Ballard Power Systems (TSX:BLDP) Q2 2021 Earnings Call

0:00 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.

0:39 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.

1:24 I'll now turn the call over to Randy.

1:26 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.

2:13 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.

3:08 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.

3:57 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.

4:44 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 eighth 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.

5:37 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.

6:22 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.

7:13 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.

8:01 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.

8:52 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.

9:41 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.

10:38 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.

11:32 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.

12:18 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.

13:05 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.

13:58 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.

14:45 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.

15:30 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.

16:31 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.

17:24 Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one 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 two. We will pause for a moment as callers join the queue. The first question comes from Aaron McNeil with TD Securities. Please go ahead.

17:54 Good morning, all, and congrats on the new role, Kate. Randy, you touched on it in your prepared remarks, but can you give us a sense of how competitive a typical new order is, particularly for one like Tata, which is a new customer? The types of questions I'm looking for answers on are, How many competitors are bidding? Are your modules priced competitively? Are less proven competitors offering discounts to build references? Are you charging a premium and relying on reputation? I know you can't get into specifics, but the pricing dynamic for us is sort of a black box, and I'd just be curious to get any thoughts that you could share.

18:38 Sure. Aaron, thanks for the question, and most of your comments are applicable. What we've seen is a change in the competitive landscape over the last number of years. If you go back five years ago, there only would have been a handful of companies, a very small handful, competing for these type of opportunities like Tata as an illustrative example. What's happened, of course, over the last number of years is that we have and, you know, much larger companies that have seen our strategy of looking at the medium and heavy duty mode of markets of bus, truck, rail and marine where the value proposition for fuel cells are strongest. And so it's a more competitive landscape, but what's critically important to understand, whether it's Tata, Solaris, Van Hul, Right Bus, New Flyer, et cetera, their logos are on the front of these buses and they care about safety. They care about reliability.

19:33 They care about durability. We're now approaching 100 million kilometers of in-revenue service, which is a massive differentiator for Ballard compared to any other company in the fuel cell industry that focused on these heavy-duty motor markets. So one of the things that's critically important, too, is we're really focused on, as our tagline here for life implies, the lifecycle for our customers and making sure that we're thinking about long-term durability and the cost for our customer, not just upfront capital costs, but over the life cycle of that deployment. So there are a number of factors that go into winning a customer like Tata. Certainly the technology, the product offering, the fit of that product in terms of power output, temperature, ease of integration, there are a number of variables there.

20:27 but reliability, durability and proven technology is a major calling card for Ballard and we play that as you would expect. That being said, your point on pricing is important. We are seeing other companies who are earlier to the game, who aren't on an eighth generation of product, trying to win early deployment opportunities and pricing aggressively and You know, that's a factor we have to, you know, take into account. And that's why we have our, you know, three by three program to cost reduce Ballard stacks and modules, you know, over that three year time horizon by 70%. So we don't want to just rest on our technology advantages, but we're looking at cost reduction as a major advantage going forward.

21:15 And the one last point I just highlight, Aaron, is this business model we have where we sell into multiple end markets, we think it's very attractive. A lot of leverage with the same core competencies, same technology, and a substantive part of the same bill of materials for modules across bus, truck, rail, and marine, and increasingly off-road and stationary power applications. What that means is that beyond the technology advantages we have, as we sell across a number of verticals, we expect to have a volume and therefore a cost advantage as well.

21:50 Got it. That's helpful. I'm hoping that you can also give us a bit more details on the updated timeline for the subsidies in China. Obviously, let's not get into picking a date or anything like that, but I guess what might be more interesting is if you can give us a sense of the mechanics of what might occur when that announcement is made, both at the JV level and then at the Ballard level. For instance, Does the JV have orders in hand contingent on the finalization of the subsidies, or will it start to build inventories? What's utilization at the JV level today versus what you think it might look like subsequently? Any sort of goalposts would be interesting.

22:35 Yeah, so some of the context on the JV, of course, is that we've done a lot of work on optimizing our production processes and We've learned a lot over the last year that's quite helpful, particularly on the plate production side. We've seen a lot of efficiency and yield improvements that are very compelling. So that's on the production side. Production utilization is very low right now, as you'd expect. And of course, this is a facility that's, I believe, the largest facility to produce fuel cell stacks and modules in the world for these heavy-duty motive applications. So over two gigawatts of production capacity about 20,000 vehicles annually that this facility can support. It's quite an impressive facility. So operating at very low utilization currently.

