Ballard Power Systems - Earnings Call - Q2 2025

Transcript

Speaker 6

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems second quarter 2025 results 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. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Sumit Kundu. Desk relations, please go ahead.

Speaker 4

Thank you, operator, and good morning. Welcome to Ballard Power Systems' second quarter financial and operating results conference call. Joining me today is Marty Neese, Ballard Power Systems' new President and Chief Executive Officer, and Jay Murray, our Vice President of Finance and Corporate Controller, who is stepping in for Kate Igbalode this quarter. 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 Marty.

Speaker 0

Thanks, Sumit. Good morning, everyone. As this is my first earnings call as CEO of Ballard, I'd like to begin by sharing some of my background and the principles I bring to Ballard. I'll apologize in advance for talking a bit about myself, but I believe context is important, both for understanding the journey that brought me here and the perspective I bring to our path forward. As the saying goes, the sum of your past moments is what led you to today. My journey includes leadership roles in both Fortune 100 companies like Flex and innovation-driven startups like Vertigi. I've led product and service businesses, publicly traded companies, and venture-backed teams. Each experience has reinforced my belief that there are always better ways to do things, and that success lies in execution, innovation, and delivering meaningful value to customers.

I spent the first 15 years of my career in the electronic manufacturing services, or the EMS industry. That experience shaped my understanding of the value of disciplined execution and cost control, delivering products with precision, frugality, and extraordinary service. In EMS, success is earned through reliability, working capital efficiency, and constant operational rigor. The past 18 years of my career have been focused on clean tech, serving as COO at SunPower, a vertically integrated public solar company, and most recently as CEO of a hydrogen electrolyzer startup. These roles were centered on innovation-led value creation, first to reach grid parity in solar and then to unlock possible parity for green hydrogen. The importance of technical excellence, product innovation, urgency, and establishing bankability was constant throughout. In 2015, I joined Ballard's board. Now, as CEO, I'm both grateful and excited to be leading this company.

Ballard has over 45 years of history pioneering and educating the world on the promise of hydrogen fuel cells. In recent years, we've transitioned from being primarily a technology development and solutions company to a product company, with growing commercial traction in bus, rail, marine, stationary power, and material handling. That transition hasn't been easy, and it hasn't been linear. Tailwinds in policy and market enthusiasm have shifted in recent years. As we face new headwinds, uncertainty, changing regulations, tariffs, and delayed adoption in certain sectors, we must evolve again. That change starts with me. We are charting a course toward becoming a sustainable, cash-flow-positive business by the end of 2027. To do that, we are aligning around what I believe are universal truths for any successful business, including Ballard's: the value of execution and cost. Execution is fundamental.

It starts with understanding, simplifying, and reducing our costs across our operations, our products, and our processes, and coupling cost improvements with disciplined capital management. Our recent investments in automated manufacturing of MEAs and bipolar plates give us the cost reduction advantage we intend to fully leverage. The value of service. Commercial success is earned from customer success. Winning on total cost of ownership and delivering real, measurable customer value is how we win. Just as important, our customers need to be willing to understand and pay for this delivered value. That's how we build a self-sustaining business. The value of innovation. Innovation is not just about technology. It's about products, services, business models, and partnerships. From stack improvements to value-added balance of plant, and from product simplification to customer-centric design, we are relentlessly focused on developing better, safer, higher-value solutions.

As the saying goes, a designer knows he has achieved perfection not when there is nothing more to add, but when there is nothing left to take away. That's the mindset we bring to product development. The customer feedback we are receiving is very encouraging and bodes well for the future of our new products in development. We also see innovation opportunities beyond the product, across our business models, supply chain, and go-to-market approach. The value of deep experience and brand. Ballard has delivered over 300 million kilometers of fuel cell-powered transportation, more than any competitor by far. We have the most durable products, the best-delivered TCO, or total cost of ownership, and a globally respected brand. Our reputation and technical depth are tremendous assets that we will continue to build upon. The path forward.

