Earnings Call Transcript - BLDP Q2 2021

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems' Second Quarter 2021 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Kate Charlton, Vice President, Investor Relations. Please go ahead.

Kate Charlton, Vice President, Investor Relations

Good morning. Welcome to Ballard's second quarter 2021 financial and operating results conference call. My name is Kate Charlton, and I'm delighted to have recently joined the Ballard Power team as the Vice President of Investor Relations. I look forward to speaking with many of you joining the call today and over the coming weeks and months. With us on today's call are Randy MacEwen, Ballard's President and CEO; and Paul Dobson, Chief Financial Officer. 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 a complete disclaimer and related information. I'll now turn the call over to Randy.

Randall MacEwen, President and CEO

Thanks Kate, and welcome to the Ballard team. I'd like to thank Guy McAree for his many years of valued service and wish him the very best in his planned retirement. I'd also like to offer a warm welcome to additional new members of our leadership team, including Linda Downs, Chief People Officer, and Mike Kubik, Vice President, Strategy and Corporate Development. As announced yesterday, I'm also pleased to welcome a new member to our Board of Directors, Hubertus Muehlhaeuser. Hubertus brings a strong background in industrial manufacturing, including commercial vehicles, construction machinery, agricultural machinery, and power training technologies. I look forward to his insight and counsel to support Ballard's strategic objectives and drive long-term shareholder value. Now welcome everyone to today's conference call. In Q2, Ballard revenue was $25 million, a more than 40% increase from Q1 and flat compared to the second quarter last year. Gross margin was 15%, adjusted EBITDA was negative $19.7 million, and cash reserves at the end of the quarter stood at $1.24 billion. We received $26 million in new orders in the quarter, up over 100% from Q1. Looking at the first half of the year, orders were also up over 40% from H1 last year. Our net order backlog of approximately $113 million shows modest quarter-over-quarter growth. The second quarter and first half of this year have highlighted our ability to navigate a challenging environment amidst widespread disruption in global supply chains. Early in the pandemic, we worked with key suppliers to ensure long-term agreements and extend purchase order coverage, allowing our suppliers to secure raw materials early before many of the 2021 shortages began to impact supplies. Maintaining dual-sourcing in different continents and increasing safety stocks on critical and long lead materials has allowed us to navigate short-term disruptions over the last 18 months. Close relationships with our suppliers continue to enable us to be nimble throughout the pandemic, limiting disruption to our customers. Throughout 2020 and into 2021, we've continued to invest in people and technology to increase our research, product development, commercialization activities, and customer experience. Cash operating costs for the second quarter were $20.1 million, reflecting our increased investment, including our investments in fuel cell technologies, systems engineering, product development and design for MEAs, plates, stacks, and modules for bus, truck, rail, and marine. These investments enable us to maintain technological leadership while reducing product costs as global momentum in the hydrogen markets begins to take hold. This is exemplified by the recent substantial completion of our MEA production capacity expansion in Burnaby, which positions us to support the growth of customer deployments and cost reduction. We remain ahead of schedule in realizing our 3x3 stack cost reduction targets for 2021. We expect to provide a more fulsome update on the progress of our cost reduction program at the end of the year. Now in the fuel cell electric bus market, momentum continues. Notable new orders include an exciting order from Tata Motors, the largest bus company in India, for 15 of our 8th generation fuel cell modules to power 15 buses in Delhi. We also received follow-on purchase orders from Solaris to power 13 buses in Frankfurt, Germany, and from New Flyer for modules to power 20 buses at AC Transit in Oakland, California. These orders show further expansion in this key market segment and further validate our technology leadership. Our fuel cell products are proven, durable, reliable, and increasingly cost competitive. In the truck market, our joint development program with MAHLE is progressing well. We've now completed the first build for the 240 kilowatt engine. This new engine is being developed for the European heavy-duty truck market, and we're on track to ship this engine and have it ready for additional testing by the end of the year. While the policy update from China is still to come, we continue to achieve important technical milestones in stack and module developments at our Weichai-Ballard joint venture. As of the end of June, there are over 3,300 fuel cell electric vehicles deployed in China powered by Ballard technology, nearing 80 million kilometers of travel distance. On our Q4 and Q1 conference calls, I discussed the increased momentum in the rail market, including our project for freight locomotives with CP in North America and our ongoing work with Siemens in Europe. As a reminder, part of our Technology Solutions business model is to work with customers during early adoption and transitioning these customers into power product customers over time. Our recent order from Siemens is a great example of this. We're now seeing the progress made through our Technology Solutions engagement translating to purchase orders for the next phase of commercialization. Our 200 kilowatt rail module development program for the Siemens Mireo Plus H train has been underway for three years, and we'll be starting deployment in the upcoming operational trial in Bavaria, Germany. The Siemens Mireo Plus H platform is a modular commuter train designed to operate on non-electrified rail lines at speeds up to 160 kilometers per hour, over a range of up to 800 kilometers. We've designed our fuel cell modules for this platform to meet the onerous rail coercion standards, and these modules are mounted on the roof of the train. We believe our collaboration with Siemens and others in Europe has us well-positioned for expected growth in the zero-emission rail market, as highlighted in the recent Fit for 55 program announced by the EU. Now in the marine market, we continue to see strong interest in our FCwave product. This is a market we're very excited about and see lots of opportunity. We're making initial deliveries in 2021 to early customers in various marine market segments. The backup and stationary power opportunities are also gaining traction, as exemplified by our recent announcement with Fusion-Fuel on their H2Evora project in Portugal. This project will utilize our 200 kilowatt FCwave system in conjunction with concentrated PV solar to generate clean hydrogen and zero-emission power. The FCwave was originally designed for marine applications, but the maritime power profile is similar to that of many stationary power generation applications. As a result, the FCwave is an ideal candidate for stationary power applications due to its large output capabilities, leading safety standards, and zero-emission profile. While backup power