Welcome to the Ballard Power 2017 Q1 Conference Call and Webcast. 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. Please go ahead..

Thanks very much, and good morning everyone. Today we are going to be discussing Ballard’s first quarter 2017 financial and operating results. And with us today, we have got Randy MacEwen, our President and CEO and Tony Guglielmin, our 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.

On today’s call, Randy is going to discuss our strategic progress to-date in 2017. Followed by Tony’s review the first quarter financial results and then we will open the call up for Q&A. But before we start just a quick note the Ballard is going to be attending several Investor Conference, is another events in the coming weeks.

Randy and I are going to be holding one-on-one meeting for business investors of the Oppenheimer Emerging Growth Conference in New York City on May 16th. Tony now be attending the B.Riley 18th Annual Institutional Investor Conference in Los Angeles on May 24th and Tony’s presentation that day will also be webcast.

I’ll be on the panel and holding one-on-one meetings with the Cowen 45th Annual Technology, Media and Telecom Conference in New York on May 31st. Randy will be attending the Roth 2nd Annual CleanTech and Industrial Growth Day in London, UK on June 21st.

And finally as we noted on our last call, we are planning Ballard Investor and Analyst Day in September in New York. So there would be further details available on that event due course. So now let me turn the call over to Randy for his remarks on our strategic progress before Tony reviews the financials..

Thanks, Guy. And welcome everyone to our 2017 first quarter earnings conference call. We had an extraordinary visit first quarter at Ballard, Q1 marks another quarter of significant incremental improvement on year-over-year revenue growth, gross margin expansion and adjusted EBITDA performance.

With additional strategic customer wins during the quarter our order books and record high providing a very strong setup through the remainder of the year. Indeed we are very excited about our outlook for 2017 and beyond.

We continue to believe, we have a compelling business model, industry-leading talent, industry-leading technology, intellectual property and the strong brand. Consistent with plan, we made solid progress against our 2017 financial performance objectives with our performance in Q1.

Highlighted by year-on-year revenue growth of 39%, gross margin improvement of 22 points to 42%, adjusted EBITDA negative of $700,000 and continued to strengthen our balance sheet with $68 million in cash reserves at the end of Q1 and no debt.

As I noted during our last conference call, we had a strong foundation for our revenue outlook in 2017 with a record $87 million of committed orders at that time expected for delivery this year. Since that time, we've made additional progress to further solidify our 2017 production, delivery and revenue plans.

Let me provide some color on our key activities so far in 2017. In the heavy duty motor market in China we closed our definitive agreement with Broad Ocean relating to technology transfer, licensing and supply agreements for the assembly and sale of FCveloCity 30 and 85 kilowatt fuel cell engines in three strategic regions in China.

This deal has an estimated value of approximately $25 million over the initial five year term including $12 million of technology solutions revenue. We also announced a further $11 million deal with Broad Ocean for supply and delivery of 200 FCveloCity fuel cell engines for use and demonstration in buses and commercial vehicles in key Chinese cities.

We expect all of these modules to be delivered in 2017. And in Q1, we announced the signing of initial supply agreement Zhuhai Yinlong Energy Group for 10 FCveloCity 30 kilowatt fuel cell engines to power buses in Beijing. We also plan to ship these 10 engines in 2017.

At this point, we now have executed initial steps in our China business model to develop an effective, heavy duty motive supply chain ecosystem in China. First, through our joint venture with Synergy we're preparing for local fuel cell stack production.

Second, we're expanding NEA production capacity in our Vancouver headquarters, and third, we're conducting technology transfer of our fuel cell engine with good coverage now in China including with Broad Ocean and Synergy. On the market demand side, we continue to see growing demand for fuel cell buses and commercial vehicles in China.

During our last call, I discussed Broad Ocean's plans to deploy more than 16,000 fuel cell vehicles. Since that time we've had another important development. Our understanding is that the cities of Foshan in Yunfu are in the process of increasing the scope of their fuel cell bus deployment plan.

As previously announced the program was initially planned to be an aggregate of 300 fuel cell buses in these two cities. Our understanding is that this program is likely to be significantly upsized. We look forward to providing an update on this later in 2017.

In addition, we continue to make great progress on important work with CRRC on two separate programs relating to fuel cell powered low floor urban trams to support China's clean energy strategy for a mass urban transit.

As expected, CRRC Sifong recently announced it's been formally awarded the contract for the planned deployment of eight hydrogen fuel cell trams for routine developed in Foshan. In our other program, we're also making great progress with CRRC Tanshan we're also starting to market fuel cell power trams in China.

