Good day and welcome to the American Superconductor Third 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. John Heilshorn. Please go ahead, sir.

Thank you, Nick. Good morning, everyone, and welcome to American Superconductor's Third Quarter of Fiscal 2019 Earnings Conference Call. I'm John Heilshorn, LHA Investor Relations, AMSC's Investor Relations Agency of record. With us on today's call are Daniel McGahn, Chairman, President and CEO; and John Kosiba, Senior Vice President and Chief Financial Officer. American Superconductor issued its earnings release for the third quarter fiscal 2019 yesterday after the market closed. For those of you who have not yet seen the release, a copy is available in the Investors 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 sale of minority investments; 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 net -- 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 any other unusual cash flows or items. The reconciliation of the non-GAAP measures to the directly comparable GAAP measures can be found in the third 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 Investor Relations page of its website at www.amsc.com. With that, I will now turn the call over to Chairman, President and CEO, Daniel McGahn. Daniel?

Thanks, John. Good morning, everyone. I'll begin today by providing an update on our Grid and Wind businesses. John Kosiba will then provide you with a detailed review of our financial results for the third fiscal quarter, which ended on December 31, 2019, and provide guidance for our fourth fiscal quarter, which will end March 31, 2020. Following our comments, we'll open up the line to questions from our analysts. At the top here, I just want to say how proud I am of the team that's really rallied behind this idea of growing through Grid. And what you're going to see today as we go through the results and as we look forward in the next few quarters is really coming to fruition this change in direction that many of you have supported us through. And we see what we think is the beginning of a lot of good news, starting with today. Revenues of nearly $18 million exceeded our guidance range for the third quarter of fiscal 2019. Grid revenues more than doubled in the third quarter of fiscal 2019 when compared to the same period last year. In fact, Grid revenues for the first 3 quarters of this fiscal year have already surpassed Grid revenues from the entire prior fiscal year. Our Grid business grew more than 30% quarter-on-quarter. And for the first 3 quarters of this fiscal year, our Grid business is up almost 60%. Our total business grew by more than 25% quarter-to-quarter and year-on-year. We are executing on our strategy to diversify our business and reduce volatility by growth through Grid. Since the start of this fiscal year, we have maintained our sales momentum, while further strengthening our backlog and extending our grid visibility well into fiscal 2020. In our Wind business, we began…

Thanks, Daniel, and good morning, everyone. AMSC generated revenues of $17.9 million for the third quarter of fiscal 2019 compared to $14.1 million in the year ago quarter. Our Grid business unit accounted for 85% of total revenues. Grid business unit revenue of $15.2 million more than doubled versus the year ago quarter with 123% year-over-year growth. D-VAR, VVO, SPS and REG each contributed to Grid growth in the third quarter of fiscal 2019. Our Wind business unit revenue of $2.7 million was driven primarily by ECS shipments to Doosan and spare part shipments to our wind licensees and their customers. Looking at the P&L in more detail. Gross margin for the third quarter of fiscal 2019 was 9%, which compares to 26% in the year ago quarter. The decrease in gross margin in the third quarter of fiscal 2019 was primarily due to a less favorable product mix and increased revenue from our cost share project with DHS for the Chicago REG project. Research and development and SG&A expenses for the third quarter of fiscal 2019 were $8.1 million compared to $7.8 million in the year ago period. Approximately 13% of our R&D and SG&A expenses in the third quarter of fiscal 2019 were noncash. Our net loss in the third quarter of fiscal 2019 was $6.8 million or $0.32 per share. This compares to a net income of $17.3 million or $0.85 per share in the year ago quarter. As a reminder, the net income in the year ago quarter included a net gain on the China settlement of $22.8 million. Our non-GAAP net loss for the third quarter of fiscal 2019 was $6.7 million or $0.32 per share compared with a non-GAAP net loss of $2.3 million or $0.11 per share in the year ago quarter. Please…

Thanks, John. To conclude today, great revenues, more than doubled in the third quarter of fiscal 2019 when compared to the same quarter last year. Our Grid business grew more than 30% sequentially in the third quarter. And for the first 3 quarters of fiscal -- of this fiscal year, our Grid business is up almost 60%. In fact, 9 months into this fiscal year, we've already met our objective of Grid growth. And because of our strong backlog, we are bullish going into fiscal year 2020. We have the advantage of supporting our expected growth with a very strong balance sheet. Operator, we'll now take questions from our analysts.

[Operator Instructions] And the first question comes from Eric Stine with Craig-Hallum.

It's Aaron Spychalla on for Eric. Maybe first on D-VAR. Obviously, the notable acceleration in 2019 on the order front, it's $55 million plus, can you just kind of talk about the pipeline there and thoughts on your outlook as we get into 2020? And then just anything on the penetration or kind of share with your existing customers like Vestas and just overall in the market there?

