Ballard Power Systems Inc. Q1 2010 Earnings Call Transcript

| About: Ballard Power (BLDP)

Ballard Power Systems Inc. (NASDAQ:BLDP)

Q1 2010 Earnings Call

April 29, 2010 11:00 a.m. ET


Lori Rozali - Senior IR Specialist

John Sheridan - President and CEO

Bruce Cousins - CFO

Michael Goldstein - CCO


Sarah Martin - Lazard Capital Markets

Burt Chao - Simmons & Company

Brian Piccioni - BMO Capital Markets

Peter Write - Tradition Equities

Jeff Osborne - Thomas Weisel Partners


(Abrupt start) Now I would turn the conference over to Lori Rozali, Senior Investor Relations Specialist.

Lori Rozali

Good morning. Today's call is to discuss Ballard's operating results for the first quarter of 2010. With us today are John Sheridan, Ballard's President and CEO; Bruce Cousins, our Chief Financial Officer; and Michael Goldstein, Chief Commercial Officer

We'll 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. For a detailed discussion of these statements, the assumptions used in generating them, and the risks and uncertainties that could cause actual results to be materially different, please refer to our press release issued last night, our most recent annual information form and other filings. As a reminder, Ballard reports its financial results in accordance with Canadian GAAP and in US dollars.

Now, over to John.

John Sheridan

Thanks everyone, and thanks for joining us today. I'll focus on our progress on growth on this call, our market activities, product shipments, revenue, and the order book, and then hand things over to Bruce to talk to the cost and bottom-line performance metrics.

So starting with revenue; we had a solid first quarter with revenue of $11.9 million on a consolidated basis, including Dantherm Power. That was an increase of 47% over last year. This is obviously in line with our guidance for full year revenue growth in excess of 35%.

And as to the breakdown of Q1 revenues, as you saw in the press release, our Material Products segment was strong, contributing $5.3 million to the total revenue growth in the quarter. That reflects a pick-up in sales of carbon fiber materials to automotive OEM customers, and continued sales of GDL materials to third-party fuel cell customers. The other supporting business segment, Contract Automotive was down slightly in Q1.

Turning to the Fuel Cell Products segment, the growth engine of the company, revenue grew by 28% in the quarter, driven by significant growth in product shipments and material handling and backup power. As the year evolves, we expect that this growth trajectory in the fuel cell products segment will heighten, and represent about 60% of our full year revenue, with the supporting segments representing about 40%.

As far as key sales activity in the quarter in fuel cell products, in material handling, we're very pleased to be working closely with Plug Power. We had shipments of a 116 SE velocity stacks in Q1, and currently have orders for more than 600 stacks.

Plug Power is the clear leader in this developing market, and Plug continues to make progress with sales to leading customers, most recently the United Natural Foods and Kimberly-Clark, and with a new distribution agreement with the Raymond Corporation.

In backup power, we are pleased to see IdaTech's progress in Indonesia in Q1. We received stack orders from IdaTech for over 100 ElectraGen systems for deployment by Hutchison Telecom in Indonesia.

On the flip side, we're disappointed with the recent development in India that BSNL has withdrawn its tender, which then included 1500 Methanol systems. The issue was related to questions of fairness with the broader tendering process, nothing at all of course to do with the fuel cell component of the tender. It was a very, very large tender; fuel cells was a small element of it. At this stage, we don't know when this tender will be reissued.

While this BSNL development will not have any material impact on Ballard, this will mean lower shipment volumes of Methanol systems to India in 2010. And as far as the impact of the BSNL delay on IdaTech, IdaTech has maintained its guidance for its unit sales volumes for 2010. No change in their volume, but has indicated that it expects a shift in mix with more hydrogen systems and fewer methanol systems.

Turning to Dantherm Power, since the closing of the transaction in January we've been pleased with progress to date. We've implemented an integrated operating model that includes relocating two of our employees to Denmark to become employees of Dantherm Power.

Dantherm Power is moving forward with several product related development initiatives that will strengthen their position in backup power. They are developing new lower cost hydrogen systems for production later this year. And on the sales front, Dantherm Power is engaged in early stage relationships with service providers in the EU, China and Canada.

