ATS Corp (ATS) 2007 Q1 法說會逐字稿

Good morning, and welcome to the ATS first-quarter conference call for the three months ended June 30, 2006. The following statement respecting forward-looking information is made on behalf of ATS and all its representatives on this call. The oral 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 this 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 projections 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 filing with Canadian provincial security regulators, including ATS's annual MD&A and consolidated financial statements and annual information form the fiscal year ended March 31, 2006.

Now, I would like to turn the call over to Ron Jutras, President and Chief Executive Officer of ATS.

Thank you and good morning, everyone. I am joined today by Gerry Beard, our CFO; Carl Galloway, Treasurer; Syl Ghirardi, CEO of Photowatt Technologies; Stewart McCuaig, General Counsel; and Bruce Seeley, Head of our PCG Business.

To begin, Gerry Beard will review our financial results before Syl Ghirardi discusses our Solar business. Gerry?

Thanks, Ron. Good morning. I'm going to begin with ASG's performance. As our results indicate, foreign exchange continues to have a significant and negative effect on revenue and operating earnings. We believe it is masking many of the positive improvements and progress we have been making in our operations. We estimate the negative effect of the strong Canadian dollar reduced first-quarter ASG revenue by $12 million, compared to the first quarter a year ago. Excluding foreign exchange, revenue would have increased an estimated 7% instead of declining by 3%. Operating earnings were also reduced by an estimated $3.7 million, due to the negative impact of foreign exchange.

Outside of currency, ASG's Eastern North American facilities, particularly those here in Cambridge, are being impacted by excess capacity and challenging conditions in the automotive market. For these reasons, Eastern North American operations are a primary focus of our improvement efforts.

Looking at other components of ASG, our Western North American operations experienced significant revenue and operating earnings growth in the first quarter over the first quarter last year. This reflects well on our improvement efforts to date and growth opportunities. Although there is some discussion of an improving economy in Europe, we continue to see challenging market conditions, and have implemented a rigorous improvement initiative process focused on increasing profitability and returns.

As part of our improvement initiatives in Europe, we divested our Berlin facility during the first quarter. Its results, including revenue, expenses, bookings and backlog, have been removed from the comparative historical periods and classified as discontinued operations. This divestiture will help our performance going forward, as Berlin had an operating loss of $600,000 in fiscal 2006, and this divestiture has freed up significant management time to focus on improving our existing European operations.

Our repetitive equipment manufacturing business, even with the negative effect of the strong Canadian dollar, had a good quarter, with revenue of $12.4 million, up over 8% from a year ago.

In looking at the industries in which ASG operates, compared to the first quarter last year, increased healthcare and computer electronics revenues were not enough to offset lower automotive revenues. We intend to continue to be selective in the challenging North American automotive sector.

Looking at ASG backlog, it grew 16% to $176 million compared to a year ago. This growth was achieved despite a $14 million order cancellation by a healthcare customer. This customer decided to revise its product plan and postpone the related automation project for the time being. We believe this order may reservice in the future, when the customer has redesigned its underlying products we manufacture. As we have previously discussed, the sales cycle in healthcare tends to be a little more fluid than in other ATS markets. Despite this cancellation, healthcare order backlog was 64% higher than a year ago at $72 million, reflecting the significant efforts and progress made in penetrating this market.

Turning to Precision Components Group, it achieved much improved results. Despite the negative effect of foreign exchange, revenue was up over 6% last year, primarily because we benefited from higher volumes on programs. Also importantly, and despite the negative effect of the strong Canadian dollar, PCG increased its operating earnings by $1.8 million to almost $900,000 in the first quarter compared to the first quarter last year. From an EBITDA perspective, PCG generated EBITDA of $2.6 million or a 10% EBITDA margin in the first quarter. This much-improved performance over the first quarter last year was achieved despite the estimated $1 million negative impact of the strong Canadian dollar on PCG's operating profits.

Now, moving to Photowatt, Photowatt International turned in record first-quarter performance. Of particular note is that the EBITDA margins of Photowatt International were at a record 28% for the first quarter, compared to 20% in the first quarter last year and 20% in the fourth quarter of fiscal 2006. Excluding the estimated effect of the translation of the euro results into Canadian dollars, Photowatt International's revenue in the first quarter would have been 15% higher and operating earnings up almost 70% compared to the first quarter a year ago. Strong first-quarter performance reflects the higher market selling prices for its products, continued improvements in production yields and throughput gains and an increased wire saw capacity brought on in the fourth quarter at Photowatt France.

During the first quarter, we also increased our sales of solar module installation kits and inverters to $3 million from a nominal amount in previous quarters. These revenues are part of a total solution strategy being adopted by Photowatt International.

Looking at Photowatt Canada, the operating loss before depreciation and solar [corporate] items was $4.1 million, $900,000 less than the loss in the fourth quarter. This reflected the reduction of staff at the Spheral plant and refocusing efforts now underway to further develop Spheral Technology processes.

Total Photowatt Canada employment stood at approximately 90 at June 30th, compared to 150 at March 31, 2006.

I will now turn to call over to Syl to give you a further update on the activities of Photowatt Technologies.

Good morning, everyone. I have four Solar business developments to highlight. The first is progress on our silicon supply strategies. These strategies are designed to find and secure economical and effective sources of feedstock for our expanding Photowatt France facility over the next several years. As you recall, we are employing a multilayered approach we believe will be successful.

Our first strategy is to manage and augment our supply of polysilicon, the traditional feedstock for solar manufacturing. Since our last call, we have secured sources of silicon supply for the majority of our plant capacity into the second quarter of calendar 2007. This means we further extended our silicon supply since our last call.

