ATS Corp (ATS) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the ATS fourth quarter conference call for three months ended March 31, 2007. (OPERATOR INSTRUCTIONS). The following statements reflecting forward-looking information is made on behalf of ATS and all of its representatives on those call. The oral statements made on this call will contain forward-looking information, but actual results could differ materially from the conclusions, forecasts or projections in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projections 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 a projection as reflected in the forward-looking information, are contained in ATS' filing with Canadian provincial securities regulators, including ATS' annual MD&A and consolidated financial statements and annual information forms for the fiscal year ended March 31, 2007.

I would also like to remind everyone that this conference call is being recorded today, Wednesday, June 28, 2007. I would now like to turn to call over to Ron Jutras, President and Chief Executive Officer of ATS. Mr. Jutras, please go ahead.

Thank you and good morning. I'm delighted to be here today as we announce the next major steps in our strategy and our commitment to unlock the full potential of our business for the benefit of our shareholders.

Also with me this morning are Gerry Beard, our Chief Financial Officer; Gary Seiter, the Chief Operating Officer Photowatt Technologies; and at the back of the room, Carl Galloway, our Vice President and Treasurer.

Our strategy is threefold. First and most important for our long-term future, put all of our resources and muscle into exploiting the heart of our business, Automation Systems, where we have achieved strong global leadership. Second, and as a related initiative, move to divest our remaining Precision Components business in an orderly and timely fashion, which we are positioned to do. And third, reinforce and strengthened our solar business so that Photowatt Technologies can quickly reach stand-alone status, which will facilitates ATS' exit from its other noncore business on attractive terms.

With our silicon supply now much improved, expanding Photowatt makes good business sense. And therefore we intend to complete a rights offering to raise $110 million this summer. This funding will support key elements of our solar growth plan, which Gary Seiter will outline in a moment.

To ensure the issue's success the Company has a standby purchase agreement with Goldman Sachs Canada Inc., Goodwood Inc. and Mason Capital Management LLC, three of our largest institutional shareholders. Our agreement is that should one or more ATS shareholders not exercise their right to purchase common shares, and should the remaining ATS shareholders decline their option to purchase such common shares, the standby purchasers will purchase all the common shares not otherwise purchased.

Although our decision to exit PCG and solar and bringing exclusive focus to automation may seem recent to some of you. These initiatives are the product of much of effort over the last two years. They are a natural evolution of an established corporate strategy intended to build lasting shareholder value. When the process is completed, ATS will be a pure Automation Systems company, with a single highly focused business model that should allow us to generate higher returns for our shareholders.

It should not come as a surprise that management is far from satisfied with our present performance. And we are absolutely determined to change the status quo and capitalize upon the good opportunities we see in our core business. We absolutely believe that the time is right to move aggressively with each of these actions.

Our Automation Systems group is now a greatly improved business, particularly in North America. I believe we're much better positioned to deliver stronger project execution and better resource utilization as a result of the extensive rationalization and organizational improvements we have already made. Today ATS is much more able to meet the increasingly global needs of our multinational customers and take advantage of improved ASG order backlog in the fourth quarter.

So excluding the two facilities where restructuring was just implemented in Q4, our global ASG business generated improved revenue and operating profit in the fourth quarter compared to the third quarter. And we expect both of these facilities to improve their performance in the first quarter of this new fiscal year, adding to the improved outlook we are reporting today.

But now let me talk about our vision and the clear direction we have to unlock the full value of our Automation Systems business. First, Automation is our greatest strength. It is our sweet spot. And it is where ATS made its mark as a market leading global player. It is also where we have unparalleled advantages over our largely regional and highly fragmented competition. I think you will agree as owners that the best businesses to own are those that are global leaders.

ATS Automation is the global leader in our industry in four specific areas. First, we are the global leader in technical skills, capabilities and innovation. Within our core business we are knowledge-based with expertise in custom automation, repeat automation, repetitive equipment manufacturing, and value added services, including consulting, installation and customer support.

Second we are the global leader in experience. Since 1978 we have designed, built, produced and installed thousands and thousands of Automation Systems for hundreds of different multinational customers. Third, we are the global leader in scale and presence. We have 16 operations in nine countries, including five facilities and 400 people in China and Asia, highly recognized as fast-growing manufacturing regions. To multinational customers our reputation for excellence, our global presence, experience and technical capabilities make us the first choice, especially on large technically advanced assignments and projects which transcend geographies.

Fourth, we are the global leader in terms of our customer base. As you may know, we have and continue to serve numerous Fortune 500 customers in sectors that include healthcare, computer electronics, automotive, consumer products and energy. Among them Hewlett-Packard, TRW, Procter & Gamble, Gillette, [Bett and Dickinson] and Johnson & Johnson.

Today we are intensifying our focus on those customers who provide us with the best opportunities and returns, and who allow us to compete on value and not just price. This means moving to customers where our capabilities are in highest demand. This is what today's announcement is really all about, strengthening our focus to unlock our full potential as a business.

In fact we have already made considerable progress in this direction. The restructuring of our core business done as part of our 2006 strategy roadmap has seen us make many improvements. These have included closing or divesting six facilities in the last two years, investing in four new facilities in China and Asia, reducing our North American workforce by 21% over the last two years, doubling our Asian work force to 400 people since the start of fiscal 2005, installing highly capable regional executives to manage our operations in each of our geographic regions, redesigning and implementing a more effective organization in North America and especially in our largest facilitates in Cambridge, implementing improved management processes in numerous areas including our sales, business development and project management functions, and achieving additional cost savings through growing supply chain management and continuous improvement discipline.

As a result, our cost base has been reduced, while our sales generation, prospecting and forecasting capabilities have improved. We are building on the foundation that is now in place and we are moving forward with our plans to provide our shareholders with improved returns.

With our increased focus on automation the time is right to seek strategic alternatives for our Precision Components Group. The consolidation of MPP has now been completed. And PCG is now right sized with a tighter more focused business model, a growing presence in China, and cash flow positive core assets that make it a more attractive business. In fact the new direction for PCG was our endgame when we started the restructuring two years ago. The exit plan announced today will see us complete this very important strategic initiative.

