Ballard Power Systems Inc (BLDP) 2018 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Ballard Power Systems Second Quarter 2018 Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Guy McAree, Director of Investor Relations. Please go ahead.

Thanks very much, and good morning, everyone. On today's call, Ballard management is going to discuss the company's second quarter 2018 financial and operating results. And I'm here today with Randy MacEwen, our President and CEO; and Tony Guglielmin, our Chief Financial Officer.

We're going to be making forward-looking statements that are based on management's current expectations, beliefs, 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.

So Randy is going to review our strategic progress in the second quarter, and then Tony will review our Q2 financial results. And following that, we'll open things up for Q&A.

Just before we start, a note that Ballard is going to be attending a couple of investor conferences in September. We'll be at the H.C. Wainwright 20th Annual Global Investment Conference on September 5 in New York City, and also on the same day, at the Gateway Conference in San Francisco.

I'll turn the call over to Randy now.

Thanks, Guy, and welcome, everyone, to our second quarter 2018 earnings conference call. Our Q2 financial results were in line with our expectations and new contract bookings. Revenue in the quarter was flat on a year-over-year basis at $26.4 million, gross margin was strong at 36% and adjusted EBITDA was negative $0.8 million.

It's worth noting once again that the relatively high level of onetime technology transfer revenue generated from China in Q1 of 2017 effectively results in flat year-over-year revenue in Q2 this year despite considerable underlying growth. We're also excited to end the quarter with a record order backlog of $283.3 million.

In Q2, we saw an expansion in demand for heavy, medium as well as light-duty fuel cell electric vehicles, or FCEV, applications, particularly where customer requirements include long range, rapid refueling, heavy payloads and route flexibility.

During Q2, progress was evident in bus, marine, automotive, Material Handling and unmanned vehicle market segments.

In the transit bus market, in Q2, we received purchase orders from Van Hool for 40 modules to power buses in Germany. This is an important step forward in planned deployments under the JIVE funding program in Europe, and we anticipate further progress later this year.

In the U.S. bus market, El Dorado's 40-foot Axess fuel cell bus powered by Ballard, successfully completed comprehensive testing at Altoona, Pennsylvania, under the Federal Transit Administration's oversight.

Testing at the Altoona facility designed to ensure better reliability and in-service performance of transit buses. This includes accelerated, 12-year, 500,000-mile life cycle test, along with tests that encompass safety, structural integrity, durability, reliability, performance, maintainability, noise, fuel economy, braking and emissions.

Successful testing at Altoona is a key milestone in the U.S. market, now enabling El Dorado's Axess bus to qualify for FTA funding in deployments of 5 or more buses.

I'd just like to highlight a landmark milestone for Ballard in the bus market. One of the buses in the Transport for London fuel cell bus fleet, each of which are powered by a Ballard module, has recently passed 30,000 hours of in-service operation, equivalent to more than 7 years of service, running 16 hours per day, 5 days per week. We believe this is industry-leading performance that we're building on in our next-generation power modules. There has been considerable positive activity in the marine market over the past quarter.

During Q2, we announced a multi-year MOU, under which we are now collaborating with ABB on the development of megawatt-scale PEM fuel cell systems, with an initial focus on the cruise ship segment. There's heightened priority around the reduction of pollution and carbon emissions in the marine sector, particularly given the substantial pollution being generated at ports by the presence of marine vessels, drayage trucks, trains, forklift trucks, along with other transport vehicles, which enables multimode fueling infrastructure opportunities.

A sharp point was put on this issue by the recent strategy announcement from the United Nations International Maritime Organization, which is focused on reducing GHG emissions from ships with targets that include a 50% reduction compared to 2008 levels by the year 2050.

Our work with ABB will initially focus on megawatt scale systems that can provide power for onboard hotel operations, while cruise ships are docked at ports. ABB has a number of applications in mind beyond this over the longer term, including fuel cell primary propulsion systems. We're now involved in initial design coordination with ABB in order to optimize the integration of our respective technologies.

