Ballard Power Systems Inc.
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Ballard Power Systems 2014 Second Quarter Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead, Mr. McAree.

[Guy McAree:]

Thanks very much. Good morning, everyone. Today's call is going to be a discussion of Ballard's second quarter 2014 operating results. And with us today, we've got John Sheridan, Ballard's President and CEO; Tony Guglielmin, our Chief Financial Officer; as well as Steve Karaffa, our Chief Commercial Officer. 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 our complete disclaimer and related information. Over to John.

[John William Sheridan:]

Thanks, Guy, and good morning, everyone. As you saw in our press release, Q2 revenue grew significantly over the first quarter. As well, all our Q2 results improved on a year-over-year basis, including 27% revenue growth, 3-point improvement in gross margin, 5% reduction in cash OpEx, and 63% improvement in adjusted EBITDA. Given this trend, and our strengthening sales pipeline, we expect to deliver a strong second half, consistent with our full year guidance. Tony will provide a fulsome report on the Q2 numbers, and then Steve will talk to the sales pipeline. First, though, I'll talk briefly about our progress on IP licensing and our strategy on IP licensing, and I'll also give you a quick update on CEO succession. So IP licensing. As you know, IP licensing is the third leg of our strategy. IP licensing is very impactful financially, since it can produce significant upfront revenue with very high margins, as well as future royalty streams. But more importantly, IP licensing fits strongly and synergistically with the 2 other legs of our strategy

[Anthony Robert Guglielmin:]

Thanks, John, and good morning, everyone. As John noted, top line revenue growth was 27% in Q2, to $18.5 million, establishing a positive trajectory for the year, in line with our plan. In terms of Telecom Backup Power, revenue was down in the quarter by 12% year-over-year to $3.7 million. This was the result of both the timing of our sales pipeline so far this year. And last year, we had an exceptionally high volume of system shipments in Q2, as we fulfilled a $6 million ElectraGen order from NSN Japan. In Material Handling, Q2 results reflected continued momentum that began in late 2013, with revenue up by 209% to $4.6 million, primarily due to the growing fuel cell stack orders from Plug Power as Plug continues to ramp up its order flow. As well, included in the Material Handling in Q2 was $500,000 of revenue from the M-Field Energy licensing transaction that John referred to a few moments ago. In Development Stage markets, Q2 revenue was down 44% to $1.8 million. This reflected lower bus revenue than in Q2 last year between the shipment of just 2 modules this year versus 5 last year, as well as only nominal revenue from distributed generation in Q2 of 2014. On the bus side, the 2 modules shipped in the quarter included an HD6 module to ElDorado National for the U.S. market and a next-generation HD7 prototype to Solaris for the European market. The revenue decline in the quarter was partially offset by $1 million of revenue from the bus assembly licensing contract with Azure Hydrogen in China. And finally, Engineering Services revenue increased 46% in Q2 to $8.4 million, and is up 89% year-to-date to $15.8 million, ahead of plan, providing a positive indicator of the growth potential for our Engineering Services business. The strong revenue growth was generated across the 3 key areas of the Engineering Services line of business. About $5.4 million came from our long-term contract with Volkswagen; $1.5 million came from other automotive contracts; and $1.5 million came from non-automotive contracts, primarily Bus and Backup Power contracts with Azure Hydrogen, as well as a micro-fuel cell contract for a customer in the U.S. And just a brief word on the progress of our work with Volkswagen. In Q2, we achieved an important milestone, delivering an early prototype next-generation fuel cell stack to VW with higher performance and higher power density. The next phase of work will focus on integration of the stack into a complete system and later into vehicles. So that's revenue. And in terms of our other financial results for the quarter, starting with gross margin. Gross margin improved 3 points in the quarter to 25%, and we expect to see a further improvement in the second half of 2014, given the impact that increasing in revenue and product volume will have on manufacturing overhead allocation and a shift in product mix, reflecting a growing proportion of high-margin licensing revenue. In terms of cash operating costs, Q2 improved 5% compared to the same period last year to $6.7 million. This was despite onetime legal and transaction costs associated with the UTC, Azure and M-Field agreements. For the rest of the year, we expect cash operating cost to be in the $5 million to $6 million per quarter range throughout the -- through the balance of the year. Adjusted EBITDA in the quarter improved 63% year-over-year to negative $1.2 million, benefiting from the $1.4 million increase in gross margin and the $400,000 reduction in cash operating cost. And we are pleased to see a further 35% improvement in earnings per share in Q2 to a loss of $0.03 per share from a loss of $0.05 per share in Q2 last year. In terms of cash used by operating activities, we drove an improvement of 37% in Q2 to negative $2.9 million. This reflects a 28% improvement in cash operating loss to negative $2.3 million and a $600,000 increase in working capital, driven by timing of revenue and customer collections. We expect cash used by operating activities to be close to flat in the second half of the year. And we ended Q2 in a strong liquidity position with cash reserves of $36.4 million. So with the continued progress we delivered in Q2, together with our growth outlook through the remainder of 2014, we have confirmed full year guidance. Specifically, revenue growth through the first half of the year was up 21%, with both Material Handling and Engineering Services well ahead of plan, offsetting the sales pipeline delays in sales of Backup Power systems, which Steve will speak to in a moment. Overall, we are on track against plan and continue to expect top line revenue growth of approximately 30% for the full year. And adjusted EBITDA through the first half of the year was negative $3 million. Given anticipated revenue growth in the second half, together with improvements in gross margin and cash operating cost, we expect to be adjusted EBITDA positive in both Q3 and Q4 and continue to expect approximately breakeven adjusted EBITDA for the full year. And with that, let me turn the call over to Steve.