We are taking a hard look at markets that are not moving as fast as expected. For example, we are adjusting our investments in the heavy-duty truck sector. These are hard choices, but they are necessary to maintain focus and discipline. Our recent realignment and headcount reduction efforts structurally lower our cost base and allow us to redirect resources toward near-term opportunities where we see clear product-market fit and margin improvement potential. We are now supplementing our industry-leading innovation culture with a focus on continuous improvement, operational rigor, capital discipline, and customer value delivery. Ballard's foundation is strong. We have no debt, no immediate capital needs, and an unmatched global team. This is why I joined and why I'm optimistic about the future we're building together.

We'll provide more detail on financial implications of our restructuring on the Q3 call, and you can expect near-term updates on key strategic focus areas. We're also planning our next Ballard Capital Markets Day, expected to take place in 2026, where we'll share more about our path forward. Moving to our Q2 performance, we delivered a solid quarter, leading to an increase in revenue of 11% year over year, with growth particularly in the rail vertical. Gross margin improved by 24 points, reflecting cost efficiency driven by our 2024 restructuring activities and a net reduction in owner's contract provisions. Despite soft order intake in Q2 of $8.3 million, we are progressing with key customers across our verticals. Notably, after the quarter, we secured one of the largest marine orders in our history with UTAP and Samskip.

Deliveries in the bus and rail segments remained on pace, and we are seeing renewed interest in material handling opportunities. We are also on schedule and progressing on Project Ford, our high-volume bipolar plate automated manufacturing initiative. This is a foundational element of our product cost reduction strategy. Before I hand the call over to Jay, I'll reiterate this. We believe deeply in the role of hydrogen and fuel cells to decarbonize key sectors of the global economy. While market adoption remains uneven, Ballard is taking steps needed to lead over the long term with discipline, clarity, and resilience. Jay, over to you.

Speaker 4

Thanks, Marty. As Marty mentioned, total revenue for Q2 was $17.8 million, up 11% year over year. The heavy-duty mobility market contributed $16.1 million, driven by bus and rail shipments. Gross margin improved to negative 8%, up 24 points compared to Q2 of last year. This improvement was due primarily to lower manufacturing overhead costs as a result of our September 2024 restructuring and by a net reduction in owner's contract provisions. Total operating expenses were $31.7 million, down 12% year over year. However, excluding initial restructuring and related charges of $5.9 million incurred in Q2 on a recent realignment and headcount reduction efforts, operating expenses decreased by 28% compared to Q2 of 2024. Cash operating costs declined in a similar manner to $22.7 million, a 27% year-over-year reduction.

Adjusted EBITDA was negative $30.6 million, a 13% improvement from negative $35.4 million last year, reflecting improved gross margin performance and lower operating costs, partially offset by an increase in restructuring expenses. Cash used by operating activities was $20.3 million, a 42% improvement versus Q2 of last year, reflecting lower cash operating losses combined with improved working capital. We closed the quarter with $550 million in cash and cash equivalent, no bank debt, and remain confident in our ability to fund operations and strategic initiatives without near-term financing. Finally, we expect full-year capital expenditure and operating expenses, excluding restructuring charges, to come at the low end of our guidance ranges for 2025. Including restructuring charges, operating expenses are now expected to be at the high end of our guidance range.

As we continue with our recently initiated corporate restructuring to further reduce our operating cost structures and capital spend, we will update both our operating expense and capital spend guidances as part of Q3 reporting as appropriate. With that, I'll turn the call over to the operator for questions.

Speaker 6

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We ask callers to kindly limit themselves to one question and one supplemental. The first question comes from Robert Brown with Lake Street Capital Markets. Please go ahead.

Speaker 2

Good morning. Just on the markets that you see that are sort of seeing near-term activity, I think rail and marine in particular you've talked about, but what are the kind of the near-term markets that you see you're pursuing and maybe how do you approach those markets now with sort of a different prospect?

