ATS Corp (ATS) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. 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. 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 Reports. ATS disclaims any intention or obligation to update or revise these forward-looking statements.

This call is being recorded for replay purposes on Thursday, November 4th 2004 at 10 AM ET. I will now turn the call over to Mr. Klaus Woerner, President and CEO of ATS. Please go ahead, Mr. Woerner.

Thank you, Operator, and good morning ladies and gentlemen. Joining me today are Ron Jutras, Bruce Seely, Gerard Bain and Carl Galloway. There's an overview on our performing results, and I would like to say first that Automation Systems and the Solar Group have performed very well, even though the second quarter's usually our weakest period because of our summer holdings setbacks. The case of ASG has achieved the substantial acceleration in operating earnings. The [inaudible] our [lower] group delivered healthy profitability, despite losing a month's production due to European summer plant shutdowns. The same, disappointingly, cannot be said for our Brazilian components group.

Here is a combination of a rapid rise in the value of the Canadian dollar, and reduced shipments tied to substantial inventory adjustments by automotive customers -- both offset significant progress linked toward reducing expenses and passing raw material costs [inaudible] The net result was a substantial loss for our ongoing PCT operations. With that said, I'd like to offer some more detailed analysis group-by-group, beginning with Automation Systems.

ASG operating earnings surpassed $10 million level for the first time since the quarter ended June 30th 2001. And we're 6 percent higher than the first quarter of this year, as the result of strong operating margins. This is particularly satisfying, since the summer quarter is generally our most challenging. This shows that the recovery is starting to extend beyond just our larger facilities in Canada and the US -- which, as you know, [inaudible] utilization, and therefore margin [inaudible].

Our operating margins in these facilities are continuing to run at their more normal rate -- in the mid-teens. But now we are beginning to see the benefits of improved performance in a number of our other locations. For example, our West Coast operations, which as you know is under new management, showed significantly improved performance over both the second quarter of last year and Q1 of this year. It's still not contributing anywhere near full potential. We should expect further improvements in future quarters. However, we are satisfied with this progress for the time being, from an operating and sales perspective.

We expect to see further improvements in margins and earnings in Q3 and beyond, based on stronger backlogs, improving utilization, and better assets use. In fact, the West Coast sees currently two very significant orders. One, in the quarter, totaling almost $37 million of new business for ATS. These orders are in the flat-panel display segment, and are for the same customer -- a long-term key account that we have served for many years.

Our Asian operations were also for this year our least substantial new workload. Our West Coast operations also received a $5 million healthcare order for a new customer that was long-late in the first quarter of this year. This is an order to build the high-speed manufacturing system for drug-delivery technology. This success reflects our strategic objectives to broaden the customer base of these operations into healthcare.

Equal amount of effort was into the turnaround in the West. Not only have increased the time to trade and assimilate the new management team in improved organizational processes to support higher efficiency, product [inaudible] and profitability. It also supports strategic sales activities to broaden the operations market opportunities. The contracts I just mentioned are prime examples, but they are higher order backlog. We're reaching to grow our earnings in the West during the second half of the year.

ASG's European operations also saw improvement in the quarter from the end of Q1. In spite of summer plant shutdowns and ongoing economic challenges in the region, one of the underlying highlights in Europe is the implementing we are now gaining with our standard technologies. ATS's SuperTrak and SuperBot is starting to catch on with European customers in a big way -- and that's support for us for two reason.

One, stem technologies further their [inaudible] GS from our European -- in our European marketplace -- giving ATS better advantage over its competitors. Two -- substantially reduced technical risk and assignments, and time to build for our NCO margin -- saving customers money.

European interest in our [sales] technology is also gratifying, because we've made technology transfer between our global facility one of our key focus areas. I'll have some more to say about ASG's technology and development later in the call.

From [inaudible] Europe, significant improvement was evident in the quarter, over Q1. But we also got where we want to be. In fact, Europe remains a challenging economic environment for our industry. With well over 150 of the world's global Fortune 500 companies headquartered in Europe, ATS's presence there is of strategic importance for our future.

Right now, our focus in Europe is on reducing costs, capturing market share, taking greater advantage of our standard of technology portfolio -- broadening our market into healthcare, as well.

ASG's Asian operations are all significantly improved, -- significantly improved performance over the breakeven results in Q1. The reason for the activity there is also picking up.

To round out the automation technology analysis, I would say we made substantial progress towards our goals, which is reflected in dramatic acceleration in earnings. This is good news, but not good enough in our view. We see real opportunity for additional improvements as we move forward.

Next, let me address the performance of our Solar Group. Photowatt lost a month of product production as a result of the traditional long summer shutdown periods in Europe. As expected, this negatively impacted shipments, while many of our expenses, of course, are fixed. Consequently, [inaudible] performance hidden in the quarter. However, we see this as temporary.

Most important, despite coping with the summer shutdown and incremental costs to bring new production and capacity online, Photowatt produced operation earnings of $500,000. This was substantially better than in Q2 of last year, when Photowatt operated just below breakeven. However, we're satisfied with the operations of Solar for the second quarter.

The key point is that Photowatt remains on track for another record-breaking year. And also positive from a mental [inaudible] -- led to Q1's record performance remained firmly intact. We're selling everything we can make.

