Good day, and welcome to the American Superconductor Fourth 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, Shelby. Good morning, everyone, and welcome to American Superconductor's Fourth Quarter and Full Fiscal 2019 Earnings Conference Call. I am John Heilshorn of 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 fourth quarter and fiscal -- full 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 Relations 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, 2020, which the company filed with the SEC on June 2, 2020, 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 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 gain on sale of interest and minority investments, stock-based compensation, gain on the China settlement, net amortization of acquisition intangibles, changes in fair value of warrants, other noncash or unusual charges or items and the tax effect of adjustments calculated at the relevant rate for the company's non-GAAP metrics. 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 China settlement and other unusual cash flows or items. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures can be found in the fourth quarter and full fiscal 2019 earnings press release that the company issued and furnished 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 at www.amsc.com. With that, I will now turn the call over to Chairman, President and CEO, Daniel McGahn. Daniel?

Thanks, John, and good morning, everyone. To start the call off, firstly, I hope all of you and your families are safe and healthy. I know this is a challenging time that we're living through. But we're going to start and focus on the good results that we were able to deliver in fiscal 2019, which ended March 31, 2020. John Kosiba will then provide a detailed review of our financial results for the fourth quarter and the full fiscal year of 2019. He will also provide guidance for the first quarter of fiscal 2020, which will end June 30, 2020. And following our remarks, we'll open up the line for questions from our analysts. In fiscal 2019, AMSC grew its Grid business by nearly 45%. This far exceeds our own expectations and is a testament to our team's execution. Full year revenues for the entire AMSC business increased by about 14% year-over-year, driven by the growth in Grid. We generated positive operating cash flow in the fourth quarter of fiscal 2019 and ended the year with a cash balance of over $66 million and no debt. We finished the fiscal year with a strong balance sheet and a record backlog in Grid. We believe this is particularly important in these challenging times, and I'll get to this shortly. But to date, we have not missed a beat in manufacturing. In fiscal 2019, we generated year-over-year revenue growth from each of our Grid product lines. We announced over $40 million of our dynamic VAR compensator, or D-VAR, orders. We built and delivered our Volt/VAR Optimizer, VVO product, to several key customers, which we believe many will develop into recurring business. We announced that the Department of Homeland Security approved the scope of our Resilient Electric Grid project, which we call…

Thanks, Daniel. Good morning, everyone. Total revenues for the fourth quarter of fiscal 2019 were $18.1 million, this is an increase of 24% compared to the year ago quarter of $14.6 million. Grid business revenues' up $13 million, increased by 19% versus the year ago quarter while our wind business revenues of $5.1 million, increased by 42% versus the year ago quarter. Moving on to the full fiscal year, we experienced year-over-year revenue growth of 14% with $63.8 million in total revenues for fiscal 2019. This is up from $56.2 million in fiscal year 2018. Grid business revenues increased 45% in fiscal 2019, driven by revenue growth in all 4 Grid product lines versus the prior year. Grid business revenue surged to represent 78% of total fiscal 2019 revenues. This marks the fifth consecutive year of Grid revenue growth. Wind business revenues decreased 35% in fiscal 2019, primarily as a result of reduced ECS shipments to Inox. This was partially offset by increased ECS shipments to Doosan Heavy Industries for their 5-megawatt class offshore wind turbine. Gross margin for the fourth quarter of fiscal 2019 was 13.9% compared to 18.9% in the year ago quarter. The decrease in gross margin was primarily a result of the lower contribution margin associated with the cost share agreement between AMSC, DHS and ComEd as well as a less favorable product mix within our wind segment. For the full fiscal year 2019, AMSC generated gross margins of 15%. This is down from 25% in fiscal year 2018. The year-over-year decrease in gross margin was primarily a result of the lower contribution margin associated with the cost share agreement between AMSC, DHS and ComEd. Additionally, during fiscal 2018, Inox revenue accounted for approximately $19 million, which positively impacted both revenue and contribution margins for that…

