Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Q2 2019 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. Welcome to Ballard's second quarter 2019 financial operating results conference call. Today we've got Randy MacEwen, our President and CEO; as well Tony Guglielmin, our Chief Financial Officer on the call. We're 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 a complete disclaimer and related information. So today, Randy's going to provide his perspective on the evolving fuel cell marketplace along with an update on the execution of Ballard's growth strategy. Tony will then review the Q2 2019 financial results and then we'll open the call up for question and answer. Just a brief note that Ballard is going to be meeting with investors to discuss strategic direction and operational highlights at a couple of upcoming conferences; the Gateway Conference in San Francisco on September 4 and 5, and the H.C. Wainwright 21st Annual Global Investment Conference in New York City on September 9 and 10 And I'll turn the call now over to Randy.

Thanks Guy. And welcome everyone to today's conference call. In my opinion, this is the most exciting time in the history of the hydrogen and fuel cell industry. In parallel with early commercial adoption, we're seeing unprecedented developments and interest globally in fuel cell electric mobility. The global megatrend towards electrification of mobility is accelerating and putting increased momentum behind fuel cell based power for mode of applications. There are signals, very clear signals that the hydrogen and fuel cell industry is in a defining stage in its evolution and inflection. As I noted on our last earnings call, the abundance of commercial activities, developments in progress bubbling below the surface has yet to be reflected in our financial results. For the second quarter and first half of 2019, financial results and new contract bookings were consistent with the type of first half of the year we expected. We delivered Q2 revenue of $23.7 million, gross margin of 23%, and adjusted EBITDA of negative $5 million, while ending Q2 with a sound financial position with cash reserves of $163.7 million. With material growth in our order book and important developments in our sales pipeline, we have a solid setup for the back half of 2019. As we reiterate our previously stated full year 2019 outlook, we also note our expectations for strong growth in 2020 and beyond to underpin Ballard's continued leadership in powering fuel cell electric vehicles. I’ve spoken on prior earnings calls about the impact of key global megatrends, including the electrification of mobility on the transportation industry. Against this backdrop, there's a clear role for fuel cell power in use cases involving extended range, rapid refueling, heavy payload, and route flexibility, including for buses, commercial trucks, rail, and marine. There is a convergence occurring between government, regulatory,…

Thanks, Randy. And good morning everyone. Top line revenue in Q2 was $23.7 million down 11% year-over-year, with power products revenue down 44% and technology solutions revenue up 61%. Within power products, heavy duty motive was down 52% or $6.8 million due primarily to a year-over-year decline in MEA product shipments to the synergy Ballard joint venture in China. Portable power UAV also declined $2.2 million, reflecting the disposition of the Protonex power manager assets in Q4 last year. These reductions were partially offset by an increase of $1.1 million in material handling with backup power essentially flat at $400,000. And within power products, you will recall that we had removed all MEA take or pay purchase commitments from the Synergy-Ballard JV from the order book in 12 month order backlog, pardon me, in the 12 month order book in 2018. We also indicated at that time, we were in discussions with the Synergy-Ballard JV with regard to future opportunities. And we made excellent progress on these discussions and subsequent to Q2, we did sign an amended stack assembly license and MEA long-term supply agreement with the Synergy-Ballard joint venture. The MEA supply agreement also includes $8 million in MEAs to be delivered this year, of which we recognized $1.1 million in Q2. Moving to technology solutions. The increase in revenue to $13.8 million in Q2 was due primarily to increased revenue from the Weichai-Ballard JV Technology Solutions program, which more than offset relatively minor declines in other projects. Gross Margin for the quarter was 23%, a decline of 13 points from Q2 last year, although an improvement from 14% in Q1. The year-over-year decline resulted from the decrease in the high-margin revenue from the MEA shipments to China as well as the lower revenues related to the disposition of…

We will now begin the question-and-answer session. [Operator instructions]. The first question comes from Rob Brown with Lake Street Capital Markets. Please go ahead.

Good morning.

Good morning, Rob.

Good morning, Rob.

First on the Synergy deal, it sounds like that's come back nicely, is that indicative of the Chinese market ramping back and maybe what's sort of your expectations now on that business into 2020?

