American Superconductor Corp (AMSC) 2004 Q1 法說會逐字稿

Good morning and welcome to American Superconductor’s fiscal year 2005 first quarter conference call. With us today is Greg Yurek, Chairman and CEO and Kevin Bisson, Senior Vice President and CFO of American of Superconductor. I would now like to turn the call over to Greg Yurek. Please go ahead.

Thank you and welcome to our first quarter conference call for fiscal 2005. I actually have with me here today Kevin Bisson, as you heard our Chief Financial Officer and also Dave Paratore our President and Chief Operating Officer. In our call we’ll review the numbers that we released in our announcement earlier today and we’ll also provide a brief update on operations and key metrics and then we’ll open up the sessions to your questions. First, however, I’d like to turn the session over to Kevin. Kevin?

Okay thanks Greg and good morning everyone. Before we begin discussing financial results for the first quarter of fiscal 2005 and our outlook for the remainder of the year 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 our SEC filings and in particular management’s discussion and analysis for more information on these factors and uncertainties.

Now turning to our first quarter results, revenue for the first quarter was $12.7m, which was $4.9m or 63% higher than revenue in the first quarter of fiscal 2004. It should be noted that the $12.7m in revenue for the quarter represented the highest quarterly revenue number in the company’s history. Each of business units exhibited strong year-over-year revenue growth. In particular AMSC Wires tripled revenue from the prior year’s quarter due mainly to record wire deliveries from our Devon’s wire manufacturing facility and higher revenue from the Long Island Power Authority or LIPA power cable project. It should be noted that significant revenue in connection with the LIPA cable project did not kick in until the September quarter of last year.

In addition significant revenue growth in the first quarter was derived from our super machines business unit as it continues to perform on schedule relative to the 36 ½ megawatt HTS motor program while the latter, with the latter contributing $7m of that unit’s revenue for the quarter. Orders received during the first quarter totaled $12.1m which was down from $17.2m of orders generated in first quarter of fiscal 2004. Last year’s first quarter orders included the LIPA power cable project of which $15m is being funded by the US Department of Energy. Orders for the quarter were driven by DVAR related orders for a large US semiconductor manufacturer and a US wind farm developer as well as the Defense Advanced Research Project Agency or DARPA contract awarded during the quarter in connection with potential US military applications for second generation HTS wire.

Backlog as of June 30th stood at $64.2m, which was down slightly from $65.3m at March 31, 2004 our fiscal 2004 year end. Of this amount approximately $42m is expected to be recognized in the remaining nine months of the current fiscal year. Combining this amount with revenue booked in the first quarter, we currently have visibility to approximately $55m in revenue for fiscal 2005.

The operating loss for the first quarter of $5m was $3.4m or 41% favorable to the operating loss of $8.4m in the first quarter of fiscal 2004. The year-over-year improvement in operating loss is due principally to significantly higher HTS wire sales and the benefits of head counts and other cost reductions actions that were implemented in July of 2003. As we noted in our earnings release issued early this morning the super machines business unit incurred a loss for the first quarter due mainly to higher than anticipated development costs related to the Super VAR prototype as well as an adjustment to the cost incentive fee on the 36 ½ megawatt navy motor program as a result of higher than expected subcontractor spending.

With regards to the Super VAR the delivery of this advanced prototype to TVA this week along with anticipated successful operation, is expected to result in minimal (Technical Difficulties) (Inaudible) Super VAR prototype related spending going forward. Relative to the fee adjustment on the navy motor program the higher than forecasted spending on the program is with one subcontractor and impacted the amount of incentive fee related to the overall program cost target that we had previously booked. It should be noted that while the nave motor contract has other incentive fee related to motor design and performance, we have chosen not accrue any of these fees until they have been fully earned, which in most cases will be closer to the completion of the contract.

Net loss for the quarter was $4.9m, which was $43.5 or 41% favorable to the net loss of $8.4m in last year’s first quarter. Net loss per share for the quarter of 18 cents per share was also favorable to the 30 cents per share loss in the first quarter of fiscal 2004. The company ended the first quarter with $49.4m in cash, cash equivalent and short and long term investments compared to the corresponding $52.6m balance at March 31, 2004. The cash earned for the quarter of $3.2m was driven primarily by the company’s net loss of $4.9m offset by non-cash depreciation and amortization expense of $2m. Despite a record revenue quarter the company was able to maintain flat working capital for the first quarter of fiscal 2005 compared to the fourth quarter of fiscal 2004 as higher receivable collections offset lower accounts payable and accruals.

With current visibility to approximately $55m in revenue for fiscal year 2005 we are increasing our revenue guidance for the full year to be in the range of $55m to $60m with roughly half of that amount deriving from our super machines business unit. As we mentioned in our last earnings conference call, we expect full year revenue to more heavily weighted towards the second half of the fiscal due to the navy’s decision to defer funding for the motor program as well as the expected timing of revenue recognition for power electronic systems orders received in the first quarter. We’re also reducing our operating loss guidance for all of fiscal 2005 to be in the range of $20m to $23m with the corresponding loss per share to be between 70 cents per share and 82 cents per share.

Before I turn it back to Greg for his remarks, I’d like to remind everyone that consistent with our prior earnings conference calls, during the question and answer portion of the call we request that you ask only one question at a time. If you have an immediate follow up question to clarify our response we will be happy to answer that question as well other wise we ask that you return to the queue if you have more than one question in order to allow as many people as possible to participate in the question and answer session. Thanks and I’ll turn it back to Greg.

