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Operator: Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Fourth Quarter and Full Year 2022 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. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Kate Charlton: Thank you, operator, and good morning. Welcome to Ballard’s fourth quarter and year-end 2022 financial and operating results conference call. With us on today’s call are Randy MacEwen, Ballard’s CEO; and Paul Dobson, Chief Financial Officer. We will be making forward-looking statements that are based on management’s current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. Before we discuss the quarter, I would like to provide an update on our Capital Markets Day. We are pleased to announce that our Capital Markets Day is scheduled for June 13, 2023 in Vancouver and will also be viewable online. We will be providing additional information over the coming months. I’ll now turn the call over to Randy.

Randy MacEwen: Thank you, Kate, and welcome everyone to today’s conference call. With an increasingly constructive policy landscape for hydrogen globally, we are excited by the growing end customer interest to decarbonize mobility and stationary power applications with fuel cells. 2022 proved to be an important year of progress for Ballard, as we achieved key customer platform wins across our verticals of bus, truck, rail and marine, along with early traction in select stationary power applications. This progress is starting to show up in our order backlog. In Q4, we secured new orders totaling $52.2 million. This activity improved our total order backlog, bringing it to approximately $133 million at the end of Q4. As we start 2023, we’re seeing continued momentum on customer order intake.

We expect to see further growth in our order backlog at the end of Q1. This strength in our order backlog, as well as a growing sales pipeline reflect progress across all of our verticals. And as a reminder, our strategy to develop PEM fuel cell technologies and products can be applied across multiple market applications, where our fuel cell technology provides the strongest value proposition and where the barriers to hydrogen refueling are lowest. These markets include bus, truck, rail and marine as well as select stationary power generation in off-road markets. We’ll provide a brief update on these applications. Our bus vertical continues to see important progress in Europe and the U.S. In 2022, we received purchase orders for approximately 250 modules for fuel cell buses, including about 100 in Q4.

This represents a roughly 25% year-over-year increase in new bus module orders in these markets. These orders included sales from nine European bus customers, of which four our repeat bus customers and five are now new bus OEM relationships. These 250 hydrogen fuel cell powered buses are planned to be deployed across 11 countries over the coming 24 months. This will effectively double the number of fuel cell buses operating in Europe and the U.S., taking the installed base from the current 250 buses in operations to about 500. As we look forward, we expect to see this order momentum continue over the coming year. Through 2022 and into early March 2023, there have been announcements by transit operators in European cities with expected tendering activity for additional 1,000 fuel cell buses to be deployed in Germany, Italy, Poland, Spain, and the UK.

We’re also seeing a strengthening of our bus sales pipeline in North America. In 2022, Foothill Transit in the LA area progressed on its procurement of 31 fuel cell buses, representing approximately 10% of its fleet with new flyer supplying the fuel cell buses powered by Ballard. And now for the first time in U.S. history, an American city has indicated plans to deploy more than 100 fuel cell buses. So, this is very, very exciting. We believe we’re well positioned to participate in supporting the rollout of larger fleet deployments of fuel cell buses. Now take a look at the truck market. In September of last year we announced a deeper strategic partnership with Quantron, a global electric vehicle integrator and an emerging specialty OEM to accelerate fuel cell truck adoption.

Ballard will serve as exclusive fuel cell supplier to Quantron for their 44-ton fuel cell electric truck platforms. As part of our strategic partnership, Quantron committed to purchase 17 megawatts of modules, which are expected to be delivered over the next two years. Beyond Quantron, we’re seeing increasing interest from other truck integrators and upfitters to use our products in various truck platforms. We are pleased to see a more diverse set of customers’ interest in our products which complement discussions for longer-term supply of modules in heavy-duty truck applications. We see strengthening market signals at the value of hydrogen-powered fuel cell trucks in certain classes and use cases will achieve high volume, given the clear advantages of range, refuel time and payload.

There’s also a growing understanding relating to the infrastructure challenges associated with electrification of this market. We look forward to highlighting our insights and the value proposition of fuel cell trucks including the comparative total cost of ownership, which we have a new model for in June at our Capital Markets Day. In the rail market, we ended the year with exciting announcement of the first commercial-scale order totaling up to 40 megawatts of fuel cell engines from Siemens for passenger commuter rail in Germany. The first 14 fuel cell modules are expected to be delivered on schedule in 2023 for deployment in the Berlin area. In 2022, we saw additional progress in the commuter rail market as we received an initial order from Stadler, the California market.

