ATS Corp (ATS) 2005 Q4 法說會逐字稿

Good morning and welcome to the ATS fourth quarter conference call for three months ended March 31, 2005. Before the call begins, I must remind you that certain forward-looking statements may be made today, including statements regarding possible future business. You're cautioned that such forward-looking statements involve risks and uncertainties. The Company's results could differ materially from those anticipated due to a number of factors, including but not limited to, the risks and uncertainties found in the Company's periodic filings with securities administrators. Please review these filings found at sedar.com. I would like remind everyone that this conference call is being recorded on Thursday, May 26, 2005 at 10 AM Eastern time. And now I would like to turn the call over to Ron Jutras, President and Chief Executive Officer of ATS. Please go in ahead, Mr. Jutras.

Thank you operator and good morning everyone. Joining me today are Mike Cybulski, Executive Vice President of Operations, Automation Systems Group; Bruce Seely, VP Operations, Precision Components Group; Gerry Beard, Vice President and Chief Financial Officer; and Carl Galloway, Vice President and Treasurer.

The past few months had been a very active period for the entire ATS team, as we began a new chapter in the development and growth of ATS, following the loss of our founder and entrepreneurial leader in early February. As one of Canada's great entrepreneurs, Klaus left big shoes to fill. But he also left a very strong company with a dominant market position and a talented and committed team of managers.

As you probably noticed, the establishment of the executive management team that will lead ATS in the future has been a significant area of focus for me. This team is stepping up to the plate with terrific enthusiasm and commitment. I've spent a lot of time over the past four months meeting with or employees and our customers, and I'm very pleased with the universal support for the changes that have made and the directions we are taking.

I'm confident that our transition is progressing quickly and smoothly, and I'm very satisfied with the internal progress we have made so far.

The fourth quarter results also showed the we are moving forward aggressively to build ATS' performance and to reward shareholders for their patience. Our markets remain challenging but our underlying performance has improved. This provides us with a platform for success in future. To restate the analogy I've used a number of times over the past four months, Klaus left us with the keys to a Porsche and our job is to build it into a team of Formula One racers. In other words, we are intensely focused on the future and I'm building ATS into a stronger, more successful company.

The future is in fact what I want to speak to you about today. But first, the purpose of these calls is to review the financial performance to date, so before I talk to you about our team's priorities for the coming year, Gerry Beard will review the financial highlights of the last quarter.

Good morning everyone. My intention today is not to repeat the disclosures found in the detailed MD&A, but rather highlight what we consider points of significance. The first point of significance in the quarter is that Automation Systems' operating margins were much improved at 8.4% compared to 5.5% for the fourth quarter last year, and 6.8% in the third quarter.

If we strip away the unusual credit issues of $3.5 million in Q4, ASG operating margins were back into the double digits at 10.8%. These credit issues were very disappointing and are not typical of our ASG customers. We have gone back and thoroughly analyzed and reevaluated our credit policies to try and minimize the risk of events like this in the future. On a positive note, improved ASG performance is very satisfying because it validates many of our recent actions to drive margins higher through better facility utilization, improved execution of projects, our ongoing standard technology initiatives, and our aggressive push into health care markets.

On a regional basis, our Asian facilities produced significantly improved operating results, achieving attractive operating margins on a 25% growth in quarterly revenue compared to last year. European operating margins, which have the most room for improvement, also significantly improved compared to fourth quarter last year. And excluding those unusual credit expenses, ASG in North America also made a strong and improving contribution. It's important to note that we believe we have room for further margin improvement as we continue to diversify our revenues, strengthen global capabilities, increase the use of standard technologies in all locations and build the order backlog.

Now let's move to Solar, which is clearly now our second-largest business segment. Our Photowatt operation had a tremendous finish to the fiscal year, with fourth quarter Solar operating results substantially surpassing our expectations. Photowatt's excellent operating margins of 14.6% compared to 8% in the fourth quarter last year, were primarily the result of substantial ongoing improvements in production yields from the continued optimization of our capital equipment and production processes.

In the quarter, we made sustainable, operational gains which included increasing production yields, reducing scrap rates, and increasing cell efficiencies. All of this allowed Photowatt to increase revenue without a proportional increase in costs.

Photowatt is performing very strongly, and increasingly capturing the value of strong demand, almost tripling its year-over-year operating profit, on a 57% increase in revenue.

Next, a brief look at the Precision Components Group results. We achieved significant improvement in the continuing PCG operations and recorded breakeven performance in the fourth quarter compared to a loss of almost $1 million in the fourth quarter last year. These breakeven results from continuing operations were achieved despite a $.5 million charge related to the discontinuation of an unprofitable customer program. This unprofitable program is scheduled to be discontinued in the first quarter of this year and we expect it will be replaced by new, profitable business that has already been won.

The substantial efforts of the PCG team are further reflected in the fact that the turnaround of PCG progressed despite a 16% or $5 million decline in revenue compared to Q4 of last year. Progress is further revealed when you consider the sequential results. Compared to Q3, PCG revenues from continuing operations increased 12% and operating profit, excluding the charge for the discontinued program, increased from a loss of $100,000 to operating profit of $.5 million.

While we're not yet where we want to be, the improved results to confirm that the continuing PCG business is moving in the right direction.

There were three separate non-cash unusual charges totaling $0.56 per share incurred in the quarter related to PCG. These included a non-cash goodwill impairment charge of $22 million that reflect the current, broadbase challenges in the automotive industry and the decline in the value of the U.S. dollar. Looking at the McAllen closure, the transfer of most of the equipment and customer programs from Texas has now taken place and the closure is on schedule. We continue to estimate that the total expenditures associated with moving this business, including relocation, requalification, and severance costs, will be approximately $1 million, of which $100,000 was spent in Q4.

The payback on the cash costs to relocate McAllen is expected to be less than one year and we expect to begin realizing these benefits in ongoing PCG operating results in the second quarter. However, the benefits of these savings in the second quarter are likely to be offset by the summer automotive shutdowns.

