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Superconductor Technologies (NASDAQ:SCON)

Q1 2013 Earnings Call

May 08, 2013 11:00 am ET

Executives

Kirsten F. Chapman - Managing Director and Principal

Jeffrey A. Quiram - Chief Executive Officer, President, Director and Member of Stock Option Committee

William J. Buchanan - Chief Financial Officer, Principal Accounting Officer, Vice President, Controller and Assistant Secretary

Operator

Welcome to the STI First Quarter 2013 Conference Call on the 8th of May 2013. [Operator Instructions] I will now hand the conference over to Kirsten Chapman of LHA. Please go ahead.

Kirsten F. Chapman

Thank you, Julie. Good morning, everyone, and thank you for joining us for STI's first quarter conference call. By now, you should have received a copy of the press release. If you have not, please feel free to contact LHA at (415) 433-3777, and we we'll get that out to you right away.

With us from management today are Jeff Quiram, President and Chief Executive Officer; and Bill Buchanan, Chief Financial Officer. I will review the Safe Harbor provisions of this conference call, and then I will turn the call over to Jeff.

Various comments regarding management's beliefs, expectations and plans for the future are forward-looking statements and are made in reliance upon the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance and are subject to various risks and uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ from those expressed in the forward-looking statements, and those differences could be material. Forward-looking statements may -- can be affected by many other factors, including those described in the Risk Factors in the MD&A sections of STI's 2012 annual report on Form 10-K. These documents are available online at STI's website, www.suptech.com, or through the SEC's website, www.sec.gov. Forward-looking statements are based on information presently available to senior management and STI, and may not be assumed any duty to update any forward-looking statements.

And now it is my pleasure to turn to Jeff -- the call over to Jeff. Please go ahead, Jeff.

Jeffrey A. Quiram

Thank you, Kirsten, and thank you all for joining us today. I'll provide an update on our Conductus wire program and then Bill will review the financials.

We are excited to be shipping qualification wire samples. A lot has happened to get us through this milestone. We have demonstrated the technical performance required for our target applications. We completed the acceptance and installation of our Conductus wire production equipment at our Advanced Manufacturing Center of Excellence in Austin, and we entered 2013 with the planned power production capability to address a variety of markets with superconducting needs.

Having clearly demonstrated the technical advantage of Conductus wire, and with that pilot production capability in place, our primary focus at this point is securing relationships with the customers that will consume our production in 2014 and beyond. The majority of our customers are leading multinational industrial companies that are currently selling or developing superconducting devices or emerging smart grid applications. In most instances, their products and technologies are already embedded in the existing electrical utility networks. This incumbent supplier status clearly positions them to effectively address the needs of electric utilities as they develop the emerging smart grid on a global scale. All of these electrical device manufacturers need cost-effective, high-performance superconducting wire for their products. As we have stated a number of times in the past, the demand for HTS wire far exceeds the current supply, and we believe this will remain the case for the remainder of the decade, at least. This high-demand, low-supply environment has encouraged our customers to place purchase orders to secure supplies of STI's Conductus wire in order to qualify it in their new product designs. After they validate that Conductus' performance as required, we believe that we are positioned to secure preferred supplier status as companies manufacture the next generation products.

As we have discussed, the majority of our customers progressed through 3 stages to select their long-term wire supplies. First, they evaluate the performance of several short lengths of wire. Second, they fully qualify the wire for their specific power device or application, which usually results in standardization for our wire supplier. For this purpose, they require wire in specific lengths and with detailed performance specifications. And then, third, once customers complete full qualification, they enter into commercial relationships that result in the placement of purchase orders for wire in lengths of hundreds of thousands of meters, depending on the application. Our goal is for Conductus wire to be selected in this third stage by one or more customers.

Last month, we announced that multiple industry-leading companies had placed purchase orders for Conductus wire to complete their product evaluations. Most of those customers have already performed the initial testing and are in the second stage of the wire selection process. Since that announcement, our backlog has continued to grow. In addition, we are pleased that this customer interest provides STI exposure across several very attractive applications, which also illustrates the diversity and uses, and capabilities of our wire. Our strategy has been to target applications that are ongoing and nearing preparation for a market launch in the near term. As a result, we have aligned our 2013 production output to fulfill purchase orders for customers actively participating or preparing to enter the market shortly. For example, several companies could begin commercial deployment on Superconducting Fault Current Limiters, providing the utility with a higher level of protection from disruptive electrical surges as compared to the existing conventional technology.

