ATS Corp (ATS) 2008 Q2 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen. Welcome to the ATS second quarter conference call. The following statement respecting forward-looking information is made on behalf of ATS and all of it's 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 a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection, in the forward-looking information and the material factors and or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information, are contained in ATS's filings with Canadian Provencal Securities regulators, including ATS's annual report and annual information form for the fiscal year ended March 31st, 2007. I would like to remind everyone that this conference call is being recorded.

  • And now it's my pleasure to turn the call over to Mr. John Bell, Chief Executive Officer, of ATS. Please go ahead, Mr. Bell.

  • - CEO

  • Thank you, Brandy and good afternoon everyone. Joining me on the call today is Eric Laborde who is calling in from Lyon, France, at the Photowatt's-- where the Photowatt's facility is. He is the newly appointed, Chief Executive Officer, of Photowatts. I also have with me in the room today Garry West who is the, CFO of ATF, who will be speaking to you momentarily. I have also asked to join us, Bruce Seeley, the President of Europe, Asia and global REM operations, as well as Mike Fisher, Vice President Sales and Business Development of North America of ASG, in order to answer any questions that you may have. And thanks, gentlemen, for being here today.

  • I was appointed to the new Board of ATS on September 13th and the Board subsequently asked me and elected me to be in term, CEO of the Company. I have some entrepreneurial roots in the Cambridge business community and they have successfully grown personally a capital goods company, a company names Shred-Tech, and an auto parts manufacturer named Polymer Technologies. As some degree of history, [Klaus Werner] and I were friends and I have a deep respect for his entrepreneurial skills and the culture of innovation that he instilled in this great Canadian Company. I should say great global Company. I'm also shareholder as well as being an employee. Be assured that I carry out my responsibilities and that as I carry out my responsibilities my interests are totally aligned with those of our thousands of shareholders.

  • Let me first speak to our Corporate priorities. The new Board is following through with the plans to return the Company to its historic and profitable roots. A global leader in the design and manufacture of automation equipment and systems, known today as ASG. Also we continue to facilitate the separation of Photowatt from ATS. We are also committed to selling the Precision Components Group. As well this Board is conducting a comprehensive search for a new permanent CEO and to date has interviewed several candidates all with excellent credentials. We expect to be able to announce an appointment hopefully before calendar year end.

  • I'd like to speak to about the automation system groups for a few moments. I spent the last two months meeting, as many of our employees, Managers and customers, as possible. I've traveled extensively and by month end will have visited most of our 24 global locations, listening and understanding better our strengths and our opportunities. As I travel about I'm really most pleased that at the heart of this Company there are hundreds of world class engineers and technicians. An incredible collection of many of the best automation innovators on the planet, this resource is our most important asset and I believe an extraordinary base to build on. Still, I'm sure it behooves us to be as good business people to control costs and to implement sound systems, and as always to sell value and not price. We will do that.

  • The key to our success, however, is the effective execution of a sound strategic plan. And that includes the best possible Managers, motivating them appropriately and providing excellent and consistent leadership. We have experienced, talented and capable Managers in Canada, Asia, the U.S. and Europe. We are working closely with those leadership team to add value and take advantage of our global capabilities.

  • Briefly the current ASG profitability projects include a very strong marketing emphasis on Asia and Western U.S. This builds on our strengths and exploits two prime growth markets. We are also looking an analysis that we also looking at the expansion opportunities that have been presented to us in Mexico, India and Eastern Europe. These opportunities are very customer focused and certainly market driven. We're looking at the implementation and going forward with the global account management. Our global footprint will add some value to some of the world's most important companies. We are implementing a global purchasing system to continue to drive down our cost base. And we are renewing and upgrading management information systems and IT infrastructure.

  • Turning a moment to PCG, I mentioned earlier that we are committed to selling it. A PCG confidential offering memorandum has been distributed as of last Friday I think and to over 30 qualified parties and we're looking forward to receiving some nonbinding letters of intent in the near future. I'm going to, for a moment, turn the meeting over to Garry West, that as you should see on your screen right now, will walk us through the financial summary. Thanks, Garry?

  • - CFO

  • Thank you, John. What you should see on the screen is a financial summary comparing revenues and EBITDA for the three months ended September 30, 2007, to the three months ended September 30th, 2006. First I'd like you to take a look at our revenue line. ASG revenue has declined year-over-year. This is--this is a result of the timing of our backlog moving from design to manufacturing, and there are also some impacts of the high Canadian dollar affecting our revenues from ASG. Photowatt revenue increased on higher megawatts sold, but it's partially offset by a lower average selling price. PCG revenue declined on lower volumes, primarily on lower volumes from automotive customers and there's also a effect, a foreign exchange effect of the high Canadian dollar in that number also. EBITDA I will be talking to as we move forward to my other slides.

  • The next slide is a financial summary comparing our net income on a consolidated basis for the three months ended September 30, 2007, to 2006. You'll see that that consolidated net income is a loss of $18.8 million compared to $2.1 million in the previous quarter and the previous year at a loss per share of $0.28 per share.

  • Next slide is a variance analysis of the results at Photowatt France where-- going back to the previous slide we had moved from an EBITDA of $3.7 million to a loss of $2.9 million. Items impacting our earnings in Photowatt were increased volumes, $6.1 million, lower average selling prices which impacted us negatively $3.2 million, increase in poly costs and lower average efficiencies impacting us to the tune of $6.5 million, to the downside. But lower metallurgical silicon costs increases to the upside of $2.6 million and then 3-- downside effects higher labor, other materials and scrap rates $2.2 million. Increased overhead due to expansion, $3.3 million. And the write-off of a deposit on metallurgical silicon in China of $1.4 million. That total variance impact is $7.9 million.

  • My next slide talks to a variance in intergroup and Corporate accounts. And these are one time earnings impacts. We had during the quarter severance costs of $4.1 million. We had a charge to income as a result of accelerating--accelerated stock option compensation of $1.2 million, primarily on the resignation of our CEO and CFO. We had proxy contest costs of $1.9 million and we had additional recruiting costs of $0.5 million, the total of those items are $7.7 million one time costs in the quarter. Now, I'd like to hand our session back to John Bell for some further discussion of our results.

