Ballard Power Systems, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems second quarter 2025 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 then 0. I would now like to turn the conference over to Sumit Kundal's guest relations. Please go ahead.

Thank you, Operator, and good morning. Welcome to Ballard's second quarter financial and operating results conference call. Joining me today is Marty Neese, Ballard's EU President and Chief Executive Officer, and Jay Murray, our Vice President of Finance and Corporate Controller, who is stepping in for Kate Iqbalodeh's headquarters. 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 forum and other public filings for our complete disclaimer and related information. I'll now turn the call over to Marty.

Thanks so much. Good morning, everyone. This is my first earnings call as CEO of Ballard. I'd like to begin by sharing some of my background and the principles I bring to Ballard. I'll apologize in advance for talking a bit about myself, but I believe context is important, both for understanding the journey that brought me here and the perspective I bring to our path forward. As the saying goes, some of your past moments is what led you to today. My journey includes leadership roles in both Fortune 100 companies like Flex and innovation-driven startups like Verdigis. I've led product and service businesses, publicly traded companies, and venture-backed teams. Each experience has reinforced my belief that there are always better ways to do things and that success lies in execution, innovation, and delivering meaningful value to customers. I spent the first 15 years of my career in the electronic manufacturing services or the EMS industry. That experience shaped my understanding of the value of disciplined execution and cost control. delivering products with precision, frugality, and extraordinary service. In EMF, success is earned through reliability, working capital efficiency, and constant operational rigor. The past 18 years of my career have been focused on clean tech, serving as COO at SunPower, a vertically integrated public solar company, and most recently as CEO of a hydrogen electrolyzer startup. These roles were centered on innovation-led value creation, first to reach grid parity in solar and then to unlock possible parity for green hydrogen. The importance of technical excellence, product innovation, urgency, and establishing bankability was constant throughout. In 2015, I joined Ballard's board. Now, as CEO, I'm both grateful and excited to be leading this company. Ballard has over 45 years of history pioneering and educating the world on the promise of hydrogen fuel cells. In recent years, we've transitioned from being primarily a technology development and solutions company to a product company with growing commercial traction in bus, rail, marine, stationary power, and material handling. That transition hasn't been easy and it hasn't been linear. Tailwinds in policy and market enthusiasm have shifted in recent years. As we face new headwinds, uncertainty, changing regulations, tariffs, and delayed adoption in certain sectors, we must evolve again. That change starts with me. We are charting a course toward becoming a sustainable, cash flow positive business by the end of 2027. To do that, we are aligning around what I believe are universal truths for any successful business, including dollars. The value of execution and cost. Execution is fundamental. It starts with understanding, simplifying, and reducing our costs across our operations, our products, and our processes, and coupling cost improvements with disciplined capital management. Our recent investments in automated manufacturing of MEAs and bipolar plates gives us the cost reduction advantage we intend to fully leverage. The value of service. Commercial success is earned from customer success. Winning on total cost of ownership and delivering real, measurable customer value is how we win. Just as important, our customers need to be willing to understand and pay for this delivered value. That's how we build a self-sustaining business. The value of innovation. Innovation is not just about technology. It's about products, services, business models, and partnerships. From stack improvements to value-added balance of plants, and from product simplification to customer-centric design, we are relentlessly focused on developing better, safer, higher-value solutions. As the saying goes, a designer knows he has achieved perfection not when there is nothing more to add, but when there is nothing left to take away. That's the mindset we bring to product development. The customer feedback we are receiving is very encouraging, and bodes well for the future of our new products in development. We also see innovation opportunities beyond the product, across our business model, supply chain, and go-to-market approach. The value of deep experience and brand. Ballard has delivered over 300 million kilometers of fuel cell power transportation, more than any competitor by far. We have the most durable products, the best delivered TCO, or total cost of ownership, and a globally respected brand. Our reputation and technical depth are tremendous assets that we will continue to build upon. The path forward. We are taking a hard look at markets that are not moving as fast as expected. For example, we are adjusting our investments in the heavy-duty truck sector. These are hard choices, but they are necessary to maintain focus and discipline. Our recent realignment and headcount reduction efforts structurally lower our cost base and allow us to redirect resources toward near-term opportunities where we see clear product market fit and margin improvement potential. We are now supplementing our industry-leading innovation culture with a focus on continuous improvement, operational rigor, capital discipline, and customer value delivery. Ballard's foundation is strong. We have no debt, no immediate capital needs, and an unmatched global team. This is why I joined and why I'm optimistic about the future we're building together. We'll provide more detail on financial implications of our restructuring on the Q3 call, and you can expect near-term updates on key strategic focus areas. We're also planning our next Ballard Capital Markets Day, expected to take place in 2026, where we'll share more about our path forward. Moving to our Q2 performance, we delivered a solid quarter, leading to an increase in revenue of 11% year over year, with growth particularly in the rail vertical. Gross margin improved by 24 points, reflecting cost efficiencies driven by our 2024 restructuring activities and a net reduction in owner's contract provisions. Despite soft order intake in Q2 of 8.3 million, we are progressing with key customers across our verticals. Notably, after the quarter we secured one of the largest marine orders in our history, with ECAP and SAMSCIP. Deliveries in the bus and rail segments remained on pace, and we are seeing renewed interest in material handling opportunities. We are also on schedule and progressing on Project 4, our high-volume bipolar plate automated manufacturing initiative. This is a foundational element of our product cost reduction strategy. Before I hand the call over to Jay, I'll reiterate this. We believe deeply in the role of hydrogen and fuel cells to decarbonize key sectors of the global economy. While market adoption remains uneven, Ballard is taking steps needed to lead over the long term with discipline, clarity, and resilience.