On another positive note, during the first quarter, we started to augment our polysilicon inventory, with silicon supply through our [OFP] conversion process. Through this proprietary process, Photowatt Canada takes lower-cost silicon fines and powders and converts them to usable polysilicon. As you may recall, Photowatt Canada has silicon fines that it's not using in our conversion process; it is proving to be an excellent addition to Photowatt International supply base.

In the first quarter, Photowatt Canada shipped about 17 tons of silicon to Photowatt International. Approximately 10 tons of this came from materials that we separated from a separation process that segregated the larger piece of silicon for use by Photowatt France. The remaining 7 tons came from our proprietary OFP conversion process

Since transferring this material, Photowatt France produced some 6,000 to 10,000 cells during the first quarter, containing a blend of polysilicon and OFP silicon, without degradation in cell efficiency. We are confident this proprietary process is a viable option. As such, we plan to scale up for production of cells using OFP silicon, but not until the third and fourth quarter, due to a summer plant shutdown at Photowatt France. The work underway to add new production equipment is part of our Photowatt International capacity expansion.

Based on current conversion capacity and inventory of surplus silicon, we expect Photowatt Canada to supply approximately 70 tons of silicon to Photowatt France this fiscal year. This conversion process will make a valuable contribution to Photowatt, and is one of several strategies we are using to deliver silicon to our facility.

Our third strategy is to produce products using refined metallurgical-grade silicon. We discussed this last quarter, and since then, the strategy has taken shape. In fact, we produced 70,000 solar cells using refined metallurgical silicon and achieved an average efficiency of over 12%. We believe that these efficiencies can further be improved. Our marketing plan for this product is now being defined, and our intention is to launch a separate product line later this fiscal year.

I believe this strategy has provided us with more good news, because it gives us another alternative to our traditional source of polysilicon. Our goal now is to secure refined metallurgical-grade silicon supply. We have 3.8 tons of supply on hand, and have approximately 20 tons on order.

That brings me to my fourth strategy, developing strategic partnerships and alliances to help us secure additional silicon supply. We are very active in this strategy, and currently we are in discussions with a few key parties that are in a position to supplement our supply of silicon. As I hope you can tell, we are employing a very systematic, deliberate and integrated approach to silicon supply. I believe our strategies will be key to our success in the marketplace next year and for the next few years, while silicon supply is likely to remain tight.

The second major Solar business development is new capacity expansion at Photowatt International. Our plan is to increase our integrated capacity to an estimated 60 MW by the end of this fiscal year. To prepare for this major capacity increase, we're taking advantage of Photowatt France's August plant shutdown to reconfigure existing production lines to create space for the new equipment which is now beginning to arrive. This latest capacity increase is expected to be in place as planned by the end of this fiscal year.

My third major highlight is an update on our Spheral Solar Technology development program. As indicated on our last call, we're working on an in-depth process development at our facility here in Cambridge. Using our own internal resources and those of SRI International, which was formerly known as Stanford Research Institute, a world-renowned scientific R&D consulting group, we have established a plan of attack to systematically investigate, model and develop the processes this technology needs for successful commercialization.

This is a very intensive program, and is being undertaken using rigorous and disciplined methodology to enable improvements. We have put substantial efforts in Spheral Solar Technology over the past few years, and I'm confident that we are currently on the right path. Progress review milestones have been put in place that will allow us to make critical decisions about the development path for this technology as we move forward over the next year. A preliminary assessment is due by the end of September, and we expect to have more comprehensive report in January.

Moving on, I am pleased to report that we continue to make strong progress in our funding strategy. We now expect to file a preliminary prospectus relating to our initial public offering before the end of the current quarter.

We have also strengthened our organization by recruiting Rob Franklin as Photowatt Technologies Executive Chairman. For those of you who don't know Rob, he served as Chairman at Placer Dome Placer Dome from 1993 until it was acquired by Barrick Gold Corporation earlier this year. In addition to serving as Director of Barrick, he is also Director of Toromont Industries, Resolve Business Outsourcing Income Fund, Great Lakes Carbon Income Fund and is a founder of Signalta Capital Corporation, a private investment firm.

Photowatt Technologies also added a new Chief Financial Officer with significant public company experience with cross-listed environment. David Adams joined us in June. He previously served as CFO at SR Telecom, and he was Vice President of Finance at CAE Electronics.

We have also added [Gary Snyder] as our Senior Vice President of Technical Operations. Gary has many years of senior engineering and management experience earned at Motorola. He holds both a Bachelor's and Master's of Science Degree in Electrical Engineering with a specialty in photovoltaics and has his MBA. So he, too, is a great addition.

To conclude my remarks, we're now on a very focused development path with Spheral Technology. We are delighted with the progress made to advance our silicon supply strategies, and our expansion program at Photowatt International is on track. Photowatt International has delivered record financial performance to open its fiscal year, and we substantially strengthened our management team.

Thanks for listening, and here's Ron.

Thanks, Syl. I'm very pleased with the progress made within our solar group over the past several quarters. In fact, its strategy and opportunities warrant more discussion, but we're absolutely prohibited from delivering this information because of our pending offering. Please keep this in mind during our Q&A.

In terms of topics we can discuss, I'd like to begin with Precision Components Group. Given strong headwinds in automotive, the rise of the Canadian dollar and high commodity and material costs, you may find PCG's first-quarter performance a surprise. We don't. PCG's performance reflects the benefits of some very serious progress by our management team over the past year to rationalize operations, improve capacity utilization, focus on profitable assignments and secure ongoing costs, efficiency and productivity gains.

We take some satisfaction that our turnaround plan success continues to build. But also note, we are committed to keeping the pressure on for continuous improvement because of our goal of achieving significantly improved rates of return, because as an automotive-dependent business, PCG's short-term future is not guaranteed.

