ATS Corp (ATS) 2006 Q3 法說會逐字稿

Good morning and welcome to the ATS third quarter conference call for the three months ended December 31, 2005. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (OPERATOR INSTRUCTIONS) The following statement respecting forward-looking information is made on behalf of ATS and all of its representatives on this call. All statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in ATS's filings with Canadian Provincial Securities regulators including ATS's annual report and annual information form for fiscal year ended March 31, 2005. I would like to remind everyone that this conference call is being recorded on Thursday, February 9, 2006 at 10:00 AM Eastern time. Now I would like to turn the call over to Ron Jutras, President and Chief Executive Officer of ATS.

Thank you, operator, and good morning, everyone. I am joined today by Bruce Seeley, Carl Galloway, Gerry Beard and Syl Ghirardi. To begin, Gerry will review financial highlights of the third quarter.

Thanks, Ron, and good morning, everyone. I'll start my review with the Automation Systems Group and then wrap up with some consolidated comments. Clearly ASG had a weak showing this quarter and reflected a combination of factors including as expected the timing of order flow. Although second quarter order bookings and the resulting backlog entering the third quarter were strong, a number of these recently booked projects were in the design phase and revenue generated was therefore constrained.

The good news is we expect to see the benefits of stronger backlog to begin to flow through in the fourth quarter. Looking deeper at operating results, ASG incurred restructuring costs of $1.9 million to reduce workforce levels and consolidate the Niagara, Ontario operations into the Cambridge operations. ATS Niagara consolidation was in fact completed in the third quarter. We estimate these initiatives reduced our fixed cost base by $9 million. This will help profitability in future quarters.

If we eliminate these onetime restructuring costs, ASG's operating earnings would have been $1.1 million. Beyond restructuring costs, ASG also had a couple of technically challenging first-time assignments in the healthcare field that required more time and resources then we had estimated. This resulted in margin slippage on these jobs and contributed to low margin performance in the third quarter. But to be clear, cumulative margins on these projects remain at attractive levels and there is substantial potential for repeat business from these customers.

Turning to the positives of the third quarter, Asian and North American West Coast operations turned in much stronger performances based on solid revenue and strong execution. The contract equipment manufacturing business delivered good operating margins on a 34% increase in revenue to $12 million. ASG healthcare backlog is a record $100 million, up over 80% from the beginning of the year, which reflects the efforts of our strategic marketing and focus on this industry.

Turning to precision components, foreign currency continues to have a significant negative impact on this business and reduced third-quarter operating results by an estimated $600,000 compared to the third-quarter last year. However we are pleased that performance continues to improve sequentially from the first and second quarters as PCG moves towards profitability.

Excluding the $500,000 of startup costs related to the new facility in China and the cost of transferring a program, PCG had breakeven operating earnings in the third quarter and produced meaningful positive cash flows from operations. We are also happy to report that the strategic initiative to divest Precision Metals is now complete. In the third quarter we reached an agreement to divest this division for its carrying value and this transaction closed on January 3rd. This sale was very difficult given the current conditions in the automotive sector and it consumed a substantial amount of management's time. However this was a necessary step on the path to stronger PCG performance. Divesting this business was important as it improves overall return on assets. This business was very capital intensive and had been incurring substantial operating losses in recent years.

With this sale and the closure of the McAllen, Texas facility both behind us now, we can devote further attention to PCG's core business and we look forward to further benefits from our continuous improvement initiatives which include Six Sigma and other cost reduction programs. PCG also continues to pursue and win profitable new business that increases capacity utilization.

Moving on to our Solar Group, as expected we incurred a loss in Solar Group in the third quarter because we're no longer deferring and capitalizing the development cost of SSP onto the balance sheet. For the third quarter, the total SSP loss from operations was $8 million. This $8 million consists of both expenditures of just over $6 million and depreciation on the property, plant and equipment of $1.7 million.

Turning to Photowatt, in the third quarter Photowatt continued to have very solid performance. Photowatt operating income was $5.1 million compared to $3.4 million in the third quarter last year. Representing a 50% year-over-year increase in profitability. Significant improvements in production yields, throughput gains, and cost reduction initiatives were the reasons for Photowatt's excellent showing.

Important to note and is that the translation effect of a strong Canadian dollar is masking some of Photowatt's performance. Looking at the Canadian dollar financial statements, Photowatt's revenues are shown to be 6% lower in the third quarter this year compared to last year. However if you look at Photowatt's revenue in the currency in which it does business, which is primarily the euro, Photowatt's revenues actually increased about 10% compared to the third quarter last year.

Finally a few observations on our balance sheet. Cash balances net of bank indebtedness at December 31, 2005 increased 23 million compared to the second quarter primarily because of a reduction in working capital in ASG. ATS invested $11 million in property, plant and equipment in the third quarter. These investments mainly relate to $2 million of capital expenditures for SSP and $6 million for Photowatt. The Photowatt capital spending relates primarily to the planned increase in cell capacity from 32 MW to 40 MW. The total expected investment to increase the cell capacity including the purchase of wire saws to reduce the thickness of wafers is $9 million.

To wrap up, we continue to have a sound balance sheet with a debt to equity ratio 0.2 to 1 which we believe continues to provide us with financial flexibility as we go forward. Now over to Ron.

Thanks, Gerry. With that as background, let's talk about what we're doing to improve performance starting with Automation Systems Group or ASG. As you know, our goal is to drive operating margins back to higher levels, so what are we doing to get back on track? Certainly order flow is much more positive than it was to begin the fiscal year and this should benefit us going forward. So will the production of ASG's cost base following the third-quarter rationalization, which is now complete.