China is critically important to our strategy. I personally spent a lot of time on our China trial, visit in China 25 times over the past 29 months. And last month, our Board of Directors and Executive team spent a full week together in China visiting with certain of our key strategic partners in government officials.

Included in our trials was a visit to the Yunfu fuel cell park for a tour of the factory that’s now being constructed and equipped by our Synergy Ballard joint venture for production of FCvelocity-9SSL fuel cell stacks using MEAs from Vancouver facility, as well as for the assembly of complete fuel cell engines.

It’s an impressive new facility with production and testing equipment now starting to be delivered and install. The Synergy Ballard JV is working around the clock is on track for commissioning later this year.

This trip made a significant impression on our Board members speaking with our partners and with government officials had seen the state of the market for our full life the exceptional level of commitment and activity to deployment of fuel cell technology in China.

China is not the only market, we all are seeing increase customer business developments and coding activity for fuel cell bus, commercial truck and training. We are seeing increased activity levels in each of our other key markets including Europe, the U.S. and Japan. In Q1, we also announced progress in United States.

We will be providing 20 FCveloCity 85 kilowatts engines to New Flyer for use in its 40 fuel cell buses, 10 for deployment with AC Transit and 10 with Orange County Transit Authority in California, all expected to be in service by the end of 2018.

And in Europe, the JIVE project was formally launched in Q1 at a ceremony in Cologne, Germany with the support of the 32 million Euro grants from the fuel cells and hydrogen joint undertaking.

The goal of JIVE is to accelerate commercialization of fuel cells and hydrogen technologies to the deployment of approximately 144 fuel cell buses in 10 European regions in cities. And we anticipate that the initial contracts between bus OEMs and transit agencies in several of these cities will be in place year-end.

We also expect our European OEM partners to provide a significant number of the JIVE buses, which we expect, the power. Next in terms of our Portable Power business for Protonex.

We continue to expect achievement of milestone C and the Army Program of Record for the Small Portable Unit Power portfolio that currently includes Protonex Squad Power Manager product in the current military fiscal year, which ends in September 2017 at which point the army can proceed with full rate production orders to begin large-scale deployment of the SPM Kits.

During Q1, Protonex announced certification from the U.S. government that enables power management products to be supported under the Commerce Department’s EAR99 classification. We have also now began to work another funded development program for the U.S.

Army focused on man-worn or Vest Power Managers, which also represents the substantial addressable market opportunity.

In terms of our work on UAVs or drones at Protonex we noted on our last call that flight testing using our fuel cell propulsion systems were successfully completed by a major UAV fix link platform with a leading unnamed aerospace company late last year.

And in March this year, initial flight tests were conducted by Boeing Insitu using our fuel cell propulsion system and its ScanEagle UAV platform. Results were very positive with all fuel cell requirements fully met. We're continuing our work with Insitu on demonstrations for the U.S.

department of defense and are also talking to systems integrators in relation to commercial UAV applications. So UAVs remain a promising, long-term opportunity for our fuel cell technology. In terms of technology solutions revenue, in Q1 was generated from 35 different projects, including work on five new programs.

Last week, we announced a follow on technology solutions contract that we've signed with one of our global automotive OEM customer, under which we will continue to advance the customers and the aid development program.

We continue to see increased levels of fuel cell activity from major OEMs in the automotive industry and our work with this customer is setting a road map for the integration of Ballard Technology into future generations of that company's fuel cell vehicle platform. So this is very exciting news.

Our technology solutions sales pipeline remains strong putting us on track for solid top line growth this year. Finally, we announced in the past few days appointed of Rob Campbell to the executive team as Chief Commercial Officer.

In this role Rob will report directly to me, and will have responsibility for global business development, sales, marketing, product line management and after sales service for our heavy duty motive, material handling and backup power markets.

Rob and I previously worked together for 10 years in both the hydrogen and fuel cell industry and the solar industry. Rob's hire comes at a critically important time for Ballard.

What we've been seeing in our business over the past six months is an intensified and accelerated interest in our - fuel cell solutions in each of our key power product verticals and in each of our key global markets.

Rob has extensive executive leadership experience in global sales, marketing and product line management for clean energy products in Japan, China, Europe, the United States and India. Rob also has deep knowledge of engineering based capital equipment solution sales to sophisticated customers in high growth markets.

Rob will be a complementary addition to our executive team as we enter the next phase of market growth and corporate scaling. Attendees are investors and analysts day in New York. In September we'll have an opportunity to meet our executive team including Rob.

