Q2 2020 Ballard Power Systems Inc Earnings Call

[music].

Thank you for standing by this is the conference operator, welcome to the Ballard power systems second quarter 2020 results conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions to join the question Q You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero I.

I would now like to turn the conference over to guide Macri Director of Investor Relations. Please go ahead.

Our second quarter, Twentytwenty financial and operating results conference call.

With us today on the call, we've got Randy Mcewen sellers, President and CEO and Tony Guberman, our CFO will be making forward looking statements that are based on management's current expectations beliefs and assumptions concerning future events actual results to be materially different. Please refer to our most recent annual information form another public filings.

Please disclaimer and related information.

Before we get started I'd like to remind everyone that we're planning a virtual investor and analyst day Twentytwenty on Tuesday September 29 this year.

Basic information regarding that event is now available on our website and we'll be adding a dial in information in the coming weeks to enable interested investors to participate in this live video stream day.

Which is set to kick off at 10 am Eastern time on the 29 to September.

On today's conference call Randy is going to provide a business update and Tony will then review quarter second quarter 2020 financials, followed by acuity sessions and I'll turn the call over to Randy.

Thanks, Guy and welcome everyone to today's conference call on.

On our second quarter financial results that will deliver topline revenue of $25.8 million gross margin was 21% adjusted EBITDA was negative $8.6 million and we finished the second quarter with $170.3 million in cash reserves.

Results were consistent with our expectations, reflecting some modest impact as a result of cobot 19.

Consistent with the revenue cadence of the past few years, we expect a strong second half.

Although we've seen some delays in certain programs and activities during the past quarter as a result of cobot 19.

Although order intake has slowed during the pandemic. Conversely, we've recently seen a significant increase a quoting activity with the quality of opportunities improving and project sizes increasing.

Indeed, our sales pipeline has grown almost 50% in 2020 compared to the end of 2019 with most of that growth coming in the past few months.

I want to repeat this point during the pandemic our sales pipeline is at record highs up almost 50% over the past few months with quoting activities, particularly high across our heavy duty motive segments of bus commercial truck rail and marine.

Now as noted on our last earnings call in the context of the Cobot 19 pandemic, our top priority remains to health and safety of our employees contractors customers and partners. We continue to comply with the most conservative public health guidelines, including having most employees working remotely and implementing.

Precautionary imprudent measures at our facilities globally.

We preserved business continuity to align with our customer deliverables, including continued operations at our essential manufacturing and testing operations in Vancouver, as well as essential field service support to customers in China, Europe, and North America.

On the supply chain side, we experienced some modest impacts in Q2, but have worked to mitigate overall 2020 risk, including by increasing our inventory positions in key materials.

Although the situation remains fluid, we're not expecting any major supply chain disruptions for the remainder of 2020.

On the demand side, while we continue experienced some modest delays in customer projects programs in order intake. We believe the overall cobot 19 context will represent long term demand acceleration as I described in the recent blog posted on our website.

There have been several important policy and commercial developments in our target geographic markets since our last earnings call I want to review. These four you. Let me first start with Europe, where momentum momentum continues to build.

On May 27th European Commission proposed at 750 billion Euro economic recovery plan with the Green deal at its core.

The plan puts a focus on kick starting a clean hydrogen economy with renewable hydrogen cleaner transport and logistics as key elements.

On July eight the European Commission released a plan entitled a hydrogen strategy for climate neutral Europe, which cemented hydrogen as a key priority to achieve the European Green deal and a clean energy transition.

The plan set so a phased approach to develop renewable hydrogen.

In the first phase from 2020 up to 2024, the strategic objective is to install at least six gigawatts of renewable hydrogen electrolyzers in the U.S view and the production of up to 1 million tons of renewable hydrogen to decarbonize existing hydrogen production and facilitate the uptake of hydro.

Engine fuel cell bosses and heavy trucks.

In the second phase from 2025 to 2030. This strategy is for hydrogen to become an intrinsic part of an integrated energy system with strategic objective to installed at least 40 gigawatts of renewable hydrogen electrolyzers and the production up up to 10 million tons of renewable hydrogen.

In this phase renewable hydrogen is expected to gradually become cost competitive with other forms of hydrogen production and the plan calls for parallel demand side policies dipped to support scaling of trucks rail and maritime transport applications, along with the build out of a network of hydrogen refueling stations.

In the third phase from 2030 onwards, and towards 2050 renewable hydrogen technology should reach maturity and be deployed at large scale to reach all hard to decarbonize sectors.

European Commission expects investments over the next decade to 2030 could range between 24 billion and 42 billion euros for Electrolyzers 220 to 340 billion euros for scaling up.

Solar and wind energy production capacity, and 65 billion euros for hydrogen transport distribution storage and hydrogen refueling stations.

And we can now add Germany, Norway in Spain, the growing list of countries that have announced hydrogen strategy to roadmaps with each of these countries recently unveiling their respective national hydrogen strategies.

Germany announced its national hydrogen strategy with 38 measures across the hydrogen value chain, including fuel cell vehicles, Germany also announced a massive coded 19 stimulus package, including 9 billion euros earmarked for green hydrogen and a commitment to five gigawatts of Green Electrolyzer capacity by 2000.

30, with a fruit further five gigawatts by 2040.

Norway strategy has a focused on the maritime sector heavy transport and industrial processes as the most relevant uses for hydrogen.

And in July, Spain announced its hydrogen roadmap and 8.9 billion Euro plan through 2030 with 57 specific measures and specific goals for 2030.

There's also a growing call in the UK for a comprehensive hydrogen strategy, including for fuel cell electric vehicles, particularly targeting zero emission bus fleets and strategies for Decarbonizing heavy goods vehicles shipping rail and an aviation.

As an example, please see the recent report entitled driving change how hydrogen Keala transport Revolution prepared by the center for policy studies.

During the quarter valid received follow on orders from right bus a long time bus OEM partner for 15 additional modules to powered buses plan for deployment in the UK at the present time, we have orders on hand from right bus for a total of 50 modules to power UK buses in London, Aberdeen and other cities.