For freight locomotive applications, hydrogen fuel cells have a unique and compelling value proposition as a zero mission, one-to-one replacement to incumbent diesel electric powertrains. With diesel fuel accounting for both the number one operating cost and emissions source, fuel cells offer similar performance for these long heavy trains without requiring overhead catenary infrastructure. While the freight locomotive market is still early, we expect continued progress in 2023, further illustrating the strong value proposition and technology advantages of Ballard’s fuel cell engines. In the marine market, we made important progress in 2022. In Q4, we saw almost 40% quarter-over-quarter backlog growth after receiving an initial order for Fc wave modules from Amogy and an order for containership application.

There’s also an important milestone in late 2022 as Norled’s MF Hydra, the world’s first hydrogen-powered ferry is now on water and expected to be put in service later this year. The regulatory environment continues to undergo a change for marine emissions. The current IMO target is to cut maritime CO2 emissions by at least 40% by 2030. And in November, the European CO2 emission trading scheme was extended to apply to the shipping sector, covering all vessels greater than 5,000 tons starting from 2025. Moving to the Stationary Power Generation market. While this market for fuel cells continues to be early stage, we received a key new customer win from CrossWind in the quarter, validating our product for fuel cell power generation from excess wind capacity.

Early in 2023, we received a follow-on order from a stationary power customer that has a multiyear relationship with Ballard and we expect to lead to higher volume orders. We continue to see interest from customers in EV charging, backup power for data centers, peaking and shore power applications. In the mining sector, we recently announced an order from First Mode for modules totaling 3 megawatts to power several hybrid hydrogen and battery ultra-class mining haul trucks, which we classify under our emerging markets vertical. In January this year, First Mode entered into a global supply agreement with Anglo American to retrofit over 400 ultra-class haul trucks with our new gen solution, including a 1.2 megawatt of fuel cells per truck. The Ballard fuel cells will be integrated in the next several power plants built by First Mode, and we look forward to a long-term relationship to help drive decarbonization in this difficult to abate sector.

As noted earlier, order backlog at the end of the quarter stood at $133 million. Of this, close to $100 million are Power Products orders, which now represent over 70% of the total backlog. Throughout 2022, we’ve seen a steady climb in our Power Products order backlog, which has more than doubled since the end of 2021 and illustrates our success helping customers begin deploying fuel cells at greater numbers. This growth has been masked by the planned and expected backlog decrease in Technology Solutions. Throughout 2022, we also highlighted our increased customer and revenue diversification, demonstrating the value of our regional and applications go-to-market strategy. As compared to Q4 2021, we’ve seen a 20% increase in customers with orders of over $1 million.

Now, looking at our key geographic markets. In Europe, there’s a steady flow of news around continued policy support. Indeed, just yesterday, the EU published a raft of new policies supporting hydrogen fuel cells, including the Net-Zero Industry Act. The European Commission has also recently agreed on definitions of renewable hydrogen that we expect will translate into higher levels of confidence for developers of hydrogen production facilities. And notably, over 70% of our 2022 order intake was attributed to Europe. Moving to the U.S. We expect continued demand growth for our technology in the U.S. as previously announced policies such as the IRA, which is really game-changing, materialize over the next 12 to 36 months, particularly as the hydrogen hubs and hydrogen production tax credit programs begin to translate into increased availability of low-cost low-carbon hydrogen for end users.

Concurrently, we’ve seen customer interest, order intake and revenue generation all increase from North American customers in the past 12 months. And North America accounted for nearly a quarter of the 2022 total corporate order intake. We made significant progress on the build-out of our previously announced facility in Oregon over the past number of months, and we expect to support the assembly of fuel cell engines for the U.S. market operational in the coming months. Now moving to China. We continue to be disappointed with the delayed adoption in the China market and with low activity levels at the Weichai-Ballard JV, which weighed on our 2022 results. Now, we’re working closely with our Weichai-Ballard JV to unlock growth in the China fuel cell bus and truck markets.

And indeed, we’re encouraged with some of the exciting opportunities in the JV sales pipeline for fuel cell buses and trucks. 2022 revenues from China represent one of the smallest proportions of total revenues in recent years, driven by the subdued transport activity resulting from COVID policies and a slow rollout of FCEV subsidies. Despite the short-term pressures, we maintain our expectation that China will be the largest market for the adoption of hydrogen and for fuel cell vehicles in the mid to long term. And our expectations are bolstered by the government’s prioritization of energy security in the 20th Congress, a development is expected to drive additional support renewables and green hydrogen. In 2022, China registered approximately 5,000 new hydrogen fuel cell electric vehicles predominantly located in the initial demonstration clusters of Beijing, including in support of the 2022 Olympics and Shanghai, bringing the total number of fuel cell vehicles on road in China to over 12,000.