Speaker 0

Yeah, thanks for the question, Rob. In addition to the rail and marine market that you mentioned, we're seeing really good traction and a value proposition of significance in the bus market, both in North America and in Europe. What really is the driver there is the total cost of ownership delivered for the asset owners operating a fleet or a bus, and hydrogen has a very strong role to play there. It's winning specifically when you start seeing larger fleets where, let's say, battery electric buses are limited in their ability to scale up infrastructure, and the cost of the additional infrastructure required for charging and other things in battery electric make those markets a little less attractive and make hydrogen a more favored solution as you go forward. We're seeing that transition playing out in real time.

Speaker 2

Okay, great. Could you color on the marine order that you have after quarter end, sort of what's driven that and some of the outcomes you're looking for there?

Speaker 0

Yeah, that order, to my knowledge, is about a two-year sales cycle to get that order over the goal line. This is not a product life that lends itself to like every three months you do another one of these kinds of shifts, if you will. That was a couple of years in the making, and it's, if I'm not mistaken, 6.3 megawatts in size, which is great. It's using our FC Wave product that was developed considerably a while back, put it that way. That value proposition starts looking like an interesting vertical over the long run because it's got the right kind of range requirement, the right kind of route requirement, the right kind of fueling infrastructure, ability to adapt to that kind of fueling infrastructure.

It'll be interesting to see how that market evolves as more and more people get familiar with how to do that kind of transition of a marine vehicle or vessel, if you will, and what that might mean to route optimization going forward with hydrogen infrastructure growing in the key ports around the geography in question.

Speaker 2

Okay, thank you. I'll turn it over.

Speaker 6

Once again, if you have a question, please press star, then one. The next question comes from Jeffrey Osborne with TD Cowen. Please go ahead.

Speaker 7

Thank you. Good morning. Just a couple of questions on my side. I was curious if we could just run through the OpEx savings that you had in Q2, and it sounds like there'll be more detail on Q3. I'm just trying to figure out what the new run rate will be. Is it similar to Q2, or any details you could help articulate that? Any restructuring charges that would flow through in Q3 that we could be modeling, or was all of that incurred in Q2?

Speaker 0

Yeah, it was not all incurred in Q2. Jay, you want to provide a little bit more color from there?

Speaker 7

Yeah, we did recently announce July restructuring. Most of the charges related to that will be incurred in Q2. We're not disclosing any amount now as we continue to work through the details of that. There was a CEO transition in there, and part of those costs are reflected in the Q2 restructuring numbers. I would say this recent restructuring in July is expected to reduce goal-forward operating costs by another 30%, with most of those realized in 2026. We'll see some benefit in the last half of the year, but not the full benefit. Got it. If I heard you right, you talked about realignment of business to be capital positive exiting 2027, or it was unclear if it was exiting or for the full year of 2027, but do you have like a framework on what you're aiming to achieve to get there?

Is it sort of 15 to 20% gross margins and then the OpEx cuts that you're announcing now are aligned to match that and get you to sort of EBITDA cash flow neutral, or does that, how do we think about like what the financial parameters are to make that statement?

Speaker 0

Yeah, it is exiting 2027. It's not for the full year of 2027. Yes, we have essentially a 10-quarter waterfall of how we'll get the gross margins expanded to the appropriate level and the cost reduced to the appropriate level. We're refining it and refining that model as we progress through Q3. Just to go back a second, just a quick annotation. Jay mentioned the restructuring charges were in Q2. He meant some of the restructuring charges were in Q2. The bulk of the restructuring charges will be in Q3. Just making that quick edit on the fly.

Speaker 7

The size and change in Q2, it'll be something meaningfully higher than that in Q3, but you're not quantifying that. Is that a fair way to think about it?

Speaker 0

That's correct.

Speaker 7

Got it. I think that's all I had. As it relates to the pipeline of orders that you're chasing for the second half of the year, you alluded to strength and following up on Rob Brown's question, rail and bus, et cetera. I think you mentioned marine material handling. What are you seeing in that market?