[Steven William Karaffa:]

Thanks, Tony, and good morning, everyone. I'd like to spend a few minutes providing you with some perspective on the sales pipeline in each of our market segments through 2014 and beyond. I'll begin with the Telecom Backup Power market. With changes that we've made to our pipeline process in order to ensure the sharpest possible focus on actively and rigorously managing sales opportunities, we now have a sales forecast dashboard that provides enhanced information to our commercial team. We use this tool to closely manage sales pipeline activity on a weekly basis. I'm sharing this background with you as context for the following points. First, our current Backup Power sales forecast for the second half of the year is underpinned by the most robust pipeline we've had in over the last 12 to 14 months. Second, while our Backup Power business is still dominated by customers from Asia, we are improving regional diversification, making positive strides in the U.S., Europe, South Africa, and the Caribbean. As a result, we have some exciting opportunities we expect will come to fruition in the second half of 2014, driving short-term revenue opportunity and establishing longer-term business foundation. In terms of Q3 shipments, we currently have firm orders and visibility to additional business for a total of more than 100 ElectraGen systems. This number exceeds the total volume of ElectraGen shipments in the last quarter. Additionally, we have a number of opportunities in our pipeline that we are working to sign during the current quarter. The net result of this pipeline activity is that we are expecting to ship a total of approximately 170 ElectraGen systems in Q3, a volume roughly twice the total shipments of last quarter. We also have line of sight to significant volumes of -- for delivery in Q4, giving us confidence in a significant growth ramp through the full year. Now let me give you some detail regarding the anticipated source of Backup Power shipments in the second half. In Japan, Ballard's relationship with our channel partner, NSN, continues to grow. Through NSN, we currently have significant business with SoftBank, a major Japanese carrier. And we are also focusing on 2 additional carriers to expand our business in the second half of the year. In the Philippines, we've completed addition -- the initial installation of 20 systems that have been delayed due to Typhoon Haiyan. And we responded to a request for quote in Q2 from Globe Telecom for a commercial rollout of 154 cell systems. We expect to hear news on this key deployment opportunity in the fourth quarter. In Myanmar, where a large-scale program is underway to update the telecom infrastructure of the country, we are working towards an initial order for a trial system in the second half of the year. We also have a significant order in hand from a customer in China and expect to ship systems in Q3. In India, Ballard is currently in the midst of field trials and pilots with 4 different carriers. And in the U.S., as mentioned in our last call, we see real potential. Progress has been slower than expected, due in large part to the process needed to obtain siting permits. However, progress is being made, and we are now deploying 4 pilot sites for a major carrier in 2 metro centers on both the West and East Coasts. Performance of these systems will be evaluated in Q3. And based on their successful completion, we expect to ship additional systems in late 2014 for broader evaluation. We also expect to ship systems to 2 other carriers in the Southern U.S. We responded to a multiyear RFQ for system deployments with one of these carriers. And the other carrier is looking to undertake system performance evaluations. In Europe, we expect to receive another large stack order from a major long-term customer by late Q3. We also anticipate additional system orders for Vodacom in South Africa. And finally, in the Caribbean, we expect to ship 30 more systems in Q3 to a region that has come to understand the value of ElectraGen systems through difficult experiences, including Hurricane Sandy 2 years ago. This will bring the total