The valor is well positioned in the European market, where we are currently powering 65 fuel cell electric buses in Europe with aggregate mileage of over 7 million kilometers.

Let me now turn to the United States in California on June 25th the California Air Resources Board pass its landmark advance clean truck regulations, requiring truck manufacturers to transition from diesel trucks to electric zero mission trucks with a plan for every new trucks sold in California to be zero Miss.

And by 2045.

Manufactures to certify medium and heavy duty chassis or complete vehicles with combustion engines are now required to sell zero emission trucks as an increasing percentage of their annual sales in California, starting in model year 2024.

For 2024 at 9% of all on road class four to eight truck sales must be zero mission incrementally scaling up to 50% for 2030 and 75% for 2035.

Similarly for class seven eight tractors the requirements are 5% for 2024, 30% for 2030 and 40% for 2035.

And in the past few weeks.

15 States, including California, New York, New Jersey, Massachusetts, North Carolina, and Pennsylvania have signed an Mou committing them all to mandating that 30% of heavy and medium duty trucks sold must be zero emission by 2030 with all having medium duty truck sales. These zero emission by 2050.

The momentum is now building throughout the us for Decarbonizing commercial trucks.

There was also important progress in California over the past few months on the zero emission bus front, several count, California transit agencies, including Orange County AC Transit in sunlight published zero emission bus rollout plans incompliance with car Viet regulations with many of these plan.

I was expecting to use fuel cell electric buses going forward.

For example in June Octa, which operates more than 500 bus is certainly a population of approximately 3 million people unveiled its zero emission bus rollout plan.

In its plan Octa noted that 100% fuel cell electric bus fleets scenario showed a lower overall cost than a mixed fleet scenario and then fuel cell less battery buses on a standalone basis and that fuel cell electric buses offered extended range and a better match to their operating parameters.

By comparison, often noted that many roots cannot be effectively served by battery electric buses without mid route charging and the current range of battery electric buses may require more vehicles and drivers than fuel cell electric buses to meet similar service levels.

The plan also noted that 100% fuel cell electric bus scenario more closely approximates the current CNG bus range CNG bus operations and current CNG business as usual scenario.

Based on the results of their analysis oxygen zero mission bus rollout plan focuses on using 100% fuel cell electric buses for fixed food operations.

In California, Ballard is now powering 37 fuel cell electric buses with cumulative mileage of over 2 million kilometers.

And now lets turned to the large China market.

First I'm pleased to confirm that the wage high dollar joint venture has now begun production activities together with assembly of next generation Lcs fuel cell stacks and Lcs based modules, we expect all manufacturing and assembly processes to be optimized and the start of produce.

Auction brand through the remainder of this year.

For Ballard this has been something of a soft launch given to travel in social distancing restrictions, resulting from cobot 19.

However, we anticipate a more formal opening ceremony at a future date to celebrate the commissioning of this important operation.

As a reminder, the joint ventures located in the city of way falling Shandong Province.

And it has it is housed in the newly constructed 19200 square meter facility currently staffed with approximately 130 employees. This is an exciting step forward in our partnership strategy with weight shy and our supply of fuel cell products for buses commercial trucks and forklifts.

In the China market.

In parallel with the work of the joint venture weight, China has built for hydrogen refueling stations or HRS is in Shen Zong province to support seven fuel cell electric bus lines with a total of over 200 fuels electric buses that have already traveled more than 1.2 million kilometers to date.

There is also we're currently underway to develop a series of fuel cell electric vehicles for the China market, including for fuel cell bus models to heavy duty fuel cell truck models and to logistics truck models, all of which are being developed that way Chinese OEM subsidiaries, John tone bus Asia Star and sign on truck.

Corsi subsidiaries, along with wage has extensive network of third party bus and truck OEM customers provides significant market opportunities for this sale of fuel cell modules in stocks to power the growing range of fuel cell electric vehicles expected to be deployed in China in the coming years.

So we're very excited with our initial progress with weight shy in the large China bus and truck markets.

We're also excited about continued progress at the synergy valor joint venture in Guangdong Province in which valor holds at 10% ownership interest as a reminder, that JV is manufacturing ballard's previous generation FC velocity nine SSL fuel cell stocks subsequent to the quarter. We received a follow on order for seven.

$1 million of Emeas from this joint venture given growing market demand.

On the China policy front, we're still awaiting the release of the updated national policy on hydrogen fuel cells, which has been delayed it is now expected this quarter.

There has however be continued progress on the provincial and local levels on June 24th Shangdong Province, released the medium and long term development plan for the hydrogen energy industry in Shandong Province, 2020 to 2030.

By which the province targets the adoption of 3000 fuel cell electric vehicles and 30 HRS is by 2022 10000 fuel cell electric vehicles and 100 HRS is by 2025 and 50000 fuel cell electric vehicles and 200 HRS is by 2030.

And in Dallas City in Shandong Province has also committed to a significant hydrogen fuel cell electric vehicle plans, including 2000 fuel cell electric vehicles 10 fuel cell bus lines and 25 HRS is by 2025 and 8000 fuel cell electric vehicles 30 fuel cell bus lines to fuel cell tram lines.

And 50 HRS is by 2030.

And during the second quarter Guandjo city with a population of late and 11 million people released its hydrogen energy industry development plan 2019 to 2030. This is an aggressive plan that sets 2030 targets, including for fuel cell electric vehicles to account for at least 30% of public transport and sanitation vehicles.

And more than 100 HRS is.

In terms of metrics in China, including fuel deployments. There are approximately 3200 commercial trucks and buses with Ballard fuel cell technology currently operating in China.

To date. These vehicles have traveled and estimated 40 million kilometers on China's roads with vehicles monitored by valor delivering approximately 98% fuel cell availability in the first half of the year.

We're also continuing to power the world's first fuel cell tram lines that went into service on the galvanizing line in the city AFFO, Sean Guangdong Province.

These five tramps of now accumulated over 50000 kilometers of service.

