American Superconductor Corp (AMSC) 2006 Q1 法說會逐字稿

Good morning and welcome to American Superconductor fiscal year 2006 first quarter conference call. With us is Greg Yurek, Chairman and CEO, and Kevin Bisson, Senior Vice President and CFO of American Superconductor. I'd like to turn the call over to Greg Yurek, go ahead, sir.

Thanks. Good morning and welcome to our fiscal 2006 first quarter conference call. On the call with me today is Kevin, as well as Terry Winter, our Chief Operating Officer, and John Howe, our Vice President for Electric Industry affairs.

In our conference call today, we're going to review the numbers that we released this morning in the announcement, and provide a brief update on key benchmarks and then we'll open up the session for your questions. First, however, I'd like to ask Kevin to provide the Safe Harbor guidance and to provide highlights on the financial reports, Kevin?

Thanks, Greg. Good morning, everyone.

Before we begin discussing financial results for the first quarter of fiscal 2006, 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 first quarter was $12.2 million, which was 0.5 million or 4% lower than revenue in the first quarter fiscal 2005. Strong year-over-year sales growth at Power Electronic Systems driven by wind power related D-VAR revenue was offset by lower direct labor spending SuperMachines related to the large Navy Motor Program and lower first generation or 1G wire shipments at AMSC Wires business unit.

Orders received during the first quarter amounted to $2.4 million. Which was lower than the $12.1 million of orders generated in the first quarter of fiscal 2005. It should be noted that power electronic systems generated $9.1 million of $12.1 million of orders obtained first quarter last year driven primarily of a receipt of order for PQ-IVR for a large U.S. semiconductor manufacturer.

As Greg will discuss in more detail in his remarks, we anticipate order growth at power Electronic Systems for the remainder of the year to be fulfilled by similar-type industrial customers coupled with utilities and wind farm operators on the heels of pending signing of the Energy Bill by President Bush. Backlog as of June 30, 2005, stood at $24.3 million, which was down $9.9 million from backlog of $34.2 million March 31, 2005.

As we mentioned in this morning's Press Release, we have current visibility to, approximately, $44 million in revenue, for fiscal 2006. Through the combination of $12.2 million of revenue generated in the first quarter, $18.5 million of current backlog expected to be converted to revenue through the remainder of the fiscal year, and approximately ,$13 million related to increased funding which is being negotiated for the Navy Motor Program and a Long Island Power Authority or LIPA cable contract. Both programs approaching the contractual funding limits and will require contract funding modifications to complete the contracts.

Based on the favorite discussions with the Navy and the Department of Energy, we are confident that these contract modifications will be completed and approved within the next three months and that incremental funding is be sufficient to complete both programs. The operating loss for the first quarter of $6.3 million was $1.3 million higher than the operating loss of $5 million in the first quarter of fiscal 2005. Lower year-over-year 1G wire shipments combined with increased 2G-related R&D spending at AMSC Wires more than offset the improved operating loss at SuperMachines due to lower SuperVAR related spending and one time incentive fee adjustment on the Navy program recorded in last year's first quarter.

In addition, higher sales volumes related margins drove the year-over-year operating loss improvement at Power Electronic Systems. Net loss for the first quarter was $5.6 million, 0.7 million higher than the net loss of $4.9 million in last year's first quarter. The first quarter's net loss reflects higher interest income than last year's first quarter, due to higher average cash and investment balances results from the $45.5 million of net proceeds from the Company's public stock offering of 4.6 million shares in March of 2005. Net loss per share for the quarter was $0.17 per share was a penny per share favorable to the $0.18 per share loss in first quarter fiscal 2005.

The Company ended the first quarter with $81.5 million in cash, cash equivalents and short and long-term investments compared to the corresponding $87.6 million balance at March 31, 2005. The cash burn for the quarter of $6.1 million included $1.7 million payment made in April to a past financial advisor of the Company in settlement of a litigation matter. The remaining cash burn of first quarter of $4.4 million was driven primarily by the Company's net loss of $5.6 million, and increased inventory of $2.8 million driven primarily by higher D-VAR and 1G wire inventory, partially offset $1.9 million of non-cash depreciation and amortization, higher payables and accruals of 1.4 million excluding impact of the settlement payment and 0.7 million of proceeds from the exercise of employee stock options.

Turning to full year guidance for fiscal 2006, we reaffirm our revenue guidance for full year revenue to be in the range of $55 million to $65 million. As we mentioned in our last earnings conference call in May, and in this morning's earnings release, we expect full year revenues to be more heavily weighted toward the second half of the fiscal year due to the Navy's funding profile for the large motor program as well as the expected timing of revenue recognition for Power Electronic Systems orders expected to be received over the next several months.

We also are reiterating our net loss guidance for fiscal 2006 to be in the range of $18 million to $23 million, with the corresponding loss per share to be between $0.55 and $0.70 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 you ask one question and if you have an immediate follow-up to clarify the response we'll be happy to answer. Otherwise if you have additional questions, please allow others to ask the questions first in order to allow as many people as possible to participate in the question and answer section.

