Good day, and welcome to the American Superconductor Third Quarter Fiscal 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. John Heilshorn. Please go ahead, sir.

Thank you, Jennifer. Good morning, everyone, and welcome to American Superconductor Corporation's Third Quarter of Fiscal 2021 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 and Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the third quarter of fiscal 2021 yesterday after the market closed. For those of you who are not able to see the release, a copy is available in the Investor Relations 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 fourth quarter fiscal 2021 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, 2021, which the company filed with the Securities and Exchange Commission on June 2, 2021, as updated in the company's Form 10-Q for the period ending December 31, 2021, 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's 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 and 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 third quarter of fiscal 2021 earnings press release that the company issued and furnished to the SEC late last night on Form 8-K. All of the company's press releases 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?

Thanks, John, and good morning, everyone. I'll begin today by providing an update of our Grid and Wind business units. John Kosiba will then provide a detailed review of our financial results for the third fiscal quarter which ended December 31, 2021, and provide guidance for the fourth fiscal quarter, which will end March 31, 2022. Following our comments, we'll open up the line to questions from our analysts. AMSC delivered strong results for the third quarter of fiscal 2021. Total revenue for the quarter grew versus the year ago period coming in at $26.8 million. Our Grid segment revenue grew by nearly 50% versus the year ago period coming in at $25 million, a company record. Grid is driving revenue growth for the company and all Grid product lines contributed to the quarter. We ended the third quarter of fiscal 2021 with more than $52 million in cash. As the world gears up for decarbonization to slow down climate change and create a path for a more sustainable world, so does the increased demand for renewable energy, semiconductors and key materials for the new green economy, such as metals, mining and chemicals. Our acquisition of Neeltran and NEPSI have allowed us to expand our business into the materials market. The materials market is fundamental to a sustainable energy shift. If you're interested in reading some more about how materials are center stage to the energy transition, there was a 2022 McKinsey publication titled, the raw-materials challenge, how the metals and mining sector will be at the core of enabling the energy transition. If we look at this calendar year 2022, approximately 90 gigawatts of Wind capacity is projected to be added globally. The solar photovoltaic sector is projecting an annual global capacity, addition of over 175 gigawatts and the…

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $26.8 million for the third quarter of fiscal 2021 compared to $23.6 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 47% in the third quarter versus the year ago quarter which now includes the addition of Neeltran. Wind business unit revenues decreased 73% in the third quarter versus the year ago quarter as a result of fewer ECS shipments during the period. Looking at the P&L in more detail. Gross margin for the third quarter of fiscal 2021 was 13% compared to 17% in the year ago quarter. As expected, gross margin did improve sequentially by 160 basis points versus the previous quarter. This was a result of stronger Grid gross margins. As a reminder, we are working our way through the Neeltran acquired backlog and have started to replace that backlog with what we expect to be more profitable projects as we look ahead into FY 2022. R&D and SG&A expenses for the third quarter of fiscal 2021 were $9.4 million. This was down from $10.1 million for the same period a year ago. The year-over-year decrease was driven by our cost control efforts. Approximately 12% of R&D and SG&A expenses in the third quarter of fiscal 2021 were noncash. Our non-GAAP net loss for the third quarter of fiscal 2021 was $4.6 million or $0.17 per share compared with $3.4 million or $0.13 per share in the year ago quarter. Our net loss in the third quarter of fiscal 2021 was $4.3 million or $0.16 per share. This compares to $7.9 million or $0.31 per share in the year ago quarter. Please see our press release…

Thanks, John. So Grid represented over 90% of our revenue in the third quarter of fiscal 2021 and was our strongest Grid quarter since we began reporting on the Grid segment. Let's take a step back and think about this. The company is reporting record revenues for this key segment and announcing stronger bookings as the world is faced with so many challenges. We're very pleased to report that Grid revenues are at this record high. This quarter, our Grid business grew by almost 50% compared with the same period last year. Our backlog has grown by nearly 60% since a year ago. We grew our total business by over 30% last year, and we expect to continue on our trajectory of growth this fiscal year. The business is scaling and is supported by a strong balance sheet. We are positioned for growth through new markets for our new energy power systems as well as through the semiconductor market. We are in position for growth through the anticipated reemergence of our Wind business, which we see coming as early as next fiscal year. We delivered our first production SPS to the Navy. We are positioned for growth through the acquisition of additional ship platform wins. We continue to be excited about our accomplishments with REG in Chicago, and the number of utilities we're currently engaged with to potentially deploy this solution in their cities. I look forward to reporting back to you at the completion of our fourth fiscal quarter of 2021. Jennifer will now take some questions from our analysts.

