ATS Corp (ATS) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. 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. (OPERATOR INSTRUCTIONS).

I remind you that our presentation today may contain forward-looking statements reflecting the Company's expectation 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 on Friday, August the 13th, 2004, at 10 AM Eastern time. 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.

Good morning, ladies and gentlemen. Joining me today is Ron Jutras, Bruce Seeley, Carl Galloway, Mike Cybulski, and Jerry Beard (ph). Over the next few minutes, I am going to share some insights into our performance to illustrate where good progress is being made and where more effort needs to be applied.

First, let's talk about progress. With consolidated revenue and earnings up, there is much to talk about. A sure sign of progress is the fact that margin in our largest and most established automation systems operations have picked up significantly. This is masked by a couple of issues I will discuss momentarily, but the trend line is very positive.

This was to be expected, since backlog is excellent and this has supported strong revenue growth, solid productivity gains and much improved utilization of our flagship Automation Systems Group, or ASG operations. We can take satisfaction from this growth because it reflects the culmination of all the work we have done over the past three years to develop innovative new products and technology, drive market share and gain new customers, particularly in health care, where ASG revenue more than doubled to $30 million in the quarter and backlog tripled to $92 million.

As highlights go, this is one of the biggest of the quarter. We believe that the work we've generated in health care is very attractive; we see many more opportunities for the future in this field. For example, you may have seen that we secured $14 million in automation systems assignments from one of the world's largest manufacturers of self-diagnostics during the quarter.

Recently also, a pharmaceutical company awarded us a $5 million order to build a high-speed manufacturing system for the drug delivery technology. What we like about these orders isn't just the size. One, it's from a repeat customer, a sure sign that ATS is gaining a loyal following in the health care sector. Both are in high-growth areas of the market that we are able to serve because of our industry-leading standard, technologies and expanded industry-specific capabilities.

On the topic of capabilities, you will to be interested to know that ATS Compliance Solutions is really making its presence felt in the health care sector. Since we started this service in April, it's been very active in serving our existing health care customers and has also added two very promising new accounts in the high-growth pharmaceutical sector. Both have long-term potential to utilize all of our capabilities.

One new customer makes over-the-counter pharmaceuticals; the other injectable drugs. Both are planning capital purchases that may in aggregate consume up to $24 million U.S. of automated systems. Through ATS Compliance Solutions, we are providing value-added consulting advice that will help these and other companies accelerate their projects and purchase while lowering their risks.

All of this is positive, but to be fair, the performance of ASC in the quarter was uneven. Some of our smaller operations in North America and the European automation facilities continue to perform poorly, and Asia was at breakeven level. For Europe, the reason was twofold. First, a very weak economy there, which has affected auto generation and therefore utilization as well as pricing. Second, our main (ph) facility took a one million provision for expected cost overruns of a very complex automotive automation assignment.

Can these factors are disheartening because they mask the pickup in the group's overall performance. The European market is still a challenge, but we also hear that through industry channels that we are doing much better than our European competition in winning new work.

Looking at our U.S. West operations, we continued to perform poorly in the quarter, reflecting challenging conditions in computer, electronics and weak execution. Fortunately, the poor margin jobs are now winding down and we now have new and well-trained leadership in place. This new management team is focused on improving radically performance and broadening the customer base for our U.S. West Coast operation.

This focus has already started to make a difference. I mentioned a few moments ago that we won a $5 million health care order to build the high-speed manufacturing system for a new drug delivery technology. This press release, released July 8, what you might not known is that this order was won by our West Coast operation, which will take the lead in building the systems over the next six months. This broadening of our West Coast customer list into health care is one of our strategic goals, of course.

The West Coast is also on the cusp of winning some major new orders from a longtime computer electronics customer to supply a number of automation systems. In fact, we've already had a sizable sizable kickoff order of well over $1 million. The customer gave us this initial assignment to get us started with the work and procurement of some long-lead items while they complete their full approval process.

We built these systems for the customer before and we are confident that the follow order will arrive very, very shortly. Furthermore, this (indiscernible) is expect to lead to even more repeat systems orders over the next few years. This is work that requires us to have a strong West Coast presence.

These are just a few examples of why we are committed to returning these operations to successful performance. Strategically, we believe the West Coast will play an important role in all generation and project execution in health care going forward, as well as the facilities traditional mainstay of computer electronics.

Although challenges remain in terms of factory loading, a better mix of new and repeat assignments within our substantial backlog creates opportunity for better margins and lower execution risks. Our near-term goal is to bring the margins of our underperforming facility up to our target rates, maintain the solid progress in margins we are already seeing at our flagship operations. This will take more time, but we also expect significant progress over the next two quarters.

We continued to see some order delays and push-outs in the first quarter and (ph) recent economic indicators are a bit worrisome. However, we are not seeing orders disappear; we are continuing to see exceptionally strong quotation activity, particularly in North America. We are also winning business in Europe and in Asia. In fact, the pace of quotations remains unprecedented.

This, along with the strong order backlog level gives us the ability to be more selective in the orders we are pursuing to ensure they meet our profit targets and our strategic value to our business. We are focused on customers AND our target markets who have an ongoing need for automation and can make use of our total solutions capability.

Bottom-line message in viewing Automation Systems results this quarter is that the group has substantial room for improvement, but progress has definitely been made.

Turning to our Solar Group, Photowatt delivered an absolute exceptional performance in the first quarter, achieving record profitability. As you know, we opened our Spheral Solar facility at the end of June, which was a major first step for this business. I'll have a brief report on SSP later in the call.

As for Photowatt, first-quarter performance reflected higher revenue in Europe, better efficiencies as a result of investments in automation than we made in recent years, and improved processes. These factors more than offset a 2.5 percent decline in average peer watt (ph) industry pricing for Solar this year. Strong Solar market activity has reduced the risk of near-term declines and prices, but also raised the risk of silicone shortages. Photowatt has taken steps to increase its inventory to help manage this risk. Overall, Photowatt outstanding performance makes us even more excited about launching SSP products, especially since SSP cost advantages are based upon a dramatically lower silicone content. The time is right for this technology.