This illustrates the relatively modest, by China standards, but continued growth of hydrogen adoption. As at the end of the year, there are now over 200 hydrogen refueling stations in operation in China with an additional 70 under construction. To succeed in China, we’ll require a local presence, a point we spoke at length about in our Q3 earnings call where we provided detail on our plan to make a significant investment to qualify as a local manufacturer of MEAs in China by setting up an MEA manufacturing facility and R&D innovation center in Shanghai. Shifting to our financials in the quarter. In Q4, Ballard delivered $20.5 million in revenue with approximately 70% of our revenue coming from Heavy-Duty Motive applications. This is an increase of roughly 10 points from the prior quarter and demonstrates again the continued progress in our planned evolution into a technology products company.

Over the past year, there’s been increasing shift and change in our revenue mix by geographic markets as compared to 2021. As we discussed on the Q3 call, continued gross margin pressures was partly affected by our pricing strategy to secure customer platform wins. The further downward pressure on gross margins in Q4 was driven by a combination of a shift in revenue mix, higher fixed overhead costs and inventory adjustments. We expect challenging gross margin dynamics to persist into 2024 until our volumes ramp and our production cost reduction initiatives move into real production. Now, in Q4, we recognized post-acquisition restructuring charges and costs related to our BMS acquisition. And there are two high-value activities for BMS going forward that I wanted to highlight.

First, we’re using BMS hydrogen fuel cell powertrain integration experience and capabilities to help Ballard customers, typically vehicle OEMs, integrate Ballard fuel cell engines into their heavy-duty platforms by providing engineering support for application engineering, powertrain integration and even in some cases, vehicle integration. We’re also using the BMS capabilities that fuel cell powertrain and integration experience to design a fuel cell controller that will enable optimized hydrogen powertrain solutions with a battery fuel cell hybrid architecture for improved performance, considering safety, reliability, durability, we’re also looking at improved fuel efficiency, helping overall customer TCO. Consistent with our announced guidance on costs for 2022, total operating expense was $146 million and total CapEx expense, $35 million.

We are now updating our guidance for total operating expense and capital expenditures for 2023. We anticipate total operating expense to be between $135 million and $155 million and for capital expenditures between $40 million and $60 million. Given the macroeconomic outlook, and in the context of our 2023 annual operating plan, we continue to review our spend carefully to ensure we’re appropriately investing in our growth strategy while maintaining a strong balance sheet. We ended 2022 with $914 million in cash and no debt. We’re making strong progress against our product cost reduction targets, including our target to reduce our fuel cell stack costs by 70% by 2024. We’re tracking well against this plan, despite inflationary pressures. We’re also confident in our team’s ability to achieve even further cost reductions over the coming few years.

Ballard is well positioned with a growing product order backlog, industry-leading fuel cell technology for our market applications, key partnerships and customers across our target markets, industry-leading deployment experience and a strong balance sheet. We’re confident we can deliver long-term shareholder value while making a meaningful impact by providing zero-emission fuel cell power for a sustainable planet. With that, I’ll turn the call back over to the operator for questions.

Operator: The first question comes from Aaron MacNeil with TD Cowen.

Aaron MacNeil: Randy, for the backlog, I appreciate the split by Power Products and Technology Solutions. I know you’re not going to provide any revenue guidance, but just given that the balance has moved significantly towards product sales, I think it would be helpful to give us all a refresher on what the typical time line is from order intake to revenue recognition. And on the Technology Solutions side, I was hoping you could give us a sense of how those revenues will trend over the next couple of quarters or years?

Randy MacEwen: Yes. Thanks, Aaron. And certainly, the order intake and then the delivery time does vary by market segment. But overall, I would characterize it as between 3 months and 18 months. And then, in terms of Technology Solutions, I think what we’ll see this year is, again, a lower portion of revenue, percentage-wise in absolute dollar terms this year for our TS business and part of that, of course, is the Audi project substantially completed in 2022. And we’re in the process really of — really putting more of our resources into our product development activities as is reflected in our cost structure as well.