Now looking at Precision Metals. As you know, to sharpen PCG's focus, we announced the decision to divest and therefore reported the discontinued operation PCG's metals division. Part of classifying this business as a discontinued operation, we are required to write down the value of the assets being held for sale, to their estimated net realizable value. This results in an after-tax non-cash charge of just under $13 million.

Now the bottom line. For the fourth quarter consolidated net earnings per share was $0.01, excluding the onetime effects of the life insurance proceeds and the PCG goodwill and Precision Metals write-downs, net EPS for the quarter was $0.12 per share, dramatic improvement in our underlying performance over the fourth quarter of last year, and a sequential improvement over the third quarter of fiscal 2005.

In closing, there is quite a bit of noise in the current quarter's numbers, mainly reflecting the refocusing and transition that is underway. However, in taking a step back, we believe ATS has made considerable and sustainable progress over the past year. Consolidated revenues have increased 25%, Consolidated operating profits are up more than threefold, the initiatives in ASG have increased margins nicely. Solar business has generated outstanding performance over the past year, with revenues up over 60% while operating profits have tripled.

Significant headway has been made in the past year to stabilize and strengthen PCG, through measures such as the sale of the thermals business, the consolidation of McAllen, and the decision to sell the Precision Metals division.

Contract equipment manufacturing business has demonstrated its future potential by increasing its annual revenues to $31 million, from $16 million a year ago, while achieving healthy operating margins.

And finally, we end the fiscal year with a very strong balance sheet that is well-positioned to support future growth. I will now turn the call back to run.

My number one immediate goal -- and it is one shared by all ATS people -- is to drive ongoing improvements in our financial results. The immediate challenge is order bookings, which in the fourth quarter were quite frankly weak. And this was true across our industrial markets. Bookings to date in the first quarter were $43 million. As you probably know, we engage in ongoing and active communications with our customers, and from our vantage point, with our high-level of visibility into our prospects and our pipeline, we believe these delays are a timing issue. More than anything else, these delays have been frustrating, considering the extremely robust level of quotation activity and our positive ongoing discussions with customers -- customers who appear fully-committed to large new programs, but have delayed issuing purchase orders for a number of reasons outside of our control.

For example, one customer that has a fairly sizable order to place is being delayed because of the availability of a particular part at their end. Another is delayed because of a merger. But these delays don't mean the work has gone away. In fact, our confidence is growing as we get deeper into the sale cycle with individual customers. And we see the probability of securing orders growing. In other words, we think it is a matter of when and not if they're going to buy.

You know, order deferral is never ideal and we have been through this situation a number of times before. What is important to us is that these strong order prospects have not disappeared. And the competitive landscape has not changed. I also believe we're positioned to win more new business than our competitors because of our natural advantages.

We also know that having capacity is absolutely necessary to free up the many prospective orders in our quotation pipeline. Therefore, we will be holding the line on our productive resources while we work aggressively with customers to put these delays behind us.

We're confident that our focused sales efforts will pay off and the size and quality of our prospect list will help us to increase backlog to higher levels.

In terms of the sale cycle, we think that in health care, including pharmaceutical, the sale cycle can often be substantially longer, and in fact more flexible than those in automotive. Since health care markets are becoming a much bigger factor in our revenue and backlog, we have to be cognizant of the order cycle here and we are.

This doesn't mean health care is any less attractive. In fact over the five years to March 31st, 2005 our health care revenue has grown 524%. And we generated a record $166.5 million in health care revenue during the past fiscal year -- more than double the previous year.

This shows quite clearly that our market share is growing and our customer base is very healthy. This will yield very tangible benefits for ATS going forward.

The outlook for our Solar group remains very strong and we believe this positive outlook will continue well into fiscal 2006. Demand for solar energy is growing and this is supported by the rising global popularity of clean, renewable energy sources and strong government subsidies, particularly in Europe. The U.S. is clearly a great potential future market, which has not yet materialized in a big way, but energy is a growing problem here also.

With the continued strength of the overall solar market, the number one industrywide challenge today is the supply of silicon feedstock. It is a primary base raw material in most solar cells, where photo outsourcing feedstock and securing long-term supplies continue to be a major area of management attention.

Silicon costs are expected to increase this fiscal year as longer-term supply agreements come up for renewal and our inventory of lower-priced silicon is consumed. While it remains to be seen if end market demand will fully absorb higher silicon prices, we are optimistic that Photowatt will continue to perform strongly at both the top and bottom lines, because of its improvements in manufacturing efficiency, yield and throughput, as demonstrated in Q4 and its continuing focus on producing further improvements for the future.

For fiscal 2006, Photowatt believes it has now secured silicon sources for most of its 2006 needs. This will help to satisfy our growth in the mid-to-near term. The largest supply challenges are expected to come over the next three years, since this is the time we think it will take for silicon capacity to increase in response to demand from the rapidly growing solar industry.

With such strong demand, silicon manufacturers are now using leverage to secure long-term prepaid contracts with solar manufacturers, that will help them fund investments in capacity increases.

Our plan is to use the strong cash flow generation from Photowatt operations to fund both its capacity expansion and silicon supply initiatives.

The strong market demand and tremendous success Photowatt is having is making us even more excited about the prospects for our Spheral Solar Power initiative. Let me update you on the SSP progress to date. This Spring SSP shipped its first modest quantities of the SuperFlex product. This is a critical milestone as we have now proven we can produce the standard 6-inch by 24-inch cell that is the standard SSP cell size in the new factory.

With the completion of this major milestone, we have now moved into the initial stages of the production optimization part of the overall commercialization program. As fully expected, the initial experiences running our processes front to back, have identified a number of areas that need to be addressed in our drive to achieve nameplate output. As you might imagine, in any brand new factory it takes real production experience identified these issues, which you just can't see on the design table and to establish process parameters. Since SSP involves some very complex, and in a couple of cases, revolutionary processes, the line from startup, to nameplate capacity is not linear. We never expected it would be.

