American Superconductor Corp (AMSC) 2002 Q4 法說會逐字稿

Welcome to the American Superconductor fourth quarter and year end conference call. With us today is Greg Yurek, president and CEO of the company; Stan Piekos, senior vice-president of corporate development and chief financial officer of American Superconductor. After their comments are given there will be a Q and A session. By pressing the number one on your touch tone phone, you can enter for a question. I would now like to turn the call over to Greg Yurek. Please go ahead.

Thanks, Chris. Good morning and welcome to our earnings conference call. With me today is Stan Piekos, our chief financial officer, and John [Howe] our vice-president for electric industry affairs. In the conference call today we will start with a brief review presented by staffer the results for the fiscal year ended March 31, 2002. I will provide a very brief update of operations, including the metrics and provide an outlook for the company going forward. I will then open it up to your questions. Stan, please review the financial results for the fiscal year.

Thank you, Greg and good morning. Actually before I get into the numbers I provide the following guidance. In our attempts to share information with you to provide insight to understand the business plan we may use statements containing our believes, plans and expectations which constitute forward-looking statements. There are a number of uncertainties that may cause actual results to differ significantly. Please refer to our SEC filings and in particular management's discussion and analysis for more information on these analysis and uncertainties. The release of results of operations including certain balance sheet data for fiscal year 2002 ending March 31, 2002, hit the business wires earlier this morning. I'll comment on certain numbers in that release. Complete detailed financial statements will be included in our form 10-K annual report which we expect to file with the SEC by June 28 of this year. Revenues for the fiscal year ended March 31, 2002 were 11.7 million, compared with 16.8 million for the previous fiscal year. By business segment, power electronics system revenues were down 1.4 million, down from 9.3 million in a prior year due to lower [SMZ] system sales. HTS business unit ramp-ups increased from seven and a half million to 10.3 million, primarily as a result of increased U.S. Navy development contract revenues. Total cost and expenses recorded last year of 73.2 million included 13th million of one time cost associated with amending the Pirelli

strategic alliance agreement and business restructuring and cost cutting measures announced during the fourth quarter of our fiscal year. These one time costs consistent with our earlier guidance included $4 million for the new Pirelli agreement. The $4 million charge included cash of $2,250,000 non-cash items valued at approximately 1.7 million consisting of AMSC stock and forgivable of a long-time receivable resulting from an earlier Pirelli agreement. Also included were one and a half million dollars for severance costs or approximately 25 percent of our work force impacted by the reduction in force implemented March 26, 2002. Three and a half million related to the plan to consolidate our power electronics system product line based on the proprietary AMSC power electronics converter and discontinued magnet production for our [SMZ] systems. Our plan is to out-source our requirements for magnets beyond any existing inventory requirements. The three and a half million covers the write off of magnet production and test production fixed assets and costs to terminate our production facility lease. Power electronics systems operations restructuring in one time costs also included a 4.1 million charge as a provision for potential excess magnet inventory and $700,000 for potential receivable reserves. The cash cost to the company of these restructuring and cost cutting actions was approximately 2 million. Looking at the restructuring and one time charges from the perspective of our two business segments. HTS costs and expenses recorded in the fourth quarter included 5 million for the new Pirelli agreement cost and severance of HTS personnel. The power electronics cost recorded in the fourth quarter included 8.9 million for severance, write off of magnet production, and inventory receivable provisions. Our operating loss by business segment was HTS, 33.9 million or 57 percent of our business unit loss, power electronics systems, 25.8 million or 43 percent of our business unit loss. During the last year, our cash and investment balance decreased 92 million to 68.2 to million. Our biggest use of cash was 62 million to add to our plant and equipment fixed assets, mainly the Devens new HTS wire plant, accounting for 67 million of the new investment this past year. Funding the operating loss was the biggest use of cash. The net P & L loss was 57 million, but that included non-cash items, depreciation amortization of 5 million non-cash restructuring and one time costs of 10 million. Decreased working capital provided cash of about

12 million last year. Cash uses was heavily concentrated in the HTS business unit. 77 million or 83 percent of the net cash use was for the HTS business. The cash use for the power electronics systems was approximately 15 million, $10 million lower than the power electronics system operating loss. Guidance. We currently anticipate consolidated revenues for fiscal year ending March 312003 will be in the range of 20 to 28 million loss per share is expected to be in the share of a dollar 70 to $2.15. We believe cash use will reduce as a result of reduced fixed asset additions. We expect debt investment of 6 million to get us to volume production by year end. We believe the cash use over the next year mainly to fund operations will be about $30 million. Let me now turn the microphone over to Greg.