We completed the closing of ATS Niagara and our global workforce reduction of 6%, as Gerry commented on. The estimated annual reduction in our cost base from these steps as you heard, is $9 million. But our improvement activities are much more extensive and far-reaching than this. They include a strategic and focused approach to addressing the challenging market dynamics in automotive, a major market for ATS. As you know, the North American automobile parts industry is undergoing significant change because of competitive pressures. This makes it difficult for us, at least short-term during the kind of margins we want and I think deserve in this sector as customers demand more for less. As a result, we are picking our spot strategically and being much more focused on global automotive opportunities. This includes increased focus on Asian manufacturers and a concentration on stronger North American auto parts suppliers. Especially those who operate both here and abroad. This solution will allow us to reduce our exposure to low margin automotive work while keeping a strategic leadership position in this important market.

Fortunately our diversified account base beyond automotive, which includes healthcare, computer electronics and consumer products customers, provides many good opportunities. By far, we believe the biggest opportunity for growth is in healthcare. As part of our strategy, we're working aggressively to increase our penetration in this large and attractive industry sector. To date the bulk of our healthcare work has been concentrated in just a few ASG facilities, but we are working to change this. We have learned a lot over the past four years about what it takes to satisfy customers in the highly regulated and demanding healthcare arena. We recognize that our experience in healthcare is already a substantial competitive advantage.

We're now taking that growing base of knowledge and moving forward with our plans to build the required discipline and processes in our other ASG facilities so we can broaden our healthcare revenue base on multiple fronts. I believe this will allow us to achieve a number of our strategic goals including our primary one, which is to generate better global performance. Also in healthcare, we broadened the reach of our ASG -- I mean ATS compliance solutions business within ASG. By creating an office for it in Philadelphia, the global hotspot for pharma and healthcare. This new office will make it more efficient for us to do business in that region with healthcare customers who could benefit from our strategic consulting advice. Certainly Compliance Solutions has earned the right to expand. In the past three months alone, it won important consulting assignments with three new healthcare customers and since its founding a little less than two years ago has played a key role in developing relationships for us with a number of the industry's largest companies. Compliance Solutions is meeting its strategic goals for ATS and has a bright future. With healthcare backlog reaching a record $100 million at the end of third quarter, we are clearly not starting from scratch here. But at the same time I believe we just started to see the benefits of our healthcare growth strategy.

As part of our improvement strategies, we are also increasingly assessing the lifetime profit potential of our customers in all markets and using this data to guide our ongoing marketing and sales activity. I believe this more disciplined approach will over time help us realize the true value of the ATS value proposition. Beyond a substantial and increased discipline we are using to choose the right and most attractive customers and markets; we are also looking internally. And we are taking steps I believe are necessary to enhance our cost competitiveness and operating performance both now and in the future.

First, I believe we can do a much better job in leveraging our global purchasing power. You heard me say this on previous calls, so to give increased intensity to this effort, we just added a seasoned global supply chain executive to our team. [Tom Beady] joined us in January. His purposes to get more than the $0.45 of every dollar we currently spend with suppliers, increase the overall strategic value of our supply chain, and to contribute to our overall margin improvement goals.

Here's another cost reduction initiative. As you know, there has been tremendous pressure on our Precision Components group to drive down costs and improve efficiencies in the face of difficult automotive markets, rising raw material costs, and negative foreign currency movements. PCG has responded in these powerful forces in a very successful way and not all the benefits of this continuing effort have yet been fully seen in PCG. We believe that ASG can also benefit. We're now in the early stages of taking what we have learned in PCG and applying it to ASG. This includes implementing a more structured continuous improvement process which encompasses lean manufacturing, Six Sigma, and increased total quality standards. I believe there is a lot of benefit that ASG can gain from the hard work and valuable lessons learned at PCG. We are beginning in Cambridge, our largest ASG facility, where the opportunity is greatest.

We are also continuing to make organizational changes designed to further improve ASG operating performance. We started with reduction in workforce and consolidation of ATS Niagara that was completed in the third quarter. We also made additional changes in management designed to strengthen and improve operational effectiveness. We are investing in new and targeted training, leadership training for middle management has been implemented in a number of our facilities. We are advancing in the completion of formal sales and account management training for our global salesforce, and we set a new educational certification standard for project managers called PMI for Project Managers Institute. This is all about driving accountability, responsibility, and performance across the entire organization. And further strengthening critical skills which are required to support our long-term business strategy. This training takes time, but it is necessary and I think extremely important to our future.

Overall while the results for this quarter were disappointing, we are making progress. For example, ASG operations in the U.S. West Coast turned in much improved performance on the strength of exactly what I'm talking about, broader revenue base and improved operational performance. ASG Asian operations also generated improved performance driven by growing demand from our multinational customers operating in Asia. Our growing presence in Asia is proving to be very attractive to our multinational customers, creating opportunities for us on a global basis. Frankly, we aren't finished in these regions. I believe we have much more room to secure more work and grow earnings.

Speaking of Asia, China is becoming a more important part of our thinking and our actions as well. We're now in the process of expanding the size of our currently very small ASG Shanghai and [Dong Wong] leased facilities, reflecting increase in our base of business and our prospects. Critical mass is very important in China, and we're committed to growing in this market to better serve our existing customers and to attract new ones. I will talk more about the overall importance of our global presence in a moment.

I think it is fair to say we have a fair amount of work to do in ASG, but the steps I referred to today combined with better order flow will help get us back on track as soon as possible. Stepping back momentarily, I think it is important for you to know we are staying the course with the strategic initiatives we created for the Company earlier this year. I gave you a feel for the elements of our strategic roadmap at our last call, but in the interests of accountability, let me update you on a couple of priority areas. The first is rolling out our strategic plan to all ASG employees worldwide. This will be completed by the end of this month. This has been a big assignment and absolutely necessary to ensure everyone is on the same page working toward the same targeted strategic, financial, and operating objectives.

