WORCESTER May 31, 2016 (Thomson StreetEvents) -- Edited Transcript of American Superconductor Corp earnings conference call or presentation Tuesday, May 31, 2016 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brion Tanous American Superconductor Corporation - Manager of IR * Daniel McGahn American Superconductor Corporation - President & CEO * David Henry American Superconductor Corporation - EVP, CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Carter Driscoll FBR Capital Markets & Co. - Analyst * Jeff Osborne Cowen and Company - Analyst * Amit Dayal Rodman & Renshaw - Analyst * Zach Houston Footprints Asset Management and Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone, and welcome to AMSC's fourth-quarter and full fiscal year 2015 conference call. This call is being recorded. All participants will be in a listen only mode until we reach the question-and-answer session. With us on the call this morning are AMSC President and CEO Daniel McGahn, Executive Vice President and CFO David Henry, and Manager of AMSC Investor Relations Brion Tanous. For opening remarks, I would like to turn the call over to Brion Tanous. Please go ahead sir. -------------------------------------------------------------------------------- Brion Tanous, American Superconductor Corporation - Manager of IR [2] -------------------------------------------------------------------------------- Thank you, Tim, and welcome to our call to discuss our fourth-quarter and full fiscal year 2015 results. Before we begin, I would 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 the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the risk factors section of our annual report on Form 10-K for the year ended March 31, 2016, which we filed with the SEC earlier today and subsequent reports that we have filed with the SEC. These forward-looking statements represent our expectations only as of today and should not be relied upon as representing our views as of any date subsequent to today. While AMSC anticipates that subsequent events and developments may cause the Company's views to change, we specifically disclaim any obligation to update these forward-looking statements. I would also like to note that we will be referring on today's call to non-GAAP net loss or net loss before gain on the sale of interest and minority investments, stock-based compensation, amortization of acquisition-related intangibles, restructuring and impairment charge, consumption of zero cost basis inventory, change in fair value of derivatives and warrants, non-cash interest expense and other unusual charges net of any tax effects related to these items. Non-GAAP net loss is a non-GAAP financial metric. A reconciliation of our non-GAAP to GAAP net loss can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our press releases and SEC filings can be accessed from the investors page of our website at www.AMSC.com. With that, I like to turn the call over to CEO Daniel McGahn. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Brion. Good morning, everyone. I'll begin today by providing an overview of our financial results for the fourth quarter and full year of fiscal 2015 which ended March 31, 2016. Dave will then provide a detailed review of our financial results and guidance for the first fiscal quarter which will end June 30, 2016. Following Dave's comments, we will provide an overview of our activities and goals for fiscal year 2016. After that we will open up the line to your questions. Fiscal 2015 was a great year, the best year in some time. It was a year of strong revenue growth and improved financial health for our Company. We grew revenues by more than 35% year over year as a result of strength in both our grid and wind businesses. Our gross margin of 23% for fiscal year 2015 was the highest corporate gross margin for the Company since before the events with China. Lastly, we generated cash from operations in the second half of fiscal 2015. The efforts that the Company has undertaken over the past several years are starting to bear fruit. Part of our strategy for growth has been to increase our engagements with electric utilities and the U.S. Navy. Both of these markets expect a long-term commitment from their vendors. The additional capital we raised in fiscal 2015 and our recent financial performance are expected to enable us to focus our conversations with electric utilities and the U.S. Navy on our solutions and their benefits and not on our balance sheet. I am personally very proud of the work and effort put forth by our employees. Fiscal 2015 was a great year of growth in our grid business. We grew grid revenues by over 40% year over year as a result of strong D-VAR bookings throughout the year. Importantly, our D-VAR business gained momentum in all three of our target markets for the product line. We also advanced our Gridtec initiatives related to our resilient electric grid or REG product in Chicago while our work with U.S. Navy on our high temperature superconductors or HTS-based Ship Protection Systems advanced on a number of fronts which I will discuss later on this call. Our wind business grew by 34% year over year in fiscal 2015 as a result of our largest customer, Inox Wind. Recently, Inox announced the commissioning of nearly 900 megawatts of wind turbines during their fiscal year which ended March 31, 2016. All of those wind turbines include our electrical control systems or ECS. In December 2015, we expanded our relationship with Inox announcing a $210 million set of strategic agreements with them. These agreements include a long-term supply contract for our 2 megawatt ECS product and a preferred supplier arrangement for our 2 megawatt ECS with shipments expected for three years beyond the completion of deliveries under the supply contract. In addition, AMSC will collaborate with Inox on the design for Inox's next-generation wind turbine for the wind power market in India which is expected to be a 3 megawatt design. I'll have additional comments regarding our relationship with Inox in a few minutes. Our results in fiscal 2015 are something I am and our employees are proud of. On that note, I'll turn the call over to Dave to discuss our financial results for the fourth fiscal quarter and full fiscal year 2015 in greater detail. Dave. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Dan, and good morning everyone. AMSC increased its revenues to $27.5 million for the fourth fiscal quarter compared to $25.1 million in the year-ago quarter. Fourth-quarter revenues grew by 10% year over year due primarily to higher grid segment revenues which represented 28% of fourth-quarter and fiscal year 2015 revenues. Revenues in our grid segment in the fourth quarter included $3.2 million recognized under the agreements with BASF. This included $3 million under the license agreement which was paid and recognized in full in the fourth quarter and $200,000 recognized under the joint development agreement. We were paid the first installment of $2 million under the joint development agreement in the fourth quarter. The remainder of this payment was recorded as deferred revenue and will be recognized as revenue ratably through the third quarter of fiscal 2016. The growth in grid revenues was partially offset by a modest decline in revenues in our wind segment. Revenues from our wind business were down 5% year over year and represented approximately 72% of total revenues for both the fourth-quarter and fiscal year 2015. During the fourth quarter, we received $6 million which represents the upfront payment under the Inox license agreement. As we discussed during last quarter's call, revenue under this license agreement is being deferred and will be recognized once our obligations under the license agreement have been completed. We are not expecting to record any revenue under this license agreement in fiscal 2016. For the full fiscal year, we increased revenues by 36% to $96 million compared to $70.4 million in fiscal year 2014. Fiscal year 2015 grid revenues increased 41% year over year while wind segment revenues increased 34% versus a year ago. 12-month backlog at March 31, 2016 was approximately $89 million compared with $41 million at March 31, 2015. The increase in backlog is primarily the result of the long-term supply agreement we completed with Inox during the third fiscal quarter as well as a stronger D-VAR backlog compared to a year ago. Looking at the P&L in more detail, gross margin for the fourth fiscal quarter was 33.6% which compares with 6.5% in the fourth quarter of fiscal 2014 and 25.6% in the previous quarter. The year-over-year increase in gross margin in the fourth quarter was primarily due to higher revenues including the BASF license revenue which was recorded at 100% margin. In addition, gross margin in the fourth fiscal quarter benefited from improved mix and factory utilization which helped to offset a reduced gross margin benefit as a result of using less previously written off inventory compared to the prior-year period. Normalized for the BASF license revenue, which will not recur, gross margin in the fourth fiscal quarter was 25.4%, flat compared to the third quarter. For the full fiscal year, gross margin was 22.9% compared to 4.4% in fiscal 2014. As we have previously discussed, a negative gross margin is associated with our superconductors product line. To build upon my gross margin comments from last quarter, if our superconductor gross margin were zero for the full fiscal year, gross margin for the Company for fiscal 2015 would have been in excess of 30%. This is why we are so focused on achieving commercial success for our REG and Ship Protection System products. R&D and SG&A expenses for the fourth quarter were $10.9 million. This was up from $8.6 million for the same period a year ago. In a year-ago period, SG&A expenses included a benefit of $2.2 million related to the reversal of previously accrued legal expenses associated with the settlement of a dispute with a former insurer. Excluding the $2.2 million reversal of legal expenses in the fourth quarter of fiscal 2014, R&D and SG&A expenses would have been approximately $10.8 million or roughly flat compared with fourth-quarter fiscal 2015. Approximately 12% of this R&D and SG&A spending in the fourth fiscal quarter was non-cash. Below operating loss in the fourth quarter we incurred a mark-to-market loss on our outstanding warrants of $600,000 due primarily to an increase in stock price which is a key valuation metric. In addition, we incurred an FX translation loss of $1.3 million which is included in other expense driven primarily by the strengthening euro in the fourth quarter. Offsetting these items we recorded a $600,000 gain in the fourth quarter from the sale of our minority investments. This included a $300,000 gain from the receipt of additional proceeds from the sale of our investment in Blade Dynamics. In addition, we recorded an approximately $300,000 gain from the sale of our minority investment in Tres Amigas in the fourth quarter. The total sale price is $650,000. The remaining proceeds are expected to be paid once certain financing conditions are met. This investment was fully written off in a prior period. Our net loss in the fourth quarter of fiscal 2015 was $3.4 million or $0.25 per share. This is flat with $3.4 million or $0.36 per share in the year-ago quarter. As I mentioned previously, the year-ago net loss included a gain of $2.2 million related to the reversal of legal expenses associated with the settlement of a dispute with a former insurer as well as a gain of $1.2 million related to the final settlement of an arbitration proceeding with a former customer. For fiscal year 2015, we cut our net loss in half to $23.1 million or $1.76 per share compared to $48.7 million or $5.74 per share in fiscal 2014. Our non-GAAP net loss for the fourth quarter of fiscal 2015 improved by 40% to $3.8 million or $0.28 per share compared with $6.4 million or $0.69 per share in the year-ago quarter. For the full fiscal year, our non-GAAP net loss decreased by 34% to $26.3 million or $1.99 per share from $39.6 million or $4.67 per share in fiscal 2014. Please see our press release issued this morning for a reconciliation of GAAP to non-GAAP results. We ended the fiscal year with $40.7 million in cash, cash equivalents and restricted cash. This compares with $37.7 million as of December 31, 2015. So we were cash positive not only for the quarter but also for the second half of the fiscal year as well. Fourth-quarter cash was aided by the cash received under the license agreement with Inox and the agreements with BASF. Excluding these proceeds as well as those from the sale of our minority investments cash burn in the fourth fiscal quarter would have been approximately $8 million due to cash required for working capital to support our ECS manufacturing ramp in Romania as well as debt service and CapEx. Operating cash flow in the fourth quarter was a positive $3.3 million driven by the Inox and BASF payments I previously discussed. As of March 31, 2016, the principal balance of our debt arrangements excluding the debt discount was $4.2 million compared with $5.2 million as of December 31, 2015. The debt represents two term loans with Hercules Technology Growth Capital. The first term loan has a remaining principal balance of $2.7 million and matures on November 1, 2016. The second term one has a remaining principal balance of $1.5 million. We are paying interest only on a monthly basis until maturity on June 1, 2017 when the entire outstanding amount will be repaid in full. Turning to our financial guidance, for the first fiscal quarter of 2016, we expect that our revenues will be in a range of $12 million to $14 million. The lower revenue in the first fiscal quarter is due primarily to seasonally lower revenues in our wind segment, Inox in particular, as well as license revenues from BASF in the fourth quarter which will not recur. First quarter is historically the weakest quarter of the year for shipments to Inox. For the first quarter of fiscal 2016 the seasonality is being compounded by what has been described by Inox as a near-term working capital constraint. Based on our discussions with our customers, we expect our wind revenues to return to a more normal level in the second quarter. Continuing with our guidance, the lower revenues are expected to result in a sequentially lower gross margin in the first quarter. As a result, we expect that our net loss for the first fiscal quarter will be less than $13 million or $0.94 per share. Our non-GAAP net loss for the first fiscal quarter is expected to be less than $12.5 million or $0.90 per share. With respect to cash, collections have been strong thus far in the first quarter. And as a result we expect to end the first fiscal quarter with a balance of cash, cash equivalents and restricted cash greater than $35 million. With that, I'll turn the call back over to Dan. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [5] -------------------------------------------------------------------------------- Thanks, Dave. At the beginning of fiscal 2015, we identified three discrete business objectives that we anticipated would provide a foundation for sustained growth and market expansion of our products: one, generate new orders for our D-VAR system; two, announce an additional city exploring the deployment of our resilient electric grid or REG system; and three, receive a new large wind order. Our first objective was to generate new orders for our D-VAR product. On that front, we were very successful. During fiscal 2015, we received approximately $28 million of new D-VAR orders from customers in South Africa, Australia, Asia, the United Kingdom and North America. And we continue to see elevated levels of quote activity in all areas of our business. In fiscal 2016, we plan to continue to pursue opportunities for our D-VAR product in three key market applications: renewable energy interconnectivity, grid support for electric utilities and power quality for industrial applications. As a result of continuing tax incentives in the US and the climate change accord in Paris, we expect the renewable sector to remain healthy in our targeted geographies while we focus our efforts on developing a strong utility and industrial pipeline for our D-VAR products. We executed on the orders front and we executed operationally as we ramp D-VAR production here in Massachusetts in fiscal 2015 after transitioning our manufacturing from Middleton, Wisconsin. We are very proud of how well this transition took place. The second objective we identified for fiscal 2015 was to announce an additional city exploring the deployment of the REG system. During the year, we announced Washington DC's Pepco was undertaking a deployment study of our REG system joining utilities in Chicago and Boston. Recall that our resilient electric grid system product was launched in conjunction with the Department of Homeland Security or DHS' Science and Technology Directorate to secure the nation's electric power grids and improve resiliency against extreme weather, acts of terrorism or other catastrophic events. Our work with Commonwealth Edison or ComEd, a unit of Chicago-based Exelon Corporation and one of the nation's largest electric utilities, continued in fiscal 2015 under our approximately $60 million cost-sharing arrangement with DHS. In November of last year, we announced that DHS allocated $3.7 million in addition to funding of $1.5 million previously authorized under the contract. Since that time, we have been performing work under this modification which serves as a bridge between the detailed deployment plan and next phases of the project in Chicago and enables us to procure certain long lead time equipment and complete certain engineering work on the project. Our third and final objective was to book a large wind order. We not only booked a large wind order in fiscal 2015, we booked multiple large wind orders. We announced approximately $250 million of new orders in India. In August 2015 we announced a $40 million follow-on order for our ECS from our largest customer Inox. As I mentioned earlier we entered into the $210 million set of strategic agreements with Inox in December 2015. We look forward to helping Inox to repeat their success of their 2 megawatt wind turbine with their next wind turbine product. As I mentioned earlier we have been selected by Inox to provide the design for Inox's next-generation wind turbine for the wind power market in India which is expected to be a 3 megawatt design. We expect to complete this license agreement before the end of fiscal 2016. We met all our objective for fiscal 2015. And we grew the business by 35%. However, we face a near-term challenge heading into 2016. Our revenues from Inox are historically softer in the first quarter but the seasonality is being compounded this quarter by what has been described by Inox as a near-term working capital shortfall as Dave mentioned earlier. We realize part of their working capital challenges are a result of the technology license payments and initial payment from the supply contract. These are both one-time events. Inox is a significant customer and we want to help them in any way that we can. But we have learned from the past and we will not expose the Company financially in the same manner that happened back in 2011. One of those lessons learned is to meet our contractual obligations and insist our customers do the same. While Inox has been and continues to be a reliable partner we also know from past experience to be cautious on our forecast for deliveries to them until they signal that they are ready to pay. An example of our resolve is the requirement to make an advance payment under the new supply contract. While Inox has made the upfront payment required under the license agreement they have not made the advance payment required under the supply contract. Recall that our obligation under the license to deliver technical information to Inox is predicated on the making the required upfront payments under both the license agreement and the supply contract respectfully. As a result, we have not transferred any technical information to Inox and will not do so until they have complied with the terms of the contract. We have also not shipped any product yet under the new supply contract and we will require compliance with the payment terms of the contract before doing so. Inox continues to report a robust backlog and we expect that their working capital constraints will be resolved in the near-term. They have given us assurances of exactly that. These near-term issues than Inox is facing demonstrate the importance of diversifying our revenues and successfully launching our new products for the grid and for the Navy. Speaking of that, let's turn to our Ship Protection System products. AMSC has been collaborating with U.S. Navy on HTS-based equipment for a number of years. We made significant strides with regard to our deployment roadmap with the U.S. Navy during fiscal 2015. In May 2015, we announced that the U.S. Navy awarded AMSC with a contract worth up to $8.5 million to provide Ship Protection System equipment. We expect to deliver on a portion of this contract before the end of fiscal 2016. We enter fiscal year 2016 engaged on a number of other fronts with the Navy with regard to the potential deployment of our