American Superconductor Corporation (AMSC) Earnings Call Transcript & Summary

Good day, and welcome to the AMSC Comtrafo acquisition call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Nicol Golez, Director of Communications. Please proceed.

Thank you, Eric. Good morning, everyone, and welcome to American Superconductor Corporation's Conference Call. I am Nicol Golez, AMSC's Director of Communications. Joining me today are Daniel McGahn, Chairman, President and Chief Executive Officer; and John Kosiba, Senior Vice President, Chief Financial Officer and Treasurer. Yesterday, after market closed, American Superconductor announced the acquisition of Comtrafo Indústria de Transformadores Elétricos S.A, referred to as Comtrafo. A copy of this release is available on the Investors page of the company's website at www.amsc.com. Today's remarks regarding American Superconductor's acquisition of Comtrafo and future expectations, including financial results, plans, prospects, markets, market opportunities, anticipated benefits and effects of the acquisition as well as expected Comtrafo financial results for calendar year 2025 constitute forward-looking statements. Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, including those set forth in the Risk Factors section of American Superconductor's Form 10-K for the year ended March 31, 2025, which the company filed with the Securities and Exchange Commission on May 21, 2025, as well as our other filings, all of which are available on our website. The company disclaims any obligation to update these forward-looking statements. With that, I will now turn the call over to Chairman, President and Chief Executive Officer, Daniel McGahn. Daniel?

Thanks, Nicol, and good morning, everyone. We're very happy to announce the acquisition of Comtrafo, a 30-year-old family-owned and operated business in Brazil that manufactures large power transformers and distribution transformers, primarily for utility customers, and additionally, for industrial customers. They currently have principal production capability in the south of Brazil outside Sao Paulo of about 125,000 square feet and are prepared to expand. They have 580 employees. They are expected to do about $55 million in revenue this calendar year with gross margins comparable to our recently demonstrated levels and operating margins regularly exceeding 20%. The acquisition is expected to be immediately accretive next quarter. These margins are normalized to not include events pertaining to the acquisition. We have and will have to do purchase accounting adjustments such as inventory and other events to bring their accounting in line with our standards. They have total backlog of about USD 85 million and 12-month backlog of approximately USD 55 million. Their lead times are similar to our own, 6 to 12 months with longer lead times for larger projects. We are paying roughly $55 million in cash and $78 million in stock for the business and an additional $29 million for the more than 100 acres of land set for manufacturing. We'll be working on the timeline for expansion and talk about that in the future. The team is very excited about the prospects for that, but that's going to take some time to understand and further plan out. Additionally, there is an earn-out in cash that can be fully earned if they're able to more than double the business. So that's a very exciting plan that they have, and we hope to be able to help them as part of AMSC. Brazil is 1 of the 10 largest economies in the world, the seventh largest electricity consumer and the largest electricity market in Latin America. The Brazilian transformer market is valued at $1.5 billion annually today. The broader Latin American market is expected to grow and become triple this by the middle of next decade. Their top customers typically are electric utilities in Brazil. They have begun to expand into the broader Latin American market. Focusing on the Brazilian market dynamics, local governments are actively promoting modernization of the transmission and distribution grid. According to the Empresa de Pesquisa Energética, Brazil has a planned investment of over $20 billion, driven by the central and local government. This is anticipated to quadruple in the coming decade. It is quite a large market opportunity and growing. We at AMSC currently build transformers as part of our business, typically for industrial customers. The acquisition extends the product portfolio to now include transformers for the distribution grid up to 15 MVA as well as large power transformers up to 250 MVA for the transmission grid. This really extends our offering for utilities, which until today was primarily focused on grid resiliency and power quality. The acquisition now extends our offering to specifically take advantage of the critical needs of power utilities for the expansion of the grid's ability to supply power. We have been making transformers for industrial equipment up to 115 kilovolts. We now expand that to include 138 kilovolts and 230-kilovolt transformers for the power grid. These are the very large transformers that are in high demand. They do extensive testing on site and believe the quality of the products as well as their speed to market are key differentiators. They have a full production team, engineering staff and quality management. They have a sales presence across Latin America, which has been focused principally on Brazil. The family intends to stay with the business and help continue to lead the operation. Their total staff of 580 individuals will double our employee population. This is the highest profit business we have acquired. We are very excited about what we believe this means for the acceleration of our revenues and substantial profit leverage in the business. Their historic gross margins are in line with our broader business in the 30% level. Their current operating margins are already exceeding 20%. This accelerates our plans by at least 1 year and positions us for further future growth in the region. Consideration for the deal was about 2.4x expected calendar year 2025 revenue, plus the additional acquisition of the land. We feel this is justified due to their established market presence and their trajectory of potential growth in a significantly growing market. The land is an important part of the acquisition, in that we believe it positions the company to be able to grow rapidly to take advantage of market dynamics. We are buying a business that complements our current business. Like past acquisitions, we buy a family-operated business, but this time, at larger manufacturing scale and in a new market for us, Brazil. We love the product, the people and the profit capability of this business. It is a business that is positioned to grow. This further expands our offerings to power utilities at a time where there are significant lead times in a growing market. The timing of the acquisition means that it won't have much of an impact on the current quarter, but we will intend to include their part of the business when we guide for the March ending quarter. We don't buy businesses based on synergies. We buy well-performing businesses that expand our product and market reach. This is what we've announced today. This opens up a whole new chapter for the company and increases the number of market tailwinds that can drive our business. We have seen many opportunities, and this one seemed to be the right fit at the right time. We're very excited to bring Comtrafo into the AMSC family. Eric, we will now take questions from our analysts that are queued up.