[Operator Instructions] And our first question today will come from Philip Shen with ROTH Capital Partners.

As it relates to the new orders that you announced yesterday in the order book that you have, can you talk through how much of that do you expect to convert to revenue in calendar 2022? And then how much in calendar 2023.

Phil, the short answer is most of that will be in calendar 2022.

All of it will be in calendar 2022 is -- almost all of it will be in fiscal -- because we finished calendar '21.

Yes. If you asked fiscal 2022, we probably would have said all of it. But since you said calendar, we didn't break it out by quarter, we'll say most.

Okay. Daniel, you spent a fair amount of time talking through the opportunities with materials and decarbonization and what that might mean for your business. And it seems like there's a fair amount of tailwind there for you. And you mentioned some geographies and possibly some new end markets. I was wondering if you might be able to expand on that, especially some of the geographies by end markets and maybe some new geographies where you're seeing business where you had not prior.

Yes, I think simply, but the acquisitions are working and they're working really well. The sales team is doing a great job out, quoting business and closing business, and we're doing it globally. So when you look at where our business has now been reconcentrated back in the U.S., somewhere between 50% and 60% of our revenues are coming from the U.S. overall. We're seeing an uptick across the globe. We see emergence of a business for us in South America, which we've done very little before. We see reemergences in the business in Europe, and we see some new prospects for business for these materials all over the world. So it could be Indonesia. It could be Taiwan for semiconductor. It could be Canada for a mining or milling operation. So I think when we explain the value of the acquisitions, we talked about leverage of content per order and we talked about leverage of the entire integrated team that we could now take these products and reach globally, and the team is doing a great job.

Great. And I think John mentioned this about the Neeltran acquisition you guys are working through some of that lower margin business. I think in the past, you've talked about there was a year's worth of low margin backlog and that eventually, you'd be driving higher margins with that business. How are you tracking to your original timeline there? And with this expansion and opportunity that you're seeing in other parts of the world and end markets, is that -- are you able to have a line of sight to those higher margins with that new business?

Yes, we do. I think we have clear line of sight there. I think the one thing to just caution is it's not a cliff. It's not a binary where we're going to -- all the backlog is going to end on the same day. So we have backlog for about a year when we started into this with Neeltran. So that means the backlog is good through June quarter and probably in the September quarter. What I'm really impressed with is how much the existing teams at the acquisitions have really stepped up, how engaged they are, how focused they are in trying to expand their business. And in many ways, being part of a bigger company was attractive to them because it really would breathe more light to their business and make it a bigger offering. The idea of taking products made in New York or in Connecticut now and trying to sell them globally are things that the 2 acquired companies had hoped to do in the future, but weren't set up to do, and now we're doing that. So we're tremendously excited that these acquisitions are working very well.

Great. Daniel. One last 1 for me. Still on gross margin or margins. This one specifically on gross margin, I know you guys don't provide guidance beyond Q4, but I was wondering if you might be able to provide a bit of an outlook on the cadence of how gross margins could trend as we get through calendar '22. Do you think -- Daniel, you were talking about the Neeltran, lower margin backlog may kind of wind down in June or certainly by September. So talk us through, is there an opportunity for us to possibly touch high teens or low 20s percentages on gross margins as we get to the back half of calendar...

Yes, that's a guide of -- it's kind of directionally the business had been in the low 20s. Certainly, when we fully integrate Neeltran and it's fully accretive and everything is working. Our desire is to be able to get back to those levels as quickly as we can. I felt compelled on the last call personally that we had to call out gross margin because it had changed dramatically downward. I think we've already seen a return to kind of where it was the previous quarter. And we do think getting into the high teens in the next quarters is certainly, I won't say assured, given the backlog because nothing in life is assured, and I have too many words telling me that nothing is guaranteed, and we have to believe things. But I have very strong confidence in the team. When I look at the backlog and I do it now on a regular basis, project by project, it all looks really good. So the hope is we spend part of years as presenting of the businesses, it's not going to really matter where the margin is going to come from because it's all going to be good, right? That's what we're trying to build here. And yes, it will take another quarter or 2 or whatever, but that's the path that we're on.

