Earnings Call Transcript - AMSC Q2 2022

Operator, Operator

Welcome to the AMSC Second Quarter Fiscal Year 2022 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Heilshorn from LHA. Please go ahead, sir.

John Heilshorn, Investor Relations

Good morning, Sandra. Good morning, everyone, and welcome to American Superconductor Corporation's Second Quarter of Fiscal 2022 Earnings Conference Call. I am John Heilshorn of LHA Investor Relations, AMSC's Investor Relations agency of record. With us on today's call are Daniel McGahn, Chairman, President and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the second quarter of fiscal 2022 yesterday after the market closed. For those of you who have not been able to see the release, a copy is available at the Investors page of the company's website at www.amsc.com. Before starting the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor's future expectations, including expectations regarding the company's third quarter fiscal 2022 financial performance, plans and prospects, constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2022, which the company filed with the Securities and Exchange Commission on June 1, 2022, and the company's other reports filed with the SEC. These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management views as of any date subsequent to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements. Also on today's call, management will refer to non-GAAP net loss, a non-GAAP financial measure. The company believes that non-GAAP net loss assists management and investors in comparing the company's performance across reporting periods on a consistent basis by excluding these noncash, nonrecurring, or other charges that it does not believe are indicative of its core operating performance. The reconciliation of GAAP net loss to non-GAAP net loss can be found in the second quarter of fiscal '22 earnings press release that the company issued and furnished to the SEC last night on Form 8-K. All of American Superconductor's press release and SEC filings can be accessed from the Investors page of its website at www.amsc.com. With that, I will now turn the call over to Chairman, President and Chief Executive Officer, Daniel McGahn. Daniel?

Daniel McGahn, CEO

Thanks, John, and good morning, everyone, and thank you for joining us today. I'll begin today by providing an update and sharing a few remarks on our business. John Kosiba will then provide a detailed review of our financial results for the second fiscal quarter, which ended September 30, 2022. We'll provide guidance for the third fiscal quarter, which will end December 31, 2022. Following our comments, we'll open up the line to questions from our analysts. We started our second quarter of fiscal year 2022 with positive orders momentum and strong market demand. Total revenues for the second quarter of fiscal year 2022 exceeded our expectations and came in above our guidance range. Our second quarter revenue of nearly $28 million was driven by strong new energy power system shipments. Our Grid segment revenue for the second quarter of fiscal year 2022 accounted for over 90% of AMSC's total revenue and grew versus the year-ago period. We had very strong bookings in the second quarter of fiscal 2022, and our grid visibility now extends well into fiscal 2023. The team is executing and driving progress with both new and existing customers for our products. We announced $30 million of new orders in October and have a solid order book of over $100 million. During our second quarter, we saw a diverse set of shipments to renewable, industrial, semiconductor, mining, and Navy projects. About 1/3 of our shipments were to renewable projects. Industrial shipments represented about 1/5; semiconductor projects were over 15%; metals, mining, and materials were also over 15%; and the Navy was nearly 10%. We believe we are well positioned to benefit from the tailwinds created by global decarbonization efforts. Mining, metals, and materials are at the heart of this movement, and that is where we have expanded our momentum and our broader portfolio of acquired products. We also see projected growth in the renewables market and increased investments in semiconductor capacity. We believe AMSC is certainly a more diversified and stronger business than it was a few years ago. We ended the second quarter with more than $37 million in cash. We have a strong balance sheet and order book. We continue to demonstrate our ability to manage our business effectively despite the challenging operating environment. We are executing against our plans of a more diversified and sustainable business. Now I'll turn the call over to John Kosiba to review our financial results for the second quarter of fiscal year 2022 and provide guidance for the third quarter of fiscal year 2022, which will end December 31, 2022. John?