In setting proper expectations, it is important to remember that with summer plant shutdowns, PCG will not show sequential progress in the second quarter. Seasonality aside, I believe PCG is taking the next step in its recovery. That means Bruce's attention is now shifting to profitable growth and strategic positioning.

Upgrading PCG's customer assignments as a key priority, and it has opportunities to do this, because some less attractive programs are coming to the end of their lifecycles. We fully expect to continue to replace these lesser assignments with more strategic work that better reflects our performance targets.

The bottom line on PCG is this. It is now much more viable, much leaner and much better-positioned to contribute to corporate performance. Now that it is on solid footing, we expect more from the group.

In many ways, PCG's comeback inspires our improvement activities within our Automation Systems Group, and ASG is my final topic today. As you know from previous calls, we defined a very clear and ambitious action plan for ASG, designed to transition our company to a more sustainable business that can grow and succeed -- a plan to give this business the structure and process it needs to maximize the value of its global leadership position, drive much higher margins and deliver the benefits of new vision and mission to shareholders and customers.

It's a long-term assignment, but I want to be equally clear that our plan and our actions also address today's most pressing challenges, including restructuring in the North American automotive sector, the Canadian currency and sales and project execution within the context of a more challenging economic environment. In combination, these challenges are big, but we're meeting them head-on with some equally large and bold initiatives.

Let me update you on our activities. To be brief, I'm providing this discussion in highlight fashion, but please don't misinterpret our actions. They are not ad hoc. They are well-planned within our strategy and roadmap, and now track within our balanced scorecard systems. For greater context, I urge you to read our annual report, which will be filed with SEDAR this week and available at atsautomation.com.

That said, our first priority is to improve margins, and this calls for cost reduction. Since our rationalization last fall, which saw the close of our ASG Niagara facility and a 6% reduction in our global ASG workforce, we have sold our underperforming Berlin business, further reduced our ASG workforce in Carolina and Ohio by approximately 10% or 30 positions, and we have made very tangible progress in our supply chain management and value engineering activities.

Let me take a moment to tell you about these activities, because they will begin to contribute in a material way to cost reduction and better performance for customers and shareholders as we gain further traction. Six months ago, we recruited Tom [Beade] to head up our global supply chain management initiatives and to participate as a partner in our value engineering efforts. Tom has substantial experience in these areas and, in concert with our regional supply chain directors, has set a five-year plan that calls on us to reduce our global supply base by 50%. This allows us to concentrate our global purchasing leverage to reduce costs and achieve better quality and delivery time performance from our remaining key suppliers.

But let me be clear. This has gone beyond goal-setting. As a small example, we have now begun consolidating our purchases of global travel at an estimated annual savings of $700,000 when fully implemented. And, over the course of the next few months, we will also consolidate global logistics to achieve better performance and prices for inbound and outbound material handling.

These might be called low-hanging fruit examples, because we're doing much more than this. Tom and his colleagues are participating in 50 value engineering initiatives. In simple terms, value engineering means taking a third party component, say a valve, and looks at the universe of valve manufacturers to determine which one provides the best product performance for our needs. Once this fundamental analysis is complete, we then seek to achieve a strategic price from the chosen supplier.

Again, we have gone beyond the planning stage to implementation. We recently awarded our valve requirements to one key supplier. We have also completed evaluations in the area of power supplies, sensors, and we're doing the same with indexers and machine component parts. That's the first five of our 50 value engineering efforts in hand, each giving better costs and quality on a global basis.

Although we're going to substantially reduce the number of companies we buy from, for risk management purposes, we will continue to maintain strategic diversification within our supply base. If a customer requires a third-party component from a supplier outside of our select supplier group and is willing to pay the extra cost, we will provide them with this flexibility. This flexibility is good for customers, but it's also good for our business.

Clearly, we aren't yet finished with these initiatives or in our other improvement areas, but we are well out of the starting gate. The ball is rolling, and we are confident that we can take significant costs out of ASG's supply chain.

I think you'll agree that cost reduction is vital, but that no company can succeed solely by exercising global purchasing power. That's why we have other important initiatives, other improvement initiatives, including now a new set of tools and processes for our sales force to follow to be more effective, responsive and accountable in performing their jobs. Over the last few months, every ASG salesperson has been given Miller Heiman sales training to enhance their sales performance, productivity and forecast accuracy. A byproduct of this initiative is the development of a much more rigorous and systematic methodology for influencing and tracking order prospects throughout our global sales pipeline. This is now starting to give us a clearer picture of prosects and where they are in terms of development, from identification through to securing purchase orders.

This initiative is very important, not only in relation to sales performance, but also in giving our manufacturing operations much more reliable and insightful information to plan their resource needs and improve utilization, which is a key driver of success in our business. We are determined to move from using our instincts to operate our business to a more data-driven approach that can plan and manage capacity utilization based upon a well-tracked, documented and supportable sales forecast. The performance system we have now implemented will be used for this purpose as we move forward.

That brings me to order booking activity both in Q1 and since then, which I would call lower than we would have liked. This is disappointing, given that our analysis of quotations shows that quote volumes in the first quarter were the highest they have been in the past 13 quarters. About the only period that came close was the fourth quarter of fiscal 2006.

In terms of dollar value of these quotes, they are essentially the same as the fourth quarter, so this shows our prospects remain strong. But right now, purchase orders are slow in coming. Part of this reflects the slower activity in the summer. Part reflects the increased frequency of engineering and consulting [events] we're obtaining in healthcare and in other markets to help better define programs and reduce the overall program risk, both for the customer and for ATS. We expect these consulting assignments will be precursors to full programs.

