Thank you for standing by. This is the conference operator. And welcome to the Ballard Power Systems’ Fourth Quarter and Full Year 2016 Earnings 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 [Operator Instructions]. I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

Thanks very much, and good morning everyone. Today’s call is to discuss Ballard’s fourth quarter and full year 2016 financial and operating results. And today, we’ve got Randy MacEwen, our President and CEO and Tony Guglielmin, our CFO with us on the line. We’re going to be making forward-looking statements that are based on management’s current expectations, beliefs and assumptions, concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. So, today Tony is going to review our Q4 and full year 2016 financial results, followed by Randy's discussion of strategic progress last year and an outlook for 2017. Then we’ll open up the call for Q&A. But before we start, couple quick notes. First, Ballard is going to be attending the 29th Annual ROTH Conference in Dana Point, California, being held in about 10 days time. Randy and I will be meeting with investors one-on-one on the Monday, March 13th. And Randy will present Ballard's investment highlights at 4:30 PM Pacific Time that same day, and its presentation will be webcast. And we’re also going to be holding and hosting an Investor and Analyst Day later this year on September 14th in New York City. Further details on that event will be forthcoming well in advance. Now, I am going to turn the call over to Randy for some brief introductory remarks before Tony reviews the financials.

Thanks, Guy. And welcome everyone to our Q4 and full year 2016 earnings conference call. As discussed on prior calls, we set two main objectives for 2016; first, to improve our strategic positioning to support long-term competitiveness, profitability and sustainability; second, to improve our financial performance and position, including revenue growth, gross margin expansion, cost discipline and balance sheet strength. We’re pleased to report that in 2016 we delivered significant and measured progress against each of these objectives. For full year 2016 in Q4 operating results, we report the following highlights; full year revenue, up 51%; full year gross margin, up 10 points; $1.8 million in positive adjusted EBITDA on the fourth quarter; and a strong balance sheet with $72.6 million in cash reserves at the end of 2016 with no debt. We believe we have a very strong set up as we start 2017. We have a record $87 million of committed order expected for delivery in 2017 already exceeding last year's revenue. Given our deliberate progress on strategic positioning and improved financial performance in 2016, coupled with our strong set up as we start 2017, we believe we continue to differentiate and distance Ballard from peer group companies, strategically and commercially, as well as representing the preferred fuel cell investment opportunity. I'd like to turn the call over to Tony for his review of our Q4 and full-year 2016 financial results. And as Guy mentioned, I'll then provide an update on our strategic positioning along with more color on our 2017 outlook. With that, over to Tony.

Thanks Randy and good morning, everyone. Before I review the financials, I want to take this opportunity to secure a personal comment. I served as Ballard CFO, since 2010. In my opinion what our team accomplished in 2016 was remarkable. The positioning, strength and quality of our business has never been stronger. I'm pleased to report strong 2016 results, an important installment on our continued journey and progress at Ballard. Top line revenue in Q4 was $30.7 million, up 54% year-over-year. This reflects the increases of 45% in Power Products and 71% in Technology Solutions. On a full-year basis, revenue was $85.3 million up 51%, reflecting 65% growth in Power Products and 31% growth in Technology Solutions. Within Power Products, for the year, growth was driven by 122% gain in Heavy Duty Motive to $26.5 million and 236% increase in Portable Power to $11.4 million, recalling that we acquired Protonex in October of 2015. Just as exciting as our strong revenue growth is the progress we made in 2016 related to gross margin. Since Randy joined Ballard more than two years ago, gross margin expansion has been a particular area of organizational focus. The gross margin in Q4 was up 11 points year-over-year to 30% and for the full-year up 10 points to 28%. With the strategic changes we have made to our business portfolio, we have seen a shift in revenue mix towards higher margin revenue businesses. This includes higher contributions from Heavy Duty Motive, a full-year contribution from Portable Power and higher revenue from Technology Solutions. Gross margin expansion in 2016 was also supported by operating efficiencies, including greater overhead absorption as a result of higher production volumes. For 2017, we are expecting further improvement in gross margin, driven by higher contributions from Heavy Duty Motive, Portable Power…

