American Superconductor Corporation (AMSC) Q4 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to AMSC's Fourth Quarter and Full Fiscal Year 2017 Earnings Conference Call. This call is being recorded. [Operator Instructions] With us on the call today are AMSC's President and CEO, Daniel McGahn; Senior Vice President and CFO, John Kosiba; and manager of AMSC Investor Relations, Brion Tanous. For opening remarks, I'd like to open the call up to Brion Tanous.

Thank you, Stephanie, and welcome to our call to discuss our fourth quarter and full fiscal year 2017 results. Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, 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 discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2018, which we filed with the SEC on June 6, 2018, and subsequent reports that we have filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the company's views to change, we specifically disclaim any obligation to update these forward-looking statements. I also would like to note that we will be referring on today's call to non-GAAP net loss or net loss before sale of minority investments, stock-based compensation, amortization and acquisition-related intangibles, consumption of 0 cost basis inventory, changes in fair value of derivatives and warrants, noncash interest expense, tax effective adjustments and other noncash or unusual charges. Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and furnished to the SEC last night on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at www.amsc.com. Now I will turn the call over to CEO, Dan McGahn. Dan?

Thanks, Brion, and good morning, everyone. I'll begin today by providing an overview of our financial results for the fourth quarter of fiscal 2017, which ended March 31, 2018. John Kosiba will then provide a review of our financial results for the fourth quarter and guidance for the first fiscal quarter of fiscal 2018, which will end June 30, 2018. Following our prepared remarks, we will open up the line for your questions. In fiscal 2017, AMSC grew its Grid business by more than 20%, our third year in a row of growth in our Grid segment. We expect revenue growth, again, in our Grid business in fiscal 2018. We commercialized high-temperature superconductor technology as represented by the U.S. Navy Ship Protection Systems order for the USS Fort Lauderdale LPD 28. We diversified D-VAR. We grew D-VAR and we introduced VVO, which signals further diversification, and we believe we've moved the needle forward on opportunities to deploy our Resilient Electric Grid products. However, our wind business underperformed in fiscal 2017. In calendar 2017, total wind installations in India dropped to about 1/3 of what they were in 2016, from 5.5 gigawatts in 2016 to just 1.8 gigawatts in 2017. According to our partner Inox, last year, the wind industry faced a number of issues ranging from high inventory to stranded assets to stuck projects with legacy power purchase agreements. We believe that these issues may be behind us. We believe the auction process for the wind industry introduced by the government of India last year is helping the market gain momentum and transparency after a nearly 18-month hiatus. Inox has been consistently winning in key wind auctions and now reports a backlog of 950 megawatts. We are carefully monitoring Inox's movement on the SECI-1 project. We are seeing signs of a recovery and continue to be optimistic about the Indian wind market. The new policies are expected to enable the overall wind business to possibly reach higher levels than previously attained. According to the Indian Wind Turbine Manufacturers Association, the wind industry in India is on course to add 30 gigawatts of new capacity in the next 3 years. This suggests that India is not only on course to exceed its goal of 60 gigawatts of installed wind by 2022, but also appears to be on track to do so a full year ahead of the government's target deadline. One simple reason for this is that the current auction-based tariffs are below the average rate of hydrocarbon-based power, which is expected to provide a strong economic rationale for increasing renewable power generation in the country. Inox reported that they increased their backlog in March of 2018. To be clear, we are anticipating significant growth from our wind business in fiscal 2018 because of Inox's reported backlog. We believe our new expanded relationship with Doosan opens up other business opportunities for us in East Asia as well as the global offshore wind market and is expected to allow for further potential diversification of future revenues within our wind business. So to repeat, we expect to grow our Grid business, again, this year and we expect significant growth from our wind segment in fiscal 2018. Fiscal year 2018 is expected to be a year of growth for AMSC. We are diversifying our business by growth through grid. The fourth quarter was another strong grid quarter for us. We achieved our fiscal 2017 objective of growing our grid revenues year-over-year. In fact, our grid business grew more than 20% in fiscal 2017. We expect to grow our grid business, again, in fiscal 2018. And as you know, D-VAR is a large contributor to our grid business. In the fourth quarter of fiscal 2017, our D-VAR business was supported by a strong basic projects in the renewable and industrial segments, very similar to our third quarter performance. The catalyst of our recent D-VAR industrial segment growth comes from mines, mills and semiconductor fabs, which require clean and reliable power. This has been an area of focus for us and we are seeing the benefits of this focus. Our VVO product addresses power quality on the distribution grid. This new product solution is gaining traction with domestic utilities. We have now commissioned VVO units operating on multiple sites at utilities in the U.S. including Alliant Energy in the state of Iowa which we announced. Our VVO pipeline is developing very nicely. We expect commercial shipments in the first quarter of fiscal 2018. We believe that the funnel of opportunities for our reserve electric grid product is significant. We continue to work with major utilities on specific projects, which show a lot of promise, but these projects take time to mature. We hope to report back soon on progress with Chicago. Beyond this year, we are focused on the West and East Coast where multiple opportunities appear to be moving forward. We remain focused on commercializing our SPS with the Navy and we will remain focused on commercializing our REG product with utilities. We are most excited about larger REG opportunities with other utilities that we believe will have a substantial yet unique feed for REG system. We believe that our issues facing utilities that simply cannot be solved using conventional power delivery systems. We believe our REG system can address those unique needs in a way that makes economic sense the utilities. We are working to help utilities understand that REG uniquely solves problems that are our priority today. During the fourth quarter, we began delivering the long lead time items for the USS Fort Lauderdale program, also known as LPD 28, during the fourth quarter. We anticipate shipping additional long lead time items during fiscal 2018. We continue to pursue additional ship platforms for our Ship Protection System with the U.S. Navy. We believe the Navy understands that our HTS-based systems are an enabling technology that will support their efforts to electrify the fleet. We continue to work with the Navy on SPS applications, in more power delivery applications as well as propulsion applications, utilizing our superconductor technology. We believe there may be opportunities to sell our SPS to certain foreign navies as well. I'll turn the call over to John Kosiba to review our financial results for the fourth quarter and full fiscal year 2017 and provide guidance for the first fiscal quarter of 2018, which will end June 30, 2018. John?