John Kosiba, CFO

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $27.7 million for the second quarter of fiscal 2022 compared to $27.9 million in the year-ago quarter. Our Grid business unit accounted for 93% of total revenues, while our Wind business unit accounted for 7%. Grid business unit revenues increased by 4% in the second quarter versus the year-ago quarter, while the Wind business unit decreased 40% over the same time period. Looking at the P&L in more detail. Gross margin for the second quarter of fiscal 2022 was 7% compared to 12% in the year-ago quarter. Gross margin for this quarter was adversely impacted by the continued drag on margins associated with the acquired Neeltran backlog and inflation pressure in the supply chain. To provide some quantitative reference, Neeltran adversely impacted our quarterly consolidated gross margins by approximately 500 basis points. We made substantial progress in reducing the Neeltran-acquired backlog. And as I mentioned last quarter, we expect to ship off most of that remaining acquired Neeltran backlog by the end of Q3 fiscal 2022. Moving on to operating expenses. R&D and SG&A expenses for the second quarter of fiscal 2022 were $9.7 million, compared to $9.4 million in the year-ago quarter. Approximately 11% of R&D and SG&A expenses in the second quarter of fiscal 2022 were noncash. Our non-GAAP net loss for the second quarter of fiscal 2022 was $6.5 million or $0.23 per share, compared with $5.1 million or $0.19 per share in the year-ago quarter. Our net loss in the second quarter of fiscal 2022 was $9.9 million or $0.35 per share. This compares to a net loss of $4.4 million or $0.16 per share in the year-ago quarter. Included in our Q2 FY 2022 net loss was a $1.9 million noncash expense for a final release of the cumulative foreign currency translation adjustment for the dissolution of our China entity. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. We ended the second quarter of fiscal 2022 with $37.4 million in cash, cash equivalents, and restricted cash. This compares to $43.1 million on June 30, 2022. Our operating cash burn in the second quarter of fiscal 2022 was $5.7 million. Now turning to our financial guidance for the third quarter of fiscal 2022. We expect that our revenues will be in the range of $22 million to $26 million. This revenue guidance contemplates, at the request of our customer, the rescheduling of a large-sized project within our Grid business to ship from Q3 to a revised requested ship date in Q4 FY 2022. Our net loss on revenue at this range is expected to not exceed $9 million or $0.32 per share. Our non-GAAP net loss is expected to not exceed $7 million or $0.25 per share. We expect operating cash flow to burn between $4.5 million to $6.5 million in the third quarter of fiscal 2022. We expect to end the third quarter with no less than $30 million in cash, cash equivalents, and restricted cash.