Thanks, I'll turn it back to Greg.

Thanks, Kevin.

In our last two earnings conference calls we provided a list of key benchmarks that management and you could utilize to track and measure our progress toward achievement of our business objectives. We also discussed two significant catalysts for our business, the Energy Bill and the Kyoto protocol, and today I'll review the benchmarks we laid out for you and update you on the progress for each of them.

I want to start today with comments on one of the catalysts, and that is the 2005 Energy Policy Act or Energy Bill, as it's commonly called. the Energy Bill was passed by both Houses of Congress and President Bush plans to sign the Bill next Monday at Sandia National Lab in New Mexico, so this catalyst is about to to go live.

How is it a catalyst for American Superconductor's business? To address the question we created an energy bill matrix that provides the categories of the bill that we expect to provide direct benefit to AMSC. In the matrix we provide the citations for each category in the Bill and how we see each category providing a business benefit to our company.

You can access the Energy Bill matrix on the home page at www.amsuper.com in the "learn more" section. The Bill provides benefits for development and sales of AMSC's current and future products, including HTS wire for new cable projects, D-VAR and SuperVAR systems needed to meet new enforceable grid reliability standards, and PowerModule, power electronic converters for fuel cells and wind turbines among others. The Bill authorizes spending of whatever sums are necessary to carry out the so-called power delivery research initiative, which specifically directs the D.O.E., Department of Energy, to launch a three year effort to complete the development and commercialization of high temperature, superconductor cables to solve power grid congestion problems. We believe American Superconductor is well positioned to receive a substantial portion of such funds and we believe the initial funds for the type of HTS cable projects that are called for in the power delivery research initiative will start to flow in the second half of government fiscal year 2006, through the Department of Energy's superconductivity program.

In fact, on Tuesday of this week the D.O.E. published a notice of inquiry in the federal register to solicit input for additional HTS power system projects for possible funding in the new government fiscal year. The deadline for responding is September 16, 2005. AMSC will be actively engaged in this process as a potential prime contractor and as a wire supplier for other industrial companies that expect to submit proposals for the HTS power equipment projects.

As with most of the Energy Bills effect on AMSC's revenues look for this to start to add to the backlog in the fourth quarter of our current fiscal year with revenues from contracts such as those called for in the power delivery research initiative of the Bill wrapping up in the next fiscal year and beyond. We did not include revenues originating from the effects of the Energy Bill in the estimated revenues of 55 to 65 million for our current fiscal year, quite frankly we're not certain of the timing concerning passage of the Bill. As already stated, there are clearly a wide range of potential benefits for AMSC's business coming out of the Energy Bill, including PUHCA reform, which is expected by industry experts to lead to a ramp up in the investment of transmission grid, and tax credit for fuel cells and wind farms, both of which should lead to more PowerModule and D-VAR sales and much more.

I'll leave the rest of the discussion bill at this point to the question-and-answer period and turn to the specific benchmarks we spelled out in the last two earnings calls, some of which have already been accomplished; some of which will take another year to complete. These are all the big benchmarks to keep your eye on. Our first benchmark is to achieve our revenue target for the fiscal year. We confirmed our revenue guidance of 55 million to 65 million in our earnings announcement earlier this morning, and we currently have visibility to revenues of $44 million for the fiscal year, which is 75% of the mid range of our guidance.

Clearly, to achieve for example, the mid range of the guidance, we'll need to bring in $16 million in additional orders and convert them to revenues during the remainder of the fiscal year. We believe we have strong prospects for new orders that will be shipped and be recognized as revenue for this fiscal year for industrial and wind farm D-VAR systems, one or more new U.S. Navy contracts for HTS rotating machines, wire orders for government and non-government opportunities, including sales of the new 344 superconductor wires and orders and contracts for PowerModule power electronic converters. So, as we guided previously, we're looking for a stronger second half than the first half of this fiscal year, and expect to achieve the revenue target for the year.

Now, in the last earnings call we added a benchmark, and that was we expected to win a series of substantial multi-year contracts for HTS cables and follow on Navy development work. By substantial, we said we mean tens of millions of dollars, per contract. We have made very good progress with the U.S. Navy and with Capitol Hill toward achieving the objective of new substantial Navy contracts for HTS rotating machines and we believe at least one of these will add to our top line in the last quarter of our fiscal year and that these contracts will add substantially to the backlog for next fiscal year.

The larger HTS cable project will come from the power delivery research in the Energy Bill as already discussed. While we could see some revenue from a new HTS cable project coming through the Department of Energy in the last quarter of this fiscal year, it is best to view a new substantial HTS cable project primarily as backlog for our next fiscal year, which is consistent with the earlier guides and; that is this does not change our estimate of 55 to 65 million for the revenue of the current fiscal year.

The third benchmark we laid out for you was the demonstration of our second generation, or 2G, 4-Centimeter Technology on a reproducible basis and our pre-pilot line and to be shipping 2G wire. Yesterday we reported compelling new results from 2G operation and provided a lot of detail in the Press Release yesterday so I won't repeat all of that here.