Yes. So first, just to correct, you had $55 million, I think, was the run rate, that's for Grid in totality, not just D-VAR. We don't break out D-VAR as a specific segment. But to give you some color, what we're seeing is we're seeing an increase in the value of the projects that we're taking, which means for the same sales effort, you're reaping more revenue. That should also translate hopefully into a bit healthier margin as we do that. We've seen some penetration into this industrial segment. We see that continuing over the next years, given where they are in their buildout cycle for capital. We did mention and maybe not strongly enough, but I'll go back and say, we are working with now several, not one, but several top-tier manufacturers of wind turbines, where we're now riding along in the projects that they're developing, that's another channel to market to help expand revenues and accelerate growth there. So we're trying to do what we can to accelerate and continue to accelerate the growth of D-VAR and Grid and then layer on the additional products, the VVO, REG and then SPS, which is part of Grid as well.

All right. Understood. And then maybe second on REG following the FERC ruling last year, can you just kind of talk about how the conversations with utilities have maybe changed since then? And do you think some move forward prior to Chicago being completed? Or is that kind of a proof point that others are waiting at?

I personally think that Chicago is the proof point. And we're focusing our team on delivery. We talked about we've manufactured key components already for the system, which is meaning that we're getting some noticeable REG revenue. To remind you, one of the things that REG does, it's a great entry point for us, but it is a cost-sharing arrangement. It does have a little drag on gross margin. So I just want to remember to highlight that with you. But we're focused on the cities that I mentioned. We've identified real projects. The FERC ruling really has expedited kind of the feeling throughout the organization that recovery is not only possible but certain. And in utility land, that's a big risk reduction. So I think that, that certainly is helping us. I know that utilities don't move at quarter-to-quarter speed. These are multiyear projects that they're looking at to fix problems that have existed in their grid for some time. So we believe we remain persistent and those orders will come. But the first project with Chicago really is the proof point.

And the next question comes from Colin Rusch with Oppenheimer.

It's encouraging to hear about Doosan moving forward with projects. Can you talk a little bit about the revenue opportunity for you guys related to 3.5-gigawatt pipeline of projects that they're working on? And any sort of expectations around the time frame for how that will get shipped and built out?

Yes. To be blunt, we don't have a second order -- follow-on order yet for the 5.5 megawatt. It looks like the market is setting up where they're going to need product. I don't know if it's very soon, but should be relatively soon. Doosan is really focused on trying to execute well in these first projects with the hope that, that translates to a very large market share for them in Korea. So we're making sure that we're there to be able to support them in the field as they start to test these wind turbines. That's an important milestone for them and for us, for sure. The numbers out of Korea are very big. The challenge always has been -- I don't think the desire of the Korean government to go forward and do these, but it's really been the timing. And I think what we have to do, in many ways, just like Chicago, we got to go step by step here. Let's get these first turbines operational, let's help support Doosan with their business development efforts by having a very good product in the field. And the belief is that as we get later in this decade, the Korean market on an annual basis should expand to what looks like in excess of 1 gigawatt a year. The hope here what we're playing for is that Doosan can get a very large market share in that market, then that would be great for us. But I don't see it's something that's going to turn, let's say, in the next couple of few quarters. But as we start to look to 2021 and beyond, we think it can become an even more important part of our business.

Okay. That's super helpful. And then just looking at the gross margins, as you see the product mix shift and revenue scaling a little bit, how should we think about the cadence of gross margin improvement as you scale revenue a little bit here?

Yes, I think I'll say kind of at a high level, and then, John, if you want to add some additional color. The thing that everybody has to remember is when you look at our numbers, look at trailing quarters and then look at the next few quarters, how they're going to come. Margin will still bounce around a little bit in projects. But we are embarking on a cost share arrangement with REG. We are in the early days of getting into production for the Ship Protection Systems. Obviously, the first articles will cost more than articles that are procured later in the cycle as we're doing multiple units. So as we see revenues expand because of these multiple products, we're trying to do what we can with D-VAR to manage, maintain and potentially grow those margins, while we realize that we're birthing some new products that are not going to be at the margins today that they're going to be in the future. So we just have to be able to weather through that and always look for cost as a key thing to drive over time. It's not something we can do, let's say, in 2020, but as we get a more diversified business, we want to continue to be able to work on margin. John?

Yes. No, I mean, I think you hit it right on the head. I mean, Colin, the other thing to keep in mind is to oversimplify it, to the extent that the revenue is driven by increased revenue in Wind and D-VAR, that's going to obviously have a positive impact on the gross margin because they have the highest contribution margins. To the extent that revenue is driven by increase in REG or some of the other early adoption products, those won't have the same accelerator of gross profit.