Photowatt, like [Oliver] mentioned, photo manufacturers remain concerned about silicon availability and cost with its rising demand. The increase in silicon, silicon inventories and actively working to secure additional supply, in response to this concern. With rising Solar demand, we also expect market selling prices could absorb silicon cost increases.

As I said earlier, we continue to invest in incremental capacity increases in Photowatt, to exploit the opportunity before us. Although these increases are vastly in the quarter, because of the plant shutdowns. On an annualized basis, our target is to increase our Solar Cell production costs approximately 50 percent by the end of this fiscal year, and a new [inaudible] build up Photowatt's potential to deliver good profits.

Now some analysis on [inaudible] component performance. As you know, we made turnarounds at PCG. The nature of priority [inaudible] for 2005. That turnaround has been somewhat delayed so far because of the economic factors. The [inaudible] is [inaudible], and severe industry-wide challenges have more than offset the potential improvements we've made.

Looking more closely, our automotive customers have had to reduce their output, as a result of extended plant shutdowns by the Big 3, and the industry-wide decline in automotive unit production during the second quarter. These shutdowns have created excess inventories -- as much as 25-days' worth of extra inventory for some of our customers. The only way for them to cope was to shut down or substantially reduce their supply. The impact to us year-to-date is a significant decrease in unit volumes. However, our turnaround has been stalled because of a second and even more significant challenge -- declining value of the US dollar.

We estimate the reduced PCG operating results were $1.8 million during the year -- the first half of this year to the end of July. This is over and above the offset in benefits from our foreign currency and currency hedging, and is also in addition to substantial movement in rates we saw earlier in 2003. Clearly, tremendous challenges face the automotive parts industry, continuing to take a significant toll in the quarter. And even though we took aggressive action, it was not enough to offset the impact of these negatives, as well as rising raw material costs.

So what have we done to cope? We believe we are now close to completing a transaction and divest our under-performing [inaudible] for our products business. We expect to conclude a sale in the next few weeks -- which is why we have presented the discontinued operations.

Next, we've successfully negotiated past-due surcharges to cover steel costs -- an increase of about 80 percent of our cost exposure. We have one remaining major customer, and we're confident that the whole lot will come onboard. This will give us a relief going forward, because we'd greatly reduce our exposure to fluctuating steel costs, and it will offset the higher costs we've had to absorb this year for steel.

However, we're still coping with rising resin prices, higher transportation costs, and higher packaging costs. These are ongoing challenges in the areas that we're working on our way through.

We're generally pleased with the progress we made in updating price increases, but frankly, it takes time to negotiate this increase, and time to see them reflect in their performance. That way, it's also been made with our global procurement strategy. So far, ECG has now implemented just under $700,000 worth of annualized cost savings from this initiative.

The actual benefits in the quarter were quite low. However, they started to be realized late in September, and will have more of an impact in the third quarter, and then progress a bit more in Q1. As each business grows, and as we add savings from the $1.3 million in additional potential cost savings, [inaudible].

The main costs [inaudible] our objective of gaining $2 million at least in annualized savings, this year. As part of our program to reduce costs and to increase efficiencies, we also reduced our PCG workforce in the second quarter. We estimated this should provide an annualized savings of over $3 million in future quarters. Right now, we believe we are pretty lean and right size for incurring new business. We'll take time to gain the full benefits from all of these areas mentioned as stress is caused by the rising value of the Canadian dollar. It's by no means subsidized.

While it remains our near-term goal, it will be a major challenge for PCG to achieve breakeven short-term. I might add that we do have some new automotive business which we expect to wrap up quickly for our McAllen, Texas facility in the third and fourth quarters. This new work is for the transplant auto manufacturers. That's my review for the quarter. I'll be back shortly with some final highlights. But first, here's Ron Jutras.

Thank you Klaus, and good morning. I'd like to quickly touch on a few items that will help to round out our discussion, today. As Klaus noted, the thermals business has been accounted for. The discontinued operation. Importantly, its results have been removed from PCG for both the quarter and the first half.

A loss from district operations of $3 million in the second quarter includes non-cash charge of $3 million before-tax, of $2 million after taxes -- to write-down the value of the thermal assets to the rest of it, in net-realizable value.

As Klaus said, we're moving forward to finalize the transaction and expect to complete the sale shortly. And for clarity purposes, we're providing restated results first quarter of Fiscal 2004 and the first quarter of this year on our website. That will be available after our call, today.

Looking at our balance sheet, you'll note that thermals and our remaining aircraft assets are presented as "Assets Held For Sale," in an aggregate D total $9.3 million. The aircraft assets were sold earlier this month for a gain of approximately $800,000. This gain will be included in our results for the third quarter.

Moving to FX. You'll note the press release contains an analysis of the estimated impact that the weakening US dollar has had on our business over the past year. As you know, the US dollar has weakened, again, since the end of September. And this has increased the impact on our business.

ASG has successfully offset the previous large [unilines] in the US dollar, as evidenced by the fact that our margins for our Canadian operations are in fact running within their historical norms, which are in the mid-teens. We're continuing to improve our efficiencies, and this will help our Canadian ASU operations to continue to overcome these most recent FX changes.