It's important to remember a substantial fraction of the so-called pre-pilot operation consists of full scale production equipment, which we have commissioned and utilizing to qualify our 2G 4-Centimeter Technology. As reported yesterday, we are now able to make 4-centimeter wide strips of 2G material over 80 to 100-meter lengths. Recall that our plan calls for us to produce 4-centimeter wide, 100-meter long strips of 2G material in the pre-pilot line through mid calendar year 2007.

We expect to initiate regular production runs of 100-meter long 344 superconductors in the current quarter. We also remain on plan to complete the demonstration of all aspects of our proprietary 2G HTS Wire manufacturing technology by December 2005, and to begin ordering the remaining full-scale manufacturing equipment needed for our pilot wire manufacturing operation in early calendar 2006. Once we install and commission all the additional full scale manufacturing equipment, in our pilot manufacturing operations, we expecting to be producing 4-centimeter wide strips that are 1,000 meters long so that will be a significant uptick in length of the base product. We confirm that we expect to have a production capacity of 300,000 meters per year of 344 superconductors by December, 2007.

With the results reported yesterday, it is clear that we're in great shape to achieve this benchmark and this includes shipping the 344 superconductor wire to customers during the second half of calendar 2005. In fact, given the outstanding quotations to customers at this stage, we believe we're on track to ship a significant amount of 344 superconductor wire to customers by the end of the current fiscal year.

In case you missed the Press Release yesterday, the 344 superconductor wire is a three-ply, 4.4 millimeter wide, 2G HTS Wire, which in itself is a mouthful, and which is the main product that will be coming out of our 2G wire manufacturing operations going forward.

The fourth benchmark is that we plan to start ordering and putting in place a significant amount of the full scale manufacturing equipment needed for the 2G pilot line. Our publicly stated plan to get the 2G pre-pilot line up and running, demonstrate reproducibility of wire production, make adjustments to the pre-pilot line as we go forward, and leverage all this knowledge and experience to finalize the specifications for the pilot manufacturing equipment.

The plan we have reviewed with you previously is that we would start to order full scale manufacturing equipment for the pilot manufacturing operation beginning in the last quarter of this fiscal year. We believe we're on track to achieve the benchmark which will be a signal we're satisfied with the operation of the pre-pilot line and with the manufacturing technologies and strategies we have selected for 2G HTS wire, and that we're continuing to ramp up the 2G wire production. In fact, in July we ordered already one original piece of the full scale production equipment so we're on plan in this particular regard. Bottom line we expect to meet the objective.

The fifth benchmark was formation of a new corporate strategic alliance focused on 2G, HTS-based fall current limiters. We checked this box when we announced in February 2005 that we had signed strategic alliance with Siemens Corporation to develop 2G HTS fall current limiters. Now the benchmark is checked off and alliance well under way and working smoothly we won't revisit the benchmark in the earnings calls going forward. I might add, though, that the development and demonstration of our 344 superconductors has generated strong interest from other equipment vendors for both transformers and fall current limiters so I don't think it will be the last time you hear us discuss this segment of the market.

The sixth benchmark was installation of the world's first transmission voltage VLI, or very low impedance superconductor cable in the commercial grid of Long Island Power Authority. This project is on track for installation during calendar year 2006 and for energizing the HTS cable in the LIPA grid in September 2006. Achievement of this benchmark will clear one of the major final hurdles to the commercialization of high capacity controllable superconductor cables so we're all going to be watching this one carefully. We expect to ship all of the 1G HTS wire for this cable to Nexans, the power cable manufacturer during the second and third quarters.

The seventh benchmark the receipt of wire orders for two additional power cable projects. We received one of these orders from Ultera for the HTS cable project with American electric power in Columbus, Ohio, and we have shipped 49,000 meters, or about 30 miles of 1G wire to Ultera in June and July. Ultera expects to start installation of the cable system in Columbus, Ohio, in December 2005 and to energize the cable in May 2006.

We completed this benchmark of the two cable wire orders in June 2005 when we received an additional order, now, for six miles, or 10,000 meters of 1G HTS Wire from Condumex for an HTS cable project in Mexico City. Having achieved the benchmark for two cable wire orders we forecast we'll receive a wire order for third HTS cable project by the end of this calendar year and should be a project of similar size to the Mexico City project.

This is worth noting that each new cable project adds more momentum to the market for HTS power cables. Right now, there are 9 cable manufacturers around the world that are engaged in the development and demonstration of HTS cable projects. of the 9 cable projects under way, some with multiple -- by one more than one cable manufacturer more than half are being powered by AMSC wire. The next really large HTS cable project beyond the one I just mentioned is expected to emerge from the Energy Bill's power delivery research energy initiative next year. Let me repeat AMSC is very well positioned to be at the heart of such a cable project.

