Good day, and welcome to the American Superconductor Second Quarter Fiscal 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Sanjay Hurry. Please go ahead, sir.

Thank you, Chantal. Good morning, everyone, and welcome to American Superconductor's Second Quarter Fiscal 2019 Earnings Conference Call. I am Sanjay Hurry of LHA Investor Relations, American Superconductor's Investor Relations Agency of record. With us on the call today are Daniel McGahn, Chairman, President and CEO; and John Kosiba, Senior Vice President and CFO. American Superconductor issued its earnings release for the second quarter of fiscal 2019 yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investor page of the company's website at www.amsc.com. Before starting the call, I'd like to remind you that various remarks that management may make during today's call about American Superconductor'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 set forth in the Risk Factors section of American Superconductor's Annual Report on Form 10-K for the year ended March 31, 2019, which the company filed with the SEC on June 5, 2019, and subsequent reports that the company has 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's views as of any date subsequent to today. While the company anticipates that subsequent events and developments may cause the company's views to change, the company specifically disclaims any obligation to update these forward-looking statements. Also, on today's call, management will refer to certain non-GAAP financial measures, non-GAAP net loss and non-GAAP operating cash flow. Non-GAAP net loss is defined by the company as net income or net loss before stock-based compensation, gain on the China settlement, net, amortization of acquisition-related intangibles, changes in fair value of warrants, other unusual charges or items, and the tax effect of adjustments calculated at the relevant rate for the company's non-GAAP metric. Non-GAAP operating cash flow is defined by the company as operating cash flow before the China settlement, net of legal fees and expenses, tax effect of adjustments, and other unusual cash flows or items. A reconciliation of the non-GAAP measures to the most direct comparable GAAP measures can be found in the second quarter of fiscal 2019 earnings press release that the company issued and furnished to the SEC last night on Form 8-K. All of American Superconductor's press releases and SEC filings can be accessed from the Investors page of its website, again, www.amsc.com. With that, I'll now turn the call over to Chairman, President and CEO, Daniel McGahn. Daniel?

Thanks, Sanjay, and good morning, everyone. I'll begin today by providing an update of our Grid and Wind business units. John Kosiba will then provide a detailed review of our financial results for the second fiscal quarter, which ended September 30, 2019, and provide guidance for the third fiscal quarter, which will end December 31, 2019. Following our comments, we will open up the line to questions from our analysts. In fiscal 2019, we're focused on building a more predictable and diversified business. We are anticipating significant growth from our Grid segment. Revenues for the second quarter of fiscal 2019 came in at the upper end of our guidance range. Grid revenues increased over 50% when compared to the same period last year. Grid growth was driven by strong D-VAR shipments, revenue from our SPS product for the U.S. Navy, VVO shipments to utilities and from our REG deployment project. In our Wind business, Doosan intends to enter the offshore wind market in Korea with our 5.5-megawatt product. In India, we continue to support Inox with our 2-megawatt onshore product. We remain vigilant at managing our operations. Our operating cash burn was better than our guidance range. And our ending cash balance was above guidance. At the halfway mark for our fiscal year, our Grid business is performing at a very high level. We are delivering against a strong backlog of Grid orders. Since the start of the fiscal year, we have maintained our sales momentum while further strengthening our backlog and extending our grid visibility into fiscal 2020. D-VAR shipments to both industrial applications and to renewable applications were both strong in the second quarter for fiscal 2019. We anticipate D-VAR shipments should provide a continued strong base of Grid revenues for the rest of the fiscal year. In…