The final observation for the quarter concerns Precision Components Group. Our primary challenge is offsetting rising raw material costs and the higher value of the Canadian dollar, both very formidable challenges. Unfortunately, PCG performance this quarter was disappointing and our goal of returning to profitability was delayed. Revenue increased, although not as much as expected, because the automotive sector had a very weak first quarter. In fact, some automotive customers extended their plant shutdowns that normally occur in July back into the month of June, and this reduced, of course, the shipment flow. We took advantage of the opportunity to clear the backlog of smaller production runs; however, these also contributed to production inefficiencies from higher changeovers and set-up costs.

MPP, one of our divisions which has been a very solid performer, had a weak quarter because of delays in receipt of new equipment, which increased operational costs.

On balance, we saw significant improvement in many of the areas we expected, including reduction in start-up costs in our new programs in our plastics division, but unfortunately we had some largely offsetting higher costs in other areas. This has delayed the turnaround we expect in PCG earnings. And this is what we are doing about it.

First, we've decided to put our money-losing Thermal Products business up for sale. Secondly, we have requested a price increase on certain poorly-performing programs, programs that have not fared well because of the combined increase in foreign currency and increased material costs. We are prepared to lose the business if we don't get these increases. We cannot and will not subsidize money-losing programs. This tough stance will possibly result in loss of some revenue.

Third, we are making progress and are on track with our initiative to achieve better global procurement through lower-cost Asian sources. Our goal is to achieve annualized cost saving of $2 million from this strategy by the end of the fiscal year. We will see the initial impact of this procurement program this quarter, and by the third quarter, we expect the benefits from PCG performance to be meaningful.

Fourth, we have identified labor cost savings amounting to approximately somewhat over $2 million on an annualized basis and expect to begin to achieve these savings starting in the second quarter, too. Bottom-line message on PCG is we are not satisfied with our performance, we are making progress with corrective action, and we are determined to improve our results as quickly as possible.

That's my overview and I hope you can tell I'm dissatisfied with our performance in some areas in our business, but I'm also encouraged by strength in many other areas and the underlying direction of our business. We are very realistic about our prospects, we understand where the challenges and opportunities lie, we are determined to drive improved performance. Now I'd like Ron Jutras to provide his insight. Ron.

Thank you, Klaus, and good morning. My intention today is not to comment on all the components of our first-quarter performance, because the MD&A issued with our press release contains complete details. However, I would like to amplify a couple of the comments Klaus made about group results, discuss the charge we took in the quarter and also talk about our balance sheet strength.

First, on the topic of Precision Components Group and its initiative of seeking price increases. We have been successful in negotiating price increases on a number of programs to help offset the change in the U.S. and Canadian exchange rates, and more recently, higher raw material costs. To give you a sense of the impact of these initiatives to date, we estimate that the price adjustments we have now obtained would had increased PCG operating earnings by approximately $350,000 in Q1, had they been in place for the full quarter. These benefits will be seen in the second quarter and in future periods as well.

We're not done with this. We continue to negotiate for price increases on other programs, and this initiative to seek price increases where they are justified and rationalize poorly performing products will continue for the foreseeable future.

In terms of shipment releases from PCG customers, these have just now returned to the levels we saw prior to the June slowdown, so that's a promising sign. However, as I hope you can tell, we are doing more than focusing on the top line to improve PCG performance. As described in today's announcements and as Klaus mentioned, we are also moving aggressively to reduce our internal costs and gain increased efficiencies as a means to achieve our performance through improvement goals.

As Klaus noted, we've also decided to divest the Thermals business. There are some parties who have expressed serious interest in acquiring this business, and we are actively pursuing these discussions to complete a transaction as soon as practical. This business has been a significant drag on operating results and a divestiture will remove this burden on performance, and it is consistent with our goal of returning to profitability in Precision Components Group. The decision to divest as also been made because of the growing attraction of computer manufacturers to Asia and the interest of potential buyers in our thermal products and the related technology.

Turning briefly to Automation Systems. Our larger and more established facilities in Eastern North America are driving current performance improvements. In these key facilities, our margins are already running at very attractive levels, meaning in the mid-teens and good utilization and revenue performance. And we can see further earnings growth as we move forward. Our operating focuses on improving utilization performance of our underperforming divisions, and we are working aggressively on this goal so that they also can contribute to our future performance.

Looking at ASG performance on a sequential basis, both (ph) the Q1 operating margins were similar to Q4. That's in spite of the cost overrun in Europe and despite about an 8 percent lower revenue volume. Third-party content was relatively high at 47 percent, and this was somewhat dilutive to the margin performance, especially since the increased expenditure was for subcontracting. This was primarily for an increase in outsourced machining to allow us to maintain delivery schedules in our higher-utilized factories and where it was not practical to use other ATS plans to do this work because of distances, transit times and capabilities in some cases. Delivery times continue to be demanding, and it is critical to our ongoing success that we manage and meet these obligations to our customers.

As for new Automation Systems' order activity, order bookings of 117 million in the quarter were quite solid. As the industry segmentation table of backlog in the MD&A shows, order activity was broad-based, but clearly, our success in health care is a major contributor to both order-booking activity and the period-end backlog.

However, as noted in today's press release, we continue to see some delays in customers issuing orders. More importantly, while there are delays, as Klaus said, we do not see significant programs being canceled or shelved like we have during the past three years. In fact, we are seeing a significantly increased number of larger projects. This is a in prospects, quotes and in orders booked. And while values can slow down a customer's approval process, we think this is a positive indicator of customer confidence.

As Klaus stated, new order prospects overall continue to be very strong. For the first six weeks of the second quarter, new order bookings were approximately 42 million. Now, this is lower than the 73 million in the same period last year; however, this was an exceptionally strong result last year, especially since the summer is generally a slower period.

A very important difference is that the backlog was much lower last year than it is today, and as we stated last quarter, we are now being more selective in the type of work we are pursuing. In fact, that order backlog stood at 231 million at June 30, 2004; it was 46 percent higher than the backlog of 158 million a year ago.

With our success in growing the health care business, we believe that the backlog is now better diversified by industry than at any point in our recent history. It's also healthier than it has been in some time from the standpoint of our improved mix of repeat and first-time systems, which should be positive for margins.

