Ballard Power Systems Inc. (BLDP) Q2 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Q2 2016 Conference Call and Webcast. 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 [Operator Instructions]. I would now like to turn the conference over to Guy McAree, Director, Investor Relations. Please go ahead.

Thanks very much, and good morning everyone. The purpose of today’s call is to discuss our second quarter 2016 financial and operating results, and we’ll provide some context on recent strategic developments. And with us today we’ve got Randy MacEwen, our President and CEO and Tony Guglielmin, our Chief Financial Officer. We are going to 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. Today, Randy is going to review the Company’s continued progress and the execution of our business strategy in 2016, and Tony will then discuss our Q2 performance across key financial metrics. And after that, we’ll open up the call for questions. Just wanted to note, before we get started, Ballard is going to be attending a number of investor conferences in the next few months, including the Jefferies Industrials Conference in New York City on August 11st, the Gateway Conference in San Francisco on September 7th and 8th, as well as the Rodman & Renshaw 18th Annual Global Investment Conference in New York on September 12th and 13th. And we’ll look forward to seeing hopefully some of you at those events. Please visit our Web site for complete list of conferences. And we’re going to turn the call now over to Randy.

Thanks, Guy, and welcome everyone to our Q2 2016 earnings conference call. On the last few earnings calls, we reviewed our progress on key aspects of Ballard’s customer centric business plans. The bookings we signed last year and early this year positioned us strongly for growth and for improved financial performance in 2016 and beyond, including the strong order book for 2016, which stood at $58 million early this year. In Q1, we realized the first instalments of this positive momentum, as revenue grew 76% year-on-year. We’re pleased to report that in Q2, we continued the strong momentum with revenue growth of 58% year-on-year. Overall, revenue growth in the first-half of 2016 was 66% to $34 million. We’re also pleased to report very strong Q2 gross margin of 29% with 25% gross margin through the first-half of the year. In addition to improving our financial performance, we continue to make solid progress on a number of strategic fronts. There are three major strategic initiatives that we want to report on today. First, we announced last night an important strategic alliance with Broad-Ocean, including an equity investment in Ballard. Second, we recently announced a landmark $168 million deal relating to the creation of a joint venture to set up a stack assembly line in China. And third, we completed two important transactions to reposition our exposure to Telecom Backup Power. I want to discuss each of these three strategic initiatives in the context of our strategy. Our strategy is to have a customer centric business model, supported by two cross leveraging growth platforms, power products and technology solutions. Our strategy is to be the leader with a stable competitive advantage in each of our served markets by offering the best value, technology, products and services. Our focus is on large addressable markets where our value proposition is strongest and where commercialization horizons are near-term, including of course, heavy duty motive applications such as fuel cell buffers and commercial vehicles. We announced last night one of the most important developments in our 37 year history. We signed a strategic collaboration framework agreement with Broad-Ocean Motor Company Limited. This deal includes $28.3 million equity investment in Ballard, representing a 9.9% ownership position in the company following the transaction. Founded in 1994, Broad-Ocean is headquartered in the City of Zhongshan in Guangdong Province, and is listed on the Shenzhen Stock Exchange with a market cap of RMB28 billion. Broad-Ocean is a leading global manufacturer of motors, alternators, starters, controllers, inverters and drivetrain systems for a variety of applications, including HVAC, appliances and electric vehicles, including buses commercial vehicles and passenger cars. Broad-Ocean produces more than 50 million motors annually for blue chip customers on five continents. Customers include King Long, Yutong, Van Hool, BAE Systems, SAIC Motor, FAW, Dongfeng, General Motors, Ford, Volvo, Fiat, TATA, Cummins, Caterpillar, Carrier, and Trane. Broad-Ocean is a global business with operations in China, the U.S., Mexico, Germany, the UK, Russia and Australia. Beyond strong organic growth, Broad-Ocean has been very active in M&A activity, including the acquisition in 2015 of Prestolite, a U.S. based manufacturer of medium duty and heavy duty starters and alternators. In 2015, they also acquired Shanghai Edrive, a leading developer and manufacturer in China of motors, controllers and electric drivetrain systems for EV buses and commercial vehicles. The company has four business units, electric vehicles, rotating electrical for vehicles, HVAC and EV operations platform. Its fourth business unit, the EV operations platform operates a commercial vehicle leasing business in China through which it buys new energy vehicles and subsequent releases these buses and commercial vehicles. Broad-Ocean is now expanding this business to include fuel cell vehicles. More on this important approach in a minute. The strategic collaboration between Ballard and Broad-Ocean is expected to include market development and product development activities for hydrogen fuel cell vehicles, including buses and commercial vehicles in China. Lots of good potential license and local assembly of Ballard fuel cell modules by Broad-Ocean in selected Chinese cities. It’ll also include integration