and stationary power remain a modest portion of our overall revenue, we're seeing significant year-over-year growth. Backup power revenues were up 125% over last year, predominantly in the European markets. We anticipate seeing future growth in large stationary power market segments across certain target geographic markets. In our mining applications, Anglo American, the world's largest platinum miner and a strategic investor in Ballard, recently provided an update on their ongoing fuel cell mining haul truck project. Anglo has been performing bench testing on 8, 100 kilowatt fuel cell modules since early last year and now plans to begin on-site testing in Q4 on Komatsu trucks at a South African mine. A rollout of 40 trucks is targeted to start in 2024. An additional 470 kilowatt modules are on order for further bench testing on next-generation trucks. Such projects illustrate our ability to leverage our core competencies and leading fuel cell technologies across an increasing variety of verticals. While the balance of plant varies based on application, we're building the revenue scaffolding to sell into multiple markets with our technological capabilities, including MEAs, plates, stacks, and module design as the foundation. Our leading technology, coupled with our ability to increase volume and drive down costs results in resiliency and diversification across geographies, market segments, and customers. This is increasingly important as global demand and outlook for hydrogen applications rapidly grows. As recently disclosed by the Hydrogen Council in the July update, since February, there's been a 60% increase in the announcements of large-scale hydrogen projects, bringing the global total to 359. The total investment into these projects and along the value chain is approximately $500 billion through 2030, of which roughly a third of these investments are considered mature. The Hydrogen Council reported that estimated investment in hydrogen projects is increasing by $1 billion every week. The momentum of decarbonization is clearly accelerating globally, including in the key markets of Europe, the U.S., and China. As reflected in our H1 revenue mix and our Q2 order inflow, Europe is coming on very strong. This is a market we're excited about and investing in. Europe remains a leader in the adoption of hydrogen decarbonized energy, mobility, and industry, accounting for more than 50% of announced projects and estimated investment. Last month, the European Commission announced the Fit for 55 package, proposing measures to reduce greenhouse gas emissions by 55% by 2030 from 1990 levels, as well as outlining a framework for a carbon-neutral Europe by 2050. This package offers a significant boost to the European hydrogen industry through a 50% target on the share of renewable hydrogen consumption, concrete and ambitious targets for maritime hydrogen use, and expansion of hydrogen refueling stations along core networks. In particular, the transport sector legislation will push for faster decarbonization, supporting even more opportunity for Ballard. Ballard already maintains over 80% market share in hydrogen fuel cell buses in the European market. These programs further accelerate hydrogen development across our verticals of bus, truck, rail, and marine. In the U.K., a strong market for Ballard, the British government has expanded upon their existing plan to stop the sale of internal combustion engine passenger vehicles by 2030 to now stop the sale of all internal combustion engine vehicles, including commercial transport by 2040. This updated decarbonization plan also includes targets for other modes of transportation, including net-zero rail transport by 2050. In the United States, there have been two significant federal announcements affecting the clean energy landscape in the past month. The first is a proposed $550 billion bipartisan infrastructure bill, which specifically calls out $9 billion for clean hydrogen and electrolyzer development and $39 billion to modernize public transit. This transit funding would include replacing thousands of vehicles with zero-emission models and invest an additional $66 billion in passenger and freight rail. If passed, this would be the largest federal investment in public transit in history and the largest in passenger rail since the creation of Amtrak 50 years ago. Numerous grant-funded opportunities in zero-emission trucking, maritime, rail, and power generation sectors are all expected over the coming year. The cost trajectory for hydrogen as a transportation fuel looks particularly encouraging as the U.S. Department of Energy has kicked off its Hydrogen Earthshot Initiative, aiming to lower the cost of renewable hydrogen production by 80% to $1 per kilogram by 2030. The second announcement came yesterday, when President Biden signed an executive order with a goal to make 50% of new vehicles sold by 2030 zero-emission and to raise fuel economy standards over the next 5 years. This announcement, together with support from Detroit automakers and on the back of the infrastructure bill, illustrates the direction and speed in which the U.S. market is moving toward a zero-emission economy. Further, in California, where Ballard maintains leading market share in fuel cell electric buses, the state announced a $2 billion incentive in its 2021-2022 budget for zero-emission vehicles and infrastructure. This is the largest single annual appropriation for clean transportation incentives in California's history. Moving next to China. I recently had an opportunity to visit China, meeting with Weichai, key stakeholders, supply chain partners, and policymakers. I also attended the 6th International Hydrogen Fuel Cell Vehicle Congress held in Shanghai, one of the largest hydrogen fuel cell conferences held annually. I observed a rapidly developing fuel cell supply chain in China. While the continued policy delays have been disappointing, the long-term vision is clear. China plans to be a hydrogen leader with a stated goal of 1 million fuel cell electric vehicles and 2,000 hydrogen refueling stations by 2030. Hydrogen is expected to comprise 10% of the energy share by 2050 to support China's climate targets of peak carbon by 2030 and net zero by 2060. Interestingly, Sinopec, the state-owned energy giant, has also announced 1,000 hydrogen refueling stations by 2025, showing great promise and support for hydrogen mobility deployment. On the corporate development front, we're being thoughtful and disciplined in our approach to capital deployment and have identified several opportunities with the potential to accelerate hydrogen fuel cell adoption, expand our capabilities, reduce customer friction points, and improve customer experience. We're in active discussions with a number of these opportunities, and we'll share more details if and when we conclude definitive agreements. The policy momentum and cross-sector investment are creating an attractive environment with compelling long-term opportunities for Ballard. For the second half of the year, there are a number of potential catalysts for Ballard, including additional supportive policy announcements, continued progress on technology and products, including cost reduction, new and follow-on orders from customers and continued expansion and diversification across our target market segments and geographies. We're well-positioned as companies, states, and nations work to decarbonize and realize a clean hydrogen future. With that, I'll turn the call back over to the operator for questions.