In the Solar segment, through Photowatt we had an excellent quarter. Looking forward, the summer will be slower because of the extended European vacation tradition, but in the main, we expect strong performance from Photowatt throughout fiscal 2005 as a result of continuing high demand. We also believe the risk of a substantial drop in solar demand near-term is low because reductions in government subsidies are not expected, and in fact, in many regions may expand, further increasing demand.

The biggest risk emerging is with raw material shortages, primarily for silicon, which is a major component of the cost structure. We are already seeing silicon prices rise, but it is also moving solar prices higher. To further protect ourselves, we are actively securing sources of silicon and increasing our investment in inventories. This is an industrywide concern; however, we still very much like the current overall market environment for Solar.

I also want to address the fact that consolidated operating earnings in the quarter included a charge of approximately 1 million before tax -- that's approximately 1 cent per share -- related to the disposable (ph) of our interest in a corporate jet and the related costs. This was an old aircraft that was becoming increasingly uneconomical to maintain and operate. We do not plan to replace the jet and intend to utilize readily-available third party charter services to get us in and out of remote locations not well served by commercial services -- in other words, where the need is justified. We estimate the savings during the next year will recover the loss from disposition and obviously expect that to continue beyond that as well.

This disposition expense is included in the selling, general and administrative expenses in the income statement and was a major reason for the increase in these costs compared to Q1 of last year. The remaining increase reflected higher costs to support increased sales, revenue and operating activities of the business. However, as a percentage of revenue and including the cost of the aircraft disposal, SG&A costs were still down significantly at 10.6 percent in Q1, compared to 12.1 percent in Q1 of last year.

Also excluding this onetime disposition cost, consolidating operated earnings would have been 51 percent higher than in Q1 of last year and 23 percent higher than in Q4 the immediately preceding quarter. Even with the disposition cost in, consolidated operating earnings were 24 percent higher than in Q1 of last year and 1 percent higher than in Q4. This shows our underlying margins are improving.

The final comments I want to make are about our financial position. Looking at cash flow on the balance sheet shows that to support a substantial increase in business activity, our investment in non-cash working capital increased 52 million in Q1. This was primarily for increases in net contracts in process, accounts receivable, inventories and reduced trade payables. The increase with especially large in Q1, as we saw investment in working capital catch up from the fourth quarter, when working capital actually declined, even while we recorded a significant increase in revenue.

Long-term investments rose $14 million in the first quarter. The largest portion of increase was for fixed assets and deferred development related to the SSP initiative. This represented approximately 5 million of the increase. The balance of the long-term investment was mostly for production equipment for new orders, productivity improvements and for maintaining the Company's other businesses.

The largest of the divisional investments was in new equipment to expand capacity at Photowatt, both in terms of improved efficiency, higher yields and throughput, and will allow us to take greater advantage of the strong market demand to grow earnings and returns. These cash requirements were funded by available cash, short-term investments and by drawing down under existing credit facilities. At June 30, 2004, we had unutilized credit facilities in place of 66 million and cash and short-term investments of approximately 17 million. Our bank debt-to-equity ratio was a very robust 0.1 to 1.

In summary, our financial position remains very strong. In fact, we believe it leads our industry and it is a clear competitive damage in securing new customers and business. Now I'll turn the call back to Klaus.

Thank you, Ron. Before we conclude, I have a brief update on Spheral Solar Power. As you know, we've had the official ribbon cutting on the SSP factory on June 23rd. In the ensuing seven weeks, we have made good progress in commissioning the new equipment, distributing more samples to potential customers and developing more applications within the distribution partners. Later this quarter, we intend to introduce the market to our first commercial product, the flexible solar module for marine, recreational vehicles and off-grid (ph) applications.

So far, all systems are go for our launch strategy and our prospects are excellent. At every trade show, market reaction for our SSP solar products has been excellent, we are making very good progress with Elk, the U.S.-based roofing company, on the joint development initiative we have with them. In fact, with the price of oil at such high levels and consumer interest in solar as an alternative energy source expanding rapidly, there's never been a better time to be in the solar business.

Concluding our presentation today, I want to reiterate that we remain confident in our ability to drive revenue and the earnings growth and are absolutely dedicated to continuing to improve our performance this year. Now, I like to invite your questions. Operator, could you please open the lines for questions? Thank you.

(OPERATOR INSTRUCTIONS) Pat Chiefalo from Merrill Lynch.

Thanks very much and good morning. My first question relates to the backlog. Last quarter, we had a pretty high backlog at around 227 million. I think it's probably the highest we've seen in years. And that was sustained this quarter at 231, but we didn't see any uptick in sales. Can you maybe characterize the duration of the backlog and when do you think we will start seeing some of that pretty strong backlog flush out to the top line? I mean, is it expected a quarter out, two quarters out? When do you think that would happen?

I'm a little bit confused by the question because I think we are seeing the backlog roll through the revenue lines. And if you look at the year-over-year increase in revenues and I think it's reflected, I think that your comment may reflect the fact that we saw a bit of a dip --.

It hasn't ramped up as rapidly (multiple speakers).

Dip in the -- especially compared to Q4. But I think partly that's timing-related issues, and clearly we expect that backlog to continue to roll through. And as we indicated on the call, we are seeing an increase in the amount of repeat systems content and within the backlog as well, which (indiscernible).

That is really the core explanation for that. Because if you have systems build order for six systems, typically, of course, we design the system, we build one first and qualify it. And then the rest are being built in one big batch. In some cases -- you know, we're already at that stage now, we're building systems 1 and 2, making sure they get properly qualified and then end up building the other four.

Okay. Could you characterize the margins that you expect in that backlog? Would it be higher than sort of the run rate you have now in the Automation System business or would it be sort of on the similar line?

I think that what we have said is that the improved mix should be positive to the operating margin line. It's historically been proven that the more repeat systems content we have, the better our margins tend to be.

One word of caution, of course. On some of these new pharmaceutical and/or medical device projects, there is obviously a fairly dramatic learning curve attached to these projects as well that we have to sometimes absorb the first time around. But as we get more and more into these industries, of course, the bad risk diminishes quite dramatically. Long-term, definitely, you'll see a major uptick in margins.

