Good day, everyone, and welcome to AMSC's First Quarter 2018 Earnings Conference Call. This call is being recorded. [Operator Instructions] With us on the call this morning are AMSC's President and CEO, Daniel McGahn; Senior Vice President and CFO, John Kosiba; and Manager of AMSC Investor Relations, Brion Tanous. For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead, sir.

Thank you, Todd, and welcome to our call to discuss our first quarter fiscal 2018 results. Before we begin, I'd like to note that various remarks management may make on this conference call about AMSC's future expectations, 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 discussed in the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2018, which we filed with the SEC on June 6, 2018, and our quarterly report on Form 10-Q for the quarter ended June 30, 2018, which we filed with the SEC last night, and other reports that we have filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the company's views to change, we specifically disclaim any obligation to update these forward-looking statements. I also would like to note that we will be referring on today's call to non-GAAP net loss or net income, or loss before stock-based compensation; amortization of acquisition related intangibles; consumption of 0 cost basis inventory; change in fair value of warrants; noncash interest expense; Sinovel settlement, net of legal fees, expenses and other noncash adjustments; tax effective adjustments; and other unusual charges or items in non-GAAP operating cash flow; or operating cash flow before Sinovel settlement, net of legal fees and expenses; tax effects of adjustments; and other unusual cash flow items. Non-GAAP net loss and non-GAAP operating cash flow are non-GAAP financial metrics. A reconciliation of our GAAP net loss to non-GAAP net loss and GAAP operating cash flow to non-GAAP operating cash flow can be found in the press release we issued and furnished to the SEC last night on Form 8-K. All of our press releases and SEC filings can be accessed from the Investors page of our website at www.amsc.com. And now I will turn the call over to CEO, Dan McGahn. Dan?

Thanks, Brion, and good morning, everybody. I'll begin today by providing information on the Sinovel settlement and then for provide an update of our Wind and Grid business units. John Kosiba will then provide a detailed review of our financial results for the first fiscal quarter, which ended June 30, 2018, and provide guidance for the second fiscal quarter, which will end September 30, 2018. Following our comments, we'll open up the line to questions from our analysts. On July 3, 2018, AMSC and Sinovel Wind Group entered into a settlement agreement to resolve all existing disputes between the parties. Under the terms of the settlement agreement, Sinovel has agreed to pay AMSC a cash amount in RMB equivalent to $57.5 million. Sinovel paid AMSC China the first installment of $32.5 million on the 4th of July. We believe that we've taken care of all taxes in China in previous periods. We owed approximately $3 million of contingent legal fees to our attorneys in connection with the first installment. This will be paid out of China. I'm happy to say we transferred just under $31 million to AMSC Austria. The money is in the bank in Austria. We anticipate taxes in Austria of $2 million to $3 million. John will be talking later about a net number of over $27 million. The second installment of $25 million is to be paid within 10 months after the date the U.S. District Court delivered the sentence against Sinovel, which occurred on the 6th of July. The second installment has also been guaranteed by a second party, this is Mr. Wenyuan Wei. Let me talk a little bit about who he is. Mr. Wei is the founder of the stock exchange in China. Mr. Wei was formerly the Chairman of Sinovel and according…

Yes, you can.

So we have approval for all of this?

Yes, we do, Dan.

I'm very happy that ComEd is comfortable with us giving you this update. We believe that AMSC and ComEd have mutual agreement on the terms and conditions of a contract between the parties. We are now working with prospective subcontractors to the project to flow terms and conditions down to them. To be clear, we do not have a signed contract yet, and any contract agreed upon by AMSC and ComEd will be subject to approval by the Department of Homeland Security in order for AMSC to collect revenue. I cannot comment any further about this at this time. I won't be able to answer any questions on this topic on this call. Turning to the Navy. In September of 2017, we announced we were designed into the San Antonio Class amphibious ship platform. We also announced we have been awarded a contract from the U.S. Navy for the long-lead materials for an HTS-based Ship Protection System to be deployed on U.S.S. Fort Lauderdale, also known as LPD 28. LPD 28 will be the 12th amphibious transport dock ship of the U.S.S. San Antonio Class. The SPS scope between AMSC as the Navy is expected to include integration and commissioning of the system on LPD 28. LPD 29 has been fully funded by Congress. LPD 30 has had long lead-time items funded by Congress. LPD 30 is expected to be the first of the upgraded San Antonio Class vessels. Ultimately, the Navy plans to create a class of 26 San Antonio hulls: 13 flight 1 vessels and 13 flight 2 vessels. LPD 28 will be the 12th San Antonio Class flight 1 vessel, LPD 29 will be the 13th San Antonio Class flight 1 vessel, and LPD 30 is expected to be the first San Antonio Class flight 2 vessel.…