PCG, however, has a greater challenge, because of its higher fixed-cost base. That makes any of the FX changes much more difficult. Our hedges will clearly help, near-term. But a successful longer-term will depend on our ability to reduce costs.

Cost-reduction initiatives we described today are well underway, and they are very important to PCG's future success, under the circumstances. I'd also like to add, the PCG management is very committed to overcoming the FX challenge, and we expect to see meaningful and growing benefits from the initiatives in future quarters.

Turning to order volumes. ASU order booking activity was unusually strong for a summer period. The flat-panel orders announced on August 26th and September 13th were the largest orders won in the quarter. A large health order for approximately $15 million was also announced on September 28th. As I said, this order was part of a customer program that originally began back in May of 2003. Twenty other orders were placed in the quarter, that ranged between $1 and 4 million. So the order activity was broad-based.

The backlog table in the press release shows the breakdown of backlog by industry. I think it's very important to note how successful we've been in our goal of penetrating the healthcare industry. This attractive new market for automation now represents a key sector for ATS -- comprising a full 35 percent of total backlog. And it's a major contributor to our close to record-high backlog level.

We also see plenty of additional growth potential in healthcare. But right now, this success makes our backlog extremely well-diversified by industry. And remember -- diversification is a key element of our long-term business strategy.

Another important fact is that the greatest increases in ASG order backlog were seen in the US West Coast, in Europe and in Asia. This is an important step in our drive to better performance and increased earnings in these locations, to improve resource utilization and higher volumes.

Order bookings since the quarter end were approximately $38 million. Comparing this to previous quarters, I want you to please note that we are reporting earlier this quarter, and so the interim bookings represent orders for a 4-week period instead of the 6 we've seen in many of the other quarters. Even so, the number's still strong. Of course, with the order backlog at near-record highs, this number is also less important to our near-term performance.

Third-party purchases were at normal levels during the quarter. Although our subcontracting costs were higher than normal, to help maintain customer delivery schedules. As a result, third-party content was 47 percent of Automation Systems' revenue.

In spite of the operating loss of PCG, all three business segments contributed positive cash flow from operations for the second quarter. An aggregate cash flow totaled $16.9 million. Investment and non-cash working capital also improved, and declined in the quarter by $30 million -- with the largest reduction coming from ASG.

Long-term investments totaled $17 million in the quarter, of which close to half was for the SSP initiative. Approximately $6 million was spent to support the team capacity expansion at Florida [inaudible]. Our cash position net of bank indebtedness was $15.5 million at quarter-end. That's an improvement of $28.7 million over the course of the quarter. We also had $79 million of undrawn credit facility at quarter-end, and our debt-to-equity ratio was at 0.1 to 1. In summary, our balance sheet remains very strong, and we believe we are well-positioned to support our current activities and future growth.

Now, I'd like to turn the call back to Klaus.

Thank you, Ron. I have 4 final topics to discuss. The first is progress in [inaudible] Solar power. As you now, our goal was to achieve initial shipments of our [SD] flex module in Q2. I'm pleased to say we did what we set out to do. Our first flex module shipment during the quarter, which was a small quantity, well-[inaudible] small quantity -- reflecting early-stage factory commissioning. But it's a first step. Our flex modules, by the way, are our first product family, and they are ideal for marine, recreational vehicles and upgrade applications.

We're really at an important junction for factory commissioning. Right now, our real challenge is to get each of the state-of-the-art manufacturing processes fine-tuned to [inaudible] speed on a commercial scale. We're making solid progress in our work, and we continue to expect that shipment volumes will be modest for now. We also expect more meaningful shipments to appear as we get deeper into the fiscal year.

We believe that demand is building for each of our target markets, flex modules, power modules and integrated working products -- both for industrial, commercial and industrial buildings. Overall, we are confident of sustained market demand for our SSP, and our ability to bring the factory to full production.

Second topic is healthcare, but most of it's specifically progress made in the ATS supply and solutions. As you will recall, we started this consulting service this past spring to help healthcare customers plan, implement and qualify their automation projects. Since then, compliance solution has -- procurement does the consult the contracts with either new customers or at new customer sites in North America. It [unfolds] more consulting contracts, and has helped [8 years. Sweden] sent $5.2 million worth of new orders from a healthcare customer. These dozen consulting contracts also provide potential, of course, for future Automation System orders.

The third topic I wanted to discuss is our roadmap for technology development. I already mentioned that we're gaining momentum, which newer technologies such as SuperTrak and SuperBot in Europe. This, in addition to significant progress we've made already in North America. Our outstanding technology has now become an important fixture of many of our projects for our customer information systems.

We're now working on several new standard technologies, which might be more accurately described as "platforms." That's saying process modules, which are ready to ship with relatively moderate configuration and tooling. The interim these platforms will address -- needs we've identified in pharmaceutical markets. And several have been launched or will have been launched by end of this fiscal year. However, we're also researching standard platforms in our other markets.