Daniel McGahn, CEO

Thanks, John. A few weeks ago, we announced $30 million of new energy power system orders driven by growing market demand. We currently have three favorable tailwinds driving demand for our new energy power systems. These are investments in renewables, semiconductors, and mining, metals, and materials. I'll focus more time elaborating on the third tailwind comprised of mining, metals, and materials because we booked significant orders in these markets, and there are important drivers fueling their expected expansion. First is the projected growth in the renewables market. Wind power projections are estimated to grow year-over-year in the markets we serve. According to Global Data, the U.S. is expected to add approximately 8 gigawatts in 2022 and increase by 26% over the next five years. The U.K. is expected to add 3.7 gigawatts in 2022 and expand by 46% over the next five years. India is expected to add 2.5 gigawatts in 2022 and grow by 34% over the next five years. About 1/3 of our product shipments during the second quarter were for renewable projects. Second, as the demand for semiconductors increases, makers of chips are expected to expand their manufacturing capacity. The global semiconductor market was valued at $556 billion in 2021 and is expected to increase by nearly 14% in 2022, continuing to grow by 4.6% in 2023. As for its future development, analysts forecast this expansion at a compound annual growth rate of 8% over the next five years to reach a value of around $900 billion by 2027. Since 2021, in the United States alone, the semiconductor industry has announced nearly $80 billion in new investments through 2025. More than 15% of our product shipments during the second quarter were for semiconductor projects. Our third tailwind is the increasing demand for mining, metals, and materials. Let me take some time to elaborate on this as this really is a new development in our business and our drive towards diversification and growth. Consider the global market conditions shaped by climate and environmental action. For example, achieving the goals of the Paris Agreement would mean quadrupling mineral requirements for clean energy technologies by 2040. Wind power, solar photovoltaics (PV), and electric vehicles (EVs) all demand more materials and are at the heart of this anticipated market shift. To give you some perspective, an onshore wind plant requires nine times more mineral resources than a gas-fired plant. An electric vehicle requires approximately six times the amount of key materials used when compared to conventional cars. In short, the quantity of key materials needed for the expected electrification of our economy is vast. The soaring demand for clean energy means mining for metals and minerals is on the rise. This demand comprised more than 15% of our product shipments during our second quarter as well as a significant part of our recent $30 million new energy power systems order announcement. To be very clear, with the acquisition of NEPSI and Neeltran, we have positioned ourselves not only at the grid connection and control point for the power projects but also upstream in the business of the basic materials that go into the systems that make, store, and move the power. This is a way for the company to benefit at multiple points along the supply chain of new energy solutions. This exciting energy future also depends upon computer chips, batteries, and fuel cells that are built from silicon, lithium, and carbon. All these building blocks must be mined, processed, and assembled. Industrial manufacturers of these essential materials must be able to power their factories in ways that scale, without adding complexity or size. This is where we believe AMSC's products are uniquely well positioned to address market demand. Our voltage compensators, capacitors, harmonic filters, transformers, and rectifiers can power the energy-intensive factories of the future without the risk of costly power interruptions that could hinder this journey to a better future. We supply products and capabilities that enable mines to effectively operate and meet the world's growing demand for metals and minerals. This demand for minerals used in EVs and battery storage is estimated to grow at least 30 times by 2040. Lithium is expected to have the fastest growth, with demand increasing 42 times by 2040, followed by graphite, cobalt, and nickel. The expansion of electricity networks will also contribute to an increased copper demand for grid lines by three times between 2020 and 2040. It's a very exciting new development in our business in dealing with these key materials for the energy future. Now let me turn to AMSC's other products and services. In addition to those markets, we're also focused on the Navy through our Ship Protection or SPS solutions. In an age of increasing global tensions, we're helping to move U.S. Navy ships into the future by installing protection systems that help them stay hidden from our enemy. Right now, we're focused on the successful installation of our ship protection system on the USS Fort Lauderdale. We have established and demonstrated our capabilities to deliver the SPS systems. In our backlog, we have the USS Harrisburg, which is scheduled to be delivered this fiscal year. The USS Richard McCool and the USS Pittsburgh. SPS contributed nearly 10% of the revenues in the second quarter of fiscal 2022 and has been a very consistent source of grid revenue for several quarters. Our team is focused on continuing to expand our Ship Protection Systems into other vessels while we are installing our initial systems. We hope to have more news coming soon regarding what we believe will be our bright future with the Navy. Our Resilient Electric Grid or REG system in Chicago continues to perform well. We continue to see strong desire from this utility as well as others to further deploy REG into the power grid. It is clear, at least to us, that REG offers the capability and functionality to solve some of the nation's current critical grid infrastructure problems right now. Turning to Wind. We are supporting Inox and Doosan in the field with the initial prototype of a 3-megawatt class wind turbine and the initial wind farm of 5.5-megawatt wind turbines, respectively. During the second quarter of fiscal 2022, we shipped 2-megawatt electrical control systems, or ECS, to our partner in India, Inox Wind. The design certification of the 3-megawatt class wind turbine prototype for the Indian market is complete. We believe Inox is in a good position to start expanding its business this year with the 3-megawatt class wind turbine, which we expect will translate into an expanded order book for us. Across our businesses, we continue to work through the ongoing challenges of supply chain constraints, transportation constraints, and inflation. These challenges are very real. We have worked with our vendors to maintain stocks of key components and carry inventory. We are carrying inventory as well. We have been managing through these challenges through constant interaction with customers as well as logistics providers. The team has been doing a great job of managing supply chain challenges and pricing it into proposals, where possible. We are, first and foremost, focused on what our customers require. And so far, we have been able to manage key customers' demand. Our company has a strong record building our business year after year, entering new markets and strengthening our existing product lines and services to our expanding customers. We believe we possess the ability, skills, and dedicated employees capable of building on our successes with an eye towards executing on new opportunities. We feel very confident about the future and believe there are tremendous opportunities ahead for us. In fact, as we look ahead into fiscal year 2023, I am highly optimistic that our recently announced order book will result in a more diversified and financially stronger AMSC. We believe the integration of our recent acquisitions enhances the fundamentals of our company and addresses market opportunities more broadly and efficiently. As we experience revenue growth in new energy shipments coupled with working off the acquired Neeltran backlog, we anticipate meaningful gross margin expansion. With an uncertain economic outlook, our team has demonstrated extraordinary operational discipline. The team is doing a great job of managing the supply chain challenges and pricing them into proposals, where possible. We believe we are well positioned to take advantage of the decarbonization tailwind and expect to continue to grow and diversify our business. We have Ship Protection System orders for deployment on the USS Harrisburg, the USS Richard McCool, and the USS Pittsburgh. We continue to hire talent aligned with our long-term plan. We are executing diligently against our plans of a more diversified and sustainable business, and we expect a strong end to fiscal year 2022. I want to thank our team for their hard work and support, and I look forward to reporting back to you at the completion of our third fiscal quarter of 2022.

