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American Superconductor Corporation (NASDAQ:AMSC)

F4Q08 Earnings Call

May 14, 2009 10:00 am ET

Executives

Jason Fredette – Director of Investor Relations

Gregory Yurek, Ph.D. – Founder and Chief Executive Officer

David A. Henry – Senior Vice President and Chief Financial Officer

Analysts

John Hardy - Broadpoint

Analyst for Paul Clegg – Jefferies & Co.

Analyst for Michael Hubbard - William Blair & Company

Theodore O'Neill - Kaufman Bros.

Carter Shoop - Deutsche Bank Securities

Analyst for Timothy Arcuri - Citi

James Ricchiuti - Needham & Co.

Walter Nasdeo - Ardour Capital Investments

Ben Shuman - Pacific Crest Securities

Analyst for Jesse Pichel - Piper Jaffray

Stuart Bush - RBC Capital Markets

Nicholas Allen - Morgan Stanley

Pavel Molchanov - Raymond James

Operator

Good day everyone and welcome to American Superconductor’s fourth quarter conference call. This call is being recorded. (Operator Instructions)

With us on the call this morning are American Superconductor’s founder and CEO Greg Yurek, Senior Vice President and CFO David Henry, and Investor Relations Director Jason Fredette. For opening remarks I would like to turn the call over to Jason Fredette. Please go ahead sir.

Jason Fredette

Thanks Melissa and welcome to the call everyone. Before we begin please note that various remarks that management may make on this conference call about American Superconductor’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors including those discussed in the risk factors section of the company’s annual report filed at the SEC on Form 10-K for the fiscal year ended March 31, 2008 and subsequent reports filed with the SEC. In addition these forward-looking statements represent the company’s expectations only as of today.

While American Superconductor anticipates that subsequent events and developments may cause the company’s views to change, the company specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied on as representing the company’s views as of any subsequent date to today.

We will be referring to our former non-GAAP metric EBITDAS this morning or earnings before interest income, other non-operating expense, income tax, depreciation, amortization and stock compensation. We also will be discussing our new non-GAAP net income metric. Reconciliations for both of these metrics can be found in our press release we issued and filed with the SEC this morning on Form 8-K. All of our SEC filings can be accessed from our section of the website, the Investors section of our website.

And finally I would like to mention that we will be taking part in some upcoming conferences. These include the Raymond James Boston Spring Conference on June 4 and the Deutsche Bank Alternative Energy Conference in Washington, D.C. on June the 10th.

Now I will turn the call over to Greg.

Gregory Yurek, Ph.D.

Thanks Jason, and good morning everyone. I’m happy to report back to you on what was the most successful quarter in American Superconductor Corporation’s history. First and foremost, we achieved our first GAAP profitable quarter in Q4, a major milestone for our company and its shareholders. Thanks to those of you investors who have been with us for the long haul through the ups and downs. Your support of our vision and of our employees of American Superconductor is much appreciated, and we look forward to making it all very worthwhile for you in the years ahead.

While we are pleased to have reached this milestone, we are focused on insuring that this is just the initial step on the way to sustainable, profitable growth. The next step is achieving our first full year of GAAP profitability, which we expect to achieve in 2009 which just started on the first of April, 2009.

We’ll get to our outlook for fiscal 2009 in a moment. For now, let’s talk a bit more about where we are right now. We have continued to grow our company during the last year despite the global economic downturn. The key reason we have been able to dodge the bullet so to speak is because of our focus on the wind industry, in particular the wind industry in China. China will continue to be the wind in our sails in fiscal 2009 with over 75% of our revenues coming from our five wind turbine manufacturing customers in China, led by Chinese market leader, Sinovel Wind. China’s economy continues to grow and China has selected wind energy as one of its key growth sectors, one that is designed to help meet China’s growing demand for electricity and one that can become another export industry for China as well. The country’s wind power install base has doubled in size for four consecutive years. At the end of 2008, China had about 12 gigawatts of capacity. In 2009, it will likely surpass 20 gigawatts of wind generated electricity.

On past conference calls, we have cited industry research firms that have projected China’s wind power base will reach 100 gigawatts by 2020. In recent weeks, Chinese government officials have confirmed this is their actual goal. The Chinese Wind Energy Association, a state run agency, recently issued a report containing what it calls conservative and positive projections. The conservative target for 2020 was 108 gigawatts of wind generated electricity. The positive target was 132 gigawatts. No matter whose data or forecast you use, aggressive growth in China’s wind sector is expected to extend well beyond the next decade. We already are capitalizing on this growth in a substantial well by selling wind turbine core electrical components to customers like Sinavel.

In January we began shipping core electrical components to Sinavel under a new three year $450 million contract. That contract covers Sinavel’s 1.5 megawatt wind turbines which they have been manufacturing now for several years. We also have been shipping core electrical components to Sinavel for the 3 megawatt wind turbines we helped them design. In fact, Sinavel’s first 3 megawatt wind turbines were erected off the coast of Shanghai within the past couple of months and prototype testing is now underway. These are the first offshore wind turbines in China. We continue to be impressed by Sinavel’s aggressiveness, speed and diligence. And the same can be said for the rest of our Chinese customers. In addition to Sinavel and CSR-ZELRI, which is already in full production mode, Dong Fang, XJ Group and Shenyang Blower Group are set to commence production of wind turbines designed by AMSC Windtec over the next 12 months. All of these companies are state owned enterprises with the financial backing and end market demand necessary to continue growing even as wind turbine installations in other parts of the world, including the U.S., have temporarily slowed.