Thanks, Dan, and good morning, everyone. AMSC generated revenues of $12.6 million for the first quarter of fiscal 2018 compared to $8.9 million in the year-ago quarter. Our Grid business unit accounted for 71% of total revenues for the first quarter while our Wind business unit accounted for 29%. The Grid business unit revenues increased by 34% in the first quarter versus the year-ago quarter, due primarily to higher D-VAR system revenues. Wind business unit revenues increased by 61% in the first quarter versus the year-ago quarter as a result of increased ECS shipments to Inox. Looking at the P&L in more detail. Gross margin for the first quarter of fiscal 2018 was 31%, which compares with negative 50% in the year-ago quarter and 22% in the previous quarter. The year-over-year increase in gross margin for the first quarter was primarily due to the increased revenue versus the year-ago quarter in addition to a favorable product mix in both Grid and Wind business units as well as reduced fixed factory overhead as a result of the factory move to our newly leased Ayer facility. Additionally, in the year-ago quarter, we had approximately $2.5 million of accelerated depreciation included in cost of revenues. R&D and SG&A expenses for the first quarter of fiscal 2018 were $8.6 million. This was down from $8.9 million for the same period a year ago, primarily driven by lower overall compensation expense due to decreased headcount. Approximately 15% of our R&D and SG&A expenses in the first quarter of fiscal 2018 were noncash. Our net loss in the first quarter of fiscal 2018 was $4.7 million or $0.23 per share. This compares with $15.3 million or $0.91 per share in the year-ago quarter. Our non-GAAP net loss for the first quarter of fiscal 2018 was $3.6…

Thanks, John. Based on Inox's public comments, Inox tends -- intends to support commitments from the SECI-1 auction during our second quarter. Our understanding is they have shipped and are shipping turbines to the site. Additionally, Inox has stated that they must commission 300 megawatts of wind turbines during our third quarter. Inox is planning to deliver another 300 megawatts to support their SECI-2 wins in the second half of this fiscal year. We are comforted by the fact that Inox has reestablished a healthy backlog of wind turbine business. As I mentioned, Inox has almost 1 gigawatt of backlog. We are well positioned to support Inox's requirements. We had a strong first quarter for Grid. We expect to grow Grid revenue again in fiscal 2018. Our D-VAR business is strong. We are delivering VVO to the market and our pipeline is developing very nicely, and we are delivering long lead-time items for LPD 28. We are pursuing additional opportunities with the Navy. We are executing against our goals and that is to the credit of our employees, due to their hard work and dedication. We are significantly improving our balance sheet and, as John said, we see scenarios where we potentially break even on an operating cash flow basis next quarter. I look forward to reporting back to you at the completion of our second fiscal quarter of 2018. Todd, we will now take questions from our analysts.

[Operator Instructions] We'll take our first question from Philip Shen with Roth Capital Partners.

This is Justin Clare on for Phil today. So congratulations on the progress you're making with ComEd. That's great to hear. And the first question here, I wanted to start off with the Navy. So you mentioned the potential for $150 million in revenue for 15 naval ships that could use your SPS solution. I was wondering if you could just talk about the timing of when those ships could be built so we can get a sense of when revenue could be recognized, if you were to win all of those contracts.

