Good day, and welcome to AMSC's Second Quarter Fiscal 2018 Earnings Conference Call. This call is being recorded. [Operator Instructions] With us on the call this morning are AMSC Chairman, President and CEO, Daniel McGahn, Senior Vice President and CFO, John Kosiba; and partner at LHA and AMSC IR newly added member, John Heilshorn. For opening remarks, I would like to turn the call over to John Heilshorn. Please go ahead, sir.

Thank you, Todd. Good morning, everyone, and welcome to AMSC's Second Quarter Fiscal 2018 Earnings Conference Call. I'm John Heilshorn, partner at LHA, and part of AMSC's IR team. With us on today's call are Daniel McGahn, Chairman, President and CEO; and John Kosiba, Senior Vice President and Chief Financial Officer. AMSC issued its earnings release for the second quarter of fiscal 2018 yesterday after the market closed. For those of you who have not seen the release, a copy is available together with all of our prior press releases and SEC filings in the Investor Relations section of the company's website at www.amsc.com. Before starting the call, 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 Factor section of the company's annual report on Form 10-K for the year ended March 31, 2018, which was filed with the SEC on June 6, 2018, and the quarterly report on Form 10-Q for the quarter ending September 30, 2018, which was filed with the SEC last night, and other reports that have been filed with the SEC. These forward-looking statements represent management's expectations only as of today and should not be relied upon as representing management views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the company's views to change, management specifically disclaims any obligation to update these forward-looking statements. Also on today's call, management will refer to non-GAAP net loss or net income or loss before sale of minority investments, stock-based compensation, gain on Sinovel settlement, amortization of acquisition-related intangibles, change in fair value of warrants and contingent consideration, noncash interest expense, tax effect of adjustments, and the other noncash or unusual charges or items and non-GAAP operating cash flow or operating cash flow before Sinovel settlement, net of legal fees and expenses, tax effect of adjustments and other unusual cash flow items. Non-GAAP net loss and non-GAAP operating cash flow are non-GAAP financial metrics. The reconciliation of GAAP net income or loss to non-GAAP net loss and GAAP operating cash flow to non-GAAP operating cash flow can be found in the press release that was issued and furnished to the SEC last night on Form 8-K. Finally, I'd like to inform everyone that AMSC's Chairman, President and CEO Daniel McGahn will participate in the upcoming Craig-Hallum Alpha Select Conference, which is being held on November 15 in New York City. With that, I will now turn the call over to Daniel. Good morning, Daniel.

Thanks, John, good morning, everyone, and, John, welcome to join the team. I'll begin today by providing an update on our Wind and Grid businesses. John Kosiba will then provide a detailed review of our financial results for the second fiscal quarter, which ended September 30, 2018 and provide guidance for the third fiscal quarter, which will end December 31, 2018. Following our comments, we'll open up the line to questions from our analysts. In the September quarter, we generated more than $1 million in operating cash flow, not including the litigation settlement. Revenue came in at the top of our guidance range. Wind and Grid revenues grew year-on-year. We believe that we're on track to achieve our fiscal 2018 objectives of year-to-year growth for both segments. The quantities of ECS shipped to Inox in the September quarter of fiscal 2018 were greater than the June quarter. During the September quarter, Inox was manufacturing wind turbines to satisfy SECI-1 demand. We continue to carefully monitor Inox's execution on the SECI-1 project. From their own conference call, they show they are a bit more than halfway completed with the delivery of turbines for the SECI-1 project. We are encouraged by Inox's sate desire to lower the levelized cost of energy by way of a new wind turbine. Inox has indicated a new turbine is an integral part of their long-term strategy to deploy wind power in India. We believe we are well positioned to support Inox's requirements and look forward to doing so. We have not entered into a definitive agreement for a new turbine with Inox. Meanwhile, we continue to execute on our 2-megawatt ECS supply contract with Inox Wind. We are diversifying our Wind business. Doosan Heavy Industries of South Korea has a license to manufacture our 3-megawatt and…