But China is not our only international success story. Just yesterday we announced an important order from ACCIONA Energy in Spain. ACCIONA Energy is one of the world’s largest renewable power generation companies. It has become the first adopter of AMSC’s new D-VAR Ride Through or D-VAR RT solution, a product we first discussed at our analyst day in December, 2008. D-VAR RT enables wind turbines to continue operating smoothly through power grid voltage disturbances that might otherwise interrupt the operation of the wind turbines. Unlike our standard D-VAR solution which is installed at the substation connecting entire wind farms to the power grid, our D-VAR RT solution is located inside or just outside the tower of individual wind turbines. The order we received from ACCIONA valued at more than $10 million U.S. dollars will enable them to meet Spain’s new grid interconnection code for 250 megawatts of existing wind turbines. We will be delivering all of the D-VAR RT solutions covered under this contract to ACCIONA Energy over the next few months. This initial contract may lead to others with ACCIONA and we’re pursuing additional D-VAR RT customers as we speak.

Now let’s turn to the power grid space. The fourth quarter was also a time of significant new superconductor cable activity. You’ve heard us speak about the deployment of superconductor cables in power grid in Columbus, Ohio and Albany and Long Island, New York. We now are seeing quite a bit of international momentum. In March we expanded our strategic alliance with Shanghai Electric Cable Research Institute, or SECRI and received an HDS wire order from them for a 30 meter long, 35 kilavolt cable system. SECRI is the leading research, development and standardization institute for China’s cable industry. They expect the first superconductor cable deployment in China’s power grid to occur early in the next decade, which is expected to lead to widespread adoption of superconductor cables throughout China.

So our roots in China are spreading from the wind power market to the power grid market on plan. The same can be said for Korea. In April, LS Cable revealed that they will be deploying the first superconductor cable in Korea’s power grid by the end of next year. That cable will be powered by AMSCs HDS wire known as 344 superconductors. LS Cable is Korea’s largest power cable manufacturer with nearly 8,200 employees worldwide and annual sales in excess of $6 billion U.S. dollars. They also are a true global leader in the superconductor cable arena and are rapidly moving towards commercialization. LS Cable will utilize our 344 superconductors to manufacture a 22.9 kilawatt cable system and it will install this system in Korea Electric Power Corporation’s commercial power delivery network near the city of Seoul in 2010. We’re excited about this project for several reasons. First, [audio impairment] each with its own adoption cycle, Korea Electric Power Corporation is Korea’s only power grid operator. They are also renowned for their progressive mindset and rapid technology adoption cycle. KEPCO as it’s called has publicly talked about superconductors playing a major role in their grid and their adoption processes now underway.

In addition to these power grid relationships, AMSC Windtec has signed two substantial Korean heavy industries companies on as customers, [Nissan] and Hyundai. Both are relying on AMSC to help them become major players in Korea’s rapidly expanding renewable energy industry. The bottom line, watch for our business in Korea, India, Spain and other international markets continue to grow over the next 12 months in the wind and power grid sectors.

Back here in the U.S. there’s a lot of talk in Washington, D.C. and the states across the nation regarding power transmission solutions for renewable energy. Most cities are cutting power grid spending among contentious rate case battles and declining demands for electricity due to the economic downturn. The situation in fact affecting one of our projects, Project Hydra in Manhattan. This project calls for us to connect an existing substation in Manhattan to a new substation with our secure super grid cable solution. While we continue to meet our Project Hydra milestones, we recently learned that ConEd is deferring investment in the new substation because of slowing load growth, rate case battles and budget constraints caused by the economic downturn. We fully expect to be able to deliver the secure super grid’s cable solution by the end of 2010. However, as a result of ConEd’s slowed rate of investment in its current grid, we will not be able to deploy the cable at a site in Manhattan by the end of next year. Having said that, ConEd right up to the CEO of ConEd remains firmly committed to the deployment of secure super grids solutions in Manhattan as does the Department of Homeland Security.

In fact, ConEd, DHS and AMSC are meeting every three days to find an alternative site so we can energize the cable in the grid as quickly as possible to insure this solution is made available to American cities in the shortest time possible. We’ll keep you informed of developments going forward. In the meantime, the project is continuing to move forward on track through the stage gates set for the fiscal year and we see no negative impact on our revenues from Project Hydra this fiscal year.

While some power grid operators have been delaying or cutting costs in recent months, the grid has quickly become a top priority for the new administration and for many Congressmen and Senators on Capitol Hill. Washington has been setting lofty renewable energy targets for our nation and, to their credit, the administration and Capitol Hill have recognized that a major multi-billion dollar investment is needed to build out a long haul transmission network to carry renewable energy from America’s heartlands to its cities. The problem, you see, is that America does not have a long haul transmission system today. It just wasn’t designed that way. And yet that is precisely what is needed to achieve the renewable energy goals being set at federal and state levels. While virtually everyone agrees new transmission is needed to achieve generation of 25% of our electricity by renewable energy sources by 2025, the method of transmission is a source of heated debate. The past 100 years we have relied primarily on overhead power lines for our transmission needs. In recent decades, however, [sighting] any new line has become an increasingly difficult and expensive proposition. This process sparks a public outcry, invites litigation and tends to last many, many years.

Now imagine creating new multi-gigawatt transmission pathways, spanning hundreds of feet in width and hundreds of miles long from state to state for high voltage towers that are more than 100 feet tall. By the way, a gigawatt is enough to power, enough power to supply the electricity needed to about a half million homes, so it’s quite a bit of power we’re talking about here. Up to now, overhead power lines have been the only solution available and so conventional wisdom is to string up more lines to move renewable energy across America. That in itself has created quite a firestorm of opposition from individuals, legislators and environmental groups who strongly desire green power and green electrons but who don’t want overhead lines marring our national parks, conservation lands and scenic wilderness not to mention their own backyards.