Thanks, Dan. Good morning, everybody. AMSC generated revenues of $13.5 million for the fourth quarter of fiscal 2017 compared to $16.2 million in the year-ago quarter. Our grid business unit accounted for 72% of total revenues for the fourth quarter. The year-over-year reduction in revenue is driven by reduced Electrical Control Systems shipments to Inox from our wind business unit, partially offset by higher grid business unit revenues. Looking at the P&L in more detail, gross margin for the fourth quarter of fiscal 2017 was 22.2% compared to 17.5% in the year-ago quarter. Our year-over-year increase in gross margin was driven primarily by strong grid product margins as well as license and royalty revenue from our wind business unit during the period. Our R&D and SG&A expenses for the fourth quarter of fiscal 2017 were $8.5 million compared to $9.8 million in the year-ago quarter. The year-over-year decrease was driven by reduced expenses resulting from our fiscal 2017 reduction in costs. Approximately 15% of our R&D and SG&A expenses in the fourth quarter were noncash. Our net loss in the fourth quarter of fiscal 2017 was $6.0 million or $0.30 per share compared to $6.9 million or $0.50 per share in the year-ago quarter. We ended the fourth quarter of fiscal 2017 with $34.2 million in cash, cash equivalents and restricted cash compared to $22.3 million as of December 31, 2017. The end of year cash balance includes net proceeds of $16.9 million from the sale of our Devens facility which closed in March 2018. Our operating cash burn in the fourth quarter of fiscal 2017 was $4.6 million, which included a $700,000 Make Whole Payment associated with the ITC acquisition. After excluding the Make Whole Payment, our operating cash burn was $3.9 million, which was in line with our previous guidance and compares to $6.7 million in the previous quarter ending December 31, 2017. The quarter-over-quarter reduction in operating cash burn was driven by a working capital benefit associated with grid collections within the quarter. On similar revenue profiles of the last 2 quarters, we believe a normalized quarterly operating cash burn would be in the range of $5 million to $6 million. Turning to our financial guidance for the first quarter of fiscal 2018. We expect that our revenues in the first quarter of fiscal 2018 will be in the range of $11 million to $13 million. Our net loss on that revenue is expected to be less than $7 million or $0.34 per share and we anticipate an operating cash burn on that revenue of $6 million to $8 million. Our forecasted operating cash burn for the first quarter reflects an expected increase in working capital as a result of the timing of certain grid product shipments within the period. Though we may continue to experience lumpiness in our working capital requirements, we have improved our overall cost structure into fiscal 2018. We believe that this translates into a lower operating cash flow breakeven point. As a result, we believe that as the business rebounds off these recent lower revenue quarters, we are positioned to break even or generate cash at quarterly revenues of less than $25 million. With that, I'll turn the call back over to Dan.