23:23 And then when you look at additional activities as the entire China market has been waiting for policy clarity, we've done a lot of work at the joint venture on next generation module design and increasing the breadth of the portfolio, so different power outputs Waychi has brought a lot of capability to bear here in terms of understanding the market requirements there and they're experts obviously at diesel engine design and so together it's a very powerful combination with Ballard's fuel cell capabilities and Waychi's engine design and supply chain muscle so there's been a lot of work done on cost reduction for balanced plant components over the last year and a half that's very compelling and then on the customer side You know, a number of customers continue to clock up kilometers as they validate the reliability and validate the durability of our products in their applications.

24:22 And we're talking about here some of the largest bus OEMs in China and some of the largest truck OEMs in China that now have, you know, new platforms with the latest generation of H.I. Ballard stacks and modules on test in the field. So that's important developments there. We don't have a contingent order book to answer your question directly at the JV. I think customers really want to understand how the point systems in various demonstration regions will get finalized and what that means. But what I think is very encouraging beyond the national policy appointing demonstration regions is the recent announcement in Shandong Province for the Hydrogen Society Program. And this is a program that's very much focused on the deployment of fuel cell trucks and buses and hydrogen refueling station infrastructure in Shandong Province. Of course, that's where the Wei Chai Ballard Joint Venture is located.

25:25 So we believe that we have a very strong position as that project starts to scale up, and we're already seeing activity from the JV with customers for that program.

25:37 Understood. That's helpful. I don't want to hug the line here, so I'll jump back in the queue. Thanks for taking the question. Thanks, Aaron. The next question comes from Mac Whale with Cormart Securities. Please go ahead.

25:52 Hi. Good morning. I thought, Randy, I would switch gears to the Gore agreement. Can you speak a little bit about the trend behind this or what the interest is from Gore? Because Gore supplies you with Can you speak to whether we should view this as a sign of your leadership in that MEA area? Can you speak to the nature of that collaboration?

26:21 We've been working with Gore materials for a long time. Gore is obviously a leader for membranes. They have evolved their recipe and their processing and their capacity over the last number of years. and I think they'll continue to be a leader at the membrane level for a very long time. And so we're very pleased with the deepening collaboration we have with Gore. There's lots of work underway as we look at collaboration that will continue to improve the performance of membranes, you know, thinner membranes, higher performance, lower cost, you know, better utilization, etc. So we're very excited about the activity we have underway with Gore, not just as a supplier, but really as a a partner that's looking at the long-term landscape for membranes in fuel cell applications, particularly for heavy-duty mobility where membrane durability is critically important.

27:17 I also want to highlight there are other membrane suppliers that we have a collaboration and partnerships and supply arrangements with, including China domestic suppliers that have emerged over the last number of years. You know, we've worked over about a four-year period with one company in particular and have worked with them to really validate their material with a number of iterations during that four-year period, helping them with their specifications so that there's another option that's domestic for the China market. We're seeing very strong technical results as well as cost opportunities for that membrane as well. So I won't comment on Gore's positioning in the MEA. I will say Ballard is very strongly positioned at the MEA, and we appreciate the relationship we have with Gore as a key supplier for membrane.

28:09 Okay. Switching then to the Linamar initiative, it's pretty early stage right now. You're working on a powertrain sort of prototype by the end of the year. What is the timing on the testing of that and then any decision on a JV? Is that like a 2022 decision point or would it be earlier or later than that?

28:35 Yeah, Matt, great question. So there are a number of work streams going on in parallel with Linamar. One relates to the commercialization discussions in terms of business model, business plan, and JV. The second relates to collaboration on the product architecture, including the integration of our modules, our stacks, into balance of plant components for module design and powertrain integration, including storage. Linamar has a lot of capabilities here and a lot of investments they've been making over the last number of years and I think are well-positioned, particularly for utility vehicles and certain vehicles in the light-duty car and van sector where we see high utilization rates.

29:24 And of course, our high power density stack is well-positioned for that market after a long investment cycle with Audi there. and then the third is really about the customer side and where do we see adoption and penetration and so those are the three work streams going on in parallel and I just want to comment that Linamar is a great international player, tier one supplier in all automotive sectors but well positioned in these light duty car market where we see Vans and Utility Vehicles seeing adoption for fuel cell vehicles and their conviction level and positioning on this I think is very, very solid.

30:09 Okay. And just my last question, if I could just throw one more in there. On the TATA order, 15 units is a great start on that. Is that, when you look at their plan, is that more like a Van Gould kind of program where you see around a million and a half every couple quarters or Is it more like Wright Bus where there's more like $2 million a quarter? Trying to get an idea of how to model that over the next six to 12 months.

30:39 Yeah, so I think like over the next six to 12 months, I wouldn't assume additional orders from Tata. You know, what we're looking at here is those 15 buses going into deployment in a pilot program in the greater New Delhi region area, Delhi region area. There'll be some time to validate those new modules. They're taking our latest generation modules. We had a prior experience with Tata on previous generation product, and so we're now moving to the latest generation product in a much larger pilot program. Now, you compared it to, for example, some of the European bus OEMs. I would actually, Matt, compare it more strongly with the Chinese bus OEMs.

