ATS Corp (ATS) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the ATS second 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 hearing the conference, please press star 1 for 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 in 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. 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, operator. And good morning, ladies and gentlemen. Thank you for attending our conference call. And joining me today are Ron Jutras, Bruce Sealey and Carl Galloway. Clearly we are very pleased with the volume of new orders generated by our automations group in the second quarter. New order bookings of $145 million was a record for the typically slower second quarter was only $19 million short of our previous record high of any quarter. This strong order activity pushed backlog up to the 200 million mark for the first time in ten quarters. I have never seen such a dramatic buying spree by customers during the summer quarter in our 25-year history. We attribute this to three main factors. An increase in U.S. economic activity, a release of pentup demand that's been building for the better part of three years and benefits of our market leadership.

I've been speaking of how benefits of our leadership for some quarters now because these benefits have allowed us to remain profitable and add market share in what truly is a horrible sales environment. Now we're seeing what market leadership means in a better environment and we think you'll agree the results are impressive. Higher backlog levels have led to better capacity to utilization in our west coast operations that should begin to show through better earnings in the second half of 2004. Later on this call I'll give you a few other thoughts and our prospects for the future. First now I'd like Ron to talk about the results of the second quarter. Ron?

Thank you, Klaus, and good morning. Our overall financial results remained at slightly above break even levels in the second quarter as a result of the disappointing performance by our precision components group. However, there are a number of positive developments which Klaus will cover that we believe signal that better times are ahead. Now I'll review our results by operating group and in doing so I'll remind you that the second quarter is traditionally our weakest because of the impact of summer vacations and plant shutdowns. This summer we were also forced to manage the impact and the associated costs of the power blackout in eastern North America which further aggravated these seasonal factors. Our automations systems group revenue was 1% lower than in Q2 of last year but up 4% from the first quarter of this year. Similarly operating earnings in automation systems were 9% lower than in Q2 last year but were 2% higher than in the first quarter this year.

In addition to the seasonal factors, there are a few items that should be noted in evaluating these comparisons. First we recorded $2 million in unusual pretax charges in Q2 this year. The largest portion of this $2 million charge was in our west coast operations because of a cost overrun on one customer program and a write-down on some inventory. The remainder totaling about a half million pretax was for expenses incurred for the planned relocation of our operations in France, along with some severance and employee relocation costs in a few other plants. Our new French facility was officially opened in October and removes a barrier to growth by replacing an unsuitable and poor quality plant that we had in that country. The second factor to consider is that the substantial increase in orders and backlog realized in the second quarter, resulted in a log jam of work in our design departments especially in our North American facilities. Most of our new order flow is also for first time systems and this increases the burden on our design resources and delays manufacturing activity, and therefore, revenue recognition. This factor held back stronger growth and revenue earnings in our North American operations, in Q2. The good news is that our output and design is increasing and we are now seeing higher utilization of our manufacturing resources which will help us to realize the benefits of stronger order flow and improved operating performance in the second half of this year.

There are some other points that are worthy of note. While the unusual charges in the west coast I just reviewed offset the benefits of increased utilizatioin in the second quarter, these plants appeared to have turned the corner. This is important since it's been our west coast operations which have been hurt the most by the economic downturn during the past three years and as such, they have been a drag of both operating results and margins for a number of quarters. We expect the improvement in backlogs and increasing stock utilization will allow the west coast operations to generate significantly better operating performance in the second half of this year.

Our European operations also produced improved contributions in the second quarter over both Q2 of last year and the first quarter of this year. However, in spite of our reasonable back levels in Europe right now, we remain cautious on the automation market in Europe, at this time, because of the weak European economy. Our Asian operations recorded an operating loss in the second quarter compared to operating earnings in the same quarter a year ago. This was attributable to the lingering impact of SARS during the period which temporarily reduced demand earlier this year and also increased expenses. This also appears to be behind us as our backlog and prospect list for new business in Asia is growing quickly as many multi-nationals are seeking long-term suppliers to rapidly developing markets in Asia, with poor facilities in Asia-pacific, ATS is ideally situated to meet customer demand.

Year over year increases in ASG earnings were also held back by higher expenses, deliberately made to support cost-reduction and efficiency gains and increased expenditures for research, development, sales and marketing, to generate new orders, and sustain market leadership. These strategic expenditures may have held back earnings during the past two years but they are a key driver of the substantial increase we've achieved in bookings and backlog. As we noted in the press release, we estimate that the 12% decline in the U.S. to Canadian exchange rates between Q2 of last year and Q2 of this year reduced ASG operating earnings by approximately $2 million. The important question is what are we doing to combat the negative impact of the rapid and steep decline we have seen this year in exchange rates. If you normalize the automation systems operating earnings by adding back the $2 million and the usual operating expenses I reviewed earlier, our operating earnings would have been $1.4 million higher than in Q2 of last year on lower revenue. I think that's pretty good evidence that the steps we've taken to reduce costs, improve efficiency and gain competitive advantages are already paying off for us even with our unfavorable past utilization, during the second quarter.

Moving on, precision components group or PCG continues to manage through a number of transitional factories -- factors which have negatively impacted operating performance. Operating loss of $2.1 million in the second quarter was recorded versus an operating profit of $1.3 million in the second quarter of last year. This loss was the result of the following items. A number of programs which were to ramp up production were delayed by repeated engineering revisions by customers and customer driven schedule changes. In short, we were ready to produce, the customers were not. These delays increased our engineering and support expenses and reduced revenue, utilization, and overhead absorption in the second quarter. This was a big reason for the weak results. While delays have continued into the third quarter, the situation has improved significantly and we expect it will continue to do so in the fourth quarter as these new programs ramp up.

PCG results were also negatively impacted by approximately $.6 million for higher maintenance, relocation, and unusual expenses during the second quarter, a substantial portion of this was a direct result of the power blackout in August, which increased our maintenance costs and increased our operating costs. The relocation costs were incurred to consolidate PCG manufacturing from our small leased Braford site into our Kitchener location to reduce future costs. Revenues for our thermals business increased 42% over the first quarter but we have yet to achieve break even performance here and it was another contributing factor to the loss in the quarter. The Powerseat subsystem contract did continue to ramp shipment volumes according to plan and it made a positive contribution to operating performance in the second quarter. We expect contributions from this contract to grow as we gain efficiency through experience and as various start up issues are resolved, and as the program volumes continue to ramp. Short-term we expect the positive earnings contributions from the program to continue to increase in both the third and fourth quarters of this year as well as beyond.

