ATS Corp (ATS) 2003 Q1 法說會逐字稿

Welcome to the ATS first quarter conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. If anyone has any difficulties during the conference, please press star, zero for operator assistance. I remind you that our presentation today may contain forward-looking statements reflecting the company's expectations regarding its future growth, results, and performance.

These forward-looking statements reflect the current views of the company's management and are subject to various risks and uncertainties which could cause the company's future growth, results, and performance to differ materially from those expressed and/or implied by these statements. Certain of these risks are described in the ATS annual report. ATS disclaims any intention or obligation to update or revise these forward-looking statements. This call is being recorded for replay purposes and I would now like to turn the conference over to Mr. Klaus Woerner, President and Chief Executive Officer of ATS. Please go ahead, Mr. Woerner.

Thank you very much, operator, and good morning, ladies and gentlemen. Ron Jutras is with me today and Ron will provide a financial report later in the call. First, my observations. There have been a number of very positive developments in our business, some that are easy to see from our press release like our interim new Automation Systems auto bookings and some that require more explanation. The most obvious is that our operating earnings in Q1 improved substantially from the preceding two quarters. Year over year the comparison is not as favorable, but remember we had a very strong opening quarter last year that proved to be a spike, not a trend. Also remember that over the past year our Precision Components Group has been transitioning into new business lines and gearing up for new valued customer programs.

Transitions like this temporarily suppress earnings during production start-ups but are key drivers of future revenue and profitability. As an example, we began producing opening volumes in May under the power seat adjustment subsystem mandate we won back in 2001. This is the largest subassembly assignment we've ever undertaken. We anticipate this mandate will produce between $12 and $50 million in new revenue for ATS this year, with a substantial step up expected next year. The bulk of this assignment, which is expected to last until 2008 fiscal year. This large program has been launched on time, on budget, and with the high quality the customer expected. In fact, the customer is pleased with all of our engineering, phototyping and production.

Really we expect the assignment will be a driver of Precision Components revenue in the future and will also be a great pilot for attracting new subassembly work going forward. This is just one of several new Precision Component programs launching this year. You'll recall we are also gearing up for another $20 million of annual work that we secured last year. These assignments are now launching and should begin to ramp up revenue in the third quarter. For obvious reasons, I consider these mandates among the very positive underlying developments in our business today, and our progress made in thermal management devices for computer manufacturers.

This initiative also began to produce significant volumes in Q1 for our Precision Components Group. We expect volumes to continue to ramp up through the balance of our fiscal year. Developments in our solar manufacturing business also qualify as positive highlights. Photowatt's revenue was ahead 95% over last year, reflecting much stronger market conditions. At Spheral Solar Power, things are on track and really beginning to take shape. The construction of our first 20 megawatt SSP facility in Cambridge is nearing completion and we expect to begin moving in by the end of September, putting us in position to launch commercial production on schedule starting next spring. The specialized SSP production equipment that is being built for this facility by our Automation Systems Group is progressing well.

The final automated workstation is slated for calendar year end delivery. Some of this is very sophisticated automation because it's used in high temperature and chemical environments. For that reason we believe also that our SSP factory will serve as a showcase for our Automation Systems capability. We've also bolstered our SSP workforce carefully, filling key positions in product development, engineering, quality control. We now have a staff of approximately 70. We have filed patent protection for new optical enhancements developed over the past year to further enhance the power of SSP's revolutionary technology.

This step gives us greater comfort in presenting our technology to interested parties now. We are now starting to provide more product samples to potential customers in a variety of markets. For example, six major building material companies will begin evaluating SSP for use in roofing tiles, roofing membranes, the type you see on industrial buildings, roof shingles and building facades. Samples are also starting to flow out to potential customers in the marine and recreational markets. These markets could be significant initial customers of SSP. Our goal is to secure supply contracts for all of SSP's first year production before we ramp up next spring.

You'll see SSP profiled in our new annual report that will be mailed this week. In particular, please take note of the photo of the SSP module. It's six by twenty-four inches, or 150 by 600 millimeters, we believe this is the largest solar cell in the world and with its size comes excellent manufacturing efficiency. The next six months will be action-packed for SSP and like all start-ups, we expect to face some challenges, but we like where we are so far with this new business. So there is good underlying news in our two small operating groups. More important, the primary driver of our business is also making good headway. In fact, we consider it pretty significant that new Automation Systems auto bookings reached the $73 million mark in the first six weeks of the second quarter.

Why is this significant? Because the second quarter is traditionally a slower period because of plant shutdowns, summer vacations, and so on. The fact that new purchase orders are so strong during the summer is encouraging evidence that demand for our major business activity is continuing to accelerate. Given the economic uncertainty of the past three years, I'm not about to call this a market recovery. For this we need to continue to achieve our auto bookings goals and continue to build our auto backlog through the rest of fiscal 2004. But strong auto bookings at this accelerated pace are a major step in the right direction and will help to enhance capacity utilization for our Automation Systems Group over the next few quarters.