With respect to automotive, we have chosen, as you know, to be more selective, because of credit concerns which hurt us badly last year and because automotive is the market for price competition is most intense. We have chosen not to participate in certain automotive assignments, and further, we are not chasing prospects which we believe have become unattractive because of overly aggressive pricing. This has had a big impact on backlog and bookings, but I believe it's a smart decision.

I have indicated before that, given the challenges of automotive and the leadtimes in healthcare, as well as our focus on quality assignments in all markets, we aren't likely to see big top-line growth short-term. So this underscores the importance of our emphasis on cost reduction, value engineering and better execution as a means to generate higher margins and to further improve our competitiveness.

In terms of better execution, we have now fully implemented a new project risk management process to identify and address project risks early and proactively. We're strengthening our applications engineering functions to improve the quality of our quotations, enhance our ability to meet GAMP, our Good Automated Manufacturing Processes, healthcare's gold standard for performance.

We have raised the bar on organization and development, moving beyond investing in technical training to implementing strategic initiatives that will help us build a stronger and more efficient organization that is better able to fulfill all our strategic goals. Expect to hear more on this front in the near term.

Another key initiative that impacts our sales performance, prospects and positioning is the progress we continue to make in executing our strategy for China. You'll be interested to know that we have now opened our new ASG manufacturing facilities in Dongguan and Shanghai. So we are now co-located with GD Technologies, our partner in the region. We are rapidly establishing a sizable platform in critical mass in China, and while it's early days, I am very pleased with our progress in achieving this Phase I goal and the strategic participation in market development initiatives underway with our strategic partners at GD.

We have had very good response from customers to our strategy for China. With the continued migration in manufacturing to low-cost labor jurisdictions, these initiatives are imperative.

In fact, our global presence and growing capabilities in Asia were instrumental in helping us win and effectively serve new a computer electronics customer. This customer has single-sourced ATS to build two automated lines valued at $16 million. Both lines were for the customer's plant located to our expanded Dongguan, China facility. Despite giving us a very aggressive delivery schedule, we not only moved the order forward on time; we did so while also engaging our Cambridge and Asian operations in production and knowledge transfer. We're now positioned to handle this customer's future orders for repeat duplicate lines completely out of Asia. Provided their new product is successful, we fully expect repeat orders.

This is just one recent example of the competitive advantage we get from our global presence and the strength and experience we're building in Asia through our ability to transfer knowledge and work into this high-growth region. Growing our strength in Asia is serving our interests in all of our facilities.

To conclude, we have made tremendous strides over the past year in critically and honestly assessing our strengths and weaknesses, identifying the right plan and priorities and putting this plan in motion. I can see from performance gains we have already made in our US West Coast, Carolina and Asian operations that we're achieving benefits from this course of action. But I can also see from our performances in Cambridge, Ohio and Europe that we have much more work to do before we can deliver results that will satisfy all of us as shareholders.

The three key messages I will leave you with today are these. One, we are taking meaningful and decisive steps to put ASG back on track. Second, our PCG performance continues to improve, in spite of currency and industry challenges. Thirdly, we are on track with our solar plans.

Thanks for listening. Now, we would like to open the line to your questions. To make sure as many voices can be heard as possible, I will like to ask you to limit yourself to two questions per turn, and I will remind you that on Solar, we have very limited latitude.

Operator, can you please open the line to questions?

(OPERATOR INSTRUCTIONS). Cameron Jeffreys, Credit Suisse.

Wondering in the Photowatt International division, was there anything in the quarter that -- obviously, the margins were very good over there. Was there anything in particular that kind of pushed it over 20%, any kind of one-time sort of thing? Or was it just a combination of strong operations, strong environment, strong demand and those types of things?

There were no unusual items flowing through the operating margin this quarter. There was strong profitability was the result of the price increases and the operational gains that we've made, combined with the new strategy of selling (indiscernible) systems products.

Is that a level of margin we should be thinking about? I think the popular belief was maybe kind of mid to upper teens. Is this kind of a new benchmark we should maybe be thinking about, or can you comment at all on that, given your restrictions?

I think you just hit right on the head. Given the restrictions, [I don't think] we can comment on it.

My second question has to do with automation systems, in terms of the revenue and the margins. On the top line, the duration of your backlog in the past has been maybe two to three quarters, in a lot of cases. Looking at the bookings, from the middle part of fiscal 2006, I would have expected the revenues to be a little bit higher than they were in this particular quarter. Is there anything -- are you guys suffering any kind of delivery date pushouts or timing or anything like that from your customers at this stage?

Let me tell you the one thing that had an impact would have been the cancellation (multiple speakers).

Just the $14 million?

Yes. That was the one thing that came through. I think that we continue to move forward on all fronts with our programs, but that would be the one factor that came through on that side of it. Obviously, currency continues to be -- add to the frustration we have is that basically -- the progress we make has tended to get absorbed by the impact of the currency movement. That's not an excuse; it's just a frustrating aspect of where we're at. Clearly, there's a recognition on our part that we need to continue to move forward and drive margin improvement to drive our performance going forward.

Tom Astle, National Bank Financial.

Just again, hopefully, a factual solar question. Just a very interesting silicon supply situation you have. I just roughly calculated, of the three non-traditional silicon sources you have, and using grams per watt, traditional grams per watt, it looks like is contributing maybe up to a maximum 20% of your production in the quarter. Is that about right?

I don't quite understand. You're saying what contributes up to 20%?

Well, of your silicon supply, it looks like -- in the quarter, it looked like about 20% of your silicon supply came from the non-traditional, the three other sources you have, two from Canada and the metallurgical.

No. No, that's not quite right.

There was no impact or minimal impact, if any, on profitability from metallurgical or the silicon shipments from Cambridge to France.

So maybe the question is how much of the silicon capacity are you getting from those three non-traditional sources?