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $14 million for the second quarter of fiscal 2019 compared to $14.9 million in the year ago quarter. Our Grid business unit accounted for 82% of total revenues, while our Wind business unit accounted for 18%. Grid business unit revenues increased 52% versus the year ago quarter, driven by higher D-VAR revenue and higher REG revenue, while our Wind business unit revenues decreased by 65% versus the year ago quarter as a result of fewer ECS shipments to Inox. Looking at the P&L in more detail. Gross margin for the second quarter of fiscal 2019 was 27%, which compares to 24% in the year ago quarter. The strength in gross margin was driven by primarily favorable project contribution margins within our Grid business unit. Research and development and SG&A expenses for the second quarter of fiscal 2019 were $7.8 million compared to $7.4 million in the year ago period. Approximately 12% of R&D and SG&A expenses in the second quarter of fiscal 2019 were noncash. Our net loss in the second quarter of fiscal 2019 was $800,000 or $0.10 per diluted share. This compares to a net income of $22.6 million or $1.10 per diluted share in the year ago quarter, which included a gain on the China settlement of $28.7 million. Our non-GAAP net loss for the second quarter of fiscal 2019 was $1.5 million or $0.07 per share compared with a non-GAAP net loss of $2.7 million or $0.13 per share in the year ago quarter. Please see our press release issued last night for a reconciliation of GAAP to non-GAAP results. Our operating cash burn in the second quarter of fiscal 2019 was $4.6 million. This was better than our previous guidance of a $5 million to $7 million cash burn. We ended the second quarter of fiscal 2019 with $68.6 million in cash, cash equivalents, marketable securities and restricted cash. This compares with $74.7 million as of June 30, 2019. Turning to our financial guidance for the third quarter of 2019. We expect that our revenues will be in the range of $14 million to $17 million. Our net loss on that revenue is expected not to exceed $7.2 million or $0.34 per share. And our non-GAAP net loss is expected not to exceed $6.5 million or $0.31 per share. Company expects operating cash flow to be a burn of $4 million to $6 million in the third quarter of fiscal 2019. This guidance does not include any tax payments or other costs related to the settlement. We expect to end the third quarter of fiscal 2019 with no less than $61 million in cash, cash equivalents, marketable securities and restricted cash. With that, I'll turn the call back over to Daniel.

Thanks, John. I'd like to conclude today's call with some comments on the recent progress by ComEd with the Federal Regulatory Commission or FERC. Two weeks ago, we jointly announced that AMSC and ComEd are proceeding on the engineering assessment for a proposed second REG system in Chicago. The purpose of the contemplated second project is to increase REG resilience in the downtown Chicago Business District by networking 3 existing substations with our REG system. The second project is contemplated to be larger in scope, 4 to 6x larger than the first, and provide greater reliability, resiliency and load-serving capabilities during outages or other grid disruptions. ComEd expects the REG project will be less disruptive to the downtown area and will not require the significant infrastructure expansion of a new substation. We look forward to executing on our first project with ComEd and continued conversations regarding the second proposed project. Now let me take a moment to discuss FERC's approval of ComEd's REG proposal. FERC is the main governing body when it comes to defining the framework by which utilities are allowed to recover their investments in the transmission network. This is important because, while REG systems provide value to both the distribution and transmission networks, the REG capability in this case is more analogous to conventional transmission assets. FERC recently granted ComEd's request to recover its portion of the cost to construct, operate and maintain both projects through its transmission rates. We believe this is very positive for AMSC, and it has accelerated conversations we're having with other utilities regarding the deployment of our REG product. Clearly, utilities and now regulators are beginning to understand the capability and the value of our REG system. In conversations with other utilities. We've learned that REG's expected benefits include substantial improvement to…

[Operator Instructions] Our first question will come from Eric Stine, Craig-Hallum.

Just wanted to chat about the FERC authorization. I guess, one, should we view this as kind of a blanket approval for other utilities? Or is this something where it's a template, and this kind of sets a precedent that it's going to be fairly easy for a utility to go this route with transmission and be able to put in rate base?

I think to be really direct, Eric, what we've seen in our conversations with utilities is an open question. Do we look to classify REG as a transmission asset or a distribution asset? And this is something we've talked about on prior conference calls. To get rate recovery on the distribution side involves the state regulator. And that's something that a distribution utility is very familiar with. It's how they spend capital. What's happening in this case is FERC is getting involved because, in this case, it's being determined it behaves more like a transmission asset, which is interesting. In many ways, REG behaves exactly like a transmission asset with the exception that it operates at safer, lower voltage. We had been in conversations with multiple utilities at their senior management level, and I don't think that they knew what the FERC would or would not approve. I think this does create a case where the FERC has been able to rule in a way that I think is very favorable to the product that is REG. And I think it serves as additional risk reduction but potentially accelerate deployment of REG in a variety of cities across the U.S. for a variety of reasons, which I went through in the call. We think this is really big news for us because it gives clarity and certainty that REG recovery is directly possible.