Another near-term opportunity is for high-field magnets that are used in multiple applications. Devices such as Magnetic Resonance Imaging or MRI and Nuclear Magnetic Resonance or NMR are currently being sold in high commercial volumes, utilizing low-temperature superconducting wire. HTS wire solutions provide a clear path to upgrade system performance and reduce the total cost of ownership. A primary cost benefit of HTS solutions versus LTS is the elimination of liquid helium for cooling, which currently cost more than 5x as much as the liquid nitrogen used for HTS solutions. In addition, that price differential is expected to increase significantly over the next several years.

Our supply commitments are to very large companies with product designs that are moving to the third stage. We believe that a large purchase order from one or any of these customers will consume all of the wire we can build for the next couple of years. While we are focused on securing a strategic stage 3 customer, the plan to prioritize our production, according to the first one or two opportunities that aligns with our goal to commercialize conductors on a very large scale, our top priority is to ship the wire for our backlog of the second-stage customer purchase orders. To do so, we are working intently on turning up our pilot RCE machine. We are producing longer lengths and have achieved significant technical progress in our test runs. Most of the pending orders are for a wire that maintains a critical current of 250 to 440 amps per centimeter width. The cable demonstration project is the most demanding commitment as it requires a critical current of 500 amps per centimeter width. We expect to ship Conductus wire for the less stringent requirements as we work for providing the high-performance wire samples for the cable project. Looking ahead, we expect the customer request, already in-house, will consume all the wire we can produce, at least until the third quarter of 2013.

Our market activity at Hannover Messe, in Germany last month, generated additional interest in Conductus wire. We expect new and current customers in the first stage of testing our wire to advance to placing purchase orders for qualification in their devices, increasing our current backlog further.

Now I'll review our business plan status as we near achieving commercial production in 2014. STI has already invested the majority of the capital expenditures required for the suite of equipment necessary to produce wire in kilometer lengths. This equipment suite will have the capacity to make 750 kilometers of Conductus wire per year. Our copy exactly model will enable us to build a cost optimized manufacturing process that scales to meet demand by deploying additional equipment suites. Our Austin facility contains floor space sufficient to deliver a projected annual capacity of 6,000 kilometers of Conductus wire before expansion is required. Today, our SDP and IBAD systems are installed, turned up and capable of making template in kilometer lengths.

We have made significant progress in turning up our pilot RCE machine, which we will utilize to fulfill our stage 2 customer purchase orders. While we did not record revenue from the orders in the first quarter, we hope to begin recognizing very modest revenue from these commitments in the second quarter. The higher throughput of our commercial scale, kilometer-length-capable RCE machine will drive STI to cash flow breakeven, which we estimate at approximately $6 million per quarter in wire revenue. The remaining $3.5 million in capital expenditure will be utilized to build 1 commercial length RCE machine and other ancillary tools, completing a production suite designed to produce 750 kilometers of Conductus wire annually. At today's market prices, this annual production volume will generate approximately $37.5 million in revenue.

In summary, we continue to execute on our plan to become a leading supplier of 2G HTS wire to the electrical device industry. We look forward to announcing wire shipments to our second-stage customers and the wire samples for our customers' high-power cable project. The remainder of 2013 will be used to implement our plans to produce Conductus wire on a commercial scale in 2014.

Now I will turn the call over to Bill for a review of the financials. Bill?

William J. Buchanan

Thank you, Jeff. We have continued selling our wireless products as we focus our -- on our program to become a 2G HTS wire manufacturer. Our first quarter revenue from our wireless business was $776,000 compared to $399,000 in the year-ago quarter. Commercial gross margins were positive the first quarter, compared to negative in the year-ago quarter due to greater volume of sales and the sale of previously reserved inventory.

Total R&D expenses, including contract and other R&D expenses, amounted to $1.4 million in the first quarter and $1.2 million in the year-ago quarter. SG&A expenses were $1.3 million for both the current and prior year's quarter. Net loss for the first quarter was $2.4 million or a loss of $0.58 per share, compared to a net loss of $3 million or loss of $1.01 in the year-ago quarter.

The total number of common shares outstanding at March 30, 2013, was 4.24 million shares. Under the balance sheet, in the first quarter, $1.8 million was used to fund our cash loss, and there was no net changes in our working capital. Payments for purchases of property and equipment for our HTS wire program, and they were $178,000.

We ended the first quarter with $1.7 million in cash and cash equivalents, and working capital totaled $1.1 million. Subsequent to the end of the first quarter, we received net proceeds of $1.95 million from a registered direct offering of 513,800 shares of our common stock and warrants. Based on our current forecast, we expect our existing cash resources will be sufficient to fund our planned operations through August of 2013.