Thanks, John. Inox stated on their fourth quarter call 3 important points that we believe positively impact our next several quarters. One, they intend to ramp up production during the first half of this fiscal year, specifically to meet SECI-1 requirements. So the first half of their year is commensurate with ours, so that would be the end of our second quarter. Two, they intend to commission 300 megawatts before the end of the calendar year, again, for SECI-1. And three, they intend to manufacture wind turbines to support the 300 megawatts of SECI-2 wins in the second half of the fiscal year. And again, that's concurrent with ours and would go through March of next year. We are comfortable and comforted by the fact that Inox has reestablished a healthy backlog of wind turbine business. We believe we're well positioned to support Inox's requirements. We are focused on continuing to grow our grid business. We had a strong fourth quarter for grid. We are well positioned to grow grid again in fiscal 2018 and we expect to do so. Our D-VAR business is strong. Our VVO pipeline is developing nicely. Our REG solution should see demonstrable progress soon, and we expect to continue to deliver long lead time items for LPD 28 in addition to pursuing additional opportunities with the U.S. Navy. Regarding our new headquarters and U.S. manufacturing facility, I'm pleased to announce that we have successfully completed the transition of our operations to our new building located in Ayer, Massachusetts. Our primary focus has been and will continue to be on our customers and employees. As we mentioned last quarter, we've seen an uptick in demand for D-VAR. We timed the transition to avoid disruption to our customers. Due to our cost reduction efforts in fiscal 2017 and continued cost management strategies going into fiscal 2018, we expect that we will have sufficient cash for our strategic initiatives in fiscal 2018. This is because we've improved our overall cost structure and we have substantially reduced both our physical footprint and headcount. We believe that this translates into a lower operating cash flow breakeven point. Based on this new cost footprint, we now have revenue scenarios that would be expected to have us generating positive operating cash flow on a quarterly basis at previously demonstrated revenue levels. As John said in his remarks, we believe our first quarter cash burn guidance is an anomaly due to the lumpiness of cash collections during the first quarter. We expect that fiscal 2018 will be a growth year for AMSC. And lastly, regarding the U.S. Department of Justice criminal case against Sinovel, our current understanding is that the DOJ's sentencing of Sinovel, which was originally scheduled for June 6, has been pushed out 1 month. Stephanie, can we now open up the line to any questions from our covering analysts?

[Operator Instructions] Our first question comes from Philip Shen with Roth Capital.

First one is on Inox. Dan, I think you mentioned that we could see a ramp-up in the second quarter, and we know about the 300 megawatts that Inox won that needs to be commission, I believe, by September. So I think Inox indicated that operations were restarted through the company's manufacturing facilities in April after a 4-quarter gap?

Right.

Can you talk about how those -- can you give us a little bit more granularity about ECS order flow for F Q1? It seems like, with the guidance, it might be a little bit limited in terms of shipments still for the first quarter -- fiscal quarter and that we should see a ramp-up in that Q2? Is that a fair way of looking at it? So if you can talk us through that, that would be great.