Moving from the short-term to something more strategic, the real underlying success story for Automation Systems Group over the past few months has been the positive and growing response we've had to our recent technology developments. Our proprietary hardware and software modules which we refer to as our standard products, are giving us a significant advantage in the marketplace, an advantage that we believe will continue to build over the next few years. By creating these advanced modules that enhance the value and functionality of our turnkey custom automation solutions, we are finding our success rate and competitive bids is better than ever. Not only are we gaining market share, we are being sole-sourced for more contracts, even with first-time customers.

For example, during the first quarter alone, we integrated into our customer solutions 42 Superbots, 28 of our standard fields and four Supertrak platforms, our intelligent next-generation conveyor system. As further evidence of our momentum, Supertrak is currently a central part of some $59 million worth of Automation Systems assignments we're quoting on right now. These highly engineered tools not only allow us to deliver value to customers in the form of fast payback, reliability, and reusability within a total turnkey system, they are a central part of the operational improvements initiatives we have undertaken with our Automation Systems Group. These modules are also faster and more economical for us to build and they reduce third-party equipment.

Incidentally our objective here is not to sell these as stand-alone products. It's to enhance the value of full turnkey systems which is our focus. As markets recover, and volumes pick up, you'll find that our standard technology initiatives will deliver very good top and bottom line benefits, benefits we expect will be sustained for years to come. We will continue to develop new automation technologies and will launch two innovative systems next month. I'll briefly discuss our forward agenda after Ron provides us with his report. Now go ahead, please, Ron.

Good morning, and thank you, Klaus. I'll start today by noting the presentation change in our financial statements reflecting the treatment of Eco-Snow as a discontinued business. As many of you are aware, we sold the operating assets of this business to BOC Group in July. Eco-Snow was previously part of the Automation Systems Group. The new presentation changes revenue, operating earnings, and margins in both periods. The net earnings are unchanged.

We're also providing the revised comparative numbers for each quarter of fiscal 2003 in the presentation materials that will be available on ATS' website later today. Today's comparisons, we used the revised numbers. As an opening comment, note that each of our three business segments made a positive contribution to operating earnings in the first quarter of fiscal 2004, something that has been elusive during the past two years because of the difficult economic environment. Revenues in the Automation Systems segment, or ASG, of $105 million were $1.8 million lower than in the first quarter of fiscal 2003, reflecting the 10% decline in the effective U.S. dollar exchange rate over the last year.

In fact, average U.S. exchange rates were 8% lower during this most recent quarter when compared to Q4. However, our ASG revenues were $5 million higher than in Q4. ASG operating earnings of $5.7 million in Q1 were 0.4 million lower than in Q1 of last year, reflecting slightly lower revenue and a small reduction in operating margin which was 5.4% compared to 5.7% last year. On a sequential basis, operating earnings and operating margin were significantly better this quarter than in both the third and fourth quarters of fiscal 2003 and they compare favorably to the 4.6% operating margin realized for all of fiscal 2003. Third-party content was 44% of Automation Systems revenue in Q1 versus 47% in Q1 of last year.

The sequential improvement in group operating earnings and margins was primarily the result of better performance in our Canadian facilities where utilization has improved the most. Our European operations experienced lower than normal margins in the quarter as some projects experienced cost overruns. We believe these projects are now largely behind us. We continue to have lower-than-desirable factory utilization in our West Coast operations, and this resulted in operating losses in these two facilities during Q1. The West Coast plants are established businesses, with proven track records. They are strategically very important to our West Coast customers, and we are confident that they will again be substantial contributors to our earnings in the future.

That said, we have made operational changes in the West. During Q1 we consolidated our West Coast machining operations into our Corvallis, Oregon facility which will reduce future expenses, and we continue to focus our efforts on improving utilization by targeting new customers and identifying business that could be transferred to these facilities. We believe there is plenty of room for margin improvement in the Automation Systems Group. This will be driven by increased revenue, repeat systems activity increases, and growing use of standard products run by improved capacity utilization at all our facilities.

We did take a significant step forward in utilization during the first quarter, and we expect that with improving demand, we will see further improvement in utilization, revenue, and margins. Importantly, the fact that we have available capacity is a critical factor in allowing us to capture some customers who are very concerned with competitors who have dramatically downsized their operations during the past two years in response to mounting losses and weak financial health. We also expect margin improvement as a result of the significant investments we've made in new technology and standard automation products. As Klaus has noted, they are a key part of our strategy to capture market share and enhance our margins.

While less than the high levels recorded in Q1 and Q4 of last year, new Automation Systems' order booking activity of $150 million remains solid in the quarter. We are encouraged by the fact that this is the first time in the last two fiscal years that new order bookings have surpassed the $100 million level in two consecutive quarters. This, combined with very strong new order bookings in the six weeks following the end of Q1 provide a solid basis for our optimism and our expectations that the worst of this downturn is now behind us. For reference, total new order bookings for all of Q2 last year were $82 million. Compared to Q1 of last year, the weaker U.S. dollar negatively impacted new order bookings in Q1 by approximately $2.5 million.

