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American Superconductor Corporation (NASDAQ:AMSC)

F4Q09 Earnings Call

May 13, 2010 10:00 am ET

Executives

Jason Fredette – Director, Corporate Communications

Greg Yurek – Founder, Chairman and CEO

David Henry – SVP, CFO and Treasurer

Analysts

Paul Clegg – Jefferies & Company

John Hardy – Broadpoint AmTech

Vishal Shah – Barclays Capital

Theodore O’Neil – Wunderlich Securities

Ben Kallo – Robert W. Baird

Ben Schuman – Pacific Crest Securities

Stewart Bush – RBC Capital Markets

Carter Shoop – Deutsche Bank

JinMing Liu – Ardour Capital

Timothy Arcuri – Citi

Pavel Molchanov – Raymond James

Carter Driscoll – Capstone Investments

Operator

Welcome to American Superconductor's fourth quarter conference call. This call is being recorded. All participants will be in a listen-only mode until we reach the question-and-answer session.

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 now like to turn the call over to Mr. Jason Fredette.

Jason Fredette

Thank you, and welcome to the call everyone. Before we being, please note that various remarks management may make on this conference call about American Superconductor's future expectations, plans and prospects constitute forward-looking statements for the proposes 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 on Form 10-K for the fiscal year ended March 31, 2009, and subsequent reports filed with the SEC. These forward-looking statements represent the company's expectations only as of today and should not be relied upon as representing the company's views as of any subsequent date. 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.

I also would like to note that we will be referring on today's call to non-GAAP net income or net income before amortization of acquisition related intangibles, restructuring and impairments, stock-based compensation, revaluation of stock warrants, other unusual charges and any tax effects related to those items. Non-GAAP net income is a non-GAAP financial metric. A reconciliation of non-GAAP to GAAP net income can be found in the press release we issued and filed with the SEC this morning on Form 8-K. All of our SEC filings can be accessed from the investors’ page of our website at www.amsc.com.

Finally, I would like to mention that we will be taking part in the Barclays Capital Global Warming Solutions and Clean Technology conference in New York next week on May 20th. We also will be hosting a meeting for financial analysts and portfolio managers at the American Wind Energy Association’s Wind Power 2010 Conference and Exhibition in Dallas, Texas on the morning of Tuesday, May 25, 2010. We will provide a live and archived webcast from that event that can be accessed on our website. More details on that will be published next week.

Now, I will turn the call over to Greg.

Greg Yurek

Thanks, Jason, and good morning everyone. It is a pleasure to be reporting back to you on another record quarter and fiscal year here at American Superconductor.

First and foremost we achieved our first full-year of profitability. This is a major turning point for our company and we are now very solidly on a path of profitable growth and net positive cash flows. We got here by laying a strong foundation of technology, patents, products, engineering excellence and of course top notch operational execution. As a result, in fiscal 2009 we strengthened what already was a strong balance sheet and finished the fiscal year with $155 million in cash and no debt. We expect to continue generating significant cash from operations in fiscal 2010 and we expect to plow a large portion of this operating cash flow back into the business to accelerate our future growth and profits.

Even with these investments we expect to be net cash flow positive for the full-year. We expect fiscal 2010 to be another record year for our company in terms of top line growth with revenues increasing by more than 30% to a range of $415 million to $425 million. Even better, we expect our GAAP earnings to be more than double year-over-year to a range of $37.5-40 million or $0.80 to $0.85 per diluted share and we expect to increase our non-GAAP earnings by at least 70% to a range of $54-56.5 million or $1.15 to $1.20 per diluted share.

This rate of earnings growth is based on productivity gains we generated in fiscal 2009 and that we expect to continue improving upon going forward. To be specific, while we expect to grow our global work force from 714 employees as of March 31, 2010 to more than 1,000 by the end of fiscal 2010, we also expect to increase our productivity as measured by net income per employees. In fiscal year 2009 we generated approximately $23,000 in GAAP net income per employee, higher than nearly all of our peers. That was last year.

In fiscal 2010 we expect to increase GAAP earnings per employee by more than 60% to at least $37,000 which would put us near the top of our peer group and would rank us among the industry elite such as GE and ABB. Our confidence regarding our growth forecast stems in part from the fact that we entered fiscal 2010 with over $380 million in backlog that is shippable in fiscal 2010 which means we have approximately 90% of our fiscal 2010 revenue forecast already in hand.

We now are working hard to bring in the additional orders that are needed to achieve our forecasted revenues and we are confident we will do so. Note that our total backlog as of March 31, 2010 was approximately $588 million which is up from the $558 million in the prior quarter. We expect to further increase our total backlog by the end of fiscal 2010, preparing us for additional strong growth in future years.

While some of this growth in backlog will be attributed to Smart Grid infrastructure orders wind power is expected to remain the key driver representing more than 85% of our fiscal 2010 revenues. We expect to see orders this year from many of our wind turbine manufacturing customers as they ramp up production in 2010 and beyond. We also expect to benefit as our largest customer, Sinovel, continues its march to becoming the largest wind turbine manufacturer in the world.