Our approach is to put the SSP factory through a deliberate and focused program that will see us run production, identify areas that require attention, and develop specific corrective action plans. When we are required, we will stop production, rapidly implement these corrective plans, and then restart production.

Our first optimization cycle is well underway and in late June we will stop production and going into an intensive improvement phase that we expect to last about a month. We will then run the entire factory, assess performance and begin a new round of optimization. We expect each optimization phase to be significantly faster, as we progress up the learning and improvement curve.

This is similar to what we see with our customers when we work with them in their factories. It is an effective and deliberate approach and it works.

We are all very impatient to see SSP ramp. I look at the strength of the market and it is a great time for us to be launching SSP. We believe distributors and dealers are lined up to take all the products we can produce from SSP this year and certainly well into next. We're also making good progress in our joint development efforts with a number of people including Elk, on the integrated roofing technology for residential applications.

Turning to PCG, we made a number of strategic decisions over the past four months, which we believe have strengthened and streamlined PCG for the future. These steps include the consolidation of McAllen which is well underway and the proposed sale of the Precision Metals division which is also moving forward. Our near-term goal is to complete these important strategic initiatives while continuing to improve and build upon our performance in ongoing PCG operations.

To close out my observations on our outlook and performance to date, ATS is improving and has room for further solid gains in operating margins. We're getting stronger at filling orders, and we have plans in place to get stronger still. We're very focused on order generation and ongoing cost efficiency. And this is a winning formula for higher profitability.

Our ASG markets have not yet stabilized, but overall economic indicators remain quite positive. And there are realistic expectations that we could see the start of a new capital spending cycle in the months ahead. This will work to our advantage, as we build our market leadership position and pull on a lot of levers to become an even better, stronger company.

I have now held my new role for four months. It has been a very active period as I said. I am very big on focusing on goals and I think it is appropriate to next take the next few moments to talk about my priorities and areas of focus for fiscal 2006. Some of these I have already touched on, but I would like to run through them again, so you can understand our targets and the progress we're making on each.

Improving margins and earnings is the first goal. These include -- this includes margin improvement in ASG, return to profitability in PCG, and the continued strong performance of our Photowatt business, while we are successfully -- while we successfully ramp up the SSP factory.

I think you can see that we're making meaningful progress on all of these fronts.

My second goal is to complete the transition of leadership from the intuitive, entrepreneurial leadership provided so brilliantly by Klaus, to a team-based, performance-driven culture. There are obvious advantages to both styles and we need to recognize the need to continue to be entrepreneurial and creative. We're committed to demonstrating this our ongoing market and technology development focus. We also recognize the advantage of being more data-driven and process-oriented. And these are two characteristics that I believe will define my leadership.

Getting the right team in place is a major priority. As I said earlier, I am confident we have a very strong team that is well able to control and drive our global operations. In the past couple of months I've chosen a number of ATS veterans to fill well-defined roles and established clear responsibilities for each member of my senior executive management team. Similar to the goals I have for myself, I have established clear priorities for each executive.

I might also mention that within ASG, Mike Cybulski took an important step this week, by pointing Joe Aikins Vice President of Systems Operations ASG East. Joe is an 18-year ATS veteran and his input provides further support to Mike in his new responsibility as the Executive Vice President of ASG Operations Worldwide.

My third goal for this year is to bring increased focus to our entire ATS team, from executives through to the plant floors of every factory. This will be achieved through the clear definition, communication and focused implementation of our business strategies. At this stage in our development as a company, I believe that a formal strategic planning process is an important and fundamental initiative that is key to providing a strong foundation for our future growth and success. We will ensure that we channel our efforts, our people, and our investments around the world into those areas that will provide the greatest rewards to our stakeholders.

This is a structured, formal process that is well underway. And while I do not expect us to make major changes in our team market strategies, I do believe that we will see meaningful benefits from greater focus, alignment and execution across all of our operations around the globe as a result of these efforts.

This will be driven throughout the organization and we will use proven management tools to measure, monitor, learn and adapt from our ongoing performance indicators.

My fourth initiative is closely related. Today ATS is a company with a global presence, but we're not adequately leveraging our global size to maximize the full value of our clear competitive strengths and differentiators in our markets. And size means nothing if it isn't leveraged. Many remote ATS operations still operate pretty autonomously and they have different strengths and capabilities. Working more closely together and reducing the gaps between the strengths of our largest operations and those of our smaller remote locations, will allow us to better capture the substantial benefits of our unique global size and presence. In other words, we will help our remote operations compete as a strong global company in their regional markets, instead of competing as just another regional supplier. This will make ATS overall a much stronger and more valuable global supplier to our multinational customer base.

Just to be clear, I still expect our largest operation to continue to push forward and to further advance their strengths, because this moves the bar even higher and all operations benefit as a result.

But we will also increased our focus on helping all operations to benefit from the heavy lifting done by their larger, more resourceful brothers. In particular, we will help the smaller operations gain greater benefits from our R&D, standard technologies, capabilities and knowledge and to go successfully.

This initiative will involve skill development in our global operations, leveraging our purchasing power globally to a much greater degree, managing our -- enhancing our global sales and marketing efforts, and further standardizing our business processes around the world.

The end result will be a unified ATS brand that global customers will recognize and confidently rely on in all regional markets.

In an increasingly global market, this is what our multinational customers expect from ATS as a dominant supplier in the industry. My visits with customers and our employees in Asia and North America, over the past four months have further reinforced this perspective. I'm sure the message will be the same when I visit and talk with customers and our employees in Europe. This fourth goal will take time. I'm also very confident that succeeding here will unlock substantial value for our shareholders in the form of greater topline growth, better cost efficiencies, improved global factory utilization and higher returns on capital employed.