And with that, I'll turn the call over to Tony for a review of our Q1 2017 financial results..

Thanks Randy, and good morning everyone. Our top line revenue was $22.7 million in Q1 up 39% compared to Q1 last year. Power products increased 9% driven by a 120% gain in heavy duty motive to $7.2 million largely related to deliveries into the China market.

Technology solutions revenue was up 90% to $11.5 million in the quarter reflecting work done in since in the China market. Just as exciting is a strong revenue growth is the progress we made in Q1 related to gross margin.

You know as a result of our continued focus on growing revenue from high margin businesses in particular heavy duty motive and technology solutions we achieved a 22% improvement in gross margin to 42% in the quarter. We also saw the benefit of higher overhead absorption resulting from an increase in production volumes.

In particular liquid cooled FCveloCity 9SSL, cell stacks along with MEAs as we begin to shift MEAs to our JV in China under our MEA supply agreement. It’s worth noting the Q1 gross margin from did benefit from an execution of the $20 million TS and support equipment transaction with our China stack assembly JV partner announced in Q4 2016.

For the full-year, we continue to expect gross margin in the low 30% range. Cash operating costs increased 6% in Q1 to $10 million.

As I was mentioned on our 2017 outlook call, we are increasing investment this year in our product development activities to address emerging market opportunities and to accelerate product costs reduction, as well as investing in our China operating platform.

These cost increases in Q1 were partially offset by the cost reduction we achieve last year as a result of the sale of our methanol backup power assets. Despite this increase in investments in our operating costs base, the Q1 cash OpEx level represents a continuation in the positive trend in operating leverage.

With the growth in revenue an improvement in gross margin, adjusted EBITDA improved 91% in Q1 to negative $700,000. I would also note that if not for a restructuring charge during the quarter, adjusted EBITDA was only the negative $100,000. Net loss in Q1 was negative $2.9 million of 71% improvements over Q1 last year.

And earnings per share improved 67% in Q1 to negative $0.02 per share. Cash used by operating activities improved to negative $3.1 million in the quarter consisting of cash operating loss of $1.2 million and working capital outflows of $1.9 million.

Finally in terms of liquidity, we ended Q1 with cash reserves of $68 million, 54% higher than at the end of Q1 2016 with no debt. We believe our balance sheet strength is unprecedented in the industry and positions us well to continue our growth trajectory. So with that, let me turn the call back over to the operator for questions..

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Sameer Joshi, Rodman & Renshaw. Please go ahead..

Thanks. Good morning, guys. Just diving into the gross margin issue 42 versus 30.5 in the previous quarter and I understand most of it is attributable to the technology solution revenue, part of which was from the 20 million contract.

Of this 1.7 how much of, it was from this contract?.

Yes Sameer. So I can’t comment specifically on the gross margin on the deal, obviously it’s commercially sensitive, but just to put some context on it as you say the reported gross margin in the quarter for Q1 was 42%. If we excluded the JV from the contribution of the JV an amount that we booked in the quarter.

We still would have been in the range of what I have indicated for the full-year, so we would have been sort of 30% north of 30% for the quarter even excluding that one item..

Okay, that is actually what I was getting at. Thanks. In terms of the order book I think as of December the order book was at the 87 million and Randy mentioned it is significantly improved.

Have you disclosed anywhere in your filings what the new number is?.

Yes so Sameer typically what we've done the last few years is just provide the order book number at the start of the year to provide people with some idea of the support we have moving into the year and so we started the year obviously very strong and we've announced some fairly significant wins in Q1, there are obviously other contracts that we've signed during the quarter as well, so we don't provide quarterly disclosure on the order book but we made good progress in Q1 and feel quite excited about the upcoming quarters as well..

Okay, just two more questions from me. First related to costs. In the last call of course you had outlined bunch of cost cutting measures that were already underway.

Should we expect the current level of cash operating expense to remain steady more or less during the rest of the year?.

Yes I would think more or less, there will be obviously a bit of timing quarter-to-quarter but yes we should be somewhere in the I think we said it’s in the high 30s close to 40 for the full-year, so you're right, just a little under 10 in the first quarter so yes..

And that's the cash number, right..

Yes, that's cash, that's correct, yes cash operating cost, that's correct..

Okay, so just last one from me, for Protonex the Insitu flight was successful and the press release said there are more test flights scheduled over the next year through 2017, what is the timeline of this coming to fruition and actually getting commercial revenues from this enterprise..

Yes, I think in terms of the timeline for next test flight, certainly the Analyst Day in September I think we are expecting to provide an update at that time.

