Ballard Power Systems Inc. (BLDP) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing-by. This is the conference operator. Welcome to the Ballard Power Systems' Second Quarter 2018 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 [Operator Instructions]. I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

Thanks very much, and good morning, everyone. On today's call Ballard's Management is going to discuss the Company's second quarter 2018 financial and operating results. And I am here today with 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. So, Randy is going to review our strategic progress in the second quarter, and then Tony will review our Q2 financial results and following that, we'll open things up for Q&A. Just before we start, a note that Ballard is going to be attending a couple of Investor conferences in September be at the HC Wainwright 20th Annual Global Investment Conference on September 5th in New York City. And also, on the same day at the Gateway conference in San Francisco. I'll turn the call over to Randy now.

Thanks Guy, and welcome everyone to our second quarter 2018 earnings conference call. Our Q2 financial results were in line with our expectations and new contract bookings. Revenue in the quarter was flat on a year-over-year basis, at $26.4 million, gross margin was strong, at 36% and adjusted EBITDA was negative $0.8 million. It's worth noting, once again that the relatively high level of one-time technology transfer revenue generated from China in Q1 of 2017, effectively results in flat year-over-year revenue in Q2 this year, despite considerable underlying growth. We're also excited to end the quarter with a record order backlog of $283.3 million. In Q2, we saw an expansion in demand, for heavy medium as well as light duty fuel cell electric vehicles or FCEV applications, particularly where customer requirement include long range, rapidly fueling, heavy payloads and route flexibility. During Q2, progress was evident in bus, marine, automotive, material handling and unmanned vehicle market segments. In the transit bus market in Q2, we received purchase orders from Van Hool, for 40 modules, to power buses in Germany. This is an important step forward in planned deployments under the JIVE funding program in Europe and we anticipate further progress later this year. In the U.S. bus market, El Dorado's 40-foot Axess fuel cell bus, powered by Ballard, successfully completed comprehensive testing, at Altoona Pennsylvania, under the Federal Transit Administrations Oversight. Testing at the Altoona facility designed to ensure better reliability and in-service performance of Transit buses. This includes accelerated 12 years 500,000-mile lifecycle test along with test and encompass safety, structural integrity, durability, reliability, performance, maintainability, noise, fuel economy, breaking emissions. Successful testing at Altoona is a key milestone in the U.S. market, now enabling El Dorado's Axess bus to qualify to FTA funding, in deployments of five or more buses. I just like to highlight, a landmark milestone for Ballard in the bus market. One of the buses in the transport for running fuel cell bus fleet, each of which are powered by a Ballard module, has recently passed 30,000 hours of in-service operation, equivalent to more than seven years of service, running 16 hours per day, five days per week. We believe this is industry leading performance that we're building on in our next generation power modules. There has been considerable positive activity in the marine market, over the past quarter. During Q2, we announced the multiyear MOU, under which we are now collaborating with ABB on the development of megawatt scale 20 fuel cell systems, with an initial focus on the cruise ship segment. There is heightened priority around the reduction of pollution and carbon emissions in the marine sector, particularly given the substantial pollution being generated at ports by the presence of marine vessels, drainage trucks, trains, forklift trucks along with other transport vehicles, which enables multi-mode fueling infrastructure opportunities. A sharp point was put on this issue by the recent strategy announcement from the United Nation's International Maritime Organization which is focused on reducing GHT emissions from ships with targets that include a 50% reduction compared to 2008 levels by the year 2050. Our work with ABB will initially focus on megawatt scale systems that can provide power for onboard hotel operations while cruise ships are docked at ports. ABB has a number of applications in mind beyond this over the longer-term including fuel cell primary propulsion systems. We're now involved in initial design coordination with ABB in order to optimize the integration of our respective technologies. Also, during Q2 Ballard joined a consortium led by Scotland's Ferguson Marine that has received funding to design and build the world's first renewables powered car and passenger ferry called HySeas III. Hydrogen for the ferry will be produced from renewable electricity and that hydrogen will fuel Ballard modules providing primary propulsion for the vessel. The HySeas III Ferry is planned to operate in the Galapagos [ph] located off the North Eastern Coast of Scotland. In the automotive sector, we recently announced a significant and exciting extension to our high motion program with Audi, a member of the Volkswagen Group. High Motion which began in 2013 and was contracted to run until March 2019 has now been extended for a further 3.5 years until August 2022, with the contract extension valued at an incremental $62 million to a $100 million. This