My fifth major priority for fiscal 2006 is to further position our solar business to maximize its future, long-term success. The launch of SSP and the continued success of Photowatt are important parts of this initiative. In context, solar is a rapid growing global industry. It is just really just beginning to emerge. We believe our solar business represents a significant future growth opportunity. We think we have the foundation required to be very successful. However, I also recognize that to be really successful requires full-time, dedicated management to rapidly grow this business successfully. Recognizing this reality, we made a significant step forward this month by recruiting and experience CEO to lead the future development of our entire Solar business. Syl Ghirardi will join ATS on June 6 with a clear mandate to further develop and implement our long-term strategies for our overall Solar business, including Photowatt and SSP.

His primary goal is to drive the success of our Solar Group, both now and in the future and to further unlock it's significant potential in value for ATS shareholders.

Syl is a seasoned executive and a strong leader, having risen to the level of President of SEBA Vision, as CEO of both 2C Optics and Sartorius, and as President and COO of HOYA North America. I don't want to feed speculation and I want to be very clear. I'm not, I repeat, not suggesting in any way that ATS will be exiting the solar business. What I'm saying is that time has come for us to take more strategically and purposely about how he can maximize the value this brings to ATS and its shareholders, both now, and in the future.

A dedicated executive management team for the Solar Group under Syl's strong, focus leadership is an important part of this task. I'm looking forward to working with Syl as we push this initiative forward.

Each of the initiatives I discussed today is part of our very clear vision for ATS, a vision I believe is very consistent with our founders, in that it will see ATS built on its industry leadership for the benefit of shareholders, customers and employees.

I mentioned a minute ago that there is tremendous value in entrepreneurial leadership. And we haven't forgotten our heritage as an innovative company, nor will we. An absolutely key part of our vision is to continue to be innovative and entrepreneurial in technology development. Standard platform technologies figure very prominently in our future, because they give us a major edge in health care and pharmaceutical industries and are a strong magnet for new work. They also enable us to gain efficiencies on our factory floors, and support the creation of the global ATS brand I mentioned earlier.

This ongoing focus continues to pay off in the form of a very successful launch of our new high-speed Lyoscan vision inspection systems for pharmaceutical and INTERPHEX, the world's largest pharmaceutical equipment tradeshow in April. I believe some of you may have insight into our presence at the show. We are delighted with the favorable comparisons that have been made between our Lyoscan system and other competing vision inspection systems. By the way, Lyoscan information can be found on our Web site, atsautomation.com.

But, this is only one recent innovation. We're also primed to launch a very promising new Supertrack-based automated pharmaceutical packaging system at Pakex in September.

In closing, we have begun a new chapter in our development as a business. We do so with a dominant industry leadership position, numerous competitive advantages, a strong financial base, and a seasoned and committed management team, a team that is highly focused on working together to drive the continued success of ATS.

Our mission is to realize the benefits of ATS' significant competitive advantages and capabilities, both near-term and beyond and to successfully grow this company to a higher and more valuable level -- create that team of Formula One racers that I mentioned earlier. I believe we have a great future. Thanks for listening. And now we would like to invite your questions. Operator, could you please open the line to questions?

(OPERATOR INSTRUCTIONS). Pat Chiefalo, Merrill Lynch.

If I could just dive into a little bit more detail on the silicon supply situation -- Ron, do you expect to see any impact this year from the tight supplies or higher prices of silicon or do think we're going to see sort of margin levels trend where they are now and potentially go higher throughout fiscal '06?

First of all, the supply side, I don't think is exactly stable. So it's a little bit difficult to answer your question. But based on what we see right now, we think there is a reasonable opportunity that we will be able to hold the line on our performance whereas the higher costs of silicon are offset by the improved performance we have. But that is not necessarily a slam dunk. That is kind of our expectation.

Do you see -- this quarter's margin level to be more in line with the sustainable level of fiscal '06 or do think you could push that higher throughout '06?

I think that we're clearly focused on -- I think the caution on being able to move margin higher relates to the fact that the supply side is a big hanging question mark.

Still on solar, I guess, how should we think about the ramping SSP business as being an impact on those overall margins? I know it is going to be sort of a step process as you optimize and manufacture. But at what point will those volume levels begin to impact the margins of SSP -- the margins of Photowatt? Could we see that in fiscal '06 or is that going to be more of a fiscal '07 type story?

Well, as we come out of the predevelopment -- the development period, obviously, it will be a negative impact on overall Solar Group performance. But, obviously, we're going to give you visibility to that so you'll be able to gauge the performance of Photowatt and that of SSP. So definitely, before the factory gets up to regional level of nameplate capacity, I expect there will be some drag.

Are we going to see that sometime in fiscal '06 as we ramp to volume?

Yes, we will come out of the development period no later than the end of September as it says in the release.

Can you remind us what type of capacity does Photowatt have right now? Given the ramp we've seen the business, I think it is fair to start thinking about how much capacity Photowatt has in terms of manufacturing?

The capacity question is a little bit difficult, because Photowatt is unique in that it has -- it is a very vertically integrated manufacturer, which is unique in the industry. So it has the ability to cast silicon to produce ingots, to cut those ingots into wafers, to then produce the wafers into cells and then produce the end point modules and capacity is measured at each point in that. When we look at it, we tend to look at cell capacity and our current cell capacity -- if Gerry a sitting around --?

32 megawatts, in that range.

32 megawatts. Okay. And what kind of level of utilization do we have today with the facility?

That facility is running full out. And 7/24 production and we will be expanding the capacity again this year.

So we're going to be expanding this year beyond the 32?

Yes.

Just my last thing before I go, just on the deterioration in orders and backlog, can you give us a sense of when and if that could potentially impact the businesses here? Is that going to be -- could we see that impacting sales potentially as early as next quarter or will that have an effect more towards the back half of fiscal '06?