Phil, I'll just have a little more color for you. The thing you can highlight this quarter, for example, we produced these margins with Wind being a drag on margins this quarter. If you really look at the -- in the Q, you'll see what we reported for Wind segment in both revenue and operating profit. I know we don't give gross profit, but you can figure out is -- we had a pretty substantial loss in Wind this quarter. So as Wind stabilizes and comes back, that's going to help move the margin needle up. And obviously, as Neeltran, as we replace those older projects with expected more profitable projects, that's going to move gross profit up. So our expectation is a few of the areas that are dragging down gross margins this year as we move into FY '22, those become less of a drag.

And our next question comes from Colin Rusch with Oppenheimer.

With these new contracts and the value of power quality, can you talk a little bit about the pricing dynamics in the Grid business and how you're thinking about that relative to incremental operating margins as you continue to grow the business?

That's a good question, Colin, because it's something that we've talked to the team kind of directly about, particularly when we could leverage multiple sources of content within the company, there's definitely the ability to maybe think about even a larger premium on pricing. So we're trying to do the best we can to focus on the value we're creating. Although, we're understanding there are some competitive pressures. Kind of in general, we've been able to focus on pricing, focus on supply chain, trying to -- helping us more now than maybe a quarter or so ago. But we feel that the team kind of guessed that we have to -- we're not looking to price to win business. We're looking -- we want to grow. We want to grow a good margin. So that's literally kind of the mantra inside the company. And if we can do both at the same time, then I think we're building the right kind of company.

Okay. So there's no kind of clear operating margin target for you guys within the organization? Or is that something you're just not ready to share yet?

I think with scale, I think if we come back out and do an Analyst Day and we talk about how we get from 100 to 200 to 250, we can go back and look at those targets. But the targets that we put out at the end of 2019, that we're still marching to how do we grow this business, where the gross margin line starts with the 3 and is hopefully a high 3. And when we think about operating cash flow type margins that were in the high teens, approaching the 20s. We know that this business can do that with additional scale. And I think that's what you're seeing is and John highlighted, even with just a little bit of lowness in the quarter-to-quarter in Wind dramatically impacts margin. So as we scale the business, I think that the numbers are there. The business works really well.

That's incredibly helpful. And then just changing gears a little bit around some of the customer activity on REG, given the progress that you're making there. and the level of interest and how that program is going to work. Can you just talk a little bit about how those other conversations are progressing with those utilities and Grid operators that are watching what you guys are doing in and around Chicago.

Yes. The part -- and we talked only a little bit about REG. I mean the real challenge right now is we have an open window here now to use the success with Chicago to go market the product. We're trying to make sure the organization is aligned to be able to answer to the interest. So as we had done a lot of different looks at projects and some degree of civil engineering and different projects. I think the fact of having one operating now, and we see it directly from utilities coming back and say, okay, well, now maybe the time to try to do this implementation we discussed back a couple of years ago. We have to be able to sort out what we think of the opportunities that could become a contract in an order in the near term. So that's kind of where we are with REG. It's a heavy business development effort to now focus on those projects in cities that we think convert to an order in -- I won't say the quickest type, but we'll say in the near field. We know we have a great support in Chicago. We know we've expanded that to a bunch of cities. Now the hard work begins of how do we translate that interest into orders. And as we said, we want an operating history in Chicago, they want operating history for them to go to do more. So, again, I think when we look at the macro climate and the tailwinds, they are there in REG, and we are seeing pretty dramatic interest in the product. So we know a lot of the people on the call are more focused on quarter-to-quarter and results on these things. But REG, we're really excited. We continue to be super excited about.

[Operator Instructions] And we'll hear next from Chip Moore with EF Hutton.

Just curious on some of the bookings momentum here globally and the rise in quotation activity. Just curious, with some of the new variants or things like that. Is that actually -- would some of that activity be even stronger? Is that still a bit of a headwind?

I didn't hear the part, sorry, Chip, with what would be a bit of a headwind?

Just with some of the new variants, Omicron and things like that, in terms of the quotation activity and the bookings momentum globally, right, in a number of markets...

