Good morning, and welcome to the AMSC Third Quarter Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Heilshorn of LHA. Please go ahead.

Thank you, Gary. Good morning, everyone, and thank you. Welcome to American Superconductor Corporation's Third Quarter of Fiscal 2022 Earnings Conference Call. I am John Heilshorn, one of LHA Investor Relations, AMSC's Investor Relations agency of record. With us on today's call are Daniel McGahn, Chairman, President and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer and Treasurer. American Superconductor issued its earnings release for the third quarter of fiscal 2022 yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investors page of the company's website at www.amsc.com. Before starting the call, I would 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 of fiscal 2022 financial performance, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those set forth in the Risk Factors section of American Superconductor's annual report on Form 10-K for the year ended March 31, 2022, which the company filed with the Securities and Exchange Commission on June 1, 2022, and the company's other reports filed with the SEC. These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management's views as of any subsequent date to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements. Also on today's call, management will refer to non-GAAP net loss, a non-GAAP financial measure. The company believes that non-GAAP net loss assist 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 fiscal 2020 earnings press release that the company issued and furnished to the SEC last night on Form 10 -- 8-K pardon me. All of American Superconductor'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, and thank you for joining us. I will begin today by providing an update and sharing a few remarks on our business. John Kosiba will then provide a detailed review of our financial results for the third fiscal quarter, which ended December 31, 2022, and we'll provide guidance for the fourth fiscal quarter, which will end March 31, 2023. Separately, John will update our operating models and talk about actions we took that are expected to lower operating expenses. Following our comments, we'll open up the line to questions from our analysts. During our third quarter of fiscal year 2022, we are delivering on our strategic priority of a more diversified business. Total revenues for the third quarter of fiscal year 2022 came in within our guidance range. Our third quarter revenue of nearly $24 million was driven by new energy power system shipments. Our grid segment revenue for the third quarter of fiscal year 2022 accounted for over 85% of AMSC's total revenue. The remainder of the revenues came from our wind business. During our third quarter, we saw a diverse set of product shipments. We shipped voltage compensators, capacitor banks, harmonic filters, transformers, rectifiers, Volt VaR optimizers, ship protection systems and electrical control systems. These products went into renewables and a variety of industrial markets, including semiconductor, mining as well as our Navy projects. We ended the third quarter with more than $30 million in cash, and I'm happy to announce that we have met our obligations in the Chicago project. The $5 million of restricted cash for the Resilient Electric Grid project in Chicago are expected to become unrestricted and hit our books during our fourth quarter of this fiscal year 2022. During our third quarter, we booked $43 million of…

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $23.9 million for the third quarter of fiscal 2022 compared to $26.8 million in the year ago quarter. Our Grid business unit accounted for 87% of total revenues, while our wind business unit accounted for 13%. Grid business unit revenues decreased by 17% in the third quarter versus the year ago quarter, while our Wind business unit increased by 76% over the same time period. Looking at the P&L in more detail. Gross margin for the third quarter of fiscal 2022 was 2% compared to 13% in the year-ago quarter. Gross margin for this quarter was adversely impacted by the continued drag on margins associated with the acquired Neeltran backlog. Additionally, one of our larger projects at Neeltran required additional costs to complete than we had originally planned. This required approximately $900,000 of additional unanticipated costs in the quarter. We do not anticipate any of these costs reoccurring in Q4 as that project is now in the final stages of production. To help provide some quantitative reference as a result of several loss contracts associated with the acquired Neeltran backlog, which includes the project I just discussed, our third quarter reported consolidated gross margins have been adversely impacted by approximately 660 basis points. We believe that Q3 fiscal 2022 will be the peak of the drag from Neeltran acquired backlog. We anticipate Neeltran gross margins to improve in Q4 and further strengthen into fiscal 2023 as we begin to execute on the new projects sold post production -- post acquisition, sorry. Moving on to operating expenses. R&D and SG&A expenses for the third quarter of fiscal 2022 were $9.3 million compared to $9.4 million in the year ago quarter. Approximately 15% of R&D and SG&A expenses in the third quarter…