of Ballard fuel cell modules with Broad-Ocean EV drive systems to produce turnkey fuel cell powertrains. And finally, we look to leverage Broad-Ocean’s global operations and supply chain infrastructure to lower the cost of Ballard fuel cell engines and the cost of integration with those engines into vehicle drivetrains. So we’re delighted to welcome Broad-Ocean as a long-term strategic shareholder. We look forward to benefiting from the impressive easy expertise, customer base, scale of operations and supply chain strength, in addition to their demand pull-through of fuel cell vehicles in China. The decision by Broad-Ocean to engage in a strategic collaboration with Ballard is a validation of our strategy in China and also recognizes the synergies that are possible between our two enterprises. I am confident that Broad-Ocean’s experience, leadership and operating assets in their EV businesses in China and globally will provide Ballard with unique opportunities to accelerate our business, including scale, cost reduction and execution. Upon closing of the transaction, Broad-Ocean is expected to become Ballard’s largest shareholder, enjoying existing investors’ United Technologies, Anglo American Platinum and Nisshinbo as strategic shareholders of Ballard. Tony will provide more details about the Broad-Ocean equity investment in his prepared remarks. We’ll now move to our second recent major strategic announcement that we want to report on. That’s the creation of a joint venture to set up a stack assembly line in China. As contract our China strategy and business model is engage strong local partners to localized fuel cell production in China to reduce cost, drive scale, mitigate market risk, avoid capital investment and protect our core intellectual property. This risk adjusted capital like and IP protected business model aligns with the China subsidies program for fuel cell vehicles. Last week, we signed a deal with Guangdong Nation Synergy for the establishment of a fuel cell stack production operation in the City of Yunfu in Guangdong Province. The fuel cell stacks will be packaged in the locally assembled fuel cell engines based on Ballard design and integrated into zero emission buses and commercial vehicles in China. Tremendous momentum towards this agreement was achieved back on May 9th when party secretary of Guangdong Province, Mr. Hu Chunhua came to visit our headquarters in Vancouver during his first ever visit to Canada. We had important discussions that day, which were hopefully advancing the strategic initiatives. This deal is indeed a watershed event for Ballard, representing our largest ever fuel cell contract with an expected value of at least $168 million over five years. Subject to closing, the transaction includes three key elements. First, Ballard will receive $18.4 million in technology solutions revenue for technology transfer services, production equipment specification and procurement services, training and commission support in relation to the establishment of a production line in Yunfu for the manufacturing and assembly of FCvelocity-9SSL fuel cell stacks with most of the revenue expected to be recognized in 2017. Second, prior to closing of the transaction, expected in late 2016, a joint venture will be created to undertake the stack manufacturing operations and will be owned 90% by synergy and 10% by Ballard. And third on commissioning of the operation, expected in 2017, Ballard will be the exclusive supplier of membrane electrode assemblies, or MEAs, for each fuel cell stack manufactured by the joint venture, with minimum annual MEA volume commitments on a take or pay basis totaling in excess of $150 million over the initial five year term from 2017 to 2021. This localization plan in China will allow the production of lower cost stacks through local component sourcing, the use of local labor and the elimination of the import duties. Ballard will have the exclusive right to buy these stacks from the joint venture for sale outside of China, which represents a significant benefit from a global markets perspective. Under the terms of the joint venture, Ballard will contribute approximately $3 million for its 10% joint venture interest, 0.1 of 03 joint venture board directors have zero rights over most key joint venture decisions, agreed on the marketing strategy and will have no further obligation to provide funding to the joint venture. We expect this transaction to deliver a number of high value benefits to Ballard, including attractive near-term and long-term deal economics and cash flows, positive market reception, risk mitigation, scaling with MEA production in Vancouver with guaranteed volumes and capital efficiency. In addition, Ballard is not exposed to any compromise of our core intellectual property since we’ll maintain production of all MEAs at our Vancouver facility. Notable the signing of our fuel cell stack production with more synergy on July 18th was accompanied by two additional and companion contract signings at the same event. In the first of these contracts, Broad-Ocean, Synergy and two major Chinese automotive OEMs, Dongfeng and FAW, signed an agreement whereby Broad-Ocean agree to purchase 10,000 fuel cell vehicles, primarily with us and commercial vehicles for deployment in China. Let me repeat this, Broad-Ocean has committed to purchase 10,000 fuel cell vehicles. This is an extraordinary development in the fuel cell industry. Indeed for the first time in the history, we’re able to refer to real market demand for fuel cell vehicles that can be counted in the thousands. And Ballard is at the center of this major industry development. Synergy will assemble and supply fuel cell modules for these vehicles under an assembly license already signed with Ballard. And the fuel cell stacks for these power modules will be produced by the joint venture company to be established on the deal we just