31:25 because the size of the Indian market is substantive compared to North America and Europe. And what we see is a very large Indian market that is now really over the last six months kind of awakened to the hydrogen opportunity in a serious way. So we think India will be a very large market long term for hydrogen and particularly for mobility where obviously Local Air Emissions, along with Climate Change, are big drivers in India.

32:00 Okay, that's helpful, Randy, because, yeah, as you pointed out, it's a big market. So I guess your comment is really, there is a legitimate hockey stick there, like in China, and it's a question of getting, seeding the market, and then once they're comfortable, you'll see sort of that uptick in growth. Yeah, I mean,

32:19 For us, we're really pleased to be working with Tata, particularly the number one bus OEM in a large market.

32:30 Great. Thanks. Thanks, Randy. Thanks, Mac. The next question comes from Michael Glenn with Raymond James. Please go ahead.

32:41 Good morning. Randy, you talked about some capital deployment. You made some pretty broad statements there about you've identified several opportunities. You're in active discussions with a number of parties. I'm just curious if you can just perhaps dig into that a little bit more. Is this M&A? Is it MOUs? Is it partnerships? Just trying to assess in more detail what we might be thinking about here.

33:11 Yeah, hi, Michael. It's Paul Dobson here. So, yeah, on the capital deployment front, we are very active, you know, both on the M&A front and with the commercial discussions with a number of large players. On the M&A front, you know, as we talked about before, really what our strategy is aimed at is accelerating deployment, customer adoption, and expanding our capability. And really looking at that in the key markets. So Europe is a big growing market, lots of support in Europe, and so looking to see how we can expand our capability there. And then also in China, looking to perhaps expand our manufacturing capability there to supply the JV and the Chinese market.

34:03 So those are some of the things that we're looking at. And then on the partnership side, you know, again, looking at key geographies, you know, Randy mentioned India, but that is a massive market. And when I first joined a few months ago, it wasn't, I think it had been on the radar before on the periphery, but now it's squarely, you know, in our sights and some interesting discussions going on there, as well as with other players in Europe as well. So there's lots going on in that space where we're We're quite active. We hope to make some announcements this year, but can't promise that, obviously. But we are in some advanced discussions with some pretty interesting opportunities.

34:52 Okay, that's great insight. And just circling back to the customer or the competition question from earlier, when you're involved in a customer engagement, and I would suspect most of these customers are also looking at battery electric solutions for their fleets as well. I'm just trying to assess how much of a competitive angle or competitive dynamic is emerging with respect to hydrogen versus battery electric when customers are looking at these type of solutions.

35:29 Yeah, Michael, in the bus market in particular, there are a number of battery electric OEMs that are showing good progress in that market. So that's a competitive market. But what we do see is it really very much a function of the transit operator, what their routes are and the duty cycles for those routes. And then therefore, what powertrain technology can meet the requirements for that fleet. And so that's how I would say that market's being characterized. In terms of the competitive dynamics, In my opinion, what we're seeing is more transit operators looking at hydrogen today than were doing so a year ago. And we've seen a number of instances where we've seen follow-on orders from transit authorities that have deployed Ballard fuel cell engines in buses over many years and are scaling up their fleets.

36:29 I'll give you many examples in North America and Europe like that. and what we're now seeing is that their experiences have been socialized with other transit authorities who are now open to this opportunity. And as the mandate for zero emission buses grows stronger in the US, in Europe and in China, this is a very large attractive market. And then as you move to the truck market, I would say that except for very short duration trips Thanks Randy, thanks for taking the questions. Great, thanks Michael. The next question comes from Craig Irwin with Ross Capital Partners.

37:39 Please go ahead.

37:40 Hi, good morning, and thanks for taking my questions. So, Randy, you know, I've followed Ballard for eons, right? I mean, it's a couple decades now. At the beginning, Ballard had some incredibly interesting and important joint ventures and collaborations with the biggest name brand OEMs, truck producers in Europe. and, you know, I guess Audi VW is the last one to really be spending money with you visibly. These other companies have been decidedly quiet around fuel cells in the last two years. You know, given your experience with them and, you know, your deep knowledge of their needs, their long-term requirements, is it possible that you pick up one of these, you know, really top-class Tier 1 OEMs, again, either for A commercial vehicle program or to support a trucking program?

38:40 And is that something that credibly is in the offering for the next year or two? Or should we look at more players, more like Molly, as to underpin the future development?