Thanks. I have five to ten minutes of remarks I would like to make before opening the session to your questions. The press release we released this morning has a lot of information with respect to financial results which stand just reviewed along with accomplishments for the year 2002 which ended March 31, 2002. Fiscal year 2002 was a paradox. On one hand, sluggish economic conditions in this country and around the world which got progressively worse during the last twelve months took its toll on the top line. Revenue expectations were in the range of 20 to $30 million. Yet we ended the year with 11.7 million of revenue, short of our goal We believe we had reason to expect right through March that certain additional orders would close. However, this proved not to be the case as customers continued to defer decisions on buying capital equipment for power quality and transmission rigged reliability solutions. The only good news is that we did not lose any potential orders to competitors during the last fiscal year. Customers simply weren't buying. We currently see movement in a positive direction in some specific cases related to power electronics system sales which includes our [SMZ] product line. However, it is still too early to forecast a turn around in sales. When the turn around does occur which is tied to both the economy and to changes in policy, I believe we can expect significant positive sales because there is definitely pent up demand. We can discuss that later. We will keep you informed of our progress in this area. Back to the paradox. While our top line suffered during the last fiscal year, we enjoyed a very successful fiscal

year with respect to key achievement in technical milestones. This includes the start up of the first in the world HTS wire manufacturing plant, a significant contract from the U.S. Navy to build and demonstrate the world's first HTS ship propulsion motor. We had outstanding progress in coated composite conductor. And we were selected by G.E. Power Systems to be the supplier of HTS wires for utility generators. And we were able to negotiate an amendment to our long standing aligns agreement with Pirelli, which gives us the right to sell our cable wire to all cable manufacturers, not just Pirelli. We also had disappointments, the key being Pirelli's report that it had found leaks in the vacuum insulation in the HTS cables that had been installed in the Detroit he had con substation last year. It resulted in a delay in this cable system in downtown Detroit. This was offset to a degree by the results of tests on HTS on these wires used in the capable, that is that the HTS wires performed at or above expectations. Weighing the successes we achieved and the disappointments we experienced and the need to accelerate the transition from a company focused on research to one focused on products, customers and manufacturing, we have implemented significant restructuring, consolidation and cost cutting measures to ensure that we have the cash and the organizational structure in place to allow us to leverage our successes and manage through the final stages of commercialization of our technology products. As of March 31, 2002, we had 68.2 million in cash, cash equivalent and long-term investments with no debt. According to our plan for the current fiscal year, we expect to have at least $35 million in cash, cash equivalent of long-term investments as of March 31, 23. 2003. We believe we have options we are currently working through that could significantly strengthen our cash position during the next twelve months without creating significant if any equity dilution. We will keep you informed of our progress during the year as we implement our strategies to continue to strengthen our balance sheet Let me end my commentary by pointing out our company is at the heart of a sea change in the way business is being done in the transmission and distribution of electricity in the USA and many other regions of the world. If you ride the national transmission grid study that was released by the U.S. Department of Energy last week, you will find that it is clear that there is a strong demand for the kinds of products and solutions American Superconductor has been conducting. And it is becoming clearer and clearer that changes in regulations and

policies will be forthcoming that will enhance the attractiveness of our products in the transmission market place even further. The mega trend we long anticipated and helped to shape is not far off. That is a big positive for American Superconductor. In parallel to the sea change in the power transmission business we are also see a change in cc powering. The dramatic shift to motor drives for crews, car go and Navy sips. American Superconductor is the new entrant to this high growth business opportunity for ultra compact high torque electric motors. As the new entrant we bring a truly disruptive technology to this growth industry. We are already well underway in developing our HTS ship propulsion products with the award of the fourth follow-on Navy contract to demonstrate and build a ship propulsion motor. In March we received another U.S. Navy contract, this to develop new power converter products based on the power module technology for electric war ships. We anticipate additional and larger contracts to build and demonstrate ship propulsion motors during the next twelve months. Under these conditions we believe we will be able to run our electric motors and generators business in the black somewhere in the next twelve to 24 months. Finally, I want to point out that AMSC has further strengthened its portfolio during the last year. The strength in this area was highlighted in a recent business week article where we were listed as one of the top ten stocks to watch based on our past portfolio. We believe this past portfolio will become a key differentiator and important corporate asset as HTS technology gains commercial acceptance over the next several years. This conclude my remarks. I want to thank you for your attention. I would like to open up the session to your questions.

At this time to register your site for a question, please press the one on your touch tone phone. To withdraw your question, press the pound sign. You we will take the first question from Peter Patterson at Patterson Investment Advisors.

Greg, Stan, John, good morning.

Good morning.

Looks like we are going to get some traction here.

We are working on it, Pete.

The question perhaps is for John. The national growth study that came out is very impressive and encouraging. What is it going to take short of Congressional determination to provide return on investment? They talked about this, but we really don't get to the heart of the matter, to the utilities. Maybe up around 16, 17 percent was the implication. Is there something in the works from the FERC? What is the next logical step to get these people to give them incentive to invest?