  • - CEO

  • Garry, thank you very much. I was remiss in not properly introducing Garry. Garry is interim CFO and he's a recently retired senior partner of Ernst & Young, and has been making a very significant contribution during the transition period of the new Board. And we're very grateful to Garry for being here with us today, as well as being with the Company. Thank you, Garry.

  • But overall, the bottom line losses are unacceptable, yes, there are some one time charges that Garry related relating to the governance change. The trailing costs from Spheral wind down and the exchange rates that have been unfavorable. We are also watching through the sales cycle on profitable contracts in France and Ohio. The details of these historic costs are outlined in the statements and the FD&A. However we believe that these necessary restructuring charges are mostly behind us and your Board is committed to embracing positive change.

  • On that, if you look at the next slide which is our leading positive indicators, on the positive note, ASG bookings for the second quarter were $133 million, compared to $101 million in 2007. Also you'll note that the ASG backlog is $220 million which is 36% higher than a year ago, and 19% higher than at year end. We've also already booked in the first six week of third quarter $52 million in orders and we believe that the pipeline is strong. Next--once again in backlog the increase in the backlog you'll note on this slide is in all regions, though the slide doesn't tell you that, and in all markets, and it bodes well for forward sales momentum and improved factory utilization absorbing overheads on a global basis. Our order backlogs now at the highest level of six quarters and most importantly many of these recently secured orders are now moving into production when a greater proportion of revenue is recognized.

  • On the next slide you'll note that our sales mix is also improving within ASG with an expansion in some high-value, high-growth markets. In particular we've seen a nice increase in revenue from other markets which include automation for the nuclear power industry. To put a couple of numbers around it in fiscal 2006, other markets represented 7% of ASG revenue, in fiscal 2007 it represents 12%. And with the 60% year-over-year increase in other revenue in the second quarter fiscal 2008, other markets accounted for just over 18% of second quarter revenue. This growth has been important to ASG as it offsets weaknesses in the North American automotive sector. Also on a positive note ASG operating margin has come back from a minus 4% in the last quarter of last year, to positive 0.5% in the first quarter and a positive 2.2% in the second quarter.

  • Historically execution on margin realization has been poor within ASG. We understand why this has been the case and we believe we can address it by implementing improvements in four areas. We want to improve project management and the management of asset-- of the management of technical risks which is a major reason for slippage between bid and delivery. We want to put continued emphasis on the reduction of SG&A. We'd like too put a sharper focus on obtaining appropriate pricing for the exceptional value that we bring. And we'd like to better leverage our global supply chain. We expect ASG operating margins to continue to improve in the last two quarters as the current work in process is diverted to shipments. But this does not negate the importance of making these improvements.

  • We've also been looking very closely at ASG's market focus. In general, we believe we need to deemphasize low margin markets and reemphasize the most attractive automation markets which include pharmaceutical, nuclear, medical equipment and Solar. That being said, I'd like to turn the call over to Eric Laborde who is going to speak to you about Photowatt. Eric?

  • - CEO

  • Yes thank you John. Good afternoon to everyone. So I'm here in Lyon in the room with Jean-Louis Dubien which is our COO. Before starting I would like to state that I'm very happy to take on the role of, CEO of Photowatt, and after introducing myself I will explain our plan to deliver the Company. Today Photowatt is like a sleeping beauty. The Company has been so capital constrained during the past five years that we are now very happy to prove to our shareholders that we can do great things with the proper support. And before starting my presentation, I just want to remind everyone that Photowatt is a vertically integrated manufacturer. In the PV industry this is a winning model. This is a model that the majority of the largest contenders in our business are switching to adapt as quickly as possible. So Photowatt is already in this position and what we have to do is just to grow faster than what we have been doing in the past.

  • I'm happy to present to you the-- our new top Management. I'm Eric Laborde, I'm the CEO of the Company, Jean-Louis Dubien which is with me will be our, Chief Operating Officer. And a new CFO is expected to join us in the near term. To make it simple, Jean-Louis will spend most of his day-to-day time running the current operation. This is a job that he has already performed successfully over the past 18 months. Myself, I will focus on developing and growing the business. On that slide you have a short description on who I am. Basically after 20 years experience in various industries I joined Photowatt in 2001 as General Manager. And then just one word about Jean-Louis Dubien who is our, Chief Operating Officer. Jean-Louis has extensive know-how in PV since he has been with Photowatt for 16 years and he's also one of the developers of the wire saw process which is widely largely used in the industry.

  • Let's talk about the future. You have on that slide the strategy I proposed to the Board of (inaudible) before I've been nominated as a CEO. This strategy has been approved by our Board and is based on three pillars. One, we need to consolidate our existing base on crystalline technology. Second, we are going to devote substantially forth on R&D to differentiate our sales by the technology. In order to be able to have a critical mass for R&D, when we conduct these R&D (inaudible) in partnership through PV alliance. Last, but not least, we are considering starting a thin film division.

  • Concerning our crystalline base, our plan calls for two main projects. The first one is to increase ASAP, our furnished capacity be able to reach 50 megawatt capacity for the whole factory. You have to know that currently in order to improve the efficiency of our metallurgical [cynical] process, we are creating a bottleneck upstream and removing this bottleneck will be a source of valuation of revenue next year. Starting 2010, a policy with (inaudible) can contract will start to show it's effect and this will result in more capacity, the same-- with the exact same facility and of course increase margins. The centerpiece of our effort will be PV alliance. It's a GV that we just-- we have just created in partnership with EDF, Electricity of France. And TA which is (inaudible) of French (inaudible). PV alliance is the leader of a large R&D corporate five years program and the main goals are for this program are first to advance the metallurgical silicon technology in order to reach 15% efficiency. In this regard we will benefit from the patenting process of Photoseal, which is a partner of the program, and use this plasma torch to remove bond, which a key there for efficiency.