In distributed generation, in February we announced an MOU with K2 Pure for a 1 megawatt fuel cell generator system to be operated with byproduct hydrogen at K2's new bleach plant in California. We've now progressed to the contract negotiation phase with K2 Pure.

And in Bus, we sold modules to both APTS of the Netherlands and SunLine Transit Agency in Palm Springs. Overall, our order book increased in the quarter by 29% or about $7 million to stand at $29 million as of the end of the quarter. And to reiterate, that's a rolling 12 month number. To give you a gauge on near-term revenue growth.

In terms of progress, again there are six growth milestones. One, we expect shippings late this year for IdaTech methanol reformate systems for India as I said. Two, we see good prospects for Dantherm Power for hydrogen system deployment in a major new network. Three, we expect site acceptance of the FirstEnergy 1 MW system towards the end of Q2.

Four, we expect to close a contract with K2 Pure, which would be our first sale of a DG byproduct hydrogen system. Five, the material handling with our shipments to date and orders at hand, we are over halfway our full year growth still; and six, in bus, we've announced contracts this quarter for seven new buses with APTS and SunLine, and have significant prospects in the USA, Norway, Brazil, and other countries.

So, just a quick overview there, but net-net all six growth milestones are on track at this point. And as of this point in the year we feel very well-positioned vis-à-vis our guidance of full year revenue growth in excess of 35%.

Finally, just quickly it's worth noting, two broader developments that will support our growth moving forward. We received an award from the U.S. Department of Energy in early March for about $6 million for development work, fuel cell durability and cost reduction. And as you might have seen yesterday, we just announced the establishment of FuelWorks, a center of excellence for the development of fuel reformers.

An important initiative, given that the fuel reformer is a key strategic enabler for the development of fuel cell supplemental power market initiatives. And just to be clear there, our focus here with FuelWorks is collaboration, it's government support, not cash investment. Ballard's cash investment this year in FuelWorks is expected to be in the neighborhood of $700,000.

So with that I'll turn it over to Bruce.

Bruce Cousins

Thanks, John, and good morning everyone. Having acquired a controlling equity position in Dantherm Power in January, this is our first quarter in which Dantherm is included in our financial results.

In order to facilitate direct comparison with prior year's results, we have therefore provided pre-consolidation figures in addition to the consolidated numbers that include Dantherm Power. With that explanation, consolidated revenue grew $3.8 million or 47% to $11.9 million in the quarter compared to Q1 last year, and pre-consolidation revenue grew 38% to $11.2 million.

This growth was primarily driven by the increase in friction material sales mentioned by John. In terms of gross margin, gross margin increased to 15% in Q1 as a result of a positive sales mix and significant overhead absorption given our production run rate increase of over 70% in the quarter.

As a reminder, our long-term gross profit target is 30%.

Looking at consolidated operating expenses, operating expense excluding depreciation & amortization, restructuring and related charges was $12.1 million representing a 6% reduction relative to the same period in 2009. Pre-consolidation operating expense was $9.7 million, a reduction of 25% year-over-year, primarily due to the 30% reset of our cost base in 2009 which more than offset the negative effects of a stronger Canadian dollar relative to the U.S. dollar.

For 2010, we expect to see a full year benefit from the decisive actions we took last year, as well as significant progress in external funding of R&D activities in the business. You may have noticed in our press release that we have introduced the reporting of EBITDA each quarter, as it is a key metric for the business and a focal point for our management team.

Consolidated EBITDA loss in the first quarter was $8.6 million, compared with $17.4 million in the prior year quarter. Pre-consolidation EBITDA loss was $7.6 million. The improvement was driven by higher gross margins, lower operating expenses and improved investment and other income. We continue to strengthen the positioning of consolidated Ballard toward positive EBITDA performance during 2011.

Looking at net loss, consolidated net loss excluding non-controlling interests in the first quarter was $10 million or $0.12 per share, reflecting an improvement of $9.1 million or 47% versus the same period last year. On a pre-consolidation basis, net loss decreased to $9 million or $0.11 per share, representing an improvement of $10.1 million or 53% versus Q1 2009.

Note that we have closed our sale leaseback transaction on our head office building during the quarter. On the closing of this transaction, we recorded a deferred gain of $9.5 million, which will be recognized income on a straight line basis over the term of the 15-year lease.