Pete, one of the most important things, aspects of this national grid study, the Department is recognizing the important role that merchant transmission can play. Truly de regulated transmission which is something our company has envisioned as becoming a new possibility because of technology advances. And there are some significant and very rapid developments taking place at the federal energy regulatory commission. The FERC is moving the entire transmission sector towards a new so-called standard market design under which we are going to see more sharply differentiated locational prices for power around the country. Once we see power priced in different areas, between rural and metropolitan areas, north and south, east and west, when we have that regional and locational price differentiation, there is now going to be a powerful profit incentive to draw the lines on the map and connect the low cost areas so that you can seizure plus power into the high cost areas. So we anticipate with the evolution of locational marginal pricing we will see the same pressure to develop and build out the transmission grid. For instance just as we saw with the gas pipeline infrastructure over the past decade.

Right. That's encouraging. Thank you, John.

Thanks, Pete.

The next question will come from David Kurzman with H.C. Wainwright.

Thanks. Couple of questions. First off, the guidance that we had had for the year was a loss of $1.90 to a loss of $2.07. If I back out the restructuring charge, loss came in at $2.11. I guess this is a question for Stan. Where did the additional loss come from? Can you talk us through what

perhaps what the line items on the income statement were that led to that?

Yes. David, the 13.9 million, the 68 cents that you backed out is restructuring one time charges per the very detailed rules and regulations on. This all has been sort of that way. The other 4 cents is, all that was related to restructuring of the business in this continuation of products we mentioned in terms of production. The other 4 cents was a provision, and it's also provision for inventory obsolescence. It is a provision, not a cash write off.

Very good. Can you offer some discussion on how you get from an $8.2 million 12-month backlog to seeing a 20 to $28 million revenue guidance for the year?

Sure, David. This is Greg speaking. That's the backlog from the backlog we have in place now that we expect to recognize revenue on and operate during our operations this year. You know, as I mentioned in my comments, we didn't lose any orders. We had, experienced continuing deferrals both on the industrial side as well as the transmission grid side here. And I don't know, maybe the way to do it, I'll give you an anecdote or two here to at least point you in the same wavelength that we are in. You can make your own judgments, obviously here. As an example, with one semiconductor manufacturer, and you may remember a year ago we divided don't expect any orders from semiconductors this year. That industry is really on the rocks for awhile. And unfortunately we were correct on that guidance. However, a year, about a year ago we concluded with one semiconductor manufacturer that our product, this is after head to head competition with at least two other competitors, that our product was the solution they wanted to put in their semiconductor fab. And the next comment was, when we are ready to start spending money again, we'll call you. Of course, we have kept in touch with them. We didn't expect any further action from them until, oh, probably this coming fall. However, we got a call from them in January saying we have been experiencing more voltage sags. There has been changes in the tax policies. You may remember the changes that occurred back in the wintertime that were favorable in terms of capital equipment purse. And they called us. They said hey, we need to start gearing up here real fast. We responded to the customer.

We did that. They came back in and said give us fresh new quotes on anywhere from two to eight power {inaudible}. We did that, sharpened our pencils up. It has been going through their process where they came back and said okay, we're ready to go. We put it through all the purchasing documents. But gee, you know, look, things are looking soft again in the semiconductor industry.

Right.

So again, these are not excuses. I'm just trying to share with you the kind of flavor of what we are dealing with here. I think that order is going to come through. Will it come through this month or the next six months? I can't tell you.

Sure.

The economy, the way the semiconductor industry is going is determinant here. From the utility side, major grid operator, and this is part of their grid, 500 kilovolt transmission grid, anywhere three to seven D-[SMZ] is the solution. We have gone through network analysis and the customer agrees with us. In March, actually February they came back to us and said, you know, we really would like to move forward. We just got a $100 million cut in our capital equipment budget. We are not going to be able to take action right away. So these aren't excuses. I'm just trying to give you a flavor for where we are at. Do I think those will turn into orders? Yes, I believe that. Can I give you precise timing? No, I can't. Do I believe in the next twelve months or this fiscal year we will be able to close on orders and actually deliver products so that we can recognize revenue? I do, to the extent we gave you the guidance there both for our power electronics systems products as well as for the additional Navy contracts we expect to see for ship propulsion motors and wire sales as well. Sorry for the long answer, but I think this is the context we are dealing in. I think our investors and the analysts that follow this company need to have a strong sense of where we are at and why this company believes it can build a top line here off of the platform we have in place.

Sure. Then just very quickly, I'll let somebody else ask questions. If I take the low end of the EPS loss

guidance, loss of $1.70 growth and multiply that by the number of shares and assume DNA offsets CapEx, then it gets me well above the $32 million of cash use that the guidance is. I'm wondering where the additional cash standings comes from

At the low end it shouldn't get you well above it, David, but there is continued like we had this year working capital reduction. Most of the restructuring charges we took in the fourth quarter were provisions for excess inventory. We have that inventory there. We can deliver on that. That's cash that the shareholder already invested in. We plan to take working capital into account, too. There's a minor amount of work in capital there. We have variability control. The CapEx should be slightly less than DNA next year, Dave. It closed to slightly over $10 million.