Thanks for the question, Rob indeed. I would say it's representative of the new parties that are coming to the China hydrogen fuel cell industry because what's happening there is, there’s a new investor that has announced, I think it's about RMB180 million to RMB200 million financing into synergy. That company is called Meijin Energy which is a very large coal producer in China. They see lots of opportunity for coal gasification to hydrogen, and the use of the hydrogen in the near term. They are investing heavily in renewable energy to hydrogen in the future and also have made an acquisition of Feishi Bus in Guangdong Province as well, which is one of the leaders in my opinion at this point in hydrogen fuel cell bus deployments. So they are making a number of investments in the hydrogen and fuel cell industry, and this investment in the joint venture is effectively -- or actually in Synergy is effectively to support the future funding of the JV. They view the stack as many do in the industry as a key part of the value chain and wanted to make sure they had exposure to this. So that financing is expected to close in the very near term, and I think it positions Synergy and the Synergy-Ballard JV very strongly going forward. We did ship some MEAs actually in Q2 to the JV. We have a new $8 million purchase order for which we expect going forward, we expect to see some additional deliveries in 2019, so that's, frankly -- wasn't something we had expected earlier in the year just given the level of uncertainty, but we'll have to wait, of course, to see this financing close. But I'm very excited about these developments at Synergy bringing in such a strong player. And I've had the opportunity to meet the top executives, including the CEO of Meijin Energy. I'm very impressed with their commitment in the hydrogen fuel cell industry. So I think you have got it right. It's an indication of the level of interest as well as the quality of the counterparties continue to step up, including in China.

Okay, thank you. And then in general, I guess moving to the European market, the JIVE program has been no shipments, but what’s sort of your view on the European bus market opportunity? What sort of penetration rate do you see that that can get to and how does that play out? Is it more programs like JIVE or is it switching to a traditional kind of supply model?

Yes. So we've seen a really significant cost reduction in the offering for fuel cell electric buses in the European market. And so this consortium, where we're looking at offering a single deck bus, through Wrightbus of €375,000, green hydrogen delivered at €5 to €7 per kilogram, and a service cost of €0.30 cents per kilometer driven. This represents a compelling total cost of ownership that in my mind is, if not at par, probably better than best in class pricing for battery electric buses, of course, with superior performance, though for fuel cell electric buses. And if you contrast the cost of fuel cell electric buses two or three years ago, where maybe the cost of a bus was more in the range of €650,000 and say five years ago, closer to €1 million, the cost reduction this represents is fairly significant. I think what you're going to see is there will be some continued support in the very near term in terms of deployments. This 1,000 fuel cell bus program obviously has some support from the CEF fund and we're very appreciative of that, but we are moving to a model where even at volumes that I would consider relatively small, i.e.1,000, we are able to offer as a consortium leaning forward together on costs, a compelling value proposition to transit operators and transit authorities. So, I think we'll see a much higher penetration as we move to 2023, 2025 and obviously, through 2030. And I think the two options for zero emission buses, and of course a number of European cities are clamoring for zero emission buses. We can see very high adoption of zero emission buses occurring. I personally believe we're going to have very high penetration for fuel cell buses, you know, in the 2025 time frame, I expect it to be circa 25% in key cities.

Great. Thank you for that overview. And then as we move into the pipeline of new opportunities, how can you characterize that and how does that sort of turn into the order book over the next 18 months?

Rob, it's Tony here. So you can just, we don't of course disclose our total pipeline dollars. We've discussed the backlog, which is quite significant. But as we mentioned, in the next 12 months, we have about $126 million to deliver; you think about, maybe about as we said we've kind of confirmed our outlook for the year, so maybe about half of that for this year and the next year. And then, in addition to the backlog that we have beyond the order book, we see a fair bit of that converting next year. We have -- some of that, of course, is the Weichai-Ballard JV. So we do see a fairly high conversion rate going into 2020. But beyond that, more into the pipeline, we do have a very significant pipeline of opportunities that we do see moving into the backlog through the balance of this year and into the next year. We will certainly have more to talk about probably in Q3 and certainly as we go into next year, but very high conversion rate, we would expect to see going into the latter part of the year.

Yes, Rob. I just to add to that the pipeline, Tony obviously has characterized the order book and backlog, but the pipeline, in my mind is very attractive from a number of ways. Obviously, we're seeing growth in the pipeline tickling key markets. But there's a lot of diversification developing. So we see contribution of the pipeline, not just from bus, but now a lot of activity on the commercial truck side, much more activity on the rail side, much more activity on marine, even say six months ago. So these medium and heavy duty markets, were seeing a lot of activity. We do expect to see some conversion, potentially in the auto space from pipeline to order book. And I think forklift is another market, we expect to see over the next 12 months, some significant developments that will migrate from pipeline into order book. So I'm pretty excited about the quality of the opportunities with the pipeline, I'm excited about the conversion rate that we're seeing. And excited about the diversification in terms of the market applications, as well as a geographic market, diversification in China. We're seeing lots of opportunity for the JV there as well.

Great. Thank you for that overview. I'll turn it over.

The next question comes from Amit Dayal with H.C. Wainwright.

