Ballard Power Systems Inc.
Q2 2012 Earnings Call Transcript

Published: 14 Aug 2012

[Operator:]

Hello, this is the conference operator. Welcome to Ballard Power Systems Second Quarter 2012 Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to Guy McAree, Director of Investor Relations.

[Guy McAree:]

Thanks. So good morning, everybody. Today's call is for us to discuss Ballard's Second Quarter 2012 Operating Results. And with us today, we've got John Sheridan, our President and CEO; and Tony Guglielmin, our Chief Financial Officer. We'll 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. For a detailed discussion of these statements and the assumptions used in generating them and the risks and uncertainties that could cause actual results to be materially different, please refer to our press release issued last night, our most recent annual information form and other filings. You should note that Ballard reports financial results in accordance with IFRS. In addition, results are consolidated to include Dantherm Power, are also in U.S. dollars unless otherwise stated. I'll turn it over to John Sheridan now.

[John William Sheridan:]

Thanks, Guy, and good morning, everyone. Before we begin with our regular report out this morning, I'd like to take a moment to acknowledge what was a very sad event for all of us here at Ballard. Late last week, a long-standing member of our Board of Directors, David J. Smith passed away unexpectedly. David was a distinguished member of the legal profession, a commissioner at the BC Securities Commission, a very valued member of Ballard's Board of Directors and also a personal friend. So our thoughts and our prayers certainly go out to David's family. Now moving on from that sobering note to the business at hand. As you saw in last night's press release, our Q2 revenues were significantly below expectations. This obviously put pressure on EBITDA and cash. But despite the low shipments and weak revenue, with our aggressive cost management and a pickup in sales booking activity, we posted a few positives in the quarter. The 12-months rolling order book at $54.4 million was up 32% from the end of Q1. Cash operating cost improved 28% and adjusted EBITDA improved 12%. With those positive points aside, the headline story is obviously the disappointing revenue. So that's where I'll focus and address the obvious questions in terms of the weakness in the quarter, what that implies in both the second half of the year and what we need to do to deliver our guidance for the full year. Following that discussion on revenue, Tony will adjust our path to profitability, cash flow and liquidity. So first, explaining the revenue weakness in Q2. Total revenue in the quarter was $10.3 million, down $8.8 million from last year. Part of the year-over-year reduction is the absence of the Daimler manufacturing contract. That contract concluded third quarter last year, you'll recall. And that provided $4.6 million in Q2 last year, so that's obviously significant to the year-over-year change. As we have discussed, our plan had been to offset this loss revenue with strong growth in fuel cell products and moderate growth in material products. However, we did not deliver that plan in Q2. Material products in Q2 continued to be weak. Fuel cell products had limited shipments and backup power, and no shipments in the quarter in bus. Drilling down in these 3 areas, material products revenue is weak at $3.5 million for the quarter. Two reasons for this, both of which are expected to recover in the second half

[Tony Guglielmin:]

Thanks, John. So I'll first address the key drivers to the bottom line profitability, gross margin and cash operating costs. So gross margin was 15% in Q2 and 19% for the first half of the year, up 2 points from the first half of 2011. Looking to the second half of the year, the higher mix of bus and engineering service revenue through the remainder of 2012 will have a positive impact in gross margin, and we expect to see gross margin in the mid- to high-20% range for the full year versus our original estimate of 30%. In terms of cash operating costs, during Q2, cash operating costs were $7.7 million, an improvement of $3 million or 28% compared to Q2 last year. For the first half of the year, cash operating costs were $17.4 million, an improvement of $4 million or 19% compared to the first half of 2011. And the reduction in Q2 cash operating costs was a result of a number of factors

[Operator:]

[Operator Instructions] Your first question is from Jeff Osborne of Stifel, Nicolaus.

[Jeff Osborne:]

I'll do a follow-up on the engineering services piece. And congratulations for the wins that you've had there, but what's the pipeline of additional awards that you think you'll be able to capture over the second half as you look for profitability for 2013? It seems like that will be an important piece of that plus the bus market coming back?

[John William Sheridan:]

It is a good point, Jeff, and I'm just hesitating in terms of how deep I can go in terms of some of our negotiation activity and prospecting activities. Maybe just mention 3 things

[Jeff Osborne:]

Perfect. And maybe just following up on the bus market. Can you just talk on what was some of the reasoning for the delays in the domestic market here and also the Van Hool shipments into Belgium in the first half. I completely understand what transpired in Brazil, but maybe just talk about the orders you had in hand and why the delay there?