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

Daniel, so when thinking about this, so obviously, I mean, an expansion into Brazil, big market, but some slightly different products than what you have today. What I'm curious -- I mean, should we think about this as more expansion to a new market? Or do you believe that this is something with a slightly different product offering and set of customers that you can bring to different markets, I mean, namely, the U.S.? And then, conversely, what do you think the opportunity is to bring AMSC's existing products to Brazil through this acquired company?

Good question. It's kind of the heart of the matter, I think that people want us to talk to. I think there's 2 dimensions of the expansion here. One is the product line independent of geography, right? So we sell to utilities today. We sell mostly power quality type solutions for problems where there's voltage issues or whatnot. This puts us right into the main feed of power. So, as the grid needs to be built to deliver more power to customers, transformers are an essential part of that. The part of the product line, we're very excited about for a longer-term growth, will be the transmission level larger type units. And those are things that potentially in the future, we'll be able to sell everywhere. The second part of it is the expansion into Brazil. So we do some business in Latin America, but really not in Brazil. So this creates a whole new opportunity for the company combined to think about how do we service those customers in Brazil itself. So the way we're thinking about it from a growth standpoint is the first priority is we have a tremendous opportunity in Brazil to grow this business that we're acquiring. That's the first priority. The second priority will be how do we expand more broadly into Latin America because there's a market there that's growing and becoming quite big, tripling probably over the next 10 years or so. So we think that opens up an opportunity to sell Comtrafo to the broader Latin American market. They started to do some of that, and we hope we can do more of that. And then, on top of that is the, can we provide AMSC content into Latin America and can we provide Comtrafo content into North America? I think those are all things to come, but that's not something I think we're going to focus the group on in 2026. It's really we have a significant advantage immediately ahead of us in Brazil. We need to take advantage of that. We need to be able to scale to be in a position to service those customers. And then, we'll continue to work with the broader team, probably over a longer period of time to get at the heart of what you're asking, Eric, which is how do you get the leverage across the entire product line, maybe throughout the Americas and eventually globally. Those are all things we're going to get to. But given the size of the company, we can't do all of the above at once. We have to focus and have success in a successive order of priorities.

Yes. Understood. Very comprehensive. I guess, maybe last one for me. So, I guess, it sounds like given that their -- the lead time is very similar to your current business. And so that $55 million annual number could change to an extent there could be some upside. But is it fair to say that people should not expect that number to grow substantially, at least over the next 12 months? Once you get beyond 12 months, then that's a different story.