Thank you. Good morning, everyone. Randy, for you, maybe to begin with you. You indicated there's a lot of global activities and a lot of the surface happening right now. What signals or what solid development should we be looking for to see how this is all progressing? And then when should some of this activity reflecting your financials, is this a 2, 3-year period or is it a little sooner than that? Any color on that would be helpful.

Yes. Amit, good morning, and thanks for the question. So there's a lot of activity occurring in different parts of the value chain and indeed in different market applications as well. I did highlight three corporate transactions that we think are indicative of the conviction level that a number of the strategic now have in fuel cell. That's three of many companies, there are a lot of other companies looking for collaboration opportunities. Whether it's in commercial truck, whether it's in pass car, whether it's in forklift, there's just a number of players that now are seeing the opportunity for hydrogen fuel cells. In a way frankly, I didn't -- I don't think they saw 12 and 24 months ago. It will take some time for some of these to percolate through from discussions to collaboration to ensuring we have the right product offering to getting into programs and deployment. So in terms of impact, there may be some modest impact earlier than you're highlighting, but I think 2023, forward, we will see a very steep growth curve in the industry and we think Ballard is at the center of this.

Understood. Thank you for that. And then in relation to the H2Bus opportunity up 1,000 buses. How should we view Ballard's sort of opportunity set here? Are you potentially going to participate in all of these 1,000 buses or a portion of these? How will that play out indeed?

Yeah. So just to be clear, the consortium has come together for the deployment of 1,000 fuel cell electric buses in Europe. 600 of them already have secured funding, we expect 200 of them to be deployed in Latvia, 200 in the UK, and 200 in Denmark of course, where we have our European head office as well. So we see 600 of those, as moving forward, all of them, this 600, plus all of the additional 400. And there's lots of work going on to identify these cities and countries for those additional 400. We expect all 1,000 of those to have Ballard fuel cell engines inside. And the way the consortium was structured was that the pricing and the lean forward together, the consortium members was based on, again, what I'd characterize is relatively modest volume. So we're very excited about this development. It took a lot of work for the consortium to come together and approach cities and countries for these deployments. So we're very pleased with how this consortium has come together. We've got some great partners there and a very powerful opportunity that will showcase again Ballard's leading fuel cell engines for bus applications and pretty significant scaling compared to where Europe has been historically.

Understood. Thank you for that. With respect to Weichai-Ballard plant. Any changes to the timeline or are you still expecting commissioning in early 2020?

Yeah, you've hit it correct. So we made excellent progress in the second quarter and in fact year-to-date. We continue to ramp up on staffing, a lot of staffing that's occurred in the first half of the year. Facility construction is underway. I'm getting daily pictures from China some visits when I'm there as well. A lot of the -- all of the long lead production equipment has been procured and is under manufacturer construction at the supply base. The product development and technology transfer program is going very well ahead of plan. There are some sensitivities from Weichai in terms of making announcements on when certain activities will happen. As you can expect, this has high, high visibility in China. This is a major program that's underway in the whole industry and not just Shandong and Beijing have attention on this but indeed that the whole hydrogen fuel cell industry are tracking this with significant interest. So again, we won't get into details about when product -- what product will be produced when. But we're very bullish on the progress that's been made. And very confident again in the quality of the counterparty we have here, the relationship with Weichai is very strong.

Understood. Just one last one for Tony maybe. The cash flow, are you still expecting $50 million for 2019, Tony?

As we kind of burned about $30 million in the first six months of the year, that included an investment into the Weichai-Ballard joint venture in Q1. And so we're looking, we would expect the burn in the second half of the year, roughly the same as the first half. And that would -- that includes by the way another roughly $7 million investments into the joint venture in Q4. So I would suspect to burn not this similar first and second half. We also have and it's just the other point I'd make, we're also -- well, we had a very good quarter on working capital, we expect to see a little, some fairly significant items flowing through, but we're also investing a bit in CapEx in the second half on expansion in MEA in advanced manufacturing. So when you put it all together, think about a similar burn in the second half to the first half.

Got it. Thank you. That's all I have. I'll take my other questions offline. Thank you.

Thanks to Amit.

[Operator Instructions] Our next question comes from Jeff Osborne with Cowen & Company.

Excellent. Good morning. Couple questions on my end. Is there still discussion about Broad Ocean investing in the Weichai JV? I might have missed that but I didn't see any reference to it in the MD&A and your prepared remarks.

Good morning, Jeff. And thanks for the question. We did have discussions to invite Broad Ocean to participate in the Weichai-Ballard JV. They've decided not to do that. So we're quite happy with the outcome because we gave them the opportunity to participate. And, we liked having the 49% position, we think the JV is going to have very high value in the future and want to own as much of it as possible.