Operator, Operator

The first question comes from Aaron MacNeil with TD Securities.

Aaron MacNeil, Analyst

Randy, you touched on it in your prepared remarks, but can you give us a sense of how competitive a typical new order is? Particularly for one like Tata, which is a new customer. The types of questions I'm looking for answers on are how many competitors are bidding? Are your modules priced competitively? Are less proven competitors offering discounts to build references? Are you charging a premium and relying on your reputation? I know you can't get into specifics, but the pricing dynamic for us is sort of a black box. And I'd just be curious to get any thoughts that you could share.

Randall MacEwen, President and CEO

Thank you, Aaron, for your question. Many of your comments are relevant. We’ve observed a shift in the competitive landscape over the past few years. Five years ago, only a handful of companies, like Tata, were competing for these opportunities. However, now we see much larger companies entering the medium and heavy-duty markets for buses, trucks, rail, and marine, where fuel cells provide the greatest value. While the competition has intensified, it’s essential to note that companies such as Tata, Solaris, Van Hool, Wrightbus, and New Flyer prioritize safety, reliability, and durability, and their names are on their buses. We are nearing 100 million kilometers in revenue service, which sets Ballard apart from other fuel cell companies in these heavy-duty markets. A crucial aspect of our approach, reflected in our tagline "Here for life," is our focus on the lifecycle for our customers, emphasizing long-term durability and costs beyond just the upfront capital requirement. Winning a customer like Tata involves multiple factors, including technology, product compatibility in terms of power output, temperature, ease of integration, and more. However, reliability and proven technology are significant strengths for Ballard, and we utilize these advantages effectively. Your mention of pricing is valid as well; we see other companies that entered earlier, who are not as advanced, attempting to secure early deployment opportunities with aggressive pricing. This is something we must consider, which is why we have our 3x3 program aimed at reducing the cost of Ballard stacks and modules by 70% over three years. We don’t solely rely on our technological advantages; we are also focused on cost reduction as a competitive edge. Additionally, our business model, selling into multiple end markets, is quite appealing. It allows us to leverage the same core competencies, technologies, and much of the same materials across buses, trucks, rail, marine, and increasingly in off-road and stationary power applications. This diversification not only enhances our technological advantages but is expected to translate into volume and cost benefits.

Aaron MacNeil, Analyst

Got it. That's helpful. I'm hoping you can also give us a bit more details on the updated timeline for the subsidies in China. Obviously, like, let's not get into picking a date or anything like that. But I guess what might be more interesting is if you can give us a sense of the mechanics of what might occur when that announcement is made, both at the JV level and then at the Ballard level. For instance, does the JV have orders in hand contingent on the finalization of the subsidies, or will it start to build inventories? What's the utilization at the JV level today versus what you think it might look like subsequently? Any sort of goalposts would be interesting.