38:54 Yeah, great question, Craig. And you're right. Many years ago, of course, both Daimler and Ford were shareholders of Ballard. And, of course, we had a longstanding and continue to have a longstanding relationship with – previously VW and now the Audi brand in the VW group. And what I'd say on the commercial vehicle market is you have Daimler and Volvo obviously in their joint venture and they're looking at the deployment of fuel cell commercial trucks as they say in the second half of the decade, so 2025 through 2030. So they clearly are making significant investment, but it'll take some time. In terms of securing customers, large OEMs, our plan is to do this with MOLLE. So they have not just the leading fuel cell module, as we co-developed that with MOLLE, but also a number of balance of plant components that go beyond the module and integrate into powertrain and are optimized.

39:57 And so this is a plan from Ballard Like we have done in China with Weichai, where you go with the Tier 1 supplier level with a compelling package to the vehicle OEMs to help simplify customer adoption and remove customer friction points. So it will take time for the Ballard Malle product to go through development, testing, field trials, etc., and so I think it'll take a few years before we see the OEMs in any large quantities purchasing that product. I just want to be very transparent on the sequencing of that. But I do view on the commercial vehicle side a number of OEMs as potential customers for Ballard and Mali as we move forward together.

40:52 Thank you for that. Thank you. My second question is really a question that I've been getting from investors, from clients. People want to know why Ballard hasn't been more aggressive, particularly on the hydrogen strategy side. There's the expectation of low-carbon fuel standard adoption across the United States, at least in another 24 states over the next several years. They're all sort of in some stage of adoption, and and that should provide access to some pretty rich subsidies for fuel cells given green hydrogen's superior environmental footprint, economics, et cetera. And you underlined some of those numbers in the front end of your call and prepared remarks.

41:42 Is a hydrogen strategy to facilitate customer adoption something that you would look to deploy your cash for? Is this a priority for Ballard right now? or do you see this as something that's best handled by other partners out there in the market like, you know, like an Air Liquide or one of the global suppliers of hydrogen today?

42:04 Yeah, thanks for the question, Greg. And, you know, as we look at supply of energy, supply of fuel, you know, we really do think that the long-term winners in that market will be companies that have scale and capacity and strong balance sheet We don't ever see Ballard being a supplier of fuel where customers pay on a per drink basis and Ballard is the financial sponsor effectively for that. So we do believe that the large energy companies like Shell, like Total, and even a broader set like Angie, and then the industrial gas companies, Linde, Air Liquide, Air Products, these companies are expert at Engineering Procurement Construction.

42:53 They're expert at the station design and the various technologies that go into station design. They're expert at transporting liquid fuels or gaseous fuels. And, of course, they have balance sheet strength. And while we have a significant balance sheet strength here on a relative basis in the fuel cell industry, You know, it's a shallow pool compared to the type of capital you need. So we do think that Shells, BP's, Total's, Angie's, etc., and then the industrial gas companies will be the long-term providers of hydrogen fuel. And, you know, you need to be in that game in volume with very significant capabilities and capital. So now that being said, our customers need hydrogen. Many of our customers are already used to procuring diesel fuel. And so we don't need to supply the hydrogen from Ballard, but we of course are partnering with many companies so we can help simplify the experience for end customers.

44:03 And so we have strong collaborations with providers of equipment and obviously with providers of hydrogen fuel. And as infrastructure gets built out, and you think about the projects we're focused on, where we're looking at return to base centralized depot refueling where the barriers to entry on hydrogen refueling are lowest. You know, we're able to bring partners to bear on these types of projects.

44:30 Thank you. And then last question, if I may, sort of a big picture question. You know, China is always unpredictable, particularly for Western companies and Western executives. I guess it's been roughly 60% of revenue over the last couple of years. Would you expect China to continue to be the majority of revenue over the next few years, or is the activity you're seeing in Europe and North America indicative that one of these other global markets, or possibly India, could surpass China? as a focus of activity for Ballard.

45:17 Yeah, great question. And so, you know, part of our business model, of course, is to be selling into multiple verticals in key geographies with a strong customer set. So we're not dependent on any one market segment, geography, or customer. And if you look at the revenue, actually, for H1 of 2021, 50% of our revenue came from Europe. Last year, it was 50% from China. and if you look at our order book, and we don't disclose our order book by geography, but very strong take-up, almost 70% from Europe and North America. So, you know, what we're seeing, of course, is that as the China policy has stalled, our China revenues have declined, but Europe, and that's, you know, the overall revenue then is kind of masking the growth that we're seeing in Europe and in North America as well as some of the other market segments. So heavy duty motive will be our largest market application and we'll see that split up between China, Europe and other markets including North America over time and I agree with you, India and other markets will start to see traction in too.

