American Superconductor Corporation
Q3 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good day, and welcome to the American Superconductor Third Quarter Fiscal 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Heilshorn of LHA. Please go ahead, sir.

[John Heilshorn:]

Thank you, Manish. Good morning, everyone, and welcome to American Superconductor Corporation's Third Quarter Fiscal 2020 Earnings Conference Call. I'm John Heilshorn, 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.

[Daniel McGahn:]

Thanks, John. Good morning everybody. I’ll begin today by providing an update on our Grid and Wind business units. John Kosiba, will then provide a detailed view of our financial results for the third fiscal quarter, which ended December 31, 2020 and provide guidance for the fourth fiscal quarter, which will end March 31, 2021. Following our comments, we’ll open up the line to questions from our analysts. AMSC delivered strong results during the third quarter of fiscal 2020. Revenue for the quarter grew by more than 30% versus the year ago period coming in at $23.6 million. Our Grid segment revenue grew 12% versus the year ago period. Brand is driving revenue growth for the company. And all Grid product lines contributed to the quarter. We generated positive operating cash flow in the third quarter of fiscal 2020 as forecasted. This is a great milestone for the company to be. We met this objective for this one quarter, and we strive to be there on a sustainable basis. We believe that this demonstrates progress towards our goal of reaching operating cash flow breakeven on a consistent, sustainable basis. We ended the third quarter of fiscal 2020 with more than $84 million in cash. Let's take a moment to review our Grid business. In October, we announced the acquisition of NEPSI. Please realize that this transaction occurred during our third quarter, which is the period we're now reporting on today. The acquisition of NEPSI directly aligns with our strategic priorities to accelerate profitable growth independent of our Wind business, broaden our product offerings, and expand both market reach and market share. Further, the addition of steady state power correction extends our product offering in the industrial sector of our Grid business expanding our available market. Going forward, we will talk about the pieces that make up our Grid segment in terms of new energy power systems, and ship protection systems. New energy power systems include NEPSI, D-VAR and VVO. We are integrating the frontend of this part of the Grid business as one. And yes, REG is part of grid as well. Grid driving revenue growth for the company. We believe that our Grid segment is on track for another year of organic growth in FY2020. And if we achieve this objective, it'll be our sixth consecutive year for Grid growth. In the third quarter, our new energy power systems revenues were driven by industrial sales principally to the United States, renewable projects in the United States, as well as international semiconductor fab.

[John Kosiba:]

Thanks, Daniel. And good morning, everyone. AMSC generated revenues of $23.6 million for the third quarter of fiscal 2020, compared to $17.9 million in the year ago quarter. Our Grid business unit economy was 72% of total revenues while our Wind business unit accounted for 28%. Grid business unit revenues increased by 12% in the third quarter versus the year ago quarter, due primarily to revenues generated from our recent acquisition of Northeast Power Systems or NEPSI. Wind business unit revenues more than doubled during the third quarter versus the year ago, quarter with a 144% increase in revenue as a result of increased ECS shipments behind Inox Wind. Looking at the P&L in more detail, gross margin for the third quarter of fiscal 2020 was 17%, up from 9% in the year ago quarter. The higher gross margin was a result of a favorable product mix, which included ECS shipments. Included in cost of goods sold in the third quarter of fiscal 2020 is approximately $1.3 million in non-cash adjustments related to the purchase accounting for the acquisition of NEPSI. These non-cash related adjustments represent a negative five percentage point impact to our gross margin in the third quarter. R&D and SG&A expenses for the third quarter of fiscal 2020, were $10.1 million. This is up from $8.1 million for the same period a year ago. Increase in R&D and SG&A expenses in the first quarter of fiscal 2020 was due primarily to the addition of NEPSI’s operating expenses to AMSC’s operations. Approximately 13% of R&D and SG&A expenses in the third quarter of fiscal 2020 were non-cash.