Foreign currency movements also had a significant negative impact on our PCG operating results which we estimate at $1.3 million. Unfortunately, in spite of our continuing cost reduction initiatives, we are unable to fully off set the foreign exchange impact in the second quarter because of the factors I noted above, especially the delays in the launch of the new programs. We expect a weak U.S. dollar will continue to have a moderating impact on our PCG results going forward. However, we do expect that operating performance for PCG will be better in the third quarter and further improvements should be seen in the fourth quarter as the production and shipment volumes scale up and these transitional issues associated with the launch of a number of new programs are fully resolved.

Our Photowatt solar business had strong revenue growth in the quarter, up 63% over the level in Q2 of last year. Sequentially Photowatt's revenue increased 7% over Q1 of this year. This was in spite of the customary month long holiday shut down of the manufacturing facility located in France. These strong shipment volumes were made possible by our decision to increase module inventories prior to the summer shutdown. This allowed us to capitalize on demand, and as Klaus will explain, we expect healthy demand to continue. Operating earnings in the solar business were essentially break even in the second quarter compared to an operating loss of $1.1 million in the second quarter of fiscal 2003. We are satisfied with this result given the fact we increased expense levels in the second quarter this year to support targeted R&D and the addition of a full time salesman in California to tap into this growing market.

In Photowatt's primary European market, the weak U.S. dollar and Japanese yen continued to create pricing pressure from offshore competition. We have offset most of the decline in selling price by improved efficiencies and increasing through-put. We expect pricing will continue to be a challenge-- continue to be challenging, however, new subsidy programs being introduced in Germany coupled with the benefits of ongoing operational improvements are expected to help us manage the situation while we launch our Spheral solar technology. Of note, we're not yet realizing the full benefits of the in-process transition to the larger 150 by 150 millimeter Photowatt cell sizes as well as other continuing cost reduction efforts being implemented at Photowatt, but these will be valuable to us going forward.

That covers a brief analysis of our three operating groups so let me turn next to our balance sheet. It remains very strong with a debt-debt ratio of less than 0.1 to 1. Companies cash position stood at $58.3 million in September 30, 2003. This is $24 million lower than the cash on hand at the start of the current fiscal year. The decline is almost entirely the result of $23 million in investments made in Spheral solar power during the past six months in plant, equipment and deferred development. Total cumulative investment in SSP was $44.5 million at September 30, 2003. Remaining reduction in casth reflects the impact of the weakening U.S. dollar on our U.S. cash balances of $3.2 million during the first half of this year. In summary, the cash-flow from operations and the proceeds from the sale of Ecosnow during the quarter of $8.9 million has more than funded both our working capital and our fixed asset investments that we made in our operating businesses this year. We strongly believe that our balance sheet strength is a major competitive advantage for ATS in the current environment especially given the financial weakness of most of our significant competitors. Now I'll turn the call back to Klaus for more comments on our outlook and an update on our strategic initiatives.

Thank you. Ron. As I mentioned earlier in the call, I'd like to spend a few minutes talking about the growth prospects for each of our three operating groups. Let me start with automation systems. It would be easy to become very bullish in our prospects here, because of booking levels in Q2, they are nothing short of spectacular. We're particularly pleased to see a strong pickup in our healthcare orders and also in the consumer products industry. For customer confidentiality reasons, I cannot talk in detail about the new numbers we have won but I can tell you that they were well diversified by industry by customers and by geographic territory. Of this one thing, our strategic marketing efforts to diversify and broaden our markets are paying off. As a consequence our backlog is not only well diversified, it's very strong.

We even enjoyed a $200 million backlog in ten quarters. This means we have substantial work on hand for the second part of our fiscal year. That in turn means better capacity, utilization, and the opportunity for better margins and earnings for automation systems. As I said it would be easy to be very bullish on our prospects, but aught for two caveats. First bookings in Q3 will be sustained at $145 million, the level we generate in Q2. Some major assignments we are waiting to hear about but October bookings are not running at this accelerated pace nor do we expect them to at this early stage in the economic cycle. For the first six weeks in the third quarter, new bookings are approximately $46 million. This still healthy but given the heavy loading in our design departments now from a practical standpoint, a temporary slowdown of new orders is welcome right now.

In fact, we are now hiring additional staff in our design departments and this will enable us to meet production schedules and to equip ourselves for new orders we see on the horizon. Second caveat is this: We have many first time assignments in backlog and these are always challenging. Of course, the upside of this challenges that we have a very good prospect for repeat and follow-on orders from the same customers whose first projects are now in the backlog. This qualifies a site we are much more optimistic on our mid-and long-term outlook than we've been for the past three years. You might be interested to know we have recently surveyed customers and potential customers in Asia-pacific and we believe our long-term prospects there are excellent. This is not a forecast but we believe we could bring annual revenue up to $100 million level in Asia-pacific in the next 3-4 years.

While still on the subject of automation system prospects, it's gratifying to note that the oils we are working on today utilitiize a large number of standard product-based technologies. To be precise these projects include 104 Superbots, 12 Supertrak platformsm and 149 ATS (INAUDIBLE). This is important because of our standard product modules are designed to be fast and economic to build and to integrate. Speed and economy of delivery are critical for both ATS and our customers in a more fast paced environment. Standard product content is also beneficial because these tools enable our automation systems to do more for our customers with more rapid payback. By lowering their cost of ownership, we believe, customers will (INAUDIBLE) from ATS more often. We believe and these recent contract wins support our belief that continued innovation in automation systems technologies is absolutely critical for our long-term success. It differentiates us from our competitors and allows us to gain and sustain market share.

That's why we've introduced two new stand-up products. At the end of the second quarter and at the industry's major trade shows. ATS Econotrak a lean alteration of our Supertrak offers high speed conveyance, and guarantees reliability with a price low enough to capture sales and either fully automated and or lean systems environments. The ATS server chassis is a high-speed general purpose assembly platform offering the same advantage for lean environments including rapid playback and very low cost of ownership. Based on our history of innovation, these tools have worked their way gradually into our total solutions capability and will become value added contributers to our sales efforts over the long-term. We're working in not only innovations and as you saw recently added a licensing agreement that gives the right to employ a specialized robotics for these applications in the semiconductor and healthcare industries. I have to say that today eight years has been in portfolio of software and hardware, the best we've ever had and this bodes well for our future.

