Q2 2005 Ballard Power Systems Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Ballard Power Second Quarter Results Conference Call. [Operator Instructions] I will now turn the conference over to Michelle Cormack, Manager, Corporate Relations. Please go ahead.

MICHELLE CORMACK, MANAGER, CORPORATE RELATIONS, BALLARD POWER SYSTEMS: Good morning everybody. Welcome to Ballard Power Systems 2005 Second Quarter Conference Call. With me today are Dennis Campbell Ballard's President and Chief Executive Officer. Dave Smith, our CFO. And Noordin Nanji our Vice President, Marketing and Business Development. Dennis will discuss the second quarter highlights. Dave will discuss some of the drivers that affected our Q2 financial results and give you some guidance for the balance of the year. Following Dave's comments well open the call to your questions.

Before we start I would like to remind you that Ballard reports its financial results in U.S. dollars. In this conference call management of Ballard will make forward-looking statements that are based on the beliefs of Ballard's management and reflect our current expectations as contemplated under section 27A of the Securities Act of 1933 as amended, and section 21E of the Securities Exchange Act of 1934 as amended. This specifically includes management's expectations regarding revenue and cash consumption. For detailed discussion of the forward-looking statements please refer to our press release issued yesterday and our annual information form. I will now turn the call over to Dennis Campbell, Ballard's President and Chief Executive Officer.

DENNIS CAMPBELL, PRESIDENT AND CEO, BALLARD POWER SYSTEMS: Thanks Michelle. Good morning. Thank you for joining our call this morning. Our press release and financial statements were issued yesterday afternoon. They are also available on our website. This morning we will review some of the highlights of our second quarter and provide a little context on our financial results. In the second quarter we continue to build the long-term sustainability enterprise by among other things concluding the negotiations for the sale of our German subsidiary Ballard Power Systems AG, The Daimler Chrysler and Ford and strengthening our relationship with EBARA corporation of Japan. Together these two initiatives will provide almost $90 million in funding most of which will go directly toward our next generation automotive fuel cell, electric drive and co-generation development programs.

Let me address the sale of Ballard Power Systems AG first. This transaction will bring significant financial benefits to Ballard, which we have outlined clearly in our press release. If you have any questions on those points I will be happy to answer them during the Q&A. But I would like to provide greater clarity on other important aspects of that deal. Our fuel cell alliance is an industry leading collaboration. Together we have put more resources into the research design and development of this technology than anyone. Including put in more demonstration vehicles on the road than all other fuel cell developers combined.

The willingness of our alliance OEM partners to commit to the next generation of fuel cell and e-drive product development and to assume all responsibility and all expenses for ongoing development of the fuel cell support systems is a very clear signal of their continued commitment to this technology and to Ballard. This transaction will ensure the each member of the alliance is clearly focused on what it does best. For Ballard, that means continuing to push forward our automotive fuel cell technology. For Daimler Chrysler and Ford it means continuing to integrate Ballard's fuel cells into advanced vehicle support systems and putting demonstration vehicles on the road.

With respect to electric drives Ballard will retain responsibility for the design, development and manufacture of e-drives for fuel cell vehicles. Both Daimler Chrysler and Ford have committed to fund the development of the next generation e-drive development program and to purchase their next generation fuel cell e-drives from Ballard. Also as part of the transaction Ballard has agreed to give up its right of first offer with Ford on electric drives for internal combustion battery hybrid vehicles. We don't presently have the capability to meet Ford's requirements in this product range and it would take a significant investment in the tens of millions of dollars to create such a capability. Since there's an existing supply chain -- we agreed to waive the right of first offer and of associated non-compete provision in exchange for the return of three million Ballard shares.

Our third area I would like to clarify is the value share that Ballard will retain. Excluding e-drive the value of fuel cell power train is split approximately 1/3 fuel cell and 2/3 support system. As we move towards commercialization we expect the value contribution of the support system drop considerably as it is substantially simplified and the hardware components are commoditized. The Department of Energy's cost targets for 2010 bear this out with the target for fuel cell at 30 dollars per kilowatt representing 2/3 of the value share and the target for support system at $15 per kilowatt representing only 1/3 of the total. In addition of course Ballard will supply the e-drive system to the alliance partners.

If the e-drive commercial target is assumed to be in the $10 to $15 per kilowatt range then the total value captured would be in the range of 73% to 75% of the value chain. As you know the sale of Ballard Power Systems AG is subject to shareholder approval. We will be issuing a proxy circular on August 5 and we'll hold a special shareholders meeting in Vancouver on August 29. We expect that the transaction will close shortly there after .I will turn now a milestone we announced in may with respect to our relationship with EBARA. The Japanese co-general market is open because of a number of reasons. Large volume potential, strong socioeconomic drivers, significant government support, and the ability to access development funding from customers and partners. The …