Slightly over ten. Very good, thank you

Next question will come from Jim LoGerfo with Banc of America Securities.

Good morning, guys. A couple of questions on the balance sheet, if I may. The difference between the liabilities and -- wait a minute, is the difference between assets and liabilities on the summary balance sheet that you showed was 20 million-ish, something to that effect?

Yes.

Can you give us a little bit of detail as to what was in the liabilities? We're trying to understand where exactly we are in terms of deferred revenues, accrued expenses, and so on.

And the, the payables are most of that, about 20 million total because we had some equipment receipts at the end of the quarter that are still in the payables. The deferred revenues, Jim, were about slightly more than a million. (Maybe that's stand)

I'm sorry, the long-term is about, the constant, 3,000,787, WPS? It's about four of that.

So the payables then, is that related to equipment for deafens?

Yes, mainly that. We had the capital come in during the quarter. Probably saw the announcement that we initiated production in Devens. That's after a thorough cooperation of the machinery. We are letting that debug still.

Okay. Can we assume then over the course of fiscal 2003 that those payables trend back down to --

Yeah, because the equipment purchases won't be anywhere near what they were last year.

Down, the remaining capital -- let me ask this, remaining CapEx for Devens in fiscal '03 is?

Next year we expect about six.

Does that include the payables or not?

No, no, that would be the CapEx. So you know, if that came in March 31, it probably would be in payables, right?

Yes, okay, got it. Then inventories, I guess the write off there, was that primarily at the Wisconsin unit?

Yes, it was.

Okay. Sounds good. And then just a brief question on the revenue guidance for next year. Are you able to provide a little bit of detail between HTS and power electronics and within HTS what of that is contracts, what of that is product and within power electronics, what of that could be spent, what could be power electronics converter systems.

Jim, Greg speaking. Give you a general idea. Our current backlog, backlog at the end of the year for [SMZ] is on the order of 4 million bucks. So that gives you some break out on the backlog number we provided already here today. And we believe that we will be able to see revenue in that product line, power electronics systems, in the range of let's say ten to $15 million. We are in pretty good shape here to I think feel comfortable to say that we would expect and work for at least one [SMZ] unit this month, the month of May, probably another one coming in June. So there's enough momentum there, that pent up demand I

mentioned, that we ought to start seeing early breaking into orders here. Maybe it's not the six, seven, eight I mentioned earlier, although I do think that will occur this year. Let's say ten to 15 in the power electronics systems business. That would mean the balance getting to 20, 28 would be in HTS, which includes, of course, both our electric motors and generators where we have a backlog on the order of 5 million right now with our current Navy contract. And as I mentioned already, we have been working toward and are expecting -- can't promise, but we are expecting significant additional, much larger contracts for motors going forward this year. We will be able to recognize revenue off of that. The rest would be on wire sales. We believe we will be able to bring in some orders, some of which we will be able to deliver on this fiscal year. The balance will start building up our backlog for the future years here. That's the general break out, Jim.

Okay. The motors contract that you mentioned, that would be more government contract? Or would that be something from a company looking to do some work with you guys? What would be the nature of that?

Well, put it in perspective, the current 6500-horsepower high torque ship propulsion motor that we are building right now is ready for tests at the end of the fiscal year. Land testing in mid 2003. Calendar 2003. Expectation is for at sea trials by the end of 2003. We expect that there will be additional government contracts coming in to build larger more powerful motors that will overlap with the 6500 hours power motor. We are working with the commercial sector, both the ship owner operators and moving toward -- again, I don't have anything firm on this, but there is very nice positive indications we are moving towards additional at-sea trials going forward, after the end of calendar 2003. That work has to start getting underway even during this fiscal year to line-up for the future. Primary contribution to our top line during the next twelve, 24 months are going to be those government contracts, U.S. Navy primarily.

Okay. Sounds good. I'll step out and get back in the queue. Thank you.

Next question will come from Christine Farkas at Merrill Lynch. Go ahead.

John, can you reconcile again the 5 million drop in inventory, the write off in inventory or magnet assets and change in working capital for the year?

The change in working capital were at 12 and receivables went down from 13.4 to 7.6. Inventory was down a million, net including those reserves, Christine. And then payables would be a Legacy of the -- the payables had the equipment in it at the end of the year. The payables were up year over year about 6 million. $12 million change in working capital.

Okay. And in terms of charges, it seems like everything has been taken out. Is there anything left over? You have provisions for futures? Is there anything we might see in the first or second quarter?