Next, as part of our goal to build a strong, consistent global AGS brand, we developed a global brand compliance scorecard. We're now using it to rate our operations and bring each up to a high common standard. As I mentioned, one of AGS's true strengths and market differentiators is already our global presence and more than ever our customers are choosing us because of it. Global brand standardization is absolutely critical to us and we wish to fully capitalized on the strength of our reach, further strengthen our global customer relationships, and create optimal factory loading around the globe. I believe that all of these activities will make us a more valuable company.

I have a few points to make on solar, but first I think it is important to draw your attention to Precision Components. As Gerry described, it has made significant progress in the past nine months and we're not yet done. One of the ways we're making strategic use of the repetitive manufacturing skills and infrastructure resident in PCG is in contract equipment manufacturing. While these results are included in the ASG segment, the work is primarily performed by PCG. In the third quarter contract equipment revenue was up 34% year-over-year and we dedicated more resources to this growing niche. We got some great momentum in the segment and we intend to capitalize on it.

Finally Solar Group. I will let Syl speak to the operational details, but I first want to make it very clear that we are aggressively moving down the path to enable us to secure investment for our solar business. We have engaged BMO Nesbitt Burns as a financial adviser and they are actively working with management and the solar subcommittee of the Board to assess critical information. Information that I believe will enable the full AGS Board to make a well-informed decision on how to take advantage of the opportunity before us in a way that best benefits all ATS shareholders.

There has been quite a bit of speculation about our solar funding strategy, so I would like to clear the air on a few issues. First we are well aware and continue to monitor activity in key capital markets with respect to solar companies both in North America and in Europe. We are also well aware that capital markets are a dynamic and that timing is very important regardless of whether we select an IPO or another strategic transaction.

Secondly we fully understand that we need to move forward with urgency. We are. We are already tackling a range of complex issues associated with making Solar Group a separate legal entity within the ATS. Anyone who has done this knows that this is far from a minor task. This includes work on legal, financial, accounting, valuation, and structural changes to position Solar for third party investment. Even before our Board has made an informed decision, we'll have already made important progress.

Third, given the strong solar industry fundamentals and attractive capital market activity, we do not think that SSP needs to be fully proven prior to pursuing a funding event. Certainly that would be optimal, however we think that current conditions and the combination of Photowatt's continuing strong performance as a well-established solar business and the potential of SSP provide us with the ability to consider various potentially attractive funding options right now.

Finally I want to state that over the past year a core objective of mine for Solar has not changed. We remain focused on positioning the Solar Group so it is able to access capital, achieve its full potential, and reward ATS shareholders. I am confident we are doing that. Now I will turn the call to Syl for a review of our Solar operations.

Good morning, everyone. Ron has already made it clear solar funding strategy is a top priority within ATS. Not surprisingly, we're doing everything we can to support that effort. We are actively engaged with financial advisors and helping to prepare the groundwork for a successful funding event. We are also running our businesses and I would like to give you a brief update on both beginning with SSP. As indicated on our last call, we're now utilizing our equipment. This is giving us the ability to define and develop SSP processes in a true manufacturing setting. I know everybody, me included, wants SSP to produce revenue, but the reality is we need to continue to work through these processes before we can ramp efficiently. While we are not yet producing meaningful revenue, we are getting results. During the third quarter, by running our machines from front to back we were able to identify a number of areas for process improvement. While at the same time attempting to use the machines to manufacture products.

Still we're making good progress. Today at low-volumes our cell yields are approximately 50% with substantial net secondary manual rework. This compares favorably with yields approximately 12% achieved in November. While the 50% reflects substantial progress, we are working diligently to make further investments and improvements in cell yields. Specifically one process in SSP's 26 manufacturing steps has been identified as a critical limiting factor in the current cell yield, and that his front bond. That is where we metallurgically bond silicon spears to aluminum foil. To this end, we sought and received assistance from a specialist in metallurgical engineering from MIT and with his help, we have developed several potential solutions which we are actively pursuing.

Our power efficiencies are already averaging 5.5 to 6%, which we believe is a reasonable performance level at this stage of our development. We expect cell power efficiency to increase as further development -- with further development processes. As you can tell, SSP's factory ramp-up is complex and time-consuming because we are a first of breed factory. For that reason, more process development will take place and we fully expect a few other challenges to be revealed. This is to be expected in the startup of this nature and that is why we continue to point out that there are substantial risks.

Looking to the future, we recently took an important step in building our management and implementing our funding strategy by hiring Jim Kopperson, Solar's first Chief Financial Officer. He is a CA and a CPA with public company and audit experience. Early in his career he was partnered with KPMG and served in the office of the chief accountant of USC.

On the product side we're also making progress. We're very pleased with the progress on the product testing being done by Elk and we are working diligently to support this effort. We have also started filling limited orders for SuperFlex modules from our marine product distributor. We have now shipped some roofing membrane samples to a customer in Europe for evaluation in insulation testing.

Let's move to Photowatt. Photowatt is one of the few solar companies in the world that is vertically integrated. With the capability of processing silicon feedstock all the way through to solar modules. This is an extremely important advantage right now because it gives us greater flexibility in sourcing silicon feedstock and means we control important process technology to support successful growth. Silicon challenge has not gone away and for that reason we continue to aggressively deploy silicon strategies to combat this issue. These strategies include broadening our supply base and we continue to find new potential sources in this regard.

Our discussion with suppliers lead us to believe we're making headway. Using our vertical integration knowledge, we have also been able to reduce our dependence on solar grade silicon by formulating it with lower-cost metallurgical silicon without sacrificing efficiency. We have also confirmed that our proprietary technology at SSP allows us to convert lower-cost silicon not commonly used by other solar manufacturers for use by Photowatt. This month our first shipments is on its way to Photowatt. As I hope you can tell, we aren't relying on any single measure to ease the shortfall. The upside is that Photowatt has secured silicon for a significant amount of its capacity through the end of the calendar 2006 and our outlook for Photowatt for the fourth quarter remains positive.