46:34 So what I would say is we like this model of resilience so that if there are any We've seen this in the solar industry. We've seen it in the wind industry where during early adoption periods, various geographies have stronger years and weaker years. And so we like this resiliency we have in our model. But I do expect China to be a major contributor to revenue as the policy clarity shapes. And we start really striving towards that million fuel cell vehicles by 2030.

47:05 Great. Thanks for taking my questions, and it's great to see the heavy-duty revenue picking up there. So, congrats.

47:13 Great. Thanks, Craig. The next question comes from Pramit Satish with Wells Fargo. Please go ahead.

47:23 Thanks. Good morning. There's been some reports of city clusters in China that have been selected for pilot programs, and recognizing that nothing is finalized as of yet, but I don't think we ever really had strong expectations that Shandong Province would be included in the first batch of city clusters. There are some other markets that are

48:00 You know, large cities like Shanghai, for example, in Beijing, where you always are going to expect to see them included. And, you know, our early work in China in Guangdong province at Ballard, you know, has a number of vehicles in Guangdong province. So, you know, those three will certainly be, I think, the highest priority three. There's likely five that will be announced, but we'll have to see how it plays out. Of course, some of the customers we're working with and some of the supply chain partners we have are in some of those other clusters as well. So we expect to sell across China in cluster cities or demonstration regions, outside of cluster demonstration regions, and in Shandong Province. And I think over time, you'll see that the cluster regions will expand. And over time, of course, subsidies will relax and the market will need to compete with economics, and that's really the long-term market we're focused on.

49:00 Okay, great. And then just switching gears, I wanted to ask about gross margins. They were kind of flat in Q2 with the first quarter. Were there any transitory or supply chain or any type of cost that hit you this quarter that could reverse over the balance of the year? Where do you see margins tracking for the balance of the year?

49:23 Thanks. Yeah, it's Paul here. Yeah, we did see some impacts in the gross margin. So one of the things Randy mentioned and talked about in the remarks was around the supply chain. So the team has done a really good job in securing supplies and getting those on board as we're going through the COVID environment. We have seen some impact in platinum prices. Platinum went from, I think, Last year, $850 an ounce to about $1,300 or so. And so we did see some of those costs come through. We've also been investing quite a bit in people and added quite a few people in our advanced manufacturing group and in other areas as well, working on product development, R&D.

50:16 launching products, and our cost reduction programs. And so some of those fixed costs coming through our margins were also there. So we are cost-based now. We think we're at where we thought we would be at this point in the year, and so expect that to be maintained going forward. We'll have to see where commodity prices get to. and see what could be passed through to customers. But right now, some contracts, we have the ability to pass those costs through to customers, but most of them we don't. So we'll be looking at ways to mitigate that risk going forward.

50:56 Great, thank you. The next question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

51:07 Good morning. Morning, Rob. I just wanted to follow up on the rail market development. You had a nice order from Siemens there. How do you see that market developing? Is that a pilot project that will take time to turn into follow-on orders, or how do you sort of see that market developing?

51:25 Yeah, thanks for the question. Of course, the rail market is a market that we're excited about and one we believe will surprise to the upside. and the Siemens opportunity is really one where we're thinking that there will be a couple of phases to this. So we've gone through the product development phase and successfully worked on a module that meets the onerous rail codes and standards and can be integrated and packaged appropriately and meet the requirements. This Mario Plus H platform, what we're expecting is a demonstration pilot in the Bavaria region. and then that will be a 30-month trial and then what we're expecting is basically from 2023 to 2024 these initial trains being put into passenger service.

52:19 What I can say is that Siemens is quoting this train in a number of projects and so I think what we likely see is 2024 is kind of when liftoff will occur in terms of sales of additional units in quantity to the European market. So there's still more work to do, and we're focused on that. But it will be relatively modest order inflow over the next couple of years as we validate this on rail.

52:51 Great. Thank you for the cover. I'll turn it over. Thank you. The next question comes from Jonathan Lamers with BMO Capital Markets. Please go ahead.

53:05 Good morning. Randy, you mentioned targeting near-term diversification across target markets and geographies. Could you give us a hint of the product areas or customer markets that Ballard might be looking to diversify into?

53:22 Yeah, so what we're seeing, again, is additional verticals where the technology can have play. And I think some of these markets, like some of the off-road markets, whether it's construction equipment or mining applications, they're large markets. And they're markets where we believe fuel cells are the only viable technology for decarbonization. So there's a lot of work going on, a lot of interest there from mining companies and, you know, equipment manufacturers of construction and mining equipment. And stationary power is a market where we're seeing lots of interest in a number of different market segments. So, you know, it's not just backup power where we're seeing increased demand in Europe, but, you know, stationary power applications with renewables where there's very large opportunities.

