Ballard Power Systems, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Bowers Power Systems second quarter 2021 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 Kate Charlton, Vice President, Investor Relations. Please go ahead.

Good morning. Welcome to the Ballard Second Quarter 2021 Financial and Operating Results Conference Call. My name is Kate Charlton, and I'm delighted to have recently joined the Ballard Power Team as the Vice President of Investor Relations. I look forward to speaking with many of you joining the call today and over the coming weeks and months. With us on today's call are Randy McEwen, Ballard President and CEO, and Paul Dobson, Chief Financial Officer. We will 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. I'll now turn the call over to Randy.

Thanks, Kate, and welcome to the Bellar team. And I'd like to thank Guy Macri for his many years of valued service and wish him the very best in his planned retirement. I'd also like to offer a warm welcome to additional new members of our leadership team, including Linda Downs, Chief People Officer, and Mike Kubik, Vice President of Strategy and Corporate Development. As announced yesterday, I'm also pleased to welcome a new member to our Board of Directors, Herbert Muehlhauser. Herbert brings a strong background in industrial manufacturing, including commercial vehicles, construction machinery, agricultural machinery and powertrain technologies. I look forward to his insight and counsel to support Ballard's strategic objectives and drive long-term shareholder value. Now welcome everyone to today's conference call. In Q2, value of revenue was $25 million, an over 40% increase from Q1, and flat compared to the second quarter last year. Gross margin was 15%, adjusted EBITDA was negative $19.7 million, and cash reserves at the end of the quarter were $1.24 billion. We received $26 million in new orders in the quarter, up over 100% from Q1. Looking at the first half of the year, orders were also up over 40% from H1 last year. Our net order backlog of approximately $113 million shows modest quarter-over-quarter growth. The second quarter and first half of this year have highlighted our ability to navigate a challenging environment amidst widespread disruption in global supply chains. Early in the pandemic, we worked with key suppliers to enter long-term agreements and extend purchase order coverage, allowing our suppliers to secure raw materials early before many of the 2021 shortages began to impact supplies. Maintaining dual sourcing in different continents and increasing safety stocks on critical and long-lead materials has allowed us to navigate short-term disruptions over the last 18 months. Close relationships with our suppliers continue to enable us to be nimble throughout the pandemic, limiting disruption to our customers. Throughout 2020 and into 2021, we've continued to invest in people and technology to increase our research, product development, commercialization activities, and customer experience. Cash operating costs for the second quarter were $20.1 million, reflecting our increased investment, including our increased investments in fuel cell technologies, Systems Engineering, and Product Development and Design for MEAs, Plates, Stacks, and Modules for Bus, Truck, Rail, and Marine. These investments enable us to maintain technological leadership while reducing product costs as global momentum in the hydrogen markets take hold. This is exemplified by the recent substantial completion of our MEA production capacity expansion in Burnaby, which positions us to support the growth of customer deployments and cost reduction. We remain ahead of schedule in realizing our 3x3 stack cost reduction targets for 2021. We expect to provide a more fulsome update on the progress of our cost reduction program at the end of the year. Now, in the fuel cell electric bus market, momentum continues. Notable new orders, including an exciting order from Tata Motors, the largest bus company in India, for 15 of our 8th generation fuel cell modules, to power 15 buses in Delhi. We also received follow-on purchase orders from Solaris to power 13 buses in Frankfurt, Germany, and from New Flyer for modules to power 20 buses at AC Transit in Oakland, California. These orders show further expansion in this key market segment and further validate our technology leadership. Our fuel cell products are proven, durable, reliable, and increasingly cost-competitive. In the truck market, our joint development program with Mahle is progressing well. We've now completed the first build for the 240-kilowatt engine. This new engine is being developed for the European heavy-duty truck market, and we're on track to ship this engine and have it ready for additional testing by the end of the year. While the policy update from China is still to come, we've continued to achieve important technical milestones in stack and module developments at our Weichai-Balor joint venture. As of the end of June, there are over 3,300 fuel cell electric vehicles deployed in China powered by Balor technology and nearing 80 million kilometers of travel distance. On our Q4 and Q1 conference calls, I discussed the increased momentum in the rail market, including our project for freight locomotives with CP in North America and our ongoing work with Siemens in Europe. As a reminder, part of our technology solutions business model is to work with customers during early adoption and transitioning these customers into power product customers over time. Our recent order from Siemens is a great example of this. We're now seeing the progress made through our technology solutions engagement translate into purchase orders for the next phase of Commercialization. Our 200-kilowatt rail module development program for the Siemens Mario Plus H train has been underway for three years and will be starting now deployment in the upcoming operational tri in Bavaria, Germany. The Siemens Mario Plus H platform is a modular commuter train designed to operate on non-electrified rail lines at speeds up to 160 kilometers per hour over a range of up to 800 kilometers. We've designed our fuel cell modules for this platform to meet the onerous rail codes and standards, and these modules are mounted on the roof of the train. We believe our collaboration with Siemens and others in Europe have us well positioned for expected growth in the zero emission rail market, as highlighted in the recent Fit for 55 program announced by the EU. Now, in the marine market, we continue to see strong interest in our FC Wave product. This is a market we're very excited about and see lots of opportunity. We're making initial deliveries in 2021 to early customers in various marine market segments. The backup and stationary power opportunities are also gaining traction, as exemplified by our recent announcement with Fusion Fuel on their H2 Evora project in Portugal. This project will utilize our 200 kilowatt FC wave system in conjunction with concentrated PV solar to generate clean hydrogen and zero emission power. The FC wave was originally designed for marine applications, but the maritime power profile is similar to that of many stationary power generation applications. As a result, the FC wave is an ideal candidate for stationary power applications