I think yes and no. The lead times there kind of on average are similar to us, where it represents about 9 months on average, 6 to 12 is where the base part of that is. There are some that are more than that. You can see that with the $30 million additional to go from the $55 million to $85 million in backlog. The good news is they're basically starting the next calendar year with the prior calendar year already in backlog. So that's a very exciting position. I think we will be mindful to help everybody understand now how the entire AMSC combined backlog will change, where revenue is going to head. But it really -- kind of simply, this adds another 20% to the business almost immediately. That's very exciting. And when we look at the leverage in that business, it's at or better than where we are today, and it's really at or similar to where we want to get to. So this is a nice building block piece that assures pretty significant additional growth for next year and doing it at the leverage in the business that we want to get to and maintain going forward.

Right, and immediately accretive if I heard that right.

Yes.

Our next question comes from Justin Clare with ROTH Capital Partners.

So I wanted to just start off. Wondering as you look to potentially expand the Comtrafo business outside of Brazil into other Latin American markets or into the U.S., are there particular product standards or certification requirements that might be needed as you expand? And maybe you can just speak to the potential timeline for when you might look to expand in a greater way across Latin America? And when could you enter the U.S.?

Yes. The standards for Latin America, they've established, and that's what they test to. We are looking at what we're going to be able to do in the U.S. from a thought exercise standpoint. They do standardize and test the product to international standards. One of the challenge with U.S. utilities, this is just from our own experience, is that you have to kind of go through the standard setting with each utility. We've done that with a number of our products. It does take some time. It could take 1 to 2 years depending on the utility to do that kind of work. So that's stuff we want to get at as quickly as we can to really understand what the opportunity is today. I think today, the opportunity clearly is in Brazil. I think that there is an exceptional opportunity for us in the broader Latin America. I think it will take time, Justin, and I think we'll come back to you, not just next quarter, but as we go forward, kind of when do we start to expect to be able to enter the entire market of the Americas, including North America. So that's an exercise that we will go through. And I think it's one of the things that Comtrafo was excited about us as an acquirer besides the fact that our CFO is a wonderful guy and gets along with them famously is that we can really help them with the market penetration more broadly because we've done -- we've been there and done that. We go through that all the time. And you guys know, I'm not a heavy promoter on saying, "Hey, we're going to do that, this, that or the other thing". I'm very pragmatic and practical. We're going to look at this the same way. But it's a huge opportunity just in Latin America alone. If we can bring this in North America, I mean, this is a substantial change in the trajectory of the business. But it's going to take quarters and maybe years to even enter the broader market than the entire Americas.

Got it. That's helpful. And then -- so I guess I'm curious, which -- so kind of going in the other direction, which AMSC products could potentially be sold in Brazil or in Latin America more broadly? And maybe you could speak to the go-to-market strategy there? And then, are there similar kind of certifications or requirements that may need to be met for your product portfolio as you look to expand?

Yes. I think the timing is really the promotion and further deepening the relationships with customers in Latin America. We do some business there. Principally, it's on the industrial side in mining. We will provide transformers and power supplies for those types of applications. Certainly having a local presence should help bolster that. I think that will be something that the market will see positively, meaning the customer-driven market. And then, we have to look at -- the investment in Brazil in power is pretty impressive. And we have offerings now, as we've talked on previous calls, for more traditional energy that we think could have applicability in Brazil. But these are all things that we have to kind of study, examine and go forward with. And I know everybody wants to focus on how big and how bright this can be. One of the challenges when we do these acquisitions is we sign and close basically at the same time. So when we look at the businesses, we look at basically bolting them on and do they fit and does it fit overall with the amount of dilution in the deal and the pricing in the deal. And if that works, then we love it, we move forward and that any additional leverage will come in the 1- to 2-year kind of time frame, typically. We've seen that in the other acquisitions that we've done. So I think the thing I want people to feel is hang in there, that there's growth coming in the overall market, there's growth coming in the product line. We've done, I think, a very good job in turning cross-selling into selling in the other acquisitions we've done, and we intend to do that with this as well. And we have a group down there that's super excited about doing that with us. So it will just take some time.

