American Superconductor Corp (AMSC) 2003 Q4 法說會逐字稿

Good morning and welcome to American Superconductor fiscal year 2003 fourth quarter and year end results conference call. With us today is Greg Yurek, President and C.E.O. of American Superconductor.

I'd now like to turn the call over to Greg Yurek.

Thank you, Adrian. Good morning and welcome to our earnings conference call. With me today is Tom Rosa (ph) who has been the Interim Chief Financial Officer since March 2003 and who is now the vice President of Finance and Accounting. Thanks, Tom for your terrific efforts in the last 11 years that you have been with AMSC and extra efforts in the last couple of months. We all very much appreciate it.

I'd also like to introduce the new Chief Financial Officer who started his employment at AMSC this week and who is here with us today. His name is Kevin Bisson. You can learn more about Kevin's credentials and background in the announcement we released Monday. Kevin has much of the experience we're looking to add to AMSC's management team at this turning point in our company's evolution. In particular, we expect to benefit from his expertise in manufacturing, and financial operations, and transactions at large global companies that he brings with him.

Since he just joined us, he will take a back seat role on the call today, but look forward to Kevin's participation in the next conference call at the end of July, and to introducing him to the shareholders' face to face. The board of directors, the management team and I are delighted to welcome Kevin to AMSC in the C.F.O. role. Kevin, perhaps you'd like to say a word or two.

You thanks and good morning to everybody. I'm delighted as well to be part of the American Superconductor management team. This is an exciting time for the company as we continue to see strong acceptance of HTS wire and applications and I look forward to helping mesh Superconductor to realizing its vast market potential. I look forward to meeting and speaking with many of you in the next several weeks and months as I increase my familiarization with all aspects of the company as well as the markets that the company serves.

I'll try turn it back over to Greg.

Thanks, Kevin.

Also with us is Dave Paratore (ph) Vice President and General Manager of our Super Machines Business Unit.

In the conference call, I will provide an update on operations and key metrics in the outlook regarding key metrics for the company going forward. We will then open the session your questions.

First, however, I'd like to ask Tom to provide the Safe Harbor guidance. Tom.

Thanks, Greg. Good morning. Before we get into financial reports and outlook for key metrics going forward, let me provide the following guidance.

In our attempt to share information with you, to provide insight to help you understand our business plan, we may use statements containing our beliefs, plans, and expectations which constitute forward looking statements.

There are a number of factors and uncertainties that may cause actual results to differ significantly. Please also refer to the S.E.C. files and in particular, management's suggestion and analysis for more information on the factors and uncertainties.

I'll turn the mic back over to Greg for his remarks before we take your questions.

Thanks, Tom. I'd like to provide a number of general comments and updates and provide you with some specific guidance for our business for this fiscal year going forward.

In the period March 2002, through March 2003, we implemented cost cutting measures consolidated two business units into one and reduced the overall workforce by 130 persons, including eight individuals at the general manager or vice president level.

These changes were designed not only to control costs, but also to help prepare the company for move together next level of success, based on the accelerating market momentum, AMSC created in the last 12 months.

I'm happy to report that we have accomplished the significant and important reshaping of the senior management team of AMSC that is consistent with these goals for business success.

With respect to the accelerating market momentum, I note the following. The fourth quarter of the last fiscal year was the best in the company's history, from a topline standpoint, we achieved $10.9 million in that quarter.

Adding fourth quarter revenue to the 10.1 in revenue we achieved during the first nine months yielded a record annual revenue of $21 million, an 80% increase in renewal over the last fiscal year.

We built up a back had log of 78 million as of March 31, 2003, and we added to that backlog in April with additional orders in contracts.

As a result, our backlog climbed to 92 million in April, 2003, a record for AMSC and a base for revenue growth in the next few fiscal years. We expect to recognize 37 million of the backlog in revenue in the current fiscal year, which puts us on track to double revenue this fiscal year over the year just ended.

The fourth quarter was outstanding not only because of the uptick in revenue, orders and backlog, but also because of the importance of certain orders and contracts we received.

Let me now review the orders and contracts we won last quarter by business unit and also provide guidance for each of the business units going forward, and then we'll get back into consolidated view of the company.

Let's start with the supermachines business unit. Perhaps the centerpiece of the fourth quarter was our win over some very stiff competition of a $70 million Navy contract. Our fifth motor contract since 1999 from the Navy's office of naval research.

This contract, which is profitable -- profitable cost-plus contract requires us to build and deliver a 36.5 megawatt superconductor ship propulsion motor by March 2006. We note that we won the contract at the time that we were still in testing a 5 megawatts superconductor ship propulsion motor we built for the Navy clearly demonstrating that Navy is quite satisfied with our performance as a developer and a manufacturer of motors. The 5 megawatt is now successfully undergoing load testing at Austin power conversion, our subcontractor on the contract and the motor is on schedule to be delivered to the Navy late they're year.