The deal that is important for our continuing revenue and earnings growth is now the balance between custom automation at each end of the process [inaudible]. We believe our move toward such a balance may help drive our margins, as well as reduce labor costs, delivery times and technical risks. Standard process modules will be built to forecast, using proven designs in both the [inaudible] assembly in one of our global facilities including in Asia.

Let me give you a couple of examples for what we understand those standard modules to be. You're all aware of the high-speed pharmaceutical inspection system order that we won earlier this year. We're currently building 4 of these systems. Demand for ATS solutions in this area is high, and with the shipment of these current units in Q3, fiscal '05 and Q1 fiscal '06, we will have launched a family of inspection systems that we have every reason to believe will be well-received.

The vaporous hydrogen [inaudible] or BHP robotic platform that we're developing for pharmaceutical is also receiving high, significant interest. This platform was featured on the cover of our recent Annual Report. Third-party market researchers yield a much larger range of applications for this technology than we had originally anticipated. These range from a variety of in-process effectiveness in bulk production, specialized back-end operational applications. We expect to formally launch its final packaging platform around the end of our fiscal year, and we have two large pharma companies lined up as probable clients.

We now know that there is significant need for SuperTrak in pharmaceutical, as well. So part of our technology will be a main goal for reversing -- revising SuperTrak documentation and making minor design changes due to pharmaceutical regulations.

We're already doing this. In fact a number of our goals now contain SuperTrak as an ATS differentiator in secondary packaging and direct-delivery devices, assembly systems and [inaudible].

We also have a number of other standard platforms on the drawing board. One case is a self-culture module for liquid biological production. We've already sold 7 such systems, all over $1 million apiece. We are only awaiting third-party market research before developing the final specifications for a well-differentiated generic version of [inaudible]

We expect to demonstrate a number of these standard pharmaceutical platforms in the next [inaudible] Interflex Trade Show in New York. It was this major venue for [inaudible]

Our final topic hasn't changed materially since year-end. While PCG's outlook, as I've already described, is current, both ASG and Solar -- the outlook for the second half is optimistic. Automation Systems backlog entering Q3 is $252 million [loss] -- close to our previous all-time record high of $256 million set in December of 2000. It's also a much better quality than it's been for some time. But it takes a higher percentage of repeat work, which supports good margin performance.

Beyond an improved economy, we believe there are 2 primary drivers for a much-higher backlog -- our successful strategic plunge into healthcare and our standard-of-technology initiatives. We expect both of these existing drivers for an even better future.

The pace of activities in North America is very strong, improving in the Far East, and we're seeing fewer model push out delays than a year ago across the board. Europe remains a challenge, and the pace of activity there is equal to other regions of the globe. But as you've seen, both Q2 work at hand has helped with the offset of this.

If trade shows are any indication of customer interest, we saw some very positive signs in 3 of the largest group of shows held in the quarter -- 2 in North America and 1 in Europe. Attendance was much-improved, and interest in ATS was very encouraging.

Overall, we believe the significant potential to build on ASG's performance. Our substantial backlog creates opportunity for better margins to improve utilization of resources, higher repeat systems content, and lower execution risks.

We also know that ASG and Solar will be primary drivers for our earnings, short-term. ATS knows how to drive results and overcome challenges, and I have no doubt we will succeed in PCG, as well.

In closing, I'd say that our significant industry leadership and strong market positioning is allowing us to outperform our competitors and gain market share. This reflects -- is reflected in our backlog, and in the size of recent orders we've won. The acceleration in earnings has started. We are absolutely committed to building on this performance in the other quarters.

Now we'd like to invite your questions. Operator, would you please open the lines to questions? Thank you.

Kevin Jeffries from CSFB. Please go ahead.

I just have about 3 quick ones. Just on your Solar. Would you expect merchants in the back half of the year to try to get back to where you were in Q1? Obviously, Q2 shut down -- crept out a little bit. But would you expect that to be kind of the return to that level?

It's Ron. Clearly, the Q2 shutdown has a substantial impact on not only volumes, but also on margins. I think if you take a look at what's happening in industry, the industry is extremely buoyant right now. I think everybody is basically enjoying the strong demand that's out there. And we're certainly seeing our share of it. So clearly, they should expect to see an acceleration in the volumes through the back half of this year as we get full production capability -- as we start to see the benefits from the capacity increases we put in place over there. So yes, we do see our margins moving back up into -- into the levels we saw in Q1.

And sticking with Solar for a second, with the SSP -- any update of what you would expect to see for capital? Do you have anything along those lines?

I think that that depends on the corporate's role of it. I think that the earliest would be at the end of the fiscal year. I think it may stretch into next fiscal year.

And finally, just on the ASG margins. I think Klaus, you mentioned in your comments that you'd expect to see margins continue to improve, there. Is that based on a sequential basis, or is that on a year-over-year basis that you're talking about that margin improvement in the back half of the year?

Both. Both.

Both?

Yes.

[John Millbeck], CIBC World Markets.

Ron, just given the raw material cost increases -- both silicon and metal -- why were you a generator of working capital in the quarter? Particularly given that backlogs are quite high, and then I would expect that the activity levels would be quite strong. Then the traditional high levels of purchase component -- it just seems odd that working capital would be a cash provider.

