should we think about it comparing, comparing and contrasting relative to the Tech Solutions revenue stream that we’ve seen mainly dominated by the Azure [ph] a couple of years ago as well as more recently VW Audi program..

So, the $20 million, it does include a variety of revenue sources, part of it is a tech transfer. So that would be a more traditional hours, number of hours to help enable our partner to get set up. There are some tests equipments and various other equipments in there as well.

That portion of it would be at our traditional -- more traditional TS margins we’ve talked in the past and potentially 40% range, again that would be on a cost plus basis. There are though -- there is an element of that -- there are some licensing, there is an element of licensing in there as well though as part of the transaction.

So, that would be -- it wouldn’t be at the 100% margin but it would certainly be at the higher margins.

So, I would say as you think about the blended margin, it’s probably in the 40% to 50% would be comfortable, if you’re just trying to come up with a swag for the margin on the total of that, maybe a little higher if we’re -- depending as we’re successful just in -- as we’re kind of negotiating the final contracts..

And if we are to spread that out kind of ratably across calendar 2017 with maybe a little minor portion in Q4, is it reasonable too?.

Yes, that would be reasonable..

Perfect. And then, Randy, just you pushed back on one of the other analyst questions, maybe just to push back on one thing you said. So, you’ve I think highlighted twice on the call that you have a fully funded business plan but in response to Greg’s question, you weren’t in a position to give kind of what a breakeven revenue level is.

A lot of companies, management teams talk about a fully funded plan, often times that doesn’t come into fruition. Certainly, you’ve improved the balance sheet, you’ve improved the OpEx profile and margin profile, that’s clearly evident.

But at what point do you think you’ll be able to share what the fully funded plan looks like and when you would hit that EBITDA breakeven level?.

Sure. I thought the question was more around the timing of when we would be profitable. And we have our views on that internally but we’ll obviously want to take few more quarters completed so that we can feel confident, absolutely confident when we provide that type of public visibility.

In terms of the breakeven point that we’ve commented before in a range of $30 million a quarter at the EBITDA, adjusted EBITDA level and that hasn’t changed..

Yes, I just wasn’t sure with the improvement in gross margins. So, gross margins then at that kind of run rate would be here in the low 30s as the current reported results.

Should that kind of continue levels moving forward, especially given Tech Solutions HD Motive is taking up steam?.

Yes..

Yes, think about $30 million as kind of the ballpark member a quarter..

Got it. And last question, as you mentioned that the portable market wouldn’t be to plan because of the squad power not achieving the program of record milestone.

Can you just remind us what the plan was and what you think the current run rate would be? And then, should we think that this program of record would be achieved relatively soon or maybe a year from now towards the close in the next fiscal year and lastly as part of that answer may be you can work in why you didn’t achieve it.

I know answering for the U.S.

government might be difficult but if you’ve got any feedback of the situation, problems that the product might have, and that’s why it didn’t get approved?.

Sure. So, there is couple of points there. First on why we didn’t achieve it. Forecasting timing of the U.S. Military contract signing is a difficult science and arts. We had received indications that would have been received in the fiscal quarter; it wasn’t.

It’s not a function of any issue with the product, the product is performing extraordinarily well in the field. We’ve got very high customer feedback in terms of performance and very high reliability numbers in the field. So, they’re very comfortable with the product, are the first to actually move it to program of record.

So, it becomes not just a nice to have but a must have. And of course, the whole reason why we’re looking to secure program of record in getting the Milestone Sales portion of the program of record is also we do have consistency from the U.S. Military on these orders and particularly the Army. And so, that’s the whole objective here.

Unfortunately, we didn’t achieve it in the fiscal year, still high level of interest from the customers to do this. I think we’re probably looking at the next fiscal year which ends next September 30th as kind of the next end post for the time table. Hopefully we are able to do it sooner than that, but no guarantees.

So, a lot of discussion, as you can imagine between our Protonex team and the decision makers in terms of the process and the next steps to move to that milestone. In terms of the financial performance, we had originally expected to see very strong growth in this year, in part resulting from that program of record milestone.

So, we expected to see in the range of $20 million of revenue from Protonex in 2016. The current run rate, if you look at it through the first three quarters we’re kind of running around $3 million a quarter, we’d expect to see something similar that in the fourth quarter.

Tony, anything you want to add?.

No, I don’t think so. I think it’s very much going to be a question of timing. The only thing I’d add is that obviously we’ll -- by the time we get back together with our outlook call in February, we hope to have -- we’d hope to have a little bit more precision on our estimate on timing. But I share Randy’s view.

Right now it’s at best we think is probably -- it would be kind of mid-year before we get confirmation on that..

Perfect, that’s very helpful. I appreciate all the responses, may be just quick question on that.

Does the lack of hitting the $20 million; was there any earn out on that deal; I forget the exact terms that perhaps you don’t have to pay?.

Yes. No, there is no earn out. .

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

Thank you for joining us today. We look forward to speaking with you again in early March next year where we’ll review full year 2016 results and also discuss our 2017 outlook. Thanks again everyone..