The average rate of exchange was $1.40 Canadian in Q1 versus $1.55 in Q1 of last year, and $1.51 in Q4. We experienced two order cancellations in the quarter which totaled $5.4 million. About 80% of this amount was a result of one customer deciding to ship their investment dollars to a new generation product, and we fully expect that this work will replace with new orders from the same customer as this next-gen product development is finalized. We also continue to see some delays in order placements during the quarter. However, we believe that this condition is also improving. Q1 order activity again was broadly based with 25 orders in excess of $1 million which comprised $54.6 million of the total new order bookings in the period.

All of our primary industry segments were represented in these larger order bookings with automotive being the biggest portion. Order backlog of June 30th stood at $158 million compared to $161 million at the start of the quarter. The decline in the quarter is entirely the result of a more than 8% decline in the period ending U.S. dollar exchange rate which dropped to $1.35 Canadian from $1.47 at the start of the quarter. Backlog as reported excludes intercompany backlog of $16.7 million with respect to the automation equipment being built for SSP. Looking next at the Precision Components Group, or PCG, shows that in spite of the decline in North American automobile production and lower U.S. exchange rate, PCG revenues of $34.4 million were 14% higher than in Q1 a year earlier and 3% higher than in Q4. The year-over-year increase was the result of higher thermal products revenues which increased $3.1 million to $3.8 million and as a result of the acquisition of Micro Precision Plastics which contributed $2.8 million to group revenue. This comparison also highlights Klaus' comments that we've been transitioning our PCG business over a number of quarters to new business which we expect will offer more attractive margins once fully ramped. Thermal volumes ramped by $1.3 million during the quarter, or 52% over the revenue of Q4, but were slightly behind expectations largely because of an unexpected customer product design change on one program and because another program did not ramp as quickly as the customer had previously forecasted.

The customer's forecast has us getting back on ramp schedule this month, and Bruce will tell you that we're on track with that. The product design change on the other program has also been completed, and we expect to be back to full shipment volume on this product this month as well. With respect to future thermals business, we made our first shipments in July on one important new program, and we have now received verbal approval on another two programs which we forecast are worth between $3 million to $4 million U.S. dollars per annum at full volume. Given the past difficulty of making accurate forecasts for thermals, we're not providing our revenue forecast for Q2, however, it's clear we expect this area to grow in future.

The ramp-up of the thermals business is very much on track, and we believe that both increasing penetration with customers in terms of new programs and strengthening demand for personal computers will help to further fuel our growth in this area. As Klaus mentioned, we launched a large power seat subassembly contract on schedule during this quarter. The value of the initial shipments in Q1 was approximately 0.8 million. Approximately 0.3 million of these initial shipments we recorded as reduction of the capitalized preproduction cost during the first quarter and therefore not reflected in revenue. The remaining 0.5 million of shipments was reflected in PCG revenue because we met the criteria for ending the preproduction period during Q1. All future shipments of course will be recognized in revenue. On another positive note, the seax contract had no significant negative impact on operating earnings in Q1 in spite of it being the initial launch period.

PCG operating earnings were $1.1 million less than in Q1 of last year, reflecting the transition of business described earlier. Progress is being made and PCG operating earnings of 0.7 million were significantly improved over the operating results in both Q3 and Q4 of last year. Start-up and fixed costs related to new programs, especially on thermals, continue to hold back greater improvements in operating earnings, and operating margins in Q1. Improvement from thermals is geared to expected increases in shipment volumes in Q2 and beyond and, as noted, the seax contract is expected to ramp up during the remainder of fiscal 2004, as well as beyond and as a result, we expect it to also contribute to positively to fiscal 2004 operating results.

Also as Klaus noted, there are a number of other new programs scheduled to commence production in the fall which we expect to contribute to PCG results as we move through the second half of this fiscal year. The solar business produced a 95% increase in revenues. This was a good showing, but there are some qualifiers. You may recall that revenue in Q1 of last year was negatively impacted because we accepted a large return shipment of $3.1 million from a customer who was having some difficulty. In addition, the strengthening of the Euro, compared to the Canadian dollar during the past year, also inflated revenue in Q1 of this year by approximately $1.3 million. The other major reason for the increase in Q1 revenue, especially compared to Q4 when solar revenue was $9.6 million was the recovery in market demand which was historic both in the third and fourth quarters by changes in subsidy programs in Germany.

You may recall this was noted last quarter. Demand continues to be strong in the second quarter. However, the strong Euro continues to create pricing pressure for us in competing with Japanese and U.S. manufacturers who are benefiting from the currency movement on European sales. Any impact on the currency movement on pricing additions was reflected in operating earnings which were 0.1 million compared to 0.5 million in Q1 of last year.. Operating earnings in Q4 were 0.2 million, however these benefit from a favorable inventory adjustment at year end that more than offset a bad debt expense in that period.