It is significant cant that the five megawatt and 36.5 megawatt motors span the range of commercial ship propulsion motors. So this contract provides not only revenue and profits but is being used to establish a new industrial base for superconductor motors for commercial shipping which is the area for ship propulsion motors and generators.

The machine business unit is the prime contractor on this new 70 million dollar contract. The key subcontractors are two business units of Northrupp Grumman (ph), ship systems and marine systems. About $1 million of the Navy contract was recognized by AMSC as revenue last quarter. We expect to recognize at least $23 million in revenue on the profitable contract in the current fiscal year.

In the fourth quarter, supermachines also booked the first commercial order for a superconductor rotating machine. In this case, TVA, the Tennessee Valley Authority, the largest public utility in the U.S., ordered the first five commercial units of the new superbar synchronous condenser (ph), a transmission grid reliability product. This is the same base platform for -- that we're using for the ship propulsion motors by the way.

TVA is pitching in to help us at product -- offset product development costs of the product. TVA's contribution to the development costs will be $600,000 in revenue to AMSC this fiscal year. The commercial sale of the five units will generate revenue to AMSC of about three-and-a-half to four-and-a-half million in fiscal years 2005 and 2006 when we expect to deliver the commercial superbar machines.

The beta for the super bar machines is expected to be up and operating at a substation in West Tennessee in November, 2003.

During the current fiscal year, the supermachines business also expects to recognize about $500,000 of the remaining portion of the five megawatt contract with the Navy, a contract won in February, 2002. Adding these opportunities up, we expect that supermachines business, the supermachines business unit to at least achieve $24 million in revenue, to be profitable and generate approximately $1 million in cash this fiscal year.

Although we do not ordinarily give quarterly guidance, I want to point out the following. We do not expect the supermachines business to be profitable in the current quarter or first fiscal quarter because the new $70 million Navy contract is just getting underway, so we're he a moving up the early part of the revenue recognition curve on the contract.

However, we do expect the supermachines business to be profitable in each of the last three quarters of this fiscal year, and to be profitable for the full fiscal year. And of course, to generate that $1 million in cash.

Let me move on now to the AMSC wires business unit. The wires business unit received a record amount of orders for HDS wires in the fourth quarter of the fiscal year just ended. After having received orders for only 20 kilometers of HGS wires in the first three quarters, we received 450 kilometers in the final quarter. The orders received in the fourth quarter came from 11 different customers and four countries.

In April, AMSC was selected by the department of energy as prior contractor to lead an HGS power cable demonstration project in the transmission grid of the Long Island Power Authority, or L.I.P.A. The contract will be managed by AMSC's grant business solutions development team which was responsible for developing this opportunity.

This is a $30 million L.I.P.A. project, a cost sharing project and is expected to generate $15 million in revenue for AMSC, over approximately the next 30 to 36 months, with approximately $4 million in revenue expected to be recognized in the current fiscal year.

The cable, which would be manufactured by Nexons (ph) will require 128 kilometers of HGSs wire. We expect the cable to be installed in the second half of calendar year 2005 in the L.I.P.A. grid.

We expect to actually manufacture and deliver most of the wire from the project in the current fiscal year.

Now, of the wire orders that we won last quarter and so far this quarter, some 88 kilometers were shipped to customers in the fourth quarter and approximately 300 kilometers will be shipped in the current fiscal year.

The balance of this backlog will be shipped mainly in fiscal 2005.

So, about 300 kilometers to be shipped to customers this fiscal year.

To get to a revenue number for AMSC wires for FY-2004, you can use a rough multiplier of about $20 per meter, some wire is sold at a higher price, some at lower price, depending on the wire specifications but $20 per meter is a general multiplier for now. Assuming that AMSC wire ships 300 kilometers of wire this fiscal year, the revenues from these wire sales will be approximately $6 million.

The current gross capacity of our new wire plant, which just got into production mode in the December/January timeframe is about 900 kilometers per year. If we assume at least a $50% yield which is reasonable for the first year of operation in the new plant, this plant should be able to ship at least $450 kilometers of the wire in the first year of operation.

Of course, we'll need to book orders additional orders for an additional 150 kilometers of wire to sell, a total of 450 kilometers of wire. The guidance that I can give is you that it would not be unable based on current customer interactions, to expect AMSC to receive orders for at least an additional 150 kilometers of wire to be delivered this fiscal year, but let's stay with the sales of 300 kilometers of wire for now as the guidance.

I'd like to shift over to the power electronics systems business unit. The power electronics business achieved record revenues of $10.9 million for the full fiscal year 2003. Most of the revenues were generated from sales of DEVAR or dynamic var (ph) integrated power electronic systems to utilities.

During fiscal 2003, we continue to make outstanding progress in the development of our advanced power module, power electronic converters, which is a component that is used in our dynamic var and other fully integrated solutions. This progress is made under a development program which was funded primarily -

We are presently experiencing technical difficulties. We should have the speakers back on in a moment. Please stand by.