system shipments to the Caribbean to almost 200. So as you can see, we've made some solid progress in our commercial efforts. We've increased our confidence in capturing purchase orders through the second half of 2014. And just as important, we are building a solid ramp into 2015. One final point, next year, we're also planning to launch our next-generation cost-reduced fuel cell stack designed for use in the ElectraGen product family. This will be consistent with our strategy to offer higher performance, better value products, and will further enhance our competitive market position. Turning to Material Handling. As we've expected, in alignment with Plug Power's guidance at the beginning of 2014 that shipment activity would be very strong this year, our second half sales pipeline going forward supports strong continued growth. Plug recently announced that they added to their book with an announcement from -- an order from Central Grocers for 182 GenDrive systems; an order from Ace Hardware; and just yesterday, an order from Walmart for 286 GenDrives. Deployments to meet the previous Walmart order for over 1,700 GenDrive systems over the next 2 years are now being scheduled beginning in Q3. As a result, we anticipate additional demand for fuel cell stacks in the second half of the year, driven by fulfillment of the Walmart orders. So all good news on that front. And we're also progressing in discussions with Plug Power on a long-term supply agreement. As stated in the last call, our focus is to continue earning Plug's business through delivery of the highest quality fuel cell stacks at competitive prices, along with first-rate customer support. And we are looking forward to formalizing that commitment in the new supply agreement. In Engineering Services, as Tony referenced, we're exceeding our plan year-to-date. And furthermore, we will be leveraging our IP licensing capability to enable additional Engineering Service contract opportunities as we move forward. We are working to close new contracts in the automotive area and are also pursuing prospects in nonautomotive areas with focus on aerospace work. As an aside, having just touched on the automotive Engineering Services segment, it's interesting to see the recent news out of Japan. The government of Japan is joining forces with the automotive sector, including Toyota and Honda, to speed up introduction of fuel cell vehicles. And Prime Minister Shinzo Abe has announced a $20,000 per vehicle government subsidy. This bodes well for the future of our Engineering Services business. Finally, just a few brief comments on some of our Development Stage markets. In the bus market, module sales have admittedly been slow so far this year. However, we foresee growth opportunities in the medium term being facilitated by several developments. First is progress that we have made in development of our new HD7 module. Next, we are making substantial progress on the channel side, where we are now actively working with 4 leading bus OEMs

[Operator:]

[Operator Instructions] The first question is from Rob Brown of Lake Street Capital Markets.

[Robert D. Brown:]

You gave a nice update on your telecom pipeline, but I wanted to dig in a little bit there. What's sort of the catalyst in getting the U.S. market going? It sounds like there's some trials going on? Is that a 2015 opportunity in terms of opening up bigger or would that be more out-years? What's your sort of sense today?

[Steven William Karaffa:]

The key to the U.S. market is we have several large customers that require extensive engineering requirements and also as we move into these various municipalities, all having their own siting requirements. So it's a pretty laborious project. The trick is once we get in and once we prove the technology works and we've established a process for siting, then we believe that the process will move much faster as we go forward. So as a result, yes, we do believe that 2015 will be a much higher growth opportunity. But at this point, we just want to make sure we get through the current process and make sure that we've checked off all the boxes. But we're optimistic.