Also well positioned for -- to increased activity we have the manpower to keep pace. The strength and capacity of our work-force will prove to be extremely important as we fill these new customer orders. We believe our capacity will make a critical difference in securing much higher volumes in a more robust economy. That in large multinational customer we worked with are increasingly predisposed to giving more work to suppliers who can demonstrate the ability to handle it and are able to support the operations globally. This is not a good sign for our competitors.

So far I've talked about the leading indicators of automation systems of the automation system business. Additions in our position component business are more challenging. We now expect to ramp volumes on number of new programs of which more slowly than originally anticipated. That means a gradual ramp in Q3 and Q4 with optimized production levels likely not achieved until late Q4 or early next fiscal year. This is very frustrating to us because it's outside of our control and effects our precision components margins. Positive news is that we are on track to achieve our targeted first year volume in our major automotive seat-adjustment subsistance assignment as well as on the other programs that are ramping up. Small reengineer activity has really settled down in the past two weeks and that's a harbinger of more normalized production cycle times.

As for our thermal management device business, third quarter is normally a seasonally high point fulcrum is normally a seasonal high point for computer sales. This provides opportunity for good volumes and for our proprietary thermal devices during the months of October and November. And that follows on the strong volumes achieved in the previous quarter when we ran at the average rate of 60,000 units a week. Fourth quarter, however, remains a question mark. We expect volumes to be lower due to seasonality. In addition there's a transition going on in the computer industry with the brand names outsourcing more responsibility for design to so-called box makers. This transition poses challenges given to strong relationships our businesses have with the brand name companies and the fact that one of the big box makers has its own thermal device production.

However, we do have a few things working in our favor. One is our sales partnership with Tyco. It has really paid off and Tyco brings a lot of connections in the marketplace. Another is the functionality of our products. Most of our volume is now in the desktop market and we are working at the leading edge of processing speeds at 2.8-3.2 gigahertz. Our technology is very good. We continue to apply innovative thinking to improve performance and to reduce the weight and size of our solutions. We are carefully examining our (INAUDIBLE) with a view towards maximizing the value we can achieve in it over the long-term.

Overall, our PCG operations face some challenges including the value of the Canadian dollar. A belief that the full transition to new customer programs enable us to post a better performance during the second half of this fiscal year. Their are also other new customer programs we are looking at so as the market is also providing us new opportunities. Finally, in Solar, we are also seeing more robust activity for our traditional Photowatt business. Price competition remains intense but the automated nature of our Photowatt operations and enhancements we have made in our conventional Solar technology over the past year allows us to rise to the occasion. The trend to lower cost solar solution provides an excellent backdrop for the introduction of our seal, Solar technology next spring. We expect good volumes from Photowatt in the third quarter and continuing into next year.

New German subsidy programs have recently been passed and we'll comment in early 2004 and this should reduce some of the substantial volatility we've seen in the market in the past -- over the past calendar year. Specifically the German government just announced its very generous incentive program worth around 60 cents a Kilowatt hour for solar energy thoughout the next 20 years. California has also extended its incentive program for another 8 years. All of this is very encouraging news for SSP which has the technology to be the market leader.

Let me briefly update you on the roll out of SSP. Construction of our new 180,000 square foot SSP facility is almost complete. This marks a delay in our schedule by about 1 month. We had anticipated a move by the end of October. Now we're looking at the end of November. This is not the end of the world but it's frustrating because it's outside of our controls as it relates to a manpower shortage in the construction trades in the region of Ontario. Despite the delay, we are already moving some parts of some equipment on to the floor of our new facility. Just this week we started testing our melt furnaces, a critical part of the Silicon Sphere manufacturing process for SSP and is now being installed in the new factory. All of the automation equipment that will be used in the factory has now passed the design stage and is in process. It is a major undertaking since some of this equipment is state-of-the-art and requires considerable time to design. Most of the assembly and installation will be complete over the next two months.

This summer we filed additional patent for the new optical enhancements that make SSP a revolutionary technology giving us the freedom to distribute initial product samples more widely. As a result we have had some very positive feedback from potential distribution partners. In fact, as you may have seen this morning, we signed the memorandum of understanding with L Corps which is a leader in the building materials industry to commercialize what's called building integrated Photowatt products. In laymans terms, this means solar cells embedded in roofing tiles. Building integrated solar products are a way of the future and this collaboration means we supply the revolutionary technology in solar cells and they supply the roofing material, manufacturing all important distribution which will bring SSP the building products market.

We're targeting distribution in three market segments, those being portable power applications such as recreational, marine, large power modules for commercial and residential products and integration products such as building facades, roofing tiles and roofing membranes. The last is the largest, the most difficult dependence rate under one (INAUDIBLE) will help us to cover. It has the potential to be a very good partnership. We're somewhat behind in our internal SSP launch schedule because of construction delays at our building, however, we have maintained our initial goal of starting to ship initial SSP product in our fourth quarter. We are determined to make this happen so we can start to generate results for our shareholders. Overall we are very busy at ATS and although we have some challenges we are starting to see signs of greater customer confidence in the future. That leads us to be a little less cautious and a lot more optimistic about the second half of fiscal 2004. The goal as always is to sustain the momentum. I believe ATS is doing its part to an aggressive, ongoing focus on business and technology development that is paying off in oils and increased market share. Thanks now for listening and now would like to invite your questions. Operator, would you please open the lines for questions.

Thank you very much. Ladies and gentlemen we will now conduct the question and answer session. If you have a question, please, press the star followed by the 1 on your touch tone phone. You will hear a three toned prompt acknowledging your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press the star followed by the 2. Please insure that you lift the handset if you are using a speaker phone, before pressing any keys. Our first question today comes from Mr. Pat Chieflo from Merrill Lynch. Please go ahead.

Thanks very much. First, I just want to start on the new orders. Can you talk about the distribution in new orders and if there were any one or two large contracts that make up the bulk of it. The reason why I ask is going into the first 11weeks, I think you guys reported about 112 million in new orders so looked like there was maybe 33 million that was reported in the last week of the quarter. Can you just give us a little more color on that?

I don't have a new detailed breakdown on that with me today. But, I would say a couple things, there was a broad base of orders. You can see that through the distribution of the backlog where we saw growth in a number of different segments including that in health-care and the consumer--and the other sector which really was an increase in the level of activity in consumer products. I would say though, that we've also seen increases in the size of some of the orders that are coming through where as over the past three years, we were talking more in the 4-5 million orders, as being large orders. We have seen an increase in the size of orders coming through. But, there was not a dominant I would say customer or order that came through in the quarter.