And you mentioned, on the distribution side, dealing with state PUCs, which is common, but I mean, is this something where -- I mean any thoughts on if you go the transmission route, whether that kind of speeds the process just in terms of derisking in regulatory approval?

It really depends on a case-by-case basis. So in some cities, they may be capped at what they're able to do in the way of rate cases and changes in cost to rate payers for a variety of different reasons. I can think of some cities, for instance, when there were some acquisitions. One of the things that they had to promise is that they weren't going to raise the distribution rates. By having potentially 2 funding sources, the transmission rates through FERC or the distribution rates through the state regulator, it gives really the utility the option to position this in a way that they can get recovery. Think of it as there's the potential for 2 pathways to payment, and whichever one is better for the ratepayer and better for the utility from an expediency standpoint, would hope to see the utility go down. There was some open question prior to this, what would FERC think. And I think we have some inkling now that FERC can think of REG as a transmission asset.

Okay. Got it. And I would think that this goes a long way towards answering what's kind of in the open question is, does another utility need to see REG in the ground, that first project in Chicago? And I guess, this would mean derisking it in that that's not the case.

I think that -- at least in the case of Chicago, it's clear that they do need to see it in order to go forward with the second project. I think what this really does is -- when we announced we were going forward with the project with Chicago, a lot of what we talked about was things that we don't fully talk to because we're not a regulated utility but they have to deal with all the time, which is the regulatory risk. The news in this FERC judgment is that, for the first project and also for the second project, that regulatory risk has been reduced dramatically.

Got it. Okay. Maybe last one from me just on VVO. Clearly, you're seeing repeat orders. I know, ultimately, your goal is to where this is kind of a stocked product. I mean is that -- any of those utilities to that point, or is that something that we should look at going forward?

Yes. I think the nice thing we're starting to see are multiple utilities buy multiples of the same exact product. So what we're trying to test and develop, we believe, is we're starting to see the beginning of that. We want to be able to manage this year to make sure that we get it right every time we ship to utilities that we're shipping the same product over and over again. And that, I think, will help add to the diversification and potential growth that could come from VVO in the future.

Our next question will come from Colin Rusch, Oppenheimer.

As you're looking at some of this growth on the utility side and a diverse or increasingly diverse customer set, can you talk a little bit about the potential for some of the seasonality and lumpiness to smooth out in that business as we go forward? Is that something that we're -- we could see a little bit more steady line in terms of the growth? Or is it going to continue to be a little bit quarter-to-quarter?

I think it's kind of in between, Colin. We're trying to make an effort here to make it less lumpy, to make it more predictable by addressing more markets that have more predictability. I think if you look kind of the trend of the Grid business, you see it to be growing, which means you don't see great lumpiness or retreats in revenue. It is a project-based business. And if those projects are large and occur over multiple periods, you might see spikes and retreats in revenue because of that. But generally, as we look at how our pipeline lays out in the future, our objective of trying to diversify the revenue even within Grid is happening. And we know this is a business that has always been considered lumpy. We think it's valuable to how we run our business, and we think it's valuable to shareholders to reduce the volatility in this business. And we're seeing, we think, some of the beginning of that. Does that mean it -- with great certainty we go forward and that's behind us? That's to be seen, and we'll try to do the best we can, Colin, to telegraph that if we know that a project is large and going to have to come over multiple periods. But we think the general vector for all this is moving upwards, and that's what we want to achieve.

Great. And then just from a manufacturing and marketing perspective, obviously, we've been kind of a little bit all over the map here for the last 5 quarters or so. Can you talk a little bit about that becoming more consistent at driving cost reduction as you get up to higher volumes? And I have one last question.

It broke up a little bit. So you're asking about cost reductions in regards to what specifically, Colin?

On the manufacturing side, your ability to drive out cost as you scale up volumes and how we should think about the margin profile.