First quarter was a cash-intensive one for both Ballard and Dantherm Power. This is in line with our expectations that cash flow from operations will be higher in the first quarter relative to the rest of 2010. Consolidated cash flow from operations was $14.2 million outflow, an increase of $5.6 million relative to Q1 2009 and as expected.

Reconsolidation cash flow from operations was $11.5 million, primarily related to the revenue ramp anticipated in the year. With Q1 revenue reflecting less than 20% of the revenue anticipated for the year, combined with the necessary inventory build of $4 million in support of this ramp, and the one-time costs of approximately $2 million incurred in the quarter related to severance and acquisition costs.

We experienced an unusually high cash burn in the quarter. We do not expect this to recur, with Q2 through Q4's cash flow from operations expected to be significantly lower than Q1. We are on track for our guidance of a 30% improvement in cash flow from operations in 2010, excluding Dantherm Power.

We should point out that Dantherm Power's cash consumption in Q1 is not representative of the quarterly run-rate expected, as Q1 was adversely impacted by the timing of collections and a delay in the filing of government subsidies in support of research and development activities. Dantherm Power is expected to be fully funded by the committed investments by Ballard, Dantherm and Danfoss until the company reaches profitability.

Also, if the Canadian dollar remains close to parity relative to the US dollar, we do expect pressure of $3 million to $4 million against our cash from operations target.

And finally, a quick comment on cash reserves. At the end of Q1, cash reserves were $86.9 million, including a $1.3 million of cash in Dantherm Power. This includes gross proceeds of $20.4 million from the sale and leaseback of our head office facility, which risk-reduces the business and further strengthens our balance sheet. Ballard has a very healthy balance sheet to support our growth plan.

To close, Q1 results are consistent with our full-year outlook. We are on track for our guidance of a 30% improvement in cash flow from operations in 2010 on a pre-consolidation basis. And we continue to strengthen positioning of consolidated Ballard with positive EBITDA performance during 2011.

With that, John, Michael and I would be pleased to take your questions. Operator.

Question-and-Answer Session


(Operator Instructions) First question is from Sanjay Shreshta from Lazard Capital Markets.

Sarah Martin - Lazard Capital Markets

This is Sarah, in for Sanjay. When would you expect the K2 contract to be finalized, and any estimate on the dollar size?

Michael Goldstein

We're working on the contract now, and while you can't ever pin down the exact date, we believe it'll be in the second quarter. And on the dollar side, I would just say that these are different sized contracts than Ballard typically does in any one deal. So I would just say it's larger.

But it's an opportunity to talk a little bit about the business model, which is also different. So, these BG deals are attractive to Ballard and create value through two mechanisms; one is a CapEx sale, and the second is a long-term service annuity, which typically could be 10 to 20 years.

So the business model is strong in this case and we think that we should be able to close a deal in the reasonably near-term.

Sarah Martin - Lazard Capital Markets

And anything else you can say with respect to opportunities in Asia?

John Sheridan

Sarah, we talked about the tenders in the last call in terms of Malaysia, Indonesia etcetera. We gave you the update today. Of course, BSNL, which you probably were aware of. Nothing really specific. There are a number of engagements that we're aware of, with our system integrator customers. Looks like mid-year could be key in terms of decision points on some of them.

As I said, the Hutch sale by IdaTech in Indonesia we think is really key. And hopefully, that's a sign of things to come.


Next question is from Burt Chao of Simmons & Company.

Burt Chao - Simmons & Company

Just a couple of questions. You mentioned the Canadian dollar, U.S. dollar FX and how it might put pressure on some of your results. Going forward, how do you think about hedging that? I know you obviously are headquartered in Canada but a lot of your sales are either in the U.S., or in the future maybe to India or other markets.

How are you thinking about managing kind of the FX exposure going forward because it could get I guess a little bit more severe other than just the U.S dollar, Canadian dollar differential?

Bruce Cousins

Great question, Burt. I guess in general I would remind you that our revenue base is largely U.S. dollar denominated with few exceptions, with price in U.S. dollars. So on the revenue front, at this juncture in the business, minimal risk from the currency standpoint. From an operating expense perspective however, there is real risk. A large portion of our workforce is based here in Canada, and Canadian dollar denominated. And exposure on that cross rate, U.S. to Canadian, is an issue for the business.