Okay. Fair enough. And just on the back half of the current quarter, how can we expect the 45 million in new orders to ramp? Is typically the back half of this quarter a little bit stronger,a little bit weaker than the first half? Trying to get a sense of how we should look at the 45 million for the first six weeks.

I think that, you know, it's very difficult to give a historical analysis of whether it's front end quarter loaded or back end quarter loaded. As Klaus commented in his presentation, you know, this is a pretty good solid order booking activity with respect to the start of the quarter down somewhat from the summer period, but there's a number of very good prospects which, you know, we are hoping will come through in the balance of this quarter as well. I don't think it's indicative. I think that, you know, one of the things we often look at is what's the trend like from the standpoint of booking activity. If you look at the rolling average of bookings year over year and what we're seeing there compared to six months and nine months, I think, we're probably talking in the neighborhood of 20-25%.

Okay. And just on the backlog, computer and healthcare were very strong in the quarter, did also, the other line that hit I think 33 million in the quarter, can you talk about what's in that?

We had an increase in the level of some of the consumer products customers we deal with. We can't name the customer name but that's really what's driven it.

Okay. On consumer products. And on the cash burn, how much can we expect remaining cash for the next couple of quarters for the Spheral products as well as just an overall estimate for the cash burn for the next few quarters?

We are basically maintaining our original estimates of the total costs of the SSP program for the time being and beginning to move forward. (INAUDIBLE). That's really geared to the increasing levels of activity we expect driven by the back-log levels.

Okay. And one last one quickly on solar. How should we think about profitability going forward? It's been hovering around break even. Any hope for us getting a little bit more profitable over the next few quarters or how should we think about that?

I think the positive news is the one comment that Klaus made about there's now some solidity with respect to the subsidy programs in Europe which have been causing a lot of grief. What he had is uncertainty with respect to the continuation of subsidy programs primarily in Germany, so that we saw this volatility over the past year where we have a lot of activity leading up to the end of the calendar year and then a delay and then a restart of activity. The new programs that were launched in Germany are particularly encouraging because they broaden the scope of where subsidies will be available and they open up the market so that they now are provided to commercial installations as opposed to just residential rooftop programs. So that means that we can now, subsidies will be available for larger commercial projects. That's a positive indicator. The interesting thing is is that pricing has come down in this market quite dramatically and there aren't a lot of people that are actually making money in it. We are actually performing financially better than most people in this space. Clearly a healthier market will help improve the situation from a pricing standpoint but I expect we're still going to see pricing come down over the next year.

Okay. So what's holding back the profitability today? Is it simply just, you know, volumes have to ramp a little bit more materially or is there something else happening that's holding back profitability?

I think that part of it is is that there is a number of people in this marketplace that have been willing to reduce pricing and sacrifice profitability and have taken the market price down.

Okay. That's all I have. Thanks.

Our next question comes from JP Benson from CIBC. Please go ahead.

Good morning. I have two questions. One on the solar business and one on the rest of the precision components. You're targeting, I guess, three major areas, Ron. Is part of the plan to get some of these strategic partners to invest in SSP or do you think it will be more of a passive relationship?

I think we are open-minded on it but that's not our motivation. Our motivation is to get distribution partners on board. While I would not rule it out, I don't think it's--it's not what we are going out doing. We're not marketing investment--

--Putting the technology to the mature level before we address something like this.

And you mentioned something about the subsidies, is this the change of government holding it up or the government contribution to the SSP initiative, what's going on exactly there?

Just timing issues. We have to submit claims and then they come in the door. Those types of things. There's nothing, there's no practical problem, per se, it's just as the program actually stretches out, I think, into 2005. You're talking about the TPC program, it stretches out to 2005 so there's a bit of a lag that will naturally develop there.

Okay. And no change in the commitment.

Nope.

Okay. It's just that -- Ron, I mean, precision components has struggled on and off. Is it still viewed as highly core to the company or at some point would you contemplate refocusing on just solar and automation systems?

We know that historically, the margin of overlag in Precision Components versus the automation side, but of course Precision Components has a very, very strategic importance to the whole business as a unit because in components we ship to the customer every week, we talk to them every week and so on so if new programs come up, you typically make the prototypes of the automations we get to quote on the automations on so it's a very, very -- it helps us to knit a very tight relationship to our customers. And also, of course, when times find new customers through inquiries get into the precision components for metal or plastic parts and so on. The two units are very tightly meshed and it's our intention for us to make Precision components more and more profitable. Once these new programs that we talked about so long have been stalling so for long and increase our level of frustration tremendously too, but once they are up and running, definitely Precision Components will show in a better light.

Okay. That's all for me. Thank you.

The next question comes from Cameron Jeffries from Credit Swiss.

Good morning, Ron, can you just give me a sense as to how much of your new orders incorporate standard equipment. Is this percentage going up and up with these new orders here or are you having trouble, I guess, with first time designs being a higher percentage of your business than you once hoped, I guess, or is it going slower than you thought.

Maybe I'll start and then Klaus can jump in at the end. I think that the comment with respect to backlog and design is more reflective of just timing. You need to understand that our booking activity has been progressing quite nicely through the last three quarters. Every system we produce is essentially custom so there is a design element especially when you get into the first time system. There's no question we are seeing benefits from the increased use of standard products within our systems. It reduces our design content, it's allowing us to reduce our costs in producing that system and it's also allowing us to increase our cycle rate. When you have $125 million in order bookings in a quarter, you're not going to be able to get that out of the design department and quite frankly, you know, as Klaus mentioned, we are actually hiring people in design to help us deal with that activity plus new orders coming through the pipe. I would say we are very pleased with respect to the level of acceptance we are now seeing in all of our established standard products. The Supertrak, the Superbots. Quite frankly 105-104 Superbots in the current worker process makes us one of the largest robot manufacturers in the world today. Which is unusual because we don't sell them (INAUDIBLE) so I think we are very pleased with the adoption of our standard product technology and it's clearly a differentiating factor in the marketplace for ATS today.

Is it fair to say that the hiring that you've had to do in the design department, is that more of a temporary thing to get you through this kind of strong bookings level in the past few months and do you think that would taper off. Obviously you kept a lot of those people through the downturn and so I'm just wondering if those are more temporary hires for the next say 3-6 months just to help bridge the glut, I guess, if you will.