[Robert D. Brown:]

Okay. And then, in terms of the Material Handling units in the quarter, did you say how many units you shipped in Q2?

[Steven William Karaffa:]

No, we did not.

[Anthony Robert Guglielmin:]

We can give you that certainly offline, though, Rob.

[Robert D. Brown:]

Okay, sure, and I can estimate it as well. And then, a quick question in -- it sounds like the automotive market in terms of fuel cells has picked up some, could you remind us what you're doing there? I know you can't necessarily name names, but maybe a sense of the programs you have under development and sort of what general areas you're addressing?

[John William Sheridan:]

Yes. So Rob, as you know, when we launched this Engineering Services line of business, our anchor customer, who we're very close to -- it's, of course, Volkswagen. Volkswagen we're into the second year of our 4-year contract and we hope to extend that 2 years. So the work with Volkswagen continues largely around the development of the architecture of their next-generation fuel cell stack. Work's going very, very well. Some key downsourcing activity now in terms of plates and things like that. The project is going very well. We've got about roughly 60 people working very actively, very closely with Volkswagen. Beyond Volkswagen, as we indicated in the press release, we did about $1.5 million of other automotive business, smaller contracts, as you would expect, but contracts with the potential to grow. And at least at this point, those are with customers that don't want to be identified. But as you would expect, they're also major global automotive OEMs. Beyond the automotive, we've been working with aerospace prospects for some time. We think that's a significant potential for us. We think that the fuel cell products will be in the aerospace portfolio over the next 5, 7, 12 years, and the development cycle there is long term as you would expect. So that means we think over the next medium term, there could be very significant program activity for us and we're seeing some early signs of success there. And the other one of interest, just because it's in the press -- or I think Tony mentioned it, rather, the micro-fuel cell opportunity, that's really neat. And again, this is -- I think it illustrates the model we're on and the strength of the model. Rather than Ballard developing on exploratory development exercises with what could be valuable new platforms and applications in markets we don't understand, we're working with players in those markets with the expertise, with the channels, with the knowledge and they're funding us. So on the micro-fuel cell opportunity, that specific application is related to soldier power, military opportunity, could be significant in a number of different markets if that progresses. So to reel it back up

[Anthony Robert Guglielmin:]

Yes. Rob, it's Tony. Just to give you that unit number now. We have it. It's 1,724 Material Handling stacks delivered in the quarter.

[Operator:]

The next question is from Les Sulewski of Sidoti & Company.

[Les Sulewski:]

Just briefly on the R&D expenses, and I understand that there's going to be a shift towards COGS. Perhaps this wasn't experienced in this quarter. What is kind of your run rate that we can assume? Is the shift going to happen in this second half or it's something more towards 2015?

[Anthony Robert Guglielmin:]

Yes, Les. Yes, there's definitely a continuing shift of R&D -- or the people, the folks that are part of the R&D group, if you will, they're reported in that line, research and product development into COGS in the second half of the year. So that will continue. So the R&D expense -- the reported R&D expense in the quarter, both in terms of what's in the statement as well as our cash, what we describe cash OpEx, will continue to come down in the second half of the year. I mentioned the run rate in the $5 million to $6 million a quarter, and a good piece of that will be further deployment of some of our folks into the Engineering Services area.

[Les Sulewski:]

Okay, that's helpful. And then, for M-Field, is there a larger opportunity outside the $1 million? And any other potential customers, let's say, in the near term? What's your visibility there?

[Steven William Karaffa:]

This is Steve Karaffa. We viewed the M-Field deal as a low-risk transactional deal in the EU using acquired technology. And as you're well aware, the EU market, while it has a lot of potential, potentially as large as the U.S. or North America, but the market dynamics are different. And as a result, we have poor traction, thus far. So again, we view this as transactional. We've got some Engineering Services work that we're going to be doing there. But beyond that, we don't expect and we're not forecasting a lot of traction until we understand that market better and the dynamics are better understood.