Actually, you're right. I think that... I think that also reflected that there was a cash outflow in the first quarter as well, John. And a large part of the cash generation we saw from the working capital sense was related to the Automation Systems group. There, we tend to see ebb-and-flow from quarter-to-quarter. So some of that is clearly temporary. But Carl, maybe you want to add a little bit more comment of the cash generation and what you expect to see from '04 going forward?

Yes, John. Certainly the project within the Systems group can have a pull, as Ron mentioned. I think as we are having some units ramp up and get some [inaudible] on trunk units and using working capital, plus it's getting stabilized as we get more in the year. Looking forward to the end of the year, I would think that we might expect to end up with cash about where it is now. With some certain business, we might invest more in working capital overall, and as I mentioned, we might have some trunking impact from time-to-time. But I wouldn't expect that the trunk impact that you could climb back to the level we were at Q1.

Second question is what is the amount of incapacity expansion that's happening at Photowatt?

As we said, the capacity expansion over the course of this fiscal year is about 50 percent increase.

But what does that take it up to, in terms of [inaudible /crossing]

That's on an annualized basis. By the time we get to the end of fiscal year. So that gets us to about 22 megawatts of -- of output per cell.

And why are you spending more of...?

I think I gave you the wrong number. It's 32.

33.

33 megawatts. I'm sorry. It's 33 megawatts. It's 33 megawatts -- up from like 22 or something. In that range.

Why are you continuing to spend on Photowatt, when before you were quite optimistic that you would eventually obsolete the technology with SSP?

Maybe I'll put my two cents' worth in, and then Klaus, you can jump in.

I think that one of the things -- the market right now for Solar continues to grow on a very, very substantial basis. So we have a current market opportunity which is developing and growing. We expect it's going to be very robust for some period of time. So we clearly have an opportunity to capitalize upon that business, and we see that opportunity continue to develop, and being robust for some period of time. That could...

What were the amount of capitalized costs for SSP in the quarter?

Do you want me to finish the first question?

Oh, I thought you did. Sorry.

I think SSP is going to be a business which is going to launch over the course of the next year its capacity. [Ink link] capacity 20 megawatts. 20 megawatts is a relatively small portion of the overall marketplace. So I think we see there's...

And the other thing is with SSP products, they're very complimentary to the ones we produce in the conventional market. So I think there's a great market position for both businesses that supports investment in both.

And lastly, just what was capitalized in the quarter?

He said that the total investment in SP was [both] half of the $17 million in capital investment in the period.

And the startup costs that -- that were capitalized?

That's included in that number. It's about half of the increase, there.

Cherylin Radbourne, RBC Capital Markets.

Just a couple more questions on Solar. You indicated now that the accounting for Spheral Solar as a production business mixed within fiscal 2006. And so I'm just wondering whether that indicates some slippage in your rollout schedule for that product?

No, I don't -- I don't think it really represents any significant slippage in schedule. I think it's -- what we're doing is we're trying... And this is a very difficult thing to call, because what we're doing is we're saying, "When do we get the specified criteria to tip us over the balance?" And I'm just saying that I think that it's going to be either in the fourth quarter or into the third -- or into the first quarter of next year -- that that's a possibility. And that's what we're expecting internally.

And in terms of the $87 million you've got on the books associated with [Spiral] Solar. When you do start to amortize that through the income statement, what type of amortization period are you anticipating?

Well, it's comprised of fixed assets. But those fixed assets have depreciation policies which are disclosed on our financial statements. The amortization period for the new development will be no less than... Will not be greater than 5 years.

I can look this up in the Annual Report, obviously -- but what is the slip between fixed assets and deferred costs? Roughly?

I don't know if I have that number. I can give it to you later. I don't have it right now.

Let's follow up on that offline. Can you give us an update on the pricing per watt in your conventional Solar -- Solar business?

Now, pricing per watt is down, year-over-year. So if you were to take a look at the pricing the second quarter of last year versus the second quarter this year, the pricing is actually down. But we are seeing now price increases which quite frankly weren't a significant factor for us in the second quarter because we basically had sold second-quarter's volume. We do expect to see some improvement -- some increase in pricing in the third quarter, and potentially into the fourth. Just simply because the demand is so strong.

And are those price increases going to be sufficient to offset what's going on with the price of silicon?

That's what we... We -- we clearly expect that. Yes.

So I think the price of Solar per watt last year was in the range of US$3 a watt. So how significantly is it down from that level?

The pricing is down probably in the neighborhood of 3-6 percent, I would say -- first of the year.

Then just a question on foreign currency. You indicated that your effective exchange rate during the quarter was down 7 percent, year-over-year. I was wondering if you could give us the effective exchange you used during the quarter.

Yes, Sheri, this is Carl. The effective rate in the second quarter was approximately $1.33.

And you've got about $100 million worth of hedges on the books at a similar rate. Can you tell us how far out those hedges extend?

It's probably out two quarters to half a million more.

Pierre Yves Terrise, Dejardins Securities.

Question regarding ASG. Nice quarter you carried in consumer. automotive is down. So why don't you give some color on that? In light of your backlog, as well -- where automotive is down. Should that be a trend, going forward? Do you see more activity in your...? More bidding activity toward healthcare and consumer-related type of end-market? And we should see a trend downwards in automotive? Could you just expand on that?