Thanks, John. In fiscal 2019, our Grid business performed again. Grid revenue grew by nearly 45%, driven mainly by D-VAR. Our D-VAR business is supported by a strong base of projects in the renewable and industrial segments as indicated by the composition of our record backlog. We are growing and diversifying revenues. A couple of calls ago, we mentioned not only pursuing new industrial customers, but also a focus on top-tier wind turbine manufacturers. And you can see this in the quarter with a new 10-plus percent customer name. We anticipate that we will begin to see recurring customers for our VVO product. We are delivering VVO to the market, and our pipeline is developing very nicely. Our growing list of repeat customers is a testament to the quality and performance of AMSC's products and people. To date, the pandemic has not materially affected our Grid business. We are focused on supporting our customers' needs and maintaining a timely flow of product from our factory to the customer site. We are focused on keeping our people safe and productive. Our manufacturing team is performing very well. We anticipate that the D-VAR business should provide a strong base of Grid revenues well into fiscal 2020. This expectation is driven by the strong backlog that we have for D-VAR as well as the overall Grid business. We don't see a dip in our pipeline. So qualitatively, as of June 3, our business does not show a slowing. But that doesn't mean we won't see future projects pushing out, and we don't know the impact to the markets we serve in the coming months and year. We are focused on what we can control. Fiscal 2019 was an important year for REG. DHS approved the scope of AMSC's REG project with Commonwealth Edison,…

[Operator Instructions] And we'll take our first question from Jed Dorsheimer with Canaccord Genuity.

I was just wondering, Dan, maybe you could dig into -- or you could elaborate on the value proposition. It sounds like COVID has actually -- well, if we look at COVID and we look at what it does to -- or the vulnerability associated with the Grid. I was wondering if you could talk about how perhaps the value proposition for your product and the D-VAR is shifted is a recognition of the vulnerabilities that we face. And then same question over on the Navy side of things.

Thanks, Jed. I think that what we see in acceleration of D-VAR really goes back to last year with the large orders that we were able to bring in. What we tried to signal was we see some acceleration in some markets, really because customers and projects are concerned about their access to their labor, and they like to get things done as quickly as possible where they still have access to that labor. I think if you think longer term, I do think a lot of the macro market trends that are affected, I think electricity becomes more critical. I think that everything that we're seeing in the market means that connecting wind and protecting ships are going to matter more in the coming years, not less. But the acceleration in the orders really was through the great work that the team did in 2019.

Got it. And you mentioned several times on the call about the strong backlog. I was wondering if you could define that a bit, just so that we understand what you consider strong to be.

Well, when we look at what we're trying to book in the way of orders, we're further out in time than any time I've been here. So we are a quarter or 2 ahead of realizing the orders compared to where we probably were in past years. We don't really break out the backlog by product line, but we kind of hinted it strongly with saying that we're able to deliver $40 million of new orders last year. There is some book and burn that comes out quarter-to-quarter. We've talked about typically with D-VAR, we're looking to book orders out, say, 6 months. We are seeing customers that are now looking at orders that have delivery dates beyond 1 year. So when we look at our pipeline, we're comforted by the fact we don't see the business slowing, but I really can't help to think what's going to happen in the fall. We do have an election coming up. I don't know what will happen in the winter. What have we reported as an aggregate backlog in the K, John?

$61 million of 12-month performance obligations.

So did you hear that, Jed? So $61 million is what we reported for the backlog for what we believe will be recognized in fiscal 2020. Why we say, we believe is one of the challenges always with the backlog has been dealing with Inox. We have to make what we think is an educated guess based upon their payment history and what they're showing us for forecast and potential projects on what revenues we might have in there. But obviously, you're seeing a shift by the company more to Grid and growth through Grid.

And we'll take our next question from Eric Stine with Craig-Hallum.

So I just wanted to start with wind because it was actually quite a good quarter there. I mean given your commentary on Inox, where they stand, I mean, should we take that as pretty much all being Doosan? And then just curious, your thoughts on, I know that the remainder will be executed in fiscal '20. I mean, should we assume, based on project schedules, that that's more front-end loaded? And then just thoughts on the potential, given your outlook in that market, the potential for a follow-on order?

