American Superconductor (AMSC) M&A call, December 11, 2025 transcript

Thank you, Eric. Good morning, everyone, and welcome to American Superconductor /de/ Corporation's conference call. I am Nicole Goles, AMSE's Director of Communications. Joining me today are Daniel McGann, Chairman, President, and Chief Executive Officer, and John Casiva, Senior Vice President, Chief Financial Officer, and Treasurer. Yesterday, after market close, American Superconductor /de/ announced the acquisition of Comtrafo Industria de Transformadores Electricos, E. 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 remark regarding American Superconductor /de/' acquisition of Contrazo and future expectations, including financial results, plans, prospects, markets, market opportunities, anticipated benefits and effects of the acquisition, as well as expected Contrazo financial results for calendar year 2025 constitute forward-looking statements.

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 /de/ 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 their 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 McGinn. Daniel?

Thanks, Nicole, 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're 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 $85 million U. S. and 12-month backlog of approximately $55 million U. S. 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 one of the ten 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 Impressa de Pesquisa Energetica, Brazil has a planned investment of over $20 billion, driven by the central and local governments.

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 MBA, as well as large power transformers up to 250 MBA 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 one year and positions us for further future growth in the region.

Consideration for the deal was about 2 times 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 Contrafo into the AMSE family.

Eric will now take questions from our analysts that are queued up.

Good morning, Eric. Hey, 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. and it's kind of the heart of the matter, I think, that people want us to talk to. I think there's two 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 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've 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 Contraffo 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 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 D all the above at once. We have to focus and have success in a successive order of priorities.

I think yes and no. The lead times there, on average, are similar to us. It represents about nine months on average. Six 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 to $85 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, you know, we'll be mindful to help everybody understand now how the entire AMSC combined backlog will change where revenue is going to head. But it really, you know, 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, you know, 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.

Yes.

And maybe can you just speak to, you know, the potential timeline for when you might, you know, look to expand in a greater way across Latin America and when could you enter the U Yeah the standards for Latin America they established and that what they test to We are looking at what we going to be able to do in the US from a thought exercise standpoint They do standardize and test the product to international standards. One of the challenges with US 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 one to two 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, 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 Contraffo 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 been there, 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 this, that, or the other thing. I'm very pragmatic and practical. We're going to look at this at the same way. But it's a huge opportunity just in Latin America alone. If we can bring this to 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 in the entire Americas.

Yeah, 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 and mining. We'll 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 of the deal.

And if that works, then we love it if we move forward. And then any additional leverage will come in the one- to two-year kind of timeframe typically. We've seen that in the other acquisitions that we've done. So I think the thing I want people to feel is, you know, hang in there. There's growth coming in the overall market. There's growth coming in the product line. And 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'll just take some time.

Yeah, to talk about the level of capital, it's probably on a level, just as we have said before, with any expansion in a factory. It's things that we can do in our balance sheet. So 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 8K, 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, you know, they put the earn-out in as part of the deal. It's something that we all wanted to have to be in 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's an important part of the transaction because we want to make sure we're in 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, you know, the only really difference between this business and the other ones we've bought is the native language and 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.

Yeah, 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 multi-language. I know the stuff I just was in the other day, it shows up in eight languages.

So we are a multi-lingual 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 and the other businesses that we've bought. The level of excitement, the passion, what they've been able to do and grow the idea of combining and going forward as something that bigger and stronger is exciting So I think we have great alignment that the entire organization wants to continue on the trajectory that we begun And if we can accelerate that that all good And that's what we're going to focus on.

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 full-time with some multi-year 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?

Yeah, I think job one is exploit the market. I think second or third order will be, you know, 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 and 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, you know, how do we offer performance, how do we manage costs, and how do we do those pieces. So, you know, I put in the 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 a customer helping to drive it, we'll look at how we understand better performance and cost across the entire product line.

there's a whole portfolio that we've been looking at this kind of was the right fit at the right time meaning that we were able to mature the discussions to the point where you could 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 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 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 talk 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 five 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.

Yeah, basically the way the structure looks is the reverse math. We have to basically double revenue in three years or sooner.

The whole structure, Tim, is EBITDA-driven.

That correlates to basically a bit more than doubling the revenue there.

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

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 six 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, you know, 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.

I really want to thank the team within AMSC to help to drive this. John Kasiba 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 and 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 this month, in a few weeks.

Thanks, everybody.