Those of you who have followed us for some time know we are now supplying 1.5 megawatt wind turbine core electrical components to Sinovel under a large contract that is expected to be fulfilled in April 2011. In the not too distant future we expect to announce a new, large scale contract that extends that relationship well beyond that timeframe so Sinovel can continue its production of 1.5 megawatt wind turbines as it is also ramping production of 3 megawatt and 5 megawatt wind turbines.

Sinovel is China’s largest wind turbine manufacturer and is now the third largest wind turbine manufacturer in the world, ranking only behind Vestas and GE. They achieved this status by manufacturing 2,400 1.5 megawatt wind turbines and 100 3 megawatt wind turbines in 2009, enough systems for nearly 4 gigawatts of wind power. That is enough zero emission electricity, by the way, for about 8 million Chinese households and each and every one of these 1.5 megawatt and 3 megawatt wind turbines are powered by AMSC’s core electrical components.

In the fourth quarter of fiscal 2009 Sinovel placed an order with us for four electrical control systems for its first prototype 5 megawatt wind turbines which were designed by and co-developed with our wholly owned AMSC Windtec subsidiary in Austria. Sinovel expects to have the first 5 megawatt wind turbine prototypes completed by the end of 2010 and plans to enter volume production of these wind turbines for the burgeoning off-shore wind market next year.

Beyond Sinovel there are a number of AMSC enabled wind turbine manufacturers that are in earlier stages of production. This includes CSR-ZELRI and Hyundai Heavy Industries who both placed follow-on core electrical component orders with us within the past few months to allow them to continue increasing production in 2010. Then there are those manufacturers who are just about to get into production. This includes XJ Group, Shenyang Blower Works and Ghodawat Energy. Each of those customers placed large initial power electronics with us in the fourth fiscal quarter.

As we exit fiscal year 2010 we would expect virtually all of our wind turbine manufacturing customers to be in production with AMSC enabled wind turbines and we will continue benefiting through their orders for our power electronic components and electrical control systems. We also have had some notable successes in the power grid sector in recent months.

In March we received our largest grid interconnection order ever when our D-VAR solution was selected by Vestas for the Colgar Wind Farm in Australia. This wind farm requires 24 of our D-VAR modules to meet the grid interconnection requirements in Western Australia and we will be shipping all of these systems to Vestas by the end of fiscal year 2010. This is just the latest in many wins for AMSC in Australia and in fact more than 30% of Australia’s wind power today is connected to the grid by our D-VAR solution.

AMSC of course has long been recognized as the grid interconnection expert for wind power with installations at more than 60 wind farms around the world. I am happy to announce on today’s call we now have officially begun to make similar inroads in the solar space. Late last week AMSC landed its first grid interconnection system order for a utility scale solar photovoltaic (PV) power plant in North America. This solution will be installed later this year and will provide the reactive compensation support necessary for the solar plant to interconnect to the grid, much in the same way we have enabled many wind farms around the world to interconnect to power grids.

While solar has historically only been practical for residential and commercial applications, utility scale projects are now being undertaken around the world to meet renewable energy standards. With this order we have established a first-mover advantage and begun to tap into a substantial new growth market. We are now in the process of developing a new solar grid interconnection solution designed specifically for the utility scale solar market that will provide optimized DC to AC conversion and reactive compensation in one package. We expect this solution will enable us to capture a solid share of what is expected to be a $2 billion market opportunity within just a few years. More on this bright sunshiny day opportunity later in fiscal 2010.

Turning now to our superconductor business, in March we announced we expanded our strategic alliance with LS Cable, the world’s third largest cable manufacturer. Under our new agreement LS Cable and AMSC will work together to deploy more than 50 KM or 31 miles of superconductor power cables and commercial power grids over the next five years and by the way, 50 circuit km of cable systems would require 10 million meters or more of HTS wire, so that is quite significant.

As you might recall, our original lines had called for the deployment of at least 10 km of superconductor power cables during the same period so this new agreement increases that targeted deployment of superconductor cables by a factor of five. Like AMSC, LS Cable sees tremendous potential in the superconductor cable market and like AMSC they are intent on establishing a leadership position in this market.

While our strategic alliance with LS Cable is global in scope, the market opportunity in Korea alone is tremendous. In late 2009 South Korea’s government announced plans to be the first country in the world to convert its entire electricity network to Smart Grid technologies. The project is estimated to cost approximately $25 billion and superconductor technology is a fundamental part of the build out.

Another tremendous opportunity exists today in the U.S. as we consider ways to strengthen the grid to support our renewable energy requirements. As we have discussed in past calls, Tres Amigas LLC has proposed a game changing super station in New Mexico that would tie America’s three power grids together for the first time ever. This would enable the large scale exchange of power from region to region that would open the door to a tremendous amount of new, renewable generation development throughout the country.

Of course the fact the Super Station would employ direct current (DC) superconductor power cable is what excites us most here at AMSC. While the project still has a long way to go with commissioning planned for 2014, Tres Amigas got through a big hurdle in March when the Federal Energy Regulatory Commission (FERC) granted Tres Amigas approval to sell transmission services at negotiated rates and while Tres Amigas did not receive the blanket waiver it had been seeking for FERC jurisdiction over [ERCOT], FERC commissioners did provide guidance on how Tres Amigas customers could apply for a waiver on a case by case basis.