It is Mike speaking. I will take that one on. First of all, I would like to point out that the $170 million backlog we have at present is not insignificant. That doesn't mean we have a lot of slack capacity in the near-term. However, we do have a big focus on securing and turning our high probability work into firm orders. If I take a look at a number of steps we would take in addressing the issue, provided that these orders don't get realized in the near-term, we would look at four different measures here, first of which is convincing customers to place engineering orders with ATS. I was just looking at this this morning. We have four such cases that really amount to in excess of $1 million in engineering orders that we have placed. This obviously utilizes a number of resources at various divisions around the world. But the nice thing about it is is it translates into in excess of $50 million worth of capital equipment, if I look at four of these separate accounts. And that is only four. There are others in the pipeline. So that is our big focus, is to get those engineering teams working on those projects early on.

Cameron Jeffreys, CSFB.

Wanted to -- Ron, if you could give us what the third-party component was in the quarter? Housekeeping?

Third-party cost in the quarter was 44%.

Also wanted to know, you did comment on some of the credit issues you had had in Automation Systems. Are there other -- are those types of problems things that you -- even though you have gone through your detailed review -- are those things that you believe could still pop-up in the next couple of quarters, just given some of the difficulties, I guess, particularly in the automotive sector?

It is Carl. No, we -- of course you're never going to completely eliminate credit risk. And as we look at new markets, it increases. And I think you're right, we're watching the entire automotive sector very closely. But with respect to that sector, I believe that our programs are tied to successful programs in the auto industry. So that may derisk in a bit. Overall though, we went to school, as Gerry mentioned, on what we believe are isolated incidents in the third -- fourth quarter. And what we found was we weren't entirely consistent in our credit practices across our worldwide divisions. So we have implemented a formal program to address those gaps and to strengthen our approach -- our global approach -- in all our divisions.

Great. My last question would be, in terms of just drilling down a little bit, about the order -- the order pace slowing a little bit -- can you give us some indication as to -- are there any particular sectors -- I guess with all the problems in the automotive sector, one would think that maybe that is the area that has maybe slowed the most. But, if we look at some of your backlog and revenue from the last couple of quarters, it would look as though your health care business has maybe slowed even a little bit more than the automotive business, which seems to run counter to everything we read in the press regarding the health of those industries. Can you just give us a little bit more color on that?

Actually, I think if we looked at the data, I think the order pipeline crosses all industry sectors quite frankly. And I think that is one reasons why we feel so confident is that -- you know, and we know -- in our discussions with customers, we see these issues pop-up. We are shaking free the engineering orders as Mike talked about. But I don't think it is industry-specific. I was very pleased to see in the paper today that we saw this very healthy surge in non-defense capital goods, strongest since last November with a 3.8% jump. So I think that -- it stays to fuel our optimism. I think that one of things we talked about in health care is that we do think the order cycle may be bit longer there as I said. And part of that is that it's unlike -- unlike on automotive where they say they're going to launch a platform in 2008, all things line up to hit that date. We're finding in the pharmaceutical and medical sector that the dates are a lot more fluid, in that they're looking at their markets and taking their time and they tend to move around a little bit more. There is just not the same, I guess -- I don't know if you want to collect commitment -- I think there is more fluidity to the endpoint. So it is just part of the sale cycle that is different in that particular market sector. But as I said, we see good order prospects in all of our industries sectors.

Marko Pencak, GMP Securities.

Just first housekeeping -- effective tax rates prospectively, should we stick with 34%?

Yes, there's been no changes in the tax rates in our jurisdiction -- no significant changes. So I think 34% is pretty reasonable.

Just wanted to follow up on the last question there. Is this not to a large degree -- the comments about having the backlog and revenues in health care -- a function of the new product introductions you have had of late and basically clients have to go and kick the tires and sort of evaluate what is going on and so that is really to a large measure part of this timing issue?

No Marko. The work we have in our pipeline for the health care and pharma sectors go well beyond what we're -- our standard platform technologies -- it is large integrated systems and so forth. So it really is 2 separate issues there. We've got to work hard to make sure that those platforms are well-received and so forth. But our backlog contains work well beyond -- the pipeline contains work well beyond those particular platforms.

Ron, you mentioned you're adding more capacity in Photowatt, what would be sort of the notional capacity you will have their, on top of the 32 megawatts that you identified?

I think that the capacity increase this year, when fully ramped up, would probably add another -- in the neighborhood of 10 megawatts.

Still be around -- sort of an exit rate would be around 42 megawatts of capacity?

42 to 44. Yes.

And when you talk about your silicon requirements largely being satisfied, are you in that comment also incorporating whatever your needs might be for SSP as well? Recognizing that is going to be small but just --?

The issue is -- it is kind of interesting. We have been spending a lot of time looking at silicon supply and the interesting thing about SSP is we don't use the same feedstock. We are able to use a lower grade of silicon material, because the manufacturing processes for SSP are actually -- purify a lower grade of silicon to make it a single crystalline structure. And we actually are looking now at whether we can take those processes in order to provide feedstock for Photowatt.

So ,are you getting that out of the silicon market or is this stuff getting recycled out of the semiconductor industry?

Basically, all the semiconductor -- all the material that we're looking at is coming out of semiconductor, both for Photowatt as well as for SSP. And we have our sources for SSP, but you're right, our requirements there are less. And we also use the differing grade of silicon, which is sometimes just reactor dust. We don't have to compete in the marketplace for that because there aren't a lot of people who can use it.

And finally, just -- you made a comment about how you're managing the silicon situation. You made some comments to the fact you're generating strong cash flow. Are you basically just sitting there and saying, where you're effectively prepared to pay them on more favorable terms from their perspective, rather than engaging in the what I've heard to be the kind of long-term take or pay agreements that other solar companies are entering into?

I think what we are saying is -- I think it is important that we work smartly on this. I think it is kind of a -- it's a difficult game to try and call what the silicon market is going to do 10 years out, which is the take or pay type of structure that is being put forward. But I do think that we need to move proactively to use our cash to secure some element of our silicon supply. So we basically have taken in the approach that -- let's take the one where there is strong ownership by Photowatt, where they take the lead and are able to secure a meaningful part of their requirements beyond 2006, by going to these types of structures. But, let's make sure that it's also fundable from our ongoing operations.