Well, we have our strategy moving forward on this. We're got metallurgical silicon, and we have got silicon we're converting from our OFP process. As Gerry alluded to, a lot of that is just starting to get in, and metallurgical is just starting to be produced.

But the 17 tons that came from Photowatt Canada?

Right.

If you just use 10 grams per watt, that would give you (multiple speakers).

The industry is roughly 10 grams per watt. We're substantially lower than that, in the normal.

So that number is lower. So it is lower than the number I quoted, then?

Yes.

Can you quickly walk us through the different two processes again in Canada, the OFP versus the separation? Can you just quickly explain that?

Yes. When we purchase -- we have the ability to purchase various size particles, from powder to larger pieces, let's say. We can separate those out. The larger pieces can be used directly with our furnaces in France, and the powder -- we have our proprietary process that converts to usable silicon feedstock for France.

Mac Whale, Sprott Securities.

Could you discuss a little bit about the supply, the size of the supply chain for those other various feedstocks -- in particular, refined metallurgical-grade silicon -- like how big is that compared to poly and what the sort of pricing is?

Well, the advantages you are probably more familiar with. But the supply of metallurgical silicon is much greater. That's the feedstock we're using to produce polysilicon. What they're doing now is refining it, and what we do with it is, through our processes in France, we further know how to use it and get the efficiencies out of that material. So the advantages are that metallurgical silicon could come onstream much faster.

But you don't have any rule of thumb, say, in terms of the size of -- like, if there's 27,000 tons of poly, what's the size of the met-grade or actually the refined -- I know the size of the met-grade industry. I'm wondering about the refined met-grade. I'm wondering what the premium on refined met-grade versus met-grade silicon is.

I think met-grade is -- I believe, I'm not to familiar with it -- is probably $5 a kilo. But the refined metallurgical is in the $30 range.

So that's still a great cost advantage over poly.

Absolutely.

That brings me to just a follow-on on that. In the press release, you stated or it was written, we believe using the lower-cost silicon is less profitable, but it's still economically viable. I was wondering if you can clarify that, because I thought if it was economically viable -- like given what you just said about $30, it looks like it should be more profitable.

Poly silicon had -- people in the industry are getting around 15% efficiency. Metallurgical silicon -- we are getting, right now, greater than 12%, and we hope to get much further beyond that. It's a cost versus an efficiency question.

But I think that the bottom line here is that the refined silicon cost advantage is better than the penalty you pay on efficiency. Is that correct?

You in the right area.

For Ron, I was wondering if, on the ASG, can you take us through your view of the industrial -- your segment's capital spending? There's a lot of concern basically in US and globally. Where do you see that -- where are we in the cycle? It would be helpful if you could sort of do it by industry.

I think that what we have seen generally is within our more traditional markets -- and I would say, computer electronics and automotive -- we're seeing a tremendous migration of that type of manufacturing into the low-cost labor jurisdiction, and I would say China and Southeast Asia. A lot of that activity we're seeing is really moving in that direction.

Within the healthcare arena, we still see a very robust global market there. I would say our activity in that space is still primarily North America, and we're starting to gain some traction with that within European. We think those are going to be good, strong markets within those jurisdictions, and think they will continue driven by demographics in the healthcare arena, in particular, but also through advances in technology.

Right now, I think that as I indicated, our quotation activity remains very high. I think the quotation activity remains fairly broad-based as well, so I don't know if I would say that in particular it's focused on one industry sector versus another. It's difficult for me to give some granularity from the standpoint of saying, well, if the automotive is up or down or sideways, is that because we're being more selective? It's just too early with respect to the processes we have implemented to be able to give you that type of feedback.

I can tell you that part of our new process that came out of our Miller Heiman training was really meant to make sure that if there's a prospect that doesn't fit our criteria, that we move on early, as opposed to in the past we tended to bring these things through and spend a lot of time and effort developing these things through the end. As you know, I think, when you get into that bigger situation, it's difficult to say, well, this is not right for us, after you have invested that much time and effort into it. I don't know if the answers your question, but that's kind of how I would see it.

Donato Sferra, TD Securities.

I just wanted to ask you a couple quick questions about the OFP silicon. What seems to be the restriction on producing more of that? Are you able to run that at capacity right now, given your raw material? Or is the restriction getting the raw material?

Right now, we're running at almost capacity.

How expandable is that capacity? If you had to expand the furnace capacity, how long would it take and how much would it cost?

I don't know exactly how long it would take, but our processes are repeatable and we can replicate the process.

Ron, you talked a little bit about -- or a lot about some of the changes you're making at the ASG group in terms of cost savings. When can we start to see the benefit of that flowing through the income statement?

I think we have actually started some of the benefits flowing through. But, as I said, currency has been eating up a lot of it. But I think we're at early stages on some of these initiatives. We're just starting to see some of the benefits start to trickle in. As I mentioned, for example, the work we're doing in supply chain -- I think we're just starting to get some traction in that area, and that we'll start to see that build through the balance of this year. Unfortunately, currency moves quickly, but these cost-saving initiatives take more time to catch hold. But like I say, I'm pleased with the progress we're making. I think we're identifying clear opportunities which are able to generate savings through the supply chain which are in the millions of dollars, just to give an order of magnitude. We see millions of dollars in savings, and estimated savings, just from the five value initiatives that we have right now. As I said, there's a lot more of those in the queue.

When do you plan to get more aggressive on the other initiatives that are in the queue?

I think we're aggressive right now. But as you know, when you identify one of these things, you start to see the savings through future procurement. Do you understand what I mean?

Yes.

When you spend money, you save money, so to speak.

David Tyerman, Scotia Capital.

David Tyerman Just expanding on Donato's last question, do you actually have a timetable and goals in mind for metrics that you can share with us, in terms of what you are trying to do with ASG?