In closing, I think its important to recognize that all solar companies face challenges but we also have significant opportunities for growth. The need for solar energy continues to grow and every forecast I have seen points to an accelerated adoption and demand. Now I will turn the call back to Ron.

That concludes our prepared remarks for today. Now we will move to the question period and in an effort to hear as many voices as possible, I'll ask you to confine yourself to two questions each. If you wish to ask more, please go back into the queue. With that said, operator, could you please open the lines to questions?

(OPERATOR INSTRUCTIONS) Frederick Bastien, Raymond James.

I would like to go back to the one process that you have identified as a critical limiting factor to current cell yield. Is this a showstopper? Does it prevent SSP from getting to commercially viable production levels and efficiencies? If yes, what are the odds that the resources that you are throwing at it will produce a positive outcome?

No, it is not a showstopper. We are presently working through the processes in that step. We should also note that we are shipping product, so it is not a limiting factor for us.

It's not a limiting factor from the standpoint of generating revenue today is what you're saying, right? It is clearly a limiting factor in our ramp ability.

All right. On the systems side, you mentioned that margins were impacted by some technically challenging first-time projects. Can you quantify the impact that those projects have had on your margins?

I don't have an exact number here but suffice it to say it was one of the substantial factors contributing to the lower margins in the quarter. Along with the other factors that I mentioned.

Was it most important factor though?

I would say they are relatively equal factors.

Have you addressed those factors and are you comfortable with the margins will improve over the next few quarters?

I think that as we have said with respect to margins, when we take a look at the situation in Q4 in particular we are an applications developer, so there is always a risk that the customers want to make changes which impact flow of work onto the floor but based upon current data that we have in front of us, we expect a better flow to the floor and we expect improved utilization and performance in the fourth quarter.

Thank you.

Cameron Jeffreys from Credit Suisse.

Just a question on the margin side, Ron. In the past you were hoping to get to double-digit margins in Automation Systems in the fourth quarter. That looks like it's probably a bit of an optimistic goal I would imagine. Is there any kind of clarity or further kind of color you can add to what kind of margin levels you might expect, say, over the next three to four quarters as we work into fiscal '07?

I think as we said we're clearly focused on improving the margins. I think one of the variables that is difficult for us to call is what is going to happen with the currency. I think that is what has caused us take a little bit more of a cautious attitude with respect to our ability to progress. I think all things being equal I think we are still focused on getting back into those double-digit operating margins but I agree with you. I think in past discussions we've had we said that we were optimistic I guess that we might get to double-digits in the fourth quarter. I think with the currency having moved the way it is that may be very much of a stretch I would say, but I just want to underscore we are expecting improved margin performance in the fourth quarter.

My second question is kind of related to that. In the backlog your order bookings are obviously showing some strength. Can you just give us some color on what types of margins might be in that? Is there -- are you pretty comfortable with where you or is there some element of I don't want to say buying business, but is there an element of some business in there that might be a little weaker on the margin side from that perspective?

I think what we are seeing is the most difficult market sector we are engaged in right now is the automotive one, and I think that has a number of different forms. I think there's just simply pricing pressure on the quote but there is also pressure as you go through to execute projects because we have very seasoned customers in this area and they are very adept at extracting more for less or for free from you. And I think those are some of the challenges that we as well as everybody else that's doing business in this sector is faced right now simply driven by the end markets and the pressure they are under. I guess if I was to look at margin risk I would say I see it as being higher in the automotive side of it, particularly where those people are in, where those systems are being installed in North America, but it is just a degree, right.

I will just jump back in queue, thanks.

John Novak, CIBC World Markets.

Ron, why was the loss of SSP greater than the guidance you provided in the prior quarter, the 5 to $6 million?

I don't think we provided guidance. I think what we told you was our benchmark was that we were running under run rate. Gerry, maybe you have something to add to that.

I think what we indicated what are, in previous quarters are expenditures run rate and I don't think we were too far off. We were just over 6 million of expenditures in the quarter. Just to clarify, the 8 million includes depreciation, which prior to this quarter there was no depreciation.

I think we were fairly close to where we had been historically, 5 to 6 comparable to the just over 6 where we are at now.

How long should we continue to expect that the 8 million, that run rate of 8 million to continue?

I think the run rate is something we are managing actively. I think it is probably -- you can be reasonably prudent to assume that through the current quarter.

Okay, but are these the type of levels we will see for the next 12 months?

I think what we're looking to do is obviously we're looking forward to try and move the business forward. That is our focus right now.

Okay, and lastly when we look at your orders and your backlog, the new orders seem down. The backlog was up. Was that all related to the delays in those healthcare programs? Or was there something else happening within that backlog number?

Could you repeat the question?

Your new orders were down sequentially. Your backlog was up sequentially. So was that really reflective of the delays?

I think there's a whole raft of issues in that particular area; that we have very strong order booking activity actually in the second quarter. And we had very solid order booking activity in the third quarter. I think that that is one of the things that is allowing us to incrementally increase the backlog level. As I think that Gerry said, the fact that -- there's a couple of projects that we are in design and quite frankly customers make change, decided they wanted to go in and rethink, some of the certain aspects of the system would put us into the situation we had to go through substantial redesign work, which caused the delay as it moved onto the manufacturing floor. That is our business. We are a custom-design and build shop and ultimately we are working with our customer to get the best solution possible. So these things can happen from time to time.

Do you anticipate more delays with the ability to ship that backlog in the fourth quarter, similar to what happened in Q3 or are you comfortable now that you will be shipping a number of these programs?

I think that what we are saying is a number of these programs will flow to the floor based on the data we have in front of us, but we are also booking new business, so it's not like the queue in design is dropping away. We are keeping the utilization in that area clearly is at levels which reflect the fact that there's a continuous stream of new work coming in the door.