Thanks Kevin. I’d like to provide brief highlight for each of our businesses and then we’ll take your question. Let’s start with our AMSC wires business. We see record productions and shipments from our Devon HS wire plant in the first quarter with total shipments of 99,500 meters. Now we need to continue to increase shipments quarter over quarter during the remainder of this fiscal year just to meet the customer demand represented by our current backlog of wire orders. Recall that we starter the fiscal year with 550,000 meters of order in backlog so we’re going to be quite busy making and shipping wire to satisfy this demand. On the sales front the bulk of our efforts are now focused on building backlog of orders for HTS wires for our next fiscal year.

Our first generation of HTS wire will continue to be the primary wire utilized in HGD products over the next 2 to 3 years. After that we believe second generation or 2G HGS wire will become the primary product due to increased customer demand for higher electrical performance and lower costs. In terms of product transition this similar to the transition made from 386 micro processors to Pentium micro processors. It didn’t happen over night because there was a need to prove out the new Pentium shifts in application environments and there was the bigger challenge to demonstrate that Pentiums could be scaled up to volume manufacturing in a cost effective way. In other words so Intel could make money selling Pentium chips instead of the well established 386 processors. The transition from 386 to Pentium micro processors did occur eventually for one very good reason, Pentium chips provided superior performance at an affordable cost to customers and Intel demonstrated to itself in a systematic way that it could make money in meeting the customer demand for better performance at lower costs. For the same reasons, demand for higher electrical performance at lower costs, we believe 2G HTS wire will replace 1G HS wire over the next several years.

Its clear to AMSC as we work to meet the needs for motors, generators, syncro disc condensers, power cables, maglo trains, magnet systems and other applications of our many HTS wire customers for more than ten countries around the world that they are starting to demand a higher electrical performance and the improved strength and durability characteristics that we have already demonstrated with our 2G HS wire and they want the lower cost that 2GHS promised by AMSC proprietary 2G manufacturing process. Take away those performance and cost advantages and customers will stay with the tried and true product they always have access to, they already have access to. Nobody wants long lengths of low performance wire. Because we are driving the transition to 2G HS wire and due to a growing customer demand for higher performance and lower costs, we recently provided a road map detailing how we plan to make this transition, one that is already well under way at AMSC.

Let’s take a look at that manufacturing roadmap. Our road maps in the transition to higher performance, lower cost 2G HS wire can be found in an announcement we released on July 27 and in graphical form in our annual shareholder meeting presentation. Both of these can be accessed under the, learn more feature on the AMSC homepage at amsuper.com. You can also find there white paper by our Chief Technical Officer Alex Malozemoff [ph] on the facts about 2G HTS wire technology. Our 2G manufacturing road map get us to a pre pilot manufacturing line by the end of this fiscal year, the cost of approximately $5m to achieve this goal have been included previously in our budget for the current fiscal year. With this investment in place we expect to produce and ship over 10,000 meters of high performance to 2G-wire in our next fiscal year.

Essential to this road map is that we are achieving the high performance results today utilizing the same profits that we are scaling up for production and equally important as the technology is the fact that we have the rights to the intellectual property needed to continue on our road map with the processes we believe will meet the customer requirements. The electrical performance of the wire we plan to ship to customers next year is expected to be 250 halves per centimeter of width of the wire , a performance level that we believe cannot and will not be matched by any other company during that time frame. The wire will be manufactured by automated slitting of 40mm, that’s 40mm wide strips of 2G material into industry standard 4mm wide wires. In other words in the time that it takes for just one manufacturing run we will have not only 1 wire but 10 wires. This is the kind of manufacturing result that makes a huge difference in reducing the cost of the high performance 2G HTS shift wires now be demanded by customers.

For the past few years we have been developing the technology to slit 2G wire maintaining the higher performance levels required for customer applications. We demonstrated successful slitting of 5m lens of high performance 2G strips a year ago and we have made significant advancements in this important processing step since last year. We expect our next fiscal year to start, in our next fiscal year to start investing as planned in our 2G HTS pilot manufacturing operation. This will be a significant step forward as we are going at this stage from modified R&D equipment to a line comprised completely of production equipment, the capital investment is expected to be in the range of $15-$20m over fiscal years ‘06 and’ 07. This investment is planned to get us to production volumes of very high performance 2G H-shifts wire in thousand meter amounts by the end of calendar 2007. We believe we have defined through our continuing systematic manufacturing development efforts a pathway that will enable this wire to have the electrical performance greater than 300 amps per centimeter of width of wire, set as the commercial threshold by the Department of Energy. And it will have the strength and durability demanded by customers and is already demonstrated with our 2G wires today.

You know I believe that there is no other company in the western hemisphere that has the HTS wire manufacturing experience of AMSC. We believe it is highly unlikely that any other company will be able to come close to matching the electrical, strength, durability and cost advantages of our proprietary 2G-HTS wire. And thus we believe we have strongly positioned ourselves through the applications of our material science , manufacturing development expertise to remain the dominant market force in HTS wires and applications. Speaking of applications in markets, I would like to move on to our super machines bed list, but before I want to point out that our LIPA HTS power transmission cable project for which AMSC is the prime contractor is on schedule and on budget to install 138 kilovolt HTS transmission cable on Long Island by the end of calendar year 2005. We’ll keep you informed on progress on this over the next year. Do note, however, that we are already scoping out with LIPA the next HTS cable segments for Long Island.