We have experienced it in this first quarter with a magnitude of over $1 million of currency hit with the very strong Canadian dollar we are experiencing.

An item we continue to look at, we do have a hedging policy in place that's been endorsed by our audit committee. It's a program that we haven't used extensively to date, but we are re-looking at it given the volatility that we're seeing in the currency markets, and it's one that we will take better advantage of moving forward to mitigate that risk.

Ultimately from a hedging perspective, it's a deferral scheme; doesn't ultimately avoid risks in terms of the cross rates, but it does neutralize us in the immediate term and that's something we'll continue to look at.

Burt Chao - Simmons & Company

And secondly in cash, end of the quarter it was $86.9 million which is a healthy balance. You've given these six targets, but kind of within the guidelines of those targets, can you go and kind of paint a picture of what you expect cash needs to be and what cash flow will look like going forward maybe for a couple of quarters?

I know it's not a crystal ball, but just to kind of see where you might think you exit the year at and kind of going forward from there.

Bruce Cousins

I'll give you a high level framing in terms of cash needs in the business. As we've given guidance for the year of a 30% improvement in cash flow from operations, if you turn that into a number value, that put us in the $20 million or below range for cash burn this year.

We've also spoken to the 'EBITDA during 2011' goal for the business. We expect to turn that corner and move to positive EBITDA performance. Well, cash flow from operations performance will lag that. It's certainly not very far behind given the profile of our business. So we expect to be in a position of generating positive cash flow in the 2012 time zone.

So if you look at the highest level, $20 million burn this year, ratcheting that down dramatically next year, and then turning that corner. As we've said many times, we feel fully funded for the cash requirements that we have embedded in our growth plan.

Michael spoke earlier about distributed generation and some very large potential transactions that we're looking at on that front. Consistent with that, there's a lot of potential overhang in terms of working capital that come with that entrée into the DG business.

Again, the aggregate cash position's coming off of $86 million, a fairly narrow ongoing operational burn for the business that we're decreasing. We've got more than enough breathing space to deal with the working capital needs that we have as a company to support these growth markets.

Burt Chao - Simmons & Company

And just as a quick follow-up, these new growth markets, attacking these growth markets are built into this 30% reduction and everything net, right?

Bruce Cousins


Burt Chao - Simmons & Company

Is there anything foreseeable that could hinder that number? Say another opportunity opened up in a market that you haven't looked at, I mean I'm just trying to get an idea of sensitivity. Obviously investors would be enthused if you got into another market but that 30% number might have to change if something just came up overnight, which governments have been known to do.

John Sheridan

Burt, anything is possible, but as you've seen over the last few years, we are being pretty focused. We are aggressive on growth, but we're being pretty focused. So I think the answer to your question is, at this point we wouldn't see anything that would come up that would take us off that cash flow from operations trajectory.


(Operator Instructions) Next question is from Brian Piccioni of BMO Capital Markets.

Brian Piccioni - BMO Capital Markets

Congratulations on the improved results. Certainly the unit growth, taking into account the discontinuing of the cogen business is quite impressive. I'd like to ask a bunch of questions. Starting with gross profit margin issues, they were quite low throughout 2009, a little bit of an improvement in terms of the number reported today but they're well, well below what we'd hoped for. How do you see that changing through the year?

Bruce Cousins

Definitely in a positive trajectory, Brian. It's an early start. I would say that production and throughput in our plants has ramped up notably in this first quarter, and that's expected to continue. In addition to that, the mix on the revenue basis we look forward in 2010 is moving in the right direction. So it's a two point improvement versus the close out rate of 14% last year that we've seen in this first quarter, and we expect that to continue to move north as the year unfolds.

Brian Piccioni - BMO Capital Markets

In the comments with the press release there's mention that you expect, just to summarize, because I can't find it in the press release right now, but that you expect the funding of Dantherm to come from positive cash flow over time. Any sense when that could occur, specifically speaking towards Dantherm Power activities?