Tres Amigas is now in the process of negotiating interconnection agreements with transmission companies, finalizing their agreements with anchor tenants for the super station, evaluating vendors for the non-superconductor components such as voltage source converters, and raising additional financing for the next phase of the project. All of these developments bode well for our global business going forward.

In fiscal 2010, however, our primary focus will remain overseas with more than 90% of revenues expected to come from international markets. Most of our attention will remain on Asia which is still in its nascent stages of growth but clearly has emerged as the leading producer and adopter of clean technology. While we here in the United States continue to have our wind power industry operating under a short-term production tax credit and while debate continues about climate change and energy bills, Asia continues to forge ahead with strong, long-term policies intended to meet rising power demands, reduce pollution and greenhouse gases, create new jobs and increase energy independence.

For instance, the Global Wind Energy Council’s latest report published in April, North American wind power installations are expected to decline by approximately 10% year-over-year in 2010 to 10 gigawatts annually and installations in Europe are expected to remain steady at about 10.5 gigawatts per year. In Asia, installations are expected to increase by approximately 14% to 17.5 gigawatts in 2010.

By 2014 the Global Wind Energy Council expects North America to be installing about 16.5 gigawatts and Europe to be installing 14.5 gigawatts of wind power on an annual basis respectively. Asia meanwhile is expected to install 27 gigawatts in 2014, the same year, nearly as much as Europe and North America combined. China alone installed nearly 14 gigawatts of wind power in 2009 and some industry analysts project the country could be installing 20 gigawatts annuals as early as 2012.

Of course, most of these installations in the near-term will be on-shore but China also has been ratcheting up its off-shore wind plans in the last few months. The China Meteorological Administration has estimated China’s off-shore wind power potential at 750 gigawatts, nearly three times larger than its on-shore potential. To begin tapping into this resource, the country’s National Energy Board (NEB) recently asked China’s 11 coastal provinces to map out potential off-shore wind farm programs.

It is expected the NEB will soon approve a number of sites for off-shore wind farms each with the capacity of 1 gigawatt or more. For some perspective on this, today about 2 gigawatts of off-shore wind power has been installed globally. All of this adds up to an entirely new growth opportunity in Asia and we are well positioned to capitalize on it. AMSC already has 10 wind turbine manufacturing customers in Asia including five in China alone.

We also have a broad operational presence in China as well as growing sales and field service support operations in Korea and India. We are particularly well positioned to address the huge Chinese off-shore market opportunity because of our previous development efforts and patent position in power dense superconductor generators which are at the core of our Sea Titan superconductor wind turbines.

With a 10 megawatt power rating, higher operating efficiency and a lower projected cost per installed megawatt in off-shore locations we expect Sea Titan wind turbines to dominate the off-shore market in the decade ahead. We expect to license our superconductor generator technology and our Sea Titan wind turbine technology to one or more licensees by the end of this year. These wind turbines will require the supply of both superconductor and power electronic components from AMSC, increasing our dollars per megawatt content compared with our standard AMSC Windtec designs.

Continuing the Asia theme, we are also positioned to be a leader in Asia’s Smart Grid built out. I touched on the activities underway in Korea a minute ago. Korea’s only electric utility, Korea Electric Power Corporation (KEPCO) has identified superconductors as one of the green technologies that it will utilize to create what they call a smart green utopia in the country by 2020. The South Korean government has also announced plans to boost the country’s domestic industries to capture 30% of the global Smart Grid market.

We recently signed a strategic alliance with KEPCO to address these opportunities together which really puts us in the [inaudible] seat as this market develops and even greater opportunities exist in China. Just last week it was announced that China’s 12th five-year plan which will cover the years 2011 through 2015 will spell out clear strategies for developing Smart Grids throughout China as part of the country’s initiative to foster the use of more clean energy and combat climate change.

The Smart Grid projects are expected to encompass all aspects of the power industry including power storage, smart power meters, electric vehicles and larger scale transmission. The country is planning to deploy a comprehensive system of Smart Grids by 2010 that will utilize a host of cutting edge technologies. We expect that list of technologies to include dynamic voltage control solutions like our D-VAR and high capacity, high efficiency superconductor power cables.

In fact, we have already achieved our first D-VAR sale in China. We are also actively engaged with power cable manufacturers and China’s State Grid Company which controls 88% of China’s power grid regarding their need to design, develop and deploy superconductor cables in the Chinese power grid. We will keep you posted about this developing market and our participation in it.

Turning back briefly to our focuses for fiscal 2010, as I mentioned earlier we are expecting to generate a significant amount of cash from operations. We often get asked how we intend to use this cash. In fiscal year 2010 we will be making aggressive investments to raise the business to a whole new level. These investments will include an increase in our global headcount as I stated earlier.

We will also invest in the expansion of our product portfolio. This will include our new utility scale solar grid interconnection solution, a new power module product for the wind market that will provide even more functionality and value add for our wind turbine customers and of course, the Sea Titan. In turn, Sea Titan wind turbines along with the demand we are seeing from companies like LS Cable and Tres Amigas for superconductor power cable solutions is the reason we began migrating our 344 Superconductor’s production line in the fourth fiscal quarter of 2009 from 40 mm technology to 100 mm technology. Investments in this production scale initiative will continue in fiscal 2010.