To implement our PCG strategy we will have hired Scotia Capital to advise us on the strategic alternatives for the group. Our intention is to complete this work and exit the business within the next 12 months and earlier if possible. The time is also right to move forward on our solar strategy, which is designed to give Photowatt the means to achieve stand-alone status.

And now I would like to turn the presentation over to Gary Seiter, Photowatt's COO, to give you the details.

Thank you Ron. Our solar strategy is intended to give Photowatt the means to achieve stand-alone status. Here is the exact order of the step-by-step approach we are taking with Photowatt. One, solar management has been refocused exclusively on Photowatt France, the engine of our solar business. This means we have halted further development of Spheral Solar Power. This move will eliminate the substantial cash outlays that have been incurred by ATS to chase SSP's commercialization. It is clear that we need to find the right vehicle to fund and drive future SSP development.

Two, we intend to secure additional long-term polysilicon supply. This will reduce our dependence on metallurgical silicon and will further support capacity expansion above and beyond our current plans. Three, we intend to recruit an experienced high-quality CEO for Photowatt. We expect this person will be located in France, right where our primary operations are based.

Four, we intend to further advance and solidify our R&D initiative. This includes advancing the performance of our solar modules made from refined metallurgical silicon. It also includes firming up our attractive R&D collaboration and partnership arrangements, called Labfab, with the world-renowned French Atomic Energy Commission and Electricity de France.

Five, we plan to expand Photowatt. Our new plan for Photowatt reduces the risk of expanding capacity before we secure silicon supply. It also means we're adjusting how we expand our silicon capacity based on the nature of the silicon we secure, whether it be virgin polysilicon, refined or enhanced metallurgical grade silicon, poly or monosilicon ingots, or polysilicon wafers. Our plan allows us to flex our capabilities in response to the materials we secure to grow the business. And it further underscores the benefit of our fully integrated manufacturing capability.

The proceeds of a rights offering will allow us to add capacity to grow revenue and EBITDA, while supporting key elements of the solar growth plan, which are summarized as follows. Construction of a new building and certain infrastructure at an estimated cost of $30 million required to house increased cell capacity and to provide for Photowatt France's future expansion up to 130 megawatts of annual capacity. Acquisition of equipment estimated at a cost of $20 million to increase Photowatt France's cell capacity by about 20 megawatts, up to approximately 80 megawatts. To fund our participation in the R&D Labfab estimated at a cost of $16 million. And to secure additional polysilicon supply contracts.

Photowatt is a great business with over 20 years of experience, a tremendous reputation, the best technology in the world, and EBITDA margins that compare favorably with larger companies in the industry. I'm excited to be able to execute this plan and to enhance the value of the solar business.

I will now turn the presentation back to Ron.

Thanks Gary. I would now like to provide a brief overview of our financial performance for the quarter. For a full disclosure please read our consolidated -- our audited consolidated financial statements and MD&A for the year ended March 31, 2007, which were released today.

Turning to our financial results for the quarter, ASG revenue was $113.8 million, or about 19% lower than a year ago. We also incurred significant restructuring and severance costs at our Cambridge and Ohio operations. ASG adjusted EBITDA was $3.6 million compared to an adjusted EBITDA of $8.1 million in the fourth quarter of fiscal 2006. Adjusted EBITDA excludes the Cambridge and Ohio restructuring severance, inventory provision cost, and an operating loss at our now closed California facility. Fourth quarter ASG operating income increased 40% in Asia, increased 54% in ASG's repetitive equipment manufacturing business, and 116% in North America and operations outside of the Cambridge, Ohio and California facilities.

Photowatt Technologies revenue was $38.5 million compared to $39.2 million in the third quarter of fiscal 2007. As we previously announced, fourth quarter revenue was impacted by a delay in the shipment of two orders, aggregating approximately EUR4 million. Shipments for one of these orders has since restarted, and are expected to continue going forward. And the production from the other has now been reallocated to different customers, because the customer has been unable to firm up the extent of their delay.

Operating earnings were reduced compared to the fourth quarter of the prior year primarily as a result of lower revenues and lower average selling prices that were experienced in the fourth quarter of fiscal 2007, and increased MGSI module production. Adjusted EBITDA for Photowatt France was $5.9 million, 16% margin compared to $7.8 million, 20% margin in the fourth quarter of fiscal 2006, and $8 million, 20% margin in the third quarter of fiscal 2007.

Turning to PCG, the fourth quarter revenue and operating performance reflected lower volumes on existing customer programs due to production cuts by the big three North American automakers. PCG's fourth quarter adjusted EBITDA was $0.7 million on revenue of $21 million compared to $2 million in the fourth quarter a year ago on revenue of $28.9 million.

ATS incurred several charges and unusual items in the fourth quarter totaling $68.8 million. Of this amount, $57.7 million were non-cash charges. The withdrawal of the Solar IPO was the primary trigger for all of these charges. And they include a non-cash charge of $37.6 million related to a valuation allowance against the Company's Canadian future tax assets, charges for the write-down of fixed assets mostly for SSP, IPO expenses, and a non-cash foreign exchange charge.

I believe the immediate outlook for our core Automation Systems business is positive. Our Automation Systems order bookings of $134 million increased 23% in the fourth quarter from the third quarter. And so far during the first quarter of fiscal 2008, we have booked another $90 million in orders. Now we have a number of additional great prospects in the order pipeline which bolster our confidence in the future. This adds further to the already much improved backlog level which stood at $185 million at the end of the fourth quarter. Also the new orders booked over the past 4.5 months were well diversified by industry and across ATS facilities. All of this is good news.

But what about the future? Where do we intend to take ATS as a pure Automation company? Our vision is to be the world's best Automation Solutions provider, the best in shareholder returns and customer satisfaction and referrals, industry leadership, and the best place to work. Therefore our first priority is to improve the performance of our core operations.

In North America we have reduced our cost, completed our recent restructuring and adjusted our capacity to more desirable levels. With improved order flow and higher backlogs, we expect to improve utilization during fiscal 2008. In Asia we have substantially increased our capacity with our new facilities and workforce, and with it, our ability to serve our customers and need their needs. In China we have two new ASG facilities on stream, and a renovated one in Tianjin, adding to the presence and capabilities we have in Malaysia and Singapore. In China we are profitable ahead of schedule, which is great news because of the significant upfront cost of our expansion. Our team is executing well against our early growth goal of rapidly growing our business to achieve critical mass in this high-growth region. In Europe we have made a number of changes to strengthen our operations and set the stage for more progress.