Also during Q2, Ballard joined a consortium led by Scotland's Ferguson Marine that has received funding to design and build the world's first renewables powered car and passenger ferry called HySeas III. Hydrogen for the ferry will be produced from renewable electricity and that hydrogen will fuel Ballard modules, providing primary propulsion for the vessel. The HySeas III ferry is planned to operate in the Orkney of Archipelago located off the northeastern coast of Scotland.

In the automotive sector, we recently announced a significant and exciting extension to our HyMotion program with Audi, a member of the Volkswagen Group. HyMotion, which began in 2013, and was contracted to run until March 2019, has now been extended for a further 3.5 years until August 2022 with the contract extension valued at an incremental $62 million to $100 million. This represents tremendous validation by the world's largest automotive OEM of Ballard's technical capabilities with respect to the complex challenge of powering high-performance cars for leading luxury brand with zero-emissions.

Ballard is working on the design and manufacture of fuel cell stacks for Audi's demonstration car program, including work on the MEA, plate and other stack components, as well as testing and integration activities. Our goal for HyMotion is to deliver outstanding fuel cell performance, including the highest power density, lightest weight, greatest durability and robust freeze start capabilities.

This contract extension takes the HyMotion program through to Audi's planned launch date for its small series fuel cell car production run. The automotive industry is undergoing transformation driven by electrification, shared mobility and autonomy, which we expect to have a dramatic impact on passenger car utilization rates by increasing daily range requirements and increasing hours of operation.

The higher utilization rates will create a sweet spot for fuel cell technology, within which we can deliver compelling economics, zero-emission, low noise and smooth acceleration, while also meeting the long, daily range and rapid refueling.

In addition to our contract extension with Audi, progress was achieved in Q2 in other light-duty motive applications. In Q2, we signed a master supply agreement with Hyster-Yale, pursuant to which Ballard will supply minimum annual volumes of air-cooled fuel cell stacks to Hyster-Yale for use in powering Class 3 forklift trucks in the Material Handling market as well as providing support on the design of a fuel cell electric propulsion system to power these lift trucks.

Progress was also achieved in the light-duty unmanned vehicle space during the quarter. We received orders from the U.S. Navy for 13 fuel cell propulsion systems for its Hybrid Tiger, UAV or drone platform. We announced a collaboration with Cellula Robotics focused on the development of the fuel cell powered long-range autonomous underwater vehicle, with funding under a contract with the Department of National Defence in Canada.

In China, we continue to see exciting developments and measured progress as this dynamic market takes clear steps towards fuel cell commercialization for heavy- and medium-duty motive applications.

We see continued developments on government regulations and subsidies that support the adoption of hydrogen and fuel cell technology on planned build-out of hydrogen refueling stations and progress on vehicle deployments in 2018 and beyond.

We expect to provide important updates on this key market, including new partnership activities later this year. I'd like to also take a moment to comment on an important transaction we completed in July to increase testing and production capacity at our facility in Vancouver.

We announced the acquisition of certain strategic assets of AFCC, the private company owned by Daimler and Ford. Both Daimler and Ford took the decision to repatriate their fuel cell development activities from Vancouver back to Germany and Detroit, respectively. And as a result, Ballard acquired a range of valuable assets that are already in place in return for approximately CAD 6 million in cash. These assets effectively result in an expansion of our MEA production capacity and testing capabilities, enabling Ballard to efficiently and rapidly meet our forecasted growth needs for approximately the next 5 years.

In comparison to the new cost of this same volume of production capacity with new equipment, we view this as high value and capital efficient from a shareholder value perspective.

Finally, I'd like to provide some additional color around key technology and product development investments that we continue to make and are positively positioning Ballard in an increasingly competitive landscape.

We continue to invest in highly disruptive technology. Our ability at Ballard to vertically integrate MEAs, stack and module products is unique and a clear differentiator to Ballard in the marketplace. Continued advancement in our MEA design is enabling development opportunities at both the stack and module levels.

We've previously made mention of our work on the next-generation liquid-cooled fuel cell stack, or LCS, product. Compelling performance improvements we expect from this stack, we expect to introduce commercially in 2019, include approximately 33% greater power density by weight, a more than doubling of planned operating lifetime, improved tolerances to low humidity as well as higher operating temperature and improved freeze-start capability.