We will also be making significant capital expenditures to bolster our IT infrastructure and roll out a new ERP system. We will erect a new wind turbine near our facilities in both Wisconsin and [inaudible] to serve as qualification platforms for future generations of wind turbine designs and power electronics and we will also continue expanding our manufacturing facility in China to meet the increased demands we see on the horizon for our renewable energy and Power Grid products.

In summary, we have reached an important milestone in the history of our company last fiscal year; our first full-year of profitability. But, we have just begun to tap into AMSC’s potential. We are executing on our plans to become a multi-billion dollar business that can continue delivering superior operating margins and I am confident we will be taking another significant step in that direction in fiscal year 2010.

Now let me turn the call over to Dave for a discussion of our financial results. Dave?

David Henry

Thanks Greg and good morning everyone. We were quite pleased with the financial results we reported for the fourth quarter and full fiscal year 2009. We increased revenues throughout the year and delivered our 13th consecutive quarter of sequential revenue growth in Q4. We also made solid improvements in our gross and operating margins throughout the year, delivered our first full year of profitability and increased our balance of cash, cash equivalents, marketable securities and restricted cash by about $38 million from a year ago.

AMSC generated revenue of $87.6 million in the fourth quarter of fiscal 2009, a 9% increase from $80.7 million in Q3 and a 43% increase from $61.2 million in the fourth quarter of fiscal 2008. Higher wind turbine component shipments were the main factor in our sequential and year-over-year growth.

ASMC power systems represented 97% of total Q4 revenues at $84.8 million. This was up approximately 46% from $58.2 million for the fourth quarter of fiscal 2008. Our AMSC superconductor segment generated the remaining 3% of revenues. AMSC superconductor revenue in the fourth quarter was $2.9 million, which compares with $3 million in the year-ago quarter. Sales to Sinovel represented 74% of total revenues in the quarter.

Gross profit for the fourth quarter of fiscal 2009 was $33.1 million translating into a gross margin of 37.8%. This compares with a gross margin of 37.5% in the third quarter of fiscal 2009 and 32.6% in the fourth quarter of fiscal 2008. Improved product mix and a strengthening dollar as compared to the Euro were the primary drivers in the sequential gross margin improvement.

As a reminder, unlike many companies in the renewable energy industry, the current weakening of the Euro against both the RMB and dollar has a beneficial effect on our gross margin and profitability because most of our revenue is denominated in RMB while about half of our costs related to that revenue are denominated in Euro. Gross margin was favorably impacted in the quarter by approximately 150 basis points as a result of foreign currency movement.

R&D expenses in the fourth quarter of fiscal 2009 were $7.2 million or 8% of revenue. This is an increase from $6.4 million or 8% of revenue for Q3 and $4.8 million or 8% of revenue for the fourth quarter of fiscal 2008. The sequential and year-over-year increases in R&D expenses were driven by engineering headcount increases and other costs in support of our new development programs such as the PM4000, our solar interconnection offering and the Sea Titan wind turbine.

SG&A expenses for the fourth quarter of fiscal 2009 were $14 million or approximately 16% of total revenue. This is up from $12.9 million or 16% of revenue for the third quarter of fiscal 2009 and $10.4 million or 17% of revenue for the fourth quarter of fiscal 2008. The sequential and year-over-year increases were driven primarily by headcount increases in support of our continued growth. In aggregate, operating expenses increased on a dollar basis but remained steady on a percentage basis from Q3 to Q4.

For fiscal 2009 operating expenses were $76.3 million or 24% of total revenue compared to $60.1 million or 33% of revenue in the prior year. Our stated objective regarding operating expenses has always been to manage their growth while continually decreasing the percentage of revenue consumed by operating expenses in order to drive operating leverage. We achieved that objective in fiscal 2009. We expect the same results in fiscal 2010.

While we expect to grow operating expenses on a dollar basis as we increase our headcount by approximately 40% and develop new solutions for the renewable energy and power grid markets we expect operating expenses as a percentage of revenue to decline slightly in fiscal 2010.

Our operating income for the fourth quarter of fiscal 2009 was $11.5 million resulting in an operating margin of 13%. This operating margin is consistent with the third fiscal quarter and is up from 7% in the year-ago quarter. AMSC power systems generated operating income of $22.4 million or 26% operating margin for the fourth fiscal quarter. This compares with a 26% operating margin in the third quarter of fiscal 2009 and a 22% operating margin for the year-ago quarter.

The operating loss at AMSC Superconductors for the fourth fiscal quarter was $7.3 million. This compares with an operating loss of $5.9 million in the third quarter of fiscal 2009 and $6.4 million for the fourth quarter of fiscal 2008. The higher AMSC Superconductor operating loss in the fourth fiscal quarter compared to each of the prior periods was primarily the result of lower wire shipments and additional unabsorbed engineering costs due to the wind down of a government program during the fourth quarter. As a reminder, stock based compensation expense is not allocated to our reporting segments.