As I said, demand for solar modules has continued to be strong since June 30th, and there are a number of operating initiatives well underway to further improve operating efficiencies and to help combat pricing pressure. These activities include a planned transition during this fiscal year to a larger 150 square millimeter cell, or a six-inch square cell, as well as further improvements in our manufacturing processes. Burnt pricing pressure in the market underscores the importance of finding ways to reduce the cost of manufacturing solar cells and modules. This is why the expected cost advantages at Spheral Solar Power are so important. As Klaus noted, our large program for SSP is on track, total investment in SSP increased by $9.9 million in the quarter, reflecting both capital cost and development expenditures. Total investment in SSP was $31.3 million at the end of June.

Review of the balance sheet and cash flow shows that our substantial financial strength remains intact, and cash generation remains solid. Cash flow from operations was $9.7 million, and investment in noncash working capital declined by $2.5 million during Q1, and that was in spite of the 8% increase in quarterly revenues compared to Q4. As a result, total cash flow from operating activities was $12.2 million in Q1 of fiscal 2004. Long-term investments totaled $15.7 million during Q1. This included 0.7 million to purchase the noncontrolling of our Informatics subsidiary during the quarter. It also included the $9.9 million increase in investment in SSP.

The balance of the long-term investment of $5.1 million in Q1 included 0.7 million in additional construction costs for a previously announced automation facility in France that will shortly replace our outmoded one in that country and the remainder was primarily for new capital equipment. Our ending cash position stood at $75.4 million, $6.9 million less than the start of the quarter. Approximately $3.4 million, close to half of this reduction is a result of currency movements on our foreign currency cash balances in the quarter. Our debt-to-equity ratio remained very strong at 0.1 to 1 at June 30th. Also note that the sale of Eco-Snow in July provided approximately $8.7 million in additional cash.

Clearly our financial strength is intact, in spite of the difficult global economic conditions over the past three years. These conditions have negatively impacted our performance over the past two years, but at this point in the cycle, with conditions beginning to improve, we believe we are very well positioned to fund our current initiatives and the expected increase in working capital that comes from revenue growth. In summary, while the financial results of the first quarter continue to reflect challenging market conditions, we believe that they also provide solid evidence that our earnings and our margins have started to improve.

We also believe that the strategic steps we've taking during the softer economic conditions to invest for the future, to build competitive advantage and to retain our ability to serve our customers will prove to be instrumental in growing revenue and earnings as economic conditions and demand improve. Before I turn the call back to Klaus, I want to note that copies of the formal presentations and supporting schedules will be posted on our website, ATSAutomation.com later today. Klaus?

Thank you, Ron. Looking ahead, I've already mentioned that we have an exciting and full agenda in position components in Spheral Solar Power. In Automation Systems we have a number of key agenda items. Most important is to build on our excellent interim order backlog in bookings through active and aggressive pursuit of new sales opportunity. In September as part of our strategic marketing efforts, we will participate in our industry's two largest trade shows, OTEC in Germany and The Asenda Technology Expo in Chicago.

We intend to use these shows to launch a next-generation conveyance system and assembly chassis for lean automation applications. These are just the latest examples of continuous engineering and development we are doing to enhance market share, differentiate ATS from competitors, and add value for customers and our shareholders. Over the source of this fiscal year, much of these development efforts will be focused on raising new standard automation technologies in modules for use in specialized healthcare applications. Also on the agenda is increasing our Automation Systems revenue in the field of contract equipment manufacturing. As discussed this opportunity on previous calls, what's new is that we have some excellent prospects here that we hope to turn into firm contracts and orders in the next few months. Overall we have an active agenda in the delivering returns from our industry leadership and recent investments made in technology development and strategic marketing. I believe business conditions are improving, that our constantly optimistic outlook remains justified and that the underlying positives in our business will yield improved results as we move forward. Thank you very much for listening. Now I would like to open the lines to your questions. Bruce Healey, Vice President of Precision Components and Carl Galloway, Corporate Treasurer, have joined Ron and I, and we all stand ready to respond. Thank you.

Thank you, sir. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press star, 1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. If you would like to decline from the polling process, please press star, 2. Please insure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from Pat Chiefalo from Merrill Lynch, please go ahead.

Thank very much. I guess maybe my first question is for Ron. Just on the order activity, in the June quarter, order activity and correct me if I'm wrong, seemed to be reasonably flat, i.e. split about 50-50 between the first half of the quarter and the second half of the quarter. Can you talk about any seasonality effects we would see in the current quarter? There was strong order activity as you mentioned with the $73 million in the first half. What can we expect for the second half of the quarter?

That's a difficult one to gauge, as we said in the presentation. Second quarter is typically a weaker quarter. It's just difficult to get purchasing managers and approvals that are necessary to release orders. Clearly we made a substantial step forward as indicated by $73 million for six weeks versus $82 million for the full quarter last year. I don't think it's appropriate necessarily to double that number and expect that's a reasonable bookings number for the full quarter. We just don't know, although I can tell you that the quotation activity still remains strong. There's lots of stuff in the pipeline. It's just a matter of will orders be released during the time frame we're talking about or not. So I know that we have to measure on a quarterly basis, but clearly we look at our business in a longer term perspective.