That takes me to our super machines business, which reported today an outstanding achievement in the commercialization of HTS technology. Let’s talk first about our 5 Mega Watt ship repulsion motor, the motor that was low tested at full tork in the factory and that we delivered to the US navy in July 2003. We have been informed by the navy’s center for advanced power systems or caps in Florida that they do expect to initiate low testing of the 5 Mega Watt motor next week. Caps has experienced considerable unexpected delays in getting its new facility up and running which has put the 5 Meg motor, which was primed and ready to do its job in a holding pattern. The US navy team is at caps this week performing a final facility review prior to start up of the initial low testing. We have been told to expect initiation of low testing next week as I said and to expect also load and ship simulation testing to continue into the fall. It is then expected that the navy will ship the motor to a naval service warfare center in Philadelphia for special acoustic testing through the winter of 2005. The navy will then define the appropriate further land based and (inaudible) testing to meet its requirements for advanced ship repulsion systems.

In the mean time we have not been idle with respect to our commercialization efforts of HTS ship repulsion motors. As we stated in our last earnings call we had received written proposals from ship builders ad ship repulsion integrators from around the world to develop business relationships directed to commercializing HTS ship repulsion motors for both commercial and military applications. They understand the benefits of HTS marine motors and are waiting for further testing of the 5 Mega Watt motor to take advantage of the breadth and depth of which expertise AMSC has in this area.

We have exchanged documents and we are on track to consummate with one or more of these companies by calendar year end. We believe this will be a very significant step in the commercialization process and we will keep you informed of our progress.

In the meantime, a US navy program to develop and manufacture a 36.5 mega watt motor is on schedule. We have a detailed design we need this fall and we are already cutting models and building HTS cables. We will keep you informed of our progress going forward, however, we do expect to deliver the motor on schedule in the Spring of 2006.

Now let’s turn to a very important – HTS commercialization results. We announced early this morning the successful operation and testing our advanced prototype superVAR synchronized condenser in the demanding environment of a power transmission grid. This machine generated 8 Mega VAR of reactive power on a continuous basis when synchronized with the first energy power transmission grid in Nashville, Ohio. It is interesting to note that the great black out of August 14, 2003, as the US/Canada Black Out Report concluded in April 2004, had as its number one cause insufficient reactive power or VAR support.

To put the superVAR in perspective the 8 Mega VAR reactive power is equivalent to over 10,000 horse power, which is equivalent to the power of F-16 Fighter Jet at take off, generated by a machine whose rotors are turning at 1800 revolutions per minute. So this not a science fair motor such as the 1.2 horsepower motor that others are currently playing with, it is a substantial machine made with real HTS wire that has been demonstrated to operate up to spec in a demanding transmission-grid environment. It is the product of many years of work to not only develop HTS wire but to understand the wires use in applications and perfecting it with customer’s applications.

We are very happy to report its success. The first of its kind on the planet and a decisive next step to commercialization of HTS technologies for the power grids. The superVAR machine is now on its way from Ohio to Galliton Tennessee to be reinstalled in the TVA substation in collaboration with the Tennessee Valley Authority at a steel mill where it was originally located and put up earlier this year. You may recall that after we first put up this machine, the decision was made by us to improve its rotary design in an effort to increase its robustness and to further reduce its cost of manufacturing. This achievement with the advanced prototype bodes well for successful operation on the TVA grid and for sales of superVAR machines in our next fiscal year as planned.

Following successful operation of the prototype it is expected that TVA will begin to release the five superVAR units they have pre-ordered to production. We expect we will deliver these machines within 9-12 months after we’ve seated the production releases. Thus we reconfirm today in our earlier guidance that we expect to manufacture and ship the five superVAR units in our next fiscal year.

And now I will close by commenting briefly on our power electronics systems business. I am pleased to inform you that this business is now for the first time in a position to achieve profitability for the full fiscal year. First of all we have current visibility to a record $12.5m with power electronic systems revenue for this fiscal year. If you take power electronics systems current back log, their first quarter revenues and their solid visibility to additional orders this quarter and next, this business is clearly building strong momentum and approaching break even annual revenues of $16m. The most encouraging news here is the amount of sales activity and the number of orders we are seeing from transmission grid operators. We anticipate further growth in this area as utilities seek to keep voltage levels stable and ensure a reliable flow for the electricity by maintaining a balance of real un-reactive power on the transmission grids. All of this positive activity gives us confidence to target and manage two full year profitability for power electronics systems.

In closing we had a great 1st quarter. We are delighted to be in a position to raise our revenue guidance to the upper end of the range we previously forecasted. The back log of orders is solid and we are now targeting profitability for two more business units for this fiscal year. Above all we are further strapping our technical and market our leadership positions in the HTS wire industry and we have advanced significantly on the path to commercialization of our super machines product line. We look forward to the rest of fiscal 2005 with a feeling of accomplishment for what we have achieved so far and a heightened sense of excitement about what is to come. You can be assured of our total commitment to continue to build AMSC, stay focused on our clearly stated goals and leverage our capabilities and opportunities. We are now happy to take you questions.