To accommodate the growing number of fuel cell electric vehicles operating in China. We estimate today. There are now 52 hydrogen fueling stations in service and an additional 50 under construction.

I would like to note as well that earlier this week, we announced that fuel cell electric vehicles powered by dollar have now cumulatively traveled over 50 million kilometers and industry, leading indicator of durability and performance and enough to circle the globe 1250 times.

As noted earlier by Guy, we're planning, our virtual Investor and Analyst Day 2020 on September 29.

We're looking forward at to this event will have more time to provide you with enhanced visibility on our corporate strategy updates on progress against our key markets and our towns.

Our unique selling proposition and sustainable competitive advantages, our current and planned value chain positioning.

Our technology and product roadmap and costs down plans.

Our progress on the implementation of advanced manufacturing here in Vancouver.

Progress at the wage high dollar joint venture and progress in our SG initiatives.

This will be an exciting day and we look forward to have the opportunity here from our senior leadership team on the impressive work at Ballard's doing to build an attractive business and with that I'll turn the call over to Tony to briefly review the Q2 financials.

Thanks, Randy and good morning, everyone.

Topline revenue in the second quarter was $25.8 million up 9% year over year in the quarter power products revenue was up 62% driven by heavy duty motive, which was up $6.1 million to $12.5 million. This was due primarily to higher shipments of.

Fuel cell products to China.

And just a reminder, too on the treatment of revenue from sales to our weighted by Ballard joint venture in China in which we have a 49% interest.

We recognize 51% of the revenue upon shipment of products by valor to the joint venture while the remaining 49% is only recognized when the JV cells in ships products, we did spend customers in China.

As of the end of Q2, this year $16.3 million of revenue associated with product shipments to the JV in relation to the 44 million dollar order placed in May of 2019 has yet to be recognized.

In addition, $2.1 million within EMEA revenue related to the $19.2 million order received in December 2019 has also yet to be recognized.

We expect this total of $18.4 million in revenue to be recognized as the associated products are sold in ship by the joint venture to its customers.

Turning to excite technology solutions the decline in Ts revenue to $9.8 million in Q2 was due primarily to decreases in revenue from the already program. The technology transfer program with our which by the dollar JV and from the development program with Siemens.

At this decline reflects both the reduction in the scope of certain programs given the plan completion of some activities as well as the impact of customer requested program changes some deferrals, resulting from covert 19, which included the impact of proven 19 travel restrictions.

As a result, we expect full year revenue for technology solutions to be down on a year over year basis.

Gross margin was 21% in Q2 down two points year over year. This decline was largely the result of the shift in product and service revenue, including a lower Ts revenue.

Cash operating cost increased 38% year over year to $11.6 million. This was primarily attributable to increased expenditures through technology and product development work related to our next generation stacks and modules for the bus truck training and marine markets.

Adjusted EBITDA in Q2 was negative $8.6 million, a decrease of $3.6 million compared to the same quarter last year. This also included Ballard $2.9 million share of losses related to the weighted showed Ballard joint venture.

Salvage net loss in Q2 was a negative $11.4 million compared to negative $7 million due to two last year and earnings per share was negative five cents in Q2 compared to negative three cents in Q2 thousand 19, and both the net loss.

EPS numbers include the same valor sure of losses from the reach our dollar JV.

Cash used by operating activities was $14.8 million in Q2, consisting of cash operating losses of $5.3 million in working capital outflows of $9.5 million.

The change in working capital was largely due to higher accounts receivable related to timing in inventory and as ranch as Randy mentioned higher inventories in anticipation of shipments in the second half of the year.

In terms of liquidity during Q2, we generated additional net proceeds of $12.2 million from the ATM program. We launched in Q1, ending Q2 with cash reserves of $170.3 million and no debt.

We ended Q2 was an order backlog of $155.5 million than a 12 month order book of $101 million down slightly from Q1 as a result of Lawter lower order intake in the quarter due to coded 19.

And lastly, I wanted to add the during the quarter, we rang the opening bell on the NASDAQ stock exchange virtually of course to celebrate the Companys 20, fiveth anniversary to on NASDAQ.

And with that let me turn the call back over to the operator for questions.

Thank you well now begin the question answer session to join the question Q You May Press Star then one on your telephone keypad, you will hear telling acknowledging yard request. If you are using a speakerphone. Please pick up your handset for pressing any key to withdraw your question.

Please press Star then too.

Well well pause for a moment as collars join the queue.

Our first question comes from Craig Irwin with Roth Capital Partners. Please go ahead.

Hi, good morning, and thanks for taking my questions.

So Randy.

Joe Bamford CEO right buses are really good customer years, and he is out there talking about.

Doing 3000 fuel cell basis over the next few years.

It seems like there's pretty good regulatory support in the UK.

And they're trying to workout the.

Funding for that although it is it is apparently in their stimulants.

Can you maybe.

Just help us a little visibility on the potential tenfold orders.

If we do see the funding materialize as expected and are there. Many other customers like this that has some aggressive programs.

To serve the European opportunity.

Craig Craig Good morning, and thanks for the question and you're right.

Joe Bamford is been a great customer for us and a great friend in fact that he is very active in the UK market agitating to to have zero emission losses, not just 3000 potentially up to 5000.

Our mission buses over the next number of years and looking for a pretty significant portion to be fuel cell buses and.

Quite influential in that market on one interesting thing about.

Joe is that not only does he owned right bus, but he also owns a company called rise hydrogen which is providing hydrogen fueling station, including for an existing project with transport for London.

So Joe is quite active in that market, it's a local producer manufacturer of buses.

Very good market share in that market.

In terms of the cadence of orders I think it's a little too early to comment on that we're pretty excited about what we're seeing in their sales pipeline with different cities in the UK as well as in Europe generally they are quite active now looking at other opportunities in Europe.

To the second part of your question of course right buses is is a great leader in this market, but there are others as well.

And so you're seeing Solaris is very actively bidding in a number of key countries.

On mainland Europe.

And you've got to it.

Van who will as well.