Randall MacEwen, President and CEO

Yes. Some context on the JV, of course, is that we've done a lot of work optimizing our production processes. We've learned a lot over the last year, particularly on the plate production side. We've seen a lot of efficiency and yield improvements that are very compelling. On the production side, production utilization is very low right now, as you'd expect. Of course, this facility, I believe, is the largest facility to produce fuel cell stacks and modules in the world for these heavy-duty motive applications. Over 2 gigawatts of production capacity, about 20,000 vehicles annually that this facility can support. It's quite an impressive facility, operating at very low utilization currently. When you look at additional activities, as the entire China market has been waiting for policy clarity, we've done a lot of work at the joint venture on next-generation module design and increasing the breadth of the portfolio, so different power outputs. Weichai has contributed significantly in understanding the market requirements. They are experts at diesel engine design. Together, it's a very powerful combination with Ballard's fuel cell capabilities and Weichai's engine design and supply chain muscle. There's been a lot of work done on cost reduction for balance of plant components over the last year and a half. That's very compelling. On the customer side, a number of customers continue to log kilometers as they validate the reliability and durability of our products in their applications. We're talking about some of the largest bus OEMs in China and some of the largest truck OEMs in China that now have new platforms with the latest generation of Weichai-Ballard stacks and modules on test in the field. So that's important development there. To answer your question directly, we don't have a contingent order book at the JV. I think customers want to understand how the point systems in various demonstration regions will get finalized and what that means. We are encouraged beyond the national policy appointing demonstration regions, particularly by the recent announcement in Shandong province for the Hydrogen Society program. This program focuses on the deployment of fuel cell trucks and buses and hydrogen refueling station infrastructure in Shandong province, which is where the Weichai-Ballard joint venture is located. We believe that we have a very strong position as that project starts to scale up, and we're already seeing activity from the JV with customers for that program.

Operator, Operator

The next question comes from Mac Whale with Cormark Securities.

MacMurray Whale, Analyst

I thought, Randy, I would switch gears to the Gore agreement. Can you speak a little bit about the trend behind this? Or what the interest is from Gore? Because Gore supplies you with membrane, but it hasn't MEA program. Can you speak to whether we should view this as a sign of your leadership in that MEA area? Or could you talk about the nature of that collaboration?

Randall MacEwen, President and CEO

We've been working with Gore materials for a long time. Gore is obviously a leader for membranes, and they have evolved their recipe, processing, and capacity over the last number of years. I believe they'll continue to be a leader at the membrane level for a very long time. We're very pleased with the deepening collaboration we have with Gore. There's a lot of work underway as we look at collaboration that will continue to improve the performance of membranes, thinner membranes, higher performance, lower cost, better utilization, etc. We're very excited about the activity we have underway with Gore, not just as a supplier but really as a partner looking at the long-term landscape for membranes in fuel cell applications, particularly for heavy-duty mobility where membrane durability is critically important. I also want to highlight that there are other membrane suppliers that we have collaborations and partnerships with, including domestic suppliers in China that have emerged over the last number of years. We've worked over about a four-year period with one company in particular, and we have helped them validate their material through a number of iterations during that time, aligning their specifications so that there's another domestic option for the China market. We're seeing very strong technical results and cost opportunities for that membrane as well. I won't comment on Gore's positioning in the MEA. I will say Ballard is very strongly positioned at the MEA, and we appreciate the relationship we have with Gore as a key supplier for membrane.

MacMurray Whale, Analyst

Okay. Switching then to the Linamar Initiative, it's at a pretty early stage right now. You're working on a powertrain sort of prototype by the end of the year. What is the timing on the testing of that? Any decision on a JV? Is that like a 2022 decision point? Or would it be earlier or later than that?

Randall MacEwen, President and CEO

Yes Mac, great question. There are a number of work streams going on in parallel with Linamar. One relates to the commercialization discussions, including business model, business plan, and JV. The second relates to collaboration on product architecture, including the integration of our modules and stacks into balance of plant components, module design, and powertrain integration, including storage. Linamar has significant capabilities here and has made several investments over the last years; they are well-positioned, particularly for utility vehicles and certain vehicles in the light-duty car and van sector where we see high utilization rates. Our high-power density stack is well positioned for that market after a long investment cycle with Audi there. The third work stream focuses on customer adoption and penetration. Those are the three work streams going on in parallel. I want to emphasize that Linamar is a great international player, a Tier 1 supplier in all automotive sectors, and is well-positioned in these light-duty car markets where we see vans and utility vehicles accepting fuel cell vehicles, and their conviction level and positioning on this is very solid.

MacMurray Whale, Analyst

Okay. Just one last question, if I could just throw one more in there. On the Tata order, 15 units is a great start on that. When you look at their plan, is that more like a Van Hool kind of program where you see around $1.5 million every couple of quarters? Or is it more like Wrightbus where there's more like $2 million a quarter? Just trying to get an idea of how to model that over the next 6 months to 12 months?

Randall MacEwen, President and CEO

Yes. Over the next 6 to 12 months, I wouldn't assume additional orders from Tata. We’re looking at those 15 buses going into deployment in a pilot program in the Greater New Delhi region area. This will take some time to validate those new modules. They're taking our latest generation modules. We had prior experience with Tata on previous generation product, and we’re now moving to the latest generation product in a much larger pilot program. You can compare it with some of the European bus OEMs, but I would actually compare it more strongly with the Chinese bus OEMs because the size of the Indian market is substantial compared to North America and Europe. We see a very large Indian market that's now serious about the hydrogen opportunity in a big way. We believe India will be a very large market long-term for hydrogen, particularly for mobility, where local air emissions, along with climate change, are big drivers in India.

Operator, Operator

The next question comes from Michael Glen with Raymond James.