Ultimately our clear priority for this region is to continue to generate an attractive earnings progression. It is not yet where we want it to be, but we are making solid progress, and we now have the order backlog to help us. In fact European backlogs at the end of the fourth quarter were sitting at their highest levels in many years.

Our second priority is to deliberately target and enter new markets so that we can expand our base of multinational customers, attracting customers who can make optimal use of our capabilities, who will work with us closely, and where value creations is the key driver of our relationship. Working with the right customers and building close relationships with them to grow revenue and earnings is more important to us than ever.

Our third priority is continuing to accelerate and develop our technical and management talent. The first part of this strategy, which focused on bolstering our regional management capability, has been largely completed. We continue to drive our performance both now and in the future. We're also pressing forward with the adoption of proven disciplined and effective talent development initiatives. Our focus is to provide our employees with a vested interest in developing a strong career path for themselves in either technical or leadership skills. And for ATS it means we will build a sustainable and strong pool of talent to provide the advanced technical leadership customers look for in ATS. For ATS shareholders it will provide greater management depth to help us successfully grow our business on a global scale.

We're also upgrading our organization at the corporate level and making key executive appointments to strengthen our organization and provide additional management depth, and deliver greater support to our regional teams in Asia, Europe and North America.

All of this adds up to our fourth priority, which I believe is the most important of all four, both to our customers and to our shareholders. It is to unify and further strengthen the ATS trusted global brand. You have heard us speak about this before, but with a single global brand we can present a much more attractive value proposition and quality standards to our customers around the world. This will also enable us to take optimum advantage of our size and global presence.

Most important is our focus to on dramatically improving our internal ability to collaborate, share and transfer knowledge globally on a seamless and efficient basis. This is what our multinational customers want from ATS, a single trusted global source for their automation needs. With the trend of increasing consolidation and globalization of manufacturing, it is very clear to us that this strategy will open more opportunities, and that is exactly why it is such a key priority.

To conclude I believe our strategy will unlock the full potential of our business because, one, it transforms ATS into a highly focused company, and empowers us to become the best Automation Solutions provider around the world, with an established, trusted global brand and attractive shareholder returns.

Two, it provides us with the means for an orderly and efficient exit from our Precision Components business at the right time. And three, it supports the development of our solar business as a stand-alone enterprise with the funding it needs to continue to expand, and to provide for our exit. ATS is already the industry leader in North America, and we are the only company in our business today with a global footprint and the size and expertise to truly become the world's largest and best Automation Solutions company.

I believe this opportunity that is before us is substantial. Our progress to date is real, and today's announcement further demonstrates the increasing intensity of our focus. We welcome your support as we build a strong global ATS brand, and with it a much more valuable investment.

That concludes our presentation today, and we thank you for listening. Now we would be pleased to answer questions. However before we do, I would like to remind you that since we will be filing a preliminary prospectus relating to the rights issue very shortly, disclosure rules do limit the nature of our answers. As a result, we are prevented from making any projections or comments about the future. I appreciate your understanding of these restrictions. Operator, maybe you could start with our questions please.

(OPERATOR INSTRUCTIONS). Frederic Bastien, Raymond James.

On ASG I was wondering your bookings were decent in the fourth quarter, but it looks like you are a bit behind in the first quarter with only one week to go. Can you expand on the positive order prospects that you have going? I noticed that you touched on them briefly.

Maybe I will start out. Unfortunately we cannot elaborate a lot more, given the fact that were going to be filing a regulatory document. Suffice it to say, I'm pleased with where we are at.

Okay. I was curious about, you noted that ASG actually performed better year-over-year, but even when you look at the normalized EBITDA that you reported in the quarter, it was inferior to last year's. Is there anything I am missing here?

I think just in response to that, I think that the comment was excluding the operations where the restructuring was. It was the performance year-over-year had improved. We took -- we had some substantial restructuring going on in our Cambridge and Ohio operations, which resulted in severance costs and other costs, direct costs. And it was also a substantial disruption within those operations. So for that reason we are not expecting the Cambridge and Ohio operations to have any sort of -- this magnitude or loss or any loss at all in the first quarter and ongoing.

You did highlight the fact that there were substantial indirect costs that arose from this restructuring. Are you able to quantify it, or at least qualify some of these costs?

Perhaps -- maybe Ron you could just describe the transition, if that makes sense to [give that]?

I think that one of the things you need to understand is that we are a knowledge-based business. Customers come to us because of our capabilities. At the end of the day our business really depends very much on the utilization and efficiency of our workforce. We don't run machines, we basically manage people. That is how we operate our business.

So when we came into the fourth quarter and we had -- we have not had a lot of substantial reductions in workforce -- but when we had a substantial reduction in workforce, combined with the organizational restructuring which took place, there was clearly disruptive elements that flowed out of that. It is very difficult for us to quantify that because it basically is not something you measure against a standard.

Okay I will try that one. And I don't know if you will be able to answer that, but you did indicate that you had secured, or identified at least, some sources of silicon through fiscal 2012. Obviously two questions arises from this, how much of that is secured versus identified? And again the second question will be how much of these source would be polysilicon versus metallurgical?

All of those quantities are secured either through long-term contracts or committed TOs. Approximately one-half of that is metallurgical silicon.

Okay, and how well is the -- I noticed you were able to successfully produce modules made out of a blend of polysilicon metallurgical and were aiming to increase the actual proportion of metallurgical in silicon use. How is that going?

Actually we're not blending polysilicon and metallurgical silicon. We produce 100% metallurgical silicon modules and 100% polysilicon modules. Actually the performance of metallurgical silicon is really a success story. We started ramping up in November and the production in the last quarter in terms of megawatts sold was about 14%. And that has increased significantly each month since the last quarter.

What about the efficiencies? Where are you at now?

The efficiencies on 100% metallurgical silicon are averaging 13% compared to polysilicon at 15%.

Excuse me. Correct. That is where polysilicon was about two years ago, is that correct?