Speaker 0

Yeah, we're seeing some green shoots in stack replacements. We're not actively doing battery box replacements or anything like that. That's not our core. However, we are seeing various integrators and OEMs talking to us about stack replacement as they start seeing the need for higher performing stacks with greater durability, and they're looking for ways to lower their total service costs of addressing that space. We play extraordinarily well in that domain with the stack lifetimes that we've been able to achieve. They're quite interested.

Speaker 7

Perfect. That's all I had. Thank you.

Speaker 6

The next question comes from MacMurray Whale with Cormark Securities. Please go ahead.

Speaker 5

Hi. I just had a question on whether there are concerns you may have that if you focus on the markets that are ready now, like you noticed the bus TCO looking attractive, will the decline in your technology development necessarily allow you to be ready for when the other markets like trucks start to see an improvement? That technology, I think, does need a deeper cost decline and is probably a better performance increase. Can you speak to how you're sort of future-proofing yourself on that front?

Speaker 0

I would say that a couple of things. One is the core technology that continues to evolve and improve is the stack. When you think about the fundability of a stack across all the different applications, making meaningful progress on durability and lifetime and efficiency and all the key customer metrics, that translates across all the verticals. That march is going on now. Additionally, we're seeing markets like trucks being more like 2030 and beyond, and we've got plenty of time as you start thinking about market signals. If we were needing to adapt further, we could adapt from there. Lastly, I'd say that all of the markets are, let's say, commercially sensitive, and understanding the total cost of ownership explicitly end to end is the work product that we've got going on now that will serve us no matter what market we're entering now or in the future.

Really, that's about getting the delivered value explicitly characterized so that we know exactly what the CapEx is, what the OpEx is, and the lifetime of the asset we're trying to serve, and making sure that we're developing a product and a service portfolio that addresses it appropriately.

Speaker 5

Okay, it would be helpful next year. Looking forward to that capital markets day to dig into a lot of these issues.

Speaker 0

Absolutely. Yeah.

Speaker 5

Great. Thanks.

Speaker 6

The next question comes from Craig Irwin with ROTH Capital Partners. Please go ahead.

Speaker 1

Hey, good morning. I feel like a quarter ago, there was a $2 million batch log addressed in full value. Could we see more pieces of the business being exited? What are some of the margin profile of the batch logs? Are there pieces of the business that you may view as suboptimal or unacross?

Speaker 0

In the case of that particular reversal, Jay, do you have the particulars on that particular platform?

Speaker 1

Not right now.

Speaker 0

Okay. Sorry, I thought I might not be able to get to the exact name of that particular reversal or what that market was. It's just too new for me at the moment. That said, we are establishing and improving our pricing disciplines and what opportunities meet a threshold and a hurdle rate and what opportunities do not. When an opportunity does not meet a hurdle rate, that doesn't mean that we suspend work in that particular vertical or that customer account. It means we have to be more creative on the balance between a CapEx and an OpEx model and understanding what the customer is solving for. Are they solving for upfront costs or are they solving for lifetime costs? Do we know the difference in how to price it accordingly?

I would just say that we've got more maturation to do in value pricing and making sure that the markets we're serving and the product we're delivering to those markets have a fit and they have a value proposition that wins and the customer recognizes that value and is willing to pay for it, whether it's upfront in the CapEx or whether it's ongoing in the services.

Speaker 1

Okay. Seeing that in the MJNA, there's still mention of the Rockwall, Texas facility, I think pushed out to be reviewed in 2026. I just wanted to know internally, what are you looking at specifically to give you the confidence if the facility of work you get as go ahead, what sort of metrics are you looking at internally to sort of think about that?

Speaker 0

Yeah. This is part of my kind of operational heritage, if you will. The first order effect for me as a former ops person is you always strive for more out of your installed capacity. As we look for ways to be more process efficient and to see the benefits of our automation coming in, we'll keep looking at our overall capacity and understanding how much available capacity we have to address the markets that we're targeting and then what the role of a Texas facility would or would not do to help us on the capacity front. As we sit today, we're still on pause in Texas without a need for that additional capacity on the horizon. We'll revisit that statement as we see the market evolve over the next couple of quarters. As we head into 2026, we should be able to get to a more certain outcome.