Thanks, Tony. So, let's now review our improved strategic positioning in 2016. We’re continuing the incremental execution of our corporate business plan that we’ve been methodically driving forward through the past two years. This progress underpins the results we have delivered to-date, but also leads the foundation for ongoing growth and future profitability. As a reminder, our strategy is to have a customer centric business model, supported by two cross-leveraging growth platforms; Power products and Technology Solutions. Our goal is to continue to be the market leader with the strong and sustainable competitive advantage in each of our served markets by offering best value, technology, product and services. Our focus is on large addressable markets where our value proposition is strongest and where commercialization horizons are near-term. I'd like to highlight three specific strategic areas where we made significant progress in 2016; the execution of our China strategy; reposition in the backup power market; and continued growth in technology solutions. So, first an update on the progress of our China strategy. As a reminder, the convergence of macro drivers in China represents a tremendous market opportunity for clean energy solutions, particularly in mass transit. The addressable market in mass transit is in China is more than 20 times larger than Europe and more than 50 times larger than North America. At Ballard, we’ve focused on the development of local fuel cell supply chain and related ecosystem to address this fast growing clean energy bus and commercial vehicle markets in China. Indeed a great deal has transpired over the last year. Let me begin with a brief update on our joint venture with Synergy for the local manufacturer of fuel cell stacks in China. The joint venture transaction, as you may recall, is expected to provide a minimum $170 million of…

Thank you. We will now begin the question-and-answer session [Operator Instructions]. First question is from Rob Brown with Lake Street Capital Markets. Please go ahead.

On the China bus business, it seems to be developing pretty significantly. And you talked about some rapid scaling into this year and into next year. Could you give us a sense of unit size that you envision that that business could develop into?

So, the market indicators, Rob, are very strong. As we mentioned, obviously, we have existing programs underway that have been announced, including with Synergy. Last year, they deployed about 24 fuel cell buses, which by historic standards, is very attractive. They're looking to scale, significantly in 2017 and 2018, to complete the execution of their 300 bus program. So, we expect probably in range of about 100 fuel cell buses from them in 2017. It's important to understand that they're not just sitting on that one project. They continue to look at other projects throughout China, and wouldn't be surprised to see them have some announcements on that front in 2017. And then, of course, the scale of opportunity we're seeing with Broad-Ocean, frankly, is unprecedented. I believe it could be a once-in-a-lifetime opportunity from what we're seeing with Broad-Ocean. Not just on the demand side, but even on the cost reduction side. As an illustrative example, they've got a team coming over here, looking at automation steps for module manufacturing; so we're quite encouraged with the level of engagement we have with them on that front. In terms of volume, their forecast are aggressive, and I think we're going to be little more conservative and wait to see some execution on this front before we come out with specific numbers for specific time periods.

And then on your gross margin expansion into moving on basically, but how do you -- if you step back, how do you see this business getting to what's the gross margin this business should be at as it develops?

Some of our call we, a number of years ago, we had put out a number that's a long term target around 30%. I would say our view has changed slightly on that largely as a result of the repositioning of the portfolio, notably the exit of some of the lower margin business. So, when you look at the three key drivers for us right now, which are the Heavy Duty Motive, the Portable Power, and Technology Solutions, I don't know that I'm comfortable giving the exact number. But I would certainly think something in excess of 30% is going to be quite sustainable as we grow those businesses and as Randy mentioned, as well product cost reduction. While it wasn't significant this year in terms of some of the steps we took, we're looking for further product cost reduction, largely driven by some of the China activity in 2018. So, without giving you a hard number, certainly, I'm quite comfortable saying it's higher than the number we've given previously, so in excess of 30%.

The next question is from Carter Driscoll with FBR. Please go ahead.

Just one echo what Rob said, very strong progress, particularly, Randy, since you taking stewardship, it's affected quite a changes the organization, so congratulations. First question, you talked about really the impact of your developments in China. In particular with the synergy JV not really being in effect to late 2017, but just talk about cost reductions. Maybe you could elaborate a little bit, because there is certainly additional ones going to come on set up and running, particularly as you service other geographies, as you are allowed to under the JV agreement as early stance. Just maybe drill down a little bit into some of the cost expectations you have. And maybe internally, it looks like you could potentially reach net breakeven this year. Is that internal goal you think is realistic? And I have one more follow-up. Thank you.