Okay, thanks. A couple of product-related questions. First, can you give us a little more color on the automotive programs on the PCG side? I know we're expecting a ramp towards the second half of the year and also towards the middle of the year. And also on the thermal side, you talked about new programs there. Are these new programs with new customers, or is it with sort of existing customers of the thermal products? And can you give us a sense of the volumes there? I know previously we've discussed volumes there ramping from 20,000 to 50,000 per week, and I just wanted to get a sense of, are we going above the 50,000 with the new programs?

I'll let Bruce take that one.

Okay. I guess first of all, some color on the automotive. They are a standard component type orders that we have traditionally done in our Precision Components business, whereas the thermals business, one of the orders is with an existing customer, and two of the pending orders are with two new.

[INAUDIBLE] I see two new customers there. And can you give a sense of the volumes?

Well, I think that what we said is we're not going to give a forecast for the second quarter, although directionally we think we're moving up. You know, I think that internally, we expect -- but the big step we expect is going to come in the third -- that we'll get a pretty substantial step in the third quarter based on the forecast data we have right now, and expect that to continue through the fourth. Volumes are also likely to be somewhat higher in the second quarter, but we don't expect to see the big step until the third.

Okay, thanks. And just one last one. On the SSP initiative, can you sort of quantify for us how much cash is left to be spent on equipment and plant on the SSP side?

Well, we had estimated that our total investment, net investment would be in the, I think it was $50 million to $55 million. That's after the government funding. There is some timing issues on the Government funding. So it's not necessarily the right parameter to compared to the 31.3 because I don't think we necessarily got that contribution from the Government in. That's about what we're talking about. That hasn't changed significantly from the initial announcement.

Okay. Thank you.

Your next question comes from J. P. Benson from CIBC World Markets. Please go ahead.

Good morning. I've got a couple of questions. Ron, could you update us where things stand on -- you've got some of your U.S. dollar exposure hedged, I believe. How much is hedged, how far out does that go? And if you could talk about, I guess on the last call you indicated that there was a bit of a logjam in engineering and work was slow getting out to the shop floor and that would improve, or I guess I got the sense that was going to improve in the June quarter, and sequentially there wasn't big revenue improvement in Q2, I guess particularly when you take the intercompany out. What was the currency impact on the Automation Systems revenues? Was this a big part, or were there other factors why maybe the revenues didn't pick up?

I'll let Carl, who is here, deal with the currency aspects of your question. I would say that we did see an improved flow of work into production, especially within the operations in Canada here where, as I indicated, our utilization improved significantly. I think there were some other things that came into play. We had some cost overruns in Europe, as I mentioned in my presentation. That was one of the things that held back I think further improvement, but overall we did see a nice step up in the operating performance in the quarter compared to the fourth quarter. Obviously we clearly understand that with improved utilization, we'll expect to see further improvements in both operating earnings and particularly in the margin side. Third-party content went down a bit in the quarter, so that would have held back the revenue as well. So that's another factor that comes into play there, J. P. , that you have to keep in mind.

Okay. And what was that third-party number? I joined the call a little late, if you've already mentioned it.

It's 44%.

Okay. And just, Carl, on the hedging?

Sure. We need to break that into two parts, J. P. , transaction versus translation. Obviously the translation of earnings and revenues from the international operations we do not hedge, and it's subject to the movements of the currency each quarter. So on the first quarter you have the U.S. being a negative impact. I think the U.S. is off about 10% on the rate. Other factors that play obviously, the Euro, while not as big in exposure, it was actually a pick-up quarter over quarter of about 10% or 11%. In terms of the transaction exposure of the Canadian operations, both PCG and Automation Systems, we have the ongoing hedge program that at the end of the year was hedging out about north of $80 million of U.S. revenues, and it's effective currently out to about five or six months of forecast. The net effect in the first quarter was net the impact of foreign exchange changed in the first quarter of this year was fairly even with the first quarter of last year.

Okay. Thank you very much.

Your next question comes from Jay McKinnell from Raymond James. Please go ahead.

Good morning. I presume that the orders in the quarter included a large chunk in the automotive system, probably included some of the orders that you press released a month or so ago. Could you give us a sense of at least the trend for some of the other segments in terms of orders?

Yeah. I mean, it's true that we're so blessed with a fairly large chunk of automotive orders and actually quite a few of those occurred in our European divisions which all now at this point have excellent backlogs which, of course, spells good news for the next several quarters for them and hopefully lets them recover their financial performance substantially over what they showed in the first quarter. But also here in North America, we've had a substantial amount of automotive work come in mainly in new technologies developed by the automotive corporations, primarily in the advance they are making in changing hydraulics to Servo systems in steering and braking but also some of our traditional customers came across with relatively large orders as well. However, we've seen a temporary decline in the healthcare and pharma sector which, like I say, is temporary. It's not something we see as a trend but we expect it to be, actually, a very, very strong part of our business. It's just one of those timely things that didn't come, the orders didn't come this quarter. They will probably come next quarter.