Regarding income taxes, the combination of higher profits from overseas jurisdictions and higher U.S. losses driven by superconductors resulted in a higher sequential effective tax rate in the fourth quarter. Income tax expense increased to $6.7 million or a 58% effective tax rate for the fourth quarter of fiscal 2009. This compares with $5.6 million or a 52% effective tax rate for the third quarter of fiscal 2009 and $3.2 million or a 71% effective tax rate for the year-ago quarter. With foreign profits expected to continue to increase and U.S. losses expected to remain relatively stable in the near-term we expect our effective tax rate to resume its gradual decline in future quarters.

For the fourth quarter of fiscal 2009 we reported GAAP net income of $4.9 million or $0.11 per diluted share. Third quarter of fiscal 2009 of $5.2 million or $0.11 per diluted share and is up significantly from $1.3 million or $0.03 per diluted share for the fourth quarter of fiscal 2008. We use non-GAAP net income which approximates cash based earnings from operations to track our financial progress and report this metric each quarter. We also provide guidance for non-GAAP net income on an annualized basis. These numbers are reconciled to GAAP at tables at the end of our earnings press release.

Our non-GAAP net income for the fourth quarter of fiscal 2009 was $8.4 million or $0.18 per diluted share. This is down slightly from $9.1 million or $0.20 per diluted share for the third quarter but is more than double our Q4 fiscal 2008 non-GAAP net income of $4.1 million or $0.09 per diluted share.

Touching briefly on the results for the full fiscal year, our total revenues were $316 million, a 73% increase from $182.8 million for full fiscal year 2008. From a business unit perspective, AMSC power systems represented 96% of our total revenues with AMSC superconductor contributing the remaining 4% in fiscal 2009.

Geographically, 87% of our full fiscal year revenues came from markets outside of the U.S. and from an end market perspective we generated approximately 83% of our full fiscal year revenue from the wind power market with most of the remainder coming from the Power Grid market. For the full fiscal year Sinovel represented 70% of total revenues.

Our gross margin for fiscal 2009 was 36.4%, a solid improvement from 28.4% the prior fiscal year. Our GAAP net income for fiscal 2009 was $16.2 million or $0.36 per diluted share. This compares with a GAAP net loss of $16.6 million in fiscal 2008 or $0.39 per share. On a non-GAAP basis we reported net income of $31.7 million or $0.70 per diluted share for fiscal 2009 which compares with a non-GAAP net loss of $3.1 million or $0.07 per share in the prior year.

AMSC ended the fiscal year with $155.1 million in cash, cash equivalents, marketable securities and restricted cash. This compares with $112.8 million as of December 31, 2009 and $117.2 million as of March 31, 2009. The sequential increase was primarily due to large payments in the quarter we received from our largest customer, Sinovel. These payments helped to lower our day sales outstanding for the quarter to 64 days in the fourth quarter from 90 days for the third fiscal quarter. Please note these figures are based on end of quarter receivables. We will base DSO on average accounts receivable in future quarters in order to provide a more normalized view of receivables management.

Our days of inventory for the fourth quarter declined to 59 days from 66 days in Q3 of fiscal 2009. This was primarily the result of shipments of inventory accumulated in the third quarter to meet fourth quarter demand. Looking ahead, Greg has already touched on the key aspects of our annual guidance so let me just add a bit of color on how we expect to see the business evolve through the year.

We expect revenues to increase sequentially in each quarter of fiscal 2010. Our GAAP and non-GAAP net income for the first quarter of fiscal 2010 are both expected to increase slightly from the fourth quarter of fiscal 2009 influenced by planned sequential revenue growth as well as the continued ramp up of our hiring efforts in support of our growth initiatives. As Greg alluded to, we will make significant investments in support of our long-term growth strategy in fiscal 2010.

Capital expenditures are expected to increase to a range of $40-50 million in fiscal 2010. We expect to entirely finance this investment from our operations. In other words, the cash generated by our expected profits in fiscal 2010 as well as through tight management of working capital. We expect capital expenditures to decrease significantly the following fiscal year.

In summary, fiscal 2010 is expected to be a year of strong revenue and earnings growth as a result of continued operational excellence and a year of positive net cash flows while making significant investments in support of our future growth. With that we will open the call to questions. Operator, would you please provide the instructions?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Paul Clegg – Jefferies & Company.

Paul Clegg – Jefferies & Company

On the guidance, directionally how do you expect gross margins to trend in fiscal 2010? Is there any scaling benefit we are going to see next year?

David Henry

From a competitive standpoint we are not providing specific gross margin guidance for fiscal 2010. We have in the past discussed several operational initiatives that are in the pipeline that we can expect can influence and improve gross margins going forward but, as of right now we are declining to give any gross margin guidance for fiscal 2010.

Greg Yurek

That is for obvious competitive reasons.

Operator

The next question comes from the line of John Hardy – Broadpoint AmTech.

John Hardy – Broadpoint AmTech

I was wondering if you could give us an update on timing of HTS break-even. Obviously you pulled in your target at the end of last year and it seems like things have been pretty constructive with LS since that point so any update there would be greatly appreciated.

Greg Yurek

The most we are going to say about that is consistent with what we have said in the past. When we get to shipments of 3-4 million meters of our wire out of the shop that represents a GAAP P&L break-even for that business. However, don’t forget what we expect our of superconductors is a mix of products. Sometimes we will be shipping wires but sometimes the revenue is going to come from large scale projects as we have done in the past. That mix could help to bring that in closer of course.