due to its large output capabilities Leading Safety Standards and Zero Emission Profile. While backup power and stationary power remains a modest portion of our overall revenue, we're seeing significant year-over-year growth. Backup power revenues were up 125% over last year, predominantly in the European markets. We anticipate seeing future growth in large stationary power market segments across certain target geographic markets. In our mining applications, Anglo American, the world's largest platinum miner and a strategic investor in Ballard, recently provided an update on their ongoing fuel cell mining haul truck project. Anglo has been performing bench testing on eight 100-kilowatt fuel cell modules since early last year and now plans to begin on-site testing in Q4 on Kamatsu trucks at a South African mine. 40 truck rollout is targeted start in 2024. An additional four 70 kilowatt modules are on order for further bench testing on next generation trucks. Such projects illustrate our ability to leverage our core competencies and leading fuel cell technologies across an increasing variety of verticals. While the balance of plant varies based on application, We're building a revenue scaffolding to sell into multiple markets with our technological capabilities, including MEAs, plates, stacks, and module design as the foundation. Our leading technology, coupled with our ability to increase volume and drive down costs, results in resiliency and diversification across geographies, market segments, and customers. This is increasingly important as the global demand and outlook for hydrogen applications rapidly grows. As recently disclosed by the Hydrogen Council in the July update, since February there's been a 60% increase in the announcements of large-scale hydrogen projects, bringing the global total to 359. The total investment into these projects and along the value chain is approximately $500 billion through 2030, of which roughly a third of these are investments are considered mature. The Hydrogen Council reported that estimated investment in hydrogen projects is increasing by $1 billion every week. The momentum in decarbonization is clearly accelerating globally, including in the key markets of Europe, US, and China. As reflected in our H1 revenue mix and our Q2 order inflow, Europe is coming on very strong. This is a market we're excited about and investing in. Europe remains a leader in the adoption of hydrogen to decarbonize energy, mobility, and industry. accounting for more than 50% of announced projects and estimated investment. Last month, the European Commission announced the Fit for 55 package proposing measures to reduce greenhouse gas emissions by 55% by 2030 from 1990 levels, as well as outlining a framework for carbon neutral Europe by 2050. This package offers a significant boost to the European hydrogen industry through a 50% target on the share of renewable hydrogen consumption, concrete and ambitious targets for maritime hydrogen use, and expansion of hydrogen refueling stations along core networks. In particular, the transport sector legislation will push for faster decarbonization, supporting even more opportunity for Ballard. Ballard already maintains over 80% market share in the hydrogen fuel cell buses in the European market. These programs further accelerate hydrogen development across our verticals of bus, truck, rail, and marine. In the UK, a strong market for Ballard, the British government has expanded upon their existing plan to stop the sale of internal combustion engine passenger vehicles by 2030 to now stop the sale of all internal combustion engine vehicles, including commercial transport, by 2040. This updated decarbonization plan also includes targets for other modes of transportation, including net zero rail transport by 2050. In the United States, there have been two significant federal announcements affecting the clean energy landscape in the past month. The first is the proposed $550 billion bipartisan infrastructure bill, which specifically calls out $9 billion for clean hydrogen and electrolyzer development and $39 billion to modernize public transit. This transit funding would include replacing thousands of vehicles with zero emission models and invest an additional $66 billion in passenger and freight rail. If passed, this would be the largest federal investment in public transit in history and the largest in passenger rail since the creation of Amtrak 50 years ago. Numerous grant-funded opportunities in zero emission trucking, maritime, rail, and power generation sectors are all expected over the coming year. The cost trajectory for hydrogen as a transportation fuel looks particularly encouraging as the U.S. Department of Energy has kicked off its Hydrogen Earthshot Initiative, aiming to lower the cost of renewable hydrogen production by 80% to $1 per kilogram by 2030. The second announcement came yesterday. President Biden signed an executive order with a goal to make 50% of new vehicles sold by 2030 zero emissions. and to raise fuel economy standards over the next five years. This announcement, together with support from Detroit automakers and on the back of the infrastructure bill, illustrates the direction and speed in which the U.S. market is moving toward a zero emission economy. Further, in California, where Ballard maintains leading market share in the fuel cell electric buses, the state announced a $2 billion incentive in its 2021 I also attended the 6th International Hydrogen Fuel Cell Vehicle Congress held in Shanghai One of the largest hydrogen fuel cell conferences held annually. I observed a rapidly developing fuel cell supply chain in China. And while the continued policy delays have been disappointing, the long-term vision is clear. China plans to be a hydrogen leader with a stated goal of 1 million fuel cell electric vehicles and 2,000 hydrogen refueling stations by 2030. Hydrogen is expected to comprise 10% of energy share by 2050 support China's climate targets of peak carbon by 2030 and net zero by 2060. Interestingly, Sinopec, the state-owned energy giant, has also announced 1,000 HRS by 2025, showing great promise and support for hydrogen mobility deployment. On the corporate development front, we're being thoughtful and disciplined in our approach to capital deployment, and have identified several opportunities with potential to accelerate hydrogen fuel cell adoption, expand our capabilities, reduce customer friction points, and improve customer experience. We're in active discussions with a number of these opportunities and will share more detail if and when we conclude definitive agreements. The policy momentum in cross-sector investment is creating an attractive environment with compelling long-term opportunity for Ballard. For the second half of the year, there are a number of potential catalysts for Ballard, including additional supportive policy announcements, continued progress on technology and products, including cost reduction, new and follow-on orders from customers, and continued expansion and diversification across our target market segments and geographies. We're well positioned as companies, states, and nations work to decarbonize and realize a clean hydrogen future. With that, I'll turn the call back over to the operator for questions.