Ballard Power Systems (NASDAQ: BLDP) (TSX: BLD) CFO Interview

Tony Guglielmin V1


Ballard Power Systems
CFO: Tony Guglielmin


WSA:  Good day from Wall Street.  This is Juan Costello, Senior Analyst with The Wall Street Analyzer.  Joining us today is Tony Guglielmin, the Chief Financial Officer for Ballard Power Systems.  The company trades on NASDAQ and the ticker symbol is BLDP and on the TSX under BLD.  Thanks for joining us today there, Tony.

Tony Guglielmin:  I appreciate it.  Thanks for taking the time to have us on.

WSA:  Certainly.  So for some of our listeners that didn’t catch our last interview with Ballard, can you provide us with a history and overview?

Tony Guglielmin:  Yes, I’d be happy to.  Ballard Power Systems is a world leader in fuel cell technology, commercial sales in fuel cells, specifically proton exchange membrane (PEM) fuel cells.  Our company has been around for almost 40 years, so lots and lots of experience.  We’ve been publicly traded now for a little over 23 years and as you mentioned, traded on NASDAQ.  We’re dual-listed and traded in Toronto as well.  We’re headquartered here in Vancouver, British Columbia in Canada.  We have about 450 employees worldwide and about 300 of them are here in our Vancouver office where we do all of our manufacturing, testing, and design.

With the years of experience that Ballard has had, we’ve developed and have over 2000 patents and patent applications in the area of fuel cell design, system integration, and manufacturing.  Over the course of our history, we’ve delivered over 250 megawatts of fuel cell products in a variety of end-market applications, including fuel cell buses globally, stationary power, and the forklift market, through our partner Plug Power.

And there are just a couple other data points that are probably relevant for your listeners.  We are a commercial company.  Last year, we had close to $60 million of commercial revenue.  This year, the street consensus has us somewhere in the $85 million range.  Again, that’s all commercial revenue and we’ve been growing 20% to 30% organically.

We are widely held, but we do have four strategic investors and I’ll mention them briefly.  Broad-Ocean Motor Company out of China — and there is a story on China, which we’ll talk about.  United Technologies in the US, Anglo American Platinum out of South Africa, and Nisshinbo Holdings out of Japan.  Those collectively own a little less than 20% of our shares outstanding.  The rest of it is widely held and heavily retail in the US.  Perhaps we’ll stop there, but that’s a bit of an overview on the company.

WSA:  Certainly.  So can you cover some of your recent news including the deal in China, as well as some of the results that you put out for the quarter?

Tony Guglielmin:  Yes, absolutely.  So just a bit of context.  You know the key end-markets in our power products platform are focused on heavy duty motives, so the bus market, I mentioned the forklift market, stationary power.  In October of last year, we acquired a company out of Southborough, Massachusetts called Protonex, which gives us portable power and power management products.  So that’s our power product platform.

I would say that’s about 65% of our revenue across that platform.  We also have a significant platform we call Technology Solutions, which is selling our core intellectual capital and using our patent portfolio to do a variety of development work for end customers who pay us on a cost-plus basis.  That’s about 35% of our revenue, which is very high, and that’s principally in the automotive space, but also in aerospace and a variety of other areas.  I provide that context because that business platform has been the one we’ve had now for a number of years and as one can expect in this early-stage industry, every year it seems one market is a bit hotter than others.

You mentioned China.  China has just been transformational in the last 12 months for us.  Up until 12 months ago we had limited business in China, but principally as the result of a change of government policy to support fuel cells for clean energy transit, specifically buses and commercial trucks — and I say supportive through a very attractive subsidiary regime — the Chinese market has just taken off in terms of demand for fuel cell engines for transit buses and a wide range of commercial vehicles.  So going back about 12 months ago, we announced a deal to power about 300 fuel cell buses in China, which, when we announced it, represented about three times the number of fuel cell buses operating in the world today.

So that deal in itself was significant, but since then we’ve announced a couple other deals related to putting fuel cells into China to power buses.  These most recent transactions were announced at the time of our quarterly results a couple weeks ago.  One was the largest deal we’ve ever announced, which was a $168 million transaction with a joint venture partner in China to supply the core of what we called MEAs, the core part of a fuel cell stack, to a five year take-or-pay contract with a joint venture partner that is now going to be assembling fuel cell stacks in China to meet all of the demand.

So we’re participating in a joint venture to localize assembly, to take advantage of lower costs, and to take advantage of these Chinese subsidies, but as I say part and parcel of that is this $150 million deal.  The $18 million is for a license and technology transfer to help this joint venture partner set up the manufacturing line.  That was one deal we announced.  The second transaction we announced in China was a significant strategic collaboration with a company that I mentioned a moment ago called Broad-Ocean Motor Company.