Speaker 1

Okay, thanks.

Speaker 6

The next question comes from Craig Irwin with ROTH Capital Partners. Please go ahead.

Speaker 1

Good morning, and thanks for taking my question. Marty, I definitely appreciate the fresh look at the business model over at Ballard. As the cash flow is by the end of 2027, you know, not so many fuel cell companies have had positive cash flows even for very brief periods. A much more important milestone, I think, for investors is positive gross margins and maybe margins above a certain threshold of maybe 15% or 20%. Can you maybe talk about what might have you pause as far as putting out the margin target for investors? Do we need to get past commitments and backlog where pricing might not abuse the same discipline that you're going to bring over the next couple of years? Are there other structural items that we might need to consider as we work towards this impressive goal of positive cash flows?

Speaker 0

Yeah, I would say it this way. I think there's an opportunity for us to do a few things at the same time. While we have a backlog of orders that were derived in prior to me times, let's say, that doesn't mean that we don't have active engagements with those strategic customers, and we're not actively looking at ways to deliver lower product costs for them while at the same time improving our own margins simultaneously. We share the benefit of a posture of that. At the same time, that helps them, that helps us. I would say that when you think about the backlog, you think about how would we improve that order book and how would we exchange value with those customers. When I say that, that includes at the CapEx level and on the overall servicing of the account level.

Think of it as total delivered value from the customer service standpoint, with upfront and follow-on cost reductions and service improvements.

Speaker 1

Understood. That makes sense. Because then one of the pieces of the equation that was kind of missing with Ballard Power Systems in the past, that you know, or at least from my opinion, right, and many investors, was a fuel strategy, right? A lot of what Ballard Power Systems was doing is just saying, "Oh, customers will figure it out," rather than taking a more active and strategic approach. Can you talk about whether or not considerations around fuel strategy are a part of what you're looking at these days? How do you feel the team tracked on their support for customers with fuels over the last several years as people are looking at different ways of buying hydrogen? Is this something that is worth a close look as you focus on these positive cash flows in the future?

Speaker 0

I will give you a quick response, which is I just spent four years trying to develop partnerships on the other side of the table as a molecule producer. The partnerships required to deliver the total cost of ownership end to end for any one of our verticals require thoughtful partnerships on fuels. To the extent that we can be more of a value add in that discussion with the right kind of strategic partners and bring the right type of imputed mileage, if you will, to bear on their offtake requirements, I think those are exchanges that would be welcome from molecule producers. Put it this way, if I had an opportunity to have partnered with Ballard at my last company, I would have loved to have done so.

Speaker 1

Fantastic. I knew you'd bring some new perspectives. Thanks for taking my questions.

Speaker 6

The next question comes from Jill Kanig, private investor. Please go ahead.

Speaker 3

Can you hear me?

Speaker 0

Absolutely.

Speaker 3

Yes. Welcome aboard, Marty. My question had to do with China. Can you sum up our activities, our present activities in China and the outlook there? Thank you.

Speaker 0

Thanks for the question, Joe. We are on materially a pause on China. We have not invested in any way, shape, or form over the last quarter. As we look forward, we're looking to make clear where or where it does not fit in our portfolio. We are continuing to buy components from China. It's become a critical supply chain node for us. It's less clear of the demand environment of how the China market is available for us to address. We have just stopped approaching the demand side of the China market and instead have been using the supply side on the supply chain to help us lower costs for customers.

Speaker 3

Thank you.

Speaker 6

This concludes the question and answer session. I would like to turn the conference back over to Marty Neese for any closing remarks. Please go ahead.

Speaker 0

Thank you for joining us today. As I mentioned, Ballard is focused, aligned, and operating with urgency. We will continue to take decisive actions to build a more capital-efficient, disciplined, and commercially focused company. We look forward to updating you on our progress next quarter. Thank you very much.

Speaker 6

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