Once again to all participants on hold. We experiencing technical difficulty. We appreciate your patience and please stand by.

Mr. Yurek, please go ahead.

Thank you, Adrian. I understand that we dropped off two or three minutes ago while I was still speaking, so I'm going to guess that you didn't hear the beginning of AMSC wires business units, so I am going to go back to that. I apologize if you have heard some of this already.

The wires business unit received a record amount of orders for HGS wires in the fourth quarter. After having received orders for 20 kilometers of HGS wires in the fourth quarter, we received 450 kilometers in the final quarter. The orders received in the fourth quarter came from 11 different customers in four different countries.

In April, AMSC was selected by the Department of Energy as prime contractor to lead an HGS power cable demonstration project in the transmission grid of the Long Island Power Authority, or L.I.P.A. That's L.I.P.A. This contract will be managed by AMSC's advanced grid solutions business development team which was responsible for developing this opportunity. The $30 million L.I.P.A. project a cost share project is expected to generate $15 million in revenue for AMSC over approximately the next 30 to 36 months. With approximately $4 million in revenue expected to be recognized in the current fiscal year. The cable which will be manufactured by Nexons will require about 128 kilometers of AMSC's HDS wire. We expect the cable to be installed in the second half calendar year 2005 in the L.I.P.A. grid. And we expect to manufacture and deliver most of this wire in the current fiscal year.

Of the wire orders won last quarter and so far this quarter, some 88 kilometers were shipped to customers in the fourth quarter and approximately 300 kilometers will be shipped in this fiscal year. The balance of this backlog will be shipped mainly in fiscal 2005 although some will be also in 2006.

To get a revenue number for AMSC wires business unit for fiscal 2004, you can use a rough multiplier of $20 per meter. Some wire is sold at a higher price and lower price, depending on the specifications. $20 per meter is a general multiplier for you to use now. Assuming that AMSC ships 300 kilometers of wire for this year the revenues will be approximately $6 million.

Current gross capacity of the new wire plant we just got into production mode in the December January time frame is about 900 kilometers per year. Assuming at least a 50% yield, which is reasonable for the first year of operation of a new plant, this plant should be able to ship at least 450 kilometers of wire in the first year of operation. Of course, we'll need to book orders for the additional 150 kilometers of wire in order to sell a total 450 kilometers.

The guidance that I can give you is that it would not be unreasonable based on current customer interactions to expect AMSC to receive additional orders for 150 kilometers of wire that could be delivered this fiscal year. But let's stay with the sales of 300 kilometers of wire from the business unit this fiscal year, at least for now.

Let me move on to power electronics systems. Our power electronics systems business achieved record revenues of 10.9 million in fiscal 2003. Most of these revenues were generated from sales DEVAR, integrated power electronic systems to utilities. During fiscal 2003 we continued to make outstanding progress in the development of our advanced power module, power electronic converter, a component in the integrated systems. This progress was made under a development program which was funded primarily under the U.S. Navy's power electronic building blocks program. Look for AMSC's power electronics business systems to begin delivering the advanced power module products to customers this year after a one-and-a-half year hiatus associated with the product development cycle as well as cost cutting measures we put in place last year.

During fiscal 2003, we did not expect and did not receive any orders from industrial customers for integrated power quality solutions. Prospects for industrials looked somewhat better at this point, so we may see industrial orders for integrated power electronic solutions in the current year.

However, we expect the bulk of the orders in revenues in this fiscal year 20 continue to come from electric utilities and transmission grid operators.

Over half of the 10.9 million in revenues recognized by power electronics systems came in the fourth fiscal quarter as orders were closed for six DEVAR units, one of which is in current backlog in the fourth quarter three DEVAR units were shipped to Northeast utilities in Connecticut and two units were shipped to Rayburn, Country Electric Cooperative in Texas, which contributed a total of $5.5 million in revenue to the topline in the fourth quarter.

Building on the base of business we established in the last fiscal year, and the increasing number of customer calls and interactions currently underway, we expect the power electronics systems business to break even in the current fiscal year.

As we have guided previously, break even for this business, assuming that we continue to complete manufacturing cost reduction activities is about $16 million in revenues. We believe we are be able to increase revenues to $16 million in the current fiscal year.

We have about 17% or $2.7 million of the $16 million target already in hand, so we do have our work cut out for us going forward.

However, as stated, the level of customer interactions and bid proposals is continuing to increase significantly. So, we are optimistic that we can top the 10.9 million of revenue we achieved last year and hit our target of $16 million for break-even in this fiscal year.

Note that the $16 million in revenue we expect to generate out of that $16 million in out of that $16 million in revenue, we expect to generate up to $4 million in cash from the power electronics systems business because we have components and systems already in inventory which turn into cash when delivered to customers. So, we expect the power electronics systems business to be profitable and cash flow positive this year the same as the supermachines business unit.

Let me move on to the consolidated results. The actual loss per share on a pro forma basis, that is excluding special non-cash charges was $2.03 cents per share for the fiscal year 2003. The loss per share on a pro forma basis in the fourth quarter was 41 cents per share.