It was, and also when we started this, we were significantly less than 13%. So we fully expect that with our technical expertise and our ability to use different kinds of materials, the strength that we have at Photowatt -- and we fully expect that the learning curve on metallurgical silicon is going to be steeper than the current learning curve on polysilicon, that we're going to be able to close the gap within the future.

Michael Willemse, CIBC World Markets.

So is your strategy on using metallurgical silicon going forward, is that 50-50 split between metallurgical and polysilicon a target, or is that just how the contracts kind of lined up?

It is really based on what we are able to secure in the marketplace. Right now, our run-rate is 50%. It will increase a little bit in the next fiscal year. We are out pursuing a long-term polysilicon contract, so those ratios will change depending upon the source of the material we're able to secure.

That really underscores the advantage of the integrated model we have within Photowatt is their ability to adjust to reflect the sources of silicon, be it whatever source it is, and whatever point in the manufacturing process it comes in.

Okay so you are still comfortable I guess running your operations as taking advantage of arbitrage between polysilicon prices and metallurgical silicon prices? You don't see any need from your customers to go to 100% polysilicon?

Not at the present time. We are actually experiencing a financial advantage of using metallurgical silicon in the current time. With prices on the market for the material and the prices at which we're selling the product, it represents an advantage to us. And our ability and our technical expertise of using this material represents a competitive advantage.

Okay. And when you indicate that you have enough silicon supply up to 2012, is that based on 60 megawatts capacity or 80 megawatts? How much capacity would that be at?

That is based on our model of what our capacity is to date, and includes our future capacity expansion. We will fully fund all our planned capacity through 2012.

Based on the expansion we have articulated within the rights issuance and what the use of those proceeds are for.

Okay. And you mentioned that you will kind of have the blueprint set out to get to 135 megawatts capacity, and with the $35 million, should we assume that there will be additional financing to actually build the equipment to get to 135 megawatts in the future?

Yes, there would need to be additional financing.

Okay. Next question. Just on your optical use powder, there is a comment that you're unable to source material there. Do you think you might be able to source material in the future? Is this a short-term issue or do you think that that is no longer an option?

There are currently a number of companies, startup companies, that are producing materials that would be applicable for this in the future. They are running engineering quantities today, production quantities are not available. The historic sources of material have dried up and companies are hoarding material today. So it really depends on the ability of startup companies to produce additional quantities.

Our intention is to pursue licensing of the technologies at this particular juncture, because we don't think it is worthwhile for us to continue to put money into maintaining the capability at this juncture.

Okay, but you are going to look into licensing it?

Correct.

Okay. And what are your latest developments with Photocell? I believe it was a joint venture you're looking at to produce metallurgical silicon.

Photocell is an ongoing effort based in Europe to produce metallurgical -- solar grade metallurgical silicon -- and their ramp up is ongoing.

I wonder if we might be able to take some questions from some other members.

Brian Chapman, Clearwater Capital.

With the respect to the rights offering, I'm just trying to understand how this is going to work. You are going to have a 10 day trading averaging period, is it, that evolve over 10 days will be the strike price on the rights?

That is correct. Five days historical and then on a go forward starting tomorrow, five days.

And the backstop participants are restricted from trading during that period?

That is correct.

Now then the backstop price is also a floating or negotiated?

No, it is based on the fixed price of 75% of the BWAP. So it is basically the formula which you just described.

So the backstop price to the extent that any shares have to be taken up to 75% of the [view all]?

That is correct. It is the same price. The same price as if somebody exercises the right or the backstop takes it up.

Oh I see. So the strike price is 75% of the BWAP in any event?

Yes.

Okay. But I thought there was some language about negotiating a price. That is not the case?

That would be -- there is a clause in there, but that is not expected to be used.

Under what circumstances would it be used?

Carl, if you can --.

I think we have a point, where as Ron had suggested, details of the rights offering will be forthcoming shortly, and we cannot go any further at this point today on those types of questions.

But the clause is essentially a catchall for unexpected --?

That is correct.

I wonder if maybe we could take some questions in the room.

Yes, we are now ready for floor questions.

(inaudible). I was wondering if you could comment on the ASG orders? You got pretty decent orders last quarter and reasonable this quarter. But the Canadian dollar has been running against you. Are the margins on these businesses -- on the business you're booking comparable to what you have been getting, worse or a comment?

I would say that I believe the margins are comparable. I think we have seen, particularly in the Canadian operations, we have seen some margins contraction just simply because the Canadian currency strengthening the way it has has has exposed I think -- and exposed some of our efficiencies I think. Quite frankly when the dollar is trading at about 55, I think there is the opportunity to mask a lot of inefficiencies in the business.

We have been going aggressively at wringing those costs out of our business over the past two years, so we're gaining ground against that. Clearly the strengthening of the Canadian dollar is an area which is working against us. But from our prospective it is a fact, it is a reality, and it is something we need to keep focused on. We continue to see opportunities to take costs out of our business, and our entire team is focused on achieving just that.

And on the indirect costs that occurred in Q4, do you expect those to continue into Q1 and beyond?

I'm sorry, which costs?

The indirect costs that you incurred at ASG, inefficiencies, etc., related to the layoff and to the management changes, etc.?

I would see them (inaudible). Clearly, I think that the initial -- we had done one other layoff in the history of the Cambridge facility. So that was a big shock to the organization, and we actually went through and we did a lot of homework in making the adjustments that we did in that we went through and really evaluated performances as the primarily determinate of where we were going to trim.

The other thing that took place is concurrently with this late in the third quarter and into the fourth quarter we completed the implementation of a comprehensive organizational restructuring within the Cambridge facility which we under took through the summer of last year. Part of that process was to develop the right structure, one that allowed us to take the structure which had been built up over the 1990s where we we're going through very aggressive growth, and essentially put a lot of different complexities into our organization. But to start with a fresh sheet of paper, develop a strategy which would allow us to improve the efficiency and effectiveness of our business.

That structure was developed. And then we right sized the structure and the workforce for anticipated demand. So a lot of work actually took place through the third quarter, and the implementation took place in the fourth quarter. So the impact was obviously strongest in the fourth quarter. We expect that that will continue to abate, and we will start to see the benefits of why we made this organizational restructuring going forward.