Thanks, John. We have macro trends in the market that are starting to drive our business. Our backlog is over $110 million and our pipeline of prospective orders reflects our growing and diversified company. We have doubled our new Energy Power Systems order intake rate. These macro trends are driven by climate and environmental policies, which raised demand for our new energy power systems. More specifically, our diversified pipeline of orders come from investments in renewables and industrial markets such as semiconductors and mining, metals and materials. Our company has transitioned from almost a pure play in wind to a company that's focusing on grid resiliency. We now have multiple plays at multiple points in the power infrastructure. Our voltage compensators, capacitors [ for monic filters ], transformers and rectifiers can power the energy-intensive factories of the future without the risk of costly power interruptions. Today, our business is about a quarter based upon renewable energy. We've grown a business that's supporting power management at the substation level for the utility as well as supporting customers in the semiconductor industry. We have a variety of applications for industrial processes and manufacturing, like mining, metals extraction, metal processing and chemical plants. The company is moving in a direction where it expects to provide more new energy power systems for more industrial uses. More than half of our new Energy Power Systems orders during the third quarter of fiscal 2022 come from industrial markets. 1/4 is from renewables. In the past, we've talked about sales leverage with our acquisitions. For example, if we get a $5 million order for D-VAR in semiconductor, we have the ability via NEPSI to get an additional 20% or $1 million in this case of additional revenue at similar margin and profit. When we look at the…

[Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum.

Maybe just on the REG milestone, if you're able to maybe some details on exactly what that milestone is and potential read through to next steps. I recently -- actually, yesterday, I saw that Chicago and ComEd announced a pretty wide-ranging agreement. It included a lot of energy initiatives and grid investments. So curious maybe your confidence level or what type of visibility you might get after this milestone into the next steps?

Yes. I mean to my confidence is very, very high. I think the good news about REG is that we've designed the business in a way financially that REG is not necessary to meet our margin projections and kind of the near-term financial aspects of the business. But looking at the longer term, this is a huge milestone for the company. It means the systems performed as advertised. It means that the utility has been able to work with their constituents, specifically regulators and all the local politics that they have to deal with, where this is now a permanent part of the grid, it has been accepted. The number of people that they brought there that work for the utility, the number of people that they brought there that work for other utilities has been staggering. Their efforts all along have been to look at this first project as a stepping stone to a future with superconductivity. Everything that we see, everything that we're told, everything we've been shown leads us to believe that there's a very bright future for REG in many, many cities in the country. This is a huge milestone for the company. I think the hardest challenge though is to predict or handicap over time, how will this progress? Utilities are notoriously slow, negotiating contracts that we do today for any of our other products take a longer time than many of the other markets that we serve. But I think when we look back about embarking on to this product, REG, we really have met a tremendous milestone. We have a system that's in the grid that's been accepted by the utility and expect an accepted by all of their constituencies, which I think is huge for the product. That means we really have a product we can go and sell going forward.

Got it. And I can appreciate the lack of timing visibility. But if you had to handicap it, I mean, do you think, especially given all of the parties that have come in and looked at this deployment? I mean do you think that, that second Chicago project is next? Or would you expect -- you've talked about diversity, diversity of customer, would you expect it to potentially be another utility?

I really can't handicap that other than saying we're working in parallel with multiple cities right now on projects that solve compelling problems in the grid right now. And we see REG as really the only solution if they want to solve these in the near term.

Got it. Okay. Maybe last one for me. Just I appreciate the commentary on the breakeven. Given your backlog pipeline and the potential for quicker turn business, I mean when you think about that breakeven number, you think that you can get there on the grid momentum alone with wind kind of in its current state? Or when you get there, do you anticipate that wind would be a meaningful part of it as well?