Aaron MacNeil: Thanks for that. Paul, of the $135 million to $155 million operating expense guidance you provided, how much is earmarked for R&D? And would you characterize it as elevated in the near term in sort of a final push towards your cost reduction initiatives, or should we view that as more representative of a run rate on a longer-term go-forward basis?

Paul Dobson: Yes, Aaron. I’d say the — what we’ve seen in terms of R&D and what we see across all of our OpEx going forward, broadly in line with what we’ve had in 2022. So looking to kind of capitalize on the investments that we’ve made and see most of our spending in sort of the — in the production and in the technology investment, so investing in our products going forward. So broadly in line with what we’ve seen in 2022 across really all of our categories.

Randy MacEwen: Yes, Aaron, maybe just to supplement, I wouldn’t characterize this as a final push. What I would say is this is going to be a sustained investment for a period of time. Because not only are we improving performance and driving down costs, we’re working on next-generation technology as well. One of the keys, of course, is that we’re designing and developing stacks including the MEAs and bipolar plates and modules to be used across multiple verticals. So, while it’s a significant investment, there’s a significant leverage that comes with the business model that we have.

Operator: The next question comes from Michael Glen with Raymond James. Please go ahead.

Michael Glen: Randy, maybe just to start, when we’re thinking about the investment that you’re going to be making in China, the $130 million MEA facility, when you’re thinking about allocating that capital, given what’s happening in Europe, given how your sales has shifted so much, like if you’re not going to be putting the money in Europe, is there a risk that you’re going to potentially miss some revenue opportunity that’s coming in that market?

Randy MacEwen: Yes. So just to clarify — sorry, maybe you can go mute, Michael, while we respond. Just to clarify one thing is that while we have MEA production planned for — in China, it’s not specific to the China market. We have the ability, of course, to use that volume globally. And certainly, that’s part of our strategy. I think the real question is, given geopolitics, we do have a local-for-local strategy where we will have increased production capabilities in not just China but in Europe as well as the U.S. marketplace and the increasing support as we saw yesterday in Europe, and we saw recently in the U.S. to support companies who are looking at localizing hydrogen and fuel cell related production activities in these markets.

So, I think the question is will we see some restrictions in those markets that require in-country domestic production. And if I just take, for example, the announcement in the EU yesterday where they announced eight strategic net zero technologies and part of their policy was to look at manufacturing capacity to cover over 40% of their annual deployment needs for hydrogen fuel cells. So, there’s an indicator of the potential need for production capacity in the European market as well. So, we did scale the MEA production facility Phase 1 there designed for the China market. We have the ability to use that capacity for global markets. But, if we see a need and market demand that justifies investment in other markets, we’ll certainly be looking at that very carefully in 2023.

Michael Glen: Okay. And then, just on the addition, I believe you said it was in China this year, there was 5,000 new fuel cell vehicles put on the road. Are you able to indicate like what’s your — what your market share is with those additions? I mean, where are those — who’s supplying fuel cells into that market?

Randy MacEwen: Yes. So, you may recall, there were two different tranches of cluster regions announced and the first tranche included Beijing and Shanghai and Guangdong province. So most of the adoption in 2022 happened in those initial clusters, specifically in Beijing and Shanghai, and a big catalyst for that was the Beijing Olympics. So, we are not situated in Beijing and Guangdong province in any material way at this time. So, it’s not unsurprising that we don’t have high volume of market share in those markets. But of course, there were — the second tranche announcement in terms of additional clusters and then, of course, localizing in Shanghai, specifically in Jiading, which has exposure just for that district for two of the five cluster regions now.

And then, of course, Weifang, where Weichai is located and our Weichai-Ballard JV is also included in the cluster region now as well. So, I would say it was more a pacing of the initial cluster regions, and I think the Beijing Olympics was a strong catalyst. But to be clear, we had very modest market share in 2022.

Operator: The next question comes from Mac Whale with Cormark Securities. Please go ahead.

MacMurray Whale: When you look at the outlook for increasing year-over-year sales given the higher backlog, is the gross margin sort of hit a low point at this point? Like, is there a contribution margin that we should expect from higher revenue, or should your sort of investment in bigger headcount and production capacity sort of outweigh that?