The LCS stack will be a key input to our next-generation power module for bus and other transport applications, which we're actively developing now. We expect this 8th-generation module initially in a 70-kilowatt package. We plan to launch in 2019 to deliver key advancements, including a 40% volume reduction, a 30% weight reduction, 50% reduction in the number of components and a more than doubling of operating lifetime, improved freeze-start capability, along with an expected cost reduction in excess of 40%.

We expect the LCS stack incorporating our latest MEA technology and our next-generation power module to support strong competitive market positioning. In our view, these products will generate a substantial return on the incremental investment and operating expense required to enable the development and commercial launch.

In the near term, we anticipate an exciting second half of 2018 with important strategic and commercial announcements. With that, let me now turn the call over to Tony for his review of Q2 2018 financial results. Tony?

Yes, thanks, Randy, and good morning, everyone. Our top line revenue in Q2 was $26.4 million, essentially flat on a year-over-year basis. Overall, our Power Products revenue increased 18% or $2.6 million to $17.8 million in the quarter. This was driven by a 9% increase in Heavy Duty Motive revenue to $13.3 million, resulting from increased product shipments to China, Europe and North America, and a $1.5 million increase in Portable Power revenue, primarily the result of product deliveries to military customers.

Technology Solutions was down 24% year-over-year or $2.8 million to $8.6 million. As Randy mentioned, this decrease reflected the $3.9 million in Q2 of last year of onetime technology transfer revenue related to the synergy Ballard stack joint venture. If not for this, Technology Solutions revenue was up quarter-over-quarter for last year.

Our gross margin remained strong in Q2, with a modest year-over-year gain of 1 point to 36%. Cash operating costs increased 24% in Q2 to $10.5 million. This was due primarily to the higher investment in technology and product development, including our next-generation LCS stack and module technology, which Randy discussed a moment ago.

Adjusted EBITDA in the quarter was negative $0.8 million compared to positive $1 million in Q2 2017, reflecting these higher operating costs in the quarter. Net loss in Q2 was negative $4.3 million compared to negative $1.2 million in Q2 last year. And earnings per share was negative $0.02 in Q2 compared to negative $0.01 per share in Q2 2017.

Cash used in operating activities was negative $16.9 million in Q2, consisting of cash operating losses of $1.6 million and working capital outflows of $15.3 million. Now this working capital increase reflects 2 items: higher accounts receivables, related to timing of revenues and related customer collections, including roughly $11 million of deliveries in the quarter into China, for which we received the majority of the payments after the quarter end in July; and an inventory build-up in anticipation of significant second half deliveries, including an anticipated historic level of shipments of heavy-duty bus modules to Europe and the U.S. in the second half.

In terms of liquidity, we ended Q2 with cash reserves of $35.2 million, down from $52.5 million at the end of Q1. And again, this reduction in cash was primarily the result of the increase in the working capital in the quarter. Overall, we anticipate a substantially lower cash burn in the second half of 2018 compared to the first half.

And finally, our order backlog, which reflects committed orders on hand stood at a record $283.3 million at the end of Q2, up significantly from $222 million at the end of Q1. This reflects new orders received in the quarter, including the Audi HyMotion program extension. At the end of Q2, our 12-month order book stood at $96 million, up from $89 million at the end of Q1.

And with that, let me turn the call back over to the operator for questions.

(Operator Instructions) Our first question comes from Rob Brown of Lake Street Capital Markets.

Nice job on the quarter. Just wanted to start with kind of the Germany and the European bus market. You talked about some ramping in the back half of the year, but maybe just kind of an update on the fuel cell penetration rate in that market and kind of how that can grow and what the opportunity is there in your view.

So the JIVE I and JIVE II programs are kind of the near-term programs that we expect to see some growth in the European bus market. Ballard is very well positioned to participate in those programs. I think what's more interesting is what happens after those 2 programs. And I think those 2 programs are in the 290 volume range for the total programs. So lots of discussion going on about the next step subsequent to that.