John Sheridan

What we said Brian when we initially announced the deal was that the investment that we had committed to as part of the transaction, which was $6 million, $3 million on closing and $3 million we would inject before 2012, along with the investment commitments to the minority shareholders, Danfoss and Dantherm, would bridge the company to positive cash flow. And the timeframe that we originally talked about, and we are staying with it, is through 2012.

Brian Piccioni - BMO Capital Markets

So basically, 2012 is the answer then?

John Sheridan


Brian Piccioni - BMO Capital Markets

Now, you touched upon the situation with respect to tender cancellation in India. Presumably that business eventually will get done, perhaps through a different mechanism but it seems that in the materials handling space there's almost a flurry of small deals that's happening, whereas in telecom space it seems that everything's associated with large sort of orders which take place over a significant period of time.

Is there any risk in a sort of quasi-ironic sense, a hope that the telecom business will migrate to a more sort of a piecemeal type business?

John Sheridan

I don't think so, but maybe I could just back you up for a minute. I might position what you said slightly differently. One of the things that Plug I think has done very, very well is they worked for a number of years, hard work, focused work, to prove to customers in small trials, facility demonstrations, ongoing interaction, making the value prop work, test cases, that this really was a product that would meet the value proposition on the operational requirements of the customer.

And then over the last year or so, despite the economy last year, Plug was able to demonstrate forward momentum, that that work had proved in the value props, customers were converting that belief into orders and things were starting to ramp up. And in a better economy this year, you're seeing I think that ramp steepen in terms of more facility conversions, more customer announcements and so on.

So, I think there's been a steady progress there and the fruits of that are now becoming more evident.

In telecom I think there's been a parallel set of activities that a number of service providers including many big ones in the U.S., in Europe, China Mobile, in Asia have experimented, have tested, have field trialed small numbers of these backup power systems. It's a new technology; it's a critical element in their network infrastructure, they needed to make sure the operational performance and the durability. Now that the positive results are emerging, now that other people, other service providers are starting to move forward, again, I think you will see the upswing.

So some of that that we are seeing now in terms of tenders, etcetera I think is just an expected progress point. And it's very, very early stage so, we are still very optimistic in that space.

Brian Piccioni - BMO Capital Markets

I see. Okay. Finally with respect to the waste hydrogen opportunity, I was wondering if you could speak towards how the business pipeline there is evolving and also whether there's possibly an opportunity to look at some inventive approaches with respect to, for example, financing the installation of a system through some sort of a lease where the power generation pays for the cash flow or something along those lines?

John Sheridan

Brian, I will let Michael talk to that in a second, I just want to make sure this is your second question is it? Probably your second question, and sorry, one thing I did want to just clarify, because you referenced backup power and you made an earlier comment about progress in terms of shipments. And we had a question before the call too about the shipment breakdown. So let me just give you those data points if I could before I let Michael jump back in on your distributed generation question.

So in terms of shipment growth in the quarter, was quite strong, which we're pleased with 341 total shipments, 178 in back-up power versus76 last year, that's all telecom service providers, so good growth, early stage but good growth.

Material handling shipments were 116 versus an anemic number last year with the economy of only seven. We are still working with the Cogen customers in a focused way we are 32 Cogen stack shipments, small number of bus, small number of automotives. Just to go back to your earlier point though, good growth besides the progress in back-up power which is with telecom service providers.

Michael, distributed generations.

Michael Goldstein

Two questions; one was on pipeline and the other was on alternative funding mechanisms. Starting with the pipeline, so, Ballard's only been in this sector a short period time, so remember we only started talking about it towards the end of last year, and in that small time we've got one project going to ship very soon to First Energy, one of the largest utilities in the U.S. and second project which is under negotiation now. So by all measures that's much faster than would be expected in this industry, with typical sell cycles from 12 to 24 months.

So pipeline around that is very strong, we have a good value proposition. And the neat thing about our value proposition in this space is that it's commercial today, so we are talking with one candidate customer where we were looking at terms that give them a multi-megawatt scale opportunity with no subsidies at commercial prices and everybody makes a good return on it.

So, today we are well positioned to get into the space. We think the value proposition works. I would point you to look at other companies in this space like Fuel Cell Energy. So, as of today there's 60 megawatts going into the ground and a 100 megawatt commitment in Korea, so people are used to looking at this business fuel cells are accepted as a power generation product, and Ballard's offering is getting widespread acceptance in terms of early pipeline opportunities.