54:15 And then as we look at data center applications, we're seeing a lot of interest in those segments. In terms of geographies, we've already commented on India. I think there are other markets like Australia and some markets in the Middle East where we're seeing increasing interest for fuel cell solutions.

54:38 Thanks. And a follow-on to that, on the fusion fuel order, do you believe that the modules designed for the marine market will be cost competitive in the stationary power market? I just have a few questions on this. Is there a segment of the European stationary power market or certain customers that Ballard Infusion Fuel are targeting for these? Is Ballard marketing its modules to other electrolyzer suppliers? Could you just talk to us about the market opportunity that you see? Because it's kind of interesting that this is opening up in electrolyzers.

55:09 Yeah, so on the marine market, first of all, you know, this FC wave, we're seeing a lot of interest in ferries and tugs and workboats and cruise applications. and so this product was designed with the marine market in mind. And what we see is that that module has a lot of applicability for other market opportunities, including stationary power. But we're also seeing even the bill of materials, for example, in our marine market product and our rail market product, probably 70 or 80% of the bill of materials is fairly similar. So we have some really good opportunity across multiple end markets. In terms of the application of the module for stationary power, I do think it's going to be cost competitive as compared to other fuel cell solutions.

56:03 When I look at the design and how that design can fit into the applications, we're seeing that a lot of customers are looking at not just the Upfront Capital Costs, but the Long-Term Operating Costs. And we've designed the module for the marine market where you get high utilization. And a lot of other stationary power fuel cell technology out there, like backup power, have low utilization. So some of the differentiation we have for our product is the durability and the design of those products for markets where durability is important. And now looking at stationary power, like the electrolyzer connection you referred to or markets where you have high utilization. Think about, for example, a mining site where you have the ability to have solar or wind as your renewable input, have an electrolyzer there, produce hydrogen. That hydrogen can be used for mining vehicles, but it can also be used to provide when the wind isn't blowing and when the sun isn't shying, and many others.

57:18 So that's an illustrative example, but there are a lot of micro-grade opportunities that we see. And of course, we're working with many electrolyzer companies, many of the leading electrolyzer companies on a number of projects.

57:32 Okay, and one follow-up on China. Do you believe that we will see an overarching national policy implementation announcement or will we just continue to see a series of regional policies sort of subtly implementing the national policy? I'm just curious whether you can comment on the clarity that your customers are looking

57:59 for. Yeah, I think China, beyond the demonstration program that's been discussed about, is really looking at announcing its hydrogen strategy So it's roadmap, very similar to what other countries have done. So that would be a more comprehensive outlook on how hydrogen will play out across industry, energy, mobility, and the connection between renewable energy, which is an abundance, of course, in China and very high penetration expected in the future, and the role that hydrogen can play there. We do expect to see a broader hydrogen strategy that is launched in China. I won't even speculate on the timing because we've gotten the policy timing wrong already.

58:48 But we do expect to see that that will occur.

58:54 Okay, but that's not what your customers need to see at this stage to start ramping up production. Is that correct?

59:00 Yeah, no, that's not a condition precedent for the type of growth we're expecting with the regional deployments and the demonstration regions as well.

59:10 Thanks for your comments.

59:11 Thank you. The next question comes from Rupert Merrer with National Bank. Please go ahead.

59:22 Good morning, everyone. Good morning, Rupert. Randy, you gave us some comments on supply chain and product development activities at Weichai and Linamar. As you get further into your partnerships with Linamar and Malé, do you see them as silos, or are you going to see some cross-pollination between the programs to accelerate development?

59:46 Yeah, great question. I think there's a lot of leverage that we'll see with the work we're doing in China and with Wei Chai in the supply chain there. The work we're doing with Mahle, and Mahle is certainly looking at a number of key balance of plant components that go inside of our module, as well as some powertrain components and the ability for us to use those components, not just with our Mahle product, but across geographic markets and different verticals. And similarly with Linamar. You know, Linamar is working on a very intriguing You know, conformable storage solution potentially that has, you know, a lot of creativity and innovation. And so if that sees commercialization, the ability to use that in markets beyond what we've contemplated with Linamar is quite compelling as well. So we do see opportunity with our three industrialization partners, Weichai, Mali, and Linamar, you know, to use their expertise, their components, in all verticals likely and in all geographies.

1:00:52 And they're all relatively comfortable working together, are they?

1:00:57 Yeah, I don't know that they'd necessarily be working together. It's more, you know, the ability for us to take, for example, a Mali component and integrate that into a China solution we're working on, for example, for the rail market. or take a Linamar storage solution, let's say, and integrate that into a product for the marine market. So there's just a number of different ways we can think about using the components and the powertrain integration capabilities that may be applicable to other markets.