The eighth benchmark was shipment of the first commercial SuperVAR synchronous condenser, and we stated in the earnings announcement this morning the SuperVAR prototype is well on the TVA grid where it has successfully handled millions of voltage events. TVA is pleased with the performance of the prototypes and we are in discussions regarding the conclusion of valuation process to officially could go throughout end of the calendar year and obviously like to see TVA move faster to release the orders for five SuperVAR machines to production; however, to be on the safe side, let's assume here they'll take the full 12-month evaluation period and in that case expect to be shipping the first commercial SuperVAR machine in the summer of2006.

In the meantime, we've continued to engage with other potential utility customers for SuperVAR machines and we're targeting at least one additional order for SuperVAR by the end of our current fiscal year. Clearly, once the investments and the transmission grids start to gather momentum coming out of the Energy Bill we expect enter SuperVAR sales to increase all along with D-VAR sales also increasing.

The ninth benchmark we sat completion of the manufacturer of the 36.5 megawatt HTS ship propulsion motor for the U.S. Navy. We expect to ship the HTS rotor assembly for this motor to Northrup Grumman in January 2006. In addition we expect to complete factory testing and delivery of the motor to the Navy in the summer of 2006. All on plan. We believe that our strong performance to date on this Navy development contract bodes well for us to receive the additional Navy contracts for HTS ship propulsion systems that we discussed earlier.

Our final key benchmark was the formation of strategic business alliance with one of the major players in global electric ship propulsion market. The objective here was to operate the penetration of worldwide commercial ship propulsion market and higher density HTS plotters and generators to supplement the marketing and sales effort with the U.S. Military which is already covered under -- or by the strategic alliance we formed with Northrup Grumman marine systems in October 2004.

Our intention is to form an alliance with the business partner that has both the appropriate industry experience and market presence worldwide which will help us grow sales more rapidly. We believe we're on track to achieve this benchmark this fiscal year. So, that is the progress report on our key benchmarks. We'll keep you informed of our progress over the next month and quarters. In closing, I want to underscore our progress in pursuing financial, business and technical goals during the first quarter was strong and on plan, and we remain confident regarding our outlook for this fiscal year and beyond. We're especially pleased with our best in class 344 superconductor wire and we're very excited about the prospects for growth across the businesses over the next year and beyond. We're now happy to take your questions.

At this time, Ladies and Gentlemen [ OPERATOR INSTRUCTIONS ]. We'll take the first question from the site of Ed Litman with William Blair & Company. Go ahead, please.

Good morning, guys.

Hi, Ed.

Greg, can you talk a little bit about how quickly you think you'll see order activity start to ramp in Power Electronic Systems with the passage of the Energy Bill? and maybe how long you think it takes to get that activity back up to levels where, maybe, it was a year or year or two ago when you were quoting pretty high order activity levels?

Yes. I think, Ed, quite clearly, and look at the business plan here and we're going to see a ramp of that magnitude even without the Energy Bill during the remainder of fiscal year. That is going to take us to, I think, the very nice road for our Power Electronic Systems business year-over-year. and increase profitability for that unit during the current fiscal year. We couldn't count on the Energy Bill to get us there and that's not baked into the numbers for this fiscal year.

Having said that, quite clearly, the extension of production of tax credit for wind farms is a boost. We've seen a number of wind farm developers in the United States, which are affected by the PTC start to shake loose now and start to call back to us. Whether we'll see that add in this fiscal year or not remains to be seen and that's two cases could be the stimulus and clearly it's going to add to the revenue growth going forward, which means, you know, backlog growth by the end of the fiscal year and revenue already this year baked in without the Energy Bill the way I look at it.

I want to emphasize something both Kevin and I mentioned, a lot of the growth here, I think, this year, is coming from from the industrial side. and that's off of the clear success that we've had with the PQ-IVRs at Micron Technologies that got installed last December. So look for that to be a strong contributor to growth this fiscal year. By the way, I want to add also, in our Energy Bill matrix, the production tax credit or tax credit for fuel cells, I think, is also going to be a boom. Because we expect to see more PowerModule, power power electronic converter sales driven off renewable energies, all of which require power converters of one type or another and that's a benefit to the Power Electronics Systems business unit. Okay, Ed?

Colin?

Oh, no.

Yes, sir. We'll go to the next question from the line of Jim Ricchiuti with Needham. Go ahead, please, the line is open.

Thank you. Good morning, just another question on the Power Electronics Systems business. I wonder if you can comment on the operating loss in this business? Given the fact, you know, year-over-year, you showed almost, looks like 70% increase in revenues, and, yet, still, a pretty significant operating loss. Almost, what, $1.1 million. Can you talk a little bit more about that and what you see going forward?

No. I think couple of things, Jim. I think, one, is that we have said in the past that you know this business is roughly break-even at $16 million. So you quarterize that for lack of a better term, you know, roughly give or take $4 million per quarter and probably a break-even number and obviously we're under that in terms of the revenue run rate. I think the other thing we saw, too, is that the margins on the revenue that we generated in this quarter were a little lighter than the norm. Primarily because of the material increases on some of the pass-through items relative to this particular order that we generated as revenue in the quarter. I wouldn't characterize the material increases as pervasive through remaining orders during this year, but particular to the shipment that we had during the quarter. Hello?

