Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2022 Results Conference Call. As a reminder all participants are in a 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 Kate Charlton, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning. Welcome to Ballard's second quarter 2022 financial and operating results conference call. With us on today's call are Randy MacEwen, Ballard's CEO; and Paul Dobson, Chief Financial Officer. I'm also excited to announce we will be hosting our Investor Day this fall on November 22. We look forward to hosting you in Vancouver. Today, we will be making forward-looking statements that are based on management's current expectations, beliefs and assumptions concerning future events. Actual results could be materially different. Please refer to our most recent annual information form and other public filings for our complete disclaimer and related information. I'll now turn the call over to Randy.

Thank you, Kate, and welcome, everyone, to today's conference call. I'd like to first report that during Q2, we welcomed David Mucciacciaro as Ballard's new Chief Commercial Officer with global responsibility for sales, marketing, product line management and customer care. Prior to joining Ballard, David was most recently Vice President, Global Sales, M&A and Marketing of Magna Electronics. He brings a depth of expertise and strong track record in leading global commercial teams, with over 25 years of sales leadership experience from the automotive industry, including with ZF, Faurecia, Lear and TRW. His skill set will be highly valuable to Ballard as we grow sales and transition into commercial scale deployment. David is already having a positive impact on our commercial activities. Now getting into the quarter. In Q2, Ballard delivered $20.9 million in revenue and secured new orders totaling $12.3 million. This activity translates to an order backlog of $91.2 million at the end of Q2. This is softer than planned, as a number of expected sizable orders have shifted out. We remain excited about our expanding opportunity set across our various applications and regions, as reflected in the significant growth of our sales pipeline. We're experiencing record levels of customer engagement, progressing through demonstration programs with multiple platform customers and fully expect to execute on important platform wins in the next 12 months. Our market focus remains unchanged, targeting large addressable markets of medium and heavy-duty mobility, including bus, truck, rail and marine as well as select stationary power generation markets. These are the applications where the value proposition is strongest for our hydrogen fuel cell technology. I'll provide a brief update of highlights and our progress on our key applications. We continue to see progress for fuel cell adoption for bus applications in Europe and the U.S.…

We will now begin the question-and-answer session. [Operator Instruction] The first question is from Aaron MacNeil with TD Securities.

Randy, as it relates to the Inflation Reduction Act, how are you thinking about the $0.60 to $3 per kilogram production incentive and the $40,000 per commercial vehicle tax credit in terms of what it could mean for U.S. bookings activity over the next 12 months? I guess, more specifically, do you think that incentive is enough to get some of the customers you're engaging with over the line and moving towards a formal order?

Yes, Aaron, thanks for the question. I think we view this as a major catalyst in the U.S. market. It wasn't too long ago, maybe 2 years ago, where the U.S. market really was not a high priority for us. In fact, we had really characterize the U.S. market as a California market. That has clearly changed over the last year. Of course, we're not quite there. There's still some work to do later this week, I think, to see this pass, of course. But I think the combination of lowering the cost of low-carbon hydrogen as well as supporting early adopters with the CapEx cost for vehicles, I think, are very powerful tools. We've seen similar tools to be successful in the U.S. before, and we're expecting this to be a significant accelerator not just for the Bus market, but for the truck market as well. And we're looking at not just fleets with opportunities to refuel at tethered refueling stations, but also longer term for corridor refueling infrastructure.

And in terms of my follow-up, I'm just wondering if you could give us a bit more detail on the guidance revisions in terms of what sort of specific activities or initiatives were canceled or deferred as you move the spending ranges lower?