  • The second goal of the program would be to develop third generation Solar cells. And on this aspect of this program we will largely benefit from the micro electronics and nanotech know-how of the 2000 research of the (inaudible) it will now bring to our partnership. The thin film division is a project that we decided to consider recently. We believe the basic technology can be portrayed now. It will potentially grow to (inaudible) silicone technology which can be purchased from at least three vendors, now. The (inaudible) efficiency is around 8%, just for your information with the same technology, Q Sell just announced 7.5% (inaudible) production on their test line. Another very important point you have to know that the cost is low, but the technology is quite capital intensive, a little bit more than the current one that we are using now on crystalline technology. And as soon as we can manage (inaudible) technology, our plan is to work with (inaudible) to engineer different layers and to increase efficiency, in order to differentiate ourselves from the competition.

  • So far where do we stand on that project? We have started our study of a short list of potential vendors has been established. We have proposals for potential production sites in France and a potential manager has been identified for this division. We've run extensive by ground (inaudible), which is a technology very similar to the one we would start with.

  • Our five year strategy, the main fact to consider is that we are considering a site capacity increase from an (inaudible) capacity of 60 megawatt now, that will increase up to 135 megawatt in the next two years. And since we do not have enough (inaudible) capacity in France we plan on starting (inaudible) production factory in a low cost country, most likely in Eastern Europe. As you can see on this slide, we think our capacity could be as high as 200 megawatts in five years.

  • This slide--on this slide I tried to show the differences between the three technologies. The way you have to read this slide, these are comparative. The base 100 is the first column on poly silicon modules. I could not show actual data because this information is going to go to our competitors and to our customers and I cannot show actual data. So it's only comparison. So with polysilicon module being the base 100, you can see that the estimating margin for thin film looks very attractive. If you look at the last line of this slide, of this chart, you see what the module gross margin of thin film is 133 compared to a base 100 on polysilicon modules. The metallurgical silicone conductors reflects what we are experiencing now. On this technology, we are at the early stage and we will see improvement years after years even though we do not believe that we'll be able to catch up with the polysilicon characteristic.

  • On the third column on this slide, I have simulated what could be our costs if we were to run at 13.5 efficiency. After saying that, what is it that everyone (inaudible) for future of the thin film, this is what I have attempted to explain on this slide. Our vision is that the market will split into two major segments, residential markets and large room or wall mounted systems. On (inaudible) the high efficiency module will be the preferred choice because of little space especially in Europe. Europe it is rare to be able to have more than 30 square meter available on PV, for PV. I will give you the (inaudible), or any face is not an issue. The lower cost is possible is-- the lower cost possible (inaudible) will be the winner and, therefore, thin film will be a clear winner in this segment. Over the next five years we might very well see thin films module on individual homes as well because of low cost and this is why the crystalline module technology and manufacturers have no choice other than going to high efficiencies. High efficiency means 18% and maybe 20%. And we have to do it fast.

  • The question is now to know what to do, the metallurgical silicon technology. We believe that metallurgical silicon technology will be of a great support to bridge a gap between supply and demand. And on top of that we believe that all of the equipment which is now invested in the (inaudible) which is the current technology will be converted on metallurgical silicon when replaced by third generation sales.

  • Back to our column of business now. I would like to comment on our run rate which has been increasing from 30 megawatts in Q1 to 38 megawatts more recently. We expect to slightly increase this run rate for the remaining of the fiscal year '08 due to better efficiency on the metallurgical silicon process. Some words about the latest development on PV alliance, I am happy to announce that PV Alliance was officially launched last Friday by the prime minister of France. The company is now incorporated, waiting for (inaudible) the R&D program to be funded. The R&D program could start as early as January 2008. The [lap side] which is the centerpiece of the program is expected to be up and running in the fall of 2009. And the first R&D know-how transfer from CEA to Photowatt is scheduled to happen very soon in December '07.

  • This slide shows you the latest development concerning the metallurgical silicon technology. I am happy, since we can say that we are the commercial success with this module which was not guaranteed six months ago, this module behave exactly the same way as the policy module and to carry the exact same guarantee, warrantee. What I say has been demonstrated lately since EDS decided to place a large order for three years with us, for up to 67.5 megawatt of these modules. Yet we are still having problems to overcome, the biggest thing that the cost of (inaudible) due to high reject rates. In fact we are experiencing some variation in the quality of what is being delivered to us, and this is all the more visible since our vendor are rapidly increasing their output. The second is certainly the massive bottleneck that we've been obliged to create in the furnace area in order to fix the quality product. Yet we have some potential avenues for improvement. A new (inaudible) it to ask about furnace which has been approved by the Board lately and we are actively working on getting these furnaces involved as fast as possible.

  • Then we have lately demonstrated at the lab level that we have an innovative process that could improve largely our (inaudible) on metallurgical silicon. This process is now being implemented in mass production. And lately more on the mid-term level we are counting a lot on the plasma torch which showed quite encouraging results in the labs.

  • I will finish my presentation by dictating our metallurgical silicon. Concerning metallurgical silicon we have approved two main vendors now, with whom we are producing the majority of our modules. Their quality has improved over the past two months after very disappointed period before and during summer. Our goal is to firm out more quantities with these two vendors within the next three to six months. On the polysilicon side we have resumed discussion with potential vendors. This discussion had been put on hold after our IP was cancelled. Now that we have some cash available from this summer's capital increase negotiations are easier to resume. We are contemplating taking a (inaudible) position on the new market entrance as well as finding potential additional long term supply contracts. Before ending my presentation I would like you to invite you to visit Photowatt. We are working on organizing a one or two-day tour in January so that you can better grasp what our business is about. Thank you for your attention.

  • - CEO

  • Thanks very much, Eric. That concludes our formal presentations. Now, we'd like to invite your questions. Brandy, would you like to poll for questions? Thank you.

  • Operator

  • Yes, thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Frederic Bastien of Raymond James. Please go ahead.

  • - Analyst

  • Hi good afternoon and thanks for the detailed description of the strategic plan there. Just quick question on the order backlog. I noticed the-- it increased 107% on computer electronics. Is that a reflection of your recent successes in Asia?