Collin?

Yes, sir. Next question from the site of Walter Nasdeo from Ardour Capital, go ahead, please.

Good morning. I have -- going back to the visible revenue of $44 million for the year, can you kind of give a break down of how, you know, through the business lines on how that breaks out?

Yeah. I think we clearly talked about in terms of backlog aid $18.5 million in backlog right now and I would say half of that, Walter, is between the Navy Motor Program and LIPA. and the lion's share of the west is probably electronic systems. In terms of the 13 million, we talked about that being both the Navy and LIPA contract for which we expect the contract modifications to be finalized within the next three months.

and I think the remaining $16 million, I believe Greg was talking about $16 million of so-called go-get to get to the mid point of our revenue range. Clearly, the bulk of that will be in the Power Electronic Systems' side of the house, primarily as we talked about related to industrial orders that we are going after at this point, and I'd say the rest of it, of that $16 million, give or take 2/3 of that 16 is Power Electronic Systems and the remainder of that is the Navy contracts, the follow-on Navy contracts that we talked about, where we expect some of the revenue to come in, probably in the fourth quarter of this year, as well as the remaining of that is the wire orders for 1G wire that we expect to book and ship this fiscal year.

Okay. Just so I can clarify, then. The -- if you're assuming some Navy contract money coming in in the fourth quarter, you must be fairly close to signing a new contract? Is that a reasonable assumption?

As we said we made very good progress over a long period of time, actually. But more recently both on Capitol Hill as well as with the purse string holders in the Navy, let's call them. So our expectations are very high that we'll be signing at least one of the two key contracts that we're going after here.

Do you have any idea of the size of that, that contract?

Again. We define these as substantial and define substantial as tens of millions of dollars. I'm not going to get more specific than that. They're going to be substantial contracts.

Okay. Thank you very much.

Sure.

Take the next question from the site of Jarett Carson with RBC. Go ahead, please.

Good morning.

Good morning, Jar.

Greg, sounds like the 2G is going progressing quite well and that you're going to be making a number of 100-meter lengths. What is it that -- what's the final gate, I guess, in terms of relative to ordering equipment in the first quarter that you feel you need to prove out?

Well, it is a very good question. Right now, Jarret, it's really going through the finalization of the specifications for the additional production equipment, and obviously we reported today we went ahead and completed the specifics on one of the full-scale production -- pieces of production equipment and we already put the order in.

Our confidence level is very high here. It is really a matter of time working through the manufacturing engineering team and coming up with the final specifications getting clarified and getting in. I say, we don't have a lot left to prove to ourselves that's really a matter of defining the specification and getting the orders in and we believe we're strongly on track.

Jarret the other thing I'd add repeatability and reproducibility of the process at 100-meters is important as well and once we get to that, that will be another trigger to the ordering to go to the ordering of the pilot production.

SuperVAR talking about shipment in summer of next year and I know SuperVAR continues to -- I don't want to say, linger, lag a little bit. That, I guess, has to mean, given the cycle of a likely order in this fiscal year? Is that -- is that unfair?

No, we're looking this fiscal year and 12-month period, rear, we installed this SuperVAR advance prototype in the grid in Tennessee and -- in November, near end of November in '04 and an official 12-month evaluation period and the utility industry we all know is very conservative and I think best to assume TVA will take the full 12-months and then looking at an order here, let's call it the fourth quarter here to be -- move it over into the next quarter and then we ship it in the summer.

Clearer. I think on previous calls been, maybe, hoping inside of the 12-month period? Relative to--

Well, absolutely no question. You know, for -- the machine is working and you know let's get on with it. But, again, we're going through the finalization of the specifications with TVA and a lot of parts of the specifications that have to be decided and slow methodical process that one goes through, with a brand new product into the grid and we expect the order to, of course, be released and let's put it 12-month period instead of getting it down early at this stage.

Thank you.

Move on to the next question from the site of David Kurtzman with Kurtzman Partners, LP.

Question about the new 344 standard wire you recently introduced. Is this actually three pieces of slit wire that are, then, laminated together to get this performance?

No. I mean, the three -- it is not, David. It is described in I think the announcement yesterday, it's one piece of slit wire that is laminated or sandwiched between two pieces of copper strip, one on either side of the slit wire and single piece of slit wire.

What you announced about a year ago adding copper to increase the stability of the wire?

We've always added copper for stability, including the first generation and the good news, this is technology manufacturing operations that we use everyday in making 1G wire, so we've adapted it to the 2G wire. It's a bit different architecture we talked about a year ago in specifics so it's really something that we've graduated to, let's say, in the details of the architecture of this 344 wire.

As a follow-up to the 3-ply question, it I can about the performance of the through-put production rates that you're achieving at this point? How fast you can produce it and what the consistency is?