Michael Glen, Analyst

Randy, you talked about some capital deployment. You made some pretty broad statements there about having identified several opportunities, and you're in active discussions with a number of parties. I'm just curious if you can dig into that a little bit more. Is this M&A? Is it memorandums of understanding? Is it partnerships? Just trying to assess in more detail what we might be thinking about here.

Paul Dobson, CFO

Yeah, hi Michael. It's Paul Dobson here. On the capital deployment front, we are very active both on the M&A front and in commercial discussions with several large players. On the M&A front, as we talked about before, really our strategy is aimed at accelerating deployment of customer adoption and expanding our capabilities, particularly in key markets. Europe is a big growing market, with lots of support in Europe. We’re looking to see how we can expand our capability there. Additionally, in China, we're looking to expand our manufacturing capability to supply the JV and the Chinese market. Those are some of the things we’re looking at. On the partnership side, we’re also looking at key geographies. As Randy mentioned, India with Tata is a massive market; when I first joined a few months ago, it was more on the periphery, but now it’s squarely in our sights. There are also interesting discussions happening with other players in Europe as well. There's a lot going on in that space, and we're quite active. We hope to make some announcements this year, but can't promise that, obviously. However, we are in advanced discussions with some pretty interesting opportunities.

Michael Glen, Analyst

Okay. That's great insight. Just circling back to the customer or the competition question from earlier. When you're involved in a customer engagement, I suspect many of these customers are also looking at battery electric solutions for their fleets. I'm trying to assess how much of that competitive angle or dynamic is emerging regarding hydrogen versus battery electric when customers are looking at these types of solutions.

Randall MacEwen, President and CEO

Yes, Michael. In the bus market, there are a number of battery electric OEMs showing good progress in that market, so that’s a competitive market. What we see is it really depends on the transit operator, what their routes are, and the duty cycles for those routes. Therefore, the powertrain technology that can meet the requirements for their fleet determines the competitive dynamics. In my opinion, what we're seeing is more transit operators looking at hydrogen today than were doing so a year ago. We’ve seen follow-on orders from transit authorities that have deployed Ballard fuel cell engines in buses over many years and are scaling up their fleets to give you many examples in North America and Europe like that. Their experiences have been shared with other transit authorities, which are now open to this opportunity. As the mandate for zero-emission buses grows stronger in the U.S., Europe, and China, this becomes a very large and attractive market. As for the truck market, except for very short duration trips, last-mile smaller trucks, what you're seeing is, in many cases, hydrogen is the predominant discussion point with battery being a secondary consideration in most of the truck market opportunities we're observing. So there is a more fuel cell-dominant opportunity as you move to the heavier trucks.

Operator, Operator

The next question comes from Craig Irwin with Roth Capital Partners.

Craig Irwin, Analyst

Randy, you know I've followed Ballard for a long time, a couple of decades now. In the beginning, Ballard had some incredibly interesting collaborations with big brand OEMs, truck producers in Europe. Audi, VW is the last one visibly spending money with you. These other companies have been quiet around fuel cells in the last two years. Given your experience with them and deep knowledge of their needs and long-term requirements, is it possible for you to pick up one of these top-class Tier 1 OEMs again, either for a commercial vehicle program or to support a trucking program? Is that something that could credibly be in the offering for the next year or two? Or should we look at more players, more like MAHLE as underpinning future development?

Randall MacEwen, President and CEO

Yes, great question Craig. Years ago, both Daimler and Ford were shareholders of Ballard, and we continue to have a longstanding relationship with previously VW and now the Audi brand in the VW Group. What I would say is, you have Daimler and Volvo in their joint venture; they’re looking at deploying fuel cell commercial trucks, as they say, in the second half of the decade, so 2025 through 2030. They are making significant investments; it will take time. Our plan is to do this with MAHLE, and not just have a leading fuel cell module as we develop that with MAHLE, but also a number of balance of plant components that go beyond the module and integrate into powertrain and are optimized. This approach from Ballard is similar to what we've done in China with Weichai, where we partner with Tier 1 suppliers to offer a compelling package to vehicle OEMs to help simplify customer adoption and remove friction points. It will take time for the Ballard-MAHLE product to go through development, testing, field trials, etc., so I believe it’s a few years before we see large quantities of purchases from OEMs. I do view a number of OEMs as potential customers for Ballard and MAHLE as we move forward together.

Craig Irwin, Analyst

So my second question is really one that investors and clients are asking. They want to know why Ballard hasn't been more aggressive, particularly on the hydrogen strategy side. There's an expectation for low-carbon fuel standard adoption across the U.S., at least in another 24 states over the next several years. They're all in some stage of adoption and should provide access to some rich subsidies for fuel cells, given green hydrogen's superior environmental footprint, economics, etc. You underline some of those numbers at the front end of your call in the prepared remarks. Is hydrogen strategy to facilitate customer adoption something you plan to deploy your cash for, and is it a priority for Ballard right now? Or do you see it as something that's best handled by other partners like Air Liquide or one of the global hydrogen suppliers?