Operator

The next question comes from the line of Vishal Shah – Barclays Capital.

Vishal Shah – Barclays Capital

What percentage of your business or revenues in 2010 will be to Sinovel and how is the traction at some of the other customers looking? Can you maybe quantify the growth there?

Greg Yurek

Let me comment on the traction and Dave can comment on the percentage of business. Traction is looking good. As you know, in the fourth quarter we had significant orders from Shenyang Blower Works, XJ and smaller ones from other companies. We have repeat orders from CSR-ZELRI and Hyundai over the last couple of months. So the traction is really starting to pick up there. We expect, as I said, by the end of this fiscal year all of our licensees will be in volume production mode.

David Henry

As we have in the past we don’t really give forward-looking information on a customer basis or a product basis by that matter. I will just reiterate Sinovel was 74% of revenues in the quarter and 70% of revenues for the full-year.

Operator

The next question comes from the line of Theodore O’Neil – Wunderlich Securities.

Theodore O’Neil – Wunderlich Securities

I was wondering on the solar business if you could detail a little bit more for us about what you will be making to sell into that market versus what you would be willing to source from others. If you could talk about what the revenue per megawatt per solar farm, sort of metric might be for that business?

Greg Yurek

There are a number of versions of the offering we have. The version 1.0 if you want to call it that is basically our D-VAR with a change in software to meet the reactive compensation needs of solar power plants that are going in now in North America. China is going to be huge in that area as well. Version 2.0 is basically what we talked about at our Analyst Day back in November of 2009 and that is still the DC to AC conversion but in fact also reactive compensation built in. So it is kind of basically an inverter with D-VAR inside so to speak. As we go forward from that version 3.0 we are looking at collecting at solar panels or groups of solar panels with inverters and sending DC to our version 2.0 inverter reactive compensation device.

Basically what we are providing is what we have done in the wind industry and that is grid interconnections but now it is going to be in addition for solar power plants starting with PD but it will also include solar thermal as we go forward.

Operator

The next question comes from the line of Ben Kallo – Robert W. Baird.

Ben Kallo – Robert W. Baird

So we read a lot about the overcapacity in turbine production in China. I know you have said in the past you haven’t seen this in your customers but can you just kind of walk us through the steps you take to ensure that is not happening with your customers and how you check up on them?

Greg Yurek

We are in constant contact with our customers in China. We have account managers that are in direct contact and all the usual things. Some of us, myself included, go and meet with these customers of course in China. So we have very direct communications on virtually a daily basis by a variety of means. We are very clear. Our customers are not slowing down. Of course consolidation is going on in China. It is being forced by the central government. No question about that.

We expect our customers are going to be the beneficiaries of that because they are going to acquire others or they are going to get a bigger market share. So as you look at AMSC and its customers in China in fiscal 2010 look for us to grab a larger market share in China. I think that is exactly what is happening and I think you are going to see that in the orders flow as we go through the next weeks and months.

Operator

The next question comes from the line of Ben Schuman – Pacific Crest Securities.

Ben Schuman – Pacific Crest Securities

Can you give an approximate breakout between HTS and Power Systems in terms of the CapEx guidance and talk about where you might expect to exit the year in terms of HTS production capacity?

David Henry

Once again from a competitive standpoint we are going to decline to talk about some of the specifics on how much we are going to spend on CapEx and superconductors. I can tell you though for most of the spending of the $40-50 million is outside of superconductors. A lot of that investment is coming in form of investment for, as Greg mentioned, our ERP systems and improving our infrastructure around the world. We need to upgrade our facilities. As we continue to add people we need to have space for these people which requires us to make investments in that regard.

We talked about the fact we are going to put up a couple of wind turbines; one in Austria and one in Wisconsin in order to do new product qualifications and to provide a platform to test out our latest generation power electronics that we will be providing to our customers. I can tell you the majority of the CapEx investment is going to be coming in those areas and not necessarily in superconductors but we will make some investments in superconductors as we scale up as we have discussed in the past, the need to get ready for the demand that is coming and so we need to make that investment towards the 100 mm production which we are going to start that process in fiscal 2010.

Greg Yurek

David said everything absolutely correctly but I just want to be clear the amount we invest in CapEx in superconductors this fiscal year will be substantial.

Operator

The next question comes from the line of Stewart Bush – RBC Capital Markets.

Stewart Bush – RBC Capital Markets

A year ago you had $190 million in backlog. So you booked and shipped $125 million in the year. My question is why is your guidance, why should we not consider that awfully conservative if you have 90% already in backlog and you see a positive outlook should we not expect you to be booking and shipping more during the year?

Greg Yurek

This is our first guidance for the year and we have been given all factors that our guidance is reasonable and we will just leave it at that.

David Henry

One other thing, if you go back when we gave our guidance last year we had around $190 million of backlog at the time and we were guiding to $225 million roughly of revenue. At that time, subsequent to all of that, several months after that, Sinovel pulled in their demand on us and that was something we didn’t know about at the time. When you look at our fill requirement this year in dollar terms compared to our fill requirement last year in dollar terms it is roughly the same. A lot of our fill is going to come in the first six months of the year and not necessarily in the last six months of the year. We think our guidance we have put out is consistent with our ability to fill in our backlog as we have in the past.