Randy MacEwen: Yes. I think for 2022, we saw clearly signs of that with some of the investments we’ve made in production capacity where the volume hasn’t caught up with that investment yet. We’re going to see that through 2023 as well and into 2024. But I do think when we look at the order backlog activity and the sales pipeline, which is really swelling with a lot of great opportunities and some scale in some of these opportunities, we do see the opportunity to move from contribution margin to gross margin where that fixed overhead cost structure gets absorbed over a larger book of business. It’s going to take some time to move through that. I do think your characterization of gross margins kind of hitting a trough or a low point here is probably directionally accurate.

So I do think we’re going to see expansion as we move forward. But I would look for the big leg up in gross margins, particularly as we look at €˜24 with some of that backlog translating to orders and some of our cost reduction initiatives translating to production.

MacMurray Whale: Okay. Got it. That makes sense because we see the difference in the 12-month order book in the backlog, there’s a difference in the year-over-year. So obviously, there’s a lot of back-end weighting here. Is that the way to read that? And I’m wondering, should we be just waiting — like should we be expecting higher individual order sizes or more frequent — like we haven’t really seen like a big 50 or 100 units sort of order or consistency in those? Like, what are your thoughts on order size?

Randy MacEwen: Yes. I do think, as we know, the bus market is the most mature of the markets that we’re looking at. And now we’re seeing — as I mentioned earlier, we’ve seen three different cities in Europe and now the first in the U.S. planning to deploy 100 fuel cell buses. Those aren’t in our order backlog. They’re certainly in our sales pipeline. So, that will — as we kind of look for 2024 to start seeing some of that translate to order book and starting looking at that translating to revenue as well, I do think we are looking at more chunky orders going forward, but also a lot more small orders from a number of different customers across the different verticals. But certainly, as we go from early demonstration programs to larger deployments, the scale is going to be driven.

I’d also highlight a number of the verticals that we’re focused on, like rail, like marine, like stationary, do have higher power output requirements. You can also look at the off-road market for the hauling trucks is another example. In some of these cases, like freight locomotives, you’re looking at 1.2 megawatts of power, you need effectively kind of 12, 15 buses to satisfy that type of power requirements. So, as we get some of the larger orders in marine and stationary and off-road, I think this is really going to see some lumpy orders as well.

MacMurray Whale: Thanks Randy. I’ll jump back in the queue.

Randy MacEwen: Yes. And Michael, just to supplement, you also highlighted a little bit of the weighting of revenue when revenue occurs. I would highlight, we’re in this cycle — continue to be in this cycle where traditionally, we have a heavier waiting of revenue in the back half of the year. And I would kind of think about something like a 70% split in the back half of the year this year compared to the first half.

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

Rob Brown: On the kind of the drivers for the bus market momentum, is it really that market maturing, or are there other sorts of drivers causing the order growth?

Randy MacEwen: I think it’s a couple of things, Rob. One is, obviously, we have demonstration programs that have been underway for a number of years in some cases and those customers have now seen the technology firsthand. They have confidently uptime and availability and reliability. So, that’s translating to confidence to move forward from, say, 5 — 3, 5, 10 buses to deployments of a much larger portion of their fleet. So, that’s a very encouraging sign. And in many cases, those transit operators have been very loud proponents in the industry talking to other transit operators who are frankly struggling with their zero-emission strategies. And of course, as we know, I’ll use the U.S. as an example, where you’ve got a requirement of 50% of all new transit buses required to be zero-emission, not low emission, but zero-emission starting in 2025 and 100% in 2029.

And so, they have to have plans. They’ve been looking at different technologies. I think some of the transit operators have trialed battery electric buses as well and have found, in some cases, that that technology has struggled to achieve the range and the performance they’re looking for depending on the duty cycle and climatic conditions of those transit operator experiences. So I think there’s a variety of factors that are leading to this, but it’s very clear. It’s frankly taking a little slower than we would like, but it’s very clear to us that the scaling is occurring. And I layer on top of this, as you think about the progress that’s going on, on the policy side for green hydrogen production, so the availability of low carbon, low-cost hydrogen in the U.S. and in the European markets, as you look out 2, 3, 4, 5 years from now, this really game changes the opportunity for the deployment of fuel cell vehicles because many of these applications fuel is a very significant part of the overall total cost of ownership, in some cases, between 30% and 60%.

And so, as that fuel becomes available and is decarbonized and is low cost, we think this fuel cell opportunity, not just for buses, but for all of these mobile applications are really going to see significant growth.

Rob Brown: Okay. Thank you. And then on kind of gross margin and I guess, pricing, you talked about some strategic pricing activity. How does that work? Is that time based, over time prices come down? Or do customers have to buy certain volume levels?

