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Ballard Power Systems Inc. (NASDAQ:BLDP)

Q3 2012 Results Earnings Call

October 31, 2012 11:00 AM ET

Executives

Guy McAree - Director, IR

John Sheridan - President and CEO

Tony Guglielmin - Chief Financial Officer

Analysts

Emily McLaughlin - Stifel Nicolaus

Operator

Hello, this is the conference operator. Welcome to the Ballard Power Systems Q3 2012 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. Please limit your questions to two so that others may participate. You’re welcome to rejoin the queue if you have additional questions. (Operator Instructions)

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

Guy McAree

Thanks, very much. Good morning, everyone. Today’s call is to discuss Ballard’s third quarter 2012 operating results. And with us here today, our John Sheridan, Ballard’s President and CEO; and Tony Guglielmin, our Chief Financial Officer.

We’re going to be making forward-looking statements, 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 and 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, and our most recent annual information form and other filings.

Note the Ballard reports financial results in accordance with IFRS. In addition, results are consolidated to include Dantherm Power, and are in U.S. dollars unless otherwise noted.

Now I’ll turn it over to John Sheridan now.

John Sheridan

Thanks, Guy. Good morning, everyone and thanks for joining us today, especially those of you in the east who are coping with the aftermath of hurricane Sandy. Tough-tough times for many-many people, especially in New York and New Jersey. It’s been a violent and a destructive storm that has highlighted once again the vulnerability of communications networks to power disruptions. Beyond the human concern we’ve monitored the impact of this storm with special interest as we have 20 of ElectraGen methanol systems deployed in the Bahamas, which was hit as you know by the early stages of the hurricane, and we are very pleased to hear from our customers that the systems operated flawlessly providing extended runtime backup power for 72 hours when it was critically needed during the storm.

But turning back from the storm to Q3 results, our focus today, of course. As you know on October 9th, we revised failure guidance, so that’s where I’ll begin. The decision of revise guidance was based on our preliminary estimates for a weaker than expected Q3 and a softer outlook for Q4. The unexpected weakness was primarily due to continued soft demand in material products and delays and timing issues in the two development stage Fuel Cell Product segments of bus and distributed generation.

We reference bus and DG as development stage given the sales in these two segments still require government support or subsidies. This is in contrast to backup power in material handling where sales are based on simple commercial value props. As such we view backup power and the chip material handling is commercial stage segments.

And I have note in this commercial stage segments, we are continuing to see growth that is pretty much on track with our plan. Also as reported in past calls we are continuing to see good growth in fuel cell engineering services. So we’re seeing a bit of [di-conomy] and growth in these different parts of our business, so I’ll give you some color in each of these areas in a minute. But first let me address the higher level point as to what we are doing to address this growth [di-conomy].

And essentially, we’re taking the two prong focus, first, we will be concentrating more attention, more resources, higher focus on the commercial stage segments as we go forward, backup power and material handling and relatively less investment in development stage segments Bus and DG.

Second, we will continue to be aggressive on cost to ensure that we have a costs base and can enable profitability on the near term with a more constrain revenue trajectory. So that’s the higher level concept now back specifically to the Q3 results, which we’re pretty much consistent with these contexts. So revenue $14.2 million up from Q2 but still down year-over-year primarily due to Bus, DG and material products. This week revenue result they had knock on effect on adjusted EBITDA which was negative $5.5 million in Q3 or negative $3.9 million excluding the $1.6 million restructuring charge in the quarter.

Cash operating costs continue to its positive trajectory and improvement of 24% in Q3 and 20% year-to-date. And cash used by operating activities was reduced to $1.3 million in Q3, a marked improved in the quarter in a 26% improvement year-to-date.

I’ll now talk to the revenue results in a bit more detail and outlook on revenue and then Tony will address costs base cash flow and liquidity. So revenue, starting with communications backup power, consistent with our heightening focused in commercial stage fuel cell markets, we acquired select IdaTech assets in the quarter, this investment has extended our product portfolio to methanol systems and is expanded our channel our rich in our customer base. We now have channel partners in Asia, South Africa and the Caribbean.

In Q3, we show sales back up power grow significantly compared to the first half of the year and up year-over-year by about three times. Beyond sales in the quarter there have been several developments that provide evidence of strengthening growth and backup power and ESA with first element energy, new customer relationship for us for electric and systems to be deployed in a major telecom network. Purchase orders major telecom service providers including Vodacom in South Africa and Telstra is Australia. An agreement for supply of initial ElectraGen systems to Nokia Siemens and also a recent announcement by NTT DOCOMO that it plans deploy methanol fuel cell systems for backup power and it’s network in Japan.

So is in good developments and a positive Q3 trajectory in communications back up power.