I think on the Grid business, we're trying to do exactly that. And that's something that, I think, you can look at the previous financials and see that we've been able to expand margins even at these revenue levels. We need to have a more regular business throughout both segments. But to speak specifically on Grid, we are introducing some new product lines that will change the mix and potentially change margin. But over a longer-term period, the next, call it, several years, as we expand revenues, we should be able to expand margin. The fixed costs themselves don't need to scale very much. And then the operating margin, there's a great deal of leverage there because the fixed costs overall down all the way to the OpEx line don't need to expand at a rate that, that approaches anywhere near where revenue hopefully will expand. So we think we're going to start to see expansion of those margins. But again, period-to-period, things are going to flop around, and John will try to go through detail. It's really a question of the size of the numbers, right? $0.5 million or $1 million may have a positive or negative impact on numbers. That's probably larger than what it really means in the business. I think the better we can try to accurately communicate those, the more predictable you can see margins become over time.

Perfect. And then one final one on Inox. I mean, obviously, this has been a challenging situation for you guys with the -- some micro visibility, a lot of uncertainty from policy perspective and, clearly, working through some issues with those guys right now. How aggressive can you be without blowing up the relationship, to be honest? Is this something where it's going to be time to walk away and find a new partner potentially in that size market? Or do you feel like there's a path forward with these guys to get to something that's more reliable for your business?

Yes. We think if you focus on the long term that there certainly is a proper path where we continue to work together. We're in a bit of a transition from the 2- to the 3-megawatt. We are doing -- -- continuing to do work on -- we have been continuing to do work on the 3-megawatt with Inox. We're in close contact with them. We try to be as clear as we can with the information that we have on what's going on in the market. Every other signal we see outside Inox and kind of the regular media is the number of players that are going to be operating in the wind market in the next 2 or 3 years is a very small number. Inox believes that they're going to be one of those players. We're going to hear from Inox. We think, later in the week, they'll probably report their results in their conference call. They're optimistic, I believe, about their ability to gain additional orders. So at this point, we just kind of have to work through the relationship with them. We try to be clear on the call to understand -- we make sure that we manage our collection risk by putting the letter of credits in place in advance. We're trying to work through those issues with Inox, and we hope to report back better information in future periods.

Our next question will come from Philip Shen, Roth Capital Partners.

Just a follow-up on the Inox topic. Specifically, do you have a sense for how long this delay in taking delivery could last? And have they signaled in any way that it could be short term? Or do you think there's a chance that it could last more than a couple quarters, for example?

Yes. Phil, I don't really know and I really don't have enough information to even speculate. What we see is, in the summer months, they're finally connecting SECI-1 to the grid, and they're doing that 18 months to 24 months behind the original schedule. The way that SECI-2 was originally contemplated and designed was almost to be an extension of SECI-1. It's leveraging all of the same existing grid infrastructure. When Inox talked about on this question on their call, they kept saying plug-and-play, plug-and-play. That was the words that they kept using over and over again, basically saying that the location is set on the grid to plug all this stuff in, and that should not be the rate-limiting step to allow them do what they need to do for SECI-2. We're going to manage our risk the best we can. We're going to try to manage the relationship the best that we can. We see this as a transition. I can't tell you how long it's going -- we're going to be in it. There's more demand beyond SECI-2 that at least is scheduled to start coming in 2020. So I think it's an overall question of risk in the Indian market. What do the projections look like for India? And when we look at outside third-party sources, they all show growth coming in the next few years. So we're in a good position from a cash balance standpoint. We're in a good position in what we're doing on the Grid business. We feel like we're doing all the things that we can control. And then we want to be a patient and good partner to Inox where we can.

Okay. Great. Coming back to REG. First approval to rate base, obviously, is great and derisks. And as you mentioned in your prepared remarks, it has accelerated in conversations. I was wondering if you might be able to expand on some of those conversations. Are you getting more utilities to the table? Or is it kind of the existing pipeline that you've shared with us in the past? Those conversations are accelerating, and any sense of timing as to, if anything can happen would be fantastic.