  • - CEO

  • I'll ask Bruce Seeley to--

  • - President of Europe, Asia, global REM operations

  • That would largely reflect the growth in automation for the Solar industry.

  • - Analyst

  • So the Solar industry, and that's--where is that manufactured from?

  • - President of Europe, Asia, global REM operations

  • The majority of that is manufactured here in North America.

  • - Analyst

  • North America, okay. How are you guys doing in Asia in terms of getting some bookings and getting your backlog higher there?

  • - President of Europe, Asia, global REM operations

  • I believe the bookings as a whole in the Corporation are gaining momentum and Asia is gaining momentum with that trend.

  • - Analyst

  • Any specific considerations or points you can guide to or point to?

  • - President of Europe, Asia, global REM operations

  • I don't think we want to get into specifics relative to business units within a specific market sector.

  • - Analyst

  • All right. My next question is it would be addressed to Eric. I was just wondering there has been-- we've talking about the 15% efficiency as the long term target for metallurgical silicon, how, how conceivably how quickly could you get there? I mean it's obviously a big impact on the margins and it's been something that we've been hearing about, but it looks like you're still a couple of percentage points from that goal.

  • - CEO

  • Well you're right, it's still, it's still a target. Our plan calls for 0.5% every semester.

  • - Analyst

  • 0.5%, so you could get there conceivably by the end of next year or a year from now?

  • - CEO

  • No, we are 13 so we need two more years to get there.

  • - CEO

  • Okay. Sorry, half a year. Okay thanks, I'll get back into queue. Great and thanks, Frederick.

  • Operator

  • Your next question comes from Peter Sklar of BMO Capital Markets. Please go ahead.

  • - Analyst

  • Just have a question for Eric, trying to understand the impact that the metallurgical silicon is having on your operating profitability. It seems that as you've increased the mix of the product your profitability has eroded and now you've gone into significant losses. Is the mix of metallurgical versus polysilicon going to continue to increase in the coming quarters, and will that provide additional pressure on your profitability?

  • - CEO

  • Yes, right now we are about 60% metallurgical silicon, and we'll remain about that over the next year. Might be a little bit higher in '09.

  • - Analyst

  • Okay. And I don't understand, what are the problems with the metallurgical silicon? Is it the fact that just your efficiencies are lower, or is the larger issue just the production issues that you're having and I guess the quality and reject rates?

  • - CEO

  • Yes, the-- so metallurgical silicon the main driver is that the efficiency is lower, it's 13% instead of 15%. And the second other problem is that we have to--we have to eject more pops, what we call low class cells, the cell which are not good for cell, and these vary quite a lot depending on the quality of what the supplier give to us. The first magnitude is the link with the metal and the second order is linked with the quality of the raw material we receive. (Inaudible), it's improving. You have to realize that we start--we started a new process and our supplier start also to increase the process, and it costs to increase quantity and to maintain quality.

  • - Analyst

  • Right, okay. John I just also wanted to mention, I think it'd be helpful if you could send out the, I guess, the presentation along with the press releases. It was kind of hard to follow the--follow it on the web. There was a delay.

  • - CEO

  • Okay thanks, Peter, this is the first time we've tried this, so we will--

  • - Analyst

  • And also if you could post it to your website after the call so we have the opportunity to print it out.

  • - CEO

  • Okay. We'll go to work on that. I think there is enough people, Peter, in this room, that can figure that one out.

  • - Analyst

  • Okay. Thank you.

  • - CEO

  • Thanks a lot.

  • Operator

  • Your next question comes from Marko Pencak of GMP Securities. Please go ahead.

  • - Analyst

  • Thank you, good afternoon. I have a couple of questions, why did you guys incur a write-off on the deposit to one of your metallurgical grade silicon suppliers?

  • - CEO

  • Why did we write-off the deposit on the metallurgical silicon suppliers?

  • - Analyst

  • Right.

  • - CEO

  • Oh, okay. Because we-- with this supplier they give it to us, or a batch of raw material, six months ago that was no good, and so we have to stop the deliveries we were sourcing for web supplier. So we wanted to reuse that silicon. We thought we had the process but in fact it turned that it was, it was decreasing the efficiencies instead of improving it. So we decided not to use that raw material and we could not get the deposit back from the supplier because as (inaudible) said, you stop ordering for myself and the depositor and I can't get it back to you. So we had to write it off. That's the life of-- it's a Chinese supplier.

  • - Analyst

  • Okay.

  • - CEO

  • Life of (inaudible) okay.

  • - Analyst

  • My next question, this may be a more general one. Just when are the Spheral Solar costs going to disappear. I thought you guys had basically put that facility on-- I mean essentially nobody's sort of occupied in that business. Can you just sort of explain what's happening there?

  • - CEO

  • Yes Marco, I think we're on the final stages of the line down, we have three or four employees we have to finish our paperwork with PCP, which is the Federal Government Agency. And we will be hopefully selling the building soon which will provide some cash, but there may be some residual value that we're making sure if there is some that we'd like to make sure every door is opened, but hopefully we'll see the end of that pretty soon.

  • - Analyst

  • No I guess somebody wants to buy your laminator. But just on the TPC, I mean do you think you guys are going to be able to get away without having--is there going to be any residual financial obligation to them?

  • - CEO

  • We believe not. We have a good meeting with them this week, so we were in process and it is our hopes that there will not be.

  • - Analyst

  • Okay. My next question is the--just in terms of your strategy. I mean it sounds like, I know that you guys have sort of been caught short on your polysilicon supply, your trading metallurgical grade, it sounds like it's going to take some time before and now you're talking about it as a bridging technology and starting to lay your hopes on thin film in a way. Which again is going to be a multi-year process. I guess my first question is why would you contemplate taking an equity stake in a new market entrant? If-- I mean is that a diversification and why are we not just trying to secure, and will that if fact enable you to grab or secure a [Peats Spot] Supply or would they not already be signed up with perspective customers? I mean that's a multi-part question, but--?