He has been very active for a long period of time continuing to look at opportunities for fuel cell buses and have launched and very good projects split with Garrett very good products. So I think we're going to see.

A significant uptick.

In Europe as well as the UK over the next couple of years.

When we look at the growth that will that I mentioned earlier, our sales pipeline a very significant portion is coming from the bus market and we're very showing a strong contribution from Europe.

I would suggest over the next 12 to 36 months.

Thank you for that.

So the next question I wanted to ask is about the.

China market right. So thank you for the update on the infrastructure in China.

I know that Thats very important because if the structure where people have to run the buses before they actually get the official column.

Release of funds.

Can you maybe on the share with us to where you think.

Discussions for regulatory regulatory support stand right now I.

I know, there's a lot of optimism that this is going to be.

Reinstated.

But what do you think has to happen or what's the potential timing.

For clarity around that.

Yes, Craig this is a very active discussion right now in China day to day.

And I know there a lot of players a lot of different provinces and key centers that are positioning too.

Secure support as demonstration regions in China.

Add so it's very sensitive moment I would suggest in China right now on this front I think we'll see clarity within the next 60 days.

Excellent. That's that's that's a short timeline I would like bets on next question is out in Saudi did just trickle down a little bit this quarter I guess, we can call it Audi Volkswagen.

Has been a very good customer for you on the services side and if we track all the revenue and the capacity from the firm contracts that they announced that really look like they're starting to bump up against the end of their capacity at this point.

Yeah.

Many of US expected there to be a commercial endpoint for Audi Volkswagen.

Are you potentially looking at a new phase of the relationship with how they.

Do you expect.

Similar services opportunity to recur, maybe with Audi or another.

And maybe will this willis shipped into a different type of relationship where you might provide component or manufacturing support.

Yes. The plan Craig was for the LT development program to complete next year, and certainly where we continue to track to that plan. There has been some reduced scope this year.

How he has had some budgets trimmed as a result of some of the financial distress.

In the overall markets for automotive, particularly in light of Koby 19, So we've been quite responsive to some of their requested changes.

I think its side and we were going to let outing lead the communications on what their plans are.

For fuel cell passenger cars, a more broadly what I would say is not not just outage, but the passenger car Oems generally we've seen a very strong shift from any of these companies to also look and how they can leverage their technology for the commercial vehicle market.

And so thats something that I think we're increasingly we're seeing from the passenger car Oems.

And I think longer term, we're still quite bullish about the passenger car market, particularly when you look at.

Vehicles that have high utilization and we'll start thinking about digital connected autonomy. This vehicles with more power demand just to support electronics onboard.

But our on shared mobility platforms and being used say 15 to 20 hours a day rather than our typical vehicle today in one hour a day utilization rates go up and the need for fast refueling and long range become important so longer term, we're very excited about the passenger car market.

As an industry that is very challenged right now in 2020, and so I think theres still lot of budgetary issues that we're seeing in the near term from those type of enterprises.

Great and then last question, if I may before I jump back into queue.

I appreciate the as the discussion about the 18.4 million in deferred revenue recognition from joint venture revenue.

Can you maybe discuss that gating factors for us to see that's.

Revenue recognized for Ballard and and what are your current what is your parents thinking about.

The tempo for lease up for that 18.4 million.

Yes, Thats a great question Craig there are a number of gating factors. There one of course is to make sure that the.

Product centers assembled at the JV are ready for the market, So thats really optimizing production and ramping through production.

Second is making sure that the vehicles that are being certified go through the right steps to make sure that customers have confidence so even though we're talking about and a case of junk Joan Tong Boss Asia Star Boss and Sino truck companies that are within the way try group of course, we need to make sure that they're they're comfortable.

Doing the testing I understand the safety protocols understand operations.

In some cases these are new platforms, new customers and so there.

Getting familiar with and then so thats why were pretty excited that there are 200 vehicles already on the road.

That are getting real life experience and clocking kilometers and customers are getting comfortable.

Then there is other customers outside of the way try group that are being introduced to the we tried dollar joint venture products as well, including.

For example, you Tom the world's largest bus Oems.

And so it's just a matter of weight shy valor joint venture.

Working with these end market customers.

Beyond the JV.

And making sure that they're ready to take those at the right time. The other aspect of this has been really getting the hydrogen fueling stations in place as well.

And so there were four in Shandong right now there is no plans that I mentioned earlier to scale up the number of hydrogen refueling stations thats going to be critical.

What I, what I expect you'll see likely just in Shandong Province alone is something in the range of of 14 or 15 cities that do fairly sizeable bust demonstration projects.

In the in the next couple of years and these initial orders will be the first part of that.

Yes, Craig it's Tony here too just to supplement Randy's comments in terms of the timing.

As read you alluded to you know Theres a number of gating items that are including of course. The fact that the joint venture is really only started to become fully operational but but certainly we start we will start to see that $18.4 million should our books in the second half of the year, perhaps into the early 2021, which kind of ties a bit to randy's column.

Into both the.

Typical back ended the year being a little hard stronger than the front end of year. This is this will be a contributing factor to why we're feeling a little bit more bullish on the back end as well.

Okay, and just just a point of clarification do we need to see positive outcome on the the China regulatory side for that to be released in the fourth quarter.

Or is this expected to be released.

Under under most circumstances.

Yes, we do expect of course, the policy to come out on the timeline. If it was deferred I don't expect to have an impact here on this revenue piece, we're talking about but would have an impact on.

Some order uptake in in later this year for the JV.

Great. Thanks, again for taking my questions Congrats on the progress.

Thank you Craig.

Our next question comes from Amit Dayal with H.C. Wainwright. Please go ahead.

Thank you good morning, everyone. I appreciate you taking my questions.

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With respect to the revenue split oil for granted ready between China and other markets.

What are your boss, we'll get some color on.

How that May ship up for 2020, and then going into 2021 as you ramp up in China.

So how that picture may look like at the end of next year.

Sure I mean, it's Tony here, so for Twentytwenty This year, China, and then when I say, China, including you're not only the power product sale will of course, the ongoing technology solutions program with weighted shy, which is of course revenue as it's a good portion of our Gs revenue China. This year will probably will be somewhere.