Fair enough. Switching gears more to the solar side of the business. You had an exceptional quarter in solar. How sustainable is this current run rate and can it grow, and how sustainable is the profitability you are seeing in it right now?

I think that's what we tried to address in the comments we made today. Clearly, the second quarter -- unfortunately, France shuts down for the month of August. That's just a reality of the situation. We have certain elements of our production we are continuing to run, such as our casting furnaces will be running through the month of August to help us get a bit of a jump start.

But the demand right now in Europe is extremely strong; we expect that to continue for the foreseeable future. And we're continuing to improve upon our operating efficiencies. Clearly, we expect to see a good solid performance from Photowatt International throughout the entire fiscal 2005 year.

So maybe just a little bit of a slowdown because of seasonality in the next quarter, but then it should easily pick up to current levels?

I think the big risk is going to be what we talked about in the call, which is (indiscernible) silicone. (multiple speakers) Overall, that's a great problem to have in any industry.

On SSP, if you can give us -- and I don't know how much detail you can -- but if you can look over the next six months to a year, how much -- and if I can phrase this question correctly -- how much of the current capacity is now being ordered in terms of -- if you can look out six months to a year in terms of capacity utilization of what you have built, how much do you see in terms of order rates that will (ph) be filled over the next six months to the next year?

Really over the next six, seven months we are looking at -- as I said earlier, we are rolling out our flexible product, okay? That of course appeals to a much, much smaller market, but more specialized markets than the rooftop units modules (indiscernible). But we see this as relatively a very quick way to the industry and also a quick way to bring up revenue, because first of all, the market is not as price-sensitive as the power module market is -- okay? Number 1.

Number 2, we have a much more diversified customer base; rather than having just one client, we have probably 15 clients, or 10, 15 clients and so on. And so the goal is to utilize approximately 3 to 5 MW within the next six to seven months, while at the same time now we are perfecting our power module structures. And then when we are established well in the flexible, then the next natural continuation then, sell actively to the power module rooftop module market.

Maybe just to clarify it and add a little bit to what Klaus said. As we said, is that the SSP factory will ramp over a period of time. We do not expect to have issues with respect to selling the products we produce in the factory. The ramping we are talking about will basically take place over the balance of this year and it will stretch likely into fiscal 2006. But we don't expect to have issues with respect to selling the production that comes out of the factory.

One last one for me. Just a question on automotive in terms of the automation systems. It seemed to have a pretty decent decline from March to the current June quarter. Can you maybe drill down a little more and just give a little more detail on if anything at all more major happened in terms of that would translate into that decline, or what can you comment on that?

I don't think it's indicative of any trend or sophisticated analysis. I think it's just part of the normal fluctuation that we see within our market sectors. And that's why the diversification of revenue is so important to us. I don't think there's anything deep to look at there. We still see lots of opportunities in automotive.

Thanks very much.

You know what we alluded to earlier, if there is an ongoing account that never allows you to make any profit on the projects you do for them, eventually you have to eliminate them, and we've done that in some cases.

Thank you.

Cameron Jeffries from CSFB.

Good morning. A couple of questions for me. Just, Ron, following up on the SSP. Do you have any update on when you think the costs will start running through your income statement for that project?

The criteria is based upon our throughput, our ability to hit throughput volumes. I think that's likely to be -- right now, our schedule will get us probably to the point where we are going to be out of that by the end of this fiscal year. We have also established as part of the criteria, which have been set and embedded by our auditors and audit committee, a drop dead date which falls into -- I think it's mid-next year.

Mid-next fiscal year or mid-next calendar?

Mid-next calendar year.

My other question, just on a pricing contracts that you are negotiating. Are there any customers you are currently talking with along those lines that are also Automation Systems customers? How much revenue are we potentially talking about? You said you would be willing to lose contracts if you can't get those types of price increases. How much of -- is there any Automation Systems' backlog that is at risk as a result of that and how much are we really talking about here potentially?

We're talking -- it's components really. There is absolutely nothing in the Automation side that is threatened with any kind of circumstances like we see in the components group.

How much revenue do you think we're -- ball park -- are you considering perhaps even walking away from if you can't get these things through?

I think that all remains to be determined based upon the discussion we have with customers (indiscernible).

Right now, we have not lost anything. We're just opening the dialogue saying that potential exists. We've had some very hard negotiations with some customers, where we went back and said we need the increase in raw material prices. If steel goes up 30 percent, steel is a major component of this product; we need to be compensated. They in turn came back and said, well, on top of what -- we are not paying you the 30 percent, plus we demand immediate 15 percent rollback of your prices. And we said, no, then in that case, your tools will be ready for pick up a month from now. So far, nobody picked up their tools.

Lastly, on the Thermals business, is there any kind of accounting or charge or anything that you would anticipate down the line? Is there anything along those lines or too early to tell depending on what you get on the pricing side in terms of selling it?

We are in discussions with people. We will have to see where the pricing comes in it, and that will determine where the issue is, so it's premature.

Can you talk about how much is at stake there, perhaps, on an asset basis or anything like that? Can you give us a sense as to --?

Rough ball park, we are probably talking about an asset base right now which is in the neighborhood of 12 million.

Great. That's it for me.

David Tyerman from Scotia Capital.

Good morning. Ron, in your commentary, I think you mentioned or you said that the mature, larger ASG units are generating operating margins in the 15 -- I think you said mid-teens level, is that correct?

That's correct.

Is that your target for the whole unit, when you refer to targets?

Yes, I think that what we have said historically is we would like to see our operating margins in the Automation Systems piece run in that -- and we have done it historically; we've run in the mid-teens.

No, I just wanted to verify. I know you have. Just taking that a step further, then, just looking at the result in Q1, you did 6 million in operating profit in the unit. Tripling that would suggest you have a 12 million shortfall to that kind of level. I'm wondering where is the biggest chunk of that coming from if some of your plants -- and it sounds like the bigger ones -- are already running at the target level?