described. Of course Ballard will provide all of the MEAs. And under the second of the additional contract signed on July 18th, Synergy secured a RMB3 billion credit facility with China Construction Bank, equivalent to approximately $450 million. So the three related contracts signed on July 18th address market demand, production capacity and capital. We’re seeing a new phase of growth in the Chinese fuel cell industry. Ballard is uniquely positioned to benefit from this growth, and we believe our business model in China, our market positioning and our partner selections, are translating to revenue visibility, volumes and cost down opportunities never seen before. Now let's move to our discussion to the third and final of our key strategic initiatives we wanted to report on. This is the status of our Telecom Backup Power business. During our last conference call, we noted, we were in the process of reviewing strategic alternatives for this business, including a possible sale. Since that time, we closed on two important transactions that fundamentally reposition our exposure to the Telecom Backup Power market and our related cost structure. The first was the sale of certain of our Methanol Telecom Backup Power business assets to CHEM, a major Taiwanese power equipment company. CHEM will pay up to $6.1 million including $3 million which was already paid at closing and an addition earn-out of up to $3.1 million based on certain sales objectives during an 18 month earn out period. In addition to the purchase price of up to $6.1 million, CHEM also agreed to purchase fuel cell stacks from Ballard over the earn-out period with a minimum spend of $2 million. CHEM is well equipped to address the telecom market opportunity, which is it's been involved in since 2008, and we’re excited by the prospect of future growth in fuel cell stack sales to CHEM. In the second deal, we licensed the synergies certain designs of our 1.7 and 5 kilowatt direct hydrogen backup power systems for exclusive manufacture and sales in China. Synergy paid $2.5 million in technology solutions fees for the license and related technology services, and we will see the addition royalty payments for each system sold, subject to annual minimums. In addition, Ballard will be the exclusive stack supplier to Synergy for these systems. In parallel to our review of strategic alternatives for our Telecom Backup Power business and the closing of these two transactions, we also implemented a cost reduction program. This program is expected to yield annualized cost savings in excess of $4 million, lower in breakeven revenue, by more than $20 million. We’re pleased with the strategic and financial implications arising from these actions. We’ve monetized our Telecom Backup Power business assets while providing continued exposure to Telecom Backup Power through future stack sales, and while also dramatically reducing our cost structure to accelerate profitability. Now before I turn the call over to Tony, I wanted to provide an update on a few other important activities. First, on our China tram projects. We continue to make excellent progress in our two programs for fuel cell engine developments for use in light rail trains by China’s CRRC. We’re advancing these two programs in parallel and tracking to customer milestone schedules. Next on our Japan strategy. Our Japan file has been very active over the past two quarters with key business developments and initial sales activities. We expect to have some positive news to announce in this regard this quarter. During Q2 in our Portable Power business, our Protonex subsidiary received a follow-on purchase order totaling $5.8 million for the supply of Squad Power Manager Special Operations Kits for the U.S. Special Operations Command. In our Technology Solutions platform, our high motion program with Volkswagen Group continues to move forward in line with expectations, and we remain very excited by the technical progress being made. The program is currently on track and meeting all technical and financial goals set for 2016. Volkswagen Group recently reconfirmed with Ballard that the company see this future as including electric powertrains for both battery electric as well as fuel cell electric vehicles. And meet initial requirements in regulated markets like the United States, China and Europe, Volkswagen expect electrification to make-up 30% of sales by 2025. As part of the electrification initiative, more than 30 new e-cars are planned to be introduced by 2025 for an annual sales target of 2 million to 3 million units. In parallel VW’s activities are being further intensified in the fuel area, where Volkswagen is already been performing research for more than 20 years. Responsibility for this technology has recently been transferred from Group research to Audi, which as a lead brand for the Group, will consolidate activities at its Neckarsulm facility. We also announced the follow-on contract with an un-named leading global automotive OEM just last week. So we continue to expect a strong year for our Technology Solutions platform in 2016. Lastly, we are thrilled to announce that Robert Booker recently joined Ballard as our new Vice President, Human Resources. He’ll support our growth going forward. Robert has an extensive HR Executive background, and most recently served for seven years as Executive VP of HR at British Gas. Robert is very enthusiastically looking for an innovative clean energy solutions company, and we’re excited he’s joined our team. So to summarize, we’ve made great progress in the first-half of 2016, both on our strategic positioning and on our financial performance. I am highly confident about Ballard’s future prospects and growth trajectory. We had industry leading talent, technology, products, intellectual property, customers, strategic partners, field experience and brand. And with that, let me turn today’s call over to Tony.