We have done this thoroughly, by the way in the first quarter, reexamination of business. We are very comfortable with the actions taken and of course, we are in good position.

You indicated the restructuring would save you about $9 million a year in cash. Does that exclude the loss from the Pirelli development contract, the 500,000 a quarter?

The total cost reductions we took, Christine, were 9 million. From the contract development revenue.

Great. In terms of the magnet out-sourcing, is this a new initiative or something that comes with the restructuring you announced?

We examined our skill set, we talked about that, and you know we are very basic. The key to core technology, the converters that go into those integrated systems. That is designed, manufacturing for design, motion of the audience here knows us, that we out-source actually the inverters, too. Magnets have been a key part of the [SMZ] system and we've gotten that to such a routine now we feel comfortable we can out-source it. There was a cost to sustain and support ongoing manufacturing capability for magnets. The key skill set in the [SMZ] integrated system is truly integrating the systems. The power electronics communications to react instantaneous to interject reactive power. We will out-source the key elements and keep the costs down.

The greater inter connectivity, the ability to analyze and understand and specify a product that can connect into the grid. Whether that grid is kicked into industrial sites or the larger transmission grids. That's where our core capabilities and core revenue generation are going to come from going forward here.

Have you already identified your sources for those magnets?

We have a couple of potential.

Okay. Again just to confirm then, you made the announcement of the restructuring and this was an additional decision to get out of that completely?

That was contemplated with the March 26 action.

Yeah.

Okay. Final question. You already initiated or indicated you initiated production at Devens. Do you have a run rate or is it really early to suggest what you are producing there?

To make sure we are very careful, I want to correct what stand said. We didn't begin production. As we said in the announcement, we began production test runs. And these test runs are to put the first wires through, you know, from one end of the plant through the other. Never done it before. That's what we are doing now. So each machine along the way gets tested out in an integrated fashion. We will learn a lot here about the capability of the machines in an integrated fashion we will learn a lot about the true automated production that we have installed there. And we will learn, start learning a lot about our yields in this new plant. Let's be clear, those are production test runs. We will ramp up, we have a specific plan for ramping up the volume month over month. And we are on target to be in volume production by the end of the year.

Okay, great. Final question on the Pirelli cry owe stat issue. Do we have a sense of timing when that report will come to you?

I don't. There is meetings that are being

planned here, looks like the end of May or June sometime. It is moving rather slowly, quite frankly. We are not getting, you know, the great visibility into what the plans at Pirelli will have here. I can tell you, I have been in contact again with all the key players at the highest levels within the other organizations, particularly Detroit Edison, who is very eager to see this demonstration go in place. So I don't think there is a sense of urgency there on the part of the customer. Certainly on the part of the Department of Energy as well. Just think in the context of the national grid study, this is something they want to see happen. Quite frankly it's out of our hands, but the best insight I have here, it looks like the end of May, sometime in June there will be additional analysis going on. We know that Pirelli has been conducting tests through the winter and spring and we hope to hear more in the June time frame

Great. Thank you very much.

Sure.

The next question will come from Jonathan Mogil at CIBC World Markets.

Hi everybody. Two questions. First of all, for the fourth quarter, could you give a breakdown between contract revenue and product revenue?

Jonathan, that will be in our detailed 10-K. I can tell you that most of it in the fourth quarter, total revenues were 3.2 million, most of that were the new U.S. Navy contracts, both in motors and generators and the power electronics systems that we announced. The actual detail will come out with the 10-K.

Is it safe to say that the sales of [SMZ] units in the fourth quarter were more than you anticipated?

No, we didn't anticipate any in the fourth quarter. There were no [SMZ] sales. There is an up side potential. We talked about a range. We don't anticipate any.

Secondly, as far as the HTS wires production, what sort of run rates do you expect to get by the end of the year? What portion of that would be sold versus saved in inventory?

Well, we will sell as much of it as we can. But remember we are just starting out with this plant. We are going to ramp up month after month, testing as we go, testing each production piece of equipment, making sure that the whole plant operates as an integrated plant. Again we have a very specific plan that is proprietary information I would rather not share here. We do see the potential, very good potential for selling most of the wire that comes out of that plant. In fact, that is specifically our plan. We don't have a plan for building up inventory. We have a plan for selling the wire that comes out of production. Everybody should anticipate, as we do, that not every wire, certainly not the first wires are going to go through this plant perfectly. We have been rather blessed up through now that everything that we put in Devens, every piece of equipment we dured on has been rather smooth. It is working very, very well. But as you go through the year, the reason we have test production runs is to find out where the issues are. You just have to anticipate issues when you start up a new manufacturing plant. Again we have been blessed so far, but I believe we will see some. However, as we go through the year and ramp the production, the idea is to sell as much as possible. That's where we are focused on the market side.