Okay. Thank you very much, Ron.

Marko Pencak with GMP Securities.

Ron, in the last couple months you announced two -- you press released two significant healthcare contracts. Is there any of these cost overruns associated with those two particular announcements?

No.

My next question has to do with automotive. You have talked about and identified the challenges in that segment which I think is obvious to everyone, but you also at the same point in time made a common saying that you guys are selectively bidding on business. And I certainly inferred that to mean that you were not just taking on business for the sake of taking it on. So I am somewhat perplexed that you are experiencing this margin pressure. Can you just explain to me like what is actually happening there and is it that you have some what you would perhaps perceive as strategic customers that you are basically saying look, they're going through a very tough time, there's a huge long-term opportunity and so we essentially have to be there for them so that we can benefit it on the other end?

That's a very complex question. Let me start talking and see if I can answer it. First of all I think the margin pressures we're seeing today reflect some of the decisions that were made a number of months ago. Because the nature of our business is that we take contracts on and we complete them over 36, 42 weeks, whatever the timeframe happens to be. So as I indicated some of this reflects the fact that customers are extracting more from us I think in the automotive sector because they are very knowledgeable and I think they are very deft at doing it.

I think that we're talking about very much in conjunction with the strategy that we developed, we are taking a more disciplined approach to saying who are the customers that we believe are a best fit with ATS and the ones that can take full advantage of our value proposition that we offer them. As well as ones where we look at the lifetime profitability potential of them and we are comfortable with it. The reality is that automotive has been a very substantial portion of our business and I think it has benefited us in numerous ways. The disciplines and the competencies we have developed in serving this market I can tell you are a big advantage for us as we moved into consumer products, consumer electronics and healthcare.

So I think that we're not looking to abandon this sector. We think that longer-term it will be an important sector, but near-term clearly it is going through a lot of turmoil. That to me has indicated that we need to be much more selective and that is exactly what we're doing. We're moving forward on that basis. We are assessing our customers and how they fit for us, what the potential is for us and recognizing that margins are likely to be still below in the sector for the foreseeable future. I am really excited though when I look about the potential for automotive particularly in Asia. There is tremendous activity as the automotive manufacturers are gearing up in that area. I think we're extremely well-positioned because of our global footprint to serve those markets and we plan to take advantage of that.

Okay. Just on your silicon supply, if we go through your press releases quarterly press releases over the last couple quarters, essentially what has been happening is that you seem to be sort of rolling forward your visibility of silicon supply. Like it used to be you are okay to the end of calendar '05 and then you're going out -- you have always been rolling that forward. Then you have this, I guess intermittent shorts during the quarter that affected Photowatt's production and your comment is that you have the majority of your silicon supply secured to the end of calendar 2006.

So I guess my question is for us to be thinking about your production volumes and you are embarking on this capacity expansion in Photowatt, should we be using sort of a 90% effective run rate to reflect intermittent silicon shortages? Or can you just explain how that is all working and how we can have any sort of visibility on true production rates prospectively?

Maybe I will start and, Syl, you can finish up. I think that there is a balance here. I think that we want to make sure that everybody understands that silicon is a huge challenge for the entire industry and it is a very fluid environment. We are working in that environment, as are all people in the industry, to adjust to it. I think that you are right. I think that our visibility is improving and we're kind of rolling it forward. We can get into a complex discussion about different types of silicon and how it comes into our process as a vertically integrated manufacturer. Because we've seen some movement there and that is part of the issue that is affected us. But overall I think what we're saying is we are rolling forward, we are continuing to secure silicon and we are continuing to execute extremely well within Photowatt.

Yes, Photowatt is really well-positioned in terms of how it uses its silicon. Having been integrated from beginning to end, it gives an opportunity to be selective in terms of our silicon that we can use. Secondly we have had numerous discussions with some of the key players in the silicon production business and we have been able to get some pretty good feedback. We also feel very good about the SSP technology and our ability to take various kinds of silicones, powders and so forth, and be able to turn them over and actually be used as feedstock for Photowatt. Photowatt is very, very well-positioned. It's got great technology for that.

So the bottomline message for me then should be something along the lines of look, it's a huge problem. Without the benefit of the various initiatives you guys just described, your production would have been even more constrained then it ultimately was, but given that these are ongoing problems, you guys can never really run at your nameplate capacity today, never mind the expansion. Is that the reasonable perspective inference here?

I would say that I think there is a risk that and I think everybody faces it, that there is a risk that depending on how you tap into the silicon supply channels, there is always a risk that you may have temporary ability to ramp capacity or restrain your capacity depending on whether the supplier delivers what he said he was going to deliver or doesn't deliver. It is just absolute (indiscernible).

We're also cognizant of the fact that we're certainly going to add capacity but we make sure we are opportunistic in terms of getting silicon.

Okay, thank you.

David Tyerman from Scotia Capital.

On the SG side, your backlog is definitely a fair bit higher now. I am wondering on the margin side do you feel you have the backlog to take you to targeted margins? Or is it a situation where the automotive challenges in FX really would prevent that from happening over the next few quarters?

I think those are the cautionary elements, David, as we commented on. I think those are the things that are in the backs of our minds. Obviously we're hedging currency and the thing is in automotive there is going to be -- I don't see this trend with respect to customers pushing very hard to get more for less is going to change. I think that's why it is very important for us to continue to be selective in what we do in automotive and push into the other markets, especially as healthcare as I indicated in my comments.

Do you think double-digits are possible in the next fiscal year or is it really going to take a while to work through these issues, assuming the currency stays where it is?

I think the issues in automotive are going to take some time to work through. That is reality. I can tell you that our goal is to definitely to move towards the double-digit level next year, but again I don't know what the currency is going to do next year, so there are risks to us achieving those numbers, but our goal is clearly to move down that path.