Operator, Operator

The first question comes from Colin Rusch from Oppenheimer.

Colin Rusch, Analyst

Can you talk a little bit about the trajectory of your win rate? I think with the mining build-out as well as the semiconductor build-out in the U.S., there's a tremendous opportunity for you guys as folks think about power quality and the importance of power quality? But I'm curious about the competitive landscape and how you guys are shaping up versus some peers within that opportunity.

Daniel McGahn, CEO

Yes. I think it's a great question, Colin. With these new offerings representing some new competition for us. What we find is our way of trying to provide a whole solution for our customer helps differentiate us. Our ability to deliver timely and manage lead times very well for customers gives us some additional competitive advantage. I think the fact that we understand the grid very well really puts us in a unique position as we look at competing with industrial customers, because they really view us as an extension of the project team that's developing the asset that's going to connect to the substation. So we think we're in a great competitive position, not only technologically but from a lead time and also just from a general competency standpoint.

Colin Rusch, Analyst

That's super helpful. And then just shifting gears around the military. Obviously, there's a lot of geopolitical activity going on right now and shifting. I mean are you seeing incremental movement on budgets activity around scoping the opportunity there? Obviously, you guys have the appropriate approvals, and it's really just around ship-by-ship budgets. But are those budgets starting to move a little bit? And what's your sense of the overall pressure to upgrade given the broader environment?

Daniel McGahn, CEO

What we know is that the technology's been de-risked. We know that we're in the throes of an installation on the very first ship. So I don't want to say the entire Navy is watching us, but the part of the Navy that matters to us is watching us. So we're really focused on ensuring that the risks around installation are mitigated on this first ship. We know the pathway to the next ships is beginning to pull from inside the Navy to do more with them. As I kind of mentioned in the remarks, we look forward to very soon coming back and talking about some demonstrable progress with the Navy.

Operator, Operator

The next question comes from Justin Clare from ROTH Capital Partners.

Justin Clare, Analyst

I guess, first off here, I just want to ask about the guidance. I was wondering if you could just help us understand kind of what's driving the wider expected net loss in Q3 versus Q2? It looks like revenues could be down a touch, but could you also see some margin compression on the gross margin side? Or are you anticipating higher OpEx? So just any color on the changes from quarter-to-quarter would be helpful.