Well, again, we're in the pre-pilot stage and we're proving out the consistency of everything at this stage and that's the whole idea of pre-pilot and full scale production in place as well as upgraded development equipment. That's what we define as pre-pilot and proving out the consistency and requesting to the wider widths as well as the longer lengths. Our process is inherently cheaper than anything else that's out there. We took 10 years to down select to the lowest cost manufacturing process.

We also add on top of that, slitting which takes out more costs. But you got to prove you can go to wider widths as well as longer lengths and that's what we're doing and announced yesterday. We're on a path of success, the good news.

Kevin mentioned one of the things we're driving toward in the remaining whatever it is, five months of this year, is calendar year, is showing that consistency to ourselves and learning a lot, what the pre-pilot is all about and order the full remaining full scale manufacturing equipment for the pilot line and operate there. That's where you're going to look for, that's why it is a pilot and not immediately manufacturing, showing the further improvement of consistency over time. Any manufacturing is going to have questions about what the yield is, and if it's perfect out of the gate. I don't believe it ! Never is.

Good news is it's looking pretty darn good for the process and our pilot line will be about linear rates of 40-meters an hour when we get started with that next year.

Great. Thank you.

Yep.

We'll move on to our next site; Brian Freckmann with Crown Capital.

How are you?

Hey, Brian.

I hate to point it out, the last couple of conference calls some of the quotes have sort of been delayed. and I'm referring to the excitement on last call was about the $140 million from the Energy Bill and I think it was 1225, and now you guys are talking sort of differently about second half of next year, federal funding.

I wanted to sort of figure out, since in the last -- or in the sort of the previous Energy Bill, there was some specific wording to you guys and now there's -- there doesn't seem to be anything exactly directly. Where can we look for funding that you guys are expecting to find in that back half of next year? Specifically.

Brian. I'll point you to our home page and go to that Energy Bill matrix I mentioned earlier and that will give you specific citations. I spoke earlier about the power delivery research initiative, which is part of the bill and that language is precisely the same as it's been for the last year or so.

Except for one thing is, as you went -- went through the process here, the house came up with $140 million and a number you're remembering for the HTS cable systems under PDRI if I can use the abbreviation. The senate came in later this spring, I think after our last conference call and in and in fact it was, and it was $105 million over three years, the House had $140 million over five years and process in Washington the house and senate come together in what's called conference committee and say you have a different number and different time than we do and work these things out in conference.

In conference they decided, in fact, not changing any of that specific language in terms of power delivery search initiative is all about. It directs the D.O.E. to go forward and get the cable projects done, period. They came out and said whatever it takes to get it down and whatever cash it takes to get it done, go get done. From our perspective that's good news go get it done and whatever it takes let's get it paid for and move it forward. That's the process.

I'm on the Web site, what part?

Home page, second item down, should be the Energy Bill matrix.

Got it, okay. I'll take a look, thanks.

Thanks, Brian.

We'll take the next question from the site of David Gross from Silicon Equity Research.

Wonder if you have a head count number for the quarter?

264, same as the end of the year.

Great, thank you.

Yep.

Next question Robert Smith, Center For Performance, go ahead, please.

Hi, Bob.

Addressing LIPA when would Phase 1 be concluded? In other words it, assuming everything goes on schedule, and you and is Phase 2 ready to lit the ground running then?

By Phase 2 you mean a follow on?

Yes. Lengthening further east.

Yes. The plan would call for, I think, 9 months or 12-months of operation of that cable. I don't think anybody would expect LIPA to release an order here.

That's what I meant. So, answer is fully accepted.

So you look at, this is energized the plan is quite clear at this stage and going to be energized in Holbrook, location, on Long Island, September 2006 and expect to operate that through the remainder of '06 and into '07. You're looking at sometime the second half of '07 I would expect before you see the order of let's say a five mile segment coming to us.

Yeah. and, are they clear as to where this ultimately is going? Going all of the way to Montauk?

Out to the fork, I'm not sure it's called Montauk, whatever the Y is, the fork there is. They literally call it the power spine of Long Island and this cable right adjacent to the power spine and then they expect to speak about going all of the way out the island.

and again how many miles is that? Do you know?

I believe the total including the five, 40-miles out there.

Okay. Thank you.

Sure.

Now take a question from the site of [Mark Plunkett with Alice Capital.] Go ahead, please.

On backlog, what do you expect it to be exiting the current quarter?

Well, we haven't given quarterly guidance on any of that, Mark, and we're not going to start this call. Kevin, unless you have color? Mark we don't give quarterly.

Thought you'd have a sense on when you'd be exiting. How much or how much wow expect to I guess book out of Navy and LIPA this quarter? Something you can share?

Ask that again, please.

In terms of the amount of revenue we booked this quarter from Navy and LIPA?

I think directionally-speaking, we talked about the fact of this quarter for the Navy will be lighter than normal, primarily because of funny limitations the Navy has put on us similar to last year's second quarter as you know.

Yeah. the fiscal years.

