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.

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.

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: product sales and engineering services. We plan to utilize licensing to develop new markets, enable new distributors and create new product supply business, as per our Azure Bus Licensing Agreement. As well, we will leverage licensing as a critical enabler for major Engineering Services contracts, as per our multiyear Volkswagen contract. So that's the strategy high level. So how are we doing in the execution of the strategy so far? Well, we are in the early stages of execution, but we're clearly making progress. We closed our first licensing transaction in September last year, the Azure Bus Licensing Agreement. And in the past month, we closed 2 additional licensing deals. First, the transaction with Azure Hydrogen for assembly of ElectraGen Telecom Backup Power systems…

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…

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,…

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

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?

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.

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

No, we did not.

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

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?

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: Engineering Services, strategic, it's high margin and the size of the business is growing and all of those things we get involved with there are potential future supply opportunities for us. They fit with our strategy.

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.

The next question is from Les Sulewski of Sidoti & Company. Les Sulewski - Sidoti & Company, LLC: 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?

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 - Sidoti & Company, LLC: 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?

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 - Sidoti & Company, LLC: 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?

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.

The next question is from Dev Bhangui of Jennings Capital.

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?

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.

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.

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.

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?

Yes, that's our focus.

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?

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.

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?

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

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

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.

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

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.

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?

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.

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?

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

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

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?

Yes. Yes, there were.

Are you able to say how many?

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.

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?

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

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?

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.

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.

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?

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.

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

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

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

Yes, there was a new aerospace engagement this quarter.

[indiscernible]

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.

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

It's commercial.

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?

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.

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

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.

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

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

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?

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.

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

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