Got it. Okay. And then just 1 more. How are you thinking about adding incremental capacity given that it seems like you have a meaningful amount of space to expand there? What could be the potential time frame and the level of CapEx that you might be thinking about for expansion?

Yes. To talk about the level of capital, it's probably on a level just as we have said before with any expansion in the factory. It's things that we can do in our balance sheet. But I think that's reassuring for everybody. The timetable, this is something we're working together as a larger team, there's a lot of excitement on how fast can we go, how fast can we grow. That's something we have to work through as a combined team. So we're not announcing today that we're doing a specific expansion, but it's something that, as we make progress, we'll certainly kind of talk about what the capability of the business can become. We did say in the prepared remarks, and it's in the 8-K, there's an earn-out portion of this. The team down there is very excited that this business is very much poised to grow, to the point where they put the earn-out in as part of the deal was something that we all wanted to have to be in a position to grow. And with simple math, if they achieve all of the earn-out, it means that they've more than doubled the business. So the land is an important part of the transaction because we want to make sure we're in a position to grow the business as rapidly as we can. But those are things on future calls, we'll talk to kind of what our capital spending is and so on. But this business is -- the only really difference between this business and the other ones we bought is the native language in the market that they're in. The way we're going to approach it is very similar to what we've done in the other businesses. I think that the acquisition of the land puts us in position to be able to exploit that and take advantage of that as rapidly as we're able to.

Our next question will come from Colin Rusch with Oppenheimer.

Dan, you've been pretty judicious around corporate culture and managing integrity of the business. Moving into a new geography, working with another language, another culture is a level of complexity you guys haven't engaged in historically. Can you just talk about your thought process on that integration? And how long you think that will take? And how much diligence you've been able to do in the M&A process here?

Yes, the multi-language we do today, I mean we have operations in a lot of countries all over the world. We've built factories in a number of countries. The principal language wasn't spoken was English. All of our material internally when we do all of our training, we do all of our policies, everything is multilanguage. I know the stuff I just was in the other day, it shows up in 8 languages. So we are a multilingual culture already. We're not a Portuguese-speaking culture. So that's something that we'll have to add. But we've had to do that with Romanian or Polish or different languages in India or any other geographies that we've operated in. So that part, I'm comforted with. And I think in many ways, the family is very reminiscent of the other families in the other businesses that we bought. The level of excitement, the passion, what they've been able to do and grow, the idea of combining and going forward, something that's bigger and stronger, is exciting. So I think we have great alignment that the entire organization wants to continue on the trajectory that we've begun. And if we can accelerate that, that's all good, and that's what we're going to focus on. Does that get at the heart of what you're thinking? Does it help?

I think so. You guys have done a nice job with the bolt-ons and then slowly integrating these businesses over time. So I think it's really just about a question of pacing for me. So we got after it. The second question, you guys have been really capable around technology design and innovation for some complex problems. And certainly, you don't want to disrupt the product line, but you have been able to drive some cost benefits through improved design on some of the products and some of the optimization of how these things fit together. Can you talk a little bit about how mature your thought process is and kind of diligence is around that opportunity even as you think about this as a bolt-on with some multiyear potential synergies as you go forward, either from sales or customer-need perspective as you look at how some of these technology pieces fit together?

Yes. I think job one is exploit the market. I think the second or third order will be -- we're now going to operate in another low-cost manufacturing area, like we have in Eastern Europe, and we have in our past before. So how do we take better advantage of that over the longer term? I think where we generally make decisions around that is a customer helps to drive that decision-making, meaning that if we have technology that we typically sell in North America, if that needs to be engineered or designed for a South American market and a South American price point, then that's something that we have to look in to do. But for us, each one of these acquisition ideas, all the kind of best ideas that we have in R&D always start with a customer conversation. And then, we try to be creative about how do we offer performance, how do we manage costs and how do we do those pieces. So I put in the number of markets about we don't buy businesses based upon the synergies. It doesn't mean that there aren't any, but that means that we're focused on the first job, which is just scale this business locally. And then over time, when we're able to, with the customer helping to drive it, we'll look at how we understand better performance and costs across the entire product line.