Thank you, at this time if you would like to ask a question please press the star and one on your touch tone phone. To withdraw your question at any time please press the pound sign. Once again to ask a question, please press the star and one at this time.

Our first question is from the side of Bill Benton with William Blair, please go ahead sir.

Good morning guys. Congratulations.

Thanks Bill.

This isn’t working well is it? Let’s try this. Good morning and congratulations on the continued progress there. Just a couple, I know you said one question, let me just try to make a multi-part question here. On power electronic systems, first I didn’t know if maybe Greg, you could just comment on where things are at in terms of mandatory liabilities, as I saw some pre-election maneuvering, it looked like may have going on and then just in terms of the financial side of that segment of the business, Kevin you sounded maybe in your commentary like it may be more back end loaded and that you might not see stuff necessarily as much this quarter, this current quarter, as maybe in the next two if you could just confirm that’s what I heard. And in the operating loss there, sequentially that picked up a little bit despite the higher revenue and I know you are talking about break even in that business on $16m in revs and I didn’t know if there were some unusual costs maybe this quarter that may in fact go away, going towards in terms of meeting that break even target.

Ok Bill, I’ll take the first and Kevin will take the last 5

That was a multi-part question on PES Greg.

(laughter) fine. Bill on the reliability standards you know look, I would love to see them happen. We are not counting on it soon. We have always taken the stance, would love to see it happen but in the meantime go get the orders. So we are excited about the possibilities for some year term orders from the transmission side and we’ll let ya’ll know about them when they occur.

So Kevin do you want to take on the operator

Yeah, I think I condensed it down to two if I miss you’ll let me know. In terms of the first one I think you had mentioned sequentially the revenue is up in PES but its down, and that the loss is higher. I think the real reason there is the, to recall the, Long Island power and dVAR shipment that we had in the fourth quarter, had unusually high margins associated with that order primarily because we were able to satisfy the order with inventory that had been written off. Obviously that’s not the case for the delivery this quarter.

Secondly my comments on revenue for PES is being geared towards the second half of the year. It’s a function of basically how we recognize revenue particularly on non-utility orders where the revenue recognition is a lot closer to what I call customer acceptance, which is primarily when the unit is not necessarily shipped but when it’s actually been energized and commissioned, so given the time line involved in that process that has to take it out probably beyond, probably closer to 6 months from the time that the unit is ordered as opposed to a lot sooner with a utility order.

Ok, so just maybe clarify that, it sounds like maybe the revenue in the PES could be more flat type numbers sequentially.

No I don’t think so. I think it will be up but I think that you will, in order to get to the 16 ½ I think you are going to see sequentially higher revenues of much, you know I think the sequential increase will be more dramatic as we enter the back end of the year. Just because of the timing of revenue recognition.

And just again to clarify on the break even, break even at $16m would imply kind of, $4m a quarter which is, I guess, you know up maybe from current levels about $700,000. The loss is obviously greater than $1m right now in the current quarter. What is the dynamics that get you there through the balance of the year? How does that play out?

I think if you again taking the $16m as break even, I think it’s a safe assumption to say that if you quarterize that, that $4m a quarter is pretty close to what we view as break even. I think that we will be at those levels or above for quarter going forward.

Ok, Ok great guys, thanks a lot.

Thats ok Bill.

Our next question is from the site of Gerard Carson with RBC Capital. Please go ahead Sir.

Hi good morning. I feel like I got a little sand bagged with the super machines with the revs coming in at not only, not down as we talked about in mid-May but up in sequential, a little more detail on that and then also on the twelvish million in new orders for the quarter relative to the call in mid-May I know we had some of, those were announced up to that point, what percentage of that roughly has been tacked on if any since mid-May.

Kevin do you want to say something?

I don’t know if I should take the word sand bag as a professional complement or not but I think that what we had mentioned in the May quarter Gerard which is still true is that there is a funny limitation in the navy program through September which is obviously the government’s fiscal year end. Our decision on the program was to continue to, in essence, charge along at the rate of cost incurred on that program, so I think what you are seeing here is that you will definitely, I think we said this in our comments, you will see a sequential downward move in super machines revenue in the second quarter. So from that standpoint I think we are consistent in saying that in the first half the revenue on super machines particularly related to the navy program is going to be less than the second half of the year. How it spanned between the first and second quarter you know we, the reason it’s up obviously again in the first quarter is because we continue to plug along in the program at the current rate we are running at, but again that situation has not changed since our call in May. The second point I didn’t catch you on PES.

On, on, just on the order, we’re talking about that twelvish million.

We, we, yes we have booked incremental orders since the announcement of the large semiconductor order in May. I would characterize it as saying it’s obviously not as big as that one but obviously we’re happy with any order in PES.

Sure and those orders were in dVAR for (inaudible) or

That’s correct.

The incremental

Correct.

Okay thank you.

Our questions is from the site of Jim Richudo [ph] with Needham & Company. Go ahead please.

Good morning. I wonder if you could comment on where you see your backlog exiting this (inaudible) and looking to fiscal ’06 how you see the potential for additional government business, related business in this area?

Well, I’ll let Kevin speak to the numbers as much as he feels he can here but Jim, basically we believe we are going to be able to, and I will make an obvious statement first of all, that is as we go towards the end of fiscal ’06 as we are producing the motor and so forth – the 36 amp megawatt motor, that program is going to be tailing off, as we go to deliver that motor to the customer so, expect it that generally for the 36 megawatt program, that is going to tail down.