Yes. I think your estimation that we're going to continue to deliver this -- we started in Q3 lightly and then a little more in Q4. We did report really 3 customers that were greater than 10%. Those were a key electrical contractor that helps us with industrial D-VAR installations. They were Siemens, which is a new name for us, and Doosan. So Doosan becomes a bigger portion certainly of our wind revenues. In the case of Siemens, that's for a Grid product, specifically for D-VAR. I don't know what's going to happen in the market with Korea, but they seem to be focused on continuing to execute and build these wind farms. They've identified a few more hundreds of megawatts they want to go build, and they have very aggressive targets. And as I said in the prepared remarks, we haven't seen signals or signs at Doosan yet that Korea is slowing, but who -- we haven't been through this before with a pandemic, at least not in my lifetime. So I can't tell you what the turns and twists are going to be. Given their demand profile, it would lead you to believe logically that there'll be another order coming in the next whatever quarters or year or so. But I can't guide you to that. I can't confirm that. I don't know if that's going to happen or not, but the pacing that they're talking about would imply you're going to see continued order traction with Doosan going forward.

Yes. And Eric, if you look at the K and you look at the percentage of revenue of Doosan was in Q4, you can see it was the majority of the wind revenue, to answer your question directly.

Okay. Yes. Perfect. And then maybe just sticking with wind, I mean, obviously, some uncertainty or quite a bit of uncertainty on Inox. But it does sound like, I mean, there is some movement, at least on the ground in terms of getting through that inventory. I mean, I guess I don't want to necessarily pin you down, but I mean, is this something that you -- where does your confidence stand in terms of getting this resolved and then being in good [ terms ] for the quarter…

Oh our confidence is [indiscernible] Yes. I mean our -- we work very closely with Inox as a company. We have great respect for them. We understand they've been through a lot of things. I think the good signs that we're seeing is they're out commissioning turbines, which means they're consuming inventory, which bodes well for their need for future inventory from us, which we think is good. It also bodes well for them from a cash standpoint. The fact that they're working and they're being able to collect means that they have cash flows that they can then flow back up the supply chain. So we want to help them as best we can, but we want to be clear. We're going to receive payment, then we're going to do our work and then we're going to deliver. And that's the message we've delivered to Inox, and that's the message we've consistently delivered to you all for the past many quarters.

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

This is Kristen on for Colin. So just wanted to follow-up on some of your comments about gross margin, and I appreciate that you've called out some of the cost-sharing agreement there. But can you talk about what that looks like on a like-for-like basis? And I appreciate that you don't break that out by segment, but just maybe some commentary on how that's trending within Grid versus wind? That would be helpful.

Yes. Why don't I talk to kind of high level what we see happening in the business, so you kind of get the -- and everybody gets kind of the machine that focuses on margin, I made -- in the comments, we're focused on margin. And then, John, if you want to get into specifics. But we have a couple of things happening, right? So as we have waning revenue in wind, which is a very mature business, which we have good contribution margin typically from, you have basically an idling or slowing of that business, where you're not doing a whole lot. That certainly impacts margin. That's also coupled with kind of 2 factors in Grid. You have a series of new products that we're launching that need to get to a certain scale to start to contribute similar contribution margins as the more established product. So specifically, when we look at SPS, and then we look at REG, certainly has an impact. We designed the program in a way where we believe that we would see positive cash contribution. The way the accounting works, you're able to ascribe not only direct product costs, but also overhead related costs to some extent with the government accounting. So we're kind of looking at it differently, but it does be -- present a near-term drag, it is a cost share program, which means that we're sharing our costs between the 3 parties. It isn't a typical commercial order that we would hopefully see in the future for REG. So you have the wind effect, you have the launching of the SPS effect and then you have a cost-sharing program with REG. Those are kind of the 3 dials. Just being accountant.

Kristen, I think you nailed it. On both -- we don't disclose gross profit by operating unit. But what I can tell you is both business units have seen a reduction in gross profit year-over-year. And for the exact reason, as Dan said. On the wind side, that's heavily driven by the reduction in revenue from Inox. I mentioned in my script, it was about $19 million of revenue in last year. We've told you this year that Inox is less than a 10% customer. So you know it's less than $6 million for the year. So at a minimum, we've lost at least $13 million of revenue from Inox year-over-year. And then you can do the math. And then on the Grid side, I think Dan did a good job explaining the Grid bridge.