Randy MacEwen: Yes. It’s a good question, Rob. There’s a couple of elements here. One is that I think we need to understand that the early adopters don’t have an economic value proposition that’s really strong today. They’re adopting in low volumes and demonstration projects where the economics are challenged and where we’re in low volume and not offer — not able to really support the type of economics that drives the higher adoption. And so these customers are taking on risk. They’re taking on as early adopters, making investments in this technology. And so, we’re effectively — and other partners in the value chain ecosystem are also doing this, taking on some of the investment and sharing some of the risk as well. And so, what we’ve done is be very selective on which partners we see large volume in the future with and how can we support the success of these early deployments to validate the technology for them for that application and to validate the longer term TCO, including based on the hydrogen fuel assumptions.

So, we’ve been making those strategic decisions. It’s translating to relationships that we think have a lot of stickiness going forward, but it is also reflected in the financial results, including the strained gross margin. So, I think in terms of how they’re structured, the way I would characterize them, not so much time-based but more volume-based. So, specific projects and programs, and in also cases we have tiered structures where customers purchase X number of units, they get a certain price. And if they want to be more aggressive in their early adoption, we’re there to help them, and we can give them a more attractive price. And so, we do see tiered pricing as well based on volume.

Operator: The next question comes from Justin Strong with Scotiabank. Please go ahead.

Justin Strong: Just a quick question here. Has your CapEx profile and time line for the upcoming Shanghai investment changed at all recently? And if not, what do you see as the biggest risk to these plans?

Randy MacEwen: Yes, Justin, first of all, welcome, and thanks for the question. Yes. So from a geopolitical perspective and also wanting to see more progress in the China market, we’re really pacing our investment in that market to defer spend in the China market as long as possible. So, we have pushed back some of the spending. So some of the spending that we would have originally expected to materialize in 2023, we pushed into 2024 to be prudent. And that’s something that we’re tracking literally every quarter on whether or not we cut checks and if so, for what purpose, whether it’s the order of equipment or land acquisition costs and permitting. So, we are pacing our investments to get as much information as possible before additional spend occurs.

Justin Strong: Great. And then, maybe just — I guess you mentioned geopolitical risk. Do you think that would be the result of, I guess, trade or tariff changes, or what do you think drives that?

Randy MacEwen: Yes. What I’ve learned is that it’s very difficult to guess or speculate on these type of things. There’s a lot of variables, and we’ve seen that in 2022 with the Putin’s invasion of Ukraine as an illustrative example. So, we have a number of variables that we have in our risk register that we track. What I would say is that right now, what I’ve seen over the last number of months is that geopolitical tensions continue to be strained and are trending in our opinion, in the wrong direction. I think what’s important is to understand is the China market is a large market. So largest market for buses, largest market for trucks, largest market for trains, largest market for marine vessels. It is today the largest user of hydrogen.

And their policies are effectively designed to promote companies — multinational companies to locate parts of the fuel cell value chain into the China market. And so, we’ve seen — I’ll just highlight a number of others. We’ve seen Cummins, as an example, we’ve seen Umicore, we’ve seen Johnson Matthey and recently Plastic Omnium all announcing their investments in China and in some cases, including in the same Jiading District as we’re localizing in a hydrogen fuel cell cluster, the investments they’re making in their parts of the value chain in China. So, there are a number of companies that are tracking to the same path that we’re on to localize the value chain in China to make sure you have access to that large market, not just for the China market, but of course, the ability to use that material globally.

Operator: The next question comes from Manav Gupta with UBS. Please go ahead.

Manav Gupta: My first question is we have had IRA passed last year. And again, treasury department is working through the kinks and — but Biden — administration is spending a lot of money or giving out a lot of money for the development of hydrogen in U.S. I’m just trying to understand from your perspective, have you started seeing a change happen as it relates to building the necessary infrastructure so hydrogen can penetrate the mobility market on a go-forward basis?

Randy MacEwen: Yes, Manav, great question. And so, last week, I was in Houston attending the CERAWeek conference, and you could feel at that conference, which I think is the largest energy conference in the world, the primacy of the discussions at the conference on hydrogen, and specifically, the opportunity set that’s presented with a very compelling $3 PTC, production tax credit for green hydrogen. And so, what I would say is that infrastructure, this policy — these levers haven’t translated to a build-out of infrastructure yet. What we are seeing is a swelling pipeline of projects that are now bidding that are — have been submitted for hydrogen hubs. And I think it’s been publicly announced by the U.S. DOE that originally they thought there’d be maybe 4, 5 hydrogen hub sites, maybe 6.