Government fiscal year ends in September. So, we have spoken about that earlier and that's the reason why we mention that the first half of this fiscal year from a revenue perspective should be lighter than the second half of this year.

I think from a LIPA perspective, we are planning, I think, Greg mentioned in his remarks, we are planning to ship the LIPA wire this quarter and finish up next quarter. from that perspective see that portion of AMSC Wires have a higher than normal revenue count because of the shipment of that wire.

Okay. great.

Yep.

[OPERATOR INSTRUCTIONS]. We'll take the next question from the site of Jim Ricchiuti with Needham.

The orders that you're pursuing, some of the larger wire orders, would -- I would assume that would have a component of the 334 wire in it? and I wonder if you can comment if those orders are going to be contingent on you achieving further milestones? If you could elaborate on the manufacturing process? Or do you think you could secure these orders based on where you are right now?

Jim, to be clear, the bulk of all wire orders and shipments this year are all going to be 1G wire and again we always said this is the workhorse wire here over the next two-years until we get to our pilot operation 300,000-meters per year capacity December '07 clearly until then 1G is the bulk of our shipments. We said we'd ship about 10,000-meters after the pre-pilot line was up and operating, making the 100-meter lengths and said we'll initiate those production run this is quarter.

Start counting off 12-months or so from the ends of this quarter, let's say. So, this fiscal year, in terms of the quotations that are outstanding for 344 wiring, you know, think of couple of thousand, few thousand meters of wire produced and shipped out the door. Compared to from Mexico city we're talking 10,000 meters for that Condumex cable and one of those plus another follow-on cable project we think we'll get this year and ship and talking about mostly 1G wire.

Greg, just things you might take in fiscal '06 for shipping and fiscal '07?

Well, once again, fiscal '07 primarily 1G wired shipped out of the door. In that period of time, thinking of our plan and make it stretches over calendar years and fiscal years, probably on the order, Jim, of certainly in the range of 1 10-20,000 meters of 344 wire shipped out by the end of fiscal '07.

Thanks.

Yep.

Next question, appears to be a a follow-up from David Kurtzman.

Thanks. I noticed in the segment reporting that the revenues for the wires division fell about 400,000 but the operating loss fell substantially more. It was over $1.8 million and I'm just wondering if you could give color there and what it means the cost of second G wire versus first G wire production?

Yeah I think some of that related to the fact that we've obviously increased our 2G expenses year-over-year. Primarily in the area of headcount. In the area of material usage, as was starting to run 100-meter lengths we talked about before. As well as increased appreciation on the equipment we purchased for the 2G pre-pilot lines that obviously we didn't have last year and that's a large component of it.

Okay. Thank you.

Moving on to question from the site of Robert Smith, Center For Performance. Go ahead, please.

We've been waiting so long for the Energy Bill and lo and behold it's here, so what is really palpable around the corner as far as you see?

Instant gratification, Bob, huh?

Instant after all of this time, yeah. [ LAUGHTER ]

Aspects of the Bill is pretty much there for a while and I think there would be a lot of thinking and planning on the part-- Yeah. It is absolutely, Bob. Let me speak to that very directly. PUHCA reform, that's the Public Utility Holding Company Act depression area law that went in place is now repealed. Quite clearly that's going to give rise to increased investment in the grid.

The Chairman of FERC on TV earlier this week saying exactly he agrees in the Energy Bill matrix and start to see the unlocking of investment in the transmission grid and you know that's not going to be far off. Utilities have been waiting for these opportunities to get put in place. Another aspect of that? In terms of unlocking investments in the transmission grid, and the FERC Chairman said this as well earlier this week, reliability standards have to, right to the question, have been developed over the last good 12-months, on North American Electricity Reliability Council and working with FERC, put those together and put in place April 1, 2005. What was missing at that point were the enforceability of those reliability standards. Those are now there through the Energy Bill. So, reliability standards now have to be followed.

So, there's an area to look for more -- near-term instant gratification if I can put it that way because I think that's clearly going to drive demand for the kind of D-VAR system and SuperVAR systems we have been seeing and clearly start with D-VAR and SuperVAR the follow on beneficiary. and then the other very near-term one production tax credits. This is really on hold, wind farm developers, you know, watching what we have the production tax credit. Should I go forth and develop the next wind farm? Now it's there for at least another two years beyond December 31, 2005, and, again, we're seeing the developers going back into action, again. in the United States.

So, another one, fuel cells. Look for us to start selling POWERMODULE to fuel cells as we go forward here because fuel cells developers for the various applications because the production tax credit there and a lot of money in the Energy Bill to develop fuel cells as well. That's going to be -- we'll be a Ben fishery through additional -- beneficiary to additional sells of POWERMODULE into the alternative energy space generally fuel cells and wind farms and so forth so those are some of the very near-term ones.