[John William Sheridan:]

Well, Jeff, I wish I could give you a better answer, but it was kind of a singular factor. What we're finding in North America, it's principally the delays in getting approvals and then after approvals, the flow-through of the funding from the government authorities to the transit operators to us to move forward with the shipments. So, I'm afraid it's nothing more than that. In terms of the business more broadly, Europe still seems to be strong despite the multitude of ongoing economic crisis and sovereign debt concerns in Europe. There still seems to be good government support, EU support for clean energy, zero-emission public transit. So we're looking forward to finding out details of JTI support, for example, for 2013 for buses. There seems to be good activity there. North America seems to be weaker, which we anticipated. I guess, again, what we didn't anticipate was some of the timing complexities.

[Jeff Osborne:]

Okay, just one last quick one for me, just following up on Europe. I think it was 6 months ago or so, you mentioned a large RFP in Norway. I believe it was similar to the TETRA system that's up in Scandinavia. Is that still in the works?

[John William Sheridan:]

Still in the works. Again, what we seem to be finding in the fuel cell sector, and I guess it's not surprising, to be honest with you, tough, tough economic times. We're trying to build a business, commercializing a new technology. There are timing challenges with it. So the Norway TETRA network, we did identify as a big opportunity. We think we're well positioned because the primary contractor's, Motorola Solutions, we work with them with the TETRA network in Denmark. But rather than that becoming a fourth quarter item this year, it looks like that will become a first, second quarter item to start to roll next year. So we're active. In fact, we have key meetings coming up in 2 weeks on the project. If we are successful with the project, we would expect to get the contract later this year, but shipments would start in '13 and go through '14 and '15.

[Operator:]

The next question is from Mike Cikos of Sidoti & Company.

[Michael Cikos:]

I had a question regarding the buses. In the prepared remarks, did you say how many were actually expected to ship? Was it 4 was going to Van Hool?

[John William Sheridan:]

Yes, I didn't give you a total number for the second half, but I did reference 4 for the U.S. and 4 for Van Hool.

[Michael Cikos:]

Okay. And what cities were they shipping to in the U.S.?

[John William Sheridan:]

Oh, in the U.S., Palm Springs, Chicago and Connecticut.

[Michael Cikos:]

Okay. And the expectation then -- or the shipments for those 8 buses, the 4 to Van Hool, and the 4 to the U.S., is that built into your current sales guidance?

[John William Sheridan:]

Yes.

[Michael Cikos:]

And based on the delays that we've seen in the funding environment, because it seems like that was what you were pointing to for the North American delays, why would we expect that to get any better in this back half of the year with the current North American funding?

[John William Sheridan:]

Okay. I probably wasn't clear there, so a couple different things. So the funding environment has toughened in North America and principally, the U.S. we're talking about. There's delays in it. So delays in the funding, the approval, the administration work, et cetera, have slipped Chicago, Connecticut and SunLine. We had expected those to ship actually in the first quarter and the second quarter. They now -- the funding is not in doubt. It's just the timing of the flow of the funding. So we're pretty firm on that. We don't see a risk there other than the frustration with the timing. In terms of bus, more broadly, we don't see big, big growth in the U.S. in terms of the current environment nor Canada for that matter either. So this isn't timing I'm talking about now, now shifting gears to talk more broadly about business potential in zero-emission buses. But in Europe and in South America, we still see very, very strong interest. So in terms of growth downstream, that's where we see the bulk of it. In terms of the risk in the second half, we don't see any risk with the numbers I talked about.

[Michael Cikos:]

Okay. And with the pickup that you're expecting in the material handling, is that all related to what's going on with Plug right now?

[John William Sheridan:]

Yes -- well, sorry, let me start over and, Tony, you should jump here in a minute. But 2 things with material handling, what I tried to describe is good growth year-over-year, not as strong as we thought when we gave our outlook initially for the year. We see year-over-year now broadly being more in the 40% to 50% growth range. And then I tried to explain, and maybe I didn't do a good job of explaining it, Mike, the volume we had in the first half of around 1,000, we would see replicated in the second half. So in most of our business, we see a good ramp second half to first half. In material handling, we see it roughly the same volume but representing about 40%, 50% growth year-over-year. Tony, what did I miss there?

[Tony Guglielmin:]

Nothing. I think you said it all. You captured it all.

[Michael Cikos:]

Okay. So from material handling, if I'm comparing first half 2012 to second half 2012 volume and revenue is going to stay about flat then?