We think the margin issue -- it's temporary. It's something that this plan -- there's a bit of investment towards the future and the growth that we want to deliver. We're focused first are growing that top line, getting the beachhead in these new markets. And then we believe, and we're working hard to make sure that, that margin comes. We know it's what we have to do. We have to deliver not only revenue growth, but we have to deliver earnings and earnings growth. And we are maturing to that kind of business here over the next year or years.

We'll take our next question from Philip Shen with ROTH Capital Partners.

The first one is on VVO. You talked about, Dan, more repeat customers. I was wondering if you might be able to give us a little more color on that, specifically, how much do you think VVO as a segment could grow year-over-year in fiscal ‘20. And then how much of that business from a mix standpoint, do you think could be repeat customers? Is it more than 50% or do you think you're still sub 50%, for example?

Well, on the VVO front, kind of, again, go back kind of high level spiritually. We're trying to continue to frontier with new customers, identify project where it's a compelling, interesting approach because it's new for a lot of distribution utilities to think this way. And then what we see typically is once we get them doing their first project, we are seeing the beginning of some recurring business. So I think we're optimistic. I think we think 2020 is an important transition year for VVO to go from kind of first projects with initial customers to recurring projects with those same kinds of customers. But also continuing to pioneer into new projects with new customers. I don't really know how big VVO can get within a year. I think we have a good sense that we're trying to prepare to be able to manufacture more. It's hard to say. Is the rate-limiting step going to be orders or capability to deliver? We're trying to modulate both. But I feel, in 2019, what we learned are the feature set that we're presenting to the market, we think, is right. We think it's highly valuable. We think we've been able to identify not only distributed generation-type projects, but also similar to how we sell D-VAR industrial projects as well. So it's hard for me to say, Phil, because we don't guide things by product, but we do see certainly potential strengthening for VVO. We're trying to put the things in place to be able to manage that if that comes here in 2020, but certainly should come in the next year or so.

Great. And shifting to D-VAR. You mentioned Siemens being a more than 10% customer now. Can you give us a little bit more color on the relationship there? How -- or whether or not that's repeat business? Do you see the end markets that they're operating in on the -- on behalf of D-VAR being a steady driver of business over time?

I think the simple answer is yes. I think what we've seen is that we have a very unique offering. We provide some feature sets that aren't in the turbine. That's kind of general how we look at it. And I think we've done a good job in selling strategically where some of these top-tier wind guys are going. We can help them get there in a way that's very cost effective for a lot of these emerging markets for them. And I can't guarantee there'll be recurring revenue with Siemens, but at least all indications show that there is a long-term potential business to be developed there. We've talked about Vestas in the past and how we've been able to develop that. I think it really just shows the ability for the team to diversify the customer base, the markets we serve and really the applications and the value that we're delivering. That bodes very well, we think, overall for D-VAR. All indications show, we have a very nice runway here with D-VAR, not just for 2020, but beyond.

[Operator Instructions] And we have no more questions in the -- oh, we do have -- no more questions in the queue at this time.

Great. Thanks, Shelby. I really appreciate everybody's time and attention. I know we're in a weird situation. It's very different to think about waking up and worrying about virus and violence. We're in a different place. I think with our families and what we're focused on, we try to focus as quickly as we could on our people and the flow of our product to our customers. We focused initially on safety, and I think those are things that are going to help us. I don't know how this virus part's going to turn over the coming months or quarters. We've tried to be proactive to get in front of it. We've tried to make sure that we're staying resilient and vigilant to hygiene and a lot of the protocols that we've put in place. We need our people to be able to deliver our results. It's not just John and I. I mean we're really kind of chief cheerleaders in all this and thinking longer term. As long as our people are safe and healthy, I think we'll keep seeing the progress that we're making in the market. I think one of the key points I want people to leave the call with is we did grow Grid, but we grew it more than even we anticipated ourselves. Analysts always want to ask and sometimes large shareholders want to ask, well, how much do you think it can grow? And we always struggle with when we say something, I see it as a promise, John sees it as a promise and we throw a number out. But when we looked at what we thought the business could deliver, we're ahead of where we thought we can be. I think we're in a great position given the backlog and the…

This concludes today's call. Thank you for your participation. You may now disconnect.