That's super helpful. I'll take the rest offline.

[Operator Instructions] Our next question comes from Tim Moore with Clear Street.

Dan, congratulations on the deal with a rapidly growing end market in Brazil and Latin America. Just kind of curious, roughly how long might have you been in talks with them? I know you raised equity in April. Just curious if there are other large U.S.-based acquisition targets just not growing as fast or maybe too high of asking valuation prices?

That's a whole portfolio that we've been looking at. This kind of was the right fit at the right time, meaning that we are able to mature the discussions to the point where you get down to terms and pricing and those things. We've looked at a number of things. Valuations, I'll just say, are different this year than they were a couple of years ago. We want to be mindful of that. We want to make sure that we are leveraging the value of the company in the right way. But there are others that we want to continue to look at. And the part of our growth strategy is to get the leverage across the product line, continue to grow organically, but also be in a position to accelerate growth when we can find the right -- I talked about the right product, the right people and the right level of profit if we find businesses to be able to add and extend. So we're now -- we've done -- this will be our fourth one in about 5 years. So there will be, I think, other opportunities, and we just have to find if it's the right fit and the right feel with some of the targets.

That makes sense, Dan. It's good that you didn't get too tempted on the U.S. stuff, but this looks very good. So I believe from the press release you talked about doubling, the double for the earn-out, that's their EBITDA in 3 years. Is that correct?

Yes. Basically, the way the structure looks, we do the reverse math. We have to basically double revenue in 3 years or sooner.

Okay. So it's doubling revenue. Is there anything tied to EBITDA? I thought I might have read that, maybe I read it wrong.

The whole structure, Tim, is EBITDA-driven. But I'm just -- as we're thinking revenue the most, that is an easier figure to understand growth in the business. That -- correlates to basically a bit more than doubling the revenue there.

And just on that, given this rapid growth and the potential to add more capacity, I know you're still working through this, and you mentioned it. I guess, you would be mindful kind of incremental margins and not adding a whole lot of capacity once it would be done in phases that you get the incremental margin without underutilization down there.

Yes. No, we want to make sure we continue to leverage in the business. That's the mindset. That's where our patience, I think, pays off.

Good. Good. And just my last question is, clearly, T&D work is booming in Brazil, in the U.S., in Europe. This is a great direct play into it. I was wondering, did you know if they have any work driven by data centers? I think Brazil is supposed to double their data sale -- data center investments over the next 5 years, and they're growing like 15%, 20% a year. I mean -- or do you think they're just doing work on T&D and they haven't pinpointed if any of it is actually going to data centers?

When you look at the market, like here in North America, Brazil seems to be trying to position itself as a center for AI. So I think it will create opportunities. I don't think that's in the immediate plans there because they kind of have their hands full with just the utility demand. But I think that there potentially could be a fit there. But that's something we have to explore, and we'll get back to everybody about. I know probably the question I get asked the most for the past 6 months or so has been the question about AI. We're excited about this acquisition and what it means really for our relationship with utilities. And as we said in the last call, we hope to have some news soon on the AMSC side on what we're going to do with data centers. So we still remain very excited about that.

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

I really want to thank the team within AMSC to help to drive this. John Kosiba here led it. John Samia, our General Counsel, led the due diligence and the transaction process. This has been a very emotional acquisition for us because of the excitement on the other side because that excitement has translated to us in what we think and what we see as this is a business. I think we have a demonstrated track record of doing a good job with selection, with pricing and managing dilution. And we try to be very pragmatic with these things, but we are wildly excited about the combined future. And I hope that, that comes across today. So thanks, everybody, for your support, and look forward to talking to you next year when we report on the third quarter for us, which ends in this month in a few weeks. Thanks, everybody.

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