Right. I mean, I'm just, on a back-of-the-envelope basis, it looks to me as if orders in the computer electronics sector were down quite a bit to where they have been in the last few quarters. Would that be true?

That is correct, too, and that is really just the -- somewhat down, but that is, again, a reflection of the time, not something that we see as a permanent situation. Everybody fully expects these sectors to recover more. We're doing, of course, everything we can to not only renew work in these sectors but also especially in our West Coast operations, find work from auto companies that are not involved in computer, semiconductor and so on.

Right.

I would also note that the big cancellation that I talked about was in that sector as well.

Okay. Two more quick questions. You referred to start-up costs in the Components Group. Could you give us a sense in dollar terms of how much those costs were in the quarter and when you expect them to fade away?

I'm sorry. Could you repeat the question, Jay?

In terms of the start-up cost in the Components Group, can you give us an idea on a dollar basis of what those start-up costs were, and in particular, I guess further I'm interested in trying to figure out how quickly they will fade away so that I know what to model going forward.

I think that we probably would guesstimate that that's probably in the neighborhood of a million to a million and a half in the quarter, and I expect that they will fade away as we move through the third quarter when these programs are all ramping up on a steeper curve.

Right. Okay. And then just finally coming back to SSP, you were talking about a commercial launch in the spring of calendar 2004. It seems to me that that represents -- or let me ask this as a question. Does that represent any kind of slippage relative to what you announced a year ago? I recall that you were talking about the end of calendar '03 or the very beginning of '04.

I don't think -- I think it's very consistent with what we've said, Jay. We said that as we would start production in early 2004 and that's really what we're talking about.

Okay. So for planning purposes, no change. Okay. That's it for me. Thanks very much.

Your next question comes from Cameron Jefferies from Credit Suisse First Boston. Please go ahead.

Good morning, gentlemen. I just had a couple of quick questions for you. First in the, I guess the bookings in the first part of this quarter, are there any big significant ones in there other than the ones you've announced, or are those pretty much the larger components of that $73 million number?

Actually I think that the bulk of the orders that came through subsequent to the quarter end were probably not included in the announcement we made. There may be some portion of it, but I don't think it was the lion's share of it. There's a broad range of orders in that $73 million. Automotive probably represents about half of them again. It's an area which is continued to be relatively strong. And then the remaining half would be kind of spread out between consumer products, healthcare, and I guess those areas.

Consumer products, computer electronics and healthcare.

Okay.

So if that helps. I think there are some decent size orders in there. When I'm saying decent, I'm saying $3 million to $4 million.

But nothing in the tens of millions or anything like that?

No. Broad-based, Cameron.

Right. And I think Klaus was mentioning something about there's -- you have roughly $50 million or $60 million of bids that you are currently looking at right now. Can you give us any sense of timing? I know it's difficult to get a sense of timing at this point, but I mean, are those things you would expect to have answers on one way or the other in the next kind of three to six months, or are some of those bids maybe into next year?

Cameron, I just want to clarify to be clear, the number he mentioned, the $59 million. It only included Supertrak, a standard product related. So the total number of quoting activities actually is substantially higher than that.

Right, right, but just those $59 million, are those something you would expect in the next, in the fairly near term, or could you give us a little bit of clarification?

If we're successful, it will definitely develop next two quarters, guaranteed.

Okay. And my last would be just, if you could give us a little bit of color on the pricing environment in the Automation Systems contracts that you are bidding on. You've obviously done really well in the first part of this quarter. Is pricing holding in, or are there still a lot of pressure out there in the market?

You may recall, I mentioned earlier that, of course, our increased use of our ATS standard product is really putting us in a different league. It allows us to bid more competitively because we do not constantly have to cope with this third-party mark-up, third-party equipment mark-up. So this effort has definitely helped us majorly to bid competitively with better margins.

Okay. Great. Thanks very much.

Your next question comes from Marko Pencak from GMP. Please go ahead.

Good morning. In the previous quarter, you talked about how $13 1/2 million of backlog in Automation Systems had been removed because of customer delays and not taking them forward. Were you able to recapture any of that business in your bookings for this quarter?

No. That's out. That's completely out of the backlog. We removed it from the backlog last quarter. It is out.

Okay. So that business hasn't come back?

Because we said at the time we didn't expect it was going to come back.

Right. I just wanted to make sure. In the Precision Components business again, I just wanted to get this nuance on these start-up costs and I just wanted to be able to clarify the difference between ongoing start-up costs that were sort of anticipated as separate and distinct from the change in thermals program, for example, that you've incurred. Are these, are the start-up costs ones that you would initially plan would still be going on and then you've got these sort of transitionary costs on top, or are they one and the same?