As we indicated, I think that within the larger ones, the West Coast is an area which is underperforming. We are working diligently on improving that and that's one of the factors. That includes the cost overrun that Klaus mentioned in his comments, which is a factor in there. The rest is basically a broad-based mix across a bunch of smaller operations which have yet to come up the curve.

So I think you're right, there that is a substantial shortfall right now and we are working diligently at bringing that up the curve. We also, as I said, expect to see further improvements within these larger, well-performing divisions, because they are flush with work, they are heavily loaded with work in fact, and they are moving successfully through that. We are also seeing the improvement in the amount of repeat systems within the business, as Klaus was commenting on as well.

If you were looking at what really has to change -- I mean, there's lots of staff here. Are there one or two things that are really critical and is it really you'd better advance on all fronts?

I think the critical things would be we can't have a cost overrun; that's going to hurt us. And we need to improve the performance on the West Coast. Those are the critical factors, I would say, that we need to move forward with and where our efforts are focused. But we are also not ignoring the fact that we have underperforming divisions that are in some of these smaller locations, and we are working diligently to improve that as well.

Sure. And based on what you know of your backlog right now and what's on the floor, et cetera, are there any more of these -- I think you've had a couple quarters now in a row with these kind of underperforming programs -- projects, I should say.

With respect to cost overruns, what we do is, in effect, this cost overrun we recognize here is basically when we looked at our cost to complete that project, we saw that we were going to incur at a cost overrun. So, as I said, the cost overrun is actually a reflection of our anticipated cost on a go-forward basis. We recognize them immediately. So that comes into play. That's part of the process under percentage completion accounting.

Is it, though, the case that you've just had a few recently or -- like it seems like, I think, it was 2 quarters in a row you've had this now and I'm just wondering if it's going to be recurring or is this -- is there any way to answer that?

I don't think that was the case in the fourth quarter. But you're right, we have had instances. To some degree, I think part of this reflects the fact we've been in a tough pricing environment. I think that's some of it. Quite frankly, I think when you have your utilization low in certain facilities, they'll often attract more cost than they would normally if the facility is run right against the wall. I think it is a natural function of how the business operates.

One other question and I'll get back in queue. Just following up along the ASG route, I think Klaus mentioned and it's in the press release that the conditions are weak in Europe. I'm wondering if you could give me a sense of where you see that. Is it getting better or is it just sort of laboring along with the European economy, sort of laboring along, or what is your feeling on that side of the business?

One of our aces in the hole is that ATS does offer a lot of stand-up (ph) contents in its offerings and so on, which our competition does not. So we can effectively address lean systems -- say, a system valued at 250 to EUR400,000 and so on, and there are also, of course, multimillion dollar systems that again are based on, say, a super track (ph) or the smaller ones on our (indiscernible) technology -- all the technologies that our European competitors do not have.

That doesn't save the bacon every time because while the customers are intrigued with the technologies ATS offers, they are extremely, extremely price focused. I think we will expect to be living with that price pressure for some time yet until there's a general uplift in the European economy. But again, as we said earlier, we don't see a lot of these projects evaporating; they're just being postponed. And of course Europe is asleep in June and July and August and so there's little activity in order placing there, too.

We will be able to get a much better handle on this whole order placement situation, I think, in the next quarter. Because it definitely has to open up. Even in a serious recession that Europe seems to be in, they can't stop progress completely, otherwise they knock themselves out of business.

So is it that you have a lot of quotes out there and they're held up or is it the case that there's just not as much activity over there as over here, and so it's just hard to get going period?

Yes, a bit of both, really, because as we mentioned earlier, the inquire activity and quoting activity here in North America is very, very active. Whereas in Europe it is much reduced. But again, we still see an awful lot of orders being out there on the horizon; it's just that the customer hasn't been able to make that decision, do I buy now or do I wait another six months.

I also want to put this in context. This is a situation which has existed in Europe for some time. And our backlogs are at less than optimal levels, but we continue to win business. We are doing much better than our competition. But the fact is that to drive our margins up to our target levels, you get that backlog higher than it is today.

That's kind of what I'm driving at. I'm trying to figure out is this one of the key pieces of the puzzle to fill that 12 million hole, and it sounds like it's part of it, but far from the whole.

The one bright star in Europe is really our division in Switzerland, which has had stellar performance this year. They've had very, very good systems go through their facility and it has been fully utilized. So definitely in their business, it was all go. But the general automation market that we are addressing in Munich and in France has not been as active because they are more automotive focused, and as you know, of course, automotive has been quite inactive in placing new -- in developing new products and placing new orders for these new products.

Great. Thank you very much.

Marko Pencak from GMP Securities.

Ron, can you tell me what you want your depreciation and amortization and was in the quarter, please?

Depreciation and amortization in the period?

You don't split it out in the press release.

It was 8.6 million per.

Thank you. Just want to -- on Thermals' prospective divestiture, can you just for modeling purposes give us a sense of what the revenue impact from that might be if you were to discontinue -- just ball park?

Thermals' revenue in the quarter was around. Just a second -- maybe you have another question --.

Sure, I can. I also want to know if you would disclose what the drag on profit was as well.

The answer is no.

Okay. I'll take the revenue number though. I just wanted to probe your comments, Klaus and Ron, in terms of the strength of the business (indiscernible) your factor loadings in different geographies. It strikes me that in North America, where you seem to have your best business, your factories are already full, and to meet customer requirements you guys are outsourcing and that obviously has a bit of a drag on profit. Maybe you're getting more repeat business without it being positive offset and you're already running at target levels.

When you talk about Europe, it sounds like it's a problem because utilization, there's softness there. So I don't know how much of an improvement we should expect from Europe until there is a turn. And then finally on the West Coast, there has been a lot of concern in terms of what their demand is for a lot of the tech companies, which are your customers, and so it's not clear to me that there's going to be any sort of demand improvement there.

So really, if you guys can't sort of balance out utilization across your facilities, given the capabilities that Ron talked about earlier, I'm just trying to understand how you might get material margin improvement as we go forward here. It strikes me that where you're already doing well, that's where things are good, and where you have problems, it's not clear to me that there is any sort of solution coming until we get a demand pickup there. Is that a fair characterization or what am I missing?