Randall MacEwen, President and CEO

Yes, thanks for the question, Craig. When we look at energy supply, we believe the long-term winners in that market will be companies that have scale and balance sheets. We don’t see Ballard as a supplier of fuel where customers pay on a per-drink basis with Ballard effectively being the financial sponsor. We believe that large energy companies like Shell, Total, and the industrial gas companies, including Linde, Air Liquide, and Air Products, are experts at engineering, procurement, and construction. They're knowledgeable about station design and the various technologies involved, as well as transporting liquid or gaseous fuels. While we have significant balance sheet strength relative to our industry, it's a shallow pool compared to what you need for that type of capital. Thus, we believe companies like Shell and Total will be the long-term hydrogen fuel providers. Our customers need hydrogen; many procure diesel fuel, so we don't need to supply it ourselves. However, we partner with many companies to simplify the experience for end customers. We have strong collaborations with equipment providers as well as hydrogen fuel providers. As the infrastructure gets built out, particularly in projects focused on return-to-base centralized depot refueling, where barriers to entry on hydrogen fueling are lowest, we can bring partners to these projects.

Craig Irwin, Analyst

Last question, if I may. A big-picture question. China is always unpredictable, particularly for Western companies and executives. It seems that over the last couple of years, it's been roughly 60% of revenue. Would you expect China to continue being a majority of revenue over the next few years? Or is the activity you're seeing in Europe and North America indicative that one of these other global markets, possibly India, could surpass China as a focus for Ballard?

Randall MacEwen, President and CEO

Yes. Great question. Our business model involves selling into multiple verticals in key geographies with a strong customer base, so we're not dependent on any one market, segment, geography, or customer. If you look at our revenue for H1 of 2021, 50% came from Europe. Last year, it was 50% from China. Looking at our order book, while we don’t disclose it by geography, we see strong take-up, with almost 70% from Europe and North America. What we're observing is that, as the China policy has stalled, our China revenues have declined, but Europe has shown growth. Heavy duty motive will be our largest market application, split between China, Europe, and other markets, including North America. I agree with you that India and other markets will begin to see traction too. We prefer this model of resiliency; if there are stalls, we've seen in the solar and wind industries that various geographies can have stronger or weaker years during early adoption periods. We appreciate this resiliency in our model. I expect China will still be a major revenue contributor as policy clarity shapes up and we strive for that 1 million fuel cell vehicles by 2030.

Operator, Operator

The next question comes from Praneeth Satish with Wells Fargo.

Praneeth Satish, Analyst

There's been some reports of city clusters in China that have been selected for the pilot programs, and recognizing that nothing is finalized as of yet. But conceptually, what would happen if the Weichai JV and its province it's located in were not in one of these clusters? How would that impact the JV if it wasn't in the city cluster? Would it make a difference?

Randall MacEwen, President and CEO

Yes. I don't think we ever had strong expectations that Shandong province would be included in the first batch of city clusters. Other large cities like Shanghai and Beijing are likely to be included. Our early work in China in Guangdong province has a number of vehicles deployed there. Those three will certainly be, I think, the highest priority three. There are likely five that will be announced, but we'll have to see how it plays out. Some of our customers and supply chain partners are in those clusters. We expect to sell across China in cluster cities or demonstration regions outside of the designated clusters as well as in Shandong province. Over time, the cluster regions will expand, and eventually, the subsidies will relax, allowing the market to compete on economics. That’s really the long-term market we're focused on.

Praneeth Satish, Analyst

Great. Just switching gears, I wanted to ask about gross margins. They were somewhat flat in Q2 compared to Q1. Were there any transitory or supply chain issues or any type of costs that impacted you this quarter that could reverse over the balance of the year? Where do you see margins tracking for the rest of the year?

Paul Dobson, CFO

Yes, it’s Paul here, Praneeth. We did see some impacts in the gross margin. Randy talked about the supply chain. The team has done well securing supplies through the COVID environment. We had some impact from rising platinum prices. Platinum went up from around $850 an ounce to about $1,300. Those costs have come through. We've also been investing quite a bit in people and added many in our advanced manufacturing and other areas, focusing on product development, R&D, launching products, and our cost reduction programs. So those fixed costs coming through our margins were also there. We think our cost base is where we thought we would be now, and expect to maintain it going forward. We’ll have to see where commodity prices land and what can be passed onto customers. We don’t have the ability to pass costs through to customers in most contracts, but we’re looking for ways to mitigate that risk going forward.

Operator, Operator

The next question comes from Rob Brown with Lake Street Capital Markets.

Robert Brown, Analyst

I wanted to follow up on the rail market development. You had a nice order from Siemens there. How do you see that market developing? Is that a pilot project that will take time to turn into follow-on orders? Or how do you envision that market evolving?

Randall MacEwen, President and CEO

Yes. Thanks for the question. The rail market is one we’re excited about, and we believe it will surpass expectations. The Siemens opportunity is really one where we’re anticipating a couple of phases. We’ve gone through the product development phase and have successfully worked on a module that meets the stringent rail coercion standards and can integrate and package appropriately to meet the requirements. We expect a demonstration pilot in Bavaria. That will span about 30 months, and we anticipate the initial trains will be put into passenger service from 2023 to 2024. Siemens is quoting this train in several projects; I think we will likely see 2024 as a lift-off period for sales of additional units in quantity in the European market. There’s still more work to do, but we’re focused on that. Modest order inflow is expected in the next few years as we validate this on rail.