1:01:29 Great. Thanks. Thanks for coming. Given the time, I'll leave it there.

1:01:33 Great. Thanks, Rupert. The next question comes from Amit Dayal with HC Wainwright. Please go ahead.

1:01:43 Thank you. Good morning, everyone. Randy, just, you know, I'm sorry, Aki, you know, bringing up China again and again for you, but, you know, does the China policy, you know, from your perspective in fuel cells sort of involve heavy subsidies, et cetera, and, you know, that is a factor that's preventing the market from moving independently in bringing these, you know, cleaner vehicles to the marketplace? Just trying to understand, you know, obviously there are maybe cost issues, but given some of the environmental benefits, et cetera, of all of this, can the market sort of move independently a little faster, you know, while the policy level stuff comes into play?

1:02:29 Yeah, so Amit, thanks for the question. And, you know, we have to understand, of course, China is a command economy. and it's driven by policy. And when policy statements are made, commercial enterprises cascade under that and move forward based on the policy statements. And we have to understand that fuel cell technology, you know, in most applications is not cost competitive today. We've outlined this before that the roadmap for cost competitiveness on a total cost of ownership for bus, truck, rail, marine, you know, we're looking at applications between 2023 and You know, 2027, 2028 timeframe where we see that TCO crossover against incumbent diesel technology. Of course, interestingly, the cost of carbon continues to go up as well.

1:03:19 And so that's a real wild card that could accelerate the timeline for TCO comparatives. So, you know, what we see, of course, and we saw this with solar and wind and batteries, is typically markets provide some initial support in early adoption. where you've got low volume and high cost. And as the policy supports initial adoption and volume increases and costs come down, then the policies relax and decrease over time. So we're expecting to see something similar to that in China. And so yes, the market is waiting for that policy support in China. And then we'll start to see volume deployed, costs come down, and policy will become less important as we've seen in other industries. So that's the dynamic there. I think the other dynamic is, of course, the build-out of hydrogen refueling stations even for centralized depot refueling like buses and commercial trucks.

1:04:22 That's critically important and China, I think, has a real advantage compared to other countries in terms of Deploying capital and putting a lot of muscle behind these type of infrastructure build-out which other jurisdictions may be more challenged with different stakeholders involved in seeing that getting realized. So I think China has the ability to move very fast once a policy framework is in place.

1:04:54 Understood. And then On the stationary power side, it seems like that's a market that is maybe ready to go now with fuel cells, et cetera, with microgrid adoption and all of the other applications around stationary power. What are we doing from a business development perspective to get a bigger share in that space? Even from an R&D perspective, what kind of resources are we applying to maybe create a bigger presence on the stationary power side?

1:05:27 Yeah, so good question. And really, we are, of course, seeing leverage off of the work we're doing in our technology and products, including the ability to use those products in a number of stationary power market applications. We have increased our business development activities globally, so in China, in Europe, in North America. and in other markets as well. We've brought on additional resources and there's a lot of active discussions underway with different companies in the value chain and some of them quite large scale companies that are looking to really game change decarbonization in stationary power market segments. So still too early for us to comment on the progress we're making there on the business development side. but we'd hope to be able to provide more visibility later this year. But we're making the investments we need to both on the technology as well as on customer engagement to move the yardsticks.

1:06:28 Understood. That's all I have. Thank you, Randy. Thank you. The next question comes from Craig Shear with Toohey Brothers. Please go ahead.

1:06:40 Hi. Thanks for taking the questions. Randy, I apologize. I'm not sure I can reconcile answers to a couple of questions regarding hydrogen fuel supply. It sounded like the response to one was that we need to leave this up to the big boys, the integrated energy conglomerates, industrial gas companies that would be the main supplier and relied upon. But in another question, it sounded like some turnkey Ballard electrolyzer application opportunities could have meaningful kind of turnkey, all quick adoption opportunities for end customers. And of course, some of that related to the fusion fuel and other opportunities.

1:07:29 Can you kind of help me understand how to triangulate all this?

1:07:32 Yeah, Craig, a great question, and we should be very clear about this. There's a difference between designing and manufacturing equipment that you sell versus being a supplier of hydrogen. And what we were describing before was the opportunity for Ballard, particularly with our PEM fuel cell capabilities, to potentially look at PEM electrolyzer manufacturing downstream. So not being a supplier of hydrogen, but a supplier of electrolyzer equipment. So we don't discount that opportunity. That's certainly an opportunity that we have a high level of interest in, but we wouldn't be looking to sell hydrogen as a captive supplier as an energy company.