We're very bullish about the European market. I think after China, Europe is the most important theater of activity for fuel cell motive applications. And I think that next step of volume, we're working hard against. Part of what we're doing there is working with a collaboration or consortium of partners on forward pricing. And really looking at what the cost of fuel cell buses should be in the future. And if you go back a year or 2 ago, it wasn't that long ago, actually fuel cell buses in Europe were in the EUR 800,000 to EUR 1 million per bus.

More recently, we've looked at buses in the EUR 650,000 range. We're now looking at fuel cell buses in the EUR 400,000 to EUR 450,000 range. And that's enabled by partners working collaboratively to reduce cost individually, find opportunities for better integration and forward price on volume. So that's an activity that's underway right now. We're doing that in parallel with some fueling partners as well.

So I'm very excited about the European market, particularly for bus, but commercial truck and rail are also markets we see a lot of opportunity. Marine, obviously, some interesting activity there for us recently. I believe that's a longer-term market, but there is a lot of interest in the European theater for marine applications as well.

Yes. And on that marine application, what's sort of the timeline in your view and maybe sort of the economic kind of outlines sort of unit revenue potential or however you want to characterize it?

Yes, it's still a little early to speak to the expected economics for larger-scale deployments. What I can say is, I'm very pleased with the work going on both with ABB as well as 2 key cruise ship operators that we are seeing the actual designs of fuel cell ships and what the power requirements would be. It's roughly around 24 megawatts of primary propulsion required. Initially, obviously, we're looking at hotel loads. Wouldn't surprise me to see those in the 3-megawatt range. And we're working against some of those opportunities. I think they are a longer-term opportunities. We won't see, I don't believe significant revenue in 2019, but I certainly, as we start looking at 2020, 2021, we'll start to see more activity in the marine area. And I think we're very well positioned with our partners.

Okay. Last question just on the receivables balance. You talked about some collections from China, but how much was collected of that $11 million from China?

We collected -- so yes, we collected about $9 million of the $11 million of shipments in July.

Our next question comes from Carter Driscoll of B. Riley FBR.

So significant potential movement, at least, in the U.S. market. I'd like to get your thoughts, Randy, about the adjustment of CAFE standards, in particular, looking like more of a indirect assault on California's ability to regulate some state emissions, thoughts from a policy perspective. There's been a lot of moving parts, policy, land as it relates to renewables, solar and some of the other technologies. Just get your thoughts on this becoming potentially law and any near-term or medium-term impact you could foresee?

Yes. It used to be we considered China a dynamic market, and now, maybe, the U.S. is fairly dynamic as well for a variety of reasons. But I think it's a little early to comment specifically on some recent activity. But what I can tell you is that we're very bullish on California. We've seen a lot of activity in terms of regulation, in terms of funding, in terms of discussions with partners there. And I believe, as I kind of think about the markets, China market #1, Europe market #2, California market #3. And we continue to make a lot of progress and continued investment in our California market opportunities.

In terms of some of the dynamics you're talking about, I think it's going to be -- going to need to be a little patient and wait and see how that plays out.

Okay. I appreciate that. In terms of -- just given -- you're not giving quantification of guidance for the year, but if you're kind of coming flat, you have a fairly pretty strong second half. How important is the development of your LCS back and module to potentially winning another brand-name OEM in China in terms of just greater power density and pushing them over the hump of becoming a potentially future customer?

Yes, so 2 issues there. First of all, the development of the LCS and the HD V8 module are not tied to 2018 performance. These are really 2019 commercial launches. So we're well in discussions with partners in China as well as in Europe and the U.S. on next-generation modules as well as next-generation technology for the China market. So there's a lot of activity underway. I think there's a lot of interest in Ballard technology, specifically, because we are vertically integrated, which enables cost compression. There isn't, pardon the pun, margin stacking through the value chain with MEA stacks and modules by having multiple suppliers there. And as we look at the performance that we're anticipating to achieve, industry-leading, without a doubt.

Have you -- did you supply any of the JV with any technology or any direct shipments, I should say, from Vancouver? I know, obviously, the MEAs go through that process, but anything directly shipped or is pretty much everything being satisfied now in China from the JV?