Yes. I think that's a fair way to look at it. I think what's different this time, if you go back to our call in September, our call in -- for the December quarter, now we're doing the March quarter, we had communications with Inox that led us to believe that they were going to start up production. And that's what the word said, and I think that's what their belief was. I think the thing this time is we have verification that customers are accepting goods, their shipping wind turbines from the factory. So I think what's different, let's say now versus, say, 6 months ago, is that we don't just have the words and descriptions publicly from Inox that they intend to or that they will. We actually see that activity and we see wind turbines leaving their factory going to the SECI-1 project. So I think this is kind of the point that we've been at each quarter, which is we see the beginning of the ramp. We've been able to ship some product in previous quarters here as we've gone through this transition. We see a very direct ramp in Q2. We would love to step out and talk about Q2 and what we believe, Phil, but we've gone 1 quarter at a time. We tried to work very well with Inox to be able to meet whatever needs that they're going to present to us. But at the end of the day, we want to make sure that they present payment prior to shipment. So we feel we're in a good situation with Inox to meet their immediate needs this quarter and what we perceive as a ramp starting in Q2 and going beyond that through SECI-1 and SECI-2. Our understanding is they do need new inventory for new ECS stock for at least part of SECI-1. I think some of the concerns that we have is what fraction of that is, and we only really understand what they need by what they're willing to pay for. So what they're presenting us is a picture of a back to production this quarter and then back to, we'll say, fuller levels of production next quarter. We're going to watch very attentively how they execute on SECI-1 because that may or may not have bearing on future projects. This is a whole new regime, a policy regime that's in place, so I think there's some learning curve in the market on getting connected on time and what all that means. But as in the prepared remarks, we echoed the sentiments that Inox shared with their investors on their most recent call, which basically said the first half of the year, which is our first half of the year as well, they'll be producing and delivering for SECI-1. They tend to be able to deliver everything by sometime in the December quarter. So that could, hopefully, be October into November maybe, but probably October. And then they're on to building product for SECI-2, which is the same amount of demand and that, that would be fulfilled over, really, the second half of the year, the December and the March quarter. So long-winded answer, Phil, to basically say, yes, we see that ramp coming, and we're trying to present that 600-megawatt demand as the reason why we see that ramp coming.

Great. And then bigger picture for Inox specifically. I think they have a backlog of 950 megawatts. You mentioned that on -- in your prepared remarks as well. But just to kind of size it for everybody, you should be able to serve that entire 950 megawatts or how much of that backlog do you expect to serve? And would that be -- do you expect to fulfill that in 2 years?

Yes. I think that's another timing with this to try to understand, will it be fulfilled in 18 months or 24 months? Probably something in that range seems to make sense given the timing of the projects. For those of you that don't follow Inox closely, they have 3 successive wins in the March quarter, which I think added this additional 350 megawatts on top of the 600 megawatts that they already have. Up next, I think, a SECI-5. Also, up next for them is they kind of explained on their call that they are also working with multiple customers. And what that means is the potential to expand their backlog even for some of these earlier SECI projects, specifically SECI-3 and SECI-4, where extending to some of these other customers. We know they have a public relationship with Adoni. Out of the first 2 SECI projects, they have 100 megawatts of turbines that they're selling to Adoni to be developed. We also understand that they've been able to secure buyers for the end wind turbine projects that are developed at least for SECI-1 and part of SECI-2. So they've tried to do as much as they can to derisk their business, lower their working capital constraints and that should translate into significant improvement for us, which is why we're calling for growth in wind for this year.

Great. One other quick question on Sinovel and then I'll pass it on. I know it sounds like it may be delayed another month, the hearing. So does that mean that the date now is July 6 or does that mean the date is now in August? And can you talk through the scenarios of what the possible sentencing could be? After sentencing is concluded, what are the scenarios that could be -- that could play out for you guys? I'm guessing it's tough to ascribe probabilities, but as far as you can help us understand that would be great.