Both of these are in the range of expectations we had set earlier. The net loss per share, including special non-cash charges in the fourth quarter increased the net loss per share dramatically for the fourth quarter and also fiscally for the year.

The non-cash charge was a an impairment charge on property, plant and equipment necessitated by financial accounting standards number 144. This is applicable to AMSC in its fiscal 2003. This is impairment charge that's tied to AMSC's decision to transition over the next three or four years to a lower cost second generation HGS wire manufacturing methodology.

The majority of the non-cash charges related to an impairment charge on the property and plant and equipment associated with the facility. The company's decision to transition to this lower cost second generation HGS wire manufacturing methodology FAS-number 144 required us to analyze whether cash flows from the first generation wire manufacturing would cover the net book value of the Devon's facility and related equipment again given that we're introducing the second generation wire much faster than earlier thought.

The analysis indicated that it would not meet that goal, resulting in a 39.2 non-cash impairment charge recorded in the fourth quarter.

Now, let's look ahead at AMSC on a -- also on a consolidated basis. Taking the various numbers we have guided to in the last four or five months along with the specific information we're provided in this call, let me provide you with some additional financial guidance.

First let me speak about revenue. Revenue for fiscal year 2004 should be in the range of $45 to $50 million this year. That would be off a base of $37 million in backlog that we have today or had in April. Clearly, there's significant potential for going above the $37 million, but we want to keep it -- give you the guidance of 45 to $50 million.

Let me now turn to our cash. The cash burn rate in fiscal year ended March 31, 2001, in other words, the previous fiscal year, ended March 31, 2001, the cash burn was $92 million.

The cash burn rate in the fiscal year just ended March 31, 2003, was -- excuse me. I made a mistake on that commentary. The cash burn rate for the fiscal year ended March 31, 2002 was $92 million. And the cash burn rate for the fiscal year just ended, March 31 2003 was down to $4 million for the year. The burn rate for the last quarter was down to $3.7 million.

This is clearly in the right direction in terms of reducing our cash burn rate year over year and quarter over quarter.

The burn rate has continued to decrease in the last two years due to completion of the buildout of the new HGS wire plant and due to cost control measures restructuring and consolidation measures we have put into place and due to higher sales and collections in the fourth quarter fiscal 2003.

In the current fiscal year, we expect the cash burn rate for the full year to be in the range of $1 million to $15 million, which will yield an ending cash of $5 million to $7 million because we started with $20 million as of April 1 in the current fiscal year. This assumes that we did not raise any additional capital in the current fiscal year.

Now, we do expect to raise additional capital to meet our needs going forward, so before we move to the question and answer period, I'd like to spend a few minutes updating you on AMSC's financing options, a subject we have gotten a lot of questions about from the investment community, and an issue that management has been focused on.

As we stated in our last two earnings calls, we have been in a process of examining options for racing additional capital to strengthen the company's cash position and accelerate the performance and commercialization of our lower cost second generation wire manufacturing methodology.

From everything that we have seen worldwide, we clearly have a leadership position in HGS wire technology and manufacturing, whether we're talking about first or second generation HGS wire. However, we're from the Andy Grove school of thought (ph) when it comes to new product generations, that is be paranoid about everything in your business and make sure that you eat your own lunch. In other words, don't let it be eaten by the competition.

With our very strong technology and manufacturing base, we intend to exploit the marker lead we have in first generation HGS wire to continue strong leadership in second generation wire sales on a going-forward basis.

In order to do that, we will need to move forward off the platform of considerable success we have achieved with the second generation wire technology during the last fiscal year. The next step in that process entails getting a second generation wire plant up and running inside the Devons wire manufacturing plant, which has always been part of the long term plan.

Our estimated cap ex for a pilot plant and initial commercial production for second generation wire, is some $25 million to $50 million. Depending on the rate at which we move forward with scale up. The capital requirement must come through a financing.

Financing optioning we're considering in order of preference are the follow. A strategic investment partner or partners taking positions in one or more of AMSC's businesses.

The second option is a financial investment in the form of a equity offering, and lastly, debt financing is still an option. We have zero debt. We have significant hard assets, especially in the Devons property plant and equipment, and we have a very strong portfolio that is not significantly valued on the balance sheet but which has significant value nonetheless. The area is something we have been extremely focused on since last summer.

There is not much more that I can say at this point other than the following.

As major shareholders ourselves, management and board of directors of sensitive to the drawbacks that shareholder dilution.

Also, as we have demonstrated this past quarter, American superconductor's success is tied into trying new technology and market development initiatives on the part of major well established operations, government entities and financial players.

It is certainly in their interests to see American Superconductor succeed in the mission to develop solutions and manufacture products that dramatically improve the cost efficiency and reliability of systems that generate deliver, and use electric power.

Lastly, I'd like to point out that we're optimistic that we will be able to achieve an acceptable form and level of financing within the next 90 days.