[Daniel McGahn:]

Thanks, John. As I said at the onset, our new energy power part of our business is doing very well. We're really excited about our growth prospects in this part of our business, and want to continue executing on our strategy of growth and diversification. Let's touch on other areas of the business. Turn to SPS. As you know, our ship protection systems or SPS has become the baseline design for the San Antonio Class and VVO's warfare ship or LPD platform. We announced in January, our fourth ship protection system contracts for the San Antonio class. This contract is for an SPS for LPD 29, also known as the USS Richard M. McCool Jr. LPD 29 will be the 13th amphibious transport dock ship of the USS San Antonio Class. The ship is named after U.S. Navy officer and Medal of Honor recipient Richard Miles McCool, Jr. Our SPS from the San Antonio class represents approximately $10 million in value for revenue per vessel. Our current backlog of SPS orders now include LPD 28, LPD 29, LPD 30 and LPD 31. Our team is very busy and focused on continuing to expand the business while we deliver our first systems. From a capacity perspective, we’ve been planning for the concurrent manufacturing of multiple SPS orders. And we're very happy, we have this capability as we are full out in producing these systems. We've talked about the expected size of the opportunity several times in the past. In total, there were 15 future San Antonio class ships, plan to be built after we had our design wins. We have now on four of these $15 million or $40 million of the potential, $150 million for this class of ship. San Antonio class is our first design win with the Navy. We were actively engaged with the Navy pursuing additional classes and vessels for deployment of our SPS. We have done some engineering for the potential deployment of our SPS in a next class of ship. We are very excited about this opportunity and the work ahead to expand into more of the U.S. Navy fleet. In each case, we have to do engineering work prior to procurement. We have to fit our common components that make up our ship protection system and show all the changes to the build of the ship. This is exciting work indeed. In addition, we're working hard to bring our Degassing Systems to forward place. We see interest here, but again, there is an engineering phase that would proceed any procurement. Turning to REG, our Resilient Electric Grid system. We announced previously that ComEd agreed to install its first Resilient Electric Grid system as a permanent asset within Chicago's electric power grid. In July of 2020, we announced that ComEd Break Ground and has been gotten construction for the REG system. We have now delivered all our hardware to the project and are providing technical assistance to comments during construction. Things are progressing very, very well. We're on schedule and anticipate energization in 2021 per ComEd schedule. We are excited about our execution to-date on this first project with ComEd, many U.S. utilities are excited to watch our success. Turning to winds. During the third quarter of fiscal 2020, we shipped two megawatt ECS to our onshore wind partner Inox Wind. As we've mentioned in October, Inox regain compliance with the two megawatt supply contracts. This is a very encouraging development for sure. We stand ready to support our partner in India, as they commission new turbines or need new stock of two megawatt ECS. We are also encouraged by Inox's stated desire to lower the levelized cost of energy further by way of a new wind turbine. To that end, we have designed and Inox is now in the process of constructing a prototype of a new three megawatt class turbine for the Indian market. They expect to test and commission this turbine in 2021. Inox has indicated a new three megawatt class turbine is an integral part of its long-term strategy to deploy wind power in India. The three megawatt class platform appears to be a great fit for the competitive tariff environment in India. Inox is working towards completing construction and then commissioning the three megawatt class prototype turbine that we designed. Once conditioning is complete, Inox will then seek type certification for the operating turbine. We expect to work with Inox to build a three megawatt class production supply chain put in place and ECS initial production order and support the already growing demand for their three megawatt class turbine. We believe we're well positioned to support Inox's anticipated requirements and look forward to doing so. Overall, the market in India appears set to be the better position in 2021 than in 2020. We will see. We service the offshore wind market through our partner Doosan Heavy Industry in South Korea. We are the exclusive supplier of ECS units for Doosan's 5.5 megawatt offshore wind turbine. The South Korean wind market presents a long-term opportunity for us as does the global offshore wind market. We have completed the initial production order of 5.5 megawatt ECF for Doosan’s off shore turbine. South Korea has mandated the development of renewable energy sources as part of this plan from long-term electric power supplies and Doosan has publicly expressed its desire to secure a large share of this accelerating South Korean wind power market. Our team is working closely with Doosan and we look forward to potentially penetrating the global offshore wind market with Doosan. In conclusion, as we move towards the end of our fiscal year 2020, which will end in March. Our grid segment is driving revenue growth for our company. We are pleased to report $1.7 million of positive operating cash flow in the third quarter. We are integrating NEPSI into the company and are now marketing and selling static power correction systems into industrial markets. Our REG team has delivered the REG hardware to Chicago and we are on schedule. We are manufacturing SPS for the San Antonio class ship platform LPD and the delivery of our SPS for our first ship was expected in 2021. We are supporting Inox with commissioning in the field and have provided more two megawatt ECS products as Inox as needed. We have completed our first production order of 5.5 megawatt ECS for Doosan and look forward to announcing our next production order for the offshore wind market. We expect to grow grid revenue again in fiscal year 2020. I'm very pleased with what our team here at AMSC was able to accomplish so far this year, especially in the middle of a global pandemic. If you listen to one of the comments that John made, last year our revenues were about $64 million for the entire year. Today, we stand nine months into the year at about $66 million. The burn is dramatically different on this $66 million of revenue than last year $64 million. I think that was a key point that John made and people should focus on that. Going forward, we believe that we are well-capitalized execute on our growth through grid strategy. I'd like to personally thank our employees for their hard work and dedication. And I look forward to reporting to you again, following the completion of our fourth fiscal quarter of 2020. Manish we'll now take questions from our analysts.