Stepping to the forefront of this debate has been EPRI, the Electric Power Research Institute, which performed technical feasibility and economic analyses of gigawatt level, direct current or DC superconductor power cable located in underground pipes which would put the flow of green electrons to customers out of sight and out of harms way. American Superconductor has analyzed the EPRI models and economic studies in great depth and has discussed this solution with other industry leaders. What we have concluded is that these superconductor electricity pipelines are, in fact, a technically and economically viable alternative for long haul transmission of green electrons.

Much of my time in recent months has been spent in Washington, letting our administration and members of Congress know that this compelling option, superconductor electricity pipeline exists and is ready to go. Superconductor electricity pipelines are high powered, DC superconductor cables that enable the transmission of many gigawatts of power from multiple generation sites to multiple load centers.

How do superconductor electricity pipelines compare to conventional transmission options such as 765 kilavolt overhead lines? Well, first and foremost our pipelines just like natural gas pipelines are underground, resolving virtually all aesthetic and security concerns. Superconductor electricity pipelines require a right-of-way only 25 feet wide compared to 400 to 600 feet for 765 kilavolt overhead lines. This means we can use existing railroad and highway rights of way rather than requiring massive land takings by eminent domain. For long haul transmission runs of 1,000 miles superconductor electricity pipelines also are two to three times more efficient than any other transmission option available, significantly reducing CO2 emissions and the lifetime cost of the transmission system.

And finally the punch line is that, for long haul transmission projects, superconductor electricity pipelines are cost competitive. To learn more about these superconductor electricity pipelines please visit our homepage where you’ll find a link to the dedicated site on this topic.

A business analysis of superconductor electricity pipeline and our meetings in Washington and state capitols is leading to growing momentum and support from members of the House and Senate, as well as industry associations and environmental groups. In fact, earlier this week House majority leader Steny Hoyer introduced two bills that he hopes will become part of the energy bill that would provide compelling incentives for superconductor electricity pipelines. Leader Hoyer’s incentives include $100 million in cost shared funds for wire manufacturing and prototype and planning work. He has also included loan guarantees, accelerated depreciation and tax incentives for long haul superconductor transmission products that are greater than 150 miles in length. This is a significant first step forward for us.

Superconductor power transmission is also showing up in Senate language related to the transmission of green electrons. This is all clearly very encouraging. However, and this is a big however, we are talking about an energy bill that is not likely to get enacted into law until late this year and we have no way of knowing whether any of this very favorable language will get into the law. If it does make it into the law, it’s going to be a very positive development. So as always while we won’t ignore these inherent opportunities for shovel ready project funding out of Washington, we continue to view government funding as an upside to an already compelling business model which is where our real day to day focus remains. To be clear, we are not, of course, including any contribution to superconductor electricity pipelines in our fiscal 2009 forecast or firing plans.

In summary, the tone and level of excitement here at American Superconductor has never been better. We have ushered in a new era for American Superconductor by delivering our first quarter of profitability. We are sharply focused on remaining GAAP profitable for the full fiscal year 2009. In parallel, we plan to increase our headcount from a little over 500 employees on March 31, 2009 to over 700 by the end of our current fiscal year to meet our current growth plans. And we plan to continue to invest in the development of new products and system level solutions for the wind and power grid markets in the U.S. and abroad that will insure us strong profitable growth in the years ahead. Very importantly, we plan to self finance these activities and at the same time to be net cash flow positive for the full year.

And now I’ll turn the call over to Dave for his financial review. Dave?

David A. Henry

Thanks Greg, and good morning everyone. As you heard in our opening remarks we are obviously pleased with our fourth quarter performance which included our first GAAP profit. Revenues, gross margin and EPS all exceeded our targets reflecting solid execution and strong end market demand. We expect our growth will continue in fiscal 2009.

Our key challenge will be significantly expanding our organization globally to maximize near and long term revenue growth while also controlling growth related costs in order to generate positive cash flow for the full fiscal year. We believe we have the right management team and the right plan in place to meet our financial objectives.

But let’s begin with our fourth quarter results. AMSC delivered its ninth consecutive quarter of sequential revenue growth generating $61.2 million in revenue for the fourth quarter of fiscal 2008, compared with $41.3 million in the third quarter of fiscal 2008 and $38.4 million in the fourth quarter of fiscal 2007. The sequential and year-over-year increases were due to higher power systems revenues, primarily driven by increased shipments of core electrical components for 1.5 megawatt wind turbines to Sinavel under our new $450 million contract, increased shipments of 3 megawatt core electrical components to Sinavel under an $18 million contract signed last year, and also increased D-VAR shipments. As a result, AMSC power system revenues increased 70% in the fourth quarter of fiscal 2008 to $52.8 million compared with $34.3 million in the fourth quarter of fiscal 2007. About 95% of our total fourth quarter revenue came from power systems.

Our AMSC superconductor segment generated the remaining 5% of sales. AMSC superconductors revenue in the fourth quarter was $3 million which compares with $4 million in the year ago quarter. This decrease was primarily the result of lower revenues from the Navy motor project which was completed in calendar 2008.

Backlog as of March 31, 2009 was approximately $558 million and is up from $199 million at March 31, 2008, and down from $602 million as of December 31, 2008. The year-over-year increase is primarily due to the $450 million, three year contract for wind turbine core electrical systems we received from Sinavel in June, 2008. The sequential decline in backlog is due primarily to shipments under that same contract. As we do not expect a follow on order for 1.5 megawatt core components from Sinavel in the near term we expect our backlog to decline in fiscal 2009 compared to the beginning of our fiscal year.