In terms of alternate financing mechanisms, those are conventional in this arena, we have nothing to tell you specifically about that right now, but it is possible that that's one of the mechanisms that will be used in our offering over time.


Next question's from Peter Write of Tradition.

Peter Write - Tradition Equities

My question is on trying to understand kind of on the long term curve, the unit growth trajectory. and how that relates to the profitability curve, and what I'm looking for, is there any rules of thumb or how do you guys think of kind of the pricing environment along with your cost curve as your entering a lot of these new different markets? And if you can comment on mix, it was touched on slightly earlier on kind of deal sizes being very different, big deals versus small deals. How should we be thinking of kind of these new business segments, Dantherm and stuff entering into the business from a margin perspective?

John Sheridan

Peter, you hit a bunch of good points there, let me just give you a couple of comments back and turn to Michael to see if he wants to add anything. I'll warn you upfront though, I don't think we're going to give you a detailed fulsome answer to your question, because you are talking in terms of a broader guidance window, but couple of things specifically. One as we've said before, we don't forward price, we are not trying to create markets by going out there with negative margins, because I don't know what that proves and specially in this type of sector.

However, in terms of establishing solidifying early stage strategic market positions, we will squeeze margins and you have seen that and as Bruce reminded us earlier we're very focused in terms of getting to our target margins 30% type range. But in some cases that's going to take a couple of years to get there and some cases it will comes sooner. So, there is the timing element, there is a competitive element, these will be the incumbent versus strategic element in terms of establishing a first mover advantage.

In terms of mix, the point is good one. There is a significant unit revenue difference as we look across our business. Even in the first quarter results, you would have seen that as you interpolate 47% revenue growth. But if you look at fuel cell products as a segment, 28% revenue growth, but yet very strong shipment growth in backup power and material handling. And part of what's at play there is, I think we referenced in our MD&A, the bus revenues in that segment in the first quarter were actually slightly down.

So much bigger unit revenues on bus; and the bus is down, that does impact the overall segments. Secondly, just to be clear there was zero revenue in distributed generation in the first quarter. Again as Michael said earlier, a high unit revenue. So mix is a key factor and I think as we go forward we'll have to provide better information to use, so, you've got the unit revenue building blocks, so that comes more apparent. In terms of the broader directional question, Michael anything you wanted to offer?

Michael Goldstein

Yes, John, I just offer this; Ballard is unique in this sense that we're so vertically integrated. So one of the things that isn't obvious from the outside is, all of these segments together drive the same base economics in the company to drive cost down. So, for example Ballard makes the materials that go into the fuel cell stacks that go into the fuel cell solutions such as DG and back-up power, and then that follows with a service revenue, which also pulls back on the materials on the stacks again.

So material handling, bus, back-up power, distributed generation, they all drive the same basic core components, which is unique in Ballard because the portfolio of opportunities has a combined effect, driving the cost mechanism downward. So, for examples, one DG sale is hundreds of stacks. So, all of our businesses are tightly connected in the sense that they work together in a favorable way to drive costs down.

Peter Wright - Tradition Equities

And you read my mind. That's my next question, which is, if we look at component margins versus integrated solution type margins, your 30% goal lines up with which one of those two business models?

Michael Goldstein

The combined. Yes, the guidance we've given would be on an enterprise basis.

Peter Wright - Tradition Equities

And last question is a quick one, $20 million cash burn through 2010, is that on cash from operations?

Bruce Cousins

That's correct, cash flow from operations.

Peter Wright - Tradition Equities

So roughly half of that, forget working capital, was in the first quarter. You expect only about 10ish million in the next three quarters?

Bruce Cousins

That's correct.


Next question is from Jess Osborne of Thomas Weisel Partners.

Jeff Osborne - Thomas Weisel Partners

Just a few quick ones for Bruce. I was wondering, excluding foreign exchange on the OpEx line if we should assume that things stay the same, you had over the last few months several announcements on partnerships and investments. And I'm just trying to get a sense of how that plays out on the OpEx line?

And then also as it relates to cost, you've now been in a rising raw material environment for the last couple of months; any trends or impacts on you hitting your cost out goals for the year in that regards?