In the order of 60, 60% audit of our revenue this year plus or minus EUR 2020.

For 22.21, we actually expect to see Europe start to become a larger portion of the total revenue contribution and Thats for two reasons number. One is this is Randy was describing we are starting to see some good momentum in the European bus market and we do have a fair a fair amount in our in our order book.

In our backlog related to Europe and the other one is just with regard to China revenue, particularly as you'll recall the revenue that we're booking in Ballard related to which I will become NOAA revenues is already now as in the second half year remedy revenue so proportionately speaking EMEA.

Revenue well, while significant in volume is a lower lower dollar value. So that shift next year, we'll we'll start to I think it ballpark evened out and we would expect beyond 2021, Europe will become an even increase in the larger portion.

EMEA, it's Randy here. Thanks for the question and just to supplement a few points.

Our strategic objective is to have balanced revenue in our key geographic market. So we characterize our key geographic markets as China, The European Theater in California, and going forward. If you look to kind of over the next five years I'd expect to see a balance of about 40% of our revenue coming from China.

About 40% coming from Europe, and about 20% coming from.

North America, but primarily primarily California.

So thats the first point on and I think the second point to that Tony mentioned is while the revenue from China.

At the Ballard level becomes somewhat constrained because we're selling employees rather than full systems. There is significant value creation occurring at our joint venture and so we expect to see of course future.

Value creation and value distributions either.

Dividends or cash distributions coming from the JV and.

First we will see EBITDA contribution that we'll see cash distributions and ultimately we would expect to see that platform potentially to IPO.

And to see value creation, there as well.

On the store NDS, and that's always going to modeled it out as low flow portfolio projections, so to your mix and though the diversification that you are starting to see already reach.

We will see looks good from a displaying Drake now.

Yes, just just add to that you know the sales pipeline that I referenced earlier a lot of that growth that we saw in over the last few months.

Is coming from the European market.

Got it looks like flow.

Last year, the discussion rules about China, and all the pharmacies over there but.

The last few months.

I hope is so those superseding with.

China is doing.

Well, what what's interesting is that you've got very strong European policy very strong policy in California, and we will see a new China policy. So within this within a span of relatively confined period, let's call. It four five months, you're likely to see all three of our key regions come out with strong.

Long supportive policy.

Yes.

Looks like it. So then when we look at the bank loan that's building against this environment.

How should we think about both pipelines good morning to orders and backlog.

Maybe a little early now but.

Are there any catalyst that potentially move some of these.

Two from pipeline into Augers quickie, Oregon. These particular more time I guess.

Yes, the type of projects, where typically involved in the sales cycle. It's a little protracted it's not something that happens over over a couple of week period. We've we've seen rare instances of that but it's the exception not the rule.

Well I can say looking at the sales pipeline is very encouraging for 2021 and 2022.

In terms of the growth rate that we'll see in heavy duty motive segment.

Got it.

And then.

Competition with Vista become walk through recent based deals over here in the us markets Im reading about.

There's emerging in China, as lymphoma infrastructure side and new them.

I will say Hello.

On your thoughts on how you're positioned relative to some of these players who are getting a little bit tomorrow.

Chris.

Promotion.

Yes. This is something we want to spend a bit of time on in the September IR day is really.

Clearly articulated unique selling proposition that Ballard has and the very strong position. We think we have from a competitive differentiation.

But one I'll just highlight here to maybe is just the real World Road experience, we have obviously with 50 50 million kilometers.

Of vehicle experience on the road with Valor technology inside industry, leading of course, and then the durability actually having.

Vehicles in the field operating over 38000 hours as an illustrative example.

It is an industry record.

Net flip from our understanding I'm not aware of any others and so.

When you look at kind of the field experience, we have performance and durability in lease heavy and medium duty motive applications.

I think it's very compelling.

Got it.

On amending.

With respect to the JV, although any additional investments that you need to be making.

Yes.

The plan and zero at local gains this start operating sort of on its own cash flows.

Yes, so the our cap as you recall or we do have the requirement to make capital cost future took some additional capital contributions into the JV through next year. We made it we made an additional capital contribution in the quarter.

So we do have.

I don't have the number right in front of the apologize, but you know foods in the neighborhood of 30 odd million left to contribute thats, the contractual capital contribution, which we will make but we're not anticipating any additional cash requirements beyond what's already.

What was already included in our disclosure around the ongoing commitment. So in that regard, though we think with the JV started to.

Move up move us move more product sales it will become cash flow breakeven in them and EBITDA contributing in the next couple of years. So.

So thats up from our perspective, we expected them ready alluded to some dividends, which probably will come up.

We ended the five year period, but beyond beyond those contractual equity fleet commitments no additional cashcall.

Promises pendulum that finished so thats all very journey. So if you get questions. Thank you Sir.

Summit.

Our next question comes from Rob Brown with Lake Street Capital market. Please go ahead.

Good morning.

In Europe.

Digging a little bit more of the sales pipeline.

You talked about coating larger size orders could you just kind of characterize with what's happening in the marketplace. What kind of size order ranges are you seeing are these more real deployments moving from test deployments or what are you seeing into in the marketplace at this point.

Good morning, Robyn. Thanks for the question I think Theres a couple of elements. There. One is that I think there's a recognition that in order to drive down the cost of hydrogen you need larger size deployments of buses in commercial trucks.

Even on the rail and marine side.

So let you have higher demand for hydrogen and higher utilization of your fueling infrastructure costs.

So I think that's that's been recognized and so we're seeing larger projects to get better economics overall, including the hydrogen costs and like you point out we've been out this imbalance for some time with demonstration projects, particularly in in the US in Europe, and we're now seeing the next step of that so it rather than having.

You know 10, and 15 buses and was it was along the Delaware, where two to five buses was a typical deployment now we're seeing in the last few years that scaled up to say 10 to 15.

And now we're looking at you know hundreds of fuel cell buses going forward and thousands eventually offered for larger scale deployments and.