Jay, over to you. Thanks, Marty. As Marty mentioned, total revenue for Q2 was $17.8 million, up 11% year over year. The heavy-duty mobility market contributed $16.1 million, driven by bus and rail shipments. Gross margin improved to negative 8% at 24 points compared to Q2 of last year. This improvement was due primarily to lower manufacturing overhead costs as a result of our September 2024 restructuring and by net production and owner's contract provisions. Total operating expenses were $31.7 million, down 12% year over year. However, excluding initial restructuring and related charges of $5.9 million incurred in Q2, On a recent realignment in headcount reduction efforts, operating expenses decreased by 28% compared to Q2 of 2024. Cash operating costs declined in a similar manner to $22.7 million, a 27% year-over-year reduction. Adjusted EBITDA was negative $30.6 million, a 13% improvement from negative $35.4 million last year, reflecting improved gross margin performance and lower operating costs. partly upset by an increase in restructuring expenses. Cash used by operating activities was $20.3 million, 42% improvement versus Q2 of last year, reflecting lower cash operating losses combined with improved working capital. We closed the quarter with $550 million in cash and cash equivalents, no bank debt, and remain confident in our ability to fund operations and strategic initiatives without near-term financing. Finally, we expect full-year capital expenditure and operating expenses, excluding restructuring charges, to come at the low end of our guidance ranges for 2025. Including restructuring charges, operating expenses are now expected to be at the high end of our guidance range. As we continue with our recently initiated corporate restructuring to further reduce our operating cost structure and capital spend, we will update both our operating expense and capital spend guidances as part of Q3 reporting as appropriate.

With that, I'll turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We ask callers to kindly limit themselves to one question and one supplemental. The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning. What are the markets that you see that are sort of seeing near-term activity? I think, you know, rail and marine in particular you've talked about, but, you know, what are the kind of the near-term markets you're pursuing and maybe how do you approach those markets now with sort of the different cost structure?

Yeah, so thanks for the question, Rob. In addition to the rail and marine market that you mentioned, we're seeing really good traction, and a value proposition of significance in the bus market, both in North America and in Europe. And what really is the driver there is the total cost of ownership delivered for the asset owner operating a fleet or a bus. And hydrogen has a very strong role to play there and is winning specifically when you start seeing larger fleets where, let's say, Battery electric buses are limited in their ability to scale up infrastructure, and the cost of the additional infrastructure required for charging and other things in battery electric make those markets a little less attractive and make hydrogen a more favored solution as you go forward.

So we're seeing that transition playing out in real time. Okay, great.

And can you give some color on the marine order that you announced at the quarter end, sort of what's sort of driven that and some of the outcomes you're looking for there?

Yeah, so that order, to my knowledge, is about a two-year sales cycle to get that order over the goal line. So this is not a product life that runs itself to like every three months you do another one of these kinds of shifts, if you will. So that was a couple of years in the making, and it's, if I'm not mistaken, 6.3 megawatts in size, which is great. It's using our FC Wave product that was developed considerably a while back, put it that way. And that value proposition starts looking like an interesting... vertical over the long run because it's got the right kind of range requirements, the right kind of route requirements, the right kind of fueling infrastructure, ability to adapt to that kind of fueling infrastructure. And so it'll be interesting to see how that market evolves as more and more people get familiar with how to do that kind of transition of a marine vehicle or vessel, if you will, and what that might mean to route optimization going forward. with hydrogen infrastructure growing in the key ports around the geography in question.

Okay, thank you. I'll turn it over. Once again, if you have a question, please press star, then one.

The next question comes from Jeffrey Osborne with TD Cohen. Please go ahead.