As we said today, delivering superVAR machines in the fiscal year ’06 will offset that somewhat but not entirely perhaps and we said before and I will just repeat it here, we expect in our pursuing additional follow on business with the government for our super machines business unit. So Kevin I don’t know if you want to add anything to that but that is probably the general guidance we can give today.

No I think that says pretty much what I was going to say Jim.

I mean do you see and as you look at the fiscal ’06, is there any way that you could give us a sense as to how you see a mix of revenue between commercial and government in super machines?

Dave you want to take a shot at that one?

Yeah I think for the most part what we see, at least in the next 12 to 18 months, the military side is still going to be a big portion of super machines. Obviously we have the success of superVAR and we see that starting to play out in it by ’06 as Greg had previously mentioned, but the majority of the work that we are doing right now for military I think we will continue forward.

Okay thanks.

Sure

I’ll log another question if I can Greg?

Go ahead Jim I am not sure what is going on there.

I wonder if you could talk a little bit about whether you still feel you are on track to ship 650,000 meters of wire this year as we discussed in the past, given the (inaudible) shipment in Q1.

Yeah, I am going to give you the blanket answer, yes. But let me turn it over to our President and Chief Operating Officer, Dave.

Yeah, I guess there are two parts to that question. The first is operationally and the second is from a sales standpoint. Operationally it is absolutely yes, there is, we have a really good process in place now so things are moving fine. From a sales standpoint, I think things look very good. There is still some work to be done there obviously, we have talked about what we have in backlog, but by the end of the fiscal year I think things look pretty good, yes.

Alright. Thank you.

Thank you, our next question is from the site if John Cleeley with Adams Harkness (ph), go ahead please.

Hi John.

Hi actually this is Spence. I’m calling in for John Cleeley. First congrats on the solid quarter and my question has to do with, do you anticipate any cost increase associated with the materials in the year term?

You are speaking about

The rise and decline in price in other words

Now on a relative scale, whether it is fluctuating, obviously (inaudible) pricing I think is probably be the predominant one to speak of and that price fluctuates as you know dramatically in the last six to twelve months. The key areas that we use very little of that, we use actually two tenths of an ounce per meter, so on a relative scale it is not an appreciable difference as it fluctuates.

Okay thanks.

Sure

Our next question is from the site of Michael Hong with Arter Capital, please go ahead.

Hi, I was wondering, could you give some guidance as for your fiscal ’06 revenues.

We are only a quarter into fiscal ’05. I think we need a few – a quarter or two at least, take a look at ’06. I think it is a little early at this point to start making public projections for fiscal ’06.

and I would say traditionally, meaning every other year in the past we never really give forecast or guidance for the subsequent year until we get through our full fiscal year. So whether we do it any earlier than that would be an unusual thing.

Well then can you tell me your expectations on your yearly growth then, from now.

Excuse me I didn’t hear that question?

Can you kind of give me your expectations on the yearly growth then, just a general ballpark?

No anything at this point is speculation, I think we would prefer to play out a good chunk of this year before we start talking about ’06.

Okay

Our next question is from the site of Brian Frackman with Crown Capital. Go ahead please.

Hey guys nice progress this quarter.

Gregory Yurek, Kevin Bisson: Thank you Brian.

If one could drill down a little further into the naval contract, I think you started looking at it in multiple ways. The cost adjustment and then, I guess I am trying to rationalize your comments about September being the government’s time to renew contracts, I have made some calls on ONR and on the IPS program, it seems you guys are the only ones who are making these comments, so I am trying to figure out what is specific about your ONR contracts that are different form the rest of the industry assumingly and what the cost adjustment issue is.

Let me just start out with a general comment for clarification then Kevin can drill down to the numbers that you are asking about. First of all, the government fiscal year is September 30th or the end of it is September 30th and as we said in the last conference call, as we are approaching the end of the government fiscal year, all parts of the Department of Defense have been focusing monies of course on the war in Iraq so there is no surprise about that and so we are trying to be very careful and very transparent in saying that expect that there will be a slow down in funding in the first half of the year as Kevin explained again earlier, to an earlier question, but then when the government fiscal year starts up October 1st, a new fiscal year, we are told by the Navy, that the Navy plans to ramp up their spending on this program. Since you said you talked to ONR, if you did you might be able to find out whether, I don’t know how much they talk about this that this is their number one rated program within ONR. Kevin you want to drill down on the money numbers.

Well I think the important point, Brian I know you have been doing some research on this, our contract obviously is with the Office of Naval research ONR. The other IPS contract that we are aware of which is the (inaudible) motors with NAVC which is a separate division of the Navy, so you are asking about other IPS contracts with ONR, that is probably why you didn’t get much of an answer.

No I guess I’m really just looking at, as you, I think your quote was cost adjustments, the profitability on the contract went from positive to negative, can you just kind of get into what the issue there was.

Well the accounting of this is that we have been accruing on this contract, based on one of the fees which is the cost target, there is a cost target, there is a cost target associated with the contract, as I mentioned due to a subcontractor overspend on the contract. We were basically forced to adjust the amount of fee that we had previously booked. And so it is just an adjustment based on how much we believe it is going to cost us to complete the contract vis-à-vis what the contract language stated. Does that help?