[Les Sulewski:]

And then, perhaps just a more high-level question. What's your -- how do you think the automotive industry is pushing for the fuel cell cars to be commercialized? Or do you think it's an aggressive move now? Or what's your take on that overall?

[John William Sheridan:]

That's a $64 million question if there ever was one, Les. It's one I've watched with interest for many, many, many years. And at times when people were bullish, I could not understand for the life of me why they were bullish. And at other times, when people are disinterested, it kind of surprises me. So needless to say, it's hard to read. But the comment that Steve made I think is significant that Japan is starting to get more serious, and Japan is starting to pool together the forces of the country. So the government is being significant in terms of plans and subsidization to get more hydrogen fueling stations out in the country. There's only about 19, I think, now, going to 41 by year end and several hundred next year, as I understand it. The government is also now being a champion to be visible and explicit in terms of subsidies. As Steve mentioned, $20,000 roughly per vehicle, partly symbolic but partly a real lever. And then, you look more deeply at what Toyota is saying and what Honda is saying. And we spend time with those companies, as you would expect. And I met with Toyota in Tokyo just a couple of months ago. Toyota wants to be there with cars in the hands of drivers, real drivers, at the end of this year, and Honda is talking next year. The numbers vary, but the numbers in Japan are going to start to get much more significant. So you're soon going to see several hundreds of vehicles on the roads in Japan, increasing in numbers in the hands of real drivers. I think that's going to start to change the dynamic. It wasn't that long ago that people were very skeptical about the future of hybrid cars and all the development money that went into hybrid cars and the very slow commercialization of hybrid cars. And I think the last number I saw, there's now about 7 million hybrid cars in the world. So I make the point, in part, because Japan surprised the global automotive OEM industry with the breakthrough on hybrids, and part of that was broader government national support. So I think this is the time to start to watch the fuel cell car commercialization time line with more interest in a more granular way. And I'd spend a lot of time looking at what develops in Japan. So the long story made short, Les, it's too early for people to jump on the bandwagon, my advice to them. But I think there's a lot more underpinnings now that would say that this commercialization is starting to move.

[Operator:]

The next question is from Dev Bhangui of Jennings Capital.

[Devdatt Bhangui:]

Two, 3 questions, I guess, and then I'll fall back in the line. So in terms of -- the first question would be more on the Material Handling side. So, John, obviously, your relationship with M-Field Energy licensing is going to grow. But also at the same time, I guess, that was a very detailed update that was given in terms of the long-term contract being negotiated right now with Plug Power in terms of supply agreement. And now, they have been talking about the GenDrive, which is your unit. So how does that mix play especially when Plug has bought or had acquired a company called Relyon, and is that going to be like 2 different kind of streams wherein you will continue to be a supplier of choice for Plug?

[John William Sheridan:]

So, Dev, I think there's a couple different themes in your comments and questions there, and let me try to pick them apart. And you steer me if I do so wrongly. As far as our Plug relationship and M-Field, as Steve talked about. M-Field is a very small one-off transactional play and we were open with Plug when we were considering that play because we don't want to do anything that would undermine in any substantive way our close working relationship with Plug. So the Plug relationship is very strategic. The Plug relation for us is intended as a long-term relationship. And Plug is the absolute critically impactful leading player in this market. This market has been in development for years. And what's developed is really the North American market, essentially, through Plug's efforts. Europe is much more speculative. Will it develop? We don't know. If it develops, it's going to take longer and the numbers will be small. But it makes sense for us to have an early positioning play there in the M-Field IP transaction and Engineering Services transaction. Just a neat little transaction that makes us $1 million with about 50% margin. And over the long term, if M-Field has success, that could be a product supply play for us in Europe. Would I bet on it? Well, time will tell. But our real focus is Plug. Back to Plug and your question about Relyon and the Relyon air-cooled stacks, we understand that stack product. I think there's real questions about how robust that stack could perform in the very demanding, mission-critical setting of 724 distribution centers. So as Steve said, we've got a very strong product, and we're committed to work very hard to provide the right support to Plug, service-wise, product-wise, competitive prices. So that's our focus.