Yes, in terms of the sequencing or value chain positioning with respect to the 9SSL stack technology, the JV is supplying stacks to the market, Ballard is supplying MEAs to our JV partner. So that's the sequencing for 9SSL technology.

No more direct shipments from Vancouver, correct?

Other than MEAs, for -- not of stacks. We do have shipments of modules as well or module kits.

Okay. Can you give an update on your work with Siemens. Any progress or anything you can highlight in this particular quarter and/or with CRCC (sic) [CRRC]?

Yes, actually very busy quarter for us with our Technology Solutions team, both on Siemens as well as deliveries for CRRC in Q2. Siemens, I believe, is very happy with the progress we've been making on the technical milestones. So we're now a couple of quarters in against this, and we've shown, I think, very good execution on that program. So a very strong relationship with Siemens going forward, I believe.

And then, in terms of CRRC, we did have shipments of modules, 4 modules in Q2 to effectively close out the deliveries for that program. I personally went to the Gaoming line during the quarter as well and talked to the Gaoming government. That line is expected to start operation in 2019. It's significantly behind schedule because of construction issues in Gaoming, but I still believe it will be the world's first fuel cell powered tram line in operation expected for 2019.

Okay. Maybe just a couple other quick ones from me. You talked about the California market being a big impetus for medium- and heavy-duty. We've had some good trials with drayage trucks, especially particularly with the ports. Could you give us a sense of the competitive landscape for those types of opportunities? And then there are some other competitors that are trying to rely exclusively on lithium, trying to migrate from the transit market into heavier duty applications. If you could just kind of give us your sense of the competitive landscape? And where the tipping point favors, fuel cells versus battery only?

Yes. I think the value proposition for fuel cell electric vehicles and Heavy Duty Motive applications is becoming much more strongly understood. So this driver of having long-range rapid refueling for heavy payload applications, you mentioned drayage trucks, I think that's an excellent illustrative example. So we're spending a lot of time with partners. You're referring to the U.S. market. This is true in other markets as well, where we continue to work together to find the right hybrid architecture to optimize cost and performance. And I believe fuel cell electric vehicles with a hybrid architecture will be the winning solution for Heavy Duty Motive.

Okay. Maybe last one from me. You mentioned the acquisition from Ford and Daimler in terms of satisfying potential capacity expansion. Could you kind of just frame what the cost savings is, if you had to build it internally versus the assets you acquired to satisfy the additional testing and capacity additions? Just trying to get a sense of the magnitude of what you save by acquiring these assets?

Yes. Carter, it's Tony here. Thanks. Yes, so we -- again, the total amount of equipment we acquired, as it was mentioned is about CAD 6 million. That included really 2 -- included a large number of assets, but the 2 most significant pools of assets, one was a significant number of test stands, and these would be test stands used both for factory acceptance testing as well as supporting our key technology solutions business. So that was one pool of assets. And the other one was some MEA production equipment, which frankly would allow us to virtually double our MEA capacity.

So we think we've picked, in the aggregate, CAD 6 million. We had -- in our capital plan, indeed, we had expected to be buying a fair bit of that equipment this year and next year, new. So this allows -- this actually displaces and lowers our planned CapEx budget. So I would expect we'd probably pick the net cost, again, used compared to new is probably $0.20, $0.20 to $0.30 on the dollar so to speak, if you will. And again, this is equipment that is not generally available in the used market either. So the alternative was to have to buy new.

So test stands -- the larger test stands can go upwards of $1 million each. And we paid substantially less. So think about 20% to 30% of the total cost of new. And then again, as was mentioned, this really takes care of our -- MEA capacity and planning for -- really for the next 5 years based on our current outlook.

The other thing I'd add to that, Carter, there is the cost savings. There's also a couple of other elements to this. And one is acceleration. And so it's the ability to have equipment already in our facilities, already working, already operating, already -- infrastructure already put in place. So there is a pretty significant acceleration to it and derisking of bringing new equipment in. So the lead time for new equipment and the risk profile dramatically different here at a much lower cost. So overall, I think very high value for Ballard.