[John William Sheridan:]

Right. And as you saw on the press release, the shipments were about 1,000 in the first half, which are way up from last year. Last year, we had a very, very irregular cadence in material handling. This year, it's more steady.

[Michael Cikos:]

I see. Other question -- and sorry, I know it's a rookie question, but as far as IdaTech, were you actually selling products to them or was it a partnership?

[John William Sheridan:]

We were supplying them with stacks, principally the 1020 air-cooled stack, and they incorporated that air-cooled stack into their system. So we had a pretty good supplier-customer relationship, but we were just a component supplier. So this is exciting for us now. We've got the end-to-end capability. We've got transparency with end-users. We've got contracts with distributors, so this is a big step for us. And thanks for the question, because the other thing for us, too, the ASPs of the stack versus the system are radically different, probably 6x to 7x.

[Operator:]

The next question comes from Walter Nasdeo of Ardour Capital.

[Walter Nasdeo:]

I wanted to just expand on the IdaTech acquisition. Now that you control kind of start-to-finish on that, is there any opportunity to try to go up and down as far as size goes? Now that you're going back or getting over into direct methanol -- into the methanol products, can you see yourself making smaller products to go right into different markets? Or you just kind of continue with what IdaTech has been developing over the years?

[John William Sheridan:]

It's interesting. The sweet spot we thought was there, with the trend in electronics you'd be familiar with in terms of the wireless networks was moving more towards the low end in terms of 2 kilowatt. So we thought the 2 kilowatt, 5 kilowatt positioned us pretty well. I don't think you're going to see much application for that market below 2, but what I would add is we're getting some input from service providers and infrastructure providers looking for more shared infrastructure situations where they might be looking for 7.5-type kilowatts. So I think it's going to be more likely to go up rather than down.

[Walter Nasdeo:]

Now since you're not just doing the stack on this -- in this product line, will you also be working with methanol cartridges or methanol delivery systems? Or is that kind of going to be outside what your plan is now?

[John William Sheridan:]

It will be primarily work done by our distributors, but we'll be engaged with them. And the fueling here is methanol and water, so it's not cartridge per se. It's pretty easy and pretty efficient delivery of methanol and water.

[Operator:]

[Operator Instructions] There's a follow-up question from Mike Cikos of Sidoti & Company.

[Michael Cikos:]

Just some more interest on IdaTech. From a dollar perspective, can you break out how much you were actually selling to them on a quarterly basis?

[John William Sheridan:]

It was very uneven on a quarterly basis. But I guess, Tony, our plan this year would have been in the neighborhood of a couple million dollars of revenue for the year for the stacks.

[Tony Guglielmin:]

Yes, certainly, I'd call it that, John, $2 million, $3 million in stacks.

[John William Sheridan:]

And Mike, your question's a good one. And again, part of our optimism, we see in the second half of this year, revenue from systems alone, as I said, just the second half approximately $5 million.

[Michael Cikos:]

Okay. And the other question was the backup power. We said was down about 79% and part of that was related to the IdaTech acquisition. Can you explain or can you dig a little deeper into why we saw that decline?

[John William Sheridan:]

Sure. And it's pretty simple in the sense that IdaTech, if you're not familiar with them, Mike, has had one principal shareholder who controlled their equity and also funded them on a debt basis. That shareholder, Investec, a financial institution, decided to exit the sector early in the year. At that point, the focus, as you'd expected, the IdaTech management team was more who they're selling to, what happens in terms of an exit. So it really put almost a stop on orders. It put a stop on our shipments of stacks to them. So with that going on in the first half of the year and the second quarter, in particular, there were no sales to IdaTech at all. Now that flips around to an advantage now. And again, as I said, you'll see press releases in the short term because we do see pent-up demand there from former IdaTech customers, now our customers. So you're going to see some fairly significant activity right out of the gate in the third quarter here.

[Tony Guglielmin:]

Mike, I'll just to add a bit more color to it just in terms of the order of magnitude. IdaTech, as you recall, was our largest customer for fuel cell stacks as well. So the order of magnitude that you see in the decline was really largely or principally related just to the 0 sales to IdaTech. So you can attribute all of that largely to the IdaTech.

[Operator:]

There are no further questions at this time. I'll turn the conference back to John Sheridan.

[John William Sheridan:]

Thanks, operator. And again, thank you all for joining us in the holiday season here. We're very positive on second half opportunities, and we look forward to being back with you in a few months to report on our Q3 progress. Have a good day.

[Operator:]

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