In conclusion, AMSC is clearly beginning a new chapter in the business growth story. We have reshaped the company under senior management team in the last year.

We are experiencing accelerated market momentum across the businesses and products and we have a very solid backlog of orders and courts that provides a base of revenue growth in the next couple of years. And we will be doing that with the streamlined balance sheet.

Add to this mix are strong progress in lower cost second generation wire, and the additional capital that I believe we will have in hand in the next 90 days, and I believe we do in fact have a strong growth scenario for our shareholders going forward. Thank you for your attention.

Now I'd like to open up the session to your questions.

Thank you. At this time, if you have a question, please press the star and one on your touch tone phone. Once again, if you have a question, press the star and one on your touch tone phone.

First question comes from David Kurzman with H C Wainwright Company. Go ahead, sir.

Good morning, everyone. A couple of things quickly, --let me ask in terms of the burn rate of $13 million to $15 million if I just go backwards and assume numbers. Let's say, $4 million of cash power electronics plus a million of cashout supermachines, that suggests that the HGS wire division is going to burn something on the order of $25 million, is that about right?

$20.

$20 million.

Yeah. About 20, David.

On the extreme end. We have a range of $13 million to $15 million.

David Kurzman Okay.

On the extreme end you would burn the $20 million to get you down to $15 million. Burn $18 million to give -- if we end up burning a total of $13 million. So, I think the math -- you did the math right, but I'm not sure how you got the 25. You got $5 million.

I was assuming cap ex and working capital.

That's cash firm.

Say again. I'm sorry.

That is a net cash burn, David, so we're saying $13 million to $15 million for fiscal '04 of which we will have positive cash flow of about $5 million between power electronics systems and supermachines, so that leaves worst case the AMSC wires business unit at about $20 million of net cash burn. That includes the cap ex.

Let me ask -

David, could I make a quick comment before we continue. As we go through the question and answer session, we request that everybody limit their questions to no more than two at a time, in the interest of allowing as many people as possible to get their questions in. Anyone who wishes, though, may rejoin the cue or the end of the cue following their two questions if they have additional ones.

Go ahead, David.

Thanks. Let me get on to the financing side. I'm sure you're going to get a lot of questions about it. Why set the deadline of 90 days. I guess this is the first part of the question.

The second part is in this period of slow moving strategic investors where big companies don't want to spend much money, what confidence do you have that a strategic investor is ready to step up and make an investment?

It's not so much of setting a deadline of 90 day, David, the message that we want to deliver is that after all of the work we have been doing for an extended period of time, we expect that we'll be table to have a commitment within the next 90 days.

So, you know, you're right. Major corporations or corporations maybe in general, but major ones tend to move slowly. We have been in discussions for over a year with certain major corporations. So, the groundwork has already been laid. The kind of extended period that you are referring to that we also would expect basically we have gone through a good bit of that, so what we're trying to tell you is that we have confidence based on all of the groundwork that we should be able to close something in the next 90 days. I hope that answers your questions.

It does. Thank you. I'll hop back in the cue.

We'll move to the side of Peter Patterson with Patterson Investments.

Greg, Tom, Dave, Kevin and Mary, good morning.

Hi, Pete.

Congratulations on significant accomplishments.

Thank you, sir.

My question relates to general electric and what I'm hearing is the degree of enthusiasm they're portraying regarding the generation of --next generation of generators using HTS wire. I'm wondering if you are hearing back from them as to a time as being '04 and '05 as to when they would step up to the plate and get going with the next generation.

Pete, last fall, October of 2002, G. he made a number of public statements and clearly indicated that they're moving forward more aggressively than -- than ever. This is GE Power Systems.

Right.

To introduce a superconductor that is a high temperature superconductor generators. I expect based on what they have stated publicly, that's as far as I can go, that you would expect to see shipments involving HTS superconductor rotors in calendar 2004. So, certainly by the end of calendar 2004. I'm using public information that's out there now. We're not that far away.

Good luck. Thank you very much.

Thanks.

The next question today comes from the side of Robert J. Smith with the Center for Performance Investing. Go ahead, sir.

Good morning, everyone.

Good morning.

Could you give us some kind of timeline on the second generation wire and the specs.

Sure. Bob it goes back to last fall. Where we laid out our plan for crossing over from first generation to second generation wire. That was subsequent to our announcement of breakthrough results that we had achieved through the spring and summer of 2002.

And things have only gotten better in terms of the development work that the team here has been doing. So, again, we have clearly made a decision that we're moving forward to transition over to the second generation wire. The timeline we're going to be consistent on this.

We have been saying it's going to be -- that the first generation wire is clearly the standard for the industry, the workhorse for the industry, if you will for the next three to four years. By that, I mean that second generation will be transitioning over, and overtaking in terms of volume production overtaking first generation in the three to four year period of time.

So that's -- I guess that's the general timeline that I can give you. In terms of the specifications, again, I'll be consistent here. We expect that second generation wire will be a form, fit and function replacement for the first generation.