Gross profit in the fourth quarter was $20 million, resulting in a 32.6% gross margin. This compares to a 23.2% gross margin in the third quarter of fiscal 2008. The improvement in gross margin was driven by a favorable mix of core electrical system and D-VAR shipments. In addition, our third quarter fiscal 2008 gross margin was negatively impacted by approximately 520 basis points by several unusual items. There were no reversals of these items in the fourth quarter that positively impacted gross margin. In the year ago quarter, gross margin was 33.2%. This figure was favorably impacted by approximately 300 basis points due to an unusually high gross margin D-VAR shipment.

R&D expenses for the fourth quarter were $4.8 million or 8% of revenue. This compares with $5.3 million or 13% of revenue for the third quarter of fiscal 2008 and $3.7 million or 10% of revenue for the fourth quarter of fiscal 2007.

SG&A expenses for the fourth quarter of fiscal 2008 were $10.4 million or 17% of revenue. This compares with $9.4 million or 23% of revenue for the third quarter of fiscal 2008 and $7.7 million or 20% of revenue for the fourth quarter of fiscal 2007. The sequential increase in SG&A was driven primarily by higher professional service fees and higher labor costs as we continued to add headcount in support of our growth.

We remain fully committed to controlling growth in our operating expenses and improving operating leverage. Recall that our forecast for fiscal 2008 was to keep the rate of growth, R&D and SG&A expenses below the rate of growth for revenue. We achieved that objective as fiscal 2008 R&D and SG&A expenses grew 29% year-over-year while revenue increased 63%. We will continue to need to, we will need to continue our rapid increase of headcount to support our growth. However, we once again expect to keep the rate of growth of R&D and SG&A expenses below the rate of revenue growth in fiscal 2009. We expect that the investments we make this year in our global workforce will lead to much improved operating leverage in our next fiscal year as revenues continue to grow and operating expense growth as a percentage of revenues grows further.

In the fourth quarter we incurred approximately $431,000 in amortization of acquisition related intangibles related to our acquisitions of Windtec and PQS. This is down from $490,000 in the year ago quarter. Intangible amortization should remain roughly flat at $400 to $500,000 per quarter in the near term.

We recorded a restructuring charge of approximately $362,000 in the fourth quarter for additional costs related to the consolidation of our Massachusetts operations and the closure of our former headquarters facility in Westborough compared to $3.6 million for the same program in the year ago quarter. The fourth quarter 2008 charge relates to some additional costs required to remediate a previously unknown environmental condition. We expect to complete this project during the first half of fiscal 2009.

Our operating income for the fourth quarter of fiscal 2008 was $4 million. This compares to operating losses of $5.7 million in the third quarter of fiscal 2008 and $2.8 million in the fourth quarter of fiscal 2007. Higher power systems revenue and gross profit levels drove a sequential and year-over-year improvement.

Our overall financial improvement is reflected in record power systems operating income of $12.9 million or a 22% operating margin in the fourth quarter of fiscal 2008. This compares to a power systems operating income of $3.2 million or an 8% operating margin for the third quarter of fiscal 2008 and $6.6 million or a 19% operating margin for the fourth quarter of fiscal 2007.

AMSC superconductors generated an operating loss of $6.4 million in the fourth quarter of fiscal 2008. This compares with operating losses of $6.3 million in the third quarter of fiscal 2008 and $4.3 million in the fourth quarter of fiscal 2007. The higher operating losses in the fourth quarter of fiscal 2008 compared to the prior year quarter are the result of lower Navy motor program development revenue and higher material costs.

Please note that stock compensation expense is not allocated to our reporting segments.

Income tax expense increased to $3.2 million from approximately $1 million in the year ago quarter due to growth in sales and profits in foreign jurisdictions. This is reflected in our international sales which were 86% of revenue in the fourth quarter of fiscal 2008 compared to 72% in the year ago quarter. Our effective tax rate of 71% in the fourth quarter of fiscal 2008 is skewed by the fact that we do not record a tax benefit on losses in the U.S.

For the fourth quarter of fiscal 2008 we reported net income of $1.3 million or $0.03 per diluted share. This compares to a net loss of $7.8 million or $0.18 per share in the third quarter of fiscal 2008 and a net loss of $1.8 million or $0.04 per share for the fourth quarter of fiscal 2007.

Excluding amortization of acquisition related intangibles, restructuring, stock compensation, revaluation of a stock warrant and related tax effects, our non-GAAP net income for the fourth quarter of fiscal 2008 was $4.1 million or $0.09 per diluted share. This compares with a non-GAAP net loss of $4.9 million or $0.11 per share for the third quarter of fiscal 2008 and non-GAAP net income of $2.7 million or $0.06 per share for the fourth quarter of fiscal 2007.

Briefly reviewing our results for full year fiscal 2008, our total revenues were $182.8 million, a 63% increase from $112.4 million for full year fiscal 2007. Our gross margin for fiscal 2008 was 28.4% compared with 28.5% for the prior fiscal year. Our net loss for fiscal 2008 was $16.6 million or $0.39 per share. This is an improvement from a net loss of $25.4 million or $0.65 per share for full year fiscal 2007.

On a non-GAAP basis we reported a net loss of $3.1 million or $0.07 per share for full year fiscal 2008. This compares with a non-GAAP net loss of $6.8 million or $0.17 per share for full year fiscal 2007.

I’m pleased to report that we delivered on our forecast of positive EBITDAS for fiscal 2008. EBITDAS was $9.9 million for full year fiscal 2008 compared to a loss of $9.1 million for full year fiscal 2007. Effective fiscal year 2009 we will no longer report EBITDAS.