[Devdatt Bhangui:]

Okay. That's great, John. And the other question would be in terms of all the excitement which is rightfully generated by Japan Inc. especially moving towards backing up effort by Honda, Toyota, and so on, and Tucson having been debuted in the U.S. just about last month with respect to all kinds of support, in terms of gas being supplied for the next 5 years and so on. I mean, we do get the update that you've given, we have pretty good update in terms of the progress at Volkswagen. But how does, in the overall scheme of things -- I mean, Volkswagen, are they not trying to accelerate it because they seem to be at least a couple of years behind the likes of Toyotas and Hondas, having kind of committed themselves in a large manner to the fuel cell vehicle department and especially when Europe is much more greener than anywhere else in terms of any comparable continent. Doesn't Volkswagen feel like expediting? And what is -- any kind detail in terms of them trying to have their own kind of a proportionate share in the fuel cell vehicle market because Volkswagen is the second-largest in the world right now and they're far behind on the fuel cell deployment.

[John William Sheridan:]

Yes. Again, Dev, some very interesting points intertwined in your comment there. And obviously, you're on top of this. So just a couple of added points. Volkswagen, to be candid, one of the most successful automotive players in the world and huge, as you say, I think to be the largest in the not-too-distant future. They are behind on fuel cell car technology, and they openly admit that. And they're behind on fuel cell car technology -- for a number of years, they didn't believe in the prospects -- that prospects for commercialization were that strong. So when they did the contract with us, it was assigned that they needed to start to get more serious. And I think what we've seen from Volkswagen in the 1.5 years of our close working relationship is progressively they are getting more serious. So working with Ballard and the Ballard IP we've got and the UTC IP we've acquired and the Engineering Services capability we've got, obviously, we can be a significant enabler to Volkswagen. It's interesting then when you contrast that with some of the other automotive OEMs, and this is where the field is going to get very fascinating, we think. So even if you go to the other end of the spectrum, somebody like Toyota, who has been at this in a very disciplined way year after year after year after year after year with major development, where Volkswagen wasn't, Toyota -- in our relationships with Toyota, we still see areas where we can help them. It wouldn't be a broad program. It'd be more specifically targeted technology areas. The other thing we get into, without going too much further here, is a number of the automotive OEMs who may be well advanced are going to have challenges with what's a cluttered IP field. And again, with the acquisition of the UTC portfolio, we think we've got some interesting IP enforcement opportunities downstream which, again, if they play out constructively, could play out in terms of Engineering Services work, sublicensing opportunities. So automotive, I am not trying to oversell it, but it's a huge global market. We're well positioned in it with what we've done with the Volkswagen relationship and the IP portfolio we've got, and our approach is going to be multifaceted here.

[Devdatt Bhangui:]

Okay, that's fantastic. Just to kind of doubt it very quickly, a small side clarification. With respect to the UTC portfolio that you mentioned and the relationship that came with that portfolio, including the kind of continued cooperation between the 2 entities here, between you and UTC, do you see any kind of -- I know that you're already engaged with other auto manufacturers, why are that relationships? But do you see the engagement getting serious in terms of really culminating into near-term revenues coming in?

[John William Sheridan:]

Yes, that's our focus.

[Devdatt Bhangui:]

Okay. And then, very quickly moving on to the financial side. Just one confirmation, I guess, from either from you, John or from Tony would be, there was a comment that said that the operating cash flow would be flat in the sense that there will be no cash consumption for the second half of 2014. Is that correct?

[Anthony Robert Guglielmin:]

Yes. It's Tony here. Yes, in terms of operating cash flow, yes, we're looking at roughly flat so that would be our operating income and working capital. What's not included in that comment would be a very modest amount of money for CapEx and our -- any finance costs like our lease expense. If you're looking at our total cash burn, we might burn a couple of million dollars in that area for the balance of the year. So in terms of what we -- I'd mentioned we were at $36.4 million, Dev, cash balance. We'll still be in the low 30s at the end of the year based on that incremental burning.