Daniel McGahn, CEO

Let me handle the revenue discussion and leave the important details to John. For Q2, we exceeded our expectations slightly due to some work we completed ahead of schedule. This contributed to a revenue increase beyond what we initially anticipated. John mentioned earlier that one customer has requested a project to be delivered in Q4, which has moved a significant project from one quarter to the next. As you review the guidance, please keep in mind there are several factors at play. We aim to be as open as possible, and if you’d like to discuss other aspects of the financial statement, feel free to do so, John.

John Kosiba, CFO

Sure. Hi, Justin. So the guide really is flat quarter-over-quarter from a P&L side. When we guide, we have to prepare for the worst-case revenue scenarios. Our guide for non-GAAP is about $500,000 worse than the previous guide. I don't see any meaningful difference in gross margin anticipated quarter-over-quarter, and OpEx is relatively flat, maybe like going up a couple of hundred grand, but not enough to swing the needle in any significant way. So I'm looking at it more as a push quarter-over-quarter in Q3 versus Q2.

Justin Clare, Analyst

Got you. Okay. That's helpful. And then just thinking through how things trend in the balance of the year, it looks like by fiscal Q4, you'll have the Neeltran backlog that has rolled off, so you could get a 500 basis point margin uplift from that. Just wondering if you could talk through kind of the other product lines, how you see margins trending? It sounds like cost inflation is an issue, but have you put in kind of the price increases that are necessary to achieve a healthy margin level by the time we get to the end of the year or into 2023?

Daniel McGahn, CEO

Yes. I think your timetable is right on. We've been trying to price in elevated costs where we can. Obviously, you can see a strengthening in the order book. We were reporting orders on a quarterly basis in the low 20s. Now we've done $40 million and $30 million back to back. So we're obviously at an accelerated higher level of backlog than we've been. We look at a lot of the indicators across the business, so you really point to growth from where we are with inventory to what we're talking about with margins and things like that. So I am very, very optimistic that we'd see strong second half. I think we're going to see that translate more into Q4. And my hope, not to go out too much further, but as we work with the team and look at 2023, we've done a lot of work already, and it's only the beginning of November to make sure that 2023 is a really strong year. So I know sometimes these calls are hard when people look at the numbers and the immediate impact, but I want to be clear, I am really excited about not only how we're going to finish up this year, but what next year could look like.

John Kosiba, CFO

Justin, on the margin, you have Neeltran. So on the same revenue, you will have the bump up in the Neeltran, which you quickly realized. And then the other piece is the mix. As we start to see in Q4, we did mention that we had a rather large grid project pushed out of Q3 and into Q4. That mix is as we see D-VAR start to approach more historical levels of revenue, you're going to see some natural margin improvement just because the mix is going to get better leading into Q4 and hopefully continue on into FY 2023.

Operator, Operator

The next question comes from Eric Stine from Craig-Hallum.

Eric Stine, Analyst

So regarding wind, you mentioned Inox and the completion of the design certification for the 3-megawatt turbine. They've been discussing this for about one to two years, and recently they talked about a commercial launch and the possibility of taking orders in the first quarter of 2023. With that in mind, when do you expect to see an official supply agreement to meet that timeline? You're clearly optimistic, which is great, but I'm just curious about the timing of when we might see that.

Daniel McGahn, CEO

Yes. I think that's the hardest thing to guess here based upon how the demand is going to ramp and how quickly we can respond. We've tried to be clear. For a lot of our products, we're looking at 9-, 12-, 15-month lead times. In the case of Inox, we want to do the best we possibly can. But it always starts with their ability to pay. So I think if we see indications from their business that they're becoming healthier, that should translate into a good indication that our business is going to start to turn around on the wind side. So I think we always tell them, the sooner the better, to meet the demand that they've been talking about. But again, here, we're in November, and we've yet to enter into an agreement on the 3-megawatt part. So I'll just leave it at that.

Eric Stine, Analyst

Got it. And if they are truly serious and are going to stick to that timeframe, though, I mean, it would seem to be that an agreement would be forthcoming in the near term where it should be.

Daniel McGahn, CEO

I'll let you read those tea leaves.