Operator

The next question comes from the line of Carter Shoop – Deutsche Bank.

Carter Shoop – Deutsche Bank

Can you clarify what your ERP spend will be? The P&L impact on the ERP spend for the upcoming year. Then my question has to do with the opportunity in China with smart grid related sales. What kind of range can investors think about for the coming fiscal year for smart grid related sales in China?

David Henry

I will let Greg address the second and I will take your first question which is on the ERP. ERP is really not going to be completed until towards the end of fiscal 2010 so from a depreciation standpoint you are not going to really see a P&L hit from it at all.

Greg Yurek

In terms of Smart Grid build out in the Asia Pacific region I talked a lot in my remarks about Korea and China. So we are very bullish about the growth opportunities in that region; no question about it. We got our tail in the door with both D-VAR and superconductor cables and we are not going to break it out though for you. We don’t do that. We are very bullish on the growth opportunity in that region and a lot of evidence that we went through here that supports the reasons for being bullish.

Operator

The next question comes from the line of JinMing Liu – Ardour Capital.

JinMing Liu – Ardour Capital

My question is related to the Chinese government regulation regarding the wind turbine industry. Recently I noticed that the government there released a draft proposal asking for comments. One thing that caught my eye in there is they may require all the turbine manufacturers to have the ability to sell design and produce at least 2.5 megawatt turbine. If that does become the actual regulation what kind of challenges and opportunities you will have?

Greg Yurek

I think it is all on the opportunity side. As you are already seeing, for example, Sinovel and Dongfong, Sinovel started with the 1.5 megawatt and they are now in production of a 3 megawatt and are expected to begin production of the 5 megawatt in 2011. Same thing with Dongfong Steam Turbine Works. They first licensed from us a 2.5 megawatt and then recently last quarter we announced they have now licensed a 5 megawatt turbine design from us. What I would suggest you look for as we go through this year is that our customers not just the Chinese but other customers around the world as well are going to upgrade to higher power ratings through the year.

Operator

The next question comes from the line of Timothy Arcuri – Citi.

Timothy Arcuri – Citi

Can I get operating margin by segment; power systems and then the absolute dollars for the superconductor segment?

David Henry

The operating margin for power systems was 26% in the quarter. Operating loss for superconductors was $7.3 million.

Operator

The next question comes from the line of Pavel Molchanov – Raymond James.

Pavel Molchanov – Raymond James

Last year Chinese wind installations beat expectations by about 3 gigs or 30%. What are you hearing from your government sources about what the pace of installations might be this year?

Greg Yurek

We think taking all the data into account it is going to be flat to up in calendar 2010. I don’t see any slow down there is the sort of takeaway as well.

Operator

The next question comes from the line of Carter Driscoll – Capstone Investments.

Carter Driscoll – Capstone Investments

I was hoping you could address the off-shore wind opportunity and maybe a little bit more about geography. Obviously big opportunity in China but maybe address the U.S. and Europe and the different stages they are in.

Greg Yurek

Sure. In January the U.K. permitted an additional 32 gigawatts of offshore wind and so there is a bit of a gold rush going on in the U.K. as we speak. The supply chains are being lined up. Turbine manufacturers are being lined up and obviously that would increase some of our licensees who would like to of course sell off-shore wind turbines in the U.K.

The U.S. is the U.S. Maybe it will happen someday but we are not counting on it. Our focus remains on Asia, number one. Number two, number three would be the U.K. for the off-shore. Chinese have been hinting at this for awhile but in the last couple of months they are now talking about 750 gigawatts off-shore and already going forward with plans on the first 1 gigawatt off-shore wind farms. I know it sounds humongous in terms of the numbers here but just go back and look at China on on-shore wind and even individual wind turbine manufacturers that weren’t even in the business in 2005. I firmly believe China is going to take off like a rocket here and we are going to participate very directly in this huge off-shore market in the U.K.

By the way, back to the Raymond James analyst question I said we expect flat to some growth in China. Don’t forget what I said earlier as well which is we expect to grab more market share within that end market. That is an important part. We see growth for our company and our customers in fiscal 2010.

Operator

The next question comes from the line of Paul Clegg – Jefferies & Company.

Paul Clegg – Jefferies & Company

A detailed question about Hyundai. Hyundai last year or I think it was closer to a year ago, signed an agreement to provide I think 100 turbines to a wind farm in Korea. I think it would have been the largest wind farm in Korea that was a partnership with [inaudible]. I don’t remember seeing any order that would correspond to anything that size on your side. Do you know whether or not that project is moving forward and if so are the turbines they are using Windtec designs?

Greg Yurek

I am not sure what that 100 wind turbine order is all about. Hyundai is spreading out. They are shipping product to Pakistan. They are putting turbines in Korea. They are shipping to the U.S. now. I am not sure where you got your information. Maybe we could talk later on offline and take a look at that more carefully.

Operator

The next question comes from the line of Theodore O’Neil – Wunderlich Securities.

Theodore O’Neil – Wunderlich Securities

You are killing me with this one question at a time business. At the risk of boring everyone to tears could you give us a little more detail on how you got to the 50% something tax rate for the quarter?