In terms of commercial orders we do know that both Boeing Insitu as well as our other partner in the UAV space are now starting to look at marketing opportunities and sales opportunities including conferences.

So I think it's a longer term horizon for material commercial sales coming from this segment, but it’s a segment we're very excited about and we're making the appropriate investment to make sure that we have a strong competitive position in what we think is going to be a compelling value proposition..

So, it’s a long-term prospect..

Yes, exactly..

Okay. Thanks for taking my questions..

Thank you..

Thanks..

The next question is from Rob Brown of Lake Street Capital Markets. Please go ahead..

Good morning. I guess first on the China market, could you sort of give us a sense of the cadence of how that business develops and these orders start to ship through this year and into next year. Is it backend loaded or what sort of the things that need to fall into place to continue shipments ramp further..

Rob, Tony here. So I’ll talk about the business that we have booked or have good visibility on. So it falls into couple of things, one is we did announce that in the quarter an order for 200 units to Broad Ocean, it had started will be soon delivered. So those will be sort of spread out largely over the rest of the year.

The other significant product deliveries that we have visibility on are the MEAs going into the joint venture so we did ship a small amount of about half a million of those in the quarter, but the MEA shipments are very much due towards the second half of the year.

So you will see a ramp up in product deliveries throughout the year to China based on the orders that we have in hand. Of course, we are working on some other opportunities in China that would happen to be more second half focused..

Okay, good. And then on the MEA capacity in Vancouver.

I guess where are you at in terms of capacity or percentage of used or maybe the other way to look at it is how many units could you support out of Vancouver at this point?.

Yes. I won’t get into the unit numbers, but I will say the current capacity that we have in manufacturing today including not only China, but the rest of our global market would see us through at least to the end of 2018. So based on projected ramp up of MEA sales into the joint venture over the five-year take or pay.

We see ourselves making some investment this year, focused largely on hitting 2019 and beyond. So we are [indiscernible] at least to the end of 2018 and we are starting to make investments for the 2019 on period..

Okay, okay. Great. And then last question on the automotive market, you talked about some incremental contracts there. I guess, could you just update us on where you think the automotive fuel cell market is in terms of products moving from sort of development to launch.

How you see that?.

Sure. So just from a macro perspective. There is I think in any given quarter, any given year, you gave mixed signals. But I think in aggregate the tone has been fairly positive over the last year.

What we have seen is that there are number of global automotive OEMs that are increasing our investment and horizon for commercialization of higher volume units is much tighter than it’s been ever. I think 2020, 2021, we are starting to see a number of different automotive OEMs have product in the field.

I think [indiscernible] obviously is the leader for volume currently and we expect them ship in the range of about 3,000 in this year. They are forecasting potentially 30,000 [indiscernible] in 2020. So obviously, they are going to lead, I think the adoption curve.

But there are a number of other, the global automotive OEMs that are focused on introducing product in the 2020 timeframe. And our goal at Ballard just to make sure that some of the key players in this space, Ballard technology insight and that’s what we are working very hard to accomplish..

Alright. Thank you. I’ll turn it over..

The next question is from Carter Driscoll, FBR..

Good morning, guys. First of all congratulations all the hard work in China obviously set yourself up extremely well for this year and beyond. First question is just maybe talk a little deeply into the tech solutions business. So of the number of programs that you are doing engineering work-on.

Is the end goal to develop a component supply relationship or if you could kind of quantify the number of programs which you think that could be a potential outcome and then maybe the contribution from VW for this particular quarter? And then I have a couple of follow-ups. Thank you..

Carter, first of all good morning. Thanks for the questions. The Technology Solution business is strategically important for Ballard. I think what you will see is on Q1 is a very good illustrative example where effectively revenue split between TS and power product, so very good financial contribution.

Strategically though this business offers a lot of value to Ballard so you know there's a lot of cross leverage that occurs between these two strategic growth platforms.

So a lot of the technology development, particularly at the sub stack level, we get a lot of leverage across into you work this things under our technology solutions engineering services programs that we can use some of that information and knowhow and knowledge and inform some of our product development and power products.

So that's critically important. And then the pretty significant investment we're making on our own balance sheet for R&D.

There is opportunities longer term to leverage that not just on our own products, but offering you know component solutions, licensing and technology transfer opportunities, so that's what we've been executing against the last few years and we see that continuing going forward.

In terms of the first quarter we had 35 projects, our goal in these projects obviously is to provide customers that have their own in-house fuel cell programs typically with access to our IP and more importantly to our intellectual capital and solve some of the most difficult technical challenges that they have in their programs, where we have the expertise and the experience to resolve for them.