Aaron, it's Paul here. So yes, we did lower slightly our guidance on our guidance on both OpEx and CapEx and, as we stated, in responding to a challenging macro environment. I mean, you will have noticed that we have been ramping up our costs, $38 million total costs in Q2, $14 million higher than the prior year. And last year, you can see that the pace has been from last year, you can see that the pace has been increasing. We're investing, as we stated, in research and development product, development, next-generation products, MEAs, plates, stacks, modules. Also focused on cost or product cost reduction, as well as scaling up our production and manufacturing scalability facilities and market development. Also investing in Europe and the U. K. with our corporate development activity as well. So yes, we did say that we would be reducing it. And when we say a challenging macro outlook that encompasses a few different things. It not only encompasses sort of the prudence on any sort of lower priority, less essential spending that we have, so really scrutinizing the prioritization. But that is, by no means, as a message that we are backing off on our commitment to scale up and invest in our products. We think that's extremely important, especially as we talk to customers and secure larger orders, they're looking for us to be able to have the best technology, be able to produce it at scale and at quality. And so we will continue to focus on that. So -- but there is maybe a few areas where we could cut back without impacting that objective. But the other area, too, is that we acknowledge also that there have been supply chain challenges, right? That could -- that we see could persist into 2023. So while we are ordering parts and production equipment and such, it is taking longer. The lead times are getting pushed out due to supply chain challenges, which will impact spending in the year. And it also -- the final area is it also acknowledges the reality of us onboarding really well-qualified people. We've done a great job this year and scaled up, I think, by about net 80 people, mostly in engineering, but it's slightly behind the pace we thought we would be at. We'll continue to press forward and look for those people, but it is a reality of the environment we're in. So taking that all together, we see our spending to be slightly less than the guidance that see our spending to be slightly less than the guidance that we provided on both OpEx and CapEx.

The next question is from Rupert Merer with National Bank.

Just a follow-up on the hydrogen PTC outlook. You talked a little about the potential for heavy-duty trucks in the U.S. I'm wondering though, does this change the value proposition in some of your other target markets in the U.S? Do you anticipate you could see an acceleration in power markets, for example, or even interest in rail, in hydrogen in the U.S.?

Yes. Rupert, I think you're right. This is going to support adoption across a number of market applications. On the rail market, we have been looking at the locomotive market with CP, obviously, in Canada. But more broadly, we're seeing a lot more interest from rail operators to decarbonize. And in North America, for freight market, you really don't have opportunity for catenary wire infrastructure. So in my opinion, the only option there is fuel cell technology. And with this change with the production tax credit and the total cost of ownership and for this application, locomotives, you're looking at fuel as the number one cost for rail applications. So we do see that strengthen the value proposition. There's work to do over the coming years to validate the hydrogen fuel cell value proposition. But certainly, the hydrogen PTC outlook is strong as we look forward in that market. And then, I think the other market we're quite excited about excited about for the long term as well is not just transit buses but coaches. And so the opportunity to see lower-cost fuel, which is important to coach total cost of ownership as well, will be valuable. So it won't be just trucks, but we'll see transit operators, coach operators and the rail market as opportunities as well for the U.S. market.

How about the Power market? Do you see any growing opportunities for either energy storage or backup power?

Yes. So for the backup power market, I don't see the PTC to be a big catalyst, in my opinion. These are typically applications that don't consume a lot of fuel, so it's more about having resiliency and 0 emission, and in some cases, the ability for accelerated permitting. So I think those are stronger drivers than PTC. There are, of course, some stationary applications where you will see more primary power, where fuel can become a larger portion of the TCO. That's still, I would say, work in progress in terms of developing those markets for the U.S.

The next question is from Jeff Osborne with Cowen & Company. Please go ahead.

Randy. I was wondering if we could dig into the gross margin pressure in the past couple of quarters. You had a bit of a laundry list of items. The 2 I wanted to try to focus on and how they sort of unwind themselves were the warranty charge you mentioned and then also the pricing strategy. Can you just touch on what the pricing philosophy has been over the past 12 to 18 months of flowing through the P&L now? And then how that sort of unwinds itself as we look at expansion into '23 and '24?