Yes, I think that's probably the question of the day, Eric. I think you nailed it. I think we have both paths open to us. I think, obviously, if there's a rapid rebound in when we get there much faster, meaning that effect rebound comes, we're really almost there with the backlog today, right? So incrementally growing the new energy part of the business is happening. If we can continue at the current rate we've been booking those orders, we're basically there. We have to deliver on it, right, and we have to deliver it on time and on cost. And we've been able to successfully do that throughout the business, and we've improved Neeltran pretty significantly quarter-on-quarter with our operating efficiency capability. So I think when I look at this, I see the backlog and I see the comments that John made about where the operating leverage comes from. And I think we already have the backlog to get there. I think time will be the tell. And I think certainly additional wind would make it easier, might make it faster. But today, as we sit here, I feel better than I ever have that we're now at the point where we're talking about potentially achieving these milestones, not in the next year or 2 or 3, but in the next quarters or a year or so. So we have a much brighter future right in front of us right now.

The next question is from Colin Rusch with Oppenheimer.

Can you talk a little bit about the raw material impact on your margins and what you're seeing in terms of the cadence of some of those lower raw materials starting to flow through your COGS line.

Yes. I think, Colin, the challenge for the business has is the rate at which we take orders and the rate that we deliver them. So for some products, we're booking orders as early as 6 months, maybe 9 months for many of the products we're out a year plus at this point. And that compared to where the business was, say, a couple of years ago, certainly has extended by at least a quarter or more for many of the product lines. And that's a bit of the kind of constipation of the backlog, if I use that term, but please don't write that, but I don't have a better language is that we're kind of stuck with this backlog. We're trying to get it out. And the good news is as we've priced in new orders and new backlog, as John said, that those are as we model them going forward, and certainly margins that we've hoped for and expected. For material prices, specifically in John's commentary, we see a stabilization of those costs, which means now as we've priced in new orders, it's just the time it takes from when we receive that order to when we deliver on it. And we're kind of in that cadence now in the coming quarters.

Okay. And that's helpful. I may ask some clarifying questions later. But next, I'm just curious about the bid activity. Obviously, there's a lot that's happened from a regulatory perspective around capacity building domestically. And so I'd love to get a better sense of how much sales activity there is and what your conversion rate is on what you've seen so far, I guess, call it over the last 6 to 12 months.

Yes. I think the bid activity has exploded. I think the number of projects that we've looked at certainly is at the highest point since as I can remember. So the prospects for the business are greater than they've been certainly in the past years. When we look at the order intake, we have announced today, we closed more than $40 million of orders last quarter. When we look at the run rate of what we're just doing the new energy over the past 3 quarters, it's about $30 million, just for new energy, right? So then you got to add in what we're doing with the Navy, you got to add and what we're doing with wind as well. Is there any other commentary you want to talk about, John? Does that help, Colin?

Yes. I'm just curious about the win rate and any delta around that.

Well, the hard part we have with the win rate is most projects down, and this is what we've done even with entrant and to some extent with NEPSI. We try never to compete directly. So the way we do it, it's a very early decision if we're going to win or not, and then it depends upon how the project goes for it is we make things smaller and less complex. And if we're able to design that in with the engineering company, which is usually the engineering procurement construction company, then we really eliminate a lot of competition. I won't say all, but almost all. So we're -- we -- today in this version of the business, we're really never in the decision-making by purchasing. An engineer has made a design that requires our smaller footprint which means that it's hard to go out and get an alternative. So when we look at direct project win rate, it's extremely high, right? But to be transparent, there's a lot of work that happens in the quarters before even getting the order, where we're trying to get designed in on the print, be it for a ship or for a substation. And really, those are the 2 that we're focused on. And the same techniques we use for the ship, we use for the substation, which is how do we make it smaller, more and more energy dense, how do we add more feature function than what the alternatives are. And that's true across everything that we do.

That's incredibly...