Got it. That makes sense. And then I saw in the filing that I think it was Weichai was around $6.2 million, Tony? And then you flag, if that's right, but you flag that the gross margins would expand throughout the year. Can you just give us a sense of what's driving that margin expansion? I assume Weichai goes up, but is there any other programs or is it the mix towards bus? I'm just trying to get a sense of the moving pieces on the top line that drive to the margins.

Yes. Certainly the TS, technology solutions more generally, but certainly the Weichai contribution is going to have an important impact. I also just -- I briefly alluded to overhead absorption that, as we're -- we expect to move more product through the pipeline and into revenue in the second half of the year. So we could see a couple of points of improvement on overhead absorption as well. So I'd say those are the really the two key drivers.

Got it. That's helpful. And then, certainly, Randy, I agree with your enthusiasm on the broader sort of developments in the space. Is there -- and certainly investors that I speak to are confused around sort of pairing fuel cells with batteries together. If you were stuck in an elevator and had to describe the value proposition of pairing the two together, is there any metrics that you can give as you've worked with potential partners around weight savings for trucks by pairing the -- you can -- and also what the battery size reduction would be? I can use a 50% smaller battery paired together with two fuel cells or one fuel cells or on a tank. You net those out, you get to x percent weight and what the impact is to cost, either upfront cost or cost per mile. Is that anything that you've put together that you could share?

Yeah, I think every use case is quite different. And we've looked at a number of use cases and have capability in house here to look at what's the right mix of fuel cells and battery? So without having a specific metric to give you what I would say in an elevator environment is really what you're doing is you're taking power density and energy density. And you're optimizing a solution for the duty cycle and providing the customer with optimized solution that's going to meet the market requirements, I think very strongly. So, I don't think there's one metric we'll talk a little bit more about that to see if something we could help you on that front. But, we've modeled a number of different use cases. And, I've seen different outcomes on those depending on what the use cases are. But I think the opportunity for driving long range, keeping costs as low as possible, and in my mind, one of the key aspects of this Jeff is you really have the ability to operate the fuel cell at the right power output, so that you're not having a wear and tear on the fuel cell. You have the ability to have the appropriate level of state of discharge on the battery. So you can avoid deep discharge on the battery, so you can preserve the durability of the battery. So I think there's a mix of ways to view this and one of them is to make sure you're mitigating the pressure points for both the fuel cell technology and the battery technology to have high durability of both components in an optimized solution.

Got it. That's helpful. Is there a way of maybe just in broad structure rank ordering the applications, it sounds like trucks were weight as a penalty, because there's limitations legally on that plus range. So trucks are first, buses are second and maybe passenger cars are third in terms of the value proposition today. But obviously things improve and pass cars in the mid-2020s might make more sense or am I wrong?

Yeah, exactly. No, that sounds right. And for us, you say pass cars in the mid-2020s. Of course, pass cars such a large market. You only need a small portion of market share there. But what we're really excited about is the longer term outlook, as you've described in your own publications for the opportunity for digital connected autonomous vehicles that have high power requirements on board plus have high utilization. And there we see the, future growth of fuel cells, while we'll see it in 2025 timeframe for sure, we expect to see very high adoption a post-2025 as we move to 2030 and 2040.

Got it, that's helpful. And then the last one and I might have missed it again trying to speed-read the filing, but can you just give us an update on anything going on or lack thereof with Hyster-Yale and CRRC, those are two partners that you've talked about in the past and didn't hear any reference to those.

Yeah, there's quite a bit of activity going on in the rail industry in Europe and in China. We're seeing activity with CRRC. And in fact, again, the CSR Sifang tram line that was supposed to be operational about a year or two ago had major construction delays is the first. There are 10 engines we delivered there. Just a couple of days ago, we got the first videos of the first trams actually in on the Gaoming line in Guangdong Province, actually testing. So that's great to see. And the line is supposed to be operational late this year. So that's a very encouraging signal. In my mind, that's a key next step in the gating item for future activity with CSR Sifang and CRRC. But there is also some activity going on in Tangshan and continue to do testing there and see opportunities with TRC, another division of CRRC. So I think there's certainly lots of activity going on. It hasn't translated to new revenue yet. But we do see significant rail opportunity in the China market long term. And in Hyster-Yale, they continue to move forward. They'll make their results are coming out if they maybe it came up yesterday or coming on the next day or two, I have forgotten when their sequence is, but they'll comment on the number of deployments they have, obviously in the fuel cell space. I think they're -- from what we've what they've commented on in prior quarters, I think their ramp rate has been a little slower than expected and that's what we've seen as well.

Makes sense. Appreciate it. Thank you.

Thank you.

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

Well, thank you for joining us today, we look forward to speaking with you again at the end of October, when we will discuss third quarter 2019 results. Thanks again, everyone.

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