I could [ talk ] by now, and I believe at this point and try to give people comfort on what we know and what we understand. So in regards to the date, I think it's public. And we tend to not really announce the dates and stuff for this case because it's not our case, just so people understand that on the call, because it's a U.S. Department of Justice case. We aren't really privy to the behind-the-scenes dealings between the prosecution and the defense. We are the victim and we are a witness, so the information flow to us is at best limited. So my understanding is that the date that was the 6th of June is now the 6th of July, and the reasoning that was given in -- from the court was because of the scheduling of the court. So my understanding is, I guess, the judge had a conflict on the 6th of June so they moved it out to the 6th of July. Our understanding on what should happen is the sentencing should include a fine and it should include restitution direction to us. I think that once a number is established, whatever that number might be, it gives a clear endpoint for the U.S. government and the Chinese government to understand what the damages are. Having 2 criminal convictions, having a U.S. case conviction under this current administration, I think bodes well. There is a lot of these trade issues that out there where front and center as part of that. In many ways, we've become the poster child for intellectual property theft in regards to China as part of this 301 action. Our understanding is the way that the administration has presented some of these trade issues to China is there is, principally, an issue over IP theft and secondarily, an issue over trade imbalance. And the idea is to use one to leverage the other. There's a 3-letter company in China that they have sanctions and fines. I think, today, that company actually has a $1 billion fine against it, so there's some additional precedent being set that helps us. Our hope is that our 4-letter company gets restitution through this process. And I think the court setting a number makes a lot of our claims in China, the $1.2 billion of claims in China, hopefully, not only vindicates the facts and the guilty verdict but also the claims of the damages and the value of the forced IP transfer. So hopefully that's helpful, Phil.

[Operator Instructions] Our next question comes from Carter Driscoll with B Riley FBR.

This is Carson Sippel, on for Carter Driscoll. Can you provide us with a quick BASF update?

There's not much we can say, technically, due to the confidentiality that we signed between the companies. But our understanding is they continue to do work, they continue to pay, which I think is important being out of the contract. We tend to not worry about that in the Western world, which I think is good. I think we've been through a lot dealing with contracts on the Silk Road, which is separate certainly then, than dealing with a relationship of a company like BASF. Everything that we said in the past about the belief and the strategy here is the hope that we could help them to develop a process, potentially that could be a lower cost, potentially they could be a second source, but that's nothing really new to report. The technical progress that they make, I'm actually not even privy to -- given the nondisclosure agreement.

Right. Okay, it makes sense. And then, also, you mentioned earlier that you're pursuing additional utility opportunities both on the West and East Coast. Can you name some of those? Or if not, can you say you're focused more on one coast over the other or any additional commentary about that?

Sure. I mean, we've announced Boston and Washington, D.C. We've announced Seattle and San Francisco and obviously, we're trying to move Chicago forward here and hopefully the very near term. There are more utilities than that. There's more than a dozen and there's probably close to 2 dozen different projects we've identified. What we're trying to focus on, literally, at this point in time, is let's get the milestone with the first utility behind us. We do see evidence that there really is a demonstrable need for REG at many utilities in the U.S. and our hope is we can move these in maturities conversations to paperwork and eventually to contracts.

Our next questioner is Colin Rusch with Oppenheimer & Co.

This is Kristen, on for Colin. While we're in the Grid segment, just sort of wanted to dig in to that a little bit more, and I was wondering if you can provide a little bit more color on the product mix in the Grid segment and then where you see those greater opportunities for growth, where you're seeing heightened coating activity or maybe some velocity in that coating activity?