We have set a goal. I don't think I'm prepared to share with you what our target is, from the standpoint of taking costs out of our cost base this year, but it's a meaningful number. I guess that's all I'll share with you at this particular point in time.

On ASG, just looking at the FX table that you provide, which is helpful, it looks like the last couple of quarters, you have been running margins excluding FX impacts of about 5%. If the dollar stabilizes, which it has for a little while now, would we reasonably expect to see that improvement from where you are right now? Or is some of that not possible to be captured because of competitive erosion or wherever?

As I indicated in my comments, we are clearly focused primarily on cost reduction and margin enhancement in the current environment. I think that's absolutely crucial, because those provide us an ongoing savings platform, if you want to say, from the standpoint of our ability to improve margins. But they also allow us to improve our competitiveness on a go-forward basis. So that's clearly where our focus is.

I think that one other things, when I look at currency, I think once the currency went through the $1.20 level is when we really started to see a lot of the issues come to the surface and be much more meaningful for us. That has been in place for some time now. As I said earlier, I think it just takes time for our improvement initiatives to catch pace with the speed at which the currencies move.

I guess I'm wondering like -- so with that table, what am I really looking at here, is really the question I have. It seems like the implication of it is that your margins would be 5%, if that didn't happen.

What that table attempts to estimate -- and there's a lot of variables in that table, both transactional and translation impacts -- and in a variety of currencies, not just the US dollar anymore, that's moving against Canada and the euro as well and, to a lesser extent, some of the other currencies we're in. But it attempts to estimate the impact on this last period's volumes if they were at last year's rates, in first quarter a year ago.

So it's just a strictly year-over-year comparison.

Frederic Bastien, Raymond James.

You mentioned that Photowatt benefited from a sale of its insulation kits and power inverters in the quarter. Can you provide more color on this strategy?

We are looking at total solutions to the market. Our experience that we have allows us the opportunity to take on projects where we actually offer additional products, inverters and installation kits and wiring. We have that as an OEM -- supplied to us as an OEM product.

I would suspect that this area is pretty well covered. What kind of an opportunity are you seeing there?

The initial results we've had is it's very good, because what's happening is that people are looking for total solutions to not just panels. With the experience we have, we are able to provide this.

Just a clarification. When you referred to the 12% efficiency that you are able to get out of metallurgical silicon, are we talking about a cell that's made entirely out of that type of silicon? Or is a mix between poly and metallurgical?

It's made with 100% metallurgical silicon.

[Alexei Yanas], Clinton Group.

I realize your restricted on what information you can give on Photowatt, but is there any information you would give on the timing of the actual IPO? Would that likely be early fourth quarter?

Secondly, if, for whatever reason, at the time the IPO market is not accommodating, would you consider strategic alternatives such as a sale?

Can't comment on the timing of the filing. Stewart is here shaking his head, so I can't comment on that. With respect to a sale, I think that's always an option that is open to you. It's always an option, so I guess that's what I would leave open.

Marko Pencak, GMP Securities.

I have a question just in terms of general philosophy for ASG. Your order intake has been declining since Q2 of the last fiscal year. You have commented on managing down your automotive exposure and the difficulties there. So that would explain part of why that is happening. But I guess my question is, given that you have not seen a compensatory offset by increases in your other -- in the other end markets, why are you still retaining capacity in your eastern ASG divisions? Because at least my perspective, and maybe you have a different view, is that the challenging conditions you have described in automotive, in particular, are not likely to reverse anytime soon.

I think that's a very good question. I think the bottom line is this. The markets we have seen have had a lot of volatility attached here from the standpoint of order prospects. There's been a lot of orders which have been in our queue which where we have seen some slip-outs, push-outs. I can tell you that, for example, there's an order that has been sitting on the pending list for the past four quarters, which is a sizable one. We think that's imminent now.

So it has been that type of data which has caused us, I think, to take a longer time than you might otherwise think to adjust capacity. I think that's one of the reasons why we have invested time and effort to develop better information systems to give us better visibility of what is coming through the sales pipeline because, obviously, having that data allows us to take action, which has been a limitation in the past. So I think we're now getting the tools in place that will allow us to better understand what capacity is appropriate for our business and then adjust it accordingly.

So I'm pleased with where we're at in that particular process, and I understand why some people may think that this is an easy -- something you can react quickly to. I think historically, we have also indicated that it's not easy to flex capacity under our current business model. So the decision to adjust capacity is one that needs to be dealt with, I think, in a very deliberate and calculated way as opposed to being a knee-jerk reaction.

But I think we are getting there, where we're going to have -- where we're getting better information to allow us to make those types of concrete decisions, because I can tell you that the entire executive team of the Company is very focused on getting our margins back up, and excess capacity has been a factor which has held us back, I would say, since 2001. Clearly, I think we're now getting the data which is going to allow us to make concrete decisions about what capacity is appropriate and how we should get to that [particular] point.

Just to clarify on your response, the [sizable awards] that you're talking about, that have been around for a while -- those would be non-automotive?

Yes.

I just wanted to get some further color into the inability for there to be closure on some of the healthcare orders that you talked about earlier, and you talked about some of the consulting assignments. I just want to understand -- is it a function of your prospective customers not yet having formulated their formal product launch strategies? Or is it uncertainties with the benefits of automation and perhaps the whole hoops that they they have to go through with respect to FDA compliance when they do adopt a different manufacturing process?

It's not based upon their willingness to accept automation. I think it's driven by the factors you said, the regulatory environment. It's also driven very much by marketing tactics and strategies within the business as well, which creates more volatility. I think we've commented on this in the past. In the automotive sector, you tend to get very well-defined launch strategies with respect to vehicle platforms and products, which don't tend to move around that much. What we're seeing in healthcare is much more volatility driven by the increased regulatory environment, as well as that at the end of the day, these are consumer products, and there's marketing decisions which are made by these companies which can cause them to shift their activity levels around.