When we've got 3200 commercial trucks and buses operating in China.

It's a very good data point that the numbers are starting to move north.

The other thing it's that's really quite interesting outside of mobility is stationary is showing some significant pickup in interest as well with much larger opportunities on the stationary side as well.

Okay. Thanks for the color in.

China JV ramp.

In production that now that you're ramping.

Could you give sense, how how many units and or kind of this plan of the ramp and then maybe when you think you can start to see visibility on the cost down with volume ramp.

Sort of plan for.

40 to how do you see that playing out.

I apologize I am going I'm going to have to ask it'd be a little patient on this one.

Hi is.

We'd like to get ahead first on the communications side, and so we want to be respectful of that request.

But certainly at the September IR day will be will provide more visibility on this front.

Okay. Thank you opener.

Thanks, Rob.

Our next question comes from Michael Glenn with Raymond James. Please go ahead.

Hey, good morning, Kate Randy can you just give some updated terms of.

Medium and heavy duty truck market clearly you have.

Strong alignment in China, as a partner to grow in that market, but as we think about Europe and North America, how should we think about your approach to that opportunity should we think about another JV with an incumbent OEM or or are there other approaches that you're thinking about that.

Yes, Michael Thanks for the question is a really interesting time, right now where you've got basically the large truck Oems as well as all the tier one suppliers looking at this market very carefully I think theres, a recognition now with with California, and with Europe, having very strong.

Policy that requires zero mission and with batteries in our view not able to satisfy many of the use cases fuel cells are really the only zero emission option longer term and so we're seeing all these Oems and tier one suppliers carefully studying and actually have accelerate.

They did their review of the fuel cell opportunity for commercial trucks.

So I think what you can expect is very comprehensive relationship that valid will strike with a major name brand partner, particularly with strong European exposure, we're not in a position yet to comment more on that but theres a lot of work that's been going on.

For the last six months on this front.

Expect significant more work for the remainder of 2020.

And we'd expect to be in a position later this year to provide.

Some really good visibility on what I think is perhaps the most exciting part of our business plan going forward.

Okay.

Thats necessary.

Encouraging to hear and then.

Clearly you've talked about Europe with respect to what's taking place with hydrogen can you speak to perhaps some of the specific strategies in place at valor to ensure that you receive your fair share of these opportunities and how should we think about the competitive environment over there we've seen a number of.

Other companies step in with some capital deployments towards fuel cell development.

How should we think about the competitive environment with these customers as well.

Sure, Yes, no we're really looking at opportunities to increase our presence in Europe.

On the fuel cell side.

We do have obviously, an existing facility in home grow Denmark, we have our marine center of excellence that will be commissioned in the coming months.

And lot of activity in the marine market by the way.

And I think that that market will surprise to the upside.

I think you look at our M&A strategy, particularly we're quite active looking at M&A opportunities in a number of them are in the European market. I think this will help strengthen our European positioning.

And then you just kind of look at the deployments in the market share were probably somewhere around 85% market share for fuel cell buses that have been deployed.

And we're also looking at collaboration consortium model. So you've seen what we announced last year with the HQ bus Europe consortium will be brought together.

Really leading players, including now on the hydrogen fueling side and electrolysis side, including rise as I mentioned earlier from module Bamford.

And including on the tank side hexagon.

And.

Right bus obviously.

With the buses so we're bringing together consortium to lean forward on volumes lean forward on the cost structure and to drive to above 375000 euro fuel cell plus cost.

With a five year old per kilogram of green hydrogen delivered to the vehicle and.

Maintenance costs of about 30 euro cents per kilometer, which is one we continue to work to drive down.

So there are number different ways. We're approaching this I think coming back to your initial question Michael above the truck market in and the collaboration we are looking at in Europe.

With with a key player for the commercial truck market.

Tied with our own physical presence and capabilities in Europe, looking to strengthen that and grow our European business as well as through M&A plus consortium model is working on all three of these parallel.

Okay and.

As we think about specifically to.

The competitive environment Theres been some larger entities they have significantly increased the capital deployment to fuel cell development. How do you are there ways that we can say couple benchmarking what you have in terms of the product versus what they have in development for the bringing to market.

Yes, I think when you look at most of the companies that are looking to bring fuel cell technology to the market, regardless of whether it's China Europe or North America. In most cases those technologies have been designed for the passenger car market 5000 hours of durability, we've designed our fuel cell tech.

Technology for 30 to 40000 hours of durability I know that has any dispute that Ballard is way ahead in the market on.

Fuel cell technology to core fuel cell technology stacks and the ace plates are understanding what balance of plant components are required to match up with with the stacks.

And then optimizing your control strategy at the module level as well I don't is any any doubt in the market that we're the leader on durability for these heavy duty motive markets.

And so you kind of look at the technology and product offerings for others. One of the key questions I would ask is.

What durability has been proven.

And.

They're going to need to invest as you point out significant capital over the number of years, while we continue to improve to our next generation.

Okay. Thanks for the info.

Oh good judgment.

Great. Thanks, Michael.

Our next question comes from Rupert Merer National Bank. Please go ahead.

Hi, good morning, everyone.

Our next given one of your previous answers you may defer. This question to later, but looking at at the JV in China.

How long do you think that will be before you might lean on on that change the four product to sell outside of the Chinese market.

Ruford Thanks to the question Great question.

I think one of the really.

We have.

Constructive things, we did in how we structured our arrangements with the we try valor joint venture was to have that optionality. So the JV is exclusive exclusive platform. Both for wait till the end dollar for bus truck and forklifts in the China market, but valid has exclusive rights to purchase.

Correct outside of China, and what that means is as we're looking at scaling in Europe and scaling in North America and other markets were seeing for example, India, becoming very active as we're seeing these market scale, we have the ability to.

You will manufacture in region.

We continue manufacturing Vancouver, if we choose but we also have the optionality of sourcing from the JV and as will describe in September the JV has significant production capacity expansion capabilities as well.

So I think it provides us a lot of Optionality I think we'll have that optionality as soon as 2021.