David Henry

I am going to assume you don’t mean the calculation of it. I am sure you know that. The reasons for the increase in the effective tax rate there are two reasons. First off, the fact the majority of our profits are coming from foreign jurisdictions and so those profits are taxed. As you know, in the U.S. where we have losses we don’t take any benefit. So during the quarter we had the combination of both our overall profit was the result of higher off-shore income combined with higher losses in the U.S. So that had a negative effect on our effective tax rate quarter-over-quarter.

As we look through to fiscal 2010 we are expecting U.S. losses to remain relatively stable. As we are guiding towards higher profits those profits would be taxed at a 25% rate. So by the algebra as you are bringing on taxes at the 25% rate going forward your effective tax rate will go down year-over-year. Hopefully I have answered your question.

Operator

The next question comes from the line of Ben Schuman – Pacific Crest Securities.

Ben Schuman – Pacific Crest Securities

Can you give a little more color on the headcount ramp in terms of which geographies you are going to be investing in and whether we can think of maybe the OpEx per employee ramping at consistent or slower rate than headcount itself?

David Henry

We have mentioned we expect our headcount to grow to more than 1,000. In terms of the geography though it is going to come where our R&D efforts are occurring. A lot of those efforts are occurring in Austria. A lot of those efforts occur in Wisconsin. We also need to increase our manufacturing operations in China. That is where the growth is going to occur. In terms of one versus the other we are not going to comment on that but it will occur in all three areas.

Greg did throw out some sort of earnings per employee. On a GAAP basis we expect that to increase year-over-year. I also mentioned in my remarks we expect our operating expenses as a percentage of revenue to continue to decline but decline slightly in fiscal 2010 compared to fiscal 2009. Beyond that, I am not going to give much more than that but hopefully I am giving you enough.

Greg Yurek

It is all going to support 70% growth in the non-GAAP earnings in fiscal 2010 and also put the foundation in for further growth in the next fiscal year. That is all pretty obvious but worth stating again I believe.

Operator

The next question comes from the line of Timothy Arcuri – Citi.

Timothy Arcuri – Citi

A question on China wind. On the 10th of May here they had pretty formalized targets now for roughly 100 gigawatts by 2020. If you look at the installs at the end of this year you are going to be maybe 40-45 assuming you do maybe 12-15 this year off of the 13 last year. So if you do the math on that it implies a pretty significant slow down on the run rate of installations to sort of get to that goal. How do you sort of handicap that? Is that not the right number? Is it going to be increased? How do you think about that?

Greg Yurek

I think clearly the Chinese government has continued to play the game of low balling the number and then beating the heck out of it. So it was just a couple of years ago they had 20-30 gigawatts as the target for 2020 that we are now at 24-25 gigawatts in China already at the end of 2009. I think they are going to continue to play this game. If you look at some industry reports out there they have it at 200 gigawatts in 2020. I think that is closer to what the expectation should be. I believe year-over-year you are going to see that ramping up and ramping up.

By the way now that they are taking off with the off-shore, they have debated that and discussed it. We have been part of those discussions over the last couple of years. That is going to be I think clearly blow away 100 gigawatts by the time we get to 2020.

Operator

The next question comes from the line of Theodore O’Neil – Wunderlich Securities.

Theodore O’Neil – Wunderlich Securities

I think you mentioned you might have a licensee for the Sea Titan by the end of the year. I was wondering what sort of revenue opportunity that would present?

Greg Yurek

Well we are expecting more specifically to grab our first licensee for both superconductor generators and also secondly for the superconductor Sea Titan wind turbine. Those will typically be run very similar to the Windtec model in which case we would be looking for an up-front license fee, some development costs of course and then royalties going down the road as well as of course selling the core components that go into them.

Having said all of that there might be a tiny bit of revenue that might be recognized from up-front license fees. We will have to wait and see how that develops. I wouldn’t look for much in this fiscal year. I think the big impact obviously comes from fiscal 2011 from the superconductor generators and Sea Titan.

Operator

The next question comes from the line of Ben Kallo – Robert W. Baird.

Ben Kallo – Robert W. Baird

To follow-up on the Sea Titan. You said you are going to have a licensee this year hopefully. Are you looking to diversify outside of Sinovel since it should be a product you could basically pick your partner there?

Greg Yurek

Yes. None of this will be exclusive by the way for the generator or for the Sea Titan wind turbine itself. We expect multiple licensees for each of those. Some will only manufacture the generator and supply it to those who are only making the Sea Titan wind turbine. We also think there are a couple there that could be vertically integrated due to generator and the Sea Titan wind turbine as well. So not exclusive is the key here. Look for multiples as we go forward beyond this year.

Operator

At this time I would like to turn the conference back over to Mr. Greg Yurek for any closing or additional comments.

Greg Yurek

Thank you. Thanks for participating on the call today. This was our first full-year of profitable growth. We are proud of it and we are going to continue to drive forward very hard to drive our earnings up as we have described here today. Thanks for your participation.

Operator

That does conclude today’s conference. Thank you for your participation.

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Source: American Superconductor Corporation F4Q09 (Qtr End 03/31/2010) Earnings Call Transcript
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