There is a bit of a mix in there, Marko. You need to understand that clearly the way we -- first of all, there are certain costs that are fixed regardless of volume. So in a start-up period, we're talking full depreciation, amortization and equipment, for example. So that's coming through the burden rate. So there is a factor that comes through there. There's other types of fixed costs that are volume-sensitive. So they are clearly geared towards volume. Obviously in the start-up period, your volumes aren't as high. So you pick them up. In addition there are costs that you typically incur in a start-up that relate to engineering, just debugging the processes, those types of things. So I would say it's a mix of those things.

Okay.

I don't have a split. Like I'm saying, I gave you a rough estimate of what I believe the impact of those numbers are, and I can't give you additional granularity, break them down between those areas. They just are in those areas.

Right. I just wanted to explore the impact of foreign exchange on your percentage of completion accounting. When you go in and review the cost assumptions that you had made and what you've incurred, is there any sort of a cumulative catch-up effect that was reported in the quarter, or do you anticipate any in the next quarter?

I think that's really the reason we have our hedging program in place, Marko, is that we typically, when we have contracts, we typically hedge the contracts in the backlog so there isn't. Like we basically record the revenues and the impact at the hedge rate.

Right. Okay. Just wanted to make sure. And the final question I really had is just about the second quarter. Last year in your second quarter, you were asked -- your revenues actually went up sequentially versus the first because I'm just referring to your comment about seasonality. And I'm just again -- because it's got a little bit hard to figure out sort of how the ramp might be but, I mean, your perspective here is that your results in the next quarter should be at or below what we've seen here given various factors you've talked about.

Say it again?

In your press release, you talked about, and you comment again today, about how your second quarter seasonally is typically softer and you mentioned some other factors in terms of the start-up costs are also going to constrain profitability. When I look at your results in your last fiscal year, your revenues in Q2 were actually higher than Q1.

Yep.

So there wasn't a seasonality factor, although your profitability was down sequentially. And I guess I just wanted to make sure that on balance, you've got some businesses ramping up, you've got some start-up costs coming and then there is obviously just some of the regular vacation time but, I mean, I guess the conclusion we should have here is that for the current quarter we're in, we should expect the results to be either flat with what you just reported or slightly below; is that right.

I don't think that's what we're saying. I think what we're saying is that we expect a substantial acceleration in revenue and earnings is likely to be constrained by these seasonal factors and I think it's difficult to gauge what the impact will be and I think we just want to put it in, we want to keep it on the radar screen for people.

Yeah, okay. That's fair. I mean, I guess I'm just trying to interpret what that means because I would imagine that most of the, I can appreciate the challenge from a new order standpoint and being able to time the release, but I would have imagined that from a delivery standpoint, certainly in Automation Systems, a lot of that revenue recognition is probably locked in right now. Precision Components certainly, some might be a little bit different. I mean, is that how we should be thinking about where the ranges might come out?

Yeah, I think so. I think that part of the issue is we obviously are -- the summer period we lose some of our productive capacity just because of vacations, but overall I think that things are progressing quite nicely.

Okay. Sorry. One last one. Now that you've divested or you are treating Eco-Snow discontinued, your effective tax rate has gone up. Should we be -- what should we be prospectively modeling as an effective tax rate for you?

I think it's more an anomaly in the quarter. I think that the effect of tax rates are still going to run in the 32%, 35% range. So I think that's still what we would expect.

Because you've been pretty consistent just sort of around 32% with the exception of Q4. So you sort of think it's on the lower end of that range should be more reasonable?

Yeah, I think that we're going to look at that. Obviously jurisdictional mix is going to have an impact on tax rate, there is no way around that. But for our internal planning purposes, we plan on basically levels, those types of levels.

All right. Thank you.

You're welcome.

Your next question comes from Peter Sklar from Nesbitt Burns. Please go ahead.

Ron, just on the backlog and the $73 million of order intake you had so far this quarter, in terms of that turning into revenue is that, I mean, how is that shaping up in terms of scheduling? Does it come sooner or later, or is it typical?

Well, I think that the backlog now is probably, from a standpoint of ability to flow into the work is probably in better shape than it's been in probably six quarters. As you recall last year, we experienced a fair number of substantial order cancellations, and we had those types of issues, and we had other backlog that we talked about last quarter that had been on hold for a couple of quarters, and that's out of the numbers as well. So I think the backlog number is pretty pure from the standpoint of everything we can see. That shouldn't mean that it revolves through the earnings line at a pretty accelerated pace but internally we expect that the bulk of this actually rolls through in the next two quarters obviously.

Right. Okay. Lastly, you talked about the amount invested in SSP during the quarter of $9.9 million. Could you explain again what's in that $9.9 million? I think there were two elements to it.

Yeah, there's the - actually I would say there may be three elements in it.

Okay.

There's the investment in the production equipment that's being manufactured and also third-party equipment that's being acquired for the manufacturing processes itself which are well underway; there's the cost of the manufacturing facility which is under construction here and as Klaus indicated, we expect that we'll start moving in at the end of September; and the last element is just our cost for the ongoing deferred development which includes the operational cost for the pilot line, development cost for product, testing, all those types of initiatives that are underway.