So, first on cost reduction. First of all, the we way think about cost reduction is thinking about the themes, thinking about different scope of work, total cost of ownership and then drilling down into the detail. So, from a theme perspective, there is no doubt that electrification of motor propulsion is happening. This is a global trend being led now, we believe in China, particularly for buses and commercial trucks. And we view fuel cells as highly complementary with this theme, because fuel cells actually address some of the key challenges of range and recharge or refuel time. So, to be clear, we think there’ll be applications and use cases for internal combustion engines, hybrid, battery, fuel cell electric and fuel cell dominant. But I think what we know is that we must deliver value at the total cost of ownerships levels. So, we look at the capital cost associated with the vehicle, and this includes, obviously, the module, tanks, battery, electric drives, converts, controllers that type of thing. We look at the operating cost, including the fuel cost and in some cases even the driver cost, and then we also look at the maintenance and service cost. And so when you look at all those elements, we’re looking to drive a total cost of ownership that supports high volume adoption of fuel cell technology. So, in terms of product cost reduction, given that context, this is an important corporate priority at Ballard. We are looking at cost reduction from the MEA level, the stack level, the module level, and even the integration level at the vehicle, particularly bus in the near-term. So, for typical Ballard scope of work, we’re looking at the module, which has a stack and balance of plan components inside of it, as well as…

So just to sum-up. So, it sounds like that you’ve begun to make some progress, which will continue in 2017. And then if some of the forecast that Broad-Ocean has for an aggressive ramp were to come true, it sounds as though maybe even in 2018, you could make significant gains, potentially in your gross margin that you just highlighted, but obviously iridescent to put a specific number around. Sounds like 30 really becomes a new baseline at a minimum, assuming all these factors come into place you hit the ramps that you’re talking about.

So you’ve articulated much more specifically than I could have.

Maybe just shifting gears, could you talk about your expectations in Europe. There is obviously a program, it’s a long process, it's not surely as large as China but you have established partnerships there; certainly, a strong commitment leading you at that. Maybe just layout expectations of timing or when that award might be really begun to flow through the different geographies and then your expectations of your partnership potentially winning. And I'll get back in the queue.

Actually, it’s a timely question. Just in the past three days, we had one of the largest European bus OEMs visiting Ballard looking at opportunities in that market. And just two nights ago, we had a major presentation provided to our Board of Directors on the European bus market opportunity. We see Europe after China as the most important bus market in the near term. We are seeing very thoughtful approach in Europe towards scaling to help reduce product cost. And while there's a the JIVE program for 142 to 144 buses depending on which numbers you look at that we expect to be rewarded in 2017. And we believe Ballard will play a very significant role in that award. We see the next phase is coming as well. So, we'll see the next tranche of procurement opportunity in 2017 for outer years as well. So, we expect to see step changes occurring in the European market. We actually published a whitepaper in December, and presented that in London. I think it agitated a lot of discussion. It's really around moving to an environment in Europe where fuel cell buses can be delivered at €650,000. And with our partners in Europe there is a lot of focus on making that happen to drive the scale that we believe this market should have. I want to highlight too, just a few years ago, Europe was really focused on GHG reduction. There has been a pretty dramatic change over the last few years on the air quality side. And if you look, just recently, at somewhere in the range of 15 cities in Europe having what are equivalent to red alerts in China occurring in a number of European cities, air quality become a very pronounced initiative. And you've seen a lot of leadership, and now a string of example is Mayor City CON in London effectively banning diesel buses starting in 2018 in certain parts of London. So, we're very encouraged with the trends we see, as well as the infrastructure that's in place in Europe. And I'm highly confident that Ballard will be at the center of the fuel cell piece.

The next question is from Sameer Joshi with Rodman & Renshaw. Please go ahead.

Just a question and I'm trying to reconcile both your cost reductions at the gross margin level, as well as the operating expense level. I do noticed that your R&D spend has come down sequentially over the last four quarters. And you just outlined a series of steps you are taking to reduce your gross margins, which it seems includes a lot of technology development and R&D efforts. How do you reconcile those? And going forward, what should R&D level expected to be?

So, I’d say pretty detailed question. Let me come back to you on that okay, because looking at the quarterly breakdown, I've to come back. I will say as you're looking at our R&D spend as part of, just to get it refreshed. As part of our cash, when we talk about R&D spend here, we really talk two parts. One is our cash operating cost, which we do get some detail on. And I just want to remind in cash or operating cost, that's the portion of R&D that isn't attributable to technology solutions. So, the folks in our organization who work in our regional different development group that are working on technology solutions projects that appears in COGS. So, what you're looking in cash operating cost is a part of that organization that's working on internal program. So we are investing, what I mentioned in my remarks. We are increasing our investments on internal programs. Those would be reflected in, what I would call cash to operating cost. So I have to come back to you on more detail, but I just wanted to make the point that it’d be important to look at R&D and cash operating costs as the core internal investment.