[indiscernible] there are the 2 indicators we're looking at is pipeline growth, which as Dan just highlighted, and we do -- especially over the last year as we had to adjust our prices based on the raw material inputs going up. we have been carefully watching our customers and making sure that we remain competitive. And across the board in the business, there's no evidence to suggest that the bids we're doing are making us uncompetitive. There's isolated pockets where we're watching and we're concerned about where there is a more competitive landscape to it. And -- but as of now, there's no --

It's actually going to happen.

We're much more focused on margin going forward, right? I mean I think that's the thing that people need to hear is we're trying to grow the business, but we're trying to expand margins as well. And that means that -- and that's I think why Collins get that, the question is, well, now you're running up into a competitive pressure with this current pricing. We haven't seen it for the business that we want to take. And that's really, I think, the key point we want to make today.

The next question is from Justin Clare with ROTH Capital Partners.

Daniel. So I guess the first one here, the $5 million of annual savings that you expect from cost reduction actions. Just wondering if you could talk through how much of that is expected to impact your cost of goods sold versus OpEx? And maybe what the impact to either R&D or SG&A might be?

I can talk about the impact, John, do you want to take the financial part of it.

Yes. So Justin, the vast majority of this is going to be in OpEx. We didn't break it down publicly, but what I will say is on the scale, call it, north of 75% will be OpEx related versus less than 25% will be COGS. I think from a capability standpoint, I'll reiterate paraphrase something I said earlier is we are expecting more content per ship from the Navy, which means that when that happens, that means we've met certain development milestones, which means unless we have something else to develop, those are not costs that we need to continue to carry. I think when we look at the substation type products, we're at a point now, I think we've learned a lot about the sales leverage. I think we're now going to demonstrate some operating leverage, particularly in the back office. We need to continue to digest what we have, which means the need to go develop something over the next quarters is very limited. But going forward, we still have the capability to be able to service our customers. We still have the capability to be able to make changes or make adjustments. And we still have the capability to develop some new technology, which could translate into future products. But right now on our road map really is we have to focus on the financial leverage that the revenue will bring. And that's the near-term focus for the team, and that allowed us to take maybe a very different look at our operating expense.

Got you. Okay. Thanks for color there. I guess then just on the gross margin here. So it looks like gross margins are expected to improve in Q4. Just wondering, is the high single-digit number for the gross margin reasonable there? And then is the improvement primarily due to the Neeltran kind of lower-margin backlog rolling off? Or are there other factors like a change in the product mix? Or is it Q4 where you're going to start to see some of these pricing actions that you've taken benefit the margin?

Sure. So I'll answer the second question. The first question, we don't guide to gross margin. So I want to be careful not to give too much clarity on that. But what I will tell you is the gross margin improvement in Q4 will be driven by all 3 of those, right? We said Neeltran gross margins are going to improve. We do have a healthy expectation of D-VAR revenue in the fourth quarter, so that's inherently going to help the mix. And then as we continue to shift backlog, in particular for the NEPSI product line has the quickest lead times. And so the pricing that we've been able to implement at NEPSI will flow through the P&L but quickest. And so you're going to see it in all 3 areas. You're going to see pricing improve the margin. You're going to see mix improve the margin, and you're going to see the impact of Neeltran improve the margin. And that's not just isolated to Q4. That's really what we're talking about is to end throughout FY 2023.

Got you. Okay. And then, I guess, just lastly here, I wanted to understand the kind of cash flow breakeven scenario in the model you're thinking about. I think I heard that it was $35 million in revenue with gross margins near 20%. But correct me if I'm wrong. So that'd be about $7 million in gross profit and then cash OpEx of, say, $7 million would get you to a breakeven. Is that the right way to think about it? Or are there different [indiscernible].

I think you might have heard that part of that script. So what I said was we see scenarios where gross margin can approach 25%, and we see our operating expense models closer to $9 million. So the breakeven is assuming a 25% gross profit with $9 million of cash OpEx.