So, essentially you're buying some sort of a future conceptually?

Essentially, what you're doing is you basically are entering into an arrangement where you pay some installments upfront and you secure a long-term supply arrangement with a silicon manufacturer and to get discounted prices through the term of that contract.

Lastly, just given that there has been this growth in this industry and your rate in terms of your positioning from a size perspective has slipped because you guys have been focusing on your Spheral initiative. Do you find that you have sort of been disadvantaged at all in your discussions with the silicon suppliers?

I think that size is obviously an important issue when you talk to the silicon manufacturers. I think that we're accountable with where we are at in our discussions with the major silicon manufacturers and our ability to participate. Clearly, some of the larger players have deeper pockets than we do and they have moved aggressively in this regard. But, overall, like I said, I'm comfortable with the approach we're taking here, which I think is a maybe more prudent type of approach in the marketplace. So I guess I'm comfortable from that perspective. But clearly some of the bigger guys have deeper pockets and have greater leverage as a result.

David Tyerman, Scotia capital.

A question on the FC order outlook. I am struck by the comments in the press release and I think in your comments, Ron, orders delays and longer sales cycles. They sound like very similar comments to what you made back in fiscal '01 when the orders were falling back. I'm wondering what is different this time. And also, what is different from even a couple of quarters ago, when the orders seemed to be so much stronger? And why do you think that it would be different this time than what we have seen in the past?

The reality in our business is that, like I say, it is never perfect. And you don't get to judge -- you don't get to decide when a customer is going to place an order. And you're right, we have seen this movement in the order flow. I think that our enthusiasm relates to the comments that Mike made. But it also relates to the fact that -- as we said, the pipeline -- what is the pipeline has gotten fatter. So as you would expect, while the order activity has been delays in the orders, the new order prospects coming into that pipeline continue to come in. And the ones that are there continue to sit, so the pipeline gets fatter. That is just a natural consequence. So when we go through our pipeline and we look at those prospects and the contact and the discussions we're having with our customers, it is what gives us the reason to the confident about where we're going.

So would this be different than back in '01 or even a few quarters ago, in terms of the amount that you see there?

I think that when we looked and we plotted out our prospect list, that we have continued to see it grow. So the overall pipeline -- the line just continues to move up and we looked at that -- Gerry what was that line like -- last three years or something like that?

Yes, it was a three-year history.

Three-year history. So it gives us that reason to be enthusiastic. I guess the question is is that in the past, where we've had this type of delay in order placement, it has tended I'd say sometimes to be more industry-specific and quite frankly it has been primarily in the computer electronics side. Because the last time we were into it, we weren't into the health care market the way we are now. So we tended to see much more cyclicality in computer electronics. The photonics industry was part of that and all that kind of stuff that in the period you're talking about, back in 2000, 2001. Right now we have never had such a diversified revenue base from an industry perspective. Look at the numbers and you go, this is extremely well-balanced. So again, we went down the path and our strategy to have a diversified revenue base was clearly to deal with potential cyclicality with individual market sectors. So it is clearly the case. It is clearly the case in the current backlog. It is clearly the case in our order pipeline. And again, I think it again adds to our confidence level going forward.

Sort of a last question on that. Your orders to date in the current quarter are good, but they're not stupendous. Is it too soon, do you think, for this to break free? Are we really looking a quarter or two down the road, more realistically, before you think you have a shot at seeing that fatter pipeline turn into a fatter backlog?

Yes, I agree with you. I think that the orders for the quarter to date are not stupendous by any means. I can tell you that our sales team is aggressively going at things. And they have set some aggressive goals for us as we have mentioned moved through the next few months.

Just a question on the ASG margins. They obviously had a pretty good improvement in the quarter, really good improvement. Is there anything in there that is not sustainable going forward?

We showed continued broad-based improvement in the operating margins. And I think we are seeing improved utilization of factories across the board, which is something that eluded us for much of the past couple of years. And I would also point to the fact that we strengthened our management team a lot over the past two years in particular. And we're starting to see the benefits of that starting to kick in. I think there is more upside that is coming from that. And clearly I think that the margins have room to grow, as we said, especially as we continue to build our backlog.

Just to follow-up on that, are you -- given your backlog is smaller right now, are you pretty much topped out, do you think, for at least a quarter or two on the margins side? And also I'm wondering with respect to Europe in particular since it seems like it was one of the things holding you back and you are making some progress, is that going to hold you back some, just given the weakness over there in the general economy and cap goods size?

I think that when you look at the regional activity level, actually Europe -- backlogs are pretty reasonable in Europe. In fact, I would say -- and it's actually one of the things that I think is actually positive at the end of the day, is that the lower backlogs are primarily resident here in Canada. And that is where we have our greatest capabilities and our greatest strength. It is also where we have the greatest sales and marketing strength. So that is another reason which gives us a lot of reason for confidence.

As for margins, I think that we have not typically provided guidance on margins. I think that clearly backlog is an important issued and utilization and being able to move margins higher as I indicated.

Scott Lackey (ph) Equilum Capital.

You talked about maximizing the value in the solar unit for ATS shareholders. Are you saying that you're going to take the solar unit public?

No. What I am saying is that we need to look at all our strategic options in order to move our business forward and make it successful. That is the number one issue. I think when I look at the solar business today, we developed the solar business with kind of two separate entities. We have Photowatt, which has a strong platform and is growing very aggressively forward into the marketplace. And then we have SSP, which is just kind of emerging. But today they're separate businesses. They operate separately. We need to bring them together. We need to refine our business strategies, develop on our executive team that can put focus on this to maximize the success of this business. And then, as part of that, we would look at all our options for how do we fund the growth of this business.