I think it'll be a function of.

How we satisfying the market requirements in those specific markets, what's the most cost cost effective way and what is the market looking for we do see some instances of courseware.

Markets are becoming much more in solar and looking for more locally produced product.

You Rupert Tony here, if I just to supplement.

What you were driving and ready to come as certainly we have the rights to buy finished product of course from the joint venture.

For the rest of the world.

Beyond that though we also are benefiting substantially from supply chain.

The joint venture our joint venture in China has qualified.

A number of low call it low cost balance of plant recalling that the balance of plant in a modules, probably 60% to 70% of the total cost of a module. So even if we're not going to be quote unquote buying modules from the joint venture we are benefiting already from new supply chain Thats driving down our current balance of plant costs that were.

Actually using in our current product today for the rest of the world. So it's really a combination of not just with the full product, but also supply chain and we'll probably have again back to see if not upon too far, but well, but we'll be getting into particularly getting into that balance of plant costs down in September and we'll give you some more concrete examples, but what we're seeing that benefit.

Already yes, there has been very strong progress it's been unbelievable how quickly.

Things operate in China, particularly with the we CCI supply chain muscle and so the conversion of some of our balance of plant components over to China's source materials at significantly lower cost while still maintaining quality has been a key deliverable and a lot of progress made so far in 2020 on that so it all.

Also means we're getting the advantage of the scale. It comes from the China market being applied on those balance of plant components to these other markets as well.

Well, maybe asking for a bit of a preview here until say to defer this question as well, but if you look at where your costs are today and where they need to be in the future. What's your sense of how much of the cost that will come with supply chain and scale.

This is how much work needs to be done on the R&D side.

So what will will show in September is about a 70% cost reduction Rupert at the stock level and about a 70% cost reduction at the module level and we'll allocate what portion of that comes from design engineering changes versus supply chain versus volume.

Assumptions and the volume assumptions will be tied out with our business plan These will be.

You know unreasonable volume assumptions.

In aggregate they roll up to about a 70% cost reduction what's really interesting is on the stack side.

Recall that our three by three program on the stock side, we're very well advanced.

And I would say probably 80, 90% of that cost reduction is highly probable at this stage with very low development risk.

Great. Thanks for the color I'll get back in Q.

Thanks, Rick.

Our next question comes from Aaron Mcneil with TD Securities. Please go ahead.

Hey, good morning, all thanks for taking my questions.

Randy you mentioned the strong line in say in Europe over the next few years I think Tony mentioned earlier that this was partially due to projects are the in the backlog. So I guess I'm wondering.

From a backlog perspective, how we think.

That European opportunity will play out any and do you expect that co bid will have a lingering impact on the trajectory of your overall backlog over the coming quarters or DC.

An inflection point now that things are somewhat stabilized.

Yes. Good question Aaron Thanks for the question I think we'll we'll likely see.

Some of the coal the challenges, we've seen including with some of the European customers likely clear in 2020 with that cloudiness to disappearing by the ended the year and much more clarity in 2021.

What I would say is that is if you look at the cadence or the sequence.

Growth in the European market.

The bus market will be first.

The commercial truck market, you're going to see very strong progress from validating the commercial truck market in Europe over the next six to 12 months.

The rail market is going to start to contribute.

And we're seeing a lot of quoting activities from our partnering in in the rail market in Europe, and then marine.

We will come subsequently as well so what we're seeing the scaffolding effect will you see the growing bus market you add on truck. Both those markets are growing you add on rail all three of those markets are growing and you add on marine So we see a very strong scaffolding effect of these four markets, where we had the same core competencies the same technology.

And in some cases same products leveraged across these heavy duty motive applications.

And Thats a step will I think we'll see that scaffolding appear most prominently in Europe first with China, and North America, having a similar scaffolding effect subsequently.

Ethernet.

I'll just supplement as well you know what rig and Randy alluded.

Through the pipeline in the record pipeline historically in interviews to be completely transparent, we havent talked a lot about our pipeline in the past we've generally focused in on the the 12 month order book and the backlog, which is the committed orders for delivery. So we talked about a 100 million AUD 12 month order book 155 backlog.

I think we're getting at what we are getting through here is.

An opportunity for us more transparency on that pipeline, because Randy alluded to some markets like the marine market in rail market and even the just due to the.

We'll call it the distributed generation Z stationary power, there's an awful lot coming into our pipeline that actually speaks to some of the Scott holding so we'll have an opportunity we're kind of thinking about how best to describe that I suspect in September will provide a bit more transparency on the pipeline, including that scaffolding effective revenue over the next.

Number of years, it's it's a growing increasingly growing market I mean, historically for US of course has been bus order bus order bus order with throwing in the weighted shy about is really diversifying both geographically and by market as I said, we have not really built into that.

During the past, but we will certainly going forward.

Okay, just I'm not going to try to pin you down on on what quarter, you think it's going to be but but presumably.

Your soft guide into some sort of inflection point in the backlog.

At some point in the near term that a fair characterization.

Yes, I mean, I think what we've indicated recently is that we're likely to see relatively strong growth rates over the next few years 30, 40% in that range.

And then as you get closer to the 2024 requirements in California 2025 requirements in Europe.

There's a lot of work that needs to occur with not just us, but partners and hydrogen refueling infrastructure.

To support that.

You will see a very steep curve.

From 2023 onwards, and at that that that will occur in Europe, any California at the same time with China, probably had scale at that point as well so our costs in our ability to address those markets even more capably from a cost side will be very help I think from from the scaling effect, we're going to see earlier in China.

Okay, and then moving on to the JV side I know you mentioned, a smaller dollars, but can you remind us.

If the anyways that relate to the 2000 unit commitment from Weightier already included in the backlog and what the timeline for wage I related backlog additions might look like the not.

Over the coming quarters, and I guess I'm, just trying to get a sense of how the 2000 years commitment might impact your backlog with in coming quarters.

Sure. So just to Egistics speak specifically, so we did theres really.

Workless focusing in on the 2000 unit order.

As you may recall, we shift.