  • - CEO

  • Yes, basically your question is why do we take an equity position compared to a long term contract? So that-- two problem with the long term contract with an existing supplier. First is they are more expensive, so for the deposit we're going put on the long term contract we can get more silicon on an equity position. And, secondly, if we go to (inaudible) you don't get enough silicon, if we want to feed our plan, we need 1,000 ton and to get 1,000 ton for our existing supplier you need to be given (inaudible) we get allocated by the existing supplier according to your size. You have to realize that. The equity position you get more for your valor, so basically we have a less investment, we get more silicon. Plus you have some risk attached to it, but it's a way to--it's a new capacity which opened to us.

  • - Analyst

  • So, okay, so presumably they don't have existing customer (inaudible) or obligations to provide to other participants on the market, then?

  • - CEO

  • Yes, they would provide--their capacity we go to the (inaudible).

  • - Analyst

  • Okay, I'll get back in line. Thanks.

  • - CEO

  • Okay thanks, Marko.

  • Operator

  • Your next question comes from David Tyerman of Scotia Capital. Please go ahead.

  • - Analyst

  • Yes, on the thin film opportunity, can you give us some idea of the timing that you're looking at? I might have slipped past the amount of capacity you're thinking of whatever down the road and how much money you think it'll take to get this thing up and running?

  • - CEO

  • Okay. So about timing, quite aggressive schedule of course for 18 months between the time the decision is taken and the time you see the first model out of the factory. Talking about cost, you have to consider that these are very preliminary numbers since these are related to first quotation. It depends on the supplier but it varies from 2.2 Euro per watts until 3 Euro per watts so for 100 megawatts you have-- you would invest 220 up to 300 in even Euro.

  • - Analyst

  • And is 100 megawatts sort of a standard sized facility?

  • - CEO

  • No, it depends on the supplier. It can be 60 or 50 and the third one is something of a 75 line, so the line are different.

  • - Analyst

  • Okay.

  • - CEO

  • I'm giving you a base-- a 100 megawatt base. We choose one supplier is going to be 120 and if choose the other one it's going to be 100.

  • - Analyst

  • Okay, and would you be looking at 50, 60 as a starting point type of thing?

  • - CEO

  • Yes, it's a minimum size, yes.

  • - Analyst

  • Okay.

  • - CEO

  • You can go under.

  • - Analyst

  • And you would start with minimum size, I take it, to minimize risk, that type of thing?

  • - CEO

  • Yes.

  • - Analyst

  • Okay. And the other question I had is on ASG. John, you sort of ran through how you intend to improve the profitability of ASG, it sounds, and I hate to say this, but it sounds a lot like what I've heard before. I'm wondering if you can try and contrast what's different going forward relative to a lot of good words in the past but not much performance?

  • - CEO

  • Yes, I think you're going to have to wait for our performance, David. And I agree, we don't disagree with the strategic plan of the last quarter, but I think execution is where we found it lagging and because I think that at the heart of this Company there's some very strong Managers that need to be properly motivated so I agree, I wouldn't be listening to me if I were you, I'd be waiting for execution and I think we have a pretty strong group of Managers. God, I think that a very, very good Board with a strong bias for action and I think that internally people have seen already that it's that orientation towards action is making the difference. And I know that's probably not a satisfactory answer as you want, but we're not going to take any left turns.

  • - Analyst

  • What do you think was the execution issue in the past, then?

  • - CEO

  • I'd just say a sense of urgency would be what it gets down to in very simple terms.

  • - Analyst

  • Okay.

  • - CEO

  • And I sure have that, let me tell you.

  • - Analyst

  • Okay that's helpful. Thank you. I'll get back in queue.

  • - CEO

  • Thanks, David.

  • Operator

  • Your next question comes from Michael Willemse of CIBC World Markets. Please go ahead.

  • - Analyst

  • Great, thank you. First question I just wanted to clarify something from David's question. It sounded like you're assuming the thin film would start at 50 to 60 megawatts but in the presentation it says from 30 megawatts going to 120 megawatts eventually. Is it 30 or maybe 50, 60 in thin film?

  • - CEO

  • No the factory has to be designed for 60 or 50, depending upon the supplier. But you-- at the beginning you just call half the equipment. You don't start from (inaudible) it's designed for 60.

  • - Analyst

  • Okay, okay. And the current-- now are we still going ahead with the current expansion to 80 megawatts? I think it was supposed to be finished by January 2010, is that still in place?

  • - CEO

  • Talking about crystalline technology?

  • - Analyst

  • Yes, crystalline.

  • - CEO

  • I'm not sure. Where did you grasp this information?

  • - Analyst

  • Well, this was from the prior Management team after they did the rights issue they were going to expand total capacity from 60 megawatts to 80 with the option to go to 130, and that 80 megawatts would be in place in January 2010.

  • - CEO

  • Okay.

  • - Analyst

  • Is that-- it sounds like that's probably in the past now?

  • - CEO

  • Now we-- I have looked into the numbers, it's dangerous to go to 80 megawatt only because doing so with only one line into a big building the additional margin which we bring, will not be of any good. So we have to expand to 100 right away. Not just step up to 80.

  • - Analyst

  • Okay.

  • - CEO

  • Am I clear? Am I clear?

  • - Analyst

  • Yes, I guess I'm just, I'm trying to figure out--

  • - CEO

  • We're still on the-- I think it's going to be more mid-2009 that we can start that.

  • - Analyst

  • Sorry, say that again? What will you start in mid-2009?

  • - CEO

  • Yes. 2009 we can start the extension, the third extension.

  • - Analyst

  • The third extension. I guess what I'm going back to, when the rights issue is done in June, there was $16 million earmarked for the PV alliance, is that $16 million still going to the PV alliance?

  • - CEO

  • Yes.

  • - Analyst

  • Okay. And then there was $20 million was going to be earmarked to increase capacity to 80 megawatts from 60 megawatts, that's no longer the case? That--

  • - CEO

  • No, we need to go higher than that. We need to go to 100. If we have only, if we have only 20 megawatts, the marginal increase will not be enough. So we need to add-- to go one step, 40 megawatts at one step-- that will go from 60 to 100.