That is, when we're selling wire to Dave Paratore and the supermachines business unit, he's not going to have to retool the coil line machining to make shipper propulsion motors. Form, fit, function and replacement is vitally important to the customer basis. The same is true for Nexons. And we are not making that up. This is what the customers tell us. Form fit function replacement, looks the same, smells the same, basically behaves the same.

It's not going to be higher performance. There's a misinformation out there in the general marketplace that second generation could be much higher performance. That's simply not the case.

Maybe a little bit, but not much to write home about. The big deal is that for the same basic electrical performance, mechanical performance, form fit function replacement, we are talking two to five times lower cost of manufacturing. That is the driver for second generation wire. Lower cost of manufacturing. So, it's really a cost-out program.

And that is a proprietary to you?

The wire approach, the wire manufacturing methodology that we have been pursuing and down selecting over eight years of investment in second generation is basically proprietary to us. Now, we have used some pieces of technology that are not exclusive to us.

For example, we use a technology out of oak ridge for the basic substrate, the metal substrate that is we have licensed on a non-exclusive basis, however, key components in building up the architecture of coded conductor wires is proprietary and exclusive to American superconductor, specifically focused on taking out the costs here. So, the low-cost methodology I would say is primarily exclusive to American Superconductor.

How much lead time do you think that you have in the marketplace?

Well, again, I'll refer back to the comment that I made earlier. Being paranoid here, the Andy gross school of thought. You know, in first generation wire, the competitors have basically fallen to the side over the years. We're really in the Western Hemisphere, for example, with as far as I know, the only company manufacturing first generation wire. So, that's great. But in second generation wire, around the world, we see different groups from universities to industrial laboratories working on second generation wire.

We feel as comfortable as one can feel in a competitive environment that we're well positioned with our technology, both in performance and progress toward scaling up. But with that much interest out there around the world, you can't slow down. You really have to be paranoid, I think.

You think that you will be first to market?

Based on where we're at, if we bring the financing in and move forward with the plans to scale up I think that is clear. And by the way, something we have been saying for some time now, since clearly last summer, to customers directly, our customers for first generation wire are first in line to be customer for second generation wire. The first volume production of second generation wire first of all coming out of the development facilities and a pilot plant is going to be limited in the next three to four years before we get into volume production. So, customer base out there has been responding very positively to that. They're fully informed of where we are at and where we think we're going. They want to participate in the cost-out program with us. They're buying first generation wire and getting prepared to transition with us over to second generation wire in the future.

Thanks. Best of luck.

We'll go next to the side of Richard Dernly (ph) (inaudible).

I'm not familiar with your company. In terms of wire plant running at 50% yield in the first year, is that standard? And do you expect, you know, a vast improvement in year two?

Well, I'll start with the last one. We expect a vast improvement in year two. Standard -- I don't know that I can say that. However, I can say that when you have a new kind of product, that is a fairly complex product and the high temperature superconductor wires with the internal architecture and the heat treatments and so forth that you have to put them through, this is not unlike a semiconductor processing in some ways. So, it's a complex process. It's a new product , and it's a brand new plant. So, and I think we would be foolish to say in the first year we would be hitting much higher yields. Which are clearly are our goal. So, I think that 50% is a rational number to put out here at this stage of the game.

At maturity, do you get --would you expect semiconductor type yields in the high 90's when you get all of the bugs out?

No. I don't think that you expect the high 90's because again this is a multi-step process, and all you need is a fraction of a percent on each one of the processes, they all multiply together. You are down to 90%. So, I think that you are talking 85 to 90, 95%, somewhere in that range.

And then on the generation to startup, do you have -- it sounds like that you have scripted this out pretty well. What kind of cost drag or cash drag do you have as you gear up this plant?

Well, we do have a full manufacturing plan. On the shelf, if you will. Now, that was completed in early April.

Yes.

So we have all of this detail about it. I'm not about to share any of that with you, because it's proprietary information. The guidance that I'm giving here is to go through a pilot stage to get -- to scale up to the pilot stage and go into the first significant level of manufacturing, we're looking at the $25 million to $50 million. That's as much guidance that I care to give given the proprietary nature of the processing and so forth.

Okay. Thank you.

We'll go next to the side of Eric Prouty with Adams, Harkness and Hill.

Great. Thanks. Greg, you said what you're anticipated to spend on a pilot plan for second generation. What would a plant for mass manufacturer in second generation costs and would it be similar to the costs of the Devons plant?

Eric, I'm not going to give again more specifics on that, because I consider that to be proprietary, but I think what you need to know is that if we got -- you know, if we spent up to $50 million in going through the pilot stage and the first voluntary manufacturing, I think you would expect or we would expect for sure that this would be a self-sustaining operation. That we would not be going back to raise huge amounts of capital as we needed to do to get the first plant up and operating. So, I hope that goes to answering what your real question is here, but at this stage, again, being fairly sensitive to not giving out proprietary information. Does that get enough to your answer?