Klaus, here. We didn't mean the down trend in automotive. It's really only a reflection of an up tick in especially the healthcare and pharmaceutical markets. Remember, 3 years ago, these markets accounted for virtually zero of our sales and profitability. But also, of course as you know, too -- automotive has had a rough couple of years.

But we certainly will not give up and are not giving up on automotive. And we're looking at several very large contracts to come into -- into house in the not-too-distant future, and so on. And we are very actively involved with quite a number of the larger automotive component suppliers and so on. So certainly our policy has not changed at all, as far as automotive goes.

In fact, we've also because of our SuperTrak and other tooling programs that we've initiated, we've been single-sourced by a number of -- of these customers. Which is virtually unheard of, in the industry. So we're still making very good progress in -- in -- in automotive and -- and enhance our reputation in that business, as well. As for the other markets, of course, it's full steam ahead. And as I mentioned earlier about the new platforms, we're building them or designing for these sectors. Okay? We expect them to pay off very well in the -- in the next year and so on.

One last question. You decided to divest your thermal business -- non-profitable business. But if I look at your precision component division, over the last about 4 years, operating margin has averaged between 4 at best years, and 2 percent in the bad years. Are you currently evaluating potential to divest entirely the operation? Is that something that is currently contemplated by management?

Currently, all efforts are on turning it around. Really. Except things that we've decided to diverse. The thermal business -- we do not at least see a long-term future in that business. But of course, our metals and plastics operation are very often also very tightly connected with our existing customer base. And of course, to make a move fast to divest of these businesses would be -- would be very delicate. We'd have to be very -- approach it very delicately.

We've certainly not given up yet, and have a lot of plans to make the components group profitable again. As you know, in all [inaudible], we'll never reach uphill profitable levels -- profitability levels as we do in -- in the -- Automation Group. However, the two businesses are very, very closely [inaudible]. One helps get the other one business. There are strategic workings that the [inaudible] group has for the whole business. But certainly, we're keeping all options open despite all of our best efforts are really -- we're very, very concentrated on turning this thing around. If we cannot turn it around eventually, then we'll definitely look at divestiture.

In this context, do you think a link between the two businesses...? Would it make sense maybe to have like a specialized division concentrated on new-product introduction, in precision components, and the volume being manufactured by -- elsewhere? By a third-party? Instead of you guys carrying the operations?

Well, for instance, we are exploring now of course manufacturing opportunities in China. A couple of our customers have come to us and said, "We're building up a larger capacity in China. It doesn't make a lot of sense saying that their product's from North America and from China -- for assembly into products there. So of course within the year, we'll be having -- we'll be operating a manufacturing business in China. And then of course, are exploring at the same time what other potential that we see.

Marko Pencak, GMP Securities.

The order strength you see in North America. Should we expect a continuation of the kind of change in composition by industry segment that we've seen so far? In other words, is it primarily healthcare that continues to be the key driver, there?

Not totally, Marco. Because I mentioned before that we're also seeing good opportunities for gain in the automotive sector, and so on. But as I can say, we're not favoring one sector over the other. Now of course we have a sales-and-marketing staff that are partially trained to sell in automotive, partially trained to sell in the healthcare and pharma markets. Everybody's going full blast again to make maximum impact on these segments.

Given the rise in your healthcare business and looking at your working capital cash interaction -- I mean the realignment in the move that was [inaudible] billings and estimates of costs and earnings. So my question is, is it the fact that you've now got more healthcare customers who are not under the same sort of financial pressure perhaps as automotive, that you're actually seeing a change in sort of the payment terms, and therefore your cash-conversion cycle? Or was the -- the shift that we saw in the quarter really just a timing phenomenon?

I think it's very difficult to gauge that, Marco. Just because of juncture. Clearly, we don't deal with business in that sector [inaudible] in terms, so there's clearly some of that. So if you see that mode of [inaudible] now, you're going to see that benefit also come through. But I think it's a little bit early to say whether this is... What the impact will be from a cash flow standpoint on a go-forward basis, longer-term.

Do you previously... When you've had very strong booking-to-backlog activity, one of the challenges I know you've run into is you tend to get bottlenecks in certain parts of... In certain facilities. There are certain parts of operations which cause your requirement to outsource to go up.

And I'm just... If you could maybe sort of from a qualitative standpoint describe to me the surge in business that you've seen. The strong quarter. And notwithstanding on the efficiency, maybe you should mention in terms of margin expectation. But I men to process all this stuff and... I guess with customer delivery expectations, what do you need to do sort of from a -- from an execution standpoint?

Oh really, very, very sharp project names -- but there's really the secret of the success here, Marko -- if you -- if your project shows danger of slipping anywhere -- whether it's a 9 or a 1 on the [TechNet] execution centers and so on -- we had to become -- be very, very aware of that, of course. We act extremely quite [inaudible] Today's climate certainly, certainly on-time delivery is more important than ever.

I guess where I'm going with this is, you -- you commented last quarter that your core sort of facilities -- Cambridge, et cetera were -- basically working full out of achieving your targeted margins. You had X-capacity on the West Coast, which seems to be improving. Asia seems to be improving. Europe's still week.