Sure. So I can walk through 28 because we have clarity on that, at least for the long-lead parts of it. So we began recognizing revenue on LPD 28 long-lead elements at the end of last year. That was about, let's call it, $1 million, about 10% of the contract. We are anticipating delivering the remainder of the long-lead elements this year, which when we originally announced it we said the long lead was about 20% of the total contract. We are in discussion space with the Navy about the release for, we'll say the regularly scheduled balance of planned components, and we look forward to being able to give an update when we've been given that release with the Navy. My understanding is LPD 28 is really a ship that's in construction. Most of the delivery occurs in 2019 into 2020, and I believe the ship gets handed over to the Navy in 2021. Every subsequent ship basically has about a 1-year offset from ship to ship, and the reason is that this LPD 28 and 29 are important ships for the shipyard in Mississippi, where they are being built. It was important to make sure that they keep the labor engaged, it's important for that shipyard from a national interest standpoint, which is why Congress really has made sure that this platform, it continues to go funded. I think the other derisking element for our business has been the announcement of LPD 30. So what was once considered as potentially a new -- completely new hull is now a modified variant of the current San Antonio Class, and will be consistent with the current San Antonio Class. So in Navy speak they call that a flight 2 of the same hull design. We tried to go through so…

Yes, that make sense. And just a follow-on with the Navy. Has this win accelerated discussions that you may be having about other classes of ships? And how many other classes of ships could you be potentially designed into? And any sense for the timing of when that could happen would be helpful.

I think the simple answer to your first question is yes. Getting the design win, getting the technology fully qualified and getting the technology deployed on the first ship, really highlights what the Navy -- what they've invested in, as they want to make a change to more advanced technology to solve a known problem. The intent of this and even the design and the qualification of the technology has happened not just on LPD, but it has happened on some other ships. We want to use those facts to be able to facilitate acceleration of deployment throughout the fleet. We kind of hinted at some of the other ships that I went through in the prepared remarks, from frigates and destroyers and carriers and such. All in all, in the long-term plan that’s public from the Navy, depending upon the year, they are building 8, 10, 12 ships a year. We've gone through in the past the math, and I won't rehash that today. I know Phil understands it pretty well, but kind of the net average value is about $10 million per ship. If they're building 10 per year, now you have a potential annual market just for those ships of $100 million a year. In our 10-K, we talk about a market in a year, next decade, which is in the $70 million to $120 million range. So that’s -- we kind of do that math out loud for you. So we're talking about $150 million potential future stream, which is kind of like base load at roughly 10 per year. And I mentioned, there may be some dislocation forward of some of that revenue once we get more normal in the production cycle. But then the hope is to stack these additional ships. And we've talked about the value equations before for those ships, so I don't want to reiterate that for everybody. So we're also trying to find ways where we can ostensibly double the market by thinking about export. And we hope to at some point be able to come back to the market and explain positively where we are on the ability to export. It's commonplace for suppliers to the Navy to be able to export to allies. There's a procedure to go through. And you can only imagine, part of the technology isn't just in the design, but it's in the operation of a ship with these kinds of systems. And we want to make sure we do everything in accordance with the requirements that are placed on us by the Department of Defense as a supplier. But we look forward to this becoming, for lack of a better term, more and more of our base business. And I think that should be refreshing to current shareholders and future shareholders, that you're building a whole new business inside of this business that maybe people will fully appreciate as we build a bigger order book.

Great. Okay, great. And then I'd like to shift to your Grid business. Just by going through your 10-Q, it looks like Vestas is becoming a more meaningful customer of yours, representing 36% of Grid revenue in Q1. I was wondering if you can just give us a sense for the opportunity you see ahead with Vestas, the product solutions that you supply and kind of what you see ahead from that relationship.

Sure. So I think for clarity for the audience, and we said this a few times before, but our Wind business is inside the turbine and our Grid business really stars at the substation that connects power generation to the transmission grid or the distribution grid. So when we sell a D-VAR, we sell it as a grid solution because, ultimately, it's the grid interconnection, it's the gateway for green power to come onto the grid. We have a historical relationship with Vestas. You can go back over time in certain periods and you can see that this isn't the first time that they have been a significant customer. Vestas is actively out trying to promote business in some developing geographies, and in these geographies, there seems to be a specific need for our solution. You're trying to enter into a weak grid and there becomes a more dramatic need for reactive compensation and voltage support. So we have sold product in the past to Vestas. We hope in the future to be a good supplier on a go-forward basis and continue to be able to deliver content to them. That -- for some people on the call, they may not fully appreciate that, even though we've said this for the past 2 to 3 years, that we want to find pathways to have content to help really deliver smarter, cleaner, better energy through whatever means or channels to market are afforded to us.