Mack Whale, Sprott Securities.

When you look at the industry as a whole, about 80% of the industry on the solar side is expanding their capacity, almost doubling it within a two year time-frame. With a 10 megawatt expansion of Photowatt, do you think that that's maybe a little bit too slow, in that you risk losing market share?

I think that there's no question that we are somewhat capital-constrained in our ability to go grow all areas of our solar business simultaneously. I think that the growth in Photowatt is going to put us into a threshold and we're putting together plans where we need to look at how we might take our module assembly operations and move them off-site, because we're kind of -- we're hitting the walls with respect to the factory that we have this year in Photowatt. But we're looking at different opportunities to take module assembly into maybe some lower cost jurisdictions as well, as part of that underlying strategy. And I think at that particular point in time we can look at how do we accelerate our growth in Photowatt.

Our focus in Photowatt has been very consistently, let's get it right before we start growing the business aggressively. And I think that we are getting it right, operationally. And they certainly have -- they had demonstrated the ability to grow. I think one of the governors on our willingness to go aggressively at growth is the silicon splicer. And the fact that there is a lack of clarity with respect to silicon sources is one of the things that wieghs on your mind when you're looking at making investments in capacity, especially if there is a risk that you might not get the silicon to use it.

I think what is amazing is how much -- the fact that you're using this basically dust and waste from other industries, is a huge opportunity for expanding your actual -- your profitability on SSP as well as at Photowatt. Do you -- is that -- was it difficult to secure the supply of that lower grade silicon?

I think those are some of the things we're working through. There are issues we need to work through. We have done some initial experiments in our ability to use that material within Photowatt. They were positive, but we need to do more in order to validate that this is a reasonable opportunity to pursue. And then we made need to lay out our plans to see how much of the material is actually available in the marketplace and that is a very fluid environment right now, because there is growth in the silicon capacity taking place, I think as you are aware.

Do you think you can -- that could be another business itself rather than -- as a silicon supply business as opposed to the photovoltaic cells business?

Clearly, I think the ability to provide silicon feedstock is a potentially lucrative market. My big concern there is it being a distraction from launching the overall SSP business. But clearly I think that we're going to look after our self first.

How much of the business on the solar side do you think has an effect on the automation business? Is solar sort of becoming what the PCG business was, in that you think you can actually direct some business back to ASG?

We are -- we have always done a fair amount of automation equipment within the solar space, including supplying equipment to our competitors. I don't know if that is what your asking me or not? But clearly, the processes that are required to produce solar cells are moving to become more and more automated. And so there is a market there for us on the equipment side. And clearly one of our motivations, especially with SSP, one of our motivations within SSP, if you recall initially was the growth of SSP will fuel a substantial appetite for automation.

And just to finish up on the solar, a lot of your competitors have gone to -- and I think you might addressed this -- have gone to sort of selling out their capacity in '05. A lot of them are moving on to '06. And how much capacity do you have firm contracts for in both Photowatt and SSP?

I don't have that information in front of me. But I can tell you we're also negotiating with our customers for them to take up some of the financial burden on the silicon supply side as well. And I think that there is an opportunity there to help us move forward. There clearly is a big appetite in the marketplace and I think it is appropriate that we would look to do those types of things with our customers as well.

Just on the automation, on a sectorial basis, is there anything different that you see happening in Asia or Europe and North America? For instance, do you see -- with an expansion of the guys in Europe, your customers in Europe expanding to East Europe, do you find that the Western Europe business is dropping off or do you see a shift there as well, to East Europe?

It is definitely becoming much more of a global marketplace. There is no question about it. We're doing business with customers in multiple jurisdictions. And that is why what I talked about there was building our global strength up, is just such an important initiative for us going forward. But you're right, we are seeing migration of all our business on a global basis and I think whether that be China, Southeast Asia, Eastern Europe, -- it is very fluid. Part of the issue for us is to make sure that we can service our equipment while it is installed, so we are building out our service network as well, to supply that side of the part of the business. But our initial focus right now is to build our backlog and our business level so we can fully-utilize the facilities we have today.

But, it's not affecting negatively the backlog at all? There is not some regional shifting going on where you're not active?

No.

Just lastly, on the new CEO, of ATS Solar Group, is he primarily -- is it -- you listed a whole bunch of companies there quickly. Is it primarily sort of a technical experience? Is it more like financial experience that he's bringing to the team?

Syl brings an interesting blend of basically financial experience as well as manufacturing. Many of the companies I mentioned are obviously -- they are actually in the contact lens and the lens business area. And he -- I think some of the key strengths he brings is, he is very much a strategic thinker -- he moves very aggressively from that perspective. But he certainly not -- I believe -- I can't remember exactly. I believe he is an engineer, so he's got that type of background. And he's also been in manufacturing businesses for a long time. So I think he brings a very powerful combination of his financial -- he has raised capital before. He has done those types of things. And he has driven a business and had bottom line accountability. He brings a great package of skill-sets do that business.

Michael Willemse, CIBC World Markets.

In one of the notes you mentioned a dispute with the Ontario government over nonincome taxes. Could you just provide more details on that?

That was in fiscal 2004. That was last year. And that relates to reassessments of capital tax and workers compensation.

So that is over and done with then?

It is still under appeal. But we have (Multiple Speakers).

There has been no further resolution of it. We're still appealing that process. But that takes time when you deal with the government.

Okay. So it is still in process then?

Yes.

Yes.

With the backlog, do you see -- I know your West Coast and Asian Automation Systems Group plants were running at pretty good capacity over the past couple of quarters. Do you think a lot of the weakness will end up back with those facilities or is it going to be more widely distributed?

As I indicated earlier, I think the backlog -- the decline in backlog -- has been primarily a Canadian operation.

So that is why you're kind of forecasting your margins to stay relatively healthy?

I think that the issue -- and I just want to point out is that I don't think that any of our facilities -- I think we've got a much better balance of our backlog across facilities, much better than we have had historically. And I know our goal is to drive our backlog higher in all locations, just so you understand.