represents tremendous validation by the world's largest automotive OEM of Ballard's technical capabilities with respect to the complex challenge of powering high performance cars for leading luxury brand with zero emissions. Ballard is working on the design and manufacture of fuel cell stacks for Audi's demonstration car program, including work on the MEA, plate and other stack components as well as testing in integration activities. Our goal for High Motion is to deliver outstanding fuel cell performances, including the highest power density, lightest weight, greatest durability and robust restart capabilities. This contract extension takes the High Motion program through to Audi's planned launch date for its small series fuel cell car production run. The automotive industry is undergoing transformation driven by electrification, shared mobility and autonomy which we expect to have a dramatic impact on passenger car utilization rates by increasing daily range requirements and increasing hours of operation. The higher utilization rates will create a sweet spot for fuel cell technology within which we can deliver compelling economics, zero emission, low noise and smooth acceleration while also meeting a long daily range and rapid refueling. In addition to our contract extension with Audi, progress was achieved in Q2 and other light-duty motive applications. In Q2, we signed a master supply agreement with Hyster-Yale pursuant to which Ballard will supply minimum annual volumes of air cooled fuel cell stacks to Hyster-Yale for use in power in Class-3 forklift trucks in the material handling market as well as providing support on the design of a fuel cell electric propulsion system to power these lift trucks. Progress was also achieved in the light duty unmanned vehicle space during the quarter. We received orders from the U.S. Navy for 13 fuel cell propulsion systems for its Hybrid Tiger UAV or Drone platform. We announced the collaboration with Cellular Robotics focused on the development of the fuel cell powered long range autonomous underwater vehicle with funding under a contract with the Department of National Defense in Canada. In China, we continue to see exciting developments and measure progress as this dynamic market takes clear steps towards fuel cell commercialization for heavy and medium duty motive applications. We see continued developments on government regulations and subsidies that support the adoption of hydrogen in fuel cell technology on plant build out of hydro refueling stations and progress on vehicle deployments in 2018 and beyond. We expect to provide important updates on this key market, including new partnership activities later this year. I'd like to also take a moment to comment on an important transaction we completed in July to increase testing and production capacity at our facility in Vancouver. We announced the acquisition of certain strategic assets of AFCC, the private company owned by Daimler and Ford. Both Daimler and Ford took the decision to repatriate their fuel-cell development activities from Vancouver back to Germany and Detroit respectively. And as a result, Ballard acquired a range of valuable assets that are already in place in return for approximately C$6 million in cash. These assets effectively result in expansion of our MEA production capacity and testing capabilities enabling Ballard to efficiently and rapidly meet our forecasted growth needs for approximately the next five years. In comparison to the new cost of the same volume of production capacity with new equipment, we view this as high value and capital efficient from a shareholder's value perspective. Finally, I'd like to provide some additional color around key technology and product development investments that we continue to make and are positively positioning Ballard in increasingly competitive landscape. We continue to invest in highly disruptive technology. Our ability at Ballard to vertically integrate MEA's stake and module products is unique and a clear differentiator to Ballard in the marketplace. Continued advancement in our MEA design is enabling development opportunities at both the stake and module levels. We previously mentioned of our work on the next-general liquid cooled fuel cell stake or LCF product compelling performance improvements, we expect from this stack, we expect to introduce commercially in 2019 include approximately 33% greater power density by weight, a more than doubling of planned operating lifetime, improved tolerances to low humidity as well as higher operating temperature and improved free start capability. The LCF stack will be a key input to our next generation power module for bus and other transport applications, which were actively developing now. We expect this eighth generation module initially in a 70-kilowatt package, we planned to launch in 2019 to deliver key advancements including a 40% volume reduction, a 30% weight reduction, 50% reduction in the number of components and a more than doubling of operating lifetime. Improve free start capability along with an excepted cost reduction in excess of 40%. We expect the LCF stack incorporating a latest MEA technology and our next-generation power module to support strong competitive market positioning. In our view, these products will generate substantial return on the incremental investment and the operating expenses required to enable the development in commercial launch. In the near term we anticipate an exciting second half of 2018 with important strategic and commercial announcements. With that, let me now turn the call over to Tony for his review of Q2, 2018 financial results. Tony?