500, AUD parts CIS over the course of last year early this year that would have been.

First satisfaction of the 2000, we also than announced a 19.2 million dollar EMEA New order last December that we've started shipping and will be shipping.

So between the best 44 million dollar ordered a $19 million order others. It starts to account for a good a good portion of that 2000 units, there's probably a little bit more than 30 days to fully satisfied so.

It's safe to say, it's either when the revenue is that more of that revenue to be recognized I mentioned earlier and some incremental.

Yet to be shipped I think the next what I'd watch for beyond that of course is expecting we anticipate getting.

Another order for revenues probably later this year for 2021.

Thats that will be the next significant order of dollars related to those sort of incremental and above the 2000 on.

Okay, Great. That's great color and then finally for me to in this is just a point of clarification did I hear correctly that you are working towards transitioning the JV into a separate public entity.

Yes, that's incorrect that's fine, but maybe you could clarify what the longer term ownership plant as for the JV.

Yes, so I think wage high has a history of doing this where they have investments in companies in China that they then take a portion of that company public.

And so certainly that something that we try and Ballard had contemplated upfront when we put together this joint venture.

There are.

Some some fuel cell companies that have gone public.

Tom or or sign a high tech as is referred to went public this year in China re fire is likely to go public as well.

Related I think it'll be a very attractive IPO market for a number of years for hydrogen fuel cell related technologies in China.

You have weighed shy behind.

In IPO, it's a different at different credibility factor I would suggest that some of the others and so yes that is that is a longer term plan to unlock value that I don't think is currently expressed in the current dollars valuation.

Okay understood. Thanks for answering the questions I'll turn it over.

The next question comes from Maxwell with Mccormick. Please go ahead.

Hi, good morning.

Good afternoon now here on the East coast.

In terms of timing on a follow up what are you kind of alluded to that getting some M&A orders.

For the next 2000, but presumably once you start to optimize the ramp up at the JV you would want to exceed month over month and increase in production and shipments. So can you speak a bit too visibility beyond the 2000 units and what sort of a production ramp.

I would look like in terms of just targeting.

Going forward.

Yes on MCE I think you know the 2000 units really aren't dependent on the announcement of the China, New China policy, whereas orders beyond that are.

And so we want to make sure that when I say they are dependent the volume is going to be dependent on how the policy shakes out which jurisdictions what the requirements are.

So I think we need to wait for that before we can you kind of forecast what 2020 will look like in terms of the JV moving units and what that means for EMEA sales, but I think kind of use that 2000 as a base load level.

We expect of course to see a growing number each year just looking only at at Chen Dung Province requirement is illustrative example.

The need to be a scaling effect.

Okay, and presumably because you have these different initiatives underway in discussions ongoing.

That the potential buyers will be relatively ready to go after an announcement has made about the policy, what's the sort of lag in policy to orders that you expect.

Yes, I think most of the.

End market I'll call the vehicle Oems outside of the way CCI group are quite active now looking at the technology.

And so.

Hopefully, we'll we'll see a number of them get platforms tested and certified added to the MIT list.

So that that lag factor is shorter.

Historically, it's really taken about six months in some cases for those platforms again registered but the time is getting more compressed.

So so perhaps that will be as getting as it was.

A number of years ago when it first was introduced.

But just generally speaking I would expect that.

We would forecast seeing.

In order from the JV in late 2020 that will set the stage for 2021 any supply.

And then we'd expect to see some scaling.

Okay, great. Thanks, I have the rest of my questions are sort of technical modeling questions I'll take them offline that made this afternoon. Thanks guys great. Thanks Mac.

Yes.

Our next question comes from an Margaret Crow with Edison. Please go ahead.

Hi.

Good afternoon, gentlemen, thank you Michael.

It's where we could see.

That being Monique.

Moving on the Fuelcell market.

Let me.

Hello.

I want to just exploring football.

What was happening platform.

First loss.

Well the till were probably slightly team will who weren't propane coal power almost on top.

And then the second one was it's good to see that you had gone up and ultimately.

From synergy great.

Thank you X.

To that.

150 million minimum revenues from them.

By the end to 2021.

Yes, so end Margaret Thanks for the question. So first on weight shy strategy and their relationship with series.

I think weight shy is very interested in having optionality on other fuel cell technologies and is.

Looking at series and obviously has an investment in series and looking at commercial collaboration with a with a joint venture in China with series.

I think the primary market that they're looking at is likely.

More stationary applications. There is a thesis that perhaps solid oxide fuel cells may be able to satisfy onboard.

Power generation for for vehicles.

I think most people at discounted solid oxide for that if anyone's going to be able to do it it's likely going to be series, but it's I think there's a pretty tough pot for solid oxide fuel cell technology, you get there my opinion.

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I have some context, the former CTO of wage I.

Had a prior history at Eton at where he to develop some solid oxide fuel cell technology and has a real affinity for that technology. So that was part of the history of that relationship as well. So I think it's a very good relationship between series in way try series is very credible company think they're doing an outstanding job.

On their commercial collaboration front their technology development and strong balance sheet get lot of respect for the CEO at series as well.

On the synergy group front of course, we are delighted to to get the follow on order.

Which was something we had.

The size of that follow on order was bang on with what we expected and what they committed to do last year for 2020, so that was very encouraging to see them come through with their commitment.

In terms of future orders. So we'll have to see how that market plays out, particularly again with the China policy coming out in the next day 60 to 90 days.

How that synergy Ballard TV stacked technology meets the market requirements. So they will have to wait on that.

In terms of the aggregate value of the synergy JV and revenue stream going forward.

I think you know what we've seen in 2020 as I said is consistent with what was agreed to last year. There's no further kind of from take or pay commitments at this point.

Okay. That's very helpful. Thank you format.

This concludes the question answer session I would like to turn the conference back over to Randy Mcewen CEO for any closing remarks.

Thank you for joining US today, we'll look forward to speaking with you again on September 29th during our Investor and Analyst Day 2020, and subsequently November when we'll discuss results for Q3. Thanks again.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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Okay.

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