Operator, Operator

The next question comes from Jonathan Lamers with BMO Capital Markets.

Jonathan Lamers, Analyst

Randy, you mentioned targeting near-term diversification across target markets and geographies. Could you hint at the product areas or customer markets that Ballard might be looking to diversify into?

Randall MacEwen, President and CEO

Yes. We're seeing increased interest in additional verticals where the technology can play. For example, off-road markets like construction equipment and mining applications are large markets where we believe fuel cells are the only viable decarbonization technology. There's increased interest from mining companies and equipment manufacturers of construction and mining equipment. Stationary power is also gaining interest across various segments. It’s not just backup power where we're seeing increased demand in Europe; stationary power applications with renewables present very large opportunities. We also see growing interest in data center applications. In terms of geography, we've already discussed India; Austrialia and some Middle Eastern markets are also showing increasing interest in fuel cell solutions.

Jonathan Lamers, Analyst

On the Fusion-Fuel order, do you believe that the modules designed for the marine market will be cost competitive in the stationary power market? Is there a segment of the European stationary power market or certain customers that Ballard and Fusion-Fuel are targeting? Is Ballard marketing its modules to other electrolyzer suppliers? Can you talk about the market opportunity you see, as it’s kind of interesting that this is opening up in electrolyzers?

Randall MacEwen, President and CEO

In the marine market, we're seeing a lot of interest in our FCwave product for ferries, tugs, workboats, and cruise applications. This product was designed for the marine market; the module also has applicability for other markets, including stationary power. The bill of materials for the marine and rail products shares about 70-80% similarity, so there are good opportunities across multiple end markets. I expect it will be cost competitive compared to other fuel cell solutions in the stationary power market. Many customers look beyond the upfront capital cost and also consider long-term operating costs. We’ve designed the module for marine applications where you get high utilization, while backup power technologies tend to have low utilization. This is a significant differentiator. Looking beyond stationary applications, consider mining sites with solar or wind inputs. Those sites can produce hydrogen, which may serve hydrogen vehicles, but that same hydrogen can also provide essential backup power when renewable inputs are unavailable. This is just an illustrative example; we see many microgrid opportunities and are working with several leading electrolyzer companies on various projects.

Jonathan Lamers, Analyst

One follow-up on China. Do you believe we’ll see an overarching national policy implementation announcement, or will we continue to see a series of regional policies suddenly implementing the national policy? I'm curious whether you can comment on the clarity your customers are looking for.

Randall MacEwen, President and CEO

Yes. Beyond the demonstration program that has been discussed, I do believe China is looking to announce its hydrogen strategy, which will serve as a more comprehensive roadmap on how hydrogen plays out across industry, energy, and mobility. This roadmap will likely explore the connection between renewable energy—which is abundant in China—and how hydrogen can support that. We expect to see a broader hydrogen strategy launched in China. I will refrain from speculating on timing because we've already been wrong about policy timing in the past, but it is expected to occur. Nonetheless, that's not a condition precedent for the type of growth we're expecting from regional deployments in the demonstration regions.

Operator, Operator

The next question comes from Rupert Merer with National Bank.

Rupert Merer, Analyst

Randy, you gave us some comments on supply chain and product development activities at Weichai and Linamar. As you get further into your partnership with Linamar and MAHLE, do you see them as silos, or will there be some cross-pollination between the programs to accelerate development?

Randall MacEwen, President and CEO

Yes, great question. I believe there's a lot of leverage we’ll see with the work we’re doing in China with Weichai and their supply chain. Similarly, the work we’re doing with MAHLE involves several key balance of plant components in our module as well as powertrain components, allowing us to use these components across geographic markets and different verticals. Linamar is working on a novel conformable storage solution that is potentially very innovative. If it sees commercialization, we could apply that in markets beyond what we’ve contemplated with Linamar. There are multiple ways we can think about leveraging the components and integration capabilities of our three industrialization partners: Weichai, MAHLE, and Linamar to apply their expertise across all verticals and geographies.

Operator, Operator

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

Amit Dayal, Analyst

Randy, I'm sorry to bring up China again, but does the China policy, from your perspective in fuel cells, involve heavy subsidies? Is that a factor preventing the market from independently bringing cleaner vehicles to market? I'm trying to understand if the market can move a bit faster while policy matters come into play.

Randall MacEwen, President and CEO

Yes. Amit, thanks for the question. We must understand that China is a command economy driven by policy. When policy statements are made, commercial enterprises align under that and start advancing based on those statements. Fuel cell technology is not cost-competitive today in most applications. We've outlined that we expect the roadmap for cost competitiveness to occur for bus, truck, rail, and marine applications between 2023 and 2027-2028 when we anticipate total cost of ownership will crossover against incumbent diesel technology. Interestingly, the cost of carbon continues to rise, which could also accelerate the timeline for TCO comparatives. Markets typically provide initial support for early adoption where low volumes and high costs coexist, then as policy backs initial adoption, the volume increases and costs decrease. We expect to see something similar in China. The market is waiting for policy support, and then we will see volume deployed, costs come down, and policy become less significant over time as we've seen in other industries. Additionally, the infrastructure build-out for hydrogen refueling stations is crucial; China has an advantage in deploying capital and investing heavily in such infrastructure projects.