Okay. And I mean, I'm not sure where the concern is. Do you know how much of overhead you are absorbing in the Automation Systems Group?

I don't have an exact number on that, but we're not absorbing a tremendous amount of overhead per se because there is a dedicated team associated with this area. So the amount of overhead absorption would probably be limited to an allocation of the square footage in the current plant. So it's not a big number.

Okay.

Relatively small.

That's all I have. Thank you.

You're welcome.

Your next question comes from Maxx Hollott from Dundee Securities. Please go ahead.

Good morning, gentlemen. Just a question on the cost for Photowatt. You mentioned that there would be some additional cost as you transitioned to the six-inch modules and I wonder if you could tell us a bit more about those costs and the other costs you anticipate for the rest of the year at Photowatt.

Well, I think that a lot of the cost associated with the development of the six-inch cell were actually done through the fourth quarter, some of it in the third quarter of last year and some in this quarter. Currently it's an initiative that's underway to reduce overall costs because the cost to produce a six-inch cell should not be significantly higher than what it costs us to produce the previously 125 millimeter. So incremental costs I think are more with respect to reconfiguring the equipment in the operation. Probably total investment in capital expenditure within the Photowatt business is in the neighborhood of approximately $8 million this year. That includes not only that transition but includes a number of initiatives underway which we see fast payback on to improve operational efficiency.

Have you -- is there any more thought to increasing the square footage of your plant? I mean, obviously the issue here is that you got to be able to produce some volume to counteract the pricing decline. Is there any thought to additional plant for purchase, et cetera?

Do you mean for Photowatt?

Yes. Or will you just essentially put in the cost improvements and hope that when SSP sort of ramps up that you'll transition into that? I think that's what you've said before. I just want to clarify that point, though.

That's the short-term plan, anyway. We have to see how SSP develops. We definitely are still increasing output at Photowatt through increased rationalization and better automation technology, material handling technologies and so on in both the cell making and the module making, but if we had to, it would be relatively easy to also outsource some of the module making which, of course you know the finished module is a large piece.

Sure.

A large object and we could potentially move that portion out, or portions of it out into another building. If we had the need for it, but we definitely want to see now what the impact of SSP is going to be on the whole marketplace. And we're planning on making -- producing about 20 megawatts worth of SSP product over the course of the first year of full production but remember, the world makes about 500 megawatts total production right now. And so it's relatively small what we're producing there with SSP, but we definitely of course expect that portion to go up.

Sure. And I don't mean to sort of harp on this, but just in terms of the margins at Photowatt, things have declined year over year, although there was a sequential uptick. What type of levels do you look for EBIT margins to be at Photowatt for the rest of the year.

Well, tell me what currency's rates going to be, I think that's clearly the question because right now that's the biggest impact. You know, quite frankly our operational efficiencies in Photowatt have increased dramatically, I would say, over the last two years. This, obviously in the last little while the Euro has had a big impact because there's a substantial amount of Japanese product and some U.S. product that's flowing into the European market, and obviously there's a currency advantage they gain because of the strength of the Euro, selling it in Euro dollars.

Sure, but I was just wondering if you sort of have a target EBIT for that segment.

I think that the question is, we have a certain target but whether that's -- I think it's questionable whether we would be able to achieve that target if the currency stays at the current level.

Thank you very much.

Ladies and gentlemen, if there are any additional questions at this time, please press star, 1. As a reminder if you are using a speakerphone, please lift the handset before pressing any keys. You have a follow-up question from Marko Pencak from GMP. Please go ahead.

For your backlog what is the effective tax, foreign exchange rate that you use? Is it period end, or is it an average during the course of the quarter?

We would record our period ending backlog at the period end rate because it's more like a balance sheet item. Most conservative view, bookings would typically be at the average rate during the quarter.

Great. Thanks.

You're welcome.

Your next question comes from John Novak from TD Newcrest. Please go ahead.

Hi, it's Jarrett Bilous actually for John. I just had a quick question outside of all the impacts of currency. Can you give any sense on how much prices are declining, maybe on a quarterly or year-over-year basis?

For what?

For solar prices?

The price decline -- I don't have an exact number, but if I recall, some of the data I was looking at the other day, I think it was in the neighborhood, we've seen about a 12% decline over the past year.

Okay, that's great. Thanks a lot.

You're welcome.

Mr. Woerner, there are no further questions at this time. Please continue.

Okay. Sorry.

It's at the very end.

Pardon me one minute. If there are no further questions, please be advised that our annual meeting of shareholders takes place Thursday, September 18th at 4:00 p.m. at Conestoga College in Kitchener. This is a must-attend event because we will display a fully operational Supertrak system along with samples of Spheral Solar Power modules and a variety of Precision Components. The time and locations are included in the information circle in the annual report you will receive very shortly. Thank you now very much for listening and good-bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.