Turning to the balance sheet, cash, cash equivalents, marketable securities and restricted cash on March 31, 2009 were $117.2 million. This was down from $122.6 million on December 31, 2008 and $119.4 million on March 31, 2008. In the fourth quarter our cash flow from operations was a negative $1.6 million. The decline in cash and negative cash flow from operations in the fourth quarter of fiscal 2008 was primarily the result of an increase in inventory to support first quarter fiscal year 2009 shipments including those to ACCIONA. As a result, days of inventories grew to 77 days in the fourth quarter from 65 days in the third quarter. However, DSO improved to 74 days in the fourth quarter from 87 days in the third quarter.

Moving on to our guidance. For full year fiscal 2009 we are expecting revenues to increase to a range of $225 million to $235 million. As of March 31, 2009 we had more than $190 million in backlog supporting this revenue forecast. Based on the aging of the backlog we expect revenues in the first quarter of fiscal 2009 to be flat to slightly up compared to fourth quarter fiscal 2008 before declining in the second and third quarters and then rebounding in the fourth quarter.

We expect that AMSC power systems revenues will represent 95% of total sales for the full fiscal year. We also expect that international sales and wind power sales will each represent approximately 80% of our revenues for full year fiscal 2009.

Gross margin in the first fiscal quarter is expected to decline 400 to 500 basis points from Q4 levels as a result of an unfavorable sales mix due primarily to lower gross margin on the ACCIONA contract. We expect this will lead to abruptly breakeven bottom line for our first fiscal quarter. Gross margin is expected to improve during the rest of the year, due in part to cost reductions in our AMSC China operation. As a result, we are increasing our target gross margin range for the full fiscal year from 28 to 30% to 30 to 32%.

We anticipate that the investments we are making to capitalize on our near and long term growth opportunities will limit us to net income of $200,000 to $1.5 million or $0.01 to $0.03 per diluted share for full year fiscal 2009. As you might surmise from this guidance and our projection for Q1, we do not expect to be profitable on a GAAP basis in each quarter of fiscal 2009. We do, however, expect to generate a non-GAAP profit in each quarter of fiscal 2009. We expect non-GAAP net income for the full fiscal year in the range of $12 million to $13.5 million or $0.27 to $0.30 per diluted share. Please note that our GAAP and non-GAAP net income per share guidance is based on 45 million shares outstanding.

We also expect to increase our cash, cash equivalents, marketable securities and restricted cash in fiscal year 2009 as compared to the end of fiscal year 2008.

And finally capital expenditures for fiscal year 2009 are expected to be in the range of $11 million to $15 million as compared to $7.6 million in fiscal 2008. The increase in CapEx is due primarily to spending for increased test capacity in power systems and IT infrastructure spending to support our growth.

With that we’ll open the call to questions, and Melissa would you please provide the instructions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from John Hardy – Broadpoint.

John Hardy – Broadpoint

I wanted to ask a little bit more detail on the revenue guidance for ’09. Obviously guidance implies a pretty significant step-down towards the beginning of the year. I wonder what you’re hearing from new customers, Hyundai in particular on their ramp towards the second half of the year.

Gregory Yurek, Ph.D.

This is Greg Yurek speaking. Well, we have not heard anything new. In fact we’ll say what we put out I think in our last earnings call remains true and that is that Hyundai has accelerated its manufacturing operation and expects to be in production in September-October timeframe of the 1.65 megawatt wind turbine machines. So, and we’ve also heard it from the public venue that new wind farms are now been financed in Korea so we know Hyundai and this is again from public records is going after those wind farms as well as focusing on U.S. opportunities. So no change from the last call. There’s plenty of public information out there that shows Hyundai heavy industry’s is moving forward quite aggressively and expect to be in production toward the last quarter of this calendar year.

Generally, if you had a more broader question there, we haven’t seen any slow down in any of our international customers whether it’s in India or Turkey or certainly all five in China. Everybody is very much on plan if not ahead of plan. So, U.S. you know we don’t have much in the way of customers here, so that would be the slow down. It’s still positive growth in the wind industry in the United States but whatever slowdown has occurred has really not impacted us in any way at all, really. So the focus on the international markets, China in particular has really kept us growing through this year and we expect to see aggressive growth through fiscal ’09 as well.

Operator

Your next question comes from Analyst for Paul Clegg – Jefferies & Co.

Analyst for Paul Clegg – Jefferies & Co.

Can you talk about traction you’re making in the D-VAR market in Europe and obviously you announced D-VAR or RT order recently. Can you talk about the traction you’re getting in other markets in Europe and how you expect those orders to be satisfied from a manufacturing perspective from facilities either in China or the U.S.? And I do have a follow up.

Gregory Yurek, Ph.D.

Well, for now all of our D-VAR units are produced in our Wisconsin operations and that will continue to be the case certainly through this fiscal year. Although I think at analyst day, you know at analyst day we talked about looking to start up our production of D-VAR in China. Don’t forget we got our first order for D-VAR we announced in January of ’09 for a substation in Inner Mongolia and that’s supposed to be installed and will be installed this summer. So, you know, there’s a reason to start thinking about and planning for production of D-VARs in China just for the local market which we expect to be really quite big.

For the European market and U.S. market and North American market in general, Australian market where we have a number of D-VAR in deal and so forth, we will continue to produce those within our Wisconsin operations. We see [stret] in the European market for D-VAR and I’m now thinking about the standard for Mega VAR, eight cubic foot box that we typically put in a substation serving an entire wind farm. We’re bidding on projects for example in the UK where there continues to be a lot of growth. The new aspect is the D-VAR [R-CHEE], the [y] through product which is for individual wind towers and not for full wind farms at the substation level. And the interesting and valuable thing to note here is that these are going in for old wind turbines, not the new wind farms. Most of our D-VAR products have been associated with new wind farms that to get plugged in to the grid have to provide the reactive compensation component right from the get go.