Just one other question and I will pass it on. On the rights offer can you give us an idea of what the record date will be on that?

It will be approximately early July, depending on when the filing of the prospectus.

Peter Sklar from BMO Capital Markets. Gary, I'm a look confused on what the impact is of metallurgical on your France operations. In the MD&A higher utilization of refined metallurgical was one of the factors that was attributed for the lower operating income quarter-over-quarter. Yet in your comment a few minutes ago you said you getting a -- you experienced a financial advantage from metallurgical during the fourth quarter. So it is not clear to me what impact metallurgical was having in terms of your margins and operating income.

We have said in the past, Peter, that we fully expected to see some pressure on margins in the near term. And that is based on lower efficiencies with metallurgical silicon, adding infrastructure to facility in anticipation of future ramp up, as well as a decrease in prices to the user. The first two are obviously we believe are short-term issues that we're going to be overcoming in the next fiscal year. We have planned in continuing price decreases of 4% to 5%, which is what the industry expects.

What was the financial advantage you were referring to in your commentary?

I look at it from a point of view of where pricing difference is relative to polysilicon. And if the price of metallurgical silicon is below that point then there's an advantage to us to buy metallurgical silicon.

Just to make sure I understand, your metallurgical margins are lower than your polysilicon on margins?

Yes.

Okay, and in the fourth quarter or currently in the first quarter do you experience any operational issues with respect to the introduction of metallurgical?

There are a few cycle time issues associated with the manufacture of metallurgical silicon.

I think there's also a comment in the MD&A when you get to it that you will see that we want to make sure that we set expectations appropriately. We're early days I would say still in the development of our technology and the processes associated with MgSi. And there are continuing to be process development work that is undergoing within Photowatt at this time with respect to MgSi, and that is not unexpected.

That is what I'm really driving at, is how far you have to go with metallurgical? Is there any way that you can indicate what your metallurgical margins are -- metallurgical margins are versus your polysilicon margins? How far behind you are? Is it hundreds of basis points or --?

I think that is a very difficult number to put out there, and we have not disclosed it. Suffice it to say that I don't know how useful it would be, because again we're flexing what we run through the factory based upon availability of supply. We expect to continue to advance the economics of MgSi. I can tell you that the difference between a 13% efficient cell and a 14% efficient cell is huge from a margin standpoint.

So I think that what we're saying is we think this is an attractive technology. We think that continuing the development is a very attractive approach for us to take. And again the plan we put forward and the rights issuance that we put forward today does allow us to advance our business, to continue develop the MgSi technology, to secure polysilicon so we can make sure that we are able to flex our capacity to provide an optimum solution for Photowatt and enhance its value for ATS shareholders.

Okay, just two further questions. In the MD&A you give a reconciliation, or a buildup, of the Photowatt operating loss, and you're showing solar corporate costs of $14.2 million for the quarter. Will some of those -- will those corporate costs, some of those corporate costs disappear as a result of the restructuring you have undertaken or -- I'm surprised -- I just wasn't clear what is in there and why that number was so big?

Well, absolutely we will not have that size of a number again. The majority of that number, $11.2 million approximately were costs related to the IPO that are being expensed.

Disbursements related to the IPO.

Was there anything else?

There were some corporate salaries in there -- Solar corporate salaries as well that we are -- we have made some cutbacks in that area, as we mentioned, and we will have some ongoing Solar corporate costs, but it definitely will not be of that magnitude that you saw there.

Okay, and Gerry lastly in the MDA you gave an outline of the $68.8 million of unusual items and other charges. There were four factors that you listed. Do you have the after-tax amount? I believe that those are --.

Well actually one of the amounts to set it out is the tax write-off of the deferred tax assets. So they are effectively now are the same pretax and after-tax.

What about the other three items?

We did not set up a tax asset related to those items.

So pretax is post tax.

Pretax is post tax.

Okay thank you.

Richard Tattersall, Heathbridge Capital. Two different questions. One is there is a comment about new salesforce initiatives and sort of has an impact. It is often disruptive when there are changes. Is that something because of margin pressure you're stretching the goals or is there sort of -- maybe you can give a little bit more color on what the changes are and what the impact will be over time. That is the first question.

One of the changes we implemented as we came to the latter have of 2006 quite frankly is a recognition that -- two things -- we needed to upgrade the quality of our sales staff, and secondly we needed to change the incentive structure which motivated and drove the closed quarters. So we implemented those changes actually in the third quarter, both changes with respect to personnel and changes with respect to incentives. I see these as positive changes and we're starting to see the benefits of that on a go forward basis.

The second question is you hired Ron Keyser from Magna as your Chief Information Officer, and he is well-regarded. And that is always a challenge installing IT [world], so what are the priorities there, and what will that impact be over time?

One of the things we early identified and really started -- we are now at the point where we now can move forward with the development implementation of an IT strategy. Just to step back, I think the businesses traditionally operated as autonomous business units with different operating systems. And we locked a comprehensive IT strategy for our business. Ron's mission is to develop a comprehensive IT strategy so we can make directed and very specific targeted investments which will provide us with optimum benefits for our Company.

So his first priority is to develop a comprehensive IT plan for our business, taking into account the needs of our business, both at the regional level and at the corporate level. We believe that key priorities of that, as I alluded to, are really to help us develop IT tools which will enhance our ability to collaborate, transfer and share knowledge between ATS facilities, so that we can seamlessly serve our customers on a more effective basis.

Increasingly we're saying more and more opportunities in our marketplace where customers are coming to us and saying, we want one in this region and we want three in this region and another two in this region. And we want to have one source where we can go to find a vendor that can help us do that on a seamless and cost-effective basis for us. There is value in that which is very meaningful. So his appointment is an important part of our brand strategy. It is about gaining and wringing additional cost out of our business. But it is also about developing the types of tools that we need to have a strong consistent global brand.

Last question. The PCG divested, what will be the impact on what were internal sales before? So that will be something that will be ongoing sales contracts likely or --?

I would say internal sales between the PCG business and the automation business are now inconsequential. Additional questions?

Lisa Bronson, GMP Securities. I have a couple of questions regarding your ASG backlog. Specifically I noticed that health care backlog is the lowest it has ever been. And I was just wondering if you could maybe comment on where you see health care orders going, if you see any improvement?