  • - Analyst

  • Okay. And then how much, do we know yet how much is it going to cost to get from 60 to 100 or will we find out in the--?

  • - CEO

  • No, we don't.

  • - Analyst

  • Okay.

  • - CEO

  • We know that--we knew that in (inaudible) capital but we don't know the detail.

  • - Analyst

  • Okay yes, that's my next question. Is there-- I guess, what's the funding source expected to be, I guess for these projects, the thin film and for the increase in crystalline capacity?

  • - CEO

  • We'll have to find the additional funding current in the year 2008.

  • - Analyst

  • Okay. Thank you.

  • - CEO

  • Okay. Michael, thanks very much. I'd like to note that you'll note now if you go to your webcast your PDF of the slides is now-- should now be available now let us know if it's not. Thanks, next question, Brandy.

  • Operator

  • Your next question comes from [Mack Well] of Comark Securities. Please go ahead.

  • - Analyst

  • Hi, Eric, let's assume that you get the thin film capacity up and running. Can you take us through Photowatt's capabilities of selling those types of cells? Because it is a different market than the crystalline. I'm just wondering whether you have the capability of actually bringing that to market and executing on the sales proposition. Because it is a different selling proposition.

  • - CEO

  • So that's-- you just answered that so far, yes definitely. I have at least two customers that can take at least 15 megawatts per year of this type of product. The first-- I'm not going to name customers. It's too dangerous. But I know at least two customers that can take these products, because they are already buying this type of product from other sources, and they need more. Because this product are perfect to be ground mounted PV field.

  • - Analyst

  • Okay. And so-- and can you just not sure if I really caught it and I'm not sure what the answer is for this, but how would you--

  • - CEO

  • Yes definitely we can sell it. I would be happy to have it right away.

  • - Analyst

  • Okay. So-- I mean you sound very confident that you can sell it. So why would that supply--why would that buyer be looking to get it from you than to someone else? I mean what is it about this particular initiative on your part that makes it better than what's out there already?

  • - CEO

  • Okay. You have to realize that thin film is a new technology. There are not that many suppliers able-- or manufacturers able to make thin film modules. Right now you have first Solar that you can buy module from the Japanese, Mitsubishi Electric, I think Fuji makes some and Canaka makes some. But there are not so many and the capacity is limited. The customer I have in mind, they can install the 20 to 30 megawatts just themselves a year of this type of module which is almost half of the capacity of first Solar right now, crystalline's about 15 megawatts you're going to go up to 100. So you see the demand is much higher than what the offer is.

  • - Analyst

  • Okay.

  • - CEO

  • So I'm confident that the market will be there for this type of product. You have to realize that the costs are low on these products and the price are lower than the metallurgics on price also.

  • - Analyst

  • Right.

  • - CEO

  • Mack, if I can butt in for a bit. So please believe that-- to answer your earlier question that we have enough capital from the rights offering to invest in this thin film.

  • - Analyst

  • Okay. Okay. And then just-- okay that answers it. And just on my second question. About the cell, the high reject rate on the met grade cells, those cells, are they basically rejects because of performance or do they just have a lower efficiency, because I would imagine that you could sell a lower efficiency cell into just precisely this market? So I'm just wondering whether the cells are just so terrible that they just can't be used for anything?

  • - CEO

  • You're correct. They're so terrible that they can't be used. We sell some of them but we are obliged to discount them to India or China to put some of them into galium or something like that.

  • - Analyst

  • Okay. And basically there's not a business around making them. So I just wanted to double check that, thanks.

  • - CEO

  • No, no (inaudible) to make it.

  • - Analyst

  • Okay. Thank you.

  • - CEO

  • Thanks, Mack.

  • - CEO

  • We have to remove it.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your next question is a follow-up from Marko Pencak of GMP Securities. Please go ahead.

  • - Analyst

  • Thank you. I want to go back to the automation systems business for a second. In January there's a restructuring, the estimated annualized savings were supposed to be $11 million. Is that still a number that you guys believe is a good number and why have we not seen sort of a more obvious impact from that cost cutting exercise?

  • - CEO

  • Marko, it's very difficult, I don't know if Bruce Seeley can add anything, but certainly I can't comment on what the previous Board did or promised. So we're in there with a fresh look and fresh ideas, and it's probably not appropriate to comment on.

  • - President of Europe, Asia, global REM operations

  • I guess I could give a small comment here in that there was cost cutting done and we are going to start to see some of the results of the increased bookings and the cost reductions and the purchasing initiatives in that, that are underway as these bookings flow through here over the next couple of quarters. And as John said earlier, I believe we'll watch how the margins do and then assessment based on that.

  • - CEO

  • Yes, I think generally in this Company what I've seen has been a lot of unabsorbed overhead and I think that the bottom line impact of additional sales should be significant without predicting any numbers. That is my first observation as you walk around, the capacity is pretty significant here.

  • - Analyst

  • You've touched on some issues with respect to the execution of contracts. And you even said that some of those sort of poor margin contracts are still flowing through. Based on sort of your, I don't know how much assessment you've actually done or how deeply you've looked at the composition of your backlog, but when would you expect that the vast majority of those sort of negative-- or not negative margin but certainly poor margin contracts will have already flowed through the P&L?

  • - CEO

  • I'll ask Bruce to add but I know there's a big one in Ohio which I thought would be shipped in January. And another ones, Bruce, that you're aware of?

  • - President of Europe, Asia, global REM operations

  • There's a couple of nagging ones. There's the one in, there's one in France and the one in Ohio that we listed and there may be a couple of others that are not of the higher margin nature and they will flow through by end of the calendar year.

  • - Analyst

  • Okay. And then just last thing on the covenants on this new credit facility, you talk about adjusted current assets to current debt and the number you cite is 1.25 to 1. Can you tell us based on the Q2 balance sheet what is that ratio and what are sort of the major adjustments?

  • - CEO

  • I'll see how fast Garry can think on his feet here, Marko. You can see he isn't going to stand up for this one.