[Devdatt Bhangui:]

Okay. No, I was just going to clarify, I guess, Tony, because if you just do the simple arithmetic, 30% CAGR over last year which is [indiscernible] $80 million roundabout for the year in revenues, you already delivered for the first half $32 million. That leaves $48 million in the second half to be delivered. You're talking about higher margins, so let's assume a round number of 30%. 30% of $48 million is $14.4 million in terms of what it leaves to do on OpEx. So right now, you're doing $6.7 million. So would $7 million per quarter be the kind of steady-state plus/minus run rate going forward at least for the next 2 quarters?

[Anthony Robert Guglielmin:]

Sorry. I missed the last part, with $7 million.

[Devdatt Bhangui:]

$7 million would be the OpEx rate in terms of cash, OpEx rate per quarter going forward?

[Anthony Robert Guglielmin:]

Yes. The OpEx rate for cash OpEx going forward -- sorry, if I've got the question right, it would be more in the $5 million to $6 million range for the balance of the year. So you're right. So cash OpEx balance of year is probably going to be in about, call it in the $11 million to $12 million range for the balance of the year, give or take.

[Devdatt Bhangui:]

Okay. So in that case, you can even be positive for the second half in terms of positive cash flow?

[Anthony Robert Guglielmin:]

Yes. Absolutely, we could be. I think the reason I'm being a bit cautious is really got less to do with operating and more to do with just working capital, frankly. We have a very -- you've made the point we're going to be doing 60% of our revenue in the back half of the year. It's really going to be -- a lot of it is going to do with the timing as we get into Q4 in customer collections. So I'm just being a bit conservative more on the working capital than I am on the cash operating. But you're absolutely right. On an operating basis, we should be positive.

[Devdatt Bhangui:]

And one last question to Steve, if I may. Steve, thanks for a very clear update country-by-country, here, with respect to -- especially the Backup Power and that's a high-margin business for Ballard, I know that. In terms of any of those countries that you mentioned and the traction that you mentioned, including the NSN in Japan, which happens to be a lead channel, what are the chances -- what are the probability of whatever percentage of that pipeline that is building out and materializing into backlog at least in the second half of 2014, to be delivered either at the same time, meaning the second half of 2014 or into early 2015?

[Steven William Karaffa:]

So thanks for the compliment. Without getting into specifics, we believe that we will go into 2015 with a backlog. And depending on how some of these projects pan out and to what degree they commit to them, it could be a large backlog. But at this point, we can't specifically define what those units are.

[Devdatt Bhangui:]

Okay. So let me just be one -- a very high-level kind of -- do you expect, Steve, the book-to-bill ratio to be, going forward, greater than 1?

[Steven William Karaffa:]

Yes, I believe so. [indiscernible] wouldn't go any further than that.

[Operator:]

The next question is from James Medvedeff of Cowen and Company.

[James Medvedeff:]

Couple of details on the quarter, if I might. Were there any -- I'm just trying to reconcile the telecom systems revenue number with the 85 systems. Were there third-party stacks also delivered?

[Steven William Karaffa:]

Yes. Yes, there were.

[James Medvedeff:]

Are you able to say how many?

[Steven William Karaffa:]

We don't have those numbers right off the top of our hand -- our head, but we could probably get that to you in a separate call.

[James Medvedeff:]

Okay. The 1,724 stacks that were delivered, you said entirely that, that was all from Material Handling. Is that accurate or was some of that for telecom?

[Anthony Robert Guglielmin:]

No. That was -- it's Tony. That was -- the 1,724 I mentioned was stacks for Material Handling.

[James Medvedeff:]

Okay. So the Walmart order is right around that size, slightly bigger. But do you feel that Plug may be building some inventory? Or if you basically delivered all the stacks that are needed for that order, what drives H2, the second half of the year?

[Steven William Karaffa:]

We're watching that closely. And we don't believe that they're building any inventory. As we look at it, they're shipping out pretty much on par with what we're shipping in. So we believe that, that's not a concern. It's certainly something that we closely monitor.