(OPERATOR INSTRUCTIONS). Marko Pencak, GMP Securities.

Just to pursue the margins on ASG, your revenues in Q4 went up only $1.5 million versus Q3. Yet you had this dramatic expansion. So from an overall company perspective, you're not really getting any volume leverage. And is it just the fact that you've got differential fixed costs in your different facilities and as you rebalanced them, that's what drives the real margin improvement?

The margin improvement sequentially is -- last quarter I think we mentioned we had some product development costs coming through.

Yes, but even if you just for that?

There was increased use of standard products as well, which drives our margins. We have had good facility utilization across each of our locations and regions.

We just executed better, Marko.

And then finally from me, just with the remainder of your Precision Components Group, are you still in an evaluative mode with respect to -- your continuing operations in that, or have you sort of gone through that process and determined that what you have retained is fixable and you can achieve profitability or is there still some parts of the business that you may look to do something with?

I think that our initial mandate is to push forward and return the business to profitability. And I think that what we have done now is I think we have addressed the areas which are the hurting areas, quite frankly. I think that -- we think we have solid businesses remaining within PCG and we're pushing forward with that. And that is the part we're going to focus on as we develop our strategic plan. That is the part that we're going to look at and say, how do we maximize the value of the Precision Components group within our overall ATS strategies? We haven't gone through that process yet. Our initial focus is to deal with the fundamental issue of getting the business back to profitability. So that is where our focus is right now. And you can see it in the quarter.

David Tyerman, Scotia capital.

Just a follow-up on that, Ron. It sounds like then with PCG you're working on the operations side right now, but you still need to go through a strategic review of the business. Is that correct? And is it possible that divestiture or other options are something you could consider as part of that review?

I think that from our perspective we are doing a strategic review of the entire ATS business. I think that is part and fundamental to what I talked about, about doing a strategic business -- developing a formal strategic plan. That is what we're going to go through for the entire corporation. And again, we're going to look to make sure that we're doing the things that are right things to make sure we generate value for our shareholders.

With respect to the business that you're looking at divesting, I'm just wondering -- the sales for the year were 30 million. But it looked like the run rate on the last quarter was more like 24. Do you have any suggestions on where that business goes going forward or how much we should be subtracting off of the overall last year's number?

You're talking about the discontinued op?

Yes.

You can look at the historical data there, David. That is going to be on our Web site, so you can pull that stuff up. You'll be able to see the quarterly stuff.

So you're going to provide the whole thing. That's fair enough. And then just Q1, on Percentage -- Q1 margins, excluding the McAllen costs -- are we still on an ascending kind of progress right now?

I think that as you look at the numbers this quarter, we showed substantial improvement, especially if you take the $.5 million charge out. Clearly I think the things that are going to weigh on us in the first quarter is going to be -- we're going to incur the bulk of the cost on the McAllen side. So that is going to be a dampener that is going to come through there. And I think the other thing is we're still, I think, a little bit cautious with respect to volatility on the automotive side. So those are the areas of caution for us.

So be careful is what I'm hearing here.

I think that we -- as I think Gerry made his comment and I think I did as well -- I think we see most of improvement coming in the -- we've got to get through the summer with the shutdowns as well. When you look at those types of things, I think that from our perspective, we think that we see meaningful improvement starting to come through. I don't expect to see a deterioration, but I think we see meaningful improvements as we get through the back half of the year.

Do you have a CapEx number for '06?

Yes, CapEx is in the neighborhood of $40 million. (multiple speakers) budget planning.

And then on SSP, do you have any thoughts, guidance, whatever on some of the metrics for this, like what sales prices, what kind of margin metrics, that kind of stuff?

We have not provided margin metrics, because clearly we're not in an operating -- we're not in an operating state where we're producing the actual numbers. I don't think -- we think it's a little bit sensitive. I can tell you from a pricing standpoint, we're looking to see what the market will the bear. It is -- we think that there is healthy margin in this business as it comes up the curve. We're not there yet.

On the deferred development costs, how much -- what is the total investment, including the government piece?

Total investment, net of the TPC financing is in the range of 100 million.

Right. But what would the government side be?

That is just under 30 million.

About 130 total. And when you start amortizing this, I think you said before you were thinking something like five years. Is that -- am I remembering correctly?

What we said we were going to do is we're going to amortize it over 100 megawatts of output. And so that would -- in my view that is likely to be substantially in less than five years.

So you are assuming that you'd go with the second stage?

Yes, we didn't get into the submit one (ph) factor game. The investment represents coming in many cases, more than one factor.

And the amount that you would be amortizing is the 100 million net, is that correct or would (Multiple Speakers) that be the 130? Sorry?

It would be the net number, yes.

On the ramp up time frame, any thoughts on that specifically?

I think we have been spending a lot of time and I have been coming up the curve. This was something that Klaus spent a tremendous amount of time on. So I have been trying to get up to speed on the curve. And I believe that one of the initial things that Syl is going to do is to get his mitts around this us a little bit better. I think that we had originally put a target out there that -- Klaus had to set the target at about a year to ramp. That doesn't seem to be crazy in my mind. But I'm just not in a position to really know whether the events that have transpired over the last four months has shortened that or lengthened it. I think that is one of the things Syl will get into when he's here.

When you are saying year, Ron, or Klaus was saying it, from when would that be?

We basically was saying -- I think that we said last time it would be about the --?

The end of fiscal '06.

The end of fiscal '06.

So that was sort of the idea back then, was to get up to a 20 megawatts by that point?

Within striking range of that.

And then the last question I had -- is there any more potential stock -- share buybacks from Klaus' estate?

We had a onetime option which we exercised. Used the life insurance policies for it. So that's done.

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

I would just like to say -- I would ask you to watch for our annual MD&A that will be issued later this month. And I thank you for listening and say goodbye to you for now. Thank you.

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