Do you characterize that? Those tons of orders. Rotation activity in North America, Europe still look off. So really what I was trying to figure out here is while I understand you need to respond, I just want to get a sense... The thing I'm trying to understand is to make sure that there aren't going to be all kinds of additional costs you have to incur, given that you guys are already sort of going full-out, where you seem to be the busiest.

As I said in my comment, Marco, the biggest jumps in backlog came in the divisions where we needed it the most. So the biggest jumps, as I said, came on the West and in Europe and in Asia. So in actual....

Capacity is always with us.

In actual fact, you know, the backlog did not grow in the Canadian and East operations in the quarter. So clearly, we're getting a better balance in, so that helps us. But clearly with the rapid rise in the backlog, it's not unrealistic to see that we need to see some of our contractors [inaudible] sneak up a bit.

On the other side of it, we've expanded the loading of our internal resources, as well, which allowed us to fuel another -- that -- that particular issue. And I think we're also looking at using some of the -- the additional space we have available in the A&D factory, as well, for taking advantage of that source we've used to support the growth.

My last question has to do with Solar. You mentioned that the margin compression that we saw in the quarter was a function of adding the capacity. Were there actually specific costs that you expensed as opposed to capitalized, associated with the capital expansion during the quarter in Photowatt?

There would be costs associated with respect to commission in the quarter. And there's also great processes up. It's not the consumer. You're going to incur inefficiencies. Those types of things. So we're making good headway with those. Those got installation and intensely concentrated on during the shutdown, obviously.

And on the Spiro business, you talked about your first commercial [sale on] flexible product. You've talked previously before that the big opportunity that you see is on the building [inaudible] and photovoltaic segment. And really just wanted to get a sense of where you are with your sort of larger-scale processing or running through the larger-scale material through your equipment. Because as you said before, that seems to be the precursor for you to be able to move to the next step with some of your perspective target discussions. Maybe if you can just give me an update on that. Thanks.

Okay, Marco. The entry into the pole modules is really -- it was a bit of a longer, drawn out process than the entry into the flexible products. And the interest in the recreational market and so on. Because the permits requirement is relatively low there, and short-term. So we have already a number of these power modules on test, collecting data on them. While we're finishing up our production capability, we're of course -- like I say -- we're creating the market for the eastern model.

So then toward the end of this year or early into next year -- we'll be in a position then where if it permits -- we have the customers lined up and we have the volumes defined, then we can then go big-time.

But the... I guess what I'm trying to understand is, is the equipment now sufficiently qualified, that you guys can actually process the larger-scale product at reasonable volumes? Which would reveal support through sort of distribution [inaudible] down the road?

We can produce the -- the modules. But we can't produce them in the mass-production environment, yet. It's really still low -- low volume production of the power modules, at this point.

And when would you think that that equipment would be -- you'd be in a position -- if you had the demand to really create it? Would that still be... Your fiscal year-end target, you mentioned?

Towards the end of fiscal year. Yes.

David Tyerman, Scotia Capital. Please go ahead.

On the backlog, I was wondering if the backlog as it stands right now, if you're having normal historical margins, which I think is probably [inaudible] kind of level?

As I think we've indicated, I think that's a fair synopsis, based on this. As best we can call it. Simply because we have a better mix of repeat and repeat systems. We've also got a better spread in the backlog across the services.

And on the FX side, do you see FX impacting the backlog for... It seems like it's stuck in a period of rapidly rising Canadian dollar, here.

Our backlog that's reported stated the ending rates of the quarter. In fact, if you took the exchange -- you probably took $8 million out of the backlog, then the backlog... If it dropped during the quarter. But clearly, the big thing with the backlog -- a lot of that is hedged out.

So that's it. We -- we hedged out the -- the lion's share of our backlog, so it offsets that deterioration.

So it sounds like the FX -- if there's any, really, it's largely on this that you're reporting today?

Yes. Even -- we even hedge into some of our high profitability closes, as we call them.

Yes. I confirmed heading on as a call a couple quarters ago. FX was a problem for a few quarters, as we saw it.

There's no question that FX and the weakening in the dollar has an impact on our business. But what we've done is we've offset that. So we've modified the impact of foreign currency in whatever results would've been if we'd had last year's exchange rates.

So if the exchange rate drops, it's going to have a -- an impact behind that. It's how do we cope with that.

But it doesn't sound like the profitability of the orders backlogged would be [inaudible]

That's correct.

Just on the PCG. I was wondering, would you -- do you expect to have a loss at the end of Q4 or Q3?

We haven't put a number out for the second quarter. I think that's [inaudible] I think we'll be to the breakeven, near-term.

Just on the SSP -- I think Klaus mentioned you see some demand there for the product. I was wondering if you could put some color on that. Is it that you have a lot of people interested, or do you have actual concrete cases? Or is it the concrete cases don't happen until the product [is mobile]? How does that all work out?

Just to go back a little bit, I think that one of the challenges we've had over the past year, moving forward and -- and taking firm orders -- has been our ability to get good-quality sample parts out of the factories. So that's one of the things that has accelerated, now, as a result of where we're at. And we're moving forward with our parts enrollment. We've done a number of the integrated products, as well. We have a lot of people that are extremely excited about that and are anxious for us to get to the point where we can commit to volumes.