So should we be modeling that back up to profitability or should we be…

Oh yeah, we will continue to book the fee on this. It is just an adjustment as to how much we are going to be booking going forward. Okay again I want to reemphasize the point that there are several other fees associated with this contract therefore the management has made a decision not to accrue any of these fees until they are earned and we think that this is a good prudent approach, given the size of this contract.

Alright guys good luck

Thanks Brain.

Thank you. Our next question shall be from the site of Jamie Perez, That’s Morgan’s Stanley

Good morning, great quarter guys.

thank you Jamie.

Could you give us an update on your bid activity, in the last quarter you said you had – were looking at 88 bids, just provide us some color on that?

I think you may be talking about Power Electronics systems and addressing $80 million worth of business.

Right

So – I don’t have a number at my finger tips here today, Dave is shaking his head ‘no’ as well. So lets just take – what we’re saying at face value both in our earlier comments as well as in the earnings announcements today, we’ve got a great backlog already built up – add that to the revenue already recognized in the first quarter and anticipation of additional orders coming in this quarter and next and we’re on our way to profitability for that business unit this year. So – just take that at face value as much as I can think to say here today.

Okay

Sure.

Thank you. Our next question is now from the site of Robert Smith with Center for Performance, go ahead please.

Yes, congratulations also on your progress.

Thanks a lot.

One of my questions was answered and I guess the second priority would be when you referred to speaking about 2G technology, you seem to be careful about staying in the western hemisphere, was there a reason behind that. I mean that, exclude Suma Tellmo (ph) I guess.

Well I’ve said, we are the only company with HGS wire manufacturing expertise in the western hemisphere, that’s a statement of fact. We manufacture –

Okay, well – I

- we’re shifting, so that would exclude - now we’re talking about 1G here of course, right, cause that’s what manufactured today.

Okay – I misunderstood that.

Yeah, okay. So you’re correct, I mean obviously Suma Tellmo is manufacturing in Japan and obviously not at the performance levels and quantities we’re at and there’s one in China, there are two companies in Europe that are doing Bungee wire manufacturing, again, we feel comfortable relative to our – both market position and in 1GHS wire, which is of course driven by our – the performance of our wire in the market place, so that’s what I was referring to Bob.

Okay. And secondly, the semi conductor manufacturers – you deliver the product to this facility and –

Have we delivered do you say?

Yeah.

We’ll be seeing revenue recognized from those deliveries in the next couple of quarters. Once again we have to not only deliver, we have to have the customer turn on the machine basically for customer acceptance - yeah we’re taking a very, very conservative – cause we think its appropriate – approach revenue recognition here. So that’s what Kevin was addressing in his – with an earlier question, why you would see a ramp. Sequentially we expect to see revenues grow and (inaudible) power electronics systems quarter over quarter, but its going to ramp significantly toward the end of the year because of that revenue recognition policy we have adopted.

Okay, and lets hope we get some really hot weather here. Good luck going forward.

Thanks a lot Bob.

Our next question is now from the site of Mark Plunkett with Atlas Capital, go ahead please.

Hi guys. Had a quick question on the Super Bar front.

Sure

Now that it’s hooked into the grid, how would you anticipate them to test it before they would then clear the way for the other orders.

Well, you know, that’s a bit of a guess, but we’re really, really pleased with how its performed in the Ohio grid and so was TVA by the way, but you know, obviously they to have it operating on their grid and that occurring very soon, anything I say beyond that is a guess because you know, quite frankly they’re customer and we’re the bender and - lets work it out this way, what we said is we believe the release – we already have the orders – they’ll release those orders to production such that we think we’ll be producing and shipping those in our next fiscal year and that’s what we said at the last conference call as well, so we think that’s appropriate guidance we’re stating –

So I guess ballpark time of six to nine months on time frame would be - I guess that would fit what you’re saying on that.

I would say anywhere from three to nine months it could be – the customer is going to dictate where they feel comfortable, saying okay yeah, we’ve seen enough, you know, lets release the first one to production, then they do it sequentially and then they, you know, release to production one or two and we deliver those and then they release the balance – its up to them quite frankly.

Right, sure

But, again we think based on what we’ve seen so far – and by the way TVA top engineering people and transmission operating people have been pie to this – this whole super bar advance prototype so they’re extremely well informed so when they see it operating on their grid, it won’t – there won’t be any surprises for them, they know everything that’s going on.

I guess after that testing period, that’s when you would be hopeful to get out there and find other utilities that would be interested in acquiring the product as well.

Well as you can imagine, we’re not bashful to talking with utilities right now about the availability of super bar, what it can bring to their grid, again as we said many times our transmission planners look at a transmission grid an analyze and, you know, D-bar is the solution for many applications but super bar is a better solution for other. So we’re letting customers – let potential customers know about the advantage of the super bar

I think they’re looking at this as a test K, as the test –

Yeah, absolutely. Realistically they’re going to want to see TVA say “yes sir, this works just the way we thought it would and here’s the release to production.” I think that will be the signal to other utilities that they can take this now seriously.

And with regards to the cost on the development, or you know, you may have some delays. Is that any concern on being able to mass produce these or do you feel like you’ve worked through those issues and what caused the delay on this first prototype.