  • - CFO

  • Marko, we're not anywhere near that ratio. We're in good shape with respect to that covenant. The extension of our existing bank debt goes until the end of December, and we're currently looking at, or currently talking with a number of financial institutions to replace that.

  • - Analyst

  • Okay. And the debt to equity, is that a net debt to equity ratio and is that equity just your-- is that the entire--does that include retainer issues? Can you just tell me what that calculation is?

  • - CFO

  • We're going to look up the calculation and give you the numbers but I tell you we're nowhere near the line.

  • - Analyst

  • Okay. All right. Thank you.

  • - CEO

  • Thanks, Marko.

  • Operator

  • Your next question is from Jamie Kozak of North Growth Management. Please go ahead.

  • - Analyst

  • Hi good evening, gentlemen, just a couple of quick questions. If you could lay out a timeline on selling of Photowatt, and then if you can also just provide a quick commentary on employee morale, that would be great? Thanks.

  • - CEO

  • On selling, Jamie, do you want to repeat that? On selling --talking about the Spheral or--?

  • - Analyst

  • No, to sell Photowatt as separate company.

  • - CEO

  • Oh, too-- yes, well we're still planning on separating them, not to have a sale, so it'll be separation of some sort, which has always been the plan.

  • - Analyst

  • Right, but could you comment on the timing of it?

  • - CEO

  • Oh, on the timing. No, we're working-- we'll be very diligent on it and I do not know there's some tax implications that we have to take a look at and practical applications of getting another listing, and so we're certainly the Board has been very involved in going forward with it as quickly as possible. So I'm sorry I can't give you anything more definitive, Jamie.

  • Operator

  • Your next question comes from Frederic Bastien of Raymond James. Please go ahead.

  • - Analyst

  • I was just curious of the sales that Photowatt generated in the quarter. Do you have an idea of what came out of France, actually? Because you think you're operating in that particular country and that there could be some great opportunities for you in that particular country.

  • - CEO

  • Right now the sales to France, because they are very minimum, it's 300 kilowatts per month or something like that, it's very minimum. It will increase next year quite a bit because we are going to start shipping to EDS and all the modules that we will ship to EDS will be mainly sold in France. The market is growing-- it's adjusting but it's still a small market. Of course, we'll try to do our best to take the-- to take our share of this market.

  • - Analyst

  • And how are the--how do the incentives compare in France relative to where they are in Spain, Germany, where the biggest markets for Solar cells?

  • - CEO

  • The incentive in France are good for small installation. They're basically for 2 kilowatt installation on a residential, on a house, the incentive is half of investment is given back as a tax rebate, and the feeding tariff is at $0.55, which is higher than in Germany and we have more (inaudible) it's quite interesting on small house it's why the market is starting. The downside is that this type of installation has to be what we say building integrated and this slow down a little bit the market because we-- all the manufacturers not have the product to do that. So we are going slowly the sales France on-- these are small installations are going slowly.

  • The larger field it's tougher because the feeding tariff on large on ground mounting is at $0.30, 30 and it's not enough to have a good return on investment for the investors. So this is a slowing down the development of the market in France. It's better for an investor to invest in Spain because the feeding tariff is I think it's 42 or 45 and you have more sun, on large installation I'm talking.

  • - Analyst

  • All right but if I look at your sales in Spain they're actually down year-over-year. Not only for the quarter, but for the first half. I would assume that there's more, a lot more competition now in Spain given the environment. So could you provide some color on that?

  • - CEO

  • They are definitely more competition. You have to realize that our sales are-- you're surprising me when you say our sales are down in Spain, it's slightly true. The-- you have to realize that the our sales to one region or another that does not reflected exactly how steady the market is in this region. Because we develop and then we took a contract, when we take a 10 megawatt contract it's a fit for our capacity. So it can varies from one quarter or one semester from the other. So the Spanish market is solid to me. Don't see the small (inaudible) as the fact that the market in Spain has decreased, you are right the competition is tougher. But it's more, for us it's more limited by the fact that we don't have enough module to supply it to everyone.

  • - Analyst

  • Fair enough. Thank you.

  • - CEO

  • Thanks, Frederic.

  • Operator

  • Your next question is a follow-up from David Tyerman of Scotia Capital. Please go ahead.

  • - Analyst

  • Yes, just on the separation of Photowatt, is the intention to separate 100% at one point in time?

  • - CEO

  • David we're working on our options now. I mean that's-- you'll-- it's a one very clear option. But it's-- there seems--there's a lot of work involved in this and I think we're going to come up with the right solution and hopefully sooner than later.

  • - Analyst

  • Okay. So it sounds like there's a fair bit of thinking yet to go and a lot of options are being held open at this point?

  • - CEO

  • Yes, they are. The new Board has approached us in with the fresh outlook on everything, but by and large the intent we are going to do something. But it looks like eventually we don't--can't say right now because we don't--.

  • - Analyst

  • Right. Okay. That is fine. And, John, you mentioned that you-- the rights offering provided enough, or hasn't provided enough funding for the thin film. Is that to build a 60 watt-- megawatt facility, or is that enough just sort of to get going and investigating this and so on? And does that also cover the going to 100 megawatts instead of 80?

  • - CEO

  • Yes. What that would involve is us being an investor as an equity partner in the thin film plant to get something going. So we're-- we've got some very interesting options that may be available to us.

  • - Analyst

  • And it would take you to 100 megawatts on the crystalline?

  • - CEO

  • Eric? Eric does that sound right to you?

  • - CEO

  • Not entirely. It would cover our need for the next year. We will need in the following years to grow to have more money.

  • - Analyst

  • Okay. And on the thin film, sorry maybe I missed this, but what sort of interest are you looking in this opportunity?

  • - CEO

  • What type of what?

  • - Analyst

  • How much interest would you be thinking of taking in this opportunity? Is it 10%, 30%, 50%?

  • - CEO

  • Oh okay, yes you're right, you would-- we would try to talk it over with somebody in order to decrease the risk. You're right. Let's picture 50/50.

  • - Analyst

  • Okay. And you think you have enough funding then to do that kind of deal, it sounds like?

  • - CEO

  • Yes.