Yes. We don't really break out the product lines within grid. But really grid, we've comprised of D-VAR principally. The lion's share comes from D-VAR. We've added the -- really, the 3 new products on top of that with VVO, with the Ship Protection Systems for the Navy and then Resilient Electric Grids for utilities. So kind of currently, the revenue we see growing is coming initially and principally from D-VAR. It's coming from diversification of D-VAR into the industrial segment, and we're seeing healthy wins, larger wins, coming from the industrial segment. So we've been able to get the grid revenue up to record levels and be able to maintain in around that, and we're seeing that we now want to grow off of this level. And we see growth coming in D-VAR this year and that's based upon -- and we kind of hinted at this last call, that we've seen an uptake in the need for production and that influenced some of our timing and the move in Massachusetts here. So we see D-VAR very healthy with the potential to grow this year. And then we're adding in revenue, we believe, from VVO. So we talked in the prepared remarks about Alliant. We have an announcement out of -- about them, the first utility we can name. We have a number of orders. We're going to continue to build that backlog. We said definitively in Q1, we're going to see commercial revenue from VVO. We're delivering to the Navy on LPD 28, so we'll see revenue which should spell some growth for the Grid segment from the Navy. And then if we're able to move forward with the first project for REG, the hope would be we'd start to recognize revenue this year. So you add all that up, you got the base growing and then you have the 3 new products all being adding on top, adding some incremental growth from each one, could spell some nice growth for grid year-to-year. Is that helpful?

That is. Are you seeing any -- you briefly mentioned some of -- further opportunities beyond the U.S. Navy. Are you seeing any progress or moving forward with any other foreign navies?

We've been able to secure export license for multiple navies, which I think is a little different than what we said in the past, sort of broader, and we are in discussions with some specific programs to look at exporting some of this line protection technology to allied navies. I didn't highlight it today purposely because I really don't understand the timing and I don't want to set the expectation that we're going to secure an order with a foreign navy this quarter or next quarter until I have a deeper degree of confidence, and I don't have that at this time. But we do have activity and we do see indications that there should be some additional growth here in the -- further out quarters that can potentially come from foreign navies.

That's helpful. And then just a last question on the relationship with Doosan. Are you seeing any traction there or opportunities for further diversification in the wind segment?

Yes. I think as we -- we learn more about where Doosan is headed and how the Korean government is investing. We also see Doosan bidding on projects outside South Korea, in East Asia. So we called it East Asia this time and not just Korea because we see them in Southeast Asia and Japan quoting some projects. So they're giving us forecasted demand, which is noticeable will become important to revenue, assuming they're able to close their orders and that translates into business for us. Really, the mission this year is to get the first control systems for the 5.5-megawatt machine to Doosan. So one of the things that we did is when we put up the initial prototype back with Hyundai several years ago, we've gone back and we have looked there's a lot of the learning, not just on performance but on protection, and we want to make sure that the latest and greatest is in the versions that Doosan will get from us. So our expectation is within the next 3, 4, 5 quarters, we hope to see initial deliveries to Doosan. And as we make those, we'll certainly make those known to you all.

[Operator Instructions]

So I think on that note, I think we'll draw to a close. I think there's a little bit of a disconnect. And I think as we talked to more people here over the next days, I think that will be a lot of the conversation that we have. We have a new core business that is growing, which is grid. The revenue fractions now have become greater and greater for grid, and we see clear prospect for growth for grid even as early as this year. We've been able to grow grid in the past 3 years and we're trying to do it a fourth. We see indications in our wind business that we should see growth as well for Inox and add in revenue, potentially, for Doosan. We see growth certainly coming. I think the challenge that we have and I think that most of you, as you look at us say, how fast and how heavy will the demand from Inox come? The part we want to remind you of is we've done a lot to better align cost with these revenues levels. The breakeven, as we're saying, we have scenarios below $25 million on a quarterly basis, which translates to below $100 million; John talked a little bit about lumpiness in working capital, which I think is probably one of the challenging parts of today's message is; the amount of cash burn that we're projecting in Q1, we believe it is an anomaly. So if you add all these together, we see better results coming in Q2, Q3, Q4 for certain, if we're saying that we're going to grow. We tend not to guide and simply because we want to make sure that Inox is showing that they need that demand by paying for it. And we think that's probably the best place for the company to be to manage our overall risk. But I do realize that seeing the revenue level quarter-to-quarter not grow and the burn continue to be persistent, certainly, would cause shareholders to ask us a lot of questions. I think we're going to answer a lot of those questions delivering on the numbers we've put out for Q1 and seeing a better Q2, Q3, Q4 and beyond. So with that, I'll say thank you, and we'll talk to everybody very soon.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.