Okay, that's helpful. And then just a final one for me. Can you just speak to the preparedness of the supply chain to support you guys as you ramp up? Should things accelerate a little bit, whether it's in the Wind, the D-VAR, VVO or SPS side at all, is your supply chain ready to support you in that sort of acceleration?

You're not bugging our place, are you, Colin?

No, I'm just trying to get a sense of...

I'm just teasing you because it's something that's paramount to us. It's something we put a lot of focus on our long-term strategic partners on our supply chain. We know we see increase in demand coming across our product lines. We have a team that's dedicated to focus to make sure that we don't have any missteps on the supply chain as we grow. That isn't to say that they won't happen. But as we've had challenges, and we have had challenges in the past, we've been able to reconcile them fast enough that they don't affect the financials of the business. So what we want to do is focus on making sure we're delivering a great product to a customer and supporting that great product and to make sure that we're able to build more and more of those as we go forward. We ramped up a lot in the way of production capability here. And it's really through the supply chain, Colin, that -- it's making sure people understand. We may need 10%, 20%, 30% more, depending upon how the order book starts to flow over time.

And the next question comes from Chip Moore with Canaccord.

I'll echo my congratulations on the strong Grid revenues. Maybe we could start with a question we're asking all our companies, guys, just any impacts on your customers or supply chain from what's going on over in China and the extended Lunar New Year there?

There's something going on in China? It doesn't impact our business at all. Everything we do here, we have all our grid products made in the U.S. We really have no exposure when we think about supply chain. For us, China is a 5-letter word that's in our past, and we are an interesting play. We believe that is a business that's growing without impact either from supply from China or from market from China or any turmoil that China would contribute. Now the broader markets, I guess, always have turbulence that may be induced by China, either through the catastrophe that's going on now or dealing with the trade issues. But I don't know how to say it more clearly, is we're a nice pure-play away from China. If people want to think of us that way, I think that's a good way to consider us.

Yes. Got it. Perfect. And maybe we could talk a little bit more about VVO getting ready for a bit of a broader launch here this year. Can you talk about early receptivity and some of the traction you're seeing on the distribution side?

Yes. The nice thing we see is when we go to these trade shows now, we don't have to present. The utilities are presenting our product as a key thing to fix their challenges. So we've seen what we think are very important utilities out there really marketing for us. And what they're simply doing is reporting on the excellent results that we've had with multiple installations with them. So the good part about VVO is it should be less volatile because you have a price point that's on the lower end of all of our products. But the counter is true that you need to sell a lot of them to move the needle. So we think we're in a very good position where we know we have a product that really solves the real problem in the market. And that problem is only going to exacerbate and grow over time. So we have the support of many utilities now that are out talking to other utilities on our behalf. Not in our direction, just simply, they're very satisfied and excited by the experience that they have. And there aren't that many cool new things on the grid. So for utility engineers that go out and talk about REG, which they do, or just go out talk about VVO, which they certainly do, there's very little opportunities for these smart guys that say, "Wow, the grid is changing, we really are being proactive to bring more renewables on the grid and bring more resiliency to the grid." And that's really where our sweet spot fits.

That's great. And one last one for me, guys, on the Navy. You alluded to potential for some more wins there. How should we think about timing? And really, how should we think about potential wins outside of the San Antonio Class?

Yes. It's hard to know with timing. I know the timing we went through to get LPD and how challenging that was took a lot of effort. I think the thing that we wanted to report today was we've been basically directed by the Navy that we understand where we're going to put the next system. I don't know on what whole number. I don't know at what date. We still focus principally on forward fit, meaning, we're trying to take an existing type of ship that they're building a new one and insert our hardware in. I had the privilege to go down and be part of the team to actually see the ship that we're considered for. And I am impressed with our engineering capability, what we're able to do to miniaturize, make things small, to really make it easy for the Navy to increase the level of protection on these ships. The things that we're doing, I'm just so proud of as an American that we're really focused on here protecting American sailors of sea, and I think this is going to be a very important thing, not just for LPD, but for many, many ship platforms in the future. It's just hard for us to handicap or tell you specifically when that's going to happen. But I think there has been a little bit of a positive turn because we know where we're going to go next. So bear with us on when.

And our next question comes from Philip Shen with Roth Capital Partners.

This is Abel Ortega. I'm on for Phil. I think you mentioned that you have $31 million worth of D-VAR backlog. Can you provide some additional color on your overall Grid backlog? Perhaps some color on the mix and timing?

So the $31 million, I think, are the announced orders, that's right, through the different press releases. Do you want to talk about the backlog that we have in the...

Yes. If you could provide some additional color on that.

Yes. So we have in excess of over $50 million of backlog. And what we do is we say that will be -- that backlog will be generated over the next 12 months.