Okay, great. And then maybe just one last question from me. There seems to be more discussions in India about the offshore wind market. They're considering an offshore target of 30 gigawatts for 2030. Do you see an opportunity to introduce an offshore design in that market? Or is that something that you could pursue with Inox?

It's certainly something we can pursue. We have a demonstrated track record of large turbines. We've delivered production-quantity units of the 3-megawatt already to date in multiple geographies, not in India yet. And then the 5.5, we delivered a prototype at kind of early production level. We hope to see more proving of our technology in the South Korean market with Doosan. We hope to be able to see exportation of those turbines outside South Korea into the global market. It certainly does set up kind of the obvious opportunity for us. If there really is an offshore market, we have the technology, it's been demonstrated and certainly should be something that could be utilized in India. We want to respect Inox's wishes. We want to be able to support Inox's business plans. Currently, as you can see, we're in -- we're at the -- hopefully, at the end of a great transition in the Indian wind market. We want to make sure we get through that and digest that, we want to make sure that Inox is comfortable with whatever we do going forward. But to be clear, it does represent an opportunity in a very unique way for our company in the future.

We'll take our next question from Colin Rusch with Oppenheimer.

Can you talk about the preparedness of the supply chain to support your ramp in both the Grid business and the Navy business?

It's a really good question. I'm happy you asked it. So when we think about the ramp in Grid and we focus on the stuff that isn't the Navy, we've had to develop a way with the D-VAR product to be able to ramp up revenue and also, we've had periods where revenues come back. So we've had to have very good relationships with our suppliers and supply chain to be able to support the market as it changes and we see delivery into new geographies and expansion of the market for D-VAR. So I feel very comfortable at this point that the supply chain that we established could be able to deal with the potential market with us. I think in the case of VVO, it's still a new product. We just got our first orders. We're looking to expand on those orders, we really see 2018 as an ability to deliver on some new orders. But we will be doing a controlled launch in '18 to really try to set up growth potential for the company in VVO in '19 and beyond. We're still at a very early stage with the supply chain, so I really can't give you any additional comfort. Some of the suppliers are similar for part of the D-VAR supply chain. So I don't see any additional risk that the VVO technology presents to our supply chain. But I think you guys know, John and I are about delivery, not just about speculation. It's risk we're going to have to manage, but it's something that we've managed in the past and we have no reason to believe at this point in time that we would have a challenge with the VVO supply chain. But the REG supply chain, we spent a great deal of…

That's super helpful. Yes, and then just a question around R&D spending and where that is getting focused right now. Could you give us a percentage breakdown in the -- in the spending and where that's going at this point?

So Colin, on the R&D spend, it's been pretty stable over the last few quarters. The vast majority of the R&D spend is on the Grid side of the business. We don't break it down publicly, but what we can tell you is the vast majority of our R&D spend is on the Grid business.

We'll take our next question from Carter Driscoll with B. Riley FBR.

So now that you -- first of all, congratulations on putting Sinovel behind you. I know it's been a long, long process and been a strong advocate for what they have perpetrated against you. If we talk about just, at a high-level, the prioritization of your newfound strength in the cash position in terms of where you're going to allocate new spend. I know you don't want to -- or can't address the contract -- pending contract with ComEd. But I think in the past, you talked about potentially some bonds to support that rollout. Just trying to get a sense of how you're going to reallocate, whether it'll be new buckets of R&D spend, as Colin was alluding to, or you're going to kind of sit and just digest and wait for Inox to really ramp back. Just trying to get a sense of how you're going to put that new balance to use now?