[John William Sheridan:]

Just to add to that. One of the things that -- if you're trying to check the flow of the numbers, you would also need the data on the Plug recourse because we do have significant shipments that serve as recourse to existing GenSys systems and GenDrive systems in the field. So just to amplify Steve's point, we don't see anything unusual in the inventory situation at all. Plug has a lot going out the door and we've got a lot going into Plug.

[James Medvedeff:]

Great. Then, on Engineering Services, is $5.4 million the run rate on Volkswagen? Or was there some fluctuation quarter-to-quarter that made that different than normal?

[Anthony Robert Guglielmin:]

Yes, Tony here. Yes, it was -- the full year contract is, we've mentioned this before, it's in the $18 million to $20 million for the year. So there is a little bit of variability. So Q2 was perhaps slightly higher than run rate, but not materially so. You can figure $18 million to $20 million for the full year.

[James Medvedeff:]

Right. That's what I was getting at. And then, the other automotive, are those new this quarter? Or did they expand this quarter?

[John William Sheridan:]

One was a new activity this quarter, one carried on.

[James Medvedeff:]

And on the aerospace piece, was that also new this quarter or carryover?

[John William Sheridan:]

Yes, there was a new aerospace engagement this quarter.

[James Medvedeff:]

[indiscernible]

[John William Sheridan:]

The micro fuel cell one is one we've been working on over the past year that's flowed from quarter-to-quarter. And again, sorry, we're not trying to be coy on this, but these are large individual customers we're dealing with that don't want a lot of transparency on their activities.

[James Medvedeff:]

That's fine. I was just going to ask if the aerospace contract is commercial or military.

[John William Sheridan:]

It's commercial.

[James Medvedeff:]

Okay. Then, let's see. A lot of mine have already been answered, but I wanted to ask on gross margin. The $600,000 inventory obsolescence charge, is that, just refresh my memory, is that a normal number for that, or was that abnormally high?

[Anthony Robert Guglielmin:]

Yes, it's Tony. It was -- we do it every quarter, of course, we look at our inventory obsolescence. It was a little higher than normal. Obviously, as we're moving through some of our -- into some of our newer products and some of our newer versions, we do have some -- we did a review on some obsolete inventory so it's as much related to just cleaning out some of our older version product but -- so slightly higher, maybe -- we're usually in the neighborhood of a couple $300,000 a quarter, if you're kind of looking for an average.

[James Medvedeff:]

Okay, that's helpful. And do you have a year-end target as you continue to increase through the year?

[Anthony Robert Guglielmin:]

No, no. We'll certainly review it quarter-to-quarter, James. But we don't have -- we don't see anything significantly -- anything unusual over the balance of the year. This was a cleanup with Q2.

[James Medvedeff:]

Okay. I forgot to ask, on the Engineering Services contracts, those other -- the other automotive and the aerospace contracts. How long do those persist?

[John William Sheridan:]

They vary. The contracts in that mix are anywhere from initial 6 months engagements to 2-year engagements with extensions.

[James Medvedeff:]

Okay. And finally, what -- you have approximately 30% revenue growth estimate which is sort of high 30s or 40% for the second half of the year. What could happen to make that -- to underachieve that estimate or overachieve it? What would be the kind of trigger -- the key factors that are still variable?

[John William Sheridan:]

Well, I guess, without getting too speculative, on the upside, something that would have a dramatic impact, given its nature, would be closing on some of our licensing pipeline initiatives. On the downside, given that Engineering Services has a very steady solid run rate, given that on Material Handling, it's an actually accelerating run rate, on the downside would be if there's any significant further delay out of the Backup Power systems pipeline, but we don't see it. As Steve said, we see 170 systems going out the door this quarter with a backlog to start next quarter. So we feel pretty good, but it's an early-stage market with lots of risks.

[Operator:]

This concludes the time allocated to questions for today's call. I'll turn the conference back over to Mr. Sheridan.

[John William Sheridan:]

Thank you. And thank you, everyone, for calling in. We do appreciate your interest in our company and support of our company. It's a fascinating sector and there's a lot of opportunities, and we're committed to execute strongly on them. We'll be back to you in October with the results of our third quarter. Thanks.

[Operator:]

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