Thank you. Good morning. And a couple questions on my side. I was curious if we could just run through the OPEX cadence that you had in Q2. And then it sounds like there'll be more detail on Q3. But I'm just trying to figure out what the new run rate will be. Is it similar to Q2? Or any details you could help articulate that? And then any restructuring charges that would flow through in Q3 that we should be modeling? Or was all of that incurred in Q2?

Yeah, so it was not all incurred in Q2, and Jay, do you want to provide a little bit more color from there?

Yeah, we recently announced July restructuring. Most of the charges related to that will be incurred in Q2. We're not disclosing the amount now as we continue to work through the details of that. There was a CEO transition in there, and part of those costs are reflected in the Q2 restructuring numbers. I would say this recent restructuring in July is expected to reduce go-forward operating costs by another 30%, with most of those realized in 2026. We'll see some benefit in the last half of the year, but not full benefit.

Got it. If I heard you right, you talked about realigning the business to be pass-flow positive exiting 27, or it was unclear if it was exiting or for the full year of 27, but do you have like a framework on what you're aiming to achieve to get there is that sort of 15 to 20% gross margins and then the OPEX cuts that you're announcing now are, you know, aligned to match that and get you to sort of be the cash flow neutral or just how do we think about like what the financial parameters are to make that statement?

Yeah, so it is exiting 2027. It's not for the full year of 2027. And yes, we have essentially a 10 quarter waterfall of how we'll get the growth margins expanded to the appropriate level and the cost reduced to the appropriate level. And we're refining that model as we progress through Q3. And just to go back a second, just a quick annotation. Jay mentioned the restructuring charges were in Q2. He meant some of the restructuring charges were in Q2. The bulk of the restructuring charges will be in Q3. So just making that quick edit on the fly.

So the sign change in Q2, it'll be something uniquely higher than that in Q3? That you're not quantifying that? Is that the right way to think about it?

That's correct.

Got it. I think that's all I had. As it relates to the pipeline of orders that you're chasing for the second half of the year, you alluded to strength in following up on Rob Brown's question, rail and bus. et cetera. But I think you mentioned, Marty, material handling. What are you seeing in that, Marty?

Yeah, we're seeing some green shoots in stack replacements. We're not actively doing battery box replacements or anything like that. That's not our core. However, we are seeing various integrators and OEMs talking to us about stack replacements as they start seeing the need for higher-performing stacks with greater durability, and they're looking for ways to lower their total service costs of addressing that space. And we play extraordinarily well in that domain with the stack lifetimes that we've been able to achieve. So they're quite interested.

Perfect. That's all I have. Thank you.

The next question comes from Mark Ware with CoreMark Securities. Please go ahead.

Hi. I just had a question on whether there are some concerns you may have that if you focus on the markets that are ready now, like you noted with the bus TCO looking attractive, will the declining of technology development necessarily allow you to be ready for when the other markets, like truck, start to see an improvement? Because that technology, I think, does need a steeper cost decline and probably a better performance increase. Can you just speak to how you're sort of future-proofing yourself on that front?

Yeah, I would say a couple things. One is the core technology that continues to evolve and improve is the stack. And when you think about the fungibility of a stack across all the different applications, making meaningful changes progress on durability and lifetime and efficiency and all the key customer metrics, that translates across all the verticals. So that march is going on now. Additionally, we're seeing markets like trucks being more like 2030 and beyond. And so we've got plenty of time as you start thinking about market signals. If we were needing to adapt further, we could adapt. from there. Lastly, I'd say that all of the markets are, let's say, commercially sensitive and understanding the total cost of ownership explicitly end-to-end is the work product that we've got going on now that will serve us no matter what market we're entering now or in the future. And really that's about getting the delivered value explicitly characterized so that we know exactly what the CapEx is, what the OpEx is, and the lifetime of the asset we're trying to serve and making sure that we're developing a product and a service portfolio that addresses it appropriately.

Okay. So that would be helpful next year. Looking forward to that capital market day to dig in on a lot of these issues. Absolutely. Yep.

Great. Thanks.

Our next question comes from Fred Guattari with Raymond Dean. Please go ahead.

Hey, good morning. I think in the quarter there was a 2 million backlog adjustment pulled out. Could you see more pieces of the business being exited? What are some of the margins for all of the backlogs? And are there pieces of the business that you may view as suboptimal or unaccounted?

Yeah, so in the case of that particular

reversal. Jay, do you have the particulars on that particular product? Not right now. Okay. Sorry, but I'm not going to be able to get to the exact name of that particular reversal or what that market was. It's just too new for me at the moment. That said, we are establishing and improving our pricing disciplines and what opportunities meet a threshold and a hurdle rate and what opportunities do not. And when an opportunity does not meet a hurdle rate, that doesn't mean that we suspend work in that particular vertical or that customer account. It means we have to be more creative on the balance between a CapEx and an OpEx model and understanding what the customer is solving for. Are they solving for upfront costs? Are they solving for lifetime costs? And do we know the difference in how to price it accordingly? So I would just say that we've got more maturation to do in value pricing and making sure that the markets we're serving and the products we're delivering to those markets have a fit and they have a value proposition that wins and the customer recognizes that value and is willing to pay for it, whether it's upfront in the capex or whether it's ongoing in the services.