Just to supplement that there is a couple of important points is that, if you look at cash operating cost, there is an increase in cash operating cost occurring on our product development programs. What is happening is we're seeing a lot of leverage that will play forward on our sales, general and administrative cost. So, we expect to see operating leverage and therefore operating margins improving as well. So, gross margin expansion has been a key focus. And I think as we start to see volume in this business, while our product development spend is in fact increasing other parts of the operating cost have decreased, including of course with the exit from the Backup Power business. So I think you’re going to start to see a lot of operating leverage and operating margins starting to come and get focused as well.

Basically the operating margins will improve and R&D might continue to likely be on the higher side?

Yes, that's exactly right. That's the way to read it.

As a percentage of revenue, of course, R&D will get more muted. But this -- we’re in this business to be the leaders, not just six months from now but six years from now. And so, we’re making the necessary spend and a balanced approach to getting the profitability while also focusing on long-term competitiveness.

Just if I could pile on just on this one point too, and just I mentioned improved operating leverage. Whether we’re looking at SG&A as a percentage of revenue or total costs as a percentage of revenue, it is coming down. And in fact that some of the data we're going to start including in our go forward and our investor deck just to highlight that operating leverage. So even, just to emphasize Randy's point, even with the increased investments that we've made, including the addition of Protonex by the way, which is a big part of why we've increased year-over-year, we did see fairly significant improvements in our operating leverage even in 2016, and we expect to see that again in 2017. So, we’ll start seeing a bit more transparent on doing some of that math for further streak. So I am glad you asked.

The $87 million backlog, does it include, if any, milestone payments on the Synergy JV, or does it only include the revenues that are expected?

It's just the revenue that's expected that's in there. So, the 87% does include for the balance to this year, we had mentioned about $20 million. While we made the announcement in September, we recognized about $4 million or $5 million of that in Q4, and then the balance of that revenue will be recognized over the course of this year. So think about $15 million or so in the full-year. This is what we’re referring here to the JV of course, the MEA JV. I should just add, plus there is actually we’re expecting to deliver some MEAs later this year as well. So there is actually some product that starts to go along with that JV in Q4 time frame.

Just one last one for me. The UAV revenues, do you expect these to be more from the Technology Solutions side or from actual Portable Power Protonex sales side?

Yes, you've actually I think captured that correctly. So, we do expect to see modest revenue on the technology solutions side as we continue flight testing and development, and integration activities. In terms of revenue, real revenue contribution from product sales, that’s not a near term objective for us, that’s realistic. I think there is still work to do here. I will say that the economic value proposition for fuel cells in drone applications when you’re competing both to get internal combustion engine and in certain use applications against batteries, it's is compelling. I would encourage you to read the whitepaper. So we think long-term this is going to be a very interesting market. The type of customer, end user customer, that we’re looking at here, will spend quite a bit time on validation; because this is a, particularly in the military application, a very demanding environment where reliability is critical.

The next question is from Jeff Osborne with Cowen & Company. Please go ahead.

Tony, can you talk about what do you expect the revenue cadence to be through the year, certainly that mix to tech solutions I would think would smooth out the year, maybe versus past years. But maybe I am reading that wrong.

No, you’re reading it very well, Jeff. So, the cadence this year is indeed expected to be smoother than it has been in the past. Although, you will hear my standard comment, which is Q1 not surprisingly, it's going to be of the year we’ll start off as our weakest quarter as historically as it has been. So, as you think about the cadence, think about as fairly typical or softer Q1. But we are looking for Q2 to Q4 to be relatively speaking with some finding variability to be much smoother in the past, and driven largely by the contribution, as we say, from both of TS but also from some of the other markets too.

And then in your prepared remarks I think you were giving some hints, but you didn’t put any specifics on it. But you talked about the deferred being drive down from the prepayments that you received in China, as well as some other CapEx needs. Can you just breakout what you think CapEx is? You hinted it's higher than $2 million to $3 million. But is $5 million or $6 million too high? I am just trying to get a sense of how we think about cash burn through the year?