Thanks Randy, and good morning, everyone. I am going to provide a very brief review of our key financial metrics for the second quarter. Top line revenue was $17.6 million in Q2, up 58% year-over-year; the result of an 87% increase in power products revenue to $211.7 million, together with an increase of 20% in technology solutions revenue to $5.9 million. In our power products platform, heavy duty motor revenue improved significantly by more than 600% to $4.7 million, driven by the delivery of fuel cell stacks, part kits and power modules. This represent partial fulfillment of the contracts we signed last year, as well as in Q1 this year, primarily to support deployment of fuel cell buses in China. Portable power generated revenue of $2.9 million in the quarter. We did not acquired the Protonex subsidiary into the fourth quarter last year, so this is a new source of revenue for us in Q2. Our material handling revenue was down slightly by $160,000 in the quarter, or 6% to $2.5 million. Since Q2, our plug power has announced several new gen drive contracts; one with FM Logistics in France, another with [Carco Group], the second largest retailer in the world, for more than 150 gen drives to be deployed in the distribution center, also located in France with shipments to the [Carco] Group beginning later this year; and a contract for 96 gen drive systems with New York Farmers Market. So based on plug momentum through the first-half of the year in addition to these important new contracts, we are anticipating a strong second half of 2016 in terms of fuel cell shipments for material handling. In Backup Power, as a result of the strategic initiatives taken in Q2, that Randy described, as expected, revenue was down 46% in Q2 to $1.6 million. Looking forward though, we expect to see continued stack sales to CHEM and other system integrators, as well as modest contribution from our direct hydrogen backup power business. Revenue from our Technology Solutions platform was up 20% in the quarter to $5.9 million across more than 20 different technology solutions programs in the quarter and up 29% year-to-date. Gross margin in Q2 was up significantly quarter-on-quarter by 19 points to 29%. This reflected a shift in mix towards higher margin heavy duty motors and portable power products, and to technology solutions. Gross margin for six months was also up significantly year-over-year at 25% versus 10% for the same period last year. Cash operating costs were up 25% in the quarter to $8.4 million, although this was primarily attributable to the inclusion of the operating costs for our Protonex subsidiary. Going forward, in 2016 and into 2017, we expect to realize the benefits of the cost saving initiatives taken in the first-half of the year. Adjusted EBITDA in Q2 was negative $2.9 million, an improvement of 40%. On a year-to-date basis, adjusted EBITDA is roughly flat to negative $10.1 million. Although, this reflects $2.5 million restructuring expenses that we took in the first-half of the year, which offset the improvement in gross margin. Net income in the quarter was negative $5.8 million, an improvement of 21% from Q2 2015. And earnings per share was negative $0.04 in the quarter compared to negative $0.06 in Q2 last year. Cash used by operating activities in Q2 improved 26% to $3.9 million from $5.3 million. This consist of a cash operating loss of negative $3.7 million and a small use of working capital in the quarter of $0.2 million. Finally, in terms of liquidity, cash reserves at June 30th remained strong at $41.3 million. This include the $3 million associated with the preliminary purchase price on the closing sale of our sale of the Telecom Backup Power assets to CHEM in June, as well as the $2.5 million prepayments associated with the hydrogen backup power license deal signed with Synergy. And as Randy mentioned, we signed yesterday a $28.3 million strategic equity investment in Broad-Ocean through the issuance of 17.25 million shares, which is expected to close in August. This is a highly efficient financing, priced at market, based on a 20 day v-weight calculation with zero warrants and zero investment banking fees. So taken together, the Broad-Ocean equity financing transaction at the Synergy joint venture deal enhance our already strong liquidity position and balance sheet to support future growth. So to sum up Q2 with a strong quarter, reflecting our solid start of year order book. We saw very strong year-over-year growth in both top line and in gross margin. And we expect to be efficient winning from significantly strengthen our balance sheet with the two recently announced strategic transactions. With that, let me turn the call back over to the operator to take your questions.