Eric Stine, Analyst

Okay, fair enough. For my follow-up, I'm just confirming the project that got delayed. Is it reasonable to assume that this is connected to the incentives from the recently passed IRA? Also, how confident are you that this will be a Q4 event, or could it possibly be pushed further into fiscal '23?

Daniel McGahn, CEO

It doesn't really relate to the Inflation Reduction Act or any investments associated with it. This issue was present in our backlog long before that. This isn't just about a customer wanting to change the date. They have their own reasons, including labor availability and other factors. I don't think it's a major concern because we encounter situations like this frequently. We try to manage them, and I hope it ultimately benefits us. I'm aiming to be more open about why things are shifting or what we are observing, providing clearer insights into our situation. This is a common occurrence for us. As I mentioned, in Q2, the project progressed faster than we expected. I want to signal that we have one project moving to Q3, which we are confident will happen in Q4.

Operator, Operator

The next question comes from Chip Moore from EF Hutton.

Chip Moore, Analyst

I want to follow up regarding that project. I'm assuming it's a D-VAR project. Can you provide an idea of its size and whether this project might be pushed to Q4?

Daniel McGahn, CEO

I mean, generally, we won't put it in a script if it's not a significant number. So it's multiple millions.

Chip Moore, Analyst

Got it. Okay. So it's quite material. And then just on margins. You've got something like you get a nice natural uplift in Q4 just from that Neeltran backlog clearing up in volumes. If we look out, with the $100 million-plus order book standing well into next year, is there a way to think about pricing and margins within that backlog and how that might roll through? Is there any help you can give us there?

Daniel McGahn, CEO

Not a lot because we're not a company that typically provides margin guidance. I don't think we're at a scale yet. However, $100,000 or $300,000 in a quarter can happen frequently. From a predictability standpoint, I can say that the orders we've been booking, when we reflect on what we discussed a couple of years ago regarding long-term models and achieving higher revenue levels, nothing has changed in the business that prevents us from meeting those gross margin targets. Acquiring a business that requires some attention is actually beneficial. We've discovered numerous market opportunities for the combined product line, possibly more than we initially expected. Therefore, I don't view the margin issues as a strong indicator of the business's health right now because we have robust bookings. We are confident that the margins in these bookings will only enhance our position in the upcoming quarters.

John Kosiba, CFO

Chip, what I can tell you is in that backlog, we do have all the latest costs anticipated in there. So the current cost on that backlog is where our costs are today. It is tough to do a year-over-year comparison of the backlog because we're a project-based business. So it's not as easy to just look at it and say, okay, did you raise your prices 9%? But what we can tell you is looking at the cost and looking at the prices that we have in that backlog, we believe it's consistent with what we're expecting margins to be in 2023.

Chip Moore, Analyst

Yes. No, that's helpful. That's what I was looking for, just to make sure you could get back to historical rates. And then if we do get Inox or some more ECS orders, that's a potential nice lift. Is the way to think about it?

Daniel McGahn, CEO

Yes, I think that's a good way to think about it.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn the conference back over to Daniel McGahn for any closing remarks.

Daniel McGahn, CEO

Thank you everyone for your attention. We are concentrating on our long-term strategy to build a more sustainable business, both in our operations and the products we deliver, as well as from a financial perspective to enhance diversification and growth. I'm pleased to see our progress, especially as we pivot from renewables and the military to also emphasize semiconductors, which are becoming an essential aspect of our operations. There are many promising developments ahead, particularly in the U.S., thanks to the administration's support for domestic manufacturing in this sector. Moreover, in the area of mining, minerals, and materials, we are noticing the benefits of our initial acquisition discussions regarding cross-selling and providing unique content that excites our customers. This indicates a bright and increasingly diversified future for us compared to two years ago. I'm looking forward to our call in January or February, as I believe we will begin to see the positive outcomes of our efforts. We expect an excellent start to the 2023 calendar year and our fiscal year 2023 as well. Thank you all.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.