Okay. And seeing that in the MDMA, there's still mention of the Rockwall, Texas facility being processed for use in 2026. Just wanted to know internally, what are you looking at specifically to give you the confidence if the facilities were to get a go-ahead? What sort of metrics are you using internally to sort of think about that?

Yeah, and this is part of my kind of operational heritage, if you will. The first-order effect for me as a former office person is you always strive for more out of your installed capacity. And so as we look for ways to be more process efficient and to see the benefits of our automation coming in, we'll keep looking at our overall capacity and understanding how much available capacity we have to address the markets that we're targeting. and then what the role of the Texas facility would or would not do to help us on the capacity front. As we sit today, we're still on pause in Texas without a need for that additional capacity on the horizon. So we'll revisit that statement as we see the market evolve over the next couple of quarters. But as we head into 2026, we should be able to get to a more certain outcome.

What's your take?

The next question comes from Craig Irvin with Rock Capital Partners. Please go ahead.

Good morning, and thanks for taking my question. So, Maddy, definitely appreciate the fresh look at the business model over at Ballard. You know, as it tackles by the end of 27, you know, not so many fuel cell companies have had positive cash flows even for very brief periods. You know, a much more important milestone, I think, for investors is positive gross margins and maybe margins above a certain threshold of maybe 15 or 20 percent. Can you maybe talk about, you know, what might have you pause as far as putting out the margin target for investors? Do we need to get past commitments and backlog where you know, pricing might not have used the same discipline that you're going to bring over the next couple years? Or are there other structural items that we might need to consider, you know, as you work towards this, you know, impressive goal of positive cash flows?

Yeah, I would say it this way. I think there's an opportunity for us to do a few things at the same time. So while we have a backlog of orders that – was derived in prior to me times, let's say, that doesn't mean that we don't have active engagements with those strategic customers and we're not actively looking at ways to deliver lower product costs for them while at the same time improving our own margins simultaneously. So we share the benefit of a cost roadmap and at the same time that helps them, that helps us. I would say that when you think about the backlog, you think about how would we improve that order book and how would we exchange value with those customers. And when I say that, that includes at the CapEx level and on the overall servicing of the account level. So think of it as total delivered value from the customer service standpoint with upfront and follow-on cost reductions and service improvements.

Understood. That makes sense.

So then one of the pieces of the equation that was kind of missing at Ballard in the past, or at least from my opinion, right, and many investors, was a field strategy, right? A lot of what Ballard was doing is just saying our customers will figure it out. Rather than taking a more active and strategic approach, can you talk about whether or not considerations around field strategy are a part of what you're looking at these days, how do you feel the team tracked on their support for customers with fuels over the last several years as people are looking at different ways of buying hydrogen? Is this something that is worth a close look as you focus on these positive cash flows in the future?

Well, I'll give you a quick response, which is I just spent four years trying to develop partnerships on the other side of the table as a molecule producer. And so the partnerships required to deliver the total cost of ownership end-to-end for any one of our verticals require thoughtful partnerships on fuels. To the extent that we can be more of a value add in that discussion with the right kind of strategic partners and bring the right type of imputed mileage, if you will, to bear on their offtake requirements, I think those are exchanges that would be welcome from molecule producers. Put it this way, if I had an opportunity to have partnered with Ballard at my last company, I would have loved to have done so.

Fantastic. I knew you'd bring some new perspectives. Thanks for taking my questions.

Our next question comes from Jill Koenig, private investor. Please go ahead.

Can you hear me?

Absolutely.

Yes. Welcome aboard, Marty. My question has to do with China. Can you sum up our activities, our present activities in China and the outlook there? Thank you.

Thanks for the question, Joe. And we are on materially a pause on China. We have not invested in any way, shape, or form over the last quarter And as we look forward, we're looking to make clear where or where it does not fit in our portfolio. We are continuing to buy components from China. It's a critical supply chain node for us. It's less clear of the demand environment of how the China market is available for us to address. And so we've just stopped approaching the demand side of the China market and instead have been using the supply side on the supply chain to help us lower costs for customers.

Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Marty for any closing remarks. Please go ahead.

Thank you for joining us today.

As I mentioned, Ballard is focused, aligned, and operating with urgency. We will continue to take decisive actions to build a more capital-efficient, disciplined, and commercially-focused company. We look forward to updating you on our progress next quarter.

Thank you very much.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.