Long-term, we look at the opportunity to offer solutions that embed a product and component opportunities and see long-term customer stickiness. What has been really exciting over the last number of years is that a number of customers have gone through a number of phases of programs. And so we don't see a lot of churn of customers.

We typically see a customer come in, we execute against a certain scope of work with certain deliverables, perform that and then we typically see a next tranche or stage of work.

And so I think the indicators are that that trend will continue and as their fuel cell programs mature we would expect to see Ballard having a product or component supply opportunities with those customers. So fairly important.

In terms of the first quarter, high motion contributed a pretty significant portion of the revenue except of course in technology solutions in Q1, we had fairly significant contribution from the Synergy-Ballard JV, I don’t know Tony if you have any additional comment on that..

Sure, just more specifically on the contribution from the VW, it was $3.7 million interest the quarter was the amount of revenue we booked on that particular contract..

Okay and then maybe just Randy as a follow-up, is the majority of the auto work on the light duty side..

Well we've seen actually activity in a couple of areas, historically like really over the last two years a lot of it’s been auto quite a bit of it obviously recently in the last two years has been on the tram side both for CRRC Tonshan and CRRC Sifong, we've had technology solutions contribution from each of those organizations.

What we do see going forward is opportunity in commercial trucks as well and the use case is particularly where battery technologies have limitations, the use cases for commercial trucks are becoming very pronounced and we're seeing I would say fairly universal global interest now in different trucking applications where fuel cells can play a competitive role.

we expect to see some additional opportunities in TS going forward on that front..

Thank you for that, a couple of quick other ones. Within the backlog and I know you are not quoting a number and update based on what you gave the of beginning of the year, but is there any contribution from the European initiative that just got funded.

Do you have any firm backlog within that number that you are not disclosed currently?.

No. That’s not in the backlog at this time..

Got it. Maybe a question for Tony, if you could kind of put a bracket around your additional spending for the JV this year versus your own product development that you will be obviously largely conducting out of Vancouver.

Just kind of, trying to get a sense for those two buckets and then one just last follow-up if I may?.

Yes. Carter maybe just to clarify. So one that in terms of spend, in capital spend, just for clarity. So we are not making any capital investments and nor we are required to make any spends for say under JV our contribution to that JV was limited to the roughly $1 million equity contribution for the 10% interest.

So we don’t need any direct costs or any direct capital contribution. What we are spending money on the Ballard side, is we are spending this year $2 million to $3 million we identify for some capacity.

Particularly I mentioned earlier on the MEA, so we are starting to make some modest investment to expand MEA capacity, obviously that is ties to product shipments for the MEA. So we are making that investment here.

Outside of that that the only other significant investments that I mentioned this last call as well is we are spending some $4 million to fully complete or ERP this year. So outside of those two, what I’ll call significant items rest to this largely ongoing maintenance CapEx..

So you don’t, I was thinking more or like working cap in terms of the expected ramp in the SSL module side at least relative where you were last year?.

Yes. Most of the payment terms that we have particularly for the MEA, we have some fairly favorable payment terms or free payment. So really isn’t a material working capital issue with regard to the joint venture. We are getting prepaid a fair bit of the deliveries..

Okay. Last question for me. Obviously a lot of strength mobility in each of those sites. Protonex still tends to be I would say bit of a disappointment relative to initial expectations.

How importantly as achieving milestone C, Randy in terms of kind of hitting this back to, what you guys initially thought when you acquired Protonex back in 2015?.

Yes. I think that’s a fair comment, I think if you measured this in quarter rather than the years. So far, the performance has been disappointment and that’s tied in large part to the fact we expected milestone C to be achieve last year. And so we announced that last year when it was clear that wasn’t going to happen.

So for this year though, it’s fairly consistent with plan for Q1. We still have expectations for milestone C to be achieved before the end of Q3, which is the end of the government fiscal quarter. And I think that’s going to offer, if that occurs as we expected to do a lot of strategic value and financial contribution going forward.

So that’s our plan and I think the UAV application we saw that as a really interesting growth opportunity when we acquired Protonex and I think the team there has done an extraordinary job of moving that along with some really blue chip customers..

Perfect. I’ll take my last question offline. I appreciate all the comments..

Great. Thank you very much..

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

Thank you for joining us today. We look forward to speaking with you again in early August when we will discuss results for the second quarter of 2017. Thanks again everyone..

This concludes today’s conference call..