Yeah, thanks Randy and good morning everyone. Top-line revenue in Q2 was $26.4 million essentially flat on a year-over-year basis. Overall, our power products revenue increased 18% or $2.6 million to $17.8 million into quarter. This was driven by a 9% increase in heavy-duty motor revenue to $13.3 million, resulting from increased product shipments to China, Europe and North America and a $1.5 million increase in portable power revenue, primarily the result of prod deliveries to military customers. Technology solutions was down 24% year-over-year or $2.8 million to $8.6 million. And as Randy mentioned, this decrease reflected the $3.9 million in Q2 of last year of onetime technology transfer revenue related to the Synergy-Ballard stack joint venture. Not for this, technology solutions revenue was up quarter-over-quarter for last year. Our gross margin remains strong in Q2 with a modest year-over-year gain of 1 point to 36%. Cash operating cost increased 24% in Q2 to $10.5 million. This was due primarily to the higher investment in technology and product development, including our next generation LCF stack and module technology, which Randy discussed a moment ago. Adjusted EBITDA in the quarter was negative $0.8 million compared to positive $1 million in Q2, 2017 reflecting these higher operating costs in the quarter. Net loss in Q2 was negative $4.3 million compared to negative $1.2 million in Q2 last year and earnings per share was negative $0.02 in Q2 compared to negative $0.01 per share in Q2, 2017. Cash used in operating activities was negative $16.9 million in Q2 consisting of cash operating losses of $1.6 million and working capital outflows of $15.3 million. Now, this working capital increased reflects two items, higher accounts receivables related to timing of revenues and related customer collections, including roughly $11 million of deliveries in the quarter into China, for which we receive the majority of the payments after the quarter end in July. And an inventory buildup in anticipation of significant second half deliveries, including an anticipated historic level of shipments of heavy-duty bus modules to Europe and the U.S. in the second half. In terms of liquidity, we ended Q2 with cash reserves of $35.2 million, down from $52.5 million at the end of Q1. And again, this reduction in cash is primarily the result of the increase in working capital in the quarter. Overall, we anticipate a substantially lower cash burn in the second half of 2018 compared to the first half. And finally, our order backlog which reflects committed orders on hand stood at a record $283.3 million at the end of Q2, up significantly from $222 million at the end of Q1. This reflects new orders received in the quarter, including the Audi high motion program extension. At the end of Q2, our 12-month order books stood at $96 million from $89 million at the end of Q1. And with that, let me turn the call back over the operator for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Brown of Lake Street Capital Markets.

Good morning. Nice quarter

Thanks Rob.

Good morning, Rob.

I just want to start with kind of Germany, in the European bus market, you talked about some ramping in the back half of the year. But maybe just kind of an update on the fuel cell penetration rate in that market and kind of how that can grow and what opportunity is there in your view?