Yes, Jeff, thanks for the question. Maybe I'll start I'll start off, and then Paul can supplement. Maybe I'll start with the pricing strategy. I think what we're seeing is we've moved to our next generation of product, and part of that next generation of product was to introduce new pricing strategy to secure orders and transition customers to that new technology. So that, I would say, is a primary driver of that pricing challenge. At the same time, of course, late last year and early this year, we've seen some inflationary pressure on the supply chain side. And so as we execute against those orders and as some of the supply chain costs have gone up a little, that's impacted, of course, our cost side of that equation. So what we do see is as these -- we're talking about early volumes for these new products. As we move to higher volume for these products and as we adjust pricing based on the supply chain changes as well, we do expect to see changes in the gross margin profile and some gross margin progression in 2023 and 2024. I think one of the things that's important to understand, of course, is that with the investments we've made in our manufacturing capacity and still low volumes, our overhead absorption is still diluted at this point. Paul, you want to comment a little bit further on the warranty?

Yes. So on the warranty, I mean, the impact in the quarter actually wasn't that severe. It is sort of looks like it's amplified because of the size of the revenues. We did book extra provisions, if you recall, in prior quarters for -- in some issues we saw in the lab with some of our products. We made good progress on resolving a lot of those and are now fully provided. We believe we're fully provided to resolve that issue with customers. It's important that we have enough warranty provision and stand behind our products as customers try them out and we roll them out. So the warranty impact was -- I would characterize as relatively minor in the quarter, and we don't see that changing much going into the second half of the year either.

And maybe just one quick follow-up. I'm not sort of following, Randy, maybe I haven't had enough coffee, but the move towards the new platforms, why do you need to discount? Did you have to do that like when you move from the Mark 9 to subsequent platforms in the past? Or is this really just an issue of moving from sort of tech solutions platform development and monetizing units that way to true commercial terms with the Move HD platform or something else? I'm just trying to understand why when a platform gets more energy dense, you need to lower the cost?

Yes. No. It's a discussion we've had with -- particularly with the bus OEMs for some time, of leaning forward on the cost structure to make sure that the total value proposition for the bus operators and the OEMs work as well. And it's not just us that's been doing that, we've been seeing other participants in the value chain supporting this to get the demonstration fleets out in the marketplace. So I would say that's part of it. The other is just there is a cost required for these operators to transition from one product to the next product, and part of the way to help incentive them to move to that next product is the pricing strategy.

The next question is from Michael Glen with Raymond James. Please go ahead.

Randy. Just during your opening comments, you -- I sort of missed it, but can you just touch on you're going to establish some manufacturing in the U.S.? Can you just give some thoughts on timing for when that would happen? Or just clarify what you're looking to build on there?

Yes. Thanks, Michael. It's -- this is really kind of our initial manufacturing facility that we look to set up in the U.S. in Oregon, where we already have a relatively small engineering team that will help support this build-out of the facility. It's a relatively modest investment initially, it's about $4 million. And the ability to manufacture up to about 2,500 modules per year, and we expect that to be online and operational in Q1 2023.

And a follow-up. There was -- over in China, I saw that Alfred Wong was moved from Managing Director of China into the CEO of China role. I'm just trying to understand a little bit better, is there a particular reason for that move? Is it indicative of something taking place in the Chinese market?

Yes. So a couple of things there. One is that Alfred was Managing Director for Asia-Pac, and so we moved him to CEO for China. So very much focused on the China market rather than Asia Pac coverage. Secondly, our organizational structure, we made some changes to be more regional, closer to the customers. So this is part of it, and part of Alfred's career arc as well.

The next question is from Craig Shere with Tuohy Brothers.

So there was kind of revenue softness in the quarter for both Stationary Power and Material Handling. Do you see that as a bit of an aberration? What are the specific prospects over the next 12 months?

Yes, Craig, thanks for the question. I don't think we expect to see any major increase on the Material Handling side over the next 12 months. But the Stationary Power market is proving to be very active in our sales pipeline. A lot of engagement there in Europe, in North America, and I expect some very positive developments on the Stationary Power market over the next 12 months.