HTS products into the fleet. Our efforts with the Navy in fiscal 2016 will focus primarily on Ship Protection Systems in addition to the development of HTS components for onboard power systems. There are several paths to getting our Ship Protection Systems deployed on a ship. The system could be retrofitted onto a ship or the systems could be designed or forward fitted into new ship designs. We believe the best near-term market opportunity is for the Navy to order an engineering change to a new ship being built with an existing design. We are focused on this third path. We like the business because it has the potential to be an annuity-like revenue once we are designed into a ship. The value of a Ship Protection System varies depending on the size of the ship. The expected revenue from a small ship such as a littoral combat ship can be anywhere from $3 million to $5 million, a medium ship such as a destroyer or an amphibious assault ship from $5 million to $15 million and a large ship such as an aircraft carrier from $20 million to $25 million. Also note that our Ship Protection System components can be used in additional Ship Protection System application in development, potentially increasing the pathways to deploy a version of the product by opening up the retrofit path. The potential value of this alternative application could be on the order of $5 million per ship. To this end, we expect to deliver a beta version of the second Ship Protection System product to the U.S. Navy and begin qualification efforts during fiscal 2016. It's important to note that our technology is appropriate for other applications for naval ships. Beyond Ship Protection Systems we see the potential for a long-term relationship with the Navy. These applications include power and propulsion in addition to protection equipment. In fiscal 2015, we established a relationship with the Navy to develop HTS power cable hardware for shipboard power applications. Work will continue on this project during fiscal 2016. The Navy has publicly said that HTS is an enabling technology in its path to create an all-electric ship. We believe Ship Protection Systems provide an opportunity for the Navy to get comfortable with the technology prior to larger scale adoption of other HTS components for application such as power and ultimately propulsion. Finally, in March of this year, we announced that we entered into a set of agreements with BASF including an agreement to jointly develop an advanced low-cost manufacturing process for second-generation HTS wire. These agreements with BASF align perfectly with our strategy of creating value beyond the wire. Developing a lower-cost HTS wire could have significant margin benefits and is expected to enhance our ability to create value through a total systems approach to marketing our HTS-based products. We look forward to updating you on our joint development agreement with BASF over the coming quarters. In summary, I am very pleased to report that our team here at AMSC not only accomplished our objectives for fiscal 2015 but they delivered results beyond my expectations. I would like to personally thank our employees for their hard work and dedication. Their hard work is paying off. We entered fiscal 2016 with a stronger balance sheet to enable us to continue to execute on our plans. With that in mind, in fiscal 2016 we aim to one, complete a license agreement with Inox for a 3 megawatt wind turbine design; two, generate continued growth in our D-VAR business; three, complete the $3.7 million phase of our REG program with DHS and enable a decision on the program's next steps; four, deliver the beta version of a second Ship Protection System product and begin qualification efforts for this product with the U.S. Navy. We are keenly focused on the creation of a sustainably profitable and positive cash flow business. I look forward to reporting to you again following the completion of our first fiscal quarter of 2016. Now we would like to open up the line to your questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Carter Driscoll, FBR -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [2] -------------------------------------------------------------------------------- Congratulations on reaching cash flow positive generation second half of the year. I know that is a big accomplishment, so just wanted to say that first off. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [3] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [4] -------------------------------------------------------------------------------- Starting off with Inox, it sounds like there isn't a change to the relationship, rather that you're holding them to the original parameters of the agreement you signed in December. Is that a fair characterization or is --? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [5] -------------------------------------------------------------------------------- Yes I think that's accurate. The point we are trying to make is we understand that they have some challenges within their business and we want to support them and one of the challenges we are actually placing on them. We have the $6 million that were paid for the technology, the $2 million up front on the next contract. Those are obviously single point events for them and cause additional constraints in working capital. We really wanted to try to go back to the events of 2010 and 2011. One of the challenges or risks that were in the business is we were shipping product at that time under open credit and in the case with the Inox contract, everything must be paid in advance under a letter of credit. There also is this advance payment to get the contract rolling and that hasn't been yet paid. So we've gotten assurances from Inox that that will be paid. We've got assurances from Inox that this is a temporary situation. And although our projections are a bit weak we think this is the right thing to do for Inox, the rating to for our business and the right thing to do for risk to our shareholders. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [6] -------------------------------------------------------------------------------- But they have communicated to you, just a follow-up, that they believe that it should return to a more normalized path assuming they make the payment starting in the June quarter. Is that the way you think about it right now? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [7] -------------------------------------------------------------------------------- Yes, I think we're really focused on the second quarter. We see what their demand is and the demand forecast that they are providing to us is in line with normal levels where the business has been. That may or may not mean additional growth to happen in the second half. We will kind of wait and see. Right now we want to get through the next weeks here in the first quarter, continue to be supportive of them and get that initial payment on the $200 million supply contract. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [8] -------------------------------------------------------------------------------- So to be clear, this is David Henry, to be clear, we expect that when revenues will return to a more normal level in the second quarter, so the quarter ending September. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [9] -------------------------------------------------------------------------------- That's not just seasonality but also within the parameters of the large agreement you signed in December, right? I mean that's (multiple speakers). -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [10] -------------------------------------------------------------------------------- Well, it's both. Inox's revenues are typically lower in the first quarter anyway. So for the June quarter, they're just going to be that seasonality is going to be compounded by these near-term working capital issues that they've told us they have. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [11] -------------------------------------------------------------------------------- Now, I'm just trying to frame it because typically you guys have had more spot orders from Inox over the past years and this seems to be more a stable base. Just trying to square those two. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [12] -------------------------------------------------------------------------------- No, the stability is projected to be there. They've communicated that to us. We You're really have to see this as your transferring the business from the contract that we announced, the $40 million that we announced in the summer a year ago. Now were going on to the terms of the now $200 million contract. And there's a lot of linkages to the technology transfer and it's a contract that from a risk standpoint is even more favorable to AMSC. We want to make sure that we continue to hold that to our favor. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [13] -------------------------------------------------------------------------------- Understood. You talk about, maybe just shifting gears a little bit, the potential for and maybe timing of the development agreement with BASF and maybe the magnitude of the potential cost reduction and whether that can play into negotiations. I am assuming you could deploy that with either Pepco or Eversource if it were to advance to that level of discussions and/or with the Ship Protection System. Just kind of help us think about the gross margin impact from that perspective and whether it depends in part on developing a lower cost HTS wire with BASF. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [14] -------------------------------------------------------------------------------- We can go forward with a product that we make today at the cost that we make it at today. And the way we've structured the resilient electric grid product and that way we've talked about pricing with potential future customers is around those numbers. So we can deliver with the capacity we have today. We do have CapEx requirements from a maintenance standpoint year to year but really we can go forward with the investment that we have. If we are able in the future, and that future is measured in years not quarters, there is the potential that through the collaboration with BASF we could improve the margin. We haven't said even what the margins we thought will be for REG let alone go out and try to promise what the future could be. But to give you kind of a sense, you've heard me say in the past that the value of the wire is somewhere between a fifth and a third in most applications. Make whatever assumptions you want in the ability to reduce the cost of that wire, and it could potentially present us with a boost in margin but for the cities that we are actively talking to today we are quoting based upon the wire being supplied with our current process. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [15] -------------------------------------------------------------------------------- Okay. And then just may be shifting gears over to that, can you talk about whether Eversource or Pepco, the discussions are further along and whether the scope is materially different in either situation and/or any update on other discussions you are having with utilities you could share at this point? And then lastly -- go ahead and then I'll just have a follow-up. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [16] -------------------------------------------------------------------------------- Yes, I'm looking forward to being able to announce updates on all those cities and potentially new cities. There's not anything tangibly that we want to talk about today on the call other than we continue to be in dialogue, we continue to make progress not only with Chicago but with the discussions with Boston, with Washington as well as a number of others. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [17] -------------------------------------------------------------------------------- Okay. And then just lastly, just to clarify, you did say that you hope to reach a point which you could make a decision on Phase 2? I think that was -- is that by the end of calendar 2016 or fiscal 2016? Just want to make sure I understood the timing. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [18] -------------------------------------------------------------------------------- Yes, we hope within the fiscal year. We have our marching orders from DHS with the $3.7 million of spend that's anticipated this year. That means we don't really need a decision until later in the fiscal year to continue on the timetable as ComEd and AMSC have agreed to so far. -------------------------------------------------------------------------------- Carter Driscoll, FBR Capital Markets & Co. - Analyst [19] -------------------------------------------------------------------------------- Great, I'll get back in the queue. Thanks, gentlemen. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [21] -------------------------------------------------------------------------------- Good morning, guys. Thanks for all the details so far. Dave, you mentioned that the working capital collections has been pretty solid in the first quarter, or start of the quarter here. Can you just mention or touch on -- it might be in the 10-K but I haven't had a chance to go through it yet -- on what your receivable exposure is to Inox and if they are actually current or a portion of the commentary that you had around the collections was from Inox? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [22] -------------------------------------------------------------------------------- Yes, that's the driver of the collections. We had a record number of sets that we shipped to Inox during the fourth quarter and we are seeing the collections on those receivables in the first quarter. We had -- we ended March with a little over $19 million in net receivables. But as I mentioned the way that we conduct business with Inox is much different than with -- back for five years ago with what happened in China. Letters of credit are required before we ship anything. And so those are all -- what we are collecting on are letters of credit that were entered into primarily during the fourth quarter now. And so we are realizing the benefits of those collections and there's really no issues with those collections. So with the lower revenues in the first quarter we do expect a lower receivable balance to accompany that as well at the end of the first quarter. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [23] -------------------------------------------------------------------------------- Got it, that's helpful. And just with all the moving pieces in the fiscal year you just finished and looking ahead to the current one, do you have any kind of high level expectations of cash burn for the year? How should we think about that just with the maintenance CapEx that you have? And I assume with the 3 megawatt license that you've committed to as part of your four-point plan, would there be a cash component to that as well assuming that they can (multiple speakers)? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [24] -------------------------------------------------------------------------------- Yes I think that the second half of last year we were able to -- we had these sources of cash that were non-dilutive that was nice. You had a license from Inox, you had the payments from BASF. I think from a structural standpoint what we've said in the past I think still holds true, at least at this time, where if you think of revenues around the $20 million a quarter range, at that level of revenue, we expect our burn is going to be somewhere -- burn from operations is going to be somewhere in the neighborhood of $4 million to $5 million per quarter. That is kind of where we are structurally at right now. When revenues are higher than the $20 per quarter our burn will be less. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [25] -------------------------------------------------------------------------------- Got it. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [26] -------------------------------------------------------------------------------- As you can see as we -- as revenues approach $30 million on a quarterly basis and higher you see that result fall through to our cash flows from operations. Our cash burn from operations in this last fiscal year was only $4.5 million. In fiscal 2014 it was like $32 million. But even if you back out the Inox payments and the BASF payments the burn from operations was around $15 million, less than half of what it was a year ago. So you can kind of make your judgments as to where -- but we are not guiding it today. You can make your judgments as to where they cash flow breakeven level is. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [27] -------------------------------------------------------------------------------- Got it, that's helpful. And then just a follow-up, do you expect assuming that Inox gets reengaged and everything gets set up and moving forward with no issues that as you enter the 3 megawatt contract would there be a cash component to that of a couple million bucks or no? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [28] -------------------------------------------------------------------------------- Yes, there would be payments for that and then we look towards the supply agreement and such. But we're still in the early stages of just trying to scope out what the product needs to look like. We want something that's going to be a winner for Inox in India and what they've led us to believe is they want to go bigger and so we are targeting a 3 megawatt. When we announce an agreement we will try to be as clear as we can on revenue and cash considerations, as clear as we are able to be at the time. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [29] -------------------------------------------------------------------------------- Perfect. I just had two other quick ones here. You mentioned the diversification of revenue with the REG product line and the Navy which is great. But can you just touch on what progress you expect during the year, over the next 18 to 24 months in terms of diversifying the wind revenue, in particular, away from just Inox? Are there any other markets of the world that value your technology that you could get a license, whether it's Brazil or some other part of the world? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [30] -------------------------------------------------------------------------------- Yes, I think part of it is stay tuned, let's watch and see if there's the right opportunity presents ourselves somewhere in the world. We've hinted at targeting Eastern Europe and South America. We have some activities already in D-VAR in South Africa. Those potentials are there and then we still have the relationship with JC&E, who knows what will happen there in China. But we do believe there is certainly the potential for diversification in wind. What we've tried to make sure is that we do the best job we can for Inox and they are and will continue to remain our focus. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [31] -------------------------------------------------------------------------------- Understand. And last one I had is several quarters ago you mentioned on the REG product line I believe it was in conjunction with ComEd that you had identified other applications outside of the loop of Chicago in suburban neighborhoods that had transmission constraints and whatnot and renewables integration. Is that something -- I was excited at the commentary around that because it seemed that that part of the market, assuming it could be rate base, could move faster than a giant co-sponsored, co-founded government program. Is that part of the negotiations you are having with them and other utilities or maybe my enthusiasm for that application is a bit misguided? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [32] -------------------------------------------------------------------------------- No, I don't think your enthusiasm is misguided at all. I think with Chicago the focus is the program that is ahead of us here with DHS's help. What we believe we have with the REG branch solution is something that works economically now without additional governmental support. We see constantly every week passes by, every month passes by, there are only more challenges to the grid be it blackouts or it be short length transmission projects that are constrained by either by cost or by something geographically where the REG brand solution is uniquely positioned. So we continue to be out there with utilities explaining the value and getting them to understand that. The challenge with utilities is they move at utility speed similar to the Navy moves at Navy speed. It's an unfortunate reality that the markets that our technology is most valued in are markets that do not move at very quick speeds. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [33] -------------------------------------------------------------------------------- Got it, I fully appreciate that. Just one quick follow-up. Is there any possibility that you could see REG revenue for someone beyond ComEd first? Or do these other utilities you are in negotiation with need to see someone like a ComEd deploy this and that's a validation of the technology and the hypothesis that you have? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [34] -------------------------------------------------------------------------------- Yes, I think either reality as possible. There is a probable path where we don't need Chicago to move forward with another order, particularly if the constraints are such and the value is such that it is a completely compelling solution. And, frankly, we have seen that. Really it's the speed at which utilities do their work and make decisions. They are not in a real competitive environment to improve the reliability and resiliency of their grid. These are long-term themes that utility executives are trying to be good shepherds for. And we are going to try to take advantage of any scenario or situation where we can provide demonstrable value versus conventional alternatives. And we see that every month in these discussions that we've had and even new discussions that rise up. -------------------------------------------------------------------------------- Jeff Osborne, Cowen and Company - Analyst [35] -------------------------------------------------------------------------------- Got it, thanks for all the details again. Thank you. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [37] -------------------------------------------------------------------------------- Just really quickly on the Inox issue. Could you recap for us how much Inox was part of revenues in 2015 fiscal and how much (multiple speakers)? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [38] -------------------------------------------------------------------------------- Yes, for the full year, they were 62% of revenue and for the fourth quarter 71%. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [39] -------------------------------------------------------------------------------- Perfect. And what do we expect them to contribute towards overall revenues in 2016? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [40] -------------------------------------------------------------------------------- We are not giving -- just like we're not giving for your guidance for the total Company we are not giving full-year guidance for Inox in particular. Although they themselves report a pretty strong backlog of 1100 megawatts. They have their near-term working capital challenge but presumably they've got -- they have the demand necessary to grow their business and to enable us to grow as well. So we'll wait and see here and see how things start panning out in the second quarter when Inox when we expect that the revenues will return to a more normal level. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [41] -------------------------------------------------------------------------------- So in relation to the payments for the supply contract, is there a deadline to this? Or does this continue to remain in limbo until they make a payment and then you can ship against it? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [42] -------------------------------------------------------------------------------- We are 100% of the supply. We've been 100% of the supply. As they want to have their business continue on as they want to grow their business which is their intent they are going to need to get current with all the money that's outstanding to us. So the time limit really is their own business. They can elect and choose to move all this forward. At this point they've been constrained on a working capital basis and they have not been able to do that but they gave us assurances that they will. And that as we've said we expect the second quarter to become more normal which implies that we believe that they will get current. And they've given us assurances that they will. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [43] -------------------------------------------------------------------------------- Understood. On the 3 megawatt license agreement with them, do these payment-related issues potentially push that out further if they're not able to go in for the cash to make these upfront payments, etc.? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [44] -------------------------------------------------------------------------------- Well we said with that deal we look forward to getting that done within the fiscal year. We are only two months into the fiscal year. We've got 10 months to get the situation behind us here, hopefully very quickly. And then we have many months left to try to look at the future and we know that our business is linked to Inox. Inox knows that their business is linked to ours. We have been able to work in a great spirit of cooperation. I'm very proud and very comforted by the strong relationship and working relationship that we have with the Jain family but as the main owner and operator of the company. We will get these issues behind us and we will continue to work together. -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [45] -------------------------------------------------------------------------------- So Amit, just one thing, the payment terms under the license to enable them to self supply limited quantities it is unique and you need to separate it from the rest of the business. When we license wind technology to our customers, we can structure those agreements and have structured those agreements in the past that limit their working capital effect. So I'm not as convinced that working capital constraints will drive the decision-making on when we complete a 3 megawatt with them. They talk about and they brag about the fact that they're going to do this 3 megawatt with us. So if you recall, generally the way the revenue streams work on the licenses it is a combination of payments for the technology which are generally made over a period of time and then that follows with royalty payments. So there's different ways to flex that to get the economic benefit that we are looking for. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [46] -------------------------------------------------------------------------------- We will make it work for them us and for them. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [47] -------------------------------------------------------------------------------- Understood. Was the backlog number you gave $89 million and could you give any color on what the mix of this backlog is? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [48] -------------------------------------------------------------------------------- I can tell you that of the $89 million in backlog $58 million of that is Inox. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [49] -------------------------------------------------------------------------------- Okay, got it. Thank you. That is helpful. Just the last question from me, so this power outage in Seattle, has that prompted any more conversations, any urgency in terms of your partnerships and deployment opportunities (multiple speakers)? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [50] -------------------------------------------------------------------------------- I want to say this. We are really happy that you are following us, you are studying us and you see what we see. You know us reasonably well at this point. We are very opportunistic and any opportunities that are afforded us we're certainly going to take. But I'd rather not comment any further than that. -------------------------------------------------------------------------------- Amit Dayal, Rodman & Renshaw - Analyst [51] -------------------------------------------------------------------------------- Understood. Thank you. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research. -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [53] -------------------------------------------------------------------------------- Good morning, Dave and Dan. Thank you for taking my questions and congratulations on another quarter and full year. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [54] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [55] -------------------------------------------------------------------------------- I guess, Dan, to start off with, with utilities focused on grid stability, can you just talk a little bit more on the level of demand you are seeing for the D-VAR systems from the renewables I guess in countries like Australia, you said South Africa and your other target market? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [56] -------------------------------------------------------------------------------- Yes, the other main target markets are really North America led by the US and United Kingdom. Geography by geography, the PTC put in place and extended through 2019 has really helped the quoting activity. So I think there is a bit of a pause or a breath without there being a definitive direction with the PTC. Now that that's behind us, we see some pent-up demand for projects that really make sense for D-VAR. There's a mandate over in the UK -- I think it's in Scotland -- where they want to get to 100% renewables. I just want to say that out loud and pause. They want to get to 100% renewables. We can be very helpful in that. Australia is a market we've had our eyes on. We've made some announcements recently about some wins there. We see the market hopefully here turning more in our favor. We've been able to market all three types of applications in Australia very well and that's a market that we like very much. In South Africa it's really been the renewable interconnection solution for D-VAR. And assuming that market goes forward with the projections that they have there, there should be continued demand for D-VAR there. So we are very optimistic. We were able to grow the D-VAR business itself. We haven't given specific numbers but very healthy growth in grid with the more than I think it was 41% year to year. We want to be able to continue growth there and then be able to continue revenue diversification by bringing more revenue to grid. -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [57] -------------------------------------------------------------------------------- Okay. Now would you say that's the bidirectional need of utilities pulling that demand? -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [58] -------------------------------------------------------------------------------- When you say bidirectional you mean we haven't and they want it or are you getting to something else? -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [59] -------------------------------------------------------------------------------- Like the grid infrastructure, I guess I'm kind of looking at solar for instance. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [60] -------------------------------------------------------------------------------- So we see that perhaps as a longer-term effect. We think things like REG allow or potentially enable that kind of grid, particularly in urban city infrastructure. We think that the evolving nature of the grid will present a longer-term opportunity for us for our current products and maybe for future products as well. But really REG is driven by the need for capacity and reliability today. D-VAR is driven by the need for renewable interconnection as well as voltage stability within the grid and at large industrial users. Those problems as the grid moves forward in the direction you are getting at those only get further exacerbated and present additional opportunity for our Company with our technology. -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [61] -------------------------------------------------------------------------------- And then if the REG products as well as Navy orders increase, Dave, do you see American superconductor taking part in that success-based capital raise for working capital needs? -------------------------------------------------------------------------------- David Henry, American Superconductor Corporation - EVP, CFO & Treasurer [62] -------------------------------------------------------------------------------- As we have said our hope is that if we -- the raise that we did last April is the last time we've raised capital for liquidity. That's still our hope. There is the possibility that if there is a growth opportunity that we'd see that there could be a capital raise off of that great opportunity. But right now we have no plans here in the future to raise capital. -------------------------------------------------------------------------------- Zach Houston, Footprints Asset Management and Research - Analyst [63] -------------------------------------------------------------------------------- Thank you. That concludes my questions. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- And that does conclude today's Q&A session. I'll turn it back over to our presenters for any closing remarks. -------------------------------------------------------------------------------- Daniel McGahn, American Superconductor Corporation - President & CEO [65] -------------------------------------------------------------------------------- I just want to end the call. It was a great year. I don't want that to go unnoticed. A lot of the effort that we put forward over the past several years really is starting to come to fruition. We are in a very strong position in many ways and that allows us to be able to work with Inox in the appropriate manner. We say what we do and we do what we say. I'm pleased that the shareholders are also recognizing that the Company is moving in the right direction. I believe in this Company and every day I'm proud to be part of an organization whose employees are able to deliver results and work according to our values. We do have some short-term challenges, although we will support Inox through their challenges and we will stand ready to continue to serve them. And with that thanks everybody and we look forward to being able to talk to again in the future. Thank you, have a good day. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- And that does conclude today's conference call. We appreciate your participation.
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