We will now begin the question-and-answer session [Operator Instructions]. The first question is from Rob Brown of Lake Street Capital, please go ahead.

First question is just understanding that 10000 vehicle commitment, what types of vehicles are these products going into, is it really the heavy duty powered bus and truck market or there are some automotive components there.

Rob it's Randy, thanks for joining us this morning, so we expect the 10000 vehicles to primarily consist of buses and commercial vehicles, and when we say commercial vehicles we're typically looking here at delivery trucks in China.

Okay, good and then another of your partners said, maybe you could just remind us what the market opportunity is you're going after and is it really through these partners that you address that market opportunity or are there other sort of venues in China that you can go.

Yes I mean we clearly see the largest market opportunities in the world for bus and commercial vehicles in China and we think we've picked the partners that have access to the customer base, access to OEMs, strong relationships with the government officials that are necessary particularly at national provincial ends and local as well as companies that have the capital to move forward with fairly significant programs. We’re focused initially on opportunities where you had depot refueling such as buses and commercial vehicles, longer term there seems to be a lot of interest right now in the opportunity for passenger cars in China, but of course we see that as a longer term opportunity. So our near term focus is on buses and commercial vehicles, and motive is clearly the focus for us right now. When you look at the macrodrivers in China with air quality and now climate change and continued urbanization and the need for mass urban transit, we're focused on buses, commercial vehicles and of course we're making great progress in our tram projects as well.

Okay, good and then the unit, is there is a unit market opportunity I know at one point there were significant numbers in the bus market but could you just give us a sense of what the opportunity is numbers that you're after.

Sure, I mean just to put things in perspective of course, in North America, annually there's about 5100 new buses, transit buses per year. In Europe that number's about 13,500 new buses per year. In China depending on which numbers you accept you're looking in the range of 250,000 to 600,000 buses and what's important is increasingly a significant portion of those new buses are new energy buses. Of course battery buses have dominated the new energy cycle over the last few years. Fuel cells with a subsidy programs that are there now we expect to see grabbing significant market share between now and 2020.

Good, I'll turn it over.

The next question is from Carter Driscoll of FBR Capital, please go ahead.

Morning, congratulations. Obviously Randy spent a lot of time remaking the profile of the company since he's taken over and made a lot of good progress so just want to say that first up. Secondarily can you talk maybe about the timing of the stack assembly are you hoping the Synergy and your ability to use that potentially, obviously to supply within China but externally from China in terms of growing your cost profile and then follow up.