But now we can reach back and we’re seeing opportunities not only in Spain but also in Germany and other European countries. So the prospects for D-VAR I think remain quite solid and we’re looking forward for growth in the North American, European markets and certainly in China for the power grid there.

Operator

Your next question comes from Analyst for Michael Hubbard - William Blair & Company.

Analyst for Michael Hubbard - William Blair & Company

A quick question on the backlog. Just wanted to get a little bit more color on what you said. Dave, did you say you expect the backlog to decline in the first quarter? Did I hear you say correctly it’s to decline throughout the course of the year? Or what was the comments related to the full year?

David A. Henry

Yes, the comment was given the fact that, you know, we’re not expecting a new 1.5 megawatt order from Sinavel this year you should expect that backlog year-over-year will decline, you know. And that’s, we’re trying to make sure that you guys understand that because of the fact that, you know, we have a three year order out there and we’re basically in year one of it now, don’t expect that backlog will grow year-over-year.

Operator

Your next question comes from Theodore O'Neill - Kaufman Bros.

Theodore O'Neill - Kaufman Bros.

Getting back to the first question, if I annualize your Q4 full revenue I get a $240 million year and so guiding to $225 to $235 is showing no growth. And I’m wondering what’s going on with the rest of the customers? Because it seems like you’re basing the forecast entirely on just what’s happening with Sinavel. Am I misunderstanding that?

David A. Henry

Well, our guidance is our guidance, Theodore. We have guided to revenue growth that is solid revenue growth. We’ve guided to increase gross margins. We’re guiding to generating cash for the full year. So we consider what we put out as guidance to obviously be reasonable and achievable, given our existing level of backlog and our near term business pipeline. So that’s it. That’s our guidance.

Gregory Yurek, Ph.D.

One other thing to note, Theodore, was that fourth quarter we saw a strong quarter of shipments from, to Sinavel for the 3 megawatt program not the 1.5 megawatt that’s the big driver of our revenue. And so we will, we would expect those shipments will be mostly completed during the first quarter so that, you know, we had a heavy, a heavy quarter of shipments from Sinavel that aren’t going to continue at least right now that’s sitting in our backlog that we can expect further revenues on later in the fiscal year. So I think that’s part of also what you’re seeing in terms of the annualization when you do that. You’ve got a heavy quarter of 3 megawatt shipments in there.

David A. Henry

Yes, and so the thing to look for is as we eat through that backlog of PM 3000 orders for the 3 megawatt systems, they deploy those 3 megawatt systems after successful testing the prototypes which we mentioned are out in the harbor or out in the ocean [of] Shanghai right now. You know, we’ve said this before. I’ll just repeat it. One would look for a follow on order for more 3 megawatt systems sometime later this fiscal year.

Operator

Your next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

Something to talk a little bit about the super connector green pipelines, though while still pretty early do you envision AMSC being the prime contractor for these projects? And if so would this be profitable for the company? And then as kind of a two part question to this topic, you know, given the time associated with new transmission lines do you think its feasible that AMSC could recognize revenue from these projects within two years from today?

Gregory Yurek, Ph.D.

That’s a good way to get in several questions at once, Carter. Thank you. So first of all we believe these will be profitable. We don’t expect to be the prime contractor on a 300 or 500 mile electricity pipeline. We would have somebody like one of the EPCs or the utility themselves but even the utilities say farm out the big projects to EPC. So we’d expect an EPC partner to be the prime contractor. We would manage, however, the overall superconductor Cryogenics components of it, so a sub prime contractor if you will.

For the actual pipelines themselves, which again we would expect to be profitable business, the, and as you said in two years yes. In the meantime again we have nothing of this in any of our forecast at this stage and let’s keep that real clear in front of everybody, having said that if you look at just Majority Leader Hoyer’s bill and you can go to our website and actually get a copy of the bills which we’ve lifted from his website, he’s promoting superconductor pipelines and also monies to in fact go through scale up early testing qualification of conductors and that is the superconductor pipeline. So, you know, there I’d expect we would be the prime contractor on early work that might start, you know, in the next year or so. So hope that answers all of your questions.

Operator

Your next question comes from Analyst for Timothy Arcuri – Citi.

Analyst for Timothy Arcuri – Citi

It’s my understanding that Hyundai is making, is going to try to make their own electrical systems for the 2.5 megawatt turbines. Could you just kind of address, you know, the extent to which maybe this is emerging as a competitive threat for maybe what you guys offer?

Gregory Yurek, Ph.D.

Yes. You’re misunderstanding though the information that’s already out there. So the next one is 2 megawatt not 2.5 megawatt for Hyundai. So it goes from 1.65 megawatt which they’re going to start producing this fall and then they go to the 2 megawatts next year. We are providing the full electrical systems, you know, in a cabinet, a box, with everything inside for the first I think it’s about 400, 200 for the 1.65 megawatt, 200 for the 2 megawatt. Somewhere in that category. After that the plan is that we’ll be selling them core electrical components for lifetime. So this will be turning into more of the Sinavel kind of deal that we have. But for the first several hundred we’ll be providing the full electrical cabinets for electrical systems in other words, and then switching over to sales of core electrical components. So nothing new here. No surprise. You may have gotten some information that was [audio impairment] in terms of the difference between full systems and core components. I’m not sure. But that’s the answer.