Broad-Ocean is a global supplier in the automotive and truck OEM market for a variety of motors, alternators, and generators globally.  They also have an electric vehicle subsidiary.  Broad-Ocean has made a strategic investment for 9.9% of Ballard.  That deal is expected to close tomorrow, actually.  That will bring in about $28 million in cash to Ballard, giving us a very important strategic partner with a global platform.  What’s interesting as well about Broad-Ocean is that, at the same time of that announcement, they also announced a commitment to buy 10,000 fuel cell vehicles in China to supply the commercial market with fuel cell vehicles.  This is an order of magnitude never heard of before in terms of fuel cell vehicles, so Broad-Ocean is going to be sponsoring and buying 10,000 vehicles.  All of those will be powered by a Ballard-powered product, so Ballard Power stacks and systems will be going into those vehicles over the next few years.  Again very significant, important deals in China, specifically.

And just to touch on your second question on our results.  As I mentioned, these two landmark deals were announced at the same time as our Q2 results.  So while China is going extremely well and it’s relatively new to us, our core business is also doing very well in our second quarter, which was to June 30th.  We announced that our results and our revenue for the quarter was up 58% over the same quarter last year and after the first six months, we’re up 66% in terms of revenue growth.

And the other important key metric for us is gross margin.  Our gross margin in the second quarter was 29%, up substantially from the second quarter last year and for the first six months our gross margin sits at 25%.  So not only are we seeing rapid growth in revenue, we’re seeing very nice gross margins, partly reflecting the important contribution from heavy duty motive and Technology Solutions, as well as our power products.  We are very excited about the Chinese deals and very excited about the growth in our core business.

WSA:  And what are some of the factors that you feel make the company uniquely positioned to continue to capitalize on some of the current trends in your sector?

Tony Guglielmin:  I would say there are a couple things.  Number one is that in the markets we participate in, heavy duty motive, principally in the bus market, stack supply and material handling, and some of the other markets in portable power and power electronics, Ballard is an industry leader in all of those markets.  We experience substantially large leading market share.  So, one of the key things is that while these markets are starting get traction, whether it’s in China, or Europe, or the US, we’re on the leading edge of participating in the growth of the overall macro market for fuel cells.

So, being an industry leader well positions us in all of the markets that we’re in.  I think the second thing is that new customers are looking at potential fuel cell applications for things in the aerospace industry, trains, and underground mining, for example.  We are the company of choice for a lot of these companies who look at Ballard with our history, our deep intellectual capital, and our IP portfolio to do this technology solutions work for these potential customers and look at new fuel cell applications.  So in the short term we’re participating by getting new, highly attractive deals to do new product development paid for by others, but these could all lead to future products.  I think that industry leadership and the competitive advantage of our intellectual capital and IP put us in a prime position to be the leader as the fuel cell industry grows.

There are two more things I’ll mention that put us in a particularly unique space.  One is our balance sheet.  We ended Q2 with over $40 million of unrestricted cash and no debt.  So we have a very clean balance sheet, we’re well-capitalized, and with the closing on this Broad-Ocean deal for $28 million tomorrow, that will add a significant amount of cash to the books.  We should end the year north of $60 million in cash, which puts us in a position to say that we’re now well-capitalized and funded to get to break-even on cash flow.  That’s friendly for shareholders, but also a very solid balance sheet.

And the last thing I’ll mention is that there’s a whole kind of other opportunity that’s been out there for many, many years that’s starting to come closer, which is fuel cell automotive.  Of course Ballard participated in that market for many years.  We kind of put it on the back burner to focus on near-term opportunities, but there is a whole resurgence in opportunities in fuel cell automotive and we’re the leading player to participate there.  We signed a very significant transaction with the Volkswagen Group and Audi a couple years ago which is now being extended out to 2019.  It’s about $120 million of revenue, but we’re also working with three other automotive companies on much smaller programs.  I think there’s some very unique optionality in the Ballard story, just in the automotive space as well, that’s perhaps not well-understood.  So those are the kinds of things that we think position us very well in terms of where we’ll fit in with the opportunity of fuel cells.

WSA:  Right.  And what are some of the key goals and milestones you’re hoping to accomplish over the course of the next 12 months?

Tony Guglielmin:  I would say first and foremost, and I’m sure every company would say this but – execution, execution, execution.  With all these transactions that we’ve announced in China and the things that we’re doing in Europe, it’s imperative that we deliver top-quality product on time and meet all our customer expectations.  So that culturally stands out first and foremost, but to kind of drill down a level, there are a couple other key milestones for us.  One of them we just ticked the box on, which is to take care of any lingering liquidity issues that the market may perceive.  Clean tech is an industry that’s notorious for coming to the market to raise money, and potentially expensive money, on an ongoing basis.  So one of our key objectives this year was to get a fully-capitalized balance sheet.