Yes. I think the pipeline that we're developing for REG is persistent. We've done a pretty thorough canvassing of U.S. utilities. That isn't to say that there aren't stones that we haven't uncovered. What we learn in each account is drivers that make it exciting for them to look at adopting, seeing those themes become more common throughout, which is kind of what I tried to go through, Phil, in the part of the prepared remarks. So there's 4 or 5 main themes here that we're seeing, not once, but over and over again. And you're really waiting for the relief of some constraint, be it construction or building or gentrification, a specific critical asset that needs additional hardening, the kinds of things utilities normally need to react to. We see this market accelerating, but we do understand that utilities move on a 3- to 5-year time horizon. We do see the advent of VVO helping to have conversations because, tactically, what VVO does is it helps make the grid work smarter today, but it helps us uncover additional opportunities for REG. So we see the potential here certainly to build a very nice business. We think we have a great partner in Exelon and ComEd that's going to help us with this first project and get that done. That's what we're focused on as a company. And if we're able to deliver other orders in the future, it's certainly something that we're actively working on. I'm very proud of the effort that the team has put forth in dealing with utilities and being able to sell D-VAR from the transmission side, the VVO on the distribution side and REG everywhere in between.

Okay. And then in terms of the last one here, coming back to VVO, and you mentioned multiple utilities are taking multiple orders. When do you think that could become -- a single utility could become a steady flow of orders, where you just see that -- maybe you have that now, and we don't know about it. But do you see that steady -- an expected steady flow so that this is just an off-the-shelf purchase and no regulatory approval required? I know that's the case now. But what are your thoughts on that? Is that around the corner for us?

Yes. I think as you look into 2020, that's -- we're hoping to be able to report back some things like that. We're seeing early indications that those things should happen. We're seeing early indications that we think we've got the feature set of the product right. We want to go through this year and make sure that we're convinced of that, the utilities are convinced of that. But we kind of said in the prepared remarks that we're starting to see multiple utilities buy multiple units, which is what we want for VVO.

And then one last thing on VVO. Is there customization for VVO? Because it sounded like, in your prepared remarks, you said you need to make sure -- or maybe it was an answer to Eric, you need to make sure that they get the right VVO product. Is there some degree of customization?

The hope is simply, Phil, no. That's what we're trying to test is that, when we look at how we sell D-VAR, it's a configure-to-order solution. One of the things that gives us the high performance in the ECS is it's a configure-to-order solution. We can tailor that to the microenvironment that, that turbine is going to operate. That's going to give us performance. That type of business has additional costs. It has engineers that need to support it. What we're trying to do in VVO is to help diminish the volatility by having more business that has a regular beat. But when we talk about it being a make-to-stock product, it means basically shipping the same product over and over again without additional engineering touch labor to configure it. So we want -- when I say get it right, it means we want to get the complete feature set right so that, that same article could be shipped to multiple utilities in multiple quantities. If we can do that, a lot of the things, I think, that you've talked to us about, Eric has talked to us about and certainly Colin even on the call about the volatility are, these are all the things that are going to diminish the volatility in the overall business, which we think is valuable.

Yes, that will make sense.

Thank you very much. At this time, we have no further questions in the queue. So I would like to turn the conference back over to Mr. McGahn for any closing remarks.

We appreciate everybody's attention and commitment to what we're trying to do here. We talked a couple years ago about growth through grid. Your objectives this year are all about growth through grid. I mentioned a little bit earlier, I'm very proud of the team and the focus that we've brought to this, not only from sales but being able to be in production and service and support that we are building a growth business here with grid. And you're just now starting to see the beginning of that. We hope to be able to report back more great news in future periods. We're going to keep working on REG with ComEd in Chicago. We think that's a very important project that we've got to execute on well. We have to execute well on the delivery of our Ship Protection Systems to the Navy as well and the business that we talked about a few years ago that we want to have a very diversified by product line of business, we see that coming very soon here. A lot of the hard work is done, and hopefully, the benefits will start to show more and more in the financial results. Thank you, everybody. We appreciate it.

Thank you very much. Ladies and gentlemen, thank you for joining us today. This now concludes today's conference. You may disconnect your phone lines, and have a great rest of the week. Thank you.