We expect this to be fully permanent employees because even though we didn't lay off people in any part of the company during the last years but we're on a heavy overtime schedule here at ATS now and really need some new help in the worst way. The other thing we've done is we've been fairly aggressive in marketing especially our Supertrak by building half a dozen small systems and shipping them to our customer sites to allow them to get to know the benefits of this equipment in their own environment to see the ease of programming and so on. It's an investment we have to make in order to get the technology close to the customers. Once they see it, they're convinced, they buy it, we take the system out again and move it to another site. It's made a tremendous impact on the popularity of these Supertraks.

Okay. My next question is on the Precision Components group and some of the delays you had customer driven delays. Be it either just willingness to, you know the timing of the delivery or engineering redesign and some elements of it, can you just give us a sense as to what the length of these delays are? A couple of months sort of thing or talking two and three quarters types of delays.

Want to take that Bruce?

I'll take that. There really has and it's been across that spectrum you talk about. There have been some that have been delayed several quarters that will be starting their launch in the third quarter and continuing in their launch to the fourth quarter and into the new year and there are some that have just really been delayed in the overall volume so it may be a product that succeeds a previous generation and rather than doing 100% conversion to new generations, they are carrying both generations for a few quarters.

And was there any -- you said you had to incur some costs along those lines. Any hope you'd get some amount of compensation back for those through these delays if it's customer driven or is it pretty much just a cost you guys have to eat?

Pretty much a cost we eat, unfortunately.

And Ron last question just a housekeeping question on the third party content, wondered if you have that figure.

Just a second here and I'll pull it up for you. Pretty well in the normal range. About 45%.

Okay. Great. Thanks.

Our next question comes from Matt Holit from Dundee Securities. Please go ahead, sir.

Good morning, gentleman.

Good morning.

A question on the solar in Europe. There have been reports a couple of the larger manufacturers have actually drawn from the market because of the pricing pressure and so forth. I understand the German subsidies going to help the pickup and potential uptake of solar in Europe. I'm just wondering in terms of margins, however, did we for example see margins drop this quarter over last and are we going to continue to see that margin pressure going forward even though, maybe, perhaps your volumes may increase?

To a performance standpoint, the solar contribution was pretty similar to what it was in the first quarter of this year. We have seen pricing come down. Wasn't that long ago we saw prices which were about $3.50 euro per watt. Probably talking about prices today which are probably in the 270-275 per watt so we've seen pretty substantial decline in that market to some degree driven by increasing production capacity as well. When you talk about people withdrawing from the market, the only one I can think about off the top of my head would be Astro powers had some problems internally because we are continuing to see increased activity and competition in the marketplace. Did I completely answer your question?

Almost. I was wondering, actually, would it be possible perhaps to give us maybe an idea where you find the margins in your solar business at this time?

Find our margins continuing to -- what we've done is we've increased -- this is all priced on a cost per watt basis. We've been very focused over the last two years of increasing the efficiency of our cells or the power generation capability of the cells. We've also been very focused on finding ways of increasing the through put of our factory without increasing the size of the factory.

Making the cells larger.

Making the cells larger, increasing our proficiencies in the production process and doing those types of things and that has allowed us to get to the point we are today recording some losses. Was not long ago where we were recording some losses, in fact, ast year in the second quarter we recorded a loss as I indicated. I think the key thing here is that this market is one where there needs to be a change in the overall cost dynamics and that's why SSP is so crucial.

Exactly.

So that's really where the big driving impetus is for us moving to SSP. I think that, Photowatt is a very attractive business in this space because it's performing better than most. From what we can determine based on the benchmarking we've done, because there are people right now looking to buy market share.

Okay. Last one,would just be in terms of R&D for Photowatt, do you see that increasing in the next few quarters and if so, by how much?

I think that the R&D within Photowatts probably going to be maintained about the same level. The increased cost was resulting from a reduction action in government subsidies that offset our R&D costs. We are continuing programs in place that relate to development to process with those types of things which help us to reduce our costs and they're providing the benefits of allowing us to offset these fairly substantial price declines.

Thanks, very much.

You're welcome.

The next question comes from Peter Sklar from Nexbitt Burns. Please go ahead with your question.

I've got three questions. The first one is on these delays on the precision component side, I take it that it's, are these automotive contracts? I take it it's not on the thermal side of the business.

It is all automotive contracts.

And does that include the seat adjustment?

The seat adjustment is right on target, we are at the volumes that we anticipated and that program is right on plan.

Okay. Secondly I've noted that the situation at DT has deteriorated and I'm just wondering if there's been any implications for you, are they pricing more aggressively for cash flow or try and win some business for cash flow or are you picking up share from them, do you have a sense what impact the DT situation is having on you?

Peter, definitely the duration at DT is ready. Of course skewing it to their customers or our customers to a degree because they don't know how long they can sustain quarterly losses of the magnitude they just sustained in the last quarter and, of course, when our customers realize that our debt equity ratio is excellent levels and so on, more and more people are coming to ATS and placing their business with us because they do have full confidence we'll be around to deliver and support. Not only next year about five or ten years from now too.

Just to add to that. It's important right now at this point in the cycle, too, let's face it people aren't building, aren't looking to buy automation systems to produce the same product they produced three years ago, it's all new generation products. A transition taking place in what they are buying. This will have repeat activity attached to it for a long period of time. And as Klaus said, they want to be dealing with businesses they know will be around.

In the interim are they screwing up pricing at all?

Not too much really, no, no, not at all. Because, you see, the one thing is for once we now offer technologies DT does not have. The cost of ownership to the customers clearly lower. Some smaller projects where we see price pressure from them but ending that multimillion multi-year, they are not participating in any more because of lack of confidence that they'll deliver.

Okay. My third question is about ELK in that press release, you had this morning. Can you talk about who they are. My initial reaction when I saw it, they seemed like a relatively small company with only 500 million of sales. Can you talk about what their product lines are, where they're positioned in the market, why you picked them, why you didn't pick a bigger player. I assume that they're a company with a lot of engineering capability. Is it an exclusive arrangement or could you possibly have other associations with other building products companies.

Most definitely. Most definitely. You're right. They're not huge with 500 million in sales but they are well spread around the United States and of course have shown a huge interest in working with us on incorporating solar with roofing technology. Obviously if this all works out well, then both our businesses will grow together. A new lease on life and, of course, we'll provide that new lease on life with our technology.

Maybe I can just add that Elk is a very attractive partner because of its size. It's imilar in size to AGS. That makes for a very conducive type of relationship.We think that makes them more agile than maybe some of the larger companies that are out there. They are also a company that has a very good reputation for being innovative in the types of products they bring to market. So, again, those are very important criteria from the standpoint of partnering with another company that we're looking to bring product to market with.