Well, for one, we mentioned and haven't really given a full answer either on this outsourcing. A lot of these medical and pharmaceutical systems have a huge amount of stainless steel, and especially treated stainless steel, because these are typically either very, very clean systems or aseptic systems, that we didn't want to invest the capital equipment and hire and train the manpower to do that work in-house until we had a feeling as to how big and how stable that business was going to be. So we relied a lot on subcontractors to do that work that have specialty capability there.

But now, having a much better insight into this business, we of course very quickly will this fall bring all that capability in-house and probably substantially reduce our outsourcing. So that definitely adds to our bottom-line margin.

In Europe, you are absolutely right. We have a bigger job and really what we had to do there is we need volume, volume, volume.

Got it. Okay.

Maybe I could just add to Klaus's comments, Marko. We do expect improvement. I think that we're in that awkward situation where we want to make sure that there's caution out there with respect to the second quarter. Clearly, we don't expect to have million dollar cost overruns in Europe going forward, so that's an improvement that's built in right there. I think we are indicating that we are winning business in those operations, and we see improvement from that perspective. We've also moved -- and I think we will see benefits from the steps we have taken on the West Coast, we are winning business, as we talked about in our presentations there as well.

Clearly, our larger facilities we say have come up the curve quite dramatically from where they were even 6 to months ago. It's taking a little bit longer to get these other operations up the curve, but I think what we are saying is that we are moving in that direction. But we do expect to see improvements. Unfortunately, the second quarter because of seasonal factors will be a little bit slower, but we do expect to see the acceleration through the back half of the year.

My last question has to do with working capital -- consuming an enormous amount of cash during the quarter. And I'm just trying to get a better sense of what's happening here from a business standpoint. Are your customers being more demanding in terms of terms or is this stuff that you negotiated when you got the orders and now that it's flowing through, you're still stuck with terms and maybe they got better?

I also notice that your cost and earnings in excess of billing on the adverse liability, I mean there seems to have been quite a big cash delta between the two of those items. And again, maybe if you could give me a qualitative feel what's going on with respect to your interactions with your customers that may be affecting that? Or is it just simply timing issues?

I'd break it down into three parts. On the systems, where most of the working capital is employed, it really relates to timing issues within the flow of work. In the solar area, it's because of Photowatt's success there. They've been building rapidly and also we've already alluded to the fact that they have also followed very high inventory strategy related to some of the raw material.

Precision Components had higher working capital than we anticipated in the quarter. They typically build inventory before the shutdown period, and as we mentioned, there was a slowdown in order releases at the back half of the quarter, and that resulted in higher than anticipated inventories.

Okay, great. Thanks.

Just to complete the question on the Thermals side, that revenue is approximately 2.6 million.

2.6? Thank you.

Cherylin Radbourne from RBC Capital Markets.

Most of my questions have been answered, so just a few quick ones. In your outlook section, you do mention that your seeing some customer delays in placing orders. I don't recall you making that comment in the fourth quarter, so I was just wondering whether that was a new development and whether you think that's a result simply of increasing order sizes that require a more rigorous approval process or whether this is a response on the part of your customers to some mixed economic data?

It's a difficult question to answer.

It's a mix of both, actually. I'll give you one example for instance. We had a very large order in the neighborhood of I think it's $25 million or so -- 25, $30 million -- that we received from one of our medical device customers. But it was an extremely difficult project to work out in terms and conditions and also to define the aspects of the systems, since this ultimately will be six individual manufacturing systems.

So rather than delay the whole project, we asked the customer to at least give us the funding to design the system. So finally after three-quarters of a year, the final negotiations had been completed on this big order; we had already designed this system, so we are ready now to start manufacturing. So, of course, while we didn't show an awful lot of revenue during that time, but at least we got ready to jump on the manufacturing of the system the moment we are ready to go. And we are ready to go on this now.

That is one of several incidents where momentarily we slowed down a little bit because of the inability of our customers to come up to the table with the proper financial arrangement in place.

This is not a new trend, coming back to your original question. I think it's something that has been in place for sometime.

So there was no deterioration or anything like that.

Definitely not.

Not really -- no, no, no. It's just -- like I say, with the change in the client mix, okay, we have to go through some learning curves ourselves and they have to also go through a learning curve with ATS, making sure that of course we are the company of choice, that they can place $30 million worth of work and be assured that this is a low-risk investment for them and pays off for them.

Just bouncing over to the Photowatt business for a moment. Can you comment on whether solar prices are increasing in proportion to the rise in silicon prices or in fact is there a risk of margin compression there?

We actually think that prices for us will probably rise more quickly. And the reason for that is some of our shipments in the quarter actually reflected the fact we had entered into some longer-term commitments. The actual world prices for new orders are actually a little bit higher than what we were shipping out in the quarter. So we should start to see those benefits. In addition to that, the prices in the world markets are rising because like I say, everybody buys silicone and everybody has to deal with the same cost. It's a law of supply and demand; with demand very high, the market pricing environment is much more elastic.

I take it there could be some benefit for you because you have started to stock up on silicone in advance of some of the price rise. Would that be accurate?

I think that's partially true. I think it remains to be seen, obviously. But our overall goal was to mitigate it. I think one of the big advantages, as Klaus said, is that SSP -- it makes the economics of SSP more attractive versus the traditional technology because we dramatically reduce the amount of silicone.

Over to PCG, notwithstanding the contracts where you are trying to negotiate price concessions from your customers, can you tell us what the outlook is for new contracts at Precision Components Group ? We haven't heard anything in a while.

There are not a lot of activities in the core Automotive group. In some of the medical applications, the quoting activity has been fairly steady and there are some new programs ramping in that area.

Last question for me just relates to the Thermals divestiture. Have you hired financial advisers to manage that sale? And I'm also wondering, given that the market is shifting to Asia, do you anticipate being able to sell the fixed assets as well as the intellectual property or just the intellectual property?

We expect that we will sell the asset base in its entirety. We have not hired financial advisers -- this is not a big business; it's as much a product line as anything. Quite frankly, the economics wouldn't dictate having a financial adviser come in. This is not a complex transaction we are in discussion people about, so it doesn't make sense.