Carter, thanks for joining this morning, so couple of points there, first on the stack assembly line in China, we do expect that line to be commissioned and operational in 2017. There are about 10 modules of performance or scope of work that our supporting our partner Synergy on. Some of them are sequenced, some of them are you know running in parallel, equipment specification, production line layout, workshop design and construction of the facilities, the actual procurement of equipment. A number of these items have been mapped out already with Synergy and we have agreement on the schedule and the sequencing. I think what's important is the transaction is scheduled to close later this year already Synergy is in the process of procuring equipment. So it’s a very good indicator that they have high confidence level in close and that they're accelerating the time when that plant will be commissioned. So they have a very ambitious schedule to get this line up and commissioned. They see an enormous market opportunity particularly with this 10000 fuel cell vehicle order. However in terms of the specific data think we want to be cautious about providing the specific timeline. Secondly Carter just requested the follow up point you had. This is I think a tremendous opportunity for Ballard in two ways. One obviously is the opportunity for us to base load our EMEA volumes here in Vancouver and then second as you point out the opportunity for us to procure stacks produced in China on an exclusive basis we're the only channel for sales of those stacks outside of China and potentially use those stacks for other applications and market opportunities globally. And I think the volume that we'll see in China is going to help reduce the cost far faster than we can obviously with just the significant improvement we've made on designs historically in going forward.

Okay, but maybe too early to talk about the magnitude of that potential, there's obviously a lot of buy in components associated with it, I mean could you, you have a ball park idea of what that could do to your overall module cost over a period of time.

Yes, I think the module costs slightly different than the stack cost that we’re just referring to here, of course we've got our roadmap that contemplates fairly significant cost down for the module not even assuming high volumes. And of course with the opportunity we're seeing with the EMEA we see significant cost down opportunities, I think we'll be a bit better positioned later this year, early next year to provide a little more definitive guidance on that.

Okay, and then the, I am assuming the 10000 order is over a multiple period of time for [indiscernible] and any other types of specific you know RFPs out there that you can point to that they're competing for, and then obviously some of the customers that you mentioned they’re supplying to currently and particularly in Europe there're some that you've had historical relationship with, I'm assuming that played into part of the rationale for this tie up.

Carter, you've picked an important point and that is a significant overlap of customer, customer sets that both, not just in China but globally that both Broad Ocean and Ballard have today, so we see that as an important opportunity. There are of course RFPs we refer to earlier, there are 20 fuel cell buses we expect to see progress on in North America particularly in California, we made reference to that previously we also see an opportunity for in excess of a 100 fuel cell buses, potentially as many as a 140 being announced later this year in Europe for future deployments that'd be two years, three years out but those are, these are being advanced currently. We've responded to those and we’re expecting to get feedback from the European authorities at some time late this year.

Thank you for that, and just last question maybe something you highlighted as much given all the positive hues you talked about but signing another global auto OEM to technology solutions I realize there isn’t a lot you can potentially say right now. Is the scope of the work similar to what you do with BW and they were one, when do you think you might be able to give us some more details about the relationship and how that unfolds.

Sure, just to clarify one point. It wasn't the signing of a new global auto OEM, this is a follow on contract from an existing partner, so it’s a partner we’ve been very active with for some time. It's a leading global fuel cell player and we have specialized technology, specialized knowhow that will help solve some of the most difficult technical issues. And the plan is for our technology to be embedded in their 2020 generation vehicles.

Got it, okay, thanks for that clarification, appreciate it, I'll go back in the queue.

The next question is from Craig Erwin of Roth Capital Partners.

Good morning, congratulations on the strong progress and thanks for taking my questions. So there's been a lot of discussion about China, very positive developments for Ballard in China. You mentioned California and Europe but when we look at the bigger picture sort of stepping back, there's some national initiatives both in South Korea and Japan that look like they're going to be pretty big opportunities for fuel cell over the next several years. Can you comment about whether or not you could see a similar sort of increase in activity with other partners or another geographies that would potentially benefit Ballard.

Craig, first of all thanks for joining the call, and thanks for the question, we are seeing very significant opportunity over the next five years in Japan. We see very strong opportunities both in certain motive opportunities as well as some stationary opportunities. So our technology, our brand is very strong in Japan, and of course there's a lot of talk about the hydrogen society in Japan. So perhaps Japan is further along in their thinking strategically and in terms of actually implementing real hydrogen refueling infrastructure perhaps further along than anyone in the world. So I think if I have the numbers correct should be around 47 fueling stations in California by about this time next year. I think in Japan that number could be over 70 by this time next year. So there's a lot of activity going on, of course Toyota is planning to manufacture 2000 Mirai this year, so that's a very important strategic initiative for Toyota and the deployment of Mirai in Japan as well as a few select markets globally. We will be expect to have some sort of update for you on our Japan file but nothing specific we can speak to you on today. In South Korea to be candid we haven't made traction in South Korea the way we have in other markets.