And you mentioned all -- you're kind of opportunity-rich with all these pilots, demonstration studies, joint ventures and such. Are there some specific mile markers you could share about when we might hear or get specific feedback in a particular area, as far as vehicles or rail or marine, over specific quarters over the next 12 to 18 months, like first half next year, we should hear this? Or just some kind of timing feedback, mile-markers?

Yes. I would say on the Rail market in Europe with Siemens, obviously, they have now secured the first commercial order, so we do expect to see more progress on that market over the coming 12 months. I think you'll likely see orders on that front. In the Marine market, you'll see some markers in terms of actual deployments hitting the water, which is very important to see those products getting demonstrated. So for example, Norled in Norway, we expect to see progress there. These are really important to have the first deployments and not just the sales of the engines, but getting them into vessels and actually powering, providing propulsive power for those vessels for a period of time as well. So I think by the end of 2023, we should have 3 or 4 different marine projects that have shown really good progress on water. And then I would say in the truck market, these parallel paths that we have both with MAHLE will receive, I think, significant technical milestones by the end of 2023 and starting to starting to engage with OEM customers. And then in parallel with the -- I'll call them the upfitters, the systems integrators, vehicle integrators like Quantron, where you see them demonstrating or unveiling a truck with a fuel cell engine from Ballard and then moving to a sales -- long-term sales relationship with these type of customers. And we see that with others as well, including Wisdom Motor out of China.

The next question is from Chris Souther with B. Riley Securities. Please go ahead.

Can you talk -- you talked a little bit about kind of the order momentum, nothing quite where you wanted. Could you talk a little bit about where the push out of that low push out of that low order levels is happening? Is it just primarily China or any of the other kind of activities, either European bus or Linamar that you kind a might be starting to hit? Just wanted to get a better sense of the disconnect between order activity versus what sounds like continued that pipeline is going to all start to hit the inflection point?

Yes, Chris, thanks for the question. Certainly, on the Bus side, we had expected to receive orders for those 2 cities that we mentioned with 100 -- over 120 fuel cell buses already this year. They've taken longer for a variety of reasons, including funding and fueling infrastructure delays. But those are still very much strong sales leads for us, and we expect to convert those. So that's one example. Another example would be on the rail side. We expected to have larger orders with some customers, they're announceable already. We'll see that, I believe, in the second half of the year. And then I do think some of the Stationary Power markets that we've been working with customers on for some time. These are large, really chunky opportunities, project opportunities, and there's some complexity to some of them. And so it's just a matter of supporting the customers through their project development cycle and moving to orders. So some of these things have taken longer than we expected. And we're still very much -- they're still all live and high probability opportunities. None of them have disappeared. It's really very much a timing issue. But we expect to see very good progress over the coming 12 months.

And maybe just within the backlog, could you break it down a little bit more by their segment or end market or geography? It sounds like the Stationary Power is growing, but I wanted to get a sense of how that changes in the mix as well as kind of the existing bus customers?

Yes, just trying to find the data for you. But we've seen the Stationary backup -- or the Stationery market, total backlog increased 33% year-over-year for Q2. I don't have my finger on the bus market at the moment. But a lot of the order intake, I think 60% of the order intake in Q2 was for bus and stationary, including some new customers as well. So seeing positive, very positive growth in those segments.

And maybe the last one here. Just China, we've seen kind of fits and starts throughout the time there, kind of both market and COVID-specific shutdowns more recently. Can you talk a bit about what the visibility looks like for the second half within China?