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $14.9 million for the second quarter of fiscal 2018 compared to $11 million in the year-ago quarter. Grid business revenues increased by 38% to $67.6 million versus the year-ago quarter as a result of higher D-VAR system revenues. Wind business revenues increased by 32% to $7.3 million versus the year ago quarter as we experienced increased ECS shipments to Inox during the period. Our Grid business unit accounted for 51% of total revenues for the second quarter, while our Wind business accounted for 49%. Gross margin for the second quarter of fiscal 2018 was 24% compared to 2% in the second quarter of 2017. The year-over-year improvement in gross margin reflects the higher revenues, a more favorable product mix, less depreciation and reduced fixed factory overhead as a result of our move to the air facility in January 2018. Research and development and SG&A expenses totaled $7.4 million in the second quarter of fiscal 2018. This was down from $8.3 million in the second quarter of fiscal 2017, primarily driven by lower compensation expense due to decreased headcount. Approximately 18% of our R&D and SG&A expenses in the second quarter of fiscal 2018 were noncash. Included in operating expenses for the second quarter of fiscal 2018, was a $28.7 million gain, net of legal and other direct costs reflecting the receipt of the first payment from Sinovel required by the settlement agreement we announced last quarter. We have not recorded any gain associated with the second payment required from Sinovel by the settlement agreement. We will record such gain in the period in which the payment is received. The combination of higher gross margin, lower operating expenses and the gain on the Sinovel settlement resulted in operating income of $24.7…

Thanks, John. We have completed 3 of our 5 stated objectives for the fiscal year. We anticipate growth from our Wind business in fiscal 2018. We have delivered initial sets to Doosan, and we saw quarter-to-quarter growth from Inox. We anticipate growth from our Grid business in fiscal 2018. Our D-VAR product is strong and has demonstrated revenue growth. We are delivering VVO to the market. Our SPS product line point with U.S. Navy is gaining significant traction. And we have penetrated the commercial utility market for our REG product. We are executing against our goals, and that is to the credit of our employees for their hard work and dedication. In the past 2 years, we've commercialized 2 HTS based system-level solutions. The dawn of superconductors as a commercial reality is now here. I look forward to reporting back to you at the completion of our third fiscal quarter of 2018. Todd, we'll now take questions from our analysts.

[Operator Instructions] We'll take our first question from Eric Stine of Craig-Hallum.

So just starting with REG. Maybe this is a tough one to answer, since this is the first -- but just maybe just some high-level thoughts on the timing you think in terms of DHS approval. And then just curious, the intention is to make this a permanent part of the grid, which I take as, put in the rate based, just curious what that means, or how that opens things up de-risk them with other utilities?

So the first on the timing with DHS. So to be clear, we need to execute the agreement -- it's really a modification to the existing vehicle with DHS. We hope that that's very straightforward from everything that we've been counseled. It appears to be straightforward. We anticipate that taking several weeks to several months, but I can't handicap, does that 2 months, 3 months, 4 months. At this point we're starting to work on it, and we will see, and we'll announce when we have a definitive go forward from DHS, we'll certainly announce that to the market. The second part of the question really is a ComEd issue. So in order from them to put this in as a permanent part of the grid, they're going to have to deal with their regulator. And that's something that, I think, the experience of them going through that is certainly going to help us with the next project and subsequent projects. One of the last pieces of risk here that needs to be retried is really the utility being able to -- enabled us to be a permanent part of the grid. So that becomes something that our partner is going to work on, that's something I know that their team is keenly focused on. And that's about as far as I'm able to comment.

Understood. And then maybe just last one for me. The guide for third quarter, maybe if you can just talk about the puts and takes there? I mean, obviously, you're expecting wind growth, grid growth but just maybe some of the trends or things that you're expecting in the quarter to drive that guide?

I think from a high level, Eric, I mean, we're showing guidance that is showing growth. I think as you'll learn to understand us, we try to be as cautiously optimistic as we can be. To remind everybody on the call, specifically with Inox, the payment terms are structured in a way where we need cash in advance or a letter of credit from Inox to be able to complete shipments to them. So that always creates some, I'll say, risk in how we describe go-forward numbers. But, kind of, in a general sense, we see them executing SECI-1, which means they can hopefully turn quickly to SECI-2, which will mean that, that demand keeps coming to us and should increase. I don't know, John, if you want to -- we typically don't add color with the segments, but is there anything directionally you want to add?

I think directionally, I think if you look at our Q2 results and the split between wind and grid, we're not looking at major changes into Q3.

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

Yes, just following up on Eric's question around the regulatory importance of this project. We know you're in discussions with a number of utilities outside of ComEd. And I guess, I'd be curious to hear what the early conversations are after this announcement in terms of folks wanting to move forward and the prospects for couple of more of these projects in queue over the next couple of years.