At the end of the first quarter of 2013, accounts receivable was $342,000, and the day sales outstanding for the first quarter ran at about 40 days. Current and noncurrent liabilities total $1.9 million at March 30, 2013, and were up slightly from the 2012 fourth quarter and primarily due to accrued expenses.

And now, operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Jim Collins [ph] from Van Clemens & Co.

Unknown Analyst

Jeff, the question that comes to my mind, of course, it's all about the length of wire that we can currently produce. Can you address, perhaps, the longest length that we can routinely make now for maybe the 250-amp up, perhaps, to the 400-amp stuff?

Jeffrey A. Quiram

Well, what we're loading in the machine, Jim, when we run -- again, that device is capable of doing 100-meter lengths. We tend to load probably something in the area of 30 meters -- 30 to 40 in totality, and we use a different -- a various strategy on how we place the different pieces. So we normally will place a couple of pretty long pieces in the middle of the deposition zone and then we'll do various shorter pieces kind of all along the edges. And, again, this is all why we're trying to turn this machine up, right? So you want to make sure you understand where you're getting the consistency and whether you're getting the kind of coverage in the deposition zones that you want and that you're getting consistent performance across. So we're still at the point where we're not loading the longest pieces of wire into this machine that we can because, frankly, that's not where we're at in the process. So the longest pieces that we're probably building right now are in the 10- to 20-meter length, to answer your question directly.

Unknown Analyst

Okay. And then I guess on a 1 to 10 basis, how close are we to the finish line, in terms of being able to have the type of consistency that you're seeking? Are we 90% there? I can't get a handle on that.

Jeffrey A. Quiram

Well, I mean -- and it's one of those things where -- let me just say, the machine is operating the way we want it to operate. So there are number of things that need to go property to create the conditions that allow the materials to grow the way you need them to grow. So you need to very tightly control the temperature. You're doing it in a vacuum and you also have different pressure differentials, and then you need to get the materials to flow into the chamber as you need them, and then all that stuff needs to be -- being controlled, of course, by the software and all of that. So the answer is all those subsystems are working. So we have a machine that is building superconducting wire as we run the machine. And so how long does it take? How many more runs do you need to do to dial in the sources and get -- because, again, it's a very fine adjustment on what the mix of these materials are in the chamber, and you can't just plug a number into the system and expect it to do it. You have to tune it to get it to do what you want it to do. We think we're a couple of weeks away from getting the best -- -- the results that we really are looking to do. I guess the point is -- and we've been through this with our wafer fab, that dialing it in and getting it operating the way you want it to go is really what takes the time, and then the nice part about is once you have it dialed in, then it just goes. So to answer your question directly, 1 to 10, where are we? We're at a 7 or an 8. But the thing is it doesn't go like 1 number to the other. You don't walk through it a number at a time. It's the type of thing where it can go to a 10 the next run. And so I hope that answers your question. The thing is it's very difficult for me to tell you that next week, it's going to work. I can't give you the exact time because it's a process, and one thing I can say is that it's a process that we've done in the past. We know how to do it, and we're proceeding as planned. We haven't run into any roadblocks that lead us to believe that we have a problem we can't solve. So it's just knowledge, just repetition and doing it, and getting it dialed in. That's the plan.

Unknown Analyst

Okay. And then at what point do we order the kilometer machine, the RCE kilometer machine, which would be what? That would be -- this is the pilot machine we're working on now. This will be what? The prototype machine, the kilometer machine for RCE?

Jeffrey A. Quiram

Yes. I mean, the kilometer machine -- it will be designed to be a production machine, and I guess the point is, Jim, there isn't -- we're building that machine, right? You don't buy that. There's nobody that can build that machine for us. So there isn't a particular date where we send out a purchase order to buy that machine. We're buying the components, we're buying the subsystems, and you do that as you're ready. Again, the thing to remember is one of the real benefits -- in addition to being able to provide longer length wire for people to do evaluation processes, evaluation of their products, the other thing that's important as we turn this machine up is we're really verifying some of the design parameters and the approaches on this machine, so that we can make sure that when we take it and go to the kilometer machine, that you're putting in place the subsystems and you're making the enhancements to the system that you want to make to get it to work. So the learning that is going on, as we turn up this 100-meter machine, is incredibly valuable to us as we get ready to build that kilometer machine, and really we start ordering the pieces -- the pieces are ordered based on lead times and when you're ready, and so there are some long lead time items that we're getting very close to the point where those will be bought. But, of course, you need to make made sure that you know exactly what the specifications and what you want that subsystem to look like before you purchase it, and so, right now, it's a process of just going through and deciding when are you ready to go buy subsystem A. We also know exactly what all those building blocks are. We understand what the lead times are on all those various components and so we have a very detailed project plan on how we build that kilometer machine. But there isn't a date, I guess, is the real message where we place a purchase order. We place hundreds of purchase orders to build this machine.