Yep. That's fine. Then just a second small question on the receivable written off, who was the customer on that, and what year was the revenue recognized from that receivable?

We're not going to get into the customer name. Obviously those are sensitive things when you are working with somebody out there. We do -- this is quite reputable customer. They already have product of ours. They're very satisfied but the budgetary issues in the last couple of years have been rather tough on everybody, I guess. We actually recognized this revenue, Tom, help me out.

Two years ago.

Two years ago. It's on the accounts receivable. If you go back and look, accounts receivable has been always -- at least $5 million or maybe more. That's been in there for that time.

Sure. Great. Thank you.

Once again, if would you like to ask a question today, please press the star and one on your touch tone phone.

We'll go back to a follow-up from David Kurzman. Go ahead, sir.

Thank you. Let me start with the -- going back to the first generation wire technology. If you do get the additional 150 kilometers of offers for this year, how much more would cash burn rate be for that division, do you expect? Or I guess said another way, what's your incremental margin?

Tom, do you want to -- I'm not sure we want to go into that but do you have any general idea you want to give?

David, we have -- as Greg mentioned earlier, there's a range of prices that we put out on the wire. We do run positive yields on that, but that -- those yields are already assumed in the -- in that $20 million cash burn number that we talked about previously, so conservatively speaking, we have not factored into that -- those additional wire sales into that equation. It would presumably get better maybe to the tune of 20% of that volume.

Incrementally it would get 20% better, right?

Correct.

You are getting a 20% incremental margin on a very low volume business. We would expect a $24 million burn rate?

Yes. I think it's about half a million dollars is what that would equate to, David.

How do you get a half million?

Correct. By taking the -- we have send an additional 120 kilometers of wire, approximately $20 per meter and factoring a 20% margin that would add 600K.

I see what you are doing. Yes. Your burn rate would probably go to $28 million.

No. From 25 down to 24.5, David.

Where did you get the 25?

I am sorry, from 20 down to 19.5. According to your number.

It would go up, not down?

No. Down. It would improve slightly.

So, how would it go -- if you are still losing money on it, how would the burn rate go down, if you are losing money on every meter out the door.

Yield is critical to the success as Greg indicated earlier, but we are making slight margins on the wire going forward. We are producing this wire on an ongoing basis, David, so the incremental business would translate more to positive cash flow than additional negative.

I'll probably have to talk you to about that offline. But let me switch to the second question and I'll get back in the cue. I went to the D.O.E. web site to try to get more information on the L.I.P.A. project. I couldn't find a press release there. Could you let me know -- have you guys announced what the specifications on that power cable are?

Yeah. I believe they were in our press release that we put out somewhere around mid April. But I'll just hit it quickly here. It's 138 kilovolts. 138,000 volt. The voltage is transmission voltage levels. Remember about 2,400 amps, that that would get you to 600 megawatts of power flow. It's 610 meters long, which if I remember is something like --well, 610 meters, we'll do the math later for the feet, but what else do you need to know for that, David?

That was coaxial, right?

It's coaxial cold electric cable, thats correct.

And I'm just wondering here, because I didn't see any press release on the D.O.E.'s web site they have announced it, though, you said?

I think they're waiting to gather up a few of them altogether, here, Dave, so, I think they probably D.O.E. will do their follow-up announcement when they have them all together.

Okay. But they let you guys announce it, right.

All right.

Right, very good. Thank you.

Sure.

We have a follow up from the side of Peter Patterson, go ahead, sir.

Hi, Greg.

Yeah.

The metric, 128 kilometers for the L.I.P.A. project, are you still optimistic for additional demonstration sites globally? And you know, in this general range, 125 would be 150 per, would only get you up beyond the capacity?

Well, again, I already said, so let me repeat it that the 128 is now included in our backlog number for wires, kilometers of wire, and adding that altogether we are looking at about 300 kilometers coming out of backlog including the L.I.P.A. piece in the current fiscal year, don't add on more there. Just to be clear on that, Pete.

Mm-hmm.

Okay. So, then the other part of your question was other cable projects

Yes.

And there are clearly still 8 to 10 cable projects that are actively being developed around the world, China, Korea, Japan, Mexico, U.S., Europe, and we are engaged in discussions with just about all of those. The one in Japan is not up for grabs right now it's a Japanese national cable project. We actually thought we did have a shot at that, but that's gone by the wayside for probably obvious reasons, being a Japanese national cable project. But we have very good shot at being the wire supplier in most of the rest of these. Including a total of three cable projects that are being developed here in the U.S., including, of course, the L.I.P.A. project as well.

Thank you.

No promises at this stage, but our wires being qualified in most if not all of the cable projects. We expect to win orders for the -- some of them are smaller than others. Others, there might only be ten kilometers of wire because some countries and companies are further behind than others. All the way up to something like the L.I.P.A. project, which is the 610 meter transmission voltage project. I hope that answers your question, Pete.