On the subject that actually shipped. What channel did you put that through?

That was a direct sale through a districting channel. We -- we actually went through a distributor. Very low volume.

Two other questions. Capex for '05?

I think we changed our guidance on that. Carl, do you want to...?

Yes. We don't have a... We don't expect CapEx to be any different than [inaudible] the year. [inaudible] CapEx moving down in the back half.

And then on the factory side? Any [inaudible] there?

Not that we can foresee.

Jay McKinnel from Raymond James.

My main questions have been at least partially answered. Let me just try a couple again for clarification. At your Analyst Conference in the spring, you indicated that your target for operating margins for the System Group was in the mid teens level by the end of this year. I think that's what you stated. So I just wanted to ask again, given your current backlog and so on, can you feel that -- that you're on track for that?

I don't know that it would be necessary to put a timeline in that, but I think we're certainly moving directionally in that way, as we said on the call earlier. The larger operations on the East Coast and in Canada are running at those levels, now. The greater dispersion of the backlog will allow our operations in... some of the operations which have lagged to... To pick up the pace and move direction that way. So I think we're certainly moving that way, and we're -- we're pretty comfortable in our ability to get there. Whether we actually get there for the end of the -- the [fiscal] -- I think there's a good chance.

I think you've -- you've stated quite clearly that the -- the -- the main Canadian and Northeastern US operations at or close to the target levels, now. And I guess you've implied that the Asian operations are now running ahead of breakeven. What can you tell us about the sort of the absolute profitability of the US West Coast and Europe? Are they -- are the profitable, at this point?

We saw marked improvement in the US West Coast operations over the course of the quarter. And we were very pleased it. And we were profitable by the end of the quarter.

And Europe?

Europe? Again -- I don't think it's the right quarter to judge it, but we were not profitable in the second quarter. And don't forget -- we lose a lot of production in the [inaudible] in Europe because of basically the vacation schedule. The month, there. So I don't know if it's the right -- the right gauge.

Just moving on to PCG. You said that breakeven will be difficult in the near term. You talked a little bit about possible alternatives eventually, if -- if -- if breakeven is -- is elusive. Can you give us some sort of timeframe for sort of an outside date that -- how long you'd be willing to -- to struggle with this, before you look at other alternatives?

At this point, I really -- I mean it's difficult to project or even speculate as to what we would do if the present initiatives are unsuccessful. Because we fully believe that the present initiatives will be successful.

[inaudible / crossing] I don't want to jump in 50 directions, but I know the one is the obvious one to go down, and of course, we... As you well know, we have other challenges and ideas right now. We're continuously improving the -- the automation systems group. The SSP, of course, is still a challenge. There's no question about it -- for a lot of people in this company. And we -- we have set ourselves firmly on turning SCG around.

If I might ask. If the current initiative that -- that you've described don't do a good job, do you have another sort of list of -- of subsequent steps? Deep -- deeper cuts -- that sort of thing, you could go to?

Fall back? Yes. It's -- but it's like I said. We really want to go with Step 1 before we even think about Step 2.

And lastly, just on SSP -- I understand that for -- my understanding is that there are certain industry bodies, both in the US and Europe that -- that perform independent technical testing on -- on TV products. And I guess Underwriters Laboratories also gets involved for -- I believe it's building-related stuff. Could you tell us where you're at in -- in -- if anywhere -- in the testing with those independent bodies?

As I mentioned earlier, already -- we're in the middle of testing these power modules, which require laboratory improvement -- approval, I mean -- to make sure that they're safe to use and they all comply with electrical specifications. A lot of data, of course, applies to the recreation market. Because there, typically your -- your power output or power generated is in the neighborhood of 24 volts. Whereas of course in the power modules and the volt uses are -- are also relatively low. Prior to going to the [inaudible] but of course the power loading is phenomenal. We have to reach up to the regulatory approval stage first before we can -- before we can obviously sell in large numbers. But you know, that's all part of the schedule. So there's nothing unusual in what we're doing, right now. It's just one of those steps we have to approach.

And of course we couldn't produce power modules in numbers until we had the basic SSP factory put together. Because the prototype line that we initially salvaged is not capable of building these large power modules.

So the testing you refer to does involve certain independent groups?

Yes.

In addition to Underwriters Laboratories, if that's the group you're talking about -- which I guess is concerned with the safety side -- have you been doing the -- are there other independent groups that are looking just at this sort of technical performance of the product?

Not really. It's just that the potential users -- like potential designers for this product, of course, want to do their own testing, as well. Making sure it meets their specifications. It meets the longevity that we -- advertise. And of course, we need their approval and also to give us the warm feeling that -- fuzzy feeling that of course our performance during the [inaudible] term is exactly as we think.

And are the products performing in terms of key metrics like Solar conversion efficiency and so on? Are the preliminary production run... Are the products from that performing in line with your expectations?

Yes, it is.

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

In that case, if there are no further questions, I'd like to thank everybody for listening and their input and at that point, I'd like to include the persons who called. Thank you very much. Have a good day.