Unknown Analyst

Okay. And then you mentioned that we have capacity for up to 6,000 kilometers, was that right?

Jeffrey A. Quiram

Yes.

Unknown Analyst

Okay. And each machine is presently defined as that they'll produce, what, 750 kilometers per machine?

Jeffrey A. Quiram

The production RCE machine, the kilometer length RCE machine is designed to have an annual production volume of 750, yes.

Unknown Analyst

So 1 machine, at today's average prices of the wire, would be somewhere around $37.5 million?

Jeffrey A. Quiram

Of revenue, yes.

Unknown Analyst

Of revenue, okay. So then the maximum, right now -- and I guess how many machines? Would that be, what, 10 machines to produce 6,000 kilometers, something like that?

Jeffrey A. Quiram

In order to do 6000 kilometers, you would have 8 RCE production kilometer machines.

Unknown Analyst

Okay. And do we plan on funding that? Do we have a way of funding that so far or just what's the plan out there?

Jeffrey A. Quiram

Well, the decision-making on how rapidly you expand and when you add the additional suites of equipment will, of course, definitely be driven by what goes on in the marketplace, and the good news is that many, many of the people that are consuming wire recognize the fact that they do need to order it. It's not the sort of thing where you place an order and wire is sitting on the shelf and you get it. It needs to be planned, it needs to be scheduled. Most of these projects, they have time. So there'll be orders placed a year in advance of when the wire will ship. It'll be that sort of backlog information, that sort of interest in the marketplace that will very much play into the decision we make on how rapidly you expand to those 8 machines. But I don't have a preconceived notion right now, Jim, on how quickly we'll go to 8. It's going to be driven by what's the demand.

Unknown Analyst

Okay. Then I guess, like the gross margins, what are we targeting? What are the targeted gross margins for the first couple of machines? Or however you want to define it.

Jeffrey A. Quiram

The targeted gross margins are primarily a function of yield. So it's do you get the yield that you anticipate out of these machines. We expect the gross margins, off these first few machines, to be well in excess of 50%.

Unknown Analyst

Okay. And then my last question would be on the low-temperature wire. This should be a lot easier to make. The price is about the same, in terms of how profitable the low-temperature wire is versus the high-temperature wire.

Jeffrey A. Quiram

Well, low-temperature wire, when you use the metric of what it's being sold on, like per kiloamp meter, which is the number we've used, low temperature wire is sold at a very at a significant discount to our high-temperature wire. So down in the $5, $10 range, and whereas the market price for high temperature wire is still well over $200. But the real issue and the thing that comes into play here are all the other subsystems that are around it. So, yes, the LTS wire is cheaper, will be cheaper than the HTS wire for a number of years, probably. However, the cooling mechanism and the cryocoolers and the use of the liquid helium is a huge cost element, and liquid helium prices have gone up something like 50% over the course of the last couple of years, and they're expected to grow by another 15% to 20% annually for the next few years. It's turning that cooling mechanism into one of the huge elements. And so, I guess the point is the HTS wire doesn't need to be the same price on a kiloamp-meter basis. It's just the total cost of ownership and the reliability of the systems is what will dictate when the transition to HTS wire occurs, and of course the availability of the wire. I mean, that's the real killer right now for the people that are building those big magnets. They can't really switch to HTS because there's not enough wire out there to satisfy what they need to do to deliver their end products to their customers, and so until that changes, that's really probably the biggest roadblock on the changeover to HTS.

Unknown Analyst

Okay, and then I guess just my last question. On the Stirling cooler, are we still using that for these large systems or does the customer have his own cooling systems?

Jeffrey A. Quiram

Today, there are other cryocooling solutions that are being used. We continue to have discussions with people about potentially scaling up our proprietary cryocooler to address a couple of specific applications. In the most -- in most instances though, Jim, the wire that is being out there testing in other devices right now, those devices are using cryocooling that are not from STI.

Operator

[Operator Instructions] Okay, thank you. That concludes our question-and-answer session. I would will now like to hand back to the host.

Jeffrey A. Quiram

Thank you all very much for joining us today, and we look forward to speaking with you all again on our next call. Good day.

Operator

Thank you. This concludes the conference call. Thank you, for participating. You may now all disconnect.

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