That number now is expected to be possibly 7 or 8 hydrogen hubs in the U.S. And we’re seeing a lot of activity by major energy players, by industrial gas companies, by renewable energy companies as they all look to participate in what should be a very attractive market in the U.S. So, I think this is game changing, the IRA, and it will lead to, again, low-cost, low-carbon hydrogen available for a number of decarbonization applications, including industry, energy and mobility. So, we do think that the mobility infrastructure likely will lag a little bit compared to decarbonizing industry applications, but we’re seeing a lot of discussion about how to build out hubs that can support mobility applications as well as corridor refueling opportunities in the U.S. So, I think this is something that’s going to take some time and off to roll out but it is, in my opinion, a matter of time only.

Manav Gupta: Perfect. My very quick follow-up here is it looked like there were some onetime items because your gross margin came in lower than expectations. Your gross margin is generally better than that. So help us understand those few line items so we can be sure that the gross margin is not what we saw in the fourth quarter. Thank you.

Paul Dobson: Sure. So, Manav, it’s Paul here. So there’s a number of factors going in, some of which we’ve already talked about affecting the gross margin, including the pricing strategy, which lowered the contribution margin for the Power Products by about 7 points. And then in our Technology Solutions business with the wind down of the Audi contract, little less activity with the joint venture technology, that lowered our margins and some new customers coming on, again, with the pricing strategy at lower margins or lower price for TS type business. And then some of the onetimes that you mentioned include some inventory write-offs source of obsolete equipment for discontinued products. And then, we also booked an onerous contract provision.

So having some customers with increasing orders, repeat orders tipping into lower tiers and causing those contracts at the moment to be onerous. And so, under accounting rules, you have to book the provision on that. And that was about, in total, about 8 points of the difference. And then finally, as we talked about earlier, with the lower amount of revenue, not absorbing all of our net fixed overhead, so the manufacturing overhead, and that was about 7 points of that.

Operator: The next question comes from Greg Wasikowski with Webber Research. Please go ahead.

Greg Wasikowski: First one, just thinking about the next 12 months here, what are the primary objectives for Ballard? And obviously, it’s a pretty tough question because everything is so important, obviously. But between sales, margins backlog, China, policy, et cetera, you name it. If we jump ahead one year from now and look back, Randy, what would be your number one milestone that you’d like to see achieve?

Randy MacEwen: Yes. We see internally, Greg, very often the top 3 deliverables this year are order book, order book and order book. So that gives you an indication of where the focus is. What I would say is that I would expect at the end of 2023, it would be very similar to the progress we made in 2022 in some ways, customer platform wins, repeat business, getting to larger orders and that backlog growing so that we have better visibility, not just for one quarter out or even the next 4 quarters but for subsequent years as well. So that to us is very important, is getting those customers through longer-term relationships, we’re embedded and sticky with those customers. And then the second thing that’s really important is cost reduction.

And we have a significant organizational investment that goes on, not only to improve product performance, but really driving down MEA, plate, stack module cost reduction. And this is a critical thing because we need to, in the future, be able to ensure we’re offering that value proposition for customers to unlock the scaling effect but also to make sure that we have gross margins that enable a sustainable business. So, we think the gross margin line in your income statement is critically important. It’s something we’re focused on for the long term. And so, those would be the two highlights. I would say, order book and cost reduction.

Greg Wasikowski: Got it. Okay. Cool. Thank you, Andy. And then for a follow-up, just on EV charging, can you talk a little bit more about that opportunity for hydrogen and fuel cells within that segment? And geographically, where are you seeing the initial demand now? And where do you expect to see a pickup in demand for that application in next year or a couple of years?

Randy MacEwen: Yes, great question. So, what I would say is that as EV infrastructure or EV adoption goes from, let’s call it, less than 1% in some markets to 5% and 10% and much higher in markets, you really start to see the strain on grid infrastructure and recharging capabilities. And so, we do see this opportunity initially in the U.S., but this is not a phenomenon that’s unique to the U.S. There will be grid infrastructure challenges in the U.S. and in the European theater. So we expect to see lots of opportunity for these applications going forward.

Operator: The next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Kashy Harrison: So, the first one for me, just a quick clarification. On the heavy-duty Chinese revenues in Q4, was the softness there mainly associated with COVID, or was that due to nuances surrounding the initial clusters being in Beijing, or was it driven by some other factor?