  • - Analyst

  • Okay. And then the other question I had was on foreign exchange. Obviously the Canadian dollar has increased quite a lot. Could you comment from an ASG standpoint on the impact, if any, on the existing backlog, and also in terms of margins, I guess, especially? And also in terms of competitiveness and how that may impact business going forward?

  • - CEO

  • Sure, we certainly can. I'm going to have Garry West answer that for you, David. It's certainly on the top of our minds as it is yours.

  • - CFO

  • All right David, in our MD&A you'll see that in ASG this quarter compared-- this quarter this year compared to this quarter last year, we felt-- we did calculation that we put in there that revenue was impacted by $4.8 million, as a result of the stronger Canadian dollar. That's a negative impact and the impact on our income was $1.8 million. There are two components to the revenue piece. One is the translation of our accounts from our branches outside of Canada, and that represents roughly half of the revenue impact. The other is transactional, and that's the sales of primarily our Cambridge facility here. The-- as you know, there was a significant difference market rates, average market rates in Q2-- in our Q2 '08 we're roughly par. A year ago the Canadian U.S. exchange rate was at 1.12. So there's almost a 12% impact there.

  • - Analyst

  • Right.

  • - CFO

  • Which is obviously significant and obviously something that gives us all concern.

  • - Analyst

  • Okay. So going forward it sounds like this is going to be a pretty heavy head wind on the margin side for a while.

  • - CFO

  • Well, yes, I guess two things have happened in the last few days. The Canadian dollar has come up a little bit, which is a good thing. Our hedging strategy is to pick up-- we really start hedging our contracts when they're slightly before they become contracts. So it's almost at the 90% level if they're down the sales funnel in our calculation. And we also hedge-- we also have a calculation to hedge our revenue exposure when our contracts are in backlog. There is a natural hedge that we have, because many of our purchases of raw materials are done in U.S. dollars. So our-- I would suggest to you that our hedging strategy, we've been quite happy that our hedging strategy-- we've been quite happy that our hedging strategy has been in place for the last, oh, almost three years when the Canadian dollar has been gaining strength.

  • - Analyst

  • Does that suggest then that the biggest impacts are ahead of us as you book new business? Because presumably the Canadian dollar input costs are there.

  • - CFO

  • I'm going to let Bruce add some flavor to this, but one of the things that I would suggest to you, since Canadian dollar has been very strong over the last six months, is that our backlog is strong. So although we have strength strength in the Canadian dollar, we're still out there on the street winning contracts while we maintain margins on our quotes.

  • - Analyst

  • Okay.

  • - CFO

  • And Bruce--

  • - President of Europe, Asia, global REM operations

  • I think that pretty much sums it up there, Garry.

  • - Analyst

  • Okay. Okay. That's helpful. Thank you.

  • - CEO

  • Thanks, David.

  • - CFO

  • (OPERATOR INSTRUCTIONS) Your next question is a follow-up from Michael Willemse of CIBC World Markets. Please go ahead.

  • - Analyst

  • Thank you. I just wanted to clarify a comment that was made earlier on the use of metallurgical silicon for cells as a percentage of sales. Did you say, Eric, that it's about 60% now and it'll probably stay at 60% for the next few quarters?

  • - CEO

  • Yes.

  • - Analyst

  • And in your presentation, it says starting in 2010, there'll be increase use of polysilicon. So is it safe to say that maybe 60% of sales will be metallurgical silicon until 2010 and then the mix will shift more towards polysilicon?

  • - CEO

  • It's-- in fact in fiscal year '09 we will have more than 60% in nickel because we can tel you it will go down again because we have basically silicon coming in. So it's going to be next year 60% on the most likely, unless we have a surprise on the polysilicon side.

  • - Analyst

  • Oh so how high could it get in fiscal 2009? Could it get to 80%?

  • - CEO

  • Yes, it could be as high as 80%, yes.

  • - Analyst

  • Okay. And the contract with the EDS, the big sale that was done, how was the pricing based on that contract?

  • - CEO

  • On that--I prefer not answer on this question because it could be to put us and the (inaudible) in a bad position. But--

  • - CEO

  • Yes, thanks Michael, sorry, we can't respond to that.

  • - Analyst

  • Yes, yes. Okay and when should you start making shipments for that?

  • - CEO

  • January, January 2008.

  • - Analyst

  • So when we see the March quarter then we'll have a good idea of what the margins are on that contract as it's blended in with all of the other sales?

  • - CEO

  • Yes, I suppose so, yes.

  • - Analyst

  • Okay. And if we can just go back to the funds from the rights issue, so the PV alliance, $16 million went into the PV alliance, so there is about $94 million left. Do we know, yet, where any of that other $94 million will be spent in kind of detailed numbers?

  • - CEO

  • We can't answer that at this time, Michael, I'm sorry.

  • - CEO

  • No, no can't comment on that.

  • - Analyst

  • But I guess it's safe to say some of it is going to go into the thin film joint venture and some of it will go to expand the crystalline capacity?

  • - CEO

  • Yes.

  • - Analyst

  • Yes.

  • - CEO

  • You can say that.

  • - Analyst

  • Okay, thank you very much.

  • - CEO

  • Great thanks, Michael.

  • - CFO

  • Want me to answer the debt question?

  • - CEO

  • Okay, Garry's come up with the answer on the debt question.

  • - CFO

  • I think that was Marko's question. Our required current asset to current debt ratio of 1.25 to 1, we can do that ratio by taking out what would have been long term debt, so that was about 48 of the-- of our current liabilities of 280. That gives us like 1.83 to 1 which is well within-- well over our ratio. The debt to shareholder's equity essentially includes all of our debt on the balance sheet and all of our equity, so that gives us lots of room against the test of 1.5 to 1.

  • - CEO

  • Okay, further questions?

  • Operator

  • Mr. Bell there are no further questions at this time. Please continue.

  • - CEO

  • Great. Thank you, everybody, for attending. We appreciate it very much, and look forward to the next quarter. Let me repeat that the PDF slides are available on the webcast and we'll put them on our website as well. Thanks, everybody.

  • Operator

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