Sure. Maybe just to touch on that deferred revenue item for those who have had a chance to look the balance sheet. We’re sitting with about $20 million of deferred revenue on our balance sheet at the end of December. A lot of that of course is prepayments largely from China. So, when we think about maybe half of that coming through working capital over the -- maybe a little less than half of that as we use some working capital plus some normal inventory. So without giving a specific number, you can probably think as we say half of that 10 and some modest other working capital being a use of cash. On CapEx, I would have said with the exception of the ERP and did not the single that out. We are probably be in the range that you were mentioning. But as disclosed in our notes, we invested about $3 million in the ERP in '16, and we’ll probably make a similar type investment to bring that to conclusion. So, something more in the 5 to 10 range is probably, maybe up to the high end of that, to deal with all of the capital including the balance of the investments. So, put those two things together that starts to give you a bit of view for cash burn. On the operating side, we didn’t get guidance and I am not about to do that. But just I think maybe Carter asked the question earlier. So we say the financial metrics that we think about here in terms of where do we need to get to be close to breakeven on operating cash flow hasn’t changed. It’s is still in the $110 million to $120 million range. So, I'll let others take a guess at where our revenue is going to be. But think about that $110 million to $120 million range to breakeven on a cash basis, excluding working capital and CapEx. So, hopefully that gives you a enough pieces of the puzzle to kind of crack cash burn.

Just two other quick ones. One, I think Randy you alluded to purchasing the third-party stake your European subsidiary. Was there any cash fee to generate for that?

It was a normal amount something like $40,000.

That’s correct, yes, about $40,000.

And the last one I had is just a -- and maybe you don’t know this. But if you reflect on the year ago’s call. What was the delta of your committed orders on hand, which is $87 million this year relative to what you reported. So, essentially what I'm trying to get is what your book and ship returns business that you closed within the year above the visibility that you had entering '16?

So, last year at this time, we had an order book of $58 million. We obviously delivered $85 million in revenue. So that kind of gives you a ratio. We entered this year with $87 million of bookings and for -- for delivering in 2017.

So when you look at that gap of $27 million, is there one particular product line that that normally book and ship comes from, or you don't get that visibility? I assume that's more in the telco backup and Protonex type activities?

So, Protonex, typically, doesn't have significant backlog of orders. The nature of the business there in terms of order intake, as well as delivery time translates to a relatively low order book. So that is one segment. Same with material handling, material handling, while we've expectations for what the revenue is for the full year, we only include the purchase order in our order book for Q1 that’s committed.

So, I guess what I'm getting at is there's no reason to believe that that $27 million turns business should decline based on the end markets that you're serving, assuming your comments on Protonex continuing to grow. And I think you put power agreement on place for '17. Is that a fair statement?

Yes.

The next question is from Craig Irwin with Roth Capital Markets. Please go ahead.

This is actually Matt on for Craig. Most of my questions have been asked and answered already. Just to kind of touch a little bit upon some of the other geographies, LA, California and Japan. What are you seeing in both of those markets? And then with Japan, obviously, I think all these markets geographies are looked at somewhat differently. So what's your go-to-market strategy there and how do you see 2017 playing out?

So, just to start with California. The two applications we're fairly excited about in terms of fuel cell applications in California, one relates obviously to the bus market we talked about the opportunities we have there for AC Transit and OCTA for 20 fuel cell buses with New Flyer. So, that's an important next step in terms of scaling in the California market. We also see, on the -- a new application or new use case that's emerging. Globally, in fact, we've seen RSP activity and customer engagement both in California, other U.S. markets, Europe, Japan and China all related to commercial trucks. So, looking at the trend of electrification and addressing some of the limitations of battery, electric vehicles and delivery applications. And so, we're seeing a lot of activity on the sales and marketing side, lot of engagement including, to address you question, in California and in fact in Japan as well. In Japan, moving to -- and obviously there's activity going on with automotive companies that address all markets. And our goal is to be inside -- have technology and IP inside a number of global automotive OEMs, which would initially see deployments likely in the California, Japanese and German markets. Going to Japan, as we commented on earlier, we know our partnership with the Toyota Group is an important one. We see opportunities for a number of different applications in that market, including Heavy Duty Motive, including Material Handling, including some boat applications, including some power generation -- stationary power generation applications. We made, as I mentioned, adhered and steady progress there as they typically do in Japan. Unfortunately, as I mentioned, we're not in a position to provide more details on the go-to-market strategy. Our partner there is very cautious in their communications. And I will say we have a very significant team in Tokyo today working with the Toyota Group, as well as with other partners in that market and expect to see progress. This is a critically strategic important, not just for the hydrogen and fuel cell industry, but for Ballard particularly.

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

Great. Thank you for joining us today. We look forward to speaking with you again in early May when we’ll discuss results for the first quarter of 2017. Thanks again.

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