[Operator:]

Thank you. We'll take our first question from Philip Shen of ROTH Capital Partners. Please go ahead.

[Philip Shen:]

Hey, guys. Thanks for the questions. The first one is on NEPSI. Just I was wondering if you could give some more color on how the combined offering now is playing with your customer base. So for the new energy product offering, how has your pipeline changed versus what it was pre-NEPSI and what kind of momentum you guys had in the beginning of the quarter?

[Daniel McGahn:]

Yes, we feel really excited Phil about the integration of the teams. They're working tremendously well together. We kind of hit it at some leverage and some synergies between the team that's working already extraordinarily well, I think the depth of the pipeline continues to show signs for growth. I think the diversification of that pipeline has been a key focus for the team. We're really excited about the future together. When I talk a lot more focused on the next quarters – necessarily the next quarter. But in the long-term we think this is a really a nice fit. And the teams are very comfortable already working together.

[Philip Shen:]

Great. Thanks, Dan. And then as a follow up there on VVO specifically, can you give us an update on what the utility activity is there? What kind of follow on orders you're getting? Or have you made it into kind of standard purchasing for a bunch of these utilities? And if so, how many do you expect to secure going forward? Thanks.

[Daniel McGahn:]

Yes, I remain tremendously excited about VVO. I think they have a perfect fit for something that's really a critical need today on the grid. We've been able to now show with utilities both of the projects already, where we've been able to deliver very quickly, the results that they were looking for. I think there's a lot of upside there. But the type of selling that we're seeing with utilities I think is also going to help us to sell larger systems for REG, also potentially to be able to penetrate utilities with the NEPSI offerings, as well as certainly REG. So VVO becomes a very important piece of the strategy as we look on how to serve utilities demand. As you hear a lot of them, the new energy power systems part of the business, it's really reconnection for renewable and we have diversified into industrial. That's really where the business has been in the future. We're looking to expand further to work more with utilities, and VVO definitely have been able to demonstrate that for us. So, net-net, we were really happy with the progress year-to-year with VVO. We do think there's tremendous opportunity. And as I mentioned in the outset, the tailwinds are really strong behind this year. The grid needs to dramatically evolve to be able to support a lot of this distributed generation. And we think VVO is a key actor in making that happen.

[Philip Shen:]

Great. We look forward to hearing on more progress there going forward. Thanks, Dan. I'll pass it on.

[Operator:]

Thank you. We'll now take our next question from Colin Rusch of Oppenheimer. Please go ahead.

[Colin Rusch:]

Thanks so much guys. Could you talk a little bit about the Navy design process and how we might start seeing that begin to roll through the P&L? It seems meaningful that you've gotten into another class of shifts at this point.