So Ron, there's no exclusivety. You could partner with others?

In fact, I believe, we will be partnering with others. Maybe not specifically in the areas we're working with these folks in but there will be other partnerships and there's discussions going on with other partners today.

What is ELK's product line?

Residential roofing systems. They're into premium asphalt, laminated shingles and vent-type products. They have a website.

Okay. And my sense as to, I think you made comments during the course of your presentation, it sounds like commercial production of your SSP product has been pushed out a bit. Is that true?

I think what we're saying is we are maintaining our goal of having our first shipments in the first, our fourth quarter. Because some of the slippage we've seen in the building, more risk attached to it.

Okay. That's all I have. Thank you.

Our next question is from David Tyerman. Please go ahead with your question.

A question on foreign exchange. I'm wondering if you can give a sense really on two things. One on your existing backlog. Could the fact we've seen the dollar continue to strengthen have an effect on the profitability and existing backlog and then going forward if you can help us understand how the rising dollar will effect you. Do you have any rule of thumb, a sense equal certain amount of profitability effect?

We have given that type of benchmark in the fourth quarter. And we went back and recalculated. It proved to be accurate given the fact there were a number of assumptions that go into that. With respect to the backlog specifically, it's important to understand the policy we follow from a hedging standpoint. We have been active hedgers of foreign currency for a long time. One might argue it cost us money over the past two years, two and a half years and really started to generate benefits for us as we moved through the last three quarters, really. But our policy from the standpoint of hedging is we typically hedge all of our balance sheet and basically our backlog, the lion's share of our backlog, and that's hedged both through foreign exchange contracts as well as our procurement of U.S. dollar purchase goods. So from a standpoint of our transaction hedging, we have an active transaction hedging policy. The other thing that comes into play just about half of our revenue, a little bit less right now in the last year comes from our operations outside of Canada. In fact, that's probably a little bit light in the historical sense because as we've said, the west coast operations have not performed at levels, they have been held back because of the downturn there. There's a lot of hedging we naturally get by a translation standpoint by operating internationally as well. We did increase the amount of disclosure we provided in the press release to give you -- to be able to allow you to gain a sense of what kind of protection we have available to us through our current hedging programs.

Right. And that's what I'm trying to understand. It looks like you've got $95 million U.S., $140 -- or $142, sorry, we're now at $130. That's kind of what was driving my question.

There's no question that that movement in currency over time has a negative impact. I think the important thing as I mentioned in my comment is to take a look and see what we're doing to deal with it. If you have structural change, you have to be able to adapt to it from the standpoint of pricing. I think we've given pretty good evidence in the current quarter we are doing that. The other thing is there's no question in our mind that increasing our utilitization of our facility is going to have a pretty substantial positive impact on our performance. So that's another major factor that will help offset this currency movement.

Right. Undoubtedly. I guess the question comes down to am I going to read the press release next quarter and see the negative impacts both revenue and operating margin that you outlined in the press release. It's very helpful to see those. I'm wondering because the dollar continues to rise, it seems logical to me that you'll continue to get hit by that.

Well, you're going to have to see that because unless the currency moves again, there's going to be a negative impact. I guess the question is our ability to offset. Definitely we are not set because the currency has moved down so our revenues in U.S. dollars will be less so there's no question about that. The fact is what we're doing to offset the impact.

Can you reiterate the numbers you gave in Q4?

Q4?

Yes, you mentioned you'd given it.

The movement we estimated would be for every million dollars of revenue, that would be consolidated revenue, we estimated the impact would be about $600 for every penny change. I think that's right, Carl?

Yeah. $600 net income for every 1 cent change, 1 cent defined for example, a movement from 140 to 139.

Okay. When you're saying $1 million in revenue, that's not the total revenue of ATS, that's the revenue that you sell into the U.S.?

That's total revenue.

Total. Okay. That's very helpful. Just a question -- sounds like you've got a lot of first time assignments which is encouraging for the future. I'm wondering whether that will have an effect on the margins going forward. In the next quarter or two, presumably those are going to be less profitable.

I think that we've said in past that first time work tends to ratchet the margin down a little bit. I think that's a cost you have to do in order to grow the business. I think there are some advantages we've gained from the standpoint of pricing with respect to standard products as well. It's reasonable to say there's a higher risk the margin will be ratcheted down a little bit because of that.

Right. Okay. Makes sense. Just a broad question on, and I think it was alluded to earlier on the precision components and I think it's true also for solar. Do you have an objective in mind in terms of margins over the midterm? Clearly you're not going to get there in the next few quarters but you've never had very high margins and I wonder if, I think, at some point you said 10% type of range which is your other business. Is that really feasible?

In the current environment, it's a stretch. There's no question about it. Simply because we are dealing with a lot of issues. And I think that, let's be honest. As you get more to being a base component supplier, the movement in the currency rate had a pretty detrimental impact on most component manufacturers because they've been under pricing pressure for a long period of time. It's really an issue of having to cope with the speed of the change in the exchange rate, that's a fundamental issue for all component suppliers. We are dealing with that. We think we have a number of initiatives under way which will help us combat that but there's no question that the movement of the currency is going to have an impact on our profitability and components.

And on solar, the impression in the short-term probably not much improvement likely but once SSP comes up, is your goal still sort of a 10% type of range?

We haven't put a number on that but we're looking for a substantially improved -- a substantial improvement in operating performance as that business scales up, yes.

Okay. A quick question about something that Klaus said, I was kind of intrigued. I think you said, Klaus, you were looking at things to do to maximize the value of thermal. What does that mean?

Thermal improvement really in the amount of heat the device can take away from the chip. Of course, ongoing cost reduction as well.

Okay. So this is, I just wondered, was that a code word for selling the division or something like that.

No, I think we are looking at ways to deal with the cost issue.

Okay. Okay. So you're not happy with the profitability and you're looking at ways to try and improve the profitability of it.

Yes. Let me say that we are never, ever happy with our profitability. We always want to do better, better, better.

That's encouraging. And one question for you, Ron. In your text you said the ASG operations excluding FX would have had $1.4 million better operating profits?

No. What I said was that if we take the ASG earningings and we normalize them, just happens that the FX was $2 million but there was also these unusual charges which I talked about which were about $2 million. So I'm saying that if you take even with the FXN, okay, if you normalize our earnings our earnings would have been $1.4 million higher on slightly lower revenues. As I said in my presentation, I think that's a good indication that we are doing a good job of offsetting these foreign currency issues.