We don't really break it down. One of the challenges that we do have in our backlog is we have to make an estimate on -- we have a large order from Inox, as we mentioned, where they are. We have to predict what would turn into revenue within a year and put that into backlog. Obviously, giving you our tone, we probably don't have much of that in there. But we don't really break it down by product. What we see is the overall order book is expanding. We see growth in Grid. We see growth across all the products in Grid.

So Abel, it's $76.2 million is the total 12-month backlog, to be more precise.

Okay. Great. And how do you expect the Grid revenues to trend by quarter throughout calendar 2020?

It's a good question. It's something that we always have to struggle with because we want to make sure that we're delivering on projects that we're working on and entering into new products -- projects as customers need them. There has been a historical lumpiness to much of the Grid business, specifically D-VAR. I don't see that going away. I do see it dampening. So the volatility will be reduced. But we're reporting today $15-plus million in Grid. Don't feel that, that's now going to happen for the next few quarters and we're going to grow off of that. If you look at trailing trends, we've been growing Grid. If you go forward, you have to assume we're going to continue to grow at that rate or higher just based upon the trajectory the past few quarters have been on. The backlog supports it. And as we're saying, we have healthy backlog well into 2020. We really sit in a very good position here as we look at December. And as we give you forward numbers for March, we're giving you some color a little further out here that things are going to be very good continuing for Grid, but please don't assume that there's going to necessarily be quarter-on-quarter growth in Grid. The overall trajectory will certainly be upward.

Okay. Great. I mean the Grid business does sound like it is doing great. And we saw a spike in EMEA grid revenues in the quarter to $5 million versus very little in the prior 2 quarters. Can you tell us what the key drivers here? And should we expect the strength in EMEA grid sustained in the quarters ahead?

Something broke up Abel when you said -- you said something, something, $5 million in the quarter, I don't know what you were referring to.

Yes. We saw a spike in EMEA grid revenues in the quarter to $5 million versus very little in the prior 2 quarters. And I was just wondering, what was the key driver here. Should we expect the strength in EMEA grid revenues...

Oh, he's talking regional. You're picking the region you're saying. Okay. Look, Abel, I think -- so on that, that's very specific to one D-VAR project. I wouldn't trend off that. Our business is project-by-project basis. That was a good project for us. But I wouldn't say that EMEA all of a sudden is going to be representing 20% of our revenue, if that's what you...

But you are seeing that when customers show up or regions show up that those individual numbers on a project base are growing. And that's, I think, important. Also realize we've opened up, we think, some additional channel to market by being able to sell with multiple wind turbine manufacturers, top-tier wind turbine manufacturers.

Great. And one last one for me. So with the success you are seeing in the Grid, when do you think you can turn the corner and generate positive operating profit for the Grid business? Do you see this in the next 4 quarters potentially?

We don't really forecast out that far. I mean what we want to do is if we continue to grow revenue, we continue to get traction with D-VAR and all the new products, the business should continue to take care of itself. So what we're trying to do is deliver the momentum on the order side, be able to meet what customer needs are going to be and the numbers, we think, should take care of themselves over time. But we don't have any specific dates out there.

And we have no additional questions at this time. I will turn the call back over to Mr. McGahn for closing remarks.

Thank you. Appreciate it. Just to kind of go back and step back kind of big picture and frame where we are. We had what I think was a very nice Analyst Day in New York recently, and we kind of introduced a new framework to think about the company, where AMSC's products really orchestrate the rhythm and harmony of power from generation to consumption, helping to create a super grid that enables more clean power generation and providing a more resilient grid. That's what we're trying to deliver. Our D-VAR business today is very strong, both on renewable and industrial side. We're delivering VVO to the market, and we keep building the pipeline of potential projects for VVO. I think a key point today for people to realize, we have manufactured some of the key components for the REG system for Chicago. And what that means from my standpoint is lowering risk of our ability to make sure we execute in delivery. And from John's standpoint, you have a little bit of a bloom in revenue due to that program. Similarly, when we look at the Navy side of our business, we help enable super ships that protect and expand the current capabilities of naval fleets. So today, we offer Ship Protection Systems and are currently focused on putting into place the capabilities to deliver on our backlog for LPD 28 and LPD 30. We do see more orders coming, not only for LPD, but we hinted at more as well. In the future, we do look forward to offering power delivery systems within the ship in addition to power generation at main ship electric propulsion. In conclusion, what we've done here is we've transitioned our revenue mix towards what we believe is a more predictable recurring revenue base by growing Grid business. We've achieved year-over-year revenue growth without Inox. Our effort to diversify our business towards Grid is really working. To be clear, we're going to continue to support our wind partners in South Korea and India, with the objective of growing both, our onshore and offshore wind business. We're executing against our goals, and that's really to the credit of our employees' hard work and dedication. And John and I look forward to reporting back to you at the completion of our fourth fiscal quarter of 2019. Thank you, everyone.

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