I think that's one of the reasons why the work we're doing in the consulting aspect of our business is so strategic to us, because what we have found is that our ability to work with a customer to help define what they are going to actually build is very valuable work from the standpoint of building a relationship with them, and also helping them to define to a much higher degree what it is the require so that, when they decide to pull the trigger, they can move or expeditiously with less risk attached to the program. I think that's an important aspect of how we're providing value to our customers through that service.

Michael Willemse, CIBC World Markets.

Syl, when ATS reported their fourth-quarter results, it was indicated that 25% of your silicon feedstock for Photowatt France could come from Photowatt Canada. Is that still the case? What capacity is that assuming, 40? Is that 40 MW?

When we reported that, we said up to 25% could be available to us, through our processes. That's at approximately the 40 MW range, yes.

So on top of that, you could also sourced metallurgical silicon?

That's correct.

In the press release, when you suggest that you have -- or when you indicate you have successfully manufactured 70,000 solar cells, how many solar cells do you normally manufacture in a quarter?

Good question. I don't -- it's in the -- I've got to calculate this one out. I would say it's close to 1 million, but don't take that as literally; I've just go to think about this. I don't -- I can get that information for you, if you want. I don't have it right now.

But the 70,000 is --

70,000 cells, for us, is more than enough to tell us that our processes work, and our strategy to use metallurgical silicon is a viable strategy to us.

One more question on ASG. Ron, you talked about the Canadian dollar impacting the business and cost cutting. What are your competitors doing on the pricing standpoint? Would you say that they are being rational? Or, if we looked at your competitors, do you think they're getting hurt on the margin just as much as you guys are?

I would have to speculate on that because, as you know, we have very few public competitors. I would say those cost competitors are going aggressively down to [motor] market -- my suspicion is that they are being hurt by the margin cuts because they are going -- it's a very aggressive market right now, I would say. Automotive continues to spend money, but pricing competition is fierce.

I would also say that some of them, I think, those that are domiciled in the US, have been under cost pressure for some time. I think some of them have gone ahead and probably taken advantage of some of the things we're doing right now. I think the advantage ATS has is its size and scale are quite unique. So its ability to gain greater leverage from some of these initiatives is, I think, extremely powerful.

What I'm talking about, just to give color -- for example, the steps we're taking to put in more formalized supply chain sourcing and management initiatives is not new. I think that some of our competition has clearly moved down that path. It's new for ATS, because we're pushing heavily in that direction, and I think the benefits to ATS are substantially greater, simply because of our size and scale, which outstrips most of our competition.

Would you say that there are some irrational competitors out there who will need to exit over the next few months? Or do you think the industry, capacity-wise, is in reasonable shape?

I think that right now, most of the competition is regionally focused. So I think that some of those -- there are competitors out there that are heavily focused. Again, it's speculative on my part, but my understanding is that competitors who are basically North American-based that are heavily dependent on automotive or having a tough ride.

Donato Sferra, TD Securities.

I know you can't give us more detailed update on the timing of the prospectus filing, but in the past, you indicated that there were legal, accounting and tax issues that you were working on. Can you give us an update on the major hurdles -- so for example, have you finalized the financial statements for the standalone entity? Have they been audited? Just things like that. Can you give us some more color on those things?

Stewart is saying no.

On the solar cell efficiency for the cells made with metallurgical-grade silicon, can you tell us what your goals are in terms of getting that efficiency up to more normalized levels, and if you think that's achievable?

We have a process in place, R&D efforts in France, along with some outside help that we're confident now that we can take steps to get cells greater than 12%. I don't want to comment any more than that. Or greater than 12% now, but we're saying noticeably higher than 12%.

James Bradford, Blackmont Capital.

If you went with an outright sale of Photowatt Technologies instead of an IPO, you would then be sitting on a mountain of cash. What would be some of the options on the table for that cash? Special dividend, or are there other options?

We're getting into the area of speculation, and I think it would be inappropriate to get into that right now.

In terms of the metallurgical silicon, are there any negative perceptions in the marketplace about modules made of metallurgical silicon, other than conversion efficiency?

Right now, the industry overall is starving for panels, so a watt is a watt. That's how panels are sold, so we feel pretty good that we have no hidden problems, in terms of us being able to sell a watt of power.

James Bradford So they don't degrade faster over time or anything like that?

No.

Is it more difficult to manufacture modules out of metallurgical cells than polysilicon cells?

No. It's exactly the same process. Once a cell is made, the rest of the process is pretty well the same.

In terms of healthcare ASG contracts, with the largest consumer of automation slowing down considerably -- i.e., the automotive business -- are r your competitors also flowing into healthcare?

Absolutely. Absolutely, and I think that's one of the reasons why -- we have been working on this for, well, five years now, and spent a lot of time and still have work to do. (Indiscernible) developed the requirements to satisfy the [intense] regulatory environment surrounding healthcare. It's not something you can flip the switch and automatically be a dominant supplier into that [bigger] marketplace. That's one of the reasons why our lead-in to the marketplace, we think, is so powerful.

Do you have less standard equipment offerings for healthcare contracts than you would in automotive, or is it about the same?

Most of our standard product platforms are usable across industry platforms. I think we have, in the past, talked about some of the standard product platforms we developed, which are specific to healthcare, where we talked about some of their inspection systems that we developed in the last while. Ampuscan and Lyoscan would be two that quickly come to mind, and also the work we're doing in barriered environments.