[Daniel McGahn:]

Sorry, Colin. Your line is breaking up a little bit. I heard that you said something about meaningful profit, but I don't know which product…

[Colin Rusch:]

Yes, on the Navy ship, right? So, the Navy design process and, and how quickly we might start to see some of that revenue start to flow towards you guys?

[Daniel McGahn:]

I think it's hard to predict. We're trying – where we are with San Antonio, that's about 10 million per year per shift. We're obviously at elevated levels relative to that because we have four on order, right. So we're trying to deal with that demand and be able to deliver systems. So from a meaningful standpoint that part of the business I think is important today, but becomes even more crucial as we look into longer term multi-year horizon. To get the next platform what I telegraphed in the call this time and I telegraphed last year is we know what we think will be the next platform. We're doing engineering work on it. Now, I can't handicap on how long it's going to take to get to a procurement. I think what the Navy is looking to do is to determine which specific whole number when we go and get inserted on, but typically you're looking at stuff that they're going to buy a year, year and a half in advance to kind of give you kind of how the flow through with your revenue model. So we got an order for another platform. It might be a year, year and a half before we have to deliver the revenue. So we are very optimistic from what the Navy feedback has come to us on what we've been able to do to date. We're really excited about 2021 with the Navy because it's an important milestone in the delivery of the first system. And I think that will help us selling additional systems, not just to the U.S. Navy, but the foreign navy as well.

[Colin Rusch:]

Okay. That's incredibly helpful. And then on the REG side, obviously moving forward with this project is a meaningful benchmark for the industry a little on you guys. Can you speak to how conversations in other geographies are going? And the pace at which those folks are evaluating the potential to move forward with pilot projects?

[Daniel McGahn:]

Yes, I'd say the number of utilities, particularly the ComEd is being a great cheerleader for – continues to increase, they're trying to hail this as a very important product for their future. They're trying to help market for us to have utilities. I think that's a tremendous value to us. They've been extremely supportive of our company. They really think that the product is a key part of their future. And they're literally out talking to other utilities about REG for us because it really doesn’t get it, since the compelling need in the grid to that. So what we hope happens is we deliver all this on time, get it energized and then we're positioned to take orders from the broader one. So stay tuned.

[Colin Rusch:]

Thanks so much guys.

[Daniel McGahn:]

Thanks Colin.

[Operator:]

Thank you. We'll now take our next question from Eric Stein of Craig-Hallum. Please go ahead.

[Aaron Spychalla:]

Yes. Good morning, Daniel and John. It's Aaron Spychalla on for Eric. Thanks for taking the questions.

[Daniel McGahn:]

Hi, Eric. Good morning.

[Aaron Spychalla:]

Maybe first on – good morning. Maybe first on Inox, now that the focus is on the three megawatt platform. You kind of talked a little bit about prototype design and commissioning, but can you just give a little bit more detail on how you're thinking that business can look here over the coming quarters as we kind of progress through those steps that are needed?

[Daniel McGahn:]

Inox was demonstrated with the two megawatt. They didn't need to get the type certification to start taking orders for the turbine or to start calling them supply chain. What we're telegraphing today is they're now actively working to build that supply chain, but we don't have an order yet for three megawatt yet. So I think getting through the events that happened during the quarter were critical to really set the table for the relationship going forward with the three megawatt. So all I can say is they choose at some point. We expect there to be an order for initial production for the three megawatt. We know they already have demand somewhat based on their conference calls to their investors. And overall, the market seems to be improving here in 2021. So we're very optimistic about not only the two, but the three megawatt in 2021 for Inox.

[Aaron Spychalla:]

All right. And then maybe my next question on the supply chain. I know that localizing that has been a big focus for you and it's helped a lot. Can you just talk about if you're seeing any issues there given kind of what's been going on?