Sure, I think as we always tend to be, we're very pragmatic. I think how we're thinking about it is the cash balance is whatever it is. The business needs to operate on an ongoing basis in a sustainable way. We are attempting to demonstrate that in the very near term. We've talked about revenue levels, that we still need to grow the existing business to higher revenue levels and we see that coming with improved growth in Grid and improved growth in Wind this year. We want to make sure that those things happen, not that we have any reason today to believe that they won't. We have them out as objectives and we have the tendency that we deliver and we really over-deliver on the objectives that we state. We think it's important for shareholders, and ultimately want to think with their interest in mind, to really see us demonstrate that before we start to bite off more than we can chew. I would not want to take something on right now and accelerate the burn and push out further the point in time we've all been trying to get to, which is getting to operating cash flows on a continually habitual and eventually sustainable basis. That's the near-term mission for the company, and specifically for John and I. That doesn't mean that we don't -- we won't look at things. That doesn't mean it certainly won't help with REG, with bonding. It certainly doesn't mean that it doesn't help with maybe the next REG project, that we have the ability maybe to do that faster than maybe people anticipated because we have the access to the capital now. We do have more capital coming. So to remind you, we have some additional payments on the Jackson Road facility, and then this additional payment of $25 million. For those of you keeping score at home, probably the similar math between the gross and the net, so we're expecting something like about $20 million coming out of that $25 million. So there's more cash coming. We're thinking about, first and foremost, let's deliver on what we said we need to do. We need to be able to deliver on Chicago, we want to continue to deliver on growth in all of our business segments. And then if there's something strategic that makes sense to accelerate growth, we have a demonstrated history of trying to take advantage of those moments in time. We have a lot to do here over the next couple of quarters, kind of as you stated, with Inox getting further stability and everybody getting comfortable with that. So we're not off to the races and going to increase the burn to potentially have higher revenues in the very near term. Our business is just -- after the number of years we've been at this business, we want to demonstrate and then look to deliver accelerated growth.

Okay, that's very helpful. I know you can't talk about ComEd, but do you anticipate DHS having any problem with a contract once it's signed? I mean, they've been an advocate for this technology and partnership with you for a long time. Maybe you can at least talk about a potential review period by DHS. Would that be relatively short, assuming you do get a commercial contract?.

Yes, it's the government, so I can't speculate. I know they have a fiscal year that's coming up here in the fall. It's going to end and a lot of things can get done before that period, usually. We've talked to them, and really what you're doing is you're taking already authorized, already appropriated, already allocated funding, and all we're doing is we're really modifying the scope of work to include the project as contemplated. So you're not looking at changing the contract vehicle, all you're really doing is changing an appendix. But it still has to go through the perfunctory review and a number of people have to look at it and all that. And I don't know how long that will take. It could take weeks, it could take months. I don't expect it to take an extraordinary long period of time. But first and foremost, we want to make sure we can move forward with our suppliers, as I mentioned. That's the focus that we need to have on our team's side. You can hear it in the prepared remarks that we said already. So we're close to ready to go. Because the DHS vehicle allows us really a way for us to get cost recovery and really revenue. So in order for us to be able to collect revenue, we need that in place. In some ways, given the commercial nature of the terms that we talked about in the past, it's almost secondary to the needs of the utility.

And does this have to be rate-based by the PUC?

I've got to go back to, I can't make any additional comment at this time and I can't answer any questions at this time.

Fair enough. Are you seeing any impact from the steel and aluminum tariffs, in particular on D-VARs, and adding incrementally any cost?

No, where we actually see potential growth for our business is in the changing dynamics of those industries. So we support mines and mills and semiconductor fabs, but we see a potential acceleration of growth in the industrial segment coming because of these tariffs. So the nature of the production and the nation state that it's produced in, that may present some interesting opportunities for us to deal with power quality issues that could happen in those industries. So we don't really see it as a cost effect on the business. We've tried to find a way to see where it's a way to accelerate revenues. And I think if we're able to demonstrate that over the coming years, that would be additional revenue that people haven't planned for.

Just 2 quick ones, if I may. So do you see any potential impact from the California rooftop mandate and then some of the allocations the California utilities have gotten for EV charging as being kind of pulling in demand for VVO, at least in that specific territory?