Thanks, Randy. And just to sort of pile on again. I think for those who aren't familiar, AFCC was co-located in our facility. So all of these test stands and production equipment don't need to move. They're actually -- they're already commissioned, if you will, and already located. So it's beyond the CapEx savings, I referred to earlier. There is significant commissioning and time frame savings as well, which would be on top of the actual cost of the equipment. So we think a very, very attractive and efficient opportunity for us.

Maybe last one from me. On the UAV development, it seems like more near term would be a commercial opportunity. You obviously have the win in South Africa. Can you talk about, maybe, the -- either the quality or the quantity of potential engagements from the commercial side versus the work you've done with Lockheed, Boeing and the Military sites?

Yes, thanks for the question. Actually, there has been a lot of activity on the commercial side. We've had some key conferences that we've attended this year. And I would say in the range of about 20 to 30 new leads that we're working against, and we'll deliver a product in the back half of this year as well as into 2019. All initial seeding opportunities that we should be able to validate the performance of the technology and start moving to longer-term sales.

I think one thing important to understand, of course, is that in the U.S. market, there still is regulations that need to be crossed over in terms of beyond visual line of sight with the FAA. So there is work to be done for a larger-scale commercial adoption for some of the commercial applications, where I think long range, particularly in high reliability, lightweight, et cetera, can really drive very good value for customers.

Our next question comes from Sameer Joshi of H.C. Wainwright.

One of the things I noticed was your Material Handling revenues have firmed up pretty well. Does this have any revenues from the Hyster-Yale relationship? And how do you see it ramping going forward?

So it's a new relationship with Hyster-Yale. We have, I believe, it's a 4-year commitment with a minimum of volume. We're pretty excited about this relationship. We think longer-term we'd see a transitioning in the forklift market, the purpose built fuel cell forklifts. We see Hyster-Yale and others being leaders in this activity. So we want to make sure we're partnered with the long-term leaders in this market.

In terms of revenue for Q2, I think primarily all of the revenue came from Plug Power. We continue to work with Plug Power and continue to have discussions about our future relationship with plug as well.

Okay, so the Hyster-Yale is more mid- to long-term relationship?

It is. That's right.

Okay. In terms of deploying the LCS once it is launched, is there going to be a phaseout of legacy systems or how do you see it being deployed across different geographies?

Yes, so in terms of the commercial introduction, we're going to be very selective about initial projects and initial partners. Make sure we're getting good feedback from the market on initial field deployments. So we'll pace it accordingly. We haven't announced the commercial launch plans yet, and I think we'll wait till later in the year to provide better visibility on that, Sameer.

Okay. In terms of the Audi rejuvenation or recommitment of $60 million to $100 million, what is the cadence of that revenue? Or to put it another way, of the $96 million 12-month backlog, what portion is from this Audi relationship?

Yes, so the cadence -- generally, the cadence for the balance of the program, you can assume, is fairly flat. The mix changes a little bit. It's been -- if you're looking backwards, has been mostly labor, doing development work. We're starting to transition a bit now to prototyping and some equipment. So the mix will change, but the overall revenue, we're actually just firming up some of the purchase orders, actually, as we speak. The contract -- the previous contract ended at the end of June. The new one fundamentally, the extension is just starting. So we're just firming that up. But assume fairly flat cadence.

In terms of the amount of -- in our backlog I mentioned we've had a $96 million, well, I'll say, 12-month order book. Something in the neighborhood of a little under 1/3 of that would be associated with the Audi program. Obviously, taking that $60 million to $100 million over 3 years as you can take the midpoint and kind of do the math. And then in the overall order book, we've already provided, as Randy said, it's a $60 million to $100 million range for the extension. And the reason for -- and we provide a fairly wide range, because there are some opportunities to increase and decrease scope around expected milestones. So I think you'd think about the $60 million to $100 million, and that's over 3 years.