Health care backlog is in great shape. You say it is the lowest it has ever been. Quite frankly I don't think that is factually correct. I think it is down. Clearly we see health care, which basically did not exist as a meaningful segment for us essentially four years ago, is now one of the largest concentrations of our revenue.

We expect to see normal fluctuations in the concentration of backlog between the different industries we serve. These fluctuations can arise for a number of reasons. But strategically most of these business segments can be cyclical in their own right. We don't think there's a cyclical change in health care. We think that this is a temporary fluctuation, based upon both the work we're doing today and also be the prospects we're seeing coming through our pipeline.

It is a great market. We're excited to be there. We think there is tremendous potential, especially in the context of the North American region. And we're very pleased with the progress we're making in health care in Europe. A year and a half ago we did no business in health care in Europe. Today we're doing health care business in our facilities in France and Munich, and that is a tremendous step forward. And we are moving forward with certifications in all the various areas which will just further enhance our ability to serve the health care arena. And I think it is a great market in Europe. There is a lot of pharmaceutical companies and health care companies located in Europe, and I'm excited about the prospects.

I guess then would you just say that it's more of a lumpy type business then? Is that what we're seeing here?

If you would plot the actual level of activity, I think you would see that there is volatility in all the sectors. I actually commented in the past, I think Healthcare can be a little bit more lumpy in that order sizes tend to be larger, and they are what -- let me step back for a minute.

One of the things that we're seeing in health care is that there is a shorter trigger between when the customer wants an -- basically commits to an order, and when it has got to go into production. In automotive project phases tend to be staged over multiple years because of product launch models. In health care these are primarily consumer products companies. So what they do is they spend a lot more time planning up front, and then when the marketing team makes a strategic decision to go, they need to go at a heck of a pace. So it does create some lumpiness.

One of the things that we have seen over time is that health care orders can vary substantially in terms of their size and magnitude, which creates lumpiness in the backlog, and there's some color in that in the MD&A. But again, this is a great business sector. We think there's tremendous potential for us. We think our skills are particularly well aligned. And we have built additional barriers or advantages for ATS in the health care sector. And we think it is going to continue to be a very attractive market segment for us for a long period to come. And we think we're very uniquely positioned to deal with it, because health care customers are big guys. They are big companies, and our size is a big advantage for these guys. Our global presence is a big advantage for these guys. So again I'm very excited about the space.

I also noticed in the press release mention of orders from the nuclear industry. Could you maybe comment on what you see going on there?

Yes, we have been the beneficiary of energy on more than one front beyond solar, I guess, is what you could say. And I don't know if you were following, but recently Atomic Energy of Canada Limited made some announcements with respect to their business. We are a partner with them in their retooling activities for nuclear reactors. We think that is a good business. We think it has got some legs under it. Particularly because the ability -- the attractiveness of retooling a nuclear facility has obvious benefits versus trying to get permits and going through the work of trying to develop a new one.

So we think it is a great spot for us, and that it is an area which is -- we have done work in this space historically. This is the first time we have gotten into the retooling end of it. So it's an important part of it. Energy also includes work we're doing in building capital equipment for the solar energy market, so we're doing that as well -- not for Photowatt. We have done work for Photowatt obviously, but for other suppliers in this space as well.

Also I noticed in some of the nonrecurring charges that you have itemized, there's a charge for -- there is an inventory provision charge. And that I think was related to the Company has moved to newer technologies. I'm just wondering if that is something that is going to be reoccurring, or what is the nature of that basically is what I want to know?

Specifically a substantial portion of that is actually related to a decision we made to developing a new generation of a work our Supertrak platform. And so we migrated up to the next level of technology, and we got caught with some inventory, and we made the decision that we should write it down -- write down the size. That was a big part of it. Gerry, you may have other things to add to that as well.

Yes, there were a couple of other noncore unprofitable lines of business that we exited as well, just as part of the restructuring also in Cambridge. So that these are costs in Cambridge.

We will not see a similar charge going forward?

We don't expect a similar charge, no.

One last question, if I may. In the Photowatt division one of the non-recurring charges was an increase in overhead and labor due to the capacity expansion. I'm wondering if that would be just a bump up to a higher level of labor charges, given the capacity expansion, or is that an onetime expense that we don't expect to see?

We had a similar costs outlined in the third quarter, if you recall. We had additional out-of-pocket costs associated with the capacity expansion that was going on during the fourth quarter. The capacity expansion was completed at the end of the fourth quarter, so we would not expect to have these come through again. These were incremental costs just associated with the capacity expansion, the continual moving of equipment and reorganizing the facility.

All right, just a few more questions. Other expenses running $12 million to $15 million the last few years. I take it that is mostly overhead, corporate overhead. Your business is going to be a lot smaller. Should that number come down quite a bit?

I'm not exactly sure which other expenses you are referring to.

In your segmented disclosure you have another expenses line that tends to run $12 million to $15 million or something like that.

Well actually there is an exceptional item in this year's corporate costs, we will call them. We had the foreign exchange, the $3.1 million foreign exchange which was a non-cash item, where we moved some cash that was in the US post IPO in order to -- we moved some of the US dollar cash into Canada to repay some US dollar debt. So economically it was a neutral transaction. But from an accounting perspective, it was repayment of net investment. So essentially we had the gain on the debt that we had in Canada, the US dollar denominated debt, which then stayed in cumulative translation adjustment, but the loss flowed through the P&L (inaudible).

I guess the question is that number being -- landing somewhere in that area year and year out, but that was on -- your base of sales is going to go down a lot going forward, if you were successful with your plans on divestitures. Do you would see the corporate overhead going down?

I think there are huge advantages for us reducing the complexity of our business model, and allowing us to focus on where I believe we can be best in the world. So I think that are advantages in that area very clearly from a cost standpoint. And we have incurred substantial costs, particularly over the past few years, with the changes that we have implemented and made. I believe that we're starting to start to see the benefits of those changes. But again there is additional cost in there which are likely to continue -- so the new regulatory requirements with respect to compliance, the cost we have to incur because of increasing complexity of financial reporting issues which every company has to deal with. So it is hard to be definitive from the standpoint of what they should reduce by. But I think that they are going to come much more into check, I guess is what I would say.