Thank you very much.

We have a question from the side of Jerry Harnish (ph) with Independent Brokerage Advisers.

Thanks, guys. I have two questions for you. One is the Navy generator contract. I noticed that was absent in the $70 million. Any chances of a generator contract this year?

This year, no. I don't think so. Remember what the knave came out with last summer, the request for proposal was for a motor, 25 megawatt with an option for a 26 megawatt generator. We certainly included both in our proposal last I guess September, October time frame. The Navy came back and said that's great. Gee, give us also an option for a 36.5 megawatt motor. Basically that's the size motor they're looking to put into the first electric warships out in 2007. So, we put the proposal in with that option as well.

What the Navy decided to do is to down select to the nearest term product opportunity, I guess, the 36.5 megawatt. I -- I expect that they're still going to come through in the future wanting to develop the generator. There are all indications positive in that direction. Certainly not this year, Jerry. Because they're focused on the 36 megawatt right now. But I would expect. I don't know what year to say, the next 12 -- 24 months, somewhere in that period of time you would expect so see an RFP come out, I would guess.

Okay. My second question is on the three alternatives for financing strategic partners, private equities and financing and debt financing, what do you people as management view as a various merits of each of those? Well, as I mentioned, earlier,

Well, as I mentioned earlier, we're sensitive to tie lugs because we're shareholders here. On the other hand there's aspects of equity financing, particularly mixed in with debt financing that could be attract attractive in the end. We have got to look at that option, that's for shoe. There is also some financial players out there that could bring some even some strategic benefits to us with an equity financing. I don't want to get more specific on that. We're looking at a lot of options.

We have hot irons in the fire, frankly. Debt financing, if we're talking about -- and I have gone into detail on this in previous earnings calls, if we're talking about debt financing with operational covenants that's mostly what you see out there, we're not particularly interested in doing that, especially to finance a scale of a pilot plant. I don't think that's appropriate. There are other forms of debt financing that could be a lot less onerous, we have to look at that, and we are. That is obviously less -- far less equity dilution involved in that particular kind of an option.

With a corporation, there's a number of possibilities here. We have created a lot of value in each one of our business units, and participation by a corporation in one or more of these business units specifically would be an option. And we should be looking at that and we are, very actively looking at that.

So, it's quite a range of options. Again, we're sensitive to things like dilution. We're very sensitive to debt with operational covenants on it. That's just not a healthy situation to get into. So, that's very unlikely we would get into that one. I hope that answers your question.

Sure does. And glad to see that cash burn coming down.

You bet. We like it, too.

We have another follow-up from the side of David Kurzman. Go ahead, sir.

Thanks. By the way, I figured out where I was confused on the cash burn issue on HGS wires. You're right, it would go down to 19.4 cash burn. The question about the raise I have is how much are you looking to raise, and then as a second question, how do you expect the cash burn for the second Gen plant get that up and running. How do you expect that to trend. Is that back end, forward-end, how does that look?

Well, I think we already said $25 million to $50 million is the Bogey here. Again, David, it depends somewhat on the mode of financing. Again, we have a number of different options on the table, and discussions that are active right now.

I don't know, let me give you an example. If I had a really attractive debt financing that was $15 million, and I mean attractive in terms of the terms and so forth, maybe that's the one we would choose, and then we would ease into the scale up as opposed to going full blast.

In any case, I can tell you that this management team will be conservative in its approach to spending cash as a function of time. We're going to want to -- we have already set up -- I said we have a manufacturing plant on the shelf now that is very detailed from bill and materials to timelines and so forth, but we will be insisting on and have defined what we call internal stage gauges.

We want to see performance internally before we leak out another bunch of money to take another step in the scale of process. We have laid it out so that we can go incrementally through the scale of process as opposed to going full blast. We have already gone full blast on the first generation wire.

That was a decision we made in 1999, went out and raised the financing. The world looked different in 1999 than it does today. That's to be sure. But we went forward and put up the full blast plant. It's been providing a lot of benefit. I can tell that you customers that come through say, gee, you made the commitment you have volume production and commercial pricing coming down the road, they make their commitments, but we don't need to do that again with second general race. So, we have the opportunity to ease through this, see the benchmarks being met, internal benchmarks and make decisions on a going forward basis to open up the spig (ph) at more as appropriate and as appropriate means tying the volume production to customer demand.

Very good. Thank you.

Mr. Yurek, we have no further questions at this time. Would if you would like to proceed with any concluding comments.

Thank you very much. We're just over an hour. I apologize. I don't know what happened with us dropping out at one point, but it was fun to give part of the presentation twice. We appreciate your time and interest in American Superconductor. We're committed to moving in company forward on a new basis, again, we have reshaped the management team as well as the company.

The management team is very excited about where we're at right now. We're going to build on the backlog that we have in place and continue to grow the company forward and return investment provide a return on the investment to shareholders on a going forward basis. Thank you for your time today. Bye, now.