Thank you for that, my second question is about the implications of the structure of your Synergy JV. So 10% ownership of the joint venture and direct sales to the joint venture of MEAs, membrane electrode assemblies. Can you discuss how the dollar margin opportunity materializes with this, how we should think about the revenue progression given the relatively smaller revenue item in an MEA versus a full fuel cell stack.

Sure, Tony here, I'll give you some just directional feel for this. So just on a couple of points, somewhere with the MEA the value of the MEA in the total stack is probably 60% plus of the total value of the dollar value of the stack. So it is a significant component, revenue component. In terms of the, so if you think about each stack think about you know say 60% little over 60% of the dollar view being MEA. With regard to the arrangement with the JV the sales of the MEAs to the joint venture will be done at market, so we are selling those with a mark-up. Think about you know perhaps something in the 30% area for margin, something in that range, obviously over time we're expecting to see cost reductions improvements in the MEA partly driven by volume, some of that of course will be passed along, but we do see the opportunity to keep in those margins. And in terms of the ramp of those as Randy mentioned so about $150 million over five years and then as Randy mentioned we expect the line to be up sometime in '17. So you know there's potentially something in the 10 million to 15 million of revenue, MEA revenue that we might see later next year and then that number will kind of ramp up and flatten out over the balance of the period.

Thank you for that, last question if I may. The list up market is a market that's really worked for you, it's really worked for plug over the last handful of years. Can you update us on your new customer developments. How are these progressing, should we see product in the market, you know maybe by the end of this year or next year from other competing fork lift OEMs, how should we expect this to materialize.

There's no change in terms of the commercialization horizon we were expecting when we talked about this even a year ago, so we've got partners we're collaborating with to look at opportunities for technology development and potentially even engine development for fork lift applications. You know the fork lift OEMs have been fairly quiet in their activities and think it'd be imprudent for us to disclose anything that gets ahead of their communications.

Thanks again for taking my questions and congratulations on the big announcements this quarter, very impressive.

The next question is from Amit Dayal of Rodman and Renshaw, please go ahead.

Thank you, good morning, first of all let me just congratulate you on such a speedy execution in China. Just wanted to dig in a little bit into the, you know this agreement with Broad Ocean, could you confirm if this 10000 vehicle agreement between Synergy and Broad Ocean, is this a firm commitment.

Yes, this is a purchase order.

And how much of you know the 150 million minimum over five years with Synergy does this sort of represent.

So just to put into perspective, the stack assembly line would be expected to be able to produce in the early period 6000 stacks per year and going to 10000 stacks per year. So just to give you a sense of scale, 10000 vehicles depending on the size of the vehicles and the number of stacks they require you might be looking at in the range of say 20000 vehicles that this facility should be able to provide stacks for.

Okay, got it, understood. And this timeline for this 10000 vehicles, is this between the next two to three years or is it you know spread over the five year period. What do you think would drive some of the faster adoption I guess outside how many mandates that are in play in China.

Yes, so, there was some coverage of this in China but they didn't specifically speak to the timeline for deployment, what I will say is that there are number of pacing items that will impact how many vehicles will occur in each year. There's obviously vehicle certifications that still need to occur and some of those are well along the week already. There's some hydrogen refueling infrastructure that needs to take place. Of course the module assembly operation for Synergy in the inflow is operational already and they’ve actually assembled modules that Ballard has provided stack kit for, module kits for. So that operation is up, but it will continue to evolve and of course the stack line itself will, we'll be looking at 2017 for commissioning that stack line. So there a number of moving pieces, I think it's probably fair to say that the timeline horizon is uncertain, it contemplates a certain number of vehicles per year but I think I'd want to be a little more conservative than what is painted in the contract just to make sure that we're not providing any misinformation.