[Daniel McGahn:]

We've seen issues with COVID in our supply chain across our product lines. The team has done a tremendous job trying to overcome those challenges. We haven't missed a beat in production. We haven't missed a beat really with the financials due to COVID, but I think the longer it goes, certainly the harder it gets on our suppliers to be able to deliver timely at the volumes that we need specifically to be the wind and the three megawatt. You're not creating a completely brand-new supply chain all the suppliers are known, but in some cases you're talking about brand-new parts, brand-new , brand new pieces that have to go into themselves. So that has been challenging. I'll say to be able to develop internationally during the pandemic, because you can't really travel and be there as suppliers, but we're trying to manage through it and do the best we can. At the end of the day, Inox strikes us as they build their order book and the demands of that also timetable for the need for the suppliers like us.

[Aaron Spychalla:]

All right. And then maybe last just on the balance sheet, can you talk a little bit about the priorities given the strength there? I mean is it more acquisitions preparing for that that REG kind of pipeline as it moves to the next phase? Or just anything else we should be thinking there?

[Daniel McGahn:]

We want to continue to scale the company. We want to grow and diversify. We think that the diversification. We think that the reduction of revenue volatility period to period are all things that's tremendously valuable for the company. I think the selection of going down the path with NEPSI was really sparked by the team who presented the idea really went by John here to go after these guys that make support of us. The integration has gone very well. So, we were very confident that we can buy and integrate companies. So that may be one path that we need to scale. We also are looking at internally at organic ways in parallel to be able to grow and scale the company. We think we have a tremendous platform that we're serving markets that have critical needs today for power management and that type of infrastructure within the grid, renewables and industrial. So, we just want to keep going in all the directions that we have been successful so far.

[Aaron Spychalla:]

Understood. Thank you for taking the questions.

[Operator:]

Thank you. We'll now take our next question from the Jed Dorsheimer of Canaccord Genuity. Please go ahead.

[Jed Dorsheimer:]

Hi, thanks. Thanks for taking my question, Dan. I guess on a REG – REG, I should say, could you – I understand the technology. I was just wondering if I could – if you could articulate the value proposition to the utility beyond improvement of resiliency, because utility seem to be under pressure. What's the pull for that?

[Daniel McGahn:]

Yes, the pull is very strong and it's very clear. So, what we're really competing against is other capital spends to upgrade substations, build new substations, bring more transition in urban core that are all tremendously expensive. So, what we see is at our substation, they need to expand capability REG in many ways is a much quicker, lower risk and more economical way to do it, and the traditional means of just building more out of the grid out. It's a very elegant way to be able to share existing assets, it's a very simple way utilities get to understand how to un-traffic is to capacity within the system. And really focused on moving power to where it's needed and when it's needed. So, utilities kind of get it at full very much as kind of how they would – how they will communicate our capital project. And it's, what's the benefit to the rate payer versus like the capital spend. And REG, from a utility standpoint, it’s really a positive, positive product.

[Jed Dorsheimer:]

Got it. I guess, I'm still not fully understanding the value proposition. So, if I'm a utility, and I'm under a decent amount of pressure and I have a set budget, how do I reallocate budget to you for REG versus allocation to, for example, improving, adding to my wind and solar assets to kind of green up the business? I'm just curious, how should I think about that reallocation of resources to REG?

[Daniel McGahn:]

Yes, the problems that you talking about are different and disparate. So, the problem we're trying to solve is on the grid itself, particularly in the urban system. So, what you are doing is let's say, I don't know, pick a big city, Chicago, for them to build a brand-new substation downtown is highly costly, prohibitive. It's in the high hundreds of millions of dollars to could be as much as a billion when you look at permitting, and land acquisition and all that. As they need to be able to evolve their grid, they see REG as a way to do exactly the same things at a much cheaper cost. But we're trying to focus on Jed simply is where the grid needs to grow or change be it through green, be it through distributed generation, be it through gentrification of neighborhoods, be it through natural upgrade of breakers and things within the substations. We're trying to leverage those types of projects to show a utility that REG is a more cost-effective solution to provide the additional capacity and reliability that they are thereafter.

[Jed Dorsheimer:]

Got it. And that’s helpful by the way, Dan. So, just I guess to finish this point, I should look at that it is largely city-based in terms of – if you have an existing city, you have an existing infrastructure, your solution is more cost-effective when you look at having to add a substation versus tearing up the streets and things of that nature, right?