Amit Dayal, Analyst

Understood. Then on the stationary power side, that seems like a market ready for fuel cells, with microgrid adoption and other applications. What are we doing from a business development perspective to increase our share there? And from an R&D perspective, what resources are we applying to greater stationary power presence?

Randall MacEwen, President and CEO

Yes, that’s a good question. We’re leveraging our technology and products, enabling us to utilize those products in numerous stationary power applications. We've ramped up our business development activities globally, including in China, Europe, North America, and other markets. We’re bringing on additional resources, and there are active discussions underway with major players in multiple market segments looking to advance decarbonization in stationary power. It is still too early for us to comment on our progress in this area, but we hope to provide more visibility later this year. We are investing in both technology and customer engagement to facilitate progress.

Amit Dayal, Analyst

Understood. That's all I had. Thank you, Randy.

Operator, Operator

The next question comes from Craig Shere with Tuohy Brothers.

Craig Shere, Analyst

Randy, I apologize if I'm unclear regarding your responses about hydrogen fuel supply. In one response, it seemed you indicated that we should leave this to the large integrated energy conglomerates and industrial gas companies, while another comment implied that there are turnkey Ballard electrolyzer opportunities. How can you clarify this?

Randall MacEwen, President and CEO

Yes, Craig, great question. We should distinguish between designing and manufacturing equipment for sale and being a supplier of hydrogen. We were describing our interest in potential PEM electrolyzer manufacturing downstream. We're not looking to be hydrogen suppliers, but rather to supply electrolyzer equipment. That’s an opportunity we’re interested in, but we wouldn’t be hydrogen suppliers like Shell or Total, who run the fueling stations and sell fuel.

Craig Shere, Analyst

Nonetheless, the end user would buy both the fuel cell equipment and electrolyzers, meaning they have what they need to make the package work, correct?

Randall MacEwen, President and CEO

Exactly. Typically, an end user like a transit authority would tell Shell they want a fueling station built. Shell would then look to an electrolyzer company for on-site hydrogen production, installing compression, chillers, storage, and dispensing equipment. They would own and operate that asset, selling hydrogen fuel to the transit operator. We would be interested in being an electrolyzer equipment supplier in that model but not in managing and operating the fueling station.

Craig Shere, Analyst

Last question, any thoughts on the ability to break out of this $100 million annualized revenue run rate? Any thoughts on when we could see cash flow breakeven?

Randall MacEwen, President and CEO

We don’t provide guidance on our current year revenue, let alone our views on cash flow breakeven. However, as we see bus deployments in China, Europe, and North America begin to scale, particularly with 2024 and 2025 goals for zero-emission buses across different markets, we expect the same with commercial truck programs through our Weichai-Ballard joint venture in China and with MAHLE in Europe. The commercialized modules need to move from pilot projects to real deployments. We foresee similar developments across marine applications, and we expect that those opportunities will all contribute to growth. Our growth curve may not be immediate, but we anticipate a steep increase as we progress further into 2024-2025.

Operator, Operator

The next question comes from Chris Souther with B. Riley.

Christopher Souther, Analyst

Maybe just within the European bus space, would you be able to frame or give an outlook on the number of buses in the backlog today and mix within that 12-month backlog and delivery cadence for this year vs. some of the visibility for next year? Just hoping to nail down the timeline we're looking at. Are all the orders to date driven to earlier programs? So let’s get a sense of the timeline for that next program batch in Europe.

Randall MacEwen, President and CEO

We're expecting significant developments on the European bus front later this year, certainly before December or perhaps in early December, when we anticipate the next major announcement regarding post-JIVE support at a considerable scale for Europe. So we’re quite excited about that. In the near term, a significant part of our order intake in the first half of the year related to buses in Europe. We expect that trend to continue with a number of bus OEMs we're working with in Europe, including Wrightbus, Solaris, Van Hool, and ADL actively winning projects in key cities, driving scaling effects. Our sales pipeline suggests that we are looking at thousands of buses signed for fuel cell deployment in Europe over the next several years.

Christopher Souther, Analyst

That’s great to hear. Turning back to India and Tata, the opportunity there. If the market were to take off, would it be preferable to engage in local production or a JV, or do you think you would source from your JVs in China, North America, or Europe over time? Just trying to understand your strategy for an expanding market like this.

Randall MacEwen, President and CEO

Yes, Chris, that's a great question. India is a unique market, much like China, Japan, and others. Companies with a strong presence and capabilities in that market can bring tremendous value. We are considering a broader strategy in India that could involve a comprehensive relationship with a key Indian partner as we assess how the market develops and business development progresses over the next 12 months.

Operator, Operator

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

Randall MacEwen, President and CEO

Great. Thanks everyone for joining us today. Paul, Kate, and I look forward to speaking with you in November when we will discuss results for Q3 2021. Thanks again.

Operator, Operator

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