I think the general sense of the market is, most of these projects are identified to fit in a need that is now or in the very near term. We have tried to queue of the pipeline in a way where Chicago would be helpful but not necessarily necessary. I think announcing Chicago going forward with this really helps utilities to realize that this is real and this is now. And it certainly should be a tailwind on our ship here to try to move REG forward even faster.

Great. And then just changing gears with the Navy. Can you give us a sense of the scope of the number of ships that you see as evaluating the technology and potential targets over the next 2 or 3 years? Certainly, there is, I think, a substantial amount of opportunity -- but I'd love to just get a bit more detail in terms of how those conversations are going? And I know that some of that information may be secondhand.

Yes, we've made tremendous progress with other platforms. We've been able to say in the past that we've done qualification of multiple platforms already. Getting the first one over the Goldwind opens up more revenue coming for LPD. We've said on other calls, we're kind of going through some detail that the Navy builds 8, 10, 12 ships a year. They're building 1 LPD ship a year, so there's a large part of the market that we still can go after. If it's frigates or destroyers or carriers or littoral combat ships, they all have some compelling need to deal with permanent protection against minefields. And there's not much I can say definitively without an instruction from the Navy that I can release information or that I have an order. But if people see things in the media, they're seeing, I'll say, stronger intention to the minefield protection capabilities that the Navy currently possesses and needs going forward in modern warfare. So our issue is becoming more topical and important to the U.S. Navy.

Great. And just one final quick one. Obviously, as you guys continue to grow here, we'd love to understanding what your working capital needs are. We're pleased to see the cash balance be robust at this point, but really I want to understand how much you're going to need to really support that growth from the balance sheet perspective?

I'll have John talk in a little bit more detail, but kind of what we're signaling is, revenue is growing incrementally, we're not yet in a position to grow to the levels that we've said previously to sustain us of operating cash flow for the business. John went through kind of the working capital adjustments for people to see the differential where we are at these revenue levels to where we need to go. But I said in the remarks specifically, we see the balance sheet there to help support growth with REG that these larger projects -- now that we've turned to be more of an operational company, we need to have an operational company balance sheet. And that really becomes valuable for us to secure and hopefully accelerate the business. John, is there color you want to add?

So I think the question is complicated. Because it really depends where the growth comes from. When you look at REG to support the existing project that we recently announced, we feel very comfortable that we have plenty of liquidity to support that project. Dan and I have discussed another project, we feel pretty good with the existing cash balance that we can support that type of project. When we get into 3, 4 projects, it's really going to depend on the cash flows of the business at that time. And so it's tough to -- I know where you're going with this. It's really tough to model, until we know which projects are moving forward and where we are in the other areas in the grid business and wind.

Growth is certainly a good problem for the business to have and it's something that -- we'll make sure that we're in a position to be able to manage.

Okay. I'll take it offline, but really, where I'm headed with this is really about credit lines with banks that can support the capital needs there. So I can get into that with you guys on our follow-up.

We'll take our next question from Philip Shen of Roth Capital Partners.

First one is on Wind. I think you mentioned in your prepared remarks that there could be a new wind turbine in the works. Just was wondering, can you give us some more color on that, specifically what kind of timing is there with the process? And then, as it relates to the competitive field there, that could be bidding into that opportunity with Inox. Is there -- how many others are being considered? Is it a -- just a 2 or 3? Or what's that number there? And then finally, in terms of timing, any sense of when a decision actually could be made? What are the factors that could speed things up or slow things down there?

So I don't understand, Phil, the 2 or 3, 2 or 3 what were you referring to?

2 or 3 other -- how many other players are bidding, potentially, vying for Inox's business besides you guys?

To be their design and R&D group? I'm missing something here.

So I think you had mentioned that Inox is potentially considering new wind turbine. And so is it definitely you guys that are going to be bidding into that wind turbine? Can you give us more color on that? And what the timing of that might be?

I can't until we announce something, Phil, but for those of you that had access to Inox's conference call that occurred a few days ago, they seemed wildly excited about it, and they used the word, this should go forward in weeks. When we have a definitive agreement, we look to announce it. We're in position to be able to support Inox. They've been a good partner to us and we look forward to working with them, and whatever their needs may be. And if we get an order, we'll announce that order.

Great. So I -- the phone was not clear, but you did you say 4 to 6 weeks is when they can make an announcement on that turbine?