Lastly, could you comment, you said earlier in the call that you do have some options to strengthen your balance sheet if that need should arise without any equity dilution. Would na involve leasing of the Devens facility? Are there other items?

Na's always an option. We talked about that earlier. We will keep that option on the shelf. I am not eager to exercise that option at all. It has a cost going down the road, as you know. I would rather keep that asset there. If we have an opportunity to invest to get a higher rate of return on investment of cash, we can always go for a mortgage off of that asset down the road. I would rather keep that on the shelf. There are other options that are more strategic in nature and I won't go into details here. It is proprietary. But to give you an idea that is a major focused effort within the company.

Safe to assume that's with the motors?

That certainly is one key area. I think you've got a sense here or should get a sense from

everything we have been saying over the last twelve months, you've seen comments ramping up over the last couple of quarters that this is a high growth business opportunity that we intend to leverage for our shareholders. That clearly will be one of the areas of opportunity.

Great. Thanks a lot.

Sure, Jonathan.

Next question will come from Robert Smith at [Center] Performance. Go ahead, please.

Good morning. I want to circle back to the Navy work. The 6500-horsepower motor, what type of vessel would that go in for sea trials?

Well, for sea trials if it's a Navy ship, it's going to be a smaller ship. There are a number of ships that are out there that are possible here, the smaller size. If you go to the larger ships, sort of the next wave, you are looking at something like EDX, destroyer and cruiser class ships that are being all electric war ships being developed by the U.S. Navy, as you may know.

What horsepower when you work with the new destroyers?

You are into the 32, 33,000-horsepower range.

What kind of contract terms would you be working with with the Navy? I'm not too clear as to where the government is in the defense business now as far as how they structure their contracts. I'm talking about production contracts.

Well, these are not procurement contracts.

I understand that. But down the road, you're going to have that.

Yeah, down the road are the procurement contracts. It is not likely -- very unlikely, as a matter of fact, we will be selling directly to the Navy. You would be selling motors to an integrate tore of propulsion systems which would then be sold to a ship integrate tore or ship builder. That's the normal course of action.

So you are not going to be selling motors to the Navy. The Navy, however, is key here because they are the end use customer. They are specifying all electric war ships and they have made a definite shift over the last couple years primarily over the last year towards HTS as the propulsion system of choice. They had been earlier focused on advanced induction motors using copper, permanent mag knelt motors for awhile. The Navy is clear in its messages that HTS is the pathway for all electric war ships.

The commercial sector would then be watching this and following what is, on what is happening with the military, I guess?

Well, as I mentioned in many previous earnings calls, over the last ten years the commercial side has led the industry here. 100 percent of cruise ships built today are electric motors driving the propel lore. They are well ahead of the Navies of the world. Merchant ships are also making that transition as well. The Navy is a follower of the commercial side. So as I mentioned a little bit earlier, we are definitely working with, on the commercial side, cruise ship owners and operators. We are working with the naval architects, the ship builders who supply those cruise ship operators. We see growth opportunity for both retrofit as well as new ships going forward. Notwithstanding the slow down in the cruise ship industry in the last six to twelve months, that industry is going to continue to grow over the next ten years. We intend to participate in ana growth industry.

What would be the range of horsepowers for cruise ships?

Let me say for commercial ships, it will range from 6500-horsepower motor that we will demonstrate with the Navy. That's commercial sized motor, up to typically about 20, 30,000-horsepower motors. The ones on the Queen Mary, electric motors on there are he well above that, up in the 50-horsepower range. But those are a little bit more odd. Typically in the larger cruise ships you are in the 20 to 30,000-horsepower range. But in addition, I should say for commercial vessels, five, 6500-horsepower is a commercial size. They are being sold today, the standard motors.

Working as a subcontractor, would the profit

possibilities be higher in commercial than military?

You know, military is always looking for commercial off the shelf, COTS as it's referred to. They want to leverage the kind of opportunity that developed on the commercial side. I would say the profit potential for the most part would be the same in both military and commercial. However, having said that, there are some special cases in the military side where the profit potential is much higher because of the nature of the propulsion system is rather special. I can't get into the details on that.

Okay. Finally, how many semiconductor fabs are you working with or attempting to pull orders from?

I'll just give you a rough idea right now. Active right now it's about five or six.

Uh-huh, okay. I assume that ASCM is one of them?

Yes, Bob, you're doing your homework.

Thanks, good luck.

Next question will come from John Quealy at Adams Harkness Hill. Go ahead, please.

Sorry if this is repetitive. Could you talk a little on the RFP side for wires and [SMZ] units, what you are seeing out there, maybe what you have in outstanding Res for both of those product lines?