[Operator Instructions] The next question is from Chip Moore with EF Hutton.

Daniel, John. I wanted to follow up on the sales leverage potential from NIPS and Neeltran. You did a good job of outlining that again, Daniel. I guess just curious on that cross-selling, how does that progress versus expectations, better than you expected? And how is it looking forward?

Yes, I think that's exactly what we're trying to get at is we set an expectation, we did this that we thought that these things would happen. Now we're seeing them, right? And we're seeing this specifically in semiconductor, and we're seeing them specifically in this new space for us, the metals, mining and materials space. The good news is when we look at semi, which is really a combination of D-VAR and the offerings that we inherit from NEPSI that those today are at similar margin, which is great. That's what we had expected. When we look at the mining and the metal and material space, which is the example we've been using for Neeltran, that's a combination of NEPSI Neeltran. And I try to do it both ways depending upon how people think about it because as we looked at it, I did in the prepared remarks, I looked at it as we looked at it, as an additional expansion of what we already have begun with NEPSI that we saw Neeltran kind of continuing on that theme with even greater sales leverage rate. But then I brought it back to just kind of compare directly those 2 markets and just say, if we get $5 million of one, we'll get another 20% or $1 million of another. And we set all these things when we did the deals and now we have been examples, and it's not 1 or 2, it's quite a few of them in the backlog. The challenge, as I pointed out and the challenge that everybody obviously seeing here is, how do we have the backlog that we have on the books for the Neeltran. How do we digest that process at move on to better priced, higher-margin backlog. And that's really why we're confident today in obtaining operating models, talking about breakeven. These are things we have not done in a couple of years, right, maybe 3 years. We want people to understand that John and I are highly confident based upon our backlog and based upon how we're usually able to deliver product at a pace that if those things can both happen, we're not really far away.

That's great color. Great to hear, Daniel. And maybe another question with that strong backlog. The inventory position just continues to build. Any way to think about working capital over the next, call it, 12 months or so?

Yes. So the inventory has built over the last year. Some of it is due just to the backlog growth, and some of it has been timing of some shipments. We do have a fair amount of shipments going out in D-VAR this quarter where we had some inventory buildup for that. So the expectation is we should leave that project out of WIP, and we should start to see that. On the working capital stream, we -- this quarter assumes we have some working capital. So the guidance I gave you of 4% to 6%. If you look, we guided to non-GAAP of 6, there's about $1.5 million of depreciation. So in theory, we'd be closer to $4.5 million I gave a pretty wide range because of working capital that could impact that up to $6 million or so. But moving forward after that, I see working capital probably in Q1, if it's negative in Q4, it's probably going to be positive in Q1, and it will net out to 0. So I expect working capital to be closer to flat and have no impact just because of the way our milestone structure is Q4 and Q1, we may have a little bit of swing from one quarter to the other, but that's already incorporated into the guidance.

Yes, that's perfect. And remind me, that larger D-VAR project has been pushed out last quarter. Do you still expect that to hit in the current quarter.

That project is included in our guidance, yes.

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

Thanks, Gary. I just want to wrap up by saying that we're a much broader and more vibrant company today than we were just a few years ago. We've been able to add new pieces of new markets. We've been able to manage pricing. We've positioned ourselves to grow, and we're hoping to see that start to pay off as early as next fiscal year. We think there's a series of tailwinds driven by climate change that are here to stay and are pushing the business forward. As I mentioned earlier, our pipeline is growing and becoming more diverse. Our order book has gone from delivering at a rate of $20 million in new Energy Power Systems orders per quarter to now delivering at a rate of over $30 million for the past 3 quarters. This is just for the new energy power systems. So our ability to convert that potential pipeline into actual orders is really starting to happen. I think it felt great prospects for us as we look at 2023, and we're even looking at quoting products for delivery already in 2024. So we think the next years look very bright for the company. Thanks, everybody.

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