So, the JIVE 1 and JIVE 2 programs are kind of the near-term programs that we expect to see some growth in the European bus market, Ballard is very well positioned to participate in those programs. I think what's more interesting is what happens after those two programs. I think those two programs are in the 290-volume range for the total programs. So, lots of discussion going on about the next step subsequent to that. We're very bullish about the European market. I think after China, Europe is the most important fuel of activity for fuel cell act, motive applications. And I think that next step of volume we're working hard against. Part of what we're doing there is working with a collaboration or consortium of partners on forward pricing and really looking at what the cost of fuel cell buses should be in the future. And if you go back a year or two ago, it wasn't, that long ago actually fuel cell buses in Europe, we're in the 800,000 to a EUR1 million per bus. More recently we've looked at buses in the EUR650 range. We're now looking at fuel cell buses in the EUR400,000 to EUR450,000 range. And that's enabled by partners working collaboratively to reduce costs individually find opportunities for better integration and forward price on volume. So that's an activity that's underway right now. We're doing that in parallel with some fueling partners as well. So, I'm very excited about the European market, particularly for bus but commercial truck and rail are also markets, we see a lot of opportunity. Marine obviously, some interesting activity there for us recently. I believe that's a longer-term market but there's a lot of interest in the European theater for marine applications as well.

Yes. And on the marine application, what sort of the timeline in your view and maybe sort of the economic can outline sort of unit revenue potential or however you want to characterize it? Thank you.

Yeah, it's still a little early to speak to the expected economics for larger scale deployments. What I can say is I am very pleased with the work going on both with ABB as well as two key cruise ship operators, that we're seeing the actual designs of fuel cell ships and what the power requirements would be, it's roughly around 24 megawatts or primary propulsion required. Initially, obviously we're working at hotel loads, win surprise me to see those in the 3-megawatt range and we're working against some of those opportunities, I think there are longer term opportunities, I don't believe significant revenue in 2019, but I certainly as we start looking at 2020, 2021, we'll start to see more activity in the marine area and I think we're very well position with our partners.

Okay. And then last question just on the receivables balance, you talked about some collections from China, but how much was collected of that 11 million from China?

We collected - so yes, we've collected about 9 million of the 11 of shipments in July.

Okay, thank you. I'll turn over.

Our next question comes from Carter Driscoll of B Riley FBR.

Hey, good morning gentlemen. So, significant potential movement at least in the U.S. market, like to get your thoughts Randy about the adjustment of café standards and particular looking like more of an indirect swap [ph] in California's ability to regulates some stated missions, thoughts from a policy perspective, there has been a lot of moving parts, policy land, as it relates to renewables, solars and the other technologies. Just get your thoughts on this becoming potentially law and any near-term or medium-term impact that you could foresee?

Yes, we considered China dynamic market, and now maybe the U.S. is fairly dynamic as well for a variety of reasons. But I think it's little early to comment specifically on some recent activity. But, what I can tell you, is that we're very bullish on California. We have seen a lot of activity in terms of regulation, in terms of funding, in terms of discussion with partners there and I believe as I kind of think about the markets, China market number one, Europe, market number two, California, market number three, and continue to make a lot of progress and continue investment in our California market opportunities. In terms of some of the dynamics you're talking about, I think it's going to be - need to be a little patience and wait and see how that plays out.

Okay, I appreciate that. In terms of just given - you're not giving quantification of guidance for the year, but if you're kind of coming flat, you have a very pretty strong second half. How important is the development of your LCF stack and module to potentially winning another brand name OEM in China, in terms of just creating a power density, pushing them over them of becoming a potentially future customer.

Yes, so two issues there. First of all, the development of the LCF and the HDVA module, are not tied to 2018 performance, these are really 2019 commercial launches. So, we're well in discussions with partners in China, as well as in Europe and the U.S. on next generation modules as well as next generation technology for the China market. So, there is a lot of activity underway, I think there is a lot of interest in Ballard technology specifically because we are vertically integrated which enables cost compressions. There isn't upon margin stacking through the value chain with MEA stacks and modules by having multiple suppliers there. And as we look at the performance that we're anticipating to achieve industry leading without a doubt.

Did you supply any of the JV with any technology or any direct shipments I should say from Vancouver, I know obviously MEAs goes through that process, but anything directly shippers is pretty much everything being set aside now in China from the JV.

Yes, in terms of the sequencing or value chain positioning with respect to the nine-fuel cell stack technology. The JV is supplying stacks to the market, Ballard is supplying MEAs to our JV partner. So that's a sequencing for nine fuel cell technology.