Well I’m going to say one common issue in the press release but let me turn it over to the chief operating officer to answer that one. The one is – that we’ve said here is, based on when we first pointed up, we looked at what was going on and said “hey you know we could do this better from a point of view of robustness of the machine and also we thin we could take out an additional manufacturing cost for the future promotional product and so that’s what we’ve done and that’s what the new machine that’s – the new prototype machine that’s running here is all about. Dave if you want to comment further on production cost going forward.

That’s probably a good summary, I would say that the – as in any kind of machine design there’s multiple ways to approach the problem and we have probably faster than we thought, we’ve come up with alternative ways that we can produce the same product and the same results with a much less complex product. So what we’ve don in this – in the second iteration of this prototype was to do just that, and so we took the opportunity to make the rotor itself a much less complicated and subsequently easier to manufacture design, so we feel very good about that in terms of volume production.

Okay, great. Alright thank you guys, thanks.

Our next question is from the site of Bill Sanchen as a follow-up with William Blair, go ahead.

number seven

Hey guys. Since I was so good at limiting myself to one question last time, the operator didn’t leave my line open. I was going to try to sneak by two here.

Lets see, well the first one is just kind of an update in terms of yields, if you could just update us there. And then also just to reconfirm on the navy side, you’re still expecting kind of flat year over year in terms of revenue in the navy contract, on a full year basis, is that a fair assessment.

Let me hand it over to Dave on the – to get the chief operating here in terms of the yield question there, we’re pretty happy (inaudible)

Yeah, yield has been very good; in fact it’s better than we originally planned. As you know, this facility has been up and running for – really – truly up and running for less than, I’d say a year in terms of its volume output, but we’re already in yields that are well over 60, 70, 80% on a weekly basis, so we’re feeling really good about where we are in terms of the output coming out of that facility and going forward.

DO you set sequential improvement in kind of yield there; I know last quarter was much improved from the prior quarter before that.

Yeah, we’ve definitely – if looked at it on a curve which we do very often, the curve is a pretty steep curve in terms of how fast its gone up on yield, really what it comes down to is we had a couple key issues to qualify out during the process of getting that machine on whole facility up and running and we’re past those, so you can expect once you’re past one or two key issues, and exponential jump in yield and that’s what’s happened.

Okay, I’m really enjoying getting the weekly reports on yield these days.

Okay good.

Ken I’ll take the second question. The nay contract revenue for the year will be up versus last year. Primarily because it’s a cost reimbursable contract and the fact that we have higher than forecasted cost about - with one subcontract that automatically means the revenue is going to be higher but if you strip that out it would effectively be roughly flat year over year.

Okay. Let me guess – is there any magnitude to that increase, its relatively small but –

Couple a million

Couple million dollars. Well I better get back into queue.

Thanks Bill.

Thanks

Our next question is from the site of Garret Carson (Ph) with RBC Capital Marketing, go ahead please.

Kevin, could you give us visibility into fiscal ’07 – inaudible-

Real wise guy.

The – question on transitioning to 2G in terms of, you know, you’ve talked about trying to configure the initial capacity for about 10,000 meters to start to get some product out to customers. For fiscal next year can you address may be a concern on how you will manage perhaps customer expectations as you got 550 to 600,000 meters in shipments this year and the potential that people will look at 2G (ph) and say we want to wait 6 or 12 months and place our order for 2G product to, for our product development process relative to going ahead with the first generation.

Good questions Jared let me just correct something. You said our capacity would be 10,000 meters next year for 2G.

Okay.

And our capacity will be factors higher than that. What we have said is that we expect to ship over 10,000 meters to customers and that’s yielded from the capacity, okay.

From the pre-pilot lines?

In the pre-pilot line.

Right okay.

Capacity will be factors higher than the 10,000 meters. But we expect to ship wire more than 10,000 meters of wire to customers. Now when I say factors above what are you going to do with all that wire? Well this is a pre-pilot line and therefore a lot of it is going to be in fact used for demonstrating that we can make it wider, longer, better, take out more cost etc, etc that’s what a pre-pilot line is all about. And so it’s a pilot line for that matter. So just want to clarify that, but out of all that we plan to ship over 10,000 meters to customers next year. Now what if we didn’t do that? I mean as I said earlier there are customers who are demanding higher performance. They are demanding better strength and durability of wire. We have terrific wire with HTS first generation wire meeting all these needs clearly, we’re shipping all this wire.

But customers always want more performance and of course they always want it at lower cost. We’re being responsive to that. Will there be some customers that say hey you know this is getting close I think I’ll wait? Sure there will be some of us that do that, no question about it. It’s something we’ve been concerned about for years and because of that we’ve kept relatively quiet about our progress in 2G technology systematic manufacturing development. But at this stage the customers have gotten pretty smart and once again they want higher performance. They want it at lower cost. So we’re managing through the transition and by – at this point actually we’re driving the transition into the market place with 2G. Hope that answers that question.

Okay that is helpful.

Thank you our next question is a follow up from Jim Ricchiuti with Needham and Co, go ahead please.

Thank you I wonder if you could comment on what the pipeline for new business looks like in the wires business and also in the CS (ph) business you talked about I pick up from the interest and activity from the traditional utility customers – I wonder would you be able to comment on what’s changed there? Because that’s clearly a little sluggish.