No, if you listen to Inox's conference call, they mentioned this new turbine a handful of times with a great deal of excitement. And I think the direct quote was that they anticipate going forward with this program in a matter of weeks without a number.

Matter of weeks, got it. Great. And then is there a foregone conclusion that if they pursue a new one that it's designed in -- are you guys designed in for that new wind turbine?

When we get an order, Phil, we'll announce it.

Okay, great. Shifting to REG, as a follow-up to some of the prior questions. You had talked about the average inflation being -- well, average potential opportunity being in that $25 million to $75 million range, and that they could be installed within a year. I'm guessing that once the decision is made, then it would take maybe a year to actually do the install. Do you have any sense -- can you give us some color as to some near-term opportunities that could be announced in calendar year '19? Is there anything that could be as soon as '19 for example? Or do you expect -- or do not have enough color to be able to say when the timing of those new opportunities might be?

At this point, I don't have enough color to prognosticate the timetable. I know, we're going to be focused on executing Chicago with excellence. And we're going to work as hard as we possibly can to generate new business from this extraordinary pipeline.

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

First off, congratulations on generating positive cash. I know it's been a long time in coming, and certainly to be congratulated on turning the business around. First question, if you -- the original agreement signed with Inox, do you have an idea of what you have shipped quantitatively against that? Is that still garnering your pull through, that contract? I know there was an extension opportunity there. I'm just trying to get a sense of what's remaining, and would that morph into a different agreement assuming you were to move forward with a new 3-megawatt design. And then just a quick follow-up to that, have you at least, discussed what type of reduction, and also LCOE that the -- moving to a 3 could help Inox with? And/or any type of particular auction they might be targeting, or particular customers you may be targeting with such a design?

You're asking me a lot of Inox questions, and I just -- I'm not the right guy to answer. But kind of, in a general sense, what I see them looking to do is to expand the product line which, over the long term, potentially expand the market. It will help them to continue to be competitive. They've been able to already increase their market share, and they maintain that. Given the environment over there, once they start to demonstrate this turbine, we will help them increase market share, I think that's to be seen, but certainly possible. But a lot of the questions you're asking me, Carter, are specifically, really are Inox questions. And I'm not able to answer them because I'm not Inox.

Fair enough. Within the -- I think you had made a comment, Dan, talking about some other opportunities within the Navy -- were you talking about lateral expansion. I mean you've always qualified that the HTS based platform could do, could barely be used for any surface platform. Or are you more specifically relating to maybe a pickup in kind of the new build market within LPD 28? Or potentially porting over to other classes, both? And then I haven't -- I know we've talked a lot Retrofittable solution in the past, but it seems like maybe the new build was more of the forefront? Could you kind of contrast those 3 opportunities within the near-term opportunity set within the Navy? Just to have a better understanding of...

I'll try to tip the whole hull where we're going with the Navy. So we're trying to do -- it's really kind of 2 dimensions of growth. We want to be able to bring our technology to as many platforms as possible with the Navy, not just the surface fleet, but the whole Navy. And then we want to be able to build content per ship. So in the case of SPS, we've talked about the pricing in the past for LPD, it's right in that, the midrange of that midship. We see the potential to expand with further content on these ships potential 10x. In the near term, however, we're focused on taking that SPS product and deploying it over as many platforms as we can. Frigates, destroyers, littoral combat, carriers, we've gone through a bunch of calls where we've tried to almost walk you through that strategy. There is a potential for current fit, virtually a new ship build. There is a potential for retrofit, which we really lead with the second product, this MCM payload product. And the news as the Navy most recently is they're trying to find the way to bring that kind of capability to the entire surface fleet. So we think that opens up a range of new content on these ships. Going beyond that, trying to go after as much as a Retrofittable market that we could, I think when we have some demonstrated history here with delivery to the Navy, not even operation, but just delivery to the Navy, I think it opens up a much bigger market for us.

And you've delivered, as you said, on the long-lead time objective for the Fort Lauderdale for this year. Has there -- do you see any acceleration in the time to deliver a similar type of product for other platforms? I mean can it be -- can you see a material reduction in the time to deliver such parts? Or was it really dependent on the other suppliers?

No, we see an acceleration once we get into full production doing multiple ships at a time. We've talked in past calls about the potential for some revenue acceleration because we're inserting into LPD 28 late in the cycle. At some point, we believe we'll be inserting earlier in the build in future ships on that platform. And that will mean you'll start to see some revenue coming from multiple ships at the same time.