Thanks very much, guys.

Pierre Terrisse from Dejardins Securities.

Good morning. Carl, you explained why the consumption in working capital. But in the upcoming quarters, obviously it seems like it's going to reverse itself, but do you expect to be cash flow positive?

In the next quarter or so?

Yes.

There's a potential for a mild increase in cash usage in the next quarter, just as we look at the timing of the projects as they flow through.

Ron, I wanted to know your margin in Solar has been trending really nicely. It's again up, obviously year-over-year, but sequentially. Do you believe that the current level of margin is sustainable? What's your view on a going-forward basis?

As I indicated in the earlier question, I think that -- take the second quarter of it because of the seasonal factors, and I think, yes, we are continuing to drive the business higher. We can sell everything we can produce, so we are going as hard as we can. And we are also continuing to do the things that are appropriate to increase our yield efficiencies and those types of things. So that is what has generated the very positive margin performance we have had, and we are not stopping. We are continuing to push forward. So given the current demand profile, which we expect to continue to see in solar, yes.

(indiscernible) the other question -- I was late on the call. But in the System group, I look at the revenue base; it's been growing really nicely year-over-year -- 124 million -- that's up almost 20 percent, but your margins are flat. So what is the explanation on the year-over-year basis?

I think what we talked about is that we are seeing uneven performance within the various operating units. So I think the big thing is to -- we have some of our larger, more established divisions, which are driving the revenue growth in our performance; some of the smaller divisions are underperforming; and the West Coast needs to come up the curve and Europe has been soft. So we are in a recovery phase in an industry standpoint, and unfortunately it doesn't happen everywhere at the same time.

One last question. If we look at your backlog at the end of the quarter, can you quantify or give an indication how much is related to existing customer or repeat systems?

We haven't done the analysis, but there is a good mix in there I would say. Obviously, the bulk of our backlog is always comprised of repeat customers. I think historically that percentage has been in 80, 85 percent range. And our shift into health care in the last three years has really gotten to the point where that number is probably not inconceivably to be consistent at this particular point in time.

They've also become repeat customers (multiple speakers).

Thank you very much.

John Novak from CIBC World Markets.

Actually, it's Mike Welmsey (ph). Just had one more question on the Thermals business. Is it going to be included as a discontinued operation or is it not material enough?

I think that at this particular point in time when we are going through the criteria, we don't think it's appropriate to be treated as a discontinued operation. That situation may change as our discussions progress.

Of the solar business, can you estimate what percentage of your sales silicon cost represents?

I don't think that that's a figure type of data point that we would likely disclose. It is a substantial portion of our material cost within the business.

With the increase in your health care backlog, is there any risk of hitting capacity utilization or is there still a lot to grow there?

Certain of our facilities are, as we said, running at high levels of utilization; there are other ones that are not. It's a matter of balancing, I think is the answer.

Okay. Sorry. Must have not caught that. And then Precision Components Group. It looks like it's probably going to be a loss the next couple of quarters. Is there any target quarter when you think it might be back to profitability or is that too hard to estimate right now?

We're going at this thing as aggressively as we can. I don't know, Bruce, if you want to add anything to that.

When do you see light at the end of the tunnel?

Well, I would like to say Q3, and if all things go as we plan, it would be Q3. But there is an awful lot of variables that are still unknown at this time, as far as response from customers and market pricing.

Great. Thank you.

Glenn Jamison (ph) from McFarlane Gordon.

Ron, I just wanted to ask one more question related to operating margins in the Systems group. Can you give me a sense for the revenue in this quarter that was generated in those facilities that you say have operating margins in the mid-teens -- can you give me an idea of what percentage of your total revenue came from those types of facilities? And I'm trying to understand for the facilities that aren't operating at those margins just how much improvement they require in order to get up to your targeted levels.

I haven't done that specific analysis, so I can't give you an answer on that right now.

Klaus, you've made a decision with the Thermals unit. Are there any other entities or assets within Precision Components that you would consider divesting of if you don't see an improvement in the next little while?

Really at this point, Thermals is the one and only. And of course, when we got into this business, we got into it under tremendously different expectations. The very rapid shift for all the computer makers to go to Asia and source in Asia, of course, came as a complete surprise to us when we planned this thing three or four years ago. We had developed an excellent product, very price competitive, very performance competitive and so on.

But a lot of Asian imitators now have taken -- really stolen our IP and are making this thing at a substantially lower cost in China and related countries and so on. So obviously, we have no choice but to divest of the manufacturing base here in Canada and follow the stream. Of course, while we are doing this, we are negotiating with companies that already have manufacturing facilities in China. We can then seamlessly transfer the entire manufacturing operation over there, help them integrate it, get it running and divest of it that way.

One last question for Ron. You had said that you have a set a drop-dead date in terms of recognizing the operating expense for the new Spheral Solar facility by mid-calendar '05. Can you give me an idea of what your best guess is at this time that incremental expense will be on a quarterly basis?

I don't today have that. I'm not sure -- first of all, the amortization will start at that particular point in time, primarily on a units of production basis. So I would have to give you a forecast of revenue in order to give you that number.

But in terms of, say, direct operating cost, people cost, do you have a sense of what that might be?

Not at this time.

Thanks, guys.

Jay McKinnel from Raymond James.

Most of my questions have been answered, but just a couple of detail points. On SSP, can you give us an idea of the remaining investment amount still to be spent before the plant comes on stream?

We haven't changed our overall estimate of the cost of the project. We've given you the spending to date -- it's in the MD&A, so I think you can look at that.

In the Precision Components Group, is the power seat subassembly contract, is it ramped up to its target volumes at this point or is it still building?

It's still ramping, as we get through the summer slowdown period, obviously, and it continues to ramp through the fall.

But it's on schedule.

It's on schedule, yes.

At what point will it hit its target annualized run rate?

It would be at really the end of Q3.

That it for me. Thanks very much.

(OPERATOR INSTRUCTIONS) Cameron Jeffries from CSFB.

Just a couple of housekeeping items. Ron, you mentioned some cancellations that might have popped up or something to that effect. Is there anything material in the quarter?