Operator

Your next question comes from James Ricchiuti - Needham & Co.

James Ricchiuti - Needham & Co.

Just a question with respect to the order you announced yesterday. That wasn’t part of your bookings in backlog number for the March quarter, was it?

David A. Henry

Yes it was Jim. That was included in our backlog for the fourth quarter and for the end of the fiscal year.

James Ricchiuti - Needham & Co.

So, you know, ex that it looks like your bookings were a little bit below $10 million from other customers.

David A. Henry

It was a relatively quiet quarter. You know as we mentioned in the past, you know, our last quarter when we had strong bookings we said, you know, don’t read too much into that because our bookings can be lumpy depending on the activity. And particularly when, you know, they’ll be really lumpy if you get a Sinavel order but, so, you know we had a really good quarter our third quarter and, you know, not to, you know, it shouldn’t be a surprise to anyone, kind of a slower quarter in fourth.

Gregory Yurek, Ph.D.

By the way, Jim, just so you know the reason we didn’t announce the ACCIONA order until yesterday we literally did not get approval to do so until Tuesday afternoon, announced it on Wednesday morning. Now as we got through the certification [cast] and the signoff the last weeks of March and that’s where we had the bookings in the March quarter. But then you have to go through all the paper work to get this whole certification on PO 12.3 from the Spanish government which took a little bit longer than our approval of the press release. But it was a booking for the third quarter actually.

David A. Henry

Fourth quarter.

Gregory Yurek, Ph.D.

Fourth quarter, I’m sorry.

Operator

Your next question comes from Michael Hubbard - William Blair & Company.

Michael Hubbard - William Blair & Company

A quick follow up. What tax rate are you baking in for both your GAAP and pro forma EPS guidance for ’09?

David A. Henry

Yes. With respect to the tax rate I would, I guess our previous guidance was because we were losing money we would try to have you look at consolidated revenues and percentages of consolidated revenues and applying a 25% tax rate to that. Now that we’re, you know, making money we had a, we can maybe start using an effective tax rate again. It’s going to be still a very high number like we saw in the fourth quarter because of the fact that we had higher international sales and the fact that we don’t record tax benefits in the U.S. So it’s a high number but not really a meaningful number there in that regard. So I would expect that an effective tax rate would be similarly high if not higher probably for full year fiscal 2009.

Operator

Your next question comes from Walter Nasdeo - Ardour Capital Investments.

Walter Nasdeo - Ardour Capital Investments

Can you give me some clarity on the wires production run rate that you guys are at right now? Are you bumping up to capacity? And then how are you building out over the next few quarters into, you know, and deep in the next year on the capacity side to meet some of these orders?

Gregory Yurek, Ph.D.

Well, we’re, we haven’t really changed the run rate per se. We’ve improved our processing. Our yields have continued to improve. And we have plans in place to expand that capacity. But remember that the whole strategy here is to be able to rapidly expand based on customer demand. So we’re not going to go out and, you know, expand our capacity ahead of, you know, something like superconductor electricity pipeline related order that might occur in the next year or two. We’re just not going to do it. The plan is in fact to be able to rapidly expand. So we’re going to do a little bit of expansion during this next fiscal year, or current fiscal year I should say. But nothing that’s a huge expansion by any means. We want to see that demand there, then we’ll spend the money to bring in the capital equipment very quickly and expand rapidly. The focus right now is on quality and performance of the wires.

Operator

Your next question comes from Ben Shuman - Pacific Crest Securities.

Ben Shuman - Pacific Crest Securities

Howdy Dave. Can you talk a little bit more about what gives you the incremental confidence to take the gross margin guidance back up to 30 to 32%? Whether that’s something related to mix or more on the cost side.

David A. Henry

It’s actually a combination of both. It’s the fact that one, power systems is going to be a higher percentage of revenue for the full fiscal year 2009 compared to full year fiscal 2008. And we also expect cost reductions in China to start kicking in towards, you know, the later half of this fiscal year as we begin to localize some of our raw material sourcing we do expect some cost reductions and we do expect that to have a benefit on power systems gross margin.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Analyst for Jesse Pichel - Piper Jaffray

You mentioned earlier that we could look for a follow on kind of order for the 3 megawatt later this year but it sounds like backlog is still going down. Does that mean there’s not going to be any backlog, additional backlog or revenue from 3 megawatt? And then also if you could just mention what percentage of Sinavel was in the quarter and how much backlog is from other wind customers and D-VAR.

Gregory Yurek, Ph.D.

Well, you know, the, I can’t predict with absolute certainty on any particular future order. So it would seem likely that there would be orders coming in to meet the needs of Hyundai heavy industries as they go into production this coming fall, as Sinavel runs through the backlog of electronics for the 3 megawatt systems. They have orders for the current 3 megawatt systems. I expect them to eat through that and then they’ll need more but I can’t predict any of that with certainty of course. So as Dave mentioned the business tends to be lumpy in terms of orders and therefore backlog. We will be of course eating down through the Sinavel backlog. We have a certain number of monthly shipments we must make and so you’ll see the backlog for Sinavel 1.5 decreasing month over month, quarter over quarter on plan. To the extent we get any significant orders from Sinavel for 3 megawatt or Hyundai or one of our other customers well that will, you know, back into the backlog. So it’s a little bit hard to say exactly where the backlog is going to end up at the end of the year at this stage of the game.

And Dave I don’t know if you have an answer on the percentages there or not?

David A. Henry

Yes. Sinavel was 68% of revenue in the fourth quarter and 67% for the full year.

Operator

Your next question comes from Stuart Bush - RBC Capital Markets.