No more direct shipments from Vancouver, correct?

Other than MEA's. not of stacks. We do have shipments of modules as well for module kits.

Okay. Give an update on your work with Siemens and - how in this particular quarter and or with CRRC?

Yeah. Actually, very busy quarter for us with our technology solutions team both on Siemens as well as deliveries for CRRC in Q2. Siemens I believe is a very happy with the progress we have been making on the technical milestones. So, we're now a couple of quarters in against this. And we've shown I think very good execution on that program. So, very strong relationship with the Siemens going forward I believe. And then in terms of CRRC, we did have shipments of modules for modules in Q2 to effectively close out the deliveries for that program. I personally went to the Gaoming line during the quarter as well and talked to the Gaoming government that line is expected to start operation in 2019. It's significantly behind schedule because of construction issues in Gaoming. But I still believe it will be the world's first fuel cell powered tram line in operation expected for 2019.

Okay. Maybe just a couple other quick ones for me. You talked about the California market being big into this or for medium and heavy-duty. It had some good trials with drainage trucks especially in particular with the ports. Can you give us a sense of the competitive landscape for those types of opportunities and then there are some other competitors that are trying to rely exclusively on lithium trying to [indiscernible] the transit market into heavier duty applications. If you could just kind of give us your sense of the competitor landscape. And where the tipping point favors fuel cells versus battery unlike that.

Yeah. I think the value proposition for fuel cell electric vehicles in heavy-duty motive applications is becoming much more strongly understood. So, this driver of having long range rapid refueling for heavy payload applications, you mentioned drainage trucks, I think that's an excellent illustrative example. So, we're spending a lot of times with partners you're referring to the U.S. market this is true in other markets as well, where we continue to work together to find the right hybrid architecture to optimize cost and performance. And I believe fuel cell electric vehicles with the hybrid architecture will be the winning solution for heavy duty motor.

Okay. Maybe last one for me. You mentioned the acquisition from Ford and Daimler in terms of satisfying potential capacity expansion. Can you guys just frame what the cost savings is if you have to build it internally versus the assets required to satisfy that additional testing and capacity additions? Just trying to get a sense of the magnitude of what you say by according to assets.

Yeah, Carter, Tony here. Thanks. Again, the total amount of equipment we acquired, it was mentioned, it's about C$6 million. That included really - included a large number of assets but at the two most significant pools of assets. One was a significant number of test stands. And these will be test stands used both for factory acceptance testing as well as supporting our key technology solutions business. so that was one pool of assets. And the other one was some MEA production equipment which frankly would allow us to virtually double our MEA capacity. So, we think we've picked in the agreement C#6 million. We had in our capital plan, indeed, we had expected to be buying a fair bid of that equipment this year and next year new. So, this is allows, so that actually displaces and lowers our planned CapEx budget. So, I would expect we probably pick the net cost again, used compared to news probably $0.20 to $0.30 on the dollar so to speak if you will. And again, this is equipment that is not generally available in the used market either. So, the alternative was to have to buy new. So, test stands, the larger test stands can go up to - upwards of $1 million each, and we paid substantially less. So, think about 20% to 30% of the total cost of the new - and as was mentioned this really takes care of our MEA capacity and planning for - really for the next five years based on our current outlook.

The other thing I'd add to that Carter there's the cost savings, there is also a couple of other elements to this and one is acceleration and so it's the ability to have equipment already in our facilities already working, already operating, already infrastructure, already put in place. So, there is a pretty significant acceleration to it and derisking of bringing new equipment in. So, the lead time for new equipment and the risk profile dramatically different here at a much lower cost, so overall, I think very high value for Ballard.

Thanks, Randy. Just to sort of pile on again. I think for those who aren't familiar, AFCC was collocated in our facility, so all of these tests stands and production equipment don't need to move they're actually - they're already commissioned if you will and are relocated so it's beyond the CapEx savings I referred to earlier, significant commissioning and timeframe savings as well which would be on top of the actual cost of the equipment. So, we think a very, very attractive and efficient opportunity for us.