Also in here, transmission infrastructure investment rulemaking to create more favorable climate for grid investment in general. and for innovative technologies in particular, which are called out within the bill. So, the Warren Buffets of the year are now released. He's been trying through mid-America to buy PacificCorps, PUHCA has held that back. We've seen financial guys like KKR and Trimaran trying to buy more grids and consolidate that will happen and more money to improve the grid and infrastructure so people can make more money and we're very solidly positioned in the middle of the all of that to be a beneficiary.

None of this reflected in the estimates for '06?

No. Because, I think--

Good.

-- instead in every earnings call they're talk being getting down early August and I don't think I believe them. Get this for October-november, maybe. They surprise us on the early side for once and we don't have that baked in at all.

Right. Thanks.

Our next question from the site of [Michael Flynn with Tokyo Capital] go ahead, please.

Hey, Greg.

Hi, Michael. Different place now, yes?

Yeah. Listen I'm barely computer literate but I can't find this Energy Bill matrix on your Web site.

Okay. Go right to the home page. and on sort of the right hand side, go down into something called "learn more" and if you go down to the second item you'll find it there.

I'm going to the right hand side, news and events, contact us. Learn more, slide presentation?

Next one down.

Next one down. Thank you very much.

Okay. Michael, give me a call later.

Okay.

Now go to site of Mark Plunkett with Atlas Capital. Go ahead, please.

Quick questions on the Navy contract or the potential follow-ons.

Yeah.

Was trying to get a better understanding of what exactly. You spoke of modifications and trying to get -- I mean the original contract was three-years $70 million. This be a separate contract? Is it with -- I guess the other part would be is it with the O&R? Which part of the Navy are you in discussions with?

Okay. Mark.

Trying to get clarity.

Good questions. We explained in the last earnings announcement and conference call, certainly in the announcement, that Navy has asked us to do more under the current 36.5 megawatt motor and there were also some cost plus contract some of the costs went up. Modifications are about doing the additional work of both for certain-- Doing additional work under 36.5 megawatt contract and talking about specifically new additional contracts beyond the modifications and talk about substantial new Navy contracts, these are beyond the modifications of the existing contract. So, there would be in the area of ship propulsion systems. They would be in the areas that would be funded not only by O.N.R. -- the Office of Naval Research 36.5 megawatt but procurement, procurement sides of the Navy. One of two contract is from the procurement said side the Navy.

Something out there in the public domain? I assume they put out RSP to look out?

I'm sure you'll find something out there. But, I can't direct you to anything right now.

In terms of their budget, like, clarification, would this be something they'd be looking to fund other fiscal year '06 budget? I guess, where--

We're saying, let me be explicit about this, we're saying that at least one of the two contracts should hit our top line in our fourth quarter of this year. Look for these to be adding primarily for the -- obviously, the big hit was the backlog for the new fiscal year and revenue next fiscal year -- but that should answer the question. Yes, these are , government fiscal year '06 kind of moneys.

Okay. Thanks.

Yep.

We'll more on to Jarett Carson RBC go ahead, please.

Greg, real quick, you mentioned fuel cells here a couple of times. If I recall your power converter was a 250 kilowatt building block and frankly there's only two, if I stretch it, I might come up with three to four players in the world that are kind of doing stuff of any substance in that range. Is it-- was that correct that -- was that correct, 250? Have you done something there to kind of down in power where there's kind of more, at least, players, running around? Or maybe a little more color there?

Yeah. Jarret good question. We cover the space of 60KW per module, and up to megawatt per module and 250 the standard size we've used in the D-VAR for the last, what, five or six-years? That's advanced into the PM 1,000 PowerModule 1,000 and the range there is 60KWs on the low end. Not go below that you're really getting into competition on the commodity end for PC board-type of POWERMODULE so that's the low end of it. That's where I think you'll pick up and we're going to be picking up application on the fuel cell area.

Okay. Great. Thanks.

Yep.

All right. It appears time for one more question and take a follow-up Jim Ricchiuti with Needham. Go ahead, please.

Greg you seem pretty confident of a pick-up in order activity in the Power Electronic Systems business, including I think you talked about the industrial market. I wonder if you can comment on where you're seeing the activity, which vertical markets you're seeing the activity from the potential industrial customers?

Yes. The main part of it, Jim, but not exclusively, but the main part of it is semiconductor industry. The success we've had with these systems that have been operating at a large semiconductor site since last December, have been very, very successful. Terrific return on investments of semiconductor manufacturer, it's been one heck of a great reference site for other semiconductor manufacturers to go to. And so that's where I see the bulk of the industrial orders coming from. So--

US sites Greg, I'm sorry?

Pardon?

U.S. sites? Sites in the U.S. or outside?

Both.

Okay.

by the way, again, it's not limited to the semiconductors in the industry where at least one non-semiconductor that we believe are going to be able to close and order on as well. The industrials have picked up and they needed the specific reference site and also, of course, the economy has to get back in shape and that's opening up for us nicely.

Great, thank you.

So, thanks for your attention on the call today. and your good questions. We look forward to performing in this business and meeting with you at our next earnings conference call. Thank you, callers.

This concludes today's teleconference, ladies and gentlemen. You may disconnect at this time.