1:08:17 Is that helpful? That's helpful, but nonetheless, if the end user buys the fuel cell equipment and buys the electrolyzers, they have all they need to make the package work, right?

1:08:34 Right. So what you'll see typically is end users buying Like a transit authority would say to Shell, we'd like to have a fueling station built. Shell will then go to an electrolyzer company if they want on-site hydrogen production, buy the electrolyzer, put in place the compression and chillers and storage and dispensing equipment, own and operate that asset, and sell the hydrogen fuel to that transit operator. So we would be okay being a provider of electrolyzer equipment in that model I just described, but we wouldn't be in the role of Shell, where we design and build a turnkey fueling station and operate that station selling fuel.

1:09:20 Do you appreciate the difference there?

1:09:23 Yes, but you get to sort of double dip. You'll support both the electrolyzers and, of course, the equipment that's fueling up.

1:09:33 Exactly. We'd have the ability in that case, in that illustrative example, where if we had electrolyzers we were selling, we'd have the ability to sell that equipment plus the ability to sell the fuel cell modules into the vehicle that are consuming the hydrogen.

1:09:52 Great. And last question, any thoughts before we get clarity on China regulation? about the ability to break out of this kind of $100 million annualized revenue run rate we've been at for a couple of years now. And any thoughts about timing to cash flow break even?

1:10:16 Yeah, I mean, we don't provide guidance on our current year revenue, let alone our views on when we'll see cash flow break even. What we do see, of course, is that as you look at deployments of buses, In China, in Europe, in North America, starting to scale, particularly you think about 2024 and 2025 objectives for zero emission buses in different markets. As you see, the progress we go through on the commercial truck side with Wei Chai Ballard Joint Venture in China, with Mali in Europe as illustrative examples, and get through commercialization of modules into trucks and on roads, And as you see, the rail programs start to move from the pilot projects to deployments.

1:11:03 And as you see, marine applications similarly doing that. You know, this is the 2024, 2025 to 30 ramp that we've talked about with all of these verticals across the three key geographies and potentially more really contributing. So, you know, we've always said that the growth rate will see a very steep curve as you kind of get to the 2024-2025 timeframe. And between now and then, we expect to see good growth by traditional industry standards, but not necessarily the hockey stick effect you'll see after that.

1:11:37 Understood. Thank you.

1:11:38 Yep. The next question comes from Chris Souther with B. Reilly. Please go ahead.

1:11:50 Thanks for taking my question here. Maybe just within the European bus space, would you be able to frame or kind of give an outlook on the number of buses in the backlog today and the mix within that 12-month backlog and delivery cadence for this year versus some of the visibility you've got for next year? Just hoping to kind of nail down The cadence that we're looking at and are all the orders to date under Drive 2 or earlier programs? So, you know, trying to get a sense of the timeline for that next program batch out of Europe.

1:12:25 So we're expecting to see some very important developments on the European bus, you know, support scheme, you know, I think later this year, certainly before December. or perhaps in the early December time frame we're expecting to see kind of the next major announcement on the support of post-Jive and pretty significant scale for Europe. So we're pretty excited about that. When you kind of look at the near term in terms of the order intake, a big part of our order intake relates to, in the first half of the year, did relate to buses in Europe. We expect that trend to continue. We have a number of bus OEMs that we're working with in Europe.

1:13:10 So, Lightbus, Solaris, Van Hool, ADL, you know, these are all active in the market and winning projects in the market in key cities that are really starting to see scaling effect occurring in those cities. And some of the sales pipeline suggests to me we're now looking at, you know, over the next number of years, thousands of buses that will be signed up in the marketplace in Europe for fuel cell deployment.

1:13:43 That's great to hear. And maybe turning back to India and Tata, the opportunity there, you talked about the momentum for clean hydrogen there as of late and, you know, market size, which is obviously, you know, very attractive. Is that one where, you know, if that were to take off a market where JV or local production would be preferential, or is it a market you think you'd source from either China, JVs or North America or Europe over time? Just wanted to get a sense of kind of a larger strategy there if that's a market you think is going to kind of take off here similar to the China potential.

1:14:18 Yeah, Chris, that's a great question. I think India, like China, like Japan and certain other markets is a very unique market. And, you know, the market companies that are present there and have strong position there and have capabilities there can bring a lot of value to bear. And so we are considering a larger strategy in China that could involve a more comprehensive relationship with a key Indian partner. We'll see how that market development and business development activity shapes over the next 12 months.

1:14:58 That's great to hear. Thanks, guys.

1:15:01 Great. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Randy McEwen, CEO, for any closing remarks.

1:15:14 Great. And thanks, everyone, for joining us today. Paul, Kate, and I look forward to speaking with you in November when we'll discuss results for Q3 2021. Thanks again. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.