A couple of other quick questions. Could you give us an idea of what the megawatts related to sales were in Q4, how many megawatts you shipped?

It was approximately 8 megawatts for the quarter.

And just to clarify, the financial advantage that you mentioned for metallurgical silicon, is that a theoretical advantage if you can get the efficiencies up, or is an actual advantage today? It sounds like it is not today, given all the other cost related to the module.

I think just to be clear, I don't want to put words in your mouth, Gary, and maybe you can clarify. But I think what Gary was alluding to is that when you take a look at the cost of polysilicon in the stock market where it is trading at versus what you can buy metallurgical silicon at right now, there is a cost advantage. Is that essentially what were you were saying there?

Yes. It gets back to the pricing of different points between -- of polysilicon. And right now there's an advantage for us to buy metallurgical silicon. Build with metallurgical silicon, even if the costs are slightly higher, and the price that we get for it is less. We would be less profitable if we bought polysilicon on the spot market.

Today?

Today.

And just on the silicon expansion, or having silicon to 2012, is that suggesting to go to the 80 megawatts or about 135?

The 80. That would be the plan. What is planned in 2010 would be 80 megawatts of cell capacity.

David, that is one of the important reasons why a use of proceeds is to secure additional polysilicon. Because my personal view is having polysilicon is more valuable than cash today in the solar business. And our ability to have cash, to go out and secure polysilicon is a trigger point from our perspective and the ability to accelerate capacity expansion.

Why would you want polysilicon if you are making more money out of using [refined that] right now?

I think the difference is that buying polysilicon on forward contracts is substantially less than the spot rate.

Okay, so you are talking spot versus --? Okay, fair enough. And then the last question I had was on the infrastructure -- the 135, what does that entail? Is it just the buildings in place or do you have other things involved there too?

The building and the facilities that are required to support the equipment that would go in there.

What is the second part of the facilities?

The facilities that are required for that equipment.

Which would mean what?

Gas handling distribution systems, waste treatment systems. There is a lot of chemical processes that take place within the manufacture of a small solar cell. (inaudible) Operator, when you put some other questions in to us from the investors on the lines, please?

Rob Caldwell, Blackmont Capital.

Ron, I have a question regarding foreign exchange having to do with the Canadian dollar. And I'm speculating that your significant growth of ASG in Europe, and potentially even more significant growth of ASG in Asia, is going to assuage the challenge we've had with the Canadian dollar over the last four years.

I think that is a fair assessment, because I think you are absolutely right. We had been growing aggressively in Asia. We're also making tremendous strides in our growth in the US as well, as we talked about in our prepared remarks. So clearly what that does is it reduces the proportion of our revenue that actually comes from the operations in Canada. So yes, as you move that mix around, obviously you're going to help allay that issue.

I don't want to underestimate the fact that the currency in the last two years has dropped about 30%. In our Canadian operations the peak operating margins that we achieved through the rapid growth period, and even some of the stable growth periods of the late '90s into 2000/2001 time period, was an operating margins in the Canadian operations which was about 16.5, 17% operating margins. So dropping 30% off of your sales price when approximately 90% of your revenue is priced in US dollars has been a huge challenge for the business.

So as I indicated and as results have shown we're making tremendous strides in offsetting the impact of that currency. Unfortunately it is not like there's a silver bullet where you flip the switch and it happens overnight. You need to work aggressively to wring these costs out of your business, and that is exactly what we have been doing, and what we are continuing to do.

(OPERATOR INSTRUCTIONS). Frederic Bastien, Raymond James.

I would like to know what does split between -- the split of revenues between what you're generating in Cambridge versus elsewhere is, and how does that compare to prior years and ultimately where you want to be?

We have not in fact disclosed the specific revenues of particular divisions, and that is not something that we would disclose here today.

Okay. I guess the last question would be with respect to your expansion in France. Now that it has been completed, at least to the 60 megawatt capacity level, where are you now in terms of utilization, and where do you expect to ramp up over the fiscal year?

Are you referring to the utilization of equipment?

Yes.

All of that equipment is currently being utilized, so we are at nameplate capacity today. Now, again, I want to caution everybody when I thought nameplate capacity I'm talking about polysilicon. So our actual production run-rate is less than that because of the use of metallurgical silicon.

Right. And we can expect again like every other year a slowdown in the summer, and then things to ramp up again in the fall and winter?

Yes, that is correct.

Michael Willemse, CIBC World Markets.

Just two more questions. Number one going back to the Deutsche Solar contract, why are you buying polysilicon wafers instead of polysilicon? If I'm correct, you guys could make your own ingots and cut your own wafers by [pulling] polysilicon.

That is correct. We are fully integrated, and we can make our own wafers and ingots. The opportunity presented itself with the Deutsche Solar contract, and we felt it was advantageous to take advantage of that and to increase output in the cell area. We have the capability to utilize materials from a variety of different sources, whether it is raw materials, whether it is ingots, whether it is bricks, whether it is wafers, and even cells. We felt that securing the Deutsche Solar deal provided us with a low-cost expansion opportunity that we wanted to take advantage of.

Okay. And then last question, you mentioned in the MD&A that the combined losses at Cambridge and Ohio were about $8.7 million, the combined operating losses. Now that $8.7 million loss, does that include the severance and the inventory provisions?

Yes, it includes that.

Okay so if you net that out, your operating loss was still about $4 million, $4.5 million. And it seems, based on your comments it sounds like normally Cambridge and Ohio should be at least breakeven or profitable.

That would be our expectations, yes.

Okay so that $4 million, $4.5 million operating loss looks like that was specific to the quarter. And then in January you mentioned that because of the restructuring you think your cost savings will be about $11 million per year. Is that still a good number? And is it safe to assume that was not reflected in the fourth quarter?

Yes, the $11 million was really the savings in salaries and estimated wages and benefits from the people that were let go. And yes, we believe that still is a good number related to the people that were let go.

Thank you.

I just would like to add that one of the things you need to also look to in your analysis is that, as we talked about on our last conference call, our backlog coming into the fourth quarter was low, and we fully expected that that would have an impact on our ability to drive utilization, and have a similar impact on our results. So Ohio and Cambridge were the areas that were most impacted by that.