Yes. Just to supplement the question about the backlog as well, one of the things that I really like about our backlog, notwithstanding it's not as firm right now as we'd like to see, as well as our sales pipeline is the diversification we see in there across multiple applications, multiple regions and customers. So there's a lot of richness we see in the order backlog and the sales pipeline, I think, which differentiates us from a number of other players in the fuel cell space. So I think that's something important to highlight. I don't think there's been any really major regional shift in over the last quarter or so. And to your point about China, very frankly, candidly, still limited visibility for the back half of the year. I would note, there are today just under 11, 000 buses and commercial trucks operating in China. About 3,500 of those vehicles have Ballard fuel cell technology inside, so over 30% market share and over 125 million kilometers of on-road service from those vehicles. So a very significant data point for Ballard in terms of real-world experience in the China market. And the other thing that's interesting in China is there still are, notwithstanding the policy uncertainty, there's still quite a few hydrogen fueling stations getting built out. So today, there's over 200, I think around 203, hydrogen refueling stations completed and operational in China, but another 63 under construction. No doubt, there's been significant delays on those 63 for a variety of reasons in the China market, but I think that's very encouraging that the fueling stations continue to get built out, notwithstanding a policy uncertainty. So I think we'll have more to share at the end of the year. There's a lot of work. We just had a question from Aaron on -- Alfred in China. He's just arrived in China, and he's actually going through the quarantine time period right now and has a number of important meetings coming up in the China market.

The next question is from Rob Brown with Lake Street Capital Markets. Please go ahead.

Just wanted to follow up on the European bus order activity. What's sort of driving that increase in units being deployed in there? And is that happening, I guess, is there a sales pipeline in other cities of that kind of change in order -- in order rates?

Yes, Rob, great question. I think this is really a situation where you're seeing those transit operators that have trialed fuel cell technology and have, in some cases, trial battery electric technology and have seen the challenges with both technologies and the opportunities with both technologies. And are deciding for their routes, for their duty cycles and load profiles, that fuel cells meet the market requirements. And so that's the transition I think that's occurring. Those operators that have seen the reliability and durability proven out, have seen the performance of the vehicles in the field, and now are amping up their zero-emission requirements and selecting fuel cell technology. And this is not limited to these two cities where we now have visibility on over 100 fuel cell buses. There are a number of other cities that are really scaling up their plans in the European market. I think the macro context in Europe is only going to accelerate this over the coming years.

The next question is from Greg Wasikowski with Webber Research. Please go ahead.

First question is on getting customers over the line. Is infrastructure the biggest gating factor there, like you just kind of touched on with buses? Or is it mostly wrapped up in supply chain, or maybe something else?

Yes. So it varies by market application. But what I would say is where you have funding -- government funding requirements tied to deployments, that's often a pacing item. And then hydrogen refueling infrastructure, I would say those are the top two.

And then back to the PTC, does that at all change your outlook on getting into electrolyzers? And then if so, can you remind us would first priority be to do that organically or potentially inorganically?

Yes. So I think we were expecting a lot of people were negative on the -- whether or not this type of bill would come back, some type of slim down, build back better bill, this IRA would come through. We actually thought that this would come through this year, so we weren't surprised by it. So I would say our view on electrolyzers is where we have the ability to help the design of MEAs to improve performance and lower cost and in-house a design and production of MEAs, we think we can be additive to an electrolyzer company. What we've seen is that there are scarcity of opportunities in the market. They're all, in my opinion, fairly fully priced in many cases. So it's been challenging to find opportunities that kind of meet our investment criteria. The other thing is that we aren't interested in being a supplier of hydrogen fuel. More really looking at that equipment, the sale of the electrolyzer equipment. So I would say this is something that is -- would be a nice to have, but is not required. Our customers are not demanding from us that we come to them and support their electrolyzer or green hydrogen production needs. So I would view it as if we found the right opportunity with -- at the right value, and we could add value from a technical perspective. Those characteristics would lead to success. Without those characteristics, I don't think we'll see us moving forward in that direction. We wouldn't do this organically. You see a number of companies have been moving from -- or adding from their fuel cell technology, whether it's PEM or even solid oxide, adding to their activity set electrolyzers. Our view is that, that's a fairly significant and demanding exercise, and there's not a full 100% overlap in terms of the technology. And so for us, focusing on the fuel cell market opportunity and driving success there is important. So this would only be an M&A opportunity, not something we do organically.

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

Great. And thank you, everyone, for joining us today. Paul, Kate and I look forward to speaking with you in the next quarter. Thanks again.

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