Okay. Maybe last one from me. On the UAV development, it seems like more near-term would be a commercial opportunity obviously as a win in South Africa, can you talk about maybe the - either the quality or the quantity of potential engagements from the commercial side versus the work you've done with Lockheed, Boeing and military?

Yeah, thanks for the question. Actually, there has been a lot of activity on the commercial side. We've had some key conferences that we've attended this year and I would say in the range of about 20 to 30 new leads that we're working against and we'll deliver a product in the back half of this year as well as in the 2019, all initial seeding opportunities that we should be able to validate the performance of the technology and start moving to longer-term sales. I think one thing important to understand of course is that in the United States market there still is regulations that need to be crossed over in terms of beyond visual line of sight with the FAA so there's work to be done for a larger scale commercial adoption for some of the commercial applications where I think long range particularly in high reliability, lightweight et cetera can really drive very good value for customers.

Appreciate it. I'll take the rest offline. Thanks guys.

Our next question comes from Sameer Joshi of H.C. Wainwright.

Good morning, guys. Thanks for taking my questions. One of the things I noticed was your material handling revenues have firmed up pretty well. Does this have any revenues from the Hyster-Yale relationship and how do you see it ramping going forward?

So, it's a new relationship with Hyster-Yale. We have - I believe it's a four-year commitment with a minimum volume. We're pretty excited about this relationship. We think longer-term, we see a transitioning in the forklift market, the purpose-built fuel cell forklifts. We see Hyster-Yale while others being leaders in this activity, so we want to make sure we're partnered with the long-term leaders in this market. In terms of revenue for Q2, I think primarily all of the revenue came from Plug Power. We continue to work with Plug power and continue to have discussions about our future relationship with Plug as well.

Okay, so the Hyster-Yale is more mid-to-long term relationship?

It is. That's right.

Okay. In terms of deploying the LCF once it is launched, is there going to be a phase out of legacy systems or how do you see it being deployed across different geographies?

Yeah, so in terms of the commercial introduction, I am going to be very selective about initial projects and initial partners, make sure we're getting good feedback from the market on initial field deployments, so we'll pace it accordingly. We haven't announced commercial launch plans yet and I think we'll wait till later in the year to provide better visibility on that Sameer.

Okay. Thanks for that. In terms of the Audi rejuvenation or recommitment of $60 million to $100 million, what is the cadence of that revenue or to put it otherwise other way of the $96 million 12-month backlog what portion is from this Audi relationship?

Yeah, so the cadence - generally the cadence for the balance of the program, you can assume it's fairly flat. The mix changes a little bit. it's been looking backwards, it's been mostly labor doing development work, we're starting to transition a bit now to prototyping and some equipment, so the mix will change but the overall revenue - we're actually just firming up some of the purchase orders actually as we speak. The contract - the previous contract ended the end of the June, the new one fundamental, the extension just starting. So, we're just firming that up, but assuming fairly flat cadence. In terms of the amount in our backlog, I mentioned we've had a $96 million well say 12 month of order book, something in the neighborhood of little under a third of that would be associated with the Audi program, obviously taking that $60 million to $100 million over three years is can pick the mid-point and kind of do that math. And then in the overall order book we have already provided as Randy said it's a $60 million to a $100 million range for the extension, and the reason for - and we provide a fairly wide range, because there are some opportunities to increase and decrease still around expected milestone. So, I think you can think about the $60 million to a $100 million and that's over three years.

Yes, one thing I would add to is that the objective of our technology solutions platform is to provide customers that have in-house fuel cell programs with access to our technology, access to our intellectual property and access to our engineering services. With a goal longer-term of transitioning those customers to customers of power product components are supply. Not commenting specifically on Audi, but generally we have - we make very strong efforts to longer-term, make sure we have customer stickiness and are looking at sale of product. And I think all of our key customers in our technology solutions program, we typically have about 35 programs underway at given time. We see very good opportunity with particularly with the largest customers for long-term component supply and I am very excited about that opportunity in the future.