Fair enough. On the SSP side, I guess I am kind of wondering where we are in terms of the ramp up, in terms of timetable and so on. Is there any sense that you can give or is it really you have to work through problem by problem? You got the current metallurgical issue that you are working with or is there some sense that we can really get here as to when you get close to commercialization.

We've actually made some pretty good progress when you think about it. We have actually got our machines running for the first time and then at the time we start actually taking the look at our process and getting them up to speed so we can manufacture at high volumes. Now having said that, we are also producing product. Our cells, as I mentioned our cell yields at 50%. In November it was 12, so we're making progress. These are things we have to work through as we go through and as we said it is going to take us a while to get through these phases. But we are pretty optimistic that the problems can be solved as long as we get the process down to a commercial and manufacturable condition.

Can you give us any more specificity though? I mean that is a pretty open ended timetable.

It needs to be open-ended, David. Quite frankly we are in a development mode here. There are going to be issues as we said and the issues that we don't know, we don't know today, so from the standpoint of our comments to the investment community, I think we need to remain cautionary and I think we have done that.

Fair enough. Thank you.

Mac Whale from Sprott Securities.

I just wanted to return to the issue the bottleneck on the SSP. Is this an issue you had a pilot facility and how long was it identified and worked on?

When you start up new machines, you are bound to find some of the problems related to it. And you're not going to find the process until you get the machines running. This is an issue that we anticipated would be here. We are just working it through. It's a step-by-step approach. We are really encouraged by what we found already by a couple of outside consultants we brought in and we have already taken a couple of their ideas and we're starting to implement some of those. So we're really encouraged by it. But again let's not lose sight. While we are in our development stage we're also manufacturing. We actually made shipments.

I think the other important note to make is that we are saying that our focus is on one of twenty-six stations. We're not talking about dealing with 25 and 26 stations.

Absolutely. That's why its curious that you focused on just the one as opposed to focusing on the other 20 some odd, but that's why I was kind of wondering and challenges if this issue came up since you engaged an adviser? Does it change your internal timeline for that strategic planning process with your adviser?

No, I think that there is a recognition on our part that the financial adviser -- I think we were at a natural process to engage with those people given the fact that being aware of what's going on in capital markets and the opportunity to raise capital right now. And also looking at quite frankly we got a great business in Photowatt and we need to grow it. I think at the same time we are investing heavily in SSP, so there's clearly a funding need here.

But I think that was what's driving the appointment of the financial adviser. The technical issues I think that we have been very forthright to say that we were going to continue to face technical hurdles as we go forward. We expect those technical hurdles will get smaller obviously but in fairness this is a complex process. It's a complex undertaking we have gone through. We are making headway but there will continue to be challenges.

I just wanted to return to my second question on the ASG backlog. If you look at that backlog, I think David Tyerman touched on this already, but when you look at that and you see the amount of revenue you have there, when you look to a year ago and you look at the backlogs or two years ago, does this backlog have the same or did it have a lower potential in terms of profitability?

I think if you take a look at the composition of the backlog you'll see how the industry sector breaks down. And I think my commentary has already answered the question if you look at that.

Okay, so healthcare is a much more profitable business in the outlook than the automotive?

I think as a general -- I think that we would see that as being the normal situation.

[Pat Chiffaro] with Waterfall Investments.

Ron, just a question sort of relating to your comments during the call. Given the fact that you don't think SSP needs to be proven before an expected funding event and the special committee to the board has been around now for about six months, do you think the capital requirements for the solar division would come more near-term? Is something there more imminent now? It sounds like we're moving forward in that process.

I think there are a number of elements. The solar committee we announced last quarter was formed and has been actively engaged in looking at funding. I think that also in tandem with that we are looking very diligently at our growth strategy for the Solar Group and establishing our capital there. So I think this is an ongoing dialogue which is taking place and as I indicated we're pushing forward on many fronts to position ourselves to raise capital. I don't know if that answers your question or not, but if I haven't, please --

No, no, it does, and given -- I'm sure as you watch the capital markets these stocks tend to trade at 6 to 7 times revenue. The timing just sort of seems like it is right given how far along you have moved in the process and given how attractive the markets are in relation to these type of investments.

Clearly as I indicated we're watching the situation and I look at that as a positive indicator that we don't have to have an optimal solution I guess to be able to go forward and successfully attract capital at attractive levels, quite frankly. I think that it is a catalyst for us to move forward more aggressively. But I also think it's the right time.

Right. In terms of timing it's pretty near-term it sounds like?

Let's be honest. We've been on this path I think to work towards establishing a funding solution for our business for a year. We started out by recognizing we'd have to build out a management team. Phil joined us in June to take on the role of heading up our two separate businesses, Photowatt basically a running business operating in France pretty autonomously; and SSP, which at that particular point was essentially a project housed within ATS.

We started out with that. To bring these together Phil's been building out his management team including the addition of the CFO which I think is absolutely instrumental on the funding side of it. And we're also looking at those other issues which allow us to separate this business because until we separate it, we can't track outside investment and like I say, that is a complex task. We are actively and fully engaged in that, pushing forward on that. Because as I said it doesn't matter what kind of investment that comes in or what strategic options we pursue, this needs to be dealt with.

Okay, thank you.

Peter Sklar, Nesbitt Burns.

My first question is on Photowatt and you described this morning that in terms of securing polysilicon or silicon supply that that had been -- you have secured most of your requirements out to the end of calendar 2006. I believe in a previous conference call you said you had secured supply out to the end of Q1 of fiscal '07, which would be June '06. So you have kind of obtained supply for an additional six months, pushed out that requirement about six months. I just wanted to know the nature of how you secure that supply. Is it on the spot market or is it subject to long-term contracts? How would the pricing of this silicon that you have secured out to the end of the year, how would that compare to the pricing for the silicon costs that would have gone through the results for the quarter you just reported?