Understood, that was helpful, and Tony maybe for you on the gross margin side, you know we've come in at around 29%, we were at 20% gross margin in the previous quarter, what should we sort of expect you know for the remainder of the year.

Obviously with the contribution from Protonix, the increases in technology solutions and then the continued growth in heavy duty motive through the second half of the year should contribute to sustainably you know sustainable gross margin. I'd be reluctant to give you a specific number but we talked early in the year about loading the 20 gross margin and we were there already, I think we'd be quite comfortable in saying we expect to see you know gross margins in the similar sort of range where we're running through the, the runway through the first half of the year.

Got it, that's all I have, thank you so much.

The next question is from Jeff Osborne of Cowen and Company, please go ahead.

Hey, good morning, most of my questions are already answered but just a couple. Tony on the 18.4 million in technology solutions that you talked about with the transfer in commissioning, how do we think about the timing of that revenue stream, it sounds like it would be all late this year and then through '17 based on that facility ramping up, possibly recognized as milestones are reached or is it late year.

Yes, like all of our other contracts it’s a percentage of completion, so think about, you know the contracts are expected to be signed you know sometime towards the end of the quarter Q3 or thereabouts so think about Q4 as really the first quarter and then it'll probably run from Q4 through the balance of '17. Hard to say whether it's going to be straight line across, but to keep it simple probably makes sense to spread it out over five quarters that's 18.1 lean over the five quarters. It will obviously as they say depending on the work that's delivered but keep it simple, think about it over five quarters.

Got it, and gross margins on that, are you giving that business away to reward yourself for the 150 longer term or is this consistent with the past technology solutions.

It would be consistent with past technology solutions margins.

Okay, that's good to hear, and then you mentioned as it related to plug power and recent awards in Europe I guess I was under the impression that they were using a different solution for the European fuel cell units. You rattled off a few in California and others can you just confirm that, our understanding you're going to be providing the equipment for the European sales.

Yes, you know it's difficult to say, we don't get that sort of specific visibility and transparency, I think the comment was just more generally, Jeff to be fair that was seeing some significant wrap up in the business, it’s been a as you can appreciate there's not been a lot of news in the last quarter so I think this is just a, for us it was more about momentum and evidence where actually going is a little difficult to say, but we are seeing some increased activity in purchase order so we got some good visibility through Q3 that the volumes are coming through.

Perfect, just two other quick ones, one for you Tony and then one for Randy. You mentioned the cost cuts coming in the second half and the reduction in breakeven levels, can you just remind us of what your assumption of breakeven revenue levels is assuming you're in this mid 20s gross margin.

See it’s a great question, it really is very much dependent on the margin assumption, here, so as we think about breakeven you can think about it at the EBITDA, you know adjusted EBITDA we're at net income but just running the math we're probably in the 120 range give or take from revenue it's kind of the roughly our breakeven target for revenue assuming margins are in that range gap.

And that's the adjusted EBITDA.

Yes, that's probably right.

Got, and then just for Randy the last one, A. Can you talk about how long Synergy and Broad Ocean have worked together and then if I heard you right the 10000 vehicles as part of the leasing unit, this could be something that could pretty easily address some of the other provinces out there beyond the Guangdong province which I think initially I guess my assumption was that Synergy was a little bit more localized and then Broad Ocean would make this kind of pan China. Is that the right way to think about it?

Yes, absolutely Jeff, Broad Ocean is thinking about a China strategy not a Guangdong strategy. They're obviously based in Guangdong but they have a number of facilities both operational and office facilities throughout China, very strong in four or five cities that we're currently exploring, so we expect to see deployment of fuel cell vehicles in a number of cities with a Broad Ocean banner. In terms of the history of partnership between Synergy and Broad Ocean, it’s actually a fairly new relationship in the three to four month timeframe.

Got it, I appreciate it, thanks so much guys.

Thanks Jeff.

This concludes the question and answer I would like to turn the conference back over to Randy MacEwen for closing remarks.

Thank you for joining us today we look forward to speaking with you again in October when we’ll discuss results for the third quarter of 2016, thanks again.

This concludes today's conference call, you may now disconnect your line. Thank you for participating and have a pleasant day.