And I will say, by the way, on friendly terms, the deal we did with Broad-Ocean was at market, you know no discount, no warrant.  So getting that balance sheet in shape was priority number one, but the next priority on our list is to get to profitability and in that regard, it’s a bit of math.  With our gross margin targets in that 30% range, operating cost base, we need to get to about $120 million or thereabouts of revenue to get to profitability.  We’re not going to be there this year and I’m certainly not going to give any guidance as to whether we’re going to get there next year or 2018.  But rest assured, getting to profitability in the next 24 months is certainly top and with that, of course, comes cash flow break-even, which would follow on very closely to that.

So balance sheet, tick the box.  Getting to cash flow break-even and profitability are the next key financial milestones and then, as I said, right at the top was execution against the deals.  So, those would be the ones I would mention.

WSA:  Right.  And I think you had touched on this, but what are some of the drivers that you wish perhaps investors in the financial community better understood about the company?

Tony Guglielmin:  Yeah, it’s a great question.  I think there’s certainly a broader sectoral overhang around clean tech more generally that it’s difficult to swim upstream when you’re in the sector.  So I think a couple things I would say to anybody who is looking at clean energy or clean tech — or thinking of investing in clean tech and particularly fuel cells — is that there are some things that separate companies from others and of the couple that I would mention, certainly the balance sheet.  I can’t overstate that.  I think having a fully capitalized, no-debt balance sheet gives us two things.  A, it’s investor friendly, but B, it gives us the capacity to grow, whether organically or non-organically.

So we’re on a fairly rapid growth trajectory.  I hadn’t mentioned M&A earlier, but we did buy a company last year and I can say that perhaps something that’s not well understood is how committed we are to grow and with the balance sheet, I think that’s important.  So, that’s one thing I would mention.

There are two other things.  Number one, I’ll go back to that optionality in automotive.  It’s not just automotive.  We have some early work going on in UAVs (Unmanned Vehicles) and a couple of other areas and I think — for investors who are taking an early look at the story — there are some interesting themes in terms of new markets that could provide some upside in the next one, two, three, or four years that aren’t well understood.  So thinking about the optionality and the balance sheet are two key things that I would focus on.

The last thing I would mention is this broader perspective that the whole clean energy sector is impacted by oil prices and the idea that in this low oil price environment there is no economic benefit to be looking at fuel cells or other technologies.  I think the story that’s not well-understood around Ballard is that we are actually unrelated and have very little relevance to oil prices.  So our end markets such as the bus market, the forklift market, and the portable power market are absolutely unrelated to fuel prices.  It’s all about the full total cost of ownership including operating cost, maintenance cost, and that’s what’s causing customers to buy the products.

Yes, it’s cleaner than diesel fuel and gas and so forth, but it’s really about payback analysis and total cost of ownership.  I was just in New York last week and there seems to be this perpetual overhang that low oil prices mean bad news for clean tech and particularly fuel cells.  I just want to leave that as a key takeaway — don’t be worried about that when you think about Ballard.  Look at our end markets and look at the competitiveness of the product that’s really independent from the fuel price.

WSA:  Sure.  Once again joining us today is Tony Guglielmin, the CFO for Ballard Power Systems.  The company trades on NASDAQ, ticker symbol BLDP, as well as on the Toronto Stock Exchange, symbol BLD.  Currently trading at $1.98 a share, market cap is about $300 million.  Before we conclude here, please briefly recap some of your key points, Tony.  Why do you believe investors should consider the company a good investment opportunity today?

Tony Guglielmin:  Sure.  Let me just summarize three or four key points.  Number one is our industry leadership.  The 40 year history of the company, the deep competitive advantage that we think we have with our IP, our 200+ engineers and scientists I think set us aside from other players.  I’ll say the balance sheet, the strong cash position, is putting us in a great position to grow the company in a very shareholder-friendly way.  And the other one I’ll put out there again is that outside of our clear and strong strategy today for power products and technology solutions, I think there’s a fair bit of embedded optionality in the Ballard story, whether it’s in automotive, UAV, or other applications, that I think are developing stories. And I’ll come back to where we started — China is just going to potentially be a game changer for us as well.  So I would leave that with investors to think about and to think about Ballard Power.

WSA:  Well, we certainly look forward to continue tracking the company’s growth and report on your upcoming progress and we’d like to thank you for taking the time to join us today and update our investor audience.  It was great having you on.

Tony Guglielmin:  Much appreciated, always a pleasure.  Thanks a lot for having us on.

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