I just want to clarify. I am looking at the disclosure we made last quarter, Peter, just to clarify the comment you made that we retraced on the silicon supply side.

Not retraced, you extended.

Okay, clear. I thought you said we had backed.

No, no, you have extended from -- my understanding of what you said it gets a little confusing between fiscal and calendar but you have extended from June '06 to the end of calendar '06.

That is correct.

To answer your question about the long-term contract, we do have some contracts. They're not long-term -- two, three years out. We are able to gather silicon right now from sources that they have been supplying us over the last two or three years. On top of that we are opportunistic in terms of we will be able to get silicon from the various sources. Again because of the unique position that Photowatt has in being vertically integrated, we are able to get silicon from various sources. Now you probably have heard silicon, some silicon prices up to $200 a kilo, but the advantage we have and certainly we have not to my knowledge bought in that range. But when the silicon comes up to that price for us, we are able to blend this with metallurgical silicon. We are able to blend it with other silicon and drops the overall silicon down. We are a little bit better positioned than most in terms of how we use and how we can fabricate an ingot and cut it.

A second question, Ron, is this process that you have described of separating the solar business from ATS, the management restructuring, legal, audit, etc., how long -- do you have a timeline on how long that separation phase will be before the solar business would stand on itself as a legal entity with financial statements etc.?

I don't think we can put exact timetables on it, Peter, but it is certainly not days. I think it is probably weeks and into months. But I can tell you we're moving forward aggressively and certainly it is within the reasonable timeframe. It is not like we're talking about this going to take a year or two years. A lot of that is dependent on the fact and we're taking (inaudible) right now, we're putting a ton of resources to task some things to move forward as quickly as possible because it is a gating issue. Obviously we are saying there is a need for funding this business, so like I say we are taking resources out of our core business, we're putting them to work on this particular task, we're bringing extra resources to bear on it and we're hiring additional people as well. So we are essentially game tackling this issue to compress it into the shortest amount of time possible. Like I said, I think it is something that will be in weeks, not days.

Okay, thanks very much.

[Tim Lash] Third Point Management.

We are very excited about the solar business opportunity and clearly what is going on in that market; the spotlight is on ATS and the management team there and it is only going to get brighter. I guess going forward we are hopeful that we can move beyond excuses and explanations and get going here with some action. I know there's been announcements, but we really need to see this move forward and I know you have been forthright and that is the base level acceptable in terms of performance. We would expect absolutely no less than being forthright, so that's just par for the course. I mean you have been fairly non committal in in terms of timing. You say weeks and you talk about years. At what point should we be disappointed in your inability to bring this thing to market?

I can't judge your decision about when you're satisfied or you are disappointed, quite frankly. As I indicated, we're doing a ton of work, okay, to move this forward. I don't feel guilty about where we are at quite frankly. I think we are doing what's necessary. I think we're doing all the things that are appropriate.

That's great. We look forward to an IPO hopefully and like I said the spotlight is clearly on you and the management team. If anybody is going to drop the ball, it's going to be you're going to drop it in your lap and hopefully you can make this happen, because this is a critical point in this company's development. It will be a shame if it wasn't executed properly. Thank you.

You're welcome. We except the challenge.

Frederick Bastien, Raymond James.

I would just like to get back to the issue on Photowatt. No, I'm sorry, on SSP. Do you think that the efficiency levels can get to the low teens? Do you think that is a reasonable target? Over the next couple of quarters?

Again we're defining the process and when we get our processes up and running we will also be improving the yield at the same time. We are at 5, 5, 6% efficiency rate right now which on a startup is pretty good. We know we can get higher and we know we have to get higher and that is what we are working towards.

It seemed that you are pretty confident that you can get to this double-digit level in your previous conference call. Are you still as confident as you were?

We know that the technology has the possibility of getting to double-digits. We know that. It's just a question now scaling up to manufacturability at those double-digit efficiency levels.

I think you're talking about confidence. Our goal hasn't changed from where we want to get to with the technology, if that is what you're asking us.

Great, thank you.

Donato Sferra from TDZ Securities.

Just a quick question on the solar business. I guess it sounds like the biggest hurdle is carving out the business and creating a separate reporting entity, but you have already been reporting that as a separate entity, so doesn't that give you a good head start on that front?

I think the near-term challenge its a gating issue for us and you're right. I think it does give us some aspect of it, but I've got to tell you I will be very blunt with you. The level of complexity that comes with doing the type of carveout is far beyond what I expected a number of months ago.

Is the biggest hurdle creating a balance sheet for the business or its own set of balance sheet? You would have been reporting the income statement separately, but is the big hurdle on the balance sheet side?

I will let Gerry talk to the financial side of it. I can tell you that there are issues with respect to separation of services, okay, IT, HR. There is the legal structure getting it separated. So where there is a single entity which is holding both businesses, there's all those types of issues which come to bear and some of which I think are still emerging.

So allocating some of the overhead to the business on an appropriate basis?

Yes to make that basically, I think supportable so that it can stand up to verification, those types of work to other parties I think is important.

Okay.

Gerry, I don't know if you have anything to add to that.

I don't have too much to add to that but Ron talked earlier about Photowatt and SSP. Photowatt is obviously a separate entity. We've got a number of legal entities involved in this reorganization, so there is some complexity with that. There's tax issues, legal issues, ownership issues, things like that that all have to be worked through.

Just to be clear, that's not excuses. Those are facts. You deal with them.

Okay. All right, thanks.

Marko Pencak, GMP securities.

Ron, when you look at your backlog for health care, what percentage of the backlog would you characterize are sort of novel or first-time undertakings that could lead to the kind of technical challenges and cost overruns that you have incurred with some of the projects this quarter?