[Daniel McGahn:]

We're exactly focused on urban because that's where the higher value is. And now you think about how the grid needs to evolve on the distribution side with more distributed generation in the city, more driving towards electric vehicles and such changing the demand on the distribution grid means that the distribution grid spread is going to have to be designed differently. And we think REG comes kind of the backbone to build that new downtown grid around. At least that's what Chicago tells us.

[Jed Dorsheimer:]

Got it. That's helpful. Thank you. I guess just with respect to NEPSI it looks like a great acquisition. But I'm just curious if I look at the core business is NEPSI going to experience a steep decline in Q4, or is it just sort of the D-VAR and kind of that core business is what has been declining?

[Daniel McGahn:]

No, I think you're missed with it’s entirely, Jed, I'll be direct with you. John made a comment, we've not shipped any ECS to Inox, it’s when. Grid is growing. Grid is doing tremendously well. We look year-to-year the organic business and adding NEPSI to both. So, D-VAR is growing. NEPSI is growing from a revenue standpoint, VVO is growing, everything is growing. And you are adding in NEPSI, which we hope to be able to grow. Really the weakness in the number that you are seeing that John had mentioned for Q4 is wind is going to be tremendously high. We're in a unique position where we can allow for that and still not have the burn explode. People that have been with us three, four years, that we didn't have a lot of ECS for those quarters, they were very difficult quarters financially. The good news, I think, if we look at March and the numbers, the revenue is right in line with where we've done in prior quarters, the burden is right in line with those prior quarters as well, even though winds is very high.

[Jed Dorsheimer:]

Yes, I mean, I hear you with that, but I mean, maybe just help me with the math, because if I look at Q3, it looks like D-VAR was cut in half. So, I guess when you say that you are missing it, you had NEPSI at $6.6 million and the SPS is fairly stable. I guess, what am I missing, because it does look as if for Q4…

[Daniel McGahn:]

SPS is growing. I think the second part you are missing is there is an acceleration of revenue in D-VAR where you have Q1, especially Q2, to some extent where you have additional revenue that was planned for Q3 and Q4 that were pulled forward. So, when you look at net-net in trailing three, four quarter averages, we still see growth, 15%, 20%, 25% for all the product lines in some cases as much as 40%.

[Jed Dorsheimer:]

Okay. I'll take it offline. Thank you.

[Daniel McGahn:]

Sure.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Daniel McGahn for any additional or closing remarks. Thank you.

[A - Daniel McGahn:]

Thank you. We had a lot and ended our third quarter of fiscal 2020 really on strong note. We delivered positive operating cash flow; we announced the acquisition of NEPSI; we concluded an equity offering for just over $50 million in net proceeds to the issuance of 3.7 million shares of common stock, which we priced at $15. So those involved with that. I hope you don't feel happy about the performance of the business. We published 8-K in October 5, which went through details on Inox's compliance with the default product. I think you get to understand kind of really by looking at where we are with Inox. And most recently we announced our fourth AMSC's Fourth Ship Protection System Contract with the U.S. Navy, for the Richard M. McCool, which I just like say saying the Cool, I guess. We're in a great, great position as we look and try to finish out strongly here in 2020. I think the prospects as we look at 2021, if you listen to everything that I said, I don't know how many times I said 2021. But 2021, we're delivering REG, 2021 we're delivering SPS, 2021 is a big year for the three megawatts, 2021 is a big year for these new energy power systems. We are in a wonderful position as a business. Sometimes I have to temper my enthusiasm because I do realize that we are in the middle of the pandemic, but any day supply chain things would change and all our hopes and desires could be affected if we're trying to fix a problem that isn't necessarily something that we created ourselves. So, I'm trying to balance my kind of exuberance overall as a business, knowing how hard something is in some weeks can be just to be able to get for us. So, we're really excited about 2020. We'll be able to come back to you and report on the full year next time. Appreciate everybody's interested in the company. And we'll talk to you soon.

[Operator:]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.