Stuart Bush - RBC Capital Markets

I’d like to ask again on the wires side. I was hoping you could help me understand you capacity to utilization figure, semiconductor plant in 2008, what you expected to be for 2009. I know you have 720,000 meters of annual capacity so when I add the LS cable order for 80,000 meters over two years and if I heard you correctly your Shanghai project is 30 meters, so is the plant running at 5 to 10% utilization? What am I missing here? I mean, if I take your 5% of your guidance range for that business, you know, we get to $11 million or down year-over-year so can you help me understand this?

Gregory Yurek, Ph.D.

Well, again we’re at our gross capacity is 720,000 meters. We have projects for fulcrum limiters and the LIPA Phase II cable project and so forth. We will be moving forward with the Hydra project on plan as I mentioned. So in addition to the orders we have with the commercial order from LS Cable and one from SECRI which is a 30 meter cable not 30 meters of wire, we will in fact be utilizing our full yield to capacity for the year. So I guess that’s the answer to your question. We’ll be utilizing the full yield to capacity for this fiscal year.

Operator

Your next question comes from Nicholas Allen - Morgan Stanley.

Nicholas Allen - Morgan Stanley

Thank you, my question has been answered.

Operator

Your next question comes from Pavel Molchanov - Raymond James.

Pavel Molchanov - Raymond James

Just a quick conceptual question for you guys. If you were advising the White House on what to do to get utilities to adopt superconductor technology, what would you tell them to do that they’re not already doing?

Gregory Yurek, Ph.D.

What I would tell them to, what I am telling them to do actually is in fact to support superconductor electricity pipelines. They’re not going to achieve their objective, their vision for 25% of electricity from renewables by 2025 without putting in a transmission grid that will support moving the electrons, the green electron from the source of their generation to the customers, from west Texas to Los Angeles, from North Dakota to Chicago, from Wyoming to Las Vegas on to San Diego and Los Angeles, etc., etc. If they don’t put in a transmission grid that will move those amounts of electrons it’s just not going to happen. The vision is impossible as a matter of fact. So put up all the overhead lines you’d like. The problem is it’s going to be very difficult and everybody seems to know this now and very difficult to get the permits for the reasons I mentioned. You’ve got cost allocation issues going through different states. You’ve got the sighting issues. You’ve got rights of way issues. You’ve got the aesthetic issues and so forth.

So, you know, the people we talk to in the Sierra Clubs and the National Park Conservation Association and National Wildlife and so forth and so on are quite conflicted people because they want the green electrons but they don’t want the overhead lines going through our national resources, if you will, the parks and conservation areas and so forth. So the answers are simple to your question, Pavel. And that is I tell them what I tell them already. You need alternative solutions. You need to create the business option here, otherwise your vision is going to go away. Pure and simple. And there’s a lot of support that’s been generated because of the realization that you need an alternative solution, out of sight, underground, out of harms’ way.

Operator

Your next question comes from Analyst for Paul Clegg – Jefferies & Co.

Analyst for Paul Clegg – Jefferies & Co.

Just a quick question, can you give us any color on your currency exposure or strategies going forward?

David A. Henry

Yes, actually the currency impact was very minimal this quarter. The euro was pretty stable and we actually moved the Sinavel contract over to being managed by AMSC China and actually being billed in RMB and the RMB was very stable versus the U.S. dollar this quarter. So the net impact on foreign currency exchange was maybe only about $300,000 for the quarter and that was driven primarily by change in the euro. And the income impact of that was, you know, $100 or $200,000.

Operator

Your next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

Can you talk a little bit about the full year guidance? We had a nice $10 million plus win on the D-VAR RT side, nice 3 megawatt shipments to Sinavel, yet we’re not really taking guidance higher. Can you help us understand if you’re either being conservative here or are you seeing maybe a couple of the orders get pushed out that you’re hoping, you know, on the D-VAR side or on the wind licensing side? Just kind of walk through some of the puts and takes for the full year revenue guidance, please.

Gregory Yurek, Ph.D.

Carter, there have been no slowdowns. There’s no push outs by any of our customers so I can say that with high confidence and certainty. Our guidance is as I said before it’s our guidance. And it calls for solid revenue growth year-over-year. Dave talked about the increase in gross margin that we expect year-over-year. We’re going to generate cash for this full year. We will be GAAP profitable for the full year, only slightly GAAP profitable by this guidance because we’re going to make a lot of investments from which we expect to get operating leverage in our next fiscal year. So we’re very proud of what our guidance is and it’s achievable and reasonable guidance. And I think we’re just going to leave it at that.

David A. Henry

Yes, Carter, when you look at sort of the bridge for Q4 to Q1, you know, we talked about how the ACCIONA orders are going to be a little bit, you know, lower gross margin. So the way to think about it is from that standpoint, you know, we had 3 megawatt Sinavel shipments in the fourth quarter. Those are ramping down in the first quarter and basically that delta is being replaced by lower margin ACCIONA shipments. So that’s why we’re saying that gross margin is going to be down quarter on quarter.

Operator

That concludes today’s question-and-answer session. At this time I’d like to turn the conference back over to Mr. Greg Yurek for any additional or closing comments.

Gregory Yurek, Ph.D.

Well once again I’d like to thank our long term investors in this company for supporting the vision of this company and the employees of this company. We’ve all been working hard and it’s just fantastic to have that first GAAP profitable quarter done, behind us now, and we’re going to continue to work real hard to achieve the guidance we’ve given this year and onward and upward from here. So thanks again and thanks for all your questions. That’s it.

Operator

That concludes today’s conference. Thank you for your participation.

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Source: American Superconductor Corporation F4Q08 (Qtr End 03/31/09) Earnings Call Transcript
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