Yes let me start with the first one here, again getting into the pipeline is another way trying to get to answer to the question about ’06 and maybe even ’07 as Jared was looking for. So we have a lot of significant opportunities we’re pursuing for HTS wires. And again it’s early it’s only 4 months into this fiscal year. And we certainly don’t want to get into any numbers for the next fiscal year at this stage of the game. But (multiple speakers). We’re pursuing some opportunities on the wire front that Jim are really significant and will be at least the first generation wire at least they are flat year over year in terms of wire. I think that’s probably as much as we can say at this stage of the game.

And on the -- I think you were asking about power electronics system and our comments that we’d expect some near term orders to close from transmission grid operators to get (indiscernible). We have very good visibility into that now and quite frankly I think we’re starting to get into reaping in some of the fruits of all the labor we’ve done. Educating the customer about what the product kit can do for them they dug into what their grid problems are and they realize they have to solve these problems. By the way even though some body asked earlier about the reliability standards even though those have not been formalized with some enforcement behind them, still the federal energy regulatory commission has been really digging in with the various utilities, the various regions to their reactive power studies.

And that has raised the level of consciousness about the need for products like D- bar (ph) and super bar (ph). So as I said we’re just plowing forward and I think we’re going to see some fruits of the labor here.

Okay thank you.

Yes.

Our next question is now from the site of Jerry Harnesh (ph) and he is with Independent Advisors, go ahead please.

Hi guys pretty good quarter.

Hi Jerry.

Question for you here one of the comments you made earlier was that as the navy contract winds down on a revenue basis that it was possible that the S-Bar (ph) revenues could pick up and compensate for that to some extent. My question is on the margin side of that is the S-Bar considerable larger margins or (indiscernible) in the Navy contract? And kind of a multi part question here, I’m a little unclear on the cash burdens (ph) going forward with the increased revenue out look, any possibilities of a break even on cash burden basis by fourth quarter or are you still expect some burn?

We first go to Dave on the margins we can’t say a lot on this at this early stage. We don’t want to set up expectations with customers in the wrong way you can imagine. So Dave will give you a limited answer on that one.

Yes I think it’s safe to say that it’s obviously with initial production you’re not looking at drastic margins in any low volume kind of manufacturing’s. So I would say to for comparative between the Navy contract and the initial view super bars, no I don’t think you should expect to have significant margin differences in those two things.

I think it’s safe to say though Jerry that as we ramp up production on the super bar that in a long run that will be a more profitable product line than the Navy contract. As you know the Navy contract is essentially a cost re-reimbursable contract with some fee attached to it. But clearly we would expect the margins and therefore the profitability to super bar at some level of scale production to be much more profitable than the contract.

And your second question on cash burn. I think we will continue to have cash burn for the year. You know I think we made some very good progress on reducing the burn we demonstrated that over the last several quarters. I think that that progress will continue but I think it will be a stretch to say that we will be cash neutral for this fiscal 2005.

Okay thank you guys.

Yes.

Our next question is now a follow up from John Cleely (ph) with Adams Harkness, go ahead please.

Yes just a short question regarding actually – looking like the 1G capacity is running at full end increase – just curious what if we can’t make all those 550,000 meters wires by time? Will there be a financial penalty associated with that or it just get shifted to next year?

No there is – from a contractual stand point the penalties are really not there but let me just re-iterate the fact that I’m extremely confident that the 550,000 is something from an operational level we can achieve.

Okay great, thanks.

We have time for perhaps one, two more questions.

Thank you our next question is from the site of Mark Weiss with Amando (ph) go ahead please.

Oh hi congratulations on a good quarter.

Thanks.

I got on the call late so I apologize if I’m asking a question that have already been asked. But did you discuss at all the progress on electric motors for commercial vessels at all as you have entered into the five mega watt motors? Any progress there and I also need a quick up day to day on the mag lev (ph) training front with Japanese partners are there any opportunities for them in sight?

Mark with respect to the other people on the call I think we’ll just skip the first question the answer is yes we did. And I don’t want to go through and repeat it for every body else at this stage on the 5 meg. With respect to the mag lev of – we said at our – I’m sorry we said in China.

Yes we (indiscernible) with their partner in Japan in terms of their progress on that market.

Yes so we’re focused on the mag lev train, super conductor mag lev in Japan, correct? Is that what you’re asking about?

Yes.

We said on the last earnings conference call that we had shipped wiring our last fiscal year to Central Japan Railways. That has built coils and they announced separately that they had a lot of successes and they saw this as a way to take significant amounts of cost in their super conductor mag lev system. And we said we plan to ship additional wire in fact even more wire this fiscal year to Central Japan Railways. That is under way we are shipping wire to them within respects – I got to tell you that they are one of the – they are the toughest wire specs in the world that we have from any of our customers but we’re meeting them.

So that is moving on plan and we’re delighted about them. I think we also said last time that if they perform on their part of the contracts using this wire that they would be looking to have at least one HTS magnet on their existing and operating super conductor meg lev train by the end of calendar 2005 early 2006 and that’s their published plan.

Thank you.

Sure.

Thank you this does conclude our question and answer section. I would like to return the program to our host for further comments.

Thanks for listening into our conference call today. Very good questions and we appreciate them and we look forward to seeing you at the next conference call, thanks.

Ladies and gentlemen this concludes today’s conference call thank you for your participation you may now disconnect your phone lines and have a great day.