We're not really seeing it. What our concern is, and I think we've gotten through this with a lot of our suppliers is you just don't know where the next supply constraint is going to come from, right? So I think what we have as a group that's very battle tested that we understand how to react. The things that we know, the things that we're concerned about, we've gotten ahead of and be able to derisk. The hard part is you don't know. The supplier says, hey, a part that usually takes 13 weeks now takes 52 weeks, right, that we have to be able to respond to. We've had to do that all long during this crisis. So those are the kinds of things that are just kind of normal blocking and tackling when it comes to the supply chain. But we have a demonstrated process that we go through to do that and qualify suppliers. So you probably can hear on the call, my trepidation about supply chain issues is quite a bit less today than it was a quarter ago.

Got it. Okay. And just one more for me. You alluded to the potential reemergence of wins next year. Obviously, you've got multiple shots on goal. Is that more Inox, the potential transition to 3 megawatts? And how should we think about that transition in terms of the 2-megawatt product assuming that if that happens?

So they're going to keep offering the 2. There are certain markets that the 2 works really well, and we did a lot of work on light wind speed and things like that with the 2. And they're a little depressed with shipments of 2-megawatt because as they kind of reemerge with demand, they had pent-up inventory and they're going through all that. So that's why you see our restocking levels kind of low. The hope is say, over the next quarters, we start to ramp to maybe, call it, decent rate, a fair rate with the 2 megawatt. When you listen to Inox and what they talk about, I mean, they're saying that the interest level for the 3-megawatt is almost larger than their backlog was for the 2-megawatt and that's just interest. So when you add it all up, it looks like there's a lot of pent-up demand for the 3 megawatt. The challenge has been getting the prototype, which we're at that stage now, making sure the supply chain is ready to ramp, which we know we are. And then as Inox turns that interest into orders, which they've already started to, we see all those things as pointing to, we think, will be a good fiscal 2022 for us, for Inox, for India. Our fiscal year and their fiscal year and the Indian year are all the same. They start April 1. So when we say next fiscal year, that certainly mean starting in the June quarter and beyond. We see what we think will be the beginning of an emergence of the 3-megawatt as an additional product. Specifically with Korea, they're going to digest the order that they have. They have to get -- fulfill the construction and the erection and the commissioning of the turbines. These are all for ECS that they bought back from us a while ago. So I'll say I'm optimistic cautiously when we look at our supply chain, where we look at planning, if Doosan order something for fiscal '22, would we be able to supply? Obviously, we want to make sure the answer to that is yes. But I think, specifically, the order will be some more stability in the 2, an order for 3 and then probably later will be an order for 5 from Doosan and that may or may not occur next year.

And our next question comes from Eric Stine with Craig-Hallum Capital Group.

So I just want to, I guess, go back to gross margin on Neeltran. I mean, obviously, you're working through low-margin business, but clearly a high level of confidence and improvement. But maybe -- I mean, just to talk through that a little bit more. I mean, do you feel that in the past -- I mean, it doesn't sound like you necessarily feel like these projects were misbid, but curious, I mean, is it just more scope given that it's part of an overall offering, is it because of different end markets? I mean, just maybe a little more color on why that confidence is there and maybe just compare that to how they had done it prior to the acquisition?

Yes. I think if I try to focus on the way, I won't steal these shows -- any quotes from a popular show on Disney+. But the way we demonstrated with D-VAR. So a lot of what we did with D-VAR and focusing on growth with good margin, making sure the margins there on product is a different culture that existed at the 2 acquisitions. So kind of simply put the NEPSI team extraordinarily well-managed entity that can deliver high level of customer satisfaction and great when we think of an operating income level business, and they understand how to scale up and scale down as revenue demand comes. Really, really well run company. We expected that because we knew the guys for a long period of time, but really high complements as we get under and run the operation now for more than a year, really well-run business with the mindset of long-term growth, but do -- but in the near term, focusing on operational performance and particularly operating cash flow, right? Doing that year-on-year, I think, some of the challenges that we have in both acquisitions is doing that quarter-on-quarter, right? So there's a bit of maturation about doing that. And I think we've come a long way there and realize that as a public company a year is 13 weeks, not 52 weeks and you got to report out and you got to be able to show how your role has changed, hopefully, for the positive. In the case of Neeltran, I'll say, it's older business, and it's -- a lot of family businesses I've seen they run this way. The 2 figures of merit are revenue size and number of employees. So the idea is to grow revenue and grow the population and become a bigger company. Where our culture, we're trying to focus on how to grow and how do we grow at good margin, which is a different set of operating instructions, right? And we're inserting that now into Neeltran. We're looking at the old backlog to understand as these projects may come again down the line with the same customers, how do we make sure we're translating the value appropriately, being there with good customer service, being there with spare parts when they need them as a lot of what we do well in our Wind business and specifically, I'll focus on the D-VAR business, translating that playbook into these acquisitions, and I'll focus more on Neeltran because I feel NEPSI is where kind of where we want to be and we're real happy. With Neeltran, we have to continue to improve. And it starts with the culture, and that's what we've been saying inside the company here in Massachusetts, but as well in Connecticut where the Neeltran operation is.