I'm a little confused on the $1.4 and how you get there. I see minus 2 from FX, minus 2 from the unusual deals and .9 on the SARS impact.

If you just take, just adding back the $2 million in unusual charges, ignoring the SARS impact. I took the number which reported, I think $5.8 and basically add $2 million back to it. Operating income, puts us $1.4 million higher than Q2 last year.

Okay. A year over year number.

Yep.

Okay. Great. I think that's it. Thanks, very much guys.

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

Thank you. First question has to do with the pricing environment and what I'm trying to compare is sort of the average price. It's always different but sort of on an aggregate business what's in your backlog today versus what you reported in the quarter should the equivalent average price should be a little bit better?

I'm not sure I understand the question, Marko.

What I'm trying to -- you made a comment, or responded to a question earlier with respect to DT that the pricing is not being affected too dramatic on the larger projects, because it's been a generational move, et cetera. All I'm trying to compare is if I look at your business today, which I'm defining as what's in your backlog, should I assume that the average pricing in your backlog is better than what your reported revenues have been this quarter and last quarter on the automation systems group?

Let me think about that for a minute. I'm still struggling with the question.

Getting better prices than we have in the past.

Talking about the -- those have been quoted for some period of time. I don't know if there's a fundamental shift in the pricing related to those.

Okay. So we shouldn't -- because it strikes me that pricing had been very, very problematic and sounds like it's still tough but it doesn't sound like you're doing anything completely outrageous any more. That's all I'm just trying to understand here.

We're not giving jobs away, that's for sure.

Okay. So we should see a relatively better pricing on an average basis.

For two reasons really Marko. First of all, it's because of our competitive position has improved dramatically and of course our facilities utilization now poses also way up.

Okay. Just wanted to touch on that. You mentioned you guys are very busy now. Should we expect your third party content to go up?

I think that probably third party content will likely rise in the quarter. Just because of the status of where the projects are at and it has to be a high third party content as we scale up the manufacturing side of it.

And given that you are very busy here in North America, and it sounds like some custome circle capacity in Europe. I mean, are you facing as you're scheduling timing issues here in North America, so that if I look at the aggregate revenues of the automation systems group, you've sort of got a bit of an imbalance still?

I would think that from a loading standpoint, yeah, I think there's an imbalance still. A natural consequence of design. It's clearly the area where we are working through it on a substantial chunk of work. And we're not exactlyl loaded on the manufacture part of it. Now that situation is improving.

Right. Okay.

Hasn't balanced yet. That's the point.

All right. Just wanted to spend a moment on the thermals business. Profitability is obviously challenging. You talked about, you know, the shift, the structural shift in manufacturing and how there might be some, you know, new competition. I guess the implication there is that there might be some programs that, you know, there some risk associated with. At what -- it sounds to me like in this business, you know, you've had some successes but just given the pace or change in that industry, you really haven't been able to yet sustainably sort of build a business or certainly a profitable one and I really just wanted to get your thoughts in terms of what are the key things that you need to see happen there that tell you this is something you should stay in versus just saying, look, it's just not one that we can generate the kinds of returns that we need to cover our, you know, customer investment?

You want to answer that? Bruce.

The goal is to continue to broaden the customer base and diversify within that that customer base. There are really the top three OEMs that are changing their models more to the outsource design model rather than internal design models. There are a whole pile of other companies out there that are still doing their own designs and we supply into several of those and the market penetration of some of those is growing. There are risks because of the box manufacturers obviously are gaining in their capabilities and they're adding thermals capability and really it's gauging where that goes in the future as far as what capabilities they have internally in thermals design moving forward.

I think coming back to the (INAUDIBLE) I think that ultimately it's driven by profitability, by ability to generate profits from the business on a sustainable basis.

So where we sit today based on Bruce's comments, you do believe that there is sufficient addressable business for you to continue your activities. Not the structural changes you've identified, you still believe there's a sufficiently large addressable market that it's a worthwhile opportunity, right?

That's correct but there are challenges, as we said.

Right. Okay. The last question I have has to do with the $2 million or particularly the part of that that was the new customer that you identified, that issue. My question is, is, is there something that you've learned from that or was there something particularly unusual, a new application that caused it to be that kind of a cost overrun? Because if I think about the average size of your project, it sounds like it might represent somewhere around 25%ish of the contract value.

Well, it was a fairly substantial program that was underway in these operations and yeah, we always learn something from a cost overrun but, I don't think, that it's necessarily indicative of something more substantial.

So it's not a deployment of one of your new technologies that might be a recurring problem or is it a brand new application that was sort of a, you know, a firstime experience for you. Just trying to get a sense of if I compare that experience to how you've characterized the composition of your business with high first time customers, how you sort of managed that kind of risk.

I wouldn't relat it to that. Fortunately or unfortunately our business requires us to develop and build custom designed and built equipment and sometimes we have cost overruns that emerge and they're always disappointing. We've done a good job of mitigating those. But from time to time they pop up. And when you're in a situation like we are today where our profitability is not as high as we'd like it to be, these tend to get magnified as well. So I think that's part of it and as we've said and indicated, there are a couple of things that came through. It wasn't just a cost overrun. There was some inventory adjustment as well in that number.

Was there any -- given the completely -- completion of accounting, was there any sort of catch-up, foreign exchange items that were reflected in the financials.

No. Because I think that, as we've indicated, the ongoing activity we have is largely hedged out and we record our revenues at the average rate during the quarter. So, you know, we tried to give an indication of what the impact of foreign currency was on the reported earnings by each of the operating groups.

Okay. Would you have closed out some contracts, foreign exchange contracts during the quarter that would have given you an offset in gain?

I think foreign exchange contracts were at higher rates than the effective rate at the time. So, you can argue that was a gain but they were doing what they were taken out to, but there was an offset in loss, based on the drop in the revenue on the contract.

You're giving us the net number.

Exactly.

Okay. Thanks, very much.

The next question comes from Jay McKinnel from Raymond James. Please go ahead.

Yes. Good morning. Most of my questions have been answered but let me just try this one coming back to the delays on the precision components site. Can you quantify a little bit maybe in terms of the percentage shortfall versus your expectations for revenues for the quarter for the year and similarly the percentage excess of the expenses that you've incurred?

I think that -- I don't think we can for you today but let me put it in context. A lot of these delays were on programs which we previously had said we expected to generate, at full ramp about $20 million in annual revenues for us. So, that's really what the overall full ramp is. The delay is the speed to get to those levels.