Those are basically product platforms we developed using our expertise developed in other industry sectors and developed specific platforms for use in healthcare. Things like the Supertrak, Superbots, many of our other standard -- SmartVision, all those types of product platforms are very applicable across all of the industry sectors, including healthcare.

Mac Whale, Sprott Securities.

When you look at the silicon process and capabilities you have, is it viable as standalone business? Or is this really just an internal stop-gap until more poly comes online?

If you're speaking about metallurgical silicon?

Well, actually, it's both of them.

Let me address metallurgical silicon. Metallurgical silicon, what we have been able to do -- and the people in France have done a fantastic job. They had been able to take this metallurgical silicon in making salable, profitable cells out of this metallurgical silicon. If we had the best conditions, we would take polysilicon at the same price as metallurgical silicon, obviously. But this gives us an opportunity to build capacity and have the silicon in place to build up capacity.

And generate a rate of return.

Exactly. Now, on the feedstocks as generated by Photowatt Canada to Photowatt France, that can go on as long as there's silicon powder and fines around.

The heart of my question, though, is that if you have a potential for better return on capital in making upgraded silicon, why bother making -- why don't you just expand that far more than your cell capacity is expanding? Because there's a lot of other buyers that will take your material. Or is there something I'm missing? Is it that over time, as all this poly comes online, we're looking at $10 poly?

Well, we buy it for a certain amount, and we still add some value to it, but it's still less. But that's an option to us. That's an option that we have with our Spheral processes.

David Tyerman, Scotia Capital.

Syl, you mentioned that your [grants for water] or lower than the 10 that seems to be the benchmark these days. Can you tell us where you are? Some of your competitors are giving that stuff out.

We're in the -- I'm looking at my lawyer here, if we can answer -- we're in the 9-gram range.

Just on the raw material availability for the OFP, do you have any sense of what's out there? Like is this a very large untapped resource, or is it pretty much what -- you're using a lot of what's out there?

Well, I can give you this much. Silicon powder comes from fluidized bed reactors. There are basically two companies that produce silicon through a fluoridized reactor, and that's MEMC and [RAC]. There are other companies, though, coming onstream that are looking for that process because, apparently, fluoridized bed is able to deliver silicon at a lower cost because it uses less energy to produce. The silicon powder is sort of a byproduct or part of the process that spins off -- the reactors spin off this dust, and that can be collected.

Are you buying pretty much all that's out there right now, or do you think there's --?

There are opportunities to get more.

Any idea how much more? Like maybe two or three times as much?

I wouldn't want to speculate in this silicon market right now.

On your SSP -- or, sorry, OFP silicon capacity, I am a bit unclear on that. Did you say you shipped seven tons of OFP?

Yes.

And you are running at capacity? So does that imply your OFP capacity is something like 30 tons a year?

We are close to capacity. We are not -- we still have some wiggle room.

That sounds like 30, 40, something like that is a reasonable number to think of?

Okay, if you say so.

Is it? I'm asking.

You know, I can't (multiple speakers).

It's in the ballpark. You're in the ballpark.

On the metallurgical silicon, are you aware of anybody else following this route?

What I understand from it, it's a brand-new way of getting at the silicon. What we're finding right now, we are really in the leading edge of this technology.

I think our ability to use metallurgical-grade silicon really comes before because we are -- as an integrated manufacturer, we're able to basically work with the entire manufacturing process from [broad] silicon right through to the end product of the cell. I think that's one of the reasons (Indiscernible) allowed to sell at this --

I want to emphasize that this is refined metallurgical silicon. It's not metallurgical silicon that people use to develop polysilicon.

Right, understood. I'm just curious, though, because in the rest of the industry, it appears that all the announcements are supply agreements between whoever and whoever, SunPower and whatever. It's all poly, and so I'm kind of curious why I haven't heard of this before, other than with you guys. It just sounds like you feel you are ahead of the rest of them on this?

Well, Photowatt has been in business for 20 years. That's a fundamental difference.

When I came into the industry, I looked at it and we looked at our silicon strategy and looked at what direction we could take. This is another opportunity; it's a three-legged stool.

The tax rate was very high in the quarter. Was that related to the Berlin thing, or what's the story there?

It primarily relates to different jurisdictional mixes. We had a good performance in Photowatt, and we had some other jurisdictions where we had losses where we were not recording a tax recovery. So when you net off the operating profits with operating losses, you end up with an effective tax rate that appears high.

So is that sustained in the future? It sounds like it might be.

No, it will bounce around a bit as we (multiple speakers). I would expect it to tread more toward where we have been in the past, in kind of the 33% range.

But not right away?

It's hard to say. It depends on the mixes of the different jurisdictions and how they come together in a particular quarter. Again, longer-term, it should trend back towards the 33%.

Fair enough. On the CapEx, any guidance on budget for this year?

I think we gave that last quarter.

So just use the same as last quarter?

Yes. We are, especially in ASG at this particular point, we're really looking at all capital expenditures and going through a fairly rigorous process. So it may be down from the guidance we gave last quarter, but we don't have a specific updated forecast as to [what are we down]. But suffice it to say, we're really watching the capital expenditures in that area right now.

Donato Sferra, TD Securities.

Just on the powder silicon, have you tied up the silicon powder supply from MEMC and RAC? Are you buying all their byproduct, or is it just a portion of their byproduct?

I can't comment on that. Sorry.

We have no further questions at this time. Please continue.

This is the conclusion of our call. I advise you that our shareholders' meeting is scheduled for Wednesday, September 20th, and it will be held at Conestoga college in Kitchener. The meeting materials will be mailed later this month, and I certainly hope you will attend. Thanks for participating in our call today.

Ladies and gentlemen, this concludes the ATS Automation Tooling Systems first-quarter conference call. Thank you for using AZT Teleconferencing. You may now disconnect.