Got it. That's great color makes sense. Maybe then just turning to these -- not necessarily new end markets, but you're certainly emphasizing them more. I mean you've moved beyond semiconductor as part of the diversification there metals and mining and chemicals. Just curious, I mean, does the market that -- I mean, I would assume you view those growth opportunities as very early. But just curious maybe what market awareness is the potential customers in those markets knowing what you can bring to the table, in particular now that you have these 2 acquisitions in the fold?

Yes, I think -- I mean I want to say it's where we want it to be. I think there's still opportunity to be able to grow. I think it's quite high. I mean the thing that I'm impressed with the team's ability to navigate is that in these key areas, we've seen a pretty significant uptick in the quoting activity, meaning that the intensity of the project, meaning revenue per project, the likelihood of certain projects going forward. When you think about, again, trying to compare our history with D-VAR. One of the challenges always in these businesses are, is the project financed, is it financeable, will it go forward on time. How do you judge that, that when I see certainty around the projects themselves going up, it really does communicate something about the market. And that's what we try to take today to kind of drop back and focus a little more big picture on the market, how the markets all interact from us from a kind of a common longer-term, sustainable vision future, but the material part of this is a critical piece of it. And it's -- frankly, it's a big reason when we looked at these acquisitions, I got excited about them because I saw, right away, how this would all fit in with what we do. You guys know me because we've been doing this a while together. I'm not the one that come out in market and backout something before we do it. I wasn't born in Missouri, but I like to be shown that there's a real pathway there. I'm being shown as a real pathway here in the materials segment. And I mentioned the McKinsey report just because I kind of -- when I first saw it, I kind of laughed because it was what I was thinking about a year ago. This is an area that we can -- we have a lot of -- why don't you go in this market? Why do you go in that market? I'm trying to telegraph the markets that we're focused on, so you understand where we think we're going to head. And if you like that, then where we're going to go is where you hope this kind of company would go.

And that is all the time we have for questions today. I'd now like to turn the conference back to Mr. Daniel McGahn for any additional or closing remarks.

To kind of wrap it up. I think this is really trying to succinctly answer a lot of questions, I think, that we get. We're feeling a lot of tailwinds in what we do. It is kind of a weird juxtaposition between the weirdness that's going on in the world in capital markets and in supply chains and things like that. At the same time, we feel our core markets, which are expanding that we see a number of tailwinds that are present today where those wins are only going to increase over time. When we think about catalysts or changes in the business that we see coming, we're talking to and reporting to improvements in gross margin. We're already seeing that. And we're trying to telegraph. We see those continued improvement coming in the coming quarters. We're laser focused on making sure that when we acquire Neeltran, we said it would be accretive. We are working to make that happen. We think that's an important milestone for the company. We sense more win coming. Hard to tell definitively where in the quarter, but it does seem like the sounds are getting louder that we're going to move forward and win and hopefully move forward in a big way. We said about another ship platform. We said, please be patient realize that, that LPD 32 is going to come, we think. And hopefully, that will give us further visibility on additional Navy revenue, but we're already doing work on the next ships tomorrow, right? So we're really jazzed about the Navy. We're so excited that the team, the ability to deliver with this new team, the hardware for LPD 28. So we see more ships coming. And then even longer term, more cities for REG. So those are kind of…

And this concludes today's conference. Thank you all for your participation. You may now disconnect.