In fact, I said there were no cancellations in the quarter, no.

Sorry. I must have missed that. Secondly, on the third-party, you indicated 47 percent this quarter. Can you remind me what Q4 was? Do you have that number with you by chance?

I can, yes. I said that the 47 percent this quarter was actually driven primarily by subcontracting. In the fourth quarter, it was about 48 percent. The rise was really -- it was actually a drop in the third-party content excluding the subcontract and the subcontract (indiscernible).

Great. Thanks.

David Tyerman with Scotia Capital.

A question on the PCG and the margin changes here. You have mentioned pricing, labor and outsourcing as all gains, and you have put some numbers against some of these things. I'm wondering if the stuff is going to hit pretty much immediately. It sounds like pricing should right away; the labor should fairly quickly, I would think; and the outsourcing presumably takes a little time. Is that how I should be thinking, so I'm going to be getting some pretty material pops right away and then a tail of additional improvements?

I think that we're looking for some meaningful improvement on the labor side through the second quarter. The price increases, obviously, that we talked about are in place now, so we'll see those in the second quarter. And you're right, I think we'll see the benefit from the outsourcing increase over the period. And obviously, a divestiture of Thermals would be an immediate pop if we complete that.

Right. But you can't give us a sense of the impact there?

I think it would be premature to do that.

Just on the Thermals, I'm not too clear, maybe it isn't clear -- do you have any sense of timing on this at this point?

As soon as practical. I think it's very difficult to put a time line on this, but as you know, we are not messing around. We are trying to move forward as quickly as possible. We have made the decision; now we have to complete it.

In terms of the other parties, do you have any sense that this can move quickly or provide any insight on that?

That is pure speculation and I don't think it's worthwhile for me to comment on that.

Fair enough. Just on the non-cash working capital, it is up a lot, and it sounds like it's going up a touch more. Are we at a new level or does it come down some based on the current run rate on revenue?

If you look at it as a percentage of our activity of business, we are actually below some historical points. Have been working on working capital efficiency over the last couple of years and I think improvements have been made there. However, from period to period, you always have kind of chunkiness due to timing and project flow.

So as a percentage of revenue, you're kind of running in the 20s now, and you're right, Carl, you were way, way higher in the past. Is the 20 sort of where you are now, you think, going forward?

We use a measure of trailing revenue, and it has historically moved between 30 and 40 percent and we are in the low 30s at this point. As I said, I think we have made some permanent efficiency gains in our approach to working capital, but it could drift a little bit higher.

But is that the target range you are looking at?

Yes.

We would like to see it lower, obviously.

Absolutely. And when you say trailing, are you looking at 12-month trailing type of stuff?

Actually, its 6-month trailing and we annualize it.

That's helpful. Just tax rate and CapEx, any insights on that going forward?

Tax rates we think will be relatively stable unless they change the laws. CapEx, I think we talk about that in the annual report, which is available today. That's posted on C-dar (ph) and I think it's being posted to our website today as well.

Last question for me was on the SSP. I think Klaus mentioned 3 to 5 megawatts of capacity being ramped up to on these first commercial products. That sounds meaningful and it sounds like it's happening over the remainder of this year. Why wouldn't you be recognizing revenue in Q4, and I think that's what you originally were suggesting was possible. Has there been some slippage here?

I didn't say we wouldn't be. Somebody asked -- under the CICA requirements, there is a requirement that you should also, in addition to having criteria based upon your output level, establish a drop-dead date so it doesn't go on forever. regardless of whether you get the output requirements or not. What I gave you is the drop-dead date that we've agreed to, which is mid next year. But clearly, we have certain criteria with respect to output levels on the processes that will get us over the hump.

There will be some initial revenue, simply because we will get some yields out of the process before they're at the point where we've gotten to this initial level of performance. It's not like you start up and all of a sudden everything runs (indiscernible). You're going to get some very low yields as processes come up, which will allow us to generate some revenue. That's the issue.

Is your view, Ron, then since you've guided, I think, in the past that you expect to lose money initially -- and even when you switch the flip the switch on the financials, that whatever -- presumably you're losing money then in the initial stages before you flip the switch, that that will just be capitalized and start to be amortized after?

Exactly. Under the accounting pronouncements that are in place in Canada, we would basically include those costs as part of our deferred development and the revenue that would come in on it would be as a reduction of those deferred development costs. And when we get to the criteria, then they would flip over and we would start to report on an operating basis.

And that all goes in your guidance of about 100 million for the project?

Yes.

Super. Thanks very much.

Marko Pencak.

Two questions on solar. First, those deferred development costs, are those the showing up in your balance sheet or PP&E or other assets?

They're in both places, so the fixed assets would be in the fixed asset category and the deferred development would be in the other assets.

On Photowatt, can you tell us where you are in terms of capacity utilization from a physical perspective?

We're expanding capacity, but right now we're running at capacity.

But you say you're expanding capacity and you expected that to come onstream when?

I think it will come on in a phased approach. It doesn't all of a sudden flip the switch there. We are talking about productivity improvements and you add in an additional piece of equipment and we get a step in our capacity. So I can't put a pin in the point where we are going to all of a sudden see a jump in our capacity. It's going to be a gradual increase.

So basically, over the next couple of quarters and aside from the sort of August seasonality issue you've talked about, but just conceptually, the only revenue chase (ph) that we would see would just be a function of pricing. Because you really can't jam out any more volume?

We still can, Marko. (multiple speakers) The plan is with the equipment that we mentioned earlier, that's going to be put in place in the next two months, I guess. That allows us to get well over 30 megawatts of production out of that building. Which remember when we invested in that business, it was about 2.5 or 3 megawatts.

Right. So by fiscal Q3, hopefully that stuff should be in place and we should start to see the ramp going into Q4?

Yes.

Thank you.

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

Operator, thank you. If there are no further questions, please be advised that our annual meeting of shareholders will be held one month from today on September 13th in Kitchener, Ontario. Our annual report and information circular for the annual meeting was mailed this week and should be arriving at your doorstep shortly. Hope to see as many of you at this meeting as possible. Thank you very much for listening today and goodbye for now.

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