On the [SMZ], the power electronics systems, the number -- I am not going to remember the exact numbers here, the numbers are similar to what we quoted in the past here on the power quality [SMZ] side for the semiconductor manufacturers. We haven't seen a lot of new activity, as I indicated earlier. We have seen some of the ones that we have done the studies before, where we have been selected as the solution of choice. Those have become active again. I am remembering the number there about $18 million in RFQs is about right. The distributor [SMZ], the transmission grid reliability solution side, we actually have seen the opportunity grow and actually dramatically in the last four months. Since January of this year, General Electric industrial systems has brought in nine, nine additional new opportunities.

When I say bring in an opportunity, it is a customer they brought in, a transmission operator where we have to go through the network analysis of their grid, their problems, their situation. And then specify solutions. We are going through that process on those nine now. Those then turn into an offer to that customer. And hopefully it leads to an order. We will keep you up to date on that. That is growing. The last time which reported a number on that, I'm remembering it was up in the 35, $40 million range. Of RFQs. So the number is now higher than that.

Moving forward, on the relationship with the wire OEM in South Korea, could you discuss that a little bit and what your expectations are for that relationship in '03?

Well, the Korean government has a new frontier program, they call it, upward of $200 million they are devoting to developing the high temperature superconductor industry in Korea. One of the goals is to develop their own wire manufacture capabilities. That is a starting place when you go country to country. Our approach here is to have a wire that has Korean content to it. So [kiss] wire is a major wire manufacturer. They are also a distributor within Korea. They will over time add Korean content to our wires in one way or another. I won't go into details here. Our job is to really convince Korean industry and the Korean government for that matter ultimately that they are wasting their money trying to develop wire. They have the best wire, best prices in the world. You have a source of it right there on Korean soil. This is where you buy. Focus the $200 million on the applications that use this wire. We are making in roads with kiss wire and it's developing.

Great. Thanks very much.

Sure.

We will take the next question, a follow-up from Jim LoGerfo. Go ahead, please.

A little bit more on the [SMZ] orders. If orders start to materialize May, June, when would customers be taking delivery and placing these units on the utility grids?

Typically, Jim, these would be going in, the earliest one I remember is in September. So September delivery. There are a number of them that have been very clear that their targets are to get products installed and operating in September, October, November time frames. So that is as specific as I can get. There are possibilities because we have some units in inventory, a couple of cases -- you know, it's hurry up and wait. When they actually get going, every case we have ever seen like that, they want product sooner than later. The good news is, we have product in inventory that we may be able to turn around sooner. Right now looking at September, October, November as the current car gets.

So as for the, I guess, seasonality of [SMZ] demand and [SMZ] installations, is spring orders for fall delivery kind of -- will that sort of be the natural cycle at some point? Is this just kind of the way this year is working out, and other years it would look more, I don't know, like late year -- late calendar year, early next calendar year orders for spring delivery? What should we think about that?

Well, I hope this will not be a seasonal business. It's always summer somewhere. So you know, during our winter, in the other hemispheres we are working with customers who are suffering voltage collapse problems. We are quoting on product for them. For their summer, which is our winter. I mention one anecdote here where this utility had $100 million budget cut. They were desperate to get this product in this summer in the United States. They are rolling the dice. They hope it won't be too hot. If it is hot, there will be voltage collapse problems. But somewhere around the world, Jim, I don't think this is going to be a seasonal business over -- once again, we have a beat in the economy going forward, in this business going forward.

Do you happen to know what that particular utility is using as a stop gap, if anything

They have the capacitor banks in place and banks in place and are hoping for the best. I'm telling you, I was interacting with and talking to a lot of utilities. I don't mean to be critical of them, but if they can get away with it, they will maybe do some rolling blackouts. We have seen them. We know what happens. The problem they are facing is that as the demand for

electricity continues to grow -- it slowed a little bit, of course, with the slowing of the economy. That's another factor here in the last nine to twelve months, of course. But overall, electricity demand is growing. Their systems are not growing. You look at all the -- you have seen the charts and the data on investments in the transmission grid. That has been going down primarily. So you've got a dangerous situation that is arising. We had a senior level executive from a major transmission operation at my last board of directors meeting a couple of weeks ago and, you know, he was saying, look, you know, we are on the verge of a disaster in this country. Maybe that's what it is going to take to really be on a national transmission grid study, that's the catalyst that it will take to get people to start investment heavily in the transmission grid. The growth opportunity here is tremendous. We are extremely well positioned, given the years of work not only on the technology and products side. Our product is now accepted in the market place here. But also the work of guys like John [Howe] here who absolutely had a direct influence on policy and regulation. You look in the national transmission grid study and out of a large number of recommendations they adopted, a good number of those came through American Superconductor. And it is just general policy recommendations, not about superconductors, there's also that. But talking about policies and regulatory changes. So we are -- the trend is in the right direction. The demand is growing and growing. It's pent up. When it opens up, I think there is going to be a lot of money to be made by a number of companies.