Bruce Cousins

Well, I heard three questions within there; partnerships, investments, and their impact on OpEx. I heard a question regarding FX exposure. And then the third piece, I'm sorry, if you could clarify it again for me?

Jeff Osborne - Thomas Weisel Partners

Yes, I was just saying, excluding FX. So putting that aside, you've signed a lot of partnerships and deals. How do we think about the trend of OpEx through the year? Historically the guidance commentary would be, that would be flattish. I just was curious if that's the same?

And then the second question would be, what's the trend on raw materials pricing that you're seeing and is there any impact to hitting your cost reduction goals through the year?

Bruce Cousins

So specific to the partnerships and some of the more recent announcements, let me remind you, on the R&D front, our agenda here is to collaborate on our research and development undertakings and find external sources of funding to help move that forward. To date we've been very effective in that regard. And so, overall, from an R&D perspective I see that investment being somewhat neutralized in our financial performance. So in aggregate, operating expense for the company is fairly consistent quarter-by-quarter as we look at 2010.

The exception to that will be currency of course. And as I mentioned, with the strong Canadian dollar, it's about a $1.5 million impact in the first quarter. We do see a $3 million to $4 million exposure for the year, should the dollar remain at parity. So that's a concern for us right at this juncture.

In terms of movement toward our cost goals, a bit of a good news bad news story here. One of our key components in the production of our product is platinum, which has become a very expensive commodity. We do have a hedging program around that but it is not 100% coverage for us by any stretch. So we do have exposure in the commodity markets with platinum sourcing. That's a bit of a headwind for us.

Fortunately, if you look at the product across the profile, it's a fairly small component of the overall product cost. And through the basket of other materials that go into our products, we've made some great headway in terms of pricing concessions with our supplier base.

As volume has really ramped up for the business, a very, very strong first quarter, and we see that trajectory continuing, we will leverage that volume improvement against supplier pricing, and I think on balance, move very positively toward our cost reduction goals that we have (inaudible).


(Operator Instructions) We have a follow-up question from Burt Chao of Simmons & Company.

Burt Chao - Simmons & Company

Just following up on a couple of things; kind of given the challenging times, the entire economy and also just the clean energy industries going forward, one of the things that Ballard, to commend you, has been great at is monetizing assets like your headquarters and also some of the intellectual property or shares in other technologies.

Going forward, is there anything else that you see as a potential, as a low-hanging fruit or even not even a low-hanging fruit that might be subject to a similar treatment? I mean, we've talked about cash balance and you've got plenty of cash, but at the same time from a capital efficiency standpoint, the leaseback makes a ton of sense and is there anything else on your radar that would make similar sense?

John Sheridan

Not really, Burt, we think we're well positioned. We feel good of what we targeted in our execution of those transactions. We think we're well positioned now, but we'll remain opportunistic.

Burt Chao - Simmons & Company

Okay. And another question; with Dantherm, you sent some employees over there to become employees there. From a geographic standpoint it's obviously a little bit stretched. Are there any plans of potentially maybe even relocating some of Dantherm or does it make absolutely no sense to consider that kind just from a multinational standpoint?

John Sheridan

It's early days, Burt, so, we'll see as we go. As I said, we've got a good integrated operating model in place, we feel good about that. We've got a very simple governance structure; simplicity is key is in governance as I'm sure you would agree. We've got a four person board, which we control; I chair it, Michael's on it. We have a senior executive from Danfoss and a senior executive from Dantherm, that's the board.

Michael and I and others are over there every couple of months now. The phase to phase to time is obviously critical to build up the integrated capability.

I should remind everybody what Dantherm Power is, it's a very small company, we're talking basically 40 people, which is essentially systems engineering shop. It was really that systems capability we wanted with this transaction as well as a broader relationship that they have through their parent company. That integrated system team, working very closely now with our stag team in Burnaby, some of the key development initiatives on the table. So far, it seems to be working well, so, as far as a broader reorganization, I don't see the need for that, at least not now.


There are no further questions at this time. I'll turn the conference back to John Sheridan.

John Sheridan

Thanks very much and thank you, all, for your continued interest in our company. We look forward to being back with you at the end of July to talk about Q2 results. Take care.


Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.

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