We will now take questions from the floor.

I have a question for Ron. It is [Rupert Devella from Detrick Capital]. A question on the Photowatt business. At what point size-wise do you feel you would have the critical mass for it to be a proper stand-alone business that is not part of ATS? And do you have an estimated timeline and cost on when you might be able to reach that point above and beyond this expansion?

That is a good question. I think that, as we have indicated in the past, we think the optimal -- we get to realizing the benefits of scope and scale really at about 100 megawatts of output. So we think that is where ideally you would get to. I think one of the things that is great about Photowatt is the fact that its performance actually is comparable to a much larger company, even though it is operating at a lower scale.

I don't think the critical mass is necessarily the trigger however for making the business stand alone. I believe that the trigger for stand-alone is to complete the rights issue. Completing the rights issue allows us to fund our plan, which I think makes tremendous business sense, which will allow us to further the plans for our business to strengthen it, make it a more robust business, allow us to be able to further progress the development of the MgSi modules, which I think is an important trigger to advance our ability to secure polysilicon, which again as another value creation.

And I'm particularly the excited also about our ability to progress with the process we're in involved with right now with the CEA and EDF for this R&D collaborative arrangement, which is in my view a really unique opportunity that we have within Photowatt, because it is French, and there's a tremendous amount of courses that come from that type of relationship. And we know that is going to take a little time to mature. It is progressing. It is not stalled out. In fact, if anything, it has probably accelerated a little bit. But we also expect it is going to take us a little time to further that.

So completing the rights issuance allows us to advance our strategies with respect to Photowatt. We think that will enhance its value. And then once we are progressing on that, that we have the opportunity to fully evaluate I think the very strategic alternative to us at the ATS level from the standpoint of our exit. And that can be a spin out. That can be a sell or merger transaction, or that could be the potential for a new IPO. But the first priority for us is to complete the rights issuance, because that is what is important to be able to execute the plan which is going to further advance the value of Photowatt.

Peter Puccetti from Goodwood. Ron, just following up, are you planning on having an analyst tour of the Photowatt facility in France?

Unfortunately we have been advised that that would be in breach of what we can do while we are in a distribution. We would love to do it quite frankly. And I think that what we would like to do is consider doing it after we get through the distribution, because I think it shows extremely well.

And I would agree. And what about having operating management from France appear during the rights offering roadshow and participate in that?

We have not -- we basically are planning Gary Seiter to attend on our involvement in our discussions with investors. So they will be involved, yes, through that vehicle. Part of the challenge we have (multiple speakers).

Physically present, do you mean or they won't be physically present?

Gary will be physically present.

Sorry, not Gary Seiter, the French management team?

The French management team is going to be busy managing and running the French business.

Okay, well I mean you know our point of view is, I think it would be a great idea to have them involved. I think they have an intimacy with that business that, with all due respect to Gary, he is relatively new to the business in terms of Photowatt's business, not the solar business. So we would as major shareholders of course we would be big fans of you doing that.

Secondly, Gerry, you mentioned in response to a question about I think Canadian dollar exposure in ASG, that you don't disclose the source of revenues in terms of currencies, etc.? Are you sure about that? I mean could you give us anymore color?

Well, we don't disclose the specific revenues of divisions. I think that's what I was referring to. Exposures on currencies, we can give a little bit of color there. We have -- Cambridge operations is our largest operation. It does a lot of business in the US, as Ron mentioned. Giving a particular metric as to exactly how much US dollars is somewhat difficult. And one of the things we are trying to do in Cambridge is do Canadian dollar business, or business in other currencies and other areas that essentially isolates us from the US dollars. But we have been at time -- the exposure to the US dollar there in the past has been in the say $100 million to $120 million revenue run-rate.

Out of a total of 500 roughly?

You're talking consolidated ASG revenue?

Yes.

Yes, give or take. But it is a very volatile number depending on the level of business in Cambridge.

And that is transaction exposure.

Yes, the US dollar work that Cambridge is doing. And I caution you again, that number moves around. Take for example with the work we're doing in the nuclear industry, obviously that is a Canadian customer, so that really has a shift on the revenue. So I just want to make sure that I give appropriate cautionary language on that number that (multiple speakers).

Understood. There is also another benefit though of having a strong Canadian dollar, which people probably don't think about. Maybe you can give us more color on that, which is you buy a lot of components and parts in ASG that are priced in US dollars.

Yes Peter, that is exactly correct. Obviously because the systems business is largely a customized business, the proportion from period to period can move around quite a bit. Each project is different. But there has always been somewhat of a natural offset to the US revenue exposure from US purchases, but it is always moving.

Thank you. And then separately, Gary, there has been some questioning about relative profitability of met sil versus polysil. If we were to look at -- and this sort of follows up on your earlier comment -- if we were to look at contract prices -- expected contract prices for polysil versus expected long-term prices for met sil, at what level of efficiency on met sil cells do you need to get to to match profitability of polysil?

What we have done actually, Peter, is looked at it from a point of view of the price of polysilicon with the current efficiencies that we are using. And the price indifference point is $70 for polysilicon.

Okay, sorry, can you explain that again?

So if long-term polysilicon prices are lower than $70, then we lose the price advantage relative to metallurgical silicon. If we are paying more than $70 for polysilicon there is an advantage to metallurgical silicon.

Based on current --?

Based on current efficiencies.

Based on current met sil and polysil efficiencies?

Yes. 15 and 13%

Right. Can you work it the other way for us though? At what yield on met sil do you have to get to using those prices to match the profitability of polysil?

Yes, I haven't done that, but I can get back to you on that.

I mean what do you think it is ballpark? I mean we're at 13 -- what did you say earlier, 13?

13%

Now on met sil?

You know it's a very complicated model. I would sure hate to speculate. Really, I would hate to make an off the cuff remark.

How about a range, a wide range?

Suffice it to say it 14% (inaudible). 1% to 13% to 14% is a fundamental shift and a huge benefit.

Okay, thank you.

Do we have other questions? That concludes our conference. I really appreciate everybody taking their time to come and visit us today and to listen to our conference call. Thank you very much.