Sameer, one thing I would add too is that the objective of our Technology Solutions platform is to provide customers that have in-house fuel cell programs with access to our technology, access to our intellectual property and access to our engineering services. With a goal longer-term of transitioning those customers to customers of Power Product components or supply, not commenting specifically on Audi, but generally, we have -- we make very strong efforts to longer term, make sure we have customer stickiness and are looking at sale of product. And I think all of our key customers in our technology solutions program, we typically have about 35 programs underway at any given time. We see very good opportunity with -- particularly with the largest customers for long-term component supply and I'm very excited about that opportunity in the future.

Great. So in addition to these $60 million to $100 million, you probably will be expecting some actual system revenues going forward?

Can't comment specifically on what would happen, but certainly that would be a target of ours. I'm excited by that opportunity.

Okay. Just one last sort of follow-up on one of the previous questions asked. Has there been any impact of the Milestone C approval on the Protonex backlog buildup? Or is the most of your backlog for Protonex from UAV is in the other systems?

Yes, it's both. The Milestone C, we are indeed seeing some -- obviously, we had some pickup in the first half of the year as you gathered year-over-year some very significant increase. But yes, we are seeing some improvement. And we expect receiving some additional orders associated with the Power Manager in the -- certainly, in the Q3 and in the second half. So the answer is yes, we're starting -- we're seeing some visibility and pickup in that area.

Our next question comes from Jeff Osborne of Cowen & Company.

A couple of questions here. On the ABB relationship, can you just give us some historical perspective? How long have you been sort of nurturing this on the marine market and other avenues of growth with them?

Yes, we've been talking with ABB for about a year now. I would say, the intensity of those discussions really picked up in the last 6 months. And in the marine segment, they're looking, obviously, at cruise lines that are imports, initially for hotel load, longer term, looking at opportunities for primary propulsion as well as some other marine applications that they haven't disclosed yet.

Got it. A couple other just quick clarifications on the AFCC stuff. Was there any staff with just the relocation of resources on Ford and Daimler's end? Were you able to add any headcount with that arrangement or just the equipment?

Yes, great question. We were pretty happy. We hired about 15 people from AFCC, particularly focus on high-quality engineering talent to supplement some of the technology solutions programs and some of our own internal development. So yes, we hired some great talent from AFCC.

Good to hear.

Yes, and also I'd just add as well. There was -- we picked up some people, some of the operators and some -- frankly, some of the folks to support even in our -- some in our G&A area. So we're very pleased to have secured some really key talent there, but as Randy says, principally in the technology area.

Got it. And then can you just give us a sense of, you mentioned some impressive cost reductions over the past couple of years for buses, in particular, and then that's driving elasticity of demand. Within that bus ecosystem, there is obviously a lot of players around the hoop, but can you just give us a sense of the fuel cell, in particular? For you folks, how much sort of over a period of time or average annual cost reductions you've been able to achieve to enable the growth of the industry?

Well, we've talked a little bit before about the 67% in that range cost reduction over the last number of years. I think what's really powerful is over 40% reduction we're looking at for V8 versus V7. And that's pretty well in hand, and that's very low volume assumption.

Got it. And then the last question was just on, again going back to the working capital, impressive that you were able to get $9 million of the $11 million back from China. What are the typical payment terms for your Chinese partners there? It sounds like it's less than 45 days, just given it was a back-end loaded quarter, and you already have the money in hand, but I just wanted to confirm.

Yes, that's correct. It depends on some of the contracts. There is some portions that are prepaid, some net 30 and some that are more in the 45. But you're absolutely right; we did have a -- we mentioned the shipments, the 4 units that went to Sifang as well as the MEAs, went later in the quarter. So frankly, it was a timing issue. But the payment terms are generally quite -- are on the shorter end, but it really comes down to the timing during the quarter.

Yes, one thing I'd add too, Jeff, is that, all of those shipments we just referred to were actually all covered by LC.

Yes, yes, fully covered.

Never any AR risk.

Yes. Just a timing issue.

Our next question comes from Craig Irwin of Roth Capital Partners.

So the $1.1 million in European bus revenue in the quarter was really nice to see after a couple quarters of waiting for this to materialize. Your orders in the last several months seem to support a fairly nice ramp going into the end of the year. How would you characterize that ramp? Or how should we be thinking about progression in the third and fourth quarters?