Turning to the second commercial stage market, material handling as you know we have an exclusive relationship with plug power and plug has about an 85% share in this market, the dominant player, Plug continue to work with major players and the distribution center and logistic fields and has been receiving repeat orders from key customers, customers including Walmart, Cisco, Kruger, P&G and Mercedes Benz. The August 2012 guidance of 1600 to 2000 [generate] systems translates into stack shipment growth of approximately 40% for Ballard. So a solid growth trajectory in material handling heading into 2013.

Again supporting this growth in these two commercial stage fuel cell markets is Fuel Cell Engineering Services. Engineering services continues to track well with Q3 revenue of more than $3 million from our work with the auto and non-automotive customers including Anglo-American in South Africa. We continue to expect more than $10 million in engineering services revenue for the full year.

So all-in-all that’s a pretty positive picture on growth, but growth in these areas has been offset year-to-date due to three specific guidance. First, the absence of the Daimler manufacturing contract that wound down third quarter last year, that provided $17.5 million in 2011 at this point in the year. So, again comparing year-over-year that’s a pretty significant factor to keep in mind.

Second, the continued softness in demand through Q3 in our material products division, just a bit more color there, material products revenue was weak at $3.8 million for the quarter down about 31%. Customers having continued timing, inventory and technical issues, we see these factors is largely behind us now, so that should begin to turnaround in Q4.

Third, the weakness in the development stage segments of Bus and DG, distributed generation which I mentioned before, which are dependent on government funding, official update at this stage in the market development, successful trials and reference site deployments. As government support has become an increasing challenge with tough macro economic conditions, tough policy decisions, sovereign debt issues etcetera, the performance of these segments has been negatively impacted. Bus revenue in Q3 was largely limited to the shipment of two modules the SunLine Transit in California and just a bit more on Bus as we look into Q4. We do anticipate activity picking up a bit there, with shipments to Van Hool schedule for Europe, as well as several shipments in the US under FDA government programs.

In Distributed Generation, revenue in Q3 was limited to the final commissioning work for the one megawatt ClearGen system for Toyota in California. That ClearGen system has now gone live, you might have seen some of the media coverage of Toyota’s launch event two weeks very well received.

By the way I have spoken about delays in this call and delays in the past in the development stage markets in particular. One example of this in DG is our continuing work towards the contract with a major gas company in Europe. We talked about this before. We have been excited about the opportunity for our first megawatt ClaerGen system in Europe. We have had a number of delays, but finally there is progress the JTI funding support for this project was confirmed just last week. So we now anticipate contract completion in the coming weeks.

So to wrap up my comments, son on the top line clearly it has been a disappointing sales year for us so far as we continue to work hard to develop early stage market against the tough economic backdrop.

Looking forward, as you know from our revised guidance, we expect revenue to increase significantly in Q4, from the year-to-date run rate, we see this increase being led primarily by the commercial stage fuel cell segments back-up power and material handling plus engineering services. And as we look into 2013 our rolling order book for the next 12 months remains strong, at $50 million.

So with those comments on the top line over to Tony to talk about the bottom line elements.

Tony Guglielmin

Thanks, John. I’m going to begin by addressing the key drivers for the bottom line profitability gross margin and cash operating cost. Let me start first with the Q3 cash operating cost, which were $7 million an improvement of $2.3 million or 24% compared to compared to Q3 last year. Our year-to-date cash operating cost were $24.4 million a 20% improvement over 2011.

As John mentioned, we continue to make progress on our OpEx management, which is really a multi-faceted program this year that has included reduced facility cost, the restructuring of our corporate bonus plan, reductions in discretionary expenses, redirection of our engineering resources to revenue generating projects and a 7% reduction in the workforce which announced or which we implemented midyear.

So with that we expect cash operating cost to be in the $30 million range for the year, down from $39.3 million last year and we should expect to see cash OpEx in the mid to high $20 million next year reflecting the full year benefit of the 2012 cost reduction initiatives.

So turning to gross margin, in the quarter gross margin was 14% down 5 points compared to Q3 last year and 17% year-to-date, down 1 point compared to last year. This was predominantly due to product mix in the quarter, with the lower proportion of high-margin bus modules and also due to high unabsorbed overheads as a result of relatively low overall sales volumes.

As said with the project revenue growth in Q4, including a higher proportion of the high-margin engineering services business, we expect gross margin of approximately 20% for the full year. As we look into to 2013, at this stage we would expect gross margin to be in the mid 20s next year.

Adjusted EBITDA loss increased 10% to negative $5.5 million in Q3, included in this number there was – John mentioned was this $1.6 million restructuring charge related to the July workforce adjustment. Year-to-date adjusted EBITDA improved 10% to negative $16.6 million. And we expect further improvements in adjusted EBITDA in Q4 based on to continue to increasing overall revenue including the growth in the high-margin engineering services, combined with the benefits of reduced cost base.