Right. That's fine, actually. That also helps me zoom in on which contracts you're talking about. Okay. Thanks, very much.

You're welcome.

Our next question is from Michael Willems from West End Partners Please go ahead.

Thanks. Most of my questions have been answered. One more on the power outage in August, do you know if you're going to get any business risk insurance on that?

No.

Nothing? Okay.

The fact is that insurance policies only cover so much.

Okay.

Our next question comes from Sherry Lynn Ratbourne from RBC Capital Markets. Please go ahead.

Hi guys. I've got two questions this morning. First question, in your prepared text you referred to pent up demand and I just wondered if you could comment as to what gives you confidence that there is pent up demand for your automation systems and whether that's specific to the computer electronics area that's been particularly weak the last couple of years or more general across all of your end markets.

I think that pent up means was really pretty well across the board except maybe not all areas of where the programs are a lot more structured because they all tie into new model developments, model releases and so on, but many other industries said we'll do it but maybe next quarter, next quarter, next quarter and so on and finally with the renewed economic activity in America and still in parts of the world, they really, time to move, time to spend the money, time to up the production capacity.

And so with the 7.2% GDP surge in Q3 sufficient to give everybody confidence to now move forward or people still somewhat in a wait and see kind of a mode?

Actually the surge started well before that. That, of course, the optimism out there, definitely bodes well for the future, there's no question about it. Since really the beginning of calendar 2003, we've seen really an increased enquirer activity, an increased activity among our customers that had been planning these projects for the last year or two but had put them on the shelf because didn't see really a good return on the investment. But all that changed the beginning of 2003.

So the slowing pace that you've seen in October, you think is probably just a timing issue?

Absolutely. Absolutely. We sometimes get four orders a week and then nothing for four weeks. So this is just a timing issue.

The activity is up major from where it was last year.

We can actually say that. This year so far in our fiscal year, 36 months, 800 quotations?

More than what we did all of last year in the first six months.

Has the rate of turning those quotations into orders changed materially year over year?

Has improved and that's why it's reflected in the backlog in the bookings numbers.

Okay my second question just related to the thermals business. You're not quite at break even yet in that business. Just wondering if you can give us an expectation as to when that business might hit break even and what the annual revenue run rate associated with break even is.

We haven't provided that information.

Do you have an expectation as to when the business will hit break even?

We have but we haven't made it -- we haven't disclosed that. That's very sensitive, obviously.

Okay. Fair enough. That's it for me.

We have a follow-up question from Cameron Jeffries from Credit Suisse. Please go ahead.

Thanks. Just wanted to know if you guys can give us some color on what the duration of your backlog looks like right now?

Duration of the backlog is a very difficult question, but I think it's, it's actually pretty tight. First of all delivery schedules are tighter than they have been historically. We have that. We don't have any projects, fortunately, in a delay mode, which we had. We had that type of activity where we had projects put on hold those types of things taking place on the backlog over the past two years, that there was no cancellations and no major productions in this quarter. I would say that it's actually pretty tight.

A pentup demand, you've seen a bit of an acceleration in terms of the or I guess a drop in the duration of your backlog with the pent up demand. . People haven't changed their kind of ultimate delivery timetable, they've just kind of put off the buying decision, is that a fair characterization?

Yeah. In fact the deliveries often don't move even though they delayed the buying decision.

Right. Okay. And with Econotrak, can you just talk about any potential cannibalization with the Supertrak? Is it a completely different customer base you're focusing on or do you expect to see some sort of a little bit of potential cannibalization there?

Since really the Econotrak is really a simplified version of Supertrak so it doesn't really compete with Supertrak at all it competes with commercially available conveyors. So there's absolutely no dilution, whatsoever, of Supertrak potential.

Okay. And is that more, I guess, the Econotrak product, is that more, you know, you had a lot of customers that just came to you and said that Supertrak is too much for us or is it that Supertrak wasn't -- you know hadn't been maybe selling as quickly as you had once hoped?

No, we are very pleased with the impact we've had with Supertrak so far. But of course, like I say, we can add to our total sales potential by developing this Econotrak which really has the same shape almost except it doesn't have the intelligent propulsion that Supertrak has. Otherwise in many ways it's compatible. So we actually very often now we quote projects where a portion is a Supertrak, that is really the highest degree of flexibility. Now a portion that would normally be a third party conveyor, we'll now incorporate the Econotrak because we can seamlessly move the product from one conveyor to the next conveyor, which is just a back end finishing situation where we use some manual labor instead of fully automating the system. Also, it's valuable in lean situations like project (INAUDIBLE) in the far east and quote maybe in Mexico where, of course, many companies don't believe in full automation and very definitely [ Inaudible ] because the labor costs are relatively below.

Okay. That's great. That's it for me. Thanks.

We are running up to about an hour and 20 minutes. We've gone on quite a ways. I don't know if there's one more question but maybe we'll have to leave it at that.

You in a hurry?

No I think that just a lot of people I know that the call has gone on longer than it typically would and we're trying to deal with all questions. But...

We do have another follow-up questioin from David Tyreman from Scotia Capital. Please proceed sir.

Yes if you'll allow me, Ron, just three quick questions. One, the tax rate liberal government this year, is it going up to and assorted business improvement effort costs in the quarter. I'm wondering among other things, are there more ahead. And three, you've got a surge in business coming. Is it possible your margins are going to be negatively impacted by a big surge here because you're trying to pump so much into the plant? Or do you have the capacity?

First question, tax rate, we'll wait and see what the liberal government does. Right now we don't expect a change in taxes. I didn't get the second part of your question.

You had a number of assorted business improvement efforts consolidating plants and what have you. And then some other unusuals. Is there anything out there right now that you can see that would crop up again in Q3.

Well, we have ongoing continuous improvement programs in place where we are funding and the comment was in the context of year over year cost increases, and I think that is just an ongoing process like we have a number of initiatives whiche we're doing in order to delivery faster and more economically but I don't see a huge increase.

Right. Okay. Fair enough. And then the last one was the surge question. If you've got a lot more business going through there. The example, I'm thinking of was actually Boeing when they had a huge surge in airliners a couple of years ago, they had a, unfortunately it didn't turn into profit. I'm wondering if there's a risk that your margins will be held down by the big surge in business.

I think that we've been pretty clear that we expect to see improvement in our bottom line as a result of an increase in backlog.

Okay. Great. Thank you.

You're welcome.

Mr. Woerner at this time there are no further questions.

Very good. In that case, then, thanks to everybody for listening and wish you all a pleasant day. Thank you very much.

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