I don't know if I have that information in front of me. You have another question you want to move on to and we will see if we can --

I guess what I am really trying to understand is clearly I can appreciate that that is a huge growth opportunity for you. I guess what I am really trying to understand is to the extent that part of that growth relates to undertaking new segments or new opportunities for automation, how much of your overall healthcare business do you think is going to come from those kind of things as opposed to stuff that is more routine or manageable or regular? That's really what I am just trying to understand.

I think that we are seeing an improvement in the amount of as you would call it -- I don't know if we would call it routine -- but more repeat or similar types of work that is coming through the chute. I think I also can tell you I think we have learned a lot about working in this space over the past while which gives us the opportunity to take better advantage of that. I would think that as an overall trendline we're continuing to attract new customers in this space, which again we tend to start out with the first system with them. But we are also seeing the increase in the amount of repeat systems activity or similar systems as well. I don't know if I have answered your question, but --

I was hoping you would say 50-50, 75/25 or some such.

Sorry, I don't have that level of granularity for you.

Second question. Your accounts receivables, your day's sales outstanding popped this quarter sequentially even though your revenues sort of happened. Just really wanted to understand this. I am also not really into your automotive customers and how should we be thinking about risk management in that regard?

It is broad-based across all the segments and what it reflects something Gerry mentioned in the third quarter there was a lot of new design work coming in at the front end but it also meant at the back end we had work flowing off the floor. So as you know our revenue recognition is on a different pattern than our cash flows. We had a heavy degree of invoicing on nearly completed projects late in the quarter, so it would have moved from contracting progress to the accounts receivable.

So there's nothing sort of untoward there?

No, it's quite normal flow.

Okay, thank you.

David Tyerman, Scotia Capital.

Yes, I was wondering on the legal entity for solar is it going to include Photowatt?

Our view right now is that there is no other option that I can consider that would be a practical sense other than to bring both of those entities together under a common unit. That has always been our thought from day one and so that is clearly the path we're on.

Okay, fair enough. Then on the Photowatt margins hitting back on the question of the silicon, it sounds like it's going to be more expensive going forward. I am wondering is it reasonable to expect margins to decline or do you think you've got enough efficiencies etc. that you can actually maintain them near current levels?

Obviously silicon supply and pricing going up is going to have some effect on pricing, however a lot of it we passed on or some of it we passed on to our customers. The other thing we're doing is we're getting a lot of efficiency out of the way we're doing things. Our wafers are being cut thinner now than they ever have. Our ability to use metallurgical silicon, which we believe we are one of the few companies to do this, that also drives the cost down quite a bit in the silicon. But it is still going to have, the spot price of silicon is still going to be high.

I think we are saying that there is a risk that we will have some impact, but we have got a number of tools in our toolkit to help us combat it.

Just on the sales side there are you going to be limited more or less to where you are right now, or can they actually climb from where they are considering the silicon issue?

We feel still optimistic we can grow this especially we're going to be now putting in more capital and more investments in to grow our capacity.

Okay, fair enough. Last question, Ron, you guys have been running around 500 million, 550 million annualized in revenue in systems for quite a long time. Could you get to target margins at that level or excluding the automotive issue and the FX which you obviously can't exclude, but would that be sufficient or do you really need either to have higher capacity utilization than that or some kind of additional restructuring to get to the double-digit levels?

I think we have done some serious restructuring already, as you know. I think that capacity utilization is a key element of us improving our margins. I can tell you historically though it's not like we were running 100% utilization to get to double-digit margins. I think we have always had various facilities with the way we were running, been underutilized while other ones were running maybe even over 100% capacity and we were outsourcing heavily historically.

I think that from my perspective I think that our near-term focus is very much on operating margins. I am more interested right now in establishing a strong foundation for our business and establishing the business so it is generating sustainable strong margins and using that as a platform for growth. I think that you can see very deliberately by the initiatives we're focusing on that that's what we're doing. That we see is the near-term step. I think beyond that once we have got those things in place, and I think we will start to see as a result of our strategy a more accelerated topline growth and the ability to make investments for growth that are based upon a good visibility with our customers of what their needs are going to be for some period of time beyond a very short-term focus. One of the challenges we have always had in our business historically has been fairly short-term visibility with respect to what's going on.

I think a big part of our strategy is really helping us to improve that visibility to make those types of decisions, but just to come back to your original question our focus near-term is to increase topline growth to improve utilization of facilities. But also to focus internally on our operational effectiveness to improve our operating margins. Given the fact that I know that automotive is going to be tough.

With the 500 million, the 550 million range, would that get you to that capacity utilization do you think?

I think that there is room within that revenue level for significant improvement in our operating margins. Because I think there's a lot of room in the operational effectiveness side of it and we also as we indicated taken a slice out of our fixed cost base.

Right. Thanks, Ron.

Mac Whale, Sprott Securities.

I just wanted to go back to the idea how you are divided, if you divide these companies up or spin them out or whatever you decide to do, how you look at IP and where that resides versus in terms of you've got architecture IP, you've got processing IP, you've got manufacturing IP. Who really owns that?

ATS owns it, but I think that the idea is -- it's one of the challenges, right? We have to get the IP within the legal entity obviously if we're going to attract third party investment. What else would work?

Secondly in terms of on the Automation side when you look at automotive, most of your business is in new systems. A lot of the times that these closures, these plant closures in the automotive area affect more your investment of those in maintenance type of CapEx. Do you see a big impact on your backlog because of closures or is there a nuance there that might be important?

I don't think so. We're still seeing a tremendous amount of quoting activity in the automotive sector. Customers are still moving forward with investments. I think the key for us is to make sure that we are comfortable on who we're doing business in this space, because there is no way I want to take a hit like we took last quarter, in the second quarter of last year.

Okay, thank you.

Gentleman, there are no further questions. Please continue.

We are getting long in the chute though, so maybe we can conclude if there are no more questions.

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