So these factors together support our guidance for adjusted EBITDA of approximately negative $18 million for the full year. A significant improvement of roughly 20% over 2011.

Now, looking at cash flow and liquidity, cash used in operations was $1.3 million in Q3, $27.6 million year-to-date, improvements of 86% and 26% respectively over the same periods, last year. The Q3 improvement was driven principally by positive working capital, $6 million in the quarter, primarily results of lower accounts receivables of $2.9 million due to significant customer collections, combined with lower inventory levels of $2.3 million.

And we closed the quarter with $13.7 million of cash reserves, net of the operating line, and we anticipate cash flow to be flat to slightly negative in Q4. And cash use next year is expected to be less than in 2012, nonetheless we are continuing to pursue opportunities to fortify our cash position including monetization opportunities related to our material products operations in Lowell, Massachusetts.

Quick review of the financials and by way of summary, year-to-date revenue has been disappointing although we expect stronger Q4 revenue in the order of $22 million and approximately $60 million for the full year consistent with our guidance and this is underpinned by a $50 million 12 month order book.

Cash operating cost as I mentioned have improved 20% year-to-date and we’re expecting to be approximately $30 million for the full year. Adjusted EBITDA, as I mentioned, has improved 10% year-to-date and is expected to be approximately negative $18 million for the full year. And cash used by operating activities has improved 26% year to date again with the expectations for flat to slightly negative cash used in Q4.

Finally, our full year 2013 outlook will be provided on our next conference call. So with that, we would be pleased to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) First question is from Emily McLaughlin of Stifel Nicolaus.

Emily McLaughlin - Stifel Nicolaus

Hey good morning. I just want to talk a little bit about the bus end market. Obviously it’s been challenging. Looking out a little bit about what’s going on in Brazil and the visibility you have there for 2013?

John Sheridan

Thanks for the question. And I guess the (inaudible) we found the Brazil experience for our company doing business there for the first time, a little bit of a process of discovery with some significant disappointments along the way, of course having signed a letter of intent to move forward with the significant contract. We still think the market is very significant in terms of potential. We still see good underpinnings for fuel cell bus developments there. But having learned the tough way on the challenges of business in Brazil, we are not going to get ahead of ourselves again.

So when we have something specific to report, we will be pleased to do so. But until then, we’re not going to give any type of speculation going forward on timing or potential. So that kind of leaves that the bus focus we’ve got is where we do have government support and as ironic as it is, a stronger government support and funding in the EU right now, so we continue to work with Van Hool on a number of opportunities partly with EU JTI support. We’re very pleased to get traction with Tata on Airbus development program, although that’s early stage, a fairly small program. And we continue to work in North America principally the U.S. But they’re pretty small programs at this point. So just a bit more broadly and to make sure I didn’t mislead anyone, when we talk about bus more specifically now as a development stage opportunity for us, it’s not that we’re backing off bus, because we really do believe as a significant opportunity of the value prop for fuel cells. But we just want to be realistic with what we see as just lower timeline for development.

Emily McLaughlin - Stifel Nicolaus

Sure. And just to confirm there were no shipments to Van Hool in the quarter?

John Sheridan

That was correct. In Q3 there were no shipments to Van Hool.

Emily McLaughlin - Stifel Nicolaus

Okay. And switching gears a little bit, do you have an update on the Motorola tender for Norway’s petro project?

John Sheridan

Again, no, only broadly we continue to work closely with Motorola. We’re very pleased with the relationship we’ve got with Motorola. The value prop for our systems is very, very strong. So we’re confident of prospects. The project is a complex one and a big one, a big price tag on it. So it’s high profile within the Norwegian government. So it looks like and not to repeat the same theme, but it looks like the timelines for contracting is longer than we had anticipated. So realistically we are now looking at contracting in the probably late first quarter, early second quarter of 2013.

So in terms of shipments, in terms of business, that would be something now we’re positioning for the back half of 2013. So the timing has changed but the size of the contract, the business potential we still see as very significant.

Emily McLaughlin - Stifel Nicolaus

Great. Okay. That’s all for me. Thanks a lot.

Operator

(Operator Instructions) There are no further questions at this time. I’ll turn the conference back to John Sheridan.

John Sheridan

Thanks operator and again thanks everybody for joining us today. With markets closed for a couple days and everything going on in the aftermath of the hurricane, we didn’t expect a lot of participation on this call. So for those of you that did join us, thanks again. We’re looking forward to a solid Q4 and reporting on that along with our 2013 outlook in February. Thanks very much.

Operator

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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