Great, so in addition to the $60 to $100 million, you probably will be expecting some actual system revenues going forward, in the long-term?

Can't comment specifically on what would happen, but certainly that would be a target of ours and I am excited by that opportunity.

Okay, just one last, sort of follow-up on one of the previous questions asked. Has there been any impact of the milestone C approval, on the Protonex backlog built up. Is the most of your backlog for Protonex on UAV is another system.

Yeah, it's both. The milestone C, we are indeed seeing some - obviously we had some pickup in the first half of the year as you gathered year-over-year some very significant increase. But yes, we are seeing some improvement and we expect to be receiving some additional orders associated with the power manager in certainly in the Q3 and in the second half. So, the answer is yes, we are starting - we are seeing some visibility in pickup in that area.

Thanks a lot for taking my question.

Thank you.

Our next question comes from Jeff Osborne of Cowen and Company.

Hey, good morning guys. I had a couple of questions here. On the ABB relationship, can you just give us some historical perspective, how long have you been sort of nurturing this in the marine market, another avenue of growth with them?

Yes, we have been talking with ABB for about a year now. I would say the intensity of those discussions really picked up in the last six months. And in the marine segment, they are looking obviously at cruise lines that are in ports, initially for hotel load, longer-term, looking at opportunities for primary propulsion as well as some other marine applications that they haven't disclosed yet.

Got it. Couple other, just quick clarifications on the AFCC stuff. Were there any staff with just a relocation of resources on Ford and Daimler's end, were you able to add any headcount with that arrangement or just the equipment?

Yeah, great question, we were pretty happy, we hired about 15 people from AFCC particularly focus on high quality engineering talent to supplement some of the technology solutions programs and some of our own internal development. So, yes, we hired some of the great talent from AFCC.

Yeah, and I also just add as well. There was - we picked up some people for some of the operators and some - frankly some of the folks to support even in our - some - in our G&A area, so we are very pleased to have secured some really key talent there. But as Randy says, principally in the technology area.

Got it. And then can you just give us a sense of, you mentioned some impressive cost reductions over the past couple of years for buses in particular, and then that's driving elasticity of demand. Within that bus ecosystem, there is obviously a lot of players around the hoop, but can you just give us a sense of the fuel cell in particular for you folks how much sort of over a period of time or average annual cost reductions you've been able to achieve to enable the growth of the industry?

Well we've talked a little bit before about the 67% in that range cost reduction over the last number of years. I think what's really powerful is you know over 40% reduction we're looking at for V7 versus V7 and that's pretty well in hand and that's very low volume assumption.

Got it. And then the last question was just on the - again going back to the working capital, impressive that you were able to get $9 million of the $11 million back from China. What are the typical payment terms for your Chinese partners there? It sounds like it's less than 45 days, just given it was a backend loaded quarter. And you already have the money in hand, but I just wanted to confirm.

Yeah, that's correct. It's depends on some of the contracts. There is some portions of it that are prepaid some that 30 and some that are more in the 45. But you're absolutely right, we did have a - we mentioned the shipments, the four units that went to Sepang as well as the MEA went later in the quarter. So frankly, it was a timing issue. But the payment terms are generally quite - are on the shorter end. But it really comes down to the timing during the quarter.

Yeah, one thing I'd add too Jeff is that all of those shipments we just referred to were actually all covered by LC

Yes, fully covered.

Never any AR risk.

Yeah, got a ton of stuff.

Excellent, guys. Appreciate it.

Thanks very much.

Our next question come from Craig Irwin of Roth Capital Partners

Hi, good morning and thanks for taking my questions.

Good morning Craig.

So, the $1.1 million in European bus revenue in the quarter was really nice to see after a couple quarters of waiting for this to materialize. Your orders in the last several months seem to support a fairly nice ramp going into the end of the year. How would you characterize that ramp? Or how should we be thinking about progression in the third and fourth quarters?

Good morning, Craig, Randy here. So, I think similar to last year, the outlook was really to be kind of relatively flat compared to last year were slightly down at the first half in the second quarter were relatively flat obviously. So, similar to the type of profile or cadence of 2017.