Craig, Randy here. So I think similar to last year, the outlook was really to be kind of relatively flat compared to last year. We're slightly down at the first half and in the second quarter we're relatively flat obviously. So similar to the type of profile or cadence of 2017.

Yes, I think just -- I think with regard -- and more specifically thinking of heavy duty, which, of course, is the bulk of revenue. And we have -- we've previously announced we had the 40 modules for Germany and about 20 modules for the U.S. that are in our backlog. We would expect those to start delivering in the second half. Certainly, particularly the U.S. ones, we expect to be largely delivered. And then the European ones we'll start to deliver.

So I think we're going to see, say over the next 12 months, a fairly steady delivery flow of those 60-odd units that we previously announced over the course of the next 12 months, but that will be consistent with Randy's more general outlook as well.

Great. Also wanted to ask a couple more questions about the Audi VW development agreement. So congratulations on renewing that and expanding that. In the quarter, it looks like we had about 35% growth in revenue over last year. Now I know these are still relatively small numbers, but was this really driven by sort of the completion of the prior program? Or when we look at this being flattish over the next couple quarters, is it flat from what we saw in the second quarter? And then, maybe, if you could comment about the scope of the agreement? What the changes were, particularly in the scope for the renewal versus the prior agreement?

Yes. So good questions, Craig. The -- first of all, we're very excited about this extension. It's a pretty significant commitment, again, for Audi and VW group. And we're -- you think about the scope, basically Ballard is providing 100% of the work on the fuel cell -- automotive fuel cell stack. And as I mentioned, I believe the stack technology we've developed here and continue to work against is industry-leading in a number of key metrics.

So I think a very powerful program. The scope really hasn't changed at all, but we are seeing a transition in activities moving from technology development, now more to commercialization. And so the kind of nature or some of the milestones and some of the talent that's required in the next couple years will change a little bit during that time frame. And we'll start to see more component supply and product supply later in the period.

So I don't see a lot of change in the scope. It is a milestone-based arrangement. And so it's important for us to continue as we've done over the last number of years to continue to hit milestones. In terms of the cadence, Tony, you can comment on that.

Yes, sure. As -- we booked -- as disclosed in our MD&A, we booked about 6 -- a little over $6 million in the second quarter, a little over $12 million for the first half of the year for the program. We would expect to see a similar cadence throughout the balance of the program.

Great. My next question is about Protonex and the Power Manager kit. So congratulations on the ramp in activity there. I know it's taken a lot of effort to get these results. Many of us that follow Ballard look at this product as noncore to the longer-term mission at Ballard. Randy, you have been very proactive in trimming things that don't necessarily make sense in the portfolio. Is this an opportunity to monetize the assets as we hit the next couple of milestones and maybe get some larger orders? And is it fair to assume that the margins on a product like this are pretty juicy like they typically are for electrical equipment going to military and special forces?

Yes, so a couple of points there. One is that, I believe Protonex is developing into a very intriguing business. And I think Milestone C was, in fact, an important milestone. We've seen through activity levels and order flow in the first half of the year as well as current activity that indeed there will be a ramp in that business.

I also believe that the asset that -- Protonex assets could be very attractive to other partners or other companies that have more capability than Ballard does in that market segment. So right now, we're continuing to work very hard to secure orders. And, of course, that provides some optionality on how we deal with that business.

Great. And then last question, if I may. Gross margins were impressive this quarter, really impressive, particularly given the headwinds that you faced this year. Can you talk about progression of gross margins through the rest of the year? Should we see something similar to what you've had in the first couple quarters? Or does mix maybe present a little bit of a headwind in the third and fourth quarters?

Craig, Tony here. I would say the first half of the year was on the high end of what we would expect for the full year. The mix indeed that will change through the back half of the year, so we might see -- I don't think we will be sustaining the type of numbers we saw in Q2, but we still expect to see very strong -- I think we've indicated in the past, 30% plus margins. So it won't be quite as robust as the first half, but still some good margins in the second half.

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

Thank you for joining us today. We look forward to speaking with you, again, at the beginning of November when we'll discuss the third quarter 2018 results. Thank you.

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