Yes, I think the simple answer is yes. I think, again, what we're trying to do, because we're very pragmatic, we want to accelerate revenues, but we don't want to accelerate problems in the field. With a new product, we want to focus on delivery of a finite number of sets this year that -- we're not releasing what number is, in '18. Make sure that we're collecting revenue on these commercial terms and that we really validated what we want, which is product works, utilities like it and they want to buy a lot of them. And then as we get into '19, California could be a driver for some growth in VVO. But we are very focused on being deliberate, step-by-step, making sure that we retire risk as we go forward so that we don't get in a situation where you accelerate a lot revenue but you have a new product in the field and then you've got to deal with that many more changes in the field. The other part is we want to make sure the feature set is ready for some of those markets and we want to have demonstrated record and data of those to be able to show to customers, which should again be able to help accelerate revenues.

And the last one for me. You're implying potentially hitting operating breakeven this quarter. Does that imply that your model or your breakeven point has been lowered?

No, please don't take that. No, I would think in your model, you know better. With working capital adjustments and changes in inventory period-to-period that what we're seeing is hopefully the return of some demand on Inox, which allows us to -- for a temporarily lower revenue, to have a reduced burn. But the numbers that we've talked about, around 25 in scenarios on a quarterly basis, that remains the target that we're focused on and we want to grow revenues to that level as fast as we can.

So Carter, just to remind you from the last quarter...

Yes, I'm sorry, so it's working capital changes largely, more than anything else, that allowed you to at least for this one period to potentially reach breakeven, is that reasonable?

Yes. And so again, just to backtrack to last quarter, last quarter's burn, I highlighted that was a little higher than we would've expected due to the working capital strain, particularly on the Grid side related to some D-VAR projects. We're getting some of that recovery in the quarter that we're guiding to. So if you look at the actuals for Q1 and the guidance for Q2 and you divide that by 2, that will smooth out that working capital hiccup between the 2 quarters and then that gives you a more probably reflective view of operating cash flow [indiscernible] demonstrated revenue [indiscernible].

And then going forward from quarters this year and beyond, what level can we grow and how quickly can we get there, and then are there more adjustments in inventory and working capital that help us or hurt us? It really depends upon where some of the businesses are. John, I think, has done a good job on the calls to try to explain to people where the breakeven is, and we've even walked back to the current levels and what that means. And happy to spend some more time, Carter, to go through that again with you.

That’s fine. Just last -- I'm sorry the $11 million in D-VAR you earned, is that -- do you expect to pull through in fiscal '18?

You're talking about the orders?

The order he's talking about, yes.

Yes, the most recent one.

There's a fraction of it that's in '18 and there is a fraction outside '18. It's healthy either way. So it's -- what it really shows is an acceleration of the order book, which is what we're trying to get people to listen. We're going to grow through Grid, and now you see evidence of that. I think before we started talking about it, people didn't really appreciate that we've got a lot of D-VAR orders, that it really has a financial impact on the numbers.

[Operator Instructions]. Speakers, I'm showing no further questions in queue.

Great. Well, I think we'll go to wrap up the call, Todd, if you don't mind. I think a lot of good news from the company today. I think this is really a series of good news that shows that for the first quarter, again, we said what we're going to do and we did what we said and we're at the higher end of the revenue range. The burn came in where we thought it was going to be. We kind of pre-telegraphed kind of what next quarter might look like. And you hear us again being very confident, we're going to be able to manage the burn very well in Q2. Going forward, we want to be able to keep growing revenue. The balance sheet is in a position of strength that we haven't been in for a significant period of time. We've been able to mature the business with the Navy. We've been able to mature the Grid business with D-VAR, now with VVO, and I was happy we were able to share some good news with REG. So all in all, everything looks and feels very good for us. I think the specter of our past is gone and it's really a new day for our company and our employees. We're able to think with degrees of freedom that, at one point, were limited for us. So it really is trying to get this to grow and accelerate growth as quickly, but yet as rationally as we can. Look forward to being able to talk to you again in a few months and hope to be able to report additional good news. Thanks, everybody.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.