Yes. I think just said, I think with regard more and we're specifically thinking of heavy duty which of course is the bulk of revenue. And we previously announced, we had the 40 modules for Germany and about 20 modules for the U.S. that are in our backlog. We would expect those to start delivering in the second half. Certainly, particularly the U.S. ones that we expect to be largely delivered, and then the European ones will start to deliver. So, I think we are going to see, actually over the next 12 months, a fairly steady delivery flow of those 60 odd units that we've previously announced over the course the next 12 months. But that'll be consistent with Randy's more general outlook as well.

Great. Thank you for that. Also wanted to ask a couple more questions about the Audi VW development agreement. So, congratulations on renewing that and expanding that. In the quarter, it looks like we had about 35% growth in revenue over last year. Now I know these are still relatively small numbers, but was this really driven by sort of the completion of the prior program? Or when we look at this thing flattish over the next couple quarters? Is it flat from what we saw in the second quarter? And then maybe if you could comment about the scope of the agreement. What the changes were, particularly in the scope for the renewal versus the prior agreements.

Yeah, so good questions, Craig. The first of all, we're very excited about this extension. It's a pretty significant commitment again, for Audi and VW Group. And we're, you think about the scope. Basically, Ballard is providing a 100% of the work on the fuel cell, automotive fuel cell stack. And as I mentioned, I believe the stack technology we've developed here and continue to work against is industry leading in a number of key metrics. So, I think a very powerful program the scope really hasn't changed at all. But we are seeing a transition activity moving from technology development now more to commercialization. And so, there were the kind of nature of some of the milestones and some of the talent that's required in the next couple of years will change a little bit during that timeframe and we'll start to see more component supply and product supply later in the period. So, I don't see a lot of change in the scope it is a milestone base arrangement and so it's important for us to continue as we've done over the last number of years to continue to hit milestones. In terms of the cadence Tony you can comment on that.

Yeah, sure. As we assume we booked it's disclosed in our MD&A we booked to about six little over $6 million in the second quarter but a little over 12 for the first half of the year for the program. And we would expect to see a similar cadence that's throughout the balance of the program.

Great, thank you for that. My next question is about Protonex and the Power Manager Kit. So, congratulations on the ramp and activity there. I know it's taken a lot of effort to get these results. Many of us that follow Ballard look at this product is non-core to the longer-term mission at Ballard, Randy you've been very proactive in trimming things that don't necessarily make sense in the portfolio. Is this an opportunity to monetize the assets as we hit the next couple of milestones and maybe get some larger orders? And is it fair to assume that the margins on a product like this are pretty juicy like they typically are for electrical equipment going to military and special forces?

Yeah. So, a couple of points there. One is that I believe Protonex is developing into a very intriguing business and I think milestones fee was in fact an important milestone. We've seen through activity levels and order flow in the first half of the year as well as current activity that indeed there will be a ramp in that business. I also believe that the asset that Protonex assets could be very attractive to other partners or other companies that have more capability than Ballard does in that market segment. So, right now we're continuing to work very hard to secure orders and of course that provide some optionality on how we deal with that business.

Great. And then last question if I may, gross margins were impressive this quarter really impressive particularly given the headwinds that you faced this year, can you talk about progression of gross margins for the rest of the year should we see something similar to what you've had in the first couple of quarters or does mix maybe present a little bit of a headwind in the third and fourth quarters?

Yeah, Craig. Tony here. I would say the first half of the year was on the high end of what we would expect for the full year. the mix indeed that will change through the back half of the year, so we might see I don't think we'll be sustaining the type of numbers we saw in Q2, but we still accept to see very strong I think we've indicated in the past 30% plus margins so won't be quite as robust as the first half but still some good margins in the second half.

Great. Thanks again for taking my questions.

Thanks, Craig.

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

Thank you for joining us today. We look forward to speaking with you again at the beginning of November, when we'll discuss the third quarter 2018 results. Thank you.

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