Randy MacEwen: Yes. So I wouldn’t just characterize it as softness in Q4, candidly, I would say it was softness in 2022. And it was a variety of factors. Certainly, COVID had pretty significant impact, including in key markets in the first half of the year in 2022, for sure. And we didn’t really see an unlocking in China until late 2022. And of course, travel resumed in early 2023. But I think more fundamentally, it’s the complexity of how the policies in China have been adopted and how the application processes work and the points — point scheme with the seven parts of the hydrogen fuel cell value chain. It’s a very complex policy scheme that many organizations are struggling to understand and importantly, for capital to have certainty that if they invest in a scale deployment, that the subsidies that are available are actually paid out.

So, to me, that’s the bigger challenge is that the policies need continued clarity. Not people are commenting on this, but I’m going to make a bold prediction here. I do think there’ll be more policy clarity in 2023, in part in response to what I view as a really emerging competitive dynamic between the U.S., Europe and China, on providing fuel cell — hydrogen fuel cell policies to support the adoption of hydrogen, but also from an economic development perspective. So, I think we’re going to see continued progress on the policy front on all three of these markets that will translate to future value for Ballard shareholders.

Kashy Harrison: And just for my follow-up question, can you either remind us or perhaps provide a framework to help us understand the revenue potential of the business, once that MEA facility in China is operating at your targeted utilization? And then, maybe part and parcel with that, what level of utilization do you think is necessary to get to positive gross margins? Thank you.

Randy MacEwen: Yes. Excellent question. So, I think it’s important to understand what we’re looking at is really the ability to manufacture MEAs in that facility that supports effectively 20,000 fuel cell engines. And so, the way I think about the levers there is obviously the revenue on MEAs selling that to the Weichai-Ballard JV and also the ability for us to use those MEAs globally for a variety of applications. But then, the next leg of that is for the JV using those domestically produced low-cost, high-performing MEAs for the sale of modules into that market. So, I see a leveraging effect that occurs by having this MEA production facility there. In terms of MEAs, we typically see — when we sell MEAs as a stand-alone material, very high gross margin on those sales. So, the kind of utilization rate for that facility, I don’t have the exact number, but I think even at 50% utilization rate there, we would see a very successful economic return.

Operator: The next question comes from Craig Shere with Tuohy Brothers. Please go ahead.

Craig Shere: With the Audi roll off, can you opine on prospects for quarterly cadence of Technology Solutions revenues in €˜23 and prospectively into 2024? And there’s a lot of discussion about potential growth in the order book this year and how that could be, say, anywhere from 3 to 18 months between book-to-bill. But is it fair to say that the bus fuel cell orders can be on the quicker end of that, say, 3 to 6 months?

Randy MacEwen: Yes. So Craig, taking the last question first, so first of all, what we’ve learned about the bus market is it’s very unpredictable when the transit operators will actually deploy their vehicles. And therefore, the ordering timing to the bus operator can vary. And even when they do get the order, sometimes there’s delays in hydrogen refueling infrastructure. So, I think relative to the segments, the bus one, when we have the order in hand, you can see realization in the 3- to 6-month time frame. That’s very reasonable. But sometimes that can take longer. I just want to flag that. And then some of these other markets, particularly when you’re talking about larger applications, 1 megawatt-type systems typically take longer for — not just for production, but for those customers to be ready for either the vehicle or site infrastructure requirements.

So, that point. And on the TS front, we don’t provide kind of a quarterly cadence. You can kind of think about it being relatively flat quarter-to-quarter for 2023 with a reduced revenue as compared to 2022.

Operator: The next question comes from Brett Castelli with Morningstar. Please go ahead.

Brett Castelli: Just a question on longer term gross margins. Should we expect gross margins by end segment or vertical to be pretty comparable, or are there certain end segments that would be maybe higher or lower across the portfolio?

Randy MacEwen: Yes. Great question. We are expecting to see certain verticals that have better gross margin performance and it’s all a function of the various options that those verticals have to achieve their decarbonization goals and the total cost of ownership for those market segments. So, as an illustrative example, we would expect to see the marine market to be a higher gross margin segment than the truck market.

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

Randy MacEwen: Thank you for joining us today. Paul, Kate and I look forward to speaking with you next quarter, and we also look forward to the Capital Markets Day in June. Thank you very much.

Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.