Ballard Power Systems, Inc.

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 queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Guy Macri, Director of Investor Relations. Please go ahead.

Welcome to Ballard's second quarter 2020 Financial and Operating Results Conference Call. With us today on the call, we've got Randy McEwen, Ballard's President and CEO, and Tony Guggemann, our CFO. will be making forward-looking statements that are based on management's current expectations, beliefs, and assumptions concerning future events. Actual results can be materially different. Please refer to our most recent annual information form and other public filings for a complete disclaimer and related information. Before we get started, I'd like to remind everyone that we're planning a Virtual Investor and Analyst Day 2020 on Tuesday, September 29th this year. Basic information regarding that event is now available on our website, and we'll be adding 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 a.m. Eastern Time on the 29th of September. On today's conference call, Randy's going to provide a business update, and Tony will then review second quarter 2020 financials, followed by a Q&A session. And I'll turn the call over to Randy.

Thanks, Guy, and welcome everyone to today's conference call. On our second quarter financial results, Ballard delivered top-line 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 COVID-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 COVID-19, and although order intake has slowed during the pandemic, conversely, we've recently seen a significant increase in 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 COVID-19 pandemic, our top priority remains the 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 and prudent measures at our facilities globally. We've 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 to experience some modest delays in customer projects, programs, and order intake, we believe the overall COVID-19 context will represent long-term demand acceleration as I described in a 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 for you. Let me first start with Europe, where momentum continues to build. On May 27th, the European Commission proposed its 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 8th, 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 sets out 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 EU and the production of up to one million tons of renewable hydrogen to decarbonize existing hydrogen production and facilitate the uptake of hydrogen fuel cell buses and heavy trucks. In the second phase from 2025 to 2030, the strategy is for hydrogen to become an intrinsic part of an integrated energy system with strategic objective to install at least 40 gigawatts of renewable hydrogen electrolyzers and the production of 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 to support scaling of trucks, rail, and maritime transport applications, along with a build-out of a network of hydrogen refueling stations. In the third phase, from 2030 onwards and towards 2050, Renewable hydrogen technologies should reach maturity and be deployed at large scale to reach all hard to decarbonize sectors. The 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 and storage, and hydrogen refueling stations. And we can now add Germany, Norway and Spain to the growing list of countries that have announced hydrogen strategy 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 COVID-19 stimulus package, including 9 billion euros earmarked for green hydrogen and a commitment to 5 gigawatts of green electrolyzer capacity by 2030, with a further 5 gigawatts by 2040. Norway's strategy has a focus 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 aviation. As an example, please see the recent report entitled, Driving Change, How Hydrogen Can Fuel a Transport Revolution, prepared by the Center for Policy Studies. During the quarter, Ballard received follow-on orders from Wright Bus, a long-time bus OEM partner, for 15 additional modules to power buses planned for deployment in the UK. At the present time, we have orders on hand from Wright Bus for a total of 50 modules to power UK buses in London, Aberdeen, and other cities. So Ballard 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 passed its landmark Advanced Clean Truck Regulation requiring truck manufacturers to transition from diesel trucks to electric zero emission trucks with a plan for every new truck sold in California to be zero emission by 2045. Manufactures through certified 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, 9% of all on-road class 4-8 truck sales must be zero emission. incrementally scaling up to 50% for 2030 and 75% for 2035. Similarly, for Class 7-8 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 heavy and medium duty truck sales being zero emission by 2050. So momentum is now building throughout the U.S. for decarbonizing commercial trucks. There was also important progress in California over the past few months on the zero-emission bus front. Several California transit agencies, including Orange County, AC Transit, and Sunline, published zero-emission bus rollout plans in compliance with car regulations, with many of these plans expecting to use fuel cell electric buses going forward. For example, in June, Okta, which operates more than 500 buses serving a population of approximately 3 million people, unveiled its zero emission bus rollout plan. In its plan, Okta noted that 100% fuel cell electric bus fleet scenario showed a lower overall cost than a mixed fleet scenario and then fuel cell 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, Okta noted that many routes cannot be effectively served by battery electric buses without mid-route charging, and that 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 a 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, Okta Zero Emission Bus Rollout Plan focuses on using 100% fuel cell electric buses for fixed route operations. In California, Ballard is now powering 37 fuel cell electric buses with cumulative mileage of over 2 million kilometers. And now let's turn to the large China market. First, I'm pleased to confirm that the Weichai-Ballard 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 a production ramp through the remainder of this year. For Ballard, this has been something of a soft launch given the travel and social distancing restrictions resulting from COVID-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 venture is located in the city of Weifeng in Shandong Province and is housed in a newly constructed 19,200 square meter facility currently staffed with approximately 130 employees. This is an exciting step forward in our partnership strategy with Weichai 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, Weichai has built four hydrogen refueling stations, or HRSs, in Shandong Province to support seven fuel cell electric bus lines with a total of over 200 fuel cell electric buses that have already traveled more than 1.2 million kilometers to date. There's also work currently underway to develop a series of fuel cell electric vehicles for the China market, including four fuel cell bus models two heavy-duty fuel cell truck models, and two logistics truck models, all of which are being developed at Weichai's OEM subsidiaries, Zhongtong Bus, Asia Star, and Sinotruck. Of course, these subsidiaries, along with Weichai's extensive network of third-party bus and truck OEM customers, provides significant market opportunities for the sale of fuel cell modules and stacks 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 Weichai in the large China bus and truck markets. We're also excited about continued progress at the Synergy Ballard joint venture in Guangdong Province, in which Ballard holds a 10% ownership interest. As a reminder, that JV is manufacturing Ballard's previous generation FC Velocity 9SSL fuel cell stacks. Subsequent to the quarter, we received a follow-on order for $7.7 million of MEAs 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 and fuel cells, which has been delayed. It is now expected this quarter. There has, however, been continued progress on the provincial and local levels. On June 24, Shandong Province released the Medium and Long-Term Development Plan for the Hydrogen Energy Industry in Shandong Province 2020-2030, by which the province targets the adoption of 3,000 fuel cell electric vehicles and 30 HRSs by 2022, 10,000 fuel cell electric vehicles and 100 HRSs by 2025, and 50,000 fuel cell electric vehicles and 200 HRSs by 2030. and Shendow City in Shandong Province has also committed to a significant hydrogen and fuel cell electric vehicle plans, including 2,000 fuel cell electric vehicles, 10 fuel cell bus lines, and 25 HRSs by 2025, and 8,000 fuel cell electric vehicles, 30 fuel cell bus lines, two fuel cell tram lines, and 50 HRSs by 2030. and during the second quarter Guangzhou City with a population of 11 million people released its Hydrogen Energy Industry Development Plan 2019-2030. 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 HRSs. In terms of metrics in China, including fuel deployments, there are approximately 3,200 commercial trucks and buses with Ballard fuel cell technology currently operating in China. To date, these vehicles have traveled an estimated 40 million kilometers on China's roads, with vehicles monitored by Ballard 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 line that went into service on the Gaoming Line in the city of Foshan, Guangdong Province. These five trams have now accumulated over 50,000 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 Ballard have now cumulatively traveled over 50 million kilometers, an industry-leading indicator of durability and performance, and enough to circle the globe 1,250 times. As noted earlier by Guy, we're planning our Virtual Investor and Analyst Day 2020 on September 29th. We're looking forward to this event where we'll 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 cost down plans, our progress on the implementation of advanced manufacturing here in Vancouver, Progress at the Waychai Ballard Joint Venture and progress in our ESG initiatives. This will be an exciting day and we look forward to having the opportunity to hear from our senior leadership team on the impressive work that 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.