Then just the last question. The utilities, either those who have purchased D-[SMZ] thus far or those who are looking at D-[SMZ] purchases, are they figuring out ways to get those purchases rolled into the rate base? How are they looking at paying for and getting reimbursed on that asset?

Let me ask John here. John, would you put a general commentary on that?

I would say that the way this technology can be applied, Jim, a lot of utilities are looking at using D-[SMZ] types of devices to improve deliver ability into areas that are voltage constrained. Think of what we did in Wisconsin or on the energy system, for example. Another possibility is to apply these devices to allow

power out of areas where you've got bottled up generation. That is becoming a key problem in many parts of the country. We have had a number of discussions with utilities where, you know, we show them how applying thighs devices can help to turn their regions into major power exporters write could be a profitable opportunity in an opportunity priced world Also I mentioned earlier the prospect of merchant transmission. We certainly look upon these as ideal candidates to provide merchant type opportunities. That is something we have been actively exploring and have had discussions with utilities about. If you think of the network as a system of pipes, these devices could be the faucets that allow power to flow in different directions and be actively controlled. This is really a type of technology that allows the utility system to become smarter, more controllable, usable in new ways. I think as entrepreneurs really start to internalize what these D-[SMZ] and other new technologies can do, they will find ways we haven't been able to think of to apply them on grids and make money.

We are speaking with the FERC here. The good news is we have smart people on the FERC, the federal energy regulatory commission. They are starting to be understand that you can not legislate changes in the laws of physics. You can't legislate changes in the laws in the way the grid works. They understand that there are new technologies, the super conducting solutions we are bringing to bear that can allow them to make changes in policy that will make energy more affordable and reliable. It is coming together. It has been a long haul here, but we are excited. Where we are at, we think we have a strong base of technology, products, business strategy here. We are in a more streamlined organization today after our restructuring. We are heading in the right direction with that restructuring. Again, we are excited. We are looking forward to moving ahead through this fiscal year.

It certainly is clear there are a lot of ways that D-[SMZ] can help solve the problems pointed to in the national grid study. But I do think utilities have had some kind of, at least a basic sense that's the case for at least sometime. How if a utility were to buy a D-[SMZ] unit, for example, to improve delivery into a constrained area, do they have a clear pathway to get reimbursed on that asset?

That's part of the issue right now. We have looked at cases, -- not looked at cases. We have been in in depth studies with specific utilities. We are -- where available transfer capacity can be increased by hundreds of megawatts. And they are ready to go. D-[SMZ] them and they say wait, I only get an 11 percent return on my money here. I can get 20 plus rate of return on an unregulated part of my business. Where do I put my money? In those cases, regulatory changes will be necessary to open up the faucet, to open up the order stream for our power electronics solutions. In other cases, again, it's a matter of preventing blackouts and brown outs in the systems. And so the driver there is a more -- well, it's a practical one of making sure the system is up and operating. You have to really, Jim, split it out here into the various segments from available power transfer capability. Yes, a D-[SMZ] can and does act like a faucet. Right now there are regulations, for example in the western area power authority, they simply won't let you turn a switch on and off in a grid. It has to be open and free to everybody. Those things are going to change, again because you have to go for making electricity more reliable, more affordable. And you have new technology solutions, these are flexible A.C. -- that's what D-[SMZ] is, a fax solution out there that can achieve those goals. Once utilities start spending money again, I think we are in a great position.

Okay. That sounds good. Thanks, guys.

Sure.

We will take the last question, follow-up from Peter Patterson. Go ahead, please.

Greg, hi.

Yeah.

What is the timetable for the HTS wire demonstration coming on for Paris and Long Island?

I talked to people at the Department of Energy last week. They are still in negotiations on a number of their superconductivity partnership initiatives that they announced last October, I believe. I am not entirely clear on when those will be completed in negotiation and when they will be moving forward. That

includes the Long Island power watt. Current targets are for having that system -- whatever the guidance we gave before hasn't changed. I think that was something like 2004 for that cable being up and operating. Check the guidance we gave earlier. There has been no change on that specific one.

Thank you very much. Hopefully we see something coming eventually, looking at D-[SMZ] here, from people like TXU in that deregulated market. Energy seems to be doing well with their product in the Houston hear

Yes, people will be talking about the D-[SMZ] experience again. Another IEEE meeting in July this summer, where we will be having a symposium on super conducting motors. A number of companies will be participating there. You are hearing a lot of testimonials coming out in places like IEEE meetings. Good for us.

Yes.

At this point, one hour and two, if the moderator can bring us to a close?

With no questions, I'll turn the meeting back over to Greg Yurek for end the conference.

Thank you for participating in the conference call today. As I mentioned earlier, we had a disappointed year the last year, but are excited about the streamlined organization. Costs are under control cash position is good. We have options for continued strength in our balance sheet. We are looking forward to an exciting and good year for our shareholders this current fiscal year. Thanks very much.

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