Okay. Maybe just a couple others for me. VVO, obviously you've had some early wins. Could you talk about specifically, the feedback from utilities? Are there any product tweaks they would like to see either in specs or functionality? Maybe you could characterize how you see that ramping in 2019 within that context?

I think, kind of, to steal thunder from yesterday. Early results are great. I mean everything that we see that's coming back from utilities is widely helpful for us to realize that I think we got it right. I think we have the right solution with the right feature set to solve some of the specific distribution problems that we've talked about between dealing with electric vehicles and solar powered homes and a broader sense conservation voltage reduction. So I think we got it right. What we're going to do in '19 is do a limited deployment of a number of these units, get that operating history, get that comfort because ultimately, what we're after are blanket recurring orders from many utilities at once, and that really builds a different kind of business for us. That will recur relatively naturally and help continue to drive grid growth, which is VVO's -- certainly a part of that story.

Two last quick ones for me. Just maybe, John, the mechanics of the payment from Sinovel, why it exceeded expectations?

Sure. So we exceeded expectations this quarter because we were able to delay some payments into Q3, so you'll notice that we exceeded in Q2. But then I noted that, included in our Q3 cash guidance, we have some payments for Sinovel. When you add the two together, we're pretty much right on target.

Got it. Okay. And maybe just last one for me. Within REG, so obviously, it was a long haul to get ComEd over the finish line. Would you characterize the PUC as recognizing the CapEx deferral or avoidance aspect of this project? And maybe using that as an education process for some of the other PUCs? Or was it more of the scope was changed by ComEd as you got deeper into what the practical application was going to be. I guess, I'm trying to understand the complexity of ComEd versus, whether it will or will not affect other REG deployments in -- trying to understand the dynamics between department of Homeland Security, the PUC rather than just the one-to-one customer relationship between you and the intended utility.

Okay. Like the Inox questions, I don't want to answer ComEd questions, but kind of in the general case, what we're doing here is, we're going to go the last mile here, which is to get something as a permanent part of the grid, which means all the risks have to be reduced. The DHS is helping facilitate the reduction of those last risks. I think it's critical, I'll say, for my opinion, I think it's critical, we need to make sure that we execute with excellence on this project. This is not just ComEd watching, this is Exelon, and this is all U.S. utilities. We have developed, I think, a very strong and deep relationship between the companies. And my sense is that they like to look at and fully understand advanced technology and be a leader. And if we can enable them to be a leader, they're going to help us to bring other utilities into the fold. They are very strong technically, they really understand the efficacy of what the product delivers for them. And we want to be a good partner and deliver for them. It's a lot like a lot of our businesses, Carter. If we deliver well, and if we're good to our customers, more business comes, more markets open up. And if we execute on our business, it really puts us in tremendous position to grow. And we have to do that in this case and in all cases.

Okay. All right, let me ask this in a slightly different way and I don't mean to blabber this. But is it more, you need to prove the solution does as you intend? Or is it on the time frame? Or is it with coming in at the expected cost. Just trying to get a sense on which of those, is it all of them? Which is the most…

It's almost none of them, Carter. I mean we have to deliver, we have to deliver on time, we're going to have to deliver -- we're going to have a performance bond that we're going to set aside for this project. This is an operational execution risk reduction. That's it. Now to say that for this company is incredible, and I don't know if the audience fully appreciates, we're not talking about science anymore. This is science fiction, that is really going to turn into reality here just with ComEd alone and already what we've done in the Navy. And I don't know how to get that across with more strength or passion that the risks really now are just like any other risk we deal with the business, which is great for us, because we execute very well.

Yes, and proof of concept is far in the past now and it's about just usual blocking and tackling in any business.

This includes our questions, so I'll turn it back to management for closing remarks.

I want to thank everybody for staying with us through all this. I know that getting things over the goal line with ComEd are transformative for our company. I know getting things over the goal line with the Navy, again, are transformative with the company. As we said in the remarks, expect more coming from the Navy. And if we listen to what Inox is saying, they're focused on execution, but they're also looking to expand their product line, and they seem very excited about that. We have a very good working relationship between the companies, and we look forward to continue to support Inox with whatever that they need. Thank you, everybody, and we'll talk to you hopefully very soon.

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